SR Bancorp, Inc. 10-K

Item 9A . Controls and Procedures. (a) Evaluation of disclosure controls and procedures. ​ Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective. (b) Management’s Annual Report on Internal Control over Financial Reporting. ​This annual report does not include a management report regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. (c) Attestation Report of the Registered Public Accounting Firm. ​Not applicable because the Company is an emerging growth company. (d) Changes in internal controls. ​There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B . Other Information. Not applicable. Item 9C. Disclo sure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 49 PA RT III Item 10 . Directors, Executive Officers and Corporate Governance. Executive Officers of SR Bancorp and Somerset Savings Bank The following table lists the individuals who are the current executive officers of SR Bancorp and Somerset Savings Bank, their ages as of June 30, 2023 and the positions they hold at Somerset Regal Bank. Name Age Position William P. Taylor 65 Chief Executive Officer Christopher J. Pribula 58 President and Chief Operating Officer David M. Orbach (1) 49 Executive Vice Chairman Neil C. Viotto 53 Senior Vice President – Mortgage Lending Harris M. Faqueri 41 Vice President and Chief Financial Officer ____________ (1) Mr. Orbach began serving as Executive Chairman of the Board of Directors of SR Bancorp and as Executive Vice Chairman of the Board of Directors of Somerset Regal Bank effective as of the closing of the Merger on September 19, 2023. William P. Taylor continues as Chief Executive Officer and Chairman of the Board of Directors of Somerset Regal Bank and serves as Chief Executive Officer and a director of SR Bancorp. The executive officers of Somerset Savings Bank are, and the executive officers of Somerset Regal Bank will be, elected annually. Directors of Somerset Savings Bank and SR Bancorp Composition of our Board . SR Bancorp has nine directors. Directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. Directors of Somerset Savings Bank are elected by SR Bancorp as its sole shareholder. The following table states our current directors’ names, their ages as of June 30, 2023, and the years when they began serving as directors of Somerset Savings Bank and SR Bancorp and when their current term expires: Name Position(s) Held With Somerset Savings Bank Age Director Since Current Term Expires William P. Taylor Chairman and Chief Executive Officer 65 2007 2025 Mary E. Davey Director 74 1995 2024 Marc Lebovitz (1) Director 53 2023 2025 Thomas Lupo (1) Director 71 2023 2024 John W. Mooney Director 73 2011 2024 David M. Orbach (1) Executive Vice Chairman 49 2023 2026 Christopher J. Pribula Director, President and Chief Operating Officer 58 2018 2026 James R. Silkensen Director 78 2011 2024 Douglas M. Sonier Director 73 1986 2025 ____________ (1) Messrs. Lebovitz, Lupo and Orbach became directors of Somerset Regal Bank and SR Bancorp effective as of the closing of the Merger on September 19, 2023. As of that date, Mr. Orbach began serving as Executive Chairman of the Board of Directors of SR Bancorp and as Executive Vice Chairman of the Board of Directors of Somerset Regal Bank. William P. Taylor continues as Chief Executive Officer and Chairman of the Board of Directors of Somerset Regal Bank and serves as Chief Executive Officer and a director of SR Bancorp. Christopher J. Pribula continues as President, Chief Operating Officer and a director of Somerset Regal Bank and SR Bancorp. 50 The Business Background of Our Directors and Executive Officers . The business experience for the past five years of each of our directors and executive officers is set forth below. Unless otherwise indicated, directors and executive officers have held their positions for the past five years. Directors William P. Taylor has served as Chairman of the Board of Somerset Regal Bank, and its predecessor, Somerset Savings Bank, since 2018. Mr. Taylor has been Chief Executive Officer of Somerset Savings Bank since 2013 and prior to that, served as President since 2009. Mr. Taylor holds a Bachelor’s of Science degree from Wake Forest University in accounting. Mr. Taylor joined Somerset Savings Bank in 1983 as assistant vice president and controller. Mr. Taylor serves on the Board of the New Jersey Bankers Association and the Somerset County Business Partnership. Mr. Taylor’s extensive executive leadership and banking experience and knowledge of our market area enhances the breadth of experience of the Board of Directors. Mary E. Davey has over 45 years of experience in upper management of non-profit organizations with responsibility for projects such as special needs housing, budget development and management, state and federal government grants, programmatic oversight and work with external auditors and outside funding bodies. Her profession includes membership in the National Association of Social Workers, Children’s Interagency Coordinating Council of Bergen County Executive Board and Chair of the Mental Health – Education Partnership/Subcommittee and a member of the Suicide Prevention and Education Committee for Bergen County and the Ridgewood Stigma-free Committee. Ms. Davey holds a Bachelor’s Degree in Sociology from Anna Maria College and a Master’s Degree in Social Work from Rutgers University. Ms. Davey is a civic leader with deep management and budgeting experience. Marc Lebovitz is the owner and President of Romark Logistics, a full-service tech-focused logistics company offering innovative and customized supply chain solutions nationwide. He currently oversees the executive team responsible for strategic planning, financial management, operations, and business development. He also serves as a Principal of Woodmont Industrial Partners which owns and manages a portfolio of industrial properties. He graduated from Wagner College with a Bachelor of Science in Business Management and serves on numerous boards and committees within the real estate, education, leadership, and commercial business fields. Mr. Lebovitz’s extensive business and board experience provides the board of directors with valuable insight into business and operational matters. Thomas Lupo is a retired banking professional with a career spanning over 50 years in bank management. He most recently served, since its inception in 2007, as President and Chief Executive Officer of Regal Bank, and also as President and Chief Executive Officer of Regal Bancorp since its inception, until the merger with Somerset Regal Bank and SR Bancorp in 2023. Mr. Lupo has held executive management positions at several community commercial banks and gained extensive experience in commercial lending, having served as Chief Lending Officer at several banks. Mr. Lupo received his BS degree in Accounting and Economics from Upsala College and his MBA in Bank Management from Fairleigh Dickinson University. He has served on numerous boards including, most recently, Bankers Cooperative Group and NJ Bankers. He also served as President of the Community Bankers Association of New Jersey. Mr. Lupo’s extensive commercial banking and lending experience provides a valuable resource to the Board of Directors. John W. Mooney is a retired Specialty Chemical Executive with 35 years of experience, progressing through manufacturing, marketing, business development and general management. He received a BS in Chemical Engineering from Rutgers University and an MBA from Rider University. He spent 33 years with National Starch and Chemical Company including seven years in a general manager position with global P&L responsibility for an $80 million unit supplying specialty chemicals to the Personal Care industry in the U.S., Europe and Asia. He spent the last few years of his career as Vice President of Business Development. Mr. Mooney serves on two non-profit boards: (1) The Central Jersey Housing Resource Center, where he also spent eight years as President; and (2) the Samaritan Homeless Interim Program. Mr. Mooney’s business experience is of significant benefit to the Board of Directors. 51 David M. Orbach has served as Executive Chairman of the Board of Regal Bancorp since its formation and of Regal Bank since 2011. Mr. Orbach acted as the lead organizer in founding Regal Bank in 2007. Prior to joining Regal, from 2005 to 2011, Mr. Orbach was the Managing Partner and Founder of Gallant Funding, L.P., a private mezzanine and bridge lending company for commercial real estate in the New Jersey and New York regions. Before starting Gallant, he served as Vice President and General Counsel, as well as a Director and Corporate Secretary, of NorCrown Bank, a community bank based in Livingston, New Jersey. Prior to joining NorCrown, Mr. Orbach was an associate in the real estate department of the law firm of Pryor Cashman Sherman & Flynn LLP, located in New York City. Mr. Orbach is involved with numerous charitable and non-profit organizations and serves as a board member within several of these organizations. Mr. Orbach earned his B.A. in Economics from the City University of New York at Queens College and his J.D. from the Benjamin N. Cardozo School of Law. Mr. Orbach’s extensive banking experience and commercial real estate experience is of significant benefit to the Board of Directors. Christopher J. Pribula has been President and Chief Operating Officer of Somerset Regal Bank, and its predecessor, Somerset Savings Bank, since 2019, having previously served as Executive Vice President and Chief Operating Officer beginning in 2013. Mr. Pribula worked in several community banks, including The Chatham Trust Company, West Jersey Community Bank, Prestige State Bank and Somerset Hills Bank, prior to joining Somerset Savings Bank in 2006 as Vice President – Operations Division Manager. Mr. Pribula serves on the Board of Raritan Valley Habitat for Humanity as Treasurer. Mr. Pribula is a graduate of Kean University with a degree in accounting. Mr. Pribula’s extensive banking and accounting experience provides expertise to the Board of Directors. James R. Silkensen is a graduate of Pacific University and received an MBA from Oregon State University . Mr. Silkensen worked at the Federal Home Loan Bank Board for 12 years and at the New Jersey League of Community Bankers for 25 years, serving the last few years as President. Mr. Silkensen served as Co-President and Chief Executive Officer of the New Jersey Bankers Association for the last two years of his career. He has served in various volunteer leadership positions at the Cranford United Methodist Church and currently serves on the Board of Trustees of the Charitable Foundation of the New Jersey Bankers Association. Mr. Silkensen brings significant banking and regulatory experience to the Board of Directors. Douglas M. Sonier is a graduate from Rider University with a BS in Accounting. He began his career with the accounting and advisory firm of WithumSmith+Brown where he was a partner for over 40 years and is currently an Emeritus Partner. His experience is primarily with privately held and not-for-profit businesses in the manufacturing, professional service, retail, and wholesale/distribution sectors. Mr. Sonier’s accounting experience benefits our Board of Directors in its oversight of audit and financial reporting matters. Executive Officers of Somerset Regal Bank Who Are Not Also Directors Neil C. Viotto has served as Senior Vice President, Mortgage Lending and CRA Officer since October 2022, having previously served as Vice President Mortgage Originations Manager from 2011-2021. Mr. Viotto had served as Senior Vice President Director of Residential and Consumer Lending at Peapack Gladstone Bank from May 2021 through October 2022 before returning to the Somerset Savings Bank. Mr. Viotto currently serves on the Land Use Board for the Town of Clinton since November 2015. Mr. Viotto is a graduate of Kean University with a degree in Accounting. Harris M. Faqueri has served as Vice President/Chief Financial Officer since March 2021. Mr. Faqueri served as Vice President, Accounting at Investors Bank, Short Hills, New Jersey where he was responsible for the management and oversight of various accounting and reporting functions, including facets of financial reporting and compliance. Mr. Faqueri is a graduate of Rutgers University with a Bachelor’s degree in Economics and an MBA in Professional Accounting . He currently serves as the Treasurer on the board of the Central Jersey Housing Resource Center. 52 Audit Committee SR Bancorp maintains an Audit Committee the members of which are Douglas M. Sonier (Chair), Mary Davey, Marc Lebovitz, John W. Mooney and James R. Silkensen. The Board of Directors believes that Mr. Sonier qualifies as an “audit committee financial expert” as such term is defined by the rules and regulations of the Securities and Exchange Commission. Code of Ethics SR Bancorp has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The code of ethics is designed to deter wrongdoing and to promote honest and ethical conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations. A copy of the Code of Ethics for Senior Officers is available to shareholders on the “Investor Relations” portion of the Bank’s website of www.somersetsavingsbank.com . Item 11 . Executive Compensation. Summary Compensation Table The following information is furnished for our principal executive officer and the two most highly compensated executive officers (other than the principal executive officer) whose total compensation exceeded $100,000 for the fiscal year ended June 30, 2023. These individuals are sometimes referred to in this document as the “named executive officers.” Name and Principal Position Year Salary Non-Equity Incentive Plan Compensation All Other Compensation (1) Total William P. Taylor 2023 $ 453,400 $ 115,000 $ 93,070 $ 661,470 Chief Executive Officer 2022 $ 371,700 $ 22,152 $ 95,782 $ 489,634 Christopher J. Pribula 2023 $ 393,308 $ 80,000 $ 188,639 $ 661,947 President and Chief Operating Officer 2022 $ 303,000 $ 17,580 $ 53,658 $ 374,238 Harris M. Faqueri 2023 $ 175,446 $ 19,000 $ 5,263 $ 199,709 Vice President and Chief Financial Officer 2022 $ 148,385 $ 6,623 $ 3,321 $ 158,329 ____________ (1) The compensation represented by the amounts for 2023 set forth in the “All Other Compensation” column for the Named Executive Officers is detailed in the following table. 401(k) Plan Employer Contributions Automobile Allowance Supplemental Retirement Plan (2) Total All Other Compensation William P. Taylor $ 10,437 $ 9,833 $ 72,800 $ 93,070 Christopher J. Pribula $ 10,455 $ 7,484 $ 170,700 $ 188,639 Harris M. Faqueri $ 5,263 $ — $ — $ 5,263 _______________ (2) Represents the contribution made to the Supplemental Executive Retirement Plan for the benefit of Messrs. Taylor and Pribula. 53 Employment Agreements. Somerset Regal Bank has entered into employment agreements with Messrs. Taylor and Pribula, which become effective as of the effective date of the mutual-to-stock conversion. The term of the employment agreement with Mr. Taylor will begin as of the effective date of the conversion and end on the third anniversary of that date. Upon notice to Mr. Taylor of at least 30 days prior to the expiration of the term of the agreement, Somerset Regal Bank may extend the term of the agreement for an additional twelve months. The initial term of the employment agreement with Mr. Pribula will begin as of the effective date of the conversion and end on the third anniversary of that date. Commencing on the first anniversary of the effective date of the agreement with Mr. Pribula and on each anniversary date thereafter, the term of the agreement will extend automatically for one additional year, so that the remaining term is again three years, unless either Somerset Regal Bank or Mr. Pribula gives notice to the other party of non-renewal. If either party provides a notice of non-renewal, the term will become fixed at that time and expire at the end of the then current term. Notwithstanding the foregoing, in the event SR Bancorp or Somerset Regal Bank enters into a transaction that would constitute a change in control, as defined under the employment agreements, the term of the agreements would automatically extend so that they would expire no less than two years following the effective date of the change in control. The employment agreements specify the base salaries of Messrs. Taylor and Pribula, which initially will be $460,000 and $400,000, respectively. The Board of Directors or the Compensation Committee of the Board of Directors of Somerset Regal Bank may increase, but not decrease, the executives’ base salaries. In addition to base salary, the agreements provide that each executive will participate in any bonus plan or arrangement of Somerset Regal Bank in which senior management is eligible to participate and/or may receive a bonus on a discretionary basis, as determined by the Board of Directors or the Compensation Committee. Somerset Regal Bank will provide a target cash bonus opportunity for Mr. Taylor of at least 25% of his base salary and for Mr. Pribula of at least 20% of his base salary. Each executive is also entitled to participate in all employee benefit plans, arrangements and perquisites offered to employees and officers of Somerset Regal Bank and the reimbursement of reasonable travel and other business expenses incurred in the performance of his duties for Somerset Regal Bank. Somerset Regal Bank will also provide each executive with the use of an automobile and reimburse the executive for automobile-related expenses. Somerset Regal Bank may terminate the executives’ employment, or the executives may resign from their employment, at any time with or without good reason. Under the employment agreements, in the event Somerset Regal Bank terminates an executive’s employment without cause or the executive voluntary resigns for “good reason” (i.e., a “qualifying termination event”), Somerset Regal Bank will pay the executive a severance payment equal to the greater of (i) the remaining base salary and total annual bonus opportunity (based on the highest annual bonus earned during the three most recent calendar years prior to his date of termination) he would have received during the remaining term of the employment agreement or (ii) two time the sum of the executive’s base salary and the average annual incentive bonus paid to the executive for the three most recently completed calendar years prior to the date of termination. In addition, the executives will be reimbursed for their monthly COBRA premium payments for up to 18 months. If a qualifying termination event occurs at or within two years following a change in control of SR Bancorp or Somerset Regal Bank (or Somerset Regal Bank), the executive would be entitled to (in lieu of the payments and benefits described in the previous paragraph) a severance payment equal to three times the sum of (i) his base salary in effect as of the date of termination (or during the three preceding years, if higher) and (ii) and average annual total incentive bonus earned by the executive for the three most recently completed calendar years prior to the change in control (or, if greater, the annual total incentive bonus that would have been earned in the year of the change in control at target bonus opportunity). In addition, the executive would receive a lump sum payment equal to the value of 36 month’s health care cost (based on COBRA premium payments). For purposes of the employment agreements, the term “good reason” includes (i) a material reduction in the executive’s base salary and/or aggregate incentive compensation opportunities (unless the reduction is part of a non-discriminatory reduction applicable to all executive officers), (ii) a material reduction in the executive’s authority, duties or responsibilities, (iii) the failure to re-appoint the executive to his executive position or the failure to nominate and recommend the election of the executive to the Board of Directors of SR Bancorp or to appoint or nominate and elect the executive to the Board of Directors of Somerset Regal Bank, (iv) a relocation of the executive’s principal place of employment by more than twenty miles or (v) a material breach of the employment agreement by the Bank. 54 The employment agreements terminate upon the executive’s death or disability. Upon termination of employment (other than a termination in connection with a change in control), the executive will be required to adhere to one-year non-competition and non-solicitation restrictions set forth in his or her employment agreement. The non-competition and non-solicitation covenants apply following a change in control for a period mutually to be agreed to by the parties, which will be no less than six months nor exceed two years. In the event payments and benefits provided to the executive become subject to Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), and after considering the value of the non-competition and non-solicitation covenants, the payments will be reduced if the reduction would leave the executive financially better off on an after-tax basis than if the executive received the entire payment and was obligated to pay the excise tax under Section 4999 of the Code. In addition, David M. Orbach entered into a new employment agreement with Somerset Regal Bank, effective as of the effective date of the Merger between Regal Bancorp and SR Bancorp. The employment agreement has a three-year term. Commencing on the first anniversary of the agreement and on each anniversary thereafter, the agreement will automatically renew for an additional year, so that the remaining term will again be three years, unless either party gives notice of non-renewal to the other, in which case the agreement will terminate at the end of the then current term. Notwithstanding the foregoing, if SR Bancorp or Somerset Regal Bank enters into a transaction that would constitute a change in control, as defined under the employment agreement, the term of the agreement would automatically extend so that it would expire no less than two years following the effective date of the change in control. During the term of the agreement, Mr. Orbach will serve as Executive Chairman of SR Bancorp and Executive Vice Chairman of Somerset Regal Bank. The initial base salary under the agreement is $375,000. The Board of Directors or the Compensation Committee of the Board of Directors of Somerset Regal Bank may increase, but not decrease, Mr. Orbach’s base salary. In addition to base salary, the agreement provides that Mr. Orbach will participate in any bonus plan or arrangement of Somerset Regal Bank in which senior management is eligible to participate and/or may receive a bonus on a discretionary basis, as determined by the Board of Directors or the Compensation Committee of the Board of Directors. Somerset Regal Bank will provide a target cash bonus opportunity for Mr. Orbach of at least 20% of his base salary. Mr. Orbach is also entitled to participate in all employee benefit plans, arrangements and perquisites offered to employees and officers of Somerset Regal Bank and the reimbursement of reasonable travel and other business expenses incurred in the performance of his duties for Somerset Regal Bank. Somerset Regal Bank will also provide him with the use of an automobile and reimburse him for automobile-related expenses. Somerset Regal Bank may terminate Mr. Orbach’s employment, or Mr. Orbach may resign from his employment, at any time with or without good reason. Under the employment agreement, if Somerset Regal Bank terminates Mr. Orbach’s employment without cause or Mr. Orbach voluntary resigns for “good reason” (i.e., a “qualifying termination event”), Somerset Regal Bank will pay him a severance payment equal to the greater of (1) the remaining base salary and total annual bonus opportunity (based on the highest annual bonus earned during the three most recent calendar years before his date of termination) he would have received during the remaining term of the employment agreement or (2) two times the sum of his base salary and the average annual incentive bonus paid to him for the three most recently completed calendar years before the date of termination. In addition, he will be reimbursed for his monthly COBRA premium payments for up to 18 months. If a qualifying termination event occurs at or within two years following a change in control of SR Bancorp or Somerset Regal Bank, Mr. Orbach would be entitled to (in lieu of the payments and benefits described in the previous paragraph) a severance payment equal to three times the sum of (1) his base salary in effect as of the date of termination (or during the three preceding years, if higher) and (2) and average annual total incentive bonus earned by him for the three most recently completed calendar years before the change in control (or, if greater, the annual total incentive bonus that would have been earned in the year of the change in control at target bonus opportunity). In addition, he will receive a lump sum payment equal to the value of 36 months’ health care cost (based on COBRA premium payments). For purposes of the employment agreement, the term “good reason” generally includes: (1) a material reduction in Mr. Orbach’s base salary and/or aggregate incentive compensation opportunities under Somerset Regal Bank’s annual and long-term incentive plans or programs, as applicable; (2) a material reduction in Mr. Orbach’s 55 authority, duties or responsibilities; (3) the failure to re-appoint Mr. Orbach to his executive position or to nominate and recommend his election to SR Bancorp’s Board of Directors or to appoint or nominate and elect him to the Somerset Regal Bank’s Board of Directors; (4) a relocation of his principal place of employment by more than 20 miles from his primary place of business; or (5) a material breach of the employment agreement. The employment agreement terminates upon Mr. Orbach’s death or disability. Upon termination of employment (other than a termination in connection with a change in control), Mr. Orbach will be required to adhere to one-year non-competition and non-solicitation restrictions set forth in the employment agreement. The non-competition and non-solicitation covenants apply following a change in control for a period mutually to be agreed to by the parties, which will be no less than six months nor exceed two years. If payments and benefits provided to Mr. Orbach becomes subject to Sections 280G and 4999 of the Internal Revenue Code, and after considering the value of the non-competition and non-solicitation covenants, the payments will be reduced if the reduction would leave him financially better off on an after-tax basis than if he received the entire payment and was obligated to pay the excise tax under Section 4999 of the Internal Revenue Code. Bonus Policy. The independent members of the Board of Directors of Somerset Regal Bank annually approve discretionary employee bonuses pursuant to a written bonus policy. The Board of Directors recognizes that the net income of Somerset Regal Bank is tied to employee contributions and has developed the policy to reflect the contributions of employees. The guidelines are based on the return on assets of Somerset Regal Bank, which are verified by an independent accounting firm, and, for senior executive officers, the bonus amounts may range from 4% to 14% of the executive’s base salary. The Board of Directors may also take into consideration other factors, such as asset quality, liquidity, expense controls and personnel issues in determining the amount of a bonus award. It is anticipated that the bonus policy will be re-evaluated by the Board of Directors of SR Bancorp and Somerset Regal Bank upon completion of the Merger. Deferred Compensation Plan. Somerset Regal Bank sponsors the Somerset Regal Bank, SLA Deferred Compensation Plan (the “Deferred Compensation Plan”) for the benefit of certain employees (including the Named Executive Officers) and directors. Both Messrs. Taylor and Pribula participate in the Deferred Compensation Plan. Participants in the Deferred Compensation Plan are eligible to defer the receipt of a portion of their compensation each year. At least semi-annually, Somerset Regal Bank credits each participant’s account under the Deferred Compensation Plan with earnings equal to the greater of (i) the highest certificate of deposit rate in effect on each June 30 and December 31 or (ii) the weighted average cost of all deposits of the Bank as of June 30 and December 31. Benefits under the Deferred Compensation Plan are paid to participants within 60 days of the earlier of the participants’ separation from service, death or disability or a fixed date elected by the participant. Distributions are normally made in equal quarterly installments over 10 years, unless the participant elects an available alternative method of distribution. Distributions upon a participant’s death are paid in a lump sum, unless the participant has already begun receiving benefits under the plan, in which case the payments will continue to be made to the participant’s beneficiary at the same time they would have been paid to the participant. Upon a participant’s disability, all benefits (or remaining benefits) will be paid to the participant in a lump sum. A participant may also take earlier distributions in the event of certain unforeseeable emergencies. Participants must make any elections regarding the time and form of distributions at the time they elect to defer compensation under the Deferred Compensation Plan and can only modify those elections in accordance with the terms of the plan. Supplemental Executive Retirement Plan. Somerset Regal Bank sponsors the Somerset Regal Bank Supplemental Executive Retirement Plan (the “Supplemental Plan”) for certain employees, including Messrs. Taylor and Pribula. Under the Supplemental Plan, on each May 1, Somerset Regal Bank will credit to each participant’s account under the plan an amount equal to a “designated percentage” of the participant’s compensation for the year. Somerset Regal Bank determines the “designated percentage” each year based on calculations provided by their benefits consultant. However, the “designated percentage” is intended to replace the benefits the participant may not receive under the Pension Plan as a result of the limit on compensation that may be considered for purposes of tax-qualified plan, which for 2023 is $330,000. At least semi-annually, Somerset Regal Bank credits each participant’s account under the Supplemental Plan with earnings equal to the greater of (i) the highest certificate of deposit rate in effect on each May 1 and November 1 or (ii) the weighted average cost of all deposits of the Bank as of May 1 and November 1. Benefits are normally distributed under the Supplemental Plan in quarterly installments over five years within 90 days following the participant’s separation from service or disability. Alternatively, participants may elect (at the time of becoming eligible to participate in the plan) that benefits be distributed in either quarterly installments 56 over 10 years or in a lump sum. Upon a participant’s death prior to the participant’s separation from service or disability, benefits will be distributed over five years with 90 days following the participants’ death, unless the participant has elected a lump sum payment. A participant may also take earlier distributions in the event of certain unforeseeable emergencies. In connection with the freezing of the Pension Plan (see “— Pension Plan ” below) and the implementation of the ESOP, Somerset Regal Bank is exploring appropriate changes to the Supplemental Plan. 401(k) Plan. Somerset Regal Bank maintains the Somerset Savings Bank, SLA Savings and Investment Plan, a tax-qualified defined contribution plan for eligible employees (the “401(k) Plan”). The named executive officers are eligible to participate in the 401(k) Plan on the same terms as other eligible employees of Somerset Regal Bank. Eligible employees who are at least 21 years of age become participants in the 401(k) Plan after they have been employed for six consecutive months. Under the 401(k) Plan, a participant may elect to defer, on a pre-tax basis, between 2% and 100% of their eligible compensation. For 2023, the salary deferral contribution limit is $22,500, provided, however, that a participant over age 50 may contribute an additional $7,500 to the 401(k) Plan for a total of $30,000. In addition to salary deferral contributions, Somerset Regal Bank makes contributions equal to 3% of the participant’s plan compensation. A participant is immediately 100% vested in his or her salary deferral contributions and employer contributions. Somerset Regal Bank intends to allow participants in the 401(k) plan to use up to 50% of their account balances in the 401(k) Plan to subscribe for stock in the offering. The expense recognized in connection with the 401(k) Plan totaled $124,294 for the fiscal year ended June 30, 2023. Pension Plan. Somerset Regal Bank sponsors the Somerset Savings Bank, SLA Pension Plan (the “Pension Plan”). The named executive officers are eligible to participant in the Pension Plan on the same basis as other eligible employees of Somerset Regal Bank. Employees become participants in the plan on the May 1 following the attainment of age 20-1/2 and the completion of one year of service. The normal annual retirement benefit (after attaining age 65) under the Pension Plan equals 1.54% of the participant’s average compensation (as defined in the plan) up to the participant’s “covered compensation” (i.e., the amount of compensation that may be taxed each year for purposes of social security) plus 2% of the participant’s compensation in excess of his or her covered compensation, multiplied by the participant’s years of credit service (up to a maximum of 27 years). The early retirement benefit (generally available after a participant has attained age 55 and completed 15 years of service) payable under the Pension Plan upon a participant’s termination of employment prior to his or her normal retirement age equals the normal retirement benefit reduced by 3-1/3% for each year between ages 55 and 57 and 6-2/3% for each year between ages 57 and 62. Participants vest in their retirement benefits under the Pension Plan after earning five years of credited service after age 18. The expense recognized in connection with the Pension Plan totaled $900,432 for the fiscal year ended June 30, 2023. Somerset Regal Bank has taken steps to freeze the Pension Plan with respect to participation and benefit accounts effective as of April 30, 2023. Employee Stock Ownership Plan. In connection with the conversion, Somerset Regal Bank adopted an employee stock ownership plan (or “ESOP”) for eligible employees. The named executive officers will be eligible to participate in the ESOP on the same terms as other eligible employees. Eligible employees will begin participation in the ESOP on the later of the effective date of the conversion or upon the first entry date commencing on or after the eligible employee’s completion of six months of service and attainment of age 21. The ESOP trustee purchased, on behalf of the ESOP, 8.0% of the total number of shares of SR Bancorp, Inc. common stock sold in the conversion and contributed to the charitable foundation. The ESOP funded its stock purchase with a loan from SR Bancorp, Inc. equal to the aggregate purchase price of the common stock. The trustee will repay the loan principally through contributions to the ESOP by Somerset Regal Bank and any dividends payable on common stock held by the ESOP over the anticipated 20-year term of the loan. The interest rate for the ESOP loan is equal to the prime rate, as published in The Wall Street Journal , on the closing date of the offering. The trustee will hold the shares purchased by the ESOP in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as the trustee repays the loan. The trustee will allocate the shares released among participants’ accounts based on each participant’s proportional share of compensation relative to all participants. A participant will vest in his or her account balance based on his or her years of service with the bank, at the rate of 25% per year after two years of service, so that the participant will be 100% vested after completing five years of service. Participants who were employed by Somerset Regal Bank immediately prior to the 57 closing of the offering will receive credit for vesting purposes for years of service prior to adoption of the ESOP. Participants also will automatically become fully vested upon attainment of their normal retirement age (age 65), death or disability, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon terminating employment in accordance with the terms of the plan document. The ESOP reallocates any unvested shares forfeited upon a participant’s termination of employment among the remaining participants. The ESOP will permit participants to direct the trustee as to how to vote the shares of common stock allocated to their accounts. The trustee will vote unallocated shares and allocated shares for which participants do not timely provide instructions on any matter in the same ratio as those shares for which participants provide timely instructions, subject to fulfillment of the trustee’s fiduciary responsibilities. Under applicable accounting requirements, Somerset Regal Bank will record a compensation expense for the ESOP at the fair market value of the shares as they are committed to be released from the unallocated suspense account, which may be more or less than the original issue price. The compensation expense resulting from the release of the common stock from the suspense account and allocation to the accounts of plan participants will result in a corresponding reduction in the earnings of SR Bancorp, Inc. Directors’ Compensation The following table sets forth for the year ended June 30, 2023, certain information as to the total remuneration we paid to our non-employee directors. Name Fees Earned or Paid in Cash ($) All Other Compensation ($) Total ($) Mary E. Davey 76,550 — 76,550 John W. Mooney 76,550 — 76,550 James R. Silkensen 76,550 — 76,550 Douglas M. Sonier 79,550 — 79,550 Director Fees. Directors of Somerset Savings Bank receive a per meeting fee of $4,200 and a per committee meeting fee of $750. The chairman of the Audit Committee receives an additional $200 per month. Each individual who serves as a director of Somerset Savings Bank also serves as a director of SR Bancorp, Inc. Initially, each director will receive director fees only in his or her capacity as a director of Somerset Savings Bank. Following the completion of the conversion and related stock offering, SR Bancorp, Inc. may also determine to pay director fees but has not determined to do so at this time. Deferred Compensation Plan. Directors are eligible to defer a portion of their board compensation under the Deferred Compensation Plan, as described above. For the year ended June 30, 2023, Ms. Davey elected to defer a portion of her board compensation. 58 Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Stock Ownership The following table provides information as of September 28, 2023 about the beneficial owners known to SR Bancorp that own more than 5% of our outstanding common stock and the shares of common stock beneficially owned by each director, by each named executive officer and by all directors and executive officers as a group. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the shares shown and none of the named individuals has pledged his or her shares. Number of Shares Owned Percent of Common Stock Outstanding (1) Directors: Mary E. Davey 8,700 * Marc Lebovitz — — Thomas Lupo — — John W. Mooney 10,000 * David M. Orbach — — Christopher J. Pribula 26,500 (2) * James W. Silkensen 10,000 * Douglas M. Sonier 25,000 * William P. Taylor 30,000 (3) * Named Executive Officer Who Is Not A Director: Harris M. Faqueri 10,000 * All directors and executive officers as a group (11 persons) 130,600 1.37% * Less than 1%. (1) Based on 9,507,930 shares outstanding as of September 28, 2023. (2) Includes 1,000 shares held by his spouse and 500 shares held by his children. (3) Includes 5,000 shares held by his parent. Equity Compensation Plans SR Bancorp did not have any equity compensation plans at June 30, 2023. Item 13 . Certain Relationships and Related Transactions, and Director Independence. Board Independence The Board of Directors has determined that each of our directors, other than Messrs. Orbach, Taylor and Pribula, would be considered independent under the Nasdaq Stock Market corporate governance listing standards. In determining the independence of our directors, the Board of Directors considered relationships between Somerset Savings Bank and our directors that are not required to be reported under “Executive Compensation—Transactions With Certain Persons,” consisting of deposit accounts that our directors maintain at Somerset Savings Bank. Transactions with Certain Persons Federal law generally prohibits publicly traded companies from making loans to their executive officers and directors, but it contains a specific exemption from the prohibition for loans made by federally insured financial institutions, such as Somerset Regal Bank, to their executive officers and directors in compliance with federal banking regulations. Somerset Regal Bank had no outstanding loans or extensions of credit to its executive officers and directors, and members of their immediate families, at June 30, 2023. Somerset Regal Bank has a policy that no extension of credit will be granted to its directors, officers or employees on terms more favorable than to those 59 available to the general public. For information about restrictions on our ability to make loans to insiders, see “Regulation and Supervision—Federal Bank Regulation—Transactions with Affiliates and Loans to Insiders.” In accordance with the listing standards of the Nasdaq Stock Market, any transactions that would be required to be reported under this section of this document must be reviewed by our audit committee or another independent body of the Board of Directors. In addition, any transaction with a director is reviewed by and subject to approval of the members of the Board of Directors who are not directly involved in the transaction to confirm that the transaction is on terms that are no less favorable as those that would be available to us from an unrelated party through an arms’ length transaction. Item 14 . Principal Accounting Fees and Services. Audit Fees. The following table sets forth the fees that Baker Tilly US, LLP billed to Somerset Savings Bank for the years ended June 30, 2023 and 2022. 2023 2022 Audit Fees (1) $ 180,015 $ 172,230 Audit-Related Fees (2) 366,030 114,095 Tax Fees — — All Other Fees — — (1) Consists of fees for the audits of Somerset Savings Bank’s financial statements, and for services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. (2) Includes fees related to the initial public offering and audits of employee benefit plans. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm. The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the Audit Committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. This approval process ensures that the firm does not provide any non-audit services to us prohibited by law or regulation. 60 PART IV Item 15 . Exhibits, Financial Statement Schedules. (a) Financial Statements and Schedules: Consolidated Financial Statements of Somerset Savings Bank, SLA and Subsidiaries Report of Independent Registered Public Accounting Firm F- 2 Consolidated Statements of Financial Condition as of June 30, 2023 and 2022 F- 3 Consolidated Statements of Income for the years ended June 30, 2023 and 2022 F- 4 Consolidated Statements of Comprehensive Income (Loss) for the years ended June 30, 2023 and 2022 F- 5 Consolidated Statements of Changes in Equity for the years ended June 30, 2023 and 2022 F- 6 Consolidated Statements of Cash Flows for the years ended June 30, 2023 and 2022 F- 7 Notes to Consolidated Financial Statements. F- 8 The Consolidated Financial Statements of Somerset Savings Bank, SLA and Subsidiaries beginning on page F-1 of this Form 10-K for the year ended June 30, 2023 are incorporated by reference herein. All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto contained in this 2023 Annual Report. (b) Exhibits Item 16 . Form 10-K Summary None. 61 Exhibit Index Exhibit Number Description 2.1 Agreement and Plan of Merger, and Amendment thereto, By and Among SR Bancorp, Inc., Somerset Savings Bank, SLA, Regal Bancorp, Inc., and Regal Bank (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 3.1 Amended and Restated Articles of Incorporation of SR Bancorp, Inc. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1/A (File No. 333-270489) as filed on July 10, 2023) 3.2 Amended and Restated Bylaws of SR Bancorp, Inc.* 4.0 Form of Common Stock Certificate of SR Bancorp, Inc. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 10.1 Employment Agreement, dated July 25, 2022, by and between Somerset Savings Bank, SLA and William P. Taylor (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 10.2 Employment Agreement, dated July 25, 2022, by and between Somerset Savings Bank, SLA and Christopher J. Pribula (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 10.3 Employment Agreement, dated July 25, 2022, by and between Somerset Savings Bank, SLA and David Orbach (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 10.4 Somerset Savings Bank Supplemental Executive Retirement Plan (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 10.5 Somerset Savings Bank, SLA Deferred Compensation Plan (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-270489) as initially filed on March 13, 2023) 21.0 Subsidiaries* 23.0 Consent of Baker Tilly US, LLP* 31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1* Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) * Filed herewith. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . SR Bancorp, Inc. Date: September 28, 2023 By: /s/ William P. Taylor William P. Taylor Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ William P. Taylor Director and Chief Executive Officer (Principal Executive Officer) September 28, 2023 William P. Taylor /s/ Harris M. Faqueri Chief Financial Officer (Principal Financial and Accounting Officer) September 28, 2023 Harris M. Faqueri /s/ Christopher J. Pribula Director, President and Chief Operating Officer September 28, 2023 Christopher J. Pribula /s/ David M. Orbach Director (Executive Chairman) September 28, 2023 David M. Orbach /s/ Douglas M. Sonier Director September 28, 2023 Douglas M. Sonier /s/ John W. Mooney Director September 28, 2023 John W. Mooney /s/ James R. Silkensen Director September 28, 2023 James R. Silkensen /s/ Mary E. Davey Director September 28, 2023 Mary E. Davey /s/ Thomas Lupo Director September 28, 2023 Thomas Lupo /s/ Marc Lebovitz Director September 28, 2023 Marc Lebovitz 63 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Consolidated Statements of Financial Condition as of June 30, 2023 and 2022 F- 3 Consolidated Statements of Income for the years ended June 30, 2023 and 2022 F- 4 Consolidated Statements of Comprehensive Income (Loss) for the years ended June 30, 2023 and 2022 F- 5 Consolidated Statements of Changes in Equity for the years ended June 30, 2023 and 2022 F- 6 Consolidated Statements of Cash Flows for the years ended June 30, 2023 and 2022 F- 7 Notes to Consolidated Financial Statements. F- 8 F- 1 REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM To the stakeholders and the Board of Directors of Somerset Savings Bank, S.L.A. and Subsidiaries: Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Somerset Savings Bank, S.L.A. and Subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Baker Tilly US, LLP We have not been able to determine the specific year that we began serving as the Company’s auditor; however, we are aware that we have served as the Company’s auditor since at least 1994. Iselin, New Jersey September 28, 2023 F- 2 Somerset Savings Bank, SLA and Subsidiaries Consolidated Statements of Financial Condition June 30, 2023 and 2022 (Dollars in thousands) June 30, 2023 2022 Assets Cash and due from banks $ 8,657 $ 7,557 Interest-bearing deposits at other banks 33,792 27,787 Total cash and cash equivalents 42,449 35,344 Securities available-for-sale, at fair value 36,076 47,857 Securities held-to-maturity 171,185 192,903 Equity securities, at fair value 24 19 Loans receivable, net of allowance for loan losses of $ 1,116 and $ 1,116 , respectively 362,252 334,558 Premises and equipment, net 3,546 3,443 Right-of-use-asset 19 — Restricted equity securities, at cost 726 702 Accrued interest receivable 1,189 1,068 Bank owned life insurance 28,714 28,056 Other assets 5,306 4,681 Total assets $ 651,486 $ 648,631 Liabilities and Equity Liabilities Deposits: Noninterest-bearing $ 40,687 $ 43,722 Interest-bearing 463,230 478,350 Total deposits 503,917 522,072 Borrowings 20,000 — Advance payments by borrowers for taxes and insurance 4,313 4,068 Lease liability 19 — Other liabilities 1,153 4,260 Total liabilities 529,402 530,400 Equity Retained earnings 127,099 125,546 Accumulated other comprehensive loss ( 5,015 ) ( 7,315 ) Total equity 122,084 118,231 Total liabilities and equity $ 651,486 $ 648,631 The accompanying notes are an integral part of these consolidated financial statements. F- 3 Somerset Savings Bank, SLA and Subsidiaries Consolidated Statem ents of Income For the Years Ended June 30, 2023 and 2022 (Dollars in thousands) Year Ended June 30, 2023 2022 Interest Income Loans, including fees $ 11,317 $ 9,302 Securities, taxable 3,680 4,003 Interest bearing deposits at other banks 1,122 127 Total interest income 16,119 13,432 Interest Expense Deposits: Demand 96 88 Savings and time 2,087 1,447 Borrowings 245 — Total interest expense 2,428 1,535 Net Interest Income 13,691 11,897 Provision for Loan Losses — — Net Interest Income After Provision For Loan Losses 13,691 11,897 Noninterest Income Service charges and fees 667 688 Increase in cash surrender value of bank owned life insurance 658 622 Fees and service charges on loans 21 21 Unrealized gain (loss) on equity securities 5 ( 8 ) Realized (loss) gain on sale of securities ( 119 ) — Other 33 28 Total noninterest income 1,265 1,351 Noninterest Expense Salaries and employee benefits 7,787 6,365 Occupancy 728 710 Furniture and equipment 1,777 1,737 Advertising 198 266 FDIC premiums 182 151 Directors fees 327 297 Professional fees 1,029 412 Insurance 165 168 Telephone, postage and supplies 316 323 Other 644 585 Total noninterest expense 13,153 11,014 Income Before Income Tax Expense 1,803 2,234 Income Tax Expense 250 363 Net Income $ 1,553 $ 1,871 The accompanying notes are an integral part of these consolidated financial statements. F- 4 Somerset Savings Bank, SLA and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) For the Years Ended June 30, 2023 and 2022 (Dollars in thousands) Year Ended June 30, 2023 2022 Net Income $ 1,553 $ 1,871 Other Comprehensive Income (Loss) Unrealized (losses) gains on securities available-for-sale, net of income tax (benefit) expense of $( 344 ) and $( 1,353 ), respectively (1) ( 973 ) ( 3,865 ) Change in defined pension plan for unrealized actuarial gains (losses) net of income tax expense (benefit) of $ 1,280 and $( 561 ), respectively (2) 3,273 ( 1,718 ) Total other comprehensive income (loss) 2,300 ( 5,583 ) Total comprehensive income (loss) $ 3,853 $ ( 3,712 ) (1) Income tax amounts on unrealized holding (losses) gains on securities available-for-sale are included in the net deferred tax asset described in Note 9. (2) Income tax amounts on the change in the defined benefit pension plan for unrealized actuarial gains (losses) are included in the net deferred tax asset described in Note 9. F- 5 Somerset Savings Bank, SLA and Subsidiaries Consolidated Statements of Changes in Equity For the Years Ended June 30, 2023 and 2022 (Dollars in thousands) Retained Earnings Accumulated Other Comprehensive Loss Total Balance, July 1, 2021 $ 123,675 $ ( 1,732 ) $ 121,943 Net income 1,871 — 1,871 Other comprehensive loss, net of tax — ( 5,583 ) ( 5,583 ) Balance, June 30, 2022 $ 125,546 $ ( 7,315 ) $ 118,231 Net income 1,553 — 1,553 Other comprehensive loss, net of tax — 2,300 2,300 Balance, June 30, 2023 $ 127,099 $ ( 5,015 ) $ 122,084 F- 6 Somerset Savings Bank, SLA and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended June 30, 2023 and 2022 (Dollars in thousands) Year Ended June 30, 2023 2022 Cash Flows from Operating Activities Net income $ 1,553 $ 1,871 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses — — Depreciation 413 395 Deferred income tax (benefit) expense ( 366 ) 264 Net amortization of premiums and discounts on securities 567 687 Net amortization of deferred loan fees, costs and discounts 568 434 Increase in cash surrender value of bank owned life insurance ( 658 ) ( 622 ) Unrealized (gain) loss on equity securities ( 5 ) 8 Gain on sale of securities, net 119 — Loss on sale of loans, net ( 1 ) — (Increase) decrease in: Accrued interest receivable ( 121 ) ( 29 ) Other assets ( 1,195 ) ( 218 ) Other liabilities 1,464 ( 1,755 ) Amortization of right-of-use asset ( 19 ) — Net cash provided by operating activities 2,319 1,035 Cash Flows from Investing Activities Proceeds from maturities and principal repayments of securities available-for-sale 9,974 13,705 Purchase of securities held-to-maturity ( 894 ) ( 34,911 ) Purchase of securities available-for-sale — ( 19,875 ) Proceeds from maturities and principal repayments of securities held-to-maturity 18,048 34,766 Proceeds from sale of securities available-for-sale 451 — Proceeds from sale of securities held-to-maturity 3,918 — Net increase in loans receivable ( 28,261 ) ( 28,194 ) Purchase of premises and equipment ( 516 ) ( 327 ) Purchase of restricted equity securities ( 24 ) ( 67 ) Net cash provided by (used in) investing activities 2,696 ( 34,903 ) Cash Flows from Financing Activities Proceeds from borrowings 20,000 — Net (decrease) increase in interest bearing deposits ( 15,120 ) 8,002 Net (decrease) increase in non-interest bearing deposits ( 3,035 ) 4,077 Net increase in advance payments by borrowers for taxes and insurance 245 382 Net cash provided by financing activities 2,090 12,461 Net increase (decrease) in cash and cash equivalents 7,105 ( 21,407 ) Cash and Cash Equivalents, Beginning of Period 35,344 56,751 Cash and Cash Equivalents, End of Period $ 42,449 $ 35,344 Supplementary Cash Flow Information Interest paid $ 2,428 $ 1,535 Income taxes paid $ 0 $ 370 F- 7 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements June 30, 2023 and 2022 (Dollars in thousands) 1. Summary of Significant Accounting Policies Business Somerset Savings Bank, SLA has been serving the communities of Somerset, Middlesex, Hunterdon and Essex counties in New Jersey since 1887. The bank is a New Jersey chartered savings bank subject to the laws and regulations of federal and state agencies. A locally managed community bank, Somerset Savings Bank, SLA provides customary retail and commercial banking services to individuals, businesses and local municipalities through its 7 full-service branch locations. Principles of Consolidation The consolidated financial statements include the accounts of Somerset Savings Bank, SLA and its wholly owned subsidiaries Somerset Investment Co. (the “Investment Co.”) and Somerset Consumer Service Corp. (“SCS”) (collectively, the “Savings Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. The Investment Co. is a special purpose entity subject to the investment company provisions of the New Jersey Corporation Business Tax Act whose activities are limited to holding investment securities and recognizing income and other gains/losses thereon. SCS has had limited activity. Basis of Presentation and Use of Estimates The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Prior period amounts have been reclassified when necessary to conform to the current year’s presentation. Such reclassifications did not have a material impact on the operating results or financial position of the Savings Bank. Material estimates that are particularly susceptible to significant changes relate to the identification of other-than-temporary impairment on securities, the allowance for loan losses and the valuation of deferred tax assets. Management believes that the evaluations of other-than-temporary impairment on securities, the allowance for loan losses and the valuation of deferred tax assets are adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area. Concentrations of Credit Risk The Savings Bank’s lending activity is concentrated in loans secured by real estate located primarily in the State of New Jersey. Credit risk exposure in this area of lending are mitigated by adhering to conservative underwriting practices and policies, and close monitoring of the loan portfolio. Residential mortgage loans originated with a loan-to-value ratio in excess of 80 % are generally insured by private mortgage insurance. The Savings Bank does not have any significant concentrations to any one industry or customer. Notes 2 and 3 discuss the types of investment securities in which the Savings Bank invests. Credit risk as it relates to investment activities is mitigated through the monitoring of ratings and the purchase of government sponsored agency securities, backed by the full faith and credit of the United States. The Savings Bank maintains accounts with other financial institutions with balances in excess of federal deposit insurance limits. The Savings Bank has not experienced any loss in such accounts and management believes that these accounts do not expose the Savings Bank to any significant credit risk. F- 8 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks and interest-earning deposits in other banks with original maturities of three months or less. The Savings Bank maintains accounts at other financial institutions with balances in excess of federal deposit insurance limits. The Savings Bank has not experienced any loss in such accounts. Securities Investments in debt securities that the Savings Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities or as held-to-maturity securities are classified as available for-sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the accumulated other comprehensive income/loss component of equity. Premiums/discounts on all securities are amortized/accreted to maturity by use of the level yield method. Gain or loss on sales of securities is based on the specific identification method. Equity securities with readily determinable fair values are measured at fair value. Any realized or unrealized gains or losses are recognized in earnings. Dividends are included in interest income. Individual securities are considered impaired when fair value is less than amortized cost. On a quarterly basis, management evaluates all securities with unrealized losses to determine if such impairments are “temporary” or “other than temporary” in accordance with applicable accounting guidance. As part of its evaluation, management considers many factors including, but not limited to, (1) the length of time and extent of impairment, (2) any adverse industry or macroeconomic conditions, (3) any changes to the financial condition or credit worthiness of the issuer, and (4) whether the Savings Bank has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. Accordingly, the Savings Bank accounts for temporary impairments based upon security classification as either trading, available-for-sale or held-to-maturity. Temporary impairments on “available-for-sale” securities are recognized, on a tax-effected basis, through other comprehensive income/loss with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Temporary impairments of “held-to-maturity” securities are not recognized in the consolidated financial statements; however, information concerning the amount and duration of impairments on held-to-maturity securities is disclosed in the notes to the consolidated financial statements. Other-than-temporary impairments on securities that the Savings Bank has decided to sell or will more likely than not be required to sell prior to the full recovery of their fair value to a level equal to or exceeding amortized cost are recognized in earnings. Otherwise, the other-than-temporary impairment is bifurcated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows expected to be collected on a debt security falls below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. Credit-related other-than-temporary impairments are recognized in earnings while noncredit-related other-than-temporary impairments are recognized, net of deferred income taxes, in other comprehensive income/loss. Loans Receivable Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs. Interest income is accrued on the unpaid principal balance and credited to income. Loan origination fees and costs are deferred and recognized over the life of the loans as an adjustment to yield (interest income). Discounts and premiums on purchased loans are amortized to income using the interest method over the expected lives of the loans. F- 9 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The loans receivable portfolio is segmented into two segments, mortgage and consumer. Mortgage loans consist of the following classes: residential and non-residential. Consumer loans consist of the following classes: equity, passbook or certificate and personal. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even when the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Allowance for Loan Losses The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Savings Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of homogeneous loans by loan class, excluding loans classified as impaired. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 1. Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. 2. National, regional, and local economic and business conditions as well as the condition of various market segments. 3. Nature and volume of the portfolio and terms of loans. 4. Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications. 5. Existence and effect of any concentrations of credit and changes in the level of such concentrations. 6. Effect of external factors, such as competition and legal and regulatory requirements. F- 10 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) 7. Value of underlying collateral for collateral dependent loans. 8. The experience, ability, and depth of lending management and other relevant staff. 9. Quality of the institution’s loan review system. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. Mortgage loans are secured by the borrower’s residential or non-residential real estate in a first lien position. Mortgage loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Consumer loans are primarily home equity loans and are generally secured by the borrower’s personal residence in a second lien position. A loan is considered impaired when, based on current information and events, it is probable that the Savings Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis 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. A specific allowance is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Savings Bank’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. A loan is categorized as a troubled debt restructuring (“TDR”) if a concession to contractual terms is granted to the borrower due to deterioration in the financial condition of the borrower. In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. Generally, a nonaccrual loan that is restructured remains on nonaccrual until the obligation is brought current and has performed for a period of time (generally nine months) to demonstrate that the borrower can meet the restructured terms. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. TDRs are considered impaired loans for purposes of calculating the Savings Bank’s allowance for loan loss until they are ultimately repaid in full or foreclosed and sold. F- 11 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated when credit deficiencies arise, such as delinquent loan payments, for residential and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Savings Bank’s allowance for loan losses and may require the Savings Bank to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Routine maintenance and repairs are expensed as incurred, while significant expenditures for improvements are capitalized. Gains or losses upon disposition are reflected in earnings as realized. Bank premises and equipment are reviewed by management for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Leases The lease liability for operating leases is measured and recognized as the present value of all future lease payment obligations. The right-of-use asset for operating leases is measured as the amount of the lease liability, plus any unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received, and any impairment recognized. The discount rate used to compute the lease liability is the implicit rate in the lease contract, if readily determinable, or the Savings Bank’s incremental borrowing rate. The implicit rates of our operating leases are not readily determinable, therefore the Savings Bank uses its incremental borrowing rate at the commencement date of each lease. The Savings Bank’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and in a similar economic environment. For all underlying classes of assets, the Company has elected to not recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement. Leases containing termination clauses in which either party may terminate the lease without cause and the notice period is less than 12 months are deemed short-term leases. The Savings Bank recognizes short-term lease costs on a straight-line basis over the lease term. Restricted Equity Securities Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district bank according to a predetermined formula. The restricted stock is carried at cost. At June 30, 2023 and 2022 , the Savings Bank held $ 726 and $ 702 , respectively, in stock of the FHLB of New York. F- 12 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Management evaluates the stock for impairment in accordance with guidance on accounting by certain entities that lend or finance the activities of others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the FHLB stock as of June 30, 2023 or 2022 . Bank Owned Life Insurance The Savings Bank invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Savings Bank on a chosen group of employees. The Savings Bank is the owner and beneficiary of the policies. This investment is carried as an asset in the consolidated statement of financial condition at the cash surrender value of the underlying policies. Increases in the cash surrender value of the policies, as well as proceeds, are recorded as income in the consolidated statement of income and are not subject to income tax so long as the policies are held for the life of the covered employees. For any policies surrendered, the death benefits will no longer be tax exempt. Revenue Recognition The Savings Bank earns income from various sources, including loans, investment securities, bank-owned life insurance, deposit accounts, and sales of assets. The revenue is recognized as it is earned and when collectability is reasonably assured. Interest income on loans is accrued on the unpaid principal balance and recorded daily. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment to the related loan yield using the interest method. Other loan fees, including late charges, are recognized as the transactions occur. Interest income on debt securities, including purchase premiums and discounts, is also accrued using the interest method over the term of the securities. Income from dividends on equity securities are recorded when declared. Fees and service charges related to deposit accounts are largely based on contracts with customers that are short-term in nature and where the performance obligations are satisfied as services are rendered. Fees are either fixed at a specific amount or assessed as a percentage of the transaction amount. No judgements or estimates are required by management to determine the amount and timing of the related revenue. Descriptions of the primary revenue contracts included as components of noninterest income are as follows: • Monthly service charges - general service fees for monthly account maintenance. These fees are charged as earned within the monthly statement period that the transactions occurred. • Account fees and charges - activity or transaction-based fees for deposit related services including, but not limited to, account overdraft fees, wire transfer fees and stop payment fees. Fees are received at the time of transaction execution concurrent with the fulfillment of performance obligations. • ATM debit card fees - include interchange fees from debit cardholder transactions or ATM surcharges for non-customer usage of Somerset Savings Bank, SLA ATMs. These fees are recognized as earned at the time of the transaction occurrence. Other income items are transactional in nature and are recorded as they occur. F- 13 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Gains or losses on sales of assets are generally recognized when the asset has been legally transferred to the buyer and the Savings Bank has no continuing involvement with the asset. The Savings Bank does not generally finance the sale of foreclosed assets. Comprehensive Income U.S. GAAP require comprehensive income and its components to be reported when a company presents a full set of financial statements. The term comprehensive income (loss) refers to net income plus other comprehensive income (loss), that is, certain revenues, expenses, gains, and losses that are reported as separate components of equity instead of net income. For the Savings Bank, the primary components of other comprehensive income (loss) are the unrealized gains or losses on available-for-sale investment securities and the unrealized actuarial gains or losses in the defined pension plan. The Savings Bank has elected to report these effects on the consolidated statement of comprehensive income (loss). Advertising Costs Advertising costs are expensed in the period in which they are incurred and recorded as a non-interest expense in the consolidated statement of income. Advertising expense was approximately $ 198 and $ 266 for the years ended June 30, 2023 and 2022 , respectively. Income Taxes Somerset Savings Bank, SLA and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to Somerset Savings Bank, SLA and its subsidiaries based on their respective income or loss included in the consolidated income tax return. Separate state income tax returns are filed by Somerset Savings Bank, SLA and its subsidiaries. Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on Somerset Savings Bank, SLA and subsidiaries’ tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The Savings Bank accounts for income taxes using the asset and liability method in accordance with accounting guidance ASC Topic 740, Income Taxes. Under this guidance, deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset that is not likely to be realized. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. The Savings Bank accounts for uncertainty in income taxes recognized in the consolidated financial statements in accordance with accounting guidance which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Savings Bank’s evaluation, no significant income tax uncertainties were identified. Therefore, the Savings Bank recognized no adjustment for unrecognized tax benefits at June 30, 2023 or 2022. The Savings Bank’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the consolidated statement of income. No interest and penalties were recorded during the years ended June 30, 2023 or 2022 . F- 14 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Retirement Benefits Substantially all employees are covered by a defined benefit pension plan and participate in a 401(k) profit sharing plan. The cost of the pension plan is based on actuarial computations of current and future benefits for employees. It is the Savings Bank’s policy to fund the recommended required contribution determined under the Employee Retirement Income Security Act. The 401(k) profit sharing plan’s annual contribution is determined by matching part of the employee’s contribution. The Savings Bank follows the accounting guidance applicable to a defined benefit pension plan that requires an employer to: (a) recognize in its statement of financial condition an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Accounting Pronouncements Adopted In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. ASU 2014-09 was adopted by the Savings Bank in 2022. The Savings Bank adopted the guidance using the modified retrospective method. The adoption did no t have a significant effect on the Saving Bank’s consolidated financial statements as the recognition of interest income has been scoped out of the guidance and noninterest income recognition is similar to previous revenue recognition practices. The Savings Bank expanded its disclosures with respect to its noninterest income as a result of this guidance. See the “Revenue Recognition” section in Note 1. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the lessee will primarily depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. ASU 2016-02 and all subsequent amendments (collectively, “ASC 842”) required adoption by the Savings Bank on July 1, 2022, though early adoption was permitted. The Savings Bank adopted ASC 842 during the first quarter of the fiscal year ended June 30, 2023. The Savings Bank maintains only one equipment lease with an initial term greater than 12 months and has determined that the impact on its consolidated financial statements is no t material. As of June 30, 2023, the Savings Bank had not entered into any material leases that have not yet commenced. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 was adopted by the Savings Bank on July 1, 2023 . The adoption did no t have a material impact on the Savings Bank's operations, cash flows or capital ratios. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses—Troubled Debt Restructurings and Vintage Disclosures. This standard eliminates the recognition and measurement guidance for troubled debt restructurings (TDRs) by creditors and enhances disclosure requirements for certain loan restructurings when a borrower is experiencing financial difficulty. In addition, the standard requires the disclosure F- 15 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) of gross write-offs by year of origination. ASU No. 2022-02 was adopted by the Savings Bank on July 1, 2023 . The adoption had no impact on the Savings Bank's operations, cash flows or capital ratios. Subsequent Events The Savings Bank has evaluated subsequent events for recognition or disclosure through September 28, 2023, the date the financial statements were available to be issued. Mutual to Stock Conversion. SR Bancorp, Inc. (“SR Bancorp”), a new Maryland corporation, was formed by the Savings Bank to be the holding company of the Savings Bank upon completion of its conversion from the mutual to stock form of organization (the “Conversion”), which occurred on September 19, 2023. In connection with the Conversion, SR Bancorp, Inc. sold 9,055,172 shares of its common stock at a price of $ 10.00 per share, which included 760,364 shares sold to the Somerset Savings Bank Employee Stock Ownership Plan. Additionally, SR Bancorp contributed 452,758 shares and $ 905,517 in cash to the Somerset Regal Charitable Foundation, Inc., a charitable foundation formed in connection with the Conversion. Upon the completion of the conversion and offering, 9,507,930 shares of SR Bancorp, Inc. common stock are outstanding. SR Bancorp’s common stock began trading on the Nasdaq Capital Market under the trading symbol “SRBK” on September 20, 2023. Acquisition. On July 25, 2022 , the Savings Bank and SR Bancorp entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Regal Bancorp, Inc. (“Regal Bancorp”), a New Jersey corporation, and Regal Bank, a New Jersey commercial bank and wholly-owned subsidiary of Regal Bancorp. The Merger Agreement was subsequently amended on March 7, 2023 and July 10, 2023. Pursuant to the Merger Agreement, as amended, promptly following the completion of the Conversion and related stock offering, SRB Interim Corporation, a wholly-owned subsidiary of SR Bancorp formed solely to facilitate the merger, merged with and into Regal Bancorp after which Regal Bancorp merged with and into SR Bancorp, with SR Bancorp as the surviving entity (collectively, the “Merger”). In connection with the Merger, Regal Bancorp shareholders received the right to exchange each of their shares of Regal Bancorp common stock for $ 23.00 in cash. The aggregate cash consideration was approximately $ 69.5 million. Immediately following the Merger, Regal Bank merged with and the Savings Bank, which was converted to a New Jersey commercial bank charter and renamed Somerset Regal Bank. Upon closing of the Merger, three directors of Regal Bancorp became directors of SR Bancorp and Somerset Regal Bank. 2. Securities Available-for-Sale The amortized cost and approximate fair value of securities available-for-sale at June 30, 2023 and June 30, 2022 are as follows: June 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Federal National Mortgage Association $ 22,981 $ — $ ( 2,575 ) $ 20,406 Federal Home Loan Mortgage Corporation 18,003 $ — ( 2,333 ) 15,670 Total securities available-for-sale $ 40,984 $ — $ ( 4,908 ) $ 36,076 F- 16 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) June 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Federal National Mortgage Association $ 29,623 $ — $ ( 1,946 ) $ 27,677 Federal Home Loan Mortgage Corporation 21,825 2 ( 1,647 ) 20,180 Total securities available-for-sale $ 51,448 $ 2 $ ( 3,593 ) $ 47,857 The amortized cost and fair value of debt securities available-for-sale by contractual maturity at June 30, 2023 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities which are based on the estimated average life of the securities. June 30, 2023 Amortized Cost Fair Value Due within 1 year $ — $ — Due after 1 but within 5 years — — Due after 5 but within 10 years — — Due after 10 years — — Mortgage-backed securities 40,984 36,076 Total securities available-for-sale $ 40,984 $ 36,076 The unrealized losses as of June 30, 2023 and 2022, categorized by the length of time of continuous loss position, and the fair value of related available-for-sale are as follows: June 30, 2023 Less than 12 Months More than 12 Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Federal National Mortgage Association $ — $ — $ 20,406 $ ( 2,575 ) $ 20,406 $ ( 2,575 ) Federal Home Loan Mortgage Corporation — — 15,670 ( 2,333 ) 15,670 ( 2,333 ) Total $ — $ — $ 36,076 $ ( 4,908 ) $ 36,076 $ ( 4,908 ) June 30, 2022 Less than 12 Months More than 12 Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Federal National Mortgage Association $ 27,677 $ ( 1,946 ) $ — $ — $ 27,677 $ ( 1,946 ) Federal Home Loan Mortgage Corporation 20,108 ( 1,647 ) — — 20,108 ( 1,647 ) Total $ 47,785 $ ( 3,593 ) $ — $ — $ 47,785 $ ( 3,593 ) All mortgage-backed securities are U.S. Government agency backed and collateralized by residential mortgages. During the year ended June 30, 2023 , gross gains of $ 0 and gross losses of $ 6 resulting from sales of securities available-for-sale were realized. During the year ended June 30, 2022 , there were no sales of securities available-for-sale. F- 17 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) 3. Securities Held-to-Maturity The amortized cost and approximate fair values of securities held-to-maturity at June 30, 2023 and June 30, 2022 are as follows: June 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Federal National Mortgage Association $ 104,612 $ — $ ( 18,459 ) $ 86,153 Federal Home Loan Mortgage Corporation 55,624 101 ( 9,014 ) 46,711 Government National Mortgage Association 332 — ( 9 ) 323 Subordinated Debt 7,750 — ( 1,450 ) 6,300 CMO 2,867 — ( 279 ) 2,588 Total securities held-to-maturity $ 171,185 $ 101 $ ( 29,211 ) $ 142,075 June 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Federal National Mortgage Association $ 119,375 $ 40 $ ( 15,556 ) $ 103,859 Federal Home Loan Mortgage Corporation 61,990 160 ( 7,642 ) 54,508 Government National Mortgage Association 403 1 — 404 Subordinated Debt 7,750 — ( 579 ) 7,171 CMO 3,385 — ( 147 ) 3,238 Total securities held-to-maturity $ 192,903 $ 201 $ ( 23,924 ) $ 169,180 The amortized cost and fair value of securities held-to-maturity by contractual maturity at June 30, 2023 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and CMOs which are based on the estimated average life of the securities. June 30, 2023 Amortized Cost Fair Value Due within 1 year $ — $ — Due after 1 but within 5 years — — Due after 5 but within 10 years 7,750 6,300 Due after 10 years — — Mortgage-backed securities 163,435 135,775 Total securities held-to-maturity $ 171,185 $ 142,075 F- 18 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The unrealized losses as of June 30, 2023 and June 30, 2022, categorized by the length of time of continuous loss position, and the fair value of related securities held-to-maturity are as follows: June 30, 2023 Less than 12 Months More than 12 Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Federal National Mortgage Association $ 1,480 $ ( 7 ) $ 84,673 $ ( 18,452 ) $ 86,153 $ ( 18,459 ) Federal Home Loan Mortgage Corporation 21,016 ( 3,917 ) 24,885 ( 5,097 ) 45,901 ( 9,014 ) Government National Mortgage Association 322 ( 9 ) — — 322 ( 9 ) Subordinated Debt — — 6,300 ( 1,450 ) 6,300 ( 1,450 ) CMO — — 2,588 ( 279 ) 2,588 ( 279 ) Total $ 22,818 $ ( 3,933 ) $ 118,446 $ ( 25,278 ) $ 141,264 $ ( 29,211 ) 2022 Less than 12 Months More than 12 Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Federal National Mortgage Association $ 38,707 $ ( 4,879 ) $ 60,895 $ ( 10,677 ) $ 99,602 $ ( 15,556 ) Federal Home Loan Mortgage Corporation 14,597 ( 1,758 ) 38,727 ( 5,884 ) 53,324 ( 7,642 ) Subordinated Debt 7,171 ( 579 ) — — 7,171 ( 579 ) CMO 3,238 ( 147 ) — — 3,238 ( 147 ) Total $ 63,713 $ ( 7,363 ) $ 99,622 $ ( 16,561 ) $ 163,335 $ ( 23,924 ) At June 30, 2023 and 2022 , the Savings Bank had $ 24 and $ 19 , respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities for the years ended June 30, 2023 and 2022: June 30, 2023 June 30, 2022 Net gains (losses) recognized equity securities $ 5 $ ( 8 ) Less: Net gains (losses) recognized on equity securities sold/acquired — — Net unrealized gains (losses) recognized on equity securities $ 5 $ ( 8 ) Management does not believe that the unrealized losses represent an other-than-temporary impairment and believes these unrealized losses (which are related to four mortgage-backed securities issued by the Federal National Mortgage Association) are the result of market rates and not related to the underlying credit quality of the issuer of the securities. The Savings Bank does not intend to sell these securities and it is not more-likely-than-not that the Savings Bank would be required to sell these securities prior to full recovery of fair value to a level which equals or exceeds amortized cost. At June 30, 2023 and 2022 , a mortgage-backed security with a carrying value of approximately $ 1 and $ 3 were pledged as collateral to secure public funds on deposit, respectively. At June 30, 2023 , mortgage-backed securities with a total carrying value of $ 32,652 was pledged as collateral to secure a $ 20,000 advance under the Federal Reserve’s Bank Term Funding Program. F- 19 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) During the year ended June 30, 2023 , gross gains of $ 4 and gross losses of $ 117 resulting from sales of securities held-to-maturity were realized. During the year ended June 30, 2022 , there were no sales of securities held-to-maturity. 4. Loans Receivable Loans at June 30, 2023 and 2022 are summarized as follows: June 30, 2023 June 30, 2022 Mortgage loans: Residential $ 353,634 $ 325,722 Non-residential 440 459 Total mortgage 354,074 326,181 Consumer: Equity 7,343 7,542 Passbook or certificate and personal 6 1 Total consumer 7,349 7,543 Total loans 361,423 333,724 Allowance for loan losses ( 1,116 ) ( 1,116 ) Deferred loan fees, net 1,945 1,950 Loans receivable, net $ 362,252 $ 334,558 The Savings Bank engages primarily in the lending of residential real estate and consumer loans. Lending activities are targeted to individuals within the Savings Bank’s geographic footprint. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral. The Savings Bank engages primarily in the lending of fixed-rate and adjustable-rate real estate residential mortgage loans. Lending activities are targeted to individuals within the Savings Bank’s geographic footprint. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and conservative underwriting standards that emphasize conservative loan-to-value ratios of generally no more than 80 %. Residential mortgage loans granted in excess of the 80 % loan-to-value ratio criterion are generally insured by private mortgage insurance. The real estate home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with second lien loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Management reviews all loans that are delinquent 90-days or more for possible impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Savings Bank will be unable to collect the scheduled payments of principal or interest in accordance with the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the likelihood of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration the unique facts and circumstances surrounding the loan and borrower, including the borrower’s payment history, the reasons for the delay and the amount of the shortfall in relation to the principal and interest owed. F- 20 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The following tables summarize the activity in the allowance for loan losses by loan class for the years ended June 30, 2023 and 2022, and information in regards to the allowance for loan losses and the recorded investment in loans receivable by loan class as of June 30, 2023 and 2022: June 30, 2023 Residential Non-Residential Equity Passbook, Certificate or Personal Total Allowance for Loan Losses: Beginning balance $ 1,036 $ 5 $ 75 $ — $ 1,116 Charge-offs — — — — — Recoveries — — — — — Provisions (credits) 3 ( 1 ) ( 2 ) — — Ending balance $ 1,039 $ 4 $ 73 $ — $ 1,116 Ending balance, Individually evaluated for impairment $ — $ — $ — $ — $ — Ending balance, Collectively evaluated for impairment $ 1,039 $ 4 $ 73 $ — $ 1,116 Loans Receivable: Ending balance $ 353,634 $ 440 $ 7,343 $ 6 $ 361,423 Ending balance, Individually evaluated for impairment $ 145 $ — $ — $ — $ 145 Ending balance, Collectively evaluated for impairment $ 353,489 $ 440 $ 7,343 $ 6 $ 361,278 June 30, 2022 Residential Non-Residential Equity Passbook, Certificate or Personal Total Allowance for Loan Losses: Beginning balance $ 1,036 $ 5 $ 75 $ — $ 1,116 Charge-offs — — — — — Recoveries — — — — — Provisions — — — — — Ending balance $ 1,036 $ 5 $ 75 $ — $ 1,116 Ending balance, Individually evaluated for impairment $ — $ — $ — $ — $ — Ending balance, Collectively evaluated for impairment $ 1,036 $ 5 $ 75 $ — $ 1,116 Loans Receivable: Ending balance $ 325,722 $ 459 $ 7,542 $ 1 $ 333,724 Ending balance, Individually evaluated for impairment $ — $ — $ — $ — $ — Ending balance, Collectively evaluated for impairment $ 325,722 $ 459 $ 7,542 $ 1 $ 333,724 F- 21 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Savings Bank’s internal risk rating system as of June 30, 2023 and 2022: June 30, 2023 Pass Special Mention Substandard Doubtful Total Residential $ 353,489 $ — $ 145 $ — $ 353,634 Non-residential 440 — — — 440 Equity 7,343 — — — 7,343 Passbook, certificate or personal 6 — — — 6 Total $ 361,278 $ — $ 145 $ — $ 361,423 June 30, 2022 Pass Special Mention Substandard Doubtful Total Residential $ 325,722 $ — $ — $ — $ 325,722 Non-residential 459 — — — 459 Equity 7,542 — — — 7,542 Passbook, certificate or personal 1 — — — 1 Total $ 333,724 $ — $ — $ — $ 333,724 The following tables provide a breakdown of impaired loans by loan portfolio class as of June 30, 2023 and 2022: June 30, 2023 Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Residential $ 145 $ 145 $ — $ 114 $ — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total 145 145 — 114 — With an allowance recorded: Residential $ — $ — $ — $ — $ — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total — — — — — Total: Residential $ 145 $ 145 $ — $ 114 $ — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total $ 145 $ 145 $ — $ 114 $ — F- 22 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) June 30, 2022 Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Residential $ — $ — $ — $ — $ — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total — — — — — With an allowance recorded: Residential — — — — — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total — — — — — Total: Residential — — — — — Non-residential — — — — — Equity — — — — — Passbook, certificate or personal — — — — — Total $ — $ — $ — $ — $ — The following tables present the classes of loans summarized by the past due status as of June 30, 2023 and 2022: June 30, 2023 Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Loans >90 Days and Accruing Non- Accrual Residential $ 353,051 $ 383 $ — $ 200 $ 353,634 $ — $ 145 Non-residential 440 — — — 440 — — Equity 7,343 — — — 7,343 — — Passbook, certificate or personal 6 — — — 6 — — Total $ 360,840 $ 383 $ — $ 200 $ 361,423 $ — $ 145 June 30, 2022 Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Loans >90 Days and Accruing Non- Accrual Residential $ 325,443 $ 279 $ — $ — $ 325,722 $ — $ — Non-residential 459 — — — 459 — — Equity 7,542 — — — 7,542 — — Passbook, certificate or personal 1 — — — 1 — — Total $ 333,445 $ 279 $ — $ — $ 333,724 $ — $ — If nonaccrual loans had performed in accordance with their contractual terms, the Savings Bank would have recognized additional income of $ 3 and $ 0 on these loans during the years ended June 30, 2023 and 2022, respectively. F- 23 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The Savings Bank may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a TDR. The Savings Bank may modify loans through rate reductions, extensions of maturity, interest only payments or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are generally considered impaired loans for purposes of calculating the Savings Bank’s allowance for loan losses. The Savings Bank identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. As of and for the years ended June 30, 2023 and 2022 , the Savings Bank had no troubled debt restructurings outstanding and/or granted. As of and for the years ended June 30, 2023 and 2022 , the Savings Bank had no foreclosed real estate owned. 5. Premises and Equipment Premises and equipment at June 30, 2023 and June 30, 2022 are summarized as follows: June 30, 2023 June 30, 2022 Land $ 926 $ 926 Buildings and improvements 7,796 7,498 Accumulated depreciation ( 5,712 ) ( 5,483 ) Net 2,084 2,015 Furnishings and equipment 4,608 4,390 Accumulated depreciation ( 4,072 ) ( 3,888 ) Net 536 502 Total $ 3,546 $ 3,443 Depreciation expense amounted to $ 413 and $ 395 for the years ended June 30, 2023 and 2022 , respectively. 6. Deposits Deposits at June 30, 2023 and 2022 consisted of the following: June 30, 2023 June 30, 2022 Demand accounts: Interest-bearing $ 137,496 $ 146,408 Noninterest-bearing 40,687 43,722 Total demand accounts 178,183 190,130 Savings and club 166,253 188,115 Certificates of deposit 159,481 143,827 Total $ 503,917 $ 522,072 Certificates of deposit with balances in excess of the FDIC insurance limit of $250 at June 30, 2023 and June 30, 2022 amounted to approximately $ 13,433 and $ 10,625 , respectively. F- 24 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Scheduled maturities of certificates of deposit are as follows: 2023 2024 $ 138,404 2025 12,380 2026 2,765 2027 4,069 2028 1,863 Total $ 159,481 7. Borrowings At June 30, 2023 and June 30, 2022 , there were no borrowings from the FHLB-NY. At June 30, 2023 and June 30, 2022, the Savings Bank could borrow overnight funds from the FHLB-NY under a redesigned overnight advance program up to the Savings Bank’s maximum borrowing capacity based on the Savings Bank’s ability to collateralize such borrowings. At June 30, 2023 , the Savings Bank’s maximum borrowing capacity was $ 100,000 . At June 30, 2023 and June 30, 2022 , the Savings Bank’s Board of Directors has authorized borrowings of up to $ 25,000 from the Federal Reserve Bank of New York (“FRB-NY”). All borrowings are secured by pledges of the Savings Bank’s qualifying loan portfolio and are generally on overnight terms with an interest rate quoted at the time of the borrowing. In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) to make available funding to eligible depository institutions in order to help assure they have the ability to meet the needs of their depositors following the recent events in the banking industry. The program allows for advances for up to one year secured by eligible high-quality securities at par value extended at the one-year overnight index swap (“OIS”) rate, plus 10 basis points, as of the day the advance is made. The interest rate is fixed for the term of the advance and there are no prepayment penalties. At June 30, 2023 , the Savings Bank had outstanding borrowings of $ 20,000 under the BTFP at a borrowing rate of 4.76 % with a maturity date of March 29, 2024 . F- 25 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) 8. Benefit Plans Retirement Plan The Savings Bank has a non-contributory pension plan covering all eligible employees. The plan is a defined benefit plan that provides benefits based on a participant’s years of service and overall annual compensation. The following tables set forth the plan’s funded status and components of net periodic pension: Year Ended June 30, 2023 Year Ended June 30, 2022 Change in benefit obligation: Obligation, beginning $ 19,066 $ 20,339 Service cost 331 476 Interest cost 704 435 Actuarial (gain) loss ( 2,063 ) ( 1,675 ) Benefit payments ( 965 ) ( 509 ) Curtailments ( 2,070 ) — Obligation, ending $ 15,003 $ 19,066 Change in plan assets: Fair value of plan assets, beginning $ 16,395 $ 18,120 Actual gain (loss) on plan assets 709 ( 3,416 ) Employer contributions — 2,200 Benefit payments ( 965 ) ( 509 ) Fair value of plan assets, ending $ 16,139 $ 16,395 Funded status, Accumulated benefit obligation $ 15,003 $ 16,411 Projected benefit obligation $ ( 15,003 ) $ ( 19,066 ) Fair value of assets 16,139 16,395 Funded status and prepaid pension cost included in other liabilities $ 1,136 $ ( 2,671 ) Assumptions used to determine benefit obligation: Discount rate 4.81 % 4.18 % Rate of increase in compensation n/a 4.75 % The Company's mortality rate assumptions use the projected mortality improvement scale, Mortality Projection-2021 , as published by the Society of Actuaries. The components of the pension and post-retirement net periodic benefit cost for the periods indicated are provided in the table below: F- 26 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Year Ended June 30, 2023 Year Ended June 30, 2022 Net periodic pension cost included the following: Service cost $ 331 $ 476 Interest cost 704 435 Expected return on plan assets ( 864 ) ( 964 ) Net amortization 574 426 Net periodic pension cost included in salaries and employee benefits $ 745 $ 373 Assumptions used to determine net periodic pension cost: Discount rate 4.81 % 4.18 % Rate of increase in compensation n/a 4.75 % Rate of return on plan assets 6.50 % 5.75 % For the years ended June 30, 2023 and 2022 , the plan’s assets realized an annual return of approximately - 24 % and - 24 %, respectively. The weighted-average allocation by asset category is as follows: June 30, 2023 June 30, 2022 Cash and equivalents 1 % 5 % Fixed income securities and mutual funds 53 53 Equity securities and mutual funds 46 42 100 % 100 % The fair values of the Savings Bank’s pension plan assets at June 30, 2023 and June 30, 2022, by asset category (see Note 12 for the definitions of levels), are as follows: Assets at Fair Value as of June 30, 2023 Asset Category (Level 1) (Level 2) (Level 3) Fair Value Cash $ 164 $ — $ — $ 164 Equity securities 501 — — 501 Mutual funds - fixed income 6,923 — — 6,923 Mutual funds - equity 8,551 — — 8,551 Total $ 16,139 $ — $ — $ 16,139 Assets at Fair Value as of June 30, 2022 Asset Category (Level 1) (Level 2) (Level 3) Fair Value Cash $ 884 $ — $ — $ 884 Equity securities 3,035 — — 3,035 Mutual funds - fixed income 8,608 — — 8,608 Mutual funds - equity 3,868 — — 3,868 Total $ 16,395 $ — $ — $ 16,395 F- 27 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The Savings Bank does not expect to contribute to the pension plan during the year ending June 30, 2023. Benefit payments, which reflect expected future service, are expected to be paid as follows: Year ending June 30: 2024 $ 4,394 2025 1,580 2026 773 2027 978 2028 952 Thereafter 4,633 $ 13,310 As of June 30, 2023 and June 30, 2022 , unrecognized net loss of $ 1,920 and $ 6,472 , respectively, was included in accumulated other comprehensive income. For the year ending June 30, 2023 , approximately $ 745 of the net loss is expected to be recognized as a component of net periodic pension cost. Savings and Investment Plan The Savings Bank has a savings and investment plan, pursuant to Section 401(k) of the Internal Revenue Code, for all eligible employees. Under this plan, employees may make voluntary contributions in an amount equal to not less than 2 % of their eligible compensation during a plan year. In addition, the Savings Bank will make contributions equal to 3 % of the plan year compensation for all eligible employees. The Savings Bank, at its discretion, may make an additional matching contribution to those participants employed at each plan year end. Plan contributions approximated $ 124 and $ 119 for the years ended June 30, 2023 and 2022 , respectively. No additional matching contributions were made during the years ended June 30, 2023 and June 30, 2022. Deferred Compensation The Savings Bank has deferred compensation plans for directors and certain officers that permit the deferral of director fees and officer compensation. Amounts deferred earn interest at rates comparable to rates the Savings Bank pays on deposit accounts. At June 30, 2023 and June 30, 2022 , liabilities under the plans totaled approximately $ 993 and $ 754 , respectively. Interest expense approximated $ 38 and $ 8 for the years ended June 30, 2023 and 2022 , respectively. 9. Income Taxes The Savings Bank qualifies as a Savings Institution under the provisions of the Internal Revenue Code and, therefore, prior to January 1, 1996, was permitted to calculate its bad debt deduction using either the experience method or the specific charge off method. Retained earnings at June 30, 2023 and June 30, 2022 included approximately $ 5,300 of such bad debt allowance for which federal income taxes have not been provided. After January 1, 1996, the Savings Bank was only permitted to deduct actual charge offs. If such amount is used for purposes other than for bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate. F- 28 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The components of income tax expense are as follows for years ended June 30, 2023 and June 30, 2022: Year Ended June 30, 2023 Year Ended June 30, 2022 Current tax expense (benefit): Federal income $ 541 $ 37 State income 75 62 Total current 616 99 Deferred tax (benefit) expense: Federal income ( 226 ) 289 State income ( 140 ) ( 25 ) Total deferred ( 366 ) 264 Total $ 250 $ 363 The following table presents a reconciliation between the effective income tax expense and the income tax expense which would be computed by applying the federal statutory tax rate of 21 % for the years ended June 30, 2023 and June 30, 2022: Year Ended June 30, 2023 Year Ended June 30, 2022 Federal income tax, at the statutory rate $ 379 $ 469 Increases (decreases) in taxes resulting from: New Jersey state tax, net of federal income tax effect ( 81 ) 37 Bank owned life insurance ( 137 ) ( 131 ) Other items, net 89 ( 12 ) Effective income tax expense $ 250 $ 363 F- 29 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) The tax effects of existing temporary differences that give rise to deferred income tax assets and liabilities are as follows: June 30, 2023 June 30, 2022 Deferred tax assets: Deferred compensation $ 293 $ 226 Unrecognized pension losses 540 1,819 Deferred loan fees 13 14 Allowance for loan loss 314 314 Unrealized loss on securities available-for-sale 1,272 929 Compensation 93 74 Depreciation 234 192 State net operating loss 210 206 Charitable contributions 26 19 Uncollected interest 1 3 Total deferred tax assets 2,996 3,796 Deferred tax liabilities: Prepaid pension 859 1,068 Deferred loan costs 178 200 Unrealized gain on securities available-for-sale — — Other 1 — Total deferred tax liabilities 1,038 1,268 Net deferred income tax asset included in other assets $ 1,958 $ 2,528 A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of such deferred tax items is reduced by the amount that is more likely than not to be realized based on available evidence. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards become deductible. A valuation allowance is recorded for tax benefits which management has determined are not more likely than not to be realized. At June 30, 2023 and June 30, 2022 , there was no valuation allowance. A corporation may carry forward net operating losses to the succeeding 20 taxable years for New Jersey state tax purposes. As of June 30, 2023 , the Savings Bank had total state net operating loss carryforwards of $ 2,950 . Based upon projections of future taxable income and the ability to carry forward net operating losses, management believes it is more likely than not the Savings Bank will realize the remaining deferred tax asset. 10. Commitments and Contingencies The Savings Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The Savings Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Savings Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. F- 30 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) At June 30, 2023, total unfunded loan related commitments, including lines of credit, amounted to $ 30,461 , including $ 23,735 for unused equity lines of credit and $ 6,726 to originate and purchase loans, expiring within three months . At June 30, 2022, total unfunded loan related commitments, including lines of credit, amounted to $ 28,904 , including $ 23,718 for unused equity lines of credit and $ 5,186 to originate and purchase loans, expiring within three months . Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Savings Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Savings Bank upon extension of credit is based on management’s credit evaluation of the counterparty. 11. Regulatory Capital The Savings Bank is subject to regulatory capital requirements administered by federal banking agencies. Failure to meet 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. The capital amounts and classifications 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 maintenance of minimum amounts and ratios (set forth in the following table) of total capital, Tier 1 capital (as defined in the regulations) and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. A capital conservation buffer of 2.50 %, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements and must be maintained to avoid limitations on capital distributions. In 2021, the Savings Bank adopted the new community bank leverage ratio framework. This framework simplifies the regulatory capital requirements by requiring the Savings Bank to meet only the Tier 1 capital to average assets (leverage) ratio. The Savings Bank must only maintain a leverage ratio greater than the 9 % required minimum to be considered well capitalized under this framework. The Savings Bank can opt out of the new framework and return to the risk-weighting framework at any time. F- 31 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Market risk, credit risk, operational risk and deposits are some of the factors that can impact the capital adequacy ratio and in turn, adversely affect the performance of the Savings Bank. As of June 30, 2023, management believes that the Savings Bank meets all capital adequacy requirements to which they are subject. As of June 30, 2023 , the most recent notification from the Federal Deposit Insurance Corporation categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Savings Bank’s category. The Bank’s actual capital amounts and ratios are as follows: Actual To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio (Dollars in thousands) June 30, 2023: Tier 1 capital (to average total assets) $ 127,099 19.61 % $ 58,326 9.00 % June 30, 2022: Tier 1 capital (to average total assets) $ 125,546 19.36 % $ 58,354 9.00 % 12. Related-Party Transactions In the ordinary course of business, the Savings Bank has engaged, and continues to engage, in banking transactions with its directors, officers and their related parties. At June 30, 2023 , the Savings Bank had $ 532 in outstanding loans to directors, officers and their related parties. June 30, 2023 June 30, 2022 Balance, beginning of period $ 495 $ 460 Additions, new loans and advances 187 102 Repayments ( 150 ) ( 67 ) Balance, end of period $ 532 $ 495 Deposits from directors, officers and their related parties held by the Savings Bank at June 30, 2023 and June 30, 2022 amounted to $ 829 and $ 798 , respectively. 13. Fair Value Measurements and Disclosures The Savings Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Savings Bank’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Savings Bank may be required to record at fair value other assets or liabilities on a non-recurring basis. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets. FASB ASC 820, Fair Value Measurements and Disclosures , defines fair value as an exit price representing the amount that would be received to sell an asset or settle a liability in an orderly transaction between market participants. A three-level hierarchy has been established for fair value measurements based upon the inputs to the valuation of an asset or liability. Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities; F- 32 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Level 2 - Valuation is determined from quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 - Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that a market participant would use to value the asset or liability. The Savings Banks’ available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss. The securities available-for-sale portfolio consists of U.S. government-sponsored enterprise and mortgage-backed securities. The fair values of these securities were obtained from an independent nationally recognized pricing service. The independent pricing service provided prices categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities. For financial assets measured at fair value on a recurring basis as of June 30, 2023 and June 30, 2022, the fair value measurements by level within the fair value hierarchy used are as follows: June 30, 2023 Description (Level 1) (Level 2) (Level 3) Total Securities available-for-sale: Federal National Mortgage Association $ — $ 20,406 $ — $ 20,406 Federal Home Loan Mortgage Corporation — 15,670 — 15,670 Equity securities 24 — — 24 Total $ 24 $ 36,076 $ — $ 36,100 June 30, 2022 Description (Level 1) (Level 2) (Level 3) Total Securities available-for-sale: Federal National Mortgage Association $ — $ 27,677 $ — $ 27,677 Federal Home Loan Mortgage Corporation — 20,180 — 20,180 Equity securities 19 — — 19 Total $ 19 $ 47,857 $ — $ 47,876 The classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Other securities are measured at fair value using quoted market prices in an active market for identical assets and are classified as Level 1 in the hierarchy. The estimated fair values of equity securities are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs). All debt securities are measured at fair value using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices and are classified as Level 2 in the hierarchy. The fair value of deposits with no defined maturities (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) is the amount payable on demand of the liabilities at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. F- 33 Somerset Savings Bank, SLA and Subsidiaries Notes to Consolidated Financial Statements — Continued June 30, 2023 and 2022 (Dollars in thousands) Deposits with stated maturities (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits. Financial Assets Measured at Fair Value on a Nonrecurring Basis The following tables present those assets and liabilities measured at fair value on a non-recurring basis at June 30, 2023 and 2022, and additional quantitative information about the valuation techniques and inputs utilized to determine fair value. All such assets and liabilities were measured using Level 3 inputs: June 30, 2023 Fair Value Measurement Quantitative Information Recorded Investment Valuation Allowance Fair Value Valuation Technique Unobservable Inputs Value/Range Impaired loans $ 145 $ — $ 145 Appraisal of collateral Selling costs 15 % June 30, 2022 Fair Value Measurement Quantitative Information Recorded Investment Valuation Allowance Fair Value Valuation Technique Unobservable Inputs Value/Range Impaired loans $ — $ — $ — Appraisal of collateral Selling costs 15 % Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Savings Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Savings Bank's impaired loans are generally collateral dependent whose fair value is estimated through current appraisals, and adjusted as necessary by management to reflect current market conditions. Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered once the loan is deemed impaired, as previously described. Impaired loans are generally classified as Level 3 assets. There were no transfers between levels within the fair value hierarchy during the years ended June 30, 2023 and 2022 . F- 34