SR Bancorp, Inc. 10-K

Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations. The objective of this section is to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our results of operations and financial condition as of the dates presented. You should read this discussion in conjunction with the SR Bancorp Consolidated Financial Statements and Notes to the Consolidated Financial Statements that appear at the end of this document. Due to the timing of the stock offering and acquisition noted below, the financial information provided herein as of and for the year ended June 30, 2023 is solely that of Somerset Savings Bank, SLA, and its subsidiaries, unless indicated otherwise. Conversion, Stock Offering and Merger The conversion of Somerset Savings Bank, SLA from the mutual to stock form of organization and related stock offering by SR Bancorp, Inc. (the "Company"), the holding company for Somerset Savings Bank, SLA, was completed on September 19, 2023. The Company’s common stock began trading on the Nasdaq Capital Market under the trading symbol “SRBK” on September 20, 2023. The Company sold 9,055,172 shares of its common stock at a price of $10.00 per share, which included 760,634 shares sold to Somerset Regal Bank’s Employee Stock Ownership Plan. Additionally, the Company contributed 452,758 shares and $906,000 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 Company common stock were outstanding. Promptly following the completion of the conversion and related stock offering, Regal Bancorp, Inc., a New Jersey corporation (“Regal Bancorp”), merged with and into the Company, with the Company as the surviving entity (the “Merger”). Immediately following the Merger, Regal Bank, a New Jersey chartered commercial bank headquartered in Livingston, New Jersey and the wholly-owned subsidiary of Regal Bancorp, merged with and into Somerset Bank, which had converted to a commercial bank charter, and was renamed Somerset Regal Bank (the “Bank”). In connection with the Merger, each outstanding share of Regal Bancorp common stock converted into the right to receive $23.00 in cash. The Merger was completed on September 19, 2023. Overview Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. Somerset Regal Bank is a New Jersey-chartered commercial bank that operates from 15 branches in Essex, Hunterdon, Middlesex, Morris, Somerset and Union Counties, New Jersey. Somerset Regal Bank offers a variety of deposit and loan products to individuals and small businesses, most of which are located in our primary market. The acquisition of Regal Bancorp and its wholly owned subsidiary, Regal Bank, expanded our market presence into Essex, Morris and Union Counties, New Jersey and enhanced our market presence in Somerset County, New Jersey. At June 30, 2024, SR Bancorp had total assets of $1.02 billion, deposits of $807.1 million and total equity of $199.5 million. Income . Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from service charges and fees related to deposit accounts and net gains in cash surrender value of bank-owned life insurance. In some years, we recognize income from the sale of securities. 40 Allowance for Credit Losses . The allowance for credit losses is a valuation allowance for the current expected credit losses in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for credit losses is charged to earnings. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged off, if any, are credited to the allowance for credit losses when realized. Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, furniture and equipment expenses, data processing, advertising, FDIC insurance premiums, directors fees, professional fees, insurance, telephone, postage and supplies and other miscellaneous expenses. Our largest noninterest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for retirement plans and other employee benefits including disability insurance and health insurance and compensation expenses related to the recently implemented employee stock ownership plan. Occupancy expenses and furniture and equipment expenses are the fixed and variable costs of buildings and equipment, and consist primarily of depreciation charges, furniture and equipment expenses, repair and maintenance costs, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter. Data processing expenses are fees paid to third parties for use of their software and for processing customer information, deposits and loans. Advertising includes most marketing expenses including multi-media advertising (public and in-branch), promotional events and materials, civic and sales focused memberships, and community support. Federal deposit insurance premiums are payments we make to the FDIC for insurance of our deposit accounts. Professional fees include legal, accounting, auditing, risk management and payroll processing expenses. Insurance includes expenses for worker’s compensation, property and casualty insurance and professional insurance. Other expenses include expenses for directors fees, office supplies, postage, telephone and other miscellaneous operating expenses. Critical Accounting Policies Certain of our accounting policies are important to the presentation of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 to our Consolidated Financial Statements included elsewhere in this document. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we plan to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. 41 Management believes our most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows: the determination of the allowance for credit losses, the assessment of the impairment of goodwill and intangible assets and the valuation of our deferred tax assets. Allowance for Credit Losses : The allowance for credit losses (“ACL”), calculated in accordance with ASC 326, is deducted from the amortized cost basis of loans. The ACL represents an amount that, in management’s judgment, is adequate to absorb the lifetime expected credit losses that may be experienced on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of economic conditions and prepayment experience. The allowance for credit losses is measured and recorded upon the initial recognition of a financial asset. Determination of the adequacy of the allowance is inherently complex and requires the use of significant and highly subjective estimates. Loans are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. In calculating the allowance for credit losses, loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type of loan, underlying collateral, geographical similarity and historical or expected credit loss patterns. The Company applies two methodologies to estimate the allowance on its pooled portfolio segments: a cohort method based on common characteristics and the weighted average remaining life method. The models related to these methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a one-year economic outlook for the applicable economic variables. In some cases, management may determine that an individual loan exhibits unique risk characteristics that differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing, among other things, the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower. Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making qualitative factor adjustments include, among other things: the impact of changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries; actual and expected changes in national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools; changes in the composition and size of the loan portfolio and in the terms of the underlying loans; changes in the experience, ability, and depth of our lending management and staff; changes in volume and severity of past due and nonaccrual assets; changes to the quality of our internal loan review system; the existence, growth, and effect of any concentrations of credit; and regulatory, legal and environmental events. Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP. However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment and changes in the financial condition of borrowers. Goodwill and Other Intangible Assets : Our intangible assets consist primarily of goodwill and core deposit intangibles. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities. Goodwill is not amortized but is subject to annual tests for impairment, or more often if events or circumstances indicate it may be impaired. We may elect to perform a qualitative assessment as a part of the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit less than the carrying value, goodwill is impaired and is written down to its estimated fair value. 42 In the year ended June 30, 2024, we performed a qualitative assessment of goodwill. Based on that assessment, we determined that it was more likely than not that the unit's fair value was not less than its carrying amount. We concluded that our goodwill was not impaired as of June 30, 2024. Core deposit intangibles are amortized on an accelerated basis using an estimated life of ten years. The core deposit intangibles are evaluated annually for impairment in accordance with GAAP. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Income Taxes : Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 income in the period that includes the enactment date. The measurement of deferred tax assets is reduced by a valuation allowance for the amount of the deferred tax asset that is more likely than not to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize interest and/or penalties related to income tax matters in other operating expenses. Business Strategy Our business strategy is to operate and grow a profitable community-oriented financial institution.We plan to achieve this by: Leveraging our residential and commercial lending expertise to pursue new opportunities to increase lending in our primary market area and expand our existing loan relationships . Prior to the Merger, Somerset Savings Bank’s principal business activity historically had been the origination of residential mortgage loans, while Regal Bank’s principal business activity historically had been the origination of multi-family and commercial real estate loans. Somerset Regal Bank will continue to provide products and services that meet the needs of the existing residential lending customers and be able to offer such products, services and expertise to the former Regal Bank customers throughout its newly-expanded market area. Additionally, Somerset Regal Bank will continue to provide products and services that meet the needs of the existing commercial customers and be able to offer such products, services and expertise to the former Somerset Savings Bank customers throughout its newly-expanded market area. The opportunity for both banks to diversify their loan portfolios and leverage their lending expertise in new markets were primary factors for the Merger. Moreover, with the additional capital raised in the stock offering, we can increase our loan originations in our market area and originate loans with larger balances. Somerset Regal Bank’s legal lending limit was $29.9 million at June 30, 2024. While Somerset Regal Bank’s credit risk management policies will result in an internal loan to one borrower limit less than Somerset Regal Bank’s regulatory limit, the legal lending limit will provide opportunities to expand existing customer relationships and reach new larger customers. We intend to leverage the SBA preferred lender expertise to expand SBA lending activity in our market areas. SBA lending capabilities provide an opportunity to establish additional commercial account relationships and the potential to generate additional noninterest income related to the sale and servicing of the guaranteed portion of an SBA loan on the secondary market. 43 Continuing to use prudent underwriting practices to maintain a high-quality loan portfolio. Maintaining high asset quality is a key to long-term financial success. Somerset Regal Bank seeks to grow its loan portfolio while keeping non-performing assets to a minimum. Somerset Regal Bank’s strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, appropriate and conservative loan underwriting criteria and active credit monitoring. At June 30, 2024, Somerset Regal Bank had $50,000 of non-performing loans. Building profitable business and consumer relationships through enhanced product offerings and by continuing to provide superior customer service. We are a full-service financial services company offering our customers a broad range of loan and deposit products and services, including internet banking, which enables our customers to pay bills on-line. Our commercial lending capacity has been significantly enhanced through our merger, which allows us to continue to increase the commercial real estate and commercial business loans we originate and better serve the small businesses in our market area, and realize higher fees and yields associated with such type of lending. Further, commercial deposit accounts, generally yield higher average balances than can be acquired from retail deposit relationships. As a community-oriented financial institution, we emphasize providing superior customer service to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to our customers and distinguishes us from the larger institutions that operate in our area. Further, given our attractive market area, we believe we are well-positioned to increase our customer relationships without a proportional increase in overhead expense or operating risk. Increasing transaction deposit accounts and deposit balances. Deposits are our primary source of funds for lending and investment. We intend to focus on expanding our core deposits (which we define as all deposits except certificates of deposit). Core deposits represented 66.2% of our total deposits at June 30, 2024 compared to 68.4% of our total deposits at June 30, 2023. We believe core deposits will increase by increasing our commercial lending activities and enhancing our relationships with retail customers through our commitment to quality customer service along with the introduction of additional products and services, such as remote deposit capture and enhanced online business account services. Continuing to leverage technology to maintain efficient operations and enhance customer service. We have historically focused on leveraging technology to maintain efficient operations and provide our customers with secure means to conduct business outside of our traditional branch network. Customer facing applications include online banking and mobile banking with bill payment capabilities, mobile deposit and debit card control functionality. We have been a Zelle ™ participant since 2019, which has allowed our customers the ability to send and receive real-time payments online and through mobile banking. Our online loan application platform affords customers the convenience of submitting a loan application online. Internally we leverage technology to achieve efficiencies for tasks such as document preparation and retention, data analytics and call report preparation. We intend to build on this foundation and have plans to add, among other services, online deposit account opening for existing customers, tokenization (meaning the process of exchanging sensitive data with a less sensitive equivalent (or token), specifically Apply Pay © , Google Pay © and Samsung Pay © ), and expanded business online banking capabilities including wire transfer origination and ACH origination services. These additional services are in various stages of implementation, and we anticipate customer availability for most prior to the end of 2024. Our investment in technology allows us to remain competitive, effectively serve our customers and results in operating efficiencies. Comparison of Financial Condition at June 30, 2024 and June 30, 2023 Total Assets . Total assets increased $369.4 million, or 56.7%, to $1.02 billion at June 30, 2024 from $651.5 million at June 30, 2023. The increase was primarily the result of the acquisition of Regal Bancorp, and its wholly-owned subsidiary Regal Bank, on September 19, 2023, which had $427.8 million of assets at the time of the acquisition. The increase was also due to net proceeds of $86.9 million obtained from the completion of the Company’s stock offering on the same date. These increases were offset by a $20.0 million repayment of a borrowing and a decrease in deposits due to the interest rate environment and competition in our market area. Cash and Cash Equivalents . Cash and cash equivalents increased $3.5 million, or 8.2%, to $45.9 million at June 30, 2024 from $42.4 million at June 30, 2023 due to $55.3 million of cash and cash equivalents acquired from 44 the Regal Bancorp acquisition and the net proceeds of $86.9 million retained from the stock offering, partially offset by $69.5 million paid for the acquisition of Regal Bancorp, offset by a $20.0 million repayment of a borrowing and a decrease in deposits due to the interest rate environment and competition in our market area. Securities Available-for-Sale . Following the completion of the Merger, the Company sold $19.2 million of its available-for-sale portfolio, followed by the sale of the remaining $35.4 million of securities-available-for-sale in the fourth quarter of the year ended June 30, 2024 at a loss of $4.4 million as part of its balance sheet restructuring. The Company held no securities available-for-sale at June 30, 2024. The Company redeployed the proceeds from the sale of these lower yielding securities into higher yielding loans as part of a balance sheet restructuring strategy. The loans originated had a positive spread differential of approximately 472 basis points over the securities that were sold, which is expected to result in $1.4 million in additional pre-tax earnings, on an annualized basis. As such, the Company estimates that the loss on the sale of securities will be recouped within approximately 3.23 years. Securities Held-to-Maturity . Securities held-to-maturity decreased $12.9 million, or 7.5%, to $158.3 million at June 30, 2024 from $171.2 million at June 30, 2023 as the maturities of securities during the period more than offset the acquisition of $2.6 million of held-to-maturity securities from the Regal Bancorp acquisition. Loans . Loans receivable, net, increased $369.6 million, or 102.0%, to $731.9 million at June 30, 2024 from $362.3 million at June 30, 2023. The Company acquired $321.6 million of loans from the Regal Bancorp acquisition, primarily consisting of multi-family and commercial real estate loans. As a result of the acquisition, the composition of the loan portfolio changed significantly from June 30, 2023. The percentage of residential mortgage loans to total loans decreased from 97.8% at June 30, 2023 to 53.7% at June 30, 2024. Commercial loans (consisting of multi-family and commercial real estate loans and commercial and industrial loans) accounted for 44.7% of loans at June 30, 2024. Bank Owned Life Insurance . Bank owned life insurance increased $8.4 million, or 29.2%, to $37.1 million at June 30, 2024 from $28.7 million at June 30, 2023. The increase was primarily the result of the Regal Bancorp acquisition, which had $7.5 million of bank owned life insurance at the time of acquisition. Goodwill and Intangible Assets . The Company recognized goodwill and a core deposit premium intangible through the acquisition of Regal Bancorp. At the time of acquisition, goodwill was $20.5 million and the core deposit premium intangible asset was $9.1 million. Finalization of the purchase allocation reduced goodwill to $20.4 million at June 30, 2024. No impairment loss was recognized on goodwill during the year ended June 30, 2024. The carrying amount of the core deposit premium intangible, net of accumulated amortization, was $7.7 million at June 30, 2024. Total Liabilities . Total liabilities increased $292.0 million, or 55.1%, to $821.4 million at June 30, 2024 from $529.4 million at June 30, 2023. The increase was primarily the result of the Regal Bancorp acquisition, which had $378.7 million of liabilities at the time of the acquisition, offset by a $20.0 million repayment of a borrowing and a decrease in deposits due to the interest rate environment and competition in our market area. Deposits . Deposits increased $303.2 million, or 60.2%, to $807.1 million at June 30, 2024 from $503.9 million at June 30, 2023 due primarily to the $371.9 million of deposits assumed from the Regal Bank acquisition offset by a decrease in deposits due to the interest rate environment and competition in our market area. At the time of the acquisition, Regal Bank’s deposits consisted of $90.8 million of noninterest-bearing deposits, $162.4 million in NOW, money market and savings accounts and $118.7 million of certificates of deposit. Borrowings . We had no borrowings outstanding at June 30, 2024 as the $20.0 million of borrowings outstanding at June 30, 2023 were repaid during the year ended June 30, 2024. Total Equity . Total equity increased $77.4 million, or 63.4%, to $199.5 million at June 30, 2024 from $122.1 million at June 30, 2023. The increase resulted primarily from the $86.9 million in net proceeds from the Company’s stock offering and other comprehensive income of $3.8 million, partially offset by the $7.6 million initial funding of the ESOP and a net loss of $10.9 million for the period. 45 Comparison of Operating Results for the Years Ended June 30, 2024 and June 30, 2023 General. The Company recorded a net loss for the year ended June 30, 2024 of $10.9 million, compared to net income of $1.6 million for the year ended June 30, 2023. The decrease was due primarily to one-time merger-related expenses of $4.4 million, a $4.2 million provision for credit losses, a $5.4 million charitable contribution to establish the Somerset Regal Charitable Foundation and a $4.5 million loss on the sale of available-for-sale securities, partially offset by $4.1 million of net accretion income related to fair value adjustments. Interest Income. Interest income increased $24.7 million, or 153.5%, to $40.9 million for the year ended June 30, 2024 from $16.1 million for the year ended June 30, 2023. The increase resulted primarily from a $22.3 million, or 197.1%, increase in interest income on loans and a $2.8 million increase in interest income on interest bearing deposits at other banks, offset by a $482,000, or 13.1%, decrease in interest income on securities. The average balance of loans increased $282.2 million, or 80.2%, to $634.3 million for the year ended June 30, 2024, compared to $352.1 million for the year ended June 30, 2023. In addition, the average yield on the loan portfolio increased 209 basis points to 5.30% for the year ended June 30, 2024 from 3.21% for the year ended June 30, 2023, which reflected the higher interest rate environment and the greater proportion of commercial loans in the portfolio. The decrease in income on securities was primarily due to the sales of $54.6 million of available-for-sale securities during the year as part of a balance sheet restructuring, which resulted in the average balance of securities decreasing $29.1 million, or 13.0%, to $195.8 million for the year ended June 30, 2024, compared to $225.0 million for the year ended June 30, 2023. The increase in the interest income on interest bearing deposits and federal funds sold was due to a 80 basis point increase in the average yield from 3.64% for the year ended June 30, 2023 to 4.44% for the year ended June 30, 2024, due to the higher interest rate environment, and a $60.4 million, or 196.1%, increase in the average balance from $30.8 million for the year ended June 30, 2023 to $91.2 million for the year ended June 30, 2024 due to excess cash from the merger and the offering. Interest Expense. Interest expense increased $9.1 million or 373.4%, to $11.5 million for the year ended June 30, 2024 from $2.4 million for the year ended June 30, 2023. The increase in interest expense resulted primarily from an increase in interest expense on certificates of deposits. The average balance of certificates of deposit increased $100.9 million, or 67.9%, to $249.4 million for the year ended June 30, 2024 from $148.5 million for the year ended June 30, 2023, while the average rate increased 246 basis points to 3.79% for the year ended June 30, 2024 from 1.33% for the year ended June 30, 2023 as the Company increased rates on certificates of deposit to increase deposits and liquidity. The average balance of interest-bearing demand deposits increased $55.8 million, to $199.2 million for the year ended June 30, 2024 from $143.5 million for the year ended June 30, 2023. The average rate on interest-bearing demand deposits increased 49 basis points to 0.56% for the year ended June 30, 2024 from 0.07% for the year ended June 30, 2023. Net Interest Income. Net interest income increased $15.7 million, or 114.5%, to $29.4 million for the year ended June 30, 2024 from $13.7 million for the year ended June 30, 2023. The net interest rate spread increased 59 basis points to 2.73% for the year ended June 30, 2024 from 2.14% for the year ended June 30, 2023 while the net interest margin increased 94 basis points to 3.19% for the year ended June 30, 2024 from 2.25% for the year ended June 30, 2023. The average balance of net interest-earning assets increased $116.34 million, or 88.8%, to $247.2 million for the year ended June 30, 2024 from $130.9 million for the year ended June 30, 2023. The increases in the net interest rate spread and net interest margin were a result of both the acquisition of Regal Bancorp and the increasing yield on interest-earning assets outpacing the increasing cost of interest-bearing liabilities primarily due to the change in the composition of the loan portfolio. 46 Average Balances and Yields . The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects are immaterial. Average balances are calculated using month-end average balances, rather than daily average balances. We believe the use of month-end average balances is representative of our operations. Non-accrual loans are included in average balances only. Average yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees are immaterial. For the Year Ended June 30, 2024 2023 Average Outstanding Balance Interest Yield/ Rate Average Outstanding Balance Interest Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans $ 634,268 $ 33,619 5.30 % $ 352,070 $ 11,317 3.21 % Securities 195,826 3,198 1.63 % 224,967 3,680 1.64 % Other 91,167 4,049 4.44 % 30,786 1,122 3.64 % Total interest-earning assets 921,261 40,866 4.44 % 607,823 16,119 2.65 % Noninterest-earning assets 64,837 40,247 Total assets $ 986,098 $ 648,070 Interest-bearing liabilities: Savings and club accounts $ 208,682 113 0.05 % $ 179,809 108 0.06 % Interest-bearing demand accounts 199,243 1,123 0.56 % 143,459 96 0.07 % Certificates of deposit 249,390 9,451 3.79 % 148,504 1,979 1.33 % Total interest-bearing deposits 657,315 10,687 1.63 % 471,769 2,183 0.46 % Federal Home Loan Bank advances 1,790 102 5.70 % — — — Other borrowings 14,915 706 4.73 % 5,110 245 4.79 % Total interest-bearing liabilities 674,021 11,495 1.71 % 476,879 2,428 0.51 % Noninterest-bearing deposits 109,726 42,532 Other noninterest-bearing liabilities 19,368 11,388 Total liabilities 803,115 530,800 Equity 182,983 117,271 Total liabilities and equity $ 986,098 $ 648,070 Net interest income $ 29,371 $ 13,691 Net interest rate spread 2.73 % 2.14 % Net interest-earning assets(1) $ 247,240 $ 130,944 Net interest margin(2) 3.19 % 2.25 % Average interest-earning assets to interest-bearing liabilities 136.68 % 127.46 % (1) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average total interest-earning assets. 47 Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. Years Ended June 30, 2024 vs. 2023 Increase (Decrease) Due to Total Increase Volume Rate (Decrease) (Dollars in thousands) Interest-earning assets: Loans $ 9,071 $ 13,231 $ 22,302 Securities (477 ) (5 ) (482 ) Other 2,201 726 2,927 Total interest-earning assets 10,795 13,952 24,747 Interest-bearing liabilities: Savings and club accounts 17 (12 ) 5 Interest-bearing accounts 37 990 1,027 Certificates of deposit 1,344 6,128 7,472 Federal Home Loan Bank advances 102 — 102 Other borrowings 470 (9 ) 461 Total interest-bearing liabilities 1,971 7,096 9,067 Change in net interest income $ 8,824 $ 6,856 $ 15,680 Provision for Credit Losses. We establish provisions for credit losses, which are charged to operations in order to maintain the allowance for credit losses at a level necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for credit losses, we consider, among other things, loss experience, evaluations of real estate collateral, current and reasonably supportable economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of delinquent loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for credit losses and make provisions for credit losses on a monthly basis. Based on our evaluation of the above factors, we recorded a provision for credit losses of $4.1 million for the year ended June 30, 2024 compared to having no provision for the year ended June 30, 2023. The provision recorded related to the Day 1 allowance for credit losses on Regal Bancorp's loan portfolio in the amount of $4.2 million was recorded through the provision for credit losses within the Consolidated Statements of (Loss) Income. In 2024, we had no charge-offs and had only one classified and non-performing loan at June 30, 2024 totaling $50,000. The absence of a provision for credit losses for the year ended June 30, 2023 reflected that we had no charge-offs for the period, no classified loans at June 30, 2023 and only one non-performing loan in the amount of $145,000 at June 30, 2023. Our allowance for credit losses as a percentage of total loans was 0.71% at June 30, 2024 compared to 0.31% at June 30, 2023, reflecting the establishment of a $4.2 million general credit reserve for the acquired loan portfolio. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2024 and June 30, 2023. 48 Noninterest Income. Noninterest income was as follows: Years Ended June 30, Change 2024 2023 Amount Percent (Dollars in thousands) Service charges and fees on deposit $ 818 $ 667 $ 151 22.6 % Increase in cash surrender value of bank-owned life insurance 907 658 249 37.8 % Fees and service charges on loans 89 21 68 323.8 % Unrealized gain on equity securities 1 5 (4 ) (80.0 )% Realized loss on sale of securities (4,463 ) (119 ) (4,344 ) 3650.4 % Gain on sale of loans 55 - 55 100.0 % Other 102 33 69 46.4 % Total noninterest income $ (2,491 ) $ 1,265 $ (3,756 ) (296.9 )% Noninterest income decreased $3.8 million, or 296.9%, to a loss of $2.5 million for the year ended June 30, 2024 from $1.3 million for the year ended June 30, 2023, primarily as a result of a decrease of $4.3 million on the sale of securities due to the $4.44 million loss incurred in connection with the sale of securities as part of the Company's balance sheet restructuring. Offsetting this decrease were increases of $249,000 in the cash surrender value of bank-owned life insurance and $151,000 in service charges and fees on deposit accounts. The increase in the cash surrender value of bank-owned life insurance was attributable to the additional bank-owned life insurance acquired in the Merger. Noninterest Expense . Noninterest expense was as follows: Years Ended June 30, Change 2024 2023 Amount Percent (Dollars in thousands) Salaries and employee benefits $ 15,102 $ 7,787 $ 7,315 93.9 % Occupancy 2,349 728 1,621 222.7 % Furniture and equipment 966 561 405 72.2 % Data processing 3,100 1,216 1,884 154.9 % Advertising 301 198 103 52.0 % Federal deposit insurance premiums 468 182 286 157.1 % Directors fees 389 327 62 19.0 % Professional fees 1,999 1,029 970 94.3 % Insurance 546 165 381 230.9 % Telephone, postage and supplies 626 316 310 98.1 % Other expenses 8,737 644 8,093 1256.7 % Total noninterest expense $ 34,583 $ 13,153 $ 21,430 162.9 % Noninterest expense increased $21.4 million, or 162.9%, to $34.6 million for the year ended June 30, 2024 from $13.2 million for the year ended June 30, 2023, primarily as a result of a $5.4 million charitable contribution, contained within other expenses, as the Company established the Somerset Regal Charitable Foundation in connection with its conversion to the stock form of organization and funded it with 452,758 shares of SR Bancorp common stock and $905,517 in cash. The increase was also due to an increase in salaries and employee benefits for change in control payments totaling $2.6 million related to the Merger, an increase in professional fees for merger expenses totaling $760,000, an increase in data processing expenses primarily due to the payment of a $414,000 early termination fee related to the acquisition of Regal Bancorp, and additional miscellaneous expenses related to the Merger totaling $72,000. Furthermore, the fact the Company was operating at a significantly greater asset size for the majority of the year ended June 30, 2024, as compared to the asset size for the year ended June 30, 2023, was a contributing factor to the increase in total noninterest expense. Income Tax Expense. The benefit for income taxes was $909,000 for the year ended June 30, 2024, compared to a tax expense of $250,000 for the year ended June 30, 2023. The benefit for the year ended June 30, 2024 was due 49 to the loss for the period and is net of a $2.2 million provision for an allowance against certain of the Company's deferred tax assets. Our effective tax rate was 7.7% and 13.9% for the year ended June 30, 2024 and 2023, respectively, reflecting lower state income tax liabilities due to the application of net operating loss carryforwards and a lower state income tax rate applied to the net investment income derived by Somerset Regal Bank’s investment company subsidiary. Market Risk General . Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our ALCO/Investment Committee, which consists of members of management, is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our Board of Directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates. We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: • growing transaction deposit accounts; • rebalancing our loan portfolio through the Merger to include higher-yielding, shorter-term commercial real estate and commercial and industrial loans; and • continuing to price our one-to-four family residential real estate loan products in a way that encourages borrowers to select our adjustable-rate loans as opposed to longer-term, fixed-rate loans. By following these strategies, we believe that we are better positioned to react to changes in market interest rates. We generally do not engage in hedging activities, such as engaging in futures or options, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities. Economic Value of Equity . We compute amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (economic value of equity “EVE”) would change in the event of a range of assumed changes in market interest rates. We measure potential change in our EVE through the use of a financial model. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100-basis point increase in the “Basis Point Change in Interest Rates” column below. 50 The table below sets forth, as of June 30, 2024 the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve. At June 30, 2024 Estimated Increase (Decrease) in EVE Change in Interest Rates (basis points)(1) Estimated EVE (2) Amount Percent (Dollars in thousands) +200 169,984 (37,805 ) (18.2 )% +100 192,907 (14,882 ) (7.2 )% — 207,789 — — -100 218,120 10,331 5.0 % -200 223,189 15,401 7.4 % -300 225,132 17,343 8.4 % -400 224,789 17,000 8.2 % (1) Assumes an immediate uniform change in interest rates at all maturities. (2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The table above indicates that at June 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 18.2% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 7.4% increase in EVE. Change in Net Interest Income . The following table sets forth, as of June 30, 2024, the calculation of the estimated changes in our net interest income (“NII”) that would result from the designated immediate changes in the United States Treasury yield curve. At June 30, 2024 Change in Interest Rates (basis points)(1) Net Interest Income Year 1 Forecast Year 1 Change From Level Net Interest Income Year 2 Forecast Year 2 Change From Level (Dollars in thousands) +200 27,149 (2,198 ) 29,847 (1,516 ) +100 29,673 326 32,230 867 — 29,347 — 31,363 — -100 28,398 (949 ) 29,029 (2,334 ) -200 27,305 (2,042 ) 26,291 (5,072 ) -300 26,062 (3,285 ) 23,241 (8,122 ) -400 24,736 (4,611 ) 20,159 (11,204 ) (1) Assumes an immediate uniform change in interest rates at all maturities. The table above indicates that at June 30, 2024, after one year, we would have experienced an 7.5% decrease in NII in the event of an instantaneous parallel 200 basis point increase in market interest rates and an 7.0% decrease in NII in the event of an instantaneous 200 basis point decrease in market interest rates. Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results. 51 Liquidity and Capital Resources Liquidity is the ability to fund assets and meet obligations as they come due. Our primary sources of funds consist of deposit inflows, loan repayments, and repayments from investment securities. In addition, we have the ability to borrow in the wholesale markets or from the Federal Home Loan Bank of New York. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a ratio of liquid assets (including cash and federal funds sold) as a percentage of total deposits ranging between 4% and 30%. At June 30, 2024, this ratio was 5.7% We believe that we have sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2024. We regularly adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess cash is invested generally in interest-earning deposits and short- and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing and investing activities during any given period. At June 30, 2024, cash and cash equivalents totaled $45.9 million. At June 30, 2024, we had $36.0 million in outstanding loan commitments and $36.1 million of unused lines of credit. Certificates of deposit due within one year of June 30, 2024 totaled $111.4 million, or 13.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, other deposit products, including replacement certificates of deposit, securities sold under agreements to repurchase (repurchase agreements) or advances from the Federal Home Loan Bank of New York and other borrowing sources. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or after June 30, 2024. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements. Our primary investing activities are originating and purchasing loans and purchasing mortgage-backed securities. During the year ended June 30, 2024, we originated $74.1 million of loans and purchased $41.5 million. We had no purchases of securities during the year ended June 30, 2024. Financing activities consist primarily of activity in deposit accounts. Deposits increased $303.2 million, or 60.2%, to $807.1 million at June 30, 2024 from $503.9 million at June 30, 2023. At the time of the acquisition, Regal Bank’s deposits consisted of $90.8 million of noninterest-bearing deposits, $162.4 million in NOW, money market and savings accounts and $118.7 million of certificates of deposit. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. We had no outstanding borrowings with the Federal Reserve Bank at June 30, 2024 and a $20.0 million outstanding borrowing at June 30, 2023. 52 Regulatory Capital Somerset Regal Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2024 Somerset Regal Bank exceeded all regulatory capital requirements. Somerset Regal Bank is considered “well capitalized” under regulatory guidelines. See “ Regulation and Supervision—Federal Banking Regulation—Capital Requirements ” and Note 14 of the Notes to the Consolidated Financial Statements. The net proceeds from the offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, our return on equity will be adversely affected following the offering until such excess funds can be deployed. Recent Accounting Pronouncements For a discussion of the impact of recent accounting pronouncements, see Note 1 of the Notes to the Consolidated Financial Statements. Impact of Inflation and Changing Prices Our consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than the effects of inflation. Item 7A . Quantitative and Qualitative Disclosures About Market Risk. For information regarding material risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Market Risk.” Item 8 . Financial Statements and Supplementary Data. The Financial Statements are included beginning on page F-1 of this annual report on Form 10-K. Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.