SR Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2023 (fiscal first quarter); unaudited. The income statement includes only 11 days of the combined company following the September 19, 2023 Regal Bancorp merger. The comparable 2022 period and June 30, 2023 balance sheet are Somerset Savings Bank, SLA on a stand-alone basis, so period comparisons are not fully like-for-like. Amounts below are in millions unless noted.
Business context and major transactions
SR Bancorp is the holding company for Somerset Regal Bank, a New Jersey community bank operating 17 full-service branches. On September 19, 2023, the company completed its mutual-to-stock conversion and offering, then acquired Regal Bancorp; Regal shareholders received $23 per share in cash. The company sold 9.1 million shares at $10 per share and issued additional shares to the charitable foundation and ESOP. SRBK began Nasdaq trading on September 20.
Key financial results and position
| Metric | September 30, 2023 / quarter | Comparable |
|---|---|---|
| Total assets | $1,108.5 | $651.5 at June 30, 2023 |
| Total loans, net | $692.4 | $362.3 at June 30, 2023 |
| Total deposits | $877.3 | $503.9 at June 30, 2023 |
| Cash and cash equivalents | $121.1 | $42.4 at June 30, 2023 |
| Borrowings | $20.0 | $20.0 at June 30, 2023 |
| Stockholders’ equity | $194.5 | $122.1 at June 30, 2023 |
| Interest income | $5.5 | $3.7 in 2022 quarter |
| Interest expense | $1.4 | $0.3 in 2022 quarter |
| Net interest income | $4.1 | $3.4 in 2022 quarter |
| Provision for credit losses | $4.2 | None in 2022 quarter |
| Noninterest income | $0.5 | $0.3 in 2022 quarter |
| Noninterest expense | $12.9 | $3.4 in 2022 quarter |
| Net loss | $(10.5); $(10.03) per share | Net income of $0.4 in 2022 quarter |
| Operating cash flow | $(6.1) | $1.2 provided in 2022 quarter |
Net interest margin was 2.41%, up from 2.25%; net interest rate spread was 2.12%, down from 2.19%. The allowance for credit losses was $5.3 million, or 0.77% of loans, versus $1.1 million, or 0.31%, at June 30. The reported loan portfolio was 52.2% residential mortgages and 46.1% commercial real estate, multifamily and commercial/industrial loans after the acquisition.
Quarterly cash flows included $0.6 million used in investing activities and $85.3 million provided by financing activities, mainly reflecting stock-offering proceeds and deposit movements. Cash increased $78.7 million to $121.1 million.
Material changes and unusual items
- The Regal acquisition drove most of the balance-sheet expansion: assets rose 70.1%, deposits 74.1%, and net loans 91.1% from June 30. The company recorded $20.5 million of goodwill and a $9.1 million core deposit intangible; purchase accounting remains provisional and may be adjusted during the measurement period through September 2024.
- Net loss included a $5.4 million charitable contribution to establish the Somerset Regal Charitable Foundation, $3.9 million of merger-related expenses, and a $4.2 million credit-loss provision, including a reserve established for acquired loans. Management stated that excluding these items on an after-tax basis, net income would have been $701,000.
- Adoption of CECL on July 1 increased the loan allowance by $47,000 and reduced retained earnings by $34,000 after tax. The acquired loan portfolio had a $14.4 million fair-value discount; the acquired lender’s prior allowance was eliminated in acquisition accounting.
- Available-for-sale securities had $6.0 million of unrealized losses at quarter-end. Held-to-maturity securities had $34.0 million of unrealized losses, with $169 million amortized cost and $135 million estimated fair value. Management attributed no credit-loss allowance to the government-backed securities portfolio.
Liquidity, capital, outlook and risks
Management reported liquid assets equal to 13.8% of deposits, within its stated 4%–30% target range, and said available sources were sufficient for expected short- and long-term needs. The company had $20 million outstanding under the Federal Reserve Bank Term Funding Program at 4.76%, maturing March 29, 2024, secured by securities with a carrying value of $32.0 million. It also disclosed $100 million of FHLB borrowing capacity and board-authorized FRB borrowing capacity of up to $25 million.
Certificates of deposit totaling $254.0 million mature within one year, equal to 29.0% of deposits. Management noted that replacement funding could cost more if deposits do not renew. Certificates exceeding the $250,000 FDIC insurance limit totaled approximately $15.8 million. The Bank reported a 15.32% Tier 1 leverage ratio and was categorized as well capitalized.
No earnings or operating guidance was provided. Management expects to maintain higher liquidity following the offering, while noting that deploying offering proceeds could reduce initial liquidity and that the larger equity base may weigh on return on equity. Interest-rate sensitivity modeling estimated a 17.3% decrease in economic value of equity under an immediate 200-basis-point rate increase; modeled net interest income declined 1.8% in year one and increased 1.1% in year two under that scenario. A 200-basis-point decrease was modeled to reduce net interest income 10.2% in year two. Management cautioned that these models rely on assumptions and are not precise forecasts.
Key disclosed risks include interest-rate and funding-cost changes, deposit retention, real estate values and borrower credit quality, acquisition integration and expected synergies, cybersecurity and operational risks, competition, regulation, and broader economic or geopolitical conditions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no pending legal proceeding believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the $10.5 million quarterly loss reflects one-time conversion, charitable contribution, merger and acquired-loan provision items, and how recurring costs develop after integration.
- Final purchase accounting, including loan fair-value marks, goodwill, core deposit intangible valuation and any subsequent measurement-period adjustments.
- Credit performance of the enlarged commercial and multifamily portfolio, future CECL allowance needs, delinquencies and charge-offs; only one $144,000 nonaccrual loan was reported at quarter-end.
- Deposit retention and repricing around the $254.0 million of certificates maturing within one year, uninsured balances, and the cost and availability of alternative funding.
- Realization and potential earnings or capital effects of securities’ unrealized losses, along with the assumptions behind interest-rate sensitivity estimates.