Business context and reporting period
This Form 10-K covers the fiscal year ended June 30, 2023; it is not a calendar fourth-quarter 2022 report. The financial statements are for Somerset Savings Bank, SLA and subsidiaries. SR Bancorp had no assets or liabilities and conducted no operating business at June 30, 2023. The bank converted to stock form, completed its offering and acquired Regal Bancorp and Regal Bank on September 19, 2023; those transactions therefore occurred after the fiscal year-end.
After the transactions, the bank was renamed Somerset Regal Bank and expanded to 17 branches across six New Jersey counties. The merger consideration was approximately $69.5 million. SR Bancorp sold 9.055 million shares at $10 each, raising $90.6 million gross and $86.9 million net. Proceeds included $43.4 million downstreamed to the bank, $7.6 million used to fund the ESOP, and $0.9 million contributed in cash to the charitable foundation; retained proceeds helped fund the acquisition.
Financial results and condition
Unless otherwise stated, figures below describe Somerset Savings Bank before the conversion and merger; amounts are in U.S. dollars.
| Metric | FY2023 / June 30, 2023 | FY2022 / June 30, 2022 |
|---|---|---|
| Total assets | $651.5 million | $648.6 million |
| Total deposits | $503.9 million | $522.1 million |
| Loans, net | $362.3 million | $334.6 million |
| Total equity | $122.1 million | $118.2 million |
| Net interest income | $13.7 million | $11.9 million |
| Net income | $1.55 million | $1.87 million |
| Net interest margin | 3.00% | 2.59% |
Interest income rose 20.0% to $16.1 million, while interest expense increased 58.2% to $2.43 million. Net interest income improved 15.1%; however, noninterest expense rose 19.4% to $13.2 million, including higher compensation and merger-related professional fees. Noninterest income declined 6.4% to $1.27 million, including a $119,000 net loss on securities sales. Income before tax was $1.80 million and income tax expense was $250,000.
Net cash provided by operating activities was $2.32 million, compared with $1.04 million in FY2022. Cash and cash equivalents increased $7.11 million to $42.45 million. Investing activities provided $2.70 million, while financing activities provided $2.09 million, including $20 million of new borrowings and net deposit outflows.
Liquidity included $36.1 million of available-for-sale securities and $100 million of reported additional Federal Home Loan Bank borrowing capacity. Liquid assets were 8.4% of deposits, within the bank’s 4%–30% target range. A $20 million Federal Reserve Bank Term Funding Program borrowing bore 4.76% and matured March 29, 2024. There were no FHLB advances. Uninsured deposits totaled $21.2 million; $138.4 million of certificates of deposit were due within one year.
The bank reported a 19.61% Tier 1 leverage ratio and was classified as well capitalized under its community bank leverage framework, which requires a ratio above 9% for that framework. The allowance for loan losses was $1.12 million, or 0.31% of loans, unchanged in dollars from FY2022. There were no charge-offs or provision for loan losses in either year. Nonperforming loans were $200,000 (0.06% of loans), versus none in FY2022; nonaccrual loans were $145,000.
Material changes versus the prior period
- Loans grew 8.3%, primarily from residential mortgage purchases, while deposits fell 3.5%. Savings deposits declined $21.9 million and certificates of deposit rose $15.7 million, reflecting customers’ response to higher market rates.
- Net interest margin increased 41 basis points, but net income fell 17.0% to $1.55 million as higher interest and operating expenses outweighed growth in interest income.
- Cash increased, supported in part by the $20 million BTFP borrowing. Available-for-sale securities declined to $36.1 million; the held-to-maturity portfolio had $29.2 million of unrealized losses at fair value at year-end.
- Total equity increased $3.9 million, reflecting net income and a $2.3 million improvement in accumulated other comprehensive loss.
Outlook, commentary and risks
Management’s strategy is to combine Somerset’s residential lending capabilities with Regal’s commercial lending expertise, grow commercial and SBA lending, expand core deposits, invest in digital services and consider future acquisitions. No specific additional acquisition was planned or agreed at filing. Management said it had increased liquidity monitoring after stress in the banking industry and reported no indications of a deposit run at Somerset as of June 30, 2023.
Management identified interest-rate, funding, credit concentration, integration, competition, cybersecurity and regulatory risks. The loan portfolio was heavily concentrated in residential real estate: residential mortgages were 97.8% of Somerset’s loans. The bank’s interest-rate model estimated that a parallel 200-basis-point increase would reduce economic value of equity by 26.5%; the modeled first-year net interest income reduction under that shock was $1.05 million, or about 7.3%. These are model estimates, not forecasts, and management cautioned that actual results may differ.
CECL became effective July 1, 2023. The filing reports that adoption had no material impact on operations, cash flows or capital ratios, despite earlier disclosure that estimates anticipated only a minimal change. The charitable foundation contribution is expected to reduce FY2024 net income by approximately $4.1 million after tax. The filing also warns of potential goodwill impairment and unanticipated integration costs; pro forma goodwill was estimated at $19.4 million based on transaction-related data, not the June 30 standalone balance sheet.
The financial statements received an unqualified audit opinion. Management concluded disclosure controls were effective; no auditor attestation on internal control was provided, consistent with the company’s emerging growth company status.
Important facts for investors to verify
- Review post-closing financial statements for the combined bank, including acquisition accounting, goodwill, integration costs and realization of merger synergies.
- Track deposit retention, deposit pricing, maturities, liquidity and repayment or refinancing of the $20 million BTFP borrowing.
- Monitor net interest margin and funding costs as rates and deposit mix change, and compare actual results with the disclosed interest-rate sensitivity models.
- Follow delinquencies, nonperforming loans, collateral values and the allowance under CECL, particularly given the real-estate concentration.
- Confirm the actual FY2024 charitable contribution expense and any continuing ESOP or stock-based compensation effects.