SRBK 10-Q Quarterly Report March 31, 2024 | Alphaminr
ALPHAMINR

SRBK 10-Q Quarter ended March 31, 2024

Balance Sheet
Cash Flow
Income Statement
10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 001-41808

SR Bancorp, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland

92-2601722

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

220 West Union Avenue

Bound Brook , New Jersey

08805

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: ( 732 ) 560-1700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SRBK

The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 15, 2024, the registrant had 9,507,930 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

Condensed Consolidated Statements of Financial Condition

1

Condensed Consolidated Statements of (Loss) Income

2

Condensed Consolidated Statements of Comprehensive (Loss)

3

Condensed Consolidated Statements of Changes in Stockholders' Equity

4

Condensed Consolidated Statements of Cash Flows

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

50

PART II.

OTHER INFORMATION

51

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

53

i

PART I—FIN ANCIAL INFORMATION

Ite m 1. Financial Statements.

SR Bancorp, Inc. and Subsidiaries

Consolidated Statements of Financial Condition

March 31, 2024 (Unaudited) and June 30, 2023

(Dollars in Thousands)

March 31, 2024

June 30, 2023

(Unaudited)

Assets

Cash and due from banks

$

52,775

$

8,657

Interest-bearing deposits at other banks

19,718

33,792

Total cash and cash equivalents

72,493

42,449

Securities available-for-sale, at fair value

32,628

36,076

Securities held-to-maturity, at amortized cost

161,817

171,185

Equity securities, at fair value

27

24

Loans receivable, net of allowance for credit losses of $ 5,076 and
$ 1,116 , respectively

698,891

362,252

Premises and equipment, net

4,954

3,546

Right-of-use asset

2,772

19

Restricted equity securities, at cost

1,274

726

Accrued interest receivable

2,487

1,189

Bank owned life insurance

36,840

28,714

Goodwill and intangible assets

28,608

—

Other assets

10,034

5,306

Total assets

$

1,052,825

$

651,486

Liabilities and Equity

Liabilities

Deposits:

Noninterest-bearing

$

123,463

$

40,687

Interest-bearing

714,572

463,230

Total deposits

838,035

503,917

Borrowings

—

20,000

Advance payments by borrowers for taxes and insurance

7,123

4,313

Accrued interest payable

224

—

Lease liability

2,859

19

Other liabilities

5,311

1,153

Total liabilities

853,552

529,402

Equity

Common stock, $ 0.01 par value, 55,000,000 authorized;
9,507,930 and — shares issued, respectively

95

—

Additional paid-in capital

91,444

—

Retained earnings

119,237

127,099

Unearned compensation ESOP

( 7,131

)

—

Accumulated other comprehensive loss

( 4,372

)

( 5,015

)

Total stockholders' equity

199,273

122,084

Total liabilities and stockholders' equity

$

1,052,825

$

651,486

See notes to consolidated financial statements

1

SR Bancorp, Inc. and Subsidiaries

Consolidate d Statements of Income (Loss)

For Three and Nine Months Ended March 31, 2024 and 2023 (Unaudited)

(Dollars in Thousands)

Three Months Ended March 31,

Nine Months Ended March 31,

2024

2023

2024

2023

(Unaudited)

(Unaudited)

Interest Income

Loans, including fees

$

9,819

$

2,918

$

23,760

$

8,256

Securities:

Taxable

779

933

2,489

2,815

Federal funds sold

76

—

157

—

Interest bearing deposits at other banks

974

235

3,071

625

Total interest income

11,648

4,086

29,477

11,696

Interest Expense

Deposits:

Demand

122

25

504

73

Savings and time

3,031

588

6,834

1,272

Borrowings

227

—

707

—

Total interest expense

3,380

613

8,045

1,345

Net Interest Income

8,268

3,473

21,432

10,351

(Credit) Provision for Credit Losses

( 142

)

—

3,913

—

Net Interest Income After (Credit) Provision for
Credit Losses

8,410

3,473

17,519

10,351

Noninterest Income

Service charges and fees

193

157

576

502

Increase in cash surrender value of bank owned life insurance

247

155

655

483

Fees and service charges on loans

36

5

47

16

Unrealized gain (loss) on equity securities

1

( 3

)

3

( 1

)

Realized gain (loss) on sale of investments

19

( 119

)

33

( 119

)

Other

20

15

80

30

Total noninterest income

516

210

1,394

911

Noninterest Expense

Salaries and employee benefits

3,631

2,024

12,050

6,030

Occupancy

772

186

1,674

548

Furniture and equipment

285

136

674

406

Data Processing

951

302

2,392

900

Advertising

75

47

204

155

FDIC premiums

120

39

348

117

Directors fees

103

81

288

258

Professional fees

357

358

1,775

914

Insurance

165

37

389

122

Telephone, postage and supplies

210

75

391

231

Other

902

124

7,799

433

Total noninterest expense

7,571

3,409

27,984

10,114

Income (Loss) Before Income Tax Expense

1,355

274

( 9,071

)

1,148

Income Tax Expense (Benefit)

292

14

( 1,243

)

135

Net Income (Loss)

1,063

260

( 7,828

)

1,013

Basic earnings (loss) per share

$

0.12

$

—

$

( 1.27

)

$

—

Diluted earnings (loss) per share

$

0.12

$

—

$

( 1.27

)

$

—

Weighted average number of common shares
outstanding - basic

8,790,082

—

6,187,588

—

Weighted average number of common shares
outstanding - diluted

8,790,082

—

6,187,588

—

2

SR Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

For Three and Nine Months Ended March 31, 2024 and 2023 (Unaudited)

(Dollars in Thousands)

Three Months Ended March 31,

Nine Months Ended March 31,

2024

2023

2024

2023

(Unaudited)

Net Income (Loss)

$

1,063

$

260

$

( 7,828

)

$

1,013

Other Comprehensive Income (Loss)

Unrealized holding (losses) gains on
securities available-for-sale, net of
income tax (expense) benefit of
$ 59 , $( 104 ), $( 238 ) and $ 272 ,
respectively

( 167

)

299

660

( 774

)

Change in defined pension plan for
unrealized actuarial gains (losses)
net of income tax (expense) benefit
of $( 120 ), $( 169 ), $ 6 and $( 231 ),
respectively

306

427

( 17

)

587

Total other comprehensive income (loss)

139

726

643

( 187

)

Total comprehensive income (loss)

$

1,202

$

986

$

( 7,185

)

$

826

See notes to consolidated financial statements

3

SR Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For Three and Nine Months Ended March 31, 2024 and 2023 (Unaudited)

(Dollars in Thousands)

Common
Stock

Additional
Paid in
Capital

Retained
Earnings

Unearned
ESOP
Compensation

Accumulated
Other
Comprehensive
Loss

Total

Balance, July 1, 2022

$

—

$

—

$

125,546

$

—

$

( 7,315

)

$

118,231

Net income

—

—

354

—

—

354

Other comprehensive loss,
net of tax

—

—

—

—

( 774

)

( 774

)

Balance, September 30, 2022

$

—

$

—

$

125,900

$

—

$

( 8,089

)

$

117,811

Net income

$

—

$

—

$

399

$

—

$

—

$

399

Other comprehensive loss,
net of tax

—

—

—

—

( 139

)

( 139

)

Balance, December 31, 2022

$

—

$

—

$

126,299

$

—

$

( 8,228

)

$

118,071

Net income

$

—

$

—

$

260

$

—

$

—

$

260

Other comprehensive income,
net of tax

—

—

—

—

726

726

Balance, March 31, 2023

$

—

$

—

$

126,559

$

—

$

( 7,502

)

$

119,057

Balance, July 1, 2023

$

—

$

—

$

127,099

$

—

$

( 5,015

)

$

122,084

Net loss

—

—

( 10,498

)

—

—

( 10,498

)

Cumulative adjustment for
change in accounting principle
(ASU No. 2016-13)

—

—

( 34

)

—

—

( 34

)

Common stock issued,
9,507,930 shares

95

91,491

—

—

—

91,586

Initial funding of ESOP,
760,634 shares

—

—

—

( 7,606

)

—

( 7,606

)

ESOP shares committed for
allocation to participants,
1,162 shares

—

( 1

)

—

11

—

10

Other comprehensive loss,
net of tax

—

—

—

—

( 1,063

)

( 1,063

)

Balance, September 30, 2023

$

95

$

91,490

$

116,567

$

( 7,595

)

$

( 6,078

)

$

194,479

Net income

—

—

1,607

—

—

1,607

ESOP shares committed for
allocation to participants,
36,870 shares

—

( 41

)

—

369

—

328

Other comprehensive income,
net of tax

—

—

—

—

1,567

1,567

Balance, December 31, 2023

$

95

$

91,449

$

118,174

$

( 7,226

)

$

( 4,511

)

$

197,981

Net income

—

—

1,063

—

—

1,063

ESOP shares committed for
allocation to participants,
9,508 shares

—

( 5

)

—

95

—

90

Other comprehensive income,
net of tax

—

—

—

—

139

139

Balance, March 31, 2024

$

95

$

91,444

$

119,237

$

( 7,131

)

$

( 4,372

)

$

199,273

See notes to consolidated financial statements

4

SR Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended March 31, 2024 and 2023 (Unaudited)

(Dollars in Thousands)

Nine Months Ended March 31,

2024

2023

Cash Flows from Operating Activities

Net (loss) income

$

( 7,828

)

$

1,013

Adjustments to reconcile net (loss) income to net cash (used in) provided by
by operating activities:

Provision for credit losses

3,913

—

Depreciation

520

310

Deferred income tax benefit

( 1,454

)

( 334

)

Accretion of acquisition fair value adjustments, net

( 3,878

)

—

Amortization of core deposit intangible asset

933

—

Net amortization of premiums and discounts on securities

220

376

Net amortization of deferred loan fees, costs and discounts

279

448

Income from cash surrender value of bank owned life insurance

( 655

)

( 483

)

Stock-based compensation expense

428

—

Unrealized (gain) loss on equity securities

( 3

)

1

Realized gain on sale of investments

( 33

)

—

(Increase) decrease in:

Accrued interest receivable

( 84

)

( 27

)

Other assets

1,133

( 982

)

Other liabilities

99

1,118

Net cash (used in) provided by operating activities

( 6,410

)

1,440

Cash Flows from Investing Activities

Proceeds from sales, maturities and principal repayments of securities available-
for-sale

16,808

8,073

Proceeds from maturities and principal repayments of securities held-to-
maturity

11,747

17,610

Purchase of securities held-to-maturity

—

( 788

)

Proceeds from time deposits in other financial institutions

8,810

—

Net increase in loans receivable

( 14,454

)

( 23,230

)

Purchase of premises and equipment

( 358

)

( 378

)

Cash paid for acquisition

( 69,538

)

—

Cash received from acquisition

55,294

—

Net cash provided by investing activities

8,309

1,287

Cash Flows from Financing Activities

Net decrease in interest bearing deposits

( 35,330

)

( 4,262

)

Net decrease in non-interest bearing deposits

( 3,315

)

( 763

)

Net increase in advance payments by borrowers for taxes and insurance

2,810

137

Proceeds from borrowings

—

20,000

Repayment of borrowings

( 20,000

)

—

Proceeds from issuance of common stock

83,980

—

Net cash provided by financing activities

28,145

15,112

Net increase in cash and cash equivalents

30,044

17,839

Cash and Cash Equivalents, Beginning of Period

42,449

35,344

Cash and Cash Equivalents, End of Period

$

72,493

$

53,183

Supplementary Cash Flow Information

Cash paid during the period for:

Interest paid

$

6,361

$

1,345

Income taxes paid

$

475

$

410

Acquisition:

Fair value of assets acquired, net of cash and cash equivalents acquired

$

372,739

$

—

Goodwill recorded at merger

$

20,477

$

—

Fair value of liabilities assumed

$

378,972

$

—

See notes to consolidated financial statements

5

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.
Summary of Significant Accounting Policies

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 $ 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 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 into 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 .

Business

SR Bancorp, Inc., a Maryland corporation, is the holding company for Somerset Regal Bank. The Bank, which was formed in 1887, serves Essex, Hunterdon, Middlesex, Morris, Somerset and Union counties in New Jersey. The Bank is a New Jersey chartered commercial bank subject to the laws and regulations of federal and state agencies. As a locally managed community bank, the Bank provides customary retail and commercial banking services to individuals, businesses and local municipalities through its 15 full-service branch locations.

Principles of Consolidation

The consolidated financial statements include the accounts of SR Bancorp, Inc. and its wholly owned subsidiary the Bank, and its wholly-owned subsidiaries Somerset Investment Co. (the “Investment Co.”), RB Properties, LLC and Somerset Consumer Service Corp. (“SCS”). 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. RB Properties, LLC was formed to own and manage real estate property acquired through foreclosure or in lieu of foreclosure in connection with loans. RB Properties, LLC is currently inactive. SCS has had limited activity.

Basis of Presentation and Use of Estimates

The financial information contained in this Quarterly Report on Form 10-Q as of and for the three and nine months ended March 31, 2024 is for the Company and the Bank, unless indicated otherwise. However, due to the timing of the Merger, the statement of income (loss) and related disclosures only includes operations of the combined entity since September 19, 2023. Financial information as of June 30, 2023 and for the three and nine months ended March 31, 2023 is for Somerset Savings Bank, SLA, on a stand-alone basis.

6

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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 Company.

Valuation and possible credit related impairment of investment securities that are particularly susceptible to significant changes relate to the allowance for credit losses and the valuation of our deferred tax assets. Management believes that the evaluation of the allowance for credit losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for credit losses may be necessary based on changes in economic conditions in the market area.

Concentrations of Credit Risk

The Company'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 is mitigated by adhering to conservative underwriting practices and policies, and close monitoring of the loan portfolio. The Company does not have any significant concentrations to any one industry or customer.

Notes 4 and 5 discuss the types of investment securities in which the Company 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.

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 Company maintains accounts at other financial institutions with balances in excess of federal deposit insurance limits. The Company has not experienced any loss in such accounts.

Adoption of Accounting Standards Codification Topic 326: Financial Instruments - Credit Losses ("ASC 326")

On July 1, 2023, the Company adopted ASC 326 ("CECL"), which requires the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that was in use through June 30, 2023. Under this guidance, an entity measures all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The CECL model applies to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The Company recorded the effect of implementing CECL using a modified-retrospective approach through a cumulative effect adjustment through retained earnings as of July 1, 2023, the beginning of the reporting period in which CECL became effective. The adoption of the new standard resulted in an increase to the allowance for credit losses on loans of $ 34 . No allowances were recorded for investment securities or unfunded lending commitments at adoption, as the estimates of those losses were de minimus.

Securities

Investments in debt securities that the Company 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 to sell in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings.

7

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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.

Sales or dispositions of securities whose fair value exceed amortized cost are recognized in earnings. On a quarterly basis, the Company assesses investments with unrealized losses in its available-for-sale and held-to-maturity portfolios regarding its ability and intent to hold those investments until fair value equals or exceeds amortized cost.

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.

In compliance with ASC 326, the Company conducted a review of its investment portfolio to determine the appropriate level of credit losses to reserve for. A determination was made that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government that are backed by the full faith and credit of the U.S. Government, and its agencies. As of the date of adoption, the Company's estimated allowance for credit losses on securities available-for-sale and held-to-maturity under ASC 326 was deemed immaterial due to the composition of the underlying securities in these portfolios, which consist primarily of U.S. government agency mortgage-backed securities. Therefore, the Company did not recognize a cumulative effect adjustment through retained earnings related to these securities.

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 credit 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.

Following the completion of the Merger, the loans receivable portfolio was segmented as follows: multi-family real estate loans, owner occupied commercial real estate loans, other commercial real estate loans, commercial and industrial loans, residential mortgage loans and consumer loans.

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 credit 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 Credit Losses

The allowance for credit losses ("ACL") is a significant accounting estimate used in the preparation of the Company's consolidated financial statements. Upon adoption of ASC 326 on July 1, 2023, the Company replaced the incurred loss impairment model with a requirement to recognize lifetime expected credit losses on loans and

8

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

other financial instruments immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Arriving at an appropriate level of ACL involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.

The Company estimates expected credit losses using a combination of the cohort method and weighted average remaining maturities method. The loan portfolio is segmented into pools of loans by similar attributes and risk characteristics, as of a particular point in time, to which expected losses are calculated over their remaining lives, or until sufficiently attrited (i.e., have reached an acceptable stage at which a significant majority of all losses are expected to have been recognized). Each model factors historical loss rates into quantitative adjustments, to which management applies qualitative adjustments.

The ACL is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the ACL, 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 credit losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all credit losses.

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. Commercial real estate loans consist of multi-family real estate, owner-occupied, mixed use and other commercial real estate, as well as other commercial loans. Commercial and industrial loans are extended to businesses as either unsecured or secured by various types of collateral, such as accounts receivable, inventory, equipment and/or real estate. Consumer loans are primarily home equity loans and are generally secured by the borrower’s personal residence in a second lien position.

Prior to the adoption of ASC 326 on July 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan is considered individually impaired when, based on current information and events, it is probable that the 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 whether a loan is individually impaired 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 individually 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.

With the adoption of ASC 326, loans that do not share risk characteristics with existing pools are evaluated on an individual basis, such as collateral dependent loans. The Company considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset is expected to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

9

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

In addition, Federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses and may require the Company 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 credit losses is adequate.

Upon adoption of ASC 326 on July 1, 2023, the Company made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances separately on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the ACL, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income when a loan is placed on non-accrual. The Company's policy is to write-off accrued interest when a loan is placed on non-accrual. Historically, the Company has not experienced uncollectible accrued interest receivable on investment debt securities.

The exposure for unfunded commitments is a component of other liabilities on the Company's consolidated statement of financial condition and represents the estimate for current expected credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit, unfunded loan commitments, availability on construction and land development loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for unfunded commitments on the consolidated statements of income is made to account for the change in the ACL on unfunded commitment exposures between reporting periods.

Premises and Equipment, net

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 Company's incremental borrowing rate. The implicit rates of the Company's operating leases are not readily determinable, therefore the Company uses its incremental borrowing rate at the commencement date of each lease. The Company'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 leases that have a 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 also deemed short-term leases. The Company recognizes short-term lease costs on a straight-line basis over the lease term.

Leases acquired in a business combination are evaluated as of the acquisition date to determine if the terms of the acquired leases are more or less favorable than the market terms of similar agreements on the acquisition date. If the lease terms are favorable as compared to the market, the Company records an asset. If the lease terms are unfavorable as compared to the market, the Company records a liability. The Company acquired $ 3.4 million of operating leases in the acquisition of Regal Bancorp.

10

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Restricted Equity Securities

Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of March 31, 2024 and June 30, 2023. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of New York (the “FHLB”), Atlantic Community Bankers Bank (“ACBB”) and Bankers Compliance Group (“BCG”).

At March 31, 2024 and June 30, 2023, the Company held $ 1.3 million and $ 726 , in stock of the FHLB of New York, respectively. At March 31, 2024 and June 30, 2023, the Company held $ 120 and $ 0 , in stock of ACBB and BCG combined, respectively.

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 was necessary related to the FHLB, ACBB or BCG stock as of March 31, 2024 or June 30, 2023 .

Bank Owned Life Insurance

The Company 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 Company on a chosen group of employees. The Company 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 (loss).

Goodwill and Other Intangible Assets

The Company acquired goodwill through the acquisition of Regal Bancorp that it tests for impairment and adjusts as conditions warrant. At March 31, 2024, goodwill was $ 20.5 million . No impairment loss was recognized since the date of the Merger through March 31, 2024.

The Company acquired a core deposit premium intangible through the acquisition of Regal Bancorp that is amortized on an accelerated basis over ten years . At March 31, 2024, the core deposit premium intangible asset had a gross carrying amount of $ 9.1 million and accumulated amortization of $ 933 .

Revenue Recognition

The Company 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.

11

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Noninterest income is accounted for under ASC 606, Revenue from Contracts with Customers , and is discussed in greater detail below. 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 judgments 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 Regal Bank 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.

Gains or losses on sales of assets are generally recognized when the asset has been legally transferred to the buyer and the Company has no continuing involvement with the asset. The Company does not generally finance the sale of foreclosed assets.

Comprehensive Income (Loss)

U.S. GAAP requires comprehensive income (loss) 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 (loss) plus other comprehensive income, that is, certain revenues, expenses, gains, and losses that are reported as separate components of equity instead of net income. For the Company, the primary component of other comprehensive income (loss) is the unrealized holding gains or losses on available-for-sale investment securities. The Company 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 non-interest expense in the consolidated statement of income (loss). Advertising expense was approximately $ 204 and $ 155 for the nine months ended March 31, 2024 and 2023 , respectively.

Income Taxes

SR Bancorp, Inc. and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to SR Bancorp, Inc. 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 SR Bancorp, Inc. and its subsidiaries.

Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on SR Bancorp, Inc. 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 Company 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

12

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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 Company 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 Company’s evaluation, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized tax benefits at March 31, 2024 or June 30, 2023.

The Company’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 nine months ended March 31, 2024 or 2023 .

Retirement Benefits

The Bank has a funded noncontributory defined benefit pension plan that covered substantially all employees meeting certain eligibility requirements as of April 30, 2023. The cost of the pension plan is based on actuarial computations of current and future benefits for employees. The Bank froze the pension plan with respect to participation and benefit accounts effective as of April 30, 2023.

The 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.

The Bank also maintains a 401(k) Plan. Eligible employees who are at least 21 years old 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. In addition to salary deferral contributions, the 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.

Employee Stock Ownership Plan (the “ESOP”)

As part of the Conversion and stock offering, the Bank established the Somerset Regal Bank Employee Stock Ownership Plan to provide eligible employees of the Bank the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Bank employees. The ESOP was funded through the purchase of 760,634 shares th rough a loan from the Company. The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders' equity. The Company records compensation expense for the ESOP equal to fair market value of shares when they are committed to be released from the suspense account to participants' accounts under the plan.

Accounting Pronouncements Adopted

In February 2016, the FASB issued ASC 326 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 previous 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. ASC 326 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. ASC 326 and all subsequent amendments (collectively, “ASC 842”) required adoption by the Company on July 1, 2022 , though early adoption was permitted. The Company adopted ASC 842 during the first

13

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

quarter of the fiscal year ended June 30, 2023 , at which time the Company maintained only one equipment lease with an initial term greater than 12 months and had determined that the impact on its consolidated financial statements was no t material. Upon completion of the Merger, the Company acquired 10 operating leases for office space. As of March 31, 2024, the Company had not entered into any material leases that have not yet commenced.

The Company adopted ASC 326 on July 1, 2023. The transition to the new ASU resulted in a cumulative effect adjustment to the allowance for credit losses of $ 47 , an increase in deferred tax assets of $ 13 , and a decrease in retained earnings of $ 34 as of the adoption date. The impact of the reserve for unfunded liabilities to the consolidated financial statements was not material. The Company did not record an allowance for held-to-maturity securities on July 1, 2023 as the investment portfolio consists almost entirely of debt securities backed by the full faith of the U.S. Government for which credit risk is deemed negligible. The impact of this ASU could change in the future depending on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods.

The following table below presents the impact of ASC 326 on the consolidated balance sheet:

July 1, 2023

As reported under
ASC 326

Pre-ASC 326

Impact of
ASC 326

(Dollars in thousands)

Assets

ACL on loans:

Owner occupied commercial real estate

$

—

$

—

$

—

Other commercial real estate

( 6

)

( 4

)

( 2

)

Multi-family

—

—

—

Commercial and industrial

—

—

—

Residential

( 1,125

)

( 1,039

)

( 86

)

Consumer

( 32

)

( 73

)

41

Unallocated

—

—

—

Total ACL on loans

$

( 1,163

)

$

( 1,116

)

$

( 47

)

Deferred income taxes

$

1,945

$

1,958

$

( 13

)

Liabilities

Liability for credit losses for unfunded
commitments

$

1

$

—

$

1

Shareholders' equity

Retained earnings

$

127,065

$

127,099

$

( 34

)

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. For public business entities, these amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross charge-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. ASU No. 2022-02 was effective for the Company on July 1, 2023 .

Subsequent Events

The Company has evaluated subsequent events for recognition or disclosure through May 15, 2024 , the date consolidated financial statements were available to be issued.

14

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

2.
Business Combination

On September 19, 2023 , the Company completed its acquisition of Regal Bancorp, Inc. and its wholly-owned subsidiary Regal Bank, under which Regal Bancorp merged with and into the Company, with the Company as the resulting entity. Immediately following the Merger, Regal Bank merged with and into Somerset Bank, which had converted to a commercial bank charter, with Somerset Bank as the surviving entity, and was renamed Somerset Regal 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 assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of September 19, 2023 based on management’s best estimate using the information available as of the merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $ 20.5 million and a core deposit intangible of $ 9.1 million . Accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through September 19, 2024. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Items that could be subject to adjustment include credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

15

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Merger-related expenses of $ 3,856 for the three months ended September 30, 2023 were re corded in the consolidated statements of income (loss) and were expensed as incurred. The following table sets forth assets acquired and liabilities assumed in the acquisition of Regal Bancorp, at their estimated fair values as of the closing date of the transaction:

As recorded
by Regal
Bancorp

Fair value
adjustments

As recorded
at acquisition

Consideration paid ( 3,023,369 Regal
Bancorp shares at $ 23.00 per share)

69,538

Assets Acquired

Cash and cash equivalents

$

55,294

$

—

$

55,294

Time deposits in other financial institutions

8,810

8,810

Securities available-for-sale, at fair value

12,487

12,487

Securities held-to-maturity, at amortized cost

2,587

2,587

Federal Home Loan Bank stock and other
restricted stock

548

548

Loans receivable, net

335,971

( 14,371

)

(a)

321,600

Allowance for credit losses

( 4,076

)

4,076

(b)

—

Accrued interest receivable

1,214

1,214

Premises and equipment, net

1,570

1,570

Right-of-use asset

3,416

3,416

Goodwill

1,047

( 1,047

)

(c)

—

Core deposit intangible

26

9,038

(d)(e)

9,064

Deferred costs

224

( 224

)

(f)

—

Bank owned life insurance

7,470

7,470

Net deferred tax asset

1,766

( 91

)

(g)

1,675

Other assets

2,298

2,298

Total assets acquired

$

430,652

$

( 2,619

)

$

428,033

Liabilities assumed

Deposits

$

373,174

$

( 1,299

)

(h)

$

371,875

Lease liability

3,444

3,444

Deferred compensation

1,521

1,521

Accrued expenses and other liabilities

2,132

2,132

Total liabilities assumed

$

380,271

$

( 1,299

)

$

378,972

Net assets acquired

$

49,061

Goodwill recorded at merger

20,477

(a)
Adjustment for interest rate and credit risk to reduce loans to fair value, to be amortized as an increase to interest income over their remaining term
(b)
Elimination of Regal Bank allowance for loan losses.
(c)
Elimination of pre-existing goodwill.
(d)
Recording of new intangible asset for the fair value of core deposits, to be amortized on an accelerated basis over the estimated average life of the deposit base.
(e)
Elimination of pre-existing intangible asset for the fair value of core deposits.
(f)
Elimination of deferred costs
(g)
Recording of the deferred income tax effects of fair value adjustments.
(h)
Adjustment to reduce time deposits to fair value, to be amortized as an increase to interest expense over their remaining term.

During the three months ended September 30, 2023, the Company recorded one-time merger-related expenses of $3.9 million, consisting of $ 2.6 million for change in control payments, $ 612 for investment banking services, $ 414 related to the termination of a data processing contract, $ 99 for legal related expenses, $ 42 for severance payments, $ 17 in other professional services and $ 30 in other miscellaneous expenses. In addition, the Company recorded a $ 5.4 million charitable contribution expense for the establishment of the Somerset Regal Charitable Foundation, as well as a $ 4.2 million provision for estimated credit losses in connection with the acquired loan portfolio.

16

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The fair value of loans acquired from Regal Bank was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Regal Bank’s allowance for credit losses associated with the loans that were acquired. The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum-of-the-years digits method. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value. Due to the complexity in valuing the assets acquired and liabilities assumed and the significant amount of data inputs required, the valuation of the assets and liabilities acquired is not yet final. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available.

The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowings was based on the FHLB calculation to prepay borrowings with associated penalties.

3.
Earnings (Loss) Per Share

Basic earnings (loss) per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding. Unallocated ESOP shares are not deemed outstanding for earnings (loss) per share calculations. There were no potentially dilutive common stock equivalents outstanding for the three and nine months ended March 31, 2024. Earnings (loss) per share data is not applicable for the three and nine months ended March 31, 2023 because the Company had not yet been formed and had no shares outstanding.

The following table presents the composition of the weighted average common shares used in the earnings per share calculation:

Three Months Ended
March 31,

Nine Months Ended
March 31,

2024

2023

2024

2023

Net income (loss) applicable to common shares

$

1,063

$

—

$

( 7,828

)

$

—

Weighted average number of common shares
outstanding

9,507,930

—

6,707,412

—

Less: Average unallocated ESOP shares

( 717,848

)

—

( 519,824

)

—

Weighted average number of common shares
outstanding, net

8,790,082

—

6,187,588

—

Basic and diluted earnings (loss) per common share

$

0.12

$

—

$

( 1.27

)

$

—

17

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

4.
Securities Available-for-Sale

The amortized cost and approximate fair value of securities available-for-sale at March 31, 2024 and June 30, 2023 are as follows:

March 31, 2024 (Unaudited)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Federal National Mortgage Association

$

20,855

$

63

$

( 2,155

)

$

18,763

Government National Mortgage Association

187

9

—

196

Federal Home Loan Mortgage Corporation

15,595

—

( 1,926

)

13,669

Total securities available-for-sale

$

36,637

$

72

$

( 4,081

)

$

32,628

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

The amortized cost and fair value of debt securities available-for-sale by contractual maturity at March 31, 2024 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and collateralized mortgage obligations ("CMOs"), which are based on the estimated average life of the securities.

March 31, 2024 (Unaudited)

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

36,637

32,628

Total securities available-for-sale

$

36,637

$

32,628

The unrealized losses as of March 31, 2024 and June 30, 2023, categorized by the length of time of continuous loss position, and the fair value of related available-for-sale are as follows:

March 31, 2024 (Unaudited)

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

$

—

$

—

$

17,247

$

( 2,155

)

$

17,247

$

( 2,155

)

Government National Mortgage
Association

—

—

—

—

—

—

Federal Home Loan Mortgage
Corporation

—

—

13,669

( 1,926

)

13,669

( 1,926

)

Total

$

—

$

—

$

30,916

$

( 4,081

)

$

30,916

$

( 4,081

)

18

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

)

All mortgage-backed securities are U.S. Government agency backed and collateralized by residential mortgages. During the nine months ended March 31, 2024, the Company acquired $ 21.3 million of available-for-sale securities from the Regal Bancorp acquisition. The Company did no t purchase any other available-for-sale securities during the three and nine months ended March 31, 2024. Following the completion of the Merger, the Company sold $ 19.2 million of its available-for-sale portfolio, which resulted in a realized gain of $ 17 . During the nine months ended March 31, 2024 , there were no other sales of securities available-for-sale. During the nine months ended March 31, 2023 , gross gains of $ 0 and gross losses of $ 6 resulting from sales of $ 457 of securities available-for-sale were realized.

5.
Securities Held-to-Maturity

The amortized cost and approximate fair values of securities held-to-maturity at March 31, 2024 and June 30, 2023 are as follows:

March 31, 2024 (Unaudited)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Federal National Mortgage Association

$

97,444

$

2

$

( 16,718

)

$

80,728

Federal Home Loan Mortgage Corporation

51,318

81

( 8,184

)

43,215

Government National Mortgage Association

288

—

( 2

)

286

Subordinated Debt

7,750

—

( 1,438

)

6,312

CMO

2,522

—

( 236

)

2,286

Foreign Government Bonds

300

—

—

300

Annuities

2,195

—

—

2,195

Total securities held-to-maturity

$

161,817

$

83

$

( 26,578

)

$

135,322

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

19

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The amortized cost and fair value of securities held-to-maturity by contractual maturity at March 31, 2024 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations. 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.

March 31, 2024 (Unaudited)

Amortized
Cost

Fair
Value

Due within 1 year

$

100

$

100

Due after 1 but within 5 years

7,950

6,512

Due after 5 but within 10 years

—

—

Due after 10 years

—

—

Mortgage-backed securities

153,767

128,710

Total securities held-to-maturity

$

161,817

$

135,322

The unrealized losses as of March 31, 2024 and June 30, 2023, categorized by the length of time of continuous loss position, and the fair value of related securities held-to-maturity are as follows:

March 31, 2024 (Unaudited)

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

$

—

$

—

$

80,737

$

( 16,718

)

$

80,737

$

( 16,718

)

Federal Home Loan Mortgage
Corporation

—

—

43,215

( 8,184

)

43,215

( 8,184

)

Government National
Mortgage Association

—

—

286

( 2

)

286

( 2

)

Subordinated Debt

—

—

6,312

( 1,438

)

6,312

( 1,438

)

CMO

—

—

2,286

( 236

)

2,286

( 236

)

Foreign Government Bonds

—

—

—

—

—

—

Annuities

—

—

—

—

—

—

Total

$

—

$

—

$

132,836

$

( 26,578

)

$

132,836

$

( 26,578

)

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

)

Upon adoption of ASC 326, management no longer evaluates securities for other than temporary impairment. On a quarterly basis, management evaluates whether there is a credit loss associated with any declines in fair value. Management considers the nature of the collateral, default rates, delinquency rates, credit ratings and interest rate changes, among other factors. However, the Company has determined that U.S. government agencies and mortgage-backed securities of U.S. government and government-sponsored agencies have a zero expected credit loss as they are all backed by the full faith and credit of the United States Government, or one of its agencies.

20

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

At March 31, 2024 and June 30, 2023, the Company had $ 27 and 24 , 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 nine months ended March 31, 2024 and 2023:

Nine Months Ended March 31,

2024

2023

Net gains recognized on equity securities

$

3

$

( 1

)

Less: Net gains (losses) recognized on equity
securities sold/acquired

—

—

Net unrealized gains recognized on
equity securities

$

3

$

( 1

)

At March 31, 2024 and June 30, 2023, mortgage-backed securities with a carrying value of approximately $ 2,108 and $ 1 , respectively, were pledged as collateral to secure public funds on deposit. During the nine months ended March 31, 2024 , there were no sales of securities held-to-maturity. During the nine months ended March 31, 2024 and 2023 gross gains of $ 4 and gross losses of $ 117 resulting from sales of securities held-to-maturity were realized.

6.
Loans Receivable

Loans at March 31, 2024 and June 30, 2023 are summarized as follows:

March 31, 2024

June 30, 2023

Owner occupied commercial real estate loans

$

60,413

$

144

Other commercial real estate loans

75,973

296

Multi-family loans

166,907

10

Commercial and industrial loans

12,358

—

Total commercial loans

315,651

450

Residential mortgage loans

375,065

353,624

Consumer and other loans

11,296

7,349

Total loans

702,012

361,423

Allowance for credit losses

( 5,076

)

( 1,116

)

Deferred loan costs, net

1,955

1,945

Loans receivable, net

$

698,891

$

362,252

The Company engages primarily in the lending of fixed-rate and adjustable-rate commercial real estate and residential mortgage loans. Lending activities are targeted to individuals within the Company'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 creditworthiness 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 75 % for commercial loans, 80 % for multifamily loans and 80 % for residential loans. 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.

At March 31, 2024, commercial loans represented 45.0 % of total loans receivable, net, while residential mortgage, consumer and other loans represented 55.0 % , nearly all of which is concentrated within our primary market area in New Jersey. The Company holds 96.1 % of its commercial loan portfolio in commercial real estate, consisting of multi-family, mixed use and owner occupied loans, with less than 1 % secured by office buildings. At March 31, 2024 , the Company had one non-accrual commercial loan in the amount of $ 72 .

21

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The Company adopted ASC 326 on July 1, 2023. All disclosures are presented in accordance with ASC 326 as of March 31, 2024 . The following tables summarize the activity in the allowance for credit losses by loan class for the three and nine months ended March 31, 2024 and 2023, prior to the adoption of ASC 326, and information in regards to the allowance for credit losses and the recorded investment in loans receivable by loan class as of March 31, 2024 and June 30, 2023, prior to the adoption of ASC 326:

Three Months Ended March 31, 2024 (Unaudited)

Owner
Occupied
Commercial
Real Estate

Other
Commercial
Real Estate

Multi-
Family

Commercial
and
Industrial

Residential
Mortgage

Consumer
and Other

Total

Allowance for Credit
Losses:

Beginning balance

$

1,364

$

533

$

1,869

$

146

$

1,285

$

21

$

5,218

Charge-offs

—

—

—

—

—

—

—

Recoveries

—

—

—

—

—

—

—

Provisions (credits)

( 27

)

( 11

)

40

( 3

)

( 152

)

11

( 142

)

Ending balance

$

1,337

$

522

$

1,909

$

143

$

1,133

$

32

$

5,076

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Ending balance,

Collectively evaluated
for impairment

$

1,337

$

522

$

1,909

$

143

$

1,133

$

32

$

5,076

Loans Receivable:

Ending balance

$

60,413

$

75,973

$

166,907

$

12,358

$

375,065

$

11,296

$

702,012

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

72

$

148

$

—

$

220

Ending balance,

Collectively evaluated
for impairment

$

60,413

$

75,973

$

166,907

$

12,286

$

374,917

$

11,296

$

701,792

Three Months Ended March 31, 2023 (Unaudited)

Owner
Occupied
Commercial
Real Estate

Other
Commercial
Real Estate

Multi-
Family

Commercial
and
Industrial

Residential
Mortgage

Consumer
and Other

Total

Allowance for Credit
Losses:

Beginning balance

$

—

$

4

$

—

$

—

$

1,039

$

73

$

1,116

Charge-offs

—

—

—

—

—

—

—

Recoveries

—

—

—

—

—

—

—

Provisions (credits)

—

—

—

—

1

( 1

)

—

Ending balance

$

—

$

4

$

—

$

—

$

1,040

$

72

$

1,116

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Ending balance,

Collectively evaluated
for impairment

$

—

$

4

$

—

$

—

$

1,040

$

72

$

1,116

Loans Receivable:

Ending balance

$

—

$

431

$

13

$

—

$

348,795

$

7,250

$

356,489

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

147

$

—

$

147

Ending balance,

Collectively evaluated
for impairment

$

—

$

431

$

13

$

—

$

348,648

$

7,250

$

356,342

22

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended March 31, 2024 (Unaudited)

Owner
Occupied
Commercial
Real Estate

Other
Commercial
Real Estate

Multi-
Family

Commercial
and
Industrial

Residential
Mortgage

Consumer
and Other

Total

Allowance for Credit
Losses:

Beginning balance

$

—

$

4

$

—

$

—

$

1,039

$

73

$

1,116

Impact of ASC 326

—

—

—

—

27

20

47

Charge-offs

—

—

—

—

—

—

—

Recoveries

—

—

—

—

—

—

—

Provisions (credits)

1,337

518

1,909

143

67

( 61

)

3,913

Ending balance

$

1,337

$

522

$

1,909

$

143

$

1,133

$

32

$

5,076

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Ending balance,

Collectively evaluated
for impairment

$

1,337

$

522

$

1,909

$

143

$

1,133

$

32

$

5,076

Loans Receivable:

Ending balance

$

60,413

$

75,973

$

166,907

$

12,358

$

375,065

$

11,296

$

702,012

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

72

$

148

$

—

$

220

Ending balance,

Collectively evaluated
for impairment

$

60,413

$

75,973

$

166,907

$

12,286

$

374,917

$

11,296

$

701,792

Nine Months Ended March 31, 2023 (Unaudited)

Owner
Occupied
Commercial
Real Estate

Other
Commercial
Real Estate

Multi-
Family

Commercial
and
Industrial

Residential
Mortgage

Consumer
and Other

Total

Allowance for Credit
Losses:

Beginning balance

$

—

$

5

$

—

$

—

$

1,036

$

75

$

1,116

Charge-offs

—

—

—

—

—

—

—

Recoveries

—

—

—

—

—

—

—

Provisions (credits)

—

( 1

)

—

—

4

( 3

)

—

Ending balance

$

—

$

4

$

—

$

—

$

1,040

$

72

$

1,116

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Ending balance,

Collectively evaluated
for impairment

$

—

$

4

$

—

$

—

$

1,040

$

72

$

1,116

Loans Receivable:

Ending balance

$

—

$

431

$

13

$

—

$

348,795

$

7,250

$

356,489

Ending balance,

Individually evaluated
for impairment

$

—

$

—

$

—

$

—

$

147

$

—

$

147

Ending balance,

Collectively evaluated
for impairment

$

—

$

431

$

13

$

—

$

348,648

$

7,250

$

356,342

23

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following table presents the credit risk profile of loans by class and fiscal year of origination as of March 31, 2024:

March 31, 2024 (Unaudited)

2024

2023

2022

2021

2020

Prior

Revolving

Total

Owner Occupied Commercial
Real Estate

Risk Rating

Pass

$

6,357

$

7,485

$

7,497

$

5,570

$

1,994

$

31,510

$

—

$

60,413

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Owner Occupied Commercial
Real Estate

$

6,357

$

7,485

$

7,497

$

5,570

$

1,994

$

31,510

$

—

$

60,413

Other Commercial Real Estate

Risk Rating

Pass

$

169

$

3,997

$

2,942

$

1,757

$

10,938

$

56,170

$

—

$

75,973

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Other Commercial Real Estate

$

169

$

3,997

$

2,942

$

1,757

$

10,938

$

56,170

$

—

$

75,973

Multi-Family

Risk Rating

Pass

$

1,496

$

27,652

$

24,255

$

12,686

$

7,435

$

93,382

$

—

$

166,906

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Multi-Family

$

1,496

$

27,652

$

24,255

$

12,686

$

7,435

$

93,382

$

—

$

166,906

Commercial and Industrial

Risk Rating

Pass

$

287

$

1,950

$

2,822

$

1,393

$

2,367

$

3,467

$

—

$

12,286

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

72

—

72

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Commercial and Industrial

$

287

$

1,950

$

2,822

$

1,393

$

2,367

$

3,539

$

—

$

12,358

Residential Mortgage

Risk Rating

Pass

$

43,201

$

56,079

$

77,427

$

76,128

$

31,174

$

90,908

$

—

$

374,917

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

148

—

148

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Residential Mortgage

$

43,201

$

56,079

$

77,427

$

76,128

$

31,174

$

91,056

$

—

$

375,065

Consumer and Other

Risk Rating

Pass

$

449

$

385

$

171

$

45

$

185

$

1,084

$

8,977

$

11,296

Special mention

—

—

—

—

—

—

—

—

Substandard

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

Total Consumer and Other

$

449

$

385

$

171

$

45

$

185

$

1,084

$

8,977

$

11,296

Gross charge-offs

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

24

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following table presents the recorded investment in loans receivable by major category and credit quality indicators at March 31, 2024:

March 31, 2024 (Unaudited)

Pass

Special
Mention

Substandard

Doubtful

Total

Owner occupied commercial real estate

$

60,413

$

—

$

—

$

—

$

60,413

Other commercial real estate

75,973

—

—

—

$

75,973

Multi-family

166,907

—

—

—

$

166,907

Commercial and industrial

12,286

—

72

—

$

12,358

Residential Mortgage

374,917

—

148

—

$

375,065

Consumer and Other

11,296

—

—

—

$

11,296

Total

$

701,792

$

—

$

220

$

—

$

702,012

The following table presents the recorded investment in loans receivable by major category and credit quality indicators at June 30, 2023, prior to the adoption of ASC 326:

June 30, 2023

Pass

Special
Mention

Substandard

Doubtful

Total

Owner occupied commercial real estate

$

144

$

—

$

—

$

—

$

144

Other commercial real estate

296

—

—

—

$

296

Multi-family

10

—

—

—

$

10

Commercial and industrial

—

—

—

—

$

—

Residential Mortgage

353,479

—

145

—

$

353,624

Consumer and Other

7,349

—

—

—

$

7,349

Total

$

361,278

$

—

$

145

$

—

$

361,423

25

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following table presents a distribution of the recorded investment and unpaid principal balance of impaired loans and the related allowance as of June 30, 2023, prior to the adoption of ASC 326.

June 30, 2023

Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

With no related allowance recorded:

Owner occupied commercial real estate

$

—

$

—

$

—

$

—

$

—

Other commercial real estate

—

—

—

—

—

Multi-family

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

Residential Mortgage

145

145

—

114

—

Consumer and Other

—

—

—

—

—

Total

145

145

—

114

—

With an allowance recorded:

Owner occupied commercial real estate

$

—

$

—

$

—

$

—

$

—

Other commercial real estate

—

—

—

—

—

Multi-family

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

Residential Mortgage

—

—

—

—

—

Consumer and Other

—

—

—

—

—

Total

—

—

—

—

—

Total:

Owner occupied commercial real estate

$

—

$

—

$

—

$

—

$

—

Other commercial real estate

—

—

—

—

—

Multi-family

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

Residential Mortgage

145

145

—

114

—

Consumer and Other

—

—

—

—

—

Total

$

145

$

145

$

—

$

114

$

—

The following table presents the amortized cost of collateral-dependent non-accrual loans by portfolio segment and type of collateral as of March 31, 2024.

March 31, 2024 (Unaudited)

Type of Collateral

Residential
Property

Commercial
Property

Business
Assets

Total

Loans:

Owner occupied commercial real estate

$

—

$

—

$

—

$

—

Other commercial real estate

—

—

—

—

Multi-family

—

—

—

—

Commercial and industrial

—

72

—

72

Residential Mortgage

148

—

—

148

Consumer and Other

—

—

—

—

Total collateral dependent loans

$

148

$

72

$

—

$

220

26

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following tables present the classes of loans summarized by the past due status as of March 31, 2024 and June 30, 2023:

March 31, 2024 (Unaudited)

Delinquency Status

Current

30-59 Days
Past Due

60-89 Days
Past Due

90+ Days
Past Due

Total Loans

>90 Days
and
Accruing

Non-
Accrual

Owner occupied commercial real estate

$

60,413

$

—

$

—

$

—

$

60,413

$

—

$

—

Other commercial real estate

75,973

—

—

—

75,973

—

—

Multi-family

166,907

—

—

—

166,907

—

—

Commercial and industrial

12,358

—

—

—

12,358

—

72

Residential Mortgage

374,350

715

—

—

375,065

—

148

Consumer and Other

11,296

—

—

—

11,296

—

—

Total

$

701,297

$

715

$

—

$

—

$

702,012

$

—

$

220

June 30, 2023

Delinquency Status

Current

30-59 Days
Past Due

60-89 Days
Past Due

90+ Days
Past Due

Total Loans

>90 Days
and
Accruing

Non-
Accrual

Owner occupied commercial real estate

$

144

$

—

$

—

$

—

$

144

$

—

$

—

Other commercial real estate

296

—

—

—

296

—

—

Multi-family

10

—

—

—

10

—

—

Commercial and industrial

—

—

—

—

—

—

—

Residential Mortgage

353,041

383

—

200

353,624

—

145

Consumer and Other

7,349

—

—

—

7,349

—

—

Total

$

360,840

$

383

$

—

$

200

$

361,423

$

—

$

145

At March 31, 2024 and June 30, 2023 , the Company had no foreclosed real estate owned.

7.
Premises and Equipment

Premises and equipment at March 31, 2024 and June 30, 2023 are summarized as follows:

March 31, 2024

June 30, 2023

(Unaudited)

Land

$

926

$

926

Buildings and leasehold improvements

9,172

7,796

Furniture, fixtures and equipment

5,151

4,608

Total

15,249

13,330

Accumulated depreciation

( 10,295

)

( 9,784

)

Net

$

4,954

$

3,546

Depreciation expense amounted to $ 520 and $ 310 for the nine months ended March 31, 2024 and 2023 , respectively.

8.
Leases

The Company accounts for its leases in accordance with ASC Topic 842. The Company's right-of-use asset and operating lease liability are recognized at lease commencement based on the present value of the remaining lease payment obligations using discount rates that represent the Company’s incremental borrowing rate as of the lease commencement dates. The Company leases only office space and equipment under operating leases, with original lease terms ranging from five to ten years . The Company elected not to include short-term leases with initial terms of twelve months or less on the Consolidated Statements of Financial Condition. The operating lease agreements recognized on the Consolidated Statements of Financial Condition as a right-of-use asset and a

27

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

corresponding lease liability, as well as other information related to the Company's operating leases, are summarized in the table below.

Nine Months Ended March 31,

2024

2023

(Dollars in thousands)

Cash paid for amounts included in the
measurement of lease liabilities

$

965

$

5

Weighted-average remaining lease term, in years

2.4

3.2

Weighted-average discount rate

1.8

3.3

Future undiscounted minimum lease payments for operating leases with initial terms of one year or more as of March 31, 2024 are as follows:

March 31, 2024

(Dollars in
thousands)

2024

$

872

2025

716

2026

504

2027

393

2028

278

Thereafter

176

Total future minimum lease payments

2,939

Less: imputed interest

( 80

)

Total

$

2,859

9.
Deposits

Deposits at March 31, 2024 and June 30, 2023 consisted of the following:

March 31, 2024

June 30, 2023

(Unaudited)

Demand accounts:

Interest-bearing

$

259,044

$

137,496

Noninterest-bearing

123,463

40,687

Total demand accounts

382,507

178,183

Savings and club

181,263

166,253

Certificates of deposit

274,265

159,481

Total

$

838,035

$

503,917

Certificates of deposit with balances in excess of the Federal Deposit Insurance Corporation (the"FDIC") insurance limit of $250 at March 31, 2024 and June 30, 2023 amounted to approximately $ 21.5 million and $ 13.4 million, respectively.

At March 31, 2024, the scheduled maturities of certificates of deposit are as follows:

2024

$

179,940

2025

83,388

2026

5,278

2027

3,397

2028

2,099

2029

163

Total

$

274,265

28

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

10.
Borrowings

At March 31, 2024 and June 30, 2023, the Company can borrow overnight funds from the FHLB under a redesigned overnight advance program up to the Company’s maximum borrowing capacity based on the Company’s ability to collateralize such borrowings. At March 31, 2024 and June 30, 2023, the Company's maximum borrowing capacity was $ 100.0 million.

At March 31, 2024 and June 30, 2023, the Company's Board of Directors authorized borrowings of up to $ 25.0 million from the Federal Reserve Bank of New York (“FRB-NY”), secured by pledges of the Company’s qualifying loan portfolio and 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 ensure they have the ability to meet the needs of their depositors following the events that occurred in the banking industry earlier in 2023. 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. On March 29, 2023, Company borrowed $ 20.0 million under the BTFP at a borrowing rate of 4.76 %, which it repaid in full during the three months ended March 31, 2024.

At March 31, 2024 , the Company had no outstanding borrowings. At June 30, 2023 , the Company had $ 20.0 million of outstanding borrowings.

11.
Commitments and Contingencies

The Company 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 Company'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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At March 31, 2024, total unfunded loan related commitments, including lines of credit, amounted to $ 69.4 million , comprised of $ 36.6 million for unused equity lines of credit and $ 32.8 million to originate and purchase loans, expiring within three months .

At June 30, 2023, total unfunded loan related commitments, including lines of credit, amounted to $ 30.5 million , comprised of $ 23.7 million for unused equity lines of credit and $ 6.7 million 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

A reserve for unfunded commitments is recognized and included in other liabilities on the consolidated statements of financial condition. Periodic adjustments to either increase or decrease the reserve are recognized in non-interest expense in the consolidated statements of income. The balance for unfunded commitments was $ 13 at March 31, 2024. Upon the adoption of ASC 326 on July 1, 2023, the Company recorded an additional reserve for

29

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

unfunded commitments of $ 1 . For the nine months ended March 31, 2024, the Company recorded a provision for unfunded commitments, which resulted in an increase to the reserve for unfunded commitments of $ 12 .

12.
Regulatory Capital

The 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 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 Bank adopted the new community bank leverage ratio framework. This framework simplifies the regulatory capital requirements by requiring the Bank to meet only the Tier 1 capital to average assets (leverage) ratio. The Bank must only maintain a leverage ratio greater than the 9.0 % required minimum to be considered well capitalized under this framework. The Bank can opt out of the new framework and return to the risk-weighting framework at any time.

Market risk, credit risk, operational risk and deposit outflows are some of the factors that can impact the capital adequacy ratio and in turn, adversely affect the performance of the Bank. As of March 31, 2024, management believes that the Bank meets all capital adequacy requirements to which they are subject. As of March 31, 2024 , the most recent notification from the FDIC categorized the 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 Bank's category. The Bank's actual capital amounts and ratios are as follows:

To be Well Capitalized

For Capital Adequacy

under Prompt Corrective

Actual

Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollar Amounts in Thousands)

March 31, 2024 (Unaudited):

Tier 1 capital (to average total assets)

$

172,863

16.58

%

$

41,716

4.00

%

$

93,861

9.00

%

June 30, 2023:

Tier 1 capital (to average total assets)

$

127,099

19.48

%

$

26,104

4.00

%

$

58,735

9.00

%

13.
Fair Value Measurements and Disclosures

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company 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

30

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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;

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 Company's 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 March 31, 2024 and June 30, 2023, the fair value measurements by level within the fair value hierarchy used are as follows:

March 31, 2024 (Unaudited)

Description

(Level 1)

(Level 2)

(Level 3)

Total

Securities available-for-sale:

Federal National Mortgage Association

$

—

$

18,763

$

—

$

18,763

Government National Mortgage Association

—

$

196

—

196

Federal Home Loan Mortgage Corporation

—

13,669

—

13,669

Equity securities

27

—

—

27

Total

$

27

$

32,628

$

—

$

32,655

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

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.

31

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

There were no transfers between levels within the fair value hierarchy during the nine months ended March 31, 2024 and 2023.

Fair Value on a Nonrecurring Basis

The Company discloses fair value information about financial assets, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial assets that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, the estimates below are not necessarily indicative of amounts that could be realized in the marketplace. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2024 and June 30, 2023 were as follows:

March 31, 2024 (Unaudited)

Description

Total

(Level 1)

(Level 2)

(Level 3)

Financial Assets:

Cash and cash equivalents

$

72,493

$

72,493

$

—

$

—

Securities held-to-maturity, at amortized cost

161,817

—

135,322

—

Restricted equity securities, at cost

1,274

—

1,274

—

Loans receivable, net

698,891

—

—

658,704

Accrued interest receivable

2,487

—

2,487

—

Financial Liabilities:

Deposits

838,035

—

682,077

—

Borrowings

—

—

—

—

June 30, 2023

Description

Total

(Level 1)

(Level 2)

(Level 3)

Financial Assets:

Cash and cash equivalents

$

42,449

$

42,449

$

—

$

—

Securities held-to-maturity, at amortized cost

171,185

—

142,075

—

Restricted equity securities, at cost

726

—

726

—

Loans receivable, net

362,252

—

—

314,886

Accrued interest receivable

1,189

—

1,189

—

Financial Liabilities:

Deposits

503,917

—

429,279

—

Borrowings

20,000

—

19,883

—

Loans

The fair values of performing loans was estimated by segregating the portfolio into its primary loan categories—owner occupied commercial real estate, other commercial real estate, multi-family, commercial and industrial, residential and consumer. These categories were further disaggregated based upon significant financial characteristics such as type of interest rate (fixed/variable). The Company discounts the contractual cash flows for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar quality and incorporates estimates of future loan prepayments.

32

SR Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Deposits

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. 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.

Borrowed Funds

The fair value of federal funds purchased is equal to the amount borrowed. The fair value of FRB-NY advances represents contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities. The discount rates used are representative of approximate rates currently offered on borrowings with similar characteristics and maturities.

33

Ite m 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview; Completed Stock Offering and Merger

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.

The conversion of Somerset Savings Bank, SLA from the mutual to stock form of organization and related stock offering by the Company 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 $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 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 converted to a commercial bank charter, and was renamed Somerset Regal 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.

The financial information contained in this Form 10-Q as of and for the three and nine months ended March 31, 2024 is for SR Bancorp and Somerset Regal Bank, unless indicated otherwise. However, due to the timing of the merger noted above, the income statement only includes operations of the combined entity since September 19, 2023. Financial information as of June 30, 2023 and for the three and nine months ended March 31, 2023 is for Somerset Savings Bank, SLA, on a stand-alone basis.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

•
statements of our goals, intentions and expectations;
•
statements regarding our business plans, prospects, growth and operating strategies;
•
statements regarding the quality of our loan and investment portfolios; and
•
estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.

34

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•
general economic conditions, either nationally or in our market areas, that are worse than expected, including potential recessionary conditions;
•
inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
•
our ability to integrate the operations of Regal Bank into Somerset Regal Bank in a timely and cost efficient manner;
•
our inability to successfully integrate acquired employees or operations or achieve the expected level of synergies or cost savings;
•
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of and the methodology calculating the adequacy of the allowance for credit losses;
•
our ability to access cost-effective funding;
•
changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;
•
fluctuations in real estate values and both residential and commercial real estate market conditions;
•
demand for loans and deposits in our market area;
•
our ability to implement and change our business strategy;
•
competition among depository and other financial institutions;
•
adverse changes in the securities or secondary mortgage markets;
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums or changes in the fiscal or monetary policies of the U.S. Treasury or Board of Governors of the Federal Reserve System;
•
changes in the quality or composition of our loan or investment portfolios;
•
technological changes that may be more difficult or expensive than expected;
•
the inability of third-party providers to perform as expected;
•
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
•
our ability to manage market risk, credit risk and operational risk;
•
changes in consumer spending, borrowing and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
•
the current or anticipated impact of military conflict, terrorism or other geopolitical event;
•
our ability to retain key employees;
•
our compensation expense associated with equity allocated or awarded to our employees; and
•
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

35

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

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 Form 10-Q.

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.

Management believes our most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows: allowance for credit losses and the valuation of our deferred tax assets.

Allowance for Credit Losses : The allowance for credit losses (“allowance” or “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 future 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. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. 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 the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower, among other things.

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

36

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 other factors such as the 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.

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.

Comparison of Financial Condition at March 31, 2024 and June 30, 2023

Total Assets . Total assets increased $401.3 million, or 61.6%, to $1.05 billion at March 31, 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 $428.0 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.

Cash and Cash Equivalents . Cash and cash equivalents increased $30.0 million, or 70.8%, to $72.5 million at March 31, 2024 from $42.4 million at June 30, 2023 due to $55.3 million of cash and cash equivalents acquired from 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.

Securities Available-for-Sale . Securities available-for-sale decreased $3.4 million, or 9.6%, to $32.6 million at March 31, 2024 from $36.1 million at June 30, 2023. The Company acquired $21.3 million of available-for-sale securities from the Regal Bancorp acquisition. Following the completion of the Merger, the Company sold $19.2 million of its available-for-sale portfolio, which resulted in a gain of $17,000. The remainder of the decrease was due to maturities and repayment of securities.

Securities Held-to-Maturity . Securities held-to-maturity decreased $9.4 million, or 5.5%, to $161.8 million at March 31, 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 $336.6 million, or 92.9%, to $698.9 million at March 31, 2024 from $362.3 million at June 30, 2023. The Company acquired $336.0 million of loans from the Regal Bancorp acquisition, primarily consisting of $311.9 million of multi-family and commercial real estate loans and $17.0 million of commercial and industrial 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

37

from 97.8% at June 30, 2023 to 53.4% at March 31, 2024. Commercial loans (consisting of multi-family and commercial real estate loans and commercial and industrial loans) accounted for 45.0% of loans at March 31, 2024.

Bank Owned Life Insurance . Bank owned life insurance increased $8.1 million, or 28.3%, to $36.8 million at March 31, 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 acquired 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. No impairment loss was recognized on goodwill during the nine months ended March 31, 2024. The carrying amount of the core deposit premium intangible, net of accumulated amortization, was $8.1 million at March 31, 2024.

Total Liabilities . Total liabilities increased $324.2 million, or 61.2%, to $853.6 million at March 31, 2024 from $529.4 million at June 30, 2023. The increase was primarily the result of the Regal Bancorp acquisition, which had $379.0 million of liabilities at the time of the acquisition.

Deposits . Deposits increased $334.1 million, or 66.3%, to $838.0 million at March 31, 2024 from $503.9 million at June 30, 2023 due primarily to the $373.2 million of deposits assumed from the Regal Bank acquisition. 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 $119.9 million of certificates of deposit.

Borrowings . We had no borrowings outstanding at March 31, 2024 as the $20.0 million of borrowings outstanding at June 30, 2023 was repaid during the three months ended March 31, 2024.

Total Equity . Total equity increased $77.2 million, or 63.2%, to $199.3 million at March 31, 2024 from $122.1 million at June 30, 2023. The increase resulted from $84.0 million in stockholders’ equity from the Regal Bancorp acquisition and the net proceeds from the Company’s stock offering and other comprehensive income of $643,000, offset by a net loss of $7.8 million for the period.

Comparison of Operating Results for the three months ended March 31, 2024 and 2023

General. Net income increased $803,000 to $1.1 million for the three months ended March 31, 2024 from $260,000 for the three months ended March 31, 2023. The increase was caused primarily by $1.4 million of net accretion income related to the fair value adjustments recorded in connection with the acquisition of Regal Bancorp. Excluding the aforementioned $1.4 million of net accretion income, offset by $242,000 of merger-related costs, net income would have been $258,000 for the three months ended March 31, 2024.

Interest Income. Interest income increased $7.6 million, or 185.1%, to $11.6 million for the three months ended March 31, 2024 from $4.1 million for the three months ended March 31, 2023. The increase resulted primarily from a $6.9 million, or 236.5%, increase in interest income on loans and a $815,000 increase in interest income on other assets, offset by a $154,000, or 16.5%, decrease in interest income on securities. The average balance of loans increased $350.9 million, or 98.5%, to $707.1 million for the three months ended March 31, 2024, compared to $356.1 million for the three months ended March 31, 2023. In addition, the average yield on the loan portfolio increased 227 basis points to 5.55% for the three months ended March 31, 2024 from 3.28% for the three months ended March 31, 2023, which reflected the higher interest rate environment and the greater proportion of commercial loans in the portfolio.

38

The average balance of securities decreased $24.3 million, or 11.0%, to $197.8 million for the three months ended March 31, 2024, compared to $222.2 million for the three months ended March 31, 2023. This decrease was also the result of a decrease of ten basis points in the average yield of securities to 1.58% for the three months ended March 31, 2024 from 1.68% for the three months ended March 31, 2023.

The increase in the interest income on other assets was due to a 33 basis point increase in the average yield of other assets from 4.15% for the three months ended March 31, 2023 to 4.48% for the three months ended March 31, 2024 and a $71.1 million, or 313.9%, increase in the average balance of other assets from $22.6 million for the three months ended March 31, 2023 to $93.7 million for the three months ended March 31, 2024 due to excess cash from the merger and the offering.

Interest Expense. Interest expense increased $2.8 million or 451.4%, to $3.4 million for the three months ended March 31, 2024 from $613,000 for the three months ended March 31, 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 $123.3 million, or 81.6%, to $274.4 million for the three months ended March 31, 2024 from $151.1 million for the three months ended March 31, 2023 and the average rate on certificates of deposit increased 254 basis points to 4.03% for the three months ended March 31, 2024 from 1.49% for the three months ended March 31, 2023 and the average balance of interest-bearing demand deposits increased $60.3 million, or 42.2%, to $203.3 million for the three months ended March 31, 2024 from $143.0 million for the three months ended March 31, 2023. The average rate on interest-bearing demand deposits increased 62 basis points to 0.69% for the three months ended March 31, 2024 from 0.07% for the three months ended March 31, 2023.

Net Interest Income. Net interest income increased $4.8 million, or 138.1%, to $8.3 million for the three months ended March 31, 2024 from $3.5 million for the three months ended March 31, 2023. The net interest rate spread increased 63 basis points to 2.83% for the three months ended March 31, 2024 from 2.20% for the three months ended March 31, 2023 while the net interest margin increased 100 basis points to 3.31% for the three months ended March 31, 2024 from 2.31% for the three months ended March 31, 2023. Net interest-earning assets increased $131.7 million, or 101.3%, to $261.8 million for the three months ended March 31, 2024 from $130.1 million for the three months ended March 31, 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.

39

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $29 and $129 for the three months ended March 31, 2024 and 2023, respectively.

Three Months Ended March 31,

2024

2023

Average
Outstanding
Balance

Interest

Average
Yield/Rate (1)

Average
Outstanding
Balance

Interest

Average
Yield/Rate (1)

(Dollars in thousands)

Interest-earning assets:

Loans

$

707,072

$

9,819

5.55

%

$

356,140

$

2,918

3.28

%

Securities

197,810

779

1.58

%

222,155

933

1.68

%

Other

93,741

1,050

4.48

%

22,648

235

4.15

%

Total interest-earning
assets

998,622

11,648

4.67

%

600,943

4,086

2.72

%

Noninterest-earning assets

78,881

40,811

Total assets

$

1,077,503

$

641,754

Interest-bearing liabilities:

Savings and club accounts

$

239,847

38

0.06

%

$

176,392

26

0.06

%

Interest-bearing demand
accounts

203,285

351

0.69

%

142,955

25

0.07

%

Certificates of deposit

274,354

2,764

4.03

%

151,097

562

1.49

%

Total interest-bearing
deposits

717,486

3,153

1.76

%

470,444

613

0.52

%

Federal Home Loan Bank
advances

—

—

—

—

—

—

Other borrowings

19,355

227

4.69

%

430

—

—

Total interest-bearing
liabilities

736,841

3,380

1.83

%

470,874

613

0.52

%

Noninterest-bearing deposits

118,535

42,118

Other noninterest-bearing
liabilities

21,537

11,005

Total liabilities

876,913

523,997

Equity

200,591

117,757

Total liabilities and equity

$

1,077,503

$

641,754

Net interest income

$

8,268

$

3,473

Net interest rate spread (1)

2.83

%

2.20

%

Net interest-earning
assets (2)

$

261,782

$

130,069

Net interest margin (3)

3.31

%

2.31

%

Average interest-earning
assets to interest-
bearing liabilities

135.53

%

127.62

%

(1)
Annualized.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.

40

Rate/Volume Analysis

The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. 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 total column represents the sum of the prior columns. For purposes of these tables, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the tables below.

Three Months Ended March 31,

2024 vs. 2023

Increase (Decrease)

Volume

Rate

Total Change

(In thousands)

Interest-earning assets:

Loans

$

11,511

$

(4,610

)

$

6,901

Securities

(409

)

255

(154

)

Other

740

75

815

Total interest-earning assets

11,842

(4,280

)

7,562

Interest-bearing liabilities:

Savings and club accounts

39

(27

)

12

Interest-bearing accounts

(563

)

889

326

Certificates of deposit

1,837

365

2,202

Federal Home Loan Bank advances

—

—

—

Other borrowings

240

(13

)

227

Total interest-bearing liabilities

1,553

1,214

2,767

Change in net interest income

$

10,289

$

(5,494

)

$

4,795

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 credit for credit losses of $142,000 for the three months ended March 31, 2024 compared to having no provision for the three months ended March 31, 2023. The credit for the three months ended March 31, 2024 reflected that we had no charge-offs for the period, and only two classified and non-performing loans at March 31, 2024 totaling $220,000. The absence of a provision for credit losses for the three months ended March 31, 2023 reflected that we had no charge-offs for the period, no classified loans at March 31, 2023 and only one non-performing loan in the amount of $145,000 at March 31, 2023. Our allowance for credit losses as a percentage of total loans was 0.72% at March 31, 2024 compared to 0.31% at March 31, 2023, reflecting the establishment of a 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 March 31, 2024 and March 31, 2023.

41

Noninterest Income. Noninterest income was as follows:

Three Months Ended March 31,

Change

2024

2023

Amount

Percent

(Dollars in thousands)

Service charges and fees on deposit

$

193

$

157

$

36

22.9

%

Increase in cash surrender value of bank-
owned life insurance

247

155

92

59.4

%

Fees and service charges on loans

36

5

31

620.0

%

Unrealized gain (loss) on equity securities

1

(3

)

4

133.3

%

Other

39

(104

)

143

137.5

%

Total noninterest income

$

516

$

210

$

306

145.7

%

Noninterest income increased $306,000, or 145.7%, to $516,000 for the three months ended March 31, 2024 from $210,000 for the three months ended March 31, 2023, primarily as a result of an increase of $92,000 in the cash surrender value of bank-owned life insurance, an increase of $36,000 in service charges and fees on deposit accounts and an increase of $143,000 in other income. 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, while the increase in other income was primarily due to the loss on sales of securities during the three months ended March 31, 2023.

Noninterest Expense . Noninterest expense was as follows:

Three Months Ended March 31,

Change

2024

2023

Amount

Percent

(Dollars in thousands)

Salaries and employee benefits

$

3,631

$

2,024

$

1,607

79.4

%

Occupancy

772

186

586

315.1

%

Furniture and equipment

285

136

149

109.6

%

Data processing

951

302

649

214.9

%

Advertising

75

47

28

59.6

%

Federal deposit insurance premiums

120

39

81

207.7

%

Directors fees

103

81

22

27.2

%

Professional fees

357

358

(1

)

(0.3

)%

Insurance

165

37

128

345.9

%

Telephone, postage and supplies

210

75

135

180.0

%

Other expenses

902

124

778

627.4

%

Total noninterest expense

$

7,571

$

3,409

$

4,162

122.1

%

Noninterest expense increased $4.2 million, or 122.1%, to $7.6 million for the three months ended March 31, 2024 from $3.4 million for the three months ended March 31, 2023, primarily as a result of an increase in salaries and employee benefits, occupancy expenses, data processing expenses and other miscellaneous expenses, all related to the Merger.

Income Tax Expense. The provision for income taxes was $292,000 for the three months ended March 31, 2024, compared to a tax provision of $14,000 for the three months ended March 31, 2023. Our effective tax rate was 21.5% and 5.1% for the three months ended March 31, 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.

Comparison of Operating Results for the nine months ended March 31, 2024 and 2023

General. Net income decreased $8.8 million to a loss of $7.8 million for the nine months ended March 31, 2024 from net income of $1.0 million for the nine months ended March 31, 2023. The decrease was caused primarily by a $5.4 million charitable contribution to the Somerset Regal Charitable Foundation established in

42

connection with its conversion to the stock form of organization, which was funded with 452,758 shares of SR Bancorp common stock and $905,517 in cash.

The decrease was also due to a $4.2 million provision for credit losses incurred during the three months ended September 30, 2023 related to the acquisition of Regal Bancorp. These expenses were partially offset by $1.6 million of net accretion income related to the fair value adjustments recorded in connection with the Merger during the nine months ended March 31, 2024. Excluding the merger-related expenses totaling $3.9 million, the $4.2 million provision for credit losses and the charitable contribution of $5.4 million on an after-tax basis, offset by the $1.6 million of net accretion income in connection with the Merger, the Company would have reported net income of $1.4 million for the nine months ended March 31, 2024.

Interest Income. Interest income increased $17.8 million, or 152.0%, to $29.5 million for the nine months ended March 31, 2024 from $11.7 million for the nine months ended March 31, 2023. The increase resulted from a $15.5 million, or 187.8%, increase in interest income on loans and a $2.6 million increase in interest income on other assets, offset by a $326,000, or 11.6%, decrease in interest income on securities. The average balance of loans increased $258.9 million, or 74.2%, to $607.9 million for the nine months ended March 31, 2024, compared to $349.1 million for the nine months ended March 31, 2023. In addition, the average yield on the loan portfolio increased 206 basis points to 5.21% for the nine months ended March 31, 2024 from 3.15% for the nine months ended March 31, 2023, which reflected the higher interest rate environment and the greater proportion of commercial loans in the portfolio. The increase in the interest income on other assets was due to a 170 basis point increase in the average yield of other assets from 3.08% for the nine months ended March 31, 2023 to 4.78% for the nine months ended March 31, 2024 and a $63.0 million, or 232.9%, increase in the average balance of other assets from $27.1 million for the nine months ended March 31, 2023 to $90.1 million for the nine months ended March 31, 2024 due to excess cash from the Merger and the offering. The average balance of securities decreased $27.5 million, or 12.0%, to $201.8 million for the nine months ended March 31, 2024, compared to $229.3 million for the nine months ended March 31, 2023.

Interest Expense. Interest expense increased $6.7 million, or 498.1%, to $8.0 million for the nine months ended March 31, 2024 from $1.3 million for the nine months ended March 31, 2023. The increase in interest expense resulted primarily from an increase in interest expense on certificates of deposit. The average rate on certificates of deposit increased 263 basis points to 3.72% for the nine months ended March 31, 2024 from 1.09% for the nine months ended March 31, 2023 and the average balance of certificates of deposit increased $95.9 million, or 65.7%, to $241.8 million for the nine months ended March 31, 2024 from $145.9 million for the nine months ended March 31, 2023.The average balance of interest-bearing demand deposits increased $34.0 million, or 23.4%, to $179.2 million for the nine months ended March 31, 2024 from $145.2 million for the nine months ended March 31, 2023. The average rate on interest-bearing demand deposits increased 30 basis points to 0.37% for the nine months ended March 31, 2024 from 0.07% for the nine months ended March 31, 2023.

Net Interest Income. Net interest income increased $11.1 million, or 107.1%, to $21.4 million for the nine months ended March 31, 2024 from $10.4 millionfor the nine months ended March 31, 2023. The net interest rate spread increased 54 basis points to 2.74% for the nine months ended March 31, 2024 from 2.20% for the nine months ended March 31, 2023 while the net interest margin increased 90 basis points to 3.18% for the nine months ended March 31, 2024 from 2.28% for the nine months ended March 31, 2023. Net interest-earning assets increased $108.1 million, or 82.5%, to $239.3 million for the nine months ended March 31, 2024 from $131.1 million for the nine months ended March 31, 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.

43

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $279 and $448 for the nine months ended March 31, 2024 and 2023, respectively.

Nine Months Ended March 31,

2024

2023

Average
Outstanding
Balance

Interest

Average
Yield/Rate (1)

Average
Outstanding
Balance

Interest

Average
Yield/Rate (1)

(Dollars in thousands)

Interest-earning assets:

Loans

$

607,947

$

23,760

5.21

%

$

349,055

$

8,256

3.15

%

Securities

201,799

2,489

1.64

%

229,327

2,815

1.64

%

Other

90,070

3,228

4.78

%

27,060

625

3.08

%

Total interest-earning
assets

899,815

29,477

4.37

%

605,442

11,696

2.58

%

Noninterest-earning assets

68,098

39,965

Total assets

$

967,914

$

645,407

Interest-bearing liabilities:

Savings and club accounts

$

219,611

84

0.05

%

$

183,044

83

0.06

%

Interest-bearing demand
accounts

179,242

504

0.37

%

145,201

73

0.07

%

Certificates of deposit

241,804

6,750

3.72

%

145,924

1,188

1.09

%

Total interest-bearing
deposits

640,657

7,338

1.53

%

474,169

1,344

0.38

%

Federal Home Loan Bank
advances

—

—

—

—

—

—

Other borrowings

19,887

707

4.74

%

147

—

—

Total interest-bearing
liabilities

660,544

8,045

1.62

%

474,316

1,344

0.38

%

Noninterest-bearing deposits

110,281

42,943

Other noninterest-bearing
liabilities

18,832

11,349

Total liabilities

789,657

528,608

Equity

178,257

116,799

Total liabilities and equity

$

967,914

$

645,407

Net interest income

$

21,432

$

10,352

Net interest rate spread (1)

2.74

%

2.20

%

Net interest-earning
assets (2)

$

239,271

$

131,126

Net interest margin (3)

3.18

%

2.28

%

Average interest-earning
assets to interest-
bearing liabilities

136.22

%

127.65

%

(1)
Annualized.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.

44

Rate/Volume Analysis

The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. 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 total column represents the sum of the prior columns. For purposes of these tables, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the tables below.

Nine Months Ended March 31,

2024 vs. 2023

Increase (Decrease)

Volume

Rate

Total Change

(In thousands)

Interest-earning assets:

Loans

8,155

7,349

15,504

Securities

(451

)

125

(326

)

Other

(444

)

3,047

2,603

Total interest-earning assets

7,260

10,521

17,781

Interest-bearing liabilities:

Savings and club accounts

22

(21

)

1

Interest-bearing accounts

(131

)

562

431

Certificates of deposit

1,045

4,517

5,562

Federal Home Loan Bank advances

—

—

—

Other borrowings

240

467

707

Total interest-bearing liabilities

1,176

5,525

6,701

Change in net interest income

6,084

4,996

11,080

Provision for Credit Losses. We recorded a provision for credit losses of $3.9 million, all in connection with the Merger for the nine months ended March 31, 2024, whereas we recorded no provision for the nine months ended March 31, 2023. The absence of a provision for credit losses for the nine months ended March 31, 2023 reflects that we had no charge-offs for the period, no classified loans at March 31, 2023 and only $145,000 of non-performing loans at March 31, 2023. Our allowance for credit losses as a percentage of total loans was 0.72% at March 31, 2024 compared to 0.31% at March 31, 2023, reflecting the establishment of a 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 March 31, 2024 and March 31, 2023.

Noninterest Income. Noninterest income was as follows:

Nine Months Ended March 31,

Change

2024

2023

Amount

Percent

(Dollars in thousands)

Service charges and fees on deposit

$

576

$

502

$

74

14.7

%

Increase in cash surrender value of bank-
owned life insurance

655

483

172

35.6

%

Fees and service charges on loans

47

16

31

193.8

%

Unrealized gain (loss) on equity securities

3

(1

)

4

400.0

%

Other

113

(89

)

202

227.0

%

Total noninterest income

$

1,394

$

911

$

483

53.0

%

Noninterest income increased $483,000, or 53.0%, to $1.4 million for the nine months ended March 31, 2024 from $911,000 for the nine months ended March 31, 2023, as a result of an increase of $172,000 in the cash surrender value of bank-owned life insurance, an increase of $74,000 in service charges and fees on deposit accounts and an increase of $202,000 in other noninterest income.

45

Noninterest Expense . Noninterest expense was as follows:

Nine Months Ended March 31,

Change

2024

2023

Amount

Percent

(Dollars in thousands)

Salaries and employee benefits

$

12,050

$

6,030

$

6,020

99.8

%

Occupancy

1,674

548

1,126

205.5

%

Furniture and equipment

674

406

268

66.0

%

Data processing

2,392

—

2,392

—

Advertising

204

155

49

31.6

%

Federal deposit insurance premiums

348

117

231

197.4

%

Directors fees

288

258

30

11.6

%

Professional fees

1,775

914

861

94.2

%

Insurance

389

122

267

218.9

%

Telephone, postage and supplies

391

231

160

69.3

%

Other expenses

7,799

433

7,366

1701.2

%

Total noninterest expense

$

27,984

$

9,214

$

18,770

203.7

%

Noninterest expense increased $18.8 million, or 203.7%, to $28.0 million for the nine months ended March 31, 2024 from $9.2 million for the nine months ended March 31, 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.

Income Tax Expense. The benefit for income taxes was $1.2 million for the nine months ended March 31, 2024, compared to a tax expense of $135,000 for the nine months ended March 31, 2023. Our effective tax rate was 13.7% and 11.8% for the nine months ended March 31, 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 C&I loans;

46

•
utilizing our investment securities portfolio as part of our balance sheet asset and liability and interest rate risk management strategy to reduce the impact of movements in interest rates on net interest income and economic value of equity, which can create temporary valuation adjustments to equity in Accumulated Other Comprehensive Income; 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. Historically, the model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. 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.

The table below sets forth, as of March 31, 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 March 31, 2024

Change in Interest Rates

Estimated Increase (Decrease) in EVE

(basis points) (1)

Estimated EVE (2)

Amount

Percent

(Dollars in thousands)

+400

$

121,126

$

(82,643

)

(40.56

)%

+300

139,918

(63,851

)

(31.34

)%

+200

164,082

(39,688

)

(19.48

)%

+100

187,807

(15,963

)

(7.83

)%

—

203,769

—

—

-100

215,865

12,095

5.94

%

-200

223,550

19,781

9.71

%

(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 March 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 19.48% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 9.71% increase in EVE.

47

Change in Net Interest Income . The following table sets forth, at March 31, 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 March 31, 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

+400

$

27,752

$

(4,869

)

$

29,556

$

(4,476

)

+300

28,988

(3,633

)

30,715

(3,317

)

+200

31,071

(1,550

)

33,506

(526

)

+100

33,306

685

35,444

1,412

—

32,621

—

34,032

—

-100

31,229

(1,392

)

31,125

(2,907

)

-200

29,719

(2,902

)

27,888

(6,143

)

The table above indicates that at March 31, 2024, we would have experienced an 4.75% decrease in NII in the event of an instantaneous parallel 200 basis point increase in market interest rates and an 9.76% 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.

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 March 31, 2024, this ratio was 8.7% We believe that we have sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 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.

48

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 March 31, 2024, cash and cash equivalents totaled $72.5 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $32.6 million at March 31, 2024.

At March 31, 2024, we had $69.4 million in outstanding loan commitments and $36.6 million of unused lines of credit. Certificates of deposit due within one year of March 31, 2024 totaled $179.9 million, or 21.5% 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 March 31, 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 nine months ended March 31, 2024, we originated $25.5 million of loans and purchased $44.0 million. We had no purchases of securities classified as held to maturity during the nine months ended March 31, 2024.

Financing activities consist primarily of activity in deposit accounts. Deposits increased $334.1 million, or 66.3%, to $838.0 million at March 31, 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 $119.9 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 March 31, 2024 and a $20.0 million outstanding borrowing at June 30, 2023.

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 March 31, 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 12 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

49

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.

Ite m 3. Quantitative and Qualitative Disclosures About Market Risk.

For information regarding material risk, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Market Risk.”

Ite m 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Company. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2024 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

50

PART II—OTHE R INFORMATION

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Ite m 1A. Risk Factors.

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2023.

Ite m 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Ite m 3. Defaults Upon Senior Securities.

Not applicable

Ite m 4. Mine Safety Disclosures.

Not applicable

Ite m 5. Other Information.

Securities Trading Plans of Directors and Executive Officers

During the three months ended March 31, 2024, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Corporation's securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.

51

Ite m 6. Exhibits.

Exhibit

Number

Description

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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of 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 With Embedded Linkbase Documents

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed herewith.

52

SIG NATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SR Bancorp, Inc.

Date: May 15, 2024

By:

/s/ William P. Taylor

William P. Taylor

Chief Executive Officer

Date: May 15, 2024

By:

/s/ Harris M. Faqueri

Harris M. Faqueri

Vice President and Chief

Financial Officer

53

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