Business Overview and History SR Bancorp, Inc. (NASDAQ: SRBK), the holding company for Somerset Regal Bank, has undergone a significant transformation in recent years, positioning the bank for long-term growth and success. The company's strategic acquisition of Regal Bancorp in 2023 has expanded its commercial lending capabilities, diversified its revenue streams, and strengthened its presence in the New Jersey market.
SR Bancorp, Inc. was founded in 1887 as Somerset Savings Bank, SLA, a mutual savings bank serving the communities of Somerset, Hunterdon, Middlesex, Morris, and Union counties in New Jersey. The bank has evolved over the years, transitioning from a savings and loan association to a commercial bank, expanding its product offerings and service area.
In 2023, SR Bancorp completed a significant milestone by converting from a mutual to a stock-form organization. As part of this conversion, the company conducted a stock offering, selling 9.06 million shares of common stock at $10 per share. This event marked SR Bancorp's debut as a publicly traded company, with its shares listed on the Nasdaq Stock Market.
Immediately following the conversion and stock offering, SR Bancorp executed its transformative acquisition of Regal Bancorp. The merger significantly expanded SR Bancorp's commercial loan portfolio and lending capabilities. To manage the growth resulting from the merger, the company implemented a balance sheet repositioning strategy in 2024. This involved selling $35.4 million in book value of lower-yielding investment securities at a pre-tax realized loss of $4.4 million. The proceeds from this sale were strategically redeployed into residential and commercial real estate mortgages, leveraging the company's newly expanded commercial lending capabilities.
As part of its commitment to the community, SR Bancorp made a substantial $5.4 million charitable contribution to establish the Somerset Regal Charitable Foundation, further solidifying its role as a responsible corporate citizen.
Financial Performance and Metrics
Financials For the fiscal year ended June 30, 2024, SR Bancorp reported annual revenue of $26.88 million and a net loss of $10.9 million. The loss was primarily due to one-time expenses related to the Regal Bancorp acquisition, including $4.4 million in merger-related costs and a $4.2 million provision for credit losses on the acquired loan portfolio. Excluding these one-time items, the company would have reported net income of $1.8 million for the year. The company's annual operating cash flow was -$1.74 million, with annual free cash flow of -$2.84 million.
The company's quarterly performance has been more encouraging. For the three months ended December 31, 2024, SR Bancorp reported revenue of $11.545 million and net income of $1.0 million, or $0.12 per diluted share. This figure includes $791,000 in net accretion income related to fair value adjustments from the Regal Bancorp acquisition. Excluding this item, the company's net income would have been $452,000 for the quarter.
The company's balance sheet has also strengthened significantly since the merger. As of December 31, 2024, SR Bancorp reported total assets of $1.06 billion, up from $651.5 million as of June 30, 2023. The company's loan portfolio has grown by 43.9% during this period, reaching $775.8 million, while deposits have increased by 2.1% to $824.1 million.
Liquidity and Capital Strength SR Bancorp's liquidity position remains strong, with cash and cash equivalents totaling $53.4 million as of December 31, 2024. The company also has the ability to borrow from the Federal Home Loan Bank of New York, with a maximum borrowing capacity of $100 million. As of December 31, 2024, the company had $30 million in outstanding FHLB borrowings. Additionally, SR Bancorp can borrow up to $25 million from the Federal Reserve Bank of New York, secured by its loan portfolio.
The company's debt-to-equity ratio stands at 0.012, based on total debt of $2.4 million and total equity of $199.48 million as of June 30, 2024. SR Bancorp's current ratio and quick ratio are both 315.87, indicating a strong ability to meet short-term obligations.
In terms of capital, SR Bancorp's subsidiary, Somerset Regal Bank, is well-capitalized, exceeding all regulatory capital requirements. As of December 31, 2024, the bank's Tier 1 capital to average assets ratio was 15.88%, well above the 9.0% requirement to be considered well-capitalized.
Business Segments and Operations
Lending Activities SR Bancorp operates primarily through its subsidiary, Somerset Regal Bank, providing a range of banking products and services to individuals and businesses in New Jersey. The bank's lending activities are concentrated in several key areas. Commercial loans make up 45.2% of the total loan portfolio, consisting primarily of multi-family loans (27.2%), other commercial real estate loans (9.3%), and owner-occupied commercial real estate loans (7.3%). Residential mortgage loans comprise the largest portion of the portfolio at 53.2%, while consumer and other loans make up the remaining 1.6%.
The bank has strategically focused on growing its commercial loan originations, particularly in the multi-family and commercial real estate sectors, to diversify its portfolio beyond the historical residential mortgage concentration. This shift has been driven in part by the acquisition of Regal Bank, which significantly expanded SRBK's commercial lending capabilities.
SR Bancorp maintains conservative underwriting standards, with loan-to-value ratios generally not exceeding 75% for commercial loans, 80% for multi-family loans, and 80% for residential mortgages (with loans above 80% typically requiring private mortgage insurance). This prudent approach has helped the bank manage credit risk in its lending activities.
Investment Activities SR Bancorp's investment portfolio primarily consists of securities held-to-maturity, including obligations issued by U.S. government-sponsored enterprises, subordinated debentures, collateralized mortgage obligations, and foreign government bonds. The amortized cost of the held-to-maturity portfolio was $148.8 million at December 31, 2024, with a fair value of $122.6 million. The bank does not have any investments in securities available-for-sale.
The investment portfolio is managed to provide liquidity, meet pledging requirements, and support the bank's asset-liability management and interest rate risk strategies. SR Bancorp closely monitors the balance of the investment portfolio based on loan demand, interest rate risk analysis, and liquidity needs.
Funding and Deposits SR Bancorp's primary sources of funding are deposits, loan repayments, and investment securities repayments and maturities. At December 31, 2024, total deposits were $824.1 million, of which 11.5% were non-interest-bearing demand deposits and 15.6% were uninsured deposits.
The bank maintains a ratio of liquid assets, including cash and federal funds sold, to total deposits between 4-30%, which was 6.5% at December 31, 2024. This approach reflects SR Bancorp's balanced and conservative strategy aimed at managing risk, maintaining liquidity, and supporting the bank's strategic objectives within its New Jersey market area.
Risks and Challenges While the Regal Bancorp acquisition has strengthened SR Bancorp's competitive position, the integration of the two organizations is not without its challenges. The company must effectively manage the integration of Regal Bank's operations, systems, and personnel to ensure a smooth transition and realization of anticipated synergies.
Additionally, the company's increased exposure to commercial real estate and multi-family lending brings heightened credit risk, particularly in the event of an economic downturn. SR Bancorp must maintain disciplined underwriting standards and closely monitor its commercial loan portfolio to mitigate this risk.
Interest rate risk is another significant concern for the company, as changes in market interest rates can impact the yields on its interest-earning assets and the costs of its interest-bearing liabilities. The company's asset-liability management committee is responsible for managing this risk through various strategies, such as growing its transaction deposit accounts and rebalancing its loan portfolio.
Outlook and Conclusion SR Bancorp's acquisition of Regal Bancorp has transformed the company, significantly expanding its commercial lending capabilities and diversifying its revenue streams. While the integration of the two organizations presents near-term challenges, the long-term potential of the combined entity is promising.
The company's strong liquidity position, well-capitalized subsidiary, and experienced management team position it well to navigate the current economic environment and capitalize on growth opportunities in its core New Jersey market. As SR Bancorp continues to execute on its strategic initiatives, shareholders can look forward to the company's continued transformation and long-term value creation.