SR Bancorp Inc

Previous wording

As previously announced, 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.

Current wording

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.

Previous wording

The financial information contained in this Form 10-Q as of and for the three and six months ended December 31, 2023 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 20, 2023. Financial information as of June 30, 2023 and for the three and six months ended December 31, 2022 is for Somerset Savings Bank, SLA, on a stand-alone basis.

Current wording

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.

Previous wording

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

Current wording

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;

Previous wording

changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio;

Current wording

changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;

Previous wording

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 a loan or the loan pools and in the terms of the underlying loans; changes in the experience, ability, and depth of our lending management and staff; changes in volume and severity of past due and nonaccrual assets; changes to the quality of our internal loan review system; the existence, growth, and effect of any concentrations of credit; and 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.

Current wording

Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making qualitative factor adjustments include, among other things: the impact of changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries; actual and expected changes in national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools; changes in the composition and size of the loan portfolio and in the terms of the underlying loans; changes in the experience, ability, and depth of our lending management and staff; changes in volume and severity of past due and nonaccrual assets; changes to the quality of our internal loan review system; the existence, growth, and effect of any concentrations of credit; and 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.

Previous wording

Total Assets. Total assets increased $423.5 million, or 65.0%, to $1.07 billion at December 31, 2023 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.

Current wording

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.

Previous wording

Cash and Cash Equivalents. Cash and cash equivalents increased $47.8 million, or 112.6%, to $90.2 million at December 31, 2023 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.

Current wording

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.

Previous wording

Securities Available-for-Sale. Securities available-for-sale decreased $1.3 million, or 3.6% to $34.8 million at December 31, 2023 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.

Current wording

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.

Previous wording

Securities Held-to-Maturity. Securities held-to-maturity decreased $6.0 million, or 3.5%, to $165.2 million at December 31, 2023 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.

Current wording

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.

Previous wording

Loans. Loans receivable, net, increased $333.5 million, or 92.1%, to $695.8 million at December 31, 2023 from $362.3 million at June 30, 2023. The Company acquired $336.0 million of loans from the Regal Bancorp acquisition, primarily consisting of $320.7 million of multi-family and commercial real estate loans and $13.4 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 from 97.8% at June 30, 2023 to 53.47% at December 31, 2023. Commercial loans (consisting of multi-family and commercial real estate loans and commercial and industrial loans) accounted for 44.83% of loans at December 31, 2023.

Current wording

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 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.

Previous wording

Bank Owned Life Insurance. Bank owned life insurance increased $7.9 million, or 27.4%, to $36.6 million at December 31, 2023 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.

Current wording

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.

Previous wording

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 thesix months ended December 31, 2023. The carrying amount of the core deposit premium intangible, net of accumulated amortization, was $8.5 million at December 31, 2023.

Current wording

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.

Previous wording

Total Liabilities. Total liabilities increased $347.6 million, or 65.7%, to $877.0 million at December 31, 2023 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.

Current wording

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.

Previous wording

Deposits. Deposits increased $339.4 million, or 67.4%, to $843.3 million at December 31, 2023 from $503.9 million at June 30, 2023 due primarily to the $373.2 millionof 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.

Current wording

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.

Previous wording

Borrowings. We had $20.0 million of borrowings at December 31, 2023 and June 30, 2023, respectively.

Current wording

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.

Previous wording

Total Equity. Total equity increased $75.9 million, or 62.2%, to $198.0 million at December 31, 2023 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, other comprehensive income of $504,000, offset by a net loss of $8.9 million for the period.

Current wording

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.

Previous wording

General. Net income increased $1.2 million to $1.6 million for the three months ended December 31, 2023 from net income of $399,000 for the three months ended December 31, 2022. 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 $32,000 of merger-related costs, offset by the aforementioned $1.4 million of net accretion income, net income would have been $605,000 for the three months ended December 31, 2023.

Current wording

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.

Previous wording

Interest Income. Interest income increased $8.4 million, or 215.6%, to $12.3 million for the three months ended December 31, 2023 from $3.9 million for the three months ended December 31, 2022. The increase resulted primarily from a $7.4 million, or 271.9%, increase in interest income on loans and a $1.0 million increase in interest income on other assets, offset by a $82,000, or 8.8%, decrease in interest income on securities. The average balance of loans increased $359.6 million, or 102.3%, to $711.2 million for the three months ended December 31, 2023, compared to $351.6 million for the three months ended December 31, 2022. In addition, the average yield on the loan portfolio increased 261 basis points to 5.73% for the three months ended December 31, 2023 from 3.12% for the three months ended December 31, 2022, which reflected the higher interest rate environment and the greater composition of commercial loans in the portfolio.

Current wording

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.

Previous wording

The average balance of securities decreased $26.6 million, or 11.6%, to $201.7 million for the three months ended December 31, 2023, compared to $228.3 million for the three months ended December 31, 2022. This decrease was offset by an increase of five basis points in the average yield of securities to 1.69% for the three months ended December 31, 2023 from 1.64% for the three months ended December 31, 2022.

Current wording

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.

Previous wording

The increase in the interest income on other assets was due to a 158 basis point increase in the average yield of other assets from 3.43% for the three months ended December 31, 2022 to 5.01% for the three months ended December 31, 2023 and a $74.1 million, or 289.2%, increase in the average balance of other assets from $25.6 million for the three months ended December 31, 2022 to $99.7 million for the three months ended December 31, 2023.

Current wording

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.

Previous wording

Interest Expense. Interest expense increased $2.8 million or 639.1%, to $3.3 million for the three months ended December 31, 2023 from $442,000 for the three months ended December 31, 2022. The increase in interest expense resulted primarily from an increase in interest expense on certificates of deposits. The average rate on certificates of deposit increased 279 basis points to 3.86% for the three months ended December 31, 2023 from 1.07% for the three months ended December 31, 2022 and the average balance of certificates of deposit increased $129.3 million, or 89.2%, to $274.1 million for the three months ended December 31, 2023 from $144.8 million for the three months ended December 31, 2022. This average balance of savings and club accounts increased $65.8 million, or 35.8%, to $249.2 million for the three months ended December 31, 2023 from $183.4 million for the three months ended December 31, 2022. The average balance of interest-bearing demand deposits increased $47.1 million, or 32.0%, to $194.1 million for the three months ended December 31, 2023 from $147.0 million for the three months ended December 31, 2022. The average rate on interest-bearing demand deposits increased 62 basis points to 0.69% for the three months ended December 31, 2023 from 0.07% for the three months ended December 31, 2022.

Current wording

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.

Previous wording

Net Interest Income. Net interest income increased $5.6 million, or 161.3%, to $9.0 million for the three months ended December 31, 2023 from $3.5 million for the three months ended December 31, 2022. Our net interest rate spread increased 88 basis points to 3.08% for the three months ended December 31, 2023 from 2.20% for the three months ended December 31, 2022 while our net interest margin increased 128 basis points to 3.56% for the three months ended December 31, 2023 from 2.28% for the three months ended December 31, 2022. Net interest-earning assets increased $145.0 million, or 111.4%, to $275.2 million for the three months ended December 31, 2023 from $130.2 million for the three months ended December 31, 2022. The increases in our net interest rate spread and our 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.

Current wording

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.

Previous wording

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 $134,000 and $197,000 for the three months ended December 31, 2023 and 2022, respectively.

Current wording

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.

Previous wording

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 we consider 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, past and current 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.

Current wording

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.

Previous wording

Based on our evaluation of the above factors, we reduced our provision for credit losses by $107,000 for the three months ended December 31, 2023 compared to having no change in our provision for the three months ended December 31, 2022. The reduction to our provision for credit losses for the three months ended December 31, 2023 reflected that we had no charge-offs for the period, one classified loan in the amount of $145,000 at December 31, 2023and $145,000 of non-performing loans for the three months ended December 31, 2023. The absence of a provision for credit losses for the three months ended December 31, 2022 reflected that we had no charge-offs for the period, no classified loans at December 31, 2022 and only $145,000 of non-performing loans for the three months ended December 31, 2022. Our allowance for credit losses as a percentage of total loans was 0.74% at December 31, 2023 compared to 0.31% at December 31, 2022, 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 December 31, 2023 and December 31, 2022.

Current wording

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.

Previous wording

Noninterest income increased $12,000, or 3.4%, to $365,000 for the three months ended December 31, 2023 from $353,000 for the three months ended December 31, 2022, primarily as a result of an increase of $71,000 in the cash surrender value of bank-owned life insurance and an increase of $30,000 in service charges and fees on deposit accounts, offset by a decrease of $92,000 in other income.

Current wording

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.

Previous wording

Noninterest expense increased $4.1 million, or 124.6%, to $7.5 million for the three months ended December 31, 2023 from $3.3 million for the three months ended December 31, 2022, primarily as a result of an increase in salaries and employee benefits, occupancy expenses, data processing expenses, professional fees and other miscellaneous expenses, all related to the Merger.

Current wording

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.

Previous wording

Income Tax Expense. The provision for income taxes was $408,000 for the three months ended December 31, 2023, compared to a tax provision of $76,000 for the three months ended December 31, 2022. Our effective tax rate was 20.2% and 16.0% for the three months ended December 31, 2023 and 2022, 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.

Current wording

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.

Previous wording

Comparison of Operating Results for the Six Months Ended December 31, 2023 and 2022

Current wording

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

Previous wording

General. Net income decreased $9.6 million to a loss of $8.9 million for the six months ended December 31, 2023 from net income of $753,000 for the six months ended December 31, 2022. The decrease was caused primarily by a $5.4 million charitable contribution to the Somerset Regal Charitable Foundation established in connection with its conversion to the stock form of organization, which was funded with 452,758 shares of SR Bancorp common stock and $906,000 in cash.

Current wording

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 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.

Previous wording

The decrease was also due to a $4.2 million provision for credit losses and $3.9 million in noninterest expenses 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 six months ended December 31, 2023. 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 $1.2 million for the six months ended December 31, 2023.

Current wording

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.

Previous wording

Interest Income. Interest income increased $10.2 million, or 134.3%, to $17.8 million for the six months ended December 31, 2023 from $7.6 million for the six months ended December 31, 2022. The increase resulted primarily from a $8.6 million, or 161.2%, increase in interest income on loans and a $1.8 million increase in interest income on other assets, offset by a $172,000, or 9.1%, decrease in interest income on securities. The average balance of loans increased $212.9 million, or 61.6%, to $558.4 million for the six months ended December 31, 2023, compared to $345.5 million for the six months ended December 31, 2022. In addition, the average yield on the loan portfolio increased 190 basis points to 4.99% for the six months ended December 31, 2023 from 3.09%for the six months ended December 31, 2022, which reflected the higher interest rate environment and the greater composition of commercial loans in the portfolio. The average balance of securities decreased $29.1 million, or 12.5%, to $203.8 million for the six months ended December 31, 2023, compared to $232.9 million for the six months ended December 31, 2022. This decrease was offset by an increase of six basis points in the average yield of securities to 1.68% for the six months ended December 31, 2023 from 1.62% for the six months ended December 31, 2022. The increase in the interest income on other assets was due to a 169 basis point increase in the average yield of other assets from 3.25% for the six months ended December 31, 2022 to 4.94% for the six months ended December 31, 2023 and a $64.2 million, or 267.6%, increase in the average balance of other assets from $24.0 million for the six months ended December 31, 2022 to $88.2 million for the six months ended December 31, 2023.

Current wording

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.

Previous wording

Interest Expense. Interest expense increased $3.9 million, or 537.3%, to $4.7 million for the six months ended December 31, 2023 from $732,000 for the six months ended December 31, 2022. 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 244 basis points to 3.31% for the six months ended December 31, 2023 from 0.87% for the six months ended December 31, 2022 and the average balance of certificates of deposit increased $81.8 million, or 56.9%, to $225.5 million for the six months ended December 31, 2023 from $143.7 million for the six months ended December 31, 2022. The average balance of savings and club accounts increased $23.6 million, or 12.7%, to $209.5 million for the six months ended December 31, 2023 from $185.9 million for the six months ended December 31, 2022. The average balance of interest-bearing demand deposits increased $21.1 million, or 14.4%, to $167.2 million for the six months ended December 31, 2023 from $146.2 million for the six months ended December 31, 2022. The average rate on interest-bearing demand deposits increased 39 basis points to 0.46% for the six months ended December 31, 2023 from 0.07% for the six months ended December 31, 2022.

Current wording

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.

Previous wording

Net Interest Income. Net interest income increased $6.3 million, or 91.4%, to $13.2 million for the six months ended December 31, 2023 from $6.9 million for the six months ended December 31, 2022. Our net interest rate spread increased 47 basis points to 2.69% for the six months ended December 31, 2023 from 2.22% for the six months ended December 31, 2022 while our net interest margin increased 82 basis points to 3.10% for the six months ended December 31, 2023 from 2.28% for the six months ended December 31, 2022. Net interest-earning assets increased $101.4 million, or 80.0%, to $228.0 million for the six months ended December 31, 2023 from $126.6 million for the six months ended December 31, 2022. The increases in our net interest rate spread and our 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.

Current wording

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.

Previous wording

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 $250,000 and $319,000 for the six months ended December 31, 2023 and 2022, respectively.

Current wording

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.

Previous wording

Provision for Credit Losses. We recorded a provision for credit losses of $4.1 million in connection with the Merger for the six months ended December 31, 2023, whereas we recorded no provision for the six months ended December 31, 2022. The absence of a provision for credit losses for the six months ended December 31, 2022 reflects that we had no charge-offs for the period, no classified loans at December 31, 2022 and only $145,000 of non-performing loans for the six months ended December 31, 2022. Our allowance for credit losses as a percentage of total loans was 0.74% at December 31, 2023 compared to 0.31% at December 31, 2022, 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 December 31, 2023 and December 31, 2022.

Current wording

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.

Previous wording

Noninterest income increased $177,000, or 25.2%, to $878,000 for the six months ended December 31, 2023 from $701,000 for the six months ended December 31, 2022, as a result of an increase of $80,000 in the cash surrender value of bank-owned life insurance, an increase of $38,000 in service charges and fees on deposit accounts and an increase of $59,000 in other noninterest income.

Current wording

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.

Previous wording

Noninterest expense increased $13.7 million, or 204.4%, to $20.4 million for the six months ended December 31, 2023 from $6.7 million for the six months ended December 31, 2022, primarily as a result of a $5.4 million charitable contribution, captured 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 $906,000 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.

Current wording

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.

Previous wording

Income Tax Expense. The benefit for income taxes was $1.5 million for the six months ended December 31, 2023, compared to a tax expense of $121,000 for the six months ended December 31, 2022. Our effective tax rate was 14.7%and 13.8% for the six months ended December 31, 2023 and 2022, 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.

Current wording

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.

Previous wording

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, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

Current wording

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.