ii
Item 1. Business.
General
SR Bancorp, Inc. (“SR Bancorp” or the “Company”) is a Maryland chartered company established to be the holding company for Somerset Savings Bank, now known as Somerset Regal Bank. SR Bancorp’s primary business activity is the ownership of the outstanding common stock of Somerset Regal Bank. SR Bancorp does not own or lease any property but instead uses the premises, equipment and other property of Somerset Regal Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement.
The Company became the holding company for Somerset Regal Bank as part of the mutual-to-stock conversion of Somerset Savings Bank, SLA, as further described below. At June 30, 2023, the conversion had not been completed, and, as of that date, the Company had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, the financial and other information contained in this document at and for the year ended June 30, 2023 and June 30, 2022 is for Somerset Savings Bank, SLA, unless indicated otherwise.
In the future, SR Bancorp may acquire or organize other entities or operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.
Our website address is www.somersetsavings.com. We plan to make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Information on our website should not be considered a part of this document.
Completed Stock Offering
On September 19, 2023, Somerset Savings Bank converted from the mutual to stock form of organization and SR Bancorp completed its stock offering. SR Bancorp sold 9,055,172 shares of its common stock at a price of $10.00 per share, which included 760,364 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 SR Bancorp common stock were outstanding. SR Bancorp’s common stock began trading on the Nasdaq Capital Market under the trading symbol “SRBK” on September 20, 2023.
Merger with Regal Bancorp, Inc. and Regal Bank
On September 19, 2023, SR Bancorp acquired Regal Bancorp, Inc. Immediately following that acquisition, Regal Bank, the wholly-owned subsidiary of Regal Bancorp, was merged with and into Somerset Savings Bank, which was renamed Somerset Regal Bank (collectively, the “Merger”). In connection with the Merger, Regal Bancorp’s shareholders received $23.00 in cash for each share of Regal Bancorp common stock they owned. The aggregate cost of the Merger was approximately $69.5 million. The acquisition of Regal Bancorp and Regal Bank, expanded our market presence into Essex, Morris and Union Counties, New Jersey and enhanced our market presence in Somerset County, New Jersey. At June 30, 2023, Somerset Savings Bank had total assets of $651.5 million, deposits of $503.9 million and total equity of $122.1 million. At June 30, 2023, Regal Bancorp had total consolidated assets of $461.8 million, deposits of $389.1 million and total equity of $51.5 million.
In connection with the Merger, the Executive Chairman of the Board of Directors of Regal Bancorp, David M. Orbach, Marc Lebovitz and Thomas Lupo, both Regal Bancorp board members, joined the Boards of Directors of SR Bancorp and Somerset Regal Bank. Mr. Orbach serves as Executive Chairman of the Board of Directors of SR Bancorp and as Executive Vice Chairman of the Board of Directors of Somerset Regal Bank. William P. Taylor continues as Chief Executive Officer and Chairman of the Board of Directors of Somerset Regal Bank and serves as
Chief Executive Officer and a director of SR Bancorp. Christopher J. Pribula continues as President, Chief Operating Officer and a director of Somerset Regal Bank and SR Bancorp. In addition, Messrs. Orbach, Taylor and Pribula entered into employment agreements with SR Bancorp and Somerset Savings Bank at the time of execution of the merger agreement among the parties, which became effective as of the effective date of the mutual-to-stock conversion for Messrs. Taylor and Pribula and became effective as of the closing of the Merger for Mr. Orbach.
The Merger increased the combined banks’ deposit base and its loan portfolio, provided Somerset Savings Bank with greater commercial lending expertise and access to commercial loan customers and provided Regal Bank with greater residential lending expertise and access to residential loan customers.
Market Area
At June 30, 2023, Somerset Savings Bank served central New Jersey through its main office in Bound Brook and six full-service banking offices in the New Jersey counties of Somerset (four offices), Hunterdon (two offices) and Middlesex (one office). The acquisition of Regal Bank on September 19, 2023 expanded Somerset Regal Bank’s market presence in northern and central New Jersey with the addition of ten full-service banking offices, which are located in the New Jersey counties of Essex (five offices), Somerset (two offices), Union (two offices) and Morris (one office).
The markets served by the combined branch networks of Somerset Savings Bank and Regal Bank encompass a broad geographic area in central and northern New Jersey. The market areas served by Somerset Regal Bank have highly developed and diverse economies. Pharmaceutical, financial services, professional services and retail companies are among the largest employers in the primary market area counties served by Somerset Regal Bank. Employment data shows that jobs in services and education/healthcare/social services accounted for the largest and second largest employment sectors, respectively, in the primary market area counties and in New Jersey. Wholesale/retail trade was the third largest employment sector for the primary market counties followed by manufacturing jobs in the counties of Hunterdon, Morris and Somerset. Finance/insurance/real estate was the fourth largest employment sector for the counties of Essex, Middlesex and the State of New Jersey. Transportation/utility jobs were the fourth largest employment sector for Union County.
Population and household data indicate that the market areas served by Somerset Regal Bank’s branches are a mix of urban and suburban markets. Middlesex County is the most populous county with a total population of 861,000, while Hunterdon County is the least populous county with a total population of 130,000. For the 2017 to 2022 period, Essex County recorded the strongest population growth with an annual growth rate of 0.9%. Comparatively, Middlesex County recorded the slowest population growth over the past five years, with an annual growth rate of 0.3%. Five-year annual population growth rates for the U.S. and New Jersey equaled 0.6% and 0.7%, respectively.
Income measures show that the counties of Hunterdon, Morris and Somerset are relatively affluent markets, with household and per capita income measures that are well above the comparable U.S. and New Jersey measures. Comparatively, household and per capita income measures for Essex County are the lowest among the primary area counties, which were also lower than the comparable New Jersey measures and similar to the comparable U.S. measures. The primary market area counties experienced income growth rates that were slightly lower than the comparable state and national growth rates for the 2017 through 2022 period.
A comparison of household income distribution measures provides another indication of the relative affluence of Hunterdon, Morris and Somerset Counties, which maintained significantly higher percentages of households with incomes above $100,000 compared to the U.S and New Jersey. None of the primary market area counties maintained a lower percentage of households with incomes above $100,000 compared to the U.S, while Essex County and Union County maintained a lower percentage of households with incomes above $100,000 compared to New Jersey.
At June 30, 2023, Somerset Savings Bank maintained its largest balance of deposits in Somerset County, where it maintains its headquarters and maintains its largest branch presence. Based on June 30, 2023 deposit data, Somerset Savings Bank’s $304.3 million of deposits provided for a 1.7% market share of bank and thrift deposits in Somerset County, which was the 11th largest market share out of 22 financial institutions in the market. At June 30,
2023, Regal Bank maintained its largest balance of deposits in Essex County, where it was headquartered and maintained its largest branch presence. Based on June 30, 2023 deposit data, Regal Bank’s $258.4 million of deposits provided for a 0.9% market share of bank and thrift deposits in Essex County, which was the 15th largest market share out of 31 financial institutions in the market.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area, including commercial banks, savings banks, savings and loan associations and credit unions, and from other financial service companies such as brokerage firms and insurance companies. Several large holding companies operate banks in our market area, and these institutions are significantly larger than us and, therefore, have significantly greater resources. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities.
Our competition for loans comes primarily from financial institutions in our market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies, financial technology companies and specialty finance companies.
We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend toward consolidation of the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions, including financial technology companies, to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.
Lending Activities
We offer a variety of loans, including residential and non-residential mortgage, equity loans and passbook, certificate or personal loans. Historically, we have had a significant portion of our loan portfolio concentrated in residential loans, including one- to four-family residential loans. At June 30, 2023, residential mortgage loans comprised 97.8% of our total loan portfolio.
We did not participate in the Paycheck Protection Program administered by the U.S. Small Business Administration.
In the future, we intend to continue to concentrate on ways to compete for a greater share of commercial loan originations in our primary market area. The Merger with Regal Bank will significantly enhance our capabilities in this area.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.