Annual Report for Fiscal Year Ending 06-30, 2026 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The objective of this section is to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our results of operations and financial condition as of the dates presented. You should read this discussion in conjunction with the SR Bancorp Consolidated Financial Statements and Notes to the Consolidated Financial Statements that appear at the end of this document.

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 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 to 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.

Overview

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.

Somerset Regal Bank is a New Jersey-chartered commercial bank that operates from 14 branches in Essex, Hunterdon, Middlesex, Morris, Somerset and Union Counties, New Jersey. Somerset Regal Bank offers a variety of deposit and loan products to individuals and small businesses, most of which are located in our primary market. The acquisition of Regal Bancorp and its wholly owned subsidiary, 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, 2026, SR Bancorp had total assets of $1.19 billion, deposits of $926.4 million and total equity of $181.8 million.

Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits. Changes in levels of interest rates affect our net interest income.

A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from service charges and fees related to deposit accounts and net gains in cash surrender value of bank owned life insurance. In some years, we recognize income from the sale of securities.

Allowance for Credit Losses. The allowance for credit losses is a valuation allowance for the current expected credit losses in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for credit losses is charged to earnings. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged off, if any, are credited to the allowance for credit losses when realized.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, furniture and equipment expenses, data processing, advertising, FDIC insurance premiums, directors fees, professional fees, insurance, telephone, postage and supplies and other miscellaneous expenses.

Our largest noninterest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for retirement plans and other employee benefits including disability insurance and health insurance and compensation expenses related to our employee stock ownership plan and equity incentive plan.

Occupancy expenses and furniture and equipment expenses are the fixed and variable costs of buildings and equipment, and consist primarily of depreciation charges, furniture and equipment expenses, repair and maintenance costs, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter.

Data processing expenses are fees paid to third parties for use of their software and for processing customer information, deposits and loans.

Advertising includes most marketing expenses including multi-media advertising (public and in-branch), promotional events and materials, civic and sales focused memberships, and community support.

Federal deposit insurance premiums are payments we make to the FDIC for insurance of our deposit accounts.

Professional fees include legal, accounting, auditing, risk management and payroll processing expenses.

Insurance includes expenses for workers' compensation, property and casualty insurance and professional insurance.

Other expenses include expenses for directors' fees, office supplies, postage, telephone and other miscellaneous operating expenses.

Critical Accounting Policies

Certain of our accounting policies are important to the presentation of our financial condition and results of operation, 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, political and global events 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 document.

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: the determination of the allowance for credit losses, the assessment of the impairment of goodwill and intangible assets and the valuation of our deferred tax assets.

Allowance for Credit Losses: The allowance for credit losses ("ACL"), calculated in accordance with the current expected credit losses concepts Accounting Standards Concept - Topic 326 - Credit Losses ("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 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. 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, among other things, the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk rating of the loan and economic conditions affecting the borrower.

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 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.

Goodwill and Other Intangible Assets: Our intangible assets consist primarily of goodwill and core deposit intangibles. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities. Goodwill is not amortized but is subject to annual tests for impairment, or more often if events or circumstances indicate it may be impaired. We may elect to perform a qualitative assessment as a part of the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value.

For the year ended June 30, 2026, the Company engaged an independent third-party appraiser to perform a qualitative assessment of goodwill. Based on that assessment, we determined that it was more likely than not that the unit's fair value was not less than its carrying amount. We concluded that our goodwill was not impaired as of June 30, 2026.

Core deposit intangibles are amortized on an accelerated basis using an estimated life of ten years and are evaluated for impairment if certain events occur. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds the fair value. The carrying amount of the intangible asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

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.

Business Strategy

Our business strategy is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by:

Leveraging our residential and commercial lending expertise to pursue new opportunities to increase lending and expand our existing loan relationships. Prior to the Merger, Somerset Savings Bank's principal business activity had been the origination of residential mortgage loans, while Regal Bank's principal business activity had been the origination of multi-family and commercial real estate loans. Somerset Regal Bank will continue to provide products and services that meet the needs of the existing residential lending customers and be able to offer such products, services and expertise to the former Regal Bank customers throughout its newly-expanded market area. Additionally, Somerset Regal Bank will continue to provide products and services that meet the needs of the existing commercial customers and be able to offer such products, services and expertise to the former Somerset Savings Bank customers throughout its newly-expanded market area.

The opportunity for both banks to diversify their loan portfolios and leverage their lending expertise in new markets were primary factors for the Merger. Moreover, with the additional capital raised in the stock offering, we can increase our loan originations and originate loans with larger balances. Somerset Regal Bank's legal lending limit was $23.9 million at June 30, 2026. While Somerset Regal Bank's credit risk management policies will result in an internal loan to one borrower limit less than Somerset Regal Bank's regulatory limit, the legal lending limit will provide opportunities to expand existing customer relationships and reach new larger customers.

We intend to leverage the SBA preferred lender expertise to expand SBA lending activity in our market areas. SBA lending capabilities provide an opportunity to establish additional commercial account relationships and the potential to generate additional noninterest income related to the sale and servicing of the guaranteed portion of an SBA loan on the secondary market.

Continuing to use prudent underwriting practices to maintain a high-quality loan portfolio. Maintaining high asset quality is a key to long-term financial success. Somerset Regal Bank seeks to grow its loan portfolio while keeping non-performing assets to a minimum. Somerset Regal Bank's strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, appropriate and conservative loan underwriting criteria and active credit monitoring. At June 30, 2026, Somerset Regal Bank had no non-performing loans.

Building profitable business and consumer relationships through enhanced product offerings and by continuing to provide superior customer service. We are a full-service financial services company offering our customers a broad range of loan and deposit products and services, including internet banking, which enables our customers to pay bills on-line. Our commercial lending capacity has been significantly enhanced through our merger, which allows us to continue to increase the commercial real estate and commercial business loans we originate and better serve the small businesses in our market area, and realize higher fees and yields associated with such type of lending. Further, commercial deposit accounts, generally yield higher average balances than can be acquired from retail deposit relationships.

As a community-oriented financial institution, we emphasize providing superior customer service to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to our customers and distinguishes us from the larger institutions that operate in our area. Further, given our attractive market area, we believe we are well-positioned to increase our customer relationships without a proportional increase in overhead expense or operating risk.

Increasing transaction deposit accounts and deposit balances. Deposits are our primary source of funds for lending and investment. We are focused on expanding our core deposits (which we define as all deposits except certificates of deposit). Core deposits represented 69.8% of our total deposits at June 30, 2026 compared to 68.3% of our total deposits at June 30, 2025. We believe core deposits will increase by increasing our commercial lending activities and enhancing our relationships with retail customers through our commitment to quality customer service along with the introduction of additional products and services, such as remote deposit capture and enhanced online business account services.

Continuing to leverage technology to maintain efficient operations and enhance customer service. We have historically focused on leveraging technology to maintain efficient operations and provide our customers with secure means to conduct business outside of our traditional branch network. Available applications include online banking and mobile banking with bill payment capabilities, mobile deposit and debit card control functionality. We have been a Zelle™ participant since 2019, which has allowed our customers the ability to send and receive real-time payments online and through mobile banking. Our online loan application platform affords customers the convenience of submitting a loan application online. Internally, we leverage technology to achieve efficiencies for tasks such as document preparation and retention, data analytics and call report preparation. Our investment in technology allows us to remain competitive, effectively serve our customers and results in operating efficiencies.

Comparison of Financial Condition at June 30, 2026 and June 30, 2025

Total Assets. Assets increased $105.7 million, or 9.7%, to $1.19 billion at June 30, 2026 from $1.09 billion at June 30, 2025. The increase was primarily driven by new loan originations, resulting in a net increase of $104.0 million in loans receivable, and a $13.7 million increase in cash and cash equivalents, partially offset by a $10.7 million decrease in securities.

Cash and Cash Equivalents. Cash and cash equivalents increased $13.7 million, or 23.7%, to $71.5 million at June 30, 2026 from $57.8 million at June 30, 2025 primarily due to an increase in deposits, a $35.0 million increase in borrowings from the Federal Home Loan Bank of New York during the year ended June 30, 2026 and funds obtained through the maturity of securities, partially offset by the use of cash to fund increased loan originations.

Securities Held-to-Maturity. Securities held-to-maturity decreased $10.7 million, or 7.5%, to $131.1 million at June 30, 2026 from $141.8 million at June 30, 2025. The decrease was primarily due to principal repayments and maturities in excess of purchases.

Loans. Loans receivable, net, increased $104.0 million, or 13.0%, to $901.2 million at June 30, 2026 from $797.2 million at June 30, 2025, driven by increases in residential mortgage loans of $48.5 million, multi-family commercial loans of $33.0 million and other commercial real estate loans of $20.1 million, partially offset by a decrease of $6.2 million in owner occupied commercial real estate loans. The increase in residential mortgage loans was principally due to the purchase of $40.5 million in loans through a third-party mortgage broker.

Bank Owned Life Insurance. Bank owned life insurance increased $1.8 million, or 4.9%, to $38.4 million at June 30, 2026 from $36.6 million at June 30, 2025.

Goodwill and Intangible Assets. The Company recognized 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. Finalization of the purchase allocation reduced goodwill to $20.4 million at June 30, 2024. No impairment losses have been recognized since the Regal Bancorp acquisition. The carrying amount of the core deposit premium intangible, net of accumulated amortization, was $5.1 million at June 30, 2026.

Total Liabilities. Total liabilities increased $117.7 million, or 13.2%, to $1.01 billion at June 30, 2026 from $892.7 million at June 30, 2025. The increase was primarily the result of an increase in deposits of $80.4 million and an increase in borrowings of $35.0 million.

Deposits. Deposits increased $80.4 million, or 9.5%, to $926.4 million at June 30, 2026 from $846.0 million at June 30, 2025. Increases in interest-bearing demand accounts of $70.0 million, or 21.9%, resulted from the Company having increased rates on certain interest-bearing demand products in an effort to remain competitive in the market area. At June 30, 2026, $128.2 million, or 13.8%, of total deposits consisted of noninterest-bearing deposits. At June 30, 2026, $191.6 million, or 20.7%, of total deposits were uninsured.

Borrowings. During the year ended June 30, 2026, the Company borrowed an additional $35.0 million from the Federal Home Loan Bank of New York to fund new loans increasing the total outstanding borrowings to $65.0 million. At June 30, 2025, there were $30.0 million of outstanding borrowings.

Total Equity. Equity decreased $12.0 million, or 6.2%, to $181.8 million at June 30, 2026 from $193.8 million at June 30, 2025. The decrease was primarily due to the repurchase of 978,778 shares of common stock at a cost of $16.3 million and the payment of dividends at a cost of $1.6 million, partially offset by net earnings of $3.4 million and stock-based compensation of $2.3 million.

Comparison of Operating Results for the Years Ended June 30, 2026 and June 30, 2025

General. Net income decreased $1.8 million to $3.4 million for the year ended June 30, 2026 from net income of $5.1 million for the year ended June 30, 2025. Net income for the year ended June 30, 2026 included $749,000 of net accretion income related to fair value adjustments resulting from the Merger. Net income for the year ended June 30, 2025 included $1.5 million of gains from life insurance proceeds and $2.8 million of net accretion income related to fair value adjustments.

Interest Income. Interest income increased $3.3 million, or 7.0%, to $49.6 million for the year ended June 30, 2026 from $46.3 million for the year ended June 30, 2025 due to a 24 basis point increase in the yield on interest-earning assets and a $17.6 million increase in the average balance of interest-earning assets. The increase in interest income resulted from a $3.7 million, or 8.9%, increase in interest income on loans due to a $70.2 million increase in the average balance of loans from $771.7 million for the year ended June 30, 2025 to $841.9 million for the year ended June 30, 2026. The increase in interest income was offset by a $410,000 decrease in interest income from interest bearing deposits at other banks primarily due to a $40.2 million decrease in the average balance, offset by a 136 basis point increase in the yield.

Interest Expense. Interest expense increased $1.6 million, or 9.6%, to $18.3 million for the year ended June 30, 2026 from $16.7 million for the year ended June 30, 2025, primarily due to a $2.1 million increase in interest expense on interest-bearing demand deposit accounts. Interest expense on interest-bearing demand deposit accounts increased due to an increase of $60.2 million in the average balance and an increase of 30 basis points in the average rate to 1.98% for the year ended June 30, 2026 from 1.68% for the year ended June 30, 2025, as the Company raised rates on certain interest-bearing deposits in an effort to remain competitive in the market area. The increase was partially offset by a $994,000 decrease in interest expense from certificates of deposit driven by a 42 basis point decline in the average rate due to the lower interest rate environment, partially offset by a $4.4 million increase in the average balance. Interest expense on borrowings increased $534,000, or 45.3%, due to an increase of $20.7 million in the average balance, offset by a 107 basis point decrease in the average cost.

Net Interest Income. Net interest income increased $1.6 million, or 5.6%, to $31.2 million for the year ended June 30, 2026 from $29.6 million for the year ended June 30, 2025. Net interest rate spread increased 22 basis points to 2.57% for the year ended June 30, 2026 from 2.35% for the year ended June 30, 2025. Net interest margin increased 11 basis points to 3.04% for the year ended June 30, 2026 from 2.93% for the year ended June 30, 2025. Net interest-earning assets decreased $46.9 million, or 17.9%, to $215.2 million for the year ended June 30, 2026 from $262.1 million for the year ended June 30, 2025. The increase in the Company's net interest rate spread and net interest margin were primarily a result of the yield on interest-earning assets increasing at a faster rate than the cost of interest-bearing liabilities.

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects are immaterial. Average balances are calculated using month-end average balances, rather than daily average balances. We believe the use of month-end average balances is representative of our operations. Non-accrual loans are included in average balances only. Average yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees are immaterial.

		For the Year Ended June 30,
		2026												2025
		Average												Average
		Outstanding												Outstanding
		Balance				Interest				Yield/Rate				Balance				Interest				Yield/Rate
		(In thousands)
Interest-earning assets:
Loans			841,917				45,406				5.39	%			771,733				41,685				5.40	%
Securities			139,327				2,390				1.72	%			151,626				2,436				1.61	%
Other			45,555				1,784				3.92	%			85,799				2,194				2.56	%
Total interest-earning assets			1,026,799				49,580				4.83	%			1,009,158				46,315				4.59	%
Noninterest-earning assets			91,273												48,076
Total assets			1,118,072												1,057,234
Interest-bearing liabilities:
Savings and club accounts			132,187				81				0.06	%			153,038				94				0.06	%
Interest-bearing demand accounts			355,849				7,050				1.98	%			295,609				4,963				1.68	%
Certificates of deposit			278,692				9,505				3.41	%			274,267				10,499				3.83	%
Total interest-bearing deposits			766,728				16,636				2.17	%			722,914				15,556				2.15	%
Federal Home Loan Bank advances			44,903				1,712				3.81	%			24,155				1,178				4.88	%
Other borrowings			-				-				-	%			-				-				-	%
Total interest-bearing liabilities			811,631				18,348				2.26	%			747,069				16,734				2.24	%
Noninterest-bearing deposits			106,962												105,042
Other noninterest-bearing liabilities			6,448												13,458
Total liabilities			925,041												865,569
Equity			193,031												191,665
Total liabilities and equity			1,118,072												1,057,234
Net interest income							31,232												29,581
Net interest rate spread											2.57	%											2.35	%
Net interest-earning assets(1)			215,168												262,090
Net interest margin(2)											3.04	%											2.93	%
Average interest-earning assets to interest-bearing liabilities			126.51	%											135.08	%

(1)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. 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 net column represents the sum of the prior columns. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

		Years Ended
		June 30, 2026 vs. 2025
				​				​		Total
		Increase (Decrease) Due to								Increase
		Volume				Rate				(Decrease)
		(In thousands)
Interest-earning assets:				​				​				​
Loans		$	3,791			$	(70	)		$	3,721
Securities			(198	)			152				(46	)
Other			(1,029	)			619				(410	)
Total interest-earning assets			2,564				701				3,265
Interest-bearing liabilities:				​				​				​
Savings and club accounts			(13	)			-				(13	)
Interest-bearing accounts			1,011				1,076				2,087
Certificates of deposit			169				(1,163	)			(994	)
Federal Home Loan Bank advances			1,012				(478	)			534
Other borrowings			-				-				-
Total interest-bearing liabilities			2,179				(565	)			1,614
Change in net interest income		$	385			$	1,266			$	1,651

Provision for Credit Losses. We establish provisions for credit losses, which are charged to operations to maintain the allowance for credit losses at a level necessary to absorb current expected credit losses in the loan portfolio 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 and classified 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 quarterly basis.

The Company recorded a provision for credit losses of $575,000 for the year ended June 30, 2026 reflecting the loan growth during the period, compared to a provision for credit losses of $133,000 for the year ended June 30, 2025. The provision of $133,000 included a recovery of $155,000 recorded during the first quarter of 2025, resulting from updates made to model assumptions in the calculation of the Company's allowance for credit losses, offset by provisions of $288,000 recorded during the remainder of the 2025 fiscal year reflecting loan growth, which included an adjustment of $157,000 due to a revised calculation of the quantitative loss factor based on updated information related to historical loss factors of both Somerset Savings Bank, SLA and Regal Bank. The Company had no charge-offs during the years ended June 30, 2026 and 2025 and no non-performing loans at June 30, 2026 or June 30, 2025. The Company's allowance for credit losses as a percentage of total loans was 0.65% at June 30, 2026 compared to 0.67% at June 30, 2025.

Noninterest Income. Noninterest income was as follows:

		Years Ended June 30,								Change
		2026				2025				Amount				Percent
		(Dollars in thousands)
Service charges and fees on deposit		$	906			$	894			$	12				1.3	%
Increase in cash surrender value of bank owned life insurance			1,063				1,043				20				1.9	%
Fees and service charges on loans			123				145				(22	)			(15.2	)%
Unrealized gain on equity securities			(10)				13				(23	)			(176.9	)%
Realized loss on sale of securities			-				-				-				-	%
Gain on sale of loans			33				51				(18	)			(35.3	)%
Gains from life insurance proceeds			-				1,492				(1,492	)			(100.0	)%
Other			101				96				5				5.2	%
Total noninterest income (loss)		$	2,216			$	3,734			$	(1,518	)			(40.7	)%

Noninterest income decreased $1.5 million to $2.2 million for the year ended June 30, 2026 from $3.7 million for the year ended June 30, 2025, primarily as a result of a $1.5 million gain from life insurance proceeds due to the death of a former employee in fiscal 2025.

Noninterest Expense. Noninterest expense was as follows:

		Years Ended June 30,								Change
		2026				2025				Amount				Percent
		(Dollars in thousands)
Salaries and employee benefits		$	15,705			$	13,916			$	1,789				12.9	%
Occupancy			2,199				2,219				(20	)			(0.9	)%
Furniture and equipment			1,326				1,218				108				8.9	%
Data processing			2,129				2,191				(62	)			(2.8	)%
Advertising			488				385				103				26.8	%
FDIC premiums			440				480				(40	)			(8.3	)%
Directors fees			403				366				37				10.1	%
Professional fees			1,694				1,854				(160	)			(8.6	)%
Insurance			492				589				(97	)			(16.5	)%
Telephone, postage and supplies			689				755				(66	)			(8.7	)%
Other expenses			2,908				3,082				(174	)			(5.6	)%
Total noninterest expense		$	28,473			$	27,055			$	1,418				5.2	%

Noninterest expense increased $1.4 million, or 5.2%, to $28.5 million for the year ended June 30, 2026 from $27.1 million for the year ended June 30, 2025, primarily due to a $1.8 million, or 12.9%, increase in salaries and employee benefits resulting from a full year of stock-based compensation expense incurred during the year ended June 30, 2026, compared to a partial period of such expense during the year ended June 30, 2025, as well as annual merit increases in employee compensation. The increase in salaries and employee benefits was partially offset by decreases of $160,000 in professional fees, $97,000 in insurance expenses and $174,000 in other expenses.

Income Tax Expense. The provision for income taxes was $1.0 million for the year ended June 30, 2026 compared to $991,000 for the year ended June 30, 2025. The Company's effective tax rate was 23.8% for the year ended June 30, 2026 compared to 16.2% for the year ended June 30, 2025. The lower effective tax rate in 2025 was attributable to $1.5 million of tax-exempt income from life insurance proceeds.

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 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 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;

●

expanding our multi-family loan portfolio and emphasizing the origination of shorter-term commercial real estate and commercial and industrial loans; 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. 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 June 30, 2026 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 June 30, 2026
	​				​		Estimated Increase (Decrease) in EVE
Change in Interest					​				​				​
Rates (basis					​				​				​
points)(1)			Estimated EVE(2)				Amount				Percent
(In thousands)
+400			$	162,711			$	(66,991	)			(29.16	)%
+300				183,671				(46,031	)			(20.04	)%
+200				201,858				(27,844	)			(12.12	)%
+100				217,237				(12,465	)			(5.43	)%
-				229,702				-				-
-100				241,109				11,407				4.97	%
-200				249,946				20,244				8.81	%
-300				255,058				25,356				11.04	%
-400				252,974				23,272				10.13	%

(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 June 30, 2026, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 12.12% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 8.81% increase in EVE.

Change in Net Interest Income. The following table sets forth, as of June 30, 2026, 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 June 30, 2026
Change in Interest			Net Interest				Year 1				Net Interest				Year 2
Rates (basis			Income Year 1				Change				Income Year 2				Change
points)(1)			Forecast				From Level				Forecast				From Level
(In thousands)
+400			$	33,791			$	(2,693	)		$	39,219			$	(159	)
+300				34,610				(1,874	)			39,648				270
+200				35,334				(1,151	)			39,818				440
+100				35,955				(529	)			39,716				338
-				36,484				-				39,378				-
-100				36,405				(79	)			38,071				(1,307	)
-200				36,187				(298	)			36,490				(2,888	)
-300				35,842				(642	)			34,743				(4,635	)
-400				35,287				(1,197	)			32,808				(6,570	)

(1)

Assumes an immediate uniform change in interest rates at all maturities.

The table above indicates that at June 30, 2026, after one year, we would have experienced an 3.15% decrease in NII in the event of an instantaneous parallel 200 basis point increase in market interest rates and an 0.81% 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 not reflect the manner in which actual yields and costs respond to changes in market interest rates. The table above 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 ALCO/Investment Committee is responsible for establishing and monitoring our liquidity targets and strategies 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 15%. At June 30, 2026, this ratio was 7.7%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2026.

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.

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 June 30, 2026, cash and cash equivalents totaled $71.5 million.

At June 30, 2026, we had $30.2 million in outstanding loan commitments and $40.8 million of unused lines of credit. Certificates of deposit due within one year of June 30, 2026 totaled $257.4 million, or 27.8% 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 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 June 30, 2026. 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 year ended June 30, 2026, we originated $155.1 million of loans and purchased $40.5 million. The Company purchased a $6.0 million fixed-to-floating rate subordinated note at 7.75% per annum for the first five years, which then floats based on a benchmark rate (as defined) for the remaining five years.

Financing activities consist primarily of activity in deposit accounts, borrowings, repurchases of and dividends paid on common stock. Deposits increased $80.4 million, or 9.5%, to $926.4 million at June 30, 2026 from $846.0 million at June 30, 2025. 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 outstanding borrowings of $65.0 million as of June 30, 2026 and $30.0 million as of June 30, 2025. We had $135.0 million of additional borrowing capacity at FHLB as of June 30, 2026.

We had no outstanding borrowings with the Federal Reserve Bank at June 30, 2026 or June 30, 2025 and did not borrow from the FRB-NY in the year ended June 30, 2026. We had $23.5 million of available borrowing capacity at FRB-NY as of June 30, 2026.

We repurchased 978,778 shares of our common stock during the year ended June 30, 2026 at a cost of $16.0 million and paid dividends on common stock of $1.6 million.

Regulatory Capital

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 June 30, 2026, 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 14 of the Notes to the Consolidated Financial Statements.

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 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.