SR Bancorp (SRBK) Q1 2027 earnings review
SR Bancorp profit doubles, but free checking deposits shrink
SR Bancorp, the parent of New Jersey's Somerset Regal Bank, grew lending profit while losing free checking deposits. Profit excluding one-offs more than doubled from a year ago to $1 million by our math, as the bank added $46 million in commercial and mortgage loans. However, customers pulled $30 million out of zero-interest accounts, so the bank took on brokered deposits to fund its loans.
| Net profit, excluding one-offs | $1.03M +118% from a year ago by our math |
|---|---|
| Net loans | $947.4M +5.1% from last quarter |
| Free checking deposits | $98.6M -23% from last quarter by our math |
| Forward outlook | None given company does not issue forecasts |
⚖️ Verdict: 🟢 Bullish
The story got better because core lending now drives profit instead of temporary accounting gains from the 2023 Regal Bancorp merger. Revenue grew faster than staff costs, which lowered overhead as a share of revenue by 5 percentage points. One caution: losing free deposits and competing for checking accounts kept the lending margin from expanding.
The question now is whether the bank can attract local deposits fast enough to keep lending without squeezing its margin. Either customers bring back checking balances, or the bank must rely on expensive brokered funding as loans reach 97% of deposits. Next quarter's deposit mix and lending margin will tell.
🐂 Bull Case
Loan Growth Doubles Profit Excluding Merger Gains
SR Bancorp's reported profit includes accounting gains "related to fair value adjustments resulting from the acquisition of Regal Bancorp in September 2023". Those one-off gains shrank to $47,000 before tax this quarter from $303,000 a year ago, which hid how fast the underlying bank grew.
The New Jersey lender grew its loan book by $46.2 million from last quarter, "driven by commercial loan growth of $32.3 million and residential mortgage loan growth of $13.9 million as a result of strong market demand".
- Net profit excluding one-offs: $1.03 million, up 117.7% from $475,000 a year ago by our math
- Net interest income excluding merger gains: $8.26 million, up 13.2% from a year ago by our math
- Net loans: $947.4 million, up 5.1% from last quarter and 14.6% from a year ago by our math
This matters because the bank is replacing fading merger accounting boosts with recurring interest from new borrowers. Average loans rose $108.5 million from a year ago, and the average rate earned on them climbed 0.14 percentage points to 5.52%.
What to watch: quarterly loan additions in the second fiscal quarter. Another $30 million or more of net new loans would show that commercial demand in New Jersey can keep lifting core earnings now that merger accounting gains are nearly gone.
Revenue Outpaced Overhead and Lowered the Efficiency Ratio
A community bank's efficiency ratio measures overhead costs as a share of total revenue, so a lower number means higher profitability. SR Bancorp lowered its efficiency ratio by 5.0 percentage points from a year ago to 81.95%.
Total revenue (net interest income plus fee income) rose 9.1% from a year ago by our math, while overhead costs grew only 2.9% to $7.3 million. Salaries and employee benefits rose 6.1% to $4.1 million "driven by annual merit increases and increases in health care costs", while spending on telephone, postage and supplies fell by $43,000. Because revenue grew faster, salaries and benefits fell by 1.3 percentage points of revenue to 45.9% by our math.
What to watch: the efficiency ratio in the next quarterly release. A reading below 80% would show that the 14-branch network can handle a bigger loan book without adding staff.
Zero Bad Loans While Buybacks Shrink Share Count
Fast loan growth can hurt a bank if new borrowers fail to pay, while share buybacks build per-share value when credit stays clean. SR Bancorp reported zero non-performing loans (loans where the borrower is behind on payments) and zero loan write-offs at the end of September.
The company set aside $177,000 for potential credit losses to cover its new loans, keeping its loss reserve at 0.64% of total loans. Meanwhile, management bought back and retired 17,127 shares for $328,000 ($19.15 per share by our math), which helped cut the average diluted share count by 7.6% from a year ago. That share reduction turned a 54.1% rise in net profit into a 66.7% jump in earnings per share by our math.
What to watch: non-performing loans in the quarterly filing. Any jump above zero in commercial real estate delinquencies would test whether the bank's 0.64% reserve is big enough for its growing loan book.
🐻 Bear Case
Free Checking Accounts Shrank and Brokered Funding Grew
SR Bancorp said total deposits rose $52.8 million, or 5.7%, from June to $979.2 million, and that loan growth was funded mainly through higher deposits. Underneath that headline, customers pulled money out of free checking accounts and the bank plugged the gap with wholesale money.
The bank added $50.0 million in brokered certificates of deposit (high-rate deposits raised through third-party brokers) "obtained during the first fiscal quarter to pay down borrowings and fund loan growth". Meanwhile, noninterest-bearing deposits (accounts that pay zero interest) dropped by $29.5 million.
- Deposits excluding brokered additions: up $2.8 million, or 0.3%, from June by our math
- Noninterest-bearing deposits: $98.6 million, down 23.0% from $128.2 million in June by our math
- Noninterest-bearing share of total deposits: 10.1%, down from 13.8% in June by our math
This matters because losing free checking accounts forces the bank to pay market rates for almost every dollar it lends out. Uninsured deposits also crept up to 19.8% of total deposits from 19.3% a year ago.
What to watch: noninterest-bearing deposits in December. Another drop below $98.6 million would force the bank to take on more brokered deposits or Federal Home Loan Bank debt to keep lending.
Rising Deposit Rates Still Squeeze the Lending Margin
Net interest margin (NIM) is the profit a bank makes on its loans and bonds after paying for deposits, expressed as a percentage of earning assets. SR Bancorp's NIM slipped 0.02 percentage points from a year ago to 3.03%.
The company raised the average rate it pays on interest-bearing checking accounts by 0.33 percentage points from a year ago to 2.20%, "resulting from competitively priced rates" in New Jersey. Total interest expense rose 24.3% to $5.4 million, outpacing the 14.8% rise in interest income. In addition, total gross loans reached 97.09% of total deposits, up from 95.39% a year ago, leaving little spare deposit funding.
What to watch: the average rate paid on interest-bearing demand deposits next quarter. A climb above 2.20% would keep the net interest margin near 3.0% even as older loans reprice higher.
👓 Other Themes
Higher Nondeductible Costs Lifted the Tax Rate
SR Bancorp's effective income tax rate rose to 25.3% this quarter from 22.6% a year ago, as tax expense grew to $362,000 from $202,000. The company said the higher rate came from an increase in expenses that cannot be deducted for tax purposes, a pattern that previously stemmed from stock-based compensation.
💲 Other KPIs
Cash on hand and deposits at other banks fell $11.3 million, or 15.8%, from June. Management used excess cash, along with $8.5 million from maturing and called bond investments, to fund new commercial and residential loans. Earning less interest on smaller cash balances trimmed interest income from other banks by $51,000 from a year ago.
Short-term debt fell by $30.0 million, or 46.2% by our math, from $65.0 million at the end of June. The bank used part of its $50.0 million in new brokered certificates of deposit to pay down this debt. The average interest rate paid on these borrowings fell to 3.80% from 4.39% a year ago.
This capital ratio — shareholders' equity excluding goodwill, divided by tangible assets — fell from 15.28% a year ago. The ratio moved lower because the bank grew its asset base while returning cash to shareholders through buybacks and dividends, though tangible book value per share still rose 3.9% by our math to $19.83.
❓ Key Questions
Why did free checking balances drop 23% this quarter?
Noninterest-bearing deposits fell by $29.5 million between June and September. Investors need to know whether a few large commercial customers moved cash or if depositors are broadly shifting into higher-paying accounts.
What rate is the bank paying on brokered deposits?
SR Bancorp added $50.0 million in brokered certificates of deposit to pay down borrowings and fund loans, but the release does not state the interest rate or maturity of those new certificates.
How high will management let the loan-to-deposit ratio go?
Gross loans reached 97.09% of total deposits at the end of September, and cash fell to $60.2 million. That leaves little room to grow loans without raising more deposits first.
Why did share buybacks slow to 17,127 shares?
The company repurchased 198,310 shares in the year-ago quarter under an 886,137-share authorization, but bought only 17,127 shares at an average of $19.15 by our math this quarter.