SRBK

SR Bancorp (SRBK)

Market cap: $124.25 million

Book value: $192.39 million

Price: $14.54

TBV per share: $18.67

Feeling Thrifty

93.67% of SPDR S&P Regional Banking ETF’s (KRE) shares are shorted. The total dollar volume betting against the less-regulated, real estate concentrated banks amounts to roughly $3 billion. When the economy crunches, regional banks get whipsawed. KRE dropped about 70% during the GFC and made the S&P 500’s halving seem somewhat less gut-wrenching. Then, a decade from its nadir, a lethal virus crawled into the United States. KRE gapped down roughly 50% and the S&P 500 was cracked for a mere 30%. Fast forward three years and the United States’ 16th largest bank goes belly up. When depositors departed, shareholders panicked. KRE was cut by 40% or so and the S&P 500 walked to a green 2%.

As it is, shorting this sector when you hear black swans flapping in the distance does make some logical sense, with one caveat. If nearly every single share has been sold short, find something else to do. Maybe buy some short-dated treasury bills like Buffett. The three-month yields 4.14%. Or instead of piling into the jam-packed short, rummage through the sector for a bargain. Find a gem among the junk. Like SR Bancorp, for instance.

SR Bancorp (SRBK) operates as the holding company for Somerset Regal Bank that provides retail and commercial banking services to individuals and businesses in the communities of Essex, Hunterdon, Middlesex, Morris, Somerset, and Union counties in northern and central New Jersey. The bank was founded in 1887 and currently employs 116 people across 14 branches.

Way before the modernized moniker, SR Bancorp was the Bound Brook Building and Loan Association. A perfect name for its 19th-century origins. In 1890, Somerset County’s population was 28,311 and Bound Brook had 187 borrowers. Referencing FRED’s latest data, Somerset’s population tallies 357,467 people and the median household income is $140,242. SRBK was a huge beneficiary of this economic miracle and now has slightly over $1 billion of assets.

But SRBK did not eclipse the billion-dollar milestone by itself. On September 19, 2023, SRBK was born from a thrift conversion that coincided with a merger. Somerset Savings, with approximately $651.5 million in total assets, $362.3 million in net loans, $503.9 million in deposits and total equity of $122.1 million, combined with Regal Bank’s $461.8 million in total assets, $336.6 million in net loans, $389.1 million in deposits and total equity of $51.5 million. Concurrently, the new entity sold 9,055,172 shares of common stock at $10.00. Depositors were blessed with first dibs, then employees, who subscribed to 760,364 shares, and the market got leftovers.

As it happens, shareholders didn't exist before the demutualization. Net proceeds of $89.6 million flowed onto their balance sheet and bolstered book value overnight without dilution. The merger should also help net interest margins over time as non-interest expenses spread across a larger asset base. Moreover, SRBK’s new loan portfolio is significantly more diversified. The percentage of residential mortgage loans to total loans decreased from 97.8% on June 30, 2023 (pre-merger) to 53.7% post-merger, and commercial loans accounted for 44.7% of the portfolio.

Despite a track record dating back to the 19th century, SRBK is an infant, orphan stock. Two 10Ks appear on the SEC’s website and they don’t conduct earnings calls. Investor presentations remain elusive as well. Their latest 10Q, however, communicates enough to excite.

As of 3/31/25 ($ in thousands)

Cash and cash equivalents: $62,224

Securities held-to-maturity: $145,413

Net loans: $780,795

Total assets – $1,073,907

Deposits: $106,020

Total liabilities: 878,839

Total shareholders’ equity – $195,068

Securities held-to-maturity primarily consist of mortgage-backed securities

Federal National Mortgage Association: $88,984

Federal Home Loan Mortgage Corporation: $46,227

Government National Mortgage Association: $235

Subordinated Debt: $7,750

CMO: $2107

Foreign Government Bonds: $200

Total – $145,413

Primarily mortgage backed securities. Average yield is 1.60%.

Loan portfolio

Owner occupied commercial real estate: $56,002

Other commercial real estate: $73,618

Multi-family: $216,058

Commercial and industrial: $11,296

Total commercial loans – $356,974

Residential mortgage: $413,918

Consumer and other: $12,832

Total loans – $783,724

Allowance for credit losses: ($5,124)

Deferred loan costs, net: $2,195

Total loans, net: $780,795

Commercial loans account for 45.5% of net loans, while residential mortgages make up 52.8%. Consumer loans cover the rest. Virtually all of SRBK’s commercial loan portfolio consists of multi-family, mixed-use, and owner-occupied loans, with less than 1% secured by office buildings. 42.3% of loans are fixed-rate, with residential mortgages filling 99.1% of that pool and adjustables fill out the remainder. Average yields on loans and all interest-earning assets are 5.32% and 4.51%.

One to four family residential mortgages offer interest rates that adjust annually after an initial fixed period of three, five or six years. Rates are adjusted to equal a percentage above the U.S. Treasury Security Index. The maximum increase or decrease to the rate is 2% per adjustment period. The lifetime interest rate cap is usually 6.0% over the initial interest rate of the loan. Multi-family and commercial real estate loans adjust every three, five, seven and ten years. Rates are indexed to the five-year United States Treasury Note rate, plus a margin and subject to a rate floor.

SRBK has zero non-accrual commercial loans. $584k of residential mortgages and $2k of consumer loans were 30-59 days delinquent, or 0.075% of net loans. A squeaky clean book. What’s more, their tier 1 capital ratio stands at 15.86%. By FDIC standards, a ratio above 9% is considered a “well-capitalized” balance sheet. SRBK has a fat cushion for losses that have been historically quite skinny.

Deposits

Non-interest-bearing demand deposits: 106,020

Interest-bearing demand deposits: $306,935

Savings and club accounts: $151,196

Time deposits: $271,433

Total: $835,584

Uninsured deposits (deposits greater than $250,000, the maximum amount for federal deposit insurance) total $133.9 million or 16.02% of the whole. Interest-bearing deposits cost 1.81%, savings and club accounts 0.06% and time deposits 3.65%. Average rate on interest-bearing deposits is 2.15%.

Net interest margins

06/30/24: 2.41%

09/30/24: 3.21%

12/31/24: 2.88%

03/31/24: 2.82%

06/30/25: 2.93%

Solid spreads, but SRBK’s 2025 net earnings were $3.7 million. That’s an improvement from negative $10.9 million a year ago but still bashful nonetheless. At the root of their crippled bottom line is an extremely bloated efficiency ratio (non-interest expense divided by the sum of non-interest income and net-interest income) of 85.32%. A lack of scale, technology, and higher-margin businesses burdens SRBK and small banks nationwide. Converting to a public corporation cranks up compliance costs too. So why do it?

To get acquired. Large banks hungry for deposits engulf small branches, strip non-interest expenses, cross-sell products, obtain cheaper funding, etc. To highlight just how hungry, here’s a bizarre statistic: In 1980, 14,469 FDIC-insured commercial banks existed… versus 3,928 as of 3/31/25. So if a bank acquired SRBK and grinded their efficiency ratio to 60%, pre-tax earnings would surge by $7.9 million to $12.7 million.

In effect, small banks trade cheaper than meets the eye. Though banks are primarily valued on tangible book value (TBV), not earnings. SRBK’s TBV per share was $18.67 as of 6/30/25 and the stock trades at $14.54 for a P/TBV of 0.78x. A good discount if growth were frozen, but SRBK’s TBV per share grew 2.07% from last quarter. Management’s buyback addiction can be held responsible. It all started on September 20, 2024. SRBK announced their first share repurchase program for up to 950,793 shares, which was 10% of their outstanding common stock at the time. SRBK waxed through that and announced a second repurchase program on July 8, 2025, for 886,137 shares – another 10% of outstanding common stock. Safe to say they’re hooked, and if history repeats, SRBK’s TBV per share will sprint past $20 within the following year.

Insiders have also grabbed shares over the past twelve months: William P. Taylor (CEO) bought 10,500 shares worth $107,238. Christopher J. Pribula (President and COO) bought 2,000 shares worth $24,023. David M. Orbach (Executive Chair) bought 38,500 shares for $458,343. Lupo Thomas (Director) bought 11,500 shares for $126,045. Marc Lebovitz (Director) bought 20,000 shares for $208,856. James Castelli (Lending Officer) bought 1,000 shares for $12,340. Mary E. Davey (Director) bought 475 shares for $5,533. Per their latest proxy, the employee shareholder ownership program was the largest holder at 851,825 shares. Among the executives, Orbach owns the most with 298,629 followed by Taylor’s 217,844.

Share buybacks, insider buys, even hedge funds like Mangrove and Stilwell Value are buying the stock. It’s a buying frenzy! Now, when does SRBK get bought? Well, thrift banks are subject to a three-year acquisition moratorium to prevent speculative activities and protect depositor interests. So until September 19, 2026, SRBK is off limits. They'll continue to purchase shares in the meantime. If a bid gets tossed their way after the moratorium, 1.0x to 1.2x tangible book value seems reasonable. Magyar Bancorp (MGYR), another NJ thrift roughly ten miles away from SRBK, trades around book value.