SR Bancorp's EPS Plunge: Is This a Buying Opportunity or a Warning Sign?

SR Bancorp (NASDAQ: SRBK) reported a GAAP earnings per share (EPS) of $0.06 for the quarter ended March 31, 2025—a stark 49.5% decline from the prior-year period. While this figure may spook short-term investors, the reality is far more nuanced. Let’s dissect the numbers, contextualize the trends, and assess whether this is a temporary stumble or a red flag for long-term investors.

The EPS Drop: More Than Meets the Eye

The $0.06 EPS is misleading when taken at face value. The decline was driven by two non-recurring factors:
1. Merger-Related Adjustments: In Q1 2024, SR Bancorp reported $1.4 million in net accretion income tied to its 2023 merger with Regal Bancorp. In 2025, accretion income dropped to $575,000, reducing the “core” adjusted net income to just $124,000.
2. Cost Pressures: Interest expense surged 27.2% to $4.3 million due to rising deposit rates (up 106 basis points to 1.75%). Meanwhile, interest income fell 1.4%, creating a margin squeeze.

Adjusted for these items, the story shifts:
- In 2024 (excluding merger costs), adjusted net income was $258,000.
- In 2025 (excluding accretion), it’s only $124,000—a 52% drop.

This suggests underlying profitability is deteriorating, even when excluding one-time items.

The Elephant in the Room: Net Interest Margin

The net interest margin (NIM)—the lifeblood of bank profitability—dropped to 2.82%, a 49-basis-point decline from a year earlier. This reflects a widening gap between rising deposit costs and stagnant loan yields.

• Interest Expense: Up 27.2% to $4.3 million, driven by competitive rate adjustments.
• Interest Income: Down 1.4% to $11.5 million, as higher loan balances couldn’t offset falling asset yields.

With the Federal Reserve’s rate hikes lingering, this margin pressure is unlikely to reverse soon. If deposit costs continue rising faster than loan yields, NIM could hit rock bottom.

Growth Metrics: Loans Up, Deposits Too

On the bright side, SR Bancorp’s balance sheet is expanding:
- Total Assets: Rose 5.2% to $1.07 billion, fueled by $48.9 million in new loans.
- Loans Outstanding: Up 6.7% to $780.8 million, with strong growth in commercial and residential lending.
- Deposits: Increased 3.5% to $835.6 million, though 16% of deposits are uninsured, raising liquidity concerns.

The bank also borrowed $30 million from the Federal Home Loan Bank to manage liquidity—a move that could pay off if loan demand stays strong but risks higher borrowing costs.

The Silver Lining: Credit Quality and Noninterest Efficiency

SR Bancorp’s credit metrics remain solid:
- No Non-Performing Loans (NPLs) as of March 31, 2025.
- Provision for Loan Losses: A $38,000 charge, far smaller than the $142,000 recovery in 2024.

On the expense side:
- Noninterest Expenses: Fell 6.7% to $7.1 million, thanks to cost-cutting measures like branch consolidations.
- Noninterest Income: Rose 5% to $542,000, boosted by service charges.

The Verdict: Buy the Dip or Avoid the Trap?

SR Bancorp’s Q1 2025 results are a mixed bag. The EPS decline is alarming, but the real issue is the erosion of net interest margins, which could worsen as rates stay high.

Bull Case:
- Loan growth and asset expansion could eventually offset margin pressures.
- The stock trades at just $12.45 (as of April 30, 2025), a 37% discount to its 52-week high of $19.60.

Bear Case:
- Rising deposit costs and stagnant loan yields may keep NIM compressed for years.
- High uninsured deposits (16%) and short-term borrowings could amplify risk if liquidity tightens.

Conclusion: SR Bancorp is a “wait-and-see” play. Investors should focus on the bank’s ability to stabilize margins in the next few quarters. If Q3 2024 earnings (due November 20, 2024) show a rebound in adjusted EPS and NIM stabilization, this could be a bargain. Otherwise, the stock risks further declines. For now, hold for long-term investors with a high risk tolerance, but avoid chasing the dip without clear margin improvement.

Final Take: A 52% drop in adjusted net income isn’t trivial, but the stock’s valuation leaves room for recovery—if SR Bancorp can navigate the interest rate storm.