S-1/A: Security Midwest Bancorp Advances Stock Conversion IPO

Sentiment:

Initial Public Offering Registration Statement Amendment 28 March 2025 8:50 PM

📋All filings for Security Midwest Bancorp, INC

Security Midwest Bancorp, the proposed holding company for Security Bank, s.b., filed an S-1/A to proceed with its mutual-to-stock conversion and public offering of up to 1,322,500 shares at $10.00 per share.

Capital raiseThe company is conducting an initial public offering (IPO) of common stock in connection with its mutual-to-stock conversion.The offering range is between 850,000 and 1,150,000 shares, with a potential increase to 1,322,500 shares, at a price of $10.00 per share.Gross offering proceeds are estimated to be between $8.5 million and $13.225 million.Net offering proceeds, after estimated expenses of $1.35 million, are expected to be between $7.15 million and $11.875 million.At least 85% of the net proceeds will be contributed to Security Bank to increase capital, fund new loans, enhance products, and support the withdrawal from a pension plan.A portion of the retained proceeds will fund a loan to the employee stock ownership plan (ESOP) for share purchases.

Worse than expectedNet income for 2024 remained flat, showing no growth, and the efficiency ratio worsened significantly, indicating higher operating costs relative to income.Interest rate spread and net interest margin decreased due to rising cost of funds, impacting profitability.Return on average assets and return on average equity are low compared to industry peers, suggesting underperformance in profitability.Non-performing loan and asset ratios are higher than the peer group median, indicating higher credit risk.The allowance for credit losses to non-performing loans is lower than the peer group median, suggesting less robust coverage for problem assets.Total equity to total assets is significantly below the peer group median, indicating a weaker capital position relative to peers prior to the capital raise.

Summary

Security Bank, s.b. is converting from a mutual to a stock savings bank, with Security Midwest Bancorp, Inc. becoming its holding company.
The company is offering between 850,000 and 1,150,000 shares of common stock at $10.00 per share, with a potential increase to 1,322,500 shares due to demand or market conditions.
Net proceeds from the offering are estimated to be between $7.15 million and $11.875 million, with at least 85% contributed to Security Bank.
Security Bank's total assets increased by 5.4% to $214.5 million at December 31, 2024, from $203.6 million at December 31, 2023.
Net income for the year ended December 31, 2024, was $683,000, a slight decrease of $1,000 from $684,000 in 2023.
The company's Cannabis-Related Business (CRB) Program generated $958,000 in fee income in 2024, representing 48.5% of noninterest income, and held $58.6 million in CRB deposits (29.4% of total deposits) and $23.3 million in CRB loans (20.4% of total loans) at year-end 2024.
Non-performing loans significantly decreased to 1.08% of total loans at December 31, 2024, from 3.73% at December 31, 2023.
The efficiency ratio worsened to 89.37% in 2024 from 80.15% in 2023, primarily due to a $702,000 write-off of capitalized conversion-related fees.
The company plans to withdraw from a multiple-employer defined benefit pension plan, incurring an estimated $1.4 million pre-tax charge but expecting $156,000 in annual pre-tax cost savings.
Pro forma valuation ratios at the midpoint of the offering range indicate discounts of 40.1% on price-to-book value, 40.1% on price-to-tangible book value, and 40.0% on price-to-core earnings compared to its peer group.

Sentiment

Score: 4

Explanation: The company is undertaking a crucial capital raise and structural conversion for long-term strategic growth. However, recent financial performance shows declining efficiency, narrowing margins, and low profitability compared to industry peers. Significant reliance on the CRB program introduces regulatory risk, and the offering's discounted valuation reflects these challenges. The long-term potential is present, but current metrics are weak.

Positives

Non-performing loans to total loans significantly improved to 1.08% at December 31, 2024, from 3.73% at December 31, 2023, indicating better asset quality.
Total assets increased by 5.4% to $214.5 million at December 31, 2024, demonstrating growth.
Net interest income increased by 2.1% to $7.2 million for the year ended December 31, 2024.
The company maintains strong regulatory capital ratios, being classified as 'well capitalized' with a Tier 1 leverage capital ratio of 8.07% and a total risk-based capital ratio of 16.85% at December 31, 2024.
The CRB Program is a substantial source of noninterest income ($958,000, or 48.5% of total noninterest income in 2024) and low-cost deposits.
Strategic initiatives include growing the loan portfolio (commercial real estate and commercial & industrial), increasing operating efficiencies, and expanding the CRB Program.
The planned withdrawal from the defined benefit pension plan is expected to result in annual pre-tax cost savings of $156,000.

Negatives

Net income for 2024 remained flat, decreasing slightly by $1,000 (0.1%) compared to 2023.
The efficiency ratio worsened significantly to 89.37% in 2024 from 80.15% in 2023, indicating a decrease in operational efficiency.
Interest rate spread decreased to 2.70% in 2024 from 3.35% in 2023, and net interest margin decreased to 3.48% from 3.68%, primarily due to a more rapid increase in the cost of funds.
A significant portion of deposits ($32.1 million, or 16.0% of total deposits at December 31, 2024) is held by one individual CRB customer, posing concentration risk.
Professional fees increased substantially in 2024, including a $702,000 write-off of capitalized fees related to the conversion process.
Return on average assets (0.32%) and return on average equity (4.63%) are low compared to the Comparative Group's median ROA (0.36%) and ROE (3.88%).
Unrealized losses on available-for-sale investment securities increased to $6.6 million at December 31, 2024.
The company does not initially intend to pay cash dividends on its common stock.

Risks

Strict enforcement of federal laws regarding cannabis could lead to the termination of the CRB Program, significantly impacting financial condition and results of operations.
A material reduction in the deposit balance of the single largest CRB customer ($32.1 million) could restrict future growth and adversely affect financial condition.
The cost of withdrawing from the multiple-employer defined benefit pension plan may be greater than the estimated $1.4 million.
Increased origination of commercial real estate and commercial and industrial loans involves higher credit risks due to larger balances and dependence on business operations.
Geographic concentration of the loan portfolio in Sangamon County, Illinois, makes the company vulnerable to local economic downturns.
The allowance for credit losses may not be sufficient to cover actual loan losses, potentially decreasing earnings.
A concentration in commercial real estate lending (303% of total capital) may subject the company to additional regulatory scrutiny.
Future changes in interest rates could negatively affect operating results and asset values, with a 200 basis point decrease in rates estimated to cause a 17.4% decrease in Economic Value of Equity (EVE) and a 9.4% decrease in net interest income.
Failure to effectively manage growth or achieve loan growth targets could negatively affect financial condition and operations.
Strong competition in the banking and financial services industry, including from larger institutions and fintech companies, may limit growth and profitability.
Changes in laws and regulations, and the increasing costs of regulatory compliance, may adversely affect operations.
Non-compliance with anti-money laundering laws (e.g., USA PATRIOT Act, Bank Secrecy Act) could result in fines or sanctions, especially due to CRB involvement.
Stringent capital requirements may adversely impact return on equity, require additional capital, or limit dividend payments and share repurchases.
The Federal Reserve Board may require the holding company to commit capital resources to support Security Bank.
As an emerging growth company, electing reduced reporting and disclosure requirements could make common stock less attractive to investors.
Inflation can have an adverse impact on the business and customers, increasing operating costs and potentially affecting loan repayment ability.
Reliance on technology and third-party vendors exposes the company to operational risks, including system failures, security breaches, and fraudulent activities.
The future trading price of the common stock may be less than the $10.00 purchase price due to market factors and the appraisal not being a guarantee of market value.
The company has broad discretion in using the proceeds of the stock offering, and failure to deploy them effectively may adversely affect financial performance.
There will be a limited trading market for the common stock, which could hinder liquidity and lower the market price.
Stock-based benefit plans, if implemented, will increase expenses and dilute existing stockholders' ownership interest.
Anti-takeover provisions in the articles of incorporation and bylaws, along with federal banking laws, could make takeover attempts more difficult.
The distribution of subscription rights could have adverse income tax consequences if deemed to have an ascertainable value by the IRS.

Future Outlook

The company expects its common stock to be quoted on the OTCQB Market upon completion of the offering. It plans to grow its loan portfolio, focusing on commercial real estate and commercial & industrial loans, and to modestly expand its CRB Program geographically. Management intends to increase operating efficiencies and core deposits. While the company does not initially intend to pay dividends, it plans to implement stock-based benefit plans after the conversion and may pursue acquisitions of other financial institutions in the future.

Management Comments

President and CEO Stephan P. Antonacci's positions foster clear accountability, effective decision-making, a clear and direct channel of communication from senior management to the full board of directors, and alignment on corporate strategy.
Management believes that maintaining strong asset quality is paramount to long-term success.
Management believes that the company's community orientation and personal service distinguishes it from larger banks.
Management believes that the company's smaller size allows it to be more responsive to customer needs.
Management believes that growing commercial real estate and commercial and industrial loans will help grow core deposits by emphasizing servicing an entire banking relationship.
Management believes the additional capital raised in the offering will enable the company to take advantage of business opportunities and achieve economies of scale.
Management believes that the anti-takeover provisions are prudent and will reduce vulnerability to unapproved takeover attempts, assisting in the orderly deployment of offering proceeds.

Industry Context

The banking and financial services industry is highly competitive, with larger institutions and fintech companies posing significant challenges. The cannabis industry, a key focus for Security Bank, is relatively new, competitive, and faces evolving federal legal and regulatory uncertainties. Recent market conditions for bank and thrift stocks have been mixed, with increased volatility in early 2025 due to broader economic concerns, despite Federal Reserve actions to lower interest rates in late 2024.

Comparison to Industry Standards

Security Bank's total assets of $214.5 million are significantly smaller than the peer group's average of $640.4 million and median of $546.0 million.
The company's LTM Return on Average Assets (ROA) of 0.32% and core ROA of 0.32% are below the Comparative Group's median ROA of 0.36% and core ROA of 0.53%.
Security Bank's Net Interest Margin (3.38%) is higher than the Comparative Group's median of 2.87%, bolstered by its low-cost demand deposits.
The Non-Interest Income to Average Assets ratio (0.98%) is higher than the Comparative Group's median of 0.39%, largely due to CRB fee income.
The Non-Interest Expense to Average Assets ratio (3.85%) is higher than the Comparative Group's median of 2.44%, contributing to a less favorable efficiency ratio.
Security Bank's Efficiency Ratio of 89.37% is significantly higher (worse) than the Comparative Group's median of 78.08%.
The ratio of Non-Performing Loans to Total Loans (1.08%) and Non-Performing Assets to Total Assets (0.57%) are higher than the Comparative Group's medians of 0.42% and 0.33%, respectively.
The Allowance for Credit Losses to Non-Performing Loans ratio (94.3%) is lower than the Comparative Group's median of 187.0%, suggesting less coverage for non-performing assets.
Security Bank's Total Equity to Total Assets ratio (6.50%) is substantially below the Comparative Group's median of 14.30%.
The pro forma pricing ratios at the midpoint of the offering range (Price/Book Value 48.54%, Price/Tangible Book Value 48.54%, Price/Core EPS 10.64x) reflect significant discounts (around 40%) compared to the peer group medians, indicating a lower initial market valuation.
Peer Group Companies include BV Financial, Inc., Catalyst Bancorp, Inc., Central Plains Bancshares, Inc., Home Federal Bancorp, Inc. of Louisiana, IF Bancorp, Inc., Magyar Bancorp, Inc., NSTS Bancorp, Inc., PB Bankshares, Inc., SR Bancorp, Inc., and Texas Community Bancshares, Inc.

Management Changes

Role	Previous Person	New Person	Effective Date	Reason
Director	NA	James R. Hillestad	2024	New appointment
Director	NA	Marcus E. Johnson	2024	New appointment
Director	NA	William R. Marriott II	2024	New appointment
Director	Beverly Hicks-Gibson	NA	February 2024	Retirement
Director	James F. Hillestad	NA	September 2024	Retirement
Director	Mitchell L. Johnson	NA	January 2024	Retirement
Executive Vice President and Chief Lending Officer	NA	Darren W. Jones	December 2022	New hire
Executive Vice President and Chief Financial Officer	NA	Brenda K. Minder	June 2021	New hire

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Board Structure	The board of directors will be divided into three staggered classes, with one-third elected annually, making it more difficult to replace a majority of the board.	Upon completion of conversion	Enhances board stability and potentially deters hostile takeovers.
Director Qualifications and Age Limit	Bylaws establish qualifications for board members, including restrictions on affiliations with competitors, prior legal/regulatory violations, residency, and an age limit of 72 for new or re-elected directors (excluding current directors).	Upon completion of conversion	Aims to ensure qualified and independent board members while potentially limiting the pool of candidates.
Stockholder Meeting and Nomination Procedures	Bylaws impose notice and information requirements for stockholder nominations of directors and submission of business proposals at annual meetings.	Upon completion of conversion	May make it more challenging for stockholders to propose actions or nominate directors without management's support.
Voting Rights Limitations	Articles of incorporation prohibit cumulative voting for directors and limit any record owner beneficially owning more than 10% of outstanding common stock from voting shares in excess of that limit.	Upon completion of conversion	Reduces the influence of large individual stockholders and makes it harder for a minority to elect directors.
Director Removal	Directors may be removed only for cause and by the affirmative vote of at least two-thirds of the voting power of all then-outstanding common stock.	Upon completion of conversion	Increases job security for directors and makes it more difficult for stockholders to remove them.
Preferred Stock Authorization	The articles of incorporation authorize 1,000,000 shares of serial preferred stock, which the board can issue with various rights and preferences without stockholder approval.	Upon completion of conversion	Provides flexibility for future capital raises but could be used to dilute voting strength or impede hostile takeovers.
Amendment Requirements	Amendments to certain articles of incorporation provisions require approval by at least 80% of outstanding voting stock, and bylaws can be amended by a majority of directors or 80% of stockholders.	Upon completion of conversion	Creates super-majority requirements that make it difficult to change key governance provisions without broad consensus.
Liquidation Account Establishment	A special liquidation account will be established for the benefit of eligible depositors, providing them with a liquidation interest in the unlikely event of Security Bank's complete liquidation after conversion.	Upon completion of conversion	Protects the historical ownership interests of mutual depositors in a liquidation scenario.
Financial Holding Company Status	Security Midwest Bancorp will not elect financial holding company status in connection with the conversion.	Upon completion of conversion	Limits the range of financial activities the holding company can engage in compared to a financial holding company.

Legal Proceedings

Not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.
No legal proceedings are currently underway that would be material to the company's financial condition or results of operations as of December 31, 2024.

Related Party Transactions

Aggregate loans outstanding to executive officers, directors, and their related parties totaled $8.5 million at December 31, 2024, up from $4.4 million at December 31, 2023.
All related party loans were made in the ordinary course of business, on substantially the same terms as to unaffiliated third parties, and did not involve more than normal risk of collectability.
Deposits from related parties totaled approximately $9.881 million at December 31, 2024, compared to $1.614 million at December 31, 2023.
Security Bank paid $18,141 in 2024 to lease parking spaces from a company majority-owned by Director Myers.
Commercial loans were made to entities with minority ownership by Director Kopecky and to entities controlled by Director Marriott.
Residential and commercial loans were made to Director Stone and her affiliates.

Stakeholder Impact

Shareholders: Opportunity to acquire an ownership interest in the company, but face potential dilution from stock-based benefit plans, a limited initial trading market, and no immediate cash dividends. Anti-takeover provisions may limit the premium in a potential acquisition.
Depositors: Existing deposit accounts will continue with unchanged terms and FDIC insurance. Eligible depositors will receive an interest in a liquidation account in the unlikely event of Security Bank's liquidation.
Employees: Will participate in an employee stock ownership plan (ESOP) and may benefit from future stock-based benefit plans, enhancing long-term incentives. Employment agreements are in place for key executives.
Customers: Expected to benefit from expanded products and services, enhanced technology, increased lending capacity, and continued community-oriented service.
Management: Will receive stock-based incentives through ESOP and future benefit plans, and employment agreements are designed to ensure stability and retention.

Next Steps

The plan of conversion requires approval by a majority of Security Bank's members (depositors) at a special meeting.
Final non-objection or approval is needed from the FDIC, Illinois Division of Banking, and Federal Reserve Board to complete the conversion and offering.
The offering is expected to expire on [expiration date], with potential extensions requiring regulatory approval and subscriber resolicitation.
Feldman Financial Advisors, Inc. will update its appraisal of the company's market value before the conversion and offering are completed.
Security Midwest Bancorp expects its common stock to be quoted on the OTCQB Market upon conclusion of the offering.
The company will register its common stock under Section 12(g) of the Securities Exchange Act of 1934.
One or more stock-based benefit plans are intended to be implemented after the conversion, subject to stockholder approval and regulatory restrictions, no earlier than six months post-conversion.
Security Bank intends to withdraw from the multiple-employer defined benefit pension plan, with the timing dependent on post-conversion capital levels and market conditions.
Security Midwest Bancorp may pursue acquisitions of banking and financial services companies in the future.

Key Dates

Date	Description
July 31, 2023	Eligibility record date for first priority depositors in the subscription offering.
September 5, 2024	Date of original engagement letter with Performance Trust Capital Partners, LLC.
September 9, 2024	Board of directors approved the plan of conversion.
December 31, 2023	Prior year-end financial reporting date.
December 31, 2024	Latest year-end financial reporting date for key metrics (total assets, deposits, equity, net income, etc.).
January 17, 2025	Date of amendment to engagement letter with Performance Trust Capital Partners, LLC.
March 14, 2025	Date of independent appraisal update by Feldman Financial Advisors, Inc.
March 28, 2025	As filed date with the SEC for the S-1/A; date of the Report of Independent Registered Public Accounting Firm.
June 30, 2024	Latest date for which market share of deposits in Sangamon County was available (2.35%).
January 1 in the year in which the stock offering closes	Eligibility date for participants in the employee stock ownership plan (ESOP).
Six months after completion of conversion	Earliest date for implementation of stock-based benefit plans, subject to stockholder approval.
June 30, 2025	Anticipated earliest date for withdrawal from the multiple-employer defined benefit pension plan.
September 30, 2025	Latest date for conversion consummation per the agency agreement, after which the agreement may terminate.
Three years following completion of conversion	Period during which no person may acquire beneficial ownership of more than 10% of common stock without prior regulatory approval.
Five years from closing of conversion	Period during which no person may acquire more than 10% of Security Bank's equity without prior regulatory approval.
[expiration date]	Expected expiration date of the offering (placeholder, 4:00 p.m., Central Time).
[extension date]	Date beyond which resolicitation of subscribers is required if the offering is extended (placeholder).
[final extension date]	Latest possible extension date for the offering, two years after the special meeting of members (placeholder).
[supplemental eligibility date]	Eligibility date for supplemental eligible account holders (placeholder).
[voting record date]	Record date for voting members to approve the plan of conversion (placeholder).

Recommendation

hold

The conversion and capital raise are strategic moves to enhance financial strength and support future growth, particularly in commercial lending and the CRB program. However, the company's recent financial performance shows a decline in efficiency, narrowing margins, and lower profitability compared to its peer group. The significant concentration of risk in the CRB sector and the discounted valuation in the offering suggest that while the long-term outlook may improve with effective capital deployment, the immediate investment appeal is moderate. A 'hold' recommendation allows investors to observe the execution of the business plan and improvements in operational metrics post-conversion before committing further capital.

Keywords

Mutual-to-stock conversion, IPO, Banking, Financial services, Cannabis banking, Commercial real estate loans, Commercial & industrial loans, Deposits, Capital raise, SEC filing, S-1/A, Illinois, Springfield, Risk management, Corporate governance, Financial performance, Regulatory compliance, Stock offering, Liquidity, Asset quality, Interest rates, Employee stock ownership plan, Stock-based benefit plans

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