10-Q: Security Midwest Bancorp Reports Strong Q1 Earnings Growth

Security Midwest Bancorp, primarily reflecting Security Bank's operations, reported a 48.9% increase in net income for Q1 2025, driven by higher net interest income and reduced credit loss provisions.

Summary

• Net income for Q1 2025 increased by $132,000, or 48.9%, to $402,000 compared to $270,000 for Q1 2024.
• Total assets grew by $3.1 million, or 1.4%, to $217.6 million at March 31, 2025, from $214.5 million at December 31, 2024.
• Net interest income rose by $229,000, or 13.2%, to $2.0 million for Q1 2025.
• No provision for credit losses was recorded for Q1 2025, compared to $45,000 for Q1 2024.
• Gross loans decreased by $2.6 million, or 2.3%, to $111.8 million at March 31, 2025.
• Deposits increased by $1.9 million, or 1.0%, to $201.3 million at March 31, 2025, with core deposits up $5.0 million, or 3.3%.
• Equity increased by $1.2 million, or 8.4%, to $15.1 million at March 31, 2025.
• The allowance for credit losses decreased to $1.1 million at March 31, 2025, from $1.16 million at December 31, 2024, representing 1.01% of total loans.
• Nonperforming loans decreased to $872,000 at March 31, 2025, from $1.2 million at December 31, 2024.
• The conversion from mutual to stock form for Security Bank had not been consummated as of March 31, 2025.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant net income growth, improved net interest income, and robust capital ratios. The reduction in nonperforming loans and increased credit loss coverage are positive indicators of asset quality. While there's a delay in the conversion and some loan portfolio contraction, the strategic focus on core deposits and CRB expansion, coupled with effective interest rate management, suggests a positive outlook.

Positives

• Net income increased by 48.9% to $402,000 for Q1 2025, up from $270,000 in Q1 2024.
• Net interest income grew by 13.2% to $2.0 million for Q1 2025.
• No provision for credit losses was recorded in Q1 2025, a decrease from $45,000 in Q1 2024.
• The average yield on loans increased by 67 basis points to 6.38% for Q1 2025.
• Total interest expense decreased by 6.1% to $572,000 for Q1 2025, primarily due to lower interest on deposits and borrowings.
• Equity increased by 8.4% to $15.1 million at March 31, 2025, driven by net income and a decrease in accumulated other comprehensive loss.
• Gross unrealized loss on available-for-sale securities decreased by $1.1 million to $5.5 million at March 31, 2025.
• Nonperforming loans decreased to $872,000 at March 31, 2025, from $1.2 million at December 31, 2024.
• Total loans past due 30 days or greater decreased to $1.2 million at March 31, 2025, from $1.6 million at December 31, 2024.
• The allowance for credit losses as a percentage of nonperforming loans increased to 129.1% at March 31, 2025, from 94.3% at December 31, 2024, indicating stronger coverage.
• Security Bank exceeded all regulatory capital requirements and was considered "well capitalized" at March 31, 2025.
• Expansion of cannabis-related business (CRB) services into Kentucky, Ohio, Michigan, and Missouri.
• Enhanced products and services, including mobile banking and streamlined commercial banking services.

Negatives

• Gross loans decreased by $2.6 million, or 2.3%, to $111.8 million at March 31, 2025.
• Investment securities decreased by $963,000, or 2.1%, to $45.4 million at March 31, 2025.
• Service fees on deposits decreased by $13,000, or 5.1%, for Q1 2025, primarily due to lower maintenance and cash counting fees from CRB customers.
• Debit card fees decreased by $11,000, or 10.5%, for Q1 2025.
• Salaries and employee benefits increased by $77,000, or 7.4%, for Q1 2025 due to increased staffing and merit increases.
• Occupancy and equipment expenses increased by $21,000, or 16.4%, for Q1 2025.
• Advertising expenses increased by $20,000, or 87.0%, for Q1 2025.
• A significant portion of certificates of deposit, $40.3 million or 92.8% of total certificates, are due within one year of March 31, 2025, posing re-pricing risk.
• The company had a concentration of deposits from CRB customers, totaling $59.9 million at March 31, 2025, which are noted as volatile.

Risks

• Interest Rate Risk: The Bank's assets (mortgage loans) have longer maturities than its liabilities (deposits), making it sensitive to changes in market interest rates. An instantaneous parallel 200 basis point decrease in interest rates would result in a 20.14% decrease in Economic Value of Equity (EVE).
• Credit Risk: Repayment of loans is dependent on economic conditions and the specific economy in the respective geographic areas, particularly for residential, multifamily, commercial, construction, farmland, and commercial and industrial loans.
• Collateral-Dependent Loans: Loans where repayment relies heavily on the fair value of collateral, which can fluctuate.
• Volatile Deposits: Concentration of deposits from cannabis-related business (CRB) customers, totaling $59.9 million at March 31, 2025, which require a higher level of liquidity due to their volatile nature.
• Liquidity Risk: A significant portion of certificates of deposit ($40.3 million, or 92.8% of total certificates) are due within one year, requiring the Bank to seek other funding sources if these deposits do not remain, potentially at higher rates.
• Operational Risk: The ongoing conversion process and the establishment of a new holding company introduce operational complexities.
• Regulatory Risk: Failure to meet minimum capital requirements can initiate mandatory and discretionary actions by regulators.
• Valuation Estimates: Material estimates, such as the allowance for credit losses and fair values of financial instruments, are inherently subjective and susceptible to significant revision.
• Economic Conditions: The ability of borrowers to honor contracts is dependent on economic conditions, particularly in central Illinois.

Future Outlook

Security Midwest Bancorp intends to complete its conversion from a mutual to a stock savings bank structure. Post-conversion, the Bank plans to withdraw from a multi-employer defined benefit plan, incurring an estimated $1.4 million expense. Strategically, the Bank aims to grow its loan portfolio, focusing on owner-occupied one-to-four family residential real estate and commercial loans, and to increase its core deposit base by enhancing products, expanding CRB services into new states (Kentucky, Ohio, Michigan, Missouri), and streamlining commercial banking services.

Management Comments

• We intend to take advantage of the benefits of this extended transition period [as an emerging growth company].
• Our strategy is to grow our loan portfolio, with a focus on owner-occupied oneto four-family residential real estate loans and commercial loans (both commercial real estate and commercial and industrial).
• We intend to continue our efforts to increase our core deposit base, with an emphasis on growth in consumer and business demand deposits.
• Management believes, as of March 31, 2025, that the Bank met all capital adequacy requirements to which it is subject.
• We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis.
• We anticipate that we will have sufficient funds to meet our current funding commitments.
• We believe, however, based on past experience that a significant portion of such deposits will remain with us.

Industry Context

The banking industry continues to navigate a dynamic interest rate environment, impacting net interest margins and loan demand. Security Bank's strategy to increase its loan yield and reduce interest expense on deposits aligns with broader industry efforts to optimize profitability in a competitive landscape. The expansion of cannabis-related business (CRB) services represents a niche growth area, though it introduces specific liquidity management challenges due to deposit volatility. The overall decrease in gross loans, despite a stated growth strategy, suggests ongoing market competition or cautious lending, while the growth in core deposits is a positive trend in an environment where deposit retention is crucial.

Comparison to Industry Standards

• The Bank's net interest margin of 3.74% for Q1 2025 is generally considered healthy for community banks, often exceeding the average for larger, more diversified institutions, but specific peer comparisons would require detailed industry data.
• The Common Equity Tier 1 capital ratio of 16.52% significantly surpasses the "well capitalized" threshold of 6.50%, indicating a very strong capital position compared to regulatory benchmarks and often exceeding many industry peers.
• The decrease in nonperforming loans and the high allowance for credit losses to nonperforming loans ratio (129.1%) suggest better-than-average asset quality management compared to industry averages, especially given the current economic climate.
• The concentration of CRB deposits, while a growth area, is a unique characteristic that requires specialized risk management and liquidity strategies, differentiating the Bank from many traditional community banks.

Legal Proceedings

• The company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, with no material impact on financial condition or results of operations as of March 31, 2025.

Stakeholder Impact

• Shareholders: Potential for increased value upon successful conversion and stock offering, benefiting from improved financial performance and strategic growth initiatives.
• Depositors: Continued focus on increasing core deposits and enhancing services, potentially leading to better product offerings and mobile banking capabilities.
• Employees: Increase in staffing levels and normal annual merit increases indicate positive employee relations, but the withdrawal from the multi-employer defined benefit plan will impact those covered by it.
• Customers (CRB): Expansion of CRB services into new states offers new opportunities, but the volatile nature of these deposits requires careful management.
• Regulatory Authorities: The Bank's "well capitalized" status and adherence to capital adequacy requirements demonstrate strong compliance.

Next Steps

• Consummation of Security Bank's conversion from mutual to stock form.
• Issuance of common stock by Security Midwest Bancorp, Inc.
• Withdrawal from the multi-employer defined benefit plan, incurring an estimated $1.4 million payment.
• Continued implementation of the strategy to grow the loan portfolio, focusing on owner-occupied one-to-four family residential real estate and commercial loans.
• Ongoing efforts to increase the core deposit base, with an emphasis on consumer and business demand deposits.
• Further expansion of CRB services into new states (Kentucky, Ohio, Michigan, Missouri).
• Streamlining commercial banking services through enhanced cash management and treasury management.
• Annual reviews of the unsecured federal funds purchase line of credit.

Key Dates

Keywords

Security Midwest Bancorp, Security Bank, 10-Q, Quarterly Report, Financial Results, Net Income, Net Interest Income, Loans, Deposits, Credit Losses, Capital Ratios, Cannabis Banking, CRB, Interest Rate Risk, Economic Value of Equity, EVE, Conversion, Stock Offering, Illinois Banking, Community Bank