10-Q: Security Midwest Bancorp Reports Strong Q2 Earnings

Security Midwest Bancorp, Inc. reported a significant increase in net income for the second quarter and first half of 2025, driven by improved net interest income and effective interest rate management.

Summary

• Net income for the three months ended June 30, 2025, was $349,548, an increase of 31.3% compared to the same period in 2024.
• Net income for the six months ended June 30, 2025, was $751,093, an increase of 40.0% compared to the same period in 2024.
• Total assets increased by $1.8 million, or 0.9%, to $216.4 million at June 30, 2025, from December 31, 2024.
• Cash and cash equivalents increased by $5.3 million, or 12.2%, to $48.9 million at June 30, 2025.
• Investment securities decreased by $1.9 million, or 4.1%, to $44.5 million, with a $1.1 million decrease in gross unrealized loss.
• Gross loans decreased by $1.3 million, or 1.2%, to $113.0 million at June 30, 2025.
• Loan originations for the six months ended June 30, 2025, totaled $17.5 million, a 76.8% increase year-over-year.
• Total deposits decreased by $3.9 million, or 2.0%, to $195.5 million, primarily due to a decrease in certificates of deposit.
• Core deposits (demand and savings) increased by $465,000, or 0.3%, to $153.3 million.
• Equity increased by $1.6 million, or 11.2%, to $15.5 million at June 30, 2025, due to net income and a decrease in accumulated other comprehensive loss.
• The conversion to stock form was completed on July 31, 2025, with 889,781 shares of common stock sold for gross proceeds of approximately $8.9 million.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net income and net interest margin, effective management of interest rate risk, and a robust capital position. The successful completion of the conversion and capital raise are also positive milestones. While there was a slight decrease in total deposits and loans, and noninterest expenses increased, the overall financial health and strategic execution appear strong.

Positives

• Net income for Q2 2025 increased by 31.3% to $349,548, and for H1 2025 increased by 40.0% to $751,093.
• Net interest income grew by 15.0% to $1.9 million in Q2 2025 and by 14.1% to $3.9 million in H1 2025.
• Net interest margin improved to 4.00% in Q2 2025 (from 3.34%) and 3.87% in H1 2025 (from 3.35%).
• Average yield on loans increased to 6.54% in Q2 2025 and 6.46% in H1 2025, indicating effective asset pricing.
• Loan originations for H1 2025 increased significantly by 76.8% to $17.5 million.
• Accumulated other comprehensive loss decreased by $813,000, reflecting an improvement in the fair value of available-for-sale securities.
• Maintained 'well capitalized' status, exceeding all regulatory capital requirements.
• Nonperforming loans decreased to $814,000 at June 30, 2025, from $1.2 million at December 31, 2024.
• Allowance for credit losses as a percentage of nonperforming loans improved to 141.2% at June 30, 2025, from 94.3% at December 31, 2024, indicating strong coverage.
• Successfully completed the conversion to stock form and raised approximately $8.9 million in gross proceeds from common stock sales.

Negatives

• Gross loans decreased by $1.3 million, or 1.2%, to $113.0 million at June 30, 2025.
• Total deposits decreased by $3.9 million, or 2.0%, primarily due to a $4.4 million decrease in certificates of deposit.
• Interest income from investment securities and interest-bearing deposits decreased.
• Noninterest expense increased by 8.5% in Q2 2025 and 6.5% in H1 2025, primarily due to higher salaries, employee benefits, and advertising.
• Unrealized losses on available-for-sale securities remain significant at $5.49 million at June 30, 2025.
• An estimated $1.4 million payment for withdrawal from a multi-employer defined benefit plan is expected post-conversion, which will be recorded as a current period expense.

Risks

• Interest rate risk due to longer maturities of assets (mortgage loans) compared to liabilities (deposits), with a modeled 17.96% decrease in Economic Value of Equity (EVE) for a 200 basis point decrease in interest rates.
• Credit risk associated with loan portfolio, particularly commercial real estate and construction loans, which are sensitive to economic conditions and collateral values.
• Subjectivity in determining the allowance for credit losses, which relies on estimates susceptible to significant revision, potentially leading to higher future provisions.
• Concentration risk from cannabis-related business (CRB) deposits, totaling $59.6 million at June 30, 2025.
• Liquidity risk from $39.6 million in certificates of deposit maturing within one year, requiring potential re-funding at higher rates if not retained.
• Regulatory risk from failure to meet minimum capital requirements, which could trigger mandatory or discretionary actions by regulators.
• Operational risk related to estimates and assumptions in financial reporting, such as fair value measurements and deferred tax assets, which could differ from actual results.
• Marketability risk for collateral-dependent loans, where fair values are determined using unobservable inputs like a 10% appraisal discount.

Future Outlook

The company plans to grow its loan portfolio, with a strategic focus on owner-occupied one-to-four family residential real estate loans and commercial loans. It intends to increase its core deposit base by enhancing products and services, including mobile banking and expanded cannabis-related business (CRB) services. Following the conversion, the Bank will withdraw from a multi-employer defined benefit plan, incurring an estimated $1.4 million expense. As an emerging growth company, it will utilize the extended transition period for new accounting pronouncements. Asset-liability management strategies will continue to focus on managing interest rate risk through loan product mix, deposit marketing, liquidity maintenance, and strategic security investments.

Management Comments

• 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.
• 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.
• Management believes, as of June 30, 2025, that the Bank met all capital adequacy requirements to which it is subject.
• The Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective.

Industry Context

The banking sector is navigating a dynamic interest rate environment. Security Midwest Bancorp's improved net interest margin and loan yields suggest effective management of its asset-liability mix in a rising or stable high-interest rate climate, outperforming some peers who might struggle with deposit costs. The focus on growing commercial and residential loans aligns with typical community bank strategies to enhance profitability. The significant unrealized losses on available-for-sale securities are a common industry-wide issue due to recent interest rate hikes, but the decrease in these losses indicates some market stabilization or strategic portfolio adjustments. The concentration in cannabis-related business (CRB) deposits represents a niche market that can offer higher fees but also carries increased regulatory scrutiny and operational complexity.

Comparison to Industry Standards

• Net Interest Margin (NIM) of 4.00% (Q2 2025) and 3.87% (H1 2025) is strong for community banks, often exceeding typical industry averages which fluctuate but generally range from 3.0% to 3.5%.
• Capital ratios, such as Common Equity Tier 1 at 16.35% and Total Capital at 17.39% (June 30, 2025), significantly exceed the 'well capitalized' minimums (6.50% and 10.00% respectively), demonstrating a robust capital position comparable to or stronger than many regional banks.
• Nonperforming loans decreased to $814,000 at June 30, 2025, from $1.2 million at December 31, 2024, indicating improved asset quality.
• The allowance for credit losses covering 141.2% of nonperforming loans is a very strong coverage ratio, suggesting a conservative approach to potential loan losses, often higher than many peers.
• While overall gross loans decreased slightly, the 76.8% increase in loan originations for H1 2025 suggests a renewed focus on growth, which is positive compared to banks experiencing stagnant or declining origination volumes.
• The shift in deposit mix, with a decrease in time deposits and a slight increase in demand deposits, indicates a move towards lower-cost funding, a positive trend in the current rate environment. The concentration in CRB deposits is a unique aspect that differentiates it from many traditional banks.

Corporate Governance

Legal Proceedings

• Not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.
• At June 30, 2025, not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

Stakeholder Impact

• Shareholders: Positive impact due to increased net income, improved margins, successful capital raise, and the common stock beginning to quote on the OTCQB Market, enhancing liquidity and visibility.
• Depositors: The establishment of a liquidation account for eligible savings account holders post-conversion provides a benefit.
• Employees: The Employee Stock Ownership Plan (ESOP) provides a direct stake in the company's success, and increased staffing levels were noted in noninterest expense.
• Customers: Enhanced products and services, including mobile banking and expanded CRB services, aim to improve customer experience and attract new business.
• Regulators: The Bank maintains 'well capitalized' status, indicating compliance with regulatory requirements.

Next Steps

• Withdraw from the multi-employer defined benefit plan, requiring an estimated $1.4 million payment.
• Continue to grow the loan portfolio, focusing on owner-occupied one-to-four family residential real estate loans and commercial loans.
• Increase core deposit base, with an emphasis on consumer and business demand deposits, by enhancing products and services.
• Manage interest rate risk through various strategies, including increasing commercial loans, emphasizing core deposits, maintaining liquidity, and investing in shortto medium-term securities.
• Security Midwest Bancorp, Inc. common stock began quoting on the OTCQB Market on August 1, 2025, under the symbol 'SBMW'.

Key Dates

Recommendation

The company demonstrated robust financial performance with substantial increases in net income and net interest margin, indicating effective operational management in a challenging interest rate environment. The successful completion of the mutual-to-stock conversion and the associated capital raise of $8.9 million provide a stronger capital base and increased liquidity. Furthermore, the company maintains a 'well capitalized' status, has improved its allowance for credit losses coverage, and is strategically focused on growing its core loan and deposit portfolios. The listing on the OTCQB market enhances visibility and liquidity for investors. While there are inherent risks in banking, the overall positive trajectory and strategic execution make it an attractive investment.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Income, Loans, Deposits, Interest Rates, Capital Adequacy, Credit Losses, Market Risk, Liquidity, Cannabis Banking, Stock Conversion, Illinois Banking, SBMW