As filed with the Securities and Exchange Commission on September 12, 2024

Registration No. 333-________

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SECURITY MIDWEST BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland		6036		Applied for
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

510 E. Monroe

Springfield, Illinois 62701

(217) 789-3500

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Stephan P. Antonacci

President and Chief Executive Officer

Security Midwest Bancorp, Inc.

510 E. Monroe

Springfield, Illinois 62701

(217) 789-3500

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Kip Weissman, Esq. Ned Quint, Esq. Luse Gorman, PC 5335 Wisconsin Avenue, N.W., Suite 780 Washington, D.C. 20015 (202) 274-2007		Ross Bevan, Esq. Silver, Freedman, Taff & Tiernan LLP 3299 K Street, N.W., Suite 100 Washington, DC 20007 (202) 295-4500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
				Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act: ☐

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

PROSPECTUS

 

(Proposed Holding Company for Security Bank, s.b.)

Up to 1,092,500 shares of Common Stock

(Subject to Increase to up to 1,256,375 shares)

 

 

Security Midwest Bancorp, Inc., a Maryland corporation and the proposed holding company for Security Bank, s.b., is offering shares of common stock for sale at $10.00 per share in connection with the conversion of Security Bank, s.b. from the mutual to the stock form of organization. There is currently no established market for our common stock. We expect that our common stock will be quoted on the OTCQB Market operated by the OTC Markets Group upon conclusion of the stock offering. Quotation on the OTCQB Market is not a condition of the conversion and stock offering. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act.

We are offering up to 1,092,500 shares of common stock for sale at a price of $10.00 per share on a best efforts basis. We may sell up to 1,256,375 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 807,500 shares in order to complete the offering.

We are offering the shares of common stock in a “subscription offering” with first priority given to eligible depositors of Security Bank, s.b. Shares of common stock not purchased in the subscription offering may be offered for sale to the public in a “community offering,” with a preference given to natural persons and trusts of natural persons residing in Sangamon County, Illinois. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering to the general public through a “syndicated offering” managed by Performance Trust Capital Partners, LLC.

The minimum number of shares of common stock you may order is 25 shares. Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 15,000 shares (150,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 30,000 shares ($300,000) of common stock in all categories of the stock offering combined.

The offering is expected to expire at 4:00 p.m., Central Time, on [expiration date]. We may extend this expiration date without notice to you until [extension date]. The Federal Deposit Insurance Corporation, the Illinois Department of Financial and Professional Regulation, Division of Banking, and the Board of Governors of the Federal Reserve System may approve a later date, which may not be beyond [final extension date]. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 1,256,375 shares or decreased to less than 807,500 shares. If the offering is extended past [extension date], we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [interest rate]% per annum. If the number of shares to be sold is increased to more than 1,256,375 shares or decreased to less than 807,500 shares, all funds submitted for the purchase of shares of common stock in the offering will be returned promptly with interest at [interest rate]% per annum. All subscribers will be resolicited and given an opportunity to place a new order within a specified period of time. Funds received in the subscription and the community offerings and, if applicable, the syndicated offering, will be held in a segregated account at Security Bank, s.b. and will earn interest at [interest rate]% per annum until completion or termination of the offering.

Performance Trust Capital Partners, LLC will assist us in selling our shares of common stock in the offering on a best efforts basis. Performance Trust Capital Partners, LLC is not required to purchase any of the shares of common stock that are being offered for sale.

OFFERING SUMMARY

Price: $10.00 per Share

 

		Minimum				Midpoint				Maximum				Adjusted Maximum
Number of shares			807,500				950,000				1,092,500				1,256,375
Gross offering proceeds		$	8,075,000			$	9,500,000			$	10,925,000			$	12,563,750
Estimated offering expenses, excluding selling agent commissions and expenses (1)		$	1,240,000			$	1,240,000			$	1,240,000			$	1,240,000
Selling agent commissions and expenses (1)(2)		$	410,000			$	410,000			$	410,000			$	410,000
Estimated net proceeds		$	6,425,000			$	7,850,000			$	9,275,000			$	10,913,750
Estimated net proceeds per share		$	7.96			$	8.26			$	8.49			$	8.69

 

(1)

See “The Conversion and Offering—Marketing and Distribution; Compensation” for a discussion of Performance Trust Capital Partners, LLC’s compensation for this offering and compensation to be received by Performance Trust Capital Partners, LLC and the other broker-dealers that may participate in a syndicated offering, if any.

(2)	Excludes records agent fees and expenses payable to Performance Trust Capital Partners, LLC, which are included in estimated offering expenses. See “The Conversion and Offering—Marketing and Distribution; Compensation.”

 

 

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 18.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Illinois Department of Financial and Professional Regulation, Division of Banking, the Board of Governors of the Federal Reserve System or any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

For assistance, please contact the Stock Information Center at [stock center number].

The date of this prospectus is [prospectus date].

TABLE OF CONTENTS

 

		Page
SUMMARY			3
RISK FACTORS			18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SECURITY BANK			39
FORWARD-LOOKING STATEMENTS			41
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING			43
OUR DIVIDEND POLICY			45
MARKET FOR THE COMMON STOCK			46
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE			47
CAPITALIZATION			48
PRO FORMA DATA			49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			54
BUSINESS OF SECURITY MIDWEST BANCORP, INC.			73
BUSINESS OF SECURITY BANK			74
REGULATION AND SUPERVISION			93
TAXATION			103
MANAGEMENT			104
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS			113
THE CONVERSION AND OFFERING			114
RESTRICTIONS ON ACQUISITION OF SECURITY MIDWEST BANCORP, INC.			135
DESCRIPTION OF CAPITAL STOCK OF SECURITY MIDWEST BANCORP, INC.			140
TRANSFER AGENT			141
EXPERTS			142
LEGAL MATTERS			142
WHERE YOU CAN FIND ADDITIONAL INFORMATION			142
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SECURITY BANK, S.B.			F-1

SUMMARY

The following summary explains the significant aspects of Security Bank, s.b.’s mutual-to-stock conversion and the related offering of Security Midwest Bancorp, Inc. common stock. It may not contain all of the information that is important to you. For additional information before making an investment decision, you should read this entire document carefully, including the financial statements and the notes to the financial statements, and the section entitled “Risk Factors.”

In this prospectus, the terms “we,” “our,” and “us” refer to Security Midwest Bancorp, Inc. and/or Security Bank, s.b., depending on the context. In addition, we sometimes refer to Security Midwest Bancorp, Inc. as “Security Midwest Bancorp,” and to Security Bank, s.b. as Security Bank.

Security Bank

Security Bank is a mutual savings bank organized under the laws of the State of Illinois and is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Division of Banking. We are a community-oriented bank offering a variety of financial products and services to meet the needs of our customers.

In 2018, we implemented a cannabis-related business (“CRB”) Program, offering deposit and cash-management services to licensed cannabis-related businesses. We currently offer depository accounts to customers operating licensed cannabis businesses in the States of Illinois, Michigan, and Ohio. In December 2022, we initiated lending to cannabis organizations and their associated real estate entities.

We operate three banking offices in Springfield, Illinois. Our market area for cannabis-related deposits is the States of Illinois, Michigan, and Ohio, while our primary market area for other deposits, as well as our primary lending market area is Sangamon County, Illinois (where our offices are located) and the contiguous counties. From time to time, we also originate loans to borrowers or secured by properties located in adjacent metropolitan markets. We believe that our community orientation and personal service distinguishes us from larger banks that operate in our market area. For additional information on our market area, see “Business of Security Bank—Market Area.”

Security Bank, originally named Workman’s Bank, represents the result of a series of mergers of financial institutions ending in 1906 with a merger with Security Improvement and Loan Association. We changed our name to Security Bank, s.b. in connection with a subsequent merger in 1995.

Our principal business consists of attracting retail deposits from the general public and CRB customers and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential real estate loans, commercial real estate loans and commercial and industrial loans. We also invest in debt securities, such as mortgage-backed securities and collateralized mortgage obligations, municipal bonds and U.S. government and agency securities. We offer a variety of deposit accounts, including demand deposit accounts, savings accounts, money market accounts and certificate of deposit accounts. In recent periods, we have borrowed limited funds to support our operations.

At June 30, 2024, we had total consolidated assets of $219.6 million, total deposits of $204.5 million and total equity of $13.9 million. For the six months ended June 30, 2024 and the year ended December 31, 2023, we recognized net income of $537,000 and $684,000, respectively.

Our executive office is located at 510 E. Monroe, Springfield, Illinois 62701, and our telephone number at this address is (217) 789-3500. Our website address is www.securitybk.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

 

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Security Midwest Bancorp, Inc.

The shares being offered will be issued by Security Midwest Bancorp, Inc. a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Security Bank upon completion of Security Bank’s mutual-to-stock conversion. Security Midwest Bancorp, Inc. was incorporated in September 2024, and has not engaged in any business to date. Upon completion of the conversion, Security Midwest Bancorp will register as a bank holding company and will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Security Midwest Bancorp’s executive office is located at 510 E. Monroe, Springfield, Illinois 62701, and its telephone number at this address is (217) 789-3500.

The Conversion and Our Organizational Structure

Pursuant to the terms of the plan of conversion, Security Bank will convert from a mutual (meaning no stockholders) savings bank to a stock savings bank. As part of the conversion, Security Midwest Bancorp, the proposed holding company for Security Bank, will offer for sale shares of its common stock in a subscription offering and, if necessary, a community offering and a syndicated offering. Upon the completion of the conversion and stock offering, Security Midwest Bancorp will be 100% owned by stockholders and Security Bank will be a wholly-owned subsidiary of Security Midwest Bancorp. See “The Conversion and Offering” for a full description of the conversion.

Business Strategy

Highlights of our current business strategy include the following:

 

•

Grow our loan portfolio, subject to market conditions. We will continue to emphasize one- to four-family residential real estate lending for borrowers residing in our market area. In furtherance of that emphasis, we have hired a full-time mortgage lending officer to support these efforts. We also intend to increase our origination of commercial real estate loans and commercial and industrial loans in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. Our low-cost source of funds obtained through our CRB Program provides us with cash to originate higher levels of loans. As of June 30, 2024, $33.4 million, or 31.0%, of our total loan portfolio consisted of one- to four-family residential real estate loans, while $40.6 million, or 37.7%, consisted of commercial real estate loans and $11.5 million, or 10.7%, consisted of commercial and industrial loans. The additional capital raised in the offering will increase our commercial lending capacity by enabling us to both originate more commercial real estate and commercial and industrial loans as well as loans with larger balances. This will permit us to serve commercial borrowers with larger lending needs and to originate larger commercial loans than we have in the past. We also believe that our smaller size allows us to be more responsive to the needs of our customers. In addition, we have invested in enhanced technology, which we believe will assist us in growing our loan portfolio, as described below.

 

•

Increase our operating efficiencies while expanding our products and services. We believe that we can enhance our net income by controlling our operating expenses while still maintaining quality control over our operations and concurrently expanding the products and services we offer to customers. We have closely monitored and assessed the number of our employees in recent years, as improvements in technology have enabled us and should continue to enable us to operate more efficiently. We completed a core data processing system conversion in 2021, which better supports our technology needs and our business model, and which we believe should continue to provide financial benefits in the future by enabling us to expand the products and services that we can offer. Our smaller size allows us to be more responsive to the needs of our customers, both with respect to engaging in new business activities and with respect to customer service and responsiveness. In recent years we have focused on improving our third-party vendor

 

4

management to reduce costs through better targeted assistance and a more thorough vendor engagement process. Our efficiency ratio (the ratio of non-interest expense divided by the sum of net interest income and non-interest income) was 82.77% and 80.15% for the six months ended June 30, 2024 and the year ended December 31, 2023, respectively. We intend to improve our efficiency ratio going forward, providing for related increases in net income due to reduced non-interest expense as a percentage of total interest income and non-interest income.

 

•

Grow our CRB Program. In 2018, we implemented our CRB Program, and we intend to continue to grow this program modestly going forward. Through our CRB Program, we provide deposit and cash-management services to customers that are licensed by their applicable state to conduct business in the cannabis industry as cultivators and dispensaries (collectively, “cannabis organizations”). We currently offer depository accounts to customers operating licensed cannabis businesses in the States of Illinois, Michigan, and Ohio. We consider geographic expansion based on competitive matters and the needs of our current customers.

In December 2022, we initiated lending to cannabis organizations and their associated real estate entities (secured by commercial real estate where the cannabis organization operates). We underwrite these loans under stringent guidelines (i.e. we do not assume potential revenue growth, but we do assume any potential negative effects of heightened cannabis regulations). We also generate traditional banking business from affiliates of cannabis organizations, including their owners. This includes personal loans and deposits, all of which are provided pursuant to our regular banking practices. We maintain stringent written policies and procedures related to cannabis organizations, including monitoring such customers’ accounts. We limit the number of CRB relationships (which may include multiple cannabis organizations or individuals) from which we accept deposits (our current limit is 35) and limit maximum deposits from any one cannabis organization by assessing off-balance sheet opportunities to reduce our risk, such as by placing excess deposits with other financial institutions.

We conduct extensive due diligence of a cannabis organization before its business is accepted, including confirmation that the business is properly licensed. Throughout the relationship, we continue the monitoring of the cannabis organization, including site visits, to ensure that the business continues to meet our stringent requirements.

At June 30, 2024, deposit balances from CRB customers were approximately $54.8 million, or 26.8% of total deposits. At June 30, 2024, one individual customer accounted for more than 10% of total deposits, holding $27.9 million of deposits, or 13.6% of total deposits at that date. Fee income from CRB customers for the six months ended June 30, 2024 and the year ended December 31, 2023 was $471,000 and $1.0 million, respectively, totaling 52.4% and 51.5% of non-interest income for these periods, and includes both account maintenance fees and cash-counting fees. At June 30, 2024, loan balances from CRB customers and their associated real estate entities were approximately $20.3 million, or 18.9%, of our total loan portfolio, and we recognized loan fees of $8,000 for loans to CRB customers and their associated real estate entities for the six months ended June 30, 2024. At June 30, 2024, all of our loans to CRB customers and their associated real estate entities were performing in accordance with their contractual terms.

 

•

Manage credit risk to maintain a low level of nonperforming assets. We believe that maintaining strong asset quality is paramount to our long-term success. Beginning in 2018, we enhanced our credit review process by upgrading our loan approval and underwriting policies, hiring a full-time credit officer, updating our outside annual credit review for all commercial real estate and commercial and industrial loans and enhancing the automation of our credit review process. We further enhanced this process by hiring a new chief lending officer in December 2022. We also limit credit risk by utilizing an internal loans-to-one-borrower limitation of 70% of our regulatory limit. At June 30, 2024, our regulatory loans-to-one borrower limit was $4.7 million, resulting in an internal limit under our policy of $3.2 million. At June 30, 2024, our ratio of non-performing loans to total loans was 1.56%, while our ratio of non-performing loans to total assets was 0.76%. These ratios were 3.73% and 2.00% at December 31, 2023, respectively.

 

5

•

Increase core deposits. We will continue to emphasize increasing “core deposits,” such as statement savings accounts, money market accounts and demand deposits, including regular and commercial checking accounts. Core deposits provide a stable source of funds to support loan growth at costs consistent with enhancing our interest rate spread and net interest margin, and provide the liquidity we require to support our CRB operations. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. At June 30, 2024, $154.6 million, or 75.6% of our deposits, were considered core deposits. We intend to attract and retain core deposits by growing our CRB Program, offering competitive products that meet the full-service banking needs of our customers, by emphasizing quality customer service, and through our convenient locations and advertising and promotions programs. Our core data processing system conversion, discussed above, enhanced the tools that we can offer customers to assist in managing their funds. Furthermore, we believe growing our commercial real estate and commercial and industrial loans will help grow our core deposits as we would emphasize servicing an entire banking relationship as opposed to just the underlying loans.

Reasons for the Conversion and Offering

We believe the additional capital raised in the offering will enable us to take advantage of business opportunities and over time grow to achieve economies of scale that may not otherwise be available to us. Our primary reasons for converting and raising additional capital through the offering are to:

 

•

increase our capital to enhance our financial strength and to support existing and future lending and deposit growth;

 

•

facilitate our withdrawal from the multiple-employer defined benefit pension plan in which we participate;

 

•

enhance our lending capacity by increasing our regulatory lending limits;

 

•

attract and retain qualified personnel by enabling us to establish stock-based benefit plans for our management and employees that will give them an opportunity and greater incentive to share in our long-term growth and success;

 

•

enhance our community ties by providing depositors, and possibly other members of our community, with the opportunity to acquire an ownership interest in Security Bank; and

 

•

provide greater flexibility to structure and finance opportunities for expansion, although we have no current arrangements or agreements with respect to any such transactions.

As of June 30, 2024, Security Bank was considered “well capitalized” for regulatory purposes.

See “The Conversion and Offering” for a more complete discussion of our reasons for conducting the conversion and offering.

How We Intend to Use the Proceeds From the Stock Offering

Security Midwest Bancorp will contribute at least 85% of the net proceeds of the offering to Security Bank. We anticipate that Security Midwest Bancorp will invest between approximately $5.5 million and $9.3 million of the net proceeds from the stock offering in Security Bank. Of the remaining funds, Security Midwest Bancorp intends to loan funds to our employee stock ownership plan to fund the plan’s purchase of shares of common stock

 

6

in the stock offering. Assuming we sell 950,000 shares of common stock in the stock offering, the midpoint of the offering range, and have net proceeds of $7.9 million, we anticipate that Security Midwest Bancorp will invest $6.7 million in Security Bank, loan $665,000 to our employee stock ownership plan to fund its purchase of shares of common stock and retain the remaining $513,000 of the net proceeds.

Security Midwest Bancorp may use the funds that it retains for investments, to pay cash dividends (subject to compliance with regulatory requirements), to repurchase shares of common stock (subject to compliance with regulatory requirements) or for other general corporate purposes. Security Bank intends to use a portion of the proceeds that it receives to pay costs associated with its planned withdrawal from the multiple-employer defined benefit pension plan in which we participate, and may use the remaining net proceeds to fund new loans, enhance existing products and services and support the development of new products and services, invest in securities, or for general corporate purposes.

We estimate that withdrawing from the multiple employer benefit pension plan in which we participate would result in a $1.8 million pre-tax charge to operations, a $1.3 million decrease in equity, a $1.3 million decrease in regulatory capital and annual pre-tax cost savings of $156,000 ($112,000 after-tax cost savings), based upon our annualized costs for the six months ended June 30, 2024, after we terminate the related pension benefits. However, the timing of the withdrawal from and subsequent termination of the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to withdraw from and terminate the plan, as it may change from time to time.

For more information on the proposed use of the proceeds from the offering, see “How We Intend to Use the Proceeds from the Offering.”

Terms of the Offering

We are offering between 807,500 shares and 1,092,500 shares of common stock to eligible depositors of Security Bank, to our tax-qualified employee stock ownership plan and to our employees, officers and directors in a subscription offering. To the extent shares remain available, we may offer shares for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in Sangamon County, Illinois. We may also offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public in a syndicated offering. The number of shares of common stock to be sold may be increased to up to 1,256,375 shares as a result of demand for the shares of common stock in the offering or changes in market conditions.

Unless the number of shares of common stock offered is increased to more than 1,256,375 shares or decreased to less than 807,500 shares, or the offering is extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the offering is extended past [extension date], we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [interest rate]% per annum. If the number of shares to be sold is increased to more than 1,256,375 shares or decreased to less than 807,500 shares, all subscribers’ stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled and funds delivered for the purchase of shares of common stock in the offering will be returned promptly with interest at [interest rate]% per annum. We will give these subscribers an opportunity to place new orders for a specified period of time. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted.

The purchase price of each share of common stock to be offered for sale in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Performance Trust Capital Partners, LLC, our marketing agent in the offering, which we refer to as “Performance Trust” in this prospectus, will use its best efforts to assist us in selling shares of our common stock but is not obligated to purchase any shares of common stock in the offering.

 

7

How We Determined the Offering Range and the $10.00 Per Share Stock Price

The amount of common stock we are offering for sale is based on an independent appraisal of the estimated market value of Security Midwest Bancorp, assuming the conversion and offering are completed. Feldman Financial Advisors, Inc., our independent appraiser, has estimated that, as of August 30, 2024, this market value was $9.5 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $8.1 million and a maximum of $10.9 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 807,500 shares to 1,092,500 shares. We may sell up to 1,256,375 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

The appraisal is based in part on Security Bank’s financial condition, results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering and the pro forma effect of the costs associated with the withdrawal from the multiple-employer defined benefit pension plan in which we participate. The independent valuation is also based on an analysis of a peer group of publicly traded bank holding companies and savings and loan holding companies that Feldman Financial Advisors, Inc. considered comparable to Security Midwest Bancorp under regulatory guidelines applicable to the independent valuation. Under these guidelines, a minimum of ten peer group companies are selected from the universe of all publicly-traded financial institutions with relatively comparable resources, strategies and financial and other operating characteristics. Such companies must also be traded on an exchange (such as the Nasdaq Stock Market or the New York Stock Exchange). The peer group companies selected for Security Midwest Bancorp also consisted of fully-converted stock institutions that were not subject to an actual or rumored acquisition and that had been fully-converted for at least six months. Feldman Financial Advisors, Inc. applied the following selection criteria to the universe of all public companies that were eligible for consideration: (i) asset size of less than $1.0 billion; (ii) tangible common equity-to-tangible assets ratios greater than 5.0%; (iii) total market capitalization less than $125 million; and (iv) institutions that are located in one of the following regions of the United States: Midwest, Mid-Atlantic, Southeast, and Southwest.

Because of the initial and continuing listing standards of the Nasdaq Stock Market and the New York Stock Exchange, including public float and round lot holders requirements, as well as the fact that many of the smaller converted thrift institutions ultimately de-list their shares from the Nasdaq Stock Market and/or are acquired by larger companies, each of the peer group companies has a comparatively larger asset size than Security Bank. The average asset size of the peer group ($523.6 million as of June 30, 2024) exceeded the asset size of Security Bank ($219.6 million as of June 30, 2024). Feldman Financial Advisors, Inc. believed that the peer group’s similar operating fundamentals and financial profiles with regard to Security Bank provided for a meaningful basis of comparison for valuation pricing purposes. When preparing the independent appraisal, Feldman Financial Advisors, Inc. made downward adjustments for financial condition, liquidity of the stock issue, and marketing of the stock issue. The downward adjustment for financial condition was attributable to Security Midwest Bancorp’s lower pro forma capital position and its higher historical level of non-performing assets to total assets. The downward adjustment for the liquidity of the issue took into consideration the lower number of shares to be outstanding and the lower market capitalization expected in comparison to the peer group companies. The downward adjustment for marketing of the issue was based on the risk and uncertainty related to a new offering in the current environment of stock market volatility. Feldman Financial Advisors, Inc. made no adjustments for earnings growth and viability, management, dividend policy, subscription interest, or the effect of banking regulations and regulatory reform.

 

8

The appraisal peer group consists of the following companies, with total assets as of June 30, 2024.

 

Company Name

Ticker Symbol

Exchange

Headquarters

Total Assets

(in millions)

1895 Bancorp of Wisconsin, Inc.

BCOW

Nasdaq

Greenfield, WI

$

561.1

Catalyst Bancorp, Inc.

CLST

Nasdaq

Opelousas, LA

295.3

Central Plains Bancshares, Inc.

CPBI

Nasdaq

Grand Island, NE

466.6

Generations Bancorp, Inc.

GBNY

Nasdaq

Seneca Falls, NY

401.8

Home Federal Bancorp, Inc. of Louisiana

HFBL

Nasdaq

Shreveport, LA

637.5

IF Bancorp, Inc.

IROQ

Nasdaq

Watseka, IL

887.7

NSTS Bancorp, Inc.

NSTS

Nasdaq

Waukegan, IL

265.9

PB Bankshares, Inc.

PBBK

Nasdaq

Coatesville, PA

449.0

Texas Community Bancshares, Inc.

TCBS

Nasdaq

Mineola, TX

451.6

William Penn Bancorporation

WMPN

Nasdaq

Bristol, PA

818.7

The following table presents a summary of selected pricing ratios for the peer group companies and for Security Midwest Bancorp (on a pro forma basis) utilized by Feldman Financial Advisors, Inc. in its appraisal. These ratios are based on Security Midwest Bancorp’s book value, tangible book value and net income as of and for the twelve months ended June 30, 2024, as adjusted for the impact of the cost to withdraw from the multiple-employer defined benefit pension plan in which we participate. The peer group ratios are based on the latest date for which complete financial data are publicly available and stock prices as of August 30, 2024. Compared to the average pricing ratios of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 35.9% on a price-to-book value basis, a discount of 36.9% on a price-to-tangible book value basis and a discount of 51.7% on a price-to-core earnings basis. Compared to the median pricing ratios of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 35.4% on a price-to-book value basis, a discount of 38.0% on a price-to-tangible book value basis and a discount of 57.1% on a price-to-core earnings basis.

 

		Price-to-core earnings multiple (1)				Price-to-book value ratio				Price-to-tangible book value ratio
Security Midwest Bancorp (on a pro forma basis, assuming completion of the conversion):
Adjusted Maximum			14.49x				56.47	%			56.47	%
Maximum			12.99x				52.58	%			52.58	%
Midpoint			11.49x				48.73	%			48.73	%
Minimum			10.00x				44.33	%			44.33	%
Valuation of peer group companies, all of which are fully converted (on an historical basis):
Averages			23.80x				76.08	%			77.28	%
Medians			26.79x				75.40	%			78.63	%

 

 

(1)	Price-to-earnings multiples calculated by Feldman Financial Advisors, Inc. in the independent appraisal are based on an estimate of “core” or recurring earnings on a trailing twelve-month basis for the twelve months ended June 30, 2024 for Security Midwest Bancorp and for the peer group companies.

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were utilized by Feldman Financial Advisors, Inc. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

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For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Determination of Share Price and Number of Shares to be Issued.”

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

(i)

first, to depositors with accounts at Security Bank with aggregate balances of at least $50 at the close of business on July 31, 2023;

 

(ii)

second, to our tax-qualified employee stock ownership plan, which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 7% of the shares of common stock sold in the offering;

 

(iii)

third, to depositors with accounts at Security Bank with aggregate balances of at least $50 at the close of business on September 30, 2024;

 

(iv)

fourth, to depositors of Security Bank at the close of business on [voting record date]; and

 

(v)

fifth, to our employees, officers and directors.

Shares of common stock not purchased in the subscription offering may be offered for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in Sangamon County, Illinois. The community offering may begin concurrently with, during or after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public through a syndicated offering, which will be managed by Performance Trust. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated offering. Any determination to accept or reject stock orders in the community offering and/or the syndicated offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to categories in the subscription offering. A detailed description of the subscription offering, the community offering and the syndicated offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25.

Generally, no individual (or group of individuals exercising subscription rights through a single deposit account held jointly) may purchase more than 15,000 shares ($150,000) of common stock. If any of the following purchase shares of common stock, their purchases, in all categories of the offering combined, when combined with your purchases, cannot exceed 30,000 shares ($300,000) of common stock:

 

•

your spouse or relatives of you or your spouse who reside with you;

 

•

most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or

 

•

other persons who may be your associates or persons acting in concert with you.

 

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Persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address at any of the applicable record dates will be subject to the overall purchase limitation of 30,000 shares ($300,000). See the detailed descriptions of “acting in concert” and “associate” in the section of this prospectus entitled “The Conversion and Offering—Limitations on Common Stock Purchases.”

Subject to FDIC, Illinois Division of Banking and Federal Reserve Board approval, we may increase or decrease the purchase limitations at any time. See the detailed description of the purchase limitations in the section of this prospectus entitled “The Conversion and Offering—Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

In the subscription offering and community offering, you may pay for your shares by:

 

•

personal check, bank check or money order made payable directly to Security Midwest Bancorp, Inc.; or

 

•

authorizing us to withdraw funds from the Security Bank savings or certificate of deposit accounts identified on the stock order form.

Please do not submit cash or wire transfers. Security Bank is not permitted to lend funds to anyone to purchase shares of common stock in the offering. Additionally, you may not use any type of third-party check to pay for shares of common stock. Funds received in the subscription and community offerings and, if applicable, the syndicated offering, will be held in a segregated account at Security Bank and will earn interest at [interest rate]% per annum until completion or termination of the offering. You may not authorize direct withdrawal from a Security Bank retirement account. See “—Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings May Take Additional Time.”

You may subscribe for shares of common stock in the offering by delivering a signed and completed stock order form, together with full payment payable to Security Midwest Bancorp, Inc. or authorization to withdraw funds from one or more of your Security Bank deposit accounts, provided that the stock order form is received (not postmarked) before 4:00 p.m., Central Time, on [expiration date]. You may submit your stock order form and payment by overnight delivery to our Stock Information Center at the address noted on the stock order form or by in-person delivery to Security Bank’s main office located at 510 E. Monroe, Springfield, Illinois. In-person delivery of stock order forms will be accepted only at Security Bank’s main office. You may not deliver your stock order form to our other banking offices. You may also submit your stock order form by mail using the stock order reply envelope provided. Please do not mail stock order forms to Security Bank’s offices. We strongly recommend overnight or in-person delivery of your stock order to increase the likelihood your order is received before the deadline. Once submitted, your order is irrevocable unless the offering is terminated or is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 1,256,375 shares or decreased to less than 807,500 shares.

For a complete description of how to purchase shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares.”

Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings May Take Additional Time

You may be able to subscribe for shares of common stock using funds in your individual retirement account (“IRA”), or other retirement account. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account held at Security Bank or elsewhere.

 

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If you wish to purchase shares of common stock in the subscription or community offerings by using some or all of the funds in your IRA or other retirement account held at Security Bank, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm (not Security Bank), before you place your stock order. If you do not have such an account, you will need to establish one. An annual administrative fee may be payable to the independent custodian or trustee. As noted above, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline due to timing constraints and, possible limitations imposed by the institution where the funds are held. We cannot guarantee that you will be able to use such funds.

For a complete description of how to use IRA funds to purchase shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares—Using Retirement Account Funds.”

You May Not Sell or Transfer Your Subscription Rights

Federal and state regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action against anyone who we believe has sold or transferred his or her subscription rights. In addition, we intend to advise the appropriate federal and state agencies of any person who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint stock registration unless they are also named on your qualifying deposit account(s). Doing so may jeopardize your subscription rights. In addition, the stock order form requires that you list all qualifying accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.

Purchases by Executive Officers and Directors

We expect our directors and executive officers, together with their associates, to subscribe for 187,850 shares ($1.9 million) of common stock in the offering, representing 23.3% of shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Our directors and executive officers will be subject to the same minimum purchase requirements and purchase limitations as other participants in the offering set forth under “—Limits on How Much Common Stock You May Purchase.”

Purchases by our directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. Any purchases made by our directors or executive officers, or their associates, for the explicit purpose of meeting the minimum number of shares of common stock required to be sold to complete the offering will be made for investment purposes only and not with a view toward redistribution.

For more information on the proposed purchases of shares of common stock by our directors and executive officers, see “Subscriptions by Directors and Executive Officers.”

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for submitting orders for shares of common stock in the subscription and community offerings is 4:00 p.m., Central Time, on [expiration date], unless we extend the subscription offering and/or the community offering. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time and date.

 

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Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 4:00 p.m., Central Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights. Holders of subscription rights will not be allowed to purchase shares of common stock unless they have received a prospectus and a stock order form.

For a complete description of the deadline for purchasing shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares—Expiration Date.”

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 807,500 shares of common stock, we may take additional steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

•

increase the purchase limitations; and/or

 

•

seek regulatory approval to extend the offering beyond [extension date].

If we extend the offering past [extension date], we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [interest rate]% per annum from the date the stock order was processed. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount will be, and in our sole discretion other subscribers may be, given the opportunity to increase their subscriptions up to the newly applicable limit.

Conditions to Completion of the Conversion

We cannot complete the conversion unless:

 

•

the plan of conversion is approved by a majority of votes eligible to be cast by members (depositors) of Security Bank as of [voting record date];

 

•

we have received orders for at least the minimum number of shares of common stock offered; and

 

•

we receive the final non-objection or approval required from the FDIC, the Federal Reserve Board and the Illinois Division of Banking to complete the conversion and offering.

Any non-objection or approval by the FDIC, the Illinois Division of Banking or the Federal Reserve Board does not constitute a recommendation or endorsement of the plan of conversion.

Our Dividend Policy

Our board of directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, we do not initially intend to pay dividends on our common stock. See “Our Dividend Policy.”

Market for Common Stock

We anticipate that the common stock sold in the offering will be quoted on the OTCQB Market operated by the OTC Markets Group. Quotation on the OTCQB Market is not a condition of the conversion and stock offering. See “Market for the Common Stock.”

 

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Delivery of Shares of Common Stock

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin the day following the completion of the conversion and offering. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described above in “—Conditions to Completion of the Conversion.” Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers may not be able to sell the shares of common stock that they purchased in the offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

Possible Change in the Offering Range

Feldman Financial Advisors, Inc. will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, Feldman Financial Advisors, Inc. determines that our pro forma market value has increased, we may sell up to 1,256,375 shares in the offering without further notice to you. If our pro forma market value at that time is either below $8.1 million or above $12.6 million, then, after consulting with the FDIC, the Illinois Division of Banking and the Federal Reserve Board, we may:

 

•

terminate the stock offering, cancel deposit account withdrawal authorizations and promptly return all funds received in the offering with interest at [interest rate]% per annum;

 

•

set a new offering range; or

 

•

take such other actions as may be permitted by the FDIC, the Illinois Division of Banking, the Federal Reserve Board, the Financial Industry Regulatory Authority and the Securities and Exchange Commission.

If we set a new offering range, we will promptly return funds, with interest at [interest rate]% per annum for funds received in the offering, cancel deposit account withdrawal authorizations and commence a resolicitation. In connection with the resolicitation, we will notify subscribers by mail sent to the address the subscriber provides on the stock order form they submitted of their right to place a new stock order for a specified period of time.

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Security Bank that is being called to vote on the conversion, and at any time after member approval with the concurrence of the FDIC, the Federal Reserve Board and the Illinois Division of Banking. In addition, we must sell a minimum of 807,500 shares to complete the offering. If we terminate the offering, we will promptly return funds, as described above.

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all of our employees being established in connection with the conversion and stock offering, to purchase 7% of the shares of common stock that we sell in the offering. Purchases by the employee stock ownership plan in the offering will be included in determining whether the required minimum number of shares have been sold in the offering. If eligible account holders subscribe for all of our common stock being sold in the offering, no shares will be available for our tax-qualified employee benefit plans and if market conditions warrant, in the judgment of the plan’s trustee, our employee stock ownership plan may instead elect to purchase shares in the open market following the completion of the conversion.

 

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We also intend to implement one or more stock-based benefit plans after completion of the conversion. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable federal regulations. If adopted within 12 months following the completion of the conversion, federal conversion regulations would allow for the stock-based benefit plans to reserve a number of shares of common stock equal to not more than 3% of the shares sold in the offering, or up to 37,691 shares of common stock at the adjusted maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion, the stock-based benefit plans would also be permitted to reserve a number of shares equal to not more than 10% of the shares of common stock sold in the offering, or up to 125,638 shares of common stock at the adjusted maximum of the offering range, for the exercise of stock options granted to key employees and directors. If the stock-based benefit plans are adopted after 12 months from the date of the completion of the conversion, the 3% and 10% limitations described above would no longer apply, and we may adopt stock-based benefit plans encompassing more than 163,329 shares of our common stock assuming the adjusted maximum of the offering range. We have not yet determined whether we will present these plans for stockholder approval within or after 12 months following the completion of the conversion.

If 3% of the shares of common stock sold in the conversion are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to 2.91% of their ownership interest of Security Midwest Bancorp, Inc. If 10% of the shares of common stock sold in the conversion are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of 9.09% of their ownership interest in Security Midwest Bancorp, Inc.

The following table summarizes the number of shares of common stock and aggregate dollar value of grants that would be available under one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of repurchased shares. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all employees. A portion of the grants shown in the table below may be made to non-management employees.

 

		Number of Shares to be Granted or Purchased (1)												Dilution Resulting From Issuance of Shares for Stock Benefit Plans (3)				Value of Grants (2)
		At Minimum of Offering Range				At Adjusted Maximum of Offering Range				As a Percentage of Common Stock to be Issued								At Minimum of Offering Range				At Adjusted Maximum of Offering Range
																		(In thousands)
Employee stock ownership plan			56,525				87,946				7.00	%			n/a			$	565			$	879
Stock awards			24,225				37,691				3.00				2.91	%			242				377
Stock options			80,750				125,638				10.00				9.09	%			375				583
Total			161,500				251,275				20.00	%			11.50	%		$	1,182			$	1,839

 

(1)	The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted and approved by stockholders more than 12 months after the completion of the conversion.

(2)

The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $4.64 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 10 years; a risk-free interest rate of 4.36%; and a volatility rate of 24.88%. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.

(3)	Represents the dilution of stock ownership interest. No dilution is reflected for the shares purchased by the employee stock ownership plan because such shares are assumed to be purchased in the offering.

 

15

Tax Consequences

Security Bank and Security Midwest Bancorp have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, including an opinion that it is more likely than not that the fair market value of the nontransferable subscription rights to purchase the common stock will be zero and, accordingly, no gain or loss will be recognized by depositors upon the distribution to them of the nontransferable subscription rights to purchase the common stock and no taxable income will be realized by depositors as a result of the exercise of the nontransferable subscription rights. Security Bank and Security Midwest Bancorp have also received an opinion of Wipfli LLP regarding the material Illinois state tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Security Bank, Security Midwest Bancorp or persons eligible to subscribe in the subscription offering. See the section of this prospectus entitled “Taxation” for additional information regarding taxes.

Emerging Growth Company Status

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors—Risks Related to Laws and Regulations—We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors” and “Regulation and Supervision—Emerging Growth Company Status.”

An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Important Risks in Owning Security Midwest Bancorp’s Common Stock

An investment in our common stock involves substantial risks and uncertainties. Investors should carefully consider all of the information in this prospectus, including the detailed discussion of these and other risks under “Risk Factors” beginning on page 18, prior to investing in our common stock.

Specific areas of risk related to our business include those related to our cannabis banking operations; regulatory matters; our lending activities; laws and regulations; market interest rates; our business strategy; economic conditions; competitive matters; operational matters; accounting matters; our reputation; legal matters; and societal responses to climate change.

Specific risks related to this offering include those related to the future trading price of the common stock; use of the net offering proceeds; our return on equity after the completion of the offering; intended new stock-based benefit plans; anti-takeover factors; forum selection provision for certain litigation; the trading market for the common stock; the irrevocability of your investment decision; and potential adverse tax consequences related to subscription rights.

 

16

How You Can Obtain Additional Information—Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have questions regarding the conversion or offering, please call our Stock Information Center. The telephone number is [stock center number]. The Stock Information Center is open Monday through Friday between 9:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center will be closed on bank holidays.

 

17

RISK FACTORS

You should consider carefully the following risk factors, in addition to general economic and business risks and all other information in this prospectus, in evaluating an investment in our common stock. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and could cause the trading price of our common stock to decline, which could cause you to lose all or part of your investment.

Risks Related to Our Cannabis Banking Operations

We provide banking services to cannabis-related businesses and the strict enforcement of federal laws regarding cannabis would likely result in our inability to continue this line of business and we could have legal action taken against us by the federal government.

We provide deposit services and extensions of credit to CRBs. As of January 1, 2020, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase cannabis for recreational use from licensed dispensaries. However, the manufacturing, distribution, possession, and use of cannabis are prohibited under the federal Controlled Substances Act, violations of which are punishable by imprisonment and fines. Although there have been several legislative attempts to resolve the conflict between state and federal cannabis laws, to date Congress has passed no such legislation.

In 2013, the U.S. Department of Justice (“DOJ”) issued a memorandum (“Cole Memo”) that outlined the DOJ’s enforcement priorities with regard to cannabis and instructed federal prosecutors to focus prosecutorial efforts on eight priorities detailed in the memorandum. In 2018, the DOJ rescinded the Cole Memo and no subsequent guidance has been issued by the DOJ, although the current U.S. Attorney General has stated that he would reinstitute a version of the Cole Memo and that the DOJ under his leadership would not pursue cases where people were complying with the laws in states that have legalized cannabis. In 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines as a response to the issuance of the Cole Memo to provide guidance for financial institutions servicing state legal cannabis businesses. The FinCEN guidance, which remains in effect, discusses federal regulators’ expectations regarding the Bank Secrecy Act of 1970 compliance and due diligence protocols when a financial institution provides banking services to a CRB. Any adverse change to the FinCEN guidance or adverse changes in the interpretation of the guidance by federal regulators could result in our being required to terminate or an immediate termination of our CRB Program, which would have an adverse effect on our financial condition and results of operations. Any change in the enforcement priorities of the DOJ, FinCEN, or our federal banking regulators or our failure to comply with the FinCEN guidance could result in legal or administrative action being taken against us, and such action could have a material adverse effect on our business, financial condition and results of operations.

A significant amount of our income is derived from fee income from deposit accounts of cannabis-related businesses; a change in the federal government’s enforcement position regarding cannabis could adversely impact our financial condition and results of operations.

A significant portion of our income is derived from fee income from CRBs’ deposit accounts. Fee income from CRBs for the six months ended June 30, 2024 and the year ended December 31, 2023 was $471,000 and $1.0 million, respectively, and includes both account maintenance fees and cash-counting fees. These amounts represented 52.4% and 51.5% of our non-interest income for these periods. While we believe we are operating in compliance in all material respects with FinCEN guidelines with regard to providing banking services to CRBs, it is possible that federal enforcement guidelines may change in a manner adverse to our CRB activities. Federal prosecutors have significant discretion and federal prosecutors may determine to strictly enforce the federal laws governing cannabis. Accordingly, any change in the federal government’s enforcement position could cause us to immediately cease providing banking services to the cannabis industry, which would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by other financial institutions whose income streams may be more diverse. The risk management practices that we implement to address our CRB Program may not be effective in preventing losses relating to our fee income in the event of such potential changes in federal government enforcement.

 

18

The cannabis industry is relatively new, highly competitive and, in some instances, strongly opposed.

The CRBs to whom we provide deposit services are operating in a relatively new industry and market. The market for cannabis products is at a relatively early stage of development and the extent to which its use will be widely adopted is uncertain. In addition to being subject to general business risks, CRBs must continue to build brand awareness and market share through significant investments in strategy, production capacity, quality assurance and compliance with regulations. Few clinical trials on the benefits of cannabis or isolated cannabinoids have been conducted and future research and clinical trials may draw negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical cannabis, which could adversely affect social acceptance of cannabis and the demand for cannabis products and dispensary services. Accordingly, there is no assurance that the cannabis industry and the market for medicinal and/or adult-use cannabis will continue to exist and grow as currently anticipated.

The cannabis industry is highly competitive and the CRBs to whom we provide deposit services may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and more qualified personnel. The CRBs to whom we provide deposit services may not be able to successfully compete against these other entities. The cannabis industry could become more competitive in the event cannabis legality becomes enhanced, including as a result of existing proposed national legislation that would, among other things, remove cannabis from the list of federal controlled substances.

It is believed by many that large well-funded businesses may have a strong economic opposition to the cannabis industry. For example, medical cannabis may adversely impact the existing market for medicines sold by mainstream pharmaceutical companies that contain active ingredients from cannabis. Furthermore, the medical marijuana industry could face a material threat from the pharmaceutical industry, should cannabis displace other drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical cannabis movement. Any inroads the pharmaceutical industry could make in halting or impeding the cannabis industry could have a detrimental impact on the CRBs to whom we provide deposit services.

Risks Related to the Multiple Employer Defined Benefit Pension Plan in Which we Participate

The cost of a withdrawal from the multiple-employer defined benefit pension plan in which we participate may be greater than estimated.

We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified, multiple-employer defined benefit pension plan for the benefit of our employees. Pentegra determines the annual contributions required to be made by each participating company, and these contributions are expensed during the relevant year. Security Bank’s contributions related to this plan for the six months ended June 30, and the year ended December 31, 2023 were $78,000 and $401,000, respectively. The benefits are based on years of service and employee compensation. We froze this plan to new participants in 2006.

Although a final decision has not been made, Security Bank intends to utilize a portion of the proceeds it receives from the stock offering to support a full withdrawal from the plan and subsequent termination of pension benefits, subject to the completion of the conversion and stock offering. We currently estimate the total cost (pre-tax) to withdraw from the plan will be approximately $1.8 million. Security Bank’s use of a portion of the net proceeds of the stock offering it receives to fund the costs associated with a withdrawal from the plan would reduce the amount of proceeds available for originating new loans and other business purposes. Because the costs of a withdrawal from this plan will primarily depend on the value of the plan’s assets and applicable interest rates at the time of our withdrawal, we will not know the actual costs associated with a withdrawal from the plan until the date of the withdrawal, which we anticipate would be no sooner than March 31, 2025. The actual cost could be significantly higher than the estimated cost provided by the plan administrator.

 

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Risks Related to our Lending Activities

We intend to increase the origination of commercial real estate loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.

At June 30, 2024, commercial real estate loans totaled $40.6 million, or 37.7% of our total loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans generally have more risk than the owner-occupied one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

As our commercial real estate loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase, which would adversely affect our business, financial condition and results of operations.

We intend to increase the origination of commercial and industrial loans secured primarily by accounts receivable, as well as inventory, equipment or other business assets, the deterioration in value of which could increase the potential for future losses.

At June 30, 2024, $11.5 million, or 10.7% of our total loan portfolio, was comprised of commercial and industrial loans to a variety of small and medium-sized businesses in our market area collateralized by general business assets including, among other things, accounts receivable and inventory. These commercial and industrial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a per loan basis. Additionally, the repayment of commercial and industrial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as inventory, which may decline in value more rapidly than we anticipate, or may be difficult to market and sell, exposing us to increased credit risk. Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets, resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.

Our emphasis on real estate loans exposes us to lending risks.

At June 30, 2024, approximately $90.0 million, or 83.6%, of our total loan portfolio, was secured by real estate, most of which is located in our primary lending market area of Sangamon County, Illinois and surrounding areas. Future declines in the real estate values in our primary lending market and surrounding markets could significantly impair the value of the particular real estate collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for credit losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in our local market area.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, commercial and industrial and consumer lending, including, the ability of borrowers to repay these loans and the value of the collateral securing these loans.

 

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A deterioration in economic conditions in our primary market area could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

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demand for our products and services may decrease;

 

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loan delinquencies, problem assets and foreclosures may increase;

 

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collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

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the value of our securities portfolio may decrease; and

 

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the net worth and liquidity of loan guarantors may decrease, thereby impairing their ability to honor commitments made to us.

Moreover, a significant decline in general economic conditions, caused by inflation, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, or other factors beyond our control could further impact these local economic conditions and could further negatively affect our financial performance. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for credit losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for credit losses may not be sufficient to cover expected credit losses in our loan portfolio, resulting in additions to our allowance. In addition, our emphasis on loan growth and on increasing our portfolio of commercial real estate and commercial and industrial loans, as well as any future credit deterioration could require us to increase our allowance for credit losses in the future. At June 30, 2024, our allowance for credit losses was 1.26% of total loans and 81.06% of nonperforming loans. Material additions to our allowance would materially decrease our net income.

Effective January 1, 2023, the Current Expected Credit Loss accounting standard, referred to as “CECL” throughout this prospectus, became effective for Security Bank and many other financial institutions. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. CECL required us to change the prior method of providing allowances for loan losses that are incurred or probable, which requires us to increase the types of data we need to collect and review to determine the appropriate level of the allowance for credit losses. The adoption of CECL resulted in a $240,000 increase in the level of the allowance for credit losses (consisting of $242,000 for the allowance for credit losses on loans and a $2,000 reduction to the allowance on off-balance sheet items).

In addition, bank regulators periodically review our allowance for credit losses and, as a result of such reviews, we may be required to increase our provision for credit losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as a result of such review or otherwise may have a material adverse effect on our financial condition and results of operations.

 

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Uncertainties associated with increased commercial loan originations may result in errors in judging collectability, which may lead to additional provisions for credit losses or charge-offs, which would negatively affect our operations.

Increasing the level of our commercial real estate and commercial and industrial loan originations would likely require us to lend to borrowers with which we have limited or no experience. Accordingly, we would not have a significant payment history pattern with which to judge future collectability. Further, newly originated loans have not been subjected to unfavorable economic conditions. As a result, it may be difficult to predict the future performance of newly originated loans. These loans may have delinquency or charge-off levels above our recent historical experience, which could adversely affect our future performance.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these factors, we have concluded that we do not currently have a concentration in multi-family and commercial real estate lending, as such loans represent 237% of total capital as of June 30, 2024, but based on our business plan, we could have such a concentration risk in the future. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or in an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and determining capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in the curtailment of our commercial real estate and multi-family lending that would adversely affect our loan originations and profitability.

Our business may be adversely affected by credit risk associated with residential property.

At June 30, 2024, $33.4 million, or 31.0%, of our total loan portfolio, was secured by one- to four-family real estate. One- to four-family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values as a result of a downturn in the Illinois housing market could reduce the value of the real estate collateral securing these types of loans. As a result, we have increased risk that we could incur losses if borrowers default on their loans because we may be unable to recover all or part of the defaulted loans by selling the real estate collateral. In addition, if borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds.

The foreclosure process may adversely impact our recoveries on non-performing loans

The judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines have been the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and our ability to minimize its losses.

 

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We are subject to environmental liability risk associated with lending activities or properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non-residential real property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Risks Related to Market Interest Rates

Future changes in interest rates could negatively affect our operating results and asset values.

Net income is the amount by which net interest income and noninterest income exceed noninterest expense and the provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:

 

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the interest income we earn on interest-earning assets, such as loans and securities; and

 

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the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable securities are called, requiring us to reinvest those cash flows at lower interest rates.

Furthermore, increases in interest rates may adversely affect our ability to originate loans, as the historically low interest rate environment experienced until relatively recently contributed significantly to our loan growth, particularly in one- to four-family residential mortgage loans, where refinance volume had, until recently, been relatively high. The increase in market interest rates experienced in 2022 and 2023 and that may continue in the future has reduced our loan origination volume, particularly refinance volume, and reduced our interest rate spread, the continuation of either of which could have a material adverse effect on our profitability and results of operations.

 

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In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates generally results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate primarily longer-term, fixed rate mortgage loans.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

During the six months ended June 30, 2024, we had $182,000 in net unrealized losses on available-for-sale investment securities. In addition, as a result of rising interest rates, we have experienced a shift in deposits from lower-cost savings and demand accounts to higher-cost certificates of deposit. For further information about this shift in deposits, see “Business of Security Bank—Sources of Funds—Deposits.” However, the rates we earn on our loans did not increase as rapidly during the six months ended June 30, 2024 and the year ended December 31, 2023, as we have a significant amount of fixed-rate residential real estate loans where the interest rates did not increase commensurate with the increase in market interest rates. In addition, most of our adjustable-rate loans do not reprice immediately, such that changes in market interest rates take a period of time to affect our portfolio yields.

We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) and our net interest income would change in the event of a range of assumed changes in market interest rates. As of June 30, 2024, in the event of an instantaneous 200 basis point decrease in interest rates, we estimate that we would experience a 17.5% decrease in EVE and a 13.7% decrease in net interest income.

At June 30, 2024, all estimated changes described later in this prospectus were within the current policy limits established by the board of directors, with the exception of estimated changes in net interest income and economic value of equity based on instantaneous decreases in the United States Treasury yield curve of 300 and 400 basis points. Our current business model of holding deposits through our CRB Program and maintaining high levels of cash due to the nature of our deposit base hinders our compliance with these policy limits, which were established prior to the establishment of our CRB Program. As a result, we intend to review and revise our policy limits to better reflect our business model.

For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Security Bank—Management of Market Risk.”

Risks Related to our Business Strategy

Our business strategy includes loan growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy primarily focuses on loan growth, funded by deposits. Achieving such growth may require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced lenders and possibly increase our support staff, the continued availability of desirable business opportunities, the level of competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Furthermore, there can be considerable costs involved in opening branches and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of new branches or loan production offices.

 

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A significant percentage of our assets is invested in securities and cash and cash equivalents, which typically has a lower yield than our loan portfolio.

Our results of operations depend substantially on our net interest income. At June 30, 2024, 46.2% of our assets were invested in investment securities and cash and cash equivalents. We maintain higher levels of liquid assets due to fluctuating cash requirements associated with our CRB Program. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us.

We depend on our management team and other key personnel to implement our business strategy and execute successful operations and we could be harmed by the loss of their services or the inability to hire additional personnel.

We depend on the services of the members of our senior management team who direct our strategy and operations. Our executive officers and lending personnel possess substantial expertise as well as extensive knowledge of our markets and key business relationships, particularly with respect to our CRB Program. Any one of them could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management.”

Risks Related to Competitive Matters

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and securities brokerage firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area.

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. For additional information see “Business of Security Bank—Market Area” and “—Competition.”

 

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Our smaller size may make it more difficult for us to compete.

Our smaller size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful noninterest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

Risks Related to Laws and Regulations

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

Security Bank is subject to extensive regulation, supervision and examination by the Illinois Division of Banking and the FDIC, and Security Midwest Bancorp will be subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision governs the activities in which an insured depository institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors and borrowers of Security Bank, rather than for our stockholders.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for credit losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Such requirements are heightened for us due to our involvement in our CRB Program. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand. We have not been subject to any fines or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in recent years.

 

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We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, which results in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%; (2) a Tier 1 to risk-based assets capital ratio of 8.5%; and (3) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount.

The application of these capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Specifically, following the completion of the offering, Security Bank’s ability to pay dividends to Security Midwest Bancorp, Inc. will be limited for any association that does not maintain the capital conservation buffer required by the capital rules, which may limit our ability to pay dividends to our stockholders. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”

At June 30, 2024, Security Bank exceeded all applicable regulatory capital requirements and was considered “well capitalized.” See “Historical and Pro Forma Regulatory Capital Compliance.”

The Federal Reserve Board may require us to commit capital resources to support Security Bank, and we may not have sufficient access to such capital resources.

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Thus, any borrowing that must be done by Security Midwest Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds or otherwise raise capital when we need to do so.

We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our growth strategy could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

 

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Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

As a result, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.

We qualify as a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to smaller reporting companies could make our common stock less attractive to investors.

We are a smaller reporting company, and, for as long as we continue to qualify as a smaller reporting company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and two years of audited financial statements in our annual report instead of three years. As long as we are a smaller reporting company that is also not an accelerated filer, we will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm review and attest as to the effectiveness of our internal control over financial reporting. In addition, as a non-accelerated filer, we will have longer deadlines to file our periodic reports with the Securities and Exchange Commission.

 

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We would remain a smaller reporting company and a non-accelerated filer for so long as our voting and non-voting equity held by non-affiliates (“public float”) is less than $250 million or our annual revenues are less than $100 million and our public float is less than $700 million. Public float is determined each year as of the end of a company’s second fiscal quarter applicable at the end of the fiscal year involved.

As a result of our smaller reporting company status and non-accelerated filer status, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.

Risks Related to Economic Conditions

Inflation can have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. From 2021 to 2023, there was a significant rise in inflation and the Federal Reserve Board raised certain benchmark interest rates in an effort to combat inflation. As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

We have a high concentration of loans secured by real estate in our market area. Adverse economic conditions, both generally and in our market area, could adversely affect our financial condition and results of operations.

We have relatively few loans outside of our market area. Consequently, we have a greater risk of loan defaults and losses in the event of a further economic downturn in our market area, as adverse economic conditions may have a negative effect on the ability of our borrowers to make timely payments of their loans. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans, investments, and collateral securing our loans, and our ongoing operations, costs and profitability. Any of these negative events may result in higher-than expected loan delinquencies, increase our levels of non-performing and classified assets, and reduce demand for our products and services, which may cause us to incur losses and may adversely affect our capital, liquidity and financial condition. According to published data, our market area has not experienced any material declines in real estate values during the last year or any material increase in the number of foreclosure proceedings.

A worsening of economic conditions could reduce demand for our products and services and/or increase our level of non-performing loans, which could adversely affect our financial condition and results of operations.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. We believe the current general economic conditions in our primary market area are healthy and stable. In addition to local economic conditions, which could have a significant impact on ability of our borrowers to repay their loans and on the value of the collateral securing their loans, deterioration in general economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

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demand for our products and services may decline;

 

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loan delinquencies, problem assets and foreclosures may increase;

 

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collateral for loans, especially real estate, may decline in value, reducing customers’ future borrowing power and the value of assets and collateral associated with existing loans; and

 

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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, tariffs and international trade disputes, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Risks Related to Operational Matters

We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.

Information technology systems are critical to our business. Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

In the event of a breakdown in our internal control systems, improper operation of our systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, loss of customers and damage to our reputation, and face regulatory action or civil litigation. Any of these events could have a material adverse effect on our financial condition and results of operations. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

Our board of directors relies to a large degree on management and outside consultants in overseeing cybersecurity risk management.

Security Bank has a standing Information Technology Steering Committee, consisting of the Executive Vice President and Chief Financial Officer, the Senior Vice President-Risk Management, information technology staff and staff from other departments within Security Bank. The committee meets monthly or more frequently if needed, and reports to the board of directors after each meeting through committee minutes. Security Bank also engages outside consultants to support its cybersecurity efforts. The directors of Security Bank do not have significant experience in cybersecurity risk management in other business entities comparable to Security Bank and rely on senior management and an information technology service provider for cybersecurity guidance.

 

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We rely on third-party vendors, which could expose us to additional cybersecurity risks.

Third-party vendors provide key components of our business infrastructure, including certain data processing and information services. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with our contractual agreements with them, or we also could be adversely affected if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not experienced any material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

We may be subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals.

We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud. If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second Annual Report on Form 10-K that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

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Our funding sources may prove insufficient to replace deposits at maturity and support our future growth. A lack of liquidity could adversely affect our financial condition and results of operations and result in regulatory limits being placed on us.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we grow, we are likely to depend more on these sources, which may include Federal Home Loan Bank of Chicago advances, federal funds purchased and brokered certificates of deposit. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area. Additionally, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return tradeoff. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.

Further, if we are required to rely more heavily on more expensive funding sources to support liquidity and future growth, our revenues may not increase proportionately to cover our increased costs. In this case, our operating margins and profitability would be adversely affected. Alternatively, we may need to sell a portion of our investment and/or loan portfolio to raise funds, which, depending upon market conditions, could result in us realizing a loss on the sale of such assets.

A lack of liquidity could also attract increased regulatory scrutiny and potential restraints imposed on us by regulators. Depending on the capitalization status and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory prompt corrective action directive, certain additional regulatory restrictions and prohibitions may apply, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits.

At June 30, 2024, we had no outstanding borrowings from the Federal Home Loan Bank of Chicago. At June 30, 2024, we had the capacity to borrow $34.4 million from the Federal Home Loan Bank of Chicago, as well as $3.0 million from a private bankers’ bank. We could significantly increase our borrowing capacity from the Federal Home Loan Bank of Chicago if we pledged additional assets as security. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Recently we have held larger levels of certificates of deposit, which has significantly increased our cost of funds and could continue to do so in the future.

At June 30, 2024, certificates of deposit comprised 24.4% of our total deposits as compared to 6.8% as of December 31, 2022. Our increased levels of certificates of deposit have resulted in a higher cost of funds than would otherwise be the case if we had a higher percentage of demand deposits and savings deposits. In addition, if our certificates of deposit do not remain with us, we may be required to access other sources of funds, including loan sales, other types of deposits, advances from the Federal Home Loan Bank of Chicago and other borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay on our certificates of deposit.

 

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Risks Related to Accounting Matters

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this prospectus as well as periodic reports we will be required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for credit losses, the calculation of our deferred tax assets and our determinations with respect to the fair values of financial instruments.

Other Risks Related to Our Business

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

We are a community bank and our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in

 

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our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees or by retaining, appointing or electing directors who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and employees. If our reputation is negatively affected by the actions of our employees or directors, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

The State of Illinois continues to experience significant financial difficulties, and this could adversely impact certain borrowers and the economic vitality of the State

The State of Illinois is continuing to experience significant financial difficulties, including material pension funding shortfalls. These issues could impact the economic vitality of the State of Illinois and the businesses operating there, encourage businesses to leave the state, and discourage new employers from starting or moving businesses to there. These issues could also result in delays in the payment of accounts receivable owed to borrowers that conduct business with the State of Illinois, and impair their ability to repay their loans when due.

Severe weather, natural disasters and other external events could significantly affect our operations and results.

Severe weather or natural disasters, such as tornados, drought and other adverse external events, could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Accordingly, the occurrence of any such severe weather or natural disaster event could have a material adverse effect on our business, which, in turn, could adversely affect our financial condition and results of operations.

Risks Related to the Offering

The future price of our common stock may be less than the purchase price in the stock offering.

If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is based upon an independent third-party appraisal of the pro forma market value of Security Bank, pursuant to federal and state banking regulations and subject to review and approval by the FDIC and the Illinois Division of Banking. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. Our aggregate pro forma market value as reflected in the final independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.

After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations may not be related to the operating performance of particular companies whose shares are traded.

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

We intend to invest between $5.5 million and $7.9 million of the net proceeds of the offering (or $9.3 million at the adjusted maximum of the offering range) in Security Bank. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by our employee stock

 

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ownership plan. We may use the remaining net proceeds to invest in short-term and other investments, repurchase shares of our common stock, pay dividends, or for other general corporate purposes. Security Bank intends to use the net proceeds it receives to pay for the expenses associated with our withdrawal from our defined benefit pension plan, fund new loans, primarily commercial real estate and commercial and industrial loans, enhance existing products and services, invest in securities or for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan and the withdrawal from the multiple employer defined pension plan in which we participate, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses may require the approval of the FDIC, the Illinois Division of Banking and/or the Federal Reserve Board. We have not established a timetable for deploying the net proceeds, and, accordingly, we may not invest the net proceeds at a time that is most beneficial to Security Midwest Bancorp, Security Bank or our stockholders.

There will be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be quoted on the OTCQB Market operated by OTC Markets Group. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, will be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

The capital we raise in the stock offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock.

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. We expect our return on equity to remain low until we are able to implement our business plan and leverage the additional capital we receive from the stock offering. Although we anticipate increasing net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the one or more stock-based benefit plans we intend to adopt. Until we can implement our business plan and increase our net interest income through investment of the proceeds of the offering, we expect our return on equity to remain low compared to our peer group, which may reduce the value of our shares.

You may not receive dividends on our common stock.

Holders of our common stock are only entitled to receive dividends our board of directors may declare out of funds legally available for such payments. We do not initially intend to pay dividends on our common stock. The declaration and payment of future cash dividends will be subject to, among other things, our then current and projected consolidated operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors our board of directors deems relevant. We may also be limited in the payment of dividends under statutory and regulatory provisions.

 

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Our stock-based benefit plans will increase our expenses, which will reduce our net income.

We anticipate that our employee stock ownership plan will purchase 7% of the shares of common stock sold in the stock offering with funds borrowed from Security Midwest Bancorp. We will record annual employee stock ownership plan expense equal to the fair value of shares of common stock committed to be released to employees, which is estimated to be between $28,000 (pre-tax) at the minimum of the offering range and $44,000 (pre-tax) at the adjusted maximum of the offering range assuming a price of $10.00 per share. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

We also intend to adopt one or more stock-based benefit plans after the stock offering that would award participants shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. The number of shares reserved for awards of restricted stock or grants of stock options under any initial stock-based benefit plan may not exceed 3% and 10%, respectively, of the total shares sold in the offering, if these plans are adopted within 12 months after the completion of the conversion. We may reserve shares of common stock for stock awards and stock options in excess of these amounts, provided the stock-based benefit plan is adopted more than one year following the stock offering.

Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is ten years; the risk free interest rate is 4.36% (based on the ten-year Treasury rate) and the volatility rate on the shares of common stock is 24.88% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options using a Black-Scholes option pricing analysis is $4.64 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual expense associated with the stock options in the first year after the offering would be $117,000 (pre-tax) at the adjusted maximum of the offering range. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual expense associated with restricted stock awarded under the stock-based benefit plan would be $75,000 (pre-tax) at the adjusted maximum of the offering range in the first year after the offering. Moreover, if we grant shares of common stock or options in excess of these amounts or values, such grants would increase our costs further.

The fair value of the shares of restricted stock on the date granted under the stock-based benefit plan will be expensed by us over the vesting period of the shares. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Security Midwest Bancorp) and the cost is the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the stock-based benefit plan would be between $48,000 at the minimum of the offering range and $75,000 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

The implementation of stock-based benefit plans is likely to dilute your ownership interest.

We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the stock offering. If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of common stock, stockholders would experience an aggregate reduction in ownership interest totaling 11.50%. Although the implementation of one or more stock-based benefit plans will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

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We have not determined the timing of the adoption of stock-based benefit plans following the stock offering. Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs and the dilution to our stockholders.

If we adopt one or more stock-based benefit plans within one year following the completion of the stock offering, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 3% and 10%, respectively, of our total outstanding shares. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the stock offering. Although the implementation of stock-based benefit plans will be subject to stockholder approval, the determination as to the timing of the implementation of such plans will be at the discretion of our board of directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses, which will reduce our net income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans is likely to dilute your ownership interest.”

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Security Midwest Bancorp without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board and the Illinois Division of Banking. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a bank holding company. There also are provisions in our articles of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Security Bank’s articles of incorporation will contain a similar restriction on acquisitions of 10% or more of its common stock, directly or indirectly, for five years following the completion of the conversion. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors, employment and change in control agreements that we intend to enter into with certain members of management and other factors may make it more difficult for companies or persons to acquire control of Security Midwest Bancorp without the consent of our board of directors, and may increase the cost of an acquisition. Taken as a whole, these statutory or regulatory provisions and provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of Security Midwest Bancorp, Inc.” and “Management—Benefits to be Considered Following Completion of the Conversion.”

A significant percentage of our common stock will be held by our directors and executive officers and benefit plans.

We expect that our directors and executive officers, together with their associates, will subscribe for 187,850 shares of common stock in the stock offering. In addition, we intend to establish an employee stock ownership plan that will purchase an amount of shares equal to 7% of the shares sold in the stock offering. As a result, upon consummation of the conversion and stock offering, an aggregate up to 244,375 shares, or 30.3%, and 275,796 shares, or 22.0%, of our outstanding common stock at the minimum and adjusted maximum of the offering range, respectively, would be held by our directors and executive officers and their associates and by our employee stock ownership plan based on the minimum and adjusted maximum of the offering range, respectively. Further, additional shares would be held by management following the implementation of one or more stock-based benefit plans, which we intend to implement no earlier than six months following the completion of the conversion following the receipt of stockholder approval.

 

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Our stock value may be negatively affected by federal regulations that restrict takeovers.

For three years following the completion of the conversion, federal and state regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Federal Reserve Board and the Illinois Division of Banking, as applicable. See “Restrictions on Acquisition of Security Midwest Bancorp, Inc.” for a discussion of applicable federal regulations regarding acquisitions. Certain prospective investors may choose to purchase shares of a company if they believe that the company will be acquired, thereby potentially increasing its stock value. Because federal and state regulations will restrict any such acquisition for at least three years after the completion of the conversion, these regulations may negatively affect our stock value.

We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.

If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders up to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notify all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted, to the extent such permission is required, by the FDIC and the Illinois Division of Banking.

You may not revoke your decision to purchase Security Midwest Bancorp common stock in the subscription or community offerings after you send us your order.

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by Feldman Financial Advisors, Inc., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond [extension date], or the number of shares to be sold in the offering is increased to more than 1,256,375 shares or decreased to fewer than 807,500 shares.

The distribution of subscription rights could have adverse income tax consequences.

If the subscription rights granted to certain current or former depositors of Security Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF SECURITY BANK

The following tables set forth selected historical consolidated financial and other data of Security Bank at the dates and for the periods indicated. The information at and for the years ended December 31, 2023 and 2022 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Security Bank included in this prospectus. The information at June 30, 2024 and for the six months ended June 30, 2024 and 2023 is derived in part from, and should be read together with, the unaudited financial statements and notes thereto of Security Bank included elsewhere in this prospectus. The information at June 30, 2024 and for the six months ended June 30, 2024 and 2023 reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the six months ended June 30, 2024 are not necessarily indicative of the results to be achieved for the full fiscal year ending December 31, 2024 or for any other period. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.

 

		At June 30, 2024				At December 31,
						2023				2022
		(In thousands)
Selected Financial Condition Data:
Total assets		$	219,565			$	203,571			$	222,301
Cash and cash equivalents			53,001				33,810				62,036
Investment securities held to maturity			1,226				2,212				3,198
Investment securities available for sale			47,180				48,529				47,413
Loans, net of allowance for credit losses			106,209				107,081				96,740
Deposits			204,463				178,110				208,725
Borrowings			—				10,500				—
Total equity			13,860				13,453				12,045

 

		For the Six Months Ended June 30,								For the Years Ended December 31,
		2024				2023				2023				2022
		(In thousands)
Selected Operating Data:
Interest income		$	4,779			$	3,758			$	7,962			$	6,080
Interest expense			1,382				193				933				223
Net interest income			3,397				3,565				7,029				5,857
Provision for credit losses			—				60				872				181
Net interest income after provision for credit losses			3,397				3,505				6,157				5,676
Noninterest income			899				1,056				2,003				2,240
Noninterest expense			3,556				3,702				7,239				6,766
Income before income taxes			740				859				921				1,150
Income tax expense			203				230				237				303
Net income		$	537			$	629			$	684			$	847

 

39

		At or For the Six Months Ended June 30,								At or For the Years Ended December 31,
		2024				2023				2023				2022
Performance Ratios:
Return on average assets (1)			0.52	%			0.62	%			0.34	%			0.36	%
Return on average equity (1)			8.06	%			9.66	%			5.43	%			6.11	%
Interest rate spread (2)			2.46	%			3.52	%			3.35	%			2.47	%
Net interest margin (1)(3)			3.35	%			3.66	%			3.68	%			2.59	%
Non-interest expense to average assets (1)			3.42	%			3.66	%			3.64	%			2.88	%
Efficiency ratio (4)			82.77	%			80.11	%			80.15	%			83.56	%
Average interest-earning assets to average interest-bearing liabilities			165.45	%			172.62	%			168.27	%			214.12	%
Capital Ratios:
Total capital to risk-weighted assets			18.00	%			17.94	%			17.91	%			17.08	%
Tier 1 capital to risk-weighted assets			16.75	%			16.69	%			15.91	%			16.00	%
Common equity tier 1 capital to risk-weighted assets			16.75	%			16.69	%			15.91	%			16.00	%
Tier 1 capital to average assets			8.49	%			8.57	%			8.62	%			7.10	%
Average equity to average assets			6.40	%			6.43	%			6.34	%			5.90	%
Asset Quality Ratios:
Allowance for credit losses as a percentage of total loans			1.26	%			1.30	%			1.97	%			1.13	%
Allowance for credit losses as a percentage of non-performing loans			81.06	%			68.00	%			52.91	%			48.63	%
Net charge-offs to average outstanding loans during the period			0.73	%			0.07	%			0.05	%			0.59	%
Non-performing loans as a percentage of total loans			1.56	%			1.92	%			3.73	%			2.32	%
Non-performing loans as a percentage of total assets			0.76	%			1.03	%			2.00	%			1.02	%
Total non-performing assets as a percentage of total assets			0.90	%			1.03	%			2.01	%			1.02	%
Other:
Number of offices			3				3				3				3
Number of full-time employees			43				43				44				43
Number of part-time employees			6				10				10				4

 

(1)	Annualized where appropriate.

(2)	Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)	Represents net interest income as a percentage of average interest-earning assets.

(4)	Represents non-interest expenses divided by the sum of net interest income and non-interest income.

 

40

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

•

statements of our goals, intentions and expectations;

 

•

statements regarding our business plans, prospects, growth and operating strategies;

 

•

statements regarding the asset quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

•

acts of war, terrorism, natural disasters or global market disruptions, including global pandemics;

 

•

general economic conditions, including any recessionary conditions and/or increases in unemployment, either nationally or in our market areas, that are worse than expected;

 

•

adverse changes in the financial services industry, securities and local real estate markets (including real estate values);

 

•

our ability to access cost-effective funding and to maintain adequate liquidity, primarily through deposits;

 

•

significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for credit losses;

 

•

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for credit losses and provision for loan losses;

 

•

our ability to implement and change our business strategies, including our ability to attract and maintain deposits and our success in introducing new financial products;

 

•

competition among depository and other financial institutions, including with respect to our ability to charge overdraft fees;

 

•

inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans originated for holding in our portfolio;

 

•

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

41

•

our success in increasing our commercial real estate and commercial and industrial lending;

 

•

our ability to maintain or improve our asset quality even as we increase our commercial real estate and commercial and industrial lending;

 

•

fluctuations in the demand for loans, deposits and non-banking services in our market area, including changes in consumer spending and savings habits;

 

•

technological changes that may be more difficult or expensive than expected;

 

•

changes in accounting and/or tax estimates;

 

•

risks related to a high concentration of loans secured by real estate located in our market area;

 

•

our ability to enter new markets successfully and capitalize on growth opportunities;

 

•

changes in laws or government regulations or policies affecting financial institutions and/or their holding companies, including changes in regulatory fees, capital requirements and insurance premiums;

 

•

changes in laws or government regulations or policies affecting the cannabis industry;

 

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

•

changes in our compensation and benefit plans, our ability to attract and retain key members of our senior management team and our ability to address staffing needs expeditiously in response to product demand or to implement our strategic plans;

 

•

loan delinquencies and changes in the underlying cash flows of our borrowers;

 

•

our ability to control costs and expenses, particularly those associated with operating as a public reporting company;

 

•

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

 

•

our ability to manage market risk, credit risk and operational risk;

 

•

the ability of third-party service providers to perform their obligations to us; and

 

•

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this prospectus.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 18.

 

42

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $6.4 million and $9.3 million, or $10.9 million if the offering range is increased by 15%. 

We intend to distribute the net proceeds as follows:

 

		Based Upon the Sale at $10.00 Per Share of
		807,500 shares								950,000 shares								1,092,500 shares								1,256,375 shares (1)
		Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds
		(Dollars in thousands)
Offering proceeds		$	8,075							$	9,500							$	10,925							$	12,564
Less offering expenses			(1,650	)							(1,650	)							(1,650	)							(1,650	)
Net offering proceeds (2)		$	6,425				100.0	%		$	7,850				100.0	%		$	9,275				100.0	%		$	10,914				100.0	%
Distribution of net proceeds:
To Security Bank		$	5,461				85.0	%		$	6,673				85.0	%		$	7,884				85.0	%		$	9,277				85.0	%
To fund loan to employee stock ownership plan		$	565				8.8	%		$	665				8.8	%		$	765				8.2	%		$	879				8.1	%
Retained by Security Midwest Bancorp		$	399				6.2	%		$	513				6.5	%		$	626				6.8	%		$	758				6.9	%

 

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)	Assumes that all shares of common stock are sold in the subscription and community offerings.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Security Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated offering were used to sell shares of common stock not purchased in the subscription and community offerings.

Security Midwest Bancorp intends to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering. Security Midwest Bancorp may also use the proceeds it retains from the offering:

 

•

to invest in short-term securities and other securities consistent with our investment policy;

 

•

to repurchase shares of our common stock subject to compliance with applicable regulatory requirements;

 

•

to pay cash dividends to our stockholders subject to compliance with applicable regulatory requirements, although we do not initially intend to pay cash dividends; and

 

•

for other general corporate purposes.

With the exception of the funding of the loan to the employee stock ownership plan, Security Midwest Bancorp has not quantified its plans for use of the net offering proceeds for each of the foregoing purposes. Initially, we may invest a substantial portion of the remaining net proceeds in investment grade securities, including U.S. Treasury securities, and securities and obligations of U.S. government agencies and U.S. government-sponsored enterprises. We may also invest the proceeds in one or more deposit accounts.

 

43

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under applicable federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund management recognition plans (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

Security Bank will receive a capital contribution equal to at least 85% of the net proceeds of the offering. We anticipate that Security Midwest Bancorp will invest $5.5 million, $6.7 million, $7.9 million and $9.3 million, respectively, of the net proceeds in Security Bank at the minimum, midpoint, maximum and adjusted maximum of the offering range. Security Bank may use the net proceeds it receives from the stock offering:

 

•

to pay costs associated with its planned withdrawal from the multiple-employer defined benefit pension plan in which it participates;

 

•

to fund primarily commercial real estate and commercial and industrial loans;

 

•

to enhance existing products and services and to support the development of new products and services;

 

•

to invest in securities issued by U.S. government agencies and U.S. government sponsored enterprises, U.S. Treasury securities and other securities in accordance with our investment policy; and

 

•

for other general corporate purposes.

Security Bank has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, a portion of the net proceeds may be invested in securities issued by U.S. government agencies and U.S. government-sponsored enterprises and U.S. Treasury securities.

We estimate that withdrawing from the plan would result in a $1.8 million pre-tax charge to operations, a $1.3 million decrease in equity, a $1.3 million decrease in regulatory capital and annual pre-tax cost savings of $156,000 ($112,000 after-tax cost savings) based on the annualized funding costs for the six months ended June 30, 2024. However, the timing of the withdrawal from the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to withdraw from the plan, as it may change from time to time.

The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of opportunities to expand our operations, our ability to receive regulatory approval for any such expansion activities, and overall market conditions.

We expect our return on equity to decrease as compared to our performance in recent years, until we are able to reinvest effectively the additional capital raised in the stock offering. See “Risk Factors—Risks Related to the Offering—We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.”

 

44

OUR DIVIDEND POLICY

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, we do not initially intend to pay cash dividends on our shares of common stock. In determining whether to pay a cash dividend and the amount of such cash dividend, the board of directors is expected to consider a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations, general economic conditions and whether retaining and investing the capital will provide our stockholders with a better overall return than paying a dividend. We cannot assure you that we will pay any dividends or that, if paid, they will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, regulations and policy, may be paid in addition to, or in lieu of, regular cash dividends.

We will file a consolidated federal tax return with Security Bank. Accordingly, it is anticipated that any cash distributions that we make to our stockholders would be treated as cash dividends and taxable for federal and state income tax purposes. Additionally, pursuant to bank regulations, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of Security Midwest Bancorp, Inc.—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Security Bank, because initially we will have no source of income other than dividends from Security Bank and earnings from the investment of the net proceeds retained by Security Midwest Bancorp from the sale of shares of common stock in the offering, and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the Illinois Division of Banking impose limitations on capital distributions by savings institutions. See “Regulation and Supervision—Illinois Bank Regulation—Dividend Restrictions.”

Any dividends paid by Security Bank to Security Midwest Bancorp, Inc. that would be deemed to be drawn from Security Bank’s bad debt reserves, if any, would be taxable at the then-current tax rate applicable to Security Bank on the amount of earnings deemed to be removed from the bad debt reserves for such distribution. Security Bank does not intend to make any distribution to Security Midwest Bancorp, Inc. that would create such a federal tax liability. See “Taxation.”

 

45

MARKET FOR THE COMMON STOCK

Security Midwest Bancorp is a newly formed company and has never issued capital stock. Security Bank, as a mutual institution, has never issued capital stock. Security Midwest Bancorp expects that that its common stock will be quoted on the OTCQB Market operated by OTC Markets Group. Quotation on the OTCQB Market is not a condition of the conversion and stock offering.

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in the stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering which may have an adverse impact on the price at which the common stock can be sold.

 

46

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At June 30, 2024, Security Bank was classified as “well capitalized” for regulatory capital purposes. The table below sets forth the historical equity capital and regulatory capital of Security Bank at June 30, 2024, and the pro forma equity capital and regulatory capital of Security Bank after giving effect to the sale of shares of common stock at $10.00 per share, all compared to levels required to be considered “well capitalized.” See “How We Intend to Use the Proceeds from the Offering.”

 

		Security Bank Historical at June 30, 2024								Pro Forma at June 30, 2024, Based Upon the Sale in the Offering of (1)
										807,500 Shares								950,000 Shares								1,092,500 Shares								1,256,375 Shares (2)
		Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets
		(Dollars in thousands)
Equity		$	13,860				6.31	%		$	17,251				7.67	%		$	18,320				8.11	%		$	19,388				8.54	%		$	20,618				9.02	%
Tier 1 leverage capital (3)(4)		$	17,909				8.49	%		$	21,300				9.86	%		$	22,369				10.30	%		$	23,437				10.73	%		$	24,667				11.22	%
Tier 1 leverage requirement			10,544				5.00				10,805				5.00				10,863				5.00				10,922				5.00				10,989				5.00
Excess		$	7,365				3.49	%		$	10,495				4.86	%		$	11,506				5.30	%		$	12,515				5.73	%		$	13,678				6.22	%
Tier 1 risk-based capital (3)(4)		$	17,909				16.75	%		$	21,300				19.72	%		$	22,369				20.67	%		$	23,437				21.61	%		$	24,667				22.69	%
Tier 1 risk-based requirement			8,556				8.00				8,640				8.00				8,658				8.00				8,677				8.00				8,698				8.00
Excess		$	9,353				8.75	%		$	12,660				11.72	%		$	13,711				12.67	%		$	14,670				13.61	%		$	15,969				14.69	%
Total risk-based capital (3)(4)		$	19,246				18.00	%		$	22,637				20.96	%		$	23,706				21.90	%		$	24,774				22.84	%		$	26,004				23.09	%
Total risk-based requirement			10,695				10.00				10,799				10.00				10,823				10.00				10,846				10.00				10,873				10.00
Excess		$	8,551				8.00	%		$	11,838				10.96	%		$	12,883				11.90	%		$	13,928				12.84	%		$	15,131				13.92	%
Common equity tier 1 risk-based capital (3)(4)		$	17,909				16.75	%		$	21,300				19.72	%		$	22,369				20.67	%		$	23,437				21.61	%		$	24,667				22.69	%
Common equity tier 1 risk-based requirement			6,952				6.50				7,020				6.50				7,035				6.50				7,050				6.50				7,067				6.50
Excess		$	10,957				10.25	%		$	14,280				13.22	%		$	15,334				14.17	%		$	16,387				15.11	%		$	17,600				16.19	%
Reconciliation of capital infused into Security Bank:
Net proceeds contributed to Security Bank										$	5,461							$	6,673							$	7,884							$	9,277
Less: Expense of withdrawal from defined benefit pension plan (5)											(1,263	)							(1,263	)							(1,263	)							(1,263	)
Less: Common stock acquired by employee stock ownership plan											(565	)							(665	)							(765	)							(879	)
Less: Common stock acquired by stock-based benefit plan											(242	)							(285	)							(328	)							(377	)
Pro forma increase										$	3,391							$	4,460							$	5,528							$	6,758

 

(1)

Pro forma capital levels assume that the employee stock ownership plan purchases 7% of the shares of common stock sold in the stock offering with funds we lend and that our stock-based benefit plan purchases 3% of the shares sold in the offering for restricted stock awards. Pro forma capital calculated under generally accepted accounting principles (“GAAP”) and regulatory capital have been reduced by the amount required to fund these plans. See “Management.”

(2)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(3)	Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.

(4)	Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

(5)

Security Bank intends to withdraw from the multiple-employer defined benefit pension plan in which it participates and terminate pension benefits. We estimated that withdrawing from the plan would result in a $1.8 million pre-tax charge to operations, a $1.3 million decrease in equity and a $1.3 million decrease in regulatory capital. The actual costs associated with the withdrawal from the plan cannot be known until the time of the withdrawal and the termination of pension benefits, and may exceed our estimates.

 

47

CAPITALIZATION

The following table presents the historical capitalization of Security Bank at June 30, 2024 and the pro forma consolidated capitalization of Security Midwest Bancorp, Inc. after giving effect to the conversion and offering, based upon the assumptions set forth under “Pro Forma Data.”

 

		Security Bank at June 30, 2024				Pro Forma at June 30, 2024 Based upon the Sale in the Offering at $10.00 per Share of
						807,500 Shares				950,000 Shares				1,092,500 Shares				1,256,375 Shares (1)
		(Dollars in thousands, except per share amounts)
Deposits (2)		$	204,463			$	204,463			$	204,463			$	204,463			$	204,463
Borrowings			—				—				—				—				—
Total deposits and borrowings		$	204,463			$	204,463			$	204,463			$	204,463			$	204,463
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized (post-conversion)		$	—			$	—			$	—			$	—			$	—
Common stock, $0.01 par value, 10,000,000 shares authorized (post-conversion) (3)			—				8				10				11				13
Additional paid-in capital (4)			—				6,417				7,840				9,264				10,901
Retained earnings (5)			18,526				18,526				18,526				18,526				18,526
Accumulated other comprehensive loss			(4,666	)			(4,666	)			(4,666	)			(4,666	)			(4,666	)
Less:
Costs to withdraw from defined benefit pension plan (6)			—				(1,263	)			(1,263	)			(1,263	)			(1,263	)
Common stock held by employee stock ownership plan (7)			—				(565	)			(665	)			(765	)			(879	)
Common stock to be acquired by stock-based benefit plans (8)			—				(242	)			(285	)			(328	)			(377	)
Total stockholders’ equity		$	13,860			$	18,215			$	19,497			$	20,779			$	22,255
Total shares outstanding			—				807,500				950,000				1,092,500				1,256,375
Total stockholders’ equity as a percentage of total assets			6.31	%			8.13	%			8.66	%			9.17	%			9.76	%
Tangible equity as a percentage of tangible assets			6.31	%			8.13	%			8.66	%			9.17	%			9.76	%

 

(1)	As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the offering.

(2)	Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.

(3)

No effect has been given to the issuance of additional shares of common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans.

(4)	On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of Security Midwest Bancorp common stock to be outstanding.

(5)	The retained income of Security Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Regulation and Supervision.”

(6)

Security Bank intends to withdraw from the multiple-employer defined benefit pension plan in which it participates and terminate pension benefits. We estimate that withdrawing from the plan would result in a $1.8 million pre-tax charge to operations, a $1.3 million decrease in equity and a $1.3 million decrease in regulatory capital. The actual costs associated with the withdrawal from the plan cannot be known until the time of the withdrawal and the termination of pension benefits, and may exceed our estimates.

(7)

Assumes that 7% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Security Midwest Bancorp. The loan will be repaid principally from Security Bank’s contributions to the employee stock ownership plan. Since Security Midwest Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Security Midwest Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.

(8)

Assumes a number of shares of common stock equal to 3% of the shares of common stock to be sold in the offering will be purchased by one or more stock-based benefit plans in open market purchases by Security Midwest Bancorp. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering, represents unearned compensation and does not reflect possible changes in the value of common stock relative to the subscription price in the offering. As we accrue compensation expense to reflect the vesting of shares granted pursuant to the stock-based benefit plan, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock-based benefit plans will require stockholder approval.

 

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PRO FORMA DATA

The following table summarizes historical data of Security Bank and pro forma data of Security Midwest Bancorp at and for the six months ended June 30, 2024 and the year ended December 31, 2023. This information is based on assumptions set forth below and in the table and related footnotes, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds in the table are based upon the following assumptions:

 

•

all shares of common stock will be sold in the subscription offering;

 

•

our employee stock ownership plan will purchase 7% of the shares of common stock sold in the stock offering with a loan from Security Midwest Bancorp. The loan will be repaid in substantially equal payments of principal and interest over a period of 20 years;

 

•

Security Bank will use a portion of the net proceeds to withdraw from the multiple-employer defined benefit pension plan in which it participates. We estimate that withdrawing from the plan and terminating pension benefits would result in a $1.8 million pre-tax charge to operations, a $1.3 million decrease in equity, a $1.3 million decrease in regulatory capital and annual pre-tax cost savings of $156,000 ($112,000 after-tax cost savings), based upon our annualized costs for the six months ended June 30, 2024;

 

•

Performance Trust will receive a selling agent fee equal to $250,000; and

 

•

expenses of the stock offering, other than selling agent fees to be paid to Performance Trust, will be $1.4 million.

Pro forma earnings on net proceeds for the six months ended June 30, 2024 and the year ended December 31, 2023 have been calculated assuming the stock has been sold at the beginning of the period and the net proceeds have been invested at yields of 4.33% and 3.84%, which represents the five-year U.S. Treasury Note rate at June 30, 2024 and December 31, 2023, respectively. In light of current market interest rates, we consider this rate to reflect the pro forma reinvestment rate more accurately than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by federal regulations. The pro forma after-tax yield on the net offering proceeds is assumed to be 3.10% and 2.75% for the six months ended June 30, 2024 and the year ended December 31, 2023, respectively, based on a combined federal and state effective tax rate of 28.5%.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted the earnings figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for the year as if the shares of common stock were outstanding at the beginning of the periods, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma information give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire a number of shares of common stock equal to 3% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We also assume that shares of common stock are granted under the plans as restricted stock awards that vest over a five-year period.

We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. We assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were

 

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$10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $4.64 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 24.88% for the shares of common stock, no dividend yield, an expected option life of 10 years and a risk-free interest rate of 4.36%. Finally, we assumed that 25% of the stock options were non-qualified options granted to directors, resulting in a tax benefit (at an assumed tax rate of 28.5%) in the form of a deduction equal to the grant-date fair value of the options.

We may reserve shares for the exercise of stock options and the grant of stock awards under one or more stock-based benefit plans in excess of 10% and 3%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest more rapidly than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.

The pro forma information does not give effect to: (i) withdrawals from deposit accounts to purchase shares of common stock in the stock offering; (ii) our results of operations after the stock offering including any earnings from reinvestment and leveraging the net proceeds of the offering in loans and other investments offering different yields than the five-year U.S. Treasury Note rate; or (iii) changes in the market price of the shares of common stock after the stock offering.

The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of the bad debt reserve or the liquidation account we will establish in the conversion in the unlikely event we are liquidated.

 

50

		At or for the Six Months Ended June 30, 2024 Based Upon the Sale at $10.00 Per Share of
		807,500 Shares				950,000 Shares				1,092,500 Shares				1,256,375 Shares (1)
		(Dollars in thousands, except per share amounts)
Gross proceeds of offering		$	8,075			$	9,500			$	10,925			$	12,564
Less: Expenses			(1,650	)			(1,650	)			(1,650	)			(1,650	)
Estimated net proceeds			6,425				7,850				9,275				10,914
Less: Common stock acquired by employee stock ownership plan (2)			(565	)			(665	)			(765	)			(879	)
Less: Common stock acquired by stock-based benefit plans (3)			(242	)			(285	)			(328	)			(377	)
Estimated net proceeds, as adjusted		$	5,618			$	6,900			$	8,182			$	9,658
For the six months ended June 30, 2024
Net income:
Historical		$	537			$	537			$	537			$	537
Pro forma adjustments:
Income on adjusted net proceeds			87				107				127				150
Expense savings from withdrawing from defined benefit pension plan (4)			56				56				56				56
Employee stock ownership plan (2)			(10	)			(12	)			(14	)			(16	)
Stock awards (3)			(17	)			(20	)			(23	)			(27	)
Stock options (5)			(35	)			(41	)			(47	)			(54	)
Pro forma net income		$	618			$	627			$	636			$	646
Earnings per share (6):
Historical		$	0.71			$	0.61			$	0.53			$	0.46
Pro forma adjustments:
Income on adjusted net proceeds			0.12				0.12				0.12				0.12
Expense savings from withdrawing from defined benefit pension plan (4)			0.07				0.06				0.05				0.05
Employee stock ownership plan (2)			(0.01	)			(0.01	)			(0.01	)			(0.01	)
Stock awards (3)			(0.02	)			(0.02	)			(0.02	)			(0.02	)
Stock options (5)			(0.05	)			(0.05	)			(0.05	)			(0.05	)
Pro forma earnings per share (6)		$	0.82			$	0.71			$	0.62			$	0.55
Offering price to pro forma net earnings per share			6.10x				7.04x				8.06x				9.09x
Number of shares used in earnings per share calculations			752,388				885,163				1,017,937				1,170,627
At June 30, 2024
Stockholders’ equity:
Historical		$	13,860			$	13,860			$	13,860			$	13,860
Estimated net proceeds			6,425				7,850				9,275				10,914
Less: Withdrawal from defined benefit pension plan (7)			(1,263	)			(1,263	)			(1,263	)			(1,263	)
Less: Common stock acquired by employee stock ownership plan (2)			(565	)			(665	)			(765	)			(879	)
Less: Common stock acquired by stock-based benefit plans (3)			(242	)			(285	)			(328	)			(377	)
Pro forma stockholders’ equity (8)		$	18,215			$	19,497			$	20,779			$	22,255
Pro forma tangible equity (8)		$	18,215			$	19,497			$	20,779			$	22,255
Stockholders’ equity per share:
Historical		$	17.16			$	14.59			$	12.69			$	11.03
Estimated net proceeds			7.96				8.26				8.49				8.69
Less: Withdrawal from defined benefit pension plan (7)			(1.56	)			(1.33	)			(1.16	)			(1.01	)
Less: Common stock acquired by employee stock ownership plan (2)			(0.70	)			(0.70	)			(0.70	)			(0.70	)
Less: Common stock acquired by stock-based benefit plans (3)			(0.30	)			(0.30	)			(0.30	)			(0.30	)
Pro forma stockholders’ equity per share (8)		$	22.56			$	20.52			$	19.02			$	17.71
Pro forma tangible equity (8)		$	22.56			$	20.52			$	19.02			$	17.71
Pro forma price to book value			44.33	%			48.73	%			52.58	%			56.47	%
Pro forma price to tangible book value			44.33	%			48.73	%			52.58	%			56.47	%
Number of shares outstanding for pro forma book value per share calculations			807,500				950,000				1,092,500				1,256,375

(footnotes begin on second following page)

 

51