As filed with the Securities and Exchange Commission on November 7, 2024

Registration No. 333-282067

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

PRE-EFFECTIVE AMENDMENT NO. 2 TO THE

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

99-4917712

(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:

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

LOGO

(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 December 19, 2024. We may extend this expiration date without notice to you until February 3, 2025. 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 December 20, 2026. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond February 3, 2025, 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 February 3, 2025, 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 0.50% 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 0.50% 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 0.50% 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.

LOGO

For assistance, please contact the Stock Information Center at (312) 521-1600.

The date of this prospectus is [prospectus date].

LOGO

TABLE OF CONTENTS


	Page

SUMMARY		3
RISK FACTORS		18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SECURITY BANK		39
RECENT DEVELOPMENTS		41
FORWARD-LOOKING STATEMENTS		48
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING		50
OUR DIVIDEND POLICY		52
MARKET FOR THE COMMON STOCK		53
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE		54
CAPITALIZATION		55
PRO FORMA DATA		56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		61
BUSINESS OF SECURITY MIDWEST BANCORP, INC.		80
BUSINESS OF SECURITY BANK		81
REGULATION AND SUPERVISION		100
TAXATION		110
MANAGEMENT		111
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS		120
THE CONVERSION AND OFFERING		121
RESTRICTIONS ON ACQUISITION OF SECURITY MIDWEST BANCORP, INC.		142
DESCRIPTION OF CAPITAL STOCK OF SECURITY MIDWEST BANCORP, INC.		147
TRANSFER AGENT		148
EXPERTS		149
LEGAL MATTERS		149
WHERE YOU CAN FIND ADDITIONAL INFORMATION		149
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.

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. Depositors of Security Bank, as a mutual savings bank, are members of, and have voting rights in, Security Bank, as to all matters requiring a vote of members. 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. In addition, upon completion of the conversion and stock offering, depositors will no longer have any voting rights in Security Bank, as Security Bank will be a wholly-owned subsidiary of Security Midwest Bancorp, with all voting rights in Security Bank vested in Security Midwest Bancorp as the sole stockholder.

After the conversion and stock offering are completed, we will be organized as a fully public stock holding company, as follows:

LOGO

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 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.

•

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

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. Furthermore, the actual cost of withdrawing from the plan could be significantly higher than the estimated cost provided by the plan administrator.

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 February 3, 2025, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the offering is extended past February 3, 2025, 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 0.50% 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 0.50% 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.

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.

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.

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 November 12, 2024; 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.

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 generally 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.;

•

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

•

cash

Cash will only be accepted at Security Bank’s main office if delivered in person and will be converted to a bank check. Please do not submit 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 0.50% per annum until completion or termination of the offering. There will be no deduction to interest payments for fees and expenses. 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 December 19, 2024. 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, however, we strongly encourage overnight or in-person delivery of your stock order to increase the likelihood your order is received before the deadline. Please do not mail stock order forms to Security Bank’s offices. Once submitted, your order is irrevocable unless the offering is terminated or is extended beyond February 3, 2025, 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 December 19, 2024 offering deadline, for assistance with purchases using funds in your IRA or other retirement account held at Security Bank or elsewhere.

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 December 19, 2024 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 158,000 shares ($1.6 million) of common stock in the offering, representing 19.6% 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 December 19, 2024, 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.

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 December 19, 2024, 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 February 3, 2025.

If we extend the offering past February 3, 2025, 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 0.50% 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 November 12, 2024;

•

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.”

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 0.50% 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 0.50% 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.

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.

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.

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 (312) 521-1600. 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.

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.

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.

A significant amount of our deposits are held by one customer. A material reduction in the customer’s deposit balance could restrict future growth and adversely affect our financial condition and results of operations.

At June 30, 2024, deposit balances from cannabis organization 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 13.7% of total deposits at that date. A material reduction in this customer’s deposit balance could require us to rely on other funding sources, such as Federal Home Loan Bank of Chicago advances, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources, which could reduce our financial flexibility and restrict 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.

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.

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.

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.

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.

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.

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, general economic conditions in our primary 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.

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.”

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.

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 if we do 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.

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.

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.

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.

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.

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.

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

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

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.

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.

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 158,000 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 214,525 shares, or 26.6%, and 245,946 shares, or 19.6%, 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.

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.

Our articles of incorporation provide that, subject to limited exceptions, state and federal courts in the State of Maryland are the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, and other employees.

The articles of incorporation of Security Midwest Bancorp provide that, unless Security Midwest Bancorp consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Security Midwest Bancorp, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Security Midwest Bancorp to Security Midwest Bancorp or its stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Maryland General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine will be conducted in a state or federal court located within the State of Maryland, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This exclusive forum provision does not apply to claims arising under the federal securities laws. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum the stockholder finds favorable for disputes with Security Midwest Bancorp and its directors, officers, and other employees or may cause a stockholder to incur additional expense by having to bring a claim in a judicial forum that is distant from where the stockholder resides, or both. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in a particular action, we may incur additional costs associated with resolving the action in another jurisdiction, which could have a material adverse effect on our financial condition and results of operations.

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 February 3, 2025, 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.

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,
	At June 30, 2024		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


	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 (1)(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		8.47	%		8.58	%		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 (1)		1.46	%		0.14	%		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 expense divided by the sum of net interest income and non-interest income.

RECENT DEVELOPMENTS

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 December 31, 2023 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 September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 is unaudited and 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 three and nine months ended September 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.


	At September 30, 2024		At December 31, 2023
	(In thousands)
Selected Financial Condition Data:
Total assets	$	244,970	$	203,571
Cash and cash equivalents		72,150		33,810
Investment securities held to maturity		980		2,212
Investment securities available for sale		48,041		48,529
Loans, net of allowance for credit losses		112,215		107,081
Deposits		228,593		178,110
Borrowings		—		10,500
Total equity		15,347		13,453


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
	(In thousands)
Selected Operating Data:
Interest income	$	2,605	$	2,057	$	7,385	$	5,816
Interest expense		784		184		2,166		378

Net interest income		1,821		1,873		5,219		5,438
Provision for credit losses		28		30		28		90

Net interest income after provision for credit losses		1,793		1,843		5,191		5,348
Noninterest income		505		505		1,404		1,562
Noninterest expense		1,800		1,895		5,356		5,598

Income before income taxes		498		453		1,239		1,312
Income tax expense		139		133		343		363

Net income	$	359	$	320	$	896	$	949


	At or For the Three Months Ended September 30,						At or For the Nine Months Ended September 30,
	2024			2023			2024			2023
Performance Ratios:
Return on average assets (1)		0.67	%		0.66	%		0.57	%		0.64	%
Return on average equity (1)		10.39	%		10.37	%		8.71	%		9.72	%
Interest rate spread (1)(2)		2.53	%		3.72	%		2.49	%		3.58	%
Net interest margin (1)(3)		3.51	%		4.00	%		3.41	%		3.77	%
Non-interest expense to average assets (1)		3.36	%		3.92	%		3.39	%		3.76	%
Efficiency ratio (4)		77.39	%		79.69	%		80.87	%		79.97	%
Average interest-earning assets to average interest-bearing liabilities		164.65	%		171.29	%		165.13	%		172.20	%

Capital Ratios:
Total capital to risk-weighted assets		17.39	%		17.13	%		17.39	%		17.13	%
Tier 1 capital to risk-weighted assets		16.16	%		15.88	%		16.16	%		15.88	%
Common equity tier 1 capital to risk-weighted assets		16.16	%		15.88	%		16.16	%		15.88	%
Tier 1 capital to average assets		8.28	%		8.71	%		8.32	%		8.68	%
Average equity to average assets		6.44	%		6.38	%		6.52	%		6.56	%

Asset Quality Ratios:
Allowance for credit losses as a percentage of total loans		1.22	%		1.25	%		1.22	%		1.25	%
Allowance for credit losses as a percentage of non-performing loans		96.51	%		38.33	%		96.51	%		38.33	%
Net (charge-offs) recoveries to average outstanding loans during the period (1)		(0.06	)%		0.04	%		(0.98	)%		(0.08	)%
Non-performing loans as a percentage of total loans		1.26	%		3.27	%		1.26	%		3.27	%
Non-performing loans as a percentage of total assets		0.58	%		1.84	%		0.58	%		1.84	%
Total non-performing assets as a percentage of total assets		0.66	%		1.84	%		0.66	%		1.84	%

Other:
Number of offices		3			3			3			3
Number of full-time employees		46			48			46			48
Number of part-time employees		7			12			7			12

(1)	Annualized.

(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 expense divided by the sum of net interest income and non-interest income.

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Total assets. Total assets were $245.0 million at September 30, 2024, an increase of $41.4 million, or 20.3%, from December 31, 2023. The increase was primarily comprised of an increase in cash and cash equivalents of $38.3 million and an increase in net loans of $5.1 million, which increases were partially offset by a decrease in investment securities of $1.7 million.

Cash and cash equivalents. Cash and cash equivalents increased by $38.3 million, or 113.4%, to $72.2 million at September 30, 2024 from the balance at December 31, 2023. The increase was due primarily to an increase in deposits.

Investment securities. Investment securities, comprised of both available for sale and held to maturity securities, decreased $1.7 million, or 3.4%, to $49.0 million at September 30, 2024 from $50.7 million at December 31, 2023. The decrease was due primarily to maturities and repayments of investments totaling $2.9 million and the effects of a $1.4 million improvement in the gross unrealized loss on securities available for sale during the nine months ended September 30, 2024, to a total unrealized loss of $4.9 million at September 30, 2024 compared to $6.3 million at December 31, 2023. At September 30, 2024 and December 31, 2023, investment securities held to maturity consisted solely of certificates of deposit totaling $980,000 and $2.2 million, respectively.

Gross loans. Loans increased by $4.4 million, or 4.0%, to $113.6 million at September 30, 2024 compared to $109.2 million at December 31, 2023. During the nine months ended September 30, 2024, loan originations totaled $20.5 million, a decrease of $14.6 million, or 41.6%, compared to the loan origination volume of $35.1 million for the nine months ended September 30, 2023. Such amounts included loans originated for sale totaling $2.1 million for the nine months ended September 30, 2024, compared to $1.6 million for the nine months ended September 30, 2023. However, we did not have any loans held for sale at September 30, 2024 or December 31, 2023. The decrease in lending volume was primarily attributable to the increase in interest rates during the period.

During the nine months ended September 30, 2024, the increase in our loan portfolio was primarily due to the following: commercial real estate loans increased $7.2 million, or 17.1%, to $48.9 million at September 30, 2024; and construction and development loans increased $989,000, or 16.8% to $6.9 million at September 30, 2024. These increases were partially offset by a decrease in residential one- to four-family loans of $611,000, or 1.8% to a total of $33.1 million at September 30, 2024; consumer loans decreased by $1.4 million, or 19.1% to $5.8 million at September 30, 2024; and commercial and industrial loans decreased by $1.1 million, or 9.8%, to a total of $10.2 million at September 30, 2024.

Our strategy is to grow our loan portfolio, with a focus on owner-occupied one- to four-family residential real estate loans and commercial loans (both commercial real estate and commercial and industrial).

Deposits. Deposits increased by $50.5 million, or 28.3%, to $228.6 million at September 30, 2024 from $178.1 million at December 31, 2023. The increase was due primarily to an increase in core deposits (consisting of demand, both retail and commercial, and savings deposits), which increased $30.9 million, or 21.0%, to $177.9 million at September 30, 2024 compared to $147.0 million at December 31, 2023. In addition, certificates of deposit increased $19.6 million, or 63.0%, to $50.7 million at September 30, 2024 from $31.1 million at December 31, 2023. This increase was due primarily to depositors’ preference for the higher yields offered on certificate accounts during recent periods of rising interest rates. The increase in CRB deposits was due primarily to a $22.9 million short-term deposit received in September, which was withdrawn in early October. Such deposit and withdrawal activity is routine business with our CRB depositors.

At each of September 30, 2024 and December 31, 2023, we had a concentration of deposits from CRB customers, comprised primarily of commercial demand accounts. These deposits totaled $78.0 million and $47.0 million at these respective dates.

During the nine months ended September 30, 2024, we continued our strategy of pursuing growth in demand accounts and other lower cost core deposits, in part by enhancing the products and services we offer, including mobile banking capabilities, expanding our offering of cannabis-related business services into other states, and streamlining commercial banking services through enhanced cash management and treasury management services. We intend to continue our efforts to increase our core deposit base, with an emphasis on growth in consumer and business demand deposits.

Borrowings. We had no outstanding advances from the Federal Home Loan Bank at September 30, 2024, compared to $10.5 million at December 31, 2023. Advances were repaid using funds from our growth in deposits during the nine months ended September 30, 2024.

Equity. Equity increased $1.9 million, or 14.1%, to $15.3 million at September 30, 2024 compared to December 31, 2023. The increase was due to net income of $896,000 during the nine months ended September 30, 2024, and a decrease in accumulated other comprehensive loss of $998,000, or 22.0%.

Comparison of Operating Results for the Three Months Ended September 30, 2024 and 2023

General. Net income for the three months ended September 30, 2024 was $359,000, an increase of $39,000, or 12.2%, compared to net income of $320,000 the three months ended September 30, 2023. The increase in net income was primarily due to a $95,000 decrease in noninterest expense and a $2,000 decrease in the provision for credit losses, which were partially offset by a $52,000 decrease in net interest income and a $6,000 increase in income taxes.

Interest income. Interest income increased $548,000, or 26.6%, to $2.6 million for the three months ended September 30, 2024 from $2.1 million for the three months ended September 30, 2023. This increase was attributable to a $326,000, or 22.6%, increase in interest on loans and a $241,000, or 91.2%, increase in interest on interest-bearing deposits and other assets, which were partially offset by a $19,000, or 5.4%, decrease in interest on investment securities.

The average balance of loans increased by $2.5 million, or 2.4%, during the three months ended September 30, 2024 over the average balance for the three months ended September 30, 2023, while the average yield on loans increased by 107 basis points to 6.47% for the three months ended September 30, 2024 from 5.40% for the three months ended September 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average balance of investment securities decreased $3.8 million, or 6.6%, to $54.5 million for the three months ended September 30, 2024 from the three months ended September 30, 2023, while the average yield on investment securities increased by three basis points to 2.44% for the three months ended September 30, 2024 from 2.41% for the three months ended September 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average balance of interest-bearing deposits and other assets, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, increased $21.4 million, or 96.0%, to $43.7 million for the three months ended September 30, 2024 from the three months ended September 30, 2023, while the average yield decreased 12 basis points, to 4.62% for the three months ended September 30, 2024 from 4.74% for the three months ended September 30, 2023.

Interest Expense. Total interest expense increased $600,000, or 326.1%, to $784,000 for the three months ended September 30, 2024 compared to $184,000 for the three months ended September 30, 2023. The increase was comprised of a $602,000, or 330.1%, increase in interest expense on deposits, which was slightly offset by a $2,000, or 98.0%, decrease in interest expense on borrowings. The increase in interest expense on deposits was primarily due to an increase of 182 basis points in the average cost of deposits to 2.49% for the three months ended September 30, 2024 from 0.67% for the three months ended September 30, 2023 and, to a lesser extent, an increase of $16.8 million, or 15.4%, in the average balance of deposits, to $126.0 million for the three months ended September 30, 2024 from $109.2 million for the three months ended September 30, 2023.

Net Interest Income. Net interest income decreased $52,000, or 2.8%, to $1.8 million for the three months ended September 30, 2024 compared to $1.9 million for the three months ended September 30, 2023. The decrease reflected a decrease in the interest rate spread to 2.53% for the three months ended September 30, 2024 from 3.72% for the three months ended September 30, 2023. The net interest margin decreased to 3.51% for the three months ended September 30, 2024 from 4.00% for the three months ended September 30, 2023. The interest rate spread and net interest margin were adversely impacted by the increases in market interest rates, which more rapidly impacted our cost of funds.

Provision for Credit Losses. Based on an analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Allowance for Credit Losses,” we recorded a provision for credit losses of $28,000 for the three months ended September 30, 2024, compared to a provision of $30,000 for the three months ended September 30, 2023. The allowance for credit losses was $1.4 million at both September 30, 2024 and 2023 and represented 1.22% of total loans at September 30, 2024 and 1.25% of total loans at September 30, 2023.

Management’s determination of the allowance balance at September 30, 2024 included consideration of the $2.5 million, or 2.4%, increase in gross loans outstanding during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, along with decreases in nonperforming and delinquent loans. Total nonperforming loans were $1.4 million at September 30, 2024, compared to $3.6 million at September 30, 2023. Total loans past due 30 days or greater were $1.6 million and $4.1 million at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses was 96.51% at September 30, 2024 compared to 38.33% at September 30, 2023.

Our estimates and assumptions used in the determination of the adequacy of the allowance could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions. Any such increase in future provisions that may be required may adversely impact our financial condition and results of operations.

Non-Interest Income. Noninterest income was $505,000 for each of the three months ended September 30, 2024 and 2023. Service fees on deposits decreased $25,000, or 8.5%, to $269,000 for the three months ended September 30, 2024 compared to $294,000 for the three months ended September 30, 2023, due primarily to a decrease in the volume of monthly maintenance fees and cash counting service fees due to a significant decline in our largest CRB account between the periods. The decrease was partially offset by an increase in the overall number of CRB accounts period over period, as we have focused on expanding our relationship base to smaller customers. Other noninterest income increased $38,000, or 92.7%, to $79,000 for the three months ended September 30, 2024 compared to $41,000 for the three months ended September 30, 2023, due primarily to fees received on short-term letter of credit agreements.

Noninterest Expense. Noninterest expense decreased $95,000, or 5.0%, to $1.8 million for the three months ended September 30, 2024 compared to $1.9 million for the three months ended September 30, 2023. Salaries and employee benefits expense decreased $87,000, or 8.0%, to $1.0 million for the three months ended September 30, 2024 compared to $1.1 million for the three months ended September 30, 2023, due primarily to a decrease in expense related to the multiple employer defined benefit plan in which we participate, as we elected not to make an additional voluntary payment due to the effect of the increase in interest rates on the funding status of the plan, which was partially offset by an increase in our management staffing and normal annual merit increases. Other expense decreased $33,000, or 16.3%, to $169,000 for the three months ended September 30, 2024 compared to $202,000 for the three months ended September 30, 2023, due primarily to nonrecurring losses from fraudulent activity in customer deposit accounts in the 2023 period.

Income Taxes. Income taxes increased by $6,000, or 4.5%, to $139,000 for the three months ended September 30, 2024, compared to $133,000 for the three months ended September 30, 2023. The increase in the income tax provision was due primarily to a $45,000, or 9.9% increase in pretax income. The effective tax rate was 27.9% and 29.4% for the three months ended September 30, 2024 and 2023, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2024 and 2023

General. Net income for the nine months ended September 30, 2024 was $896,000, a decrease of $53,000, or 5.6%, compared to net income of $949,000 the nine months ended September 30, 2023. The decrease in net income was primarily due to a $219,000 decrease in net interest income and a $158,000 decrease in noninterest income, which were partially offset by a $62,000 decrease in the provision for credit losses, a $242,000 decrease in noninterest expenses and a $20,000 decrease in income taxes.

Interest income. Interest income increased $1.6 million, or 27.0%, to $7.4 million for the nine months ended September 30, 2024 from $5.8 million for the nine months ended September 30, 2023. This increase was attributable to a $1.1 million, or 29.8%, increase in interest on loans; an $8,000, or 0.8%, increase in interest on investment securities and a $428,000, or 42.8%, increase in interest on interest-bearing deposits and other assets, which increases were primarily due to increases in the yields earned on such assets.

The average balance of loans increased by $7.6 million, or 7.5%, to $108.9 million during the nine months ended September 30, 2024 over the average balance for the nine months ended September 30, 2023, while the average yield on loans increased by 103 basis points to 6.03% for the nine months ended September 30, 2024 from 5.00% for the nine months ended September 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average balance of investment securities decreased $3.6 million, or 6.0%, to $55.7 million for the nine months ended September 30, 2024 from the nine months ended September 30, 2023, while the average yield on investment securities increased by 17 basis points to 2.46% for the nine months ended September 30, 2024 from 2.29% for the nine months ended September 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average yield on interest-bearing deposits and other assets, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, increased 59 basis points, to 4.80% for the nine months ended September 30, 2024 from 4.21% for the nine months ended September 30, 2023, while the average balance increased $8.0 million, or 25.3%, for the nine months ended September 30, 2024. The increase in the average yield was due to increases in market interest rates.

Interest Expense. Total interest expense increased $1.8 million, or 473.0%, to $2.2 million for the nine months ended September 30, 2024 compared to $378,000 for the nine months ended September 30, 2023. The increase was primarily comprised of a $1.8 million, or 475.0%, increase in interest expense on deposits. The increase in interest expense on deposits was primarily due to an increase of 188 basis points in the average cost of deposits to 2.33% for the nine months ended September 30, 2024 from 0.45% for the nine months ended September 30, 2023 and, to a lesser extent, an increase of $12.1 million, or 10.9%, in the average balance of deposits, to $123.6 million for the nine months ended September 30, 2024 from $111.5 million for the nine months ended September 30, 2023.

Net Interest Income. Net interest income decreased $219,000, or 4.0%, to $5.2 million for the nine months ended September 30, 2024 compared to $5.4 million for the nine months ended September 30, 2023. The decrease reflected a decrease in the interest rate spread to 2.49% for the nine months ended September 30, 2024 from 3.58% for the nine months ended September 30, 2023. The net interest margin decreased to 3.41% for the nine months ended September 30, 2024 from 3.77% for the nine months ended September 30, 2023. The interest rate spread and net interest margin were adversely impacted by the increases in market interest rates, which more rapidly impacted our cost of funds.

Provision for Credit Losses. Based on an analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Allowance for Credit Losses,” we recorded a provision for credit losses of $28,000 for the nine months ended September 30, 2024, compared to a provision of $90,000 for the nine months ended September 30, 2023. The allowance for credit losses was $1.4 million at September 30, 2024 and $1.4 million at September 30, 2023 and represented 1.22% of total loans at September 30, 2024 and 1.25% of total loans at September 30, 2023.

Management’s determination of the allowance balance at September 30, 2024 included consideration of the $4.4 million, or 4.0%, increase in loans outstanding during the nine months ended September 30, 2024, along with decreases in nonperforming and delinquent loans. Total nonperforming loans were $1.4 million at September 30, 2024, compared to $3.6 million at September 30, 2023. Total loans past due 30 days or greater were $1.6 million and $4.1 million at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses was 96.51% at September 30, 2024 compared to 38.33% at September 30, 2023.

Non-Interest Income. Noninterest income information is as follows.


	Nine Months Ended September 30,				Change
	2024		2023		Amount			Percent
	(Dollars in thousands)
Service fees on deposit accounts	$	793	$	979	$	(186	)		(19.0	)%
Debit card fees		312		325		(13	)		(4.0	)%
Mortgage loan servicing fees, net		101		114		(13	)		(11.4	)%
Gain on sale of loans		41		26		15			57.7	%
Gain on sale of foreclosed assets		—		3		(3	)		(100.0	)%
Brokerage fees		—		19		(19	)		(100.0	)%
Other		156		96		60			62.5

Total noninterest income	$	1,403	$	1,562	$	(159	)		(10.2	)%

The decrease in service fees on deposits was due primarily to a decrease in the volume of monthly maintenance fees and cash counting service fees due to a significant decline in our largest CRB account between the periods. The decrease was partially offset by an increase in the overall number of CRB accounts period over period, as we have focused on expanding our relationship base to smaller customers.

Noninterest Expense. Noninterest expense information is as follows.


	Nine Months Ended September 30,				Change
	2024		2023		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	3,021	$	3,172	$	(151	)		(4.8	)%
Occupancy expense		416		431		(15	)		(3.5	)%
Data processing fees		432		394		38			9.6	%
FDIC insurance premiums		99		117		(18	)		(15.4	)%
Advertising		117		112		5			4.5	%
Directors fees		74		72		2			2.8	%
Debit card expense		57		52		5			9.6	%
Professional fees		485		544		(59	)		(10.8	)%
Telephone and internet		99		100		(1	)		(1.0	)%
Other		556		604		(48	)		(7.9	)%

Total noninterest expense	$	5,356	$	5,598	$	(242	)		(4.3	)%

The decrease in salaries and employee benefits was due primarily to a decrease in expense related to the multiple employer defined benefit plan in which we participate, as we elected not to make an additional voluntary payment due to the effect of the increase in interest rates on the funding status of the plan, which was partially offset by an increase in our management staffing and normal annual merit increases. The decrease in professional fees was due primarily to a write-off of certain capitalized fees totaling $106,000 incurred for previous services related to our mutual-to-stock conversion process in the prior year. The increase in data processing was due primarily to our overall growth. The decrease in other expense was due primarily to nonrecurring losses from fraudulent activity in customer deposit accounts during the 2023 period.

Income Taxes. Income taxes decreased by $20,000, or 5.5%, to $343,000 for the nine months ended September 30, 2024, compared to $363,000 for the nine months ended September 30, 2023. The decrease in the income tax provision was due primarily to a $73,000, or 5.6% decrease in pretax income. The effective tax rate was 27.7% for each of the nine months ended September 30, 2024 and 2023.

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;

•

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.

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.

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. Furthermore, the actual cost of withdrawing from the plan could be significantly higher than the estimated cost provided by the plan administrator.

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 must sell a minimum of 807,500 shares in order to complete the offering. See “The Conversion and Offering—Determination of Share Price and Number of Shares to be Issued.”

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.”

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.”

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.

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)
	Security Bank Historical at June 30, 2024					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.

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
	Security Bank at June 30, 2024			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.

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

$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.


	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)


	At or for the Year Ended December 31, 2023 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 year ended December 31, 2023
Net income:
Historical	$	684		$	684		$	684		$	684
Pro forma adjustments:
Income on adjusted net proceeds		154			189			225			265
Expense savings from withdrawing from defined benefit pension plan (4)		287			287			287			287
Employee stock ownership plan (2)		(20	)		(24	)		(27	)		(31	)
Stock awards (3)		(35	)		(41	)		(47	)		(54	)
Stock options (5)		(70	)		(82	)		(94	)		(108	)

Pro forma net income	$	1,000		$	1,013		$	1,028		$	1,043

Earnings per share (6):
Historical	$	0.91		$	0.77		$	0.67		$	0.58
Pro forma adjustments:
Income on adjusted net proceeds		0.21			0.21			0.22			0.23
Expense savings from withdrawing from defined benefit pension plan (4)		0.38			0.32			0.28			0.24
Employee stock ownership plan (2)		(0.03	)		(0.03	)		(0.03	)		(0.03	)
Stock awards (3)		(0.05	)		(0.04	)		(0.04	)		(0.04	)
Stock options (5)		(0.09	)		(0.09	)		(0.09	)		(0.09	)

Pro forma earnings per share (6)	$	1.33		$	1.14		$	1.01		$	0.89

Offering price to pro forma net earnings per share		7.52x			8.77x			9.90x			11.24x
Number of shares used in earnings per share calculations		753,801			886,825			1,019,849			1,172,826

At December 31, 2023
Stockholders’ equity:
Historical	$	13,453		$	13,453		$	13,453		$	13,453
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)	$	17,808		$	19,090		$	20,372		$	21,848

Pro forma tangible equity (8)	$	17,808		$	19,090		$	20,372		$	21,848

Stockholders’ equity per share:
Historical	$	16.66		$	14.16		$	12.31		$	10.71
Estimated net proceeds		7.95			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)	$	22.05		$	20.10		$	18.65		$	17.39

Pro forma tangible equity (8)	$	22.05		$	20.10		$	18.65		$	17.39

Pro forma price to book value		45.35	%		49.75	%		53.62	%		57.50	%
Pro forma price to tangible book value		45.35	%		49.75	%		53.62	%		57.50	%
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 following page)

(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 7% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of these tables, the funds used to acquire these shares are assumed to have been borrowed from Security Midwest Bancorp. Security Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Security Bank’s total annual payments are based upon 20 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification 718-40, “Employers’ Accounting for Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Security Bank, the fair value of the common stock remains equal to the subscription price and the related expense reflects an effective tax rate of 28.5%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that (i) 1,413, 1,663, 1,912 and 2,198 shares were committed to be released during the six months ended June 30, 2024 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, (ii) 2,826, 3,325, 3,824 and 4,397 shares were committed to be released during the year ended December 31, 2023 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively and (iii) in accordance with ASC 718-40, only the shares committed to be released during the period were considered outstanding for purposes of earnings per share calculations.

(3)

If approved by stockholders, one or more stock-based benefit plans may purchase an aggregate number of shares of common stock equal to 3% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Security Midwest Bancorp or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Security Midwest Bancorp. The tables assume that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 5% of the amount contributed to the stock-based benefit plans is amortized as an expense during the six months ended June 30, 2024, (iii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the year ended December 31, 2023 and (iv) the stock-based benefit plans expense reflects an effective tax rate of 28.5%. Assuming that shares of common stock equal to 3% of the shares sold in the offering are awarded from authorized but unissued shares, stockholders would have their ownership and voting interests diluted by approximately 2.91%.

(4)

Represents after-tax cost savings associated with the withdrawal from the multiple-employer defined benefit pension plan of approximately $56,000 for the six months ended June 30, 2024 and $287,000 for the year ended December 31, 2023, assuming an effective combined federal and state tax rate of 28.5%. The expense savings amount is derived from the elimination of the expense associated with funding the pension plan and reflects the actual funding contribution expense, as adjusted for income taxes, that was recorded in the respective periods and was based on certain actuarial analyses and assumptions. The actual pension plan contribution expense, before income taxes, was $78,000 for the six months ended June 30, 2024 and $401,000 for the year ended December 31, 2023.

(5)

If approved by stockholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant are $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model is $4.64 for each option, and the aggregate grant-date fair value of the stock options is amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans 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. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. The actual exercise price of the stock options may not equal the $10.00 price per share. If a portion of the shares to satisfy the exercise of options is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming that all shares of common stock used to cover the exercise of stock options (equal to 10% of the shares sold in the offering) are authorized but unissued shares, stockholders would have their ownership and voting interests diluted by approximately 9.09%.

(6)

Earnings per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2, above.

(7)

Represents costs associated with the withdrawal from the multiple-employer defined benefit pension plan and the subsequent termination of pension benefits. We estimate that withdrawal from the plan would result in a $1.8 million charge to operations, a $1.3 million decrease in equity and a $1.3 million decrease in regulatory capital. The actual costs will not be known until the actual withdrawal from the defined benefit pension plan, and may exceed our estimates.

(8)

The retained income of Security Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Regulation and Supervision.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our financial information and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited and unaudited consolidated financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Security Bank provided in this prospectus.

Overview

Total assets were $219.6 million at June 30, 2024, an increase of $16.0 million, or 7.9%, over December 31, 2023. The increase was primarily comprised of an increase in cash and cash equivalents of $19.2 million, which was partially offset by decreases in investment securities of $2.3 million and in net loans of $872,000. Total assets were $203.6 million at December 31, 2023, a decrease of $18.7 million, or 8.4%, from $222.3 million at December 31, 2022. The decrease was primarily comprised of a decrease in cash and cash equivalents of $28.2 million to $33.8 million, which was partially offset by an increase in loans of $11.4 million.

Net income for the six months ended June 30, 2024 was $537,000, a decrease of $93,000, or 14.7%, compared to the six months ended June 30, 2023. The decrease in net income was primarily due to a $168,000 decrease in net interest income and a $158,000 decrease in noninterest income, which were partially offset by a $60,000 decrease in the provision for credit losses, a $146,000 decrease in noninterest expense and a $27,000 decrease in income taxes. Net income for the year ended December 31, 2023 was $684,000, a decrease of $164,000, or 19.3%, compared to the year ended December 31, 2022. The decrease in net income was primarily due to a $691,000 increase in the provision for credit losses, a $237,000 decrease in noninterest income and a $473,000 increase in noninterest expense, which were partially offset by a $1.2 million increase in net interest income, and a $65,000 decrease in income taxes.

Business Strategy

Highlights of our current business strategy include the following:

•

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 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.

•

Anticipated Increase in Noninterest Expense

Following the completion of the conversion, our noninterest expense is expected to increase because of the increased costs associated with operating as a public company, increased costs related to potential expansion of the franchise, the increased compensation expense associated with the purchase of shares of common stock by our employee stock ownership plan as well as the implementation of one or more stock-based benefit plans, if approved by our stockholders, no earlier than six months after the completion of the conversion. For further information, see “Summary—Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion;” “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans will increase our expenses, which will reduce our net income;” and “Management —Benefits to be Considered Following Completion of the Stock Offering.”

In addition, following the conversion, we expect to incur a non-recurring expense to withdraw from the multiple-employer defined benefit pension plan in which we participate. We estimate that withdrawing from the plan and the subsequent termination of 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. 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.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use with respect to critical accounting policies are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Credit Losses. The allowance for credit losses is the estimated amount considered necessary to cover expected, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for credit losses which is charged against income. In determining the allowance for credit losses, we make significant estimates and have identified this policy as one of our most critical accounting policies.

We adopted Accounting Standards Update No. 2016-13, “Current Expected Credit Losses” (CECL), effective January 1, 2023. 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).

We perform a quarterly evaluation of the allowance for credit losses. Our determination of the adequacy of the allowance for credit losses is based on the assessment of the expected credit losses on loans over the expected life of the loans. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

In accordance with the provisions of the accounting standards under CECL, we estimate the allowance for credit losses balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience of a defined peer group, by affiliate, paired with economic forecasts, provide the basis for the quantitatively modeled estimates of expected credit losses. We adjust our quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the qualitative factors.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. We use the average historical loss method to measure the quantitative portion of the allowance for credit losses over the forecast and reversion periods.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When we determine that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Prior to January 1, 2023, we calculated the allowance for loan losses under the probable incurred methodology. Using this methodology, the analysis had two components, specific and general allowances. The specific percentage allowance was for unconfirmed losses related to loans that were determined to be impaired. Impairment was measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan was less than the loan’s carrying value, a charge was recorded for the difference.

The general allowance, which was for loans reviewed collectively, was determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyzed historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis established historical loss percentages and qualitative factors that were applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that were reviewed collectively. The qualitative component was critical in determining the allowance for loan losses as certain trends may have indicated the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could have misstated the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Determining the proper valuation allowance for deferred taxes is critical in properly valuing the deferred tax asset and the related recognition of income tax expense or benefit. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology we utilize can be found in Notes 6 and 13 of the Unaudited and Audited Consolidated Financial Statements, respectively — “Disclosures About Fair Value of Assets and Liabilities.”

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

Total assets. Total assets were $219.6 million at June 30, 2024, an increase of $16.0 million, or 7.9%, from December 31, 2023. The increase was primarily comprised of an increase in cash and cash equivalents of $19.2 million, which was partially offset by decreases in investment securities of $2.3 million and in net loans of $872,000.

Cash and cash equivalents. Cash and cash equivalents increased by $19.2 million, or 56.8%, to $53.0 million at June 30, 2024 from $33.8 million at December 31, 2023. The increase was due primarily to an increase in deposits.

Investment securities. Investment securities, comprised of both available for sale and held to maturity securities, decreased $2.3 million, or 4.6%, to $48.4 million at June 30, 2024 from $50.7 million at December 31, 2023. The decrease was due primarily to maturities and repayments of investments totaling $2.0 million and the effects of a $182,000 increase in the gross unrealized loss on securities available for sale during the six months ended June 30, 2024, to a total unrealized loss of $6.5 million at June 30, 2024 compared to $6.3 million at December 31, 2023. At June 30, 2024 and December 31, 2023, investment securities held to maturity consisted solely of certificates of deposit totaling $1.2 million and $2.2 million, respectively.

Gross loans. Loans decreased by $1.6 million, or 1.5%, to $107.6 million at June 30, 2024 compared to $109.2 million at December 31, 2023. During the six months ended June 30, 2024, loan originations totaled $8.4 million, a decrease of $10.6 million, or 55.6%, compared to the loan origination volume of $19.0 million for the six months ended June 30, 2023. Such amounts included loans originated for sale totaling $1.1 million for the six months ended June 30, 2024, compared to $1.0 million for the six months ended June 30, 2023. However, we did not have any loans held for sale at June 30, 2024 or December 31, 2023.

During the six months ended June 30, 2024, the decrease in our loan portfolio was primarily due to the following: commercial real estate loans decreased $1.2 million, or 2.9%, to $40.6 million at June 30, 2024; farmland loans decreased by $785,000, or 18.8% to a total of $3.4 million at June 30, 2024; and consumer loans decreased by $974,000, or 13.5% to a total of $6.2 million at June 30, 2024. These decreases were partially offset by an increase in construction and development loans of $1.7 million, or 29.2% to a total of $7.6 million at June 30, 2024 and an increase in commercial and industrial loans of $178,000, or 1.6%, to a total of $11.5 million at June 30, 2024.

Increases in market interest rates that began during 2022 and continued through 2023 resulted in the slowing of our loan demand compared to prior years. Our strategy is to grow our loan portfolio, with a focus on owner-occupied one- to four-family residential real estate loans and commercial loans (both commercial real estate and commercial and industrial).

Deposits. Deposits increased by $26.4 million, or 14.8%, to $204.5 million at June 30, 2024 from $178.1 million at December 31, 2023. The increase was due primarily to an increase in certificates of deposit, which increased $18.7 million, or 60.1%, to $49.8 million at June 30, 2024 from $31.1 million at December 31, 2023. This increase was due primarily to depositors’ preference for the higher yields offered on certificate accounts during recent periods of rising interest rates. In addition, core deposits (consisting of demand, both retail and commercial, and savings deposits) increased $7.6 million, or 5.2%, to $154.6 million at June 30, 2024 compared to $147.0 million at December 31, 2023.

At each of June 30, 2024 and December 31, 2023, we had a concentration of commercial demand deposits from CRB customers. These deposits totaled $54.8 million and $47.0 million at these respective dates.

During the six months ended June 30, 2024, we continued our strategy of pursuing growth in demand accounts and other lower cost core deposits, in part by enhancing the products and services we offer, including mobile banking capabilities, expanding our offering of cannabis-related business services into other states, and streamlining commercial banking services through enhanced cash management and treasury management services. We intend to continue our efforts to increase our core deposit base, with an emphasis on growth in consumer and business demand deposits.

Borrowings. We had no outstanding advances from the Federal Home Loan Bank at June 30, 2024, compared to $10.5 million from December 31, 2023. Advances were repaid using funds from our growth in deposits during the six months ended June 30, 2024.

Equity. Equity increased $407,000, or 3.0%, to $13.9 million at June 30, 2024 compared to December 31, 2023. The increase was due to net income of $537,000 during the six months ended June 30, 2024, partially offset by an increase in accumulated other comprehensive loss of $130,000, or 2.9%.

Comparison of Financial Condition at December 31, 2023 and December 31, 2022

Total assets. Total assets were $203.6 million at December 31, 2023, a decrease of $18.7 million, or 8.4%, from $222.3 million at December 31, 2022. The decrease was primarily comprised of a decrease in cash and cash equivalents of $28.2 million, which was partially offset by an increase in gross loans of $11.4 million.

Cash and cash equivalents. Cash and cash equivalents decreased by $28.2 million, or 45.5%, to $33.8 million at December 31, 2023 from $62.0 million at December 31, 2022. The decrease was due primarily to cash being used to fund deposit outflow.

Time deposits. Time deposits decreased by $1.0 million during the year ended December 31, 2023, as the remaining time deposits matured during the year and were not renewed.

Investment securities. Investment securities, comprised of both available for sale and held to maturity securities, increased $130,000, or 0.3%, to $50.7 million at December 31, 2023 from $50.6 million at December 31, 2022. The decrease was due primarily to calls, maturities and repayments of investments totaling $4.0 million, which were partially offset by purchases of $3.2 million and the effects of a $1.3 million improvement in the gross unrealized losses on securities in 2023, to a total of $6.3 million at December 31, 2023 compared to $7.6 million at December 31, 2022. At December 31, 2023 and 2022, investment securities held to maturity consisted solely of certificates of deposit totaling $2.2 million and $3.2 million, respectively.

Gross loans. Total loans increased by $11.4 million, or 11.7%, to $109.2 million at December 31, 2023 compared to $97.8 million at December 31, 2022. During the year ended December 31, 2023, loan originations totaled $37.3 million, an increase of $18.6 million, or 99.8%, from loan origination volume of $18.7 million for the year ended December 31, 2022. Such amounts included loans originated for sale totaling $2.0 million for the year ended December 31, 2023, a decrease of $2.2 million, or 52.8%, from the $4.2 million total for the year ended December 31, 2022. However, we did not have any loans held for sale at December 31, 2023 or December 31, 2022.

During the year ended December 31, 2023, the decrease in our loan portfolio was primarily due to the following: commercial real estate loans increased $9.6 million, or 29.8%, to $41.8 million at December 31, 2023; construction and development loans increased by $4.7 million, or 373.6% to a total of $5.9 million at December 31, 2023; and consumer loans increased by $1.3 million, or 22.4% to a total of $7.2 million at December 31, 2023. These increases were partially offset by a decrease in residential real estate loans of $1.3 million, or 3.8%, to $33.7 million at December 31, 2023 and a decrease in commercial and industrial loans of $2.9 million, or 20.7%, to a total of $11.3 million at December 31, 2023. Our strategy is to grow our loan portfolio, with a focus on owner-occupied one- to four-family residential real estate loans and commercial loans (both commercial real estate and commercial and industrial).

Deposits. Deposits decreased by $30.6 million, or 14.7%, to $178.1 million at December 31, 2023 from $208.7 million at December 31, 2022. The decrease was due primarily to a decrease of $47.5 million, or 24.4% in core deposits (consisting of demand and savings deposits), to $147.0 million at December 31, 2023 compared to December 31, 2022. The decrease in core deposits was primarily attributable to a $27.6 million, or 37.0%, decrease in deposits from customers in the cannabis industry, of which $22.9 million represented a decrease of the deposit balances by one depositor in that segment. Certificates of deposit increased $16.8 million, or 117.8%, to $31.1 million at December 31, 2023 from $14.3 million at December 31, 2022. This increase was due primarily to depositors’ preference for the higher yields offered on certificate accounts during recent periods of rising interest rates.

At each of December 31, 2023 and 2022, we had a concentration of commercial demand deposits from customers legally engaged in cannabis-related businesses. These deposits totaled $47.0 million and $74.6 million at those respective dates.

During the year ended December 31, 2023, we continued our strategy of pursuing growth in demand accounts and other lower cost core deposits, in part by enhancing the products and services we offer, including mobile banking capabilities, expanding our offering of cannabis-related business services into other states, and streamlining commercial banking services through enhanced cash management and treasury management services. We intend to continue our efforts to increase our core deposit base, with an emphasis on growth in consumer and business demand deposits.

Borrowings. Advances from the Federal Home Loan Bank totaled $10.5 million at December 31, 2023, while we had no advances outstanding at December 31, 2022. Proceeds from advances were used primarily to fund loan growth as excess cash was used to fund deposit outflows during the year. The advances matured in January 2024.

Equity. Equity increased $1.4 million, or 11.7%, to $13.5 million at December 31, 2023 compared to December 31, 2022. Retained earnings increased $512,000, as net income of $684,000 was partially offset by a charge of $172,000 due to our adoption of ASC 326 with respect to the allowance for credit losses. Additionally, accumulated other comprehensive loss decreased by $896,000 to $4.5 million at December 31, 2023.

Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023

General. Net income for the six months ended June 30, 2024 was $537,000, a decrease of $93,000, or 14.7%, compared to the six months ended June 30, 2023. The decrease in net income was primarily due to a $168,000 decrease in net interest income and a $158,000 decrease in noninterest income, which were partially offset by a $60,000 decrease in the provision for credit losses, a $146,000 decrease in noninterest expenses and a $27,000 decrease in income taxes.

Interest income. Interest income increased $1.0 million, or 27.2%, to $4.8 million for the six months ended June 30, 2024 from $3.8 million for the six months ended June 30, 2023. This increase was attributable to an $806,000, or 34.2%, increase in interest on loans; a $27,000, or 4.1%, increase in interest on investment securities and a $187,000, or 25.4%, increase in interest on interest-bearing deposits and other assets, which increases were primarily due to increases in the yields earned on such assets.

The average balance of loans increased by $10.2 million, or 10.4%, during the six months ended June 30, 2024 over the average balance for the six months ended June 30, 2023, while the average yield on loans increased by 103 basis points to 5.82% for the six months ended June 30, 2024 from 4.79% for the six months ended June 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average balance of investment securities decreased $3.4 million, or 5.7%, to $56.2 million for the six months ended June 30, 2024 from $59.7 million for the six months ended June 30, 2023, while the average yield on investment securities increased by 23 basis points to 2.47% for the six months ended June 30, 2024 from 2.24% for the six months ended June 30, 2023. The increase in the average yield was due to increases in market interest rates.

The average yield on interest-bearing deposits and other assets, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, increased 86 basis points, to 4.90% for the six months ended June 30, 2024 from 4.04% for the six months ended June 30, 2023, while the average balance increased $1.2 million, or 3.4%, for the six months ended June 30, 2024. The increase in the average yield was due to increases in market interest rates.

Interest Expense. Total interest expense increased $1.2 million, or 615.2%, to $1.4 million for the six months ended June 30, 2024 compared to $193,000 for the six months ended June 30, 2023. The increase was comprised of a $1.2 million, or 613.5%, increase in interest expense on deposits and a $3,000 increase in interest expense on borrowings. The increase in interest expense on deposits was primarily due to an increase of 191 basis points in the average cost of deposits to 2.25% for the six months ended June 30, 2024 from 0.34% for the six months ended June 30, 2023 and, to a lesser extent, an increase of $9.6 million, or 8.5%, in the average balance of deposits, to $122.4 million for the six months ended June 30, 2024 from $112.7 million for the six months ended June 30, 2023.

Interest expense on borrowings increased $3,000 for the six months ended June 30, 2024, as the Bank had no borrowings outstanding during the six months ended June 30, 2023. The average borrowings outstanding was $117,000 and the average cost of borrowings was 5.13% for the six months ended June 30, 2024.

Net Interest Income. Net interest income decreased $168,000, or 4.7%, to $3.4 million for the six months ended June 30, 2024 compared to $3.6 million for the six months ended June 30, 2023. The decrease reflected a decrease in the interest rate spread to 2.46% for the six months ended June 30, 2024 from 3.52% for the six months ended June 30, 2023. The net interest margin decreased to 3.35% for the six months ended June 30, 2024 from 3.66% for the six months ended June 30, 2023. The interest rate spread and net interest margin were adversely impacted by the increases in market interest rates.

Provision for Credit Losses. Based on an analysis of the factors described in “—Critical Accounting Policies—Allowance for Credit Losses,” we did not record a provision for credit losses for the six months ended June 30, 2024, compared to a provision of $60,000 for the six months ended June 30, 2023. The allowance for credit losses was $1.4 million at June 30, 2024 and $2.2 million at December 31, 2023 and represented 1.26% of total loans at June 30, 2024 and 1.97% of total loans at December 31, 2023.

The decrease in the provision for credit losses was primarily attributable to a $1.6 million, or 1.5%, decrease in gross loans outstanding during the six months ended June 30, 2024, along with decreases in nonperforming and delinquent loans year-to-year. Total nonperforming loans were $1.7 million at June 30, 2024, compared to $2.0 million at June 30, 2023. Total loans past due 30 days or greater were $2.0 million and $2.4 million at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses was 81.1% at June 30, 2024 compared to 68.0% at June 30, 2023.

Non-Interest Income. Noninterest income information is as follows.


	Six Months Ended June 30,				Change
	2024		2023		Amount			Percent
	(Dollars in thousands)
Service fees on deposit accounts	$	525	$	685	$	(160	)		(23.4	)%
Debit card fees		209		209		—			—
Mortgage loan servicing fees, net		69		79		(10	)		(12.7	)
Gain on sale of loans		19		16		3			(18.8	)
Brokerage fees		—		13		(13	)		(100.0	)
Other		77		54		23			42.6

Total noninterest income	$	899	$	1,056	$	(157	)		(14.9	)%

Noninterest Expense. Noninterest expense information is as follows.


	Six Months Ended June 30,				Change
	2024		2023		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	2,022	$	2,085	$	(63	)		(3.0	)%
Occupancy expense		275		278		(3	)		(1.1	)
Data processing fees		278		256		(22	)		8.6
FDIC insurance premiums		63		67		(4	)		(6.0	)
Advertising		64		68		(4	)		(5.9	)
Directors fees		49		48		1			2.1
Debit card expense		37		34		3			8.8
Professional fees		316		397		(81	)		(20.4	)
Telephone and internet		65		67		(2	)		(3.0	)
Other		387		402		(15	)		(3.7	)

Total noninterest expense	$	3,556	$	3,702	$	(146	)		(3.9	)%

Income Taxes. Income taxes decreased by $27,000, or 11.7%, to $203,000 for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The decrease in the income tax provision was due primarily to a $120,000, or 13.9% decrease in pretax income. The effective tax rates were 27.5% and 26.8% for the six months ended June 30, 2024 and 2023, respectively.

Comparison of Operating Results for the Years Ended December 31, 2023 and 2022

General. Net income for the year ended December 31, 2023 was $684,000, a decrease of $164,000, or 19.3%, compared to the year ended December 31, 2022. The decrease in net income was primarily due to a $691,000 increase in the provision for credit losses, a $237,000 decrease in noninterest income and a $473,000 increase in noninterest expenses, which were partially offset by a $1.2 million increase in net interest income, and a $65,000 decrease in income taxes.

Interest Income. Interest income increased $1.9 million, or 31.0%, to $8.0 million for the year ended December 31, 2023 from $6.1 million for the year ended December 31, 2022. This increase was attributable to a $1.1 million, or 25.5%, increase in interest on loans; a $455,000, or 49.4%, increase in interest on investment securities and a $342,000, or 37.7%, increase in interest on interest-bearing deposits and other assets, all of which increases were primarily due to increases in the yields on such assets.

The average balance of loans increased by $2.5 million, or 2.5%, during the year ended December 31, 2023 over the average balance for the year ended December 31, 2022, while the average yield on loans increased by 95 basis points to 5.15% for the year ended December 31, 2023 from 4.20% for the year ended December 31, 2022. The increase in the average yield on loans was due primarily to the overall increases in market interest rates.

The average balance of investment securities decreased $3.1 million, or 5.0%, to $58.8 million for the year ended December 31, 2023 from $61.9 million for the year ended December 31, 2022, while the average yield on investment securities increased by 85 basis points to 2.34% for the year ended December 31, 2023 from 1.49% for the year ended December 31, 2022. The increase in the average yield on securities was due primarily to the overall increases in market interest rates.

The average yield on interest-bearing deposits and other assets, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, increased 295 basis points, to 4.38% for the year ended December 31, 2023 from 1.43% for the year ended December 31, 2022, while the average balance decreased $35.0 million, or 55.1%, for the year ended December 31, 2023. The increase in the average yield was due to increases in market interest rates.

Interest Expense. Total interest expense increased $710,000, or 318.8%, to $933,000 for the year ended December 31, 2023 compared to $223,000 for the year ended December 31, 2022. The increase was comprised of a $515,000, or 230.9%, increase in interest expense on deposits and a $196,000 increase in interest expense on borrowings. The increase in interest expense on deposits was primarily due to an increase of 46 basis points in the average cost of deposits to 0.67% for the year ended December 31, 2023 from 0.21% for the year ended December 31, 2022 and a $4.2 million, or 4.0%, in the average balance of deposits, to $110.0 million for the year ended December 31, 2023 from $105.8 million for the year ended December 31, 2022.

Interest expense on borrowings increased $196,000 for the year ended December 31, 2023, as we had no borrowings outstanding during the year ended December 31, 2022. The average balance of borrowings outstanding was $3.5 million and the average cost of borrowings was 5.65% for the year ended December 31, 2023.

Net Interest Income. Net interest income increased $1.2 million, or 20.0%, to $7.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase reflected an increase in the interest rate spread to 3.35% for the year ended December 31, 2023 from 2.47% for the year ended December 31, 2022. The net interest margin increased to 3.68% for the year ended December 31, 2023 from 2.59% for the year ended December 31, 2022. The interest rate spread and net interest margin were impacted by the increases in market interest rates.

Provision for Credit Losses. Based on an analysis of the factors described in “—Critical Accounting Policies—Allowance for Credit Losses,” we recorded a provision for credit losses of $872,000 for the year ended December 31, 2023, an increase of $691,000, or 381.3%, from the year ended December 31, 2022. The allowance for credit losses, which included an increase of $240,000 upon adoption of ASC 326 effective January 1, 2023, was $2.2 million at December 31, 2023 and $1.1 million at December 31, 2022 and represented 1.98% of total loans at December 31, 2023, and 1.13% of total loans at December 31, 2022.

The increase in the provision for credit losses was primarily attributable to an $11.4 million, or 11.6%, increase in gross loans during the year ended December 31, 2023, along with increases in nonperforming and delinquent loans year-to-year. Total nonperforming loans were $4.1 million at December 31, 2023, compared to $2.3 million at December 31, 2022. Total loans past due 30 days or greater were $4.0 million and $3.2 million at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses was 52.9% at December 31, 2023 compared to 48.6% at December 31, 2022.

Non-Interest Income. Noninterest income information is as follows.


	Years Ended December 31,					Change
	2023		2022			Amount			Percent
	(Dollars in thousands)
Service fees on deposit accounts	$	1,235	$	1,413		$	(178	)		(12.6	)%
Debit card fees		429		432			(3	)		(0.7	)
Mortgage loan servicing fees, net		147		157			(10	)		(6.4	)
Gain on sale of loans		37		87			(50	)		(57.5	)
Brokerage fees		23		97			(74	)		(76.3	)
Gain (loss) on sale of real estate owned		3		(74	)		77			104.1
Other		129		128			1			0.8

Total noninterest income	$	2,003	$	2,240		$	(237	)		(10.6	)%

The decrease in service fees on deposits was due primarily to a decrease in volume of monthly maintenance fees and cash counting service fees due to a significant decline in our largest CRB account during 2023. The decrease was partially offset by an increase in the overall number of CRB accounts year over year, as we have focused on expanding our relationship base to smaller customers. The decrease in gains on sales of loans was due to a $2.4 million, or 54.4%, decrease in the volume of sales year over year, primarily as a result of the increase in market interest rates.

Noninterest Expense. Noninterest expense information is as follows.


	Years Ended December 31,				Change
	2023		2022		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	4,023	$	3,770	$	253			6.7	%
Occupancy expense		573		499		74			14.8
Data processing		514		602		(88	)		(14.6	)
FDIC insurance premiums		139		137		2			1.5
Advertising		145		105		40			38.1
Director fees		96		97		(1	)		(1.0	)
Debit card expense		71		51		20			39.2
Professional fees		709		563		146			25.9
Telephone and internet		135		120		15			12.5
Other		834		822		12			1.5

Total noninterest expense	$	7,239	$	6,766	$	473			7.0	%

The increase in salaries and employee benefits was due primarily to an increase in our management staffing along with normal annual merit increases. The increase in occupancy and equipment expense was due primarily to increases in expenses for repairs to office buildings and increases in depreciation expense due to improvements made in 2023 and 2022. The increase in professional fees was due primarily to a write-off of certain capitalized fees totaling $106,000 incurred for previous services related to our mutual-to-stock conversion process in the prior year. The decrease in data processing expense was due primarily to cost savings realized related to a change in our primary data processing service provider.

Income Taxes. Income taxes decreased by $65,000, or 21.6%, to $238,000 for the year ended December 31, 2023, compared to $303,000 for the year ended December 31, 2022. The decrease in the income tax provision was due primarily to a $229,000, or 19.9% decrease in pretax income. The effective tax rates were 25.8% and 26.3% for the years ended December 31, 2023 and 2022, respectively.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees were immaterial for the six months ended June 30, 2024 and 2023 and the years ended December 31, 2023 and 2022.


	For the Six Months Ended June 30,
	2024								2023
	Average Outstanding Balance			Interest		Average Yield/Rate (1)			Average Outstanding Balance			Interest		Average Yield/Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	108,661		$	3,161		5.82	%	$	98,427		$	2,355		4.79	%
Investment securities		56,243			694		2.47	%		59,668			667		2.24	%
Interest-bearing deposits and other		37,722			924		4.90	%		36,477			736		4.04	%

Total interest-earning assets		202,626			4,779		4.72	%		194,572			3,758		3.86	%
Non-interest-earning assets		7,477								9,009
Allowance for credit losses		(1,901	)							(1,110	)

Total assets	$	208,202							$	202,471

Interest-bearing liabilities:
Interest-bearing demand	$	52,681			405		1.54	%	$	64,740			107		0.33	%
Savings accounts		28,023			36		0.26	%		33,398			16		0.10	%
Certificates of deposit		41,647			938		4.50	%		14,579			70		0.96	%

Total interest-bearing deposits		122,351			1,379		2.25	%		112,717			193		0.34	%
Borrowings		117			3		5.13	%		—			—		—

Total interest-bearing liabilities		122,468			1,382		2.26	%		112,717			193		0.34	%

Non-interest-bearing deposits		61,104								74,167
Other non-interest-bearing liabilities		11,300								2,567

Total liabilities		194,872								189,451
Equity		13,330								13,020

Total liabilities and equity	$	208,202							$	202,471

Net interest income				$	3,397							$	3,565

Net interest rate spread (2)							2.46	%							3.52	%
Net interest-earning assets (3)	$	80,158							$	81,855

Net interest margin (4)							3.35	%							3.66	%
Average interest-earning assets to interest-bearing liabilities		165.45	%							172.62	%

(1)	Annualized.

(2)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)	Net interest margin represents net interest income divided by average total interest-earning assets.


	For the Years Ended December 31,
	2023								2022
	Average Outstanding Balance			Interest		Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Loans	$	103,634		$	5,339		5.15	%	$	101,152		$	4,253		4.20	%
Investment securities		58,824			1,376		2.34	%		61,899			922		1.49	%
Interest-bearing deposits and other		28,493			1,247		4.38	%		63,466			905		1.43	%

Total interest-earning assets		190,951			7,962		4.17	%		226,517			6,080		2.68	%
Non-interest-earning assets		9,075								9,718
Allowance for credit losses		(1,254	)							(1,156	)

Total assets	$	198,772							$	235,079

Interest-bearing liabilities:
Interest-bearing demand	$	60,040			294		0.49	%	$	54,258			99		0.18	%
Savings accounts		32,096			48		0.15	%		35,306			33		0.09	%
Certificates of deposit		17,879			396		2.21	%		16,226			91		0.56	%

Total interest-bearing deposits		110,015			738		0.67	%		105,790			223		0.21	%
Borrowings		3,467			196		5.65	%		—			—		—

Total interest-bearing liabilities		113,482			934		0.82	%		105,790			223		0.21	%

Non-interest-bearing deposits		69,871								112,948
Other non-interest-bearing liabilities		2,816								2,474

Total liabilities		186,169								221,212
Equity		12,603								13,867

Total liabilities and equity	$	198,772							$	235,079

Net interest income				$	7,028							$	5,857

Net interest rate spread (1)							3.35	%							2.47	%
Net interest-earning assets (2)	$	77,469							$	120,727

Net interest margin (3)							3.68	%							2.59	%
Average interest-earning assets to interest-bearing liabilities		168.27	%							214.12	%

(1)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)	Net interest margin represents net interest income divided by average total interest-earning assets.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.


	Six Months Ended June 30, 2024 vs. 2023									Years Ended December 31, 2023 vs. 2022
	Increase (Decrease) Due to						Total Increase (Decrease)			Increase (Decrease) Due to					Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)			Volume			Rate		Total Increase (Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	262		$	544		$	806		$	107		$	979	$	1,086
Investment securities		(39	)		66			27			(48	)		502		454
Interest-bearing deposits and other		26			162			188			(716	)		1,058		342

Total interest-earning assets		249			772			1,021			(657	)		2,539		1,882

Interest-bearing liabilities:
Interest-bearing demand		(24	)		322			298			12			183		195
Savings accounts		(3	)		23			20			(3	)		18		15
Certificates of deposit		291			577			868			10			295		305
Borrowings		3			—			3			196			—		196

Total interest-bearing liabilities		267			922			1,189			215			496		711

Change in net interest income	$	(18	)	$	(150	)	$	(168	)	$	(872	)	$	2,043	$	1,171

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability and Investment Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. The Committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

As part of our ongoing asset-liability management, we intend to use the following strategies to manage our interest rate risk:

(i)

increase our commercial loan portfolio (commercial and industrial loans as well as commercial real estate loans) with shorter term, higher yielding loan products;

(ii)

emphasize the marketing of our savings, money market and demand accounts;

(iii)

continue to maintain a high level of cash and cash equivalents; and

(iv)

invest in short- to medium-term to repricing and/or maturity securities depending on market interest rates.

Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and

borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by up to 400 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The tables below sets forth, as of June 30, 2024 and December 31, 2023, the calculation of the estimated changes in our net interest income that would result from the designated instantaneous changes in the United States Treasury yield curve.


At June 30, 2024
Change in Interest Rates (basis points) (1)	Net Interest Income Year 1 Forecast		Year 1 Change from Level
	(Dollars in thousands)
+400	$	9,167		12.0	%
+300		8,959		9.4	%
+200		8,714		6.4	%
+100		8,475		3.5	%
Level		8,188		—
-100		7,780		(5.0	)%
-200		7,247		(11.5	)%
-300		6,436		(21.4	)%
-400		5,678		(30.7	)%

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.


At December 31, 2023
Change in Interest Rates (basis points) (1)	Net Interest Income Year 1 Forecast		Year 1 Change from Level
	(Dollars in thousands)
+400	$	8,496		7.9	%
+300		8,380		6.4	%
+200		8,224		4.4	%
+100		8,078		2.6	%
Level		7,875		—
-100		7,416		(5.8	)%
-200		6,800		(13.7	)%
-300		6,049		(23.2	)%
-400		5,508		(30.1	)%

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

The tables above indicate that at June 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 6.4% increase in net interest income, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced an 11.5% decrease in net interest income and at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 4.4% increase in net interest income, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 13.7% decrease in net interest income. At December 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 15.09% increase in net interest income, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 24.78% decrease in net interest income.

Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (economic value of equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by up to 400 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The table below sets forth, as of June 30, 2024, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.


At June 30, 2024
Change in Interest Rates (basis points) (1)	Estimated EVE (2)								EVE as a Percentage of Present Value of Assets (3)
			Estimated Increase (Decrease) in EVE						EVE Ratio (4)			Increase (Decrease) (basis points)
			Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
(Dollars in thousands)
+400	$	46,287	$	1,543			3.45	%		23.90	%		300
+300		46,706		1,962			4.38	%		23.53	%		263
+200		46,627		1,883			4.21	%		22.92	%		202
+100		46,171		1,427			3.19	%		22.11	%		121
—		44,744		—			—			20.90	%		—
-100		43,785		(959	)		(2.14	)%		19.98	%		(92	)
-200		36,920		(7,824	)		(17.49	)%		16.45	%		(445	)
-300		28,472		(16,272	)		(36.37	)%		12.42	%		(848	)
-400		17,895		(26,849	)		(60.01	)%		7.55	%		(1,335	)

(1)	Assumes an immediate uniform change in interest rates at all maturities.

(2)	EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	EVE Ratio represents EVE divided by the present value of assets.

The table below sets forth, as of December 31, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.


At December 31, 2023
Change in Interest Rates (basis points) (1)	Estimated EVE (2)								EVE as a Percentage of Present Value of Assets (3)
			Estimated Increase (Decrease) in EVE						EVE Ratio (4)			Increase (Decrease) (basis points)
			Amount			Percent			EVE Ratio (4)			Increase (Decrease) (basis points)
(Dollars in thousands)
+400	$	45,206	$	409			0.91	%		25.71	%		309
+300		45,897		1,110			2.46	%		25.34	%		272
+200		45,935		1,138			2.54	%		24.64	%		202
+100		45,917		1,120			2.50	%		23.87	%		125
—		44,797		—			—			22.62	%		—
-100		41,766		(3,031	)		(6.77	)%		20.48	%		(214	)
-200		35,934		(8,863	)		(19.78	)%		17.16	%		(546	)
-300		27,277		(17,520	)		(39.11	)%		12.71	%		(991	)
-400		16,598		(28,199	)		(62.95	)%		7.43	%		(1,519	)

(1)	Assumes an immediate uniform change in interest rates at all maturities.

(2)	EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	EVE Ratio represents EVE divided by the present value of assets.

The tables above indicate that at June 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 4.21% increase in EVE, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 17.49% decrease in EVE, and at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 2.54% increase in EVE, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 19.78% decrease in EVE. At December 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 8.46% increase in EVE, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 26.25% decrease in EVE.

At June 30, 2024, all estimated changes presented in the above tables 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 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.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the tables.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from sales, maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Chicago. At June 30, 2024, we had the ability to borrow approximately $34.4 million from the Federal Home Loan Bank of Chicago, and we also had the ability to borrow $3.0 million from a private bankers’ bank at that date. We had no borrowings outstanding at June 30, 2024.

The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We calculate our liquidity ratio as the sum of cash, short-term assets (generally securities with a remaining maturity of less than one year) and marketable assets divided by the sum of net deposits (generally time deposits of $250,000 or more and brokered deposits less than $250,000), short-term liabilities (generally borrowings with a remaining maturity of one year or less) and volatile liabilities (generally federal funds purchased, securities sold under agreements to repurchase, and time deposits of $250,000 or more). We seek to maintain a liquidity ratio of 20.0% or greater. For the six months ended June 30, 2024 and the year ended December 31, 2023, our liquidity ratio averaged 49.4% and 41.1%, respectively, due to our maintaining high levels of liquid assets to satisfy the cash nature of our CRB business, in particular. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of June 30, 2024.

We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected deposit flows; (2) expected loan demand; (3) yields available on cash and cash equivalents and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in cash and cash equivalents and short- and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2024, cash and cash equivalents totaled $53.0 million. Investment securities classified as available-for-sale, which provide an additional source of liquidity, totaled $47.2 million at June 30, 2024.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

For the six months ended June 30, 2024, cash flows from operating activities, investing activities and financing activities resulted in a net increase in cash and cash equivalents of $19.2 million. Net cash provided by operating activities amounted to $746,000, primarily due to proceeds from the sale of loans of $1.1 million and net income of $537,000. Net cash provided by investing activities amounted to $2.6 million, primarily due to paydowns of mortgage-backed securities of $1.0 million and maturities of held-to-maturity securities of $986,000. Net cash provided by financing activities amounted to $15.9 million, primarily due to a net increase in deposits of $26.4 million, offset by the repayment of $10.5 million of Federal Home Loan Bank advances. For the year ended December 31, 2023, cash flows from operating activities, investing activities and financing activities resulted in a net decrease in cash and cash equivalents of $28.2 million. Net cash provided by operating activities amounted to $2.1 million, primarily due to the proceeds from the sale of loans of $2.0 million, net income of $684,000 and a provision for credit losses of $872,000. Net cash used in investing activities amounted to $10.2 million, primarily due to a net increase in gross loans of $11.5 million. Net cash used financing activities amounted to $20.1 million, primarily due to a net decrease in deposits of $30.6 million. For further information, see the statements of cash flows contained in the consolidated financial statements appearing elsewhere in this prospectus.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of June 30, 2024, totaled $46.6 million, or 93.5% of our certificates of deposit, and 22.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management. At June 30, 2024, Security Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Federal Bank Regulation—Capital Requirements” and Note 5 of the Notes to the Unaudited Financial Statements.

Recent Accounting Pronouncements

Please refer to Note 1 to the Financial Statements beginning on page F-1 for a description of recent accounting pronouncements that may affect our financial condition and results of operations. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to non-public companies.

Commitments and Contingencies

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn

upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

We use the same credit policies in granting lines of credit as we do for on-balance-sheet instruments.

As of June 30, 2024, commitments to originate loans were $4.5 million, undisbursed amounts committed on construction loans were $797,000 amounts available to draw against on lines of credit were $4.4 million and other commitments were $35,000.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

BUSINESS OF SECURITY MIDWEST BANCORP, INC.

Security Midwest Bancorp, Inc. is incorporated in the State of Maryland, and has not engaged in any business to date. Upon completion of the conversion, Security Midwest Bancorp will own all of the issued and outstanding stock of Security Bank. We intend to contribute at least 85% of the net proceeds from the stock offering to Security Bank. Security Midwest Bancorp will retain the remainder of the net proceeds from the stock offering and use a portion of the retained net proceeds to make a loan to the employee stock ownership plan. At a later date, we may use the net proceeds to pay dividends to stockholders and repurchase shares of common stock, subject to our planned growth, capital needs and regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”

After the conversion and the offering are complete, Security Midwest Bancorp, as the holding company of Security Bank, will be authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. See “Regulation and Supervision—Holding Company Regulation” for a discussion of the activities that are permitted for bank holding companies. We currently have no understandings or agreements to acquire other financial institutions although we may determine to do so in the future. We may also borrow funds for reinvestment in Security Bank.

Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends we receive from Security Bank. Security Bank is subject to regulatory limitations on the amount of dividends that it may pay. See “Regulation and Supervision—Illinois Bank Regulation—Dividend Restrictions.” Initially, Security Midwest Bancorp will neither own nor lease any property, but will instead pay a fee to Security Bank for the use of its premises, equipment and furniture. At the present time, we intend to employ only persons who are officers of Security Bank to serve as officers of Security Midwest Bancorp. We will, however, use the support staff of Security Bank from time to time. We will pay a fee to Security Bank for the time devoted to Security Midwest Bancorp by employees of Security Bank; however, these persons will not be separately compensated by Security Midwest Bancorp. Security Midwest Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.

BUSINESS OF SECURITY BANK

General

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 FDIC and the Illinois Division of Banking. We operate three banking offices in Springfield, Illinois. Our current 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 are a community-oriented bank offering a variety of financial products and services to meet the needs of our customers. 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.”

In 2018, we implemented our CRB Program. Through our CRB Program, we provide deposit and cash-management services to 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).

Cannabis Banking

In 2018, we implemented our CRB Program. Through our CRB Program, we provide deposit and cash-management services to cannabis organizations. 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 limit the number of cannabis-organization relationships from which we accept deposits (our current limit is 35, although we may increase this limit in the

future). We further reduce the risk related to deposits from cannabis organizations by limiting deposits from cannabis organizations as needed based on our capital levels, and using off-balance sheet opportunities, such as placing excess deposits with third-party institutions, as necessary. We maintain high levels of liquidity due to the significant cash flows of cannabis organizations; specifically, cash and cash equivalents totaled $53.0 million at June 30, 2024, representing 24.1% of our total assets.

Cannabis organizations are legal in Illinois and many other states, although certain of their activities are not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis organizations. A financial institution that provides services to cannabis organizations can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines.

We maintain stringent written policies and procedures related to cannabis organizations, including monitoring such accounts and limiting the number of cannabis organizations from which we accept deposits. We conduct extensive due diligence of a cannabis organization before its business is accepted, including confirmation that the business is properly licensed. We offer depository accounts to customers operating licensed cannabis businesses in the States of Illinois, Michigan, and Ohio. Throughout the relationship, we continue to monitor cannabis organizations, including conducting site visits, to ensure that the business continues to meet our stringent requirements. Specifically, on a monthly basis we analyze each cannabis organization account, including a comparison with historical activity and expectation as well as a detailed review of transactions exceeding a specified dollar amount threshold. Further, we conduct quarterly reviews of every cannabis organization relationship from which we accept deposits and lend funds for an analysis of the overall flow and use of funds as well as with respect to regulatory compliance.

While we believe we are operating in compliance in all material respects with the FinCEN guidelines, federal enforcement guidelines may change in a manner adverse to our CRB Program activities. Federal prosecutors have significant discretion and federal prosecutors may choose to strictly enforce the federal laws governing cannabis. Any change in the federal government’s enforcement position could cause us to immediately cease providing banking services to the cannabis industry. We may become subject to increased competition in this area in the future, and any government action, such as re-scheduling or de-scheduling cannabis, that enhances the legality of cannabis or cannabis operations could further increase competition in this area. In addition to legal risks, our CRB Program activities are subject to normal business risks, including the financial stability and viability of the underlying organization. To address these risks, in addition to the steps we take as described above, we thoroughly underwrite each cannabis organization and require the delivery of annual financial reports from them. Our CRB Program activities are subject to other normal business risks, such as wire fraud.

At June 30, 2024, deposit balances from cannabis organization 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 $471,1000 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. Although our historical experience has shown these deposits to be generally stable, we maintain high levels of liquid assets related to these deposits and we have invested a majority of the proceeds of cannabis organization customer deposits into short- and medium-term securities to provide liquidity and manage interest rate risk.

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. Fee income from loan originations to these customers and their associated real estate entities for the six months ended June 30, 2024 was $8,000. 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.

Market Area

We conduct our business from our main office and two branch offices, all of which are located in Springfield, Illinois. All of our offices are located in Sangamon County, Illinois. Our primary market area for our lending activities and our non-cannabis deposit gathering is diversified economically, with Springfield serving as the state capitol of Illinois and the metropolitan area serving as a regional economic base for the surrounding area. Economic sectors in the metropolitan area of Springfield include health care, education trade and services, while the more rural sections of our market area contain a variety of agriculture and manufacturing-related employment.

Sangamon County’s population, which is estimated to be approximately 194,000 as of July 2024, decreased at an annual rate of 0.1% from 2019, compared to a 0.4% decline in the population of the State of Illinois over that period, but lagging the U.S. population growth rate of 0.4%. The number of households in Sangamon County increased at a 0.3% annual rate over the same time period, compared to growth of 0.2% and 0.6%, respectively, for Illinois and the entire U.S. during the same period. Projected five-year population and household growth rates for Sangamon County generally match the comparable projected growth rates for Illinois but are below the comparable U.S. projected growth rates.

Sangamon County’s July 2024 median household income of $74,278 was below the Illinois median of $79,180 and the U.S. median of $75,874. Over the next five years, Sangamon County is projected to experience slightly higher growth rates in household income relative to the comparable projected Illinois and U.S. growth rates.

As of June 2024, the unemployment rate in Sangamon County was 5.3%, compared to rates of 6.1% and 4.3% for the State of Illinois and the U.S. as a whole, respectively.

According to information from the National Association of Realtors, as of June 30, 2024, demand for office space in the Springfield, Illinois metropolitan area is stronger than nationwide, as the Springfield metropolitan area has a faster absorption of office space. As a result, rent prices rose faster during the 12 months ended June 30, 2024 in this area than the rent prices nationwide. In addition, the vacancy rate as of June 30, 2024 is lower in this area than the nationwide vacancy rate.

Competition

We face competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. We also compete with fintech and Internet banking companies. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. We face increasing competition with respect to our CRB activities.

As of June 30, 2024 (the latest date for which information is available), our market share of deposits represented 2.35% of FDIC-insured deposits in Sangamon County, ranking us 11th in market share of deposits out of 24 institutions then operating in Sangamon County. Our ability to compete in our primary market area does not depend on any existing relationships.

Lending Activities

General. Our primary business has traditionally been the origination of one- to four-family residential real estate loans, commercial real estate loans and commercial and industrial loans. We also originate a limited amount of multi-family residential real estate loans, construction and development loans, farmland loans and consumer loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. We had no loans held for sale at June 30, 2024, December 31, 2023 or December 31, 2022. As of June 30, 2024, undisbursed amounts committed on construction loans were $1.3 million.


							At December 31,
	At June 30, 2024						2023						2022
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential (including construction loans)	$	33,354			30.98	%	$	33,742			30.88	%	$	35,062			35.88	%
Multi-family		5,012			4.66			5,205			4.76			5,125			5.24
Commercial		40,564			37.68			41,754			38.21			32,179			32.93
Construction and development		7,626			7.08			5,901			5.40			1,246			1.27
Farmland		3,394			3.15			4,180			3.82			3,992			4.08
Commercial and industrial loans		11,485			10.67			11,308			10.35			14,255			14.59
Consumer loans		6,217			5.78			7,191			6.58			5,874			6.01

		107,652			100.00	%		109,281			100.00	%		97,733			100.00	%

Less:
Allowance for credit losses		(1,357	)					(2,158	)					(1,103	)
Deferred loan fees, net		(162	)					(149	)					(48	)
Unearned dealer interest paid		76						107						157

Loans, net	$	106,209					$	107,081					$	96,739

Contractual Maturities. The following tables summarize the contractual maturities of our total loan portfolio at June 30, 2024. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.


	One- to Four- Family Residential Real Estate		Multi-Family Real Estate		Commercial Real Estate		Construction and Development
	(In thousands)
Amounts due in:
One year or less	$	1,129	$	—	$	1,490	$	6,303
After one through five years		6,905		3,109		18,232		1,323
After five through 15 years		7,475		—		15,343		—
More than 15 years		17,845		1,903		5,499		—

Total	$	33,354	$	5,012	$	40,564	$	7,626


	Farmland		Commercial and Industrial		Consumer		Total Loans
	(In thousands)
Amounts due in:
One year or less	$	—	$	3,144	$	414	$	12,480
After one through five years		253		5,302		3,186		38,310
After five through 15 years		1,494		1,151		2,563		28,026
More than 15 years		1,647		1,888		54		28,836

Total	$	3,394	$	11,485	$	6,217	$	107,652

The following table sets forth our fixed and adjustable-rate loans at June 30, 2024 that are contractually due after June 30, 2025.


	Due After June 30, 2025
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
One- to four-family residential (including construction loans)	$	11,476	$	20,749	$	32,225
Multi-family		3,109		1,903		5,012
Commercial		25,648		13,426		39,074
Construction and development		1,323		—		1,323
Farmland		254		3,140		3,394
Commercial and industrial loans		5,162		3,179		8,341
Consumer loans		4,413		1,390		5,803

Total loans	$	51,385	$	43,787	$	95,172

One- to Four-Family Residential Real Estate Lending. Our historical primary lending activity has been the origination of one- to four-family, owner-occupied, first and second residential mortgage loans, virtually all of which are secured by properties located in our market area. At June 30, 2024, one- to four-family residential real estate loans totaled $33.4 million, or 30.98% of our total loan portfolio. At June 30, 2024, we had $31.7 million of our one- to four-family residential real estate loans in the first lien position and $1.7 million in a junior lien position, although we currently will not take a junior lien position on a one- to four-family residential real estate loan where we also do not have the first lien position. The average principal loan balance of our one- to four-family residential real estate loans was $60,000 at June 30, 2024.

We currently offer one- to four-family residential real estate loans with terms of up to 30 years. In recent periods, we have sold a majority of the one- to four-family residential real estate loans we have originated, primarily to Freddie Mac. We originate fixed-rate and, to a lesser extent, adjustable-rate one- to four-family residential real estate loans, although we sell the majority of the fixed-rate one- to four-family residential real estate loans that we originate. One- to four-family residential real estate loans often remain outstanding for shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans. We generally limit the loan-to-value ratios of our mortgage loans without private mortgage insurance to 80% of the sales price or appraised value, whichever is lower. Loans where the borrower obtains private mortgage insurance may be made with loan-to-value ratios of up to 90%.

Our adjustable-rate one- to four-family residential real estate loans carry terms to maturity ranging from 10 to 30 years and generally have fixed rates for initial terms of three or five years, and adjust thereafter for periods of between one and five years, at a margin, which in recent years has been tied to the one-year U.S. Treasury rate. The maximum amount by which the interest rate may be increased or decreased is generally 3% for the first adjustment period and 3% per adjustment period thereafter, with a lifetime interest rate cap of generally 6% over the initial interest rate of the loan and a floor of 3%.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to five years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in market interest rates generally may be limited.

We have not offered but may offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower only pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also have not offered and will not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan,

resulting in an increased principal balance during the life of the loan. We have not offered “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).

We generally require title insurance on all of our one- to four-family residential real estate mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We do not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan. If we identify an environmental problem on land that will secure a loan, the environmental hazard must be remediated before the closing of the loan.

When underwriting residential real estate loans, we review and verify each loan applicant’s employment, income and credit history and, if applicable, our experience with the borrower. Our policy is to obtain credit reports and financial statements on all borrowers and guarantors. Generally, all properties securing real estate loans are appraised by independent appraisers. Appraisals are subsequently reviewed by our internal underwriting staff. All appraisals, whether for loans sold on the secondary market or retained, are input into Freddie Mac’s Uniform Collateral Data Portal for reasonableness prior to origination. In addition, subsequent to loan origination, our loan quality control process may utilize an independent third party to conduct appraisal reviews.

Our one- to four-family residential real estate loans also includes home equity lines of credit and home equity loans. Our home equity lines of credit and home equity loans are secured by either first mortgages or second mortgages on owner-occupied one- to four-family residences. At June 30, 2024, we had $3.4 million of outstanding home equity lines of credit and $1.6 million outstanding of home equity loans. At June 30, 2024, the unadvanced portion of home equity lines of credit totaled $4.1 million.

The underwriting standards utilized for home equity lines of credit include a title review, the recordation of a lien, a determination of the applicant’s ability to satisfy existing debt obligations and payments on the proposed loan, and the value of the collateral securing the loan. The loan-to-value ratio for our home equity lines of credit is generally limited to 80% when combined with the first security lien, if applicable. Our home equity lines of credit generally have a 10-year draw period and adjustable rates of interest, subject to a contractual floor, which are indexed to the prime rate as published in The Wall Street Journal.

Commercial Real Estate Lending. At June 30, 2024, we had $40.6 million in commercial real estate loans, representing 37.68% of our total loan portfolio.

We originate commercial real estate loans with rates that adjust after an initial fixed-rate period of generally one to five years. We also originate commercial real estate loans with fixed rates with terms of three or five years and a balloon payment due at the end of the term. Our commercial real estate loans generally have amortization terms of 15 to 20 years. The maximum loan-to-value ratio of our commercial real estate loans is generally 80%. Our commercial real estate loans are typically secured by residential rental properties, offices and warehouses, or other commercial properties. Our commercial real estate loans also include loans that were originated as construction loans and have since become permanent financing. The majority of our commercial real estate loans are owner-occupied. At June 30, 2024, the average principal loan balance of our outstanding commercial real estate loans was $507,000, and the largest of such loans was a $3.9 million loan secured by retail property. This loan was performing in accordance with its terms at June 30, 2024.

Set forth below is information regarding our commercial real estate loans at June 30, 2024.


Type of Loan	Number of Loans		Balance
			(In thousands)
Office/retail/multi-use		35	$	15,317
Cannabis-related business		9		13,791
Religious organization		8		2,966
Hotel		2		2,321
Automotive		1		1,111
Restaurant		1		1,062
Other commercial real estate		24		3,996

Total		80	$	40,564

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally seek a debt service ratio of at least 1.25x. Generally, commercial real estate loans are appraised by outside independent appraisers; however, if the value of the loan is less than $500,000, we may utilize third-party evaluations in lieu of formal appraisals, which are subsequently reviewed by our credit department.

Personal guarantees are generally obtained from the principals of commercial real estate loan borrowers, although this requirement may be waived in limited circumstances depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require property, casualty and title insurance and flood insurance if the property is in a flood zone area. Commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally depends, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties, and we may require additional paydowns to enhance the loan-to-value position.

Commercial and Industrial Lending. At June 30, 2024, we had $11.5 million of commercial and industrial loans, representing 10.67% of our total loan portfolio. We offer regular lines of credit and revolving lines of credit to small businesses in our market area to finance short-term working capital needs such as accounts receivable and inventory with terms generally up to 12 months and that are due on demand and subject to annual automatic renewal or a renewal process. While many lines of credit are for small businesses and manufacturers, we have begun to develop relationships with professional organizations such as accountants, law firms and medical professionals. Our commercial lines of credit are typically variable rate tied to the prime rate as published in The Wall Street Journal. We generally obtain personal guarantees with respect to commercial and industrial lines of credit. At June 30, 2024, the average loan size of our commercial and industrial loans was $157,000, and our largest outstanding commercial and industrial loan balance was a $1.6 million unsecured loan. This loan was performing in accordance with its terms at June 30, 2024.

We typically originate commercial and industrial loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any

collateral securing the loan. Depending on the collateral used to secure the loans, commercial and industrial loans are made in amounts generally of up to 80% of the value of the collateral securing the loan. Commercial and industrial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment. As a result, the availability of funds for the repayment of commercial and industrial loans may substantially depend on the success of the business itself and the general economic environment in our market area. Therefore, commercial and industrial loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial and industrial loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, compared to residential real estate loans, and also generally require substantially greater evaluation and oversight efforts such as more frequent review of financial statements and the receipt of borrowing base certificates.

Loan Originations, Participations, Purchases and Sales

Most of our loan originations are generated by our loan personnel and from referrals from existing customers, real estate brokers, accountants and other professionals. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and pricing levels established by competing banks, thrifts, credit unions, and mortgage-banking companies. Our volume of loan originations is influenced significantly by market interest rates and economic conditions, and, accordingly, the volume of our loan originations can vary from period to period. We generally do not sell any of the commercial and industrial or commercial real estate loans we originate, but we sell participation interests in loans, as described below.

We may purchase loan participations secured by properties primarily within the State of Illinois in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. At June 30, 2024, the outstanding balances of our loan participations where we were not the lead lender totaled $1.6 million, or 1.5% of our loan portfolio, all of which were commercial real estate loans. All such loans were performing in accordance with their original repayment terms. On occasion, we also have sold participation interests in loans that exceeded our loans-to-one borrower legal lending limit and for risk diversification. However, at June 30, 2024, we had no loans for which we have sold participation interests. Historically, we have not purchased whole loans.

Loans to One Borrower. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Security Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral”). This 15% of unimpaired capital and surplus was approximately $4.7 million as of June 30, 2024. Our current internal lending limit policy is 70% of our regulatory lending limit, equaling $3.2 million as of June 30, 2024. On the same date, we had four borrowers with outstanding balances in excess of this internal policy amount; such loans were originated when we had higher levels of capital and were in compliance with the then-applicable limit, and, as such, are deemed to comply with our loans-to-one-borrower limit. At June 30, 2024, our largest credit relationship totaled $4.4 million, consisting of six loans secured by commercial real estate. At June 30, 2024, this loan relationship was performing in accordance with its current terms.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the board of directors. In the approval process for residential loans, we assess the borrower’s ability to repay the loan and the value of the property securing the loan. To assess the borrower’s ability to repay, we review the borrower’s income and expenses and employment and credit history. In the case of commercial real estate loans, we also review projected income, expenses and the viability of the project being financed. We generally require appraisals of all real property securing loans. Appraisals are performed by independent licensed appraisers who are approved by our board of directors. All real estate secured loans generally require fire, title and casualty insurance and, if warranted, flood insurance in amounts at least equal to the principal amount of the loan or the maximum amount available. Our loan approval policies and limits are also reviewed and approved annually by our board of directors. All loans we originate are subject to our underwriting guidelines.

Certain individual officers have loan approval authority that varies based on loan type with limits up to $250,000. The approval of the Officer’s Loan Committee, consisting of five officers at the level of vice president or above, is required for approval of secured loans above $500,000 and unsecured loans over $100,000, in either case in amounts up to $1.0 million. The approval of our Directors’ Loan Committee is required for all loans between $1.0 million and $2.0 million, while approval of the full board of directors is required for all loans in excess of $2.0 million up to and including our legal lending limit, and, not withstanding the foregoing limits, for all loans related to CRB customers.

Delinquencies, Non-Performing Assets and Classified Assets

Delinquency Procedures. When a commercial or consumer loan is 10 days past due (15 days for a residential mortgage loan), we send the borrower a late notice. We generally also contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, we mail the borrower a demand letter reminding the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. The account is monitored on a regular basis thereafter. If necessary, subsequent delinquency notices are issued at an additional 30 days past due. By the 90th day of delinquency, we will send the borrower a final demand for payment and may recommend foreclosure. At 120 days, we typically begin foreclosure proceedings for residential mortgage loans, although for commercial and consumer loans we may start the foreclosure process sooner than 120 days. Loans are charged off when we believe that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors each month.

Past-Due Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.


							At December 31,
	At June 30, 2024						2023						2022
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due
	(In thousands)
Real estate loans:
One- to four-family residential (including construction loans)	$	75	$	112	$	1,057	$	330	$	367	$	823	$	661	$	145	$	1,439
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		—		—		276		—		—		1,755		—		—		212
Construction and development		—		—		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—		—		—
Commercial and industrial loans		37		—		261		136		—		325		—		—		580
Consumer loans		47		51		80		170		57		42		55		46		91

Total	$	159	$	163	$	1,674	$	636	$	424	$	2,945	$	716	$	191	$	2,322

Non-Performing Loans. Loans greater than 10 days delinquent are reviewed on a weekly basis by our lending personnel and our Credit Risk Specialist. Our loan committee reviews classified and watch list credits on a monthly basis and on an as-needed basis by appropriate management personnel. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the specific loan in the allowance for credit losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral less estimated costs to sell. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. Loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of resolution. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

A loan is classified as modified for a borrower experiencing financial difficulties if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market rates, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

Real Estate Owned. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for credit losses, or, if the existing allowance is inadequate, charged to expense during the period in which we acquire the property. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. We had $297,000, $3,000 and $0 of real estate owned at June 30, 2024, December 31, 2023 and December 31, 2022, respectively.

Non-Performing Assets. The following table sets forth information regarding our non-performing assets.


	At June 30, 2024			At December 31,
	At June 30, 2024			2023			2022
	(Dollars in thousands)
Non-accrual loans:
Real estate:
One- to four-family residential (including construction loans)	$	1,057		$	1,491		$	1,498
Multi-family		—			—			—
Commercial		276			2,154			212
Construction and development		—			33			50
Farmland		—			—			—
Commercial and industrial		261			325			374
Consumer		80			76			134

Total non-accrual loans		1,674			4,079			2,268

Accruing loans past due 90 days or more		—			—			—

Total non-performing loans	$	1,674		$	4,079		$	2,268

Foreclosed assets	$	297		$	3		$	—

Total non-performing assets	$	1,971		$	4,082		$	2,268

Loans modified for borrowers experiencing financial difficulties:
Real estate:
One- to four-family residential (including construction loans)	$	—		$	—		$	—
Multi-family		—			—			—
Commercial		1,338			1,410			—
Construction and development		—			—			—
Farmland		—			—			—
Commercial and industrial		—			—			—
Consumer		—			39			—

Total	$	1,338		$	1,449		$	—

Total non-performing loans to total loans(1)		1.56	%		3.73	%		2.32	%
Total non-accrual loans to total loans (1)		1.56	%		3.73	%		2.32	%
Total non-performing assets to total assets		0.90	%		2.01	%		1.02	%

(1)	Includes both non-accrual loans and non-accruing loans modified for borrowers experiencing financial difficulties.

The increase in non-performing commercial real estate loans as of December 31, 2023, as well as the related ratios, was due to our foreclosing on one hotel property, and subsequently selling the property in 2024.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific allowance for credit losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that were both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances.

In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed. Management reviews the status of each loan on our watch list on a monthly basis with our credit committee and on a quarterly basis with the full board of directors. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”

On the basis of this review of our loans, our classified and special mention loans at the dates indicated were as follows:


	At June 30, 2024		At December 31,
	At June 30, 2024		2023		2022
	(In thousands)
Substandard loans	$	1,711	$	4,079	$	3,274
Doubtful loans		—		—		166
Loss loans		—		—		—

Total classified loans	$	1,711	$	4,079	$	3,440

Special mention loans	$	—	$	—	$	1,033

Allowance for Credit Losses

Analysis and Determination of the Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of expected credit losses in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of a loan receivable is charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for credit losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

We continue to monitor and modify our allowance for credit losses as conditions dictate. No assurances can be given that the level of allowance for credit losses will cover all of the expected losses on the loans or that future adjustments to the allowance for credit losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for credit losses.

Allowance for Credit Losses. The following table sets forth activity in our allowance for credit losses on loans for the periods indicated.


	At or For the Six Months Ended June 30,						At or For the Years Ended December 31,
	2024			2023			2023			2022
	(Dollars in thousands)
Allowance for credit losses on loans at beginning of period	$	2,158		$	1,103		$	1,103		$	1,508
Effect of adoption of ASC 326		—			242			242			—
Provision for (recovery of) credit losses		(7	)		70			868			188
Charge-offs:
Real estate loans:
One- to four-family residential (including construction loans)		(12	)		—			—			(108	)
Multi-family		—			—			—			—
Commercial		(754	)		(54	)		(54	)		—
Construction and development		—			—			—			(62	)
Farmland		—			—			—			—
Commercial and industrial loans		(39	)		(18	)		(18	)		(415	)
Consumer loans		—			(6	)		(6	)		(26	)

Total charge-offs		(805	)		(78	)		(78	)		(611	)

Recoveries:
Real estate loans:
One- to four-family residential (including construction loans)		8			6			12			5
Multi-family		—			—			—			—
Commercial		—			—			9			—
Construction and development		—			—			—			—
Farmland		—			—			—			—
Commercial and industrial loans		1			—			—			12
Consumer loans		2			2			2			1

Total recoveries		11			8			23			18

Net charge-offs		(794	)		(70	)		(55	)		(593	)

Allowance for credit losses on loans at end of period	$	1,357		$	1,345		$	2,158		$	1,103

Allowance to non-performing loans		81.06	%		68.00	%		52.91	%		48.63	%
Allowance to total loans outstanding at the end of the period		1.26	%		1.29	%		1.97	%		1.13	%
Net charge-offs to average loans outstanding during the period		1.46	% (1)		0.14	% (1)		0.05	%		0.59	%

(1)	Annualized.

The increase in charge-offs for the six months ended June 30, 2024 was due to one commercial real estate loan that was foreclosed upon and purchased by a third party at a sheriff’s sale. We had already fully reserved for the charged-off amount, such that the transaction did not affect earnings for the six months ended June 30, 2024.

The following table sets forth additional information with respect to charge-offs by category for the periods indicated.


	For the Six Months Ended June 30, (1)						For the Years Ended December 31,
	2024			2023			2023			2022
Net (charge-offs) recoveries to average loans outstanding during the period:
Real estate loans:
One- to four-family residential (including construction loans)		(0.02	)%		0.04	%		0.04	%		(0.30	)%
Multi-family		—			—			—			—
Commercial		(3.66	)%		(0.33	)%		(0.12	)%		—
Construction and development		—			—			—			(2.18	)%
Farmland		—			—			—			—
Commercial and industrial loans		(0.66	)%		(0.27	)%		(0.15	)%		(2.80	)%
Consumer loans		0.06	%		(0.12	)%		(0.06	)%		(0.43	)%

(1)	Annualized.

Allocation of Allowance for Credit Losses. The following table sets forth the allowance for credit losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.


									At December 31,
	At June 30, 2024								2023								2022
	Allowance for Credit Losses		Percent of Allowance in Each Category to Total Allocated Allowance			Percent of Loans in Each Category to Total Loans			Allowance for Credit Losses		Percent of Allowance in Each Category to Total Allocated Allowance			Percent of Loans in Each Category to Total Loans			Allowance for Credit Losses		Percent of Allowance in Each Category to Total Allocated Allowance			Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential (including construction loans)	$	507		37.4	%		31.0	%	$	524		24.3	%		30.9	%	$	235		21.3	%		35.9	%
Multi-family		12		0.9			4.6			12		0.6			4.8			8		0.7			5.2
Commercial		482		35.5			37.7			1,246		57.7			38.2			293		26.6			32.9
Construction and development		61		4.5			7.1			48		2.2			5.4			123		11.1			1.3
Farmland		7		0.5			3.1			7		0.3			3.8			36		3.3			4.1
Commercial and industrial		171		12.6			10.7			206		9.6			10.3			323		29.3			14.6
Consumer		117		8.6			5.8			115		5.3			6.6			85		7.7			6.0

Total	$	1,357		100.0	%		100.0	%	$	2,158		100.0	%		100.0	%	$	1,103		100.0	%		100.0	%

Although we believe that we use the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for credit losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the FDIC and the Illinois Division of Banking will periodically review our allowance for credit losses. As a result of such reviews, we may have to adjust our allowance for credit losses.

Investment Activities

General. Our board of directors is responsible for approving and overseeing our investment policy. The investment policy is reviewed at least annually by management and any changes to the policy are recommended to the board of directors and are subject to its approval. This policy dictates that investment decisions be made based on the safety of the investment, regulatory standards, liquidity requirements, potential returns and consistency with our interest rate risk management strategy. Our Investment and Finance Committee, which consists of our President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Senior Vice President-Controller and Senior Vice President-Enterprise Risk, oversees our investing activities and strategies. All transactions are formally reviewed by the Capital Planning and Budget Committee of our board of directors at least quarterly.

Our current investment policy authorizes us to invest in debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises. The policy also permits investments in mortgage-backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as investments in federal funds, deposits in other insured institutions and certain mutual funds. In addition, management is authorized to invest in investment grade state and municipal obligations, commercial paper and corporate debt obligations within regulatory parameters. We neither engage in any investment hedging activities or trading activities, nor do we purchase any mortgage derivative products, corporate junk bonds, and certain types of structured notes.

Generally accepted accounting principles require that, at the time of purchase, we designate a debt security as held-to-maturity, available-for-sale, or trading, depending on our ability and intent to hold such security. Debt securities designated as available for sale are reported at fair value, while debt securities designated as held to maturity are reported at amortized cost. All of our debt securities (other than certificates of deposit) are designated as available for sale.

Portfolio Maturities and Yields. The composition and maturities of the available-for-sale investment securities portfolio at June 30, 2024 are summarized in the following table. In addition to the securities below, we held $1.2 million of certificates of deposit with a weighted average yield of 1.36% held to maturity at June 30, 2024, all of which will mature within two years of June 30, 2024. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted average yield is calculated based on the yield to maturity weighted for the size of each debt security over the entire portfolio of debt securities. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.


	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Municipal bonds - taxable	$	370		2.50	%	$	1,940		2.00	%	$	5,368		1.72	%	$	354		2.05	%	$	8,032	$	6,857		1.84	%
Municipal bonds - non-taxable		861		1.13	%		847		1.57	%		966		1.22	%		—		—			2,674		2,534		1.30	%
U.S. Government treasury securities		—		—			7,996		1.26	%		—		—			—		—			7,996		7,137		1.26	%
U.S. Government agency securities		—		—			500		0.75	%		178		2.57	%		500		1.00	%		1,178		987		1.13	%
Residential mortgage - backed securities		—		—			117		1.52	%		2,033		2.30	%		16,123		2.93	%		18,273		15,865		2.85	%
Collateralized mortgage obligations		—		—			—		—			113		2.69	%		15,440		3.48	%		15,553		13,800		3.48	%

Total	$	1,231		1.54	%	$	11,400		0.46	%	$	8,658		2.19	%	$	32,417		3.15	%	$	53,706	$	47,180		2.53	%

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We may also use borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, as necessary, but we have required limited borrowings in recent periods to fund our operations. In addition, we receive funds from scheduled loan payments, loan prepayments, retained income and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from cannabis organizations, as well as residents, non-profit organizations and businesses within our market area. We offer a selection of deposit accounts, including savings accounts, demand deposit accounts, money market accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. At June 30, 2024, we had $10.0 million of brokered deposits, while we had no brokered deposits at December 31, 2023 or 2022.

Interest

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Security Midwest Bancorp, Inc. S-1/A