Security Midwest Bancorp, Inc. (SBMW) stock intrinsic value fair value estimate & owner earnings analysis

Security Midwest Bancorp owns Security Bank, s.b., a $244 million savings bank with three offices in Springfield, Illinois. It makes mostly home mortgage and local real estate loans in Sangamon County and funds them with retail deposits plus a distinctive niche: about $59 million (roughly a third of deposits) comes from state-licensed cannabis businesses in Illinois, Michigan, Ohio and Kentucky, with Missouri being added. These are largely non-interest-bearing commercial demand accounts that also pay cash-handling and maintenance fees. That cheap funding is why the bank earned a 3.9% net interest margin in 2025, unusually high for a thrift, while keeping roughly 45% of its balance sheet in liquid assets to service cash-heavy customers. The bank serves these businesses with deposits and services; it does not grow or sell cannabis. The company converted from mutual to stock ownership in July 2025, raising about $8.9 million. Equity is now $23.7 million (June 2026), about $28.50 per weighted diluted share or $26.70 per share outstanding, and it carries $35 million of Federal Home Loan Bank advances taken in 2025 to buy higher-yielding securities. Earnings level. For a bank, borrowings and deposits are raw material, so we value earnings after interest and subtract no debt. Owner cash earnings were $0.67 million in 2025 ($0.80 per share) and $1.27 million in 2024. Both years carry one-time costs: 2025 includes a $922,000 charge to withdraw from a multi-employer pension plan and a $419,000 loss on repositioning securities; 2024 includes a $702,000 write-off of conversion costs. Excluding those, the business earned roughly $1.3-1.8 million a year, and the first half of 2026 confirms it: net income of $808,000 (EPS $0.97) on net interest income up 17% from a year earlier, two consecutive quarters at about $0.47-0.50 per share. Only two full years of data exist, so we anchor on about $1.70 per share of normalized earnings, which is a return to the level the bank already showed without one-time charges, not growth. Base case ($25.54): earnings hold near $1.70 per share for ten years. No loan growth or margin expansion is credited; the new capital is largely already deployed. Beyond year ten we fade earnings to about $1.40, because the cannabis-deposit edge is not permanent: if federal banking rules for cannabis loosen, larger banks will compete for those deposits and the funding advantage narrows. Bear case ($11.36): two named risks combine. First, deposit concentration: the largest cannabis customer's balance already fell sharply in 2025, and losing a large share of the $59 million would force replacement with FHLB advances or certificates of deposit at around 4%, costing roughly $1.5-2 million a year in pre-tax spread, which is essentially all of today's earnings. Second, a credit cycle of the 2008-2010 kind on a $120 million real-estate loan book: losses of about 1.5-2% of loans over two years ($2-2.5 million), producing two loss years. After that, earnings settle near $0.75 per share. Capital stays well above minimums throughout (tangible equity near 9-10% of assets), so no dilution is required, and the bear value remains well under book. Bull case ($31.10): earnings run near $1.95 per share, the first-half 2026 annualized pace, as the securities repositioning and lower deposit costs persist and the cannabis-deposit franchise keeps expanding into Missouri, which it is already licensed to do; fading to $1.80 after year ten. Margin-of-safety price. We are reasonably sure of the normal earnings level, about $1.50-1.95 per share, because two quarters of clean 2026 results agree with the one-off-adjusted 2025 and 2024 figures; but the history is short. The worst plausible outcome is the simultaneous loss of cannabis deposits and fees and a local real-estate downturn, which the bear case models; beyond it, a regulatory action restricting cannabis banking at a small institution is possible. The structure survives either: no holding-company debt, equity near 10% of assets, and an asset base dominated by mortgages and investment securities. If we are wrong about the durability of the cannabis deposits and about 2026 being representative, the shares are worth roughly the bear value, about $11. The bank pays no dividend yet, so returns depend on earnings accumulating in book value and any buybacks permitted from the second year after conversion. The margin-of-safety price is $13: from that price, accumulated earnings of about $1.70 a year plus closing even half the gap to the base value imply roughly 20% a year over an assumed three-to-five-year holding period, and the bear case value sits modestly below that price. Above that, the concentrated deposit base makes the return too dependent on one customer group. The pension withdrawal liability was accrued in 2025; we found no further obligation disclosed. Owner earnings reconcile exactly to net income plus non-cash charges in both years.