Safe and Sound

Farmers and Merchants State Bank of Alpha

Alpha, MN
1
Star Rating
Started in 1911, Farmers and Merchants State Bank of Alpha is an FDIC-insured bank headquartered in Alpha, MN. The bank has equity of $4.3 million on assets of $95.1 million, according to December 31, 2017, regulatory filings.

With 8 full-time employees, the bank currently holds loans and leases worth $26.8 million, including real estate loans of $16.5 million. U.S. bank customers currently have $90.7 million in deposits with the bank.

Overall, Bankrate believes that, as of December 31, 2017, Farmers and Merchants State Bank of Alpha exhibited a significantly below-average condition, earning 1 out of 5 stars for safety and soundness. Keep reading for a breakdown of how the bank did on the three important criteria Bankrate used to grade American banks.

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THE INSTITUTION'S SCORE

Capital Score

Capital works as a bulwark against losses and provides protection for account holders during times of financial instability for the bank. It follows then that when it comes to measuring an a bank's financial strength, capital is useful. From a safety and soundness perspective, the more capital, the better.

On our test to measure capital adequacy, Farmers and Merchants State Bank of Alpha received a score of 0 out of a possible 30 points, falling short of the national average of 13.13.

One way to measure this buffer is looking at a bank's Tier 1 capital ratio. Farmers and Merchants State Bank of Alpha's Tier 1 capital ratio was 15.55 percent, higher than the 6 percent level regulators consider adequate, but less than the national average of 25.65 percent. A higher capital ratio means the bank will be better able to stand up to financial difficulties.

Overall, Farmers and Merchants State Bank of Alpha held equity amounting to 4.48 percent of its assets, which was lower than the national average of 12.03 percent.

Asset Quality Score

Bankrate uses this test to determine the effect of troubled assets, such as past-due mortgages, on the bank's loan loss reserves and overall capitalization.

Having large numbers of these kinds of assets could eventually force a bank to use capital to cover losses, decreasing its equity buffer. It also means that there are likely to be many assets that are in non-accrual status and thus aren't earning money, pushing down earnings and increasing the risk of a future failure.

Farmers and Merchants State Bank of Alpha scored 28 out of a possible 40 points on Bankrate's test of asset quality, less than the national average of 37.49.

The percentage of problem assets a bank holds compared to its total assets is a handy indicator of asset quality.As of December 31, 2017, 2.86 percent of Farmers and Merchants State Bank of Alpha's loans were noncurrent, meaning they were more than 90 days past due or were in non-accrual status. That's above the national average of 1.01 percent.

Banks keep a reserve to handle troubled assets known as an "allowance for loan and lease losses." Comparing the size of that reserve to the total amount of at-risk loans can be a handy indicator when evaluating a bank's ability to manage troubled assets. Unfortunately, the FDIC did not provide information on Farmers and Merchants State Bank of Alpha's loan loss allowance in its most recent filings.

Earnings score

A bank's earnings performance has an effect on its long-term survivability. A bank can retain its earnings, giving a boost to its capital buffer, or put them to work addressing problematic loans, potentially making the bank more resilient in times of trouble. Losses, on the other hand, reduce a bank's ability to do those things.

Farmers and Merchants State Bank of Alpha did below-average on Bankrate's test of earnings, achieving a score of 0 out of a possible 30.

One important measure of a bank's earnings is return on equity, calculated by dividing net income (profit, essentially) by total equity. Farmers and Merchants State Bank of Alpha's most recent annualized quarterly return on equity was 6.10 percent, below the national average of 8.10 percent.

The bank reported net income of $257,000 on total equity of $4.3 million for the twelve months ended December 31, 2017. The bank had an annualized return on average assets, or ROA, of 0.36 percent, below the 1 percent deemed satisfactory in accordance with industry standards and below the average for U.S. banks of 1.00 percent.

WHAT IS SAFE & SOUND?

Bankrate.com's Safe & Sound Ratings provide a star rating system to evaluate the current financial status of financial institutions. The information gathered about banks, credit unions and thrifts is updated as set forth in the Terms of Use of Safe & Sound Ratings and Reports. The Safe & Sound Ratings information is grouped by categories of banks, thrifts and credit unions.

Scoring methodology

Bankrate.com evaluates the financial condition of institutions and assigns a one- to five-star rating for each with five stars representing the highest rating. Institutions with satisfactory performance will generally receive a rating of three or more stars. The majority of institutions fall into the three- to four-star range. An institution with an "NR" rating may be too new to rate or may have limited the publicly available information in their regulatory filings. The "NR" is not an indication of financial strength or weakness. The Safe & Sound rating is believed to be reliable, but the information is not guaranteed. In addition, events since the information was collected may have altered the institution's financial condition.