Farmers and Merchants State Bank of Pierz

THE INSTITUTION'S SCORE

Capital Score

Capital acts as a buffer against losses and as protection for depositors when a bank is struggling financially. Therefore, a bank's level of capital is an essential measurement of an institution's financial resilience. When it comes to safety and soundness, the more capital, the better.

On our test to measure the adequacy of a bank's capital, Farmers and Merchants State Bank of Pierz received a score of 12 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 Pierz's Tier 1 capital ratio was 14.64 percent, above the 6 percent level regulators consider adequate, but lower than the national average of 25.65 percent. The higher the capital ratio, the better the bank will be able to stand up to economic downturns.

Overall, Farmers and Merchants State Bank of Pierz held equity amounting to 10.38 percent of its assets, which was lower than the national average of 12.03 percent.

Asset Quality Score

This test is intended to try to understand how the bank's reserves set aside to cover loan losses, as well as overall capitalization, could be affected by troubled assets, such as past-due mortgages.

A bank with extensive holdings of these kinds of assets could eventually have to use capital to cover losses, reducing 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 interest for the bank, diminishing earnings and increasing the risk of a future failure.

On Bankrate's asset quality test, Farmers and Merchants State Bank of Pierz scored 40 out of a possible 40 points, exceeding the national average of 37.49 points.

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, 0.52 percent of Farmers and Merchants State Bank of Pierz's loans were noncurrent -- in other words, they were more than 90 days past due or were in non-accrual status. That's below the national average of 1.01 percent.

Banks maintain a reserve to deal with troubled assets known as an "allowance for loan and lease losses." How large that reserve is can be a helpful indicator when evaluating a bank's ability to manage problem assets, especially when compared to the total amount of problem loans. Unfortunately, the FDIC did not provide information on Farmers and Merchants State Bank of Pierz's loan loss allowance in its most recent filings.

Earnings score

How profitable a bank is has an effect on its safety and soundness. Earnings can be retained by the bank, increasing its capital cushion, or be used to address problematic loans, likely making the bank more resilient in times of trouble. Losses, on the other hand, lessen a bank's ability to do those things.

Farmers and Merchants State Bank of Pierz scored 28 out of a possible 30 on Bankrate's earnings test, above the national average of 15.12.

Return on equity, calculated by dividing net income (essentially, profit) by the total amount of equity, is one important way to measure a bank's earnings. Farmers and Merchants State Bank of Pierz's most recent annualized quarterly return on equity was 19.57 percent, above the national average of 8.10 percent.

The bank earned net income of $4.4 million on total equity of $23.2 million for the twelve months ended December 31, 2017. The bank experienced an annualized return on average assets, or ROA, of 1.98 percent, above the 1 percent deemed satisfactory in accordance with industry standards, and above the average for U.S. banks of 1.00 percent.