Safe and Sound

Farmers and Merchants State Bank

Winterset, IA
5
Star Rating
Farmers and Merchants State Bank is a Winterset, IA-based, FDIC-insured bank that opened its doors in 1938. Regulatory filings show the bank having equity of $17.8 million on assets of $198.1 million, as of December 31, 2017.

U.S. bank customers have $174.0 million on deposit at 4 offices in IA run by 36 full-time employees. With that footprint, the bank holds loans and leases worth $111.5 million, including $68.2 million worth of real estate loans.

Overall, Bankrate believes that, as of December 31, 2017, Farmers and Merchants State Bank exhibited a superior condition, earning a full 5 stars for safety and soundness. Here's a breakdown of how the bank did on the three key criteria Bankrate used to grade American banks on safety and soundness.

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THE INSTITUTION'S SCORE

Capital Score

When it comes to measuring an a bank's financial fortitude, capital is important. It works as a buffer against losses and as protection for depositors when a bank is struggling financially. When looking at safety and soundness, the higher the capital, the better.

On our test to measure capital adequacy, Farmers and Merchants State Bank received a score of 10 out of a possible 30 points, failing to reach 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's Tier 1 capital ratio was 12.76 percent, exceeding the 6 percent level regulators consider adequate, but under the national average of 25.65 percent. The higher the capital ratio, the better the bank will be able to weather economic difficulties.

Overall, Farmers and Merchants State Bank held equity amounting to 9.01 percent of its assets, which was lower than the national average of 12.03 percent.

Asset Quality Score

In this test, Bankrate tries to determine the impact of problem assets, such as unpaid mortgages, on the bank's reserves set aside to cover loan losses, as well as overall capitalization.

A bank with large numbers of these kinds of assets may eventually have to use capital to cover losses, cutting down on its buffer of equity. It also means that there are likely to be many assets that are in non-accrual status and no longer earning interest for the bank, resulting in reduced earnings and potentially more risk of a failure in the future.

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

A widely used indicator of asset quality is the percentage of problem assets a bank holds compared to its total assets. As of December 31, 2017, 0.07 percent of Farmers and Merchants State Bank'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 handle troubled assets known as an "allowance for loan and lease losses." Comparing the size of that reserve to the total amount of problematic loans can be a widely used indicator when evaluating a bank's ability to manage troubled assets. Farmers and Merchants State Bank's loan loss allowance was 1,448.78 percent of its total noncurrent loans, above the national average. All else being equal, a higher ratio of loan loss allowance to noncurrent loans is better.

Earnings score

How profitable a bank is has an effect on its safety and soundness. Earnings may be retained by the bank, boosting its capital cushion, or be used to address problematic loans, potentially making the bank better prepared to withstand economic trouble. However, banks that are losing money have less ability to do those things.

Farmers and Merchants State Bank scored 20 out of a possible 30 on Bankrate's test of earnings, exceeding the national average of 15.12.

Return on equity, calculated by dividing net income (profit, basically) by total equity, is one widely used measure of a bank's earnings. Farmers and Merchants State Bank's most recent annualized quarterly return on equity was 10.43 percent, above the national average of 8.10 percent.

For the twelve months ended December 31, 2017, the bank reported net income of $2.0 million on total equity of $17.8 million. The bank had an annualized return on average assets, or ROA, of 1.01 percent, above the 1 percent deemed satisfactory in accordance with industry standards, and above 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.