Safe and Sound

Farmers State Bank of Underwood

Underwood, MN
4
Star Rating
Farmers State Bank of Underwood is an Underwood, MN-based, FDIC-insured bank founded in 1915. The bank holds equity of $6.1 million on $66.1 million in assets, according to December 31, 2017, regulatory filings.

U.S. bank customers have $59.3 million on deposit at 3 offices in MN run by 16 full-time employees. With that footprint, the bank holds loans and leases worth $49.5 million, $31.7 million of which are for real estate.

Overall, Bankrate believes that, as of December 31, 2017, Farmers State Bank of Underwood exhibited a good condition, earning 4 out of 5 stars for safety and soundness. Here's a look at how the bank did on the three major criteria Bankrate used to score U.S. banks.

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THE INSTITUTION'S SCORE

Capital Score

When it comes to measuring an an institution's financial resilience, capital is valuable. It works as a cushion against losses and affords protection for accountholders during periods of economic instability for the bank. From a safety and soundness perspective, more capital is better.

On our test to measure capital adequacy, Farmers State Bank of Underwood received a score of 10 out of a possible 30 points, coming in below the national average of 13.13.

One widely followed measure of this buffer is a bank's Tier 1 capital ratio. Farmers State Bank of Underwood's Tier 1 capital ratio was 11.54 percent, higher than 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 headwinds.

Overall, Farmers State Bank of Underwood held equity amounting to 9.19 percent of its assets, which was lower than the national average of 12.03 percent.

Asset Quality Score

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

A bank with extensive holdings of these kinds of assets may eventually have to use capital to cover losses, shrinking its buffer of equity. Many of those assets are also likely to be in non-accrual status and no longer earning money, diminishing earnings and elevating the risk of a failure in the future.

On Bankrate's test of asset quality, Farmers State Bank of Underwood scored 32 out of a possible 40 points, lower than the national average of 37.49 points.

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, 2.25 percent of Farmers State Bank of Underwood'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 deal with problem assets known as an "allowance for loan and lease losses." The size of that reserve 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 State Bank of Underwood's loan loss allowance in its most recent filings.

Earnings score

How profitable a bank is affects its long-term survivability. Earnings can be retained by the bank, giving a boost to its capital cushion, or be used to address problematic loans, likely making the bank better able to withstand economic shocks. Conversely, losses reduce a bank's ability to do those things.

Farmers State Bank of Underwood outperformed the average on Bankrate's test of earnings, achieving a score of 26 out of a possible 30.

One key way to measure a bank's earnings is return on equity, or net income (essentially profit) divided by total equity. Farmers State Bank of Underwood's most recent annualized quarterly return on equity was 18.51 percent, above the national average of 8.10 percent.

The bank earned net income of $1.1 million on total equity of $6.1 million for the twelve months ended December 31, 2017. The bank had an annualized return on average assets, or ROA, of 1.65 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.