Safe and Sound

Merchants State Bank

Freeman, SD
5
Star Rating
Merchants State Bank is an FDIC-insured bank founded in 1899 and currently based in Freeman, SD. The bank holds equity of $19.3 million on $158.9 million in assets, according to December 31, 2017, regulatory filings.

Thanks to the work of 30 full-time employees in 4 offices in SD, the bank currently holds loans and leases worth $116.8 million, $71.0 million of which are for real estate. The bank currently holds $130.5 million in deposits from U.S. customers.

Overall, Bankrate believes that, as of December 31, 2017, Merchants State Bank exhibited a superior condition, earning a full 5 stars for safety and soundness. Here's a breakdown of how the bank fared 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

Capital works as a cushion against losses and provides protection for account holders during periods of financial trouble for the bank. It follows then that when it comes to measuring an a bank's financial stability, capital is crucial. From a safety and soundness perspective, the higher the capital, the better.

Merchants State Bank scored above the national average of 13.13 points on our test to measure the adequacy of a bank's capital, achieving a score of 16 out of a possible 30 points.

One widely followed measure of this buffer is a bank's Tier 1 capital ratio. Merchants State Bank's Tier 1 capital ratio was 14.56 percent, higher than the 6 percent level considered adequate by regulators, but less than the national average of 25.65 percent. A higher capital ratio suggests the bank will be better able to stand up to economic headwinds.

Overall, Merchants State Bank held equity amounting to 12.17 percent of its assets, which exceeded the national average of 12.03 percent.

Asset Quality Score

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

Having large numbers of these kinds of assets could eventually force a bank to use capital to cover losses, shrinking its equity cushion. It also means that there are likely to be many assets that are in non-accrual status and no longer earning money, decreasing earnings and elevating the chances of a future failure.

On Bankrate's asset quality test, Merchants State Bank scored 36 out of a possible 40 points, coming in below the national average of 37.49 points.

A useful indicator of asset quality is the percentage of problem assets a bank holds compared to its total assets. As of December 31, 2017, 1.89 percent of 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 above the national average of 1.01 percent.

Banks maintain a reserve known as an "allowance for loan and lease losses" to deal with troubled assets . Comparing how large that reserve is 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 Merchants State Bank's loan loss allowance in its most recent filings.

Earnings score

A bank's ability to earn money affects its long-term survivability. A bank can retain its earnings, increasing its capital cushion, or put them to work addressing problematic loans, potentially making the bank more resilient in tough times. Obviously, banks that are losing money are less able to do those things.

Merchants State Bank scored 22 out of a possible 30 on Bankrate's earnings test, beating out the national average of 15.12.

Return on equity, calculated by dividing net income (essentially, profit) by total equity, is one important way to measure a bank's earnings. The most recent annualized quarterly return on equity for Merchants State Bank was 12.72 percent, above the national average of 8.10 percent.

The bank reported net income of $2.4 million on total equity of $19.3 million for the twelve months ended December 31, 2017. The bank had an annualized return on average assets, or ROA, of 1.52 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.