Small Institution Performance Evaluation
FFIEC November 13, 1995
PUBLIC DISCLOSURE
April 12, 1999
Date of Evaluation
COMMUNITY REINVESTMENT ACT
PERFORMANCE EVALUATION
Merchants State Bank
Name of Depository Institution
289757
Identification Number of Institution
Freeman, South Dakota
Address of Institution
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, Minnesota 55401-1804
NOTE: This evaluation is not, nor should it be construed as, an assessment of the financial condition of
this institution. The rating assigned to this institution does not represent an analysis, conclusion, or
opinion of the federal financial supervisory agency concerning the safety and soundness of this
financial institution.
Small Institution Performance Evaluation
FFIEC November 13, 1995
GENERAL INFORMATION
The Community Reinvestment Act (“CRA”) requires each federal financial supervisory agency to use its
authority when examining financial institutions subject to its supervision to assess the institution’s record
of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. Upon conclusion of such examination, the
agency must prepare a written evaluation of the institution’s record of meeting the credit needs of its
community.
This document is an evaluation of the CRA performance of Merchants State Bank, Freeman, South
Dakota, prepared by the Federal Reserve Bank of Minneapolis, the institution’s supervisory agency, as of
April 12, 1999. The agency rates the CRA performance of an institution consistent with the provisions set
forth in Appendix A to 12 CFR Part 228.
INSTITUTION’S CRA RATING: “Satisfactory.”
The bank’s satisfactory rating is based on several factors. First, the bank maintains a high net loan-todeposit ratio. Second, the bank has made a significant number of its loans within its assessment area.
Third, based on an analysis of the bank’s loans, the bank lends to borrowers of different income levels
and to businesses and farms of different sizes. Finally, the geographic distribution of the bank’s loans is
reasonable.
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Small Institution Performance Evaluation
FFIEC November 13, 1995
DESCRIPTION OF INSTITUTION
Offices. Based on its size and financial condition, the bank effectively meets the credit needs of residents,
businesses, and farms located in its assessment area. The bank received a satisfactory rating at the
conclusion of its last CRA performance evaluation, conducted January 7, 1997. The bank’s main office is
located in Freeman, South Dakota. It has not opened or closed any offices since the previous evaluation.
In addition to the main office, the bank operates a full-service branch office in Hurley, South Dakota.
The bank operates one automated teller machine (“ATM”) located at the Freeman Shopping Center. This
ATM accepts deposits and is available 24 hours a day.
The lobby and drive-up facilities in both offices are open from 9:00 a.m. to 4:00 p.m. Monday through
Friday and on Saturday from 9:00 a.m. to noon. The bank’s office hours are reasonable for the
communities it serves.
Loan portfolio. According to the December 31, 1998, Report of Condition (“ROC”), the bank’s assets
totaled approximately $58,921 million. The ROC data indicate the bank continues to be a full-service
community lender with a focus on agricultural lending. The composition of the bank’s loan portfolio has
remained fairly stable since the previous evaluation. The bank’s agricultural lending has increased and
commercial lending has decreased as a relative percentage of the entire loan portfolio. A total of 65% of
the bank’s portfolio is composed of agricultural loans. The remaining categories include commercial
(21%), consumer (6%), and consumer real estate (6%) loans. Overall, the composition of the bank’s loan
portfolio reflects the level of demand for specific types of loans by residents and businesses of the bank’s
market.
Credit products. The bank continues to offer a variety of consumer, residential real estate, commercial,
and agricultural loan products to fulfill the credit needs of the residents and businesses within its
assessment area. In addition to offering conventional loan products, the bank continues to offer loan
programs of the Small Business Administration and Farm Service Agency. The bank also offers loans
through South Dakota Beginning Farmer Bond Program. Loans through this program typically benefit
entities with gross annual revenues of $1 million or less.
DESCRIPTION OF MERCHANT STATE BANK’S ASSESSMENT AREA
Assessment area. The bank’s assessment area consists of nine block numbering areas (“BNA”) in a fivecounty area surrounding the bank’s offices in Freeman and Hurley, South Dakota. All of the BNAs are
designated middle income. The bank’s main office is in Hutchinson County BNA 9686. Hutchinson
County also includes BNAs 9687 and 9688. The Hurley branch is located in Turner County BNA 9652.
Turner County also includes BNA 9651. In addition, the assessment area includes BNAs in McCook
County (9646 and 9647), Hanson County (9641), and Yankton County (9664). Freeman is located
approximately 50 miles southwest of Sioux Falls, South Dakota, and the Hurley branch is about 25 miles
southeast of Freeman.
The assessment area’s economy is mainly dependent on agriculture. Major crops include corn and
soybeans. These crops are grown primarily as feed for the cattle and hogs raised in the area. Farming
conditions have been quite good until just recently. Market prices for livestock are down, consistent with
the national agricultural economy. The drop in prices does not represent a crisis, but is part of the cyclical
nature of farming. Bank management indicated that a minimal number of farmers are currently
participating in the government’s Conservation Reserve Program, as overall government assistance is not
needed.
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Small Institution Performance Evaluation
FFIEC November 13, 1995
The decline in market prices affects the entire community. Businesses have experienced decreased sales,
but for the most part are faring well. Local businesses located throughout the assessment area experience
significant competition from larger department and outlet stores located in Yankton and Sioux Falls,
South Dakota.
For the most part, major employers include the local school systems and medical facilities. The town of
Freeman offers both a public and private school system and a recently expanded hospital and clinic
facility. Other major employers in Freeman include Wildcat Manufacturing; AMPI; Fensel’s; TOTE,
Inc.; Grand Labs; Stern Oil Co., Inc.; Freeman Co-op Oil; and Freeman Shopping Center. Freeman
serves as a regional hub for the communities within a 100-mile radius and is home to two major farm
implement dealers. Major employers in Turner County include Dakota Telecommunications Group,
Parker Filters, the hospital located in Viborg, and four nursing homes located throughout the county.
Unemployment in the assessment area is very low. As of the 1990 census, the unemployment rate in the
assessment area was 1.9%. According to estimates by the state of South Dakota, the 1998 unemployment
rate for the five counties in the assessment area was 2.4%.
In addition to discussions with bank management, examiners contacted a government official.
Information received from this contact and bank management was used in the evaluation of the bank’s
CRA performance.
Population. The population of the assessment area is 29,529 according to 1990 U.S. Census data.
According to more recent estimates provided by the U.S. Census Bureau, population growth is decreasing
in all but two counties within the assessment area. Turner and Yankton counties report population
increases of 0.6% and 9.3%, respectively, from 1990 to 1998. Hanson, Hutchinson, and McCook
counties report population decreases of 2.0%, 2.6%, and 1.6%, respectively, during those same years.
Hutchinson and Turner counties are the largest whole counties in the assessment area by population.
Approximately 28% of the assessment area’s population reside in Hutchinson County and 29% reside in
Turner County. Yankton County is the largest among the five, but only a section of Yanton County is
part of the bank’s assessment area.
Income. CRA divides income levels into four categories: low, moderate, middle, and upper. Because the
bank’s assessment area is located in a nonmetropolitan area, the categorization of a borrower or BNA’s
income is determined relative to the statewide nonmetropolitan median family income. The regulation
defines low-income individuals as those with incomes of less than 50% of the statewide nonmetropolitan
median family income, while moderate-income individuals have incomes of at least 50% but less than
80% of this amount. The regulation defines middle-income individuals as persons with incomes of at
least 80% but less than 120% of the statewide nonmetropolitan median family income. Individuals with
incomes of 120% or more of the statewide nonmetropolitan median family income are classified as upperincome persons.
For purposes of classifying borrowers’incomes, this evaluation used the U.S. Department of Housing and
Urban Development estimated 1998 median family income for the nonmetropolitan areas of South
Dakota. This figure is $36,800. For purposes of classifying BNA income levels, this evaluation used the
1990 statewide nonmetropolitan median family income for South Dakota, which was $25,547.
According to 1990 census data, the assessment area’s median family income is $24,809, while its median
household income is $20,211. There are 11,274 households and 8,268 families within the assessment
area. The distribution of assessment area residents by median household and family income is
summarized in the following table.
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Small Institution Performance Evaluation
FFIEC November 13, 1995
ASSESSMENT AREA POPULATION DISTRIBUTION BY INCOME LEVEL
Low
Moderate
Middle
Upper
Unit of Measure
Income
Income
Income
Income
Households Compared to
Median Household Income
23.3%
17.8%
19.5%
39.4%
Families Compared to
Median Family Income
19.3%
19.6%
25.7%
35.4%
Approximately 12.3% of the families and 16.1% of the households have incomes that are below the
poverty level. These figures are slightly lower than the statewide nonmetropolitan figures of 13.7% and
17.9%, respectively. The percentages of low- and moderate-income families and households are
consistent with those in the statewide nonmetropolitan areas of South Dakota.
CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA
The bank’s performance in meeting the credit needs of its assessment area is satisfactory. Much of the
analysis on the following pages is based on a statistical sample of loans originated between September 17,
1998, and March 17, 1999. The following chart shows the loans the bank originated by dollar amount
and number since the last evaluation.
LOAN ORIGINATIONS
%
33.8
Total Amount
of Loans
(in thousands)
$ 2,879
%
5.8
31
2.2
$ 1,221
2.5
Commercial Loans
256
17.8
$ 9,530
19.4
Agricultural Loans
667
46.2
$35,582
72.3
Loan Type
Consumer Loans
Residential Real Estate
Total Number
of Loans
488
According to the December 31, 1998, ROC, the bank’s loan portfolio consisted of approximately 6%
consumer, 6% residential real estate, 21% commercial, and 65% agricultural loans. Based on the volume
and dollar amount of loan activity for the loan categories, we elected to sample consumer, commercial,
and agricultural loans. The sample period includes the six-month period between September 17, 1998,
and March 17, 1999. Examiners reviewed 96 consumer, 60 small business, and 103 small farm loans.
The consumer loans were chosen for review because they represent a significant percentage of the total
number of loans originated in the sample period. Commercial and agricultural loans were chosen because
they represent a significant percentage of the total dollar amount of loans originated during the sample
period.
The following criteria were analyzed to determine the bank’s CRA rating: net loan-to-deposit ratio, credit
extended inside compared with credit extended outside the assessment area, loans to borrowers of
different income levels and to businesses of different sizes, and loans to borrowers in different
geographies. In assigning the overall rating, the greatest weight was placed on the bank’s net loan-todeposit ratio and the distribution of loans to businesses and farms of different sizes.
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Small Institution Performance Evaluation
FFIEC November 13, 1995
LOAN-TO-DEPOSIT RATIO ANALYSIS
The bank’s net loan-to-deposit ratio is highly satisfactory. Based on the data from the bank’s quarterly
ROC for the calendar quarters since the last evaluation, the quarterly average of the bank’s net loan-todeposit ratio is 86.15%. The bank’s quarterly average net loan-to-deposit ratio was 86% at the previous
evaluation. The following chart summarizes the bank’s quarterly net loan-to-deposit ratio and its
components since the last evaluation, dated January 7, 1997.
DATE
December 31, 1996
March 31, 1997
June 30, 1997
September 30, 1997
December 31, 1997
March 31, 1998
June 30, 1998
September 30, 1998
December 31, 1998
NET LOANS
(in thousands)
$36,718
$35,409
$37,861
$40,837
$40,399
$40,846
$41,670
$43,253
$42,669
DEPOSITS
(in thousands)
$45,223
$43,525
$44,281
$44,388
$47,570
$47,050
$46,391
$46,908
$52,310
NET LOAN-TODEPOSIT RATIO
81.19%
81.35%
85.50%
92.00%
84.93%
86.81%
89.82%
92.21%
81.57%
The bank’s loan volume tends to fluctuate with the agricultural cycle. The bank’s loan portfolio has
grown steadily since the previous evaluation. Further, the bank’s December 31, 1998, net loan-to-deposit
ratio of 81.57% compares favorably with the bank’s national peer group, which had an average ratio of
64.50%. The bank’s net loan-to-deposit ratio placed it in the 86th percentile of the national peer group.
Competition for loan and deposit dollars in the assessment area is strong. In addition to the banks listed
in the following chart, the bank’s competition includes a branch of Home Federal Savings Bank,
Freeman, and a branch of Norwest Bank South Dakota, National Association, Sioux Falls, in Viborg,
South Dakota. The following chart illustrates the asset size and average quarterly net loan-to-deposit ratio
for the bank and local comparable banks since December 1996.
BANK
Merchants State Bank
Freeman, South Dakota
The First National Bank of
Freeman
Freeman, South Dakota
Menno State Bank
Menno, South Dakota
Farmers State Bank
Marion, South Dakota
Dakota Heritage State Bank
Chancellor, South Dakota
The Security State Bank
Emery, South Dakota
TOTAL ASSETS
As of December 31, 1998
(in thousands)
QUARTERLY AVERAGE
NET LOAN-TO-DEPOSIT
RATIO
$58,921
86.15%
$54,514
49.70%
$26,851
41.36%
$42,387
84.91%
$26,200
67.99%
$27,967
61.95%
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Small Institution Performance Evaluation
FFIEC November 13, 1995
BANK
First Midwest Bank
Centerville, South Dakota
Security State Bank
Alexandria, South Dakota
Valley Exchange Bank
Lennox, South Dakota
TOTAL ASSETS
As of December 31, 1998
(in thousands)
QUARTERLY AVERAGE
NET LOAN-TO-DEPOSIT
RATIO
$55,620
75.68%
$42,269
66.52%
$44,510
56.85%
As shown, the bank’s net loan-to-deposit ratio is the highest among the comparable banks in the
assessment area. It is substantially higher than its direct competitor located in Freeman. The community
contact and bank management acknowledged the highly competitive banking market in the assessment
area. The community contact also did not identify any unmet credit needs in the community. Bank
management also noted that the loan portfolio has shown consistent growth since the previous evaluation.
Much of the bank’s loan and deposit growth has occurred near the community of Viborg, which is located
about ten miles south of Hurley. The bank has been successful in penetrating the Viborg area.
The bank’s net loan-to-deposit ratio is high and compares favorably with the national peer group and local
comparable banks. Based on the growth of the loan portfolio, the competitive financial services market,
and the lack of identified unmet credit needs, the bank’s net loan-to-deposit ratio exceeds the standards
for satisfactory performance.
COMPARISON OF CREDIT EXTENDED INSIDE AND OUTSIDE THE ASSESSMENT AREA
The bank’s lending activity in the assessment area meets the standards for satisfactory performance. A
review of the statistical sample of loans originated by the bank during the past six months reveals that the
bank originated a substantial majority of its loans inside the assessment area. The following table shows
the percentages of loans the bank originated within the assessment area based on total number and dollar
amount in each major loan category.
LOANS ORIGINATED INSIDE THE ASSESSMENT AREA
Loan Type
Total Number of Loans Total Dollar Amount of Loans
Consumer
89.6%
78.6%
Small Business
86.7%
89.3%
Small Farm
95.1%
87.3%
The percentages noted at this evaluation are very similar to those noted at the previous evaluation in
January 1997. As the data in the table indicate, the bank makes the vast majority of its loans in the
assessment area. Based on the high percentage of loans originated in the assessment area, the bank meets
the standards for satisfactory performance in this category.
LENDING TO BORROWERS OF DIFFERENT INCOME LEVELS AND TO BUSINESSES OF
DIFFERENT SIZES
The bank’s level of lending to individuals of different income levels and to businesses of different sizes
meets the standards for satisfactory performance. As previously mentioned, CRA groups income levels
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Small Institution Performance Evaluation
FFIEC November 13, 1995
into four categories: low, moderate, middle, and upper. The following table shows the percentage of
consumer loans made to borrowers of different income levels.
DISTRIBUTION OF LOANS IN THE ASSESSMENT AREA
BY BORROWER INCOME LEVEL*
Consumer
8.2%
Total Number of Loans
37.2%
43.0%
11.6%
24.2%
Total Amount of Loans
23.4%
35.8%
16.6%
*Income level is based on the South Dakota 1998 nonmetropolitan median family income of
$36,800.
Consumer lending. The bank does not generally collect income information from consumer borrowers.
Accordingly, data in this table are based on estimates provided by bank management.
The data in the table indicate that the bank has extended a significant majority of its loans to low- and
moderate-income borrowers. As mentioned earlier, the assessment area is composed of 19.3% lowincome, 19.6% moderate-income, 25.7% middle-income, and 35.4% upper-income families. There are
several factors that explain the bank’s level of lending. First, according to bank management, the bank’s
clientele is composed of many retired customers whose sole source of income is social security.
According to the 1990 census data, 40.2% and 40.6% of households in Hutchinson and Turner counties,
respectively, receive Social Security income. The bank’s lending activity is heavily concentrated in these
two counties. A community contact indicated that Freeman is a popular retirement destination because of
the excellent health care available at the hospital and clinic. In addition, many of the consumer loans are
small dollar loans used for unforeseen household or living expenses rather than for discretionary
purposes. Of the consumer loans in the sample, 37%, or 38.5%, of the loans were for original amounts
totaling $2,000 or less.
It is clear from the loan data that the bank is willing to extend credit to qualified borrowers of all income
levels. However, because consumer loans represent a relatively small portion of the bank’s loans and
income data is based on estimates, limited weight is placed on this data.
Small business and small farm lending. The bank has a good record of providing small business and
small farm loans to entities with gross annual revenues of $1 million or less. For the purposes of this
evaluation, small business loans are identified as most commercial loans with original principal amounts
of $1 million or less. Small farm loans are loans with agricultural purposes with original amounts
$500,000 or less. The loan sample reveals that the bank originated 86.5% of its small business loans to
entities with gross annual revenues of $1 million or less. The bank has a similar record for small farm
loans. The loan sample reveals that the bank originated 84.7% of its small farm loans to entities with
gross annual revenues of $1 million or less.
The bank’s CRA loan sample also shows that most small business loans were for small amounts.
According to the loans sampled, 88.5% of the small business loans were originated for amounts of
$100,000 or less. A total of 9.6% of small business loans were originated for amounts greater than
$100,000 and less than or equal to $250,000, and 1.9% were originated for amounts greater than $250,000
and less than or equal to $1 million. A similar percentage of the bank’s small farm loans were originated
for amounts of $100,000 or less. A total of 87.8% of small farm loans were originated for amounts less
than or equal to $100,000, 7.1% were originated for amounts greater than $100,000 and less than or equal
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Small Institution Performance Evaluation
FFIEC November 13, 1995
to $250,000, and 5.1% were originated for amounts greater than $250,000 and less than or equal to
$500,000.
Financial institutions that are required to report data for small business and small farm loans made a total
of 134 small business loans and 601 small farms loans in the assessment area in 1997. Of the small
business loans, 92.5% were for amounts under $100,000, and 76.1% were to businesses with revenues of
$1 million or less. Of the small farm loans, 90.8% were for amounts under $100,000, and 93.5% were to
farms with revenues of $1 million or less. Compared with the financial institutions required to report
small business and farm loans, the bank extended relatively more of its small business loans to entities
with gross annual revenues of $1 million or less, but relatively fewer small farm loans to such entities.
The bank also extended relatively fewer loans with original principal amounts of $100,000 or less than
the reporting institutions.
Overall, the bank’s lending to individuals of different income levels and to businesses and farms of
different sizes is very good. A majority of the bank’s consumer lending is extended to low- and
moderate-income borrowers. In addition, the vast majority of the bank’s small business loans and small
farm loans were for amounts less than $100,000 and to entities with gross annual revenues of $1 million
or less. The bank demonstrates very good responsiveness to meeting the credit needs of the residents,
businesses, and farms in the assessment area. The bank’s performance in this category meets the
standards for satisfactory performance.
GEOGRAPHIC DISTRIBUTION OF LOANS
The distribution of the bank’s loans throughout the assessment area meets the standards for satisfactory
performance. Because all of the BNAs in the bank’s assessment area are middle income, a limited
analysis was performed.
The bank’s lending is concentrated on Hutchinson (BNA 9686) and Turner counties, where the bank’s
offices are located. The bank has no lending activity in northern McCook, western Hutchinson, and
Turner counties, which are located some distance from the bank’s offices and are more conveniently
served by other financial institutions.
Based on a statistical sample of the bank’s loans, the following table shows the distribution of loans in the
middle-income BNAs.
Loans
Consumer
Number
Percentage
Small Farm
Number
Percentage
Small Business
Number
Percentage
DISTRIBUTION OF LOANS IN THE ASSESSMENT AREA
BY MIDDLE-INCOME BNA
Hanson
McCook
Hutchinson
Turner
9641
9646
9647
9686
9687 9688 9651
9652
Yankton
9664
0
0
0
0
2
2.3%
23
26.7%
0
0
0
0
4
4.7%
53
61.6%
4
4.7%
0
0
0
0
1
1.9%
21
40.4%
0
0
1
1.9%
3
5.8%
25
48.1%
1
1.9%
0
0
0
0
9
9.2%
30
30.6%
0
0
0
0
13
13.3%
43
43.9%
3
3.0%
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Small Institution Performance Evaluation
FFIEC November 13, 1995
The distribution of the bank’s lending throughout the assessment area is reasonable. The majority of the
bank’s lending is concentrated around the BNAs that contain the bank’s two offices, BNA 9686 and BNA
9652. The high percentage of loans originated in BNA 9652 illustrates the bank’s increased level of
growth in Viborg and the surrounding communities. The distribution of loans throughout the BNAs is
reasonable. In general, the evaluation did not identify any unexplained gaps in lending.
GENERAL
The evaluation did not reveal any violations of the substantive provisions of the fair lending and housing
laws and regulations. In addition, the bank has not received any CRA-related complaints since the
previous evaluation.
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