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1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) --- of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or Transition Report Pursuant to Section 13 or 15(d) --- of the Securities Exchange Act of 1934 For the transition period from to --- --- Commission File Number 0-14492 ------------------------------ FARMERS & MERCHANTS BANCORP, INC. --------------------------------- OHIO 34-1469491 - ------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 307-11 North Defiance Street Archbold, Ohio 43502 - ------------------------------- --------------------- (Address of principal (Zip Code) Executive offices) Registrant's telephone number, including area code (419)446-2501 ---------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None - --------------------------- ------------------------------ - --------------------------- ------------------------------ Securities registered pursuant to Section 12(b) of the Act: Common shares without par value - -------------------------------------------------------------------------------- (Title of class) - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 305 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. { } As of March 1, 2000, Registrant had outstanding 1,300,000 shares of common stock at a market value of $157,185,000. 1
2 FARMERS & MERCHANTS BANCORP, INC. TABLE OF CONTENTS PAGE Form 10-K Items - --------------- Item 1. Business 2 - 20 Item 2. Properties 20 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7- 20 Item 8. Financial Statements and Supplementary Data 23 Item 9. Disagreements on Accounting and Financial Disclosure 24 Item 10. Directors and Executive Officers of the Registrant 24 - 27 Item 11. Management Remuneration and Transactions 28 Item 12. Security Ownership of Certain Beneficial Owners and Management 28 Item 13. Certain Relationships and Related Transactions 28 Item 14. Financial Schedules and Reports on Form 8-K 29 Schedule 1 - Schedule of Property and Equipment 30 Schedule 2 - Schedule of Accumulated Depreciation - Property and Equipment 31 Signatures 32 Financial Data Schedule 33 - 34 Total Pages: 34 i
3 BUSINESS HISTORY The Farmers & Merchants State Bank is a community bank, as it has been since 1897. When Archbold's population was less than 900, there were six local businessmen foresighted enough in their thinking and views to realize the need for a bank in the village of Archbold. J. O. Swisher and Jacob Ehrat (livestock brokers) C. M. McLaughlin and A. J. Vernier (hardware merchants) and L. D. Gotshall and I. W. Gotshall (lumber merchants), were founders of the then Farmers & Merchants Bank, a private bank. The bank's first office was one room located in the Vernier Hotel building, currently occupied by the Archbold Barber Shop. In 1907, the first new structure was built at the corner of Depot and North Defiance Streets, which is now the Subway. The bank was heralded as one of the most unusual and attractive banks in the area, featuring marble interior, brass trimmed teller cages, tile floor, leaded windows, and high vaulted ceiling. The vault featured a time controlled money safe. The building and equipment were unique to the early 1900's and adequately served the banking needs of the area for over 50 years with only minor interior alterations. In August of 1913 the village of Archbold was hit by a disastrous fire which destroyed all the business district on the east side of N. Defiance Street from the bank at the corner of Depot Street to the Murbach medical building at the corner of Holland Street. This was a tremendous loss for a dozen or more businesses, causing many to liquidate. Young businessmen and enterprising citizens promoted a waterworks system and passed a $16,000 bond issue to finance the project. This seemed to be the turning point for the advancement of industry and the community rallied from this eventful experience to an unusual growth. In 1919 the founding directors elected to change from a private bank to a state chartered bank and at this time changed its name from the Farmers & Merchants Bank to The Farmers & Merchants State Bank, as required in the state charter. This has been the only name change in the bank's 99 year history. The bank's capital funds were $53,510 thousand and resources were $571,549 thousand. The bank experienced growth, especially during the post-war years and early 1950's. By 1958, the bank's resources had grown to 7 1/2 million dollars. The directors and officers realized the need for a larger building to accommodate the increase in business and services. In 1958, the bank moved to its present N. Defiance Street location greatly improving service to its customers and offering drive-up banking, electronic bookkeeping, convenient parking, and a social room for the community to use. The new building featured the latest in modern banking facilities and The Farmers & Merchants State Bank was prepared to more efficiently serve the ever growing community. With resources of over $23 million in 1969, The Farmers & Merchants State Bank again realized the need for additional space and inaugurated a building expansion, which nearly doubled the original structure built in 1958. The new addition, opened early in 1970, provided for an additional drive-up window, walk-up window, direct entrance from the bank parking lot to the lobby, three spacious private offices, conference room, and a large community room with a fully equipped kitchen to facilitate groups from 60 to 100. In 1972, with total resources of over $34 million and to continue its growth, The Farmers & Merchants State Bank established an office on N. Shoop Avenue, Wauseon. The office was opened in November 1973 and provided greater banking service to the Wauseon area. The Wauseon office provided complete banking service and a community room with kitchen facilities to accommodate 15 - 80 people. In 1977 - 1978 additional office space was added to The Farmers & Merchants State Bank in Archbold, and an automatic teller machine, "Teller 24", was installed in the entrance lobby. 2
4 A second Wauseon office was established in the downtown area on the corner of N. Fulton and Depot streets in August of 1978. It is a very convenient location for shoppers and businesses. The Downtown office also provides 24 hour banking with "Teller 24". During April of 1980 a second office was opened in Archbold, located in the Lugbill Addition near Woodland Oaks. The Woodland office is a convenient branch offering full banking services to those Archbold residents in the outlying area. With resources of $83 million the decision was made to open full service offices in Stryker and West Unity in 1981. During that year, new computerized proof equipment was added to capture the required data in today's complex and competitive banking environment. A new division was added to the Operations Department in the creation of the Central Information File Department. Plus, two new branches were opened, the Delta office in June and the all new Bryan E. High office in December. In 1985 the conversion of the former bank, The Farmers & Merchants State Bank, into a holding company structure was performed to provide greater flexibility for expanding the bank's business into activities closely related to banking, as well as, placing the bank in a position to react in a timely and effective manner to the many complex changes affecting the banking industry. On April 22, 1985, a new Ohio chartered bank was formed and incorporated as the FMSB Bank following the formation of a holding company, The Farmers & Merchants Bancorp, Inc., which was incorporated as a bank holding company under the laws of the State of Ohio on February 25, 1985. A triangular merger was then effected whereby the former bank, The Farmers & Merchants State Bank, was merged with and into the new bank, the FMSB Bank with each outstanding share of common stock of the former bank being converted by operation of law upon consummation of the merger into two shares of common stock of Farmers & Merchants Bancorp, Inc. Upon the merger becoming effective July 31, 1985, 260,000 shares of Farmers & Merchants Bancorp, Inc., no par value common stock were issued. The resulting new bank in the merger is the FMSB Bank; however, its name was changed concurrently with the merger to The Farmers & Merchants State Bank. Upon consummation of the merger, the stockholders of Farmers & Merchants Bancorp, Inc. received the same percentage of ownership in the holding company as their percentage of ownership of the former bank. The former bank then ceased to exist. All of the 260,000 issued and outstanding shares of stock of the new bank, The Farmers & Merchants State Bank, were held by the bank holding company, Farmers & Merchants Bancorp, Inc. With the success The Farmers & Merchants State Bank was experiencing in Stryker, West Unity and Bryan and the prospect of continued growth in Williams County, it was decided to open another office in Bryan and one in Montpelier. In May of 1992, the doors were opened at a second office in Bryan located on S. Main Street; and in July of 1992 the bank was pleased to be able to offer their financial services to the community of Montpelier. The Bryan S. Main Street banking center has three drive-up lanes and a drive-up ATM. Also during 1992, the West Unity Office was expanded and an additional drive-up lane was added at the Delta Office. Also during 1992, an accidental death and disability insurance company was formed, Farmers & Merchants Life Insurance Company. The company was organized under the laws of the State of Arizona with 100% of the 100,000 issued and outstanding shares of common stock owned by Farmers & Merchants Bancorp, Inc. 3
5 The growth of The Farmers & Merchants State Bank continued to be very favorable in 1993 with assets in excess of $370 million, but with the tremendous growth that was occurring, the bank was feeling growing pains brought on by cramped quarters. There were no longer community rooms in either the Main Office or the Wauseon Shoop Office. All available space at the Main Office had been used, by turning closets and storage space into offices and many of the offices that were designed for one officer were housing two officers. The Marketing and Personnel departments had been moved to the Wauseon Shoop Office basement, the former community room. The time had come for the addition of more office space at the Main Office. The former Christy Building, located on the north side of the Main Office, was demolished during the fall of 1993 to clear the way for the building expansion to begin. Because of the ever-increasing flow of customers at the Wauseon N. Shoop Office, a decision was made to install a drive-up ATM. That ATM was installed in December, 1993. An ATM was also installed at Sauder Woodworking Co. to better serve the Sauder employees, who work various shifts, making it inconvenient for them to bank during regular banking hours. 1994 was a very special year for The Farmers & Merchants State Bank. Earnings were very strong, asset quality remained outstanding, and the bank expanded its presence within its market area. The goals for 1994 were exceeded, with a new high in assets of $406 million. With a growing interest to expand the bank's market area and branch into Henry County, an application was submitted for a Napoleon office. Once the application was approved, the bank wasted no time in getting the building constructed. The full service Napoleon Office, with a drive-up ATM, was conveniently located on St. Rt. 108 on the north edge of Napoleon making it easily accessible for the residents of Henry County. During the time the Napoleon office was under construction, plans were completed for expansion of the Wauseon N. Shoop Office. This was the first expansion of this office since its opening in 1973, and with the basement being used for offices, more office space was greatly needed. The new addition consisted of four additional offices, a large secretarial/new accounts area, restroom, and supply room. In October, 1994, the newly constructed expansion of the Main Office and the remodeling of the first floor of the original structure was completed. The offices were ready for occupancy in time for the annual Christmas Club Open House, November 4th and 5th. The remodeling of the offices located in the basement of the Main Office began as soon as Open House was over. The Napoleon Office opened for business during the second week of February, 1995. On Sunday, February 12, 1995, an Open House was held at the Main Office and the new Napoleon Office. An ATM was placed at Northwest State Community College in March, 1995, to better serve the customers from the Four County Area. In April, 1995, a drive-up ATM was installed at the Archbold Woodland Office. During the spring of 1996, the Delta Office began an extensive remodeling and expansion project. The need was seen for more loan officer space and an ATM machine. The project was completed in October of 1996. Two more ATM locations were also secured during this year. An ATM was placed in the Community Hospital of Williams County, Bryan, and another in the Fulton County Health Center, Wauseon. The Farmers & Merchants State Bank now has twelve ATM's located throughout Fulton, Williams, and Henry Counties. In June of 1996, Farmers & Merchants Bancorp split its stock, 5 for 1. The goal was to bring the price per share down so it would be more affordable and possibly encourage trading. The Farmers & Merchants State Bank again hit a new growth plateau. At year end assets went over the $500 million mark. 4
6 The Bank continued to expand ATM locations during 1997 by installing a drive-up machine at our West Unity office. During the fourth quarter 1997 an ATM (cash dispensing only) was installed at Wyse Commons at the Fairlawn Haven Complex in Archbold. 1997 proved to be a very profitable year for the Bank and ended the year with $528,273,000 in assets. An application was submitted and approved for a new full service office to be located at the east end of the village of Montpelier. Construction of that building began in October 1997 and was open for business in June 1998. With the opening of the Montpelier Eastside Office in June 1998, The Farmers & Merchants State Bank now has 12 office locations in 8 communities. There were four new ATM's installed during 1998. Those ATM's are located at the Bryan East High Office, Stryker Office, Montpelier Eastside Office, and Repp Oil in Fayette. With the addition of these new ATM's the bank now has 18 ATM locations throughout our market area. The existing Fulton County Health Center ATM was relocated to Beck's Petro Country Store, Ridgeville Corners. Construction of the Swanton Office began in June 1999. This office, which opened in November 1999, is the bank's first office located in Lucas County. With the addition of another drive-up ATM at the Swanton Office, the bank now has 19 ATM locations. Assets at the end of the fourth quarter were $598,529 million. FM Investments, the brokerage department of The Farmers & Merchants State Bank, opened for business in April 1999. The office for this department is located in the Main Office, Archbold. Securities are offered through Raymond James Financial Services, Inc. NATURE OF ACTIVITIES The Farmers & Merchants State Bank through its equivalent of 225 full time employees engages in general commercial banking and savings business. Its activities include commercial and residential mortgage, consumer, and credit card lending activities. Because of the geographical locations in which the bank's branches are located, a substantial amount of the bank's loan portfolio is composed of loans made to the farming industry for such things as farm land, farm equipment, livestock and general operation loans for seed, fertilizer, feed, etc. Other types of lending activities include loans for home improvements, student loans, and loans for such items as autos, trucks, recreational vehicles, mobile homes, motorcycles, etc. The bank also is engaged in direct finance leasing and has invested in leveraged type leases, although the activity in this area has substantially decreased in recent years. The bank also provides checking account services, as well as, savings and other time deposit services such as certificates of deposits. In addition, ATM's (automated teller machines) (Money Access Corporation) are also provided in its offices in Archbold, Wauseon, Bryan, Delta and Napoleon, Ohio. Two ATM's are also located at Sauder Woodworking Co., Inc., a major employer in Archbold. Additional locations are at Northwest State Community College, Fulton County Hospital in Wauseon, and Williams County Hospital in Bryan. During 1987 The Farmers & Merchants State Bank began offering discount brokerage services to its customers. The offering of these services was a result of management's ongoing commitment to offer a full range of financial services to its customers. Farmers & Merchants Life Insurance Company was established to provide needed additional services to The Farmers & Merchants State Bank's customers through the issuance of life and disability insurance policies. The lending officers of The Farmers & Merchants State Bank are the selling agents of the policies to the bank's customers. The insuring company will be USLIFE Credit Insurance Company, an Illinois Corporation, while Farmers & Merchants Life Insurance Co. will be the participating reinsurer. Farmers & Merchants Bancorp, Inc.'s original investment in Farmers & Merchants Life Insurance Co. was $100,000. This investment represented less than 5% of Farmers & Merchants Bancorp, Inc.'s equity capital. 5
7 Farmers & Merchants Bancorp, Inc. is a bank holding company within the meaning of the Bank Holding Company Act of 1956. The bank subsidiary, The Farmers & Merchant State Bank, is in turn regulated and examined by the Ohio Division of Banks, the Federal Deposit Insurance Corporation and the Federal Reserve System. The activities of the bank subsidiary are also subject to other federal and state laws and regulations, including usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z as promulgated thereunder by the Board of Governors, the Truth in Savings Act, the Bank Bribery Act, the Competitive Equality Banking Act of 1987, the Expedited Funds Availability Act, the Community Reinvestment Act, the FDICIA (Federal Deposit Insurance Corporation Insurance Act), FIRREA (Federal Institutions Reform, Recovery, and Enforcement Act of 1989), and the Bank Merger Act among others. The commercial banking business in the geographical area in which The Farmers & Merchants State Bank operates is highly competitive. In its banking activities, it competes directly with other commercial banks and savings and loan institutions in each of its operating localities. The following is a summary by geographical area of The Farmers & Merchants State Bank principal competition: Branch Location ------ -------- Archbold, Ohio First National Bank of Northwest Ohio (2 offices) Wauseon, Ohio National City Bank (Subsidiary of National City Corporation) First Federal Savings & Loan of Defiance City Loan Bank State Bank & Trust Company First National Bank of Northwest Ohio Stryker, Ohio First National Bank of Northwest Ohio West Unity, Ohio National Bank of Montpelier Delta, Ohio State Bank & Trust Company First Federal Savings & Loan of Delta Bryan, Ohio First National Bank of Northwest Ohio (2 offices) National City Bank (Subsidiary of National City Corporation) First Federal Savings & Loan of Defiance (2 offices) Community First Bank & Trust Montpelier, Ohio First National Bank of Northwest Ohio National Bank of Montpelier (2 offices) First Federal Savings & Loan of Defiance Napoleon, Ohio Henry County Bank (3 offices) Beneficial Bank First Federal Savings & Loan of Defiance, Ohio First National Bank of Northwest Ohio (2 offices) National City Bank (Subsidiary of National City Corporation) (2 offices) 6
8 SELECTED STATISTICAL AND FINANCIAL INFORMATION EARNINGS SUMMARY Farmers & Merchants Bancorp, Inc. reported net income of $6.8 million for 1999 which is down $864 thousand from 1998 net income of $7.6 million, and virtually the same as 1997's net income of $6.8 million. The decrease in 1999 net income is primarily a result of increased operating expenses and an increase in the loan loss provision. Earnings per share correspondingly decreased slightly for 1999 to $5.23 compared to $5.89 for 1998 and $5.22 for 1997. INTEREST INCOME The following table presents net interest income, interest spread and net interest margin for the three years 1997 through 1999, comparing average outstanding balances of earnings assets and interest bearing liabilities with the associated interest income and expense and their corresponding average rates of earned and paid. The tax exempt asset yields have been tax effected to reflect a marginal corporate tax rate of 34%. Average outstanding loan balances include nonperforming loans and mortgage loans held for sale. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities. 7
9 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL 1999 ---------------------------------------------------------- Average Interest/ Balance Dividends Yield/Rate ---------------- ------------------- ------------------ ASSETS Interest Earning Assets: Loans (1) $ 428,087 $ 37,236 8.70% Taxable investment securities 89,834 5,001 5.57% Tax-exempt investment securities 30,106 1,434 4.76% Interest bearing deposits 100 3 3.00% Federal funds sold 2,019 105 5.20% ---------------- ------------------- Total Interest Earning Assets 550,146 $ 43,779 7.96% =================== =================== Non-Interest Earning Assets: Cash and cash equivalents 9,940 Other assets 25,103 ---------------- Total Assets $ 585,189 ================ LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 98,711 $ 4,199 4.25% Other time deposits 295,376 15,577 5.27% Other borrowed money 16,503 1,029 6.24% Federal funds purchased and securities sold under agreement to repurchase 6,129 345 5.63% ---------------- ------------------- Total Interest Bearing Liabilities 416,719 $ 21,150 5.08% =================== =================== Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 110,064 Other 1,544 ---------------- Total Liabilities 528,327 Stockholders' Equity 56,862 ---------------- Total Liabilities and Shareholders' Equity $ 585,189 ================ Interest/dividend income/yield $ 43,779 7.96% Interest expense/yield 21,150 5.08% ------------------- ------------------- Net Interest Spread $ 22,629 2.88% =================== =================== Net Interest Margin 4.11% =================== 8
10 1998 ---------------------------------------------------------------- Average Interest/ Balance Dividends Yield/Rate --------------------- ------------------- ------------------ ASSETS Interest Earning Assets: Loans (1) $ 408,291 $ 36,335 8.90% Taxable investment securities 75,880 4,641 6.12% Tax-exempt investment securities 25,654 1,259 4.91% Interest bearing deposits 100 5 5.00% Federal funds sold 12,123 648 5.35% ---------------------- ------------------- Total Interest Earning Assets 522,048 $ 42,888 8.22% =================== =================== Non-Interest Earning Assets: Cash and cash equivalents 14,745 Other assets 16,484 ---------------------- Total Assets $ 553,277 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 89,643 $ 4,635 5.17% Other time deposits 290,141 16,547 5.70% Other borrowed money 11,051 698 6.32% Federal funds purchased and securities sold under agreement to repurchase 3,276 206 6.25% ---------------------- ------------------- Total Interest Bearing Liabilities 394,111 $ 22,086 5.60% =================== =================== Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 100,420 Other 5,807 Total Liabilities 500,338 Stockholders' Equity 52,939 ---------------------- Total Assets & Shareholders' Equity $ 553,277 ====================== Interest/dividend income/yield $ 42,888 8.22% Interest expense/yield 22,086 5.61% ------------------- ------------------- Net Interest Spread $ 20,802 2.61% =================== =================== Net Interest Margin 3.98% =================== 9
11 1997 ----------------------------------------------------------------- Average Interest/ Balance Dividends Yield/Rate ---------------------- ------------------- ------------------- ASSETS Interest Earning Assets: Loans (1) $384,498 $34,271 8.91% Taxable investment securities 72,158 4,540 6.29% Tax-exempt investment securities 22,069 1,131 5.13% Interest bearing deposits 100 5 5.00% Federal funds sold 3,805 211 5.55% ---------------------- ------------------- Total Interest Earning Assets 482,630 $40,158 8.32% =================== =================== Non-Interest Earning Assets: Cash and cash equivalents 13,161 Other assets 14,371 ---------------------- Total Assets $510,162 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 87,439 $ 4,618 5.28% Other time deposits 270,751 15,659 5.78% Other borrowed money 9,414 596 6.34% Federal funds purchased and securities sold under agreement to repurchase 4,443 266 5.99% ---------------------- ------------------- Total Interest Bearing Liabilities 372,047 $21,139 5.68% =================== =================== Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 87,013 Other 4,554 Total Liabilities 463,614 Stockholders' Equity 46,548 ---------------------- Total Assets & Shareholders' Equity $510,162 ====================== Interest/dividend income/yield $40,158 8.32% Interest expense/yield 21,139 5.68% ------------------- ------------------- Net Interest Spread $19,019 2.64% =================== =================== Net Interest Margin 3.94% =================== The primary source of the Company's traditional banking revenue is net interest income. Net interest income is the difference between interest income on interest earning assets, such as loans and securities, and interest expense on liabilities used to fund those assets such as interest bearing deposits and other borrowings. Net interest income is affected by changes in both interest rates and the amount and composition of earnings assets and liabilities. The change in net interest income is most often measured as a result of two statistics interest spread and net interest margin. The difference between the yields on earning assets and the rates paid for interest bearing liabilities supporting those funds represents the interest spread. Because non-interest bearing sources of funds such as demand deposits and stockholders' equity also support earning assets, the net interest margin exceeds the interest spread. 10
12 The following tables show changes in interest income, interest expense and net interest due resulting from changes in volume and rate variances for major categories of earnings assets and interest bearing liabilities. 1999 vs 1998 ----------------------------------------------------------------- Net Due to Change in Change Volume Rate ---------------------- ------------------- ------------------- Interest Earned On: Loans $ 901 $ 1,722 $ (821) Taxable investment securities 360 777 (417) Tax-exempt investment securities 175 212 (37) Interest bearing deposits (2) - (2) Federal funds sold (543) (525) (18) ---------------------- ------------------- ------------------- Total Interest Earning Assets $ 891 $ 2,185 $ (1,294) ====================== =================== =================== Interest Paid On: Savings deposits $ (436) $ 386 $ (822) Other time deposits (970) 276 (1,246) Other borrowed money 331 340 (9) Federal funds sold and security repurchase agreements 139 161 (22) ---------------------- ------------------- ------------------- $ (936) $ 1,162 $ (2,098) ====================== =================== =================== 1998 vs 1997 ----------------------------------------------------------------- Net Due to Change in Change Volume Rate ---------------------- ------------------- ------------------- Interest Earned On: Loans $ 2,064 $ 2,117 $ (53) Taxable investment securities 101 228 (127) Tax-exempt investment securities 128 176 (48) Interest bearing deposits - - - Federal funds sold 437 445 (8) ---------------------- ------------------- ------------------- Total Interest Earning Assets $ 2,730 $ 2,966 $ (236) ====================== =================== =================== Interest Paid On: Savings deposits $ 18 $ 114 $ (96) Other time deposits 888 1,106 (218) Other borrowed money 102 103 (1) Federal funds sold and security repurchase agreements (62) (73) 11 ---------------------- ------------------- ------------------- $ 946 $ 1,250 $ (304) ====================== =================== =================== 11
13 Interest income and fees on loans and leases increased $901 thousand for 1999 to $37.2 million from $36.3 million for 1998. This compares with an increase of $2.1 million for 1998 over 1997 income of $34.2 million. The increase for 1999 was primarily due to an increase in loan activity with some increase resulting from an increased investment in marketable debt securities. Net interest margin was 4.11% for 1999, 3.98% for 1998 and 3.94% for 1997. While industry trends have been for a narrowing of the interest margin due to rising interest rates by the Federal Reserve and price competition, The Farmers & Merchants State Bank has been able to modestly increase their margins. NONINTEREST INCOME Noninterest income was $3.1 million for 1999 compared to $4 million for 1998 and $2.9 million for 1997. The reduction in noninterest income was primarily in four categories. Miscellaneous customer service charges were $299 thousand for 1999 compared to $452 thousand for 1998 and $288 for 1997. Mastercard fees dropped $199 thousand for 1999 to $293 thousand compared to $492 thousand for 1998 and $406 thousand for 1997. Mortgage servicing rights income was $138 thousand for 1999 compared to $814 thousand for 1998 and $261 thousand for 1997. Finally, the gain on sale of loans held-for-sale was $116 thousand for 1999, while gain on sale of loans-held-for-sale for 1998 and 1997 were $477 thousand and $160 thousand, respectively. NONINTEREST EXPENSE Noninterest expenses have demonstrated steady increases. Noninterest expense for 1997 amounted to $11 million compared to $12.9 million for 1998, and $14.3 million for 1999, representing increases of $1.8 million and $1.4 million for 1998 and 1999, respectively. No one specific noninterest expense category accounted for a significant portion of these increases. Increases were experienced in all categories as can be seen from the income statement in the shareholders' report. FINANCIAL CONDITION Average earning assets have demonstrated a consistent increase since 1997. These assets were $550 million for 1999, a $28 million or 5.4% increase over 1998 levels of $522 million compared to a $40 million or 8.2% increase for 1998 over 1997. Most of this growth has come from increased loan activity with some increase in marketable debt securities. Average interest bearing liabilities have also showed steady increases rising $22 million from $372 million for 1997 to $394 million for 1998 and increasing again $23 million to $417 million for 1999, representing a 5.9% increase for 1998 and a 5.7% increase for 1999. Average non-interest bearing deposits which increased $9.6 million from $100 million for 1998 to $110 million for 1999 also helped support the increase. INVESTMENT SECURITIES Security balances at December 31 are summarized below: (In Thousands) ----------------------------------------------------------------- 1999 1998 1997 ---------------------- ------------------- ------------------- U.S. Treasury and Government agencies $ 44,921 $ 55,686 $ 44,695 Mortgage-backed securities 9,827 35,520 25,617 State and local governments 31,246 10,993 8,991 Corporate debt securities 9,627 19,115 10,327 Equity securities 20 20 20 ---------------------- ------------------- ------------------- $ 95,641 $ 121,334 $ 89,650 ====================== =================== =================== 12
14 The following table sets forth (dollars in thousands) the maturities of investment securities at December 31, 1999 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent adjustments, using a thirty-four percent rate have been made in yields on obligations of state and political subdivisions. Stocks of domestic corporations have not been included. Maturities --------------------------------------------------------------------------------------- After One Year Within One Year Within Five Years ------------------------------------------- ----------------------------------------- Amount Yield Amount Yield ---------------------- ------------------- ------------------- ------------------- U.S. Treasury $ 1,036 6.00% $ 5,787 6.39% U.S. Government agency 7,910 6.14% 28,322 5.82% Mortgage-backed securities 1,024 6.24% 9,201 5.90% State and local governments 4,179 8.17% 7,117 8.20% Taxable state and local governments 700 5.28% 2,374 6.09% Corporate debt securities 500 6.14% 9,302 5.83% Maturities --------------------------------------------------------------------------------------- After Five Years Within Ten Years After Ten Years ------------------------------------------- ----------------------------------------- Amount Yield Amount Yield ---------------------- ------------------- ------------------- ------------------- U.S. Treasury $ - N/A $ - N/A U.S. Government agency 2,608 5.13% - N/A Mortgage-backed securities - N/A 9 10.42% State and local governments 9,904 7.86% 6,801 9.44% Taxable state and local governments - N/A - N/A Corporate debt securities - N/A - N/A At December 31, 1999 the Bank held no large block of any one investment security, except for U.S. Treasury and other U.S. Government agencies. No one holding in debt securities exceeded $2.5 million. The Bank did hold stock in the Federal Home Loan Bank of Cincinnati at a cost of $2.8 million. This is required in order to obtain Federal Home Loan Bank Loans. LOAN PORTFOLIO The Bank's various loan portfolios are subject to varying levels of credit risk. Management mitigates these risks through portfolio diversification and through standardization of lending policies and procedures. (In Thousands) -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ -------------- ------------------- -------------- ------------ Loans: Commercial/industrial $ 100,996 $ 81,253 $ 65,633 $ 67,763 $ 58,987 Agricultural 46,035 38,882 44,939 41,195 41,328 Real estate mortgage 237,056 200,675 205,626 195,043 173,302 Installment 71,662 68,385 75,767 63,199 61,021 Commercial paper 7,330 13,648 7,837 3,959 7,604 IDB 7,015 4,587 4,511 3,670 3,336 ------------ -------------- ------------------- -------------- ------------ Total Loans $ 470,094 $ 407,430 $ 404,313 $ 374,829 $ 345,578 ============ ============== =================== ============== ============ 13
15 The following table shows the maturity of loans: Maturities (In Thousands) --------------------------------------------------------------------------------------- After One Within Year Within After One Year Five Years Five Years Total ---------------------- ------------------- ------------------- ------------------- Commercial/industrial/agriculture $ 85,062 $ 38,681 $ 23,288 $ 147,031 Real estate mortgage 560 8,121 228,375 237,056 Installment 9,288 59,336 3,038 71,662 Commercial paper 7,330 - - 7,330 Industrial Development Bonds 721 1,180 5,114 7,015 The following table presents the total of loans due after one year which have 1) predetermined interest rates and 2) floating or adjustable interest rates: (In Thousands) After One Year ---------------------- Commercial/industrial/agriculture Fixed $ 25,521 Variable 8,769 Real estate mortgage Fixed 35,602 Variable 78,300 Installment Fixed 55,501 Variable 36 Industrial Development Bonds Fixed 6,295 Variable - The following table summarizes the Company's nonaccrual and past due loans as of December 31: (In Thousands) -------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------- ------------------- ------------------- ------------------- --------------- Nonaccrual loans $ 6,504 $ 6,455 $ 2,890 $ 3,489 $ 3,494 Accruing loans past due 90 days or more 2,264 1,988 1,396 1,899 2,698 ---------------- ------------------- ------------------- ------------------- --------------- Total $ 8,768 $ 8,443 $ 4,286 $ 5,388 $ 6,192 ================ =================== =================== =================== =============== As of December 31, 1999, management, to the best of their knowledge, is not aware of any significant loans, group of loans or segments of the loan portfolio not included above, where there are serious doubts as to the ability of the borrowers to comply with the present loan payment terms. Although loans may be classified as nonperforming, many continue to pay interest irregularly or at less than original contractual rates. Interest income which would have been recorded under the original terms of the nonaccrual loans was $53 thousand for 1999 and $40 thousand for 1998. Any collections of interest on nonaccrual loans are included in interest income when collected. This amounted to $53 thousand for 1999 and $172 for 1998. 14
16 Loans are placed on nonaccrual status in the event one of the following occurs: the total line of the customer is charged off to the extent of 50%, the loan is in past due status for more than 180 days. The $6.5 million of nonaccrual loans as of December 31, 1999 are secured. At December 31, 1999 the Bank has $8.7 million of loans which it considers to be potential problem loans in that the borrowers are experiencing financial difficulties. These loans are subject to constant management attention and are reviewed more frequently that quarterly. The amount of the potential problem loans was considered in management's review of the loan loss reserve required at December 31, 1999. In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance or reserve for possible loan losses is established by way of expense charges to earnings. This expense, used to enlarge a bank's allowance for loan losses, is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the bank's borrowers. At December 31, 1999, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $46 million. The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities The allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects expected losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on a regular analysis of all loans and commitments over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss portion is determined using a historical loss analysis by loan category. The unallocated portion of the reserve for loan losses is determined based on management's assessment of general economic conditions as well as specific economic factors in the Bank's marketing area. This assessment inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank's historical loss factors used to determine the allocated component of the allowance. Actual charge-off of loan balances are based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral. The following table presents a reconciliation of the allowance for loan losses: 15
17 (In Thousands) --------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------- --------------- --------------- --------------- ------------ Loans $ 470,094 $ 407,430 $ 404,313 $ 374,829 $ 345,577 ================ =============== =============== =============== ============ Daily average of outstanding loans $ 428,087 $ 408,291 $ 384,498 $ 358,261 $ 324,239 ================ =============== =============== =============== ============ Allowance for loan losses - January 1 $ 5,850 $ 5,850 $ 5,500 $ 5,500 $ 5,500 Loans Charged Off: Commercial 185 472 263 623 748 Installment 1,085 1,260 1,239 1,053 691 Real estate mortgages 304 42 29 35 40 ---------------- --------------- --------------- --------------- ------------ 1,574 1,774 1,531 1,711 1,479 ---------------- --------------- --------------- --------------- ------------ Loan Recoveries: Commercial 493 540 384 197 584 Installment 331 339 364 443 426 Real estate mortgages 13 3 22 3 84 ---------------- --------------- --------------- --------------- ------------ 837 882 770 643 1,094 ---------------- --------------- --------------- --------------- ------------ Net Charge Offs 737 892 761 1,068 385 ---------------- --------------- --------------- --------------- ------------ Privision for loan loss 1,637 892 1,111 1,068 385 ---------------- --------------- --------------- --------------- ------------ Allowance for loan losses - December 31 $ 6,750 $ 5,850 $ 5,850 $ 5,500 $ 5,500 ================ =============== =============== =============== ============ Ratio of net charge-offs to average loans outstanding 0.17% 0.22% 0.20% 0.30% 0.12% ================ =============== =============== =============== ============ Allocation of the allowance for loan losses among the various loan categories is as follows: % of Loans in Each Amount Category To (000's) Total Loans ---------------------- ------------------- Balance at End of Period Applicable To: Commercial/industrial $ 3,948 32.26% Installment 1,504 15.72% Real estate 1,298 52.01% ---------------------- ------------------- $ 6,750 100.00% ====================== =================== DEPOSITS The amount of outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity are as follows: Over Six Over Three Less Than Over Under Less Than Twelve Twelve Three Months Six Months Months Months ---------------------- ------------------- ------------------- ------------------- Time deposits $ 27,471 $ 24,942 $ 13,491 $ 1,861 16
18 The following table presents the average amount of and average rate paid on each deposit category: Demand NOW Savings Time Deposits Accounts Accounts Accounts ------------- ----------- ------------ ----------- December 31, 1999: - ------------------ Average balance (In thousands) $ 43,655 $ 61,609 $ 101,506 $ 292,581 Average rate 0.00% 2.44% 2.65% 5.32% December 31, 1998: - ------------------ Average balance (In thousands) $ 38,906 $ 44,218 $ 108,981 $ 287,484 Average rate 0.00% 2.29% 3.32% 5.76% December 31, 1997: - ------------------ Average balance (In thousands) $ 34,665 $ 40,626 $ 100,025 $ 268,181 Average rate 0.00% 2.49% 3.57% 5.84% SHORT-TERM BORROWINGS The Company's average balance of short-term borrowings was less than 30% of end of year stockholders' equity for each year reported. RETURN ON ASSETS AND EQUITY The Company has consistently maintained regulatory capital ratios at or above the "well capitalized" levels. See Note Note 16 to the Consolidated Financial Statements for more information. Stockholders' equity ended at $57.9 million for 1999 compared to $55.3 million for 1998, a $2.6 million or 4.7% increase. Dividends remained at $1.40 per share for 1999 compared to $1.40 for 1998 and $1.25 for 1997 resulting in the dividend payout ratios shown in the table below. Management and the Board of Directors are continually reviewing this ratio. The amount of dividends which can be paid are subject to regulatory restrictions. The following table shows consolidated operating and capital ratios of the Company for each of the last three years: 1999 1998 1997 ---------------------- ------------------- ------------------- Return on average assets 1.16% 1.38% 1.33% Return on average equity 11.95% 14.46% 14.56% Dividend payout ratio 26.79% 23.77% 23.95% Equity to assets ratio 9.67% 9.45% 9.25% FUNDING The Company's bank subsidiary continues to follow the strategy of acquiring assets for investment purposes and retaining its own loan production, attempting to achieve reasonable spreads through matching such assets with one of a number of funding sources available. The Farmers & Merchants State Bank functions as a financial intermediary, and as a result, its financial condition should be examined in terms of trends in its sources and uses of funds. The following comparison of daily average balances (in thousands) indicates how the bank has managed its sources and uses of funds. 17
19 1999 ----------------------------------------------------------------- Net Change Average ----------------------------------------- Balance Amount Percentage ---------------------- ------------------- ------------------- Funding Uses: Loans $ 428,087 $ 19,796 4.85% Taxable securities 89,834 13,954 18.39% Tax exempt securities 30,106 4,452 17.35% Interest bearing deposits 100 - 0.00% Federal funds sold 2,019 (10,104) -83.35% ---------------------- ------------------- $ 550,146 $ 28,098 5.38% ====================== =================== Funding Sources: Deposits: Noninterest bearing demand $ 110,064 $ 9,644 9.60% Savings 98,711 9,068 10.12% Other time 295,376 5,235 1.80% Other borrowed money 16,503 5,452 49.33% Federal funds purchased agreements to repurchase 6,129 2,853 87.09% ---------------------- ------------------- $ 526,783 $ 32,252 6.52% ====================== =================== 1998 1997 --------------------------------------------------------- ------------------- Net Change Average -------------------------------------- Average Balance Amount Percentage Balance ----------------- ------------------- ---------------- ------------------- Funding Uses: Loans $ 408,291 $ 23,793 6.19% $ 384,498 Taxable securities 75,880 3,722 5.16% 72,158 Tax exempt securities 25,654 3,585 16.24% 22,069 Interest bearing deposits 100 - 0.00% 100 Federal funds sold 12,123 8,318 218.61% 3,805 ----------------- ------------------- ------------------- $ 522,048 $ 39,418 8.17% $ 482,630 ================= =================== =================== Funding Sources: Deposits: Noninterest bearing demand $ 100,420 $ 13,407 15.41% $ 87,013 Savings 89,643 2,204 2.52% 87,439 Other time 290,141 19,390 7.16% 270,751 Other borrowed money 11,051 1,637 17.39% 9,414 Federal funds purchased and agreements to repurchase 3,276 (1,167) -26.27% 4,443 ----------------- ------------------- ------------------- $ 494,531 $ 35,471 7.73% $ 459,060 ================= =================== =================== 18
20 LIQUIDITY Historically, the primary source of liquidity has been core deposits which include noninterest bearing demand deposits, NOW and money market accounts and time deposits of individuals. Although new customers were attracted during 1999 and interest rates are competitive, changes in consumer preferences resulted in an overall decline in core deposits from 1998 levels. Overall deposits declined $9 million to $503 million for 1999 compared to deposits at the end of 1998 of $512 million. Deposits for 1998 had increased by $50.1 million from 1997 deposits of $479 million. The primary use of new funds is placing the funds back into the community through loans for the acquisition of new homes, consumer products and for business development. The use of new funds for loans is measured by the loan to deposit ratio. The Company's loan to deposit ratio for 1999 was 92.13% compared to 78.33% for 1998 and 86.31% for 1997. Short-term debt such as federal funds purchased and securities sold under agreement to repurchase also provides the Company with liquidity. Short-term debt was $7.3 million at the end of 1999 compared to $2.9 million at the end of 1998, providing $4.4 million in additional funds for the Company. Other borrowings are also a source of funds. Other borrowings consist of loans from the Federal Home Loan Bank of Cincinnati at fixed rates. These funds are then used to provide housing mortgages back to the community in the form of fixed rate loans. Borrowings from this source increased $13.8 million to $25 million for 1999 compared to $11.2 million for 1998. ASSET/LIABILITY MANAGEMENT The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. It involves the management of the balance sheet mix, maturities, repricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Changes in net income, other than volume related, arise when interest rates on assets reprice in a time frame or interest rate environment that is different from that of the repricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest-earning assets and interest-bearing liabilities. Historically, The Farmers & Merchants State Bank has maintained liquidity through cash flows generated in the normal course of business, loan repayments, maturing earning assets, the acquisition of new deposits, and borrowings. The Bank's asset and liability management program is designed to maximize net interest income over the long term while taking into consideration both credit and interest rate risk. Interest rate sensitivity varies with different types of interest-earning assets and interest bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to the market rate differ considerably from long-term investment securities and fixed rate loans. Similarly, time deposits over $100,000 and money market certificates are much more interest rate sensitive than passbook savings accounts. The shorter term interest rate sensitivities are the key to measurement of the interest sensitivity gap, or excess interest sensitive earnings assets over interest-bearing liabilities. The following table summarizes the repricing opportunities as of December 31, 1999 for each major category of interest-earning assets (at amortized cost) and interest-bearing liabilities: 19
21 0-90 90-365 1-5 Over 5 Days Days Years Years Total ---------------- ---------------- --------------- ------------------- --------------- Interest bearing deposit $ - $ 100 $ - $ - $ 100 Investment securities 2,169 13,200 62,104 19,321 96,794 Loans 122,903 137,970 84,568 125,735 471,176 ---------------- ---------------- --------------- ------------------- --------------- Total Rate Sensitive Assets 125,072 151,270 146,672 145,056 568,070 ---------------- ---------------- --------------- ------------------- --------------- Deposits 76,841 171,130 189,693 58 437,722 Federal funds purchased and - agreements to repurchase 6,391 326 626 - 7,343 Other borrowings 4,063 12,190 6,246 2,540 25,039 ---------------- ---------------- --------------- ------------------- --------------- Total Rate Sensitive Liabilities 87,295 183,646 196,565 2,598 470,104 ---------------- ---------------- --------------- ------------------- --------------- Gap $ 37,777 $ (32,376) $(49,893) $142,458 $ 97,966 ================ ================ =============== =================== =============== OTHER MATTERS Information required by subsections of Item 1, to which no response has been made, are inapplicable to the business of the Company. PROPERTIES The principal office of Farmers & Merchants Bancorp, Inc. is located in facilities owned by The Farmers & Merchants State Bank at 307-11 North Defiance Street, Archbold, Ohio 43502. The Farmers & Merchants State Bank operates from and utilizes the entire facilities at 307-11 North Defiance Street. In addition, the bank owns the property from 200 to 208 Ditto Street, Archbold, Ohio, which it uses for Bank parking and a community mini-park area. The Bank owns real estate at two locations, 207 Ditto Street and 209 Ditto Street in Archbold, Ohio upon which the bank built a commercial building to be used for storage, and a parking lot for company vehicles and employee parking. In late 1993 construction began on a 15,237 square foot addition on an adjacent lot it owned at 313 North Defiance Street. This addition was substantially completed by the end of 1994 with final completion taking place in the spring of 1995. Then in 1993 the Bank purchased real estate across from the main facilities to provide for possible parking expansion. In 1989 the Bank purchased additional real estate in Bryan, Ohio, and has established another branch operation in Bryan. The Bank, in 1988, purchased real estate immediately adjacent to its branch bank premises in Delta, Ohio for expansion of parking facilities. In 1990 the Bank purchased real estate in Delta, Ohio for additional parking to serve its branch office. The Bank constructed in 1994 a 1,540 square foot addition to the branch in Wauseon, Ohio. The bank obtained permission to open a branch in Napoleon, Ohio. Facilities were completed in the Spring of 1995. The Bank also owns real estate consisting of land and buildings housing each of its full service branch operations, except for the Montpelier, Ohio facilities which are leased. Construction has begun on permanent facilities for the Montpelier operations and was completed in June of 1998. The Bank purchased land for a Swanton branch with construction to begin in 1999 with a year end completion date. The Bank also began an addition to its Napoleon office with a completion date of first quarter 1999. 20
22 The Bank has an Option to Purchase on a parcel of land on St. Rt. 66 north of Defiance, Ohio. Upon approval the Bank will commence building a full service banking center, with plans to open during the fourth quarter of 2000 or first quarter of 2001. Branch Location ------ -------- Archbold, Ohio 1313 South Defiance Street Wauseon, Ohio 1130 North Shoop Avenue 119 North Fulton Street Stryker, Ohio 300 South Defiance Street West Unity, Ohio 200 West Jackson Street Bryan, Ohio 924 W. High Street 1000 South Main Street Delta, Ohio 101 Main Street Montpelier, Ohio 225 West Main Street 1150 East Main Street Napoleon, Ohio 2255 Scott Street Swanton, Ohio 7 Turtle Creek Circle The majority of the above locations have drive-up service facilities. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Bank, to which the Bank is a party or of which any of its properties is the subject. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No items were submitted during the fourth quarter of the fiscal year covered by this report to a vote of the security holders through solicitation of proxies or otherwise. PART II MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company's stock is not quoted on the National Association of Securities Dealers Automated Quotations System (NASDAQ). The company's stock is traded in the principal market area of Fulton, Williams, and Henry Counties, Ohio. The company has no broker that sets a price for the company's stock, therefore, the only source as to the high and low sale price is from private sales. The high and low sale price known to the company's management is as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1999 High $75.00 $100.00 $113.00 $105.00 Low $75.00 $75.00 $85.00 $75.00 1998 High $55.00 $65.00 $70.00 $75.00 Low $55.00 $55.00 $65.00 $70.00 As of March 1, 2000, there were 1,497 record holders of common stock of the company. 21
23 Dividends are paid quarterly. Per share dividends for the years ended 1998 and 1997 are as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ----------- ----------- ----------- ----------- ----- 1999 $.30 $.30 $.30 $.50 $1.40 1998 $.30 $.30 $.30 $.50 $1.40 SELECTED FINANCIAL DATA Selected financial data is presented on page 33, of the Annual Report to shareholders for the year ended December 31, 1999 and are incorporated herein by reference. OTHER ACCOUNTING ISSUES During 1999, management completed the process of preparing for the Year 2000 date change. This process involved identifying and resolving date recognition issues in the Company's computer systems, software and other operating equipment. To date the Company has successfully managed the transition. Although considered unlikely, unanticipated problems such as non-compliant third party and disruptions to the economy in general could still occur. Management will continue to monitor all business processes, including transactions with the Company's customers, vendors and other third parties throughout 2000 to address any issues which may arise, and to ensure all activities continue to process properly. 22
24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants 23
25 MESSAGE FROM MANAGEMENT: At Farmers & Merchants Bancorp, Inc., service is the strength and key to our performance. Fueled by strong loan demand and overhead control, the bank's Board of Directors, management, and employees can report another good year in 1999. This resulted in 11.95 percent Return on Average Equity and 1.16 percent Return on Average Assets. With a new high in assets of $598,529,000, capital accounts have increased to $57,889,000 with a net income of $6,793,000 or $5.23 per share. Our continued success can be attributed in part to the strength of the economy in our market area. The results of Farmers & Merchants Bancorp, Inc. in 1999 also reflect favorably on the professionalism, dedication, and enthusiasm of our people. Although resources do not show up on the balance sheet, they are crucial to our continued success. The real story for 1999 was the resources and efforts put into upgrading our computer hardware, software, and electronic devices to ready ourselves for Year 2000. As you know, the bank's Y2K progress and compliance was closely monitored by federal banking authorities. We agreed with the American Bankers Association's position that, as we moved into the new year, the safest place for your money was in the bank. We are very pleased to announce that our bank experienced no Y2K problems and it was "business as usual" on January 3, 2000. We sincerely appreciate the time and effort given by Marilyn Johnson and the Y2K Committee members to ensure the Farmers & Merchants Bancorp, Inc. was compliant. We also appreciate the confidence that our customers and you, our shareholders, had in us that this issue would not be a problem. The Farmers & Merchants Bancorp, Inc. remains committed to providing service to its customers in a process that is first-rate from start to finish. As banking products become more like commodities, quality service is increasingly what differentiates outstanding companies from merely adequate ones. We know we must be able to deliver both excellent service and quality products, not one at the exclusion of the other. Your bank will continue to respond to customers' demands to provide banking services when, where, and how they desire. This past year your bank has expanded its market area with the opening of the Swanton Office in November. Barry Gray, Branch Manager, and Debra Kauffman, Assistant Branch Manager, and their staff are doing an excellent job serving the Swanton market area. At your convenience, please stop in for a tour of our newest office. We are presently developing plans for the bank's Defiance Office. Construction should begin in late spring or early summer and we anticipate opening late this year or the first quarter of 2001. A major concern for the coming year will be to increase our deposit base. As you are probably well aware, the need for deposits remains very competitive with new specials appearing almost daily in the newspapers. We have just introduced a new 36 month "Excel-A-Rate" CD with the option to change the interest rate two times at any point during the term of the certificate of deposit. Stop in any of our convenient offices for complete details. WE NEED YOUR DEPOSITS. Connecting and solidifying banking relationships are the goals for the bank this year. We are reaching out to connect with our shareholders, customers, and communities to increase our profitability and enhance our service. The bank and its vendors are working together to improve processes and offer better products. All employees are working with their customers to broaden and refine customer relationships. the connections with our communities demonstrate that part of being a good business is being a good neighbor. On behalf of the Board of Directors, Advisory Boards, the management team, and the employees of the Farmers & Merchants Bancorp, Inc., we wish to thank the shareholders for their confidence in our company. We look forward to the opportunities and challenges of 2000 and the New Millennium. Joe E. Crossgrove Eugene D. Bernath President/Chief Executive Officer Chairman of the Board 1
26 CONTENTS Audited Consolidated Financial Statements FARMERS & MERCHANTS BANCORP, INC. And wholly owned subsidiaries December 31, 1999 Message from Management 1 Table of Contents 2 Board of Directors, Advisory Boards and Officers 3-5 Independent Auditors' Report 6 Consolidated Balance Sheets 7 Consolidated Statements of Income 8 Consolidated Statements of Changes in Shareholders' Equity 9 Consolidated Statements of Cash Flows 10 Notes to Consolidated Financial Statements 11-31 Independent Auditors'Report on Supplementary Information 32 Five Year Summary 33 Trading Market for the Company's Stock 34 Selected Financial Data by Management 35 Independent Auditors' Report 36 Management Report 37 Charts of Selected Highlights 38-39 1999 Promotional Highlights 40-43
27 DIRECTORS MAYNARD SAUDER MICHAEL D. CULLER Chairman/Chief Executive Asst. Vice President EUGENE D. BERNATH Officer Chief Agri Finance Officer Chairman of the Board Sauder Woodworking Co. The Farmers & Merchants State Bank BARBARA J. BRITENRIKER MERLE J. SHORT Vice President DEXTER L. BENECKE Farmer Comptroller & Chief Financial Officer President President Viking Trucking, Inc. Promow, Inc. DIANN K. MEYER Vice President Asst. Vice President Alex Products, Inc. STEVEN J. WYSE Human Resource Officer President JERRY L. BOYERS SteelinQ Systems, Inc. KENT E. ROTH President Auditor Edifice Construction DIRECTOR EMERITUS Security Officer Management ELIAS H. FREY MARILYN K. JOHNSON JOE E. CROSSGROVE CHARLES E. LUGBILL Assistant Cashier President/Chief Executive KENNETH E. STAMM Compliance and CRA Officer ROBERT H. STOTZER Officer The Farmers & Merchants State Bank ROBERT V. WHITMER JUDITH A. WARNCKE ROBERT G. FREY Asst. Cashier President ARCHBOLD MAIN OFFICE Marketing Officer E. H. Frey & Sons, Inc. EUGENE D. BERNATH J. SCOTT MILLER LEE E. GRAFFICE Chairman of the Board Asst. Cashier President Agri Finance Officer Graffice Motor Sales JOE E. CROSSGROVE President RUTH ANN DUNN JACK C. JOHNSON Chief Executive Officer Asst. Cashier President Agri Finance Officer Hawk's Clothing, Inc. MAYNARD SAUDER Partner Vice President JANE C. BRUNER REJO Partnership Asst. Cashier HAROLD H. PLASSMAN Operations Supervisor DEAN E. MILLER Vice President President JOYCE G. KINSMAN MBC Holdings, Inc. EDWARD A. LEININGER Asst. Cashier Executive Vice President Loan Review Officer DALE L. NAFZIGER Commercial Loan Officer Vice President BRETT J. KAHRS Homestead Ice Cream Co. REX D. RICE Asst. Cashier Executive Vice President Senior Investment Executive HAROLD H. PLASSMAN Chief Lending Officer Attorney Plassman, Rupp, Hensal & Short GEORGE JELEN ARCHBOLD WOODLAND Asst. Vice President OFFICE JAMES L. PROVOST Secondary Market Officer Retired Loan Underwriter DEBORAH L. SHINABERY Dyer & McDermott, Inc. Asst. Vice President RANDAL H. SCHROEDER Branch Manager JAMES C. SANEHOLTZ Asst. Vice President President Chief Operations Officer DIANE J. SWISHER Saneholtz-McKarns, Inc. Asst. Cashier Asst. Branch Manager 3
28 ARCHBOLD ADVISORY BOARD WAUSEON ADVISORY BOARD WEST UNITY OFFICE BRUCE C. LAUBER RICHARD L. ELROD LEWIS D. HILKERT President President Vice President Lauber Manufacturing Co. Mustang Corporation Branch Manager JO ELLEN HORNISH WARREN A. KAHRS PATRICIA R. BURKHOLDER President President Assistant Cashier Hornish Brothers, Inc. Kahrs Tractor Sales, Inc. Assistant Branch Manager ANTHONY J. RUPP JOSEPH H. KOLB President Owner WEST UNITY ADVISORY Rupp Furniture Co. Kolb & Son BOARD GENE SCHAFFNER JULIAN GIOVARELLI ALVIN E. CAROTHERS Farmer President Farmer Gio Sales, Inc. GEORGE F. STOTZER BEN G. WESTFALL Partner SANDRA K. BARBER President Stotzer Do-It Center Fulton County Recorder Westfall Realty, Inc. Chairman, Ohio Lottery Commission LARRY M. WENDT TED W. MANEVAL Farmer DR. KENNETH H. KLING Farmer Owner Fulton County Vision Services R. BURDELL COLON WAUSEON SHOOP OFFICE President ALLEN G. LANTZ Rup-Col., Inc. Vice President STRYKER OFFICE Branch Manager CHARLES W. KLINGER RONALD D. SHORT Pharmacist GLORIA GUNN Asst. Vice President Klinger Pharmacy Asst. Vice President Branch Manager Asst. Branch Manager PATTI L. ROSEBROCK DELTA OFFICE JERRY A. BORTON Asst. Cashier Assistant Cashier Asst. Branch Manager CYNTHIA K. KNAUER Agri Finance Officer Asst. Vice President Branch Manager SUSAN DIERINGER STRYKER ADVISORY Asst. Cashier BOARD ARTHUR J. SHORT Loan Officer Asst. Branch Manager FRED W. GRISIER Owner WAUSEON DOWNTOWN Grisier Funeral Home DELTA ADVISORY BOARD OFFICE RICHARD E. RAKER TERRY J. KAPER CAROL J. ENGLAND Owner Attorney Asst. Vice President Raker Oil Company Barber, Kaper, Stamm & Robinson Branch Manager Corporate Secretary STEVEN PLANSON ROBERT E. GILDERS Farmer Chairman JEAN E. HORWATH GB Manufacturing Asst. Cashier WILLIAM J. BRENNER Asst. Branch Manager Attorney EUGENE BURKHOLDER President Falor Farm Center 4
29 AL KREUZ MONTPELIER WEST GARY W. SPENCER Retired Fulton County MAIN Assistant Vice President Commissioner OFFICE Commercial Loan Officer DONALD G. GERDES LANCE D. NOFZIGER Human Resource Manager Asst. Cashier NAPOLEON ADVISORY Worthington Steel, Delta Branch Manager BOARD BARBARA C. SCHIE BRYAN EAST HIGH OFFICE MONTPELIER EASTSIDE Office Manager OFFICE Fulton Anesthesia Associates, DAVID C. FRAZER Inc. Assistant Vice President JOHN S. FEE Branch Manager Asst. Vice President DAVID M. DAMMAN Branch Manager Farm Drainage Contractor CAROL L. CHURCH Farmer Assistant Cashier GREGORY A. SIMS Assistant Branch Manager Asst. Branch Manager JAMES T. VAN POPPEL President Van Poppel Limited SOUTHTOWNE OFFICE MONTPELIER ADVISORY BOARD DENNIS L. MEYER MICHAEL T. SMITH Realtor Assistant Cashier GREGORY D. SHOUP Reiser Realty Branch Manager President Peltcs Lumber Co., Inc. RUTH M. FORD SWANTON OFFICE Assistant Branch Manager RICHARD S. DYE Probation Department BARRY N. GRAY RICHARD S. BRUCE Bryan Municipal Court Asst. Cashier Assistant Vice President Branch Manager Commercial Loan Officer ROBERT D. MERCER President DEBRA J. KAUFFMAN Bob Mercer Realty and Asst. Cashier BRYAN ADVISORY BOARD Auctions Asst. Branch Manager Asst. Corporate Secretary W. PAUL TRODER GEORGE B. RINGS President Pharmacist Allied Moulded Products, Inc. Rings Pharmacy RUSTY BRUNICARDI Joe Crossgrove, President President/Chief Executive Chief Executive Officer Officer; Charles Lugbill, Community Hospital of retiring Chairman; Eugene Williams Co., Inc. Bernath, appointed Chairman D. ROBERT SHAFFER NAPOLEON OFFICE Farmer STEPHEN E. JACKSON DR. C. NICHOLAS WALZ Asst. Vice President Partner Branch Manager Williams County Family Medical Center DIANA J. DENNIE PAUL R. MANLEY Assistant Cashier Process Msanager - Frame & Panel Assistant Branch Manager Sauder Woodworking Co. MICHAEL F. SCHNITKEY Assistant Cashier Agri Finance Officer 5
30 [KROUSE, KERN & CO., INC. LETTERHEAD] January 12, 2000 Board of Directors Farmers & Merchants Bancorp, Inc. Archbold, Ohio INDEPENDENT AUDITORS' REPORT We have audited the consolidated balance sheets of Farmers & Merchants Bancorp, Inc., Archbold, Ohio, and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmers & Merchants Bancorp, Inc. and subsidiaries, as of December 31, 1999 and 1998, and the results of its consolidated operations and cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. Krouse, Kern & Co., Inc. KROUSE, KERN & CO., INC. 6
31 FARMERS & MERCHANTS BANCORP, INC. Consolidated Balance Sheets December 31, 1999 and 1998 ASSETS (In Thousands) ------------------------------------------ 1999 1998 -------------------- -------------------- Cash and due from banks $ 17,245 $ 18,549 Interest bearing deposits with banks 100 100 Federal funds sold - 19,045 Investment securities at market 95,641 121,334 Federal Home Loan Bank stock 2,764 2,577 Loans, less allowance for loan losses of $6,750 for 1999 and $5,850 for 1998 462,865 401,192 Loans held for resale 389 6,013 Finance lease receivable 693 516 Bank premises and equipment-net 10,176 9,430 Accrued interest and other assets 7,020 6,904 Deferred tax charge 1,636 209 -------------------- -------------------- TOTAL ASSETS $ 598,529 $ 585,869 ==================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 65,444 $ 52,631 NOW accounts 47,919 43,775 Savings 98,666 117,501 Time 291,137 298,276 -------------------- -------------------- Total Deposits 503,166 512,183 Federal funds purchased 3,090 - Securities sold under agreement to repurchase 4,253 2,916 Other borrowings 25,039 11,240 Dividend payable 650 650 Accrued interest and other liabilities 4,442 3,530 -------------------- -------------------- Total Liabilities 540,640 530,519 -------------------- -------------------- SHAREHOLDERS' EQUITY: Common stock, no par value - authorized 1,500,000 shares; issued 1,300,000 shares 12,677 12,677 Undivided profits 45,975 41,002 Accumulated other comprehensive income (763) 1,671 -------------------- -------------------- Total Shareholders' Equity 57,889 55,350 -------------------- -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY $ 598,529 $ 585,869 ==================== ==================== See Accompanying Notes to Consolidated Financial Statements. 7
32 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 (In Thousands)(Except for Per Share Amounts) --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- INTEREST INCOME: Interest and fees on loans $ 37,236 $ 36,335 $ 34,271 Interest and Dividends on Investment Securities: U.S. Treasury and government agency 3,754 3,427 3,552 State and local governments 1,645 1,473 1,234 Corporate debt securities 849 822 719 Dividends 187 178 166 Interest on federal funds sold 105 648 211 Interest on deposits in banks 3 5 5 ------------------- ------------------- ------------------- Total Interest Income 43,779 42,888 40,158 ------------------- ------------------- ------------------- INTEREST EXPENSE: Deposits 19,776 21,182 20,276 Borrowed funds 1,374 903 863 ------------------- ------------------- ------------------- Total Interest Expense 21,150 22,085 21,139 ------------------- ------------------- ------------------- Net Interest Income 22,629 20,803 19,019 PROVISION FOR LOAN LOSSES 1,637 892 1,111 ------------------- ------------------- ------------------- NET INCOME AFTER PROVISION FOR LOAN LOSS 20,992 19,911 17,908 ------------------- ------------------- ------------------- OTHER INCOME: Service charges on deposit accounts 1,524 1,320 1,152 Other service charges and fees 1,574 2,706 1,787 Net securities gains (losses) 31 - (4) ------------------- ------------------- ------------------- Total Other Income 3,129 4,026 2,935 ------------------- ------------------- ------------------- OTHER EXPENSES: Salaries and wages 5,885 5,438 4,404 Pension and other employee benefits 1,536 1,394 1,206 Occupancy expense (net) 542 510 481 Furniture and equipment 1,272 981 722 Data processing fees 766 743 625 Franchise taxes 629 604 492 Other operating expense 3,691 3,197 3,101 ------------------- ------------------- ------------------- 14,321 12,867 11,031 ------------------- ------------------- ------------------- INCOME BEFORE INCOME TAXES 9,800 11,070 9,812 INCOME TAXES 3,007 3,413 3,035 ------------------- ------------------- ------------------- NET INCOME 6,793 7,657 6,777 OTHER COMPREHENSIVE INCOME: Unrealized gain (loss) on available-for-sale securities (net of tax effect of ($1,253), $345 and $157 for 1999, 1998 and 1997 respectively) (2,434) 669 311 ------------------- ------------------- ------------------- COMPREHENSIVE INCOME $ 4,359 $ 8,326 $ 7,088 =================== =================== =================== NET INCOME PER SHARE - BASIC $ 5.23 $ 5.89 $ 5.22 =================== =================== =================== WEIGHTED AVERAGE SHARES OUTSTANDING 1,300,000 1,300,000 1,300,000 =================== =================== =================== See Accompanying Notes to Consolidated Financial Statements. 8
33 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 (In Thousands) --------------------------------------------------------------- Accumulated Other Common Undivided Comprehensive Stock Profits Income ------------------- ------------------- ------------------- BALANCE AT DECEMBER 31, 1996 $ 12,677 $ 30,013 $ 691 Net income for 1997 - 6,777 - Other comprehensive income net of tax: Unrealized gain on Available-For-Sale securities (net of tax effect of $153) - - 314 Reclassification adjustment (net of tax) (3) Cash dividends ($1.25 per share) - (1,625) - ------------------- ------------------- ------------------- BALANCE AT DECEMBER 31, 1997 12,677 35,165 1,002 Net income for 1998 - 7,657 - Other comprehensive income net of tax: Unrealized gain on Available-For-Sale securities (net of tax effect of $345) - - 669 Cash dividends ($1.40 per share) - (1,820) - ------------------- ------------------- ------------------- BALANCE AT DECEMBER 31, 1998 12,677 41,002 1,671 Net income for 1999 6,793 Other comprehensive income net of tax: Unrealized loss on Available-For-Sale securities (net of tax effect of ($1,253)) (2,454) Reclassification adjustment (net of tax) 20 Cash dividends ($1.40 per share) (1,820) - ------------------- ------------------- ------------------- BALANCE AT DECEMBER 31, 1999 $ 12,677 $ 45,975 $ (763) =================== =================== =================== See Accompanying Notes to Consolidated Financial Statements. 9
34 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 (In Thousands) --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,793 $ 7,657 $ 6,777 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 1,243 943 700 Amortization of servicing rights 163 307 51 Amortization of securities premiums/discounts 413 392 315 Provision for loan losses 1,637 892 1,111 Provision for deferred income taxes (172) 52 43 (Gain) loss on sale of other (114) (447) (160) (Gain) loss on sale of securities (31) - 4 Originations of mortgage loans held for sale (33,426) (107,368) (34,311) Proceeds from mortgage loans held for sale 33,542 107,845 34,471 Net change in other assets/liabilities 633 (769) (220) ------------------- ------------------- ------------------- Net Cash Provided by Operating Activities 10,681 9,504 8,781 ------------------- ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of bank premises and equipment (1,991) (2,740) (789) Maturity proceeds of available-for-sale securities 36,635 22,000 23,546 Sale proceeds of available-for-sale securities 17,114 - 10,363 Purchase of available-for-sale securities (32,314) (53,228) (24,093) Net increase in loans and leases (57,863) (9,970) (30,535) ------------------- ------------------- ------------------- Net Cash Used by Investing Activities (38,419) (43,938) (21,508) ------------------- ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits (9,017) 50,885 22,921 Net change in short-term borrowings 19,427 318 (4,165) Proceeds from other borrowings - 1,000 3,000 Payments on other borrowings (1,201) (1,053) (707) Payment of dividends (1,820) (1,820) (1,495) ------------------- ------------------- ------------------- Net Cash Provided by Financing Activities 7,389 49,330 19,554 ------------------- ------------------- ------------------- Net Change in Cash and Cash Equivalents (20,349) 14,896 6,827 CASH AND CASH EQUIVALENTS - JANUARY 1 37,694 22,798 15,971 ------------------- ------------------- ------------------- CASH AND CASH EQUIVALENTS - DECEMBER 31 $ 17,345 $ 37,694 $ 22,798 =================== =================== =================== RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and due from banks $ 17,245 $ 18,549 $ 16,213 Interest bearing deposits 100 100 100 Federal funds sold - 19,045 6,485 ------------------- ------------------- ------------------- $ 17,345 $ 37,694 $ 22,798 =================== =================== =================== SUPPLEMENTARY CASH FLOWS DISCLOSURES: Cash paid during the year for: Interest (net of amount capitalized) $ 21,357 $ 22,020 $ 21,136 Income taxes 2,024 3,280 2,652 See Accompanying Notes to Consolidated Financial Statements. 10
35 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NATURE OF ACTIVITIES: The consolidated income of Farmers & Merchants Bancorp, Inc. is principally from income of the bank subsidiary, The Farmers & Merchants State Bank. The subsidiary Bank grants agribusiness, commercial, consumer and residential loans to customers primarily in northwest Ohio. CONSOLIDATION POLICY: The consolidated financial statements include the accounts of Farmers & Merchants Bancorp, Inc. and its wholly-owned subsidiaries, The Farmers & Merchants State Bank (the Bank), a commercial banking institution, and the Farmers & Merchants Life Insurance Company, a life, accident and health insurance company. All material intercompany balances and transactions have been eliminated. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on local economic conditions in the agricultural industry. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. 11
36 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) CASH AND CASH EQUIVALENTS: For purposes of the statement of cash flows, the company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. This includes cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one day periods. INVESTMENT SECURITIES: Debt securities are classified as held-to-maturity when the Bank has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains and losses on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. LOANS: Loans are stated at the amount of unpaid principal, reduced by unearned discounts and deferred loan fees and costs, as well as, by the allowance for loan losses. Interest on commercial, installment, and real estate loans is accrued on a daily basis based on the principal outstanding. Generally, a loan (including a loan considered impaired under Statement 114, "Accounting by Creditors for Impairment of a Loan") is classified as nonaccrual and the accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest and these loans are placed on a "cash basis" for purposes of income recognition. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal and accrued interest, and the loan is in the process of collection. Loans held for resale are valued at the lower of aggregate cost or market, market determined by current market quotations. 12
37 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) LOANS (Continued): Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as a net adjustment to the related loan's yield. The Bank is generally amortizing these costs over the contractual life of such loans. Fees related to standby letters of credit are recognized at the beginning of the commitment period. ALLOWANCE FOR LOAN LOSSES: The allowance for possible loan losses is established through a provision for loan losses charged against income. Loans deemed to be uncollectible and changes in the allowance relating to impaired loans are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level believed to be adequate by management to absorb estimated future loan losses for on and off balance sheet credit exposure. Management's evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated future cash flows. This evaluation is inherently subjective as it may require material estimates including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. SERVICING ASSETS AND LIABILITIES: It is the Bank's policy to service loans it has sold to FREDDIEMAC. When the Bank undertakes an obligation to service financial assets, it recognizes either a servicing asset or a servicing liability for that servicing contract at its fair market value. Servicing assets and liabilities are to be amortized in proportion to and over the period of estimated net servicing income. Capitalized mortgage servicing rights are included in other assets and totaled $889 thousand and $922 thousand at December 31, 1999 and 1998, respectively. No valuation allowance is required. 13
38 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) FINANCE LEASES: Finance leases are recorded at the sum of the minimum lease payments less any executory costs and profit thereon to be paid and any unguaranteed residual value. If the residual is guaranteed, it is included in the minimum lease payments. The difference between the gross investment in the lease and the cost is recorded as unearned income, which is amortized over the lease term by the interest method. The unearned interest is included in the balance sheet as a deduction from the related gross investment, which results in the net investment in the lease. BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various properties and is computed using accelerated methods. Costs for maintenance and repairs are charged to operations as incurred. Gains and losses on dispositions are included in current operations. OTHER REAL ESTATE OWNED: Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of the Bank's carrying amount or fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas, costs relating to holding the property are expensed. The portion of interest costs relating to the development of real estate are capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. FAIR VALUE OF FINANCIAL INSTRUMENTS: FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the fair value information about financial instruments, both assets and liabilities, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB Statement No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 14
39 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) FEDERAL INCOME TAX: Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of the allowance for loan losses and available-for-sale securities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Bancorp files consolidated income tax returns with its bank subsidiary. EARNINGS PER SHARE: Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during each year. NOTE 2. CASH AND CASH EQUIVALENTS Banks are required to maintain reserve funds in vault cash and/or on deposit with the Federal Reserve Bank. The aggregate reserves required at December 31, 1999 and 1998 were $5.6 million and $5.1 million, respectively. NOTE 3. INVESTMENT SECURITIES The amortized cost and estimated market values of investments in securities as of December 31, are detailed below. Fair market values are based on quoted market prices or dealer quotes except for domestic corporations stocks that are recorded at cost. (In Thousands) ------------------------------------------------------------------ 1999 ------------------------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- --------------- --------------- -------------- Available-for-Sale: U.S. Treasury $ 6,823 $ 25 $ 6 $ 6,842 U.S. Government agency 38,840 2 763 38,079 Mortgage-backed securities 10,234 2 409 9,827 State and local governments 31,075 501 330 31,246 Corporate debt securities 9,802 - 175 9,627 Equity securities 20 - - 20 -------------- --------------- --------------- -------------- $ 96,794 $ 530 $ 1,683 $ 95,641 ============== =============== =============== ============== 15
40 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 3. INVESTMENT SECURITIES (Continued) (In Thousands) ------------------------------------------------------------------ 1998 ------------------------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- --------------- --------------- -------------- Available-for-Sale: U.S. Treasury $ 16,792 $ 320 $ - $ 17,112 U.S. Government agency 37,978 614 18 38,574 Mortgage-backed securities 10,986 56 49 10,993 State and local governments 34,119 1,413 12 35,520 Corporate debt securities 18,905 210 - 19,115 Equity securities 20 - - 20 -------------- --------------- --------------- -------------- $ 118,800 $ 2,613 $ 79 $ 121,334 ============== =============== =============== ============== The gross realized gains and losses for the years ended December 31, are presented below: (In Thousands) ------------------------------------------------- 1999 1998 1997 -------------- --------------- --------------- Gross realized gains $ 38 $ - $ 6 Gross realized losses 7 - 10 -------------- --------------- --------------- Net Realized Gains(Losses) $ 31 $ - $ (4) ============== =============== =============== The amortized cost and estimated market value of debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (In Thousands) -------------------------------- Available-for-Sale -------------------------------- Amortized Cost Fair Value --------------- --------------- One year or less $ 15,369 $ 15,352 After one year through five years 62,104 60,922 After five years through ten years 12,512 12,307 After ten years 6,809 7,060 --------------- --------------- Total $ 96,794 $ 95,641 =============== =============== 16
41 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 3. INVESTMENT SECURITIES (Continued) Investments with a carrying value of $68.8 million and $66.9 million at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and securities sold under repurchase agreements. NOTE 4. FEDERAL HOME LOAN BANK STOCK The Federal Home Loan Bank stock is recorded at cost. The stock is held as collateral security for all indebtedness of the Bank to the Federal Home Loan Bank. NOTE 5. LOANS Loans at December 31, are summarized below: (In Thousands) -------------------------------- Loans 1999 1998 --------------- --------------- Real estate $ 237,056 $ 194,662 Commercial and industrial 100,996 87,266 Agricultural (excluding real estate) 46,035 38,882 Consumer and other loans 71,589 68,197 Overdrafts 73 188 Commercial paper 7,330 13,648 Industrial Development Bonds 7,015 4,587 --------------- --------------- 470,094 407,430 Less: Deferred loan fees and costs (479) (388) --------------- --------------- 469,615 407,042 Less: Allowance for loan losses (6,750) (5,850) --------------- --------------- Loans - Net $ 462,865 $ 401,192 =============== =============== (In Thousands) ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- Allowance for Loan Losses Balance at beginning of year $ 5,850 $ 5,850 $ 5,500 Provision for loan loss 1,637 892 1,111 Recoveries 837 882 770 Loans charged off (1,574) (1,774) (1,531) --------------- --------------- -------------- $ 6,750 $ 5,850 $ 5,850 =============== =============== ============== 17
42 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 5. LOANS (Continued) As of December 31, 1999 and 1998, the recorded investment in impaired loans amounted to approximately $8.5 and $8.7 million, respectively. The average recorded investment in impaired loans amounted to approximately $6.5 million, $4.7 million and $3.2 million for 1999, 1998 and 1997, respectively. Of the loans that were considered impaired for 1999 and 1998, the recorded investment in impaired loans that have a related allowance determined in accordance with SFAS No. 114 and No. 118 was $6.3 million and $6.5 million, respectively for which the related allowance for loan loss was $2.8 million and $2.4 million, respectively. The Bank stops accruing interest income when a loan is deemed to be impaired, and recognizes interest income when the interest income is actually received. Interest income recognized on impaired loans was $53, $172 and $402 thousand for 1999, 1998 and 1997, respectively. As of December 31, 1999 there were $524 thousand in commitments to lend additional funds to debtors whose loans are not performing. $146.2 million in one to four family residential mortgage loans have been pledged as security for loans the Bank has received from the Federal Home Loan Bank. Senior officers and directors and their affiliated companies were indebted to the Bank in the aggregate of $14.2 and $8.6 million at December 31, 1999 and 1998, respectively. All such loans were made on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable loan transactions with other persons. Loans made during 1999 were $28.8 million and repayments were $23.2 million. In the opinion of management, these loans do not involve more than normal risk of collectibility or possess other unfavorable features. Loans for which the Bank is providing collection services is $158.2, $147.9 and $98.6 million for 1999, 1998 and 1997, respectively. Servicing assets recognized during 1999 amounted to $130 thousand and amortization of servicing assets amounted to $163 thousand. The fair value of recognized servicing assets was $1.4 million, fair value being determined by the present value of expected future cash flows. No allowance for impairment has been provided. As of December 31, 1999 there were $7.1 million of undisbursed loans in process. NOTE 6. FINANCE LEASE RECEIVABLE Finance leases as of December 31 are as follows: (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Gross investment in leases $ 792 $ 605 Unearned income (99) (89) --------------- --------------- Finance Lease Receivable $ 693 $ 516 =============== =============== 18
43 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 6. FINANCE LEASE RECEIVABLE (Continued) All amounts are considered collectible, and therefore, no allowance has been provided. NOTE 7. BANK PREMISES AND EQUIPMENT The major categories of banking premises and equipment and accumulated depreciation at December 31 are summarized below: (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Land $ 1,983 $ 1,681 Buildings 9,123 8,030 Furnishings 6,031 5,867 --------------- --------------- 17,137 15,578 Less: Accumulated depreciation (6,961) (6,148) --------------- --------------- Banking Premises and Equipment (Net) $ 10,176 $ 9,430 =============== =============== NOTE 8. DEPOSITS Time deposits at December 31 consist of the following: (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Time deposits under $100,000 $ 223,372 $ 229,143 Time deposits of $100,000 or more 67,765 69,133 --------------- --------------- $ 291,137 $ 298,276 =============== =============== For each of the five years subsequent to December 31, 1999, maturities for time deposits having a remaining term of more than one year follows: 2000 $ 171,297 2001 97,321 2002 13,603 2003 6,219 2004 and thereafter 2,697 --------------- $ 291,137 =============== Deposits to related parties as of December 31, 1999 and 1998 amounted to $11.6 million and $14.8 million, respectively. 19
44 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 9. REPURCHASE AGREEMENTS The Bank's policy requires U. S. Government securities as collateral for the underlying repurchase agreements. As of December 31, 1999 and 1998 U. S. Treasury securities with a book value of $4.5 million and $3.5 million, respectively, were underlying the repurchase agreements and were under the Bank's control. NOTE 10. OTHER BORROWINGS Other borrowings consisted of the following at December 31: (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Federal Home Loan Bank, various loans due in monthly installments of $105 thousand plus annual payments of $400 thousand including interest at varying rates from 5.40% to 7.05%. Notes are secured by a blanket lien on 100% of the one to four family residential mortgage loan portfolio $ 25,039 $ 11,240 =============== =============== The following is a schedule by years of future minimum principal payments as of December 31: 2000 $ 16,253 2001 1,308 2002 1,367 2003 1,418 2004 and thereafter 4,693 --------------- $ 25,039 =============== 20
45 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 11. FEDERAL INCOME TAXES Deferred tax assets and liabilities at December 31 are comprised of the following: (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Deferred Tax Assets: Allowance for loan losses $ 2,008 $ 1,702 Other - 12 Net unrealized loss on available- for-sale securities 392 - --------------- --------------- 2,400 1,714 --------------- --------------- Deferred Tax Liabilities: Accreted discounts on bonds 40 35 FHLB stock dividends 356 293 Mortgage servicing rights 302 312 Other 66 3 Net unrealized gain on available- for-sale securities - 862 --------------- --------------- 764 1,505 --------------- --------------- Net Deferred Tax Asset $ 1,636 $ 209 =============== =============== The components of income tax expense for the years ended December 31 are as follows: (In Thousands) ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- Current: Federal $ 3,195 $ 3,361 $ 2,993 Deferred: Federal (188) 52 42 --------------- --------------- -------------- $ 3,007 $ 3,413 $ 3,035 =============== =============== ============== 21
46 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 11. FEDERAL INCOME TAXES (Continued) (In Thousands) ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- Income tax at statutory rates $ 3,399 $ 3,771 $ 3,354 Tax effect: Tax exempt interest (468) (428) (384) Costs attributable to tax exempt interest 76 70 63 Other items, net - - 2 --------------- --------------- -------------- $ 3,007 $ 3,413 $ 3,035 =============== =============== ============== NOTE 12. RETIREMENT INCOME PLAN The Bank has established a 401(k) profit sharing plan which allows eligible employees to save at a minimum one percent of eligible compensation on a pre-tax basis, subject to certain Internal Revenue Service limitations. The Bank will match 50% of employee 401(k) contributions up to four percent of total eligible compensation. In addition the Bank may make a discretionary contribution from time to time as is deemed advisable. A participant is 100% vested in the participant's deferral contributions and employer matching contributions. A seven year vesting schedule applies to employer discretionary contributions. In order to be eligible to participate, the employee must be 21 years of age, completed six months of service, work 1,000 hours in the plan year and be employed on the last day of the year. Entry dates have been established at January 1 and July 1 of each year. The plan calls for only lump-sum distributions upon either termination of employment, retirement, death or disability. Contributions to the 401(k) profit sharing plan for both the employer matching contribution and the discretionary contribution were $363, $421, and $315 thousand for 1999, 1998 and 1997, respectively. NOTE 13. RELATED PARTY TRANSACTIONS The Bank has conducted transactions with its officers and directors as set forth in Note 5. NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES The Bank's financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements and standby letters of credit. A summary of the Bank's commitments and contingent liabilities at December 31, 1999 and 1998 is as follows: 22
47 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES (Continued) (In Thousands) -------------------------------- 1999 1998 --------------- --------------- Commitments to extend credit $ 83,344 $ 76,651 Credit card arrangements 12,163 10,237 Standby letters of credit 1,531 1,419 Commitments to extend credit, credit card arrangements and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank's credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded in the financial statements. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they generally do not present any significant liquidity risk to the Bank. In the ordinary course of business, the company at times, is subject to pending and threatened legal actions and proceedings. It is the opinion of management that the outcome of any such matters and proceedings would not have a material effect on the financial position of the company. NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK All of the Bank's loans, commitments, and standby letters of credit have been granted to customers in the Bank's market area of northwest Ohio. All such customers are depositors of the Bank. Also, investments in state and municipal securities may involve governmental entities within the Bank's market area. The concentrations of credit by type of loan are set forth in Note 5. Standby letters of credit were granted primarily to commercial borrowers. NOTE 16. REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material affect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 1999, that the Bank meets all the capital adequacy requirements to which it is subject. 23
48 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 16. REGULATORY CAPITAL REQUIREMENTS (Continued) As of December 31, 1999, the most recent notification from the FDIC indicated the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category. The Bank's actual and required capital amounts and ratios as of December 31, 1999 and 1998 are as follows: To Be Well Capitalized Under the Prompt For Capital Corrective Action Actual Adequacy Purposes(a) Provisions(a) -------------------------- -------------------------- -------------------------- (000's) (000's) (000's) Amount Ratio Amount Ratio Amount Ratio ------------- ---------- -------------- ---------- ------------- ---------- As of December 31, 1999 Total Risk-Based Capital (to Risk Weighted Assets) Consolidated $63,970 14.8% $34,580 8.0% $ - N/A Farmers & Merchants State Bank 63,554 13.9% 36,580 8.0% 45,720 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated 58,563 13.6% 17,220 4.0% N/A Farmers & Merchants State Bank 47,833 10.5% 18,220 4.0% 27,330 6.0% Tier I Capital (to Adjusted Total Assets) Consolidated 58,563 9.9% 23,660 4.0% N/A Farmers & Merchants State Bank 47,833 8.1% 23,620 4.0% 29,530 5.0% 24
49 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 16. REGULATORY CAPITAL REQUIREMENTS (Continued) To Be Well Capitalized Under the Prompt For Capital Corrective Action Actual Adequacy Purposes(a) Provisions(a) -------------------------- -------------------------- -------------------------- (000's) (000's) (000's) Amount Ratio Amount Ratio Amount Ratio ------------- ---------- -------------- ---------- ------------- ---------- As of December 31, 1998 Total Risk-Based Capital (to Risk Weighted Assets) Consolidated $57,675 13.4% $34,430 8.0% $ - N/A Farmers & Merchants State Bank 58,550 13.9% 33,700 8.0% 42,120 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated 52,757 11.8% 17,880 4.0% N/A Farmers & Merchants State Bank 43,304 10.3% 16,820 4.0% 25,230 6.0% Tier I Capital (to Adjusted Total Assets) Consolidated 52,757 9.2% 22,940 4.0% N/A Farmers & Merchants State Bank 43,304 7.5% 23,100 4.0% 28,870 5.0% (a) The amount and ratios provided are minimums under the regulations. The Bank is restricted as to the amount of dividends which can be paid. Dividends declared by the Bank that exceed the net income for the current year plus retained income for the preceding two years must be approved by federal and state regulatory agencies. Under this formula dividends of $15.8 million may be paid without prior regulatory approval. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK Fair values of financial instruments are management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises and equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates. The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1999 and 1998 are reflected below: 25
50 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued) (In Thousands) ------------------------------------------------------------------ 1999 1998 -------------------------------- -------------------------------- Book Fair Book Fair Value Value Value Value -------------- --------------- --------------- -------------- Financial Assets: Cash $ 17,245 $ 17,245 $ 18,549 $ 18,549 Interest bearing deposits 100 100 100 100 Federal funds sold - 19,045 19,045 Available-for-sale securities 95,641 95,641 121,334 121,334 Federal Home Loan Bank 2,764 2,764 2,577 2,577 Net loans 463,947 466,870 407,721 422,147 Interest receivable 5,077 5,077 5,187 5,187 Financial Liabilities: Deposits $ 503,166 $ 502,220 $ 512,183 $ 515,500 Short-term borrowings: Federal funds purchased 3,090 3,090 - Repurchase agreement sold 4,253 4,253 2,916 2,916 Other borrowings 25,039 24,976 11,240 11,341 Interest payable 1,784 1,784 1,991 1,991 The following assumptions and methods were used in estimating the fair value for financial instruments: CASH AND SHORT-TERM INVESTMENTS: The carrrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate their fair values. INVESTMENT SECURITIES: Fair values for securities are based on quoted market prices, where available. If quoted prices are not available, fair values are based on quoted market prices of comparable instruments. STOCK IN FEDERAL HOME LOAN BANK: No ready market exists for the stock, and it has no quoted market value. The stock is redeemable at par; therefore, fair value equals cost. 26
51 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued) LOANS: Most commercial and real estate mortgage loans are made on a variable rate basis. For those variable-rate loans that reprice frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. DEPOSITS: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. BORROWINGS: Short-term borrowings are carried at cost which approximates fair value. Other long-term debt was generally valued using a discounted cash flows analysis with a discounted rate based on current incremental borrowing rates for similar types of arrangements, or if not available, based on an approach similar to that used for loans and deposits. Long-term borrowings include their related current maturities. ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying amounts of accrued interest approximate their fair values. INTEREST RATE RISK: The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a falling rate environment and less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. 27
52 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS (In Thousands) -------------------------------- 1999 1998 --------------- -------------- ASSETS: Cash $ 669 $ 685 Related party receivables: Dividends 350 52 Note receivable 10,000 10,000 Investment in subsidiaries 47,696 45,617 --------------- -------------- TOTAL ASSETS $ 58,715 $ 56,354 =============== ============== LIABILITIES: Accrued expenses 176 $ 354 Dividends payable 650 650 --------------- -------------- Total Liabilities 826 1,004 --------------- -------------- SHAREHOLDERS' EQUITY: Common stock, no par value - 1,500,000 shares authorized; 1,300,000 shares issued 12,677 12,677 Undivided profits 45,975 41,002 Accumulated other comprehensive income (763) 1,671 --------------- -------------- Total Shareholders' Equity 57,889 55,350 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,715 $ 56,354 =============== ============== 28
53 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) STATEMENTS OF INCOME (In Thousands) ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- INCOME: Equity in net income of subsidiaries $ 6,451 $ 7,313 $ 6,406 Interest income 600 600 600 --------------- --------------- -------------- Total Income 7,051 7,913 7,006 --------------- --------------- -------------- EXPENSES: Miscellaneous 14 19 16 Professional fees 18 16 15 Supplies 6 6 6 Taxes 44 39 1 --------------- --------------- -------------- Total Expense 82 80 38 --------------- --------------- -------------- INCOME BEFORE INCOME TAXES 6,969 7,833 6,968 INCOME TAXES 176 176 191 --------------- --------------- -------------- NET INCOME $ 6,793 $ 7,657 $ 6,777 =============== =============== ============== 29
54 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) (In Thousands) ------------------------------------------------- Accumulated Other Common Undivided Comprehensive Stock Profits Income --------------- --------------- -------------- BALANCE at December 31, 1996 $ 12,677 $ 30,013 $ 691 Net income for 1997 - 6,777 Other comprehensive income net of tax: Unrealized gain on Available-For-Sale securities (net of tax effect of $153) - - 314 Reclassification adjustment (net of tax) (3) Dividends ($1.25 per share) - (1,625) - --------------- --------------- -------------- BALANCE at December 31, 1997 12,677 35,165 1,002 Net income for 1998 - 7,657 - Other comprehensive income net of tax: Unrealized gain on Available-For-Sale securities (net of tax effect of $345) - - 669 Dividends ($1.40 per share) - (1,820) - --------------- --------------- -------------- BALANCE at December 31, 1998 12,677 41,002 1,671 Net income for 1999 - 6,793 - Other comprehensive income net of tax: Unrealized loss on Available-For-Sale securities (net of tax effect of ($1,253)) - - (2,454) Reclassification adjustment (net of tax) 20 Dividends ($1.40 per share) - (1,820) - --------------- --------------- -------------- BALANCE AT DECEMBER 31, 1999 $ 12,677 $ 45,975 $ (763) =============== =============== ============== 30
55 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) STATEMENTS OF CASH FLOWS (In Thousands) ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,793 $ 7,657 $ 6,777 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in undistributed net income of subsidiaries (4,513) (6,143) (4,910) Changes in Operating Assets and Liabilities: Receivable (298) - 190 Accrued expenses (178) 175 - --------------- --------------- -------------- Net Cash Provided by Operating Activities 1,804 1,689 2,057 --------------- --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (1,820) (1,820) (1,495) --------------- --------------- -------------- Net Change in Cash and Cash Equivalents (16) (131) 562 CASH AND CASH EQUIVALENTS - beginning of year 685 816 254 --------------- --------------- -------------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 669 $ 685 $ 816 =============== =============== ============== 31
56 [KROUSE, KERN & CO., INC. LETTERHEAD] January 12, 2000 Board of Directors Farmers & Merchants Bancorp, Inc. Archbold, Ohio INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION Our report on our audits of the basic financial statements of Farmers & Merchants Bancorp, Inc., Archbold, Ohio, and its wholly-owned subsidiaries, The Farmers & Merchants State Bank and Farmers & Merchants Life Insurance Company for the years ended December 31, 1999 and 1998, appears on page 6. The examination was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The five year summary of operations is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Krouse, Kern & Co., Inc. KROUSE, KERN & CO., INC. 32
57 FARMERS & MERCHANTS BANCORP, INC. Five Year Summary of Consolidated Operations (In Thousands Except for Per Share Amounts) ------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- --------------- --------------- --------------- ---------------- Summary of Income: Interest income $ 43,779 $ 42,888 $ 40,158 $ 38,382 $ 34,228 Interest expense 21,150 22,085 21,139 20,905 17,749 --------------- --------------- --------------- --------------- ---------------- Net Interest Income 22,629 20,803 19,019 17,477 16,479 Provision for loan losses 1,637 892 1,111 1,068 385 --------------- --------------- --------------- --------------- ---------------- Net interest income after provision for loan losses 20,992 19,911 17,908 16,409 16,094 Other income (expense) (11,192) (8,841) (8,096) (8,614) (8,594) --------------- --------------- --------------- --------------- ---------------- Net income before income taxes 9,800 11,070 9,812 7,795 7,500 Income taxes 3,007 3,413 3,035 2,312 2,203 --------------- --------------- --------------- --------------- ---------------- Net income $ 6,793 $ 7,657 $ 6,777 $ 5,483 $ 5,297 =============== =============== =============== =============== ================ Per Share of Common Stock: Earnings per common share outstanding: (Based on weighted average number of shares outstanding) (All per share amounts have been retroactively restated to reflect a 5 for 1 stock split in 1996) Net income $ 5.23 $ 5.89 $ 5.22 $ 4.22 $ 4.07 Dividends 1.40 1.40 1.25 1.15 1.10 Weighted average number of shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 Year-end assets $ 598,529 $ 585,869 $ 528,273 $ 501,449 $ 464,090 Average assets 585,189 553,277 510,163 482,770 430,304 Year-end equity capital 57,889 55,350 48,844 43,381 39,621 Average equity capital 56,862 52,940 46,548 41,501 38,034 See Independent Auditors' Report on Supplementary Information. 33
58 FARMERS & MERCHANTS BANCORP, INC. Trading Market for the Company's Stock The Company's stock is not actively traded on any exchange. The range and sales prices, based upon information that the Company has been made aware, are listed below: Stock Prices -------------------------------------------------- Quarter Low High ------- --- ---- 1999-- by quarter 1st $ 75.00 $ 75.00 2nd 75.00 100.00 3rd 85.00 113.00 4th 75.00 105.00 1998-- by quarter 1st $ 55.00 $ 55.00 2nd 55.00 65.00 3rd 65.00 70.00 4th 70.00 75.00 Dividends declared on a quarterly basis for the last two fiscal years: Quarter 1999 1998 ------- ---- ---- Dividends declared per share 1st $ .30 $ .30 2nd .30 .30 3rd .30 .30 4th .50 .50 34
59 FARMERS & MERCHANTS BANCORP, INC. SELECTED FINANCIAL DATA BY MANAGEMENT FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Farmers & Merchants Bancorp, Inc. again experienced another good year with solid income and asset growth. Interest income again increased in 1999 for the Company from $42.9 million for 1998 to $43.8 million for 1999. Average loan growth for 1999 was 6.42% while net interest income increased 8.78%. Operating earnings for 1999 was $6.8 million compared to $7.7 million for 1998, representing a decrease of approximately $900 thousand or 11%. This decrease was primarily the result of a $74 million decrease in the fixed rate mortgage loan origination activity of the Bank during 1999. This decreased level of activity resulted in other income decreasing by $864 thousand. LIQUIDITY: Maintaining sufficient funds to meet depositor and borrower needs on a daily basis are among management's top priorities. This is accomplished by investing in assets such as U. S. Government, U. S. Agency, Municipal, and Corporate investment securities and Commercial Paper which can be converted to cash in a timely manner, as well as, maintaining appropriate levels of cash. The average aggregate balance of these assets was $116.2 million for 1999 representing almost 20% of total average assets. CAPITAL RESOURCES: Shareholders' equity was $57.9 million at December 31, 1999 compared to $55.3 million for 1998. The company continues to have a strong capital base and its bank subsidiary The Farmers & Merchants State Bank continues to maintain regulatory capital ratios that are significantly above the defined regulatory capital ratios. At December 31, 1999, The Farmers & Merchants State Bank had a total risk-based capital ratio of 13.9% and a 10.5% core capital to risk-based asset ratio which are well in excess of regulatory guidelines. The bank's leverage ratio of 8.1% is also substantially in excess of regulatory guidelines. These ratios compare to 13.9%, 10.3% and 7.5%, respectively for 1998. The Company's subsidiaries are restricted by regulations from making dividend distributions in excess of certain prescribed amounts. 35
60 [KROUSE, KERN & CO., INC. LETTERHEAD] January 12, 2000 To the Board of Directors The Farmers & Merchants State Bank Archbold, Ohio INDEPENDENT AUDITORS' REPORT We have examined management's assertion that The Farmers & Merchants State Bank maintain a system of internal control over financial reporting which is designed to provide reasonable assurance to the Bank's management and Board of Directors regarding the preparation of reliable published financial statements as of December 31, 1999, included in the accompanying management report. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control structure over financial reporting, testing and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertions that The Farmers & Merchants State Bank maintained a system of internal control over financial reporting which is designed to provided reasonable assurance to the Bank's management and Board of Directors regarding the preparation of reliable published financial statements as of December 31, 1999, is fairly stated, in all material respects, based upon criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ Krouse, Kern & Co., Inc. KROUSE, KERN & CO., INC. 36
61 [THE FARMERS & MERCHANTS STATE BANK LETTERHEAD] MANAGEMENT REPORT as of December 31, 1999 FINANCIAL STATEMENTS Management of The Farmers & Merchants State Bank is responsible for the preparation, integrity and fair presentation of its published financial statements as of December 31, 1999, and for the year then ended. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts, some of which are based on judgments and estimates of management. INTERNAL CONTROLS Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed its internal control structure over financial reporting as of December 31, 1999. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that The Farmers & Merchants State Bank maintained an effective internal control structure over financial reporting as of December 31, 1999. DESIGNATED LAWS Management is also responsible for compliance with the federal and state laws and regulations relating to safety and soundness, including those designated laws and regulations regarding dividend restrictions and loans to insiders. Based on our assessment, management believes The Farmers & Merchants State Bank complied in all material respects, with those designated laws and regulations for the year ended December 31, 1999. 37
62 FARMERS & MERCHANTS BANCORP, INC. SELECTED FINANCIAL DATA BY MANAGEMENT Key Ratios: 1999 1998 1997 1996 1995 ----------------- ---------------- ---------------- ---------------- ---------------- Return on average equity 11.95% 14.46% 14.56% 13.21% 13.93% Return on average assets 1.16% 1.38% 1.33% 1.14% 1.23% Loan to deposit ratio 92.13% 78.33% 86.31% 84.15% 84.06% Capital to assets ratio 9.67% 9.45% 9.25% 8.65% 8.54% [BAR GRAPH] [BAR GRAPH] Return on Average Equity Return on Average Assets [BAR GRAPH] [BAR GRAPH] Loan to Deposit Ratio Capital to Assets Ratio 38
63 FARMERS & MERCHANTS BANCORP, INC. SELECTED FINANCIAL DATA BY MANAGEMENT (In Thousands Except for Per Share Amounts) -------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- ---------------- ---------------- ---------------- ---------------- Loans 462,865 401,192 397,295 368,900 339,614 Total Assets 598,529 585,869 528,273 501,449 464,090 Shareholders' Equity 57,889 55,350 48,844 43,381 39,621 Interest Income 43,779 42,888 40,158 38,382 34,228 Interest Expense 21,150 22,085 21,139 20,905 17,749 Net Interest 22,629 20,803 19,019 17,477 16,479 Other Expense 11,192 8,841 8,096 8,614 8,594 Federal Income Tax 3,007 3,413 3,035 2,312 2,203 Net Income 6,793 7,657 6,777 5,483 5,297 Net Income per Share 5.23 5.89 5.22 4.22 4.07 Dividends per Share 1.40 1.40 1.25 1.15 1.10 [BAR GRAPH] [BAR GRAPH] Shareholders' Equity Loans Total Assets Interest Expense Interest Income [BAR GRAPH] [BAR GRAPH] Federal Income Tax Net Income Other Expense Dividends per Share Net Income Per Share 39
64 1999 ANNUAL REPORT PHOTOS HENRY COUNTY Diana Dennie, AC/Napoleon Asst. Mgr.; Stephen Jackson, AVP/Napoleon Mgr.; Michael Schnitkey, AC/Agri Finance Officer; Gary Spencer, AVP/Commercial Loan Officer SWANTON EMPLOYEES OPENING DAY Hollyn McKibben, Teller; Debra Kauffman, AC/Asst. Mgr.; Barry Gray, AC/Mgr.; Jennifer Fravor, Teller; Kathy Keeler, Asst. Teller/Supervisor; Heather Waldron, Teller: Carrol Muston, New Accounts; Vicky Bratton, Loan Administrator; Judy Carpenter, Teller Supervisor FULTON COUNTY Edward Leininger, EVP/Commercial Loan Officer; Allen Lantz, VP/Wauseon Shoop Mgr.; Rex Rice, EVP/Chief Lending Officer; Debra Kauffman, AC/Swanton Asst. Mgr.; Carol England, AVP/Wauseon Downtown Mgr.; Cynthia Knauer, AVP/Delta Mgr.; Deborah Shinabery, AVP/Archbold Woodland Mgr. WILLIAMS COUNTY Jack Fee, AVP/Montpelier Eastside Mgr.; Michael Smith, AC/Bryan SouthTowne Mgr.; David Frazer, AVP/Bryan East High Mgr.; Ronald Short, AVP/Stryker Mgr.; Richard Bruce, AVP/Commercial Loan Officer; Lewis Hilkert, VP/West Unity Mgr.; Lance Nofziger, AC/Montpelier West Main Mgr. 40
65 ANGEL TREE PROJECT LydiaHuber, Executive Administrative Assistant and Cheryl Helberg, New Accounts Rep., prepare for distribution of the Christmas Gifts donated by the Directors and the Archbold Main Office and Woodland Employees. AGRI FINANCE SPECIALISTS Nancy Flgy, Secretary; Joyce Crites, Secretary; Diane Deatrick, Receptionist; Scott Miller, AC/Agri Finance Officer; Lisa Borton, Insurance Clerk; Jacque Wells, Secretary; Jerry Borton, AC/Agri Finance Officer; Bonnie Goertz, Secretary; Ruth Ann Dunn, Agri Finance Officer; Beth Bay, Secretary; Terri LeBowsky, Secretary; Michael Culler, AVP/Chief Agri Finance Officer; Michael Schnitkey, AC/Agri Finance Officer SUPER 55 TOUR TO "NOAH" Super 55 Club members enjoyed a trip to Pennsylvania in April. 41
66 BINGO AT FAIRLAWN HAVEN Diane Swisher, AC/Archbold Woodland Asst. Mgr. assists resident Orval Short while playing Bingo. WILLIAMS COUNTY FAIR PARADE Moola Moola and Montpelier Eastside and West Main employees and family members preparing for the start of the Williams Co. Fair parade. STRYKER CHRISTMAS CLUB OPEN HOUSE AVP/Stryker Branch Mgr. Ronald Short visits with guest Gary Stuckey during the annual Christmas Club Open House. 42
67 SANTA VISITS BRYAN SOUTHTOWNE Vickie Grimm, Secretarial Supervisor/SouthTowne Office, poses with her husband Doug, son Drew, and Santa Claus. FULTON COUNTY "RELAY FOR LIFE" Helen Tefft, Teller; Kim Armstrong, guest; Diann Meyer, AVP/HR Director; Marilyn Johnson, AC/Compliance/CRA Officer and Sharon Cordy, HR Admin. Asst. participated with 11 other employees and guests to form the F & M "Relay for Life" team. FULTON COUNTY SENIOR CENTER Peggy Volkman, Consumer Loan Officer, presents bank products and services to Fulton County residents. 43
68 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements exist on accounting and financial disclosures or related matters. No change of accountants has been made since 1982. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS The information called for herein is presented below: Year First Principal Occupation or Became Name Age Employment for Past Five Years Director ---- --- ------------------------------ -------- Eugene Bernath 66 Farmer 1978 Chairman of the Board, Farmers & Merchants Bancorp, Inc. The Farmers & Merchants State Bank Dexter Benecke 57 President, Viking Trucking, Inc. 1999 Vice President Alex Products, Inc. Jerry L. Boyers 66 President, Edifice Construction 1976 Management Joe E. Crossgrove 63 President, Chief Executive Officer 1992 The Farmers & Merchants State Bank Robert G. Frey 59 President, E. H. Frey & Sons, Inc. 1987 Lee E. Graffice 68 President, Graffice Motor Sales 1983 Jack C. Johnson 47 President, Hawk's Clothing, Inc. 1991 Partner, REJO Partnership Dean E. Miller 55 President, MBC Holdings, Inc. 1986 Dale L. Nafziger 69 Vice-President, Homestead Ice Cream Co. 1969 Harold H. Plassman 70 Attorney, Plassman, Rupp, Hensel 1985 & Short James L. Provost 71 Retired, Dyer & McDermott, Inc. 1995 James C. Saneholtz 53 President, Saneholtz-McKarns, Inc. 1995 ` Maynard Sauder 67 President, Sauder Woodworking Co. 1980 24
69 Merle J. Short 59 Farmer, President of Promow, Inc. 1987 Steven J. Wyse 55 President, SteelinQ Systems, Inc. 1991 EXECUTIVE OFFICERS ------------------ Principal Occupation Name Age for Past Five Years ---- --- -------------------- Eugene Bernath 66 Farmer Chairman of the Board Farmers & Merchants State Bank Joe E. Crossgrove 63 President, Chief Executive Officer The Farmers & Merchants State Bank (since 1991) Executive Vice President and Treasurer of Farmers & Merchants Bancorp, Inc. Director and Vice President of Farmers & Merchants Life Insurance Co. Rex D. Rice 40 Vice President Chief Lending Officer Edward Leininger 43 Vice President Commercial Loan Officer Allen G. Lantz 46 Vice President Branch Manager Lewis Hilkert 49 Vice President Branch Manager Carol England 59 Assistant Vice President Corporate Secretary Branch Manager Ronald D. Short 47 Assistant Vice President Branch Manager Cynthia Knauer 53 Assistant Vice President Branch Manager Dave Frazier 41 Assistant Vice President Branch Manager John Fee 39 Assistant Vice President Branch Manager Steve Jackson 45 Assistant Vice President Branch Manager 25
70 Deborah Shinabery 44 Assistant Vice President Branch Manager Randal H. Schroeder 39 Assistant Vice President Chief Operations Officer George Jelen 48 Assistant Vice President Mortgage Loan Officer Barbara Britenriker 38 Assistant Vice President Chief Financial Officer Comptroller Michael D. Culler 41 Assistant Vice President Chief Agricultural Finance Officer Diann K. Meyer 39 Assistant Vice President Human Resource Officer Gloria Gunn 42 Assistant Vice President Assistant Branch Manager Richard Bruce 52 Assistant Vice President Commercial Loan Officer Kent Roth 35 Auditor Bank Security Officer Marilyn Johnson 43 Compliance Officer Jean Horwath 48 Assistant Cashier Assistant Branch Manager Diane Swisher 42 Assistant Cashier Assistant Branch Manager Patti Rosebrock 42 Assistant Cashier Assistant Branch Manager Michael T. Smith 33 Assistant Cashier Branch Manager Debra Kauffman 39 Assistant Cashier Assistant Branch Manager Assistant Corporate Secretary J. Scott Miller 43 Assistant Cashier Assistant Agri-Finance Officer Judith Warncke 52 Assistant Cashier Marketing Officer 26
71 Diana Dennie 37 Assistant Cashier Branch Manager Jerry Borton 50 Assistant Cashier Loan Officer Joyce G. Kinsman 30 Assistant Cashier Loan Review Officer Jane Bruner 39 Assistant Cashier Operations Supervisor Patricia Burkholder 36 Assistant Cashier Assistant Branch Manager Barry Gray 39 Assistant Cashier Assistant Branch Manager Lesley Shirkey 30 Asset Recovery Officer Brett Kahrs 35 Brokerage Officer Carol Church 40 Assistant Cashier Assistant Branch Manager Ruth Ford 46 Assistant Branch Manager Lance Nofziger 29 Branch Manager Michael Schnitkey 31 Assistant Cashier Agricultural Finance Officer Gregory Sims 29 Assistant Branch Manager Ruth Ann Dunn 45 Assistant Cashier Administrative Agri Assistant Sue Dieringer 41 Assistant Cashier Consumer Loan Officer Kelby Schmucker 32 Credit Analyst 27
72 ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on April 8, 2000 is incorporated herein by reference. The directors of Farmers & Merchants Bancorp, Inc. are also the directors of The Farmers & Merchants State Bank and Farmers & Merchants Life Insurance Co. The Board of Directors met twenty-six times during the 1999 calendar year. All but two of the current directors of the Corporation attended at least seventy-five percent of the meetings of the Board. Maynard Sauder was in attendance at sixty-nine percent of the meetings and Steve Wyse was in attendance at fifty-eight percent of the meetings. Average attendance at Board meetings held during the year was eighty percent. Directors received, as directors' fees, $300 for each board meeting, plus a bonus of $600 for 1999. The Subsidiary Bank Board of Directors met semi-monthly during 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held Saturday, April 8, 2000, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHER There are no transactions to report. CERTAIN BUSINESS RELATIONSHIPS No family relationships exist between any executive officers of the Bank. LOANS TO RELATED PARTIES This information is presented on page 18, Note 5 of the Annual Report to shareholders, and is incorporated herein by reference. CERTAIN BUSINESS RELATIONSHIPS The company retained the law firm of Plassman, Rupp, Hensal and Short in 1988. One of the principals, Harold Plassman, is a member of the Board of Directors. During 1999 the company paid fees to Plassman, Rupp, Hensal and Short for routine legal services. It is the company's intention to retain the law firm in 2000. 28
73 PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Annual Report ------------- (1) Financial Statements Report of Independent Accountants Page 6 Consolidated Balance Sheets Page 7 Consolidated Statements of Income Page 8 Consolidated Statements of Changes in Shareholders' Equity Page 9 Consolidated Statements of Cash Flows Page 10 Notes to Consolidated Financial Statements Pages 11 - 31 (2) Financial Statement Schedules Independent Auditors' Report on Additional Information Page 32 Five Year Summary of Operations Page 33 (3) Other Information Trading Market for the Company's Stock Page 34 Selected Financial Data by Management Page 35 Independent Auditors' Report Page 36 Management Report Page 37 Selected Financial Data by Management Pages 38 - 39 1999 Annual Report Photos Pages 40 - 43 (4) Exhibits (3.1) Articles of Incorporation have been submitted with previous 10-K reports. (13.1) 1999 Annual Report to Shareholders (contained herein) (23.1) Notice of Annual Meeting and Proxy Statement (b) Reports on Form 8-K None (c) Exhibits required by Item 601. None required (d) Schedules required by Regulation S-X The Condensed Financial Information of the Registrant required by this report are included in the Annual Report to Shareholders, Note 18, pages 28 through 31. (e) Signatures Page 32 (f) Exhibit 27 Financial Data Schedule Page 33 - 34 Other schedules required to be filed as part of this report. Form 10-K --------- Schedule of Property and Equipment Page 30 Schedule of Accumulated Depreciation - Property and Equipment Page 31 29
74 PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K SCHEDULE OF PROPERTY AND EQUIPMENT (In Thousands) Exhibit 1 Year Ended December 31, 1999 --------------------------------------------------------------------------------------- Beginning Ending Balance Additions Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ 1,681 $ 302 $ 1,983 Building 8,030 1,093 9,123 Equipment 5,867 621 457 6,031 ---------------------- ------------------- ------------------- ------------------- $ 15,578 $ 2,016 $ 457 $ 17,137 ====================== =================== =================== =================== Year Ended December 31, 1998 --------------------------------------------------------------------------------------- Beginning Ending Balance Additions Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ 1,472 $ 209 $ - $ 1,681 Building 7,398 676 44 8,030 Equipment 4,606 1,827 566 5,867 ---------------------- ------------------- ------------------- ------------------- $ 13,476 $ 2,712 $ 610 $ 15,578 ====================== =================== =================== =================== Year Ended December 31, 1997 --------------------------------------------------------------------------------------- Beginning Ending Balance Additions Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ 1,120 $ 108 $ - $ 1,228 Building 6,475 662 - 7,137 Equipment 4,074 414 155 4,333 ---------------------- ------------------- ------------------- ------------------- $ 11,669 $ 1,184 $ 155 $ 12,698 ====================== =================== =================== =================== 30
75 SCHEDULE OF ACCUMULATED DEPRECIATION - PROPERTY AND EQUIPMENT Exhibit 2 Year Ended December 31, 1999 --------------------------------------------------------------------------------------- Beginning Ending Balance Depreciation Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ - $ - $ - Building 2,406 262 2,668 Equipment 3,742 981 430 4,293 ---------------------- ------------------- ------------------- ------------------- $ 6,148 $ 1,243 $ 430 $ 6,961 ====================== =================== =================== =================== Year Ended December 31, 1998 --------------------------------------------------------------------------------------- Beginning Ending Balance Depreciation Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ - $ - $ - $ - Building 2,234 216 44 2,406 Equipment 3,577 727 562 3,742 ---------------------- ------------------- ------------------- ------------------- $ 5,811 $ 943 $ 606 $ 6,148 ====================== =================== =================== =================== Year Ended December 31, 1997 --------------------------------------------------------------------------------------- Beginning Ending Balance Depreciation Retirements Balance ---------------------- ------------------- ------------------- ------------------- Land $ - $ - $ - $ - Building 2,022 212 - 2,234 Equipment 3,100 488 11 3,577 ---------------------- ------------------- ------------------- ------------------- $ 5,122 $ 700 $ 11 $ 5,811 ====================== =================== =================== =================== 31
76 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. Farmers & Merchants Bancorp, Inc. By: /s/ Joe E. Crossgrove Date: 3/8/00 ----------------------------- --------- Joe E. Crossgrove Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Joe E. Crossgrove Date: 3/8/00 /s/ Barbara Britenriker Date: 3/8/00 - ----------------------------------------- ---------------------------------- Joe E. Crossgrove, Director Barbara Britenriker Chief Executive Officer Chief Accounting Officer /s/ Eugene D. Bernath Date: 3/8/00 /s/ Kent Roth Date: 3/8/00 - ----------------------------------------- ---------------------------------- Eugene D. Bernath Kent Roth, Auditor Director and Chairman /s/ Dexter Benecke Date: 3/8/00 /s/ Harold H. Plassman Date: 3/8/00 - ----------------------------------------- ---------------------------------- Dexter Benecke, Director Harold H. Plassman, Director /s/ Jerry Boyers Date: 3/8/00 /s/ James Provost Date: 3/8/00 - ----------------------------------------- ---------------------------------- Jerry Boyers, Director James Provost, Director /s/ Robert Frey Date: 3/8/00 /s/ James Saneholtz Date: 3/8/00 - ----------------------------------------- ---------------------------------- Robert Frey, Director James Saneholtz, Director /s/ Lee Grafice Date: 3/8/00 /s/ Maynard Sauder Date: 3/8/00 - ----------------------------------------- ---------------------------------- Lee Grafice, Director Maynard Sauder, Director /s/ Jack C. Johnson Date: 3/8/00 /s/ Merle J. Short Date: 3/8/00 - ----------------------------------------- ---------------------------------- Jack C. Johnson, Director Merle J. Short, Director /s/ Dean Miller Date: 3/8/00 /s/ Steven J. Wyse Date: 3/8/00 - ----------------------------------------- ---------------------------------- Dean Miller, Director Steven J. Wyse, Director /s/ Dale L. Nafziger Date: 3/8/00 - ----------------------------------------- Dale L. Nafziger, Director 32
77 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 17,245 100 0 0 98,405 98,405 98,405 469,615 6,750 598,529 503,166 7,343 5,092 25,039 0 0 12,677 45,212 598,529 37,236 6,248 295 43,779 19,776 1,374 22,629 1,637 31 14,321 9,800 9,800 0 0 6,793 5.23 5.23 6.97 6,504 2,264 0 8,768 6,750 1,574 837 6,750 6,750 0 0