SEC Filing | Farmers & Merchants Bancorp, Inc.

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, 1997 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 (I.R.S. 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: Common6 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, 1998, Registrant had outstanding 1,300,000 shares of common stock at a market value of $84,500,000.

2 FARMERS & MERCHANTS BANCORP, INC. TABLE OF CONTENTS PAGE Form 10-K Items Item 1. Business 1 - 15 Item 2. Properties 16 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 22 Item 8. Financial Statements and Supplementary Data 23 - 59 Item 9. Disagreements on Accounting and Financial Disclosure 60 Item 10. Directors and Executive Officers of the Registrant 60 - 63 Item 11. Management Remuneration and Transactions 64 Item 12. Security Ownership of Certain Beneficial Owners and Management 64 Item 13. Certain Relationships and Related Transactions 64 Item 14. Financial Schedules and Reports on Form 8-K 65 Schedule 1 - Schedule of Property and Equipment 66 Schedule 2 - Schedule of Accumulated Depreciation - Property and Equipment 67 Signatures 68 Financial Data Schedule 70 Total Pages: 70 i

3 PART I ITEM 1. 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. - 1 -

4 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. 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. - 2 -

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. - 3 -

6 NATURE OF ACTIVITIES The Farmers & Merchants State Bank through its equivalent of 199 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. 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. - 4 -

7 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) - 5 -

8 SELECTED STATISTICAL AND FINANCIAL INFORMATION The following statistical information concerning the operations of the company is provided in accordance with Guide 3 of the Securities and Exchange Commission relating to the operations of bank holding companies. It should be read in conjunction with the financial statements, notes thereto and other financial information appearing elsewhere herein. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL The following table presents the distribution of assets and analysis of net interest earnings (dollars in thousands): ASSETS 1997 ------------------------------------------------ Interest Average and Yield/ Balance Dividend Rate ------- -------- ---- 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 with other banks 100 5 5.00 Federal funds sold and securities purchased under agreement to resell 3,805 211 5.55 ------------- ------------- Total Interest Earning Assets 482,630 $ 40,158 8.32% ============= =========== Non-interest Earnings Assets: Cash and due from banks 13,161 Other assets 14,371 ------------- $ 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 Obligations: Non-interest bearing deposits 87,013 Other 4,554 ------------- Total Liabilities 463,614 Stockholders' Equity 46,548 ------------- Total Liabilities and Stockholders' Equity $ 510,162 ============= Interest and dividend income/yield $ 40,158 8.32% Interest expense/rate 21,139 5.68 ------------- ---------- Net Interest spread $ 19,019 2.64% ============= ========== Net interest margin 3.94% ========== - 6 -

9 ASSETS 1996 ------------------------------------------ Interest Average and Yield/ Balance Dividend Rate ------- -------- ---- Interest earning Assets: Loans (1) $ 358,261 $ 32,353 9.03% Taxable investment securities 75,051 4,556 6.07 Tax-exempt investment securities 21,223 1,109 5.23 Interest bearing deposits with other banks 100 7 7.00 Federal funds sold and securities purchased under agreement to resell 6,613 357 5.40 ------------- ------------- Total Interest Earning Assets 461,248 $ 38,382 8.32% ============= ========== Non-interest Earnings Assets: Cash and due from banks 13,086 Other assets 15,895 ------------- $ 490,229 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 117,734 $ 4,525 3.84% Other time deposits 258,446 15,418 5.97 Other borrowed money 9,411 594 6.31 Federal funds purchased and securities sold under agreement to repurchase 6,522 368 5.64 ------------- ------------- Total Interest Bearing Liabilities 392,113 $ 20,905 5.33% ============= ========== Non-interest Bearing Obligations: Non-interest bearing deposits 50,580 Other 5,700 ------------- Total Liabilities 448,393 Stockholders' Equity 41,836 ------------- Total Liabilities and Stockholders' Equity $ 490,229 ============= Interest and dividend income/yield $ 38,382 8.32% Interest expense/rate 20,905 5.33 ------------- ---------- Net Interest spread $ 17,477 2.99% ============= ========== Net interest margin 3.79% ========== - 7 -

10 ASSETS 1995 ----------------------------------------- Interest Average and Yield/ Balance Dividend Rate ------- -------- ---- Interest earning Assets: Loans (1) $ 324,239 $ 29,561 9.12% Taxable investment securities 55,383 3,153 5.69 Tax-exempt investment securities 16,689 1,041 6.24 Interest bearing deposits with other banks 526 3 .65 Federal funds sold and securities purchased under agreement to resell 8,394 470 5.60 ------------- ------------- Total Interest Earning Assets 405,231 $ 34,228 8.45% ============= ========== Non-interest Earning Assets: Cash and due from banks 11,565 Other assets 13,508 ------------- $ 430,304 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 81,891 $ 3,931 4.80% Other time deposits 253,165 12,810 5.06 Other borrowed money 10,091 637 6.32 Federal funds purchased and securities sold under agreement to repurchase 6,019 371 6.16 ------------- ------------- Total Interest Bearing Liabilities 351,166 $ 17,749 5.05% ============= ========== Non-interest Bearing Obligations: Non-interest bearing deposits 38,112 Other 2,992 ------------- Total Liabilities 392,270 Stockholders' Equity 38,034 ------------- Total Liabilities and Stockholders' Equity $ 430,304 ============= Interest and dividend income/yield $ 34,228 8.45% Interest expense/rate 17,749 5.05 ------------- ---------- Net interest spread $ 16,479 3.40% ============= ========== Net interest margin 4.07% ========== (1) For the purpose of these computations, nonaccruing loans are included in the daily average outstanding loan amounts. - 8 -

11 The following table sets forth (in thousands of dollars) for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: 1997 - 1996 ------------------------------------------------ Increase (Decrease) Increase Attributable Changes in (Decrease) ------------------------ in Interest Volume Rate ----------- ------ ---- Interest Earned On: Loans $ 1,918 $ 2,339 $ (421) Taxable investment securities (16) (182) 166 Tax-exempt investment securities 22 43 (21) Interest bearing deposits with other banks (2) 0 (2) Federal funds sold and securities purchased under agreements to resell (146) (156) 10 ------------- ------------- ------------- Total Interest Earnings Assets $ 1,776 $ 2,044 $ (268) ============= ============= ============= Interest Paid On: Savings deposits $ 93 $ (1,600) $ 1,693 Other time deposits 241 712 (471) Other borrowed 2 0 2 Federal funds purchased and securities sold under agreements to repurchase (102) (124) 22 ------------- ------------- ------------- Total Interest Bearing Liabilities $ 234 $ (1,012) $ 1,246 ============= ============= ============= 1996 - 1995 ------------------------------------------------ Interest Earned On: Loans $ 2,792 $ 3,072 $ (280) Taxable investment securities 1,403 1,194 209 Tax-exempt investment securities 68 236 (168) Interest bearing deposits with other banks 4 (30) 34 Federal funds sold and securities purchased under agreements to resell (113) (96) (17) ------------- ------------- ------------- Total Interest Earnings Assets $ 4,154 $ 4,376 $ (222) ============= ============= ============= Interest Paid On: Savings deposits $ 594 $ 1,378 $ (784) Other time deposits 2,608 314 2,294 Other borrowed (43) (42) (1) Federal funds purchased and securities sold under agreements to repurchase (3) 28 (31) ------------- ------------- ------------- Total Interest Bearing Liabilities $ 3,156 $ 1,678 $ 1,478 ============= ============= ============= The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. - 9 -

12 INVESTMENT PORTFOLIO The following table sets forth (dollars in thousands) the carrying amount of investment securities at the dates indicated. 1997 1996 1995 ------------- ------------- -------------- U. S. Treasury and other U. S. Government agencies $ 44,695 $ 51,737 $ 45,556 State and political subdivisions 25,617 21,678 19,926 Mortgage-backed securities 8,991 8,986 8,438 Obligations of domestic corporations 10,327 17,065 8,689 Stocks of domestic corporations 2,420 2,255 2,106 ------------- ------------- ------------- Total $ 92,050 $ 101,721 $ 84,715 ============= ============= ============= The following table sets forth (dollars in thousands) the maturities of investment securities at December 31, 1997 and the weighted average yields of such securities calculated on the basis of the 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 and other U. S. Government agencies $ 11,748 5.74% $ 39,052 6.28% State and political subdivisions 1,495 9.94 7,860 8.21 Taxable state and political subdivisions 531 6.32 1,245 6.62 Obligations of domestic corporations 2,034 5.93 8,249 6.44 Maturities -------------------------------------------------------------- After Five Years Within Ten Years After Ten Years ---------------- --------------- Amount Yield Amount Yield ------ ----- ------ ----- U. S. Treasury and other U. S. Government agencies $ 745 6.72% $ 1,788 6.37% State and political subdivisions 5,404 8.61 7,530 9.77 Taxable state and political subdivisions 0 .00 433 5.75 Obligations of domestic corporations 0 .00 0 .00 At December 31, 1997 the company 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 $2.9 million dollars. The bank did hold stock in the Federal Home Loan Bank of Cincinnati at a cost of $2.4 million. This is required in order to obtain Federal Home Loan Bank loans. - 10 -

13 LOAN PORTFOLIO The following table shows (dollars in thousands) the company's loan distribution at the end of each of the last five years: 1997 1996 1995 ------------- ------------- ------------ Loans: Commercial and industrial $ 65,633 $ 67,763 $ 58,987 Agricultural 44,939 41,195 41,328 Real estate - mortgage 205,626 195,043 173,302 Installment 75,767 63,199 61,021 Commercial paper 7,837 3,959 7,604 Industrial Development Bonds 4,511 3,670 3,336 ------------- ------------- ------------- Total Loans $ 404,313 $ 374,829 $ 345,578 ============= ============= ============= 1994 1993 ------------- ------------- Loans: Commercial and industrial $ 65,848 $ 58,155 Agricultural 29,586 29,527 Real estate - mortgage 145,576 118,164 Installment 62,462 53,414 Commercial paper 2,019 5,270 Industrial Development Bonds 1,826 2,222 ------------- ------------- Total Loans $ 307,317 $ 266,752 ============= ============= The following table shows (dollars in thousands) the maturity of loans: Maturities ----------------------------------------------------------------- After One Within Year Within After One Year Five Years Five Years Total ------- ---------- ---------- ----- Commercial, industrial, and agricultural (combined) $ 103,392 $ 3,990 $ 3,190 $ 110,572 Real estate - mortgage 117,668 62,064 25,894 205,626 Consumer 39,352 27,056 9,359 75,767 Commercial paper 7,837 0 0 7,837 Industrial Development Bonds 1,680 1,373 1,458 4,511 ------------- ------------- ------------- ------------- Total $ 269,929 $ 94,483 $ 39,901 $ 404,313 ============= ============= ============= ============= In regard to loans maturing after one year, information was not available which would enable the categorization of such as to those loans having fixed interest rates and those having variable interest rates. - 11 -

14 NONACCRUAL PAST DUE AND RESTRUCTURED LOANS The following table summarizes (dollars in thousands) the company's nonaccrual and past due loans: 1997 1996 1995 ------------- ------------- ------------- Nonaccrual loans $ 2,890 $ 3,489 $ 3,494 Accruing loans past due 90 days or more 1,396 1,899 2,698 ------------- ------------- ------------- $ 4,286 $ 5,388 $ 6,192 ============= ============= ============= 1994 1993 ------------- ------------- Nonaccrual loans $ 2,681 $ 3,264 Accruing loans past due 90 days or more 2,601 2,226 ------------- ------------- $ 5,282 $ 5,490 ============= ============= As of December 31, 1997, management, to the best of its 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. Interest income which would have been recorded under the original terms of the nonaccrual loans was $324 thousand for the year 1997. Any collections of interest on nonaccrual loans are included in interest income when collected. This amounted to $402 thousand for 1997. 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% or more, the loan is in past due status for more than 180 days. The $2.8 million of nonaccrual loans are secured at December 31, 1997. POTENTIAL PROBLEM LOANS: At December 31, 1997, the Bank has $4.3 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 than quarterly. The amount of potential problem loans was considered in management's review of the loan loss reserve required at December 31, 1997. LOAN CONCENTRATION: 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, 1997, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $44.9 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. - 12 -

15 SUMMARY OF LOAN LOSS EXPERIENCE The following table reflects (in thousands) the bank's loan loss experience for each of the five years ended December 31, 1997: 1997 1996 1995 ------------- ------------- ------------- Loans $ 404,313 $ 374,829 $ 345,577 ============= ============= ============= Daily average of loans outstanding $ 384,498 $ 358,261 $ 324,239 ============= ============= ============= Allowance for loan losses -- beginning of year $ 5,500 $ 5,500 $ 5,500 Loans Charged Off: Commercial 263 623 748 Installment 1,239 1,053 691 Real estate mortgage 29 35 40 ------------- ------------- ------------- 1,531 1,711 1,479 ------------- ------------- ------------- Loan Recoveries: Commercial 384 197 584 Installment 364 443 426 Real estate mortgage 22 3 84 ------------- ------------- ------------- 770 643 1,094 ------------- ------------- ------------- Net loans charged off 761 1,068 385 Provision for loan loss 1,111 1,068 385 ------------- ------------- ------------- Allowance for Loan Loss-- End of Year $ 5,850 $ 5,500 $ 5,500 ============= ============= ============= Ratio of net charge-offs to average loans outstanding .20% .30% .12% ============= ============= ============= - 13 -

16 1994 1993 ------------- ------------- Loans $ 307,317 $ 266,752 ============= ============= Daily average of loans outstanding $ 277,729 $ 244,774 ============= ============= Allowance for loan losses -- beginning of year $ 5,000 $ 4,775 1994 1993 ------------- ------------- Loans Charged Off: Commercial 602 706 Installment 569 552 Real estate mortgage 0 38 ------------- ------------- 1,171 1,296 ------------- ------------- Loan Recoveries: Commercial 729 266 Installment 311 335 Real estate mortgage 67 12 ------------- ------------- 1,107 613 ------------- ------------- Net loans charged off 64 683 Provision for loan loss 564 908 ------------- ------------- Allowance for Loan Loss-- End of Year $ 5,500 $ 5,000 ============= ============= Ratio of net charge-offs to average loans outstanding .20% .28% ============= ============= Allocation of the allowance for loan losses: Percent of Loans in Amount Each Category Balance at End of Period Applicable To: (in thousands) to Total Loans Commercial and industrial $ 1,650 28.21% Installment 1,131 19.33% Real estate 3,069 52.46% $ 5,850 100.00% ============= ======== The charge-off amounts are based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan experience and management's estimation of future potential losses. - 14 -

17 DEPOSITS The following table presents the average amount of (in thousands) and the average rate paid on each deposit category that is in excess of ten percent of average total deposits: Demand NOW Savings Time December 31, 1997: Deposits Accounts Accounts Accounts - --------------------------- ------------- ------------- ------------- --------- Average balance $ 51,116 $ 35,897 $ 87,439 $ 270,751 Average rate .00% 2.91% 1.65% 4.88% December 31, 1996: - --------------------------- Average balance $ 50,580 $ 33,798 $ 117,734 $ 224,648 Average rate .00% 3.05% 1.41% 5.84% December 31, 1995: - --------------------------- Average balance $ 38,112 $ 34,475 $ 81,891 $ 218,690 Average rate .00% 3.04% 2.13% 4.72% 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 three Over Six Years Under Less than Less Than Over Twelve Three Months Six Months Twelve Months Months ------------ ---------- ------------- ------------- Time deposits $ 15,460 $ 9,877 $ 10,841 $ 21,585 ============= ============= ============= ============= RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the company for each of the last three years: Years Ended December 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- Return on average assets 1.33% 1.14% 1.23% Return on average equity 14.56% 13.21% 13.93% Dividend payout ratio 23.95% 27.23% 26.99% Equity to assets ratio 9.25% 8.65% 8.54% SHORT-TERM BORROWINGS The company's average balance of short-term borrowings during the year was less than 30% of end of year stockholders' equity for each year required to be reported; therefore, no data is presented. OTHER MATTERS Information required by subsections of Item 1, to which no response has been made, are inapplicable to the business of the company. - 15 -

18 ITEM 2. 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 used 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 Fall of 1994. In 1996, the Bank purchased additional land in West Unity to expand the parking lot. The Bank also purchased a lot with a building on it that is being used for storage adjacent to the South Defiance, Archbold office. The Bank also owns real estate consisting of land and buildings housing each of its full service branch bank operations. Construction has begun on new facilities for the Montpelier operations and should be completed in 1998. The following is a compendium of the various branch locations: 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 Napoleon, Ohio 2255 Scott Street The majority of the above locations have drive-up service facilities. - 16 -

19 ITEM 3. 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. ITEM 4. 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 ITEM 5. 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 company's management is as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1997 High $45.00 $72.00 $72.00 $70.00 Low $40.00 $55.00 $72.00 $65.00 1996 High $35.00 $35.00 $40.00 $40.00 Low $32.00 $35.00 $40.00 $40.00 As of March 1, 1998, there were 1,305 record holders of common stock of the company. Dividends are paid quarterly. Per share dividends for years 1997 and 1996 are as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ----------- ----------- ----------- ----------- ----- 1997 $.25 $.25 $.25 $.50 $1.25 1996 $.25 $.25 $.25 $.40 $1.15 ITEM 6. SELECTED FINANCIAL DATA Selected financial data is presented on page 58 of the Annual Report to shareholders for the year ended December 31, 1997 and are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on information concerning the company's financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included in the annual report. Reference should be made to those statements and the selected financial data presented elsewhere in the report for an understanding of the following discussion and analysis. - 17 -

20 FINANCIAL CONDITION 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 such, 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: 1997 -------------------------------------------- Increase (Decrease) Average ---------------------------- Balance Amount Percentage ------- ------ ---------- Funding Uses: Loans $ 384,498 $ 26,237 7.32% Taxable investment securities 72,158 (2,893) (3.85%) Tax-exempt investment securities 22,069 846 3.99% Interest bearing deposits with other banks 100 0 .00% Federal funds sold and securities purchased under agreement to resell 3,805 (2,808) (42.46%) ------------- ------------- $ 482,630 $ 21,382 4.64% ============= ============= ========== Funding Sources: Deposits: Non-interest bearing deposits $ 87,013 $ 36,433 72.03% Savings deposits 87,439 (30,295) (25.73%) Other time deposits 270,751 12,305 4.76% Other borrowed money 9,414 3 .03% Federal funds purchased and securities sold under agreement to repurchase 4,443 (2,079) (31.88%) ------------- ------------- ----------- $ 459,060 $ 16,367 3.70% ============= ============= ========== 1996 1995 ------------------------------------------------ ------------ Increase (Decrease) ------------------- Average Balance Amount Percentage Balance ------- ------ ---------- ------- Funding Uses: Loans $ 358,261 $ 34,022 10.49% $ 324,239 Taxable investment securities 75,051 19,668 35.51 55,383 Tax-exempt investment securities 21,223 4,534 27.17 16,689 Interest bearing deposits with other banks 100 (426) (80.99) 526 Federal funds sold and securities purchased under agreement to resell 6,613 (1,781) (21.22) 8,394 ------------- ------------- ----------- $ 461,248 $ 56,017 13.82% $ 405,231 ============= ============= ============= =========== Funding Sources: Deposits: Non-interest bearing deposits $ 50,580 $ 12,468 32.71% $ 38,112 Savings deposits 117,734 35,843 43.77 81,891 Other time deposits 258,446 5,281 2.09 253,165 Other borrowed money 9,411 (680) (6.74) 10,091 Federal funds purchased and securities sold under agreement to repurchase 6,522 503 8.36 6,019 ------------- ------------- ----------- $ 442,693 $ 53,415 13.72% $ 389,278 ============= ============= ============= =========== - 18 -

21 Total assets for Farmers & Merchants Bancorp, Inc. have increased from $464 million in 1995 to $501.4 million in 1996 and to $528.3 million in 1997, an 8.1% and 5.4% increase, respectively. The increase in assets of $26.9 million is primarily the result of growth in the loan portfolio of $29.2 million and federal funds sold of $6.5 million, while investments dropped $9.7 million. The increase in the loan portfolio came primarily from two areas. Mortgage loans increased $10.6 million to $205.6 million from the $195 million level for 1996, while at the same time, consumer loans were increasing $12.6 million to $75.8 million from $63.2 million for 1996. These increases can again be attributed to favorable interest rates, as well as, an aggressive but controlled and managed loan policy. While the loan portfolio has increased significantly, the net charge-offs have remained fairly level. Net charge-offs were $385 thousand for 1995, $1.1 million for 1996 and $761 thousand for 1997. Because of the tremendous growth in the loan portfolio, it was determined that the allowance for possible loan losses should be increased by a modest $350 thousand to $5.85 million after remaining at $5.5 million for three years. The increase in the loan portfolio and federal funds sold was in part funded through a decrease in the investment portfolio. The U.S. Treasury security portfolio decreased from $27.7 million for 1996 to $22.2 million for 1997, a decrease of $5.5 million. The other major investment portfolio that was used was the domestic corporate obligation bond portfolio. Domestic corporate obligations dropped $6.7 million from almost $17 million for 1996 to $10.3 million for 1997. These decreases were from maturities and sales, and not from decreases in market values. In fact market values for the entire investment portfolio had a net increase of $.5 million for 1997. The other major funding source for the increase in the loan portfolio came from an increase in deposits. Other than regular savings deposits which showed a decrease of almost $7 million from 1996 levels of $95 million, all other deposit categories demonstrated significant growth with overall deposits increasing $22.9 million to $461.3 million from 1996 levels of $438.4 million, over a 5% increase. The Farmers & Merchants State Bank continues to use borrowed funds from the Federal Home Loan Bank of Cincinnati to fund its fixed rate loan portfolio. The loans reduce the Bank's exposure to interest rate risk as the Bank matches a fixed rate liability with the loan made. The Bank also receives a better servicing margin on these loans than were experienced with loans sold on the secondary market. New borrowings for 1997 amounted to $3 million while repayments amounted to $707 thousand, a net increase of almost $2.3 million. CAPITAL RESOURCES Total capital increased $5.5 million or 12.6% for 1997 compared to $3.8 million or 9.6% for 1996 and $5 million or 14.5% for 1995. These increases came from profits and changes in market values of the securities portfolio. Profits amounted to $6.7 million for 1997, $5.5 million for 1996 and $5.3 million for 1995, while net after tax effect changes in market values of the investment portfolio contributed $311 thousand for 1997 and $1.1 million for 1995, but negatively impacted capital for 1996 in the amount of $228 thousand. As a result of the continued increasing profitable operations, the per share dividends have been steadily increasing also. For 1997 dividends of $1.25 per share or $1.625 million were declared as compared to $1.15 or $1.495 million for 1996 and $1.10 or $1,430 million for 1995. The per share amounts for 1996 and 1995 have been restated to reflect a 5 for 1 stock split in 1996. The amount of dividends which can be paid are subject to regulatory restrictions. - 19 -

22 Under regulatory risk-based guidelines, capital is measured against the Bank's risk-adjusted assets. The Bank's Tier 1 capital (common stockholders' equity less goodwill, if any) to risk-adjusted assets was approximately 9.6% at December 31, 1997, well above the 4% minimum requirement. Total capital to risk-adjusted assets approximately 13.4%, also well above the 8% minimum requirement for this ratio. The leverage ratio was at 7.1% compared to the 4% requirement. These same ratios as of December 31, 1996 were, 8.9%, 12.9% and 6.4%, respectively. According to regulatory guidelines, the Bank is considered to be well capitalized. The Farmers & Merchants State Bank declared a $10 million dividend to Farmers & Merchants Bancorp, Inc. on December 31, 1996 with the approval of the FDIC and the State of Ohio Division of Financial Institutions. Farmers & Merchants Bancorp, Inc. then loaned to The Farmers & Merchants State Bank on December 31, 1996, $10 million in exchange for an unsecured subordinated note receivable. The note is due January 1, 2007. Interest at the rate of 6% is payable annually on the first day of January of each year. The purpose of the transaction was to reduce the Bank's liability for Ohio Franchise Tax. 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, 1997 for each major category of interest-earning assets (at amortized cost) and interest-bearing liabilities: (Dollars in Thousands) 0 - 90 90 - 365 1 - 5 Over 5 Days Days Years Years Total ---- ---- ----- ----- ----- Interest bearing deposits $ 0 $ 100 $ 0 $ 0 $ 100 Federal funds sold 6,485 0 0 0 6,485 Investments 4,567 15,320 56,235 15,928 92,050 Loans 155,033 117,350 93,421 38,689 404,493 ---------- ----------- ---------- --------- ----------- Total Rate Sensitive Assets 166,085 132,770 149,656 54,617 503,128 Rate Sensitive Liabilities 76,093 133,675 202,965 11,292 424,025 ---------- ----------- ---------- --------- ----------- Gap $ 89,992 $ (905) $ (53,309) $ 43,325 $ 79,103 ========== =========== ========== ========= =========== - 20 -

23 Management with the assistance of outside advisors is continually looking for opportunities that can minimize market price risk or interest rate risk, and thus improve the quality of the portfolio. LIQUIDITY Historically, the primary source of liquidity for the Company has been core deposits. This is true for 1997 as well. Deposits increased $22.9 million in 1997. This compares with $34.3 million for 1996 and $59.6 million for 1995. The loan to deposit ratio increased slightly to 86.3% for 1997 compared to 84.1% for 1996 and 1995. Short term marketable debt securities has also provided the Company with liquidity. Securities maturing in one year or less amounted to a market value of $15.8 million 17.7% of total marketable debt securities compared to $20 million or 20.4% for 1996 and $20.9 million or 25.3% for 1995. Still another source of liquidity are Federal Funds Sold. Federal Funds Sold which are for very short durations of time increased $6.5 million. RESULTS OF OPERATIONS OVERVIEW Net income for 1997 was $6.8 million, a $1.3 million or 23.6% increase over 1996 net income of $5.5 million. Net income for 1995 was $5.3 million. Net interest margin before the provision for loan losses increased 8.5% to $19 million over $17.5 million for 1996. Net interest margin for 1996 increased 6.1% over the $16.5 million for 1995. The net interest margin percentage was 3.9% for 1997, 3.8% for 1996 and 4.1% for 1995. INTEREST INCOME Interest income and fees on loans and leases increased 5.9% or $1.9 million to $34.3 million. This compares to interest and fee income of $32.4 million for 1996 and $29.6 million for 1995. All of the increase in interest income for 1997 can be attributed to an increase in lending activities. Interest income on the investment portfolio for 1997 was $5.5 million compared to $5.5 million for 1996 and $4.1 million for 1995. INTEREST EXPENSE Interest expense on deposits increased to $20.3 million for 1997, up a very minimal $333 thousand from 1996 interest expense of $19.9 million. - 21 -

24 ALLOWANCE FOR LOAN LOSSES In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance or reserve for loan losses is established by way of expense charges to income. The Bank evaluates the adequacy of the allowance for loan losses based on an analysis of specific problem loans, as well as, on an aggregate basis. Factors considered by management in determining the proper reserve include review of general economic conditions, changes in the portfolio mix, past loan-loss experience, the financial condition of the borrowers and reports of examinations furnished by State and Federal banking authorities. Management reviews the calculation of the allowance for loan losses on a quarterly basis, and feels that the allowance is adequate. The Bank has established the allowance for loan losses to reduce the gross level of loans outstanding by an estimate of uncollectible loans. As loans are deemed uncollectible, they are charged against the allowance. A provision for loan losses is expensed against current income on a monthly basis. This provision serves to replenish the allowance for loan losses to accommodate charge-offs and growth in the loan portfolio, thereby maintaining the allowance at an adequate level. For 1997 provisions charged against income amounted to $1.1 million compared to $1.1 million for 1996 and $385 thousand for 1995. The allowance was established at $5.85 million at December 31, 1997, representing 1.4% of total loans. This compares to $5.5 million or 1.5% for 1996 and $5.5 million or 1.6% for 1995. OTHER OPERATING INCOME The operating income increased by $558 thousand over 1997 to $2.9 million, up from $2.4 million for 1996 and $2.1 million for 1995. Increases in miscellaneous customer fees and mastercard fees account for the bulk of this increase. OTHER OPERATING EXPENSES As was the case in 1996, despite increased loan and deposit activity, management was able to hold operating expenses in check. Operating expenses of $11 million for 1997 increased only slightly compared to $10.9 million for 1996 and $10.7 million for 1995. OTHER ACCOUNTING ISSUES Management is currently reviewing the Year 2000 situation in order to address potential problems that may occur in time to take corrective action. The service center which the Bank uses to process its transactions has established a testing schedule and has assured the Bank that the software being used will be updated to accept Year 2000 dates and transactions. The Bank's internal Year 2000 committee is working diligently to address Year 2000 problems that may exist with the Bank's hardware. A Y2K budget has been compiled and approved by the Board of Directors. At this time, management believes that the transition into the next century can be conducted smoothly and with minimum additional costs. - 22 -

25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants - 23 -

26 MESSAGE FROM MANAGEMENT: We are pleased to report that for the year 1997, the FARMERS & MERCHANTS BANCORP, INC., earnings were again very strong, asset quality remained outstanding, and the Bank expanded its presence within its market area. Capital accounts have increased to $48,844,000 with net income of $6,777,000 or $5.22 per share compared to $4.22 in 1996. This resulted with an impressive 14.56 percent Return on Average Equity and 1.33 percent Return on Average Assets and a new high in assets of $528,273,000. The higher earnings and returns were a direct result of excellent asset quality, continued loan growth, active capital management, proper management of interest rate risk and control of overhead expenses. The excellent results of the Farmers & Merchants Bancorp, Inc. in 1997 reflected favorably on the professionalism, dedication and enthusiasm of our people. Thanks to their efforts and customary excellence, we successfully achieved one of our most notable years. Continuing its emphasis to keep pace with industry advances and developments, the Bancorp made significant moves with technology and electronics during the year. Designed to focus on customer satisfaction, operating efficiency and expanded computer capabilities, major allocations of resources were invested in reshaping systems to remain competitive as we move into the 21st century. Whatever plans we make, however, one thing will remain unchanged, the unique way we do business. We are able to form stronger ties with our customers on an individual basis by permitting local decision-making opportunities at each of our offices. Another tradition that will not change is our commitment to the communities we serve. Each of our offices works to improve the way of life for the people in their area. Loan quality remains a high focus in the banking industry. Again, our well-established system to monitor the loan portfolio and act accordingly performed well in 1997. One of the major keys to our success and performance this past year was the enhancement of the Bank's loan-to-deposit ratio without sacrificing underwriting or pricing standards. A number of product and program considerations have been identified to assist the Bank with this challenge. Loan growth in 1998 is expected to remain strong, especially in the Real Estate Mortgage area. A major concern which will occupy much of our time for the coming year and 1999 is the Year 2000 (Y2K) issue. The Year 2000 poses some significant concerns about the potentially serious problems that could result for anything that uses or is run by a computer. Problems could exist not only on personal computers, but also with time clocks, passenger elevators, home furnaces, VCRs and much more. Our concern is not only for the computer systems we use daily, but also for our customers and their businesses, as well as the vendors from whom we order supplies. If these potential problems are not addressed, our day to day operations could be disrupted and cause us all to spend needless dollars to remedy the situation. It is important that we all look at our daily lives and operations to determine what may be affected by the Year 2000 dilemma. At the same time we are making internal changes, outside forces are creating an atmosphere for success. Recent legislative developments and a loosening of federal regulations are encouraging signs. When you combine all of these factors and the healthy economy we are currently enjoying, the outlook for the Bancorp and its shareholders is very promising. We cannot think of a better time to be in this business. We would like to express our appreciation for the constant input and support of the Board of Directors, Advisory Boards, our loyal employees, the cooperation of the communities we serve, and finally the continued confidence of our shareholders. Joe E. Crossgrove Charles E. Lugbill President and Chief Executive Officer Chairman of the Board 24

27 DIRECTORS MAYNARD SAUDER MICHAEL D. CULLER President Asst. Vice President CHARLES E. LUGBILL Sauder Woodworking Co. Chief Agri Finance Officer Chairman of the Board The Farmers & Merchants State MERLE J. SHORT BARBARA J. BRITENRIKER Bank Farmer Asst. Vice President President Comptroller & Chief Financial Officer EUGENE D. BERNATH Promow, Inc. Farmer DIANN K. MEYER STEVEN J. WYSE Asst. Vice President JERRY L. BOYERS President Personnel Officer President Granite Industries Edifice Construction Management KENT E. ROTH DIRECTOR EMERITUS Auditor JOE E. CROSSGROVE Security Officer President ELIAS H. FREY Bank Secrecy Officer Chief Executive Officer KENNETH E. STAMM The Farmers & Merchants State ROBERT H. STOTZER MARILYN K. JOHNSON Bank ROBERT V. WHITMER Assistant Cashier Compliance Officer and ROBERT G. FREY CRA Officer President ARCHBOLD MAIN OFFICE E. H. Frey & Sons, Inc. JUDITH A. WARNCKE CHARLES E. LUGBILL Asst. Cashier LEE E. GRAFFICE Chairman of the Board Marketing Officer President Graffice Motor Sales JOE E. CROSSGROVE J. SCOTT MILLER President Asst. Cashier JACK C. JOHNSON Chief Executive Officer Agri Finance Officer President Hawk's Clothing, Inc. MAYNARD SAUDER DEBRA J. KAUFFMAN Partner Vice President Asst. Cashier & Consumer REJO Partnership Lending Officer EUGENE D. BERNATH Asst. Corporate Secretary DEAN E. MILLER Vice President President RICHARD D. ERNEST MBC Holdings, Inc. EDWARD A. LEININGER Assistant Cashier Vice President Asset Recovery Officer DALE L. NAFZIGER Commercial Loan Officer Retired JANE C. BRUNER REX D. RICE Assistant Cashier HAROLD H. PLASSMAN Vice President Operations Supervisor Attorney Chief Lending Officer Plassman, Rupp, Hensal & Short JOYCE G. KINSMAN GEORGE JELEN Assistant Cashier JAMES L. PROVOST Asst. Vice President Loan Review Officer Retired Mortgage Loan Officer Dyer & Mc Dermott, Inc. SHAWN O. MCCUTCHEON RANDAL H. SCHROEDER Secretarial Supervisor JAMES C. SANEHOLTZ Asst. Vice President President Chief Operations Officer Saneholtz-McKarns, Inc. 25

28 PHYLLIS MUNDAY GLORIA GUNN PATTI L. ROSEBROCK Bookkeeping Supervisor Asst. Vice President Asst. Cashier Asst. Branch Manager Asst. Branch Manager DIANNA J. WEBER Teller Supervisor WAUSEON DOWNTOWN OFFICE STRYKER ADVISORY ARCHBOLD WOODLAND BOARD OFFICE CAROL J. ENGLAND Asst. Vice President FRED W. GRISIER DEBORAH L. STONER Branch Manager Owner Asst. Vice President Corporate Secretary Grisier Funeral Home Branch Manager JEAN E. HORWATH RONALD R. ROBINSON DIANE J. SWISHER Asst. Cashier Owner Asst. Cashier Asst. Branch Manager R. Home Interiors Asst. Branch Manager RICHARD E. RAKER WAUSEON ADVISORY BOARD Owner ARCHBOLD ADVISORY BOARD Raker Oil Company RICHARD L. ELROD DEXTER L. BENECKE President STEVEN PLANSON Vice President Mustang Corporation Farmer Benecke Trucking, Inc. Alex Products, Inc. WARREN A. KAHRS President WEST UNITY OFFICE BRUCE C. LAUBER Kahrs Tractor Sales, Inc. President LEWIS D. HILKERT Lauber Manufacturing Co. JOSEPH H. KOLB Vice President Owner Branch Manager JO ELLEN HORNISH Kolb & Son President PATRICIA R. BURKHOLDER Hornish Brothers, Inc. JULIAN GIOVARELLI Assistant Branch Manager President ANTHONY J. RUPP Gio Sales, Inc. President WEST UNITY ADVISORY Rupp Furniture Co. SANDRA K. BARBER BOARD Fulton County Recorder GENE SCHAFFNER Chairman, Ohio Lottery Commission ALVIN E. CAROTHERS Farmer Farmer DR. KENNETH H. KLING GEORGE F. STOTZER Owner BEN G. WESTFALL Partner Fulton County Vision Services President Stotzer Do-It Center Westfall Realty, Inc. STRYKER OFFICE WILLIAM W. HOLLINGSHEAD WAUSEON SHOOP OFFICE Owner RONALD D. SHORT Hollingshead Mortuary ALLEN G. LANTZ Asst. Vice President Vice President Branch Manager TED W. MANEVAL Branch Manager Farmer 26

29 R. BURDELL COLON KEVIN L. GRAY GEORGE B. RINGS President Assistant Cashier Pharmacist Rup-Col., Inc. Assistant Branch Manager Rings Pharmacy DELTA OFFICE BRYAN ADVISORY BOARD NAPOLEON OFFICE CYNTHIA K. KNAUER W. PAUL TRODER STEPHEN E. JACKSON Asst. Vice President President Asst. Vice President Branch Manager Allied Moulded Products, Inc. Branch Manager BARRY N. GRAY RUSTY BRUNICARDI DIANA J. DENNIE Assistant Cashier President Assistant Cashier Asst. Branch Manager Chief Executive Officer Assistant Branch Manager Community Hospital of Williams Co., Inc. NAPOLEON ADVISORY BOARD DELTA ADVISORY BOARD D. ROBERT SHAFFER BARBARA C. SCHIE TERRY J. KAPER Farmer Office Manager Attorney Fulton Anesthesia Associates, Barber, Kaper, Stamm & Robinson DR. C. NICHOLAS WALZ Inc. Partner DONALD C. EICHER Williams County Family Medical DAVID M. DAMMAN Retired Grocer Center Farm Drainage Contractor Farmer ROBERT E. GILDERS PAUL R. MANLEY President Vice President Manufacturing JAMES T. VAN POPPEL GB Manufacturing Ohio Art Co. President Van Poppel Corp. EUGENE BURKHOLDER President MONTPELIER OFFICE DENNIS L. MEYER Falor Farm Center Realtor JOHN S. FEE Ed Rohrs Realty AL KREUZ Asst. Vice President Fulton County Commissioner Branch Manager BRYAN EAST HIGH OFFICE MONTPELIER ADVISORY BOARD DAVID C. FRAZIER Assistant Vice President GREGORY D. SHOUP Branch Manager President Peltcs Lumber Co., Inc. CAROL L. CHURCH Assistant Branch Manager RICHARD S. DYE Vice President Dyco Manufacturing SOUTHTOWNE OFFICE MICHAEL T. SMITH ROBERT D. MERCER Assistant Cashier President Branch Manager Bob Mercer Realty and Auctions 27

30 FARMERS & MERCHANTS BANCORP, INC. TABLE OF CONTENTS December 31, 1997 PAGE Independent Auditors' Report 29 Consolidated Balance Sheets 30 Consolidated Statements of Income 31 Consolidated Statements of Changes in Shareholders' Equity 32 Consolidated Statements of Cash Flows 33 Notes to Consolidated Financial Statements 34 - 54 Supplementary Information: Independent Auditors' Report on Supplementary Information 55 Five Year Summary of Consolidated Operations 56 28

31 [KROUSE, KERN & CO., INC LETTERHEAD] January 14, 1998 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, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its consolidated operations and cash flows for the years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. /S/ KROUSE, KERN & CO., INC. KROUSE, KERN & CO., INC. 29

32 FARMERS & MERCHANTS BANCORP, INC. Consolidated Balance Sheets December 31, 1997 and 1996 ASSETS (In thousands) 1997 1996 ------------ ------------- ------------- Cash and due from banks......................................................... $ 16,213 $ 15,871 Interest bearing deposits with banks............................................ 100 100 Federal funds sold.............................................................. 6,485 0 Investment securities at market value........................................... 92,050 101,721 Loans, less allowance for loan losses of $5,850 for 1997 and $5,500 for 1996..................................................................... 398,151 368,900 Investment in leases............................................................ 492 319 Bank premises and equipment - net............................................... 7,665 7,576 Accrued interest and other assets............................................... 6,503 6,153 Deferred income tax charge...................................................... 614 809 ------------- ------------- TOTAL ASSETS $ 528,273 $ 501,449 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand................................................................... $ 51,163 $ 50,019 NOW accounts............................................................. 48,264 37,795 Savings.................................................................. 87,923 94,768 Time.................................................................... 273,948 255,795 ------------- ------------- Total Deposits 461,298 438,377 Federal funds purchased......................................................... 0 2,790 Securities sold under agreement to repurchase................................... 2,598 3,973 Other borrowings................................................................ 11,292 8,998 Dividend payable................................................................ 650 520 Accrued interest and other liabilities.......................................... 3,591 3,410 ------------- ------------- Total Liabilities 479,429 458,068 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, no par value - authorized 1,500,000 shares; issued 1,300,000 shares......................................................... 12,677 12,677 Undivided profits.......................................................... 35,165 30,013 Net unrealized gain on securities available for sale (net of tax effect $515 in 1997 and $357 in 1996)........................................... 1,002 691 ------------- ------------- Total Shareholders' Equity 48,844 43,381 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 528,273 $ 501,449 ============= ============= See Accompanying Notes to Consolidated Financial Statements. 30

33 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 (In thousands except for per share amounts) INTEREST INCOME: 1997 1996 1995 ------------- ------------- ------------- Interest and fees on loans............................... $ 34,229 $ 32,339 $ 29,554 Interest on Investment Securities: U. S. Treasury securities............................ 1,507 1,493 1,040 Securities of U. S. Government agencies.............. 2,045 2,095 1,531 Obligations of states and political sub-divisions.... 1,234 1,220 1,124 Obligations of domestic corporations................. 719 707 362 Interest on federal funds................................ 211 357 470 Interest on deposits in banks............................ 5 7 3 Dividends................................................ 166 150 137 Lease finance revenues................................... 42 14 7 ------------- ------------- ------------- Total Interest Income 40,158 38,382 34,228 ------------- ------------- ------------- INTEREST EXPENSE: Interest on deposits..................................... 20,276 19,943 16,741 Interest on borrowed funds............................... 863 962 1,008 ------------- ------------- ------------- Total Interest Expense 21,139 20,905 17,749 ------------- ------------- ------------- Net Interest Income 19,019 17,477 16,479 PROVISION FOR LOAN LOSSES........................................ 1,111 1,068 385 ------------- ------------- ------------- Net Interest Income After Provision for Loan Losses 17,908 16,409 16,094 ------------- ------------- ------------- OTHER INCOME: Service charges on deposit accounts...................... 1,152 1,097 1,012 Other service charges and fees........................... 1,787 1,275 1,034 Net securities gains..................................... (4) 5 72 ------------- ------------- ------------- 2,935 2,377 2,118 ------------- ------------- ------------- OTHER EXPENSES: Salaries and wages....................................... 4,404 4,849 4,529 Pension and other employee benefits...................... 1,206 1,172 989 Occupancy expense (net).................................. 481 498 453 Furniture and equipment expense.......................... 722 788 692 Other operating expenses................................. 4,218 3,684 4,049 ------------- ------------- ------------- 11,031 10,991 10,712 ------------- ------------- ------------- INCOME BEFORE FEDERAL INCOME TAX 9,812 7,795 7,500 FEDERAL INCOME TAXES............................................. 3,035 2,312 2,203 ------------- ------------- ------------- NET INCOME $ 6,777 $ 5,483 $ 5,297 ============= ============= ============= Net income per share: Net income before securities gains.......................... $ 5.22 $ 4.21 $ 4.02 Net securities gains........................................ .00 .01 .05 ------------- ------------- ------------- NET INCOME PER SHARE $ 5.22 $ 4.22 $ 4.07 ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 1,300,000 1,300,000 1,300,000 ============= ============= ============= See Accompanying Notes to Consolidated Financial Statements. 31

34 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Net Unrealized Gain (Loss) on Common Undivided Available for (In thousands) Stock Profits Sale Securities ------------ ------------- ------------- ----------------- BALANCE AT DECEMBER 31, 1994.................................. $ 12,677 $ 22,158 $ (249) Net income for 1995...................................... 0 5,297 0 Unrealized gains on securities classified as Available for Sale (net of tax effect of $599)................... 0 0 1,168 Cash dividends ($1.10 per share)......................... 0 (1,430) 0 ------------- ------------- -------------- BALANCE AT DECEMBER 31, 1995 12,677 26,025 919 Net income for 1996...................................... 0 5,483 0 Unrealized gains on securities classified as Available for Sale (net of tax effect of ($115))................. 0 0 (228) Cash dividends ($1.15 per share)......................... 0 (1,495) 0 ------------- ------------- -------------- BALANCE AT DECEMBER 31, 1996.................................. 12,677 30,013 691 Net income for 1997...................................... 0 6,777 0 Unrealized gains on securities classified as Available for Sale (net of tax effect of $157)................... 0 0 311 Cash dividends ($1.25 per share)......................... 0 (1,625) 0 ------------- ------------- -------------- BALANCE AT DECEMBER 31, 1997 $ 12,677 $ 35,165 $ 1,002 ============= ============= ============== See Accompanying Notes to Consolidated Financial Statements. 32

35 FARMERS & MERCHANTS BANCORP, INC. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995 ------------- ------------- ------------- Net income................................................... $ 6,777 $ 5,483 $ 5,297 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization............................ 700 798 689 Premium amortization..................................... 470 582 737 Discount amortization.................................... (155) (196) (128) Provision for loan losses................................ 1,111 1,068 385 Provision for deferred income taxes...................... 43 266 241 (Gain) loss on sale of fixed assets...................... 0 (1) 20 (Gain) loss on sale of investment securities............. 4 (5) (72) Changes in Operating Assets and Liabilities: Accrued interest receivable and other assets............. (350) (373) (1,299) Accrued interest payable and other liabilities........... 181 162 836 ----------- ------------ ------------ Net Cash Provided by Operating Activities 8,781 7,784 6,706 ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures......................................... (789) (1,176) (1,654) Proceeds from sale of fixed assets........................... 0 1 4 Proceeds from maturities of investment securities: Held to Maturity......................................... 0 0 20,450 Available for Sale....................................... 23,546 30,890 12,278 Proceeds from sale of investment securities: Available for Sale....................................... 10,363 255 1,997 Purchase of investment securities: Held to Maturity......................................... 0 0 (8,040) Available for Sale....................................... (24,093) (48,874) (32,556) Net increase in loans........................................ (30,362) (30,354) (38,477) Net increase in leases....................................... (173) (257) (3) ----------- ------------ ------------ Net Cash Used by Investing Activities (21,508) (49,515) (46,001) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits..................................... 22,921 34,387 59,595 Net change in short term borrowings.......................... (4,165) (156) (7,479) Increase in long-term borrowings............................. 3,000 0 400 Payments on long-term borrowings............................. (707) (665) (612) Payments of dividends........................................ (1,495) (1,625) (1,300) ----------- ------------ ------------ Net Cash Provided by Financing Activities 19,554 31,941 50,604 ----------- ------------ ------------ Net change in cash and cash equivalents 6,827 (9,790) 11,309 Cash and cash equivalents at beginning of the year................ 15,971 25,761 14,452 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 22,798 $ 15,971 $ 25,761 =========== ============ ============ RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and cash due from banks................................. $ 16,213 $ 15,871 $ 14,951 Interest bearing deposits.................................... 100 100 100 Federal funds sold........................................... 6,485 0 10,710 ----------- ------------ ------------ $ 22,798 $ 15,971 $ 25,761 =========== ============ ============ See Accompanying Notes to Consolidated Financial Statements. 33

36 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES 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 and accident and health insurance company. 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 agri-business, commercial, consumer and residential loans to customers primarily in northwest, Ohio. 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. 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: Securities, when purchased, are designated as Investment Securities Available for Sale and are carried at market value. They remain in that category until they are sold or mature. The specific identification method is used in determining the cost of securities sold. Unrealized holding gains and losses, net of tax, on securities classified as Available for Sale are reported as a net amount as a separate component of shareholders' equity until realized. 34

37 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) INVESTMENT SECURITIES: (Continued) In accordance with a provision provided by the Financial Accounting Standards Board, The Farmers & Merchants State Bank elected to reclassify any investment securities classified as Held to Maturity to Available for Sale during 1995. The effect of this reclassification was to increase the net unrealized gain on securities Available for Sale by $562 thousand net of a tax effect of $289 thousand. 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 is accrued on all loans not discounted by applying the interest rate to the amount outstanding. When it is not reasonable to expect that interest will be realized, accrual of income ceases and these loans are placed on a "cash basis" for purposes of income recognition. LOAN ORIGINATION FEES AND COSTS: The Bank has adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 91, which establishes financial accounting and reporting guidelines for accounting for nonrefundable fees and costs associated with originating or acquiring loans. Statement No. 91 requires that nonrefundable loan fees, such as the fees more commonly known as "points" or "origination fees" but not necessarily limited thereto, be deferred and recognized over the life of the loan as an adjustment of yield. Likewise, certain direct loan origination costs are to be deferred and recognized as a reduction in the yield of the loan. MORTGAGE SERVICING RIGHTS: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement No. 65." FAS 122 states that "a mortgage banking enterprise that purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights shall allocate the cost of the mortgage loans based on the relative fair values at the date of purchase or origination." The Bank adopted FAS 122 effective January 1, 1996 and uses the present value of expected future cash flows in determining fair values. 35

38 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) IMPAIRED LOANS: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." FAS 114 states that "a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement." When it is determined by the creditor that a loan is impaired, "the creditor shall measure the impairment based on 1) the present value of expected future cash flows discounted at the loan's effective rate, 2) the loan's observable market price, or 3) the fair value of the collateral if the loan is collateral dependent." FAS 114 was adopted by the Bank effective January 1, 1995. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is available for future charge-offs. It is increased by provisions charged to operations and decreased by charge-offs net of recoveries. The provision is primarily the result of management's continuous review and evaluation of problem loans, supplemented by historical net charge-off experience, economic conditions and the size of the loan portfolio. The allowance is maintained at a level which management believes to be adequate to provide for potential losses. For tax purposes, the Bank follows a policy of providing additions to the allowance for possible loan losses in accordance with maximum amounts under applicable federal tax laws. BANKING PREMISES AND EQUIPMENT: Banking 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. PREMIUM RESERVES AND BENEFIT LIABILITIES: Liabilities for unreported claims are calculated from runoff experience. Liabilities for future reserves are based on the 1964 CDT at 3%. Mortality reserves for life insurance contracts are determined using the 1958 CET 3.5% net level reserve method. Premium reserves for the accident and health policies are determined by the mean Prorata and rule of 78's. 36

39 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (Continued) 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 nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. FEDERAL INCOME TAX: The provision for federal income taxes is based on reported income and expense, adjusted for permanent differences between reported income and taxable income. The deferred portion of the provision relates to those items of income and expense in the financial statements that are recognized in different time periods for income tax purposes. EARNINGS PER SHARE: Earnings per share are computed based on the weighted average number of shares of common stock outstanding during each year, after restatement for stock dividends. NOTE 2. CASH AND FEDERAL FUNDS SOLD 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, 1997 were $3.7 million. 37

40 NOTE 3. INVESTMENT SECURITIES The amortized cost and estimated market values of investments in securities as of December 31, 1997 and 1996 are detailed below. Fair market values are based on quoted market prices or dealer quotes. 1997 ------------------------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ------------ ----------- ------------- ------------- ----------- Available for Sale: U.S. Treasury $ 22,200 $ 195 $ 22 $ 22,373 U.S. Government Agency 22,100 224 2 22,322 Mortgage-Backed 9,033 24 66 8,991 State and political subdivisions 24,499 1,127 9 25,617 Obligation of domestic corporations 10,282 48 3 10,327 Stocks of domestic corporations 20 0 0 20 Federal Home Loan Bank stock (restricted) 2,400 0 0 2,400 ----------- ------------- ------------- ----------- $ 90,534 $ 1,618 $ 102 $ 92,050 =========== ============= ============= =========== 1996 ----------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ------------ ----------- ------------- ------------- ----------- Available for Sale: U.S. Treasury $ 27,743 $ 109 $ 25 $ 27,827 U.S. Government Agency 23,825 193 108 23,910 Mortgage-Backed 9,023 31 68 8,986 State and political subdivisions 20,865 827 14 21,678 Obligation of domestic corporations 16,961 126 22 17,065 Stocks of domestic corporations 20 0 0 20 Federal Home Loan Bank stock (restricted) 2,235 0 0 2,235 ----------- ------------- ------------- ----------- $ 100,672 $ 1,286 $ 237 $ 101,721 =========== ============= ============= =========== 38

41 NOTE 3. INVESTMENT SECURITIES (Continued) The Federal Home Loan Bank stock is held as collateral security for all indebtedness of The Farmers & Merchants State Bank to the Federal Home Loan Bank. The gross realized gains and losses for the years ended December 31, are presented below: (In thousands) ------------ Gross Realized Gains: 1997 1996 1995 ------------- ------------- ------------- Available for Sale: State and political subdivisions 6 5 105 ------------- ------------- ------------- 6 5 105 ------------- ------------- ------------- Gross Realized Losses: Available for Sale: U.S. Treasury and agency securities 10 0 33 ------------- ------------- ------------- Net Realized Gains (Loss) (4) $ 5 $ 72 ============= ============= ============= Gross proceeds from sale of Available for Sale securities $ 10,363 $ 255 $ 1,997 ============= ============= ============= The amortized cost and estimated market value of debt securities at December 31, 1997, 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. Investment Securities Available for Sale ----------------------------------- Market (In thousands) Amortized Cost Value ------------ -------------- ----------- Within one year $ 15,806 $ 15,831 From one through five years 56,405 57,005 From five through ten years 6,149 6,351 After ten years 9,754 10,443 ----------- ----------- Total $ 88,114 $ 89,630 =========== =========== Investments with a carrying value of $61.6 million and $62.2 million at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and securities sold under repurchase agreements. 39

42 NOTE 4. LOANS Loans at December 31, 1997 and 1996 are summarized below: (In thousands) 1997 1996 ------------ ------------- ------------- Real estate $ 205,626 $ 195,043 Commercial and industrial 65,633 67,763 Agricultural (excluding real estate) 44,939 41,195 Consumer and other loans 75,767 63,199 Commercial paper 7,837 3,959 3,959 Industrial Development Bonds 4,511 3,670 ------------- ------------- 404,313 374,829 Less: Deferred loan fees and costs (312) (429) ------------- ------------- 404,001 374,400 Less: Allowance for loan losses (5,850) (5,500) ------------- ------------- Loans - Net $ 398,151 $ 368,900 ============= ============= $44.1 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 $6.1 and $12.4 million at December 31, 1997 and 1996, 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 1997 were $16.4 million and repayments were $22.7 million. In the opinion of management, these loans do not involve more than normal risk of collectibility or possess other unfavorable features. The following schedule details past due and nonaccrual loans: Past Due Past Due 30 to 89 Days 90 Days or More (In thousands) Still Accruing Still Accruing Nonaccrual ------------ -------------- -------------- ---------- Real estate $ 2,653 $ 167 $ 444 Commercial and industrial 2,506 1,091 1,575 Agricultural (excluding real estate) 750 0 816 Consumer and other loans 2,227 138 55 40

43 NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for loan losses is as follows: (In thousands) 1997 1996 1995 ------------ ------------- ------------- ------------- Balance at beginning of year $ 5,500 $ 5,500 $ 5,500 Provision charged to operating expenses 1,111 1,068 385 Loans charged-off (1,531) (1,711) (1,479) Recoveries 770 643 1,094 ------------- ------------- ------------- Balance at End of Year $ 5,850 $ 5,500 $ 5,500 ============= ============= ============= At December 31, 1997 and 1996, the recorded investment in loans considered impaired was $7.170 million and $3.489 million, respectively. Of the $7.170 million and $3.489 million for 1997 and 1996, respectively that were considered impaired, $2.9 million and $1.5 million, respectively required the establishment of an allocated reserve. Average investment in impaired loans for 1997 was $3.190 million and $3.492 million for 1996. 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 during 1997 and 1996 was $402 thousand and $354 thousand, respectively. The allowance for loan losses for federal income tax purposes was $843 thousand for 1997, 1996 and 1995. 41

44 NOTE 6. BANKING PREMISES AND EQUIPMENT The major categories of banking premises and equipment and accumulated depreciation at December 31, 1997 and 1996 are summarized below: (In thousands) 1997 1996 ------------ ------------- ------------- Land $ 1,472 $ 1,228 Buildings 7,398 7,138 Furnishings 4,605 4,332 ------------- ------------- 13,475 12,698 Less: Accumulated depreciation (5,810) (5,122) ------------- ------------- Banking Premises and Equipment - Net $ 7,665 $ 7,576 ============= ============= Depreciation charged to operating expenses was $700, $798 and $689 thousand for 1997, 1996 and 1995, respectively. NOTE 7. DEPOSITS Time deposits at December 31, 1997 and 1996 were comprised of the following: (In thousands) 1997 1996 ------------ ------------- ------------- Time deposits under $100,000 $ 216,185 $ 199,934 Time deposits of $100,000 or more 57,763 55,861 ------------- ------------- $ 273,948 $ 255,795 ============= ============= The aggregate amount of maturities for each of the five following years for time deposits having a remaining term of more than one year follows: 1998 $ 137,874 1999 115,754 2000 16,634 2001 1,710 2002 1,292 The aggregate amount of demand deposits reclassified as loan balances as of December 31, 1997 and 1996 were $92 thousand and $429 thousand, respectively. Deposits to related parties as of December 31, 1997 amounted to $5.8 million. 42

45 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 8. REPURCHASE AGREEMENTS The maximum amount of repurchase agreements outstanding at the end of any given month during 1997 was $4.949 million with an average outstanding balance for 1997 of $2.990 million determined on a daily average basis. Accrued interest payable on repurchase agreements as of December 31, 1997 was $75 thousand. Securities underlying the agreements were under the Bank's control. NOTE 9. OTHER BORROWINGS Other borrowings consisted of the following at December 31, 1997 and 1996: (In thousands) 1997 1996 ------------ ------------- ------------- Federal Home Loan Bank, various loans due in monthly installments of $105 thousand plus an annual payment of $300 thousand including interest at varying rates from 5.40% to 6.75%. Notes are secured by a blanket lien on 100% of the Bank's one to four family residential mortgage loan portfolio. $ 11,292 $ 8,998 ============= ============= The following is a schedule by years of future minimum principal payments: Year Ended Principal December 31 Payments ----------- --------- 1998 $ 1,052 1999 1,101 2000 1,153 2001 1,208 2002 1,267 Thereafter 5,511 43

46 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 10. FEDERAL INCOME TAXES Federal income tax costs for the years 1997, 1996 and 1995 were $3.035, $2.312 and $2.203 million, respectively. The actual tax results for the three years differ from tax computed at the maximum statutory rate as follows: (In thousands) 1997 1996 1995 ------------ ------------- ------------- ------------- Tax at maximum statutory rate $ 3,354 $ 2,650 $ 2,511 Tax effect of: Tax exempt interest (384) (406) (354) Costs attributable to tax exempt interest 63 59 47 Other items, net 2 9 (1) ------------- ------------- ------------- Federal Income Tax Cost $ 3,035 $ 2,312 $ 2,203 ============= ============= ============= The provision for federal income taxes is comprised of the following components: (In thousands) 1997 1996 1995 ------------ ------------- ------------- ------------- Currently payable $ 3,003 $ 2,045 $ 1,967 ------------- ------------- ------------- Other 0 0 (6) ------------- ------------- ------------- Deferred: Stock dividend 56 51 46 Provision for loan losses (118) 0 70 Accreted discount on securities (6) 54 22 Real estate and installment loan fees and costs 100 162 52 Retirement plan costs 0 0 52 ------------- ------------- ------------- 32 267 242 ------------- ------------- ------------- Total Provisions $ 3,035 $ 2,312 $ 2,203 ============= ============= ============= The timing differences between financial reporting and tax reporting resulted in a deferred charge of $614 thousand and $809 thousand as of December 31, 1997 and 1996, respectively. The deferred charge for income tax costs is included in the asset section of the balance sheets. 44

47 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 11. 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. Pension expense for the 401(k) profit sharing plan for both the employer matching contribution and the discretionary contribution was $315 thousand, $267 thousand and $202 thousand for 1997, 1996 and 1995, respectively. During 1995 the Bank had a defined benefit retirement plan in place. The plan was terminated in 1996 and all assets were transferred to the 401(k) profit sharing plan. Pension expense for 1995 under the defined benefit plan amounted to $38 thousand. NOTE 12. 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, 1997 is as follows: Notational (In thousands) Amount ------------ ------------ Commitments to extend credit $ 62,486 Credit card arrangements 9,619 Standby letters of credit 2,299 45

48 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (Continued) 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. Commitments as of December 31, 1997 to lend at fixed and variable rates amounted to $9.6 million and $64.8 million, respectively. 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 13. CONCENTRATIONS OF CREDIT 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 4. Standby letters of credit were granted primarily to commercial borrowers. As of December 31, 1997, the company had on deposit with financial institutions $128 thousand in excess of FDIC insurable limits. NOTE 14. REGULATORY CAPITAL REQUIREMENTS Federal regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance sheet items. Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels. 46

49 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 14. REGULATORY CAPITAL REQUIREMENTS (Continued) A comparison of the Bank's capital as of December 31, 1997 with the minimum requirement is presented below: Minimum (In thousands) Actual Requirements ------ ------------ Tier 1 Risk-based Capital 9.58% 4.00% Total Risk-based Capital 13.44% 8.00% Leverage Ratio 7.06% 4.00% According to regulatory guidelines, the Bank is considered to be "well capitalized". 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 $2.3 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. On December 31, 1996 the Bank declared and paid a $10 million dividend to the Bank's parent company, Farmers & Merchants Bancorp, Inc. with approval from the FDIC and the State of Ohio Division of Financial Institutions. On December 31, 1996 Farmers & Merchants Bancorp, Inc. loaned to The Farmers & Merchants State Bank $10 million in exchange for an unsecured subordinated note receivable. The note is due January 1, 2007. Interest at the rate of 6% is payable annually on the first day of January each year. The Bank has the option of prepaying all or any part of the note at any time without notice or penalty, subject to the approval of the FDIC and the State of Ohio Division of Financial Institutions. NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: (In thousands) 1997 1996 1995 ------------ ------------- ------------- ------------- Interest (net of amount capitalized) $ 21,136 $ 20,969 $ 17,166 Income taxes $ 2,652 $ 2,128 $ 2,359 47

50 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values and estimated fair values for on and off-balance sheet financial instruments as of December 31, 1997 and 1996 are reflected below: 1997 1996 -------------------------- -------------------------- Book Fair Book Fair (In thousands) Value Value Value Value ----- ----- ----- ----- Financial Assets: Cash $ 16,313 $ 16,313 $ 15,971 $ 15,971 Federal funds sold 6,485 6,485 0 0 Investment Securities: Available for sale 92,050 92,050 101,721 101,721 Net loans 398,151 406,323 368,900 376,206 Financial Liabilities: Deposits $ 461,298 $ 462,967 $ 438,377 $ 439,349 Short-term borrowing: Federal funds purchased 0 0 2,790 2,790 Securities sold under agreement to repurchase 2,598 2,598 3,973 3,973 Other borrowing 11,292 11,642 8,998 8,654 Off-Balance Sheet Financial Instruments: Commitments to extend credit $ 62,486 $ 62,486 $ 49,480 $ 49,480 Credit card arrangements 9,619 9,619 7,726 7,726 Standby letters of credit 2,299 2,299 2,245 2,245 The following assumptions and methods were used in estimating the fair value for financial instruments: CASH AND SHORT-TERM INVESTMENTS: For cash on hand and in banks, as well as, federal funds sold, the carrying amount is a reasonable estimate of fair value. 48

51 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) INVESTMENT SECURITIES: Fair value is based on quoted market prices or dealer quotes. See Note 3, Investment Securities, for additional information. LOANS: The estimated fair value of the Loan portfolio is based on expected future cash flows discounted by an appropriate rate derived in part from the Treasury yield curve. DEPOSITS: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated using anticipated future cash flows discounted by an appropriate rate derived in part from the Treasury yield curve. 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. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. 49

52 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 17. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS (In thousands) 1997 1996 ------------ ------------- ------------- ASSETS: Cash $ 816 $ 254 Related party receivables: Dividends 650 520 Note receivable 10,000 10,000 Income tax receivable 0 12 Investment in subsidiaries 38,207 33,115 ------------- ------------- TOTAL ASSETS $ 49,673 $ 43,901 ============= ============= LIABILITIES: Accrued expenses $ 179 $ 0 Dividends payable 650 520 ------------- ------------- Total Liabilities 829 520 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, no par value - authorized 1,500,000 shares; issued 1,300,000 shares 12,677 12,677 Undivided profits 35,165 30,013 Unrealized gain on securities classified as Available for Sale (net of tax effect of $510 for 1997 and $357 for 1996) 1,002 691 ------------- ------------- 48,844 43,381 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,673 $ 43,901 ============= ============= 50

53 NOTE 17. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) STATEMENTS OF INCOME (In thousands) 1997 1996 1995 ------------ -------------- ------------- -------------- INCOME: Equity in net income of subsidiaries $ 6,406 $ 5,510 $ 5,117 Interest income 600 0 0 -------------- ------------- -------------- 7,006 5,510 5,117 -------------- ------------- -------------- EXPENSES: Miscellaneous 16 17 13 Professional fees 15 15 16 Supplies 6 8 4 Taxes 1 1 1 -------------- ------------- -------------- 38 41 34 -------------- ------------- -------------- INCOME BEFORE INCOME TAXES 6,968 5,469 5,083 INCOME TAXES (BENEFITS) 191 (14) (12) -------------- ------------- -------------- NET INCOME $ 6,777 $ 5,483 $ 5,095 ============== ============= ============== 51

54 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 17. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Net Unrealized Gain (Loss) on Common Undivided Available for (In thousands) Stock Profits Sale Securities ------------- ----------- ------------- --------------- BALANCE at December 31, 1994 $ 12,677 $ 22,360 $ (248) Net income for 1995 0 5,095 0 Unrealized losses on securities classified as Available for Sale (net of tax effect of $599) 0 0 1,167 Dividends ($1.10 per share) 0 (1,430) 0 ----------- ------------ ------------ BALANCE at December 31, 1995 12,677 26,025 919 Net income for 1996 0 5,483 0 Unrealized losses on securities classified as Available for Sale (net of tax effect of ($115)) 0 0 (228) Dividends ($1.15 per share) 0 (1,495) 0 ----------- ------------ ------------ BALANCE at December 31, 1996 12,677 30,013 691 Net income for 1997 0 6,777 0 Unrealized losses on securities classified as Available for Sale (net of tax effect of $153) 0 0 311 Dividends ($1.25 per share) 0 (1,625) 0 ----------- ---------- ------------- BALANCE AT DECEMBER 31, 1997 $ 12,677 $ 35,165 $ 1,002 =========== ============ ============ 52

55 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 17. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (Continued) STATEMENTS OF CASH FLOWS (In thousands) 1997 1996 1995 ------------ ---------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,777 $ 5,483 $ 5,095 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in undistributed net income of subsidiaries (4,910) 6,316 (3,819) Changes in Operating Assets and Liabilities: Income tax receivable 190 10 (13) ---------------- --------------- --------------- Net Cash Provided by Operating Activities 2,057 11,809 1,263 ---------------- --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Loan) to repayment by subsidiary 0 (10,000) 0 ---------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (1,495) (1,625) (1,300) ---------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents 562 184 (37) Cash and cash equivalents - beginning of year 254 70 107 ---------------- --------------- ---------------- CASH AND CASH EQUIVALENTS -- END OF YEAR $ 816 $ 254 $ 70 ================ =============== ================ 53

56 FARMERS & MERCHANTS BANCORP, INC. Notes to Consolidated Financial Statements (Continued) NOTE 18. STOCK SPLIT On June 28, 1996, the Board of Directors authorized a five-for-one stock split, thereby increasing the total number of shares authorized to 1.5 million and the total number of shares issued and outstanding to 1.3 million. All references in the accompanying financial statements to the number of common shares and per share amounts have been restated to reflect the stock split. 54

57 [KROUSE, KERN & CO., INC. LETTERHEAD] January 14, 1998 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, 1997 and 1996, appears on page 1. 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. 55

58 FARMERS & MERCHANTS BANCORP, INC. Five Year Summary of Consolidated Operations (In thousands except for per share 1997 1996 1995 1994 1993 --------------------------------- ------------- ------------ ------------- ----------- ----------- amounts) ------- Summary of Income: Interest income $ 40,158 $ 38,382 $ 34,228 $ 27,779 $ 26,650 Interest expense 21,139 20,905 17,749 12,561 12,424 ------------- ------------ ------------- ----------- ----------- Net Interest Income 19,019 17,477 16,479 15,218 14,226 Provision for loan losses 1,111 1,068 385 564 908 ------------- ------------ ------------- ----------- ----------- Net interest income after provision for loan losses 17,908 16,409 16,094 14,654 13,318 Other income (expense) (8,096) (8,614) (8,594) (7,939) (7,617) ------------- ------------ ------------- ----------- ----------- Earnings before federal income taxes 9,812 7,795 7,500 6,715 5,701 Income taxes 3,035 2,312 2,203 1,749 1,394 ------------- ------------ ------------- ----------- ----------- Net income $ 6,777 $ 5,483 $ 5,297 $ 4,966 $ 4,307 ============= ============ ============= =========== =========== Per Share of Common Stock: Earnings per common share outstanding: (Based on the weighted average number of shares outstanding) (All per share amounts have been retroactively restated to reflect 5 for 1 stock split in 1996) Net income $ 5.22 $ 4.22 $ 4.07 $ 3.82 $ 3.31 Dividends 1.25 1.15 1.10 1.00 1.00 Weighted average number of shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 Year-end assets $ 528,273 $ 501,449 $ 464,090 $ 406,186 $ 371,913 Average assets 510,163 482,770 430,304 387,440 362,244 Year-end equity capital 48,844 43,381 39,621 34,586 31,169 Average equity capital 46,548 41,501 38,034 32,838 30,025 See Independent Auditors' Report on Supplementary Information. 56

59 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 ------- --- ---- 1997-- by quarter 1st $ 40.00 $ 45.00 2nd 55.00 72.00 3rd 72.00 72.00 4th 65.00 70.00 1996-- by quarter (after retroactive 1st $ 32.00 $ 35.00 restatement for 5 for 1 stock 2nd 35.00 35.00 split in 1996) 3rd 40.00 40.00 4th 40.00 40.00 Dividends declared on a quarterly basis for the last two fiscal years: Quarter 1997 1996 ------- ---------- --------- Dividends declared per share (after retroactive restatement for 5 for 1 stock split in 1996) By quarter 1st $ .25 $ .25 2nd .25 .25 3rd .25 .25 4th .50 .40 57

60 FARMERS & MERCHANTS BANCORP, INC. SELECTED FINANCIAL DATA BY MANAGEMENT FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Farmers & Merchants Bancorp, Inc. reported consolidated earnings of $6.777 million for 1997 representing an increase of almost $1.3 million over the $5.5 million for 1996, a 23.6% increase. This increase was primarily the result of an increase in interest income from loans. Consolidated assets grew by $26.8 million in 1997 to a record $528 million from consolidated assets of $501 million for 1996. This represents a 5.3% percent increase. As was the case for 1996's increase, the increase for 1997 was due almost entirely to an increase in lending activity. As a result of the continued growth in the loan portfolio, management is of the opinion that a modest increase in the loan loss reserve of $350 thousand to $5.85 million is appropriate to cover potential loan losses. The return on average assets and average shareholders' equity for 1997 was 1.33% and 14.56%, respectively. These returns compare to 1.14% average return on assets and 13.21% average return on shareholders' equity for 1996. 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 $100 million for 1997 representing 19.3% of total average assets. CAPITAL RESOURCES Shareholders' equity was $48.8 million at December 31, 1997 compared to $43.4 million for 1996. 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, 1997, The Farmers & Merchants State Bank had a total risk-based capital ratio of 13.4% and a 9.6% core capital to risk-based asset ratio which are well in excess of regulatory guidelines. The bank's leverage ratio of 7.1% is also substantially in excess of regulatory guidelines. These ratios compare to 12.9%, 8.9% and 6.5%, respectively for 1996. As was reported last year, these ratios for 1996 were substantially lower than in past years due to a $10 million dividend paid by The Farmers & Merchants State Bank to Farmers & Merchants Bancorp, Inc. the parent company. This dividend with the subsequent loan of $10 million to The Farmers & Merchants State Bank by Farmers & Merchants Bancorp, Inc. was done to save state franchise taxes. The Company's subsidiaries are restricted by regulations from making dividend distributions in excess of certain prescribed amounts. 58

61 FARMERS & MERCHANTS BANCORP, INC. SELECTED FINANCIAL DATA BY MANAGEMENT Key Ratios: 1997 1996 1995 1994 1993 ------------ ------------- ------------ ------------- ----------- Return on average equity 14.56% 13.21% 13.93% 15.12% 14.34% Return on average assets 1.33 1.14 1.23 1.28 1.19 Loan to deposit ratio 86.31 84.15 84.06 87.55 81.12 Capital to assets ratio 9.25 8.65 8.54 8.51 8.38 Other key selected highlights are as follows: 1997 1996 1995 1994 1993 ------------ -------------- -------------- --------------- -------------- Loans $ 398,151 $ 368,900 $ 339,614 $ 301,522 $ 261,600 Total Assets 528,273 501,449 464,090 406,186 371,913 Shareholders' Equity 48,844 43,381 39,621 34,586 31,169 Interest income 40,158 38,382 34,228 27,779 26,650 Interest expense 21,139 20,905 17,749 12,561 12,424 Net Interest 19,019 17,477 16,479 15,218 14,226 Other expense (net) 8,096 8,614 8,594 7,940 7,617 Federal income tax 3,035 2,312 2,203 1,749 1,394 Net income 6,777 5,483 5,297 4,965 4,307 Net income per share 5.22 4.22 4.07 3.82 3.31 Dividends per share 1.25 1.15 1.10 1.00 1.00 59

62 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOUSRE 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 ---- --- ------------------------------ -------- Charles Lugbill 70 Chairman of the Board of Farmers 1968 and Merchants Bancorp, Inc. and, The Farmers & Merchants State Bank Eugene Bernath 64 Farmer 1978 Jerry L. Boyers 64 President, Edifice Construction 1976 Management Joe E. Crossgrove 61 President, Chief Executive Officer 1992 The Farmers & Merchants State Bank Robert G. Frey 57 President, E. H. Frey & Sons, Inc. 1987 Lee E. Graffice 66 President, Graffice Motor Sales 1983 Jack C. Johnson 45 President, Hawk's Clothing, Inc. 1991 Partner, REJO Partnership Dean E. Miller 53 President, MBC Holdings, Inc. 1986 Dale L. Nafziger 67 Retired 1969 Harold H. Plassman 68 Attorney, Plassman, Rupp, Hensel 1985 & Short James L. Provost 69 Retired, Dyer & McDermott, Inc. 1995 James C. Saneholtz 51 President, Saneholtz-McKarns, Inc. 1995 Maynard Sauder 65 President, Sauder Woodworking Co. 1980 Merle J. Short 57 Farmer, President of Promow, Inc. 1987 Steven J. Wyse 53 President, Granite Industries, Inc. 1991 60

63 EXECUTIVE OFFICERS ------------------ Principal Occupation Name Age for Past Five Years ---- --- ------------------- Charles Lugbill 70 Secretary/Treasurer Agri Trading Chairman of the Board of Farmers and Merchants Bancorp, Inc. and, The Farmers & Merchants State Bank Joe E. Crossgrove 60 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 38 Vice President Chief Lending Officer Edward Leininger 40 Vice President Commercial Loan Officer Allen G. Lantz 44 Vice President Branch Manager Lewis Hilkert 47 Vice President Branch Manager Carol England 57 Assistant Vice President Corporate Secretary Branch Manager Ronald D. Short 45 Assistant Vice President Branch Manager Cynthia Knauer 51 Assistant Vice President Branch Manager Dave Frazier 39 Assistant Vice President Branch Manager John Fee 37 Assistant Vice President Branch Manager Steve Jackson 43 Assistant Vice President Branch Manager 61

64 Deborah Stoner 41 Assistant Vice President Branch Manager Randal H. Schroeder 37 Assistant Vice President Chief Operations Officer George Jelen 46 Assistant Vice President Mortgage Loan Officer Barbara Britenriker 36 Assistant Vice President Chief Financial Officer Comptroller Michael D. Culler 39 Assistant Vice President Chief Agricultural Finance Officer Diann K. Meyer 37 Assistant Vice President Personnel Manager Gloria Gunn 40 Assistant Vice President Assistant Branch Manager Richard Bruce 50 Assistant Vice President Commercial Loan Officer Kent Roth 33 Auditor Bank Security Officer Bank Secrecy Officer Marilyn Johnson 41 Compliance Officer Jean Horwath 46 Assistant Cashier Assistant Branch Manager Diane Swisher 40 Assistant Cashier Assistant Branch Manager Patti Rosebrock 40 Assistant Cashier Assistant Branch Manager Michael T. Smith 31 Assistant Cashier Branch Manager Debra Kauffman 37 Assistant Cashier Assistant Corporate Secretary Consumer Loan Officer J. Scott Miller 41 Assistant Cashier Assistant Agri-Finance Officer Judy Warncke 49 Assistant Cashier Marketing Officer 62

65 Diana Dennie 35 Assistant Cashier Branch Manager Jerry Borton 48 Assistant Cashier Loan Officer Joyce G. Kinsman 28 Assistant Cashier Loan Review Officer Richard D. Ernest 33 Assistant Cashier Asset Recovery Officer Jane Bruner 37 Assistant Cashier Operations Supervisor Barry Gray 37 Assistant Cashier Assistant Branch Manager Kevin Gray 25 Assistant Cashier Assistant Branch Manager 63

66 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 4, 1998 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 1997 calendar year. All current directors of the Corporation attended at least seventy-five percent of the meetings of the Board. Average attendance at Board meetings held during the year was ninety percent. Directors received, as directors' fees, $300 for each board meeting, plus a bonus of $600 for 1997. The Subsidiary Bank Board of Directors met semi-monthly during 1997. 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 4, 1998, 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 16, Note 4 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 1997 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 1998. 64

67 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 5 Consolidated Balance Sheets Page 6 Consolidated Statements of Income Page 7 Consolidated Statements of Changes in Shareholders' Equity Page 8 Consolidated Statements of Cash Flows Page 9 Notes to Consolidated Financial Statements Pages 10 - 30 (2) Financial Statement Schedules Independent Auditors' Report on Additional Information Page 31 Five Year Summary of Operations Page 32 (3) Exhibits (3.1) Articles of Incorporation have been submitted with previous 10-K reports. (13.1) 1997 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 17 pages 26 through 29 Other schedules required to be filed as part of this report. Form 10-K Schedule of Property and Equipment Page 42 Schedule of Accumulated Depreciation - Property and Equipment Page 43 65

68 SCHEDULE OF PROPERTY AND EQUIPMENT Exhibit 1 Year Ended December 30, 1997 ----------------------------------------------------------------- Beginning Ending (in thousands) Balance Additions Retirements Balance ------------- -------------- ------------- -------------- Land........................................ $ 1,228 $ 244 $ 0 $ 1,472 Building.................................... 7,137 261 0 7,398 Banking house equipment..................... 4,333 284 11 4,606 ------------- -------------- ------------- -------------- $ 12,698 $ 789 $ 11 $ 13,476 ============= ============== ============= ============== Year Ended December 30, 1996 ----------------------------------------------------------------- Beginning Ending (in thousands) Balance Additions Retirements Balance ------------- -------------- ------------- -------------- Land........................................ $ 1,120 $ 108 $ 0 $ 1,228 Building.................................... 6,475 662 0 7,137 Banking house equipment..................... 4,074 414 155 4,333 ------------- -------------- ------------- -------------- $ 11,669 $ 1,184 $ 155 $ 12,698 ============= ============== ============= ============== Year Ended December 30, 1995 ----------------------------------------------------------------- Beginning Ending (in thousands) Balance Additions Retirements Balance ------------- -------------- ------------- -------------- Land........................................ $ 1,073 $ 47 $ 0 $ 1,120 Building.................................... 6,042 523 90 6,475 Banking house equipment..................... 3,033 1,084 43 4,074 ------------- -------------- ------------- -------------- $ 10,148 $ 1,654 $ 133 $ 11,669 ============= ============== ============= ============== 66

69 SCHEDULE OF ACCUMULATED DEPRECIATION -- PROPERTY AND EQUIPMENT Exhibit 2 Year Ended December 30, 1997 ----------------------------------------------------------------- Beginning Provision for Ending (in thousands) Balance Depreciation Retirements Balance ------------- -------------- --------------- ----------- Building.................................... $ 2,022 $ 212 $ 0 $ 2,234 Banking house equipment..................... 3,100 488 11 3,577 ------------- -------------- ------------- -------------- $ 5,122 $ 700 $ 11 $ 5,811 ============= ============== ============= ============== Year Ended December 30, 1996 ----------------------------------------------------------------- Beginning Provision for Ending (in thousands) Balance Depreciation Retirements Balance ------------- -------------- --------------- ----------- Building.................................... $ 1,814 $ 208 $ 0 $ 2,022 Banking house equipment..................... 2,657 590 147 3,100 ------------- -------------- ------------- -------------- $ 4,471 $ 798 $ 147 $ 5,122 ============= ============== ============= ============== Year Ended December 30, 1995 ----------------------------------------------------------------- Beginning Provision for Ending (in thousands) Balance Depreciation Retirements Balance ------------- -------------- --------------- ----------- Building.................................... $ 1,683 $ 203 $ 72 $ 1,814 Banking house equipment..................... 2,208 486 37 2,657 ------------- -------------- ------------- -------------- $ 3,891 $ 689 $ 109 $ 4,471 ============= ============== ============= ============== 67

70 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: Joe E. Crossgrove Date: 3/6/98 ------------------------------ ---------------- 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. Joe E. Crossgrove Date: 3/6/98 Barbara Britenriker Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Joe E. Crossgrove, Director Barbara Britenriker Chief Executive Officer Chief Accounting Officer Charles Lugbill Date: 3/6/98 Kent Roth Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Charles Lugbill Kent Roth, Auditor Director and Chairman Eugene D. Bernath Date: 3/6/98 Harold H. Plassman Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Eugene D. Bernath, Director Harold H. Plassman, Director Jerry Boyers Date: 3/6/98 James Provost Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Jerry Boyers, Director James Provost, Director Robert Frey Date: 3/6/98 James Saneholtz Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Robert Frey, Director James Saneholtz, Director Lee Grafice Date: 3/6/98 Maynard Sauder Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Lee Grafice, Director Maynard Sauder, Director Jack C. Johnson Date: 3/6/98 Merle J. Short Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Jack C. Johnson, Director Merle J. Short, Director Dean Miller Date: 3/6/98 Steven J. Wyse Date: 3/6/98 - -------------------------------------- --------------- ------------------------------- ---------------- Dean Miller, Director Steven J. Wyse, Director Dale L. Nafziger Date: 3/6/98 - -------------------------------------- --------------- Dale L. Nafziger, Director 68

71 EXHIBIT INDEX EXHIBIT NUMBER 27 FINANCIAL DATA SCHEDULE

9 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 16,213 100 6,485 0 92,050 92,050 92,050 404,001 5,850 528,273 461,298 2,598 4,241 11,292 0 0 12,677 36,167 528,273 34,271 5,505 382 40,158 20,276 863 19,019 1,111 (4) 11,031 9,812 9,812 0 0 6,777 5.22 5.22 9.23 2,890 9,532 0 12,422 5,500 1,531 770 5,850 5,850 0 0