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