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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, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-14492
FARMERS & MERCHANTS BANCORP, INC.
OHIO 34-1469491
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
307-11 North Defiance Street
Archbold, Ohio 43502
- ------------------------------- --------------------------
(Address of principal (Zip Code)
Executive offices)
Registrant's telephone number, including area code (419)446-2501
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(b) of the Act:
Common shares without par value
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 305 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { }
As of March 1, 1999, Registrant had outstanding 1,300,000 shares of common stock
at a market value of $97,500,000.
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FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
PAGE
Form 10-K Items
Item 1. Business 2-16
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 18-23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Disagreements on Accounting and
Financial Disclosure 25
Item 10. Directors and Executive Officers
of the Registrant 26-28
Item 11. Management Remuneration and Transactions 29
Item 12. Security Ownership of Certain
Beneficial Owners and Management 29
Item 13. Certain Relationships and Related
Transactions 29
Item 14. Financial Schedules and Reports on Form 8-K 30
Schedule 1 - Schedule of Property and Equipment 31
Schedule 2 - Schedule of Accumulated Depreciation -
Property and Equipment 32
Signatures 33
Financial Data Schedule 34-35
Total Pages: 35
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PART I
ITEM 1. BUSINESS
HISTORY
The Farmers & Merchants State Bank is a community bank, as it has been
since 1897. When Archbold's population was less than 900, there were six local
businessmen foresighted enough in their thinking and views to realize the need
for a bank in the village of Archbold. J. O. Swisher and Jacob Ehrat (livestock
brokers) C. M. McLaughlin and A. J. Vernier (hardware merchants) and L. D.
Gotshall and I. W. Gotshall (lumber merchants), were founders of the then
Farmers & Merchants Bank, a private bank. The bank's first office was one room
located in the Vernier Hotel building, currently occupied by the Archbold Barber
Shop.
In 1907, the first new structure was built at the corner of Depot and
North Defiance Streets, which is now the Subway. The bank was heralded as one of
the most unusual and attractive banks in the area, featuring marble interior,
brass trimmed teller cages, tile floor, leaded windows, and high vaulted
ceiling. The vault featured a time controlled money safe. The building and
equipment were unique to the early 1900's and adequately served the banking
needs of the area for over 50 years with only minor interior alterations.
In August of 1913 the village of Archbold was hit by a disastrous fire
which destroyed all the business district on the east side of N. Defiance Street
from the bank at the corner of Depot Street to the Murbach medical building at
the corner of Holland Street. This was a tremendous loss for a dozen or more
businesses, causing many to liquidate. Young businessmen and enterprising
citizens promoted a waterworks system and passed a $16,000 bond issue to finance
the project. This seemed to be the turning point for the advancement of industry
and the community rallied from this eventful experience to an unusual growth.
In 1919 the founding directors elected to change from a private bank to
a state chartered bank and at this time changed its name from the Farmers &
Merchants Bank to The Farmers & Merchants State Bank, as required in the state
charter. This has been the only name change in the bank's 99 year history. The
bank's capital funds were $53,510 thousand and resources were $571,549 thousand.
The bank experienced growth, especially during the post-war years and
early 1950's. By 1958, the bank's resources had grown to 7 1/2 million dollars.
The directors and officers realized the need for a larger building to
accommodate the increase in business and services. In 1958, the bank moved to
its present N. Defiance Street location greatly improving service to its
customers and offering drive-up banking, electronic bookkeeping, convenient
parking, and a social room for the community to use. The new building featured
the latest in modern banking facilities and The Farmers & Merchants State Bank
was prepared to more efficiently serve the ever growing community.
With resources of over $23 million in 1969, The Farmers & Merchants
State Bank again realized the need for additional space and inaugurated a
building expansion, which nearly doubled the original structure built in 1958.
The new addition, opened early in 1970, provided for an additional drive-up
window, walk-up window, direct entrance from the bank parking lot to the lobby,
three spacious private offices, conference room, and a large community room with
a fully equipped kitchen to facilitate groups from 60 to 100.
In 1972, with total resources of over $34 million and to continue its
growth, The Farmers & Merchants State Bank established an office on N. Shoop
Avenue, Wauseon. The office was opened in November 1973 and provided greater
banking service to the Wauseon area. The Wauseon office provided complete
banking service and a community room with kitchen facilities to accommodate
15-80 people.
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In 1977 - 1978 additional office space was added to The Farmers &
Merchants State Bank in Archbold, and an automatic teller machine, "Teller 24",
was installed in the entrance lobby.
A second Wauseon office was established in the downtown area on the
corner of N. Fulton and Depot streets in August of 1978. It is a very convenient
location for shoppers and businesses. The Downtown office also provides 24 hour
banking with "Teller 24".
During April of 1980 a second office was opened in Archbold, located in
the Lugbill Addition near Woodland Oaks. The Woodland office is a convenient
branch offering full banking services to those Archbold residents in the
outlying area.
With resources of $83 million the decision was made to open full
service offices in Stryker and West Unity in 1981.
During that year, new computerized proof equipment was added to capture
the required data in today's complex and competitive banking environment. A new
division was added to the Operations Department in the creation of the Central
Information File Department. Plus, two new branches were opened, the Delta
office in June and the all new Bryan E. High office in December.
In 1985 the conversion of the former bank, The Farmers & Merchants
State Bank, into a holding company structure was performed to provide greater
flexibility for expanding the bank's business into activities closely related to
banking, as well as, placing the bank in a position to react in a timely and
effective manner to the many complex changes affecting the banking industry. On
April 22, 1985, a new Ohio chartered bank was formed and incorporated as the
FMSB Bank following the formation of a holding company, The Farmers & Merchants
Bancorp, Inc., which was incorporated as a bank holding company under the laws
of the State of Ohio on February 25, 1985. A triangular merger was then effected
whereby the former bank, The Farmers & Merchants State Bank, was merged with and
into the new bank, the FMSB Bank with each outstanding share of common stock of
the former bank being converted by operation of law upon consummation of the
merger into two shares of common stock of Farmers & Merchants Bancorp, Inc. Upon
the merger becoming effective July 31, 1985, 260,000 shares of Farmers &
Merchants Bancorp, Inc., no par value common stock were issued. The resulting
new bank in the merger is the FMSB Bank; however, its name was changed
concurrently with the merger to The Farmers & Merchants State Bank. Upon
consummation of the merger, the stockholders of Farmers & Merchants Bancorp,
Inc. received the same percentage of ownership in the holding company as their
percentage of ownership of the former bank. The former bank then ceased to
exist. All of the 260,000 issued and outstanding shares of stock of the new
bank, The Farmers & Merchants State Bank, were held by the bank holding company,
Farmers & Merchants Bancorp, Inc.
With the success The Farmers & Merchants State Bank was experiencing in
Stryker, West Unity and Bryan and the prospect of continued growth in Williams
County, it was decided to open another office in Bryan and one in Montpelier. In
May of 1992, the doors were opened at a second office in Bryan located on S.
Main Street; and in July of 1992 the bank was pleased to be able to offer their
financial services to the community of Montpelier. The Bryan S. Main Street
banking center has three drive-up lanes and a drive-up ATM. Also during 1992,
the West Unity Office was expanded and an additional drive-up lane was added at
the Delta Office.
Also during 1992, an accidental death and disability insurance company
was formed, Farmers & Merchants Life Insurance Company. The company was
organized under the laws of the State of Arizona with 100% of the 100,000 issued
and outstanding shares of common stock owned by Farmers & Merchants Bancorp,
Inc.
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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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NATURE OF ACTIVITIES
The Farmers & Merchants State Bank through its equivalent of 210 full
time employees engages in general commercial banking and savings business. Its
activities include commercial and residential mortgage, consumer, and credit
card lending activities. Because of the geographical locations in which the
bank's branches are located, a substantial amount of the bank's loan portfolio
is composed of loans made to the farming industry for such things as farm land,
farm equipment, livestock and general operation loans for seed, fertilizer,
feed, etc. Other types of lending activities include loans for home
improvements, student loans, and loans for such items as autos, trucks,
recreational vehicles, mobile homes, motorcycles, etc. The bank also is engaged
in direct finance leasing and has invested in leveraged type leases, although
the activity in this area has substantially decreased in recent years.
The bank also provides checking account services, as well as, savings
and other time deposit services such as certificates of deposits. In addition,
ATM's (automated teller machines) (Money Access Corporation) are also provided
in its offices in Archbold, Wauseon, Bryan, Delta and Napoleon, Ohio. Two ATM's
are also located at Sauder Woodworking Co., Inc., a major employer in Archbold.
Additional locations are at Northwest State Community College, Fulton County
Hospital in Wauseon, and Williams County Hospital in Bryan.
During 1987 The Farmers & Merchants State Bank began offering discount
brokerage services to its customers. The offering of these services was a result
of management's ongoing commitment to offer a full range of financial services
to its customers.
Farmers & Merchants Life Insurance Company was established to provide
needed additional services to The Farmers & Merchants State Bank's customers
through the issuance of life and disability insurance policies. The lending
officers of The Farmers & Merchants State Bank are the selling agents of the
policies to the bank's customers. The insuring company will be USLIFE Credit
Insurance Company, an Illinois Corporation, while Farmers & Merchants Life
Insurance Co. will be the participating reinsurer. Farmers & Merchants Bancorp,
Inc.'s original investment in Farmers & Merchants Life Insurance Co. was
$100,000. This investment represented less than 5% of Farmers & Merchants
Bancorp, Inc.'s equity capital.
Farmers & Merchants Bancorp, Inc. is a bank holding company within the
meaning of the Bank Holding Company Act of 1956. The bank subsidiary, The
Farmers & Merchant State Bank, is in turn regulated and examined by the Ohio
Division of Banks, the Federal Deposit Insurance Corporation and the Federal
Reserve System. The activities of the bank subsidiary are also subject to other
federal and state laws and regulations, including usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and
Regulation Z as promulgated thereunder by the Board of Governors, the Truth in
Savings Act, the Bank Bribery Act, the Competitive Equality Banking Act of 1987,
the Expedited Funds Availability Act, the Community Reinvestment Act, the FDICIA
(Federal Deposit Insurance Corporation Insurance Act), FIRREA (Federal
Institutions Reform, Recovery, and Enforcement Act of 1989), and the Bank Merger
Act among others.
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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
The following statistical information concerning the operations of the
company is provided in accordance with Guide 3 of the Securities and Exchange
Commission relating to the operations of bank holding companies. It should be
read in conjunction with the financial statements, notes thereto and other
financial information appearing elsewhere herein.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL
ASSETS
1998
-------------------------------------------------
Interest
Average and Yield/
Balance Dividend Rate
------------- ------------- -------------
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 with other banks 100 5 5.00
Federal funds sold and securities
purchased under agreement to resell 12,123 648 5.35
------------- -------------
Total Interest Earning Assets 522,048 $ 42,888 8.22%
============= ===========
Non-interest Earnings Assets:
Cash and due from banks 14,745
Other assets 16,484
-------------
$ 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 Obligations:
Non-interest bearing deposits 100,420
Other 5,807
-------------
Total Liabilities 500,338
Stockholders' Equity 52,939
-------------
Total Liabilities and Stockholders' Equity $ 553,277
=============
Interest and dividend income/yield $ 42,888 8.22%
Interest expense/rate 22,086 5.61
------------- ----------
Net Interest Spread $ 20,802 2.61%
============= ===========
Net Interest Margin 3.98%
===========
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9
ASSETS
1997
----------------------------------------------
Interest
Average and Yield/
Balance Dividend Rate
------------- ------------- -----------
Interest Earning Assets:
Loans (1) $ 384,498 $ 34,271 8.91%
Taxable investment securities 72,158 4,540 6.29
Tax-exempt investment securities 22,069 1,131 5.13
Interest bearing deposits with other banks 100 5 5.00
Federal funds sold and securities
purchased under agreement to resell 3,805 211 5.55
------------- -------------
Total Interest Earning Assets 482,630 $ 40,158 8.32%
============= ===========
Non-interest Earnings Assets:
Cash and due from banks 13,161
Other assets 14,371
-------------
$ 510,162
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 87,439 $ 4,618 5.28%
Other time deposits 270,751 15,659 5.78
Other borrowed money 9,414 596 6.34
Federal funds purchased and securities
sold under agreement to repurchase 4,443 266 5.99%
------------- -------------
Total Interest Bearing Liabilities 372,047 $ 21,139 5.68
============= ==========
Non-interest Bearing Obligations:
Non-interest bearing deposits 87,013
Other 4,554
-------------
Total Liabilities 463,614
Stockholders' Equity 46,548
-------------
Total Liabilities and Stockholders' Equity $ 510,162
=============
Interest and dividend income/yield $ 40,158 8.32%
Interest expense/rate 21,139 5.68
------------- ----------
Net Interest Spread $ 19,019 2.64%
============= ===========
Net Interest Margin 3.94%
===========
-8-
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ASSETS
1996
----------------------------------------------
Interest
Average and Yield/
Balance Dividend Rate
------------- ------------- -----------
Interest Earning Assets:
Loans (1) $ 358,261 $ 32,353 9.03%
Taxable investment securities 75,051 4,556 6.07
Tax-exempt investment securities 21,223 1,109 5.23
Interest bearing deposits with other banks 100 7 7.00
Federal funds sold and securities
purchased under agreement to resell 6,613 357 5.40
------------- ------------- ----------
Total Interest Earning Assets 461,248 $ 38,382 8.32%
============= ===========
Non-interest Earning Assets:
Cash and due from banks 13,086
Other assets 15,895
--------------
$ 490,229
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 117,734 $ 4,525 3.84%
Other time deposits 258,446 15,418 5.97
Other borrowed money 9,411 594 6.31
Federal funds purchased and securities
sold under agreement to repurchase 6,522 368 5.64
------------- -------------
Total Interest Bearing Liabilities 392,113 $ 20,905 5.33%
============= ===========
Non-interest Bearing Obligations:
Non-interest bearing deposits 50,580
Other 5,700
-------------
Total Liabilities 448,393
Stockholders' Equity 41,836
-------------
Total Liabilities and Stockholders' Equity $ 490,229
=============
Interest and dividend income/yield $ 38,382 8.32%
Interest expense/rate 20,905 5.33
------------- ----------
Net Interest Spread $ 17,477 2.99
============= ==========
Net Interest Margin 3.79%
==========
(1) For the purpose of these computations, nonaccruing loans are included in the
daily average outstanding loan amounts.
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The following table sets forth (in thousands of dollars) for the
periods indicated, a summary of the changes in interest earned and interest paid
resulting from changes in volume and changes in rates:
1998-1997
--------------------------------------------------
Increase (Decrease)
Increase Attributable to Changes in
(Decrease) ---------------------------------
in Interest Volume Rate
------------- ------------- ---------------
Interest Earned On:
Loans $ 2,064 $ 2,117 $ (53)
Taxable investment securities 101 228 (127)
Tax-exempt investment securities 128 176 (48)
Federal funds sold and securities purchased
under agreements to resell 437 445 (8)
------------- ------------- --------------
Total Interest Earnings Assets $ 2,730 $ 2,966 $ (236)
============= ============= =============
Interest Paid On:
Savings deposits $ 18 $ 114 $ (96)
Other time deposits 888 1,106 (218)
Other borrowed 102 103 (1)
Federal funds purchased and securities
sold under agreements to repurchase (62) (73) 11
------------- ------------- -------------
Total Interest Bearing Liabilities $ 946 $ 1,250 $ (304)
============= ============= =============
1997-1996
--------------------------------------------------
Increase (Decrease)
Increase Attributable to Changes in
(Decrease) --------------------------------
in Interest Volume Rate
------------- ------------- --------------
Interest Earned On:
Loans $ 1,918 $ 2,339 $ (421)
Taxable investment securities (16) (182) 166
Tax-exempt investment securities 22 43 (21)
Interest bearing deposits with other banks (2) 0 (2)
Federal funds sold and securities purchased
under agreements to resell (146) (156) 10
------------- ------------- -------------
Total Interest Earnings Assets $ 1,776 $ 2,044 $ (268)
============= ============= =============
Interest Paid On:
Savings deposits $ 93 $ (1,600) $ 1,693
Other time deposits 241 712 (471)
Other borrowed 2 0 2
Federal funds purchased and securities
sold under agreements to repurchase (102) (124) 22
------------- ------------- -------------
Total Interest Bearing Liabilities $ 234 $ (1,012) $ 1,246
============= ============= =============
The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
-10-
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INVESTMENT PORTFOLIO
The following table sets forth (dollars in thousands) the carrying
amount of investment securities at the dates indicated:
1998 1997 1996
------------- ------------- -------------
U. S. Treasury and other U. S. Government
agencies $ 55,686 $ 44,695 $ 51,737
State and political subdivisions 35,520 25,617 21,678
Mortgage-backed securities 10,993 8,991 8,986
Obligations of domestic corporations 19,115 10,327 17,065
Stocks of domestic corporations 2,597 2,420 2,255
------------- ------------- -------------
Total $ 123,911 $ 92,050 $ 101,721
============= ============= =============
The following table sets forth (dollars in thousands) the maturities of
investment securities at December 31, 1998 and the weighted average yields of
such securities calculated on the basis of the cost and effective yields
weighted for the scheduled maturity of each security. Tax-equivalent
adjustments, using a thirty-four percent rate, have been made in yields on
obligations of state and political subdivisions. Stocks of domestic corporations
have not been included.
Maturities
----------------------------------------------------------------
After One Year
Within One Year Within Five Years
---------------------------- -----------------------------
Amount Yield Amount Yield
------------- ---------- ------------- -----------
U. S. Treasury $ 8,529 5.91% $ 7,494 6.36%
U.S. Government agencies 3,590 7.26% 7,968 5.93%
Mortgaged-backed securities 563 6.17% 8,430 6.00%
State and political subdivisions 2,452 8.19% 9,488 8.11%
Taxable state and political
subdivisions 1,210 6.36% 3,097 5.90%
Obligations of domestic
corporations 4,799 6.36% 14,106 5.90%
Maturities
----------------------------------------------------------------
After Five Years
Within Ten Years After Ten Years
------------------------------ -----------------------------
Amount Yield Amount Yield
------------- ------------- ------------- -----------
U. S. Treasury $ 0 N/A $ 0 N/A
U. S. Government agencies 26,420 5.34% 0 N/A
Mortgage-backed securities 1,993 5.64% 0 N/A
State and political subdivisions 10,020 7.96% 7,430 9.57%
Taxable state and political
subdivisions 422 5.75% 0 N/A
Obligations of domestic
corporations 0 N/A 0 N/A
At December 31, 1998 the company held no large block of any one
investment security. Except for U. S. Treasury and other U. S. Government
agencies, no one holding in debt securities exceeded $2.3 million dollars. The
bank did hold stock in the Federal Home Loan Bank of Cincinnati at a cost of
$2.6 million. This is required in order to obtain Federal Home Loan Bank loans.
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13
LOAN PORTFOLIO
The following table shows (dollars in thousands) the company's loan
distribution at the end of each of the last five years:
1998 1997 1996
------------- ------------- -------------
Loans:
Commercial and industrial $ 87,266 $ 65,633 $ 67,763
Agricultural 38,882 44,939 41,195
Real estate - mortgage 200,675 205,626 195,043
Installment 68,385 75,767 63,199
Commercial paper 13,648 7,837 3,959
Industrial Development Bonds 4,587 4,511 3,670
------------- ------------- -------------
Total Loans $ 413,443 $ 404,313 $ 374,829
============= ============= =============
1995 1994
------------- -------------
Loans:
Commercial and industrial $ 58,987 $ 65,848
Agricultural 41,328 29,586
Real estate - mortgage 173,302 145,576
Installment 61,021 62,462
Commercial paper 7,604 2,019
Industrial Development Bonds 3,336 1,826
------------- -------------
Total Loans $ 345,578 $ 307,317
============= =============
The following table shows (dollars in thousands) the maturity of loans:
Maturities
------------------------------------------------------------------
After One
Within Year Within After
One Year Five Years Five Years Total
------------- ------------- ------------- -------------
Commercial, industrial, and
agricultural (combined) $ 78,630 $ 30,349 $ 17,169 $ 126,148
Real estate - mortgage 5,437 8,894 186,344 200,675
Installment 11,511 54,577 2,297 68,385
Commercial paper 13,648 0 0 13,648
Industrial Development Bonds 1,025 676 2,886 4,587
------------- ------------- ------------- -------------
Total $ 110,251 $ 94,496 $ 208,696 $ 413,443
============= ============= ============= =============
After One Year After Five
Within Five Years Years Total
------------------------------- ---------------- -------------
Commercial, industrial, and
agricultural (combined) Fixed $ 14,186 $ 8,860 $ 23,046
Variable 16,163 8,309 24,472
Real estate - mortgage Fixed 6,387 69,109 75,496
Variable 2,507 117,235 119,742
Installment Fixed 53,304 2,133 55,437
Variable 1,273 164 1,437
IDB's Fixed 676 2,886 3,562
-12-
14
NONACCRUAL PAST DUE AND RESTRUCTURED LOANS
The following table summarizes (dollars in thousands) the company's
nonaccrual and past due loans as of December 31:
1998 1997 1996
------------- ------------- -------------
Nonaccrual loans $ 6,455 $ 2,890 $ 3,489
Accruing loans past due 90 days or more 1,988 1,396 1,899
------------- ------------- -------------
$ 8,443 $ 4,286 $ 5,388
============= ============= =============
1995 1994
------------- -------------
Nonaccrual loans $ 3,494 $ 2,681
Accruing loans past due 90 days or more 2,698 2,601
------------- -------------
$ 6,192 $ 5,282
============= =============
As of December 31, 1998, management, to the best of its knowledge, is
not aware of any significant loans, group of loans or segments of the loan
portfolio not included above, where there are serious doubts as to the ability
of the borrowers to comply with the present loan payment terms.
Interest income which would have been recorded under the original terms
of the nonaccrual loans was $40 thousand for the year 1998. Any collections of
interest on nonaccrual loans are included in interest income when collected.
This amounted to $172 thousand for 1998.
Loans are placed on nonaccrual status in the event one of the following
occurs: the total line of the customer is charged off to the extent of 50% or
more, the loan is in past due status for more than 180 days.
The $6.5 million of nonaccrual loans are secured at December 31, 1998.
POTENTIAL PROBLEM LOANS:
At December 31, 1998, the Bank has $8.4 million of loans which it
considers to be potential problem loans in that the borrowers are experiencing
financial difficulties. These loans are subject to constant management attention
and are reviewed more frequently than quarterly.
The amount of potential problem loans was considered in management's
review of the loan loss reserve required at December 31, 1998.
LOAN CONCENTRATION:
In extending credit to families, businesses and governments, banks
accept a measure of risk against which an allowance or reserve for possible loan
losses is established by way of expense charges to earnings. This expense, used
to enlarge a bank's allowance for loan losses, is determined by management based
on a detailed monthly review of the risk factors affecting the loan portfolio,
including general economic conditions, changes in the portfolio mix, past due
loan-loss experience and the financial condition of the bank's borrowers.
At December 31, 1998, the Bank had loans outstanding to individuals and
firms engaged in the various fields of agriculture in the amount of $38.9
million. The ratio of this segment of loans to the total loan portfolio is not
considered unusual for a bank engaged in and servicing rural communities.
-13-
15
SUMMARY OF LOAN LOSS EXPERIENCE
The following table reflects (in thousands) the bank's loan loss
experience for each of the five years ended December 31:
1998 1997 1996
------------- ------------- -------------
Loans $ 413,443 $ 404,313 $ 374,829
============= ============= =============
Daily average of outstanding loans $ 408,291 $ 384,498 $ 358,261
============= ============= =============
Allowance for loan losses -
beginning of year $ 5,850 $ 5,500 $ 5,500
Loans Charged Off:
Commercial 472 263 623
Installment 1,260 1,239 1,053
Real estate mortgages 42 29 35
------------- ------------- -------------
1,774 1,531 1,711
------------- ------------- -------------
Loan Recoveries:
Commercial 540 384 197
Installment 339 364 443
Real estate mortgages 3 22 3
------------- ------------- -------------
882 770 643
------------- ------------- -------------
Net charged off 892 761 1,068
Provision for loan loss 892 1,111 1,068
------------- ------------- -------------
Allowance for Loan Losses - End of Year $ 5,850 $ 5,850 $ 5,500
============= ============= =============
Ratio of net charge-offs to average loans
outstanding .22% .20% .30%
============= ============= =============
-14-
16
Allocation of the allowance for loan losses:
1995 1994
------------- -------------
Loans $ 345,577 $ 307,317
============= =============
Daily average of outstanding loans $ 324,239 $ 277,729
============= =============
Allowance for loan losses -
beginning of year $ 5,500 $ 5,000
Loans Charged Off:
Commercial 748 602
Installment 691 569
Real estate mortgages 40 0
------------- -------------
1,479 1,171
------------- -------------
Loan Recoveries:
Commercial 584 729
Installment 426 311
Real estate mortgages 84 67
------------- -------------
1,094 1,107
------------- -------------
Net charged off 385 64
Provision for loan loss 385 564
------------- -------------
Allowance for Loan Losses - End of Year $ 5,500 $ 5,500
============= =============
Ratio of net charge-offs to average loans outstanding .12% .20%
============ =============
Allocation of the allowance for loan losses:
Percent of
Loans in
Amount Each Category
Balance at End of Period Applicable To: (in thousands) to Total Loans
-------------- ---------------
Commercial and industrial $ 3,281 32.43%
Installment 1,665 17.53%
Real estate 904 50.04%
------------- -----------
$ 5,850 100.00%
============= ===========
The charge-off amounts are based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors, including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan experience and management's estimation of future potential losses.
-15-
17
DEPOSITS
The following table presents the average amount of (in thousands) and
the average rate paid on each deposit category that is in excess of ten percent
of average total deposits:
Demand NOW Savings Time
December 31, 1998: Deposits Accounts Accounts Accounts
-------------------- ------------- ------------- ------------- ---------
Average balance $ 38,906 $ 44,218 $ 108,981 $ 287,484
Average rate .00% 2.29% 3.32% 5.76%
December 31, 1997:
Average balance $ 34,665 $ 40,626 $ 100,025 $ 268,181
Average rate .00% 2.49% 3.57% 5.84%
December 31, 1996:
Average balance $ 32,041 $ 33,798 $ 104,441 $ 250,834
Average rate .00% 3.05% 3.35% 6.15%
The amount of outstanding time certificates of deposits and other time
deposits in amounts of $100,000 or more by maturity are as follows:
Over three Over Six
Under Less Than Less Than Over Twelve
Three Months Six Months Twelve Months Months
------------ ----------- ------------- -------------
Time deposits $ 20,987 $ 15,831 $ 16,432 $ 15,883
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of
the company for each of the last three years:
1998 1997 1996
----------- ----------- ----------
Return on average assets 1.38% 1.33% 1.14%
Return on average equity 14.46% 14.56% 13.21%
Dividend payout ratio 23.77% 23.95% 27.23%
Equity to assets ratio 9.45% 9.25% 8.65%
SHORT-TERM BORROWINGS
The company's average balance of short-term borrowings during the year
was less than 30% of end of year stockholders' equity for each year required to
be reported; therefore, no data is presented.
OTHER MATTERS
Information required by subsections of Item 1, to which no response has
been made, are inapplicable to the business of the company.
-16-
18
ITEM 2. PROPERTIES
The principal office of Farmers & Merchants Bancorp, Inc. is located in
facilities owned by The Farmers & Merchants State Bank at 307-11 North Defiance
Street, Archbold, Ohio 43502.
The Farmers & Merchants State Bank operates from and utilizes the
entire facilities at 307-11 North Defiance Street. In addition, the bank owns
the property from 200 to 208 Ditto Street, Archbold, Ohio, which it 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.
The following is a compendium of the various branch locations:
Branch Location
- --------------- --------------------------
Archbold, Ohio 1313 South Defiance Street
Wauseon, Ohio 1130 North Shoop Avenue
119 North Fulton Street
Stryker, Ohio 300 South Defiance Street
West Unity, Ohio 200 West Jackson Street
Bryan, Ohio 924 W. High Street
1000 South Main Street
Delta, Ohio 101 Main Street
Montpelier, Ohio 225 West Main Street
1150 East Main Street
Napoleon, Ohio 2255 Scott Street
The majority of the above locations have drive-up service facilities.
-17-
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ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine proceedings incidental to the business of the Bank, to which the Bank is
a party or of which any of its properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The company's stock is not quoted on the National Association of
Securities Dealers Automated Quotations System (NASDAQ).
The company's stock is traded in the principal market area of Fulton,
Williams, and Henry Counties, Ohio. The company has no broker that sets a price
for the company's stock, therefore, the only source as to the high and low sale
price is from private sales. The high and low sale price known to the company's
management is as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1998 High $45.00 $72.00 $72.00 $70.00
Low $40.00 $55.00 $72.00 $65.00
1997 High $45.00 $72.00 $72.00 $70.00
Low $40.00 $55.00 $72.00 $65.00
As of March 1, 1999, there were 1,397 record holders of common stock of
the company.
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
----------- ----------- ----------- ----------- -----------
1998 $.30 $.30 $.30 $.50 $1.40
1997 $.25 $.25 $.25 $.50 $1.25
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is presented on page 35 of the Annual Report to
shareholders for the year ended December 31, 1998 and are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on information concerning
the company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in the
annual report. Reference should be made to those statements and the selected
financial data presented elsewhere in the report for an understanding of the
following discussion and analysis.
-18-
20
FINANCIAL CONDITION
The company's bank subsidiary continues to follow the strategy of
acquiring assets for investment purposes and retaining its own loan production,
attempting to achieve reasonable spreads through matching such assets with one
of a number of funding sources available.
The Farmers & Merchants State Bank functions as a financial
intermediary, and as such, its financial condition should be examined in terms
of trends in its sources and uses of funds. The following comparison of daily
average balances (in thousands) indicates how the bank has managed its sources
and uses of funds:
1998
----------------------------------------------
Increase (Decrease)
Average ----------------------------
Balance Amount Percentage
Funding Uses:
Loans $ 408,291 $ 23,793 6.19%
Taxable investment securities 75,880 3,722 5.16
Tax-exempt investment securities 25,654 3,585 16.24
Interest bearing deposits with other banks 100 0 .00
Federal funds sold and securities purchased under
agreement to resell 12,123 8,318 218.61
------------- -------------
$ 522,048 $ 39,418 8.17%
============= ============= ==========
Funding Sources:
Deposits:
Non-interest bearing deposits $ 100,420 $ 13,407 15.41%
Savings deposits 89,643 2,204 2.52
Other time deposits 290,141 19,390 7.16
Other borrowed money 11,051 1,637 17.39
Federal funds purchased and securities sold
under agreement to repurchase 3,276 (1,167) (26.27)
------------- -------------
$ 494,531 $ 35,471 7.73%
============= ============= ==========
1998 1997
------------------------------------------------ -------------
Increase (Decrease)
------------------------------
Average Average
Balance Amount Percentage Balance
------------- ------------- ------------ -------------
Funding Uses:
Loans $ 384,498 $ 26,237 7.32% $ 358,261
Taxable investment securities 72,158 (2,893) (3.85) 75,051
Tax-exempt investment securities 22,069 846 3.99 21,223
Interest bearing deposits with other banks 100 0 .00 100
Federal funds sold and securities purchased
under agreement to resell 3,805 (2,808) (42.46) 6,613
------------- ------------- -----------
$ 482,630 $ 21,382 4.64% $ 461,248
============= ============= ============= ===========
Funding Sources:
Deposits:
Non-interest bearing deposits $ 87,013 $ 36,433 72.03% $ 50,580
Savings deposits 87,439 (30,295) (25.73) 117,734
Other time deposits 270,751 12,305 4.76 258,446
Other borrowed money 9,414 3 .03 9,411
Federal funds purchased and securities sold
under agreement to repurchase 4,443 (2,079) (31.88) 6,522
------------- ------------- -----------
$ 459,060 $ 16,367 3.70% $ 442,693
============= ============= ============= ===========
-19-
21
Total assets for Farmers & Merchants Bancorp, Inc. have increased from
$501.4 million in 1996 to $528.3 million in 1997 and to $585.9 million in 1998,
a 10.9% and 8.1% increase, respectively. The increase in assets of $57.6 million
has occurred primarily in the loan portfolio, federal funds sold, and
investments. The net loan portfolio has grown $9 million, federal funds sold has
increased $12.6 million, and the investment portfolio has increased by $31.8
million.
The increase in the loan portfolio came primarily from an increase in
commercial paper of $5.8 million and loans held for sale of $5 million.
While the loan portfolio has increased significantly, the net
charge-offs have remained fairly level. Net charge-offs were $1.1 million for
1996, $761 thousand for 1997 and $892 thousand for 1998. Even though the loan
portfolio has grown to a record $407 million, management believes that as a
result of more aggressive collection policies and procedures, the reserve of
$5.85 million is still adequate.
The major funding source for the increase in the assets discussed above
came from an increase in deposits. Regular savings deposits showed an increase
of almost $29.5 million from 1997 levels of $87.9 million, while time deposits
grew $24.3 million to $298.3 million for 1998. Total deposits for 1998
demonstrated an 11 percent increase over 1997 levels.
The Farmers & Merchants State Bank continues to use borrowed funds from
the Federal Home Loan Bank of Cincinnati to fund its fixed rate loan portfolio.
The loans reduce the Bank's exposure to interest rate risk as the Bank matches a
fixed rate liability with the loan made. The Bank also receives a better
servicing margin on these loans than were experienced with loans sold on the
secondary market. New borrowings for 1998 amounted to $1 million compared to net
borrowings for 1997 of $3 million.
CAPITAL RESOURCES
Total capital increased $6.5 million or 13.3% for 1998 compared to $5.5
million or 12.6% for 1997. These increases came from profits and changes in
market values of the securities portfolio. Profits amounted to $7.6 million for
1998, $6.7 million for 1997 and $5.5 million for 1996, while net after tax
effect changes in market values of the investment portfolio contributed $669
thousand for 1998 and $311 million for 1997, but negatively impacted capital for
1996 in the amount of $228 thousand.
As a result of the continued increasing profitable operations, the per
share dividends have been steadily increasing also. For 1998 dividends of $1.40
per share or $1.82 million were declared compared to 1997 dividends of $1.25 per
share or $1.625 million, and $1.15 or $1.495 million for 1996. The per share
amounts for 1996 have been restated to reflect a 5 for 1 stock split in 1996.
The amount of dividends which can be paid are subject to regulatory
restrictions.
-20-
22
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, 1998 for each major category of interest-earning assets (at
amortized cost) and interest-bearing liabilities:
(Dollars in Thousands)
0 - 90 90 - 365 1 - 5 Over 5
Days Days Years Years Total
---------- ----------- ---------- --------- -----------
Interest bearing deposits $ 0 $ 100 $ 0 $ 0 $ 100
Federal funds sold 19,045 0 0 0 19,045
Securities 11,928 26,116 42,443 43,424 123,911
Loans 154,375 103,051 99,965 56,052 413,443
---------- ----------- ---------- --------- -----------
Total Rate Sensitive Assets 185,348 129,267 142,408 99,476 556,499
Deposits 164,569 179,040 115,943 0 459,552
Repurchase agreement 2,916 0 0 0 2,916
Long-Term Debt 0 0 0 11,240 11,240
---------- ----------- ---------- --------- -----------
Rate Sensitive Liabilities 167,485 179,040 115,943 11,240 473,708
---------- ----------- ---------- --------- -----------
Gap $ 17,863 $ (49,773) $ 26,465 $ 88,236 $ 82,791
========== =========== ========== ========= ===========
Management with the assistance of outside advisors is continually
looking for opportunities that can minimize market price risk or interest rate
risk, and thus improve the quality of the portfolio.
LIQUIDITY
Historically, the primary source of liquidity for the Company has been
core deposits. This is true for 1997 as well. Deposits increased $50.1 million
for 1998 compared to $2.9 million for 1997 and $34.3 million for 1996.
-21-
23
The loan to deposit ratio decreased for 1998 to 79.6 percent compared
to 86.3 percent for 1997 and 84.1 percent for 1996.
Short-term marketable debt securities has also provided the Company
with liquidity. Securities maturing in one year or less amounted to a market
value of $22.1 million as of December 31, 1998 compared to $18.8 million as of
December 31, 1997 and $20 million as of December 31, 1996. This is 18.2 percent
of total marketable debt securities for 1998 compared to 17.6 percent for 1997,
and 20.4 percent for 1996.
Still another source of liquidity are Federal Funds Sold. Federal Funds
Sold which are for very short durations of time increased $12.6 million to $19
million.
RESULTS OF OPERATIONS
OVERVIEW
Net operating income for 1998 was $7.6 million, a 12.9 percent increase
over 1997's net income of $6.8 million. Net income for 1996 was $5.5 million.
Net interest margin before provision for loan losses increased 9.4 percent to
$20.1 million from $19 million for 1997. Net interest margin for 1997 increased
8.5 percent to $19 million over the $17.5 million for 1996.
INTEREST INCOME
Interest income and fees on loans and leases increased 6 percent for
1998 to $36.3 million over 1997 levels of $34.2 million. This compares to
interest and fee income of $32.4 million for 1996. All of the increase in
interest income for 1998 can be attributed to an increase in lending activities.
Interest income on the investment portfolio for 1998 was $5.7 million
compared to 1997 and 1996 which was $5.5 million.
INTEREST EXPENSE
Interest expense on deposits increased to $21.1 million for 1998
compared to $20.3 million for 1997 and $19.9 million for 1996. This increase is
due to an increase in deposits.
-22-
24
ALLOWANCE FOR LOAN LOSSES
In extending credit to families, businesses and governments, banks
accept a measure of risk against which an allowance or reserve for loan losses
is established by way of expense charges to income. The Bank evaluates the
adequacy of the allowance for loan losses based on an analysis of specific
problem loans, as well as, on an aggregate basis. Factors considered by
management in determining the proper reserve include review of general economic
conditions, changes in the portfolio mix, past loan-loss experience, the
financial condition of the borrowers and reports of examinations furnished by
State and Federal banking authorities. Management reviews the calculation of the
allowance for loan losses on a quarterly basis, and feels that the allowance is
adequate.
The Bank has established the allowance for loan losses to reduce the
gross level of loans outstanding by an estimate of uncollectible loans. As loans
are deemed uncollectible, they are charged against the allowance. A provision
for loan losses is expensed against current income on a monthly basis. This
provision serves to replenish the allowance for loan losses to accommodate
charge-offs and growth in the loan portfolio, thereby maintaining the allowance
at an adequate level.
The provision for loan losses charged against income for 1998 was $892
thousand compared to $1.1 million for 1997 and 1996.
OTHER INCOME
Other operating income increased by $1.1 million for 1998 to $4
million. This compares to an increase of $558 thousand for 1997 over 1996 to
$2.9 million, up from $2.4 million for 1996. Increases in miscellaneous customer
fees, MasterCard fees, and loan servicing fees accounts for the bulk of this
increase.
OTHER OPERATING EXPENSES
Operating expenses increased $1.8 million to $12.9 million over 1997
operating expenses of $11 million. Most of this increase was due to payroll
costs in terms of increases in both number of employees and salary increases.
Operating expenses for 1997 had increased slightly over 1996 operating expenses
of $10.9 million.
OTHER ACCOUNTING ISSUES
Management is currently reviewing the Year 2000 situation in order to
address potential problems that may occur in time to take corrective action. The
service center which the Bank uses to process its transactions have assured the
Bank that the software used has already been or will be updated to accept Year
2000 dates and transactions. The Bank's internal management information systems
personnel are also working diligently to address Year 2000 problems that may
exist with the Bank's hardware.
At this time, management believes that the transition into the next
century can be conducted smoothly and with minimum additional costs.
-23-
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
-24-
26
MESSAGE FROM MANAGEMENT:
It is with great pride that we can report 1998 was another year of increased
earnings. It was one of the best years in our history in terms of finanical
performance. Capital accounts have increased to $55,350,000 with net income of
$7,657,000 or $5.89 per share as compared to $5.22 in 1997. This resulted in an
impressive 14.46 percent Return on Average Equity and 1.38 percent Return on
Average Assets and a new high in assets of $585,869,000. Farmers & Merchants
Bancorp, Inc. was highlighted by strong revenue growth along with excellent
asset quality, proper management of interest rate and control of overhead
expenses.
We are most proud of the effort and performance of our 223 employees. They
accomplished a great deal this year, producing strong sales performance while
upgrading systems and preparing for Year 2000. This was all delivered without
sacrificing the finanical performance with you have come to expect. These
accomplishments along with the opportunities created by changes in the
competitive environment of several key markets, certainly make us optimistic
about our prospects for the future. We must, however, always remain aware of the
challenges that growth creates and stay dedicated to delivering top-notch
service and high quality shareholder returns.
1998 financial performance was also highlighted by improving our net interest
margin. Our balance sheet is solid and provides considerable financial
flexibility. The net interest margin continues to improve from a focus on better
earning-asset and deposit mix.
Among the events of 1998, the completion of the new Montpelier Office is the
most noteworthy. With the addition of the new Eastside Office, giving us
drive-up service along with an Automated Teller Machine (ATM), we are able to
better serve our customers in the Montpelier area. ATMs were also placed in R &
H Restaurant in Fayette, Ohio, and Beck's Country Store in Ridgeville Corners,
Ohio. This brings the total ATMs in our banking system to seventeen. With more
and more companies going to Direct Deposit for their payrolls, this is a service
we must expand.
This past year, there has been a lot written concerning the Year 2000 Issue and
the effect it could have on the economy. The banking industry has been among the
most aggressive in readiness for Year 2000. We have taken this issue very
seriously and are following the necessary steps to make certain that January 3,
2000, is just another business day. We are also working closely with our
business partners to ensure they will be ready.
We expect 1999 to be another successful year but not without its challenges.
Even though our net interest margin has improved, it will still take sharp
pricing and control of overhead expenses to maintain this improvement. 1999 will
also see the introduction of a new service for the Farmers & Merchants Bancorp,
Inc., that being a full service Brokerage Department headed by Mr. Brett Kahrs.
This is another step your bank is taking to make sure that we can provide our
customers a full range of financial services.
We sincerely thank all of our employees, customers, Board of Directors, Advisory
Boards, and the continued confidence of our shareholders. We look forward to
capitalizing on the opportunities and meeting the challenges that await us in
1999.
Joe E. Crossgrove Charles E. Lugbill
President and Chief Executive Officer Chairman of the Board
-1-
27
DIRECTORS
CHARLES E. LUGBILL
Chairman of the Board
The Farmers & Merchants State
Bank
EUGENE D. BERNATH
Farmer
JERRY L. BOYERS
President
Edifice Construction Management
JOE E. CROSSGROVE
President
Chief Executive Officer
The Farmers & Merchants State
Bank
ROBERT G. FREY
President
E. H. Frey & Sons, Inc.
LEE E. GRAFFICE
President
Graffice Motor Sales
JACK C. JOHNSON
President
Hawk's Clothing, Inc.
Partner
REJO Partnership
DEAN E. MILLER
President
MBC Holdings, Inc.
DALE L. NAFZIGER
Retired
HAROLD H. PLASSMAN
Attorney
Plassman, Rupp, Hensal & Short
JAMES L. PROVOST
Retired
Dyer & McDermott, Inc.
JAMES C. SANEHOLTZ
President
Saneholtz-McKarns, Inc.
MAYNARD SAUDER
President
Sauder Woodworking Co.
MERLE J. SHORT
Farmer
President
Promow, Inc.
STEVEN J. WYSE
President
Granite Industries
DIRECTOR EMERITUS
ELIAS H. FREY
KENNETH E. STAMM
ROBERT H. STOTZER
ROBERT V. WHITMER
ARCHBOLD MAIN OFFICE
CHARLES E. LUGBILL
Chairman of the Board
JOE E. CROSSGROVE
President
Chief Executive Officer
MAYNARD SAUDER
Vice President
EUGENE D. BERNATH
Vice President
EDWARD A. LEININGER
Executive Vice President
Commercial Loan Officer
REX D. RICE
Executive Vice President
Chief Lending Officer
GEORGE JELEN
Asst. Vice President
Secondary Market Officer
Loan Underwriter
RANDAL H. SCHROEDER
Asst. Vice President
Chief Operations Officer
MICHAEL D. CULLER
Asst. Vice President
Chief Agri Finance Officer
BARBARA J. BRITENRIKER
Vice President
Comptroller & Chief Financial Officer
DIANN K. MEYER
Asst. Vice President
Human Resource Officer
KENT E. ROTH
Auditor
Security Officer
MARILYN K. JOHNSON
Assistant Cashier
Compliance and CRA
Officer
JUDITH A. WARNCKE
Asst. Cashier
Marketing Officer
J. SCOTT MILLER
Asst. Cashier
Agri Finance Officer
DEBRA J. KAUFFMAN
Asst. Cashier & Consumer
Lending Officer
Asst. Corporate Secretary
JANE C. BRUNER
Assistant Cashier
Operations Supervisor
JOYCE G. KINSMAN
Assistant Cashier
Loan Review Officer
BRETT J. KAHRS
Senior Investment Executive
ARCHBOLD WOODLAND
OFFICE
DEBORAH L. STONER
Asst. Vice President
Branch Manager
DIANE J. SWISHER
Asst. Cashier
Asst. Branch Manager
ARCHBOLD ADVISORY BOARD
DEXTER L. BENECKE
Vice President
Benecke Trucking, Inc.
Alex Products, Inc.
BRUCE C. LAUBER
President
Lauber Manufacturing Co.
JO ELLEN HORNISH
President
Hornish Brothers, Inc.
ANTHONY J. RUPP
President
Rupp Furniture Co.
-2-
28
GENE SCHAFFNER
Farmer
GEORGE F. STOTZER
Partner
Stotzer Do-It Center
WAUSEON SHOOP OFFICE
ALLEN G. LANTZ
Vice President
Branch Manager
GLORIA GUNN
Asst. Vice President
Asst. Branch Manager
JERRY A. BORTON
Assistant Cashier
Agri Finance Officer
WAUSEON DOWNTOWN
OFFICE
CAROL J. ENGLAND
Asst. Vice President
Branch Manager
Corporate Secretary
JEAN E. HORWATH
Asst. Cashier
Asst. Branch Manager
WAUSEON ADVISORY BOARD
RICHARD L. ELROD
President
Mustang Corporation
WARREN A. KAHRS
President
Kahrs Tractor Sales, Inc.
JOSEPH H. KOLB
Owner
Kolb & Son
JULIAN GIOVARELLI
President
Gio Sales, Inc.
SANDRA K. BARBER
Fulton County Recorder
Chairman, Ohio Lottery Commission
DR. KENNETH H. KLING
Owner
Fulton County Vision Services
STRYKER OFFICE
RONALD D. SHORT
Asst. Vice President
Branch Manager
PATTI L. ROSEBROCK
Asst. Cashier
Asst. Branch Manager
STRYKER ADVISORY
BOARD
FRED W. GRISIER
Owner
Grisier Funeral Home
RICHARD E. RAKER
Owner
Raker Oil Company
STEVEN PLANSON
Farmer
WILLIAM J. BRENNER
Attorney
WEST UNITY OFFICE
LEWIS D. HILKERT
Vice President
Branch Manager
PATRICIA R. BURKHOLDER
Assistant Cashier
Assistant Branch Manager
WEST UNITY ADVISORY
BOARD
ALVIN E. CAROTHERS
Farmer
BEN G. WESTFALL
President
Westfall Realty, Inc.
TED W. MANEVAL
Farmer
R. BURDELL COLON
President
Rup-Col., Inc.
CHARLES W. KLINGER
Pharmacist
Klinger Pharmacy
DELTA OFFICE
CYNTHIA K. KNAUER
Asst. Vice President
Branch Manager
BARRY N. GRAY
Assistant Cashier
Asst. Branch Manager
DELTA ADVISORY BOARD
TERRY J. KAPER
Attorney
Barber, Kaper, Stamm & Robinson
DONALD C. EICHER
Retired Grocer
ROBERT E. GILDERS
Chairman
GB Manufacturing
EUGENE BURKHOLDER
President
Falor Farm Center
AL KREUZ
Retired Fulton County
Commissioner
BRYAN EAST HIGH OFFICE
DAVID C. FRAZER
Assistant Vice President
Branch Manager
CAROL L. CHURCH
Assistant Cashier
Assistant Branch Manager
SOUTHTOWNE OFFICE
MICHAEL T. SMITH
Assistant Cashier
Branch Manager
RUTH M. FORD
Assistant Branch Manager
RICHARD C. BRUCE
Assistant Vice President
Commercial Loan Officer
-3-
29
BRYAN ADVISORY BOARD
W. PAUL TRODER
President
Allied Moulded Products, Inc.
RUSTY BRUNICARDI
President
Chief Executive Officer
Community Hospital of Williams
Co., Inc.
D. ROBERT SHAFFER
Farmer
DR. C. NICHOLAS WALZ
Partner
Williams County Family Medical
Center
PAUL R. MANLEY
Vice President Manufacturing
Ohio Art Co.
MONTPELIER WEST MAIN
OFFICE
LANCE D. NOFZIGER
Branch Manager
MONTPELIER EASTSIDE
OFFICE
JOHN S. FEE
Asst. Vice President
Branch Manager
MONTPELIER ADVISORY
BOARD
GREGORY D. SHOUP
President
Peltcs Lumber Co., Inc.
RICHARD S. DYE
Minister
Munson United Brethern Church
ROBERT D. MERCER
President
Bob Mercer Realty and
Auctions
GEORGE B. RINGS
Pharmacist
Rings Pharmacy
NAPOLEON OFFICE
STEPHEN E. JACKSON
Asst. Vice President
Branch Manager
DIANA J. DENNIE
Assistant Cashier
Assistant Branch Manager
MICHAEL F. SCHNITKEY
Assistant Cashier
Agri Finance Officer
RICHARD D. ERNEST
Assistant Cashier
Commerical Loan Officer
NAPOLEON ADVISORY BOARD
BARBARA C. SCHIE
Office Manager
Fulton Anesthesia Associates,
Inc.
DAVID M. DAMMAN
Farm Drainage Contractor
Farmer
JAMES T. VAN POPPEL
President
Van Poppel Corp.
DENNIS L. MEYER
Realtor
Ed Rohrs Realty
CHAIRMAN CHARLES LUGBILL WITH MANAGERS AT ANNUAL MEETING
Seated from left: Cynthia Knauer, AVP/Delta Manager; Deborah Stoner,
AVP/Archbold Woodland Manager; Carol England, AVP/Wauseon Downtown Manager.
Second row from left: Charles Lugbill, Chairman of the Board; Steve Jackson,
AVP/Napoleon Manager; Ronald Short, AVP/Stryker Manager. Back row from left: Joe
Crossgrove, President and CEO; Michael Smith, AC/Bryan SouthTowne Manager; John
Fee, AVP/Montpelier Eastside Manager; David Frazer, AVP/Bryan E. High Manager;
Allen Lantz, VP/Wauseon Shoop Manager; Lewis Hilkert, VP/West Unity Manager.
-4-
30
MESSAGE TO OUR SHAREHOLDERS:
UPDATE ON YEAR 2000 (Y2K) READINESS PROGRAM
With the Year 2000 rapidly approaching, our twelve member Project Team continues
to actively address and manage preparations for complete readiness. Members of
the team were drawn from different areas of the bank to ensure all potential
issues could be addressed. A detailed Work Plan directs all activities required
to implement the five phases of Y2K readiness - AWARENESS, ASSESSMENT,
RENOVATION, VALIDATION and IMPLEMENTATION.
Since the Year 2000 poses great concerns and complex challenges, a comprehensive
approach has been developed to identify, modify and test all systems and
components which require changes in order to accurately handle and process
information in the Year 2000 and thereafter. Our efforts focus on six key areas
of exposure: 1) Computer technology and operating systems, 2) Software
applications, 3) Automated processing functions, 4) Infrastructure, 5) Customer
risk and 6) Legal risk.
Key customer concerns are ACCESS TO THEIR MONEY and ACCURACY OF THEIR ACCOUNT
RECORDS. An essential part of our Year 2000 initiative is communication and
customer awareness. Efforts focus on providing information on the bank and Year
2000, as well as educating our employees to effectively address customer
questions and concerns.
A high priority status has been assigned to systems, applications and equipment
vital to maintaining ongoing business functions and critical operations. Several
key systems were awaiting upgrades at year end 1998. By maintaining close
contact with our vendors and suppliers, we are confident those remaining changes
will be timely and successful. Systems deemed Y2K compliant by vendors, as well
as systems that have been replaced or upgraded, will require complete and
thorough internal testing to ensure Year 2000 readiness.
Extensive testing and validation efforts focus on verification of critical
information and calculations to ensure that computer interfaces accurately
handle various dates and information. All critical systems must be thoroughly
tested and retested, if needed, to ensure Year 2000 readiness. Testing and
validation procedures will consume a major portion of our time in 1999.
Progress on the development of contingency plans for all mission critical
systems continues. The plans will address potential Year 2000 problems and
provide a detailed, well-planned methodology to quickly resolve a problem should
one occur. An independent third party will be retained in 1999 to evaluate both
our contingency planning process and testing procedures.
Risk assessments were developed for material customers, business partners and
third parties who pose potential risks to the bank. Part of our Y2K compliance
efforts will be continued monitoring in regard to their progress toward Year
2000 readiness.
With adequate preparations, the appropriate resources, and the involvement of
senior management, our board of directors and employees, we anticipate minimal
impact on our ability to deliver uninterrupted financial services to our
customers. We will be prepared for "business as usual" on January 3, 2000.
Joe E. Crossgrove Marilyn K. Johnson
President & Chief Executive Officer Assistant Cashier/Y2K Project Manager
THE STATEMENTS CONTAINED HEREIN ARE YEAR 2000 READINESS DISCLOSURES AS DEFINED
IN THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT (S.2392: ENACTED
10/19/98)
-5-
31
FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
December 31, 1998
PAGE
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
Supplementary Information:
Independent Auditors' Report on
Supplementary Information 32
Five Year Summary of Consolidated
Operations 33
32
[KROUSE, KERN & CO., INC. LETTERHEAD]
January 13, 1999
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, 1998 and 1997 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997,
and the results of its consolidated operations and cash flows for the years
ended December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/ KROUSE, KERN & CO., INC.
KROUSE, KERN & CO., INC.
-6-
33
FARMERS & MERCHANTS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS
(In thousands) 1998 1997
------------- -------------
Cash and due from banks......................................................... $ 18,549 $ 16,213
Interest bearing deposits with banks............................................ 100 100
Federal funds sold.............................................................. 19,045 6,485
Investment securities at market................................................. 123,911 92,050
Loans, less allowance for loan losses of $5,850 for 1998 and $5,850 for
1997......................................................................... 401,192 397,295
Loans held for resale........................................................... 6,013 856
Finance lease receivable........................................................ 516 492
Bank premises and equipment - net............................................... 9,430 7,665
Accrued interest and other assets............................................... 6,904 6,503
Deferred income tax asset....................................................... 209 614
------------- -------------
TOTAL ASSETS $ 585,869 $ 528,273
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand................................................................... $ 52,631 $ 51,163
NOW accounts............................................................. 43,775 48,264
Savings.................................................................. 117,501 87,923
Time.................................................................... 298,276 273,948
------------- -------------
Total Deposits 512,183 461,298
Securities sold under agreement to repurchase................................... 2,916 2,598
Other borrowings................................................................ 11,240 11,292
Dividend payable................................................................ 650 650
Accrued interest and other liabilities......................................... 3,530 3,591
------------- -------------
Total Liabilities 530,519 479,429
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 1,500,000 shares; issued
1,300,000 shares......................................................... 12,677 12,677
Undivided profits.......................................................... 41,002 35,165
Accumulated Other Comprehensive Income:
Net unrealized gain on securities available for sale (net of tax
effect of $862 in 1998 and $515 in 1997)........................... 1,671 1,002
------------- -------------
Total Shareholders' Equity 55,350 48,844
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 585,869 $ 528,273
============= =============
See Accompanying Notes to Consolidated Financial Statements.
-7-
34
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996
(In thousands except for per share amounts)
INTEREST INCOME: 1998 1997 1996
------------- ------------- -------------
Interest and fees on loans............................... $ 36,296 $ 34,229 $ 32,339
Interest on Investment Securities:
U. S. Treasury securities............................ 1,216 1,507 1,493
Securities of U. S. Government agencies.............. 2,211 2,045 2,095
Obligations of states and political subdivisions..... 1,473 1,234 1,220
Obligations of domestic corporations................. 822 719 707
Interest on federal funds................................ 648 211 357
Interest on deposits in banks............................ 5 5 7
Dividends................................................ 178 166 150
Lease finance revenues................................... 39 42 14
------------- ------------- -------------
Total Interest Income 42,888 40,158 38,382
------------- ------------- -------------
INTEREST EXPENSE:
Interest on deposits..................................... 21,182 20,276 19,943
Interest on borrowed funds............................... 903 863 962
------------- ------------- -------------
Total Interest Expense 22,085 21,139 20,905
------------- ------------- -------------
Net Interest Income 20,803 19,019 17,477
PROVISION FOR LOAN LOSSES........................................ 892 1,111 1,068
------------- ------------- -------------
Net Interest Income After Provision for
Loan Losses 19,911 17,908 16,409
------------- ------------- -------------
OTHER INCOME:
Service charges on deposit accounts...................... 1,320 1,152 1,097
Other service charges and fees........................... 2,706 1,787 1,275
Net securities gains..................................... 0 (4) 5
------------- ------------- -------------
Total Other Income 4,026 2,935 2,377
------------- ------------- -------------
OTHER EXPENSES:
Salaries and wages....................................... 5,438 4,404 4,849
Pension and other employee benefits...................... 1,394 1,206 1,172
Occupancy expense (net).................................. 510 481 498
Furniture and equipment expense.......................... 981 722 788
Other operating expenses................................. 4,544 4,218 3,684
------------- ------------- -------------
Total Other Expenses 12,867 11,031 10,991
------------- ------------- -------------
INCOME BEFORE INCOME TAX 11,070 9,812 7,795
INCOME TAXES.................................................. 3,413 3,035 2,312
------------- ------------- -------------
NET INCOME 7,657 6,777 5,483
OTHER COMPREHENSIVE INCOME:
Unrealized gain (loss) on investment securities (net of
taxes of 345, $157 and ($115) for 1998, 1997 and
1996, respectively).................................... 669 311 (228)
------------- ------------- -------------
COMPREHENSIVE INCOME $ 8,326 $ 7,088 $ 5,255
============= ============= =============
NET OPERATING INCOME PER SHARE $ 5.89 $ 5.22 $ 4.22
============= ============= =============
COMPREHENSIVE INCOME PER SHARE $ 6.40 $ 5.45 $ 4.04
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING $ 1,300,000 1,300,000 1,300,000
============= ============= =============
See Accompanying Notes to Consolidated Financial Statements.
-8-
35
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Accumulated
Other
Common Undivided Comprehensive
(In thousands) Stock Profits Income
------------- ------------- --------------
BALANCE AT DECEMBER 31, 1995.................................. $ 12,677 $ 26,025 $ 919
Net income for 1996...................................... 0 5,483 0
Unrealized losses on securities classified as Available
for Sale (net of tax effect of ($115))................. 0 0 (228)
Cash dividends ($1.15 per share)......................... 0 (1,495) 0
------------- ------------- --------------
BALANCE AT DECEMBER 31, 1996 12,677 30,013 691
Net income for 1997...................................... 0 6,777 0
Unrealized gains on securities classified as Available
for Sale (net of tax effect of $157)................... 0 0 311
Cash dividends ($1.25 per share)......................... 0 (1,625) 0
------------- ------------- --------------
BALANCE AT DECEMBER 31, 1997.................................. 12,677 35,165 1,002
Net income for 1998...................................... 0 7,657 0
Unrealized gains on securities classified as Available
for Sale (net of tax effect of $345)................... 0 0 669
Cash dividends ($1.40 per share)......................... 0 (1,820) 0
------------- ------------- --------------
BALANCE AT DECEMBER 31, 1998 $ 12,677 $ 41,002 $ 1,671
============= ============= ==============
See Accompanying Notes to Consolidated Financial Statements.
-9-
36
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
------------- ------------- -------------
Net income................................................... $ 7,657 $ 6,777 $ 5,483
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation............................................. 943 700 798
Premium amortization..................................... 512 470 582
Discount amortization.................................... (120) (155) (196)
Provision for loan losses................................ 892 1,111 1,068
Provision for deferred income taxes...................... 52 43 266
(Gain) loss on sale of fixed assets...................... 30 0 (1)
(Gain) loss on sale of investment securities............. 0 4 (5)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets............. (401) (350) (373)
Accrued interest payable and other liabilities........... (61) 181 162
----------- ------------ ------------
Net Cash Provided by Operating Activities 9,504 8,781 7,784
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................... (2,740) (789) (1,175)
Proceeds from maturities of available for sale securities.... 22,000 23,546 30,890
Proceeds from sale of available for sale securities.......... 0 10,363 255
Purchase of available for sales securities................... (53,051) (23,928) (48,724)
Acquisition of stock by stock dividend (non-cash)............ (177) (165) (150)
Net increase in loans........................................ (9,946) (30,362) (30,354)
Net increase in leases....................................... (24) (173) (257)
----------- ------------ ------------
Net Cash Used by Investing Activities (43,938) (21,508) (49,515)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits..................................... 50,885 22,921 34,387
Net change in short term borrowings.......................... 318 (4,165) (156)
Increase in long-term borrowings............................. 1,000 3,000 0
Payments on long-term borrowings............................. (1,053) (707) (665)
Payments of dividends........................................ (1,820) (1,495) (1,625)
----------- ------------ ------------
Net Cash Provided by Financing Activities 49,330 19,554 31,941
----------- ----------- ------------
Net change in cash and cash equivalents 14,896 6,827 (9,790)
Cash and cash equivalents - beginning of the year................. 22,798 15,971 25,761
----------- ------------ ------------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 37,694 $ 22,798 $ 15,971
=========== =========== ============
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks................................. $ 18,549 $ 16,213 $ 15,871
Interest bearing deposits.................................... 100 100 100
Federal funds sold........................................... 19,045 6,485 0
----------- ------------ ------------
$ 37,694 $ 22,798 $ 15,971
=========== ============ ============
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amount capitalized)..................... $ 22,020 $ 21,136 $ 20,969
Income taxes............................................. $ 3,280 $ 2,652 $ 2,128
See Accompanying Notes to Consolidated Financial Statements.
-10-
37
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
CONSOLIDATION POLICY:
The consolidated financial statements include the accounts of
Farmers & Merchants Bancorp, Inc. and its wholly-owned
subsidiaries, The Farmers & Merchants State Bank (the Bank), a
commercial banking institution, and the Farmers & Merchants Life
Insurance Company, a life, accident and health insurance company.
NATURE OF ACTIVITIES:
The consolidated income of Farmers & Merchants Bancorp, Inc. is
principally from income of the bank subsidiary, The Farmers &
Merchants State Bank. The subsidiary Bank grants agribusiness,
commercial, consumer and residential loans to customers primarily
in northwest Ohio.
ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH 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:
Securities, when purchased, are designated as Investment Securities
Available for Sale and are carried at market value. They remain in
that category until they are sold or mature. The specific
identification method is used in determining the cost of securities
sold.
Unrealized holding gains and losses, net of tax, on securities
classified as Available for Sale are reported as a net amount as a
separate component of shareholders' equity until realized.
-11-
38
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
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.
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
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 are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
Beginning in 1995, the Bank adopted Statement 114. Under the
Standard when a loan is deemed to be impaired, that is, based on
current information and events, it is probable that not all amounts
due according to the contractual terms of the loan agreement will
be collectible, the impairment is measured based on either the
present value of expected future cash flows discounted at the
loan's effective rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
This impairment is credited to the allowance for loan losses.
-12-
39
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
ALLOWANCE FOR LOAN LOSSES: (Continued)
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.
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:
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinquishments of
Liabilities". FAS 125 requires that each time an entity undertakes
an obligation to service financial assets, it shall recognize
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.
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.
-13-
40
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of the fair value information
about financial instruments, both assets and liabilities, whether
or not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and
estimates of cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. FASB Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
FEDERAL INCOME TAX:
The provision for federal income taxes is based on reported income
and expense, adjusted for permanent differences between reported
income and taxable income. The deferred portion of the provision
relates to those items of income and expense in the financial
statements that are recognized in different time periods for income
tax purposes.
EARNINGS PER SHARE:
Earnings per share are computed based on the weighted average
number of shares of common stock outstanding during each year, and
any stock splits or dividends are retroactively recognized in all
periods presented in the financial statements.
COMPREHENSIVE INCOME:
The Financial Accounting Standards Board has issued Statement No.
130, Reporting Comprehensive Income, that the Company is required
to adopt for its year ended December 31, 1998. This pronouncement
is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for
reporting and presentation of comprehensive income and its
components. The Statement requires that items recognized as
components of comprehensive income be reported in the financial
statements. The Statement also requires that a company classify
items of other comprehensive income by their nature in the
financial statements, and display the accumulated balance of other
comprehensive income separately from retained earnings in the
equity section of a statement of financial position. Comprehensive
income of the Company currently consists of unrealized gains and
losses on securities available for sale.
-14-
41
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 2. CASH AND FEDERAL FUNDS SOLD
Banks are required to maintain reserve funds in vault cash and/or
on deposit with the Federal Reserve Bank. The aggregate reserves
required at December 31, 1998 and 1997 were $5.1 million and $3.7
million, respectively.
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities as of December 31, 1998 and 1997 are detailed below.
Fair market values are based on quoted market prices or dealer
quotes except for domestic corporations stocks and Federal Home
Loan Bank stock which are recorded at cost.
1998
-----------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
------------ ------------- ----------- -------------
Available for Sale:
U.S. Treasury $ 16,792 $ 320 $ 0 $ 17,112
U.S. Government
agency 37,978 614 18 38,574
Mortgage-Backed 10,986 56 49 10,993
State and political
subdivisions 34,119 1,413 12 35,520
Obligation of
domestic
corporations 18,905 210 0 19,115
Stocks of domestic
corporations 20 0 0 20
Federal Home Loan Bank
stock (restricted) 2,577 0 0 2,577
----------- ------------- ------------- -----------
$ 121,377 $ 2,613 $ 79 $ 123,911
=========== ============= ============= ===========
-15-
42
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
1997
-----------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
------------ ------------- ------------- -------------
Available for Sale:
U.S. Treasury $ 22,200 $ 195 $ 22 $ 22,373
U.S. Government
agency 22,100 224 2 22,322
Mortgage-Backed 9,033 24 66 8,991
State and political
subdivisions 24,499 1,127 9 25,617
Obligation of
domestic
corporations 10,282 48 3 10,327
Stocks of domestic
corporations 20 0 0 20
Federal Home Loan Bank
stock (restricted) 2,400 0 0 2,400
----------- ------------- ------------- -----------
$ 90,534 $ 1,618 $ 102 $ 92,050
=========== ============= ============= ===========
The Federal Home Loan Bank stock is held as collateral
security for all indebtedness of The Farmers & Merchants State
Bank to the Federal Home Loan Bank.
The gross realized gains and losses for the years ended
December 31, are presented below:
(In thousands) 1998 1997 1996
------------- ------------- -------------
Gross realized gains $ 0 $ 6 $ 5
------------- ------------- -------------
Gross realized losses 0 10 0
------------- ------------- -------------
Net Realized Gains (Loss) $ 0 $ (4) $ 5
============= ============= =============
The amortized cost and estimated market value of debt
securities at December 31, 1998, 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.
-16-
43
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
Investment Securities
Available for Sale
-----------------------------------
Market
(In thousands) Amortized Cost Value
-------------- ----------------- -------------
Within one year $ 21,912 $ 22,095
From one through five years 50,584 73,117
From five through ten years 38,854 17,989
After ten years 7,430 8,113
----------- -----------
Total $ 118,780 $ 121,314
=========== ===========
Investments with a carrying value of $66.9 million and $61.6
million at December 31, 1998 and 1997, respectively, were
pledged to secure public deposits and securities sold under
repurchase agreements.
NOTE 4. LOANS
Loans at December 31 consist of:
(In thousands) 1998 1997
------------- ------------- -------------
Real estate $ 194,662 $ 204,770
Commercial and industrial 87,266 65,633
Agricultural (excluding real estate) 38,882 44,939
Consumer and other loans 68,197 75,675
Overdrafts 188 92
Commercial paper 13,648 7,837
Industrial Development Bonds 4,587 4,511
------------- -------------
407,430 403,457
Less: Deferred loan fees and costs (388) (312)
------------- -------------
407,042 403,145
Less: Allowance for loan losses (5,850) (5,850)
------------- -------------
Loans - Net $ 401,192 $ 397,295
============= =============
As of December 31, 1998 there were $578 thousand in
commitments to lend additional funds to debtors whose loans
are not performing.
$128.8 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.
-17-
44
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 4. LOANS (Continued)
Senior officers and directors and their affiliated companies
were indebted to the Bank in the aggregate of $8.6 and $6.1
million at December 31, 1998 and 1997, 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 1998 were $23.3 million and
repayments were $20.8 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
$147.9, $98.6 and $76.2 million for 1998, 1997 and 1996,
respectively. Servicing assets recognized during 1998 amounted
to $855 thousand and amortization of servicing assets amounted
to $306 thousand. The fair value of recognized servicing
assets was $1.3 million, fair value being determined by the
present value of expected future cash flows.
No allowance for impairment has been provided.
NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for loan losses is as follows:
(In thousands) 1998 1997 1996
------------- ------------- ------------- -------------
Balance at beginning of year $ 5,850 $ 5,500 $ 5,500
Provision charged to operating
expenses 892 1,111 1,068
Loans charged-off (1,774) (1,531) (1,711)
Recoveries 882 770 643
------------- ------------- -------------
Balance at End of Year $ 5,850 $ 5,850 $ 5,500
============= ============= =============
At December 31, 1998 and 1997, the recorded investment in
loans considered impaired was $8.743 and $7.170 million,
respectively, for which the related allowance for loan loss
was $2.374 and $2.744 million, respectively. Of the $8.743 and
$7.170 million in impaired loans for 1998 and 1997,
respectively that were considered impaired, the recorded
investment in impaired loans that have a related allowance for
credit losses determined in accordance with SFAS No. 114 was
$6.451 and $2.889 million, respectively. Average investment in
impaired loans was $4.7 million, $3.2 million and $3.5 million
for 1998, 1997 and 1996, 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 $172, $402, and $354 thousand
for 1998, 1997 and 1996, respectively.
-18-
45
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 6. FINANCE LEASE RECEIVABLE
Finance leases as of December 31 are as follows:
(In thousands) 1998 1997
------------- -------------
Gross investment in leases $ 605 $ 598
Unearned income (89) (106)
------------- -------------
Finance Lease Receivable $ 516 $ 492
============= =============
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) 1998 1997
-------------- ------------- -------------
Land $ 1,681 $ 1,472
Buildings 8,030 7,398
Furnishings 5,867 4,605
------------- -------------
15,578 13,475
Less: Accumulated depreciation (6,148) (5,810)
------------- -------------
Banking Premises and Equipment - Net $ 9,430 $ 7,665
============= =============
NOTE 8. DEPOSITS
Time deposits at December 31 consist of the following:
(In thousands) 1998 1997
------------ ------------- -------
Time deposits under $100,000 $ 229,143 $ 216,185
Time deposits of $100,000 or more 69,133 57,763
------------- -------------
$ 298,276 $ 273,948
============= =============
As of December 31, 1998 the aggregate amount of maturities for
each of the five following years for time deposits having a
remaining term of more than one year follows:
1999 $ 222,106
2000 58,740
2001 9,636
2002 2,530
2003 5,264
-------------
$ 298,276
=============
-19-
46
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 8. DEPOSITS (Continued)
Deposits to related parties as of December 31, 1998 amounted
to $14.8 million.
NOTE 9. REPURCHASE AGREEMENTS
The Bank's policy requires U. S. Government securities as
collateral for the underlying repurchase agreements. As of
December 31, 1998 U. S. Treasury securities with a book value
of $3.5 million 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) 1998 1997
------------- ------------- ------------
Federal Home Loan Bank, various loans due in monthly
installments of $105 thousand plus an annual payment of $300
thousand including interest at varying rates from 5.40% to
6.75%. Notes are secured by a blanket lien on 100% of one to
four family residential mortgage loan
portfolio. $ 11,240 $ 11,292
============= =============
The following is a schedule by years of future minimum
principal payments:
Year Ended Principal
December 31 Payments
----------- ---------
1999 $ 1,201
2000 1,253
2001 1,308
2002 1,367
2003 1,409
Thereafter 4,702
-------------
$ 11,240
=============
NOTE 11. FEDERAL INCOME TAXES
Deferred tax assets and liabilities at December 31 are
comprised of the following:
(In thousands) 1998 1997
------------ ------------- -------------
Deferred tax assets:
Allowance for loan losses $ 1,702 $ 1,702
Other 12 8
------------- -------------
1,714 1,710
------------- -------------
-20-
47
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. FEDERAL INCOME TAXES (Continued)
1998 1997
------------- -------------
Deferred tax liabilities:
Accreted discounts on bonds 35 103
FHLB stock dividends 293 233
Mortgage servicing rights 312 245
Other 3 0
Net unrealized gain on securities
Available for sale 862 515
------------- -------------
1,505 1,096
------------- -------------
Net Deferred Tax Assets $ 209 $ 614
============= =============
The components of income tax expense for the years ended
December 31 are as follows:
(in thousands) 1998 1997 1996
------------- ------------- -------------
Current:
Federal $ 3,361 $ 2,993 $ 2,043
Deferred:
Federal 52 42 269
------------- ------------- -------------
$ 3,413 $ 3,035 $ 2,312
============= ============= =============
Income tax at statutory rates $ 3,771 $ 3,354 $ 2,650
Tax effect of:
Tax exempt interest (428) (384) (406)
Costs attributable to tax
exempt interest 70 63 59
Other items, net 0 2 9
------------- ------------- -------------
Income Tax Cost $ 3,413 $ 3,035 $ 2,312
============= ============= =============
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.
-21-
48
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 12. RETIREMENT INCOME PLAN (Continued)
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 $446, $315, and $267 thousand for 1998, 1997
and 1996, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
The Bank has conducted transactions with its officers and
directors as set forth in Note 4.
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, 1998 and 1997 is as follows:
Notational Amount
(In thousands) 1998 1997
------------ ------------- -------------
Commitments to extend credit $ 76,651 $ 62,486
Credit card arrangements 10,237 9,619
Standby letters of credit 1,419 2,299
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. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and standby letters of
credit have been granted to customers in the Bank's market
area of northwest Ohio. All such customers are depositors of
the Bank. Also, investments in state and municipal securities
may involve governmental entities within the Bank's market
area. The concentrations of credit by type of loan are set
forth in Note 4. Standby letters of credit were granted
primarily to commercial borrowers.
-22-
49
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. REGULATORY CAPITAL REQUIREMENTS
Federal regulatory agencies have adopted various capital
standards for financial institutions, including risk-based
capital standards. The primary objectives of the risk-based
capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to
take into account the different risks among financial
institutions' assets and off-balance sheet items.
Quantitative measures established by regulation to ensure
capital adequacy require the Banks to maintain certain minimum
amounts and ratios of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes the Bank
meets all capital adequacy requirements to which they are
subject as of December 31, 1998.
To be categorized as well capitalized, the Company must
maintain the total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the minimum requirements
column below. A comparison of the Company's capital as of
December 31, 1998 and 1997 with the minimum requirement is
presented below:
Actual
------------------------------ Minimum
1998 1997 Requirements
------------- ------------- -------------
Tier 1 Risk-based Capital:
Company 11.80% 10.05% 4.00%
The Farmers & Merchants
State Bank 10.33% 9.58% 4.00%
Total Risk-based Capital:
Company 13.44% 12.98% 8.00%
The Farmers & Merchants
State Bank 13.97% 13.44% 8.00%
Leverage Ratio:
Company 9.17% 9.06% 4.00%
The Farmers & Merchants
State Bank 7.53% 7.06% 4.00%
According to regulatory guidelines, the Bank is considered to
be "well capitalized".
The Bank is restricted as to the amount of dividends which can
be paid. Dividends declared by the Bank that exceed the net
income for the current year plus retained income for the
preceding two years must be approved by federal and state
regulatory agencies. Under this formula dividends of $6.2
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.
-23-
50
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
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. 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,
1998 and 1997 are reflected below:
1998 1997
------------------------ ------------------------
Book Fair Book Fair
(In thousands) Value Value Value Value
----------- ----------- ----------- ----------
Financial Assets:
Cash $ 18,649 $ 18,649 $ 16,313 $ 16,313
Interest bearing
deposits 100 100 0 0
Federal funds sold 19,045 19,045 6,485 6,485
Investment Securities:
Available for sale 123,911 123,911 92,050 92,050
Net loans 407,721 422,147 398,643 406,323
Accrued interest
receivable 5,187 5,187 5,069 5,069
Financial Liabilities:
Deposits $ 512,183 $ 515,500 $ 461,298 $ 462,967
Short-term borrowing:
Federal funds
purchased
Securities sold
under agreement
to repurchase 2,916 2,916 2,598 2,598
Other borrowing 11,240 11,341 11,292 11,642
Accrued interest payable 1,991 1,991 1,926 1,926
The following assumptions and methods were used in estimating
the fair value for financial instruments:
CASH AND SHORT-TERM INVESTMENTS:
For cash on hand and in banks, as well as, federal
funds sold, the carrying amount is a reasonable
estimate of fair value.
-24-
51
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued)
INVESTMENT SECURITIES:
Fair value is based on quoted market prices or dealer
quotes. See Note 3, Investment Securities, for
additional information.
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.
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 estimated fair value of
the fixed rate loan portfolio is based on expected
future cash flows discounted by an appropriate rate
derived in part from the Treasury yield curve.
DEPOSITS:
The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount
payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposits is
estimated using anticipated future cash flows
discounted by an appropriate rate derived in part
from the Treasury yield curve.
BORROWINGS:
Short-term borrowings are carried at cost which
approximates fair value. Other long-term debt was
generally valued using a discounted cash flows
analysis with a discounted rate based on current
incremental borrowing rates for similar types of
arrangements, or if not available, based on an
approach similar to that used for loans and deposits.
Long-term borrowings include their related current
maturities.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts of accrued interest approximate
their fair values.
-25-
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) 1998 1997
------------ ------------- -------------
ASSETS:
Cash $ 685 $ 816
Related party receivables:
Dividends 52 650
Note receivable 10,000 10,000
Investment in subsidiaries 45,617 38,207
------------- -------------
TOTAL ASSETS $ 56,354 $ 49,673
============= =============
LIABILITIES:
Accrued expenses $ 354 $ 179
Dividends payable 650 650
------------- -------------
Total Liabilities 1,004 829
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value -
authorized 1,500,000 shares;
issued 1,300,000 shares 12,677 12,677
Undivided profits 41,002 35,165
Unrealized gain on securities
classified as Available for
Sale (net of tax effect of
$862 for 1998 and $515 for
1997) 1,671 1,002
------------- -------------
55,350 48,844
------------- -------------
LIABILITIES AND SHAREHOLDERS'
EQUITY $ 56,354 $ 49,673
============= =============
-26-
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) 1998 1997 1996
------------- -------------- ------------- --------------
INCOME:
Equity in net income of subsidiaries $ 7,313 $ 6,406 $ 5,510
Interest income 600 600 0
-------------- ------------- --------------
Total Income 7,913 7,006 5,510
-------------- ------------- --------------
EXPENSES:
Miscellaneous 19 16 17
Professional fees 16 15 15
Supplies 6 6 8
Taxes 39 1 1
-------------- ------------- --------------
Total Expenses 80 38 41
-------------- ------------- --------------
INCOME BEFORE INCOME TAXES 7,833 6,968 5,469
INCOME TAXES (BENEFITS) 176 191 (14)
-------------- ------------- --------------
NET INCOME $ 7,657 $ 6,777 $ 5,483
============== ============= ==============
-27-
54
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Undivided Comprehensive
(In thousands) Stock Profits Income
------------- ----------- ------------- -----------
BALANCE at December 31, 1995 $ 12,677 $ 26,025 $ 919
Net income for 1996 0 5,483 0
Unrealized losses on securities
classified as Available for Sale
(net of tax effect of ($115)) 0 0 (228)
Dividends ($1.15 per share) 0 (1,495) 0
----------- ------------ ------------
BALANCE at December 31, 1996 12,677 30,013 691
Net income for 1997 0 6,777 0
Unrealized gains on securities
classified as Available for Sale
(net of tax effect of $153) 0 0 311
Dividends ($1.25 per share) 0 (1,625) 0
----------- ------------ ------------
BALANCE at December 31, 1997 12,677 35,165 1,002
Net income for 1998 0 7,657 0
Unrealized gains on securities
classified as Available for Sale
(net of tax effect of $345) 0 0 669
Dividends ($1.40 per share) 0 (1,820) 0
----------- ---------- -------------
BALANCE AT DECEMBER 31, 1998 $ 12,677 $ 41,002 $ 1,671
=========== ============ ============
-28-
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) 1998 1997 1996
------------ ---------------- --------------- ----------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 7,657 $ 6,777 $ 5,483
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Equity in undistributed net
income of subsidiaries (6,143) (4,910) 6,316
Changes in Operating Assets and
Liabilities:
Income tax receivable 0 190 10
Accrued expenses 175 0 0
---------------- --------------- ----------------
Net Cash Provided by Operating
Activities 1,689 2,057 11,809
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Loan) to repayment by
subsidiary 0 0 (10,000)
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of dividends (1,820) (1,495) (1,625)
---------------- --------------- ----------------
Net increase (decrease) in cash and
cash equivalents (131) 562 184
Cash and cash equivalents - beginning
of year 816 254 70
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 685 $ 816 $ 254
================ =============== ================
-29-
56
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
STOCK SPLIT:
On June 28, 1996, the Board of Directors authorized a
five-for-one stock split, thereby increasing the
total number of shares authorized to 1.5 million and
the total number of shares issued and outstanding to
1.3 million. All references in the accompanying
financial statements to the number of common shares
and per share amounts have been restated to reflect
the stock split.
NOTE 19. YEAR 2000 COMPLIANCE
The year 2000 has presented a unique set of challenges to
those industries reliant on information technology. As a
result of methods employed by early programmers, many software
applications and operational programs may be unable to
distinguish the year 2000 from the year 1900. If not
effectively addressed, this problem could result in the
production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the
industry's dependence on electronic data processing systems.
In 1997 the Company began the process of identifying the
hardware and software issues required to be addressed to
assure year 2000 compliance. The Company began by assessing
the issues related to the year 2000 and the potential for
those issues to adversely affect the Company's own operations
and those of its subsidiaries.
Since that time the Company has established a Year 2000
Committee composed of representatives from key areas
throughout the organization. It is the purpose of the
Committee to identify areas subject to complications related
to the year 2000 issues and to initiate remedial measures
designed to eliminate any adverse effects on the Company's
operations. The Committee has identified all mission-critical
software and hardware that may be adversely affected by the
year 2000, and has required vendors to represent that the
systems and products provided are or will be 2000 compliant.
The Company expects that all mission-critical software will be
upgraded to achieve year 2000 compliance and tested by June
30, 1999. In addition the Committee is developing contingency
plans for business recovery should a mission-critical system
fail at year end, as well as systems which do not become
compliant by June 30, 1999.
The Company is committed to a plan for achieving compliance,
focusing not only on its own data processing systems, but also
on its customers. The Committee has taken steps to educate and
assist its customers with identifying their year 2000
compliance problems. In addition the Committee has proposed
policy and procedure changes to help identify potential risks
to the Company and to gain an understanding of how customers
are managing the risks associated with the year 2000.
-30-
57
NOTE 19. YEAR 2000 COMPLIANCE (Continued)
Management believes that the Company has an effective company
year 2000 compliance program in place and that additional
expenditures required to bring its systems into compliance
will not have a material adverse effect on the Company's
operations, cash flows, or financial condition. Management
expects total additional out of pocket expenditures to be
approximately $200 thousand. This includes fees to outside
consulting firms, costs to upgrade equipment specifically for
the purpose of year 2000 compliance, and certain
administrative expenditures. However, the year 2000 problem is
pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that year 2000
compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future
financial results.
-31-
58
January 13, 1999
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, 1998 and 1997, 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.
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59
FARMERS & MERCHANTS BANCORP, INC.
Five Year Summary of Consolidated Operations
(In thousands except for per share 1998 1997 1996 1995 1994
--------------------------------- ----------- ----------- ----------- ----------- -----------
amounts)
-------
Summary of Income:
Interest income $ 42,888 $ 40,158 $ 38,382 $ 34,228 $ 27,779
Interest expense 22,085 21,139 20,905 17,749 12,561
----------- ----------- ----------- ----------- -----------
Net Interest Income 20,803 19,019 17,477 16,479 15,218
Provision for loan losses 892 1,111 1,068 385 564
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 19,911 17,908 16,409 16,094 14,654
Other income (expense) (8,841) (8,096) (8,614) (8,594) (7,939)
----------- ----------- ----------- ----------- -----------
Earnings before federal
income taxes 11,070 9,812 7,795 7,500 6,715
Income taxes 3,413 3,035 2,312 2,203 1,749
----------- ----------- ----------- ----------- -----------
Net income $ 7,657 $ 6,777 $ 5,483 $ 5,297 $ 4,966
=========== =========== =========== =========== ===========
Per Share of Common Stock:
Earnings per common share
outstanding:
(Based on the weighted average
number of shares outstanding)
(All per share amounts have
been retroactively restated to
reflect 5 for 1 stock split in
Net income $ 5.89 $ 5.22 $ 4.22 $ 4.07 $ 3.82
Dividends 1.40 1.25 1.15 1.10 1.00
Weighted average number
of shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Year-end assets $ 585,869 $ 528,273 $ 501,449 $ 464,090 $ 406,186
Average assets 553,277 510,163 482,770 430,304 387,440
Year-end equity capital 55,350 48,844 43,381 39,621 34,586
Average equity capital 52,940 46,548 41,501 38,034 32,838
See Independent Auditors' Report
on Supplementary Information.
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60
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
------- --------- ----------
1998 - by quarter 1st $ 55.00 $ 55.00
2nd 55.00 65.00
3rd 65.00 70.00
4th 70.00 75.00
1997 - by quarter 1st $ 40.00 $ 45.00
2nd 55.00 72.00
3rd 72.00 72.00
4th 65.00 70.00
Dividends declared on a quarterly basis for the last two fiscal years:
Quarter 1998 1997
------- ---------- ------
Dividends declared per share
1st $ .30 $ .25
2nd .30 .25
3rd .30 .25
4th .50 .50
-34-
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FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Farmers & Merchants Bancorp, Inc. again reported another increase in
consolidated operating earnings. Operating earnings for 1998 was $7.7 million
compared to $6.8 million for 1997 representing an increase of almost $1 million
or an increase of 13%. This increase was primarily the result of an increase in
interest income from loans.
Consolidated assets grew by $57.6 million in 1998 to a record $585.9 million
from consolidated assets of $528.3 million for 1997, representing a 10.9%
increase. This increase in assets occurred primarily in the loan portfolio and
investment securities available for sale.
The return on average assets and average shareholders' equity for 1998 was 1.38%
and 14.46%, respectively. These returns compare to 1.33% average return on
assets and 14.56% average return on shareholders' equity for 1997.
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 $121.7 million for 1998 representing 22%
of total average assets.
CAPITAL RESOURCES:
Shareholders' equity was $55.3 million at December 31, 1998 compared to $48.8
million for 1997. 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, 1998, The Farmers & Merchants State Bank had a total risk-based
capital ratio of 13.9% and a 10.3% core capital to risk-based asset ratio which
are well in excess of regulatory guidelines. The bank's leverage ratio of 7.5%
is also substantially in excess of regulatory guidelines. These ratios compare
to 13.4%, 9.6% and 7.1%, respectively for 1997.
The Company's subsidiaries are restricted by regulations from making dividend
distributions in excess of certain prescribed amounts.
-35-
62
[KROUSE, KERN & CO., INC. LETTERHEAD]
January 13, 1999
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, 1998, 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, 1998, 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-
63
[FARMERS & MERCHANTS STATE BANK LETTERHEAD]
MANAGEMENT REPORT
as of December 31, 1998
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, 1998, 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, 1998. 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, 1998.
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, 1998.
-37-
64
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
Key Ratios:
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Return on average equity 14.46% 14.56% 13.21% 13.93% 15.12%
Return on average assets 1.38% 1.33% 1.14% 1.23% 1.28%
Loan to deposit ratio 78.33% 86.31% 84.15% 84.06% 87.55%
Capital to assets ratio 9.45% 9.25% 8.65% 8.54% 8.51%
[GRAPH 1] [GRAPH 2]
[Return on average equity] [Return on average assets]
[GRAPH 3] [GRAPH 4]
[Loan to deposit ratio] [Capital to assets ratio]
-38-
65
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
Other key selected highlights are depicted in the following graphs:
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Loans $ 401,192 $ 397,295 $ 368,900 $ 339,614 $ 301,522
Total Assets 585,869 528,273 501,449 464,090 406,186
Shareholders' Equity 55,350 48,844 43,381 39,621 34,586
Interest Income 42,888 40,158 38,382 34,228 27,779
Interest Expense 22,085 21,139 20,905 17,749 12,561
Net Interest 20,803 19,019 17,477 16,479 15,218
Other Expense 8,841 8,096 8,614 8,594 7,940
Federal Income Tax 3,413 3,035 2,312 2,203 1,749
Net Income 7,657 6,777 5,483 5,297 4,965
Net Income per Share 5.89 5.22 4.22 4.07 3.82
Dividends per Share 1.40 1.25 1.15 1.10 1.00
[GRAPH 5] [GRAPH 6]
[Shareholders' Equity/Loans/Total Assets] [Interest Expense/Interest Income]
[GRAPH 7] [GRAPH 8]
[Federal Income Tax/Net Income/Other Expense] [Dividends per Share/
Net Income per Share]
-39-
66
1998 ANNUAL REPORT PHOTOS
OFFICERS REPRESENT BANK AT ANNUAL MEETING
Seated from left: Rex Rice, EVP/Chief Lending Officer; Joe Crossgrove, Pres. &
CEO; Edward Leininger, EVP/Commercial Loan Officer; Second row from left:
Richard Ernest, AC/Commercial Loan Officer; Debra Kauffman, AC/Consumer Loan
Officer; Joyce Kinsman, AC/Loan Review Officer; Barbara Britenriker,
VP/Comptroller & CFO; Judith Warncke, AC/Marketing Officer; Marilyn Johnson,
AC/Compliance & CRA Officer; George Jelen, AVP/Sec. Market Officer & Loan
Underwriter; Diann Meyer, Asst. VP/Human Resource Officer; Kent Roth, Auditor &
Security Officer; Randy Schroeder, AVP/Chief Operations Officer; Michael Culler,
AVP/Chief Agri Finance Officer; Richard Bruce, AVP/Commercial Loan Officer
WAUSEON SHOOP OFFICE CELEBRATES 25TH ANNIVERSARY
Allen Lantz, VP/Wauseon Shoop Manager, and Gloria Gunn, AVP/Asst. Manager,
Serving refreshments during anniversary celebration
-40-
67
WAUSEON DOWNTOWN OFFICES
SERVES SUNDAES FOR
20TH ANNIVERSARY CELEBRATION
Kim Armstrong, Virginia Garrow and Melissa
Robertson, Downtown office tellers, enjoying the
celebration by serving ice cream sundaes.
OPEN HOUSE AT ARCHBOLD
WOODLAND OFFICE
Deborah Stoner, AVP/Woodland
Manager, offers a big balloon to a
shy guest during the annual open
house celebration.
F & M IS BRANCHING OUT
The Swanton Banking Center sign announces
the F & M's future presence in the Swanton area.
RONALD ROBINSON RETIRES FROM
STRYKER ADVISORY BOARD
Charles Lugbill, Chairman (left), and
Ronald Short, AVP/Stryker Manager (right),
present appreciation plaque to Ronald
Robinson for his many years of service on
the Stryker Advisory Board.
-41-
68
F & M SUPPORTS WILLIAMS CO. BEEF PRODUCERS
Lewis Hilkert, VP/West Unity Manager, (right) along with
West Unity Advisory Board Members, Burdell Colon and
Ted Maneval, enjoying their shift at the Beef Producers
booth during the Williams County Fair.
BRYAN OFFICES SUPPORT BRYAN
ATHLETIC FIELD HOUSE PROJECT
Michael Smith, AC/ Bryan SouthTowne Manager,
watches as David Frazer, AVP/Bryan E. High Manager, presents
check to Tom Sprow, (center) member of
Athletic Boosters field house steering committee.
DELTA OPEN HOUSE -
A TIME FOR FELLOWSHIP
From left, Delta Advisory Board Member
Al Kreuz and Barry Gray, AC/Delta Asst.
Manager, visiting with Char Kreuz
at the gift table.
-42-
69
MONTPELIER EMPLOYEES PARTICIPATE IN
SUMMERFEST "BED" RACE
Montpelier West Main Teller, Roxanne Chamberlain,
and her daughter team up with Molly Startzman,
Montpelier Eastside Secretary, and Lance Nofziger,
Montpelier West Main Manager for the annual "Bed" Race.
F & M TAKES THE BANK TO THE
HENRY COUNTY FAIR
Steve Jackson, AVP/Napoleon Manager, and
Diana Dennie, AC/Asst. Manager, ensuring the
ATM is ready for the Henry Co. Fair.
MONTPELIER EASTSIDE
RIBBON CUTTING
Joe Crossgrove, Pres & CEO, (far left)
along with Directors, Advisory Board
Members, Village of Montpelier
Officials, Montpelier Chamber of
Commerce Representative and F & M
officers and employees watch while
John Fee, AVP/Montpelier Eastside
Manager, cuts the ribbon at the opening
of the Eastside Office.
-43-
70
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
- ---------------- --- ---------------------------------- ----------
Charles Lugbill 71 Chairman of the Board of Farmers 1968
and Merchants Bancorp, Inc. and,
The Farmers & Merchants State
Bank
Eugene Bernath 65 Farmer 1978
Jerry L. Boyers 65 President, Edifice Construction 1976
Management
Joe E. Crossgrove 62 President, Chief Executive Officer 1992
The Farmers & Merchants State
Bank
Robert G. Frey 58 President, E. H. Frey & Sons, Inc. 1987
Lee E. Graffice 67 President, Graffice Motor Sales 1983
Jack C. Johnson 46 President, Hawk's Clothing, Inc. 1991
Partner, REJO Partnership
Dean E. Miller 54 President, MBC Holdings, Inc. 1986
Dale L. Nafziger 68 Retired 1969
Harold H. Plassman 69 Attorney, Plassman, Rupp, Hensel 1985
& Short
James L. Provost 70 Retired, Dyer & McDermott, Inc. 1995
James C. Saneholtz 52 President, Saneholtz-McKarns, Inc. 1995
`
Maynard Sauder 66 President, Sauder Woodworking Co. 1980
Merle J. Short 58 Farmer, President of Promow, Inc. 1987
Steven J. Wyse 54 President, Granite Industries, Inc. 1991
-25-
71
EXECUTIVE OFFICERS
Principal Occupation
Name Age for Past Five Years
- ------------------ --- ------------------------
Charles Lugbill 71 Secretary/Treasurer Agri Trading
Chairman of the Board of Farmers
& Merchants Bancorp, Inc. and,
The Farmers & Merchants State
Bank
Joe E. Crossgrove 62 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 39 Vice President
Chief Lending Officer
Edward Leininger 41 Vice President
Commercial Loan Officer
Allen G. Lantz 45 Vice President
Branch Manager
Lewis Hilkert 48 Vice President
Branch Manager
Carol England 58 Assistant Vice President
Corporate Secretary
Branch Manager
Ronald D. Short 46 Assistant Vice President
Branch Manager
Cynthia Knauer 52 Assistant Vice President
Branch Manager
Dave Frazier 40 Assistant Vice President
Branch Manager
John Fee 38 Assistant Vice President
Branch Manager
Steve Jackson 44 Assistant Vice President
Branch Manager
Deborah Stoner 42 Assistant Vice President
Branch Manager
-26-
72
Randal H. Schroeder 38 Assistant Vice President
Chief Operations Officer
George Jelen 47 Assistant Vice President
Mortgage Loan Officer
Barbara Britenriker 37 Assistant Vice President
Chief Financial Officer
Comptroller
Michael D. Culler 40 Assistant Vice President
Chief Agricultural Finance Officer
Diann K. Meyer 38 Assistant Vice President
Personnel Manager
Gloria Gunn 41 Assistant Vice President
Assistant Branch Manager
Richard Bruce 51 Assistant Vice President
Commercial Loan Officer
Kent Roth 34 Auditor
Bank Security Officer
Bank Secrecy Officer
Marilyn Johnson 42 Compliance Officer
Jean Horwath 47 Assistant Cashier
Assistant Branch Manager
Diane Swisher 41 Assistant Cashier
Assistant Branch Manager
Patti Rosebrock 41 Assistant Cashier
Assistant Branch Manager
Michael T. Smith 32 Assistant Cashier
Branch Manager
Debra Kauffman 38 Assistant Cashier
Assistant Corporate Secretary
Consumer Loan Officer
J. Scott Miller 42 Assistant Cashier
Assistant Agri-Finance Officer
Judy Warncke 50 Assistant Cashier
Marketing Officer
Diana Dennie 36 Assistant Cashier
Branch Manager
-27-
73
Jerry Borton 49 Assistant Cashier
Loan Officer
Joyce G. Kinsman 29 Assistant Cashier
Loan Review Officer
Richard D. Ernest 34 Assistant Cashier
Asset Recovery Officer
Jane Bruner 38 Assistant Cashier
Operations Supervisor
Barry Gray 38 Assistant Cashier
Assistant Branch Manager
Kevin Gray 26 Assistant Cashier
Assistant Branch Manager
-28-
74
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 10, 1999 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 1998 calendar
year. All current directors of the Corporation attended at least seventy-five
percent of the meetings of the Board. Average attendance at Board meetings held
during the year was ninety percent.
Directors received, as directors' fees, $300 for each board meeting,
plus a bonus of $600 for 1998.
The Subsidiary Bank Board of Directors met semi-monthly during 1998.
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 10, 1999, 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 4 of the Annual Report
to shareholders, and is incorporated herein by reference.
CERTAIN BUSINESS RELATIONSHIPS
The company retained the law firm of Plassman, Rupp, Hensal and Short
in 1988. One of the principals, Harold Plassman, is a member of the Board of
Directors. During 1998 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 1999.
-29-
75
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 Pages 33 - 35
(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
1998 Annual Report Photos Pages 40 - 43
(4) Exhibits
(3.1) Articles of Incorporation have been
submitted with previous 10-K reports.
(13.1) 1998 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 26 through 29.
(e) Signatures Page 33
(f) Exhibit 27 Financial Data Schedule Page 34 - 35
Other schedules required to be filed as part of this report.
Form 10-K
---------
Schedule of Property and Equipment Page 31
Schedule of Accumulated Depreciation - Property and Equipment Page 32
-30-
76
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
SCHEDULE OF PROPERTY AND EQUIPMENT
EXHIBIT 1
Year Ended December 31, 1998
-----------------------------------------------------------------
Beginning Ending
(In Thousands) Balance Additions Retirements Balance
------------- ------------- ----------- -------------
Land $ 1,472 $ 209 $ 0 $ 1,681
Building 7,398 676 44 8,030
Banking house equipment 4,606 1,827 566 5,867
------------- ------------- ------------- -------------
$ 13,476 $ 2,712 $ 610 $ 15,578
============= ============= ============= =============
Year Ended December 31, 1997
-----------------------------------------------------------------
Beginning Ending
(In Thousands) Balance Additions Retirements Balance
------------- ------------- ----------- -------------
Land $ 1,228 $ 244 $ 0 $ 1,472
Building 7,137 261 0 7,398
Banking house equipment 4,333 284 11 4,606
------------- ------------- ------------- -------------
$ 12,698 $ 789 $ 11 $ 13,476
============= ============= ============= =============
Year Ended December 31, 1996
-----------------------------------------------------------------
Beginning Ending
(In Thousands) Balance Additions Retirements Balance
------------- ------------- ----------- -------------
Land $ 1,120 $ 108 $ 0 $ 1,228
Building 6,475 662 0 7,137
Banking house equipment 4,074 414 155 4,333
------------- ------------- ------------- -------------
$ 11,669 $ 1,184 $ 155 $ 12,698
============= ============= ============= =============
-31-
77
SCHEDULE OF ACCUMULATED DEPRECIATION - PROPERTY AND EQUIPMENT
EXHIBIT 2
Year Ended December 31, 1998
-----------------------------------------------------------------
Beginning Provision for Ending
(In Thousands) Balance Depreciation Retirements Balance
------------- -------------- ----------- -------------
Building $ 2,234 $ 216 $ 44 $ 2,406
Banking house equipment 3,577 727 562 3,742
------------- ------------- ------------- -------------
$ 5,811 $ 943 $ 606 $ 6,148
============= ============= ============= =============
Year Ended December 31, 1997
-----------------------------------------------------------------
Beginning Provision for Ending
(In Thousands) Balance Depreciation Retirements Balance
------------- -------------- ----------- -------------
Building $ 2,022 $ 212 $ 0 $ 2,234
Banking house equipment 3,100 488 11 3,577
------------- ------------- ------------- -------------
$ 5,122 $ 700 $ 11 $ 5,811
============= ============= ============= =============
Year Ended December 31, 1996
-----------------------------------------------------------------
Beginning Provision for Ending
(In Thousands) Balance Depreciation Retirements Balance
------------- -------------- ----------- -------------
Building $ 1,814 $ 208 $ 0 $ 2,022
Banking house equipment 2,657 590 147 3,100
------------- ------------- ------------- -------------
$ 4,471 $ 798 $ 147 $ 5,122
============= ============= ============= =============
-32-
78
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
Farmers & Merchants Bancorp, Inc.
By: Joe E. Crossgrove Date: 3-19-99
----------------------- --------
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: 3-19-99 /s/ Barbara Britenriker Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Joe E. Crossgrove, Director Barbara Britenriker
Chief Executive Officer Chief Accounting Officer
/s/ Charles Lugbill Date: 3-19-99 /s/ Kent Roth Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Charles Lugbill Kent Roth, Auditor
Director and Chairman
/s/ Eugene D. Bernath Date: 3-19-99 /s/ Harold H. Plassman Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Eugene D. Bernath, Director Harold H. Plassman, Director
/s/ Jerry Boyers Date: 3-19-99 /s/ James Provost Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Jerry Boyers, Director James Provost, Director
/s/ Robert Frey Date: 3-19-99 /s/ James Saneholtz Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Robert Frey, Director James Saneholtz, Director
Lee Grafice Date: 3-19-99 /s/ Maynard Sauder Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Lee Grafice, Director Maynard Sauder, Director
/s/ Jack C. Johnson Date: 3-19-99 /s/ Merle J. Short Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Jack C. Johnson, Director Merle J. Short, Director
/s/ Dean Miller Date: 3-19-99 /s/ Steven J. Wyse Date: 3-19-99
- --------------------------- ----------- ----------------------------- -----------
Dean Miller, Director Steven J. Wyse, Director
/s/ Dale L. Nafziger Date: 3-19-99
- --------------------------- -----------
Dale L. Nafziger, Director
-33-
79
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------
27 FINANCIAL DATA SCHEDULE