<PAGE> 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, 1996
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 0-14492
------------------------------
FARMERS & MERCHANTS BANCORP, INC.
OHIO 34-1469491
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
307-11 North Defiance Street
Archbold, Ohio 43502
------------------------------- -------------------
(Address of principal
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(g) 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
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 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, 1997, Registrant had outstanding 1,300,000 shares of common
stock at a market value of $52,000,000.
- 1 -
<PAGE> 2
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 98 year history. The
bank's capital funds were $53,509.84 and resources were $571,549.28.
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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<PAGE> 3
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.
- 3 -
<PAGE> 4
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 $406,186,216. 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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<PAGE> 5
NATURE OF ACTIVITIES
The Farmers & Merchants State Bank through its equivalent of 205 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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<PAGE> 6
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:
<TABLE>
<CAPTION>
Branch Location
---------------- -------------------------------------------------
<S> <C>
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)
Society Bank and 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)
</TABLE>
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<PAGE> 7
SELECTED STATISTICAL AND FINANCIAL INFORMATION
The following statistical information concerning the operations
of the company is provided in accordance with Guide 3 of the
Securities and Exchange Commission relating to the operations of
bank holding companies. It should be read in conjunction with the
financial statements, notes thereto and other financial information
appearing elsewhere herein.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY,
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table presents the distribution of assets and analysis
of net interest earnings (dollars in thousands):
<TABLE>
<CAPTION>
ASSETS
1996
----------------------------
Interest
Average and Yield/
Balance Dividend Rate
-------- -------- --------
<S> <C> <C> <C>
Interest earning Assets:
Loans (1) $358,261 $ 32,353 9.03%
Taxable investment securities 75,051 4,556 6.07
Tax-exempt investment securities 21,223 1,109 5.23
Interest bearing deposits with other banks 100 7 7.00
Federal funds sold and securities
purchased under agreement to resell 6,613 357 5.40
-------- --------
Total Interest Earning Assets 461,248 $ 38,382 8.32%
======== =====
Non-interest Earnings Assets:
Cash and due from banks 13,086
Other assets 15,895
--------
$490,229
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $117,734 $ 4,525 3.84%
Other time deposits 258,446 15,418 5.97
Other borrowed money 9,411 594 6.31
Federal funds purchased and securities
sold under agreement to repurchase 6,522 368 5.64
-------- --------
Total Interest Bearing Liabilities 392,113 $ 20,905 5.33%
======== =====
Non-interest Bearing Obligations:
Non-interest bearing deposits 50,580
Other 5,700
--------
Total Liabilities 448,393
Stockholders' Equity 41,836
--------
Total Liabilities and Stockholders' Equity $490,229
========
Interest and dividend income/yield $ 38,382 8.32%
Interest expense/rate 20,905 5.33
------- -----
Net Interest spread $ 17,477 2.99%
======== =====
Net interest margin 3.79%
=====
</TABLE>
- 7 -
<PAGE> 8
<TABLE>
<CAPTION>
ASSETS
1995
---------------------------
Interest
Average and Yield/
Balance Dividend Rate
-------- -------- -------
<S> <C> <C> <C>
Interest earning Assets:
Loans (1) $324,239 $29,561 9.12%
Taxable investment securities 55,383 3,153 5.69
Tax-exempt investment securities 16,689 1,041 6.24
Interest bearing deposits with other banks 526 3 .65
Federal funds sold and securities
purchased under agreement to resell 8,394 470 5.60
-------- -------
Total Interest Earning Assets 405,231 $34,228 8.45%
======= ======
Non-interest Earning Assets:
Cash and due from banks 11,565
Other assets 13,508
--------
$430,304
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 81,891 $ 3,931 4.80%
Other time deposits 253,165 12,810 5.06
Other borrowed money 10,091 637 6.32
Federal funds purchased and securities
sold under agreement to repurchase 6,019 371 6.16
-------- -------
Total Interest Bearing Liabilities 351,166 $17,749 5.05%
======= ======
Non-interest Bearing Obligations:
Non-interest bearing deposits 38,112
Other 2,992
--------
Total Liabilities 392,270
Stockholders' Equity 38,034
--------
Total Liabilities and Stockholders' Equity $430,304
========
Interest and dividend income/yield $34,228 8.45%
Interest expense/rate 17,749 5.05
------- ------
Net interest spread $16,479 3.40%
======= ======
Net interest margin 4.07%
======
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
ASSETS
1994
----------------------------
Interest
Average and Yield/
Balance Dividend Rate
-------- -------- -------
<S> <C> <C> <C>
Interest earning Assets:
Loans (1) $277,729 $ 22,976 8.27%
Taxable investment securities 65,693 3,438 5.23
Tax-exempt investment securities 17,627 1,177 6.68
Interest bearing deposits with other banks 190 2 .83
Federal funds sold and securities
purchased under agreement to resell 4,642 186 4.03
-------- --------
Total Interest Earning Assets 365,881 $27,779 7.59%
======= ======
Non-interest Earning Assets:
Cash and due from banks 10,769
Other assets 10,791
--------
$387,441
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $ 64,678 $3,807 5.89%
Other time deposits 244,907 7,947 3.25
Other borrowed money 9,813 619 6.30
Federal funds purchased and securities
sold under agreement to repurchase 4,121 188 4.57
-------- -------
Total Interest Bearing Liabilities 323,519 $ 12,561 $3.88%
======== ======
Non-interest Bearing Obligations:
Non-interest bearing deposits 28,842
Other 2,242
--------
Total Liabilities 354,603
Stockholders' Equity 32,838
--------
Total Liabilities and Stockholders' Equity $387,441
========
Interest and dividend income/yield $27,779 7.59%
Interest expense/rate 12,561 3.88
------- -------
Net interest spread $15,218 3.71%
======= =======
Net interest margin 4.16%
=======
</TABLE>
(1) For the purposes of these computations, nonaccruing loans are
included in the daily average outstanding loan amounts.
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<PAGE> 10
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:
<TABLE>
1996 - 1995
---------------------------------------
(Decrease) Increase (Decrease)
Attributable Changes in
--------------------------
in Interest Volume Rate
----------- ------------ ------------
<S> <C> <C> <C>
Interest Earned On:
Loans $ 2,792 $ 3,072 $ (280)
Taxable investment securities 1,403 1,194 209
Tax-exempt investment securities 68 236 (168)
Interest bearing deposits with other banks 4 (30) 34
Federal funds sold and securities purchased
under agreements to resell (113) (96) (17)
----------- ------------ ------------
Total Interest Earnings Assets $ 4,154 $ 4,376 $ (222)
=========== ============ ============
Interest Paid On:
Savings deposits $ 594 $ 1,378 $ (784)
Other time deposits 2,608 314 2,294
Other borrowed (43) (42) (1)
Federal funds purchased and securities
sold under agreements to repurchase (3) 28 (31)
----------- ------------ ------------
Total Interest Bearing Liabilities $ 3,156 $ 1,678 $ 1,478
=========== ============ ============
<CAPTION>
1995 - 1994
----------------------------------------
<S> <C> <C> <C>
Interest Earned On:
Loans $ 6,585 $ 4,240 $ 2,345
Taxable investment securities (285) (587) 302
Tax-exempt investment securities (136) (58) (78)
Interest bearing deposits with other banks 1 2 (1)
Federal funds sold and securities purchased
under agreements to resell 284 210 74
----------- ------------ ------------
Total Interest Earnings Assets $ 6,449 $ 3,807 $ 2,642
=========== ============ ============
Interest Paid On:
Savings deposits $ 124 $ 1,698 $ (1,574)
Other time deposits 4,863 (1,373) 6,236
Other borrowed 18 18 0
Federal funds purchased and securities
sold under agreements to repurchase 183 117 66
----------- ------------ ------------
Total Interest Bearing Liabilities $ 5,188 $ 460 $ 4,728
=========== ============ ============
</TABLE>
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.
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<PAGE> 11
INVESTMENT PORTFOLIO
The following table sets forth (dollars in thousands) the
carrying amount of investment securities at the dates indicated.
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
U. S. Treasury and other U. S. Government
agencies $ 51,737 $45,556 $43,112
State and political subdivisions 21,678 19,926 19,236
Mortgage-backed securities 8,986 8,438 5,986
Obligations of domestic corporations 17,065 8,689 7,312
Stocks of domestic corporations 2,255 2,106 1,970
-------- ------- -------
Total $101,721 $84,715 $77,616
======== ======= =======
</TABLE>
The following table sets forth (dollars in thousands) the
maturities of investment securities at December 31, 1996 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.
<TABLE>
<CAPTION>
Maturities
-----------------------------------------
After One Year
Within One Year Within Five Years
------------------ ---------------------
Amount Yield Amount Yield
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
U. S. Treasury and other U. S.
Government agencies $10,107 6.35% $ 45,257 6.18%
State and political subdivisions $ 3,450 8.15% $ 7,454 8.72%
Taxable state and political
subdivisions $ 0 .00% $ 9,023 6.33%
Obligations of domestic
corporations $ 6,484 6.24% $ 1,006 6.91%
<CAPTION>
Maturities
-----------------------------------------
After Five Years
Within Ten Years After Ten Years
------------------- --------------------
Amount Yield Amount Yield
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
U. S. Treasury and other U. S.
Government agencies $ 2,711 6.08% $ 2,516 6.04%
State and political subdivisions $ 4,969 8.71% $ 4,991 10.23%
Taxable state and political
subdivisions $ 0 .00% $ 449 5.75%
</TABLE>
At December 31, 1996 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 one
million dollars. The bank did hold stock in the Federal Home Loan
Bank of Cincinnati at a cost of $2.235 million. This is required in
order to obtain Federal Home Loan Bank loans.
- 11 -
<PAGE> 12
LOAN PORTFOLIO
The following table shows (dollars in thousands) the company's
loan distribution at the end of each of the last five years:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- --------
<S> <C> <C> <C>
Loans:
Commercial and industrial $ 67,763 $ 58,987 $ 65,848
Agricultural 41,195 41,328 29,586
Real estate - mortgage 195,043 173,302 145,576
Installment 63,199 61,021 62,462
Commercial paper 3,959 7,604 2,019
Industrial Development Bonds 3,670 3,336 1,826
---------- --------- --------
Total Loans $ 374,829 $ 345,578 $307,317
========== ========= ========
<CAPTION>
1993 1992
--------- --------
<S> <C> <C>
Loans:
Commercial and industrial $ 58,155 $ 48,750
Agricultural 29,527 30,489
Real estate - mortgage 118,164 105,894
Installment 53,414 42,849
Commercial paper 5,270 11,529
Bankers' Acceptance 0 984
Industrial Development Bonds 2,222 1,764
--------- --------
Total Loans $ 266,752 $242,259
========= ========
</TABLE>
The following table shows (dollars in thousands) the maturity of loans:
<TABLE>
<CAPTION>
Maturities
-------------------------------------------------------------
After One
Within Year Within After
One Year Five Years Five Years Total
----------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Commercial, industrial, and
agricultural (combined) $ 94,154 $ 13,100 $ 1,704 $108,958
Real estate - mortgage 148,673 21,771 24,599 195,043
Installment 4,993 56,028 2,178 63,199
Commercial paper 3,959 0 0 3,959
Industrial Development Bonds 1,361 534 1,775 3,670
----------- ---------- ----------- -------
Total $ 253,140 $ 91,433 $ 30,256 $374,829
=========== ============ =========== ========
</TABLE>
In regard to loans maturing after one year, information was not
available which would enable the categorization of such as to those
loans having fixed interest rates and those having variable interest
rates.
- 12 -
<PAGE> 13
NONACCRUAL PAST DUE AND RESTRUCTURED LOANS
The following table summarizes (dollars in thousands) the
company's nonaccrual and past due loans
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $3,489 $3,494 $2,681
Accruing loans past due 90 days or more 1,899 2,698 2,601
------ ------ ------
$5,388 $6,192 $5,282
====== ====== ======
1993 1992
------ ------
Nonaccrual loans $3,264 $3,362
Accruing loans past due 90 days or more 2,226 1,109
------ ------
$5,490 $4,471
====== ======
</TABLE>
As of December 31, 1996, 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 $624 thousand for the
year 1996. Any collections of interest on nonaccrual loans are
included in interest income when collected. This amounted to $354
thousand for 1996.
Loans are placed on nonaccrual status in the event one of the
following occurs: the total line of the customer is charged of to
the extent of 50% or more, the loan is in past due status for more
than 180 days.
The $3.489 million of nonaccrual loans is secured at December
31, 1996.
POTENTIAL PROBLEM LOANS:
At December 31, 1996, the Bank has $5.388 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, 1996.
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, 1996, the company has loans outstanding to
individuals and firms engaged in the various fields of agriculture
in the amount of $41.195 million. The ratio of this segment of loans
to the total of the company's loan portfolio is not considered
unusual for a bank engaged in and servicing rural communities.
- 13 -
<PAGE> 14
No individual borrower exceeds $1.383 million of the above amount and all
such loans are performing in accordance with their contractual terms.
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, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Loans $374,829 $345,577 $307,317
======== ======== ========
Daily average of loans outstanding $358,261 $324,239 $277,729
======== ======== ========
Allowance for loan losses --
beginning of year $5,500 $5,500 $5,000
Loans Charged Off:
Commercial 623 748 602
Installment 1,053 691 569
Real estate mortgage 35 40 0
-------- -------- --------
1,711 1,479 1,171
-------- -------- --------
1996 1995 1994
-------- -------- --------
Loan Recoveries:
Commercial 197 584 729
Installment 443 426 311
Real estate mortgage 3 84 67
-------- -------- --------
643 1,094 1,107
-------- -------- --------
Net loans charged off 1,068 385 64
Provision for loan loss 1,068 385 564
-------- -------- --------
Allowance for Loan Loss -- End of Year $5,500 $5,500 $5,500
======== ======== ========
Ratio of net charge-offs to average loans
outstanding .30% .12% .02%
======== ======== ========
1993 1992
-------- --------
Loans $266,752 $242,259
======== ========
Daily average of loans outstanding $244,774 $215,381
======== ========
Allowance for loan losses --
beginning of year $4,775 $4,250
</TABLE>
- 14 -
<PAGE> 15
<TABLE>
<CAPTION>
1993 1992
------- -----
<S> <C> <C>
Loans Charged Off:
Commercial 706 503
Installment 552 358
Real estate mortgage 38 20
------- -----
1,296 881
------- -----
Loan Recoveries:
Commercial 266 220
Installment 335 331
Real estate mortgage 12 42
------- -----
613 593
------- -----
Net loans charged off 683 288
Provision for loan loss 908 813
------- -----
Allowance for Loan Loss -- End of Year $ 5,000 $ 4,775
======= =====
Ratio of net charge-offs to average loans .28% .13%
outstanding ======= =====
Allocation of the allowance for
loan losses
</TABLE>
<TABLE>
<CAPTION>
Percent of
Loans in
Amount Each Category
(in thousands) to Total Loans
-------------- --------------
<S> <C> <C>
Balance at End of Period Applicable To:
Commercial and industrial $ 3,678 29.67%
Installment 1,547 17.21
Real estate 275 53.12
----------- ----------
$ 5,500 100.00%
=========== ==========
</TABLE>
The charge-off amounts are based upon periodic evaluations of the
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 -
<PAGE> 16
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:
<TABLE>
<CAPTION>
NOW Savings Time
December 31, 1996: Accounts Accounts Accounts
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Average balance $33,798 $117,734 $224,648
Average rate 3.05% 1.41% 5.84%
December 31, 1995:
- ------------------
Average balance $34,475 $81,891 $218,690
Average rate 3.04% 2.13% 4.72%
December 31, 1994:
- ------------------
Average balance $41,526 $64,678 $203,381
Average rate 2.54% 3.00% 3.04%
</TABLE>
The amount of outstanding time certificates of deposits and
other time deposits in amounts of $100,000 or more by maturity are
as follows:
<TABLE>
<CAPTION>
Over three Over One
Under Less than Year Within Over
Three Months Twelve Months Five Years Five Years
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Certificates of deposit $12,288 $33,046 $10,527 $ 0
============ ============= =========== ==========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital
ratios of the company for each of the last three years:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Return on average assets 1.14% 1.23% 1.28%
Return on average equity 13.21% 13.93% 15.12%
Dividend payout ratio 27.23% 26.99% 26.18%
Equity to assets ratio 8.65% 8.54% 8.48%
</TABLE>
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 -
<PAGE> 17
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. The Bank owns a commercial
building at 313 North Defiance Street, which is located adjacent to
the Bank's principal office. Demolition of the existing building at
this location took place in late 1993, and construction began on a
15,237 square foot addition which was substantially completed by the
end of 1994 with final completion taking place in the spring of
1995. In 1993 the Bank also purchased real estate across from the
main facilities to provide for possible parking expansion.
In 1989 the Bank purchased additional real estate in Bryan,
Ohio, and has established another branch operation in Bryan. The
Bank, in 1988, purchased real estate immediately adjacent to its
branch bank premises in Delta, Ohio for expansion of parking
facilities. In 1990 the Bank purchased real estate in Delta, Ohio
for additional parking to serve its branch office. The Bank
constructed in 1994 a 1,540 square foot addition to the branch in
Wauseon, Ohio. The Bank obtained permission to open a branch in
Napoleon, Ohio. Facilities were completed in the fall of 1994.
The Bank also owns real estate consisting of land and buildings
housing each of its full service branch bank operations, except for
the Montpelier, Ohio facilities which are leased. 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 E. High Street
1000 South Main Street
Delta, Ohio 101 Main Street
Montpelier, Ohio 225 West Main Street
Napoleon, Ohio 2255 Scott Street
The majority of the above locations have drive-up service facilities.
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.
- 17 -
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of the security holders
through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The company's stock is not quoted on the National Association
of Securities Dealers Automated Quotations System (NASDAQ).
The company's stock is traded in the principal market area of
Fulton, Williams, and Henry Counties, Ohio. The company has no
broker that sets a price for the company's stock, therefore, the
only source as to the high and low sale price is from private sales.
The high and low sale price known to company's management is as
follows after restatement for five for one stock split:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996 High $35.00 $35.00 $40.00 $40.00
Low $32.00 $35.00 $40.00 $40.00
1995 High $32.00 $32.00 $32.00 $32.00
Low $27.00 $32.00 $32.00 $32.00
</TABLE>
As of March 1, 1997, there were 1,256 record holders of common
stock of the company.
Dividends are paid quarterly. Per share dividends for years
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
1996 $.25 $.25 $.25 $.40 $1.15
1995 $.20 $.20 $.20 $.50 $1.10
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is presented on page 37 of the Annual
Report to shareholders for the year ended December 31, 1996 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.
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.
- 18 -
<PAGE> 19
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 indicates how the
bank has managed its sources and uses of funds (in thousands):
<TABLE>
<CAPTION>
1996
-----------------------------------------
Increase (Decrease)
-----------------------------
Average
Balance Amount Percentage
---------- ---------- -------------
<S> <C> <C> <C>
Funding Uses:
Loans $358,261 $34,022 10.49%
Taxable investment securities 75,051 19,668 35.51%
Tax-exempt investment securities 21,223 4,534 27.17%
Interest bearing deposits with other banks 100 (426) (80.99%)
Federal funds sold and securities purchased under
agreement to resell 6,613 (1,781) (21.22%)
---------- ----------
$461,248 $56,017 13.82%
========== ========== ========
Funding Sources:
Deposits:
Non-interest bearing deposits $50,580 $12,468 32.71%
Savings deposits 117,734 3,876 31.48
Other time deposits 258,446 37,248 16.84
Other borrowed money 9,411 (680) (6.74)
Federal funds purchased and securities sold
under agreement to repurchase 6,522 503 8.36
Other 5,700 2,708 90.51
---------- ----------
$448,393 $56,123 14.31%
========== ========== ========
<CAPTION>
1995 1994
----------------------------------------------
Increase (Decrease)
----------------------
Average
Balance Amount Percentage Balance
----------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Funding Uses:
Loans $324,239 $46,510 16.75% 277,729
Taxable investment securities 55,383 (10,310) (15.69) 65,693
Tax-exempt investment securities 16,689 (938) (5.32) 17,627
Interest bearing deposits with other banks 526 336 176.84 190
Federal funds sold and securities purchased
under agreement to resell 8,394 3,752 80.83 4,642
----------- ---------- --------
$405,231 $39,350 10.75% $ 365,881
=========== ========== =========== ========
Funding Sources:
Deposits:
Non-interest bearing deposits $38,112 $9,270 32.14% 28,842
Savings deposits 113,858 49,180 76.04 64,678
Other time deposits 221,198 (23,709) (9.68) 244,907
Other borrowed money 10,091 278 2.83 9,813
Federal funds purchased and securities sold
under agreement to repurchase 6,019 1,898 46.06 4,121
Other 2,992 750 33.45 2,242
----------- ---------- --------
$392,270 $37,667 10.62% $ 354,603
=========== ========== =========== ========
</TABLE>
- 19 -
<PAGE> 20
Total assets for Farmers & Merchants Bancorp, Inc. have
increased from $406.1 million in 1994 to $464 million in 1995 and to
$501.4 million in 1996, a 14.28% and 8% increase, respectively. The
increase in assets of $37 million is primarily the result of growth
in the loan portfolio which increased $29 million, $21.7 million in
real estate mortgages and $8.8 million in commercial loans. These
increases can be attributed to favorable interest rates, as well as,
an aggressive, but controlled and managed loan policy.
Investment securities increased $17 million from $84.7 million
for 1995 to $101.7 million for 1996. Two categories of investment
securities accounted most of this growth, $6.7 million in U.S.
Government and agency securities and $8.3 million in corporate
securities. The security portfolio also benefited from a $1 million
unrealized increase in the market value of the portfolio.
The above increases in the loan and investment securities
portfolio were made possible entirely from an increase in deposits
of $34.4 million to $438.4 million for 1996 from $404 million for
1995. Most of the increase came in demand deposits which experienced
growth of $12.6 million and savings and time deposits of $19
million.
Net charge-offs increased in 1996 over 1995 and 1994 to $1.1
million for 1996 compared to $385 thousand for 1995 and $64 thousand
for 1994. This increase was due to writing off a considerable number
of small dollar volume installment loans. Despite this increase it
is still only .28% of the total loan portfolio, and it is felt that
these write-offs have helped tremendously in "cleaning up" the loan
portfolio, and with a renewed commitment to credit quality during
1996, the loan loss reserve of $5.5 million or 1.5% of the total
loan portfolio is more than adequate to cover possible loan losses.
The Farmers & Merchants State Bank continued to use borrowed
funds from the Federal Home Loan Bank of Cincinnati. The Federal
Home Loan Bank program allows the bank to protect itself in the
event it would offer fixed rate mortgage loans. The loans from the
Federal Home Loan Bank 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.
CAPITAL RESOURCES
During 1996 stockholders' equity increased by $3.76 million to
$43.4 million representing a 9.5% increase.
Dividends (which are subject to regulatory restrictions) for
1996 were $1.495 million on 1,300,000 shares of outstanding common
stock.
Under Federal Reserve Board's risk-based guidelines, capital is
measured against the Bank's risk-adjusted assets. The Bank's Tier 1
capital (common stockholders' equity less goodwill, if any) to
risk-adjusted assets was approximately 8.9% at December 31, 1996,
well above the 4% minimum requirement. Total capital to
risk-adjusted assets approximated 12.9%, also well above the 8%
minimum requirement. The leverage ratio was at 6.45% compared to
the 4% requirement. According to FDIC capital guidelines, the Bank
is considered to be well capitalized.
These ratios for 1995 were 11.8%, 13.1% and 8.3%, respectively.
The decrease is due to a $10 million dividend which was paid by The
Farmers & Merchants State Bank to Farmers & Merchants Bancorp, Inc.
on December 31, 1996 with the approval of the FDIC and State of Ohio
Division of Financial Institutions. Farmers & Merchants Bancorp then
loaned to The Farmers & Merchants State Bank on December 31, 1996
$10 million in exchange for an unsecured subordinated note
receivable. The note is due January 1, 2007. Interest at the rate of
6% is payable annually on the first day of January each year. The
purpose for this transaction was to reduce the amount of Ohio
Franchise Tax the Bank will have to pay.
- 20 -
<PAGE> 21
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, 1996 for each major category of interest-earning
assets (at amortized cost) and interest-bearing liabilities:
<TABLE>
<CAPTION>
(Dollars in Thousands)
0 - 90 90 - 365 1 - 5 Over 5
Days Days Years Years Total
--------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest bearing deposits $0 $100 $0 $0 $100
Investments 7,041 13,001 62,168 16,207 98,417
Loans 167,786 85,355 91,752 30,255 375,148
--------- ----------- ----------- ------- -------
Total Rate Sensitive Assets 174,827 98,456 153,920 46,462 473,665
Rate Sensitive Liabilities 225,517 115,660 57,965 4,977 404,119
--------- ----------- ----------- ------- -------
Gap $(50,690) $(17,204) $95,955 $41,485 $69,546
========= =========== =========== ======= =======
</TABLE>
In accordance with FASB guidelines, The Farmers & Merchants
State Bank redesignated its remaining Held to Maturity Investment
portfolio to Available for Sale in 1996. It is felt that this will
provide the Bank with even more liquidity. 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.
- 21 -
<PAGE> 22
LIQUIDITY
Historically, the primary source of liquidity for the Company
has been the increases in core deposits. This is true for 1996 as
well. Deposits increased $34.3 million in 1996 mainly from increased
demand deposits of $12.6 million and increased savings and time
deposits of $19 million. This compares with increases in core
deposits of $59.6 million for 1995 and $21.9 million for 1994.
The loan to deposit ratio remained virtually unchanged at 84.1%
for 1996 and 1995 from a high of 87.5% for 1994.
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 $20 million representing 20.4% of
total marketable debt securities, a slight drop from prior year
levels of $20.9 million or 25.3% for 1995 and $25.4 million or 33.4%
for 1994.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1996 was $5.5 million, a $200 thousand or 3.8%
increase over 1995 net income of $5.3 million. Net interest margin
before the provision for loan losses was $17.5 million for 1996
compared to $16.5 million for 1995, a 6.1% increase. The net
interest margin percentage was 3.79% for 1996 compared to 4.07% for
1995.
INTEREST INCOME
Interest income and fees on loans increased $2.8 million to an
all time high of $32.3 million for 1996. This compares with income
of $29.5 million for 1995 and $32.3 million for 1996. This compares
with income of $29.5 million for 1995 and $23 million for 1994. This
increase is due to an increase in average loans outstanding to $358
million for 1996 compared to $324 million for 1995 and $278 million
for 1994.
Interest on investment securities for 1996 was $5.6 million
compared to $4.1 million for 1995, a $1.5 million increase. Again
most of this increase in income is a result of an increase in
volume. The average volume for investment securities was $96.2
million for 1996 compared to $72 million for 1995.
INTEREST EXPENSE
Interest expense increased to $20.9 million for 1996 up $3.2
million from interest expense of $17.7 million for 1995. This
represents a 17.8% increase. While some of this increase is due to
an increase in volume of average outstanding deposits from $335
million for 1995 to $376 million for 1996, the majority of the
increase is a result in rates being paid on savings accounts and
time deposits in order to attract deposits.
Interest expense on borrowed funds declined from just over $1
million for 1995 to $962 thousand for 1996 because of the reduction
in the amount of outstanding principal.
- 22 -
<PAGE> 23
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 was $1.07 million compared to
$385 thousand for 1995. Most of this expense came from the
installment loan portfolio. Management believes that the installment
loan portfolio is now in good shape. This year's allowance for loan
losses remains at $5.5 million, the same level it was for 1995 and
1994.
OTHER OPERATING INCOME
Other operating income increased to almost $2.4 million, up
from $2.1 million for 1995. Most of this increase, $264 thousand,
was as a result of the adoption of FAS 122 which requires the
allocation of the cost of mortgage loans originated with a
definitive plan to sell or securitize those loans between the fair
value of the loan and the fair value of the servicing rights.
OTHER OPERATING EXPENSES
Despite increased loan and deposit activity, management was
able to hold operating expenses to a minimum. Operating expenses of
$10.9 million for 1996 increased only slightly over 1995 expenses of
$10.7 million, a 1.9% increase, compared to a $1 million increase of
1995 expenses over 1994 levels or a 10.1% increase.
<TABLE>
<CAPTION>
The following table illustrates these increases:
Dollar Percentage
Increase (Decrease) Increase (Decrease)
------------------------------------------ ----------------------
1996 1995 1996 1995
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries $ 320 $ 464 7.07% 11.42%
Employee benefits $ 183 $ 133 18.50% 15.54%
Occupancy expense $ 45 $ 42 9.93% 10.28%
Furniture and equipment $ 96 $ 203 13.87% 41.61%
Other operating expense $ (365) $ 139 (9.01%) 3.56%
</TABLE>
Salary expense increased in 1996 because of increases in
compensation to employees based on merit and the general rise in
economic conditions, as well as, the increase in the number of
employees. Employee benefits also increased for the same reasons as
compensation.
Operating supplies and real estate taxes accounted for most of
the occupancy expense increase. These increase costs were a natural
result of the expansion of the main facilities in Archbold.
- 23 -
<PAGE> 24
As was the case for 1995, the increase in furniture and
equipment for 1996 was due to an increase in depreciation expense of
just over $100 thousand. Again this is a direct consequence of the
expansion of the main facilities in Archbold.
Most of the other operating expenses remained fairly consistent
with 1995 levels. The largest change came in the drop of FDIC
assessments from almost $400 thousand for 1995 to $2 thousand for
1996. This significant decrease was a result of legislation based on
a compromise on the savings and loan crisis.
- 24 -
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Report of Independent Accountants
- 25 -
<PAGE> 26
MESSAGE FROM MANAGEMENT:
At the FARMERS & MERCHANTS BANCORP, INC., service is the strength and key to
our performance. Fueled by strong loan demand and overhead control, the Bank's
directors, management and employees are pleased to report another excellent
year in 1996. This resulted in an impressive 13.21 percent Return on Average
Equity and 1.14 percent Return on Average Assets. With a new high in assets of
$501,449,000, capital accounts have increased to $43,381,000 with net income of
$5,483,000 or $4.22 per share compared to $4.07 in 1995 (adjusted for stock
split in June of 1996).
The Farmers & Merchants Bancorp, Inc. continues to be responsive in listening
to and flexible in working with its customers, while at the same time
maintaining sound credit judgment. The Bank's loan portfolio represents a solid
foundation upon which the Bank's safety, soundness and profitability are built.
This foundation results from two basics: a philosophy of being conservative,
yet responsive and a lending premise that emphasizes quality not quantity. The
Farmers & Merchants Bancorp, Inc. provides its customers with easy, accessible
services to help them achieve their financial goals. The Bank's continued
responsiveness promotes the trust and respect that forms the basis for a solid
banking relationship in which our customers needs are met.
While the above results are gratifying, we enter 1997 and beyond with a sense
of urgency. The banking industry is changing rapidly, as evidenced by the many
bank mergers and acquisitions announced during the year. Our competitors, both
bank and non-bank, are becoming larger and more sophisticated. Many traditional
banking services have become commodities, necessitating a low cost structure
for providers of such services. Geographic boundaries continue to lose
relevance as technology makes many physical facilities obsolete. To be
successful in this changing environment, Farmers & Merchants Bancorp, Inc. must
continue to evolve to a more marketing-oriented financial services
organization. First and foremost, our focus must be on the customer. Our
products and services must be designed for and centered around the customer's
needs - a challenge that every financial institution faces.
Among the events of 1996, the completion of the Delta Office expansion is the
most noteworthy. The renovations were completed in time for our Annual Open
House, the first weekend in November. Much credit must be given to the Delta
Staff for keeping the office operating efficiently during the time of
construction. We placed Automated Teller Machines (ATM's) in the Fulton County
Health Center, Community Hospital of Williams County and the Delta Office to
better serve our customers from the four county area. An Asset Recovery
Department was created to handle the collection work for the bank's eleven (11)
offices. This department is located at the Main Office and has already proven
to be a much needed addition.
In 1997, the Farmers & Merchants Bancorp, Inc. will be celebrating its "100th
Anniversary" with several planned events held throughout the year. We will keep
you informed as to when they will be held and hopefully you will be able to
attend.
The word "relationship" may have a slightly old-fashioned sound to it, but our
relationships must be as modern as technology can make them. While a
brick-and-mortar branch network remains the primary customer connection at
present, we are committed to meeting our customers' banking needs anytime and
anywhere. Be it over the telephone, via computer, through ATMs or in a form not
yet seen, we see technology as a tool that will help enhance, not replace,
existing service. In our vision, tradition and tomorrow can co-exist.
<PAGE> 27
In closing, we remain committed to building on traditions with innovation and
positive results. The ideals and spirit that have served as the foundation of
our organization for the past century will continue to guide us to remain one
of the finest community banks in Ohio. We believe these efforts will provide
shareholder rewards that are consistent with acceptable levels of return on
investment.
We would like to express our appreciation for the input and support of our
Board of Directors, Advisory Boards, Loyal employees and customers, and the
cooperation of the communities we serve, and finally the continued confidence
of our shareholders.
We look forward to the opportunities and challenges of 1997.
Joe E. Crossgrove Charles E. Lugbill
Executive Vice President and Cashier President and Chairman of the Board
<PAGE> 28
<TABLE>
<S> <C> <C>
DIRECTORS MAYNARD SAUDER RANDAL H. SCHROEDER
President Asst. Vice President
CHARLES E. LUGBILL Sauder Woodworking Co. Chief Operations Officer
President
Chairman of the Board MERLE J. SHORT MICHAEL D. CULLER
The Farmers & Merchants State Farmer Asst. Vice President
Bank President Chief Agri Finance Officer
Promow, Inc.
EUGENE D. BERNATH BARBARA J. BRITENRIKER
Farmer STEVEN J. WYSE Asst. Vice President
President Comptroller & Chief Financial
JERRY L. BOYERS Bil-Jax, Inc. Officer
President
Edifice Construction Management DIANN K. MEYER
DIRECTOR EMERITUS Asst. Vice President
JOE E. CROSSGROVE Personnel Officer
Executive Vice President ERIE J. SAUDER
Cashier OLLEY LAUBER KENT E. ROTH
The Farmers & Merchants State ELIAS H. FREY Auditor
Bank KENNETH E. STAMM Security Officer
ROBERT H. STOTZER Bank Secrecy Officer
ROBERT G. FREY ROBERT V. WHITMER
President MARILYN K. JOHNSON
E. H. Frey & Sons, Inc. Compliance Officer
ARCHBOLD MAIN OFFICE CRA Officer
LEE E. GRAFFICE
President CHARLES E. LUGBILL JUDITH A. WARNCKE
Graffice Motor Sales President & Chairman of the Board Asst. Cashier
Marketing Officer
JACK C. JOHNSON JOE E. CROSSGROVE
President Executive Vice President J. SCOTT MILLER
Hawk's Clothing, Inc. Cashier Asst. Cashier
Partner Agri Finance Officer
REJO Partnership KENNETH E. STAMM
Senior Vice President DEBRA J. KAUFFMAN
DEAN E. MILLER Asst. Cashier & Consumer
President MAYNARD SAUDER Lending Officer
MBC Holdings, Inc. Vice President Asst. Corporate Secretary
DALE L. NAFZIGER EUGENE D. BERNATH DIANA J. DENNIE
Retired Vice President Asst. Cashier
Mortgage-Loan Officer
HAROLD H. PLASSMAN EDWARD A. LEININGER
Attorney Vice President BARBARA COLON
Plassman, Rupp, Hensal & Short Commercial Loan Officer Asst. Cashier
Proof and Transit Supervisor
JAMES L. PROVOST REX D. RICE
Retired Vice President JOYCE G. KINSMAN
Dyer & Mc Dermott, Inc. Chief Lending Officer Loan Review Officer
JAMES C. SANEHOLTZ GEORGE JELEN SHAWN MCCUTCHEON
President Asst. Vice President Secretarial Supervisor
Saneholtz-McKarns, Inc. Mortgage Loan Officer
</TABLE>
<PAGE> 29
<TABLE>
<S> <C> <C>
PHYLLIS MUNDAY GLORIA GUNN STRYKER ADVISORY
Bookkeeping Supervisor Asst. Vice President BOARD
Asst. Branch Manager
DIANNA J. WEBER FRED W. GRISIER
Teller Supervisor Owner
WAUSEON DOWNTOWN Grisier Funeral Home
OFFICE
ARCHBOLD WOODLAND RONALD R. ROBINSON
OFFICE CAROL J. ENGLAND Owner
Asst. Vice President R. Home Interiors
DEBORAH L. STONER Branch Manager
Asst. Vice President Corporate Secretary RICHARD E. RAKER
Branch Manager Owner
JEAN E. HORWATH Raker Oil Company
DIANE J. SWISHER Asst. Cashier
Asst. Cashier Asst. Branch Manager STEVEN PLANSON
Asst. Branch Manager Farmer
WAUSEON ADVISORY BOARD
ARCHBOLD ADVISORY BOARD WEST UNITY OFFICE
RICHARD L. ELROD
DEXTER L. BENECKE President LEWIS D. HILKERT
Vice President Mustang Corporation Vice President
Benecke Trucking, Inc. Branch Manager
Alex Products, Inc. JOSEPH H. KOLB
Owner MICHAEL T. SMITH
BRUCE C. LAUBER Kolb & Son Asst. Cashier
President Asst. Branch Manager
Lauber Manufacturing Co. JULIAN GIOVARELLI
President
JO ELLEN HORNISH Gio Sales, Inc. WEST UNITY ADVISORY
President BOARD
Hornish Brothers, Inc. SANDRA K. BARBER
Fulton County Recorder ALVIN E. CAROTHERS
ANTHONY J. RUPP Chairman, Ohio Lottery Commission Farmer
President
Rupp Furniture Co. DR. KENNETH H. KLING BEN G. WESTFALL
Owner President
GENE SCHAFFNER Fulton County Vision Services Westfall Realty, Inc.
Farmer
WILLIAM W. HOLLINGSHEAD
GEORGE F. STOTZER STRYKER OFFICE Owner
Partner Hollingshead Mortuary
Stotzer Do-It Center RONALD D. SHORT
Asst. Vice President TED W. MANEVAL
Branch Manager Farmer
WAUSEON SHOOP OFFICE
PATTI L. ROSEBROCK R. BURDELL COLON
ALLEN G. LANTZ Asst. Cashier President
Vice President Asst. Branch Manager Rup-Col., Inc.
Branch Manager
</TABLE>
<PAGE> 30
<TABLE>
<S> <C> <C>
DELTA OFFICE BRYAN ADVISORY BOARD GEORGE B. RINGS
Pharmacist
CYNTHIA K. KNAUER W. PAUL TRODER Rings Pharmacy
Asst. Vice President President
Branch Manager Allied Moulded Products, Inc.
NAPOLEON OFFICE
BARRY N. GRAY RUSTY BRUNICARDI
Asst. Branch Manager President STEPHEN E. JACKSON
Chief Executive Officer Asst. Vice President
Community Hospital of Williams Branch Manager
DELTA ADVISORY BOARD Co., Inc.
MARILYN J. BERGSTEDT
TERRY J. KAPER D. ROBERT SHAFFER Asst. Cashier
Attorney Farmer Asst. Branch Manager
Barber, Kaper, Stamm & Robinson
DR. C. NICHOLAS WALZ
DONALD C. EICHER Partner NAPOLEON ADVISORY BOARD
Retired Grocer Williams County Family Medical
Center BARBARA C. SCHIE
ROBERT E. GILDERS Office Manager
President PAUL R. MANLEY Fulton Anesthesia Associates,
GB Manufacturing Vice President Manufacturing Inc.
Ohio Art Co.
EUGENE BURKHOLDER DAVID M. DAMMAN
President Farm Drainage Contractor
Falor Farm Center MONTPELIER OFFICE Farmer
AL KREUZ JOHN S. FEE JAMES T. VAN POPPEL
Fulton County Commissioner Asst. Vice President President
Branch Manager Van Poppel Corp.
BRYAN EAST HIGH OFFICE LINDA S. NOFZIGER DENNIS L. MEYER
Asst. Cashier Realtor
RICHARD S. BRUCE Asst. Branch Manager Ed Rohrs Realty
Asst. Vice President
Branch Manager
MONTPELIER ADVISORY
RANDY L. SHIRKEY BOARD
Asst. Branch Manager
GREGORY D. SHOUP
President
SOUTHTOWNE OFFICE Peltcs Lumber Co., Inc.
DAVID C. FRAZER RICHARD S. DYE
Asst. Vice President Vice President
Branch Manager Dyco Manufacturing
KEVIN L. GRAY
Asst. Branch Manager ROBERT D. MERCER
President
Bob Mercer Realty and
Auctions
</TABLE>
<PAGE> 31
FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
December 31, 1996
PAGE
Independent Auditors' Report 5
Consolidated Balance Sheets 6
Consolidated Statements of Income 7
Consolidated Statements of Changes in
Shareholders' Equity 8
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 10-33
Supplementary Information:
Independent Auditors' Report on
Supplementary Information 34
Five Year Summary of Consolidated
Operations 35
<PAGE> 32
January 15, 1997
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, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and
1995, and the results of its consolidated operations and cash flows for the
years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
KROUSE, KERN & CO., INC.
- 5 -
<PAGE> 33
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
(In thousands)
- --------------
1996 1995
-------- --------
<S> <C> <C>
Cash and due from banks $ 15,871 $ 14,951
Interest bearing deposits with banks ....................... 100 100
Federal funds sold ......................................... 0 10,710
Investment securities (market value of $101,721 for 1996 and
$84,715 for 1995) ....................................... 101,721 84,715
Loans, less allowance for loan losses of $5,500 for 1996 and
$5,500 1995 ............................................. 368,900 339,614
Investment in leases ....................................... 319 62
Bank premises and equipment - net .......................... 7,576 7,198
Accrued interest and other assets .......................... 6,153 5,780
Deferred income tax charge ................................. 809 960
-------- --------
TOTAL ASSETS $501,449 $464,090
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand .................................................... $ 50,019 $ 37,436
NOW accounts .............................................. 37,795 35,027
Savings ................................................... 94,768 85,664
Time ...................................................... 255,795 245,863
-------- --------
Total Deposits 438,377 403,990
Federal funds purchased .......................................... 2,790 0
Securities sold under agreement to repurchase .................... 3,973 6,919
Other borrowings ................................................. 8,998 9,662
Dividend payable ................................................. 520 650
Accrued interest and other liabilities ........................... 3,410 3,248
-------- --------
Total Liabilities 458,068 424,469
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 1,500 shares; issued
1,300 shares .................................................. 12,677 12,677
Undivided profits .............................................. 30,013 26,025
Net unrealized gain on securities available for sale (net of tax
effect of $357 in 1996 and $472 in 1995) ...................... 691 919
-------- --------
Total Shareholders' Equity 43,381 39,621
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $501,449 $464,090
======== ========
</TABLE>
See Accompanying Notes to Consolidated
Financial Statements.
- 6 -
<PAGE> 34
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands except for per share amounts)
- ----------------------------------------------
INTEREST INCOME: 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest and fees on loans ................ $ 32,339 $ 29,554 $22,971
Interest on Investment Securities
U. S. Treasury securities .............. 1,493 1,040 987
Securities of other U. S. Government
agencies ............................. 2,095 1,531 1,849
Obligations of states and political sub-
divisions ............................ 1,220 1,124 1,255
Obligations of domestic corporations ... 707 362 415
Interest on federal funds ................. 357 470 187
Interest on deposits in banks ............. 7 3 2
Dividends ................................. 150 137 108
Lease finance revenues .................... 14 7 5
-------- --------- -------
Total Interest Income 38,382 34,228 27,779
-------- --------- -------
INTEREST EXPENSE:
Interest on deposits ...................... 19,943 16,741 11,754
Interest on borrowed funds ................ 962 1,008 807
-------- --------- -------
Total Interest Expense 20,905 17,749 12,561
-------- --------- -------
Net Interest Income 17,477 16,479 15,218
PROVISION FOR LOAN LOSSES .................... 1,068 385 564
-------- --------- -------
Net Interest Income After Provision
for Loan Losses 16,409 16,094 14,654
-------- --------- -------
OTHER INCOME:
Service charges on deposit accounts ....... 1,097 1,012 909
Other service charges and fees ............ 1,275 1,034 831
Net securities gains ...................... 5 72 50
-------- --------- -------
2,377 2,118 1,790
-------- --------- -------
OTHER EXPENSES:
Salaries and wages ........................ 4,849 4,529 4,064
Pension and other employee benefits ....... 1,172 989 856
Occupancy expense (net) ................... 498 453 410
Furniture and equipment expense ........... 788 692 489
Other operating expenses .................. 3,684 4,049 3,910
-------- --------- -------
10,991 10,712 9,729
-------- --------- -------
INCOME BEFORE FEDERAL INCOME TAX 7,795 7,500 6,715
FEDERAL INCOME TAXES ......................... 2,312 2,203 1,749
-------- --------- -------
NET INCOME $ 5,483 $ 5,297 $ 4,966
======== ========= =======
Net income per share:
Net income before securities gains ........ $ 4.21 $ 4.02 $ 3.78
Net securities gains ..................... .01 .05 .04
-------- --------- -------
NET INCOME PER SHARE $ 4.22 $ 4.07 $ 3.82
======== ========= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 1,300 1,300 1,300
======== ========= =======
</TABLE>
See Accompanying Notes to Consolidated
Financial Statements.
- 7 -
<PAGE> 35
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Common Undivided Available for
(In thousands) Stock Profits Sale Securities
- --------------- ------- --------- ---------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $12,677 $ 18,492 0
Adjustment for initial application of unrealized
gain (loss) for securities classified as
Available for Sale (net of tax effect of
$149........................................ 0 0 289
------- -------- -------
12,677 18,492 289
ADJUSTED BALANCE
Net income for 1994............................ 0 4,966 0
Unrealized losses on securities classified as
Available for Sale (net of tax effect of
($275))..................................... 0 0 (538)
Cash dividends ($1.00 per share)............... 0 (1,300) 0
------- -------- -------
BALANCE AT DECEMBER 31, 1994...................... 12,677 22,158 (249)
Net income for 1995............................ 0 5,297 0
Unrealized gains on securities classified as
Available for Sale (net of tax effect of
$599)...................................... 0 0 1,168
Cash dividends ($1.10 per share)............... 0 (1,430) 0
------- -------- -------
BALANCE AT DECEMBER 31, 1995...................... 12,677 26,025 919
Net income for 1996............................ 0 5,483 0
Unrealized gains on securities classified as
Available for Sale (net of tax effect of
($115))...................................... 0 0 (228)
Cash dividends ($1.15 per share)............... 0 (1,495) 0
------- -------- -------
BALANCE AT DECEMBER 31, 1996 $12,677 $ 30,013 $ 691
======= ======== =======
</TABLE>
See Accompanying Notes to Consolidated
Financial Statements.
- 8 -
<PAGE> 36
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Net income .......................................... $ 5,483 $ 5,297 $ 4,966
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization ................. 798 689 477
Premium amortization .......................... 582 737 1,427
Discount amortization ......................... (196) (128) (72)
Provision for loan losses ..................... 1,068 385 564
Provision for deferred income taxes ........... 266 241 (225)
(Gain) loss on sale of fixed assets ........... (1) 20 0
(Gain) on sale of investment securities ....... (5) (72) (50)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets .. (373) (1,299) 6
Accrued interest payable and other liabilities 162 836 737
-------- -------- --------
Net Cash Provided by Operating Activities 7,784 6,706 7,830
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (1,176) (1,654) (2,994)
Proceeds from sale of fixed assets ................. 1 4 1
Proceeds from maturities of investment securities:
Held to Maturity ................................ 0 20,450 30,941
Available for Sale .............................. 30,890 12,278 4,639
Proceeds from sale of investment securities:
Held to Maturity ................................ 0 0 1,451
Available for Sale .............................. 255 1,997 0
Purchase of investment securities:
Held to Maturity ................................ 0 (8,040) (20,148)
Available for Sale .............................. (48,874) (32,556) (6,524)
Net increase in loans .............................. (30,354) (38,477) (40,486)
Net decrease in leases ............................. (257) (3) 7
-------- -------- --------
Net Cash Used by Investing Activities (49,515) (46,001) (33,113)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................... 34,387 59,595 21,925
Net change in short term borrowings ................ (156) (7,479) 6,731
Increase in long-term borrowings ................... 0 400 2,000
Payments on long-term borrowings ................... (665) (612) (536)
Payments of dividends .............................. (1,625) (1,300) (1,300)
-------- -------- --------
Net Cash Provided by Financing Activities 31,941 50,604 28,820
-------- -------- --------
Net change in cash and cash equivalents (9,790) 11,309 3,537
Cash and cash equivalents at beginning of the year .... 25,761 14,452 10,915
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 15,971 $ 25,761 $ 14,452
======== ======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks ....................... $ 15,871 $ 14,951 $ 14,352
Interest bearing deposits .......................... 100 100 100
Federal funds sold ................................. 0 10,710 0
-------- -------- --------
$ 15,971 $ 25,761 $ 14,452
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
- 9 -
<PAGE> 37
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
CONSOLIDATION POLICY:
The consolidated financial statements include the accounts of
Farmers & Merchants Bancorp, Inc. and its wholly-owned
subsidiaries, The Farmers & Merchants State Bank, (the Bank),
a commercial banking institution, and The Farmers & Merchants
Life Insurance Company, a life and accident and health
insurance company.
NATURE OF ACTIVITIES:
The consolidated income of Farmers & Merchants Bancorp, Inc.
is principally from income of the bank subsidiary, The Farmers
& Merchants State Bank. The subsidiary Bank grants
agri-business, commercial, consumer and residential loans to
customers primarily in northwest, Ohio.
ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS:
For purposes of the statement of cash flows, the company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. This
includes cash on hand, amounts due from banks, and federal
funds sold. Generally, federal funds are purchased and sold
for one-day periods.
INVESTMENT SECURITIES:
Securities, when purchased, are designated as Investment
Securities Available for Sale and are carried at market value.
They remain in that category until they are sold or mature.
The specific identification method is used in determining the
cost of securities sold.
- 10 -
<PAGE> 38
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
INVESTMENT SECURITIES: (Continued)
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.
In accordance with a provision provided by the Financial
Accounting Standards Board. The Farmers & Merchants State Bank
elected to reclassify any investment securities classified as
Held to Maturity to Available for Sale during 1995. The effect
of this reclassification was to increase the net unrealized
gain on securities Available for Sale by $561,746 net of a tax
effect of $289,385.
LOANS:
Loans are stated at the amount of unpaid principal, reduced by
unearned discounts and deferred loan fees and costs, as well
as, by the allowance for loan losses. Interest is accrued on
all loans not discounted by applying the interest rate to the
amount outstanding. When it is not reasonable to expect that
interest will be realized, accrual of income ceases and these
loans are placed on a "cash basis" for purposes of income
recognition.
LOAN ORIGINATION FEES AND COSTS:
The Bank has adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standard No. 91,
which establishes financial accounting and reporting
guidelines for accounting for nonrefundable fees and costs
associated with originating or acquiring loans. Statement No.
91 requires that nonrefundable loan fees, such as the fees
more commonly known as "points" or "origination fees" but not
necessarily limited thereto, be deferred and recognized over
the life of the loan as an adjustment of yield. Likewise,
certain direct loan origination costs are to be deferred and
recognized as a reduction in the yield of the loan.
- 11 -
<PAGE> 39
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
MORTGAGE SERVICING RIGHTS:
The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights an amendment of FASB
Statement No. 65." FAS 122 states that "a mortgage banking
enterprise that purchases or originates mortgage loans with a
definitive plan to sell or securitize those loans and retain
the mortgage servicing rights shall allocate the cost of the
mortgage loans based on the relative fair values at the date
of purchase or origination." The Bank adopted FAS 122
effective January 1, 1996.
IMPAIRED LOANS:
The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan." FAS 114
states that "a loan is impaired when, based on current
information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual
terms of the loan agreement." When it is determined by the
creditor that a loan is impaired, "the creditor shall measure
the impairment based on 1) the present value of expected
future cash flows discounted at the loan's effective rate, 2)
the loan's observable market price, or 3) the fair value of
the collateral if the loan is collateral dependent." FAS 114
was adopted by the Bank effective January 1, 1995.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is available for future
charge-offs. It is increased by provisions charged to
operations and decreased by charge-offs net of recoveries.
The provision is primarily the result of management's
continuous review and evaluation of problem loans,
supplemented by historical net charge-off experience, economic
conditions and the size of the loan portfolio. The allowance
is maintained at a level which management believes to be
adequate to provide for potential losses. For tax purposes,
the Bank follows a policy of providing additions to the
allowance for possible loan losses in accordance with maximum
amounts under applicable federal tax laws.
- 12 -
<PAGE> 40
FARMERS & MERCHANTS BANCORP, INC.
Notes to Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
BANKING PREMISES AND EQUIPMENT:
Banking premises and equipment are stated at cost less
accumulated depreciation. Depreciation is based on the
estimated useful lives of the various properties and is
computed using accelerated methods. Costs for maintenance and
repairs are charged to operations as incurred.
PREMIUM RESERVES AND BENEFIT LIABILITIES
Liabilities for unreported claims are calculated from runoff
experience. Liabilities for future reserves are based on the
1964 CDT at 3%.
Premium reserves for life insurance contracts are determined
using the 1958 CET 3.5% net level reserve method. Premium
reserves for the accident and health policies are determined
by the mean Prorata and rule of 78's.
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.
- 13 -
<PAGE> 41
FARMERS & MERCHANTS BANCORP, INC.
Notes to Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
EARNINGS PER SHARE:
Earnings per share are computed based on the weighted average
number of shares of common stock outstanding during each year,
after restatement for stock dividends.
NOTE 2. CASH AND FEDERAL FUNDS SOLD
Banks are required to maintain reserve funds in vault cash and/or on
deposit with the Federal Reserve Bank. The aggregate reserves required
at December 31, 1996 were $3.191 million.
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities as of December 31, 1996 and 1995 are detailed below. Fair
market values are based on quoted market prices or dealer quotes.
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
--------------- -------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury $ 27,743 $ 109 $ 25 $ 27,827
U.S. Government
Agency 23,825 193 108 23,910
Mortgage-Backed 9,023 31 68 8,986
State and political
subdivisions 20,865 827 14 21,678
Obligation of
domestic
corporations 16,961 126 22 17,065
Stocks of domestic
corporations 20 0 0 20
Federal Home Loan Bank
stock (restricted) 2,235 0 0 2,235
--------- ------- ------- --------
$ 100,672 $ 1,286 $ 237 $101,721
========= ======= ======= ========
</TABLE>
- 14 -
<PAGE> 42
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
------------ ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury $ 22,598 $ 177 $ 18 $ 22,757
U.S. Government agency 22,453 409 64 22,798
Mortgage-Backed 8,463 10 34 8,439
State and political
subdivisions 19,026 944 44 19,926
Obligation of domestic
corporations 8,678 49 38 8,689
Stocks of domestic
corporations 20 0 0 20
Federal Home Loan
Bank stock (restricted) 2,086 0 0 2,086
------------- --------- ------- --------
$ 83,324 1,589 $ 198 $ 84,715
============= ========= ======= ========
The gross realized gains and losses for the years ended December 31, are presented below:
(In thousands)
-------------
Gross Realized Gains: 1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Held to Maturity:
U.S. Treasury and agency
securities $ 0 $ 0 $ 42
State and political subdivisions 0 0 8
Available for Sale:
State and political subdivisions 5 105 0
---------- -------- ------
5 105 50
---------- -------- ------
Gross Realized Losses:
Available for Sale:
U.S. Treasury and agency securities 0 33 0
--------- -------- ------
0 33 0
--------- -------- ------
Net Realized Gains $ 5 $ 72 50
========== ======== ======
Gross proceeds from sale of Available
for Sale securities $ 255 $ 1,997 $ 0
========== ======== =======
</TABLE>
- 15 -
<PAGE> 43
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
The above securities classified as Held to Maturity which were
disposed in 1994 were disposed because they were called by the
issuer. The amortized cost of these securities were $1.4 million
determined on the specific identification method.
The amortized cost and estimated market value of debt securities at
December 31, 1996, 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.
<TABLE>
<CAPTION>
Investment Securities
Available for Sale
Market
(In thousands) Amortized Cost Value
-------------- --------------- -----------
<S> <C> <C>
Within one year $ 20,042 $ 20,116
From one through five years 62,168 62,597
From five through ten years 7,620 7,773
After ten years 8,587 8,980
----------- -----------
Total $ 98,417 $ 99,466
=========== ===========
</TABLE>
Investments with a carrying value of $62.2 million and $52 million
at December 31, 1996 and 1995, respectively, were pledged to secure
public deposits and securities sold under repurchase agreements.
NOTE 4. LOANS
Loans at December 31, 1996 and 1995 are summarized below:
<TABLE>
<Caption
(In thousands) 1996 1995
---------------- ------------ -----------
<S> <C> <C>
Real estate $ 195,043 $ 173,302
Commercial and industrial 67,763 58,987
Agricultural (excluding real estate) 41,195 41,328
Consumer and other loans 63,199 61,021
Commercial paper 3,959 7,603
Industrial Development Bonds 3,670 3,336
------------ -----------
374,829 345,577
Less: Deferred loan fees and costs (429) (463)
------------ -----------
374,400 345,114
Less: Allowance for loan losses (5,500) (5,500)
------------ -----------
Loans - Net $ 368,900 $ 339,614
============ ===========
</TABLE>
- 16 -
<PAGE> 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 $12.4 million and $11.9
million at December 31, 1996 and 1995, 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
1996 were $19 million and repayments were $18.5 million. In the
opinion of management, these loans do not involve more than normal
risk of collectibility or possess other unfavorable features.
The following schedule details past due and nonaccrual loans:
<TABLE>
<CAPTION>
Past Due Past Due
30 to 89 Days 90 Days or More
(In thousands) Still Accruing Still Accruing Nonaccrual
--------------- --------------- ---------------- ------------
<S> <C> <C> <C>
Real estate $3,470 $919 $1,474
Commercial and industrial 1,996 269 1,429
Agricultural (excluding real estate) 190 107 432
Consumer and other loans 2,181 604 154
</TABLE>
NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses is as follows:
(In thousands) 1996 1995 1994
-------------- -------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $5,500 $5,500 $5,000
Provision charges to operating
expenses 1,068 385 564
Loans charged-off (1,711) (1,479) (1,171)
Recoveries 643 1,094 1,107
-------- --------- ---------
Balance at End of Year $5,500 $5,500 $5,500
======== ========= =========
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans
considered impaired was $3.489 million and $3.494 million,
respectively. Of the $3.489 million and $3.494 million for 1996 and
1995, respectively that were considered impaired, $1.8 million and
$1.5 million, respectively required the establishment of an
allocated reserve.
Average investment in impaired loans for 1996 was $3.492 million and
$3.088 million for 1995. The Bank stops accruing interest income
when a loan is deemed to be impaired, and recognizes interest income
when the interest income is actually received. Interest income
recognized on impaired loans during 1996 and 1995 was $1.422 million
and $2.275 million, respectively.
The allowance for loan losses for federal income tax purposes was
$843 thousand for 1996 and 1995 and $636 thousand for 1994.
- 17 -
<PAGE> 45
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 6. BANKING PREMISES AND EQUIPMENT
The major categories of banking premises and equipment and
accumulated at depreciation December 31, 1996 and 1995 are
summarized below:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
------------------------------------ ------- -------
<S> <C> <C>
Land $1,228 $1,120
Buildings 7,138 6,476
Furnishings 4,332 4,073
------- -------
12,698 11,669
Less: Accumulated depreciation (5,122) (4,471)
------- -------
Banking Premises and Equipment - Net $7,576 $7,198
======= =======
</TABLE>
Depreciation charged to operating expenses was $798, $689 and $477
thousand for 1996, 1995 and 1994 respectively.
NOTE 7. DEPOSITS
Time deposits at December 31, 1996 and 1995 were comprised of the
following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
------------- -------- --------
<S> <C> <C>
Certificates of deposits under $100,000 $199,934 $192,679
Certificates of deposits of $100,000 or more 55,861 53,184
-------- --------
$255,795 $245,863
======== ========
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:
<S> <C>
1997 $201,144
1998 32,462
1999 14,906
2000 6,166
2001 1,117
</TABLE>
NOTE 8. REPURCHASE AGREEMENTS
The maximum amount of repurchase agreements outstanding at the
end of any given month during 1996 was $6.450 million with an average
outstanding balance for 1996 of $5.605 million determined on a daily
average basis. Accrued interest payable on repurchase agreements as of
December 31, 1996 was $96 thousand. Securities underlying the
agreements were under the Bank's control.
- 18 -
<PAGE> 46
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 9. OTHER BORROWINGS
Other borrowings consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
-------------- ---- ----
<S> <C> <C>
Federal Home Loan Bank, various
loans due in monthly installments
of $101 thousand including interest
at varying rates from 5.40% to
6.75%. Notes are secured by a
blanket lien on mortgage loan
portfolio. $ 8,998 $ 9,662
============= =============
The following is a schedule by years of future minimum principal payments:
Year Ended Principal
December 31 Payments
----------- --------
1997 $ 707
1998 $ 752
1999 $ 801
2000 $ 853
2001 $ 908
Thereafter $ 4,977
</TABLE>
- 19 -
<PAGE> 47
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 10. FEDERAL INCOME TAXES
Federal income tax costs for the years 1996, 1995 and 1994 were
$2.312, $2.203 and $1.749 million, respectively. The actual tax
results for the three years differs from tax computed at the maximum
statutory rate as follows:
<TABLE>
(In thousands) 1996 1995 1994
-------------- ---------- ---------- ----------
<S> <C> <C> <C>
Tax at maximum statutory rate $ 2,650 $ 2,511 $ 2,260
Tax effect of:
Tax exempt interest (406) (354) (400)
Costs attributable to tax exempt
interest 59 47 38
Other items, net 9 (1) 15
Refunds of prior year taxes 0 0 (182)
Tax examination 0 0 18
---------- ---------- ----------
Federal Income Tax Cost $ 2,312 $ 2,203 $ 1,749
========== ========== ==========
The provision for federal income taxes is comprised of the following
components:
<CAPTION>
(In thousands) 1996 1995 1994
-------------- ----------- ----------- -----------
<S> <C> <C> <C>
Currently payable $ 2,045 $ 1,967 $ 2,122
----------- ----------- -----------
Refunds of prior year's taxes 0 0 182
Environmental tax 0 0 (6)
Other 0 6 (28)
----------- ----------- -----------
0 6 148
----------- ----------- -----------
Deferred:
Stock dividend (51) (46) (37)
Provision for loan losses 0 (70) 222
Accreted discount on securities (54) (22) (15)
Direct lease financing revenue 0 0 (2)
Real estate and installment loan
fees and costs (162) (52) 22
Retirement plan costs 0 (52) 35
----------- ----------- -----------
(267) (242) 225
----------- ----------- -----------
Total Provisions $ 2,312 $ 2,203 $ 1,749
=========== =========== ===========
</TABLE>
The timing differences between financial reporting and tax reporting
resulted in a deferred charge of $809 thousand and $960 thousand as
of December 31, 1996 and 1995, respectively. The deferred charge
for income tax costs is included in the asset section of the
statement of condition.
- 20 -
<PAGE> 48
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 10. FEDERAL INCOME TAXES (Continued)
During 1994 the Bank was examined by the Internal Revenue Service for
the tax years ended December 31, 1991 and 1992. This examination
resulted in combined additional assessments of $18 thousand. The
Bank also received $182 thousand in refunds during the tax year ended
December 31, 1994 as a result of amending the 1991 and 1992 tax
returns for reclassification of municipal securities.
NOTE 11. RETIREMENT INCOME PLAN
The Bank maintained a trusteed noncontributory defined benefit
retirement income plan covering all employees who have attained the
age of 21 and completed six months of service on a full-time basis.
Application for termination and dissolution of the plan was made in
1995. In 1996 approval was granted, and the defined benefit
retirement plan was terminated. All of the assets were transferred
to a 401(k) profit sharing plan established in 1995.
The defined benefit retirement plan called for benefits to be paid to
eligible employees at normal retirement age at a monthly benefit
equal to 60% of average monthly compensation less 50% of the monthly
Primary Social Security Amount, reduced prorata for service less than
30 years. In no event would the monthly benefit be less than the
benefit accrued as of July 31, 1983. Benefits were also available
for early retirement at age 60 with 15 years of service 1) payable at
age 65 equal to the accrued normal retirement pension using years of
service and average monthly compensation at the time of early
retirement and assuming the employee received no further compensation
after retirement to calculate the Primary Social Security Amount; or
2) an immediate pension equal to one above but reduced 5/9% for each
month prior to age 65 that the pension commences. The plan also had
provisions for termination benefits and pre-retirement death
benefits.
The normal form of benefit payment was a 50% Joint and Survivor form
if the participant was married, and a life with a minimum of 120
monthly payments guaranteed annuity otherwise.
Plan assets consisted of common stock, investment grade corporate
bonds, U.S. Government obligations, and a cash management account
consisting primarily of U.S. Treasury obligations.
- 21 -
<PAGE> 49
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. RETIREMENT INCOME PLAN (Continued)
Pension expense under this plan for 1995 and 1994 includes the
following components:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
-------------- ------ -------
<S> <C> <C> <C>
Service costs of the current period $ 62 $ 134
Interest cost of the projected benefit
obligation 101 123
Actual return on assets held in plan (226) 22
Net amortization and deferral 101 (138)
----- ------
Net Pension Expense $ 38 $ 141
===== ======
Assumptions used in accounting for the pension plan at December
31, 1995 and 1994 were as follows:
<CAPTION>
(In thousands) 1995 1994
-------------- ------ ------
<S> <C> <C>
Discount rate 8.25% 8.25%
Rate of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on assets 8.00% 8.00%
The accumulated benefit obligation under the plan as of December
31, 1995 and 1994 were as follows:
<CAPTION>
(In thousands) 1995 1994
-------------- ------- --------
<S> <C> <C>
Vested accumulated benefit obligations $ 1,141 $ 917
Nonvested accumulated benefit obligation 0 36
------- -------
Total Accumulated Benefit Obligation $ 1,141 $ 953
======= =======
The following is a reconciliation of the funded status of the plan
with amounts reflected in the consolidated balance sheets at
December 31, 1995 and 1994:
(In thousands) 1995 1994
-------------- ------- --------
<S> <C> <C>
Reconciliation of funded status:
Projected benefit obligation $ (1,141) $ (1,437)
Plan assets at fair value 1,647 1,407
------- --------
Projected benefit obligation 506 (30)
------- --------
Unrecognized obligation:
Unrecognized net loss (gain) 60 (31)
Unrecognized prior service costs 0 3
Unrecognized initial net obligation (68) (72)
------- --------
Total (8) (100)
------- --------
Accrued Pension Cost at Year End $ (498) $ 130
======= ========
Net Pension Liability Recognized in
the Consolidated Balance Sheet $ 0 $ 130
======= ========
</TABLE>
- 22 -
<PAGE> 50
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. RETIREMENT INCOME PLAN (Continued)
As was mentioned above, the Bank has terminated the
defined benefit retirement plan, and has replaced it
with a 401(k) profit sharing plan. All assets of the
defined benefit plan were transferred to the 401(k)
profit sharing plan during 1996. The assets
transferred which were in excess of future benefit
obligations were allocated to participants by
increasing accrued pension benefits before plan
termination.
The 401(k) profit sharing plan allows eligible
employees to save at a minimum one percent of eligible
compensation on a pre-tax basis, subject to certain
Internal Revenue Service limitations. The Bank will
match 50% of employee 401(k) contributions up to four
percent of total eligible compensation. In addition
the Bank may make a discretionary contribution from
time to time as is deemed advisable. A participant is
100% vested in the participant's deferral
contributions and employer matching contributions. A
seven year vesting schedule applies to employer
discretionary contributions.
In order to be eligible to participate, the employee
must be 21 years of age, completed six months of
service, work 1,000 hours in the plan year and be
employed on the last day of the year. Entry dates
have been established at January 1 and July 1 of each
year.
The plan calls for only lump-sum distributions upon
either termination of employment, retirement, death or
disability.
Pension expense for the 401(k) profit sharing plan for
both the employer matching contribution and the
discretionary contribution was $267 thousand and $225
thousand for 1996 and 1995, respectively.
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's financial statements do not reflect various
commitments and contingent liabilities which arise in
the normal course of business and which involve
elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit
card arrangements and standby letters of credit. A
summary of the Bank's commitments and contingent
liabilities at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Notational
(In thousands) Amount
-------------- ----------
<S> <C> <C>
Commitments to extend credit $ 49,480
Credit card arrangements $ 7,726
Standby letters of credit $ 2,245
</TABLE>
- 23 -
<PAGE> 51
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Bank's policy was to charge benefit funding and costs of
administration of the plan to operations. Charges to operations were
$38 thousand for 1995 and $156 thousand for 1994.
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. Management has no knowledge of any pending
or threatened litigation.
NOTE 13. CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and standby letters of credit
have been granted to customers in the Bank's market area of northwest
Ohio. All such customers are depositors of the Bank. Also,
investments in state and municipal securities may involve
governmental entities within the Bank's market area. The
concentrations of credit by type of loan are set forth in Note 4.
Standby letters of credit were granted primarily to commercial
borrowers.
As of December 31, 1996, the company had on deposit with financial
institutions $230 thousand in excess of FDIC insurable limits.
NOTE 14. REGULATORY CAPITAL REQUIREMENTS
Federal regulatory agencies have adopted various capital standards
for financial institutions, including risk-based capital standards.
The primary objectives of the risk-based capital framework are to
provide a more consistent system for comparing capital positions of
financial institutions and to take into account the different risks
among financial institutions' assets and off-balance sheet items.
Risk-based capital standards have been supplemented with requirements
for a minimum Tier 1 capital to assets ratio (leverage ratio). In
addition, regulatory agencies consider the published capital levels
as minimum levels and may require a financial institution to
maintain capital at higher levels.
- 24 -
<PAGE> 52
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 14. REGULATORY CAPITAL REQUIREMENTS
A comparison of the Bank's capital as of December
31, 1996 with the minimum requirement is presented
below:
<TABLE>
(In thousands) Actual Requirements
------------------------------- ------ ------------
<S> <C> <C>
Tier 1 Risk-based Capital 8.90% 4.00%
Total Risk-based Capital 12.94% 8.00%
Leverage Ratio 6.45% 4.00%
</TABLE>
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 $1 million may be paid without prior
regulatory approval. Regardless of formal regulatory restrictions,
the Bank may not pay dividends that would result in its capital
levels being reduced below the minimum requirements shown above.
On December 31, 1996 the Bank declared and paid a $10 million
dividend to the Bank's parent company, Farmers & Merchants Bancorp,
Inc. with approval from the FDIC and the State of Ohio Division of
Financial Institutions. On December 31, 1996 Farmers & Merchants
Bancorp, Inc. loaned to The Farmers & Merchants State Bank $10
million in exchange for an unsecured subordinated note receivable.
The note is due January 1, 2007. Interest at the rate of 6% is
payable annually on the first day of January each year. The Bank has
the option of prepaying all or any part of the note at any time
without notice or penalty, subject to the approval of the FDIC and
the State of Ohio Division of Financial Institutions.
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
(In thousands) 1996 1995 1994
--------------------------- ------------ ---------- -------
<S> <C> <C> <C>
Interest (net of amount
capitalized) $20,969 $17,166 $12,239
Income taxes $ 2,128 $ 2,359 $ 1,148
</TABLE>
- 25 -
<PAGE> 53
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values and estimated fair values for on and off-balance
sheet financial instruments as of December 31, 1996 and
1995 are reflected below:
<TABLE>
1996 1995
--------------------------- -----------------------
Book Fair Book Fair
(In thousands) Value Value Value Value
------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 15,971 $ 15,972 $ 15,051 $ 15,051
Federal funds sold $ 0 $ 0 $ 10,710 $ 10,710
Investment Securities:
Available for sale $101,721 $102,315 $ 84,715 $ 84,715
Net loans $368,900 $376,206 $339,614 $344,641
Financial Liabilities:
Deposits $438,377 $439,349 $403,990 $406,005
Short-term borrowing:
Federal funds purchase $ 2,790 $ 2,790 $ 0 $ 0
Securities sold under
agreement to
repurchase $ 3,973 $ 3,973 $ 6,919 $ 6,919
Other borrowing $ 8,998 $ 8,654 $ 9,662 $ 9,864
Off-Balance Sheet Financial Instruments:
Commitments to
extend credit $ 49,480 $ 49,480 $ 50,322 $ 50,322
Credit card
arrangements $ 7,726 $ 7,726 $ 5,506 $ 5,506
Standby letters of
credit $ 2,245 $ 2,245 $ 1,630 $ 1,630
</TABLE>
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.
INVESTMENT SECURITIES:
Fair value is based on quoted market prices or dealer quotes.
See Note 3, Investment Securities, for additional information.
- 26 -
<PAGE> 54
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
LOANS:
The estimated fair value of the Loan portfolio is based on
expected future cash flows discounted by an appropriate rate
derived in part from the Treasury yield curve.
DEPOSITS:
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates
of deposits is estimated using anticipated future cash flows
discounted by an appropriate rate derived in part from the
Treasury yield curve.
BORROWINGS:
Short-term borrowings are carried at cost which approximates fair
value. Other long-term debt was generally valued using a
discounted cash flows analysis with a discounted rate based on
current incremental borrowing rates for similar types of
arrangements, or if not available, based on an approach similar
to that used for loans and deposits. Long-term borrowings
include their related current maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The
fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
- 27 -
<PAGE> 55
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 17. CHANGE IN ACCOUNTING METHOD
In May 1993, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities", (FAS 115). FAS 115 requires, among other things,
that securities classified as "Available for Sale" be carried at
fair value. Adjustments required to reflect fair value and the
related income tax effects are excluded from earnings and
reported separately as a component of shareholders' equity. This
standard was adopted for the Bank's first year beginning after
December 15, 1993 as required. The cumulative effect of the
change as of the date of adoption, January 1, 1994, was to
increase shareholders' equity (net of income taxes) by $289
thousand.
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
<TABLE>
BALANCE SHEET
<S> <C> <C>
(In thousands) 1996 1995
-------------- ------- -------
ASSETS:
Cash $ 254 $ 70
Related party receivables -
Dividends 520 650
Note receivable 10,000 0
Income tax receivable 12 24
Investment in subsidiaries 33,115 39,527
------- -------
TOTAL ASSETS $43,901 $40,271
======= =======
LIABILITIES:
Dividends payable $520 $650
------- -------
SHAREHOLDERS' EQUITY:
Common stock, no par value -
authorized 1,500 shares;
issued 1,300 shares 12,677 12,677
Undivided profits 30,013 26,025
Unrealized gain on securities
classified as Available for
Sale (net of tax effect of
$357 for 1996 and $472 for 1995) 691 919
------- -------
43,381 39,621
------- -------
LIABILITIES AND SHAREHOLDERS'
EQUITY $43,901 $40,271
======= =======
</TABLE>
- 28 -
<PAGE> 56
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
<TABLE>
STATEMENTS OF INCOME
<S> <C> <C> <C>
(In thousands) 1996 1995 1994
--------------------------------------- ------ ------ ------
INCOME:
Equity in net income of subsidiaries $5,510 $5,117 $5,203
Interest income 0 0 1
------ ------ ------
5,510 5,117 5,204
------ ------ ------
EXPENSES:
Miscellaneous 17 13 0
Professional fees 15 16 20
Supplies 8 4 15
Taxes 1 1 0
------ ------ ------
41 34 35
------ ------ ------
INCOME BEFORE INCOME TAXES 5,469 5,083 5,169
INCOME TAXES (BENEFITS) (14) (12) 0
------ ------ ------
NET INCOME $5,483 $5,095 $5,169
====== ====== ======
</TABLE>
- 29 -
<PAGE> 57
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Unrealized
Gain (Loss) on
Common Undivided Available for
(In thousands except per share amounts) Stock Profits Sale Securities
------------------------------------- ------- --------- ---------------
<S> <C> <C> <C>
BALANCE at December 31, 1993 $12,677 $ 18,491 $ 0
Adjustment for initial application
of unrealized gain for securities
classified as Available for Sale
(net of tax effect of $149) 0 0 289
------- --------- ---------------
BALANCE at December 31, 1993 12,677 18,491 289
Net income for 1994 0 5,169 0
Unrealized losses on securities
classified as Available for Sale
(net of tax effect of ($275)) 0 0 (537)
Dividends ($1.00 per share) 0 (1,300) 0
------- --------- ---------------
BALANCE at December 31, 1994 12,677 22,360 (248)
Net income for 1995 0 5,095 0
Unrealized losses on securities
classified as Available for Sale
(net of tax effect of $599) 0 0 1,167
Dividends ($1.10 per share) 0 (1,430) 0
------- --------- ---------------
BALANCE at December 31, 1995 12,677 26,025 919
Net income for 1995 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
======= ========= ===============
</TABLE>
- 30 -
<PAGE> 58
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
<TABLE>
STATEMENTS OF CASH FLOWS
(In thousands) 1996 1995 1994
---------------------------------------------- -------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 5,483 $ 5,095 $ 5,169
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Equity in undistributed net
income of subsidiaries 6,316 (3,819) (3,803)
Changes in Operating Assets and
Liabilities:
Income tax receivable 10 (13) 0
-------- ------- -------
Net Cash Provided by Operating
Activities 11,809 1,263 1,366
-------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Loan to) repayment by
subsidiary (10,000) 0 10
-------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments of dividends (1,625) (1,300) (1,300)
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents 184 (37) 76
Cash and cash equivalents - beginning
of year 70 107 31
-------- ------- -------
CASH AND CASH EQUIVALENTS --
END OF YEAR $ 254 $ 70 $ 107
======== ======= =======
</TABLE>
- 31 -
<PAGE> 59
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 19. 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.
- 32 -
<PAGE> 60
January 15, 1997
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, 1996 and 1995, appears on page 1. The
examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 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.
KROUSE, KERN & CO., INC.
- 33 -
<PAGE> 61
FARMERS & MERCHANTS BANCORP, INC.
Five Year Summary of Consolidated Operations
<TABLE>
(In thousands except for per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Income:
Interest income $ 38,382 $ 34,228 $ 27,779 $ 26,650 $ 27,666
Interest expense 20,905 17,749 12,561 12,424 14,482
----------- -------- -------- -------- --------
Net Interest Income 17,477 16,479 15,218 14,226 13,184
Provision for loan losses 1,068 385 564 908 813
----------- -------- -------- -------- --------
Net interest income after
provision for loan losses 16,409 16,094 14,654 13,318 12,371
Other income (expense) (8,614) (8,594) (7,939) (7,617) (7,128)
----------- -------- -------- -------- --------
Earnings before federal
income taxes 7,795 7,500 6,715 5,701 5,243
Income taxes 2,312 2,203 1,749 1,394 1,287
----------- -------- -------- -------- --------
Net income $ 5,483 $ 5,297 $ 4,966 $ 4,307 $ 3,956
=========== ======== ======== ======== ========
Per Share of Common Stock:
Earnings per common share
outstanding:
(Based on the weighted average
number of shares outstanding)
(All per share amounts have
been retroactively restated to
reflect 5 for 1 stock split in 1996
Net income $ 4.22 $ 4.07 $ 3.82 $ 3.31 $ 3.04
Dividends $ 1.15 $ 1.10 $ 1.00 $ 1.00 $ .80
Weighted average number
of shares outstanding 1,300 1,300 1,300 1,300 1,300
Year-end assets $ 501,449 $464,090 $406,186 $371,913 $358,710
Average assets $ 482,770 $430,304 $387,440 $362,244 $336,774
Year-end equity capital $ 43,381 $ 39,621 $ 34,586 $ 31,169 $ 28,163
Average equity capital $ 41,501 $ 38,034 $ 32,838 $ 30,025 $ 27,142
</TABLE>
See Independent Auditors' Report
on Supplementary Information.
- 34 -
<PAGE> 62
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:
<TABLE>
<CAPTION>
Stock Prices
---------------------------------------
Quarter Low High
---------------------------------------
<S> <C> <C> <C>
1996 -- by quarter (after retroactive 1st $ 32.00 $35.00
restatement for 5 for 1 stock 2nd 35.00 35.00
split in 1996) 3rd 40.00 40.00
4th 40.00 40.00
1995 -- by quarter (after retroactive 1st 27.00 32.00
restatement for 5 for 1 stock 2nd 32.00 32.00
split in 1996) 3rd 32.00 32.00
4th 32.00 32.00
</TABLE>
Dividends declared on a quarterly basis for the last two fiscal years:
<TABLE>
<CAPTION>
Quarter 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Dividends declared per share (after retroactive
restatement for 5 for 1 stock split in 1996)
By quarter 1st $ .25 $ .20
2nd .25 .20
3rd .25 .20
4th .40 .50
</TABLE>
- 35 -
<PAGE> 63
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Farmers & Merchants Bancorp, Inc. reported consolidated earnings of $5.483
million for 1996 representing an increase of $186 thousand over the $5.297
million for 1995, a 3.5% increase. This increase was primarily the result of
an increase in interest from loans with a corresponding increase in the
interest costs associated with deposits, the net effect of which was an
increase in net interest income.
Consolidated assets grew by $37.5 million in 1996 to a record $501.5 million
from consolidated assets of $464 million for 1995. This represents an 8%
increase. As was the case for 1995's increase, the increase for 1996 was due
almost entirely to an increase in lending activity. While loans demonstrated a
healthy yet controlled growth pattern, management is still of the opinion that
a loan loss reserve of $5.5 million is adequate to cover potential loan losses.
The return on average assets and average shareholders' equity for 1996 was
1.14% and 13.21%, respectively. These returns compare to 1.23% average return
on assets and 13.93% average return on shareholders' equity for 1995.
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 $94.5 million for 1996 representing
19.58% of total average assets. As was stated above, the Bank reclassified in
1995 its remaining Held to Maturity security portfolio to Available for Sale to
enhance the Bank's liquidity position.
CAPITAL RESOURCES
Shareholders' equity was $43.4 million at December 31, 1996 compared to $39.6
million for 1995. 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, 1996, The Farmers & Merchants State Bank had a total risk-based
capital ratio of 12.94% and a 8.90% core capital to risk-based asset ratio.
Selected capital ratios must also be maintained. The Bank's leverage ratio of
6.45% is substantially in excess of the minimum 4% guideline. All of these
ratios have declined when compared to the prior year's ratios of 13.06%, 11.81%
and 8.28%, respectively. This is due entirely from the $10 million dollar
dividend paid by The Farmers & Merchants State Bank to Farmers & Merchants
Bancorp, Inc. the parent company. This dividend with the subsequent loan of
$10 million to The Farmers & Merchants State Bank by Farmers & Merchants
Bancorp, Inc. was done to save state franchise taxes.
- 36 -
<PAGE> 64
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT (Continued)
The Company's subsidiaries are restricted by regulations from making dividend
distributions in excess of certain prescribed amounts.
During 1993 and 1994, the Financial Accounting Standards Board issued numerous
standards which affect the accounting and reporting of investment securities
for 1994, and impaired loans for 1995. In 1995 it also issued standards which
will affect how mortgage servicing rights will be treated. The impact of these
pronouncements on the Consolidated Financial Statements are discussed in the
Notes to the Consolidated Financial Statements.
- 37 -
<PAGE> 65
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
<TABLE>
Key Ratios:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Return on average equity 13.21% 13.93% 15.12% 14.34% 14.81%
Return on average assets 1.14% 1.23% 1.28% 1.19% 1.16%
Loan to deposit ratio 84.15% 84.06% 87.55% 81.12% 77.37%
Capital to assets ratio 8.65% 8.54% 8.51% 8.38% 7.85%
</TABLE>
Other key selected highlights are as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans $368,900 $339,614 $301,522 $261,600 $237,380
Total Assets 501,449 464,090 406,186 371,913 358,710
Shareholders' Equity 43,381 39,621 34,586 31,169 28,163
Interest income 38,382 34,228 27,779 26,650 27,666
Interest expense 20,905 17,749 12,561 12,424 14,482
Net Interest 17,477 16,479 15,218 14,226 13,184
Other expense (net) 8,614 8,594 7,940 7,617 7,128
Federal income tax 2,312 2,203 1,749 1,394 1,287
Net income 5,483 5,297 4,965 4,307 3,956
Net income per share 4.22 4.07 3.82 3.31 3.04
Dividends per share 1.15 1.10 1.00 1.00 .80
</TABLE>
- 38 -
<PAGE> 66
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:
<TABLE>
<CAPTION>
Principal Occupation First Became
Name Age For Past Five Years Director
- ------------------ --- --------------------------------------- ------------
<S> <C> <C> <C>
Eugene Bernath 63 Farmer 1978
Jerry L. Boyers 63 President of Edifice Construction 1976
Management
Joe E. Crossgrove 60 Executive Vice President and Cashier of 1992
The Farmers & Merchants State Bank
Robert Frey 56 President of E. H. Frey & Sons, Inc. 1987
Lee Graffice 68 President of Graffice Motor Sales 1983
Jack Johnson 44 President of Hawk's Clothing, Inc. 1991
Partner in Rejo Partnership
Charles Lugbill 69 President of Lugbill Bros., Inc. 1968
(Cattle Feeding and Farm Supply
Center)
Dean Miller 52 President of MBC Holdings, Inc. 1986
Dale L. Nafziger 66 Retired 1969
Harold H. Plassman 67 Attorney in Plassman, Rupp, Hensal 1985
& Short
James Provost 68 Retired, Dyer & McDermott, Inc. 1995
James C. Saneholtz 50 President of Saneholtz-McKarns, Inc. 1995
Maynard Sauder 64 President of Sauder Woodworking Co. 1980
Merle J. Short 56 Farmer 1987
President of Promow, Inc.
Steven J. Wyse 52 President of Bil-Jax, Inc. 1991
</TABLE>
- 26 -
<PAGE> 67
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Principal Occupation
Name Age For Past Five Years
----------------- --- ----------------------------------------
<S> <C> <C>
Charles Lugbill 69 President of Farmers & Merchants
Bancorp and The Farmers &
Merchants State Bank President
of Lugbill Bros., Inc.
Joe E. Crossgrove 59 Executive Vice President and Cashier
of 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 Company
Rex D. Rice 37 Vice President
Chief Lending Officer
Edward Leininger 39 Vice President
Commercial Loan Officer
Allen G. Lantz 43 Vice President
Branch Manager
Lewis Hilkert 46 Vice President
Branch Manager
Carol England 56 Assistance Vice President
Secretary
Branch Manager
Ronald D. Short 44 Assistant Vice President
Branch Manager
Cynthia Knauer 50 Assistant Vice President
Branch Manager
Dave Frazier 38 Assistant Vice President
Branch Manager
John Fee 36 Assistant Vice President
Branch Manager
Steve Jackson 42 Assistant Vice President
Branch Manager
Deborah Stoner 40 Assistant Vice President
Branch Manager
</TABLE>
- 27 -
<PAGE> 68
<TABLE>
<S> <C> <C>
Randal Schroeder 36 Assistant Vice President
Chief Operations Officer
George Jelen 45 Assistant Vice President
Mortgage Loan Officer
Barbara Britenriker 35 Assistant Vice President
Chief Financial Officer
Comptroller
Michael D. Culler 38 Assistant Vice President
Agricultural Loan Officer
Diann K. Meyer 36 Assistant Vice President
Personnel Manager
Gloria Gunn 39 Assistant Vice President
Assistant Branch Manager
Richard Bruce 49 Assistant Vice President
Assistant Branch Manager
Kent Roth 32 Auditor
Bank Security Officer
Bank Secrecy Officer
Marilyn Johnson 40 Compliance Officer
Jean Horwath 45 Assistant Cashier
Assistant Branch Manager
Diane Swisher 39 Assistant Cashier
Assistant Branch Manager
Patti Rosebrock 39 Assistant Cashier
Assistant Branch Manager
Michael T. Smith 30 Assistant Cashier
Assistant Branch Manager
Marilyn Bergsdedt 45 Assistant Cashier
Assistant Branch Manager
Linda Nofziger 42 Assistant Cashier
Assistant Branch Manager
Debra Kauffman 36 Assistant Cashier
Assistant Corporate Secretary
Consumer Loan Officer
Barb Colon 36 Assistant Cashier
Proof & Transit Supervisor
</TABLE>
- 28 -
<PAGE> 69
<TABLE>
<S> <C> <C>
J. Scott Miller 40 Assistant Cashier
Assistant Agri-Loan Officer
Judy Warncke 48 Assistant Cashier
Marketing Officer
Diana Dennie 34 Assistant Cashier
Mortgage Loans
Jerry Borton 47 Assistant Cashier
Agri-Loan Officer
</TABLE>
- 29 -
<PAGE> 70
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
5, 1997 is incorporated herein by reference.
The Board of Directors met eleven times during 1996. All but four current
directors attended at least seventy-five (75%) percent of the meetings of the
Board. Steven Wyse, Charles Lugbill and Dale Nafziger attended seventy-three
(73%) percent of the Board meetings. Dean Miller attended sixty-four (64%)
percent of the Board meetings. Average attendance at Board meetings held during
1996 was eighty-seven (87%).
Directors received, as directors' fees, $300 for each board meeting, plus a
bonus of $600 for 1996.
The Subsidiary Bank Board of Directors met semi-monthly during 1996.
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 5, 1997, 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 17, 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 1996 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 1997.
- 30 -
<PAGE> 71
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Annual Report
-------------
(1) Financial Statements
Report of Independent Accountants Page 5
Consolidated Balance Sheets Page 6
Consolidated Statements of Income Page 7
Consolidated Statements of Changes in
Shareholders' Equity Page 8
Consolidated Statements of Cash Flows Page 9
Notes to Consolidated Financial Statements Pages 10 - 32
(2) Financial Statement Schedules
Independent Auditors' Report on Additional
Information Page 33
Five Year Summary of Operations Page 34
(3) Exhibits
(3.1) Articles of Incorporation have been submitted with previous
10-K reports.
(13.1) 1996 Annual Report to Shareholders (contained herein).
(27.) Financial Data Schedule
(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 of the Registrant required by this report are
included in the Annual Report to Shareholders, Note 18, pages 28
through 31 Other schedules required to be filed as part of this report:
Form 10-K
-------------
Schedule of Property and Equipment Page 32
Schedule of Accumulated Depreciation - Property and Equipment Page 33
- 31 -
<PAGE> 72
SCHEDULE OF PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Year Ended December 30, 1996
----------------------------------------------
Beginning Ending
(in thousands) Balance Additions Retirements Balance
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
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
======= ======= =========== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 30, 1995
------------------------------------------
<S> <C> <C> <C> <C>
Land ..................... $ 1,073 $ 47 $ 0 $ 1,120
Building ................. 6,042 523 90 6,475
Banking house equipment .. 3,033 1,084 43 4,074
------- ------- ----------- --------
$10,148 $ 1,654 133 $11,669
======= ======= =========== =======
</TABLE>
<TABLE>
Year Ended December 30, 1994
----------------------------------------------
<S> <C> <C> <C> <C>
Land ..................... $ 794 $ 279 0 $ 1,073
Building ................. 3,857 2,185 0 6,042
Banking house equipment .. 2,536 530 33 3,033
------- ------- ----------- -------
$ 7,187 $ 2,994 33 $10,148
======= ======= =========== =======
</TABLE>
- 32 -
<PAGE> 73
SCHEDULE OF ACCUMULATED DEPRECIATION -- PROPERTY AND EQUIPMENT
Exhibit 2
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------
Beginning Provision for Ending
(in thousands) Balance Depreciation Retirements Balance
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Building .............. $ 1,814 $ 208 $ 0 $ 2,022
Banking house
equipment ............ 2,657 590 147 3,100
----------- ------------- ----------- ----------
$ 4,471 $ 798 $ 147 $ 5,122
=========== ============= =========== ==========
<Capiton>
Year Ended December 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Building .............. $ 1,683 $ 203 $ 72 $ 1,814
Banking house
equipment ............ 2,208 486 37 2,657
----------- ------------- ----------- ----------
$ 3,891 $ 689 $ 109 $ 4,471
=========== ============= =========== ==========
<Capiton>
Year Ended December 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Building .............. $ 1,513 $ 170 $ 0 $ 1,683
Banking house
equipment ............. 1,934 307 33 2,208
----------- ------------- ----------- ----------
$ 3,447 $ 477 $ 33 $ 3,891
=========== ============= =========== ==========
</TABLE>
- 33 -
<PAGE> 74
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Farmers & Merchants Bancorp, Inc.
By: /s/ Joe E. Crossgrove Date: March 10,1997
Joe E. Crossgrove,
Executive Vice-President,
Treasurer and Director
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.
<TABLE>
<S> <C> <C> <C>
/s/ Joe E. Crossgrove Date: March 10, 1997 /s/ Barbara Britenriker Date: March 10, 1997
- --------------------------- ----------------------------
Joe E. Crossgrove, Director Barbara Britenriker
Executive Vice-President, Chief Accounting Officer
Treasurer
/s/ Charles Lugbill Date: March 10, 1997 /s/ Kent Roth Date: March 10, 1997
- --------------------------- ----------------------------
Charles Lugbill Kent Roth, Auditor
Director and President
/s/ Eugene D. Bernath Date: March 10, 1997 /s/ Harold H. Plassman Date: March 10, 1997
- --------------------------- ----------------------------
Eugene D. Bernath, Director Harold H. Plassman, Director
/s/ Jerry Boyers Date: March 10, 1997 /s/ James Provost Date: March 10, 1997
- --------------------------- ----------------------------
Jerry Boyers, Director James Provost, Director
/s/ Robert Frey Date: March 10, 1997 /s/ James Saneholtz Date: March 10, 1997
- --------------------------- ----------------------------
Robert Frey, Director James Saneholtz, Director
/s/ Lee Grafice Date: March 10, 1997 /s/ Maynard Sauder Date: March 10, 1997
- --------------------------- ----------------------------
Lee Grafice, Director Maynard Sauder, Director
/s/ Jack C. Johnson Date: March 10, 1997 /s/ Merle J. Short Date: March 10, 1997
- --------------------------- ----------------------------
Jack C. Johnson, Director Merle J. Short, Director
/s/ Dean Miller Date: March 10, 1997 /s/ Steven J. Wyse Date: March 10, 1997
- --------------------------- ----------------------------
Dean Miller, Director Steven J. Wyse, Director
/s/ Dale L. Nafziger Date: March 10, 1997
- ---------------------------
Dale L. Nafziger, Director
</TABLE>
- 36 -
<PAGE> 75
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,871
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,721
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 374,719
<ALLOWANCE> 5,500
<TOTAL-ASSETS> 501,449
<DEPOSITS> 438,377
<SHORT-TERM> 6,763
<LIABILITIES-OTHER> 3,930
<LONG-TERM> 8,998
0
0
<COMMON> 12,677
<OTHER-SE> 30,704
<TOTAL-LIABILITIES-AND-EQUITY> 501,449
<INTEREST-LOAN> 32,353
<INTEREST-INVEST> 5,515
<INTEREST-OTHER> 514
<INTEREST-TOTAL> 38,382
<INTEREST-DEPOSIT> 19,943
<INTEREST-EXPENSE> 962
<INTEREST-INCOME-NET> 17,477
<LOAN-LOSSES> 1,068
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 10,991
<INCOME-PRETAX> 7,795
<INCOME-PRE-EXTRAORDINARY> 7,795
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,483
<EPS-PRIMARY> 4.22
<EPS-DILUTED> 4.22
<YIELD-ACTUAL> 10.56
<LOANS-NON> 3,489
<LOANS-PAST> 9,736
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,388
<ALLOWANCE-OPEN> 5,500
<CHARGE-OFFS> 1,711
<RECOVERIES> 643
<ALLOWANCE-CLOSE> 5,500
<ALLOWANCE-DOMESTIC> 5,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
