SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
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of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
or
Transition Report Pursuant to Section 13 or 15(d)
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of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-14492
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FARMERS & MERCHANTS BANCORP, INC.
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OHIO 34-1469491
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
307-11 North Defiance Street
Archbold, Ohio 43502
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(Address of principal (Zip Code)
Executive offices)
Registrant's telephone number , including area code (419)446-2501
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
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- ------------------------------- --------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common shares without par value
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 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, 2003, Registrant had outstanding 1,300,000 shares of common stock
at a market value of $123,500,000.
1
FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
PAGE
Form 10-K Items
Item 1. Business 2 - 20
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote
of Security Holders 21
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7 - 19
Item 8. Financial Statements and Supplementary Data 22 - 67
Item 9. Disagreements on Accounting and
Financial Disclosure 68
Item 10. Directors and Executive Officers
of the Registrant 68 - 69
Item 11. Management Remuneration and Transactions 69
Item 12. Security Ownership of Certain
Beneficial Owners and Management 69
Item 13. Certain Relationships and Related
Transactions 70
Item 14. Controls and Procedures 70
Item 15. Financial Schedules and Reports on Form 8-K 71 - 73
Schedule 1 - Schedule of Property and Equipment 72
Schedule 2 - Schedule of Accumulated Depreciation -
Property and Equipment 73
Signatures 74
Certification 75 - 76
Exhibit 99.1 77
Exhibit 99.2 78
Total Pages: 78
i
BUSINESS
HISTORY
The Farmers & Merchants State Bank is a community bank, as it has been since
1897. When Archbold's population was less than 900, there were six local
businessmen foresighted enough in their thinking and views to realize the need
for a bank in the village of Archbold. J. O. Swisher and Jacob Ehrat (livestock
brokers) C. M. McLaughlin and A. J. Vernier (hardware merchants) and L. D.
Gotshall and I. W. Gotshall (lumber merchants), were founders of the then
Farmers & Merchants Bank, a private bank. The bank's first office was one room
located in the Vernier Hotel building, currently occupied by the Archbold Barber
Shop.
In 1907, the first new structure was built at the corner of Depot and North
Defiance Streets, which is now the Subway. The bank was heralded as one of the
most unusual and attractive banks in the area, featuring marble interior, brass
trimmed teller cages, tile floor, leaded windows, and high vaulted ceiling. The
vault featured a time controlled money safe. The building and equipment were
unique to the early 1900's and adequately served the banking needs of the area
for over 50 years with only minor interior alterations.
In August of 1913 the village of Archbold was hit by a disastrous fire which
destroyed all the business district on the east side of N. Defiance Street from
the bank at the corner of Depot Street to the Murbach medical building at the
corner of Holland Street. This was a tremendous loss for a dozen or more
businesses, causing many to liquidate. Young businessmen and enterprising
citizens promoted a waterworks system and passed a $16,000 bond issue to finance
the project. This seemed to be the turning point for the advancement of industry
and the community rallied from this eventful experience to an unusual growth.
In 1919 the founding directors elected to change from a private bank to a state
chartered bank and at this time changed its name from the Farmers & Merchants
Bank to The Farmers & Merchants State Bank, as required in the state charter.
This has been the only name change in the bank's 99 year history. The bank's
capital funds were $53,510 thousand and resources were $571,549 thousand.
The bank experienced growth, especially during the post-war years and early
1950's. By 1958, the bank's resources had grown to $7.5 million. The directors
and officers realized the need for a larger building to accommodate the increase
in business and services. In 1958, the bank moved to its present N. Defiance
Street location greatly improving service to its customers and offering drive-up
banking, electronic bookkeeping, convenient parking, and a social room for the
community to use. The new building featured the latest in modern banking
facilities and The Farmers & Merchants State Bank was prepared to more
efficiently serve the ever growing community.
With resources of over $23 million in 1969, The Farmers & Merchants State Bank
again realized the need for additional space and inaugurated a building
expansion, which nearly doubled the original structure built in 1958. The new
addition, opened early in 1970, provided for an additional drive-up window,
walk-up window, direct entrance from the bank parking lot to the lobby, three
spacious private offices, conference room, and a large community room with a
fully equipped kitchen to facilitate groups from 60 to 100.
In 1972, with total resources of over $34 million and to continue its growth,
The Farmers & Merchants State Bank established an office on N. Shoop Avenue,
Wauseon. The office was opened in November 1973 and provided greater banking
service to the Wauseon area. The Wauseon office provided complete banking
service and a community room with kitchen facilities to accommodate 15 - 80
people.
In 1977 - 1978 additional office space was added to The Farmers & Merchants
State Bank in Archbold, and an automatic teller machine, "Teller 24", was
installed in the entrance lobby.
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".
2
During April of 1980 a second office was opened in Archbold, located in the
Lugbill Addition near Woodland Oaks. With resources of $83 million the decision
was made to open full service offices in Stryker and West Unity in 1981.
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.
New computerized proof equipment to capture the required data in today's complex
and competitive banking environment was also added during 1985, along with a new
division being added to the Operations Department in the creation of the Central
Information File Department. Plus, two new branches were opened for business,
the Delta office in June and the all-new Bryan E. High Street office in
December.
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.
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.
3
With strong earnings, outstanding asset quality, and the bank expanding its
presence in the market area, 1994 was a very special year for The Farmers &
Merchants State Bank. The goals for 1994 were exceeded, with a new high in
assets of $406 million. With a growing interest to expand the bank's market area
and branch into Henry County, an application was submitted for a Napoleon
office. Once the application was approved, the bank wasted no time in getting
the building constructed. The full service Napoleon Office, with a drive-up ATM,
was conveniently located on St. Rt. 108 on the north edge of Napoleon making it
easily accessible for the residents of Henry County.
During the time the Napoleon office was under construction, plans were completed
for expansion of the Wauseon N. Shoop Office. This was the first expansion of
this office since its opening in 1973, and with the basement being used for
offices, more office space was greatly needed. The new addition consisted of
four additional offices, a large secretarial/new accounts area, restroom, and
supply room.
In October, 1994, the newly constructed expansion of the Main Office and the
remodeling of the first floor of the original structure was completed. The
offices were ready for occupancy in time for the annual Christmas Club Open
House, November 4th and 5th. The remodeling of the offices located in the
basement of the Main Office began as soon as Open House was over.
The Napoleon Office opened for business during the second week of February,
1995. On Sunday, February 12, 1995, an Open House was held at the Main Office
and the new Napoleon Office.
An ATM was placed at Northwest State Community College in March, 1995, to better
serve the customers from the Four County Area. In April, 1995, a drive-up ATM
was installed at the Archbold Woodland Office.
During the spring of 1996, the Delta Office began an extensive remodeling and
expansion project. The need was seen for more loan officer space and an ATM
machine. The project was completed in October of 1996. Two more ATM locations
were also secured during this year. An ATM was placed in the Community Hospital
of Williams County, Bryan, and another in the Fulton County Health Center,
Wauseon. The Farmers & Merchants State Bank now has twelve ATM's located
throughout Fulton, Williams, and Henry Counties.
In June of 1996, Farmers & Merchants Bancorp split its stock, 5 for 1. The goal
was to bring the price per share down so it would be more affordable and
possibly encourage trading. Also during that year, The Farmers & Merchants State
Bank again hit a new growth plateau. Year end assets were over $500 million.
The Bank continued to expand ATM locations during 1997 by installing a drive-up
machine at our West Unity office. During the fourth quarter 1997 an ATM (cash
dispensing only) was installed at Wyse Commons at the Fairlawn Haven Complex in
Archbold. 1997 proved to be a very profitable year for the Bank and ended the
year with $528 million in assets. An application was submitted and approved for
a new full service office to be located at the east end of the village of
Montpelier. Construction of that building began in October 1997 and was open for
business in June 1998.
With the opening of the Montpelier Eastside Office in June 1998, The Farmers &
Merchants State Bank had 12 office locations in 8 communities. There were four
new ATM's installed during 1998. Those ATM's are located at the Bryan East High
Office, Stryker Office, Montpelier Eastside Office, and Repp Oil in Fayette.
With the addition of these new ATM's the bank now has 18 ATM locations
throughout our market area. The existing Fulton County Health Center ATM was
relocated to Beck's Petro Country Store, Ridgeville Corners.
Construction of the Swanton Office began in June 1999. This office, which opened
in November 1999, is the bank's first office located in Lucas County. With the
addition of another drive-up ATM at the Swanton Office, there were 19 ATM
locations. Assets at the end of the fourth quarter were $598 million.
In 2000, two new automated teller machines were added to off-site locations,
Sauder Village in Archbold, Ohio and the Delta Eagles in Delta, Ohio. In
December of 2000 construction of the new Defiance Banking Center began. Assets
at the end of the fourth quarter exceeded $635 million.
4
In 2001 the new Defiance branch was opened in Defiance, Ohio and an ATM was
placed at the Bryan Eagles, Bryan, Ohio. With the Main office experiencing a
lack of office space, plans for a new operations facility were in progress. The
ATM was removed from Beck's Petro County Store, Ridgeville Corners.
During the first quarter of 2002, construction of the new operations center
began on the corner of Fulton County Rd. C and Clyde's Way, Archbold, Ohio.
Occupation of the center is planned for the first quarter of 2003.
One thing that has never changed through the tremendous growth The Farmers &
Merchants State Bank experienced over the years is that it continues to be "Your
Community Bank". This image remains a goal of the Bank's strategic plan. The
Bank is proud to have played a large part in the growth of northwest Ohio. It is
The Farmers & Merchants State Bank's commitment to insure that community banking
continues to grow and prosper by providing quality customer service and
adequately fulfilling the financial needs of the individuals, farmers,
businesses, and industries in our market area.
NATURE OF ACTIVITIES
The Farmers & Merchants State Bank through its equivalent of 275 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, Stryker, West Unity, Bryan, Delta and Napoleon,
Montpelier, Swanton, and Defiance. Two ATM's are also located at Sauder
Woodworking Co., Inc., a major employer in Archbold. Additional locations are at
Northwest State Community College, Archbold; Williams County Hospital, Bryan;
Fairlawn Haven Wyse Commons, Archbold; Repp Oil, Fayette; Delta Eagles, Bryan;
and Sauder Village Barn Restaurant, Archbold.
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. 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.
F&M Investments, the brokerage department of The Farmers & Merchants State Bank,
opened for business in April, 1999. Securities are offered through Raymond James
Financial Services, Inc.
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.
5
The commercial banking business in the geographical area in which The Farmers &
Merchants State Bank operates is highly competitive. In its banking activities,
it competes directly with other commercial banks and savings and loan
institutions in each of its operating localities. The following is a summary by
geographical area of The Farmers & Merchants State Bank principal competition:
Branch Location
- ------------------------ ------------------------------------------------
Archbold, Ohio Sky Financial (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
Sky Financial
Midwest Community Federal Credit Union
Stryker, Ohio Sky Financial
West Unity, Ohio National Bank of Montpelier
Delta, Ohio State Bank & Trust Company
First Federal Savings & Loan of Delta
Bryan, Ohio Sky Financial (2 offices)
National City Bank (Subsidiary of National City
Corporation)
First Federal Savings & Loan of Defiance
(2 offices)
Community First Bank & Trust
National Bank of Montpelier
Midwest Community Federal Credit Union
Montpelier, Ohio Sky Financial
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
Sky Financial (2 offices)
National City Bank (Subsidiary of National City
Corporation)
Swanton, Ohio Fifth Third Bank
National City Bank
First Federal Savings & Loan of Delta
Key Bank
6
Defiance, Ohio State Bank & Trust Company (4 offices)
First Federal Bank of the Midwest
Sherwood State Bank
City Loan
American General
Midwest Community Federal Credit Union
Fort Defiance Federal Credit Union
Sky Financial
SELECTED STATISTICAL AND FINANCIAL INFORMATION
EARNINGS SUMMARY
Farmers & Merchants Bancorp, Inc. reported net income of $7.4 million for 2002,
which is an increase of $642 thousand over the 2001 net income of $6.8 million,
and virtually the same as 2000 net income of $7.4 million. Earnings per share
correspondingly increased for 2002 to $5.69 per share compared to $5.20 per
share and $5.69 per share for 2000 and 1999, respectively.
INTEREST INCOME
The following table presents net interest income, interest spread and net
interest margin for the three years 2000 through 2002, comparing average
outstanding balances of earnings assets and interest bearing liabilities with
the associated interest income and expense and their corresponding average rates
of earned and paid. The tax exempt asset yields have been tax effected to
reflect a marginal corporate tax rate of 34%. Average outstanding loan balances
include nonperforming loans and mortgage loans held for sale. Average
outstanding security balances are computed based on carrying values including
unrealized gains and losses on available-for-sale securities.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND
INTEREST DIFFERENTIAL
2002
-----------------------------------------
Average Interest/
Balance Dividends Yield/Rate
------- --------- ----------
ASSETS
Interest Earning Assets:
Loans (1) $476,981 $ 35,309 7.40%
Taxable investment securities 134,990 6,410 4.75%
Tax-exempt investment securities 39,812 1,622 4.07%
Interest bearing deposits 823 25 3.04%
Federal funds sold 3,522 58 1.65%
-------- --------- ----------
Total Interest Earning Assets 656,128 $ 43,424 6.62%
========= ==========
Non-Interest Earning Assets:
Cash and cash equivalents 15,873
Other assets 23,135
---------
Total Assets $695,136
=========
7
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $197,819 $ 1,705 0.86%
Other time deposits 333,247 15,869 4.76%
Other borrowed money 17,773 990 5.57%
Federal funds purchased and securities
sold under agreement to repurchase 23,609 415 1.76%
-------- --------
Total Interest Bearing Liabilities 572,448 $ 18,979 3.32%
======== =======
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits 40,485
Other 7,708
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Total Liabilities 620,641
Stockholders' Equity 74,495
--------
Total Liabilities and
Shareholders' Equity $695,136
========
Interest/dividend income/yield $ 43,424 6.62%
Interest expense/yield 18,979 3.32%
-------- -------
Net Interest Spread $ 24,445 3.30%
======== =======
Net Interest Margin 3.73%
=======
2001
-----------------------------------------------------
Average Interest/
Balance Dividends Yield/Rate
-------- --------- ----------
ASSETS
Interest Earning Assets:
Loans (1) $472,181 $ 40,728 8.63%
Taxable investment securities 106,774 6,203 5.81%
Tax-exempt investment securities 29,565 1,310 4.43%
Interest bearing deposits 120 231 192.50%
Federal funds sold 11,342 473 4.17%
-------- --------
Total Interest Earning Assets 619,982 $ 48,945 7.89%
======== =======
Non-Interest Earning Assets:
Cash and cash equivalents 22,847
Other assets 20,640
--------
Total Assets $663,469
========
8
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $179,610 $ 4,898 2.73%
Other time deposits 320,341 18,049 5.63%
Other borrowed money 20,822 2,085 10.01%
Federal funds purchased and securities
sold under agreement to repurchase 25,656 416 1.62%
-------- --------
Total Interest Bearing Liabilities 546,429 $ 25,448 4.66%
======== ========
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits 42,170
Other 5,440
--------
Total Liabilities 594,039
Stockholders' Equity 69,430
--------
Total Liabilities and
Shareholders' Equity $663,469
========
Interest/dividend income/yield $ 48,945 7.89%
Interest expense/yield 25,448 4.66%
-------- --------
Net Interest Spread $ 23,497 3.24%
======== ========
Net Interest Margin 3.79%
========
2000
-------------------------------------------------
Average Interest/
Balance Dividends Yield/Rate
------- --------- ----------
ASSETS
Interest Earning Assets:
Loans (1) $475,035 $ 42,661 8.98%
Taxable investment securities 78,995 4,782 6.05%
Tax-exempt investment securities 27,094 1,313 4.85%
Interest bearing deposits 100 4 4.00%
Federal funds sold 2,021 130 6.43%
-------- --------
Total Interest Earning Assets 583,245 $ 48,890 8.38%
======== =======
Non-Interest Earning Assets:
Cash and cash equivalents 16,020
Other assets 19,810
--------
Total Assets $619,075
========
9
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits $143,675 $ 4,805 3.34%
Other time deposits 304,666 17,494 5.74%
Other borrowed money 28,637 1,942 6.78%
Federal funds purchased and securities
sold under agreement to repurchase 20,670 1,268 6.13%
-------- --------
Total Interest Bearing Liabilities 497,648 $ 25,509 5.13%
======== =======
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits 54,837
Other 5,102
--------
Total Liabilities 557,587
Stockholders' Equity 61,488
--------
Total Liabilities and
Shareholders' Equity $619,075
========
Interest/dividend income/yield $ 48,890 8.38%
Interest expense/yield 25,509 5.13%
-------- -------
Net Interest Spread $ 23,381 3.26%
======== =======
Net Interest Margin 4.01%
=======
(1) For purposes of these computations, non-accruing loans are included in
the daily average outstanding loan amounts.
The primary source of the Company's traditional banking revenue is net interest
income. Net interest income is the difference between interest income on
interest earning assets, such as loans and securities, and interest expense on
liabilities used to fund those assets such as interest bearing deposits and
other borrowings. Net interest income is affected by changes in both interest
rates and the amount and composition of earnings assets and liabilities. The
change in net interest income is most often measured as a result of two
statistics - interest spread and net interest margin. The difference between the
yields on earning assets and the rates paid for interest bearing liabilities
supporting those funds represents the interest spread. Because non-interest
bearing sources of funds such as demand deposits and stockholders' equity also
support earning assets, the net interest margin exceeds the interest spread.
The following tables show changes in interest income, interest expense and net
interest due resulting from changes in volume and rate variances for major
categories of earnings assets and interest bearing liabilities.
2002 vs 2001
------------------------------------------------
Net Due to Change in
Change Volume Rate
------- ------- -------
Interest Earned On:
Loans $(5,419) $ 355 $(5,774)
Taxable investment securities 207 1,340 (1,133)
Tax-exempt investment securities 312 417 (105)
Interest bearing deposits (206) 21 (227)
Federal funds sold (415) (129) (286)
------- ------- -------
Total Interest Earning Assets $(5,521) $ 2,005 $(7,526)
======= ======= =======
Interest Paid On:
Savings deposits $(3,193) $ 157 $(3,350)
Other time deposits (2,180) 615 (2,795)
Other borrowed money (1,095) (170) (925)
Federal funds sold and security
repurchase agreements (1) (36) 35
------- ------- -------
$(6,469) $ 566 $(7,035)
======= ======= =======
10
2001 vs 2000
-----------------------------------------------
Net Due to Change in
Change Volume Rate
------ ------ ----
Interest Earned On:
Loans $(1,933) $ (246) $(1,687)
Taxable investment securities 1,421 1,614 (193)
Tax-exempt investment securities (3) 109 (112)
Interest bearing deposits 227 39 188
Federal funds sold 343 389 (46)
------- ------- -------
Total Interest Earning Assets $ 55 $ 1,905 $(1,850)
======= ======= =======
Interest Paid On:
Savings deposits $ 93 $ 2,228 $(2,135)
Other time deposits 555 883 (328)
Other borrowed money 143 (783) 926
Federal funds sold and security --
repurchase agreements (852) 81 (933)
------- ------- -------
$ (61) $ 2,409 $(2,470)
======= ======= =======
Interest income from fees on loans and leases decreased $5.4 million to $35.3
million for 2002 from $40.7 million for 2001. This compares with a decrease of
$2 million for 2001 under 2000 interest income of $42.7 million. The decrease
for 2001 was primarily due to a decrease in commercial loan activity, while the
decrease for 2002 was primarily due to a drop in interest rates.
Net interest margin was 3.73 percent for 2002, 3.79% for 2001, and 4.01% for
2000. Although the interest rate earned on the bank's interest earning assets
dropped in 2002, there was a corresponding drop in the interest rate paid on
deposits resulting in a net interest margin approximately the same as for 2001.
NON-INTEREST INCOME
Non-interest income for 2002 of $5.8 million is just slightly less than that for
2001 of $5.9 million. Non-interest income for 2001 experienced a dramatic
increase over 2000 levels due to an increase in fixed rate mortgage loan
activity as a result of the favorable interest rates for such loans in 2001.
These types of loans are sold to investors while the Bank retains the mortgage
servicing rights on these loans. As a result, mortgage servicing rights income
increased $1.6 million for 2001 over 2000 mortgage servicing rights income of
$113 thousand. As a result of the refinancing activity in 2001, there was not as
much of this activity in 2002. As a result mortgage servicing rights for 2002
dropped to a level similar to that of 2000. Service charges on deposits and
other service charges increased for 2002 enough to offset the drop in mortgage
servicing rights income.
NON-INTEREST EXPENSE
Non-interest expense for 2002 increased approximately a half a million dollars
for 2002 over 2001 to $17.7 million, a 3.2 percent increase. This compares to an
increase of $2.9 million or 17.2 percent increase for 2001 over 2000.
11
FINANCIAL CONDITION
Average earning assets have again demonstrated consistent growth over the last
three years. Average earnings assets for 2002 were $656 million compared to $620
million for 2001 and $583 million for 2000. This growth in average earnings
assets represent a 5.83 percent and 6.3 percent for 2002 and 2001, respectively.
Almost all of the increase in assets for 2002 over 2001 has been in the
securities available for sale. Average interest bearing liabilities have also
showed steady increases rising $26 million in 2002 and an increase of $48.8
million in 2001.
INVESTMENT SECURITIES
Security balances at December 31 are summarized below:
(In Thousands)
------------------------------------------------------
2002 2001 2000
--------------- --------------- -----------------
U.S. Treasury and Government agencies $104,618 $ 92,622 $ 61,115
Mortgage-backed securities 16,618 21,409 7,863
State and local governments 55,860 50,819 32,157
Corporate debt securities 1,650 7,091 9,196
Commercial paper -- 974 2,908
Equity securities 47 47 20
======== ======== ========
$178,793 $172,962 $113,259
======== ======== ========
The following table sets forth (dollars in thousands) the maturities of
investment securities at December 31, 2002 and the weighted average yields of
such securities calculated on the basis of cost and effective yields weighted
for the scheduled maturity of each security. Tax-equivalent adjustments, using a
thirty-four percent rate have been made in yields on obligations of state and
political subdivisions. Stocks of domestic corporations have not been included.
Maturities
-----------------------------------------------------------------------
After One Year
Within One Year Within Five Years
---------------------------- ------------------------------------
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury $ 1,927 5.41% $ 2,198 3.08%
U.S. Government agency 42,313 4.13% 55,256 4.60%
Mortgage-backed securities 3,227 1.70% 7,800 5.11%
State and local governments 8,370 4.86% 20,160 5.95%
Taxable state and local governments 499 6.00% 8,243 5.58%
Corporate debt securities 501 3.60% 1,114 3.68%
Commercial paper -- 0.00% -- 0.00%
Maturities
--------------------------------------------------------------
After Five Years
Within Ten Years After Ten Years
-------------------------- ---------------------------
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury $ -- 0.00% $ -- 0.00%
U.S. Government agency -- 0.00% -- 0.00%
Mortgage-backed securities 5,095 4.90% -- 0.00%
State and local governments 14,758 5.84% 536 7.00%
Taxable state and local governments 1,118 6.22% -- 0.00%
Corporate debt securities -- 0.00% -- 0.00%
Commercial paper -- 0.00% -- 0.00%
12
At December 31, 2002 the Bank held no large block of any one investment
security, except for U.S. Treasury and other U.S. Government agencies. One
holding in debt securities exceeded $3.4 million which was a FHLMC Agency note
maturing July 15, 2005. The Bank also holds stock in the Federal Home Loan Bank
of Cincinnati at a cost of $3.3 million. This is required in order to obtain
Federal Home Loan Bank Loans.
LOAN PORTFOLIO
The Bank's various loan portfolios are subject to varying levels of credit risk.
Management mitigates these risks through portfolio diversification and through
standardization of lending policies and procedures. The following table shows
the Bank's loan portfolio by category of loan:
(In Thousands)
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----- ---- ---- ---- ----
Loans:
Commercial/industrial $100,119 $ 96,992 $ 96,990 $100,996 $ 81,253
Agricultural 66,136 53,717 51,337 46,035 38,882
Real estate mortgage 272,857 247,545 261,289 237,056 200,675
Installment 51,156 55,845 69,081 71,662 68,385
IDB 7,810 7,590 8,647 7,015 4,587
-------- -------- -------- -------- --------
Total Loans $498,078 $461,689 $487,344 $462,764 $393,782
======== ======== ======== ======== ========
The following table shows the maturity of loans:
Maturities (In Thousands)
--------------------------------------------------------------------
After One
Within Year Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Commercial/industrial/agriculture $ 87,449 $ 32,330 $ 46,476 $166,255
Real estate mortgage 6,738 24,407 241,712 272,857
Installment 8,573 36,449 6,134 51,156
Industrial Development Bonds 1,702 1,921 4,187 7,810
The following table presents the total of loans due after one year which have 1)
predetermined interest rates and 2) floating or adjustable interest rates:
(In Thousands)
--------------------------
Fixed Variable
Rate Rate
------------ ---------
Real estate $ 62,940 $ 216,531
Commercial and industrial 70,509 95,208
Consumer, Master Card and overdrafts 49,591 1,565
Industrial Development Bonds 7,810 --
The following table summarizes the Company's non-accrual and past due loans as
of December 31:
(In Thousands)
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ----------- -------- ------
Nonaccrual loans $ 6,014 $ 5,353 $ 6,622 $ 6,504 $ 6,455
Accruing loans past due
90 days or more 2,589 5,408 2,577 2,264 1,988
------- ------- ------- ------- -------
Total $ 8,603 $10,761 $ 9,199 $ 8,768 $ 8,443
======= ======= ======= ======= =======
13
As of December 31, 2002, management, to the best of their knowledge, is not
aware of any significant loans, group of loans or segments of the loan portfolio
not included above, where there are serious doubts as to the ability of the
borrowers to comply with the present loan payment terms.
Although loans may be classified as non-performing, many continue to pay
interest irregularly or at less than original contractual rates. Interest income
that would have been recorded under the original terms of these loans was $1.5
million for 2002 and $1.9 million for 2001. Any collections of interest on
non-accrual loans are included in interest income when collected. This amounted
to $195 for 2002, $257 thousand for 2001 and $177 for 2000.
Loans are placed on non-accrual status in the event one of the following occurs:
the total line of the customer is charged off to the extent of 50%, the loan is
in past due status for more than 180 days.
The $6 million of non-accrual loans as of December 31, 2002 are secured.
At December 31, 2002 the Bank has $8.6 million of loans which it considers to be
potential problem loans in that the borrowers are experiencing financial
difficulties. These loans are subject to constant management attention and are
reviewed more frequently that quarterly.
The amount of the potential problem loans was considered in management's review
of the loan loss reserve required at December 31, 2002.
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, 2002, the Bank had loans outstanding to individuals and firms
engaged in the various fields of agriculture in the amount of $66 million. The
ratio of this segment of loans to the total loan portfolio is not considered
unusual for a bank engaged in and servicing rural communities.
The allowance for loan losses is evaluated based on an assessment of the losses
inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated.
Management considers several different risk assessments in determining the
allowance for loan losses. The allocated component of the allowance for loan
losses reflects expected losses resulting from an analysis of individual loans,
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. For those loans where the
internal credit rating is at or below a predetermined classification and
management can reasonably estimate the loss that will be sustained based upon
collateral, the borrowers operating activity and economic conditions in which
the borrower operates, a specific allocation is made. For those borrowers that
are not currently behind in their payment, but for which management believes
based on economic conditions and operating activities of the borrower, the
possibility exists for future collection problems, a reserve is established. The
amount of reserve allocated to each loan portfolio is based on past loss
experiences, the different levels of risk within each loan portfolio. The
historical loan loss portion is determined using a historical loss analysis by
loan category.
The unallocated portion of the reserve for loan losses is determined based on
management's assessment of general economic conditions as well as specific
economic factors in the Bank's marketing area. This assessment inherently
involves a higher degree of uncertainty. It represents estimated inherent but
undetected losses within the portfolio that are probable due to uncertainties in
economic conditions, delays in obtaining information, including unfavorable
information about a borrower's financial condition and other current risk
factors that may not have yet manifested themselves in the Bank's historical
loss factors used to determine the allocated component of the allowance.
14
Actual charge-off of loan balances is based upon periodic evaluations of the
loan portfolio by management. These evaluations consider several factors,
including, but not limited to, general economic conditions, financial condition
of the borrower, and collateral.
As can be seen from the table below, charge-offs increased to $3.1 million for
2002, and the provision was $2.6 million. Both of these amounts are up
significantly over prior years. Credit losses in the installment loan and real
estate loan portfolio have remained fairly steady even given the downturn in the
economy. The increase was primarily the result of one large commercial credit in
which $1,500,000 of the note was written off and another $1.75 million of this
loan was added to the reserve for loan losses.
The following table presents a reconciliation of the allowance for loan losses:
(In Thousands)
---------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Loans $498,078 $461,689 $487,344 $462,764 $393,782
======== ======== ======== ======== ========
Daily average of outstanding loans $475,035 $472,181 $475,035 $428,087 $408,291
======== ======== ======== ======== ========
Allowance for loan losses-January 1 $ 7,275 $ 7,160 $ 6,750 $ 5,850 $ 5,850
Loans Charged Off:
Commercial 2,987 1,826 257 185 472
Installment 1,050 1,254 1,883 1,085 1,260
Real estate mortgages 215 54 233 304 42
-------- -------- -------- -------- --------
4,252 3,134 2,373 1,574 1,774
-------- -------- -------- -------- --------
Loan Recoveries:
Commercial 801 421 358 493 540
Installment 366 191 923 331 339
Real estate mortgages 16 5 6 13 3
-------- -------- -------- -------- --------
1,183 617 1,287 837 882
-------- -------- -------- -------- --------
Net Charge Offs 3,069 2,517 1,086 737 892
-------- -------- -------- -------- --------
Provision for loan loss 2,194 2,632 1,496 1,637 892
-------- -------- -------- -------- --------
Allowance for loan losses-December 31 $ 6,400 $ 7,275 $ 7,160 $ 6,750 $ 5,850
======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding 0.65% 0.53% 0.23% 0.17% 0.22%
======== ======== ======== ======== ========
Allocation of the allowance for loan losses among the various loan categories is
as follows:
% of Loans
in Each
Amount Category To
(000's) Total Loans
----------- --------------
Balance at End of Period Applicable To:
Commercial/industrial $3,170 1.91%
Installment 1,140 2.23%
Real estate 1,306 0.48%
Unallocated 784 0.16%
--------- --------
$6,400 4.61%
========= ========
15
DEPOSITS
The amount of outstanding time certificates of deposits and other time deposits
in amounts of $100,000 or more by maturity are as follows:
Over One
Over Three Year Less Over
Under Less Than Than Three Three
Three Months One Year Years Years
------------ -------- ----- -----
Time deposits $ 33,595 $ 40,446 $ 14,979 $ 1,079
The following table presents the average amount of and average rate paid on each
deposit category:
Demand NOW Savings Time
Deposits Accounts Accounts Accounts
-------- -------- -------- --------
December 31, 2002:
Average balance (In thousands) $ 40,485 $ 93,084 $ 104,735 $ 333,247
Average rate 0.00% 1.18% 1.32% 4.53%
December 31, 2001:
Average balance (In thousands) $ 38,377 $ 75,765 $ 118,393 $ 319,326
Average rate 0.00% 2.00% 2.86% 5.67%
December 31, 2000:
Average balance (In thousands) $ 41,211 $ 45,753 $ 97,922 $ 304,666
Average rate 0.00% 2.14% 3.44% 5.77%
RETURN ON ASSETS AND EQUITY
The Company has consistently maintained regulatory capital ratios at or above
the "well capitalized" levels. See Note 16 to the Consolidated Financial
Statements for more information.
Stockholders' equity as of December 31, 2002 was $77.7 million compared to $70.3
million for 2001 and $65 million for 2000, a $7.4 million or 10.5 percent
increase. Dividends for 2002 increased by $.05 per share to $1.65 compared to
$1.60 per share and $1.50 per share for 2001 and 2000, respectively resulting in
the dividend payout ratios shown in the table below. Management and the Board of
Directors are continually reviewing this ratio. The dividends that can be paid
are subject to regulatory restrictions.
The following table shows consolidated operating and capital ratios of the
Company for each of the last three years:
2002 2001 2000
---- ---- ----
Return on average assets 1.06% 1.02% 1.19%
Return on average equity 9.93% 9.73% 12.02%
Dividend payout ratio 28.99% 30.79% 26.38%
Equity to assets ratio 10.70% 10.29% 10.23%
FUNDING
The Company's bank subsidiary continues to follow the strategy of acquiring
assets for investment purposes and retaining its own loan production, attempting
to achieve reasonable spreads through matching such assets with one of a number
of funding sources available.
16
The Farmers & Merchants State Bank functions as a financial intermediary, and as
a result, its financial condition should be examined in terms of trends in its
sources and uses of funds. The following comparison of daily average balances
(in thousands) indicates how the bank has managed its sources and uses of funds.
2002
---------------------------------------------------
Net Change
Average -------------------------------
Balance Amount Percentage
Funding Uses:
Loans $476,981 $ 4,800 1.02%
Taxable securities 134,990 28,216 26.43%
Tax exempt securities 39,812 10,247 34.66%
Interest bearing deposits 823 703 585.83%
Federal funds sold 3,522 (7,820) -68.95%
-------- --------
$656,128 $ 36,146 5.83%
======== ========
Funding Sources:
Deposits:
Noninterest bearing demand $135,214 $ 93,044 220.64%
Savings 104,735 (74,875) -41.69%
Other time 333,247 12,906 4.03%
Other borrowed money 17,773 (3,049) -14.64%
Federal funds purchased --
agreements to repurchase 23,609 (2,047) -7.98%
-------- --------
$614,578 $ 25,979 4.41%
======== ========
17
2001 2000
---------------------------------------------------- -------
Net Change
Average --------------------------------- Average
Balance Amount Percentage Balance
------- ------ ---------- -------
Funding Uses:
Loans $472,181 $ (2,854) -0.60% $475,035
Taxable securities 106,774 27,779 35.17% 78,995
Tax exempt securities 29,565 2,471 9.12% 27,094
Interest bearing deposits 120 20 20.00% 100
Federal funds sold 11,342 9,321 461.21% 2,021
-------- -------- --------
$619,982 $ 36,737 6.30% $583,245
======== ======== ========
Funding Sources:
Deposits:
Noninterest bearing demand $ 42,170 $(58,420) -58.08% $100,590
Savings 179,610 81,688 83.42% 97,922
Other time 320,341 15,675 5.14% 304,666
Other borrowed money 20,822 (7,815) -27.29% 28,637
Federal funds purchased
agreements to repurchase 25,656 4,986 24.12% 20,670
-------- -------- --------
$588,599 $ 36,114 6.54% $552,485
======== ======== ========
LIQUIDITY
Historically, the primary source of liquidity has been core deposits that
include non-interest bearing demand deposits, NOW and money market accounts and
time deposits of individuals. Through marketing efforts and competitive interest
rates, new customers and additional deposits were attracted during 2002 although
not by as much as in 2001. Core deposits increased again in 2002. Overall
deposits increased almost $10.2 million to $576 million for 2002 compared to
deposits at the end of 2001 of $566 million and $516 million for 2000. These
increases represent 1.8 percent and 9.6 percent increases, respectively.
Again, historically, the primary use of new funds is placing the funds back into
the community through loans for the acquisition of new homes, consumer products
and for business development. The use of new funds for loans is measured by the
loan to deposit ratio. The Company's loan to deposit ratio for 2002 was 86.32
percent, 2001 was 82.71 percent, and 93 percent for 2000. Because of the decline
in interest rates, there was an increase in real estate loan activity which
increased the loan to deposit ratio slightly for 2002 over the 2001 ratio.
Short-term debt such as federal funds purchased and securities sold under
agreement to repurchase also provides the Company with liquidity. Short-term
debt for both federal funds purchased and securities sold under agreement to
repurchase amounted to $38.2 million at the end of 2002 compared to $26.5
million at December 31, 2001 and $18.9 million at the end of 2001. These funds
provided an additional $11.7 million in liquidity for 2002.
Other borrowings are also a source of funds. Other borrowings consist of loans
from the Federal Home Loan Bank of Cincinnati at fixed rates. These funds are
then used to provide housing mortgages back to the community in the form of
fixed rate loans. Borrowings from this source increased by $11.3 million to
$28.7 million at December 31, 2002. This compares to decreased borrowings during
2001 of $13.4 million to $17.4 million at December 31, 2001, and borrowings of
$30.8 million at the end of 2000.
18
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 that 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,
2002 for each major category of interest-earning assets (at amortized cost) and
interest-bearing liabilities:
0-90 90-365 1-5 Over 5
Days Days Years Years Total
--------- --------- --------- --------- ---------
Interest bearing deposit $ 279 $ -- $ -- $ -- $ 279
Investment securities 20,205 44,064 93,509 21,015 178,793
Loans 177,844 186,323 67,868 65,804 497,839
--------- --------- --------- --------- ---------
Total Rate Sensitive Assets 198,328 230,387 161,377 86,819 676,911
--------- --------- --------- --------- ---------
Deposits 150,863 224,522 200,988 -- 576,373
Federal funds purchased and --
agreements to repurchase 38,200 -- -- -- 38,200
Other borrowings 518 1,553 23,259 3,366 28,696
--------- --------- --------- --------- ---------
Total Rate Sensitive Liabilities 189,581 226,075 224,247 3,366 643,269
--------- --------- --------- --------- ---------
Gap $ 8,747 $ 4,312 $ (62,870) $ 83,453 $ 33,642
========= ========= ========= ========= =========
OTHER MATTERS
The Financial Accounting Standards Board issued several new pronouncements
during 2002. Statement of Financial Accounting Standards No. 145 entitled
Rescission of FASB Statements No. 4, 44, and 64, and Amendment of FASB State No.
13, and Technical Corrections will not have a material impact on the financial
statements of the Company.
19
Statement of Financial Accounting Standards No. 146 entitled Accounting for
Costs Associated with Exit or Disposal Activities was issued in 2002 and is
effective for exit or disposal activities initiated after December 31, 2002.
Management does anticipate this pronouncement having a material impact on the
financial statements.
Statement of Financial Accounting Standards No. 147 entitled Acquisitions of
Certain Financial Institutions removes financial institutions from the scope of
FASB 72 which dealt with the financial accounting and reporting procedures for
acquisitions of banking and thrift institutions accounted for by the purchase
method, and requires these types of transactions to be accounted in accordance
with FASB Statements No. 141, Business Combinations and No. 142, Goodwill and
Other Intangible Assets. Management believes that this pronouncement will not
have a material impact on Farmers & Merchants Bancorp's financial statements, as
the primary method of growth for the Company has been through opening new
branches in desired locations as opposed to acquiring existing banks.
PROPERTIES
The principal office of Farmers & Merchants Bancorp, Inc. is located in
facilities owned by The Farmers & Merchants State Bank at 307-11 North Defiance
Street, Archbold, Ohio 43502.
The Farmers & Merchants State Bank operates from and utilizes the entire
facilities at 307-11 North Defiance Street. In addition, the bank owns the
property from 200 to 208 Ditto Street, Archbold, Ohio, which it uses for Bank
parking and a community mini-park area. The Bank owns real estate at two
locations, 207 Ditto Street and 209 Ditto Street in Archbold, Ohio upon which
the bank built a commercial building to be used for storage, and a parking lot
for company vehicles and employee parking.
In late 1993 construction began on a 15,237 square foot addition on an adjacent
lot it owned at 313 North Defiance Street. This addition was substantially
completed by the end of 1994 with final completion taking place in the spring of
1995. Then in 1993 the Bank purchased real estate across from the main
facilities to provide for possible parking expansion.
In 1989 the Bank purchased additional real estate in Bryan, Ohio, and has
established another branch operation in Bryan. The Bank, in 1988, purchased real
estate immediately adjacent to its branch bank premises in Delta, Ohio for
expansion of parking facilities. In 1990 the Bank purchased real estate in
Delta, Ohio for additional parking to serve its branch office. The Bank
constructed in 1994 a 1,540 square foot addition to the branch in Wauseon, Ohio.
The bank obtained permission to open a branch in Napoleon, Ohio. Facilities were
completed in the Spring of 1995. The Bank also owns real estate consisting of
land and buildings housing each of its full service branch operations, except
for the Montpelier, Ohio facilities which are leased. Construction has begun on
permanent facilities for the Montpelier operations and was completed in June of
1998.
The Bank has purchased a parcel of land in Archbold, Ohio on which it is
constructing a new $4 million operations center to accommodate the growth that
has taken place at the Bank. This facility was completed in February, 2003.
Current locations of retail banking services are:
Branch Location
- ----------------------------- -------------------------------
Archbold, Ohio 1313 South Defiance Street
Wauseon, Ohio 1130 North Shoop Avenue
119 North Fulton Street
Stryker, Ohio 300 South Defiance Street
West Unity, Ohio 200 West Jackson Street
Bryan, Ohio 924 W. High Street
1000 South Main Street
Delta, Ohio 101 Main Street
20
Montpelier, Ohio 225 West Main Street
1150 East Main Street
Napoleon, Ohio 2255 Scott Street
Swanton, Ohio 7 Turtle Creek Circle
Defiance, Ohio 1175 Hotel Drive
The majority of the above locations have drive-up service facilities.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
proceedings incidental to the business of the Bank, to which the Bank is a party
or of which any of its properties is the subject.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the fiscal year covered by
this report to a vote of the security holders through solicitation of proxies or
otherwise.
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The company's stock is not quoted on the National Association of Securities
Dealers Automated Quotations System (NASDAQ).
The company's stock is traded in the principal market area of Fulton, Williams,
and Henry Counties, Ohio. The company has no broker that sets a price for the
company's stock, therefore, the only source as to the high and low sale price is
from private sales. The high and low sale price known to the company's
management is as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2002 High $110.00 $115.00 $112.00 $115.00
Low $85.00 $95.00 $95.00 $95.00
2001 High $105.00 $115.00 $105.00 $130.00
Low $85.00 $85.00 $90.00 $90.00
As of March 1, 2002, there were 1,718 record holders of common stock of the
company.
Dividends are paid quarterly. Per share dividends for the years ended 2001 and
2000 are as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- ---------
2001 $.35 $.40 $.40 $.50 $1.65
2001 $.35 $.35 $.35 $.55 $1.60
SELECTED FINANCIAL DATA
Selected financial data is presented on pages 56 and 57 of the Annual Report to
shareholders for the year ended December 31, 2001 and are incorporated herein by
reference.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
22
MESSAGE FROM MANAGEMENT:
As the year 2002 drew to a close, the management and associates of Farmers &
Merchants Bancorp, Inc. mirrored the nation in demonstrating the capacity for
meeting the challenges of change. The ability to remain focused on the company's
long-term goals while working through this period is a testament to the
dedication of our personnel and the fundamental strength of our organization.
Perhaps the start of this decade, in fact century, foretold of the turbulent
challenging times that would lie ahead. Remember the dire warning of the year
2000 rollover and the basic nonevent it turned out to be. Since the time change,
the new millennium has provided unending challenges. We have weathered the
terrorist attack on domestic soil, the lowest rate environment in over forty
years, accounting scandals that shake the public trust in private industry, and
drops in the stock market being compared to pre-depression times.
The last few years have reinforced the adage - "never say never". Predicting any
future trends or rate environment seems difficult. The mortgage activity these
past five months has provided a needed revenue source. The return of investor's
money back to banking has made most banks flush with deposits. As the stock
market begins its slow rebound, an eye will be kept on the deposit levels to
insure adequate liquidity in the system.
The current rate environment has hit our population living on fixed incomes the
hardest, especially the elderly. We have felt the pain of a tightened interest
margin, as have they of losing interest income. Risk management and strategic
planning have proven to be essential for maintaining success. While we are not
completely satisfied with our 2002 results, we have been able to weather the
turbulent times with positive dependable results.
During the course of 2002, we did move ahead with initiatives that we believe
will enhance shareholder value for years to come. Our guiding principles have
been twofold: 1) To build a financial services company that delivers a broad
range of high-value products through a sales culture that builds deep
relationships with our customers. 2) To create long-term shareholder value
through a diversified earnings stream, effective risk management and superior
technical and operational efficiencies. Farmers & Merchants Bancorp, Inc.
expects to achieve continued growth through relationship banking with customized
services and local decision making.
2003 brings with it renewed expectations of better times. Recovery, slow but
sure with the end of the second quarter reinforcing the structure for the
remainder of the year. What is missing from the historical comparison in the
first paragraph? Think back to the mid 70's and the prices of oil. The wild card
in all of this is the eminent threat of war. As all Americans, we stand ready to
face the challenges ahead.
Farmers & Merchants Bancorp, Inc. is looking ahead to a year of growth and
expanded opportunity. We are grateful for the contributions of our employees and
the support of our customers and friends. We hope the new year will bring peace
and prosperity for all.
Joe E. Crossgrove Eugene D. Bernath
President/CEO Chairman of the Board
23
FARMERS & MERCHANTS BANCORP, INC.
CONTENTS
Audited Consolidated Financial Statements
and wholly owned subsidiaries December 31, 2002
Message from Management 23
Table of Contents 24
Board of Directors, Advisory Boards and Officers 25 - 28
Independent Auditors' Report 29
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Changes in Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34 - 54
Five Year Summary 55
Quarterly Financial Data 56
Selected Financial Data by Management 57 - 59
Market Risk 60
Trading Market for the Company's Stock 61
Independent Auditors' Report 62
Management Report 63
2002 Promotional Highlights 64 - 67
24
DIRECTORS
EUGENE D. BERNATH JAMES C. SANEHOLTZ BARBARA J. BRITENRIKER
Chairman of the Board President Senior Vice President
The Farmers & Merchants State Bank Saneholtz-McKarns, Inc. Comptroller
Chief Financial Officer
DEXTER L. BENECKE MAYNARD SAUDER
President Chairman ALLEN G. LANTZ
Viking Trucking, Inc. Sauder Woodworking Co. Senior Vice President
Vice President Branch Administrator
SanJan, Inc. MERLE J. SHORT
Farmer GEORGE JELEN
JERRY L. BOYERS President Vice President
President Promow, Inc. Secondary Mortgage Director
Edifice Construction
Management STEVEN J. WYSE RANDAL H. SCHROEDER
President Vice President
JOE E. CROSSGROVE SteelinQ Systems, Inc. Senior Operations Officer
President/Chief Executive
Officer DIRECTOR EMERITUS MICHAEL D. CULLER
The Farmers & Merchants State Bank Vice President
LEE E. GRAFFICE Senior Agri Finance Officer
ROBERT G. FREY CHARLES E. LUGBILL
President DALE L. NAFZIGER DIANN K. MEYER
E. H. Frey & Sons, Inc. HAROLD H. PLASSMAN Vice President
President JAMES L. PROVOST Human Resource Director
Yoder & Frey, Inc. KENNETH E. STAMM
ROBERT V. WHITMER KENT E. ROTH
JULIAN GIOVARELLI Auditor
President Security Officer
GIO Sales, Inc. ARCHBOLD MAIN OFFICE
MARILYN K. JOHNSON
JACK C. JOHNSON EUGENE D. BERNATH Asst. Vice President
President Chairman of the Board Compliance & CRA Officer
Hawk's Clothing, Inc.
Partner JOE E. CROSSGROVE J. SCOTT MILLER
REJO Partnership President Asst. Vice President
Chief Executive Officer Agri Loan Officer
DEAN E. MILLER Cashier
President JUDITH A. WARNCKE
MBC Holdings, Inc. MAYNARD SAUDER Asst. Vice President
Vice Chairman of the Board Marketing Officer
ANTHONY J. RUPP
President DEAN E. MILLER DOUGLAS A. BERNATH
Rupp Furniture Co. Vice President of the Board Asst. Cashier
Financial Advisor
DAVID P. RUPP, JR. EDWARD A. LEININGER
Attorney Executive Vice President JANE C. BRUNER
Plassman, Rupp, Hensal, Chief Operating Officer Asst. Cashier
Short & Hagans Sr. Commercial Loan Officer Operations Supervisor
REX D. RICE JAY A. BUDDE
Executive Vice President Asst. Cashier
Chief Lending Officer E-Commerce Director
25
RUTH ANN DUNN ARCHBOLD ADVISORY BOARD WAUSEON ADVISORY BOARD
Asst. Cashier
Loan Document Administrator BRUCE C. LAUBER RICHARD L. ELROD
President President
NANCY J. FIGY Lauber Manufacturing Co. Mustang Corporation
Asst. Cashier
Administrative Asst Agri Finance MICHAEL D. KREBS WARREN A. KAHRS
President President
BRETT J. KAHRS Laub Auto Parts, Inc. Kahrs Tractor Sales, Inc.
Asst. Cashier
Senior Investment Executive GENE SCHAFFNER JOSEPH H. KOLB
Farmer Owner
NORMA J. KAUFFMAN Kolb & Son
Asst. Cashier GEORGE F. STOTZER
Deposit Administrator Partner SANDRA K. BARBER
Stotzer Do-It Center Fulton County Recorder
GLORIA J. LAUBER Chairman, Ohio Lottery Commission
Asst. Cashier LARRY M. WENDT
Mortgage Loan Director Farmer DR. KENNETH H. KLING
President of Board of Directors Owner
RYAN D. MILLER Ridgeville Telephone Fulton County Vision Services
Asst. Cashier
Commercial Lender
WAUSEON SHOOP OFFICE STRYKER OFFICE
LILLIS F. NOWACZYK
Asst. Cashier GLORIA GUNN RONALD D. SHORT
Consumer Loan Director Asst. Vice President Asst. Vice President
Branch Manager Branch Manager
KELBY J. SCHUMUCKER
Asst. Cashier SUSAN DIERINGER PATTI L. ROSEBROCK
Credit Analyst Asst. Cashier Asst. Cashier
Asst. Branch Manager Asst. Branch Manager
DIANE J. SWISHER
Asst. Cashier JERRY A. BORTON
Central Processing Supervisor Assistant Vice President STRYKER ADVISORY
Agri Loan Officer BOARD
LYDIA A. HUBER
Executive Administrative Assistant SUSAN C. PIKE FRED W. GRISIER
Asst. Corporate Secretary Asst. Cashier Retired
Credit Card Administrator Grisier Funeral Home
ARCHBOLD WOODLAND STEVEN J. PLANSON
OFFICE WAUSEON DOWNTOWN Farmer
OFFICE
DEBORAH L. SHINABERY CAROL J. ENGLAND RICHARD E. RAKER
Asst. Vice President Asst. Vice President Retired
Branch Manager Branch Manager Raker Oil Company
Corporate Secretary
ARTHUR J. SHORT WILLIAM J. BRENNER
Asst. Cashier JEAN E. HORWATH Attorney
Asst. Branch Manager Asst. Cashier
Asst. Branch Manager
26
WEST UNITY OFFICE EUGENE BURKHOLDER D. ROBERT SHAFFER
President Farmer
LEWIS D. HILKERT Falor Farm Center
Senior Vice President PAUL R. MANLEY
Branch Manager AL KREUZ Director of Intercompany
Retired Fulton County Synergies
PATRICIA R. BURKHOLDER Commissioner Sauder Woodworking Co.
Assistant Cashier
Assistant Branch Manager DONALD G. GERDES GARRY COURTNEY
Human Resource Manager President/CEO
Worthington Steel, Delta C.E. Electronics
WEST UNITY ADVISORY
BOARD
BRYAN EAST HIGH OFFICE MONTPELIER WEST MAIN
BEN G. WESTFALL OFFICE
President DAVID C. FRAZER
Westfall Realty, Inc. Assistant Vice President KELLY L. BENTLEY
Branch Manager Asst. Cashier
TED W. MANEVAL Branch Manager
Farmer CAROL L. CHURCH
Assistant Cashier JEANNIE L. VONDEYLEN
R. BURDELL COLON Assistant Branch Manager Asst. Branch Manager
President
Rup-Col., Inc.
BRYAN SOUTHTOWNE OFFICE MONTPELIER EASTSIDE
CHARLES W. KLINGER OFFICE
Pharmacist MICHAEL T. SMITH
Klinger Pharmacy Assistant Vice President KELLY L. BENTLEY
Branch Manager Asst. Cashier
MICHAEL L. RICHER Branch Manager
Farmer RUTH M. FORD
Asst. Cashier BARRY R. VONDEYLEN
Asst. Branch Manager Asst. Branch Manager
DELTA OFFICE
RICHARD S. BRUCE MONTPELIER ADVISORY
CYNTHIA K. KNAUER Vice President BOARD
Asst. Vice President Commercial Loan Officer
Branch Manager GREGORY D. SHOUP
President
BETH A. BAY BRYAN ADVISORY BOARD Peltcs Lumber Co., Inc.
Asst. Cashier
Asst. Branch Manager RUSTY BRUNICARDI RICHARD S. DYE
President/Chief Executive Self-employed
Officer
DELTA ADVISORY BOARD Community Hospital of Williams ROBERT D. MERCER
Co., Inc. President
TERRY J. KAPER Bob Mercer Realty and
Attorney DR. C. NICHOLAS WALZ Auctions
Barber, Kaper, Stamm & Robinson President
Bryan Medical Group GEORGE B. RINGS
ROBERT E. GILDERS Pharmacist
Chairman Rings Pharmacy
GB Manufacturing
27
NAPOLEON OFFICE SWANTON ADVISORY
BOARD
STEPHEN E. JACKSON
Asst. Vice President ANTHONY G. FRY
Branch Manager Member
Select Stone
DIANA J. DENNIE LLC
Asst. Cashier
Asst. Branch Manager DANIEL P. MCQUADE
Attorney
MICHAEL F. SCHNITKEY The McQuades Co., LPA
Asst. Cashier
Agri Finance Officer LISA J. MITCHELL
Owner/Manager
GARY W. SPENCER Swanton Health Care Center
Asst. Vice President
Commercial Loan Officer NORMAN ZEITER
President/Owner
Swanton Welding Co.
NAPOLEON ADVISORY BOARD
BARBARA C. SCHIE DEFIANCE OFFICE
Office Manager
Fulton Anesthesia Associates, Inc. DAVID A. KUNESH
Asst. Vice President
DAVID M. DAMMAN Branch Manager
Farm Drainage Contractor
Farmer LILLIAN SUE CUEVAS
Asst. Cashier
JAMES J. VAN POPPEL Asst. Branch Manager
President
Van Poppel Limited
DENNIS L. MEYER
Realtor
Reiser Realty
SWANTON OFFICE
BARRY N. GRAY
Asst. Vice President
Branch Manager
DEBRA J. KAUFFMAN
Asst. Cashier
Asst. Branch Manager
28
January 10, 2003
Board of Directors
Farmers & Merchants Bancorp, Inc.
Archbold, Ohio
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated balance sheets of Farmers & Merchants Bancorp,
Inc. and subsidiaries, Archbold, Ohio, as of December 31, 2002 and 2001 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 2002, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. Those 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, 2002 and 2001,
and the results of its consolidated operations and cash flows for the years
ended December 31, 2002, 2001 and 2000 in conformity with accounting principles
generally accepted in the United States of America.
KROUSE, KERN & CO., INC.
Fort Wayne, Indiana
29
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Balance Sheets
December 31, 2002 and 2001
ASSETS
(In Thousands)
-----------------------
2002 2001
-------- --------
Cash and due from banks $ 18,508 $ 17,842
Interest bearing deposits with banks 279 146
Investment securities at market 178,793 172,963
Federal Home Loan Bank stock 3,328 3,178
Loans, less allowance for loan losses of $6,400
for 2002 and $7,275 for 2001 491,021 453,836
Loans held for resale 6,076 13,788
Finance lease receivable 418 619
Bank premises and equipment-net 15,034 12,332
Accrued interest and other assets 13,029 8,922
-------- --------
TOTAL ASSETS $726,486 $683,626
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 43,808 $ 41,991
NOW accounts 103,316 84,763
Savings 99,657 111,213
Time 329,592 328,190
-------- --------
Total Deposits 576,373 566,157
Federal funds purchased 9,570 5,595
Securities sold under agreement to repurchase 28,630 20,944
Other borrowings 28,696 17,410
Dividend payable 650 715
Accrued interest and other liabilities 4,829 2,455
-------- --------
Total Liabilities 648,748 613,276
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $500 par value - authorized 1,300,000
shares; issued and outstanding 1,300,000 shares 12,677 12,677
Undivided profits 61,345 56,092
Accumulated other comprehensive income 3,716 1,581
-------- --------
Total Shareholders' Equity 77,738 70,350
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $726,486 $683,626
======== ========
See Accompanying Notes to Consolidated Financial Statements.
30
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000
(In Thousands) (Except for Per Share Amounts)
2002 2001 2000
---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 35,309 $ 40,728 $ 42,661
Interest and Dividends on Investment Securities:
U.S. Treasury and government agency 5,378 4,981 3,829
State and local governments 2,280 1,798 1,513
Corporate debt securities 224 528 544
Dividends 150 206 209
Interest on federal funds sold 58 473 130
Interest on deposits in banks 25 231 4
---------- ---------- ----------
Total Interest Income 43,424 48,945 48,890
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 17,574 22,947 22,299
Borrowed funds 1,405 2,501 3,210
---------- ---------- ----------
Total Interest Expense 18,979 25,448 25,509
---------- ---------- ----------
Net Interest Income 24,445 23,497 23,381
PROVISION FOR LOAN LOSSES 2,194 2,632 1,496
---------- ---------- ----------
NET INCOME AFTER PROVISION
FOR LOAN LOSS 22,251 20,865 21,885
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 2,032 1,899 1,745
Other service charges and fees 2,216 1,686 1,308
Gains (loss) on sale of loans 1,260 424 112
Mortgage servicing rights income 292 1,722 113
Net securities gains (losses) 76 228 --
---------- ---------- ----------
Total Other Income 5,876 5,959 3,278
---------- ---------- ----------
OTHER EXPENSES:
Salaries and wages 7,201 7,059 6,542
Pension and other employee benefits 2,140 1,937 1,603
Occupancy expense (net) 444 482 432
Furniture and equipment 1,566 1,444 1,178
Data processing fees 1,022 1,001 758
Franchise taxes 815 842 772
Mortgage servicing rights expense 902 911 129
Other operating expense 3,650 3,500 3,240
---------- ---------- ----------
Total Other Expenses 17,740 17,176 14,654
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 10,387 9,648 10,509
INCOME TAXES 2,989 2,892 3,118
---------- ---------- ----------
NET INCOME $ 7,398 $ 6,756 $ 7,391
========== ========== ==========
NET INCOME PER SHARE - BASIC $ 5.69 $ 5.20 $ 5.69
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,300,000 1,300,000 1,300,000
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
31
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2002, 2001 and 2000
(In Thousands)
------------------------------------------
Accumulated
Other
Common Undivided Comprehensive
Stock Profits Income
-------- -------- --------
BALANCE AT DECEMBER 31, 1999 $ 12,677 $ 45,975 $ (763)
Comprehensive income:
Net income for 2000 -- 7,391 --
Other comprehensive income net of tax:
Unrealized gain on Available-For-Sale
securities (net of tax effect of $853) -- -- 1,658
Cash dividends ($1.50 per share) -- (1,950) --
-------- -------- --------
BALANCE AT DECEMBER 31, 2000 12,677 51,416 895
Comprehensive income:
Net income for 2001 -- 6,756 --
Other comprehensive income net of tax:
Unrealized loss on Available-For-Sale
securities (net of tax effect of $431) -- -- 836
Reclassification adjustment for gain on sale of
Available-For-Sale securities (net of tax) -- -- (150)
Cash dividends ($1.60 per share) -- (2,080) --
-------- -------- --------
BALANCE AT DECEMBER 31, 2001 12,677 56,092 1,581
Comprehensive income:
Net income for 2002 -- 7,398
Other comprehensive income net of tax:
Unrealized gain on Available-For-Sale
securities (net of tax effect of $1,126) -- 2,185
Reclassification adjustment for gain on sale of
Available-For-Sale securities (net of tax) (50)
Cash dividends ($1.65 per share) -- (2,145) --
-------- -------- --------
BALANCE AT DECEMBER 31, 2002 $ 12,677 $ 61,345 $ 3,716
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
32
FARMERS & MERCHANTS BANCORP, INC.
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
(In Thousands)
------------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,398 $ 6,756 $ 7,391
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation 1,345 1,282 1,096
Amortization of servicing rights 902 911 129
Amortization of securities premiums/discounts 1,360 278 222
Provision for loan losses 2,194 2,632 1,496
Provision for deferred income taxes 245 365 (55)
(Gain) loss on sale of other (26) 21 (80)
(Gain) loss on sale of securities (76) (228) --
Originations of mortgage loans held for sale (149,938) (141,754) (21,553)
Proceeds from mortgage loans held for sale 143,862 128,293 21,727
Net change in other assets/liabilities 1,101 (2,027) (2,807)
Net Cash Provided (Used) by Operating Activities --------- --------- ---------
8,367 (3,471) 7,566
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of premises, equipment, & other real estate (4,551) (3,469) (1,276)
Proceeds from sale of premises, equipment,
and other real estate 424 195 15
Purchase of life insurance contracts (5,057) -- --
Maturity proceeds of available-for-sale securities 65,280 46,212 28,427
Sale proceeds of available-for-sale securities 8,282 10,882 --
Purchase of available-for-sale securities (77,508) (116,015) (36,660)
Net increase in loans and leases (25,390) 23,230 (25,585)
--------- --------- ---------
Net Cash Used by Investing Activities (38,520) (38,965) (35,079)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 10,215 49,694 13,297
Net change in short-term borrowings 11,661 7,636 11,560
Proceeds from other borrowings 15,000 5,000 27,000
Payments on other borrowings (3,714) (18,377) (21,253)
Payment of dividends (2,210) (1,950) (2,015)
--------- --------- ---------
Net Cash Provided by Financing Activities 30,952 42,003 28,589
--------- --------- ---------
Net Change in Cash and Cash Equivalents 799 (433) 1,076
CASH AND CASH EQUIVALENTS - JANUARY 1 17,988 18,421 17,345
--------- --------- ---------
CASH AND CASH EQUIVALENTS - DECEMBER 31 $ 18,787 $ 17,988 $ 18,421
========= ========= =========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 18,508 $ 17,842 $ 17,951
Interest bearing deposits 279 146 100
Federal funds sold -- -- 370
--------- --------- ---------
$ 18,787 $ 17,988 $ 18,421
========= ========= =========
SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Cash paid during the year for:
Interest (net of amount capitalized) $ 19,370 $ 25,665 $ 25,155
Income taxes 1,316 3,480 4,334
See Accompanying Notes to Consolidated Financial Statements.
33
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
NATURE OF ACTIVITIES:
The consolidated income of Farmers & Merchants
Bancorp, Inc. is principally from income of the bank
subsidiary, The Farmers & Merchants State Bank. The
subsidiary Bank grants agribusiness, commercial,
consumer and residential loans to customers primarily
in northwest Ohio and accounts for 99% of the
consolidated revenues.
CONSOLIDATION POLICY:
The consolidated financial statements include the
accounts of Farmers & Merchants Bancorp, Inc. and its
wholly-owned subsidiaries, The Farmers & Merchants
State Bank (the Bank), a commercial banking
institution, and the Farmers & Merchants Life
Insurance Company, a life, accident and health
insurance company. All material inter-company
balances and transactions have been eliminated.
ESTIMATES:
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
The determination of the adequacy of the allowance
for loan losses is based on estimates that are
particularly susceptible to significant changes in
the economic environment and market conditions. In
connection with the determination of the estimated
losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific
items of collateral including real property, consumer
assets, and business assets. Although the bank has a
diversified loan portfolio, a substantial portion of
its debtors' ability to honor their contracts is
dependent on local economic conditions in the
agricultural industry.
While management uses available information to
recognize losses on loans, further reductions in the
carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition
regulatory agencies, as an integral part of their
examination process, periodically review the
estimated losses on loans. Such agencies may require
the Bank to recognize additional losses based on
their judgments about information available to them
at the time of their examination. Because of these
factors, it is reasonably possible that the estimated
losses on loans may change materially in the near
term. However, the amount of the change that is
reasonably possible cannot be estimated.
34
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the
company considers all highly liquid debt instruments
purchased with a maturity of three months or less to
be cash equivalents. This includes cash on hand,
amounts due from banks, and federal funds sold.
Generally, federal funds are purchased and sold for
one day periods.
INVESTMENT SECURITIES:
Debt securities are classified as held-to-maturity
when the Bank has the positive intent and ability to
hold the securities to maturity. Securities
held-to-maturity are carried at amortized cost. The
amortization of premiums and the accretion of
discounts are recognized in interest income using
methods approximating the interest method over the
period to maturity.
Debt securities not classified as held-to-maturity
are classified as available-for-sale. Securities
available-for-sale are carried at fair value with
unrealized gains and losses reported in other
comprehensive income. Realized gains and losses on
securities available for sale are included in other
income (expense) and, when applicable, are reported
as a reclassification adjustment, net of tax, in
other comprehensive income. Gains and losses on sales
of securities are determined on the
specific-identification method.
Declines in the fair value of individual
held-to-maturity and available-for-sale securities
below their cost that are other than temporary result
in write-downs of the individual securities to their
fair value. The related write-downs are included in
earnings as realized losses.
LOANS:
Loans are stated at the amount of unpaid principal,
reduced by unearned discounts and deferred loan fees
and costs, as well as, by the allowance for loan
losses. Interest on commercial, installment, and real
estate loans is accrued on a daily basis based on the
principal outstanding.
Generally, a loan (including a loan considered
impaired under Statement 114, "Accounting by
Creditors for Impairment of a Loan") is classified as
nonaccrual and the accrual of interest income is
generally discontinued when a loan becomes 90 days
past due as to principal or interest and these loans
are placed on a "cash basis" for purposes of income
recognition. Management may elect to continue the
accrual of interest when the estimated net realizable
value of collateral is sufficient to cover the
principal and accrued interest, and the loan is in
the process of collection.
Loans held for resale are valued at the lower of
aggregate cost or market, market determined by
current market quotations.
35
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
LOANS (Continued):
Loan origination and commitment fees and certain
direct loan origination costs are deferred and
amortized as a net adjustment to the related loan's
yield. The Bank is generally amortizing these costs
over the contractual life of such loans. Fees related
to standby letters of credit are recognized at the
beginning of the commitment period.
ALLOWANCE FOR LOAN LOSSES:
The allowance for possible loan losses is established
through a provision for loan losses charged against
income. Loans deemed to be uncollectible and changes
in the allowance relating to impaired loans are
charged against the allowance for loan losses, and
subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is maintained at a
level believed to be adequate by management to absorb
probable loan losses inherent in the loan portfolio
for on and off balance sheet credit exposure as of
the balance sheet dates. Management's evaluation of
the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect
the borrowers ability to repay (including the timing
of future payments), the estimated value of any
underlying collateral, composition of the loan
portfolio, current economic conditions, and other
relevant factors. Allowances for impaired loans are
generally determined based on collateral values or
the present value of estimated future cash flows.
This evaluation is inherently subjective as it may
require material estimates including the amount and
timing of future cash flows expected to be received
on impaired loans that may be susceptible to
significant change.
SERVICING ASSETS AND LIABILITIES:
It is the Bank's policy to service loans it has sold
to FREDDIE MAC. When the Bank undertakes an
obligation to service financial assets, it recognizes
either a servicing asset or a servicing liability for
that servicing contract at its fair market value.
Servicing assets and liabilities are to be amortized
in proportion to and over the period of estimated net
servicing income. The amount of servicing assets
recognized during 2002 was $260 thousand, while
servicing assets amortized during 2002 was $901
thousand. Capitalized mortgage servicing rights are
included in other assets and totaled $1.025 million
and $1.666 million at December 31, 2002 and 2001,
respectively. The fair value of recognized servicing
assets was $1.9 million, fair value being determined
by the present value of expected future cash flows.
No valuation allowance is required.
36
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
FINANCE LEASES:
Finance leases are recorded at the sum of the minimum
lease payments less any executory costs and profit
thereon to be paid and any unguaranteed residual
value. If the residual is guaranteed, it is included
in the minimum lease payments. The difference between
the gross investment in the lease and the cost is
recorded as unearned income, which is amortized over
the lease term by the interest method. The unearned
interest is included in the balance sheet as a
deduction from the related gross investment, which
results in the net investment in the lease.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is based on
the estimated useful lives of the various properties
and is computed using accelerated methods. Costs for
maintenance and repairs are charged to operations as
incurred. Gains and losses on dispositions are
included in current operations.
OTHER REAL ESTATE OWNED:
Real estate properties acquired through or in lieu of
loan foreclosure are initially recorded at the lower
of the Bank's carrying amount or fair value less
estimated selling cost at the date of foreclosure.
Any write-downs based on the asset's fair value at
the date of acquisition are charged to the allowance
for loan losses. After foreclosure, these assets are
carried at the lower of their new cost basis or fair
value less cost to sell. Costs of significant
property improvements are capitalized, whereas, costs
relating to holding the property are expensed. The
portion of interest costs relating to the development
of real estate are capitalized. Valuations are
periodically performed by management, and any
subsequent write-downs are recorded as a charge to
operations, if necessary, to reduce the carrying
value of a property to the lower of its cost or fair
value less cost to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107, "Disclosures about Fair Value
of Financial Instruments", requires disclosure of the
fair value information about financial instruments,
both assets and liabilities, whether or not
recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where
quoted market prices are not available, fair values
are based on estimates using present value or other
valuation techniques. Those techniques are
significantly affected by assumptions used, including
the discount rate and estimates of cash flows. In
that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets
and, in many cases, could not be realized in
immediate settlement of the instrument. FASB
Statement No. 107 excludes certain financial
instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not
represent the underlying value of the Company.
37
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
FEDERAL INCOME TAX:
Income taxes are provided for the tax effects of the
transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of
the allowance for loan losses and available-for-sale
securities. The deferred tax assets and liabilities
represent the future tax return consequences of those
differences, which will either be taxable or
deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and
liabilities are reflected at income tax rates
applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted
through the provision for income taxes. The Bancorp
files consolidated income tax returns with its bank
subsidiary.
EARNINGS PER SHARE:
Basic earnings per share are computed based on the
weighted average number of shares of common stock
outstanding during each year.
NOTE 2. CASH AND CASH EQUIVALENTS
Banks are required to maintain reserve funds in vault cash
and/or on deposit with the Federal Reserve Bank. The aggregate
reserves required at December 31, 2002 and 2001 were $9.2
million and $8.1 million, respectively.
The Company and its subsidiaries maintain cash balances with
high quality credit institutions. At times such balances may
be in excess of the federally insured limits.
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments
in securities as of December 31, are detailed below. Fair
market values are based on quoted market prices or dealer
quotes.
(In Thousands)
-----------------------------------------------------------
2002
-----------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- ------ --------
Available-for-Sale:
U.S. Treasury $ 4,125 $ 90 $ -- $ 4,215
U.S. Government agency 97,569 2,834 -- 100,403
Mortgage-backed securities 16,123 495 -- 16,618
State and local governments 53,683 2,209 32 55,860
Corporate debt securities 1,615 35 -- 1,650
Equity securities 47 -- -- 47
-------- -------- ------ --------
$173,162 $ 5,663 $ 32 $178,793
======== ======== ======== ========
38
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
(In Thousands)
-----------------------------------------------------------
2001
-----------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- ------ --------
Available-for-Sale:
U.S. Treasury $ 4,915 $ 123 $ -- $ 5,038
U.S. Government agency 85,257 2,410 82 87,585
Mortgage-backed securities 21,369 122 82 21,409
State and local governments 50,256 806 243 50,819
Corporate debt securities 7,751 86 746 7,091
Commercial paper 974 -- -- 974
Equity securities 47 -- -- 47
-------- -------- -------- --------
$170,569 $ 3,547 $ 1,153 $172,963
======== ======== ======== ========
The gross realized gains and losses for the years ended
December 31, are presented below:
(In Thousands)
-----------------------------------------
2002 2001 2000
------- --------- --------
Gross realized gains $ 79 $ 228 $ --
Gross realized losses (3) -- --
------- --------- --------
Net Realized Gains 76 $ 228 $ --
======= ========= ========
The amortized cost and estimated market value of debt
securities at December 31, 2002, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
(In Thousands)
-------------------------
Amortized
Cost Fair Value
--------- ----------
One year or less $ 56,838 $ 57,625
After one year through five years 94,771 98,790
After five years through ten years 20,970 21,761
After ten years 536 570
-------- --------
Total $173,115 $178,746
======== ========
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVESTMENT SECURITIES (Continued)
Investments with a carrying value of $131 million and $106.6
million at December 31, 2002 and 2001, respectively, were
pledged to secure public deposits and securities sold under
repurchase agreements.
NOTE 4. FEDERAL HOME LOAN BANK STOCK
The Federal Home Loan Bank stock is recorded at cost since it
is not actively traded, and therefore, has no readily
determinable market value. The stock is held as collateral
security for all indebtedness of the Bank to the Federal Home
Loan Bank.
NOTE 5. LOANS
Loans at December 31, are summarized below:
(In Thousands)
------------------------------
2002 2001
----------- -----------
Loans:
Real estate $ 272,857 $ 247,545
Commercial and industrial 100,119 96,992
Agricultural (excluding real estate) 66,136 53,717
Consumer and other loans 50,996 54,992
Overdrafts 160 853
Industrial Development Bonds 7,810 7,590
----------- -----------
498,078 461,689
Less: Deferred loan fees and costs (657) (578)
----------- -----------
497,421 461,111
Less: Allowance for loan losses (6,400) (7,275)
----------- -----------
Loans - Net $ 491,021 $ 453,836
=========== ===========
The following is a maturity schedule by major category of loans including
available for sale loans:
(In Thousands)
----------------------------------------------
Principal Payments Due Within
----------------------------------------------
Two to After
One Year Five Years Five Years
------------- ------------ -------------
Real estate loans $ 6,738 $ 24,407 $ 241,712
Commercial and industrial loans 87,449 32,330 46,476
Consumer, Master Card and overdrafts 8,573 36,449 6,134
Industrial Development Bonds 1,702 1,921 4,187
40
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 5. LOANS (Continued)
The distribution of fixed rate loans and variable rate loans
by major loan category is as follows as of December 31, 2002:
(In Thousands)
---------------------------
Fixed Variable
Rate Rate
------------ -------------
Real estate loans $ 62,940 $ 216,531
Commercial and industrial loans 70,509 95,208
Consumer, Master Card and overdrafts 49,591 1,565
Industrial Development Bonds 7,810
$133.7 million in one to four family residential mortgage
loans have been pledged as security for loans the Bank has
received from the Federal Home Loan Bank.
Senior officers and directors and their affiliated companies
were indebted to the Bank in the aggregate of $15.8 and $16.3
million at December 31, 2002 and 2001, 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 2002 were $124.5 million and
repayments were $125 million. In the opinion of management,
these loans do not involve more than normal risk of
collectibility or possess other unfavorable features.
As of December 31, 2002 and 2001 there were $10.4 million and
$3.3 million, respectively of undisbursed loans in process.
Loans for which the Bank is providing collection services is
$209.9, $191.7 and $163.5 million for 2002, 2001 and 2000,
respectively.
The following is an analysis of the allowance for loan loss:
(In Thousands)
-----------------------------------------
2002 2001 2000
---------- ----------- ----------
Allowance for Loan Losses
Balance at beginning of year $ 7,275 $ 7,160 $ 6,750
Provision for loan loss 2,194 2,632 1,496
Recoveries 1,183 617 1,287
Loans charged off (4,252) (3,134) (2,373)
----------- ----------- -----------
$ 6,400 $ 7,275 $ 7,160
=========== =========== ===========
41
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 5. LOANS (Continued)
As of December 31, 2002 and 2001, the recorded investment in
impaired loans amounted to approximately $17.9 and $16.2
million, respectively. The average recorded investment in
impaired loans amounted to approximately $5.5 million, $12.8
million and $8.6 million for 2002, 2001 and 2000,
respectively. Of the loans that were considered impaired for
2002 and 2001, the recorded investment in impaired loans that
have a related allowance determined in accordance with SFAS
No. 114 was $5.6 million and $5.1 million, respectively for
which the related allowance for loan loss was $2.4 million and
$3.8 million, respectively. As of December 31, 2002 there were
no commitments to lend additional funds to debtors whose loans
are not performing.
The Bank stops accruing interest income when a loan is deemed
to be impaired, and recognizes interest income when the
interest income is actually received. Interest income
recognized on impaired loans was $195, $257 and $177 thousand
for 2002, 2001 and 2000, respectively.
Loans held for sale are residential mortgage loans that will
be sold to FREDDIE MAC. Fair market value has been determined
based upon the market in which the Bank normally operates and
includes consideration of all open positions, outstanding
commitments, and related fees paid. Gains or losses are
recognized at settlement dates and are determined by the
difference between the sales price and the carrying value.
Gains and losses are included in other income.
NOTE 6. FINANCE LEASE RECEIVABLE
Finance leases as of December 31 are as follows:
(In Thousands)
--------------------------
2002 2001
---------- ----------
Gross investment in leases $ 460 $ 684
Unearned income (42) (65)
---------- ----------
Finance Lease Receivable $ 418 $ 619
========== ==========
All amounts are considered collectible, and therefore, no
allowance has been provided.
NOTE 7. BANK PREMISES AND EQUIPMENT
The major categories of banking premises and equipment and
accumulated depreciation at December 31 are summarized below:
(In Thousands)
-------------------------
2002 2001
---------- ----------
Land $ 2,769 $ 2,601
Buildings 13,974 10,661
Furnishings 8,470 8,308
---------- ----------
25,213 21,570
Less: Accumulated depreciation (10,179) (9,238)
---------- ----------
Banking Premises and Equipment (Net) $ 15,034 $ 12,332
========== ==========
42
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 8. DEPOSITS
Time deposits at December 31 consist of the following:
(In Thousands)
----------------------------
2002 2001
---------- ----------
Time deposits under $100,000 $ 239,493 $ 246,455
Time deposits of $100,000 or more 90,099 81,735
---------- ----------
$ 329,592 $ 328,190
========== ==========
For each of the five years subsequent to December 31, 2002,
maturities for time deposits having a remaining term of more
than one year follows:
2002 $ 213,882
2003 88,920
2004 22,492
2005 2,589
2006 and thereafter 1,709
---------
$ 329,592
=========
Deposits to directors, executive officers companies in which
they have a direct or indirect ownership as of December 31,
2002 and 2001 amounted to $14.5 million and $10.7 million,
respectively.
NOTE 9. REPURCHASE AGREEMENTS
The Bank's policy requires qualifying securities as collateral
for the underlying repurchase agreements. As of December 31,
2002 and 2001 securities with a book value of $33.6 million
and $33.1 million, respectively, were underlying the
repurchase agreements and were under the Bank's control.
NOTE 10. OTHER BORROWINGS
Other borrowings consisted of the following at December 31:
(In Thousands)
--------------------------
2002 2001
---------- ----------
Federal Home Loan Bank, various
loans due in monthly installments
of $105 thousand plus annual
payments of $400 thousand
including interest at varying
rates from 5.40% to 7.05%.
Notes are secured by a blanket
lien on 100% of the one to four
family residential mortgage loan
portfolio $ 28,696 $ 17,410
========== ==========
43
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 10. OTHER BORROWINGS (Continued)
The following is a schedule by years of future minimum
principal payments as of December 31:
2003 $ 13,368
2004 2,656
2005 2,243
2006 1,967
2007 6,611
2008 and thereafter 1,851
-----------
$ 28,696
===========
NOTE 11. FEDERAL INCOME TAXES
Deferred tax assets and liabilities at December 31 are
comprised of the following:
(In Thousands)
---------------------
2002 2001
-------- --------
Deferred Tax Assets:
Allowance for loan losses $ 1,890 $ 2,187
-------- --------
Deferred Tax Liabilities:
Accreted discounts on bonds 193 139
FHLB stock dividends 564 497
Mortgage servicing rights 348 567
Other 95 50
Net unrealized gain on available-
for-sale securities 1,914 814
-------- --------
3,114 2,067
-------- --------
Net Deferred Tax Asset (Liability) $ (1,224) $ 120
======== ========
The Company has not recorded a valuation allowance for
deferred tax assets because management believes that it is
more likely than not that they will be ultimately realized.
44
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. FEDERAL INCOME TAXES (Continued)
The components of income tax expense for the years ended
December 31 are as follows:
(In Thousands)
-----------------------------------------
2002 2001 2000
---------- ----------- ----------
Current:
Federal $ 2,749 $ 2,732 $ 3,173
Deferred:
Federal 240 160 (55)
---------- ----------- ----------
$ 2,989 $ 2,892 $ 3,118
========== =========== ==========
(In Thousands)
---------------------------------
2002 2001 2000
------- ------- -------
Income tax at statutory rates $ 3,594 $ 3,411 $ 3,485
Tax effect:
Tax exempt interest (685) (596) (447)
Costs attributable to tax
exempt interest, etc. 80 77 80
------- ------- -------
$ 2,989 $ 2,892 $ 3,118
======= ======= =======
NOTE 12. RETIREMENT INCOME PLAN
The Bank has established a 401(k) profit sharing plan which
allows eligible employees to save at a minimum one percent of
eligible compensation on a pre-tax basis, subject to certain
Internal Revenue Service limitations. The Bank will match 50%
of employee 401(k) contributions up to four percent of total
eligible compensation. In addition the Bank may make a
discretionary contribution from time to time as is deemed
advisable. A participant is 100% vested in the participant's
deferral contributions and employer matching contributions. A
seven year vesting schedule applies to employer discretionary
contributions.
In order to be eligible to participate, the employee must be
21 years of age, completed six months of service, work 1,000
hours in the plan year and be employed on the last day of the
year. Entry dates have been established at January 1 and July
1 of each year.
The plan calls for only lump-sum distributions upon either
termination of employment, retirement, death or disability.
Contributions to the 401(k) profit sharing plan for both the
employer matching contribution and the discretionary
contribution were $509, $472, and $410 thousand for 2002, 2001
and 2000, respectively.
45
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 13. RELATED PARTY TRANSACTIONS
The Bank has conducted transactions with its officers and
directors as set forth in Notes 5 and 8.
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's financial statements do not reflect various
commitments and contingent liabilities which arise in the
normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments
and contingent liabilities are commitments to extend credit,
credit card arrangements and standby letters of credit. A
summary of the Bank's commitments and contingent liabilities
at December 31, is as follows:
(In Thousands)
-------------------------
2002 2001
---------- ----------
Commitments to extend credit $ 92,035 $ 81,654
Credit card arrangements 23,582 23,809
Standby letters of credit 2,706 1,971
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.
The Bank was committed in the amount of $561 thousand for the
completion of the new operations center as of December 31,
2002.
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Nearly 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. Most all such customers are
depositors of the Bank. Also, investments in state and
municipal securities may involve governmental entities within
the Bank's market area. The concentrations of credit by type
of loan are set forth in Note 5. Standby letters of credit
were granted primarily to commercial borrowers.
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal
Deposit Insurance Corporation (FDIC). Failure to meet the
minimum regulatory requirements can initiate certain
mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material
effect on the Bank and the consolidated financial statements.
Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative
measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines
are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
46
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. REGULATORY CAPITAL REQUIREMENTS
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios of: total risk-based capital and Tier I capital to
risk-weighted assets (as defined in the regulations), and Tier
I capital to adjusted total assets (as defined). Management
believes, as of December 31, 2002, that the Bank meets all the
capital adequacy requirements to which it is subject.
As of December 31, 2002 the most recent notification from the
FDIC indicated the Bank was categorized as well capitalized
under the regulatory framework for prompt corrective action.
To remain categorized as well capitalized, the Bank will have
to maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as disclosed in the table below. There
are no conditions or events since the most recent notification
that management believes have changed the Bank's prompt
corrective action category.
The Bank's actual and required capital amounts and ratios as
of December 31, 2002 and 2001 are as follows:
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes (a) Provisions (a)
------------------- --------------------- ----------------------
(000's) (000's) (000's)
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of December 31, 2002:
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated $ 83,851 16.51% $ 40,750 8.00% $ 50,938 10.00%
Farmers & Merchants
State Bank 79,702 15.44% 41,300 8.00% 51,626 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 74,008 14.53% 20,375 4.00% 30,563 6.00%
Farmers & Merchants
State Bank 63,302 12.26% 20,650 4.00% 30,976 6.00%
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated 74,008 10.19% 29,059 4.00% 43,589 5.00%
Farmers & Merchants
State Bank 63,302 8.84% 28,636 4.00% 35,794 5.00%
47
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 16. REGULATORY CAPITAL REQUIREMENTS (Continued)
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes (a) Provisions (a)
------------------- --------------------- ----------------------
(000's) (000's) (000's)
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of December 31, 2001:
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated $ 76,030 16.78% $ 36,255 8.00% $ 45,319 10.00%
Farmers & Merchants
State Bank 73,717 15.16% 38,900 8.00% 48,625 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 68,769 15.17% 18,127 4.00% 27,191 6.00%
Farmers & Merchants
State Bank 57,625 11.85% 19,451 4.00% 29,177 6.00%
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated 68,769 10.01% 27,488 4.00% 34,360 5.00%
Farmers & Merchants
State Bank 57,625 8.39% 27,473 4.00% 34,341 6.00%
(a) The amount and ratios provided are minimums under the
regulations.
The Bank is restricted as to the amount of dividends that can
be paid. Dividends declared by the Bank that exceed the net
income for the current year plus retained income for the
preceding two years must be approved by federal and state
regulatory agencies. Under this formula dividends of $15.5
million may be paid without prior regulatory approval.
Regardless of formal regulatory restrictions, the Bank may not
pay dividends that would result in its capital levels being
reduced below the minimum requirements shown above.
NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK
Fair values of financial instruments are management's estimate
of the values at which the instruments could be exchanged in a
transaction between willing parties. These estimates are
subjective and may vary significantly from amounts that would
be realized in actual transactions. In addition, other
significant assets are not considered financial assets
including deferred tax assets, premises, equipment and
intangibles. Further, the tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on the fair value estimates and have not
been considered in any of the estimates.
48
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued)
The book values and estimated fair values for on and
off-balance sheet financial instruments as of December 31,
2002 and 2001 are reflected below:
(In Thousands)
----------------------------------------------------
2002 2001
------------------------- --------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial Assets:
Cash and cash equivalents $ 18,508 $ 18,508 $ 17,842 $ 17,842
Interest bearing deposits 279 279 146 146
Available-for-sale securities 178,793 178,793 172,963 172,963
Federal Home Loan Bank 3,328 2,899 3,178 3,178
Net loans 497,515 525,585 468,243 489,264
Interest receivable 5,963 5,963 6,287 6,287
Financial Liabilities:
Deposits $ 576,373 $ 584,707 $ 566,157 $ 574,852
Short-term borrowings:
Federal funds purchased 9,570 9,570 5,595 5,595
Repurchase agreement sold 28,630 28,630 20,944 20,944
Other borrowings 28,696 29,028 17,410 17,766
Interest payable 1,530 1,530 1,921 1,921
Off-Balance-Sheet Financial Instruments
Commitments to
extend credit $ 115,617 $ 115,617 $ 105,463 $ 105,463
Standby letters of credit 2,706 2,706 1,971 1,971
The following assumptions and methods were used in estimating
the fair value for financial instruments:
CASH AND SHORT-TERM INVESTMENTS:
The carrying amounts reported in the balance sheet
for cash and due from banks and federal funds sold
approximate their fair values.
INVESTMENT SECURITIES:
Fair values for securities are based on quoted market
prices, where available. If quoted prices are not
available, fair values are based on quoted market
prices of comparable instruments.
49
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued)
STOCK IN FEDERAL HOME LOAN BANK:
No ready market exists for the stock, and it has no
quoted market value. The stock is redeemable at par;
therefore, fair value equals cost.
LOANS:
Most commercial and real estate mortgage loans are
made on a variable rate basis. For those
variable-rate loans that reprice frequently, and with
no significant change in credit risk, fair values are
based on carrying values. The fair values of the
fixed rate and all other loans are estimated using
discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms
to borrowers with similar credit quality.
DEPOSITS:
The fair values disclosed for deposits with no
defined maturities are equal to their carrying
amounts, which represent the amount payable on
demand. The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of
deposit approximate their fair value at the reporting
date. Fair value for fixed-rate certificates of
deposit are estimated using a discounted cash flow
analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
BORROWINGS:
Short-term borrowings are carried at cost that
approximates fair value. Other long-term debt was
generally valued using a discounted cash flows
analysis with a discounted rate based on current
incremental borrowing rates for similar types of
arrangements, or if not available, based on an
approach similar to that used for loans and deposits.
Long-term borrowings include their related current
maturities.
ACCRUED INTEREST RECEIVABLE AND PAYABLE:
The carrying amounts of accrued interest approximate
their fair values.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The amounts shown under carrying value represent
accruals or deferred fees arising from the related
off-balance-sheet financial instruments. Fair value
for off-balance-sheet financial instruments are based
fees currently charged to enter into similar
arrangements, taking into account the remaining terms
of the agreements and the counterparties' credit
standing.
50
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 17. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
INTEREST RATE RISK:
The Company assumes interest rate risk (the risk that
general interest rate levels will change) as a result
of its normal operations. As a result, the fair
values of the Company's financial instruments will
change when interest rate levels change and that
change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of
assets and liabilities to the extent believed
necessary to minimize interest rate risk. However,
borrowers with fixed rate obligations are more likely
to prepay in a falling rate environment and less
likely to prepay in a rising rate environment.
Conversely, depositors who are receiving fixed rates
are more likely to withdraw funds before maturity in
a rising rate environment and less likely to do so in
a falling rate environment. Management monitors rates
and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities
with terms that mitigate the Company's overall
interest rate risk.
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
BALANCE SHEETS
(In Thousands)
--------------------
2002 2001
-------- --------
ASSETS:
Cash $ 655 $ 773
Related party receivables:
Dividends 325 715
Note receivable 10,000 10,000
Investment in subsidiaries 67,553 59,756
-------- --------
TOTAL ASSETS $ 78,533 $ 71,244
======== ========
LIABILITIES:
Accrued expenses $ 145 $ 179
Dividends payable 650 715
-------- --------
Total Liabilities 795 894
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value -
1,500,000 shares authorized; 1,300,000 shares issued 12,677 12,677
Undivided profits 61,345 56,092
Accumulated other comprehensive income 3,716 1,581
-------- --------
Total Shareholders' Equity 77,738 70,350
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 78,533 $ 71,244
======== ========
51
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
(In Thousands)
-----------------------------------
2002 2001 2000
-------- -------- --------
INCOME:
Equity in net income of subsidiaries $ 7,075 $ 6,409 $ 7,055
Interest income 600 600 600
-------- -------- --------
Total Income 7,675 7,009 7,655
-------- -------- --------
EXPENSES:
Miscellaneous 35 23 23
Professional fees 20 14 17
Supplies 8 7 7
Taxes 68 30 43
-------- -------- --------
Total Expenses 131 74 90
-------- -------- --------
INCOME BEFORE INCOME TAXES 7,544 6,935 7,565
INCOME TAXES 147 179 174
-------- -------- --------
NET INCOME $ 7,397 $ 6,756 $ 7,391
======== ======== ========
52
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
------------------------------------------
Accumulated
Other
Common Undivided Comprehensive
Stock Profits Income
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 $ 12,677 $ 45,975 $ (763)
Comprehensive income:
Net income for 2000 - 7,391 -
Other comprehensive income net of tax:
Unrealized gain on Available-For-Sale
securities (net of tax effect of $853) - - 1,658
Dividends ($1.50 per share) - (1,950) -
-------- -------- -------
BALANCE AT DECEMBER 31, 2000 12,677 51,416 895
Comprehensive income:
Net income for 2001 - 6,756 -
Other comprehensive income net of tax:
Unrealized loss on Available-For-Sale
securities (net of tax effect of $431) - - 836
Reclassification adjustment for gain on sale of
Available-For-Sale securities (net of tax) (150)
Dividends ($1.60 per share) - (2,080) -
-------- -------- -------
BALANCE AT DECEMBER 31, 2001 12,677 56,092 1,581
Comprehensive income:
Net income for 2002 - 7,397 -
Other comprehensive income net of tax:
Unrealized loss on Available-For-Sale
securities (net of tax effect of $1,126) - - 2,185
Reclassification adjustment for gain on sale of
Available-For-Sale securities (net of tax) (50)
Dividends ($1.65 per share) - (2,145) -
-------- -------- -------
BALANCE AT DECEMBER 31, 2002 $ 12,677 $ 61,344 $ 3,716
======== ======== ========
53
FARMERS & MERCHANTS BANCORP, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 18. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (Continued)
STATEMENT OF CASH FLOWS
(In Thousands)
-----------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,397 $ 6,756 $ 7,391
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Equity in undistributed net income
of subsidiaries (7,075) (6,409) (7,055)
Changes in Operating Assets and
Liabilities:
Accrued expenses 271 5 (2)
-------- -------- --------
Net Cash Provided by
Operating Activities 593 352 334
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from wholly-owned subsidiaries 1,500 1,665 1,718
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (2,210) (1,950) (2,015)
-------- -------- --------
Net Change in Cash and
Cash Equivalents (117) 67 37
CASH AND CASH EQUIVALENTS -
beginning of year 773 706 669
-------- -------- --------
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 656 $ 773 $ 706
======== ======== ========
54
FARMERS & MERCHANTS BANCORP, INC.
Five-Year Summary of Consolidated Operations
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Summary of Income:
Interest income $ 43,424 $ 48,945 $ 48,890 $ 43,779 $ 42,888
Interest expense 18,979 25,448 25,509 21,150 22,085
---------- ---------- ---------- ---------- ----------
Net Interest Income 24,445 23,497 23,381 22,629 20,803
Provision for loan loss 2,194 2,632 1,496 1,637 892
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan loss 22,251 20,865 21,885 20,992 19,911
Other income (expense) (11,864) (11,217) (11,376) (11,192) (8,841)
---------- ---------- ---------- ---------- ----------
Net income before
income taxes 10,387 9,648 10,509 9,800 11,070
Income taxes 2,989 2,892 3,118 3,007 3,413
---------- ---------- ---------- ---------- ----------
Net income $ 7,398 $ 6,756 $ 7,391 $ 6,793 $ 7,657
========== ========== ========= ========== ==========
Per Share of Common Stock:
Earnings per common share
outstanding (Based on weighted
average number of shares
outstanding):
Net income $ 5.69 $ 5.20 $ 5.69 $ 5.23 $ 5.89
Dividends $ 1.65 $ 1.60 $ 1.50 $ 1.40 $ 1.40
Weighted average number
of shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Year-end assets $ 726,486 $ 683,626 $ 635,160 $ 598,529 $ 585,869
Average assets 695,137 663,469 619,075 585,189 553,277
Year-end equity capital 77,738 70,350 64,988 57,889 55,350
Average equity capital 74,495 69,429 61,488 56,862 52,940
55
FARMERS & MERCHANTS BANCORP, INC.
Quarterly Financial Data
Quarter Ended in 2002
-----------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
---------- ---------- ---------- ----------
Summary of Income:
Interest income $ 11,200 $ 10,662 $ 10,881 $ 10,681
Interest expense 5,016 4,883 4,688 4,392
---------- ---------- ---------- ----------
Net Interest Income 6,184 5,779 6,193 6,289
Provision for loan loss 656 393 537 608
---------- ---------- ---------- ----------
Net interest income after
provision for loan loss 5,528 5,386 5,656 5,681
Other income (expense) (2,955) (3,230) (3,234) (2,445)
---------- ---------- ---------- ----------
Net income before 2,573 2,156 2,422 3,236
income taxes 670 543 641 1,135
---------- ---------- ---------- ----------
Net Income $ 1,903 $ 1,613 $ 1,781 $ 2,101
========== ========== ========== ==========
Earnings per Common Share $ 1.46 $ 1.24 $ 1.37 $ 1.62
========== ========== ========== ==========
Average common shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000
========== ========== ========== ==========
Quarter Ended in 2001
-----------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
---------- ---------- ---------- ----------
Summary of Income:
Interest income $ 12,711 $ 12,686 $ 12,029 $ 11,519
Interest expense 6,886 6,541 6,178 5,843
---------- ---------- ---------- ----------
Net Interest Income 5,825 6,145 5,851 5,676
Provision for loan loss 184 486 152 1,810
---------- ---------- ---------- ----------
Net interest income after
provision for loan loss 5,641 5,659 5,699 3,866
Other income (expense) (2,891) (2,677) (3,100) (2,549)
---------- ---------- ---------- ----------
Net income before income taxes 2,750 2,982 2,599 1,317
Income taxes 832 851 713 496
---------- ---------- ---------- ----------
Net Income $ 1,918 $ 2,131 $ 1,886 $ 821
========== ========== ========== ==========
Earnings per Common Share $ 1.48 $ 1.64 $ 1.45 $ 0.63
========== ========== ========== ==========
Average common shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000
========== ========== ========== ==========
56
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
Key Ratios:
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
Return on average equity 14.46% 11.95% 12.02% 9.73% 9.93%
Return on average assets 1.38% 1.16% 1.19% 1.02% 1.06%
Loan to deposit ratio 78.33% 92.13% 93.00% 82.71% 86.32%
Capital to assets ratio 9.45% 9.67% 10.23% 10.29% 10.70%
[CHARTS]
57
FARMERS & MERCHANTS BANCORP, INC.
SELECTED FINANCIAL DATA BY MANAGEMENT
(In Thousands Except for Per Share Amounts)
----------------------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Loans $ 401,192 $ 456,617 $ 480,645 $ 468,243 $ 497,515
Total Assets $ 585,869 $ 598,529 $ 635,160 $ 683,626 $ 726,486
Shareholders' Equity $ 55,350 $ 57,889 $ 64,988 $ 70,350 $ 77,738
Interest Income $ 42,888 $ 43,779 $ 48,890 $ 48,945 $ 43,424
Interest Expense $ 22,085 $ 21,150 $ 25,509 $ 25,448 $ 18,979
Net Interest $ 20,803 $ 22,629 $ 23,381 $ 23,497 $ 24,445
Other Expense $ 8,841 $ 11,192 $ 11,376 $ 11,216 $ 11,864
Federal Income Tax $ 3,413 $ 3,007 $ 3,118 $ 2,892 $ 2,989
Net Income $ 7,657 $ 6,793 $ 7,391 $ 6,756 $ 7,398
Net Income per Share $ 5.89 $ 5.23 $ 5.69 $ 5.20 $ 5.69
Dividends per Share $ 1.40 $ 1.40 $ 1.50 $ 1.60 $ 1.65
[CHARTS]
58
SELECTED FINANCIAL DATA BY MANAGEMENT
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While the economic situation in the United States has been generally flat at
best during 2002, Farmers & Merchants Bancorp, Inc. has experienced yet another
year of solid growth both in terms of net income and assets. Interest rates have
experienced a dramatic drop over the past year. As a result, total interest
income dropped from $48.9 million for 2001 and 2000 to $43.4 for 2002. This drop
is from a reduction in interest income on loans, even though the loan portfolio
grew from $468 million at the end of 2001 to $497 million at the end of 2002.
But while the interest that the Company has collected has decreased due to a
drop in interest rates, the interest that the Company had to pay also
demonstrated a significant decrease. Total interest expense dropped to just
under $19 million compared to $25.4 and $25.5 million for 2001 and 2000
respectively. The net result of all of this is that net interest income,
interest income less interest expense, increased by almost $1 million to $24.4
million for 2002 compared to $23.5 million for 2001 and $23.4 million for 2000.
The Company was able to reduce the provision for loan loss for 2002 to $2.2
million compared to $2.6 and $1.5 million for 2001 and 2000, respectively. The
Bank has worked hard to improve loan quality while making credit available to
all of those who are in need and worthy. The reserve for loan losses, an
estimate of loans currently in the loan portfolio that might become
uncollectible was established at $6.4 million as of December 31, 2002 or 1.3
percent of the total loan portfolio compared to $7.3 million as of December 31,
2001 or 1.5 percent of the loan portfolio at December 31, 2001. This drop is a
result of better loan quality, but also the write-off of a significant credit
during 2002.
Operating expenses for 2002 were $17.7 million a 3.3 percent growth over 2001
operating expenses of $17.2 million. Operating expenses for 2001 climbed $2.5
million from 2000 levels of $14.6 million.
The net result has been an increase in net income for the Company over 2001 to
just under $7.4 million compared to $6.75 million for 2001, and even with the
net income of $7.4 million for 2000.
LIQUIDITY
Maintaining sufficient funds to meet depositor and borrower needs on a daily
basis continue to be among management's top priorities. This is accomplished not
only by the immediately liquid resources of cash, due from banks and federal
funds sold, but also by the Company's available for sale securities portfolio.
The average aggregate balance of these assets was $195 million during 2002
compared to $159 million for 2001 representing 28.1 percent and 24 percent of
total average assets, respectively. Of the almost $179 million of debt
securities in the portfolio as of December 31, 2002, $57.6 million or 32 percent
of the portfolio is expected to mature in 2003.
CAPITAL RESOURCES
Shareholders' equity was $77.7 million as of December 31, 2002 compared $70
million at December 31, 2001. 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, 2002, The Farmers & Merchants State Bank had a total risk-based
capital ratio of 15.4% and a 12.2% core capital to risk-based asset ratio that
are well in excess of regulatory guidelines. The bank's leverage ratio of 8.8%
is also substantially in excess of regulatory guidelines. These ratios compare
to 5.1%, 11.9% and 8.4% respectively for 2001, and 14.6%, 11.3% and 8.5%,
respectively for 2000.
The Company's subsidiaries are restricted by regulations from making dividend
distributions in excess of certain prescribed amounts.
59
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. The primary market risk to which The Company is subject is
interest rate risk. The majority of the Company's interest rate risk arises from
the instruments, positions and transactions entered into for purposes other than
trading such as loans, available for sale securities, interest bearing deposits,
short term borrowings and long term borrowings. Interest rate risk occurs when
interest bearing assets and liabilities reprice at different times as market
interest rates change. For example, if fixed rate assets are funded with
variable rate debt, the spread between asset and liability rates will decline or
turn negative if rates increase.
Interest rate risk is managed within an overall asset/liability framework for
the Company. The principal objectives of asset/liability management are to
manage sensitivity of net interest spreads and net income to potential changes
in interest rates. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. The Company employs a sensitivity analysis in the form of a
net interest income to help in this analysis as presented below:
0-90 Days 90-365 Days 1-5 Years Over 5 Years Total
--------- ----------- --------- ------------ ---------
Interest Bearing Dep $ 279 $ -- $ -- $ -- $ 279
Investment Securities 20,205 44,064 93,509 21,015 178,793
Loans 177,844 186,323 67,868 65,804 497,839
--------- ----------- --------- ------------ ---------
Total Rate
Sensitive Assets 198,328 230,387 161,377 86,819 676,911
--------- ----------- --------- ------------ ---------
Deposits 150,863 224,522 200,988 -- 576,373
Fed Funds Purchased & --
Agreements to repurchase 38,200 -- -- -- 38,200
Other borrowings 518 1,553 23,259 3,366 28,696
--------- ----------- --------- ------------ ---------
Total Rate
Sensitive Liabilities 189,581 226,075 224,247 3,366 643,269
--------- ----------- --------- ------------ ---------
GAP $ 8,747 $ 4,312 $ (62,870) $ 83,453 $ 33,642
========= =========== ========= ============ =========
60
TRADING MARKET FOR THE COMPANY'S STOCK
The Company's stock is not actively traded on any exchange. The range and sales
prices, based upon information that the Company has been made aware, are listed
below:
Stock Prices
--------------------------------------------------
Quarter Low High
------- ---------- ----------
2002-- by quarter 1st $ 85.00 $ 110.00
2nd 95.00 115.00
3rd 95.00 112.00
4th 95.00 115.00
2001-- by quarter 1st $ 85.00 $ 105.00
2nd 85.00 115.00
3rd 90.00 105.00
4th 90.00 130.00
Dividends declared on a quarterly basis for the last two fiscal years:
Quarter 2002 2001
------- ---------- -----------
Dividends declared per share
1st $ .35 $ .35
2nd .40 .35
3rd .40 .35
4th .50 .55
There are no conditions that currently exist that would indicate that dividends
comparable to those paid in the last two years could not be paid in the
foreseeable future.
61
January 10, 2003
To the Board of Directors
The Farmers & Merchants State Bank
Archbold, Ohio
INDEPENDENT AUDITORS' REPORT
We have examined management's assertion included in the accompanying Management
Report that The Farmers & Merchants State Bank maintained a system of internal
control over financial reporting which is designed to provide reasonable
assurance to the Bank's management and Board of Directors regarding the
preparation of reliable published financial statements in accordance with
accounting principles generally accepted in the United States of America as of
December 31, 2002, based upon criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The management of The Farmers & Merchants State Bank
is responsible for maintaining effective internal control over financial
reporting. Our responsibility is to express an opinion on management's assertion
based upon our examination.
Our examination was made in accordance with attestation standards established by
the American Institute of Certified Public Accountants and, accordingly,
included obtaining an understanding of the internal control over financial
reporting, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assertion that The Farmers & Merchants State Bank
maintained a system of internal control over financial reporting which is
designed to provided reasonable assurance to the Bank's management and Board of
Directors regarding the preparation of reliable published financial statements
in accordance with accounting principles generally accepted in the United States
of America as of December 31, 2002, is fairly stated, in all material respects,
based upon criteria established in "Internal Control - Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
KROUSE, KERN & CO., INC.
Fort Wayne, Indiana
62
MANAGEMENT REPORT
as of December 31, 2002
FINANCIAL STATEMENTS
Management of The Farmers & Merchants State Bank is responsible for the
preparation, integrity and fair presentation of its published financial
statements as of December 31, 2002, and for the year then ended. The financial
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts, some of which are based on judgments
and estimates of management.
INTERNAL CONTROLS
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2002. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that The
Farmers & Merchants State Bank maintained an effective internal control
structure over financial reporting as of December 31, 2002.
DESIGNATED LAWS
Management is also responsible for compliance with the federal and state laws
and regulations relating to safety and soundness, including those designated
laws and regulations regarding dividend restrictions and loans to insiders.
Based on our assessment, management believes The Farmers & Merchants State Bank
complied in all material respects, with those designated laws and regulations
for the year ended December 31, 2002.
63
[Photo]
WAUSEON SHOOP MANAGERS
AVP/Branch Mgr. Gloria Gunn and
Asst. Cashier/Asst. Branch Mgr. Sue Dieringer
[Photo]
DINING AT GREAT BEAR LODGE
From Left: Super 55 tour guest,
Carol England, AVP/Downtown Branch Mgr., Duane England
[Photo]
WOODLAND BRANCH "POPCORN" DAY
James Snyder and AVP/Mgr. Deborah Shinabery
[Photo]
F & M DONATES TO
QUADCO REHABILITATION CENTER
AVP/Stryker Branch Mgr. Ronald Short presents check to
Quadco Representatives
64
[Photo]
DELTA MANAGERS SELLING TICKETS AT
DELTA CHICKEN FESTIVAL DINNER
AVP/Branch Mgr. Cynthia Knauer and
Asst. Cashier/Asst. Branch Mgr. Beth Bay
[Photo]
F & M EMPLOYEES STAFF WILLIAMS CO.
BEEF PRODUCERS STAND
St. VP/West Unity Branch Mgr. Lewis Hilkert and
Vickie Grimm, Bryan SouthTowne Secretarial Supervisor
[Photo]
BRYAN SOUTHTOWNE BRANCH CELEBRATES
10TH ANNIVERSARY
Seated from left: Marie Wolff, Asst.
Teller Supervisor; Vickie Grimm,
Secretarial Supervisor; Becky VanArsdalen, Teller;
Erin Hallet, Teller
Standing from left: Cherri Andres, Teller; Linda Coy, New Accounts Rep.;
Richard Bruce, VP/Commercial Loan Officer; Michael Smith, AVP/Mgr; Ruth Ford,
Asst. Cashier/Asst. Mgr.; Michelle Robarge, Commercial Loan Secretary, Michelle
Nape, Teller Supervisor
[Photo]
WILLIAMS COUNTY BUSINESS &
INDUSTRY SHOW F & M BOOTH
AVP/Bryan E. High Branch Mgr. David Frazer and
Children, McKenzie and Mason
65
[Photo]
MONTPELIER W. MAIN BRANCH CELEBRATES
10TH ANNIVERSARY
Jeannie VonDeylen, W. Main Asst. Mgr; Kelly Bentley,
Asst. Cashier/Montpelier Mgr.; Barry VonDeylen, Eastside Asst.
Mgr.
[Photo]
NAPOLEON BRANCH CHRISTMAS CARD CLUB OPEN HOUSE
VP/Sr. Agri Finance Officer Michael Culler and
AVP/Napoleon Branch Mgr. Stephen Jackson
[Photo]
SWANTON STAFF READY FOR
CHRISTMAS CLUB OPEN HOUSE
Front from left: Kathy Keller, Asst. Teller Supervisor; Hoilyn
McKibben, Teller; Debra Kauffman, Asst. Cashier/Asst Mgr.
Back from left: Vicky Bratton, Loan Secretary; Judy Carpenter,
Teller Supervisor; Barry Gray, AVP/Mgr.; Carrol Muston,
New Accounts Rep.; Joanne Pero, Teller
[Photo]
DEFIANCE OFFICE 1ST ANNIVERSARY
From left: Stephanie Eckert, Teller; Cheri Helberg, Loan Support;
Krystie Landversicht, Teller; L. Sue Cuevas, Asst. Cashier/Asst.
Mgr.; David Kunesh, AVP/Mgr.; Cathy Wiedman, Teller
Supervisor; Tiffany Browns, Teller
66
[Photo]
DIRECTORS EMERITUS
Front from left: Robert Whitmer, Lee Graffice, Dale Nafziger
Back from left: Harold Plassman, Kenneth Stamm, Charles Lugbill
[Photo]
DIRECTOR DALE NAFZIGER RETIRES
Seated from left: Eugene Bernath, Chairman of the Board, Dale
Nafziger, Joe Crossgrove, President/CEO/Cashier
Standing from left: Maynard Sauder, Vice Chairman and Dean
Miller, Vice President
[Photo]
TELLERS RECEIVE HONOR ROLL AWARDS
From left: Deb Felix, Main Office
Teller Supervisor; Edward Leinger, Exec. VP
[Photo]
BRANCH ADMINISTRATOR AND MANAGERS
Front from left: Kelly Bentley, AC/Montpelier W. Main and
Eastside Mgr.; Carol England, AVP/Wauseon Downtown Mgr.;
Cynthia Knauer, AVP/Delta Mgr.
Middle from left: Barry Gray, AVP/Swanton Mgr.; Deborah
Shinabery, AVP/Archbold Woodland Mgr.; Gloria Gunn,
AVP/Wauseon Shoop Mgr.; David Kunesh, AVP/ Defiance Mgr.;
Back from left: Ronald Short AVP/Stryker Mgr.; Stephen Jackson,
AVP/Napoleon Mgr.; David Frazer, AVP/Bryan E. High Mgr.;
Michael Smith, AVP/Bryan SouthTowne Mgr.; Allen Lantz, Sr.
VP/Branch Administrator, Lewis Hilkert, Sr. VP/West Unity Mgr.
[Photo]
F&M AG APPRECIATION DAY
AVP/Agri Loan Officer Scott Miller and Max Wyse, Inventory
Controller at Pettisville Grain
67
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements exist on accounting and financial disclosures or related
matters.
No change of accountants has been made since 1982.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The information called for herein is presented below:
Year First
Principal Occupation or Became
Name Age Employment for Past Five Years Director
- --------------------------- --- ----------------------------------------- -----------
Eugene Bernath 70 Farmer 1978
Chairman of the Board,
Farmers & Merchants Bancorp, Inc.
The Farmers & Merchants State Bank
Dexter Benecke 60 President, Viking Trucking, Inc. 1999
Jerry L. Boyers 69 President, Edifice Construction 1976
Management
Joe E. Crossgrove 66 President, Chief Executive Officer 1992
The Farmers & Merchants State
Bank
Robert G. Frey 63 President, E. H. Frey & Sons, Inc. 1987
Julian Giovarelli 71 President, GIO Sales, Inc. 2000
Jack C. Johnson 50 President, Hawk's Clothing, Inc. 1991
Partner, REJO Partnership
Dean E. Miller 59 President, MBC Holdings, Inc. 1986
Anthony J. Rupp 53 President, Rupp Furniture Co. 2000
David P. Rupp Jr. 61 Attorney, Plassman, Rupp, Hensel, 2001
Short & Hagans
James C. Saneholtz 56 President, Saneholtz-McKarns, Inc. 1995
`
Maynard Sauder 71 Chairman, Sauder Woodworking Co. 1980
Merle J. Short 62 Farmer, President of Promow, Inc. 1987
Steven J. Wyse 58 President, SteelinQ Systems, Inc. 1991
68
EXECUTIVE OFFICERS
Principal Occupation
Name Age for Past Five Years
- --------------------------- --- -----------------------------------------
Eugene Bernath 70 Farmer
Chairman of the Board
Farmers & Merchants State Bank
Joe E. Crossgrove 66 President, Chief Executive Officer
The Farmers & Merchants State
Bank (since 1991) Executive Vice
President and Treasurer of Farmers
& Merchants Bancorp, Inc.
Director and Vice President of Farmers
& Merchants Life Insurance Co.
Rex D. Rice 43 Executive Vice President
Chief Lending Officer
Edward Leininger 46 Executive Vice President
Commercial Loan Officer
Carol England 62 Assistant Vice President
Corporate Secretary
Branch Manager
Barbara Britenriker 40 Senior Vice President
Chief Financial Officer
Comptroller
Allen Lantz 49 Vice President
Branch Administrator
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, 2003 is incorporated herein by reference.
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, 2003, is incorporated herein by reference.
69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHER
There are no transactions to report.
CERTAIN BUSINESS RELATIONSHIPS
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, 2003 is incorporated herein by reference.
LOANS TO RELATED PARTIES
This information is presented on page 40, Note 5 of the Annual Report to
shareholders, and is incorporated herein by reference.
CERTAIN BUSINESS RELATIONSHIPS
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, 2003 is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures are effective as of December 31, 2002. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect the internal controls subsequent to December 31, 2002
70
PART IV
ITEM 15. 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 29
Consolidated Balance Sheets Page 30
Consolidated Statements of Income Page 31
Consolidated Statements of Changes in
Shareholders' Equity Page 32
Consolidated Statements of Cash Flows Page 33
Notes to Consolidated Financial Statements Pages 34 - 55
(2) Financial Statement Schedules
Five Year Summary of Operations Page 56
(3) Other Information
Selected Financial Data by Management Pages 58 - 60
Trading Market for the Company's Stock Page 61
Independent Auditors' Report Page 62
Management Report Page 63
2002 Annual Report Photos Pages 64 - 67
(4) Exhibits
(3.1) Articles of Incorporation have been
submitted with previous 10-K reports.
(13.1) 2002 Annual Report to Shareholders (contained herein)
(23.1) Notice of Annual Meeting and Proxy Statement
(b) Reports on Form 8-K
None
(c) Exhibits required by Item 601.
None required
(d) Schedules required by Regulation S-X
The Condensed Financial Information of the Registrant required
by this report are included in the Annual Report to
Shareholders, Note 18, pages 50 through 53.
(e) Signatures Page 74
(f) Other schedules required to be filed as part of this report.
(g) Certification Statements Pages 75-76
Form 10-K
---------
Schedule of Property and Equipment Page 72
Schedule of Accumulated Depreciation - Property and Equipment Page 73
71
PART IV
ITEM 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
SCHEDULE OF PROPERTY AND EQUIPMENT
(In Thousands)
Schedule 1
Year Ended December 31, 2002
-------------------------------------------------------------
Beginning Ending
Balance Additions Retirements Balance
------- --------- ----------- -------
Land $ 2,601 $ 167 $ - $ 2,768
Building 10,661 3,314 - 13,975
Equipment 8,308 601 439 8,470
-------- ---------- ---------- --------
$ 21,570 $ 4,082 $ 439 $ 25,213
======== ========== ========== ========
Year Ended December 31, 2001
-------------------------------------------------------------
Beginning Ending
Balance Additions Retirements Balance
------- --------- ----------- -------
Land $ 2,614 $ 13 $ 26 $ 2,601
Building 9,349 1,312 - 10,661
Equipment 6,390 1,980 62 8,308
-------- ------------ --------- -------
$ 18,353 $ 3,305 $ 88 $21,570
======== ============ ========= =======
Year Ended December 31, 2000
-------------------------------------------------------------
Beginning Ending
Balance Additions Retirements Balance
------- --------- ----------- -------
Land $ 1,983 $ 656 $ 25 $ 2,614
Building 9,123 251 25 9,349
Equipment 6,031 416 57 6,390
-------- ---------- --------- -------
$ 17,137 $ 1,323 $ 107 $ 18,353
======== ========== ========= =======
72
SCHEDULE OF ACCUMULATED DEPRECIATION - PROPERTY AND EQUIPMENT
Schedule 2
Year Ended December 31, 2002
---------------------------------------------------------
Beginning Ending
Balance Depreciation Retirements Balance
------- ------------ ----------- --------
Land $ - $ - $ - $ -
Building 3,250 317 - 3,567
Equipment 5,988 1,028 404 6,612
-------- ----------- --------- --------
$ 9,238 $ 1,345 $ 404 $ 10,179
======== ========== ========= ========
Year Ended December 31, 2001
---------------------------------------------------------
Beginning Ending
Balance Depreciation Retirements Balance
------- ------------ ----------- --------
Land $ - $ - $ - $ -
Building 2,944 306 - 3,250
Equipment 5,055 976 43 5,988
-------- ----------- --------- --------
$ 7,999 $ 1,282 $ 43 $ 9,238
======== ========== ========= ========
Year Ended December 31, 2000
---------------------------------------------------------
Beginning Ending
Balance Depreciation Retirements Balance
------- ------------ ----------- --------
Land $ - $ - $ - $ -
Building 2,668 286 10 2,944
Equipment 4,293 810 48 5,055
-------- ----------- --------- --------
$ 6,961 $ 1,096 $ 58 $ 7,999
======== ========== ========= ========
73
FARMERS & MERCHANTS BANCORP, INC.
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/s Joe E. Crossgrove Date: March 28, 2003
--------------------- --------------
Joe E. Crossgrove
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Joe E. Crossgrove Date: March 28, 2003 /s/ Barbara Britenriker Date: March 28, 2003
- ----------------------------------- -------------- ------------------------------- --------------
Joe E. Crossgrove, Director Barbara Britenriker
Chief Executive Officer Chief Financial Officer
/s/ Eugene D. Bernath Date: March 28, 2003 /s/ Kent Roth Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Eugene D. Bernath Kent Roth, Auditor
Director and Chairman
/s/ Dexter Benecke Date: March 28, 2003 /s/ Anthony J. Rupp Date: March 28, 2003
- ----------------------------------- -------------- ------------------------------- --------------
Dexter Benecke, Director Anthony J. Rupp, Director
/s/ Jerry Boyers Date: March 28, 2003 /s/ David P. Rupp Jr. Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Jerry Boyers, Director David P. Rupp Jr., Director
/s/ Robert Frey Date: March 28, 2003 /s/ James Saneholtz Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Robert Frey, Director James Saneholtz, Director
/s/ Julian Giovarelli Date: March 28, 2003 /s/ Maynard Sauder Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Julian Giovarelli, Director Maynard Sauder, Director
/s/ Jack C. Johnson Date: March 28, 2003 /s/ Merle J. Short Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Jack C. Johnson, Director Merle J. Short, Director
/s/ Dean Miller Date: March 28, 2003 /s/ Steven J. Wyse Date: March 28, 2003
- ----------------------------------- ------------------ ------------------------------- --------------
Dean Miller, Director Steven J. Wyse, Director
74
FARMERS & MERCHANTS BANCORP, INC.
CERTIFICATION
I, Joe E. Crossgrove certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date March 28, 2003
/s/ Joe E. Crossgrove
----------------------------------
Joe E. Crossgrove
Chief Executor Officer
75
FARMERS & MERCHANTS BANCORP, INC.
CERTIFICATION
I, Barbara Britenriker certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date March 28, 2003
/s/ Barbara Britenriker
-------- ---------------------
Barbara Britenriker
Chief Financial Officer
76