<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION 

                             Washington, D.C. 20549
                                    FORM 10-K
               /X/ Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 1998
                                       or
             / /   Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                      For the transition period from   to

                         Commission File Number 0-14492

                        FARMERS & MERCHANTS BANCORP, INC.


          OHIO                                       34-1469491
-------------------------------               --------------------------
(State or other jurisdiction of                    (IRS Employer
incorporation or organization)                     Identification No.)

307-11 North Defiance Street
     Archbold, Ohio                                    43502
-------------------------------               --------------------------
  (Address of principal                              (Zip Code)
   Executive offices)

        Registrant's telephone number, including area code (419)446-2501

           Securities registered pursuant to Section 12(b) of the Act:

                                                 Name of each exchange on
Title of each class                                  which registered
     None                                                 None



           Securities registered pursuant to Section 12(b) of the Act:

                         Common shares without par value
                                (Title of class)


                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   / X /    No   /   /

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 305 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { }

As of March 1, 1999, Registrant had outstanding 1,300,000 shares of common stock
at a market value of $97,500,000.







                                      -1-
<PAGE>   2




                        FARMERS & MERCHANTS BANCORP, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>


                                                                                                                     PAGE
<S>                                                                                                               <C>
Form 10-K Items
Item 1.           Business                                                                                           2-16

Item 2.           Properties                                                                                           17

Item 3.           Legal Proceedings                                                                                    18

Item 4.           Submission of Matters to a Vote
                  of Security Holders                                                                                  18

Item 5.           Market for Registrant's Common Equity
                  and Related Stockholder Matters                                                                      18

Item 6.           Selected Financial Data                                                                              18

Item 7.           Management's Discussion and Analysis
                  of Financial Condition and Results
                  of Operations                                                                                     18-23

Item 8.           Financial Statements and Supplementary Data                                                          24

Item 9.           Disagreements on Accounting and
                  Financial Disclosure                                                                                 25

Item 10.          Directors and Executive Officers
                  of the Registrant                                                                                 26-28

Item 11.          Management Remuneration and Transactions                                                             29

Item 12.          Security Ownership of Certain
                  Beneficial Owners and Management                                                                     29

Item 13.          Certain Relationships and Related
                  Transactions                                                                                         29

Item 14.          Financial Schedules and Reports on Form 8-K                                                          30
                  Schedule 1 - Schedule of Property and Equipment                                                      31
                  Schedule 2 - Schedule of Accumulated Depreciation -
                                 Property and Equipment                                                                32

Signatures                                                                                                             33

Financial Data Schedule                                                                                             34-35

Total Pages:                                                                                                           35

</TABLE>

                                        i


<PAGE>   3





                                     PART I


ITEM 1. BUSINESS

HISTORY

         The Farmers & Merchants State Bank is a community bank, as it has been
since 1897. When Archbold's population was less than 900, there were six local
businessmen foresighted enough in their thinking and views to realize the need
for a bank in the village of Archbold. J. O. Swisher and Jacob Ehrat (livestock
brokers) C. M. McLaughlin and A. J. Vernier (hardware merchants) and L. D.
Gotshall and I. W. Gotshall (lumber merchants), were founders of the then
Farmers & Merchants Bank, a private bank. The bank's first office was one room
located in the Vernier Hotel building, currently occupied by the Archbold Barber
Shop.

         In 1907, the first new structure was built at the corner of Depot and
North Defiance Streets, which is now the Subway. The bank was heralded as one of
the most unusual and attractive banks in the area, featuring marble interior,
brass trimmed teller cages, tile floor, leaded windows, and high vaulted
ceiling. The vault featured a time controlled money safe. The building and
equipment were unique to the early 1900's and adequately served the banking
needs of the area for over 50 years with only minor interior alterations.

         In August of 1913 the village of Archbold was hit by a disastrous fire
which destroyed all the business district on the east side of N. Defiance Street
from the bank at the corner of Depot Street to the Murbach medical building at
the corner of Holland Street. This was a tremendous loss for a dozen or more
businesses, causing many to liquidate. Young businessmen and enterprising
citizens promoted a waterworks system and passed a $16,000 bond issue to finance
the project. This seemed to be the turning point for the advancement of industry
and the community rallied from this eventful experience to an unusual growth.

         In 1919 the founding directors elected to change from a private bank to
a state chartered bank and at this time changed its name from the Farmers &
Merchants Bank to The Farmers & Merchants State Bank, as required in the state
charter. This has been the only name change in the bank's 99 year history. The
bank's capital funds were $53,510 thousand and resources were $571,549 thousand.

         The bank experienced growth, especially during the post-war years and
early 1950's. By 1958, the bank's resources had grown to 7 1/2 million dollars.
The directors and officers realized the need for a larger building to
accommodate the increase in business and services. In 1958, the bank moved to
its present N. Defiance Street location greatly improving service to its
customers and offering drive-up banking, electronic bookkeeping, convenient
parking, and a social room for the community to use. The new building featured
the latest in modern banking facilities and The Farmers & Merchants State Bank
was prepared to more efficiently serve the ever growing community.

         With resources of over $23 million in 1969, The Farmers & Merchants
State Bank again realized the need for additional space and inaugurated a
building expansion, which nearly doubled the original structure built in 1958.
The new addition, opened early in 1970, provided for an additional drive-up
window, walk-up window, direct entrance from the bank parking lot to the lobby,
three spacious private offices, conference room, and a large community room with
a fully equipped kitchen to facilitate groups from 60 to 100.

         In 1972, with total resources of over $34 million and to continue its
growth, The Farmers & Merchants State Bank established an office on N. Shoop
Avenue, Wauseon. The office was opened in November 1973 and provided greater
banking service to the Wauseon area. The Wauseon office provided complete
banking service and a community room with kitchen facilities to accommodate 
15-80 people.


                                      -2-
<PAGE>   4


         In 1977 - 1978 additional office space was added to The Farmers &
Merchants State Bank in Archbold, and an automatic teller machine, "Teller 24",
was installed in the entrance lobby.

         A second Wauseon office was established in the downtown area on the
corner of N. Fulton and Depot streets in August of 1978. It is a very convenient
location for shoppers and businesses. The Downtown office also provides 24 hour
banking with "Teller 24".

         During April of 1980 a second office was opened in Archbold, located in
the Lugbill Addition near Woodland Oaks. The Woodland office is a convenient
branch offering full banking services to those Archbold residents in the
outlying area.

         With resources of $83 million the decision was made to open full
service offices in Stryker and West Unity in 1981.

         During that year, new computerized proof equipment was added to capture
the required data in today's complex and competitive banking environment. A new
division was added to the Operations Department in the creation of the Central
Information File Department. Plus, two new branches were opened, the Delta
office in June and the all new Bryan E. High office in December.

         In 1985 the conversion of the former bank, The Farmers & Merchants
State Bank, into a holding company structure was performed to provide greater
flexibility for expanding the bank's business into activities closely related to
banking, as well as, placing the bank in a position to react in a timely and
effective manner to the many complex changes affecting the banking industry. On
April 22, 1985, a new Ohio chartered bank was formed and incorporated as the
FMSB Bank following the formation of a holding company, The Farmers & Merchants
Bancorp, Inc., which was incorporated as a bank holding company under the laws
of the State of Ohio on February 25, 1985. A triangular merger was then effected
whereby the former bank, The Farmers & Merchants State Bank, was merged with and
into the new bank, the FMSB Bank with each outstanding share of common stock of
the former bank being converted by operation of law upon consummation of the
merger into two shares of common stock of Farmers & Merchants Bancorp, Inc. Upon
the merger becoming effective July 31, 1985, 260,000 shares of Farmers &
Merchants Bancorp, Inc., no par value common stock were issued. The resulting
new bank in the merger is the FMSB Bank; however, its name was changed
concurrently with the merger to The Farmers & Merchants State Bank. Upon
consummation of the merger, the stockholders of Farmers & Merchants Bancorp,
Inc. received the same percentage of ownership in the holding company as their
percentage of ownership of the former bank. The former bank then ceased to
exist. All of the 260,000 issued and outstanding shares of stock of the new
bank, The Farmers & Merchants State Bank, were held by the bank holding company,
Farmers & Merchants Bancorp, Inc.

         With the success The Farmers & Merchants State Bank was experiencing in
Stryker, West Unity and Bryan and the prospect of continued growth in Williams
County, it was decided to open another office in Bryan and one in Montpelier. In
May of 1992, the doors were opened at a second office in Bryan located on S.
Main Street; and in July of 1992 the bank was pleased to be able to offer their
financial services to the community of Montpelier. The Bryan S. Main Street
banking center has three drive-up lanes and a drive-up ATM. Also during 1992,
the West Unity Office was expanded and an additional drive-up lane was added at
the Delta Office.

         Also during 1992, an accidental death and disability insurance company
was formed, Farmers & Merchants Life Insurance Company. The company was
organized under the laws of the State of Arizona with 100% of the 100,000 issued
and outstanding shares of common stock owned by Farmers & Merchants Bancorp,
Inc.





                                      -3-
<PAGE>   5


         The growth of The Farmers & Merchants State Bank continued to be very
favorable in 1993 with assets in excess of $370 million, but with the tremendous
growth that was occurring, the bank was feeling growing pains brought on by
cramped quarters. There were no longer community rooms in either the Main Office
or the Wauseon Shoop Office. All available space at the Main Office had been
used, by turning closets and storage space into offices and many of the offices
that were designed for one officer were housing two officers. The Marketing and
Personnel departments had been moved to the Wauseon Shoop Office basement, the
former community room. The time had come for the addition of more office space
at the Main Office. The former Christy Building, located on the north side of
the Main Office, was demolished during the fall of 1993 to clear the way for the
building expansion to begin.

         Because of the ever-increasing flow of customers at the Wauseon N.
Shoop Office, a decision was made to install a drive-up ATM. That ATM was
installed in December, 1993. An ATM was also installed at Sauder Woodworking Co.
to better serve the Sauder employees, who work various shifts, making it
inconvenient for them to bank during regular banking hours.

         1994 was a very special year for The Farmers & Merchants State Bank.
Earnings were very strong, asset quality remained outstanding, and the bank
expanded its presence within its market area. The goals for 1994 were exceeded,
with a new high in assets of $406 million. With a growing interest to expand the
bank's market area and branch into Henry County, an application was submitted
for a Napoleon office. Once the application was approved, the bank wasted no
time in getting the building constructed. The full service Napoleon Office, with
a drive-up ATM, was conveniently located on St. Rt. 108 on the north edge of
Napoleon making it easily accessible for the residents of Henry County.

         During the time the Napoleon office was under construction, plans were
completed for expansion of the Wauseon N. Shoop Office. This was the first
expansion of this office since its opening in 1973, and with the basement being
used for offices, more office space was greatly needed. The new addition
consisted of four additional offices, a large secretarial/new accounts area,
restroom, and supply room.

         In October, 1994, the newly constructed expansion of the Main Office
and the remodeling of the first floor of the original structure was completed.
The offices were ready for occupancy in time for the annual Christmas Club Open
House, November 4th and 5th. The remodeling of the offices located in the
basement of the Main Office began as soon as Open House was over.

         The Napoleon Office opened for business during the second week of
February, 1995. On Sunday, February 12, 1995, an Open House was held at the Main
Office and the new Napoleon Office.

         An ATM was placed at Northwest State Community College in March, 1995,
to better serve the customers from the Four County Area. In April, 1995, a
drive-up ATM was installed at the Archbold Woodland Office.

         During the spring of 1996, the Delta Office began an extensive
remodeling and expansion project. The need was seen for more loan officer space
and an ATM machine. The project was completed in October of 1996. Two more ATM
locations were also secured during this year. An ATM was placed in the Community
Hospital of Williams County, Bryan, and another in the Fulton County Health
Center, Wauseon. The Farmers & Merchants State Bank now has twelve ATM's located
throughout Fulton, Williams, and Henry Counties.

         In June of 1996, Farmers & Merchants Bancorp split its stock, 5 for 1.
The goal was to bring the price per share down so it would be more affordable
and possibly encourage trading.

         The Farmers & Merchants State Bank again hit a new growth plateau. At
year end assets went over the $500 million mark.




                                      -4-
<PAGE>   6


NATURE OF ACTIVITIES

         The Farmers & Merchants State Bank through its equivalent of 210 full
time employees engages in general commercial banking and savings business. Its
activities include commercial and residential mortgage, consumer, and credit
card lending activities. Because of the geographical locations in which the
bank's branches are located, a substantial amount of the bank's loan portfolio
is composed of loans made to the farming industry for such things as farm land,
farm equipment, livestock and general operation loans for seed, fertilizer,
feed, etc. Other types of lending activities include loans for home
improvements, student loans, and loans for such items as autos, trucks,
recreational vehicles, mobile homes, motorcycles, etc. The bank also is engaged
in direct finance leasing and has invested in leveraged type leases, although
the activity in this area has substantially decreased in recent years.

         The bank also provides checking account services, as well as, savings
and other time deposit services such as certificates of deposits. In addition,
ATM's (automated teller machines) (Money Access Corporation) are also provided
in its offices in Archbold, Wauseon, Bryan, Delta and Napoleon, Ohio. Two ATM's
are also located at Sauder Woodworking Co., Inc., a major employer in Archbold.
Additional locations are at Northwest State Community College, Fulton County
Hospital in Wauseon, and Williams County Hospital in Bryan.

         During 1987 The Farmers & Merchants State Bank began offering discount
brokerage services to its customers. The offering of these services was a result
of management's ongoing commitment to offer a full range of financial services
to its customers.

         Farmers & Merchants Life Insurance Company was established to provide
needed additional services to The Farmers & Merchants State Bank's customers
through the issuance of life and disability insurance policies. The lending
officers of The Farmers & Merchants State Bank are the selling agents of the
policies to the bank's customers. The insuring company will be USLIFE Credit
Insurance Company, an Illinois Corporation, while Farmers & Merchants Life
Insurance Co. will be the participating reinsurer. Farmers & Merchants Bancorp,
Inc.'s original investment in Farmers & Merchants Life Insurance Co. was
$100,000. This investment represented less than 5% of Farmers & Merchants
Bancorp, Inc.'s equity capital.

         Farmers & Merchants Bancorp, Inc. is a bank holding company within the
meaning of the Bank Holding Company Act of 1956. The bank subsidiary, The
Farmers & Merchant State Bank, is in turn regulated and examined by the Ohio
Division of Banks, the Federal Deposit Insurance Corporation and the Federal
Reserve System. The activities of the bank subsidiary are also subject to other
federal and state laws and regulations, including usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and
Regulation Z as promulgated thereunder by the Board of Governors, the Truth in
Savings Act, the Bank Bribery Act, the Competitive Equality Banking Act of 1987,
the Expedited Funds Availability Act, the Community Reinvestment Act, the FDICIA
(Federal Deposit Insurance Corporation Insurance Act), FIRREA (Federal
Institutions Reform, Recovery, and Enforcement Act of 1989), and the Bank Merger
Act among others.





                                      -5-
<PAGE>   7


         The commercial banking business in the geographical area in which The
Farmers & Merchants State Bank operates is highly competitive. In its banking
activities, it competes directly with other commercial banks and savings and
loan institutions in each of its operating localities. The following is a
summary by geographical area of The Farmers & Merchants State Bank principal
competition:




<TABLE>
<CAPTION>
    Branch                                                        Location
----------------                                     ------------------------------------------------
<S>                                                  <C>
Archbold, Ohio                                       First National Bank of Northwest Ohio
                                                       (2 offices)

Wauseon, Ohio                                        National City Bank (Subsidiary of National City
                                                       Corporation)
                                                     First Federal Savings & Loan of Defiance
                                                     City Loan Bank
                                                     State Bank & Trust Company
                                                     First National Bank of Northwest Ohio

Stryker, Ohio                                        First National Bank of Northwest Ohio

West Unity, Ohio                                     National Bank of Montpelier

Delta, Ohio                                          State Bank & Trust Company
                                                     First Federal Savings & Loan of Delta

Bryan, Ohio                                          First National Bank of Northwest Ohio
                                                       (2 offices)
                                                     National City Bank (Subsidiary of National City
                                                       Corporation)
                                                     First Federal Savings & Loan of Defiance
                                                       (2 offices)
                                                     Community First Bank & Trust

Montpelier, Ohio                                     First National Bank of Northwest Ohio
                                                     National Bank of Montpelier (2 offices)
                                                     First Federal Savings & Loan of Defiance

Napoleon, Ohio                                       Henry County Bank (3 offices)
                                                     Beneficial Bank
                                                     First Federal Savings & Loan of Defiance, Ohio
                                                     First National Bank of Northwest Ohio (2 offices)
                                                     National City Bank (Subsidiary of National City
                                                       Corporation) (2 offices)


</TABLE>




                                      -6-
<PAGE>   8


SELECTED STATISTICAL AND FINANCIAL INFORMATION

         The following statistical information concerning the operations of the
company is provided in accordance with Guide 3 of the Securities and Exchange
Commission relating to the operations of bank holding companies. It should be
read in conjunction with the financial statements, notes thereto and other
financial information appearing elsewhere herein.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                                                 ASSETS
                                                                                     1998
                                                              -------------------------------------------------   
                                                                                  Interest
                                                                  Average           and             Yield/
                                                                  Balance         Dividend           Rate
                                                              -------------     -------------     -------------   
<S>                                                           <C>               <C>                    <C>  
     Interest Earning Assets:
         Loans (1)                                            $     408,291     $      36,335          8.90%
         Taxable investment securities                               75,880             4,641          6.12
         Tax-exempt investment securities                            25,654             1,259          4.91
         Interest bearing deposits with other banks                     100                 5          5.00
         Federal funds sold and securities
           purchased under agreement to resell                       12,123               648          5.35
                                                              -------------     -------------
     Total Interest Earning Assets                                  522,048     $      42,888          8.22%
                                                                                =============    ===========
     Non-interest Earnings Assets:
         Cash and due from banks                                     14,745
         Other assets                                                16,484
                                                              -------------   
                                                              $     553,277
                                                              =============   
                                                  LIABILITIES AND SHAREHOLDERS' EQUITY
     Interest Bearing Liabilities:
         Savings deposits                                     $      89,643     $       4,635          5.17%
         Other time deposits                                        290,141            16,547          5.70
         Other borrowed money                                        11,051               698          6.32
         Federal funds purchased and securities
           sold under agreement to repurchase                         3,276               206          6.25
                                                              -------------     -------------
     Total Interest Bearing Liabilities                             394,111     $      22,086          5.60%
                                                                                =============    ===========
     Non-interest Bearing Obligations:
         Non-interest bearing deposits                              100,420
         Other                                                        5,807
                                                              -------------
         Total Liabilities                                          500,338
         Stockholders' Equity                                        52,939
                                                              -------------
         Total Liabilities and Stockholders' Equity           $     553,277
                                                              =============
         Interest and dividend income/yield                                     $      42,888          8.22%
         Interest expense/rate                                                         22,086          5.61
                                                                                -------------    ----------
         Net Interest Spread                                                    $      20,802          2.61%
                                                                                =============    ===========
         Net Interest Margin                                                                           3.98%
                                                                                                 ===========
</TABLE>





                                      -7-
<PAGE>   9


<TABLE>
<CAPTION>
                                                                 ASSETS
                                                                                     1997
                                                              ----------------------------------------------   
                                                                                  Interest
                                                                Average             and             Yield/
                                                                Balance           Dividend           Rate
                                                              -------------     -------------    -----------     
<S>                                                           <C>               <C>                    <C>  
     Interest Earning Assets:
         Loans (1)                                            $     384,498     $      34,271          8.91%
         Taxable investment securities                               72,158             4,540          6.29
         Tax-exempt investment securities                            22,069             1,131          5.13
         Interest bearing deposits with other banks                     100                 5          5.00
         Federal funds sold and securities
           purchased under agreement to resell                        3,805               211          5.55
                                                              -------------     -------------
     Total Interest Earning Assets                                  482,630     $      40,158          8.32%
                                                                                =============    ===========
     Non-interest Earnings Assets:
         Cash and due from banks                                     13,161
         Other assets                                                14,371
                                                              -------------     
                                                              $     510,162
                                                              =============
 
                                                       LIABILITIES AND SHAREHOLDERS' EQUITY
     Interest Bearing Liabilities:
         Savings deposits                                     $      87,439     $       4,618          5.28%
         Other time deposits                                        270,751            15,659          5.78
         Other borrowed money                                         9,414               596          6.34
         Federal funds purchased and securities
           sold under agreement to repurchase                         4,443               266          5.99%
                                                              -------------     -------------
     Total Interest Bearing Liabilities                             372,047     $      21,139          5.68
                                                                                =============    ==========
     Non-interest Bearing Obligations:
         Non-interest bearing deposits                               87,013
         Other                                                        4,554
                                                              -------------
         Total Liabilities                                          463,614
         Stockholders' Equity                                        46,548
                                                              -------------
         Total Liabilities and Stockholders' Equity           $     510,162
                                                              =============
         Interest and dividend income/yield                                     $      40,158          8.32%
         Interest expense/rate                                                         21,139          5.68
                                                                                -------------    ----------
         Net Interest Spread                                                    $      19,019          2.64%
                                                                                =============    ===========
         Net Interest Margin                                                                           3.94%
                                                                                                 ===========

</TABLE>





                                      -8-
<PAGE>   10


<TABLE>
<CAPTION>
                                                                ASSETS
                                                                                     1996
                                                              ----------------------------------------------   
                                                                                  Interest
                                                                Average             and             Yield/
                                                                Balance           Dividend           Rate
                                                              -------------     -------------    -----------   
<S>                                                           <C>               <C>                    <C>  
     Interest Earning Assets:
         Loans (1)                                            $     358,261     $      32,353          9.03%
         Taxable investment securities                               75,051             4,556          6.07
         Tax-exempt investment securities                            21,223             1,109          5.23
         Interest bearing deposits with other banks                     100                 7          7.00
         Federal funds sold and securities
           purchased under agreement to resell                        6,613               357          5.40
                                                              -------------     -------------    ----------

     Total Interest Earning Assets                                  461,248     $      38,382          8.32%
                                                                                =============    ===========

     Non-interest Earning Assets:
         Cash and due from banks                                     13,086
         Other assets                                                15,895
                                                             --------------
                                                              $     490,229
                                                             ==============

                                              LIABILITIES AND SHAREHOLDERS' EQUITY
     Interest Bearing Liabilities:
         Savings deposits                                     $     117,734     $       4,525          3.84%
         Other time deposits                                        258,446            15,418          5.97
         Other borrowed money                                         9,411               594          6.31
         Federal funds purchased and securities
           sold under agreement to repurchase                         6,522               368          5.64
                                                              -------------     -------------

     Total Interest Bearing Liabilities                             392,113     $      20,905          5.33%
                                                                                =============    ===========

     Non-interest Bearing Obligations:
         Non-interest bearing deposits                               50,580
         Other                                                        5,700
                                                              -------------   
         Total Liabilities                                          448,393

         Stockholders' Equity                                        41,836
                                                              -------------   
         Total Liabilities and Stockholders' Equity           $     490,229
                                                              =============

         Interest and dividend income/yield                                     $      38,382          8.32%
         Interest expense/rate                                                         20,905          5.33
                                                                                -------------    ----------

         Net Interest Spread                                                    $      17,477          2.99
                                                                                =============    ==========

         Net Interest Margin                                                                           3.79%
                                                                                                 ==========   

</TABLE>


(1) For the purpose of these computations, nonaccruing loans are included in the
    daily average outstanding loan amounts.




                                      -9-
<PAGE>   11


         The following table sets forth (in thousands of dollars) for the
periods indicated, a summary of the changes in interest earned and interest paid
resulting from changes in volume and changes in rates:

<TABLE>
<CAPTION>
                                                                             1998-1997
                                                          --------------------------------------------------  
                                                                                  Increase (Decrease)
                                                            Increase           Attributable to Changes in
                                                           (Decrease)      ---------------------------------     
                                                           in Interest       Volume              Rate
                                                          -------------    -------------     ---------------  
<S>                                                       <C>              <C>               <C>           
Interest Earned On:
     Loans                                                $       2,064    $       2,117     $         (53)
     Taxable investment securities                                  101              228              (127)
     Tax-exempt investment securities                               128              176               (48)
     Federal funds sold and securities purchased
       under agreements to resell                                   437              445                (8)
                                                          -------------    -------------     --------------

     Total Interest Earnings Assets                       $       2,730    $       2,966     $        (236)
                                                          =============    =============     =============

     Interest Paid On:
         Savings deposits                                 $          18    $         114     $         (96)
         Other time deposits                                        888            1,106              (218)
         Other borrowed                                             102              103                (1)
         Federal funds purchased and securities
           sold under agreements to repurchase                      (62)             (73)               11
                                                          -------------    -------------     -------------

           Total Interest Bearing Liabilities             $         946    $       1,250     $        (304)
                                                          =============    =============     =============
<CAPTION>
                                                                              1997-1996
                                                         --------------------------------------------------  
                                                                                Increase (Decrease)
                                                            Increase         Attributable to Changes in
                                                           (Decrease)      --------------------------------
                                                           in Interest       Volume              Rate
                                                          -------------    -------------     --------------  
Interest Earned On:
     Loans                                                $       1,918    $       2,339     $        (421)
     Taxable investment securities                                  (16)            (182)              166
     Tax-exempt investment securities                                22               43               (21)
     Interest bearing deposits with other banks                      (2)               0                (2)
     Federal funds sold and securities purchased
       under agreements to resell                                  (146)            (156)               10
                                                          -------------    -------------     -------------

     Total Interest Earnings Assets                       $       1,776    $       2,044     $        (268)
                                                          =============    =============     =============

     Interest Paid On:
         Savings deposits                                 $          93    $      (1,600)    $       1,693
         Other time deposits                                        241              712              (471)
         Other borrowed                                               2                0                 2
         Federal funds purchased and securities
           sold under agreements to repurchase                     (102)            (124)               22
                                                          -------------    -------------     -------------

           Total Interest Bearing Liabilities             $         234    $      (1,012)    $       1,246
                                                          =============    =============     =============
</TABLE>

         The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.








                                      -10-
<PAGE>   12


INVESTMENT PORTFOLIO

         The following table sets forth (dollars in thousands) the carrying
amount of investment securities at the dates indicated:

<TABLE>
<CAPTION>
                                                                1998             1997              1996
                                                          -------------    -------------     -------------
<S>                                                       <C>              <C>               <C>          
U. S. Treasury and other U. S. Government
   agencies                                               $      55,686    $      44,695     $      51,737
State and political subdivisions                                 35,520           25,617            21,678
Mortgage-backed securities                                       10,993            8,991             8,986
Obligations of domestic corporations                             19,115           10,327            17,065
Stocks of domestic corporations                                   2,597            2,420             2,255
                                                          -------------    -------------     -------------

Total                                                     $     123,911    $      92,050     $     101,721
                                                          =============    =============     =============
</TABLE>

         The following table sets forth (dollars in thousands) the maturities of
investment securities at December 31, 1998 and the weighted average yields of
such securities calculated on the basis of the cost and effective yields
weighted for the scheduled maturity of each security. Tax-equivalent
adjustments, using a thirty-four percent rate, have been made in yields on
obligations of state and political subdivisions. Stocks of domestic corporations
have not been included.

<TABLE>
<CAPTION>
                                                                     Maturities
                                        ----------------------------------------------------------------
                                                                                  After One Year
                                             Within One Year                     Within Five Years
                                        ----------------------------       -----------------------------
                                               Amount          Yield            Amount            Yield
                                        -------------     ----------       -------------     -----------
<S>                                     <C>               <C>              <C>               <C>  
U. S. Treasury                          $       8,529          5.91%       $       7,494          6.36%
U.S. Government agencies                        3,590          7.26%               7,968          5.93%
Mortgaged-backed securities                       563          6.17%               8,430          6.00%
State and political subdivisions                2,452          8.19%               9,488          8.11%
Taxable state and political
   subdivisions                                 1,210          6.36%               3,097          5.90%
Obligations of domestic
   corporations                                 4,799          6.36%              14,106          5.90%


<CAPTION>
                                                                     Maturities
                                        ----------------------------------------------------------------
                                             After Five Years
                                             Within Ten Years                     After Ten Years
                                        ------------------------------     -----------------------------
                                              Amount          Yield           Amount             Yield
                                        -------------    -------------     -------------     -----------
<S>                                     <C>              <C>              <C>                <C>
U. S. Treasury                          $           0            N/A       $           0            N/A
U. S. Government agencies                      26,420          5.34%                   0            N/A
Mortgage-backed securities                      1,993          5.64%                   0            N/A
State and political subdivisions               10,020          7.96%               7,430          9.57%
Taxable state and political
   subdivisions                                   422          5.75%                   0            N/A
Obligations of domestic
   corporations                                     0            N/A                   0            N/A
</TABLE>

         At December 31, 1998 the company held no large block of any one
investment security. Except for U. S. Treasury and other U. S. Government
agencies, no one holding in debt securities exceeded $2.3 million dollars. The
bank did hold stock in the Federal Home Loan Bank of Cincinnati at a cost of
$2.6 million. This is required in order to obtain Federal Home Loan Bank loans.




                                      -11-
<PAGE>   13


LOAN PORTFOLIO

         The following table shows (dollars in thousands) the company's loan
distribution at the end of each of the last five years:


<TABLE>
<CAPTION>
                                                                 1998             1997              1996
                                                          -------------    -------------     -------------
Loans:
<S>                                                       <C>              <C>               <C>          
     Commercial and industrial                            $      87,266    $      65,633     $      67,763
     Agricultural                                                38,882           44,939            41,195
     Real estate - mortgage                                     200,675          205,626           195,043
     Installment                                                 68,385           75,767            63,199
     Commercial paper                                            13,648            7,837             3,959
     Industrial Development Bonds                                 4,587            4,511             3,670
                                                          -------------    -------------     -------------
     Total Loans                                          $     413,443    $     404,313     $     374,829
                                                          =============    =============     =============
<CAPTION>
                                                                                1995              1994
                                                                           -------------     -------------
<S>                                                                          <C>             <C>          
Loans:

     Commercial and industrial                                               $    58,987     $      65,848
     Agricultural                                                                 41,328            29,586
     Real estate - mortgage                                                      173,302           145,576
     Installment                                                                  61,021            62,462
     Commercial paper                                                              7,604             2,019
     Industrial Development Bonds                                                  3,336             1,826
                                                                           -------------     -------------
     Total Loans                                                           $     345,578     $     307,317
                                                                           =============     =============
</TABLE>
     The following table shows (dollars in thousands) the maturity of loans:


<TABLE>
<CAPTION>
                                                                     Maturities
                                        ------------------------------------------------------------------
                                                           After One
                                          Within          Year Within         After
                                         One Year          Five Years       Five Years          Total
                                        -------------     -------------    -------------     -------------
<S>                                     <C>               <C>              <C>               <C>          
Commercial, industrial, and
   agricultural (combined)              $      78,630     $      30,349    $      17,169     $     126,148
Real estate - mortgage                          5,437             8,894          186,344           200,675
Installment                                    11,511            54,577            2,297            68,385
Commercial paper                               13,648                 0                0            13,648
Industrial Development Bonds                    1,025               676            2,886             4,587
                                        -------------     -------------    -------------     -------------
Total                                   $     110,251     $      94,496    $     208,696     $     413,443
                                        =============     =============    =============     =============
<CAPTION>

                                                   After One Year            After Five
                                                  Within Five Years            Years                Total
                                        -------------------------------    ----------------  -------------
<S>                                     <C>               <C>              <C>               <C>          
Commercial, industrial, and
   agricultural (combined)                      Fixed     $      14,186    $       8,860     $      23,046
                                             Variable            16,163            8,309            24,472
Real estate - mortgage                          Fixed             6,387           69,109            75,496
                                             Variable             2,507          117,235           119,742
Installment                                     Fixed            53,304            2,133            55,437
                                             Variable             1,273              164             1,437
IDB's                                           Fixed               676            2,886             3,562


</TABLE>



                                      -12-
<PAGE>   14


NONACCRUAL PAST DUE AND RESTRUCTURED LOANS

         The following table summarizes (dollars in thousands) the company's
nonaccrual and past due loans as of December 31:

<TABLE>
<CAPTION>

                                                                1998             1997              1996
                                                          -------------    -------------     -------------
<S>                                                       <C>              <C>               <C>          
Nonaccrual loans                                          $       6,455    $       2,890     $       3,489
Accruing loans past due 90 days or more                           1,988            1,396             1,899
                                                          -------------    -------------     -------------
                                                          $       8,443    $       4,286     $       5,388
                                                          =============    =============     =============
<CAPTION>
  
                                                                                 1995              1994
                                                                           -------------     -------------
Nonaccrual loans                                                           $       3,494     $       2,681
Accruing loans past due 90 days or more                                            2,698             2,601
                                                                           -------------     -------------
                                                                           $       6,192     $       5,282
                                                                           =============     =============
</TABLE>


         As of December 31, 1998, management, to the best of its knowledge, is
not aware of any significant loans, group of loans or segments of the loan
portfolio not included above, where there are serious doubts as to the ability
of the borrowers to comply with the present loan payment terms.

         Interest income which would have been recorded under the original terms
of the nonaccrual loans was $40 thousand for the year 1998. Any collections of
interest on nonaccrual loans are included in interest income when collected.
This amounted to $172 thousand for 1998.

         Loans are placed on nonaccrual status in the event one of the following
occurs: the total line of the customer is charged off to the extent of 50% or
more, the loan is in past due status for more than 180 days.

         The $6.5 million of nonaccrual loans are secured at December 31, 1998.

POTENTIAL PROBLEM LOANS:

         At December 31, 1998, the Bank has $8.4 million of loans which it
considers to be potential problem loans in that the borrowers are experiencing
financial difficulties. These loans are subject to constant management attention
and are reviewed more frequently than quarterly.

         The amount of potential problem loans was considered in management's
review of the loan loss reserve required at December 31, 1998.

LOAN CONCENTRATION:

         In extending credit to families, businesses and governments, banks
accept a measure of risk against which an allowance or reserve for possible loan
losses is established by way of expense charges to earnings. This expense, used
to enlarge a bank's allowance for loan losses, is determined by management based
on a detailed monthly review of the risk factors affecting the loan portfolio,
including general economic conditions, changes in the portfolio mix, past due
loan-loss experience and the financial condition of the bank's borrowers.

         At December 31, 1998, the Bank had loans outstanding to individuals and
firms engaged in the various fields of agriculture in the amount of $38.9
million. The ratio of this segment of loans to the total loan portfolio is not
considered unusual for a bank engaged in and servicing rural communities.





                                      -13-
<PAGE>   15


SUMMARY OF LOAN LOSS EXPERIENCE

         The following table reflects (in thousands) the bank's loan loss
experience for each of the five years ended December 31:



<TABLE>
<CAPTION>
                                                                1998             1997              1996
                                                          -------------    -------------     -------------
<S>                                                       <C>              <C>               <C>          
Loans                                                     $     413,443    $     404,313     $     374,829
                                                          =============    =============     =============
Daily average of outstanding loans                        $     408,291    $     384,498     $     358,261
                                                          =============    =============     =============
Allowance for loan losses -
   beginning of year                                      $       5,850    $       5,500     $       5,500
Loans Charged Off:
     Commercial                                                     472              263               623
     Installment                                                  1,260            1,239             1,053
     Real estate mortgages                                           42               29                35
                                                          -------------    -------------     -------------
                                                                  1,774            1,531             1,711
                                                          -------------    -------------     -------------

Loan Recoveries:
     Commercial                                                     540              384               197
     Installment                                                    339              364               443
     Real estate mortgages                                            3               22                 3
                                                          -------------    -------------     -------------

                                                                    882              770               643
                                                          -------------    -------------     -------------

Net charged off                                                     892              761             1,068

Provision for loan loss                                             892            1,111             1,068
                                                          -------------    -------------     -------------

Allowance for Loan Losses - End of Year                   $       5,850    $       5,850     $       5,500
                                                          =============    =============     =============

Ratio of net charge-offs to average loans
   outstanding                                                   .22%               .20%             .30%
                                                          =============    =============     =============
</TABLE>





                                      -14-
<PAGE>   16


         Allocation of the allowance for loan losses:

<TABLE>
<CAPTION>
                                                                                 1995              1994
                                                                           -------------     -------------
<S>                                                                        <C>               <C>          
Loans                                                                      $     345,577     $     307,317
                                                                           =============     =============

Daily average of outstanding loans                                         $     324,239     $     277,729
                                                                           =============     =============

Allowance for loan losses -
   beginning of year                                                       $       5,500     $       5,000

Loans Charged Off:
     Commercial                                                                      748               602
     Installment                                                                     691               569
     Real estate mortgages                                                            40                 0
                                                                           -------------     -------------

                                                                                   1,479             1,171
                                                                           -------------     -------------

Loan Recoveries:
     Commercial                                                                      584               729
     Installment                                                                     426               311
     Real estate mortgages                                                            84                67
                                                                           -------------     -------------

                                                                                   1,094             1,107
                                                                           -------------     -------------

Net charged off                                                                      385                64

Provision for loan loss                                                              385               564
                                                                           -------------     -------------

Allowance for Loan Losses - End of Year                                    $       5,500     $       5,500
                                                                           =============     =============

Ratio of net charge-offs to average loans outstanding                              .12%               .20%
                                                                           ============      =============

         Allocation of the allowance for loan losses:

<CAPTION>
                                                                                               Percent of
                                                                                                Loans in
                                                                            Amount           Each Category
Balance at End of Period Applicable To:                                   (in thousands)    to Total Loans
                                                                          --------------    ---------------  
<S>                                                                        <C>                    <C>   
     Commercial and industrial                                             $       3,281          32.43%
     Installment                                                                   1,665          17.53%
     Real estate                                                                     904          50.04%
                                                                           -------------     -----------

                                                                           $       5,850         100.00%
                                                                           =============     ===========
</TABLE>

         The charge-off amounts are based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors, including,
but not limited to, general economic conditions, loan portfolio composition,
prior loan experience and management's estimation of future potential losses.





                                      -15-
<PAGE>   17


DEPOSITS

         The following table presents the average amount of (in thousands) and
the average rate paid on each deposit category that is in excess of ten percent
of average total deposits:

<TABLE>
<CAPTION>
                                        Demand             NOW             Savings            Time
    December 31, 1998:                 Deposits         Accounts         Accounts          Accounts
   --------------------              -------------     -------------    -------------     ---------
<S>                                  <C>               <C>              <C>               <C>       
     Average balance                 $  38,906         $  44,218        $  108,981        $  287,484
     Average rate                         .00%             2.29%             3.32%             5.76%

    December 31, 1997:
     Average balance                 $  34,665         $  40,626        $  100,025        $  268,181
     Average rate                         .00%             2.49%             3.57%             5.84%

    December 31, 1996:
     Average balance                 $  32,041         $  33,798        $  104,441        $  250,834
     Average rate                         .00%             3.05%             3.35%             6.15%
</TABLE>

         The amount of outstanding time certificates of deposits and other time
deposits in amounts of $100,000 or more by maturity are as follows:


<TABLE>
<CAPTION>
                                                          Over three       Over Six
                                          Under            Less Than       Less Than          Over Twelve
                                       Three Months        Six Months    Twelve Months           Months
                                       ------------       -----------    -------------       -------------
<S>                                     <C>               <C>            <C>                 <C>          
Time deposits                           $    20,987       $    15,831    $   16,432          $      15,883
</TABLE>

RETURN ON EQUITY AND ASSETS

         The following table shows consolidated operating and capital ratios of
the company for each of the last three years:

<TABLE>
<CAPTION>

                                                                1998             1997              1996
                                                            -----------      -----------       ----------
<S>                                                             <C>               <C>              <C>  
Return on average assets                                        1.38%             1.33%            1.14%
Return on average equity                                       14.46%            14.56%           13.21%
Dividend payout ratio                                          23.77%            23.95%           27.23%
Equity to assets ratio                                          9.45%             9.25%            8.65%
</TABLE>

SHORT-TERM BORROWINGS

         The company's average balance of short-term borrowings during the year
was less than 30% of end of year stockholders' equity for each year required to
be reported; therefore, no data is presented.

OTHER MATTERS

         Information required by subsections of Item 1, to which no response has
been made, are inapplicable to the business of the company.





                                      -16-
<PAGE>   18


ITEM 2.  PROPERTIES

         The principal office of Farmers & Merchants Bancorp, Inc. is located in
facilities owned by The Farmers & Merchants State Bank at 307-11 North Defiance
Street, Archbold, Ohio 43502.

         The Farmers & Merchants State Bank operates from and utilizes the
entire facilities at 307-11 North Defiance Street. In addition, the bank owns
the property from 200 to 208 Ditto Street, Archbold, Ohio, which it uses for
Bank parking and a community mini-park area. The Bank owns real estate at two
locations, 207 Ditto Street and 209 Ditto Street in Archbold, Ohio upon which
the bank built a commercial building to be used for storage, and a parking lot
for company vehicles and employee parking.

         In late 1993 construction began on a 15,237 square foot addition on an
adjacent lot it owned at 313 North Defiance Street. This addition was
substantially completed by the end of 1994 with final completion taking place in
the spring of 1995. Then in 1993 the Bank purchased real estate across from the
main facilities to provide for possible parking expansion.

         In 1989 the Bank purchased additional real estate in Bryan, Ohio, and
has established another branch operation in Bryan. The Bank, in 1988, purchased
real estate immediately adjacent to its branch bank premises in Delta, Ohio for
expansion of parking facilities. In 1990 the Bank purchased real estate in
Delta, Ohio for additional parking to serve its branch office. The Bank
constructed in 1994 a 1,540 square foot addition to the branch in Wauseon, Ohio.
The bank obtained permission to open a branch in Napoleon, Ohio. Facilities were
completed in the Spring of 1995.

         The Bank also owns real estate consisting of land and buildings housing
each of its full service branch operations, except for the Montpelier, Ohio
facilities which are leased. Construction has begun on permanent facilities for
the Montpelier operations and was completed in June of 1998.

         The Bank purchased land for a Swanton branch with construction to begin
in 1999 with a year end completion date. The Bank also began an addition to its
Napoleon office with a completion date of first quarter 1999.

         The following is a compendium of the various branch locations:

   Branch                                           Location
---------------                             --------------------------
Archbold, Ohio                              1313 South Defiance Street
Wauseon, Ohio                               1130 North Shoop Avenue
                                            119 North Fulton Street
Stryker, Ohio                               300 South Defiance Street
West Unity, Ohio                            200 West Jackson Street
Bryan, Ohio                                 924 W. High Street
                                            1000 South Main Street
Delta, Ohio                                 101 Main Street
Montpelier, Ohio                            225 West Main Street
                                            1150 East Main Street
Napoleon, Ohio                              2255 Scott Street


      The majority of the above locations have drive-up service facilities.





                                      -17-
<PAGE>   19


ITEM 3.  LEGAL PROCEEDINGS

         There are no material pending legal proceedings, other than ordinary
routine proceedings incidental to the business of the Bank, to which the Bank is
a party or of which any of its properties is the subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No items were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through solicitation of
proxies or otherwise.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         The company's stock is not quoted on the National Association of
Securities Dealers Automated Quotations System (NASDAQ).

         The company's stock is traded in the principal market area of Fulton,
Williams, and Henry Counties, Ohio. The company has no broker that sets a price
for the company's stock, therefore, the only source as to the high and low sale
price is from private sales. The high and low sale price known to the company's
management is as follows:

<TABLE>
<CAPTION>
                                                 1st Quarter          2nd Quarter        3rd Quarter          4th Quarter
                                                 -----------          -----------        -----------          ----------- 
<S>                 <C>                            <C>                 <C>                 <C>                  <C>   
        1998         High                           $45.00              $72.00              $72.00               $70.00
                     Low                            $40.00              $55.00              $72.00               $65.00

        1997         High                           $45.00              $72.00              $72.00               $70.00
                     Low                            $40.00              $55.00              $72.00               $65.00
</TABLE>

         As of March 1, 1999, there were 1,397 record holders of common stock of
the company.

         Dividends are paid quarterly. Per share dividends for the years ended
1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                              1st Quarter        2nd Quarter          3rd Quarter        4th Quarter              Total
                              -----------        -----------          -----------        -----------            ----------- 
<S>                             <C>                <C>                 <C>                 <C>                     <C>  
         1998                   $.30               $.30                $.30                $.50                    $1.40
         1997                   $.25               $.25                $.25                $.50                    $1.25
</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

         Selected financial data is presented on page 35 of the Annual Report to
shareholders for the year ended December 31, 1998 and are incorporated herein by
reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS

         The purpose of this discussion is to focus on information concerning
the company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in the
annual report. Reference should be made to those statements and the selected
financial data presented elsewhere in the report for an understanding of the
following discussion and analysis.




                                      -18-
<PAGE>   20


FINANCIAL CONDITION

         The company's bank subsidiary continues to follow the strategy of
acquiring assets for investment purposes and retaining its own loan production,
attempting to achieve reasonable spreads through matching such assets with one
of a number of funding sources available.

         The Farmers & Merchants State Bank functions as a financial
intermediary, and as such, its financial condition should be examined in terms
of trends in its sources and uses of funds. The following comparison of daily
average balances (in thousands) indicates how the bank has managed its sources
and uses of funds:


<TABLE>
<CAPTION>
                                                                                                   1998
                                                                           ----------------------------------------------
                                                                                                  Increase (Decrease)
                                                                             Average         ----------------------------  
                                                                              Balance           Amount         Percentage
<S>                                                                        <C>               <C>                     <C>  
Funding Uses:
     Loans                                                                 $     408,291     $      23,793           6.19%
     Taxable investment securities                                                75,880             3,722           5.16
     Tax-exempt investment securities                                             25,654             3,585          16.24
     Interest bearing deposits with other banks                                      100                 0            .00
     Federal funds sold and securities purchased under
       agreement to resell                                                        12,123             8,318         218.61
                                                                           -------------     -------------
                                                                           $     522,048     $      39,418           8.17%
                                                                           =============     =============      ==========
Funding Sources:
     Deposits:
         Non-interest bearing deposits                                     $     100,420     $      13,407          15.41%
         Savings deposits                                                         89,643             2,204           2.52
         Other time deposits                                                     290,141            19,390           7.16
     Other borrowed money                                                         11,051             1,637          17.39
     Federal funds purchased and securities sold
       under agreement to repurchase                                               3,276            (1,167)        (26.27)
                                                                           -------------     -------------
                                                                           $     494,531     $      35,471           7.73%
                                                                           =============     =============      ==========
<CAPTION>

                                                                                 1998                             1997
                                                          ------------------------------------------------    -------------
                                                                                 Increase (Decrease)
                                                                            ------------------------------
                                                            Average                                            Average
                                                             Balance        Amount            Percentage        Balance
                                                          -------------    -------------      ------------    -------------  
<S>                                                       <C>              <C>                    <C>         <C>          
Funding Uses:
     Loans                                                $     384,498    $      26,237          7.32%       $     358,261
     Taxable investment securities                               72,158           (2,893)        (3.85)              75,051
     Tax-exempt investment securities                            22,069              846          3.99               21,223
     Interest bearing deposits with other banks                     100                0           .00                  100
     Federal funds sold and securities purchased
       under agreement to resell                                  3,805           (2,808)       (42.46)               6,613
                                                          -------------    -------------                        -----------
                                                          $     482,630    $      21,382          4.64%         $   461,248
                                                          =============    =============     =============      ===========
Funding Sources:
     Deposits:
         Non-interest bearing deposits                    $      87,013    $      36,433         72.03%       $      50,580
         Savings deposits                                        87,439          (30,295)       (25.73)             117,734
         Other time deposits                                    270,751           12,305          4.76              258,446
     Other borrowed money                                         9,414                3           .03                9,411
     Federal funds purchased and securities sold
       under agreement to repurchase                              4,443           (2,079)       (31.88)               6,522
                                                          -------------    -------------                        -----------
                                                          $     459,060    $      16,367          3.70%         $   442,693
                                                          =============    =============     =============      ===========
</TABLE>




                                      -19-
<PAGE>   21


          Total assets for Farmers & Merchants Bancorp, Inc. have increased from
$501.4 million in 1996 to $528.3 million in 1997 and to $585.9 million in 1998,
a 10.9% and 8.1% increase, respectively. The increase in assets of $57.6 million
has occurred primarily in the loan portfolio, federal funds sold, and
investments. The net loan portfolio has grown $9 million, federal funds sold has
increased $12.6 million, and the investment portfolio has increased by $31.8
million.

         The increase in the loan portfolio came primarily from an increase in
commercial paper of $5.8 million and loans held for sale of $5 million.

         While the loan portfolio has increased significantly, the net
charge-offs have remained fairly level. Net charge-offs were $1.1 million for
1996, $761 thousand for 1997 and $892 thousand for 1998. Even though the loan
portfolio has grown to a record $407 million, management believes that as a
result of more aggressive collection policies and procedures, the reserve of
$5.85 million is still adequate.

         The major funding source for the increase in the assets discussed above
came from an increase in deposits. Regular savings deposits showed an increase
of almost $29.5 million from 1997 levels of $87.9 million, while time deposits
grew $24.3 million to $298.3 million for 1998. Total deposits for 1998
demonstrated an 11 percent increase over 1997 levels.

         The Farmers & Merchants State Bank continues to use borrowed funds from
the Federal Home Loan Bank of Cincinnati to fund its fixed rate loan portfolio.
The loans reduce the Bank's exposure to interest rate risk as the Bank matches a
fixed rate liability with the loan made. The Bank also receives a better
servicing margin on these loans than were experienced with loans sold on the
secondary market. New borrowings for 1998 amounted to $1 million compared to net
borrowings for 1997 of $3 million.

CAPITAL RESOURCES

         Total capital increased $6.5 million or 13.3% for 1998 compared to $5.5
million or 12.6% for 1997. These increases came from profits and changes in
market values of the securities portfolio. Profits amounted to $7.6 million for
1998, $6.7 million for 1997 and $5.5 million for 1996, while net after tax
effect changes in market values of the investment portfolio contributed $669
thousand for 1998 and $311 million for 1997, but negatively impacted capital for
1996 in the amount of $228 thousand.

         As a result of the continued increasing profitable operations, the per
share dividends have been steadily increasing also. For 1998 dividends of $1.40
per share or $1.82 million were declared compared to 1997 dividends of $1.25 per
share or $1.625 million, and $1.15 or $1.495 million for 1996. The per share
amounts for 1996 have been restated to reflect a 5 for 1 stock split in 1996.
The amount of dividends which can be paid are subject to regulatory
restrictions.







                                      -20-
<PAGE>   22


ASSET/LIABILITY MANAGEMENT

         The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. It involves the management of the
balance sheet mix, maturities, repricing characteristics and pricing components
to provide an adequate and stable net interest margin with an acceptable level
of risk. Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.

         Changes in net income, other than volume related, arise when interest
rates on assets reprice in a time frame or interest rate environment that is
different from that of the repricing period for liabilities. Changes in net
interest income also arise from changes in the mix of interest-earning assets
and interest-bearing liabilities.

         Historically, The Farmers & Merchants State Bank has maintained
liquidity through cash flows generated in the normal course of business, loan
repayments, maturing earning assets, the acquisition of new deposits, and
borrowings. The Bank's asset and liability management program is designed to
maximize net interest income over the long term while taking into consideration
both credit and interest rate risk.

         Interest rate sensitivity varies with different types of
interest-earning assets and interest bearing liabilities. Overnight federal
funds on which rates change daily and loans which are tied to the market rate
differ considerably from long-term investment securities and fixed rate loans.
Similarly, time deposits over $100,000 and money market certificates are much
more interest rate sensitive than passbook savings accounts. The shorter term
interest rate sensitivities are the key to measurement of the interest
sensitivity gap, or excess interest sensitive earnings assets over
interest-bearing liabilities.

         The following table summarizes the repricing opportunities as of
December 31, 1998 for each major category of interest-earning assets (at
amortized cost) and interest-bearing liabilities:

<TABLE>
<CAPTION>
                                                                    (Dollars in Thousands)
                                         0 - 90           90 - 365           1 - 5           Over 5
                                         Days              Days             Years             Years           Total
                                      ----------       -----------       ----------         ---------       -----------  
<S>                                   <C>              <C>               <C>                <C>             <C>        
Interest bearing deposits             $        0       $       100       $        0         $       0       $       100
Federal funds sold                        19,045                 0                0                 0            19,045
Securities                                11,928            26,116           42,443            43,424           123,911
Loans                                    154,375           103,051           99,965            56,052           413,443
                                      ----------       -----------       ----------         ---------       -----------
Total Rate Sensitive Assets              185,348           129,267          142,408            99,476           556,499
Deposits                                 164,569           179,040          115,943                 0           459,552
Repurchase agreement                       2,916                 0                0                 0             2,916
Long-Term Debt                                 0                 0                0            11,240            11,240
                                      ----------       -----------       ----------         ---------       -----------

Rate Sensitive Liabilities               167,485           179,040          115,943            11,240           473,708
                                      ----------       -----------       ----------         ---------       -----------

Gap                                   $   17,863       $   (49,773)      $   26,465         $  88,236       $    82,791
                                      ==========       ===========       ==========         =========       ===========
</TABLE>

         Management with the assistance of outside advisors is continually
looking for opportunities that can minimize market price risk or interest rate
risk, and thus improve the quality of the portfolio.

LIQUIDITY

         Historically, the primary source of liquidity for the Company has been
core deposits. This is true for 1997 as well. Deposits increased $50.1 million
for 1998 compared to $2.9 million for 1997 and $34.3 million for 1996.





                                      -21-
<PAGE>   23


         The loan to deposit ratio decreased for 1998 to 79.6 percent compared
to 86.3 percent for 1997 and 84.1 percent for 1996.

         Short-term marketable debt securities has also provided the Company
with liquidity. Securities maturing in one year or less amounted to a market
value of $22.1 million as of December 31, 1998 compared to $18.8 million as of
December 31, 1997 and $20 million as of December 31, 1996. This is 18.2 percent
of total marketable debt securities for 1998 compared to 17.6 percent for 1997,
and 20.4 percent for 1996.

         Still another source of liquidity are Federal Funds Sold. Federal Funds
Sold which are for very short durations of time increased $12.6 million to $19
million.

RESULTS OF OPERATIONS

OVERVIEW

         Net operating income for 1998 was $7.6 million, a 12.9 percent increase
over 1997's net income of $6.8 million. Net income for 1996 was $5.5 million.
Net interest margin before provision for loan losses increased 9.4 percent to
$20.1 million from $19 million for 1997. Net interest margin for 1997 increased
8.5 percent to $19 million over the $17.5 million for 1996.

INTEREST INCOME

         Interest income and fees on loans and leases increased 6 percent for
1998 to $36.3 million over 1997 levels of $34.2 million. This compares to
interest and fee income of $32.4 million for 1996. All of the increase in
interest income for 1998 can be attributed to an increase in lending activities.

         Interest income on the investment portfolio for 1998 was $5.7 million
compared to 1997 and 1996 which was $5.5 million.

INTEREST EXPENSE

         Interest expense on deposits increased to $21.1 million for 1998
compared to $20.3 million for 1997 and $19.9 million for 1996. This increase is
due to an increase in deposits.





                                      -22-

<PAGE>   24


ALLOWANCE FOR LOAN LOSSES

         In extending credit to families, businesses and governments, banks
accept a measure of risk against which an allowance or reserve for loan losses
is established by way of expense charges to income. The Bank evaluates the
adequacy of the allowance for loan losses based on an analysis of specific
problem loans, as well as, on an aggregate basis. Factors considered by
management in determining the proper reserve include review of general economic
conditions, changes in the portfolio mix, past loan-loss experience, the
financial condition of the borrowers and reports of examinations furnished by
State and Federal banking authorities. Management reviews the calculation of the
allowance for loan losses on a quarterly basis, and feels that the allowance is
adequate.

         The Bank has established the allowance for loan losses to reduce the
gross level of loans outstanding by an estimate of uncollectible loans. As loans
are deemed uncollectible, they are charged against the allowance. A provision
for loan losses is expensed against current income on a monthly basis. This
provision serves to replenish the allowance for loan losses to accommodate
charge-offs and growth in the loan portfolio, thereby maintaining the allowance
at an adequate level.

         The provision for loan losses charged against income for 1998 was $892
thousand compared to $1.1 million for 1997 and 1996.

OTHER INCOME

         Other operating income increased by $1.1 million for 1998 to $4
million. This compares to an increase of $558 thousand for 1997 over 1996 to
$2.9 million, up from $2.4 million for 1996. Increases in miscellaneous customer
fees, MasterCard fees, and loan servicing fees accounts for the bulk of this
increase.

OTHER OPERATING EXPENSES

         Operating expenses increased $1.8 million to $12.9 million over 1997
operating expenses of $11 million. Most of this increase was due to payroll
costs in terms of increases in both number of employees and salary increases.
Operating expenses for 1997 had increased slightly over 1996 operating expenses
of $10.9 million.

OTHER ACCOUNTING ISSUES

         Management is currently reviewing the Year 2000 situation in order to
address potential problems that may occur in time to take corrective action. The
service center which the Bank uses to process its transactions have assured the
Bank that the software used has already been or will be updated to accept Year
2000 dates and transactions. The Bank's internal management information systems
personnel are also working diligently to address Year 2000 problems that may
exist with the Bank's hardware.

         At this time, management believes that the transition into the next
century can be conducted smoothly and with minimum additional costs.





                                      -23-
<PAGE>   25


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Report of Independent Accountants










                                      -24-
<PAGE>   26


    
MESSAGE FROM MANAGEMENT:

It is with great pride that we can report 1998 was another year of increased
earnings. It was one of the best years in our history in terms of finanical
performance. Capital accounts have increased to $55,350,000 with net income of
$7,657,000 or $5.89 per share as compared to $5.22 in 1997. This resulted in an
impressive 14.46 percent Return on Average Equity and 1.38 percent Return on
Average Assets and a new high in assets of $585,869,000. Farmers & Merchants
Bancorp, Inc. was highlighted by strong revenue growth along with excellent
asset quality, proper management of interest rate and control of overhead
expenses.

We are most proud of the effort and performance of our 223 employees. They
accomplished a great deal this year, producing strong sales performance while
upgrading systems and preparing for Year 2000. This was all delivered without
sacrificing the finanical performance with you have come to expect. These
accomplishments along with the opportunities created by changes in the
competitive environment of several key markets, certainly make us optimistic
about our prospects for the future. We must, however, always remain aware of the
challenges that growth creates and stay dedicated to delivering top-notch
service and high quality shareholder returns.

1998 financial performance was also highlighted by improving our net interest
margin. Our balance sheet is solid and provides considerable financial
flexibility. The net interest margin continues to improve from a focus on better
earning-asset and deposit mix.

Among the events of 1998, the completion of the new Montpelier Office is the
most noteworthy. With the addition of the new Eastside Office, giving us
drive-up service along with an Automated Teller Machine (ATM), we are able to
better serve our customers in the Montpelier area. ATMs were also placed in R &
H Restaurant in Fayette, Ohio, and Beck's Country Store in Ridgeville Corners,
Ohio. This brings the total ATMs in our banking system to seventeen. With more
and more companies going to Direct Deposit for their payrolls, this is a service
we must expand.

This past year, there has been a lot written concerning the Year 2000 Issue and
the effect it could have on the economy. The banking industry has been among the
most aggressive in readiness for Year 2000. We have taken this issue very
seriously and are following the necessary steps to make certain that January 3,
2000, is just another business day. We are also working closely with our
business partners to ensure they will be ready.

We expect 1999 to be another successful year but not without its challenges.
Even though our net interest margin has improved, it will still take sharp
pricing and control of overhead expenses to maintain this improvement. 1999 will
also see the introduction of a new service for the Farmers & Merchants Bancorp,
Inc., that being a full service Brokerage Department headed by Mr. Brett Kahrs.
This is another step your bank is taking to make sure that we can provide our
customers a full range of financial services.

We sincerely thank all of our employees, customers, Board of Directors, Advisory
Boards, and the continued confidence of our shareholders. We look forward to
capitalizing on the opportunities and meeting the challenges that await us in
1999.



Joe E. Crossgrove                                         Charles E. Lugbill
President and Chief Executive Officer                     Chairman of the Board







                                      -1-
<PAGE>   27


DIRECTORS

CHARLES E. LUGBILL
Chairman of the Board
The Farmers & Merchants State
Bank

EUGENE D. BERNATH
Farmer

JERRY L. BOYERS
President
Edifice Construction Management

JOE E. CROSSGROVE
President
Chief Executive Officer
The Farmers & Merchants State
Bank

ROBERT G. FREY
President
E. H. Frey & Sons, Inc.

LEE E. GRAFFICE
President
Graffice Motor Sales

JACK C. JOHNSON
President
Hawk's Clothing, Inc.
Partner
REJO Partnership

DEAN E. MILLER
President
MBC Holdings, Inc.

DALE L. NAFZIGER
Retired

HAROLD H. PLASSMAN
Attorney
Plassman, Rupp, Hensal & Short

JAMES L. PROVOST
Retired
Dyer & McDermott, Inc.

JAMES C. SANEHOLTZ
President
Saneholtz-McKarns, Inc.

MAYNARD SAUDER
President
Sauder Woodworking Co.

MERLE J. SHORT
Farmer
President
Promow, Inc.

STEVEN J. WYSE
President
Granite Industries

DIRECTOR EMERITUS

ELIAS H. FREY
KENNETH E. STAMM
ROBERT H. STOTZER
ROBERT V. WHITMER


ARCHBOLD MAIN OFFICE

CHARLES E. LUGBILL
Chairman of the Board

JOE E. CROSSGROVE
President
Chief Executive Officer

MAYNARD SAUDER
Vice President

EUGENE D. BERNATH
Vice President

EDWARD A. LEININGER
Executive Vice President
Commercial Loan Officer

REX D. RICE
Executive Vice President
Chief Lending Officer

GEORGE JELEN
Asst. Vice President
Secondary Market Officer
Loan Underwriter

RANDAL H. SCHROEDER
Asst. Vice President
Chief Operations Officer

MICHAEL D. CULLER
Asst. Vice President
Chief Agri Finance Officer

BARBARA J. BRITENRIKER
Vice President
Comptroller & Chief Financial Officer

DIANN K. MEYER
Asst. Vice President
Human Resource Officer

KENT E. ROTH
Auditor
Security Officer


MARILYN K. JOHNSON
Assistant Cashier
Compliance and CRA
Officer

JUDITH A. WARNCKE
Asst. Cashier
Marketing Officer

J. SCOTT MILLER
Asst. Cashier
Agri Finance Officer

DEBRA J. KAUFFMAN
Asst. Cashier & Consumer
Lending Officer
Asst. Corporate Secretary

JANE C. BRUNER
Assistant Cashier
Operations Supervisor

JOYCE G. KINSMAN
Assistant Cashier
Loan Review Officer

BRETT J. KAHRS
Senior Investment Executive


ARCHBOLD WOODLAND
OFFICE

DEBORAH L. STONER
Asst. Vice President
Branch Manager

DIANE J. SWISHER
Asst. Cashier
Asst. Branch Manager


ARCHBOLD ADVISORY BOARD

DEXTER L. BENECKE
Vice President
Benecke Trucking, Inc.
Alex Products, Inc.

BRUCE C. LAUBER
President
Lauber Manufacturing Co.

JO ELLEN HORNISH
President
Hornish Brothers, Inc.

ANTHONY J. RUPP
President
Rupp Furniture Co.





                                      -2-
<PAGE>   28

GENE SCHAFFNER
Farmer

GEORGE F. STOTZER
Partner
Stotzer Do-It Center


WAUSEON SHOOP OFFICE

ALLEN G. LANTZ
Vice President
Branch Manager

GLORIA GUNN
Asst. Vice President
Asst. Branch Manager

JERRY A. BORTON
Assistant Cashier
Agri Finance Officer


WAUSEON DOWNTOWN
OFFICE

CAROL J. ENGLAND
Asst. Vice President
Branch Manager
Corporate Secretary

JEAN E. HORWATH
Asst. Cashier
Asst. Branch Manager


WAUSEON ADVISORY BOARD

RICHARD L. ELROD
President
Mustang Corporation

WARREN A. KAHRS
President
Kahrs Tractor Sales, Inc.

JOSEPH H. KOLB
Owner
Kolb & Son

JULIAN GIOVARELLI
President
Gio Sales, Inc.

SANDRA K. BARBER
Fulton County Recorder
Chairman, Ohio Lottery Commission

DR. KENNETH H. KLING
Owner
Fulton County Vision Services

STRYKER OFFICE

RONALD D. SHORT
Asst. Vice President
Branch Manager

PATTI L. ROSEBROCK
Asst. Cashier
Asst. Branch Manager


STRYKER ADVISORY
BOARD

FRED W. GRISIER
Owner
Grisier Funeral Home

RICHARD E. RAKER
Owner
Raker Oil Company

STEVEN PLANSON
Farmer

WILLIAM J. BRENNER
Attorney


WEST UNITY OFFICE

LEWIS D. HILKERT
Vice President
Branch Manager

PATRICIA R. BURKHOLDER
Assistant Cashier
Assistant Branch Manager


WEST UNITY ADVISORY
BOARD

ALVIN E. CAROTHERS
Farmer

BEN G. WESTFALL
President
Westfall Realty, Inc.

TED W. MANEVAL
Farmer

R. BURDELL COLON
President
Rup-Col., Inc.

CHARLES W. KLINGER
Pharmacist
Klinger Pharmacy

DELTA OFFICE

CYNTHIA K. KNAUER
Asst. Vice President
Branch Manager

BARRY N. GRAY
Assistant Cashier
Asst. Branch Manager


DELTA ADVISORY BOARD

TERRY J. KAPER
Attorney
Barber, Kaper, Stamm & Robinson

DONALD C. EICHER
Retired Grocer

ROBERT E. GILDERS
Chairman
GB Manufacturing

EUGENE BURKHOLDER
President
Falor Farm Center

AL KREUZ
Retired Fulton County
Commissioner


BRYAN EAST HIGH OFFICE

DAVID C. FRAZER
Assistant Vice President
Branch Manager

CAROL L. CHURCH
Assistant Cashier
Assistant Branch Manager


SOUTHTOWNE OFFICE

MICHAEL T. SMITH
Assistant Cashier
Branch Manager

RUTH M. FORD
Assistant Branch Manager

RICHARD C. BRUCE
Assistant Vice President
Commercial Loan Officer






                                      -3-
<PAGE>   29

BRYAN ADVISORY BOARD

W. PAUL TRODER
President
Allied Moulded Products, Inc.

RUSTY BRUNICARDI
President
Chief Executive Officer
Community Hospital of Williams
Co., Inc.

D. ROBERT SHAFFER
Farmer

DR. C. NICHOLAS WALZ
Partner
Williams County Family Medical
Center

PAUL R. MANLEY
Vice President Manufacturing
Ohio Art Co.


MONTPELIER WEST MAIN
OFFICE

LANCE D. NOFZIGER
Branch Manager


MONTPELIER EASTSIDE
OFFICE

JOHN S. FEE
Asst. Vice President
Branch Manager


MONTPELIER ADVISORY
BOARD

GREGORY D. SHOUP
President
Peltcs Lumber Co., Inc.

RICHARD S. DYE
Minister
Munson United Brethern Church

ROBERT D. MERCER
President
Bob Mercer Realty and
Auctions

GEORGE B. RINGS
Pharmacist
Rings Pharmacy

NAPOLEON OFFICE

STEPHEN E. JACKSON
Asst. Vice President
Branch Manager

DIANA J. DENNIE
Assistant Cashier
Assistant Branch Manager

MICHAEL F. SCHNITKEY
Assistant Cashier
Agri Finance Officer

RICHARD D. ERNEST
Assistant Cashier
Commerical Loan Officer


NAPOLEON ADVISORY BOARD

BARBARA C. SCHIE
Office Manager
Fulton Anesthesia Associates,
Inc.

DAVID M. DAMMAN
Farm Drainage Contractor
Farmer

JAMES T. VAN POPPEL
President
Van Poppel Corp.

DENNIS L. MEYER
Realtor
Ed Rohrs Realty
















            CHAIRMAN CHARLES LUGBILL WITH MANAGERS AT ANNUAL MEETING

         Seated from left: Cynthia Knauer, AVP/Delta Manager; Deborah Stoner,
AVP/Archbold Woodland Manager; Carol England, AVP/Wauseon Downtown Manager.
Second row from left: Charles Lugbill, Chairman of the Board; Steve Jackson,
AVP/Napoleon Manager; Ronald Short, AVP/Stryker Manager. Back row from left: Joe
Crossgrove, President and CEO; Michael Smith, AC/Bryan SouthTowne Manager; John
Fee, AVP/Montpelier Eastside Manager; David Frazer, AVP/Bryan E. High Manager;
Allen Lantz, VP/Wauseon Shoop Manager; Lewis Hilkert, VP/West Unity Manager.





                                      -4-
<PAGE>   30



MESSAGE TO OUR SHAREHOLDERS:

                   UPDATE ON YEAR 2000 (Y2K) READINESS PROGRAM

With the Year 2000 rapidly approaching, our twelve member Project Team continues
to actively address and manage preparations for complete readiness. Members of
the team were drawn from different areas of the bank to ensure all potential
issues could be addressed. A detailed Work Plan directs all activities required
to implement the five phases of Y2K readiness - AWARENESS, ASSESSMENT,
RENOVATION, VALIDATION and IMPLEMENTATION.

Since the Year 2000 poses great concerns and complex challenges, a comprehensive
approach has been developed to identify, modify and test all systems and
components which require changes in order to accurately handle and process
information in the Year 2000 and thereafter. Our efforts focus on six key areas
of exposure: 1) Computer technology and operating systems, 2) Software
applications, 3) Automated processing functions, 4) Infrastructure, 5) Customer
risk and 6) Legal risk.

Key customer concerns are ACCESS TO THEIR MONEY and ACCURACY OF THEIR ACCOUNT
RECORDS. An essential part of our Year 2000 initiative is communication and
customer awareness. Efforts focus on providing information on the bank and Year
2000, as well as educating our employees to effectively address customer
questions and concerns.

A high priority status has been assigned to systems, applications and equipment
vital to maintaining ongoing business functions and critical operations. Several
key systems were awaiting upgrades at year end 1998. By maintaining close
contact with our vendors and suppliers, we are confident those remaining changes
will be timely and successful. Systems deemed Y2K compliant by vendors, as well
as systems that have been replaced or upgraded, will require complete and
thorough internal testing to ensure Year 2000 readiness.

Extensive testing and validation efforts focus on verification of critical
information and calculations to ensure that computer interfaces accurately
handle various dates and information. All critical systems must be thoroughly
tested and retested, if needed, to ensure Year 2000 readiness. Testing and
validation procedures will consume a major portion of our time in 1999.

Progress on the development of contingency plans for all mission critical
systems continues. The plans will address potential Year 2000 problems and
provide a detailed, well-planned methodology to quickly resolve a problem should
one occur. An independent third party will be retained in 1999 to evaluate both
our contingency planning process and testing procedures.

Risk assessments were developed for material customers, business partners and
third parties who pose potential risks to the bank. Part of our Y2K compliance
efforts will be continued monitoring in regard to their progress toward Year
2000 readiness.

With adequate preparations, the appropriate resources, and the involvement of
senior management, our board of directors and employees, we anticipate minimal
impact on our ability to deliver uninterrupted financial services to our
customers. We will be prepared for "business as usual" on January 3, 2000.



Joe E. Crossgrove                         Marilyn K. Johnson
President & Chief Executive Officer       Assistant Cashier/Y2K Project Manager

THE STATEMENTS CONTAINED HEREIN ARE YEAR 2000 READINESS DISCLOSURES AS DEFINED
IN THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT (S.2392: ENACTED
10/19/98)





                                      -5-
<PAGE>   31



                        FARMERS & MERCHANTS BANCORP, INC.

                                TABLE OF CONTENTS

                                December 31, 1998





<TABLE>
<CAPTION>


                                                                                                               PAGE
<S>                                                                                                         <C>
Independent Auditors' Report                                                                                      6

Consolidated Balance Sheets                                                                                       7

Consolidated Statements of Income                                                                                 8

Consolidated Statements of Changes in
   Shareholders' Equity                                                                                           9

Consolidated Statements of Cash Flows                                                                            10

Notes to Consolidated Financial Statements                                                                  11 - 31

Supplementary Information:

     Independent Auditors' Report on
     Supplementary Information                                                                                   32

     Five Year Summary of Consolidated
     Operations                                                                                                  33

</TABLE>



<PAGE>   32

                     [KROUSE, KERN & CO., INC. LETTERHEAD]

January 13, 1999


Board of Directors
Farmers & Merchants Bancorp, Inc.
Archbold, Ohio

                            INDEPENDENT AUDITORS' REPORT

We have audited the consolidated balance sheets of Farmers & Merchants Bancorp,
Inc., Archbold, Ohio, and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farmers
& Merchants Bancorp, Inc. and subsidiaries, as of December 31, 1998 and 1997,
and the results of its consolidated operations and cash flows for the years
ended December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.



                                                   /s/ KROUSE, KERN & CO., INC.

                                                       KROUSE, KERN & CO., INC.



                                      -6-
<PAGE>   33



                           FARMERS & MERCHANTS, INC.

                          Consolidated Balance Sheets
                           December 31, 1998 and 1997

                                     ASSETS


<TABLE>
<CAPTION>
(In thousands)                                                                                      1998              1997
                                                                                             -------------    -------------
<S>                                                                                          <C>              <C>          
Cash and due from banks.........................................................             $      18,549    $      16,213
Interest bearing deposits with banks............................................                       100              100
Federal funds sold..............................................................                    19,045            6,485
Investment securities at market.................................................                   123,911           92,050
Loans, less allowance for loan losses of $5,850 for 1998 and $5,850 for
   1997.........................................................................                   401,192          397,295
Loans held for resale...........................................................                     6,013              856
Finance lease receivable........................................................                       516              492
Bank premises and equipment - net...............................................                     9,430            7,665
Accrued interest and other assets...............................................                     6,904            6,503
Deferred income tax asset.......................................................                       209              614
                                                                                             -------------    -------------
TOTAL ASSETS                                                                                 $     585,869    $     528,273
                                                                                             =============    =============
                                              LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
    Deposits:
       Demand...................................................................             $      52,631    $      51,163
       NOW accounts.............................................................                    43,775           48,264
       Savings..................................................................                   117,501           87,923
       Time....................................................................                    298,276          273,948
                                                                                             -------------    -------------
                  Total Deposits                                                                   512,183          461,298
Securities sold under agreement to repurchase...................................                     2,916            2,598
Other borrowings................................................................                    11,240           11,292
Dividend payable................................................................                       650              650
Accrued interest and other liabilities.........................................                     3,530            3,591
                                                                                             -------------    -------------
                  Total Liabilities                                                                530,519          479,429
                                                                                             -------------    -------------
SHAREHOLDERS' EQUITY:
     Common stock, no par value - authorized 1,500,000 shares; issued
       1,300,000 shares.........................................................                    12,677           12,677
     Undivided profits..........................................................                    41,002           35,165
     Accumulated Other Comprehensive Income:
          Net unrealized gain on securities available for sale (net of tax
             effect of $862 in 1998 and $515 in 1997)...........................                     1,671            1,002
                                                                                             -------------    -------------
                  Total Shareholders' Equity                                                        55,350           48,844
                                                                                             -------------    -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                   $     585,869    $     528,273
                                                                                             =============    =============
</TABLE>



See Accompanying Notes to Consolidated Financial Statements.




                                      -7-
<PAGE>   34


                        FARMERS & MERCHANTS BANCORP, INC.
                        Consolidated Statements of Income
              for the years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
(In thousands except for per share amounts)
INTEREST INCOME:                                                                1998              1997              1996
                                                                           -------------     -------------    -------------
<S>                                                                        <C>               <C>              <C>          
     Interest and fees on loans...............................             $      36,296     $      34,229    $      32,339
     Interest on Investment Securities:
         U. S. Treasury securities............................                     1,216             1,507            1,493
         Securities of U. S. Government agencies..............                     2,211             2,045            2,095
         Obligations of states and political subdivisions.....                     1,473             1,234            1,220
         Obligations of domestic corporations.................                       822               719              707
     Interest on federal funds................................                       648               211              357
     Interest on deposits in banks............................                         5                 5                7
     Dividends................................................                       178               166              150
     Lease finance revenues...................................                        39                42               14
                                                                           -------------     -------------    -------------
                  Total Interest Income                                           42,888            40,158           38,382
                                                                           -------------     -------------    -------------
INTEREST EXPENSE:
     Interest on deposits.....................................                    21,182            20,276           19,943
     Interest on borrowed funds...............................                       903               863              962
                                                                           -------------     -------------    -------------
                  Total Interest Expense                                          22,085            21,139           20,905
                                                                           -------------     -------------    -------------
                  Net Interest Income                                             20,803            19,019           17,477
PROVISION FOR LOAN LOSSES........................................                    892             1,111            1,068
                                                                           -------------     -------------    -------------
                  Net Interest Income After Provision for
                    Loan Losses                                                   19,911            17,908           16,409
                                                                           -------------     -------------    -------------
OTHER INCOME:
     Service charges on deposit accounts......................                     1,320             1,152            1,097
     Other service charges and fees...........................                     2,706             1,787            1,275
     Net securities gains.....................................                         0                (4)               5
                                                                           -------------     -------------    -------------
                Total Other Income                                                 4,026             2,935            2,377
                                                                           -------------     -------------    -------------
OTHER EXPENSES:
     Salaries and wages.......................................                     5,438             4,404            4,849
     Pension and other employee benefits......................                     1,394             1,206            1,172
     Occupancy expense (net)..................................                       510               481              498
     Furniture and equipment expense..........................                       981               722              788
     Other operating expenses.................................                     4,544             4,218            3,684
                                                                           -------------     -------------    -------------
                Total Other Expenses                                              12,867            11,031           10,991
                                                                           -------------     -------------    -------------
INCOME BEFORE INCOME TAX                                                          11,070             9,812            7,795
INCOME TAXES..................................................                     3,413             3,035            2,312
                                                                           -------------     -------------    -------------
NET INCOME                                                                         7,657             6,777            5,483
OTHER COMPREHENSIVE INCOME:
     Unrealized gain (loss) on investment securities (net of 
       taxes of 345, $157 and ($115) for 1998, 1997 and
       1996, respectively)....................................                       669               311             (228)
                                                                           -------------     -------------    -------------
COMPREHENSIVE INCOME                                                       $       8,326     $       7,088    $       5,255
                                                                           =============     =============    =============
NET OPERATING INCOME PER SHARE                                             $        5.89     $        5.22    $        4.22
                                                                           =============     =============    =============
COMPREHENSIVE INCOME PER SHARE                                             $        6.40     $        5.45    $        4.04
                                                                           =============     =============    =============
WEIGHTED AVERAGE SHARES OUTSTANDING                                        $   1,300,000         1,300,000        1,300,000
                                                                           =============     =============    =============
</TABLE>


See Accompanying Notes to Consolidated Financial Statements.




                                      -8-
<PAGE>   35


                        FARMERS & MERCHANTS BANCORP, INC.

                      Consolidated Statements of Changes in
                    Shareholders' Equity for the years ended
                        December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                                                Accumulated
                                                                                                                   Other
                                                                                Common          Undivided      Comprehensive
(In thousands)                                                                  Stock           Profits           Income
                                                                           -------------     -------------      --------------
<S>                                                                        <C>               <C>                <C>           
BALANCE AT DECEMBER 31, 1995..................................             $      12,677     $      26,025      $          919
     Net income for 1996......................................                         0             5,483                   0
     Unrealized losses on securities classified as Available
       for Sale (net of tax effect of ($115)).................                         0                 0                (228)
     Cash dividends ($1.15 per share).........................                         0            (1,495)                  0
                                                                           -------------     -------------      --------------

BALANCE AT DECEMBER 31, 1996                                                      12,677            30,013                 691
     Net income for 1997......................................                         0             6,777                   0
     Unrealized gains on securities classified as Available
       for Sale (net of tax effect of $157)...................                         0                 0                 311
     Cash dividends ($1.25 per share).........................                         0            (1,625)                  0
                                                                           -------------     -------------      --------------

BALANCE AT DECEMBER 31, 1997..................................                    12,677            35,165               1,002
     Net income for 1998......................................                         0             7,657                   0
     Unrealized gains on securities classified as Available
       for Sale (net of tax effect of $345)...................                         0                 0                 669
     Cash dividends ($1.40 per share).........................                         0            (1,820)                  0
                                                                           -------------     -------------      --------------

BALANCE AT DECEMBER 31, 1998                                               $      12,677     $      41,002      $        1,671
                                                                           =============     =============      ==============

</TABLE>

See Accompanying Notes to Consolidated Financial Statements.





                                      -9-
<PAGE>   36


                        FARMERS & MERCHANTS BANCORP, INC.

                      Consolidated Statements of Cash Flows
              for the years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:                                         1998              1997              1996
                                                                           -------------     -------------    -------------
<S>                                                                        <C>               <C>              <C>          
     Net income...................................................         $       7,657     $       6,777    $       5,483
     Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
         Depreciation.............................................                   943               700              798
         Premium amortization.....................................                   512               470              582
         Discount amortization....................................                  (120)             (155)            (196)
         Provision for loan losses................................                   892             1,111            1,068
         Provision for deferred income taxes......................                    52                43              266
         (Gain) loss on sale of fixed assets......................                    30                 0               (1)
         (Gain) loss on sale of investment securities.............                     0                 4               (5)
     Changes in Operating Assets and Liabilities:
         Accrued interest receivable and other assets.............                  (401)             (350)            (373)
         Accrued interest payable and other liabilities...........                   (61)              181              162
                                                                             -----------      ------------     ------------
                  Net Cash Provided by Operating Activities                        9,504             8,781            7,784
                                                                             -----------      ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures.........................................                (2,740)             (789)          (1,175)
     Proceeds from maturities of available for sale securities....                22,000            23,546           30,890
     Proceeds from sale of available for sale securities..........                     0            10,363              255
     Purchase of available for sales securities...................               (53,051)          (23,928)         (48,724)
     Acquisition of stock by stock dividend (non-cash)............                  (177)             (165)            (150)
     Net increase in loans........................................                (9,946)          (30,362)         (30,354)
     Net increase in leases.......................................                   (24)             (173)            (257)
                                                                             -----------      ------------     ------------
                  Net Cash Used by Investing Activities                          (43,938)          (21,508)         (49,515)
                                                                             -----------      ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in deposits.....................................                50,885            22,921           34,387
     Net change in short term borrowings..........................                   318            (4,165)            (156)
     Increase in long-term borrowings.............................                 1,000             3,000                0
     Payments on long-term borrowings.............................                (1,053)             (707)            (665)
     Payments of dividends........................................                (1,820)           (1,495)          (1,625)
                                                                             -----------      ------------      ------------
                  Net Cash Provided by Financing Activities                       49,330            19,554           31,941
                                                                             -----------       -----------      ------------
Net change in cash and cash equivalents                                           14,896             6,827           (9,790)
Cash and cash equivalents - beginning of the year.................                22,798            15,971           25,761
                                                                             -----------      ------------     ------------
CASH AND CASH EQUIVALENTS - END OF THE YEAR                                  $    37,694      $     22,798      $    15,971
                                                                             ===========       ===========      ============
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
     Cash and cash due from banks.................................           $    18,549      $     16,213     $     15,871
     Interest bearing deposits....................................                   100               100              100
     Federal funds sold...........................................                19,045             6,485                0
                                                                             -----------      ------------     ------------
                                                                             $    37,694      $     22,798     $     15,971
                                                                             ===========      ============     ============
SUPPLEMENTARY CASH FLOW DISCLOSURES:
     Cash paid during the year for:
         Interest (net of amount capitalized).....................           $    22,020      $     21,136     $     20,969
         Income taxes.............................................           $     3,280      $      2,652     $      2,128

</TABLE>


See Accompanying Notes to Consolidated Financial Statements.




                                      -10-
<PAGE>   37


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)



NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

             CONSOLIDATION POLICY:

             The consolidated financial statements include the accounts of
             Farmers & Merchants Bancorp, Inc. and its wholly-owned
             subsidiaries, The Farmers & Merchants State Bank (the Bank), a
             commercial banking institution, and the Farmers & Merchants Life
             Insurance Company, a life, accident and health insurance company.

             NATURE OF ACTIVITIES:

             The consolidated income of Farmers & Merchants Bancorp, Inc. is
             principally from income of the bank subsidiary, The Farmers &
             Merchants State Bank. The subsidiary Bank grants agribusiness,
             commercial, consumer and residential loans to customers primarily
             in northwest Ohio.

             ESTIMATES:

             The preparation of financial statements in conformity with
             generally accepted accounting principles requires management to
             make estimates and assumptions that affect the reported amounts of
             assets and liabilities and disclosure of contingent assets and
             liabilities at the date of the financial statements and the
             reported amounts of revenues and expenses during the reporting
             period. Actual results could differ from those estimates.

             CASH AND CASH EQUIVALENTS:

             For purposes of the statement of cash flows, the company considers
             all highly liquid debt instruments purchased with a maturity of
             three months or less to be cash equivalents. This includes cash on
             hand, amounts due from banks, and federal funds sold. Generally,
             federal funds are purchased and sold for one day periods.

             INVESTMENT SECURITIES:

             Securities, when purchased, are designated as Investment Securities
             Available for Sale and are carried at market value. They remain in
             that category until they are sold or mature. The specific
             identification method is used in determining the cost of securities
             sold.

             Unrealized holding gains and losses, net of tax, on securities
             classified as Available for Sale are reported as a net amount as a
             separate component of shareholders' equity until realized.





                                      -11-
<PAGE>   38


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
            (Continued)

             LOANS:

             Loans are stated at the amount of unpaid principal, reduced by
             unearned discounts and deferred loan fees and costs, as well as, by
             the allowance for loan losses. Interest on commercial, installment,
             and real estate loans is accrued on a daily basis based on the
             principal outstanding.

             Generally, a loan (including a loan considered impaired under
             Statement 114, "Accounting by Creditors for Impairment of a Loan")
             is classified as nonaccrual and the accrual of interest income is
             generally discontinued when a loan becomes 90 days past due as to
             principal or interest and these loans are placed on a "cash basis"
             for purposes of income recognition. Management may elect to
             continue the accrual of interest when the estimated net realizable
             value of collateral is sufficient to cover the principal and
             accrued interest, and the loan is in the process of collection.

             Loans held for resale are valued at the lower of aggregate cost or
             market, market determined by current market quotations.

             Loan origination and commitment fees and certain direct loan
             origination costs are deferred and amortized as a net adjustment to
             the related loan's yield. The Bank is generally amortizing these
             costs over the contractual life of such loans. Fees related to
             standby letters of credit are recognized at the beginning of
             commitment period.

             ALLOWANCE FOR LOAN LOSSES:

             The allowance for possible loan losses is established through a
             provision for loan losses charged against income. Loans deemed to
             be uncollectible are charged against the allowance for loan losses,
             and subsequent recoveries, if any, are credited to the allowance.

             Beginning in 1995, the Bank adopted Statement 114. Under the
             Standard when a loan is deemed to be impaired, that is, based on
             current information and events, it is probable that not all amounts
             due according to the contractual terms of the loan agreement will
             be collectible, the impairment is measured based on either the
             present value of expected future cash flows discounted at the
             loan's effective rate, the loan's observable market price, or the
             fair value of the collateral if the loan is collateral dependent.
             This impairment is credited to the allowance for loan losses.





                                      -12-
<PAGE>   39
                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
            (Continued)

             ALLOWANCE FOR LOAN LOSSES: (Continued)

             The allowance for loan losses is maintained at a level believed to
             be adequate by management to absorb estimated future loan losses
             for on and off balance sheet credit exposure. Management's
             evaluation of the adequacy of the allowance is based on the Bank's
             past loan loss experience, known and inherent risks in the
             portfolio, adverse situations that may affect the borrowers ability
             to repay (including the timing of future payments), the estimated
             value of any underlying collateral, composition of the loan
             portfolio, current economic conditions, and other relevant factors.
             This evaluation is inherently subjective as it may require material
             estimates including the amount and timing of future cash flows
             expected to be received on impaired loans that may be susceptible
             to significant change.

             SERVICING ASSETS AND LIABILITIES:

             The Financial Accounting Standards Board (FASB) issued Statement of
             Financial Accounting Standards No. 125, "Accounting for Transfers
             and Servicing of Financial Assets and Extinquishments of
             Liabilities". FAS 125 requires that each time an entity undertakes
             an obligation to service financial assets, it shall recognize
             either a servicing asset or a servicing liability for that
             servicing contract at its fair market value. Servicing assets and
             liabilities are to be amortized in proportion to and over the
             period of estimated net servicing income.

             FINANCE LEASES:

             Finance leases are recorded at the sum of the minimum lease
             payments less any executory costs and profit thereon to be paid and
             any unguaranteed residual value. If the residual is guaranteed, it
             is included in the minimum lease payments. The difference between
             the gross investment in the lease and the cost is recorded as
             unearned income, which is amortized over the lease term by the
             interest method. The unearned interest is included in the balance
             sheet as a deduction from the related gross investment, which
             results in the net investment in the lease.

             BANK PREMISES AND EQUIPMENT:

             Bank premises and equipment are stated at cost less accumulated
             depreciation. Depreciation is based on the estimated useful lives
             of the various properties and is computed using accelerated
             methods. Costs for maintenance and repairs are charged to
             operations as incurred.




                                      -13-
<PAGE>   40


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
           (Continued)

             FAIR VALUE OF FINANCIAL INSTRUMENTS:

             FASB Statement No. 107, "Disclosures about Fair Value of Financial
             Instruments", requires disclosure of the fair value information
             about financial instruments, both assets and liabilities, whether
             or not recognized in the balance sheet, for which it is practicable
             to estimate that value. In cases where quoted market prices are not
             available, fair values are based on estimates using present value
             or other valuation techniques. Those techniques are significantly
             affected by assumptions used, including the discount rate and
             estimates of cash flows. In that regard, the derived fair value
             estimates cannot be substantiated by comparison to independent
             markets and, in many cases, could not be realized in immediate
             settlement of the instrument. FASB Statement No. 107 excludes
             certain financial instruments and all nonfinancial instruments from
             its disclosure requirements. Accordingly, the aggregate fair value
             amounts presented do not represent the underlying value of the
             Company.

             FEDERAL INCOME TAX:

             The provision for federal income taxes is based on reported income
             and expense, adjusted for permanent differences between reported
             income and taxable income. The deferred portion of the provision
             relates to those items of income and expense in the financial
             statements that are recognized in different time periods for income
             tax purposes.

             EARNINGS PER SHARE:

             Earnings per share are computed based on the weighted average
             number of shares of common stock outstanding during each year, and
             any stock splits or dividends are retroactively recognized in all
             periods presented in the financial statements.

             COMPREHENSIVE INCOME:

             The Financial Accounting Standards Board has issued Statement No.
             130, Reporting Comprehensive Income, that the Company is required
             to adopt for its year ended December 31, 1998. This pronouncement
             is not expected to have a significant impact on the Company's
             financial statements. The Statement establishes standards for
             reporting and presentation of comprehensive income and its
             components. The Statement requires that items recognized as
             components of comprehensive income be reported in the financial
             statements. The Statement also requires that a company classify
             items of other comprehensive income by their nature in the
             financial statements, and display the accumulated balance of other
             comprehensive income separately from retained earnings in the
             equity section of a statement of financial position. Comprehensive
             income of the Company currently consists of unrealized gains and
             losses on securities available for sale.




                                      -14-
<PAGE>   41

                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 2.  CASH AND FEDERAL FUNDS SOLD

             Banks are required to maintain reserve funds in vault cash and/or
             on deposit with the Federal Reserve Bank. The aggregate reserves
             required at December 31, 1998 and 1997 were $5.1 million and $3.7
             million, respectively.

NOTE 3.  INVESTMENT SECURITIES

             The amortized cost and estimated market values of investments in
             securities as of December 31, 1998 and 1997 are detailed below.
             Fair market values are based on quoted market prices or dealer
             quotes except for domestic corporations stocks and Federal Home
             Loan Bank stock which are recorded at cost.

<TABLE>
<CAPTION>
                                                                                 1998
                                                 ----------------------------------------------------------------- 
                                                      Gross               Gross             Gross          Gross
                                                    Amortized           Unrealized        Unrealized       Market
             (In thousands)                            Cost              Gains             Losses          Value
                                                 ------------       -------------      -----------   ------------- 

<S>                                              <C>                <C>                <C>           <C>          
             Available for Sale:
                 U.S. Treasury                   $     16,792       $         320      $         0   $      17,112
                 U.S. Government
                    agency                             37,978                 614               18          38,574
                 Mortgage-Backed                       10,986                  56               49          10,993
                 State and political
                    subdivisions                       34,119               1,413               12          35,520
                 Obligation of
                    domestic
                    corporations                       18,905                 210                0          19,115
                 Stocks of domestic
                    corporations                           20                   0                0              20
                 Federal Home Loan Bank
                    stock (restricted)                  2,577                   0                0           2,577
                                                  -----------       -------------    -------------     -----------

                                                  $   121,377       $       2,613    $          79     $   123,911
                                                  ===========       =============    =============     ===========
</TABLE>




                                      -15-
<PAGE>   42


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 3.           INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                                                      1997
                                                      ----------------------------------------------------------------- 
                                                          Gross               Gross             Gross          Gross
                                                        Amortized           Unrealized        Unrealized       Market
                  (In thousands)                           Cost              Gains             Losses          Value
                                                      ------------       -------------      ------------- ------------- 

<S>                                                   <C>                <C>                <C>           <C>          
                  Available for Sale:
                      U.S. Treasury                   $     22,200       $         195      $        22   $      22,373
                      U.S. Government
                         agency                             22,100                 224                2          22,322
                      Mortgage-Backed                        9,033                  24               66           8,991
                      State and political
                         subdivisions                       24,499               1,127                9          25,617
                      Obligation of
                         domestic
                         corporations                       10,282                  48                3          10,327
                      Stocks of domestic
                         corporations                           20                   0                0              20
                      Federal Home Loan Bank
                         stock (restricted)                  2,400                   0                0           2,400
                                                       -----------       -------------    -------------     -----------

                                                       $    90,534       $       1,618    $         102     $    92,050
                                                       ===========       =============    =============     ===========
</TABLE>

                  The Federal Home Loan Bank stock is held as collateral
                  security for all indebtedness of The Farmers & Merchants State
                  Bank to the Federal Home Loan Bank.

                  The gross realized gains and losses for the years ended
                  December 31, are presented below:

<TABLE>
<CAPTION>
                  (In thousands)                             1998             1997              1996
                                                          -------------    -------------     -------------
<S>                                                      <C>               <C>               <C>           
                  Gross realized gains                    $           0    $           6     $           5
                                                          -------------    -------------     -------------

                  Gross realized losses                               0               10                 0
                                                          -------------    -------------     -------------

                  Net Realized Gains (Loss)               $           0    $          (4)    $           5
                                                          =============    =============     =============
</TABLE>

                  The amortized cost and estimated market value of debt
                  securities at December 31, 1998, by contractual maturity, are
                  shown below. Expected maturities will differ from contractual
                  maturities because borrowers may have the right to call or
                  prepay obligations with or without call or prepayment
                  penalties.




                                      -16-
<PAGE>   43


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 3.           INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>

                                                                           Investment Securities
                                                                             Available for Sale
                                                                       -----------------------------------    
                                                                                                  Market
                  (In thousands)                                          Amortized Cost           Value
                  --------------                                       -----------------     -------------
<S>                                                                        <C>                 <C>        
                  Within one year                                          $    21,912         $    22,095
                  From one through five years                                   50,584              73,117
                  From five through ten years                                   38,854              17,989
                  After ten years                                                7,430               8,113
                                                                           -----------         -----------

                  Total                                                    $   118,780         $   121,314
                                                                           ===========         ===========
</TABLE>

                  Investments with a carrying value of $66.9 million and $61.6
                  million at December 31, 1998 and 1997, respectively, were
                  pledged to secure public deposits and securities sold under
                  repurchase agreements.

NOTE 4.           LOANS

                  Loans at December 31 consist of:

<TABLE>
<CAPTION>
                  (In thousands)                                                  1998              1997
                  -------------                                            -------------     -------------
<S>                                                                        <C>               <C>          
                  Real estate                                              $     194,662     $     204,770
                  Commercial and industrial                                       87,266            65,633
                  Agricultural (excluding real estate)                            38,882            44,939
                  Consumer and other loans                                        68,197            75,675
                  Overdrafts                                                         188                92
                  Commercial paper  13,648                                         7,837
                  Industrial Development Bonds                                     4,587             4,511
                                                                           -------------     -------------
                                                                                 407,430           403,457
                  Less: Deferred loan fees and costs                                (388)             (312)
                                                                           -------------     -------------
                                                                                 407,042           403,145
                  Less: Allowance for loan losses                                 (5,850)           (5,850)
                                                                           -------------     -------------

                  Loans - Net                                              $     401,192     $     397,295
                                                                           =============     =============
</TABLE>

                  As of December 31, 1998 there were $578 thousand in
                  commitments to lend additional funds to debtors whose loans
                  are not performing.

                  $128.8 million in one to four family residential mortgage
                  loans have been pledged as security for loans the Bank has
                  received from the Federal Home Loan Bank.





                                      -17-
<PAGE>   44


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 4.           LOANS (Continued)

                  Senior officers and directors and their affiliated companies
                  were indebted to the Bank in the aggregate of $8.6 and $6.1
                  million at December 31, 1998 and 1997, respectively. All such
                  loans were made on substantially the same terms and
                  conditions, including interest rates and collateral, as those
                  prevailing at the time for comparable loan transactions with
                  other persons. Loans made during 1998 were $23.3 million and
                  repayments were $20.8 million. In the opinion of management,
                  these loans do not involve more than normal risk of
                  collectibility or possess other unfavorable features.

                  Loans for which the Bank is providing collection services is
                  $147.9, $98.6 and $76.2 million for 1998, 1997 and 1996,
                  respectively. Servicing assets recognized during 1998 amounted
                  to $855 thousand and amortization of servicing assets amounted
                  to $306 thousand. The fair value of recognized servicing
                  assets was $1.3 million, fair value being determined by the
                  present value of expected future cash flows.
                  No allowance for impairment has been provided.

NOTE 5.           ALLOWANCE FOR POSSIBLE LOAN LOSSES

                  An analysis of the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
                  (In thousands)                                  1998             1997              1996
                  -------------                           -------------    -------------     -------------
<S>                                                       <C>              <C>               <C>          
                  Balance at beginning of year            $       5,850    $       5,500     $       5,500
                  Provision charged to operating
                    expenses                                        892            1,111             1,068
                  Loans charged-off                              (1,774)          (1,531)           (1,711)
                  Recoveries                                        882              770               643
                                                          -------------    -------------     -------------

                  Balance at End of Year                  $       5,850    $       5,850     $       5,500
                                                          =============    =============     =============
</TABLE>

                  At December 31, 1998 and 1997, the recorded investment in
                  loans considered impaired was $8.743 and $7.170 million,
                  respectively, for which the related allowance for loan loss
                  was $2.374 and $2.744 million, respectively. Of the $8.743 and
                  $7.170 million in impaired loans for 1998 and 1997,
                  respectively that were considered impaired, the recorded
                  investment in impaired loans that have a related allowance for
                  credit losses determined in accordance with SFAS No. 114 was
                  $6.451 and $2.889 million, respectively. Average investment in
                  impaired loans was $4.7 million, $3.2 million and $3.5 million
                  for 1998, 1997 and 1996, respectively.

                  The Bank stops accruing interest income when a loan is deemed
                  to be impaired, and recognizes interest income when the
                  interest income is actually received. Interest income
                  recognized on impaired loans was $172, $402, and $354 thousand
                  for 1998, 1997 and 1996, respectively.




                                      -18-
<PAGE>   45


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 6.           FINANCE LEASE RECEIVABLE

                  Finance leases as of December 31 are as follows:

<TABLE>
<CAPTION>
                  (In thousands)                                                 1998              1997
                                                                           -------------     -------------
<S>                                                                        <C>               <C>          
                  Gross investment in leases                               $         605     $         598
                  Unearned income                                                    (89)             (106)
                                                                           -------------     -------------

                  Finance Lease Receivable                                 $         516     $         492
                                                                           =============     =============
</TABLE>

                  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:

<TABLE>
<CAPTION>
                  (In thousands)                                                  1998              1997
                  --------------                                           -------------     -------------
<S>                                                                        <C>               <C>          
                  Land                                                     $       1,681     $       1,472
                  Buildings                                                        8,030             7,398
                  Furnishings                                                      5,867             4,605
                                                                           -------------     -------------
                                                                                  15,578            13,475
                  Less: Accumulated depreciation                                  (6,148)           (5,810)
                                                                           -------------     -------------

                  Banking Premises and Equipment - Net                     $       9,430     $       7,665
                                                                           =============     =============
</TABLE>

NOTE 8.           DEPOSITS

                  Time deposits at December 31 consist of the following:

<TABLE>
<CAPTION>
                  (In thousands)                                              1998              1997
                   ------------                                            -------------     -------
<S>                                                                        <C>               <C>          
                  Time deposits under $100,000                             $     229,143     $     216,185
                  Time deposits of $100,000 or more                               69,133            57,763
                                                                           -------------     -------------

                                                                           $     298,276     $     273,948
                                                                           =============     =============
</TABLE>

                  As of December 31, 1998 the aggregate amount of maturities for
                  each of the five following years for time deposits having a
                  remaining term of more than one year follows:

<TABLE>
<S>                                 <C>                                    <C>          
                                    1999                                   $     222,106
                                    2000                                          58,740
                                    2001                                           9,636
                                    2002                                           2,530
                                    2003                                           5,264
                                                                           -------------

                                                                           $     298,276
                                                                           =============
</TABLE>





                                      -19-


<PAGE>   46


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)



NOTE 8.           DEPOSITS (Continued)

                  Deposits to related parties as of December 31, 1998 amounted
                  to $14.8 million.

NOTE 9.           REPURCHASE AGREEMENTS

                  The Bank's policy requires U. S. Government securities as
                  collateral for the underlying repurchase agreements. As of
                  December 31, 1998 U. S. Treasury securities with a book value
                  of $3.5 million were underlying the repurchase agreements and
                  were under the Bank's control.

NOTE 10.          OTHER BORROWINGS

                  Other borrowings consisted of the following at December 31:

<TABLE>
<CAPTION>

                  (In thousands)                                                           1998           1997
                  -------------                                                      -------------     ------------
<S>                                                                                  <C>               <C>          
                  Federal Home Loan Bank, various loans due in monthly
                    installments of $105 thousand plus an annual payment of $300
                    thousand including interest at varying rates from 5.40% to
                    6.75%. Notes are secured by a blanket lien on 100% of one to
                    four family residential mortgage loan
                    portfolio.                                                       $      11,240     $      11,292
                                                                                     =============     =============
</TABLE>

                  The following is a schedule by years of future minimum
principal payments:


<TABLE>
<CAPTION>
                                    Year Ended                              Principal
                                    December 31                             Payments
                                    -----------                            ---------
                                  <S>                                      <C>
                                    1999                                   $       1,201
                                    2000                                           1,253
                                    2001                                           1,308
                                    2002                                           1,367
                                    2003                                           1,409
                                    Thereafter                                     4,702
                                                                           -------------
                                                                           $      11,240
                                                                           =============

</TABLE>

NOTE 11.          FEDERAL INCOME TAXES

                  Deferred tax assets and liabilities at December 31 are
comprised of the following:
<TABLE>
<CAPTION>

                  (In thousands)                                                 1998              1997
                   ------------                                            -------------     -------------
<S>                                                                        <C>               <C>          
                  Deferred tax assets:
                      Allowance for loan losses                            $       1,702     $       1,702
                      Other                                                           12                 8
                                                                           -------------     -------------
                                                                                   1,714             1,710
                                                                           -------------     -------------
</TABLE>



                                                               -20-

<PAGE>   47


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 11.          FEDERAL INCOME TAXES (Continued)

<TABLE>
<CAPTION>
                                                                                  1998              1997
                                                                           -------------     -------------
<S>                                                                        <C>              <C>
                  Deferred tax liabilities:
                      Accreted discounts on bonds                                     35               103
                      FHLB stock dividends                                           293               233
                      Mortgage servicing rights                                      312               245
                      Other                                                            3                 0
                      Net unrealized gain on securities
                         Available for sale                                          862               515
                                                                           -------------     -------------

                                                                                   1,505             1,096
                                                                           -------------     -------------

                  Net Deferred Tax Assets                                  $         209     $         614
                                                                           =============     =============
</TABLE>

                  The components of income tax expense for the years ended
December 31 are as follows:

<TABLE>
<CAPTION>
                  (in thousands)                                1998             1997              1996
                                                          -------------    -------------     -------------
<S>                                                       <C>              <C>               <C>          
                  Current:
                      Federal                             $       3,361    $       2,993     $       2,043
                  Deferred:
                      Federal                                        52               42               269
                                                          -------------    -------------     -------------

                                                          $       3,413    $       3,035     $       2,312
                                                          =============    =============     =============

                  Income tax at statutory rates           $       3,771    $       3,354     $       2,650
                  Tax effect of:
                      Tax exempt interest                          (428)            (384)             (406)
                      Costs attributable to tax
                         exempt interest                             70               63                59
                      Other items, net                                0                2                 9
                                                          -------------    -------------     -------------

                  Income Tax Cost                         $       3,413    $       3,035     $       2,312
                                                          =============    =============     =============
</TABLE>

NOTE 12.          RETIREMENT INCOME PLAN

                  The Bank has established a 401(k) profit sharing plan which
                  allows eligible employees to save at a minimum one percent of
                  eligible compensation on a pre-tax basis, subject to certain
                  Internal Revenue Service limitations. The Bank will match 50%
                  of employee 401(k) contributions up to four percent of total
                  eligible compensation. In addition the Bank may make a
                  discretionary contribution from time to time as is deemed
                  advisable. A participant is 100% vested in the participant's
                  deferral contributions and employer matching contributions. A
                  seven year vesting schedule applies to employer discretionary
                  contributions.

                  In order to be eligible to participate, the employee must be
                  21 years of age, completed six months of service, work 1,000
                  hours in the plan year and be employed on the last day of the
                  year. Entry dates have been established at January 1 and July
                  1 of each year.



                                      -21-
<PAGE>   48

                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)



NOTE 12.          RETIREMENT INCOME PLAN (Continued)

                  The plan calls for only lump-sum distributions upon either
                  termination of employment, retirement, death or disability.

                  Contributions to the 401(k) profit sharing plan for both the
                  employer matching contribution and the discretionary
                  contribution were $446, $315, and $267 thousand for 1998, 1997
                  and 1996, respectively.

NOTE 13.          RELATED PARTY TRANSACTIONS

                  The Bank has conducted transactions with its officers and
directors as set forth in Note 4.

NOTE 14.          COMMITMENTS AND CONTINGENT LIABILITIES

                  The Bank's financial statements do not reflect various
                  commitments and contingent liabilities which arise in the
                  normal course of business and which involve elements of credit
                  risk, interest rate risk and liquidity risk. These commitments
                  and contingent liabilities are commitments to extend credit,
                  credit card arrangements and standby letters of credit. A
                  summary of the Bank's commitments and contingent liabilities
                  at December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>

                                                                                    Notational Amount
                  (In thousands)                                                  1998              1997
                   ------------                                            -------------     -------------
<S>                                                                        <C>               <C>          
                  Commitments to extend credit                             $      76,651     $      62,486
                  Credit card arrangements                                        10,237             9,619
                  Standby letters of credit                                        1,419             2,299

</TABLE>
                  Commitments to extend credit, credit card arrangements and
                  standby letters of credit all include exposure to some credit
                  loss in the event of nonperformance of the customer. The
                  Bank's credit policies and procedures for credit commitments
                  and financial guarantees are the same as those for extensions
                  of credit that are recorded in the financial statements.
                  Because these instruments have fixed maturity dates, and
                  because many of them expire without being drawn upon, they
                  generally do not present any significant liquidity risk to the
                  Bank.

                  In the ordinary course of business, the company at times, is
                  subject to pending and threatened legal actions and
                  proceedings. It is the opinion of management that the outcome
                  of any such matters and proceedings would not have a material
                  effect on the financial position of the company.

NOTE 15.          CONCENTRATIONS OF CREDIT

                  All of the Bank's loans, commitments, and standby letters of
                  credit have been granted to customers in the Bank's market
                  area of northwest Ohio. All such customers are depositors of
                  the Bank. Also, investments in state and municipal securities
                  may involve governmental entities within the Bank's market
                  area. The concentrations of credit by type of loan are set
                  forth in Note 4. Standby letters of credit were granted
                  primarily to commercial borrowers.




                                      -22-
<PAGE>   49

                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 16.          REGULATORY CAPITAL REQUIREMENTS

                  Federal regulatory agencies have adopted various capital
                  standards for financial institutions, including risk-based
                  capital standards. The primary objectives of the risk-based
                  capital framework are to provide a more consistent system for
                  comparing capital positions of financial institutions and to
                  take into account the different risks among financial
                  institutions' assets and off-balance sheet items.

                  Quantitative measures established by regulation to ensure
                  capital adequacy require the Banks to maintain certain minimum
                  amounts and ratios of total and Tier 1 capital (as defined) to
                  average assets (as defined). Management believes the Bank
                  meets all capital adequacy requirements to which they are
                  subject as of December 31, 1998.

                  To be categorized as well capitalized, the Company must
                  maintain the total risk-based, Tier 1 risk-based, and Tier 1
                  leverage ratios as set forth in the minimum requirements
                  column below. A comparison of the Company's capital as of
                  December 31, 1998 and 1997 with the minimum requirement is
                  presented below:

<TABLE>
<CAPTION>
                                                                       Actual                   
                                                          ------------------------------        Minimum    
                                                             1998             1997            Requirements
                                                          -------------    -------------     -------------
<S>                                                           <C>               <C>                 <C>  
                  Tier 1 Risk-based Capital:
                      Company                                 11.80%            10.05%              4.00%
                      The Farmers & Merchants
                         State Bank                           10.33%             9.58%              4.00%
                  Total Risk-based Capital:
                      Company                                 13.44%            12.98%              8.00%
                      The Farmers & Merchants
                         State Bank                           13.97%            13.44%              8.00%
                  Leverage Ratio:
                      Company                                  9.17%             9.06%              4.00%
                      The Farmers & Merchants
                         State Bank                            7.53%             7.06%              4.00%
</TABLE>

                  According to regulatory guidelines, the Bank is considered to
be "well capitalized".

                  The Bank is restricted as to the amount of dividends which can
                  be paid. Dividends declared by the Bank that exceed the net
                  income for the current year plus retained income for the
                  preceding two years must be approved by federal and state
                  regulatory agencies. Under this formula dividends of $6.2
                  million may be paid without prior regulatory approval.
                  Regardless of formal regulatory restrictions, the Bank may not
                  pay dividends that would result in its capital levels being
                  reduced below the minimum requirements shown above.






                                      -23-
<PAGE>   50


                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)

NOTE 17.          FAIR VALUE INFORMATION AND INTEREST RATE RISK

                  Fair values of financial instruments are management's estimate
                  of the values at which the instruments could be exchanged in a
                  transaction between willing parties. These estimates are
                  subjective and may vary significantly from amounts that would
                  be realized in actual transactions. Further, the tax
                  ramifications related to the realization of the unrealized
                  gains and losses can have a significant effect on the fair
                  value estimates and have not been considered in any of the
                  estimates.

                  The book values and estimated fair values for on and
                  off-balance sheet financial instruments as of December 31,
                  1998 and 1997 are reflected below:

<TABLE>
<CAPTION>
                                                                             1998                    1997
                                                                     ------------------------  ------------------------
                                                                          Book        Fair        Book          Fair
                  (In thousands)                                          Value      Value        Value        Value
                                                                     -----------  -----------  -----------   ----------
                  Financial Assets:
<S>                                                                 <C>           <C>            <C>          <C>      
                      Cash                                           $    18,649    $  18,649    $  16,313    $  16,313
                      Interest bearing
                         deposits                                            100          100            0            0
                      Federal funds sold                                  19,045       19,045        6,485        6,485
                      Investment Securities:
                         Available for sale                              123,911      123,911       92,050       92,050
                         Net loans                                       407,721      422,147      398,643      406,323
                         Accrued interest
                           receivable                                      5,187        5,187        5,069        5,069

                      Financial Liabilities:
                           Deposits                                  $   512,183    $ 515,500  $   461,298  $   462,967
                           Short-term borrowing:
                               Federal funds
                                 purchased
                               Securities sold
                                 under agreement
                                 to repurchase                             2,916        2,916        2,598        2,598
                           Other borrowing                                11,240       11,341       11,292       11,642
                           Accrued interest payable                        1,991        1,991        1,926        1,926
</TABLE>

                  The following assumptions and methods were used in estimating
the fair value for financial instruments:

                           CASH AND SHORT-TERM INVESTMENTS:

                           For cash on hand and in banks, as well as, federal
                           funds sold, the carrying amount is a reasonable
                           estimate of fair value.



                                      -24-
<PAGE>   51



                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 17.          FAIR VALUE INFORMATION AND INTEREST RATE RISK (Continued)

                           INVESTMENT SECURITIES:

                           Fair value is based on quoted market prices or dealer
                           quotes. See Note 3, Investment Securities, for
                           additional information.

                           STOCK IN FEDERAL HOME LOAN BANK:

                           No ready market exists for the stock, and it has no
                           quoted market value. The stock is redeemable at par;
                           therefore, fair value equals cost.

                           LOANS:

                           Most commercial and real estate mortgage loans are
                           made on a variable rate basis. For those
                           variable-rate loans that reprice frequently, and with
                           no significant change in credit risk, fair values are
                           based on carrying values. The estimated fair value of
                           the fixed rate loan portfolio is based on expected
                           future cash flows discounted by an appropriate rate
                           derived in part from the Treasury yield curve.

                           DEPOSITS:

                           The fair value of demand deposits, savings accounts,
                           and certain money market deposits is the amount
                           payable on demand at the reporting date. The fair
                           value of fixed-maturity certificates of deposits is
                           estimated using anticipated future cash flows
                           discounted by an appropriate rate derived in part
                           from the Treasury yield curve.

                           BORROWINGS:

                           Short-term borrowings are carried at cost which
                           approximates fair value. Other long-term debt was
                           generally valued using a discounted cash flows
                           analysis with a discounted rate based on current
                           incremental borrowing rates for similar types of
                           arrangements, or if not available, based on an
                           approach similar to that used for loans and deposits.
                           Long-term borrowings include their related current
                           maturities.

                           ACCRUED INTEREST RECEIVABLE AND PAYABLE

                           The carrying amounts of accrued interest approximate
                           their fair values.





                                      -25-
<PAGE>   52

                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)


NOTE 18.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                  FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                      BALANCE SHEETS
                  (In thousands)                                                 1998              1997
                   ------------                                            -------------     -------------
<S>                                                                        <C>               <C>          
                  ASSETS:
                    Cash                                                   $         685     $         816
                    Related party receivables:
                         Dividends                                                    52               650
                         Note receivable                                          10,000            10,000
                    Investment in subsidiaries                                    45,617            38,207
                                                                           -------------     -------------

                  TOTAL ASSETS                                             $      56,354     $      49,673
                                                                           =============     =============

                  LIABILITIES:
                      Accrued expenses                                     $         354     $         179
                      Dividends payable                                              650               650
                                                                           -------------     -------------

                         Total Liabilities                                         1,004               829
                                                                           -------------     -------------

                  SHAREHOLDERS' EQUITY:
                    Common stock, no par value -
                      authorized 1,500,000 shares;
                      issued 1,300,000 shares                                     12,677            12,677
                    Undivided profits                                             41,002            35,165
                    Unrealized gain on securities
                      classified as Available for
                      Sale (net of tax effect of
                      $862 for 1998 and $515 for
                      1997)                                                        1,671             1,002
                                                                           -------------     -------------

                                                                                  55,350            48,844
                                                                           -------------     -------------

                  LIABILITIES AND SHAREHOLDERS'
                    EQUITY                                                 $      56,354     $      49,673
                                                                           =============     =============
</TABLE>





                                      -26-
<PAGE>   53

                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)

NOTE 18.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                  FINANCIAL INFORMATION (Continued)

                                                   STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                  (In thousands)                                      1998             1997              1996
                  -------------                                   --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>           
                  INCOME:
                      Equity in net income of subsidiaries        $        7,313    $       6,406    $        5,510
                      Interest income                                        600              600                 0
                                                                  --------------    -------------    --------------

                         Total Income                                      7,913            7,006             5,510
                                                                  --------------    -------------    --------------

                  EXPENSES:
                      Miscellaneous                                           19               16                17
                      Professional fees                                       16               15                15
                      Supplies                                                 6                6                 8
                      Taxes                                                   39                1                 1
                                                                  --------------    -------------    --------------

                         Total Expenses                                       80               38                41
                                                                  --------------    -------------    --------------

                  INCOME BEFORE INCOME TAXES                               7,833            6,968             5,469

                  INCOME TAXES (BENEFITS)                                    176              191               (14)
                                                                  --------------    -------------    --------------

                  NET INCOME                                      $        7,657    $       6,777    $        5,483
                                                                  ==============    =============    ==============
</TABLE>




                                      -27-
<PAGE>   54

                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)

NOTE 18.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                  FINANCIAL INFORMATION (Continued)

                STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                               Accumulated
                                                                                                  Other
                                                                Common        Undivided       Comprehensive
                  (In thousands)                                  Stock         Profits           Income
                   -------------                                -----------  -------------   -----------
<S>                                                             <C>           <C>               <C>         
                  BALANCE at December 31, 1995                  $    12,677   $     26,025      $        919
                      Net income for 1996                                 0          5,483                 0
                      Unrealized losses on securities
                         classified as Available for Sale
                         (net of tax effect of ($115))                    0              0              (228)
                      Dividends ($1.15 per share)                         0         (1,495)                0
                                                                -----------   ------------      ------------

                  BALANCE at December 31, 1996                       12,677         30,013               691
                      Net income for 1997                                 0          6,777                 0
                      Unrealized gains on securities
                         classified as Available for Sale
                         (net of tax effect of $153)                      0              0               311
                      Dividends ($1.25 per share)                         0         (1,625)                0
                                                                -----------   ------------      ------------


                  BALANCE at December 31, 1997                       12,677         35,165             1,002
                      Net income for 1998                                 0          7,657                 0
                      Unrealized gains on securities
                         classified as Available for Sale
                         (net of tax effect of $345)                      0              0               669
                      Dividends ($1.40 per share)                         0         (1,820)                0
                                                                -----------     ----------     -------------

                  BALANCE AT DECEMBER 31, 1998                  $    12,677   $     41,002      $      1,671
                                                                ===========   ============      ============
</TABLE>




                                      -28-
<PAGE>   55


                    FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)

NOTE 18.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                    FINANCIAL INFORMATION (Continued)

                                                 STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                  (In thousands)                                       1998             1997              1996
                   ------------                                 ----------------  ---------------  ----------------
<S>                                                             <C>               <C>               <C>            
                  CASH FLOWS FROM OPERATING
                    ACTIVITIES:
                      Net income                                $          7,657  $         6,777   $         5,483
                      Adjustments to Reconcile Net
                         Income to Net Cash Provided
                         by Operating Activities:
                           Equity in undistributed net
                             income of subsidiaries                       (6,143)          (4,910)            6,316
                      Changes in Operating Assets and
                         Liabilities:
                           Income tax receivable                               0              190                10
                           Accrued expenses                                  175                0                 0
                                                                ----------------  ---------------  ----------------

                      Net Cash Provided by Operating
                         Activities                                        1,689            2,057            11,809
                                                                ----------------  ---------------  ----------------

                  CASH FLOWS FROM INVESTING
                    ACTIVITIES:
                      (Loan) to repayment by
                         subsidiary                                            0                0           (10,000)
                                                                ----------------  ---------------  ----------------

                  CASH FLOWS FROM FINANCING
                    ACTIVITIES:
                      Payment of dividends                                (1,820)          (1,495)           (1,625)
                                                                ----------------  ---------------  ----------------

                  Net increase (decrease) in cash and
                    cash equivalents                                        (131)             562               184

                  Cash and cash equivalents - beginning
                    of year                                                  816              254                70
                                                                ----------------  ---------------  ----------------

                  CASH AND CASH EQUIVALENTS -
                    END OF YEAR                                 $            685  $           816  $            254
                                                                ================  ===============  ================
</TABLE>





                                      -29-
<PAGE>   56


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)



NOTE 18.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                    FINANCIAL INFORMATION (Continued)

                           STOCK SPLIT:

                           On June 28, 1996, the Board of Directors authorized a
                           five-for-one stock split, thereby increasing the
                           total number of shares authorized to 1.5 million and
                           the total number of shares issued and outstanding to
                           1.3 million. All references in the accompanying
                           financial statements to the number of common shares
                           and per share amounts have been restated to reflect
                           the stock split.

NOTE 19.            YEAR 2000 COMPLIANCE

                  The year 2000 has presented a unique set of challenges to
                  those industries reliant on information technology. As a
                  result of methods employed by early programmers, many software
                  applications and operational programs may be unable to
                  distinguish the year 2000 from the year 1900. If not
                  effectively addressed, this problem could result in the
                  production of inaccurate data, or, in the worst cases, the
                  inability of the systems to continue to function altogether.

                  Financial institutions are particularly vulnerable due to the
                  industry's dependence on electronic data processing systems.
                  In 1997 the Company began the process of identifying the
                  hardware and software issues required to be addressed to
                  assure year 2000 compliance. The Company began by assessing
                  the issues related to the year 2000 and the potential for
                  those issues to adversely affect the Company's own operations
                  and those of its subsidiaries.

                  Since that time the Company has established a Year 2000
                  Committee composed of representatives from key areas
                  throughout the organization. It is the purpose of the
                  Committee to identify areas subject to complications related
                  to the year 2000 issues and to initiate remedial measures
                  designed to eliminate any adverse effects on the Company's
                  operations. The Committee has identified all mission-critical
                  software and hardware that may be adversely affected by the
                  year 2000, and has required vendors to represent that the
                  systems and products provided are or will be 2000 compliant.

                  The Company expects that all mission-critical software will be
                  upgraded to achieve year 2000 compliance and tested by June
                  30, 1999. In addition the Committee is developing contingency
                  plans for business recovery should a mission-critical system
                  fail at year end, as well as systems which do not become
                  compliant by June 30, 1999.

                  The Company is committed to a plan for achieving compliance,
                  focusing not only on its own data processing systems, but also
                  on its customers. The Committee has taken steps to educate and
                  assist its customers with identifying their year 2000
                  compliance problems. In addition the Committee has proposed
                  policy and procedure changes to help identify potential risks
                  to the Company and to gain an understanding of how customers
                  are managing the risks associated with the year 2000.





                                      -30-
<PAGE>   57


NOTE 19.          YEAR 2000 COMPLIANCE (Continued)

                  Management believes that the Company has an effective company
                  year 2000 compliance program in place and that additional
                  expenditures required to bring its systems into compliance
                  will not have a material adverse effect on the Company's
                  operations, cash flows, or financial condition. Management
                  expects total additional out of pocket expenditures to be
                  approximately $200 thousand. This includes fees to outside
                  consulting firms, costs to upgrade equipment specifically for
                  the purpose of year 2000 compliance, and certain
                  administrative expenditures. However, the year 2000 problem is
                  pervasive and complex and can potentially affect any computer
                  process. Accordingly, no assurance can be given that year 2000
                  compliance can be achieved without additional unanticipated
                  expenditures and uncertainties that might affect future
                  financial results.









                                      -31-
<PAGE>   58



January 13, 1999



Board of Directors
Farmers & Merchants Bancorp, Inc.
Archbold, Ohio

                           INDEPENDENT AUDITORS' REPORT ON
                              SUPPLEMENTARY INFORMATION

Our report on our audits of the basic financial statements of Farmers &
Merchants Bancorp, Inc., Archbold, Ohio, and its wholly-owned subsidiaries, The
Farmers & Merchants State Bank and Farmers & Merchants Life Insurance Company
for the years ended December 31, 1998 and 1997, appears on page 6. The
examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The five year summary of operations is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.



                                                  /s/ KROUSE, KERN & CO., INC.

                                                      KROUSE, KERN & CO., INC.







                                      -32-
<PAGE>   59


                        FARMERS & MERCHANTS BANCORP, INC.

                  Five Year Summary of Consolidated Operations

<TABLE>
<CAPTION>


(In thousands except for per share           1998           1997           1996           1995            1994
 ---------------------------------       -----------    -----------    -----------    -----------    -----------
   amounts)
   -------
<S>                                      <C>            <C>            <C>            <C>            <C>        
Summary of Income:
    Interest income                      $    42,888    $    40,158    $    38,382    $    34,228    $    27,779
    Interest expense                          22,085         21,139         20,905         17,749         12,561
                                         -----------    -----------    -----------    -----------    -----------

        Net Interest Income                   20,803         19,019         17,477         16,479         15,218

    Provision for loan losses                    892          1,111          1,068            385            564
                                         -----------    -----------    -----------    -----------    -----------

    Net interest income after
       provision for loan losses              19,911         17,908         16,409         16,094         14,654
    Other income (expense)                    (8,841)        (8,096)        (8,614)        (8,594)        (7,939)
                                         -----------    -----------    -----------    -----------    -----------

    Earnings before federal
       income taxes                           11,070          9,812          7,795          7,500          6,715
    Income taxes                               3,413          3,035          2,312          2,203          1,749
                                         -----------    -----------    -----------    -----------    -----------

    Net income                           $     7,657    $     6,777    $     5,483    $     5,297    $     4,966
                                         ===========    ===========    ===========    ===========    ===========

    Per Share of Common Stock:
       Earnings per common share
        outstanding:
        (Based on the weighted average
        number of shares outstanding)
        (All per share amounts have
        been retroactively restated to
        reflect 5 for 1 stock split in
                                                                                                           
             Net income                  $      5.89    $      5.22    $      4.22    $      4.07    $      3.82
             Dividends                          1.40           1.25           1.15           1.10           1.00
             Weighted average number
               of shares outstanding       1,300,000      1,300,000      1,300,000      1,300,000      1,300,000

Year-end assets                          $   585,869    $   528,273    $   501,449    $   464,090    $   406,186
Average assets                               553,277        510,163        482,770        430,304        387,440
Year-end equity capital                       55,350         48,844         43,381         39,621         34,586
Average equity capital                        52,940         46,548         41,501         38,034         32,838

</TABLE>

See Independent Auditors' Report
on Supplementary Information.





                                      -33-
<PAGE>   60

                       FARMERS & MERCHANTS BANCORP, INC.

                     Trading Market for the Company's Stock



The Company's stock is not actively traded on any exchange. The range and sales
prices, based upon information that the Company has been made aware, are listed
below:

<TABLE>
<CAPTION>
                                                                                        Stock Prices
                                                                     ------------------------------------------------- 
                                                                     Quarter               Low                  High
                                                                     -------            ---------           ----------   
<S>                                                                   <C>              <C>                  <C>      
1998 - by quarter                                                      1st              $   55.00            $   55.00
                                                                       2nd                  55.00                65.00
                                                                       3rd                  65.00                70.00
                                                                       4th                  70.00                75.00

1997 - by quarter                                                      1st              $   40.00            $   45.00
                                                                       2nd                  55.00                72.00
                                                                       3rd                  72.00                72.00
                                                                       4th                  65.00                70.00
</TABLE>

Dividends declared on a quarterly basis for the last two fiscal years:

<TABLE>
<CAPTION>
                                                                     Quarter              1998                 1997
                                                                     -------            ----------           ------
<S>                                                                    <C>                <C>                   <C>   
Dividends declared per share
                                                                       1st                $   .30               $  .25
                                                                       2nd                    .30                  .25
                                                                       3rd                    .30                  .25
                                                                       4th                    .50                  .50

</TABLE>





                                      -34-
<PAGE>   61


                       FARMERS & MERCHANTS BANCORP, INC.

                      SELECTED FINANCIAL DATA BY MANAGEMENT



FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Farmers & Merchants Bancorp, Inc. again reported another increase in
consolidated operating earnings. Operating earnings for 1998 was $7.7 million
compared to $6.8 million for 1997 representing an increase of almost $1 million
or an increase of 13%. This increase was primarily the result of an increase in
interest income from loans.

Consolidated assets grew by $57.6 million in 1998 to a record $585.9 million
from consolidated assets of $528.3 million for 1997, representing a 10.9%
increase. This increase in assets occurred primarily in the loan portfolio and
investment securities available for sale.

The return on average assets and average shareholders' equity for 1998 was 1.38%
and 14.46%, respectively. These returns compare to 1.33% average return on
assets and 14.56% average return on shareholders' equity for 1997.

LIQUIDITY:

Maintaining sufficient funds to meet depositor and borrower needs on a daily
basis are among management's top priorities. This is accomplished by investing
in assets such as U. S. Government, U. S. Agency, Municipal, and Corporate
investment securities and Commercial Paper which can be converted to cash in a
timely manner, as well as, maintaining appropriate levels of cash. The average
aggregate balance of these assets was $121.7 million for 1998 representing 22%
of total average assets.

CAPITAL RESOURCES:

Shareholders' equity was $55.3 million at December 31, 1998 compared to $48.8
million for 1997. The company continues to have a strong capital base and its
bank subsidiary The Farmers & Merchants State Bank continues to maintain
regulatory capital ratios that are significantly above the defined regulatory
capital ratios.

At December 31, 1998, The Farmers & Merchants State Bank had a total risk-based
capital ratio of 13.9% and a 10.3% core capital to risk-based asset ratio which
are well in excess of regulatory guidelines. The bank's leverage ratio of 7.5%
is also substantially in excess of regulatory guidelines. These ratios compare
to 13.4%, 9.6% and 7.1%, respectively for 1997.

The Company's subsidiaries are restricted by regulations from making dividend
distributions in excess of certain prescribed amounts.






                                      -35-
<PAGE>   62



                     [KROUSE, KERN & CO., INC. LETTERHEAD]


January 13, 1999



To the Board of Directors
The Farmers & Merchants State Bank
Archbold, Ohio

                            INDEPENDENT AUDITORS' REPORT

We have examined management's assertion that The Farmers & Merchants State Bank
maintain a system of internal control over financial reporting which is designed
to provide reasonable assurance to the Bank's management and Board of Directors
regarding the preparation of reliable published financial statements as of
December 31, 1998, included in the accompanying management report.

Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal control structure, and such other procedures as we considered necessary
in the circumstances. We believe that our examination provides a reasonable
basis for our opinion.

Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assertions that The Farmers & Merchants State Bank
maintained a system of internal control over financial reporting which is
designed to provided reasonable assurance to the Bank's management and Board of
Directors regarding the preparation of reliable published financial statements
as of December 31, 1998, is fairly stated, in all material respects, based upon
criteria established in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).



                                                   /S/ KROUSE, KERN & CO., INC.

                                                       KROUSE, KERN & CO., INC.




                                      -36-
<PAGE>   63


                  [FARMERS & MERCHANTS STATE BANK LETTERHEAD]


                                MANAGEMENT REPORT
                             as of December 31, 1998




FINANCIAL STATEMENTS

Management of The Farmers & Merchants State Bank is responsible for the
preparation, integrity and fair presentation of its published financial
statements as of December 31, 1998, and for the year then ended. The financial
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts, some of which are based on judgments
and estimates of management.

INTERNAL CONTROLS

Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.

There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.

Management assessed its internal control structure over financial reporting as
of December 31, 1998. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that The
Farmers & Merchants State Bank maintained an effective internal control
structure over financial reporting as of December 31, 1998.

DESIGNATED LAWS

Management is also responsible for compliance with the federal and state laws
and regulations relating to safety and soundness, including those designated
laws and regulations regarding dividend restrictions and loans to insiders.
Based on our assessment, management believes The Farmers & Merchants State Bank
complied in all material respects, with those designated laws and regulations
for the year ended December 31, 1998.







                                      -37-
<PAGE>   64
                       FARMERS & MERCHANTS BANCORP, INC.

                     SELECTED FINANCIAL DATA BY MANAGEMENT


<TABLE>
<CAPTION>
Key Ratios:    
                               1998      1997      1996      1995      1994
                              ------    ------    ------    ------    ------
<S>                           <C>       <C>       <C>       <C>       <C>
Return on average equity      14.46%    14.56%    13.21%    13.93%    15.12%
Return on average assets       1.38%     1.33%     1.14%     1.23%     1.28%
Loan to deposit ratio         78.33%    86.31%    84.15%    84.06%    87.55%
Capital to assets ratio        9.45%     9.25%     8.65%     8.54%     8.51%

</TABLE>

                    [GRAPH 1]                     [GRAPH 2]
 
           [Return on average equity]    [Return on average assets]



                    [GRAPH 3]                     [GRAPH 4]

             [Loan to deposit ratio]      [Capital to assets ratio]



                                      -38-





      
      
      
      
      
      

<PAGE>   65
                       FARMERS & MERCHANTS BANCORP, INC.
                     SELECTED FINANCIAL DATA BY MANAGEMENT

Other key selected highlights are depicted in the following graphs:

<TABLE>
<CAPTION>

                                    1998           1997            1996            1995           1994    
                                 ---------      ---------       ---------       ---------       ---------
<S>                              <C>            <C>             <C>             <C>             <C>
Loans                            $ 401,192      $ 397,295       $ 368,900       $ 339,614       $ 301,522
Total Assets                       585,869        528,273         501,449         464,090         406,186
Shareholders' Equity                55,350         48,844          43,381          39,621          34,586
Interest Income                     42,888         40,158          38,382          34,228          27,779
Interest Expense                    22,085         21,139          20,905          17,749          12,561
Net Interest                        20,803         19,019          17,477          16,479          15,218
Other Expense                        8,841          8,096           8,614           8,594           7,940
Federal Income Tax                   3,413          3,035           2,312           2,203           1,749
Net Income                           7,657          6,777           5,483           5,297           4,965
Net Income per Share                  5.89           5.22            4.22            4.07            3.82
Dividends per Share                   1.40           1.25            1.15            1.10            1.00

</TABLE>

                 [GRAPH 5]                                [GRAPH 6]

  [Shareholders' Equity/Loans/Total Assets]   [Interest Expense/Interest Income]




                 [GRAPH 7]                                [GRAPH 8]

 [Federal Income Tax/Net Income/Other Expense]       [Dividends per Share/
                                                     Net Income per Share]



                                      -39-
<PAGE>   66




                           1998 ANNUAL REPORT PHOTOS


                  OFFICERS REPRESENT BANK AT ANNUAL MEETING




Seated from left: Rex Rice, EVP/Chief Lending Officer; Joe Crossgrove, Pres. &
CEO; Edward Leininger, EVP/Commercial Loan Officer; Second row from left:
Richard Ernest, AC/Commercial Loan Officer; Debra Kauffman, AC/Consumer Loan
Officer; Joyce Kinsman, AC/Loan Review Officer; Barbara Britenriker,
VP/Comptroller & CFO; Judith Warncke, AC/Marketing Officer; Marilyn Johnson,
AC/Compliance & CRA Officer; George Jelen, AVP/Sec. Market Officer & Loan
Underwriter; Diann Meyer, Asst. VP/Human Resource Officer; Kent Roth, Auditor &
Security Officer; Randy Schroeder, AVP/Chief Operations Officer; Michael Culler,
AVP/Chief Agri Finance Officer; Richard Bruce, AVP/Commercial Loan Officer

















                WAUSEON SHOOP OFFICE CELEBRATES 25TH ANNIVERSARY

   Allen Lantz, VP/Wauseon Shoop Manager, and Gloria Gunn, AVP/Asst. Manager,
               Serving refreshments during anniversary celebration





                                      -40-
<PAGE>   67



                            WAUSEON DOWNTOWN OFFICES
                               SERVES SUNDAES FOR
                          20TH ANNIVERSARY CELEBRATION

                   Kim Armstrong, Virginia Garrow and Melissa
                Robertson, Downtown office tellers, enjoying the
                   celebration by serving ice cream sundaes.




                             OPEN HOUSE AT ARCHBOLD
                                WOODLAND OFFICE

                          Deborah Stoner, AVP/Woodland
                       Manager, offers a big balloon to a
                        shy guest during the annual open
                               house celebration.




                            F & M IS BRANCHING OUT
                   The Swanton Banking Center sign announces
               the F & M's future presence in the Swanton area.

                          RONALD ROBINSON RETIRES FROM
                             STRYKER ADVISORY BOARD

                      Charles Lugbill, Chairman (left), and
                   Ronald Short, AVP/Stryker Manager (right),
                      present appreciation plaque to Ronald
                    Robinson for his many years of service on
                           the Stryker Advisory Board.






                                      -41-

<PAGE>   68



                   F & M SUPPORTS WILLIAMS CO. BEEF PRODUCERS

            Lewis Hilkert, VP/West Unity Manager, (right) along with
              West Unity Advisory Board Members, Burdell Colon and
             Ted Maneval, enjoying their shift at the Beef Producers
                     booth during the Williams County Fair.







                           BRYAN OFFICES SUPPORT BRYAN
                          ATHLETIC FIELD HOUSE PROJECT

                  Michael Smith, AC/ Bryan SouthTowne Manager,
          watches as David Frazer, AVP/Bryan E. High Manager, presents
                     check to Tom Sprow, (center) member of
                Athletic Boosters field house steering committee.





                               DELTA OPEN HOUSE -
                              A TIME FOR FELLOWSHIP

                     From left, Delta Advisory Board Member
                     Al Kreuz and Barry Gray, AC/Delta Asst.
                        Manager, visiting with Char Kreuz
                               at the gift table.




                                      -42-
<PAGE>   69
                     MONTPELIER EMPLOYEES PARTICIPATE IN
                            SUMMERFEST "BED" RACE
                                      
                                      
              Montpelier West Main Teller, Roxanne Chamberlain,
                and her daughter team up with Molly Startzman,
              Montpelier Eastside Secretary, and Lance Nofziger,
           Montpelier West Main Manager for the annual "Bed" Race.
                                      
                                      
                         F & M TAKES THE BANK TO THE
                              HENRY COUNTY FAIR
                                      
                   Steve Jackson, AVP/Napoleon Manager, and
                 Diana Dennie, AC/Asst. Manager, ensuring the
                     ATM is ready for the Henry Co. Fair.
                                      
                                      
                             MONTPELIER EASTSIDE
                                RIBBON CUTTING
                                      
                    Joe Crossgrove, Pres & CEO, (far left)
                     along with Directors, Advisory Board
                        Members, Village of Montpelier
                       Officials, Montpelier Chamber of
                      Commerce Representative and F & M
                      officers and employees watch while
                      John Fee, AVP/Montpelier Eastside
                   Manager, cuts the ribbon at the opening
                           of the Eastside Office.
                                      





                                     -43-
<PAGE>   70
    
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         No disagreements exist on accounting and financial disclosures or
         related matters.

         No change of accountants has been made since 1982.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                               BOARD OF DIRECTORS

              The information called for herein is presented below:

<TABLE>
<CAPTION>
                                                                                                 Year First
                                                     Principal Occupation or                      Became
     Name                       Age               Employment for Past Five Years                  Director
----------------                ---            ----------------------------------                ----------      
<S>                              <C>          <C>                                                  <C> 
Charles Lugbill                     71         Chairman of the Board of Farmers                    1968
                                                 and Merchants Bancorp, Inc. and,
                                                 The Farmers & Merchants State
                                                 Bank

Eugene Bernath                      65         Farmer                                              1978

Jerry L. Boyers                     65         President, Edifice Construction                     1976
                                                 Management

Joe E. Crossgrove                   62         President, Chief Executive Officer                  1992
                                                 The Farmers & Merchants State
                                                 Bank

Robert G. Frey                      58         President, E. H. Frey & Sons, Inc.                  1987

Lee E. Graffice                     67         President, Graffice Motor Sales                     1983

Jack C. Johnson                     46         President, Hawk's Clothing, Inc.                    1991
                                                 Partner, REJO Partnership

Dean E. Miller                      54         President, MBC Holdings, Inc.                       1986

Dale L. Nafziger                    68         Retired                                             1969

Harold H. Plassman                  69         Attorney, Plassman, Rupp, Hensel                    1985
                                                 & Short

James L. Provost                    70         Retired, Dyer & McDermott, Inc.                     1995

James C. Saneholtz                  52         President, Saneholtz-McKarns, Inc.                  1995
`
Maynard Sauder                      66         President, Sauder Woodworking Co.                   1980

Merle J. Short                      58         Farmer, President of Promow, Inc.                   1987

Steven J. Wyse                      54         President, Granite Industries, Inc.                 1991
</TABLE>




                                      -25-
<PAGE>   71



                               EXECUTIVE OFFICERS
<TABLE>
<CAPTION>


                                                         Principal Occupation
      Name                      Age                     for Past Five Years
------------------              ---                     ------------------------   

<S>                             <C>           <C>
Charles Lugbill                 71             Secretary/Treasurer Agri Trading
                                                 Chairman of the Board of Farmers
                                                 & Merchants Bancorp, Inc. and,
                                                 The Farmers & Merchants State
                                                 Bank

Joe E. Crossgrove               62             President, Chief Executive Officer
                                                 The Farmers & Merchants State
                                                 Bank (since 1991) Executive Vice
                                                 President and Treasurer of Farmers
                                                 & Merchants Bancorp, Inc.
                                                 Director and Vice President of Farmers
                                                 & Merchants Life Insurance Co.

Rex D. Rice                     39             Vice President
                                               Chief Lending Officer

Edward Leininger                41             Vice President
                                               Commercial Loan Officer

Allen G. Lantz                  45             Vice President
                                               Branch Manager

Lewis Hilkert                   48             Vice President
                                               Branch Manager

Carol England                   58             Assistant Vice President
                                               Corporate Secretary
                                               Branch Manager

Ronald D. Short                 46             Assistant Vice President
                                               Branch Manager

Cynthia Knauer                  52             Assistant Vice President
                                               Branch Manager

Dave Frazier                    40             Assistant Vice President
                                               Branch Manager

John Fee                        38             Assistant Vice President
                                               Branch Manager

Steve Jackson                   44             Assistant Vice President
                                               Branch Manager

Deborah Stoner                  42             Assistant Vice President
                                               Branch Manager
</TABLE>


                                      -26-
<PAGE>   72

<TABLE>


<S>                             <C>           <C>
Randal H. Schroeder             38             Assistant Vice President
                                               Chief Operations Officer

George Jelen                    47             Assistant Vice President
                                               Mortgage Loan Officer

Barbara Britenriker             37             Assistant Vice President
                                               Chief Financial Officer
                                               Comptroller

Michael D. Culler               40             Assistant Vice President
                                               Chief Agricultural Finance Officer

Diann K. Meyer                  38             Assistant Vice President
                                               Personnel Manager

Gloria Gunn                     41             Assistant Vice President
                                               Assistant Branch Manager

Richard Bruce                   51             Assistant Vice President
                                               Commercial Loan Officer

Kent Roth                       34             Auditor
                                               Bank Security Officer
                                               Bank Secrecy Officer

Marilyn Johnson                 42             Compliance Officer

Jean Horwath                    47             Assistant Cashier
                                               Assistant Branch Manager

Diane Swisher                   41             Assistant Cashier
                                               Assistant Branch Manager

Patti Rosebrock                 41             Assistant Cashier
                                               Assistant Branch Manager

Michael T. Smith                32             Assistant Cashier
                                               Branch Manager

Debra Kauffman                  38             Assistant Cashier
                                               Assistant Corporate Secretary
                                               Consumer Loan Officer

J. Scott Miller                 42             Assistant Cashier
                                               Assistant Agri-Finance Officer

Judy Warncke                    50             Assistant Cashier
                                               Marketing Officer

Diana Dennie                    36             Assistant Cashier
                                               Branch Manager

</TABLE>




                                      -27-
<PAGE>   73
<TABLE>

<S>                             <C>           <C>
Jerry Borton                    49             Assistant Cashier
                                               Loan Officer

Joyce G. Kinsman                29             Assistant Cashier
                                               Loan Review Officer

Richard D. Ernest               34             Assistant Cashier
                                               Asset Recovery Officer

Jane Bruner                     38             Assistant Cashier
                                               Operations Supervisor

Barry Gray                      38             Assistant Cashier
                                               Assistant Branch Manager

Kevin Gray                      26             Assistant Cashier
                                               Assistant Branch Manager
</TABLE>






                                      -28-
<PAGE>   74



ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS

         The information called for herein is presented in the proxy statement
to be furnished in connection with the solicitation of proxies on behalf of the
Board of Directors of the Registrant for use at its Annual Meeting to be held on
April 10, 1999 is incorporated herein by reference.

         The directors of Farmers & Merchants Bancorp, Inc. are also the
directors of The Farmers & Merchants State Bank and Farmers & Merchants Life
Insurance Co.

         The Board of Directors met twenty-six times during the 1998 calendar
year. All current directors of the Corporation attended at least seventy-five
percent of the meetings of the Board. Average attendance at Board meetings held
during the year was ninety percent.

         Directors received, as directors' fees, $300 for each board meeting,
plus a bonus of $600 for 1998.

         The Subsidiary Bank Board of Directors met semi-monthly during 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information called for herein is presented in the proxy statement
to be furnished in connection with the solicitation of proxies on behalf of the
Board of Directors of the Registrant for use at its Annual Meeting to be held
Saturday, April 10, 1999, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND OTHER

         There are no transactions to report.

CERTAIN BUSINESS RELATIONSHIPS

         No family relationships exist between any executive officers of the
Bank.

LOANS TO RELATED PARTIES

         This information is presented on page 18, Note 4 of the Annual Report
to shareholders, and is incorporated herein by reference.

CERTAIN BUSINESS RELATIONSHIPS

         The company retained the law firm of Plassman, Rupp, Hensal and Short
in 1988. One of the principals, Harold Plassman, is a member of the Board of
Directors. During 1998 the company paid fees to Plassman, Rupp, Hensal and Short
for routine legal services. It is the company's intention to retain the law firm
in 1999.





                                      -29-
<PAGE>   75



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K


<TABLE>
<CAPTION>

         (a)      The following documents are filed as part of this report:

                                                                                               Annual Report
                                                                                               -------------
<S>                       <C>                                                                  <C>                         
                  (1)      Financial Statements
                           Report of Independent Accountants                                     Page 6
                           Consolidated Balance Sheets                                           Page 7
                           Consolidated Statements of Income                                     Page 8
                           Consolidated Statements of Changes in
                           Shareholders' Equity                                                  Page 9
                           Consolidated Statements of Cash Flows                                 Page 10
                           Notes to Consolidated Financial Statements                            Pages 11 - 31
                  (2)      Financial Statement Schedules
                           Independent Auditors' Report on Additional
                           Information                                                           Page 32
                           Five Year Summary of Operations                                       Pages 33 - 35
                  (3)      Other Information
                           Trading Market for the Company's Stock                                Page 34
                           Selected Financial Data by Management                                 Page 35
                           Independent Auditors' Report                                          Page 36
                           Management Report                                                     Page 37
                           Selected Financial Data by Management                                 Pages 38 - 39
                           1998 Annual Report Photos                                             Pages 40 - 43
                  (4)      Exhibits
                           (3.1)    Articles of Incorporation have been
                                    submitted with previous 10-K reports.
                           (13.1)   1998 Annual Report to Shareholders (contained herein)
                           (23.1)   Notice of Annual Meeting and Proxy Statement
         (b)      Reports on Form 8-K
                  None
         (c)      Exhibits required by Item 601.
                  None required
         (d)      Schedules required by Regulation S-X
                  The Condensed Financial Information of the Registrant required
                  by this report are included in the Annual Report to
                  Shareholders, Note 18, pages 26 through 29.
         (e)      Signatures                                                                     Page 33
         (f)      Exhibit 27 Financial Data Schedule                                             Page 34 - 35

                  Other schedules required to be filed as part of this report.
                                                                                                    Form 10-K
                                                                                                    ---------
                  Schedule of Property and Equipment                                                 Page 31
                  Schedule of Accumulated Depreciation - Property and Equipment                      Page 32

</TABLE>



                                      -30-
<PAGE>   76



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K




                       SCHEDULE OF PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>

                                                                                                          EXHIBIT 1

                                                                           Year Ended December 31, 1998
                                                          ----------------------------------------------------------------- 
                                                           Beginning                                            Ending
(In Thousands)                                              Balance         Additions        Retirements        Balance
                                                          -------------    -------------     -----------      -------------
<S>                                                       <C>              <C>               <C>              <C>          
Land                                                      $       1,472    $         209     $           0    $       1,681
Building                                                          7,398              676                44            8,030
Banking house equipment                                           4,606            1,827               566            5,867
                                                          -------------    -------------     -------------    -------------

                                                          $      13,476    $       2,712     $         610    $      15,578
                                                          =============    =============     =============    =============

                                                                           Year Ended December 31, 1997
                                                          -----------------------------------------------------------------    
                                                           Beginning                                            Ending
(In Thousands)                                              Balance         Additions        Retirements        Balance
                                                          -------------    -------------     -----------      -------------
Land                                                      $       1,228    $         244     $           0    $       1,472
Building                                                          7,137              261                 0            7,398
Banking house equipment                                           4,333              284                11            4,606
                                                          -------------    -------------     -------------    -------------

                                                          $      12,698    $         789     $          11    $      13,476
                                                          =============    =============     =============    =============

                                                                           Year Ended December 31, 1996
                                                          -----------------------------------------------------------------    
                                                           Beginning                                            Ending
(In Thousands)                                              Balance         Additions        Retirements        Balance
                                                          -------------    -------------     -----------      -------------
Land                                                      $       1,120    $         108     $           0    $       1,228
Building                                                          6,475              662                 0            7,137
Banking house equipment                                           4,074              414               155            4,333
                                                          -------------    -------------     -------------    -------------

                                                          $      11,669    $       1,184     $         155    $      12,698
                                                          =============    =============     =============    =============
</TABLE>







                                      -31-
<PAGE>   77



          SCHEDULE OF ACCUMULATED DEPRECIATION - PROPERTY AND EQUIPMENT



<TABLE>
<CAPTION>
                                                                                                          EXHIBIT 2

                                                                           Year Ended December 31, 1998
                                                          -----------------------------------------------------------------  
                                                           Beginning      Provision for                         Ending
(In Thousands)                                              Balance       Depreciation       Retirements        Balance
                                                          -------------   --------------     -----------      -------------
<S>                                                       <C>              <C>               <C>              <C>          
Building                                                  $       2,234    $         216     $          44    $       2,406
Banking house equipment                                           3,577              727               562            3,742
                                                          -------------    -------------     -------------    -------------

                                                          $       5,811    $         943     $         606    $       6,148
                                                          =============    =============     =============    =============

                                                                           Year Ended December 31, 1997
                                                          -----------------------------------------------------------------    
                                                           Beginning      Provision for                         Ending
(In Thousands)                                              Balance       Depreciation       Retirements        Balance
                                                          -------------   --------------     -----------      -------------
Building                                                  $       2,022    $         212     $           0    $       2,234
Banking house equipment                                           3,100              488                11            3,577
                                                          -------------    -------------     -------------    -------------

                                                          $       5,122    $         700     $          11    $       5,811
                                                          =============    =============     =============    =============

                                                                           Year Ended December 31, 1996
                                                          -----------------------------------------------------------------    
                                                           Beginning      Provision for                         Ending
(In Thousands)                                              Balance       Depreciation       Retirements        Balance
                                                          -------------   --------------     -----------      -------------
Building                                                  $       1,814    $         208     $           0    $       2,022
Banking house equipment                                           2,657              590               147            3,100
                                                          -------------    -------------     -------------    -------------

                                                          $       4,471    $         798     $         147    $       5,122
                                                          =============    =============     =============    =============
</TABLE>




                                      -32-
<PAGE>   78



Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.

                                      Farmers & Merchants Bancorp, Inc.

                                      By: Joe E. Crossgrove        Date: 3-19-99
                                          -----------------------       --------
                                      Joe E. Crossgrove
                                      Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


<TABLE>
<S>                                     <C>                     <C>                                <C>                  
/s/ Joe E. Crossgrove                     Date: 3-19-99           /s/ Barbara Britenriker            Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Joe E. Crossgrove, Director                                       Barbara Britenriker
Chief Executive Officer                                           Chief Accounting Officer


/s/ Charles Lugbill                       Date: 3-19-99           /s/ Kent Roth                      Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Charles Lugbill                                                   Kent Roth, Auditor
Director and Chairman

/s/ Eugene D. Bernath                     Date: 3-19-99           /s/ Harold H. Plassman             Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Eugene D. Bernath, Director                                       Harold H. Plassman, Director


/s/ Jerry Boyers                          Date: 3-19-99           /s/ James Provost                  Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Jerry Boyers, Director                                            James Provost, Director


/s/ Robert Frey                           Date: 3-19-99           /s/ James Saneholtz                Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Robert Frey, Director                                             James Saneholtz, Director


Lee Grafice                               Date: 3-19-99           /s/ Maynard Sauder                 Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Lee Grafice, Director                                             Maynard Sauder, Director


/s/ Jack C. Johnson                       Date: 3-19-99           /s/ Merle J. Short                 Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Jack C. Johnson, Director                                         Merle J. Short, Director


/s/ Dean Miller                           Date: 3-19-99           /s/ Steven J. Wyse                 Date: 3-19-99
---------------------------                    -----------        -----------------------------            -----------   
Dean Miller, Director                                             Steven J. Wyse, Director


/s/ Dale L. Nafziger                      Date: 3-19-99
---------------------------                    -----------
Dale L. Nafziger, Director



</TABLE>





                                      -33-
<PAGE>   79



                               INDEX TO EXHIBITS




EXHIBIT NO.                        DESCRIPTION
-----------                        -----------------------
   27                              FINANCIAL DATA SCHEDULE