<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, 1997
                                       or
                Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                        For the transition period from to
                         Commission File Number 0-14492
                        FARMERS & MERCHANTS BANCORP, INC.


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

307-11 North Defiance Street
         Archbold, Ohio                                        43502
----------------------------                            ------------------
      (Address of principal                                  (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:

                        Common6 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, 1998, Registrant had outstanding 1,300,000 shares of common stock
at a market value of $84,500,000. 



<PAGE>   2
                        FARMERS & MERCHANTS BANCORP, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>


                                                                                 PAGE
Form 10-K Items
<S>               <C>                                                         <C>
Item 1.           Business                                                     1 - 15

Item 2.           Properties                                                       16

Item 3.           Legal Proceedings                                                17

Item 4.           Submission of Matters to a Vote
                  of Security Holders                                              17

Item 5.           Market for Registrant's Common Equity
                  and Related Stockholder Matters                                  17

Item 6.           Selected Financial Data                                          17

Item 7.           Management's Discussion and Analysis
                  of Financial Condition and Results
                  of Operations                                               17 - 22

Item 8.           Financial Statements and Supplementary Data                 23 - 59

Item 9.           Disagreements on Accounting and
                  Financial Disclosure                                             60

Item 10.          Directors and Executive Officers
                  of the Registrant                                           60 - 63

Item 11.          Management Remuneration and Transactions                         64

Item 12.          Security Ownership of Certain
                  Beneficial Owners and Management                                 64

Item 13.          Certain Relationships and Related
                  Transactions                                                     64

Item 14.          Financial Schedules and Reports on Form 8-K                      65
                  Schedule 1 - Schedule of Property and Equipment                  66
                  Schedule 2 - Schedule of Accumulated Depreciation -
                                 Property and Equipment                            67

Signatures                                                                         68

Financial Data Schedule                                                            70

Total Pages:                                                                       70

</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.

                                    - 1 -
<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.


                                    - 2 -
<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. 



                                    - 3 -
<PAGE>   6

NATURE OF ACTIVITIES

         The Farmers & Merchants State Bank through its equivalent of 199 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.



                                    - 4 -
<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>


                                    - 5 -

<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

The following table presents the distribution of assets and analysis of net
interest earnings (dollars in thousands):


<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>


                                      - 6 -

<PAGE>   9
<TABLE>
<CAPTION>
                                                          ASSETS
                                                                                1996
                                                           ------------------------------------------
                                                                             Interest
                                                           Average             and             Yield/
                                                           Balance           Dividend           Rate
                                                           -------           --------           ----
<S>                                                     <C>              <C>                 <C>
Interest earning Assets:
    Loans (1)                                            $     358,261     $      32,353          9.03%
    Taxable investment securities                               75,051             4,556          6.07
    Tax-exempt investment securities                            21,223             1,109          5.23
    Interest bearing deposits with other banks                     100                 7          7.00
    Federal funds sold and securities
      purchased under agreement to resell                        6,613               357          5.40
                                                         -------------     -------------
Total Interest Earning Assets                                  461,248     $      38,382          8.32%
                                                                           =============    ==========
Non-interest Earnings Assets:
    Cash and due from banks                                     13,086
    Other assets                                                15,895
                                                         -------------
                                                         $     490,229
                                     LIABILITIES AND SHAREHOLDERS' EQUITY    
Interest Bearing Liabilities:
    Savings deposits                                     $     117,734     $       4,525          3.84%
    Other time deposits                                        258,446            15,418          5.97
    Other borrowed money                                         9,411               594          6.31
    Federal funds purchased and securities
      sold under agreement to repurchase                         6,522               368          5.64
                                                         -------------     -------------
Total Interest Bearing Liabilities                             392,113     $      20,905          5.33%
                                                                           =============    ==========
Non-interest Bearing Obligations:
    Non-interest bearing deposits                               50,580
    Other                                                        5,700
                                                         -------------
    Total Liabilities                                          448,393
    Stockholders' Equity                                        41,836
                                                         -------------
    Total Liabilities and Stockholders' Equity           $     490,229
                                                         =============
    Interest and dividend income/yield                                     $      38,382          8.32%
    Interest expense/rate                                                         20,905          5.33
                                                                           -------------    ----------
    Net Interest spread                                                    $      17,477          2.99%
                                                                           =============    ==========
    Net interest margin                                                                           3.79%
                                                                                            ==========

</TABLE>


                                      - 7 -

<PAGE>   10
<TABLE>
<CAPTION>

                                                           ASSETS
                                                                                1995
                                                           -----------------------------------------
                                                                             Interest
                                                           Average             and            Yield/
                                                           Balance           Dividend           Rate
                                                           -------           --------           ----
<S>                                                     <C>               <C>                <C>
Interest earning Assets:
    Loans (1)                                            $     324,239     $      29,561          9.12%
    Taxable investment securities                               55,383             3,153          5.69
    Tax-exempt investment securities                            16,689             1,041          6.24
    Interest bearing deposits with other banks                     526                 3           .65
    Federal funds sold and securities
      purchased under agreement to resell                        8,394               470          5.60
                                                         -------------     -------------

Total Interest Earning Assets                                  405,231     $      34,228          8.45%
                                                                           =============    ==========

Non-interest Earning Assets:
    Cash and due from banks                                     11,565
    Other assets                                                13,508
                                                         -------------
                                                         $     430,304
                                                         =============
                                       LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
    Savings deposits                                     $      81,891     $       3,931          4.80%
    Other time deposits                                        253,165            12,810          5.06
    Other borrowed money                                        10,091               637          6.32
    Federal funds purchased and securities
      sold under agreement to repurchase                         6,019               371          6.16
                                                         -------------     -------------

Total Interest Bearing Liabilities                             351,166     $      17,749          5.05%
                                                                           =============    ==========

Non-interest Bearing Obligations:
    Non-interest bearing deposits                               38,112
    Other                                                        2,992
                                                         -------------
    Total Liabilities                                          392,270

    Stockholders' Equity                                        38,034
                                                         -------------
    Total Liabilities and Stockholders' Equity           $     430,304
                                                         =============

    Interest and dividend income/yield                                     $      34,228          8.45%
    Interest expense/rate                                                         17,749          5.05
                                                                           -------------    ----------

    Net interest spread                                                    $      16,479          3.40%
                                                                           =============    ==========

         Net interest margin                                                                      4.07%
                                                                                            ==========

</TABLE>

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

                                    - 8 -

<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>


                                                                             1997 - 1996
                                                           ------------------------------------------------
                                                                                  Increase (Decrease)
                                                            Increase            Attributable Changes in
                                                           (Decrease)           ------------------------
                                                           in Interest          Volume              Rate
                                                           -----------          ------              ----
<S>                                                      <C>              <C>               <C>
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
                                                          =============    =============     =============


                                                                             1996 - 1995
                                                          ------------------------------------------------
Interest Earned On:
     Loans                                                $       2,792    $       3,072     $        (280)
     Taxable investment securities                                1,403            1,194               209
     Tax-exempt investment securities                                68              236              (168)
     Interest bearing deposits with other banks                       4              (30)               34
     Federal funds sold and securities purchased
       under agreements to resell                                  (113)             (96)              (17)
                                                          -------------    -------------     -------------

     Total Interest Earnings Assets                       $       4,154    $       4,376     $        (222)
                                                          =============    =============     =============

     Interest Paid On:
         Savings deposits                                 $         594    $       1,378     $        (784)
         Other time deposits                                      2,608              314             2,294
         Other borrowed                                             (43)             (42)               (1)
         Federal funds purchased and securities
           sold under agreements to repurchase                       (3)              28               (31)
                                                          -------------    -------------     -------------

           Total Interest Bearing Liabilities             $       3,156    $       1,678     $       1,478
                                                          =============    =============     =============
</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.


                                     - 9 -

<PAGE>   12

INVESTMENT PORTFOLIO

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

<TABLE>
<CAPTION>

                                                               1997             1996              1995
                                                          -------------    -------------     --------------
<S>                                                      <C>              <C>               <C>
U. S. Treasury and other U. S. Government
   agencies                                               $      44,695    $      51,737     $      45,556
State and political subdivisions                                 25,617           21,678            19,926
Mortgage-backed securities                                        8,991            8,986             8,438
Obligations of domestic corporations                             10,327           17,065             8,689
Stocks of domestic corporations                                   2,420            2,255             2,106
                                                          -------------    -------------     -------------

Total                                                     $      92,050    $     101,721     $      84,715
                                                          =============    =============     =============
</TABLE>


         The following table sets forth (dollars in thousands) the maturities of
investment securities at December 31, 1997 and the weighted average yields of
such securities calculated on the basis of the cost and effective yields
weighted for the scheduled maturity of each security. Tax-equivalent
adjustments, using a thirty-four percent rate, have been made in yields on
obligations of state and political subdivisions. Stocks of domestic corporations
have not been included.

<TABLE>
<CAPTION>

                                                                     Maturities
                                          --------------------------------------------------------------
                                                                                    After One Year
                                              Within One Year                     Within Five Years
                                              --------------                      -----------------
                                           Amount             Yield           Amount             Yield
                                           ------             -----           ------             -----
<S>                                    <C>                   <C>          <C>                   <C>
U. S. Treasury and other U. S.
   Government agencies                  $      11,748          5.74%       $      39,052          6.28%
State and political subdivisions                1,495          9.94                7,860          8.21
Taxable state and political
   subdivisions                                   531          6.32                1,245          6.62
Obligations of domestic
   corporations                                 2,034          5.93                8,249          6.44

<CAPTION>
                                                                     Maturities
                                          --------------------------------------------------------------
                                              After Five Years
                                              Within Ten Years                     After Ten Years
                                              ----------------                     ---------------
                                           Amount             Yield           Amount             Yield
                                           ------             -----           ------             -----
<S>                                    <C>                   <C>          <C>                   <C>
U. S. Treasury and other U. S.
   Government agencies                  $         745          6.72%       $       1,788          6.37%
State and political subdivisions                5,404          8.61                7,530          9.77
Taxable state and political
   subdivisions                                     0           .00                  433          5.75
Obligations of domestic
   corporations                                     0           .00                    0           .00

</TABLE>


         At December 31, 1997 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 $2.9 million dollars. The
bank did hold stock in the Federal Home Loan Bank of Cincinnati at a cost of
$2.4 million. This is required in order to obtain Federal Home Loan Bank loans.


                                     - 10 -

<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>

                                                               1997             1996              1995
                                                          -------------    -------------     ------------
<S>                                                      <C>              <C>               <C>
Loans:
     Commercial and industrial                            $      65,633    $      67,763     $      58,987
     Agricultural                                                44,939           41,195            41,328
     Real estate - mortgage                                     205,626          195,043           173,302
     Installment                                                 75,767           63,199            61,021
     Commercial paper                                             7,837            3,959             7,604
     Industrial Development Bonds                                 4,511            3,670             3,336
                                                          -------------    -------------     -------------

     Total Loans                                          $     404,313    $     374,829     $     345,578
                                                          =============    =============     =============

                                                                                1994              1993
                                                                           -------------     -------------
Loans:
     Commercial and industrial                                             $      65,848     $      58,155
     Agricultural                                                                 29,586            29,527
     Real estate - mortgage                                                      145,576           118,164
     Installment                                                                  62,462            53,414
     Commercial paper                                                              2,019             5,270
     Industrial Development Bonds                                                  1,826             2,222
                                                                           -------------     -------------

     Total Loans                                                           $     307,317     $     266,752
                                                                           =============     =============

</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)              $     103,392     $       3,990    $       3,190     $     110,572
Real estate - mortgage                        117,668            62,064           25,894           205,626
Consumer                                       39,352            27,056            9,359            75,767
Commercial paper                                7,837                 0                0             7,837
Industrial Development Bonds                    1,680             1,373            1,458             4,511
                                        -------------     -------------    -------------     -------------

Total                                   $     269,929     $      94,483    $      39,901     $     404,313
                                        =============     =============    =============     =============

</TABLE>


         In regard to loans maturing after one year, information was not
available which would enable the categorization of such as to those loans having
fixed interest rates and those having variable interest rates.


                                     - 11 -

<PAGE>   14

NONACCRUAL PAST DUE AND RESTRUCTURED  LOANS

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

<TABLE>
<CAPTION>

                                                               1997             1996              1995
                                                          -------------    -------------     -------------
<S>                                                      <C>              <C>               <C>
Nonaccrual loans                                          $       2,890    $       3,489     $       3,494
Accruing loans past due 90 days or more                           1,396            1,899             2,698
                                                          -------------    -------------     -------------
                                                          $       4,286    $       5,388     $       6,192
                                                          =============    =============     =============

                                                                               1994              1993
                                                                           -------------     -------------
Nonaccrual loans                                                           $       2,681     $       3,264
Accruing loans past due 90 days or more                                            2,601             2,226
                                                                           -------------     -------------
                                                                           $       5,282     $       5,490
                                                                           =============     =============

</TABLE>

         As of December 31, 1997, 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 $324 thousand for the year 1997. Any collections of
interest on nonaccrual loans are included in interest income when collected.
This amounted to $402 thousand for 1997.

         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 $2.8 million of nonaccrual loans are secured at December 31, 1997.

POTENTIAL PROBLEM LOANS:

         At December 31, 1997, the Bank has $4.3 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, 1997.

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, 1997, the Bank had loans outstanding to individuals and
firms engaged in the various fields of agriculture in the amount of $44.9
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.


                                     - 12 -

<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, 1997:

<TABLE>
<CAPTION>


                                                               1997             1996              1995
                                                          -------------    -------------     -------------
<S>                                                      <C>              <C>               <C>
Loans                                                     $     404,313    $     374,829     $     345,577
                                                          =============    =============     =============
Daily average of loans outstanding                        $     384,498    $     358,261     $     324,239
                                                          =============    =============     =============
Allowance for loan losses --
   beginning of year                                      $       5,500    $       5,500     $       5,500
Loans Charged Off:
     Commercial                                                     263              623               748
     Installment                                                  1,239            1,053               691
     Real estate mortgage                                            29               35                40
                                                          -------------    -------------     -------------
                                                                  1,531            1,711             1,479
                                                          -------------    -------------     -------------

Loan Recoveries:
     Commercial                                                     384              197               584
     Installment                                                    364              443               426
     Real estate mortgage                                            22                3                84
                                                          -------------    -------------     -------------

                                                                    770              643             1,094
                                                          -------------    -------------     -------------

Net loans charged off                                               761            1,068               385

Provision for loan loss                                           1,111            1,068               385
                                                          -------------    -------------     -------------

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

Ratio of net charge-offs to average loans
   outstanding                                                      .20%             .30%              .12%
                                                          =============    =============     =============
</TABLE>


                                     - 13 -

<PAGE>   16
<TABLE>
<CAPTION>

                                                                                1994              1993
                                                                           -------------     -------------
<S>                                                                       <C>               <C>
Loans                                                                      $     307,317     $     266,752
                                                                           =============     =============

Daily average of loans outstanding                                         $     277,729     $     244,774
                                                                           =============     =============

Allowance for loan losses --
   beginning of year                                                       $       5,000     $       4,775

                                                                                1994              1993
                                                                           -------------     -------------
Loans Charged Off:
     Commercial                                                                      602               706
     Installment                                                                     569               552
     Real estate mortgage                                                              0                38
                                                                           -------------     -------------

                                                                                   1,171             1,296
                                                                           -------------     -------------

Loan Recoveries:
     Commercial                                                                      729               266
     Installment                                                                     311               335
     Real estate mortgage                                                             67                12
                                                                           -------------     -------------

                                                                                   1,107               613
                                                                           -------------     -------------

Net loans charged off                                                                 64               683

Provision for loan loss                                                              564               908
                                                                           -------------     -------------

Allowance for Loan Loss-- End of Year                                      $       5,500     $       5,000
                                                                           =============     =============

Ratio of net charge-offs to average loans outstanding                                .20%              .28%
                                                                           =============     =============

         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
     Commercial and industrial                                             $       1,650          28.21%
     Installment                                                                   1,131          19.33%
     Real estate                                                                   3,069          52.46%

                                                                           $       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.


                                     - 14 -

<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, 1997:                 Deposits         Accounts           Accounts          Accounts
---------------------------         -------------     -------------     -------------        ---------
<S>                                  <C>             <C>                <C>              <C>
     Average balance                  $  51,116      $     35,897      $    87,439        $   270,751
     Average rate                           .00%             2.91%            1.65%              4.88%

    December 31, 1996:
---------------------------
     Average balance                  $  50,580      $     33,798      $    117,734       $   224,648
     Average rate                           .00%             3.05%             1.41%             5.84%

    December 31, 1995:
---------------------------
     Average balance                  $  38,112      $     34,475      $    81,891        $   218,690
     Average rate                           .00%             3.04%            2.13%              4.72%

</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 Years
                                           Under             Less than         Less Than       Over Twelve
                                        Three Months        Six Months       Twelve Months       Months
                                        ------------        ----------       -------------   -------------
<S>                                    <C>               <C>              <C>               <C>
Time deposits                           $      15,460     $       9,877    $      10,841     $      21,585
                                        =============     =============    =============     =============

</TABLE>

RETURN ON EQUITY AND ASSETS

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


<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                             -------------------------------------------
                                                               1997             1996              1995
                                                               ----             ----              ----
<S>                                                           <C>               <C>              <C>    
Return on average assets                                        1.33%             1.14%            1.23%
Return on average equity                                       14.56%            13.21%           13.93%
Dividend payout ratio                                          23.95%            27.23%           26.99%
Equity to assets ratio                                          9.25%             8.65%            8.54%

</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.


                                     - 15 -

<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 used 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 Fall of 1994.

         In 1996, the Bank purchased additional land in West Unity to expand the
parking lot. The Bank also purchased a lot with a building on it that is being
used for storage adjacent to the South Defiance, Archbold office.

         The Bank also owns real estate consisting of land and buildings housing
each of its full service branch bank operations. Construction has begun on new
facilities for the Montpelier operations and should be completed in 1998.

         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

Napoleon, Ohio                                   2255 Scott Street

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



                                     - 16 -

<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 company's
management is as follows:

<TABLE>
<CAPTION>

                                                 1st Quarter          2nd Quarter        3rd Quarter          4th Quarter
                                                 -----------          -----------        -----------          -----------
<S>                 <C>                            <C>                 <C>                 <C>                  <C>
        1997         High                           $45.00              $72.00              $72.00               $70.00
                     Low                            $40.00              $55.00              $72.00               $65.00

        1996         High                           $35.00              $35.00              $40.00               $40.00
                     Low                            $32.00              $35.00              $40.00               $40.00

</TABLE>


         As of March 1, 1998, there were 1,305 record holders of common stock of
the company.

         Dividends are paid quarterly.  Per share dividends for years 1997 and 
1996 are as follows:

<TABLE>
<CAPTION>
                              1st Quarter        2nd Quarter          3rd Quarter        4th Quarter              Total
                              -----------        -----------          -----------        -----------              -----
<S>                            <C>                <C>                 <C>                 <C>                     <C>
         1997                   $.25               $.25                $.25                $.50                    $1.25
         1996                   $.25               $.25                $.25                $.40                    $1.15

</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

         Selected financial data is presented on page 58 of the Annual Report to
shareholders for the year ended December 31, 1997 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.



                                     - 17 -
<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>

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

                                                                                 1996                             1995
                                                          ------------------------------------------------    ------------
                                                                                 Increase (Decrease)
                                                                                 -------------------
                                                             Average
                                                             Balance          Amount           Percentage        Balance
                                                             -------          ------           ----------        -------
Funding Uses:
     Loans                                                $     358,261    $      34,022         10.49%       $     324,239
     Taxable investment securities                               75,051           19,668         35.51               55,383
     Tax-exempt investment securities                            21,223            4,534         27.17               16,689
     Interest bearing deposits with other banks                     100             (426)       (80.99)                 526
     Federal funds sold and securities purchased
       under agreement to resell                                  6,613           (1,781)       (21.22)               8,394
                                                          -------------    -------------                        -----------
                                                          $     461,248    $      56,017         13.82%         $   405,231
                                                          =============    =============     =============      ===========
Funding Sources:
     Deposits:
         Non-interest bearing deposits                    $      50,580    $      12,468         32.71%       $      38,112
         Savings deposits                                       117,734           35,843         43.77               81,891
         Other time deposits                                    258,446            5,281          2.09              253,165
     Other borrowed money                                         9,411             (680)        (6.74)              10,091
     Federal funds purchased and securities sold
       under agreement to repurchase                              6,522              503          8.36                6,019
                                                          -------------    -------------                        -----------
                                                          $     442,693    $      53,415         13.72%         $   389,278
                                                          =============    =============     =============      ===========
</TABLE>


                                      - 18 -

<PAGE>   21


         Total assets for Farmers & Merchants Bancorp, Inc. have increased from
$464 million in 1995 to $501.4 million in 1996 and to $528.3 million in 1997, an
8.1% and 5.4% increase, respectively. The increase in assets of $26.9 million is
primarily the result of growth in the loan portfolio of $29.2 million and
federal funds sold of $6.5 million, while investments dropped $9.7 million.

         The increase in the loan portfolio came primarily from two areas.
Mortgage loans increased $10.6 million to $205.6 million from the $195 million
level for 1996, while at the same time, consumer loans were increasing $12.6
million to $75.8 million from $63.2 million for 1996. These increases can again
be attributed to favorable interest rates, as well as, an aggressive but
controlled and managed loan policy.

         While the loan portfolio has increased significantly, the net
charge-offs have remained fairly level. Net charge-offs were $385 thousand for
1995, $1.1 million for 1996 and $761 thousand for 1997. Because of the
tremendous growth in the loan portfolio, it was determined that the allowance
for possible loan losses should be increased by a modest $350 thousand to $5.85
million after remaining at $5.5 million for three years.

         The increase in the loan portfolio and federal funds sold was in part
funded through a decrease in the investment portfolio. The U.S. Treasury
security portfolio decreased from $27.7 million for 1996 to $22.2 million for
1997, a decrease of $5.5 million. The other major investment portfolio that was
used was the domestic corporate obligation bond portfolio. Domestic corporate
obligations dropped $6.7 million from almost $17 million for 1996 to $10.3
million for 1997. These decreases were from maturities and sales, and not from
decreases in market values. In fact market values for the entire investment
portfolio had a net increase of $.5 million for 1997.

         The other major funding source for the increase in the loan portfolio
came from an increase in deposits. Other than regular savings deposits which
showed a decrease of almost $7 million from 1996 levels of $95 million, all
other deposit categories demonstrated significant growth with overall deposits
increasing $22.9 million to $461.3 million from 1996 levels of $438.4 million,
over a 5% increase.

         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 1997 amounted to $3 million while
repayments amounted to $707 thousand, a net increase of almost $2.3 million.

CAPITAL RESOURCES

         Total capital increased $5.5 million or 12.6% for 1997 compared to $3.8
million or 9.6% for 1996 and $5 million or 14.5% for 1995. These increases came
from profits and changes in market values of the securities portfolio. Profits
amounted to $6.7 million for 1997, $5.5 million for 1996 and $5.3 million for
1995, while net after tax effect changes in market values of the investment
portfolio contributed $311 thousand for 1997 and $1.1 million for 1995, 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 1997 dividends of $1.25
per share or $1.625 million were declared as compared to $1.15 or $1.495 million
for 1996 and $1.10 or $1,430 million for 1995. The per share amounts for 1996
and 1995 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.



                                     - 19 -

<PAGE>   22


         Under regulatory risk-based guidelines, capital is measured against the
Bank's risk-adjusted assets. The Bank's Tier 1 capital (common stockholders'
equity less goodwill, if any) to risk-adjusted assets was approximately 9.6% at
December 31, 1997, well above the 4% minimum requirement. Total capital to
risk-adjusted assets approximately 13.4%, also well above the 8% minimum
requirement for this ratio. The leverage ratio was at 7.1% compared to the 4%
requirement. These same ratios as of December 31, 1996 were, 8.9%, 12.9% and
6.4%, respectively. According to regulatory guidelines, the Bank is considered
to be well capitalized.

         The Farmers & Merchants State Bank declared a $10 million dividend to
Farmers & Merchants Bancorp, Inc. on December 31, 1996 with the approval of the
FDIC and the State of Ohio Division of Financial Institutions. Farmers &
Merchants Bancorp, Inc. then loaned to The Farmers & Merchants State Bank on
December 31, 1996, $10 million in exchange for an unsecured subordinated note
receivable. The note is due January 1, 2007. Interest at the rate of 6% is
payable annually on the first day of January of each year. The purpose of the
transaction was to reduce the Bank's liability for Ohio Franchise Tax.

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, 1997 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                         6,485                 0                0                 0             6,485
Investments                                4,567            15,320           56,235            15,928            92,050
Loans                                    155,033           117,350           93,421            38,689           404,493
                                      ----------       -----------       ----------         ---------       -----------
Total Rate Sensitive Assets              166,085           132,770          149,656            54,617           503,128
Rate Sensitive Liabilities                76,093           133,675          202,965            11,292           424,025
                                      ----------       -----------       ----------         ---------       -----------
Gap                                   $   89,992       $      (905)      $  (53,309)        $  43,325       $    79,103
                                      ==========       ===========       ==========         =========       ===========
</TABLE>


                                     - 20 -


<PAGE>   23



         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 $22.9 million
in 1997. This compares with $34.3 million for 1996 and $59.6 million for 1995.

         The loan to deposit ratio increased slightly to 86.3% for 1997 compared
to 84.1% for 1996 and 1995.

         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 $15.8 million 17.7% of total marketable debt securities compared to $20
million or 20.4% for 1996 and $20.9 million or 25.3% for 1995.

         Still another source of liquidity are Federal Funds Sold. Federal Funds
Sold which are for very short durations of time increased $6.5 million.


RESULTS OF OPERATIONS

OVERVIEW

         Net income for 1997 was $6.8 million, a $1.3 million or 23.6% increase
over 1996 net income of $5.5 million. Net income for 1995 was $5.3 million. Net
interest margin before the provision for loan losses increased 8.5% to $19
million over $17.5 million for 1996. Net interest margin for 1996 increased 6.1%
over the $16.5 million for 1995. The net interest margin percentage was 3.9% for
1997, 3.8% for 1996 and 4.1% for 1995.


INTEREST INCOME

         Interest income and fees on loans and leases increased 5.9% or $1.9
million to $34.3 million. This compares to interest and fee income of $32.4
million for 1996 and $29.6 million for 1995. All of the increase in interest
income for 1997 can be attributed to an increase in lending activities.

         Interest income on the investment portfolio for 1997 was $5.5 million
compared to $5.5 million for 1996 and $4.1 million for 1995.


INTEREST EXPENSE

         Interest expense on deposits increased to $20.3 million for 1997, up a
very minimal $333 thousand from 1996 interest expense of $19.9 million.


                                     - 21 -

<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.

         For 1997 provisions charged against income amounted to $1.1 million
compared to $1.1 million for 1996 and $385 thousand for 1995. The allowance was
established at $5.85 million at December 31, 1997, representing 1.4% of total
loans. This compares to $5.5 million or 1.5% for 1996 and $5.5 million or 1.6%
for 1995.

OTHER OPERATING INCOME

         The operating income increased by $558 thousand over 1997 to $2.9
million, up from $2.4 million for 1996 and $2.1 million for 1995. Increases in
miscellaneous customer fees and mastercard fees account for the bulk of this
increase.

OTHER OPERATING EXPENSES

         As was the case in 1996, despite increased loan and deposit activity,
management was able to hold operating expenses in check. Operating expenses of
$11 million for 1997 increased only slightly compared to $10.9 million for 1996
and $10.7 million for 1995.

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 has established a
testing schedule and has assured the Bank that the software being used will be
updated to accept Year 2000 dates and transactions. The Bank's internal Year
2000 committee is working diligently to address Year 2000 problems that may
exist with the Bank's hardware. A Y2K budget has been compiled and approved by
the Board of Directors.

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


                                     - 22 -

<PAGE>   25

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Report of Independent Accountants











                                     - 23 -



<PAGE>   26

MESSAGE FROM MANAGEMENT:

We are pleased to report that for the year 1997, the FARMERS & MERCHANTS
BANCORP, INC., earnings were again very strong, asset quality remained
outstanding, and the Bank expanded its presence within its market area. Capital
accounts have increased to $48,844,000 with net income of $6,777,000 or $5.22
per share compared to $4.22 in 1996. This resulted with an impressive 14.56
percent Return on Average Equity and 1.33 percent Return on Average Assets and a
new high in assets of $528,273,000. The higher earnings and returns were a
direct result of excellent asset quality, continued loan growth, active capital
management, proper management of interest rate risk and control of overhead
expenses. The excellent results of the Farmers & Merchants Bancorp, Inc. in 1997
reflected favorably on the professionalism, dedication and enthusiasm of our
people. Thanks to their efforts and customary excellence, we successfully
achieved one of our most notable years.

Continuing its emphasis to keep pace with industry advances and developments,
the Bancorp made significant moves with technology and electronics during the
year. Designed to focus on customer satisfaction, operating efficiency and
expanded computer capabilities, major allocations of resources were invested in
reshaping systems to remain competitive as we move into the 21st century.
Whatever plans we make, however, one thing will remain unchanged, the unique way
we do business. We are able to form stronger ties with our customers on an
individual basis by permitting local decision-making opportunities at each of
our offices. Another tradition that will not change is our commitment to the
communities we serve. Each of our offices works to improve the way of life for
the people in their area.

Loan quality remains a high focus in the banking industry. Again, our
well-established system to monitor the loan portfolio and act accordingly
performed well in 1997. One of the major keys to our success and performance
this past year was the enhancement of the Bank's loan-to-deposit ratio without
sacrificing underwriting or pricing standards. A number of product and program
considerations have been identified to assist the Bank with this challenge. Loan
growth in 1998 is expected to remain strong, especially in the Real Estate
Mortgage area.

A major concern which will occupy much of our time for the coming year and 1999
is the Year 2000 (Y2K) issue. The Year 2000 poses some significant concerns
about the potentially serious problems that could result for anything that uses
or is run by a computer. Problems could exist not only on personal computers,
but also with time clocks, passenger elevators, home furnaces, VCRs and much
more. Our concern is not only for the computer systems we use daily, but also
for our customers and their businesses, as well as the vendors from whom we
order supplies. If these potential problems are not addressed, our day to day
operations could be disrupted and cause us all to spend needless dollars to
remedy the situation. It is important that we all look at our daily lives and
operations to determine what may be affected by the Year 2000 dilemma.

At the same time we are making internal changes, outside forces are creating an
atmosphere for success. Recent legislative developments and a loosening of
federal regulations are encouraging signs. When you combine all of these factors
and the healthy economy we are currently enjoying, the outlook for the Bancorp
and its shareholders is very promising. We cannot think of a better time to be
in this business.

We would like to express our appreciation for the constant input and support of
the Board of Directors, Advisory Boards, our loyal employees, the cooperation of
the communities we serve, and finally the continued confidence of our
shareholders.


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

                                      24
<PAGE>   27

<TABLE>
<S>                                    <C>                                      <C>     
DIRECTORS                               MAYNARD SAUDER                           MICHAEL D. CULLER                     
                                        President                                Asst. Vice President                  
CHARLES E. LUGBILL                      Sauder Woodworking Co.                   Chief Agri Finance Officer            
Chairman of the Board                                                                                                  
The Farmers & Merchants State           MERLE J. SHORT                           BARBARA J. BRITENRIKER                
Bank                                    Farmer                                   Asst. Vice President                  
                                        President                                Comptroller & Chief Financial Officer 
EUGENE D. BERNATH                       Promow, Inc.                                                                   
Farmer                                                                           DIANN K. MEYER                        
                                        STEVEN J. WYSE                           Asst. Vice President                  
JERRY L. BOYERS                         President                                Personnel Officer                     
President                               Granite Industries                                                             
Edifice Construction Management                                                  KENT E. ROTH                          
                                          DIRECTOR EMERITUS                      Auditor                               
JOE E. CROSSGROVE                                                                Security Officer                      
President                               ELIAS H. FREY                            Bank Secrecy Officer                  
Chief Executive Officer                 KENNETH E. STAMM                                                               
The Farmers & Merchants State           ROBERT H. STOTZER                        MARILYN K. JOHNSON                    
Bank                                    ROBERT V. WHITMER                        Assistant Cashier                     
                                                                                 Compliance Officer and                
ROBERT G. FREY                                                                   CRA Officer                           
President                               ARCHBOLD MAIN OFFICE                                                           
E. H. Frey & Sons, Inc.                                                          JUDITH A. WARNCKE                     
                                        CHARLES E. LUGBILL                       Asst. Cashier                         
LEE E. GRAFFICE                         Chairman of the Board                    Marketing Officer                     
President                                                                                                              
Graffice Motor Sales                    JOE E. CROSSGROVE                        J. SCOTT MILLER                       
                                        President                                Asst. Cashier                         
JACK C. JOHNSON                         Chief Executive Officer                  Agri Finance Officer                  
President                                                                                                              
Hawk's Clothing, Inc.                   MAYNARD SAUDER                           DEBRA J. KAUFFMAN                     
Partner                                 Vice President                           Asst. Cashier & Consumer              
REJO Partnership                                                                 Lending Officer                       
                                        EUGENE D. BERNATH                        Asst. Corporate Secretary             
DEAN E. MILLER                          Vice President                                                                 
President                                                                        RICHARD D. ERNEST                     
MBC Holdings, Inc.                      EDWARD A. LEININGER                      Assistant Cashier                     
                                        Vice President                           Asset Recovery Officer                
DALE L. NAFZIGER                        Commercial Loan Officer                                                        
Retired                                                                          JANE C. BRUNER                        
                                        REX D. RICE                              Assistant Cashier                     
HAROLD H. PLASSMAN                      Vice President                           Operations Supervisor                 
Attorney                                Chief Lending Officer                                                          
Plassman, Rupp, Hensal & Short                                                   JOYCE G. KINSMAN                      
                                        GEORGE JELEN                             Assistant Cashier                     
JAMES L. PROVOST                        Asst. Vice President                     Loan Review Officer                   
Retired                                 Mortgage Loan Officer                                                          
Dyer & Mc Dermott, Inc.                                                          SHAWN O. MCCUTCHEON                   
                                        RANDAL H. SCHROEDER                      Secretarial Supervisor                
JAMES C. SANEHOLTZ                      Asst. Vice President    
President                               Chief Operations Officer
Saneholtz-McKarns, Inc.

</TABLE>

                                      25
<PAGE>   28

<TABLE>
<S>                                    <C>                                      <C>
PHYLLIS MUNDAY                          GLORIA GUNN                              PATTI L. ROSEBROCK       
Bookkeeping Supervisor                  Asst. Vice President                     Asst. Cashier            
                                        Asst. Branch Manager                     Asst. Branch Manager     
DIANNA J. WEBER                                                                                           
Teller Supervisor                                                                                         
                                        WAUSEON DOWNTOWN                                                  
                                        OFFICE                                   STRYKER ADVISORY         
ARCHBOLD WOODLAND                                                                BOARD                    
OFFICE                                  CAROL J. ENGLAND                                                  
                                        Asst. Vice President                     FRED W. GRISIER          
DEBORAH L. STONER                       Branch Manager                           Owner                    
Asst. Vice President                    Corporate Secretary                      Grisier Funeral Home     
Branch Manager                                                                                            
                                        JEAN E. HORWATH                          RONALD R. ROBINSON       
DIANE J. SWISHER                        Asst. Cashier                            Owner                    
Asst. Cashier                           Asst. Branch Manager                     R. Home Interiors        
Asst. Branch Manager                                                                                      
                                                                                 RICHARD E. RAKER         
                                        WAUSEON ADVISORY BOARD                   Owner                    
ARCHBOLD ADVISORY BOARD                                                          Raker Oil Company        
                                        RICHARD L. ELROD                                                  
DEXTER L. BENECKE                       President                                STEVEN PLANSON           
Vice President                          Mustang Corporation                      Farmer                   
Benecke Trucking, Inc.                                                                                    
Alex Products, Inc.                     WARREN A. KAHRS                                                   
                                        President                                WEST UNITY OFFICE        
BRUCE C. LAUBER                         Kahrs Tractor Sales, Inc.                                         
President                                                                        LEWIS D. HILKERT         
Lauber Manufacturing Co.                JOSEPH H. KOLB                           Vice President           
                                        Owner                                    Branch Manager           
JO ELLEN HORNISH                        Kolb & Son                                                        
President                                                                        PATRICIA R. BURKHOLDER   
Hornish Brothers, Inc.                  JULIAN GIOVARELLI                        Assistant Branch Manager 
                                        President                                                         
ANTHONY J. RUPP                         Gio Sales, Inc.                                                   
President                                                                        WEST UNITY ADVISORY      
Rupp Furniture Co.                      SANDRA K. BARBER                         BOARD                    
                                        Fulton County Recorder                                            
GENE SCHAFFNER                          Chairman, Ohio Lottery Commission        ALVIN E. CAROTHERS       
Farmer                                                                           Farmer                   
                                        DR. KENNETH H. KLING                                              
GEORGE F. STOTZER                       Owner                                    BEN G. WESTFALL          
Partner                                 Fulton County Vision Services            President                
Stotzer Do-It Center                                                             Westfall Realty, Inc.    
                                                                                                          
                                        STRYKER OFFICE                           WILLIAM W. HOLLINGSHEAD  
WAUSEON SHOOP OFFICE                                                             Owner                    
                                        RONALD D. SHORT                          Hollingshead Mortuary    
ALLEN G. LANTZ                          Asst. Vice President                                              
Vice President                          Branch Manager                           TED W. MANEVAL           
Branch Manager                                                                   Farmer                   

</TABLE>

                                      26
<PAGE>   29

<TABLE>

<S>                                    <C>                                      <C>
R. BURDELL COLON                        KEVIN L. GRAY                            GEORGE B. RINGS               
President                               Assistant Cashier                        Pharmacist                    
Rup-Col., Inc.                          Assistant Branch Manager                 Rings Pharmacy                
                                                                                                               
                                                                                                               
DELTA OFFICE                            BRYAN ADVISORY BOARD                     NAPOLEON OFFICE               
                                                                                                               
CYNTHIA K. KNAUER                       W. PAUL TRODER                           STEPHEN E. JACKSON            
Asst. Vice President                    President                                Asst. Vice President          
Branch Manager                          Allied Moulded Products, Inc.            Branch Manager                
                                                                                                               
BARRY N. GRAY                           RUSTY BRUNICARDI                         DIANA J. DENNIE               
Assistant Cashier                       President                                Assistant Cashier             
Asst. Branch Manager                    Chief Executive Officer                  Assistant Branch Manager      
                                        Community Hospital of Williams                                         
                                        Co., Inc.                                NAPOLEON ADVISORY BOARD       
DELTA ADVISORY BOARD                                                                                           
                                        D. ROBERT SHAFFER                        BARBARA C. SCHIE              
TERRY J. KAPER                          Farmer                                   Office Manager                
Attorney                                                                         Fulton Anesthesia Associates, 
Barber, Kaper, Stamm & Robinson         DR. C. NICHOLAS WALZ                     Inc.                          
                                        Partner                                                                
DONALD C. EICHER                        Williams County Family Medical           DAVID M. DAMMAN               
Retired Grocer                          Center                                   Farm Drainage Contractor      
                                                                                 Farmer                        
ROBERT E. GILDERS                       PAUL R. MANLEY                                                         
President                               Vice President Manufacturing             JAMES T. VAN POPPEL           
GB Manufacturing                        Ohio Art Co.                             President                     
                                                                                 Van Poppel Corp.              
EUGENE BURKHOLDER                                                                                              
President                               MONTPELIER OFFICE                        DENNIS L. MEYER               
Falor Farm Center                                                                Realtor                       
                                        JOHN S. FEE                              Ed Rohrs Realty               
AL KREUZ                                Asst. Vice President          
Fulton County Commissioner              Branch Manager                
                                                                      
                                                                      
BRYAN EAST HIGH OFFICE                  MONTPELIER ADVISORY           
                                        BOARD                         
DAVID C. FRAZIER                                                      
Assistant Vice President                GREGORY D. SHOUP              
Branch Manager                          President                     
                                        Peltcs Lumber Co., Inc.       
CAROL L. CHURCH                                                       
Assistant Branch Manager                RICHARD S. DYE                
                                        Vice President                
                                        Dyco Manufacturing            
SOUTHTOWNE OFFICE                                                     
                                                                      
MICHAEL T. SMITH                        ROBERT D. MERCER              
Assistant Cashier                       President                     
Branch Manager                          Bob Mercer Realty and         
                                        Auctions                      

</TABLE>

                                      27
<PAGE>   30


                        FARMERS & MERCHANTS BANCORP, INC.

                                TABLE OF CONTENTS

                                December 31, 1997


<TABLE>
<CAPTION>

                                                                  PAGE
<S>                                                           <C>
Independent Auditors' Report                                        29

Consolidated Balance Sheets                                         30

Consolidated Statements of Income                                   31

Consolidated Statements of Changes in
   Shareholders' Equity                                             32

Consolidated Statements of Cash Flows                               33

Notes to Consolidated Financial Statements                     34 - 54

Supplementary Information:

     Independent Auditors' Report on
     Supplementary Information                                      55

     Five Year Summary of Consolidated
     Operations                                                     56
</TABLE>


                                      28
<PAGE>   31
[KROUSE, KERN & CO., INC LETTERHEAD]

January 14, 1998



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, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996,
and the results of its consolidated operations and cash flows for the years
ended December 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.


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

                                      29
<PAGE>   32


                        FARMERS & MERCHANTS BANCORP, INC.

                           Consolidated Balance Sheets
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>


                                                             ASSETS
(In thousands)                                                                                   1997              1996
 ------------                                                                                -------------    -------------
<S>                                                                                         <C>              <C>
Cash and due from banks.........................................................             $      16,213    $      15,871
Interest bearing deposits with banks............................................                       100              100
Federal funds sold..............................................................                     6,485                0
Investment securities at market value...........................................                    92,050          101,721
Loans, less allowance for loan losses of $5,850 for 1997 and $5,500
   for 1996.....................................................................                   398,151          368,900
Investment in leases............................................................                       492              319
Bank premises and equipment - net...............................................                     7,665            7,576
Accrued interest and other assets...............................................                     6,503            6,153
Deferred income tax charge......................................................                       614              809
                                                                                             -------------    -------------
TOTAL ASSETS                                                                                 $     528,273    $     501,449
                                                                                             =============    ============= 
                                              LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
    Deposits:
       Demand...................................................................             $      51,163    $      50,019
       NOW accounts.............................................................                    48,264           37,795
       Savings..................................................................                    87,923           94,768
       Time....................................................................                    273,948          255,795
                                                                                             -------------    -------------
                  Total Deposits                                                                   461,298          438,377
Federal funds purchased.........................................................                         0            2,790
Securities sold under agreement to repurchase...................................                     2,598            3,973
Other borrowings................................................................                    11,292            8,998
Dividend payable................................................................                       650              520
Accrued interest and other liabilities..........................................                     3,591            3,410
                                                                                             -------------    -------------
                  Total Liabilities                                                                479,429          458,068
                                                                                             -------------    -------------
SHAREHOLDERS' EQUITY:
     Common stock, no par value - authorized 1,500,000 shares; issued
       1,300,000 shares.........................................................                    12,677           12,677
     Undivided profits..........................................................                    35,165           30,013
     Net unrealized gain on securities available for sale (net of tax effect
       $515 in 1997 and $357 in 1996)...........................................                     1,002              691
                                                                                             -------------    -------------
                  Total Shareholders' Equity                                                        48,844           43,381
                                                                                             -------------    -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                   $     528,273    $     501,449
                                                                                             =============    =============
</TABLE>

See Accompanying Notes to Consolidated
Financial Statements.


                                      30
<PAGE>   33


                        FARMERS & MERCHANTS BANCORP, INC.

                        Consolidated Statements of Income
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


(In thousands except for per share amounts)
INTEREST INCOME:                                                                1997             1996              1995
                                                                           -------------     -------------    -------------
<S>                                                                       <C>               <C>              <C>
     Interest and fees on loans...............................             $      34,229     $      32,339    $      29,554
     Interest on Investment Securities:
         U. S. Treasury securities............................                     1,507             1,493            1,040
         Securities of U. S. Government agencies..............                     2,045             2,095            1,531
         Obligations of states and political sub-divisions....                     1,234             1,220            1,124
         Obligations of domestic corporations.................                       719               707              362
     Interest on federal funds................................                       211               357              470
     Interest on deposits in banks............................                         5                 7                3
     Dividends................................................                       166               150              137
     Lease finance revenues...................................                        42                14                7
                                                                           -------------     -------------    -------------
                  Total Interest Income                                           40,158            38,382           34,228
                                                                           -------------     -------------    -------------
INTEREST EXPENSE:
     Interest on deposits.....................................                    20,276            19,943           16,741
     Interest on borrowed funds...............................                       863               962            1,008
                                                                           -------------     -------------    -------------
                  Total Interest Expense                                          21,139            20,905           17,749
                                                                           -------------     -------------    -------------
                  Net Interest Income                                             19,019            17,477           16,479
PROVISION FOR LOAN LOSSES........................................                  1,111             1,068              385
                                                                           -------------     -------------    -------------
                  Net Interest Income After Provision for
                    Loan Losses                                                   17,908            16,409           16,094
                                                                           -------------     -------------    -------------
OTHER INCOME:
     Service charges on deposit accounts......................                     1,152             1,097            1,012
     Other service charges and fees...........................                     1,787             1,275            1,034
     Net securities gains.....................................                        (4)                5               72
                                                                           -------------     -------------    -------------
                                                                                   2,935             2,377            2,118
                                                                           -------------     -------------    -------------
OTHER EXPENSES:
     Salaries and wages.......................................                     4,404             4,849            4,529
     Pension and other employee benefits......................                     1,206             1,172              989
     Occupancy expense (net)..................................                       481               498              453
     Furniture and equipment expense..........................                       722               788              692
     Other operating expenses.................................                     4,218             3,684            4,049
                                                                           -------------     -------------    -------------
                                                                                  11,031            10,991           10,712
                                                                           -------------     -------------    -------------
INCOME BEFORE FEDERAL INCOME TAX                                                   9,812             7,795            7,500
FEDERAL INCOME TAXES.............................................                  3,035             2,312            2,203
                                                                           -------------     -------------    -------------
NET INCOME                                                                 $       6,777     $       5,483    $       5,297
                                                                           =============     =============    =============
Net income per share:
     Net income before securities gains..........................          $        5.22     $        4.21    $        4.02
     Net securities gains........................................                    .00               .01              .05
                                                                           -------------     -------------    -------------
NET INCOME PER SHARE                                                       $        5.22     $        4.22    $        4.07
                                                                           =============     =============    =============
WEIGHTED AVERAGE SHARES OUTSTANDING                                            1,300,000         1,300,000        1,300,000
                                                                           =============     =============    =============
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.


                                      31
<PAGE>   34


                        FARMERS & MERCHANTS BANCORP, INC.

                      Consolidated Statements of Changes in
                    Shareholders' Equity for the years ended
                        December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                                                                               Net Unrealized
                                                                                                               Gain (Loss) on
                                                                             Common           Undivided         Available for
(In thousands)                                                                Stock             Profits        Sale Securities
 ------------                                                              -------------     -------------   -----------------
<S>                                                                       <C>               <C>                <C>      
BALANCE AT DECEMBER 31, 1994..................................             $      12,677     $      22,158      $         (249)
     Net income for 1995......................................                         0             5,297                   0
     Unrealized gains on securities classified as Available
       for Sale (net of tax effect of $599)...................                         0                 0               1,168
     Cash dividends ($1.10 per share).........................                         0            (1,430)                  0
                                                                           -------------     -------------      --------------

BALANCE AT DECEMBER 31, 1995                                                      12,677            26,025                 919
     Net income for 1996......................................                         0             5,483                   0
     Unrealized gains on securities classified as Available
       for Sale (net of tax effect of ($115)).................                         0                 0                (228)
     Cash dividends ($1.15 per share).........................                         0            (1,495)                  0
                                                                           -------------     -------------      --------------

BALANCE AT DECEMBER 31, 1996..................................                    12,677            30,013                 691
     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
                                                                           =============     =============      ==============
</TABLE>


See Accompanying Notes to Consolidated
Financial Statements.



                                      32
<PAGE>   35


                        FARMERS & MERCHANTS BANCORP, INC.

                      Consolidated Statements of Cash Flows
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:                                           1997              1996             1995
                                                                           -------------     -------------    -------------
<S>                                                                       <C>               <C>              <C>
     Net income...................................................           $     6,777      $      5,483     $      5,297
     Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
         Depreciation and amortization............................                   700               798              689
         Premium amortization.....................................                   470               582              737
         Discount amortization....................................                  (155)             (196)            (128)
         Provision for loan losses................................                 1,111             1,068              385
         Provision for deferred income taxes......................                    43               266              241
         (Gain) loss on sale of fixed assets......................                     0                (1)              20
         (Gain) loss on sale of investment securities.............                     4                (5)             (72)
     Changes in Operating Assets and Liabilities:
         Accrued interest receivable and other assets.............                  (350)             (373)          (1,299)
         Accrued interest payable and other liabilities...........                   181               162              836
                                                                             -----------      ------------     ------------
                  Net Cash Provided by Operating Activities                        8,781             7,784            6,706
                                                                             -----------      ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures.........................................                  (789)           (1,176)          (1,654)
     Proceeds from sale of fixed assets...........................                     0                 1                4
     Proceeds from maturities of investment securities:
         Held to Maturity.........................................                     0                 0           20,450
         Available for Sale.......................................                23,546            30,890           12,278
     Proceeds from sale of investment securities:
         Available for Sale.......................................                10,363               255            1,997
     Purchase of investment securities:
         Held to Maturity.........................................                     0                 0           (8,040)
         Available for Sale.......................................               (24,093)          (48,874)         (32,556)
     Net increase in loans........................................               (30,362)          (30,354)         (38,477)
     Net increase in leases.......................................                  (173)             (257)              (3)
                                                                             -----------      ------------     ------------
                  Net Cash Used by Investing Activities                          (21,508)          (49,515)         (46,001)
                                                                             -----------      ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in deposits.....................................                22,921            34,387           59,595
     Net change in short term borrowings..........................                (4,165)             (156)          (7,479)
     Increase in long-term borrowings.............................                 3,000                 0              400
     Payments on long-term borrowings.............................                  (707)             (665)            (612)
     Payments of dividends........................................                (1,495)           (1,625)          (1,300)
                                                                             -----------      ------------     ------------
                  Net Cash Provided by Financing Activities                       19,554            31,941           50,604
                                                                             -----------      ------------     ------------
Net change in cash and cash equivalents                                            6,827            (9,790)          11,309
Cash and cash equivalents at beginning of the year................                15,971            25,761           14,452
                                                                             -----------      ------------     ------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR                                 $    22,798      $     15,971     $     25,761
                                                                             ===========      ============     ============
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
     Cash and cash due from banks.................................           $    16,213      $     15,871     $     14,951
     Interest bearing deposits....................................                   100               100              100
     Federal funds sold...........................................                 6,485                 0           10,710
                                                                             -----------      ------------     ------------
                                                                             $    22,798      $     15,971     $     25,761
                                                                             ===========      ============     ============
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.


                                      33
<PAGE>   36


                        FARMERS & MERCHANTS BANCORP, INC.

                   Notes to Consolidated Financial Statements



NOTE 1.           SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

                           CONSOLIDATION POLICY:

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

                           NATURE OF ACTIVITIES:

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

                           ESTIMATES:

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

                           CASH EQUIVALENTS:

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

                           INVESTMENT SECURITIES:

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

                           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.


                                      34
<PAGE>   37


                        FARMERS & MERCHANTS BANCORP, INC.

             Notes to Consolidated Financial Statements (Continued)



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

                           INVESTMENT SECURITIES: (Continued)

                           In accordance with a provision provided by the
                           Financial Accounting Standards Board, The Farmers &
                           Merchants State Bank elected to reclassify any
                           investment securities classified as Held to Maturity
                           to Available for Sale during 1995. The effect of this
                           reclassification was to increase the net unrealized
                           gain on securities Available for Sale by $562
                           thousand net of a tax effect of $289 thousand.

                           LOANS:

                           Loans are stated at the amount of unpaid principal,
                           reduced by unearned discounts and deferred loan fees
                           and costs, as well as, by the allowance for loan
                           losses. Interest is accrued on all loans not
                           discounted by applying the interest rate to the
                           amount outstanding. When it is not reasonable to
                           expect that interest will be realized, accrual of
                           income ceases and these loans are placed on a "cash
                           basis" for purposes of income recognition.

                           LOAN ORIGINATION FEES AND COSTS:

                           The Bank has adopted the Financial Accounting
                           Standards Board's Statement of Financial Accounting
                           Standard No. 91, which establishes financial
                           accounting and reporting guidelines for accounting
                           for nonrefundable fees and costs associated with
                           originating or acquiring loans. Statement No. 91
                           requires that nonrefundable loan fees, such as the
                           fees more commonly known as "points" or "origination
                           fees" but not necessarily limited thereto, be
                           deferred and recognized over the life of the loan as
                           an adjustment of yield. Likewise, certain direct loan
                           origination costs are to be deferred and recognized
                           as a reduction in the yield of the loan.

                           MORTGAGE SERVICING RIGHTS:

                           The Financial Accounting Standards Board (FASB)
                           issued Statement of Financial Accounting Standards
                           No. 122 "Accounting for Mortgage Servicing Rights an
                           Amendment of FASB Statement No. 65." FAS 122 states
                           that "a mortgage banking enterprise that purchases or
                           originates mortgage loans with a definitive plan to
                           sell or securitize those loans and retain the
                           mortgage servicing rights shall allocate the cost of
                           the mortgage loans based on the relative fair values
                           at the date of purchase or origination." The Bank
                           adopted FAS 122 effective January 1, 1996 and uses
                           the present value of expected future cash flows in
                           determining fair values.



                                      35
<PAGE>   38


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

                           IMPAIRED LOANS:

                           The Financial Accounting Standards Board (FASB)
                           issued Statement of Financial Accounting Standards
                           No. 114, "Accounting by Creditors for Impairment of a
                           Loan." FAS 114 states that "a loan is impaired when,
                           based on current information and events, it is
                           probable that a creditor will be unable to collect
                           all amounts due according to the contractual terms of
                           the loan agreement." When it is determined by the
                           creditor that a loan is impaired, "the creditor shall
                           measure the impairment based on 1) the present value
                           of expected future cash flows discounted at the
                           loan's effective rate, 2) the loan's observable
                           market price, or 3) the fair value of the collateral
                           if the loan is collateral dependent." FAS 114 was
                           adopted by the Bank effective January 1, 1995.

                           ALLOWANCE FOR LOAN LOSSES:

                           The allowance for loan losses is available for future
                           charge-offs. It is increased by provisions charged to
                           operations and decreased by charge-offs net of
                           recoveries. The provision is primarily the result of
                           management's continuous review and evaluation of
                           problem loans, supplemented by historical net
                           charge-off experience, economic conditions and the
                           size of the loan portfolio. The allowance is
                           maintained at a level which management believes to be
                           adequate to provide for potential losses. For tax
                           purposes, the Bank follows a policy of providing
                           additions to the allowance for possible loan losses
                           in accordance with maximum amounts under applicable
                           federal tax laws.

                           BANKING PREMISES AND EQUIPMENT:

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

                           PREMIUM RESERVES AND BENEFIT LIABILITIES:

                           Liabilities for unreported claims are calculated from
                           runoff experience. Liabilities for future reserves
                           are based on the 1964 CDT at 3%.

                           Mortality reserves for life insurance contracts are
                           determined using the 1958 CET 3.5% net level reserve
                           method. Premium reserves for the accident and health
                           policies are determined by the mean Prorata and rule
                           of 78's.


                                      36
<PAGE>   39


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, after restatement for stock
                           dividends.

NOTE 2.           CASH AND FEDERAL FUNDS SOLD

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


                                      37
<PAGE>   40
NOTE 3.  INVESTMENT SECURITIES

                  The amortized cost and estimated market values of investments
                  in securities as of December 31, 1997 and 1996 are detailed
                  below. Fair market values are based on quoted market prices or
                  dealer quotes.

<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
                                                       ===========       =============    =============     ===========

<CAPTION>
                                                                                      1996
                                                      -----------------------------------------------------------------
                                                          Gross          Gross            Gross               Gross
                                                        Amortized      Unrealized       Unrealized            Market
                  (In thousands)                          Cost           Gains            Losses              Value
                   ------------                        -----------       -------------    -------------     -----------
                 <S>                                <C>                <C>                <C>           <C>
                  Available for Sale:
                      U.S. Treasury                    $    27,743       $         109    $          25     $    27,827
                      U.S. Government
                         Agency                             23,825                 193              108          23,910
                      Mortgage-Backed                        9,023                  31               68           8,986
                      State and political
                         subdivisions                       20,865                 827               14          21,678
                      Obligation of
                         domestic
                         corporations                       16,961                 126               22          17,065
                      Stocks of domestic
                         corporations                           20                   0                0              20
                      Federal Home Loan Bank
                         stock (restricted)                  2,235                   0                0           2,235
                                                       -----------       -------------    -------------     -----------

                                                       $   100,672       $       1,286    $         237     $   101,721
                                                       ===========       =============    =============     ===========
</TABLE>


                                      38
<PAGE>   41


NOTE 3.  INVESTMENT SECURITIES (Continued)

                  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)
                   ------------
                  Gross Realized Gains:                        1997             1996              1995
                                                          -------------    -------------     -------------
                  <S>                                     <C>             <C>              <C>
                    Available for Sale:
                      State and political subdivisions                6                5               105
                                                          -------------    -------------     -------------

                                                                      6                5               105
                                                          -------------    -------------     -------------
                  Gross Realized Losses:
                    Available for Sale:
                      U.S. Treasury and agency
                         securities                                  10                0                33
                                                          -------------    -------------     -------------

                  Net Realized Gains (Loss)                          (4)   $           5     $          72
                                                          =============    =============     =============

                  Gross proceeds from sale of
                    Available for Sale securities         $      10,363    $         255     $       1,997
                                                          =============    =============     =============
</TABLE>




                  The amortized cost and estimated market value of debt
                  securities at December 31, 1997, by contractual maturity, are
                  shown below. Expected maturities will differ from contractual
                  maturities because borrowers may have the right to call or
                  prepay obligations with or without call or prepayment
                  penalties.

<TABLE>
<CAPTION>


                                                                               Investment Securities
                                                                                Available for Sale
                                                                       -----------------------------------
                                                                                                 Market
                  (In thousands)                                         Amortized Cost          Value
                   ------------                                          --------------        -----------
                  <S>                                                    <C>                  <C>
                  Within one year                                          $    15,806         $    15,831
                  From one through five years                                   56,405              57,005
                  From five through ten years                                    6,149               6,351
                  After ten years                                                9,754              10,443
                                                                           -----------         -----------

                  Total                                                    $    88,114         $    89,630
                                                                           ===========         ===========
</TABLE>


                  Investments with a carrying value of $61.6 million and $62.2
                  million at December 31, 1997 and 1996, respectively, were
                  pledged to secure public deposits and securities sold under
                  repurchase agreements.


                                      39
<PAGE>   42


NOTE 4.           LOANS

                  Loans at December 31, 1997 and 1996 are summarized below:

<TABLE>
<CAPTION>

                  (In thousands)                                                1997              1996
                   ------------                                            -------------     -------------
                <S>                                                      <C>                 <C>       
                  Real estate                                              $     205,626     $     195,043
                  Commercial and industrial                                       65,633            67,763
                  Agricultural (excluding real estate)                            44,939            41,195
                  Consumer and other loans                                        75,767            63,199
                  Commercial paper  7,837                                          3,959             3,959
                  Industrial Development Bonds                                     4,511             3,670
                                                                           -------------     -------------
                                                                                 404,313           374,829
                  Less: Deferred loan fees and costs                                (312)             (429)
                                                                           -------------     -------------
                                                                                 404,001           374,400
                  Less: Allowance for loan losses                                 (5,850)           (5,500)
                                                                           -------------     -------------

                  Loans - Net                                              $     398,151     $     368,900
                                                                           =============     =============
</TABLE>


                  $44.1 million in one to four family residential mortgage loans
                  have been pledged as security for loans the Bank has received
                  from the Federal Home Loan Bank.

                  Senior officers and directors and their affiliated companies
                  were indebted to the Bank in the aggregate of $6.1 and $12.4
                  million at December 31, 1997 and 1996, 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 1997 were $16.4 million and
                  repayments were $22.7 million. In the opinion of management,
                  these loans do not involve more than normal risk of
                  collectibility or possess other unfavorable features.

                  The following schedule details past due and nonaccrual loans:

<TABLE>
<CAPTION>

                                                          Past Due           Past Due
                                                      30 to 89 Days      90 Days or More
                  (In thousands)                      Still Accruing       Still Accruing      Nonaccrual
                   ------------                       --------------       --------------      ----------
                 <S>                                 <C>                 <C>                <C>                
                  Real estate                          $        2,653      $         167       $       444
                  Commercial and industrial                     2,506              1,091             1,575
                  Agricultural (excluding real
                    estate)                                       750                  0               816
                  Consumer and other loans                      2,227                138                55
</TABLE>


                                      40
<PAGE>   43


NOTE 5.  ALLOWANCE FOR POSSIBLE LOAN LOSSES


                  An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>


                  (In thousands)                               1997             1996              1995
                   ------------                           -------------    -------------     -------------
                 <S>                                     <C>              <C>              <C>                       
                  Balance at beginning of year            $       5,500    $       5,500     $       5,500
                  Provision charged to operating
                    expenses                                      1,111            1,068               385
                  Loans charged-off                              (1,531)          (1,711)           (1,479)
                  Recoveries                                        770              643             1,094
                                                          -------------    -------------     -------------

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


                  At December 31, 1997 and 1996, the recorded investment in
                  loans considered impaired was $7.170 million and $3.489
                  million, respectively. Of the $7.170 million and $3.489
                  million for 1997 and 1996, respectively that were considered
                  impaired, $2.9 million and $1.5 million, respectively required
                  the establishment of an allocated reserve.

                  Average investment in impaired loans for 1997 was $3.190
                  million and $3.492 million for 1996. The Bank stops accruing
                  interest income when a loan is deemed to be impaired, and
                  recognizes interest income when the interest income is
                  actually received. Interest income recognized on impaired
                  loans during 1997 and 1996 was $402 thousand and $354
                  thousand, respectively.

                  The  allowance for loan losses for federal  income tax 
                  purposes was $843 thousand for 1997,  1996 and 1995.


                                      41
<PAGE>   44


NOTE 6.           BANKING PREMISES AND EQUIPMENT

                  The major categories of banking premises and equipment and
                  accumulated depreciation at December 31, 1997 and 1996 are
                  summarized below:

<TABLE>
<CAPTION>

                  (In thousands)                                                1997              1996
                   ------------                                            -------------     -------------
                  <S>                                                     <C>               <C>
                  Land                                                     $       1,472     $       1,228
                  Buildings                                                        7,398             7,138
                  Furnishings                                                      4,605             4,332
                                                                           -------------     -------------
                                                                                  13,475            12,698
                  Less: Accumulated depreciation                                  (5,810)           (5,122)
                                                                           -------------     -------------

                  Banking Premises and Equipment - Net                     $       7,665     $       7,576
                                                                           =============     =============
</TABLE>


                  Depreciation  charged to operating  expenses was $700,  $798 
                  and $689 thousand for 1997, 1996 and 1995, respectively.

NOTE 7.           DEPOSITS

                  Time deposits at December 31, 1997 and 1996 were comprised of
                  the following:

<TABLE>
<CAPTION>

                  (In thousands)                                                1997              1996
                   ------------                                            -------------     -------------
                  <S>                                                     <C>               <C>
                  Time deposits under $100,000                             $     216,185     $     199,934
                  Time deposits of $100,000 or more                               57,763            55,861
                                                                           -------------     -------------

                                                                           $     273,948     $     255,795
                                                                           =============     =============
</TABLE>


                  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>
                                    1998                                   $     137,874
                                    1999                                         115,754
                                    2000                                          16,634
                                    2001                                           1,710
                                    2002                                           1,292
</TABLE>

                  The aggregate amount of demand deposits reclassified as loan
                  balances as of December 31, 1997 and 1996 were $92 thousand
                  and $429 thousand, respectively.

                  Deposits to related parties as of December 31, 1997 amounted
                  to $5.8 million.

                                      42
<PAGE>   45
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)



NOTE 8.           REPURCHASE AGREEMENTS

                  The maximum amount of repurchase agreements outstanding at the
                  end of any given month during 1997 was $4.949 million with an
                  average outstanding balance for 1997 of $2.990 million
                  determined on a daily average basis. Accrued interest payable
                  on repurchase agreements as of December 31, 1997 was $75
                  thousand. Securities underlying the agreements were under the
                  Bank's control.

NOTE 9.           OTHER BORROWINGS

                  Other borrowings consisted of the following at December 31,
                  1997 and 1996:


<TABLE>
<CAPTION>

                  (In thousands)                                                1997             1996
                   ------------                                            -------------     -------------
                 <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 the Bank's one to four family 
                    residential mortgage loan portfolio.                   $      11,292     $       8,998
                                                                           =============     =============
</TABLE>

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

<TABLE>
<CAPTION>

                                    Year Ended                               Principal
                                    December 31                              Payments
                                    -----------                              ---------
                                  <S>                                     <C>
                                    1998                                   $       1,052
                                    1999                                           1,101
                                    2000                                           1,153
                                    2001                                           1,208
                                    2002                                           1,267
                                    Thereafter                                     5,511
</TABLE>


                                      43
<PAGE>   46
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 10.          FEDERAL INCOME TAXES

                  Federal income tax costs for the years 1997, 1996 and 1995
                  were $3.035, $2.312 and $2.203 million, respectively. The
                  actual tax results for the three years differ from tax
                  computed at the maximum statutory rate as follows:

<TABLE>
<CAPTION>

                  (In thousands)                              1997             1996              1995
                   ------------                           -------------    -------------     -------------
                  <S>                                    <C>              <C>               <C>
                  Tax at maximum statutory rate           $       3,354    $       2,650     $       2,511
                  Tax effect of:
                     Tax exempt interest                           (384)            (406)             (354)
                     Costs attributable to tax exempt
                        interest                                     63               59                47
                     Other items, net                                 2                9                (1)
                                                          -------------    -------------     -------------

                  Federal Income Tax Cost                 $       3,035    $       2,312     $       2,203
                                                          =============    =============     =============
</TABLE>

                  The provision for federal income taxes is comprised of the
                  following components:

<TABLE>
<CAPTION>

                  (In thousands)                              1997             1996              1995
                   ------------                           -------------    -------------     -------------
                  <S>                                    <C>              <C>               <C>
                  Currently payable                       $       3,003    $       2,045     $       1,967
                                                          -------------    -------------     -------------

                  Other                                               0                0                (6)
                                                          -------------    -------------     -------------

                  Deferred:
                      Stock dividend                                 56               51                46
                      Provision for loan losses                    (118)               0                70
                      Accreted discount on securities                (6)              54                22
                      Real estate and installment loan
                         fees and costs                             100              162                52
                      Retirement plan costs                           0                0                52
                                                          -------------    -------------     -------------

                                                                     32              267               242
                                                          -------------    -------------     -------------

                  Total Provisions                        $       3,035    $       2,312     $       2,203
                                                          =============    =============     =============
</TABLE>

                  The timing differences between financial reporting and tax
                  reporting resulted in a deferred charge of $614 thousand and
                  $809 thousand as of December 31, 1997 and 1996, respectively.
                  The deferred charge for income tax costs is included in the
                  asset section of the balance sheets.





                                      44
<PAGE>   47
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)



NOTE 11.          RETIREMENT INCOME PLAN

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

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

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

                  Pension expense for the 401(k) profit sharing plan for both
                  the employer matching contribution and the discretionary
                  contribution was $315 thousand, $267 thousand and $202
                  thousand for 1997, 1996 and 1995, respectively.

                  During 1995 the Bank had a defined benefit retirement plan in
                  place. The plan was terminated in 1996 and all assets were
                  transferred to the 401(k) profit sharing plan. Pension expense
                  for 1995 under the defined benefit plan amounted to $38
                  thousand.

NOTE 12.          COMMITMENTS AND CONTINGENT LIABILITIES

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

<TABLE>
<CAPTION>

                                                                             Notational
                  (In thousands)                                               Amount
                   ------------                                            ------------
<S>                                                                       <C>
                  Commitments to extend credit                             $     62,486
                  Credit card arrangements                                        9,619
                  Standby letters of credit                                       2,299
</TABLE>





                                      45
<PAGE>   48
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)



NOTE 12.          COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

                  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.

                  Commitments as of December 31, 1997 to lend at fixed and
                  variable rates amounted to $9.6 million and $64.8 million,
                  respectively.

                  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 13.          CONCENTRATIONS OF CREDIT

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

                  As of December 31, 1997, the company had on deposit with
                  financial institutions $128 thousand in excess of FDIC
                  insurable limits.

NOTE 14.          REGULATORY CAPITAL REQUIREMENTS

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

                  Risk-based capital standards have been supplemented with
                  requirements for a minimum Tier 1 capital to assets ratio
                  (leverage ratio). In addition, regulatory agencies consider
                  the published capital levels as minimum levels and may require
                  a financial institution to maintain capital at higher levels.



                                      46
<PAGE>   49
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)



NOTE 14.          REGULATORY CAPITAL REQUIREMENTS (Continued)

                  A comparison of the Bank's capital as of December 31, 1997
                  with the minimum requirement is presented below:

<TABLE>
<CAPTION>

                                                                                                     Minimum
                  (In thousands)                                                      Actual       Requirements
                                                                                      ------       ------------
                 <S>                                                                <C>                <C>     
                  Tier 1 Risk-based Capital                                            9.58%             4.00%
                  Total Risk-based Capital                                            13.44%             8.00%
                  Leverage Ratio                                                       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 $2.3
                  million may be paid without prior regulatory approval.
                  Regardless of formal regulatory restrictions, the Bank may not
                  pay dividends that would result in its capital levels being
                  reduced below the minimum requirements shown above.

                  On December 31, 1996 the Bank declared and paid a $10 million
                  dividend to the Bank's parent company, Farmers & Merchants
                  Bancorp, Inc. with approval from the FDIC and the State of
                  Ohio Division of Financial Institutions. On December 31, 1996
                  Farmers & Merchants Bancorp, Inc. loaned to The Farmers &
                  Merchants State Bank $10 million in exchange for an unsecured
                  subordinated note receivable. The note is due January 1, 2007.
                  Interest at the rate of 6% is payable annually on the first
                  day of January each year. The Bank has the option of prepaying
                  all or any part of the note at any time without notice or
                  penalty, subject to the approval of the FDIC and the State of
                  Ohio Division of Financial Institutions.

NOTE 15.          SUPPLEMENTAL CASH FLOW INFORMATION

                  Cash paid during the year for:
<TABLE>
<CAPTION>

                  (In thousands)                               1997             1996              1995
                   ------------                           -------------    -------------     -------------
                 <S>                                     <C>              <C>               <C>
                  Interest (net of amount
                    capitalized)                          $      21,136    $      20,969     $      17,166
                  Income taxes                            $       2,652    $       2,128     $       2,359
</TABLE>



                                      47
<PAGE>   50
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS

                  The book values and estimated fair values for on and
                  off-balance sheet financial instruments as of December 31,
                  1997 and 1996 are reflected below:

<TABLE>
<CAPTION>
                                                            1997                          1996
                                                 --------------------------     --------------------------
                                                      Book           Fair           Book            Fair
                  (In thousands)                     Value          Value           Value          Value
                                                     -----          -----           -----          -----
                 <S>                            <C>            <C>             <C>            <C>
                  Financial Assets:
                      Cash                       $    16,313    $    16,313     $   15,971     $    15,971
                      Federal funds sold               6,485          6,485              0               0
                      Investment Securities:
                           Available for sale         92,050         92,050        101,721         101,721
                      Net loans                      398,151        406,323        368,900         376,206

                  Financial Liabilities:
                      Deposits                   $   461,298    $   462,967     $  438,377     $   439,349
                      Short-term borrowing:
                           Federal funds
                             purchased                     0              0          2,790           2,790
                           Securities sold
                             under agreement
                             to repurchase             2,598          2,598          3,973           3,973
                      Other borrowing                 11,292         11,642          8,998           8,654

                  Off-Balance Sheet Financial Instruments:
                      Commitments to
                         extend credit           $    62,486    $    62,486     $   49,480     $    49,480
                      Credit card
                         arrangements                  9,619          9,619          7,726           7,726
                      Standby letters of
                         credit                        2,299          2,299          2,245           2,245
</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.




                                      48
<PAGE>   51
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)



NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

                           INVESTMENT SECURITIES:

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

                           LOANS:

                           The estimated fair value of the Loan portfolio is
                           based on expected future cash flows discounted by an
                           appropriate rate derived in part from the Treasury
                           yield curve.

                           DEPOSITS:

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

                           BORROWINGS:

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

                           OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:

                           The fair value of commitments is estimated using the
                           fees currently charged to enter into similar
                           agreements, taking into account remaining terms of
                           the agreements and the present creditworthiness of
                           the counterparties. For fixed-rate loan commitments,
                           fair value also considers the difference between
                           current levels of interest rates and the committed
                           rates. The fair value of guarantees and letters of
                           credit is based on fees currently charged for similar
                           agreements or on the estimated cost to terminate them
                           or otherwise settle the obligations with the
                           counterparties at the reporting date.


                                      49
<PAGE>   52
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 17. FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
         FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                  BALANCE SHEETS
                  (In thousands)                                                1997              1996
                   ------------                                            -------------     -------------
                 <S>                                                      <C>               <C>
                  ASSETS:
                    Cash                                                   $         816     $         254
                    Related party receivables:
                         Dividends                                                   650               520
                         Note receivable                                          10,000            10,000
                    Income tax receivable                                              0                12
                    Investment in subsidiaries                                    38,207            33,115
                                                                           -------------     -------------
                  TOTAL ASSETS                                             $      49,673     $      43,901
                                                                           =============     =============
                  LIABILITIES:
                      Accrued expenses                                     $         179     $           0
                      Dividends payable                                              650               520
                                                                           -------------     -------------
                         Total Liabilities                                           829               520
                                                                           -------------     -------------
                  SHAREHOLDERS' EQUITY:
                    Common stock, no par value -
                      authorized 1,500,000 shares;
                      issued 1,300,000 shares                                     12,677            12,677
                    Undivided profits                                             35,165            30,013
                    Unrealized gain on securities
                      classified as Available for
                      Sale (net of tax effect of
                      $510 for 1997 and $357 for
                      1996)                                                        1,002               691
                                                                           -------------     -------------

                                                                                  48,844            43,381
                                                                           -------------     -------------

                  LIABILITIES AND SHAREHOLDERS'
                    EQUITY                                                 $      49,673     $      43,901
                                                                           =============     =============
</TABLE>


                                      50
<PAGE>   53


NOTE 17.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                    FINANCIAL INFORMATION (Continued)

                             STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                  (In thousands)                                       1997             1996              1995
                   ------------                                   --------------    -------------    --------------
                 <S>                                             <C>               <C>              <C>
                  INCOME:
                      Equity in net income of subsidiaries        $        6,406    $       5,510    $        5,117
                      Interest income                                        600                0                 0
                                                                  --------------    -------------    --------------

                                                                           7,006            5,510             5,117
                                                                  --------------    -------------    --------------

                  EXPENSES:
                      Miscellaneous                                           16               17                13
                      Professional fees                                       15               15                16
                      Supplies                                                 6                8                 4
                      Taxes                                                    1                1                 1
                                                                  --------------    -------------    --------------

                                                                              38               41                34
                                                                  --------------    -------------    --------------


                  INCOME BEFORE INCOME TAXES                               6,968            5,469             5,083

                  INCOME TAXES (BENEFITS)                                    191              (14)              (12)
                                                                  --------------    -------------    --------------

                  NET INCOME                                      $        6,777    $       5,483    $        5,095
                                                                  ==============    =============    ==============
</TABLE>



                                      51
<PAGE>   54
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 17.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                    FINANCIAL INFORMATION (Continued)

                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                             Net Unrealized
                                                                                             Gain (Loss) on
                                                                Common        Undivided       Available for
                  (In thousands)                                  Stock         Profits      Sale Securities
                   -------------                                -----------  -------------   ---------------
                 <S>                                           <C>           <C>               <C>                      
                  BALANCE at December 31, 1994                  $    12,677   $     22,360      $       (248)
                      Net income for 1995                                 0          5,095                 0
                      Unrealized losses on securities
                         classified as Available for Sale
                         (net of tax effect of $599)                      0              0             1,167
                      Dividends ($1.10 per share)                         0         (1,430)                0
                                                                -----------   ------------      ------------

                  BALANCE at December 31, 1995                       12,677         26,025               919
                      Net income for 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 losses 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
                                                                ===========   ============      ============
</TABLE>

                                      52
<PAGE>   55
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 17.          FARMERS & MERCHANTS BANCORP, INC. (PARENT COMPANY ONLY)
                    FINANCIAL INFORMATION (Continued)

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                  (In thousands)                                      1997             1996              1995
                   ------------                                 ----------------  ---------------   ----------------
                 <S>                                           <C>               <C>               <C>  
                  CASH FLOWS FROM OPERATING
                    ACTIVITIES:
                      Net income                                $          6,777  $         5,483   $         5,095
                      Adjustments to Reconcile Net
                         Income to Net Cash Provided
                         by Operating Activities:
                           Equity in undistributed net
                             income of subsidiaries                       (4,910)           6,316            (3,819)
                      Changes in Operating Assets and
                         Liabilities:
                           Income tax receivable                             190               10               (13)
                                                                ----------------  ---------------   ---------------

                      Net Cash Provided by Operating
                         Activities                                        2,057           11,809             1,263
                                                                ----------------  ---------------  ----------------

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

                  CASH FLOWS FROM FINANCING
                    ACTIVITIES:
                      Payment of dividends                                (1,495)          (1,625)           (1,300)
                                                                ----------------  ---------------  ----------------

                  Net increase (decrease) in cash and
                    cash equivalents                                         562              184               (37)

                  Cash and cash equivalents - beginning
                    of year                                                  254               70               107
                                                                ----------------  ---------------  ----------------

                  CASH AND CASH EQUIVALENTS --
                    END OF YEAR                                 $            816  $           254  $             70
                                                                ================  ===============  ================

</TABLE>


                                      53
<PAGE>   56
                      FARMERS & MERCHANTS BANCORP, INC.

            Notes to Consolidated Financial Statements (Continued)


NOTE 18.          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.







                                      54
<PAGE>   57

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

January 14, 1998



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, 1997 and 1996, appears on page 1. The
examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 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.


                                      55
<PAGE>   58


                        FARMERS & MERCHANTS BANCORP, INC.

                  Five Year Summary of Consolidated Operations

<TABLE>
<CAPTION>


(In thousands except for per share                 1997              1996             1995             1994           1993
 ---------------------------------             -------------     ------------     -------------    -----------     -----------
   amounts)
   -------
<S>                                           <C>               <C>              <C>              <C>             <C>   
Summary of Income:
    Interest income                            $      40,158     $     38,382     $      34,228    $    27,779     $    26,650
    Interest expense                                  21,139           20,905            17,749         12,561          12,424
                                               -------------     ------------     -------------    -----------     -----------

        Net Interest Income                           19,019           17,477            16,479         15,218          14,226

    Provision for loan losses                          1,111            1,068               385            564             908
                                               -------------     ------------     -------------    -----------     -----------

    Net interest income after
       provision for loan losses                      17,908           16,409            16,094         14,654          13,318
    Other income (expense)                            (8,096)          (8,614)           (8,594)        (7,939)         (7,617)
                                               -------------     ------------     -------------    -----------     -----------

    Earnings before federal
       income taxes                                    9,812            7,795             7,500          6,715           5,701
    Income taxes                                       3,035            2,312             2,203          1,749           1,394
                                               -------------     ------------     -------------    -----------     -----------

    Net income                                 $       6,777     $      5,483     $       5,297    $     4,966     $     4,307
                                               =============     ============     =============    ===========     ===========

    Per Share of Common Stock:
       Earnings per common share
        outstanding:
        (Based on the weighted average
        number of shares outstanding)
        (All per share amounts have
        been retroactively restated to
        reflect 5 for 1 stock split in
        1996)
             Net income                        $          5.22   $       4.22     $        4.07    $      3.82     $     3.31
             Dividends                                    1.25           1.15              1.10           1.00           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                                $       528,273   $    501,449     $     464,090    $   406,186     $   371,913
Average assets                                         510,163        482,770           430,304        387,440         362,244
Year-end equity capital                                 48,844         43,381            39,621         34,586          31,169
Average equity capital                                  46,548         41,501            38,034         32,838          30,025

</TABLE>

See Independent Auditors' Report
on Supplementary Information.


                                      56
<PAGE>   59
                      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> 
1997-- by quarter                                                      1st              $   40.00            $   45.00
                                                                       2nd                  55.00                72.00
                                                                       3rd                  72.00                72.00
                                                                       4th                  65.00                70.00

1996-- by quarter (after retroactive                                   1st              $   32.00            $   35.00
              restatement for 5 for 1 stock                            2nd                  35.00                35.00
              split in 1996)                                           3rd                  40.00                40.00
                                                                       4th                  40.00                40.00

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

                                                                     Quarter              1997                 1996
                                                                     -------            ----------           ---------
Dividends declared per share (after retroactive
     restatement for 5 for 1 stock split in 1996)
        By quarter                                                     1st                $   .25               $  .25
                                                                       2nd                    .25                  .25
                                                                       3rd                    .25                  .25
                                                                       4th                    .50                  .40
</TABLE>


                                      57
<PAGE>   60
                      FARMERS & MERCHANTS BANCORP, INC.

                      SELECTED FINANCIAL DATA BY MANAGEMENT


FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Farmers & Merchants Bancorp, Inc. reported consolidated earnings of $6.777
million for 1997 representing an increase of almost $1.3 million over the $5.5
million for 1996, a 23.6% increase. This increase was primarily the result of an
increase in interest income from loans.

Consolidated assets grew by $26.8 million in 1997 to a record $528 million from
consolidated assets of $501 million for 1996. This represents a 5.3% percent
increase. As was the case for 1996's increase, the increase for 1997 was due
almost entirely to an increase in lending activity. As a result of the continued
growth in the loan portfolio, management is of the opinion that a modest
increase in the loan loss reserve of $350 thousand to $5.85 million is
appropriate to cover potential loan losses.

The return on average assets and average shareholders' equity for 1997 was 1.33%
and 14.56%, respectively. These returns compare to 1.14% average return on
assets and 13.21% average return on shareholders' equity for 1996.

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 $100 million for 1997 representing 19.3%
of total average assets.

CAPITAL RESOURCES

Shareholders' equity was $48.8 million at December 31, 1997 compared to $43.4
million for 1996. 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, 1997, The Farmers & Merchants State Bank had a total risk-based
capital ratio of 13.4% and a 9.6% core capital to risk-based asset ratio which
are well in excess of regulatory guidelines. The bank's leverage ratio of 7.1%
is also substantially in excess of regulatory guidelines. These ratios compare
to 12.9%, 8.9% and 6.5%, respectively for 1996.

As was reported last year, these ratios for 1996 were substantially lower than
in past years due to a $10 million dividend paid by The Farmers & Merchants
State Bank to Farmers & Merchants Bancorp, Inc. the parent company. This
dividend with the subsequent loan of $10 million to The Farmers & Merchants
State Bank by Farmers & Merchants Bancorp, Inc. was done to save state franchise
taxes.

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


                                      58
<PAGE>   61
                      FARMERS & MERCHANTS BANCORP, INC.


                    SELECTED FINANCIAL DATA BY MANAGEMENT

<TABLE>
<CAPTION>

Key Ratios:
                                          1997            1996               1995              1994             1993
                                      ------------    -------------      ------------      -------------     -----------
<S>                                      <C>               <C>               <C>              <C>              <C>      
Return on average equity                  14.56%            13.21%            13.93%           15.12%            14.34%
Return on average assets                   1.33              1.14              1.23             1.28              1.19
Loan to deposit ratio                     86.31             84.15             84.06            87.55             81.12
Capital to assets ratio                    9.25              8.65              8.54             8.51              8.38

Other key selected highlights are as follows:

<CAPTION>
                                           1997           1996              1995              1994             1993
                                      ------------   --------------    --------------   ---------------   --------------
Loans                                 $    398,151   $      368,900    $      339,614   $       301,522   $      261,600
Total Assets                               528,273          501,449           464,090           406,186          371,913
Shareholders' Equity                        48,844           43,381            39,621            34,586           31,169

Interest income                             40,158           38,382            34,228            27,779           26,650
Interest expense                            21,139           20,905            17,749            12,561           12,424
Net Interest                                19,019           17,477            16,479            15,218           14,226

Other expense (net)                          8,096            8,614             8,594             7,940            7,617
Federal income tax                           3,035            2,312             2,203             1,749            1,394
Net income                                   6,777            5,483             5,297             4,965            4,307

Net income per share                          5.22             4.22              4.07              3.82             3.31
Dividends per share                           1.25             1.15              1.10              1.00             1.00

</TABLE>


                                      59
<PAGE>   62

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOUSRE

         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                 70               Chairman of the Board of Farmers                                    1968
                                                    and Merchants Bancorp, Inc. and,
                                                    The Farmers & Merchants State
                                                    Bank

Eugene Bernath                  64               Farmer                                                              1978

Jerry L. Boyers                 64               President, Edifice Construction                                     1976
                                                    Management

Joe E. Crossgrove               61               President, Chief Executive Officer                                  1992
                                                    The Farmers & Merchants State
                                                    Bank

Robert G. Frey                  57               President, E. H. Frey & Sons, Inc.                                  1987

Lee E. Graffice                 66               President, Graffice Motor Sales                                     1983

Jack C. Johnson                 45               President, Hawk's Clothing, Inc.                                    1991
                                                    Partner, REJO Partnership

Dean E. Miller                  53               President, MBC Holdings, Inc.                                       1986

Dale L. Nafziger                67               Retired                                                             1969

Harold H. Plassman              68               Attorney, Plassman, Rupp, Hensel                                    1985
                                                    & Short

James L. Provost                69               Retired, Dyer & McDermott, Inc.                                     1995

James C. Saneholtz              51               President, Saneholtz-McKarns, Inc.                                  1995

Maynard Sauder                  65               President, Sauder Woodworking Co.                                   1980

Merle J. Short                  57               Farmer, President of Promow, Inc.                                   1987

Steven J. Wyse                  53               President, Granite Industries, Inc.                                 1991

</TABLE>


                                      60
<PAGE>   63


                               EXECUTIVE OFFICERS
                               ------------------
<TABLE>
<CAPTION>

                                                    Principal Occupation
      Name                      Age                  for Past Five Years
      ----                      ---                  -------------------
<S>                            <C>              <C>     
Charles Lugbill                 70               Secretary/Treasurer Agri Trading
                                                    Chairman of the Board of Farmers
                                                    and Merchants Bancorp, Inc. and,
                                                    The Farmers & Merchants State
                                                    Bank

Joe E. Crossgrove               60               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                     38               Vice President
                                                 Chief Lending Officer

Edward Leininger                40               Vice President
                                                 Commercial Loan Officer

Allen G. Lantz                  44               Vice President
                                                 Branch Manager

Lewis Hilkert                   47               Vice President
                                                 Branch Manager

Carol England                   57               Assistant Vice President
                                                 Corporate Secretary
                                                 Branch Manager

Ronald D. Short                 45               Assistant Vice President
                                                 Branch Manager

Cynthia Knauer                  51               Assistant Vice President
                                                 Branch Manager

Dave Frazier                    39               Assistant Vice President
                                                 Branch Manager

John Fee                        37               Assistant Vice President
                                                 Branch Manager

Steve Jackson                   43               Assistant Vice President
                                                 Branch Manager
</TABLE>


                                      61
<PAGE>   64

<TABLE>
<S>                            <C>              <C>     
Deborah Stoner                  41               Assistant Vice President
                                                 Branch Manager

Randal H. Schroeder             37               Assistant Vice President
                                                 Chief Operations Officer

George Jelen                    46               Assistant Vice President
                                                 Mortgage Loan Officer

Barbara Britenriker             36               Assistant Vice President
                                                 Chief Financial Officer
                                                 Comptroller

Michael D. Culler               39               Assistant Vice President
                                                 Chief Agricultural Finance Officer

Diann K. Meyer                  37               Assistant Vice President
                                                 Personnel Manager

Gloria Gunn                     40               Assistant Vice President
                                                 Assistant Branch Manager

Richard Bruce                   50               Assistant Vice President
                                                 Commercial Loan Officer

Kent Roth                       33               Auditor
                                                 Bank Security Officer
                                                 Bank Secrecy Officer

Marilyn Johnson                 41               Compliance Officer

Jean Horwath                    46               Assistant Cashier
                                                 Assistant Branch Manager

Diane Swisher                   40               Assistant Cashier
                                                 Assistant Branch Manager

Patti Rosebrock                 40               Assistant Cashier
                                                 Assistant Branch Manager

Michael T. Smith                31               Assistant Cashier
                                                 Branch Manager

Debra Kauffman                  37               Assistant Cashier
                                                 Assistant Corporate Secretary
                                                 Consumer Loan Officer

J. Scott Miller                 41               Assistant Cashier
                                                 Assistant Agri-Finance Officer

Judy Warncke                    49               Assistant Cashier
                                                 Marketing Officer
</TABLE>


                                      62
<PAGE>   65


<TABLE>
<S>                            <C>              <C>     

Diana Dennie                    35               Assistant Cashier
                                                 Branch Manager

Jerry Borton                    48               Assistant Cashier
                                                 Loan Officer

Joyce G. Kinsman                28               Assistant Cashier
                                                 Loan Review Officer

Richard D. Ernest               33               Assistant Cashier
                                                 Asset Recovery Officer

Jane Bruner                     37               Assistant Cashier
                                                 Operations Supervisor

Barry Gray                      37               Assistant Cashier
                                                 Assistant Branch Manager

Kevin Gray                      25               Assistant Cashier
                                                 Assistant Branch Manager
</TABLE>





                                      63
<PAGE>   66


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 4, 1998 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 1997 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 1997.

         The Subsidiary Bank Board of Directors met semi-monthly during 1997.

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 4, 1998, 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 16, 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 1997 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 1998.


                                      64
<PAGE>   67


                                     PART IV

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

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

<TABLE>
<CAPTION>

                                                                                                 Annual Report
                                                                                                 -------------
         <S>      <C>     <C>                                                                      <C>
                  (1)      Financial Statements
                           Report of Independent Accountants                                         Page 5
                           Consolidated Balance Sheets                                               Page 6
                           Consolidated Statements of Income                                         Page 7
                           Consolidated Statements of Changes in
                           Shareholders' Equity                                                      Page 8
                           Consolidated Statements of Cash Flows                                     Page 9
                           Notes to Consolidated Financial Statements                                Pages 10 - 30
                  (2)      Financial Statement Schedules
                           Independent Auditors' Report on Additional
                           Information                                                               Page 31
                           Five Year Summary of Operations                                           Page 32
                  (3)      Exhibits
                           (3.1) Articles of Incorporation have been submitted
                           with previous 10-K reports. (13.1) 1997 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 17 pages 26 through 29 Other schedules
                  required to be filed as part of this report.
                                                                                                   Form 10-K
                  Schedule of Property and Equipment                                                 Page 42
                  Schedule of Accumulated Depreciation - Property and Equipment                      Page 43

</TABLE>


                                      65
<PAGE>   68


                       SCHEDULE OF PROPERTY AND EQUIPMENT

                                                                       Exhibit 1
<TABLE>
<CAPTION>

                                                                  Year Ended December 30, 1997
                                                  -----------------------------------------------------------------
                                                  Beginning                                             Ending
(in thousands)                                     Balance         Additions        Retirements         Balance
                                                 -------------    --------------    -------------    --------------
<S>                                             <C>              <C>               <C>              <C>
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 30, 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
                                                 =============    ==============    =============    ==============

                                                                  Year Ended December 30, 1995
                                                  -----------------------------------------------------------------
                                                  Beginning                                             Ending
(in thousands)                                     Balance         Additions        Retirements         Balance
                                                 -------------    --------------    -------------    --------------
Land........................................     $       1,073    $           47    $           0    $        1,120
Building....................................             6,042               523               90             6,475
Banking house equipment.....................             3,033             1,084               43             4,074
                                                 -------------    --------------    -------------    --------------

                                                 $      10,148    $        1,654    $         133    $       11,669
                                                 =============    ==============    =============    ==============
</TABLE>


                                      66

<PAGE>   69


         SCHEDULE OF ACCUMULATED DEPRECIATION -- PROPERTY AND EQUIPMENT

                                                                     Exhibit 2


<TABLE>
<CAPTION>

                                                                       Year Ended December 30, 1997
                                                  -----------------------------------------------------------------
                                                  Beginning       Provision for                         Ending
(in thousands)                                     Balance          Depreciation      Retirements           Balance
                                                 -------------    --------------      ---------------   -----------
<S>                                             <C>              <C>               <C>              <C>
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 30, 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
                                                 =============    ==============    =============    ==============

                                                                     Year Ended December 30, 1995
                                                  -----------------------------------------------------------------
                                                  Beginning       Provision for                         Ending
(in thousands)                                     Balance        Depreciation        Retirements           Balance
                                                 -------------    --------------      ---------------   -----------
Building....................................     $       1,683    $          203    $          72    $        1,814
Banking house equipment.....................             2,208               486               37             2,657
                                                 -------------    --------------    -------------    --------------

                                                 $       3,891    $          689    $         109    $        4,471
                                                 =============    ==============    =============    ==============
</TABLE>



                                      67

<PAGE>   70


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.

<TABLE>
<S><C>

                                                                  Farmers & Merchants Bancorp, Inc.

                                                                  By: Joe E. Crossgrove              Date: 3/6/98
                                                                     ------------------------------       ----------------
                                                                  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.

                                          
Joe E. Crossgrove                         Date: 3/6/98            Barbara Britenriker                Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Joe E. Crossgrove, Director                                       Barbara Britenriker
Chief Executive Officer                                           Chief Accounting Officer


Charles Lugbill                           Date: 3/6/98            Kent Roth                          Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Charles Lugbill                                                   Kent Roth, Auditor
Director and Chairman

Eugene D. Bernath                         Date: 3/6/98            Harold H. Plassman                 Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Eugene D. Bernath, Director                                       Harold H. Plassman, Director


Jerry Boyers                              Date: 3/6/98            James Provost                      Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Jerry Boyers, Director                                            James Provost, Director


Robert Frey                               Date: 3/6/98            James Saneholtz                    Date: 3/6/98              
--------------------------------------         ---------------    -------------------------------         ----------------
Robert Frey, Director                                             James Saneholtz, Director


Lee Grafice                               Date: 3/6/98            Maynard Sauder                     Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Lee Grafice, Director                                             Maynard Sauder, Director


Jack C. Johnson                           Date: 3/6/98            Merle J. Short                     Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Jack C. Johnson, Director                                         Merle J. Short, Director


Dean Miller                               Date: 3/6/98            Steven J. Wyse                     Date: 3/6/98            
--------------------------------------         ---------------    -------------------------------         ----------------
Dean Miller, Director                                             Steven J. Wyse, Director


Dale L. Nafziger                          Date: 3/6/98            
--------------------------------------         ---------------
Dale L. Nafziger, Director

</TABLE>


                                      68
                                       
<PAGE>   71


                                EXHIBIT INDEX


EXHIBIT NUMBER

     27                  FINANCIAL DATA SCHEDULE