UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------- DATE OF REPORT: October 2, 1996 -------------------- FIRST MERCHANTS CORPORATION (Exact Name of Registrant as Specified in its Charter) -------------------- INDIANA 0-17071 35-1544218 (State of Incorporation) (SEC File No.) (IRS Employer ID No.) 200 East Jackson Street P.O. Box 792 Muncie, Indiana 47305-2814 (Address of Principal Executive Offices) (317) 747-1500 (Registrant's Telephone Number) Page 1 of 43 Pages Exhibit Index on Page 6
ITEM 1. Not Applicable. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On October 2, 1996, First Merchants Corporation acquired all of the assets of Randolph County Bancorp through the merger of Randolph County Bancorp with and into First Merchants Corporation (the "Merger"). Randolph County Bancorp's principal asset was the shares of common stock of its wholly-owned subsidiary, The Randolph County Bank (the "Bank"). The Bank is an Indiana state chartered commercial bank providing various commercial and consumer banking services to its customers located primarily in the Winchester, Indiana community and the surrounding area. As a result of the Merger, the Bank became the fifth wholly- owned subsidiary of First Merchants Corporation, joining First Merchants Bank, National Association, Pendleton Banking Company, First United Bank and The Union County National Bank of Liberty. First Merchants Corporation accounted for the Merger under the pooling of interests method of accounting. Pursuant to the terms of the Merger, shareholders of Randolph County Bancorp receive twenty and 53/100 (20.53) shares of First Merchants Corporation common stock for each share of Randolph County Bancorp common stock held. Cash will be paid for fractional shares of First Merchants Corporation common stock resulting from the exchange ratio. Based on the exchange ratio, shareholders of Randolph County Bancorp will receive approximately Five Hundred Sixty-five Thousand Seven Hundred Five (565,705) shares of First Merchants Corporation common stock. The terms of the Merger were agreed upon in arm's length negotiations between the respective managements of First Merchants Corporation and Randolph County Bancorp. For further information regarding the terms of the Merger, see the Agreement of Reorganization and Merger between First Merchants Corporation and Randolph County Bancorp dated January 17, 1996, which is incorporated into this Form 8-K by reference and filed as an exhibit hereto. ITEMS 3-6. Not Applicable. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired. (i) Independent Auditor's Report. (ii) Consolidated Balance Sheet as of December 31, 1995 and 1994. 2
(iii) Consolidated Statement of Income for the Years Ended December 31, 1995, 1994 and 1993. (iv) Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993. (v) Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993. (vi) Notes to Consolidated Financial Statements. (vii) Consolidated Condensed Balance Sheet as of June 30, 1996 (unaudited). (viii) Consolidated Condensed Statement of Income for the Six Months Ended June 30, 1996 and 1995 (unaudited). (ix) Consolidated Condensed Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 1996 (unaudited). (x) Consolidated Condensed Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (unaudited). (xi) Notes to Consolidated Condensed Financial Statements (unaudited). (b) Pro Forma Financial Information. (i) Pro Forma Condensed Combined Financial Information Including Balance Sheet as of December 31, 1995 and Statements of Income for each of the Years in the Three-Year Period Ended December 31, 1995. (ii) Pro Forma Condensed Combined Financial Information Including Balance Sheet as of June 30, 1996 and Statement of Income for the Six Months Ended June 30, 1996. 3
(c) Exhibits. (2) Agreement of Reorganization and Merger by and between First Merchants Corporation and Randolph County Bancorp dated January 17, 1996. (Incorporated by reference to First Merchants Corporation's Registration Statement on Form S-4 [SEC File No. 33-02349] ordered effective on May 9, 1996.) (23) Consent of Geo. S. Olive & Co., LLC ITEM 8. Not Applicable. 4
SIGNATURES Pursuant to the requirements 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. DATE: October 14, 1996. FIRST MERCHANTS CORPORATION By: /s/ Larry R. Helms ----------------------------------- Larry R. Helms, Senior Vice President 5
INDEX OF FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired. (i) Independent Auditor's Report. . . . . . . . . . . . . . . . . . 9 (ii) Consolidated Balance Sheet as of December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . 10 (iii) Consolidated Statement of Income for the Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 11 (iv) Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 13 (v) Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . 14 (vi) Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (vii) Consolidated Condensed Balance Sheet as of June 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . 28 (viii) Consolidated Condensed Statement of Income for the Six Months Ended June 30, 1996 and 1995 (unaudited). . . . . . . . . . . . 29 (ix) Consolidated Condensed Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 1996 and 1995 (unaudited) . . . . . . 30 (x) Consolidated Condensed Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (unaudited). . . . . . . . . . . . . . . 31 (xi) Notes to Consolidated Condensed Financial Statements (unaudited). . . . . . . . . . . . . . . . . . . . . 32 (b) Pro Forma Financial Information. (i) Pro Forma Condensed Combined Financial Information Including Balance Sheet as of December 31, 1995 6
and Statements of Income for each of the Years in the Three-Year Period Ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . 33 (ii) Pro Forma Condensed Combined Financial Information Including Balance Sheet as of June 30, 1996 and Statement of Income for the Six Months Ended June 30, 1996. . . . . . . . . . . . . . . . . . . 39 (c) Exhibits. (2) Agreement of Reorganization and Merger by and between First Merchants Corporation and Randolph County Bancorp dated January 17, 1996 . . . . . . . . . . . . . (A) (23) Consent of Geo. S. Olive & Co., LLC . . . . . . . . . . . . . . 43 (A) Incorporated by reference to First Merchants Corporation's Registration Statement on Form S-4 (SEC File No. 33-02349) ordered effective on May 9, 1996. 7
RANDOLPH COUNTY BANCORP AND SUBSIDIARY Consolidated Financial Statements December 31, 1995 and 1994 8
INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Randolph County Bancorp Winchester, Indiana We have audited the consolidated balance sheet of Randolph County Bancorp and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 described above present fairly, in all material respects, the consolidated financial position of Randolph County Bancorp and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. GEO. S. OLIVE & CO. LLC Indianapolis, Indiana January 17, 1996, except for the last paragraph of the note on Loans and Allowance as to which the date is March 19, 1996 9
CONSOLIDATED BALANCE SHEET DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 4,080,023 $ 2,503,628 Federal funds sold 1,400,000 1,050,000 ------------------------------------ Cash and cash equivalents 5,480,023 3,553,628 Interest-bearing deposits 103,595 Investment securities Available for sale 22,029,295 Held to maturity 28,776,202 ------------------------------------ Total investment securities 22,029,295 28,776,202 Loans 43,493,754 43,778,184 Allowance for loan losses (593,580) (489,409) ------------------------------------ Net loans 42,900,174 43,288,775 Premises and equipment 1,331,159 1,459,800 Interest receivable 1,082,609 1,037,736 Other assets 292,182 315,625 ------------------------------------ Total assets $73,219,037 $78,431,766 ------------------------------------ ------------------------------------ LIABILITIES Deposits Noninterest bearing $ 7,333,464 $ 6,537,517 Interest bearing 56,107,793 62,243,689 ------------------------------------ Total deposits 63,441,257 68,781,206 Due to broker 387,591 795,000 Interest payable 380,724 304,932 Other liabilities 256,405 223,635 ------------------------------------ Total liabilities 64,465,977 70,104,773 ------------------------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $100 stated value Authorized 60,000 shares Issued and outstanding 27,555 and 27,567 shares 2,755,500 2,756,700 Paid-in capital 709,036 709,344 Retained earnings 5,250,057 4,860,949 Net unrealized gain on securities available for sale 38,467 ------------------------------------ Total stockholders' equity 8,753,060 8,326,993 ------------------------------------ Total liabilities and stockholders' equity $73,219,037 $78,431,766 ------------------------------------ ------------------------------------ See notes to consolidated financial statements. 10
CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable Taxable $3,857,471 $3,446,748 $3,358,934 Tax exempt 26,112 34,340 34,793 Investment securities Taxable 854,488 1,024,299 1,182,463 Tax exempt 340,132 435,395 586,638 Federal funds sold 68,798 27,523 46,706 Deposits with financial institutions 5,297 1,055 ---------------------------------------------- Total interest income 5,152,298 4,968,305 5,210,589 ---------------------------------------------- INTEREST EXPENSE Deposits 2,489,584 2,326,572 2,532,477 Short-term borrowings 8,636 44,095 3,927 ---------------------------------------------- Total interest expense 2,498,220 2,370,667 2,536,404 ---------------------------------------------- NET INTEREST INCOME 2,654,078 2,597,638 2,674,185 Provision for loan losses 408,000 120,000 240,000 ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,246,078 2,477,638 2,434,185 ---------------------------------------------- OTHER INCOME Fiduciary activities 35,680 59,705 45,635 Service charges on deposit accounts 143,992 119,292 112,264 Other customer fees 28,425 36,184 27,246 Security gain 220,000 Other income 14,715 26,494 12,775 ---------------------------------------------- Total other income 222,812 241,675 417,920 ---------------------------------------------- OTHER EXPENSES Salaries and employee benefits 812,950 822,890 773,491 Net occupancy expenses 143,934 152,663 56,404 Equipment expenses 77,953 62,107 45,691 Data processing fees 71,209 70,211 66,583 Deposit insurance expense 78,431 156,958 151,157 Printing and office supplies 45,087 53,839 48,686 Advertising 46,250 44,650 39,500 Legal and professional fees 69,685 50,541 40,457 Director and committee fees 65,900 71,050 69,800 Other expenses 123,128 129,372 111,848 ---------------------------------------------- Total other expenses 1,534,527 1,614,281 1,403,617 ---------------------------------------------- (continued) 11
CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ 934,363 $1,105,032 $1,448,488 Income tax expense 267,337 302,931 409,877 ---------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 667,026 802,101 1,038,611 CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES 33,500 ---------------------------------------------- NET INCOME $ 667,026 $ 802,101 $1,072,111 ---------------------------------------------- ---------------------------------------------- PER SHARE Income before cumulative effect of change in accounting method $24.20 $29.10 $37.68 Net income 24.20 29.10 38.89 WEIGHTED AVERAGE SHARES OUTSTANDING 27,565 27,567 27,567 See notes to consolidated financial statements. 12
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NET UNREALIZED COMMON STOCK GAIN ON ---------------------------- SECURITIES SHARES PAID-IN RETAINED AVAILABLE OUTSTANDING AMOUNT CAPITAL EARNINGS FOR SALE TOTAL - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1993 9,189 $ 918,900 $709,344 $5,270,204 $6,898,448 Net income for 1993 1,072,111 1,072,111 Cash dividends ($11.50 per share) (169,997) (169,997) 200% stock dividend 18,378 1,837,800 (1,837,800) ---------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1993 27,567 2,756,700 709,344 4,334,518 7,800,562 Net income for 1994 802,101 802,101 Cash dividends ($10 per share) (275,670) (275,670) ---------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1994 27,567 2,756,700 709,344 4,860,949 8,326,993 Net income for 1995 667,026 667,026 Cash dividends ($10 per share) (275,586) (275,586) Unrealized gain on securities available for sale, net of taxes of $15,237 $38,467 38,467 Purchase of stock (12) (1,200) (308) (2,332) (3,840) ---------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1995 27,555 $2,755,500 $709,036 $5,250,057 $38,467 $8,753,060 ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- See notes to consolidated financial statements. 13
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 667,026 $ 802,101 $1,072,111 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 408,000 120,000 240,000 Depreciation and amortization 130,957 100,449 36,353 Deferred income tax (15,862) 27,159 (76,018) Investment securities amortization, net 95,274 361,978 312,138 Security gain (220,000) Net change in Interest receivable (44,873) 68,134 (60,642) Interest payable 75,792 47,644 (48,100) Other assets 111,231 (263,005) 110,380 Other adjustments 48,578 3,474 (61,023) ---------------------------------------------- Net cash provided by operating activities 1,476,123 1,267,934 1,305,199 ---------------------------------------------- INVESTING ACTIVITIES Net change in interest-bearing deposits (103,595) 100,000 Purchases of securities held to maturity (8,133,079) (11,802,796) (19,940,074) Proceeds from maturities and payments of securities held to maturity 14,441,000 16,055,577 17,880,875 Net change in loans (132,280) (3,718,068) (5,110,851) Purchases of premises and equipment (2,316) (707,920) (483,189) Premiums paid on life insurance (744,800) Refunds of life insurance premiums 744,800 Other 82,053 47,510 ---------------------------------------------- Net cash provided (used) by investing activities 6,069,730 653,646 (8,250,529) ---------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, NOW, money market and savings deposits (3,256,441) (8,282,200) 2,268,738 Certificates of deposit (2,083,507) 5,519,650 799,827 Cash dividends (275,670) (179,186) (169,997) Purchase of stock (3,840) ---------------------------------------------- Net cash provided (used) by financing activities (5,619,458) (2,941,736) 2,898,568 ---------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,926,395 (1,020,156) (4,046,762) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,553,628 4,573,784 8,620,546 ---------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $5,480,023 $3,553,628 $4,573,784 ---------------------------------------------- ---------------------------------------------- ADDITIONAL CASH FLOWS INFORMATION Interest paid $2,422,418 $2,429,994 $2,584,504 Income tax paid 249,253 404,195 419,860 See notes to consolidated financial statements. 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Randolph County Bancorp ("Company"), and its wholly owned subsidiary, The Randolph County Bank ("Bank"), conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a bank holding company whose principal activity is the ownership and management of the Bank. The Bank operates under a state bank charter and provides full banking services, including trust services. As a state bank, the Bank is subject to the regulation of the Department of Financial Institutions, State of Indiana and the Federal Deposit Insurance Corporation. The Bank generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Randolph County, Indiana and surrounding counties. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon economic conditions in the agricultural industry. CONSOLIDATION--The consolidated financial statements include the accounts of the Company and the Bank after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES--The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, on January 1, 1994. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in stockholders' equity, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. At January 1, 1994, the Bank determined there were no securities which should be reclassified as available for sale, and therefore there was no change in total stockholders' equity. Prior to the adoption of SFAS No. 115, investment securities were carried at cost, adjusted for amortization of premiums and discounts. Realized gains and losses on sales were included in other income. Gains and losses on the sale of securities were determined on the specific-identification method. 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Loans are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans, except for installment loans with add-on interest, for which a method that approximates the level yield method is used. Loans are placed in a nonaccrual status when the collection of interest becomes doubtful. Interest income previously accrued but not deemed collectible is reversed and charged against current income. Interest on nonaccrual loans is then recognized as income when collected. Allowance for loan losses is maintained to absorb potential loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of December 31, 1995, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method for bank premises and the declining-balance method for equipment based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Advertising costs are expensed as incurred. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiary. Earnings per share have been computed based upon the weighted average common shares outstanding during each year. - - ACQUISITION OF COMPANY In January, 1996, the Company signed a definitive agreement to be acquired by First Merchants Corporation ("First"), Muncie, Indiana. The agreement provides that each stockholder of the Company would receive shares of First common stock for each common share of Company stock held. The proposed transaction is subject to the approval of the Company's stockholders and appropriate regulatory authorities. 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) - - RESTRICTION ON CASH AND DUE FROM BANKS The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 1995, was $586,000. - - INVESTMENT SECURITIES 1995 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- Available for sale U.S. Treasury $ 3,709 $ 23 $ 8 $ 3,724 Federal agencies 4,892 28 10 4,910 State and municipal 8,428 50 18 8,460 Corporate obligations 4,937 25 27 4,935 ---------------------------------------------------------- Total investment securities $21,966 $126 $63 $22,029 ---------------------------------------------------------- ---------------------------------------------------------- 1994 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31 COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- Held to maturity U.S. Treasury $ 5,468 $182 $ 5,286 Federal agencies 4,999 120 4,879 State and municipal 9,826 $20 84 9,762 Corporate obligations 8,483 5 185 8,303 ---------------------------------------------------------- Total investment securities $28,776 $25 $571 $28,230 ---------------------------------------------------------- ---------------------------------------------------------- 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) The amortized cost and estimated market value of securities available for sale at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 1995 ------------------------------------ AMORTIZED FAIR MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE - ------------------------------------------------------------------------------ Within one year $ 9,073 $ 9,073 One to five years 12,406 12,454 Five to ten years 352 367 After ten years 135 135 ------------------------------------ Totals $21,966 $22,029 ------------------------------------ ------------------------------------ Securities with a carrying value of $103,000 and $99,600 were pledged at December 31, 1995 and 1994 to secure certain deposits and for other purposes as permitted or required by law. There were no sales of investment securities during 1995, 1994 or 1993. However, a gain of $220,000 was realized in 1993 from proceeds of an investment security previously written off in 1992. The tax expense on this gain was $87,000 in the year ended December 31, 1993. On December 31, 1995, the Bank transferred all securities from held to maturity to available for sale in accordance with a transition reclassification allowed by the Financial Accounting Standards Board. Such securities had a carrying value of $21,966,000 and a fair value of $22,029,000. 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) LOANS AND ALLOWANCE DECEMBER 31 1995 1994 - --------------------------------------------------------------------------------------------------------- Commercial and industrial loans $ 3,230 $ 3,578 Real estate loans (includes $10,111 and $9,687 secured by farmland) 22,590 18,848 Agricultural production financing and other loans to farmers 6,063 5,681 Individuals' loans for household and other personal expenditures 12,988 17,016 Tax-exempt loans 85 90 Other loans 5 47 ---------------------------- 44,961 45,260 Unearned interest on loans (1,467) (1,482) ---------------------------- Total loans $43,494 $43,778 ---------------------------- ---------------------------- DECEMBER 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $489 $567 $382 Provision for losses 408 120 240 Recoveries on loans 21 20 16 Loans charged off (324) (218) (71) ------------------------------------------- Balances, December 31 $594 $489 $567 ------------------------------------------- ------------------------------------------- Nonperforming loans Nonaccruing loans $33 Loans contractually past due 90 days or more other than nonaccruing $36 $343 $45 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) The Company adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN and ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. The adoption of SFAS No. 114 and 118 did not have a material impact on the Company's financial position or results of operations. Impaired loans totaled $631,000 at December 31, 1995. An allowance for losses at December 31, 1995, was not deemed necessary for impaired loans totaling $525,000, but an allowance of $73,000 was recorded for the remaining balance of impaired loans of $106,000. The average balance of impaired loans for 1995 was $572,000. Interest income and cash receipts of interest totaled $47,000 and $37,000 during the period in 1995 that the loans were impaired. The Bank has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: 1995 1994 - ------------------------------------------------------------------------------ Balances, January 1 $963 $795 Changes in composition of related parties (442) New loans, including renewals 84 1,167 Payments, etc., including renewals (96) (999) ------------------------- Balances, December 31 $509 $963 ------------------------- ------------------------- On March 19, 1996, the Company charged off $188,000 in loans to a single borrower. In conjucnction with the chargeoff, a provision for loan losses of $188,000 was also recorded. These transactions were the result of information related to the borrower which became available subsequent to December 31, 1995 and discussions with regulatory authorities. Both of these transactions are reflected in the December 31, 1995 consolidated financial statements. - - PREMISES AND EQUIPMENT DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------ Land $ 223 $ 223 Buildings 1,208 1,203 Equipment 511 512 --------------------------- Total cost 1,942 1,938 Accumulated depreciation (611) (478) --------------------------- Net $1,331 $1,460 --------------------------- --------------------------- 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) DEPOSITS DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------ Noninterest bearing $ 7,333 $ 6,538 Interest-bearing demand 9,446 10,464 Savings deposits 9,949 12,981 Certificates and other time deposits of $100,000 or more 5,476 4,279 Other certificates and time deposits 31,237 34,519 ---------------------------- Total deposits $63,441 $68,781 ---------------------------- ---------------------------- Certificates maturing in years ending December 31: 1996 $25,555 1997 6,109 1998 4,154 1999 642 2000 253 -------------- $36,713 -------------- -------------- 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) INCOME TAX YEAR ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- Income tax expense Currently payable Federal $196 $188 $339 State 87 88 147 Deferred Federal (12) 19 (55) State (4) 8 (21) ----------------------------------- Total income tax expense $267 $303 $410 ----------------------------------- ----------------------------------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $318 $376 $492 Tax exempt interest (107) (139) (183) Effect of state income taxes 55 63 83 Other 1 3 18 ----------------------------------- Actual tax expense $267 $303 $410 ----------------------------------- ----------------------------------- A cumulative net deferred tax asset is included in other assets.The components of the asset are as follows: DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------ Differences in depreciation methods $(32) $(17) Differences in accounting for loan losses 187 143 State income tax (14) (13) Differences in accounting for pensions (19) (2) Differences in accounting for securities available for sale (25) Other 5 ----------------------------------- $ 102 $111 ----------------------------------- ----------------------------------- Assets $192 $151 Liabilities (90) (32) ----------------------------------- $ 102 $119 ----------------------------------- ----------------------------------- 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet. Financial instruments whose contract amount represents credit risk as of December 31 were as follows: 1995 1994 - -------------------------------------------------------------------------------- Commitments to extend credit $2,746 $3,276 Standby letters of credit 55 55 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and Bank are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. - - RESTRICTION ON DIVIDENDS Without prior approval, the Bank is restricted by Indiana law and regulations of the Department of Financial Institutions, State of Indiana, and the Federal Deposit Insurance Corporation as to the maximum amount of dividends it can pay to its parent to the balance of the undivided profits account, adjusted for defined bad debts. As a practical matter, the Bank restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 1995, total stockholders' equity of the Bank was $8,756,000 of which $6,152,000 was restricted from dividend distribution to the Company. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) PENSION PLAN The Bank's defined-benefit pension plan covers substantially all of its employees. The benefits are based primarily on years of service and employees' pay near retirement. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Pension expense was $52,000 for 1995, $77,000 for 1994 and $50,000 for 1993. The following tables set forth the plan's funded status and amounts recognized in the consolidated balance sheet: DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------------------------------------ Actuarial present value of Accumulated benefit obligation including vested benefits of $1,481 and $1,287 $1,510 $1,309 ---------------------------- Projected benefit obligation for service rendered to date $(1,890) $(1,591) Plan assets at fair value, primarily time deposits in financial institutions 1,678 1,411 ---------------------------- Projected benefit obligation in excess of plan assets (212) (180) Unrecognized net loss from experience different than that assumed 211 149 Unrecognized prior service cost 153 158 Unrecognized net asset at January 1, 1987 being recognized over 17 years (108) (123) ---------------------------- Prepaid pension cost included in other assets $ 44 $ 4 ---------------------------- ---------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Pension expense includes the following components Service cost - benefits earned during the year $57 $65 $52 Interest cost on projected benefit obligation 105 100 98 Actual return on plan assets (246) (6) (21) Net amortization and deferral 136 (82) (79) ----------------------------------------- $52 $77 $50 ----------------------------------------- ----------------------------------------- Assumptions used in the accounting were: Discount rate 6.25% 6.75% 6.00% Rate of increase in compensation 4.00% 4.00% 4.50% Expected long-term rate of return on assets 8.00% 7.00% 7.00% 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents approximates carrying value. INTEREST-BEARING DEPOSITS--The fair value of interest-bearing time deposits approximates carrying value. INVESTMENT SECURITIES--Fair values are based on quoted market prices. LOANS-For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans, are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable approximate carrying values. DEPOSITS--The fair values of noninterest-bearing and interest-bearing demand accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. DUE TO BROKER--The fair value of due to broker approximates carrying value. The estimated fair values of the Company's financial instruments are as follows: 1995 ---------------------------- CARRYING FAIR DECEMBER 31 AMOUNT VALUE - ------------------------------------------------------------------------------ ASSETS Cash and cash equivalents $ 5,480 $ 5,480 Interest-bearing deposits 104 104 Investment securities available for sale 22,029 22,029 Loans, net 42,900 42,939 Interest receivable 1,083 1,083 LIABILITIES Deposits 63,441 63,409 Interest payable 381 381 Due to broker 388 388 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: CONDENSED BALANCE SHEET DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------ ASSETS Cash $ 7 $ 2 Investment in subsidiary 8,756 8,321 Other assets 200 197 ---------------------------- Total assets $ 8,963 $ 8,520 ---------------------------- ---------------------------- LIABILITIES Dividend payable $ 193 $ 193 Other liabilities 17 ---------------------------- Total liabilities 210 193 STOCKHOLDERS' EQUITY 8,753 8,327 ---------------------------- Total liabilities and stockholders' equity $8,963 $8,520 ---------------------------- ---------------------------- CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31 1995 1994 1993 - ----------------------------------------------------------------------------- Income--dividends from subsidiary $281 $279 $ 174 Expense--other expense 18 2 1 -------------------------------- Income before income tax and equity in undistributed income of subsidiary 263 277 173 Income tax benefit 7 1 -------------------------------- Income before equity in undistributed income of subsidiary 270 278 173 Equity in undistributed income of subsidiary 397 524 899 -------------------------------- NET INCOME $667 $802 $1,072 -------------------------------- -------------------------------- 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $667 $802 $1,072 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary (397) (524) (899) Change in Other assets (3) (101) (4) Other liabilities 18 -------------------------------- Net cash provided by operating activities 285 177 169 -------------------------------- FINANCING ACTIVITIES Cash dividends (276) (179) (165) Purchase of stock (4) -------------------------------- Net cash used by financing activities (280) (179) (165) -------------------------------- NET INCREASE (DECREASE) IN CASH 5 (2) 4 CASH AT BEGINNING OF YEAR 2 4 -------------------------------- CASH AT END OF YEAR $ 7 $ 2 $ 4 -------------------------------- -------------------------------- 27
RANDOLPH COUNTY BANCORP CONSOLIDATED CONDENSED BALANCE SHEET JUNE 30, 1996 (UNAUDITED) ASSETS Cash and due from banks $ 2,066,900 Interest-bearing deposits 107,319 Investment securities available for sale 24,270,905 Loans 44,829,303 Allowance for loan losses (665,663) ----------------- Net loans 44,163,640 Premises and equipment 1,273,289 Interest receivable 1,088,399 Other assets 326,214 ----------------- Total assets $ 73,296,666 ----------------- ----------------- LIABILITIES Deposits Noninterest bearing $ 5,333,893 Interest bearing 57,053,987 ----------------- Total deposits 62,387,880 Federal funds purchased 1,500,000 Interest payable 407,725 Other liabilities 62,317 ----------------- Total liabilities 64,357,922 ----------------- Commitments and Contingencies STOCKHOLDERS' EQUITY Common stock, $100 stated value Authorized - 60,000 shares Issued and outstanding - 27,555 shares 2,755,500 Paid-in capital 709,036 Retained earnings 5,593,391 Net unrealized gain on securities available for sale (119,183) ----------------- Total stockholders' equity 8,938,744 ----------------- Total liabilities and stockholders' equity $ 73,296,666 ----------------- ----------------- See notes to consolidated condensed financial statements. 28
RANDOLPH COUNTY BANCORP CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------------- 1996 1995 ------------------------------- INTEREST INCOME Loans receivable $1,994,342 $1,867,882 Investment securities 593,654 624,834 Federal funds sold 53,597 9,289 Deposits with financial institutions 3,625 1,634 ------------------------------- Total interest income 2,645,218 2,503,639 ------------------------------- INTEREST EXPENSE Deposits 1,240,992 1,217,456 Short-term borrowings 7,869 8,636 ------------------------------- Total interest expense 1,248,861 1,226,092 ------------------------------- NET INTEREST INCOME 1,396,357 1,277,547 Provision for loan losses 90,000 60,000 ------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,306,357 1,217,547 ------------------------------- OTHER INCOME Fiduciary 3,984 1,425 Service charges on deposit accounts 85,792 55,682 Other customer fees 21,897 14,333 Other income 7,960 9,442 ------------------------------- Total other income 119,633 80,882 ------------------------------- OTHER EXPENSES Salaries and employee benefits 421,074 422,495 Net occupancy expenses 77,604 71,417 Equipment expenses 33,010 41,737 Data processing fees 29,847 29,356 Deposit insurance expense 1,000 77,138 Printing and office supplies 22,822 21,886 Advertising 18,586 23,094 Legal and professional fees 26,473 23,231 Director and committee fees 30,300 35,100 Other expenses 141,082 57,620 ------------------------------- Total other expenses 801,798 803,074 ------------------------------- INCOME BEFORE INCOME TAX 624,192 495,355 Income tax expense 198,193 142,955 ------------------------------- NET INCOME $ 425,999 $ 352,400 ------------------------------- ------------------------------- PER SHARE Net income $ 15.45 $ 12.78 WEIGHTED AVERAGE SHARES OUTSTANDING 27,565 27,567 See notes to consolidated condensed financial statements. 29
RANDOLPH COUNTY BANCORP CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) 1996 1995 ------------------------------- Balances, January 1 $8,753,060 $8,326,993 Net income 425,999 352,400 Cash dividends (82,665) (82,701) Change in unrealized gain (loss) on securities available for sale, net of taxes of $103,402 (157,650) ------------------------------- Balances, June 30 $8,938,744 $8,596,692 ------------------------------- ------------------------------- See notes to consolidated condensed financial statements. 30
RANDOLPH COUNTY BANCORP CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------------------- 1996 1995 ------------------------------------- OPERATING ACTIVITIES Net income $ 425,999 $ 352,400 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 90,000 60,000 Depreciation and amortization 57,870 67,037 Investment securities amortization, net 58,082 51,606 Net change in Interest receivable (5,790) 81,025 Interest payable 27,001 48,377 Other adjustments 34,373 92,037 ------------------------------------- Net cash provided by operating activities 687,535 752,482 ------------------------------------- INVESTING ACTIVITIES Net change in interest-bearing deposits (3,724) (100,000) Purchase of securities held to maturity (2,843,274) Purchase of securities available for sale (9,983,335) Proceeds from maturities of securities available for sale 7,035,000 Proceeds from maturities of securities held to maturity 8,516,000 Net change in loans (1,373,790) (1,151,960) Purchase of premises and equipment (1,850) Other 12,786 58,040 ------------------------------------- Net cash provided (used) by investing activities (4,313,063) 4,476,956 ------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, NOW, money market and savings deposits (2,055,575) (4,899,998) Certificates of deposit 1,002,198 (1,041,491) Net increase in short-term borrowings 1,500,000 Cash dividends (234,218) (192,969) ------------------------------------- Net cash used by financing activities 212,405 (6,134,458) ------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (3,413,123) (905,020) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,480,023 3,553,628 ------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,066,900 $ 2,648,608 ------------------------------------- ------------------------------------- See notes to consolidated financial statements. 31
RANDOLPH COUNTY BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1: General The significant accounting policies followed by Randolph County Bancorp (Corporation) and its wholly owned subsidiary for interim financial reporting are consistent with the accounting polices followed for annual financial reporting. All adjustments which are in the opinion of management necessary for a fair statement of the results for the period reported have been included in the accompanying consolidated financial statements. Note 2: Acquisition On October 2, 1996, First Merchants Corporation of Muncie, Indiana (First Merchants) acquired all of the assets of the Corporation through the merger of the Corporation with and into First Merchants. Pursuant to the terms of the merger agreement, stockholders of the Corporation receive 20.53 shares of First Merchants common stock for each share of the Corporation common stock held. 32
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet as of December 31, 1995, and the pro forma combined condensed statements of income for each of the years in the three-year period ended December 31, 1995, give effect to the Merger based on the historical consolidated financial statements of First Merchants Corporation ("First Merchants") and its subsidiaries and the historical consolidated financial statements of Randolph County Bancorp ("Randolph County") and its subsidiary under the assumptions and adjustments set forth in the accompanying notes to the pro forma financial statements. The pro forma financial statements have been prepared by the managements of First Merchants and Randolph County based upon their respective financial statements. These pro forma statements, which include results of operations as if the Merger had been consummated at the beginning of each period presented, may not be indicative of the results that actually would have occurred if the Merger had been in effect on the dates indicated or which may be obtained in the future. The following pro forma combined condensed balance sheet and condensed statements of income include: (a) First Merchant's historical consolidated financial information. (b) Randolph County's historical consolidated financial information. (c) The combined statements of First Merchants and Randolph County, which have been designated herein as "First Merchants/Randolph County Pro Forma Combined." (d) Union National Bancorp's ("Union National") historical consolidated financial information, which has been designated herein as "Union National." On August 1, 1996, Union National was merged with and into First Merchants. The merger was accounted for as a pooling of interests; accordingly, historical financial data for Union National is included for all periods presented. (e) The combined statements of First Merchants, Randolph County and Union National which have been designated herein as "Pro Forma Combined." 33
PRO FORMA COMBINED CONDENSED BALANCE SHEET December 31, 1995 (Unaudited) (In Thousands) (a) (b) (c) (d) (e) PRO FORMA FIRST MERCHANTS PRO FORMA ADJUSTMENTS RANDOLPH COUNTY/ ADJUSTMENTS FIRST RANDOLPH INCREASE PRO FORMA UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) COMBINED NATIONAL (DECREASE) COMBINED -------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 31,432 $ 4,080 $ 35,512 $ 3,461 $ 38,973 Federal funds sold 37,500 1,400 38,900 38,900 Interest-bearing deposits 155 104 259 259 Investment securities: Available for sale 143,120 22,029 165,149 60,789 225,938 Held to maturity 58,214 58,214 2,464 60,678 -------------------------------------------------------------------------------------------- Total investment securities 201,334 22,029 223,363 63,253 286,616 Mortgage loans held for sale 736 736 736 Loans 418,994 43,494 462,488 89,850 552,338 Allowance for loan losses ( 4,957) ( 594) ( 5,551) ( 1,144) ( 6,695) -------------------------------------------------------------------------------------------- Net loans 414,037 42,900 456,937 88,706 545,643 Premises and equipment 10,476 1,331 11,807 3,027 14,834 Goodwill 1,845 1,845 1,845 Other assets 10,344 1,375 11,719 2,631 14,350 -------------------------------------------------------------------------------------------- Total Assets $ 707,859 $ 73,219 $ 781,078 $161,078 $ 942,156 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Liabilities: Deposits $ 588,156 63,441 $ 651,597 $132,339 $ 783,936 Repurchase agreements 27,293 27,293 1,594 28,887 Other short-term borrowings 6,682 6,682 1,808 8,490 Federal Home Loan Bank advances 1,000 1,000 8,000 9,000 Other liabilities 4,255 1,025 5,280 1,596 6,876 -------------------------------------------------------------------------------------------- Total Liabilities 627,386 64,466 691,852 145,337 $ 837,189 -------------------------------------------------------------------------------------------- Stockholders' equity: Common stock 632 2,756 ( 2,686)(1) 702 970 ( 852) (2) 820 Additional paid - in capital 15,852 709 2,686(1) 19,247 1,957 852 (2) 22,056 Retained earnings 62,836 5,250 68,086 12,119 80,205 Net unrealized gain on securities available for sale 1,153 38 1,191 695 1,886 -------------------------------------------------------------------------------------------- Total Stockholders' Equity 80,473 8,753 89,226 15,741 104,967 -------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $707,859 $ 73,219 $ 781,078 $161,078 $ 942,156 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- See notes to pro forma consolidated balance sheet 34
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited) The following pro forma adjustments are necessary to record the Merger and pending merger. [1] To reflect exchange of shares of Randolph County common stock for shares of First Merchants common stock, retaining the historical cost basis of assets, liabilities and equity through the treatment as a pooling of interest. A total of 565,704 shares of First Merchants common stock will be issued at the exchange ratio of 20.53 shares of First Merchants common stock for each of the 27,555 issued and outstanding shares of Randolph County common stock as of December 31, 1995, resulting in a transfer from common stock to additional paid-in capital of $2,686,000 to reflect the decrease in the aggregate par value of the issued and outstanding shares of First Merchants common stock relative to the aggregate par value of the currently outstanding shares of Randolph County common stock. Common stock $ (2,686) Additional paid-in capital $ 2,686 [2] To reflect exchange of shares of Union National common stock for shares of First Merchants common stock, retaining the historical cost basis of assets, liabilities and equity through the treatment as a pooling of interest. A total of 942,685 shares of First Merchants common stock will be issued at the exchange ratio of 4.86 shares of First Merchants common stock for each of the 193,968 issued and outstanding shares of Union National common stock as of December 31, 1995, resulting in a transfer from common stock to additional paid-in capital of $852,000 to reflect the decrease in the aggregate par value of the issued and outstanding shares of First Merchants common stock relative to the aggregate par value of the currently outstanding shares of Union National common stock. Common stock $ (852) Additional paid-in capital $ 852 35
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME Year Ended December 31, 1995 (Unaudited) (In thousands, except share and per share data) (a) (b) (c) (d) (e) FIRST MERCHANTS/ PRO FORMA RANDOLPH PRO FORMA ADJUSTMENTS COUNTY ADJUSTMENTS FIRST RANDOLPH INCREASE PRO FORMA UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) COMBINED NATIONAL (DECREASE) COMBINED -------------------------------------------------------------------------------------------- Interest income $ 49,964 $ 5,152 $ 55,116 $ 11,332 $ 66,448 Interest expense 22,083 2,498 24,581 6,770 31,351 -------------------------------------------------------------------------------------------- Net interest income 27,881 2,654 30,535 4,562 35,097 Provision for loan losses 640 408 1,048 340 1,388 -------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 27,241 2,246 29,487 4,222 33,709 Total other income 6,907 223 7,130 463 7,593 Total other expenses 18,842 1,535 20,377 2,617 22,994 -------------------------------------------------------------------------------------------- Income before income taxes 15,306 934 16,240 2,068 18,308 Income taxes 5,448 267 5,715 545 6,260 -------------------------------------------------------------------------------------------- Net income $ 9,858 $ 667 $ 10,525 $ 1,523 $ 12,048 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Net income per common share $ 1.95 $ 1.87 $ 1.84 Average Shares Outstanding $5,055,169 $5,621,078 $6,564,214 36
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME Year Ended December 31, 1994 (Unaudited) (In thousands, except share and per share data) (a) (b) (c) (d) (e) FIRST MERCHANTS/ PRO FORMA RANDOLPH PRO FORMA ADJUSTMENTS COUNTY ADJUSTMENTS FIRST RANDOLPH INCREASE PRO FORMA UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) COMBINED NATIONAL (DECREASE) COMBINED ----------------------------------------------------------------------------------------------------- Interest income $ 43,114 $ 4,968 $ 48,082 $ 9,684 $ 57,766 Interest expense 16,131 2,370 18,501 5,327 23,828 ----------------------------------------------------------------------------------------------------- Net interest income 26,983 2,598 29,581 4,357 33,938 Provision for loan losses 782 120 902 300 1,202 ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 26,201 2,478 28,679 4,057 32,736 Total other income 6,298 241 6,539 379 6,918 Total other expenses 18,434 1,614 20,048 2,584 22,632 ----------------------------------------------------------------------------------------------------- Income before income taxes 14,065 1,105 15,170 1,852 17,022 Income taxes 4,907 303 5,210 449 5,659 ----------------------------------------------------------------------------------------------------- Net income $ 9,158 $ 802 $ 9,960 $ 1,403 $ 11,363 ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- Net income per common share $ 1.80 $ 1.76 $ 1.72 Average Shares Outstanding 5,077,307 5,643,257 6,587,564 37
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME Year Ended December 31, 1993 (Unaudited) (In thousands, except share and per share data) (a) (b) (c) (d) (e) PRO FORMA FIRST PRO FORMA ADJUSTMENTS MERCHANTS/ ADJUSTMENTS FIRST RANDOLPH INCREASE RANDOLPH COUNTY UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) PRO FORMA NATIONAL (DECREASE) COMBINED COMBINED --------------------------------------------------------------------------------------------- Interest income $ 42,006 $ 5,210 $ 47,216 $ 9,365 $ 56,581 Interest expense 16,498 2,536 19,034 5,022 24,056 --------------------------------------------------------------------------------------------- Net interest income 25,508 2,674 28,182 4,343 32,525 Provision for loan losses 1,014 240 1,254 400 1,654 --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 24,494 2,434 26,928 3,943 30,871 Total other income 6,589 418 7,007 343 7,350 Total other expenses 18,215 1,403 19,618 2,490 22,108 --------------------------------------------------------------------------------------------- Income before income taxes 12,868 1,449 14,317 1,796 16,113 Income taxes 4,396 410 4,806 444 5,250 --------------------------------------------------------------------------------------------- Net income(1) $ 8,472 $ 1,039 $ 9,511 $ 1,352 $ 10,863 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Net income per common share $ 1.65 $ 1.67 $ 1.64 Average Shares Outstanding 5,124,626 5,690,576 6,634,145 (1) Net income excludes the cumulative effect of change in accounting for income taxes. 38
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet as of June 30, 1996, and the pro forma combined condensed statement of income for the year ended June 30, 1996, give effect to the Merger based on the historical consolidated financial statements of First Merchants Corporation ("First Merchants") and its subsidiaries and the historical consolidated financial statements of Randolph County Bancorp ("Randolph County") and its subsidiary under the assumptions and adjustments set forth in the accompanying notes to the pro forma financial statements. The pro forma financial statements have been prepared by the managements of First Merchants and Randolph County based upon their respective financial statements. These pro forma statements, which include results of operations as if the Merger had been consummated at the beginning of each period presented, may not be indicative of the results that actually would have occurred if the Merger had been in effect on the dates indicated or which may be obtained in the future. The following pro forma combined condensed balance sheet and condensed statements of income include: (a) First Merchant's historical consolidated financial information. (b) Randolph County's historical consolidated financial information. (c) The combined statements of First Merchants and Randolph County, which have been designated herein as "First Merchants/Randolph County Pro Forma Combined." (d) Union National Bancorp's ("Union National") historical consolidated financial information, which has been designated herein as "Union National." On August 1, 1996, First Merchants acquired for shares of First Merchants common stock, all of the issued and outstanding common stock of Union National. The transaction will be accounted for as a pooling of interests; accordingly, historical financial data for Union National is included for all periods presented. (e) The combined statements of First Merchants, Randolph County and Union National which have been designated herein as "Pro Forma Combined." 39
PRO FORMA COMBINED CONDENSED BALANCE SHEET June 30, 1996 (Unaudited) (In thousands) (a) (b) (c) (d) (e) FIRST MERCHANTS/ PRO FORMA RANDOLPH PRO FORMA ADJUSTMENTS COUNTY ADJUSTMENTS FIRST RANDOLPH INCREASE PRO FORMA UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) COMBINED NATIONAL (DECREASE) COMBINED --------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 31,106 $ 2,067 $ 33,173 $ 3,627 $ 36,800 Federal funds sold 15,100 15,100 15,100 Interest-bearing deposits 107 107 107 Investment securities: Available for sale 145,992 24,271 170,263 56,984 227,247 Held to maturity 51,015 51,015 3,025 54,040 --------------------------------------------------------------------------------------------- Total investment securities 197,007 24,271 221,278 60,009 281,287 --------------------------------------------------------------------------------------------- Loans 439,926 44,829 484,755 99,170 583,925 Allowance for loan losses (4,919) (665) (5,584) (1,047) (6,631) --------------------------------------------------------------------------------------------- Net loans 435,007 44,164 479,171 98,123 577,294 Premises and equipment 10,467 1,273 11,740 3,021 14,761 Goodwill 1,780 1,780 1,780 Other assets 13,742 1,415 15,157 2,795 17,952 --------------------------------------------------------------------------------------------- Total Assets $ 704,209 $ 73,297 $777,506 $167,575 $945,081 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Liabilities: Deposits $ 574,225 $ 62,388 $ 636,613 $ 135,851 $772,464 Short-term borrowings 41,611 1,500 43,111 5,274 48,385 Federal Home Loan Bank advances 9,000 9,000 Other liabilities 5,872 470 6,342 1,609 7,951 --------------------------------------------------------------------------------------------- Total Liabilities 621,708 64,358 686,066 151,734 837,800 --------------------------------------------------------------------------------------------- Stockholders' equity: Common stock 633 2,756 (2,686)(1) 703 970 (852)(2) 821 Additional paid -in capital 16,132 709 2,686 (1) 19,527 1,957 852 (2) 22,336 Retained earnings 65,971 5,593 71,564 12,800 84,364 Net unrealized gain (loss) on securities available for sale (235) (119) (354) 114 (240) --------------------------------------------------------------------------------------------- Total Stockholders' Equity 82,501 8,939 91,440 15,841 107,281 --------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 704,209 $ 73,297 $ 777,506 $ 167,575 $945,081 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- See notes to pro forma consolidated balance sheet 40
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited) The following pro forma adjustments are necessary to record the Mergers. [1] To reflect exchange of shares of Randolph County common stock for shares of First Merchants common stock, retaining the historical cost basis of assets, liabilities and equity through the treatment as a pooling of interest. A total of 565,705 shares of First Merchants common stock were issued at the exchange ratio of 20.53 shares of First Merchants common stock for each of the 27,555 issued and outstanding shares of Randolph County common stock as of June 30, 1996, resulting in a transfer from common stock to additional paid-in capital of $2,686,000 to reflect the decrease in the aggregate par value of the issued and outstanding shares of First Merchants common stock relative to the aggregate par value of the currently outstanding shares of Randolph County common stock. Common stock $ (2,686) Additional paid-in capital $ 2,686 [2] To reflect exchange of shares of Union National common stock for shares of First Merchants common stock, retaining the historical cost basis of assets, liabilities and equity through the treatment as a pooling of interest. A total of 942,685 shares of First Merchants common stock were issued at the exchange ratio of 4.86 shares of First Merchants common stock for each of the 193,968 issued and outstanding shares of Union National common stock as of June 30, 1996, resulting in a transfer from common stock to additional paid-in capital of 852,000 to reflect the decrease in the aggregate par value of the issued and outstanding shares of First Merchants common stock relative to the aggregate par value of the currently outstanding shares of Union National common stock. Common stock $ (852) Additional paid-in capital $ 852 41
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME Six Months Ended June 30, 1996 (Unaudited) (In thousands, except share and per share data) (a) (b) (c) (d) (e) PRO FORMA FIRST MERCHANTS/ PRO FORMA ADJUSTMENTS RANDOLPH COUNTY ADJUSTMENTS FIRST RANDOLPH INCREASE PRO FORMA UNION INCREASE PRO FORMA MERCHANTS COUNTY (DECREASE) COMBINED NATIONAL (DECREASE) COMBINED ------------------------------------------------------------------------------------------------------ Interest income $ 25,376 $ 2,645 $ 28,021 $ 5,993 $ 34,014 Interest expense 11,176 1,249 12,425 3,467 15,892 ----------------------------------------------------------------------------------------------------- Net interest income 14,200 1,396 15,596 2,526 18,122 Provision for loan losses 320 90 410 170 580 ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 13,880 1,306 15,186 2,356 17,542 Total other income 3,610 120 3,730 239 3,969 Total other expenses 9,546 802 10,348 1,446 11,794 ----------------------------------------------------------------------------------------------------- Income before income taxes 7,944 624 8,568 1,149 9,717 Income taxes 2,785 198 2,983 333 3,316 ----------------------------------------------------------------------------------------------------- Net income $ 5,159 $ 426 $ 5,585 $ 816 $ 6,401 ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- Net income per common share $ 1.02 $ 0.99 $ 0.97 Average Shares Outstanding 5,062,259 5,627,964 6,570,649 42
Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report, dated January 17, 1996, except for the last paragraph of the note on Loans and Allowance as to which the date is March 19, 1996, on the consolidated financial statements of Randolph County Bancorp included herein in the Current Report on Form 8-K of First Merchants Corporation, dated October 2, 1996. GEO S. OLIVE & CO. LLC Indianapolis, Indiana October 11, 1996 43