<TABLE>
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C>
September 30, September 30,
Revenue and income: 1996 1995 1996 1995
Equity in earnings of First Indiana
Corporation:
Earnings before FDIC assessment $978,000 $961,000 $2,920,000 $3,008,000
FDIC assessment ($908,000) --- ($908,000) ---
--------- --------- --------- ---------
70,000 961,000 2,012,000 3,008,000
Commissions and fees 373,000 583,000 ---
Investment income 88,000 181,000 354,000 408,000
--------- --------- --------- ---------
531,000 1,142,000 2,949,000 3,416,000
Gross profit from construction sales 1,649,000
Gain on sale of assets --- --- --- 1,293,000
--------- --------- --------- ---------
531,000 1,142,000 2,949,000 6,358,000
Expenses:
Selling expenses 178,000 244,000 210,000
General and administrative expenses 279,000 224,000 618,000 1,131,000
Interest expense --- 44,000 42,000 243,000
--------- --------- --------- ---------
457,000 268,000 904,000 1,584,000
Income before income taxes 74,000 874,000 2,045,000 4,774,000
Income tax expense 23,000 347,000 641,000 1,886,000
--------- --------- --------- ---------
Net Income $51,000 $527,000 $1,404,000 $2,888,000
========= ========= ========= =========
Net income per share $.03 $.26 $.67 $1.41
Average shares outstanding 2,094,913 2,061,751 2,095,262 2,054,968
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 0 587,000
<SECURITIES> 0 4,636,000
<RECEIVABLES> 0 451,000
<ALLOWANCES> 0 96,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 5,621,000
<PP&E> 0 213,000
<DEPRECIATION> 0 78,000
<TOTAL-ASSETS> 0 37,066,000
<CURRENT-LIABILITIES> 0 324,000
<BONDS> 0 0
0 0
0 0
<COMMON> 0 1,829,000
<OTHER-SE> 0 28,541,000
<TOTAL-LIABILITY-AND-EQUITY> 0 37,066,000
<SALES> 373,000 583,000
<TOTAL-REVENUES> 531,000 2,949,000
<CGS> 0 0
<TOTAL-COSTS> 457,000 862,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 42,000
<INCOME-PRETAX> 74,000 2,045,000
<INCOME-TAX> 23,000 641,000
<INCOME-CONTINUING> 51,000 1,404,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 51,000 1,404,000
<EPS-PRIMARY> .03 .67
<EPS-DILUTED> .03 .67
</TABLE>
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
ASSETS September 30, December 31, September 30,
Current assets 1996 1995 1995
Cash and cash equivalents $587,000 $1,699,000 $1,259,000
Short term investments 4,636,000 7,194,000 7,042,000
Trade accounts, notes and other
receivables, less allowance
for doubtful accounts 355,000 1,005,000 1,632,000
Prepaid expenses 43,000 3,000 10,000
---------- ---------- ----------
Total current assets 5,621,000 9,901,000 9,943,000
Investments
First Indiana Corporation
(market value of $44,393,000,
$38,882,000, and $37,750,000) 28,944,000 27,549,000 $26,748,000
Office furniture and equipment 213,000 241,000 241,000
Less accumulated depreciation 78,000 196,000 193,000
---------- ---------- ----------
135,000 45,000 48,000
Other assets
Notes receivable 748,000 771,000 787,000
Goodwill, net of accumulated
amortization 1,158,000 ---
Other 460,000 460,000 460,000
---------- ---------- ----------
2,366,000 1,231,000 1,247,000
Total Assets $37,066,000 $38,726,000 $37,986,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $39,000 $221,000 $421,000
Accrued compensation 78,000 36,000 32,000
Taxes, other than income taxes 15,000 15,000 48,000
Income taxes 36,000 191,000 211,000
Other accrued expenses 156,000 334,000 330,000
---------- ---------- ----------
Total current liabilities 324,000 797,000 1,042,000
Long-term notes payable - banks 2,500,000 2,500,000
Deferred income taxes 6,372,000 5,931,000 5,524,000
Shareholders' equity
Common stock without par value, authorized
authorized 4,000,000 shares,
issued 2,286,654 shares 1,829,000 1,829,000 1,829,000
Capital in excess of stated value 5,021,000 4,986,000 4,986,000
Unrealized gains (losses) on short-term
short-term investments, net
of deferred income taxes (15,000) 72,000 34,000
Retained earnings 25,271,000 24,230,000 23,690,000
32,106,000 31,117,000 30,539,000
Less 242,532, 245,413, and
245,413 treasury shares, at cost 1,736,000 1,619,000 1,619,000
---------- ---------- ----------
Total shareholders' equity 30,370,000 29,498,000 28,920,000
Total Liabilities and
Shareholders' Equity $37,066,000 $38,726,000 $37,986,000
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
-3-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C> <C>
Nine Months Ended Year Ended
September 30, December 31
1996 1995 1995
Cash flows from operating activities:
Net income $1,404,000 $2,888,000 $3,358,000
Add (deduct) items not affecting cash:
Depreciation and amortization 36,000 250,000 252,000
Deferred income taxes 441,000 1,119,000 1,404,000
Gain on sale of assets (1,293,000) (1,293,000)
Equity in earnings of
First Indiana Corporation (2,012,000) (3,008,000) (3,938,000)
Dividends received from First Indiana 761,000 634,000 846,000
Other, net 6,000 41,000 (28,000)
Changes in operating assets and liabilities
Accounts, notes, & other receivables 650,000 4,438,000 5,065,000
Contracts in progress and inventory 2,159,000 2,159,000
Prepaid expenses (40,000) 99,000 106,000
Accounts payable & accrued expenses (318,000) (2,203,000) (2,427,000)
Accrued income taxes payable (155,000) (226,000) (246,000)
---------- ---------- ----------
Cash provided by operating activities: 773,000 4,898,000 5,258,000
Cash flows from investing activities:
Proceeds from sale of assets 5,144,000 5,222,000
Purchase of property, plant & equipment (101,000) (44,000) (44,000)
Decrease (increase) in long-term
notes receivable 23,000 (300,000) (260,000)
Decrease (increase) in Goodwill
and other assets (1,184,000) 94,000 70,000
decrease (increase) in short-term
investments, at cost 2,414,000 (7,042,000) (7,076,000)
---------- ---------- ----------
Net cash provided by investing activities 1,152,000 2,148,000 (2,088,000)
Cash flows from financing activities:
Principal payment on long-term borrowing (2,500,000) (3,000,000) (3,000,000)
Proceeds from reissue of treasury shares 109,000 247,000 267,000
Purchase of treasury shares (237,000) (417,000) (417,000)
Cash dividends paid (409,000) (327,000) (327,000)
Net cash used by financing activities (3,037,000) (3,497,000) (3,477,000)
---------- ---------- ----------
Decrease in cash and cash equivalents (1,112,000) (747,000) (307,000)
Cash at beginning of period 1,699,000 2,006,000 2,006,000
---------- ---------- ----------
Cash at end of period $587,000 $1,259,000 $1,699,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1995 to September 30, 1996
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Unrealized
in Excess Gains
Common of Stated (Losses) Retained Treasury
Stock Value Investmen Earnings Shares Total
Balance January 1, 1995 $1,829,000 $4,979,000 $ $20,999,000 ($1,378,000) $26,429,000
Net income 9 months ended 9/30/95 --- --- --- 2,888,000 --- 2,888,000
Shares of common stock issued in
connection with stock grants,
& exercise of stock options --- 7,000 --- 64,000 176,000 247,000
Purchase of treasury shares --- --- --- --- (417,000) (417,000)
Cash dividends paid --- --- --- (327,000) --- (327,000)
Unrealizeed gains-short-term invest-
ments,net of deferred income taxes --- --- 34,000 --- --- 34,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 66,000 --- 66,000
-------- -------- -------- -------- -------- --------
Balance September 30, 1995 1,829,000 4,986,000 34,000 23,690,000 (1,619,000) 28,920,000
Net income 3 months ended 12/31/95 --- --- --- 470,000 --- 470,000
Shares of common stock issued in
connection with stock grants,
& exercise of stock options --- --- 20,000 20,000
Unrealized gains-short-term invest-
ments,net of deferred income taxes --- --- 38,000 --- --- 38,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 50,000 --- 50,000
-------- -------- -------- -------- -------- --------
Balance December 31, 1995 1,829,000 4,986,000 72,000 24,230,000 (1,619,000) 29,498,000
Net income 9 months ended 9/30/96 --- --- --- 1,404,000 --- 1,404,000
Shares of common stock issued in
connection with restricted grants,
and exercise of stock options --- 35,000 --- 50,000 120,000 205,000
Purchase of Treasury Shares --- --- --- --- (237,000) (237,000)
Cash dividends paid --- --- --- (409,000) --- (409,000)
Unrealized losses-short-term invest-
ments, net of deferred income taxes --- --- (87,000) --- --- (87,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (4,000) --- (4,000)
-------- -------- -------- -------- -------- --------
Balance September 30, 1996 $1,829,000 $5,021,000 ($15,000) $25,271,000 ($1,736,000) $30,370,000
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-5-
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
Note 1. Nature of Operations and Summary of Significant
Accounting Policies
The Somerset Group, Inc. (The Company ) is a registered savings
bank holding company. It s major asset is a 21.8% ownership
interest in First Indiana Corporation, which owns 100% of First
Indiana Bank, a federally chartered stock savings bank. Beginning
during the second quarter of 1996, the Company operates an
insurance agency and also sells investment products. The Company
operated in the construction industry prior to June 1995. During
1995 and 1994 the Company sold substantially all assets of its
construction industry operations for a combination of cash and
notes receivable. The Company is seeking acquisitions in select
financial services operations including fund management, annuity
brokerage, and new products for expansion of its insurance and
investment products operations.
(a) Principles of Consolidation: The consolidated financial
statements include the accounts of The Somerset Group, Inc.
( the Company ) and its 100% owned subsidiaries for all
periods.
(b) Cash and Cash Equivalents: For purposes of reporting cash
flows, cash and cash equivalents include: cash on hand, cash
in banks, and money market funds immediately available.
(c) Short-Term Investments: The investments are valued at market
price on the statement date. They are available-for-sale and
proceeds are available on three days notice. Unrealized
holding gains and losses are excluded from earnings and are
reported net of deferred income taxes as a separate component
of shareholders equity until realized.
(d) Investment in First Indiana Corporation: First Indiana
Corporation is a bank holding company whose primary subsidiary
is a savings bank which operates in Indiana, North Carolina,
and Florida through its mortgage banking division. The
Company s investment in First Indiana Corporation is stated at
cost, adjusted for the Company s share of undistributed
earnings, and includes adjustments under the purchase method
of accounting. Capital changes of First Indiana Corporation
are reflected as a separate component of consolidated retained
earnings.
(e) Income Taxes: The Company uses the asset and liability method
to account for income taxes. The principal temporary
difference between the financial statement carrying amounts
and the tax bases of existing assets and liabilities that
results in deferred taxes is the investment in First Indiana
Corporation, which is accounted for under the equity method of
accounting.
(f) Income Per Share: Income per share is based on the average
number of common shares and common share equivalents (stock
options) outstanding during the year. The effect of
outstanding stock options on income per share on a fully
diluted basis is not material. All share and per share
amounts have been adjusted for a five-for-four stock split
that was effective February 29, 1996.
(g) Treasury Shares: Treasury shares issued to fund employee
benefit plans are valued at average cost of all treasury
shares at the date of issuance.
-6-
Note 2. Sale of Assets
The Company sold all assets of its construction products and
services operations during 1995 and 1994 and ceased doing business
in the construction industry. The results of these operations for
1995 are included in the consolidated financial statements through
the dates of sale. The total sale price of the assets sold in 1995
was $5,522,000. After consideration of expenses relating to the
sales, the Company recorded a gain on sale before income taxes for
1995 of $1,293,000. At the time of the sales, these assets
represented all of the Company s operating activities. Sales, cost
of sales, and gross profit of the construction operations contained
in the Consolidated Statements of Income were as follows:
Nine Months Ended
September 30,
1996 1995
Sales $ --- $11,178,000
Cost of Sales --- 9,529.000
----- -----------
Gross Profit $ --- $ 1,649,000
Note 3. Short-Term Investments
Short-term investments are valued at market price and are
available-for-sale. The Company is actively seeking new businesses
in the financial services industry and expects to utilize these
funds for that purpose.
Note 4. Investment in First Indiana Corporation
The Company s percentage of ownership of First Indiana Corporation
was 21.8% at September 30, 1996, 21.9% at December 31, 1995, and
22.0% at September 30, 1995. The Company s equity in earnings of
First Indiana Corporation shown in the Consolidated Statements of
Income is before income taxes. Federal and state income taxes
applicable to the equity earnings are contained as a component of
total federal and state income tax expense.
Note 5. Average Shares Outstanding
Average shares outstanding included the common share equivalents of
outstanding stock options. There were 45,102, 47,623, and 22,520
equivalent shares included in the average shares outstanding for
the periods ended September 30, 1996, December 31, 1995, and
September 30, 1995. The Company had 84,250 shares, 113,375 shares,
and 121,730 shares of its stock reserved for future stock grants as
of September 30, 1996, December 31, 1995, and September 30, 1995.
Note 6. Financial Statement Preparation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-
Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included.
-7-
PART I
Item 1 - Financial Statements
The information required by Rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations.
An industry-wide special assessment by the Federal Deposit
Insurance Corporation ( FDIC ) had a significant impact on the
Company s equity in earnings of First Indiana Corporation for the
third quarter. The one-time charge imposed on all banks with
deposits insured by the Savings Association Insurance Fund will
recapitalize the Fund and result in lower deposit insurance
premiums for First Indiana.
Net income for the three months amounted to $51,000, or $.03 per
share, including the non-recurring charge against earnings of
$908,000 before income taxes and $675,000 after income taxes. Net
income for the quarter before the FDIC assessment amounted to
$675,000, or $.32 per share, a 28% increase over the $527,000, or
$.26 per share, earned in the third quarter of 1995.
For the nine months ended September 30, 1996, the Company s
earnings amounted to $1,404,000, or $.67 per share, after the FDIC
assessment. Excluding the assessment, net income was $2,028,000,
or $.97 per share, compared with $2,888,000, or $1.41 per share,
for the same period in 1995. The 1995 earnings included the
operating results of the construction operations from January 1,
1995 to their sale in the second quarter, as well as the after tax
gain on the sale of assets of $782,000. During most of the first
nine months of 1996, the Company did not have any operations to
replace the sales and income generated by these operations in prior
years.
During the second quarter of 1996, the Company completed a major
step in its expansion into the financial services industry. It
acquired One Insurance Agency, Inc. and One Investment Corporation
from its affiliated company First Indiana Bank. The acquisition
included the licensed agents and brokers of the companies and the
existing portfolios of insurance and investment products offered
for sale. These two companies formed the nucleus of Somerset's
Financial Services Division.
Somerset also entered into an agreement with First Indiana Bank for
Somerset to provide non-FDIC-insured investment and insurance
products and investment counseling services for customers of the
Bank. Under the terms of the agreement, the Bank agreed to
exclusively refer customers for these products to Somerset.
Operating expenses during the three months were higher than last
year as a result of expenses incurred in operating the insurance
and investment businesses acquired during the second quarter.
There were no such operations nor expenses during the third quarter
of 1995.
Operating expenses for the nine months were significantly lower
than last year, as the Company downsized all operations following
the sale of the construction divisions late in the second quarter
of 1995. Expenses incurred in 1996 following the acquisitions were
lower than the expenses incurred in 1995 from its construction
operations.
-8-
Cash provided from the sales of the construction assets was used
in early 1996 to retire all outstanding debt. Therefore the
Company did not have any interest expense during the second or
third quarter of 1996.
The one-time FDIC charge is a positive event for future operations
since it will lead to much lower deposit insurance premiums for
First Indiana Bank and place the Bank on a level field with the
rest of the industry. First Indiana s future deposit premiums will
fall 83%.
First Indiana s solid performance from its core business during the
quarter is indicative of its ability to maintain market share in a
very competitive market. We are pleased to report that the
insurance and investment operations that Somerset acquired in June
of this year are performing up to expectations. Management does
expect future results of these acquisitions to grow, as operations
will be expanded by additions to the products and services
portfolio and entry into non-traditional bank markets.
Capital Resources and Liquidity
Management considers the capital resources and liquidity of the
Company to have been very good at September 30, 1996, December 31,
1995, and September 30, 1995.
Because of the sale of all construction industry operating assets
and the conversion of the related net current assets to cash, the
Company's balance sheet contains a large percentage of liquid
assets. These liquid assets are being invested temporarily and are
intended for use in acquisitions of businesses in the financial
services industry.
The second quarter acquisition of One Insurance Agency, Inc. and
One Investment Corporation was completed using cash held by the
Company. The purchase price and costs of the acquisition amounted
to $1,470,000, which represented 3.8% of the Registrant s assets.
Consolidated net income of the acquired corporations during 1995,
had they been owned by Somerset, would have amounted to 8.2% of
consolidated income of the Company. The transaction included
intangible assets of $1,181,000.
At September 30, 1996, the Company had a very high ratio of current
assets to current liabilities that stood at 17.4 to one, compared
to 9.5 to one at September 30, 1995. In addition, 93% of current
assets and 15% of total assets consisted of cash, cash equivalents
and short-term investments.
The Company had no long-term debt at September 30, 1996, compared
to $2.5 million at September 30, 1995. The long-term debt of $2.5
million was retired early in March 1996.
Shareholders equity increased to $30.4 million at September 30,
1996 from $28.9 million at September 30, 1995. Adjusted for the
February 29, 1996 5-for-4 stock split, shareholders equity
amounted to $14.86 per share compared to $13.60 per share at
September 30, 1995.
The Company s investment in First Indiana Corporation is stated at
cost, plus the Company s share of undistributed earnings, as
required by the FASB s accounting standard for equity accounting.
This treatment does not give effect to the market value of this
investment within the consolidated financial statements. At
September 30, 1996, the market value of the Company s investment in
First Indiana Corporation, as determined from the closing price on
the NASDAQ National Market System was $15 million greater than the
carrying value in the consolidated financial statements. At
September 30, 1995, such market value was $11 million greater than
the carrying value.
-9-
Operating activities during the first half of 1996 provided
$773,000 of cash, compared to $4.9 million provided in the first
nine months of 1995. The major reason for the change is that the
Company had very little activity from operations during 1996 and
used cash to reduce accounts payable, accrued expenses, and income
taxes payable, and 1995 benefited from the conversion of accounts
receivable and other current assets of the construction operations
to cash.
Cash dividends paid increased to $409,000 in the first nine months
of 1996, compared to $327,000 last year, or 25%. This increase
resulted from the 5-for-4 stock split of February 19, 1996, and the
payment of the regular semi-annual dividend of $.10 per share was
paid on the post stock split shares.
The Company is seeking additional acquisitions in select financial
services industries including fund management, annuity brokerage,
and new products for expansion of its insurance and investment
product operations. These acquisitions could require debt to be
incurred. The Somerset Group, Inc. is a registered savings bank
holding company and subject to regulations of permitted activities
defined in the National Housing Act and administered by the Office
of Thrift Supervision.
PART II
OTHER INFORMATION
Items 1 through 6
The information required by these items has been omitted as it is
not applicable.
Reports Filed on Form 8-K
No reports were filed on Form 8-K during the three months ended
September 30, 1996. A Form 8-K was filed on June 27, 1996
reporting the event of the purchase of 100% of the outstanding
stock of One Investment Corporation and its wholly owned subsidiary
One Insurance Agency, Inc.
SIGNATURES
(Registrant)
By s/Marni McKinney
Marni McKinney
President & Chief Executive Officer
By s/Joseph M. Richter
Joseph M. Richter
Executive Vice President
& Chief Financial Officer
Date: November 5, 1996 -10-
