THE SOMERSET GROUP, INC.
CONSOLIDAED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30
<TABLE>
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Revenue and income:
Equity in earnings of First
Corporation 846,000 930,000 1,717,000 1,942,000
Commissions and fees 297,000 210,000 640,000 210,000
Investment income 111,000 103,000 204,000 266,000
-------- -------- -------- --------
Total revenue and income 1,254,000 1,243,000 2,561,000 2,418,000
Expenses:
Selling expenses 206,000 66,000 369,000 66,000
General & administrative exp 583,000 126,000 835,000 339,000
Interest expense --- --- --- 42,000
------- ------- -------- -------
Total expenses 789,000 192,000 1,204,000 447,000
Income before income taxes 465,000 1,051,000 1,357,000 1,971,000
Income tax expense 93,000 336,000 350,000 618,000
------- ------- ------- --------
Net income 372,000 715,000 1,007,000 1,353,000
======= ======= ======== ========
Income per share $0.14 $0.27 $0.38 $0.52
Average shares outstanding 2,627,170 2,623,630 2,629,723 2,619,296
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 270,000
<SECURITIES> 5,398,000
<RECEIVABLES> 143,000
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,943,000
<PP&E> 254,000
<DEPRECIATION> 104,000
<TOTAL-ASSETS> 39,136,000
<CURRENT-LIABILITIES> 109,000
<BONDS> 0
0
0
<COMMON> 1,829,000
<OTHER-SE> 29,994,000
<TOTAL-LIABILITY-AND-EQUITY> 39,136,000
<SALES> 640,000
<TOTAL-REVENUES> 2,561,000
<CGS> 1,204,000
<TOTAL-COSTS> 1,204,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,357,000
<INCOME-TAX> 350,000
<INCOME-CONTINUING> 1,007,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007,000
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
THE SOMERSET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
ASSETS 1997 1996 1996
Current assets
Cash and cash equivalents 270,000 1,060,000 1,439,000
Short term investments 5,398,000 4,724,000 4,579,000
Trade accounts, notes and receivables
less allowance for doubtful accoun 131,000 187,000 38,000
Prepaid expenses 33,000 13,000 46,000
Refundable income taxes 111,000 ---
-------- ------- --------
Total current assets 5,943,000 5,984,000 5,860,000
Investments
First Indiana Corp(market values of
$50,962,000, $48,470,000 and
$43,487,000) 30,702,000 29,746,000 29,072,000
Office furniture and equipment 254,000 226,000 311,000
Less accumulated depreciation 104,000 86,000 203,000
------- ------- -------
150,000 140,000 108,000
Other assets
Notes receivable 644,000 740,000 757,000
Goodwill, net of amortization 1,175,000 1,142,000 1,175,000
Other 522,000 460,000 460,000
--------- --------- ---------
2,341,000 2,342,000 2,392,000
Total Assets 39,136,000 38,212,000 37,432,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable 41,000 37,000 135,000
Accrued compensation 33,000 64,000 12,000
Taxes, other than income taxes 16,000 9,000 6,000
Income taxes 16,000 44,000
Other accrued expenses 19,000 23,000 191,000
------- ------- -------
Total current liabilities 109,000 149,000 388,000
Deferred income taxes 7,204,000 6,827,000 6,404,000
Shareholders' equity
Common stock without par value,
authorized 4,000,000 shares, issued
2,858,218 shares 1,829,000 1,829,000 1,829,000
Capital in excess of stated value 5,198,000 5,181,000 5,025,000
Unrealized losses on short-term
investments net of deferred taxes (27,000) (34,000)
Retained earnings 26,648,000 25,962,000 25,359,000
---------- ---------- ----------
33,648,000 32,972,000 32,179,000
Less 285,643, 303,165 and 289,165,
treasury shares, at cost 1,825,000 1,736,000 1,539,000
---------- ---------- ----------
Total shareholders' equity 31,823,000 31,236,000 30,640,000
Total Liabilities and Equity 39,136,000 38,212,000 37,432,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-3-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended Year Ended
<TABLE>
<S> <C> <C> <C>
June 30, December 31,
1997 1996 1996
Cash flows from operating activities:
Net income 1,007,000 1,353,000 2,039,000
Add (deduct) items not affecting cash:
Depreciation and amortization 60,000 13,000 67,000
Deferred income taxes 377,000 473,000 896,000
Equity in earnings of First Indiana (1,717,000) (1,942,000) (3,002,000)
Dividends received from First Indiana Co 544,000 508,000 1,015,000
Other, net 15,000
Changes in operating assets and liabilities:
Trade accounts, notes, and other rec, 56,000 619,000 1,029,000
Prepaid expenses (20,000) (43,000) (10,000)
Accounts payable and accrued expenses (24,000) (262,000) (473,000)
Accrued and refundable income taxes (127,000) (147,000) (175,000)
------- ------- --------
Net cash provided by operating activities 156,000 572,000 1,401,000
Cash flows from investing activities:
Purchase of property, plant and equipment (28,000) (70,000) (89,000)
Payment for purchase of One Investment (73,000) (1,182,000) (1,415,000)
Decrease in notes receivable and other ass 34,000 14,000 31,000
(Increase) decrease ub sgirt-term investments,
at cost (575,000) 2,446,000 2,470,000
-------- --------- ---------
Net cash (used) provided by investing (642,000) 1,208,000 997,000
Cash flows from financing activities:
Principal payments on long-term borrowings --- (2,500,000) (2,500,000)
Proceeds from reissue of treasury shares 243,000 96,000 109,000
Purchase of treasury shares (313,000) (21,000) (237,000)
Cash dividends paid (234,000) (205,000) (409,000)
------- -------- --------
Net cash (used) provided by financing (304,000) (2,630,000) (3,037,000)
(Decrease) increase in cash and cash equival (790,000) (850,000) (639,000)
Cash and cash equivalents at beginning 1,060,000 1,699,000 1,699,000
-------- -------- --------
Cash and cash equivalents at end of period 270,000 849,000 1,060,000
======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-4-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1996 to June 30, 1997 (unaudited)
<TABLE>
<S> <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, 1996 1,829,000 4,986,000 72,000 24,230,000 (1,619,000) 29,498,000
Net income 6 months ended 6/30/97 --- --- --- 1,353,000 --- 1,353,000
Shares of common stock issued in
connection with restricted stock
grants and exercise of stock options --- 39,000 --- 19,000 101,000 159,000
Purchase of treasury shares --- --- --- --- (21,000) (21,000)
Cash dividends paid --- --- --- (205,000) --- (205,000)
Unrealized losses on short-term
investments, net of deferred
income taxes --- --- (106,000) --- --- (106,000)
Equity in other capital changes of
First Indiana Corporation, net
of deferred income taxes --- --- --- (38,000) --- (38,000)
-------- -------- ------- ---------- -------- ---------
Balance, June 30, 1996 1,829,000 5,025,000 (34,000) 25,359,000 (1,539,000) 30,640,000
Net income 7/1/96 to 12/31/96 --- --- --- 686,000 --- 686,000
Shares of common stock issued in
connection with restricted grants
& exercise of stock options --- 156,000 --- 45,000 19,000 220,000
Purchase of treasury shares --- --- --- --- (216,000) (216,000)
Cash dividends paid --- --- --- (204,000) --- (204,000)
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- 34,000 --- --- 34,000
Equity in other capital changes of
First Indiana Corporation, net
of deferred income taxes --- --- --- 76,000 --- 76,000
-------- -------- ------ --------- -------- ----------
Balance December 31, 1996 1,829,000 5,181,000 --- 25,962,000 (1,736,000) 31,236,000
Net income 6 months ended 6/30/97 --- --- --- 1,007,000 --- 1,007,000
Shares of common stock issued in
connection with restricted grants,
& exercise of stock options --- 17,000 --- 44,000 224,000 285,000
Purchase of treasury shares --- --- --- --- (313,000) (313,000)
Cash dividends paid --- --- --- (234,000) --- (234,000)
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- (27,000) --- --- (27,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (131,000) (131,000)
-------- -------- ------- --------- --------- ---------
Balance June 30, 1997 1,829,000 5,198,000 (27,000) 26,648,000 (1,825,000) 31,823,000
========= ========= ====== ========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-5-
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant
Accounting Policies
The Somerset Group, Inc. (The "Company") is a registered savings
bank holding company. Its major asset is a 21.4% ownership
interest in First Indiana Corporation ("First Indiana"), which
owns 100% of First Indiana Bank (the "Bank"). The Company also
operated in the construction industry during 1995. During 1995
the Company sold substantially all assets of its construction
industry operations for a combination of cash and notes
receivable. The Company formed a new financial services division
and in 1996 commenced expansion into the financial service
industry, and currently operates an insurance agency, a stock
brokerage division, and offers financial advisory and asset
management services.
(a) Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its 100%
owned subsidiaries.
(b) Commissions and Fees: Commissions and fees represent revenue
of the financial services division and are recognized on an accrual
basis.
(c) 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 availabale.
(d) 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 and are reported net of deferred income taxes
as a separate component of sharehollders' equity until realized.
(e) 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 diviaion. The Company's investment in First
Indiana Corp[oration is stated at cost, adjussted 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 on consolidated retained earnings.
(f) Office Furniture and Equipment: Office furniture and
equipment are stated at historical costs for financial reporting
purposes. Depreciation is determined using the straight-line
method based upon the estimated useful live of individual assets.
Both straight-line and accelerated methods are used for income
tax purposes.
(g) Income Taxes: The Company uses the asset and liability method
to account for income taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their tax basis. The
principal temporary difference between the financial statement
carrying amounts and the tax basis that result in deferred taxes
is the investment in First Indiana, accounted for under the
equity method of accounting. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income
in the period that includes the effective date.
(h) 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
five-for-four stock splits that were effective February 26, 1997
and February 29,1996.
-6-
(i) Treasury Shares: Treasury shares issued to fund employee
benefit plans are valued at average cost of all treasury shares
at the date of issuance.
Note 2. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana
Corporation was 21.4% at June 30, 1997, 21.8% at December 31,
1996, and 21.8% at June 30, 1996. 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 3. Average Shares Outstanding
Average shares outstanding included the common share equivalents
of outstanding stock options. There were 46,343, 62,389, and
46,232 equivalent shares included in the average shares
outstanding for the periods ended June 30, 1997, December 31,
1996, and June 30, 1996. The Company had 141,389 shares, 105,313
shares, and 84,250 shares of its stock reserved for future stock
grants as of June 30, 1997, December 31, 1996, and June 30, 1996.
Note 4. Income Per Share
The Financial Accounting Standards Board has issued Statement
128, "Earnings Per Share Statement." Statement 128 is effective
for financial statements for periods ended after December 15,
1997, and earlier application is not permitted. The statement
requires dual representation of Basic earnings per share and
diluted earnings per share. Had Statement 128 been effective for
the six months ended June 30, 1997 and 1996, the proforma
earnings per share would be as follows:
3 Months Ended 6 Months Ended
June 30 June 30
1997 1996 1997 1996
Earnings per share,as reported $.14 $.27 $.38 $.52
Statement 128 earnings per share:
Basic earnings $.14 $.28 $.39 $.53
Diluted earnings $.14 $.27 $.38 $.52
Note 5. Financial Instruments
The estimated fair value of the Company's financial instruments
at June 30, 1997 approximate their carrying value as reflected in
the Consolidated Balance Sheets. The Company's financial
instruments include cash and cash equivalents, short-term
investments, receivables, other assets, and trade accounts
payable and accrued expenses. Financial instruments also include
the investment in First Indiana that has a fair value of
$50,962,000.
Note 6. Financial Statement Preparation
The accompanying financial statements have been prepared with
generally accepted account principles for interim financial
information and with the instruction to From 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
Net income for the three months ended June 30, 1997 was 48% below
that recorded in the second quarter of 1996, and amounted to
$372,000, or $.14 per share, compared with $715,000, or $.27 per
share for the 1996 quarter. For the six months ended June 30,
1997 net income was 26% below that of the 1996 period and
amounted to $1,007,000, or $.38 per share, compared with
$1,353,000, or $.52 per share, for the first half of 1996. The
decrease in earnings was primarily from increased expenses from
the start up of a new operating division and non-recurring
compensation expenses.
Revenue and income increased modestly during the quarter;
$1,254,000 compared with $1,243,000. Equity earnings of First
Indiana Corporation were 9% lower than the second quarter of
1996, but were offset by an increase in revenue from sales of
non-bank financial services. The non-bank financial services
include insurance and non-FDIC- insured investment products, and
fees from the new diversion, Somerset Wealth Management.
Somerset Wealth Management commenced operations on May 1, 1997,
and offers a package of objective financial advisory services
including portfolio management and monitoring, financial
counseling, and investment planning.
For the six months ended June 30, 1997 revenue and income
increased 6% to $2,561,000 from $2,418,000 in 1996. Operating
expenses were above last year as a result of the start-up and one
time costs included during the second quarter that caused a 26%
reduction in the net income for the first half of 1997. The 6%
increase in revenue and income was the net result of a 12%
decline in equity earnings of First Indiana Corporation, offset
by an increase in commissions and fees from the non-bank
financial services.
The lower equity earnings from First Indiana for the quarter and
six months resulted from several factors including comparatively
higher operating expenses, an increase in the loan loss provision
and a reduction of Somerset's equity percentage of ownership used
to compute equity income. The lower percentage resulted from the
issuance of additional shares of common stock by First Indiana
Corporation to parties other than The Somerset Group, Inc.
First Indiana's net interest income for the quarter increased
slightly to $15.5 million, compared with $15.2 million a year
ago. Net interest income for the six months ended June 30, 1997
was $31.0 million, compared with $30.9 million for the same
period last year. The bank increased its quarterly provision for
loan losses to $2.7 million, compared with $2.5 million for the
same period last year. For the year to date the bank increased
its provision for loan losses to $5.5 million compared to $4.4
million.
For a more detailed discussion of the Results of Operations of
First Indiana Corporation, please refer to the Form 10-Q of First
Indiana Corporation, filed with the Securities and Exchange
Commission under File Number 0-14354.
Commissions and fee income from the sale of insurance and non-FDIC-
insured investments to customers of First Indiana Bank
continued to meet our expectations during the first half of 1997.
The introduction of new variable annuities and mutual funds
during the first quarter of 1997 continue to be effective in
improving the Company's revenue and generally are well received
by our clients. The upward performance of the over all equity
markets has been a factor in improving our sales of these
products.
-8-
Somerset Wealth Management operated at a loss during the two
months since it commenced operations on May 1, 1997. Operating
losses were in line with expectations, and account for a portion
of the increase in selling expenses for the quarter and six
months compared to 1996. The remainder of the increase in
selling expenses which are variable in nature and increase or
decrease with sales, is attributable to the increase in revenue
from the sale of insurance and investment products.
During the quarter, the Board of Directors made a stock grant
award to two officers of the Company for meeting certain
specified performance objectives. The effect of this award was
charged as expense during the quarter and accounts for the
increase in general and administrative expenses. We do not
expect any future awards to have such a one-time effect on
operating costs.
We expect Somerset Wealth Management to operate at a modest loss
while we are building a client base and revenue. However, we do
expect positive results over the longer term. We also expect
improved net income during the remainder of year, since operating
expenses should not be impacted by unusual one-time costs.
Impact of Accounting Standard
The Financial Accounting Standards Board has issued Statement
128, "Earnings Per Share." Statement 128 is effective for
financial statements for periods ending after December 15, 1997.
The statement requires dual presentation of Basic earnings per
share and Diluted earnings per share. See Note 4 of the Notes to
Consolidated Financial Statements for a proforma presentation of
the implementation of Statement 128 on earnings per share.
CAPITAL RESOURCES AND LIQUIDITY
Management considers the capital resources and liquidity of the
Company to have been very good at June 30, 1997, December 31,
1996, and June 30, 1996.
Because of the sale of all construction industry operating assets
during 1995, 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 additional acquisitions
of businesses in the financial services industry.
At June 30, 1997, the Company had a very high ratio of current
assets to current liabilities, that stood at 55 to one, compared
to 15 to one at June 30, 1996. In addition, 95% of the current
assets consisted of cash, cash equivalents, and short-term
investments. The ratio improved primarily from the reduction of
current liabilities by utilizing cash provided by operations.
Working capital amounted to $5.8 million at June 30, 1997 and
December 31, 1997 and $5.5 million at June 30, 1996.
The Company had no long-term debt at June 30, 1997, December 31,
1996, nor at June 30, 1996.
Shareholders' equity increased to $31.8 million at June 30, 1997,
from $30.6 million at June 30, 1996. Adjusted for the March 14,
1997 five-for-four stock split, the per share amounts were $12.37
compared to $11.93.
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 June
30, 1997, 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 $20 million greater than the
carrying value in the consolidated financial statements. At June
30, 1996, such market value was $14 million greater than the
carrying value.
-9-
Operating activities during the first half of 1997 provided
$156,000 of cash, compared to cash provided of $572,000 of cash
in the first half of 1996. The major reason for the change is
that the Company had lower net income during the 1997 period
compared to 1996.
Cash dividends paid increased to $234,000 in the 1997 first half,
compared to $205,000 last year, or 14%. This increase resulted
from the five-for-four stock split of March 14, 1997, and the
payment of the regular semi-annual dividend of $.09 per share on
the post stock split shares, compare to $.08 last year.
The Company purchased 21,073 treasury shares during 1997 at a
total cost of $313,000 and reissued 38,595 treasury shares under
the company's stock option plans for cash proceeds of $243,000.
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.
-10-
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 on Form 8-K were filed during the three months ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SOMERSET GROUP, INC.
(Registrant)
s/Marni McKinney
Marni McKinney
President and
Chief Executive Officer
s/Joseph M. Richter
Joseph M. Richter
Executive Vice President
and Chief Financial Officer
DATE: July 30, 1997
-11-
