THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
Revenue and income: 1997 1996
Equity in earnings of First Indiana Corp. $871,000 $1,012,000
Commissions and fees 343,000 ---
Investment income 93,000 163,000
--------- ---------
Total revenue and income 1,307,000 1,175,000
Expenses:
Selling expenses 163,000 ---
General and administrative expenses 252,000 213,000
Interest expense --- 42,000
------- -------
Total expenses 415,000 255,000
Income before income taxes 892,000 920,000
Income tax expense 257,000 282,000
------- -------
Net income $635,000 $638,000
======= =======
Income per share $.24 $.24
Average shares outstanding 2,623,351 2,614,963
</TABLE>
See accompaning Notes to Consolidated Financial Statements.
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,139,000
<SECURITIES> 4,730,000
<RECEIVABLES> 230,000
<ALLOWANCES> 97,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,047,000
<PP&E> 244,000
<DEPRECIATION> 95,000
<TOTAL-ASSETS> 38,881,000
<CURRENT-LIABILITIES> 7,061,000
<BONDS> 0
0
0
<COMMON> 1,829,000
<OTHER-SE> 29,870,000
<TOTAL-LIABILITY-AND-EQUITY> 38,881,000
<SALES> 343,000
<TOTAL-REVENUES> 1,307,000
<CGS> 415,000
<TOTAL-COSTS> 415,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 892,000
<INCOME-TAX> 257,000
<INCOME-CONTINUING> 635,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635,000
<EPS-PRIMARY> $.24
<EPS-DILUTED> $.24
</TABLE>
THE SOMERSET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS March 31 December 31 March 31
Current assets 1997 1996 1996
Cash and cash equivalents $1,139,000 $1,060,000 $1,439,000
Short term investments 4,730,000 4,724,000 4,670,000
Trade accounts, notes and other receivables
less allowance for doubtful account 133,000 187,000 649,000
Prepaid expenses 45,000 13,000 52,000
---------- ---------- ----------
6,047,000 5,984,000 6,810,000
Investments
First Indiana Corporation (market values of
$41,619,000, $48,470,000 and
$41,223,000 30,345,000 29,746,000 28,238,000
Office furniture and equipment 244,000 226,000 241,000
Less accumulated depreciation 95,000 86,000 200,000
---------- ---------- ----------
149,000 140,000 41,000
Other assets
Notes receivable 732,000 740,000 775,000
Goodwill, net of amortization 1,122,000 1,142,000 ---
Other 486,000 460,000 460,000
---------- ---------- ----------
2,340,000 2,342,000 1,235,000
Total Assets $38,881,000 $38,212,000 $36,324,000
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $36,000 $37,000 $5,000
Accrued compensation 40,000 64,000 8,000
Taxes, other than income taxes 11,000 9,000 4,000
Income taxes 18,000 16,000 2,000
Other accrued expenses 16,000 23,000 326,000
---------- ---------- ----------
Total current liabilities 121,000 149,000 345,000
Deferred income taxes 7,061,000 6,827,000 6,125,000
Shareholders' equity
Common stock, no par, at stated 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 5,160,000 5,181,000 5,020,000
Unrealized losses on short-term investments
net of deferred income taxes (35,000) --- (15,000)
Retained earnings 26,404,000 25,962,000 24,609,000
---------- ---------- ----------
33,358,000 32,972,000 31,443,000
Less 285,115, 303,156, and 298,540,
treasury shares at cost 1,659,000 1,736,000 1,589,000
---------- ---------- ----------
Total shareholders' equity 31,699,000 31,236,000 29,854,000
Total Liabilities and Equity $38,881,000 $38,212,000 $36,324,000
====================================
See accompanying Notes to Consolidated Financial Statements.
-3-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1996 to March 31, 1997 (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, 1996 $1,829,000 $4,986,000 $72,000 $24,230,000 ($1,619,000)$29,498,000
Net income quarter ended 3/31/96 --- --- --- 638,000 --- 638,000
Shares of common stock issued in
connection with restricted stock grants,
and exercise of stock options --- 34,000 --- (12,000) 51,000 73,000
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 --- --- (87,000) --- --- (87,000)
Equity in other capital changes of First
Indiana Corp., net of deferred
income taxes --- --- --- (42,000) --- (42,000)
Balance, March 31, 1996 1,829,000 5,020,000 (15,000) 24,609,000 (1,589,000) 29,854,000
Net income 4/1/96 to 12/31/96 --- --- --- 1,401,000 --- 1,401,000
Shares of common stock issued in
connection with restricted grants,
& exercise of stock options --- 161,000 --- 76,000 69,000 306,000
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 --- --- 15,000 --- --- 15,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 80,000 --- 80,000
Balance December 31, 1996 1,829,000 5,181,000 --- 25,962,000 (1,736,000) 31,236,000
Net income quarter ended 3/31/97 --- --- --- 635,000 --- 635,000
Shares of common stock issued in
connection with restricted grants,
& exercise options --- (21,000) --- 41,000 119,000 139,000
Purchase of Treasury shares --- --- --- --- (42,000) (42,000)
Cash dividends paid --- --- --- (234,000) --- (234,000)
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- (35,000) --- --- (35,000)
Balance, March 31, 1997 $1,829,000 $5,160,000 ($35,000)$26,404,000 $1,659,000 $31,699,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C> <C>
Three Months En Year Ended
March 31 December 31
Cash flows from operating activities: 1997 1996 1996
Net income $635,000 $638,000 $2,039,000
Add (deduct) items not affecting cash
Depreciation and amortization 29,000 4,000 67,000
Deferred income taxes 234,000 194,000 896,000
Equity in earnings of First Indiana Corp (871,000) (1,012,000) (3,002,000)
Dividends received from First Indiana Cor 272,000 254,000 1,015,000
Other, net 15,000
Changes in operating assets and liabilities:
Trade accounts, notes, and other receiv 54,000 356,000 1,029,000
Prepaid expenses (32,000) (49,000) (10,000)
Accounts payable and accrued expenses (30,000) (263,000) (473,000)
Accrued income taxes 2,000 (189,000) (175,000)
-------- -------- --------
Net cash provided(used)by operating activitie 293,000 (67,000) 1,401,000
Cash flows from investing activities:
Purchase of property, plant and equipment 18,000 (89,000)
Payment for purchase of One Investment Corp (1,415,000)
Decrease (increase) in notes receivable and
other assets (18,000) (4,000) 31,000
Decrease (Increase) in short-term investments,
at cost (36,000) 2,484,000 2,470,000
-------- -------- --------
Net cash provided (used) by investing activit (36,000) 2,480,000 997,000
Cash flows from financing activities:
Principal payments on long-term borrowings --- (2,500,000) (2,500,000)
Proceeds from reissue of treasury shares 98,000 53,000 109,000
Purchase of treasury shares (42,000) (21,000) (237,000)
Cash dividends paid (234,000) (205,000) (409,000)
-------- -------- --------
Net cash used by financing activities (178,000) (2,673,000) (3,037,000)
Increase (decrease) in cash and cash equivale 79,000 (260,000) (639,000)
Cash and equivalents at beginning of period 1,060,000 1,699,000 1,699,000
-------- -------- --------
Cash and cash equivalents at end of period $1,139,000 $1,439,000 $1,060,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-5-
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 21.6% 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 available.
(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 are
reported net of deferred income taxes as a separate component
of shareholders' 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 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.
(f) Office Furniture and Equipment: Office furniture and equipment
are stated at historical cost 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.
-6-
(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 a five-for-four stock split
that was effective February 26, 1997 and February 29, 1996.
(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 21.6% at March 31, 1997, 21.8% at December 31, 1996, and 21.9%
at March 31, 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 59,441, 62,389, and 58,559
equivalent shares included in the average shares outstanding for
the periods ended March 31, 1997, December 31, 1996, and March 31,
1996. The Company had 81,438 shares, 105,313 shares, and 113,594
shares of its stock reserved for future stock grants as of March
31, 1997, December 31, 1996, and March 31, 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 ending after December 15, 1997,
and earlier application is not permitted. The statement requires
dual presentation of Basic earnings per share and Diluted earnings
per share. Had Statement 128 been effective for the three months
ended March 31, 1997 and 1996, the proforma earnings per share
would be as follows:
3 Months Ended
March 31
1997 1996
Earnings per share, as reported $.24 $.24
Statement 128 earnings per share:
Basic earnings $.25 $.25
Diluted earnings $.24 $.24
-7-
Note 5. Financial Instruments
The estimated fair value of the Company's financial instruments at
March 31, 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 $41,619,000.
Note 6. Financial Statement Preparation
The accompanying financial statements have been prepared 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.
-8-
PART I
Item 1 - Financial Statements
The information required by Rule 10.01 of Regulation S-X is
presented on the previous page.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Net income from operations during the three months ended March 31,
1997 were comparable to those of the same quarter last year, and
amounted to $.24 per share in both 1997 and 1996. Actual earnings
for the 1997 quarter were $635,000, compared to $638,000 last year.
Equity earnings of First Indiana Corporation for 1997 were 14%
lower than 1996, and amounted to $871,000, compared to $1,012,000
in 1996. The lower earnings of First Indiana were offset by income
from One Insurance Agency and One Investment Corporation. The
Company acquired these operations in June 1996, therefore, there
were no comparable amounts during the first quarter of 1996.
First quarter earnings of First Indiana Corporation during the 1996
quarter were at record high levels. First Indiana's net interest
margin remained stable at 4.39%, compared to 4.40% in 1996, and net
interest income for the quarter amounted to $15.5 million, compared
with $15.7 million one year ago. In comparison to last year, two
principal factors contributed to the lower earnings. Lower
originations of single family home mortgage loans resulted in lower
fee income, and an increase in the quarterly provision for loan
losses to $2.8 million, compared to $1.9 million last year. The
increased provision was in anticipation of expected continued
growth in targeted loan portfolios of home equity loans,
construction, and business loans. The quarter saw growth in these
areas, which was accomplished without lower margins.
For a more detailed discussion of the Results of Operations of
First Indiana Corporation for the first quarter of 1997, please
refer to the Form 10-Q of First Indiana Corporation, filed with the
Securities and Exchange Commission under File Number 0-14354.
One Insurance Agency and One Investment Corporation offer insurance
and non-FDIC-insured investments to customers of First Indiana
Bank. These operations exceeded our expectations during 1996 and
during the first quarter of 1997. Revenue and earnings were
significantly improved compared to the results of these operations
last year before they were acquired by the Company. New variable
annuities and mutual funds were recently added to the product
portfolios and the Company commenced an intensified life insurance
marketing program. The new products and marketing emphasis are
expected to improve future revenue and net income.
In February 1997, we formed Somerset Wealth Management, a new
venture that recognizes the needs of today's consumers to plan for
their future. Somerset Wealth Management will offer a package of
advisory and counseling services, under an overall policy of
objective advice, skilled asset allocation, and reliable results.
Services offered include portfolio management and monitoring,
financial counseling, and retirement plan design and
administration. We expect this new division to be operational in
May 1997.
-9-
Investment income during the quarter of $93,000 was $70,000 lower
than the $163,000 earned during 1996. The decline was a direct
result of lower investable cash during 1997, that was used to
purchase One Insurance Agency and One Investment Corporation during
the second quarter of last year, and the retirement of all
outstanding debt late in the first quarter of 1996. Interest
expense for 1997 was eliminated by the debt retirement compared to
expense in 1996 of $42,000.
Selling expenses and General and Administrative expenses amounted
to $415,000 during the current quarter compared to $213,000 in the
1996 quarter. This increase was a direct result of increased
operating expenses associated with One insurance Agency and One
Investment Corporation with no comparable expenses in 1996.
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 March 31, 1997, December 31,
1996, and March 31, 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 March 31, 1997, the Company had a very high ratio of current
assets to current liabilities, that stood at 50 to one, compared to
20 to one at March 31, 1996. In addition, 97% of the current
assets consisted of cash, cash equivalents, and short-term
investments.
The Company had no long-term debt at March 31, 1997, December 31,
1996, and at March 31, 1996. All long-term debt was retired in
March 1996.
Shareholders' equity increased to $31.7 million at March 31, 1997,
from $29.9 million at March 31, 1996. Adjusted for the March 14,
1997 five-for-four stock split, the per share amounts were $12.32
compared to $11.66.
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 March
31, 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 $11 million greater than the
carrying value in the consolidated financial statements. At March
31, 1996, such market value was $13 million greater than the
carrying value.
-10-
Operating activities during the first quarter of 1997 provided
$293,000 of cash, compared to usage of $67,000 of cash in the first
quarter of 1996. 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. During the 1997 quarter, these items were not
significantly reduced.
Cash dividends paid increased to $234,000 in the 1997 first
quarter, 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 regular semi-annual dividend of $.09 per share on
the post stock split shares, compared to $.08 last year.
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.
-11-
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
March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE SOMERSET GROUP, INC.
(Registrant)
By s/Marni McKinney
Marni McKinney
President and
Chief Executive Officer
By s/Joseph M. Richter
Joseph M. Richter
Executive Vice President
and Chief Financial Officer
DATE: May 2, 1997
-12-
