THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
<TABLE>
<S> <C> <C> <C> <C>
Revenue and income: 1997 1996 1997 1996
Equity in earnings of First Indiana Corporation:
Earnings before FDIC assess $998,000 $978,000 2,715,000 2,920,000
FDIC assessment --- (908,000) --- (908,000)
------- ------- --------- ---------
998,000 70,000 2,715,000 2,012,000
Commissions and Fees 297,000 373,000 937,000 583,000
Investment income 97,000 88,000 301,000 354,000
-------- ------- --------- ---------
1,392,000 531,000 3,953,000 2,949,000
Expenses:
Selling expenses 215,000 178,000 584,000 244,000
Administrative expenses 199,000 279,000 1,034,000 618,000
Interest expense --- 42,000
------- ------- --------- --------
414,000 457,000 1,618,000 904,000
Income before income taxes 978,000 74,000 2,335,000 2,045,000
Income tax expense 299,000 23,000 649,000 641,000
------- ------ -------- ---------
Net income $679,000 $51,000 1,686,000 1,404,000
======= ====== ========= =========
Net income per share $.26 $.02 $.64 $.54
</TABLE>
Average shares outstanding 2,614,852 2,618,641 2,621,791 2,619,078
See accompanying Notes to Consolidated Financial Statements
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 432,000
<SECURITIES> 5,204,000
<RECEIVABLES> 114,000
<ALLOWANCES> 11,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,874,000
<PP&E> 295,000
<DEPRECIATION> 115,000
<TOTAL-ASSETS> 39,837,000
<CURRENT-LIABILITIES> 95,000
<BONDS> 0
0
0
<COMMON> 1,829,000
<OTHER-SE> 30,381,000
<TOTAL-LIABILITY-AND-EQUITY> 39,837,000
<SALES> 2,715,000
<TOTAL-REVENUES> 3,953,000
<CGS> 0
<TOTAL-COSTS> 1,618,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,335,000
<INCOME-TAX> 649,000
<INCOME-CONTINUING> 1,686,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,686,000
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
THE SOMERSET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
September 30, December 31, September 30
ASSETS 1997 1996 1996
Current assets
Cash and cash equivalents $432,000 $1,060,000 $587,000
Short term investments 5,204,000 4,724,000 4,636,000
Accounts, notes and other receivables
less allow. for doubtful accounts 103,000 187,000 355,000
Prepaid expenses 31,000 13,000 43,000
Refundable income taxes 104,000 --
--------- --------- ---------
Total current assets 5,874,000 5,984,000 5,621,000
--------- --------- ---------
Investments
First Indiana Corporation (market values
of $53,792,000, $48,470,000 and
$44,393,000) 31,500,000 29,746,000 $28,944,000
--------- --------- ----------
Office furniture and equipment 295,000 226,000 213,000
Goodwill, net of accum. amortization 115,000 86,000 78,000
------- ------- -------
180,000 140,000 135,000
------- ------- -------
Other assets
Notes receivable 606,000 740,000 748,000
Goodwill, Net of amortization 1,154,000 1,142,000 1,158,000
Other 523,000 460,000 460,000
--------- --------- ---------
2,283,000 2,342,000 2,366,000
---------- ---------- ----------
Total Assets $39,837,000 $38,212,000 $37,066,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $17,000 $37,000 $39,000
Accrued compensation 15,000 64,000 78,000
Taxes, other than income taxes 30,000 9,000 15,000
Income taxes 16,000 36,000
Other accrued expenses 33,000 23,000 156,000
------ ------- -------
Total current liabilities 95,000 149,000 324,000
------- ------- -------
Deferred income taxes 7,532,000 6,827,000 6,372,000
--------- --------- ---------
Shareholders' equity
Common stock without par value, authorized
4,000,000 shares, issued 2,858,218 share 1,829,000 1,829,000 1,829,000
Capital in excess of stated value 5,199,000 5,181,000 5,021,000
Unrealized losses on short-term investments
net of deferred income taxes (7,000) (15,000)
Retained earnings 27,140,000 25,962,000 25,271,000
---------- ---------- ----------
34,161,000 32,972,000 32,106,000
Less 293,833, 303,165 and 303,165
treasury shares, at cost 1,951,000 1,736,000 1,736,000
---------- ---------- ----------
Total shareholders' equity 32,210,000 31,236,000 30,370,000
---------- ---------- ----------
Liabilities and Shareholders' Equity $39,837,000 $38,212,000 $37,066,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-3-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended Year Ended
<TABLE>
<S> <C> <C> <C>
September 30, December 31,
1997 1996 1996
Cash flows from operating activities:
Net income 1,686,000 1,404,000 2,039,000
Add (deduct) items not affecting cash:
Depreciation and amortization 91,000 36,000 67,000
Deferred income taxes 805,000 441,000 896,000
Equity in earnings of First Indiana (2,715,000)(2,012,000) 3,002,000)
Dividends received from First Indiana C 814,000 761,000 1,015,000
Other, net 6,000 15,000
Changes in operating assets and liabilities:
Accounts, notes, and other receivable 84,000 650,000 1,029,000
Prepaid expenses (18,000) (40,000) (10,000)
Accounts payable and accrued expenses (38,000) (318,000) (473,000)
Accrued and refundable income taxes (120,000) (155,000) (175,000)
Net cash provided by operating activities 589,000 773,000 1,401,000
Cash flows from investing activities:
Purchase of property, plant and equipment (69,000) (101,000) (89,000)
Payment for purchase of One Investment Corp (73,000)(1,415,000)(1,415,000)
Decrease in notes receivable and other ass 71,000 254,000 31,000
(Increase) decrease in short-term investme (487,000) 2,414,000 2,470,000
Net cash (used) provided by investing activi (558,000) 1,152,000 997,000
Cash flows from financing activities:
Principal payments on long-term borrowings -- (2,500,000)(2,500,000)
Proceeds from reissue of treasury shares 252,000 109,000 109,000
Purchase of treasury shares (449,000) (237,000) (237,000)
Cash dividends paid (462,000) (409,000) (409,000)
Net cash (used) provided by financing act (659,000)(3,037,000)(3,037,000)
(Decrease) increase in cash and cash equival (628,000)(1,112,000) (639,000)
Cash and cash equivalents at begin of period1,060,000 1,699,000 1,699,000
Cash and cash equivalents at end of period $432,000 $587,000 1,060,000
======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1996 to September 30, 1997
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Unrealized
in Excess Gains
Common of Stated (Losses) o Retained Treasury
Stock Value Investment 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 9 months ended 9/30/97 --- --- --- 1,404,000 --- 1,404,000
Shares of common stock issued in
connection with restricted stock 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 on short-term
investments, net of deferred
income taxes --- --- (87,000) --- --- (87,000)
Equity in other capital changes of First
Indiana Corp., net of 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
Net income 9/1/96 to 12/31/96 --- --- --- 635,000 --- 635,000
Shares of common stock issued in
connection with restricted grants,
& exercise of stock options --- 160,000 --- 14,000 --- 174,000
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 --- --- --- 42,000 --- 42,000
Balance December 31, 1996 1,829,000 5,181,000 --- 25,962,000 (1,736,000) 31,236,000
Net income 9 months ended 9/30/97 --- --- --- 1,686,000 --- 1,686,000
Shares of common stock issued in
connection with restricted grants,
& exercise of stock options --- 18,000 --- 41,000 234,000 293,000
Purchase of treasury shares --- --- --- --- (449,000) (449,000)
Cash dividends paid --- --- --- (462,000) --- (462,000)
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- (7,000) --- --- (7,000)
Equity in other capital changes of First
Indiana Corporation, net of deferred
income taxes --- --- --- (87,000) (87,000)
Balance September 30, 1997 $1,829,000 $5,199,000 ($7,000)$27,140,000 $1,951,000 $32,210,000
</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 21.5% 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 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 21.5% at September 30, 1997, 21.8% at December
31, 1996, and 21.8% at September 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 46,073, 62,389, and
56,378 equivalent shares included in the average shares
outstanding for the periods ended September 30, 1997, December
31, 1996, and September 30, 1996. The Company had 105,313 shares
of its stock reserved for future stock grants as of September 30,
1997 and December 31, 1996, and 152,162 shares reserved as of
September 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 nine months ended September 30, 1997 and 1996, the proforma
earnings per share would be as follows:
3 Months Ended 9 Months Ended
September 30, September 30,
1997 1996 1997 1996
Earnings per share, as reported $.26 $.02 $.64 $.54
Statement 128 earnings per share:
Basic earnings $.26 $.02 $.66 $.55
Diluted earnings $.26 $.02 $.64 $.54
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
$53,792,000.
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 1
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 September 30, 1997 was 12
times that recorded in the same quarter of 1996, and amounted to
$679,000, or $.26 per share, compared with $51,000, or $.02 per
share for the 1996 quarter. For the nine months ended September
30, 1997, net income was 20% greater than that of the 1996 period
and amounted to $1,686,000, or $.64 per share, compared with
$1,404,000, or $.54 per share. The 1996 earnings included a one-time charge
for a special assessment by the Federal Deposit Insurance Corporation (FDIC)
that reduced earnings by $624,000. Excluding this one-time expense from last
year's quarterly results, net income for the third quarter of 1996 amounted
to $675,000, or $.26 per share, the same as 1997 earnings on a per share
basis. Excluding the FDIC special assessment from the nine month results
of 1996, net income for the 1996 period was $2,028,000 or $.77 per share.
The third quarter results also represented a 68% improvement over
earnings during the second quarter of 1997. Net income during the
second quarter was $372,000, or $.14 per share compared to third
quarter results of $679,000, or $.26 per share. The second quarter
results were lowered by an increase of operating costs related to
the commencement of operations of Somerset Wealth Management and
other one-time compensation expenses.
Somerset Wealth Management commenced operations on May 1, 1997.
This division offers a package of financial advisory services,
including portfolio management and monitoring, financial
counseling, and investment planning. Considering that 1997 results
have been lowered by the operating losses of this start-up venture,
management is pleased that income during the third quarter from the
Company's other operations increased to offset these operating
losses. Somerset Wealth Management continued to make significant
progress towards profitable operations during the quarter, but it
will take a few more quarters to build the client based to a level
that provides adequate revenue for profitability. The venture has
been meeting our goals for assets under management that exceeded
$30 million at the end of the quarter.
Total revenue and income decreased modestly during the quarter,
compared to 1996, excluding the FDIC assessment, $1,392,000
compared to $1,439,000. Equity earnings of First Indiana
Corporation were 2% higher than last year, but were offset by a
decrease in revenue from sales of non-bank insurance and non-FDIC
insured investment products, investment income, and fees earned by
Somerset Wealth Management.
For the nine months ended September 30, 1997 revenue and income
increased modestly; $3,953,000 compared with $3,857,000, excluding
the FDIC assessment from the 1996 amounts. Equity earnings of
First Indiana Corporation were 7% lower than 1996, but were offset
by an increase in revenue from sales of non-bank financial products
and services. The lower equity earnings from First Indiana
resulted from several factors including 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.
-8-
First Indiana's net interest margin for the quarter increased to
4.49%, compared with 4.33% for the same quarter in 1996. For the
nine months of 1997 net interest margin was 4.42%, compared with
4.36% for the same period last year. Net interest income increased
8% for the third quarter to $16.3 million, compared with $15.1
million for the third quarter of 1996. For the nine months ended
September 30, 1997, net interest income was $47.3 million, compared
with $46.1 million for the same period in 1996.
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 nine months 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 were 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.
Management continues to search for further acquisition
opportunities that will enhance the Company's growth as a
comprehensive financial service entity.
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. All
other pronouncements by the Financial Accounting Standards Board
are not applicable to the Company's Consolidated Financial
Statements.
CAPITAL RESOURCES AND LIQUIDITY
Management considers the capital resources and liquidity of the
Company to have been very good at September 30, 1997, December 31,
1996, and September 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 September 30, 1997, the Company had a very high ratio of current
assets to current liabilities that stood at 62 to one, compared
with 17 to one at June 30, 1996. In addition, 96% 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 September 30, 1997 and
December 31, 1996 and $5.3 million at September 30, 1996.
The Company had no long-term debt at any of the dates shown in the
Consolidated Balance Sheets.
Shareholders' equity increased to $32.2 million at September 30,
1997, from $32.1 million at September 30, 1996. Adjusted for the
March 14, 1997 five-for-four stock split, the net book value per
share amounts were $12.56 compared to $11.89.
-9-
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, 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 $22 million greater than the
carrying value in the consolidated financial statements. At
September 30, 1996, such market value was $15 million grater than
the carrying value.
Operating activities during the nine months ended September 30,
1997 provided $589,000 of cash, compared with cash provided of
$773,000 in 1996. The major cause of the decrease is that during
1996 the Company had substantially higher collection of trade
accounts receivable. This collection of accounts receivable
resulted from the withdrawal of the Company from the construction
industry in 1995 that allowed for collection of amounts due for
completed contracts with no additional construction sales and trade
related additions to accounts receivable in 1996.
Cash dividends paid increased to $462,000 in 1997, compared to
$409,000 last year, or 12.5%. The increase resulted from an
increase in the annual dividend to $.18 per share compared with
$.16 per share in 1996, considering the 5 for 4 stock split of
March 14, 1997.
The Company purchased 30,825 treasury shares during the first nine
months of 1997 at a cost of $449,000 and reissued 40,157 treasury
shares under the Company's stock option plans for proceeds of
$252,000.
The Somerset Group, Inc. is a registered savings and loan holding
company and is subject to regulations regarding permitted
activities as 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
September 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)
By Marni McKinney
Marni McKinney
President and
Chief Executive Officer
By Joseph M. Richter
Joseph M. Richter
Executive Vice President
and Chief Financial Officer
DATE: October 31, 1997
-11-
