Somerset buys back assets from First Indiana

Twenty-one partners of Somerset Financial Services LLC have bought the assets of the accounting firm from parent First Indiana Corp. and renamed it Somerset CPAs PC.

First Indiana received $11.4 million from the transaction that closed Oct. 25, including $5.4 million of existing cash at Somerset

"As things changed, it became more and more difficult to do work for bank clients," said Patrick Early, managing partner of Somerset CPAs. "In the best interest of both organizations, we decided it would be better if we separate again."

First Indiana's leadership change also contributed to the decision. Robert H. Warrington replaced retired Bud Melton and became president of the corporation in June. He has shifted the company's focus entirely to banking operations. First Indiana is the holding company for First Indiana Bank, the largest commercial bank headquartered in the city.

The bank took a hit in 2003 when a number of commercial clients defaulted on loans. First Indiana eliminated 70 jobs in September as it consolidates some operations and seeks to cuts costs. The company expects the reorganization to be complete by year-end.

"Our focus is exclusively on the central Indiana area," Warrington said. "But there's been some changes in the marketplace that may allow more referrals to go back and forth between First Indiana and Somerset when we're independent [rather] than together."

The stiffer regulations are the result of the Sarbanes-Oxley Act of 2002. The goal is to protect shareholders from corporate malfeasance by requiring greater transparency of financial statements and demanding greater executive and director accountability.

Because of the reform, Somerset could no longer perform audit work for First Indiana customers as a related subsidiary. Conversely, Somerset could no longer refer clients to First Indiana for banking services.

Julie Lindy, editor of Inside Public Accounting, an Atlanta-based industry newsletter, thinks the move makes sense for Somerset.

"It gives them the potential to target clients they couldn't target before," Lindy said. "Just based on history, the firms that have done this-and there haven't been a lot-have done very well."

One firm that has repurchased assets is the locally based Katz Sapper & Miller LLP. The city's second-largest accounting firm bought back the assets of its consulting arm for $25 million in 2000 after a consolidation with H&R Block Inc. failed to shape Katz Sapper into a national practice.

HRB Business Services, a Kansas Citybased subsidiary of H&R Block Inc., purchased the consulting division in September 1998. Partnering with the large national firm was expected to give Katz Sapper the extra cash it needed to grow through acquisition. It instead became a small part of a much larger firm.

"I would imagine that [Somerset's] partner group and staff are pretty excited," said David Resnick, Katz Sapper's managing partner. "If it's anything like [our situation], they're excited to control their own destiny again."

First Indiana said it would take a charge of $2.2 million, which was posted in thirdquarter results released Oct. 28. The transaction requires Somerset employees to forfeit roughly 217,000 non-vested stock options that have a market value of $1.3 million.

With 40 public accountants, Somerset is the city's eighth-largest accounting firm, according to IBJ's largest Indianapolis-area accounting firms list on page 28.

Founded in 1960, the firm was called Whipple & Co. until The Somerset Group Inc. bought it in January 1998. The Somerset Group was another publicly traded company, besides First Indiana, led by the McKinney family. Somerset merged with First Indiana in September 2000.

Rolling Somerset into First Indiana gave the banking entity an entry into financial services, Early said, while providing the accounting arm access to capital to grow.