<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 1-12898
[Source One Mortgage Services Corporation Logo]
(Exact name of registrant as specified in its charter)
Delaware 38-2011419
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
27555 Farmington Road, Farmington Hills, Michigan 48334-3357
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (810) 488-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
There is no aggregate market value of the voting stock held by non-affiliates
of the Registrant.
As of November 10, 1995, the number of shares of the Registrant's Common Stock
outstanding was 2,345,336.
<PAGE> 2
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
September 30, 1995 (Unaudited) and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income (Unaudited),
Nine Months and Three Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
1
<PAGE> 3
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1995 1994
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 46 $ 1,240
Short-term investments 17,313 44,128
Mortgage loans receivable 388,263 210,472
Pool loan purchases 135,128 163,859
Loans held for investment 23,336 19,775
Capitalized servicing (net) 367,512 530,450
Common equity securities (net) 9,601 45,140
Long-term investments 5,621 6,068
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $13,000 at
September 30, 1995 and $13,350 at December 31, 1994) 43,762 49,785
Premises and equipment 32,040 36,173
Other assets 92,974 102,922
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,115,596 $ 1,210,012
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 632,736 $ 647,251
Accounts payable and other liabilities 97,656 86,674
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 730,392 733,925
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value, 12,000,000 shares
authorized, 4,000,000 shares of 8.42% cumulative
Series A (aggregate liquidation preference of $100,000)
issued and outstanding 40 40
Common stock, $.01 par value, 8,000,000 shares
authorized, 2,345,336 and 3,206,049 shares issued and
outstanding as of September 30, 1995 and December
31, 1994, respectively 23 32
Paid-in capital 412,309 522,032
Unrealized investment loss (net) (945) (4,065)
Retained deficit (26,223) (41,952)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 385,204 476,087
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,115,596 $1,210,012
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Mortgage servicing revenue $ 107,439 $ 125,990 $ 32,058 $ 41,396
Amortization of capitalized servicing 51,676 68,521 14,564 22,769
- ----------------------------------------------------------------------------------------------------------------------
Net servicing revenue 55,763 57,469 17,494 18,627
- ----------------------------------------------------------------------------------------------------------------------
Interest income 27,476 62,259 11,238 12,979
Interest expense 19,638 50,546 7,386 11,635
- ----------------------------------------------------------------------------------------------------------------------
Net interest revenue 7,838 11,713 3,852 1,344
- ----------------------------------------------------------------------------------------------------------------------
Net realized investment gain (loss) on
exchange of securities with affiliate 216 (8,596) -- --
Net realized investment (loss) gain (543) 3,841 135 1,726
Net gain on sale of mortgages 15,328 30,613 9,552 1,806
Net gain on sale of servicing 28,229 -- -- --
Other 10,506 19,855 3,547 5,086
- ----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 117,337 114,895 34,580 28,589
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 41,152 48,158 12,872 18,045
Office occupancy and equipment 10,975 13,974 3,563 4,625
Provision for loan losses 4,374 5,194 1,787 2,178
Other operating expenses 24,391 33,769 8,714 9,581
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 80,892 101,095 26,936 34,429
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary
loss and cumulative effect of accounting change 36,445 13,800 7,644 (5,840)
Income tax expense (benefit) 13,499 5,383 2,884 (1,824)
- ----------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative
effect of accounting change 22,946 8,417 4,760 (4,016)
Extraordinary loss on retirement of debt (net
of income tax benefit) (902) -- -- --
Cumulative effect of change in accounting for
purchased mortgage servicing rights (net of
deferred income tax benefit) -- (44,296) -- --
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 22,044 $ (35,879) $ 4,760 $ (4,016)
Less dividends on preferred stock 6,315 4,537 2,105 2,105
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 15,729 $ (40,416) $ 2,655 $ (6,121)
======================================================================================================================
Net income (loss) per common share:
Before extraordinary loss and cumulative effect
of accounting change $ 6.23 $ 1.08 $ 1.13 $ (1.86)
Extraordinary loss (0.34) -- -- --
Cumulative effect of accounting change -- (12.28) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 5.89 $ (11.20) $ 1.13 $ (1.86)
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 22,044 $(35,879)
Noncash items included in the determination of net income (loss):
Amortization of capitalized servicing 51,676 68,521
Provision for loan losses 4,374 5,194
Depreciation and amortization 5,600 6,859
Net realized loss on investments 327 4,755
Amortization of goodwill 1,568 1,568
Gain on sale of servicing (28,229) --
Amortization of deferred gain on sale of servicing (3,233) (1,000)
Net (increase) decrease in mortgage loans receivable (177,791) 942,793
Net increase (decrease) in accounts payable and other liabilities 25,541 (60,248)
Net decrease in other assets 14,182 48,781
Net change in current and deferred income taxes
receivable and payable 13,095 4,960
Extraordinary loss on retirement of debt 902 --
Cumulative effect of change in accounting for
purchased mortgage servicing rights -- 44,296
- -----------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (69,944) 1,030,600
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on pool loan purchases, mortgage claims
receivable and real estate acquired 154,184 190,314
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (123,804) (202,604)
Capitalized excess servicing income (4,694) (15,762)
Additions to purchased mortgage servicing rights (36,077) (42,337)
Additions to originated mortgage servicing rights (20,447) --
Sale of servicing 169,774 70,242
Net decrease in short-term investments 26,815 98,242
Principal payments received on long-term investments 774 1,461
Additions to long-term investments (1,227) (147)
Purchase of common equity securities -- (95,529)
Proceeds from sales of common equity securities 21,370 97,029
Net disposition (acquisition) of premises and equipment 353 (3,322)
Net (increase) decrease in loans held for investment (3,561) 3,484
- -----------------------------------------------------------------------------------------------
Net cash provided by investing activities 183,460 101,071
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 2,278,060 1,395,950
Repayments on commercial paper (2,073,435) (1,861,476)
Net decrease in credit agreement borrowings (137,144) (763,355)
Retirement of debt (85,872) --
Repurchase of common stock (90,004) --
Net proceeds from issuance of preferred stock -- 96,850
Dividends paid (6,315) (3,134)
Other -- (35)
- -----------------------------------------------------------------------------------------------
Net cash used by financing activities (114,710) (1,135,200)
- -----------------------------------------------------------------------------------------------
Net decrease in cash (1,194) (3,529)
Cash at beginning of period 1,240 6,954
- -----------------------------------------------------------------------------------------------
Cash at end of period $ 46 $ 3,425
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Source One
Mortgage Services Corporation (together with its subsidiaries, the "Company")
have been prepared in conformity with generally accepted accounting principles
for interim financial information and with the instructions for 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 necessary adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The operating results for the nine month period ended September 30,
1995 are not necessarily indicative of the results to be expected for the year
ending December 31, 1995.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Securities and Exchange Commission
("S.E.C.") on March 29, 1995.
Certain reclassifications have been made to the financial statements for 1994
to conform to the 1995 presentation.
DEBT
In March 1995, the Company consolidated its three then existing credit
facilities into a single facility in the amount of $500 million, which can be
increased at the Company's option with bank concurrence up to $1.0 billion.
Borrowings under the consolidated facility, which matures in March 1998, are
secured primarily by the Company's mortgage loans receivable and mortgage
servicing portfolio. As of November 10, 1995, no borrowings were outstanding
under the consolidated facility.
In the third quarter of 1995, the Company entered into an unsecured credit
agreement for $60 million which matures in June 1996.
RECENT DEVELOPMENTS
On November 7, 1995, the S.E.C. declared effective a registration statement
allowing the Company to offer to exchange up to $100 million aggregate
principal amount of Quarterly Income Capital Securities for up to 4 million
shares of its 8.42% cumulative preferred stock, series A.
5
<PAGE> 7
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
ACCOUNTING STANDARD RECENTLY ADOPTED
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights", an amendment of SFAS No. 65, which requires the total cost
of acquiring mortgage loans, either through loan origination activities or
purchase transactions, to be allocated to the mortgage servicing rights and the
loans based on their relative fair values. The statement requires entities to
measure impairment on a disaggregated basis by stratifying the capitalized
servicing asset based on one or more predominant risk characteristics of the
underlying loans. Impairment is recognized through a valuation allowance for
each individual stratum.
In the 1995 third quarter, the Company adopted the provisions of SFAS No. 122
as of January 1, 1995. SFAS No. 122 prohibits retroactive application to 1994,
therefore the reported results for the 1994 periods are in accordance with SFAS
No. 65 and are not directly comparable to the 1995 results reported under SFAS
No. 122.
The adoption of SFAS No. 122 as it relates to the capitalization of
originated mortgage servicing rights resulted in pretax gains, net of
amortization, of $19.8 million and $10.8 million for the nine months and
three months ended September 30, 1995, respectively. The impairment provisions
of SFAS No. 122 resulted in a pretax charge (gain) of $11.8 million and ($.2)
million for the nine months and three months ended September 30, 1995,
respectively.
STOCKHOLDERS' EQUITY
In connection with the sale of servicing to a third party on March 31, 1995,
the Company transferred $90.0 million in cash and $19.5 million in common
equity securities and investments to Fund American Enterprises, Inc., ("FAE"),
the Company's parent, in April 1995, in exchange for shares of the Company's
common stock which were retired. All of the common equity securities involved
in such exchange were actively traded, readily marketable, and listed on a
national exchange and, for purposes of such exchange, were valued at their
reported closing prices on the day preceding the exchange.
NET INCOME PER SHARE
Net income per share amounts were computed based on 2,345,336 and 3,291,297
weighted average total number of common shares outstanding for the three months
ended September 30, 1995 and 1994, respectively. Net income per share amounts
were computed based on 2,670,074 and 3,608,009 weighted average total number of
common shares outstanding for the nine months ended September 30, 1995 and
1994, respectively.
6
<PAGE> 8
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - NINE MONTH AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1995 AND 1994
Source One Mortgage Services Corporation (together with it's subsidiaries,
the "Company") had net income of $22.0 million for the nine months ended
September 30, 1995 compared to a net loss of $35.9 million for the first nine
months of 1994. The 1995 net income amount includes a $28.2 million pretax,
$18.3 million after tax, gain on the sale of servicing to a third party and a
net $8.0 million pretax, $5.2 million after tax, gain resulting from the
adoption of a new accounting standard. The 1994 net loss amount reflects a
$44.3 million after tax charge related to adopting a change in accounting
methodology for measuring impairment on the Company's purchased mortgage
servicing rights asset. For the three month period ended September 30, 1995,
the Company reported net income of $4.8 million compared to a net loss of $4.0
million for the same three months of 1994. The 1995 third quarter results
include an $11.0 million pretax, $7.2 million after tax, gain resulting from the
adoption of a new accounting standard.
In the 1995 third quarter, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights", an amendment of SFAS No. 65, as of January 1, 1995. SFAS No.
122 requires the total cost of acquiring mortgage loans, either through
loan origination activities or purchase transactions, to be allocated to the
mortgage servicing rights and the loans based on their relative fair values. The
statement requires entities to measure impairment on a disaggregated basis by
stratifying the capitalized servicing asset based on one or more predominant
risk characteristics of the underlying loans. Impairment is recognized through
a valuation allowance for each individual stratum.
SFAS No. 122 prohibits retroactive application to 1994, therefore the
reported results for the 1994 periods are in accordance with SFAS No. 65 and are
not directly comparable to the 1995 results reported under SFAS No. 122. The
primary difference between SFAS No. 122 and SFAS No. 65 relates to the
capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS No.
65, the costs inherent in creating OMSR's were not capitalized. Under SFAS No.
122, a portion of the total cost of an originated loan is allocated to the right
to service the loan based on its relative fair value of the mortgage servicing
right and the loan.
The Company estimated the fair values of its servicing rights by calculating
the expected future cash flows associated with such rights. In making those
estimates, the Company incorporated assumptions that market participants would
use in their estimates of future servicing income and expense and discounted
those cash flows using current market rates.
To measure impairment of the capitalized servicing asset, the Company
stratified its mortgage loan servicing portfolio based on its predominant
risk characteristics which were determined to be prepayment and default
risks. This resulted in stratification by interest rate, loan type (investor)
and original maturity. The fair value of each stratum was computed and compared
to its recorded book value to determine if a valuation allowance, or recovery of
a previously established valuation allowance, was required.
7
<PAGE> 9
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The adoption of SFAS No. 122 as it related to the capitalization of
originated mortgage servicing rights resulted in the recognition of additional
net pretax gains of $20.4 million and $10.9 million for the nine month and three
month periods ended September 30, 1995, respectively. The impairment provisions
of SFAS No. 122 resulted in a pretax charge of $11.8 million for the nine
months ended September 30, 1995 and a $.2 million pretax gain for the three
months ended September 30, 1995.
Net servicing revenue decreased to $55.8 million for the first nine months of
1995 from $57.5 million for the comparable 1994 period. Net servicing revenue
was $17.5 million and $18.6 million for third quarters of 1995 and 1994,
respectively. The decreases reflect lower mortgage servicing revenue due to
the sale of $9.9 billion of servicing to a third party in the first quarter of
1995 and impairment of the capitalized servicing asset as a result of adopting
SFAS No. 122, offset by slower amortization of the capitalized servicing asset
due to lower actual and anticipated prepayments in 1995 compared to 1994 and a
smaller servicing asset due to the sale of servicing.
The Company's mortgage loan servicing portfolio totalled $28.6 billion as of
September 30, 1995 versus $39.6 billion as of December 31, 1994 and $40.0
billion as of September 30, 1994. The decline in the servicing portfolio
balance is mainly due to the sale of $9.9 billion of servicing to a third party
for gross proceeds (before taxes and expenses) of $189.5 million in the first
quarter of 1995. Management's intent regarding the sale was to take advantage
of the substantial increase in the value of servicing rights that was created
by the rise in interest rates during 1994 and to bring servicing and
origination activities into better balance. Additional sales transactions may
occur in the future when management deems it to be economically advantageous.
However, a strategy of the Company is to continue building the servicing
portfolio in order to take advantage of its low cost servicing operation. To
that end, in the third quarter 1995, the Company entered into an agreement to
acquire the rights to service approximately $5.0 billion of mortgage loans from
a third party. The transaction closed on October 31, 1995.
Mortgage loan production decreased to $1,948 million for the nine months
ended September 30, 1995 compared to $4,090 million for the comparable 1994
period. Regular mortgage loan payoffs decreased to $1,550 million for the first
nine months of 1995 compared to $4,179 million for the comparable 1994 period.
(See table on page 9). The decreases in mortgage loan production and payoffs
reflect increases in market interest rates and a corresponding fall off in
refinancing activity from early 1994 levels. Mortgage loan production for the
1995 third quarter increased to $1,009 million compared to $718 million for the
1994 third quarter reflecting a decrease in market interest rates for the 1995
third quarter compared to the comparable 1994 period.
Net interest revenue was $7.8 million for the nine months ended September 30,
1995 versus $11.7 million for the comparable 1994 period. The decrease is
primarily the result of a decrease in average mortgage loans receivable
inventory and related short-term debt borrowings associated with the decrease
in mortgage loan production during 1995 compared to 1994. Recent declines in
market interest rates led to an increase in mortgage loan production and
related average mortgage loans receivable inventory during the third quarter of
1995 compared to the third quarter of 1994 resulting in an increase in net
interest revenue to $3.8 million for the three months ended September 30, 1995
from $1.3 million for the comparable 1994 period.
8
<PAGE> 10
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
A summary of the Company's mortgage loan production and servicing portfolio
follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
($ in millions) 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOAN PRODUCTION
Originations by loan type:
FHA/VA Insured $ 1,074 $ 1,791 $ 552 $ 340
Conventional 874 2,299 457 378
- ----------------------------------------------------------------------------------------------------------------------
Total $ 1,948 $ 4,090 $ 1,009 $ 718
======================================================================================================================
Originations by source:
Retail $ 1,059 $ 2,493 $ 534 $ 459
Wholesale 889 1,597 475 259
- ----------------------------------------------------------------------------------------------------------------------
Total $ 1,948 $ 4,090 $ 1,009 $ 718
======================================================================================================================
SERVICING PORTFOLIO (a)
Beginning balance $ 39,568 $ 38,403 $ 28,746 $ 38,870
Sale of servicing (9,893) -- -- --
Mortgage loan production 1,948 4,090 1,009 718
Servicing acquisitions -- 3,707 -- 1,651
Servicing released, principal amortization,
foreclosures and other (1,506) (1,982) (501) (459)
Regular payoffs (1,550) (4,179) (687) (741)
- ----------------------------------------------------------------------------------------------------------------------
Ending balance $ 28,567 $ 40,039 $ 28,567 $ 40,039
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average net servicing fee
(at end of period) (b) 0.424% 0.414%
Weighted average interest rate (a)(c) 8.27% 8.14%
Number of loans serviced (a)(c) 438,058 543,428
Percent delinquent (a)(c)(d) 4.96% 4.84%
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $4,111
million and $4,294 million at September 30, 1995 and December 31, 1994,
respectively.
(b) Excludes loans subserviced for others having a principal balance of $4,111
million and $4,294 million as of September 30, 1995 and December 31, 1994,
respectively.
(c) Excludes $1,651 million outstanding principal balance of interim servicing
as of December 31, 1994.
(d) Includes loans in process of foreclosure.
9
<PAGE> 11
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net realized investment gain on exchange of securities with affiliate was $.2
million for the nine months ended September 30, 1995 versus a net realized
investment loss of $8.6 million for the same period of 1994, which were the
results of transfers of common equity securities and investments totalling
$19.5 million in 1995 and $112 million in 1994 to Fund American Enterprises,
Inc. ("FAE"), the Company's parent, in exchange for shares of the Company's
common stock held by FAE which were retired by the Company.
Net gain on sale of mortgages totalled $15.3 million for the first nine
months of 1995 compared to $30.6 million for the same 1994 period. The
deterioration is attributable to a decrease in mortgage loan sales volume due
to lower mortgage loan production, particularly sales of premium refinance
products, during the first nine months of 1995 compared to 1994 and intensive
price competition during 1995, partially offset by a net gain of $20.4 million
related to the adoption of SFAS No. 122. Net gain on sale of mortgages was
$9.6 million for the third quarter of 1995 compared to $1.8 million for the 1994
third quarter. The increase is attributable to a net gain of $10.9 million
recorded in the third quarter of 1995 related the adoption of SFAS No. 122,
offset by net losses on the sale of mortgages in 1995 reflecting intensive price
competition. Management anticipates that the competitive origination market
will continue to have negative effects on marketing gains during the remainder
of 1995 compared to 1994, however, those effects should be largely offset by the
effects of implementing SFAS No. 122.
Net gain on sale of servicing was $28.2 million for the 1995 first nine
months resulting from the sale of $9.9 billion of the Company's mortgage loan
servicing portfolio to a third party in the first quarter of 1995.
Other revenue, which consists primarily of loan processing fees, insurance
commissions and brokerage fees, was $10.5 million and $19.9 million for the
nine months ended September 30, 1995 and 1994, respectively. Loan processing
fees tend to decrease or increase with mortgage loan production. Accordingly,
the decrease in other revenue reflects the decrease in mortgage loan production
in 1995 compared to 1994.
In conjunction with a restructuring plan implemented in 1994, the Company
downsized the production network and reduced headcount during 1995 which
resulted in decreased salaries and employee benefits expense, office occupancy
and equipment expense and other operating expenses in 1995 compared to 1994
levels. Management believes the mortgage loan production network is in line
with current and anticipated levels of mortgage loan production.
Salaries and employee benefits expense was $41.2 million and $48.2 million
for the nine months ended September 30, 1995 and 1994, respectively, and $12.9
million and $18.0 million for the quarters ended September 30, 1995 and 1994,
respectively. Generally accepted accounting principles ("GAAP") require loan
origination fees to be netted against direct loan origination costs. Since
salaries and employee benefits expense is the largest component of loan
origination costs, approximately 90% of loan origination fees are accounted for
as a reduction to salaries and benefits expense. A decline in loan origination
fees, reflecting lower mortgage loan production during 1995 versus 1994, offset
the decreases in unadjusted salaries and employee benefits expense. Excluding
the effects of loan origination fees, salaries and employee benefits expense
would have decreased $20.9 million and $3.8 million for the nine month and three
month periods ended September 30, 1995, respectively, compared to the same 1994
periods, as indicated in the following table, reflecting downsizing of the
production network.
10
<PAGE> 12
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------
(thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unadjusted salaries and employee
benefits expense $ 53,608 $ 74,543 $ 18,554 $ 22,370
GAAP net origination revenues (12,456) (26,385) (5,682) (4,325)
- -----------------------------------------------------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 41,152 $ 48,158 $ 12,872 $ 18,045
=============================================================================================================================
</TABLE>
Office occupancy and equipment expense decreased to $11.0 million for the
first nine months of 1995 compared to $14.0 million for the same 1994 period.
Office occupancy and equipment expense decreased to $3.6 million for the third
quarter of 1995 compared to $4.6 million for the 1994 third quarter. In
conjunction with a restructuring plan implemented in 1994, the decrease
reflects lower office lease and other loan production related expenses
associated with downsizing the production network.
Other operating expenses, which consist primarily of loan processing expenses
and general and administrative expenses, decreased to $24.4 million for the
nine months ended September 30, 1995 from $33.8 million for the comparable 1994
period. Other operating expenses decreased to $8.7 million for the 1995 third
quarter compared to $9.6 million for the 1994 third quarter. The decreases
reflect a decrease in loan processing expenses associated with lower mortgage
loan production and decreases in general and administrative expenses related to
downsizing the production network during late 1994 and into the first quarter
of 1995.
Management anticipates that office occupancy and equipment and other
operating expenses will continue to be lower for the remainder of 1995
compared to 1994 as a result of a restructuring plan implemented in 1994 to
bring the mortgage loan production network in line with anticipated levels of
mortgage loan production. However, there can be no assurance that this result
will occur.
LIQUIDITY AND CAPITAL RESOURCES
Short-term investments, mortgage loans receivable and the mortgage loan
servicing portfolio provide a liquidity reserve since they may be sold to meet
liquidity needs. The Company's primary sources of cash during the first nine
months of 1995 were funds provided by operations, the sale of servicing and the
issuance of commercial paper. Cash has primarily been used for mortgage loan
production, additions to capitalized servicing and pool loan purchases,
repayments of commercial paper and short-term credit agreement borrowings,
repurchase of common stock, and the retirement of debt.
11
<PAGE> 13
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table summarizes total debt outstanding:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
September 30, December 31,
(thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates
of 5.99% and 5.83% as of September 30, 1995 and
December 31, 1994, respectively $ 230,725 $ 26,100
Secured credit agreements, weighted average interest
rate of 7.21% - 195,000
Credit agreements, weighted average interest rates
of 6.49% and 5.38% as of September 30, 1995 and
December 31, 1994, respectively 61,377 3,753
Medium-term notes due 1996, weighted average
interest rate of 9.65% 29,700 40,000
8.25% debentures due November 1, 1996 74,650 125,000
8.875% medium-term notes due October 15, 2001 138,355 160,000
9.0% debentures due June 1, 2012 100,000 100,000
Less unamortized discount,
premium and issuance costs (net) (2,071) (2,602)
- ----------------------------------------------------------------------------------------------------------
Total debt $ 632,736 $ 647,251
==========================================================================================================
</TABLE>
In March 1995, the Company consolidated its three then existing credit
facilities into a single credit facility in the amount of $500 million, which
can be increased at the Company's option with bank concurrence up to $1.0
billion. Borrowings under the consolidated facility, which matures in March
1998, are secured primarily by the Company's mortgage loans receivable and
mortgage servicing portfolio. As of November 10, 1995, no borrowings were
outstanding under the consolidated facility.
In the third quarter of 1995, the Company entered into an unsecured credit
agreement for $60 million which matures in June 1996.
12
<PAGE> 14
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's consolidated secured credit agreement contains covenants which
limit its ability to pay dividends or make distributions on its capital in
addition to preferred stock dividends. These covenants also require the
Company to maintain a certain level of total tangible net worth and a certain
ratio of debt to total tangible net worth. The Company is currently in
compliance with all such covenants.
On November 7, 1995, the S.E.C. declared effective a registration statement
allowing the Company to offer to exchange up to $100 million aggregate
principal amount of Quarterly Income Capital Securities for up to 4 million
shares of its 8.42% cumulative preferred stock, series A.
The Company has a dividend policy which may result in the payment of
dividends on the Company's common stock, dependent upon the earnings, cash
position and capital needs of the Company, limitations in credit agreements,
general business conditions and other factors deemed relevant by the Company's
Board of Directors. The Company did not declare any dividends on its common
stock for the nine months ended September 30, 1995 or during 1994.
On March 31, 1995, the Company sold $9.9 billion of its mortgage servicing
portfolio to a third party for gross proceeds (before taxes and expenses) of
$189.5 million. The transaction resulted in a pretax gain of $28.2 million in
the first quarter of 1995. The portion of the Company's mortgage servicing
portfolio that was sold consisted of approximately 114,000 loans that had a
weighted average interest rate of 7.72% and were representative of the
Company's entire mortgage servicing portfolio. The loans were secured by
properties located principally in California, Washington, Texas and Florida.
Management's intent regarding the sale was to take advantage of the substantial
increase in the value of servicing rights that was created by the rise in
interest rates during 1994. Additional sales transactions may occur in the
future when management deems it to be economically advantageous.
However, a strategy of the Company is to continue building the servicing
portfolio in order to take advantage of its low cost servicing operation. To
that end, in the third quarter 1995, the Company entered into an agreement to
acquire the rights to service approximately $5.0 billion of mortgage loans from
a third party. The transaction closed on October 31, 1995.
During the first nine months of 1995, the Company retired $82.3 million of
public debt. The Company recorded an extraordinary loss after tax of $.9
million on these retirements. The Company may retire additional debt during
the remainder of 1995.
In connection with the sale of servicing to a third party on March 31, 1995,
the Company transferred $90.0 million in cash and $19.5 million in common
equity securities and investments to FAE, in April 1995, in exchange for shares
of the Company's common stock which were retired. All of the common equity
securities involved in such exchange were actively traded, readily marketable,
and listed on a national exchange and, for purposes of such exchange, were
valued at their reported closing prices on the day preceding the exchange.
13
<PAGE> 15
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
No. Description
------- -----------------------
27 Financial Data Schedule
b. Form 8-K: The Company filed six current Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended September 30,
1995.
(i) July 21, 1995: Reported Distribution Date Statements for July 25,
August 1, August 1, and July 20, 1995 relating to the Source One
Mortgage Services Corporation Agency MBS Multi-Class Pass-Through
Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively.
(ii) July 25, 1995: Reported Report to the Trustee and Report to the
Certificate Holders for the month of July 1995 relating to the Source
One Mortgage Services Corporation 11 1/2% Mortgage Pass-Through
Certificates, Series A.
(iii) August 21, 1995: Reported Distribution Date Statements for
August 25, September 1, September 1, and August 20, 1995 relating
to the Source One Mortgage Services Corporation Agency MBS
Multi-Class Pass-Through Certificates Series 1987-2, 1988-1,
1988-2 and 1990-1, respectively.
(iv) August 25, 1995: Reported Report to the Trustee and Report to the
Certificate Holders for the month of August 1995 relating to the
Source One Mortgage Services Corporation 11 1/2% Mortgage
Pass-Through Certificates, Series A.
(v) September 22, 1995: Reported Distribution Date Statements for
September 25, September 25, October 1, October 1 and September 20,
1995 relating to the Source One Mortgage Services Corporation Agency
MBS Multi-Class Pass-Through Certificates Series 1987-1, 1987-2,
1988-1, 1988-2 and 1990-1, respectively.
(vi) September 25, 1995: Reported Report to the Trustee and Report
to the Certificate Holders for the month of September 1995 relating
to the Source One Mortgage Services Corporation 11 1/2% Mortgage
Pass-Through Certificates, Series A.
14
<PAGE> 16
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOURCE ONE MORTGAGE SERVICES CORPORATION
----------------------------------------
(Registrant)
DATE: November 14, 1995 /s/ Mark A. Janssen
----------------------------------------
MARK A. JANSSEN
Senior Vice President and Controller
(Chief Accounting Officer)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 46
<SECURITIES> 9,601
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 32,040
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,115,596
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 23
0
40
<OTHER-SE> 385,141
<TOTAL-LIABILITY-AND-EQUITY> 1,115,596
<SALES> 0
<TOTAL-REVENUES> 117,337
<CGS> 0
<TOTAL-COSTS> 80,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,374
<INTEREST-EXPENSE> 19,638
<INCOME-PRETAX> 36,445
<INCOME-TAX> 13,499
<INCOME-CONTINUING> 22,946
<DISCONTINUED> 0
<EXTRAORDINARY> (902)
<CHANGES> 0
<NET-INCOME> 22,044
<EPS-PRIMARY> 5.89
<EPS-DILUTED> 0
</TABLE>
