<PAGE> 1
UNITED STATES
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 June 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 LOGO]
MORTGAGE SERVICES CORPORATION
(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 .
---------- ----------
As of August 8, 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>
PAGE
NO.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
June 30, 1995 (Unaudited) and December 31, 1994........................ 2
Consolidated Statements of Income (Unaudited),
Six Months and Three Months Ended June 30, 1995 and 1994............... 3
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 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.............. 7-12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 13
SIGNATURES............................................................. 14
</TABLE>
1
<PAGE> 3
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(thousands, except for share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 4,615 $ 1,240
Short-term investments 10,651 44,128
Mortgage loans receivable 354,117 210,472
Pool loan purchases 171,181 163,859
Loans held for investment 21,866 19,775
Capitalized servicing (net) 363,756 530,450
Common equity securities (net) 13,821 45,140
Long-term investments 4,755 6,068
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $13,350) 45,019 49,785
Premises and equipment 33,104 36,173
Other assets 112,491 102,922
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,135,376 $ 1,210,012
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 639,664 $ 647,251
Accounts payable and other liabilities 111,978 86,674
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 751,642 733,925
- -----------------------------------------------------------------------------------------------------------------------------------
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 June 30, 1995 and December 31, 1994, respectively 23 32
Paid-in capital 412,309 522,032
Unrealized investment loss (net) (1,760) (4,065)
Retained deficit (26,878) (41,952)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 383,734 476,087
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,135,376 $ 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
(thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Mortgage servicing revenue $ 75,381 $ 84,594 $ 34,215 $ 40,919
Amortization of capitalized servicing 24,483 45,752 10,844 19,216
- -----------------------------------------------------------------------------------------------------------------------------------
Net servicing revenue 50,898 38,842 23,371 21,703
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income 16,238 49,280 8,992 19,863
Interest expense 12,297 38,911 5,214 17,199
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 3,941 10,369 3,778 2,664
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized investment gain (loss) on exchange
of securities with affiliate 216 (8,596) 216 (8,596)
Net realized investment (loss) gain (678) 2,115 165 (43)
Net (loss) gain on sale of mortgages (3,834) 28,807 (2,503) 16,576
Net gain on sale of servicing 28,229 -- -- --
Other 7,034 14,769 3,510 6,852
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 85,806 86,306 28,537 39,156
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 28,294 30,113 13,347 16,051
Office occupancy and equipment 7,412 9,349 3,729 4,721
Provision for loan losses 2,587 3,016 1,370 1,302
Other operating expenses 15,635 24,188 8,087 11,510
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 53,928 66,666 26,533 33,584
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 31,878 19,640 2,004 5,572
Income tax expense 11,692 7,207 1,014 2,213
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative
effect of accounting change 20,186 12,433 990 3,359
Extraordinary loss on retirement of debt (net
of income tax benefit) (902) -- (227) --
Cumulative effect of change in accounting for
purchased mortgage servicing rights (net of
deferred income tax benefit) -- (44,296) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 19,284 $(31,863) $ 763 $ 3,359
Less dividends on preferred stock 4,210 2,432 2,105 2,105
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 15,074 $(34,295) $ (1,342) $ 1,254
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary loss and cumulative effect
of accounting change $ 5.64 $ 2.65 $ (.45) $ .37
Extraordinary loss (.32) -- (.09) --
Cumulative effect of accounting change -- (11.75) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 5.32 $ (9.10) $ (.54) $ .37
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 19,284 $ (31,863)
Noncash items included in the determination of net income (loss):
Amortization of capitalized servicing 24,483 45,752
Provision for loan losses 2,587 3,016
Depreciation and amortization 3,874 4,485
Net realized loss on investments 462 6,481
Amortization of goodwill 1,045 1,045
Gain on sale of servicing (28,229) --
Amortization of deferred gain on sale of servicing (2,276) --
Net (increase) decrease in mortgage loans receivable (143,645) 790,299
Net increase (decrease) in accounts payable and other liabilities 36,548 (77,854)
Net decrease in other assets 1,008 40,462
Net change in current and deferred income taxes receivable and payable 11,555 7,076
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 (72,402) 833,195
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on pool loan purchases, mortgage claims
receivable and real estate acquired 80,903 126,759
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (86,046) (138,956)
Capitalized excess servicing income (1,971) (12,644)
Additions to capitalized servicing (28,440) (21,342)
Sale of servicing 169,774 20,046
Net decrease (increase) in short-term investments 33,477 (132,378)
Principal payments received on long-term investments 364 1,142
Additions to long-term investments (51) (82)
Purchase of common equity securities -- (70,830)
Proceeds from sales of common equity securities 15,031 72,276
Net disposition (acquisition) of premises and equipment 451 (2,453)
Net (increase) decrease in loans held for investment (2,091) 2,801
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 181,401 (155,661)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 799,874 1,004,950
Repayments on commercial paper (610,774) (1,483,975)
Net decrease in credit agreement borrowings (114,638) (299,402)
Retirement of debt (85,872) --
Repurchase of common stock (90,004) --
Net proceeds from issuance of preferred stock -- 96,850
Dividends paid (4,210) (1,029)
Other -- (24)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (105,624) (682,630)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 3,375 (5,096)
Cash at beginning of period 1,240 6,954
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 4,615 $ 1,858
- -----------------------------------------------------------------------------------------------------------------------------------
</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 six month period ended June 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 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 August 8, 1995, no borrowings were outstanding under
the consolidated facility.
RECENTLY ISSUED ACCOUNTING STANDARD
In May 1995, the Financial Accounting Standards Board ("FASB") 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.
The provisions of the statement are required to be applied prospectively in
years beginning after December 15, 1995 to transactions involving the
origination or acquisition of servicing rights, and to impairment evaluations of
all capitalized servicing rights whenever acquired. Earlier application is
encouraged and retroactive application prior to the year of adoption is
prohibited. The Company currently expects to adopt the provisions of SFAS No.
122 for fiscal year 1995.
It is expected that the adoption of SFAS No. 122, as it relates to the
capitalization of originated mortgage servicing rights, will have a moderately
favorable impact on the Company's reported financial condition and results of
operations. However, management is currently unable to estimate the effects of
the impairment provisions of adopting the new statement.
5
<PAGE> 7
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
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 2,468,295 and 3,411,826
weighted average total number of common shares outstanding for the three months
ended June 30, 1995 and 1994, respectively. Net income per share amounts were
computed based on 2,835,134 and 3,768,990 weighted average total number of
common shares outstanding for the six months ended June 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 - SIX MONTH AND THREE MONTH PERIODS ENDED
JUNE 30, 1995 AND 1994
Source One Mortgage Services Corporation (together with its subsidiaries, the
"Company") had net income of $19.3 million for the six months ended June 30,
1995 compared to a net loss of $31.9 million for the first six 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. 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 periods ended June 30, 1995
and 1994, the Company reported net income of $.8 million and $3.4 million,
respectively.
In May 1995, the Financial Accounting Standards Board ("FASB") 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.
The provisions of SFAS No. 122 are required to be applied prospectively in
years beginning after December 15, 1995 to transactions involving the
origination or acquisition of servicing rights, and to impairment evaluations of
all capitalized servicing rights whenever acquired. Earlier application is
encouraged and retroactive application prior to the year of adoption is
prohibited. The Company currently expects to adopt the provisions of SFAS No.
122 for fiscal year 1995.
It is expected that the adoption of SFAS No. 122, as it relates to the
capitalization of originated mortgage servicing rights, will have a moderately
favorable impact on the Company's reported financial condition and results of
operations. However, management is currently unable to estimate the effects of
the impairment provisions of adopting the new statement.
Net servicing revenue increased to $50.9 million for the first half of 1995
from $38.8 million for the comparable 1994 period. The increase reflects lower
mortgage servicing revenue resulting from the sale of $9.9 billion of servicing
to a third party in the first quarter of 1995, and decreased amortization of the
capitalized mortgage servicing asset due to a decrease in actual and anticipated
mortgage loan prepayments and a lower capitalized servicing asset. Exclusive of
the impact of adopting SFAS No. 122, management anticipates that amortization of
the capitalized mortgage servicing asset in 1995 would continue to be lower when
compared to 1994 due to lower actual and anticipated loan prepayments. However,
should interest rates decline and mortgage loan prepayments accelerate,
amortization expense would be expected to increase in future periods. However,
there can be no assurance that these results will occur.
7
<PAGE> 9
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company's mortgage loan servicing portfolio totalled $28.7 billion as of
June 30, 1995 versus $39.6 billion as of December 31, 1994 and $38.9 billion as
of June 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. Under circumstances deemed appropriate by management,
additional sales transactions may occur in the future.
Mortgage loan production decreased to $939 million for the first half of 1995
compared to $3,372 million for the comparable 1994 period. Mortgage loan
production for the quarter ended June 30, 1995 decreased to $610 million
compared to $1,277 million for the 1994 second quarter. Regular mortgage loan
payoffs decreased to $863 million for the first six months of 1995 compared to
$3,438 million for the comparable 1994 period. Regular mortgage loan payoffs for
the quarter ended June 30, 1995 decreased to $479 million compared to $1,255
million for the 1994 second quarter. (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.
Net interest revenue was $3.9 million for the six months ended June 30, 1995
versus $10.4 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.
Net realized investment gain on exchange of securities with affiliate was $.2
million for the six months ended June 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 loss on sale of mortgages into the secondary market totalled $3.8 million
for the first half of 1995 compared to a net gain on sale of mortgages of $28.8
million for the comparable 1994 period. Net loss on sale of mortgages was $2.5
million for the second quarter of 1995 compared to net gain on sale of mortgages
of $16.6 million for the 1994 second quarter. The deterioration is attributable
to a decrease in mortgage loan sales volume due to lower mortgage loan
production, particularly sales of premium refinance products, during the first
half of 1995 compared to 1994 and intensive price competition during 1995.
Management anticipates that the net gain on sale of mortgages will continue to
be unfavorable during the remainder of 1995 compared to 1994 primarily as a
result of continued intense price competition.
8
<PAGE> 10
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
A summary of the Company's mortgage loan production and servicing portfolio
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------------------
($ in millions) 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOAN PRODUCTION
Originations by loan type:
FHA/VA Insured $ 522 $ 1,451 $ 335 $ 569
Conventional 417 1,921 275 708
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 939 $ 3,372 $ 610 $ 1,277
- -------------------------------------------------------------------------------------------------------------------------------
Originations by source:
Retail $ 525 $ 2,034 $ 332 $ 739
Wholesale 414 1,338 278 538
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 939 $ 3,372 $ 610 $ 1,277
- -------------------------------------------------------------------------------------------------------------------------------
SERVICING PORTFOLIO (a)
Beginning balance $39,568 $38,403 $28,970 $38,484
Sale of servicing (9,893) -- -- --
Mortgage loan production 939 3,372 610 1,277
Servicing acquisitions -- 2,056 -- 1,010
Servicing released, principal amortization,
foreclosures and other (1,005) (1,523) (355) (646)
Regular payoffs (863) (3,438) (479) (1,255)
- -------------------------------------------------------------------------------------------------------------------------------
Ending balance $28,746 $38,870 $28,746 $38,870
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average net servicing fee (at end of period) (c) .427% .414%
Weighted average interest rate (a)(b) 8.29% 8.14%
Number of loans serviced (a)(b) 442,352 543,428
Percent delinquent (a)(b)(d) 4.90% 4.84%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans subserviced for others having a principal balance of
$4,190 million and $4,294 million at June 30, 1995 and December 31, 1994,
respectively.
(b) Excludes $1,651 million outstanding principal balance of interim
servicing as of December 31, 1994.
(c) Excludes loans subserviced for others having a principal balance of
$4,190 million and $4,294 million as of June 30, 1995 and December 31,
1994, respectively.
(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 gain on sale of servicing was $28.2 million for the 1995 first half
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 $7.0 million and $14.8 million for the six
months ended June 30, 1995 and 1994, respectively. For the second quarters of
1995 and 1994, other revenue was $3.5 million and $6.9 million, respectively.
Loan processing fees tend to decrease or increase with mortgage loan production.
Accordingly, the decreases reflect the decrease in mortgage loan production in
1995 compared to 1994.
Salaries and employee benefits expense was $28.3 million and $30.1 million
for the six months ended June 30, 1995 and 1994, respectively, and $13.3 million
and $16.1 million for the quarters ended June 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
$17.1 million and $6.3 million for the six month and three month periods ended
June 30, 1995, respectively, compared to the same 1994 periods, as indicated in
the following table, reflecting downsizing of the production network.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unadjusted salaries and employee
benefits expense $ 35,054 $ 52,173 $ 17,581 $ 23,873
GAAP net origination revenues (6,760) (22,060) (4,234) (7,822)
- -----------------------------------------------------------------------------------------------------------------------------------
GAAP salaries and employee
benefits expense $ 28,294 $ 30,113 $ 13,347 $ 16,051
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Office occupancy and equipment expense decreased to $7.4 million for the
first half of 1995 compared to $9.3 million for the 1994 first half. Office
occupancy and equipment expense decreased to $3.7 million for the second quarter
of 1995 compared to $4.7 million for the 1994 second 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 $15.6 million for the six
months ended June 30, 1995 from $24.2 million for the comparable 1994 period.
Other operating expenses decreased to $8.1 million for the 1995 second quarter
compared to $11.5 million for the 1994 second 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.
10
<PAGE> 12
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 half 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, and the retirement
of debt.
The following table summarizes total debt outstanding:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(thousands)
Commercial paper, weighted average interest rates
of 6.20% and 5.83% as of June 30, 1995 and
December 31, 1994, respectively $215,200 $ 26,100
Secured credit agreements, weighted average interest
rates of 6.71% and 7.21% as of June 30, 1995 and
December 31, 1994, respectively 75,000 195,000
Credit agreement, weighted average interest rates
of 6.72% and 5.38% as of June 30, 1995 and
December 31, 1994, respectively 8,967 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) (2,208) (2,602)
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt $639,664 $647,251
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 August 8, 1995, no borrowings were
outstanding under the consolidated facility.
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.
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 six months ended June 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. Under circumstances deemed appropriate by management, additional
sales transactions may occur in the future.
During the first half 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.
12
<PAGE> 14
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 June 30, 1995.
(i) April 25, 1995: Reported Report to the Trustee and Report to the
Certificate Holders for the month of April 1995 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-
Through Certificates, Series A.
(ii) April 28, 1995: Reported Distribution Date Statements for April 25,
May 1, May 1, and April 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.
(iii) May 25, 1995: Reported Report to the Trustee and Report to the
Certificate Holders for the month of May 1995 relating to the Source
One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through
Certificates, Series A.
(iv) May 26, 1995: Reported Distribution Date Statements for May 25, June
1, June 1, and May 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.
(v) June 26, 1995: Reported Report to the Trustee and Report to the
Certificate Holders for the month of June 1995 relating to the Source
One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through
Certificates, Series A.
(vi) June 27, 1995: Reported Distribution Date Statements for June 25,
June 25, July 1, July 1 and June 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.
13
<PAGE> 15
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: August 8, 1995 /s/ Mark A. Janssen
------------------------------------------------
MARK A. JANSSEN
Senior Vice President and Controller
(Chief Accounting Officer)
14
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,615
<SECURITIES> 13,821
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 33,104
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,135,376
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 23
0
40
<OTHER-SE> 383,671
<TOTAL-LIABILITY-AND-EQUITY> 1,135,376
<SALES> 0
<TOTAL-REVENUES> 85,806
<CGS> 0
<TOTAL-COSTS> 53,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,587
<INTEREST-EXPENSE> 12,297
<INCOME-PRETAX> 31,878
<INCOME-TAX> 11,692
<INCOME-CONTINUING> 20,186
<DISCONTINUED> 0
<EXTRAORDINARY> (902)
<CHANGES> 0
<NET-INCOME> 19,284
<EPS-PRIMARY> 5.32
<EPS-DILUTED> 0
</TABLE>
