<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, 1996
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]
(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 13, 1996, the number of shares of the Registrant's Common Stock
outstanding was 2,247,000.
<PAGE> 2
[50 years 1946-1996 logo]
FORM 10-Q
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
June 30, 1996 (Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income (Unaudited),
Six Months and Three Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
1
<PAGE> 3
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 1,405 $ 4,146
Investments 11,273 26,290
Mortgage loans receivable 439,489 381,028
Pool loan purchases 121,041 118,995
Loans held for investment 22,586 24,335
Capitalized servicing (net) 435,369 397,071
Common equity securities (net) - 529
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $13,500) 44,217 45,416
Premises and equipment 29,359 31,014
Other assets 88,004 106,205
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,192,743 $ 1,135,029
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term debt $ 475,269 $ 424,661
Long-term debt 237,212 237,185
Subordinated debentures 54,224 54,786
Accounts payable and other liabilities 85,885 96,153
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 852,590 812,785
- ------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value, 12,000,000 shares authorized,
1,760,939 shares of 8.42% cumulative, Series A (aggregate
liquidation preference of $25 per share) issued and outstanding 18 18
Common stock, $.01 par value, 8,000,000 shares authorized,
2,247,000 shares issued and outstanding 22 22
Paid-in capital 346,088 346,088
Unrealized investment loss (net) - (546)
Retained deficit (5,975) (23,338)
- ------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 340,153 322,244
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,192,743 $ 1,135,029
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
[50 years 1946-1996 Logo]
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Mortgage servicing revenue $ 68,096 $ 75,381 $ 33,491 $ 34,215
Amortization of capitalized servicing (10,030) (37,112) (9,868) (23,144)
Net loss on interest rate contracts (4,902) - (1,912) -
- -------------------------------------------------------------------------------------------------------------
Net servicing revenue 53,164 38,269 21,711 11,071
- -------------------------------------------------------------------------------------------------------------
Interest income 22,389 16,238 11,852 8,992
Interest expense (20,109) (12,252) (9,672) (5,191)
- -------------------------------------------------------------------------------------------------------------
Net interest revenue 2,280 3,986 2,180 3,801
- -------------------------------------------------------------------------------------------------------------
Net realized investment (loss) gain on sale
of securities to affiliates (855) 216 - 216
Net realized investment (loss) gain (150) (678) (197) 165
Net gain on sale of mortgages 24,469 5,776 11,327 2,338
Net gain on sale of servicing - 28,229 - -
Other 9,538 6,959 4,741 3,488
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 88,446 82,757 39,762 21,079
- -------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 31,715 28,280 16,014 13,342
Office occupancy and equipment 6,916 7,412 3,496 3,729
Provision for loan losses 4,944 2,587 2,986 1,370
Other operating expenses 14,687 15,677 7,841 8,108
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 58,262 53,956 30,337 26,549
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary loss 30,184 28,801 9,425 (5,470)
Income tax expense (benefit) 10,968 10,615 3,503 (1,602)
- -------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss 19,216 18,186 5,922 (3,868)
Extraordinary loss on retirement of debt
(net of income tax benefit) - (902) - (227)
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 19,216 17,284 5,922 (4,095)
Less dividends on preferred stock 1,853 4,210 926 2,105
- -------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 17,363 $ 13,074 $ 4,996 $ (6,200)
=============================================================================================================
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary loss $ 7.73 $ 4.93 $ 2.22 $ (2.42)
Extraordinary loss - (.32) - (.09)
- -------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 7.73 $ 4.61 $ 2.22 $ (2.51)
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
[50 years 1946-1996 Logo]
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 19,216 $ 17,284
Noncash items included in the determination of net income:
Amortization of capitalized servicing 10,030 37,112
Net loss on interest rate contracts 4,955 -
Provision for loan losses 4,944 2,587
Depreciation and amortization 3,819 3,874
Net realized loss on investments 1,005 462
Amortization of goodwill 1,045 1,045
Gain on sale of servicing - (28,229)
Amortization of deferred gain on sale of servicing (1,913) (2,276)
Net increase in mortgage loans receivable (58,461) (143,645)
Net (decrease) increase in accounts payable and other liabilities (10,624) 36,548
Net decrease in other assets 5,759 1,008
Net change in current and deferred income taxes receivable and payable 11,283 10,478
Extraordinary loss on retirement of debt - 902
- -------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (8,942) (62,850)
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on pool loan purchases, mortgage claims
receivable and real estate acquired 88,658 80,903
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (94,449) (86,046)
Capitalized excess servicing income (5,387) (1,971)
Additions to purchased mortgage servicing rights (16,431) (28,440)
Originated mortgage servicing rights (25,286) (9,552)
Net proceeds from sale of servicing - 169,774
Additions to long-term investments (6,405) (51)
Principal payments received on long-term investments 216 364
Net decrease in short-term investments 16,101 33,477
Proceeds from sales of common equity securities 514 15,031
Net (acquisition) disposition of premises and equipment (690) 451
Net decrease (increase) in loans held for investment 1,749 (2,091)
- -------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (41,410) 171,849
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 2,984,371 799,874
Repayments on commercial paper (2,893,079) (610,774)
Net decrease in credit agreement borrowings (15,763) (114,638)
Retirement of debt (25,200) (85,872)
Repurchase of common stock - (90,004)
Dividends paid (1,853) (4,210)
Other (865) -
- -------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 47,611 (105,624)
- -------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2,741) 3,375
Cash at beginning of period 4,146 1,240
- -------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,405 $ 4,615
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
[50 years 1946-1996 Logo]
FORM 10-Q
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,
1996 are not necessarily indicative of the results to be expected for the year
ending December 31, 1996.
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, 1995 filed with the Securities and Exchange Commission on
March 28, 1996.
Certain reclassifications have been made to the financial statements for
1995 to conform to the 1996 presentation.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The adoption of this statement will eliminate the distinction
between "normal" servicing rights and excess servicing receivables and will
change the Company's method of measuring the value of its capitalized excess
servicing asset. The statement is effective for transfers and servicing of
financial assets beginning in fiscal year 1997. The Company has not yet
determined what impact, if any, the adoption of this statement will have on its
financial position or results of operations.
NET INCOME PER SHARE
Net income per share amounts were computed based on 2,247,000 weighted
average total number of common shares outstanding for both the six and three
month periods ended June 30, 1996. Net income per share amounts were computed
based on 2,835,134 and 2,468,295 weighted average total number of common shares
outstanding for the six and three month periods ended June 30, 1995,
respectively.
5
<PAGE> 7
[50 years 1946-1996 Logo]
FORM 10-Q
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, 1996 AND 1995
Source One Mortgage Services Corporation (together with its subsidiaries,
the "Company") had net income of $19.2 million and $17.3 million for the six
months ended June 30, 1996 and 1995, respectively. The 1996 net income amount
includes a $27.5 million pretax, $17.9 million after tax, recovery of valuation
allowances related to the Company's mortgage servicing rights asset. 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 Company reported net income
of $5.9 million for the three months ended June 30, 1996 compared to a net loss
of $4.1 million for the same 1995 period.
Net servicing revenue increased to $53.2 million for the six months ended
June 30, 1996 from $38.3 million for the comparable 1995 period. Mortgage
servicing revenue, however, decreased $7.3 million primarily due to a decrease
in both the size of the servicing portfolio and the average servicing fee rates
on the mortgage loan servicing portfolio. The decrease in mortgage servicing
revenue was more than offset by a $27.1 million decrease in amortization of the
capitalized servicing asset which was due to a substantial recovery of the
valuation allowances for the impairment of mortgage servicing rights.
Amortization of capitalized servicing for the three months ended June 30, 1996
and 1995, was $9.9 million and $23.1 million, respectively. In the second
quarter of 1996, the Company recovered $7.5 million of valuation allowances for
the impairment of capitalized servicing. In the second quarter of 1995, the
Company recorded impairment of $12.1 million on the capitalized servicing
asset. The recoveries during the first half of 1996 reflect an increase in
market interest rates and a corresponding increase in the fair values of the
Company's mortgage servicing rights from year end 1995 levels. The recoveries
for the six and three month periods ended June 30, 1996 were partially offset
by higher amortization of the capitalized servicing asset, reflecting a lower
interest rate environment during the first half of 1996 versus the comparable
period of 1995.
In the first quarter of 1995, the Company sold $9.9 billion of servicing to
a third party and recognized a $28.2 million net gain on the sale. The Company
has implemented a portfolio management strategy that is designed to optimize
returns on its servicing portfolio. As such, additional sales and purchase
transactions may occur in the future when management deems it to be
economically advantageous.
As part of its portfolio risk management strategy, the Company utilizes
various derivative financial instruments, including interest rate floors and
principal-only ("P/O") swaps, to mitigate the effect on earnings of higher
amortization and impairment on the capitalized servicing asset which results
from increased prepayment activity. As interest rates decline, prepayment
activity generally increases, thereby reducing the value of the capitalized
servicing asset, while the value of the derivative financial instruments
increases. Conversely, in a rising interest rate environment, the value of the
capitalized servicing asset would be expected to increase while the value of
such financial instruments would decrease. From September 1995 through May 1996
the Company has invested in $5.5 million of interest rate floor contracts. In
July 1996, the Company entered into a significant P/O swap transaction with a
notional value of $91 million. The Company may enter into similar types of
transactions in the future to further reduce the sensitivity of its servicing
value and revenues to changes in market interest rates.
Net loss on interest rate contracts of $4.9 million for the six months ended
June 30, 1996 represents the decline in market value of the Company's
investment in interest rate floor contracts ("floors") resulting from increases
in market interest rates since the beginning of 1996. The floors derive their
value from the 10 year constant maturity treasury yield index or the 10 year
swap rate index, as applicable. The floor yields range from 5.47% to 6.24%. The
carrying value of the Company's interest rate floor contracts totaled $1.4
million and $3.5 million as of June 30, 1996 and December 31, 1995,
respectively, with total notional principal amounts of $1,100 million and $500
million, respectively. The Company is not exposed to losses in excess of its
$5.5 million initial investment in the floors.
6
<PAGE> 8
[50 years 1946-1996 Logo]
FORM 10-Q
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 increased to $31.3 billion
as of June 30, 1996 from $28.7 billion as of June 30, 1995. The increase in the
servicing portfolio reflects a $4.7 billion servicing rights acquisition in the
fourth quarter of 1995.
Mortgage loan production increased to $2,312 million for the six months
ended June 30, 1996 compared to $939 million for the same six months of 1995.
Mortgage loan production for the quarter ended June 30, 1996 increased to
$1,107 million compared to $610 million for 1995. Regular mortgage loan payoffs
were $1,783 million and $863 million for the six months ended June 30, 1996 and
1995, respectively, and $864 million and $479 million for the three month
periods ended June 30, 1996 and 1995, respectively. The increases in mortgage
loan production and payoffs for both the six and three month periods ending
June 30, 1996 reflect lower market interest rates and a corresponding increase
in refinancing activity versus the comparable 1995 periods. (See table on page
9.)
Net interest revenue was $2.3 million for the six months ended June 30, 1996
versus $4.0 million for the comparable 1995 period. Although interest income
increased as a result of increased mortgage loan production and the related
average mortgage loans receivable inventory, interest expense on short-term
borrowings also increased as a result of the higher mortgage production levels
during the first half of 1996 compared to 1995. The issuance of $56.0 million
principal amount of subordinated debentures in December 1995 also resulted in
an increase to interest expense for the first half of 1996.
Net gain on sale of mortgages increased to $24.5 million from $5.8 million
for the six months ended June 30, 1996 and 1995, respectively. For the three
months ended June 30, 1996, net gain on sale of mortgages totaled $11.3 million
compared to $2.3 million for the same three months of 1995. The increases are
primarily due to an increase in capitalized originated mortgage servicing
rights income resulting from the increase in production and the related
mortgage loan sales volume during 1996 compared to 1995.
Other revenue, which consists primarily of loan processing fees, insurance
commissions and brokerage fees, was $9.5 million and $7.0 million for the six
months ended June 30, 1996 and 1995, respectively. For the second quarters of
1996 and 1995, other revenue was $4.7 million and $3.5 million, respectively.
Loan processing fees tend to increase or decrease with mortgage loan
production. Accordingly, the increases reflect the increase in mortgage loan
production in 1996 compared to 1995.
7
<PAGE> 9
[50 years 1946-1996 Logo]
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Salaries and employee benefits expense was $31.7 million and $28.3 million
for the six months ended June 30, 1996 and 1995, respectively, and $16.0
million and $13.3 million for the quarters ended June 30, 1996 and 1995,
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. An increase in loan
origination fees, reflecting higher mortgage loan production during 1996 versus
1995, partially offset the increase in unadjusted salaries and employee
benefits expense. Excluding the effects of loan origination fees, salaries and
employee benefits expense would have increased approximately 17% , as indicated
in the following table, reflecting increased loan officer commissions due to
higher mortgage loan production volumes during both the six and three month
periods ended June 30, 1996 compared to 1995.
<TABLE>
<CAPTION>
=============================================================================================================
Six Months Ended Three Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unadjusted salaries and employee
benefits expense $ 40,940 $ 35,054 $ 20,607 $ 17,581
GAAP net origination revenues (9,225) (6,774) (4,593) (4,239)
- -------------------------------------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 31,715 $ 28,280 $ 16,014 $ 13,342
=============================================================================================================
</TABLE>
The provision for loan losses was $4.9 million for the six months ended June
30, 1996 compared to $2.6 million for 1995. For the second quarters of 1996 and
1995, the provision for loan losses was $3.0 million and $1.4 million,
respectively. The increases in 1996 are primarily due to higher average loss
volumes relating to certain California residential mortgage loans.
8
<PAGE> 10
[50 years 1946-1996 Logo]
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A summary of the Company's mortgage loan production and servicing portfolio
follows:
<TABLE>
<CAPTION>
=============================================================================================================
Six Months Ended Three Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------
($ in millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOAN PRODUCTION
Originations by loan type:
FHA/VA Insured $ 1,192 $ 522 $ 580 $ 335
Conventional 1,120 417 527 275
- -------------------------------------------------------------------------------------------------------------
Total $ 2,312 $ 939 $ 1,107 $ 610
=============================================================================================================
Originations by source:
Retail $ 1,100 $ 525 $ 505 $ 332
Wholesale 1,212 414 602 278
- -------------------------------------------------------------------------------------------------------------
Total $ 2,312 $ 939 $ 1,107 $ 610
=============================================================================================================
SERVICING PORTFOLIO (a)
Beginning balance $ 31,831 $ 39,568 $ 31,605 $ 28,970
Mortgage loan production 2,312 939 1,107 610
Regular payoffs (1,783) (863) (864) (479)
Sale of servicing - (9,893) - -
Principal amortization, servicing released
and foreclosures (1,031) (1,005) (519) (355)
- -------------------------------------------------------------------------------------------------------------
Ending balance $ 31,329 $ 28,746 $ 31,329 $ 28,746
=============================================================================================================
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------
Number of loans serviced (a) 481,393 494,051
Weighted average net servicing fee (at end of period) (b) .407% .419%
Weighted average interest rate (a) 8.25% 8.33%
Percent delinquent (a)(c) 5.27% 6.08%
=============================================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of
$3,884 million and $4,039 million as of June 30, 1996 and December
31, 1995, respectively.
(b) Excludes loans subserviced for others having a principal balance of
$3,884 million and $4,039 million as of June 30, 1996 and December
31, 1995, respectively.
(c) Includes loans in process of foreclosure.
9
<PAGE> 11
[50 years 1946-1996 Logo]
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash flow requirements relate to funding mortgage loan
production and investments in mortgage servicing rights. To meet these funding
needs, the Company relies on commercial paper borrowings, short-term credit
facilities, medium-term debt, early funding programs and cash flow from
operations. Management believes capital resources will be sufficient to meet
the Company's operating needs as well as to fund maturing medium and long-term
debt.
The following table summarizes total debt outstanding:
<TABLE>
<CAPTION>
========================================================================================================
June 30, December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates
of 5.62% and 6.14% as of June 30, 1996 and
December 31, 1995, respectively $ 347,905 $ 256,613
Credit agreements, weighted average interest rates
of 6.06% and 6.57% as of June 30, 1996 and
December 31, 1995, respectively 48,574 64,485
Medium-term notes due 1996, weighted average
interest rates of 9.50% and 9.60% as of June 30, 1996
and December 31, 1995, respectively 4,500 29,700
8.25% debentures due November 1, 1996 74,650 74,650
8.875% medium-term notes due October 15, 2001 138,355 138,355
9.0% debentures due June 1, 2012 100,000 100,000
9.375% subordinated debentures due December 31, 2025 55,976 55,976
Less unamortized discount,
premium and issuance costs (net) (3,255) (3,147)
- --------------------------------------------------------------------------------------------------------
Total debt $ 766,705 $ 716,632
========================================================================================================
</TABLE>
The Company has secured credit agreements which contain covenants limiting
its ability to pay dividends or make distributions on its capital in excess of
preferred stock dividend and subordinated debt interest payment requirements
each year. The 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. As of
June 30, 1996 and December 31, 1995, there were no loan balances outstanding
under the secured credit agreements.
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, 1996.
10
<PAGE> 12
[50 years 1946-1996 Logo]
FORM 10-Q
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, 1996.
(i) April 23, 1996: Reported Distribution Date Statements for April 25,
May 1, May 1, and April 20, 1996 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) April 25, 1996: Reported Report to the Trustee and Report to the
Certificate Holders for the month of April 1996 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage
Pass-Through Certificates, Series A.
(iii) May 28, 1996: Reported Report to the Trustee and Report to the
Certificate Holders for the month of May 1996 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage
Pass-Through Certificates, Series A.
(iv) May 28, 1996: Reported Distribution Date Statements for May 25,
June 1, June 1, and May 20, 1996 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 25, 1996: Reported Report to the Trustee and Report to the
Certificate Holders for the month of June 1996 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage
Pass-Through Certificates, Series A.
(vi) June 28, 1996: Reported Distribution Date Statements for June 25,
June 25, July 1, July 1 and June 20, 1996 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.
11
<PAGE> 13
[50 years 1946-1996 Logo]
FORM 10-Q
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 13, 1996 /s/ Mark A. Janssen
- --------------------- ----------------------------------------
Mark A. Janssen
Senior Vice President and Controller
(Chief Accounting Officer)
12
<PAGE> 14
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,405
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 29,359
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,192,743
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 22
<OTHER-SE> 340,113
<TOTAL-LIABILITY-AND-EQUITY> 1,192,743
<SALES> 0
<TOTAL-REVENUES> 88,446
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 58,262
<LOSS-PROVISION> 4,944
<INTEREST-EXPENSE> 20,109
<INCOME-PRETAX> 30,184
<INCOME-TAX> 10,968
<INCOME-CONTINUING> 19,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,216
<EPS-PRIMARY> 7.73
<EPS-DILUTED> 0
</TABLE>
