<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 September 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 LOGO]
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 November 14, 1996, the number of shares of the Registrant's Common Stock
outstanding was 2,247,000.
<PAGE> 2
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
September 30, 1996 (Unaudited) and December 31, 1995 ................ 2
Consolidated Statements of Income (Unaudited),
Nine Months and Three Months Ended September 30, 1996 and 1995 ...... 3
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 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 ........................................... 6-11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 12
SIGNATURES .......................................................... 13
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>
- -----------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 1,429 $ 4,146
Investments 37,243 26,290
Mortgage loans receivable 273,455 381,028
Pool loan purchases 130,490 118,995
Loans held for investment 22,917 24,335
Capitalized servicing (net) 389,065 397,071
Common equity securities (net) - 529
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $13,500) 49,390 45,416
Premises and equipment 28,701 31,014
Other assets 134,226 106,205
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $1,066,916 $1,135,029
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term debt $ 344,010 $ 424,661
Long-term debt 237,035 237,185
Subordinated debentures 54,381 54,786
Accounts payable and other liabilities 84,006 96,153
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 719,432 812,785
- -----------------------------------------------------------------------------------------------
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 earnings (deficit) 1,356 (23,338)
- -----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 347,484 322,244
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,066,916 $1,135,029
===============================================================================================
</TABLE>
2 See accompanying notes to consolidated financial statements.
<PAGE> 4
FORM 10-Q
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,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Mortgage servicing revenue $101,105 $107,439 $ 33,009 $ 32,058
Amortization of capitalized servicing (26,076) (51,676) (16,046) (14,564)
Net loss on financial instruments (5,127) - (225) -
- -------------------------------------------------------------------------------------------------------------------
Net servicing revenue 69,902 55,763 16,738 17,494
- -------------------------------------------------------------------------------------------------------------------
Interest income 32,104 27,476 9,715 11,238
Interest expense (28,271) (19,638) (8,162) (7,386)
- -------------------------------------------------------------------------------------------------------------------
Net interest revenue 3,833 7,838 1,553 3,852
- -------------------------------------------------------------------------------------------------------------------
Net realized investment (loss) gain on sale
of securities to affiliates (855) 216 - -
Net realized investment (loss) gain (450) (543) (300) 135
Net gain on sale of mortgages 32,217 15,328 7,748 9,552
Net gain on sale of servicing 10,080 28,229 10,080 -
Other 13,578 10,506 4,040 3,547
- -------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 128,305 117,337 39,859 34,580
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 44,585 41,152 12,870 12,872
Office occupancy and equipment 10,219 10,975 3,303 3,563
Provision for loan losses 7,323 4,374 2,379 1,787
Other operating expenses 22,937 24,391 8,250 8,714
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 85,064 80,892 26,802 26,936
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary loss 43,241 36,445 13,057 7,644
Income tax expense 15,767 13,499 4,799 2,884
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 27,474 22,946 8,258 4,760
Extraordinary loss on retirement of debt
(net of income tax benefit) - (902) - -
- -------------------------------------------------------------------------------------------------------------------
NET INCOME 27,474 22,044 8,258 4,760
Less dividends on preferred stock 2,780 6,315 927 2,105
- -------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 24,694 $ 15,729 $ 7,331 $ 2,655
==================================================================================================================
NET INCOME PER COMMON SHARE:
Before extraordinary loss $ 10.99 $ 6.23 $ 3.26 $ 1.13
Extraordinary loss - (.34) - -
- -------------------------------------------------------------------------------------------------------------------
Net income per common share $ 10.99 $ 5.89 $ 3.26 $ 1.13
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. 3
<PAGE> 5
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 27,474 $ 22,044
Noncash items included in the determination of net income:
Amortization of capitalized servicing 26,076 51,676
Net unrealized loss on financial instruments 4,955 -
Provision for loan losses 7,323 4,374
Depreciation and amortization 5,229 5,600
Net realized loss on investments 1,305 327
Amortization of goodwill 1,568 1,568
Gain on sale of servicing (10,080) (28,229)
Amortization of deferred gain on sale of servicing (2,869) (3,233)
Net decrease (increase) in mortgage loans receivable 107,573 (177,791)
Net (decrease) increase in accounts payable and other liabilities (9,509) 25,541
Net decrease in other assets 10,549 14,182
Net change in current and deferred income taxes receivable and payable 1,099 13,095
Extraordinary loss on retirement of debt - 902
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 170,693 (69,944)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on pool loan purchases, mortgage claims
receivable and real estate acquired 122,778 154,184
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (145,570) (123,804)
Capitalized excess servicing income (7,623) (4,694)
Additions to purchased mortgage servicing rights (22,534) (36,077)
Originated mortgage servicing rights (32,135) (20,447)
Net proceeds from sale of servicing 11,706 169,774
Additions to long-term investments (6,317) (1,227)
Principal payments received on long-term investments 313 774
Net (increase) decrease in short-term investments (10,354) 26,815
Proceeds from sales of common equity securities 514 21,370
Net (acquisition) disposition of premises and equipment (1,009) 353
Net decrease (increase) in loans held for investment 1,418 (3,561)
- --------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (88,813) 183,460
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 3,975,380 2,278,060
Repayments on commercial paper (4,019,134) (2,073,435)
Net decrease in credit agreement borrowings (7,498) (137,144)
Retirement of debt (29,700) (85,872)
Repurchase of common stock - (90,004)
Dividends paid (2,780) (6,315)
Other (865) -
- --------------------------------------------------------------------------------------------------------
Net cash used by financing activities (84,597) (114,710)
- --------------------------------------------------------------------------------------------------------
Net decrease in cash (2,717) (1,194)
Cash at beginning of period 4,146 1,240
- --------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,429 $ 46
========================================================================================================
</TABLE>
4 See accompanying notes to consolidated financial statements.
<PAGE> 6
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 nine month period ended September
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 in
order that the 1995 and 1996 presentations are consistent.
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 nine and three
month periods ended September 30, 1996. Net income per share amounts were
computed based on 2,670,074 and 2,345,336 weighted average total number of
common shares outstanding for the nine and three month periods ended September
30, 1995, respectively.
5
<PAGE> 7
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-NINE MONTH AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995
Source One Mortgage Services Corporation (together with its subsidiaries,
the "Company") had net income of $27.5 million and $22.0 million for the nine
months ended September 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 capitalized servicing asset and a
$10.1 million pretax, $6.6 million after tax, gain on the sale of servicing to
a third party. 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
$11.8 million pretax, $7.7 million after tax, charge for impairment of the
Company's capitalized servicing asset. Net income for the three months ended
September 30, 1996 was $8.3 million versus $4.8 million for the third quarter
of 1995. This increase was primarily due to the gain recognized on the
servicing sale.
Net servicing revenue increased for the nine months ended September 30,
1996 to $69.9 million from $55.8 million for the comparable 1995 period.
Mortgage servicing revenue decreased $6.3 million, primarily due to a decrease
in both the size of the Company's servicing portfolio and the average servicing
fee rates earned on the portfolio. This decrease was more than offset by a
$25.6 million decrease in the amortization of the Company's capitalized
servicing asset. Amortization of capitalized servicing for the nine months
ended September 30, 1996 and 1995, was $26.1 million and $51.7 million,
respectively. This decrease was attributable to a $27.5 million recovery of
the valuation allowances for the impairment of the underlying mortgage
servicing rights due to increased market interest rates and a corresponding
increase in the fair value of these rights from year end 1995 levels. The
recoveries experienced in the nine month period ended September 30, 1996 were
partially offset by higher amortization of the capitalized servicing asset due
to higher average asset balances during 1996 as compared to 1995.
Net gain on sale of servicing was $10.1 million for the nine months ended
September 30, 1996 as compared to $28.2 million for the nine months ended
September 30, 1995. The Company sold $3.3 billion of servicing rights to a
third party during the third quarter of 1996 versus $9.9 billion during the
first quarter of 1995. This is consistent with the Company's portfolio
management strategy that is designed to optimize returns on its servicing
portfolio. In October 1996, the Company entered into a contract to acquire the
rights to service approximately $2.8 billion of mortgage loans from a third
party. 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 financial instruments, including interest rate floors and
principal-only ("P/O") swaps, to mitigate the effect on earnings of higher
amortization and impairment of 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 financial instruments increases.
Conversely, as interest rates increase, the value of the capitalized servicing
asset would increase while the value of such financial instruments would
decrease.
From September 1995 through May 1996, the Company invested in $5.5 million
of interest rate floor contracts ("floors"). 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%. As of
September 30, 1996 and December 31, 1995, the carrying value of the floors
totaled $1.4 million and $3.5 million with total notional amounts of $1,100
million and $500 million, respectively.
6
<PAGE> 8
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In July 1996, the Company entered into two P/O swap transactions. The
value of the P/O swaps is determined by changes in the value of the referenced
P/O strip security. The payments received by the Company under the P/O swaps
relate to the cash flows of the referenced P/O security. The payments made by
the Company are based upon a notional amount tied to the market price and the
remaining balance of the referenced P/O security, multiplied by a floating rate
indexed to LIBOR. The total notional value of the P/O swaps was approximately
$92 million as of September 30, 1996.
During the nine months ended September 30, 1996, the Company recognized a
net loss of $5.1 million on its financial instruments. The net loss included
unrealized losses of $4.9 million and realized losses of $.2 million from the
valuation and net cash flows of various financial instruments. With respect to
the floors, the Company is not exposed to losses in excess of its $5.5 million
initial investment. The Company's exposure to losses on the P/O swaps is
related to changes in the market value of the referenced P/O security over the
life of the contract.
The Company's mortgage loan servicing portfolio decreased to $27.6 billion
as of September 30, 1996 from $31.8 billion as of December 31, 1995. The
decrease in the servicing portfolio reflects a sale of $3.3 billion in
servicing rights in the third quarter of 1996, in addition to the net effect of
mortgage loan production, regular payoffs, principal amortization, servicing
released and foreclosures.
The Company's mortgage loan production of $3,103 million and regular
payoffs of $2,417 million during the nine months ended September 30, 1996
increased 59% and 56%, respectively, from the comparable 1995 period. These
increases are reflective of overall lower market interest rates and a
corresponding increase in refinancing activity from the same 1995 period.
Conversely, the Company's mortgage loan production of $791 million and regular
payoffs of $634 million during the quarter ended September 30, 1996 decreased
22% and 8%, respectively, from the comparable 1995 period. These decreases are
a result of higher average market interest rates during the third quarter of
1996 as compared to the third quarter of 1995. (See table on page 9.)
Net interest revenue decreased to $3.8 million from $7.8 million for the
nine months ended September 30, 1996 and 1995, respectively. The rise in
interest income is indicative of higher production levels experienced in 1996
as compared to 1995. However, this increase was more than offset by an
increase in interest expense, $28.3 million versus $19.6 million, for the nine
months ended September 30, 1996 and 1995, respectively. This is primarily due
to the increased cost of short-term borrowings necessary to fund production and
the additional expense related to the December 1995 issuance of $56 million in
principal amount of subordinated debentures in exchange for preferred stock.
Interest income decreased in the third quarter of 1996 as compared to the third
quarter of 1995 to $9.7 million from $11.2 million, respectively. This decrease
is the result of a decline in production in the third quarter of 1996 due to
interest rates which exceeded those of the third quarter of 1995.
Net gain on sale of mortgages increased to $32.2 million from $15.3
million for the nine months ended September 30, 1996 and 1995, respectively.
The increase is 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 consisted primarily of loan processing fees,
insurance commissions and brokerage fees, was $13.6 million and $10.5 million
for the nine months ended September 30, 1996 and 1995, respectively. Loan
processing fees tend to increase or decrease with mortgage loan production.
Accordingly, the increase primarily reflects the increase in mortgage loan
production in 1996 compared to 1995.
7
<PAGE> 9
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 $44.6 million and $41.1 million
for the nine months ended September 30, 1996 and 1995, respectively, and $12.9
million for the quarters ended September 30, 1996 and 1995, respectively.
Generally accepted accounting principles ("GAAP") require certain loan
origination revenues 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 as indicated in the following
table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unadjusted salaries and employee benefits
expense $ 59,767 $ 53,608 $18,827 $18,554
GAAP net origination revenues (15,182) (12,456) (5,957) (5,682)
- -----------------------------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 44,585 $ 41,152 $12,870 $12,872
=====================================================================================================
</TABLE>
Excluding the effects of loan origination revenues, salaries and employee
benefits expense would have increased approximately 11% during the nine month
period ended September 30, 1996 compared to the same 1995 period. This
increase reflects the additional personnel expenses and loan officer
commissions associated with the Company's significant increase in mortgage loan
production. During the three month period ended September 30, 1996 salaries and
employee benefits expense would have increased approximately 1% compared to the
same 1995 period. Although salaries and loan officer commissions decreased as
a result of lower production volumes during the quarter, this decrease was more
than offset primarily by an increase in employee benefits expense. The
increased employee benefits expense resulted from an appreciation in the value
of stock appreciation rights and an increase in the long term incentive plan
accrual. The increase in origination revenues during the nine month period
ended September 30, 1996 to $15.2 million from $12.5 million for the comparable
1995 period is consistent with the 59% increase in production in 1996 offset by
slightly lower origination revenues per loan due to increased competition.
The provision for loan losses was $7.3 million for the nine months ended
September 30, 1996 compared to $4.4 million for 1995. For the third quarters
of 1996 and 1995, the provision for loan losses was $2.4 million and $1.8
million, respectively. The increases in 1996 are primarily due to higher
average loss volumes relating to certain California residential mortgage loans.
8
<PAGE> 10
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A summary of the Company's mortgage loan production and servicing
portfolio follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
($ in millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOAN PRODUCTION
Originations by loan type:
FHA/VA Insured $ 1,634 $ 1,074 $ 442 $ 552
Conventional 1,469 874 349 457
- -----------------------------------------------------------------------------------------------------------------------
Total $ 3,103 $ 1,948 $ 791 $ 1,009
=======================================================================================================================
Originations by source:
Retail $ 1,471 $ 1,059 $ 371 $ 534
Wholesale 1,632 889 420 475
- -----------------------------------------------------------------------------------------------------------------------
Total $ 3,103 $ 1,948 $ 791 $ 1,009
=======================================================================================================================
SERVICING PORTFOLIO (a)
Beginning balance $31,831 $39,568 $31,329 $28,746
Mortgage loan production 3,103 1,948 791 1,009
Regular payoffs (2,417) (1,550) (634) (687)
Sale of servicing (3,302) (9,893) (3,302) -
Principal amortization, servicing released
and foreclosures (1,568) (1,506) (537) (501)
- -----------------------------------------------------------------------------------------------------------------------
Ending balance $27,647 $28,567 $27,647 $28,567
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of loans serviced (a) 439,264 494,051
Weighted average net servicing fee (at end of period) (b) .421% .419%
Weighted average interest rate (a) 8.31% 8.33%
Percent delinquent (a)(c) 5.61% 6.08%
=======================================================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of
$3,796 million and $4,039 million as of September 30, 1996 and
December 31, 1995, respectively. Does not include $2.8 billion of
servicing acquisitions currently under contract.
(b) Excludes loans subserviced for others having a principal balance of
$3,796 million and $4,039 million as of September 30, 1996 and
December 31, 1995, respectively.
(c) Includes loans in process of foreclosure.
9
<PAGE> 11
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>
- --------------------------------------------------------------------------------------
September 30, December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates
of 5.61% and 6.14% as of September 30, 1996 and
December 31, 1995, respectively $212,859 $256,613
Credit agreements, weighted average interest rates
of 6.10% and 6.57% as of September 30, 1996 and
December 31, 1995, respectively 56,774 64,485
Medium-term notes due 1996, weighted average
interest rate of 9.60% as of December 31, 1995 - 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) (3,188) (3,147)
- --------------------------------------------------------------------------------------
Total debt $635,426 $716,632
======================================================================================
</TABLE>
The Company has a secured credit agreement which contains 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 September 30, 1996 and December 31, 1995, there was no loan
balance outstanding under the secured credit agreement.
The Company is currently in the process of amending and restating this
credit agreement to increase its borrowing capacity and flexibility. The
Company expects to finalize the amended agreement prior to December 31, 1996.
The provisions of the amended agreement increase the borrowing capacity from
$500 million to $750 million, which will allow the Company to finance planned
growth in production and servicing. The provisions will also extend the
maturity, reduce borrowing costs and amend covenants which will allow the
Company to repurchase up to $60 million of additional shares of its common
stock from its parent, Fund American Enterprises, Inc., the sole common
shareholder of the Company. The Company intends to repurchase its common stock
shares, up to $60 million, in the fourth quarter of 1996.
10
<PAGE> 12
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 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, 1996.
11
<PAGE> 13
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 September 30,
1996.
(i) July 23, 1996: Reported Distribution Date Statements for July 25,
August 1, August 1, and July 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) July 25, 1996: Reported Report to the Trustee and Report to the
Certificate Holders for the month of July 1996 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-
Through Certificates, Series A.
(iii) August 23, 1996: Reported Distribution Date Statements for August
25, September 1, September 1, and August 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.
(iv) August 26, 1996: Reported Report to the Trustee and Report to the
Certificate Holders for the month of August 1996 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-
Through Certificates, Series A.
(v) September 25, 1996: Reported Report to the Trustee and Report to
the Certificate Holders for the month of September 1996 relating to
the Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-
Through Certificates, Series A.
(vi) September 25, 1996: Reported Distribution Date Statements for
September 25, September 25, October 1, October 1, and September
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.
12
<PAGE> 14
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: NOVEMBER 14, 1996 /S/ MICHAEL C. ALLEMANG
----------------------------------------
Michael C. Allemang
Executive Vice President
(Chief Financial Officer)
13
<PAGE> 15
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
[S] [C] [C]
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,429
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 28,701
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,066,916
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 22
<OTHER-SE> 347,444
<TOTAL-LIABILITY-AND-EQUITY> 1,066,916
<SALES> 0
<TOTAL-REVENUES> 128,305
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 85,064
<LOSS-PROVISION> 7,323
<INTEREST-EXPENSE> 28,271
<INCOME-PRETAX> 43,241
<INCOME-TAX> 15,767
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,474
<EPS-PRIMARY> 10.99
<EPS-DILUTED> 0
</TABLE>
