<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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) (Zip code)
Registrant's telephone number, including area code: (810) 488-7000
<TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
8.42% CUMULATIVE PREFERRED STOCK, SERIES A NEW YORK STOCK EXCHANGE
9.375% QUARTERLY INCOME CAPITAL SECURITIES NEW YORK STOCK EXCHANGE
(SUBORDINATED INTEREST DEFERRABLE DEBENTURES, DUE 2025)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
THERE IS NO AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. AS OF MARCH 28, 1996, THE NUMBER OF SHARES OF THE
REGISTRANT'S COMMON STOCK OUTSTANDING WAS 2,247,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1995 (Parts II and IV).
<PAGE> 2
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
PART I
ITEM 1. BUSINESS
GENERAL
Source One Mortgage Services Corporation, a Delaware corporation (together
with its subsidiaries, the "Company" or "Source One"), is one of the largest
mortgage banking companies in the United States. As of December 31, 1995, the
Company had a mortgage loan servicing portfolio totalling $31.8 billion,
including $4.0 billion of loans subserviced for others, which is serviced on
behalf of approximately 320 institutional investors and numerous other security
holders. As of December 31, 1995, the Company had 128 retail branch offices in
25 states and originated $2.9 billion in mortgage loans for the year then
ended.
As a mortgage banker, the Company engages primarily in the business of
producing, selling and servicing residential mortgage loans. Its sources of
revenue are net servicing revenue, net interest revenue, net gain on sale of
mortgages, net gain on sale of servicing, and other revenue (including
underwriting and appraisal fees). Through subsidiaries, the Company also
provides credit-related insurance products (such as life, disability, health,
accidental death, and property and casualty insurance).
The Company was incorporated in 1972 and is the successor to Citizens
Mortgage Corporation which was organized in 1946. The Company is now an
indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc.
("Fund American"), a Delaware corporation organized in 1980, which was formerly
known as The Fund American Companies, Inc. and Fireman's Fund Corporation.
The Company's principal executive offices are located at 27555 Farmington
Road, Farmington Hills, Michigan 48334-3357; its telephone number is (810)
488-7000.
INDUSTRY OVERVIEW
Mortgage banking is the business of serving as a financial intermediary in
(i) the origination and purchase of mortgage loans, (ii) the holding of such
loans while aggregating sufficient loans to form appropriate mortgage-backed
security pools, (iii) the subsequent sale of such loans through pools or
directly to investors, and (iv) the ongoing management or servicing of such
loans during the repayment period. Mortgage bankers generate revenue in each of
the four stages of the mortgage banking process.
MORTGAGE LOAN PRODUCTION
The Company produces residential mortgage loans through a system of retail
branch offices, a specialized marketing program, mortgage brokers, and a
correspondent network of banks, thrift institutions and other mortgage lenders.
The existence of these mortgage production sources gives the Company the
flexibility to shift its production between those sources as market conditions
warrant and allows it to emphasize the production mode which is most
economically advantageous.
Loans produced, whether through origination or purchase, include
conventional residential mortgage loans as well as mortgage loans that are
either insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans Administration ("VA") (government loans). In
evaluating loans purchased through its correspondent network and loans
originated through its broker network, the Company applies the same quality
standards as required for loans originated by the Company itself. The Company's
quality control department reviews a sample of the loans purchased to determine
compliance with Company standards.
It is a policy of the Company to primarily produce fixed rate mortgage
loans. As of December 31, 1995 approximately 6% of the Company's total mortgage
loan servicing portfolio consisted of adjustable rate mortgage loans.
1
<PAGE> 3
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
The following table sets forth selected information regarding the
Company's mortgage loan production:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHA/VA $1,565 $2,065 $3,453 $1,927 $1,641
Conventional 1,287 2,521 7,999 5,664 2,386
- ----------------------------------------------------------------------------------------------------------------
Total production $2,852 $4,586 $11,452 $7,591 $4,027
- ----------------------------------------------------------------------------------------------------------------
Retail branch originations $1,347 $2,005 $4,922 $3,326 $1,695
Specialized marketing program originations 152 804 2,179 661 134
Mortgage broker originations 196 696 1,708 1,026 290
Correspondent network
acquisitions 1,157 1,081 2,643 2,578 1,908
- ----------------------------------------------------------------------------------------------------------------
Total production $2,852 $4,586 $11,452 $7,591 $4,027
================================================================================================================
</TABLE>
RETAIL BRANCH OFFICES. As of December 31, 1995, the Company had 128 retail
branch offices in 25 states. Each office has sales representatives who
originate mortgage loans through contacts with real estate brokers, builders
and developers, and others, as well as through direct contact with homebuyers.
As of December 31, 1995, the Company's retail branch offices were located
in the following states:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
STATE OFFICES STATE OFFICES STATE OFFICES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California 29 Florida 5 Kansas 1
Washington 21 Missouri 4 Maryland 1
Texas 11 Ohio 4 Massachusetts 1
Illinois 7 Kentucky 3 Oregon 1
Nevada 7 New Jersey 2 Rhode Island 1
Arizona 6 Pennsylvania 2 Tennessee 1
Michigan 6 Alaska 1 Virginia 1
New York 6 Arkansas 1
Colorado 5 Iowa 1
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Mortgage loans originated by the Company are subject to a defined
underwriting process in order to assess the prospective borrower's ability to
repay the loan requested and the adequacy of the property as collateral. In
addition, the Company is subject to the underwriting guidelines of FHA, VA, the
Federal Home Loan Mortgage Corporation ("FHLMC," also known as "Freddie Mac")
and the Federal National Mortgage Association ("FNMA," also known as "Fannie
Mae"), as well as specific contractual requirements of institutional investors
who have agreed to acquire mortgage loans originated by the Company.
Most branch office originations are referred to regional operating centers
for preparation of loan documentation, evaluation of compliance with the
Company's underwriting conditions and closing of the loans.
SPECIALIZED MARKETING PROGRAM. The Company also generates mortgage loan
originations through affinity programs and by responding to refinancing
requests from the population of loans currently serviced by the Company. The
products currently offered by the Specialized Marketing Program consist of
purchase money first mortgages, home equity lines of credit, closed-end second
mortgages, refinancing and relocation assistance. The Company is currently
developing the ability to provide outsource services for other mortgage lenders
through this program.
2
<PAGE> 4
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
MORTGAGE BROKERS. The Company conducts a program through which it closes
loans originated by a network of mortgage brokers. The funding price for such
loans is set by the Company on a daily basis. The mortgage broker receives
compensation equivalent to the difference between the Company's pricing
schedule and the closing price. The Company maintains an office to service this
network in West Bloomfield, Michigan. As of December 31, 1995 there were
approximately 400 active participants in the Company's mortgage broker network,
with no single broker or group of affiliated brokers accounting for more than
10% of the Company's total mortgage loan originations.
CORRESPONDENT NETWORK. The Company conducts a program through which it
agrees to purchase mortgage loans from a network of banks, thrift institutions
and other mortgage lenders. The funding price for such loans is set by the
Company on a daily basis. In addition, the Company pays a premium for the
release of servicing rights, which is negotiated on a case-by-case basis. As of
December 31, 1995 there were approximately 200 participants in the Company's
correspondent network, with no single participant or group of affiliated
participants accounting for more than 10% of the Company's total mortgage loan
originations.
SALES OF LOANS
The Company sells loans either through mortgage-backed securities issued
pursuant to programs of the Government National Mortgage Association ("GNMA,"
also known as "Ginnie Mae"), FNMA and FHLMC or to institutional investors. Most
loans are aggregated in pools of $1 million or more, which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
Substantially all GNMA securities are sold without recourse to the Company for
loss of principal in the event of a subsequent default by the mortgage borrower
due to the underlying FHA and VA insurance.
The following table summarizes the principal amount of the Company's
loans sold:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA $1,252 46.30% $2,301 40.94% $ 3,138 29.40%
FNMA 927 34.29 2,282 40.61 4,747 44.48
FHLMC 251 9.28 929 16.53 2,702 25.32
Other 274 10.13 108 1.92 85 0.80
- --------------------------------------------------------------------------------------------------------------------------
Total loan sales $2,704 100.00% $5,620 100.00% $10,672 100.00%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Servicing agreements relating to mortgage-backed securities issued
pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance
funds to make the required payments to investors in the event of a delinquency
by the borrower. The Company expects that it would recover most funds advanced
upon cure of default by the borrower or at foreclosure. However, in connection
with VA partially guaranteed loans and certain conventional loans (which are at
most partially insured by private mortgage insurers), funds advanced may not
cover losses due to potential declines in collateral value. In addition, most
of the Company's servicing agreements for mortgage-backed securities typically
require the payment to investors of a full month's interest on each loan
although the loan may be paid off (by optional prepayment or foreclosure) other
than on a month-end basis. In this instance, the Company is obligated to pay
the investor interest at the note rate from the date of the loan payoff through
the end of that calendar month without reimbursement.
The Company, through private placements and public offerings, has also
sold mortgage loans through the issuance of mortgage pass-through certificates.
The Company issued $521.7 million of real estate mortgage investment conduit
("REMIC") certificates through December 31, 1990 for which it is the primary
servicer. The REMIC certificates were sold pursuant to five separate trusts
which have no recourse provisions. The Company has not issued any mortgage pass-
3
<PAGE> 5
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
through certificates since 1990, however the Company may offer additional
mortgage pass-through certificates in the future if economic and market
conditions warrant.
Historically, the Company's sales of loans have generated net gains.
However, if secondary market interest rates decline after the Company obtains a
mandatory forward commitment for a loan, the loan may not close and the Company
may incur a loss from the cost of covering its obligations under such
commitment. If secondary market interest rates increase after the Company
commits to an interest rate for a loan, and the Company has not obtained a
forward commitment, the Company may incur a loss when the loan is subsequently
sold. To minimize this risk, the Company obtains mandatory forward commitments
of up to 120 days to sell mortgage-backed securities with respect to all loans
which have been funded and a substantial portion of loans in process
("pipeline") which it believes will close.
The Company's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis.
In addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers, with no dealer
having in excess of 20 percent of current commitments. The Company currently
transacts business with seven approved dealers.
LOAN SERVICING
Mortgage loan servicing consists primarily of collecting monthly loan
payments and remitting amounts due to investors, collecting property tax and
insurance escrow deposits and making tax and insurance premium payments when
due. The Company collects a servicing fee from the monthly loan payment equal
to a fixed percentage of the outstanding principal balance of the loan, plus
any late charges.
The Company currently retains the rights to service substantially all of
the mortgage loans it produces. In addition, the Company may acquire the rights
to service or subservice a mortgage loan portfolio without originating or
acquiring the underlying mortgage loans. The Company customarily makes such
purchases of servicing rights from banks, thrift institutions and other
mortgage lenders. The fees paid to acquire such servicing rights are negotiated
on a case-by-case basis. During 1995, the Company purchased the rights to
service $4.7 billion of mortgage loans from a third party.
The Company also sells servicing rights when management deems it
economically advantageous. In 1995, the Company sold the rights to service a
total of $11.0 billion of mortgage loans to third parties resulting in a pretax
gain of $40.0 million. In 1994, the Company sold the rights to service $3.9
billion of mortgage loans to a third party and continues to subservice these
loans pursuant to a five-year subservicing agreement.
The following table summarizes the changes in the Company's mortgage loan
servicing portfolio including loans subserviced, interim servicing contracts
and those under contract to acquire and excluding loans sold but not
transferred:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(in millions)
Year ended December 31, 1995 1994 1993 1992 1991
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $39,568 $38,403 $37,312 $41,014 $35,585
Mortgage loan production 2,852 4,586 11,452 7,591 4,027
Servicing acquisitions 4,674 3,707 6,368 2,323 6,756
---------------------------------------------------------------------------
Total servicing in 7,526 8,293 17,820 9,914 10,783
---------------------------------------------------------------------------
Regular payoffs 2,271 4,728 13,563 11,532 3,893
Sale of servicing 10,973 - - - -
Principal amortization,
servicing released and
foreclosures 2,019 2,400 3,166 2,084 1,461
---------------------------------------------------------------------------
Total servicing out 15,263 7,128 16,729 13,616 5,354
---------------------------------------------------------------------------
Balance at end of year $31,831 $39,568 $38,403 $37,312 $41,014
---------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
The Company closely monitors the rate of delinquencies and foreclosures
incident to its servicing portfolio. The following table summarizes the
Company's delinquency and foreclosure experience with respect to residential
mortgage loans serviced by the Company:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(% OF TOTAL RESIDENTIAL LOANS SERVICED)
DECEMBER 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
31-59 days past due 3.99% 3.15% 3.41% 3.26% 3.56%
60-89 days past due .70 .54 .58 .65 .61
90 days or more past due .59 .38 .45 .48 .41
- ------------------------------------------------------------------------------
Total delinquencies 5.28% 4.07% 4.44% 4.39% 4.58%
- ------------------------------------------------------------------------------
Foreclosures .80% .77% .92% .77% .74%
- ------------------------------------------------------------------------------
</TABLE>
RELATED ACTIVITIES
In conjunction with its origination activities and portfolio servicing,
the Company provides certain credit-related insurance products (such as life,
disability, health, accidental death, and property and casualty insurance)
through subsidiaries. The insurance subsidiaries act as agents and receive fees
based on premium value, but do not assume any insurance risk. Insurance
products are sold through (i) solicitation at the time of mortgage application,
(ii) direct mail solicitation shortly after mortgage loan closing, (iii)
solicitation by a direct solicitor and (iv) resolicitation of the Company's
portfolio on an annual basis. At certain locations, personal solicitation by
Company staff is permitted by state regulations which determine allowable
insurance sales practices. The fees recognized under these programs were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(in thousands)
Year ended December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insurance revenue $4,762 $4,582 $5,039 $5,605 $5,495
- -----------------------------------------------------------------------------
</TABLE>
CERTAIN BUSINESS CONDITIONS
Changes in the economy or prevailing interest rates can have significant
effects, including material adverse effects, on the mortgage banking business
and the Company.
Inflation and changes in interest rates can have differing effects on
various aspects of the Company's business, particularly with respect to
marketing gains and losses on the sale of mortgage loans, mortgage loan
production, the value of the Company's servicing portfolio and net interest
revenue. Historically, the Company's loan originations and loan production
income have increased in response to falling interest rates and have decreased
during periods of rising interest rates. Periods of low inflation and falling
interest rates tend to reduce loan servicing income and the value of the
Company's mortgage loan servicing portfolio because prepayments of mortgages
are greater and the average life of loan servicing rights is shortened.
Conversely, periods of increasing inflation and rising interest rates tend to
increase loan servicing income and the value of the Company's mortgage loan
servicing portfolio because prepayments of mortgages are lower and the average
life of loan servicing rights is lengthened.
COMPETITION
The Company competes nationally and locally with other mortgage bankers,
state and national banks, thrift institutions and insurance companies. National
banks and thrift institutions have substantially more flexibility in their loan
origination programs than the Company, which must originate loans meeting the
standards of the secondary market. Mortgage lenders compete primarily with
respect to price and service. Competition may also occur on mortgage terms and
closing costs. The Company competes, in part, by using its commissioned sales
force to maintain close relationships with real estate brokers, builders and
developers and members of its correspondent and broker networks. In the opinion
of management, no single mortgage lender dominates the industry.
5
<PAGE> 7
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
REGULATION
The Company is subject to the rules and regulations of, and examinations
by, FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing,
selling and servicing mortgage loans. These rules and regulations, among other
things, prohibit discrimination, provide for inspections and appraisals of
properties, require credit reports on prospective borrowers and, in some cases,
fix maximum interest rates, fees and loan amounts. Lenders are required to
submit audited financial statements annually. FNMA and GNMA require the
maintenance of specified net worth levels which vary depending on the amount of
FNMA loans serviced and GNMA mortgage-backed securities issued by the Company.
Mortgage loan origination activities are subject to fair housing laws, the
Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination in residential lending and require the
disclosure of certain information to borrowers. Certain conventional mortgage
loans are also subject to state usury statutes. FHA and VA loans are exempt
from the effect of such usury statutes. There are also various state laws
affecting the Company's mortgage banking and insurance operations. The
Company's audit and quality control departments monitor compliance with these
regulations.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 1,680 persons
(of whom approximately 360 were engaged in loan servicing activities and
approximately 1,320 were engaged in residential loan production activities,
appraisal functions, administrative and managerial responsibilities). None of
the Company's employees are covered by a collective bargaining agreement.
Management believes that the Company's employee relations are good.
ITEM 2. PROPERTIES
The Company owns its principal executive offices in Farmington Hills,
Michigan which house the majority of the Company's employees. The Company also
owns an office building in West Bloomfield, Michigan where the operations of
its wholly-owned subsidiary, The Mortgage Authority, Inc., are conducted. The
Company leases several other office facilities and operating equipment under
cancelable and noncancelable agreements. Most leases contain renewal clauses.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against the Company in the ordinary course
of business. Management believes that any liabilities which could result from
such claims would not materially affect the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
<PAGE> 8
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reported on page 4 of the Company's 1995 Annual Report to Shareholders,
herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reported on pages 3-4 of the Company's 1995 Annual Report to Shareholders,
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reported on pages 5-11 of the Company's 1995 Annual Report to
Shareholders, herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements reported in the consolidated financial statements of
the Company and the notes thereto and the report thereon of Ernst & Young LLP,
independent auditors, appearing on pages 12-37 of the Company's 1995 Annual
Report to Shareholders, herein incorporated by reference. Selected Quarterly
Financial Data reported on page 38 of the Company's 1995 Annual Report to
Shareholders, herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
<PAGE> 9
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
(AS OF MARCH 28, 1996)
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
- -------------------------------------------------------------------------------
<S> <C> <C>
Michael C. Allemang 53 1993
Terry L. Baxter 50 1994
James A. Conrad 54 1987
Robert R. Densmore 47 1986
Robert P. Keller 58 1995
Gordon S. Macklin 67 1996
Robert W. Richards 53 1983
Roger K. Taylor 43 1995
Allan L. Waters 38 1993
- -------------------------------------------------------------------------------
</TABLE>
Mr. Allemang has served as a director, Executive Vice President and Chief
Financial Officer since November 1993 and was a director and Vice President of
Fund American Enterprises, Inc. from August 1992 to December 1993. He was
formerly Senior Vice President of Fireman's Fund Insurance Company ("Fireman's
Fund") from 1991 to 1992 and served as Vice President and Treasurer of Fund
American from 1989 to 1991 and Vice President of Fireman's Fund from 1986 to
1991.
Mr. Baxter has served as a director since 1994. He has served as President
of Fund American Enterprises, Inc. since January 1994. He was the Managing
Director of the National Transportation Safety Board from 1990 to 1993, and
before that was Senior Vice President of the National Bank of Washington. Mr.
Baxter previously served as Assistant Director of The Office of Management and
Budget under President Reagan and was a Vice President of GEICO Corporation.
Mr. Baxter is also a director of Fund American Enterprises, Inc., FOTK, Inc.,
Centricut, LLC., Main Street America Holdings, Inc., and White Mountains
Insurance Company.
Mr. Conrad has served as a director since 1987. He has served as President
since December 1989 and President and Chief Executive Officer since April 1990.
He was Executive Vice President, Production Division from 1987 to 1989, and
Corporate Vice President, Wholesale Division from 1985 to 1987. Mr. Conrad
joined the Company in 1983.
Mr. Densmore has served as a director since 1986. He has served as
Executive Vice President since 1985 and Executive Vice President and Secretary
since 1986. Mr. Densmore joined the Company in 1976.
Mr. Keller has served as a director since August 1995. He has served as
the President and Chief Executive Officer of SDN Bancorp, Inc. and San Dieguito
National Bank of Encinitas, California since October 1995 and President and
Chief Executive Officer of Dartmouth Capital Group, Inc. since June 1995.
Dartmouth and SDN are bank holding companies. From August 1994 to March 1995,
Mr. Keller was the President and Chief Executive Officer of Independence
Bancorp of Arizona, Inc., a bank holding company. Prior to August 1994, Mr.
Keller served as a consultant to Independent Bancorp of Arizona, Inc. and
Caliber Bank, and as President and Chief Executive Officer of New Dartmouth
Bank in Manchester, New Hampshire. Mr. Keller is also a director of Pennichuck
Corporation (a public utility holding company), Centricut, LLC and White
Mountain Holdings, Inc.
Mr. Macklin has served as a director since February 1996. He has served as
Chairman of White River Corporation, an information services company,
since December 1993, and as Chairman of Hambrecht & Quist, Inc., a venture
capital and investment banking company from 1987 to 1992. Mr. Macklin is also a
director of Fund American Enterprises Holdings, Inc., Martin Marietta
Corporation, MCI Communications Corporation, MedImmune, Inc., InfoVest
Corporation and Fusion Systems Corporation.
8
<PAGE> 10
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
Mr. Richards has served as a director since 1983. He has served as
Chairman since December 1989, and was President from 1987 to 1989. He was
Executive Vice President from 1985 to 1987. Mr. Richards joined the Company in
1971. He is also a director of CMAC Investment Corporation.
Mr. Taylor has served as a director since August 1995. He has served as
the Chief Operating Officer of Financial Security Assurance Holdings Ltd.
("FSA"), a publicly-held financial guaranty insurer with securities listed on
the New York Stock Exchange, since May 1993. He is also a member of FSA's
management review committee for structured transactions and its underwriting
committee for municipal transactions. Prior to joining FSA in 1990 as an
advisor for its new municipal bond insurance business, Mr.Taylor was an
Executive Vice President, founder and executive committee member of Financial
Guaranty Insurance Company. He is also a director of FSA.
Mr. Waters has served as a director since 1993. He is also a director of
Fund American Enterprises, Inc., FSA, White Mountains Holdings, Inc. and White
Mountains Insurance Company. Mr. Waters has served as Senior Vice President and
Chief Financial Officer of Fund American since 1993. He was formerly Vice
President and Controller of Fund American Enterprises, Inc. from 1991 to 1993;
was Vice President, Controller and Assistant Secretary of Fund American from
1990 to 1991, and was Vice President, Finance of Fund American from 1988 to
1990.
COMMITTEES OF THE BOARD OF DIRECTORS
The major committees of the Board of Directors, committee membership and
the functions of those committees are described below.
EXECUTIVE COMMITTEE. The members of the Executive Committee are: Robert W.
Richards (Chairman), Terry L. Baxter and James A. Conrad.
The Executive Committee has been delegated all of the powers and authority
of the Board on all but such matters which are reserved to the Board by the
Delaware General Corporate Law.
AUDIT COMMITTEE. The members of the Audit Committee are: Allan L. Waters
(Chairman) and Robert P. Keller.
The Audit Committee exercises the powers of the Board in the management of
the business and affairs of the Company regarding the accounting, reporting and
financial control practices of the Company. It reviews the qualifications of
the independent certified public accountants, makes recommendations to the
Board as to their selection, reviews the plan, fees and results of their audit,
and reviews their non-audit services and related fees.
HUMAN RESOURCES COMMITTEE. The members of the Human Resources Committee
are Terry L. Baxter (Chairman), Gordon S. Macklin and Roger K. Taylor.
The Human Resources Committee establishes compensation for executive
officers of the Company.
9
<PAGE> 11
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS (AS OF MARCH 28, 1996)
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION SINCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael C. Allemang 53 Executive Vice President 1993
and Chief Financial Officer
James A. Conrad 54 President and 1985
Chief Executive Officer
John A. Courson 53 Senior Vice President; 1990
President and
Chief Executive Officer
of Central Pacific
Mortgage Company
Robert R. Densmore 47 Executive Vice President 1983
and Secretary
Robert W. Richards 53 Chairman 1979
- --------------------------------------------------------------------------------
</TABLE>
Mr. Courson has served as a Senior Vice President of the Company and
President and Chief Executive Officer of Central Pacific Mortgage Company
("Central Pacific"), a wholly-owned subsidiary of the Company, since July 1990.
Prior to that he was President and Chief Operating Officer of Fundamental
Mortgage Corporation of Dallas, Texas.
Based upon its review of the reports furnished to the Company for 1995
pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, the
Company believes that all of such reports were filed on a timely basis, except
for an inadvertent late filing of a Form 3 by Robert P. Keller, a director, an
inadvertent late filing of a Form 3 by Gordon S. Macklin, a director, and a
inadvertent late filing of a Form 3 by Roger K. Taylor, a director.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding the salary,
incentive compensation and benefits paid by the Company to its Chief Executive
Officer and its four most highly compensated executive officers other than the
Chief Executive Officer (collectively, the "Named Executive Officers") during
each of the three most recent fiscal years.
10
<PAGE> 12
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------- -------------------------
AWARDS PAYOUTS
------------ ---------
OTHER LONG-TERM ALL
ANNUAL INCENTIVE OTHER
NAME AND COMPENSATION SARS PLAN COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS (a) (#) PAYOUTS (b)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Conrad 1995 $222,627 $38,000 $40,034 - $- $4,500
President and Chief 1994 219,212 75,000 32,718 - - 4,500
Executive Officer 1993 209,958 - 191,261 26,123 - -
Robert W. Richards 1995 $218,059 $36,000 $32,099 - $- $4,500
Chairman 1994 211,528 72,000 25,295 - - 4,500
1993 202,728 - 176,345 24,149 - -
Robert R. Densmore 1995 $166,748 $34,500 $10,698 - $- $4,500
Executive Vice President 1994 160,000 54,000 23,920 - - 4,500
and Secretary 1993 153,352 - 113,374 21,345 - -
Michael C. Allemang 1995 $163,847 $27,000 $12,000 - $- $4,500
Executive Vice President 1994 156,107 52,000 12,381 - - 4,500
and Chief Financial Officer 1993 - - - - - -
John A. Courson 1995 $187,044 $87,512 $14,945 - $- $4,500
Senior Vice President; 1994 187,293 24,531 14,316 - - 4,500
President and Chief 1993 199,327 70,000 17,714 2,033 - -
Executive Officer of
Central Pacific
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts shown for 1995 consist of the following: (i) Mr. Conrad:
interest reimbursement of $32,578 on amounts paid to purchase investment
contracts and reimbursement of automobile expenses; (ii) Mr. Richards: interest
reimbursement of $23,661 on amounts paid to purchase investment contracts and
reimbursement of automobile expenses; (iii) Mr. Densmore: reimbursement of
automobile expenses; (iv) Mr. Allemang: reimbursement of automobile expenses;
(v) Mr. Courson: interest reimbursement on amounts paid to purchase investment
contracts and reimbursement of automobile expenses. Amounts shown for 1994
consist of the following: (i) Mr. Conrad: interest reimbursement of $25,638 on
amounts paid to purchase investment contracts and reimbursement of automobile
expenses; (ii) Mr. Richards: interest reimbursement of $18,611 on amounts paid
to purchase investment contracts and reimbursement of automobile expenses;
(iii) Mr. Densmore: interest reimbursement of $13,222 on amounts paid to
purchase investment contracts and reimbursement of automobile expenses; (iv)
Mr. Allemang: reimbursement of automobile and relocation expenses; (v) Mr.
Courson: reimbursement of automobile expenses and interest reimbursement on
amounts paid to purchase investment contracts. Amounts shown for 1993 consist
of the following: (i) Mr. Conrad: reimbursement of $156,414 for the payment of
certain income taxes and interest reimbursement on amounts paid to purchase
shares of the Company's Class B common stock and reimbursement of automobile
expenses; (ii) Mr. Richards: reimbursement of $149,495 for the payment of
certain income taxes and interest reimbursement on amounts paid to purchase
shares of the Company's Class B common stock and reimbursement of automobile
expenses; (iii) Mr. Densmore: reimbursement of $86,543 for the payment of
certain income taxes and interest reimbursement on amounts paid to purchase
shares of the Company's Class B common stock and reimbursement of automobile
expenses; (iv) Mr. Courson: reimbursement for automobile expenses and interest
reimbursement on amounts paid to purchase shares of the Company's Class B
common stock and reimbursement for the payment of certain income taxes.
(b) Represents amounts allocated pursuant to the Company's employee stock
ownership plan ("ESOP"). There were no allocations to the ESOP for the year
ended December 31, 1993.
INVESTMENT CONTRACTS AND STOCK APPRECIATION RIGHTS
In 1993, certain directors and executive officers of the Company exchanged
all their shares of the Company's Class B common stock for 1.558 units in an
investment contract and 1.558 units of Stock Appreciation Rights ("SAR") for
each Class B share held. The investment contract entitles the holder to receive
the lesser of $86.625 or the closing price of Fund American's common stock on
the day preceding exercise of the investment contract, multiplied by a factor
of 1.223 in cash for each unit held. The units may be exercised at any time at
the option of the holder.
The SARs may be exercised at any time simultaneously with each exercised
investment contract unit at the option of the holders thereof. The value of
each SAR is equal to the difference between $86.625 and the closing price of
Fund American's common stock on the date preceding the exercise of the SAR
multiplied by a factor of 1.223. The following table summarizes SAR values as
of December 31, 1995.
11
<PAGE> 13
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SARS AT FISCAL YEAR END (b) SARS AT FISCAL YEAR-END (b)
---------------------------- ---------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (a) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Conrad 9,323 $0 16,800 0 $75,407 $0
Robert W. Richards 5,345 0 18,804 0 84,402 0
Robert R. Densmore 0 0 12,000 0 53,862 0
Michael C. Allemang 0 0 0 0 0 0
John A. Courson 0 0 2,033 0 9,126 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the number of investment contract units with respect to
which the SARs were exercised.
(b) The number and value of unexercised SARs are based on shares of Fund
American common stock.
PENSION BENEFITS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
YEARS OF SERVICE
---------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $30,000 $40,000 $50,000 $60,000 $70,000
150,000 36,000 48,000 60,000 72,000 84,000
175,000 42,000 56,000 70,000 84,000 98,000
200,000 48,000 64,000 80,000 96,000 112,000
225,000 54,000 72,000 90,000 108,000 126,000
250,000 60,000 80,000 100,000 120,000 140,000
300,000 72,000 96,000 120,000 144,000 168,000
400,000 96,000 128,000 160,000 192,000 224,000
450,000 108,000 144,000 180,000 216,000 252,000
500,000 120,000 160,000 200,000 240,000 280,000
- ------------------------------------------------------------------------------
</TABLE>
The gross annual benefit paid is computed as a straight-life annuity
reduced by .485% of average salary up to covered compensation; that is, the
average of social security wage bases for the 35 years prior to retirement. The
annual benefits shown in the above table are not reduced to reflect the
limitations imposed by the Internal Revenue Code, which limit the annual
benefits payable from qualified plans to any individual. The Company maintains
a Supplemental Retirement Plan which is a non-qualified unfunded deferred
compensation plan. Under the plan, certain highly compensated employees
affected by these limitations will receive additional retirement income
payments from the Company so that their pension benefits will equal the amounts
they would otherwise have been were it not for the limitations.
Messrs. Conrad, Richards, Densmore, Allemang and Courson participate in
retirement plans under which they are entitled to receive estimated annual
retirement benefits in accordance with the table shown above.
Participants in the retirement plans are eligible to receive normal
retirement benefits at age 65, reduced normal retirement benefits at age 55
with at least ten years of service, or a deferred vested benefit if they
terminate employment prior to retirement but after five years of service.
Eligible compensation for Messrs. Conrad, Richards, Densmore, Allemang and
Courson, includes base salary plus bonus received, but is limited to not more
than one and one-third of base salary in total. Benefits accrued under the
retirement plans are limited to eligible compensation of $150,000 for each of
the Named Executive Officers.
Benefits under the retirement plans for a single person are computed on a
straight-life basis and benefits for a married person are generally computed on
a joint and 50% survivor basis, subject to each participant's right to elect
alternative survivor benefits.
12
<PAGE> 14
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
As of December 31, 1995, Messrs. Conrad, Richards, Densmore, Allemang and
Courson had 12, 24, 19, 2, and 5 whole years of credited service, respectively,
for purposes of computing their benefits under the retirement plans.
INCENTIVE COMPENSATION ARRANGEMENTS
Fund American Enterprises, Inc. ("FAE"), the sole common shareholder of
the Company, has entered into an incentive compensation arrangement which could
result in the payment of additional compensation to certain senior officers of
the Company (including the Named Executive Officers) in the event of a sale of
the Company. Under this arrangement, if there is a sale of the Company,
one-third of all phantom shares previously allocated under the Company's
Long Term Incentive Plan in each earning period (26,442.97 phantom shares
in the aggregate) will become fully earned and vested. In addition, those
senior officers would be paid a portion of the amount by which the price at
which the Company is sold exceeds the book value of the Company (the "Incentive
Amount"). The portion of the Incentive Amount payable to any one of the
eligible senior officers ranges from .0580% to 1.6814% of the Inventive Amount,
and the portion of the Inventive Amount payable to such senior officers as a
whole is limited to 5.1260% of the Incentive Amount. Any sums payable under
this arrangement to an eligible senior officer would be payable no later than
one year after the date of the sale of the Company and would accrue interest
until the date of payment. Payment of compensation pursuant to this arrangement
to any eligible senior officer is contingent upon such senior officer
continuing employment with the Company for at least one year after the sale;
provided, however, that such senior officer will be entitled to immediate
payment if prior to that time his or her employment (i) is involuntarily
terminated other than for cause or (ii) is involuntarily terminated as a result
of a constructive termination, or (iii) in certain limited circumstances, is
involuntarily terminated in connection with a material reduction in benefits.
COMPENSATION OF DIRECTORS
Directors who are neither employees of the Company nor employees or
directors of Fund American (Messrs. Keller, Macklin and Taylor) receive an
annual retainer of $10,000 and a fee of $1,500 for each board meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resources Committee of the Board of Directors establishes
compensation for executive officers of the Company. None of the members of the
Human Resources Committee, namely Terry L. Baxter, Gordon S. Macklin and Roger
K. Taylor, is, or was, an officer or employee of the Company or any of the
Company's subsidiaries.
13
<PAGE> 15
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 28, 1996, there was one holder of the 2,247,000 shares of the
Company's issued and outstanding common stock, each entitled to one vote, as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TITLE OF NAME AND ADDRESS NUMBER OF PERCENT
CLASS OF BENEFICIAL OWNER SHARES OWNED OF CLASS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock Fund American Enterprises, Inc. 2,247,000 100.0%
The 1820 House
Norwich, Vermont 05055-0850
- --------------------------------------------------------------------------------
The following table sets forth, as of March 28, 1996, beneficial ownership
of Fund American common stock by each director of the Company and each of the
"Named Executive Officers" as defined herein.
- --------------------------------------------------------------------------------
NAME OF NUMBER OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED(b) OF CLASS (c)
- --------------------------------------------------------------------------------
Common stock (a) Michael C. Allemang 2,336 *
Terry L. Baxter - -
James A. Conrad 836 *
John A. Courson 266 *
Robert R. Densmore 758 *
Robert P. Keller - -
Gordon S. Macklin 5,000 *
Robert W. Richards 894 *
Roger K. Taylor - -
Allan L. Waters (d) 6,900 *
- --------------------------------------------------------------------------------
</TABLE>
*Represents less than 1% of the outstanding shares.
(a) Represents Fund American common stock pursuant to Item 403(b) of
Regulation S-K of the Securities Act of 1933.
(b) Except for Messrs. Baxter, Keller, Macklin, Taylor and Waters,
includes shares beneficially owned by the Company's Employee Stock Ownership
Plan (whereby voting rights are exercised by the Plan's trustee and
attributable under terms of the Plan to such person.)
(c) Determined based on the beneficial ownership provisions specified in
Rule 13d-3(d)(1) of the Exchange Act. Except to the extent indicated above, all
executive officers and directors have (or share with their spouses) sole voting
and investment power with respect to the shares for which they claim beneficial
ownership.
(d) Includes currently exercisable stock options held by Mr. Waters of
1,000 shares.
14
<PAGE> 16
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of a tax allocation agreement between the Company
and Fund American, Fund American has agreed to compensate the Company for the
use of certain accumulated unrealized losses associated with the Company's
common equity securities portfolio if such losses, when realized, can be
utilized in Fund American's consolidated tax returns.
During 1995, the Company transferred a total of $27 million of certain
common equity securities and $93 million in cash and money market investments
to Fund American Enterprises, Inc., ("FAE") the sole common shareholder of the
Company, in exchange for 959,049 shares of the Company's common stock held by
FAE, which were retired by the Company. The Company recognized a $2.2 million
pretax loss on the noncash exchanges.
During 1995, Mr. Conrad received $806,821 upon the exercise of 9,323
investment contract units and Mr. Richards received $463,011 upon the exercise
of 5,345 investment contract units. See discussion of "Investment Contracts and
Stock Appreciation Rights" on page 11.
15
<PAGE> 17
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (1) Financial Statements
The Financial Statements applicable to Source One Mortgage Services
Corporation and consolidated subsidiaries have been incorporated by
reference herein from Source One Mortgage Services Corporation's 1995
Annual Report to Shareholders as they appear in the Index to Financial
Statements and Financial Statement Schedules appearing on page 18 of
this Annual Report on Form 10-K.
(2) Financial Statement Schedules
None.
(3) Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K and by
this form are listed on page 20 of this Annual Report on Form 10-K.
The management contracts and compensatory plans or arrangements
required to be filed as exhibits and included in such list of exhibits
are as follows:
Exhibit 10(a) Source One Mortgage Services Corporation Employee
Stock Ownership Plan, as amended.
Exhibit 10(b) First Amendment to Source One Mortgage Services
Corporation Amended Employee Stock Ownership Plan.
Exhibit 10(c) Form of Second Amendment to Source One Mortgage
Services Corporation Amended Employee Stock Ownership Plan.
Exhibit 10(d) Form of Third Amendment to Source One Mortgage
Services Corporation Amended Employee Stock Ownership Plan.
Exhibit 10(e) Fourth Amendment to Source One Mortgage Services
Corporation Amended Employee Stock Ownership Plan.
Exhibit 10(f) Form of Source One Mortgage Services Corporation
Voluntary Deferred Compensation Plan.
Exhibit 10(g) First Amendment to Source One Mortgage Services
Corporation Voluntary Deferred Compensation Plan.
Exhibit 10(h) Form of Source One Mortgage Services Corporation
Employee Stock Ownership Plan Trust Agreement.
Exhibit 10(i) Form of Source One Mortgage Services Corporation
Retirement Plan, as amended and restated.
Exhibit 10(j) First Amendment to Source One Mortgage Services
Corporation Retirement Plan.
Exhibit 10(k) Second Amendment to Source One Mortgage Services
Corporation Retirement Plan.
Exhibit 10(l) Third Amendment to Source One Mortgage Services
Corporation Retirement Plan.
Exhibit 10(m) Form of Source One Mortgage Services Corporation
Retirement Plan Trust Agreement.
Exhibit 10(n) Source One Mortgage Services Corporation Supplemental
Retirement Plan.
Exhibit 10(o) Source One Mortgage Services Corporation Stock
Appreciation Rights Plan.
16
<PAGE> 18
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
Exhibit 10(cc) Investment Contract by and between Source One
Mortgage Services Corporation and James A. Conrad.
Exhibit 10(dd) Investment Contract by and between Source One
Mortgage Services Corporation and John A. Courson.
Exhibit 10(ee) Investment Contract by and between Source One
Mortgage Services Corporation and Robert R. Densmore.
Exhibit 10(ff) Investment Contract by and between Source One
Mortgage Services Corporation and Robert W. Richards.
Exhibit 10(hh) Source One Mortgage Services Corporation Long Term
Incentive Plan.
Exhibit 10(ll) Incentive Agreement in the event of a sale of Source
One Mortgage Services Corporation among certain Senior Officers of
Source One Mortgage Services Corporation and Fund American
Enterprises, Inc.
17
<PAGE> 19
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
Source One Mortgage Services Corporation and Subsidiaries
Index to Financial Statements and Financial Statement Schedules
(Item 14(a))
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANNUAL
REPORT
PAGE(S)*
- --------------------------------------------------------------------------------
<S> <C>
Financial Statements:
Consolidated statements of condition
as of December 31, 1995 and 1994.................................. 13
Consolidated statements of income for each of the
years ended December 31, 1995, 1994 and 1993...................... 14
Consolidated statements of stockholders' equity for each
of the years ended December 31, 1995, 1994 and 1993............... 15
Consolidated statements of cash flows for each
of the years ended December 31, 1995, 1994 and 1993............... 16-17
Notes to consolidated financial statements.......................... 18-37
Other Financial Information:
Report of independent auditors...................................... 12
Selected quarterly financial data (unaudited)....................... 38
</TABLE>
Schedules for which provision is made in Regulation S-X are not required under
the related instructions or are inapplicable and, therefore, have been omitted
or the information required is included in the consolidated financial
statements or notes thereto.
*Source One Mortgage Services Corporation's 1995 Annual Report to
Shareholders.
18
<PAGE> 20
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
b. Reports on Form 8-K
The Company filed 6 reports on Form 8-K during the fourth quarter of 1995.
The dates and contents are described below.
October 25, 1995 Reported Report to the Trustee and Report to the
Certificate Holders for the month of October 1995
relating to the Source One Mortgage Services
Corporation 11-1/2% Mortgage Pass-Through Certificates,
Series A.
October 31, 1995 Reported Distribution Date Statements for October 25,
November 1, November 1, and October 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.
November 27, 1995 Reported Report to the Trustee and Report to the
Certificate Holder for the month of November 1995
relating to the Source One Mortgage Services
Corporation 11-1/2% Mortgage Pass-Through Certificates,
Series A.
November 29, 1995 Reported Distribution Date Statements for November 25,
December 1, December 1 and November 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.
December 26, 1995 Reported Report to the Trustee and Report to the
Certificate Holders for the month of December 1995
relating to the Source One Mortgage Services
Corporation 11-1/2% Mortgage Pass-Through Certificates,
Series A.
December 28, 1995 Reported Distribution Date Statements for December 25,
1995, December 25, 1995, January 1, 1996, January 1,
1996 and December 20, 1995 relating to the Source One
Mortgage Services Corporation Agency MBSMulti-Class
Pass-Through Certificates Series 1987-1, 1987-2, 1988-1,
1988-2 and 1990-1, respectively.
19
<PAGE> 21
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
c. Exhibits
Exhibit No.
3(a) Restated Certificate of Incorporation of Source One Mortgage Services
Corporation (incorporated by reference to Exhibit 4(a) of the February 28,
1994 Current Report on Form 10-K, File No. 1-12898, formerly File
No. 33-8562).
(b) Certificate of Designation for Series A Preferred Stock of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 3(b) of
the Annual Report on Form 10-K for the year ended December 31, 1993, File
No. 1-12898).
(c) Amended and Restated Bylaws of Source One Mortgage Services Corporation
(incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the
registration statement on Form S-3, Registration No. 33-71924).
4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage
Corporation (now "Source One Mortgage Services Corporation") and National
Bank of Detroit dated March 1, 1983 and relating to mortgage Pass-Through
Certificates, Series A, 11-1/2 Pass-Through Rate (incorporated by
reference to Exhibit 4(b) of the Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and The First National Bank of
Chicago dated September 25, 1987 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1987-1 (incorporated by reference to
Exhibit 10(jj) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and The First National Bank of
Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1987-2 (incorporated by reference to
Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and The First National Bank of
Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-1 (incorporated by reference to
Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and The National Bank of
Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-2 (incorporated by reference to
Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and The First National Bank of
Chicago dated July 30, 1990 and relating to the Agency MBS Multi-Class
Pass-Through Certificates, Series 1990-1 (incorporated by reference to
Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No.
1-12898, formerly File No. 33-8562).
(g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and National Bank of Detroit dated
September 15, 1986 (incorporated by reference to Exhibit 4(a) of the
registration statement on Form S-1, Registration No. 33-8562).
(h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and National Bank of
Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b)
of the registration statement on Form S-1, Registration No. 33-8562).
20
<PAGE> 22
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
(i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and The First National Bank of Chicago
dated November 21, 1988 (incorporated by reference to Exhibit 4(h)
of the Annual Report on Form 10-K for the year ended December 31, 1990,
File No. 1-12898, formerly File No. 33-8562).
(j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated November 21, 1988 (incorporated by reference to
Exhibit 4(i) of the Annual Report on Form 10-K for the year ended December
31, 1990, File No. 1-12898, formerly File No. 33-8562).
(k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(k) of the Annual Report on Form 10-K for the year ended December
31, 1991, File No. 1-12898, formerly File No. 33-8562).
(l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(l) of the Annual Report on Form 10-K for the year ended December
31, 1991, File No. 1-12898, formerly File No. 33-8562).
(m) Indenture between Source One Mortgage Services Corporation and The First
National Bank of Chicago dated May 7, 1992 (incorporated by reference to
Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992, File No. 1-12898, formerly File No. 33-8562).
(n) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of medium-term indebtedness adopted
pursuant to authority delegated by the Board of Directors of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 19(b)
of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992,
File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish
the terms of the Medium-Term Notes, Series B, of Source One Mortgage
Services Corporation issuable under the Indenture between Source One
Mortgage Services Corporation and The First National Bank of Chicago dated
May 7, 1992).
(o) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of a series of medium-term notes, Series
B, entitled "9% Debentures due June 1, 2012" adopted pursuant to authority
delegated by the Board of Directors of Source One Mortgage Services
Corporation (incorporated by reference to Exhibit (i) of the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992, File No. 1-12898,
formerly File No. 33-8562). (Said resolutions establish the terms of the 9%
Debentures due June 1, 2012 of Source One Mortgage Services Corporation
issued under the Indenture between Source One Mortgage Services Corporation
and The First National Bank of Chicago dated May 7, 1992).
(p) Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange Commission
on December 21, 1995).
(q) First Supplemental Indenture dated December 1, 1995 between Source One
Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as
trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to
the Report on Schedule 13E-4 filed with the Securities and Exchange
Commission on December 21, 1995).
(r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit
4(p) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
(s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit
4(q) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
21
<PAGE> 23
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
(t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r) of
the Annual Report on Form 10-K for the year ended December 31, 1992, File
No. 1-12898, formerly File No. 33-8562).
(u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s)
of the Annual Report on Form 10-K for the year ended December 31, 1992,
File No. 1-12898, formerly File No. 33-8562).
(v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of
Source One Mortgage Services Corporation (incorporated by reference to
Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 1-12898).
(w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest
Deferrable Debentures, Due 2025); included in the First Supplemental
Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange Commission
on December 21, 1995).
10 Material Contracts
(a) Source One Mortgage Services Corporation Employee Stock Ownership Plan, as
amended (incorporated by reference to Exhibit 10(a) of the Annual Report on
Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly
File No. 33-8562).
(b) First Amendment to Source One Mortgage Services Corporation Amended
Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(a)
of the Current Report on Form 8-K dated November 11, 1993, File No.
1-12898, formerly File No. 33-8562).
(c) Form of Second Amendment to Source One Mortgage Services Corporation
Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit
10(b) of the Current Report on Form 8-K dated November 11, 1993, File No.
1-12898, formerly File No. 33-8562).
(d) Form of Third Amendment to Source One Mortgage Services Corporation Amended
Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(d)
of the Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 1-12898).
(e) Fourth Amendment to Source One Mortgage Services Corporation Amended
Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(e)
of the Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 1-12898).
(f) Form of Source One Mortgage Services Corporation Voluntary Deferred
Compensation Plan (incorporated by reference to Exhibit 10(e) of the Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-12898).
(g) First Amendment to Source One Mortgage Services Corporation Voluntary
Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of
the Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 1-12898).
(h) Form of Source One Mortgage Services Corporation Employee Stock Ownership
Plan Trust Agreement (incorporated by reference to Exhibit 10(b) of the
registration statement on Form S-1, Registration No. 33-8562).
(i) Form of Source One Mortgage Services Corporation Retirement Plan, as
amended and restated (incorporated by reference to Exhibit 10(hh) of the
Annual Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(j) First Amendment to Source One Mortgage Services Corporation Retirement Plan
(incorporated by reference to Exhibit 10(j) of the Annual Report on Form
10-K for the year ended December 31, 1994, File No. 1-12898).
22
<PAGE> 24
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
(k) Second Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(l) Third Amendment to Source One Mortgage Services Corporation
Retirement Plan (incorporated by reference to Exhibit 10(l) of the
Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 1-12898).
(m) Form of Source One Mortgage Services Corporation Retirement Plan Trust
Agreement (incorporated by reference to Exhibit 10(d) of the registration
statement on Form S-1, Registration No. 33-8562).
(n) Source One Mortgage Services Corporation Supplemental Retirement Plan
(incorporated by reference to Exhibit 10(n) of the Annual Report on Form
10-K for the year ended December 31, 1989, File No. 1-12898, formerly
File No. 33-8562).
(o) Source One Mortgage Services Corporation Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 10(c) of the Current Report on Form
8-K dated November 11, 1993, File No. 1-12898, formerly File No.
33-8562).
(p) Amended and Restated Revolving Credit Agreement dated as of March 24,
1995 by and among Source One Mortgage Services Corporation and The
Mortgage Authority, Inc. (a subsidiary of Source One Mortgage Services
Corporation), and The First National Bank of Chicago, individually and as
administrative agent and certain other lenders (incorporated by reference
to Exhibit 10(p) of the Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 1-12898).
(q) Amended and Restated Security and Collateral Agency Agreement dated as
of March 24, 1995 by and among Source One Mortgage Services Corporation,
The Mortgage Authority, Inc. (a subsidiary of Source One Mortgage
Services Corporation), The First National Bank of Chicago (in its
capacity as administrative agent for the lenders), Norwest Bank
Minnesota, N.A. (as the successor trustee under certain Indentures under
which Source One Mortgage Services Corporation is an issuer of certain
debt securities) and National City Bank, Kentucky, as collateral agent
(incorporated by reference to Exhibit 10(q) of the Annual Report on Form
10-K for the year ended December 31, 1994, File No. 1-12898).
(r) Transition Memorandum dated March 24, 1995 by and among Source One
Mortgage Services Corporation and The Mortgage Authority, Inc. (a
subsidiary of Source One Mortgage Services Corporation) and the First
National Bank of Chicago, as agent for the Existing Lenders and
Continuing Lenders named therein (incorporated by reference to Exhibit
10(r) of the Annual Report on Form 10-K for the year ended December 31,
1994, File No. 1-12898).
(s) Tax allocation agreement among Fireman's Fund Corporation, Fireman's
Fund Insurance Company, Fireman's Fund Mortgage Corporation (now "Source
One Mortgage Services Corporation"), CMC Insurance Agency, Inc.,
MHM Corporation (Michigan), MHMC Insurance Agency, Inc., MHM Corporation
(Idaho) and Fireman's Fund Mortgage Securities Corporation effective
July 1, 1986 (incorporated by reference to Exhibit 10(y) of the
September 22, 1988 Current Report on Form 8-K, File No. 1-12898,
formerly File No. 33-8562).
(t) Eurocommercial Paper Program Agreement dated August 1, 1988 among
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and the Dealers named therein (incorporated by reference
to Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K,
File No. 1-12898, formerly File No. 33-8562).
(u) Commercial Paper Dealer Agreement dated September 25, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by
reference to exhibit 10(cc) of the September 22, 1988 Current Report on
Form 8-K, File No. 1-12898, formerly File No. 33-8562).
23
<PAGE> 25
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
(v) Commercial Paper Dealer Agreement dated September 23, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and First Boston Corporation (incorporated by reference to
Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(w) Issuing and Paying Agency Agreement dated June 19, 1987 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Manufacturers Hanover Trust Company (incorporated by
reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562).
(x) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(x) of the Annual
Report on Form 10-K for the year ended December 31, 1992, File No.
1-12898, formerly File No. 33-8562).
(y) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(t) of the Annual
Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(z) Letter of Representations dated November 23, 1990 relating to Issuing
and Paying Agency Agreement dated September 18, 1986 between Fireman's
Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Morgan Guaranty Trust Company of New York (incorporated
by reference to Exhibit 10(v) of the Report on Form 10-K for the year
ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(aa) Depository Agreement dated June 16, 1993 between Source One Mortgage
Services Corporation and The First National Bank of Chicago (incorporated
by reference to Exhibit 10(a) of the Current Report on Form 8-K dated
February 28, 1994, File No. 1-12898, formerly File No. 33-8562).
(bb) Stock Purchase Agreement dated December 15, 1995, between Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.*
(cc) Investment Contract by and between Source One Mortgage Services
Corporation and James A. Conrad (incorporated by reference to Exhibit
10(dd) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(dd) Investment Contract by and between Source One Mortgage Services
Corporation and John A. Courson (incorporated by reference to Exhibit
10(ee) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(ee) Investment Contract by and between Source One Mortgage Services
Corporation and Robert R. Densmore (incorporated by reference to Exhibit
10(ff) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(ff) Investment Contract by and between Source One Mortgage Services
Corporation and Robert W. Richards (incorporated by reference to Exhibit
10(gg) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(gg) Investment Services Agreement dated November 13, 1991 between Source
One Mortgage Services Corporation and Fund American Enterprises, Inc
(incorporated by reference to Exhibit 10(rr) of the Annual Report on Form
10-K for the year ended December 31, 1991, File No. 1-12898, formerly
File No. 33-8562).
24
<PAGE> 26
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
(hh) Source One Mortgage Services Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10(ii) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(ii) Agreement dated August 10, 1995 by and between Source one Mortgage
Services Corporation and Comerica Bank (incorporated by reference to
Exhibit 10(ddd) of the registration statement on Form S-4, Registration
No. 33-62765).
(jj) Amendment No. 1 to Loan Agreement by and between Source One Mortgage
Services Corporation and Comerica Bank (incorporated by reference to
Exhibit 10(fff) of the registration statement on Form S-4, Registration
No. 33-62765).
(kk) First Amendment to Amended and Restated Revolving Credit Agreement by
and among Source One Mortgage Services Corporation, The Mortgage
Authority, Inc. (a subsidiary of Source One Mortgage Services
Corporation), and The First National Bank of Chicago, individually and as
administrative agent, and certain other Lenders (incorporated by
reference to Exhibit 10(eee) of the registration statement on Form S-4,
Registration No. 33-62765).
(ll) Incentive Agreement in the event of a sale of Source One Mortgage
Services Corporation among certain Senior Officers of Source One Mortgage
Services Corporation and Fund American Enterprises, Inc.*
13 Source One Mortgage Services Corporation 1995 Annual Report to
Shareholders. Such report, except for those portions which are expressly
incorporated by reference in this Annual Report on Form 10-K, is
furnished only for the information of the Commission and is not deemed
filed as part hereof.*
21 Subsidiaries of Source One Mortgage Services Corporation
(incorporated by reference to Exhibit 22 of the February 28, 1994
Current Report on Form 8-K, File No. 1-12898, formerly File No.
33-8562).
23 Consent of Ernst & Young LLP.*
24 Powers of Attorney.*
27 Financial Data Schedule.*
* Filed herewith.
25
<PAGE> 27
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 28, 1996 By: /s/ MARK A. JANSSEN
------------------------------------
Mark A. Janssen
Senior Vice President and Controller
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ ROBERT W. RICHARDS Chairman March 28, 1996
- ---------------------- and Director
Robert W. Richards
* President, Chief March 28, 1996
- ---------------------- Executive Officer
James A. Conrad and Director
(Principal Executive Officer)
* Executive Vice March 28, 1996
- ---------------------- President, Chief
Michael C. Allemang Financial Officer
and Director
(Principal Financial Officer)
* Senior Vice President March 28, 1996
- ---------------------- and Controller
Mark A. Janssen (Principal Accounting Officer)
* Executive Vice March 28, 1996
- ---------------------- President, Secretary
Robert R. Densmore and Director
* Director March 28, 1996
- ----------------------
Terry L. Baxter
* Director March 28, 1996
- ----------------------
Robert P. Keller
* Director March 28, 1996
- ----------------------
Gordon S. Macklin
* Director March 28, 1996
- ----------------------
Roger K. Taylor
* Director March 28, 1996
- ----------------------
Allan L. Waters
*By: /s/ ROBERT W. RICHARDS
----------------------
Robert W. Richards
As Attorney-in-fact for the persons indicated
- --------------------------------------------------------------------------------
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
The Company does not have any voting securities registered under Section
12 of the Act, and all of the Company's voting securities are held by a single
entity. Accordingly, no proxy statement, form of proxy or other proxy
soliciting material has been, or will be, sent to more than 10 of the
registrant's security holders with respect to any annual or other meeting of
security holders.
26
<PAGE> 1
Exhibit 10(bb)
FUND AMERICAN ENTERPRISES, INC.
The 1820 House, Main Street
Norwich, Vermont 05055-0850
December 15, 1995
Mr. Michael C. Allemang
Senior Vice President and Chief Financial Officer
Source One Mortgage Services Corporation
27555 Farmington Road
Farmington Hills, Michigan 48334
STOCK PURCHASE AGREEMENT
Dear Mike:
This Stock Purchase Agreement sets forth the agreement of Fund American
Enterprises, Inc. (the "Purchaser") to purchase shares of Common Stock
("Stock") of Source One Mortgage Services Corporation ("SOMSC") on the terms
and conditions stated herein.
1. Stock Purchase. The Purchaser will, at any time or from time to time,
purchase Stock aggregating up to $100,000,000 within 5 business days after
receipt of written notice from SOMSC during the term hereof, in the amount (in
whole shares) so specified by SOMSC, at a purchase price per share of Stock
equal to the Per Share Price. The purchase price of Stock is payable by (at
the Purchaser's option) (i) cash or (ii) the transfer to SOMSC of certain
specified Assets (defined below) having a fair market value equal to the
aggregate purchase price or (iii) any combination of (i) and (ii). At each
closing, SOMSC will deliver certificates for the Stock purchased at such
closing registered in the name of the Purchaser or its nominee. At any closing
involving the transfer by the Purchaser to SOMSC of securities in payment of
all or any portion of the purchase price of Stock, certificates evidencing such
securities shall be delivered to SOMSC duly endorsed or accompanied by duly
completed stock/bond powers, or by any other method of transferring ownership
that is mutually agreeable to the parties.
2. "Specified Assets" means, initially, the investment securities listed
on the New York Stock Exchange, described in Schedule A (the "Initial
Securities"). Thereafter,
(i) the Specified Assets shall also include any proceeds received under
paragraph 10 from the sale of the Initial Securities or any other
Specified Assets and any Substitution Securities received under paragraph
11 for the Initial Securities or any other Specified Assets, and any
distributions or dividends payable in respect of Specified Assets and any
security resulting from a conversion, modification, reclassification or
other similar transaction with respect to any Specified Assets, and
(ii) the Specified Assets shall not include any securities or cash which are
transferred to SOMSC pursuant hereto, or disposed of in compliance with
this paragraph 2, or any Stock or distribution of any kind with respect
thereto, or any securities which have been surrendered by the Purchaser
in any conversion, modification, reclassification or other similar
transaction as stated in (i) above or any securities which are sold
pursuant to paragraph 10 or deliverable in exchange for Substitution
Securities received under paragraph 11.
<PAGE> 2
The Purchaser agrees that it will not transfer or subject to a lien any of
Purchaser's assets or properties which constitute Specified Assets so long as
this Agreement remains in effect, except that (i) the Purchaser may transfer
Specified Assets to SOMSC at a closing held hereunder and (ii) the Purchaser
may dispose, as the Purchaser sees fit in its sole discretion, of Specified
Assets so long as the value of remaining cash and cash equivalents, together
with the fair market value of the remaining Specified Assets, is at least $100
million.
Nothing in this Agreement shall restrict the Purchaser in any way from
disposing, as the Purchaser sees fit in its sole discretion, of some or all of
assets or properties of the Purchaser which do not constitute Specified Assets.
Also, it is understood and agreed that the Purchaser remains the owner of the
Specified Assets for all purposes, retaining all voting and other rights,
unless and until some or all thereof are transferred to SOMSC at a closing held
pursuant to this Agreement.
3. The fair market value of securities for all purposes of this Agreement
shall be determined by the Purchaser applying the valuation principles stated
in Schedule B, using market information for the last market day prior to the
valuation day. In the case of the Initial Securities, their agreed fair market
values as of December 11, 1995 is as set forth in Schedule A. In the case of
any Substitution Securities, their initial fair market values will be the
amount at which they are credited for substitution purpose pursuant to
Paragraph 11. In each case, the Purchaser from time to time may, and prior to
any transfer to SOMSC hereunder or any substitution therefor pursuant to
paragraph 11, will adjust the initial (or previously adjusted) fair market
value as may be necessary to reflect any events, developments or circumstances
occurring after the date hereof or of their transfer to the Purchaser which in
the Purchaser's reasonable judgment materially change their fair market value,
determined in accordance with the valuation principles stated in Schedule B.
Purchaser agrees that it will promptly take all appropriate action to maintain,
at all times during the effective period of this Agreement, the value of cash
and cash equivalents, together with the fair market value of Specified Assets,
determined in accordance with the valuation principles stated in Schedule B, in
an amount not less than $100,000,000.
4. "Per Share Price" means the price of Stock, as determined as of the
most recent available quarterly balance sheet date, pursuant to the terms of
the valuation formula set forth on Schedule C.
5. Term. The term of this Agreement shall continue from the date hereof
until the earlier of (i) the Specified Assets are exhausted by transfer(s) to
SOMSC pursuant hereto and (ii) the Purchaser and SOMSC mutually agree in
writing to end the term of this Agreement (which mutual agreement will be
effective on and as of the date specified therein).
6. Mutual Representations and Warranties. Each party hereby represents
and warrants to the other that on and as of the date hereof;
(a) Each is a duly organized and validly existing corporation in good
standing under the laws of its jurisdiction of incorporation and any other
jurisdiction in which it has its principal office. Each has been duly
authorized by all necessary corporate action (including without limitation any
necessary vote of security holders) to enter into and carry out this Agreement.
(b) No consent, permit, notice, registration, waiver or other action by
any third party or any governmental agency is required to be obtained, made or
given by it in connection with entering into or carrying out this Agreement.
Neither the entering into nor carrying out of this Agreement will cause any
breach or violation of, or any lien against its properties or assets under, or
any acceleration of any of its obligations pursuant to, any agreement,
commitment, law, statute, regulation or order to which it or any of its
properties are subject.
<PAGE> 3
(c) It has not engaged any broker, finder or similar person in connection
with the transactions contemplated hereby.
(d) It is an "accredited investor" as that term is defined in SEC
Regulation D, and is acquiring any securities to be transferred or issued to it
pursuant hereto for its own account.
(e) It is familiar with the affairs of the other party and (in the case
of SOMSC) is familiar with the affairs of the issuers of the Initial
Securities. Except for the express representations and warranties made herein,
it is relying totally on its own evaluation of the risks and benefits
associated with this Agreement and the securities which may be transferred or
issued to it hereunder.
7. Additional Representations, Warranties and Agreements of the Parties.
(a) The Purchaser represents and warrants to SOMSC THAT:
(i) It owns 100% of the Initial Securities, free and clear of
all liens,
(ii) It has conducted no business since its incorporation
activities and holding investments.
(iii) It is not an "investment advisor" required to be registered
under the Investment Advisors Act of 1940, as amended (the "Advisors Act").
The Purchaser agrees that if it should ever be required to be registered under
the Advisors Act, it will so register on a timely basis and will comply with
the requirements of the Advisors Act.
(b) SOMSC represents and warrants to the Purchaser that it is not an
"investment company" required to be registered under the Investment Company Act
of 1940, as amended (the "Company Act"), and agrees that if it should ever be
required to be registered under the Company Act, it will so register on a
timely basis and will comply with the requirements of the Company Act.
8. Resales. Each party agrees that it will not resell any securities
transferred or issued to it hereunder except in a transaction registered under
the securities Act of 1933, as amended, or any successor statute or in a
transaction exempt from such registration, established to the reasonable
satisfaction of the transferor or issuer, as the case may be.
9. Covenants of the Purchaser. Purchaser agrees that during the term of
this Agreement it will not:
(a) Engage in any material business other than owning the Specified
Assets and other investment securities.
(b) Voluntarily incur any indebtedness or obligations which would or
might constitute a claim enforceable against the Specified Assets (other than
under this Agreement and under a credit facility extended by The Chase
Manhattan Bank, N.A. and other financial institutions to the Purchaser and
other borrowers in principal amount not to exceed $75,000,000).
(c) Subject any Specified Assets to any lien or permit any Specified
Assets to become subject to any lien,
10. Sale. Notwithstanding anything in this Agreement, the Purchaser may,
at any time and from time to time, at its election sell some or all of the
Specified Assets to third parties not affiliated with the
<PAGE> 4
Purchaser in arms'-length transactions for cash and/or securities which
thereupon become part of the Specified Assets.
11. Substitution. Notwithstanding anything in this Agreement, the
Purchaser may, at any time and from time to time, at its election, exchange
cash and/or securities in the Specified Assets for cash and/or securities
("Substitution Securities") held by the Purchaser or any of its affiliates
thereof with an aggregate fair market value not less than the aggregate fair
market value of the cash and/or securities to be exchanged, all determined as
of the date of substitution, provided that the Purchaser, promptly after such
substitution, delivers to SOMSC its calculation of the fair market values of
all assets included in the exchange, which calculation confirms its compliance
with this paragraph 11.
12. Separate Portfolio Accounting and Management. If any investment
securities are transferred to SOMSC pursuant to this Agreement, SOMSC, as sole
and absolute owner of such securities, will retain Fund American Enterprises,
Inc. as portfolio manager with respect to such investment securities pursuant
to a mutually acceptable Investment Services Agreement.
13. Miscellaneous.
(a) This Agreement is governed by the internal law of New York State.
Exclusive jurisdiction and venue for its enforcement shall lie in the state and
federal courts of the State of New York.
(b) Each party will pay and bear its own expenses in connection with this
Agreement and the enforcement hereof, except that in any proceeding primarily
between the parties for the enforcement hereof, the prevailing party may
recover its reasonable attorney's fees. Each party will pay and bear the cost
of any stock transfer tax applicable to the transfer or issuance of securities
by it.
(c) This Agreement is the entire agreement of the parties as to its
subject matter, and supersedes any other agreements between the parties
relating to the subject matter hereof. Nothing in this Agreement may be waived
or amended except by a writing signed by the parties hereto. Nothing in this
Agreement is intended to create any third-party beneficiary rights.
If the foregoing correctly states our agreement, please so indicate by
signing an enclosed copy of this letter to me.
Very truly yours,
-----------------------------------
for Fund American Enterprises, Inc.
Agreed:
- --------------------------------------------
for Source One Mortgage Services Corporation
Schedules
A. Initial Securities
B. Valuation Principles
C. Valuation Formula
<PAGE> 5
SCHEDULE A
FUND AMERICAN ENTERPRISES, INC.
SCHEDULE OF SECURITIES
VALUED AS OF
DECEMBER 15, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SECURITY SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Zurich Reinsurance Centre Holdings, Inc. 1,900,000 $29.00 $55,100,000
San Juan Basin Royalty Trust 8,000,000 6.00 48,000,000
------------
$103,100,000
============
</TABLE>
<PAGE> 6
SCHEDULE B
VALUATION PRINCIPLES
The following valuation principles shall be applied when determining the value
of the Specified Assets for purposes of this Stock Purchase Agreement.
For any security which is publicly held or so listed or publicly traded, such
security shall be valued at its daily Closing Price. "Closing Price" on any
day of any security means (1) if such security is listed on the New York Stock
Exchange, the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, or, (2) if such security is not listed or admitted to trading on the New
York Stock Exchange as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
(3) if such security is not listed or admitted to trading on any national
securities exchange, the last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by NASDAQ. The source of the information used to compute the Closing
Price of any such security shall be The Wall Street Journal.
For any security which is not publicly held or is not listed or publicly
traded, such security shall be valued at the transferee's carrying value of the
security, calculated in accordance with generally accepted accounting
principles, as of the date of transfer.
<PAGE> 7
SCHEDULE C
VALUATION FORMULA
SOURCE ONE MORTGAGE SERVICES CORPORATION
VALUATION METHODOLOGY
- - The valuation per share equals the company valuation divided by a
number equal to the positive difference between the number of all shares
of capital stock issued and outstanding and the number of shares issued as
part of any "Capital Infusion" (as hereinafter defined) by Fund American
Enterprises, Inc. ("FAE"), Fund American Enterprises Holdings, Inc.
("FAEH"), and/or any "Person" (as hereinafter defined). The share
valuation should be rounded to the nearest 1/100 of a cent.
- - The initial (6/30/86) total company valuation is the acquisition
price; $258,148,000. This also equals the 6/30/86 GAAP book net worth
under purchase accounting (except that it does not include capitalized
acquisition costs). Since the initial number of shares outstanding is
2,600,000, the initial valuation per share is $99.2877.
- - Company valuations will be performed on a formula basis not less than
quarterly for purposes of the plan and will be equal to:
- current GAAP book net worth minus the GAAP effect of any Capital
Infusion,
- minus current GAAP book value of in place mortgage servicing
portfolio,
- plus current "formula value" of in place mortgage servicing
portfolio (purchased and originated),
- minus the current GAAP book value of capitalized acquisition costs,
- minus current GAAP book value of the initial purchase accounting
write up related to good will, buildings, FNMA stock, in process
mortgage originations ("pipeline"), systems development and the
branch network,
- plus the 6/30/86 excess purchase price that would have resulted had
the in place servicing portfolio been valued and capitalized at its
formula value on that date, and excluding capitalized acquisition
costs ($907,509). (This amount is a constant for all periods and
equals $109,765,000).
- - The "formula value" of the mortgage servicing portfolio is a
percentage (rounded to the nearest 1/1000 of a percent) multiplied by the
total outstanding principal balance of the portfolio. This servicing
value excludes the "pipeline" of mortgages in process but not yet closed.
- - This portfolio valuation percentage is determined initially as of
6/30/86 and first updated as of 12/31/86. Thereafter, the percentage will
be updated quarterly. The percentage will remain constant between the
quarterly updates, unless the Board of Directors (the "Board") of Source
One Mortgage Services Corporation (the "Company") and FAEH Chairman decide
more frequent changes are needed.
<PAGE> 8
- - This percentage will be developed from the Company's "bid model,"
using data for the actual in place servicing portfolio as of 6/30/86,
12/31/86, 3/31/87, etc. The model (which includes certain supplemental
calculations such as insurance, income and tax benefits) produces
after-tax cash flows which are discounted at an after-tax rate. The
discounted cash flows equal the estimated value of the servicing
portfolio. This value divided by the total in place principal balance
equals the portfolio valuation percentage.
- - The model's after-tax cash flows are composed of servicing income,
minus servicing expense, minus/plus taxes (all on a cash basis). Some of
the highlights of the model are as follows:
- Cash servicing income includes servicing fees, interest savings
(due to escrow balances and cash flow "float"), plus ancillary
income such as insurance commissions, late charges, assumption fees
and prepayment penalties,
- Cash servicing expense includes 100% of all variable servicing
costs and 85% of all fixed servicing costs. This does not include
any Company interest expense, principal payments on debt or
amortization of capitalized purchased servicing costs. The expenses
are based on actual costs for the latest 12-month period, plus a
reasonable inflation assumption for future years.
- Taxes are calculated at the expected effective rate for each year
(federal, state and local on a stand-alone basis) times: (cash
servicing income, less cash servicing expense, less non-cash
purchased servicing amortization). This amortization is based on
the actual tax basis of the purchased servicing rights (not on the
total servicing valuation) and on the actual tax basis amortization
schedule.
- - The discount rate used in the portfolio valuation is based on the
average daily yield of 10-year U.S. Treasury Bonds (as determined from the
Federal Reserve Board "Statistical Release"), rounded to the nearest 1/100
of a percent, plus a 700 basis point risk premium. The average yield is
for the period beginning 10 business days before the "as of" date for the
bid model and ending 10 working days after. For example, the initial
period would be the 21 business days from 6/16 to 7/15/86 with an average
Treasury rate of 7.42%. The after-tax discount rate = (average pre-tax
Treasury rate + 700 basis points) X (1 - posted effective tax rate).
- - The prepayment rate will be a weighted average of the rates
experienced over the 48 months immediately preceding the valuation date.
The weighting distribution will be as follows: 50% for the most recent 12
months, 30% for the prior 12 months and 10% for each of the remaining 2
prior 12-month periods. Annual changes in the rate will be limited to a
cap and floor of plus or minus 20%. (Cumulative quarterly changes during
a calendar year will be limited to 5%, 10% and 15%, respectively, of the
prior year-end rate.) The first prepayment rate will be calculated as of
December 31, 1985. Therefore, the prepayment rate on the initial
valuation date (June 30, 1986) will be capped at a 10% increase from the
weighted average rate on December 31, 1985. A separate rate (rounded to
the nearest 1/100 of a percent) will be determined for residential and
commercial loans.
- - The interest saving on escrow balances for P & I float is based on the
average A1/P1 commercial paper rate for the latest 36 months, plus dealer
cost, plus backup line cost, minus balance borrowing cost. (The following
pages provide additional details on various assumptions.)
- - All assumptions used in the bid model will be agreed to by the
Company and FAEH management. Further, the Company Board and the FAEH
Chairman will agree on the treatment
<PAGE> 9
of any Capital Infusion with the intent that the effect of any Capital
Infusion on the operation of this formula shall be neutralized to the
fullest extent possible.
- - As used herein: The term "Capital Infusion", means any infusion of
new capital in the Company, after October 1, 1991, by FAE, FAEH and/or any
Person for which FAE, FAEH and/or such Person receives capital stock of
the Company. (The term "Capital Infusion" includes, but is not limited
to, the $300,000,000 capital infusion in November, 1991, (which capital
infusion consisted of a portfolio of common equity securities and other
investments then valued at approximately $300,000,000) by FAE for which
FAE was issued 1,660,118 shares of Class A Common Stock (including certain
treasury shares of Class A Common Stock) of the Company.) The term
"Person" means any person or entity other than (i) those persons listed on
Annex I attached hereto and (ii) any employee stock ownership plan or
similar plan of the Company.
<PAGE> 10
SERVICING PORTFOLIO VALUATION
INPUT REQUIREMENT BASIS OF DETERMINATION
Initial Servicing Actual costs over the 12-month
costs per loan period immediately preceding the
valuation date. Servicing costs
will include full variable costs
and an 85% fixed cost allocation.
Servicing costs Estimate based on anticipated
growth rate inflation and assuming no
escalation of fixed costs due to
increased cost fixed cost
allocation.
Insurance income/ Estimate of future income based
Miscellaneous fee income on experience over the prior 3
years.
Prepayment Rate The prepayment rate will be a
weighted average of the rates
experienced over the 48 months
immediately preceding the
valuation date. The weighting
distribution will be as follows:
50% for the most recent 12 months,
30% for the prior 12 months and
10% for each of the remaining 2
prior 12-month periods. Annual
changes in the rate will be
limited to a cap and floor of plus
or minus 20%. (Cumulative
quarterly changes during a
calendar year will be limited to
5%, 10% and 15%, respectively, of
the prior year-end rate.) The
first prepayment rate will be
calculated as of December 31,
1985. Therefore, the prepayment
rate on the initial valuation date
(June 30, 1986) will be capped at
a 10% increase from the weighted
average rate on December 31,
1985. A separate rate (rounded
to the nearest 1/100 of a
percent) will be determined for
residential and commercial loans.
Foreclosures The number of loans is based on
current FHA experience. To be
reviewed and updated at
quarterly valuation dates.
Foreclosure loss per loan Estimate of Company foreclosure
losses on GNMA pools based on
loan loss experience. To be
reviewed and updated at quarterly
valuation dates.
Escrow balance per loan Based on the average escrow
balance available over the
previous 12 months.
<PAGE> 11
INPUT REQUIREMENT BASIS OF DETERMINATION
Interest earned on Average A1-P1 commercial paper
escrow/P&I balances rate over the 36 months
immediately preceding the
valuation date, plus the cost of
a back-up line of credit, plus
dealer costs, less the cost of
escrow available lines. Rates
utilized in determining the
average will be AA rates as
published by the Federal Reserve.
Escrow interest cost Estimate based on 13 states
which require interest payments
on escrow funds held. To be
reviewed and updated at quarterly
valuation dates.
Escrow growth rate Estimate, to be held constant for
future evaluation periods.
Principal and interest float Estimate float available on
FHA/VA and conventional loans. No
float assumed available on GNMA
loans (float benefits are offset
by interest advanced on
delinquent loans) or commercial
loans. To be reviewed and updated
at quarterly valuation dates.
Reserve requirement Estimate based on current
experience and objectives. To
be reviewed and updated at
quarterly valuation dates.
Tax rate Federal taxes applied as
projected under current law.
State taxes assumed at 2%.
Discount rate The discount rate will be applied
to cash flows after adjustment for
the effective tax rate in the
period. The discount rate used in
the portfolio valuation is based
on the average daily yield of
10-year U.S. Treasury Bonds
(as determined from the Federal
Reserve Board "Statistical
Release"), rounded to the nearest
1/100 of a percent, plus a 700
basis point risk premium. The
average yield is for the period
beginning 10 working days before
the "as of" valuation date and
ending 10 working days after.
<PAGE> 1
Exhibit 10(ll)
INCENTIVE AGREEMENT
IN THE EVENT OF A SALE OF SOURCE ONE
The following will occur at the close of a sale of the company:
1. Sale Incentive: Each of the individuals listed on the enclosed schedule
shall be entitled to a special bonus in connection with the sale of the
company which will consist of two elements:
a. One third of all shares allocated under the LTIP in each earning
period (26,442.97 shares in the aggregate) will become fully earned
and vested to participants on the date of close, the value of which
will be determined by using the Market Price (as defined in the
Plan) of FAEH shares on the closing date of the sale;
b. Each listed individual will be entitled to a share (represented by
the pro rata factor) of the purchase price in excess of GAAP book.
The bonus amount payable to Messrs. Allemang and Densmore will be a minimum of
$356,092 and $360,616, respectively.
Payment of bonus amounts shall be made one year after the sale with interest
accruing from the date of sale at the "Daily Prime Rate," as defined in the
Company's Voluntary Deferred Compensation Plan. Notwithstanding the foregoing,
however, the payment described above for each individual will be reduced by the
smallest amount required so that no part of the payment is not deductible under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), so
long as such reduction is less than the excise tax that would otherwise be
assessed under Section 4999 of the Code upon the payment of bonus amounts
absent such reduction.
The payout of the bonus is contingent upon continuation of the executive's
employment with Source One for a period of one year from the sale, unless
involuntarily terminated other than for "Cause" or as a result of "Constructive
Termination," both as defined under the LTIP, or in connection with a material
reduction in benefits as defined in Paragraph 2 below, in which case payment
will be made at time of termination.
<PAGE> 2
2. Current Benefits: Fund American will attempt to secure continuation of
benefits reasonably comparable to those currently in place for a period of
at least 36 months after the sale. Such programs include retirement
plans, ESOP, LTIP, EICP, deferred compensation plans, health and life
insurance, car leases and allowances, and club memberships. A material
reduction in these benefits would constitute "Constructive
Termination." In addition, Jim Conrad and Bob Richards will be provided
supplemental retirement benefits that will permit each of them to begin
receiving retirement benefits (starting at the time of termination,
constructive or otherwise) as if they had reached age fifty-eight (for
purposes of eligibility for an early retirement benefit, determining
Benefit Service and the percentage reduction in benefits due to the start
of benefits before the normal retirement date) under the Company's
retirement plan and SERP and begin receiving post retirement medical
benefits coverage as if each had reached age fifty-five at the time of
termination, if his employment should be involuntarily terminated other
than for "Cause" or if "Constructive Termination" occurs, as defined above
and under the LTIP. Finally, Jim Conrad and Bob Richards will be entitled
to any additional benefits available to terminated employees in such case.
3. Transaction Pool: A pool of $200,000 will be established by the Company
for possible distribution to certain employees, other than members of the
Management Committee, who deserve special consideration for making
the sale a success.
Date: 2-15-96 James A. Conrad
------------------- ---------------------------------
James A. Conrad
President and CEO
Source One Mortgage
Services Corporation
Terry L. Baxter
---------------------------------
Terry L. Baxter
President
Fund American Enterprises, Inc.
<PAGE> 3
SALE BONUS
<TABLE>
<CAPTION>
BASE SHARES PRO RATA FACTOR
(%)
<S> <C> <C>
Conrad 8,892.33 1.6814
Richards 6,351.67 1.2010
Allemang 3,176.00 .6006
Densmore 3,176.00 .6006
Janssen 333.33 .1890
Brady 635.33 .1201
Champion 635.33 .1201
Courson 635.33 .1201
Manasco 635.33 .1201
Everett 333.33 .0630
Gillies 333.33 .0630
Jansen 333.33 .0630
Schrader 333.33 .0630
Taylor 333.33 .0630
Cleary 305.67 .0580
--------- ------
26,442.97 5.1260
</TABLE>
<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION*
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 148,595 $ 142,493 $ 173,564 $ 118,072 $ 132,900
Total expenses 105,313 137,215 111,387 100,747 90,967
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting changes 43,282 5,278 62,177 17,325 41,933
Income tax expense 16,132 4,474 22,056 7,378 19,706
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of accounting changes 27,150 804 40,121 9,947 22,227
Extraordinary loss on retirement of debt (902) - - - -
Cumulative effect of accounting changes (a) - (44,296) - (25,769) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26,248 $ (43,492) $ 40,121 $ (15,822) $ 22,227
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share (b):
Before extraordinary loss and
cumulative effect of accounting changes $ 7.55 $ (1.65) $ 9.48 $ 2.34 $ 7.88
Net income (loss) per share $ 7.20 $ (14.21) $ 9.48 $ (3.73) $ 7.88
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share (c) $ - $ - $ 6.39 $ 2.40 $ 2.00
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Servicing portfolio at end of year (d):
Balance (in millions) $ 31,831 $ 39,568 $ 38,403 $ 37,312 $ 41,014
Number of loans serviced (e) 494,051 543,428 518,972 578,883 611,253
Weighted average interest rate (e) 8.33% 8.14% 8.53% 9.34% 9.79%
Percent delinquent (e) 5.28% 4.07% 4.44% 4.39% 4.58%
Percent in process of foreclosure .80% .77% .92% .77% .74%
Total mortgage loan production (in millions) $ 2,852 $ 4,586 $ 11,452 $ 7,591 $ 4,027
Servicing rights acquisitions (in millions) $ 4,674 $ 3,707 $ 6,368 $ 2,323 $ 6,756
Sale of servicing rights (in millions) $ 10,973 $ 3,868 $ - $ - $ -
Number of employees at end of year 1,680 2,055 3,060 2,145 1,700
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS)
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage loans receivable $ 381,028 $ 210,472 $1,298,506 $1,116,113 $ 797,363
Capitalized servicing (net) (f) 397,071 530,450 666,666 624,657 605,396
Total assets 1,135,029 1,210,012 2,647,153 2,456,898 1,962,588
Debt 716,632 647,251 1,959,643 1,835,909 1,337,001
Total liabilities 812,785 733,925 2,095,153 1,924,773 1,417,728
Total stockholders' equity (g) 322,244 476,087 552,000 512,906 525,778
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*See accompanying notes to Selected Consolidated Financial Data.
3
<PAGE> 2
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(a) The 1994 amount reflects the cumulative effect, as of January 1, 1994,
of a change in the methodology used to measure impairment of the purchased
mortgage servicing rights asset. See Note 2 to the consolidated financial
statements. The 1992 amount reflects the cumulative effect, as of January 1,
1992, of adopting Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions".
(b) Net income (loss) per common share amounts for all years presented are
based on the weighted average number of common shares outstanding.
(c) Cash dividends per common share were computed based on the total
number of common shares outstanding as of the dividend record dates.
(d) Includes loans subserviced for others having a principal balance of
$4.0 billion and $4.3 billion as of December 31, 1995 and 1994, respectively.
(e) Excludes interim servicing of loans having a principal balance of
$1,651 million, $4,190 million, $75 million, and $1,675 million as of December
31, 1994, 1993, 1992 and 1991, respectively.
(f) Reflects a $68.1 million cumulative effect adjustment to the purchased
mortgage servicing rights asset as of January 1, 1994 relating to a change in
the methodology used to measure its impairment. See Note 2 to the consolidated
financial statements.
(g) Total stockholders' equity excludes amounts applicable to redeemable
Class B common stock for years prior to 1993. In November 1993, all the shares
of redeemable Class B common stock were redeemed at the option of the holders
thereof. See Note 8 to the consolidated financial statements.
FORM 10-K
The financial information contained in this report substantially conforms
with the information required in the "Form 10-K" Annual Report to be filed by
the Company with the Securities and Exchange Commission at the end of March
1996. Certain supplemental information appears in such Form 10-K that is not
necessarily disclosed within this document. Copies of such Form 10-K (without
exhibits) are available, without charge, upon request to the Corporate
Secretary's Office, Source One Mortgage Services Corporation, 27555 Farmington
Road, Farmington Hills, Michigan 48334-3357 (telephone: (810) 488-7000).
BUSINESS
The Company engages primarily in the business of producing, selling and
servicing residential mortgage loans. Its primary sources of revenue are net
servicing revenue, net interest revenue, net gain on sale of mortgages, net
gain on sale of servicing, and other revenue (including underwriting and
appraisal fees).
The Company is also engaged, through certain of its subsidiaries, in the
sale of credit-related insurance products (such as life, disability, health,
accidental death, and property and casualty insurance).
MARKET FOR STOCK AND RELATED MATTERS
There is no established public trading market for the Company's common
stock. As of March 28, 1996, there was one holder of the 2,247,000 shares of
the Company's issued and outstanding common stock.
No cash dividends on common stock were declared for the years ended
December 31, 1995 or 1994. For the year ended December 31, 1993, the Company
declared cash dividends on common stock aggregating $26.6 million. The
Company's secured credit agreements contain covenants which limit its ability
to pay dividends or make distributions on its capital in excess of preferred
stock dividend and subordinated debt interest requirements each year. 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.
4
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The Company reported net income of $26.2 million for the year ended
December 31, 1995 compared to a net loss of $43.5 million for the year ended
December 31, 1994 and net income of $40.1 million in 1993. The 1995 net income
includes $40.0 million of pretax gains on sales of servicing to third parties.
The 1994 net loss includes the effects of a $68.1 million pretax charge related
to a change in accounting methodology for the purchased mortgage servicing
rights ("PMSR") asset. The 1993 net income amount reflects $34.4 million of
pretax realized gains on the sale and exchange of certain common equity
securities with Fund American Enterprises Holdings, Inc., the Company's
ultimate parent ("Fund American"), and certain of its subsidiaries.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", an
amendment of SFAS No. 65, as of January 1, 1995. SFAS No. 122 requires the
total cost of acquiring mortgage loans, either through loan origination
activities or purchase transactions, to be allocated to the mortgage servicing
rights and the loans based on their relative fair values. The statement
requires entities to measure impairment on a disaggregated basis by stratifying
the mortgage servicing rights based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each individual stratum.
SFAS No. 122 prohibits retroactive application to prior years, therefore
the reported results for 1994 and 1993 are in accordance with SFAS No. 65 and
are not directly comparable to the 1995 results reported under SFAS No. 122. A
major difference between SFAS No. 122 and SFAS No. 65 relates to the
capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS
No. 65, the costs inherent in creating OMSR's could not be capitalized. Under
SFAS No. 122, a portion of the total cost of an originated loan is allocated to
the right to service the loan based on the relative fair value of the mortgage
servicing right and the loan.
The Company estimated the fair values of its mortgage servicing rights by
calculating the present value of the expected future cash flows associated with
such rights. In making those estimates, the Company incorporated assumptions
that market participants would use in their estimates of future servicing
income and expense and discounted those cash flows using current estimated
market rates.
To measure impairment of the mortgage servicing rights, the Company
stratified the related mortgage loan servicing portfolio based on its
predominant risk characteristics which were determined to be prepayment,
default and operational risks. This resulted in stratification by interest
rate, loan type (investor) and original term of maturity. The fair value of
each stratum was computed and compared to its recorded book value to determine
if a valuation allowance, or recovery of a previously established valuation
allowance, was required.
The adoption of SFAS No. 122 as it related to the capitalization of
originated mortgage servicing rights resulted in the recognition of additional
pretax gain on sale of mortgages of $27.2 million for the year ended December
31, 1995. The impairment provisions of SFAS No. 122 resulted in a pretax
charge of $28.0 million for the year. The discount rate and prepayment
assumptions are significant factors used in estimating the fair value of the
Company's mortgage servicing rights and could be significantly impacted by
changes in interest rates. Accordingly, it is likely that management's estimate
of the fair value of the mortgage servicing rights could change in the near
term due to changes in interest rates.
In 1994, the Company adopted an accounting methodology that measured
impairment of PMSRs by discounting the estimated future cash flows using a
current market rate. Prior to 1994, the Company measured impairment of PMSRs
on a disaggregated basis including a cost of capital charge for estimating
future cash flows. The adoption of the new accounting methodology, recorded as
a cumulative adjustment as of January 1, 1994, resulted in a $68.1 million
pretax, $44.3 million after tax, charge to income for 1994.
5
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
Net servicing revenue was $60.5 million for the year ended December 31,
1995 versus $82.4 million in 1994 and $53.5 million in 1993. Mortgage servicing
revenue decreased in 1995 compared to 1994 primarily due to the sale of $11.0
billion of servicing to third parties. Amortization of capitalized servicing
decreased in 1995 compared to 1994 due to slower amortization of the
capitalized mortgage servicing asset reflecting lower actual and anticipated
prepayments and a smaller capitalized servicing asset due to the sale of
servicing, partially offset by higher impairment charges related to the
adoption of SFAS No. 122 in 1995. The increase in net servicing revenue in
1994 compared to 1993 was primarily due to slower amortization of the
capitalized servicing asset reflecting the reduced pace of mortgage loan
payoffs in the servicing portfolio during 1994 compared to 1993, partially
offset by lower weighted average net servicing fee rates on newly originated
loans.
A steady rise in market interest rates for mortgage loans during 1994
resulted in a decrease in loan prepayments from the mortgage servicing
portfolio during 1995 and 1994. However, falling interest rates through most
of 1995 resulted in increased prepayment activity later in 1995.
The Company's average prepayment rates for the years ended December 31,
1995, 1994 and 1993 were 8%, 13% and 38%, respectively. The payoff rate used
to estimate future servicing cash flows for measuring impairment is based on
current median prepayment estimates by interest rate and origination date,
compiled by several large brokerage firms.
In 1995, the Company discounted estimated cash flows for its PMSR and OMSR
assets using current market interest rates of 10.5% for conventional loans and
12.0% for insured loans in accordance with SFAS No. 122. In 1994, the discount
rate used to discount future cash flows of the PMSR's was based on then current
market interest rates used for mortgage servicing sales as quoted by industry
brokers. The discount rate ranged from 8.59% to 12.55% for the year ended
December 31, 1994. In 1993, the interest component used to discount the cash
flows of the PMSR's was 2.72% and was developed based on the Company's then
most recent twelve-month average cost of capital including the actual cost of
debt and dividends paid on the Company's equity capital.
The Company's mortgage servicing portfolio decreased to $31.8 billion as
of December 31, 1995 from $39.6 billion and $38.4 billion as of December 31,
1994 and 1993, respectively. During 1995, the Company sold the rights to
service a total of $11.0 billion of mortgage loans to third parties for net
proceeds of $199.1 million resulting in a pretax gain of $40.0 million. In
1994, the Company sold the rights to service $3.9 billion of mortgage loans to
a third party for net proceeds of $70.2 million and continues to service these
loans pursuant to a subservicing agreement. A gain of $19.9 million was
deferred in 1994 and is being recognized in income over the five-year life of
the subservicing agreement. For the years ended December 31, 1995 and 1994,
the Company recognized $4.2 million and $2.7 million, respectively, of the
deferred gain which is included in net servicing revenue on the consolidated
statements of income. The mortgage servicing portfolio as of December 31, 1995
and 1994 includes loans subserviced for others having a principal balance
totalling $4.0 billion and $4.3 billion, respectively.
Management's intent regarding the 1995 servicing sales was to take
advantage of the substantial increase in the value of servicing rights that was
created by the rise in interest rates during 1994 and to bring servicing and
origination activities into better balance. Additional sales transactions may
occur in the future when management deems it to be economically advantageous.
However, a strategy of the Company is to build the servicing portfolio in order
to take advantage of its low cost servicing operation. To that end, the
Company purchased the rights to service $4.7 billion of mortgage loans from a
third party in the fourth quarter of 1995.
6
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
Total mortgage loan production decreased to $2.9 billion for the year
ended December 31, 1995 from $4.6 billion and $11.5 billion in 1994 and 1993,
respectively. Production related to refinance activity represented
approximately 23%, 50%, and 67% of total mortgage loan production for the years
ended December 31, 1995, 1994 and 1993, respectively. Mortgage loan payoffs
decreased to $2.3 billion and $4.7 billion for the years ended December 31,
1995 and 1994 from $13.6 billion in 1993. The decreases in mortgage loan
production and payoffs in 1995 and 1994 reflect increases in market interest
rates during 1994 and a corresponding reduction in refinancing activity from
1993 levels. However, declining market interest rates for mortgage loans
during 1995, particularly during the fourth quarter, and a flattening of the
yield curve sparked fixed rate loan production resulting in higher mortgage
loan production volumes during the second half of 1995 compared to the first
half of the year.
In 1994, the Company implemented a restructuring plan as a result of a
contracting mortgage loan origination market to bring its mortgage loan
production network in line with anticipated levels of mortgage loan production.
As a result, the Company recorded a pretax restructuring charge totalling $5.2
million, which included $2.7 million for future lease expenses related to
closed facilities, $1.2 million in asset writedowns and $1.3 million for
employee termination and other costs. As of December 31, 1995, $.9 million
remained accrued on the Company's consolidated statement of condition relating
to future lease expenses on closed facilities. The restructuring actions
resulted in improved efficiency of the mortgage loan production operations and
slightly lower operating costs during 1995.
Net interest revenue was $10.3 million for the year ended December 31,
1995 compared to $12.1 million in 1994 and $25.5 million in 1993. The lower
net interest revenue in 1995 and 1994 was the result of a significant decrease
in mortgage loans receivable inventory, partially offset by lower short-term
borrowings, reflecting decreased mortgage loan production. In addition, during
1995, using the proceeds from the sale of servicing rights, the Company
repurchased and retired $82.3 million of long-term debt which resulted in an
extraordinary loss after tax of $.9 million. In 1994, a reduction of
short-term borrowings resulted from lower mortgage loan production, the
issuance of $100.0 million of preferred stock and servicing sale proceeds of
$70.2 million.
The Company had net realized investment losses on the sale and exchange of
securities with affiliates of $2.2 million and $8.6 million for the years ended
December 31, 1995 and 1994, respectively, compared to a net realized investment
gain of $34.4 million in 1993. The 1995 and 1994 losses resulted from the
transfers of $27.0 million and $112.0 million, respectively, of certain common
equity securities 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. The 1993 gain amount is the result of the sale
and exchange of certain common equity securities to Fund American, the
Company's ultimate parent, and certain of its subsidiaries for cash and a more
diversified portfolio of marketable equity securities. All the equity
securities involved in such transactions were actively traded, readily
marketable, and listed on a national exchange and, for purposes of such
transactions, were valued at their closing prices on the day preceding the date
of each transaction.
In the first quarter of 1996, the Company sold its remaining common equity
securities to FAE and recognized a pretax realized loss of $.9 million on the
sale.
Net realized investment loss was $.5 million for the year ended December
31, 1995 compared to a net realized investment gain of $3.3 million in 1994 and
a net realized investment loss of $3.9 million in 1993. The 1995 loss amount
primarily reflects net losses on the sales of common equity securities to third
parties during the year. The 1994 gain amount reflects net gains realized on
the sale of common equity securities
7
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
to third parties, offset by writedowns of certain long-term investments to
estimated fair value. The 1993 loss amount primarily relates to writedowns of
certain long-term investments to estimated fair value.
Net gain on sale of mortgages decreased to $24.0 million for the year
ended December 31, 1995 from $29.5 million in 1994 and $34.8 million in 1993.
The 1995 net gain amount includes $27.2 million related to the adoption of SFAS
No. 122. Intensive price competition during 1995 led to increased pricing
subsidies on originated loans which subsequently reduced gains on sales of
mortgages into the secondary market. The decrease in 1994 compared to 1993
reflects lower mortgage loan sales volumes due to the reduction in mortgage
loan production and increased pricing subsidies on newly originated loans
during the second half of 1994.
During 1995, the Company sold the rights to service a total of $11.0
billion of its mortgage loan servicing portfolio to third parties resulting in
total pretax gains of $40.0 million for the year.
Other revenue, which consists primarily of loan processing fees and
insurance commissions, decreased to $16.4 million for the year ended December
31, 1995 from $23.9 million in 1994 and $29.2 million in 1993. Loan processing
fees, which generally represent approximately 80% of other revenue, tend to
decrease or increase with mortgage loan production. Accordingly, the decreases
in 1995 and 1994 primarily reflect the decreases in mortgage loan production in
1995 and 1994 compared to the previous year.
Salaries and employee benefits expense was $51.3 million, $61.6 million,
and $44.4 million for the years ended December 31, 1995, 1994 and 1993,
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 employee benefits expense. A decline in loan
origination fees, reflecting lower mortgage loan production during 1995 versus
1994, partially offset the decrease in unadjusted salaries and employee
benefits expense. Excluding the effects of loan origination fees, salaries and
employee benefits expense would have decreased approximately 25% in 1995
compared to 1994 and 23% in 1994 compared to 1993, as indicated in the
following table, reflecting headcount reductions due to the downsizing of the
production network during 1994 and lower incentive compensation expenses due to
lower mortgage loan production volumes in 1995 and 1994.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unadjusted salaries and employee benefits expense $68,807 $91,115 $118,713
GAAP net origination revenues (17,550) (29,550) (74,296)
- -----------------------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $51,257 $61,565 $44,417
- -----------------------------------------------------------------------------------------------
</TABLE>
Office occupancy and equipment expense decreased to $14.3 million for the
year ended December 31, 1995 compared to $18.2 million in 1994. Office
occupancy and equipment expense was $15.9 million for the year ended December
31, 1993. The decrease in 1995 reflects lower office lease and related
expenses as a result of the downsizing of the production network due to a
contracting mortgage loan origination market in conjunction with the
restructuring plan implemented in 1994. The increase in 1994 compared to 1993
reflects higher office lease and related expenses associated with the expansion
of the production network during 1993 and early 1994.
The provision for loan losses was $7.0 million for the year ended December
31, 1995 compared to $8.2 million and $3.7 million in 1994 and 1993,
respectively. The increase in 1994 from 1993 was primarily due to charge-offs
relating to certain commercial real estate owned properties and higher average
loss volumes relating to certain California residential mortgage loans.
8
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
Other operating expenses, which consist primarily of loan processing
expenses and general office expenses, were $32.8 million for the year ended
December 31, 1995 compared to $44.0 million in 1994 and $47.4 million in 1993.
Loan processing expenses tend to decrease or increase with mortgage loan
production. Accordingly, the decreases in other operating expenses in 1995 and
1994 reflect lower mortgage loan production in 1995 and 1994 compared to 1993.
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
financing needs, the Company relies on commercial paper borrowings, short-term
credit facilities, medium and long-term debt, early funding programs, and cash
flow from operations. In 1995 and 1994, the Company also generated cash from
the sale of servicing and the issuance of preferred stock which was used to
reduce medium and long-term debt and to repurchase its common stock from FAE.
In August 1995, the Company entered into a $60.0 million unsecured
revolving credit facility which expires in July 1996. As of December 31, 1995,
the Company had $60.0 million outstanding under this borrowing line.
In March 1995, the Company consolidated its three then existing credit
facilities into a single credit facility in the amount of $500.0 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 December 31, 1995, no borrowings were
outstanding under the consolidated facility. As of December 31, 1994, there
was $195.0 million outstanding under the previous three credit facilities.
The Company's secured credit agreements contains covenants which limit its
ability to pay dividends or make distributions on its capital in excess of
preferred stock dividend and subordinated debt interest requirements each year.
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 $650.0 million domestic and Euro commercial paper
program. The weighted average number of days to maturity of commercial paper
outstanding as of December 31, 1995 was 19 days. As of December 31, 1995 and
1994, there was $256.6 million and $26.1 million of commercial paper
outstanding, respectively.
Central Pacific Mortgage Company, a wholly-owned subsidiary of the
Company, has a revolving credit agreement under which it can borrow up to $10.0
million through March 31, 1996. Borrowings under the credit agreement are
guaranteed by the Company. As of December 31, 1995 and 1994, there was $4.5
million and $3.8 million outstanding under this agreement, respectively.
Effective December 8, 1995, the Company exchanged and retired 2,239,061
shares of its 8.42% cumulative preferred stock, series A, for $56.0 million
principal amount of 9.375% subordinated interest deferrable debentures
("subordinated debentures"), due December 31, 2025. Interest on the
subordinated debentures is paid quarterly in arrears at the annual rate of
9.375% on the last business day of each March, June, September and December.
The first interest payment was made on December 29, 1995 for the period from
November 1, 1995 (the last regular dividend payment date with respect to the
preferred stock) through December 8, 1995 at the annual rate of 8.42% and from
December 9, 1995 through December 31, 1995 at the annual rate of 9.375%. The
purpose for the exchange was to improve the Company's after-tax cash flow
9
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
since the interest payable on the subordinated debentures is deductible for
federal income tax purposes, whereas dividends payable on the preferred stock
is not.
The subordinated debentures are redeemable at the option of the Company,
in whole or in part, at any time on or after May 1, 1999. On or after such
date, the subordinated debentures may be redeemed at the option of the Company
at a price equal to 100% of the principal amount redeemed ($25 for each $25
principal amount of subordinated debenture), plus accrued and unpaid interest
to the date fixed for redemption.
In June 1992, the Company issued $100.0 million of 9% debentures due June
2012 under terms of a $250.0 million shelf registration statement filed with
the Securities and Exchange Commission ("SEC") in April 1992. The proceeds
were used for general corporate purposes.
Under a $200.0 million shelf registration statement filed with the SEC in
November 1988, the Company issued $40.0 million of medium-term notes in 1989,
with a total weighted average interest rate of 9.65% due 1996, and in October
1991, the Company issued $160.0 million of 8.875% medium-term notes due October
2001. During 1995, the Company repurchased and retired $10.3 million of
medium-term notes that were due in 1996 and $21.6 million of medium-term notes
that were due in 2001.
In 1986, the Company issued $125.0 million of 8.25% debentures due
November 1, 1996. During 1995, the Company repurchased and retired $50.4
million of these debentures.
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.
In March 1994, the Company issued 4 million shares of 8.42% cumulative
preferred stock, series A, ("preferred stock"), with an aggregate liquidation
preference of $25 per share for net proceeds to the Company of $96.8 million.
In connection with the issuance of preferred stock, the Company transferred a
total of $112.0 million of certain common equity securities to FAE in exchange
for 838,826 shares of the Company's common stock held by FAE, which were
retired by the Company. The Company recognized an $8.6 million pretax loss on
these noncash transfers. The Company also repurchased and retired 85,248
shares of its common stock held by FAE for $10.0 million cash in 1994.
In 1993, the Company redeemed all outstanding shares of its Class B common
stock. Also in 1993, the Company's certificate of incorporation was amended to
authorize 20 million shares of $.01 par value preferred stock. In addition,
that amendment converted the Company's Class A common stock, no par value to
common stock, $.01 par value, and increased the number of authorized shares
from 5 million to 80 million. In February 1994, the Company's certificate of
incorporation was further amended to change the number of authorized shares of
preferred and common stock to 12 million and 8 million, respectively.
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 during 1995 or 1994. The Company declared a total of $26.6 million
common stock dividends for the year ended December 31, 1993.
Quarterly cash dividends are paid on preferred stock at an annual rate of
8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on
the first day of each February, May, August and November. The first dividend
payment was made on May 1, 1994 with respect to the period from the date of
initial issuance of the preferred stock through April 30, 1994. The Company
paid cash dividends totalling $8.4 million and $5.2 million on its preferred
stock for the years ended December 31, 1995 and 1994, respectively.
10
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The preferred stock is not redeemable prior to May 1, 1999. On or after
such date, the preferred stock may be redeemed at the option of the Company at
a price of $25 per share, plus accrued and unpaid dividends to the redemption
date.
During 1995, the Company sold the rights to service a total of $11.0
billion of mortgage loans to third parties for net proceeds of $199.1 million
which were used to repurchase and retire debt, repurchase common stock, and for
general corporate purposes.
During 1995, the Company transferred a total of $27.0 million of common
equity securities and $93.0 million in cash and money market investments to FAE
in exchange for 959,049 shares of the Company's common stock held by FAE, which
were retired by the Company. The Company recognized a $2.2 million pretax loss
on these transfers.
During 1995, the Company repurchased and retired a total of $82.3 million
of public debt and recorded an extraordinary loss after tax of $.9 million.
During 1994, the Company sold the rights to service $3.9 billion of
mortgage loans to a third party for net proceeds of $70.2 million. The Company
continues to service these loans pursuant to a subservicing agreement which
ends in 1999. The proceeds from the sale were used to reduce short-term debt
and for general corporate purposes.
INFLATION
Inflation affects the Company primarily in the area of mortgage loan
originations. Interest rates normally increase during periods of high inflation
and decrease during periods of low inflation. Historically, the Company's
mortgage loan originations have increased in response to falling interest rates
and have decreased during periods of rising interest rates. However, higher
interest rate environments typically enhance the value of the Company's
mortgage servicing portfolio due to less refinance activity. Lower interest
rates generally result in higher payoffs and, therefore, typically reduce the
value of the mortgage servicing portfolio.
11
<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
STOCKHOLDERS AND BOARD OF DIRECTORS
SOURCE ONE MORTGAGE SERVICES CORPORATION
We have audited the accompanying consolidated statements of condition of
Source One Mortgage Services Corporation and subsidiaries (the Company) as of
December 31, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Source One
Mortgage Services Corporation and subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, in
1995 the Company changed its method of accounting for mortgage servicing
rights. As discussed in Note 2 to the consolidated financial statements, in
1994 the Company changed its method of accounting for its purchased mortgage
servicing rights asset.
ERNST + YOUNG LLP [SIGNATURE]
Detroit, Michigan
January 26, 1996
12
<PAGE> 11
CONSOLIDATED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31, 1995 1994
- -----------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 4,146 $ 1,240
Investments 26,290 50,196
Mortgage loans receivable 381,028 210,472
Pool loan purchases 118,995 163,859
Loans held for investment 24,335 19,775
Capitalized servicing (net) 397,071 530,450
Common equity securities (net) 529 45,140
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $13,500 in 1995 and $13,350 in 1994) 45,416 49,785
Premises and equipment 31,014 36,173
Other assets 106,205 102,922
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,135,029 $1,210,012
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Liabilities:
Debt $ 716,632 $ 647,251
Accounts payable and other liabilities 96,153 86,674
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 812,785 733,925
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value, 12,000,000 shares
authorized, 1,760,939 and 4,000,000 shares of 8.42% cumulative
Series A (aggregate liquidation preference of $25 per share)
issued and outstanding as of December 31, 1995 and 1994 18 40
Common stock, $.01 par value, 8,000,000 shares
authorized, 2,247,000 and 3,206,049 shares issued and
outstanding as of December 31, 1995 and 1994 22 32
Paid-in capital 346,088 522,032
Unrealized investment loss (net) (546) (4,065)
Retained deficit (23,338) (41,952)
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 322,244 476,087
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,135,029 $1,210,012
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
REVENUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing revenue $141,883 $169,293 $187,113
Amortization of capitalized servicing 81,385 86,943 133,572
- -------------------------------------------------------------------------------------------------------------
Net servicing revenue 60,498 82,350 53,541
- -------------------------------------------------------------------------------------------------------------
Interest income 37,669 72,031 117,000
Interest expense 27,348 59,954 91,465
- -------------------------------------------------------------------------------------------------------------
Net interest revenue 10,321 12,077 25,535
- -------------------------------------------------------------------------------------------------------------
Net realized investment (loss) gain on sale
and exchange of securities with affiliates (2,159) (8,596) 34,400
Net realized investment (loss) gain (544) 3,333 (3,911)
Net gain on sale of mortgages 24,015 29,471 34,839
Net gain on sale of servicing 40,041 - -
Other 16,423 23,858 29,160
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 148,595 142,493 173,564
=============================================================================================================
EXPENSES
- -------------------------------------------------------------------------------------------------------------
Salaries and employee benefits 51,257 61,565 44,417
Office occupancy and equipment 14,326 18,241 15,909
Provision for loan losses 6,956 8,206 3,664
Restructuring charges - 5,154 -
Other operating expenses 32,774 44,049 47,397
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 105,313 137,215 111,387
- -------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 43,282 5,278 62,177
Income tax expense 16,132 4,474 22,056
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of accounting change 27,150 804 40,121
Extraordinary loss on repurchase of debt
(net of $486 income tax benefit) (902) - -
Cumulative effect of change in accounting for
purchased mortgage servicing rights
(net of $23,852 deferred income tax benefit) - (44,296) -
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 26,248 (43,492) 40,121
Less dividends on preferred stock 7,634 6,642 -
- -------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 18,614 $(50,134) $ 40,121
=============================================================================================================
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary loss and
cumulative effect of accounting change $ 7.55 $ (1.65) $ 9.48
Extraordinary loss (.35) - -
Cumulative effect of accounting change - (12.56) -
- -------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 7.20 $ (14.21) $ 9.48
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
UNREALIZED TOTAL
INVESTMENT RETAINED STOCK-
PREFERRED COMMON PAID-IN GAIN EARNINGS HOLDERS'
STOCK STOCK CAPITAL (LOSS) (DEFICIT) EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992 $ - $ - $ 542,246 $ (24,017) $ (5,323) $ 512,906
Net income - - - - 40,121 40,121
Unrealized investment gain (net) - - - 23,731 - 23,731
Recognition of compensation
pursuant to stock plans - - (442) - - (442)
Issuance of performance
stock earned - - 244 - - 244
Decrease in book value of
redeemable common stock - - 2,056 - - 2,056
Conversion of 4,130,123 shares of
Class A common stock, no par
value, to common stock,
$.01 par value - 41 (41) - - -
Common dividends declared
of $6.39 per share - - - - (26,616) (26,616)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 - 41 544,063 (286) 8,182 552,000
Net loss - - - - (43,492) (43,492)
Unrealized investment loss (net) - - - (3,779) - (3,779)
Issuance of 4,000,000 shares of 8.42%
cumulative Series A preferred stock,
$.01 par value (aggregate liquidation
preference of $25 per share) 40 - 99,960 - - 100,000
Repurchase of 924,074 shares of
common stock, $.01 par value,
from parent - (9) (121,991) - - (122,000)
Preferred dividends declared
of $2.105 per share - - - - (6,642) (6,642)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 40 32 522,032 (4,065) (41,952) 476,087
Net income - - - - 26,248 26,248
Unrealized investment gain (net) - - - 3,519 - 3,519
Repurchase of 959,049 shares of
common stock, $.01 par value,
from parent - (10) (119,990) - - (120,000)
Exchange of 2,239,061 shares
of 8.42% cumulative Series A preferred
stock, $.01 par value (aggregate
liquidation preference of $25 per share)
for 9.375% subordinated debentures (22) - (55,954) - - (55,976)
Preferred dividends declared
of $2.105 per share - - - - (7,634) (7,634)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 $ 18 $ 22 $ 346,088 $ (546) $ (23,338) $ 322,244
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 26,248 $ (43,492) $ 40,121
Noncash items included in the determination of
net income (loss):
Amortization of capitalized servicing 81,385 86,943 133,572
Provision for loan losses 6,956 8,206 3,664
Depreciation and amortization 7,347 10,450 8,206
Net realized loss (gain) on investments 2,703 5,263 (30,489)
Amortization of goodwill 2,090 2,090 2,090
Gain on sale of servicing (40,041) - -
Amortization of deferred gain on sale of servicing (4,188) (2,700) -
Net (increase) decrease in mortgage loans receivable (170,556) 1,060,241 (182,393)
Net increase (decrease) in accounts
payable and other liabilities 18,749 (29,894) (40,046)
Net decrease (increase) in other assets 3,768 42,444 (29,132)
Net change in current and deferred income taxes
receivable and payable 16,849 (4,716) 15,330
Extraordinary loss on repurchase of debt 902 - -
Cumulative effect of change in accounting
for purchased mortgage servicing rights - 44,296 -
- ---------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (47,788) 1,179,131 (79,077)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------
Collections on pool loan purchases, mortgage
claims receivable and real estate acquired 192,697 254,136 213,319
Additions to pool loan purchases, mortgage
claims receivable and real estate acquired (150,420) (242,841) (255,945)
Capitalized excess servicing income (7,442) (16,712) (58,073)
Additions to purchased mortgage servicing rights (82,147) (90,049) (72,229)
Originated mortgage servicing rights (31,197) - -
Net proceeds from sales of servicing 181,109 70,242 -
Net decrease in investments 23,006 65,391 20,624
Purchase of common equity securities - (122,101) (5,706)
Proceeds from sale of common equity securities
to affiliates - - 129,812
Proceeds from sales of common equity securities 21,390 129,679 20,094
Net disposition (acquisition) of premises and equipment 185 (3,491) (11,222)
Net (increase) decrease in loans held for investment (4,560) 3,836 3,392
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 142,621 $ 48,090 $ (15,934)
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from issuance of commercial paper $ 4,050,417 $ 1,778,950 $ 3,751,087
Repayments on commercial paper (3,819,904) (2,326,875) (3,703,977)
Net (decrease) increase in credit agreement
and bid loan borrowings (133,978) (765,673) 74,477
Repurchase of debt (85,872) - -
Net proceeds from issuance of preferred stock - 96,850 -
Repurchase of common stock from parent (92,980) (10,000) -
Redemption of Class B common stock - - (4,624)
Dividends paid (8,420) (5,239) (26,616)
Other (1,190) (948) (47)
- --------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (91,927) (1,232,935) 90,300
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,906 (5,714) (4,711)
Cash at beginning of year 1,240 6,954 11,665
- --------------------------------------------------------------------------------------------
Cash at end of year $ 4,146 $ 1,240 $ 6,954
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION
Source One Mortgage Services Corporation (together with its subsidiaries,
the "Company") was incorporated in 1972. It is the successor to Citizens
Mortgage Corporation which was organized in 1946. The Company is now an
indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc.
("Fund American"), a Delaware corporation organized in 1980, which was formerly
known as The Fund American Companies, Inc. and Fireman's Fund Corporation.
The Company is one of the largest mortgage banking companies in the United
States. As of December 31, 1995, the Company had a mortgage loan servicing
portfolio totalling $31.8 billion, including $4.0 billion of loans subserviced
for others, which is serviced on behalf of approximately 320 institutional
investors and numerous other security holders. As of December 31, 1995, the
Company had 128 retail branch offices in 25 states and originated $2.9 billion
in mortgage loans for the year then ended.
As a mortgage banker, the Company engages primarily in the business of
producing, selling and servicing residential mortgage loans. Its sources of
revenue are net servicing revenue, net interest revenue, net gain on sale of
mortgages, net gain on sale of servicing and other revenue (including
underwriting and appraisal fees). Through subsidiaries, the Company also
provides credit-related insurance products (such as life, disability, health,
accidental death, and property and casualty insurance).
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include
the accounts of Central Pacific Mortgage Company, a wholly-owned subsidiary of
the Company, (together with its subsidiaries, "Central Pacific") and all other
subsidiaries, and have been prepared in accordance with generally accepted
accounting principles. Significant intercompany transactions have been
eliminated in consolidation. The financial statements include all adjustments
considered necessary by management to fairly present the financial position,
results of operations and cash flows of the Company. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
amounts in prior year financial statements have been reclassified to conform
with the current year presentation.
Fund American acquired the stock of the Company in 1986. The acquisition
resulted in a purchase price in excess of historical book value of the
Company's net assets. The excess purchase price allocated to identifiable
assets is being amortized primarily over 5 to 20 years depending on asset type
and the portion allocated to goodwill is being amortized over 20 years.
ACCOUNTING STANDARD RECENTLY ADOPTED
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of SFAS No. 65, 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 mortgage
servicing rights based on one or more predominant risk characteristics of the
underlying loans. Impairment is recognized through a valuation allowance for
each individual stratum. Pursuant to SFAS No. 122, prior year financial
statements have not been restated.
18
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
INVESTMENTS
Investments primarily consist of the following: short-term investments
stated at fair value with unrealized gains and losses, if any, reported in
income; real estate mortgage investment conduit ("REMIC") residuals considered
held to maturity and carried at amortized cost using a method which
approximates the effective yield method of amortization on a prospective basis;
investment partnership interests reported using the equity method of
accounting; and interest rate floor contracts considered held for purposes
other than trading and carried at fair value with unrealized gains and losses
reported in other income.
MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are stated at the lower of aggregate cost or
market value. Conventional mortgage loans are placed on a nonaccrual basis when
delinquent ninety days or more as to interest or principal. Interest on
delinquent Federal Housing Administration ("FHA") insured loans is accrued at
the insured rate beginning on the sixty-first day of delinquency. Interest on
delinquent Veterans Administration ("VA") guaranteed loans is accrued at the
loan rate during the period of delinquency.
RECOGNITION OF REVENUES RELATED TO MORTGAGE LOANS RECEIVABLE
Discounts from the origination of mortgage loans receivable are deferred
and recognized as adjustments to gain or loss on sale. Gains and losses from
the sale of mortgage loans are recognized when proceeds are received. Loan
origination fees, net of certain direct costs, have been deferred and are taken
into income when mortgage loans receivable are sold.
POOL LOAN PURCHASES
Pool loan purchases, which are carried at cost, represent FHA insured, VA
guaranteed and conventional loans which were either delinquent or in the
process of foreclosure at the time they were purchased from Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
or Federal Home Loan Mortgage Corporation ("FHLMC") mortgage-backed security
pools that the Company services. Following the purchase of these loans,
interest is accrued at a rate based on expected recoveries.
LOANS HELD FOR INVESTMENT
Loans held as permanent investments are stated at the lower of cost or
market value determined at the time the permanent investment decisions were
made. The amount of discount, if any, is amortized to income over the
anticipated life of the investment.
CAPITALIZED SERVICING
Capitalized servicing includes certain costs incurred in the origination
and acquisition of mortgage servicing rights ("originated and purchased
servicing") which are deferred and amortized over the expected life of the
loan. The total cost of acquiring mortgage loans, either through origination
activities or purchase transactions, is allocated between the mortgage
servicing rights and the loans based on their relative fair values. The fair
values of mortgage servicing rights are estimated by calculating the present
value of the expected future cash flows associated with such rights,
incorporating assumptions that market participants would use in their estimates
of future servicing income and expense. A current market rate is used to
discount estimated future cash flows. Impairment of mortgage servicing rights
is measured on a disaggregated basis by stratifying the mortgage servicing
rights based on one or more predominant risk characteristics of the underlying
loans. Impairment is recognized through a valuation allowance for each
individual stratum.
Capitalized servicing also includes the present value of future servicing
revenue in excess of normal servicing revenue on loans sold with servicing
retained ("excess servicing") which is deferred and amortized using a method
that relates the anticipated net servicing revenue to total projected net
servicing revenue to
19
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
CAPITALIZED SERVICING (CONTINUED)
be received over the expected life of the loan. Impairment tests for excess
servicing are performed on a disaggregated basis. The original discount rate is
used to discount excess servicing future cash flows.
RECOGNITION OF REVENUES RELATED TO SERVICING MORTGAGE LOANS
Mortgage servicing revenue represents fees earned for servicing real
estate mortgage loans owned by investors and late charge income. The servicing
fees are calculated based on the outstanding principal balances of the loans
serviced and are recognized together with late charge income when received.
COMMON EQUITY SECURITIES
Common equity securities are carried at fair value. Unrealized gains and
losses, net of tax, are recorded as a separate component of stockholders'
equity with no corresponding credit or charge to net income.
MORTGAGE CLAIMS RECEIVABLE AND REAL ESTATE ACQUIRED
Mortgage claims receivable represent claims filed primarily with FHA and
VA and are carried at cost less an estimated allowance for amounts which are
not fully recoverable from claims filed with the underlying mortgage insuring
agencies.
Real estate acquired is stated at the lower of net realizable value or the
recorded balance satisfied at the date of acquisition determined on an
individual property basis. Costs relating to holding the properties are charged
to expense as incurred.
The allowance for loan losses is based upon an analysis of the mortgage
loan servicing portfolio and reflects an amount which, in management's
judgment, is adequate to provide for estimated losses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements and systems and
programming software, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
method over the estimated useful lives of the related assets or over the lease
terms, whichever period is shorter.
NET INCOME PER SHARE
Net income per share amounts were computed based on the weighted average
total number of common shares outstanding. There were 2,584,450, 3,527,713 and
4,232,474 weighted average common shares outstanding for the years ended
December 31, 1995, 1994 and 1993, respectively.
DIVIDENDS PER SHARE
Cash dividends per share were computed based on the total number of common
shares outstanding as of the dividend record dates.
NOTE 2. CAPITALIZED SERVICING
In 1995, the Company estimated the fair values of its mortgage servicing
rights by calculating the present value of the expected future cash flows
associated with such rights. In making those estimates, the Company
incorporated assumptions that market participants would use in their estimates
of future servicing income and expense and discounted those cash flows using
current estimated market rates of 10.5% for conventional loans and 12.0% for
insured loans.
In 1995, to measure impairment of the mortgage servicing rights, the
Company stratified the related mortgage loan servicing portfolio based on its
predominant risk characteristics which were determined to be prepayment,
default and operational risks. This resulted in stratification by interest
rate, loan type (investor)
20
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 2. CAPITALIZED SERVICING (CONTINUED)
and original term to maturity. The prepayment assumptions used in the
estimation of fair values were based on market prepayment estimates. The fair
value of each stratum was computed and compared to its recorded book value to
determine if a valuation allowance, or recovery of a previously established
valuation allowance, was required.
The discount rate and prepayment assumptions are significant factors used
in estimating the fair value of the Company's mortgage servicing rights and
could be significantly impacted by changes in interest rates. Accordingly, it
is likely that management's estimate of the fair value of the mortgage
servicing rights could change in the near term due to changes in interest
rates.
The following table summarizes the fair value of mortgage servicing rights
and certain characteristics of the Company's servicing portfolio related to
those mortgage servicing rights as of December 31, 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fair Value Weighted
Mortgage Principal Average Weighted Weighted
Servicing Balance Interest Average Average
Rights Serviced (a) Rate Maturity Service Fee
Loan type (in thousands) (in millions) (in percent) (in months) (in percent)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insured $171,959 $ 8,872 8.77% 259 .44%
Conventional 193,425 13,354 8.45 231 .34
Adjustable Rate 21,599 1,297 8.06 309 .43
- ---------------------------------------------------------------------------------------
Total $386,983 $23,523 8.55% 246 .38%
=======================================================================================
</TABLE>
(a) Excludes $4.3 billion of mortgage servicing rights related to
originations not capitalized prior to the adoption of SFAS No. 122.
The adoption of SFAS No. 122 resulted in a decrease in net income of $1.4
million or $.53 per share for the year ended December 31, 1995.
In 1994, the Company adopted an accounting methodology that measured
impairment of purchased servicing by discounting the estimated future cash
flows using a current market rate. Prior to 1994, the Company measured
impairment of purchased servicing on a disaggregated basis including a cost of
capital charge for estimating future cash flows. The adoption of the new
accounting methodology, recorded as a cumulative adjustment as of January 1,
1994, resulted in a $68.1 million pretax, $44.3 million after tax, charge to
income for 1994.
The Company estimates the fair value of its capitalized excess servicing
asset by discounting the anticipated future cash flows over the estimated life
of the related loans. In making these estimates, the Company uses "interest
only strip" interest rates as quoted by market participants to determine the
appropriate discount rates and prepayment speed assumption rates that are based
on interest rates, loan types and original term of maturity. The discount rate
used to capitalize excess servicing for 1995 was 12.00%, and ranged from 8.00%
to 10.00% for the year ended December 31, 1994, and was 8.00% for the year
ended December 31, 1993. For the years ended December 31, 1995, 1994 and 1993,
the weighted average discount rates inherent in the carrying amount of the
capitalized excess servicing asset were 10.03%, 9.12% and 9.03%, respectively.
21
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 2. CAPITALIZED SERVICING (CONTINUED)
The following table summarizes changes in the Company's capitalized
servicing asset:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Deferred
Gain on Total
Purchased Originated Excess Valuation Sale of Capitalized
Servicing Servicing Servicing Allowance Servicing Servicing
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992 $551,254 $ - $ 73,403 $ - $ - $ 624,657
Additions 117,508 - 58,073 - - 175,581
Scheduled amortization (90,054) - (11,531) - - (101,585)
Impairment/unscheduled amortization (8,500) - (23,487) - - (31,987)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 570,208 - 96,458 - - 666,666
Cumulative effect of accounting change (68,147) - - - - (68,147)
Additions 69,704 - 16,712 - (19,912) 66,504
Scheduled amortization (61,665) - (12,120) - - (73,785)
Impairment/unscheduled amortization (12,818) - (340) - - (13,158)
Amortization of deferred gain - - - - 2,700 2,700
Sales (21,706) - (28,624) - - (50,330)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 475,576 - 72,086 - (17,212) 530,450
Additions 64,239 31,197 7,442 - - 102,878
Scheduled amortization (43,936) (1,364) (7,553) - - (52,853)
Impairment/unscheduled amortization - - (564) (27,968) - (28,532)
Amortization of deferred gain - - - - 4,188 4,188
Sales (132,371) - (26,689) - - (159,060)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 $ 363,508 $29,833 $ 44,722 $(27,968) $(13,024) $ 397,071
===============================================================================================================================
</TABLE>
During 1994, the Company sold the rights to service $3,868 million of
mortgage loans for net proceeds of $70.2 million and continues to service these
loans pursuant to a subservicing agreement. Accordingly, the Company recorded a
deferred gain on the sale which is being recognized in income over the
five-year life of the subservicing agreement.
NOTE 3. COMMON EQUITY SECURITIES AND INVESTMENTS
The Company's portfolio of common equity securities is carried at fair
value. Unrealized gains and losses, net of tax, are reported as a separate
component of stockholders' equity with no corresponding credit or charge to net
income. Realized gains and losses from sales of common equity securities are
based on the specific identification method.
The Company transferred a total of $27.0 million and $112.0 million of
certain common equity securities to Fund American Enterprises, Inc. ("FAE"),
the Company's parent in 1995 and 1994, respectively, in exchange for shares of
the Company's common stock held by FAE, which were retired by the Company. All
of the equity securities involved in such transactions were actively traded,
readily marketable, and listed on a national exchange and, for purposes of such
transactions, were valued at their reported closing prices on the day preceding
the date of each transaction.
The Company received proceeds on the sale of common equity securities of
$21.4 million and $129.7 million for the years ended December 31, 1995 and
1994, respectively. For the years ended December 31, 1995 and 1994,
respectively, realized gains on the sale of common equity securities of $2.8
million and $10.6 million, and realized losses on the sale of common equity
securities of $5.6 million and $14.5 million, were included in the
determination of income.
22
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 3. COMMON EQUITY SECURITIES AND INVESTMENTS (CONTINUED)
The fair value of the portfolio of common equity securities is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common equity securities at adjusted cost $1,369 $51,393
Gross unrealized gains - 1,068
Gross unrealized losses (840) (7,321)
- -------------------------------------------------------------------------------------------------------
Common equity securities at fair value $ 529 $45,140
=======================================================================================================
</TABLE>
The carrying value of debt securities, which are included in investments
on the consolidated statements of condition, is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
Debt securities at fair value $2,735 $4,902
Gross unrealized gains - (179)
- -----------------------------------------------------------------------
Debt securities at amortized cost $2,735 $4,723
=======================================================================
</TABLE>
The change in net unrealized investment loss on the portfolio of common
equity securities has been (charged) credited to stockholders' equity as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized investment loss at beginning of year $(4,065) $ (286) $(24,017)
(Decrease) increase in gross unrealized gains (1,068) (3,875) 4,943
Decrease (increase) in gross unrealized losses 6,481 (1,938) 31,006
(Decrease) increase in deferred income
tax (expense) benefit (1,894) 2,034 (12,218)
- -------------------------------------------------------------------------------------------------------------------
Net unrealized investment loss at end of year $ (546) $(4,065) $ (286)
===================================================================================================================
</TABLE>
NOTE 4. MORTGAGE LOANS RECEIVABLE
The following table summarizes mortgage loans receivable:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable rate mortgage loans, weighted average interest
rates of 6.55% and 7.66% as of December 31, 1995
and 1994, respectively $ 17,605 $ 46,344
Fixed rate 5 year through 20 year mortgage loans,
weighted average interest rates of 7.47% and
8.81% as of December 31, 1995 and 1994, respectively 59,507 34,040
Fixed rate 30 year mortgage loans, weighted average
interest rates of 7.89% and 9.27% as of
December 31, 1995 and 1994, respectively 303,007 131,302
- ------------------------------------------------------------------------------------------------------
380,119 211,686
Premiums (discounts) 909 (1,214)
- ------------------------------------------------------------------------------------------------------
Total mortgage loans receivable $381,028 $210,472
======================================================================================================
</TABLE>
23
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 5. POOL LOAN PURCHASES
The following table summarizes pool loan purchases:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Balance
(in thousands) Number of Loans
- ------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan Type: FHA $ 77,644 $ 102,768 1,433 1,850
VA 32,456 41,941 545 719
Conventional 8,895 19,150 106 224
- ------------------------------------------------------------------------------------------------------
Total pool loan purchases $118,995 $ 163,859 2,084 2,793
======================================================================================================
</TABLE>
NOTE 6. OTHER ASSETS
The following table summarizes other assets:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 21,978 $ 24,068
Amount due from sale of servicing 14,672 -
Escrow advances 11,663 15,465
Deferred income tax benefit (Note 15) 10,533 16,474
Interest receivable-pool loan purchases 9,805 12,675
Branch network 8,925 9,775
Note receivable from sale of servicing 7,000 -
Current income tax benefit (Note 15) - 4,384
Other 21,629 20,081
- -------------------------------------------------------------------------------------
Total other assets $106,205 $102,922
=====================================================================================
</TABLE>
NOTE 7. DEBT
The Company has a $650.0 million domestic and Euro commercial paper
program. The weighted average number of days to maturity of commercial paper
outstanding as of December 31, 1995 was 19 days.
In August 1995, the Company entered into a $60.0 million unsecured
revolving credit facility, which expires in July 1996.
In March 1995, the Company consolidated its three then existing credit
facilities into a single credit facility in the amount of $500.0 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 December 31, 1995, no borrowings were
outstanding under the consolidated facility. As of December 31, 1994, there was
$195.0 million outstanding under the previous three credit facilities.
The Company's secured credit agreements contain covenants which limit its
ability to pay dividends or make distributions on its capital in excess of
preferred stock dividend and subordinated debt interest requirements each year.
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.
Under the credit agreements described above, the Company receives interest
expense credits as a result of holding escrow and custodial funds in trust
accounts at non-affiliated banks.
24
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 7. DEBT (CONTINUED)
Central Pacific Mortgage Company, a wholly-owned subsidiary of the
Company, has a revolving credit agreement under which it can borrow up to $10.0
million through March 31, 1996. Borrowings under the credit agreement are
guaranteed by the Company. As of December 31, 1995 and 1994, there was $4.5
million and $3.8 million outstanding under this agreement, respectively.
Effective December 8, 1995, the Company exchanged and retired 2,239,061
shares of its 8.42% cumulative preferred stock, series A, for $56.0 million
principal amount of 9.375% subordinated interest deferrable debentures
("subordinated debentures"), due December 31, 2025. Interest on the
subordinated debentures is paid quarterly in arrears at the annual rate of
9.375% on the last business day of each March, June, September and December.
The first interest payment was made on December 29, 1995 for the period from
November 1, 1995 (the last regular dividend payment date with respect to the
preferred stock) through December 8, 1995 at the annual rate of 8.42% and from
December 9, 1995 through December 31, 1995 at the annual rate of 9.375%.
The subordinated debentures are redeemable at the option of the Company,
in whole or in part, at any time on or after May 1, 1999. On or after such
date, the subordinated debentures may be redeemed at the option of the Company
at a price equal to 100% of the principal amount redeemed ($25 for each $25
principal amount of subordinated debenture), plus accrued and unpaid interest
to the date fixed for redemption.
In June 1992, the Company issued $100.0 million of 9% debentures due June
2012 under terms of a $250.0 million shelf registration statement filed with
the Securities and Exchange Commission ("SEC") in April 1992. The proceeds were
used for general corporate purposes.
Under a $200.0 million shelf registration statement filed with the SEC in
November 1988, the Company issued $40.0 million of medium-term notes in 1989,
with a total weighted average interest rate of 9.65% due 1996, and in October
1991, the Company issued $160.0 million of 8.875% medium-term notes due October
2001. During 1995, the Company repurchased and retired $10.3 million of
medium-term notes that were due in 1996 and $21.6 million of medium-term notes
that were due in 2001.
In 1986, the Company issued $125.0 million of 8.25% debentures due
November 1, 1996. During 1995, the Company repurchased and retired $50.4
million of these debentures.
As of December 31, 1994, in addition to the debentures and medium-term
notes, credit agreement borrowings of $195.0 million could be optionally
classified as long-term debt due to the commitment periods which extended
beyond one year and the Company's intention to maintain those borrowings beyond
one year.
25
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 7. DEBT (CONTINUED)
The following table summarizes debt outstanding:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates of 6.14%
and 5.83% as of December 31, 1995 and 1994, respectively $ 256,613 $ 26,100
Secured credit agreements, weighted average interest rate of 7.21% - 195,000
Credit agreements, weighted average interest rates of 6.57%
and 5.38% as of December 31, 1995 and 1994, respectively 64,485 3,753
Medium-term notes due 1996, weighted average interest rates
of 9.60% and 9.65% as of December 31, 1995 and 1994, respectively 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
9.375% subordinated debentures, due December 31, 2025 55,976 -
Less unamortized discount, premium and issuance costs (net) (3,147) (2,602)
- -----------------------------------------------------------------------------------------------------------------------
Total debt $ 716,632 $ 647,251
=======================================================================================================================
</TABLE>
The aggregate maturities of debt for the five calendar years after
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1997 1998 1999 2000 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$104,350 $ - $ - $ - $ - $ 294,331 $ 398,681
===================================================================================================================
</TABLE>
NOTE 8. STOCKHOLDERS' EQUITY
In March 1994, the Company issued 4 million shares of 8.42% cumulative
preferred stock, series A, ("preferred stock"), with an aggregate liquidation
preference of $25 per share for net proceeds to the Company of $96.8 million.
Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares
of its preferred stock for $56.0 million principal amount of 9.375%
subordinated debentures, due December 31, 2025. The preferred stock is not
redeemable prior to May 1, 1999. On or after such date, the preferred stock may
be redeemed at the option of the Company at a price of $25 per share, plus
accrued and unpaid dividends to the redemption date.
Quarterly cash dividends are paid on preferred stock at an annual rate of
8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on
the first day of each February, May, August and November. The first dividend
payment was made on May 1, 1994 with respect to the period from the date of
initial issuance of the preferred stock through April 30, 1994.
In connection with sales of rights to service a total of $11.0 billion of
mortgage loans to third parties during 1995, the Company transferred a total of
$27.0 million of common equity securities and $93.0 million in cash and money
market investments to FAE in exchange for 959,049 shares of the Company's
common stock held by FAE, which were retired by the Company.
In connection with the issuance of preferred stock in 1994, the Company
transferred a total of $112.0 million of certain common equity securities to
FAE in exchange for 838,826 shares of the Company's common stock held by FAE,
which were retired by the Company. The Company also repurchased and retired
85,248 shares of its common stock held by FAE for $10.0 million cash in 1994.
26
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
In 1993, the Company redeemed all outstanding shares of its Class B common
stock. Also in 1993, the Company's certificate of incorporation was amended to
authorize 20 million shares of $.01 par value preferred stock. In addition,
that amendment converted the Company's Class A common stock, no par value to
common stock, $.01 par value, and increased the number of authorized shares
from 5 million to 80 million. In February 1994, the Company's certificate of
incorporation was further amended to change the number of authorized shares of
preferred stock and common stock to 12 million and 8 million, respectively.
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company has only limited involvement with derivative financial
instruments and does not use any derivative financial instruments for trading
purposes. The Company's use of derivative financial instruments is primarily
limited to commitments to extend credit, mandatory forward commitments and
interest rate floors.
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and reduce its own exposure to fluctuations in interest rates. These
financial instruments primarily include commitments to extend credit and
mandatory forward commitments. Those instruments involve, to varying degrees,
elements of credit and market risk in excess of the amount recognized on the
consolidated statements of condition. The contract or notional amounts of those
instruments reflect the extent of risk the Company has in the instruments.
The Company's exposure to credit loss in the event of nonperformance by
the counterparty to the financial instrument for commitments to extend credit
("mortgage loan pipeline") is represented by the contractual notional amount of
those instruments. The Company's locked mortgage loan pipeline that is expected
to close totalled $221.9 million and $147.5 million as of December 31, 1995 and
1994, respectively. Fixed rate commitments result in the Company having market
risk as well as credit risk. Variable rate commitments result only in credit
risk. The amount of collateral required upon extension of credit is based on
the Company's credit evaluation of the mortgagor and consists of the
mortgagor's residential property.
The Company obtains mandatory forward commitments of up to 120 days to
sell mortgage-backed securities to hedge the market risk associated with a
substantial portion of the mortgage loan pipeline that is expected to close and
all mortgage loans receivable. As of December 31, 1995 and 1994, the Company
had approximately $561.0 million and $351.2 million of mandatory forward
commitments outstanding, respectively. If secondary market interest rates
decline after the Company obtains a mandatory forward commitment for a loan,
the loan may not close and the Company may incur a loss from the cost of
covering its obligations under such commitment. If secondary market rates
increase before the Company obtains a mandatory forward commitment for a loan
and the loan closes, the Company may incur a loss when the loan is subsequently
sold.
The Company's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis
in order to manage the risk inherent in these off-balance-sheet financial
instruments. In addition, the risk management area seeks to reduce counterparty
risk by committing to sell mortgage loans only to approved dealers, with no
dealer having in excess of 20% of current commitments. The Company currently
transacts business with seven approved dealers.
The Company sells loans either through mortgage-backed securities issued
pursuant to programs of GNMA, FNMA, FHLMC or institutional investors. Most
loans are aggregated in pools of $1.0 million or more, which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
27
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Substantially all GNMA securities are sold without recourse to the Company
for loss of principal in the event of a subsequent default by the mortgage
borrower due to underlying FHA and VA insurance. Prior to December 1992,
substantially all conventional securities were sold with recourse to the
Company, to the extent of insufficient proceeds from private mortgage
insurance, foreclosure and other recoveries. Since December 1992, conventional
loans have been sold without recourse to the Company.
Servicing agreements relating to mortgage-backed securities issued
pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance
funds to make the required payments to investors in the event of a delinquency
by the borrower. The Company expects that it would recover most funds advanced
upon cure of default by the borrower or at foreclosure. However, in connection
with VA partially guaranteed loans and certain conventional loans (which are at
most partially insured by private mortgage insurers), funds advanced may not
cover losses due to potential declines in collateral value. In addition, most
of the Company's servicing agreements for mortgage-backed securities typically
require the payment to investors of a full month's interest on each loan
although the loan may be paid off (by optional prepayment or foreclosure) other
than on a month-end basis. In this instance, the Company is obligated to pay
the investor interest at the note rate from the date of the loan payoff through
the end of that calendar month without reimbursement.
As of December 31, 1995, 1994 and 1993, the Company serviced approximately
$10.7 billion, $11.9 billion and $11.4 billion of GNMA loans, respectively, and
$3.5 billion, $3.7 billion and $4.8 billion of conventional loans with
recourse, respectively.
In order to cover loan losses that may result from these servicing
arrangements and other losses, the Company has provided an allowance for loan
losses of $13.5 million and $13.4 million as of December 31, 1995 and 1994,
respectively, which management believes is adequate to cover unreimbursed
foreclosure advances and principal losses. During 1995, the Company modified
the methodology used to estimate the allowance for loan losses to more
accurately reflect the Company's experience. This change reduced the amount of
the allowance that would have been computed under the prior methodology.
The Company enters into interest rate floor contracts ("floors") to reduce
the sensitivity of its earnings to changes in market interest rates. The
interest rate floor contracts derive their value from the 10 year constant
maturity treasury yield index. The floor yields range from 5.47% to 5.85%. To
the extent that market interest rates increase, the value of the floors
declines. However, the Company is not exposed to losses in excess of its
initial investment in the floors. The interest rate floor contracts are carried
at market value with unrealized gains and losses recorded in other income on
the consolidated statements of income. As of December 31, 1995 the carrying
value of the Company's open interest rate floor contracts totalled $3.5 million
with a total notional principal amount of $500.0 million. The floors have terms
ranging from one to five years.
28
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts for the Company's financial instruments
have been determined by the Company using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current
market exchange.
The following methods and assumptions were used by the Company to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND INVESTMENTS
For cash and short-term investments, the carrying amount equals fair
value.
For investments in REMIC residuals, for which there are no quoted market
prices, fair value is estimated based on discounted cash flow analyses, using
interest only strip interest rates, prepayment speed assumptions, and LIBOR
rates, taking into consideration the characteristics of the related collateral.
For interest rate floor contracts, fair value is estimated based on quoted
market prices for those or similar investments and equals carrying value.
LOANS RECEIVABLE
For mortgage loans receivable and loans held for investment, fair value is
estimated using quoted market prices for securities backed by similar loans,
adjusting for differences in loan characteristics.
POOL LOAN PURCHASES
For pool loan purchases, fair value is estimated based on discounted cash
flow analyses, using the Company's short-term incremental borrowing rate or
quoted market prices for securities backed by similar loans.
CAPITALIZED EXCESS SERVICING
For capitalized excess servicing, fair value is estimated by computing the
anticipated net revenue to be received over the life of the related loans,
discounted using quoted interest only strip interest rates and prepayment speed
assumptions.
COMMON EQUITY SECURITIES
For common equity securities, fair value is based on quoted market prices
and is equal to the carrying value.
LOANS IN FORECLOSURE AND MORTGAGE CLAIMS RECEIVABLE
For these financial instruments, fair value is estimated by discounting
anticipated future cash flows using the Company's short-term incremental
borrowing rate.
DEBT
For commercial paper and credit agreements, the carrying amount
approximates fair value. For debentures and medium-term notes, fair value is
estimated by discounting future cash flows using the Company's incremental
borrowing rates for similar types of borrowing arrangements. For subordinated
debentures, fair value is based on quoted market prices.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Fair value for commitments to sell mortgage loans is based on current
settlement values for those commitments. Fair value for commitments to extend
credit is based on current quoted market prices for securities backed by
similar loans.
29
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 4,146 $ 4,146 $ 1,240 $ 1,240
Investments 26,290 26,290 50,196 50,375
Mortgage loans receivable 381,028 391,484 210,472 211,371
Pool loan purchases 118,995 122,260 163,859 164,859
Loans held for investment 24,335 24,956 19,775 18,631
Capitalized excess servicing 44,722 46,032 72,086 98,307
Common equity securities 529 529 45,140 45,140
Loans in foreclosure and mortgage
claims receivable (net) (a) 29,630 29,018 33,266 32,421
- -------------------------------------------------------------------------------------------------------
Financial Liabilities:
Short-term debt $424,661 $ 428,212 $224,085 $224,085
Long-term debt 291,971 332,220 423,166 416,828
Off-balance-sheet financial instruments:
Mandatory forward commitments N/A 562,379 N/A 349,037
Commitments to extend credit
expected to close (pipeline) N/A 226,572 N/A 147,821
=======================================================================================================
</TABLE>
(a) Excludes $15.8 million and $16.5 million of real estate owned in 1995 and
1994, respectively.
- --------------------------------------------------------------------------------
It was not practicable to estimate the fair value of conventional loans
sold with recourse, which is an off-balance-sheet financial instrument
representing the Company's obligation to repurchase defaulted loans sold, since
a reasonable estimate of fair value could not be made without incurring
excessive costs.
NOTE 11. MORTGAGE SERVICING
The Company's portfolio of mortgages serviced, including loans
subserviced, interim servicing contracts and those under contract to acquire
and excluding loans sold but not transferred, totalled $31.8 billion, $39.6
billion and $38.4 billion as of December 31, 1995, 1994 and 1993, respectively.
The Company's portfolio of mortgages serviced as of December 31, 1995 is
summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Weighted Average
---------------------------------------------------------
Net Remaining
Principal Loan Interest Servicing Contractual
Balance Serviced Balance Rate Fee Rate Life
Loan type (in millions) (in thousands) (in percent) (in percent) (in months)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
Conventional $16,291 $ 73 8.37% .411% 229
FHA 7,606 49 8.67 .433 271
VA 3,814 49 8.43 .432 256
Commercial 81 709 7.51 .155 171
- ----------------------------------------------------------------------------------------
27,792 61 8.46 .419 245
Subservicing 4,039
- ----------------------------------------------------------------------------------------
Total mortgage
servicing portfolio $31,831
========================================================================================
</TABLE>
30
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 11. MORTGAGE SERVICING (CONTINUED)
The servicing fee rates in the table above are shown after deducting any
guarantee fees. Guarantee fees, when applicable, range from six basis points
for governmental loans up to approximately thirty basis points for certain
conventional loans. Certain loans sold to private investors have no guarantee
fees.
The following table summarizes the Company's mortgage servicing
portfolio by interest rate range:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number Principal Average Number Principal Average
of Balance Interest Rate of Balance Interest Rate
Interest Rate Range Loans (in millions) (in percent) Loans (in millions) (in percent)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6.00% and lower 2,674 $ 114 5.51% 6,597 $ 318 5.37%
6.00% - 6.49% 8,208 434 6.19 11,887 800 6.21
6.50% - 6.99% 25,192 2,077 6.69 37,415 3,339 6.71
7.00% - 7.49% 64,052 4,573 7.16 89,649 7,316 7.16
7.50% - 7.99% 84,899 6,745 7.63 93,328 7,748 7.61
8.00% - 8.49% 60,843 4,315 8.10 57,323 4,220 8.09
8.50% - 8.99% 80,936 4,217 8.60 78,998 4,465 8.60
9.00% - 9.49% 38,939 2,234 9.08 36,115 2,168 9.08
9.50% - 9.99% 57,131 3,185 9.60 59,174 3,383 9.60
10.00% and above 71,177 3,937 10.55 72,942 4,160 10.52
- ------------------------------------------------------------------------------------------------------------------
Total 494,051 $31,831 8.33% 543,428 $37,917 8.14%
==================================================================================================================
</TABLE>
The following table summarizes the Company's mortgage servicing
portfolio by location of property:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Principal of Principal
Number Principal Balance of Number Principal Balance of
of Balance Servicing of Balance Servicing
State Loans (in millions) Portfolio Loans (in millions) Portfolio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 73,865 $ 6,668 20.9% 79,621 $ 7,195 19.0%
New York 45,830 2,803 8.8 35,214 2,611 6.9
Washington 30,064 2,386 7.5 42,584 3,502 9.2
Texas 28,841 1,705 5.4 26,411 1,863 4.9
Florida 28,123 1,502 4.7 29,955 1,842 4.9
Michigan 30,235 1,308 4.1 33,174 1,865 4.9
Illinois 18,486 1,291 4.1 20,984 1,580 4.2
New Jersey 15,201 1,056 3.3 18,075 1,331 3.5
Arizona 15,751 949 3.0 17,570 1,104 2.9
Massachusetts 12,822 875 2.7 14,416 1,005 2.7
Other* 194,833 11,288 35.5 225,424 14,019 37.0
- -------------------------------------------------------------------------------------------------------------------
Total 494,051 $31,831 100.0% 543,428 $37,917 100.0%
===================================================================================================================
</TABLE>
*No other state constitutes more than 2.7% of the Company's servicing portfolio
as of December 31, 1995.
The above tables include loans subserviced for others having a principal
balance of $4,039 million and $4,294 million as of December 31, 1995 and 1994,
respectively. The above tables exclude $1,651 million outstanding principal
balance of interim servicing as of December 31, 1994.
31
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 11. MORTGAGE SERVICING (continued)
Escrow funds of approximately $236.0 million, $277.9 million and $281.7
million as of December 31, 1995, 1994 and 1993, respectively, relating to
mortgages serviced and subserviced, are held in non-interest bearing accounts
at non-affiliated banks and are not included in the consolidated financial
statements.
The Company has in force an errors and omissions policy in the amount of
$20 million. Primary fidelity coverage up to a limit of $35 million is provided
under a Fund American master policy, for which the Company pays a portion of
the premium.
NOTE 12. RESTRUCTURING CHARGES
As a result of a contracting mortgage loan origination market, the Company
implemented a restructuring plan in 1994 to bring its mortgage loan production
network in line with anticipated levels of mortgage loan production. As a
result, the Company recorded a pretax restructuring charge totalling $5.2
million in 1994, which included $2.7 million for future lease expenses related
to closed facilities, $1.2 million in asset writedowns and $1.3 million for
employee termination and other costs. As of December 31, 1995, $.9 million
remained accrued on the Company's consolidated statement of condition relating
to future lease expenses on closed facilities. The restructuring actions
resulted in improved efficiency of the mortgage loan production operations and
slightly lower operating costs during 1995.
NOTE 13. LEASE COMMITMENTS
The Company has entered into a number of noncancelable operating lease
agreements with respect to premises and equipment. The minimum annual rental
commitments under these leases as of December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(in thousands) 1996 1997 1998 1999 2000 Total
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$3,814 $2,285 $1,218 $497 $164 $7,978
========================================================================
</TABLE>
Leases for branches which were subject to the Company's restructuring plan
implemented in 1994 are included in the table above. Future lease payments of
$.9 million were included in the Company's restructuring reserve recorded in
1994, and therefore do not represent future operating expenses.
Total rental expense for the years ended December 31, 1995, 1994 and 1993
was $4.6 million, $6.9 million and $5.2 million, respectively. Some leases
contain escalation clauses that correspond with increased real estate taxes,
other operating expenses, and/or renewal options that call for increased rents
when the leases are renewed.
NOTE 14. OTHER OPERATING EXPENSES
The following table summarizes other operating expenses:
<TABLE>
- ------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone $ 4,015 $ 5,572 $ 5,663
Amortization of goodwill 2,090 2,090 2,090
Postage 1,985 2,325 2,841
Bank charges 1,948 2,901 2,795
Travel and entertainment 1,808 2,636 2,662
Office supplies and printing 1,768 2,471 2,906
Professional services 1,649 3,045 3,661
Other 17,511 23,009 24,779
- ------------------------------------------------------------------------------------
Total other operating expenses $32,774 $44,049 $47,397
====================================================================================
</TABLE>
32
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 15. INCOME TAXES
The Company files a consolidated federal income tax return with Fund
American. Federal income tax expense is provided substantially on a separate
return basis except for the impact of a $1.9 million credit to the deferred
income tax asset in 1995, a $2.0 million benefit to the deferred income tax
asset in 1994 and a $12.2 million credit to the deferred income tax liability
in 1993, relating to unrealized losses and gains on the Company's portfolio of
common equity securities. As of December 31, 1995 and 1994, the Company had
recorded $.3 million and $2.2 million, respectively, of deferred tax assets
relating to accumulated unrealized losses on the portfolio of common equity
securities. Pursuant to terms of a tax allocation agreement between the Company
and Fund American, Fund American has agreed to compensate the Company for the
use of these capital losses if such losses, when realized, can be utilized in
Fund American's consolidated tax return.
The following table summarizes income taxes due from or (to) Fund
American:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net current taxes $ (6,766) $ 4,384
Net deferred taxes 10,533 16,474
==================================================================================================
Total income tax expense is as follows:
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $11,847 $ 14,483 $15,060
State and local 248 266 1,645
Deferred expense (benefit) 4,037 (10,275) 5,351
- --------------------------------------------------------------------------------------------------
Total income tax expense $16,132 $ 4,474 $22,056
==================================================================================================
</TABLE>
The current federal income tax expense for the year ended December 31,
1995 shown above excludes a $.5 million benefit relating to the extraordinary
loss on the repurchase and retirement of debt which has been reported as a net
amount on the consolidated statement of income.
Deferred tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993 represent the net change in the deferred tax asset or liability during
the year. Deferred income taxes arise from temporary differences between the
tax bases of assets and liabilities and their reported amounts on the
consolidated financial statements. The net deferred tax expense (benefit) for
the years ended December 31, 1995, 1994 and 1993, shown above, exclude a $1.9
million deferred tax expense, a $2.0 million deferred tax benefit and a $12.2
million deferred tax expense, respectively, associated with unrealized gains
and losses on the common equity securities portfolio which were charged
directly to stockholders' equity. The deferred tax benefit for the year ended
December 31, 1994 shown above also excludes a $23.9 million benefit relating to
the cumulative effect of the change in accounting for purchased mortgage
servicing rights which has been reported as a net amount in the consolidated
statement of income.
33
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 15. INCOME TAXES (continued)
The following table summarizes the types of temporary differences giving
rise to the net deferred tax assets and net deferred tax liabilities. There
were no valuation allowances recorded relating to the net deferred tax assets
as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchase accounting adjustments $ - $10,208 $ - $11,220
Accumulated unrealized losses
on common equity securities 294 - 2,188 -
Capitalized servicing 13,667 - 18,694 -
Allowance for loan losses 4,774 - 4,721 -
Depreciation - 2,352 - 2,182
Deferred bi-weekly income 1,353 - 1,332 -
Accrued postretirement benefits 1,159 - 1,018 -
Other, net 5,752 3,906 5,492 3,569
- ------------------------------------------------------------------------------------------------------------------------
Total $26,999 $16,466 $33,445 $16,971
========================================================================================================================
</TABLE>
A reconciliation of taxes calculated using the federal statutory rate of
35% to income tax expense follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at federal statutory rate $ 15,149 $1,847 $21,762
Amortization of purchase
accounting adjustments 732 732 732
Dividends received deduction (35) (263) (695)
State taxes 161 173 1,069
Other, net 125 1,985 (812)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense $ 16,132 $4,474 $22,056
==========================================================================================================
</TABLE>
NOTE 16. PENSION PLAN
The Company has a defined benefit pension plan covering most of its
employees. Benefits under the plan are based on years of service and the
employees' highest average compensation over five consecutive years in their
last ten years of employment. Funding of retirement costs complies with the
minimum funding requirements specified by the Employee Retirement Income
Security Act. Cash contributions received by the plan for the years ended
December 31, 1995, 1994 and 1993 totalled $1.7 million, $1.1 million, and $1.9
million, respectively.
34
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 16. PENSION PLAN (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized on the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits
of $15,085 and $10,956 in 1995 and 1994, respectively $ 17,232 $ 12,611
Effect of future projected salary increases 6,738 5,058
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 23,970 17,669
Plan assets at fair value, primarily long-term bonds (18,117) (13,066)
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 5,853 4,603
Unrecognized net loss (5,061) (3,761)
Prior service cost not yet recognized in net periodic pension cost 1,001 1,119
Unrecognized net obligation at transition (57) (102)
- ------------------------------------------------------------------------------------------------------------------------
Accrued pension cost included in accounts
payable and other liabilities $ 1,736 $ 1,859
========================================================================================================================
A summary of the components of net periodic pension cost is as follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year $ 1,354 $ 1,633 $ 1,388
Interest cost on projected benefit obligation 1,388 1,308 1,156
Actual return on plan assets (3,801) 985 (1,313)
Net amortization and deferral 2,613 (1,575) 929
- ------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1,554 $ 2,351 $ 2,160
========================================================================================================================
Assumptions used in the determination of the projected benefit obligation were:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 8.0% 7.0%
Rate of increase in compensation levels 6.0% 6.0% 6.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
========================================================================================================================
</TABLE>
NOTE 17. POSTRETIREMENT BENEFITS
The Company has an unfunded postretirement benefit plan which provides for
postretirement health care and life insurance benefits. Postretirement life
insurance benefits are provided to substantially all employees. Postretirement
health care benefits are provided to substantially all employees hired prior to
January 1, 1991. The Company provides for term life insurance coverage based on
the employees' annual earnings and length of service. Postretirement health
care benefits are contributory, whereby the Company provides for 87.5% of
medical costs to retirees who retired prior to January 1, 1993. Effective
January 1, 1993, the plan was amended to provide for a portion of monthly
retiree medical costs based on years of service to retirees who retire on or
after January 1, 1993.
35
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 17. POSTRETIREMENT BENEFITS (CONTINUED)
A summary of the components of net periodic postretirement benefit cost
is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 86 $105 $ 92
Interest cost 250 240 253
Net amortization and deferral - 7 14
- ----------------------------------------------------------------------
Net periodic postretirement benefit cost $336 $352 $359
======================================================================
</TABLE>
The following table sets forth the plan's funded status reconciled to the
amount recognized on the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31, (in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired participants $2,141 $2,148
Fully eligible active participants 474 344
Other active participants 1,043 776
- -----------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 3,658 3,268
Plan assets at fair value - -
- -----------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation in excess of plan assets 3,658 3,268
Unrecognized net loss (338) (51)
- -----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in accounts payable
and other liabilities $3,320 $3,217
===============================================================================================
</TABLE>
A 10.13% annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1996, gradually decreasing to 5.0% by the year
2007 and remaining at that level thereafter. Increasing the assumed health care
cost trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1995 by 4.66%
and increase the aggregate of the service cost and interest cost components of
net periodic postretirement benefit cost for 1995 by 3.59%. A discount rate of
7.0% was used to determine the accumulated postretirement benefit obligation as
of December 31, 1995.
NOTE 18. STOCK PLANS
In 1986 the Company established an Employee Stock Ownership Plan ("ESOP")
to enable employees to have an equity interest in the Company. As discussed in
Note 8, the Company redeemed all the shares of Class B common stock held by the
ESOP in November 1993 for $4.6 million in cash. Management subsequently used
that cash to invest in Fund American common stock. The assets currently held by
the ESOP consist substantially of Fund American common stock. Effective in the
fourth quarter of 1993, the ESOP was amended to allow employees who terminate
their employment with the Company, and who are vested in the ESOP, to receive
their distribution in cash or shares of Fund American common stock.
Contributions to the ESOP are determined at the discretion of the Board of
Directors.
In connection with the exchange of Class B common stock (Note 8), the
Company established a Stock Appreciation Rights ("SAR") plan under which
certain officers of the Company received stock appreciation rights in exchange
for their shares of Class B common stock. The SARs may be exercised any time at
the option of the holders thereof. The value of each SAR is equal to the
difference between $86.625 and the closing price of Fund American's common
stock on the date preceding the exercise of the SAR multiplied by a factor of
1.223.
36
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
NOTE 18. STOCK PLANS (CONTINUED)
The Company has a long-term incentive plan which provides for the granting
of stock-based and cash incentive awards to key senior management employees of
the Company. Awards under the plan are payable upon the achievement of
specified financial goals covering four overlapping three-year periods
beginning January 1, 1994, 1995, 1996 and 1997.
NOTE 19. CONTINGENCIES
Various claims have been made against the Company in the ordinary course
of business. Management believes that any liabilities which could result would
not materially affect the Company's financial position or results of
operations.
NOTE 20. RELATED-PARTY TRANSACTIONS
As discussed in Notes 3 and 8, the Company had various stock transactions
with FAE. The Company also has a tax allocation agreement with Fund American as
discussed in Note 15.
The Company believes that all of the above transactions were on terms that
were reasonable and competitive. Additional transactions of this nature may be
expected to take place in the ordinary course of business in the future.
NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of reporting cash flows, cash includes cash on hand and
amounts on deposit at banks excluding custodial bank accounts.
The following table provides additional cash and noncash information not
presented elsewhere on the consolidated financial statements:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $48,975 $ 42,951 $ 57,607
- -----------------------------------------------------------------------------------------------------
Income taxes paid $ 345 $ 9,328 $ 18,240
- -----------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Exchange of common equity securities for
shares of common stock from parent (Note 3) $27,020 $112,000 $ -
Exchange of 2,239,061 shares of 8.42% cumulative Series A
preferred stock for 9.375% subordinated debentures (Note 8) 55,976 - -
Exchange of common equity securities with affiliates - - 192,006
Acquisition of servicing rights 7,026 24,934 45,279
Redemption of Class B common stock (Note 8) - - 12,539
=====================================================================================================
</TABLE>
37
<PAGE> 36
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
Selected quarterly financial data for 1995 and 1994 is shown in the
following table. The quarterly financial data includes, in the opinion of
management, all necessary recurring adjustments for a fair presentation of the
results of operations for the interim periods. In the 1995 third quarter, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," as of January 1,
1995. Accordingly, the following table reconciles the reported 1995 first and
second quarter amounts to the amounts that would have been reported under SFAS
No. 122.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(in thousands, except for per share amounts) March June September December
Quarters Ended 31 30 30 31
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Total revenue, as reported $ 57,269 $ 28,537 $34,580 $31,258
SFAS No. 122 adjustment 4,409 (7,458) - -
- -----------------------------------------------------------------------------------------------
Total revenue, as adjusted 61,678 21,079 34,580 31,258
- -----------------------------------------------------------------------------------------------
Income before extraordinary loss, as reported 19,196 990 4,760 4,204
SFAS No. 122 adjustment 2,858 (4,858) - -
- -----------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss, as adjusted 22,054 (3,868) 4,760 4,204
- -----------------------------------------------------------------------------------------------
Extraordinary loss (675) (227) - -
Net income, as reported 18,521 763 4,760 4,204
SFAS No. 122 adjustment 2,858 (4,858) - -
- -----------------------------------------------------------------------------------------------
Net income (loss), as adjusted $ 21,379 $(4,095) $ 4,760 $ 4,204
- -----------------------------------------------------------------------------------------------
Net income (loss) per share before extraordinary
loss, as reported $ 5.33 $ (.45) $ 1.13 $ 1.24
SFAS No. 122 adjustment per share .89 (1.97) - -
- -----------------------------------------------------------------------------------------------
Net income (loss) per share before extraordinary
loss, as adjusted 6.22 (2.42) 1.13 1.24
- -----------------------------------------------------------------------------------------------
Extraordinary loss per share (.21) (.09) - -
Net income (loss) per share, as reported 5.12 (.54) 1.13 1.24
SFAS No. 122 adjustment per share .89 (1.97) - -
- -----------------------------------------------------------------------------------------------
Net income (loss) per share, as adjusted $ 6.01 $ (2.51) $ 1.13 $ 1.24
===============================================================================================
1994
Total revenue $ 47,150 $39,156 $28,589 $27,598
Income (loss) before cumulative effect
of accounting change $ 9,074 $ 3,359 $(4,016) $(7,613)
Cumulative effect of accounting change (44,296) - - -
- -----------------------------------------------------------------------------------------------
Net (loss) income $(35,222) $ 3,359 $(4,016) $(7,613)
Net (loss) income per share before
cumulative effect of accounting change $ 2.12 $ .37 $ (1.86) $ (2.95)
Cumulative effect of accounting change
per share (10.73) - - -
- -----------------------------------------------------------------------------------------------
Net (loss) income per share $ (8.61) $ .37 $ (1.86) $ (2.95)
===============================================================================================
</TABLE>
38
<PAGE> 1
EXHIBIT 23
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Source One Mortgage Services Corporation of our report dated
January 26, 1996, included in the 1995 Annual Report to Shareholder of Source
One Mortgage Services Corporation.
We consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 33-47025 and Form S-4 No. 33-62765) of Source One
Mortgage Services Corporation and in the related Prospectuses of our report
dated January 26, 1996, with respect to the consolidated financial statements
of Source One Mortgage Services Corporation incorporated by reference in this
Annual Report (Form 10-K) for the year ended December 31, 1995.
Ernst & Young LLP
Detroit, Michigan
March 25, 1996
<PAGE> 1
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that James A. Conrad does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and Robert L. Densmore, and each of them, the true and lawful attorney-in-fact
of the undersigned, with full power of substitution and revocation, for and in
the name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ James A. Conrad
-----------------------------------
James A. Conrad
<PAGE> 2
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Robert R. Densmore does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Robert R. Densmore
-----------------------------------
Robert R. Densmore
<PAGE> 3
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Robert W. Richards does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert R. Densmore
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Robert W. Richards
-----------------------------------
Robert W. Richards
<PAGE> 4
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Gordon S. Macklin does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Gordon S. Macklin
-----------------------------------
Gordon S. Macklin
<PAGE> 5
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Michael C. Allemang does hereby make,
constitute and appoint Mark A. Janssen, Robert R. Densmore, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Michael C. Allemang
-----------------------------------
Michael C. Allemang
<PAGE> 6
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Terry Baxter does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Terry Baxter
-----------------------------------
Terry Baxter
<PAGE> 7
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Robert P. Keller does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Robert P. Keller
-----------------------------------
Robert P. Keller
<PAGE> 8
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Allan L. Waters does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Allan L. Waters
-----------------------------------
Allan L. Waters
<PAGE> 9
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Mark A. Janssen does hereby make,
constitute and appoint Michael C. Allemang, Robert W. Richards and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Mark A. Janssen
-----------------------------------
Mark A. Janssen
<PAGE> 10
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Roger K. Taylor does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards
and James A. Conrad, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1995, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of the first day of March, 1996.
/s/ Roger K. Taylor
-----------------------------------
Roger K. Taylor
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,146
<SECURITIES> 529
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 31,014
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,135,029
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 22
<OTHER-SE> 322,204
<TOTAL-LIABILITY-AND-EQUITY> 1,135,029
<SALES> 0
<TOTAL-REVENUES> 148,595
<CGS> 0
<TOTAL-COSTS> 105,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,956
<INTEREST-EXPENSE> 27,348
<INCOME-PRETAX> 43,282
<INCOME-TAX> 16,132
<INCOME-CONTINUING> 27,150
<DISCONTINUED> 0
<EXTRAORDINARY> (902)
<CHANGES> 0
<NET-INCOME> 26,248
<EPS-PRIMARY> 7.20
<EPS-DILUTED> 0
</TABLE>
