<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-12898
(Exact name of registrant as specified in its charter)
[SOURCE ONE LOGO]
SOURCE ONE MORTGAGE SERVICES CORPORATION
27555 Farmington Road, Farmington Hills, Michigan 48334-3357
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (248) 488-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X___ No _____.
As of November 14, 1997, the number of shares of the Registrant's Common Stock
outstanding was 3,211,881.
<PAGE> 2
FORM 10-Q
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Source One Mortgage Services Corporation and Subsidiaries
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
September 30, 1997 (Unaudited) and December 31, 1996 2
Consolidated Statements of Income (Unaudited),
Nine Months and Three Months Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements (Unaudited) 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7-17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
1
<PAGE> 3
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
=======================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share and per share amounts)
=====================================================================================================
September 30, December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash $ 2,019 $ 923
Investments 79,430 46,555
Investment in unconsolidated affiliate (net) 180,740 --
Mortgage loans receivable 484,033 314,937
Pool loan purchases 151,114 131,539
Loans held for investment 13,265 23,351
Capitalized servicing (net) 167,067 410,939
Receivable from sale of servicing 33,011 --
Common equity securities (net) -- 2,312
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $12,800 in 1997
and $15,400 in 1996) 36,773 51,501
Premises and equipment 23,393 28,054
Other assets 56,288 120,943
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,227,133 $1,131,054
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior debt $ 606,582 $ 643,262
Subordinated debt 54,998 54,535
Accounts payable and other liabilities 112,636 118,500
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 774,216 816,297
=====================================================================================================
Stockholders' Equity:
Preferred stock, $.01 par value, 12,000,000 shares authorized,
1,760,939 shares of 8.42% cumulative, Series A (aggregate
liquidation preference of $25 per share) issued and outstanding 18 18
Common stock, $.01 par value, 8,000,000 shares authorized,
3,211,881 and 2,247,000 shares issued and outstanding as of
September 30, 1997 and December 31, 1996, respectively 32 22
Paid-in capital 462,480 346,088
Unrealized investment gain in unconsolidated affiliate, after tax 35,529 --
Retained deficit (45,142) (31,371)
=====================================================================================================
TOTAL STOCKHOLDERS' EQUITY 452,917 314,757
=====================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,227,133 $1,131,054
=====================================================================================================
</TABLE>
2
See accompanying notes to consolidated financial statements.
<PAGE> 4
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
==============================================================================
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)
(Unaudited)
==============================================================================
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Mortgage servicing revenue $ 69,380 $101,105 $ 20,741 $ 33,009
Amortization of capitalized servicing (43,524) (26,076) (19,301) (16,046)
Net gain (loss) on financial instruments 4,286 (5,127) 6,026 (225)
- ----------------------------------------------------------------------------------------------------------------
Net servicing revenue 30,142 69,902 7,466 16,738
- ----------------------------------------------------------------------------------------------------------------
Interest income 32,020 32,104 12,032 9,715
Interest expense (25,067) (28,271) (8,791) (8,162)
- ----------------------------------------------------------------------------------------------------------------
Net interest revenue 6,953 3,833 3,241 1,553
- ----------------------------------------------------------------------------------------------------------------
Net realized investment gain (loss) on exchange and
sale of securities to affiliates 326 (855) -- --
Net realized investment loss (706) (450) (300) (300)
Equity in earnings from unconsolidated affiliate 6,312 -- 3,071 --
Net gain on sale of mortgages 15,740 32,217 6,480 7,748
(Loss) gain on sale of servicing (4,296) 10,080 -- 10,080
Other 13,771 13,578 4,774 4,040
- ----------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 68,242 128,305 24,732 39,859
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 40,328 44,585 13,534 12,870
Office occupancy and equipment 9,351 10,219 2,760 3,303
Provision for loan losses 6,129 7,323 2,060 2,379
Restructuring charges 1,728 -- -- --
Other operating expenses 17,837 22,937 4,937 8,250
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 75,373 85,064 23,291 26,802
- ----------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and
extraordinary loss (7,131) 43,241 1,441 13,057
Income tax (benefit) expense (2,115) 15,767 353 4,799
- ----------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary loss (5,016) 27,474 1,088 8,258
Extraordinary loss on early retirement of debt
(net of $3,217 income tax benefit) (5,975) -- -- --
- ----------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $(10,991) $ 27,474 $ 1,088 $ 8,258
Less dividends on preferred stock 2,780 2,780 927 927
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock $(13,771) $ 24,694 $ 161 $ 7,331
- ----------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME PER COMMON SHARE:
Before extraordinary loss $ (2.70) $ 10.99 $ .05 $ 3.26
Extraordinary loss (2.06) -- -- --
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income per common share $ (4.76) $ 10.99 $ .05 $ 3.26
================================================================================================================
</TABLE>
3
See accompanying notes to consolidated financial statements.
<PAGE> 5
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
==============================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
================================================================================================================
Nine months ended September 30, 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (10,991) $ 27,474
Noncash items included in the determination of net (loss) income:
Amortization of capitalized servicing 43,524 26,076
Net unrealized (gain) loss on financial instruments (4,697) 4,955
Provision for loan losses 6,129 7,323
Depreciation and amortization 4,588 5,326
Write-down of loans held for investment 3,000 --
Net realized loss on investments 380 1,305
Amortization of goodwill -- 1,568
Loss (gain) on sale of servicing 4,296 (10,080)
Amortization of deferred gain on sale of servicing (1,936) (2,869)
Undistributed earnings from unconsolidated affiliate (6,312) --
Extraordinary loss on early retirement of debt (net) 5,975 --
Net (increase) decrease in mortgage loans receivable (169,096) 107,573
Net increase (decrease) in accounts payable and other liabilities 25,622 (9,509)
Net decrease in other assets 47,416 10,452
Net change in current and deferred income taxes receivable and payable (8,400) 1,099
- ----------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (60,502) 170,693
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on and sales of pool loan purchases, mortgage
claims receivable and real estate acquired 240,351 131,585
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (251,327) (154,377)
Additions to capitalized mortgage servicing rights (111,140) (62,292)
Net proceeds from sale of servicing 241,514 11,706
Additions to long-term investments (53,924) (6,317)
Distributions received on long-term investments 852 313
Net decrease (increase) in short-term investments 24,756 (10,354)
Proceeds from sales of common equity securities to affiliates -- 514
Net disposition (acquisition) of premises and equipment 1,553 (1,009)
Net decrease in loans held for investment 7,086 1,418
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 99,721 (88,813)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 5,740,707 3,975,380
Repayments on commercial paper (6,043,443) (4,019,134)
Net increase (decrease) in credit agreement borrowings 384,590 (7,498)
Retirement of debt (129,872) (29,700)
Issuance of common stock 12,675 --
Dividends paid (2,780) (2,780)
Other -- (865)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (38,123) (84,597)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,096 (2,717)
Cash at beginning of period 923 4,146
- ----------------------------------------------------------------------------------------------------------------
Cash at end of period $ 2,019 $ 1,429
================================================================================================================
</TABLE>
4
See accompanying notes to consolidated financial statements.
<PAGE> 6
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Source One
Mortgage Services Corporation (together with its subsidiaries, the "Company")
have been prepared in conformity with generally accepted accounting principles
for interim financial information and with the instructions for Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. The operating results for the nine month period ended September
30, 1997 are not necessarily indicative of the results to be expected for the
year ending December 31, 1997.
For further information, refer to the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ending December 31, 1996 filed with the Securities and Exchange Commission
on March 28, 1997.
Certain reclassifications have been made to the financial statements to
achieve consistent presentation of the 1996 and 1997 results.
STOCKHOLDERS' EQUITY
In January 1997, the Company transferred its remaining common equity
securities with a market value of $2.6 million to its direct parent, in
exchange for 21,239 shares of the Company's common stock held by the Company's
direct parent, which were retired by the Company. The Company realized a
pretax gain of $.3 million from the transfer in the first quarter of 1997.
In March 1997, the Company issued 105,000 shares of its common stock to
its ultimate parent, for cash proceeds of $12.7 million. In addition, the
Company issued 230,293 shares of its common stock to its direct parent in
exchange for 1.0 million shares of the common stock of Financial Security
Assurance Holdings Ltd. ("FSA") valued at $27.8 million. The Company issued an
additional 650,827 shares of its common stock to its direct parent effective in
the second quarter of 1997 in exchange for 2.5 million shares of FSA common
stock, 2.0 million shares of FSA convertible redeemable preferred stock and
options to acquire 2.6 million shares of FSA common stock valued at $78.5
million, net of associated tax liabilities and other adjustments. FSA is a
leading Aaa/AAA writer of financial guaranty insurance whose common stock is
publicly traded on the New York Stock Exchange. The Company uses the equity
method to account for its investment in FSA common stock and applies the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115 to
account for its investments in FSA convertible redeemable preferred stock and
options to acquire FSA common stock. The investments in FSA convertible
redeemable preferred stock and options to acquire FSA common stock are reported
at fair value as of the balance sheet date, with related unrealized investment
gains and losses excluded from earnings and reported as an after tax amount in
a separate component of stockholders' equity. Refer to Liquidity and Capital
Resources for further discussion.
RECENTLY ADOPTED ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" which supersedes SFAS No. 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 125 eliminates the distinction between
"normal" servicing rights and excess servicing receivables and changes the
Company's method of measuring the value of its capitalized excess servicing
asset. SFAS No. 125 is effective for transfers and servicing of financial
assets beginning in fiscal year 1997. The effective date for certain
provisions of SFAS No. 125 has been deferred to fiscal year 1998.
The Company adopted the provisions of SFAS No. 125 as of January 1, 1997.
SFAS No. 125 prohibits retroactive application, therefore, the reported results
for the 1996 period are in accordance with prior
5
<PAGE> 7
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
accounting standards and are not directly comparable to the 1997 results
reported under SFAS No. 125. The adoption of SFAS No. 125 as it relates to the
valuation of capitalized servicing did not have a material impact on the
Company's financial results in the first nine months of 1997.
NET INCOME PER SHARE
Net income per share amounts were computed based on 2,893,833 and
3,211,881 weighted average total number of common shares outstanding for the
nine month and three month periods ended September 30, 1997. Net income per
share amounts were computed based on 2,247,000 weighted average total number of
common shares outstanding for both the nine month and three month periods ended
September 30, 1996.
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 in the consolidated financial statements:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine months ended September 30, (in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 30,488 $ 36,434
- --------------------------------------------------------------------------------
Income taxes paid $ 5,980 $ 14,664
- --------------------------------------------------------------------------------
Noncash investing and financing activities:
Exchange of common equity securities for $ $
shares of common stock from parent 2,638 --
Receivable from sale of servicing rights 33,011 --
Capital contribution from parent in exchange for
investment in unconsolidated affiliate 106,365 --
================================================================================
</TABLE>
6
<PAGE> 8
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
SUMMARY - Source One Mortgage Services Corporation reported a net loss of
$11.0 million for the nine months ended September 30, 1997 compared to net
income of $27.5 million for the nine months ended September 30, 1996. The 1997
net loss includes a $9.2 million pretax extraordinary loss on the early
retirement of the Company's medium-term debt, a $4.3 million pretax loss on the
sale of servicing to a third party, a $3.0 million pretax write-down of loans
held for investment, $1.7 million of pretax restructuring charges and a $8.2
million pretax charge to the valuation allowances for impairment of the
Company's mortgage servicing rights asset partially offset by a $4.3 million
net gain on financial instruments. The 1996 net income amount includes a $10.1
million pretax gain on the sale of servicing to a third party, a $27.5 million
pretax recovery of valuation allowances related to the Company's mortgage
servicing rights asset partially offset by a $5.1 million net loss on financial
instruments.
As part of the Company's corporate strategy to minimize exposure to
interest rate risk inherent in its servicing asset, the Company took actions to
reduce the size of its owned servicing portfolio and expand its subservicing
business in the first quarter of 1997. In February 1997, the Company sold
approximately $17 billion of its nonrecourse mortgage servicing portfolio to a
third party for estimated proceeds of $271.5 million. The following table
illustrates the change in the Company's mortgage servicing portfolio mix as a
result of the sale:
<TABLE>
<CAPTION>
=================================================================================================
September 30, December 31,
(in millions) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage servicing portfolio owned $10,428 $26,410
Mortgage servicing portfolio subserviced for others 18,216 2,791
- -------------------------------------------------------------------------------------------------
Total mortgage servicing portfolio $28,644 $29,201
=================================================================================================
</TABLE>
The Company recorded a $4.3 million pretax loss on the sale in the first
nine months of 1997. The Company will continue to service these loans pursuant
to a subservicing agreement at least until March 1998, June 1998 and August
1998 for Federal Home Loan Mortgage Corporation ("FHLMC") loans, Government
National Mortgage Association ("GNMA") loans and Federal National Mortgage
Association ("FNMA") loans, respectively. The subservicing period can be
extended for two years beyond these dates at the option of the purchaser.
Currently, the Company is negotiating the extension of the subservicing period
under the terms of the subservicing agreement which would include a decrease in
the subservicing fee. However, no assurances can be given that the Company
will be successful in extending the subservicing period. During the third
quarter of 1996, the Company sold the rights to service $3.3 billion of its
mortgage servicing portfolio for net proceeds of $55.9 million and realized a
pretax gain of $10.1 million.
The Company's mortgage loan production and mortgage servicing portfolio
activity for the first nine months of 1997 and 1996 are summarized in the
following tables:
<TABLE>
<CAPTION>
==============================================================================
Nine Months Ended
September 30,
MORTGAGE LOAN PRODUCTION: (in millions) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
BY TYPE:
FHA/VA Insured $1,761 $1,634
Conventional 956 1,469
- ------------------------------------------------------------------------------
Total $2,717 $3,103
==============================================================================
</TABLE>
7
<PAGE> 9
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
==============================================================================
Nine Months Ended
September 30,
MORTGAGE LOAN PRODUCTION: (in millions) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
BY SOURCE:
Retail $1,013 $1,471
Wholesale 1,704 1,632
- ------------------------------------------------------------------------------
Total $2,717 $3,103
==============================================================================
</TABLE>
Over the last few years, industry competition for originating
conventional mortgage loans has increased resulting in lower profit margins.
As a result, during 1997 the Company has decided to increase its focus on
originating government loans and alternative "niche" products. Beginning in
the third quarter of 1997, the Company developed programs to originate
subprime mortgage loans and other niche products such as high loan-to-value
("LTV") second mortgages, 203k (FHA home improvement) loans and manufactured
housing loans. The subprime and high LTV loans will be originated and sold
servicing released and the 203k and manufactured housing loans will be
originated with the servicing retained. The Company does not expect these new
products to have a significant effect on the Company's operating results until
1998.
<TABLE>
<CAPTION>
===============================================================================
Nine Months Ended
September 30,
MORTGAGE SERVICING PORTFOLIO (a): (in millions) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $29,201 $31,831
Mortgage loan production 2,717 3,103
Regular payoffs (2,127) (2,417)
Sale of servicing -- (3,302)
Principal amortization, servicing released,
foreclosures and other (1,147) (1,568)
- -------------------------------------------------------------------------------
Ending balance $28,644 $27,647
===============================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,216
million and $3,796 million as of September 30, 1997 and 1996, respectively.
The decrease in 1997 mortgage loan production and payoffs is due to higher
market interest rates and lower refinance activity throughout most of the nine
month period ended September 30, 1997 than in the comparable 1996 period.
<TABLE>
<CAPTION>
================================================================================
September 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
MORTGAGE SERVICING PORTFOLIO: Owned Total (a) Owned Total (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of loans serviced 173,187 462,234 451,802 478,779
Weighted average net servicing fee
(at end of period) .424% (c) .422% (c)
Weighted average interest rate 8.69% 8.41% 8.59% 8.48%
Percent delinquent (b) 8.20% 6.78% 7.44% 7.17%
================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,216
million and $2,791 million as of September 30, 1997 and December 31, 1996,
respectively.
(b) Includes loans in process of foreclosure.
(c) This amount would be calculated as a combination of two different
measurements, the net servicing fee earned on the Company's owned
servicing portfolio and the average subservicing fee earned on its
subservicing portfolio which is not calculated as a percentage of
the outstanding principal balance serviced, and therefore, would not be
meaningful.
8
<PAGE> 10
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The increase in the delinquency rate of the Company's owned servicing
portfolio at September 30, 1997 is primarily the result of the February 1997
servicing sale, after which, the Company retained a majority of its delinquent
loans.
REVENUE - Mortgage servicing revenue decreased to $69.4 million from
$101.1 million for the nine months ended September 30, 1997 and 1996,
respectively. The decrease in mortgage servicing revenue is due primarily to
the February 1997 servicing sale, slightly offset by increased subservicing
revenue generated from the sale and a slightly higher average net servicing fee
earned on the Company's owned portfolio. Amortization of capitalized servicing
increased $17.4 million during the nine month period ended September 30, 1997
from the comparable 1996 period. Amortization includes a $8.2 million charge
to the valuation allowances for impairment of the Company's mortgage servicing
rights asset in 1997 and the recovery of $27.5 million of the valuation
allowances in 1996. Excluding the effects of these items, amortization expense
decreased to $35.3 million from $53.6 million for the nine month periods ended
September 30, 1997 and 1996, respectively. This decrease in amortization
expense is primarily the result of a smaller servicing asset due to the
February 1997 servicing sale. The impairment charge to the valuation
allowances in 1997 is a result of increased market consensus prepayment rates
and a corresponding decrease in the fair value of the Company's mortgage
servicing asset from year end 1996. The recovery of valuation allowances on
the servicing asset in 1996 reflects decreased market consensus prepayment
rates and a corresponding increase in the fair value of the Company's mortgage
servicing rights from year end 1995.
The Company recorded a net gain on its financial instruments of $4.3
million for the nine months ended September 30, 1997 compared to a net loss of
$5.1 million for the same 1996 period. The 1997 net gain includes realized
losses of $.4 million from net cash flows paid and unrealized gains of $4.7
million due to a net increase in the fair value of the financial instruments.
The 1996 net loss includes realized losses of $.2 million from net cash flows
paid and unrealized losses of $4.9 million due to a decrease in the fair value
of the financial instruments.
The Company invests in various financial instruments in order to offset
changes in the value of its capitalized servicing asset and to mitigate the
effect on earnings of higher amortization and impairment of the asset which
results from increased prepayment activity that can occur with decreases in
market interest rates. As interest rates decline, prepayment activity
increases, thereby reducing the value of the mortgage servicing rights, while
the value of the financial instruments used to hedge the servicing rights
increases. Conversely, as interest rates increase, the value of the servicing
rights increases, while the value of the financial instruments used to hedge
the servicing rights decreases. The financial instruments utilized by the
Company to hedge servicing rights include interest rate floor contracts and
principal-only swap transactions.
The interest rate floor contracts derive their value from differences
between the floor rate specified in the contract and market interest rates.
The floor rates range from 5.47% to 6.24%. To the extent that market interest
rates increase, the value of the floor 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 fair value with related realized
and unrealized gains and losses included in net gain or loss on financial
instruments in the consolidated statements of income. As of September 30,
1997, the carrying value of the Company's open interest rate floor contracts
totaled $5.6 million with a total notional principal amount of $1.2 billion.
The floors have remaining terms ranging from approximately one to five years.
The value of the principal-only swaps is determined by changes in the
value of referenced principal-only strips. As of September 30, 1997, the
carrying value of the Company's principal-only swap transactions totaled $8.6
million, with an original notional principal amount of $98.1 million. The
principal-only swap transactions are carried at fair value with related
realized and unrealized gains and losses included in net gain or loss on
financial instruments in the consolidated statements of income. The
principal-only swaps have remaining terms ranging from approximately three to
four years.
9
<PAGE> 11
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Interest income decreased slightly to $32.0 million from $32.1 million for
the nine months ended September 30, 1997 and 1996, respectively. The decrease
in interest income is the result of decreased production and a corresponding
decrease in average mortgage loans receivable inventory. This decrease was
almost entirely offset by interest income earned on the outstanding receivable
balance from the February 1997 servicing sale, an increase in interest income
from pool loan purchases due to a higher average asset balance and
income earned on an investment acquired in the second quarter of 1997.
Interest expense decreased to $25.1 million from $28.3 million for the nine
months ended September 30, 1997 and 1996, respectively. This decrease is due
primarily to the net effect of the retirement of $104.4 million of medium-term
notes and long-term debentures during 1996, the early retirement of $119.6
million of medium-term notes in May 1997, decreased production and cash
proceeds received from the 1997 servicing sale.
The Company recognized $6.3 million of equity in earnings of an
unconsolidated affiliate in the nine months ended September 30, 1997. The
Company acquired its investment in this affiliate in 1997 as a result of a
corporate restructuring plan developed by Fund American Enterprises Holdings,
Inc. ("Fund American"), the Company's ultimate parent, involving several of its
subsidiaries including the Company. As part of the plan, the Company received
capital contributions of 3.5 million shares of the common stock of Financial
Security Assurance Holdings Ltd. ("FSA"). The Company uses the equity method
to account for its investment in the FSA common stock. Refer to Liquidity and
Capital Resources for further discussion.
Net gain on mortgage sales decreased to $15.7 million from $32.2 million
for the nine months ended September 30, 1997 and 1996, respectively. This
decrease is due primarily to decreased capitalized originated mortgage
servicing rights ("OMSR") income as a result of lower mortgage loan production
and sales volumes in the first nine months of 1997 as compared to the same 1996
period. Also contributing to the decrease in capitalized OMSR income is a
change in the Company's mortgage loan production mix which includes a higher
volume of correspondent production, which generates lower OMSR income. The
Company does not expect the trend toward a higher concentration of
correspondent production to continue. The decrease in the 1997 gain also
reflects a $3.0 million pretax charge relating to mortgage loans held for
investment which were identified for sale and marked down from amortized cost
to current market value during the second quarter of 1997. These loans
totaling approximately $12.5 million at September 30, 1997, net of the
write-down, are included in loans held for investment in the consolidated
statement of condition as of September 30, 1997.
EXPENSES - Salaries and employee benefits expense was $40.3 million and
$44.6 million for the nine months ended September 30, 1997 and 1996,
respectively. Generally accepted accounting principles ("GAAP") require
certain loan origination revenues to be netted against direct loan origination
costs. Since salaries and employee benefits expense is the largest component
of loan origination costs, approximately 90% of loan origination revenues are
accounted for as a reduction to salaries and benefits expense as indicated in
the following table:
<TABLE>
<CAPTION>
================================================================================
Nine Months Ended
September 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Unadjusted salaries and employee
benefits expense $ 53,851 $ 59,767
GAAP net origination revenues (13,523) (15,182)
- --------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 40,328 $ 44,585
================================================================================
</TABLE>
10
<PAGE> 12
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A decrease in loan origination revenues, reflecting lower retail mortgage
loan production during the nine month period ended September 30, 1997 as
compared to the same 1996 period, partially offset the decrease in unadjusted
salaries and employee benefits expense. Excluding the effects of loan
origination revenues, salaries and employee benefits expense decreased 10%.
This decrease primarily reflects decreased headcount as a result of the
Company's restructuring plan implemented in the second quarter of 1997 and
lower loan officer commissions associated with the decrease in mortgage loan
production for the nine month period ended September 30, 1997 as compared to
the same 1996 period. The 1997 salaries and employee benefits expense includes
approximately $1.4 million of additional expense related to the early
retirement and replacement of the Company's Chief Executive Officer. The 1996
salaries and employee benefits expense includes approximately $1.2 million of
additional expense related to the early retirement of the Company's Chairman.
The provision for loan losses was $6.1 million and $7.3 million for the
nine months ended September 30, 1997 and 1996, respectively. The decrease in
the provision is due primarily to a decrease in the average loss per loan as
well as lower loss volumes on conventional mortgage loans during the first nine
months of 1997 as compared to the first nine months of 1996. The 1997 provision
includes a $.4 million charge related to the sale of a commercial real estate
owned property in the second quarter of 1997. A valuation allowance for this
property of $2.6 million was included in the December 31, 1996 allowance for
loan losses.
In April 1997, the Company's management approved and implemented a
restructuring plan designed to reduce its operating costs in order to improve
its financial performance. As part of this plan, the Company reduced its work
force, primarily in overhead areas, by approximately 100 employees during the
second quarter of 1997 to bring its overhead costs in line with its production
and servicing operations. As a result, the Company recognized restructuring
charges totaling $1.7 million during the second quarter of 1997. The amount
includes approximately $1.6 million of employee separation costs, including
severance payments, health care coverage and postemployment education benefits
and $.1 million of miscellaneous expenses. As of September 30, 1997, $.1
million of these charges remained accrued on the Company's consolidated
statement of condition.
Other operating expenses were $17.8 million and $22.9 million for the nine
month periods ended September 30, 1997 and 1996, respectively. The decrease is
due primarily to the elimination of amortization expense related to goodwill
and other intangible assets which were written off at year end 1996.
The Company recognized an extraordinary loss of $6.0 million, net of
income tax benefit, on the early retirement of $119.6 million of its
outstanding 8.875% medium-term notes due October 15, 2001 in the second quarter
of 1997.
The Company's income tax provision for the nine months ended September 30,
1997 includes an additional provision for state income taxes due to several
pending state tax audits and the effect of the February 1997 servicing sale.
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1996
SUMMARY - Source One Mortgage Services Corporation reported net income of
$1.1 million for the quarter ended September 30, 1997 compared to $8.3 million
of net income for the quarter ended September 30, 1996. The 1997 net income
includes a $8.3 million pretax charge to the valuation allowances for
impairment of the Company's mortgage servicing rights asset partially offset by
a $6.0 million net gain on financial instruments. The 1996 net income amount
includes a $10.1 million pretax gain on the sale of servicing to a third party.
11
<PAGE> 13
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's mortgage loan production and mortgage servicing portfolio
activity for the three month periods ended September 30, 1997 and 1996 are
summarized in the following tables:
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
September 30,
MORTGAGE LOAN PRODUCTION: (in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
BY TYPE:
FHA/VA Insured $ 873 $ 442
Conventional 376 349
- --------------------------------------------------------------------------------
Total $ 1,249 $ 791
================================================================================
BY SOURCE:
Retail $ 420 $ 371
Wholesale 829 420
- --------------------------------------------------------------------------------
Total $ 1,249 $ 791
================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
September 30,
- --------------------------------------------------------------------------------
MORTGAGE SERVICING PORTFOLIO (a): (in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $28,583 $31,329
Mortgage loan production 1,249 791
Regular payoffs (831) (634)
Sale of servicing -- (3,302)
Principal amortization, servicing released,
foreclosures and other (357) (537)
- --------------------------------------------------------------------------------
Ending balance $28,644 $27,647
================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,216
million and $3,796 million as of September 30, 1997 and 1996, respectively.
The increase in 1997 mortgage loan production and payoffs reflects lower
market interest rates and a corresponding increase in refinance activity in the
third quarter of 1997 as compared to the third quarter of 1996. In addition, a
portion of the increase in mortgage loan production is the result of the
Company's efforts to increase overall production by expanding its correspondent
network.
REVENUE - Mortgage servicing revenue decreased to $20.7 million from $33.0
million for the three months ended September 30, 1997 and 1996, respectively.
The decrease in mortgage servicing revenue is due primarily to the February
1997 servicing sale, partially offset by increased subservicing revenue
generated from the sale and a slightly higher average net servicing fee earned
on the Company's owned portfolio. Amortization of capitalized servicing
increased $3.3 million during the third quarter of 1997 from the third quarter
of 1996. Amortization includes a $8.3 million charge to the valuation
allowances for impairment of the Company's mortgage servicing rights asset in
1997. Excluding the effect of this item, amortization expense decreased to
$11.0 million for the third quarter of 1997 from $16.0 million for the
comparable 1996 period. The decrease in amortization expense is primarily the
result of a smaller servicing asset due to the February 1997 servicing sale.
The impairment charge to the valuation
12
<PAGE> 14
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
allowances in the quarter ended September 30, 1997 reflects increased market
consensus prepayment rates and a corresponding decrease in the fair value of
the Company's mortgage servicing rights from the quarter ended June 30, 1997.
The Company recorded a net gain of $6.0 million on its financial
instruments for the quarter ended September 30, 1997 compared to a net loss of
$.2 million for the quarter ended September 30, 1996. The 1997 net gain
represents unrealized gains due to an increase in the fair value of the
financial instruments. The 1996 net loss represents realized losses due to net
cash flows paid on the financial instruments.
Interest income increased to $12.0 million from $9.7 million for the
quarters ended September 30, 1997 and 1996, respectively. This increase is the
result of increased mortgage loan production and a corresponding increase in
average mortgage loans receivable inventory, interest income earned on the
outstanding receivable balance from the February 1997 servicing sale, an
increase in interest income from pool loan purchases due to a higher average
asset balance and income earned on an investment acquired in the second
quarter of 1997. Interest expense increased to $8.8 million for the third
quarter of 1997 from $8.2 million for the third quarter of 1996. This increase
is due primarily to increased borrowings as a result of higher production
levels in the third quarter of 1997 compared to the same 1996 period, offset by
the retirement of $74.6 million of long-term debentures in the fourth quarter
of 1996, the early retirement of $119.6 million of the Company's medium-term
notes in May 1997 and cash proceeds received from the 1997 servicing sale.
The Company recognized $3.1 million of equity in earnings of an
unconsolidated affiliate in the third quarter of 1997. Refer to Liquidity and
Capital Resources for further discussion.
Net gain on mortgage sales decreased to $6.5 million for the three months
ended September 30, 1997 from $7.7 million for the three months ended September
30, 1996. This decrease is due primarily to decreased capitalized originated
mortgage servicing rights ("OMSR") income resulting from the change in the
Company's mortgage loan production mix which includes a higher volume of
correspondent production, which generates lower OMSR income. The Company does
not expect the trend toward a higher concentration of correspondent production
to continue. In addition, mortgage loan sales volumes for the third quarter of
1997 remained comparable to those in 1996.
The Company sold $3.3 billion of servicing rights to a third party
recognizing a $10.1 million gain on the sale of servicing in the third quarter
of 1996.
EXPENSES - Salaries and employee benefits expense was $13.5 million and
$12.9 million for the three months ended September 30, 1997 and 1996,
respectively. Generally accepted accounting principles ("GAAP") require
certain loan origination revenues to be netted against direct loan origination
costs. Since salaries and employee benefits expense is the largest component
of loan origination costs, approximately 90% of loan origination revenues are
accounted for as a reduction to salaries and benefits expense as indicated in
the following table:
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
September 30,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Unadjusted salaries and employee benefits expense $19,265 $18,827
GAAP net origination revenues (5,731) (5,957)
- --------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $13,534 $12,870
================================================================================
</TABLE>
13
<PAGE> 15
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Excluding the effects of loan origination revenues, salaries and employee
benefits expense increased 2% during the three months ended September 30, 1997
as compared to the three months ended September 30, 1996. This increase is
due primarily to the increase in loan officer commissions associated with the
Company's significant increase in mortgage loan production and approximately
$1.4 million of additional expense related to the early retirement and
replacement of the Company's Chief Executive Officer in the third quarter of
1997. This increase was partially offset by reduced headcount as a result of
the Company's restructuring plan implemented in the second quarter of 1997.
The provision for loan losses was $2.1 million and $2.4 million for the
three months ended September 30, 1997 and 1996, respectively. The decrease in
the provision is due primarily to a decrease in the average loss per loan on
conventional mortgage loans during the third quarter of 1997 as compared to the
third quarter of 1996.
Other operating expenses decreased to $4.9 million from $8.3 million for
the three month period ended September 30, 1997 and 1996, respectively. The
decrease is primarily due to the elimination of amortization expense related to
goodwill and other intangible assets which were written off at year end 1996
as well as decreases in various other operating expenses.
14
<PAGE> 16
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash flow requirements relate to funding mortgage
loan production and investments in mortgage servicing rights. To meet these
funding needs, the Company relies on commercial paper borrowings, short-term
credit facilities, medium and long-term debt, early funding programs and cash
flow from operations. The Company also generates cash from sales of servicing.
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.
Senior and subordinated debt consists of the following:
<TABLE>
<CAPTION>
========================================================================================
September 30, December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates
of 5.92% and 5.69% as of September 30, 1997 and
December 31, 1996, respectively $ 59,444 $362,180
Credit agreements, weighted average interest rates
of 6.22% and 6.19% as of September 30, 1997 and
December 31, 1996, respectively 429,694 45,000
8.875% medium-term notes due October 15, 2001 18,723 138,355
9.0% debentures due June 1, 2012 100,000 100,000
9.375% subordinated debentures due December 31, 2025 55,976 55,976
Less unamortized discount,
premium and issuance costs (net) (2,257) (3,714)
- ----------------------------------------------------------------------------------------
Total senior and subordinated debt $661,580 $697,797
========================================================================================
</TABLE>
The Company must comply with certain financial covenants contained in its
secured revolving credit facility, including restrictions relating to tangible
net worth and leverage. In addition, the Company's secured facility contains
certain covenants which limit its ability to pay dividends or make
distributions of its capital in excess of preferred stock dividend and
subordinated debt interest requirements each year. The Company is currently in
compliance with all such covenants. As of September 30, 1997, there was $425.0
million outstanding under the Company's secured credit facility. As of
December 31, 1996, the Company had no outstanding borrowings under its secured
credit facility.
On July 25, 1997, the Company amended and restated its secured credit
agreement to reflect a reduction in its borrowing requirements resulting from
the cash proceeds received from the February 1997 servicing sale. The
provisions of the amended agreement decrease the Company's borrowing capacity
from $750.0 million to $500.0 million and reduce borrowing costs by lowering the
facility fee. The provisions also allow the Company to use proceeds received
from the servicing sale to pay additional dividends on its common stock of up to
$75.0 million.
In July 1997, the Company's $60.0 million unsecured credit agreement was
not extended. This agreement was designed to give the Company benefit for
escrow funds held in custodial banks. The Company continues to receive this
benefit by replacing borrowings under this facility with borrowings under the
bid loan provision of the Company's secured credit agreement. The Company's
total bank facility borrowing capacity did not decline with the termination of
the unsecured credit agreement, however, because borrowings under this agreement
reduced the Company's ability to borrow up to the $500.0 million maximum under
its secured credit facility. As of December 31, 1996, there was $45.0 million
outstanding under the Company's unsecured credit agreement.
15
<PAGE> 17
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has a dividend policy which may result in the payment of
dividends on the Company's common stock, dependent upon the earnings, cash
position and capital needs of the Company, limitations in the credit
agreements, general business conditions and other factors deemed relevant by
the Company's Board of Directors. The Company did not declare any dividends on
its common stock for the nine months ended September 30, 1997.
In November 1997, the Company's commercial paper rating was downgraded by
Moody's from P-3 to Not Prime. In addition, in April 1997, the Company's
commercial paper rating was downgraded by Standard & Poors from A-2 to A-3. As
a result of the decrease in the ratings in November, the Company is no longer
able to issue commercial paper. The Company has replaced its commercial paper
borrowings with borrowings under its $500.0 million committed bank facility,
although the borrowings under this facility are more costly than commercial
paper borrowings. The Company's management believes its capital resources will
be sufficient to meet the Company's future operating needs as well as to fund
maturing medium and long-term debt.
In April 1997, the Company amended a short-term borrowing agreement
entered into August 1996. The provisions of the amended agreement increased
the Company's facility from $25.0 million to $50.0 million. As of September
30, 1997 there was $50.0 million outstanding under the new agreement. As of
December 31, 1996 there was $15.0 million outstanding under the original
agreement. As a result of the rating downgrade in November, the Company is no
longer able to borrow under this agreement.
In January 1997, the Company transferred its remaining common equity
securities with a market value of $2.6 million to the Company's direct parent,
in exchange for 21,239 shares of the Company's common stock held by the
Company's direct parent, which were retired by the Company.
In February 1997, the Company sold approximately $17 billion of its
nonrecourse mortgage servicing portfolio to a third party for estimated
proceeds of $271.5 million. The Company has used the proceeds of $241.5
million received from the sale through September 30, 1997 to reduce outstanding
short-term debt and to retire $119.6 million of its 8.875% medium-term notes.
The remaining balance of $33.0 million, including accrued interest, is
reflected as a receivable from sale of servicing in the consolidated statement
of condition as of September 30, 1997. The Company is currently evaluating its
options as to how it will utilize the remaining proceeds from the sale. These
options include: (i) purchasing additional mortgage servicing rights from third
parties; (ii) further reducing its outstanding indebtedness; (iii) reducing its
outstanding preferred or common shareholders' equity or (iv) any combination of
the foregoing.
In March 1997, the Board of Directors of Fund American Enterprises
Holdings, Inc. ("Fund American"), the Company's ultimate parent, approved a
corporate restructuring plan involving several of its subsidiaries including
the Company. In accordance with this plan, the Company contracted to receive
capital infusions from its direct parent of approximately $139 million
(approximately $119 million net of associated tax liabilities and other
adjustments) consisting primarily of common stock, convertible redeemable
preferred stock and options to acquire common stock of Financial Security
Assurance Holdings Ltd. ("FSA"). During the first quarter of 1997, the Company
issued 230,293 shares of its common stock to its direct parent in exchange for
1.0 million shares of FSA common stock valued at $27.8 million and issued
105,000 shares of its common stock to Fund American for cash proceeds of $12.7
million. During the second quarter of 1997, the Company recorded the remaining
contribution by its direct parent of $78.5 million of contracted net assets
consisting of 2.5 million shares of FSA common stock, 2.0 million shares of FSA
convertible redeemable preferred stock and options to acquire 2.6 million
shares of FSA common stock in exchange for 650,827 shares of the Company's
common stock. The capital infusions were undertaken to improve the Company's
debt ratings and reduce the Company's borrowing costs.
16
<PAGE> 18
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As part of the corporate restructuring plan approved by Fund American, on
July 31, 1997 (upon receipt of regulatory and lender approvals) Fund American
Enterprises, Inc., the Company's direct parent, was merged with White Mountains
Holdings, Inc., a wholly-owned subsidiary of Fund American. The combined
entity was immediately renamed White Mountains Holdings, Inc.
In May 1997, the Company repurchased $119.6 million of its outstanding
8.875% medium-term notes due October 15, 2001. The Company funded this
repurchase with proceeds from the February 1997 servicing sale. Prior to the
repurchase, the majority of the noteholders amended the indenture governing the
notes to eliminate the provision which required the notes to be ratably secured
with other indebtedness of the Company. As a result of such amendment, the
Company is now able to secure its obligations under its secured credit
agreement without having to include indebtedness relating to the notes which
remain unsecured.
The Company is currently considering further steps to restructure its debt
including (i) the issuance of approximately $50 million of additional
medium-term notes pursuant to an existing shelf registration and (ii) entering
into interest rate swaps whereby the Company's obligation to pay a fixed rate
of interest on a portion of its outstanding medium-term notes and debentures
will be swapped for an obligation to pay a floating rate of interest. The
Company believes that using floating rate debt to finance a larger portion of
its mortgage servicing assets is prudent, since the value of such assets
generally increases as interest rates increase, and declines as interest rates
decrease.
17
<PAGE> 19
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit
No. Description
------- ---------------------
27 Financial Data Schedule
b. Form 8-K: The Company filed seven current Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended September 30,
1997.
(i) July 25, 1997: Reported Report to the Trustee and Report to the
Certificate Holders for the month of July 1997 relating to the Source
One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through
Certificates, Series A.
(ii) July 31, 1997: Reported Distribution Date Statements for July 25,
August 1, August 1, and July 20, 1997 relating to the Source One
Mortgage Services Corporation Agency MBS Multi-Class Pass-Through
Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively.
(iii) August 22, 1997: Reported Distribution Date Statements for August
25, September 1, September 1, and August 20, 1997 relating to the
Source One Mortgage Services Corporation Agency MBS Multi-Class
Pass-Through Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1,
respectively.
(iv) August 25, 1997: Reported Report to the Trustee and Report to the
Certificate Holders for the month of August 1997 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage
Pass-Through Certificates, Series A.
(v) September 19, 1997: Reported early retirement of James A. Conrad,
Chief Executive Officer and Director and naming of his successor,
Frank Mohan to Source One Mortgage Services Corporation.
(vi) September 25, 1997: Reported Distribution Date Statements for
September 25, September 25, October 1, October 1, and September 20,
1997 relating to the Source One Mortgage Services Corporation Agency
MBS Multi-Class Pass-Through Certificates Series 1987-1, 1987-2,
1988-1, 1988-2 and 1990-1, respectively.
(vii) September 25, 1997: Reported Report to the Trustee and Report to
the Certificate Holders for the month of September 1997
relating to the Source One Mortgage Services Corporation 11-1/2%
Mortgage Pass-Through Certificates, Series A.
18
<PAGE> 20
FORM 10-Q
Source One Mortgage Services Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOURCE ONE MORTGAGE SERVICES CORPORATION
----------------------------------------
(Registrant)
DATE: NOVEMBER 14, 1997 /S/ MICHAEL C. ALLEMANG
----------------- ----------------------------------------
Michael C. Allemang
Executive Vice President
(Chief Financial Officer)
19
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT NO. Description
- ----------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,019
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 23,393
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,227,133
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 32
<OTHER-SE> 452,867
<TOTAL-LIABILITY-AND-EQUITY> 1,227,133
<SALES> 0
<TOTAL-REVENUES> 68,242
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 75,373
<LOSS-PROVISION> 6,129
<INTEREST-EXPENSE> 25,067
<INCOME-PRETAX> (7,131)
<INCOME-TAX> (2,115)
<INCOME-CONTINUING> (5,016)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,975)
<CHANGES> 0
<NET-INCOME> (10,991)
<EPS-PRIMARY> (4.76)
<EPS-DILUTED> 0
</TABLE>
