<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
Delaware 38-2011419
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification no.)
27555 Farmington Road, Farmington Hills, Michigan 48334-3357
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (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 August 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>
<S> <C>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
June 30, 1997 (Unaudited) and December 31, 1996................................. 2
Consolidated Statements of Income (Unaudited),
Six Months and Three Months Ended June 30, 1997 and 1996........................ 3
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 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....................................................... 7-16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 17
SIGNATURES...................................................................... 18
</TABLE>
1
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FORM 10-Q
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Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
June 30, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 855 $ 923
Investments 66,588 46,555
Investment in unconsolidated affiliate (net) 143,555 --
Mortgage loans receivable 201,368 314,937
Pool loan purchases 177,381 131,539
Loans held for investment 17,168 23,351
Capitalized servicing (net) 159,603 410,939
Receivable from sale of servicing 45,011 --
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) 37,565 51,501
Premises and equipment 23,906 28,054
Other assets 62,756 120,943
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 935,756 $ 1,131,054
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior debt $ 358,132 $ 643,262
Subordinated debt 54,844 54,535
Accounts payable and other liabilities 92,440 118,500
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 505,416 816,297
- ------------------------------------------------------------------------------------------------------
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
June 30, 1997 and December 31, 1996, respectively 32 22
Paid-in capital 462,480 346,088
Unrealized investment gain in unconsolidated affiliate, after tax 13,113 --
Retained deficit (45,303) (31,371)
- ------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 430,340 314,757
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 935,756 $ 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>
===============================================================================================================
Six Months Ended Three Months Ended
June 30, June 30,
- ---------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Mortgage servicing revenue $ 48,639 $ 68,096 $ 19,018 $33,491
Amortization of capitalized servicing (24,223) (10,030) (15,600) (9,868)
Net (loss) gain on financial instruments (1,740) (4,902) 4,356 (1,959)
- ---------------------------------------------------------------------------------------------------------------
Net servicing revenue 22,676 53,164 7,774 21,664
- ---------------------------------------------------------------------------------------------------------------
Interest income 19,988 22,389 10,736 11,852
Interest expense (16,276) (20,109) (8,217) (9,672)
- ---------------------------------------------------------------------------------------------------------------
Net interest revenue 3,712 2,280 2,519 2,180
- ---------------------------------------------------------------------------------------------------------------
Net realized investment gain (loss) on exchange and
sale of securities to affiliates 326 (855) -- --
Net realized investment loss (406) (150) (300) (150)
Equity in earnings from unconsolidated affiliate 3,241 -- 3,059 --
Net gain on sale of mortgages 9,260 24,469 1,341 11,327
Loss on sale of servicing (4,296) -- (1,101) --
Other 8,997 9,538 4,657 4,741
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 43,510 88,446 17,949 39,762
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Salaries and employee benefits 26,794 31,715 13,026 16,014
Office occupancy and equipment 6,591 6,916 3,398 3,496
Provision for loan losses 4,069 4,944 2,364 2,986
Restructuring charges 1,728 -- 1,728 --
Other operating expenses 12,900 14,687 6,517 7,841
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 52,082 58,262 27,033 30,337
- ---------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and
extraordinary loss (8,572) 30,184 (9,084) 9,425
Income tax (benefit) expense (2,468) 10,968 (2,793) 3,503
- ---------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary loss (6,104) 19,216 (6,291) 5,922
Extraordinary loss on early retirement of debt
(net of $3,217 income tax benefit) (5,975) -- (5,975) --
- ---------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (12,079) $ 19,216 $(12,266) $ 5,922
Less dividends on preferred stock 1,853 1,853 926 926
- ---------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock $ (13,932) $ 17,363 $(13,192) $ 4,996
===============================================================================================================
NET (LOSS) INCOME PER COMMON SHARE:
Before extraordinary loss (2.91) 7.73 (2.25) 2.22
Extraordinary loss (2.19) -- (1.86) --
- ---------------------------------------------------------------------------------------------------------------
Net (loss) income per common share $ (5.10) $ 7.73 $ (4.11) $ 2.22
===============================================================================================================
</TABLE>
3
See accompanying notes to consolidated financial statements.
<PAGE> 5
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
===============================================================================================================
Six months ended June 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (12,079) $ 19,216
Noncash items included in the determination of net (loss) income:
Amortization of capitalized servicing 24,223 10,030
Net unrealized loss on financial instruments 1,312 4,955
Provision for loan losses 4,069 4,944
Depreciation and amortization 2,979 3,819
Write-down of loans held for investment 3,000 --
Net realized loss on investments 80 1,005
Amortization of goodwill -- 1,045
Loss on sale of servicing 4,296 --
Amortization of deferred gain on sale of servicing (1,291) (1,913)
Undistributed earnings from unconsolidated affiliate (3,146) --
Extraordinary loss on early retirement of debt 5,975 --
Net decrease (increase) in mortgage loans receivable 113,569 (58,461)
Net decrease in accounts payable and other liabilities (5,521) (10,624)
Net decrease in other assets 43,284 5,759
Net change in current and deferred income taxes receivable and payable (8,557) 11,283
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 172,193 (8,942)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Collections on and sales of pool loan purchases, mortgage
claims receivable and real estate acquired 182,542 96,467
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (218,517) (102,258)
Additions to capitalized mortgage servicing rights (61,087) (47,104)
Net proceeds from sale of servicing 226,482 --
Additions to long-term investments (51,480) (6,405)
Distributions received on long-term investments 385 --
Net decrease in short-term investments 29,369 16,317
Proceeds from sales of common equity securities to affiliates -- 514
Net disposition (acquisition) of premises and equipment 1,670 (690)
Net decrease in loans held for investment 3,183 1,749
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 112,547 (41,410)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper 4,098,141 2,984,371
Repayments on commercial paper (4,365,321) (2,893,079)
Net increase (decrease) in credit agreement borrowings 101,422 (15,763)
Retirement of debt (129,872) (25,200)
Issuance of common stock 12,675 --
Dividends paid (1,853) (1,853)
Other -- (865)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (284,808) 47,611
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash (68) (2,741)
Cash at beginning of period 923 4,146
- ---------------------------------------------------------------------------------------------------------------
Cash at end of period $ 855 $ 1,405
===============================================================================================================
</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 six month period ended June 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 ended 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 asociated 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 the FSA common stock and applies the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115 to
account for its investments in the FSA convertible redeemable preferred stock
and options to acquire FSA common stock. These investments 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 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 and second quarters of 1997.
NET INCOME PER SHARE
Net income per share amounts were computed based on 2,732,174 and
3,211,881 weighted average total number of common shares outstanding for the
six month and three month periods ended June 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 six month and three month periods ended
June 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>
====================================================================
Six months ended June 30, (in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 22,765 $27,124
- --------------------------------------------------------------------
Income taxes paid $ 6,066 $ 163
- --------------------------------------------------------------------
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 45,011 --
Capital contribution from parent in exchange for
investment in unconsolidated affiliate 106,365 --
====================================================================
</TABLE>
6
<PAGE> 8
FORM 10-Q
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Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
SUMMARY - Source One Mortgage Services Corporation (together with its
subsidiaries, the "Company") reported a net loss of $12.1 million for the six
months ended June 30, 1997 compared to net income of $19.2 million for the six
months ended June 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 $.1 million pretax recovery of valuation allowances
related to the Company's mortgage servicing rights asset offset by a $1.7
million net loss on financial instruments. The 1996 net income amount includes
a $27.5 million pretax recovery of valuation allowances related to the
Company's mortgage servicing rights asset offset by a $4.9 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>
==================================================================================
June 30, December 31,
(in millions) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Mortgage servicing portfolio owned $ 9,651 $ 26,410
Mortgage servicing portfolio subserviced 18,932 2,791
- ----------------------------------------------------------------------------------
Total mortgage servicing portfolio $28,583 $ 29,201
==================================================================================
</TABLE>
The Company recorded a $4.3 million pretax loss on the sale in the first
six months of 1997. The Company will continue to service these loans pursuant
to a subservicing agreement for a minimum of one year and a maximum of three
years from the time of transfer, at the option of the purchaser.
The Company's mortgage loan production and mortgage servicing portfolio
activity for the first six months of 1997 and 1996 are summarized in the
following tables:
<TABLE>
<CAPTION>
=============================================================================
Six Months Ended
June 30,
- -----------------------------------------------------------------------------
MORTGAGE LOAN PRODUCTION (in millions) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
BY TYPE:
FHA/VA Insured $ 888 $ 1,192
Conventional 580 1,120
- -----------------------------------------------------------------------------
Total $ 1,468 $ 2,312
=============================================================================
BY SOURCE:
Retail $ 593 $ 1,100
Wholesale 875 1,212
- -----------------------------------------------------------------------------
Total $ 1,468 $ 2,312
=============================================================================
</TABLE>
7
<PAGE> 9
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
===================================================================================
Six Months Ended
June 30,
- -----------------------------------------------------------------------------------
MORTGAGE SERVICING PORTFOLIO (a): (in millions) 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 29,201 $ 31,831
Mortgage loan production 1,468 2,312
Regular payoffs (1,296) (1,783)
Principal amortization, servicing released,
foreclosures and other (790) (1,031)
- -----------------------------------------------------------------------------------
Ending balance $ 28,583 $ 31,329
===================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,932
million and $3,884 million as of June 30, 1997 and 1996, respectively.
The decrease in 1997 mortgage loan production and payoffs reflects higher
prevailing market interest rates and a corresponding decrease in refinance
activity during most of the first six months of 1997 compared to the same 1996
period.
<TABLE>
<CAPTION>
================================================================================
June 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
MORTGAGE SERVICING PORTFOLIO: Owned Total Owned Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of loans serviced 166,586 465,306(a) 451,802 478,779(a)
Weighted average net servicing fee
(at end of period) .427% n/a .422% n/a
Weighted average interest rate 8.82% 8.45% 8.59% 8.48%
Percent delinquent (b) 8.26% 6.32% 7.44% 7.17%
================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,932
million and $2,791 million as of June 30, 1997 and December 31, 1996,
respectively.
(b) Includes loans in process of foreclosure.
The increase in the delinquency rate of the Company's owned servicing
portfolio at June 30, 1997 is primarily the result of the February 1997
servicing sale, after which, the Company retained a majority of its delinquent
loans.
REVENUE - Net servicing revenue decreased to $22.7 million for the first
six months of 1997 from $53.2 million for the comparable 1996 period. Mortgage
servicing revenue was $48.6 million and $68.1 million for the six months ended
June 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 $14.2 million for the first six
months of 1997 compared to the first six months of 1996. However, excluding
the effects of the recoveries of $.1 million and $27.5 million of valuation
allowances related to the capitalized servicing asset for the six months ended
June 30, 1997 and 1996, respectively, amortization decreased to $24.3 million
for the first six months of 1997 from $37.5 million for the comparable 1996
period. The decrease in amortization expense reflects a smaller servicing
asset due to the February 1997 servicing sale and lower scheduled amortization
expense due to lower market consensus prepayment rates throughout the first
half of 1997 as compared to the first half of 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.
8
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FORM 10-Q
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Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net loss on financial instruments decreased to $1.7 million for the six
months ended June 30, 1997 from $4.9 million for the comparable 1996 period.
The 1997 net loss includes $.4 million in realized losses from net cash flows
paid and $1.3 million in unrealized losses due to a net decrease in the fair
value of the financial instruments. The 1996 net loss of $4.9 million includes
$.1 million in realized gains from net cash flows received offset by $5.0
million in unrealized losses 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 June 30, 1997, the
carrying value of the Company's open interest rate floor contracts totaled $2.4
million with a total notional principal amount of $1.1 billion. The floors
have remaining terms ranging from approximately one to four years.
The value of the principal-only swaps is determined by changes in the
value of referenced principal-only strips. As of June 30, 1997, the carrying
value of the Company's principal-only swap transactions totaled $4.3 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 three to four years.
Net interest revenue increased to $3.7 million for the first six months of
1997 from $2.3 million for the first six months of 1996. Interest income
decreased to $20.0 million from $22.4 million for the six months ending June
30, 1997 and 1996, respectively. This decrease is the result of decreased
mortgage loan production and a corresponding decrease in average mortgage loans
receivable inventory. This decrease was partially offset by interest income
earned on the outstanding receivable balance from the February 1997 servicing
sale and an increase in interest income from pool loan purchases due to a
repurchase of loans totaling approximately $140 million in principal amount at
the beginning of March 1997. The decrease in interest income was more than
offset by a decrease in interest expense due primarily to the retirement of
$104.4 million of medium-term notes and debentures during 1996, decreased
short-term borrowings as a result of cash proceeds received from the 1997
servicing sale and lower production levels in the first six months of 1997 as
compared to those of the same 1996 period and the early retirement of $119.6
million of the Company's medium-term notes in May 1997.
The Company recognized $3.2 million of equity in earnings of an
unconsolidated affiliate in the first six months of 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
9
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FORM 10-Q
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Source One Mortgage Services Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $9.3 million for the six months
ended June 30, 1997 from $24.5 million for the six months ended June 30, 1996.
This decrease is due primarily to the decrease in capitalized originated
mortgage servicing rights income resulting from the decrease in mortgage loan
production and the corresponding decrease in mortgage loan sales volumes in the
first two quarters of 1997 as compared to the first two quarters of 1996. The
decrease also reflects a $3.0 million pretax charge relating to the Company's
mortgage loans held for investment which were identified for sale and marked
down from amortized cost to current market value at June 30, 1997. These loans
totaling approximately $16.4 million at June 30, 1997, net of the write-down,
are included in loans held for investment in the consolidated statement of
condition as of June 30, 1997.
EXPENSES - Salaries and employee benefits expense was $26.8 million and
$31.7 million for the six months ended June 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 fees are accounted for
as a reduction to salaries and benefits expense as indicated in the following
table:
<TABLE>
<CAPTION>
================================================================================
Six Months Ended
June 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Unadjusted salaries and employee
benefits expense $34,587 $40,940
GAAP net origination revenues (7,793) (9,225)
- --------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $26,794 $31,715
================================================================================
</TABLE>
A decrease in loan origination revenues, reflecting lower retail mortgage
loan production in the first half of 1997 as compared to the first half of
1996, partially offset the decrease in unadjusted salaries and benefits
expense. Excluding the effects of loan origination revenues, salaries and
employee benefits expense decreased 16% during the first six months of 1997 as
compared to the first six months of 1996. 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 significant decrease in mortgage loan production for the six month
period ended June 30, 1997 as compared to the six month period ended June 30,
1996.
The provision for loan losses was $4.1 million and $4.9 million for the
six months ended June 30, 1997 and 1996, respectively. 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. The decrease in the provision is due primarily to a decrease in
the average loss per loan coupled with lower average loss volumes on
conventional mortgage loans during the first six months of 1997 as compared to
the first six months of 1996.
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.
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)
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 June 30, 1997, $.1 million of these charges remained accrued
on the Company's consolidated statement of condition.
Other operating expenses were $12.9 million and $14.7 million for the six
month periods ended June 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 first half of 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 JUNE 30, 1997 COMPARED WITH QUARTER ENDED JUNE 30, 1996
SUMMARY - Source One Mortgage Services Corporation (together with its
subsidiaries, the "Company") reported a net loss of $12.3 million for the
quarter ended June 30, 1997 compared to $5.9 million of net income for the
quarter ended June 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,
an additional $1.1 million pretax loss on the sale of servicing to a third
party which occurred in the first quarter of 1997, a $3.0 million pretax
write-down of loans held for investment, $1.7 million of pretax restructuring
charges and a $6.3 million pretax charge to the valuation allowances for the
impairment of the Company's mortgage servicing rights asset offset by a $4.4
million net gain on financial instruments. The 1996 net income amount includes
a $7.5 million pretax recovery of valuation allowances related to the Company's
mortgage servicing rights asset offset by a $2.0 million net loss on financial
instruments.
The Company's mortgage loan production and mortgage servicing portfolio
activity for the three month periods ended June 30, 1997 and 1996 are
summarized in the following tables:
<TABLE>
<CAPTION>
================================================================================
Three Months Ended
June 30,
- --------------------------------------------------------------------------------
MORTGAGE LOAN PRODUCTION (in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
BY TYPE:
FHA/VA Insured $ 518 $ 580
Conventional 309 527
- --------------------------------------------------------------------------------
Total $ 827 $1,107
================================================================================
BY SOURCE:
Retail $ 325 $ 505
Wholesale 502 602
- --------------------------------------------------------------------------------
Total $ 827 $1,107
================================================================================
</TABLE>
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)
<TABLE>
<CAPTION>
===================================================================================
Three Months Ended
June 30,
- -----------------------------------------------------------------------------------
MORTGAGE SERVICING PORTFOLIO (a): (in millions) 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 28,851 $ 31,605
Mortgage loan production 827 1,107
Regular payoffs (705) (864)
Principal amortization, servicing released,
foreclosures and other (390) (519)
- -----------------------------------------------------------------------------------
Ending balance $ 28,583 $ 31,329
===================================================================================
</TABLE>
(a) Includes loans subserviced for others having a principal balance of $18,932
million and $3,884 million as of June 30, 1997 and 1996, respectively.
The volume of mortgage loan production and payoffs in the second quarter
of 1997 began to approach the volume of the second quarter of 1996 as interest
rates, which were increasing during the first quarter of 1997, began to decline
in the second quarter. Rates in the second quarter of 1996 continued the
increase that had begun at the beginning of the year.
REVENUE - Net servicing revenue decreased to $7.8 million for the quarter
ended June 30, 1997 from $21.7 million for the comparable 1996 period.
Mortgage servicing revenue was $19.0 million and $33.5 million for the three
months ended June 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. Amortization
of capitalized servicing increased $5.7 million during the second quarter of
1997 compared to the second quarter of 1996. However, excluding the effects of
a charge for impairment totaling $6.3 million and the recovery of $7.5 million
of valuation allowances related to the capitalized servicing asset for the
three months ended June 30, 1997 and 1996, respectively, amortization decreased
to $9.3 million for the second quarter of 1997 from $17.4 million for the
comparable 1996 period. The decrease in amortization expense reflects a
smaller servicing asset due to the February 1997 servicing sale. The charge to
the valuation allowance on the servicing asset in the quarter ended June 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 March 31, 1997. The recovery of the valuation allowance on the
servicing asset in the second quarter of 1996 reflects decreased market
consensus prepayment rates and a corresponding increase in the fair values of
the Company's mortgage servicing rights.
The Company recorded a net gain of $4.4 million on its financial
instruments for the quarter ended June 30, 1997 compared to a net loss of $2.0
million for the quarter ended June 30, 1996. The 1997 net gain includes $.2
million in realized losses from net cash flows paid and $4.6 million in
unrealized gains due to an increase in the fair value of the financial
instruments. The 1996 net loss of $2.0 million represents unrealized losses
due to a decrease in the fair value of the financial instruments.
Net interest revenue increased to $2.5 million for the quarter ended June
30, 1997 from $2.2 million for the comparable 1996 period. Interest income
decreased to $10.7 million from $11.9 million for the quarters ended June 30,
1997 and 1996, respectively. This decrease is the result of decreased mortgage
loan production and a corresponding decrease in average mortgage loans
receivable inventory. This decrease was partially offset by interest income
earned on the outstanding receivable balance from the February 1997 servicing
sale and an increase in interest income from pool loan purchases due to a
repurchase of loans totaling approximately $140 million in principal amount at
the beginning of March 1997. The decrease in interest income was more than
offset by a decrease in interest expense due
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)
primarily to the retirement of $104.4 million of medium-term notes and
debentures during 1996, decreased short-term borrowings as a result of cash
proceeds received from the 1997 servicing sale and lower production levels in
the second quarter of 1997 as compared to those of the same 1996 period and the
early retirement of $119.6 million of the Company's medium-term notes in May
1997.
The Company recognized $3.1 million of equity in earnings of an
unconsolidated affiliate in the second quarter of 1997. Refer to Liquidity and
Capital Resources for further discussion.
Net gain on mortgage sales decreased to $1.3 million for the three months
ended June 30, 1997 from $11.3 million for the three months ended June 30,
1996. This decrease is primarily due to the decrease in capitalized originated
mortgage servicing rights income resulting from the decrease in mortgage loan
production and the corresponding decrease in mortgage loan sales volumes in the
second quarter of 1997 as compared to the second quarter of 1996. The decrease
also reflects a $3.0 million pretax charge relating to the Company's mortgage
loans held for investment which were identified for sale and marked down from
amortized cost to current market value in the second quarter of 1997.
The Company recorded an additional $1.1 million loss on the February 1997
sale of servicing in the second quarter of 1997. The additional loss is the
result of higher actual prepayment experience on the loans sold than was
initially estimated.
EXPENSES - Salaries and employee benefits expense was $13.0 million and
$16.0 million for the three months ended June 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 fees are accounted for
as a reduction to salaries and benefits expense as indicated in the following
table:
================================================================================
Three Months Ended
June 30,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Unadjusted salaries and employee
benefits expense $17,414 $20,607
GAAP net origination revenues (4,388) (4,593)
- --------------------------------------------------------------------------------
GAAP salaries and employee benefits expense $13,026 $16,014
================================================================================
A decrease in loan origination revenues, reflecting lower retail mortgage
loan production in the second quarter of 1997 as compared to the second quarter
of 1996, partially offset the decrease in unadjusted salaries and benefits
expense. Excluding the effects of loan origination revenues, salaries and
employee benefits expense decreased 15% during the three months ending June 30,
1997 as compared to the three months ending June 30, 1996. This decrease
primarily reflects a decrease in origination personnel as a result of decreased
production and decreased headcount as a result of the Company's restructuring
plan implemented in the second quarter of 1997.
The provision for loan losses was $2.4 million and $3.0 million for the
three months ended June 30, 1997 and 1996, respectively. 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. The decrease in the provision is
due primarily to a decrease in the average loss per loan coupled with lower
average loss volumes on conventional mortgage loans during the second quarter
of 1997 as compared to the second quarter of 1996.
The Company recorded $1.7 million in restructuring charges in the second
quarter of 1997 as a result of a restructuring plan implemented in April 1997
designed to reduce its operating costs in order to improve
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)
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 to bring its overhead costs in line with its production and
servicing operations. The amount includes approximately $1.6 million of
employee separation costs and $.1 million of other miscellaneous expenses.
Other operating expenses decreased to $6.5 million from $7.8 million for
the three month period ending June 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.
The Company recognized an extraordinary loss of $6.0 million, net of
income tax benefit, for the early retirement of $119.6 million of its 8.875%
medium-term notes due October 15, 2001 in the second quarter of 1997.
The Company's income tax provision for the second quarter of 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.
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>
=======================================================================================
June 30, December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates
of 5.95% and 5.69% as of June 30, 1997 and
December 31, 1996, respectively $ 95,000 $ 362,180
Credit agreements, weighted average interest rates
of 6.21% and 6.19% as of June 30, 1997 and
December 31, 1996, respectively 146,422 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) (3,145) (3,714)
- ---------------------------------------------------------------------------------------
Total senior and subordinated debt $412,976 $ 697,797
=======================================================================================
</TABLE>
The Company must comply with certain financial covenants contained in its
secured and unsecured revolving credit facilities, 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 June 30, 1997, there
was $120.0 million oustanding under the Company's secured credit facility. As
of December
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)
31, 1996, the Company had no outstanding borrowings under its secured credit
facility. As of June 30, 1997 and December 31, 1996, there was $20.0 million
and $45.0 million outstanding under the Company's unsecured credit facility,
respectively.
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.
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 six months ended June 30, 1997.
In April 1997, the Company's commercial paper investment rating was
downgraded by Moody's from P-2 to P-3 and by Standard & Poors from A-2 to A-3.
The decrease in the rating has reduced the Company's ability to issue
commercial paper while increasing the cost of issuance. Although the Company's
access to the commercial paper markets has been limited, it has committed bank
facilities under which it can borrow up to $ 500.0 million. The Company's
management believes its capital resources will be sufficient to meet the
Company's operating needs as well as to fund maturing medium and long-term
debt.
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 $226.5
million received from the sale through June 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 $45.0 million is reflected as a receivable from sale
of servicing in the consolidated statement of condition as of June 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
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)
infusions were undertaken to improve the Company's debt ratings and reduce the
Company's borrowing costs.
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 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 June 30,
1997 there was $50.0 million outstanding under the new agreement. As of
December 31, 1996 there was $25.0 million outstanding under the original
agreement.
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. Refer to Part II. Other Information, Item 2. Changes in Securities
for further discussion.
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.
16
<PAGE> 18
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
PART II. OTHER INFORMATION
Item 2. Changes in Securities
In May 1997, the Company repurchased $119.6 million of its 8.875%
medium-term notes due 2001. Prior to such 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.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit
No. Description
------- -----------------------
27 Financial Data Schedule
b. Form 8-K: The Company filed six current Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended June 30, 1997.
(i) April 25, 1997: Reported Report to the Trustee and Report to the
Certificate Holders for the month of April 1997 relating to the
Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-
Through Certificates, Series A.
(ii) April 25, 1997: Reported Distribution Date Statements for April 25,
May 1, May 1, and April 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) May 27, 1997: Reported Report to the Trustee and Report to the
Certificate Holders for the month of May 1997 relating to the Source
One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through
Certificates, Series A.
(iv) May 27, 1997: Reported Distribution Date Statements for May 25, June
1, May 1, and May 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.
(v) June 24, 1997: Reported Distribution Date Statements for June 25,
July 1, July 1, and June 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.
(vi) June 25, 1997: Reported Report to the Trustee and Report to the
Certificate Holders for the month of June 1997 relating to the Source
One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through
Certificates, Series A.
17
<PAGE> 19
FORM 10-Q
================================================================================
Source One Mortgage Services Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOURCE ONE MORTGAGE SERVICES CORPORATION
----------------------------------------
(Registrant)
DATE: AUGUST 14, 1997 /S/ MICHAEL C. ALLEMANG
-------------------------------------------
Michael C. Allemang
Executive Vice President
(Chief Financial Officer)
18
<PAGE> 20
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 855
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 23,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 935,756
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 32
<OTHER-SE> 430,290
<TOTAL-LIABILITY-AND-EQUITY> 935,756
<SALES> 0
<TOTAL-REVENUES> 43,510
<CGS> 0
<TOTAL-COSTS> 52,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,069
<INTEREST-EXPENSE> 16,276
<INCOME-PRETAX> (8,572)
<INCOME-TAX> (2,468)
<INCOME-CONTINUING> (6,104)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,975)
<CHANGES> 0
<NET-INCOME> (12,079)
<EPS-PRIMARY> (5.10)
<EPS-DILUTED> 0
</TABLE>
