-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrmCeilVGqC14TN1q1OzwNmBGysR+G0sIU/JQVstJw8QFy50Gvy6n2zTCdoT6uM+ UtqXi/34tgGV4qG3UP4+mg== 0000950124-96-001385.txt : 19960329 0000950124-96-001385.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950124-96-001385 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE ONE MORTGAGE SERVICES CORP CENTRAL INDEX KEY: 0000801543 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 382011419 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12898 FILM NUMBER: 96540254 BUSINESS ADDRESS: STREET 1: 27555 FARMINGTON RD CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-3357 BUSINESS PHONE: 8104887000 MAIL ADDRESS: STREET 1: 27555 FARMINGTON ROAD CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-3357 FORMER COMPANY: FORMER CONFORMED NAME: FIREMANS FUND MORTGAGE CORP DATE OF NAME CHANGE: 19911104 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ------------------ to --------------------- Commission file number 1-12898 [SOURCE ONE LOGO] SOURCE ONE MORTGAGE SERVICES CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-2011419 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (810) 488-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED 8.42% CUMULATIVE PREFERRED STOCK, SERIES A NEW YORK STOCK EXCHANGE 9.375% QUARTERLY INCOME CAPITAL SECURITIES NEW YORK STOCK EXCHANGE (SUBORDINATED INTEREST DEFERRABLE DEBENTURES, DUE 2025)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / THERE IS NO AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. AS OF MARCH 28, 1996, THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING WAS 2,247,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995 (Parts II and IV). 2 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries PART I ITEM 1. BUSINESS GENERAL Source One Mortgage Services Corporation, a Delaware corporation (together with its subsidiaries, the "Company" or "Source One"), is one of the largest mortgage banking companies in the United States. As of December 31, 1995, the Company had a mortgage loan servicing portfolio totalling $31.8 billion, including $4.0 billion of loans subserviced for others, which is serviced on behalf of approximately 320 institutional investors and numerous other security holders. As of December 31, 1995, the Company had 128 retail branch offices in 25 states and originated $2.9 billion in mortgage loans for the year then ended. As a mortgage banker, the Company engages primarily in the business of producing, selling and servicing residential mortgage loans. Its sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing, and other revenue (including underwriting and appraisal fees). Through subsidiaries, the Company also provides credit-related insurance products (such as life, disability, health, accidental death, and property and casualty insurance). The Company was incorporated in 1972 and is the successor to Citizens Mortgage Corporation which was organized in 1946. The Company is now an indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund American"), a Delaware corporation organized in 1980, which was formerly known as The Fund American Companies, Inc. and Fireman's Fund Corporation. The Company's principal executive offices are located at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357; its telephone number is (810) 488-7000. INDUSTRY OVERVIEW Mortgage banking is the business of serving as a financial intermediary in (i) the origination and purchase of mortgage loans, (ii) the holding of such loans while aggregating sufficient loans to form appropriate mortgage-backed security pools, (iii) the subsequent sale of such loans through pools or directly to investors, and (iv) the ongoing management or servicing of such loans during the repayment period. Mortgage bankers generate revenue in each of the four stages of the mortgage banking process. MORTGAGE LOAN PRODUCTION The Company produces residential mortgage loans through a system of retail branch offices, a specialized marketing program, mortgage brokers, and a correspondent network of banks, thrift institutions and other mortgage lenders. The existence of these mortgage production sources gives the Company the flexibility to shift its production between those sources as market conditions warrant and allows it to emphasize the production mode which is most economically advantageous. Loans produced, whether through origination or purchase, include conventional residential mortgage loans as well as mortgage loans that are either insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Veterans Administration ("VA") (government loans). In evaluating loans purchased through its correspondent network and loans originated through its broker network, the Company applies the same quality standards as required for loans originated by the Company itself. The Company's quality control department reviews a sample of the loans purchased to determine compliance with Company standards. It is a policy of the Company to primarily produce fixed rate mortgage loans. As of December 31, 1995 approximately 6% of the Company's total mortgage loan servicing portfolio consisted of adjustable rate mortgage loans. 1 3 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries The following table sets forth selected information regarding the Company's mortgage loan production:
- ---------------------------------------------------------------------------------------------------------------- (IN MILLIONS) YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------- FHA/VA $1,565 $2,065 $3,453 $1,927 $1,641 Conventional 1,287 2,521 7,999 5,664 2,386 - ---------------------------------------------------------------------------------------------------------------- Total production $2,852 $4,586 $11,452 $7,591 $4,027 - ---------------------------------------------------------------------------------------------------------------- Retail branch originations $1,347 $2,005 $4,922 $3,326 $1,695 Specialized marketing program originations 152 804 2,179 661 134 Mortgage broker originations 196 696 1,708 1,026 290 Correspondent network acquisitions 1,157 1,081 2,643 2,578 1,908 - ---------------------------------------------------------------------------------------------------------------- Total production $2,852 $4,586 $11,452 $7,591 $4,027 ================================================================================================================
RETAIL BRANCH OFFICES. As of December 31, 1995, the Company had 128 retail branch offices in 25 states. Each office has sales representatives who originate mortgage loans through contacts with real estate brokers, builders and developers, and others, as well as through direct contact with homebuyers. As of December 31, 1995, the Company's retail branch offices were located in the following states:
- ----------------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF STATE OFFICES STATE OFFICES STATE OFFICES - ----------------------------------------------------------------------------------------------------------------------- California 29 Florida 5 Kansas 1 Washington 21 Missouri 4 Maryland 1 Texas 11 Ohio 4 Massachusetts 1 Illinois 7 Kentucky 3 Oregon 1 Nevada 7 New Jersey 2 Rhode Island 1 Arizona 6 Pennsylvania 2 Tennessee 1 Michigan 6 Alaska 1 Virginia 1 New York 6 Arkansas 1 Colorado 5 Iowa 1 - -----------------------------------------------------------------------------------------------------------------------
Mortgage loans originated by the Company are subject to a defined underwriting process in order to assess the prospective borrower's ability to repay the loan requested and the adequacy of the property as collateral. In addition, the Company is subject to the underwriting guidelines of FHA, VA, the Federal Home Loan Mortgage Corporation ("FHLMC," also known as "Freddie Mac") and the Federal National Mortgage Association ("FNMA," also known as "Fannie Mae"), as well as specific contractual requirements of institutional investors who have agreed to acquire mortgage loans originated by the Company. Most branch office originations are referred to regional operating centers for preparation of loan documentation, evaluation of compliance with the Company's underwriting conditions and closing of the loans. SPECIALIZED MARKETING PROGRAM. The Company also generates mortgage loan originations through affinity programs and by responding to refinancing requests from the population of loans currently serviced by the Company. The products currently offered by the Specialized Marketing Program consist of purchase money first mortgages, home equity lines of credit, closed-end second mortgages, refinancing and relocation assistance. The Company is currently developing the ability to provide outsource services for other mortgage lenders through this program. 2 4 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries MORTGAGE BROKERS. The Company conducts a program through which it closes loans originated by a network of mortgage brokers. The funding price for such loans is set by the Company on a daily basis. The mortgage broker receives compensation equivalent to the difference between the Company's pricing schedule and the closing price. The Company maintains an office to service this network in West Bloomfield, Michigan. As of December 31, 1995 there were approximately 400 active participants in the Company's mortgage broker network, with no single broker or group of affiliated brokers accounting for more than 10% of the Company's total mortgage loan originations. CORRESPONDENT NETWORK. The Company conducts a program through which it agrees to purchase mortgage loans from a network of banks, thrift institutions and other mortgage lenders. The funding price for such loans is set by the Company on a daily basis. In addition, the Company pays a premium for the release of servicing rights, which is negotiated on a case-by-case basis. As of December 31, 1995 there were approximately 200 participants in the Company's correspondent network, with no single participant or group of affiliated participants accounting for more than 10% of the Company's total mortgage loan originations. SALES OF LOANS The Company sells loans either through mortgage-backed securities issued pursuant to programs of the Government National Mortgage Association ("GNMA," also known as "Ginnie Mae"), FNMA and FHLMC or to institutional investors. Most loans are aggregated in pools of $1 million or more, which are purchased by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC. Substantially all GNMA securities are sold without recourse to the Company for loss of principal in the event of a subsequent default by the mortgage borrower due to the underlying FHA and VA insurance. The following table summarizes the principal amount of the Company's loans sold:
- -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE (IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL - -------------------------------------------------------------------------------------------------------------------------- GNMA $1,252 46.30% $2,301 40.94% $ 3,138 29.40% FNMA 927 34.29 2,282 40.61 4,747 44.48 FHLMC 251 9.28 929 16.53 2,702 25.32 Other 274 10.13 108 1.92 85 0.80 - -------------------------------------------------------------------------------------------------------------------------- Total loan sales $2,704 100.00% $5,620 100.00% $10,672 100.00% - --------------------------------------------------------------------------------------------------------------------------
Servicing agreements relating to mortgage-backed securities issued pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance funds to make the required payments to investors in the event of a delinquency by the borrower. The Company expects that it would recover most funds advanced upon cure of default by the borrower or at foreclosure. However, in connection with VA partially guaranteed loans and certain conventional loans (which are at most partially insured by private mortgage insurers), funds advanced may not cover losses due to potential declines in collateral value. In addition, most of the Company's servicing agreements for mortgage-backed securities typically require the payment to investors of a full month's interest on each loan although the loan may be paid off (by optional prepayment or foreclosure) other than on a month-end basis. In this instance, the Company is obligated to pay the investor interest at the note rate from the date of the loan payoff through the end of that calendar month without reimbursement. The Company, through private placements and public offerings, has also sold mortgage loans through the issuance of mortgage pass-through certificates. The Company issued $521.7 million of real estate mortgage investment conduit ("REMIC") certificates through December 31, 1990 for which it is the primary servicer. The REMIC certificates were sold pursuant to five separate trusts which have no recourse provisions. The Company has not issued any mortgage pass- 3 5 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries through certificates since 1990, however the Company may offer additional mortgage pass-through certificates in the future if economic and market conditions warrant. Historically, the Company's sales of loans have generated net gains. However, if secondary market interest rates decline after the Company obtains a mandatory forward commitment for a loan, the loan may not close and the Company may incur a loss from the cost of covering its obligations under such commitment. If secondary market interest rates increase after the Company commits to an interest rate for a loan, and the Company has not obtained a forward commitment, the Company may incur a loss when the loan is subsequently sold. To minimize this risk, the Company obtains mandatory forward commitments of up to 120 days to sell mortgage-backed securities with respect to all loans which have been funded and a substantial portion of loans in process ("pipeline") which it believes will close. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis. In addition, the risk management area seeks to reduce counterparty risk by committing to sell mortgage loans only to approved dealers, with no dealer having in excess of 20 percent of current commitments. The Company currently transacts business with seven approved dealers. LOAN SERVICING Mortgage loan servicing consists primarily of collecting monthly loan payments and remitting amounts due to investors, collecting property tax and insurance escrow deposits and making tax and insurance premium payments when due. The Company collects a servicing fee from the monthly loan payment equal to a fixed percentage of the outstanding principal balance of the loan, plus any late charges. The Company currently retains the rights to service substantially all of the mortgage loans it produces. In addition, the Company may acquire the rights to service or subservice a mortgage loan portfolio without originating or acquiring the underlying mortgage loans. The Company customarily makes such purchases of servicing rights from banks, thrift institutions and other mortgage lenders. The fees paid to acquire such servicing rights are negotiated on a case-by-case basis. During 1995, the Company purchased the rights to service $4.7 billion of mortgage loans from a third party. The Company also sells servicing rights when management deems it economically advantageous. In 1995, the Company sold the rights to service a total of $11.0 billion of mortgage loans to third parties resulting in a pretax gain of $40.0 million. In 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party and continues to subservice these loans pursuant to a five-year subservicing agreement. The following table summarizes the changes in the Company's mortgage loan servicing portfolio including loans subserviced, interim servicing contracts and those under contract to acquire and excluding loans sold but not transferred:
--------------------------------------------------------------------------- (in millions) Year ended December 31, 1995 1994 1993 1992 1991 --------------------------------------------------------------------------- Balance at beginning of year $39,568 $38,403 $37,312 $41,014 $35,585 Mortgage loan production 2,852 4,586 11,452 7,591 4,027 Servicing acquisitions 4,674 3,707 6,368 2,323 6,756 --------------------------------------------------------------------------- Total servicing in 7,526 8,293 17,820 9,914 10,783 --------------------------------------------------------------------------- Regular payoffs 2,271 4,728 13,563 11,532 3,893 Sale of servicing 10,973 - - - - Principal amortization, servicing released and foreclosures 2,019 2,400 3,166 2,084 1,461 --------------------------------------------------------------------------- Total servicing out 15,263 7,128 16,729 13,616 5,354 --------------------------------------------------------------------------- Balance at end of year $31,831 $39,568 $38,403 $37,312 $41,014 ---------------------------------------------------------------------------
4 6 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries The Company closely monitors the rate of delinquencies and foreclosures incident to its servicing portfolio. The following table summarizes the Company's delinquency and foreclosure experience with respect to residential mortgage loans serviced by the Company:
- ----------------------------------------------------------------------------- (% OF TOTAL RESIDENTIAL LOANS SERVICED) DECEMBER 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------ 31-59 days past due 3.99% 3.15% 3.41% 3.26% 3.56% 60-89 days past due .70 .54 .58 .65 .61 90 days or more past due .59 .38 .45 .48 .41 - ------------------------------------------------------------------------------ Total delinquencies 5.28% 4.07% 4.44% 4.39% 4.58% - ------------------------------------------------------------------------------ Foreclosures .80% .77% .92% .77% .74% - ------------------------------------------------------------------------------
RELATED ACTIVITIES In conjunction with its origination activities and portfolio servicing, the Company provides certain credit-related insurance products (such as life, disability, health, accidental death, and property and casualty insurance) through subsidiaries. The insurance subsidiaries act as agents and receive fees based on premium value, but do not assume any insurance risk. Insurance products are sold through (i) solicitation at the time of mortgage application, (ii) direct mail solicitation shortly after mortgage loan closing, (iii) solicitation by a direct solicitor and (iv) resolicitation of the Company's portfolio on an annual basis. At certain locations, personal solicitation by Company staff is permitted by state regulations which determine allowable insurance sales practices. The fees recognized under these programs were as follows:
- ----------------------------------------------------------------------------- (in thousands) Year ended December 31, 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------- Insurance revenue $4,762 $4,582 $5,039 $5,605 $5,495 - -----------------------------------------------------------------------------
CERTAIN BUSINESS CONDITIONS Changes in the economy or prevailing interest rates can have significant effects, including material adverse effects, on the mortgage banking business and the Company. Inflation and changes in interest rates can have differing effects on various aspects of the Company's business, particularly with respect to marketing gains and losses on the sale of mortgage loans, mortgage loan production, the value of the Company's servicing portfolio and net interest revenue. Historically, the Company's loan originations and loan production income have increased in response to falling interest rates and have decreased during periods of rising interest rates. Periods of low inflation and falling interest rates tend to reduce loan servicing income and the value of the Company's mortgage loan servicing portfolio because prepayments of mortgages are greater and the average life of loan servicing rights is shortened. Conversely, periods of increasing inflation and rising interest rates tend to increase loan servicing income and the value of the Company's mortgage loan servicing portfolio because prepayments of mortgages are lower and the average life of loan servicing rights is lengthened. COMPETITION The Company competes nationally and locally with other mortgage bankers, state and national banks, thrift institutions and insurance companies. National banks and thrift institutions have substantially more flexibility in their loan origination programs than the Company, which must originate loans meeting the standards of the secondary market. Mortgage lenders compete primarily with respect to price and service. Competition may also occur on mortgage terms and closing costs. The Company competes, in part, by using its commissioned sales force to maintain close relationships with real estate brokers, builders and developers and members of its correspondent and broker networks. In the opinion of management, no single mortgage lender dominates the industry. 5 7 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries REGULATION The Company is subject to the rules and regulations of, and examinations by, FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing, selling and servicing mortgage loans. These rules and regulations, among other things, prohibit discrimination, provide for inspections and appraisals of properties, require credit reports on prospective borrowers and, in some cases, fix maximum interest rates, fees and loan amounts. Lenders are required to submit audited financial statements annually. FNMA and GNMA require the maintenance of specified net worth levels which vary depending on the amount of FNMA loans serviced and GNMA mortgage-backed securities issued by the Company. Mortgage loan origination activities are subject to fair housing laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act and the regulations promulgated thereunder which, among other things, prohibit discrimination in residential lending and require the disclosure of certain information to borrowers. Certain conventional mortgage loans are also subject to state usury statutes. FHA and VA loans are exempt from the effect of such usury statutes. There are also various state laws affecting the Company's mortgage banking and insurance operations. The Company's audit and quality control departments monitor compliance with these regulations. EMPLOYEES As of December 31, 1995, the Company employed approximately 1,680 persons (of whom approximately 360 were engaged in loan servicing activities and approximately 1,320 were engaged in residential loan production activities, appraisal functions, administrative and managerial responsibilities). None of the Company's employees are covered by a collective bargaining agreement. Management believes that the Company's employee relations are good. ITEM 2. PROPERTIES The Company owns its principal executive offices in Farmington Hills, Michigan which house the majority of the Company's employees. The Company also owns an office building in West Bloomfield, Michigan where the operations of its wholly-owned subsidiary, The Mortgage Authority, Inc., are conducted. The Company leases several other office facilities and operating equipment under cancelable and noncancelable agreements. Most leases contain renewal clauses. ITEM 3. LEGAL PROCEEDINGS Various claims have been made against the Company in the ordinary course of business. Management believes that any liabilities which could result from such claims would not materially affect the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 8 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reported on page 4 of the Company's 1995 Annual Report to Shareholders, herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Reported on pages 3-4 of the Company's 1995 Annual Report to Shareholders, herein incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reported on pages 5-11 of the Company's 1995 Annual Report to Shareholders, herein incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements reported in the consolidated financial statements of the Company and the notes thereto and the report thereon of Ernst & Young LLP, independent auditors, appearing on pages 12-37 of the Company's 1995 Annual Report to Shareholders, herein incorporated by reference. Selected Quarterly Financial Data reported on page 38 of the Company's 1995 Annual Report to Shareholders, herein incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 9 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- BOARD OF DIRECTORS (AS OF MARCH 28, 1996)
DIRECTOR NAME AGE SINCE - ------------------------------------------------------------------------------- Michael C. Allemang 53 1993 Terry L. Baxter 50 1994 James A. Conrad 54 1987 Robert R. Densmore 47 1986 Robert P. Keller 58 1995 Gordon S. Macklin 67 1996 Robert W. Richards 53 1983 Roger K. Taylor 43 1995 Allan L. Waters 38 1993 - -------------------------------------------------------------------------------
Mr. Allemang has served as a director, Executive Vice President and Chief Financial Officer since November 1993 and was a director and Vice President of Fund American Enterprises, Inc. from August 1992 to December 1993. He was formerly Senior Vice President of Fireman's Fund Insurance Company ("Fireman's Fund") from 1991 to 1992 and served as Vice President and Treasurer of Fund American from 1989 to 1991 and Vice President of Fireman's Fund from 1986 to 1991. Mr. Baxter has served as a director since 1994. He has served as President of Fund American Enterprises, Inc. since January 1994. He was the Managing Director of the National Transportation Safety Board from 1990 to 1993, and before that was Senior Vice President of the National Bank of Washington. Mr. Baxter previously served as Assistant Director of The Office of Management and Budget under President Reagan and was a Vice President of GEICO Corporation. Mr. Baxter is also a director of Fund American Enterprises, Inc., FOTK, Inc., Centricut, LLC., Main Street America Holdings, Inc., and White Mountains Insurance Company. Mr. Conrad has served as a director since 1987. He has served as President since December 1989 and President and Chief Executive Officer since April 1990. He was Executive Vice President, Production Division from 1987 to 1989, and Corporate Vice President, Wholesale Division from 1985 to 1987. Mr. Conrad joined the Company in 1983. Mr. Densmore has served as a director since 1986. He has served as Executive Vice President since 1985 and Executive Vice President and Secretary since 1986. Mr. Densmore joined the Company in 1976. Mr. Keller has served as a director since August 1995. He has served as the President and Chief Executive Officer of SDN Bancorp, Inc. and San Dieguito National Bank of Encinitas, California since October 1995 and President and Chief Executive Officer of Dartmouth Capital Group, Inc. since June 1995. Dartmouth and SDN are bank holding companies. From August 1994 to March 1995, Mr. Keller was the President and Chief Executive Officer of Independence Bancorp of Arizona, Inc., a bank holding company. Prior to August 1994, Mr. Keller served as a consultant to Independent Bancorp of Arizona, Inc. and Caliber Bank, and as President and Chief Executive Officer of New Dartmouth Bank in Manchester, New Hampshire. Mr. Keller is also a director of Pennichuck Corporation (a public utility holding company), Centricut, LLC and White Mountain Holdings, Inc. Mr. Macklin has served as a director since February 1996. He has served as Chairman of White River Corporation, an information services company, since December 1993, and as Chairman of Hambrecht & Quist, Inc., a venture capital and investment banking company from 1987 to 1992. Mr. Macklin is also a director of Fund American Enterprises Holdings, Inc., Martin Marietta Corporation, MCI Communications Corporation, MedImmune, Inc., InfoVest Corporation and Fusion Systems Corporation. 8 10 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries Mr. Richards has served as a director since 1983. He has served as Chairman since December 1989, and was President from 1987 to 1989. He was Executive Vice President from 1985 to 1987. Mr. Richards joined the Company in 1971. He is also a director of CMAC Investment Corporation. Mr. Taylor has served as a director since August 1995. He has served as the Chief Operating Officer of Financial Security Assurance Holdings Ltd. ("FSA"), a publicly-held financial guaranty insurer with securities listed on the New York Stock Exchange, since May 1993. He is also a member of FSA's management review committee for structured transactions and its underwriting committee for municipal transactions. Prior to joining FSA in 1990 as an advisor for its new municipal bond insurance business, Mr.Taylor was an Executive Vice President, founder and executive committee member of Financial Guaranty Insurance Company. He is also a director of FSA. Mr. Waters has served as a director since 1993. He is also a director of Fund American Enterprises, Inc., FSA, White Mountains Holdings, Inc. and White Mountains Insurance Company. Mr. Waters has served as Senior Vice President and Chief Financial Officer of Fund American since 1993. He was formerly Vice President and Controller of Fund American Enterprises, Inc. from 1991 to 1993; was Vice President, Controller and Assistant Secretary of Fund American from 1990 to 1991, and was Vice President, Finance of Fund American from 1988 to 1990. COMMITTEES OF THE BOARD OF DIRECTORS The major committees of the Board of Directors, committee membership and the functions of those committees are described below. EXECUTIVE COMMITTEE. The members of the Executive Committee are: Robert W. Richards (Chairman), Terry L. Baxter and James A. Conrad. The Executive Committee has been delegated all of the powers and authority of the Board on all but such matters which are reserved to the Board by the Delaware General Corporate Law. AUDIT COMMITTEE. The members of the Audit Committee are: Allan L. Waters (Chairman) and Robert P. Keller. The Audit Committee exercises the powers of the Board in the management of the business and affairs of the Company regarding the accounting, reporting and financial control practices of the Company. It reviews the qualifications of the independent certified public accountants, makes recommendations to the Board as to their selection, reviews the plan, fees and results of their audit, and reviews their non-audit services and related fees. HUMAN RESOURCES COMMITTEE. The members of the Human Resources Committee are Terry L. Baxter (Chairman), Gordon S. Macklin and Roger K. Taylor. The Human Resources Committee establishes compensation for executive officers of the Company. 9 11 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS (AS OF MARCH 28, 1996)
EXECUTIVE OFFICER NAME AGE POSITION SINCE - -------------------------------------------------------------------------------- Michael C. Allemang 53 Executive Vice President 1993 and Chief Financial Officer James A. Conrad 54 President and 1985 Chief Executive Officer John A. Courson 53 Senior Vice President; 1990 President and Chief Executive Officer of Central Pacific Mortgage Company Robert R. Densmore 47 Executive Vice President 1983 and Secretary Robert W. Richards 53 Chairman 1979 - --------------------------------------------------------------------------------
Mr. Courson has served as a Senior Vice President of the Company and President and Chief Executive Officer of Central Pacific Mortgage Company ("Central Pacific"), a wholly-owned subsidiary of the Company, since July 1990. Prior to that he was President and Chief Operating Officer of Fundamental Mortgage Corporation of Dallas, Texas. Based upon its review of the reports furnished to the Company for 1995 pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, the Company believes that all of such reports were filed on a timely basis, except for an inadvertent late filing of a Form 3 by Robert P. Keller, a director, an inadvertent late filing of a Form 3 by Gordon S. Macklin, a director, and a inadvertent late filing of a Form 3 by Roger K. Taylor, a director. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information regarding the salary, incentive compensation and benefits paid by the Company to its Chief Executive Officer and its four most highly compensated executive officers other than the Chief Executive Officer (collectively, the "Named Executive Officers") during each of the three most recent fiscal years. 10 12 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries
SUMMARY COMPENSATION TABLE - ---------------------------------------------------------------------------------------------------------------------- ANNUAL COMPENSATION LONG TERM COMPENSATION --------------------------------- ------------------------- AWARDS PAYOUTS ------------ --------- OTHER LONG-TERM ALL ANNUAL INCENTIVE OTHER NAME AND COMPENSATION SARS PLAN COMPENSATION PRINCIPAL POSITION YEAR SALARY BONUS (a) (#) PAYOUTS (b) - ---------------------------------------------------------------------------------------------------------------------- James A. Conrad 1995 $222,627 $38,000 $40,034 - $- $4,500 President and Chief 1994 219,212 75,000 32,718 - - 4,500 Executive Officer 1993 209,958 - 191,261 26,123 - - Robert W. Richards 1995 $218,059 $36,000 $32,099 - $- $4,500 Chairman 1994 211,528 72,000 25,295 - - 4,500 1993 202,728 - 176,345 24,149 - - Robert R. Densmore 1995 $166,748 $34,500 $10,698 - $- $4,500 Executive Vice President 1994 160,000 54,000 23,920 - - 4,500 and Secretary 1993 153,352 - 113,374 21,345 - - Michael C. Allemang 1995 $163,847 $27,000 $12,000 - $- $4,500 Executive Vice President 1994 156,107 52,000 12,381 - - 4,500 and Chief Financial Officer 1993 - - - - - - John A. Courson 1995 $187,044 $87,512 $14,945 - $- $4,500 Senior Vice President; 1994 187,293 24,531 14,316 - - 4,500 President and Chief 1993 199,327 70,000 17,714 2,033 - - Executive Officer of Central Pacific - ----------------------------------------------------------------------------------------------------------------------
(a) Amounts shown for 1995 consist of the following: (i) Mr. Conrad: interest reimbursement of $32,578 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (ii) Mr. Richards: interest reimbursement of $23,661 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (iii) Mr. Densmore: reimbursement of automobile expenses; (iv) Mr. Allemang: reimbursement of automobile expenses; (v) Mr. Courson: interest reimbursement on amounts paid to purchase investment contracts and reimbursement of automobile expenses. Amounts shown for 1994 consist of the following: (i) Mr. Conrad: interest reimbursement of $25,638 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (ii) Mr. Richards: interest reimbursement of $18,611 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (iii) Mr. Densmore: interest reimbursement of $13,222 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (iv) Mr. Allemang: reimbursement of automobile and relocation expenses; (v) Mr. Courson: reimbursement of automobile expenses and interest reimbursement on amounts paid to purchase investment contracts. Amounts shown for 1993 consist of the following: (i) Mr. Conrad: reimbursement of $156,414 for the payment of certain income taxes and interest reimbursement on amounts paid to purchase shares of the Company's Class B common stock and reimbursement of automobile expenses; (ii) Mr. Richards: reimbursement of $149,495 for the payment of certain income taxes and interest reimbursement on amounts paid to purchase shares of the Company's Class B common stock and reimbursement of automobile expenses; (iii) Mr. Densmore: reimbursement of $86,543 for the payment of certain income taxes and interest reimbursement on amounts paid to purchase shares of the Company's Class B common stock and reimbursement of automobile expenses; (iv) Mr. Courson: reimbursement for automobile expenses and interest reimbursement on amounts paid to purchase shares of the Company's Class B common stock and reimbursement for the payment of certain income taxes. (b) Represents amounts allocated pursuant to the Company's employee stock ownership plan ("ESOP"). There were no allocations to the ESOP for the year ended December 31, 1993. INVESTMENT CONTRACTS AND STOCK APPRECIATION RIGHTS In 1993, certain directors and executive officers of the Company exchanged all their shares of the Company's Class B common stock for 1.558 units in an investment contract and 1.558 units of Stock Appreciation Rights ("SAR") for each Class B share held. The investment contract entitles the holder to receive the lesser of $86.625 or the closing price of Fund American's common stock on the day preceding exercise of the investment contract, multiplied by a factor of 1.223 in cash for each unit held. The units may be exercised at any time at the option of the holder. The SARs may be exercised at any time simultaneously with each exercised investment contract unit at the option of the holders thereof. The value of each SAR is equal to the difference between $86.625 and the closing price of Fund American's common stock on the date preceding the exercise of the SAR multiplied by a factor of 1.223. The following table summarizes SAR values as of December 31, 1995. 11 13 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES - --------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SARS AT FISCAL YEAR END (b) SARS AT FISCAL YEAR-END (b) ---------------------------- --------------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE (a) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------- James A. Conrad 9,323 $0 16,800 0 $75,407 $0 Robert W. Richards 5,345 0 18,804 0 84,402 0 Robert R. Densmore 0 0 12,000 0 53,862 0 Michael C. Allemang 0 0 0 0 0 0 John A. Courson 0 0 2,033 0 9,126 0 - -------------------------------------------------------------------------------------------------------------------------------
(a) Represents the number of investment contract units with respect to which the SARs were exercised. (b) The number and value of unexercised SARs are based on shares of Fund American common stock. PENSION BENEFITS - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ YEARS OF SERVICE --------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------------------------------------------------------------------------ $125,000 $30,000 $40,000 $50,000 $60,000 $70,000 150,000 36,000 48,000 60,000 72,000 84,000 175,000 42,000 56,000 70,000 84,000 98,000 200,000 48,000 64,000 80,000 96,000 112,000 225,000 54,000 72,000 90,000 108,000 126,000 250,000 60,000 80,000 100,000 120,000 140,000 300,000 72,000 96,000 120,000 144,000 168,000 400,000 96,000 128,000 160,000 192,000 224,000 450,000 108,000 144,000 180,000 216,000 252,000 500,000 120,000 160,000 200,000 240,000 280,000 - ------------------------------------------------------------------------------
The gross annual benefit paid is computed as a straight-life annuity reduced by .485% of average salary up to covered compensation; that is, the average of social security wage bases for the 35 years prior to retirement. The annual benefits shown in the above table are not reduced to reflect the limitations imposed by the Internal Revenue Code, which limit the annual benefits payable from qualified plans to any individual. The Company maintains a Supplemental Retirement Plan which is a non-qualified unfunded deferred compensation plan. Under the plan, certain highly compensated employees affected by these limitations will receive additional retirement income payments from the Company so that their pension benefits will equal the amounts they would otherwise have been were it not for the limitations. Messrs. Conrad, Richards, Densmore, Allemang and Courson participate in retirement plans under which they are entitled to receive estimated annual retirement benefits in accordance with the table shown above. Participants in the retirement plans are eligible to receive normal retirement benefits at age 65, reduced normal retirement benefits at age 55 with at least ten years of service, or a deferred vested benefit if they terminate employment prior to retirement but after five years of service. Eligible compensation for Messrs. Conrad, Richards, Densmore, Allemang and Courson, includes base salary plus bonus received, but is limited to not more than one and one-third of base salary in total. Benefits accrued under the retirement plans are limited to eligible compensation of $150,000 for each of the Named Executive Officers. Benefits under the retirement plans for a single person are computed on a straight-life basis and benefits for a married person are generally computed on a joint and 50% survivor basis, subject to each participant's right to elect alternative survivor benefits. 12 14 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries As of December 31, 1995, Messrs. Conrad, Richards, Densmore, Allemang and Courson had 12, 24, 19, 2, and 5 whole years of credited service, respectively, for purposes of computing their benefits under the retirement plans. INCENTIVE COMPENSATION ARRANGEMENTS Fund American Enterprises, Inc. ("FAE"), the sole common shareholder of the Company, has entered into an incentive compensation arrangement which could result in the payment of additional compensation to certain senior officers of the Company (including the Named Executive Officers) in the event of a sale of the Company. Under this arrangement, if there is a sale of the Company, one-third of all phantom shares previously allocated under the Company's Long Term Incentive Plan in each earning period (26,442.97 phantom shares in the aggregate) will become fully earned and vested. In addition, those senior officers would be paid a portion of the amount by which the price at which the Company is sold exceeds the book value of the Company (the "Incentive Amount"). The portion of the Incentive Amount payable to any one of the eligible senior officers ranges from .0580% to 1.6814% of the Inventive Amount, and the portion of the Inventive Amount payable to such senior officers as a whole is limited to 5.1260% of the Incentive Amount. Any sums payable under this arrangement to an eligible senior officer would be payable no later than one year after the date of the sale of the Company and would accrue interest until the date of payment. Payment of compensation pursuant to this arrangement to any eligible senior officer is contingent upon such senior officer continuing employment with the Company for at least one year after the sale; provided, however, that such senior officer will be entitled to immediate payment if prior to that time his or her employment (i) is involuntarily terminated other than for cause or (ii) is involuntarily terminated as a result of a constructive termination, or (iii) in certain limited circumstances, is involuntarily terminated in connection with a material reduction in benefits. COMPENSATION OF DIRECTORS Directors who are neither employees of the Company nor employees or directors of Fund American (Messrs. Keller, Macklin and Taylor) receive an annual retainer of $10,000 and a fee of $1,500 for each board meeting attended. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Human Resources Committee of the Board of Directors establishes compensation for executive officers of the Company. None of the members of the Human Resources Committee, namely Terry L. Baxter, Gordon S. Macklin and Roger K. Taylor, is, or was, an officer or employee of the Company or any of the Company's subsidiaries. 13 15 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 28, 1996, there was one holder of the 2,247,000 shares of the Company's issued and outstanding common stock, each entitled to one vote, as follows:
- -------------------------------------------------------------------------------- TITLE OF NAME AND ADDRESS NUMBER OF PERCENT CLASS OF BENEFICIAL OWNER SHARES OWNED OF CLASS - -------------------------------------------------------------------------------- Common stock Fund American Enterprises, Inc. 2,247,000 100.0% The 1820 House Norwich, Vermont 05055-0850 - -------------------------------------------------------------------------------- The following table sets forth, as of March 28, 1996, beneficial ownership of Fund American common stock by each director of the Company and each of the "Named Executive Officers" as defined herein. - -------------------------------------------------------------------------------- NAME OF NUMBER OF PERCENT TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED(b) OF CLASS (c) - -------------------------------------------------------------------------------- Common stock (a) Michael C. Allemang 2,336 * Terry L. Baxter - - James A. Conrad 836 * John A. Courson 266 * Robert R. Densmore 758 * Robert P. Keller - - Gordon S. Macklin 5,000 * Robert W. Richards 894 * Roger K. Taylor - - Allan L. Waters (d) 6,900 * - --------------------------------------------------------------------------------
*Represents less than 1% of the outstanding shares. (a) Represents Fund American common stock pursuant to Item 403(b) of Regulation S-K of the Securities Act of 1933. (b) Except for Messrs. Baxter, Keller, Macklin, Taylor and Waters, includes shares beneficially owned by the Company's Employee Stock Ownership Plan (whereby voting rights are exercised by the Plan's trustee and attributable under terms of the Plan to such person.) (c) Determined based on the beneficial ownership provisions specified in Rule 13d-3(d)(1) of the Exchange Act. Except to the extent indicated above, all executive officers and directors have (or share with their spouses) sole voting and investment power with respect to the shares for which they claim beneficial ownership. (d) Includes currently exercisable stock options held by Mr. Waters of 1,000 shares. 14 16 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to the terms of a tax allocation agreement between the Company and Fund American, Fund American has agreed to compensate the Company for the use of certain accumulated unrealized losses associated with the Company's common equity securities portfolio if such losses, when realized, can be utilized in Fund American's consolidated tax returns. During 1995, the Company transferred a total of $27 million of certain common equity securities and $93 million in cash and money market investments to Fund American Enterprises, Inc., ("FAE") the sole common shareholder of the Company, in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized a $2.2 million pretax loss on the noncash exchanges. During 1995, Mr. Conrad received $806,821 upon the exercise of 9,323 investment contract units and Mr. Richards received $463,011 upon the exercise of 5,345 investment contract units. See discussion of "Investment Contracts and Stock Appreciation Rights" on page 11. 15 17 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. (1) Financial Statements The Financial Statements applicable to Source One Mortgage Services Corporation and consolidated subsidiaries have been incorporated by reference herein from Source One Mortgage Services Corporation's 1995 Annual Report to Shareholders as they appear in the Index to Financial Statements and Financial Statement Schedules appearing on page 18 of this Annual Report on Form 10-K. (2) Financial Statement Schedules None. (3) Exhibits The exhibits required to be filed by Item 601 of Regulation S-K and by this form are listed on page 20 of this Annual Report on Form 10-K. The management contracts and compensatory plans or arrangements required to be filed as exhibits and included in such list of exhibits are as follows: Exhibit 10(a) Source One Mortgage Services Corporation Employee Stock Ownership Plan, as amended. Exhibit 10(b) First Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan. Exhibit 10(c) Form of Second Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan. Exhibit 10(d) Form of Third Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan. Exhibit 10(e) Fourth Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan. Exhibit 10(f) Form of Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan. Exhibit 10(g) First Amendment to Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan. Exhibit 10(h) Form of Source One Mortgage Services Corporation Employee Stock Ownership Plan Trust Agreement. Exhibit 10(i) Form of Source One Mortgage Services Corporation Retirement Plan, as amended and restated. Exhibit 10(j) First Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(k) Second Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(l) Third Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(m) Form of Source One Mortgage Services Corporation Retirement Plan Trust Agreement. Exhibit 10(n) Source One Mortgage Services Corporation Supplemental Retirement Plan. Exhibit 10(o) Source One Mortgage Services Corporation Stock Appreciation Rights Plan. 16 18 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries Exhibit 10(cc) Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad. Exhibit 10(dd) Investment Contract by and between Source One Mortgage Services Corporation and John A. Courson. Exhibit 10(ee) Investment Contract by and between Source One Mortgage Services Corporation and Robert R. Densmore. Exhibit 10(ff) Investment Contract by and between Source One Mortgage Services Corporation and Robert W. Richards. Exhibit 10(hh) Source One Mortgage Services Corporation Long Term Incentive Plan. Exhibit 10(ll) Incentive Agreement in the event of a sale of Source One Mortgage Services Corporation among certain Senior Officers of Source One Mortgage Services Corporation and Fund American Enterprises, Inc. 17 19 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries Source One Mortgage Services Corporation and Subsidiaries Index to Financial Statements and Financial Statement Schedules (Item 14(a))
- -------------------------------------------------------------------------------- ANNUAL REPORT PAGE(S)* - -------------------------------------------------------------------------------- Financial Statements: Consolidated statements of condition as of December 31, 1995 and 1994.................................. 13 Consolidated statements of income for each of the years ended December 31, 1995, 1994 and 1993...................... 14 Consolidated statements of stockholders' equity for each of the years ended December 31, 1995, 1994 and 1993............... 15 Consolidated statements of cash flows for each of the years ended December 31, 1995, 1994 and 1993............... 16-17 Notes to consolidated financial statements.......................... 18-37 Other Financial Information: Report of independent auditors...................................... 12 Selected quarterly financial data (unaudited)....................... 38
Schedules for which provision is made in Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted or the information required is included in the consolidated financial statements or notes thereto. *Source One Mortgage Services Corporation's 1995 Annual Report to Shareholders. 18 20 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries b. Reports on Form 8-K The Company filed 6 reports on Form 8-K during the fourth quarter of 1995. The dates and contents are described below. October 25, 1995 Reported Report to the Trustee and Report to the Certificate Holders for the month of October 1995 relating to the Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through Certificates, Series A. October 31, 1995 Reported Distribution Date Statements for October 25, November 1, November 1, and October 20, 1995 relating to the Source One Mortgage Services Corporation Agency MBS Multi-Class Pass-Through Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively. November 27, 1995 Reported Report to the Trustee and Report to the Certificate Holder for the month of November 1995 relating to the Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through Certificates, Series A. November 29, 1995 Reported Distribution Date Statements for November 25, December 1, December 1 and November 20, 1995 relating to the Source One Mortgage Services Corporation Agency MBS Multi-Class Pass-Through Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively. December 26, 1995 Reported Report to the Trustee and Report to the Certificate Holders for the month of December 1995 relating to the Source One Mortgage Services Corporation 11-1/2% Mortgage Pass-Through Certificates, Series A. December 28, 1995 Reported Distribution Date Statements for December 25, 1995, December 25, 1995, January 1, 1996, January 1, 1996 and December 20, 1995 relating to the Source One Mortgage Services Corporation Agency MBSMulti-Class Pass-Through Certificates Series 1987-1, 1987-2, 1988-1, 1988-2 and 1990-1, respectively. 19 21 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries c. Exhibits Exhibit No. 3(a) Restated Certificate of Incorporation of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the February 28, 1994 Current Report on Form 10-K, File No. 1-12898, formerly File No. 33-8562). (b) Certificate of Designation for Series A Preferred Stock of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 3(b) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (c) Amended and Restated Bylaws of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the registration statement on Form S-3, Registration No. 33-71924). 4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated March 1, 1983 and relating to mortgage Pass-Through Certificates, Series A, 11-1/2 Pass-Through Rate (incorporated by reference to Exhibit 4(b) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated September 25, 1987 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-1 (incorporated by reference to Exhibit 10(jj) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-2 (incorporated by reference to Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-1 (incorporated by reference to Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The National Bank of Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-2 (incorporated by reference to Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated July 30, 1990 and relating to the Agency MBS Multi-Class Pass-Through Certificates, Series 1990-1 (incorporated by reference to Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated September 15, 1986 (incorporated by reference to Exhibit 4(a) of the registration statement on Form S-1, Registration No. 33-8562). (h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b) of the registration statement on Form S-1, Registration No. 33-8562). 20 22 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries (i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(h) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(i) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(k) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(l) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (m) Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992 (incorporated by reference to Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (n) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of medium-term indebtedness adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 19(b) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the Medium-Term Notes, Series B, of Source One Mortgage Services Corporation issuable under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (o) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of a series of medium-term notes, Series B, entitled "9% Debentures due June 1, 2012" adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit (i) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the 9% Debentures due June 1, 2012 of Source One Mortgage Services Corporation issued under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (p) Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). (q) First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). (r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit 4(p) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit 4(q) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). 21 23 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries (t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-12898). (w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest Deferrable Debentures, Due 2025); included in the First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). 10 Material Contracts (a) Source One Mortgage Services Corporation Employee Stock Ownership Plan, as amended (incorporated by reference to Exhibit 10(a) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (b) First Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(a) of the Current Report on Form 8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562). (c) Form of Second Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(b) of the Current Report on Form 8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562). (d) Form of Third Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(d) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (e) Fourth Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(e) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (f) Form of Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(e) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (g) First Amendment to Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (h) Form of Source One Mortgage Services Corporation Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit 10(b) of the registration statement on Form S-1, Registration No. 33-8562). (i) Form of Source One Mortgage Services Corporation Retirement Plan, as amended and restated (incorporated by reference to Exhibit 10(hh) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (j) First Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(j) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). 22 24 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries (k) Second Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (l) Third Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(l) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (m) Form of Source One Mortgage Services Corporation Retirement Plan Trust Agreement (incorporated by reference to Exhibit 10(d) of the registration statement on Form S-1, Registration No. 33-8562). (n) Source One Mortgage Services Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10(n) of the Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-12898, formerly File No. 33-8562). (o) Source One Mortgage Services Corporation Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10(c) of the Current Report on Form 8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562). (p) Amended and Restated Revolving Credit Agreement dated as of March 24, 1995 by and among Source One Mortgage Services Corporation and The Mortgage Authority, Inc. (a subsidiary of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as administrative agent and certain other lenders (incorporated by reference to Exhibit 10(p) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (q) Amended and Restated Security and Collateral Agency Agreement dated as of March 24, 1995 by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. (a subsidiary of Source One Mortgage Services Corporation), The First National Bank of Chicago (in its capacity as administrative agent for the lenders), Norwest Bank Minnesota, N.A. (as the successor trustee under certain Indentures under which Source One Mortgage Services Corporation is an issuer of certain debt securities) and National City Bank, Kentucky, as collateral agent (incorporated by reference to Exhibit 10(q) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (r) Transition Memorandum dated March 24, 1995 by and among Source One Mortgage Services Corporation and The Mortgage Authority, Inc. (a subsidiary of Source One Mortgage Services Corporation) and the First National Bank of Chicago, as agent for the Existing Lenders and Continuing Lenders named therein (incorporated by reference to Exhibit 10(r) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (s) Tax allocation agreement among Fireman's Fund Corporation, Fireman's Fund Insurance Company, Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation"), CMC Insurance Agency, Inc., MHM Corporation (Michigan), MHMC Insurance Agency, Inc., MHM Corporation (Idaho) and Fireman's Fund Mortgage Securities Corporation effective July 1, 1986 (incorporated by reference to Exhibit 10(y) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (t) Eurocommercial Paper Program Agreement dated August 1, 1988 among Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the Dealers named therein (incorporated by reference to Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (u) Commercial Paper Dealer Agreement dated September 25, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by reference to exhibit 10(cc) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). 23 25 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries (v) Commercial Paper Dealer Agreement dated September 23, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and First Boston Corporation (incorporated by reference to Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (w) Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (x) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(x) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (y) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(t) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (z) Letter of Representations dated November 23, 1990 relating to Issuing and Paying Agency Agreement dated September 18, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Morgan Guaranty Trust Company of New York (incorporated by reference to Exhibit 10(v) of the Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (aa) Depository Agreement dated June 16, 1993 between Source One Mortgage Services Corporation and The First National Bank of Chicago (incorporated by reference to Exhibit 10(a) of the Current Report on Form 8-K dated February 28, 1994, File No. 1-12898, formerly File No. 33-8562). (bb) Stock Purchase Agreement dated December 15, 1995, between Source One Mortgage Services Corporation and Fund American Enterprises, Inc.* (cc) Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad (incorporated by reference to Exhibit 10(dd) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (dd) Investment Contract by and between Source One Mortgage Services Corporation and John A. Courson (incorporated by reference to Exhibit 10(ee) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (ee) Investment Contract by and between Source One Mortgage Services Corporation and Robert R. Densmore (incorporated by reference to Exhibit 10(ff) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (ff) Investment Contract by and between Source One Mortgage Services Corporation and Robert W. Richards (incorporated by reference to Exhibit 10(gg) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (gg) Investment Services Agreement dated November 13, 1991 between Source One Mortgage Services Corporation and Fund American Enterprises, Inc (incorporated by reference to Exhibit 10(rr) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). 24 26 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries (hh) Source One Mortgage Services Corporation Long Term Incentive Plan (incorporated by reference to Exhibit 10(ii) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (ii) Agreement dated August 10, 1995 by and between Source one Mortgage Services Corporation and Comerica Bank (incorporated by reference to Exhibit 10(ddd) of the registration statement on Form S-4, Registration No. 33-62765). (jj) Amendment No. 1 to Loan Agreement by and between Source One Mortgage Services Corporation and Comerica Bank (incorporated by reference to Exhibit 10(fff) of the registration statement on Form S-4, Registration No. 33-62765). (kk) First Amendment to Amended and Restated Revolving Credit Agreement by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. (a subsidiary of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as administrative agent, and certain other Lenders (incorporated by reference to Exhibit 10(eee) of the registration statement on Form S-4, Registration No. 33-62765). (ll) Incentive Agreement in the event of a sale of Source One Mortgage Services Corporation among certain Senior Officers of Source One Mortgage Services Corporation and Fund American Enterprises, Inc.* 13 Source One Mortgage Services Corporation 1995 Annual Report to Shareholders. Such report, except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, is furnished only for the information of the Commission and is not deemed filed as part hereof.* 21 Subsidiaries of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 22 of the February 28, 1994 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). 23 Consent of Ernst & Young LLP.* 24 Powers of Attorney.* 27 Financial Data Schedule.* * Filed herewith. 25 27 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Source One Mortgage Services Corporation Date: March 28, 1996 By: /s/ MARK A. JANSSEN ------------------------------------ Mark A. Janssen Senior Vice President and Controller Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- /s/ ROBERT W. RICHARDS Chairman March 28, 1996 - ---------------------- and Director Robert W. Richards * President, Chief March 28, 1996 - ---------------------- Executive Officer James A. Conrad and Director (Principal Executive Officer) * Executive Vice March 28, 1996 - ---------------------- President, Chief Michael C. Allemang Financial Officer and Director (Principal Financial Officer) * Senior Vice President March 28, 1996 - ---------------------- and Controller Mark A. Janssen (Principal Accounting Officer) * Executive Vice March 28, 1996 - ---------------------- President, Secretary Robert R. Densmore and Director * Director March 28, 1996 - ---------------------- Terry L. Baxter * Director March 28, 1996 - ---------------------- Robert P. Keller * Director March 28, 1996 - ---------------------- Gordon S. Macklin * Director March 28, 1996 - ---------------------- Roger K. Taylor * Director March 28, 1996 - ---------------------- Allan L. Waters *By: /s/ ROBERT W. RICHARDS ---------------------- Robert W. Richards As Attorney-in-fact for the persons indicated - -------------------------------------------------------------------------------- Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. The Company does not have any voting securities registered under Section 12 of the Act, and all of the Company's voting securities are held by a single entity. Accordingly, no proxy statement, form of proxy or other proxy soliciting material has been, or will be, sent to more than 10 of the registrant's security holders with respect to any annual or other meeting of security holders. 26 EX-10.BB 2 EXHIBIT 10(BB) 1 Exhibit 10(bb) FUND AMERICAN ENTERPRISES, INC. The 1820 House, Main Street Norwich, Vermont 05055-0850 December 15, 1995 Mr. Michael C. Allemang Senior Vice President and Chief Financial Officer Source One Mortgage Services Corporation 27555 Farmington Road Farmington Hills, Michigan 48334 STOCK PURCHASE AGREEMENT Dear Mike: This Stock Purchase Agreement sets forth the agreement of Fund American Enterprises, Inc. (the "Purchaser") to purchase shares of Common Stock ("Stock") of Source One Mortgage Services Corporation ("SOMSC") on the terms and conditions stated herein. 1. Stock Purchase. The Purchaser will, at any time or from time to time, purchase Stock aggregating up to $100,000,000 within 5 business days after receipt of written notice from SOMSC during the term hereof, in the amount (in whole shares) so specified by SOMSC, at a purchase price per share of Stock equal to the Per Share Price. The purchase price of Stock is payable by (at the Purchaser's option) (i) cash or (ii) the transfer to SOMSC of certain specified Assets (defined below) having a fair market value equal to the aggregate purchase price or (iii) any combination of (i) and (ii). At each closing, SOMSC will deliver certificates for the Stock purchased at such closing registered in the name of the Purchaser or its nominee. At any closing involving the transfer by the Purchaser to SOMSC of securities in payment of all or any portion of the purchase price of Stock, certificates evidencing such securities shall be delivered to SOMSC duly endorsed or accompanied by duly completed stock/bond powers, or by any other method of transferring ownership that is mutually agreeable to the parties. 2. "Specified Assets" means, initially, the investment securities listed on the New York Stock Exchange, described in Schedule A (the "Initial Securities"). Thereafter, (i) the Specified Assets shall also include any proceeds received under paragraph 10 from the sale of the Initial Securities or any other Specified Assets and any Substitution Securities received under paragraph 11 for the Initial Securities or any other Specified Assets, and any distributions or dividends payable in respect of Specified Assets and any security resulting from a conversion, modification, reclassification or other similar transaction with respect to any Specified Assets, and (ii) the Specified Assets shall not include any securities or cash which are transferred to SOMSC pursuant hereto, or disposed of in compliance with this paragraph 2, or any Stock or distribution of any kind with respect thereto, or any securities which have been surrendered by the Purchaser in any conversion, modification, reclassification or other similar transaction as stated in (i) above or any securities which are sold pursuant to paragraph 10 or deliverable in exchange for Substitution Securities received under paragraph 11. 2 The Purchaser agrees that it will not transfer or subject to a lien any of Purchaser's assets or properties which constitute Specified Assets so long as this Agreement remains in effect, except that (i) the Purchaser may transfer Specified Assets to SOMSC at a closing held hereunder and (ii) the Purchaser may dispose, as the Purchaser sees fit in its sole discretion, of Specified Assets so long as the value of remaining cash and cash equivalents, together with the fair market value of the remaining Specified Assets, is at least $100 million. Nothing in this Agreement shall restrict the Purchaser in any way from disposing, as the Purchaser sees fit in its sole discretion, of some or all of assets or properties of the Purchaser which do not constitute Specified Assets. Also, it is understood and agreed that the Purchaser remains the owner of the Specified Assets for all purposes, retaining all voting and other rights, unless and until some or all thereof are transferred to SOMSC at a closing held pursuant to this Agreement. 3. The fair market value of securities for all purposes of this Agreement shall be determined by the Purchaser applying the valuation principles stated in Schedule B, using market information for the last market day prior to the valuation day. In the case of the Initial Securities, their agreed fair market values as of December 11, 1995 is as set forth in Schedule A. In the case of any Substitution Securities, their initial fair market values will be the amount at which they are credited for substitution purpose pursuant to Paragraph 11. In each case, the Purchaser from time to time may, and prior to any transfer to SOMSC hereunder or any substitution therefor pursuant to paragraph 11, will adjust the initial (or previously adjusted) fair market value as may be necessary to reflect any events, developments or circumstances occurring after the date hereof or of their transfer to the Purchaser which in the Purchaser's reasonable judgment materially change their fair market value, determined in accordance with the valuation principles stated in Schedule B. Purchaser agrees that it will promptly take all appropriate action to maintain, at all times during the effective period of this Agreement, the value of cash and cash equivalents, together with the fair market value of Specified Assets, determined in accordance with the valuation principles stated in Schedule B, in an amount not less than $100,000,000. 4. "Per Share Price" means the price of Stock, as determined as of the most recent available quarterly balance sheet date, pursuant to the terms of the valuation formula set forth on Schedule C. 5. Term. The term of this Agreement shall continue from the date hereof until the earlier of (i) the Specified Assets are exhausted by transfer(s) to SOMSC pursuant hereto and (ii) the Purchaser and SOMSC mutually agree in writing to end the term of this Agreement (which mutual agreement will be effective on and as of the date specified therein). 6. Mutual Representations and Warranties. Each party hereby represents and warrants to the other that on and as of the date hereof; (a) Each is a duly organized and validly existing corporation in good standing under the laws of its jurisdiction of incorporation and any other jurisdiction in which it has its principal office. Each has been duly authorized by all necessary corporate action (including without limitation any necessary vote of security holders) to enter into and carry out this Agreement. (b) No consent, permit, notice, registration, waiver or other action by any third party or any governmental agency is required to be obtained, made or given by it in connection with entering into or carrying out this Agreement. Neither the entering into nor carrying out of this Agreement will cause any breach or violation of, or any lien against its properties or assets under, or any acceleration of any of its obligations pursuant to, any agreement, commitment, law, statute, regulation or order to which it or any of its properties are subject. 3 (c) It has not engaged any broker, finder or similar person in connection with the transactions contemplated hereby. (d) It is an "accredited investor" as that term is defined in SEC Regulation D, and is acquiring any securities to be transferred or issued to it pursuant hereto for its own account. (e) It is familiar with the affairs of the other party and (in the case of SOMSC) is familiar with the affairs of the issuers of the Initial Securities. Except for the express representations and warranties made herein, it is relying totally on its own evaluation of the risks and benefits associated with this Agreement and the securities which may be transferred or issued to it hereunder. 7. Additional Representations, Warranties and Agreements of the Parties. (a) The Purchaser represents and warrants to SOMSC THAT: (i) It owns 100% of the Initial Securities, free and clear of all liens, (ii) It has conducted no business since its incorporation activities and holding investments. (iii) It is not an "investment advisor" required to be registered under the Investment Advisors Act of 1940, as amended (the "Advisors Act"). The Purchaser agrees that if it should ever be required to be registered under the Advisors Act, it will so register on a timely basis and will comply with the requirements of the Advisors Act. (b) SOMSC represents and warrants to the Purchaser that it is not an "investment company" required to be registered under the Investment Company Act of 1940, as amended (the "Company Act"), and agrees that if it should ever be required to be registered under the Company Act, it will so register on a timely basis and will comply with the requirements of the Company Act. 8. Resales. Each party agrees that it will not resell any securities transferred or issued to it hereunder except in a transaction registered under the securities Act of 1933, as amended, or any successor statute or in a transaction exempt from such registration, established to the reasonable satisfaction of the transferor or issuer, as the case may be. 9. Covenants of the Purchaser. Purchaser agrees that during the term of this Agreement it will not: (a) Engage in any material business other than owning the Specified Assets and other investment securities. (b) Voluntarily incur any indebtedness or obligations which would or might constitute a claim enforceable against the Specified Assets (other than under this Agreement and under a credit facility extended by The Chase Manhattan Bank, N.A. and other financial institutions to the Purchaser and other borrowers in principal amount not to exceed $75,000,000). (c) Subject any Specified Assets to any lien or permit any Specified Assets to become subject to any lien, 10. Sale. Notwithstanding anything in this Agreement, the Purchaser may, at any time and from time to time, at its election sell some or all of the Specified Assets to third parties not affiliated with the 4 Purchaser in arms'-length transactions for cash and/or securities which thereupon become part of the Specified Assets. 11. Substitution. Notwithstanding anything in this Agreement, the Purchaser may, at any time and from time to time, at its election, exchange cash and/or securities in the Specified Assets for cash and/or securities ("Substitution Securities") held by the Purchaser or any of its affiliates thereof with an aggregate fair market value not less than the aggregate fair market value of the cash and/or securities to be exchanged, all determined as of the date of substitution, provided that the Purchaser, promptly after such substitution, delivers to SOMSC its calculation of the fair market values of all assets included in the exchange, which calculation confirms its compliance with this paragraph 11. 12. Separate Portfolio Accounting and Management. If any investment securities are transferred to SOMSC pursuant to this Agreement, SOMSC, as sole and absolute owner of such securities, will retain Fund American Enterprises, Inc. as portfolio manager with respect to such investment securities pursuant to a mutually acceptable Investment Services Agreement. 13. Miscellaneous. (a) This Agreement is governed by the internal law of New York State. Exclusive jurisdiction and venue for its enforcement shall lie in the state and federal courts of the State of New York. (b) Each party will pay and bear its own expenses in connection with this Agreement and the enforcement hereof, except that in any proceeding primarily between the parties for the enforcement hereof, the prevailing party may recover its reasonable attorney's fees. Each party will pay and bear the cost of any stock transfer tax applicable to the transfer or issuance of securities by it. (c) This Agreement is the entire agreement of the parties as to its subject matter, and supersedes any other agreements between the parties relating to the subject matter hereof. Nothing in this Agreement may be waived or amended except by a writing signed by the parties hereto. Nothing in this Agreement is intended to create any third-party beneficiary rights. If the foregoing correctly states our agreement, please so indicate by signing an enclosed copy of this letter to me. Very truly yours, ----------------------------------- for Fund American Enterprises, Inc. Agreed: - -------------------------------------------- for Source One Mortgage Services Corporation Schedules A. Initial Securities B. Valuation Principles C. Valuation Formula 5 SCHEDULE A FUND AMERICAN ENTERPRISES, INC. SCHEDULE OF SECURITIES VALUED AS OF DECEMBER 15, 1995
MARKET VALUE SECURITY SHARES PER SHARE TOTAL Zurich Reinsurance Centre Holdings, Inc. 1,900,000 $29.00 $55,100,000 San Juan Basin Royalty Trust 8,000,000 6.00 48,000,000 ------------ $103,100,000 ============
6 SCHEDULE B VALUATION PRINCIPLES The following valuation principles shall be applied when determining the value of the Specified Assets for purposes of this Stock Purchase Agreement. For any security which is publicly held or so listed or publicly traded, such security shall be valued at its daily Closing Price. "Closing Price" on any day of any security means (1) if such security is listed on the New York Stock Exchange, the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, or, (2) if such security is not listed or admitted to trading on the New York Stock Exchange as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such security is listed or admitted to trading or, (3) if such security is not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ. The source of the information used to compute the Closing Price of any such security shall be The Wall Street Journal. For any security which is not publicly held or is not listed or publicly traded, such security shall be valued at the transferee's carrying value of the security, calculated in accordance with generally accepted accounting principles, as of the date of transfer. 7 SCHEDULE C VALUATION FORMULA SOURCE ONE MORTGAGE SERVICES CORPORATION VALUATION METHODOLOGY - - The valuation per share equals the company valuation divided by a number equal to the positive difference between the number of all shares of capital stock issued and outstanding and the number of shares issued as part of any "Capital Infusion" (as hereinafter defined) by Fund American Enterprises, Inc. ("FAE"), Fund American Enterprises Holdings, Inc. ("FAEH"), and/or any "Person" (as hereinafter defined). The share valuation should be rounded to the nearest 1/100 of a cent. - - The initial (6/30/86) total company valuation is the acquisition price; $258,148,000. This also equals the 6/30/86 GAAP book net worth under purchase accounting (except that it does not include capitalized acquisition costs). Since the initial number of shares outstanding is 2,600,000, the initial valuation per share is $99.2877. - - Company valuations will be performed on a formula basis not less than quarterly for purposes of the plan and will be equal to: - current GAAP book net worth minus the GAAP effect of any Capital Infusion, - minus current GAAP book value of in place mortgage servicing portfolio, - plus current "formula value" of in place mortgage servicing portfolio (purchased and originated), - minus the current GAAP book value of capitalized acquisition costs, - minus current GAAP book value of the initial purchase accounting write up related to good will, buildings, FNMA stock, in process mortgage originations ("pipeline"), systems development and the branch network, - plus the 6/30/86 excess purchase price that would have resulted had the in place servicing portfolio been valued and capitalized at its formula value on that date, and excluding capitalized acquisition costs ($907,509). (This amount is a constant for all periods and equals $109,765,000). - - The "formula value" of the mortgage servicing portfolio is a percentage (rounded to the nearest 1/1000 of a percent) multiplied by the total outstanding principal balance of the portfolio. This servicing value excludes the "pipeline" of mortgages in process but not yet closed. - - This portfolio valuation percentage is determined initially as of 6/30/86 and first updated as of 12/31/86. Thereafter, the percentage will be updated quarterly. The percentage will remain constant between the quarterly updates, unless the Board of Directors (the "Board") of Source One Mortgage Services Corporation (the "Company") and FAEH Chairman decide more frequent changes are needed. 8 - - This percentage will be developed from the Company's "bid model," using data for the actual in place servicing portfolio as of 6/30/86, 12/31/86, 3/31/87, etc. The model (which includes certain supplemental calculations such as insurance, income and tax benefits) produces after-tax cash flows which are discounted at an after-tax rate. The discounted cash flows equal the estimated value of the servicing portfolio. This value divided by the total in place principal balance equals the portfolio valuation percentage. - - The model's after-tax cash flows are composed of servicing income, minus servicing expense, minus/plus taxes (all on a cash basis). Some of the highlights of the model are as follows: - Cash servicing income includes servicing fees, interest savings (due to escrow balances and cash flow "float"), plus ancillary income such as insurance commissions, late charges, assumption fees and prepayment penalties, - Cash servicing expense includes 100% of all variable servicing costs and 85% of all fixed servicing costs. This does not include any Company interest expense, principal payments on debt or amortization of capitalized purchased servicing costs. The expenses are based on actual costs for the latest 12-month period, plus a reasonable inflation assumption for future years. - Taxes are calculated at the expected effective rate for each year (federal, state and local on a stand-alone basis) times: (cash servicing income, less cash servicing expense, less non-cash purchased servicing amortization). This amortization is based on the actual tax basis of the purchased servicing rights (not on the total servicing valuation) and on the actual tax basis amortization schedule. - - The discount rate used in the portfolio valuation is based on the average daily yield of 10-year U.S. Treasury Bonds (as determined from the Federal Reserve Board "Statistical Release"), rounded to the nearest 1/100 of a percent, plus a 700 basis point risk premium. The average yield is for the period beginning 10 business days before the "as of" date for the bid model and ending 10 working days after. For example, the initial period would be the 21 business days from 6/16 to 7/15/86 with an average Treasury rate of 7.42%. The after-tax discount rate = (average pre-tax Treasury rate + 700 basis points) X (1 - posted effective tax rate). - - The prepayment rate will be a weighted average of the rates experienced over the 48 months immediately preceding the valuation date. The weighting distribution will be as follows: 50% for the most recent 12 months, 30% for the prior 12 months and 10% for each of the remaining 2 prior 12-month periods. Annual changes in the rate will be limited to a cap and floor of plus or minus 20%. (Cumulative quarterly changes during a calendar year will be limited to 5%, 10% and 15%, respectively, of the prior year-end rate.) The first prepayment rate will be calculated as of December 31, 1985. Therefore, the prepayment rate on the initial valuation date (June 30, 1986) will be capped at a 10% increase from the weighted average rate on December 31, 1985. A separate rate (rounded to the nearest 1/100 of a percent) will be determined for residential and commercial loans. - - The interest saving on escrow balances for P & I float is based on the average A1/P1 commercial paper rate for the latest 36 months, plus dealer cost, plus backup line cost, minus balance borrowing cost. (The following pages provide additional details on various assumptions.) - - All assumptions used in the bid model will be agreed to by the Company and FAEH management. Further, the Company Board and the FAEH Chairman will agree on the treatment 9 of any Capital Infusion with the intent that the effect of any Capital Infusion on the operation of this formula shall be neutralized to the fullest extent possible. - - As used herein: The term "Capital Infusion", means any infusion of new capital in the Company, after October 1, 1991, by FAE, FAEH and/or any Person for which FAE, FAEH and/or such Person receives capital stock of the Company. (The term "Capital Infusion" includes, but is not limited to, the $300,000,000 capital infusion in November, 1991, (which capital infusion consisted of a portfolio of common equity securities and other investments then valued at approximately $300,000,000) by FAE for which FAE was issued 1,660,118 shares of Class A Common Stock (including certain treasury shares of Class A Common Stock) of the Company.) The term "Person" means any person or entity other than (i) those persons listed on Annex I attached hereto and (ii) any employee stock ownership plan or similar plan of the Company. 10 SERVICING PORTFOLIO VALUATION INPUT REQUIREMENT BASIS OF DETERMINATION Initial Servicing Actual costs over the 12-month costs per loan period immediately preceding the valuation date. Servicing costs will include full variable costs and an 85% fixed cost allocation. Servicing costs Estimate based on anticipated growth rate inflation and assuming no escalation of fixed costs due to increased cost fixed cost allocation. Insurance income/ Estimate of future income based Miscellaneous fee income on experience over the prior 3 years. Prepayment Rate The prepayment rate will be a weighted average of the rates experienced over the 48 months immediately preceding the valuation date. The weighting distribution will be as follows: 50% for the most recent 12 months, 30% for the prior 12 months and 10% for each of the remaining 2 prior 12-month periods. Annual changes in the rate will be limited to a cap and floor of plus or minus 20%. (Cumulative quarterly changes during a calendar year will be limited to 5%, 10% and 15%, respectively, of the prior year-end rate.) The first prepayment rate will be calculated as of December 31, 1985. Therefore, the prepayment rate on the initial valuation date (June 30, 1986) will be capped at a 10% increase from the weighted average rate on December 31, 1985. A separate rate (rounded to the nearest 1/100 of a percent) will be determined for residential and commercial loans. Foreclosures The number of loans is based on current FHA experience. To be reviewed and updated at quarterly valuation dates. Foreclosure loss per loan Estimate of Company foreclosure losses on GNMA pools based on loan loss experience. To be reviewed and updated at quarterly valuation dates. Escrow balance per loan Based on the average escrow balance available over the previous 12 months. 11 INPUT REQUIREMENT BASIS OF DETERMINATION Interest earned on Average A1-P1 commercial paper escrow/P&I balances rate over the 36 months immediately preceding the valuation date, plus the cost of a back-up line of credit, plus dealer costs, less the cost of escrow available lines. Rates utilized in determining the average will be AA rates as published by the Federal Reserve. Escrow interest cost Estimate based on 13 states which require interest payments on escrow funds held. To be reviewed and updated at quarterly valuation dates. Escrow growth rate Estimate, to be held constant for future evaluation periods. Principal and interest float Estimate float available on FHA/VA and conventional loans. No float assumed available on GNMA loans (float benefits are offset by interest advanced on delinquent loans) or commercial loans. To be reviewed and updated at quarterly valuation dates. Reserve requirement Estimate based on current experience and objectives. To be reviewed and updated at quarterly valuation dates. Tax rate Federal taxes applied as projected under current law. State taxes assumed at 2%. Discount rate The discount rate will be applied to cash flows after adjustment for the effective tax rate in the period. The discount rate used in the portfolio valuation is based on the average daily yield of 10-year U.S. Treasury Bonds (as determined from the Federal Reserve Board "Statistical Release"), rounded to the nearest 1/100 of a percent, plus a 700 basis point risk premium. The average yield is for the period beginning 10 working days before the "as of" valuation date and ending 10 working days after. EX-10.LL 3 EX-10(LL) 1 Exhibit 10(ll) INCENTIVE AGREEMENT IN THE EVENT OF A SALE OF SOURCE ONE The following will occur at the close of a sale of the company: 1. Sale Incentive: Each of the individuals listed on the enclosed schedule shall be entitled to a special bonus in connection with the sale of the company which will consist of two elements: a. One third of all shares allocated under the LTIP in each earning period (26,442.97 shares in the aggregate) will become fully earned and vested to participants on the date of close, the value of which will be determined by using the Market Price (as defined in the Plan) of FAEH shares on the closing date of the sale; b. Each listed individual will be entitled to a share (represented by the pro rata factor) of the purchase price in excess of GAAP book. The bonus amount payable to Messrs. Allemang and Densmore will be a minimum of $356,092 and $360,616, respectively. Payment of bonus amounts shall be made one year after the sale with interest accruing from the date of sale at the "Daily Prime Rate," as defined in the Company's Voluntary Deferred Compensation Plan. Notwithstanding the foregoing, however, the payment described above for each individual will be reduced by the smallest amount required so that no part of the payment is not deductible under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), so long as such reduction is less than the excise tax that would otherwise be assessed under Section 4999 of the Code upon the payment of bonus amounts absent such reduction. The payout of the bonus is contingent upon continuation of the executive's employment with Source One for a period of one year from the sale, unless involuntarily terminated other than for "Cause" or as a result of "Constructive Termination," both as defined under the LTIP, or in connection with a material reduction in benefits as defined in Paragraph 2 below, in which case payment will be made at time of termination. 2 2. Current Benefits: Fund American will attempt to secure continuation of benefits reasonably comparable to those currently in place for a period of at least 36 months after the sale. Such programs include retirement plans, ESOP, LTIP, EICP, deferred compensation plans, health and life insurance, car leases and allowances, and club memberships. A material reduction in these benefits would constitute "Constructive Termination." In addition, Jim Conrad and Bob Richards will be provided supplemental retirement benefits that will permit each of them to begin receiving retirement benefits (starting at the time of termination, constructive or otherwise) as if they had reached age fifty-eight (for purposes of eligibility for an early retirement benefit, determining Benefit Service and the percentage reduction in benefits due to the start of benefits before the normal retirement date) under the Company's retirement plan and SERP and begin receiving post retirement medical benefits coverage as if each had reached age fifty-five at the time of termination, if his employment should be involuntarily terminated other than for "Cause" or if "Constructive Termination" occurs, as defined above and under the LTIP. Finally, Jim Conrad and Bob Richards will be entitled to any additional benefits available to terminated employees in such case. 3. Transaction Pool: A pool of $200,000 will be established by the Company for possible distribution to certain employees, other than members of the Management Committee, who deserve special consideration for making the sale a success. Date: 2-15-96 James A. Conrad ------------------- --------------------------------- James A. Conrad President and CEO Source One Mortgage Services Corporation Terry L. Baxter --------------------------------- Terry L. Baxter President Fund American Enterprises, Inc. 3 SALE BONUS
BASE SHARES PRO RATA FACTOR (%) Conrad 8,892.33 1.6814 Richards 6,351.67 1.2010 Allemang 3,176.00 .6006 Densmore 3,176.00 .6006 Janssen 333.33 .1890 Brady 635.33 .1201 Champion 635.33 .1201 Courson 635.33 .1201 Manasco 635.33 .1201 Everett 333.33 .0630 Gillies 333.33 .0630 Jansen 333.33 .0630 Schrader 333.33 .0630 Taylor 333.33 .0630 Cleary 305.67 .0580 --------- ------ 26,442.97 5.1260
EX-13 4 EXHIBIT 13 1 EXHIBIT 13 SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION* - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 148,595 $ 142,493 $ 173,564 $ 118,072 $ 132,900 Total expenses 105,313 137,215 111,387 100,747 90,967 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes 43,282 5,278 62,177 17,325 41,933 Income tax expense 16,132 4,474 22,056 7,378 19,706 - ----------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting changes 27,150 804 40,121 9,947 22,227 Extraordinary loss on retirement of debt (902) - - - - Cumulative effect of accounting changes (a) - (44,296) - (25,769) - - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 26,248 $ (43,492) $ 40,121 $ (15,822) $ 22,227 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per common share (b): Before extraordinary loss and cumulative effect of accounting changes $ 7.55 $ (1.65) $ 9.48 $ 2.34 $ 7.88 Net income (loss) per share $ 7.20 $ (14.21) $ 9.48 $ (3.73) $ 7.88 - ----------------------------------------------------------------------------------------------------------------------------------- Cash dividends per common share (c) $ - $ - $ 6.39 $ 2.40 $ 2.00 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA - ----------------------------------------------------------------------------------------------------------------------------------- Servicing portfolio at end of year (d): Balance (in millions) $ 31,831 $ 39,568 $ 38,403 $ 37,312 $ 41,014 Number of loans serviced (e) 494,051 543,428 518,972 578,883 611,253 Weighted average interest rate (e) 8.33% 8.14% 8.53% 9.34% 9.79% Percent delinquent (e) 5.28% 4.07% 4.44% 4.39% 4.58% Percent in process of foreclosure .80% .77% .92% .77% .74% Total mortgage loan production (in millions) $ 2,852 $ 4,586 $ 11,452 $ 7,591 $ 4,027 Servicing rights acquisitions (in millions) $ 4,674 $ 3,707 $ 6,368 $ 2,323 $ 6,756 Sale of servicing rights (in millions) $ 10,973 $ 3,868 $ - $ - $ - Number of employees at end of year 1,680 2,055 3,060 2,145 1,700 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (IN THOUSANDS) DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage loans receivable $ 381,028 $ 210,472 $1,298,506 $1,116,113 $ 797,363 Capitalized servicing (net) (f) 397,071 530,450 666,666 624,657 605,396 Total assets 1,135,029 1,210,012 2,647,153 2,456,898 1,962,588 Debt 716,632 647,251 1,959,643 1,835,909 1,337,001 Total liabilities 812,785 733,925 2,095,153 1,924,773 1,417,728 Total stockholders' equity (g) 322,244 476,087 552,000 512,906 525,778 - -----------------------------------------------------------------------------------------------------------------------------------
*See accompanying notes to Selected Consolidated Financial Data. 3 2 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (a) The 1994 amount reflects the cumulative effect, as of January 1, 1994, of a change in the methodology used to measure impairment of the purchased mortgage servicing rights asset. See Note 2 to the consolidated financial statements. The 1992 amount reflects the cumulative effect, as of January 1, 1992, of adopting Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". (b) Net income (loss) per common share amounts for all years presented are based on the weighted average number of common shares outstanding. (c) Cash dividends per common share were computed based on the total number of common shares outstanding as of the dividend record dates. (d) Includes loans subserviced for others having a principal balance of $4.0 billion and $4.3 billion as of December 31, 1995 and 1994, respectively. (e) Excludes interim servicing of loans having a principal balance of $1,651 million, $4,190 million, $75 million, and $1,675 million as of December 31, 1994, 1993, 1992 and 1991, respectively. (f) Reflects a $68.1 million cumulative effect adjustment to the purchased mortgage servicing rights asset as of January 1, 1994 relating to a change in the methodology used to measure its impairment. See Note 2 to the consolidated financial statements. (g) Total stockholders' equity excludes amounts applicable to redeemable Class B common stock for years prior to 1993. In November 1993, all the shares of redeemable Class B common stock were redeemed at the option of the holders thereof. See Note 8 to the consolidated financial statements. FORM 10-K The financial information contained in this report substantially conforms with the information required in the "Form 10-K" Annual Report to be filed by the Company with the Securities and Exchange Commission at the end of March 1996. Certain supplemental information appears in such Form 10-K that is not necessarily disclosed within this document. Copies of such Form 10-K (without exhibits) are available, without charge, upon request to the Corporate Secretary's Office, Source One Mortgage Services Corporation, 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (telephone: (810) 488-7000). BUSINESS The Company engages primarily in the business of producing, selling and servicing residential mortgage loans. Its primary sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing, and other revenue (including underwriting and appraisal fees). The Company is also engaged, through certain of its subsidiaries, in the sale of credit-related insurance products (such as life, disability, health, accidental death, and property and casualty insurance). MARKET FOR STOCK AND RELATED MATTERS There is no established public trading market for the Company's common stock. As of March 28, 1996, there was one holder of the 2,247,000 shares of the Company's issued and outstanding common stock. No cash dividends on common stock were declared for the years ended December 31, 1995 or 1994. For the year ended December 31, 1993, the Company declared cash dividends on common stock aggregating $26.6 million. The Company's secured credit agreements contain covenants which limit its ability to pay dividends or make distributions on its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. These covenants also require the Company to maintain a certain level of total tangible net worth and a certain ratio of debt to total tangible net worth. The Company is currently in compliance with all such covenants. 4 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 The Company reported net income of $26.2 million for the year ended December 31, 1995 compared to a net loss of $43.5 million for the year ended December 31, 1994 and net income of $40.1 million in 1993. The 1995 net income includes $40.0 million of pretax gains on sales of servicing to third parties. The 1994 net loss includes the effects of a $68.1 million pretax charge related to a change in accounting methodology for the purchased mortgage servicing rights ("PMSR") asset. The 1993 net income amount reflects $34.4 million of pretax realized gains on the sale and exchange of certain common equity securities with Fund American Enterprises Holdings, Inc., the Company's ultimate parent ("Fund American"), and certain of its subsidiaries. The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", an amendment of SFAS No. 65, as of January 1, 1995. SFAS No. 122 requires the total cost of acquiring mortgage loans, either through loan origination activities or purchase transactions, to be allocated to the mortgage servicing rights and the loans based on their relative fair values. The statement requires entities to measure impairment on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. SFAS No. 122 prohibits retroactive application to prior years, therefore the reported results for 1994 and 1993 are in accordance with SFAS No. 65 and are not directly comparable to the 1995 results reported under SFAS No. 122. A major difference between SFAS No. 122 and SFAS No. 65 relates to the capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS No. 65, the costs inherent in creating OMSR's could not be capitalized. Under SFAS No. 122, a portion of the total cost of an originated loan is allocated to the right to service the loan based on the relative fair value of the mortgage servicing right and the loan. The Company estimated the fair values of its mortgage servicing rights by calculating the present value of the expected future cash flows associated with such rights. In making those estimates, the Company incorporated assumptions that market participants would use in their estimates of future servicing income and expense and discounted those cash flows using current estimated market rates. To measure impairment of the mortgage servicing rights, the Company stratified the related mortgage loan servicing portfolio based on its predominant risk characteristics which were determined to be prepayment, default and operational risks. This resulted in stratification by interest rate, loan type (investor) and original term of maturity. The fair value of each stratum was computed and compared to its recorded book value to determine if a valuation allowance, or recovery of a previously established valuation allowance, was required. The adoption of SFAS No. 122 as it related to the capitalization of originated mortgage servicing rights resulted in the recognition of additional pretax gain on sale of mortgages of $27.2 million for the year ended December 31, 1995. The impairment provisions of SFAS No. 122 resulted in a pretax charge of $28.0 million for the year. The discount rate and prepayment assumptions are significant factors used in estimating the fair value of the Company's mortgage servicing rights and could be significantly impacted by changes in interest rates. Accordingly, it is likely that management's estimate of the fair value of the mortgage servicing rights could change in the near term due to changes in interest rates. In 1994, the Company adopted an accounting methodology that measured impairment of PMSRs by discounting the estimated future cash flows using a current market rate. Prior to 1994, the Company measured impairment of PMSRs on a disaggregated basis including a cost of capital charge for estimating future cash flows. The adoption of the new accounting methodology, recorded as a cumulative adjustment as of January 1, 1994, resulted in a $68.1 million pretax, $44.3 million after tax, charge to income for 1994. 5 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) Net servicing revenue was $60.5 million for the year ended December 31, 1995 versus $82.4 million in 1994 and $53.5 million in 1993. Mortgage servicing revenue decreased in 1995 compared to 1994 primarily due to the sale of $11.0 billion of servicing to third parties. Amortization of capitalized servicing decreased in 1995 compared to 1994 due to slower amortization of the capitalized mortgage servicing asset reflecting lower actual and anticipated prepayments and a smaller capitalized servicing asset due to the sale of servicing, partially offset by higher impairment charges related to the adoption of SFAS No. 122 in 1995. The increase in net servicing revenue in 1994 compared to 1993 was primarily due to slower amortization of the capitalized servicing asset reflecting the reduced pace of mortgage loan payoffs in the servicing portfolio during 1994 compared to 1993, partially offset by lower weighted average net servicing fee rates on newly originated loans. A steady rise in market interest rates for mortgage loans during 1994 resulted in a decrease in loan prepayments from the mortgage servicing portfolio during 1995 and 1994. However, falling interest rates through most of 1995 resulted in increased prepayment activity later in 1995. The Company's average prepayment rates for the years ended December 31, 1995, 1994 and 1993 were 8%, 13% and 38%, respectively. The payoff rate used to estimate future servicing cash flows for measuring impairment is based on current median prepayment estimates by interest rate and origination date, compiled by several large brokerage firms. In 1995, the Company discounted estimated cash flows for its PMSR and OMSR assets using current market interest rates of 10.5% for conventional loans and 12.0% for insured loans in accordance with SFAS No. 122. In 1994, the discount rate used to discount future cash flows of the PMSR's was based on then current market interest rates used for mortgage servicing sales as quoted by industry brokers. The discount rate ranged from 8.59% to 12.55% for the year ended December 31, 1994. In 1993, the interest component used to discount the cash flows of the PMSR's was 2.72% and was developed based on the Company's then most recent twelve-month average cost of capital including the actual cost of debt and dividends paid on the Company's equity capital. The Company's mortgage servicing portfolio decreased to $31.8 billion as of December 31, 1995 from $39.6 billion and $38.4 billion as of December 31, 1994 and 1993, respectively. During 1995, the Company sold the rights to service a total of $11.0 billion of mortgage loans to third parties for net proceeds of $199.1 million resulting in a pretax gain of $40.0 million. In 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party for net proceeds of $70.2 million and continues to service these loans pursuant to a subservicing agreement. A gain of $19.9 million was deferred in 1994 and is being recognized in income over the five-year life of the subservicing agreement. For the years ended December 31, 1995 and 1994, the Company recognized $4.2 million and $2.7 million, respectively, of the deferred gain which is included in net servicing revenue on the consolidated statements of income. The mortgage servicing portfolio as of December 31, 1995 and 1994 includes loans subserviced for others having a principal balance totalling $4.0 billion and $4.3 billion, respectively. Management's intent regarding the 1995 servicing sales was to take advantage of the substantial increase in the value of servicing rights that was created by the rise in interest rates during 1994 and to bring servicing and origination activities into better balance. Additional sales transactions may occur in the future when management deems it to be economically advantageous. However, a strategy of the Company is to build the servicing portfolio in order to take advantage of its low cost servicing operation. To that end, the Company purchased the rights to service $4.7 billion of mortgage loans from a third party in the fourth quarter of 1995. 6 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) Total mortgage loan production decreased to $2.9 billion for the year ended December 31, 1995 from $4.6 billion and $11.5 billion in 1994 and 1993, respectively. Production related to refinance activity represented approximately 23%, 50%, and 67% of total mortgage loan production for the years ended December 31, 1995, 1994 and 1993, respectively. Mortgage loan payoffs decreased to $2.3 billion and $4.7 billion for the years ended December 31, 1995 and 1994 from $13.6 billion in 1993. The decreases in mortgage loan production and payoffs in 1995 and 1994 reflect increases in market interest rates during 1994 and a corresponding reduction in refinancing activity from 1993 levels. However, declining market interest rates for mortgage loans during 1995, particularly during the fourth quarter, and a flattening of the yield curve sparked fixed rate loan production resulting in higher mortgage loan production volumes during the second half of 1995 compared to the first half of the year. In 1994, the Company implemented a restructuring plan as a result of a contracting mortgage loan origination market to bring its mortgage loan production network in line with anticipated levels of mortgage loan production. As a result, the Company recorded a pretax restructuring charge totalling $5.2 million, which included $2.7 million for future lease expenses related to closed facilities, $1.2 million in asset writedowns and $1.3 million for employee termination and other costs. As of December 31, 1995, $.9 million remained accrued on the Company's consolidated statement of condition relating to future lease expenses on closed facilities. The restructuring actions resulted in improved efficiency of the mortgage loan production operations and slightly lower operating costs during 1995. Net interest revenue was $10.3 million for the year ended December 31, 1995 compared to $12.1 million in 1994 and $25.5 million in 1993. The lower net interest revenue in 1995 and 1994 was the result of a significant decrease in mortgage loans receivable inventory, partially offset by lower short-term borrowings, reflecting decreased mortgage loan production. In addition, during 1995, using the proceeds from the sale of servicing rights, the Company repurchased and retired $82.3 million of long-term debt which resulted in an extraordinary loss after tax of $.9 million. In 1994, a reduction of short-term borrowings resulted from lower mortgage loan production, the issuance of $100.0 million of preferred stock and servicing sale proceeds of $70.2 million. The Company had net realized investment losses on the sale and exchange of securities with affiliates of $2.2 million and $8.6 million for the years ended December 31, 1995 and 1994, respectively, compared to a net realized investment gain of $34.4 million in 1993. The 1995 and 1994 losses resulted from the transfers of $27.0 million and $112.0 million, respectively, of certain common equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's parent, in exchange for shares of the Company's common stock held by FAE, which were retired by the Company. The 1993 gain amount is the result of the sale and exchange of certain common equity securities to Fund American, the Company's ultimate parent, and certain of its subsidiaries for cash and a more diversified portfolio of marketable equity securities. All the equity securities involved in such transactions were actively traded, readily marketable, and listed on a national exchange and, for purposes of such transactions, were valued at their closing prices on the day preceding the date of each transaction. In the first quarter of 1996, the Company sold its remaining common equity securities to FAE and recognized a pretax realized loss of $.9 million on the sale. Net realized investment loss was $.5 million for the year ended December 31, 1995 compared to a net realized investment gain of $3.3 million in 1994 and a net realized investment loss of $3.9 million in 1993. The 1995 loss amount primarily reflects net losses on the sales of common equity securities to third parties during the year. The 1994 gain amount reflects net gains realized on the sale of common equity securities 7 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) to third parties, offset by writedowns of certain long-term investments to estimated fair value. The 1993 loss amount primarily relates to writedowns of certain long-term investments to estimated fair value. Net gain on sale of mortgages decreased to $24.0 million for the year ended December 31, 1995 from $29.5 million in 1994 and $34.8 million in 1993. The 1995 net gain amount includes $27.2 million related to the adoption of SFAS No. 122. Intensive price competition during 1995 led to increased pricing subsidies on originated loans which subsequently reduced gains on sales of mortgages into the secondary market. The decrease in 1994 compared to 1993 reflects lower mortgage loan sales volumes due to the reduction in mortgage loan production and increased pricing subsidies on newly originated loans during the second half of 1994. During 1995, the Company sold the rights to service a total of $11.0 billion of its mortgage loan servicing portfolio to third parties resulting in total pretax gains of $40.0 million for the year. Other revenue, which consists primarily of loan processing fees and insurance commissions, decreased to $16.4 million for the year ended December 31, 1995 from $23.9 million in 1994 and $29.2 million in 1993. Loan processing fees, which generally represent approximately 80% of other revenue, tend to decrease or increase with mortgage loan production. Accordingly, the decreases in 1995 and 1994 primarily reflect the decreases in mortgage loan production in 1995 and 1994 compared to the previous year. Salaries and employee benefits expense was $51.3 million, $61.6 million, and $44.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. Generally accepted accounting principles ("GAAP") require loan origination fees to be netted against direct loan origination costs. Since salaries and employee benefits expense is the largest component of loan origination costs, approximately 90% of loan origination fees are accounted for as a reduction to salaries and employee benefits expense. A decline in loan origination fees, reflecting lower mortgage loan production during 1995 versus 1994, partially offset the decrease in unadjusted salaries and employee benefits expense. Excluding the effects of loan origination fees, salaries and employee benefits expense would have decreased approximately 25% in 1995 compared to 1994 and 23% in 1994 compared to 1993, as indicated in the following table, reflecting headcount reductions due to the downsizing of the production network during 1994 and lower incentive compensation expenses due to lower mortgage loan production volumes in 1995 and 1994.
- ----------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Unadjusted salaries and employee benefits expense $68,807 $91,115 $118,713 GAAP net origination revenues (17,550) (29,550) (74,296) - ----------------------------------------------------------------------------------------------- GAAP salaries and employee benefits expense $51,257 $61,565 $44,417 - -----------------------------------------------------------------------------------------------
Office occupancy and equipment expense decreased to $14.3 million for the year ended December 31, 1995 compared to $18.2 million in 1994. Office occupancy and equipment expense was $15.9 million for the year ended December 31, 1993. The decrease in 1995 reflects lower office lease and related expenses as a result of the downsizing of the production network due to a contracting mortgage loan origination market in conjunction with the restructuring plan implemented in 1994. The increase in 1994 compared to 1993 reflects higher office lease and related expenses associated with the expansion of the production network during 1993 and early 1994. The provision for loan losses was $7.0 million for the year ended December 31, 1995 compared to $8.2 million and $3.7 million in 1994 and 1993, respectively. The increase in 1994 from 1993 was primarily due to charge-offs relating to certain commercial real estate owned properties and higher average loss volumes relating to certain California residential mortgage loans. 8 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) Other operating expenses, which consist primarily of loan processing expenses and general office expenses, were $32.8 million for the year ended December 31, 1995 compared to $44.0 million in 1994 and $47.4 million in 1993. Loan processing expenses tend to decrease or increase with mortgage loan production. Accordingly, the decreases in other operating expenses in 1995 and 1994 reflect lower mortgage loan production in 1995 and 1994 compared to 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash flow requirements relate to funding mortgage loan production and investments in mortgage servicing rights. To meet these financing needs, the Company relies on commercial paper borrowings, short-term credit facilities, medium and long-term debt, early funding programs, and cash flow from operations. In 1995 and 1994, the Company also generated cash from the sale of servicing and the issuance of preferred stock which was used to reduce medium and long-term debt and to repurchase its common stock from FAE. In August 1995, the Company entered into a $60.0 million unsecured revolving credit facility which expires in July 1996. As of December 31, 1995, the Company had $60.0 million outstanding under this borrowing line. In March 1995, the Company consolidated its three then existing credit facilities into a single credit facility in the amount of $500.0 million, which can be increased at the Company's option with bank concurrence up to $1.0 billion. Borrowings under the consolidated facility, which matures in March 1998, are secured primarily by the Company's mortgage loans receivable and mortgage servicing portfolio. As of December 31, 1995, no borrowings were outstanding under the consolidated facility. As of December 31, 1994, there was $195.0 million outstanding under the previous three credit facilities. The Company's secured credit agreements contains covenants which limit its ability to pay dividends or make distributions on its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. These covenants also require the Company to maintain a certain level of total tangible net worth and a certain ratio of debt to total tangible net worth. The Company is currently in compliance with all such covenants. The Company has a $650.0 million domestic and Euro commercial paper program. The weighted average number of days to maturity of commercial paper outstanding as of December 31, 1995 was 19 days. As of December 31, 1995 and 1994, there was $256.6 million and $26.1 million of commercial paper outstanding, respectively. Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, has a revolving credit agreement under which it can borrow up to $10.0 million through March 31, 1996. Borrowings under the credit agreement are guaranteed by the Company. As of December 31, 1995 and 1994, there was $4.5 million and $3.8 million outstanding under this agreement, respectively. Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its 8.42% cumulative preferred stock, series A, for $56.0 million principal amount of 9.375% subordinated interest deferrable debentures ("subordinated debentures"), due December 31, 2025. Interest on the subordinated debentures is paid quarterly in arrears at the annual rate of 9.375% on the last business day of each March, June, September and December. The first interest payment was made on December 29, 1995 for the period from November 1, 1995 (the last regular dividend payment date with respect to the preferred stock) through December 8, 1995 at the annual rate of 8.42% and from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%. The purpose for the exchange was to improve the Company's after-tax cash flow 9 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) since the interest payable on the subordinated debentures is deductible for federal income tax purposes, whereas dividends payable on the preferred stock is not. The subordinated debentures are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 1999. On or after such date, the subordinated debentures may be redeemed at the option of the Company at a price equal to 100% of the principal amount redeemed ($25 for each $25 principal amount of subordinated debenture), plus accrued and unpaid interest to the date fixed for redemption. In June 1992, the Company issued $100.0 million of 9% debentures due June 2012 under terms of a $250.0 million shelf registration statement filed with the Securities and Exchange Commission ("SEC") in April 1992. The proceeds were used for general corporate purposes. Under a $200.0 million shelf registration statement filed with the SEC in November 1988, the Company issued $40.0 million of medium-term notes in 1989, with a total weighted average interest rate of 9.65% due 1996, and in October 1991, the Company issued $160.0 million of 8.875% medium-term notes due October 2001. During 1995, the Company repurchased and retired $10.3 million of medium-term notes that were due in 1996 and $21.6 million of medium-term notes that were due in 2001. In 1986, the Company issued $125.0 million of 8.25% debentures due November 1, 1996. During 1995, the Company repurchased and retired $50.4 million of these debentures. Management believes capital resources will be sufficient to meet the Company's operating needs as well as to fund maturing medium and long-term debt. In March 1994, the Company issued 4 million shares of 8.42% cumulative preferred stock, series A, ("preferred stock"), with an aggregate liquidation preference of $25 per share for net proceeds to the Company of $96.8 million. In connection with the issuance of preferred stock, the Company transferred a total of $112.0 million of certain common equity securities to FAE in exchange for 838,826 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized an $8.6 million pretax loss on these noncash transfers. The Company also repurchased and retired 85,248 shares of its common stock held by FAE for $10.0 million cash in 1994. In 1993, the Company redeemed all outstanding shares of its Class B common stock. Also in 1993, the Company's certificate of incorporation was amended to authorize 20 million shares of $.01 par value preferred stock. In addition, that amendment converted the Company's Class A common stock, no par value to common stock, $.01 par value, and increased the number of authorized shares from 5 million to 80 million. In February 1994, the Company's certificate of incorporation was further amended to change the number of authorized shares of preferred and common stock to 12 million and 8 million, respectively. The Company has a dividend policy which may result in the payment of dividends on the Company's common stock, dependent upon the earnings, cash position and capital needs of the Company, limitations in credit agreements, general business conditions and other factors deemed relevant by the Company's Board of Directors. The Company did not declare any dividends on its common stock during 1995 or 1994. The Company declared a total of $26.6 million common stock dividends for the year ended December 31, 1993. Quarterly cash dividends are paid on preferred stock at an annual rate of 8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on the first day of each February, May, August and November. The first dividend payment was made on May 1, 1994 with respect to the period from the date of initial issuance of the preferred stock through April 30, 1994. The Company paid cash dividends totalling $8.4 million and $5.2 million on its preferred stock for the years ended December 31, 1995 and 1994, respectively. 10 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The preferred stock is not redeemable prior to May 1, 1999. On or after such date, the preferred stock may be redeemed at the option of the Company at a price of $25 per share, plus accrued and unpaid dividends to the redemption date. During 1995, the Company sold the rights to service a total of $11.0 billion of mortgage loans to third parties for net proceeds of $199.1 million which were used to repurchase and retire debt, repurchase common stock, and for general corporate purposes. During 1995, the Company transferred a total of $27.0 million of common equity securities and $93.0 million in cash and money market investments to FAE in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized a $2.2 million pretax loss on these transfers. During 1995, the Company repurchased and retired a total of $82.3 million of public debt and recorded an extraordinary loss after tax of $.9 million. During 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party for net proceeds of $70.2 million. The Company continues to service these loans pursuant to a subservicing agreement which ends in 1999. The proceeds from the sale were used to reduce short-term debt and for general corporate purposes. INFLATION Inflation affects the Company primarily in the area of mortgage loan originations. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, the Company's mortgage loan originations have increased in response to falling interest rates and have decreased during periods of rising interest rates. However, higher interest rate environments typically enhance the value of the Company's mortgage servicing portfolio due to less refinance activity. Lower interest rates generally result in higher payoffs and, therefore, typically reduce the value of the mortgage servicing portfolio. 11 10 REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries STOCKHOLDERS AND BOARD OF DIRECTORS SOURCE ONE MORTGAGE SERVICES CORPORATION We have audited the accompanying consolidated statements of condition of Source One Mortgage Services Corporation and subsidiaries (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Source One Mortgage Services Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 2 to the consolidated financial statements, in 1995 the Company changed its method of accounting for mortgage servicing rights. As discussed in Note 2 to the consolidated financial statements, in 1994 the Company changed its method of accounting for its purchased mortgage servicing rights asset. ERNST + YOUNG LLP [SIGNATURE] Detroit, Michigan January 26, 1996 12 11 CONSOLIDATED STATEMENTS OF CONDITION - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) DECEMBER 31, 1995 1994 - ----------------------------------------------------------------------------------------------------------------- ASSETS - ----------------------------------------------------------------------------------------------------------------- Cash $ 4,146 $ 1,240 Investments 26,290 50,196 Mortgage loans receivable 381,028 210,472 Pool loan purchases 118,995 163,859 Loans held for investment 24,335 19,775 Capitalized servicing (net) 397,071 530,450 Common equity securities (net) 529 45,140 Mortgage claims receivable and real estate acquired (net of allowance for loan losses of $13,500 in 1995 and $13,350 in 1994) 45,416 49,785 Premises and equipment 31,014 36,173 Other assets 106,205 102,922 - ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,135,029 $1,210,012 ================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------- Liabilities: Debt $ 716,632 $ 647,251 Accounts payable and other liabilities 96,153 86,674 - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 812,785 733,925 - ----------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value, 12,000,000 shares authorized, 1,760,939 and 4,000,000 shares of 8.42% cumulative Series A (aggregate liquidation preference of $25 per share) issued and outstanding as of December 31, 1995 and 1994 18 40 Common stock, $.01 par value, 8,000,000 shares authorized, 2,247,000 and 3,206,049 shares issued and outstanding as of December 31, 1995 and 1994 22 32 Paid-in capital 346,088 522,032 Unrealized investment loss (net) (546) (4,065) Retained deficit (23,338) (41,952) - ----------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 322,244 476,087 - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,135,029 $1,210,012 =================================================================================================================
See accompanying notes to consolidated financial statements. 13 12 CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- REVENUE - ------------------------------------------------------------------------------------------------------------- Mortgage servicing revenue $141,883 $169,293 $187,113 Amortization of capitalized servicing 81,385 86,943 133,572 - ------------------------------------------------------------------------------------------------------------- Net servicing revenue 60,498 82,350 53,541 - ------------------------------------------------------------------------------------------------------------- Interest income 37,669 72,031 117,000 Interest expense 27,348 59,954 91,465 - ------------------------------------------------------------------------------------------------------------- Net interest revenue 10,321 12,077 25,535 - ------------------------------------------------------------------------------------------------------------- Net realized investment (loss) gain on sale and exchange of securities with affiliates (2,159) (8,596) 34,400 Net realized investment (loss) gain (544) 3,333 (3,911) Net gain on sale of mortgages 24,015 29,471 34,839 Net gain on sale of servicing 40,041 - - Other 16,423 23,858 29,160 - ------------------------------------------------------------------------------------------------------------- TOTAL REVENUE 148,595 142,493 173,564 ============================================================================================================= EXPENSES - ------------------------------------------------------------------------------------------------------------- Salaries and employee benefits 51,257 61,565 44,417 Office occupancy and equipment 14,326 18,241 15,909 Provision for loan losses 6,956 8,206 3,664 Restructuring charges - 5,154 - Other operating expenses 32,774 44,049 47,397 - ------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 105,313 137,215 111,387 - ------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effect of accounting change 43,282 5,278 62,177 Income tax expense 16,132 4,474 22,056 - ------------------------------------------------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting change 27,150 804 40,121 Extraordinary loss on repurchase of debt (net of $486 income tax benefit) (902) - - Cumulative effect of change in accounting for purchased mortgage servicing rights (net of $23,852 deferred income tax benefit) - (44,296) - - ------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 26,248 (43,492) 40,121 Less dividends on preferred stock 7,634 6,642 - - ------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 18,614 $(50,134) $ 40,121 ============================================================================================================= NET INCOME (LOSS) PER COMMON SHARE: Before extraordinary loss and cumulative effect of accounting change $ 7.55 $ (1.65) $ 9.48 Extraordinary loss (.35) - - Cumulative effect of accounting change - (12.56) - - ------------------------------------------------------------------------------------------------------------- Net income (loss) per common share $ 7.20 $ (14.21) $ 9.48 =============================================================================================================
See accompanying notes to consolidated financial statements. 14 13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries - -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------------------------------------------------------- UNREALIZED TOTAL INVESTMENT RETAINED STOCK- PREFERRED COMMON PAID-IN GAIN EARNINGS HOLDERS' STOCK STOCK CAPITAL (LOSS) (DEFICIT) EQUITY - -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1992 $ - $ - $ 542,246 $ (24,017) $ (5,323) $ 512,906 Net income - - - - 40,121 40,121 Unrealized investment gain (net) - - - 23,731 - 23,731 Recognition of compensation pursuant to stock plans - - (442) - - (442) Issuance of performance stock earned - - 244 - - 244 Decrease in book value of redeemable common stock - - 2,056 - - 2,056 Conversion of 4,130,123 shares of Class A common stock, no par value, to common stock, $.01 par value - 41 (41) - - - Common dividends declared of $6.39 per share - - - - (26,616) (26,616) - -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1993 - 41 544,063 (286) 8,182 552,000 Net loss - - - - (43,492) (43,492) Unrealized investment loss (net) - - - (3,779) - (3,779) Issuance of 4,000,000 shares of 8.42% cumulative Series A preferred stock, $.01 par value (aggregate liquidation preference of $25 per share) 40 - 99,960 - - 100,000 Repurchase of 924,074 shares of common stock, $.01 par value, from parent - (9) (121,991) - - (122,000) Preferred dividends declared of $2.105 per share - - - - (6,642) (6,642) - -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1994 40 32 522,032 (4,065) (41,952) 476,087 Net income - - - - 26,248 26,248 Unrealized investment gain (net) - - - 3,519 - 3,519 Repurchase of 959,049 shares of common stock, $.01 par value, from parent - (10) (119,990) - - (120,000) Exchange of 2,239,061 shares of 8.42% cumulative Series A preferred stock, $.01 par value (aggregate liquidation preference of $25 per share) for 9.375% subordinated debentures (22) - (55,954) - - (55,976) Preferred dividends declared of $2.105 per share - - - - (7,634) (7,634) - -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995 $ 18 $ 22 $ 346,088 $ (546) $ (23,338) $ 322,244 ================================================================================================================================
See accompanying notes to consolidated financial statements. 15 14 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES - --------------------------------------------------------------------------------------------- Net income (loss) $ 26,248 $ (43,492) $ 40,121 Noncash items included in the determination of net income (loss): Amortization of capitalized servicing 81,385 86,943 133,572 Provision for loan losses 6,956 8,206 3,664 Depreciation and amortization 7,347 10,450 8,206 Net realized loss (gain) on investments 2,703 5,263 (30,489) Amortization of goodwill 2,090 2,090 2,090 Gain on sale of servicing (40,041) - - Amortization of deferred gain on sale of servicing (4,188) (2,700) - Net (increase) decrease in mortgage loans receivable (170,556) 1,060,241 (182,393) Net increase (decrease) in accounts payable and other liabilities 18,749 (29,894) (40,046) Net decrease (increase) in other assets 3,768 42,444 (29,132) Net change in current and deferred income taxes receivable and payable 16,849 (4,716) 15,330 Extraordinary loss on repurchase of debt 902 - - Cumulative effect of change in accounting for purchased mortgage servicing rights - 44,296 - - --------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (47,788) 1,179,131 (79,077) - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES - --------------------------------------------------------------------------------------------- Collections on pool loan purchases, mortgage claims receivable and real estate acquired 192,697 254,136 213,319 Additions to pool loan purchases, mortgage claims receivable and real estate acquired (150,420) (242,841) (255,945) Capitalized excess servicing income (7,442) (16,712) (58,073) Additions to purchased mortgage servicing rights (82,147) (90,049) (72,229) Originated mortgage servicing rights (31,197) - - Net proceeds from sales of servicing 181,109 70,242 - Net decrease in investments 23,006 65,391 20,624 Purchase of common equity securities - (122,101) (5,706) Proceeds from sale of common equity securities to affiliates - - 129,812 Proceeds from sales of common equity securities 21,390 129,679 20,094 Net disposition (acquisition) of premises and equipment 185 (3,491) (11,222) Net (increase) decrease in loans held for investment (4,560) 3,836 3,392 - --------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 142,621 $ 48,090 $ (15,934) - ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 16 15 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------- FINANCING ACTIVITIES - -------------------------------------------------------------------------------------------- Proceeds from issuance of commercial paper $ 4,050,417 $ 1,778,950 $ 3,751,087 Repayments on commercial paper (3,819,904) (2,326,875) (3,703,977) Net (decrease) increase in credit agreement and bid loan borrowings (133,978) (765,673) 74,477 Repurchase of debt (85,872) - - Net proceeds from issuance of preferred stock - 96,850 - Repurchase of common stock from parent (92,980) (10,000) - Redemption of Class B common stock - - (4,624) Dividends paid (8,420) (5,239) (26,616) Other (1,190) (948) (47) - -------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (91,927) (1,232,935) 90,300 - -------------------------------------------------------------------------------------------- Net increase (decrease) in cash 2,906 (5,714) (4,711) Cash at beginning of year 1,240 6,954 11,665 - -------------------------------------------------------------------------------------------- Cash at end of year $ 4,146 $ 1,240 $ 6,954 ============================================================================================
See accompanying notes to consolidated financial statements. 17 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES ORGANIZATION Source One Mortgage Services Corporation (together with its subsidiaries, the "Company") was incorporated in 1972. It is the successor to Citizens Mortgage Corporation which was organized in 1946. The Company is now an indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund American"), a Delaware corporation organized in 1980, which was formerly known as The Fund American Companies, Inc. and Fireman's Fund Corporation. The Company is one of the largest mortgage banking companies in the United States. As of December 31, 1995, the Company had a mortgage loan servicing portfolio totalling $31.8 billion, including $4.0 billion of loans subserviced for others, which is serviced on behalf of approximately 320 institutional investors and numerous other security holders. As of December 31, 1995, the Company had 128 retail branch offices in 25 states and originated $2.9 billion in mortgage loans for the year then ended. As a mortgage banker, the Company engages primarily in the business of producing, selling and servicing residential mortgage loans. Its sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing and other revenue (including underwriting and appraisal fees). Through subsidiaries, the Company also provides credit-related insurance products (such as life, disability, health, accidental death, and property and casualty insurance). BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company include the accounts of Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, (together with its subsidiaries, "Central Pacific") and all other subsidiaries, and have been prepared in accordance with generally accepted accounting principles. Significant intercompany transactions have been eliminated in consolidation. The financial statements include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of the Company. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. Fund American acquired the stock of the Company in 1986. The acquisition resulted in a purchase price in excess of historical book value of the Company's net assets. The excess purchase price allocated to identifiable assets is being amortized primarily over 5 to 20 years depending on asset type and the portion allocated to goodwill is being amortized over 20 years. ACCOUNTING STANDARD RECENTLY ADOPTED As of January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No. 65, which requires the total cost of acquiring mortgage loans, either through loan origination activities or purchase transactions, to be allocated to the mortgage servicing rights and the loans based on their relative fair values. The statement requires entities to measure impairment on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. Pursuant to SFAS No. 122, prior year financial statements have not been restated. 18 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED) INVESTMENTS Investments primarily consist of the following: short-term investments stated at fair value with unrealized gains and losses, if any, reported in income; real estate mortgage investment conduit ("REMIC") residuals considered held to maturity and carried at amortized cost using a method which approximates the effective yield method of amortization on a prospective basis; investment partnership interests reported using the equity method of accounting; and interest rate floor contracts considered held for purposes other than trading and carried at fair value with unrealized gains and losses reported in other income. MORTGAGE LOANS RECEIVABLE Mortgage loans receivable are stated at the lower of aggregate cost or market value. Conventional mortgage loans are placed on a nonaccrual basis when delinquent ninety days or more as to interest or principal. Interest on delinquent Federal Housing Administration ("FHA") insured loans is accrued at the insured rate beginning on the sixty-first day of delinquency. Interest on delinquent Veterans Administration ("VA") guaranteed loans is accrued at the loan rate during the period of delinquency. RECOGNITION OF REVENUES RELATED TO MORTGAGE LOANS RECEIVABLE Discounts from the origination of mortgage loans receivable are deferred and recognized as adjustments to gain or loss on sale. Gains and losses from the sale of mortgage loans are recognized when proceeds are received. Loan origination fees, net of certain direct costs, have been deferred and are taken into income when mortgage loans receivable are sold. POOL LOAN PURCHASES Pool loan purchases, which are carried at cost, represent FHA insured, VA guaranteed and conventional loans which were either delinquent or in the process of foreclosure at the time they were purchased from Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"), or Federal Home Loan Mortgage Corporation ("FHLMC") mortgage-backed security pools that the Company services. Following the purchase of these loans, interest is accrued at a rate based on expected recoveries. LOANS HELD FOR INVESTMENT Loans held as permanent investments are stated at the lower of cost or market value determined at the time the permanent investment decisions were made. The amount of discount, if any, is amortized to income over the anticipated life of the investment. CAPITALIZED SERVICING Capitalized servicing includes certain costs incurred in the origination and acquisition of mortgage servicing rights ("originated and purchased servicing") which are deferred and amortized over the expected life of the loan. The total cost of acquiring mortgage loans, either through origination activities or purchase transactions, is allocated between the mortgage servicing rights and the loans based on their relative fair values. The fair values of mortgage servicing rights are estimated by calculating the present value of the expected future cash flows associated with such rights, incorporating assumptions that market participants would use in their estimates of future servicing income and expense. A current market rate is used to discount estimated future cash flows. Impairment of mortgage servicing rights is measured on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. Capitalized servicing also includes the present value of future servicing revenue in excess of normal servicing revenue on loans sold with servicing retained ("excess servicing") which is deferred and amortized using a method that relates the anticipated net servicing revenue to total projected net servicing revenue to 19 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED) CAPITALIZED SERVICING (CONTINUED) be received over the expected life of the loan. Impairment tests for excess servicing are performed on a disaggregated basis. The original discount rate is used to discount excess servicing future cash flows. RECOGNITION OF REVENUES RELATED TO SERVICING MORTGAGE LOANS Mortgage servicing revenue represents fees earned for servicing real estate mortgage loans owned by investors and late charge income. The servicing fees are calculated based on the outstanding principal balances of the loans serviced and are recognized together with late charge income when received. COMMON EQUITY SECURITIES Common equity securities are carried at fair value. Unrealized gains and losses, net of tax, are recorded as a separate component of stockholders' equity with no corresponding credit or charge to net income. MORTGAGE CLAIMS RECEIVABLE AND REAL ESTATE ACQUIRED Mortgage claims receivable represent claims filed primarily with FHA and VA and are carried at cost less an estimated allowance for amounts which are not fully recoverable from claims filed with the underlying mortgage insuring agencies. Real estate acquired is stated at the lower of net realizable value or the recorded balance satisfied at the date of acquisition determined on an individual property basis. Costs relating to holding the properties are charged to expense as incurred. The allowance for loan losses is based upon an analysis of the mortgage loan servicing portfolio and reflects an amount which, in management's judgment, is adequate to provide for estimated losses. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements and systems and programming software, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets or over the lease terms, whichever period is shorter. NET INCOME PER SHARE Net income per share amounts were computed based on the weighted average total number of common shares outstanding. There were 2,584,450, 3,527,713 and 4,232,474 weighted average common shares outstanding for the years ended December 31, 1995, 1994 and 1993, respectively. DIVIDENDS PER SHARE Cash dividends per share were computed based on the total number of common shares outstanding as of the dividend record dates. NOTE 2. CAPITALIZED SERVICING In 1995, the Company estimated the fair values of its mortgage servicing rights by calculating the present value of the expected future cash flows associated with such rights. In making those estimates, the Company incorporated assumptions that market participants would use in their estimates of future servicing income and expense and discounted those cash flows using current estimated market rates of 10.5% for conventional loans and 12.0% for insured loans. In 1995, to measure impairment of the mortgage servicing rights, the Company stratified the related mortgage loan servicing portfolio based on its predominant risk characteristics which were determined to be prepayment, default and operational risks. This resulted in stratification by interest rate, loan type (investor) 20 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 2. CAPITALIZED SERVICING (CONTINUED) and original term to maturity. The prepayment assumptions used in the estimation of fair values were based on market prepayment estimates. The fair value of each stratum was computed and compared to its recorded book value to determine if a valuation allowance, or recovery of a previously established valuation allowance, was required. The discount rate and prepayment assumptions are significant factors used in estimating the fair value of the Company's mortgage servicing rights and could be significantly impacted by changes in interest rates. Accordingly, it is likely that management's estimate of the fair value of the mortgage servicing rights could change in the near term due to changes in interest rates. The following table summarizes the fair value of mortgage servicing rights and certain characteristics of the Company's servicing portfolio related to those mortgage servicing rights as of December 31, 1995:
- --------------------------------------------------------------------------------------- Fair Value Weighted Mortgage Principal Average Weighted Weighted Servicing Balance Interest Average Average Rights Serviced (a) Rate Maturity Service Fee Loan type (in thousands) (in millions) (in percent) (in months) (in percent) - --------------------------------------------------------------------------------------- Insured $171,959 $ 8,872 8.77% 259 .44% Conventional 193,425 13,354 8.45 231 .34 Adjustable Rate 21,599 1,297 8.06 309 .43 - --------------------------------------------------------------------------------------- Total $386,983 $23,523 8.55% 246 .38% =======================================================================================
(a) Excludes $4.3 billion of mortgage servicing rights related to originations not capitalized prior to the adoption of SFAS No. 122. The adoption of SFAS No. 122 resulted in a decrease in net income of $1.4 million or $.53 per share for the year ended December 31, 1995. In 1994, the Company adopted an accounting methodology that measured impairment of purchased servicing by discounting the estimated future cash flows using a current market rate. Prior to 1994, the Company measured impairment of purchased servicing on a disaggregated basis including a cost of capital charge for estimating future cash flows. The adoption of the new accounting methodology, recorded as a cumulative adjustment as of January 1, 1994, resulted in a $68.1 million pretax, $44.3 million after tax, charge to income for 1994. The Company estimates the fair value of its capitalized excess servicing asset by discounting the anticipated future cash flows over the estimated life of the related loans. In making these estimates, the Company uses "interest only strip" interest rates as quoted by market participants to determine the appropriate discount rates and prepayment speed assumption rates that are based on interest rates, loan types and original term of maturity. The discount rate used to capitalize excess servicing for 1995 was 12.00%, and ranged from 8.00% to 10.00% for the year ended December 31, 1994, and was 8.00% for the year ended December 31, 1993. For the years ended December 31, 1995, 1994 and 1993, the weighted average discount rates inherent in the carrying amount of the capitalized excess servicing asset were 10.03%, 9.12% and 9.03%, respectively. 21 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 2. CAPITALIZED SERVICING (CONTINUED) The following table summarizes changes in the Company's capitalized servicing asset:
- ------------------------------------------------------------------------------------------------------------------------------- Deferred Gain on Total Purchased Originated Excess Valuation Sale of Capitalized Servicing Servicing Servicing Allowance Servicing Servicing - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1992 $551,254 $ - $ 73,403 $ - $ - $ 624,657 Additions 117,508 - 58,073 - - 175,581 Scheduled amortization (90,054) - (11,531) - - (101,585) Impairment/unscheduled amortization (8,500) - (23,487) - - (31,987) - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1993 570,208 - 96,458 - - 666,666 Cumulative effect of accounting change (68,147) - - - - (68,147) Additions 69,704 - 16,712 - (19,912) 66,504 Scheduled amortization (61,665) - (12,120) - - (73,785) Impairment/unscheduled amortization (12,818) - (340) - - (13,158) Amortization of deferred gain - - - - 2,700 2,700 Sales (21,706) - (28,624) - - (50,330) - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1994 475,576 - 72,086 - (17,212) 530,450 Additions 64,239 31,197 7,442 - - 102,878 Scheduled amortization (43,936) (1,364) (7,553) - - (52,853) Impairment/unscheduled amortization - - (564) (27,968) - (28,532) Amortization of deferred gain - - - - 4,188 4,188 Sales (132,371) - (26,689) - - (159,060) - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995 $ 363,508 $29,833 $ 44,722 $(27,968) $(13,024) $ 397,071 ===============================================================================================================================
During 1994, the Company sold the rights to service $3,868 million of mortgage loans for net proceeds of $70.2 million and continues to service these loans pursuant to a subservicing agreement. Accordingly, the Company recorded a deferred gain on the sale which is being recognized in income over the five-year life of the subservicing agreement. NOTE 3. COMMON EQUITY SECURITIES AND INVESTMENTS The Company's portfolio of common equity securities is carried at fair value. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders' equity with no corresponding credit or charge to net income. Realized gains and losses from sales of common equity securities are based on the specific identification method. The Company transferred a total of $27.0 million and $112.0 million of certain common equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's parent in 1995 and 1994, respectively, in exchange for shares of the Company's common stock held by FAE, which were retired by the Company. All of the equity securities involved in such transactions were actively traded, readily marketable, and listed on a national exchange and, for purposes of such transactions, were valued at their reported closing prices on the day preceding the date of each transaction. The Company received proceeds on the sale of common equity securities of $21.4 million and $129.7 million for the years ended December 31, 1995 and 1994, respectively. For the years ended December 31, 1995 and 1994, respectively, realized gains on the sale of common equity securities of $2.8 million and $10.6 million, and realized losses on the sale of common equity securities of $5.6 million and $14.5 million, were included in the determination of income. 22 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 3. COMMON EQUITY SECURITIES AND INVESTMENTS (CONTINUED) The fair value of the portfolio of common equity securities is as follows:
- ------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------- Common equity securities at adjusted cost $1,369 $51,393 Gross unrealized gains - 1,068 Gross unrealized losses (840) (7,321) - ------------------------------------------------------------------------------------------------------- Common equity securities at fair value $ 529 $45,140 =======================================================================================================
The carrying value of debt securities, which are included in investments on the consolidated statements of condition, is as follows:
- ----------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------------- Debt securities at fair value $2,735 $4,902 Gross unrealized gains - (179) - ----------------------------------------------------------------------- Debt securities at amortized cost $2,735 $4,723 =======================================================================
The change in net unrealized investment loss on the portfolio of common equity securities has been (charged) credited to stockholders' equity as follows:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Net unrealized investment loss at beginning of year $(4,065) $ (286) $(24,017) (Decrease) increase in gross unrealized gains (1,068) (3,875) 4,943 Decrease (increase) in gross unrealized losses 6,481 (1,938) 31,006 (Decrease) increase in deferred income tax (expense) benefit (1,894) 2,034 (12,218) - ------------------------------------------------------------------------------------------------------------------- Net unrealized investment loss at end of year $ (546) $(4,065) $ (286) ===================================================================================================================
NOTE 4. MORTGAGE LOANS RECEIVABLE The following table summarizes mortgage loans receivable:
- ------------------------------------------------------------------------------------------------------ December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------ Adjustable rate mortgage loans, weighted average interest rates of 6.55% and 7.66% as of December 31, 1995 and 1994, respectively $ 17,605 $ 46,344 Fixed rate 5 year through 20 year mortgage loans, weighted average interest rates of 7.47% and 8.81% as of December 31, 1995 and 1994, respectively 59,507 34,040 Fixed rate 30 year mortgage loans, weighted average interest rates of 7.89% and 9.27% as of December 31, 1995 and 1994, respectively 303,007 131,302 - ------------------------------------------------------------------------------------------------------ 380,119 211,686 Premiums (discounts) 909 (1,214) - ------------------------------------------------------------------------------------------------------ Total mortgage loans receivable $381,028 $210,472 ======================================================================================================
23 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 5. POOL LOAN PURCHASES The following table summarizes pool loan purchases:
- ------------------------------------------------------------------------------------------------------ Principal Balance (in thousands) Number of Loans - ------------------------------------------------------------------------------------------------------ December 31, 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------ Loan Type: FHA $ 77,644 $ 102,768 1,433 1,850 VA 32,456 41,941 545 719 Conventional 8,895 19,150 106 224 - ------------------------------------------------------------------------------------------------------ Total pool loan purchases $118,995 $ 163,859 2,084 2,793 ======================================================================================================
NOTE 6. OTHER ASSETS The following table summarizes other assets:
- ------------------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------------------------- Goodwill $ 21,978 $ 24,068 Amount due from sale of servicing 14,672 - Escrow advances 11,663 15,465 Deferred income tax benefit (Note 15) 10,533 16,474 Interest receivable-pool loan purchases 9,805 12,675 Branch network 8,925 9,775 Note receivable from sale of servicing 7,000 - Current income tax benefit (Note 15) - 4,384 Other 21,629 20,081 - ------------------------------------------------------------------------------------- Total other assets $106,205 $102,922 =====================================================================================
NOTE 7. DEBT The Company has a $650.0 million domestic and Euro commercial paper program. The weighted average number of days to maturity of commercial paper outstanding as of December 31, 1995 was 19 days. In August 1995, the Company entered into a $60.0 million unsecured revolving credit facility, which expires in July 1996. In March 1995, the Company consolidated its three then existing credit facilities into a single credit facility in the amount of $500.0 million, which can be increased at the Company's option with bank concurrence up to $1.0 billion. Borrowings under the consolidated facility, which matures in March 1998, are secured primarily by the Company's mortgage loans receivable and mortgage servicing portfolio. As of December 31, 1995, no borrowings were outstanding under the consolidated facility. As of December 31, 1994, there was $195.0 million outstanding under the previous three credit facilities. The Company's secured credit agreements contain covenants which limit its ability to pay dividends or make distributions on its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. These covenants also require the Company to maintain a certain level of total tangible net worth and a certain ratio of debt to total tangible net worth. The Company is currently in compliance with all such covenants. Under the credit agreements described above, the Company receives interest expense credits as a result of holding escrow and custodial funds in trust accounts at non-affiliated banks. 24 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 7. DEBT (CONTINUED) Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, has a revolving credit agreement under which it can borrow up to $10.0 million through March 31, 1996. Borrowings under the credit agreement are guaranteed by the Company. As of December 31, 1995 and 1994, there was $4.5 million and $3.8 million outstanding under this agreement, respectively. Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its 8.42% cumulative preferred stock, series A, for $56.0 million principal amount of 9.375% subordinated interest deferrable debentures ("subordinated debentures"), due December 31, 2025. Interest on the subordinated debentures is paid quarterly in arrears at the annual rate of 9.375% on the last business day of each March, June, September and December. The first interest payment was made on December 29, 1995 for the period from November 1, 1995 (the last regular dividend payment date with respect to the preferred stock) through December 8, 1995 at the annual rate of 8.42% and from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%. The subordinated debentures are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 1999. On or after such date, the subordinated debentures may be redeemed at the option of the Company at a price equal to 100% of the principal amount redeemed ($25 for each $25 principal amount of subordinated debenture), plus accrued and unpaid interest to the date fixed for redemption. In June 1992, the Company issued $100.0 million of 9% debentures due June 2012 under terms of a $250.0 million shelf registration statement filed with the Securities and Exchange Commission ("SEC") in April 1992. The proceeds were used for general corporate purposes. Under a $200.0 million shelf registration statement filed with the SEC in November 1988, the Company issued $40.0 million of medium-term notes in 1989, with a total weighted average interest rate of 9.65% due 1996, and in October 1991, the Company issued $160.0 million of 8.875% medium-term notes due October 2001. During 1995, the Company repurchased and retired $10.3 million of medium-term notes that were due in 1996 and $21.6 million of medium-term notes that were due in 2001. In 1986, the Company issued $125.0 million of 8.25% debentures due November 1, 1996. During 1995, the Company repurchased and retired $50.4 million of these debentures. As of December 31, 1994, in addition to the debentures and medium-term notes, credit agreement borrowings of $195.0 million could be optionally classified as long-term debt due to the commitment periods which extended beyond one year and the Company's intention to maintain those borrowings beyond one year. 25 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 7. DEBT (CONTINUED) The following table summarizes debt outstanding:
- ----------------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Commercial paper, weighted average interest rates of 6.14% and 5.83% as of December 31, 1995 and 1994, respectively $ 256,613 $ 26,100 Secured credit agreements, weighted average interest rate of 7.21% - 195,000 Credit agreements, weighted average interest rates of 6.57% and 5.38% as of December 31, 1995 and 1994, respectively 64,485 3,753 Medium-term notes due 1996, weighted average interest rates of 9.60% and 9.65% as of December 31, 1995 and 1994, respectively 29,700 40,000 8.25% debentures due November 1, 1996 74,650 125,000 8.875% medium-term notes due October 15, 2001 138,355 160,000 9.0% debentures due June 1, 2012 100,000 100,000 9.375% subordinated debentures, due December 31, 2025 55,976 - Less unamortized discount, premium and issuance costs (net) (3,147) (2,602) - ----------------------------------------------------------------------------------------------------------------------- Total debt $ 716,632 $ 647,251 =======================================================================================================================
The aggregate maturities of debt for the five calendar years after December 31, 1995 are as follows:
- ------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1997 1998 1999 2000 Thereafter Total - ------------------------------------------------------------------------------------------------------------------- $104,350 $ - $ - $ - $ - $ 294,331 $ 398,681 ===================================================================================================================
NOTE 8. STOCKHOLDERS' EQUITY In March 1994, the Company issued 4 million shares of 8.42% cumulative preferred stock, series A, ("preferred stock"), with an aggregate liquidation preference of $25 per share for net proceeds to the Company of $96.8 million. Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its preferred stock for $56.0 million principal amount of 9.375% subordinated debentures, due December 31, 2025. The preferred stock is not redeemable prior to May 1, 1999. On or after such date, the preferred stock may be redeemed at the option of the Company at a price of $25 per share, plus accrued and unpaid dividends to the redemption date. Quarterly cash dividends are paid on preferred stock at an annual rate of 8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on the first day of each February, May, August and November. The first dividend payment was made on May 1, 1994 with respect to the period from the date of initial issuance of the preferred stock through April 30, 1994. In connection with sales of rights to service a total of $11.0 billion of mortgage loans to third parties during 1995, the Company transferred a total of $27.0 million of common equity securities and $93.0 million in cash and money market investments to FAE in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. In connection with the issuance of preferred stock in 1994, the Company transferred a total of $112.0 million of certain common equity securities to FAE in exchange for 838,826 shares of the Company's common stock held by FAE, which were retired by the Company. The Company also repurchased and retired 85,248 shares of its common stock held by FAE for $10.0 million cash in 1994. 26 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED) In 1993, the Company redeemed all outstanding shares of its Class B common stock. Also in 1993, the Company's certificate of incorporation was amended to authorize 20 million shares of $.01 par value preferred stock. In addition, that amendment converted the Company's Class A common stock, no par value to common stock, $.01 par value, and increased the number of authorized shares from 5 million to 80 million. In February 1994, the Company's certificate of incorporation was further amended to change the number of authorized shares of preferred stock and common stock to 12 million and 8 million, respectively. NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company has only limited involvement with derivative financial instruments and does not use any derivative financial instruments for trading purposes. The Company's use of derivative financial instruments is primarily limited to commitments to extend credit, mandatory forward commitments and interest rate floors. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. These financial instruments primarily include commitments to extend credit and mandatory forward commitments. Those instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized on the consolidated statements of condition. The contract or notional amounts of those instruments reflect the extent of risk the Company has in the instruments. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit ("mortgage loan pipeline") is represented by the contractual notional amount of those instruments. The Company's locked mortgage loan pipeline that is expected to close totalled $221.9 million and $147.5 million as of December 31, 1995 and 1994, respectively. Fixed rate commitments result in the Company having market risk as well as credit risk. Variable rate commitments result only in credit risk. The amount of collateral required upon extension of credit is based on the Company's credit evaluation of the mortgagor and consists of the mortgagor's residential property. The Company obtains mandatory forward commitments of up to 120 days to sell mortgage-backed securities to hedge the market risk associated with a substantial portion of the mortgage loan pipeline that is expected to close and all mortgage loans receivable. As of December 31, 1995 and 1994, the Company had approximately $561.0 million and $351.2 million of mandatory forward commitments outstanding, respectively. If secondary market interest rates decline after the Company obtains a mandatory forward commitment for a loan, the loan may not close and the Company may incur a loss from the cost of covering its obligations under such commitment. If secondary market rates increase before the Company obtains a mandatory forward commitment for a loan and the loan closes, the Company may incur a loss when the loan is subsequently sold. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis in order to manage the risk inherent in these off-balance-sheet financial instruments. In addition, the risk management area seeks to reduce counterparty risk by committing to sell mortgage loans only to approved dealers, with no dealer having in excess of 20% of current commitments. The Company currently transacts business with seven approved dealers. The Company sells loans either through mortgage-backed securities issued pursuant to programs of GNMA, FNMA, FHLMC or institutional investors. Most loans are aggregated in pools of $1.0 million or more, which are purchased by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC. 27 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) Substantially all GNMA securities are sold without recourse to the Company for loss of principal in the event of a subsequent default by the mortgage borrower due to underlying FHA and VA insurance. Prior to December 1992, substantially all conventional securities were sold with recourse to the Company, to the extent of insufficient proceeds from private mortgage insurance, foreclosure and other recoveries. Since December 1992, conventional loans have been sold without recourse to the Company. Servicing agreements relating to mortgage-backed securities issued pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance funds to make the required payments to investors in the event of a delinquency by the borrower. The Company expects that it would recover most funds advanced upon cure of default by the borrower or at foreclosure. However, in connection with VA partially guaranteed loans and certain conventional loans (which are at most partially insured by private mortgage insurers), funds advanced may not cover losses due to potential declines in collateral value. In addition, most of the Company's servicing agreements for mortgage-backed securities typically require the payment to investors of a full month's interest on each loan although the loan may be paid off (by optional prepayment or foreclosure) other than on a month-end basis. In this instance, the Company is obligated to pay the investor interest at the note rate from the date of the loan payoff through the end of that calendar month without reimbursement. As of December 31, 1995, 1994 and 1993, the Company serviced approximately $10.7 billion, $11.9 billion and $11.4 billion of GNMA loans, respectively, and $3.5 billion, $3.7 billion and $4.8 billion of conventional loans with recourse, respectively. In order to cover loan losses that may result from these servicing arrangements and other losses, the Company has provided an allowance for loan losses of $13.5 million and $13.4 million as of December 31, 1995 and 1994, respectively, which management believes is adequate to cover unreimbursed foreclosure advances and principal losses. During 1995, the Company modified the methodology used to estimate the allowance for loan losses to more accurately reflect the Company's experience. This change reduced the amount of the allowance that would have been computed under the prior methodology. The Company enters into interest rate floor contracts ("floors") to reduce the sensitivity of its earnings to changes in market interest rates. The interest rate floor contracts derive their value from the 10 year constant maturity treasury yield index. The floor yields range from 5.47% to 5.85%. To the extent that market interest rates increase, the value of the floors declines. However, the Company is not exposed to losses in excess of its initial investment in the floors. The interest rate floor contracts are carried at market value with unrealized gains and losses recorded in other income on the consolidated statements of income. As of December 31, 1995 the carrying value of the Company's open interest rate floor contracts totalled $3.5 million with a total notional principal amount of $500.0 million. The floors have terms ranging from one to five years. 28 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts for the Company's financial instruments have been determined by the Company using appropriate market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND INVESTMENTS For cash and short-term investments, the carrying amount equals fair value. For investments in REMIC residuals, for which there are no quoted market prices, fair value is estimated based on discounted cash flow analyses, using interest only strip interest rates, prepayment speed assumptions, and LIBOR rates, taking into consideration the characteristics of the related collateral. For interest rate floor contracts, fair value is estimated based on quoted market prices for those or similar investments and equals carrying value. LOANS RECEIVABLE For mortgage loans receivable and loans held for investment, fair value is estimated using quoted market prices for securities backed by similar loans, adjusting for differences in loan characteristics. POOL LOAN PURCHASES For pool loan purchases, fair value is estimated based on discounted cash flow analyses, using the Company's short-term incremental borrowing rate or quoted market prices for securities backed by similar loans. CAPITALIZED EXCESS SERVICING For capitalized excess servicing, fair value is estimated by computing the anticipated net revenue to be received over the life of the related loans, discounted using quoted interest only strip interest rates and prepayment speed assumptions. COMMON EQUITY SECURITIES For common equity securities, fair value is based on quoted market prices and is equal to the carrying value. LOANS IN FORECLOSURE AND MORTGAGE CLAIMS RECEIVABLE For these financial instruments, fair value is estimated by discounting anticipated future cash flows using the Company's short-term incremental borrowing rate. DEBT For commercial paper and credit agreements, the carrying amount approximates fair value. For debentures and medium-term notes, fair value is estimated by discounting future cash flows using the Company's incremental borrowing rates for similar types of borrowing arrangements. For subordinated debentures, fair value is based on quoted market prices. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Fair value for commitments to sell mortgage loans is based on current settlement values for those commitments. Fair value for commitments to extend credit is based on current quoted market prices for securities backed by similar loans. 29 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Company's financial instruments are as follows:
- ------------------------------------------------------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ------------------------------------------------------------------------------------------------------- Financial Assets: Cash $ 4,146 $ 4,146 $ 1,240 $ 1,240 Investments 26,290 26,290 50,196 50,375 Mortgage loans receivable 381,028 391,484 210,472 211,371 Pool loan purchases 118,995 122,260 163,859 164,859 Loans held for investment 24,335 24,956 19,775 18,631 Capitalized excess servicing 44,722 46,032 72,086 98,307 Common equity securities 529 529 45,140 45,140 Loans in foreclosure and mortgage claims receivable (net) (a) 29,630 29,018 33,266 32,421 - ------------------------------------------------------------------------------------------------------- Financial Liabilities: Short-term debt $424,661 $ 428,212 $224,085 $224,085 Long-term debt 291,971 332,220 423,166 416,828 Off-balance-sheet financial instruments: Mandatory forward commitments N/A 562,379 N/A 349,037 Commitments to extend credit expected to close (pipeline) N/A 226,572 N/A 147,821 =======================================================================================================
(a) Excludes $15.8 million and $16.5 million of real estate owned in 1995 and 1994, respectively. - -------------------------------------------------------------------------------- It was not practicable to estimate the fair value of conventional loans sold with recourse, which is an off-balance-sheet financial instrument representing the Company's obligation to repurchase defaulted loans sold, since a reasonable estimate of fair value could not be made without incurring excessive costs. NOTE 11. MORTGAGE SERVICING The Company's portfolio of mortgages serviced, including loans subserviced, interim servicing contracts and those under contract to acquire and excluding loans sold but not transferred, totalled $31.8 billion, $39.6 billion and $38.4 billion as of December 31, 1995, 1994 and 1993, respectively. The Company's portfolio of mortgages serviced as of December 31, 1995 is summarized below:
- ------------------------------------------------------------------------------------------- Weighted Average --------------------------------------------------------- Net Remaining Principal Loan Interest Servicing Contractual Balance Serviced Balance Rate Fee Rate Life Loan type (in millions) (in thousands) (in percent) (in percent) (in months) - -------------------------------------------------------------------------------------------- Residential Conventional $16,291 $ 73 8.37% .411% 229 FHA 7,606 49 8.67 .433 271 VA 3,814 49 8.43 .432 256 Commercial 81 709 7.51 .155 171 - ---------------------------------------------------------------------------------------- 27,792 61 8.46 .419 245 Subservicing 4,039 - ---------------------------------------------------------------------------------------- Total mortgage servicing portfolio $31,831 ========================================================================================
30 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 11. MORTGAGE SERVICING (CONTINUED) The servicing fee rates in the table above are shown after deducting any guarantee fees. Guarantee fees, when applicable, range from six basis points for governmental loans up to approximately thirty basis points for certain conventional loans. Certain loans sold to private investors have no guarantee fees. The following table summarizes the Company's mortgage servicing portfolio by interest rate range:
- ------------------------------------------------------------------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number Principal Average Number Principal Average of Balance Interest Rate of Balance Interest Rate Interest Rate Range Loans (in millions) (in percent) Loans (in millions) (in percent) - ------------------------------------------------------------------------------------------------------------------- 6.00% and lower 2,674 $ 114 5.51% 6,597 $ 318 5.37% 6.00% - 6.49% 8,208 434 6.19 11,887 800 6.21 6.50% - 6.99% 25,192 2,077 6.69 37,415 3,339 6.71 7.00% - 7.49% 64,052 4,573 7.16 89,649 7,316 7.16 7.50% - 7.99% 84,899 6,745 7.63 93,328 7,748 7.61 8.00% - 8.49% 60,843 4,315 8.10 57,323 4,220 8.09 8.50% - 8.99% 80,936 4,217 8.60 78,998 4,465 8.60 9.00% - 9.49% 38,939 2,234 9.08 36,115 2,168 9.08 9.50% - 9.99% 57,131 3,185 9.60 59,174 3,383 9.60 10.00% and above 71,177 3,937 10.55 72,942 4,160 10.52 - ------------------------------------------------------------------------------------------------------------------ Total 494,051 $31,831 8.33% 543,428 $37,917 8.14% ==================================================================================================================
The following table summarizes the Company's mortgage servicing portfolio by location of property:
- ------------------------------------------------------------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Percentage Percentage of Principal of Principal Number Principal Balance of Number Principal Balance of of Balance Servicing of Balance Servicing State Loans (in millions) Portfolio Loans (in millions) Portfolio - ------------------------------------------------------------------------------------------------------------------- California 73,865 $ 6,668 20.9% 79,621 $ 7,195 19.0% New York 45,830 2,803 8.8 35,214 2,611 6.9 Washington 30,064 2,386 7.5 42,584 3,502 9.2 Texas 28,841 1,705 5.4 26,411 1,863 4.9 Florida 28,123 1,502 4.7 29,955 1,842 4.9 Michigan 30,235 1,308 4.1 33,174 1,865 4.9 Illinois 18,486 1,291 4.1 20,984 1,580 4.2 New Jersey 15,201 1,056 3.3 18,075 1,331 3.5 Arizona 15,751 949 3.0 17,570 1,104 2.9 Massachusetts 12,822 875 2.7 14,416 1,005 2.7 Other* 194,833 11,288 35.5 225,424 14,019 37.0 - ------------------------------------------------------------------------------------------------------------------- Total 494,051 $31,831 100.0% 543,428 $37,917 100.0% ===================================================================================================================
*No other state constitutes more than 2.7% of the Company's servicing portfolio as of December 31, 1995. The above tables include loans subserviced for others having a principal balance of $4,039 million and $4,294 million as of December 31, 1995 and 1994, respectively. The above tables exclude $1,651 million outstanding principal balance of interim servicing as of December 31, 1994. 31 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 11. MORTGAGE SERVICING (continued) Escrow funds of approximately $236.0 million, $277.9 million and $281.7 million as of December 31, 1995, 1994 and 1993, respectively, relating to mortgages serviced and subserviced, are held in non-interest bearing accounts at non-affiliated banks and are not included in the consolidated financial statements. The Company has in force an errors and omissions policy in the amount of $20 million. Primary fidelity coverage up to a limit of $35 million is provided under a Fund American master policy, for which the Company pays a portion of the premium. NOTE 12. RESTRUCTURING CHARGES As a result of a contracting mortgage loan origination market, the Company implemented a restructuring plan in 1994 to bring its mortgage loan production network in line with anticipated levels of mortgage loan production. As a result, the Company recorded a pretax restructuring charge totalling $5.2 million in 1994, which included $2.7 million for future lease expenses related to closed facilities, $1.2 million in asset writedowns and $1.3 million for employee termination and other costs. As of December 31, 1995, $.9 million remained accrued on the Company's consolidated statement of condition relating to future lease expenses on closed facilities. The restructuring actions resulted in improved efficiency of the mortgage loan production operations and slightly lower operating costs during 1995. NOTE 13. LEASE COMMITMENTS The Company has entered into a number of noncancelable operating lease agreements with respect to premises and equipment. The minimum annual rental commitments under these leases as of December 31, 1995 are summarized as follows:
- ------------------------------------------------------------------------ (in thousands) 1996 1997 1998 1999 2000 Total - ------------------------------------------------------------------------ $3,814 $2,285 $1,218 $497 $164 $7,978 ========================================================================
Leases for branches which were subject to the Company's restructuring plan implemented in 1994 are included in the table above. Future lease payments of $.9 million were included in the Company's restructuring reserve recorded in 1994, and therefore do not represent future operating expenses. Total rental expense for the years ended December 31, 1995, 1994 and 1993 was $4.6 million, $6.9 million and $5.2 million, respectively. Some leases contain escalation clauses that correspond with increased real estate taxes, other operating expenses, and/or renewal options that call for increased rents when the leases are renewed. NOTE 14. OTHER OPERATING EXPENSES The following table summarizes other operating expenses: - ------------------------------------------------------------------------------------ Year ended December 31, (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------ Telephone $ 4,015 $ 5,572 $ 5,663 Amortization of goodwill 2,090 2,090 2,090 Postage 1,985 2,325 2,841 Bank charges 1,948 2,901 2,795 Travel and entertainment 1,808 2,636 2,662 Office supplies and printing 1,768 2,471 2,906 Professional services 1,649 3,045 3,661 Other 17,511 23,009 24,779 - ------------------------------------------------------------------------------------ Total other operating expenses $32,774 $44,049 $47,397 ====================================================================================
32 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 15. INCOME TAXES The Company files a consolidated federal income tax return with Fund American. Federal income tax expense is provided substantially on a separate return basis except for the impact of a $1.9 million credit to the deferred income tax asset in 1995, a $2.0 million benefit to the deferred income tax asset in 1994 and a $12.2 million credit to the deferred income tax liability in 1993, relating to unrealized losses and gains on the Company's portfolio of common equity securities. As of December 31, 1995 and 1994, the Company had recorded $.3 million and $2.2 million, respectively, of deferred tax assets relating to accumulated unrealized losses on the portfolio of common equity securities. Pursuant to terms of a tax allocation agreement between the Company and Fund American, Fund American has agreed to compensate the Company for the use of these capital losses if such losses, when realized, can be utilized in Fund American's consolidated tax return. The following table summarizes income taxes due from or (to) Fund American:
- -------------------------------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - -------------------------------------------------------------------------------------------------- Net current taxes $ (6,766) $ 4,384 Net deferred taxes 10,533 16,474 ================================================================================================== Total income tax expense is as follows: - -------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Current income taxes: Federal $11,847 $ 14,483 $15,060 State and local 248 266 1,645 Deferred expense (benefit) 4,037 (10,275) 5,351 - -------------------------------------------------------------------------------------------------- Total income tax expense $16,132 $ 4,474 $22,056 ==================================================================================================
The current federal income tax expense for the year ended December 31, 1995 shown above excludes a $.5 million benefit relating to the extraordinary loss on the repurchase and retirement of debt which has been reported as a net amount on the consolidated statement of income. Deferred tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993 represent the net change in the deferred tax asset or liability during the year. Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts on the consolidated financial statements. The net deferred tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993, shown above, exclude a $1.9 million deferred tax expense, a $2.0 million deferred tax benefit and a $12.2 million deferred tax expense, respectively, associated with unrealized gains and losses on the common equity securities portfolio which were charged directly to stockholders' equity. The deferred tax benefit for the year ended December 31, 1994 shown above also excludes a $23.9 million benefit relating to the cumulative effect of the change in accounting for purchased mortgage servicing rights which has been reported as a net amount in the consolidated statement of income. 33 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 15. INCOME TAXES (continued) The following table summarizes the types of temporary differences giving rise to the net deferred tax assets and net deferred tax liabilities. There were no valuation allowances recorded relating to the net deferred tax assets as of December 31, 1995 and 1994.
- ------------------------------------------------------------------------------------------------------------------------ December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities - ------------------------------------------------------------------------------------------------------------------------ Purchase accounting adjustments $ - $10,208 $ - $11,220 Accumulated unrealized losses on common equity securities 294 - 2,188 - Capitalized servicing 13,667 - 18,694 - Allowance for loan losses 4,774 - 4,721 - Depreciation - 2,352 - 2,182 Deferred bi-weekly income 1,353 - 1,332 - Accrued postretirement benefits 1,159 - 1,018 - Other, net 5,752 3,906 5,492 3,569 - ------------------------------------------------------------------------------------------------------------------------ Total $26,999 $16,466 $33,445 $16,971 ========================================================================================================================
A reconciliation of taxes calculated using the federal statutory rate of 35% to income tax expense follows:
- ----------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Tax expense at federal statutory rate $ 15,149 $1,847 $21,762 Amortization of purchase accounting adjustments 732 732 732 Dividends received deduction (35) (263) (695) State taxes 161 173 1,069 Other, net 125 1,985 (812) - ---------------------------------------------------------------------------------------------------------- Total income tax expense $ 16,132 $4,474 $22,056 ==========================================================================================================
NOTE 16. PENSION PLAN The Company has a defined benefit pension plan covering most of its employees. Benefits under the plan are based on years of service and the employees' highest average compensation over five consecutive years in their last ten years of employment. Funding of retirement costs complies with the minimum funding requirements specified by the Employee Retirement Income Security Act. Cash contributions received by the plan for the years ended December 31, 1995, 1994 and 1993 totalled $1.7 million, $1.1 million, and $1.9 million, respectively. 34 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 16. PENSION PLAN (CONTINUED) The following table sets forth the plan's funded status and amounts recognized on the Company's consolidated statements of condition:
- ------------------------------------------------------------------------------------------------------------------------ December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $15,085 and $10,956 in 1995 and 1994, respectively $ 17,232 $ 12,611 Effect of future projected salary increases 6,738 5,058 - ------------------------------------------------------------------------------------------------------------------------ Projected benefit obligation 23,970 17,669 Plan assets at fair value, primarily long-term bonds (18,117) (13,066) - ------------------------------------------------------------------------------------------------------------------------ Projected benefit obligation in excess of plan assets 5,853 4,603 Unrecognized net loss (5,061) (3,761) Prior service cost not yet recognized in net periodic pension cost 1,001 1,119 Unrecognized net obligation at transition (57) (102) - ------------------------------------------------------------------------------------------------------------------------ Accrued pension cost included in accounts payable and other liabilities $ 1,736 $ 1,859 ======================================================================================================================== A summary of the components of net periodic pension cost is as follows: - ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Service cost for benefits earned during the year $ 1,354 $ 1,633 $ 1,388 Interest cost on projected benefit obligation 1,388 1,308 1,156 Actual return on plan assets (3,801) 985 (1,313) Net amortization and deferral 2,613 (1,575) 929 - ------------------------------------------------------------------------------------------------------------------------ Net periodic pension cost $ 1,554 $ 2,351 $ 2,160 ======================================================================================================================== Assumptions used in the determination of the projected benefit obligation were: - ------------------------------------------------------------------------------------------------------------------------ December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Discount rate 7.0% 8.0% 7.0% Rate of increase in compensation levels 6.0% 6.0% 6.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% ========================================================================================================================
NOTE 17. POSTRETIREMENT BENEFITS The Company has an unfunded postretirement benefit plan which provides for postretirement health care and life insurance benefits. Postretirement life insurance benefits are provided to substantially all employees. Postretirement health care benefits are provided to substantially all employees hired prior to January 1, 1991. The Company provides for term life insurance coverage based on the employees' annual earnings and length of service. Postretirement health care benefits are contributory, whereby the Company provides for 87.5% of medical costs to retirees who retired prior to January 1, 1993. Effective January 1, 1993, the plan was amended to provide for a portion of monthly retiree medical costs based on years of service to retirees who retire on or after January 1, 1993. 35 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 17. POSTRETIREMENT BENEFITS (CONTINUED) A summary of the components of net periodic postretirement benefit cost is as follows:
- ---------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - ---------------------------------------------------------------------- Service cost $ 86 $105 $ 92 Interest cost 250 240 253 Net amortization and deferral - 7 14 - ---------------------------------------------------------------------- Net periodic postretirement benefit cost $336 $352 $359 ======================================================================
The following table sets forth the plan's funded status reconciled to the amount recognized on the Company's consolidated statements of condition:
- ----------------------------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retired participants $2,141 $2,148 Fully eligible active participants 474 344 Other active participants 1,043 776 - ----------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 3,658 3,268 Plan assets at fair value - - - ----------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation in excess of plan assets 3,658 3,268 Unrecognized net loss (338) (51) - ----------------------------------------------------------------------------------------------- Accrued postretirement benefit cost included in accounts payable and other liabilities $3,320 $3,217 ===============================================================================================
A 10.13% annual rate of increase in the per capita costs of covered health care benefits was assumed for 1996, gradually decreasing to 5.0% by the year 2007 and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by 4.66% and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1995 by 3.59%. A discount rate of 7.0% was used to determine the accumulated postretirement benefit obligation as of December 31, 1995. NOTE 18. STOCK PLANS In 1986 the Company established an Employee Stock Ownership Plan ("ESOP") to enable employees to have an equity interest in the Company. As discussed in Note 8, the Company redeemed all the shares of Class B common stock held by the ESOP in November 1993 for $4.6 million in cash. Management subsequently used that cash to invest in Fund American common stock. The assets currently held by the ESOP consist substantially of Fund American common stock. Effective in the fourth quarter of 1993, the ESOP was amended to allow employees who terminate their employment with the Company, and who are vested in the ESOP, to receive their distribution in cash or shares of Fund American common stock. Contributions to the ESOP are determined at the discretion of the Board of Directors. In connection with the exchange of Class B common stock (Note 8), the Company established a Stock Appreciation Rights ("SAR") plan under which certain officers of the Company received stock appreciation rights in exchange for their shares of Class B common stock. The SARs may be exercised any time at the option of the holders thereof. The value of each SAR is equal to the difference between $86.625 and the closing price of Fund American's common stock on the date preceding the exercise of the SAR multiplied by a factor of 1.223. 36 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries NOTE 18. STOCK PLANS (CONTINUED) The Company has a long-term incentive plan which provides for the granting of stock-based and cash incentive awards to key senior management employees of the Company. Awards under the plan are payable upon the achievement of specified financial goals covering four overlapping three-year periods beginning January 1, 1994, 1995, 1996 and 1997. NOTE 19. CONTINGENCIES Various claims have been made against the Company in the ordinary course of business. Management believes that any liabilities which could result would not materially affect the Company's financial position or results of operations. NOTE 20. RELATED-PARTY TRANSACTIONS As discussed in Notes 3 and 8, the Company had various stock transactions with FAE. The Company also has a tax allocation agreement with Fund American as discussed in Note 15. The Company believes that all of the above transactions were on terms that were reasonable and competitive. Additional transactions of this nature may be expected to take place in the ordinary course of business in the future. NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION For purposes of reporting cash flows, cash includes cash on hand and amounts on deposit at banks excluding custodial bank accounts. The following table provides additional cash and noncash information not presented elsewhere on the consolidated financial statements:
- ----------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Interest paid $48,975 $ 42,951 $ 57,607 - ----------------------------------------------------------------------------------------------------- Income taxes paid $ 345 $ 9,328 $ 18,240 - ----------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Exchange of common equity securities for shares of common stock from parent (Note 3) $27,020 $112,000 $ - Exchange of 2,239,061 shares of 8.42% cumulative Series A preferred stock for 9.375% subordinated debentures (Note 8) 55,976 - - Exchange of common equity securities with affiliates - - 192,006 Acquisition of servicing rights 7,026 24,934 45,279 Redemption of Class B common stock (Note 8) - - 12,539 =====================================================================================================
37 36 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries Selected quarterly financial data for 1995 and 1994 is shown in the following table. The quarterly financial data includes, in the opinion of management, all necessary recurring adjustments for a fair presentation of the results of operations for the interim periods. In the 1995 third quarter, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," as of January 1, 1995. Accordingly, the following table reconciles the reported 1995 first and second quarter amounts to the amounts that would have been reported under SFAS No. 122.
- ----------------------------------------------------------------------------------------------- (in thousands, except for per share amounts) March June September December Quarters Ended 31 30 30 31 - ----------------------------------------------------------------------------------------------- 1995 Total revenue, as reported $ 57,269 $ 28,537 $34,580 $31,258 SFAS No. 122 adjustment 4,409 (7,458) - - - ----------------------------------------------------------------------------------------------- Total revenue, as adjusted 61,678 21,079 34,580 31,258 - ----------------------------------------------------------------------------------------------- Income before extraordinary loss, as reported 19,196 990 4,760 4,204 SFAS No. 122 adjustment 2,858 (4,858) - - - ----------------------------------------------------------------------------------------------- Income (loss) before extraordinary loss, as adjusted 22,054 (3,868) 4,760 4,204 - ----------------------------------------------------------------------------------------------- Extraordinary loss (675) (227) - - Net income, as reported 18,521 763 4,760 4,204 SFAS No. 122 adjustment 2,858 (4,858) - - - ----------------------------------------------------------------------------------------------- Net income (loss), as adjusted $ 21,379 $(4,095) $ 4,760 $ 4,204 - ----------------------------------------------------------------------------------------------- Net income (loss) per share before extraordinary loss, as reported $ 5.33 $ (.45) $ 1.13 $ 1.24 SFAS No. 122 adjustment per share .89 (1.97) - - - ----------------------------------------------------------------------------------------------- Net income (loss) per share before extraordinary loss, as adjusted 6.22 (2.42) 1.13 1.24 - ----------------------------------------------------------------------------------------------- Extraordinary loss per share (.21) (.09) - - Net income (loss) per share, as reported 5.12 (.54) 1.13 1.24 SFAS No. 122 adjustment per share .89 (1.97) - - - ----------------------------------------------------------------------------------------------- Net income (loss) per share, as adjusted $ 6.01 $ (2.51) $ 1.13 $ 1.24 =============================================================================================== 1994 Total revenue $ 47,150 $39,156 $28,589 $27,598 Income (loss) before cumulative effect of accounting change $ 9,074 $ 3,359 $(4,016) $(7,613) Cumulative effect of accounting change (44,296) - - - - ----------------------------------------------------------------------------------------------- Net (loss) income $(35,222) $ 3,359 $(4,016) $(7,613) Net (loss) income per share before cumulative effect of accounting change $ 2.12 $ .37 $ (1.86) $ (2.95) Cumulative effect of accounting change per share (10.73) - - - - ----------------------------------------------------------------------------------------------- Net (loss) income per share $ (8.61) $ .37 $ (1.86) $ (2.95) ===============================================================================================
38 EX-23 5 EXHIBIT 23 1 EXHIBIT 23 We consent to the incorporation by reference in this Annual Report (Form 10-K) of Source One Mortgage Services Corporation of our report dated January 26, 1996, included in the 1995 Annual Report to Shareholder of Source One Mortgage Services Corporation. We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-47025 and Form S-4 No. 33-62765) of Source One Mortgage Services Corporation and in the related Prospectuses of our report dated January 26, 1996, with respect to the consolidated financial statements of Source One Mortgage Services Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1995. Ernst & Young LLP Detroit, Michigan March 25, 1996 EX-24 6 EXHIBIT 24 1 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that James A. Conrad does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and Robert L. Densmore, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ James A. Conrad ----------------------------------- James A. Conrad 2 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Robert R. Densmore does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Robert R. Densmore ----------------------------------- Robert R. Densmore 3 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Robert W. Richards does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert R. Densmore and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Robert W. Richards ----------------------------------- Robert W. Richards 4 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Gordon S. Macklin does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Gordon S. Macklin ----------------------------------- Gordon S. Macklin 5 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Michael C. Allemang does hereby make, constitute and appoint Mark A. Janssen, Robert R. Densmore, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Michael C. Allemang ----------------------------------- Michael C. Allemang 6 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Terry Baxter does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Terry Baxter ----------------------------------- Terry Baxter 7 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Robert P. Keller does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Robert P. Keller ----------------------------------- Robert P. Keller 8 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Allan L. Waters does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Allan L. Waters ----------------------------------- Allan L. Waters 9 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Mark A. Janssen does hereby make, constitute and appoint Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Mark A. Janssen ----------------------------------- Mark A. Janssen 10 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Roger K. Taylor does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert W. Richards and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1995, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the first day of March, 1996. /s/ Roger K. Taylor ----------------------------------- Roger K. Taylor EX-27 7 EXHIBIT 27
5 1,000 12-MOS DEC-31-1995 DEC-31-1995 4,146 529 0 0 0 0 31,014 0 1,135,029 0 0 0 18 22 322,204 1,135,029 0 148,595 0 105,313 0 6,956 27,348 43,282 16,132 27,150 0 (902) 0 26,248 7.20 0
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