[INSIDE FRONT COVER]
CONTENTS

Letter to Stockholders                                                2
Financial Highlights                                                  4
Positioned for Profits                                                5
Financials                                                           17
Corporate Directory                                                  48
Stockholder Information                                              49
<PAGE>

COMPANY OVERVIEW
North American  Mortgage Company is a leading U.S.  mortgage banker funding $9.5
billion in loans for the purchase or  refinance  of homes in 1996 and  operating
more than 100 loan production  offices in 32 states. The Company is the nation's
third largest independent mortgage banker and ranks in the top dozen of all home
mortgage  lenders  It  offers a wide  array of loan  products  and  programs  to
consumers  realty  brokers,  mortgage  brokers  and  builders,  and in  addition
provides related financial products, including home equity credit and full lines
of  insurance.  The Company also services  Mortgage  loans and ended 1996 with a
servicing portfolio of $13.3 billion.
<PAGE>
[PHOTO]
<PAGE>

TO OUR STOCKHOLDERS

During the past year, North American  Mortgage Company  completed the investment
phase of the corporate  strategy we developed to strengthen,  diversify and grow
the Company.  Many key initiatives are now fully implemented and others are well
underway. We believe that, due to strategic decisions and additional investments
made  during the past two years,  the Company is well  positioned  to succeed in
today's difficult mortgage-banking environment.

In 1996,  the strong  housing  market and  relatively  favorable  interest  rate
environment spurred consumer loan demand, resulting in an estimated $785 billion
in new residential mortgage  originations.  This growth in volume,  however, was
accompanied  by  continued  consolidation  within the  industry and severe price
competition. In this highly charged environment, your Company increased its loan
fundings by 26 percent over 1995,  to $9.5  billion.  Earnings for the year were
$2.30  per  share  despite  price  competition  and  continued   start-up  costs
associated  with strategic  investments.  We believe that,  with  initiatives on
course,  investments  made and  major  expansions  complete,  we will be able to
compete effectively in 1997.

The recent trend toward consolidation in our industry shows no signs of abating.
Commercial  banks have  become  major  players in the  mortgage  market  through
banking  industry  consolidation  and the  acquisition of  independent  mortgage
companies.  North  American  Mortgage  Company  faces  larger and more  powerful
competitors than ever before. Fewer companies control more of the market. At the
beginning  of  the  decade,  the  combined  market  shares  of  the  25  largest
originators  accounted for little more than  one-quarter of the total,  while in
1996 the same group captured nearly 40 percent.  Consolidation has also resulted
in price  competition,  driving the Company's price subsidies to borrowers to an
average of 35 basis points on loans  originated in 1996,  compared with 32 basis
points in 1995 and 22 basis points in 1994.

As these  statistics  demonstrate,  mortgage banking today is an enterprise that
demands new thinking.  North American Mortgage Company has considered  carefully
how best to compete under these evolving conditions,  and we have taken specific
strategic actions to deal with each of the challenges presented by our industry.
We have met our  challenges  by  strengthening  our core  business  of  mortgage
origination;  by entering related businesses where we can leverage our expertise
and resources; by reducing our production costs through hub-and-spoke processing
between branches and satellites; and by investing in people and technology. Each
of these actions merits  discussion,  and each should strengthen our competitive
position in 1997.

2
<PAGE>
STRENGTHENING  OUR CORE  BUSINESS  North  American  Mortgage  Company has gained
capacity  through  expanded  operations and a continuing push for  efficiencies,
with a focus on  processing.  From our origins in  California,  your Company has
sought and achieved a national presence that allows us to take full advantage of
the regional  nature of business  cycles,  expanding  where the local economy is
growing.  With 109  offices  in 32 states in every  region of the  country,  our
expansion drive is now complete.  We have also worked to become a more efficient
producer with the full  implementation  of our re-  engineered  loan  processing
system, developed in consultation with Coopers & Lybrand.

ENTERING  RELATED  BUSINESSES  In today's  competitive  climate,  a broad market
presence and efficient  operations  cannot, in themselves,  ensure the continued
financial  health of your Company.  We are engaged in ongoing  evaluation of and
entry into closely  related  businesses  that draw on our core  competencies  as
mortgage   bankers,   businesses   where  we  can  capitalize  on  our  existing
distribution network and physical and technological infrastructure.  We look for
opportunities in higher-margin  businesses that will generate additional revenue
streams  and that will  offset the  cycles of the  mortgage  industry.  In prior
years, we took the first steps of introducing insurance,  home equity and credit
card products.

In 1996, we made an important  decision to enter subprime lending,  which offers
considerably  higher profit margins than conventional  mortgage  lending.  After
examining  alternatives,  we  inaugurated  this  highly  promising  venture in a
strategic  alliance  with  a  major  subprime  securitizer,   ContiMortgage,   a
subsidiary of  ContiFinancial.  Following a pilot phase in seven of our branches
during the fourth  quarter of 1996, we are now rolling out the subprime  program
across the  Company and we expect to complete  implementation  in our  wholesale
branches during the first quarter of 1997.

During 1996, the Company decided to securitize mortgage loans that exceed Fannie
Mae and Freddie Mac  guidelines in order to offer  desirable  products with more
timely  approvals and  consistent  pricing and  underwriting  standards than are
possible  under  sale  to a  loan  conduit.  We  intend  to  sponsor  our  first
securitization in the second quarter of 1997.

We also introduced an affinity  program with United Airlines that offers members
of United's  frequent  flier  program miles for  mortgages,  and we are actively
investigating  similar programs with market leaders in travel and other industry
sectors.

REDUCING  PRODUCTION  COSTS In addition to  expanding  our reach during the past
year,  we  continued  to seek  ways to  lower  production  costs.  Beginning  in
wholesale  branches,  we experimented with a hub-and-spoke  transaction model in
which  full-service  branches  within  a region  carry  out the  processing  and
underwriting  functions for loan applications generated by satellite offices. We
then expanded the model to selected  retail  branches.  Our retail  branches now
support processing for more than 50 satellites.  We are currently  analyzing the
existing branch network to identify  additional  locations  where  hub-and-spoke
linkages will generate further savings.

3
<PAGE>

INVESTING IN PEOPLE AND TECHNOLOGY In tandem with our geographical expansion and
cost-saving  initiatives,  we have invested significant resources in recruiting,
training and  retaining top  employees  and adding  important new  technological
tools.  These investments are now complete and we look forward to profiting from
them in the years to come.

In addition to inaugurating and following through on its strategic  initiatives,
North American  Mortgage  Company  continues to pay close attention to financial
fundamentals. Our balance sheet remains strong; we have a current warehouse line
of credit of $1 billion; our investment-grade  debt ratings were affirmed by the
rating agencies; and we continue to enjoy good financial liquidity.

Despite the challenges of the increasingly  competitive lending environment,  we
believe  that 1997 will  offer many  opportunities  to North  American  Mortgage
Company.  The economy is healthy, and consumer confidence is high - both primary
determinants  for home  purchase  decisions.  Your Company is now  positioned to
benefit from the  initiatives we have  implemented  and the  investments we have
made. We thank you for your support during this period of building,  and we look
forward to rewarding your confidence in 1997.



[s/John F. Farrell, Jr.]                            [s/Terrance G. Hodel]
John F. Farrell, Jr                                 Terrance G. Hodel
Chairman of the Board                               President
Chief Executive Officer                             Chief Operating Officer

March 14, 1997

FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years ended December 31,          1996         1995        1994          1993
--------------------------------------------------------------------------------
<S>                           <C>          <C>         <C>         <C>
Loan production In millions      $9,473       $7,495      $9,755       $17,607
Servicing portfolio
In millions                     $13,293      $14,109     $14,839       $17,280
Net income In thousands         $32,953      $40,455      $8,182       $47,694
Total assets In thousands      $853,657     $746,368    $765,374    $1,627,843
Stockholders' equity
In thousands                   $203,401     $193,144    $153,105      $165,380
Net income per share              $2.30        $2.69       $0.53         $3.17
Average shares outstanding
In thousands                     14,317       15,039      15,480        15,035
</TABLE>

4


<PAGE>

NORTH AMERICAN MORTGAGE COMPANY

POSITIONED FOR PROFITS

In 1996, North American Mortgage Company increased originations by 26 percent to
$9.5 billion,  while  implementing  initiatives  designed to increase profits in
1997 and beyond.  As we continue to compete  effectively  in a  mortgage-banking
environment  characterized by fewer major players and greater price competition,
we know that long-term  success depends on maintaining a solid foundation in our
core business,  entering  promising new businesses,  operating  through the most
efficient  structure,  and  making  the most of our  investments  in people  and
technology.

LOAN ORIGINATIONS($ IN BILLIONS)
[BAR CHART]
-----------------------------------
'95                    '96
7.5                    9.5
-----------------------------------
5
<PAGE>



<PAGE>
[PHOTO]
Profitability depends on making the right strategic decisions - like growing our
retail market share by offering customers attractive products and the ability to
do business at their convenience.

<PAGE>
NORTH AMERICAN MORTGAGE COMPANY

A STRONG BASE

The Company has  steadily  developed  its core  business of mortgage  lending by
extending  its  geographical  market  reach,   employing  multiple   origination
channels,  offering  a range of diverse  products  and  emphasizing  operational
efficiency.  In addition to  generating  revenue from mortgage  production,  the
Company has continued to improve the performance of its servicing operation.

Over the past five years,  we have achieved a significant  presence in all major
markets.  We are  particularly  pleased with the  performance of our Midwest and
Northeast  regions,  both  operations  we built from the ground up.  Within four
years of  start-up,  together  the Midwest and  Northeast  regions have grown to
generate more than one-quarter of the Company's total fundings.

THE RIGHT BALANCE OF  ORIGINATION  CHANNELS The Company  recognizes the value of
reaching customers through retail,  wholesale and telemarketing  channels.  This
three-part  approach  allows the Company to benefit from the  advantages of each
channel  without  becoming  too  dependent  on any one.  Our  branch  expansion,
completed in 1996, has increased our volume of retail  business,  which today is
our most profitable  origination  channel.  Retail is primarily  oriented to the
purchase  market,  which,  since the refinancing boom in 1993, has accounted for
more than 70 percent of  originations  nationwide.  At North  American  Mortgage
Company,  retail  volume,  including  telemarketing,  stood at 42 percent of all
originations in 1996.

The wholesale  channel,  which produces a higher percentage of refinancings than
retail production, is based on the Company's relationship with a network of more
than 6,500 independent  mortgage  brokers.  The Company maintains ties with this
broker  network  through  calling  officers and  marketing  seminars,  which are
designed to increase  awareness  of the  Company's  loan  products and to assist
brokers in educating their customers.

AN ARRAY OF PROGRAMS  AND PRODUCTS We believe that  providing  consumers  with a
diverse  array of  attractive  programs and  products is a way to  differentiate
North American Mortgage Company in the marketplace. Accordingly, we have created
programs  that are  directed  primarily  at purchase  loans and are  targeted to
different  kinds of consumers  and  markets.  These  programs  are  particularly
important to  maintaining a healthy retail  channel,  and they performed well in
1996.  Purchase  Express(R),  for example, is an advance credit approval program
intended to build  customer  loyalty.  As popular among realty  brokers as it is
among buyers,  Purchase Express  accounted for 24 percent of the Company's total
retail fundings in 1996.

RETAIL/WHOLESALE COMPARISON
($ In Millions)
[BAR CHART]
   '94        '95         '96
----------------------------------
*  3,822      3,312      3,995
+  5,933      4,183      5,478
----------------------------------
* Retail
       + Wholesale

FUNDING BY REGION
(% of Total Funding)
[CHART BY REGION]
                   '94        '95         '96
------------------------------------------------
Pacific            23%         19%         20%
Southern CA/NV     21%         19%         18%
Southwest          24%         23%         18%
Midwest             3%         14%         18%
Mid-Atlantic       20%         15%         13%
Northeast           2%          5%          8%
Telemarketing       7%          5%          5%
------------------------------------------------
[REGIONAL GRAPHIC MAP OF UNITED STATES]

7
<PAGE>

NORTH AMERICAN MORTGAGE COMPANY

NUMBER OF LOANS PER SERVICING EMPLOYEE
[BAR CHART]

    '94         '95          '96
----------------------------------
+    933       1,070        1,086
*    692         732         n/a
----------------------------------
             + NAMC*
             * MBA**
* North American Mortgage Company
**Mortgage Bankers Association

LOAN DELINQUENCY RATE
(INCLUDES FORECLOSURES)
[BAR CHART]
     '94        '95         '96
----------------------------------
+    2.43%     3.06%       3.43%
*    5.28%     5.40%       5.40%
----------------------------------
+ North American Mortgage Company
* Mortgage Bankers Association

Some of the Company's most  successful  loan programs are aimed at  fast-growing
but traditionally  underserved segments of the overall mortgage market.  Opening
Doors for  America(TM)is a community  lending program that uses such vehicles as
special loan  programs,  flexible  underwriting,  outreach and education to help
make home buying a reality for first-time,  low- to moderate-income and minority
purchasers. This commitment has benefited communities across the country, and it
has had a significant impact on the Company,  accounting for $2.6 billion of our
1996  production.  Opening Doors for America has also earned us recognition from
the Federal Housing  Administration  as one of the nation's top five FHA lenders
to African-American, Asian-American and Hispanic households.

Another  innovative   program,   introduced  in  1995,  is  Rehab  Express,(TM)a
government-insured  loan that targets older, urban markets by combining purchase
and property  improvement  costs. In 1996, the first full year Rehab Express was
offered,  North American Mortgage Company was the  fourth-largest  originator of
loans  of  this  type,   according  to  the  Department  of  Housing  and  Urban
Development.  Although this  specialized and complex product  represents  modest
volume  for  the  Company,  it  generates  high  revenue  due to  limited  price
competition.  Based on the success of Rehab  Express,  we are  planning to add a
conventional loan to our rehabilitation product line in 1997.

A HIGH-QUALITY  SERVICING  PORTFOLIO North American  Mortgage Company ended 1996
with a servicing  portfolio  of $13.3  billion.  The  delinquency  rate is a key
measure of portfolio  quality,  and in 1996 the Company  continued  its enviable
record against the industry average. While our delinquency rate rose slightly in
1996 to 3.58 percent (including  foreclosures),  it compares very favorably with
the  industry-wide  figure of 5.65  percent.  Our average  coupon rate also rose
modestly,  to 7.80 percent in 1996 from 7.73 percent in 1995, but it remained in
line with  prevailing  interest  rates,  continuing to reduce the probability of
borrower refinancing and consequent portfolio runoff.

Making optimal use of technology, reporting and tracking regulatory changes, the
Company is among the most efficient  servicers in the industry.  For example, in
1996,  the Company  serviced an average of 1,086 loans per  servicing  employee.
This  figure,  up for the third  consecutive  year,  compares  with an  industry
average of 732 loans per servicing  employee in 1995,  the latest year for which
statistics are available.


8

<PAGE>

NORTH AMERICAN MORTGAGE COMFPANY
NEW OPPORTUNITIES

North  American  Mortgage  Company  actively   evaluates  related  new  business
opportunities  that hold promise for the future.  We subject  these  ventures to
stringent tests:  they must draw on our core  competencies as mortgage  bankers,
they must be  delivered  through our existing  channels,  they must be congruent
with our corporate mission and they must hold significant  potential for profit.
In 1996, we expanded our existing  related  businesses,  introduced three highly
promising new initiatives and began planning for future additions.

CROSS-SELLING  PRODUCTS TO CURRENT CUSTOMERS North American Mortgage Company has
a broad database of qualified customers - new homebuyers,  refinancers and those
whose  loans it  services - who are  potential  buyers of related  products  and
services. New homeowners,  for example,  frequently encounter changing insurance
requirements,  and the  Company  has  expanded  its  product  lines  through its
subsidiary  North American  Mortgage  Insurance  Services (NAMIS) to serve them.
NAMIS has a dedicated  sales force  operating in conjunction  with the Company's
production  branches  and from its  headquarters  in Santa Rosa.  The  insurance
operation  offers  homeowners,  auto and life insurance and is licensed to write
policies in most states where the Company originates loans.

The Company more than doubled the size of its  insurance  portfolio in 1996 with
the acquisition of the assets of Lomas Insurance  Services,  a national provider
of personal lines insurance products and services. At year-end, NAMIS had 89,068
policies in force, compared with 33,225 at the close of 1995.

In December 1995, the Company  introduced  EquityEdge,(TM)a  home equity line of
credit.  Homebuyers can take advantage of this convenient product at the time of
a mortgage loan closing with  virtually no extra  paperwork.  Some customers use
the credit line for immediate improvements, some employ it to eliminate the need
for mortgage insurance or to reduce a "jumbo" loan to meet the conforming limit,
and some simply want to have a cushion for  unexpected  expenses.  EquityEdge is
also  available as a  stand-alone  product,  allowing  homeowners to draw on the
equity in their homes to meet such needs as home improvements,  major purchases,
college tuition or debt consolidation while taking advantage of tax benefits. In
1996, the product's first year, EquityEdge generated $58.5 million in fundings.

As these examples  demonstrate,  the Company and its insurance  subsidiary  have
recently increased the number of products available for cross-sale,  and each is
actively  marketing  its products to customers - at the point of sale,  when the
customer has an active need.

9
<PAGE>
[PHOTO]
Through  subprime  lending,  we offer people who have hit a financial rough spot
the chance to consolidate debt and get on with their lives.

<PAGE>

SUBPRIME LENDING The most significant  strategic decision the Company reached in
1996 was to enter subprime lending. This line of business, generating loans used
primarily as debt-consolidation vehicles by homeowners with less than impeccable
credit  histories,  offers  opportunity  on many  fronts.  Consumers,  who  have
collectively  run up the highest rates of personal  debt ever,  are now eager to
use the  equity  they  have in  their  homes  to help  them  manage  that  debt,
especially  at interest  rates  considerably  lower than those on credit  cards.
Current market size is estimated at $120 billion,  and no lender controls even a
five percent market share.  The yields  available to originators are much higher
than for  conventional  mortgage loans.  Subprime  lending will flow through the
retail,  wholesale and  telemarketing  channels already employed by the Company.
North American  Mortgage Company can take advantage of this market,  originating
subprime  loans in its  existing  production  offices,  for the most  part  with
current personnel. As a leading mortgage lender, we can bring efficiencies,  add
credibility and increase the customer service quotient in subprime lending.

In  determining  the course of its entry into the subprime  market,  the Company
evaluated and rejected the  alternative  scenarios of acquisition  and start-up.
Instead,   we  decided  to  capitalize  on  our  strengths  in  processing   and
distribution  by  seeking  a  strategic  alliance  with a major  securitizer  of
subprime loans. This option had a threefold advantage:  it was the quickest, the
most cost effective and entailed the least amount of risk.

In October,  the Company officially entered the subprime business in a strategic
alliance with ContiMortgage, a subsidiary of ContiFinancial, a major securitizer
of subprime  loans.  ContiMortgage  will  underwrite  and purchase the Company's
originations  and will also assist us in training our originators and processors
in the special characteristics of these loans.

A pilot subprime program was inaugurated in six wholesale branch offices and our
telemarketing  operation  during the fourth quarter of 1996,  using our existing
broker network and reaching out to additional brokers who specialize in subprime
lending.  Initial  response  has  been  very  positive,  and we plan to roll out
subprime lending to our 46 wholesale branches during the first quarter.  We will
also implement  training,  tools and systems to support subprime lending through
our retail channel.

SECURITIZING  NONCONFORMING LOANS  Nonconforming  loans, in contrast to subprime
loans, are  distinguished by size or other  characteristics  apart from borrower
credit.  Traditionally,  nonconforming  loans have been sold to securitizers who
offer a patchwork of  constantly  changing  guidelines,  leading  inevitably  to
approval delays and inconsistent  pricing and underwriting  standards.  In 1996,
North American  Mortgage  Company studied the option of leveraging the Company's
financial strength to create its own nonconforming  products. We determined that
we can benefit by acting as our own  securitizer,  gaining control over product,
pricing and underwriting  while streamlining  approval.  We plan to complete our
first securitization during the second quarter of the year.

UNITED AIRLINES  AFFINITY PROGRAM In late 1996, North American  Mortgage Company
entered into a partnership with United Airlines in a miles-for-mortgage  program
offered to United's MILEAGE PLUS(R) members.  The  HouseMiles(TM)program  proved
immediately  popular with consumers  because of its special  features:  a simple
formula based on loan amount rather than interest payment,  with no ceiling; all
miles  delivered up front rather than in  installments;  and the draw of a major
airline carrier. The size of the average HouseMiles loan to date is in excess of
$156,000,  compared with the 1996 Company-wide  average of $97,162.  The program
underscores  the value of  strategic  partnerships  with leading  companies,  an
avenue the Company will continue to pursue in 1997.

11

<PAGE>
[PHOTO]
We have  structured  our  business to foster  entrepreneurship  and  flexibility
within regions while lowering costs.

<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
A Flexible Business Structure

Throughout the entire  organization,  North American  Mortgage Company practices
autonomous  decision making in the context of a cohesive corporate  culture.  In
growing our  Company to a national  organization,  we opted for a  decentralized
structure  supported by significant  management  guidance.  Branches function as
entrepreneurial  small  businesses,   competing   aggressively  in  their  local
territories  and making  their own  decisions,  within  Company  guidelines,  on
pricing,  processing,  underwriting and funding. This approach has enabled us to
operate flexibly,  seeking maximum opportunity in a highly regionalized mortgage
market, while giving us an edge in recruiting able, ambitious staff.

HUBS AND SPOKES In 1996,  we  experimented  with a lower-cost  way to expand our
market  penetration  through a  regional  hub-and-spoke  transaction  model.  We
believe that delegating authority within established  guidelines allows us to be
more competitive in regional  markets.  Nevertheless,  we recognize that certain
processing and  underwriting  functions can be accomplished  more efficiently by
full-service  branches on behalf of satellite offices within the same region. We
began  applying  the  hub-and-spoke  model in existing  wholesale  branches  and
expanded it to include selected retail branches and satellites in 1996. In 1997,
we will extend the use of the model to additional  locations  within our network
of existing branches. In addition to benefiting from processing efficiencies, we
can now respond  more quickly to local  economic  conditions  because  satellite
offices  are  easier  to open and  less  costly  to  operate  than  full-service
branches.  With hub-and-spoke  processing,  we will ultimately achieve a greater
local presence, while giving loan officers in satellite offices the back-up they
need to be successful and reducing our overall origination costs.

RETAIL BRANCH FUNCTIONS IN HUB-AND-SPOKE SYSTEM
[FLOW CHART]
---------------------------------------------------------------
SATELLITE BRANCHES                           SATELLITE BRANCHES
                     FULL-SERVICE BRANCHES
SATELLITE BRANCHES                           SATELLITE BRANCHES
---------------------------------------------------------------
FULL-SERVICE BRANCHES               SATELLITE BRANCHES
Meet with customers                 Meet with customers
Take applications                   Take applications
Process loans                       Ship loans to full-service
Underwrite loans                     branches for processing
Prepare loan documents
Fund loans
Ship funded loan packages
 to corporate headquarters
---------------------------------------------------------------
  
13
<PAGE>
[PHOTO}

Bringing the  origination  process  closer to the customer is one of the ways we
deliver superior service...and gain competitive advantage.


<PAGE>
NORTH AMERICAN MORTGAGE COMPANY

A UNIQUE CONVERGENCE OF PEOPLE AND TECHNOLOGY

The  Company  has  invested  heavily  in both  skilled  people  and  appropriate
technology  over the past  several  years - adding 172 retail  loan  officers in
1996, for example.  We fully expect to capitalize on that investment in 1997 and
the years to come.  We take an  integrated  approach to human and  technological
resources:  by recruiting the right people,  by giving them the training to make
them more  productive and by putting  powerful and  user-friendly  technological
tools on their desktops,  we benefit from a unique  convergence of these two key
resources.

In 1996, we  implemented a new  telecommunications  infrastructure  that will be
capable  of  supporting  future  growth  even if  specific  overlaying  business
strategies change. In 1997, we plan to create an enterprise-wide  data warehouse
to ensure  consistency  and  usability  of data  throughout  the  Company.  This
initiative symbolizes our philosophy of maintaining  centralized control of data
with decentralized delivery of information so that all offices and all functions
- production, processing, underwriting and servicing - can access the tools they
need to do their jobs more efficiently and more profitably.

FASTER,  BETTER, CLOSER TO THE CUSTOMER Automated credit scoring,  introduced in
1995, was fully implemented  across all wholesale  branches in 1996. This system
gives the Company  immediate  feedback  regarding a  customer's  credit risk and
increases  the  accuracy and  consistency  of our credit  scoring,  resulting in
greater efficiencies and higher-quality loan originations.

Even more ambitious is the automated  underwriting  program,  which is currently
being  integrated  into the process our  underwriters  use to do their jobs.  We
anticipate that this automated system will handle approximately one-third of our
loans  with  very  little  manual  intervention  by  underwriters,  thus  saving
personnel costs. For the balance of our loan applications,  the system will flag
specific  problems for the  underwriter to investigate.  Automated  underwriting
will be moved further forward in the production system. By the fourth quarter of
1997, we expect to have it installed on  originators'  laptop  computers so that
they can have an early indication of risk and counsel customers accordingly.

Automated  underwriting  at the laptop  level is part of our  ongoing  effort to
bring the entire  production  process closer to the customer at the retail point
of sale,  whether  that  point is a  kitchen  table,  a  satellite  office  or a
full-service  branch.  In 1996,  we  completed  the  enhancement  of software on
laptops  across  the  Company,   transforming   them  from  data  recorders  for
applications  into interactive tools capable of generating  prequalification  or
loan status reports when the loan officer and customer are face to face.

Technology  also plays a major role in the  efficient  handling of our servicing
portfolio. Our artificial intelligence and scoring collection system enables our
servicing  employees to spot  potential  problem areas earlier in the process so
they may  contact  certain  borrowers  sooner in the credit  cycle and work with
those who need help.


RETAIL LOAN OFFICERS AND RETAIL BRANCHES

[BAR CHART]
---------------------------------
     '94       '95        '96
*    638       623        803
+     85        91        106
---------------------------------
* Number of Retail Loan Officers
+ Number of Retail Branches

15  
<PAGE>

NORTH AMERICAN MORTGAGE COMPANY


ENHANCED  COMMUNICATIONS In 1996, we began to make use of the World Wide Web for
communicating  inside and outside the Company. We implemented a Company intranet
for internal communications,  a particular advantage for a national organization
such as ours.  Currently,  our intranet  offers features such as bulletin boards
where employees in different  regions can share  information.  The intranet will
also deliver  information  during the production process and serve as a training
medium.  On the external front,  the Company launched its site on the World Wide
Web in February  1997 at  www.namc.com.  As  electronic  commerce  develops more
fully, we expect our Web site to emerge as an alternative  delivery  channel for
retail  customers,  realty  brokers,  builders  and  our  partners  in  business
alliances.

DEVELOPING  THE  POTENTIAL OF OUR PEOPLE  During the past year, we increased our
emphasis on branch management training, raising capabilities with new management
tools and techniques. In small-group sessions throughout the year, all regional,
district  and  branch  managers  participated  in  Branch  Management  Works,  a
week-long  intensive  learning  experience at North American Mortgage  Company's
Santa Rosa  headquarters.  The curriculum,  which was developed at the corporate
level with input from the field, covered financial analysis,  pricing,  planning
for growth and sales management.

16

<PAGE>
FINANCIALS



<PAGE>
<TABLE>
SELECTED FINANCIAL DATA                                                     YEAR ENDED DECEMBER 31
(Amounts in thousands, except Operating and Per Share Data)

<CAPTION>

SELECTED STATEMENT OF OPERATING DATA                 1996              1995             1994              1993               1992
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>              <C>                 <C>              <C>
REVENUES:
   Loan administration fees, net                 $ 45,280          $ 41,830         $ 50,574            $  38,784       $   26,314
   Loan origination fees                           84,605            69,282           75,140              125,807           80,860
   Gain (loss) from sales of loans                101,153            81,652          (14,951)              37,912           26,508
   Net interest income                             28,680            27,534           29,491               30,021           24,425
   Gain from sales of servicing                    37,634            46,037          120,739               88,821           52,102
   Other                                            9,441             8,445            7,172                7,594            6,279
                                                    -----             -----            -----                -----            -----

    Total Revenues                               $306,793          $274,780         $268,165            $ 328,939       $  216,488
Expenses:
   Amortization and impairment
  of purchased and originated
    servicing                                      10,462             7,310              965                5,072            5,799
    Other expenses                                241,349           203,753          255,963              250,435          163,233
                                                  -------           -------          -------              -------          -------

    Total Expenses                               $251,811          $211,063         $256,928            $ 255,507       $  169,032
                                                 ========          ========         ========            =========       ==========

Income before income tax expense                   54,982            63,717           11,237               73,432           47,456
Income tax expense                                 22,029            23,262            3,055               25,738            7,290
Net Income                                       $ 32,953          $ 40,455          $ 8,182            $  47,694       $   40,166
                                                 --------          --------          -------            ---------       ----------

Net income per share(1)                          $   2.30          $   2.69          $   .53            $    3.17
                                                 --------          --------          -------            ---------

Dividends per share                              $    .24          $    .24          $   .24            $     .21           $  .05
                                                 --------          --------          -------            ---------           ------
------------------------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL PRO FORMA INFORMATION(2)
------------------------------------------------------------------------------------------------------------------------------------
Supplemental pro forma net income                                                                                       $   32,456
------------------------------------------------------------------------------------------------------------------------------------
Supplemental pro forma net income per share                                                                                 $ 2.37
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding(3)             14,317            15,039           15,480              15,035            13,704
                                                   ------            ------           ------              ------            ------


SELECTED BALANCE SHEET DATA AT END OF PERIOD
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents                        $ 22,005          $ 12,273         $102,045          $    11,695       $    5,192
Total assets                                      853,657           746,368          765,374            1,627,843        1,020,560
Short-term borrowings(4)                          158,584           146,833          205,175            1,047,357          783,801
Term loan                                              --                --               --                   --           16,388
Purchase money note                                    --                --           10,580               12,091           13,473
Notes payable                                      75,724            74,801           99,699               99,592
Subordinated debt                                  10,070            10,070           10,070               10,070            9,967
Total liabilities                                 650,256           553,224          612,269            1,462,463          945,117
Stockholders' equity/partners'
 capital                                         $203,401          $193,144         $153,105          $   165,380       $   75,443
                                                 ========          ========         ========          ===========       ==========

SELECTED OPERATING DATA ($ in millions)
Volume of loans originated                       $  9,473          $  7,495         $  9,755           $   17,607       $   11,789
Loan servicing portfolio @ end of period(5)      $ 13,293          $ 14,109         $ 14,839           $   17,280       $   11,813
                                                 ========          ========         ========           ==========       ==========


1    1996 and 1995 results are not directly  comparable  to results for 1994 and
     prior years due to the  adoption of FAS No. 122. See  Financial  Accounting
     Standards Board No. 122, "Accounting for Mortgage Servicing Rights" on page
     23 for further discussion.
2    Supplemental  pro forma net income is computed by  adjusting  revenues  and
     expenses for interest savings from the net proceeds of the public offering,
     additional  operating expenses caused by the corporate structure and income
     taxes on adjusted  net income that would have been  payable had the Company
     purchased the Partnership at the beginning of the first period presented in
     the  Company's   Registration  Statement  related  to  its  initial  public
     offering.  Supplemental  pro forma net income per share is then computed on
     the basis of the weighted average number of shares that would have been
     outstanding during the year.
3    1992 is pro forma.
4    Short-term  borrowings  are  comprised  of  warehouse  lines of credit  and
     commercial paper.
5    Excludes servicing rights of $1.4 billion, $2.5 billion, $1.2 billion, $2.1
     billion,  and $2.6 billion,  for the years ended December 31, 1992, through
     1996 respectively, which had been sold but were sub-serviced by the Company
     prior to transfer.
</TABLE>

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company's revenues from its mortgage origination activities result from loan
originations and related fees, interest income earned on mortgage loans that are
held by the  Company  pending  their sale and net gains on the sale of  mortgage
loans.   The  Company's   revenues  related  to  servicing  rights  are  derived
principally  from loan servicing fees earned on servicing  rights and from gains
realized on the sale of servicing rights.

LOAN ORIGINATIONS - During 1996, total U.S. mortgage  originations  increased to
an estimated $785 billion from $636 billion in 1995.  Generally,  U.S.  mortgage
origination  volume varies with two factors:  the level of new and existing home
purchases  and the  level of  refinancings  of  existing  mortgage  loans.  (See
adjacent  table.) Both of these factors are impacted by interest  rates.  To the
extent the economy  encounters a period of rising interest rates,  mortgage loan
originations may decline, particularly loan originations due to refinancings.

Mortgage  originations  for the purchase of new and existing homes  increased in
1996 to an  estimated  $556 billion  from $480  billion in 1995.  This  increase
reflects  the very strong U.S.  housing  market in 1996.  According  to industry
estimates, 1996 was the highest purchase market in history.

Mortgage  originations  from  refinances  also  increased to an  estimated  $229
billion  compared with $156 billion  during 1995. As  demonstrated  in the graph
shown below, refinancing activity is especially sensitive to changes in mortgage
interest rates. The strongest  refinance quarters for the industry over the past
two years  were the last  quarter of 1995 and the first  quarter  of 1996,  when
30-year  mortgage rates were generally below the 7.5% level.  The overall higher
level of  refinancings  in 1996 compared with 1995 resulted from a  particularly
slow  first  half of 1995,  when  prevailing  refinance  mortgage  rates were on
average above borrowers' existing fixed mortgage rates.
<TABLE>
<CAPTION>
                                                      1-4 Family U.S.
                                                   Mortgage Originations*
                                                  ----------------------
($ in Billions)                                  1996     1995      1994
------------------------------------------------------------------------
<S>                                             <C>      <C>        <C>
New and existing home purchases                  $556     $480      $551
Refinancings                                      229      156       222
------------------------------------------------------------------------
Total                                            $785     $636      $773
========================================================================

*Sources: HUD and Mortgage Bankers Association (1996 market data based on 
current estimates).
</TABLE>

INDUSTRY REFINANCING AND 30-YEAR FIXED INTEREST RATES
1995-1996
[BAR/MOUNTAIN CHART]
---------------------------------
Industry
Refinance Fundings (in billions)
---------------------------------
1995      1st Qtr        14
          2nd Qtr        21
          3rd Qtr        54
          4th Qtr        67

1996      1st Qtr        89
          2nd Qtr        59
          3rd Qtr        36
          4th Qtr        45
----------------------------------
30 Year Fixed Interest Rate
----------------------------------
Jan95     9.15%     Jan96    7.03%
Feb95     8.83%     Feb96    7.08%
Mar95     8.46%     Mar96    7.62%
Apr95     8.32%     Apr96    7.93%
May95     7.96%     May96    8.07%
Jun95     7.57%     Jun96    8.32%
Jul95     7.61%     Jul96    8.25%
Aug95     7.86%     Aug96    8.00%
Sep95     7.64%     Sep96    8.23%
Oct95     7.48%     Oct96    7.92%
Nov95     7.38%     Nov96    7.62%
Dec95     7.20%     Dec96    7.60%


20

<PAGE>

The Company's loan origination  volume in 1996 of $9.5 billion  increased by 26%
over the $7.5 billion in 1995. This increase in origination  volume is primarily
attributable  to  the  general  rise  in  the  total  level  of  U.S.   mortgage
originations   and  to  the  positive  impact  of  the  Company's  retail  sales
initiatives. During the year, the Company increased its retail branch offices by
15, its satellite  locations by 29 and added 172 retail loan  officers.  Despite
these increases,  however,  the Company's loan origination volumes have been and
continue to be negatively  impacted by aggressive  price  competition from other
originators. (See discussion of price subsidies following.)

The adjacent  tables show the  Company's  market share and its  originations  by
distribution channel:

CURRENT  ORIGINATION  TRENDS - The first  quarter of the year is  generally  the
slowest for housing  sales due to seasonal  conditions.  Total  fundings for the
Company in the first two months of 1997 totaled $1.3 billion  compared with $1.6
billion for the same period in 1996. As previously  discussed,  the  origination
level for the first quarter of 1996  benefited  from a relatively  high level of
refinance activity.  Refinance fundings for the Company were $549 million in the
first two months of 1997 compared with $868 million in the same period of 1996.

<TABLE>
<CAPTION>
                                                 COMPANY'S MARKET SHARE*
                                                 ------------------------
                                               1996      1995       1994
-------------------------------------------------------------------------
<S>                                          <C>       <C>        <C>
New and existing home purchases               1.04%     1.08%      0.94%
Refinancings                                  1.57%     1.48%      2.28%
Total                                         1.20%     1.18%      1.26%
-------------------------------------------------------------------------

*Based on total 1-4 Family Mortgage Originations as reported by HUD and Mortgage
 Bankers Association (1996 market data based on current estimates).

                                                COMPANY'S ORIGINATION
                                                BY DISTRIBUTION CHANNEL
                                                                                      
 ($ in billions)                         1996         1995         1994
-----------------------------------------------------------------------
<S>                                     <C>          <C>         <C>
Wholesale                               $5.5          $4.2        $5.9
Retail*                                  4.0           3.3         3.9
-----------------------------------------------------------------------
Total                                   $9.5          $7.5        $9.8
-----------------------------------------------------------------------

*Includes telemarketing.
</TABLE>

NET INTEREST  INCOME - Between the closing of a loan and its sale, the Company's
loans are financed by short-term  borrowings under a warehouse line of credit, a
commercial  paper facility and with general  corporate  funds. The Company's net
interest  income or loss is the difference  between the interest income it earns
on the mortgage  loans it originates and its interest costs under its short-term
borrowings  during the holding  period.  Generally,  the  Company's net interest
income is impacted by: (i) the spread between  short-term and long-term interest
rates, (ii) the average balance of the Company's real estate loans held for sale
and (iii) the level of corporate cash balances and compensating balances used to
reduce short-term  borrowing costs. A decrease in any of the above factors would
have a negative impact on the Company's net interest income.

21
<PAGE>
During 1996, the Company's  interest rate spread,  its average  balance of loans
held for sale and its compensating  balances used to reduce short-term borrowing
costs increased compared with 1995. This increase,  however,  was largely offset
by a reduction  in  corporate  cash used to finance the loans held for sale (see
"Liquidity and Capital Resources").

GAIN  (LOSS)  FROM SALES OF LOANS - In 1996 and 1995,  the  Company's  gain from
sales of loans was impacted by three factors: price subsidies,  hedging activity
and the  recognition of gains related to Originated  Mortgage  Servicing  Rights
(OMSRs) under FAS No. 122. In 1994,  OMSRs were not  recognized  for  accounting
purposes,  and therefore,  the only comparable factors were pricing and hedging.
The following  paragraphs describe each of these factors.  

Price subsidies: The Company may make a loan at a price (i.e., interest rate and
discount) that is higher or lower than it would receive if it  immediately  sold
the loan in the secondary  market.  The Company adjusts the pricing on its loans
depending on competitive  pressures.  From 1994 through 1996, price  competition
for mortgage loans remained intense,  and the Company generally priced its loans
below the  secondary  market.  The price  competition  was  largely led by major
banks,  which were aggressively  trying to increase market share and build their
servicing portfolios.

Price   competition  in  the  Company's   wholesale   origination   channel  was
particularly  intense throughout 1996 and remained intense even when origination
volumes were  increasing  during the year.  In the opinion of  management,  this
prolonged  price  competition for loans sourced  through  wholesale  brokers has
signaled that a secular change has taken place in the pricing  structure of this
origination  channel.  To the extent that such  pricing  pressure  continues  or
intensifies  further,  the  Company's  gain on sales of loans will be negatively
impacted.  Hedging activity: Gains or losses may result from changes in interest
rates that result in changes in the market value of the loans, or commitments to
purchase  loans,  from the time the interest  rate lock is given to the borrower
until the time that the loan is sold by the Company to the investor. The Company
uses an options  pricing  model to  provide  information  to hedge  this  latter
interest   rate  risk.   The  Company  uses  forward   delivery   contracts  for
mortgage-backed  securities  and whole loan sales as hedging  instruments.  This
strategy  virtually  eliminates  basis  risk as the  borrower's  loan is used to
satisfy the forward delivery contract.  In periods of gradually  declining rates
with  relatively low  volatility,  such as the Company  experienced  for most of
1995, the Company's  hedging  activity  generally  produces gains. The Company's
hedging  strategy is negatively  impacted  during  periods of high interest rate
volatility or during periods when there is a significant change in the direction
of interest rates. The Company  experienced both of these conditions  during the
first nine months of 1996 and, therefore, its hedging profitability for the year
was negatively affected.

22
<PAGE>
OMSR impact: OMSR gains result from the creation of servicing rights in the loan
origination process. OMSR gains are affected by the volume of loan originations,
the product mix of  servicing  originated  and the general  market for  mortgage
servicing rights. (See discussion  Financial Accounting Standards Board No. 122,
"Accounting for Mortgage Servicing Rights," which follows.)

FINANCIAL ACCOUNTING STANDARDS BOARD NO. 122, "ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS" - In May 1995, the Financial  Accounting  Standards Board issued FAS No.
122,  "Accounting  for Mortgage  Servicing  Rights," an amendment to FAS No. 65.
Effective  January 1, 1995,  the Company  adopted FAS No. 122. Since FAS No. 122
prohibits  retroactive  application,  the historical accounting results for 1994
and before have not been restated and,  accordingly,  the accounting results for
the years ended  December  31, 1996,  and  December  31, 1995,  are not directly
comparable to the year ended December 31, 1994. The primary  difference  between
FAS No.  122 and FAS No. 65, as it relates  to the  Company,  is the  accounting
treatment for the normal servicing fee associated with in-house OMSRs. Virtually
all of the Company's  originations are in-house,  whereby the underlying loan is
funded and closed by the  Company.  Under FAS No. 65, OMSRs were not recorded as
an asset.  In 1994, the revenues and costs of creating OMSRs were  recognized by
the Company in the financial  statements at the time the  underlying  loans were
sold.  As a  result  of  this  accounting  treatment,  the  Company's  financial
statements in 1994 did not recognize any balance sheet or income statement value
for the OMSRs created by the Company,  even though these OMSRs had a substantial
market value. Under FAS No. 122, OMSRs are treated as an asset separate from the
underlying  loan.  In 1996 and 1995,  the total cost of creating a mortgage loan
was  allocated  at the time of  origination  between the loan and the  servicing
right based on their respective fair values. Additionally, gains on the sales of
loans  attributable  to the allocation of costs to the OMSR were recognized when
the related loan was sold, even though the OMSR asset was recognized on the date
the loan was  originated.  A  portion  of the  asset  established  for OMSRs was
amortized and the OMSR asset was analyzed for impairment  based on market prices
under comparable servicing sale contracts when available or,  alternatively,  on
the expected future net servicing revenue stream.  Several  financial  statement
captions  reported in the Company's  Statement of Operations  for the year ended
December 31, 1996,  and December 31, 1995,  were impacted by the adoption of FAS
No.  122,  including:  Gain  (loss)  from  sale of  loans,  Gain  from  sales of
servicing, and Amortization and impairment of loan servicing. The impact on each
of these  line  items is  discussed  in  detail  in the  Results  of  Operations
discussion for the years ended December 31, 1996, and December 31, 1995.

23
<PAGE>
SERVICING RIGHTS - The principal  balance of the Company's  servicing  portfolio
was $13.3 billion and $14.1 billion at December 31, 1996, and December 31, 1995,
respectively.  Substantially  all of these  servicing  rights have been obtained
through in-house origination sources (i.e., loans which are funded and closed by
the Company). As more fully described above, servicing rights for mortgage loans
originated  prior to 1995 were  capitalized  on the  balance  sheet  only to the
extent of the value of excess  servicing,  while essentially all of the value of
servicing  originated  since  1995 has  been  capitalized.  As a  result  of the
difference  in  accounting  treatment,  the  balance  sheet  carrying  value for
servicing rights is significantly  different  depending on whether the servicing
was  originated  before  January 1, 1995  (pre-1995),  or after  January 1, 1995
(post-1995).  Management  believes  that  the  total  fair  market  value of its
pre-1995  servicing rights is substantially  more than its carrying value, while
the fair market value of post-1995  servicing rights is  approximately  equal to
its total  carrying  value.  In 1996,  the Company sold $2.8 billion of pre-1995
servicing  rights and recorded a net pre-tax gain of $32.8  million.  The prices
received  for  sales  in 1996  may not  necessarily  reflect  the  value  of the
remaining pre-1995  portfolio,  due to differences in portfolio  characteristics
(i.e.,  servicing fees, age, coupon rates) and changes in market conditions.  At
December  31,  1996,  the net  balance  sheet  carrying  value (the total  OMSR,
Purchased  Servicing and Excess Servicing  Assets) and the principal  balance of
the servicing  portfolio  originated pre-1995 and post-1995 were as shown in the
adjacent table:  Management  continually  evaluates the Company's  investment in
retained  servicing  rights and  periodically  makes decisions to sell servicing
rights after considering the following criteria: cash requirements, market value
for servicing rights compared with their economic value to the Company, exposure
to prepayment  risk,  and earnings  impact.  To the extent the Company elects to
sell  pre-1995  servicing  rights,  virtually  all of the net proceeds from such
sales are  recognized  as one-time  gains from the sale of servicing  due to the
minimal book value of these servicing rights. Of the approximately  $5.8 billion
of pre-1995 servicing remaining at December 31, 1996, the Company estimates that
it may be economically  advantageous (i.e., where market value equals or exceeds
the economic value to the Company) to sell approximately $2.5 billion as part of
its  future  servicing   sales.   The  Company's   results  of  operations  have
historically  been and will  continue to be impacted by the amount and timing of
sales of pre-1995 servicing rights.  Historically,  when interest rates decline,
the  incremental  value created by the Company's  production  organization  from
higher  refinance  originations  has more than  offset  the loss in value to its
servicing portfolio resulting from higher prepayments.  Accordingly, the Company
does not presently hold any financial  prepayment  hedges,  but it has relied on
its ability to  originate  new  servicing as a  macro-hedge.  Under FAS No. 122,
however, if rates were to decline, the timing of additional  production revenues
and any  servicing  impairment  charge  might not occur in the same  period  for
financial  statement  purposes.  The Company  could be  required to  recognize a
servicing  impairment  charge in one  reporting  period,  while the  incremental
production revenues could be generated over several periods.

<TABLE>
<CAPTION>
                                                               TOTAL AT
                                       PRE-1995    POST-1995   12/31/96
-----------------------------------------------------------------------
<S>                                   <C>         <C>         <C>
Balance sheet carrying value           $1,338      $132,440    $133,778
(In thousands)
Servicing portfolio principal          $5,757      $  7,536    $ 13,293
balance (In millions)
-----------------------------------------------------------------------
Carrying Value Percentage                0.03%         1.76%       1.01%
</TABLE>

24

<PAGE>

RESULTS OF OPERATIONS
Year ended December 31, 1996, compared with the year ended December 31, 1995.

SUMMARY - Net income in 1996 was $33.0 million,  compared with $40.5 million for
1995. The decrease in net income was  attributable  to a combination of factors.
The Company's direct  origination  income  (origination fees and OMSR gains less
origination  expenses)  increased  as a result  of the 26%  rise in  origination
volume.  This increase was more than offset by lower servicing sale gains, lower
hedging gains and higher amortization and impairment of OMSRs.

REVENUES  -  Revenues  for 1996 were  $306.8  million,  a $32.0  million  or 12%
increase, compared with 1995 revenue of $274.8 million.
Loan  administration  fees were $45.3 million in 1996, an 8% increase,  compared
with $41.8 million in 1995. Loan  administration fees rose, despite a 2% decline
in the average size of the Company's servicing portfolio,  due to an increase in
the Company's  weighted  average service fee and a reduction in excess servicing
fee amortization,  which is netted against servicing revenues.  Loan origination
fees were $84.6 million in 1996, a 22% increase,  compared with $69.3 million in
1995. This increase reflects the higher origination level, partially offset by a
decrease in the average origination fees collected on each loan as a result of a
slightly higher percentage of wholesale and telemarketing originations. In 1996,
the Company's wholesale and telemarketing  originations represented 63% of total
production  as  opposed  to 60% in 1995.  The gain on sales of loans was  $101.2
million in 1996,  compared  with $81.7  million in 1995.  The gain from sales of
loans is impacted by hedging  activities,  pricing  subsidies and gains recorded
due to the allocation of a portion of the cost of the loan to OMSR under FAS No.
122. (See adjacent table.)

<TABLE>
<CAPTION>
 (In thousands)                           1996                1995
-----------------------------------------------------------------------
<S>                                   <C>                  <C>
Hedging gains                          $  6,631             $ 14,289
Pricing subsidies                       (33,471)             (23,697)
FAS No. 122 impact                      127,993               91,060
-----------------------------------------------------------------------  
                                       $101,153             $ 81,652
-----------------------------------------------------------------------
</TABLE>

Hedging gains were $6.6 million,  or 7 basis points on loans originated in 1996,
compared with $14.3 million,  or 19 basis points, in 1995. The Company's hedging
results  were  negatively  impacted  by the upward  turn in  interest  rates and
increased bond market volatility  experienced during the first three quarters of
this  year.  Hedging  gains  for this  period  averaged  1 basis  point on loans
originated  compared with 25 basis points on loans originated  during the fourth
quarter of 1996. Pricing subsidies  increased to $33.5 million during 1996, with
the average  subsidy on loans  produced at 35 basis points,  compared with $23.7
million,  or 32 basis points,  during 1995. This increase reflects the continued
price  competition  for  mortgage  loans,  particularly  loans  sourced  through
wholesale  brokers.  FAS No. 122 related  gains were $128.0  million in 1996, an
increase of 41%,  compared  with $91.1  million  during 1995.  This  increase is
related to a 36% increase in loans sold during 1996,  compared  with 1995,  that
were  originated  after  the  implementation  of FAS No.  122 and a higher  OMSR
capitalization  rate,  resulting  from changes in product mix and market values.
Interest income, net of warehouse  interest expense,  increased to $28.7 million
for 1996, compared with $27.5 million for 1995. This 4% increase in net interest
income was due to an increase in the average  balance of loans held for sale, an
increase in the interest  rate spread  earned,  and an increase in  compensating
balance credits used to reduce warehouse  borrowing costs.  These increases were
partially  offset by a reduction  in corporate  cash used to fund the  warehouse
(see "Liquidity and Capital Resources").

25
<PAGE>
Gain from sales of  servicing  was $37.6  million in 1996,  compared  with $46.0
million in 1995, an 18% decrease. In 1996, the Company sold $8.2 billion (or 87%
of originations) of servicing rights, compared with the sale of $6.7 billion (or
89% of  originations)  in 1995. The related gain  decreased,  however,  due to a
smaller  amount of  pre-1995  servicing  sold during  1996.  The gain on sale of
pre-1995  servicing  during 1996 was $32.8 million (on $2.8 billion of principal
sold), compared with a gain of $37.3 million (on $3.3 billion of principal sold)
in 1995.

EXPENSES - Expenses for 1996 were $251.8 million,  a 19% increase  compared with
$211.1 million in 1995.  Personnel  costs were $150.1  million,  a 23% increase,
compared with $122.0 million in 1995,  caused  primarily by a 26% growth rate in
loan origination volume. Personnel costs were also impacted by hiring additional
loan officers in connection with the Company's  retail sales  initiative.  Other
operating  costs  increased  15% to $73.5 million for 1996 from $64.1 million in
1995. These expense increases were primarily attributable to the 26% increase in
origination  volume and the higher startup and operating  costs  associated with
new branches and satellite locations. Interest expense decreased to $9.4 million
in 1996, compared with $9.8 million in 1995. This decrease was the result of the
decline in interest  expense on the  medium-term  notes  (MTNs),  due to a lower
average balance of MTNs outstanding in 1996. Amortization and impairment of loan
servicing  increased to $10.5  million  during 1996,  compared with $7.3 million
during  1995.  The primary  causes for this  increase  were the size of the OMSR
assets on the balance sheet, which caused higher amortization expense, partially
offset by a lower impairment charge in 1996.

YEAR ENDED  DECEMBER 31, 1995,  COMPARED WITH THE YEAR ENDED  DECEMBER 31, 1994.
SUMMARY - Net income in 1995 increased by 394% to $40.5  million,  compared with
net  income of $8.2  million  for 1994.  The  increase  in net  income  for 1995
reflected a significant  improvement in gain on sale of loans (see discussion of
FAS No. 122 impact  below) and a reduction of costs,  largely due to the closing
of 29 offices in a downsizing  plan during  1994.  These  improved  results were
partially  offset by a reduction in the gain from sales of  servicing  resulting
from a reduction in the volume of servicing sold and due to higher book value of
the servicing rights.

REVENUES  -  Revenues  for 1995  were  $274.8  million,  a $6.6  million,  or 2%
increase,  compared  with 1994 revenue of $268.2  million.  Loan  administration
fees, net of the  amortization of excess  servicing fees of $4.7 million in 1995
and $629,000 in 1994, were $41.8 million in 1995, a 17% decrease,  compared with
$50.6 million in 1994. This decrease is primarily the result of the 12% decrease
in the average size of the  Company-owned  loan servicing  portfolio,  partially
offset by an increase in the average  servicing fee collected.  Loan origination
fees were $69.3 million in 1995, an 8% decrease,  compared with $75.1 million in
1994. This decrease resulted primarily from a 23% decrease in loan originations,
partially offset by an increase in origination fees collected on each loan. This
increase  in the  average  fees  collected  was  primarily  a result of a higher
percentage  of retail  production  in 1995 (44% as opposed to 39%), on which the
Company  receives higher loan  origination  fees. The gain on sales of loans was
$81.7 million in 1995,  compared  with a loss of $15.0  million  during 1994. In
1994,  gains or losses on sales of loans  resulted from hedging  activities  and
pricing  subsidies.  In 1995, gains or losses on sales of loans were affected by
these same factors,  but were also affected by FAS No. 122. Under FAS No. 122, a
higher gain on sale is recorded  when a loan  originated  by the Company is sold
and the servicing is retained  compared  with FAS No. 65,  because under FAS No.
122, the cost of the loan is reduced by the amount allocated to OMSRs.

26

<PAGE>

Hedging  gains  increased  by $7.6  million as a result of periods of  declining
interest rates and lower interest rate volatility,  both of which existed during
most of 1995. Adjacent is a summary of marketing results for 1995 and 1994:

<TABLE>
<CAPTION>
 (In thousands)                        1995               1994
------------------------------------------------------------------------
<S>                               <C>               <C>
Hedging gains                      $ 14,289          $   6,640
Pricing subsidies                   (23,697)           (21,591)
FAS No. 122 impact                   91,060                 --
------------------------------------------------------------------------
                                   $ 81,652          $ (14,951)
------------------------------------------------------------------------
</TABLE>

Pricing  subsidies  increased  10%, with the average  subsidy on loans  produced
increasing  to 32 basis  points  during 1995,  compared  with 22 basis points in
1994, due to intense price  competition  associated with industry  overcapacity.
Interest income, net of warehouse  interest expense,  decreased to $27.5 million
for 1995, compared with $29.5 million for 1994. This 7% decrease in net interest
income was  primarily  due to a lower  average  daily  balance of loans held for
sale.  Gain from sales of servicing  was $46.0  million in 1995,  compared  with
$120.7 million in 1994, a 62% decrease. The reduction in gain resulted primarily
from a 32%  decrease in the volume of  servicing  sold and the  reduction of the
gain  from  sales of  servicing  by  $34.8  million  in 1995  due to OMSR  basis
associated with servicing sold. The Company sold mortgage  servicing rights with
an aggregate  principal balance of $6.7 billion in 1995, or 89% of originations,
compared with $9.9 billion, or 101% of originations, in 1994.

EXPENSES - Expenses for 1995 were $211.1 million,  an 18% decrease compared with
$256.9 million in 1994.
Personnel  costs were $122.0  million,  an 18%  decrease,  compared  with $147.9
million  in 1994.  This  decrease  in  personnel  expenses  from  1994  occurred
principally in the residential  loan production  area.  These declining  expense
levels resulted from staffing  reductions and reduced  commission  payments as a
result of lower production volume.  Other operating costs decreased 21% to $64.1
million  for 1995 from $81.1  million in 1994.  These cost  reductions  occurred
throughout the Company,  but were greatest in the loan  production  area, due to
the  closing of 29 offices in the  downsizing  plan  during 1994 and the reduced
loan origination  volumes from 1994 to 1995.  Interest expense decreased to $9.8
million for 1995,  compared with $10.8  million for 1994.  This decrease was the
result of lower  prepayments on certain  securitized  loan pools serviced by the
Company,  which require the Company to pay interest to the security  holders for
the  period  from the  prepayment  to the end of the  month,  as well as reduced
interest on its purchase money note,  which matured in March 1995.  Amortization
and impairment of loan servicing increased to $7.3 million during 1995, compared
with  $965,000  during  1994.  The  primary  cause for the  increase  relates to
amortization  and impairment of OMSRs of $6.6 million in 1995 resulting from the
adoption of FAS No. 122 and a pattern of falling interest rates,  which produces
higher prepayment activity.

INFLATION
The Company is affected by  inflation  primarily  through its impact on interest
rates.  During periods of rising  inflation,  interest  rates  generally tend to
increase,  causing  decline  in  loan  origination  volumes,  particularly  loan
refinancing activity.  During periods of rising interest rates, prepayment rates
tend to slow,  extending the average life of the Company's  servicing  portfolio
and generally enhancing its value. During periods of reduced inflation, interest
rates generally tend to decline,  resulting in increased loan origination volume
and loan refinancing  activity,  affecting the Company's  servicing portfolio in
the opposite manner.

LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow requirements primarily depend on both the level and cost
of its loan  originations,  the level of its  servicing  sales and the cash flow
generated by, or required by its other operating activities.  Additionally,  the
Company  may use or provide  cash  through  its  investing  and other  financing
activities.

27
<PAGE>

LIQUIDITY  SOURCES - The Company's  loan  originations  are  primarily  financed
through warehouse  borrowings,  commercial paper borrowings,  and with corporate
funds. This financing requirement begins at the time of loan closing and extends
for an  average  of  approximately  30 days  until  the  loan is sold  into  the
secondary  market. On January 23, 1996, the Company entered into a new warehouse
line of credit  facility which will expire on January 23, 1999. The  outstanding
commitment  under this  facility  was $1.0  billion at December  31,  1996.  The
Company's  management  expects,  although  there can be no assurance,  that this
facility  will  continue to be available  in the future.  The Company also has a
commercial paper borrowing  program.  Borrowings under this $500 million program
replace,  at a reduced interest rate,  borrowings under the Company's  warehouse
line of  credit.  The  warehouse  line of credit  acts as the  liquidity  backup
facility  for the  commercial  paper  borrowings.  At times,  the  Company  will
accelerate  the  sale  of  its  mortgage  loan  inventory  through  the  use  of
"gestation"  facilities  provided by an investment bank and the Federal National
Mortgage  Association.  The Company's  corporate funds are generally invested in
its inventory of mortgage loans held for sale.  The level of funds  available to
support its inventory  decreased  from 1995 to 1996 because of the cash used for
the investing and other  financial  activities  detailed below. In October 1993,
the Company implemented a $250 million MTN program.  Since 1993, $126 million in
MTNs have been issued and $76 million remain outstanding at December 31, 1996.

INVESTING AND OTHER FINANCIAL ACTIVITIES

COMMON STOCK - On February 7, 1996, the Company  authorized the repurchase of up
to 1.5 million  shares of common  stock.  During 1996,  the Company  repurchased
1,182,400 shares under this authorization at an aggregate cost of $21.5 million.
As of December 31, 1996,  the Company held 2,322,916  shares in treasury  stock,
which  have been  acquired  since 1994 under the  current  and prior  repurchase
authorizations at an aggregate cost of $40.7 million.

DIVIDENDS - The Company has paid  quarterly  common  stock  dividends  since the
initial public offering on July 15, 1992. Dividend payments totaled $3.4 million
in 1996 and $3.6  million in 1995.  In February  1997,  the  Company's  board of
directors approved a common stock dividend of $.06 per share.

BUSINESS INVESTMENT - In October 1996, the Company purchased the assets of Lomas
Insurance Services for $3.5 million.

MTN PROGRAM AND PURCHASE MONEY NOTE - In 1996, the Company issued $26 million in
seven-year MTNs. The Company paid off in both 1996 and 1995, $25 million of MTNs
that matured.  Also, in 1995, the Company paid off a purchase money mortgage for
$10.2 million.

PROPERTY,  PLANT AND  EQUIPMENT  - During 1996 and 1995,  the Company  purchased
property and equipment totaling $10.0 million and $3.6 million, respectively.

EXCESS  SERVICING FEES - During 1996 and 1995, the Company created $37.9 million
and $49.1 million of excess  servicing fees during loan sales  transactions.  In
general,  the Company  creates excess  servicing fees when the secondary  market
price offered for that  servicing  asset is lower than the economic value or the
amount the Company  could  receive by  accumulating  the asset and selling it as
part of a bulk sale at a later date.  During the Company's holding period of the
Excess  Servicing Fee asset,  the Company is at risk that the asset will decline
in value and a write down will be required,  primarily due to faster  prepayment
speeds.  The carrying  amount of excess  servicing  rights was $25.5 million and
$20.6 million at December 31, 1996 and December 31, 1995, respectively.


28

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
North American Mortgage Company(R)

We have audited the accompanying  consolidated  balance sheets of North American
Mortgage  Company(R) and  subsidiaries as of December 31, 1996 and 1995, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1996.  These
financial   statements  are  the   responsibility  of  North  American  Mortgage
Company(R)'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 consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of North
American Mortgage  Company(R) and subsidiaries at December 31, 1996 and 1995 and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1996,  in  conformity  with
generally accepted accounting principles.

In  1995,  North  American  Mortgage  Company(R)  adopted  Financial  Accounting
Standards Board Statement No. 122,  "Accounting for Mortgage  Servicing Rights."
These changes are discussed in Note D of the Notes to the Consolidated Financial
Statements.

[s/ERNST & YOUNG LLP]


San Francisco, California
January 31, 1997

29
<PAGE>
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31                                      1996             1995
-----------------------------------------------------------------------
<S>                                           <C>              <C>
DOLLARS IN THOUSANDS
ASSETS
     Cash and cash equivalents                $ 22,005         $ 12,273
     Advances and other receivables             85,299           76,628
     Real estate loans held for sale to
        investors
        net of unearned discounts              554,415          526,913
     Originated loan servicing - Note D        107,679           56,353
     Excess servicing fees - Note D             25,540           20,559
     Purchased loan servicing - Note D             559            1,163
     Other intangible assets - Note D            9,391            6,438
     Property and equipment - Note E            38,541           36,339
     Other assets                               10,228            9,702
------------------------------------------------------------------------
                                              $853,657         $746,368
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
     LIABILITIES
        Warehouse line of credit - Note C     $158,584         $146,833
        Notes payable - Note C                  75,724           74,801
        Commercial paper - Note C              340,115          279,221
        Subordinated debt - Note C              10,070           10,070
        Accounts payable and other 
         liabilities                            65,763           42,299
------------------------------------------------------------------------
                                               650,256          553,224
========================================================================
COMMITMENTS AND CONTINGENCIES -
     Notes I, J, K, and N
     STOCKHOLDERS' EQUITY - Note G
        Convertible preferred stock (1,000,000
         shares authorized,
        748,179 shares issued and outstanding)     --                --
        Common stock (50,000,000 shares
         authorized, 16,394,544 and
         16,394,543 shares issued at
         December 31, 1996 and 1995, 
         respectively)                            164               163
        Additional paid-in capital            112,492           110,250
        Retained earnings                     131,435           101,909
        Treasury stock (2,322,916 and
         1,140,516 shares at
         December 31, 1996 and 1995,
         respectively)                        (40,690)          (19,178)
                                              203,401           193,144
------------------------------------------------------------------------
                                             $853,657          $746,368
========================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


30


<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31                               1996              1995             1994
Amounts in thousands, except per share data
<S>                                                <C>               <C>             <C>
INCOME
   Loan administration fees, net
   of excess servicing fee amortization             $ 45,280          $ 41,830        $ 50,574
   Loan origination fees                              84,605            69,282          75,140
   Gain (loss) from sales of loans                   101,153            81,652         (14,951)
   Interest income, net of warehouse
   interest expense of
   $20,428, $11,588 and $11,166 for 1996,
   1995 and 1994, respectively - Note C               28,680            27,534          29,491
   Gain from sales of servicing - Note J              37,634            46,037         120,739
   Other                                               9,441             8,445           7,172
----------------------------------------------------------------------------------------------
                                                     306,793           274,780         268,165
EXPENSES
   Personnel                                         150,076           122,033         147,941
   Other operating expenses                           73,487            64,142          81,121
   Interest expense                                    9,430             9,828          10,812
   Downsizing expenses - Note M                           --                --           8,470
   Depreciation and amortization of
   property and equipment                              7,852             7,306           7,207
   Amortization and impairment of
   loan servicing                                     10,462             7,310             965
   Amortization of other intangibles                     504               444             412
----------------------------------------------------------------------------------------------
                                                     251,811           211,063         256,928
==============================================================================================

   Income before income taxes                         54,982            63,717          11,237
   Income tax expense - Note H                        22,029            23,262           3,055
----------------------------------------------------------------------------------------------
   NET INCOME                                       $ 32,953          $ 40,455        $  8,182
==============================================================================================

Net income per share                                $   2.30          $   2.69        $    .53
----------------------------------------------------------------------------------------------
Weighted average shares outstanding                   14,317            15,039          15,480
----------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE                                 $    .24            $  .24        $    .24
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

31
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                            COMMON        ADD.                                     TOTAL
                                                COMMON       STOCK     PAID-IN         RETAINED       TREASURY    STCKHLDRS
                                         STOCK SHARES       AMOUNT     CAPITAL         EARNINGS        STOCK      EQUITY
--------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>           <C>       <C>            <C>           <C>              <C>

Balance at December 31, 1993                 15,848        $158      $104,620       $ 60,602                       $165,380
   Net income                                                                          8,182                          8,182
   Dividends                                                                          (3,716)                        (3,716)
   Stock issuances under option plan             82           1         1,324                                         1,325
   Stock issuances under Employee
        Stock Purchase Plan                      89           1         1,111                                         1,112
   Purchases of Treasury Stock                                                                    $(19,178)         (19,178)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994                 16,019         160       107,055         65,068       (19,178)         153,105

   Net income                                                                         40,455                         40,455
   Dividends                                                                          (3,614)                        (3,614)
   Stock issuances under option plan           144            2         2,002                                         2,004
   Stock issuances under Employee
        Stock Purchase Plan                     95            1         1,193                                         1,194
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                16,258          163       110,250        101,909       (19,178)         193,144

   Net income                                                                         32,953                         32,953
   Dividends                                                                          (3,427)                        (3,427)
   Stock issuances under option plan            39                       599                                            599
   Stock issuances under Employee 
        Stock Purchase Plan                     98            1         1,643                                         1,644
   Purchases of Treasury Stock                                                                     (21,512)         (21,512)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                16,395         $164      $112,492       $131,435      $(40,690)        $203,401
============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
32

<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                              1996          1995          1994
---------------------------------------------------------------------------------------
<S>                                               <C>          <C>            <C>
DOLLARS IN THOUSANDS

OPERATING ACTIVITIES
   Net income                                      $32,953      $ 40,455       $ 8,182
   Adjustments to reconcile net
   income to net cash
   provided by (used in) operating activities
   Depreciation and amortization                    21,441        19,738         9,214
   Capitalized excess servicing fee income         (37,937)      (49,110)       (5,407)
   Gain on sales of servicing rights               (37,634)      (46,037)     (120,739)
   Cash proceeds from sales of servicing
      rights                                       135,126       111,850       122,244
   Decrease (increase) in real estate
      loans held for sale,
   net of unearned discounts                       (27,502)       15,090       952,641
   Decrease (increase) in advances and
      other receivables                             (8,671)      (19,887)        3,397
   Increase (decrease) in accounts payable
      and other liabilities                         23,464        17,440       (19,049)
   Decrease (increase) in other assets                (527)       (1,720)        3,571
---------------------------------------------------------------------------------------
   NET CASH PROVIDED BY OPERATING
      ACTIVITIES                                   100,713        87,819       954,054

INVESTING ACTIVITIES
   Acquisition of assets of branches
      and insurance operations
   acquired including purchase
      accounting adjustments                        (3,551)        (143)          (913)
   Purchase of servicing rights                         --          (80)          (131)
   Acquisition of originated
      servicing rights                            (128,343)     (97,751)             --
   Purchase of property and equipment               (9,959)      (3,608)        (11,058)
   Retirement of property and equipment                 --          892              --
---------------------------------------------------------------------------------------
   NET CASH USED IN INVESTING ACTIVITIES          (141,853)    (100,690)        (12,102)

FINANCING ACTIVITIES
   Issuance of notes payable                        25,844           --              --
   Principal payments on long-term debt            (24,921)     (35,478)         (1,511)
   Net increase (decrease) in
      warehouse line of credit
   and commercial paper                             72,645      (41,007)       (829,634)
   Dividends                                        (3,427)      (3,614)         (3,716)
   Purchases of Treasury Stock                    (21,512)           --         (19,178)
   Stock issuance under Employee
      Stock Purchase Plan
   and Stock Option Plan                             2,243        3,198           2,437
----------------------------------------------------------------------------------------
   NET CASH PROVIDED BY (USED IN)
      FINANCING ACTIVITIES                          50,872      (76,901)       (851,602)
----------------------------------------------------------------------------------------
   INCREASE (DECREASE) IN CASH AND
      CASH EQUIVALENTS                               9,732      (89,772)         90,350
---------------------------------------------------------------------------------------
   Cash and cash equivalents at beginning
      of year                                       12,273      102,045          11,695
---------------------------------------------------------------------------------------
   CASH AND CASH EQUIVALENTS AT END OF YEAR        $22,005     $ 12,273        $102,045
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

33
<PAGE>

Notes to Consolidated Financial Statements

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------
ORGANIZATION  The accompanying  Consolidated  Financial  Statements  include the
accounts  of  North  American  Mortgage  Company(R);   North  American  Mortgage
Insurance  Services;  Sonoma  Conveyancing   Corporation;   Fairfield  Financial
Holdings  Inc.; IC Capital Co.,  Inc.;  Vintage  Reinsurance  Company;  and IMCO
Capital Co., Inc.

CASH AND CASH EQUIVALENTS Cash and cash equivalents  include cash on hand and in
banks and short-term investments with maturities of three months or less.

REAL ESTATE LOAN  VALUATION  Real estate loans held for sale, net of the related
commitments, are stated at the lower of aggregate cost or market value.

PURCHASED LOAN  SERVICING  Purchased loan servicing is recorded at cost which is
not in excess of the future net cash flows related to the  servicing  portfolio.
The cost is being amortized in proportion to the estimated  future net servicing
income. Impairment of purchased loan servicing is determined using the estimated
fair  value  of the  purchased  mortgage  servicing  rights  on a  disaggregated
portfolio basis.

ORIGINATED  LOAN  SERVICING  Originated  loan servicing is recorded based on its
fair  value  relative  to the loan as a whole.  The cost is being  amortized  in
proportion  to  the  estimated  future  net  servicing  income.   Impairment  of
originated  loan  servicing is determined  using the estimated fair value of the
mortgage servicing rights on a disaggregated portfolio basis.

EXCESS  SERVICING FEES In determining the gain or loss on sale of mortgage loans
to  investors  where the stated  servicing  fee rate differs  materially  from a
normal servicing fee rate, the sales price is adjusted by the difference between
the  actual  sales  price and the  estimated  sales  price  that would have been
obtained if a normal  servicing  fee rate had been  specified  and a capitalized
servicing fee receivable is recorded.  Capitalized servicing fees are carried at
amounts  not in excess of the  estimated  future  discounted  cash  flows  using
original discount rates on a disaggregated portfolio basis. The Company uses the
income forecast method to amortize capitalized  servicing fees. Under the income
forecast method,  capitalized  servicing fees are amortized in proportion to the
estimated  future excess  servicing  income and over the period of the estimated
economic life of the loans sold. The estimated  economic lives of the loans used
by the Company are based on the median  prepayment  rates  forecasted by several
large brokerage firms.

OTHER INTANGIBLE  ASSETS  Amortization of other intangible assets is provided by
the straight-line method over estimated useful lives of 5 to 20 years.

PROPERTY AND EQUIPMENT  Property and  equipment is stated at cost.  Depreciation
and  amortization is calculated  using the  straight-line  method over estimated
useful lives of the assets (3 to 35 years).

LOAN  ADMINISTRATION  The Company  services  mortgages  for investors as well as
mortgages held for sale. In connection with mortgage servicing  activities,  the
Company  segregates  escrow and custodial  funds in separate  trust accounts and
excludes  these  balances  (approximately  $276.9  million and $230.1 million at
December 31, 1996 and 1995,  respectively)  from the balance sheet.  These funds
represent  principal and interest  payment  amounts held for  investors  pending
scheduled  remittance  and funds held for  borrowers  for  payment of  scheduled
items, primarily taxes and insurance.

34


<PAGE>

INCOME RECOGNITION Lending transaction costs are deferred until the related loan
is sold.  Commitment  fees paid to investors are being deferred until either the
expiration of the  commitment or the sale of the related loan.  Upon sale of the
loan  or  expiration  of the  commitment,  the  deferred  origination  fees  are
recognized as loan  origination fees in the statement of operations and deferred
origination costs are recognized in the applicable expense classification.  Loan
administration  income  represents  fees earned for servicing  loans for various
investors.  The  fees  are  either  based  on a  contractual  percentage  of the
outstanding  principal  balance  or a fixed  dollar  amount  per loan.  Fees are
credited  to income  when the  related  payments  are  received.  Discounts  and
premiums  from the  origination  of real estate loans held for sale are deferred
and recognized as adjustments to gain or loss upon sale.

INCOME TAXES The Company has adopted Statement of Financial Accounting Standards
No. 109,  "Accounting  for Income  Taxes." The Company has provided  disclosures
related to income  taxes (see Note H). The  Company  and its  subsidiaries  file
separate  United  States  federal  income tax returns  and  separate or combined
returns for certain  states,  including  California.  State and local income tax
returns  are filed  according  to the taxable  activities  of the  Company.  The
liability  method of accounting  is used for income  taxes.  Under the liability
method,  deferred tax assets and  liabilities  are  recognized  for the expected
future tax consequences of existing  differences between financial reporting and
tax  reporting  bases of assets and  liabilities,  as well as for the  operating
losses and tax credit carry-forwards, using enacted tax laws and rates. Deferred
tax expense  represents  the net change in the  deferred  tax asset or liability
balance  during the year.  This amount,  together  with income  taxes  currently
payable or  refundable  for the current  year,  represents  the total income tax
expense for the year.

NET INCOME PER SHARE Net income per share is computed by dividing  net income by
the average  number of common shares  outstanding  and the  additional  dilutive
effect (if any) of stock  options  outstanding  during the period.  The dilutive
effect of stock options is computed using the Treasury Stock method.

COMMITMENT  DEPOSITS  FROM  BUILDERS AND  PRE-PAID  COMMITMENT  FEES  Commitment
deposits from  builders are included in other  liabilities  and  represent  fees
received for  guaranteeing  the funding of mortgage loans to borrowers.  Prepaid
commitment  fees are  included  in  other  assets  and  represent  fees  paid to
permanent  investors  to ensure the ultimate  sale of the loans.  These fees are
recognized as revenue or expense when the loans are sold to permanent  investors
or when the commitment expires.

USE OF ESTIMATES IN THE  PREPARATION OF FINANCIAL  STATEMENTS The preparation of
the Consolidated Financial Statements of the Company requires management to make
estimates and  assumptions  that affect  reported  amounts.  These estimates are
based  on  information  available  as of the date of the  financial  statements.
Therefore, actual results could differ from those estimates.

RECENTLY  ISSUED  FINANCIAL  ACCOUNTING  STANDARD  In June 1996,  the  Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 125,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishments  of  Liabilities"  (SFAS No.  125).  As  amended,  SFAS No. 125,
applies to securities lending,  repurchase  agreements,  dollar rolls, and other
similar secured financing transactions occurring after December 31, 1997, and to
all other transfers and servicing of financial  assets  occurring after December
31, 1996. FAS 125 will result in the recording of 


35
<PAGE>
Originated  Mortgage  Servicing  Rights  (OMSR)  on the  date  of the  sale of a
mortgage loan as opposed to the current  practice of recording OMSRs on the date
that loans are originated.  Additionally,  under FAS 125, excess  servicing fees
will be  combined  with  OMSR  for  balance  sheet  presentation  as well as for
transactions   beginning  in  the  first  quarter  of  1997.  Based  on  current
circumstances,  the Company  believes that the application of the new rules will
not have a material impact on the financial statements.

NOTE B - NATURE OF OPERATIONS
--------------------------------------------------------------------------------
The  Company  is  engaged   primarily  in  the  mortgage  banking  business  and
accordingly,  originates,  acquires, sells and services mortgage loans which are
principally  first-lien  mortgage  loans  secured by single (one to four) family
residences.  The  Company  also sells the  servicing  rights  associated  with a
portion of such  loans.  The  Company  sells the  majority  of the  conventional
mortgage loans it originates under purchase and guarantee  programs sponsored by
the Federal Home Loan Mortgage  Corporation  ("FHLMC") and the Federal  National
Mortgage  Association  ("FNMA").  The  Company's  loans  insured by the  Federal
Housing   Administration   ("FHA")  or  partially  guaranteed  by  the  Veterans
Administration  ("VA")  or  Farmers  Home  Administration  are  pooled  to  form
Government National Mortgage Association ("GNMA") securities.  The Company sells
FHLMC,  FNMA and GNMA  securities to  investment  banking firms that are primary
dealers in government  securities.  Loans not conforming to requirements of such
agencies are sold to private institutional  investors.  The principal sources of
revenue from the Company's business are (i) loan administration  fees, (ii) loan
origination  fees,  (iii) gain from sales of loans,  (iv) net interest earned on
mortgage loans during the period that they are held by the Company  pending sale
and (v) gain from sales of servicing.
<TABLE>
NOTE C - BORROWING ARRANGEMENTS
-------------------------------------------------------------------------------------------------------------------
Borrowing arrangements consist of the following:
<CAPTION>
December 31                                                                             1996               1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>
Dollars in thousands

Warehouse  line of credit  facilities  with banks at December  31,  1996,  of $1
billion  expiring  January 23, 1999,  and at December 31, 1995, of $800 million,
bearing a variable interest rate, as described below, with outstanding  interest
and principal due on demand and
collateralized by mortgage loans held for sale.                                         $158,584          $146,833

Outstanding  medium-term notes, net of discount,  bearing interest rates between
5.78% and 7.34% at December  31, 1996,  and between  4.61% and 6.53% at December
31, 1995. Interest is payable semi-annually and principal is due at various
dates through August 25, 2003.                                                           $75,724           $74,801

Outstanding  Commercial paper notes at December 31, 1996, bearing interest rates
of 5.59% to 6.75% and due  between  January 2, 1997 and  January 16, 1997 and at
December 31, 1995, bearing interest rates of 5.78% to 6.30% and due
between January 2, 1996 and January 24, 1996.                                           $340,115          $279,221

Unsecured notes payable to insurance companies and accrued interest,  due August
1999,  subordinated  to the  warehouse  line of credit,  interest  at 10 percent
payable or capitalized at the Company's option semi-annually, principal
and accrued interest due upon maturity.                                                  $10,070           $10,070
</TABLE>
36


<PAGE>
The Company has a warehouse  line of credit with banks to fund its mortgage loan
activity.  The line bears  interest  at various  interest  rates.  The  weighted
average  cost of funds to fund the  Company's  mortgage  loan  activity in 1996,
1995,  and 1994 was 5.99 percent,  6.68 percent and 5.62 percent,  respectively.
Under  various  agreements,  interest  expense is reduced as a result of holding
escrows  and  custodial  funds at  non-affiliated  banks.  Borrowing  costs were
reduced by $10.9 million,  $9.9 million and $10.7 million during 1996, 1995, and
1994  respectively,  for  the use of such  compensating  balances.  Compensating
balances averaged $217.3 million and $209.5 million for the years ended December
31, 1996 and 1995,  respectively,  and were comprised of corporate and custodial
accounts.  The  Company  must  comply  with  certain  covenants  provided in its
warehouse loan agreement,  including requirements relating to net worth, working
capital and leverage. In addition,  the Company is limited to $35 million as the
aggregate amount it may disburse for cash dividends and stock repurchases in any
four  consecutive  quarters.  At any time that the Company is not in  compliance
with certain covenants to its loan agreement,  the Company cannot declare or pay
any  non-stock  dividends.  At December  31, 1996,  and  December 31, 1995,  the
Company was in compliance  with the  aforementioned  loan  covenants.  Aggregate
maturities of borrowing arrangements excluding discounts,  at December 31, 1996,
are as shown in the chart.

<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
<S>                                                      <C>
(In thousands)              
1997                                                      $498,699
1998                                                        25,000
1999                                                        10,070
2000                                                        25,000
2001                                                            --
2002 and beyond                                             26,000
                                                          $584,769

</TABLE>
Interest  paid for the years ended  December 31,  1996,  1995 and 1994 was $29.9
million, $22.5 million and $21.6 million, respectively.

NOTE D - ORIGINATED LOAN SERVICING, PURCHASED LOAN SERVICING,
EXCESS SERVICING FEES AND OTHER INTANGIBLE ASSETS
--------------------------------------------------------------------------------
The Company  elected to adopt FAS No. 122,  "Accounting  for Mortgage  Servicing
Rights" for its financial statement reporting beginning January 1, 1995. FAS No.
122 prohibits  retroactive  application prior to that date. FAS No. 122 requires
that mortgage  servicing  rights be  capitalized  when acquired  either  through
purchase or  origination  for mortgage loans that will be  subsequently  sold or
securitized  with the  servicing  rights  retained.  The amount of the  mortgage
servicing right capitalized is based on its fair value relative to the loan as a
whole. To determine the fair value of servicing rights created, the Company used
the market prices under comparable servicing sale contracts,  when available, or
alternatively used a valuation model that calculates the present value of future
cash flows to determine  the fair value of the servicing  rights.  In using this
valuation method, the Company incorporated  assumptions that market participants
would use in estimating future net servicing income which included  estimates of
the cost of servicing per loan,  the discount  rate,  float value,  an inflation
rate,  ancillary  income per loan,  prepayment  speeds  and  default  rates.  In
determining  servicing  value  impairment,  the  post-implementation  originated
servicing portfolio was disaggregated into its predominant risk characteristics.
The Company has  determined  those risk  characteristics  to be  prepayment  and
foreclosure  risks.  The Company has  disaggregated  the portfolio by loan type,
investor  type and  interest  rate to  reflect  those risk  characteristics.  To
determine the fair value for impairment  measurement purposes,  the Company used
the market prices under comparable servicing sale contracts,  when available, or
alternatively  used a  valuation  model  to  determine  the  fair  value  of the
servicing rights.

37
<PAGE>
The fair  value of  post-implementation  Originated  Loan  Servicing  was $109.5
million  and  $56.4  million  at  December  31,  1996  and  1995,  respectively.
Originated loan servicing and the related valuation  allowance activity for 1996
and 1995 were as follows:

<TABLE>
<CAPTION>
In thousands                              1996                                      1995
----------------------------------------------------------------------------------------------------------------------
                                          Originated           Valuation            Originated           Valuation
                                          Loan Servicing,      Allowance,           Loan Servicing,      Allowance,
                                          Net of               Originated           Net of               Originated
                                          Amortization         Servicing            Amortization         Servicing
<S>                                       <C>                 <C>                 <C>                  <C>
Balance at beginning of year               $ 58,905            $(2,552)           $     --              $     --
Additions                                   128,343                 --              97,751                    --
Scheduled amortization                       (8,321)                --              (3,067)                   --
Impairment additions charged to
   operations                                    --             (3,589)                 --                (3,517)
Impairment reductions credited to
   operations                                    --              2,052                  --                    --
Basis on servicing sales                    (67,159)                --             (35,779)                  965
------------------------------------------------------------------------------------------------------------------
                                           $111,768            $(4,089)            $58,905               $(2,552)

===================================================================================================================
</TABLE>
Purchased  loan  servicing  and  excess   servicing  fees,  net  of  accumulated
amortization were as follows:

<TABLE>
<CAPTION>
                                             Purchased Loan Servicing,              Excess Servicing Fees,
                                             Net of Amortization                    Net of Amortization
In thousands                                 1996         1995          1994         1996          1995          1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>           <C>         <C>          <C>         <C>
Balance at beginning of year                 $1,163      $1,933        $2,907       $20,559       $ 7,001     $ 3,588
Additions                                        --          80           131        37,937        49,110       5,407
Scheduled amortization                         (604)       (725)         (964)       (2,498)       (1,878)       (630)
Amortization resulting from higher
   than anticipated prepayments                  --          --           --           (125)       (2,800)         --
Basis on servicing sales                         --        (125)         (141)      (30,333)      (30,874)     (1,364)
-----------------------------------------------------------------------------------------------------------------------
Balance at end of year                       $  559      $1,163        $1,933       $25,540       $20,559      $7,001
=======================================================================================================================
</TABLE>
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31                                            1996              1995
--------------------------------------------------------------------------------
In thousands
<S>                                                  <C>               <C>
Goodwill                                              $7,479            $7,412
Book of insurance business                             3,354                55
Organization costs                                     1,731             1,641
Trademark                                                349               349
--------------------------------------------------------------------------------
                                                      12,913             9,457
Accumulated amortization                              (3,522)           (3,019)
--------------------------------------------------------------------------------
                                                      $9,391            $6,438
================================================================================
</TABLE>

38

<PAGE>
NOTE E - PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31                                    1996              1995
--------------------------------------------------------------------------------
In thousands
<S>                                         <C>              <C>
Land                                         $ 3,900          $ 3,900
Building                                      17,230           17,163
Furniture and equipment                       49,674           40,567
Leasehold improvements                         2,191            1,500
-------------------------------------------------------------------------------- 
                                              72,995           63,130
Accumulated depreciation
   and amortization                          (34,454)         (26,791)
-------------------------------------------------------------------------------- 
                                             $38,541          $36,339
================================================================================
</TABLE>

NOTE F - RETIREMENT AND 401(K) SAVINGS PLAN AND SUPPLEMENTAL EXECUTIVE 
RETIREMENT PLAN
--------------------------------------------------------------------------------
The Company has a defined  contribution  Retirement Plan and 401(k) Savings Plan
which covers  substantially  all employees.  The Company's  contributions to the
Retirement Plan are equal to 4% of the participants'  compensation and were $1.8
million,  $2.0 million, and $1.9 million in 1996, 1995, and 1994,  respectively.
The Company began  contributions to the 401(k) Savings Plan in 1996 equal to 50%
of the  participants'  contributions  not to exceed  the lessor of 1 1/2% of the
participants'  basic  compensation or the maximum amount  permissible  under the
plan.  Company  contributions  for the 401(k)  Savings Plan were $0.9 million in
1996. The Retirement  Plan contains a vesting  schedule  graduated from three to
seven years of service,  and the 401(k) Savings Plan contains a vesting schedule
graduated  from one to four years of service.  The  Company  has a  Supplemental
Executive Retirement Plan, which covers certain members of management.  The plan
benefits  accrue as a  percentage  of the portion of each  participant's  annual
salary and  bonuses  in excess of the amount  included  in the  retirement  plan
covering all employees.  The cost of the Plan was $87,000,  $69,000, and $30,000
in 1996, 1995 and 1994, respectively. The plan is an unfunded plan.

NOTE G - PREFERRED STOCK, STOCK PLANS AND STOCK RIGHTS PLAN
--------------------------------------------------------------------------------
The Board of Directors of the Company is authorized,  without  further action of
stockholders of the Company, to issue up to 20,000,000 shares of Preferred Stock
in one or more  classes or series  and to fix the number of shares  constituting
such series,  the  designations,  relative  rights,  preferences and limitations
relating to shares of any such series.  The  Company's  Board of  Directors  has
authorized the issuance of a series of Preferred  Stock  consisting of 1,000,000
shares of Series A Convertible Preferred Stock par value $0.01 per share, with a
dividend rate of $0.20 per annum and for which unpaid  dividends are cumulative.
Unpaid cumulative  dividends were $667,000 and $517,000 at December 31, 1996 and
December  31,  1995,  respectively.  The Company has the option to convert  each
share of Convertible Preferred Stock into one share of Common Stock. At December
31, 1996 and 1995,  748,179 shares of Series A Convertible  Preferred Stock were
outstanding,  all of which are held by  Fairfield  Financial  Holdings,  Inc., a
wholly-owned subsidiary.

39
<PAGE>
During 1992,  the Board of  Directors  declared a dividend  distribution  of one
Preferred Stock Purchase Right (a "Right") for each outstanding  share of Common
Stock.  The  Rights  are  not  currently  exercisable  and are  attached  to all
outstanding  shares of Common Stock. The Rights will generally separate from the
Common Stock and be distributed  to registered  holders of the Common Stock upon
(1) acquisition of beneficial ownership by a person or persons of 15% or more of
the Company's Common Stock, (2) a tender offer or exchange offer for 15% or more
of the Company's Common Stock which is not approved by the board of directors of
the Company,  or (3) the declaration by the board that any person holding 10% or
more of the Company's Common Stock is an "adverse person" (generally, an adverse
person is a party seeking a financial gain by taking actions that are not in the
interest of the remaining stockholders).  Each Right gives the registered holder
the right to purchase from the Company one  one-hundredth of a share of Series A
Cumulative Preferred Stock upon certain terms and subject to certain conditions.
The Company has a stock option plan (the "Plan") that  provides for the granting
of non-qualified and qualified  options to employees and directors.  Options are
generally  granted at the average market price of the Company's  common stock on
the date of grant,  vest over a three-year period of equal amounts each year and
expire 10 years after the date of grant.  Stock  option  transactions  under the
Plan were as follows:
<TABLE> 
<CAPTION>
                                                                  Weighted-Average
                                                     Options      Exercise Price        Options
                                                     1996         1996                  1995
---------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>                <C>
Outstanding options at beginning
   of year                                         1,338,193      $18.18             1,323,379
      Options granted                                234,475      $25.63               236,822
      Options exercised                              (39,005)     $15.35              (143,915)
      Options expired or canceled                     (3,457)     $19.88               (78,093)
---------------------------------------------------------------------------------------------------
   Outstanding options at
      end of year                                  1,530,206      $19.39             1,338,193
---------------------------------------------------------------------------------------------------

Exercise price:
   Per share for options
      exercised during
      the year                                    $11.50-$18.625                      $11.50-$24.19
   Per share for options outstanding
      at end of year                              $11.50-$29.375                     $11.50-$29.375
Weighted-average fair value of
   options granted                                       $ 12.90                             $ 8.78
Weighted-average contractual life of
   options outstanding (in years)                            7.6                                5.6

</TABLE>
Of the  outstanding  options as of December  31,  1996,  1,306,189  options were
immediately  exercisable  under the Plan.  Options  designated for future grants
under the Plan were 149,521 and 446,294 as of December  31,  1996,  and December
31, 1995, respectively.

The Company has an Employee Stock Purchase Plan which covers  substantially  all
employees.  Employees  may  purchase  stock at a price equal to 85% of the lower
stock price at the  beginning  or the end of the  purchase  period.  The Company
issued  97,924  shares of Common Stock for the Employee  Stock  Purchase Plan at
$16.7875 per share on December 31, 1996, and 95,193 shares at $12.5375 per share
on December 31, 1995.

40
<PAGE>
The  Company  currently  follows  Accounting  Principles  Board  Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related  interpretations
in accounting for its stock options. Under APB 25, because the exercise price of
the Company's  employee  stock options equals the market price of the underlying
stock on the date of grant, no compensation  expense is recognized.  The Company
intends  to  follow  the  provisions  of APB  25 for  future  years.  Pro  forma
information  regarding  net income and  earnings  per share is  required by FASB
Statement No. 123, "Accounting for Stock-Based  Compensation" ("Statement 123"),
and has been  determined as if the Company had accounted for its employee  stock
options under the fair value method of that Statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model  with the  following  weighted-average  assumptions  for  1996  and  1995,
respectively: risk-free interest rates of 5.5% and 7.4%; dividend yields of 1.5%
and 1.5%;  volatility  factors of the  expected  market  price of the  Company's
common stock of .50 and .50; and a weighted-average expected life of the options
of 7 years.  The  Black-Scholes  option valuation model was developed for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.  For purposes of
pro forma  disclosures,  the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma net income and
earnings per share  determined  as if the Company had accounted for its employee
stock options under Statement 123 follows (in thousands  except for earnings per
share information): 
<TABLE>
<CAPTION>
                                              1996                  1995
-------------------------------------------------------------------------
<S>                                        <C>                   <C>
Pro forma net income                        $30,625               $39,310
Pro forma earnings per share                $  2.14               $  2.61
</TABLE>

41

<PAGE>
NOTE H - INCOME TAXES
--------------------------------------------------------------------------------
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
Years Ended                                        1996             1995
--------------------------------------------------------------------------------
In thousands
<S>                                               <C>              <C>
Deferred tax liabilities
   Warehouse capitalized origination costs         $   533          $   875
   Depreciation                                      4,079            4,062
   Originated and excess servicing                  40,635           20,099
   Other                                               247              543
--------------------------------------------------------------------------------
Total deferred tax liabilities                     $45,494          $25,579
================================================================================
Deferred tax assets:
   Purchased servicing                               1,916            3,011
   Loss, foreclosure & other book reserves           2,080            2,295
   Accrued expenses                                    549              876
   Other                                               512              464
--------------------------------------------------------------------------------
Total deferred tax assets                          $ 5,057          $ 6,646
--------------------------------------------------------------------------------
Net deferred liability                             $40,437          $18,933
================================================================================

During 1996, net income of the Company was entirely from the U.S. Significant
components of the provision for income taxes are as follows:
</TABLE>
<TABLE>
<CAPTION>
Years Ended                   1996            1995          1994
----------------------------------------------------------------------
In thousands
<S>                        <C>            <C>            <C>
Current:
   Federal                 $   371        $ 3,845        $ 2,297
   State                       154            484            758
----------------------------------------------------------------------
Total Current                  525          4,329          3,055
----------------------------------------------------------------------
Deferred:
   Federal                 $17,133        $14,271              0
   State                     4,371          4,662              0
----------------------------------------------------------------------
Total Deferred              21,504         18,933              0
----------------------------------------------------------------------
                           $22,029        $23,262        $ 3,055
======================================================================
</TABLE>
The reconciliation of income tax expense at the U.S. federal statutory tax rate
to income tax expense calculated for financial reporting purposes is:
<TABLE>
<CAPTION>
Years Ended                                           1996                  1995                  1994
-------------------------------------------------------------------------------------------------------------
In thousands                                                 %                     %                      %
<S>                                           <C>          <C>      <C>          <C>       <C>         <C>
Tax at U.S. statutory rate                    $19,244        35     $22,301        35      $3,933        35
State income taxes net of federal benefit       2,941         5       3,345         5         590         5
Change in valuation allowance                       0       ---      (2,519)       (4)     (1,971)      (17)
Other                                            (156)      ---         135         1         503         4
-------------------------------------------------------------------------------------------------------------
                                              $22,029        40     $23,262        37      $3,055        27
=============================================================================================================
</TABLE>
Income taxes paid in 1996, 1995 and 1994 totaled $2.5 million, $7.7 million, and
$7.5 million, respectively.

42

<PAGE>
NOTE I - LEASES
--------------------------------------------------------------------------------
The Company  occupies  certain  office space and rents  equipment  under various
operating  leases which expire at various  dates through  2001.  Future  minimum
payments  consist of the following at December 31, 1996.  Rental expense for the
years ended December 31, 1996,  1995 and 1994, was $13.9 million,  $14.6 million
and $17.2 million, respectively.
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
In thousands
<S>                                                <C>
1997                                               $12,545
1998                                                 8,155
1999                                                 4,009
2000                                                 1,865
2001 and beyond                                        992
--------------------------------------------------------------------------------
Total                                              $27,566
================================================================================
</TABLE>

NOTE J - MORTGAGE SERVICING PORTFOLIO AND RELATED OFF-BALANCE SHEET RISK AND 
INSURANCE COVERAGE
--------------------------------------------------------------------------------
The Company's  origination and servicing  activities are primarily  concentrated
within the states of  California,  Texas,  Virginia,  Arizona and Maryland.  The
Company's servicing portfolio is comprised of the following:
<TABLE>
<CAPTION>
December 31                          1996                         1995                         1994
------------------------------------------------------------------------------------------------------------------------
                                     Number       Principal       Number       Principal       Number       Principal
                                     of           Balance         of           Balance         of           Balance
                                     Loans        Outstanding     Loans        Outstanding     Loans        Outstanding
<S>                                 <C>          <C>             <C>          <C>             <C>          <C>
GNMA FHA/VA                           29,772      $ 2,646          28,041      $ 2,488          21,611      $ 1,900
Conventional loans & other           107,043       10,647         115,276       11,621         130,236       12,936
Loans subserviced for others               3            --              3            --             41            3
-----------------------------------------------------------------------------------------------------------------------
                                     136,818      $13,293         143,320      $14,109         151,888      $14,839
=======================================================================================================================
</TABLE>
The above amounts exclude servicing  rights,  which had been sold but were being
subserviced by the Company prior to transfer, of $2,646 million,  $2,146 million
and $1,224  million as of December 31, 1996,  1995 and 1994,  respectively.  The
Company is required to advance,  from corporate  funds,  escrow and  foreclosure
costs for loans which it services.  A portion of the advances is not recoverable
for loans serviced for GNMA. In addition, VA insurance only protects the Company
from  losses for a set  percentage  of the  initial  loan amount or a set dollar
amount.  As of  December  31,  1996 and 1995,  a reserve  for the  unrecoverable
advances and losses of approximately  $852,000 and $798,000 has been established
for GNMA loans in default.  GNMA FHA/VA losses  including  GNMA VA no-bid losses
for the years ended December 31, 1996, 1995 and 1994, were $1,444,000,  $949,000
and $572,000,  respectively.  Upon  foreclosure,  a FHA/VA property is typically
conveyed to HUD or VA. However, when it is in the VA's financial interest,  they
have the authority to deny conveyance of the foreclosed  property to the VA ("VA
no-bid").  The VA instead  reimburses  the Company  based on a percentage of the
loans' outstanding  principal balance ("guarantee" amount). For GNMA VA no-bids,
the foreclosed property is conveyed to the Company, and the Company then assumes
the  market  risk of  disposing  of the  property,  GNMA VA no-bid  losses  were
approximately $1,270,000 and $685,000 during 1996 and 1995, respectively.  There
were no significant  GNMA VA no-bid losses for the year ended December 31, 1994.
Prior to conveying title to HUD on FHA loans that have been foreclosed upon, the
Company is required to return the property to an inhabitable condition. The cost
of returning the property to an inhabitable  condition is not  recoverable  from
HUD. The related reserve for  unrecoverable  advances and losses on FHA/VA loans
in default  for  potential  no-bid  losses as of  December  31, 1996 and 1995 is
included in the reserve for unrecoverable advances described above.

43
<PAGE>
The Company has servicing  agreements  with certain  investors which require the
repurchase of real estate  mortgages in the event of default by the primary and,
if applicable,  secondary obligors. The aggregate principal balances outstanding
as of December 31, 1996 and 1995 relating to these agreements are  approximately
$8.2 million and $16.8  million,  respectively.  As of December 31, 1996,  there
have been no  significant  repurchases of loans under the terms of the servicing
agreements. The Company has the ability to meet these funding requirements under
normal  business  circumstances.  At December  31, 1996 and 1995,  the number of
loans in the Company's  servicing  portfolio  included loans  collateralized  by
California properties of 37% and 45%, respectively,  and loans collateralized by
Texas properties of 12% and 14%, respectively.  Loans from no other state exceed
5% of the number of loans in the  portfolio  of either  year.  The Company  sold
servicing  rights for  mortgages  with  outstanding  principal  balances of $8.2
billion, $6.7 billion and $9.9 billion during the years ended December 31, 1996,
1995 and 1994,  respectively.  These sales  resulted in gains of $37.6  million,
$46.0 million and $120.7 million. The Company has issued various representations
and  warranties  associated  with whole  loan and bulk  servicing  sales.  These
representations  and warranties may require the Company to repurchase  defective
loans as defined in the applicable  servicing and sales agreements.  At December
31, 1996 and 1995,  the  Company had  reserved  $4.5  million and $3.6  million,
respectively,  for potential  losses  resulting from these  representations  and
warranties.  Errors and  omissions  coverage was $23.5 million and fidelity bond
insurance  coverage under a mortgage banker's bond was $47.0 million at December
31, 1996 and 1995.

NOTE K - MORTGAGE LOAN PIPELINE, HEDGES AND RELATED OFF-BALANCE SHEET RISK
------------------------------------------------------------------------
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business through the origination and sale of mortgage loans and
the management of the related loss exposure  caused by  fluctuations in interest
rates. These financial  instruments  include commitments to extend credit (e.g.,
mortgage loan pipeline),  mandatory and optional forward commitments,  and other
hedging  instruments.  The  Company's  pipeline  of  loans  in  process  totaled
approximately  $2.1  billion and $2.4  billion as of December 31, 1996 and 1995,
respectively.  Until a rate commitment is extended by the Company to a borrower,
there is no market  risk to the  Company.  Loans in process  for which  interest
rates were committed to the borrower  totaled  approximately  $534.7 million and
$509.9  million as of  December  31, 1996 and 1995,  respectively.  For loans in
process  for which  interest  rates were  committed  to  borrowers,  the Company
determines  daily  what  portion  of  those  loans  to  hedge.  In  making  this
determination,  both the anticipated percentage of the pipeline that is expected
to fund  and  the  inherent  risk  position  of the  portfolio  are  considered.
Mandatory and optional forward  commitments are used by the Company to hedge its
interest  rate  exposure  during the  period  from when the  Company  extends an
interest rate lock to a loan applicant  until the time in which the loan is sold
to an investor.  These  instruments  involve,  to varying  degrees,  elements of
credit and interest rate risk. Credit risk is managed by the Company by entering
into  agreements  only with Wall Street  investment  bankers with primary dealer
status and with permanent investors meeting the credit standards of the Company.
At any time the risk to the Company,  in the event of 

44
<PAGE>

default by the  purchaser,  is the  difference  between the  contract  price and
current  market  value,   which  amount  is  a  percentage  of  the  outstanding
commitments.  To the extent that the  counterparties are not able to fulfill the
forward  commitments,  the  Company  is at risk to the  extent  that  there  are
fluctuations  in the market  value of the  mortgage  loans and locked  pipeline.
Realized gains and losses on mandatory and optional delivery forward commitments
are  recognized  in gain  (loss)  from sales of loans in the  period  settlement
occurs.   Unrealized   gains  and  losses  on  mandatory  and  optional  forward
commitments are included in the lower of cost or market valuation  adjustment to
mortgage  loans held for sale.  At December  31, 1996 and 1995,  the Company had
mandatory and optional forward commitments aggregating $756.9 million and $589.1
million,  respectively,  which covered the market risk  associated with the real
estate  loans  held for sale to  investors  of $554  million  and $527  million,
respectively,  and the pipeline loans for which interest rates were committed of
$534.7 million and $509.9 million,  respectively. The Company had adequate lines
of credit at December 31, 1996 and 1995 to fund its projected loan closings from
its mortgage loan pipeline.  At December 31, 1996 and 1995, the Company had firm
commitments  outstanding  to fund  residential  mortgages  for various  builders
totaling $96.0 million and $38.0 million, respectively. These commitments expose
the  Company to market risk as the builder has the option to require the Company
to fund loans to borrowers at precommitted  interest  rates.  The Company hedges
its optional  builder  commitments  by investing in put and call options to sell
and  purchase  Treasury  bonds and notes  and in  over-the-counter  put and call
options to sell and purchase mortgage-backed  securities.  During 1996 and 1995,
the Company did not have any significant open put or call options.

NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments:
* Cash and cash equivalents,  warehouse line of credit, purchase money notes and
commercial paper: The carrying amounts of the assets and liabilities approximate
fair value  because of the short  maturity of those  instruments. 
* Real estate loans held for sale (LHS) to investors  and mandatory and optional
delivery forward  commitments used to hedge market-rate risk: Fair values of LHS
and commitments are based on quoted market prices.
* Excess servicing fees: Fair values for excess servicing fee assets approximate
the present values, based on market interest rates for similar  instruments,  of
the difference  between the normal and stated  servicing fees over the estimated
lives of the underlying mortgage loans. The estimated lives of the loans used by
the Company are based on the median prepayment rates forecasted by several large
brokerage firms.
* Notes  payable  and  subordinated  debt:  The fair  value is  estimated  using
discounted  cash flow  analysis for similar types of borrowing  arrangements  to
companies with similar credit standing.
* Loans in process  for which  interest  rates were  committed  to the  borrower
(locked pipeline) and mandatory and  optional-delivery  forward commitments used
to hedge  market-rate  risk:  Fair values of the locked  pipeline,  allowing for
estimated fallout based on historical  experience and commitments,  are based on
quoted market prices.

45
<PAGE>
The following  table presents the carrying  amounts and estimated fair values of
certain of the Company's  financial  instruments  at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
In millions                       1996                         1995
-------------------------------------------------------------------------------------------
                                  Carrying                     Carrying
                                  Amount        Fair Value     Amount            Fair Value
<S>                                <C>           <C>          <C>               <C>
Financial assets:
   Real estate loans for
      sale to investors             $554.4        $557.5       $526.9            $532.3
   Locked Pipeline                     ---          (1.8)         ---               3.1
   Forward Delivery
      Commitments                      ---           5.4          ---              (2.2)
-------------------------------------------------------------------------------------------
   Net                               554.4         561.1        526.9             533.2
===========================================================================================
   Excess servicing fees              25.5          26.8         20.6              20.8
Financial liabilities:
   Notes payable                     (75.7)        (75.5)       (74.8)            (74.7)
   Subordinated debt                 (10.1)        (10.1)       (10.1)            (10.1)
</TABLE>
The carrying  amounts shown in the table are included in the balance sheet under
the indicated captions.

NOTE M - DOWNSIZING EXPENSES
Beginning in the second quarter of 1994, the Company's loan  production  volumes
began to  decline  significantly.  The  decline in volume  was  consistent  with
overall industry trends and was the result of a contracting  origination  market
caused by sharp increases in interest rates. Lower origination  volumes resulted
in production over capacity within the mortgage banking  industry.  In addition,
industry overcapacity  intensified price competition reducing margins throughout
the Company's branch origination  network.  During 1994,  management developed a
plan to downsize  the  Company's  production  capacity in order to adjust to the
contracted  loan  origination   market.   Management  first  reduced   headcount
throughout its branches and at its corporate  office in order to bring personnel
costs in line with lower production levels.  Approximately  1,100 employees were
terminated  during 1994 as a result of the downsizing  efforts.  Total severance
expenses recognized for the year were $2.5 million.

<TABLE>
<CAPTION>
December 31,                             1996         1995         1994
------------------------------------------------------------------------
<S>                                     <C>         <C>          <C>
Occupancy lease costs, net
   of recovery on subleases             $ 293       $ 907       $ 3,397
Fixed asset write-offs and
   equipment lease buyouts                160         236         1,438
Severance costs                            --          --            40
Other                                      81          89           302
   ---------------------------------------------------------------------        
                                         $534      $1,232        $5,177
========================================================================
</TABLE>
Management also identified  unprofitable  and marginally  profitable  production
locations and decided to close 29 facilities.  Each lease on the closed branches
was evaluated for a possible buyout or sublease  arrangement to either eliminate
or reduce the future lease  obligations  associated  with the closed  production
facilities.  Based on this analysis,  the Company established a reserve totaling
$3.8  million  which was  charged to expense in the fourth  quarter of 1994.  At
December 31,  1996,  1995 and 1994,  $293,000,  $907,000 and $3.4 million in the
reserve remained. During the fourth quarter of 1994, the Company also recorded a
reserve  totaling  $1.6  million  for  write-offs  of  leasehold   improvements,
furniture and equipment and terminations of certain  equipment leases for assets
located at the production  facilities  identified  above.  At December 31, 1996,
1995 and 1994,  $160,000,  $236,000  and $1.4  million of the reserve  remained.
Downsizing  expenses  incurred  during  1994 were $8.5  million.  There  were no
downsizing  expenses  incurred  during  1995 or 1996.  The  related  reserves at
December  31,  1996,  1995 and 1994 are  shown in the  above  chart.  Management
believes that remaining  reserves are adequate to cover future costs expected to
be incurred from remaining payments required from the downsizing plan.

46

<PAGE>
NOTE N - CONTINGENCIES
The Company is a defendant  in  litigation  arising in the normal  course of its
business.  Although  the  ultimate  outcome  of  pending  litigation  cannot  be
reasonably  estimated  at this time,  the Company  believes  that any  liability
resulting  from the  aggregate  amount of damages for  outstanding  lawsuits and
claims will not have a material adverse effect on its financial position.

NOTE O - QUARTERLY FINANCIAL DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 UNAUDITED
--------------------------------------------------------------------------------
Dollars in
thousands, except
per share data          First       Second      Third       Fourth      Total
<S>                    <C>         <C>         <C>         <C>         <C>
Revenues                $68,562     $77,163     $76,836     $84,232     $306,793
Costs and expenses       56,128      62,698      61,961      71,024      251,811
Income before
   income taxes          12,434      14,465      14,875      13,208       54,982
Income tax expense        4,974       5,794       5,950       5,311       22,029
Net income              $ 7,460     $ 8,671     $ 8,925     $ 7,897     $ 32,953
================================================================================
Net income per share    $  0.50     $  0.61     $  0.64     $  0.57     $   2.30
================================================================================
Stock price per
   Common Share:
   High                  26.250      20.750      19.000      23.000
   Low                   19.750      15.750      15.000      18.625
--------------------------------------------------------------------------------
Dividends per
   Common Share          $ 0.06      $ 0.06      $ 0.06    $   0.06      $  0.24
================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 UNAUDITED
--------------------------------------------------------------------------------
Dollars in
thousands, except
per share data          First      Second      Third        Fourth      Total
<S>                     <C>        <C>         <C>          <C>         <C>
Revenues                $53,736    $67,267     $74,579      $79,198     $274,780
Costs and expenses       45,039     51,325      55,029       59,670      211,063
Income before
   income taxes           8,697     15,942      19,550       19,528       63,717
Income tax expense        3,039      5,893       7,427        6,903       23,262
--------------------------------------------------------------------------------
Net income              $ 5,658    $10,049     $12,123     $ 12,625     $ 40,455
================================================================================
Net income per share    $  0.38    $  0.67     $  0.80      $  0.84     $   2.69
================================================================================
Stock price per
   Common Share:
   High                  18.125     25.875      26.000       25.375
   Low                   14.500     17.125      20.000       20.250
--------------------------------------------------------------------------------
Dividends per
   Common Share         $  0.06    $  0.06     $  0.06      $  0.06     $   0.24
================================================================================
</TABLE>

47
                                                                 
<PAGE>
CORPORATE DIRECTORY

BOARD OF DIRECTORS

JOHN F. FARRELL, JR.
Chairman of the Board and
Chief Executive Officer

TERRANCE G. HODEL
President and
Chief Operating Officer

WILLIAM L. BROWN*+
Former Chairman and
Chief Executive Officer
Bank of Boston

WILLIAM F. CONNELL*+
Chairman and Chief Executive Officer
Connell Limited Partnership

MAGNA L. DODGE*
Senior Vice President
Lehman Brothers Inc.

WILLIAM O. MURPHY+*
Retired Partner
Simpson Thacher & Bartlett

ROBERT J. MURRAY*+
Chairman,
Chief Executive Officer and President
New England Business Services

JAMES B. NICHOLSON+
President and Chief Executive Officer
Pressure Vessel Services, Inc.


SENIOR OFFICERS

JOHN F. FARRELL, JR.
Chairman of the Board and
Chief Executive Officer

TERRANCE G. HODEL
President and
Chief Operating Officer

HAROLD B. BONNIKSON
Executive Vice President
Residential Loan Production

MICHAEL G. CONWAY
Executive Vice President
Secondary Marketing and
Credit Risk Management

ROBERT J. GALLAGHER
Executive Vice President
Planning and Business Development

MARTIN S. HUGHES
Executive Vice President,
Chief Financial Officer and Treasurer

GARY F. MOORE
Executive Vice President
Information Technology,
Human Resources and Training

ROBERT A. ROSEN
Executive Vice President
Loan Administration

CAROLYN OWENS VOGT
Senior Vice President,
General Counsel and Secretary


* Member of Audit Committee
+ Member of Compensation Committee
* Member of Nominating Committee

48



<PAGE>
STOCKHOLDER INFORMATION

EXECUTIVE OFFICE

North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699
707-536-3310
Internet: www.namc.com


TRANSFER AGENT AND REGISTRAR

The Bank of New York
101 Barclay Street
New York, New York 10286
800-524-4458


ANNUAL MEETING OF SHAREHOLDERS

To be held at Chase  Manhattan Bank, 270 Park Avenue,  3rd floor,  New York, New
York, at 10:00 a.m. (Eastern time) on May 28, 1997.


COMMON STOCK

Shares of North  American  Mortgage  Company  are  traded on the New York  Stock
Exchange under the symbol NAC. As of February 18, 1997, North American  Mortgage
Company had 997 registered stockholders of record.


STOCKHOLDER INQUIRIES

Communications concerning stock transfers, lost certificates, changes of address
and dividend payments should be directed to the Transfer Agent (see above).  The
Company's Form 10-K as filed with the Securities and Exchange Commission will be
provided without charge, but without exhibits. Requests should be addressed to:

Martin S. Hughes
Executive Vice President
Investor Relations
North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699


INVESTOR RELATIONS

Inquiries concerning the Company or its operations should be directed to:

Martin S. Hughes
Executive Vice President
North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699
707-523-5049


EMPLOYEES

As of January 31, 1997, the Company had 2,877 employees.

49