<PAGE>   1
                                                                    EXHIBIT 13

                                    [LOGO]

SELECTED CONSOLIDATED FINANCIAL DATA
& CORPORATE INFORMATION*

Income Statement Data (in thousands, except per share amounts)
<TABLE>
<CAPTION>
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Year Ended December 31,                                     1996           1995            1994         1993          1992
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<S>                                                     <C>            <C>             <C>          <C>           <C>
Total revenue                                            $  148,680     $  148,595      $  142,493   $  173,564    $  118,072
Total expenses                                              143,553        105,313         137,215      111,387       100,747
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Income before income taxes, extraordinary loss
and cumulative effect of accounting changes                   5,127         43,282           5,278       62,177        17,325
Income tax expense                                            9,453         16,132           4,474       22,056         7,378
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(Loss) income before extraordinary loss and
cumulative effect of accounting changes                      (4,326)        27,150             804       40,121         9,947
Extraordinary loss on retirement of debt                          -           (902)              -            -             -
Cumlative effect of accounting changes (a)                        -              -         (44,296)           -       (25,769)
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Net (loss) income                                        $   (4,326)    $   26,248      $  (43,492)  $   40,121    $  (15,822)
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Net (loss) income per common share (b):
  Before extraordinary loss and cumulative
    effect of accounting changes                         $    (3.57)    $     7.55      $    (1.65)  $     9.48    $     2.34
  Net (loss) income per share                            $    (3.57)    $     7.20      $   (14.21)  $     9.48    $    (3.73)
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Cash dividends per common share (c)                      $        -     $        -      $        -   $     6.39    $     2.40
Cash dividends declared on common shares                 $        -     $        -      $        -   $   26,616    $   10,133
Payment for common shares repurchased                    $        -     $  120,000      $  122,000   $        -    $        -
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OPERATING DATA
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Servicing portfolio at end of year (d):
 Balance (in millions)                                   $   29,201     $   31,831      $   39,568   $   38,403    $   37,312
 Number of loans serviced (e)                               478,779        494,051         543,428      518,972       578,883
 Weighted average interest rate (e)                            8.48%          8.33%           8.14%        8.53%         9.34%
 Weighted average net servicing fee (e) (f)                    .422%          .419%           .410%        .432%         .462%
 Percent delinquent (e)                                        6.24%          5.28%           4.07%        4.44%         4.39%
 Percent in process of foreclosure                              .93%           .80%            .77%         .92%          .77%
Total mortgage loan production (in millions)             $    3,831     $    2,852      $    4,586   $   11,452    $    7,591
Servicing rights acquisitions (in millions)              $    2,789     $    4,674      $    3,707   $    6,368    $    2,323
Sale of servicing rights (in millions)                   $    3,302     $   10,973      $    3,868   $        -    $        -
Number of employees at end of year                            1,682          1,680           2,055        3,060         2,145
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BALANCE SHEET DATA (in thousands)
December 31,
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Mortgage loans receivable                                $  314,937     $  381,028      $  210,472   $1,298,506    $1,116,113
Capitalized servicing (net) (g)                             410,939        397,071         530,450      666,666       624,657
Total assets                                              1,131,054      1,135,029       1,210,012    2,647,153     2,456,898
Senior debt                                                 643,262        661,846         647,251    1,959,643     1,835,909
Subordinated debt                                            54,535         54,786               -            -             -
Total liabilities                                           816,297        812,785         733,925    2,095,153     1,924,773
Total stockholders' equity (h)                              314,757        322,244         476,087      552,000       512,906
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</TABLE>


*See accompanying notes to selected consolidated financial data.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT


                                       3


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                                    [LOGO]


NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
& CORPORATE INFORMATION

(a)  The 1994 amount reflects the cumulative after tax effect, as of January
     1, 1994, of a change in the methodology used to measure impairment of the
     purchased mortgage servicing rights asset. See Note 3 to the consolidated
     financial statements. The 1992 amount reflects the cumulative after tax
     effect, as of January 1, 1992, of adopting Statement of Financial
     Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"  and
     SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
     Than Pensions."

(b)  Net (loss) income per common share amounts for all years presented are
     based on the weighted average number of common shares outstanding.

(c)  Cash dividends per common share were computed based on the total number
     of common shares outstanding as of the dividend record dates.

(d)  Includes loans subserviced for others having a principal balance of $2.8
     billion, $4.0 billion and $4.3 billion as of December 31, 1996, 1995 and
     1994, respectively, except as noted.

(e)  Excludes interim servicing of loans having a principal balance of $1,651
     million, $4,190 million and $75 million as of December 31, 1994, 1993 and
     1992, respectively.

(f)  Excludes loans subserviced for others as noted in (d) above.

(g)  Reflects a $68.1 million cumulative pretax effect adjustment to the
     purchased mortgage servicing rights asset as of January 1, 1994 relating
     to a change in the methodology used to measure its impairment. See Note 3
     to the consolidated financial statements.

(h)  Total stockholders' equity excludes amounts applicable to redeemable
     Class B common stock for years prior to 1993. In November 1993, all the
     shares of redeemable Class B common stock were redeemed at the option of
     the holders thereof.

FORM 10-K
     The financial information contained in this report substantially conforms
     with the information required in the "Form 10-K" Annual Report filed by the
     Company with the Securities and Exchange Commission at the end of March
     1997. Certain supplemental information appears in such Form 10-K that is
     not necessarily disclosed within this document. Copies of such Form 10-K
     (without exhibits) are available, without charge, upon request to the
     Corporate Secretary's Office, Source One Mortgage Services Corporation,
     27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (telephone:
     (810) 488-7000).

BUSINESS
     The Company engages primarily in the business of producing, selling and
     servicing residential mortgage loans and subservicing residential mortgage
     loans for third parties. Its primary sources of revenue are net servicing
     revenue, net interest revenue, net gain on sale of mortgages, net gain on
     sale of servicing and other revenue (including underwriting and appraisal
     fees).

     The Company is also engaged, through certain of its subsidiaries, in the
     sale of credit-related insurance products (such as life, disability,
     health, accidental death and property and casualty insurance).

MARKET FOR STOCK AND RELATED MATTERS
     There is no established public trading market for the Company's common
     stock. As of March 28, 1997, there were two holders of the 2,561,054 shares
     of the Company's issued and outstanding common stock.

     No cash dividends on common stock were declared for the years ended
     December 31, 1996, 1995 or 1994. The Company's secured credit agreement
     contains covenants which limit its ability to pay dividends or make
     distributions on its capital in excess of preferred stock dividend and
     subordinated debt interest requirements each year. In addition, the Company
     must comply with certain financial covenants provided in its secured and
     unsecured credit agreements, including restrictions relating to tangible
     net worth and leverage. The Company is currently in compliance with all
     such covenants.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       4


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

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
     The Company reported a net loss of $4.3 million for the year ended December
     31, 1996 as compared to net income of $26.2 million for the year ended
     December 31, 1995. The 1996 net loss reflects a $29.1 million pretax charge
     for the write-off of the Company's goodwill and other intangible assets
     (refer to Note 7 to the consolidated financial statements for further
     discussion) and a $.9 million pretax charge for impairment of its
     capitalized servicing asset. These amounts were partially offset by a $10.1
     million pretax gain on the sale of servicing to a third party and a $9.9
     million pretax net gain on financial instruments. The 1995 net income
     includes a $28.0 million pretax charge for impairment of the Company's
     capitalized servicing asset, $40.0 million of pretax gains on the sale of
     servicing to third parties and a $.8 million pretax net gain on financial
     instruments.

     Net servicing revenue was $77.5 million and $61.3 million for the years
     ended December 31, 1996 and 1995, respectively. Mortgage servicing revenue
     decreased slightly in 1996 primarily as a result of a lower average
     servicing portfolio balance during 1996 as compared to 1995. This decrease
     was partially offset by the recognition of a portion of the Company's
     deferred gain on the 1994 sale of servicing rights to a third party subject
     to a subservicing agreement which related to loans sold by the third party
     in 1996. Amortization of the Company's capitalized servicing asset
     decreased in 1996 primarily as a result of a significantly lower impairment
     charge for valuation allowances for the underlying mortgage servicing
     rights. This charge totaled $.9 million in 1996 as compared to $28.0
     million in 1995. This decrease, however, was partially offset by higher
     scheduled amortization expense due to higher market consensus prepayment
     rates as well as a higher average asset balance during 1996 as compared to
     1995.

     The average prepayment rate of the Company's owned servicing portfolio was
     11.2% for the year ended December 31, 1996 as compared to 8.3% for 1995.
     The Company's prepayment experience is significantly influenced by
     fluctuations in mortgage interest rates. A steady decline in market
     interest rates for mortgage loans during 1995 in addition to average lower
     interest rates in 1996 contributed to the increase in mortgage loan
     prepayments during 1996.

     Mortgage interest rates also affect the value of the Company's investment
     in mortgage servicing rights ("MSR"). As mentioned above, interest rates
     directly influence prepayment rates as well as other assumptions used in
     valuing the Company's MSR asset. In order to offset changes in the value of
     its MSR asset and to mitigate the effect on earnings of higher amortization
     and impairment of the asset which results from increased prepayment
     activity, the Company invests in various financial instruments. As interest
     rates decline, prepayment activity generally increases, thereby reducing
     the value of the MSR asset, while the value of the financial instruments
     increases. Conversely, as interest rates increase, the value of the MSR
     asset increases while the value of such financial instruments decreases.
     The financial instruments utilized by the Company include interest rate
     floor contracts ("floors") and principal-only ("P/O") swaps.

     The floors are derivative contracts which derive their value from a
     specified interest rate. The cash flow from the floors is equal to the
     difference between the floor rate and the prevailing interest rate applied
     to the notional amount. Payments are made to the Company only when the
     prevailing interest rates are below the floor rate. To the extent that
     prevailing interest rates decrease, the value of the floors increases, even
     if the interest rates do not fall below the floor rate. To the extent that
     prevailing interest rates increase, the value of the floors decreases.
     However, the Company is not exposed to losses in excess of its initial
     investment in the floors.

     The P/O swaps are derivative contracts, the value of which is determined by
     changes in the value of the referenced P/O strip security. The payments
     received by the Company under the P/O swaps relate to the cash flows of the
     referenced P/O security. The payments made by the Company are based upon a
     notional amount tied to the market price and the remaining balance of the
     referenced P/O security multiplied by a floating rate indexed to the London
     Interbank Offered Rates for U.S. dollar deposits ("LIBOR").

     For the year ended December 31, 1996, the Company recognized a $9.9 million
     gain on its financial instruments as compared to a gain of $.8 million in
     1995. The 1996 gain includes $8.1 million in realized gains from the sale
     of financial instruments and net cash flows received and $1.8 million in
     unrealized gains due to changes in the fair market value of


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       5


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                                    [LOGO]


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

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
     the various financial instruments. The 1995 gain includes unrealized gains
     due to changes in the fair market value of the financial instruments. As of
     December 31, 1996 and 1995, the carrying value of the financial instruments
     was $8.0 million and $3.5 million, respectively, and is included in
     investments in the consolidated statements of condition. Refer to Note 10
     to the consolidated financial statements for further discussion.

     The Company's total mortgage servicing portfolio decreased to $29.2 billion
     as of December 31, 1996 from $31.8 billion as of December 31, 1995. The
     Company is continuing to act on its corporate strategy to optimize returns
     on its owned servicing portfolio by buying and selling mortgage servicing
     rights based on the underlying risk and return characteristics. The Company
     purchased the rights to service $2.8 billion and $4.7 billion of mortgage
     loans from third parties during 1996 and 1995, respectively. During 1996,
     the Company sold the rights to service $3.3 billion of mortgage loans for
     net proceeds of $55.9 million and a pretax gain of $10.1 million. During
     1995, the Company sold a total of $11.0 billion in servicing rights to
     third parties for net proceeds of $199.1 million and a pretax gain of $40.0
     million.

     Loans being subserviced for others had principal balances totaling $2.8
     billion and $4.0 billion as of December 31, 1996 and 1995, respectively. In
     1994, the Company sold the rights to service $3.9 billion of mortgage loans
     to a third party and continues to service the majority of these loans
     pursuant to a subservicing agreement. The gain of $19.9 million was
     deferred and is being recognized over the five-year life of the
     subservicing agreement. In the fourth quarter of 1996, the third party sold
     the rights to service approximately $1.0 billion of these mortgage loans,
     representing approximately 25% of the total loans subserviced by the
     Company. Accordingly, the Company recognized an additional $2.4 million of
     the deferred gain in 1996, as mortgage servicing revenue, representing
     approximately 25% of the deferred balance at the time of sale. For the
     years ended 1996 and 1995, the Company has recognized $6.1 million and $4.2
     million, respectively, of the deferred gain as part of net servicing
     revenue in the consolidated statements of income.

     During 1996, the Company forged a new strategy with respect to its
     servicing operations. A major focus of this strategy is reducing exposure
     to interest rate risk, which increases with the size of an owned servicing
     portfolio. To reduce the exposure, the Company is taking actions to
     contract its owned servicing portfolio and expand its subservicing
     business. Consistent with this corporate strategy, the Company sold,
     subject to regulatory and investor approvals, approximately $17 billion of
     its non-recourse mortgage servicing portfolio to a third party for
     estimated proceeds of $271.5 million in February of 1997. The transaction
     is expected to result in the recognition of an after tax loss of
     approximately $2.1 million in the first quarter of 1997. The portion of the
     Company's mortgage servicing portfolio that was sold consists of
     approximately 284,000 loans with a weighted average interest rate of 8.39%.
     The Company will continue to service these loans pursuant to a subservicing
     agreement for a minimum of one year and a maximum of three years, at the
     option of the purchaser. Refer to Note 22 to the consolidated financial
     statements for further discussion.

     Total mortgage production for the years ended December 31, 1996 and 1995
     was $3.8 billion and $2.9 billion, respectively. Production related to
     refinancing activity made up 33% of total mortgage production for 1996 as
     compared to 23% for 1995. Mortgage loan payoffs for the years ended
     December 31, 1996 and 1995 were $3.0 billion and $2.3 billion,
     respectively. The increase in mortgage loan production and payoffs in 1996
     reflects overall lower market interest rates during 1996 and a
     corresponding increase in refinancing activity from 1995 levels.

     Net interest revenue decreased for the year ending December 31, 1996 to
     $4.8 million from $10.3 million for the year ending December 31, 1995. The
     increase in interest income for the 1996 year from 1995 is indicative of
     the increase in production levels experienced in 1996 as compared to 1995.
     However, this was more than offset by the increase in interest expense due
     to the increase in short-term borrowings necessary to fund the production
     as well as the additional expense related to the $56 million in principal
     amount of subordinated debentures issued in December 1995.


     The Company had net realized losses on the sale and exchange of securities
     with affiliates of $.9 million and $2.2 million for the years ended
     December 31, 1996 and 1995, respectively. The 1996 loss was a result of the
     Company selling its remaining common equity securities to Fund American
     Enterprises, Inc. ("FAE"), the Company's parent.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       6


<PAGE>   5
                                    [LOGO]


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

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
(CONTINUED)

     The 1995 loss resulted from the transfer of $27.0 million of certain common
     equity securities to FAE in exchange for shares of the Company's common
     stock held by FAE, which were then retired by the Company. All of the
     equity securities involved in such transactions were actively traded,
     readily marketable, listed on a national exchange and, for purposes of such
     transactions, were valued at their closing prices on the day preceding the
     date of each transaction.

     The net realized investment gain of $.6 million for the year ended December
     31, 1996 includes a $1.4 million gain on the return of a partnership
     investment, offset by the write-down of certain investments to realizable
     value. The net realized loss of $.5 million for the year ended December 31,
     1995 primarily reflects net losses realized on the sale of the Company's
     common equity securities to third parties.

     Net gain on sale of mortgages increased to $38.3 million for the year ended
     December 31, 1996 from $24.0 million for 1995. The increase reflects
     increased production and related mortgage sales volumes in 1996.

     Other revenue was $18.1 million and $15.6 million for the years ended
     December 31, 1996 and 1995, respectively. The increase in other revenue,
     which consists primarily of loan processing fees, insurance commissions and
     brokerage fees, was directly related to the increase in production volumes.

     Salaries and employee benefits expense for the years ended December 31,
     1996 and 1995 was $56.3 and $51.3 million, respectively. Generally accepted
     accounting principles ("GAAP") require loan origination revenues to be
     netted against direct loan origination costs. Since salaries and employee
     benefits expense is the largest component of loan origination costs,
     approximately 90% of loan origination fees are accounted for as a reduction
     to salaries and employee benefits expense as illustrated in the following
     table:

     ------------------------------------------------------------------------
     Year ended December 31, (in thousands)                1996        1995
     ------------------------------------------------------------------------
     Unadjusted salaries and employee benefits expense $  76,114    $ 68,807
     GAAP net origination revenues                      (19,820)     (17,550)
     ------------------------------------------------------------------------
     GAAP salaries and employee benefits expense       $  56,294    $ 51,257
     ------------------------------------------------------------------------

     An increase in loan origination revenues, reflecting higher retail mortgage
     loan production in 1996, partially offsets the increase in unadjusted
     salaries and employee benefits expense. Excluding the effects of loan
     origination revenues, salaries and employee benefits expense increased 11%
     in 1996 as compared to 1995. This increase reflects the additional
     personnel expenses and loan officer commissions associated with the
     Company's increased mortgage loan production in 1996.

     Office occupancy and equipment expense decreased to $13.6 million in 1996
     from $14.3 million in 1995. This decrease is primarily due to a decrease in
     depreciation expense resulting from certain assets of the Company becoming
     fully depreciated in 1995.

     The provision for loan losses increased to $10.3 million for the year ended
     December 31, 1996 from $7.0 million for the year ended December 31, 1995.
     This increase is attributable to higher average loss volumes relating to
     certain California residential mortgage loans, charge-offs of certain
     commercial real estate owned properties and increased losses due to
     servicing portfolios acquired by the Company during the fourth quarters of
     1995 and 1996. The delinquency rates of these acquired portfolios were
     higher than the Company's historical average delinquency rate. The Company
     purchased these portfolios for prices which were reflective of these higher
     delinquency rates.

     In the fourth quarter of 1996, the Company wrote off the remaining carrying
     value of goodwill and other intangible assets totaling $29.1 million. Refer
     to Note 7 to the consolidated financial statements for further discussion.

     Other operating expenses, which consist primarily of loan processing
     expenses and general office expenses, increased to $34.3 million for the
     year ended December 31, 1996 from $32.8 million in 1995. Loan processing
     expenses tend to decrease or increase with mortgage loan production.
     Accordingly, the increase in other operating expenses in 1996 reflects
     higher mortgage loan production in 1996 as compared to 1995.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       7


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                                    [LOGO]


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

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

     The Company reported net income of $26.2 million for the year ended
     December 31, 1995, compared to a net loss of $43.5 million for the year
     ended December 31, 1994. The 1995 net income reflects $40.0 million of
     pretax gains on sales of servicing to third parties. The 1994 net loss
     includes the effects of a $68.1 million pretax charge related to a change
     in accounting methodology for the purchased mortgage servicing rights
     ("PMSR") asset.

     Effective January 1, 1995, the Company adopted the provisions of Statement
     of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
     Mortgage Servicing Rights",  an amendment of SFAS No. 65. SFAS No. 122
     requires the total cost of acquiring mortgage loans, either through loan
     origination activities or purchase transactions, to be allocated to the
     mortgage servicing rights and the loans based on their relative fair
     values. The statement requires entities to measure impairment on a
     disaggregated basis by stratifying the mortgage servicing rights based on
     one or more predominant risk characteristics of the underlying loans.
     Impairment is recognized through a valuation allowance for each individual
     stratum.

     SFAS No. 122 prohibits retroactive application to prior years, therefore,
     the reported results for 1994 are in accordance with SFAS No. 65 and are
     not directly comparable to the 1995 results reported under SFAS No. 122. A
     major difference between SFAS No. 122 and SFAS No. 65 relates to the
     capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS
     No. 65, the costs inherent in creating OMSR's could not be capitalized.
     Under SFAS No. 122, a portion of the total cost of an originated loan is
     allocated to the right to service the loan based on the relative fair value
     of the mortgage servicing right and the loan.

     The Company estimated the fair values of its mortgage servicing rights by
     calculating the present value of the expected future cash flows associated
     with such rights. In making those estimates, the Company incorporated
     assumptions that market participants would use in their estimates of future
     servicing income and expense and discounted those cash flows using current
     estimated market rates.

     To measure impairment of the mortgage servicing rights, the Company
     stratified the related mortgage loan servicing portfolio based on its
     predominant risk characteristics which were determined to be prepayment,
     default and operational risks. This resulted in stratification by interest
     rate, loan type (investor) and original term of maturity. The fair value of
     each stratum was computed and compared to its recorded book value to
     determine if a valuation allowance, or recovery of a previously established
     valuation allowance, was required.

     The adoption of SFAS No. 122 as it related to the capitalization of
     originated mortgage servicing rights resulted in the recognition of
     additional pretax gain on sale of mortgages of $27.2 million for the year
     ended December 31, 1995. The impairment provisions of SFAS No. 122 resulted
     in a pretax charge of $28.0 million for the year. The discount rate and
     prepayment assumptions are significant factors used in estimating the fair
     value of the Company's mortgage servicing rights and could be significantly
     impacted by changes in interest rates. Accordingly, it is likely that
     management's estimate of the fair value of the mortgage servicing rights
     could change in the near term due to changes in interest rates.

     Net servicing revenue was $61.3 million and $82.4 for the years ended
     December 31, 1995 and 1994, respectively. The decrease in 1995 was
     primarily due to the decrease in mortgage servicing revenue resulting from
     the sale of $11.0 billion of servicing rights to third parties during 1995.
     Amortization of capitalized servicing decreased in 1995 due to slower
     amortization of the capitalized mortgage servicing asset reflecting lower
     actual and anticipated prepayments and a smaller capitalized servicing
     asset due to the sale of servicing, partially offset by higher impairment
     charges related to the adoption of SFAS No. 122.

     The average prepayment rate of the Company's owned servicing portfolio was
     8.3% for the year ended December 31, 1995 as compared to 13.5% for 1994. A
     steady rise in market interest rates for mortgage loans during 1994
     resulted in a decrease in loan prepayments from the mortgage servicing
     portfolio during 1995. However, falling interest rates through most of 1995
     resulted in increased prepayment activity later in 1995.



  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       8


<PAGE>   7
                                    [LOGO]


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

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
(CONTINUED)

     The Company's mortgage servicing portfolio decreased to $31.8 billion as of
     December 31, 1995 from $39.6 billion as of December 31, 1994. In 1995, a
     total of $11.0 billion in servicing rights were sold to third parties for
     net proceeds of $199.1 million and a pretax gain of $40.0 million. In 1994,
     the Company sold the rights to service $3.9 billion of mortgage loans to a
     third party for net proceeds of $70.2 million and continues to service the
     majority of these loans pursuant to a subservicing agreement. The gain of
     $19.9 million has been deferred and is being recognized over the five-year
     life of the subservicing agreement. For the years ended December 31, 1995
     and 1994, the Company recognized $4.2 million and $2.7 million,
     respectively, of the deferred gain as part of net servicing revenue on the
     consolidated financial statements of income. Loans being subserviced for
     others had principal balances totaling $4.0 billion and $4.3 billion as of
     December 31, 1995 and 1994, respectively.

     Total mortgage production for the years ended December 31, 1995 and 1994
     was $2.9 and $4.6 billion, respectively. Production related to refinancing
     activity made up 23% and 50% of total mortgage production for 1995 and
     1994, respectively. Mortgage loan payoffs for the years December 31, 1995
     and 1994 were $2.3 billion and $4.7 billion, respectively. The decrease in
     mortgage loan production and payoffs in 1995 reflects an increase in market
     interest rates during 1994 and a corresponding reduction in refinancing
     activity from 1994 levels. Although interest rates during 1995 steadily
     declined, particularly during the fourth quarter, the resulting increase in
     production during the second half of 1995 was not sufficient to offset the
     decrease in production volumes during the first half of 1995.

     Net interest revenue decreased for the year ending December 31, 1995 to
     $10.3 million from $12.1 million for the year ending December 31, 1994. The
     decrease in net interest revenue in 1995 as compared to 1994 is a
     reflection of lower average inventory balances associated with lower
     mortgage production levels, partially offset by decreased short-term
     borrowings. In addition, the Company used the proceeds from the 1995 sale
     of its servicing rights to repurchase and retire $82.3 million of long-term
     debt, which resulted in an extraordinary loss after tax of $.9 million.

     The Company had net realized losses on the sale and exchange of securities
     with affiliates of $2.2 million and $8.6 million for the years ended
     December 31, 1995 and 1994, respectively. The 1995 and 1994 losses resulted
     from the transfers of $27.0 million and $112.0 million, respectively, of
     certain common equity securities to FAE in exchange for shares of the
     Company's common stock held by FAE, which was then retired by the Company.
     All of the equity securities involved in such transactions were actively
     traded, readily marketable, listed on a national exchange and, for purposes
     of such transactions, were valued at their closing prices on the day
     preceding the date of each transaction.

     The net realized investment loss of $.5 million for the year ended December
     31, 1995 primarily reflects net losses realized on the sale of certain
     common equity securities to third parties. The net realized gain of $3.3
     million for the 1994 year is primarily due to net gains realized on the
     sale of the common equity securities to third parties offset by write-downs
     of certain long-term investments to estimated fair value.

     Net gain on sale of mortgages decreased to $24.0 million for the year ended
     December 31, 1995 from $29.5 million for 1994. The 1995 net gain amount
     includes a $27.2 million gain related to the adoption of SFAS No. 122.
     Intensive price competition during 1995 led to increased pricing subsidies
     on originated loans which correspondingly reduced gains on sales of
     mortgages into the secondary market.

     Other revenue, which consists primarily of loan processing fees, insurance
     commissions and brokerage fees decreased to $15.6 million for the year
     ended December 31, 1995 from $23.9 million for 1994. Loan processing fees,
     which generally represent approximately 80% of other revenue, tend to
     decrease or increase with mortgage loan production. Accordingly, the
     decrease in 1995 is directly related to the decrease in mortgage loan
     production in 1995 as compared to 1994.

     Salaries and employee benefits expense for the years ended December 31,
     1995 and 1994 was $51.3 million and $61.6 million, respectively. Generally
     accepted accounting principles ("GAAP") require loan origination revenues
     to be netted against direct loan origination costs. Since salaries and
     employee benefits expense is the largest component of loan


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       9


<PAGE>   8
                                    [LOGO]


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

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
(CONTINUED)

     origination costs, approximately 90% of loan origination fees are accounted
     for as a reduction to salaries and employee benefits expense as illustrated
     in the following table:

     ------------------------------------------------------------------------
     Year ended December 31, (in thousands)                 1995       1994
     ------------------------------------------------------------------------
     Unadjusted salaries and employee benefits expense $  68,807    $ 91,115
     GAAP net origination revenues                      (17,550)     (29,550)
     ------------------------------------------------------------------------
     GAAP salaries and employee benefits expense       $  51,257    $ 61,565
     ------------------------------------------------------------------------

     A decline in loan origination revenues, reflecting lower retail mortgage
     loan production in 1995, partially offsets the decrease in unadjusted
     salaries and employee benefits expense. Excluding the effects of loan
     origination revenues, salaries and employee benefits expense decreased 25%
     in 1995 as compared to 1994. This decrease reflects headcount reductions
     due to the downsizing of the production network during 1994 and lower
     incentive compensation expenses due to lower mortgage loan production
     volumes in 1995.

     Office occupancy and equipment expense decreased to $14.3 million in 1995
     from $18.2 million in 1994. The decrease reflects lower office lease and
     related expenses as a result of the restructuring plan implemented by the
     Company in 1994 to downsize its production network in response to a
     contracting mortgage loan origination market.

     The provision for loan losses decreased to $7.0 million for the year ended
     December 31, 1995 from $8.2 million for the year ended December 31, 1994.
     The 1994 amount includes charge-offs relating to certain commercial real
     estate owned properties.

     Other operating expenses, which consist primarily of loan processing
     expenses and general office expenses, decreased to $32.8 million for the
     year ended December 31, 1995 from $44.0 million in 1994. Loan processing
     expenses tend to decrease or increase with mortgage loan production.
     Accordingly, the decrease in other operating expenses in 1995 reflects
     lower mortgage loan production in 1995 as compared to 1994.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary cash flow requirements relate to funding mortgage
     loan production and investments in mortgage servicing rights. To meet these
     financing needs, the Company relies on commercial paper borrowings,
     short-term credit facilities, medium and long-term debt, early funding
     programs and cash flow from operations. The Company also generates cash
     from the sale of servicing. In 1994, the Company generated cash through the
     issuance of preferred stock which was used to reduce medium and long-term
     debt and to repurchase its common stock from FAE.

     In August 1995, the Company entered into a $60.0 million unsecured
     revolving credit facility which was extended in 1996 and expires in July
     1997. As of December 31, 1996 and 1995, the Company had $45.0 million and
     $60.0 million, respectively, outstanding under this borrowing facility.

     In November 1996, the Company amended and restated its secured revolving
     credit agreement which it entered into in March of 1995. The provisions of
     the amended agreement increased the Company's revolving credit facility
     from $500 million to $750 million and can be further increased, at the
     Company's option with bank concurrence, up to $1.25 billion. Borrowings
     under the facility are secured primarily by the Company's mortgage loans
     receivable and mortgage servicing portfolio. The revolving credit facility
     expires on November 12, 1999. As of December 31, 1996 and 1995, the Company
     had no outstanding borrowings under this facility or the previous facility.

     The Company must comply with certain financial covenants provided in its
     secured and unsecured revolving credit facilities, including restrictions
     relating to tangible net worth and leverage. In addition, the secured
     facility contains certain covenants which limit the Company's ability to
     pay dividends or make distributions of its capital in excess of preferred
     stock dividend and subordinated debt interest requirements each year. The
     Company is currently in compliance with all such covenants.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       10


<PAGE>   9
                                    [LOGO]


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

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

     The Company has a $650.0 million domestic and Euro commercial paper
     program. The weighted average number of days to maturity of commercial
     paper outstanding as of December 31, 1996 was 23 days. As of December 31,
     1996 and 1995, there was $362.2 million and $256.6 million of commercial
     paper outstanding, respectively.

     Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company,
     has a revolving credit agreement under which it can borrow up to $10.0
     million through June 30, 1997. Borrowings under the credit agreement are
     guaranteed by the Company. As of December 31, 1996 there were no borrowings
     outstanding under this agreement. As of December 31, 1995, there was $4.5
     million outstanding under this agreement.

     Effective December 8, 1995, the Company exchanged and retired 2,239,061
     shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million
     principal amount of 9.375% subordinated interest deferrable debentures
     ("subordinated debentures"), due December 31, 2025. Interest on the
     subordinated debentures is paid quarterly in arrears at the annual rate of
     9.375% on the last business day of each March, June, September and
     December. The first interest payment was made on December 29, 1995 for the
     period from November 1, 1995 (the last regular dividend payment date with
     respect to the preferred stock) through December 8, 1995 at the annual rate
     of 8.42% and from December 9, 1995 through December 31, 1995 at the annual
     rate of 9.375%. The purpose for the exchange was to improve the Company's
     after-tax cash flow since the interest payable on the subordinated
     debentures is deductible for federal income tax purposes, whereas dividends
     payable on the preferred stock are not.

     The subordinated debentures are redeemable at the option of the Company, in
     whole or in part, at any time on or after May 1, 1999. On or after such
     date, the subordinated debentures may be redeemed at the option of the
     Company at a price equal to 100% of the principal amount redeemed ($25 for
     each $25 principal amount of subordinated debenture), plus accrued and
     unpaid interest to the date fixed for redemption.

     In June 1992, the Company issued $100.0 million of 9% debentures due June
     2012 under terms of a $250.0 million shelf registration statement filed
     with the Securities and Exchange Commission ("SEC") in April 1992. The
     proceeds were used for general corporate purposes.

     Under a $200.0 million shelf registration statement filed with the SEC in
     November 1988, the Company issued $40.0 million of medium-term notes in
     1989, with a total weighted average interest rate of 9.65% due 1996, and in
     October 1991, the Company issued $160.0 million of 8.875% medium-term notes
     due October 2001. During 1995, the Company repurchased and retired $10.3
     million of the medium-term notes that were due in 1996 and $21.6 million of
     the medium-term notes that were due in 2001. During 1996, the Company
     repaid the remaining $29.7 million of the medium-term notes due in 1996 on
     their maturity dates.

     In 1986, the Company issued $125.0 million of 8.25% debentures due November
     1, 1996. The Company repurchased and retired $50.4 million of these
     debentures during 1995 and repaid the remaining $74.6 million on their
     maturity date in 1996.

     Management believes capital resources will be sufficient to meet the
     Company's operating needs as well as to fund maturing medium and long-term
     debt.

     In February 1994, the Company's certificate of incorporation was amended to
     change the number of authorized shares of preferred and common stock to 12
     million and 8 million, respectively. In March 1994, the Company issued 4
     million shares of 8.42% cumulative preferred stock, Series A, ("preferred
     stock"), with an aggregate liquidation preference of $25 per share for net
     proceeds to the Company of $96.8 million. In connection with the issuance
     of preferred stock, the Company transferred a total of $112.0 million of
     certain common equity securities to FAE in exchange for 838,826 shares of
     the Company's common stock held by FAE, which were retired by the Company.
     The Company recognized an $8.6 million pretax loss on these noncash
     transfers. The Company also repurchased and retired 85,248 shares of its
     common stock held by FAE for $10.0 million cash in 1994.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       11


<PAGE>   10
                                    [LOGO]


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

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
     The Company has a dividend policy which may result in the payment of
     dividends on the Company's common stock, dependent upon the earnings, cash
     position and capital needs of the Company, limitations in credit
     agreements, general business conditions and other factors deemed relevant
     by the Company's Board of Directors. The Company did not declare any
     dividends on its common stock during 1996, 1995 or 1994.

     Quarterly cash dividends are paid on preferred stock at an annual rate of
     8.42% or $2.105 per share, if declared by the Board of Directors, in
     arrears on the first day of each February, May, August and November. The
     first dividend payment was made on May 1, 1994 with respect to the period
     from the date of initial issuance of the preferred stock through April 30,
     1994. The Company paid cash dividends totaling $3.7 million, $8.4 million
     and $5.2 million on its preferred stock for the years ended December 31,
     1996, 1995 and 1994, respectively.

     The preferred stock is not redeemable prior to May 1, 1999. On or after
     such date, the preferred stock may be redeemed at the option of the Company
     at a price of $25 per share, plus accrued and unpaid dividends to the
     redemption date.

     During 1996, the Company sold the rights to service a total of $3.3 billion
     of mortgage loans to a third party for net proceeds of $55.9 million, which
     were used for general corporate purposes.

     During 1995, the Company sold the rights to service a total of $11.0
     billion of mortgage loans to third parties for net proceeds of $199.1
     million, which were used to repurchase and retire debt, repurchase common
     stock and for general corporate purposes.

     During 1995, the Company transferred a total of $27.0 million of common
     equity securities and $93.0 million in cash and money market investments to
     FAE in exchange for 959,049 shares of the Company's common stock held by
     FAE, which were retired by the Company. The Company recognized a $2.2
     million pretax loss on these transfers. During 1995, the Company
     repurchased and retired a total of $82.3 million of public debt and
     recorded an extraordinary loss after tax of $.9 million.

     During 1994, the Company sold the rights to service $3.9 billion of
     mortgage loans to a third party for net proceeds of $70.2 million. The
     Company continues to service the majority of these loans pursuant to a
     subservicing agreement which ends in 1999. The proceeds from the sale were
     used to reduce short-term debt and for general corporate purposes.

INFLATION
     Inflation affects the Company primarily in the area of mortgage loan
     originations. Interest rates normally increase during periods of high
     inflation and decrease during periods of low inflation. Historically, the
     Company's mortgage loan originations have increased in response to falling
     interest rates and have decreased during periods of rising interest rates.
     However, higher interest rate environments typically enhance the value of
     the Company's mortgage servicing portfolio due to less refinance activity.
     Lower interest rates generally result in higher payoffs and, therefore,
     typically reduce the value of the mortgage servicing portfolio.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       12


<PAGE>   11
                                    [LOGO]


REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Source One Mortgage Services Corporation

     We have audited the accompanying consolidated statements of condition of
     Source One Mortgage Services Corporation and subsidiaries (the Company) as
     of December 31, 1996 and 1995, and the related consolidated statements of
     income, 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 the Company's management. Our responsibility is to
     express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
     standards. Those standards require that we plan and perform the audit to
     obtain reasonable assurance about whether the financial statements are free
     of material misstatement. An audit includes examining, on a test basis,
     evidence supporting the amounts and disclosures in the financial
     statements. An audit also includes assessing the accounting principles used
     and significant estimates made by management, as well as evaluating the
     overall financial statement presentation. We believe that our audits
     provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
     in all material respects, the consolidated financial position of Source One
     Mortgage Services Corporation and subsidiaries as of December 31, 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.

     As discussed in Notes 1 and 3 to the consolidated financial statements, in
     1995 the Company changed its method of accounting for mortgage servicing
     rights. As discussed in Note 3 to the consolidated financial statements, in
     1994 the Company changed its method of accounting for its purchased
     mortgage servicing rights asset.


     /S/ Ernst & Young LLP

     Detroit, Michigan
     January 30, 1997,

         except for Notes 7 and 22,
         as to which the date is
         March 21, 1997




  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       13


<PAGE>   12
                                    [LOGO]



CONSOLIDATED STATEMENTS OF CONDITION

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
December 31, (in thousands, except for share and per share amounts)        1996                  1995
------------------------------------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                   <C>
Cash                                                                 $      923            $    4,146
Investments                                                              46,555                26,290
Mortgage loans receivable                                               314,937               381,028
Pool loan purchases                                                     131,539               118,995
Loans held for investment                                                23,351                24,335
Capitalized servicing (net)                                             410,939               397,071
Common equity securities (net)                                            2,312                   529
Mortgage claims receivable and real estate acquired
 (net of allowance for loan losses of $15,400 in 1996
 and $13,500 in 1995)                                                    51,501                45,416
Premises and equipment                                                   28,054                31,014
Other assets                                                            120,943               106,205
------------------------------------------------------------------------------------------------------
Total assets                                                         $1,131,054            $1,135,029
------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------
Liabilities:
Senior debt                                                          $  643,262            $  661,846
Subordinated debt                                                        54,535                54,786
Accounts payable and other liabilities                                  118,500                96,153
------------------------------------------------------------------------------------------------------
Total liabilities                                                    $  816,297            $  812,785
------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value, 12,000,000 shares authorized,
  1,760,939 shares of 8.42% cumulative Series A (aggregate
  liquidation preference of $25 per share) issued and
  outstanding as of December 31, 1996 and 1995                               18                    18
Common stock, $.01 par value, 8,000,000 shares authorized,
  2,247,000 shares issued and outstanding as of
  December 31, 1996 and 1995                                                 22                    22
Paid-in capital                                                         346,088               346,088
Unrealized investment loss (net)                                              -                  (546)
Retained deficit                                                        (31,371)              (23,338)
------------------------------------------------------------------------------------------------------
Total stockholders' equity                                              314,757               322,244
------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                           $1,131,054            $1,135,029
------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       14


<PAGE>   13
                                    [LOGO]



CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands, except for per share amounts)              1996           1995             1994
----------------------------------------------------------------------------------------------------------------------------
REVENUE
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>              <C>
Mortgage servicing revenue                                                  $  139,578     $  141,883       $  169,293
Amortization of capitalized servicing                                          (71,936)       (81,385)         (86,943)
Net gain on financial instruments                                                9,904            840                -
----------------------------------------------------------------------------------------------------------------------------
 Net servicing revenue                                                          77,546         61,338           82,350
----------------------------------------------------------------------------------------------------------------------------
Interest income                                                                40,826          37,669           72,031
Interest expense                                                              (36,018)        (27,348)         (59,954)
----------------------------------------------------------------------------------------------------------------------------
 Net interest revenue                                                           4,808          10,321           12,077
----------------------------------------------------------------------------------------------------------------------------
Net realized investment loss on sale and
 exchange of securities with affiliates                                          (855)         (2,159)          (8,596)
Net realized investment gain (loss)                                               623            (544)           3,333
Net gain on sale of mortgages                                                  38,346          24,015           29,471
Net gain on sale of servicing                                                  10,080          40,041                -
Other                                                                          18,132          15,583           23,858
----------------------------------------------------------------------------------------------------------------------------
Total revenue                                                                 148,680         148,595          142,493
----------------------------------------------------------------------------------------------------------------------------
EXPENSES
----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits                                                 56,294          51,257           61,565
Office occupancy and equipment                                                 13,619          14,326           18,241
Provision for loan losses                                                      10,260           6,956            8,206
Write-off of goodwill and other intangible assets                              29,128               -                -
Restructuring charges                                                               -               -            5,154
Other operating expenses                                                       34,252          32,774           44,049
----------------------------------------------------------------------------------------------------------------------------
Total expenses                                                                143,553         105,313          137,215
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
 and cumulative effect of accounting change                                     5,127          43,282            5,278
Income tax expense                                                              9,453          16,132            4,474
----------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary loss and
  cumulative effect of accounting change                                       (4,326)         27,150              804
Extraordinary loss on repurchase of debt
  (net of $486 income tax benefit)                                                  -            (902)               -
Cumulative effect of change in accounting for
  purchased mortgage servicing rights
  (net of $23,852 deferred income tax benefit)                                      -               -          (44,296)
----------------------------------------------------------------------------------------------------------------------------
Net (loss) income                                                              (4,326)         26,248          (43,492)
Less dividends on preferred stock                                               3,707           7,634            6,642
----------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock                                $  (8,033)     $   18,614       $  (50,134)
----------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share:
Before extraordinary loss and
 cumulative effect of accounting change                                     $   (3.57)     $     7.55       $    (1.65)
Extraordinary loss                                                                  -            (.35)               -
Cumulative effect of accounting change                                              -               -           (12.56)
----------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share                                          $   (3.57)     $     7.20       $   (14.21)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       15


<PAGE>   14
                                    [LOGO]





CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996, 1995 and 1994
(in thousands, except for share and per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
                                                                                           Unrealized                        Total
                                                                                           Investment     Retained          Stock-
                                                Preferred        Common         Paid-in          Gain     Earnings        holders'
                                                    Stock         Stock         Capital         (Loss)    (Deficit)         Equity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>         <C>           <C>           <C>            <C>
Balances at January 1, 1994                       $     -        $   41      $  544,063      $   (286)   $   8,182      $  552,000
Net loss                                                -             -               -             -      (43,492)        (43,492)
Unrealized investment loss (net)                        -             -               -        (3,779)           -          (3,779)
Issuance of 4,000,000 shares of
  8.42% cumulative Series A
  preferred stock, $.01 par value
  (aggregate liquidation
  preference of $25 per share)                         40             -          99,960             -            -         100,000
Repurchase of 924,074 shares of
  common stock, $.01 par value,
  from parent                                           -            (9)       (121,991)            -            -        (122,000)
Preferred dividends declared
  of $2.105 per share                                   -             -               -             -       (6,642)         (6,642)
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994                          40            32         522,032        (4,065)      (41,952)       476,087
Net income                                              -             -               -             -        26,248         26,248
Unrealized investment gain (net)                        -             -               -         3,519             -          3,519
Repurchase of 959,049 shares of
  common stock, $.01 par value,
  from parent                                           -           (10)       (119,990)            -             -       (120,000)
Exchange of 2,239,061 shares of
 8.42% cumulative Series A
 preferred stock, $.01 par value
 (aggregate liquidation
 preference of $25 per share) for
 9.375% subordinated
 debentures                                           (22)            -         (55,954)            -             -        (55,976)
Preferred dividends declared of
 $2.105 per share                                       -             -               -             -        (7,634)        (7,634)
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995                          18            22         346,088          (546)      (23,338)       322,244
Net loss                                                -             -               -             -        (4,326)        (4,326)
Unrealized investment gain (net)                        -             -               -           546             -            546
Preferred dividends declared of
 $2.105 per share                                       -             -               -             -        (3,707)        (3,707)
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                     $    18        $   22      $  346,088      $      -    $  (31,371)    $  314,757
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       16


<PAGE>   15
                                    [LOGO]


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,                                                       1996                   1995               1994
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>               <C>
Net (loss) income                                                        $  (4,326)             $  26,248       $    (43,492)
Noncash items included in the determination of
net (loss) income:
 Amortization of capitalized servicing                                      71,936                 81,385             86,943
 Write-off of goodwill and other intangible assets                          29,128                      -                  -
 Net unrealized gain on financial instruments                               (1,820)                  (840)                 -
 Provision for loan losses                                                  10,260                  6,956              8,206
 Depreciation and amortization                                               8,825                  7,347             10,450
 Net realized loss on investments                                              232                  2,703              5,263
 Amortization of goodwill                                                    2,090                  2,090              2,090
 Gain on sale of servicing                                                 (10,080)               (40,041)                 -
 Amortization of deferred gain on sale of servicing                         (6,139)                (4,188)            (2,700)
Net decrease (increase) in mortgage loans receivable                        66,091               (170,556)         1,060,241
Net (decrease) increase in accounts payable and other
 liabilities                                                               (15,002)                18,749            (29,894)
Net decrease in other assets                                                 5,399                  3,768             42,444
Net change in current and deferred income taxes
  receivable and payable                                                   (10,158)                16,849             (4,716)
Extraordinary loss on repurchase of debt                                         -                    902                  -
Cumulative effect of change in accounting
  for purchased mortgage servicing rights                                        -                      -             44,296
----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities                           146,436                (48,628)         1,179,131
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
----------------------------------------------------------------------------------------------------------------------------
Collections on pool loan purchases, mortgage
  claims receivable and real estate acquired                               160,936                192,697            254,136
Additions to pool loan purchases, mortgage claims
  receivable and real estate acquired                                     (189,825)              (150,420)          (242,841)
Capitalized excess servicing income                                        (10,114)                (7,442)           (16,712)
Additions to purchased mortgage servicing rights                           (40,449)               (82,147)           (90,049)
Originated mortgage servicing rights                                       (38,015)               (31,197)                 -
Net proceeds from sales of servicing                                        11,706                181,109             70,242
Net (increase) decrease in investments                                     (20,134)                23,846             65,391
Purchase of common equity securities                                             -                      -           (122,101)
Proceeds from sale of common equity securities
  to affiliates                                                                514                      -                  -
Proceeds from sales of common equity securities                                  -                 21,390            129,679
Net (acquisition) disposition of premises and equipment                     (1,410)                   185             (3,491)
Net decrease (increase) in loans held for investment                           984                 (4,560)             3,836
----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities                         $(125,807)             $ 143,461       $     48,090
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       17


<PAGE>   16
                                    [LOGO]




CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Year ended December 31,                                                1996                1995                  1994
--------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
--------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                   <C>
Proceeds from issuance of commercial paper                      $ 5,140,110         $ 4,050,417           $ 1,778,950
Repayments on commercial paper                                   (5,034,543)         (3,819,904)           (2,326,875)
Net decrease in credit agreement and borrowings                     (20,497)           (133,978)             (765,673)
Retirement of debt                                                 (104,350)            (85,872)                    -
Net proceeds from issuance of preferred stock                             -                   -                96,850
Repurchase of common stock from parent                                    -             (92,980)              (10,000)
Dividends paid on preferred stock                                    (3,707)             (8,420)               (5,239)
Other                                                                  (865)             (1,190)                 (948)
--------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities                               (23,852)            (91,927)           (1,232,935)
--------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash                                      (3,223)              2,906                (5,714)
Cash at beginning of year                                             4,146               1,240                 6,954
--------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                             $       923         $     4,146           $     1,240
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       18


<PAGE>   17
                               [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

ORGANIZATION
Source One Mortgage Services Corporation (together with its subsidiaries, the
"Company") was incorporated in 1972 and is the successor to Citizens Mortgage
Corporation which was organized in 1946. The Company is now an indirect
wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund
American"), a Delaware corporation organized in 1980, which was formerly known
as The Fund American Companies, Inc. and Fireman's Fund Corporation.

The Company is one of the largest mortgage banking companies in the United
States. As of December 31, 1996, the Company had a mortgage loan servicing
portfolio totaling $29.2 billion, including $2.8 billion of loans subserviced
for others, which is serviced on behalf of approximately 320 institutional
investors and numerous other security holders. As of December 31, 1996, the
Company had 131 retail branch offices in 26 states and originated $3.8 billion
in mortgage loans for the year then ended.

As a mortgage banker, the Company engages primarily in the business of
producing, selling and servicing residential mortgage loans and subservicing
residential mortgage loans for third parties. Its sources of revenue are net
servicing revenue, net interest revenue, net gain on sale of mortgages, net
gain on sale of servicing and other revenue (including underwriting and
appraisal fees). Through subsidiaries, the Company also provides credit-related
insurance products (such as life, disability, health, accidental death and
property and casualty insurance).

BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include the
accounts of Central Pacific Mortgage Company, a wholly-owned subsidiary of the
Company, (together with its subsidiaries, "Central Pacific") and all other
subsidiaries, and have been prepared in accordance with generally accepted
accounting principles. Significant intercompany transactions have been
eliminated in consolidation. The financial statements include all adjustments
considered necessary by management to fairly present the financial position,
results of operations and cash flows of the Company. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
amounts in prior year financial statements have been reclassified to conform
with the current year presentation.

Fund American acquired the stock of the Company in 1986. The acquisition
resulted in a purchase price in excess of historical book value of the
Company's net assets. The excess purchase price allocated to identifiable
assets was amortized primarily over 5 to 20 years depending on asset type and
the portion allocated to goodwill was amortized over 20 years. In the fourth
quarter of 1996, the Company wrote off the remaining carrying value of
goodwill and other intangible assets. Refer to Note 7 to the consolidated
financial statements for further discussion.


ACCOUNTING STANDARD RECENTLY ADOPTED
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of SFAS No. 65, which requires the total cost
of acquiring mortgage loans, either through loan origination activities or
purchase transactions, to be allocated to the mortgage servicing rights and the
loans based on their relative fair values. The statement requires entities to
measure impairment on a disaggregated basis by stratifying the mortgage
servicing rights based on one or more predominant risk characteristics of the
underlying loans. Impairment is recognized through a valuation allowance for
each individual stratum. Pursuant to SFAS No. 122, consolidated financial
statements prior to 1995 have not been restated.

SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT


                                        19

<PAGE>   18
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)

INVESTMENTS
     Investments primarily consist of the following: short-term investments
     stated at fair value with unrealized gains and losses, if any, reported in
     income; real estate investment conduit ("REMIC") residuals considered held
     to maturity and carried at amortized cost using a method which approximates
     the effective yield method of amortization on a prospective basis;
     investment partnership interests reported using the equity method of
     accounting; and interest rate floor contracts ("floors") and principal-only
     ("P/O") swaps considered held for interest rate risk management purposes
     and carried at fair value with unrealized gains and losses reported in net
     gain on financial instruments.

MORTGAGE LOANS RECEIVABLE
     Mortgage loans receivable are stated at the lower of aggregate cost or
     market value. Conventional mortgage loans are placed on a nonaccrual basis
     when delinquent ninety days or more as to interest or principal. Interest
     on delinquent Federal Housing Administration ("FHA") insured loans is
     accrued at the insured rate beginning on the sixty-first day of
     delinquency. Interest on delinquent Veterans Administration ("VA")
     guaranteed loans is accrued at the loan rate during the period of
     delinquency.

RECOGNITION OF REVENUES RELATED TO MORTGAGE LOANS RECEIVABLE
     Discounts from the origination of mortgage loans receivable are deferred
     and recognized as adjustments to gain or loss on sale. Gains and losses
     from the sale of mortgage loans are recognized when proceeds are received.
     Loan origination fees, net of certain direct costs, have been deferred and
     are taken into income when mortgage loans receivable are sold.

POOL LOAN PURCHASES
     Pool loan purchases, which are carried at cost, represent FHA insured, VA
     guaranteed and conventional loans which were either delinquent or in the
     process of foreclosure at the time they were purchased from Government
     National Mortgage Association ("GNMA"), Federal National Mortgage
     Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
     mortgage-backed security pools that the Company services. Following the
     purchase of these loans, interest is accrued at a rate based on expected
     recoveries.

LOANS HELD FOR INVESTMENT
     Loans held as permanent investments are stated at the lower of cost or
     market value determined at the time the permanent investment decisions were
     made. The amount of discount, if any, is amortized to income over the
     anticipated life of the investment.

CAPITALIZED SERVICING
     Capitalized servicing includes certain costs incurred in the origination
     and acquisition of mortgage servicing rights ("originated and purchased
     servicing") which are deferred and amortized over the expected life of the
     loan. The total cost of acquiring mortgage loans either through origination
     activities or purchase transactions, is allocated between the mortgage
     servicing rights and the loans based on their relative fair values. The
     fair values of mortgage servicing rights are estimated by calculating the
     present value of the expected future cash flows associated with such
     rights, incorporating assumptions that market participants would use in
     their estimates of future servicing income and expense. A current market
     rate is used to discount estimated future cash flows. Impairment of
     mortgage servicing rights is measured on a disaggregated basis by
     stratifying the mortgage servicing rights based on one or more predominant
     risk characteristics of the underlying loans. Impairment is recognized
     through a valuation allowance for each individual stratum.

     Capitalized servicing also includes the present value of future servicing
     revenue in excess of normal servicing revenue on loans sold with servicing
     retained ("excess servicing") which is deferred and amortized using a
     method that relates the anticipated servicing revenue to total projected
     servicing revenue to be received over the expected life of the loan.
     Impairment tests for excess servicing are performed on a disaggregated
     basis. The original discount rate is used to discount excess servicing
     future cash flows.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       20


<PAGE>   19
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)

RECOGNITION OF REVENUES RELATED TO SERVICING MORTGAGE LOANS
     Mortgage servicing revenue represents fees earned for servicing real estate
     mortgage loans owned by investors and late charge income. The servicing
     fees are calculated based on the outstanding principal balances of the
     loans serviced and are recognized together with late charge income when
     received.

COMMON EQUITY SECURITIES
     Common equity securities are carried at fair value. Unrealized gains and
     losses, net of tax, are recorded as a separate component of stockholders'
     equity with no corresponding credit or charge to net income. Realized gains
     and losses from sales of common equity securities are based on the specific
     identification method.

MORTGAGE CLAIMS RECEIVABLE AND REAL ESTATE ACQUIRED
     Mortgage claims receivable represent claims filed primarily with FHA and VA
     and are carried at cost less an estimated allowance for amounts which are
     not fully recoverable from claims filed with the underlying mortgage
     insuring agencies.

     Real estate acquired is stated at the lower of net realizable value or the
     recorded balance satisfied at the date of acquisition determined on an
     individual property basis. Costs relating to holding the properties are
     charged to expense as incurred.

     The allowance for loan losses is based upon an analysis of the mortgage
     loan servicing portfolio and reflects an amount which, in management's
     judgment, is adequate to provide for estimated losses.

PREMISES AND EQUIPMENT
     Premises and equipment, including leasehold improvements and systems and
     programming software, are stated at cost less accumulated depreciation and
     amortization. Depreciation and amortization are computed on a straight-line
     method over the estimated useful lives of the related assets or over the
     lease terms, whichever period is shorter.

NET INCOME PER SHARE
     Net income per share amounts were computed based on the weighted average
     total number of common shares outstanding. There were 2,247,000, 2,584,450
     and 3,527,713 weighted average common shares outstanding for the years
     ended December 31, 1996, 1995 and 1994, respectively.

DIVIDENDS PER SHARE
     Cash dividends per share were computed based on the total number of common
     shares outstanding as of the dividend record dates.

NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARD

     In June 1996, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
     for Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities." The adoption of this statement will eliminate the distinction
     between "normal" servicing rights and excess servicing receivables and will
     change the Company's method of measuring the value of its capitalized
     excess servicing asset. The statement is effective for transfers and
     servicing of financial assets beginning in fiscal year 1997. The Company
     has not yet determined what impact, if any, the adoption of this statement
     will have on its financial position or results of operations.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       21

<PAGE>   20
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. CAPITALIZED SERVICING

     For the years ended December 31, 1996 and 1995, the Company estimated the
     fair values of its mortgage servicing rights by calculating the present
     value of the expected future cash flows associated with such rights. In
     making those estimates, the Company incorporated assumptions that market
     participants would use in their estimates of future servicing income and
     expense.

     As a result of the pending sale of approximately $17 billion in mortgage
     servicing rights (refer to Note 22 to the consolidated financial
     statements), the Company refined its calculation for measuring the
     impairment of its capitalized servicing asset during the fourth quarter of
     1996. The $17 billion portfolio was valued as one stratum using the market
     price as determined by the third party purchaser.

     The Company evaluated the predominant risk characteristics (prepayment,
     default and operational) on the remaining owned servicing portfolio. The
     Company stratified the portfolio by interest rate, loan type (investor),
     original term to maturity and principal recourse. Consistent with its
     existing methodology, the Company measured impairment of its remaining
     owned servicing portfolio using assumptions that market participants would
     use to value their estimates of future net servicing revenue. In estimating
     fair value, the Company used market consensus prepayment rates and
     discounted the future cash flows using discount rates that approximate
     current market rates of 10.5% for conventional loans, 12% for insured loans
     and 21% for recourse loans. The fair value of each stratum was computed and
     compared to its recorded book value to determine if a valuation allowance,
     or recovery of a previously established allowance, was required. As a
     result of refining the calculation on its remaining owned servicing
     portfolio, the Company recognized $13.4 million of pretax impairment during
     the fourth quarter of 1996.

     The discount rate and prepayment assumptions are significant factors used
     in estimating the fair value of the Company's mortgage servicing rights and
     could be significantly impacted by changes in interest rates. Accordingly,
     it is likely that management's estimate of the fair value of the mortgage
     servicing rights could change in the near term due to changes in interest
     rates.


     The following table summarizes the fair value of mortgage servicing rights
     and certain characteristics of the Company's servicing portfolio related to
     those mortgage servicing rights as of December 31, 1996:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                      Fair Value                     Weighted
                        Mortgage      Principal       Average     Weighted      Weighted
                       Servicing        Balance      Interest      Average       Average
                          Rights   Serviced (a)          Rate     Maturity   Service Fee
Loan Type         (in thousands)  (in millions)  (in percent)  (in months)  (in percent)
----------------------------------------------------------------------------------------
<S>               <C>             <C>            <C>           <C>          <C>
 Insured                $207,303        $11,932         8.88%          264          .45%
 Conventional            124,257          7,856          8.44          215           .38
 Recourse                 26,452          2,188          8.72          214           .31
 Adjustable Rate          16,219            997          7.97          301           .42
----------------------------------------------------------------------------------------
 Total                  $374,231        $22,973         8.67%          244          .41%
----------------------------------------------------------------------------------------
</TABLE>


(a)  Excludes $3.4 billion of mortgage servicing rights related to originations
     not capitalized prior to the adoption of SFAS No. 122.

     In 1995, to measure impairment of the mortgage servicing rights, the
     Company stratified the related mortgage loan servicing portfolio based on
     its predominant risk characteristics which were determined to be
     prepayment, default and operational risks. This resulted in stratification
     by interest rate, loan type (investor) and original term to maturity. In
     estimating fair value, the Company used market consensus prepayment rates
     and discounted the future cash flows using discount rates that approximated
     then current market rates of 10.5% for conventional loans and 12.0% for
     insured loans. The fair value of each stratum was computed and compared to
     its recorded book value to determine if a valuation allowance, or recovery
     of a previously established valuation allowance, was required.

     In 1994, the Company adopted an accounting methodology that measured
     impairment of purchased servicing by discounting the estimated future cash
     flows using a current market rate. Prior to 1994, the Company measured


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       22


<PAGE>   21
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. CAPITALIZED SERVICING (CONTINUED)

     impairment of purchased servicing on a disaggregated basis including a cost
     of capital charge for estimating future cash flows. The adoption of the new
     accounting methodology, recorded as a cumulative adjustment as of January
     1, 1994, resulted in a $68.1 million pretax, $44.3 million after tax,
     charge to income for 1994.

     The Company estimates the fair value of its capitalized excess servicing
     asset by discounting the anticipated future cash flows over the estimated
     life of the related loans. In making these estimates, the Company uses
     "interest only strip"  interest rates as quoted by market participants to
     determine the appropriate discount rates and prepayment speed assumption
     rates that are based on interest rates, loan types and original term of
     maturity. The discount rate used to capitalize excess servicing ranged from
     12.00% to 12.60% for 1996, was 12.00% for 1995 and ranged from 8.00% to
     10.00% for 1994. For the years ended December 31, 1996, 1995 and 1994, the
     weighted average discount rates inherent in the carrying amount of the
     capitalized excess servicing asset were 10.36%, 10.03% and 9.12%,
     respectively.

     The following table summarizes changes in the Company's capitalized
     servicing asset:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Deferred
                                                                                                            Gain on         Total
                                             Purchased      Originated         Excess       Valuation       Sale of   Capitalized
(in thousands)                               Servicing      Servicing       Servicing       Allowance     Servicing     Servicing
---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>           <C>              <C>            <C>         <C>
Balances at January 1, 1994                  $  570,208      $      -      $   96,458        $      -      $      -    $  666,666
Cumulative effect of
  accounting change                             (68,147)            -               -               -             -       (68,147)
Additions                                        69,704             -          16,712               -       (19,912)       66,504
Scheduled amortization                          (61,665)            -         (12,120)              -             -       (73,785)
Impairment/unscheduled
  amortization                                  (12,818)            -            (340)              -             -       (13,158)
Amortization of deferred gain                         -             -               -               -         2,700         2,700
Sales                                           (21,706)            -         (28,624)              -             -       (50,330)
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994                   475,576             -          72,086               -       (17,212)      530,450
Additions                                        64,239        31,197           7,442               -             -       102,878
Scheduled amortization                          (43,936)       (1,364)         (7,553)              -             -       (52,853)
Impairment/unscheduled
  amortization                                        -            -             (564)        (27,968)            -       (28,532)
Amortization of deferred gain                         -            -                -               -         4,188         4,188
Sales                                          (132,371)           -          (26,689)              -             -      (159,060)
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995                   363,508       29,833           44,722         (27,968)      (13,024)      397,071
Additions                                        77,385       38,015           10,114               -             -       125,514
Scheduled amortization                          (56,746)      (6,262)          (6,924)              -             -       (69,932)
Impairment/unscheduled
 amortization                                         -            -           (1,076)           (928)            -        (2,004)
Amortization of deferred gain                         -            -                -               -         6,139         6,139
Sales                                           (37,685)           -           (8,164)              -             -       (45,849)
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                 $ 346,462      $61,586       $   38,672        $(28,896)     $ (6,885)   $  410,939
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


     During 1994, the Company sold the rights to service $3.9 billion of
     mortgage loans to a third party for net proceeds of $70.2 million and
     continues to service the majority of these loans pursuant to a subservicing
     agreement. Accordingly, the Company recorded a deferred gain on the sale
     which is being recognized as income over the five-year life of the
     subservicing agreement. In the fourth quarter of 1996, the third party sold
     the rights to service approximately $1.0 billion of these mortgage loans,
     representing approximately 25% of the total loans subserviced by the
     Company. Accordingly, the Company recognized an additional $2.4 million of
     the deferred gain in 1996 as mortgage servicing revenue, representing
     approximately 25% of the deferred balance at the time of the sale.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       23


<PAGE>   22
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. COMMON EQUITY SECURITIES AND INVESTMENTS

     In January 1996, the Company sold its remaining $1.4 million of common
     equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's
     direct parent, for cash proceeds. In 1995, the Company transferred $27.0
     million of certain common equity securities to FAE in exchange for shares
     of the Company's common stock held by FAE, which were retired by the
     Company. All of the equity securities involved in such transactions were
     actively traded, readily marketable, listed on a national exchange and, for
     purposes of such transactions, were valued at their reported closing prices
     on the day preceding the date of each transaction.

     The Company received proceeds on the sale of common equity securities of
     $.5 million and $21.4 million for the years ended December 31, 1996 and
     1995, respectively, including the transactions with Fund American. Realized
     gains and losses from the sale of these securities were included in the
     determination of income. For the year ended December 31, 1996, the Company
     realized losses totaling $.9 million. For the year ended December 31, 1995,
     the Company realized gains totaling $2.8 million and losses totaling $5.6
     million.

     In December 1996, the Company received shares of certain common equity
     securities with a market value of $2.3 million as a return of a partnership
     investment. The resulting gain of $1.4 million is included in the
     determination of income. In January 1997, the Company transferred these
     shares to FAE in exchange for shares of the Company's common stock held by
     FAE, which were retired by the Company. Refer to Note 22 to the
     consolidated financial statements for further discussion.


The fair value of the portfolio of common equity securities is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                         1996               1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
Common equity securities at adjusted cost                                         $  2,312           $  1,369
Gross unrealized losses                                                                  -               (840)
------------------------------------------------------------------------------------------------------------------
Common equity securities at fair value                                            $  2,312           $    529
------------------------------------------------------------------------------------------------------------------
</TABLE>

The carrying value of debt securities, which is included in investments on
the consolidated statements of condition, approximates fair value and is as
follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                         1996               1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
Debt securities at fair value which approximates amortized cost                   $  1,577           $  2,735
------------------------------------------------------------------------------------------------------------------
</TABLE>

The change in net unrealized investment loss on the portfolio of common equity
securities has been charged to stockholders' equity as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                               1996                1995          1994
------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>             <C>
Net unrealized investment loss at beginning of year                $  (546)        $  (4,065)      $  (286)
Decrease in gross unrealized gains                                       -            (1,068)       (3,875)
Decrease (increase) in gross unrealized losses                         840             6,481        (1,938)
(Decrease) increase in deferred income tax (expense) benefit          (294)           (1,894)        2,034
------------------------------------------------------------------------------------------------------------------
Net unrealized investment loss at end of year                      $     -         $    (546)      $(4,065)
------------------------------------------------------------------------------------------------------------------
</TABLE>



  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       24

<PAGE>   23
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. MORTGAGE LOANS RECEIVABLE

  The following table summarizes mortgage loans receivable:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                            1996              1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>
Adjustable rate mortgage loans, weighted average interest rates of 6.60%
 and  6.55% as of December 31, 1996 and 1995, respectively                             $  35,077        $  17,605
Fixed rate 5 year through 20 year mortgage loans, weighted average
  interest rates of 7.73% and 7.47% as of December 31, 1996
  and 1995, respectively                                                                  51,160           59,507
Fixed rate 30 year mortgage loans, weighted average
 interest rates of 8.19% and 7.89% as of December 31,
 1996 and 1995, respectively                                                             228,067          303,007
-------------------------------------------------------------------------------------------------------------------
                                                                                         314,304          380,119
Net premiums                                                                                 633              909
-------------------------------------------------------------------------------------------------------------------
Total mortgage loans receivable                                                         $314,937        $ 381,028
-------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 6. POOL LOAN PURCHASES

   The following table summarizes pool loan purchases:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                               Principal Balance
                                                                (in thousands)           Number of Loans
-----------------------------------------------------------------------------------------------------------------
December 31,                                                   1996       1995          1996         1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>          <C>           <C>
Loan Type:FHA                                                  $ 89,922   $ 77,644     1,621         1,433
          VA                                                     35,341     32,456       592           545
          Conventional                                            6,276      8,895        75           106
-----------------------------------------------------------------------------------------------------------------
Total pool loan purchases                                      $131,539   $118,995     2,288         2,084
-----------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 7. OTHER ASSETS

   The following table summarizes other assets:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                             1996         1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>
Goodwill                                                                             $      -      $   21,978
Amount due from sale of servicing                                                      46,823          14,672
Escrow advances                                                                        18,878          11,663
Deferred income tax benefit (Note 15)                                                  18,210          10,533
Interest receivable-pool loan purchases                                                11,900           9,805
Branch network                                                                              -           8,925
Note receivable from sale of servicing                                                  7,000           7,000
Other                                                                                  18,132          21,629
-----------------------------------------------------------------------------------------------------------------
Total other assets                                                                   $120,943      $  106,205
-----------------------------------------------------------------------------------------------------------------
</TABLE>

     In the fourth quarter of 1996, the Company wrote off the remaining carrying
     value of goodwill and other intangible assets totaling $29.1 million. It is
     the Company's policy to account for goodwill and other intangible assets at
     the lower of amortized cost or fair value. On an ongoing basis, management
     reviews the valuation and amortization of these assets. As a part of its
     ongoing review, management estimates the fair value of the Company's
     intangible assets, taking


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       25


<PAGE>   24
                                    [LOGO]


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. OTHER ASSETS (CONTINUED)

  into consideration any events and circumstances which might have diminished
  their value. During 1996, increased competition and industry consolidation
  had adversely impacted the value of both the mortgage loan production and
  servicing operations of the Company. In addition, the sale of approximately
  $17 billion in servicing to a third party at an  after tax loss of
  approximately $2.1 million is described in Note 22 to the consolidated
  financial statements. The impact of this sale is dependent upon the length
  of the subservicing period, which will be at least one year from the date of
  the sale.

  The Company performed an evaluation of the recoverability of goodwill and
  other intangible assets taking into consideration the impact of the above
  factors and the reduction in interest rates in the fourth quarter of 1996 on
  its forecast of future operations. Based on such valuation, the Company had
  determined that its projected results would not support the future
  amortization of the Company's remaining goodwill and other intangible assets
  of $29.1 million at December 31, 1996 and, therefore, reduced the carrying
  amount of these assets accordingly. The Company's valuation assumes continued
  industry consolidation in mortgage servicing operations and intense
  competition in loan origination operations.




NOTE 8. SENIOR AND SUBORDINATED DEBT
  Senior and Subordinated Debt consists of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                               1996                1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>               <C>
Commercial paper, weighted average interest rates of 5.69%
 and 6.14% as of December 31, 1996 and 1995, respectively                               $ 362,180          $256,613
Credit agreements, weighted average interest rates of 6.19%
 and 6.57% as of December 31, 1996 and 1995, respectively                                  45,000            64,485
Medium-term notes due 1996, weighted average interest rates
 of 9.60% as of December 31, 1995                                                               -            29,700
8.25% debentures due November 1, 1996                                                           -            74,650
8.875% medium-term notes due October 15, 2001                                             138,355           138,355
9.0% debentures due June 1, 2012                                                          100,000           100,000
9.375% subordinated debentures, due December 31, 2025                                      55,976            55,976
Less unamortized discount, premium and issuance costs (net)                                (3,714)           (3,147)
-------------------------------------------------------------------------------------------------------------------
Total senior and subordinated debt                                                       $697,797          $716,632
-------------------------------------------------------------------------------------------------------------------
</TABLE>

COMMERCIAL PAPER
  The Company has a $650.0 million domestic and Euro commercial paper program
  backed by its secured credit agreement. The weighted average number of days
  to maturity of commercial paper outstanding as of December 31, 1996 and 1995
  was 22.8 days and 19.0 days, respectively.

CREDIT AGREEMENTS
  In November 1996, the Company amended and restated its secured revolving
  credit agreement. The provisions of the amended agreement increased the
  Company's revolving credit facility from $500 million to $750 million and can
  be further increased, at the Company's option with bank concurrence, up to
  $1.25 billion. Borrowings under the facility are secured primarily by the
  Company's mortgage loans receivable and mortgage servicing portfolio. The
  revolving credit facility expires on November 12, 1999. As of December 31,
  1996 and 1995, the Company had no outstanding borrowings under this facility
  or the previous facility.

  The Company also has a $60 million unsecured revolving credit facility which
  expires in July 1997. As of December 31, 1996 and 1995, there was $45.0
  million and $60.0 million outstanding under this agreement, respectively.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       26


<PAGE>   25
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. SENIOR AND SUBORDINATED DEBT (CONTINUED)

  The Company must comply with certain financial covenants provided in its
  secured and unsecured revolving credit facilities, including restrictions
  relating to tangible net worth and leverage. In addition, the secured
  facility contains certain covenants which limit the Company's ability to pay
  dividends or make distributions of its capital in excess of preferred stock
  dividend and subordinated debt interest requirements each year. The Company
  is currently in compliance with all such covenants.

  Under the credit agreements described above, the Company receives interest
  expense credits as a result of holding escrow and custodial funds in trust
  accounts at non-affiliated banks.

  Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company,
  has a revolving credit agreement under which it can borrow up to $10.0
  million through June 30, 1997. Borrowings under the credit agreement are
  guaranteed by the Company. As of December 31, 1996, there were no borrowings
  outstanding under this agreement. As of December 31, 1995, there was $4.5
  million outstanding under this agreement.

MEDIUM-TERM NOTES AND DEBENTURES
  In June 1992, the Company issued $100.0 million of 9% debentures due June
  2012 under terms of a $250.0 million shelf registration statement filed with
  the Securities and Exchange Commission ("SEC") in April 1992. The proceeds
  were used for general corporate purposes.

  In October 1991, the Company issued $160.0 million of 8.875% medium-term
  notes due October 2001. During 1995, the Company repurchased and retired
  $21.6 million of these medium-term notes.

SUBORDINATED DEBENTURES
  Effective December 8, 1995, the Company exchanged and retired 2,239,061
  shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million
  principal amount of 9.375% subordinated interest deferrable debentures
  ("subordinated debentures"), due December 31, 2025. Interest on the
  subordinated debentures is paid quarterly in arrears at the annual rate of
  9.375% on the last business day of each March, June, September and December.
  The first interest payment was made on December 29, 1995 for the period from
  November 1, 1995 (the last regular dividend payment date with respect to the
  preferred stock) through December 8, 1995 at the annual rate of 8.42% and
  from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%.

  The subordinated debentures are redeemable at the option of the Company, in
  whole or in part, at any time on or after May 1, 1999. On or after such date,
  the subordinated debentures may be redeemed at the option of the Company at a
  price equal to 100% of the principal amount redeemed ($25 for each $25
  principal amount of subordinated debenture), plus accrued and unpaid interest
  to the date fixed for redemption.

  Aggregate maturities of medium-term notes, debentures and subordinated
  debentures, excluding discount, premium and issuance costs, for the five
  calendar years after December 31, 1996 are as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in thousands)    1997    1998    1999    2000          2001           Thereafter            Total
---------------------------------------------------------------------------------------------------
<S>             <C>     <C>     <C>     <C>         <C>            <C>                   <C>
                 $   -    $  -    $  -    $  -      $138,355            $155,976       $  294,331
---------------------------------------------------------------------------------------------------
</TABLE>

NOTE 9. STOCKHOLDERS' EQUITY

  In March 1994, the Company issued 4 million shares of 8.42% cumulative
  preferred stock, Series A, ("preferred stock"), with an aggregate liquidation
  preference of $25 per share for net proceeds to the Company of $96.8 million.
  Effective December 8, 1995, the Company exchanged and retired 2,239,061
  shares of its preferred stock for $56.0 million principal amount of 9.375%
  subordinated debentures, due December 31, 2025. The preferred stock is not
  redeemable prior to May 1, 1999. On or after such date, the preferred stock
  may be redeemed at the option of the Company at a price of $25 per share,
  plus accrued and unpaid dividends to the redemption date.



SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       27



<PAGE>   26
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)

  Quarterly cash dividends are paid on preferred stock at an annual rate of
  8.42% or $2.105 per share, if declared by the Board of Directors, in arrears
  on the first day of each February, May, August and November. The first
  dividend payment was made on May 1, 1994 with respect to the period from the
  date of initial issuance of the preferred stock through April 30, 1994.

  In connection with sales of rights to service a total of $11.0 billion of
  mortgage loans to third parties during 1995, the Company transferred a total
  of $27.0 million of common equity securities and $93.0 million in cash and
  money market investments to FAE in exchange for 959,049 shares of the
  Company's common stock held by FAE, which were retired by the Company.

  In February 1994, the Company's certificate of incorporation was amended to
  change the number of authorized shares of preferred stock and common stock to
  12 million and 8 million, respectively. In connection with the issuance of
  preferred stock in 1994, the Company transferred a total of $112.0 million of
  certain common equity securities to FAE in exchange for 838,826 shares of the
  Company's common stock held by FAE, which were retired by the Company. The
  Company also repurchased and retired 85,248 shares of its common stock held
  by FAE for $10.0 million cash in 1994.

NOTE 10. FINANCIAL INSTRUMENTS

Financial Instruments with Off-Balance-Sheet Risk
  The Company utilizes derivative financial instruments in the management of
  interest rate risk. The Company's use of derivative financial instruments is
  primarily limited to commitments to extend credit, mandatory forward
  commitments, interest rate floor contracts ("floors") and principal-only
  ("P/O") swaps. All of the Company's derivative financial instruments are held
  or issued for purposes other than trading.

  The Company is a party to financial instruments with off-balance-sheet risk
  in the normal course of business to meet the financing needs of its customers
  and reduce its own exposure to fluctuations in interest rates. These
  financial instruments primarily include commitments to extend credit and
  mandatory forward commitments. Those instruments involve, to varying degrees,
  elements of credit and market risk in excess of the amount recognized in the
  consolidated statements of condition. The contract or notional amounts of
  those instruments reflect the extent of risk the Company has in the
  instruments.

  The Company's exposure to credit loss in the event of nonperformance by the
  counterparty to the financial instrument for commitments to extend credit
  ("mortgage loan pipeline") is represented by the contractual notional amount
  of those instruments. The Company's locked mortgage loan pipeline that is
  expected to close totaled $175.7 million and $221.9 million as of December
  31, 1996 and 1995, respectively. Fixed rate commitments result in the Company
  having market risk as well as credit risk. Variable rate commitments result
  only in credit risk. The amount of collateral required upon extension of
  credit is based on the Company's credit evaluation of the mortgagor and
  consists of the mortgagor's residential property.

  The Company obtains mandatory forward commitments of up to 120 days to sell
  mortgage-backed securities to hedge the market risk associated with a
  substantial portion of the mortgage loan pipeline that is expected to close
  and all mortgage loans receivable. As of December 31, 1996 and 1995, the
  Company had approximately $454.6 million and $561.0 million of mandatory
  forward commitments outstanding, respectively. If secondary market interest
  rates decline after the Company obtains a mandatory forward commitment for a
  loan, the loan may not close and the Company may incur a loss from the cost
  of covering its obligations under such commitment. If secondary market rates
  increase before the Company obtains a mandatory forward commitment for a loan
  and the loan closes, the Company may incur a loss when the loan is
  subsequently sold.

  The Company's risk management function closely monitors the mortgage loan
  pipeline to determine appropriate forward commitment coverage on a daily
  basis in order to manage the risk inherent in these off-balance-sheet


SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       28


<PAGE>   27
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)

  financial instruments. In addition, the risk management area seeks to reduce
  counterparty risk by committing to sell mortgage loans only to its nine
  approved dealers, with no dealer having in excess of 20% of current
  commitments.

  The Company sells loans either through mortgage-backed securities issued
  pursuant to programs of GNMA, FNMA, FHLMC or institutional investors. Most
  loans are aggregated in pools of $1.0 million or more, which are purchased by
  institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.

  Substantially all GNMA securities are sold without recourse to the Company
  for loss of principal in the event of a subsequent default by the mortgage
  borrower due to underlying FHA or VA insurance. Prior to December 1992,
  substantially all conventional securities were sold with recourse to the
  Company to the extent of insufficient proceeds from private mortgage
  insurance, foreclosure and other recoveries. Since December 1992,
  conventional loans have been sold without recourse to the Company.

  Servicing agreements relating to mortgage-backed securities issued pursuant
  to the programs of GNMA, FNMA and FHLMC require the Company to advance funds
  to make the required payments to investors in the event of a delinquency by
  the borrower. The Company expects that it would recover most funds advanced
  upon default by the borrower or at foreclosure. However, in connection with
  VA partially guaranteed loans and certain conventional loans (which may be,
  at most, partially insured by private mortgage insurers), funds advanced may
  not cover losses due to potential declines in collateral value. The Company
  is subject to limited amounts of principal risk with respect to these loans
  since the insurer has the option to reimburse the servicer for the lower of
  fair market value of the property or the mortgage loan outstanding, in
  addition to the VA guarantee on the loan. In addition, most of the Company's
  servicing agreements for mortgage-backed securities typically require the
  payment to investors of a full month's interest on each loan although the
  loan may be paid off (by optional prepayment or foreclosure) other than on a
  month-end basis. In this instance, the Company is obligated to pay the
  investor interest at the note rate from the date of the loan payoff through
  the end of that calendar month without reimbursement.

  As of December 31, 1996, 1995 and 1994, the Company serviced approximately
  $13.5 billion, $10.7 billion and $11.9 billion of GNMA loans, respectively,
  and $2.9 billion, $3.5 billion and $3.7 billion of conventional loans with
  recourse, respectively.

  In order to cover loan losses that may result from these servicing
  arrangements and other losses, the Company has provided an allowance for loan
  losses of $15.4 million and $13.5 million as of December 31, 1996 and 1995,
  respectively, which management believes is adequate to cover unreimbursed
  foreclosure advances and principal losses. During 1995, the Company refined
  the estimates used to calculate the allowance for loan losses to more
  accurately reflect the Company's experience. This change reduced the amount
  of the allowance that would have been computed using the prior estimates.

  In order to offset changes in the value of its investment in mortgage
  servicing rights ("MSR") and to mitigate the effect on earnings of higher
  amortization and impairment of the MSR asset which results from increased
  prepayment activity, the Company invests in various financial instruments. As
  interest rates decline, prepayment activity generally increases, thereby
  reducing the value of the MSR asset, while the value of the financial
  instruments increases. Conversely, as interest rates increase, the value of
  the MSR asset increases while the value of such financial instruments
  decreases. The financial instruments utilized by the Company include interest
  rate floor contracts ("floors") and principal-only ("P/O") swaps.

  The floors derive their value from the 10 year constant maturity treasury
  yield index or the 10 year swap index, as applicable. The floor yields range
  from 5.47% to 6.24%. To the extent that market interest rates increase, the
  value of the floor declines. However, the Company is not exposed to losses in
  excess of its initial investment in the floors. The total notional principal
  amount of the floors was $1.0 billion and $.5 billion as of December 31, 1996
  and December 31, 1995, respectively. As of December 31, 1996 and 1995, the
  carrying value of the Company's open floors was $4.8 million and $3.5
  million, respectively. The floors have remaining terms ranging from 2 to 5
  years.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       29

<PAGE>   28
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)

  In July 1996, the Company entered into two P/O swap transactions with a total
  notional value of $150.0 million. The value of the P/O swaps is determined by
  changes in the value of the underlying P/O strip security. The payments
  received by the Company under the P/O swaps relate to the cash flows of the
  referenced P/O security. The payments made by the Company are based upon a
  notional amount tied to the market price and the remaining balance of the
  underlying P/O security, multiplied by a floating rate indexed to LIBOR. The
  Company's exposure to loss in the P/O swaps is related to changes in the
  market value of the underlying P/O security over the life of the contract.
  The remaining original notional value of the P/O swaps was $50.0 million as
  of December 31, 1996. The carrying value of the P/O swaps was $3.2 million as
  of December 31, 1996. The P/O swaps have a remaining term of 4.5 years.

  The floors and P/O swaps are carried at market value and are included in
  investments in the consolidated statements of condition. Realized and
  unrealized gains and losses are recorded in net gain on financial instruments
  in the consolidated statements of income.

FAIR VALUE OF FINANCIAL INSTRUMENTS
  The Company determines the estimated fair value of its financial instruments
  using appropriate market information and valuation methodologies.
  Considerable judgment is required to interpret the market information to
  develop the estimates of fair value. As a result, the estimates provided
  herein are not necessarily indicative of the amounts that could be realized
  in a current market exchange.

  The following methods and assumptions were used by the Company to estimate
  the fair value of each class of financial instruments for which it is
  practicable to estimate that value:

 CASH AND INVESTMENTS
  For cash and short-term investments, the carrying amount equals fair value.

  For interest rate floor contracts and P/O swaps, fair value is estimated
  based on quoted market prices for those or similar investments and is equal
  to the carrying value.

  For investments in REMIC residuals, for which there are no quoted market
  prices, fair value is estimated based on discounted cash flow analyses, using
  interest only strip interest rates, prepayment speed assumptions and LIBOR
  rates, taking into consideration the characteristics of the related
  collateral.

 LOANS RECEIVABLE
  For mortgage loans receivable and loans held for investment, fair value is
  estimated using quoted market prices for securities backed by similar loans,
  adjusting for difference in loan characteristics.

 POOL LOAN PURCHASES
  For pool loan purchases, fair value is estimated based on discounted cash
  flow analyses, using the Company's short-term incremental borrowing rate or
  quoted market prices for securities backed by similar loans.

 CAPITALIZED EXCESS SERVICING
  For capitalized excess servicing, fair value is estimated by computing the
  anticipated revenue to be received over the life of the related loans based
  on market consensus prepayment rates, discounted using quoted interest only
  strip interest rates.

 COMMON EQUITY SECURITIES
  For common equity securities, fair value is based on quoted market prices and
  is equal to the carrying value.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       30


<PAGE>   29
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)

 LOANS IN FORECLOSURE AND MORTGAGE CLAIMS RECEIVABLE
  For these financial instruments, fair value is estimated by discounting
  anticipated future cash flows using the Company's short-term incremental
  borrowing rate.

 DEBT
  For commercial paper and credit agreements, the carrying amount approximates
  fair value. For debentures and medium-term notes, fair value is estimated by
  discounting future cash flows using the Company's incremental borrowing rates
  for similar types of borrowing arrangements. For subordinated debentures,
  fair value is based on quoted market prices.

 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
  Fair value for commitments to sell mortgage loans is based on current
  settlement values for those commitments. Fair value for commitments to extend
  credit is based on current quoted market prices for securities backed by
  similar loans.

The estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
December 31,                                                    1996                        1995
---------------------------------------------------------------------------------------------------------
                                                       Carrying          Fair      Carrying          Fair
(in thousands)                                          Amount          Value       Amount          Value
---------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>           <C>             <C>
Financial Assets:
Cash                                                  $    923       $    923        $4,146        $4,146
Investments
  Interest rate floor contracts                          4,825          4,825         3,455         3,455
  Principal-only swaps                                   3,185          3,185             -             -
  Other                                                 38,545         38,545        22,835        22,835
Mortgage loans receivable                              314,937        315,895       381,028       391,484
Pool loan purchases                                    131,539        135,841       118,995       122,260
Loans held for investment                               23,351         23,289        24,335        24,956
Capitalized excess servicing                            38,672         39,617        44,722        46,032
Common equity securities                                 2,312          2,312           529           529
Loans in foreclosure and mortgage
  claims receivable (net) (a)                           38,387         37,714        29,630        29,018
---------------------------------------------------------------------------------------------------------
Financial Liabilities:
Short-term debt                                       $406,205       $406,205      $424,661      $428,212
Long-term debt                                         291,592        322,715       291,971       332,220
Off-Balance-Sheet Financial Instruments:
Mandatory forward commitments                              N/A        454,456           N/A       562,379
Commitments to extend credit
  expected to close (pipeline)                             N/A        176,757           N/A       226,572
---------------------------------------------------------------------------------------------------------
</TABLE>


(a)  Excludes $13.1 million and $15.8 million of real estate owned in 1996 and
     1995, respectively.


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       31

<PAGE>   30
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. MORTGAGE SERVICING

  The Company's portfolio of mortgages serviced, including loans subserviced,
  interim servicing contracts and those under contract to acquire and
  excluding loans sold but not transferred, totaled $29.2 billion, $31.8
  billion and $39.6 billion as of December 31, 1996, 1995 and 1994,
  respectively (refer to Note 22 to the consolidated financial statements).
  The Company's portfolio of mortgages serviced as of December 31, 1996 is
  summarized below:

<TABLE>
<CAPTION>
                                                                       Weighted Average
                                        ---------------------------------------------------------------------------
                                                                                            Net           Remaining
                          Principal                   Loan           Interest         Servicing         Contractual
                   Balance Serviced                Balance               Rate          Fee Rate                Life
Loan Type              (in millions)         (in thousands)       (in percent)      (in percent)         (in months)
-------------------------------------------------------------------------------------------------------------------
<S>                     <C>              <C>                 <C>                <C>                  <C>
 Residential
   Conventional             $12,266                $    69               8.41%             .409%                213
   FHA                        9,546                     51               8.85              .434                 271
   VA                         4,525                     52               8.54              .434                 260
 Commercial                      73                    695               7.49              .154                 166
-------------------------------------------------------------------------------------------------------------------
                            $26,410                $    58               8.59%             .422%                242
 Subservicing                 2,791
-------------------------------------------------------------------------------------------------------------------
 Total mortgage
   servicing portfolio      $29,201
-------------------------------------------------------------------------------------------------------------------
</TABLE>


  The servicing fee rates in the table above are shown after deducting any
  guarantee fees. Guarantee fees, when applicable, range from six basis points
  for governmental loans up to approximately thirty basis points for certain
  conventional loans. Certain loans sold to private investors have no guarantee
  fees.

The following table summarizes the Company's mortgage servicing portfolio by
interest rate range:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31,                                 1996                                        1995
-------------------------------------------------------------------------------------------------------------------
                                                             Weighted                                      Weighted
                             Number        Principal          Average      Number       Principal           Average
                                 of          Balance    Interest Rate          of         Balance     Interest Rate
Interest Rate Range           Loans     (in millions)     (in percent)      Loans    (in millions)      (in percent)
-------------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>            <C>            <C>
5.99% and lower               1,239         $    87          5.49%          2,674         $   114              5.51%
6.00%-6.49%                   5,477             291          6.22           8,208             434              6.19
6.50%-6.99%                  18,449           1,443          6.71          25,192           2,077              6.69
7.00%-7.49%                  51,791           3,416          7.15          64,052           4,573              7.16
7.50%-7.99%                  71,954           5,436          7.63          84,899           6,745              7.63
8.00%-8.49%                  62,120           4,455          8.10          60,843           4,315              8.10
8.50%-8.99%                  77,020           4,043          8.58          80,936           4,217              8.60
9.00%-9.49%                  37,690           2,049          9.06          38,939           2,234              9.08
9.50%-9.99%                  69,506           3,614          9.57          57,131           3,185              9.60
10.00% and above             83,533           4,367         10.49          71,177           3,937             10.55
-------------------------------------------------------------------------------------------------------------------
Total                       478,779         $29,201          8.48%        494,051         $31,831             8.33%
-------------------------------------------------------------------------------------------------------------------
</TABLE>



  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       32

<PAGE>   31
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. MORTGAGE SERVICING (CONTINUED)

  The following table summarizes the Company's mortgage servicing portfolio by
  location of property:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
December 31,                                    1996                                            1995
-----------------------------------------------------------------------------------------------------------------------
                                                         Percentage                                        Percentage
                                                       of Principal                                      of Principal
                             Number         Principal    Balance of            Number        Principal     Balance of
                                 of           Balance     Servicing                of          Balance      Servicing
State                         Loans      (in millions)    Portfolio             Loans     (in millions)     Portfolio
-----------------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>           <C>                   <C>         <C>            <C>
California                   67,559           $5,811           19.9%           73,865        $  6,668            20.9%
New York                     43,406            2,555             8.7           45,830           2,803             8.8
Washington                   26,583            2,054             7.0           30,064           2,386             7.5
Texas                        31,603            1,673             5.7           28,841           1,705             5.4
Florida                      29,463            1,495             5.1           28,123           1,502             4.7
Illinois                     17,836            1,157             4.0           18,486           1,291             4.1
Michigan                     26,873            1,128             3.9           30,235           1,308             4.1
New Jersey                   14,446              979             3.4           15,201           1,056             3.3
Arizona                      15,657              899             3.1           15,751             949             3.0
Virginia                     16,116              840             2.9           15,481             826             2.6
Other*                      189,237           10,610            36.3          192,174          11,337            35.6
-----------------------------------------------------------------------------------------------------------------------
Total                       478,779          $29,201          100.0%          494,051         $31,831           100.0%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

*No other state constitutes more than 2.9% of the Company's servicing
 portfolio as of December 31, 1996.

  The above tables include loans subserviced for others having a principal
  balance of $2,791 million and $4,039 million as of December 31, 1996 and
  1995, respectively.

  Escrow funds of approximately $207.8 million, $236.0 million and $277.9
  million as of December 31, 1996, 1995 and 1994, respectively, relating to
  mortgages serviced and subserviced, are held in non-interest bearing accounts
  at non-affiliated banks and are not included in the consolidated financial
  statements.

  The Company has in force an errors and omissions policy in the amount of $20
  million. Primary fidelity coverage up to a limit of $35 million is provided
  under a Fund American master policy, for which the Company pays a portion of
  the premium.

NOTE 12. RESTRUCTURING CHARGES

  As a result of a contracting mortgage loan origination market, the Company
  implemented a restructuring plan in 1994 to bring its mortgage loan
  production network in line with anticipated levels of mortgage loan
  production. As a result, the Company recorded a pretax restructuring charge
  totaling $5.2 million in 1994, which included $2.7 million for future lease
  expenses related to closed facilities, $1.2 million in asset writedowns and
  $1.3 million for employee termination and other costs. As of December 31,
  1996 and 1995, $.5 million and $.9 million, respectively, remained accrued on
  the Company's consolidated statements of condition relating to future lease
  expenses on closed facilities. The restructuring actions resulted in improved
  efficiency of the mortgage loan production operations and slightly lower
  operating costs for 1995.




  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       33


<PAGE>   32
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. LEASE COMMITMENTS

  The Company has entered into a number of noncancelable operating lease
  agreements with respect to premises and equipment. The minimum annual rental
  commitments under these leases as of December 31, 1996 are as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
(in thousands)    1997       1998     1999     2000         2001          Total
---------------------------------------------------------------------------------
<S>             <C>       <C>       <C>      <C>        <C>          <C>
                $2,837     $1,841     $769     $379         $154       $  5,980
---------------------------------------------------------------------------------
</TABLE>

  Leases for branches which were closed as a result of the Company's
  restructuring plan implemented in 1994 are included in the table above. As of
  December 31, 1996, $.5 million of future lease payments remained accrued on
  the Company's consolidated statement of condition, and therefore, do not
  represent future operating expenses.

  Total rental expense for the years ended December 31, 1996, 1995 and 1994 was
  $4.5 million, $4.6 million and $6.9 million, respectively.  Some leases
  contain escalation clauses that correspond with increased real estate taxes,
  other operating expenses and/or renewal options that call for increased rents
  when the leases are renewed.


NOTE 14. OTHER OPERATING EXPENSES

The following table summarizes other operating expenses:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Year ended December 31, (in thousands)          1996         1995          1994
---------------------------------------------------------------------------------
<S>                                         <C>            <C>          <C>
Telephone                                      $4,316       $4,015       $5,572
Professional services                           3,376        1,649        3,045
Postage                                         2,119        1,985        2,325
Amortization of goodwill                        2,090        2,090        2,090
Office supplies and printing                    2,063        1,768        2,471
Travel and entertainment                        1,885        1,808        2,636
Bank charges                                    1,618        1,948        2,901
Other                                          16,785       17,511       23,009
--------------------------------------------------------------------------------
Total other operating expenses                $34,252      $32,774      $44,049
--------------------------------------------------------------------------------
</TABLE>



  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       34

<PAGE>   33
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. INCOME TAXES

  The Company files a consolidated federal income tax return with Fund
  American. Federal income tax expense is provided substantially on a separate
  return basis except for the impact of a $.3 million credit to the deferred
  income tax asset in 1996, a $1.9 million credit to the deferred income tax
  asset in 1995 and a $2.0 million benefit to the deferred income tax asset in
  1994, relating to unrealized losses and gains on the Company's portfolio of
  common equity securities. As of December 31, 1995, the Company had recorded
  $.3 million of deferred tax assets relating to accumulated unrealized losses
  on the portfolio of common equity securities. Pursuant to terms of a tax
  allocation agreement between the Company and Fund American, Fund American has
  agreed to compensate the Company for the use of these capital losses if such
  losses, when realized, can be utilized in Fund American's consolidated tax
  return.

The following table summarizes income taxes due (to) or from Fund American:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                                1996      1995
----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>
Net current taxes                                                                       $(5,746)  $(6,766)
Net deferred taxes                                                                       18,210    10,533
----------------------------------------------------------------------------------------------------------

</TABLE>

   Total income tax expense is as follows:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                                        1996         1995      1994
----------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
Current income taxes:
 Federal                                                                   $17,280      $11,847   $14,483
 State and local                                                               144          248       266
Deferred (benefit) expense                                                  (7,971)       4,037   (10,275)
----------------------------------------------------------------------------------------------------------
Total income tax expense                                                    $9,453      $16,132    $4,474
----------------------------------------------------------------------------------------------------------
</TABLE>



  The current federal income tax expense for the year ended December 31, 1995
  shown above excludes a $.5 million benefit relating to the extraordinary loss
  on the repurchase and retirement of debt which has been reported as a net
  amount in the consolidated statements of income.

  Deferred tax (benefit) expense for the years ended December 31, 1996, 1995
  and 1994 represent the net change in the deferred tax asset or liability
  during the year.  Deferred income taxes arise from temporary differences
  between the tax bases of assets and liabilities and their reported amounts on
  the consolidated financial statements.  The net deferred tax (benefit)
  expense for the years ended December 31, 1996, 1995 and 1994, shown above
  exclude a $.3 million deferred tax expense, a $1.9 million deferred tax
  expense and a $2.0 million deferred tax benefit, respectively, associated
  with unrealized gains and losses on the common equity securities portfolio
  which were charged directly to stockholders' equity.  The deferred tax
  benefit for the year ended December 31, 1994 shown above also excludes a
  $23.9 million benefit relating to the cumulative effect of the change in
  accounting for purchased mortgage servicing rights which has been reported as
  a net amount in the consolidated statements of income.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       35


<PAGE>   34
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. INCOME TAXES (CONTINUED)

  The following table summarizes the types of temporary differences giving rise
  to the net deferred tax assets and net deferred tax liabilities.  There were
  no valuation allowances recorded relating to the net deferred tax assets as
  of December 31, 1996 and 1995.



<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                     1996                         1995
---------------------------------------------------------------------------------------------------------------

                                                       Deferred      Deferred       Deferred         Deferred
                                                            Tax           Tax            Tax              Tax
                                                          Assets    Liabilities        Assets      Liabilities
---------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>           <C>          <C>
Purchase accounting adjustments                             $     -        $6,219      $      -       $10,208
Accumulated unrealized losses
 on common equity securities                                      -             -           294             -
Capitalized servicing                                        18,384             -        13,667             -
Allowance for loan losses                                     4,838             -         4,774             -
Depreciation                                                      -         2,583             -         2,352
Deferred bi-weekly income                                     1,351             -         1,353             -
Accrued postretirement benefits                               1,181             -         1,159             -
Other, net                                                    6,739         5,481         5,752         3,906
---------------------------------------------------------------------------------------------------------------
Total                                                       $32,493       $14,283       $26,999       $16,466
---------------------------------------------------------------------------------------------------------------
</TABLE>




  A reconciliation of taxes calculated using the federal statutory rate of 35%
  to income tax expense follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                                        1996          1995         1994
---------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>          <C>
Tax expense at federal statutory rate                                       $1,795  $     15,149  $     1,847
Write-off of goodwill                                                        6,960             -            -
Purchase accounting adjustments                                                732           732          732
Dividends received deduction                                                     -           (35)        (263)
State taxes                                                                     94           161          173
Other, net                                                                    (128)          125        1,985
---------------------------------------------------------------------------------------------------------------
Total income tax expense                                                    $9,453  $     16,132  $     4,474
---------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 16. PENSION PLAN

  The Company has a defined benefit pension plan covering most of its
  employees. Benefits under the plan are based on years of service and the
  employees' highest average compensation over five consecutive years in their
  last ten years of employment. Funding of retirement costs complies with the
  minimum funding requirements specified by the Employee Retirement Income
  Security Act. Cash contributions received by the plan for the years ended
  December 31, 1996, 1995 and 1994 totaled $1.3 million, $1.7 million and $1.1
  million, respectively.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT


                                       36


<PAGE>   35
                                         [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. PENSION PLAN (CONTINUED)

  The following table sets forth the plan's funded status and amounts
  recognized on the Company's consolidated statements of condition:


<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
December 31, (in thousands)                                                                 1996             1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>
Actuarial present value of benefit obligation:
 Accumulated benefit obligation, including vested benefits
  of $16,627 and $15,085 in 1996 and 1995, respectively                                      $18,586       $17,232
 Effect of future projected salary increases                                                   5,138         6,738
--------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                                                                  23,724        23,970
Plan assets at fair value, primarily long-term bonds                                         (20,942)      (18,117)
--------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets                                          2,782         5,853
Unrecognized net loss                                                                         (1,111)       (5,061)
Prior service cost not yet recognized in net periodic pension cost                               871         1,001
Unrecognized net obligation at transition                                                        (11)          (57)
--------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost included in accounts
 payable and other liabilities                                                               $ 2,531       $ 1,736
--------------------------------------------------------------------------------------------------------------------------------

</TABLE>


 A summary of the components of net periodic pension costs is as follows:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                                          1996           1995          1994
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>           <C>
Service cost for benefits earned during the year                                $ 1,578       $ 1,354     $ 1,633
Interest cost on projected benefit obligation                                     1,633         1,388       1,308
Actual return on plan assets                                                     (1,998)       (3,801)        985
Net amortization and deferral                                                       892         2,613      (1,575)
--------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost                                                       $ 2,105       $ 1,554     $ 2,351
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Assumptions used in the determination of the projected benefit obligation were:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                     1996          1995          1994
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>            <C>
Discount rate                                                                    7.25%         7.00%          8.00%
Rate of increase in compensation levels                                          5.00%         6.00%          6.00%
Expected long-term rate of return on assets                                      8.00%         8.00%          8.00%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 17. POSTRETIREMENT BENEFITS

  The Company has an unfunded postretirement benefit plan which provides for
  postretirement health care and life insurance benefits. Postretirement life
  insurance benefits are provided to substantially all employees. Postretirement
  health care benefits are provided to substantially all employees hired prior
  to January 1, 1991. The Company provides for term life insurance coverage
  based on the employees' annual earnings and length of service. Postretirement
  health care benefits are contributory, whereby the Company provides for 87.5%
  of medical costs to retirees who retired prior to January 1, 1993. Effective
  January 1, 1993, the plan was amended to provide for a portion of monthly
  retiree medical costs, based on years of service, to retirees who retire on or
  after January 1, 1993.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       37

<PAGE>   36
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. POSTRETIREMENT BENEFITS (CONTINUED)
  A summary of the components of net periodic postretirement benefit cost is as
  follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                             1996       1995       1994
----------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>        <C>
Service cost                                                     $  110     $   86    $   105
Interest cost                                                       239        250        240
Net amortization and deferral                                         -          -          7
----------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost                         $  349     $  336    $   352
----------------------------------------------------------------------------------------------
</TABLE>


  The following table sets forth the plan's funded status reconciled to the
  amount recognized on the Company's consolidated statements of condition:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
December 31, (in thousands)                                                   1996       1995
----------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>
Accumulated postretirement benefit obligation:
Retired participants                                                    $  1,868      $  2,141
Fully eligible active participants                                           533           474
Other active participants                                                  1,009         1,043
----------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation                        3,410         3,658
Plan assets at fair value                                                      -             -
----------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation in excess of plan assets         3,410         3,658
Unrecognized net gain (loss)                                                  67          (338)
----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in accounts payable
 and other liabilities                                                  $  3,477      $  3,320
----------------------------------------------------------------------------------------------
</TABLE>



  A 9.66% annual rate of increase in the per capita costs of covered health
  care benefits was assumed for 1997, gradually decreasing to 5.0% by the year
  2007 and remaining at that level thereafter. Increasing the assumed health
  care cost trend rate by one percentage point in each year would increase the
  accumulated postretirement benefit obligation as of December 31, 1996 by
  3.94% and increase the aggregate of the service cost and interest cost
  components of net periodic postretirement benefit cost for 1996 by 2.56%. A
  discount rate of 7.25% and 7.0% was used to determine the accumulated
  postretirement benefit obligation as of December 31, 1996 and 1995,
  respectively.

NOTE 18. STOCK PLANS

  In 1986, the Company established an Employee Stock Ownership Plan ("ESOP") to
  enable employees to have an equity interest in the Company. The Company
  redeemed all the shares of Class B common stock held by the ESOP in November
  1993 for $4.6 million in cash. Management subsequently used that cash to
  invest in Fund American common stock. The assets currently held by the ESOP
  consist substantially of Fund American common stock. Effective in the fourth
  quarter of 1993, the ESOP was amended to allow employees who terminate their
  employment with the Company, and who are vested in the ESOP, to receive their
  distribution in cash or shares of Fund American common stock. Contributions
  to the ESOP are determined at the discretion of the Board of Directors.

  Effective October 1, 1996, the Company amended its ESOP to include employees
  of Fund American Enterprises, Inc., the Company's direct parent, as eligible
  employees and to add an employee savings plan feature under Section 401(k) of
  the Internal Revenue Code of 1986. Eligible employees may contribute to the
  plan up to 14% of their salary not to exceed the maximum allowable under
  Internal Revenue Service guidelines. Contributions are invested at the
  direction of the employee in one or more funds or can be directed to
  purchase common stock of Fund American at fair market value. The Company
  does not match employee contributions.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       38

<PAGE>   37
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18. STOCK PLANS (CONTINUED)

  In connection with the exchange of Class B common stock, the Company
  established a Stock Appreciation Rights ("SAR") plan under which certain
  officers of the Company received stock appreciation rights in exchange for
  their shares of Class B common stock. The SARs may be exercised any time at
  the option of the holders thereof. The value of each SAR is equal to the
  difference between $86.625 and the closing price of Fund American's common
  stock on the date preceding the exercise of the SAR multiplied by a factor of
  1.223.

  The Company has a long-term incentive plan which provides for the granting of
  stock-based and cash incentive awards to key senior management employees of
  the Company. Awards under the plan are payable upon the achievement of
  specified financial goals covering four overlapping three-year periods
  beginning January 1, 1994, 1995, 1996 and 1997.

NOTE 19. CONTINGENCIES

  Various claims have been made against the Company in the ordinary course of
  business. Management believes that any liabilities which could result would
  not materially affect the Company's financial position.

NOTE 20. RELATED-PARTY TRANSACTIONS

  As discussed in Notes 4 and 9, the Company had various stock transactions
  with FAE. The Company also has a tax allocation agreement with Fund American
  as discussed in Note 15.

  The Company believes that all of the above transactions were on terms that
  were reasonable and competitive. Additional transactions of this nature may
  be expected to take place in the ordinary course of business in the future.

NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION

  For purposes of reporting cash flows, cash includes cash on hand and amounts
  on deposit at banks, excluding custodial bank accounts.

  The following table provides additional cash and noncash information not
  presented elsewhere on the consolidated financial statements:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands)                             1996        1995          1994
---------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>           <C>
Interest paid                                                 $  57,172   $  48,975     $  42,951
---------------------------------------------------------------------------------------------------
Income taxes paid                                             $  18,650   $     345     $   9,328
---------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
  Acquisition of common equity securities as a return
    of partnership investment, net (Note 4)                   $   2,312   $       -     $       -
  Exchange of common equity securities for
    shares of common stock from parent (Note 4)                       -      27,020       112,000
  Exchange of 2,239,061 shares of 8.42% cumulative
    Series A preferred stock for 9.375% subordinated
    debentures (Note 9)                                               -      55,976             -
---------------------------------------------------------------------------------------------------
</TABLE>


  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                       39

<PAGE>   38
                                    [LOGO]

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22. SUBSEQUENT EVENTS

  In January 1997, the Company transferred its common equity securities with a
  market value of $2.6 million to FAE in exchange for 21,239 shares of the
  Company's common stock held by FAE, which were retired by the Company. The
  Company realized a pretax gain of $.3 million from the transfer in the first
  quarter of 1997.

  In February 1997, the Company sold, subject to regulatory and investor
  approvals, approximately $17 billion of its non-recourse mortgage servicing
  portfolio to a third party for estimated proceeds of $271.5 million. The
  transaction is expected to result in the recognition of an after tax loss of
  approximately $2.1 million in the first quarter of 1997. Source One will
  retain subservicing on the portfolio for a minimum of one year and a maximum
  of three years, at the option of the purchaser. The Company is currently
  evaluating its options as to how it will utilize the proceeds from the sale.
  These options include: (i) purchasing additional mortgage servicing rights
  from third parties; (ii) reducing its outstanding indebtedness; (iii)
  reducing its outstanding preferred or common shareholders' equity; or (iv) a
  combination of any of the foregoing.

  As a result of the 1997 servicing sale, the Company expects that its mortgage
  servicing revenue and its related amortization for 1997 and thereafter will
  be significantly less than its mortgage servicing revenue and related
  amortization in 1996. The Company is currently analyzing its cost structure
  to identify expenses that may be reduced as a result of the sale.

  In mid-March 1997, the Boards of Directors of Fund American Enterprises
  Holdings, Inc. ("Fund American") and several of its subsidiaries approved a
  corporate restructuring plan that will strengthen the Company by increasing
  its stockholders' equity. The most significant part of the plan is that
  Source One will receive a capital contribution of common stock of Financial
  Security Assurance Holdings, Ltd. ("FSA") and options to purchase common
  stock of FSA. These securities have a total current estimated fair value of
  approximately $126 million. In mid-March 1997, the Company sold 230,293
  shares of its common stock to FAE in exchange for 1 million shares of the
  common stock of FSA valued at $27.8 million. The balance of the contribution
  is subject to insurance regulatory and lender approvals and is expected to
  occur in the second quarter of 1997.

  In addition, as part of this restructuring plan, the Company sold 105,000
  shares of its common stock to Fund American for $12.7 million in mid-March
  1997.

  SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                      40
<PAGE>   39
                                    [LOGO]

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

  Selected quarterly financial data for 1996 and 1995 is shown in the
  following table. The quarterly financial data includes, in the opinion of
  management, all necessary recurring adjustments for a fair presentation of
  the results of operations for the interim periods. In the third quarter of
  1995, the Company retroactively adopted the provisions of Statement of
  Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
  Servicing Rights," as of January 1, 1995. Accordingly, the following table
  reconciles the reported 1995 first and second quarter amounts that would
  have been reported under SFAS No. 122:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Quarters Ended                                                                   March      June    September     December
(in thousands, except for per share amounts)                                        31        30           30           31
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>       <C>         <C>          <C>
1996
Total revenue                                                                 $ 48,684  $ 39,762    $  39,859    $  20,375
Net income (loss)                                                             $ 13,294  $  5,922    $   8,258    $ (31,800)(a)
Net income (loss) per share                                                   $   5.50  $   2.22    $    3.26    $  (14.55)
-------------------------------------------------------------------------------------------------------------------------------
1995
Total revenue, as reported                                                    $ 57,269  $ 28,537    $  34,580    $  31,258
SFAS No. 122 adjustment                                                          4,409    (7,458)           -            -
-------------------------------------------------------------------------------------------------------------------------------
Total revenue, as adjusted                                                    $ 61,678  $ 21,079    $  34,580    $  31,258
-------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss, as reported                                 $ 19,196  $    990    $   4,760    $   4,204
SFAS No. 122 adjustment                                                          2,858    (4,858)           -            -
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss,
  as adjusted                                                                   22,054    (3,868)       4,760        4,204
-------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss                                                                (675)     (227)           -            -

Net income, as reported                                                         18,521       763        4,760        4,204
SFAS No. 122 adjustment                                                          2,858    (4,858)           -            -
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as adjusted                                                $ 21,379  $ (4,095)   $   4,760    $   4,204
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share before
  extraordinary loss, as reported                                             $   5.33  $   (.45)   $    1.13    $    1.24
SFAS No. 122 adjustment per share                                                  .89     (1.97)           -            -
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share before
  extraordinary loss, as adjusted                                                 6.22     (2.42)        1.13         1.24
-------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss per share                                                      (.21)     (.09)           -            -

Net income (loss) per share, as reported                                          5.12      (.54)        1.13         1.24
SFAS No. 122 adjustment per share                                                  .89     (1.97)           -            -
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share, as adjusted                                      $   6.01  $  (2.51)   $    1.13    $    1.24
-------------------------------------------------------------------------------------------------------------------------------
(a)  Includes a $29.1 million pretax write-off of the Company's goodwill and other intangible assets.
</TABLE>





 SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT

                                      41