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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark one)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
         For the fiscal year ended December 31, 1997
                                       OR
[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934
         For the transition period from:                   to
                                        ------------------    ------------------

                           Commission File No. 0-21341

                           OCWEN FINANCIAL CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                 FLORIDA                                      65-0039856
   --------------------------------------              -------------------------
     (State or other jurisdiction of                       (I.R.S. Employer
     incorporation or organization)                      Identification No.)

          THE FORUM, SUITE 1000
     1675 PALM BEACH LAKES BOULEVARD
        WEST PALM BEACH, FLORIDA                                 33401
   --------------------------------------              -------------------------
   (Address of principal executive office)                    (Zip Code)

                                 (561) 681-8000
   -----------------------------------------------------------------------------
              (Registrant's telephone number, including area code)
   
Securities registered pursuant to Section 12(b) of the Act: Not applicable.

Securities registered pursuant to Section 12 (g) of the Act:

     COMMON STOCK, $.01 PAR VALUE          NEW YORK STOCK EXCHANGE (NYSE)
         (Title of each class)       (Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No[ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

Aggregate  market  value  of  the  Common  Stock,   $.01  par  value,   held  by
nonaffiliates  of the registrant,  computed by reference to the closing price as
reported  on the  NYSE  as of the  close  of  business  on  February  27,  1998:
$902,378,460 (for purposes of this calculation affiliates include only directors
and executive officers of the Company).

Number of shares of Common Stock, $.01 par value, outstanding as of February 27,
1998: 60,708,520 shares 

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the definitive Proxy Statement
for  the  Annual  Meeting  of  Shareholders  to be  held  on May  13,  1998  are
incorporated  by reference  into Part III,  Items 10-13.  Portions of the Annual
Report to Shareholders are incorporated by reference into Part II, Items 5-8.

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                                       1

<PAGE>


<TABLE>
<CAPTION>
                                         OCWEN FINANCIAL CORPORATION
                                         1997 FORM 10-K ANNUAL REPORT
                                               TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------

                                                                                                        PAGE
                                                                                                        ----

                                                    PART I

<S>                                                                                                       <C>

Item 1.   Business................................................................................        4
            General...............................................................................        4
            Recent Transactions...................................................................        5
            Discount Loan Acquisition and Resolution Activities...................................        6
            Investment in Joint Ventures..........................................................       11
            Lending Activities ...................................................................       11
            Loan Servicing Activities.............................................................       18
            Asset Quality.........................................................................       18
            Investment Activities.................................................................       24
            Sources of Funds......................................................................       30
            Computer Systems and Use of Technology................................................       33
            Economic Conditions...................................................................       34
            Competition...........................................................................       35
            Subsidiaries..........................................................................       35
            Employees.............................................................................       36
            Regulation............................................................................       36
            The Company...........................................................................       36
            The Bank..............................................................................       37
            Federal Taxation......................................................................       41
            State Taxation........................................................................       43


Item 2.   Properties..............................................................................       43
            Offices...............................................................................       43


Item 3.   Legal Proceedings.......................................................................       43


Item 4.   Submission of Matters to a Vote of Security Holders.....................................       43



                                              PART II


Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters...............       43


Item 6.   Selected Consolidated Financial Data....................................................       43


Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations...       44


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..............................       44


Item 8.   Financial Statements....................................................................       44
</TABLE>


                                                   2

<PAGE>


<TABLE>
<CAPTION>
                                   OCWEN FINANCIAL CORPORATION
                                   1997 FORM 10-K ANNUAL REPORT
                                         TABLE OF CONTENTS
                                             (CONTINUED)
- ------------------------------------------------------------------------------------------------------------

                                                                                                        PAGE
                                                                                                        ----

<S>                                                                                                      <C>

Item 9.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure...............................................................       44



                                              PART III



Item 10.  Directors and Executive Officers of Registrant..........................................       44


Item 11.  Executive Compensation..................................................................       44


Item 12.  Security Ownership of Certain Beneficial Owners and Management..........................       44


Item 13.  Certain Relationships and Related Transactions..........................................       44



                                              PART IV



Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................       45


          Signatures..............................................................................       47
</TABLE>








FORWARD-LOOKING STATEMENTS

         CERTAIN  STATEMENTS  CONTAINED  HEREIN ARE NOT, AND CERTAIN  STATEMENTS
CONTAINED  IN FUTURE  FILINGS BY THE COMPANY  WITH THE  SECURITIES  AND EXCHANGE
COMMISSION,  IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC OR
SHAREHOLDER  COMMUNICATIONS,  MAY  NOT BE  BASED  ON  HISTORICAL  FACTS  AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.  FORWARD-LOOKING  STATEMENTS WHICH ARE BASED ON VARIOUS  ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL), MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE  PERIOD OR PERIODS,  OR BY THE USE OF  FORWARD-LOOKING  TERMINOLOGY,
SUCH AS "MAY," "WILL," "COULD," "BELIEVE," "EXPECT,"  "ANTICIPATE,"  "CONTINUE,"
"INTENDS," "PLANS," "PRESENTS," OR SIMILAR TERMS OR VARIATION ON THOSE TERMS, OR
BY THE USE OF THE  NEGATIVE OF SUCH  TERMINOLOGY.  ACTUAL  RESULTS  COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN  FORWARD-LOOKING  STATEMENTS DUE TO A VARIETY
OF  FACTORS,  INCLUDING,  BUT NOT  LIMITED  TO,  THOSE  RELATED TO THE  ECONOMIC
ENVIRONMENT,  PARTICULARLY  IN THE MARKET  AREAS IN WHICH THE COMPANY  OPERATES,
COMPETITIVE PRODUCTS AND PRICING, THE GROWTH OR DECLINE OF, AND THE AVAILABILITY
OF PRODUCT TO  PURCHASE  IN, THE  DISCOUNT  LOAN  INDUSTRY  FISCAL AND  MONETARY
POLICIES  OF THE U.S. OR U.K.  GOVERNMENTS,  CHANGES IN  GOVERNMENT  REGULATIONS
AFFECTING  FINANCIAL  INSTITUTIONS AND REAL ESTATE INVESTMENT TRUSTS,  INCLUDING
REGULATORY  FEES,  CAPITAL  REQUIREMENTS  AND  TAXATION,  CHANGES IN  PREVAILING
INTEREST  AND CURRENCY  EXCHANGE  RATES,  ACQUISITIONS  AND THE  INTEGRATION  OF
ACQUIRED BUSINESSES,  SOFTWARE  INTEGRATION,  DEVELOPMENT AND LICENSING,  CREDIT
INTEREST RATE AND OPERATIONAL RISK MANAGEMENT,  ASSET/LIABILITY  MANAGEMENT, THE
FINANCIAL AND SECURITIES  MARKETS AND THE  AVAILABILITY OF AND COSTS  ASSOCIATED
WITH SOURCES OF  LIQUIDITY.  THE COMPANY DOES NOT  UNDERTAKE,  AND  SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH
MAY BE MADE TO ANY  FORWARD-LOOKING  STATEMENTS  TO REFLECT  THE  OCCURRENCE  OF
ANTICIPATED  OR  UNANTICIPATED  EVENTS OR  CIRCUMSTANCES  AFTER THE DATE OF SUCH
STATEMENTS.


                                       3

<PAGE>


                                     PART I


ITEM 1.  BUSINESS

GENERAL

         Ocwen Financial  Corporation  (the "Company") is a specialty  financial
services company which conducts  business  primarily  through Ocwen Federal Bank
FSB  (the  "Bank"),  a  federally-chartered  savings  bank  and  a  wholly-owned
subsidiary of the Company,  and, to a lesser  extent,  through  Ocwen  Financial
Services,  Inc.  ("OFS"),  93.7% owned  subsidiary of the Company which acquired
both the  subprime  single  family  residential  lending  operations  previously
conducted by the Bank and  substantially  all of the assets of Admiral Home Loan
("Admiral"),  the  Company's  primary  correspondent  mortgage  banking firm for
subprime single family  residential  loans, in a transaction which closed on May
1, 1997.  The  Company,  directly and through its  non-bank  subsidiaries,  also
conducts certain lending and investment activities.

         The Company  considers  itself to be  involved  in the single  business
segment of  providing  financial  services  and  conducts a variety of  business
activities  within this  segment.  The  Company's  primary  business  activities
currently  consist of its subprime  single  family,  small  commercial and large
commercial discount loan acquisition and resolution activities,  commercial real
estate  lending  activities,   single  family  residential  lending  activities,
mortgage  loans for others,  investments  in a wide variety of  mortgage-related
securities  and  investments  in  low-income  housing tax credit  interests.  In
addition,  the Company  previously  operated an automated banking division,  the
operations of which were  discontinued  in September  1995. The following  table
presents the  contribution by business  activity to the Company's net income for
the years indicated.


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                             -------------------------------------------------------------------------
                                                      1997                     1996                      1995
                                             ---------------------     ---------------------     ---------------------
                                                                      (Dollars in Thousands)
                                             -------------------------------------------------------------------------
                                              Amount         %          Amount         %          Amount         %
                                             --------     --------     --------     --------     --------     --------
<S>                                          <C>                <C>    <C>                <C>    <C>             <C>
Discount Loans:
  Single family residential loans ........   $ 22,384        28%       $ 12,580        25%       $  4,778        19%
  Large commercial real estate loans .....     23,476        30          16,179        32           9,824        39
  Small commercial real estate loans .....      5,194         7           3,687         7           4,395        17

Investment in low-income housing tax      
  credits ................................      9,353        12           7,269        14           3,538        14

Commercial real estate lending ...........     11,802        15           3,785         8           3,041        12

Subprime single family residential
 lending .................................     (1,526)       (2)          4,115         8             364         1

Mortgage loan servicing ..................      3,780         5           2,559         5             175         1

Investment securities ....................      5,615         7           2,226         4           2,454        10

Other ....................................     (1,146)       (2)         (2,258)       (3)         (3,102)      (13)
                                             --------     -----        --------     -----        --------     -----
                                             $ 78,932       100%       $ 50,142       100%       $ 25,467       100%
                                             ========     =====        ========     =====        ========     =====
</TABLE>


         The  Company's  strategy  focuses on what it believes to be the current
trend toward the growth in the sale or outsourcing of servicing of nonperforming
and  underperforming  loans by financial  institutions and government  agencies,
particularly  in the event that credit  quality for some product  lines (such as
subprime mortgage loans)  deteriorates.  The Company's  strategy also focuses on
leveraging  its  technology  infrastructure  and core  expertise  to expand  its
activities  into related  business  lines both for itself and on a fee basis for
others. For example,  the Company has acquired two software companies and formed
a new corporation, Ocwen Asset Investment Corp. ("OAIC"), a Virginia corporation
which elected to be taxed as a real estate investment trust ("REIT") for federal
income tax purposes and which is managed by Ocwen Capital Corporation ("OCC"), a
newly-formed, wholly-owned subsidiary of the Company.

         In May 1997, OAIC successfully  completed an initial public offering of
its common  stock,  which  resulted in net  proceeds  of $283.8  million for its
shares,  inclusive of the amount  contributed  by Investors  Mortgage  Insurance
Holding Company ("IMI"), a wholly-owned  subsidiary of the Company.  At December
31, 1997, IMI owned  approximately  9.0% of the outstanding common stock of OAIC
and had  options to  purchase  an  additional  10% of OAIC's  common  stock (one


                                       4

<PAGE>

quarter of which vest annually  over the next four years  beginning in May 1998.
Also at  December  31,  1997,  IMI owned  160,000  or 0.837% of the  outstanding
limited  partnership units of Ocwen Partnership,  L.P.  ("OPLP"),  the operating
partnership formed to undertake the business of OAIC.

         On November 6, 1997,  the  Company  acquired  Amos,  Inc.  ("Amos"),  a
Connecticut  based company engaged primarily in the development of mortgage loan
servicing software. Amos' products are Microsoft(R) Windows based, client/server
architecture and feature real-time processing, year 2000 compliance, a scaleable
database platform and strong workflow capabilities. The aggregate purchase price
was $9.7  million,  including  $4.9 million  which is contingent on Amos meeting
certain software development performance criteria.

         On January 20,  1998,  the Company  acquired DTS  Communications,  Inc.
("DTS"), a real estate technology company located in San Diego, California,  for
a purchase  price of $13.0  million in cash,  common  stock of the  Company  and
repayment  of  certain  indebtedness.  DTS has  developed  technology  tools  to
automate real estate transactions over the Internet.  DTS has been recognized by
Microsoft  Corporation  for the  Microsoft(R)  component-based  architecture  to
facilitate  electronic data interchange.  The common stock of the Company issued
in the acquisition was acquired from affiliates of the Company at the same price
per  share  as was  used  to  calculate  the  number  of  shares  issued  in the
acquisition.  DTS was  recently  honored as the  recipient  of this year's Inman
Innovator Award for "Software Applications that help the Real Estate Industry be
more efficient and speed up the Real Estate Transaction Process."

         The  Company  plans  to  enhance  both the  Amos  and DTS  products  by
combining  features  from its  proprietary  software  systems  for loan  default
management and loss  mitigation.  Eventually,  it is the Company's  intention to
make its advanced loan resolution  technology  available to third parties in the
mortgage industry through the marketing of software licenses.

         The Company is a registered savings and loan holding company subject to
regulation by the Office of Thrift  Supervision (the "OTS"). The Bank is subject
to  regulation  by the OTS,  as its  chartering  authority,  and by the  Federal
Deposit  Insurance  Corporation  ("FDIC"),  as a result of its membership in the
Savings Association Insurance Fund ("SAIF") which insures the Company's deposits
up to the maximum  extent  permitted by law. The Bank is also subject to certain
regulation  by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve Board") and currently is a member of the Federal Home Loan Bank ("FHLB")
of New York, one of the 12 regional banks which comprise the FHLB System.

RECENT TRANSACTIONS

         On January 20, 1998, the Company acquired DTS (as discussed above).

         On March 6, 1998, the Company acquired an approximately 35% interest in
Norland  Capital  Group  PLC,  which  trades  as  Kensington   Mortgage  Company
("Kensington"),  for (POUND  STERLING) 27.5 million,  or  approximately  US$45.4
million.   Kensington   Mortgage  is  a  leading  originator  of  non-conforming
residential mortgages in the UK, with over (POUND STERLING) 400 million of total
loans  outstanding  to over 8,000  borrowers  as of  December  1997.  Founded in
October of 1995,  Kensington  has become a major  provider of  residential  home
loans to UK  borrowers  who are  unable to qualify  for loans  from  traditional
sources, such as building societies and banks. Kensington has the distinction of
being the only non-conforming  originator on the UK Council of Mortgage Lenders,
the trade  association for the UK mortgage lending  industry,  whose 122 members
collectively account for 98% of the residential mortgage lending in the UK. This
council  represents  the  UK's  mortgage  lenders,   including  banks,  building
societies and other residential mortgage lenders, to the government, Parliament,
the media and other audiences.

         On January 28, 1998, the Company,  OAIC and Aames Financial Corporation
("Aames")  announced  that they had entered into a  nonbinding  letter of intent
pursuant to which they are negotiating for OAIC to acquire subordinated residual
interests with respect to mortgage loans originated or acquired by Aames through
the first quarter of 1998 and for the Company to assume  responsibility  for the
special  servicing of  nonperforming  loans  underlying such  residuals.  As the
result of these  negotiations,  on March 19, 1998,  OAIC  announced  that it had
executed  a  definitive  agreement  with  a  Wall  Street  firm  concerning  the
acquisition  of a subordinate  interest-only  security for  approximately  $14.3
million plus closing costs. Pursuant to related agreements, the Bank will be the
special servicer with respect to the underlying loans.

         On February  17,  1998,  OAIC  repurchased  from IMI 175,000  shares of
OAIC's common stock for an aggregate of  approximately  $3.1  million,  reducing
IMI's  ownership  in OAIC to 8.12%.  These  shares  were  immediately  resold to


                                       5

<PAGE>

certain  officers  and  directors  of the  Company  and  OAIC.  As  part of this
transaction,  IMI  acquired  175,000  units  from  OPLP for  approximately  $3.1
million, increasing IMI's ownership in OPLP to 1.736%.

         On March 31,  1998,  the Company  announced  that it had  entered  into
definitive  agreements for the acquisition of  substantially  all of the assets,
and certain liabilities, of the United Kingdom operations of Cityscape Financial
Corp. (Nasdaq SmallCap Market:  CTYSC). The acquisition includes the purchase of
Cityscape's  UK whole  loan  portfolio,  securitized  loan  residuals,  and loan
origination  and  servicing  businesses  for a  price  of  approximately  (POUND
STERLING)  285 million,  subject to  adjustment as of closing based on an agreed
upon formula (currently  estimated to result in an upward or downward adjustment
of approximately (POUND STERLING) 5 million).  Closing,  which is anticipated to
occur in April,  1998,  is subject to  satisfaction  of a number of  conditions,
including  obtaining  rating  agency  consents  and  various   substitutions  in
connection with the transfer of the securitized  residuals and related servicing
rights  (which  will  require  the  consents  of the  trustees  of  the  several
securitizations).  As a result,  there can be no assurance that the  transaction
will be consummated.

DISCOUNT LOAN ACQUISITION AND RESOLUTION ACTIVITIES

         The  Company  believes  that,  under  appropriate  circumstances,   the
acquisition of  nonperforming  and  underperforming  mortgage loans at discounts
offers significant  opportunities to the Company.  Discount loans generally have
collateral coverage which is sufficiently in excess of the purchase price of the
loan,  such that  successful  resolutions can produce total returns which are in
excess of an equivalent investment in performing mortgage loans.

         The Company  began its discount  loan  operations in 1991 and initially
focused on the  acquisition  of single  family  residential  loans.  In 1994 the
Company  expanded this  business to include the  acquisition  and  resolution of
discount  multi-family  residential and commercial real estate loans  (together,
unless the context otherwise requires, "commercial real estate loans"). Prior to
entering the discount loan business,  management of the Company had  substantial
loan resolution  experience through former subsidiaries of the Company which had
been  engaged in the  business  of  providing  private  mortgage  insurance  for
residential  loans.  This  experience  assisted  the Company in  developing  the
procedures, facilities and systems which are necessary to appropriately evaluate
and acquire  discount loans and to resolve such loans in a timely and profitable
manner.  Management of the Company  believes that the resources  utilized by the
Company in connection with the acquisition, servicing and resolution of discount
real estate loans, which include proprietary technology and software,  allow the
Company to effectively manage an extremely  data-intensive business and that, as
discussed below, these resources have applications in other areas.

         COMPOSITION OF THE DISCOUNT LOAN  PORTFOLIO.  At December 31, 1997, the
Company's  net discount loan  portfolio  amounted to $1.43 billion or 47% of the
Company's  total  assets.  Substantially  all of  the  Company's  discount  loan
portfolio is secured by first mortgage liens on real estate.

         The  following  table  sets  forth  the  composition  of the  Company's
discount loan portfolio by type of loan at the dates indicated:


<TABLE>
<CAPTION>
                                                             December 31,
                               -----------------------------------------------------------------------------
                                   1997              1996              1995           1994            1993
                               -----------       -----------       -----------    -----------    -----------
                                                         (Dollars in Thousands)
<S>                            <C>               <C>               <C>            <C>            <C>        
Single family residential
 loans .....................   $   900,817       $   504,049       $   376,501    $   382,165    $   430,355
Multi-family residential
 loans .....................       191,302           341,796           176,259        300,220             --
Commercial real estate loans       701,035 (1)       465,801 (1)       388,566        102,138          1,845
Other loans ................         1,865             2,753             2,203            911          1,316
                               -----------       -----------       -----------    -----------    -----------
  Total discount loans .....     1,795,019         1,314,399           943,529        785,434        433,516
Unaccreted discount ........      (337,350)(2)      (241,908)(2)      (273,758)      (255,974)      (129,882)
Allowance for loan losses ..       (23,493)          (11,538)               --             --             --
                               -----------       -----------       -----------    -----------    -----------
Discount loans, net ........   $ 1,434,176       $ 1,060,953       $   669,771    $   529,460    $   303,634
                               ===========       ===========       ===========    ===========    ===========
</TABLE>

- -------------------
(1)   The balance at  December  31, 1997  consisted  of $363.7  million of loans
      secured by office  buildings,  $98.9  million of loans  secured by hotels,
      $106.8 million of loans secured by retail  properties or shopping  centers
      and $131.6  million of loans secured by other  properties.  The balance at
      December 31, 1996  consisted of $202.1  million of loans secured by office
      buildings,  $46.0  million of loans secured by hotels,  $138.6  million of
      loans secured by retail  properties or shopping  centers and $79.1 million
      of loans secured by other properties.

(2)   The balance at December  31, 1997  consisted  of $170.7  million on single
      family residential loans, $46.0 million on multi-family residential loans,
      $120.5  million on commercial  real estate loans and $0.2 million on other
      loans,  respectively.  The balance at December 31, 1996 consisted of $92.2
      million on single family  residential loans, $71.8 million on multi-family
      residential  loans, $77.6 million on commercial real estate loans and $0.3
      million on other loans, respectively.

         The  properties  which secure the Company's  discount loans are located
throughout  the United  States.  At December 31, 1997,  the five states with the
greatest  concentration of properties securing the Company's discount loans were
California, New Jersey, New York, Connecticut and Pennsylvania, which had $311.1
million,  $220.9  million,  $201.5  million,  $103.7  million and $95.5  million
principal amount of discount loans (before unaccreted  discount),  respectively.


                                       6

<PAGE>

The Company believes that the relatively geographic distribution of its discount
loan portfolio can reduce the risks associated with  concentrating such loans in
very limited more geographic  areas, and that, due to its expertise,  technology
and software, and procedures,  the geographic  distribution of its discount loan
portfolio does not place significantly  greater burdens on the Company's ability
to resolve such loans.

         Discount  loans may have net book  values up to the Bank's  loan-to-one
borrower limitation. See "Business Regulation-The Bank-Loan-to-One Borrower."

         ACQUISITION OF DISCOUNT LOANS.  In the early years of the program,  the
Company  acquired  discount  loans  from  the  FDIC  and  the  Resolution  Trust
Corporation  ("RTC")  primarily  in auctions of pools of loans  acquired by them
from the large number of  financial  institutions  which failed  during the late
1980s and early  1990s.  Although  the RTC no  longer  is in  existence  and the
banking and thrift  industries  have recovered from the problems  experienced in
the  late  1980s  and  early  1990s,  governmental  agencies,  particularly  the
Department of Housing and Urban  Development  ("HUD"),  continue to be potential
sources of discount loans. The Company obtains a substantial  amount of discount
loans from various private sector sellers,  such as banks, savings institutions,
mortgage companies,  subprime lenders and insurance  companies.  At December 31,
1997,  approximately  58% of the loans in the Company's  discount loan portfolio
had been acquired from the private sector.

         The  percentage  of  discount  loans  in the  Company's  discount  loan
portfolio  acquired from private  sector sellers has decreased in recent periods
as a result of the Company's  acquisition  of a  substantial  amount of discount
loans from HUD.  During the year ended  December  31,  1997,  the  Company and a
co-investor were the successful bidder to purchase from HUD 24,773 single family
residential  loans with an aggregate unpaid  principal  balance of $1.55 billion
and a purchase price of $1.34 billion.  The Company  acquired  $771.6 million of
these loans and the right to service all of such loans. In 1996, the Company and
a  co-investor  were the  successful  bidder to purchase  from HUD 4,591  single
family  residential  loans with an aggregate unpaid principal  balance of $258.1
million and a purchase  price of $204.0  million.  The Company  acquired  $112.2
million of these loans and the right to service all of such loans.  In 1996, the
Company also acquired from HUD discount  multi-family  residential loans with an
unpaid principal  balance of $225 million.  The foregoing  acquisitions  were in
addition to the acquisition of $741.2 million gross  principal  amount of single
family  residential loans from HUD by BCBF, LLC (the "LLC"), a limited liability
company formed in March 1996 between the Bank and BlackRock Capital Finance L.P.
("BlackRock"). See "Business-Investment in Joint Ventures."

         Primarily as a result of  acquisitions  from HUD,  during 1996 and 1997
the Company  (including its pro rata interest in the LLC) was the second largest
acquiror in the United  States  (behind  Goldman  Sachs'  Whitehall  Street Real
Estate Fund) of distressed real estate assets worldwide and the largest acquiror
in the U.S. of portfolios of such assets,  according to statistics  published by
REAL ESTATE ALERT.

         HUD loans are acquired by HUD pursuant to various  assignment  programs
of the Federal  Housing  Administration  ("FHA").  Under  programs of the FHA, a
lending institution may assign an FHA-insured loan to HUD because of an economic
hardship on the part of the borrower  which  precludes  the borrower from making
the scheduled principal and interest payment on the loan. FHA-insured loans also
are  automatically  assigned to HUD upon the 20th  anniversary  of the  mortgage
loan.  In most  cases,  loans  assigned  to HUD after  this  20-year  period are
performing under the original terms of the loan. Once a loan is assigned to HUD,
the FHA insurance has been paid and the loan is no longer insured.  As a result,
none of the HUD loans are insured by the FHA.

         A majority of the $771.6  million of loans acquired from HUD during the
year ended  December 31, 1997 are subject to  forbearance  agreements  after the
servicing transfer date. During the forbearance  period,  borrowers are required
to make a monthly  payment  which is based on their ability to pay and which may
be less than the contractual  monthly  payment.  Once the forbearance  period is
over,  the  borrower  is  required  to make at  least  the  contractual  payment
regardless of ability to pay. Virtually all of the foregoing loans acquired from
HUD will  reach  the end of the  forbearance  period  by the end of 1998.  Prior
purchases  of loans from HUD by the  Company  (and the LLC)  primarily  included
loans that were beyond the forbearance period.

         Discount real estate loans  generally  are acquired in pools,  although
discount commercial real estate loans may be acquired individually.  These pools
generally are acquired in auctions or competitive bid circumstances in which the
Company  faces   substantial   competition.   Although  many  of  the  Company's
competitors  have  access to  greater  capital  and have other  advantages,  the
Company  believes  that it has a competitive  advantage  relative to many of its
competitors  as a result of its  experience in managing and  resolving  discount
loans,  its large  investment  in the  computer  systems,  technology

                                       7

<PAGE>

and other resources  which are necessary to conduct this business,  its national
reputation and the strategic  relationships  and contacts which it has developed
in connection with these activities.

         The  Company  generally  acquires  discount  loans  solely  for its own
portfolio.  From time to time, however, the Company and one or more co-investors
may submit a joint bid to acquire a pool of  discount  loans in order to enhance
the prospects of submitting a successful bid. If successful, the Company and the
co-investors  generally  allocate  ownership of the acquired  loans in an agreed
upon manner,  although in certain  instances the Company and the co-investor may
continue to have a joint interest in the acquired loans. In addition,  from time
to time the Company and a co-investor may acquire discount loans through a joint
venture. See "Business-Investment in Joint Ventures."

         Prior to making an offer to purchase a portfolio of discount loans, the
Company conducts an extensive  investigation  and evaluation of the loans in the
portfolio.  Evaluations of potential  discount loans are conducted  primarily by
the Company's  employees who specialize in the analysis of nonperforming  loans,
often with further  specialization  based on geographic  or collateral  specific
factors.  The Company's employees regularly use third parties,  such as brokers,
who are  familiar  with a  property's  type  and  location,  to  assist  them in
conducting an evaluation of the value of a collateral property, and depending on
the circumstances, particularly in the case of commercial real estate loans, may
use  subcontractors,  such as local counsel and  engineering  and  environmental
experts,  to assist in the evaluation and  verification  of information  and the
gathering of other  information  not  previously  made  available by a potential
seller.

         The  Company  determines  the  amount to be  offered  by it to  acquire
potential  discount  loans  by  using a  proprietary  modeling  system  and loan
information  database which focuses on the  anticipated  recovery amount and the
timing  and cost of the  resolution  of the  loans.  The  amount  offered by the
Company  generally  is at a discount  from both the stated value of the loan and
the value of the underlying collateral which the Company estimates is sufficient
to generate an acceptable return on its investment.

         RESOLUTION OF DISCOUNT  LOANS.  After a discount loan is acquired,  the
Company  utilizes  its  computer   software  systems  to  resolve  the  loan  as
expeditiously as possible in accordance with specified  procedures.  The various
resolution alternatives generally include the following: (i) the borrower brings
the loan  current in  accordance  with  original  or  modified  terms,  (ii) the
borrower repays the loan or a negotiated  amount of the loan, (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate owned and held for sale by the Company,  or (iv)
the  Company  forecloses  on the  loan  and  the  property  is  acquired  at the
foreclosure sale either by a third party or by the Company,  in which case it is
classified  as real estate owned and held for sale by the Company.  In addition,
in the case of single  family  residential  loans,  assistance  is  provided  to
borrowers in the form of forbearance  agreements under which the borrower either
makes a monthly  payment less than or equal to the original  monthly  payment or
makes a monthly payment more than the contractual monthly payment to make up for
arrearages.

         In appropriate  cases,  the Company works with borrowers to resolve the
loan in advance of foreclosure.  One method is through  forbearance  agreements,
which generally allow the borrower to pay the contractual monthly payment plus a
portion of the arrearage each month, and other means. Although this strategy may
result in an initial  reduction in the yield on a discounted  loan,  the Company
believes that it is  advantageous  because it (i) generally  results in a higher
resolution value than foreclosure;  (ii) reduces the amount of real estate owned
acquired  by  foreclosure  or by  deed-in-lieu  thereof  and  related  costs and
expenses;  (iii)  enhances  the  ability of the  Company to sell the loan in the
secondary market,  either on a whole loan basis or through  securitizations  (in
which case the Company  may  continue  to earn fee income  from  servicing  such
loans); and (iv) permits the borrower to retain ownership of the home and, thus,
enhances  relations  between the Company  and the  borrower.  As a result of the
Company's current loan resolution strategy of emphasizing forbearance agreements
and other  resolutions in advance of  foreclosure,  the Company has been able to
resolve 71% of its discount loans before foreclosure.

         The  general  goal of the  Company's  asset  resolution  process  is to
maximize,  in a timely  manner,  cash recovery on each loan in the discount loan
portfolio.  The Company generally  anticipates a longer period (approximately 12
to 30 months) to resolve  discount  commercial  real estate loans than  discount
single family residential loans because of their complexity and the wide variety
of issues that may occur in connection with the resolution of such loans.

         The Credit  Committee of the Board of  Directors  of the Bank  actively
monitors  the asset  resolution  process to identify  discount  loans which have
exceeded their expected  foreclosure period and real estate owned which has been
held longer than  anticipated.  Plans of action are  developed for each of these
assets to remedy the cause for delay and are reviewed by the Credit Committee.


                                       8

<PAGE>

         SALE OF DISCOUNT LOANS.  From time to time the Company sells performing
discount  loans  either  on  a  whole  loan  basis  or  indirectly  through  the
securitization of such loans and sale of the mortgage-related  securities backed
by them. During the years ended December 31, 1997, 1996 and 1995,  respectively,
the Company sold $518.9  million,  $230.2  million and $51.6 million of discount
loans, respectively, which resulted in gains of $60.4 million, $15.3 million and
$6.0 million, respectively, including net securitization gains of $53.1 million,
$7.9 million and $0, respectively.  Also during 1997, the LLC, as part of larger
transactions involving the Company and an affiliate of Black Rock, completed the
securitizations  of 1,730 discount single family residential loans acquired from
HUD in 1996 and 1995, with an unpaid principal balance of $78.4 million and past
due  interest  of $22.5  million,  which  resulted  in the  Company  recognizing
indirect  gains of $14.0  million as a result of the Company's pro rata interest
in the LLC.  The  Company  continues  to  service  the  loans  for a fee and has
retained  interests  in  the  related  subordinate  class  of  securities.   For
information  concerning the foregoing  securitizations and retained  securities,
see "Business-Investment Activities."

         ACTIVITY IN THE DISCOUNT LOAN PORTFOLIO. The following table sets forth
the activity in the Company's  gross discount loan portfolio  during the periods
indicated:


<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                       ------------------------------------------------------------------------------------------------------
                               1997                1996                  1995                 1994                1993
                       -------------------  -------------------   ------------------   ------------------  ------------------
                                    No. of               No. of               No. of               No. of              No. of
                         Amount      Loans    Amount      Loans     Amount     Loans     Amount     Loans    Amount     Loans
                       ----------   ------  ----------    -----   ---------    -----   ---------   ------  ---------   ------
                                                                  (Dollars in Thousands)
<S>                    <C>           <C>    <C>           <C>     <C>          <C>     <C>          <C>    <C>          <C>  
Balance at beginning
 of period...........  $1,314,399    5,460  $  943,529    4,543   $ 785,434    3,894   $ 433,516    5,160  $ 310,464    5,358
Acquisitions(1)......   1,776,773   17,703   1,110,887    4,812     791,195    2,972     826,391    2,781    294,359    2,412
Resolutions and
 repayments(2).......    (484,869)  (1,978)   (371,228)  (2,355)   (300,161)    (960)   (265,292)  (2,153)  (116,890)  (1,430)
Loans transferred to
 real estate owned...    (292,412)  (1,596)   (138,543)    (860)   (281,344)    (984)   (171,300)  (1,477)   (26,887)    (602)
Sales................    (518,872)  (6,609)   (230,246)    (680)    (51,595)    (379)    (37,881)    (417)   (27,530)    (578)
                       ----------   ------  ----------    -----   ---------    -----   ---------   ------  ---------   ------
Balance at end of
 period..............  $1,795,019   12,980  $1,314,399    5,460   $ 943,529    4,543   $ 785,434    3,894  $ 433,516    5,160
                       ==========   ======  ==========    =====   =========    =====   =========   ======  =========   ======
</TABLE>


- ---------------------
(1)  In  1997,   acquisitions  consisted  of  $1.06  billion  of  single  family
     residential  loans,  $57.7 million of  multi-family  residential  loans and
     $657.0  million of  commercial  real estate  loans.  In 1996,  acquisitions
     consisted of $365.4  million of single  family  residential  loans,  $310.4
     million of  multi-family  residential  loans,  $433.5 million of commercial
     real estate loans and $1.5  million of other loans.  The 1996 data does not
     include  the  Company's  pro rata share of the $741.2  million of  discount
     loans acquired by the LLC (see Business  Investment in Joint Ventures).  In
     1995, acquisitions consisted of $272.8 million of single family residential
     loans, $141.2 million of multi-family  residential loans, $374.9 million of
     commercial  real estate  loans and $2.3  million of other  loans.  In 1994,
     acquisitions  consisted  of $395.8  million  of single  family  residential
     loans, $315.5 million of multi-family  residential loans and $115.1 million
     of  commercial  real  estate  loans.  In  1993,  substantially  all  of the
     acquisitions were of single family residential loans.

(2)  Resolutions  and  repayments  consists  of loans  which were  resolved in a
     manner  which  resulted  in  partial or full  repayment  of the loan to the
     Company,  as well as  principal  payments on loans which have been  brought
     current in  accordance  with their  original  or  modified  terms  (whether
     pursuant to  forbearance  agreements  or otherwise) or on other loans which
     have not been resolved.

         For  information  relating to the activity in the Company's real estate
owned which is attributable  to the Company's  discount loan  acquisitions,  see
"Business-Asset Quality - Real Estate Owned."


                                        9

<PAGE>

         PAYMENT  STATUS OF  DISCOUNT  LOANS.  The  following  table  sets forth
certain  information  relating to the payment  status of loans in the  Company's
discount loan portfolio at the dates indicated.


<TABLE>
<CAPTION>
                                                               December 31,
                                 -----------------------------------------------------------------------
                                     1997            1996           1995           1994          1993
                                 -----------     -----------     ----------     ----------    ----------
                                                           (Dollars in Thousands)
Loan status:
<S>                              <C>             <C>             <C>            <C>           <C>       
  Current....................... $   673,256     $   579,597     $  351,630     $  113,794    $   23,629
  Past due 31 days to 89 days...      22,786          22,161         86,838         57,023        15,175
  Past due 90 days or more (1)..   1,070,924         563,077        385,112        413,506       254,413
  Acquired and servicing not
   yet transferred..............      28,053         149,564        119,949        201,111       140,299
                                 -----------     -----------     ----------     ----------    ----------
                                   1,795,019       1,314,399        943,529        785,434       433,516
  Unaccreted discount...........    (337,350)       (241,908)      (273,758)      (255,974)     (129,882)
  Allowance for loan losses.....     (23,493)        (11,538)            --             --            --
                                 -----------     -----------     ----------     ----------    ----------
                                 $ 1,434,176     $ 1,060,953     $  669,771     $  529,460    $  303,634
                                 ===========     ===========     ==========     ==========    ==========
</TABLE>

- ----------------
(1)   Includes  $432.6  million  and $57.0  million  of loans  with  forbearance
      agreements at December 31, 1997 and 1996, respectively, and $638.3 million
      and $506.1 million of loans without forbearance agreements at December 31,
      1997  and  1996,  respectively.  Of  the  $432.6  million  of  loans  with
      forbearance  agreements  past  due 90  days or  more  in  accordance  with
      original  terms,  $184.5 million were current and $131.8 million were past
      due 31 to 89 days under the terms of the forbearance agreements.

         ACCOUNTING  FOR  DISCOUNT  LOANS.  The  acquisition  cost for a pool of
discount loans is allocated to each  individual  loan within the pool based upon
the  Company's  pricing  methodology.  Prior to January 1,  1997,  the  discount
associated  with all single family  residential  loans was recognized as a yield
adjustment  and was accreted  into  interest  income  using the interest  method
applied on a loan-by-loan basis once foreclosure  proceedings were initiated, to
the extent the timing and amount of cash flows could be  reasonably  determined.
Effective  January 1, 1997,  the  Company  ceased  accretion  of discount on its
nonperforming  single family residential loans. The discount which is associated
with a single family residential loan and certain  multi-family  residential and
commercial real estate loans which are current or  subsequently  brought current
by the borrower in accordance with the loan terms is accreted into the Company's
interest  income  as a yield  adjustment  using  the  interest  method  over the
contractual maturity of the loan. For all other loans interest is earned as cash
is received.

         Gains on the  repayment and discharge of loans are recorded in interest
income on discount loans.  Upon receipt of title to property securing a discount
loan, the loans are transferred to real estate owned.

         Beginning in 1996, adjustments to reduce the carrying value of discount
loans to the fair value of the property  securing  the loan are charged  against
the  allowance for loan losses on the discount  loan  portfolio.  Prior to 1996,
such adjustments were charged against interest income on discount loans.

         OTHER  DISCOUNT  LOAN   ACTIVITIES.   The  Company  believes  that  the
procedures, facilities and systems which it has developed in connection with the
acquisition and resolution of discount loans may be applied in other businesses.
The Company  commenced a program in 1995 to utilize this experience by financing
the acquisition of discount loans by other  institutions.  During 1997 and 1996,
the Company originated $0 million and $25.8 million,  respectively, of portfolio
finance loans,  which had an aggregate  balance of $17.7 million at December 31,
1997.  Portfolio finance loans generally have two-year terms,  floating interest
rates  which  adjust  in  accordance  with a  designated  reference  rate  and a
loan-to-value  ratio  which does not  exceed  the lesser of 90% of the  purchase
price or the estimated value of the collateral as determined by the Company, and
may include terms which provide the Company with a participation interest in the
profits from the resolution of the discount loan collateral.  Portfolio  finance
loans are  included  in the  Company's  non-discount  loan  portfolio  under the
category  of loan  which is  represented  by the  properties  which  secure  the
discount loans that  collateralize  the Company's  portfolio  finance loans. See
"Business - Lending Activities."

         The Company's discount loan acquisitions and resolution  activities and
related  securitization   activities  also  have  contributed  significantly  to
increases  in  the  Company's  loan  servicing  activities.  See  "Business-Loan
Servicing Activities."


                                       10

<PAGE>


INVESTMENT IN JOINT VENTURES

         At December  31,  1997,  the  Company's  investment  in joint  ventures
consisted solely of its investment in BCFL, L.L.C. ("BCFL"), a limited liability
company  formed in January  1997  between the Company and  BlackRock  to acquire
multi-family  loans.  At December 31, 1996,  the  Company's  investment in joint
ventures  consisted of its 50%  investment in the LLC. On December 12, 1997, the
LLC  distributed  all of its assets to the Company  and its other 50%  investor,
BlackRock.  Simultaneous to the distribution,  the Company acquired  BlackRock's
portion of the distributed assets.

         ACQUISITION  OF HUD LOANS BY THE LLC. In April 1996,  the LLC purchased
16,196 single family residential loans offered by HUD at an auction. Many of the
loans,  which had an aggregate unpaid principal balance of $741.2 million at the
date of acquisition, were not performing in accordance with their original terms
or an applicable forbearance agreement. The aggregate purchase price paid to HUD
amounted  to  $626.4  million.  All of the HUD  loans  acquired  by the LLC were
secured by first mortgage liens on single family residences.

         In  connection  with  the  acquisition,  the  Company  entered  into an
agreement  with the LLC to  service  the HUD loans in  accordance  with its loan
servicing and loan default resolution procedures.  In return for such servicing,
the Company  received  specific fees which were payable on a monthly basis.  The
Company did not pay any additional amount to acquire these servicing rights and,
as a result,  the  acquisition of the right to service the HUD loans held by the
LLC did not result in the Company's  recording  capitalized  mortgage  servicing
rights for financial reporting purposes.

         SECURITIZATION  OF THE HUD  LOANS.  During  1997,  the LLC,  as part of
larger  transactions  involving  the  Company  and an  affiliate  of  BlackRock,
completed securitizations of 1,730 HUD loans held by it with an unpaid principal
balance of $78.4  million,  past due  interest  of $22.5  million and a net book
value of $60.6 million;  and during 1996, the LLC completed a securitization  of
9,825 HUD loans with an aggregate  unpaid  principal  balance of $419.4 million,
past due interest of $86.1 million and a net book value of $394.2  million.  The
LLC  recognized  gains of $14.0 million and $69.8  million  (including a gain of
$12.9 million on the sale in 1996 of $79.4 million of securities to the Company)
from the sale of the senior  classes in the REMICs  formed for purposes of these
transactions  in the years ended  December 31, 1997 and 1996,  respectively,  of
which $7.0  million  and $34.9  million,  respectively,  were  allocable  to the
Company as a result of its pro rata  interest in the LLC and  included in equity
in earnings of joint venture.

         ACCOUNTING FOR INVESTMENT IN JOINT VENTURES.  The Company's  investment
in the LLC was accounted for under the equity  method of  accounting.  Under the
equity method of accounting,  an investment in the shares or other  interests of
an  investee  is  initially  recorded  at the cost of the  shares  or  interests
acquired and thereafter is periodically  increased (decreased) by the investor's
proportionate  share of the earnings  (losses) of the investee and  decreased by
all  dividends  received  by the  investor  from  the  investee.  The  Company's
investment  in the LLC amounted to $0 and $67.9 million at December 31, 1997 and
1996, respectively. Because the LLC was a pass-through entity for federal income
tax  purposes,  provisions  for  income  taxes were  established  by each of the
Company  and its  co-investor,  and not the LLC.  The Company  recognized  $23.7
million and $38.3 million of pre-tax  income from its  investment in the LLC for
the years ended December 31, 1997 and 1996, respectively.

LENDING ACTIVITIES

         COMPOSITION OF LOAN PORTFOLIO.  At December 31, 1997, the Company's net
loan portfolio  amounted to $266.3 million or 9% of the Company's  total assets.
Loans  held for  investment  in the  Company's  loan  portfolio  are  carried at
amortized cost,  less an allowance for loan losses,  because the Company has the
ability and presently intends to hold them to maturity.


                                       11

<PAGE>

         The following  table sets forth the  composition  of the Company's loan
portfolio by type of loan at the dates indicated.


<TABLE>
<CAPTION>
                                                               December 31,
                                  ----------------------------------------------------------------------
                                     1997            1996            1995            1994         1993
                                  ---------       ---------       ---------       ---------    ---------
                                                          (Dollars in Thousands)
<S>                               <C>             <C>             <C>             <C>          <C>      
Single family residential loans.. $  46,226       $  73,186       $  75,928       $  31,926    $  30,385
Multi-family residential loans...    71,382(1)       67,842(1)       49,047(1)        1,800       39,352
Commercial real estate and land
  loans:
  Hotels (3) ....................    89,362(2)      200,311(2)      125,791          19,659       14,237
  Office buildings (3) ..........    68,759         128,782          61,262              --           --
  Land ..........................     2,858           2,332          24,904           1,315        4,448
  Other .........................    16,094          25,623           2,494           4,936        4,059
                                  ---------       ---------       ---------       ---------    ---------
    Total .......................   177,073         357,048         214,451          25,910       22,744
Commercial non-mortgage .........        --           2,614              --              --           --
Consumer ........................       244             424           3,223           1,558        3,639
                                  ---------       ---------       ---------       ---------    ---------
    Total loans .................   294,925         501,114         342,649          61,194       96,120
Undisbursed loan proceeds .......   (22,210)        (89,840)        (39,721)             --           --
Unaccreted discount .............    (2,721)         (5,169)         (5,376)         (3,078)      (6,948)
Allowance for loan losses .......    (3,695)         (3,523)         (1,947)         (1,071)        (884)
                                  ---------       ---------       ---------       ---------    ---------
    Loans, net ................   $ 266,299       $ 402,582       $ 295,605       $  57,045    $  88,288
                                  =========       =========       =========       =========    =========
</TABLE>


- ------------------
(1)   At  December  31,  1997,  1996 and 1995,  multi-family  residential  loans
      included $33.3 million,  $36.6 million,  and $7.7 million of  construction
      loans, respectively.

(2)   At December  31, 1997 and 1996,  hotel loans  included  $25.3  million and
      $26.4 million of construction loans, respectively.

(3)   During 1997, payoffs of commercial real estate loans secured by hotels and
      office buildings totaled $80.5 million and $107.3 million, respectively.

         The Company's  lending  activities are conducted on a nationwide  basis
and, as a result,  the  properties  which secure its loan  portfolio are located
throughout the United States. At December 31, 1997, the five states in which the
largest amount of properties securing loans in the Company's loan portfolio were
New  York,  New  Jersey,  California,  Maryland  and  Illinois,  which had $58.8
million,  $35.4  million,  $27.7  million,  $26.1  million and $21.2  million of
principal  amount of loans,  respectively.  As noted above, the Company believes
that the relatively geographic distribution of its loan portfolio can reduce the
risks associated with concentrating such loans in more limited geographic areas.


                                       12

<PAGE>

         CONTRACTUAL  PRINCIPAL  REPAYMENTS.  The  following  table  sets  forth
certain  information  at December 31, 1997  regarding the dollar amount of loans
maturing  in  the  Company's  loan  portfolio  based  on  scheduled  contractual
amortization,  as well as the  dollar  amount  of  loans  which  have  fixed  or
adjustable  interest  rates.  Demand loans,  loans having no stated  schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. Loan balances have not been reduced for (i) undisbursed  loan proceeds,
unearned  discounts  and the  allowance  for loan  losses or (ii)  nonperforming
loans.


<TABLE>
<CAPTION>
                                                                          Maturing in
                                            ----------------------------------------------------------------------
                                                              After One Year    After Five Years
                                                 One           Through Five          Through            After Ten
                                            Year or Less           Years            Ten Years             Years
                                            ------------       ------------       ------------        ------------
                                                                    (Dollars in Thousands)
<S>                                         <C>                <C>                <C>                 <C>         
Single family residential loans.......      $      4,999       $      1,789       $      8,094        $     31,344
Multi-family residential loans........            24,454             29,227              3,979              13,722
Commercial real estate and land loans.            18,646            150,108              4,233               4,085
Consumer and other loans..............                21                224                 --                  --
                                            ------------       ------------       ------------        ------------
   Total..............................      $     48,120       $    181,348       $     16,306        $     49,151
                                            ============       ============       ============        ============

Interest rate terms on amounts due:
   Fixed..............................      $     10,974       $    166,001       $     16,132        $     27,951
   Adjustable.........................            37,146             15,347                174              21,200
                                            ------------       ------------       ------------        ------------
                                            $     48,120       $    181,348       $     16,306        $     49,151
                                            ============       ============       ============        ============
</TABLE>


         Scheduled  contractual  principal repayments may not reflect the actual
maturities  of loans  because of  prepayments  and, in the case of  conventional
mortgage  loans,  due-on-sale  clauses.  The  average  life of  mortgage  loans,
particularly  fixed-rate  loans,  tends to increase  when current  mortgage loan
rates are  substantially  higher  than  rates on  existing  mortgage  loans and,
conversely,  decrease when rates on existing mortgages are substantially  higher
than current mortgage loan rates.

         ACTIVITY  IN THE LOAN  PORTFOLIO.  The  following  table sets forth the
activity in the Company's loan portfolio during the periods indicated.


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                          ----------------------------------------------
                                                              1997             1996             1995
                                                          -----------      -----------       -----------
                                                                      (Dollars in Thousands)
<S>                                                       <C>              <C>               <C>        
Balance at beginning of period.......................     $   501,114      $   342,649       $    61,194
Originations:
   Single family residential loans...................           1,987           10,681            14,776
   Multi-family residential loans....................          16,799           68,076            48,664
   Commercial real estate loans......................          69,948          199,017           212,630
   Commercial non-mortgage and consumer loans........           1,140            3,366               207
                                                          -----------      -----------       -----------
      Total loans originated.........................          89,874          281,140           276,277
                                                          -----------      -----------       -----------
Purchases:
   Single family residential loans...................              78              305            29,833
   Commercial real estate loans......................              --               --             2,245
   Consumer loans....................................              --               --             1,966
                                                          -----------      -----------       -----------
      Total loans purchased..........................              78              305            34,044
                                                          -----------      -----------       -----------
Sales ...............................................          (2,346)              --                --
Loans transferred from available for sale............          13,782               45             4,353
Principal repayments.................................        (306,916)        (121,818)          (33,168)
Transfer to real estate owned........................            (661)          (1,207)              (51)
                                                          -----------      -----------       -----------
Net increase (decrease) in net loans.................        (206,189)         158,465           281,455
                                                          -----------      -----------       -----------
Balance at end of period.............................     $   294,925      $   501,114       $   342,649
                                                          ===========      ===========       ===========
</TABLE>



                                       13

<PAGE>

         LOANS AVAILABLE FOR SALE. In addition to loans acquired for investment,
the Company also  originates  and  purchases  loans which it presently  does not
intend to hold to maturity.  Such loans are  designated  as loans  available for
sale upon origination or purchase and generally are carried at the lower of cost
or  aggregate  market  value.  At December 31, 1997,  loans  available  for sale
amounted to $177.0 million or 6% of the Company's total assets.

         The following  table sets forth the  composition of the Company's loans
available for sale by type of loan at the dates indicated.


<TABLE>
<CAPTION>
                                                                         December 31
                                          --------------------------------------------------------------------------
                                              1997            1996           1995            1994            1993
                                          -----------     -----------     -----------    -----------     -----------
                                                                   (Dollars in thousands)
<S>                                       <C>             <C>             <C>            <C>             <C>        
Single family residential loans......     $   176,554     $   111,980     $   221,927    $    16,825     $    30,217
Multi-family residential loans.......              --          13,657          28,694         83,845          44,919
Consumer loans.......................             487             729           1,169          1,623          25,930
                                          -----------     -----------     -----------    -----------     -----------
                                              177,041     $   126,366     $   251,790    $   102,293     $   101,066
                                          ===========     ===========     ===========    ===========     ===========
</TABLE>


         Although  the  Company's  loans  available  for  sale  are  secured  by
properties located  nationwide,  currently a substantial  majority of such loans
are subprime single family residential loans originated primarily in the western
states, particularly California,  primarily as the result of Admiral having been
located there prior to the  acquisition  of  substantially  all of its assets by
OFS. As a result, $35.2 million or 20% of the Company's loans available for sale
at December 31, 1997 were secured by properties located in California, primarily
as the result of Admiral  having been located there prior to the  acquisition of
substantially all of its assets by OFS.

         SINGLE FAMILY RESIDENTIAL LOANS. Since late 1994, the Company's lending
activities   have  included  the  origination  and  purchase  of  single  family
residential loans to borrowers who because of prior credit problems, the absence
of a credit  history  or other  factors  are unable or  unwilling  to qualify as
borrowers for a single family  residential  loan under guidelines of the Federal
National  Mortgage  Association  ("FNMA")  and the  Federal  Home Loan  Mortgage
Corporation  ("FHLMC")  ("conforming  loans") and who have substantial equity in
the properties  which secure the loans.  Loans to  non-conforming  borrowers are
perceived  by the Company as being  advantageous  because  they  generally  have
higher  interest rates and  origination  and servicing fees and generally  lower
loan-to-value  ratios than conforming loans and because the Company's  expertise
in the  servicing  and  resolution  of  nonperforming  loans can be  utilized in
underwriting  such loans, as well as to address loans acquired  pursuant to this
program which become nonperforming after acquisition.

         Through 1996, the Company acquired  subprime single family  residential
loans  primarily  through a  correspondent  relationship  with Admiral and, to a
lesser extent,  correspondent  relationships with three other financial services
companies.  Correspondent  institutions  originate  loans  based  on  guidelines
provided  by the  Company  and  promptly  sell  the  loans to the  Company  on a
servicing-released basis.

         In order to solidify and expand its sources of subprime  single  family
residential loans, the Company,  through OFS, acquired  substantially all of the
assets  of  Admiral  in  a  transaction   which  closed  on  May  1,  1997.  See
"Business-Subsidiaries." At the time of acquisition, Admiral engaged in subprime
lending on a retail and wholesale basis through eleven loan  production  offices
located in California and independent mortgage brokers and correspondent lending
institutions  located in California and eleven other states.  In connection with
the Company's  acquisition  of assets from  Admiral,  the Bank  transferred  its
retail and wholesale  subprime single family  residential  lending operations to
OFS, which included, among other things, transferring its rights under contracts
with  brokers  and  correspondent   lending  institutions  and  its  rights  and
obligations  under leases to six loan production  offices recently opened by it,
which are located in California, Illinois,  Massachusetts,  Oregon and Utah. OFS
currently  conducts its business on a retail and wholesale basis through 27 loan
production  offices located in seven states and plans to open an additional five
such offices in 1998.

         OFS'  principal  sources  of funds  consist of (i) four lines of credit
with  unaffiliated  parties which  aggregate $650 million and are secured by the
mortgage  loans  acquired  with  such  lines and (ii) a $30  million  unsecured,
subordinated  credit facility  provided by the Company to OFS at the time of the
acquisition  of  substantially  all of the assets of  Admiral.  The  Company has
adopted policies that set forth the specific lending requirements of the Company
as they relate to the processing,  underwriting,  property  appraisal,  closing,
funding  and  delivery  of  subprime  loans.   These  policies  include  program
descriptions  which set forth four classes of loans,  designated  A, B, C and D.
Class A loans  generally  relate to  borrowers  who have no or  limited  adverse
incidents in their credit  histories,  whereas  Class B, C and D loans relate to


                                       14

<PAGE>

increasing  degrees of adverse  incidents in the  borrower's  credit  histories.
Factors  which are  considered  in  evaluating a borrower in this regard are the
presence or absence of a credit history,  prior  delinquencies in the payment of
mortgage and consumer credit and personal bankruptcies.

         The terms of the loan  products  offered  by the  Company  directly  or
through its  correspondents  emphasize  real estate  loans which  generally  are
underwritten  with  significant  reliance on a borrower's level of equity in the
property securing the loan, which may be an owner-occupied  or, depending on the
class of loan  and its  terms,  a  non-owner  occupied  property.  Although  the
Company's  guidelines  require  information  in order to enable  the  Company to
evaluate a borrower's ability to repay a loan by relating the borrower's income,
assets and liabilities to the proposed indebtedness,  because of the significant
reliance on the ratio of the principal amount of the loan to the appraised value
of the security property, each of the four principal classes of loans identified
by the Company include products which permit reduced documentation for verifying
a borrower's  income and  employment.  Loans which permit reduced  documentation
generally  require  documentation  of employment  and income for the most recent
six-month period, as opposed to the two-year period required in the case of full
documentation  loans.  Although  the  Company  reserves  the  right to  verify a
borrower's income, assets and liabilities and employment history,  other than as
set forth above,  it generally  does not verify such  information  through other
sources.

         The  Company's  strategy  is to offer a broad  range of products to its
borrowers and its origination  sources.  Loans may have principal  amounts which
conform to the guidelines set by FHLMC or FNMA for conforming loans or principal
amounts which  significantly  exceed these  amounts (so called  "jumbo  loans").
Loans may have fixed or  adjustable  interest  rates and terms  ranging up to 30
years.

         The following  table sets forth the activity in the Company's net loans
available for sale during the periods indicated:


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                     ------------------------------------------------------
                                                         1997               1996                 1995
                                                     ------------       --------------       --------------
                                                                     (Dollars in Thousands)
<S>                                                  <C>                <C>                  <C>           
Balance at beginning of period.................      $    126,366       $      251,790       $      102,293
Purchases:
  Single family residential....................           278,081              284,598              230,077
  Multi-family residential.....................                --               10,456               10,056
                                                     ------------       --------------       --------------
                                                          278,081              295,054              240,133
                                                     ------------       --------------       --------------
Originations:
  Single family residential....................           316,101                9,447                  360
  Multi-family residential.....................                --                   --               24,810
                                                     ------------       --------------       --------------
                                                          316,101                9,447               25,170
                                                     ------------       --------------       --------------
Sales..........................................          (501,079)            (395,999)            (100,104)
Increase in lower of cost or market reserve....            (1,034)              (2,455)                (118)
Loans transferred (to)/from loan portfolio.....           (13,674)                  45               (4,353)
Principal repayments, net of capitalized
  interest.....................................           (22,151)             (27,845)             (11,231)
Transfer to real estate owned..................            (5,569)              (3,671)                  --
                                                     ------------       --------------       --------------
  Net increase (decrease) in loans.............            50,675             (125,424)             149,497
                                                     ------------       --------------       --------------
Balance at end of period.......................      $    177,041       $      126,366       $      251,790
                                                     ============       ==============       ==============
</TABLE>


         The  Company  purchased  and  originated  a total of $588.3  million of
single family  residential  loans to  non-conforming  borrowers  during 1997 and
$294.0  million of such loans during 1996. At December 31, 1997, the Company had
$167.0 million of subprime single family residential loans, which had a weighted
average yield of 10.41%.

         The Company generally intends to sell or securitize its subprime single
family  residential loans, and as a result, all of such loans were classified as
available  for sale at December  31, 1997.  During 1997,  the Company sold $82.6
million of subprime single family  residential  loans for gains of $3.3 million;
during 1996 the Company sold $161.5 million of such 


                                       15

<PAGE>

loans for gains of $571,000;  and during 1995 the Company sold $25.3  million of
subprime single family  residential  loans for gains of $188,000.  An additional
$415.8 million and $211.2 million of loans were  securitized  and sold in public
offerings underwritten by unaffiliated  investment banking firms during 1997 and
1996,  respectively,  generating  gains  of  $18.8  million  and  $7.2  million,
respectively,  upon the sale of the securities. The Company retained subordinate
and REMIC  residual  securities  in  connection  with these  transactions.  Such
securities  had an  aggregate  carrying  value of $41.8  million at December 31,
1997. See "Business-Investment Activities."

         Although  subprime  loans  generally have higher levels of default than
conforming  loans,  the  Company  believes  that the  borrower's  equity  in the
security  property and its expertise in the area of resolution of  nonperforming
loans will continue to make its subprime  borrower loan program a successful one
notwithstanding  such  defaults  and  any  resulting  losses.  There  can  be no
assurance that this will be the case, however.

         In addition to the Company's  subprime single family  residential  loan
programs,  from  time to time  the  Company  purchases  pools of  single  family
residential  loans for investment  purposes.  During 1995, the Company purchased
$29.8 million of loans which were primarily secured by properties located in the
area surrounding the Bank's physical facility in northern New Jersey.

         MULTI-FAMILY   RESIDENTIAL  AND  COMMERCIAL  REAL  ESTATE  LOANS.   The
Company's  lending  activities  include  the  acquisition  of loans  secured  by
commercial  real  estate,  particularly  loans  secured  by  hotels  and  office
buildings,  which the  Company  began  originating  in late 1994 and late  1995,
respectively.  Commercial  real estate loans  currently  are made to finance the
purchase and refinance of commercial properties, the refurbishment of distressed
properties and, recently,  the construction of hotels. At December 31, 1997, the
Company's  loans secured by commercial real estate (and land) amounted to $177.1
million and  consisted  primarily  of $89.4  million and $68.8  million of loans
secured by hotels and office buildings, respectively.

         From time to time, the Company originates loans for the construction of
multi-family residences,  as well as bridge loans to finance the acquisition and
rehabilitation of distressed multi-family  residential  properties.  At December
31, 1997, the Company's  multi-family  residential loan portfolio included $33.3
million of multi-family  residential  construction loans, of which $21.1 million
had been funded, and $38.1 million of acquisition and  rehabilitation  loans, of
which $34.8 million had been funded.

         From time to time the Company also originates loans secured by existing
multi-family  residences.  Although  the Company has  deemphasized  this type of
lending in recent  periods,  it  previously  was active in the  origination  and
securitization  of  such  loans.   During  1995,  1994  and  1993,  the  Company
securitized  multi-family  residential  loans  acquired by it with an  aggregate
principal   amount  of  $83.9   million,   $346.6  million  and  $67.1  million,
respectively.  The Company  subsequently  sold all of the  securities  backed by
these loans.

         The multi-family  residential and commercial real estate loans acquired
by the Company in recent periods  generally have principal  amounts between $3.0
million  and the Bank's  loan-to-one-borrower  limitation  (see  "Regulation-The
Bank-Loans-to-One-Borrower") and are secured by properties which in management's
view have good  prospects  for  appreciation  in value during the loan term.  In
addition,   the  Company  currently  is  implementing  a  program  to  originate
multi-family residential and commercial real estate loans with smaller principal
amounts  (generally  up to $3.0  million)  and  which may be  secured  by a wide
variety of such properties.

         The Company's large multi-family residential and commercial real estate
loans  generally  have  fixed  interest  rates,  terms of two to five  years and
payment  schedules which are based on  amortization  over 15 to 25 year periods.
The maximum  loan-to-value ratio generally does not exceed 80% of the stabilized
value of the  property and 88% of the total costs of the property in the case of
construction, refurbishment or rehabilitation loans.

         Multi-family  residential  and commercial real estate loans are secured
by a first priority lien on the real property,  all improvements thereon and, in
the  case of  hotel  loans,  all  fixtures  and  equipment  used  in  connection
therewith,  as well as a first  priority  assignment  of all  revenue  and gross
receipts generated in connection with the property.  The liability of a borrower
on  multi-family  residential  and  commercial  real estate  loans  generally is
limited to the  borrower's  interest in the  property,  except  with  respect to
certain specified circumstances.

         In addition to stated interest, the large multi-family  residential and
commercial  real  estate  loans  originated  by  the  Company  commonly  include
provisions  pursuant  to  which  the  borrower  agrees  to pay  the  Company  as
additional  interest  


                                       16

<PAGE>

on the loan an amount based on specified percentages  (generally between 10-38%)
of the net cash flow from the  property  during the term of the loan  and/or the
net proceeds from the sale or  refinancing  of the property upon maturity of the
loan.  Participating  interests  also may be obtained in the form of  additional
fees which must be paid by the borrower in  connection  with a prepayment of the
loan,  generally after an initial  lock-out period during which  prepayments are
prohibited.  The fees which  could be payable  by a  borrower  during  specified
periods  of the loan  consist  either of fixed  exit  fees or yield  maintenance
payments,  which are required to be paid over a specified  number of years after
the  prepayment  and are  intended to  increase  the yield to the Company on the
proceeds from the loan payoff to a level which is comparable to the yield on the
prepaid loan. At December 31, 1997, the Company's loan portfolio included $101.1
million of funded and unfunded  loans in which the Company  participates  in the
residual profits of the underlying real estate,  of which $89.0 million had been
funded.  The Company  generally  accounts for loans in which it  participates in
residual  profits  as loans  and not as  investments  in real  estate;  however,
because of concerns  raised by the staff of the OTS in this regard,  in December
1996 and during  1997 the Bank sold to the Company  subordinated,  participating
interests in a total of eleven acquisition,  development and construction loans,
which  interests  had an  aggregate  principal  balance of $18.0  million.  On a
consolidated  basis,  eight of these loans,  which  amounted to $64.3 million at
December 31, 1997,  were carried by the Company as  investments  in real estate.
The Bank (but not the Company) has agreed with the OTS to cease  origination  of
mortgage loans with profit participation features in the underlying real estate,
with the exception of existing commitments.

         Construction  loans  generally  have  terms of three to four  years and
interest  rates which float on a monthly  basis in  accordance  with  designated
reference rates. Payments during the term of the loan may be made to the Company
monthly on an  interest-only  basis.  The loan  amount may  include an  interest
reserve  which is  maintained by the Company and utilized to pay interest on the
loan during a portion of its term.

         Construction  loans are  secured by a first  priority  lien on the real
property,  all  improvements  thereon and all  fixtures  and  equipment  used in
connection therewith, as well as a first priority assignment of all revenues and
gross receipts generated in connection with the property. Construction loans are
made without  pre-leasing  requirements  or any  requirement  of a commitment by
another  lender to "take-out" the  construction  loan by making a permanent loan
secured by the property upon  completion  of  construction.  Disbursements  on a
construction loan are subject to a retainage percentage of 10% and are made only
after evidence that  available  funds have been utilized by the borrower and are
sufficient  to  pay  for  all  construction   costs  through  the  date  of  the
construction  advance  and funds  remain  in the  construction  budget  and from
sources other than the loan to complete construction of the project.

         The Company generally requires the general  contractor  selected by the
borrower,  which along with the general construction  contract is subject to the
Company's review and approval,  to provide payment and performance  bonds issued
by a surety  approved  by the  Company in an amount at least  equal to the costs
which are estimated to be necessary to complete  construction  of the project in
accordance  with the  construction  contract.  Moreover,  the Company  generally
conducts site inspections of projects under construction at least bi-monthly and
of completed projects at least semi-annually.

         Multi-family  residential,  commercial  real  estate  and  construction
lending  generally are considered to involve a higher degree of risk than single
family residential  lending because such loans involve larger loan balances to a
single  borrower  or  group of  related  borrowers.  In  addition,  the  payment
experience  on  multi-family   residential  and  commercial  real  estate  loans
typically is dependent on the successful operation of the project, and thus such
loans may be adversely affected to a greater extent by adverse conditions in the
real estate markets or in the economy generally.  Risk of loss on a construction
loan is  dependent  largely  upon the  accuracy of the  initial  estimate of the
property's  value at completion of construction or development and the estimated
cost  (including  interest)  of  construction,  as well as the  availability  of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns.  If the estimate of value proves to be
inaccurate,  the Company may be  confronted,  at or prior to the maturity of the
loan, with a project which, when completed, has a value which is insufficient to
ensure full repayment.  In addition to the foregoing,  multi-family  residential
and  commercial  real  estate  loans which are not fully  amortizing  over their
maturity and which have a balloon  payment due at their stated  maturity,  as is
generally the case with the Company's  multi-family  residential  and commercial
real estate loans,  involve a greater degree of risk than fully amortizing loans
because  the  ability of a borrower  to make a balloon  payment  typically  will
depend on its ability either to timely  refinance the loan or to timely sell the
security property. The ability of a borrower to accomplish these results will be
affected by a number of factors, including the level of available mortgage rates
at the  time of sale or  refinancing,  the  financial  condition  and  operating
history of the  borrower  and the  property  which  secures the loan,  tax laws,
prevailing   economic   conditions  and  the   availability   of  financing  for
multi-family residential and commercial real estate generally.


                                       17

<PAGE>

LOAN SERVICING ACTIVITIES

         During 1996, the Company  developed a program to provide loan servicing
and various other asset management and resolution services to third party owners
of  nonperforming  assets,  underperforming  assets and subprime  assets such as
Class B, C and D single family residential  mortgage loans.  Servicing contracts
entered into by the Company  provide for the payment to the Company of specified
fees and in some cases may include terms which allow the Company to  participate
in the profits  resulting  from the  successful  resolution  of the assets being
serviced.

         The Bank has been approved as a loan  servicer by HUD,  FHLMC and FNMA.
The Bank is rated a Tier 1 servicer and as a preferred  servicer  for  high-risk
mortgages  by  FHLMC,  the  highest  rating  categories,  and also is rated as a
"strong"  special  servicer for commercial  mortgage loans by Standard & Poor's,
which also is the highest  rating  category.  In addition,  the Bank is the only
servicer rated as a special servicer for residential mortgage loans.

         The following  tables set forth the number and amount of loans serviced
by the Company for others at the dates indicated:


<TABLE>
<CAPTION>
                                                                        December 31, 1997
                               -----------------------------------------------------------------------------------------------------
                                    Discount Loans            Subprime Loans             Other Loans                  Total
                               -----------------------   -----------------------   -----------------------   -----------------------
                                              No. of                    No. of                   No. of                     No. of
                                 Amount        Loans       Amount        Loans       Amount       Loans        Amount        Loans
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                      (Dollars in Thousands)
<S>                            <C>              <C>      <C>               <C>     <C>                       <C>              <C>   
Loans securitized and sold
  with recourse ............   $  624,591       11,148   $  555,914        4,976   $       --           --   $1,180,505       16,124
Loans serviced for third
  parties ..................    1,682,764       23,181    2,352,352       29,911      294,198        1,092    4,329,314       54,184
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                               $2,307,355       34,329   $2,908,266       34,887   $  294,198        1,092   $5,509,819       70,308
                               ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========


                                                                        December 31, 1996
                               -----------------------------------------------------------------------------------------------------
                                    Discount Loans            Subprime Loans             Other Loans                  Total
                               -----------------------   -----------------------   -----------------------   -----------------------
                                              No. of                    No. of                   No. of                     No. of
                                 Amount        Loans       Amount        Loans       Amount       Loans        Amount        Loans
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                      (Dollars in Thousands)

<S>                            <C>              <C>      <C>               <C>     <C>                       <C>              <C>   
Loans securitized and sold
  with recourse ............   $  204,586        4,796   $  202,766        1,879   $       --           --   $  407,352        6,675
Loans serviced for third
  parties ..................    1,209,535       22,511        6,784           60      294,427          917    1,510,746       23,488
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                               $1,414,121       27,307   $  209,550        1,939   $  294,427          917   $1,918,098       30,163
                               ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>


         The increases in the number and amount of loans serviced by the Company
for  others in recent  periods  were  primarily  attributable  to the  Company's
acquisition of rights to service  discount loans acquired from HUD by BlackRock,
directly and indirectly through the LLC, and servicing rights resulting from the
securitization  of both loans  acquired  from HUD by the Company and  BlackRock,
directly and indirectly  through the LLC, and subprime single family residential
loans held by the Company.

         The Company  generally  does not purchase  rights to service  loans for
others and, as a result,  capitalized  mortgage  servicing rights amount to only
$5.7 million and $2.4 million at December  31, 1997 and 1996,  respectively.  In
accordance  with Statement of Financial  Accounting  Standards  ("SFAS") No. 122
"Accounting  for  Mortgage  Servicing  Rights," the Company  amortizes  mortgage
servicing  rights  over the  estimated  weighted  average  life of the loans and
periodically evaluates its mortgage servicing rights for impairment based on the
fair value of those rights, which is recognized through a valuation allowance.

ASSET QUALITY

         The Company,  like all  financial  institutions,  is exposed to certain
credit risks related to the value of the  collateral  that secures its loans and
the ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's  loan and  investment  portfolios  and the Company's real
estate  owned for  potential  problems  and reports to the Board of Directors at
regularly scheduled meetings.

         NONPERFORMING  LOANS.  It is  the  Company's  policy  to  establish  an
allowance for  uncollectible  interest on loans in its loan  portfolio and loans
available for sale which are past due 90 days or more and to place such loans on
non-accrual  

                                       18

<PAGE>

status.  As a result,  the Company  currently  does not have any loans which are
accruing  interest but are past due 90 days or more. Loans also may be placed on
non-accrual  status when,  in the judgment of  management,  the  probability  of
collection of interest is deemed to be insufficient to warrant further  accrual.
When a loan is placed on  non-accrual  status,  previously  accrued  but  unpaid
interest is reversed by a charge to interest income.

         The  following  table sets forth  certain  information  relating to the
Company's nonperforming loans in its loan portfolio at the dates indicated:


<TABLE>
<CAPTION>
                                                                          December 31,
                                              --------------------------------------------------------------------
                                                 1997          1996          1995           1994            1993
                                              ---------     ---------     ---------       ---------      ---------
                                                                     (Dollars in Thousands)
<S>                                           <C>           <C>           <C>             <C>            <C>      
Nonperforming loans (1):
  Single family residential loans.........    $   1,575     $   2,123     $   2,923       $   2,478      $   2,347
  Multi-family residential loans..........        7,583(2)        106           731             152            664
  Consumer and other loans................           --            55           202              29            556
                                              ---------     ---------     ---------       ---------      ---------
    Total.................................    $   9,158     $   2,284     $   3,856       $   2,659      $   3,567
                                              =========     =========     =========       =========      =========

Nonperforming loans as a percentage of:
  Total loans (3).........................         3.36%         0.56%         1.27%           4.35%          3.71%
  Total assets............................         0.30%         0.09%         0.20%           0.21%          0.27%

Allowance for loan losses as 
 a percentage of:
    Total loans(3)........................         1.37%         0.87%         0.65%(4)        1.84%          0.99%
    Nonperforming loans...................        40.35%       154.24%        50.49%          40.28%         24.78%
</TABLE>


- -------------------
(1)   The Company  did not have any  nonperforming  loans in its loan  portfolio
      which were deemed troubled debt restructurings at the dates indicated.

(2)   The increase in nonperforming  multi-family  residential loans during 1997
      was  primarily  attributable  to a $7.4 million loan secured by a 127-unit
      condominium  building  located  in New York,  New York,  which  management
      believes is well collateralized.

(3)   Total loans is net of undisbursed loan proceeds.

(4)   The decrease in the  allowance  for loan losses as a  percentage  of total
      loans from 1994 was due to the significant  increase in the loan portfolio
      in 1995 as a result of the purchase of single family residential loans and
      the  origination of  multi-family  residential  and commercial real estate
      loans.

         The following  table presents a summary of the Company's  nonperforming
loans in the loans available for sale portfolio at the dates indicated:


<TABLE>
<CAPTION>
                                                                          December 31,
                                                1997           1996           1995           1994            1993
                                             ----------     ----------     ----------     ----------     ----------
                                                                     (Dollars in Thousands)
<S>                                          <C>            <C>            <C>            <C>            <C>       
 Nonperforming loans:
  Single family loans..................      $   13,509     $   14,409     $    7,833     $       --     $       --
  Consumer loans.......................              25             36            100            120            884
                                             ----------     ----------     ----------     ----------     ----------
                                             $   13,534     $   14,445          7,933     $      120     $      884
                                             ==========     ==========     ==========     ==========     ==========
 Nonperforming loans a percentage of:
  Total loans available for sale                   7.64%         11.43%           3.2%           .12%           .87%
  Total assets                                      .44%           .58%           .58%           .01%           .06%
</TABLE>


                                       19

<PAGE>

         For  information  relating  to  the  payment  status  of  loans  in the
Company's discount loan portfolio,  see "Business-Discount  Loan Acquisition and
Resolution Activities."

         REAL  ESTATE  OWNED.  Properties  acquired  through  foreclosure  or by
deed-in-lieu  thereof are valued at the lower of  amortized  cost or fair value.
Properties   included  in  the  Company's   real  estate  owned   portfolio  are
periodically  re-evaluated to determine that they are being carried at the lower
of cost or fair value less  estimated  costs to sell.  Holding  and  maintenance
costs  related to  properties  are recorded as expenses in the period  incurred.
Deficiencies   resulting  from  valuation   adjustments  to  real  estate  owned
subsequent to acquisition  are recognized as a valuation  allowance.  Subsequent
increases  related to the  valuation  of real estate  owned are  reflected  as a
reduction  in the  valuation  allowance,  but  not  below  zero.  Increases  and
decreases  in the  valuation  allowance  are  charged  or  credited  to  income,
respectively.  Accumulated  valuation  allowances  amounted to $12.3  million at
December 31, 1997 as compared to $11.5 million at December 31, 1996.

         The  following  table sets forth  certain  information  relating to the
Company's real estate owned at the dates indicated.


<TABLE>
<CAPTION>
                                                                            December 31,
                                                        ----------------------------------------------------
                                                          1997       1996       1995       1994       1993
                                                        --------   --------   --------   --------   --------
                                                                       (Dollars in Thousands)
<S>                                                     <C>        <C>        <C>        <C>        <C>     
Discount loan portfolio:
   Single family residential.........................   $ 76,409   $ 49,728   $ 75,144   $ 86,426   $ 33,369
   Multi-family residential .........................     16,741     14,046     59,932         --         --
   Commercial real estate ...........................     71,339     36,264     31,218      8,801         --
                                                        --------   --------   --------   --------   --------
        Total .......................................    164,489    100,038    166,294     95,227     33,369
Loan portfolio ......................................        357        592        262      1,440        128
Loans available for sale.............................      2,419      3,074         --         --         -- 
                                                        --------   --------   --------   --------   --------
        Total .......................................   $167,265   $103,704   $166,556   $ 96,667   $ 33,497
                                                        ========   ========   ========   ========   ========
</TABLE>


         The following table sets forth certain geographical information by type
of property at December 31, 1997 related to the Company's real estate owned.


<TABLE>
<CAPTION>
                                                           Multi-family Residential
                               Single Family Residential         and Commercial                 Total
                               -------------------------   -------------------------   ------------------------
                                                No. of                      No. of                     No. of
                                Amount        Properties    Amount        Properties     Amount      Properties
                               --------       ----------   --------       ----------   ---------     ----------
                                                           (Dollars in Thousands)
<S>                            <C>                <C>      <C>                 <C>     <C>                <C>
California...............      $ 24,717           314      $ 28,703            41      $  53,420          355
Florida..................         3,080            53        14,181            20         17,261           73
Connecticut..............         3,945            63        13,075            11         17,020           74
New York.................        11,099           216         2,101            13         13,201          229
New Jersey...............         7,536           105         3,555            12         11,091          117
Other....................        28,451(1)        604        26,822(2)         53         55,272          657
                               --------      --------      --------      --------      ---------     --------
 Total...................      $ 78,828         1,355      $ 88,437           150      $ 167,265        1,505
                               ========      ========      ========      ========      =========     ========
</TABLE>

- -------------------
(1)   Consists  of  properties  located  in  40  other  states,  none  of  which
      aggregated over $5.6 million in any one state.

(2)   Consists  of  properties  located  in  20  other  states,  none  of  which
      aggregated over $7.5 million in any one state.


                                       20

<PAGE>

         The  following  table sets forth the  activity in the real estate owned
during the periods indicated.


<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                   ---------------------------------------------------------------------------
                                             1997                      1996                     1995
                                   ------------------------  ------------------------- -----------------------
                                                   No. of                   No. of                     No of
                                     Amount      Properties    Amount     Properties     Amount     Properties
                                   ---------     ----------  ---------    ----------   ---------    ----------
                                                            (Dollars in Thousands)
<S>                                <C>                <C>    <C>              <C>      <C>              <C>  
Balance at beginning of period.... $ 103,704          825    $ 166,556        1,070    $  96,667        1,018
Properties acquired through
  foreclosure or deed-in-lieu
  thereof ........................   205,621        1,656      102,098          918      185,174          970
Acquired in connection with
  acquisitions of discount loans..    38,486          545        2,529           12       24,617          311
Sales ............................  (179,693)      (1,521)    (160,592)      (1,175)    (139,233)      (1,229)
Change in allowance ..............      (853)          --       (6,887)          --         (669)          --
                                   ---------    ---------    ---------    ---------    ---------    ---------
Balance at end of period ......... $ 167,265        1,505    $ 103,704          825    $ 166,556        1,070
                                   =========    =========    =========    =========    =========    =========
</TABLE>


         The following  table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.


<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ----------------------------------------------------
                                                             1997               1996                1995
                                                        ------------        ------------        ------------
                                                                        (Dollars in Thousands)
<S>                                                     <C>                 <C>                 <C>         
One to two months.................................      $     83,144        $     17,695        $     25,398
Three to four months..............................            28,912              15,291              22,672
Five to six months................................            20,929              14,348              25,742
Seven to 12 months................................            23,621              13,004              76,782
Over 12 months....................................            10,659              43,366              15,962
                                                        ------------        ------------        ------------
                                                        $    167,265        $    103,704        $    166,556
                                                        ============        ============        ============
</TABLE>


         The average  period  during which the Company held the $179.7  million,
$160.6 million and $139.2 million of real estate owned which was sold during the
years ended December 31, 1997,  1996 and 1995,  respectively,  was 9 months,  11
months and 8 months, respectively.

         Although  the  Company   evaluates  the   potential   for   significant
environmental problems prior to acquiring or originating a loan, there is a risk
for any mortgage loan,  particularly a multi-family  residential  and commercial
real estate loan, that hazardous substances or other environmentally  restricted
substances  could be discovered on the related real estate.  In such event,  the
Company might be required to remove such substances from the affected properties
or to engage in abatement procedures at its sole cost and expense.  There can be
no assurance that the cost of such removal or abatement  will not  substantially
exceed  the  value of the  affected  properties  or the  loans  secured  by such
properties,  that the Company  would have  adequate  remedies  against the prior
owners or other responsible  parties or that the Company would be able to resell
the affected  properties  either prior to or  following  completion  of any such
removal or abatement procedures.  If such environmental  problems are discovered
prior to  foreclosure,  the Company  generally will not foreclose on the related
loan;  however,  the value of such  property as  collateral  will  generally  be
substantially  reduced,  and as a result,  the  Company  may  suffer a loss upon
collection of the loan.

         From time to time,  the Company makes loans to finance the sale of real
estate  owned.  At December  31, 1997,  such loans  amounted to $8.4 million and
consisted of $4.4 million of single family  residential  loans,  $3.7 million of
multi-family  residential  loans and $339,000 of  commercial  loans.  All of the
Company's  loans to finance the sale of real  estate  owned were  performing  in
accordance with their terms at December 31, 1997.

         CLASSIFIED  ASSETS.  OTS regulations  require that each insured savings
association  classify its assets on a regular basis. In addition,  in connection
with  examinations  of insured  associations,  OTS examiners  have  authority to
identify  problem  assets and, if  appropriate,  require them to be  classified.
There are three  classifications for problem assets:  "substandard,"  "doubtful"
and "loss."  Substandard  assets  have one or more  defined  weaknesses  and are
characterized  by the distinct  possibility  that the insured  institution  will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses  make  collection  or  liquidation  in full on the basis of currently
existing  facts,  conditions  and  values  questionable,  and  there  is a  high
possibility 

                                       21

<PAGE>

of loss. An asset classified as a loss is considered  uncollectible  and of such
little value that  continuance as an asset of the  institution is not warranted.
Another  category  designated  "special  mention" also must be  established  and
maintained for assets which do not currently expose an insured  institution to a
sufficient degree of risk to warrant classification as substandard,  doubtful or
loss but do  possess  credit  deficiencies  or  potential  weaknesses  deserving
management's  close  attention.  Assets  classified as  substandard  or doubtful
require the institution to establish  general  allowances for loan losses. If an
asset or portion thereof is classified as a loss, the insured  institution  must
either  establish  specific  allowances for loan losses in the amount of 100% of
the portion of the asset classified as a loss or charge off such amount. In this
regard, the Company establishes required reserves and charges off loss assets as
soon as  administratively  practicable.  General loss allowances  established to
cover possible losses related to assets  classified  substandard or doubtful may
be included in determining an institution's  regulatory capital,  while specific
valuation allowances for loan losses do not qualify as regulatory capital.

         In 1996,  based upon discussions with the OTS and as a result of an OTS
bulletin  issued on December 13, 1996 entitled  "Guidance on the  Classification
and Regulatory  Reporting of Certain  Delinquent Loans and Other Credit Impaired
Assets," the Company has  classified all discount loans that are 90 or more days
contractually  past due, not otherwise  classified,  as special  mention and all
real estate owned, not otherwise  classified,  as special  mention.  The Company
also modified its policy for classifying  nonperforming  discount loans and real
estate owned related to its discount  loan  portfolio  ("nonperforming  discount
assets") to take into  account  both the holding  period of such assets from the
date of acquisition  and the ratio of book value to market value of such assets.
All  nonperforming  discount  assets  which are held 15 months or more after the
date of acquisition are classified  substandard;  nonperforming  discount assets
held 12  months  to  less  than 15  months  from  the  date of  acquisition  are
classified  as  substandard  if a ratio of book value to market  value is 80% or
more; and  nonperforming  discount assets held less than 12 months from the date
of acquisition  are classified as substandard if they have a ratio of book value
to market value of more than 85%. In  addition,  nonperforming  discount  assets
which are  performing  for a period of time  subsequent  to  acquisition  by the
Company  are   classified  as   substandard   at  the  time  such  loans  become
nonperforming.  The  Company  also  modified  its  classified  assets  policy to
classify all real estate owned which is not cash flowing and which has been held
for  more  than  15  months  and  three  years  as  substandard   and  doubtful,
respectively.  The Company's past experience  indicates that classified discount
assets do not necessarily correlate to probability or severity of loss.

         Excluding  assets which have been classified loss and fully reserved by
the  Company,  the  Company's  classified  assets at December 31, 1997 under the
above policy consisted of $404.1 million of assets classified as substandard and
$577,000 of assets classified as doubtful. In addition, at the same date, $616.1
million of assets were designated as special mention.

         Substandard  assets  at  December  31,  1997  under  the  above  policy
consisted  primarily of $242.4 million of loans and real estate owned related to
the Company's discount single family residential loan program, $150.5 million of
loans and real estate owned related to the Company's  discount  commercial  real
estate loan  program  and $9.7  million of subprime  single  family  residential
loans.  Special  mention assets at December 31, 1997 under the policy  consisted
primarily  of $559.3  million and $56.8  million of loans and real estate  owned
related  to the  Company's  discount  single  family  residential  and  discount
commercial real estate loan programs, respectively.

         ALLOWANCES  FOR LOSSES.  The Company  maintains an  allowance  for loan
losses  for each of its loan  and  discount  loan  portfolios  at a level  which
management  considers adequate to provide for potential losses in each portfolio
based upon an evaluation of known and inherent risks in such portfolios.


                                       22

<PAGE>

         The following  table sets forth the breakdown of the allowance for loan
losses on the  Company's  loan  portfolio  and discount  loan  portfolio by loan
category  and the  percentage  of loans in each  category  to total loans in the
respective portfolios at the dates indicated:


<TABLE>
<CAPTION>
                                                                December 31,
                              --------------------------------------------------------------------------------------
                                    1997              1996             1995              1994              1993
                              ---------------   ---------------   ---------------   --------------   ---------------
                               Amount    %       Amount     %     Amount     %      Amount     %     Amount      %
                              -------  ------   -------   -----   ------   ------   ------   -----   ------    -----
                                                           (Dollars in Thousands)
<S>                           <C>        <C>    <C>        <C>    <C>        <C>    <C>       <C>    <C>        <C>  
Loan portfolio:
Single family residential   
  loans.....................  $   512    15.7%  $   520    14.6%  $  346     22.2%  $  615    52.2%  $  174     31.6%
Multi-family residential
  loans.....................    2,163    24.2       673    13.5      683     14.3       --     2.9      333     40.9
Commercial real estate        
  loans.....................    1,009    60.0     2,299    71.3      875     62.6      218    42.3      218     23.7
Commercial non-mortgage
  loans.....................       --      --        11     0.5       --      --        --      --       --       --
Consumer loans..............       11     0.1        20     0.1       43      0.9      238     2.6      159      3.8
                              -------  ------   -------   -----   ------   ------   ------   -----   ------    -----
  Total.....................  $ 3,695   100.0%  $ 3,523   100.0%  $1,947    100.0%  $1,071   100.0%  $  884    100.0%
                              =======  ======   =======   =====   ======   ======   ======   =====   ======    =====

Discount loan
  portfolio(1):
Single family residential   
  loans.....................  $15,017    50.2%  $ 3,528    38.4%  $   --       --%  $   --      --%  $   --       --%
Multi-family residential      
  loans.....................    2,616    10.7     3,124    26.0       --       --       --      --       --       --
Commercial real estate        
  loans.....................    5,860    39.0     4,886    35.4       --       --       --      --       --       --
Other loans.................       --     0.1        --     0.2       --       --       --      --       --       --
                              -------  ------   -------   -----   ------   ------   ------   -----   ------    -----
  Total...................    $23,493   100.0%  $11,538   100.0%  $   --       --%  $   --      --%  $   --       --%
                              =======  ======   =======   =====   ======   ======   ======   =====   ======    =====
</TABLE>


- -------------------
(1)   The Company did not maintain an allowance  for loan losses on its discount
      loan portfolio prior to 1996.

         The  allocation of the  allowance to each  category is not  necessarily
indicative  of future  losses and does not restrict the use of the  allowance to
absorb losses in any other category.

         The following table sets forth an analysis of activity in the allowance
for loan losses  relating to the  Company's  loan  portfolio  during the periods
indicated:


<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                         --------------------------------------------------------------------
                                           1997           1996           1995           1994           1993
                                         --------       --------       --------       --------       --------
                                                                (Dollars in Thousands)
<S>                                      <C>            <C>            <C>            <C>            <C>     
   Balance at beginning of period....    $  3,523       $  1,947       $  1,071       $    884       $    752
   Provision for loan losses.........         325          1,872          1,121             --             --
   Charge-offs:
     Single family residential loans         (100)          (261)          (131)          (302)          (150)
     Multi-family residential loans..          --             (7)            --             --           (170)
     Commercial real estate loans....          --             --            (40)            --             --
     Consumer loans..................         (53)           (28)           (92)          (170)           (16)
                                         --------       --------       --------       --------       --------
      Total charge-offs..............        (153)          (296)          (263)          (472)          (336)
   Recoveries:
     Single family residential loans           --             --              3            410            346
     Multi-family residential loans..          --             --             --             --             --
     Commercial real estate loans....          --             --             15             --             --
     Consumer loans..................          --             --             --            249            122
                                         --------       --------       --------       --------       --------
      Total recoveries...............          --             --             18            659            468
                                         --------       --------       --------       --------       --------
      Net (charge-offs) recoveries...        (153)          (296)          (245)           187            132
                                         --------       --------       --------       --------       --------
   Balance at end of period..........    $  3,695       $  3,523       $  1,947       $  1,071       $    884
                                         ========       ========       ========       ========       ========
   Net charge-offs (recoveries) as a
     percentage of average loan
     portfolio, net..................        0.04%          0.09%          0.19%         (0.28)%        (0.10)%
</TABLE>


                                       23

<PAGE>

         The following table sets forth an analysis of activity in the allowance
for loan losses  relating to the Company's  discount loan  portfolio  during the
periods indicated:

                                                      Year Ended December 31,
                                                      -----------------------
                                                        1997         1996
                                                      --------     ----------
                                                       (Dollars in Thousands)

Balance at beginning of period ....................   $ 11,538     $       --
Provision for loan losses .........................     31,894         20,578
Charge-offs:
  Single family residential loans .................    (13,281)        (7,009)
  Multi-family residential loans ..................     (2,056)          (704)
  Commercial real estate loans ....................     (5,012)        (1,503)
  Other loans .....................................         --             --
                                                      --------     ----------
     Total charge-offs ............................    (20,349)        (9,216)
                                                      --------     ----------
Recoveries:
  Single family residential loans .................        410            176
  Multi-family residential loans ..................         --             --
  Commercial real estate loans ....................         --             --
  Consumer loans ..................................         --             --
                                                      --------     ----------
     Total recoveries .............................        410            176
                                                      --------     ----------
     Net (charge-offs) ............................    (19,939)        (9,040)
                                                      --------     ----------
Balance at end of period ..........................   $ 23,493     $   11,538
                                                      ========     ==========
Net charge-offs as a percentage of average 
  discount loan  portfolio ........................       1.55%          1.34%

INVESTMENT ACTIVITIES

         GENERAL.  The investment  activities of the Company  currently  include
investments in mortgage-related securities, investment securities and low-income
housing tax credit  interests.  The investment  policy of the Company,  which is
established by the Investment  Committee and approved by the Board of Directors,
is designed  primarily to provide a portfolio of diversified  instruments  while
seeking to optimize net interest  income  within  acceptable  limits of interest
rate risk, credit risk and liquidity.

         MORTGAGE-BACKED AND RELATED SECURITIES.  From time to time, the Company
invests   in   mortgage-backed   and   mortgage-related   securities.   Although
mortgage-backed and  mortgage-related  securities  generally yield less than the
loans that back such securities  because of costs  associated with their payment
guarantees  or  credit  enhancements,  such  securities  are  more  liquid  than
individual  loans and may be used to  collateralize  borrowings  of the Company.
Other mortgage-backed and mortgage-related  securities indirectly bear the risks
of the underlying loans, such as prepayment risk (interest-only  securities) and
credit  risk  (subordinated  interests),  and are  generally  less  liquid  than
individual loans.

         Mortgage-related  securities  include  senior and  subordinate  regular
interests  and  residual  interests  in  collateralized   mortgage   obligations
("CMOs"),  including CMOs which have qualified as REMICs.  The regular interests
in some CMOs are like  traditional  debt  instruments  because  they have stated
principal amounts and traditionally defined  interest-rate terms.  Purchasers of
certain  other  interests in REMICs are  entitled to the excess,  if any, of the
issuer's cash inflows,  including reinvestment earnings,  over the cash outflows
for debt  service  and  administrative  expenses.  These  interests  may include
instruments  designated  as  residual  interests,   which  represent  an  equity
ownership  interest in the underlying  collateral,  subject to the first lien of
the investors in the other classes of the REMIC.

         A  senior-subordinated  structure  often is used with  CMOs to  provide
credit  enhancement for securities  which are backed by collateral  which is not
guaranteed  by  FNMA,  FHLMC or the  Government  National  Mortgage  Association
("GNMA"). These structures divide mortgage pools into two risk classes: a senior
class and one or more  subordinated  classes.  The subordinated  classes provide
protection  to the senior class.  When cash flow is impaired,  debt service goes
first to the holders of senior  classes.  In addition,  incoming cash flows also
may be held in a  reserve  fund to meet any  future  shortfalls  of cash flow to
holders of senior classes.  The holders of subordinated  classes may not receive
any principal repayments until the holders of senior classes have been paid and,
when  appropriate,  until a specified level of funds has been contributed to the
reserve fund.


                                       24

<PAGE>

         Interest-only  and  principal-only  securities  are so-called  stripped
mortgage-related  securities,  in which interest  coupons may be stripped from a
mortgage-related  security to create an  interest-only  ("IO") strip,  where the
investor receives all of the interest cash flows and none of the principal,  and
a principal-only  ("PO") strip, where the investor receives all of the principal
cash  flows  and  none of the  interest.  Inverse  floating  rate  interest-only
("Inverse  IO")   securities  also  have  coupons  which  are  stripped  from  a
mortgage-related  security.  However,  Inverse IOs have coupons  whose  interest
rates change  inversely  with,  and often as a multiple of, a specialized  index
such as the one-month London Interbank Offered Rate ("LIBOR").

         The  following  table  sets  forth  the  fair  value  of the  Company's
mortgage-backed  and  related  securities   available  for  sale  at  the  dates
indicated.


<TABLE>
<CAPTION>
                                                                       December 31,
                                                      ---------------------------------------------
                                                          1997             1996             1995
                                                      ----------        ----------       ----------
                                                                  (Dollars in Thousands)
<S>                                                   <C>               <C>              <C>       
Mortgage-related  securities:
   Single family residential:
     CMOs (AAA-rated)............................     $  160,451        $   73,935       $  138,831
     Interest only:

       AAA-rated.................................         13,863             1,173               --
       FHLMC.....................................         64,745            47,571            2,182
       FNMA......................................         59,715            49,380            9,592
       GNMA......................................         29,766                --               --

     Principal only..............................             --                --            8,218
     Subordinates................................         67,830            19,164           27,310
     PAC securities .............................             --                --              574
     REMIC residuals.............................         15,693            20,560              472
     Futures contracts and swaps.................            (94)           (1,921)          (1,598)
                                                      ----------        ----------       ----------
       Total.....................................        411,969           209,862          185,581
                                                      ----------        ----------       ----------

   Multi-family residential and commercial:
     Interest only:
       AAA-rated.................................          1,030            83,590          103,932
       FNMA......................................             --                --            5,261
       Non-investment grade......................          3,477             3,799               --
     Subordinates................................         14,048            57,534           42,954
     Futures contracts...........................             --              (780)            (248)
                                                      ----------        ----------       ----------
       Total.....................................         18,555           144,143          151,899
                                                      ----------        ----------       ----------
          Total..................................     $  430,524        $  354,005       $  337,480
                                                      ==========        ==========       ==========
</TABLE>


         At December 31, 1997, the carrying value of the Company's investment in
IO strips  amounted to $172.6  million.  The Company invests in IO strips and PO
strips  from time to time  based on its  capital  position,  interest  rate risk
profile  and the market  for such  securities.  IO strips and PO strips  exhibit
considerably   more  price  volatility  than  mortgages  or  ordinary   mortgage
pass-through  securities,  due in part to the  uncertain  cash flows that result
from changes in the prepayment rates of the underlying mortgages. In the case of
IO strips in particular,  increased prepayments of the underlying mortgages as a
result of a decrease in market  interest  rates or other factors can result in a
loss of all or part of the purchase price of such  security,  although IO strips
relating to mortgage-related  securities backed by multi-family  residential and
commercial  real estate  loans  (which  amounted  to $4.5  million of the $172.6
million of IO strips owned by the Company at December 31, 1997)  generally  have
provisions which prohibit and/or provide  economic  disincentives to prepayments
for specified  periods.  The Company  generally  attempts to offset the interest
rate risk associated with a particular IO strip or PO strip by purchasing  other
securities.  At December  31, 1997,  all of the  Company's IO strips were either
issued by FHLMC, FNMA or GNMA or rated AAA by national rating agencies, with the
exception of IO  securities  with an aggregate  carrying  value of $3.5 million,
which were rated investment grade below this level.

         The Company generally retains subordinate  securities,  subordinate IOs
and  REMIC  residual  securities,   which  are  certificated,   related  to  its
securitization  of  loans.  Subordinate  securities,  subordinate  IOs and REMIC
residual


                                       25

<PAGE>

securities  retained represent the present value of the right to the excess cash
flows generated by the securitized  loans that represent the difference  between
(a)  principal and interest at the stated rate paid by borrowers and (b) the sum
of (i) principal and pass-through interest paid to third-party  investors,  (ii)
trustee fees, (iii) third-party  credit  enhancement fees (if applicable),  (iv)
stipulated servicing fees and (v) estimated loan portfolio losses. The Company's
right  to  receive  this  excess  cash  flow may  begin  after  certain  reserve
requirements have been met, which are specific to each securitization and may be
used as a means of credit enhancement.  The Company determines the present value
of anticipated cash flows at the time each  securitization  transaction  closes,
utilizing valuation assumptions appropriate for each particular transaction.

         The  significant  valuation  assumptions are related to the anticipated
average  lives of the loans  sold,  the  anticipated  prepayment  speeds and the
anticipated  credit losses  related  thereto.  In order to determine the present
value of this excess cash flow, the Company currently applies a discount rate of
between 18% and 28% to the projected cash flows.

         The annual  prepayment rate of the  securitized  loans is a function of
full and partial  prepayments and defaults.  The Company makes assumptions as to
the prepayment  rates of the underlying  loans,  which the Company  believes are
reasonable, in estimating fair values of the subordinate securities, subordinate
IOs and REMIC  residual  securities  retained.  During fiscal 1997,  the Company
utilized  proprietary  prepayment  curves generated by the Company  (reaching an
approximate maximum annual rate of 28%).

         In its estimates of annual loss rates, the Company utilizes assumptions
that it believes are reasonable.  The Company estimates annual losses of between
0.25% and 1.20% of the underlying loans.

         The Company classifies its subordinate securities,  subordinate IOs and
REMIC  residual   securities  retained  as  available  for  sale  securities  in
accordance with SFAS No. 115. Securities  available for sale are carried at fair
value with the net unrealized  gains or losses reported as a separate  component
of stockholders' equity, net of tax. The determination of fair value is based on
the previously mentioned valuation basis and on broker valuation estimates.  The
subordinate  securities,  subordinate IOs and REMIC residual securities retained
are amortized based on the interest method.

         The  Company  retains  the  right to  service  loans it  originates  or
purchases and then subsequently securitizes.  Fees for servicing loans are based
on a  stipulated  percentage  which is equal to  between  0.50% and 0.60% of the
unpaid  principal  balance of the  underlying  loans.  The Company  recognizes a
servicing asset as part of its gain on securitized loan sales.

         The Company periodically assesses the carrying value of its subordinate
securities,  subordinate IOs and REMIC residual  securities  retained as well as
the  servicing  assets  for  impairment.  There  can be no  assurance  that  the
Company's  estimates  used to  determine  the gain on  securitized  loan  sales,
subordinate  securities,  subordinate IOs and REMIC residual securities retained
and servicing  assets  valuations  will remain  appropriate for the life of each
securitization.  If actual loan  prepayments  or defaults  exceed the  Company's
estimates,   the  carrying  value  of  the  Company's  subordinate   securities,
subordinate IOs and REMIC residual  securities  retained and/or servicing assets
may be decreased or the Company may increase its allowance  for possible  credit
losses on loans  sold  through  a charge  against  earnings  during  the  period
management  recognizes  the  disparity.  Other  factors  may  also  result  in a
writedown of the Company's  subordinate  securities,  subordinate  IOs and REMIC
residual  securities retained in subsequent periods. As of December 31, 1997 the
Company determined that no such impairment existed.

         At December 31, 1997, the carrying value of the Company's investment in
subordinate  classes of  mortgage-related  securities amounted to $81.9 million,
and  included  $62.8  million  of  subordinated   classes  of   mortgage-related
securities  acquired in  connection  with the  securitization  activities of the
Company and $19.1 million  acquired from the LLC in 1996 in connection  with its
securitization of HUD loans.  During 1997, the Company acquired $50.1 million of
subordinate classes of mortgage-related  securities,  all of which were acquired
in  connection  with the  Company's  securitizations  of loans.  For  additional
information see "Business - Discount Loan Acquisition and Resolution  Activities
- -  Activity  in  the  Discount   Loan   Portfolio"   and   "Business  -  Lending
Activities-Single Family Residential Loans." At December 31, 1997, the Company's
subordinate   securities  supported  senior  classes  of  securities  having  an
outstanding  principal  balance of $1.77 billion.  Because of their  subordinate
position,  subordinate classes of mortgage-related  securities involve more risk
than the other classes.


                                       26

<PAGE>

         During 1996, the Company retained  residual  securities in REMICs which
were formed in connection with the  securitization and sale of $211.2 million of
subprime single family residential loans in two underwritten public offerings as
partial payment for the loans sold by it. These REMIC residual  securities had a
carrying  value of $15.7  million at  December  31,  1997 and  supported  senior
classes of securities having an outstanding principal balance of $135.6 million,
which provide credit support similar to the senior-subordinated  structure. Cash
flows  supporting  the REMIC  residuals are generated by the amount by which the
interest collected on the underlying  mortgage loans exceeds the interest due on
the senior  securities.  See  "Business  - Lending  Activities  - Single  family
Residential Loans."

         The Company generally does not intend to purchase  subordinate  classes
of mortgage-related  securities created by unaffiliated parties. The Company may
retain subordinated  classes resulting from the securitization of assets held by
it directly or indirectly  through the Bank and  investments in joint  ventures,
although  it is  intended  that any  such  securities  held by the Bank  will be
distributed to the Company as a dividend  subject to its ability to declare such
dividends under applicable limitations.

         Under a regulatory  bulletin  issued by the OTS, a  federally-chartered
savings  institution  such as the Bank  generally  may  invest  in  "high  risk"
mortgage  securities only to reduce its overall  interest rate risk and after it
has  adopted  various   policies  and   procedures,   although  under  specified
circumstances such securities also may be acquired for trading purposes. A "high
risk"  mortgage  security  for this purpose  generally  is any  mortgage-related
security  which  meets one of three  tests  which are  intended  to measure  the
average  life or price  volatility  of the  security  in relation to a benchmark
fixed rate, 30-year mortgage-backed pass-through security. At December 31, 1997,
the Bank  held  mortgage-related  securities  with a  carrying  value of  $141.1
million  (amortized cost of $137.0 million) which were classified as "high-risk"
mortgage securities by the OTS.

         The expected actual maturity of a mortgage-backed  and related security
is  shorter  than its  stated  maturity  due to  prepayments  of the  underlying
mortgages.  Prepayments that are faster than anticipated may shorten the life of
the security and adversely affect its yield to maturity. The yield is based upon
the  interest  income and the  amortization  of any premium or  accretion of any
discount related to the  mortgage-backed  and related  security.  Prepayments on
mortgage-backed  and  related  securities  have the effect of  accelerating  the
amortization of premiums and accretion of discounts, which decrease and increase
interest  income,  respectively.  Although  prepayments of underlying  mortgages
depend on many factors,  including the type of mortgages,  the coupon rate,  the
age of  mortgages,  the  geographical  location  of the  underlying  real estate
collateralizing  the mortgages and general levels of market interest rates,  the
difference  between  the  interest  rates on the  underlying  mortgages  and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments.  During periods of falling mortgage  interest rates,
if the coupon rate of the underlying  mortgages  exceeds the  prevailing  market
interest rates offered for mortgage loans,  refinancing  generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Similarly,  during periods of increasing interest rates,  refinancing  generally
decreases, thus lengthening the estimated maturity of mortgage loans.

         INVESTMENT  SECURITIES.  At December  31, 1997,  investment  securities
consisted  primarily  of  the  Company's  investment  in  OAIC  and  a  required
investment in FHLB stock and investments in other common stocks.  Non-marketable
equity securities held for investment are stated at cost because the Company has
the  ability  and  the  intent  to  hold  them to  maturity.  Marketable  equity
securities  are designated as available for sale and are carried at market value
based on quoted market prices.  Net unrealized gains or losses are reported as a
separate component of stockholders' equity. Unrealized losses on securities that
reflect a decline in value which is other than temporary, if any, are charged to
earnings.

                                       27

<PAGE>
         The following table sets forth the Company's  investment  securities at
the dates indicated.


<TABLE>
<CAPTION>
                                                                   December 31,
                                               ---------------------------------------------------
                                                   1997                1996               1995
                                               ------------       ------------        ------------
                                                              (Dollars in Thousands)
Marketable equity securities:
<S>                                            <C>                <C>                 <C>         
   Other common stocks (1)...............      $     46,272       $         --        $         --
Non-marketable equity securities:
   U.S. Government securities............                --                 --              10,036
   FHLB stock(2).........................            10,825              8,798               8,520
   Limited partnership interests (3).....             2,470                103                 109
                                               ------------       ------------        ------------
     Total...............................      $     59,567       $      8,901        $     18,665
                                               ============       ============        ============
</TABLE>


- -------------------
(1)   Balance at December 31, 1997  consisted  primarily of 1,715,000  shares of
      stock of OAIC.

(2)   As a member of the FHLB of New York,  the Bank is required to purchase and
      maintain  stock in the FHLB of New York in an amount  equal to at least 1%
      of  its  aggregate  unpaid  residential   mortgage  loans,  home  purchase
      contracts and similar  obligations  at the beginning of each year or 5% of
      borrowings, whichever is greater.

(3)   Balance at  December  31,  1997  consisted  primarily  of 160,000  limited
      partnership units of OPLP.

         TRADING  SECURITIES.  When  securities are purchased with the intent to
resell in the near term, they are classified as trading  securities and reported
on the Company's  consolidated  statement of financial condition as a separately
identified  trading  account.  Securities in this account are carried at current
market value. All trading securities are  marked-to-market,  and any increase or
decrease in unrealized appreciation or depreciation is included in the Company's
consolidated statements of operations.

         Under guidelines approved by the Board of Directors of the Company, the
Company  is  authorized  to  hold  a  wide  variety  of  securities  as  trading
securities,  including U.S. Government and agency securities and mortgage-backed
and  mortgage-related  securities.  The  Company  also  is  authorized  by  such
guidelines to use various  hedging  techniques  in  connection  with its trading
activities,  as well as to effect short sales of  securities,  pursuant to which
the Company  sells  securities  which are to be acquired by it at a future date.
Under  current  guidelines,  the amount of  securities  held by the Company in a
trading  account may not exceed on a gross basis the greater of $200  million or
15% of the  Company's  total  assets,  and the  total net  amount of  securities
(taking into account any related hedge or buy/sell agreement relating to similar
securities) may not exceed the greater of $150 million or 10% of total assets.

         The Company's securities held for trading at December 31, 1996 amounted
to $75.6  million and  represented  one  AAA-rated CMO which was sold in January
1997. The Company held no securities for trading at December 31, 1997.

         INVESTMENTS  IN LOW-INCOME  HOUSING TAX CREDIT  INTERESTS.  The Company
invests in low-income  housing tax credit  interests  primarily  through limited
partnerships for the purpose of obtaining Federal income tax credits pursuant to
Section 42 of the Code,  which  provides a tax credit to  investors in qualified
low-income  rental housing that is constructed,  rehabilitated or acquired after
December 31, 1986. To be eligible for housing tax credits,  a property generally
must first be  allocated  an amount of tax credits by the tax credit  allocating
agency,  which in most cases also serves as the housing finance  agency,  of the
state in which the property is located.  If the property is to be constructed or
rehabilitated,  it must be  completed  and placed in service  within a specified
time,  generally  within  two  years  after  the  year in which  the tax  credit
allocation  is  received.  A  specified  portion  of the  apartment  units  in a
qualifying  project may be rented only to  qualified  tenants for a period of 15
years,  or a portion of any  previously  claimed tax credits  will be subject to
recapture, as discussed below.

         At December 31, 1997,  the Company's  investment in low-income  housing
tax  credit  interests  amounted  to $128.6  million or 4% of total  assets,  as
compared  to $93.3  million or 4% of total  assets at  December  31,  1996.  The
Company's 

                                       28

<PAGE>

investments in low-income  housing tax credit  interests are made by the Company
indirectly through  subsidiaries of the Company,  which may be a general partner
and/or a limited partner in the partnership.

         In accordance  with a 1995  pronouncement  of the Emerging  Issues Task
Force, the Company's accounting for investments in low-income housing tax credit
partnerships  in which it acts solely as a limited  partner,  which  amounted to
$78.6  million in the  aggregate at December  31,  1997,  depends on whether the
investment was made on or after May 18, 1995.

         Low-income  housing  tax  credit  partnerships  in which  the  Company,
through a subsidiary, acts as a general partner, are presented on a consolidated
basis. At December 31, 1997, the Company's  investment in low-income housing tax
credit interests  included $50.0 million of assets related to low-income housing
tax credit  partnerships  in which a subsidiary of the Company acts as a general
partner.  At December 31, 1997, the Company had commitments to make $2.1 million
of additional investments in such partnerships.

         The  Company  also  makes  loans  to  low-income   housing  tax  credit
partnerships  in which it has  invested  to  construct  the  affordable  housing
project owned by the  partnerships.  At December 31, 1997, the Company had $37.6
million of  construction  loans  outstanding  to  low-income  housing tax credit
partnerships  and  commitments to fund an additional $9.9 million of such loans.
Approximately  $7.3  million of such funded  construction  loans at December 31,
1997 were made to partnerships in which subsidiaries of the Company acted as the
general  partner  and thus were  consolidated  with the  Company  for  financial
reporting purposes. The risks associated with these construction loans generally
are the same as those made by the Company to  unaffiliated  third  parties.  See
"Business-Lending Activities".

         The affordable  housing  projects  owned by the low-income  housing tax
credit  partnerships  in which the Company had invested at December 31, 1997 are
geographically  located  throughout the United States. At December 31, 1997, the
Company's largest funded investment in a low-income  housing tax credit interest
was a $9.7 million investment in a partnership which owned a 170-unit qualifying
project  located  in  Racine,  Wisconsin,  and the  Company's  largest  unfunded
investment  in such a partnership  was a $9.0 million  commitment to fund equity
and debt investments in a partnership which will construct a 96-unit  qualifying
project in Knoxville, Tennessee, of which $1.3 million of equity and $849,000 of
debt was funded as of such date.

         At December 31, 1997, the Company had invested in or had commitments to
invest in 43 low-income  housing tax credit  partnerships,  of which 31 had been
allocated tax credits.  The Company  estimates that the investment in low-income
housing tax credit  interests in which it had invested at December 31, 1997 will
provide approximately $217.3 million of tax credits.

         During 1997, the Company sold an investment in a low-income housing tax
credit  interest  which had a carrying value of $15.7 million for a gain of $6.3
million.  During 1996,  the Company  sold $19.8  million of its  investments  in
low-income housing tax credit interests for a gain of $4.9 million. Depending on
available  prices,  its ability to utilize tax  credits and other  factors,  the
Company may seek to sell other of its low-income housing tax credit interests in
the future.

         The ownership of low-income  housing tax credit interests  produces two
types of tax benefits. The primary tax benefit flows from the low-income housing
tax credits under the Code which are generated by the ownership and operation of
the real  property  in the manner  required to obtain  such tax  credits.  These
credits may be used to offset  Federal  income tax on a dollar for dollar  basis
but may not offset the alternative  minimum tax; tax credits thus may reduce the
overall  Federal  income  tax to an  effective  rate of 20%.  In  addition,  the
operation of the rental properties  produces losses for financial  statement and
tax  purposes  in the  early  years and  sometimes  throughout  the  anticipated
ownership  period.  These tax losses may be used to offset  taxable  income from
other  operations and thereby reduce income tax which would otherwise be paid on
such taxable income.

         Tax credits may be claimed  over a ten-year  period on a  straight-line
basis once the  underlying  multi-family  residential  properties  are placed in
service. Tax credits claimed reduce the tax payments computed based upon taxable
income to not less than the  alternative  minimum tax  computed for that year or
any year not more than  three  years  before or 15 years  after the year the tax
credit is  earned.  The  taxpayer  Relief  Act of 1997  changed  the tax  credit
carryback  period  from 3 years to 1 year and the carry  forward  period from 15
years to 20 years for credits that become  available for use in years  beginning
after  December 31, 1997.  Tax credits are realized even if units in the project
do not continue to be occupied once the units in the project have been initially
rented to a qualifying  tenant, and tax credits are not dependent on a project's
operating  income or  appreciation.  Tax credits can be claimed  over a ten-year
period and generally can be lost or 

                                       29

<PAGE>

recaptured only if non-qualifying  tenants are placed in units, ownership of the
project is  transferred  or the project is  destroyed  and not rebuilt  during a
15-year compliance period for the project.  The Company has established specific
investment  criteria for investment in multi-family  residential  projects which
have been  allocated tax credits,  which  require,  among other things,  a third
party  developer  of the project  and/or the seller of the  interest  therein to
provide a guarantee  against  loss or  recapture  of tax credits and to maintain
appropriate  insurance to fund rebuilding in case of destruction of the project.
Notwithstanding  the  Company's  efforts,  there  can be no  assurance  that the
multi-family  residential  projects owned by the  low-income  housing tax credit
partnerships  in which it has invested will satisfy  applicable  criteria during
the 15-year  compliance  period and that there will not be loss or  recapture of
the tax credits associated therewith.

         Investments made pursuant to the affordable  housing tax credit program
of the Code are subject to numerous  risks  resulting  from changes in the Code.
For example,  the Balanced Budget Act of 1995, which was vetoed by the President
of the United States in December  1995 for reasons  which were  unrelated to the
tax credit  program,  generally  would have  established  a sunset  date for the
affordable  housing tax credit program of the Code for housing placed in service
after  December 31, 1997 and would have required a favorable vote by Congress to
extend the credit  program.  Although  this change  would not have  impacted the
Company's existing investments,  other potential changes in the Code, which have
been discussed from time to time, could reduce the benefits  associated with the
Company's  existing  investments  in  low-income  housing tax credit  interests,
including the replacement of the current graduated income taxation provisions in
the Code with a "flat tax" based system and increases in the alternative minimum
tax, which cannot be reduced by tax credits. Management of the Company is unable
to predict  whether any of the  foregoing  or other  changes to the Code will be
subject to future  legislation and, if so, what the contents of such legislation
will be and its effects, if any, on the Company.

SOURCES OF FUNDS

         GENERAL.   Deposits,  FHLB  advances,  reverse  repurchase  agreements,
securities  financings,  maturities,  resolutions  and  principal  repayments on
securities  and loans and proceeds from the sale of  securities,  loans and real
estate owned held for sale currently are the principal  sources of funds for use
in the  Company's  investment  and  lending  activities  and for  other  general
business purposes. Management of the Company closely monitors rates and terms of
competing sources of funds on a regular basis and generally utilizes the sources
which are the most cost effective.

         DEPOSITS.  The primary source of deposits for the Company  currently is
brokered  certificates of deposit obtained primarily through national investment
banking firms which, pursuant to agreements with the Company, solicit funds from
their  customers  for  deposit  with the  Company  ("brokered  deposits").  Such
deposits  obtained through national  investment  banking firms amounted to $1.34
billion  or 68% of the  Company's  total  deposits  at  December  31,  1997.  In
addition, during 1995, the Company commenced a program to obtain certificates of
deposit from customers of regional and local investment  banking firms which are
made aware of the Company's  products by the Company's  direct  solicitation and
marketing efforts.  At December 31, 1997, $251.9 million or 13% of the Company's
deposits  were  obtained  in this manner  through  over 140  regional  and local
investment banking firms. The Company also solicits certificates of deposit from
institutional  investors  and  high  net  worth  individuals  identified  by the
Company.  At December  31, 1997,  $177.9  million or 9% of the  Company's  total
deposits consisted of deposits obtained by the Company from such efforts.

         The Company's  brokered deposits at December 31, 1997 were net of $11.7
million of  unamortized  deferred  fees.  The  amortization  of deferred fees is
computed  using the  interest  method and is  included  in  interest  expense on
certificates of deposit.

         The Company  believes  that the  effective  cost of brokered  and other
wholesale deposits is more attractive to the Company than deposits obtained on a
retail basis from branch  offices after the general and  administrative  expense
associated  with the  maintenance  of  branch  offices  is taken  into  account.
Moreover,  brokered and other wholesale deposits generally give the Company more
flexibility  than retail sources of funds in  structuring  the maturities of its
deposits  and in  matching  liabilities  with  comparably  maturing  assets.  At
December  31,  1997,  $840.5  million or 46% of the  Company's  certificates  of
deposits were scheduled to mature within one year.

         Although  management  of the Company  believes  that brokered and other
wholesale  deposits are advantageous in certain respects,  such funding sources,
when  compared  to  retail  deposits  attracted  through a branch  network,  are
generally  more  sensitive to changes in interest  rates and  volatility  in the
capital  markets and are more likely to be compared by the investor to competing
investments.  In  addition,  such  funding  sources  may be  more  sensitive  to
significant  changes in the financial  condition of the Company.  There are also
various  regulatory  limitations  on the  ability  of all  but  well-capitalized
insured financial  institutions to obtain brokered deposits. See "Regulation The
Bank - Brokered Deposits." These


                                       30

<PAGE>

limitations  currently are not  applicable to the Company  because the Bank is a
well-capitalized  financial  institution  under applicable laws and regulations.
See "Regulation - The Bank -Regulatory  Capital  Requirements."  There can be no
assurances,   however,  that  the  Company  will  not  become  subject  to  such
limitations in the future.

         As a result of the Company's  reliance on brokered and other  wholesale
deposits,  significant changes in the prevailing  interest rate environment,  in
the  availability of alternative  investments  for individual and  institutional
investors or in the Company's financial  condition,  among other factors,  could
affect the Company's liquidity and results of operations much more significantly
than might be the case with an  institution  that obtained a greater  portion of
its funds from retail or core deposits attracted through a branch network.

         In addition  to  brokered  and other  wholesale  deposits,  the Company
obtains  deposits from its office  located in Bergen County,  New Jersey.  These
deposits include  non-interest  bearing checking accounts,  NOW and money market
checking accounts, savings accounts and certificates of deposit and are obtained
through advertising, walk-ins and other traditional means. At December 31, 1997,
the deposits which were allocated to this office amounted to $60.7 million or 3%
of the Company's deposits.

         The  following  table sets forth  information  related to the Company's
deposits at the dates indicated.


<TABLE>
<CAPTION>
                                                                  December 31,
                                -------------------------------------------------------------------------------
                                          1997                        1996                         1995
                                -----------------------   ------------------------     ------------------------
                                  Amount      Avg. Rate     Amount       Avg. Rate       Amount       Avg. Rate
                                ----------    ---------   ----------     ---------     ----------    ----------
                                                             (Dollars in Thousands)
<S>                             <C>             <C>       <C>                <C>       <C>                 <C> 
Non-interest bearing
   checking accounts..........  $  130,372        --%     $   96,563           --%     $   48,482            --%
NOW and money market
   checking accounts..........      27,624      4.73          22,208         2.99          17,147          3.37
Savings accounts..............       1,664      2.30           2,761         2.30           3,471          2.30
                                ----------                ----------                   ----------
                                   159,660                   121,532                       69,100
                                ----------                ----------                   ----------
Certificates of deposit(1)....   1,834,899                 1,809,098                    1,440,240
Unamortized deferred fees.....     (11,737)                  (10,888)                      (7,694)
                                ----------                ----------                   ----------
Total certificates of deposit.   1,823,162      6.00       1,798,210         5.80       1,432,546          5.68
                                ----------                ----------                   ----------
     Total deposits...........  $1,982,822      5.95      $1,919,742         5.47      $1,501,646          5.46
                                ==========                ==========                   ==========
</TABLE>


- -------------------
(1)   At December 31, 1997, 1996 and 1995,  certificates of deposit issued on an
      uninsured  basis  amounted  to $133.7  million,  $147.5  million and $80.0
      million,  respectively.  Of the $133.7  million of  uninsured  deposits at
      December 31, 1997,  $98.1 million were from political  subdivisions in New
      Jersey and secured or collateralized as required under state law.

         The following  table sets forth, by various  interest rate  categories,
the certificates of deposit in the Company at the dates indicated.


<TABLE>
<CAPTION>
                                                                      December 31,
                                                   --------------------------------------------------
                                                      1997                1996               1995
                                                   -----------        -----------         -----------
                                                                 (Dollars in Thousands)
<S>                                                <C>                <C>                 <C>        
   2.99% or less..............................     $       841        $     1,442         $       222
   3.00-3.50%.................................              --                  4                  39
   3.51-4.50..................................              41              1,149              42,751
   4.51-5.50..................................         292,192            595,730             454,653
   5.51-6.50..................................       1,300,463            990,621             660,745
   6.51-7.50..................................         229,134            208,774             273,655
   7.51-8.50..................................             491                490                 481
                                                   -----------        -----------         -----------
                                                   $ 1,823,162        $ 1,798,210         $ 1,432,546
                                                   ===========        ===========         ===========
</TABLE>



                                       31

<PAGE>

         The  following  table  sets  forth the  amount  and  maturities  of the
certificates of deposit in the Company at December 31, 1997.


<TABLE>
<CAPTION>
                                                  Over Six
                                                 Months and         One Year
                                Six Months        Less than        Through Two        Over Two
                                 and Less         One Year            Years             Years            Total
                               ------------     ------------      ------------      ------------     ------------
                                                          (Dollars in Thousands)
<S>                            <C>              <C>               <C>               <C>              <C>         
2.99% or less.............     $        813     $         --      $         28      $         --     $        841
3.00-3.50%................               --               --                --                --               --
3.51-4.50.................               24               --                11                 6               41
4.51-5.50.................          172,733           32,710            42,758            43,991          292,192
5.51-6.50.................          288,206          287,208           260,386           464,663        1,300,463
6.51-7.50.................           28,568           30,201            73,151            97,214          229,134
7.51-8.50.................               --               --               295               196              491
                               ------------     ------------      ------------      ------------     ------------
                               $    490,344     $    350,119      $    376,629      $    606,070     $  1,823,162
                               ============     ============      ============      ============     ============
</TABLE>


         At December 31, 1997, the Company had $194.5 million of certificates of
deposit in amounts of $100,000 or more  outstanding  maturing as follows:  $97.7
million within three months; $28.4 million over three months through six months;
$19.4  million  over six months through 12 months; and $49.0 million thereafter.

         For additional  information related to the Company's deposits, see Note
15 to the Consolidated Financial Statements included in Item 8 hereof.

         BORROWINGS.  Through the Bank,  the Company  obtains  advances from the
FHLB of New York upon the security of certain of its residential  first mortgage
loans,   mortgage-backed  and  mortgage-related  securities  and  other  assets,
including FHLB stock, provided certain standards related to the creditworthiness
of the Bank have been met.  FHLB  advances  are  available  to member  financial
institutions  such as the Bank for investment  and lending  activities and other
general business purposes.  FHLB advances are made pursuant to several different
credit programs,  each of which has its own interest rate, which may be fixed or
adjustable, and range of maturities.

         The  Company  also  obtains  funds  pursuant to  securities  sold under
reverse  repurchase  agreements.  Under  these  agreements,  the  Company  sells
securities (generally mortgage-backed and mortgage-related  securities) under an
agreement to repurchase  such  securities at a specified  price at a later date.
Reverse repurchase  agreements have short-term  maturities (typically 90 days or
less) and are deemed to be financing  transactions.  All  securities  underlying
reverse  repurchase   agreements  are  reflected  as  assets  in  the  Company's
consolidated financial statements and are held in safekeeping by broker-dealers.

         Beginning in 1997,  borrowings  of the Company  include lines of credit
obtained by OFS, as follows:  (i) a $200.0  million  secured line of credit from
Morgan  Stanley  Mortgage  Capital Inc.,  (ii) a $50.0  million  secured line of
credit from Texas  Commerce Bank National  Association,  (iii) a $200.0  million
secured line of credit from Merrill Lynch and (iv) a $200.0 million secured line
of credit from Lehman  Commercial Paper, Inc. An aggregate of $118.3 million was
outstanding to OFS under these lines of credit at December 31, 1997,  which have
interest rates which float in accordance with a designated prime rate.

         The Company's  borrowings also include notes,  subordinated  debentures
and other interest-bearing  obligations.  At December 31, 1997, this category of
borrowings consisted primarily of $100.0 million of 12% Subordinated  Debentures
issued  by the Bank in June  1995 and due 2005  (the  "Debentures")  and  $125.0
million of 11.875% Notes due 2003 (the "Notes")  issued by the Company through a
public offering on September 25, 1996 and due 2003.  Historically,  from time to
time,  the Company  privately  has raised funds by issuing  short-term  notes to
certain  executives  and  stockholders  of the  Company.  Such notes were repaid
during 1996 and amounted to $8.6 million at December 31, 1995.


                                       32

<PAGE>

         The following  table sets forth  information  relating to the Company's
borrowings and other interest-bearing obligations at the dates indicated.

                                                          December 31,
                                                ------------------------------
                                                  1997       1996       1995
                                                --------   --------   --------
                                                     (Dollars in Thousands)
FHLB advances ...............................   $     --   $    399   $ 70,399
Reverse repurchase agreements ...............    108,250     74,546     84,761
Obligations outstanding under lines of       
 credit .....................................    118,304         --         --
Notes, debentures and other interest
  bearing obligations:
   Notes ....................................    125,000    125,000         --

   Debentures ...............................    100,000    100,000    100,000
   Hotel mortgages payable ..................         --        573      8,427
   Short-term notes .........................      1,975         --      8,627
                                                --------   --------   --------
                                                 226,975    225,573    117,054
                                                --------   --------   --------
                                                $453,529   $300,518   $272,214
                                                ========   ========   ========

         The  following  table sets forth  certain  information  relating to the
Company's  short  term  borrowings  having  average  balances  during any of the
reported periods of greater than 30% of  stockholders'  equity at the end of the
reported period.


<TABLE>
<CAPTION>
                                                            At or for the Year Ended December 31,
                                                       -----------------------------------------------
                                                          1997                1996             1995
                                                       ----------          ---------        ----------
                                                                         (Dollars in Thousands)
<S>                                                    <C>                 <C>              <C>       
FHLB ADVANCES:
  Average amount outstanding during the period....     $    9,482          $  71,221        $   14,866
  Maximum month-end balance outstanding
   during the period..............................     $      399          $  81,399        $  100,399
  Weighted average rate:
   During the period..............................           5.46%              5.69%             7.57%
   At end of period...............................             --%              7.02%             5.84%
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT:
  Average amount outstanding during the period....     $   84,272          $      --        $       --
  Maximum month-end balance outstanding
   during the period..............................     $  267,095          $      --        $       --
  Weighted average rate:
   During the period..............................           6.62%                --%               --%
   At end of period...............................           6.32%                --%               --%
</TABLE>


COMPUTER SYSTEMS AND USE OF TECHNOLOGY

         The Company believes that its use of information  technology has been a
key factor in achieving success in the acquisition, management and resolution of
discount loans and believes that this technology also has applicability to other
aspects of its business  which involve  servicing  intensive  assets,  including
subprime   residential   mortgage   lending,   servicing  of   nonperforming  or
underperforming loans for third parties and asset management services.

         In addition to its standard industry software  applications  which have
been customized to meet the Company's  requirements,  the Company has internally
developed fully integrated proprietary applications designed to provide decision
support,  automation of decision  execution,  tracking and  exception  reporting
associated with the management of nonperforming and  underperforming  loans. The
Company also has  deployed:  a predictive  dialing  solution  which  permits the
Company  to  direct  the  calls  made  by  its   collectors  and  increases  the
productivity  of the  department;  an interactive  voice  response  system which
provides automated account  information to customers;  a document imaging system
which permits immediate access to pertinent loan documents; and a data warehouse
which permits  corporate  data to be shared on a centralized  basis for decision
support.  The Company is also  implementing  electronic  commerce  which further
automates the Company's communications with its third party service providers.


                                       33

<PAGE>

         The  Company's  proprietary  systems  result  in a number  of  benefits
including  consistency  of service to customers,  reduced  training  periods for
employees, resolution decisions which evaluate on an automated basis the optimal
means to maximize the net  resolution  proceeds  (which may include a variety of
resolution  alternatives  including placing the borrowers on forbearance  plans,
pursuing  a  pre-approved  sale  of  the  property,  or  completing  foreclosure
proceedings),  the ability to effect  foreclosure as quickly as possible  within
state-specific  foreclosure  timelines and the management of third party service
providers  to ensure  quality of service.  The  federal  mortgage  agencies  and
credit-rating  agencies have  established a variety of measurements for approved
servicers,  against which the Company  compares  favorably.  See  "Business-Loan
Servicing Activities."

         Through its  document  imaging  system,  the Company is able to produce
complete  foreclosure  packages  within minutes.  The Company  believes that the
industry standard generally is to prepare a complete  foreclosure package within
sixty days.  Delays in the time to  resolution  result in increased  third party
costs, opportunity costs and direct servicing expenses. As a result, the Company
has designed its systems and  procedures to move a loan through the  foreclosure
process in a timely manner.

         The Company has invested in a sophisticated computer  infrastructure to
support  its  software  applications.  The  Company  uses an IBM RISC  AS400 and
NetFrame and COMPAQ Proliant file servers as its primary hardware platform.  The
Company uses CISCO Routers,  Cabletron Hubs and chassis with fiber optic cabling
throughout and between buildings so as to achieve the highest  performance.  The
Company  also has  deployed  a DAVOX  predicative  dialer  which  currently  has
capacity for 120 seats. The Company's document imaging system currently stores 6
million images.  The Company's  systems have significant  capacity for expansion
and upgrade.

         The  Company  protects  its  proprietary   information  by  developing,
maintaining and enforcing a comprehensive set of information  security policies;
by having each employee  execute an  intellectual  property  agreement  with the
Company,  which  among  other  things,   prohibits  disclosure  of  confidential
information  and  provides for the  assignment  of  developments;  by affixing a
copyright  symbol to copies of any of the Company's  proprietary  information to
which a third party has access; by emblazoning the start-up screen of any of the
Company's  proprietary  software with the Company's logo and a copyright symbol;
by having third-party contract employees and consultants execute a contract with
the Company which contains,  among other things,  confidentiality and assignment
provisions;  and by  otherwise  limiting  third-party  access  to the  Company's
proprietary information.

ECONOMIC CONDITIONS

         GENERAL.  The success of the Company is dependent  to a certain  extent
upon  the  general  economic  conditions  in the  geographic  areas  in which it
conducts substantial  business activities.  Adverse changes in national economic
conditions  or in the  economic  conditions  of  regions  in which  the  Company
conducts  substantial business likely would impair the ability of the Company to
collect on outstanding loans or dispose of real estate owned and would otherwise
have an adverse effect on its business,  including the demand for new loans, the
ability of customers to repay loans and the value of both the collateral pledged
to the  Company  to  secure  its  loans  and its real  estate  owned.  Moreover,
earthquakes  and other natural  disasters could have similar  effects.  Although
such disasters have not  significantly  adversely  affected the Company to date,
the  availability  of insurance for such disasters in  California,  in which the
Company  conducts  substantial  business  activities,  is severely  limited.  At
December  31,  1997,  the Company had loans with an unpaid  balance  aggregating
$375.1  million  (including  loans  available  for sale)  secured by  properties
located in California  and $48.3 million of the Company's  real estate owned was
located in California, which collectively represent 13.8% of the Company's total
assets at such date.

         EFFECTS OF CHANGES IN INTEREST RATES. The Company's  operating  results
depend to a large extent on its net  interest  income,  which is the  difference
between the interest income earned on  interest-earning  assets and the interest
expense incurred in connection with its interest-bearing liabilities. Changes in
the general level of interest rates can affect the Company's net interest income
by  affecting  the spread  between  the  Company's  interest-earning  assets and
interest-bearing liabilities, as well as, among other things, the ability of the
Company to originate loans; the value of the Company's  interest-earning  assets
and its ability to realize gains from the sale of such assets;  the average life
of the Company's  interest-earning  assets;  the value of the Company's mortgage
servicing  rights;  and the Company's  ability to obtain deposits in competition
with  other  available  investment  alternatives.   Interest  rates  are  highly
sensitive to many factors,  including  governmental monetary policies,  domestic
and international economic and political conditions and other factors beyond the
control of the Company. The Company actively monitors its assets and liabilities
and  employs a hedging  strategy  which seeks to limit the effects of changes in
interest  rates  on  its  operations.  Although  management  believes  that  the
maturities  of the Company's  assets  currently are well balanced in relation to
its  liabilities  (based on various  estimates  as to how changes


                                       34

<PAGE>

in the general level of interest rates will impact its assets and  liabilities),
there can be no assurance  that the  profitability  of the Company  would not be
adversely affected during any period of changes in interest rates.

COMPETITION

         The  businesses  in which the Company is engaged  generally  are highly
competitive.  The acquisition of discount loans is particularly competitive,  as
acquisitions of such loans are often based on competitive  bidding.  The Company
also  encounters  significant  competition in connection  with its other lending
activities, its investment and in its deposit-gathering  activities. Many of the
Company's  competitors are significantly larger than the Company and have access
to greater  capital and other  resources.  In  addition,  many of the  Company's
competitors  are not  subject to the same  extensive  federal  regulations  that
govern  federally-insured  institutions  such  as the  Bank  and  their  holding
companies.  As a result, many of the Company's  competitors have advantages over
the Company in conducting certain businesses and providing certain services.

SUBSIDIARIES

         Set  forth  below  is a  brief  description  of the  operations  of the
Company's significant non-banking subsidiaries.

         IMI. Through subsidiaries,  IMI owns an interest in the Westin Hotel in
Columbus, Ohio, residential units in cooperative buildings which are acquired in
connection  with the  foreclosure  on loans held by the Bank or by  deed-in-lieu
thereof, as well as other real estate related ventures.  During 1997, IMI sold a
69%  partnership  interest in the Westin Hotel for a small gain. At December 31,
1997, IMI also owned 9% of the outstanding common stock of OAIC.

         OFS.  OFS was formed by the Company  under  Florida law in October 1996
for the purposes of purchasing  substantially all of the assets of Admiral,  the
Company's primary correspondent mortgage banking firm for subprime single family
residential  loans,  and  assuming  all of the  Bank's  subprime  single  family
residential  lending  operations.   Under  the  terms  of  the  acquisition,   a
transaction  which closed on May 1, 1997, the Company agreed to pay Admiral $6.8
million and to transfer to Admiral 20% of the voting  stock of OFS. In addition,
OFS  assumed   specified   liabilities  of  Admiral  in  connection   with  this
transaction,  including a $3.0 million unsecured loan which was made by the Bank
to Admiral at the time OFS entered  into the asset  acquisition  agreement  with
Admiral, which loan was repaid with the proceeds from a $30.0 million unsecured,
subordinated  credit facility  provided by the Company to OFS at the time of the
closing  of such  acquisition.  On  December  3,  1997,  Ocwen  purchased  2,705
additional  shares of  common  stock of OFS for $15.0  million,  increasing  its
ownership percentage from 80% to 93.7%.
See "Business- Lending Activities-Single Family Residential Loans."

         OCC. OCC is a  wholly-owned  subsidiary of the Company which was formed
under  Florida  law to manage  the  day-to-day  operations  of OAIC,  subject to
supervision by OAIC's Board of Directors.  The directors and executive  officers
of OCC  consist  solely of  William  C.  Erbey,  Chairman,  President  and Chief
Executive  Officer,  and other  executive  officers  of the  Company.  OAIC is a
Virginia  corporation which elected to be taxed as a REIT under the Code. In May
1997,  OAIC  conducted an initial  public  offering of 17,250,000  shares of its
common stock, which resulted in net proceeds of $238.8 million, inclusive of the
$27.9 million contributed by the Company for an additional  1,875,000 shares, or
9.8% of the  outstanding  shares of OAIC common stock.  The OAIC common stock is
traded on the Nasdaq National Market under the symbol "OAIC."

         Pursuant to a management agreement between OCC and OAIC, and subject to
supervision by OAIC's Board of Directors,  OCC formulates  operating  strategies
for OAIC,  arranges for the acquisition of assets by OAIC,  arranges for various
types of financing  for OAIC,  monitors  the  performance  of OAIC's  assets and
provides certain  administrative and managerial  services in connection with the
operation  of OAIC.  For  performing  these  services,  OCC  receives (i) a base
management  fee in an amount equal to 1% of total  assets per annum,  calculated
and paid quarterly based upon the average invested assets, as defined,  by OAIC,
which is intended to cover OCC's cost of  providing  management  services to the
Company, and (ii) a quarterly incentive fee in an amount equal to the product of
(A) 25% of the dollar amount by which (1)(a) funds from operations,  as defined,
per share of OAIC  common  stock  plus (b) gains  (or  minus  losses)  from debt
restructuring and sales of property per share of OAIC common stock,  exceeds (2)
an amount equal to (a) the weighted average of the initial public offering price
per share of the OAIC  common  stock and the prices  per share of any  secondary
offerings  of OAIC common  stock by OAIC  multiplied  by (b) the  ten-year  U.S.
Treasury rate plus 5% per annum,  multiplied by (B) the weighted  average number
of shares of OAIC common stock  outstanding.  The Board of Directors of OAIC may
adjust the base  management fee in the future if necessary to align the fee more
closely with the actual costs of 


                                       35

<PAGE>

such services. OCC also may be reimbursed for the costs of certain due diligence
tasks  performed  by it on  behalf  of  OAIC  and  will  be  reimbursed  for the
out-of-pocket expenses incurred by it on behalf of OAIC.

         Recently,  the Company  transferred the lending  operations  associated
with its large multi-family residential and commercial real estate loans to OCC.
To date, OCC has emphasized  originating loans for OAIC (in order to enable OAIC
to invest the proceeds from the initial public  offering of OAIC's common stock)
and not the Company.

EMPLOYEES

         At  December  31, 1997 the  Company  had 990 full time  employees.  The
employees are not represented by a collective bargaining  agreement.  Management
considers the Company's employee relations to be satisfactory.

REGULATION

         Financial  institutions  and their holding  companies  are  extensively
regulated  under  federal and state laws. As a result,  the business,  financial
condition and  prospects of the Company can be  materially  affected not only by
management  decisions and general  economic  conditions,  but also by applicable
statutes  and  regulations  and other  regulatory  pronouncements  and  policies
promulgated by regulatory  agencies with  jurisdiction  over the Company and the
Bank, such as the OTS and the FDIC. The effect of such statutes, regulations and
other pronouncements and policies can be significant, cannot be predicted with a
high degree of  certainty  and can change over time.  Moreover,  such  statutes,
regulations  and other  pronouncements  and  policies  are  intended  to protect
depositors and the insurance funds administered by the FDIC and not stockholders
or holders of indebtedness which are not insured by the FDIC.

        The  enforcement  powers  available to Federal  banking  regulators  are
substantial  and  include,  among  other  things,  the  ability to assess  civil
monetary penalties,  to issue cease-and-desist or removal orders and to initiate
injunctive  actions against  banking  organizations  and  institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading or untimely reports filed with regulatory authorities.

        The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof as currently in effect.  This  discussion is not intended to constitute,
and does not purport to be, a complete  statement of all legal  restrictions and
requirements  applicable  to the Company and the Bank and all such  descriptions
are qualified in their entirety by reference to applicable statutes, regulations
and other regulatory pronouncements.

         THE COMPANY

         GENERAL.  The Company is a registered  savings and loan holding company
under the Home Owner's Loan Act (the "HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.

         ACTIVITIES  RESTRICTION.  There are  generally no  restrictions  on the
activities  of a savings and loan holding  company,  such as the Company,  which
holds only one subsidiary savings  institution.  However, if the Director of the
OTS determines that there is reasonable  cause to believe that the  continuation
by a savings and loan holding company of an activity  constitutes a serious risk
to the  financial  safety,  soundness  or stability  of its  subsidiary  savings
institution,  the Director may impose such  restrictions as are deemed necessary
to address  such risk,  including  limiting:  (i)  payment of  dividends  by the
savings  institution;  (ii) transactions between the savings institution and its
affiliates;  and (iii) any  activities  of the  savings  institution  that might
create a serious  risk  that the  liabilities  of the  holding  company  and its
affiliates may be imposed on the savings institution.  Notwithstanding the above
rules as to permissible  business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the qualified  thrift lender ("QTL") test set forth in OTS  regulations,
then such unitary  holding  company shall become  subject to the  activities and
restrictions  applicable  to multiple  savings and loan holding  companies  and,
unless the savings institution  requalifies as a QTL within one year thereafter,
shall register as, and become subject to the  restriction  applicable to, a bank
holding company. See "The Bank-Qualified Thrift Lender Test."

         If the Company were to acquire control of another  savings  institution
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the authority to approve  emergency
thrift acquisition and where each subsidiary


                                       36

<PAGE>

savings  institution  meets the QTL test, as set forth below,  the activities of
the Company and any of its subsidiaries (other than the Bank or other subsidiary
savings institutions) would thereafter be subject to further restrictions. Among
other things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings  institution  generally  shall commence or continue for a
limited  period of time  after  becoming  a multiple  savings  and loan  holding
company or subsidiary thereof any business activity,  other than: (i) furnishing
or performing  management  services for a subsidiary savings  institution;  (ii)
conducting an insurance agency or escrow business;  (iii) holding,  managing, or
liquidating assets owned by or acquired from a subsidiary  savings  institution;
(iv) holding or managing  properties  used or occupied by a  subsidiary  savings
institution;  (v) acting as trustee under deeds of trust;  (vi) those activities
authorized  by  regulation  as of March 5,  1987 to be  engaged  in by  multiple
savings and loan holding  companies;  or (vii) unless the Director of the OTS by
regulation  prohibits  or limits such  activities  for savings and loan  holding
companies,   those  activities  authorized  by  the  Federal  Reserve  Board  as
permissible for bank holding  companies.  Those  activities  described in clause
(vii)  above also must be  approved  by the  Director  of the OTS prior to being
engaged in by a multiple savings and loan holding company.

         RESTRICTIONS  ON  ACQUISITIONS.  Except  under  limited  circumstances,
savings and loan holding companies are prohibited from acquiring,  without prior
approval  of  the  Director  of the  OTS:  (i)  control  of  any  other  savings
institution or savings and loan holding company or  substantially  of the assets
thereof;  or (ii) more than 5% of the voting shares of a savings  institution or
holding  company  thereof  which is not a  subsidiary.  Except  with  the  prior
approval  of the  Director  of the OTS,  no director or officer of a savings and
loan holding company, or person owning or controlling by proxy or otherwise more
than  25%  of  such  company's   stock,  may  acquire  control  of  any  savings
institution,  other  than a  subsidiary  savings  institution,  or of any  other
savings and loan holding company.

         The  Director  of the OTS may  approve  acquisitions  resulting  in the
formation of a multiple  savings and loan holding company which controls savings
institutions  in more than one state only if: (i) the multiple  savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987;  (ii) the  acquiror  is  authorized  to acquire  control of the savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit Insurance Act ("FDIA");  or (iii) the statutes of the state in which the
institution to be acquired is located  specifically  permit  institutions  to be
acquired by state-chartered  savings institutions located in the state where the
acquiring  entity  is  located  (or by a  holding  company  that  controls  such
state-chartered savings institutions).

         RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES.  Transactions between the
Company or any of its non-bank  subsidiaries and the Bank are subject to various
restrictions, which are described below under "The Bank-Affiliate Transactions."

         THE BANK

         GENERAL. The Bank is a federally-chartered savings bank organized under
the  HOLA.  As  such,  the  Bank  is  subject  to  regulation,  supervision  and
examination  by the OTS.  The  deposit  accounts  of the Bank are  insured up to
applicable  limits by the SAIF  administered  by the FDIC and, as a result,  the
Bank also is subject to regulation, supervision and examination by the FDIC.

         The  business  and  affairs of the Bank are  regulated  in a variety of
ways.  Regulations apply to, among other things,  insurance of deposit accounts,
capital ratios,  payment of dividends,  liquidity  requirements,  the nature and
amount of the investments that the Bank may make,  transactions with affiliates,
community and consumer lending laws,  internal policies and controls,  reporting
by and examination of the Bank and changes in control of the Bank.

         INSURANCE OF  ACCOUNTS.  Pursuant to  legislation  enacted in September
1996, a fee was required to be paid by all SAIF-insured institutions at the rate
of $0.657 per $100 of deposits held by such  institutions at March 31, 1995. The
money collected  recapitalized the SAIF reserve to the level of 1.25% of insured
deposits  as required by law. In  September  1996,  the Bank  recorded a pre-tax
accrual of $7.1  million for this  assessment,  which was  subsequently  paid in
November  1996. The  recapitalization  of the SAIF has resulted in lower deposit
insurance premiums for most SAIF-insured financial  institutions,  including the
Bank.

         Insured  institutions  also are  required  to share in the  payment  of
interest on the bonds issued by a specially created  government entity ("FICO"),
the  proceeds of which were applied  toward  resolution  of the thrift  industry
crisis in the 1980s.  Beginning on January 1, 1997, in addition to the insurance
premiums paid by  SAIF-insured  institutions to maintain the SAIF reserve at its
required level pursuant to the current risk classification system,  SAIF-insured
institutions pay deposit


                                       37

<PAGE>

insurance  premiums  at the  annual  rate of 6.4 basis  points of their  insured
deposits and BIF-insured institutions will pay deposit insurance premiums at the
annual rate of 1.3 basis points of their insured deposits towards the payment of
interest on the FICO bonds.

         Under the current risk classification system, institutions are assigned
to one of three  capital  groups  which  are  based  solely  on the  level of an
institution's   capital--"well   capitalized,"   "adequately   capitalized"  and
"undercapitalized"--which  are  defined  in the same  manner as the  regulations
establishing the prompt  corrective  action system under Section 38 of the FDIA,
as discussed  below.  These three groups are then divided into three  subgroups,
which are based on supervisory  evaluations by the institution's primary federal
regulator,  resulting  in  nine  assessment  classifications.  Assessment  rates
currently range from 0 basis points for well capitalized,  healthy  institutions
to  27  basis  points  for   undercapitalized   institutions   with  substantial
supervisory concerns.

         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging in unsafe or unsound practices,  is in an
unsafe  or  unsound  condition  to  continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

         REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations
are subject to three capital requirements of general  applicability:  a tangible
capital  requirement,  a core or leverage  capital  requirement and a risk-based
capital requirement. All savings associations currently are required to maintain
tangible  capital of at least 1.5% of adjusted  total  assets (as defined in the
regulations),  core  capital  equal to 3% of  adjusted  total  assets  and total
capital  (a  combination  of core  and  supplementary  capital)  equal  to 8% of
risk-weighted  assets  (as  defined in the  regulations).  For  purposes  of the
regulation,  tangible  capital is core capital less all  intangibles  other than
qualifying  purchased  mortgage  servicing  rights,  of which  the Bank had $4.9
million at December 31, 1997. Core capital includes common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in  the  equity  accounts  of  fully   consolidated   subsidiaries  and  certain
nonwithdrawable accounts and pledged deposits. Core capital generally is reduced
by  the  amount  of  a  savings  association's  intangible  assets,  other  than
qualifying mortgage servicing rights.

         A savings  association  is  allowed to include  both core  capital  and
supplementary  capital in the  calculation  of its total capital for purposes of
the risk-based capital  requirements,  provided that the amount of supplementary
capital  included  does not  exceed  the  savings  association's  core  capital.
Supplementary  capital  consists  of  certain  capital  instruments  that do not
qualify  as core  capital,  including  subordinated  debt  (such  as the  Bank's
Debentures) which meets specified  requirements,  and general valuation loan and
lease loss  allowances  up to a maximum  of 1.25% of  risk-weighted  assets.  In
determining the required amount of risk-based capital,  total assets,  including
certain  off-balance  sheet items,  are multiplied by a risk weight based on the
risks inherent in the type of assets.  The risk weights  assigned by the OTS for
principal categories of assets currently range from 0% to 100%, depending on the
type of asset.

         OTS  policy  imposes a  limitation  on the amount of net  deferred  tax
assets  under SFAS No. 109 that may be  included  in  regulatory  capital.  (Net
deferred  tax assets  represent  deferred tax assets,  reduced by any  valuation
allowances,  in excess of deferred tax  liabilities.)  Application  of the limit
depends on the possible sources of taxable income available to an institution to
realize  deferred tax assets.  Deferred tax assets that can be realized from the
following  generally are not limited:  taxes paid in prior  carryback  years and
future reversals of existing taxable temporary  differences.  To the extent that
the  realization  of  deferred  tax assets  depends on an  institution's  future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its  tax-planning  strategies,  such  deferred  tax  assets are  limited  for
regulatory  capital  purposes  to the lesser of the amount  that can be realized
within  one year of the  quarter-end  report  date or 10% of core  capital.  The
Bank's regulatory  capital at December 31, 1997, has been reduced by $536,000 of
disallowed deferred tax assets in excess of the OTS limit.

         In  August  1993,  the  OTS  adopted  a  final  rule  incorporating  an
interest-rate risk component into the risk-based capital  regulation.  Under the
rule, an  institution  with a greater than "normal"  level of interest rate risk
will be subject to a deduction of its interest  rate risk  component  from total
capital for purposes of determining  whether it has met the  risk-based  capital
requirement.  As a result,  such an  institution  will be  required  to maintain
additional capital in order to comply with the risk-based  capital  requirement.
Although the final rule was  originally  scheduled to be effective as of January
1994,  the


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<PAGE>

OTS has indicated  that it will delay invoking its interest rate risk rule until
appeal procedures are implemented and evaluated. The OTS has not yet established
an effective date for the capital deduction.  Management of the Company does not
believe that the adoption of an interest rate risk  component to the  risk-based
capital  requirement will adversely  affect the Bank if it becomes  effective in
its current form.

         In April 1991,  the OTS  proposed  to modify the 3% of  adjusted  total
assets  core  capital  requirement  in  the  same  manner  as  was  done  by the
Comptroller  of the Currency for national  banks.  Under the OTS proposal,  only
savings  associations  rated  composite 1 under the CAMEL rating  system will be
permitted to operate at the regulatory minimum core capital ratio of 3%. For all
other  savings  associations,  the minimum core capital ratio will be 3% plus at
least an  additional  100 to 200 basis  points,  which  will  increase  the core
capital  ratio  requirement  from 4% to 5% of adjusted  total assets or more. In
determining  the amount of  additional  capital,  the OTS will  assess  both the
quality  of risk  management  systems  and the  level  of  overall  risk in each
individual savings association through the supervisory process on a case-by-case
basis.

         PROMPT  CORRECTIVE  ACTION.  Federal law provides  the Federal  banking
regulators  with broad power to take "prompt  corrective  action" to resolve the
problems of undercapitalized  institutions. The extent of the regulators' powers
depends  on  whether  the   institution  in  question  is  "well   capitalized,"
"adequately capitalized,"  "undercapitalized,"  "significantly undercapitalized"
or  "critically  undercapitalized."  Under  regulations  adopted by the  Federal
banking regulators, an institution shall be deemed to be: (i) "well capitalized"
if it has a total  risk-based  capital  ratio of  10.0%  or  more,  has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total  risk-based  capital  ratio of 8.0% or more,  a Tier I risk-based
capital  ratio of 4.0% or more and a Tier I  leverage  capital  ratio of 4.0% or
more (3.0% under  certain  circumstances)  and does not meet the  definition  of
"well  capitalized,"  (iii)  "undercapitalized"  if it  has a  total  risk-based
capital ratio that is less than 8.0%, a Tier I risk-based  capital ratio that is
less than 4.0% or a Tier I leverage  capital  ratio that is less than 4.0% (3.0%
under certain circumstances),  (iv) "significantly undercapitalized" if it has a
total  risk-based  capital  ratio  that is less than 6.0%,  a Tier I  risk-based
capital ratio that is less than 3.0% or a Tier I leverage  capital ratio that is
less  than  3.0%,  and (v)  "critically  undercapitalized"  if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate  Federal banking  regulator to downgrade
an  institution  to the  next  lower  category  (provided  that a  significantly
undercapitalized    institution    may   not   be   downgraded   to   critically
undercapitalized) if the regulator; determines: (i) after notice and opportunity
for  hearing  or  response,  that the  institution  is in an unsafe  or  unsound
condition  or (ii) that the  institution  has  received  (and not  corrected)  a
less-than-satisfactory  rating  for  any of the  categories  of  asset  quality,
management, earnings or liquidity in its most recent exam. At December 31, 1997,
the Bank was a "well capitalized" institution under the prompt corrective action
regulations of the OTS.

         Depending  upon  the  capital  category  to  which  an  institution  is
assigned,  the  regulators'  corrective  powers,  many of which are mandatory in
certain   circumstances,   include:   prohibition   on  capital   distributions;
prohibition on payment of management fees to controlling persons;  requiring the
submission  of a capital  restoration  plan;  placing  limits  on asset  growth;
limiting  acquisitions,  branching  or new  lines  of  business;  requiring  the
institution  to issue  additional  capital stock  (including  additional  voting
stock) or to be acquired; restricting transactions with affiliates;  restricting
the interest  rates that the  institution  may pay on  deposits;  ordering a new
election of  directors  of the  institution;  requiring  that  senior  executive
officers or directors be dismissed;  prohibiting the institution  from accepting
deposits from correspondent  banks;  requiring the institution to divest certain
subsidiaries;  prohibiting  the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.

         QUALIFIED THRIFT LENDER TEST. All savings  associations are required to
meet the QTL test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations.  A savings association that does
not meet the QTL test set forth in the HOLA and  implementing  regulations  must
either  convert to a bank charter or comply with the following  restrictions  on
its  operations:  (i) the association may not engage in any new activity or make
any new investment,  directly or indirectly,  unless such activity or investment
is permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB;  and (iv) payment of dividends
by the association  shall be subject to the rules regarding payment of dividends
by a  national  bank.  Upon  the  expiration  of three  years  from the date the
association  ceases to be a QTL, it must cease any  activity  and not retain any
investment  not  permissible  for a  national  bank and  immediately  repay  any
outstanding FHLB advances (subject to safety and soundness considerations).  The
Bank met the QTL test throughout 1997.


                                       39

<PAGE>

         RESTRICTIONS  ON  CAPITAL  DISTRIBUTIONS.  The  OTS has  promulgated  a
regulation  governing  capital  distributions  by  savings  associations,  which
include cash  dividends,  stock  redemptions or repurchases,  cash-out  mergers,
interest payments on certain convertible debt and other transactions  charged to
the  capital  account  of  a  savings  association  as a  capital  distribution.
Generally,   the  regulation  creates  three  tiers  of  associations  based  on
regulatory capital, with the top two tiers providing a safe harbor for specified
levels of capital  distributions  from associations so long as such associations
notify  the OTS and  receive  no  objection  to the  distribution  from the OTS.
Associations  that do not qualify for the safe harbor  provided  for the top two
tiers of  associations  are required to obtain prior OTS approval  before making
any capital distributions.

         Tier  I   associations   may  make  the   highest   amount  of  capital
distributions,  and are defined as savings  associations  that, before and after
the  proposed  distribution,  meet or exceed  their fully  phased-in  regulatory
capital requirements.  Tier I associations may make capital distributions during
any  calendar  year  equal to the  greater  of:  (i) 100% of net  income for the
calendar  year-to-date  plus 50% of its "surplus capital ratio" at the beginning
of the  calendar  year;  and (ii)  75% of its net  income  over the most  recent
four-quarter  period.  The  "surplus  capital  ratio"  is  defined  to mean  the
percentage by which the  association's  ratio of total capital to assets exceeds
the ratio of its fully  phased-in  capital  requirement  to  assets,  and "fully
phased-in  capital  requirement"  is  defined to mean an  association's  capital
requirement under the statutory and regulatory  standards applicable on December
31,  1994,  as modified to reflect any  applicable  individual  minimum  capital
requirement  imposed upon the association.  At December 31, 1997, the Bank was a
Tier I association under the OTS capital distribution regulation.

         In December 1994, the OTS published a notice of proposed  rulemaking to
amend its capital distribution regulation.  Under the proposal, the three tiered
approach  contained in existing  regulations  would be replaced and institutions
would be permitted to make capital  distributions that would not result in their
capital  being  reduced   below  the  level   required  to  remain   "adequately
capitalized," as defined above under "Prompt Corrective Action."

         LOAN-TO-ONE BORROWER. Under applicable laws and regulations, the amount
of loans and extensions of credit which may be extended by a savings institution
such as the Bank to any one borrower,  including related entities, generally may
not  exceed  the  greater  of  $500,000  or 15% of the  unimpaired  capital  and
unimpaired surplus of the institution. Loans in an amount equal to an additional
10% of unimpaired  capital and unimpaired surplus also may be made to a borrower
if  the  loans  are  fully  secured  by  readily   marketable   securities.   An
institution's  "unimpaired capital and unimpaired surplus" includes, among other
things, the amount of its core capital and supplementary capital included in its
total capital under OTS regulations.

         At  December  31,  1997,  the Bank's  unimpaired  capital  and  surplus
amounted  to  $405.1  million,  resulting  in a  general  loans-to-one  borrower
limitation  of  $60.8  million  under  applicable  laws  and  regulations.   See
"Business-Discount Loan Acquisition and Resolution Activities-Composition of the
Discount Loan Portfolio" and "Lending Activities-Composition of Loan Portfolio."

         BROKERED  DEPOSITS.  Under applicable laws and regulations,  an insured
depository  institution may be restricted in obtaining,  directly or indirectly,
funds by or through any  "deposit  broker," as defined,  for deposit into one or
more deposit  accounts at the institution.  The term "deposit broker"  generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling  interests in those deposits to third  parties.  In addition,
the term "deposit broker" includes any insured depository  institution,  and any
employee of any  insured  depository  institution,  which  engages,  directly or
indirectly,  in the solicitation of deposits by offering rates of interest (with
respect to such  deposits)  which are  significantly  higher than the prevailing
rates of interest on deposits offered by other insured  depository  institutions
having the same type of charter in such depository  institution's  normal market
area.  As a result of the  definition  of  "deposit  broker,"  all of the Bank's
brokered  deposits,  as well as possibly its deposits obtained through customers
of regional and local  investment  banking firms and the deposits  obtained from
the Bank's direct solicitation  efforts of institutional  investors and high net
worth individuals,  are potentially subject to the restrictions described below.
Under  FDIC  regulations,  well-capitalized  institutions  are  subject  to  the
no-brokered deposit limitations,  while adequately- capitalized institutions are
able to accept,  renew or roll over brokered  deposits  only:  (i) with a waiver
from the  FDIC;  and (ii)  subject  to the  limitation  that  they do not pay an
effective  yield on any such  deposit  which  exceeds  by more than (a) 75 basis
points,  the effective yield paid on deposits of comparable size and maturity in
such institution's normal market area for deposits accepted in its normal market
area or (b) by 120%  for  retail  deposits  and  130%  for  wholesale  deposits,
respectively,  of  the  current  yield  on  comparable  maturity  U.S.  Treasury
obligations for deposits accepted outside the institution's  normal market area.
Undercapitalized  institutions are not permitted to accept brokered deposits and
may not


                                       40

<PAGE>

solicit  deposits by offering an  effective  yield that  exceeds by more than 75
basis points, the prevailing  effective yields on insured deposits of comparable
maturity in the institution's  normal market area or in the market area in which
such  deposits  are  being  solicited.  At  December  31,  1997,  the Bank was a
well-capitalized  institution  which was not subject to restrictions on brokered
deposits. See "Business - Sources of Funds - Deposits."

         LIQUIDITY  REQUIREMENTS.  All  savings  associations  are  required  to
maintain an average daily  balance of liquid  assets,  which  include  specified
short-term assets and certain long-term assets, equal to a certain percentage of
the sum of its average daily balance of net  withdrawable  deposit  accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all  savings  associations.  In  November  1997,  the OTS  amended  its
liquidity regulations to, among other things, provide that a savings association
shall maintain  liquid assets of not less than 4% of the amount of its liquidity
base at the end of the  preceding  calendar  quarter as well as to provide  that
each savings association must maintain  sufficient  liquidity to ensure its safe
and sound operation. Prior to November 1997, the required liquid asset ratio was
5%. Historically, the Bank has operated in compliance with these requirements.

         AFFILIATE TRANSACTIONS. Under federal law and regulation,  transactions
between a savings association and its affiliates are subject to quantitative and
qualitative  restrictions.  Affiliates of a savings association  include,  among
other  entities,  companies that control,  are controlled by or are under common
control with the savings  association.  As a result,  the Company,  OAIC and the
Company's non-bank subsidiaries are affiliates of the Bank.

         Savings  associations  are  restricted  in their  ability  to engage in
"covered transactions" with their affiliates. In addition,  covered transactions
between  a  savings  association  and an  affiliate,  as well as  certain  other
transactions with or benefiting an affiliate, must be on terms and conditions at
least as favorable to the savings  association  as those  prevailing at the time
for comparable transactions with non-affiliated companies.  Savings associations
are  required  to  make  and  retain  detailed  records  of  transactions   with
affiliates.

         Notwithstanding  the foregoing,  a savings association is not permitted
to make a loan or extension of credit to any  affiliate  unless the affiliate is
engaged  only in  activities  the Federal  Reserve  Board has  determined  to be
permissible for bank holding companies. Savings associations also are prohibited
from  purchasing or investing in securities  issued by an affiliate,  other than
shares of a subsidiary.

         Savings  associations  are also  subject  to  various  limitations  and
reporting  requirements on loans to insiders.  These limitations require,  among
other  things,  that all loans or  extensions  of credit to insiders  (generally
executive  officers,  directors or 10% stockholders of the institution) or their
"related  interests" be made on substantially the same terms (including interest
rates and collateral) as, and follow credit underwriting procedures that are not
less stringent  than,  those  prevailing for  comparable  transactions  with the
general public and not involve more than the normal risk of repayment or present
other unfavorable features.

         COMMUNITY  INVESTMENT AND CONSUMER  PROTECTION LAWS. In connection with
its  lending  activities,  the Bank is  subject  to a variety  of  federal  laws
designed  to protect  borrowers  and promote  lending to various  sectors of the
economy and  population.  Included  among these are the  Federal  Home  Mortgage
Disclosure Act, Real Estate  Settlement  Procedures Act,  Truth-in-Lending  Act,
Equal  Credit  Opportunity  Act,  Fair Credit  Reporting  Act and the  Community
Reinvestment Act.

         SAFETY  AND  SOUNDNESS.  Other  regulations  include:  (i) real  estate
lending standards for insured institutions,  which provide guidelines concerning
loan-to-value  ratios for various  types of real estate loans;  (ii)  risk-based
capital  rules to account for interest rate risk,  concentration  of credit risk
and the risks  posed by  "non-traditional  activities;"  (iii)  rules  requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement  exposure to their  correspondent  banks;  and
(iv)  rules  addressing  various  "safety  and  soundness"   issues,   including
operations and managerial standards,  standards for asset quality,  earnings and
stock  valuations,  and  compensation  standards  for the  officers,  directors,
employees and principal stockholders of the insured institution.

FEDERAL TAXATION

         GENERAL.  The Company and all of its  subsidiaries  currently file, and
expect to continue to file, a consolidated  Federal income tax return based on a
calendar  year.  Prior to  October  1, 1996,  IMI and its  subsidiaries  filed a
separate 


                                       41

<PAGE>

Federal  consolidated  tax  return.  Consolidated  returns  have the  effect  of
eliminating   inter-company   transactions,   including   dividends,   from  the
computation of taxable income.

         For  taxable  years  beginning  prior to  January  1,  1996,  a savings
institution,  such as the Bank, that met certain  definitional tests relating to
the  composition  of its  assets and the  sources  of its income (a  "qualifying
savings  institution") was permitted to establish  reserves for bad debts and to
claim annual tax deductions for additions to such reserves. A qualifying savings
institution was permitted to make annual additions to such reserves based on the
institution's loss experience.  Alternatively,  a qualifying savings institution
could elect,  on an annual  basis,  to use the  "percentage  of taxable  income"
method to  compute  its  addition  to its bad debt  reserve on  qualifying  real
property  loans  (generally,  loans  secured by an  interest  in  improved  real
estate).  The percentage of taxable income method  permitted the  institution to
deduct a specified  percentage  of its  taxable  income  before such  deduction,
regardless of the institution's  actual bad debt experience,  subject to certain
limitations.  From 1988 to 1995, the Bank has claimed bad debt deductions  under
the percentage of taxable  income method because that method  produced a greater
deduction than did the experience method.

         On August 20, 1996,  President  Clinton  signed the Small  Business Job
Protection  Act ("the Act") into law.  One  provision  of the Act  repealed  the
reserve  method of accounting for bad debts for savings  institutions  effective
for taxable years  beginning  after 1995 and provided for recapture of a portion
of the reserves  existing at the close of the last taxable year beginning before
January 1, 1996.  For its tax years  beginning on or after January 1, 1996,  the
Bank is  required to account  for its bad debts  under the  specific  charge-off
method.  Under this method,  deductions may be claimed only as and to the extent
that loans become wholly or partially worthless.

         ALTERNATIVE  MINIMUM TAX. In addition to the regular  corporate  income
tax, corporations,  including qualifying savings institutions, are subject to an
alternative  minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income  ("AMTI")  and applies if it exceeds the regular tax  liability.  AMTI is
equal to regular  taxable  income with certain  adjustments.  For taxable  years
beginning  after  1989,  AMTI  includes an  adjustment  for 75% of the excess of
"adjusted  current  earnings" over regular  taxable  income.  Net operating loss
carrybacks  and  carryforwards  are  permitted  to  offset  only  90%  of  AMTI.
Alternative  minimum tax paid can be credited  against  regular tax due in later
years.

         TAX RESIDUALS.  From time to time, the Company acquires REMIC residuals
or retains  residual  securities  in REMICs  which were formed by the Company in
connection with the  securitization  and sale of loans.  Although a tax residual
may have  little or no future  economic  cash flows from the REMIC from which it
has been issued,  the tax residual does bear the income tax liability or benefit
resulting from the  difference  between the interest rate paid on the securities
by the REMIC and the interest  rate  received on the mortgage  loans held by the
REMIC.  This  generally  results in taxable  income for the Company in the first
several years of the REMIC and equal amounts of tax deductions  thereafter.  The
Company  receives  cash  payments  in  connection  with the  acquisition  of tax
residuals to compensate the Company for the time value of money  associated with
the tax  payments  related  to  these  securities  and the  costs  of  modeling,
recording,  monitoring and reporting the securities. The Company defers all fees
received and recognizes such fees in interest income on a level yield basis over
the  expected  life of the  deferred  tax asset  related to tax  residuals.  The
Company also adjusts the  recognition in interest  income of fees deferred based
upon the changes in the actual prepayment rates of the underlying mortgages held
by the REMIC and periodic reassessments of the expected life of the deferred tax
asset  related to tax  residuals.  At December 31,  1997,  the  Company's  gross
deferred  tax  assets  included  $3.5  million  which  was  attributable  to the
Company's tax residuals and related deferred income.

         INVESTMENTS  IN  LOW-INCOME   HOUSING  TAX  CREDIT  INTERESTS.   For  a
discussion of the tax effects of  investments  in low-income  housing tax credit
interests, see "Business-Investment  Activities-Investment in Low-Income Housing
Tax Credit Interests."

         EXAMINATIONS.  The most recent  examination by the IRS of the Company's
Federal  income tax return was of the tax return filed for 1993.  The statute of
limitations has run out with respect to 1993 and all prior tax years.  Thus, the
Federal  income  tax  returns  for the  years  1994  through  1997  are open for
examination. The Internal Revenue Service currently is completing an examination
of the Company's  Federal income tax return for 1994;  management of the Company
does not  anticipate any material  adjustments as a result of this  examination,
although  there can be no  assurances  in this  regard.  No state  return of the
Company has been examined,  and no notification has been received by the Company
that any state intends to examine any of the Company's tax returns.


                                       42

<PAGE>

STATE TAXATION

         The  Company's  income is subject  to tax by the States of Florida  and
California, which have statutory tax rates of 5.5% and 11.3%, respectively,  and
is determined based on certain  apportionment  factors.  The Company is taxed in
New Jersey on income, net of expenses,  earned in New Jersey at a statutory rate
of 3.0%.


I
TEM 2.  PROPERTIES

         At December 31, 1997, the Company conducted business from its executive
and  administrative   offices  located  in  West  Palm  Beach,   Florida  and  a
full-service banking office located in northern New Jersey.

         The following  table sets forth  information  relating to the Company's
executive and main offices at December 31, 1997.


<TABLE>
<CAPTION>
                                                                             Net Book Value of Property or
                                                                                        Leasehold
                    Location                              Owned/Leased                Improvements
                                                                                 (Dollars in Thousands)
- -------------------------------------------------   ---------------------- -----------------------------------
<S>                                                          <C>                     <C>         
Executive Offices:
     1675 Palm Beach Lakes Blvd.
     West Palm Beach, FL.......................              Leased                  $      6,021

Main Office:
     2400 Lemoine Ave
     Fort Lee, NJ..............................              Leased                  $         --
</TABLE>



         In addition to the above  offices,  OFS  maintains  27 loan  production
offices in 7 states,  including  18 offices in  California.  These  offices  are
operated  pursuant to leases with up to three-year  terms,  each of which can be
readily replaced on commercially reasonable terms.



ITEM 3.  LEGAL PROCEEDINGS


         None.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


         None.



                                     PART II


ITEM 5.  MARKET FOR  THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
         MATTERS

         Information   required   by  this  Item   appears   under  the  caption
"Shareholder Information" on page 71 of the Annual Report to Stockholders and is
incorporated herein by reference.


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL INFORMATION

         Information  required by this Item appears under the caption  "Selected
Consolidated  Financial  Information"  on pages 1 to 2 of the  Annual  Report to
Stockholders and is incorporated herein by reference.


                                       43

<PAGE>


ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION   AND
         RESULTS OF OPERATIONS

         Information   required   by  this  Item   appears   under  the  caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  on  pages  4 to 20 of the  Annual  Report  to  Stockholders  and is
incorporated herein by reference.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Information  required by this Item appears under the caption "Asset and
Liability Management" on pages 15 to 17 of the Annual Report to Stockholders and
is incorporated herein by reference.


ITEM 8.  FINANCIAL STATEMENTS

         Information  required  by this  Item  appears  on pages 22 to 70 in the
Annual Report to Stockholders and is incorporated herein by reference.


ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  contained in the Company's 1998 Proxy Statement under
the  captions  "Election of  Directors  -- Nominees  for  Director,"  "Executive
Officers Who Are Not Directors," and "Security  Ownership of Certain  Beneficial
Owners  --  Section  16(a)  Beneficial   Ownership   Reporting   Compliance"  is
incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

         The  information  contained in the Company's 1998 Proxy Statement under
the captions "Executive  Compensation," other than under the sub-caption "Report
of  the  Nominating  and  Compensation   Committee,"  and  "Board  of  Directors
Compensation" is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  contained in the Company's 1998 Proxy Statement under
the caption  "Security  Ownership  of Certain  Beneficial  Owners --  Beneficial
Ownership of Common Stock" is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  contained in the Company's 1998 Proxy Statement under
the caption  "Certain  Relationships  and Related  Transactions" is incorporated
herein by reference.


                                       44

<PAGE>


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    EXHIBITS
       3.1        Amended and Restated Articles of Incorporation (1)
       3.2        Bylaws (1)
       4.0        Form of Certificate of Common Stock (1)
       4.1        Form of Indenture between the Company and Bank One,  Columbus,
                  NA as Trustee (1)
       4.2        Form of Note due 2003 (included in Exhibit 4.1) (1)
       4.3        Certificate of Trust of Ocwen Capital Trust I (3)
       4.4        Amended and  Restated  Declaration  of Trust of Ocwen  Capital
                  Trust I (3)
       4.5        Form of Capital Security of Ocwen Capital Trust I (4)
       4.6        Form of  Indenture  relating  to 10 7/8%  Junior  Subordinated
                  Debentures due 2027 of the Company (3)
       4.7        Form of 10 7/8% Junior Subordinated Debentures due 2027 of the
                  Company (4)
       4.8        Form of  Guarantee  of the  Company  relating  to the  Capital
                  Securities of Ocwen Capital Trust I (3)
       4.9        Form of Indenture between the Company and The Bank of New York
                  as Trustee
       4.10       Form of Subordinated  Debentures due 2005 (included in Exhibit
                  4.2) (5)
      10.1        Ocwen Financial  Corporation 1991  Non-Qualified  Stock Option
                  Plan, as amended (1)
      10.2        Annual Incentive Plan (1)
      10.3        Ocwen Financial Corporation 1996 Stock Plan for Directors,  as
                  amended (2)
      10.4        Ocwen Financial Corporation 1998 Annual Incentive Plan (6)
      10.5        Ocwen Financial Corporation Long-Term Incentive Plan (6)
      11.1        Computation of earnings per share (7)
      13.1        Annual Report to Stockholders  for the year ended December 31,
                  1997
      21.0        Subsidiaries (see "Business-General")
      23.0        Consent of Price Waterhouse LLP
      27.1        Financial Data Schedule - For the year ended December 31, 1997
      27.2        Amended  Financial Data Schedule - For the year ended December
                  31, 1996
      27.3        Amended  Financial  Data  Schedule  -  For  the  period  ended
                  September 30, 1996
      27.4        Amended  Financial  Data Schedule - For the period ended March
                  31, 1997
      27.5        Amended  Financial  Data  Schedule - For the period ended June
                  30, 1997
      27.6        Amended  Financial  Data  Schedule  -  For  the  period  ended
                  September 30, 1997
      99.0        BCBF, L.L.C. December 31, 1997 audited financial statements

- -------------------
(1)   Incorporated  by reference to the  similarly  described  exhibit  filed in
      connection with the Registrant's  Registration Statement on Form S-1, File
      No. 333-5153, declared effective by the commission on September 25, 1996.

(2)   Incorporated by reference to the similarly described exhibit included with
      the  Registrants  Quarterly  Report  on Form  10-Q for the  quarter  ended
      September 30, 1996.

(3)   Incorporated  by reference to the  similarly  identified  exhibit filed in
      connection with the Company's Registration Statement on Form S-1 (File No.
      333-28889),  as amended, declared effective by the Commission on August 6,
      1997.
(4)   Incorporated  by reference to similarly  described  exhibit  included with
      Registrant's Quarterly Report on Form 10-Q for the quarter ended September
      30, 1997.

(5)   Incorporated  by reference to the  similarly  described  exhibit  filed in
      connection  with Amendment No. 2 to Offering  Circular on Form OC (on Form
      S-1) filed on June 7, 1995.

(6)   Incorporated  by  reference  to the  similarly  described  exhibit  to the
      Company's  Definitive  Proxy  Statement with respect to the Company's 1998
      Annual Meeting as filed with the Commission on March 31, 1998.

(7)   Computation  of earnings per share appears on page 55 in the Annual Report
      to Stockholders and is incorporated herein by reference.

      The Company's  management  contracts or compensatory plans or arrangements
      consist of Exhibits No. 10.1, 10.2, 10.3, 10.4 and 10.5.


                                       45

<PAGE>

         FINANCIAL   STATEMENTS  AND  SCHEDULES.   The  following   Consolidated
Financial  Statements  of  Ocwen  Financial  Corporation  and  Report  of  Price
Waterhouse LLP,  Independent  Certified  Public  Accountants are incorporated by
reference to pages 22 to 70 of the Company's Annual Report to Stockholders:


              Report of Independent Certified Public Accountants

              Consolidated  Statements  of  Financial  Condition at December 31,
              1997 and 1996

              Consolidated  Statements of Operations for each of the three years
              in the period ended December 31, 1997

              Consolidated  Statements  of Changes in  Stockholders'  Equity for
              each of the three years in the period ended December 31, 1997

              Consolidated  Statements of Cash Flows for each of the three years
              in the period ended December 31, 1997

              Notes to Consolidated Financial Statements

         Financial  statement  schedules have been omitted  because they are not
applicable or the required  information is shown in the  Consolidated  Financial
Statements or notes thereto.

         REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1997.

(1)      A Form 8-K was filed by the Company on October 30, 1997 which contained
         a news release announcing the Company's financial results for the three
         and nine months ended September 30, 1997.

(2)      A Form  8-K/A was filed by the  Company  on  November  21,  1997  which
         contained the news release  announcing the Company's  financial results
         for the three and nine months ended  September  30, 1997 dated  October
         27, 1997 and originally filed on October 30, 1997,  amended for changes
         to reflect the final financial  information as determined in connection
         with the filing by the Company of its Form 10-Q for the  quarter  ended
         September  30,  1997,  including  the  retroactive  adjustment  for the
         2-for-1  stock split  approved by the Board of Directors on October 29,
         1997.


                                       46

<PAGE>


S
IGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                    OCWEN FINANCIAL CORPORATION


                            By: /s/ William C. Erbey
                                ------------------------------------------------
                                    William C. Erbey
                                    Chairman of the Board, President and
                                    Chief Executive Officer
                                    (duly authorized representative)


Date:  March 31, 1998


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this  Report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated:

/s/ William C. Erbey                                       Date:  March 31, 1998
- ------------------------------------------------------
    William C. Erbey, Chairman of the Board,
    Chief Executive Officer and President
    (principal executive officer)



/s/ Barry N. Wish                                          Date:  March 31, 1998
- -------------------------------------------------------
    Barry N. Wish, Director



/s/ W.C. Martin                                            Date:  March 31, 1998
- -------------------------------------------------------
    W.C. Martin, Director



/s/ Howard H. Simon                                        Date:  March 31, 1998
- -------------------------------------------------------
    Howard H. Simon, Director



/s/ Hon.  Thomas F. Lewis                                  Date:  March 31, 1998
- -------------------------------------------------------
    Hon. Thomas F. Lewis, Director


/s/ Mark S. Zeidman                                        Date:  March 31, 1998
- -------------------------------------------------------
    Mark S. Zeidman, Chief Financial Officer
    (principal financial and accounting officer)


                                       47





SELECTED CONSOLIDATED FINANCIAL INFORMATION

    The following  tables present  selected  consolidated  financial data of the
Ocwen Financial  Corporation and its subsidiaries  ("Ocwen" or the "Company") at
the dates and for the periods indicated.  The historical  operations and balance
sheet data at and for the years ended December 31, 1997,  1996,  1995,  1994 and
1993 have been derived from  financial  statements  audited by Price  Waterhouse
LLP,  independent  certified  public  accountants.   The  selected  consolidated
financial  data should be read in  conjunction  with,  and is  qualified  in its
entirety  by  reference  to,  the  information  in  the  Consolidated  Financial
Statements and related notes set forth elsewhere herein.

<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                          ---------------------------------------------------------------
                                                             1997          1996        1995(1)       1994(1)      1993(2)
                                                          ---------     ---------    ---------     ---------     --------
                                                                     (Dollars in Thousands, Except per share data)
<S>                                                       <C>           <C>          <C>           <C>           <C>     
Operations Data:
Interest income.......................................... $ 272,531     $ 193,894    $ 137,275      $131,458     $ 78,923
Interest expense.........................................   156,289       116,160       84,060        62,598       35,306
                                                          ---------     ---------    ---------      --------     --------

     Net interest income.................................   116,242        77,734       53,215        68,860       43,617
Provision for loan losses (3)............................    32,218        22,450        1,082            --           --
                                                          ---------     ---------    ---------      --------     --------
     Net interest income after provision for loan losses.    84,024        55,284       52,133        68,860       43,617
                                                          ---------     ---------    ---------      --------     --------
Gains on sales of interest earning assets, net...........    82,212        21,682        6,916         5,727        8,386
Servicing
 fees and other charges.........................    25,881         4,682        2,870         4,786        3,738
Gain on sale of branch offices...........................        --            --        5,430        62,600           --
Income (loss) on real estate owned, net..................     7,277         3,827        9,540         5,995       (1,158)
Fees on financing transactions (4).......................        --            --           --            --       15,340
Other non-interest income................................     8,498         7,112        6,385         2,467        9,566
                                                          ---------     ---------    ---------      --------     --------
     Total non-interest income...........................   123,868        37,303       31,141        81,575       35,872
                                                          ---------     ---------    ---------      --------     --------
Non-interest expense.....................................   126,793        69,606       45,573        68,858       41,859
Distributions on capital securities......................     5,249            --           --            --           --
Equity in earnings of investment in joint venture (5)....    23,688        38,320           --            --           --
Income taxes.............................................   (21,309)      (11,159)      (4,562)      (29,724)     (10,325)
Minority interest in net loss of consolidated subsidiary.       703            --           --            --           --
                                                          ---------     ---------    ---------      --------     --------
Income from continuing operations........................    78,932        50,142       33,139        51,853       27,305
Discontinued operations (6)..............................        --            --       (7,672)       (4,514)      (2,270)
Extraordinary gains......................................        --            --           --            --        1,538
Cumulative effect of a change in accounting principle....        --            --           --            --       (1,341)
                                                          ---------     ---------    ---------      --------     --------
     Net income.......................................... $  78,932     $  50,142    $  25,467      $ 47,339     $ 25,232
                                                          =========     =========    =========      ========     ========
Income from continuing operations per share (16):
     Basic............................................... $    1.40     $    0.99    $    0.64      $   0.81     $   0.42
     Diluted............................................. $    1.39     $    0.94    $    0.60      $   0.76     $   0.40
Net income per share (16):
     Basic............................................... $    1.40     $    0.99    $    0.49      $   0.74     $   0.38
     Diluted                                              $    1.39     $    0.94    $    0.46      $   0.70     $   0.37
</TABLE>


                                                                1

<PAGE>

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                            ------------------------------------------------------------------
                                                               1997          1996         1995(1)       1994(1)       1993(2)
                                                            ----------    ----------    ----------    ----------    ----------
                                                                                (Dollars in Thousands)
<S>                                                         <C>           <C>           <C>           <C>           <C>       
Balance Sheet Data:
Total assets ............................................   $3,069,165    $2,483,685    $1,973,590    $1,226,403    $1,396,677
Securities available for sale (7) .......................      430,524       354,005       337,480       187,717       527,183
Loans available for sale (7)(8) .........................      177,041       126,366       251,790       102,293       101,066
Investment securities, net ..............................       59,567         8,901        18,665        17,011        32,568
Mortgage-related securities held for investment, net ....           --            --            --        91,917       121,550
Loan portfolio, net (8) .................................      266,299       402,582       295,605        57,045        88,288
Discount loan portfolio (8) .............................    1,434,176     1,060,953       669,771       529,460       303,634
Investment in low-income housing tax credit interests ...      128,614        93,309        81,362        49,442        16,203
Real estate owned, net (9) ..............................      167,265       103,704       166,556        96,667        33,497
Investment in joint ventures (15) .......................        1,056        67,909            --            --            --
Excess of purchase price over net assets acquired, net ..       15,560            --            --            --        10,467
Deposits ................................................    1,982,822     1,919,742     1,501,646     1,023,268       871,879
Borrowings and other interest-bearing obligations .......      453,529       300,518       272,214        25,510       373,792
Capital securities ......................................      125,000            --            --            --            --
Stockholders' equity (10) ...............................      419,692       203,596       139,547       153,383       111,831

Other Data:
Average assets (11) .....................................   $2,835,514    $2,013,283    $1,521,368    $1,714,953    $1,152,655
Average equity ..........................................      290,030       161,332       121,291       119,500        97,895
Return on average assets (11)(12):
  Income from continuing operations .....................         2.78%         2.35%         2.18%         3.02%         2.37%
  Net income ............................................         2.78          2.35          1.67          2.76          2.19
Return on average equity (12):
  Income from continuing operations .....................        27.22         31.08         27.32         43.39         27.89
  Net income ............................................        27.22         31.08         21.00         39.61         25.77
Average equity to average assets ........................        10.23          8.01          7.97          6.97          8.49
Net interest spread .....................................         4.81          5.46          5.25          4.86          4.05
Net interest margin .....................................         4.91          4.84          4.54          4.75          4.30
Efficiency ratio (13) ...................................        48.06         45.38         54.00         45.77         52.66
Nonperforming loans to loans at end of period (14).......         3.39          0.56          1.27          4.35          3.71
Allowance for loan losses to loans at end of period (14).         1.37          0.87          0.65          1.84          0.99
Bank regulatory capital ratios at end of period:
  Tangible ..............................................        10.66          9.33          6.52         11.28          5.25
  Core (Leverage) .......................................        10.66          9.33          6.52         11.28          6.00
  Risk-based ............................................        14.83         12.85         11.80         14.74         13.31
Number of full-service offices at end of period .........            1             1             1             3            28
</TABLE>


                                                               2

<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION

(1)    Financial  data at December 31, 1995 and 1994 reflects the Company's sale
       of two and twenty-three branch offices,  respectively,  which resulted in
       the  transfer  of  deposits  of  $111.7   million  and  $909.3   million,
       respectively,  and  resulted in a gain on sale of $5.4  million and $62.6
       million during 1995 and 1994, respectively.  Operations data for 1995 and
       1994 reflects the gains from these transactions. Exclusive of these gains
       and related income taxes and profit sharing expense, the Company's income
       from  continuing  operations  would  have been  $30.3  million  and $24.0
       million during 1995 and 1994, respectively.  See "Management's Discussion
       and Analysis of Financial  Condition  and Results of Operations - Results
       of Operations."

(2)    Balance  sheet data at December 31, 1993  reflects the merger of Berkeley
       Federal Savings  Company ("Old  Berkeley") into the Bank on June 3, 1993,
       and  operations  data for the year ended  December 31, 1993  reflects the
       operations of Old Berkeley from the date of merger.  This transaction was
       accounted for using the purchase method of accounting.

(3)    The  provision  for loan losses in 1997 and 1996  consists  primarily  of
       $31.9 million and $20.6 million,  respectively,  related to the Company's
       discount  loan  portfolio.  Beginning in the first  quarter of 1996,  the
       Company began recording general  valuation  allowances on discount loans.
       See  "Management's  Discussion  and Analysis of Financial  Condition  and
       Results of Operations-Results of Operations-Provision for Loan Losses."

(4)    Represents  a portion of the amounts  paid to the  Company in  connection
       with the Company's  acquisition  of certain  mortgage-related  securities
       which  generate  taxable  income  in  the  first  several  years  of  the
       instrument's life and tax losses of an equal amount thereafter,  but have
       minimal or no cash flows.  Commencing in 1994,  such amounts are deferred
       and  recognized  in  interest  income  on a level  yield  basis  over the
       expected  life of that portion of the deferred tax asset which relates to
       tax residuals.

(5)    Relates to the Company's  investment in BCBF,  L.L.C.  (the "LLC"), a 50%
       owned joint venture formed between the Bank and BlackRock Capital Finance
       ("BlackRock")  to acquire loans from the  Department of Housing and Urban
       Development ("HUD") in April 1996.

(6)    In September  1995, the Company  announced its decision to dispose of its
       automated banking division,  which was substantially complete at December
       31,  1995.  See  "Management's   Discussion  and  Analysis  of  Financial
       Condition   and  Results  of   Operations  -  Results  of   Operations  -
       Discontinued  Operations"  and  Note  3  to  the  Consolidated  Financial
       Statements.

(7)    Securities  available  for  sale  are  carried  at  market  value.  Loans
       available for sale are carried at the lower of cost or market value.

(8)    The discount loan  portfolio  consists of mortgage  loans  purchased at a
       discount  to the  unpaid  debt,  most  of  which  were  nonperforming  or
       subperforming  at the date of  acquisition.  The loan portfolio and loans
       available  for sale  consist  of other  loans  which were  originated  or
       purchased  by  the  Company  for   investment  or  for  potential   sale,
       respectively.  Data related to discount  loans does not include  discount
       loans held by the LLC.

(9)    Real estate owned  consists of properties  acquired by  foreclosure or by
       deed-in-lieu  thereof  on  loans  and is  primarily  attributable  to the
       Company's discount loan acquisition and resolution business.

(10)   Reflects the Company's repurchase of 8,815,060 shares of its common stock
       during 1995 for an aggregate of $42.0 million.

(11)   Includes the Company's  pro rata share of the average  assets held by the
       LLC.

(12)   Exclusive  of  a  one-time   assessment  to   recapitalize   the  Savings
       Association  Insurance  Fund (the  "SAIF")  in 1996 and of gains from the
       sales of branch  offices in 1995 and 1994 and  related  income  taxes and
       profit  sharing  expense,  (i)  return on average  assets on income  from
       continuing  operations amounted to 2.54% and 2.00% and 1.40% during 1996,
       1995 and 1994, respectively,  and (ii) return on average equity on income
       from continuing  operations amounted to 33.35%,  25.02% and 20.06% during
       1996, 1995 and 1994, respectively.

(13)   The efficiency ratio represents  non-interest  expense divided by the sum
       of net interest  income before  provision  for loan losses,  non-interest
       income and equity in earnings of investment in joint  venture.  Exclusive
       of the SAIF assessment in 1996 and gains from the sales of branch offices
       in 1995 and 1994 and related profit sharing expense, the efficiency ratio
       amounted  to  41.33%,  56.34%  and  64.14%  during  1996,  1995 and 1994,
       respectively.

(14)   Nonperforming loans and total loans do not include loans in the Company's
       discount loan portfolio or loans available for sale.

(15)   Relates to the Company's  investment in BCFL, L.L.C.  ("BCFL"), a limited
       liability  corporation  in which the Company has a 10% interest which was
       formed in January 1997 with BlackRock to acquire multi-family residential
       loans from HUD, at December 31, 1997 and the LLC at December 31, 1996. At
       December 31, 1996, the net discount loans, which were available for sale,
       held by the LLC amounted to $110.7 million. See "Management's  Discussion
       and Analysis of Financial  Condition and Results of Operations-Changes in
       Financial Condition - Investment in Joint Ventures."

(16)   All per share  amounts have been  adjusted  retroactively  to reflect the
       10-for-1  stock  split in 1996 and the 2-for-1  stock  split in 1997.  In
       addition,  all per share  amounts have been  adjusted for the adoption of
       Statement  of  Financial  Accounting  Standards  No. 128,  "Earnings  per
       share." See Note 23 to the Consolidated Financial Statements.

                                       3

<PAGE>


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

     The following discussion of the Company's consolidated financial condition,
results of operations  and capital  resources  and  liquidity  should be read in
conjunction  with  Selected  Consolidated  Financial  Data and the  Consolidated
Financial Statements and related notes included elsewhere herein.

Results of Operations

     GENERAL.  The  Company  recorded  net  income  of $78.9  million  for 1997,
compared  with  $50.1  million  for 1996 and $25.5  million  for  1995.  Diluted
earnings  per share were  $1.39 for 1997,  as  compared  with $0.94 for 1996 and
$0.46 for 1995.

     The  Company  has  emphasized  discount  loan  acquisition  and  resolution
activities and a variety of other mortgage lending  activities,  which generally
reflect the  Company's  focus on business  lines which offer the  potential  for
greater  returns  without  increased  risk of loss. As a result of the Company's
business strategy,  the average balance of the Company's discount loan portfolio
(which does not include the Company's  pro rata share of discount  loans held by
LLC), loan portfolio and loans available for sale have increased as follows:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                             ---------------------------------------------------------------------------------
                                                     1997                          1996                        1995
                                             -----------------------     -------------------------    ------------------------
                                                             % of                         % of                        % of
                                              Average       Average        Average       Average        Average      Average
                                              Balance       Assets         Balance       Assets         Balance      Assets
                                             ----------  -----------     ----------    -----------    -----------  -----------
                                                                          (Dollars in Thousands)

<S>                                          <C>              <C>      <C>               <C>       <C>             <C>
Discount loan portfolio...................   $1,283,020       45%        $  675,345       34%        $  483,204        32%
Loan portfolio............................      410,863       15            328,378       16            130,901         9
Loans available for sale..................      171,837        6            175,078        9            167,011        11
                                             ----------       ---        ----------       ---        ----------       ---
                                             $1,865,720       66%        $1,178,801       59%        $  781,116        52%
                                             ==========       ===        ==========       ===        ==========       ===
</TABLE>


     This growth in the Company's lending activities,  particularly its discount
loan activities, has substantially contributed to the Company's profitability in
recent  periods.  In this regard,  the Company  estimates that its discount loan
acquisition and resolution  activities,  which includes the single family, large
commercial and small commercial business lines, accounted for approximately 65%,
64% and 75% of its net income during the years ended December 31, 1997, 1996 and
1995, respectively.

     The Company's  discount loan activities  also include  investments in joint
ventures to acquire  discount loans,  which to date have consisted  primarily of
the Company's 50% interest in the LLC. Equity in earnings of investment in joint
ventures  amounted  to $23.7  million and $38.3  million  during the years ended
December 31, 1997 and 1996, respectively,  and were primarily comprised of $14.0
million and $35.6  million of gains  related to the  securitization  of discount
single family residential loans acquired from HUD, respectively. See "Changes In
Financial Condition -- Investment in Joint Ventures."

     The Company  currently  anticipates  that the available  current and future
supply of discount  loans is  sufficient  to support the  Company's  operational
needs,  but this is not a certainty and could change as a result of a variety of
factors which bear on market availability.

     The Company's lending activities and increasing use of securitizations have
resulted in gains on the sale of interest-earning  assets becoming a significant
part of the Company's operating results. Gains from the sale of interest-earning
assets amounted to $82.2 million,  $21.7 and $7.0 million during the years ended
December 31, 1997, 1996 and 1995, respectively. A significant component of these
gains  in  1997  and  1996  (approximately  $71.9  million  and  $15.2  million,
respectively)  were gains from the securitization of discount loans and subprime
single family residential loans.

     The Company's operating results in 1995 were significantly  affected by the
effects  of the  sale of  branch  offices  at the end of 1995  and  1994,  which
resulted  in $5.4  million  and $62.6  million of gains  before  profit  sharing
expense and income taxes during these respective  periods.  As a result of these
sales,  the Company's  average  assets  decreased  during 1995 and the Company's
principal source of deposits  shifted to brokered and other wholesale  deposits.
The Company's  operating  results  during 1995 were also affected by losses from
discontinued   operations  of  its  automated   banking   division  and  related
activities, which, net of the applicable tax effect, amounted to $7.7 million.

     NET  INTEREST  INCOME.  The  operations  of the Company  are  substantially
dependent  on its net  interest  income,  which is the  difference  between  the
interest  income  received  from its  interest-earning  assets and the  interest
expense  paid  on its  interest-bearing  liabilities.  Net  interest  income  is
determined by an institution's net interest spread (i.e., the difference between
the  yield  earned on its  interest-earning  assets  and the  rates  paid on its
interest-bearing  liabilities),  the relative amount of interest-earning  assets
and interest-bearing  liabilities and the degree of mismatch in the maturity and
repricing  characteristics of its  interest-earning  assets and interest-bearing
liabilities.

     The  following  table sets forth,  for the periods  indicated,  information
regarding  the total  amount  of income  from  interest-earning  assets  and the
resultant average yields, the interest expense associated with  interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
interest  margin.  Information  is based on average  daily  balances  during the
indicated periods.

                                                               4

<PAGE>

<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                        --------------------------------------------------------------------------------------------
                                                      1997                           1996                            1995
                                        -------------------------------  -----------------------------  ----------------------------
                                          Average             Average     Average             Average   Average            Average
                                          Balance   Interest Yield/Rate   Balance  Interest Yield/Rate  Balance  Interest Yield/Rate
                                        ---------- --------- ----------  --------  -------- ---------- -------- --------- ----------
                                                                    (Dollars in Thousands)
<S>                                     <C>        <C>          <C>    <C>        <C>          <C>   <C>        <C>          <C>  
Average Assets:
Federal funds sold and
   repurchase agreements..............  $  163,671 $   8,959    5.47%  $   84,997 $   4,681    5.51% $   55,256 $   3,502    6.34%
Securities held for trading...........       3,295       248    7.53       21,291     1,216    5.71          --        --      --
Securities available for sale(1)......     299,558    28,545    9.53      284,433    26,932    9.47     211,559    18,391    8.69
Loans available for sale(2)...........     171,837    18,368   10.69      175,078    17,092    9.76     167,011    15,608    9.35
Investment securities and other(3)....      36,905     4,061   11.00       36,264     3,990   11.00      46,440     4,033    8.68
Mortgage-related securities
   held for investment................          --        --      --           --        --      --      77,257     4,313    5.58
Loan portfolio (1)....................     410,863    54,701   13.31      328,378    36,818   11.21     130,901    15,430   11.79
Discount loan portfolio ..............   1,283,020   157,649   12.29      675,345   103,165   15.28     483,204    75,998   15.73
                                        ---------- ---------           ---------- ---------          ---------- ---------
   Total interest earning assets,
     interest income..................   2,369,149   272,531   11.50    1,605,786   193,894   12.07   1,171,628   137,275   11.72
                                                   ---------                      ---------                     ---------
Non-interest earning cash.............      14,843                          6,372                        17,715
Allowance for loan losses.............     (22,001)                       (11,250)                       (1,180)
Investment in low-income
   housing tax credit interests ......      96,096                         83,110                        63,925
Investment in joint ventures..........      34,777                         46,193                            --
Real estate owned.....................     131,007                        137,250                       144,348
Other assets..........................     211,643                        145,822                       124,932
                                        ----------                    -----------                    ----------
   Total assets.......................  $2,835,514                    $ 2,013,283                    $1,521,368
                                        ==========                    ===========                    ==========

Average Liabilities and 
Stockholders' Equity:
Interest-bearing demand deposits......  $   31,719     1,220    3.85  $    33,167       620    1.87  $   31,373     1,031    3.29 
Savings deposits......................       2,121        49    2.31        3,394        78    2.30      20,370       451    2.21
Certificates of deposit...............   1,964,351   120,801    6.15    1,481,197    93,075    6.28   1,119,836    70,371    6.28
                                        ---------- ---------          ----------- ---------          ---------- ---------
Total interest-bearing deposits.......   1,998,191   122,070    6.11    1,517,758    93,773    6.18   1,171,579    71,853    6.13
Securities sold under agreements
   to repurchase......................      16,717     1,000    5.98       19,581     1,101    5.62      16,754       951    5.68
Securities sold but not yet purchased.          --        --      --           --        --      --      17,149     1,142    6.66
Advances from the Federal Home
   Loan Bank .........................       9,482       518    5.46       71,221     4,053    5.69      14,866     1,126    7.57
Obligations outstanding under lines
   of credit .........................      84,272     5,578    6.62           --        --      --          --        --      --
Notes, debentures and other
   interest bearing obligations.......     228,233    27,123   11.88      148,282    17,233   11.62      78,718     8,988   11.42
                                        ---------- ---------          ----------- ---------          ---------- ---------
   Total interest-bearing liabilities,
     interest expense.................   2,336,895   156,289    6.69    1,756,842   116,160    6.61   1,299,066    84,060    6.47
                                                   ---------                      ---------                     ---------
Non-interest bearing deposits.........      23,224                         10,938                        19,960
Escrow deposits.......................      78,986                         41,306                         4,073
Other liabilities ....................     106,379                         42,865                        76,978
                                        ----------                    -----------                    ----------
   Total liabilities..................   2,545,484                      1,851,951                     1,400,077
Stockholders' equity .................     290,030                        161,332                       121,291
                                        ----------                    -----------                    ----------
   Total liabilities and
     stockholders' equity ............  $2,835,514                    $ 2,013,283                    $1,521,368
                                        ==========                    ===========                    ==========
Net interest income...................             $ 116,242                      $  77,734                     $ 53,215
                                                   =========                      =========                     ========
Net interest spread...................                          4.81%                          5.46%                         5.25%
                                                              =======                      =========                      ========
Net interest margin...................                          4.91%                          4.84%                         4.54%
                                                              =======                      =========                      ========
Ratio of interest-earning assets
   to interest-bearing liabilities ...        101%                            91%                           90%
                                        ==========                   ============                    ==========
</TABLE>

- -------------------
(1)   Excludes effect of unrealized gains or losses on securities  available for
      sale, net of taxes.

(2)   The average  balances of loans  available for sale and the loan  portfolio
      include  nonperforming  loans,  interest on which is  recognized on a cash
      basis.

(3)   Interest  income from  investment  securities and other includes  interest
      income  attributable  to that portion of the Company's  deferred tax asset
      which relates to tax residuals.  See Note 21 to the Consolidated Financial
      Statements.  If the average  balance of the deferred tax asset  related to
      tax residuals was included in the average balance of investment securities
      and other,  the weighted  average yield would have been 10.88%,  7.34% and
      5.93% during 1997, 1996 and 1995, respectively.

                                        5

<PAGE>
     The following table describes the extent to which changes in interest rates
and  changes  in  volume  of   interest-earning   assets  and   interest-bearing
liabilities  have affected the Company's  interest income and expense during the
periods   indicated.   For  each   category  of   interest-earning   assets  and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume  multiplied by prior rate), (ii) changes
in rate (change in rate  multiplied  by prior  volume) and (iii) total change in
rate  and  volume.  Changes  attributable  to both  volume  and rate  have  been
allocated  proportionately  to the  change  due to volume  and the change due to
rate.

<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                --------------------------------------------------------------------
                                                           1997 vs. 1996                     1996 vs. 1995
                                                --------------------------------    --------------------------------
                                                    Increase (Decrease) Due To         Increase (Decrease) Due To
                                                --------------------------------    --------------------------------
                                                  Rate       Volume       Total       Rate       Volume      Total
                                                --------    --------    --------    --------    --------    --------
                                                                        (Dollars in Thousands)
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>     
Interest-Earning Assets:

Federal funds sold and
   repurchase agreements ....................   $    (29)   $  4,307    $  4,278    $   (507)   $  1,686    $  1,179
Securities available for sale ...............        173       1,440       1,613       1,757       6,784       8,541
Securities held for trading .................        297      (1,265)       (968)        608         608       1,216
Loans available for sale ....................      1,597        (321)      1,276         713         771       1,484
Mortgage-related securities held
   for investment ...........................         --          --          --          --      (4,313)     (4,313)
Loan portfolio ..............................      7,642      10,241      17,883        (788)     22,176      21,388
Discount loan portfolio .....................    (23,426)     77,910      54,484      (2,235)     29,402      27,167
Investment securities and other .............         --          71          71         947        (990)        (43)
                                                --------    --------    --------    --------    --------    --------
   Total interest-earning assets ............    (13,746)     92,383      78,637         495      56,124      56,619
                                                --------    --------    --------    --------    --------    --------

Interest-Bearing Liabilities:
Interest-bearing demand deposits ............        628         (28)        600        (467)         56        (411)
Savings deposits ............................         --         (29)        (29)         17        (390)       (373)
Certificates of deposit .....................     (2,026)     29,752      27,726          (3)     22,707      22,704
                                                --------    --------    --------    --------    --------    --------
   Total interest-bearing deposits ..........     (1,398)     29,695      28,297        (453)     22,373      21,920
Securities sold under agreements
   to repurchase ............................         67        (168)       (101)         (9)        159         150
Securities sold but not yet purchased .......         --          --          --          --      (1,142)     (1,142)
Advances from the Federal Home Loan Bank ....       (156)     (3,379)     (3,535)       (345)      3,272       2,927
Obligations outstanding under lines of credit         --       5,578       5,578          --          --          --
Notes, debentures and other interest
   bearing obligations ......................        397       9,493       9,890         163       8,082       8,245
                                                --------    --------    --------    --------    --------    --------
   Total interest-bearing liabilities .......     (1,090)     41,219      40,129        (644)     32,744      32,100
                                                --------    --------    --------    --------    --------    --------
Increase (decrease) in net interest income ..   $(12,656)   $ 51,164    $ 38,508    $  1,139    $ 23,380    $ 24,519
                                                ========    ========    ========    ========    ========    ========
</TABLE>


     1997 VERSUS 1996

     The  Company's  net interest  income  before  provision  for loan losses of
$116.2  million  increased  $38.5  million or 50% during 1997 as compared to the
prior year.  This  increase  resulted  from a $78.6  million or 41%  increase in
interest   income  due  to  a  $763.4   million  or  48%   increase  in  average
interest-earning assets during 1997, offset in part by a 57 basis point decrease
in the weighted average yield earned. The increase in interest income was offset
in part by a $40.1  million or 35% increase in interest  expense due to a $580.1
million or 33% increase in the Company's average interest-bearing liabilities.

     Interest  income on the discount loan portfolio  increased by $54.5 million
or 53% in 1997  versus 1996 as a result of a $607.7  million or 90%  increase in
the average balance of the discount loan portfolio,  which was offset in part by
a 299 basis point decrease in the weighted average yield earned.  The decline in
the yield during 1997,  as compared to 1996,  is  primarily  attributable  to an
increase in the average  balance of single family  discount loans as a result of
acquisitions from HUD and the Company's  decision to cease accretion of discount
on nonperforming  single family residential  discount loans effective January 1,
1997. Discount accretion on nonperforming  single family discount loans amounted
to $4.6 million or 69 basis points in yield  during 1996.  The Company  believes
that the yield earned on its single family  residential  discount loan portfolio
in 1997  remained  below  

                                       6

<PAGE>

the  yield  earned  in the  prior  year  also  due to its  current  strategy  of
attempting to work with borrowers to either (i) bring their loans current,  (ii)
modify the terms of their loans,  (iii) enter into  forbearance  agreements that
require the borrower to make monthly payments greater than or equal to scheduled
payment  amounts or (iv) refinance the loans with the Company.  This  resolution
strategy  results in lower  initial  yields as compared to borrowers  paying off
their loans in full or in part and, to the extent the loans are ultimately sold,
will result in a significant portion of the earnings being reflected in gains on
sales of interest earning assets. In addition, the majority of the single family
HUD loans  acquired by the Company in February and September  1997 are currently
under a HUD  forbearance  plan whereby the borrower  makes  payments  based upon
ability to pay for a specific period of time, which generally results in a lower
effective  yield than the contract  rate.  Once this period is over the borrower
must make at least its  contractual  mortgage  payment or the Company can pursue
foreclosure or other actions.  The yield on the overall  discount loan portfolio
is also  likely to continue  to  fluctuate  from year to year as a result of the
timing  of  resolutions,   particularly  the  resolution  of  large  multifamily
residential  and  commercial  real  estate  loans,  and the  mix of the  overall
portfolio between paying and nonpaying loans.

     Interest income on the loan portfolio  increased by $17.9 million or 49% in
1997 from 1996 primarily due to $12.3 million of additional interest received in
connection  with the payoff of ten loans secured by hotel and office  properties
and,  to a  lesser  extent,  an  increase  in the  average  balance  of the loan
portfolio for 1997 of $82.5 million or 25% over that of 1996.

     Interest income on federal funds sold and repurchase  agreements  increased
$4.3  million or 91% during 1997 as compared to 1996  primarily as a result of a
$78.7 million or 93% increase in the average balance.

     Interest expense on deposits  increased $28.3 million or 30% during 1997 as
compared to 1996, and reflects the Company's  continued use of  certificates  of
deposit  to  fund  its  asset  growth.  The  average  amount  of  the  Company's
certificates  of  deposits  increased  from $1.48  billion  during 1996 to $1.96
billion during 1997.

     Interest   expense  on  notes,   debentures   and  other   interest-bearing
obligations  increased  by $9.9  million or 57% during  1997 as compared to 1996
primarily  due to the issuance of $125.0  million of 11.875% Notes (the "Notes")
in September 1996.

     Also  contributing  to the increase in interest  expense during 1997 is the
interest  expense on lines of credit  established at Ocwen  Financial  Services,
Inc.  ("OFS") (see  "Changes in Financial  Condition -  Obligations  Outstanding
Under Lines of Credit"), which amounted to $5.6 million during 1997, as compared
to $0 during 1996 and 1995. OFS, a recently  formed,  93.7% owned  subsidiary of
the  Company,  acquired  substantially  all of the assets of  Admiral  Home Loan
("Admiral"),  the  Company's  primary  correspondent  mortgage  banking firm for
subprime single family loans.

     1996 VERSUS 1995

     The  Company's  net  interest  income  before  provision  for  loan  losses
increased by $24.5  million or 46.1% during 1996, as compared to the prior year.
This increase  resulted from a $56.6 million or 41% increase in interest  income
due to a $434.2 million or 37% increase in average  interest-earning assets and,
to a lesser extent,  a 35 basis point increase in the weighted  average yield on
such  assets.  The  increase  in  interest  income was offset in part by a $32.1
million or 38%  increase  in  interest  expense  due to a $457.8  million or 35%
increase in average  interest-bearing  liabilities,  primarily  certificates  of
deposit, Federal Home Loan Bank ("FHLB") advances, notes and debentures,  and to
a lesser extent,  a 14 basis point increase in the weighted average rate paid on
interest-bearing  liabilities.  The Company's net interest  margin  increased to
4.84% in 1996 from 4.54% in 1995.

     The increase in interest income during 1996, as compared to the prior year,
reflects  substantial  increases in the average  balances of the  discount  loan
portfolio,  loan portfolio and securities available for sale. Beginning in 1996,
adjustments  to reduce the carrying value of discount loans to the fair value of
the property securing the loan are charged against the allowance for loan losses
on the discount loan  portfolio.  Prior to 1996, such  adjustments  were charged
against  interest  income on discount  loans.  Had charge-offs on discount loans
been included as a reduction of interest  income in 1996,  the weighted  average
yield on the discount loan portfolio would have been 13.9%.

     The average balance of the Company's interest-bearing liabilities increased
substantially  during  1996,  as compared  to the prior  year,  as a result of a
$361.4  million  or 32%  increase  in the  average  balance of  certificates  of
deposit,  a $56.4  million  or 379%  increase  in the  average  balance  of FHLB
advances and a $69.6 million or 88% increase in the average balance of notes and
debentures, which reflect the Company's reliance on brokered and other wholesale
certificates  of deposit and  advances  from the FHLB as a source of funds,  the
Company's issuance of the Notes in September 1996 and the Bank's issuance of 12%
Subordinated Debentures (the "Debentures") in June 1995, respectively.

     PROVISIONS  FOR LOAN LOSSES.  Provisions for losses on loans are charged to
operations  to maintain an allowance  for losses on both the loan  portfolio and
the discount loan portfolio at a level which management considers adequate based
upon an  evaluation  of  known  and  inherent  risks  in such  loan  portfolios.
Management's  periodic  evaluation  is based on an analysis of both the discount
loan  portfolio and the loan  portfolio,  historical  loss  experience,  current
economic conditions and other relevant factors.

     Provisions  for loan losses  amounted to $32.2  million,  $22.5 million and
$1.1  million  during  the  years  ended  December  31,  1997,  1996  and  1995,
respectively. The increase in provisions for loan losses in 1997 was largely due
to an $11.3  million  increase in the  provision for losses on the discount loan
portfolio,  which  occurred  primarily  as a result of a $607.7  million  or 90%
increase in the average  balance of the discount loan  portfolio  during 1997 as
compared to 1996.  The increase in  provisions  for losses in 1996 was primarily
attributable  to a change in methodology for valuing  discount loans,  which was
adopted by the  Company  effective  January 1, 1996.  Pursuant to this change in
methodology,  the Company establishes provisions for losses on discount loans as

                                       7

<PAGE>
necessary  to  maintain  an  allowance  for losses at a level  which  management
believes  reflects the inherent  losses which may have occurred but have not yet
been specifically  identified,  and records all charge-offs on the discount loan
portfolio,  net of  recoveries,  against  the  allowance  for losses on discount
loans.  Prior to 1996,  provisions  for losses on loans were not  established in
connection  with the discount loan portfolio  because  adjustments to reduce the
carrying  value of  discount  loans to the lower of  amortized  cost or the fair
market value of the  properties  securing the loans  discounted at the effective
interest rate, which amounted to $5.0 million in 1995, were recorded in interest
income on discount  loans.  Provisions for losses on the discount loan portfolio
amounted to $31.9 million and $20.6 million during 1997 and 1996,  respectively,
and net charge-offs on the discount loan portfolio amounted to $20.3 million and
$9.2 million during the same respective years.

     Provisions  for losses on the loan  portfolio  amounted to  $325,000,  $1.9
million and $1.1 million  during the years ended  December  31,  1997,  1996 and
1995, respectively.  Net charge-offs on the loan portfolio amounted to $153,000,
$296,000 and $245,000  during the years ended December 31, 1997,  1996 and 1995,
respectively.

     Although  management  utilizes its best  judgment in providing for possible
loan losses,  there can be no  assurance  that the Company will not increase its
provisions for possible loan losses in subsequent periods. Changing economic and
business  conditions,  fluctuations  in local  markets for real  estate,  future
changes in  nonperforming  asset  trends,  material  upward  movements in market
interest rates or other factors could affect the Company's future provisions for
loan  losses.  In  addition,  the Office of Thrift  Supervision  ("OTS"),  as an
integral part of its examination  process,  periodically reviews the adequacy of
the Company's  allowance for losses on loans and discount loans and as a result,
may require the Company to recognize changes to such allowances for losses based
on its judgment about information available to it at the time of examination.

     NON-INTEREST INCOME. Non-interest income increased $86.6 million or 232% in
1997 as compared to 1996.  Exclusive  of the $5.4  million gain from the sale of
branch offices in 1995, non-interest income increased by $11.5 million or 45% in
1996. The increase in non-interest income during 1997 was primarily attributable
to gains from the sale of  interest-earning  assets and servicing fees and other
charges.  The increase in  non-interest  income during 1996 was primarily due to
gains from the sale of interest-earning assets.

     The following  table sets forth the  principal  components of the Company's
non-interest income during the years indicated.

<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                           -------------------------------------
                                                                              1997         1996           1995
                                                                           ---------     ---------     ---------
                                                                                     (Dollars in Thousands)
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         Servicing fees and other charges..............................    $  25,881     $   4,682     $   2,870
         Gains on sales of interest-earning assets, net................       82,212        21,682         6,916
         Income on real estate owned, net..............................        7,277         3,827         9,540
         Other income..................................................        8,498         7,112         6,385
                                                                           ---------     ---------     ---------
           Subtotal....................................................      123,868        37,303        25,711
         Gain from sale of branch offices..............................           --            --         5,430
                                                                           ---------     ---------     ---------
           Total.......................................................    $ 123,868     $  37,303     $  31,141
                                                                           =========     =========     =========
</TABLE>


     Servicing fees and other charges  increased in 1997 and 1996 primarily as a
result  of  increases  in loan  servicing  and  related  fees as a result of the
Company's increase in loans (primarily subprime and nonperforming)  serviced for
others.  During 1997 and 1996,  the average  unpaid  principal  balance of loans
serviced for others amounted to $3.11 billion and $887.9 million, respectively.

     The following  table sets forth the Company's  loans serviced for others at
December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                            December 31, 1997
                                           ----------------------------------------------------------------------------------------
                                              Discount Loans         Subprime Loans          Other Loans                Total
                                           -------------------   --------------------   ---------------------   -------------------
                                                       No. of                  No. of                 No. of                 No. of
                                             Amount    Loans       Amount      Loans      Amount      Loans       Amount     Loans
                                           ---------- --------   ----------   -------   ----------   --------   ----------  -------
                                                                       (Dollars in Thousands)
<S>                                        <C>          <C>      <C>            <C>     <C>          <C>        <C>          <C>   
Loans securitized and sold with recourse.. $  624,591   11,148   $  555,914     4,976   $       --         --   $1,180,505   16,124
Loans serviced for third parties .........  1,682,764   23,181    2,352,352    29,911      294,198      1,092    4,329,314   54,184
                                           ---------- --------   ----------   -------   ----------   --------   ---------- --------
                                           $2,307,355   34,329   $2,908,266    34,887   $  294,198      1,092   $5,509,819   70,308
                                           ========== ========   ==========   =======   ==========   ========   ========== ========

                                                                            December 31, 1996
                                           ----------------------------------------------------------------------------------------
                                              Discount Loans         Subprime Loans          Other Loans                Total
                                           -------------------   --------------------   ---------------------   -------------------
                                                       No. of                  No. of                 No. of                 No. of
                                             Amount    Loans       Amount      Loans      Amount      Loans       Amount     Loans
                                           ---------- --------   ----------   -------   ----------   --------   ---------- --------
                                                                       (Dollars in Thousands)
Loans securitized and sold with recourse.. $  204,586    4,796   $  202,766     1,879   $       --         --   $  407,352    6,675
Loans serviced for third parties .........  1,209,535   22,511        6,784        60      294,427        917    1,510,746   23,488
                                           ---------- --------   ----------   -------   ----------   --------   ---------- --------
                                           $1,414,121   27,307   $  209,550     1,939   $  294,427        917   $1,918,098   30,163
                                           ========== ========   ==========   =======   ==========   ========   ========== ========
</TABLE>


                                                                  8

<PAGE>

     Net  gains on sales  of  interest-earning  assets  in 1997  were  primarily
comprised  of $71.9  million  of net gains  recognized  in  connection  with the
securitization of single family subprime loans, single family discount loans and
small commercial discount loans, as presented in the table below.  Additionally,
the  Company  recorded  a $2.6  million  gain on the  sale  of  mortgage-related
securities  to OAIC,  $2.7  million  of gains  from the sales of  single  family
subprime loans and $3.5 million of gains from sales of certain large  commercial
loans in the Company's discount loan portfolio.

     Net  gains on sales  of  interest-earning  assets  in 1996  were  primarily
comprised of a $5.4 million gain from the sale of 256 single family loans in the
Company's  discount loan portfolio  which had been brought current in accordance
with their terms, a $4.5 million gain from the sale of discount  commercial real
estate loans and, as presented in the table below, $15.2 million of net gains in
connection  with the  securitization  of single family  subprime loans and large
discount commercial real estate loans.

     Net  gains on sales  of  interest-earning  assets  in 1995  were  primarily
comprised  of a $6.0  million  gain  from the  sale of  loans  in the  Company's
discount loan portfolio  which had been brought current in accordance with their
terms and, as presented in the table  below,  a $1.6 million gain in  connection
with the securitization of multi-family residential loans.

     The  following  table  sets forth the  Company's  net gains  recognized  in
connection with the securitization of loans during 1997, 1996 and 1995.

<TABLE>
<CAPTION>

                                   Loans Securitized
- ------------------------------------------------------------------------------------
                                                                                            Book Value of
                Type of Loans                         Principal        No. of Loans    Securities Retained (1)     Net Gain
- --------------------------------------------       ---------------    --------------   -----------------------  --------------
1997:
<S>                                                   <C>                      <C>            <C>                  <C>      
Single family discount......................          $  418,795               6,295          $   20,635           $  51,137
Single family subprime......................             415,830               3,640              25,334              18,802
Small commercial discount...................              62,733                 302               4,134               1,994
                                                      ----------            --------          ----------           ---------
                                                      $  897,358              10,237          $   50,103           $  71,933
                                                      ==========            ========          ==========           =========

1996:
Large commercial discount...................          $  164,417                  25          $    8,384           $   7,929
Single family subprime......................             211,204               1,180              18,236               7,232
                                                      ----------            --------          ----------           ---------
                                                      $  375,621               1,205          $   26,620           $  15,161
                                                      ----------            --------          ----------           ---------

1995:
Multi-family................................          $   83,875                  25           $      --            $  1,606
                                                      ==========            ========          ==========           =========
</TABLE>

- -------------------
(1)  Consists of  subordinated  and/or  residual  securities  resulting from the
     Company's  securitization  activities,  which had a carrying value of $78.5
     million at December 31, 1997.

     Gains on sale of interest-earning  assets (as well as other assets, such as
real estate  owned,  as  discussed  below)  generally  are  dependent on various
factors which are not necessarily  within the control of the Company,  including
market and economic conditions.  As a result, there can be no assurance that the
gains on sale of  interest-earning  assets  (and other  assets)  reported by the
Company in prior  periods will be reported in future  periods or that there will
not be substantial inter-period variations in the results from such activities.

     The  following  table sets forth the results of the  Company's  real estate
owned (which does not include  investments in real estate,  as discussed  below)
during the years  indicated,  which were primarily  related to the discount loan
portfolio.

                                                Year Ended December 31,
                                           --------------------------------
                                             1997        1996        1995
                                           --------    --------    --------
                                                 (Dollars in Thousands)

     Gains on sales ...................... $ 30,651    $ 22,835    $ 19,006
     Provision for losses in fair value...  (13,450)    (18,360)    (10,510)
     Rental income (carrying costs), net..   (9,924)       (648)      1,044
                                           --------    --------    --------
     Income on real estate owned, net..... $  7,277    $  3,827    $  9,540
                                           ========    ========    ========

     For additional information relating to the Company's real estate owned, see
"Changes in Financial Condition - Real Estate Owned."

     Other income for 1997 and 1996 included gains in the amount of $6.3 million
and $4.9 million, respectively,  realized in connection with the sale of certain
of the Company's  investments  in low-income  housing tax credit  projects.  See
"Changes in Financial  Condition - Investments in Low-Income  Housing Tax Credit
Interests."  Other income for 1995  includes a $4.7 million gain realized on the
sale of one of the two hotels owned by the Company.  A 69% partnership  interest
in the  second  hotel  was sold in 1997 for a  minimal  gain.  See  "Changes  in
Financial Condition - Investment in Real Estate."

     The  Company  realized  a $5.4  million  gain  from the sale of two  branch
offices  and $111.7  million of related  deposits at the end of 1995 and a $62.6
million gain from the sale of twenty-three  branch offices and $909.3 million of
related  deposits at the end of 

                                       9

<PAGE>
1994. The Company sold these branch offices and the related deposit  liabilities
because of the premiums which could be obtained for such deposits under existing
market and economic  conditions  and because the Company  believed that it could
replace these  deposits with other sources of funds,  such as brokered and other
wholesale  deposits,  FHLB  advances and reverse  repurchase  agreements,  which
management  generally  believes  have an effective  cost to the Company which is
more attractive than the deposits obtained from branch offices after the general
and administrative expense associated with such offices is taken into account.

     NON-INTEREST  EXPENSE.  Non-interest expense increased $57.2 million or 82%
during 1997 and $24.0 million or 53% during 1996.  The increase in  non-interest
expense in 1997 was primarily  attributable to an increase of 474 in the average
number of  employees  which  resulted  in a $38.5  million  or 99%  increase  in
compensation and employee benefits, an $8.7 million or 98% increase in occupancy
and equipment  expense and an $11.8  million or 79% increase in other  operating
expenses.  The increase in non-interest expense in 1996 was primarily related to
a $14.2  million or 57% increase in employee  compensation  and benefits and the
SAIF assessment of $7.1 million.

     The following  table sets forth the  principal  components of the Company's
non-interest expense during the periods indicated.

<TABLE>
<CAPTION>

                                                            Year Ended December 31,
                                                       -------------------------------
                                                         1997       1996        1995
                                                       --------   --------    --------
                                                            (Dollars in Thousands)
<S>                                                    <C>        <C>         <C>     
     Compensation and employee benefits ............   $ 77,573   $ 39,043    $ 24,797
     Occupancy and equipment .......................     17,657      8,921       8,360
     Net operating loss (income) on investment
       in real estate and certain low-income housing
       tax credit interests ........................      4,792       (425)        337
     SAIF assessment ...............................         --      7,140          --
     Other operating expenses ......................     26,771     14,927      12,079
                                                       --------   --------    --------
       Total .......................................   $126,793   $ 69,606    $ 45,573
                                                       ========   ========    ========
</TABLE>


     The  increases  in  compensation  and  employee  benefits  in 1997 and 1996
reflect an increase in the average  number of employees  from 344 during 1995 to
398  during  1996 to 872  during  1997.  In  addition,  profit  sharing  expense
increased by $8.6 million and $8.4 million during 1997 and 1996, respectively.

     The increase in occupancy and equipment expense of $8.7 million in 1997 was
primarily  related to a $3.4 million  increase in general  office and  equipment
expenses,  a $3.1 million  increase in data processing  costs and a $1.3 million
increase in rent  expense,  all largely  attributable  to the increase in leased
loan and production  office space and to the increase in the number of full-time
employees discussed above.

     Other operating expenses increased by $11.8 million in 1997, primarily as a
result of a $2.9  million  increase in loan  related  expenses  (primarily  as a
result of the Company's increased  investment in loans), a $2.6 million increase
in  professional  fees, a $1.4 million  increase in due diligence  costs, a $1.4
million  reserve  established  on a receivable and $1.1 million of certain other
one-time  charges  offset in part by a $1.5  million  decline in FDIC  insurance
premiums  (primarily  due to a reduction in assessment  rates as a result of the
recapitalization of the SAIF in 1996). See Note 25 to the Consolidated Financial
Statements for a disclosure of the components of other operating expenses.

     DISTRIBUTIONS ON  COMPANY-OBLIGATED,  MANDATORILY  REDEEMABLE SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR  SUBORDINATED  DEBENTURES OF THE COMPANY.
In August 1997, Ocwen Capital Trust I ("OCT"), a wholly-owned  subsidiary of the
Company, issued $125.0 million of 10 7/8% Capital Securities. Cash distributions
on the Capital  Securities  accrue from the date of  original  issuance  and are
payable  semi-annually  in  arrears  on  February  1 and  August 1 of each year,
commencing on February 1, 1998, at an annual rate of 10 7/8% of the  liquidation
amount of $1,000 per Capital  Security.  Through  December 31, 1997, the Company
has  accrued  $5.2  million of  distributions  payable to holders of the Capital
Securities. See Note 18 to the Consolidated Financial Statements and "Changes in
Financial Condition - Company-Obligated,  Mandatorily  Redeemable  Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company."

     EQUITY IN EARNINGS OF  INVESTMENT IN JOINT  VENTURE.  Equity in earnings of
investment in joint venture  relates to the LLC. The Company's  $23.7 million of
earnings from the LLC during 1997  consisted of 50% of the net income of the LLC
before  deduction of the Company's 50% share of loan servicing  fees,  which are
paid  100% to the  Company,  and the  recapture  of $5.1  million  of  valuation
allowances  established  in 1996 by the Company on its equity  investment in the
LLC as a result of the resolution and securitization of loans. The Company's 50%
pro rata share of the LLC's  income  during  1997  consisted  primarily  of $4.5
million of interest  income on discount  loans and $14.0 million of gains on the
sale of discount loans,  including the securitizations of HUD loans in March and
December of 1997.  All of the assets of the LLC were  distributed  at the end of
1997.

     The  Company's  equity in earnings of LLC amounted to $38.3 million in 1996
and included 50% of the net income of the LLC before  deduction of the Company's
50% share of loan servicing fees, which are paid 100% to the Company, 50% of the
gain on sale of loan servicing  rights which the Company  acquired from the LLC,
$7.6 million in provision  for losses on the equity  investment in the LLC and a
$460,000 gain on sale of future  contracts used to hedge the loans  securitized.
The Company's 50% pro rata share of the LLC's income in 1996 consisted primarily
of $10.1 million of net interest  income on discount  loans and $35.6 million of
gains on sales of discount  loans.  The Company has  recognized  50% of the loan
servicing  fees not  eliminated  in  consolidation  in 

                                       10

<PAGE>

servicing  fees and  other  charges.  See  "Changes  in  Financial  Condition  -
Investment  in  Joint  Ventures"  and  Note  2  to  the  Consolidated  Financial
Statements.

     INCOME  TAX  EXPENSE.  Income  tax  expense on the  Company's  income  from
continuing operations amounted to $21.3 million,  $11.2 million and $4.6 million
during 1997,  1996 and 1995,  respectively.  The  Company's  effective  tax rate
amounted to 21.4%, 18.2% and 12.1% during 1997, 1996 and 1995, respectively. The
Company's  low  effective  tax  rates in 1997,  1996  and  1995  were  primarily
attributable  to the tax credits  resulting  from the  Company's  investment  in
low-income housing tax credit interests,  which amounted to $14.9 million,  $9.3
million and $7.7 million during 1997, 1996 and 1995, respectively.  Exclusive of
the above amounts, the Company's effective tax rate amounted to 36.4%, 33.4% and
32.6%  during  1997,  1996 and 1995,  respectively.  See  "Changes in  Financial
Condition - Investments in Low Income Housing Tax Credit Interests."

     DISCONTINUED  OPERATIONS.  In September  1995,  the Company  announced  its
decision  to  dispose  of  its  automated  banking  division,   which  generally
emphasized the installation of automated  teller machines and automated  banking
centers in a wide variety of  locations  which were not  associated  with branch
offices  of the  Company,  as well as the  development  and  installation  of an
automated  multi-application  card  system  for the  distribution  of  financial
products and  services to members of a college or  university  population.  As a
result of this  decision,  an  after-tax  loss on disposal  of $3.2  million was
recorded,  which  consisted  of a net loss of $2.0 million on the sale of assets
and a loss of $1.2 million  incurred from related  operations until the sale and
disposition, which was substantially completed at December 31, 1995. Losses from
the operations of the discontinued division prior to discontinuance, net of tax,
amounted to $4.5 million during 1995. See Note 3 to the  Consolidated  Financial
Statements.

                                       11

<PAGE>


CHANGES IN FINANCIAL CONDITION

     The  following  table sets  forth  information  relating  to certain of the
Company's assets and liabilities at the dates indicated.

<TABLE>
<CAPTION>

                                                               December 31,                         Increase (Decrease)
                                                     -------------------------------          ----------------------------
                                                         1997               1996                Dollars          Percent
                                                     -----------         -----------          ----------       -----------
                                                                              (Dollars in Thousands)
<S>                                                      <C>                 <C>                  <C>              <C>
ASSETS:
   Securities held for trading....................   $        --         $    75,606          $  (75,606)        (100)%
   Securities available for sale..................       430,524             354,005              76,519           22
   Loans available for sale.......................       177,041             126,366              50,675           40
   Loan portfolio, net............................       266,299             402,582            (136,283)         (34)
   Discount loan portfolio, net...................     1,434,176           1,060,953             373,223           35
   Investment in low-income housing
     tax credit interests.........................       128,614              93,309              35,305           38
   Investment in joint ventures...................         1,056              67,909             (66,853)         (98)
   Real estate owned, net.........................       167,265             103,704              63,561           61
   Investment in real estate......................        65,972              41,033              24,939           61
   Deferred tax asset.............................        45,148               5,860              39,288          670
   Total assets...................................     3,069,165           2,483,685             585,480           24
LIABILITIES:
   Deposits.......................................     1,982,822           1,919,742              63,080            3
   Securities sold under agreements
     to repurchase................................       108,250              74,546              33,704           45
   Notes, debentures and other....................       226,975             225,573               1,402            1
   Obligations outstanding under lines of credit..       118,304                  --             118,304           --
   Capital securities.............................       125,000                  --             125,000           --
   Total liabilities..............................     2,523,430           2,280,089             243,341           11
   Stockholders' equity...........................       419,692             203,596             216,096          106
</TABLE>



     SECURITIES  HELD FOR  TRADING.  The  Company  held $75.6  million in single
family  collateralized  mortgage obligations ("CMO") for trading at December 31,
1996.  This security,  which was sold in January 1997, was acquired from the LLC
in connection with the LLC's  securitization  of a portion of the HUD Loans. See
"Investment  in  Joint  Ventures"  and  Note  2 to  the  Consolidated  Financial
Statements.

     SECURITIES  AVAILABLE FOR SALE.  Securities available for sale increased by
$76.5 million or 22% during 1997 primarily as a result of the purchase of $196.2
million of  interest  only  securities  ("IO"),  $175.4  million of CMOs and the
acquisition of $50.1 million of subordinate  securities.  All of the subordinate
securities  were acquired in connection  with the  Company's  securitization  of
loans.  These acquisitions were offset in part by the repayment of $43.2 million
of CMOs,  the sale of $122.0  million,  $44.2  million and $37.2 million of IOs,
CMOs and multi-family subordinates,  respectively,  $59.2 million of net premium
amortization on IOs and a $25.0 million increase in net unrealized  losses.  See
Note 6 to the Consolidated Financial Statements.

     LOANS  AVAILABLE FOR SALE.  Loans  available for sale,  which are comprised
primarily  of subprime  single  family  residential  loans,  increased  by $50.7
million or 40% during 1997. The increase in 1997 occurred  primarily as a result
of purchases and  originations  of $594.2  million of single family  residential
loans,  offset in part by sales of $501.1  million and  principal  repayments of
$22.2 million of such loans. Of the single family loans sold during 1997, $415.8
million were due to the Company's securitization of such loans.

     At December 31, 1997,  nonperforming  loans  available for sale amounted to
$13.5  million or 7.6% of total loans  available  for sale, as compared to $14.4
million or 11.4% at December 31, 1996.  Nonperforming  loans  available for sale
consist primarily of subprime single family  residential  loans,  reflecting the
higher risks associated with such loans. During 1997 and 1996, respectively, the
Company recorded a $2.1 million and $1.6 million reduction in the carrying value
of these loans to record them at the lower of cost or fair market value.

     LOAN PORTFOLIO,  NET. The Company's net loan portfolio  decreased by $136.3
million or 34%  during  1997  primarily  as a result of  significant  payoffs of
commercial  real  estate  loans  secured  by hotel and  office  buildings.  From
December 31, 1996 to December 31,  1997,  commercial  real estate and land loans
decreased  by $180.0  million,  including a $110.9  million and a $60.0  million
decrease in loans secured by hotels and office buildings, respectively.

     Nonperforming  loans  amounted  to $9.2  million or 3.4% of total  loans at
December  31,  1997,  as  compared  to $2.3  million  or 0.6% of total  loans at
December 31, 1996. At December 31, 1997, nonperforming loans consisted primarily
of $7.6 million of multi-family  residential loans. The Company's  allowance for
loan losses amounted to 40.4% and 154.2% of nonperforming  loans at December 31,
1997  and  1996,  respectively.   See  Note  8  to  the  Consolidated  Financial
Statements.

                                       12

<PAGE>

     DISCOUNT LOAN PORTFOLIO,  NET. The discount loan portfolio increased $373.2
million or 35% during 1997. During 1997,  discount loan  acquisitions  having an
unpaid  principal  balance of $1.78 billion,  which  included  $771.6 million of
single  family  residential  loans  acquired  from HUD,  more than offset $484.9
million of  resolutions  and  repayments,  $292.4  million of  transfers to real
estate  owned and $518.9  million of sales.  Of the  discount  loans sold during
1997,  $416.5  million were due to the  Company's  securitization  of performing
discount loans. See Note 9 to the Consolidated Financial Statements.

     At December 31, 1997,  discount  loans which were  performing in accordance
with original or modified  terms amounted to $1.01 billion or 56.4% of the gross
discount loan portfolio,  as compared to $579.6 million or 44.1% at December 31,
1996. The Company's allowance for losses on its discount loan portfolio amounted
to $23.5  million or 1.6% at December 31, 1997,  as compared to $11.5 million or
1.1% at December 31, 1996.  The Company did not maintain an allowance for losses
on its discount loan portfolio prior to 1996.

     INVESTMENTS  IN  LOW-INCOME  HOUSING  TAX CREDIT  INTERESTS.  In 1993,  the
Company commenced a program to invest in multi-family residential projects which
have been  allocated  low-income  housing  tax credits  under  Section 42 of the
Internal Revenue Code by a state tax credit  allocating  agency. At December 31,
1997, the Company had $128.6  million of  investments in low-income  housing tax
credit interests, as compared to $93.3 million at December 31, 1996.

     Investments by the Company in low-income  housing tax credit interests made
on or after  May 18,  1995 in which  the  Company  invests  solely  as a limited
partner, which amounted to $47.2 million at December 31, 1997, are accounted for
using the equity method in accordance  with the consensus of the Emerging Issues
Task Force through Issue Number 94-1. Limited partnership investments made prior
to May 18, 1995,  which  amounted to $31.4  million at December  31,  1997,  are
accounted  for under the  effective  yield  method as a reduction  of income tax
expense. Low-income housing tax credit partnerships in which the Company invests
as both a limited and,  through a  subsidiary,  a general  partner,  amounted to
$50.0  million at December 31, 1997 and are presented on a  consolidated  basis.
See Note 13 to the Consolidated Financial Statements.

     INVESTMENT  IN  JOINT  VENTURES.  From  time  to  time  the  Company  and a
co-investor  acquire  discount loans by means of a co-owned  joint  venture.  At
December 31, 1997, the Company's $1.1 million  investment in joint venture,  net
consisted  of a 10%  interest in BCFL,  a limited  liability  company  which was
formed  by the  Company  and  BlackRock  in  January  1997 to  acquire  discount
multi-family  residential  loans from HUD. In December 1997, the LLC distributed
its assets to the Company and its other 50%  investor,  BlackRock.  Simultaneous
with  the  distribution,   the  Company  acquired  BlackRock's  portion  of  the
distributed assets. See Note 2 to the Consolidated Financial Statements.

     REAL ESTATE OWNED, NET. Real estate owned, net, consists almost entirely of
properties  acquired  by  foreclosure  or  deed-in-lieu  thereof on loans in the
Company's discount loan portfolio. Such properties amounted to $164.5 million or
98.3% of total real estate  owned at December  31, 1997 and  consisted  of $76.4
million,  $16.7 million and $71.3 million of properties  attributable  to single
family  residential  loans,  multi-family  residential loans and commercial real
estate loans, respectively.  Real estate owned increased by $63.6 million or 61%
during 1997 as a result of  increases  in single  family and  multi-family  real
estate owned attributable to the discount loan portfolio.

     The Company  actively  manages  its real estate  owned.  During  1997,  the
Company  sold  1,521  properties  with a  carrying  value of $179.7  million  as
compared to the sale of 1,175 properties with a carrying value of $160.6 million
during 1996 and 1,229  properties with a carrying value of $139.2 million during
1995.  These sales  resulted in gains,  net of the  provision for loss, of $17.2
million, $4.5 million and $8.5 million during 1997, 1996 and 1995, respectively,
which are included in  determining  the  Company's  income (loss) on real estate
owned. See Note 10 to the Consolidated Financial Statements.

     INVESTMENT IN REAL ESTATE. In conjunction with its multi-family residential
and commercial  real estate lending  business  activities,  the Company has made
certain  acquisition,  development and  construction  loans in which the Company
participates in the expected  residual profits of the underlying real estate and
the  borrower  has not made an equity  contribution  substantial  to the overall
project.  As such, the Company  accounts for these loans under the equity method
of  accounting  as though it has made an  investment  in a real  estate  limited
partnership. The Company's investment in such loans amounted to $62.0 million at
December 31, 1997, as compared to $24.9 million at December 31, 1996.

     The  Company  also has  invested,  indirectly,  in The  Westin  Hotel  (the
"Westin") located in Columbus,  Ohio. The Company's  investment in such property
decreased to $1.4  million at December  31, 1997 from $16.1  million at December
31,  1996  primarily  as a result  of the  Company's  sale of a 69%  partnership
interest in the Westin on July 15, 1997 for a minimal gain.

     DEFERRED TAX ASSET.  At December 31, 1997,  the deferred tax asset,  net of
deferred  tax  liabilities,  amounted  to $45.1  million,  an  increase of $39.2
million  from the $5.9  million  deferred  tax asset at December  31,  1996.  At
December 31, 1997,  the gross  deferred tax asset  amounted to $49.5 million and
consisted  primarily of $3.5 million  related to tax residuals,  $5.6 million of
gains on loan  foreclosures,  $3.2 million  mark-to-market  and reserves on real
estate owned  properties,  $9.8 million of loan loss  reserves,  $4.0 million of
reserves on securities available for sale, $2.0 million of contingency reserves,
$3.2  million  of accrued  profit  sharing  expense,  $7.7  million of  deferred
interest expense on the discount loan portfolio and $6.7 million  mark-to-market
on securities  available for sale. The gross deferred tax liability  amounted to
$4.4 million and consisted primarily of $2.3 million of deferred interest income
on the  discount  loan  portfolio.  At December  31,  1996,  the gross tax asset
amounted to $15.1 million,  and consisted  primarily of $3.7 million  related to
tax residuals,  $3.5 million of mark-to-market and reserves on real estate owned
and $3.9 million of deferred interest expense on the discount loan portfolio and
the  gross  deferred  tax  liability  amounted  to $9.2  

                                       13

<PAGE>

million and consisted  primarily of $4.6 million of deferred  interest income on
the  discount  loan  portfolio  and $2.1  million of  mark-to-market  on certain
securities available for sale.

     As a result of the  Company's  earnings  history,  current tax position and
taxable income  projections,  management believes that the Company will generate
sufficient  taxable  income in future  years to realize the  deferred  tax asset
which existed at December 31, 1997. In evaluating the  expectation of sufficient
future  taxable  income,  management  considered  future  reversals of temporary
differences and available tax planning strategies that could be implemented,  if
required. A valuation allowance was not required at December 31, 1997 because it
was management's  assessment that,  based on available  information,  it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance  will be  established  in the  future  to the  extent  of a change  in
management's  assessment  of the  amount of the net  deferred  tax asset that is
expected to be realized. See Note 21 to the Consolidated Financial Statements.

     DEPOSITS. Deposits increased $63.1 million or 3% during 1997 primarily as a
result of brokered deposits obtained through national  investment  banking firms
which solicit deposits from their customers,  which amounted to $1.34 billion at
December 31, 1997, as compared to $1.22  billion at December 31, 1996.  Deposits
obtained as a result of the Company's direct  solicitation and marketing efforts
to regional and local investment  banking firms and institutional  investors and
high net worth  individuals  amounted to $429.8  million at December 31, 1997 as
compared to $540.6 million at December 31, 1996. See Note 15 to the Consolidated
Financial Statements.

     NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes, debentures
and other  interest-bearing  obligations  of $227.0 million at December 31, 1997
increased $1.4 million  during 1997 and consist  primarily of the $125.0 million
of 11.875%  Notes  issued by the  Company in 1996 and the $100.0  million of 12%
Debentures issued by the Bank in 1995. See Note 17 to the Consolidated Financial
Statements.

     OBLIGATIONS  OUTSTANDING  UNDER  LINES OF CREDIT.  Obligations  outstanding
under  lines of credit  amounted  to $118.3  million at  December  31,  1997 and
represent  borrowings under new lines of credit  established at OFS during 1997.
These lines of credit  have a one-year  term with  interest  rates that float in
accordance  with a  designated  prime  rate  (see  "Liquidity,  Commitments  and
Off-Balance Sheet Risks").

     COMPANY-OBLIGATED,  MANDATORILY  REDEEMABLE  SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR  SUBORDINATED  DEBENTURES OF THE COMPANY.  In August 1997,
OCT,  a wholly  owned  subsidiary  of Ocwen,  issued  $125.0  million of 10 7/8%
Capital  Securities.  Proceeds  from  issuance  of the Capital  Securities  were
invested in 10 7/8% Junior  Subordinated  Debentures issued by Ocwen. The Junior
Subordinated  Debentures,  which  represent  the sole assets of the Trust,  will
mature on August 1, 2027. Intercompany transactions between OCT and the Company,
including the Junior Subordinated Debentures, are eliminated in the consolidated
financial statements of the Company.

     Through  December  31,  1997,  the  Company  had  accrued  $5.2  million of
distributions  payable to holders of the Capital Securities.  See Note 18 to the
Consolidated Financial Statements.

     STOCKHOLDERS' EQUITY. Stockholders' equity increased $216.1 million or 106%
during 1997. The increase in stockholder's  equity during 1997 was primarily due
to $78.9 million of net income and $142.0  million of net proceeds in connection
with the sale of  3,450,000  shares of common  stock,  offset in part by an $8.5
million  decrease  in  unrealized  gain  on  equity  securities  and  securities
available for sale. The $64.0 million  increase in  stockholders'  equity during
1996 was primarily due to $50.1 million of net income earned during 1996, a $4.9
million increase in unrealized gain on securities available for sale and a $13.0
million  increase in common stock and additional  paid-in  capital in connection
with the  issuance  of  2,928,830  shares  of  common  stock as a result  of the
exercise  of vested  stock  options by certain of the  Company's  and the Bank's
current and former officers and directors.  These increases more than offset the
loans made to certain of such officers and  directors to fund their  exercise of
the stock options,  which had an unpaid principal balance of $0 and $3.8 million
at December 31, 1997 and 1996, respectively.

                                       14

<PAGE>

ASSET AND LIABILITY MANAGEMENT

     Asset and liability  management is concerned  with the timing and magnitude
of the repricing of assets and  liabilities.  It is the objective of the Company
to attempt to control risks associated with interest rate movements. In general,
management's  strategy is to match asset and liability  balances within maturity
categories to limit the Company's exposure to earnings variations and variations
in the value of assets and  liabilities  as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Asset/Liability  Committee,  which is comprised of directors and officers of
the Bank, in accordance with policies  approved by the Board of Directors of the
Bank.  The  Asset/Liability  Committee  meets  regularly to review,  among other
things, the sensitivity of the Company's assets and liabilities to interest rate
changes, the book and market values of assets and liabilities,  unrealized gains
and losses,  including those attributable to hedging transactions,  purchase and
sale activity, and maturities of investments and borrowings. The Asset/Liability
Committee  also  approves and  establishes  pricing and funding  decisions  with
respect to the Company's overall asset and liability composition.

     The  Asset/Liability  Committee is  authorized to utilize a wide variety of
off-balance  sheet  financial  techniques  to  assist  it in the  management  of
interest rate risk. These techniques include interest rate exchange  agreements,
pursuant to which the parties  exchange the  difference  between  fixed-rate and
floating-rate  interest payments on a specified principal amount (referred to as
the  "notional  amount")  for a specified  period,  without the  exchange of the
underlying  principal amount.  Interest rate exchange agreements are utilized by
the Company to protect  against the decrease in value of a  fixed-rate  asset or
the increase in borrowing cost from a short-term,  fixed-rate liability, such as
reverse repurchase  agreements,  in an increasing interest rate environment.  At
December  31,  1997,  the  Company  had  entered  into  interest  rate  exchange
agreements  with an aggregate  notional  amount of $36.9 million.  Interest rate
exchange agreements had the effect of increasing  (decreasing) the Company's net
interest  income by  $(198,000),  $(58,000) and $358,000  during 1997,  1996 and
1995, respectively. See Note 20 to the Consolidated Financial Statements.

     The Company also enters into  interest  rate futures  contracts,  which are
commitments to either  purchase or sell  designated  financial  instruments at a
future  date  for a  specified  price  and may be  settled  in  cash or  through
delivery.  Eurodollar  futures  contracts have been sold by the Company to hedge
the  repricing  or  maturity  risk of certain  short  duration  mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset  declines  in the  market  value  of its  fixed-rate  loans  and  certain
fixed-rate  mortgage-backed  and related  securities  available  for sale in the
event of an  increasing  interest  rate  environment.  At December  31, 1997 the
Company had no outstanding  Eurodollar futures contracts.  At December 31, 1996,
the  Company had entered  into  Eurodollar  futures  (short)  contracts  with an
aggregate notional amount of $405.0 million.  At December 31, 1997 and 1996, the
Company  had  entered  into U.S.  Treasury  futures  (short)  contracts  with an
aggregate  notional amount of $194.5 million and $165.1  million,  respectively.
Futures  contracts had the effect of increasing  (decreasing)  the Company's net
interest income by $2.0 million, $(729,000) and $(619,000) during 1997, 1996 and
1995, respectively.  In addition, futures contracts had the effect of decreasing
the Company's non-interest income by $4.8 million, $4.1 million and $3.3 million
during the years ended December 31, 1997, 1996 and 1995, respectively.  See Note
20 to the Consolidated Financial Statements.

     The  Asset/Liability  Committee's methods for evaluating interest rate risk
include an analysis of the Company's  interest rate sensitivity  "gap," which is
defined as the difference between  interest-earning  assets and interest-bearing
liabilities  maturing  or  repricing  within  a  given  time  period.  A gap  is
considered  positive when the amount of  interest-rate  sensitive assets exceeds
the amount of interest-rate sensitive liabilities.  A gap is considered negative
when the amount of interest-rate  sensitive  liabilities  exceeds  interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result  in an  increase  in net  interest  income.  During a period  of  falling
interest  rates,  a  negative  gap would  tend to result in an  increase  in net
interest  income,  while a positive gap would tend to affect net interest income
adversely.  Because  different types of assets and liabilities  with the same or
similar  maturities may react  differently to changes in overall market rates or
conditions,  changes in interest rates may affect net interest income positively
or negatively  even if an institution  were  perfectly  matched in each maturity
category.

     The following  table sets forth the estimated  maturity or repricing of the
Company's  interest-earning assets and interest-bearing  liabilities at December
31, 1997. The amounts of assets and liabilities shown within a particular period
were  determined  in  accordance  with the  contractual  terms of the assets and
liabilities,  except  (i)  adjustable-rate  loans,  performing  discount  loans,
securities  and FHLB advances are included in the period in which they are first
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate,
mortgage-related securities reflect estimated prepayments,  which were estimated
based on  analyses  of broker  estimates,  the  results  of a  prepayment  model
utilized by the Company and empirical data, (iii)  nonperforming  discount loans
reflect the  estimated  timing of  resolutions  which result in repayment to the
Company, (iv) fixed-rate loans reflect scheduled contractual amortization,  with
no estimated prepayments, (v) NOW and money market checking deposits and savings
deposits, which do not have contractual maturities,  reflect estimated levels of
attrition,  which are based on detailed studies of each such category of deposit
by the Company, and (vi) escrow deposits and other non-interest bearing checking
accounts,  which  amounted to $130.4 million at December 31, 1997, are excluded.
Management  believes that these  assumptions  approximate  actual experience and
considers  them  reasonable;  however,  the  interest  rate  sensitivity  of the
Company's  assets  and  liabilities  in the table  could vary  substantially  if
different  assumptions are used or actual experience differs from the historical
experience on which the assumptions are based.

                                       15

<PAGE>

<TABLE>
<CAPTION>
                                                                                      December 31, 1997
                                                             ------------------------------------------------------------------
                                                                             Four to     More than
                                                             Within Three    Twelve     One Year to   Three Years
                                                                Months       Months     Three Years     and Over        Total
                                                             ------------  ----------   -----------    ----------    ----------
                                                                                   (Dollars in Thousands)
<S>                                                               <C>         <C>           <C>           <C>           <C>    
Rate-Sensitive Assets:
   Interest-earning cash ..................................   $  140,001   $       --    $       --    $       --    $  140,001
   Securities available for sale ..........................       42,763      150,736       130,694       106,331       430,524
   Loans available for sale(1) ............................       19,045       64,904        83,406         9,686       177,041
   Investment securities, net .............................           --           --            --        59,567        59,567
   Loan portfolio, net(1) .................................      113,372       31,298        39,922        81,707       266,299
   Discount loan portfolio, net ...........................      199,115      373,111       349,201       512,749     1,434,176
                                                              ----------   ----------    ----------    ----------    ----------
   Total rate-sensitive assets ............................      514,296      620,049       603,223       770,040     2,507,608
                                                              ----------   ----------    ----------    ----------    ----------
Rate-Sensitive Liabilities:
   NOW and money market checking deposits .................        7,277        3,072         6,101        11,174        27,624
   Savings deposits .......................................           84          227           448           905         1,664
   Certificates of deposit ................................      277,966      562,498       610,872       371,826     1,823,162
                                                              ----------   ----------    ----------    ----------    ----------
     Total interest-bearing deposits ......................      285,327      565,797       617,421       383,905     1,852,450
   Securities sold under agreement to repurchase ..........      108,250           --            --            --       108,250
   Obligations outstanding under lines of credit ..........      118,304           --            --            --       118,304
   Notes, debentures and other interest bearing obligations        1,975           --            --       225,000       226,975
                                                              ----------   ----------    ----------    ----------    ----------
     Total rate-sensitive liabilities .....................      513,856      565,797       617,421       608,905     2,305,979
                                                              ----------   ----------    ----------    ----------    ----------
   Interest rate sensitivity gap before off-
     balance sheet financial instruments ..................          440       54,252       (14,198)      161,135       201,629
   Futures contracts and interest rate swap ...............      189,274      (14,487)      (30,827)     (143,960)           --
                                                              ----------   ----------    ----------    ----------    ----------
Interest rate sensitivity gap .............................   $  189,714   $   39,765    $  (45,025)   $   17,175    $  201,629
                                                              ==========   ==========    ==========    ==========    ==========
Cumulative interest rate sensitivity gap ..................   $  189,714   $  229,479    $  184,454    $  201,629
                                                              ==========   ==========    ==========    ==========
Cumulative interest rate sensitivity gap as a
   percentage of total rate-sensitive assets.............          7.57%        9.15%         7.36%         8.04%
                                                              ==========   ==========    ==========    ==========
</TABLE>


(1)  Balances have not been reduced for nonperforming loans.

     Although the interest rate sensitivity gap analysis is a useful measurement
and contributes toward effective asset and liability management, it is difficult
to predict the effect of changing  interest  rates based solely on that measure.
As a result, the Asset/Liability  Committee also regularly reviews interest rate
risk by forecasting the impact of alternative  interest rate environments on net
interest income and market value of portfolio equity ("MVPE"),  which is defined
as the net present value of an institution's  existing  assets,  liabilities and
off-balance sheet  instruments,  and evaluating such impacts against the maximum
potential  changes in net  interest  income and MVPE that is  authorized  by the
Board of Directors of the Bank.

     The  following  table  sets  forth  at  December  31,  1997  the  estimated
percentage  change in the  Company's  net  interest  income over a  four-quarter
period and MVPE based upon the indicated changes in interest rates,  assuming an
instantaneous and sustained uniform change in interest rates at all maturities.

<TABLE>
<CAPTION>

                                                         Estimated Changes in
                Change              -----------------------------------------------------------
          (in Interest Rates)            Net Interest Income                   MVPE
     ----------------------------   ----------------------------   ----------------------------
<S>               <C>                           <C>                           <C>    
                 +400                           (10.5)%                       (11.4)%
                 +300                            (5.1)                         (5.3)
                 +200                             7.6                           0.3
                 +100                             4.3                           3.3
                    0                              --                            --
                 -100                           (18.7)                        (12.2)
                 -200                           (35.5)                        (15.2)
                 -300                           (33.9)                        (13.9)
                 -400                           (33.8)                        (12.3)
</TABLE>


     The  negative  estimated  changes in MVPE for -100 to -400 and for +300 and
+400 changes in interest  rates as well as in net  interest  income for +300 and
+400 changes in interest rates are attributable to the Company's  sensitivity to
changes in interest rates. Such sensitivity stems from the Company's investments
in IO-stripped and inverse IO-stripped  mortgage-backed securities (together "IO
strips").  IO strips exhibit considerably more price volatility than mortgage or
ordinary  mortgage  pass-through  securities,  due in part to the uncertain cash
flows  that  result  from  changes  in the  prepayment  rates of the  underlying
mortgages.  In the case of IO strips,  increased  prepayments  of the underlying
mortgages as a result of a decrease in market  interest  rates or other  factors
can result in a loss of all or part of the purchase price of such security.

                                       16

<PAGE>

     Management  of the  Company  believes  that the  assumptions  used by it to
evaluate the  vulnerability  of the Company's  operations to changes in interest
rates approximate actual experience and considers them reasonable;  however, the
interest  rate  sensitivity  of the  Company's  assets and  liabilities  and the
estimated  effects of changes in interest  rates on the  Company's  net interest
income and MVPE could vary  substantially  if different  assumptions are used or
actual  experience  differs  from the  historical  experience  on which they are
based.

     The following  table shows the  Company's  financial  instruments  that are
sensitive to changes in interest rates,  categorized by expected  maturity,  and
the  instruments'  fair  values  at  December  31,  1997.  Market-rate-sensitive
instruments  are generally  defined as on and off balance sheet  derivatives and
other financial instruments.


<TABLE>
<CAPTION>
                                                                Expected Maturity Date At December 31, 1997 (1)
                                      ---------------------------------------------------------------------------------------------
                                                                                                                Total       Fair
                                         1998       1999       2000       2001        2002      Thereafter     Balance      Value
                                      ----------  --------   --------  ----------   ---------   ----------   ----------  ----------
                                                                       (Dollars in Thousands)
<S>                                      <C>        <C>        <C>         <C>         <C>          <C>         <C>         <C>    
Rate-Sensitive Assets:
   Interest-earning cash............. $  140,001  $     --   $     --  $       --   $      --   $       --   $  140,001  $  140,001
     Average interest rate ..........       4.46%       --         --          --          --           --         4.46%
   Securities available for sale ....    195,526    93,302     36,275      23,049      14,999       67,373      430,524     430,524
     Average interest rate ..........       8.58%    10.10%     13.84%      13.56%      13.97%       14.66%       10.76%
   Loans available for sale(2) ......     77,994    37,376     14,443      10,952       8,648       27,628      177,041     184,884
     Average interest rate ..........       9.37%     9.20%      9.48%       9.50%       9.47%        9.40%        9.36%
   Investment securities, net .......         --        --         --          --          --       59,567       59,567      59,567
     Average interest rate ..........         --        --         --          --          --           --           --%         --
   Loan portfolio, net(2) ...........    111,323    30,348     41,540      63,914       4,865       14,309      266,299     281,850
     Average interest rate ..........       9.10%     9.07%      9.04%       9.01%       8.99%        8.97%        9.06%         --
   Discount loan portfolio, net .....    457,624   262,918    122,206      63,511      45,038      482,879    1,434,176   1,657,222
     Average interest rate ..........       8.71%     8.79%      8.83%       8.86%       8.85%        8.81%        8.78%         --
                                      ----------  --------   --------  ----------   ---------   ----------   ----------  ----------
   Total rate-sensitive assets ...... $  982,468  $423,944   $214,464  $  161,426   $  73,550   $  651,756   $2,507,608  $2,754,048
                                      ==========  ========   ========  ==========   =========   ==========   ==========  ==========
Rate-Sensitive Liabilities:
   NOW and money market checking
     deposits ....................... $   10,349  $  3,384   $  2,717  $    2,183   $   1,754   $    7,237   $   27,624  $   72,233
     Average interest rate ..........       3.45%     3.33%      3.32%       3.31%       3.30%        3.21%        3.34%
   Savings deposits .................        311       249        199         159         128          618        1,664       1,589
     Average interest rate ..........       2.30%     2.30%      2.30%       2.30%       2.30%        2.30%        2.30%         --
   Certificates of deposit ..........    840,463   376,607    234,265     225,497     145,995          335    1,823,162   1,865,196
     Average interest rate ..........       5.82%     6.11%      6.10%       6.11%       6.39%        6.53%        6.00%         --
                                      ----------  --------   --------  ----------   ---------   ----------   ----------  ----------
   Total interest-bearing deposits...    851,123   380,240    237,181     227,839     147,877        8,190    1,852,450   1,939,018
   Securities sold under agreement
     to repurchase ..................    108,250        --         --          --          --           --      108,250     108,250
     Average interest rate ..........       5.93%       --         --          --          --           --         5.93%         --
    Obligations outstanding under
       lines of credit ..............    118,304        --         --          --          --           --      118,304     118,304
     Average interest rate ..........       6.59%       --         --          --          --           --         6.59%         --
   Notes, debentures and other ......      1,975        --         --          --          --      225,000      226,975     255,538
     Average interest rate ..........       7.06%       --         --          --          --        11.93%       11.89%         --
                                      ----------  --------   --------  ----------   ---------   ----------  -----------  ----------
   Total rate-sensitive liabilities.. $1,079,652  $380,240   $237,181  $  227,839   $ 147,877   $  233,190  $ 2,305,979  $2,421,110
                                      ==========  ========   ========  ==========   =========   ==========  ===========  ==========
</TABLE>


- -------------------
(1)  Expected  maturities are contractual maturities adjusted for prepayments of
     principal. The Company uses certain assumptions to estimate fair values and
     expected  maturities.  For  assets,  expected  maturities  are  based  upon
     contractual  maturity,  projected  repayments and prepayments of principal.
     The  prepayment  experience  reflected  herein  is based  on the  Company's
     historical  experience.  The Company's  average  Constant  Prepayment  Rate
     ("CPR")  is  12.6%  and  16.7%  on  its  fixed-rate   and   adjustable-rate
     portfolios, respectively, for interest-earning assets (excluding investment
     securities,  which do not have prepayment features).  The actual maturities
     of these instruments could vary  substantially if future prepayments differ
     from the Company's historical experience.

(2)  Balances have not been reduced for nonperforming loans.

     The Company believes that the broad geographic distribution of its discount
loan  portfolio  and  loan   portfolio   reduces  the  risks   associated   with
concentrating  such loans in limited  geographic areas. See Note 8 and Note 9 to
the Consolidated Financial Statements.

Liquidity, Commitments and Off-Balance Sheet Risks

     Liquidity is a measurement of the Company's  ability to meet potential cash
requirements,  including ongoing commitments to fund deposit withdrawals,  repay
borrowings,  fund  investment,  loan  acquisition and lending  activities,  make
corporate  acquisitions and fund other general  business  purposes.  The primary
sources of funds for liquidity  currently  consist of deposits,  FHLB  advances,
reverse  repurchase  agreements,  lines of credit and  maturities  and principal
payments  on loans and  securities  and  proceeds  from sales  thereof.  Another
significant  source of asset liquidity is the ability to securitize  assets such
as discount loans and subprime

                                       17

<PAGE>
loans, as well as the direct sale of such loans.

     Sources of liquidity  include  certificates of deposit  obtained  primarily
from wholesale  sources.  At December 31, 1997, the Company had $1.82 billion of
certificates  of deposit,  including  $1.34 billion of brokered  certificates of
deposit  obtained through  national  investment  banking firms, all of which are
non-cancelable.  At the same  date,  scheduled  maturities  of  certificates  of
deposit  during the 12 months ending  December 31, 1998 and 1999 and  thereafter
amounted to $840.5  million,  $376.6 million and $606.1  million,  respectively.
Brokered and other wholesale  deposits  generally are more responsive to changes
in interest  rates than core deposits and, thus, are more likely to be withdrawn
from the Company upon  maturity as changes in interest  rates and other  factors
are perceived by investors to make other investments more attractive. Management
of the Company  believes  that it can adjust the rates paid on  certificates  of
deposit to retain  deposits  in changing  interest  rate  environments  and that
brokered and other  wholesale  deposits can be both a relatively  cost-effective
and stable source of funds. There can be no assurance that this will continue to
be the case in the future, however.

     Sources of  borrowings  include  FHLB  advances,  which are  required to be
secured  by  single  family  and/or  multi-family  residential  loans  or  other
acceptable collateral,  and reverse repurchase agreements. At December 31, 1997,
the Company had no FHLB  advances  outstanding,  was eligible to borrow up to an
aggregate of $647.9  million from the FHLB of New York (subject to  availability
of acceptable  collateral)  and had $68.2  million of single family  residential
loans,  approximately  $9.0 million of multi-family  residential loans and $26.1
million of loans secured by hotel  properties which could be pledged as security
for such advances.  At the same date, the Company had contractual  relationships
with six  brokerage  firms and the FHLB of New York  pursuant  to which it could
obtain  funds from  reverse  repurchase  agreements  and had  $326.2  million of
unencumbered  mortgage-related  securities  which  could be used to secure  such
borrowings.  At present, the Company has no outstanding FHLB advances due to the
availability of other less costly sources of funding,  a circumstance  which the
Company evaluates on a regular basis.

     The  liquidity  of the  Company  includes  lines of credit  obtained by OFS
subsequent to its assumption of the subprime lending  activities of the Bank and
acquisition of  substantially  all of the assets of Admiral,  as follows:  (i) a
$200.0 million secured line of credit from Morgan Stanley Mortgage Capital Inc.,
of which $100 million was committed, (ii) a $50.0 million secured line of credit
from Texas Commerce Bank National Association, (iii) a $200 million secured line
of credit from Merrill Lynch,  of which $100 million was  committed,  and (iv) a
$200 million secured line of credit from Lehman Commercial Paper, Inc., of which
$100 million was committed.  An aggregate of $118.3  million was  outstanding to
OFS under these lines of credit at December 31, 1997,  which have interest rates
which float in accordance with a designated prime rate. In addition, the Company
has provided a $30.0 million unsecured,  subordinated credit facility to OFS, of
which $30.0 million was outstanding at December 31, 1997. At present OFS intends
to  continue  to  seek  appropriate  leverage  with  respect  to its  underlying
business, and thus, will seek additional lines of credit as its assets warrant.

     The Company  believes  that its existing  sources of  liquidity,  including
internally  generated funds, will be adequate to fund planned activities for the
foreseeable  future,  although  there  can  be no  assurances  in  this  regard.
Moreover, the Company continues to evaluate other sources of liquidity,  such as
lines of credit from unaffiliated parties,  which will enhance the management of
its liquidity and the costs thereof.

     The Company's  operating  activities  provided cash flows of $114.3 million
and of $101.4 million during 1997 and 1996, respectively, and used cash flows of
$189.4  million  during 1995.  During the foregoing  years,  cash resources were
provided  primarily by net income and proceeds from sales of loans available for
sale, and cash  resources  were used  primarily to purchase and originate  loans
available for sale.

     The Company's investing activities used cash flows totaling $493.7 million,
$558.3  million and $474.5  million  during 1997,  1996 and 1995,  respectively.
During the foregoing years,  cash flows from investing  activities were provided
primarily by principal payments on discount loans and loans held for investment,
maturities of and principal  payments received on securities  available for sale
and proceeds  from sales of discount  loans,  securities  available for sale and
real estate  owned,  and cash flows from  investing  activities  were  primarily
utilized to purchase and originate  discount loans and loans held for investment
and purchase securities available for sale.

     The Company's  financing  activities provided cash flows of $479.5 million,
$454.5 million and of $681.8 million during 1997,  1996 and 1995,  respectively.
Cash flows from financing  activities  were primarily  related to changes in the
Company's deposits, issuance of common stock and the Capital Securities in 1997,
issuance of the Notes in 1996,  issuance of the  Debentures in 1995 and advances
from FHLB. Cash flows used by financing  activities  were primarily  utilized to
repay advances from the FHLB and reverse  repurchase  agreements and include the
transfer of deposits in connection with the sale of branch offices in 1995.

     The Bank is  required  under  applicable  federal  regulations  to maintain
specified levels of "liquid" investments in qualifying types of U.S. government,
federal agency and other  investments  having  maturities of five years or less.
Current OTS  regulations  require  that a savings  association  maintain  liquid
assets of not less than 4% of its  average  daily  balance  of net  withdrawable
deposit accounts and borrowings payable in one year or less.  Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes,  averaged,  5.6%, 8.8% and 12.9%
during the years ended  December  31,  1997,  1996 and 1995,  respectively,  and
amounted to 5.0% at December 31, 1997.

     At  December  31,  1997,   the  Company  had  $182.1  million  of  unfunded
commitments related to the purchase and origination of loans.  Management of the
Company  believes  that the  Company  has  adequate  resources  to fund all such
unfunded commitments to the extent

                                       18

<PAGE>

required and that substantially all of such unfunded  commitments will be funded
during 1998. See Note 27 to the Consolidated Financial Statements.  In addition,
management  of the  Company  believes  it has  adequate  resources  to fund  its
anticipated employee and facility expansion needs.

     In  addition  to  commitments  to extend  credit,  the  Company is party to
various  off-balance  sheet  financial  instruments  in the normal course of the
Company's  business in order to manage its  interest  rate risk.  See "Asset and
Liability   Management"  above  and  Note  27  to  the  Consolidated   Financial
Statements.

     The Company conducts business with a variety of financial  institutions and
other companies in the normal course of business,  including  counterparties  to
its off-balance sheet financial instruments. The Company is subject to potential
financial  loss if the  counterparty  is  unable  to  complete  an  agreed  upon
transaction.  The Company  seeks to limit  counterparty  risk through  financial
analysis, dollar limits and other monitoring procedures.

Regulatory Capital and Other Requirements

     Federally-insured  institutions  such as the Bank are  required to maintain
minimum  levels of regulatory  capital.  These  standards  generally  must be as
stringent as the comparable capital  requirements  imposed on national banks. In
addition  to  regulatory  capital  requirements  of  general  applicability,   a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances.

     In connection  with an examination of the Bank in late 1996 and early 1997,
the staff of the OTS expressed concern about many of the Bank's  non-traditional
operations,  which  generally  are  deemed by the OTS to  involve  higher  risk,
certain of the Bank's accounting policies and the adequacy of the Bank's capital
in light of the Bank's lending and investment  strategies.  The activities which
were  of  concern  to  the  OTS  included  the  Bank's  subprime  single  family
residential   lending   activities,   the  Bank's  origination  of  acquisition,
development  and  construction   loans  with  terms  which  provide  for  shared
participation in the results of the underlying real estate,  the Bank's discount
loan activities,  which involve significantly higher investment in nonperforming
and classified  assets than the majority of the savings and loan  industry,  and
the Bank's  investment in subordinated  classes of  mortgage-related  securities
issued  in  connection  with the  Bank's  asset  securitization  activities  and
otherwise.

     Following the above-referenced  examination,  the Bank committed to the OTS
to maintain a core capital (leverage) ratio and a total risk-based capital ratio
of at least 9% and 13%,  respectively.  The Bank  continues to be in  compliance
with this commitment as well as the regulatory  capital  requirements of general
applicability, as indicated in Note 24 to the Consolidated Financial Statements.
Based on discussions  with the OTS, the Bank believes that this  commitment does
not affect its status as a "well-capitalized"  institution,  assuming the Bank's
continued  compliance with the regulatory  capital  requirements  required to be
maintained by it pursuant to such commitment.

     Although  the  Bank  has  expressed  disagreement  with  the  level of risk
perceived by the OTS in its  business,  the Bank has taken various other actions
to  address  OTS  concerns  with  respect  to its risk  profile,  including  the
following:  (i) the sale to the Company in 1996 of  subordinated,  participating
interests in a total of eleven acquisition,  development and construction loans,
which interests had an aggregate  principal  balance of $16.9 million;  (ii) the
cessation of originating  mortgage loans with profit  participation  features in
the underlying real estate,  with the exception of existing  commitments,  which
consisted of commitments  for nine loans with an aggregate  principal  amount of
$79.2  million at December 31, 1997;  (iii) the transfer of its subprime  single
family residential lending operations and its large multi-family residential and
commercial real estate lending operations to OFS and OCC, respectively;  (iv) an
agreement  (a)  to   discontinue   the  purchase  of   subordinate   classes  of
mortgage-related  securities  created by unaffiliated  parties,  (b) to sell the
five such securities held by it at March 31, 1997 (aggregate book value of $32.0
million),  which was  completed  by a sale to OAIC on May 19, 1997 (at a gain of
$2.6 million to the  Company),  and (c) subject to the  requirements  of the OTS
capital  distribution  regulation,  to dividend  to the Company all  subordinate
mortgage-related  securities  acquired  by  the  Bank  in  connection  with  its
securitization   activities,   including  two  subordinate  securities  with  an
aggregate  book value of $19.5 million  which were  dividended to the Company in
June  1997  and one  subordinate  security  and one  residual  security  with an
aggregate  book value of $14.4 million  which were  dividended to the Company in
November 1997; (v) the  establishment as of December 31, 1996 of requested write
downs  of  cost  basis,  which  amounted  to $7.2  million,  against  loans  and
securities  resulting  from its  investment in loans  acquired from HUD; (vi) an
agreement to employ a senior  officer to head its Credit  Management  Department
and to take other steps to improve the  effectiveness  of its independent  asset
review function;  and (vii) an agreement to provide the OTS with certain reports
on a regular basis. In addition to the foregoing,  and based on discussions with
the OTS, the Company  modified  certain of its  accounting  policies in a manner
which will result in more conservative recognition of income. Specifically,  the
Company (i) ceased  accreting  into interest  income  discount on  nonperforming
residential   loans,   effective   January  1,  1997;  (ii)   discontinued   the
capitalization  of period  expenses to real estate owned,  effective  January 1,
1997; and (iii) an agreement to classify as doubtful for regulatory purposes all
real estate owned which are not generating cash flow and which has been held for
more  than  three  years.  If  the  new  policy  on  accretion  of  discount  on
nonperforming residential loans had been applied in 1996 and 1995, the Company's
income from continuing  operations  before income taxes, as adjusted for related
profit sharing expense,  would have decreased by approximately  $1.4 million and
$1.1  million,  respectively.  If the new  policy  on  capitalization  of period
expenses on real estate owned had been adopted in 1996 and 1995,  the  Company's
income from continuing  operations  before income taxes, as adjusted for related
profit sharing expense,  would have increased by approximately  $610,000 in 1996
and would have decreased by approximately  $2.3 million in 1995. In light of the
foregoing,  the Company  does not believe that the  above-referenced  accounting
changes had a material effect on the Company's financial condition or results of
operations.

                                       19

<PAGE>

     Although the above individual  regulatory  capital  requirements  have been
agreed to by the OTS,  there can be no assurance that in the future the OTS will
agree to a  decrease  in such  requirements  or will not seek to  increase  such
requirements  or will not impose these or other  individual  regulatory  capital
requirements in a manner which affects the Bank's status as a "well-capitalized"
institution under applicable laws and regulations.

Recent Accounting Developments

     For  information  relating to the effects on the Company of the adoption of
recent  accounting  standards,   see  Note  1  to  the  Consolidated   Financial
Statements.

Year 2000 Date Conversion

     The Company has begun to coordinate  the  identification,  evaluation,  and
implementation  of changes to computer  systems and  applications  necessary  to
achieve a year 2000 date conversion with no effect on customers or disruption to
business operations.  These actions are necessary to ensure that the systems and
applications will recognize and process the year 2000 and beyond. Major areas of
potential  business  impact have been  identified and  dimensioned,  and initial
conversion  efforts  are  underway.  The  Company  also  is  communicating  with
customers,  financial  institutions  and others  with which it does  business to
identify and coordinate  year 2000  conversion  issues.  The Company expects its
year 2000 conversion will be completed on a timely basis.  The cost of achieving
year 2000 compliance,  which will be largely incurred through 1998, is estimated
to range from $300,000 to $600,000, and will be charged to expense as incurred.

Forward-Looking Statements

   CERTAIN  STATEMENTS  CONTAINED  IN THIS  ANNUAL  REPORT ARE NOT,  AND CERTAIN
STATEMENTS  CONTAINED IN FUTURE  FILINGS BY THE COMPANY WITH THE  SECURITIES AND
EXCHANGE  COMMISSION,  IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER
PUBLIC OR SHAREHOLDER  COMMUNICATIONS,  MAY NOT BE BASED ON HISTORICAL FACTS AND
ARE  "FORWARD-LOOKING  STATEMENTS"  WITHIN THE  MEANING  OF  SECTION  27A OF THE
SECURITIES ACT OF 1933, AS AMENDED,  AND SECTION 21E OF THE SECURITIES  EXCHANGE
ACT OF 1934, AS AMENDED.  FORWARD-LOOKING  STATEMENTS WHICH ARE BASED ON VARIOUS
ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL),  MAY BE IDENTIFIED
BY REFERENCE  TO A FUTURE  PERIOD OR PERIODS,  OR BY THE USE OF  FORWARD-LOOKING
TERMINOLOGY,  SUCH AS "MAY," "WILL," "COULD," "BELIEVE," "EXPECT," "ANTICIPATE,"
"CONTINUE,"  "INTENDS,"  "PLANS,"  "PRESENTS,"  OR SIMILAR TERMS OR VARIATION ON
THOSE TERMS, OR BY THE USE OF THE NEGATIVE OF SUCH  TERMINOLOGY.  ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN  FORWARD-LOOKING  STATEMENTS DUE
TO A VARIETY OF FACTORS,  INCLUDING,  BUT NOT LIMITED TO,  THOSE  RELATED TO THE
ECONOMIC  ENVIRONMENT,  PARTICULARLY  IN THE MARKET  AREAS IN WHICH THE  COMPANY
OPERATES,  COMPETITIVE  PRODUCTS AND PRICING,  THE GROWTH OR DECLINE OF, AND THE
AVAILABILITY  OF PRODUCT TO PURCHASE IN, THE DISCOUNT LOAN  INDUSTRY  FISCAL AND
MONETARY  POLICIES  OF THE  U.S.  OR U.K.  GOVERNMENTS,  CHANGES  IN  GOVERNMENT
REGULATIONS AFFECTING FINANCIAL  INSTITUTIONS AND REAL ESTATE INVESTMENT TRUSTS,
INCLUDING  REGULATORY  FEES,  CAPITAL  REQUIREMENTS  AND  TAXATION,  CHANGES  IN
PREVAILING   INTEREST  AND  CURRENCY   EXCHANGE  RATES,   ACQUISITIONS  AND  THE
INTEGRATION  OF  ACQUIRED  BUSINESSES,  SOFTWARE  INTEGRATION,  DEVELOPMENT  AND
LICENSING, CREDIT INTEREST RATE AND OPERATIONAL RISK MANAGEMENT, ASSET/LIABILITY
MANAGEMENT,  THE FINANCIAL AND SECURITIES  MARKETS AND THE  AVAILABILITY  OF AND
COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY.  THE COMPANY DOES NOT UNDERTAKE, AND
SPECIFICALLY  DISCLAIMS ANY OBLIGATION,  TO PUBLICLY  RELEASE THE RESULTS OF ANY
REVISIONS  WHICH MAY BE MADE TO ANY  FORWARD-LOOKING  STATEMENTS  TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR  UNANTICIPATED  EVENTS OR  CIRCUMSTANCES  AFTER THE
DATE OF SUCH STATEMENTS.

                                       20


<PAGE>
         REPORT OF MANAGEMENT


                                      OCWEN
                                     [LOGO]


         The management of Ocwen is  responsible  for the  preparation  and fair
         presentation   of  the  financial   statements   and  other   financial
         information   contained  in  this  annual  report.   The   accompanying
         consolidated financial statements have been prepared in conformity with
         generally accepted accounting  principles applied on a consistent basis
         and include amounts based on management's best estimates and judgments.
         Nonfinancial  information  included in this annual report has also been
         prepared  by  management  and  is  consistent  with  the   consolidated
         financial  statements.  In the opinion of management,  the consolidated
         financial  statements fairly reflect the Company's  financial position,
         results of operations and cash flows.

         To assure  that  financial  information  is  reliable  and  assets  are
         safeguarded,  management  has  established  and  maintains an effective
         system of internal  accounting  controls  and  procedures  that provide
         reasonable  assurance  as to  the  integrity  and  reliability  of  the
         financial  statements,  the  protection  of  assets  against  loss from
         unauthorized  use or  disposition  and the  prevention and detection of
         errors and irregularities on a timely basis.

         Price Waterhouse LLP conducts its audit of the  consolidated  financial
         statements in accordance with generally  accepted  auditing  standards.
         Such standards include the evaluation of internal  accounting  controls
         to establish a basis for developing the scope of its examination of the
         consolidated   financial   statements.   In  addition  to  the  use  of
         independent  certified  public  accountants,  the  Company  maintains a
         professional   staff  of  internal  auditors  who  conduct   financial,
         procedural and special audits. To ensure their independence, both Price
         Waterhouse  LLP and the  internal  auditors  have direct  access to the
         Audit Committee of the Board of Directors.

         The Audit Committee,  which consists solely of independent directors of
         the Company, makes recommendations to the Board of Directors concerning
         the appointment of the  independent  certified  public  accountants and
         meets with Price  Waterhouse  LLP and the internal  auditors to discuss
         the results of their audits, the Company's internal accounting controls
         and financial reporting matters.




         /s/ WILLIAM C. ERBEY                    /s/ MARK S. ZEIDMAN
            ------------------------------          -----------------------
             William C. Erbey                        Mark S. Zeidman
             Chairman, Chief Executive Officer       Senior Vice President and
             and President                           Chief Financial Officer

================================================================================
                          OCWEN FINANCIAL CORPORATION

                                       21


<PAGE>

                     One East Broward Boulevard           Telephone 954 463 6280
                     Suite 1700
                     Fort Lauderdale, FL 33301


PRICE WATERHOUSE LLP                              [LOGO]





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders of Ocwen Financial Corporation

In our opinion, the accompanying  consolidated statements of financial condition
and  the  related   consolidated   statements  of  operations,   of  changes  in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial  position of Ocwen Financial  Corporation  (the "Company") and its
subsidiaries  at December 31, 1997 and 1996 and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997, in conformity with generally  accepted  accounting  principles.  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 of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatements.  An audit includes examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.



/s/ PRICE WATERHOUSE LLP
   ---------------------------
    PRICE WATERHOUSE LLP

    Fort Lauderdale, Florida
    January 27, 1998


                                       22

<PAGE>

<TABLE>
<CAPTION>

                                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS
                                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                            December 31,
                                                                                    --------------------------
                                                                                        1997           1996
                                                                                    -----------    -----------
<S>                                                                                 <C>            <C>        
Assets
Cash and amounts due from depository institutions ...............................   $    12,243    $     6,878
Interest earning deposits .......................................................       140,001         13,341
Federal funds sold and repurchase agreements ....................................            --         32,000
Securities held for trading .....................................................            --         75,606
Securities available for sale, at market value ..................................       430,524        354,005
Loans available for sale, at lower of cost or market ............................       177,041        126,366
Investment securities, net ......................................................        59,567          8,901
Loan portfolio, net .............................................................       266,299        402,582
Discount loan portfolio, net ....................................................     1,434,176      1,060,953
Investments in low-income housing tax credit interests ..........................       128,614         93,309
Investment in joint ventures ....................................................         1,056         67,909
Real estate owned, net ..........................................................       167,265        103,704
Investment in real estate .......................................................        65,972         41,033
Premises and equipment, net .....................................................        21,542         14,619
Income taxes receivable .........................................................            --         15,115
Deferred tax asset ..............................................................        45,148          5,860
Excess of purchase price over net assets acquired, net ..........................        15,560             --
Principal, interest and dividends receivable ....................................        17,284         16,821
Escrow advances on loans ........................................................        47,888         27,409
Other assets ....................................................................        38,985         17,274
                                                                                    -----------    -----------
                                                                                    $ 3,069,165    $ 2,483,685
                                                                                    ===========    ===========
Liabilities and Stockholders' Equity
Liabilities:
   Deposits .....................................................................   $ 1,982,822    $ 1,919,742
   Advances from the Federal Home Loan Bank .....................................            --            399
   Securities sold under agreements to repurchase ...............................       108,250         74,546
   Obligations outstanding under lines of credit ................................       118,304             --
   Notes, debentures and other interest bearing obligations .....................       226,975        225,573
   Accrued interest payable .....................................................        32,238         24,843
   Income taxes payable .........................................................         3,132             --
   Accrued expenses, payables and other liabilities .............................        51,709         34,986
                                                                                    -----------    -----------
     Total liabilities ..........................................................     2,523,430      2,280,089
                                                                                    -----------    -----------

Company-obligated, mandatorily redeemable securities of subsidiary
   trust holding solely junior subordinated debentures of the Company ...........       125,000             --

Minority interest ...............................................................         1,043             --

Commitments and Contingencies (Note 27)

Stockholders' Equity:
   Preferred stock, $.01 par value; 20,000,000 shares authorized;
     0 shares issued and outstanding ............................................            --             --
   Common stock, $.01 par value; 200,000,000 shares authorized;
     60,565,835 and 53,488,340 shares issued and outstanding at
     December 31, 1997 and 1996, respectively ...................................           606            535
   Additional paid-in capital ...................................................       164,751         22,990
   Retained earnings ............................................................       259,349        180,417
   Unrealized (loss) gain on securities available for sale and equity securities,
     net of taxes ...............................................................        (5,014)         3,486
   Notes receivable on exercise of common stock options .........................            --         (3,832)
                                                                                    -----------    -----------
     Total stockholders' equity .................................................       419,692        203,596
                                                                                    -----------    -----------
                                                                                    $ 3,069,165    $ 2,483,685
                                                                                    ===========    ===========

              THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                       23

<PAGE>

<TABLE>
<CAPTION>
                                         OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS
                                          (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                       For the years ended December 31,
                                                                                --------------------------------------------
                                                                                    1997             1996            1995
                                                                                -----------     ------------     -----------
<S>                                                                             <C>             <C>               <C>       
Interest income:
   Federal funds sold and repurchase agreements.............................    $     8,959     $      4,681       $   3,502
   Securities available for sale............................................         28,545           26,932          18,391
   Securities held for trading..............................................            248            1,216              --
   Loans available for sale.................................................         18,368           17,092          15,608
   Mortgage-related securities held for investment..........................             --               --           4,313
   Loans....................................................................         54,701           36,818          15,430
   Discount loans...........................................................        157,649          103,165          75,998
   Investment securities and other..........................................          4,061            3,990           4,033
                                                                                -----------     ------------     -----------
                                                                                    272,531          193,894         137,275
                                                                                -----------     ------------     -----------
Interest expense:
   Deposits.................................................................        122,070           93,773          71,853
   Securities sold under agreements to repurchase...........................          1,000            1,101             951
   Securities sold but not yet purchased....................................             --               --           1,142
   Advances from the Federal Home Loan Bank.................................            518            4,053           1,126
   Obligations outstanding under lines of credit............................          5,578               --              --
   Notes, debentures and other interest bearing obligations.................         27,123           17,233           8,988
                                                                                -----------     ------------     -----------
                                                                                    156,289          116,160          84,060
                                                                                -----------     ------------     -----------
   Net interest income before provision for loan losses.....................        116,242           77,734          53,215
Provision for loan losses...................................................         32,218           22,450           1,082
                                                                                -----------     ------------     -----------
   Net interest income after provision for loan losses......................         84,024           55,284          52,133
                                                                                -----------     ------------     -----------
Non-interest income:
   Servicing fees and other charges.........................................         25,881            4,682           2,870
   Gains on sales of interest earning assets, net...........................         82,212           21,682           6,916
   Gains from sale of branch offices........................................             --               --           5,430
   Gain on real estate owned, net...........................................          7,277            3,827           9,540
   Gain on sale of real estate held for investment..........................             --               --           4,658
   Other income.............................................................          8,498            7,112           1,727
                                                                                -----------     ------------     -----------
                                                                                    123,868           37,303          31,141
                                                                                -----------     ------------     -----------
Non-interest expense:
   Compensation and employee benefits.......................................         77,573           39,043          24,797
   Occupancy and equipment..................................................         17,657            8,921           8,360
   Net operating loss (income) on investments in real estate and certain
     low-income housing tax credit interests................................          4,792             (425)            337
   Savings Association Insurance Fund recapitalization assessment...........             --            7,140              --
   Other operating expenses.................................................         26,771           14,927          12,079
                                                                                -----------     ------------     -----------
                                                                                    126,793           69,606          45,573
                                                                                -----------     ------------     -----------
Distributions on Company-obligated, mandatorily redeemable
   securities of subsidiary trust holding solely junior subordinated
   debentures of the Company................................................          5,249               --              --
Equity in earnings of investment in joint venture...........................         23,688           38,320              --
                                                                                -----------     ------------     -----------
   Income from continuing operations before income taxes....................         99,538           61,301          37,701
Income tax expense..........................................................        (21,309)        (11,159)         (4,562)
Minority interest in net loss of consolidated subsidiary....................            703               --              --
                                                                                -----------     ------------     -----------
   Income from continuing operations........................................         78,932           50,142          33,139
Discontinued operations:
   Loss from operations of discontinued divisions to September 30, 1995
     net of tax benefits of $2,321 for 1995.................................             --               --          (4,468)
   Loss on disposal of divisions, net of tax benefit of $1,776..............             --               --          (3,204)
                                                                                -----------     ------------     -----------
     Net income ............................................................    $    78,932     $     50,142     $    25,467
                                                                                ===========     ============     ===========
Basic earnings per share:
   Income from continuing operations........................................    $      1.40     $       0.99     $      0.64
   Discontinued operations, net of tax benefit..............................             --               --           (0.15)
                                                                                -----------     ------------     -----------
     Net income.............................................................    $      1.40     $       0.99          $ 0.49
                                                                                ===========     ============     ===========
Diluted earnings per share:
   Income from continuing operations........................................    $      1.39     $       0.94     $      0.60
   Discontinued operations, net of tax benefit..............................             --               --           (0.14)
                                                                                -----------     ------------     -----------
     Net income.............................................................    $      1.39     $       0.94     $      0.46
                                                                                ===========     ============     ===========
Weighted average common shares outstanding:
   Basic....................................................................     56,185,956       50,556,572      51,712,415
                                                                                ===========     ============     ===========
   Diluted..................................................................     56,836,484       53,378,882      55,538,160
                                                                                ===========     ============     ===========

                     THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                              24

<PAGE>

<TABLE>
<CAPTION>

                                         OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                     FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                          (Dollars in Thousands, except share data)

                                                                                                  Unrealized      Notes
                                                                                                  gain (loss)   receivable
                                                                                                on securities  on exercise
                                                                             Additional           available     of common
                                                          Common Stock        paid-in  Retained    for sale,      stock
                                                        Shares      Amount    capital  earnings  net of taxes     options   Total
                                                        ------      ------    -------  --------  ------------     -------   -----
<S>                                                   <C>              <C>    <C>      <C>         <C>      <C>           <C>   
Balances at December 31, 1994........................ 64,389,420     $ 644 $  13,330 $ 142,230  $ (2,821)     $    --     $ 153,383
Net Income...........................................         --        --        --    25,467        --           --        25,467
Repurchase of common stock options...................         --        --      (132)       --        --           --          (132)
Exercise of common stock options.....................    865,240         8     1,412        --        --           --         1,420
Repurchase of common stock ..........................(17,630,120)     (176)   (4,399)  (37,422)       --           --       (41,997)
Change in unrealized gain (loss) on securities,
   net of taxes .....................................         --        --        --        --     1,406           --         1,406
                                                     -----------  -------- --------- --------- ---------      -------      --------
Balances at December 31, 1995........................ 47,624,540       476    10,211   130,275    (1,415)          --       139,547
Net Income...........................................         --        --        --    50,142        --           --        50,142
Repurchase of common stock options...................         --        --      (177)       --        --           --          (177)
Exercise of common stock options.....................  5,857,660        59    12,933        --        --           --        12,992
Issuance of common stock.............................      6,140        --        23        --        --           --            23
Notes receivable on exercise of common stock options,

   net of repayments.................................         --        --        --        --        --       (3,832)       (3,832)
Change in unrealized gain (loss) on securities,
   net of taxes .....................................         --        --        --        --     4,901           --         4,901
                                                     -----------  -------- --------- --------- ---------      -------      --------
Balances at December 31, 1996........................ 53,488,340       535    22,990   180,417     3,486       (3,832)      203,596
Net income...........................................         --        --        --    78,932        --           --        78,932
Issuance of common stock.............................  6,906,198        69   141,934        --        --           --       142,003
Repurchase of common stock options...................         --        --    (3,208)       --        --           --        (3,208)
Exercise of common stock options.....................    171,297         2     3,035        --        --           --         3,037
Repayment of notes receivable on exercise of
   common stock options, net of advances.............         --        --        --        --        --        3,832         3,832
Change in unrealized gain (loss) on securities,
   net of taxes .....................................         --        --        --        --    (8,500)          --        (8,500)
                                                     -----------  -------- --------- --------- ---------      -------      --------
Balances at December 31, 1997........................ 60,565,835  $    606 $ 164,751 $ 259,349 $  (5,014)     $    --      $419,692
                                                     ===========  ======== ========= ========= =========      =======      ========

                        THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                                 25

<PAGE>

<TABLE>
<CAPTION>
                                       OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                                  (Dollars in Thousands)

                                                                                    For the years ended December 31,
                                                                               -----------------------------------------
                                                                                   1997           1996           1995
                                                                               -----------    -----------    -----------
<S>                                                                            <C>            <C>            <C>        
Cash flows from operating activities:

   Net income ..............................................................   $    78,932    $    50,142    $    25,467
   Adjustments to reconcile net income to net cash
     provided by operating activities:
   Net cash provided from trading activities ...............................       132,600        (60,881)         2,949
   Proceeds from sales of loans available for sale .........................       519,163        397,606        100,104
   Purchases of loans available for sale ...................................      (278,081)      (295,054)      (271,210)
   Origination of loans available for sale .................................      (316,101)        (9,447)        (2,829)
   Principal payments received on loans available for sale .................        22,240         26,689         10,103
   Premium amortization (discount accretion), net ..........................        63,506         11,640         (2,401)
   Depreciation and amortization ...........................................        10,865          7,646          3,755
   Provision for loan losses ...............................................        32,218         22,450          1,082
   Gains on sales of interest earning assets, net ..........................       (82,212)       (21,682)        (6,955)
   Loss on sales of premises and equipment .................................            --             97          3,002
   Gain on sale of low-income housing tax credit interests .................        (6,298)        (4,861)            --
   Gain on sale of real estate owned, net ..................................       (17,201)        (4,475)        (8,496)
   Gain on sales of branch offices .........................................            --             --         (5,430)
   Gain on sale of real estate held for investment .........................            --             --         (4,658)
   Decrease (increase) in principal, interest and dividends receivable .....          (463)        (2,277)        (6,484)
   Decrease (increase) in income taxes receivable ..........................        18,247        (14,110)       (11,030)
   (Increase) decrease in deferred tax asset ...............................       (39,288)        16,403         (1,568)
   (Increase) decrease in escrow advances ..................................       (20,479)        (6,255)           914
   Increase in other assets ................................................       (27,501)       (12,037)       (14,064)
   Increase (decrease) in accrued expenses, interest payable
     and other liabilities .................................................        24,118           (226)        (1,677)
                                                                               -----------    -----------    -----------
Net cash provided (used) by operating activities ...........................       114,265        101,368       (189,426)
                                                                               -----------    -----------    -----------

Cash flows used by investing activities:
   Proceeds from sales of securities available for sale ....................       202,670        175,857        836,247
   Purchases of securities available for sale ..............................      (415,822)      (233,858)      (934,179)
   Maturities of and principal payments received on securities
     available for sale ....................................................        46,084         28,756         21,639
   Maturities of and principal payments received on securities
     held for investment ...................................................            --         10,006         17,545
   Purchase of investment securities .......................................       (42,166)          (276)            --
   Acquisition of subsidiaries .............................................       (11,635)            --             --
   Purchase of low-income housing tax credit interests .....................       (54,573)       (34,240)       (29,280)
   Proceeds from sales of low-income housing tax credit interests ..........        22,026         24,667             --
   Proceeds from sales of discount loans ...................................       500,151        190,616         38,942
   Proceeds from sale of real estate held for investment ...................        14,905             --         25,193
   Proceeds from sales of loans held for investment ........................         2,384         14,883             --
   Purchase and originations of loans held for investment,
     net of undisbursed loan funds .........................................      (138,884)      (237,525)      (270,600)
   Purchase of discount loans ..............................................    (1,464,611)      (925,850)      (547,987)
   Decrease (increase) in investment in joint ventures .....................        66,853        (67,909)            --
   Principal payments received on loans held for investment ................       291,998        119,923         36,859
   Principal payments received on discount loans ...........................       382,781        244,205        214,626
   Purchase of and capital improvements to real estate held for investment..       (39,844)       (29,946)            --
   Proceeds from sales of real estate owned ................................       196,180        169,084        148,225
   Purchase of real estate owned in connection with discount loan purchases        (38,486)        (1,628)       (24,617)
   Additions to premises and equipment .....................................       (13,744)        (5,243)       (12,207)
   Other, net ..............................................................            --            227          5,067
                                                                               -----------    -----------    -----------
Net cash used by investing activities ......................................      (493,733)      (558,251)      (474,527)
                                                                               -----------    -----------    -----------

                                                      (Continued on next page)

                        THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                                 26

<PAGE>

<TABLE>
<CAPTION>

                                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                             (Dollars in Thousands)

                                                                              For the years ended December 31,
                                                                            -----------------------------------
                                                                               1997        1996         1995
                                                                            ---------    ---------    ---------
<S>                                                                            <C>         <C>          <C>    
Cash flows from financing activities:
   Increase in deposits .................................................      63,080      414,728      585,335
   Increase (decrease) in securities sold under agreements to repurchase       33,704      (10,215)      84,761
   Proceeds from issuance of notes, debentures and other interest bearing
     obligations, net of repayments .....................................       1,402      125,000      107,615
   Proceeds from issuance of obligations under lines of credit ..........     118,304           --           --
   Repayment of obligations assumed in connection with acquisition of
     subsidiary .........................................................      (3,000)          --           --
   Payment of debt issuance costs .......................................          --       (5,252)      (3,301)
   Payments on advances from Federal Home Loan Bank .....................        (399)    (146,000)    (105,000)
   Payments and repurchase of notes and mortgages payable ...............          --       (8,798)     (10,672)
   Repayments (originations) of loans made to executive officers, net ...       3,832       (3,832)          --
   Exercise of common stock options .....................................       3,037       12,993        1,420
   Advances from the Federal Home Loan Bank .............................          --       76,000      170,000
   Proceeds from issuance of Capital Trust Securities ...................     125,000           --           --
   Payment of Capital Trust Securities issuance costs ...................      (4,262)          --           --
   Issuance of shares of common stock, net ..............................     142,003           --           --
   Sales of deposits ....................................................          --           --     (111,686)
   Premium received on sales of deposits ................................          --           --        5,492
   Repurchase of common stock options and common stock ..................      (3,208)        (177)     (42,129)
   Other ................................................................          --           23           --
                                                                            ---------    ---------    ---------
Net cash provided by financing activities ...............................     479,493      454,470      681,835
                                                                            ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ....................     100,025       (2,413)      17,882
Cash and cash equivalents at beginning of period ........................      52,219       54,632       36,750
                                                                            ---------    ---------    ---------
Cash and cash equivalents at end of period ..............................   $ 152,244    $  52,219    $  54,632
                                                                            =========    =========    =========

Reconciliation of cash and cash equivalents at end of period:
   Cash and amounts due from depository institutions ....................   $  12,243    $   6,878    $   4,200
   Interest earning deposits ............................................     140,001       13,341       50,432
   Federal funds sold and repurchase agreements .........................          --       32,000           --
                                                                            ---------    ---------    ---------
                                                                            $ 152,244    $  52,219    $  54,632
                                                                            =========    =========    =========
Supplemental disclosure of cash flow information:

   Cash paid during the period for:
   Interest .............................................................   $ 148,895    $ 115,015    $  72,626
                                                                            =========    =========    =========

   Income taxes .........................................................   $  28,228    $   4,725    $  12,858
                                                                            =========    =========    =========

Supplemental schedule of non-cash investing and financing activities:

   Exchange of discount loans and loans available for sale for securities   $ 897,358    $ 375,621    $  83,875
                                                                            =========    =========    =========

   Real estate owned acquired through foreclosure .......................   $ 205,621    $ 102,140    $ 185,001
                                                                            =========    =========    =========

   Transfer of mortgage-related securities from held for investment
     to available for sale ..............................................   $      --    $      --    $  73,706
                                                                            =========    =========    =========


                        THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                                 27

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     Ocwen  Financial  Corporation  ("Ocwen"  or the  "Company")  is a financial
services  holding company engaged  primarily in the  acquisition,  servicing and
resolution  of  nonperforming  and  underperforming  mortgage  loans  ("discount
loans"), multi-family residential and commercial real estate lending activities,
subprime single family  residential  lending  activities and various  investment
activities  including  mortgage related  securities and,  low-income housing tax
credit interests.  The Company's  consolidated  financial statements include the
accounts of Ocwen and its subsidiaries. The Company owns directly and indirectly
all of the outstanding  common and preferred stock of its primary  subsidiaries,
Ocwen Federal Bank FSB (the "Bank") and,  Investors  Mortgage  Insurance Holding
Company ("IMI"). Ocwen also owns 93.7% of Ocwen Financial Services ("OFS"), with
the remaining  6.3% owned by Admiral Home Loan  ("Admiral")  and reported in the
consolidated  financial  statements  as a  minority  interest.  All  significant
intercompany transactions and balances have been eliminated in consolidation.

     The Bank is a federally  chartered  savings bank regulated by the Office of
Thrift  Supervision  ("OTS").  IMI's primary  subsidiaries  are engaged in hotel
operations  and other real estate related  ventures.  OFS is engaged in subprime
single family residential lending activities.

Reclassification

     Certain  amounts  included  in the  1996 and  1995  consolidated  financial
statements have been reclassified in order to conform to the 1997 presentation.

Consolidated Statements of Cash Flows

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
cash on hand, interest bearing and non-interest  bearing deposits and all highly
liquid debt instruments  purchased with an original  maturity of three months or
less.  Cash flows  associated  with  items  intended  as hedges of  identifiable
transactions  or events are  classified  in the same  category as the cash flows
from the items being hedged.

Trading Activities

     From time to time, the Company purchases investment and mortgage-backed and
related securities into its trading account.  In addition,  securities  acquired
and sold shortly thereafter resulting from the securitization of loans available
for sale are  accounted  for as the sale of loans and the  purchase  and sale of
trading  securities.  Securities held for trading purposes are carried at market
value with the unrealized gains or losses included in gains on sales of interest
earning assets, net.

Securities Available for Sale

     Certain mortgage-related  securities are designated as assets available for
sale because the Company  does not intend to hold them to  maturity.  Securities
available for sale are carried at market value with the net unrealized  gains or
losses  reported as a separate  component of  stockholders'  equity.  Unrealized
losses  on  securities  that  reflect  a decline  in value  which is other  than
temporary,  if any, are charged to earnings.  At  disposition,  the realized net
gain or loss is included in earnings  on a specific  identification  basis.  The
amortization  of premiums  and  accretion of  discounts  are computed  using the
interest  method after  considering  actual and estimated  prepayment  rates, if
applicable.  Actual prepayment experience is periodically reviewed and effective
yields are recalculated  when differences arise between  prepayments  originally
anticipated and amounts actually received plus anticipated future prepayments.

     During December 1995, in conjunction with a transition  provision  provided
by the Financial  Accounting Standards Board pertaining to the classification of
securities  in  accordance  with  Statement  of Financial  Accounting  Standards
("SFAS")  No.  115,  "Accounting  for  Certain  Investments  in Debt and  Equity
Securities", the Company transferred all of its mortgage-related securities held
for  investment,  with a book value of $75,194 and a market  value of $73,706 to
securities available for sale.

Investment Securities

     Non-marketable  equity  securities  held for  investment are stated at cost
because the Company has the ability and the intent to hold them to maturity.

     Investments in marketable equity securities are designated as available for
sale and are  carried  at  market  value  based on  quoted  market  prices.  Net
unrealized gains or losses are reported as a separate component of stockholders'
equity. Unrealized losses on securities that reflect a decline in value which is
other than temporary, if any, are charged to earnings.

                                       28

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

Loan Available for Sale and Held for Investment

     Loans  originated or purchased by the Company  which the Company  presently
does not intend to hold to maturity are  designated as loans  available for sale
upon  origination  or  purchase  and are  stated  at the  lower of  cost,  after
considering  deferred loan fees and costs, or aggregate  market value.  Upon the
sale of a loan, any unamortized  deferred loan fees, net of costs,  are included
in the gain or loss on sale of  interest  earning  assets.  Gains and  losses on
disposal of such assets are computed on a specific identification basis.

     Loans held for investment are stated at amortized  cost,  less an allowance
for loan losses, because the Company has the ability and the intent to hold them
to maturity.

     Interest income is accrued as it is earned. Loans are placed on non-accrual
status after being  delinquent  greater than 89 days, or earlier if the borrower
is deemed by  management  to be unable to continue  performance.  When a loan is
placed on  non-accrual  status,  interest  accrued but not received is reversed.
While a loan is on non-accrual  status,  interest is recognized  only as cash is
received.  Loans are returned to accrual status only when the loan is reinstated
and ultimate collectibility of future interest is no longer in doubt.

     Loan  origination  fees and  certain  direct  loan  origination  costs  are
deferred  and  recognized  over  the  lives  of the  related  loans  as a  yield
adjustment and included in interest  income using the interest method applied on
a loan-by-loan basis.

Allowance for Estimated Loan Losses on Loan Portfolio

     The  allowance  for  estimated  loan losses is  maintained  at a level that
management,  based  upon an  evaluation  of  known  and  inherent  risks  in the
portfolio,   considers  adequate  to  provide  for  potential  losses.  Specific
valuation  allowances are  established for impaired loans in the amount by which
the carrying  value,  before  allowance for estimated  losses,  exceeds the fair
value of collateral  less costs to dispose on an individual  loan basis,  except
for single  family  residential  mortgage  loans and  consumer  loans  which are
generally  evaluated for impairment as homogeneous  pools of loans.  The Company
considers a loan to be impaired when, based upon current information and events,
it believes  that it is probable  that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement on a timely
basis. The Company measures these impaired loans at the fair value of the loans'
underlying  collateral less estimated disposal costs. Impaired loans may be left
on accrual  status  during the period the Company is pursuing  repayment  of the
loan.  These loans are placed on non-accrual  status at such time that the loans
either:  (i)  become 90 days  delinquent;  or (ii) the  Company  determines  the
borrower is incapable of, or has ceased efforts toward,  curing the cause of the
impairment.  Impairment  losses  are  recognized  through  an  increase  in  the
allowance for loan losses and a  corresponding  charge to the provision for loan
losses. When an impaired loan is either sold, transferred to REO or charged off,
any related  valuation  allowance is credited to the  allowance for loan losses.
Charge-offs occur when loans, or a portion thereof, are considered uncollectible
and of such  little  value  that their  continuance  as  bankable  assets is not
warranted.  General  valuation  allowances are also established for the inherent
risks in the loan portfolio  which have occurred but have yet to be specifically
identified. Management's periodic evaluation of the allowance for estimated loan
losses is based upon an analysis of the portfolio,  historical loss  experience,
economic  conditions and trends,  collateral  values and other relevant factors.
Future adjustments to the allowance may be necessary if economic  conditions and
trends,  collateral values and other relevant factors differ  substantially from
the assumptions used in making the evaluation.

Discount Loan Portfolio

     Certain  mortgage  loans,  for  which the  borrower  is not  current  as to
principal  and  interest  payments  or which  there is a reason to  believe  the
borrower will be unable to continue to make its scheduled principal and interest
payments,  are  acquired at a discount.  The  Company  accounts  for its initial
investment in a pool of loans based upon the pricing  methodologies  used to bid
on the pool. The acquisition cost is allocated to each loan within the pool when
the bid price was determined  based upon an analysis of the expected future cash
flows of each  individual  loan.  The  acquisition  cost is accounted for in the
aggregate when the bid price was  determined  using  assumptions  concerning the
expected  future  cash flows  from  groups of loans  within  the pool.  Prior to
January 1, 1997,  the discount  associated  with all single  family  residential
loans was  recognized as a yield  adjustment  and accreted into interest  income
using the  interest  method  applied on a  loan-by-loan  basis once  foreclosure
proceedings  are  initiated,  to the  extent the timing and amount of cash flows
could be reasonably  determined.  Effective  January 1, 1997, the Company ceased
accretion of discount on its  nonperforming  discount single family  residential
loans.  For those single  family  residential  mortgage  loans which are brought
current by the  borrower and certain  multi-family  and  commercial  real estate
loans  which are  current and the Company  believes  will  remain  current,  the
remaining  unamortized  discount is  accreted  into  interest  income as a yield
adjustment using the interest method over the contractual  maturity of the loan.
For all other  loans,  interest is reported  as cash is  received.  Gains on the
repayment  and  discharging  of  loans  are  reported  as  interest  income.  In
situations where the collateral is foreclosed upon, the loans are transferred to
real estate owned upon  receipt of title to the  property  and  accretion of the
related discount is discontinued.

                                       29

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

Real Estate Owned

     Properties  acquired  through  foreclosure  are  valued at the lower of the
adjusted cost basis of the loan or fair value less  estimated  costs of disposal
of the property at the date of  foreclosure.  Properties  held are  periodically
re-evaluated  to determine  that they are being  carried at the lower of cost or
fair value less estimated costs to dispose. Sales proceeds and related costs are
recognized  with  passage of title to the buyer and,  in cases where the Company
finances the sale, receipt of sufficient down payment.  Rental income related to
properties  is  reported  as income as earned.  Holding  and  maintenance  costs
related to properties are reported as period costs as incurred.  No depreciation
expense  related to properties has been  recorded.  Decreases in market value of
foreclosed  real estate  subsequent to foreclosure are recognized as a valuation
allowance on a property specific basis.  Subsequent increases in market value of
the  foreclosed  real  estate  are  reflected  as  reductions  in the  valuation
allowance,  but not below zero.  Such  changes in the  valuation  allowance  are
charged or credited to income.

Valuation Allowances on Discount Loans and Real Estate Owned

     Beginning in the first quarter of 1996, the Company began recording general
valuation  allowances  on discount  loans and real  estate  owned to reflect the
inherent losses which have occurred but have yet to be specifically  identified.
Management has established the valuation  allowances  based upon historical loss
experience, economic conditions and trends, collateral values and other relevant
factors.  Previously, the Company recorded specific valuation allowances on real
estate owned.  Also  beginning in 1996, the Company began  recording  losses and
charge-offs on discount loans against the allowance for loan losses. Previously,
these amounts were deducted from interest income.

Investment in Real Estate

     In  conjunction  with its  multi-family  and  commercial  lending  business
activity, the Company has made certain acquisition, development and construction
loans  in  which  the  Company  participates  in  the  residual  profits  of the
underlying  real  estate and the  borrower  has not made an equity  contribution
substantial  to the overall  project.  As such,  the Company  accounts for these
loans under the equity  method of accounting as though it has made an investment
in a real estate limited partnership.

     The Company also has invested indirectly,  through its IMI subsidiaries, in
certain hotel properties and other real estate related ventures.

Investments in Low-income Housing Tax Credit Interests

     Low-income  housing tax credit  partnerships own  multi-family  residential
properties  which have been  allocated  tax credits  under the Internal  Revenue
Code. The  obligations of the  partnership to sustain  qualifying  status of the
properties covers a 15-year period;  however,  tax credits accrue over a 10-year
period on a  straight-line  basis.  Investments  by the  Company  in  low-income
housing  tax  credit  partnerships  made on or after  May 18,  1995 in which the
Company invests solely as a limited partner,  are accounted for using the equity
method in  accordance  with the  consensus  of the  Emerging  Issues  Task Force
through issue number 94-1.  For the Company's  limited  partnership  investments
made prior to this date,  the Company  records its receipt of income tax credits
and other tax benefits on a level yield basis over the 15-year obligation period
and  reports  the  tax  credits  and tax  benefits  net of  amortization  of its
investment  in the limited  partnership  as a reduction  of income tax  expense.
Low-income housing tax credit  partnerships in which the Company has invested as
a limited  partner,  and through a subsidiary acts as the general  partner,  are
presented on a consolidated basis. For all investments in low-income housing tax
credit  partnerships made after May 18, 1995, the Company  capitalizes  interest
expense and certain direct costs incurred during the pre-operating period.

Excess of Cost Over Net Assets Acquired

     The excess of  purchase  price over net assets of  acquired  businesses  is
stated at cost and is  amortized  on a  straight-line  basis over the  estimated
future  periods to be  benefited.  The  carrying  value of cost in excess of net
assets  acquired  is  reviewed  for  impairment  whenever  events or  changes in
circumstances  indicate  that  it may  not be  recoverable.  If  such  an  event
occurred,  the Company would prepare projections of future results of operations
for the remaining  amortization  period. If such projections  indicated that the
cost in excess of net assets  acquired would not be  recoverable,  the Company's
carrying  value of such asset would be reduced by the  estimated  excess of such
value over projected income. No such impairment existed at December 31, 1997.

Premises and Equipment

     Premises  and  equipment  are  carried at cost and,  except  for land,  are
depreciated over their estimated useful lives on the straight-line  method.  The
estimated useful lives of the related assets range from 3 to 10 years.

Interest Rate Risk Management Activities

     The Company  manages its exposure to interest rate  movements by seeking to
match asset and liability balances within maturity categories, both directly and
through  the  use  of  derivative   financial   instruments.   These  derivative
instruments  include  interest  rate swaps  ("swaps")  and interest rate futures

                                       30

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

contracts that are designated and effective as hedges, as well as swaps that are
designated  and  effective  in  modifying  the  interest  rate  and/or  maturity
characteristics of specified assets or liabilities.

     The net interest  received or paid on swaps is reflected as interest income
or expense of the related hedged  position.  Gains and losses resulting from the
termination of swaps are recognized  over the shorter of the remaining  contract
lives of the  swaps or the  lives of the  related  hedged  positions  or, if the
hedged  positions are sold,  are  recognized  in the current  period as gains on
sales of interest earning assets, net. Gains and losses on futures contracts are
deferred and amortized over the terms of the related  assets or liabilities  and
reflected as interest income or expense of the related hedged positions.  If the
hedged  positions are sold, any unamortized  deferred gains or losses on futures
contracts  are  recognized  in the current  period as gains on sales of interest
earning assets, net. Interest rate contracts are carried at fair value.

Income Taxes

     The  Company  files  consolidated  Federal  income  tax  returns  with  its
subsidiaries.  Consolidated  income  tax is  allocated  among  the  subsidiaries
participating in the consolidated  returns as if each subsidiary of the Company,
which has one or more subsidiaries, filed its own consolidated return.


     The Company  accounts for income taxes using the asset and liability method
which requires the  recognition of deferred tax  liabilities  and assets for the
expected future tax consequences of temporary  differences  between the carrying
amounts  and the tax basis of assets  and  liabilities.  Additionally,  deferred
taxes are adjusted for subsequent tax rate changes.

Investment in Joint Ventures

     In March 1996, the Company and BlackRock Capital Finance L.P. ("BlackRock")
formed BCBF,  L.L.C. (the "LLC"), a limited  liability  corporation,  to acquire
loans from the U.S.  Department of Housing and Urban  Development  ("HUD").  The
Company  and  BlackRock  each owned 50% of the LLC. In  December  1997,  the LLC
distributed all of its assets to the Company and BlackRock.  Simultaneous to the
distribution,  the  Company  acquired  BlackRock's  portion  of the  distributed
assets. In January 1997, BCFL, L.L.C. ("BCFL"), a limited liability company, was
formed by the Company and BlackRock to acquire discount multi-family residential
loans from HUD.

     The  Company's  investment  in the LLC is  accounted  for under the  equity
method of accounting.  Under the equity method of  accounting,  an investment in
the shares or other  interests of an investee is initially  recorded at the cost
of the shares or interests  acquired and  thereafter is  periodically  increased
(decreased) by the investor's  proportionate  share of the earnings  (losses) of
the investee and  decreased by all  dividends  received by the investor from the
investee.  The  Company's  investment  in BCFL is  accounted  for under the cost
method.

     The  Company  services  all loans on  behalf of the LLC for a fee,  and all
intercompany  transactions  between the Company and the LLC are  eliminated  for
financial  reporting  purposes to the extent of the  Company's  ownership in the
LLC.

Basic and Diluted Earnings Per Share

     Basic  earnings per share is  calculated  based upon the  weighted  average
number of shares of common stock outstanding  during the year.  Diluted earnings
per share is  calculated  based upon the  weighted  average  number of shares of
common stock  outstanding and all dilutive  potential common shares  outstanding
during the year.  The  computation  of diluted  earnings per share  includes the
impact of the exercise of the  outstanding  options to purchase common stock and
assumes  that the proceeds  from such  issuance  are used to  repurchase  common
shares at fair value.

Risks and Uncertainties

     In the normal course of business,  the Company  encounters two  significant
types of risk:  economic  and  regulatory.  There are three main  components  of
economic risk:  interest rate risk,  credit risk and market risk. The Company is
subject  to  interest  rate  risk  to  the  degree  that  its   interest-bearing
liabilities  mature or reprice at different speeds, or different bases, than its
interest-earning  assets.  Credit  risk is the risk of default on the  Company's
loan portfolio that results from a borrowers' inability or unwillingness to make
contractually  required  payments.  Market risk reflects changes in the value of
loans  held for  sale,  securities  available  for sale and  purchased  mortgage
servicing  rights due to  changes in  interest  rates or other  market  factors,
including the rate of  prepayments  of principal and the value of the collateral
underlying loans and the valuation of real estate held by the Company.

     The Bank is subject to the  regulations  of  various  government  agencies.
These  regulations can and do change  significantly  from period to period.  The
Bank also undergoes periodic examinations by the regulatory agencies,  which may
subject it to further  changes  with  respect  to asset  valuations,  amounts of
required  loss  allowances  and  operating   restrictions   resulting  from  the
regulators'  judgments  based on  information  available  to them at the time of
their examination.

                                       31

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     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  and
disclosure of  contingent  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.  Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans and
discount loans.

Recent Accounting Standards

     On January 1, 1996,  the  Company  adopted  SFAS No. 123,  "Accounting  for
Stock-Based  Compensation,"  which  requires  that  the fair  value of  employee
stock-based  compensation  plans be  recorded  as a  component  of  compensation
expense in the statement of operations as of the date of grant of awards related
to such plans or that the  impact of such fair value on net income and  earnings
per  share  be  disclosed  on a pro  forma  basis  in a  footnote  to  financial
statements  for awards  granted after  December 15, 1994, if the  accounting for
such awards  continues to be in  accordance  with  Accounting  Principles  Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees".  The Company
has elected to continue such  accounting  under the provisions of APB No. 25 and
has disclosed the pro forma information as required in Note 23.

     On January 1, 1997,  the  Company  adopted  SFAS No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 (i) sets forth the criteria for (a)  determining  when to recognize
financial and servicing assets and liabilities; and (b) accounting for transfers
of financial  assets as sales or borrowings;  and (ii) requires (a)  liabilities
and derivatives related to a transfer of financial assets to be recorded at fair
value;  (b)  servicing  assets and  retained  interests  in  transferred  assets
carrying  amounts be  determined by  allocating  carrying  amounts based on fair
value;  (c) amortization of servicing assets and liabilities be in proportion to
net servicing  income;  (d) impairment  measurement based on fair value; and (e)
pledged  financial assets to be classified as collateral.  SFAS No. 125 provides
implementation  guidance for assessing  isolation of transferred  assets and for
accounting for transfers of partial  interests,  servicing of financial  assets,
securitizations, transfers of sales-type and direct financing lease receivables,
securities lending transactions, repurchase agreements including "dollar rolls",
"wash sales",  loan  syndications and  participations,  risk  participations  in
banker's  acceptances,  factoring  arrangements,  transfers of receivables  with
recourse and  extinguishments of liabilities.  In December 1996, the FASB issued
SFAS No. 127,  "Deferral of the Effective Date of FASB Statement No. 125", which
delayed implementation of certain provisions of SFAS No. 125.

     In February 1997, the FASB issued SFAS No. 128,  "Earnings per Share." SFAS
No. 128 simplifies the standards found in APB No. 15 for computing  earnings per
share ("EPS") and makes them comparable to international  standards.  Under SFAS
No. 128,  the  Company is required to present  both basic and diluted EPS on the
face of its  statements of operations.  Basic EPS,  which  replaces  primary EPS
required by APB No. 15 for entities with complex  capital  structures,  excludes
common stock  equivalents and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period.  Diluted EPS gives effect to all dilutive  potential  common shares that
were  outstanding  during the period.  SFAS No. 128 is effective  for  financial
statements  for both interim and annual  periods  ending after December 15, 1997
with  earlier  application  not  permitted.  The  Company  adopted  SFAS No. 128
effective December 31, 1997. All prior period EPS data has been restated.

     In  February  1997,  the FASB also  issued  SFAS No.  129,  "Disclosure  of
Financial Information About Capital Structure".  SFAS No. 129 supersedes capital
structure  disclosure  requirements found in previous accounting  pronouncements
and  consolidates  them into one  statement  for ease of  retrieval  and greater
visibility for non-public entities. These disclosures are required for financial
statements  for periods ending after December 15, 1997. As SFAS No. 129 makes no
changes to previous accounting pronouncements as those pronouncements applied to
the Company, the adoption of SFAS No. 129 had no impact on the Company's results
of operations and financial condition.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive  income, either in
a  separate  statement  for  comprehensive  income,  or as  part  of a  combined
statement of income and  comprehensive  income in a full-set of  general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business  enterprise  during a period from  transactions  and other events and
circumstances,  excluding those resulting from investments by and  distributions
to  owners.  SFAS No.  130  requires  that  comprehensive  income  be  presented
beginning  with net  income,  adding the  elements of  comprehensive  income not
included in the determination of net income, to arrive at comprehensive  income.
SFAS No. 130 also requires that an enterprise display the accumulated balance of
other  comprehensive  income  separately  from retained  earnings and additional
paid-in  capital in the equity  section of the statement of financial  position.
SFAS No. 130 is effective for the  Company's  fiscal year  beginning  January 1,
1998. SFAS No. 130 requires the presentation of information already contained in
the  Company's  financial  statements  and  therefore is not expected to have an
impact on the Company's financial position or results of operation.

     In June  1997,  the FASB  also  issued  SFAS No.  131,  "Disclosures  About
Segments of an Enterprise  and Related  Information."  SFAS No. 131  establishes
standards for the reporting of information  about  operating  segments by public
business  enterprises  in their 

                                       32

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

annual  and  interim  financial  reports  issued to  shareholders.  SFAS No. 131
requires that a public  business  enterprise  report  financial and  descriptive
information,  including  profit or loss,  certain  specific  revenue and expense
items, and segment assets,  about its reportable  operating segments.  Operating
segments  are  defined as  components  of an  enterprise  about  which  separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision-maker in deciding how to allocate resources and in assessing
performance.  SFAS No. 131 is effective  for  financial  statements  for periods
beginning after December 15, 1997. SFAS No. 131 is a disclosure  requirement and
therefore is not expected to have an effect on the Company's  financial position
or results of operations.

                                       33


<PAGE>


                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 2   ACQUISITION AND DISPOSITION TRANSACTIONS

     During 1997, the Company  consolidated  its subprime  single family lending
operations within OFS in connection with its acquisition of substantially all of
the assets of Admiral in a transaction  which closed on May 1, 1997.  The excess
of purchase price over net assets acquired  related to this  transaction,  which
amounted to $10,826,  net of  accumulated  amortization  of $504 at December 31,
1997, is amortized on a straight-line basis over a period of 15 years.

     On November 6, 1997, the Company acquired AMOS,  Inc., a Connecticut  based
company  engaged  primarily  in  the  development  of  mortgage  loan  servicing
software.  AMOS'  products  are  Microsoft(R)  Windows(R)  based,  client/server
architecture and feature real-time processing, year 2000 compliance, a scaleable
database platform and strong workflow capabilities. The aggregate purchase price
was $9.7 million,  including  $4.9 million  which is  contingent  on AMOS,  Inc.
meeting  certain  software  development  performance  criteria.  The  excess  of
purchase  price over net assets  acquired  related  to this  transaction,  which
amounted to $4,735, net of accumulated amortization of $53 at December 31, 1997,
is amortized on a straight-line basis over a period of 15 years.

     The Company's  investment in joint ventures include investments in BCFL and
the LLC.  The Company owns a 10% interest in BCFL and a 50% interest in the LLC.
BCFL was  formed to  acquire  multifamily  loans.  At  December  31,  1997,  the
Company's 10% investment, which is accounted for under the cost method, amounted
to $1,056.

     On December 12, 1997, the LLC  distributed all of its assets to the Company
and its other 50%  investor,  BlackRock.  Simultaneously,  the Company  acquired
BlackRock's  portion of the distributed  assets. The Company's 50% investment in
the LLC  amounts  to $0 and  $67,909,  net of a  valuation  allowance  of $0 and
$5,114, at December 31, 1997 and 1996, respectively.

     The Company's  equity in earnings of the LLC of $23,688 and $38,320 for the
years ended  December  31, 1997 and 1996,  respectively,  include 50% of the net
income of the LLC before  deduction of the Company's 50% share of loan servicing
fees  which  are paid 100% to the  Company.  Equity  in  earnings  for 1997 also
includes the recapture of $5,114 of valuation allowances  established in 1996 by
the  Company on its equity  investment  in the joint  venture as a result of the
resolution and  securitization of loans.  Equity in earnings for 1996 includes a
provision for losses on the Company's equity  investment in the joint venture of
$7,614. The Company has recognized 50% of the loan servicing fees not eliminated
in  consolidation  in  servicing  fees and other  charges.  Because the LLC is a
pass-through entity for federal income tax purposes, provisions for income taxes
were established by each of the Company and its co-investor, and not the LLC.

     Set forth below are the statements of financial condition of the LLC at the
dates indicated, and statements of operations for the periods indicated.

<TABLE>
<CAPTION>

                                  BCBF, L.L.C.
                        STATEMENTS OF FINANCIAL CONDITION

                                                                        December 31,
                                                                   ---------------------
                                                                      1997       1996
                                                                   ---------   ---------
                                                                   (Dollars in Thousands)
                                                                   ---------   ---------
<S>                                                                 <C>        <C>     
     Assets:
     Cash .......................................................   $     --   $     10
     Loans held for sale, at lower of cost or market value ......         --    110,702
     Real estate owned, net of valuation allowance of $0 and $511
       at December 31, 1997 and 1996, respectively ..............         --     25,595
     Other assets ...............................................         --     10,526
                                                                    --------   --------

                                                                    $     --   $146,833
                                                                    ========   ========
     Liabilities and Owners' Equity
     Liabilities:
       Accrued expenses, payables and other liabilities .........   $     --   $    787
                                                                    --------   --------
       Total liabilities ........................................         --        787
                                                                    --------   --------
     Owners' Equity:
       Ocwen Federal Bank FSB ...................................         --     73,023
       BlackRock Capital Finance L.P. ...........................         --     73,023
                                                                    --------   --------

       Total owners' equity .....................................         --   $146,046
                                                                    --------   --------
                                                                    $     --   $146,833
                                                                    ========   ========
</TABLE>


                                       34

<PAGE>

<TABLE>
<CAPTION>


                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

                                  BCBF, L.L.C.
                            STATEMENTS OF OPERATIONS


                                                  For the Period    For the Period
                                                  January 1, 1997   March 13, 1996
                                                     Through          Through
                                                   December 31,      December 31,
                                                      1997             1996
                                                  --------------    --------------
<S>                                                 <C>              <C>     
Interest income ...............................     $  8,928         $ 38,647
Interest expense ..............................           --           18,503
 ..............................................     --------         --------
  Net interest income .........................        8,928           20,144
 ..............................................     --------         --------
Non-interest income:
  Gain on sale of loans held for sale .........       27,994           71,156
  Gain on sale of loan servicing rights........           --            1,048
  Loss on real estate owned, net ..............          (93)            (130)
  Loan fees ...................................           23               50
                                                    --------         --------
                                                      27,924           72,124
Operating expenses:
  Loan servicing fees .........................        1,850            5,743
  Other loan expenses .........................           13              273
                                                    --------         --------
                                                       1,863            6,016
                                                    --------         --------
Net income ....................................     $ 34,989         $ 86,252
                                                    ========         ========
</TABLE>



     In October 1996, the LLC securitized  9,825 loans with an unpaid  principal
balance  of  $419,382,  past due  interest  of  $86,131  and a net book value of
$394,234.  Proceeds from sales of the related  securities by the LLC amounted to
$466,806.  In March 1997, as part of a larger transaction  involving the Company
and an affiliate of BlackRock,  the LLC  securitized  1,196 loans with an unpaid
principal balance of $51,714,  past due interest of $14,209 and a net book value
of  $40,454.  Proceeds  from  the sale of the  related  securities  amounted  to
$58,866. In December 1997, as part of a larger transaction involving the Company
and BlackRock, the LLC securitized 534 loans with an unpaid principal balance of
$26,644,  past due interest of $8,303 and a net book value of $20,139.  Proceeds
from the  sale of the  related  securities  amounted  to  $30,178.  The  Company
continues to service the securitized loans and is paid a servicing fee.

                                       35


<PAGE>


                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)



NOTE 3   DISCONTINUED OPERATIONS

     In September  1995,  the Company  announced  its decision to dispose of its
automated banking division and related activities. As a result of this decision,
a loss of $3,204, net of tax benefit of $1,776 was recorded  consisting of a net
loss of $1,954 on the sale of assets and a loss of $1,250  incurred from related
operations until the sales and  dispositions,  both of which were  substantially
complete at  December  31,  1995.  Losses from  operations  of the  discontinued
division, net of tax, amounted to $4,468 for the nine months ended September 30,
1995. Gross revenues from the automated banking division and related  activities
for the year ended December 31, 1995 amounted to $1,822.

                                       36


<PAGE>


                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 4   FAIR VALUE OF FINANCIAL INSTRUMENTS

     Substantially  all of the Company's  assets,  liabilities  and  off-balance
sheet instruments and commitments are considered financial instruments.  For the
majority of the Company's financial instruments, principally loans and deposits,
fair  values are not readily  available  since  there are no  available  trading
markets  as  characterized  by  current   exchanges   between  willing  parties.
Accordingly,  fair  values  can  only be  derived  or  estimated  using  various
valuation  techniques,  such as computing the present value of estimated  future
cash flows using discount rates  commensurate with the risks involved.  However,
the  determination of estimated  future cash flows is inherently  subjective and
imprecise.  In addition,  for those financial  instruments  with  option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.

     The fair  values  reflected  below  are  indicative  of the  interest  rate
environments as of December 31, 1997 and 1996 and do not take into consideration
the  effects  of  interest  rate   fluctuations.   In  different  interest  rate
environments,  fair value  results  can  differ  significantly,  especially  for
certain fixed-rate  financial  instruments and non-accrual  assets. In addition,
the fair values  presented do not attempt to estimate the value of the Company's
fee generating  businesses and anticipated future business activities.  In other
words,   they  do  not  represent  the  Company's  value  as  a  going  concern.
Furthermore,  the differences  between the carrying  amounts and the fair values
presented  may  not be  realized  because,  except  as  indicated,  the  Company
generally  intends to hold these  financial  instruments to maturity and realize
their recorded values.

     Reasonable  comparability  of fair values among  financial  institutions is
difficult due to the wide range of permitted  valuation  techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective  pricing  standards  introduces a degree of  subjectivity  to these
derived or estimated fair values. Therefore,  while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.

     The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:

Cash and Cash Equivalents

     Cash and cash  equivalents  have been valued at their  carrying  amounts as
these are reasonable  estimates of fair value given the relatively  short period
of time between origination of the instruments and their expected realization.

Investments and Mortgage-Backed and Related Securities

     For  investments and  mortgage-backed  and related  securities,  fair value
equals quoted  price,  if available.  For  securities  for which a quoted market
price is not available,  fair value is estimated  using quoted market prices for
similar instruments.

Loans and Discount Loans

     The fair value of  performing  whole loans is  estimated  based upon quoted
market prices for similar whole loan pools.  The fair value of the discount loan
portfolio is estimated based upon current market yields at which recent pools of
similar mortgages have traded taking into consideration the timing and amount of
expected cash flows.

Low-Income Housing Tax Credit Interests

     The  fair  value  of the  investments  in  low-income  housing  tax  credit
interests  is estimated by  discounting  the future tax benefits  expected to be
realized  from  these   investments   using  discount  rates  at  which  similar
investments  were  being  made on or about the  respective  financial  statement
dates.

Deposits

     The fair  value of demand  deposits,  savings  accounts  and  money  market
deposits is the amount  payable on demand at the reporting  date. The fair value
of  fixed-maturity  certificates  of deposit is  estimated  by  discounting  the
required  cash  payments at the market rates  offered for deposits  with similar
maturities on or about the respective financial statement dates.

Borrowings

     The fair value of the Company's notes and debentures and capital securities
are based upon  quoted  market  prices.  The fair value of the  Company's  other
borrowings is estimated  based upon the discount  value of the future cash flows
expected to be paid on such  borrowings  using  estimated  market discount rates
that reflect the borrowings of others with similar terms and maturities.

                                       37

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


Risk Management Instruments

     The fair value of interest rate swap  agreements  is the  estimated  amount
that the Company would  receive or pay to terminate  the swap  agreements at the
reporting date taking into account  interest rates and the credit  worthiness of
the swap  counterparties on or about the respective  financial  statement dates.
Market  quotes are used to  estimate  the fair value of  interest  rate  futures
contracts.

Loan Commitments

     The fair value of loan commitments is estimated  considering the difference
between interest rates on or about the respective  financial statement dates and
the committed rates.

Real Estate Owned

     Real estate,  although not a financial  instrument,  is an integral part of
the Company's  business.  The fair value of real estate is estimated  based upon
appraisals, broker price opinions and other standard industry valuation methods,
less anticipated selling costs.

     The  carrying  amounts  and the  estimated  fair  values  of the  Company's
financial instruments and real estate owned are as follows:


<TABLE>
<CAPTION>
                                                          December 31, 1997                     December 31, 1996
                                               -------------------------------------   -------------------------------------
                                                Carrying Amount        Fair Value       Carrying Amount        Fair Value
                                               -----------------    ----------------   -----------------   -----------------
FINANCIAL ASSETS:
<S>                                                   <C>                 <C>                 <C>                 <C>       
   Cash and cash equivalents................          $  152,244          $  152,244          $   52,219          $   52,219
   Securities held for trading..............                  --                  --              75,606              75,606
   Securities available for sale............             430,524             430,524             354,005             354,005
   Loans available for sale.................             177,041             184,884             126,366             128,784
   Investment securities....................              59,567              59,567               8,901               8,901
   Loan portfolio, net......................             266,299             281,850             402,582             410,934
   Discount loan portfolio, net.............           1,434,176           1,657,222           1,060,953           1,140,686
   Investments in low-income housing tax
     credit interests.......................             128,614             151,130              93,309             113,850
   Real estate owned, net...................             167,265             212,443             103,704             130,221
FINANCIAL LIABILITIES:
   Deposits.................................           1,982,822           2,024,857           1,919,742           1,934,717
   Advances from the Federal Home Loan Bank                   --                  --                 399                 399
   Securities sold under agreements
     to repurchase..........................             108,250             108,250              74,546              74,546
   Obligations outstanding under lines of credit         118,304             118,304                  --                  --
   Notes, debentures and other interest
     bearing obligations....................             226,975             255,538             225,573             246,511
  Capital securities........................             125,000             135,313                  --                  --
OTHER:
   Loan commitments.........................             225,569             225,569             194,128             194,128


                                                                        38
</TABLE>


<PAGE>
                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 5    SECURITIES HELD FOR TRADING

     The Company held no securities  for trading at December 31, 1997.  The book
and fair  values  and  gross  unrealized  gains  and  losses  for the  Company's
securities held for trading at December 31, 1996 were as follows:


<TABLE>
<CAPTION>
                                                                            Gross               Gross
                                                         Book            Unrealized           Unrealized            Fair
                                                         Value              Gains               Losses              Value
                                                      ----------        ------------        ------------        ------------
<S>                                                   <C>               <C>                 <C>                 <C>         
Collateralized mortgage obligations.........          $   75,526        $         --        $       (140)       $     75,386
Futures contracts...........................                  --                 220                  --                 220
                                                      ----------        ------------        ------------        ------------
                                                      $   75,526        $        220        $       (140)       $     75,606
                                                      ==========        ============        ============        ============
</TABLE>



     The Company  traded  assets  totaling  $1,023,965,  $373,723 and $93,942 in
aggregate  sales  proceeds  during the years ended  December 31, 1997,  1996 and
1995, respectively,  primarily in connection with the Company's  securitizations
of loans, resulting in realized net gains of $72,214, $14,645 and $2,949 for the
years ended December 31, 1997, 1996 and 1995, respectively.  Unrealized gains on
securities  held for trading and included in gains on sales of interest  earning
assets amounted to $0, $80 and $0, respectively, in 1997, 1996 and 1995.

                                       39

<PAGE>
                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 6   SECURITIES AND LOANS AVAILABLE FOR SALE

     The amortized cost, fair value and gross unrealized gains and losses on the
Company's  securities and loans available for sale are as follows at the periods
ended:


<TABLE>
<CAPTION>
                                                                            Gross                Gross
                                                       Amortized         Unrealized            Unrealized             Fair
                                                         Cost               Gains                Losses               Value
                                                      ----------         -----------           -----------         ---------
<S>                                                   <C>                   <C>               <C>                  <C>      
DECEMBER 31, 1997:
Mortgage-related securities:
   Single family residential:
     AAA-rated collateralized mortgage
       obligations..........................          $  160,347            $    195          $      (91)          $ 160,451
     FHLMC interest only....................              73,214                 219              (8,688)             64,745
     FNMA interest only.....................              71,215                 829             (12,329)             59,715
     GNMA interest only.....................              35,221                  --              (5,455)             29,766
     AAA-rated interest only................              14,700                  19                (856)             13,863
     Subordinates...........................              62,247               6,587              (1,004)             67,830
     REMIC residuals........................              17,267                  --              (1,574)             15,693
     Swaps..................................                  --                  --                 (94)                (94)
                                                      ----------            --------          ----------           ---------
                                                         434,211               7,849             (30,091)            411,969
                                                      ----------            --------          ----------           ---------
   Multi-family and commercial:
     AAA-rated interest only................               1,008                 229                (207)              1,030
     Non-investment grade interest only.....               2,743                 734                  --               3,477
     Subordinates...........................              12,107               2,047                (106)             14,048
                                                      ----------            --------          ----------           ---------
                                                          15,858               3,010                (313)             18,555
                                                      ----------            --------          ----------           ---------
                                                      $  450,069            $ 10,859          $  (30,404)          $ 430,524
                                                      ==========            ========          ==========           =========
Loans:
     Single family residential..............          $  176,554            $  7,843          $       --           $ 184,397
     Consumer loans.........................                 487                  --                  --                 487
                                                      ----------            --------          ----------           ---------
                                                      $  177,041            $  7,843          $       --           $ 184,884
                                                      ==========            ========          ==========           =========
</TABLE>


                                                                  40

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


<TABLE>
<CAPTION>
                                                                             Gross               Gross
                                                       Amortized          Unrealized          Unrealized             Fair
                                                         Cost                Gains              Losses               Value
                                                      ----------          ----------          -----------          ---------
<S>                                                   <C>                   <C>               <C>                  <C>      
DECEMBER 31, 1996:
Mortgage-related securities:
   Single- family residential:
     AAA-rated collateralized mortgage
       obligations..........................          $   74,224            $    227          $     (516)          $  73,935
     FHLMC interest only....................              46,735                 963                (127)             47,571
     FNMA interest only.....................              48,573               1,315                (508)             49,380
     AAA-rated interest only................               1,166                  27                 (20)              1,173
     Subordinates...........................              15,550               3,614                  --              19,164
     REMIC residuals........................              19,211               1,349                  --              20,560
     Futures contracts......................                  --                  19              (1,940)             (1,921)
                                                      ----------           ---------          ----------           ---------
                                                         205,459               7,514              (3,111)            209,862
                                                      ----------           ---------          ----------           ---------
   Multi-family and commercial:
     AAA-rated interest only................              82,996               1,353                (759)             83,590
     Non-investment grade interest only.....               3,620                 205                 (26)              3,799
     Subordinates...........................              56,500               1,856                (822)             57,534
     Futures contracts......................                  --                  --                (780)               (780)
                                                      ----------           ---------          ----------           ---------
                                                         143,116               3,414              (2,387)            144,143
                                                      ----------           ---------          ----------           ---------
                                                      $  348,575           $  10,928          $   (5,498)          $ 354,005
                                                      ==========           =========          ==========           =========
Loans:
   Single family residential................             111,980           $   2,948          $     (970)          $ 113,958
   Multi-family residential.................              13,657                 305                                  13,962
   Consumer loans...........................                 729                 143                  (8)                864
                                                      ----------           ---------          ----------           ---------
                                                      $  126,366           $   3,396          $     (978)          $ 128,784
                                                      ==========           =========          ==========           =========
</TABLE>


     A profile of the  maturities of  securities  available for sale at December
31,  1997  follows.  Mortgage-backed  securities  are  included  based  on their
weighted-average maturities,  reflecting anticipated future prepayments based on
a consensus of dealers in the market.


<TABLE>
<CAPTION>
                                                                               Amortized Cost         Fair Value
                                                                               --------------        -----------
<S>                                                                               <C>                <C>        
         Due within one year...........................................           $   120,839        $   120,700
         Due after 1 through 5 years...................................               246,204            223,873
         Due after 5 through 10 years..................................                79,322             81,655
         Due after 10 years............................................                 3,704              4,296
                                                                                  -----------        -----------
                                                                                  $   450,069        $   430,524
                                                                                  ===========        ===========

                                                              41

</TABLE>


<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     Gross  realized  gains and losses,  proceeds on sales,  premiums  amortized
against and  discounts  accreted  to income  were as follows  during the periods
ended December 31:


<TABLE>
<CAPTION>
                                                                             1997          1996           1995
                                                                           ---------     ---------     ---------
         Securities:
<S>                                                                        <C>           <C>           <C>      
         Gross realized gains..........................................    $   9,637     $   4,323     $   1,266
         Gross realized losses.........................................       (3,591)       (3,757)       (2,079)
                                                                           ---------     ---------     ---------
         Net realized gains (losses)...................................    $   6,046     $     566     $    (813)
                                                                           =========     =========     =========

         Proceeds on sales.............................................    $ 202,670     $ 175,857     $ 836,247
                                                                           =========     =========     =========

         Premiums amortized against interest income....................    $  73,019     $  23,508     $   5,188
         Discounts accreted to interest income.........................    $  (6,734)       (3,261)       (3,135)
                                                                           ---------     ---------     ---------
         Net premium amortization......................................    $  66,285     $  20,247     $   2,053
                                                                           =========     =========     =========

         Loans:
         Gross realized gains..........................................    $   4,069     $   2,150     $   1,817
         Gross realized losses.........................................       (1,662)       (3,152)           --
                                                                           ---------     ---------     ---------
         Net realized gains (losses)...................................    $   2,407     $  (1,002)    $   1,817
                                                                           =========     =========     =========

         Proceeds on sales.............................................    $ 519,163     $ 397,606     $ 100,104
                                                                           =========     =========     =========


     One security in the  available for sale  portfolio,  with a market value of
$12,334,  is pledged as collateral to the State of New Jersey in connection with
the  Bank's  sales  of   certificates   of  deposit  over  $100  to  New  Jersey
municipalities. Additionally, certain mortgage-related securities are pledged as
collateral for securities sold under agreements to repurchase (see Note 16).

                                       42
</TABLE>


<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 7   INVESTMENT SECURITIES

     The book and fair  values  and gross  unrealized  gains  and  losses on the
Company's investment securities are as follows at December 31:


<TABLE>
<CAPTION>
                                                                         Gross               Gross
                                                         Book         Unrealized          Unrealized             Fair
                                                         Value           Gains              Losses               Value
                                                      ----------      ----------          ----------           ---------
<S>                                                   <C>               <C>               <C>                  <C>      
1997:
Marketable Equity Securities:
   Other common stocks......................          $   38,545        $  9,638          $   (1,911)          $  46,272
Non-marketable Equity Securities:
   Federal Home Loan Bank stock.............              10,825              --                  --              10,825
   Limited partnership interests............               2,470              --                  --               2,470
                                                      ----------        --------          ----------           ---------
                                                      $   51,840        $  9,638          $   (1,911)          $  59,567
                                                      ==========        ========          ==========           =========
1996:
Non-marketable Equity Securities:
   Federal Home Loan Bank stock.............          $    8,798        $     --          $       --           $   8,798
   Limited partnership interests............                 103              --                  --                 103
                                                      ----------        --------          ----------           ---------
                                                      $    8,901        $     --          $       --           $   8,901
                                                      ==========        ========          ==========           =========


     Included  in interest  income on  investment  securities  and other for the
periods ended  December 31, 1997,  1996 and 1995 are $1,603,  $1,767 and $1,388,
respectively, of deferred fees accreted on tax residuals (see Note 21).

     As a member  of the  FHLB  system,  the Bank is  required  to  maintain  an
investment  in the capital  stock of the FHLB in an amount at least equal to the
greater of 1% of  residential  mortgage  assets,  5% of  outstanding  borrowings
(advances)  from  the  FHLB,  or 0.3% of total  assets.  FHLB  capital  stock is
generally pledged to secure FHLB advances.

     The  Company's  investment  in other common  stocks at December 31, 1997 is
primarily  comprised of 1,715,000  shares of stock in OAIC with a book value and
fair value of $25,519 and $35,158, respectively.

     Dividends  earned on FHLB stock and other common stocks amounted to $2,000,
$567 and $505 during 1997, 1996 and 1995, respectively.

                                       43

</TABLE>


<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 8   LOAN PORTFOLIO

     The Company's loan portfolio consisted of the following at December 31:


<TABLE>
<CAPTION>
                                                                                     1997               1996
                                                                                 -----------         -----------
         Carrying value:
<S>                                                                              <C>                 <C>        
           Single family residential...................................          $    46,226         $    73,186
           Multi-family residential:
             Permanent.................................................               38,105              31,252
             Construction..............................................               33,277              36,590
                                                                                 -----------         -----------
             Total multi-family residential............................               71,382              67,842
                                                                                 -----------         -----------
           Commercial real estate:
             Hotel:
               Permanent...............................................               64,040             173,947
               Construction............................................               25,322              26,364
             Office ...................................................               68,759             128,782
             Land .....................................................                2,858               2,332
             Other ....................................................               16,094              25,623
                                                                                 -----------         -----------
               Total commercial real estate............................              177,073             357,048
                                                                                 -----------         -----------
         Commercial non-mortgage.......................................                   --               2,614
                                                                                 -----------         -----------
         Consumer .....................................................                  244                 424
                                                                                 -----------         -----------
               Total loans.............................................              294,925             501,114
         Undisbursed loan funds..........................................            (22,210)            (89,840)
         Unaccreted discount...........................................               (2,721)             (5,169)
         Allowance for loan losses.....................................               (3,695)             (3,523)
                                                                                 -----------         -----------
               Loans, net..............................................          $   266,299         $   402,582
                                                                                 ===========         ===========
</TABLE>


     At December  31, 1997 the Company had $4,382 of single  family  residential
loans and  $3,686  of  multi-family  residential  loans  outstanding,  at market
interest  rates and  terms,  which  were  issued to  facilitate  the sale of the
Company's real estate owned and real estate held for development.

     Included in the loan  portfolio  at December 31, 1997 and 1996 are $101,126
and $315,871  respectively,  of loans in which the Company  participates  in the
residual  profits of the underlying real estate,  of which $88,954 and $233,749,
respectively, have been funded. The Company records any residual profits as part
of interest income when received.

                                       44

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     The  following  table  presents  a summary of the  Company's  nonperforming
loans,  allowance  for loan losses and  significant  ratios at and for the years
ended December 31:

<TABLE>
<CAPTION>

                                                                              1997          1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         Nonperforming loans:
         Single family residential.....................................    $   1,575     $   2,123     $   2,923
         Multi-family..................................................        7,583           106           731
         Consumer......................................................           --            55           202
                                                                           ---------     ---------     ---------
                                                                           $   9,158     $   2,284     $   3,856
                                                                           ---------     ---------     ---------
         Allowance for loan losses:
         Balance at beginning of year..................................    $   3,523     $   1,947     $   1,071
         Provision for loan losses.....................................          325         1,872         1,121
         Charge-offs...................................................         (153)         (296)         (263)
         Recoveries....................................................           --            --            18
                                                                           ---------     ---------     ---------
         Balance at end of year........................................    $   3,695     $   3,523     $   1,947
                                                                           =========     =========     =========
         Significant ratios:
         Nonperforming loans as a percentage of:
         Loans.........................................................         3.36%         0.56%         1.27%
         Total assets..................................................         0.30%         0.09%         0.20%

         Allowance for loan losses as a percentage of:
         Loans.........................................................         1.39%         0.87%         0.65%

         Nonperforming loans...........................................        40.35%       154.24%        50.49%
         Net charge-offs (recoveries) as a percentage of average loans.         0.04%         0.09%         0.19%
</TABLE>


     If  non-accrual  loans had been current in accordance  with their  original
terms,  interest  income for the years ended  December 31,  1997,  1996 and 1995
would have been  approximately  $515,  $214 and $322  higher,  respectively.  No
interest has been accrued on loans greater than 89 days past due.

     At December 31, 1997,  the Company had no investment  in impaired  loans as
defined in accordance with SFAS No. 114, and as amended by SFAS No. 118.

     The loan portfolio is geographically  located throughout the United States.
The  following  table sets forth the five states in which the largest  amount of
properties securing the Company's loans were located at December 31, 1997.


<TABLE>
<CAPTION>
                                                           Singe Family  Multi-family  Commercial
                                                            Residential  Residential   Real Estate     Consumer      Total
                                                            -----------  -----------   -----------   -----------  -----------
<S>                                                         <C>          <C>           <C>           <C>          <C>        
     New York............................................   $     3,871  $    31,835   $    23,068   $        --  $    58,774
     New Jersey..........................................        27,433        5,448         2,544             9       35,434
     California..........................................         2,771        4,763        20,213            --       27,747
     Maryland............................................           140           --        26,008            --       26,148
     Illinois............................................            56           --        21,098            --       21,154
     Other...............................................        11,955       29,336        84,142           235      125,668
                                                            -----------  -----------   -----------   -----------  -----------
     Total...............................................   $    46,226  $    71,382   $   177,073   $       244  $   294,925
                                                            ===========  ===========   ===========   ===========  ===========

                                                                    45

</TABLE>


<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 9    DISCOUNT LOAN PORTFOLIO

     The Company has acquired,  through  private  sales and  auctions,  mortgage
loans at a discount because the borrowers are either not current as to principal
and interest  payments or there is doubt as to the borrowers'  ability to pay in
full the contractual  principal and interest.  The Company estimates the amounts
it will realize through  foreclosure,  collection efforts or other resolution of
each loan and the length of time required to complete the collection  process in
determining the amounts it will bid to acquire such loans.

     The resolution  alternatives applied to the discount loan portfolio are (i)
the borrower  brings the loan current in  accordance  with  original or modified
terms;  (ii) the  borrower  repays the loan or a  negotiated  amount;  (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as real  estate  owned  and held for sale by the  Company  and (iv) the  Company
forecloses  on the loan and the property is either  acquired at the  foreclosure
sale by a third-party or by the Company,  in which case it is classified as real
estate owned and held for sale.  The Company  periodically  reviews the discount
loan portfolio performance to ensure that nonperforming loans are carried at the
lower of amortized cost or net realizable value of the underlying collateral and
the remaining unaccreted discount is adjusted accordingly. Upon receipt of title
to the property, the loans are transferred to real estate owned.

     The Company's discount loan portfolio consists of the following at December
31:


<TABLE>
<CAPTION>
                                                                                         Carrying Value
                                                                                 -------------------------------
                                                                                     1997               1996
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>        
         Loan type:
           Single family residential...................................          $   900,817         $   504,049
           Multi-family residential....................................              191,302             341,796
           Commercial real estate......................................              701,035             465,801
           Other.......................................................                1,865               2,753
                                                                                 -----------         -----------
             Total discount loans......................................            1,795,019           1,314,399
           Unaccreted discount.........................................             (337,350)           (241,908)
           Allowance for loan losses...................................              (23,493)            (11,538)
                                                                                 -----------         -----------
           Discount loans, net.........................................          $ 1,434,176         $ 1,060,953
                                                                                 -----------         -----------
</TABLE>


     The  following  table sets forth the  payment  status at December 31 of the
loans in the Company's gross discount loan portfolio:

<TABLE>
<CAPTION>
                                                         December 31, 1997                       December 31, 1996
                                                  ------------------------------         ------------------------------
                                                   Principal          Percentage           Principal         Percentage
                                                    Amount             of Loans             Amount            of Loans
                                                  -----------        -----------         -----------        -----------
Loans without Forbearance Agreements:
<S>                                               <C>                     <C>            <C>                      <C>   
Current.....................................      $   670,115             37.33%         $   572,043             43.52%
Past due 31 to 89 days......................           21,098              1.18               19,458              1.48
Past due 90 days or more....................          638,319             35.56              506,113             38.51
Acquired and servicing not yet transferred..           28,053              1.56              149,564             11.38
                                                  -----------          --------          -----------         ---------
Subtotal....................................        1,357,585             75.63            1,247,178             94.89
                                                  -----------          --------          -----------         ---------

Loans with Forbearance Agreements:
Current.....................................            3,140              0.18                7,554              0.57
Past due 31 to 89 days......................            1,688              0.09                2,703              0.21
Past due 90 days or more....................          432,606(1)          24.10               56,964              4.33
                                                  -----------          --------          -----------         ---------
Subtotal....................................          437,434             24.37               67,221              5.11
                                                  -----------          --------          -----------         ---------

Total.......................................      $ 1,795,019            100.00%         $ 1,314,399            100.00 %
                                                  ===========          ========          ===========         =========
</TABLE>

- -------------------
(1)  Includes  $316.3  million  of loans  which  were less than 90 days past due
     under the terms of the  forbearance  agreements  at December 31,  1997,  of
     which $184.5 million were current and $131.8 million were past due 31 to 89
     days.

                                       46

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     A summary of income on  discount  loans is as follows  for the years  ended
December 31:


<TABLE>
<CAPTION>
                                                                              1997         1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>            <C>           <C>     
         Interest Income:
           Realized....................................................    $ 157,649     $  97,174     $  70,807
           Accreted and unrealized.....................................           --         5,991         5,191
                                                                           ---------     ---------     ---------
                                                                           $ 157,649     $ 103,165     $  75,998
                                                                           =========     =========     =========
         Gains on Sales:
           Realized gains on sales.....................................    $   4,215     $   7,393     $   6,008
                                                                           =========     =========     =========
           Proceeds on sales...........................................    $ 500,151     $ 190,616      $ 38,942
                                                                           =========     =========     =========
</TABLE>


     Proceeds on sales of discount  loans during 1997 and 1996 include  non-cash
proceeds  related to the exchange of discount loans for securities in connection
with the Company's securitization activities (see Note 5).

     The following table sets forth the activity in the Company's gross discount
loan portfolio during the years ended December 31:


<TABLE>
<CAPTION>
                                                                            1997          1996           1995
                                                                        ------------   -----------    ----------
<S>                                                                     <C>            <C>            <C>       
         Principal balance at beginning of year........................ $  1,314,399   $   943,529    $  785,434
         Acquisitions..................................................    1,776,773     1,110,887       791,195
         Resolutions and repayments....................................     (484,869)     (371,228)     (300,161)
         Loans transferred to real estate owned........................     (292,412)     (138,543)     (281,344)
         Sales.........................................................     (518,872)     (230,246)      (51,595)
                                                                        ------------   -----------    ----------
         Principal balance at end of year ............................. $  1,795,019   $ 1,314,399    $  943,529
                                                                        ============   ===========    ==========
</TABLE>


     The discount loan portfolio is geographically located throughout the United
States.  The  following  table sets forth the five  states in which the  largest
amount of  properties  securing  the  Company's  discount  loans were located at
December 31, 1997:


<TABLE>
<CAPTION>
                                                                                             Commercial
                                                   Single family        Multi-family         Real Estate
                                                    Residential          Residential          and Other             Total
                                                   -------------        ------------         -----------         -----------
<S>                                                   <C>                  <C>               <C>                 <C>        
     California.............................       $  160,042           $  59,473            $    91,627         $   311,142
     New Jersey.............................           80,442               3,430                137,026             220,898
     New York...............................           98,248               9,527                 93,677             201,452
     Connecticut............................           54,802              21,856                 27,074             103,732
     Pennsylvania...........................           39,616              52,599                  3,329              95,544
     Other..................................          467,667              44,417                350,167             862,251
                                                   ----------           ---------            -----------         -----------
     Total..................................       $  900,817           $ 191,302            $   702,900         $ 1,795,019
                                                   ==========           =========            ===========         ===========
</TABLE>


     The following  schedule  presents a summary of the Company's  allowance for
loan losses and  significant  ratios for its discount loans at and for the years
ended December 31:


<TABLE>
<CAPTION>
                                                                             1997         1996           1995
                                                                          ---------     ---------     ---------
<S>                                                                       <C>           <C>           <C>      
     Allowance for loan losses:
         Balance at beginning of year..................................   $  11,538     $      --     $      --
         Provision for loan losses.....................................      31,894        20,578            --
         Charge-offs...................................................     (20,349)       (9,216)           --
         Recoveries....................................................         410           176            --
                                                                          ---------     ---------     ---------
         Balance at end of year........................................   $  23,493     $  11,538     $      --
                                                                          =========     =========     =========
     Significant ratios:
     Allowances for loan losses as a percentage of
       discount loan portfolio, net....................................        1.64%         1.09%           --%
     Net charge-offs (recoveries) as a percentage of average discount loans    1.55%         1.34%           --%
</TABLE>


                                                                 47

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 10  REAL ESTATE OWNED

     Real  estate  owned,  net of  allowance  for  losses,  is held for sale and
consists of the following at December 31:

<TABLE>
<CAPTION>

                                                                                    1997                1996
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>        
         Discount loan portfolio:
           Single family residential...................................          $    76,409         $    49,728
           Multi-family residential....................................               16,741              14,046
           Commercial real estate......................................               71,339              36,264
                                                                                 -----------         -----------
             Total discount loan portfolio.............................              164,489             100,038
         Loan portfolio................................................                  357                 592
         Loans available for sale......................................                2,419               3,074
                                                                                 -----------         -----------
                                                                                 $   167,265         $   103,704
                                                                                 ===========         ===========
</TABLE>



     The  following  schedule  presents  the  activity,  in  aggregate,  in  the
valuation allowances on real estate owned for the years ended December 31:


<TABLE>
<CAPTION>
                                                                              1997         1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         Balance at beginning of year..................................    $  11,493     $   4,606     $   3,937
         Provision for losses..........................................       13,450        18,360        10,510
         Charge-offs and sales.........................................      (12,597)      (11,473)       (9,841)
                                                                           ---------     ---------     ---------
         Balance at end of year........................................    $  12,346     $  11,493     $   4,606
                                                                           =========     =========     =========
</TABLE>


     The following  table sets forth the results of the Company's  investment in
real estate owned,  which were primarily related to the discount loan portfolio,
during the years ended December 31:


<TABLE>
<CAPTION>
                                                                             1997          1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         Gains on sales................................................    $  30,651     $  22,835     $  19,006
         Provision for losses..........................................      (13,450)      (18,360)      (10,510)
         (Carrying costs) rental income, net...........................       (9,924)         (648)        1,044
                                                                           ---------     ---------     ---------
                                                                           $   7,277     $   3,827     $   9,540
                                                                           =========     =========     =========
</TABLE>



NOTE 11  INVESTMENT IN REAL ESTATE


<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                 -------------------------------
                                                                                    1997                1996
                                                                                 -----------         -----------

         Loans accounted for as investments in real estate:
<S>                                                                              <C>                 <C>        
           Multi-family residential....................................          $    61,967         $    24,946
           Nonresidential..............................................                2,369                  --
         Hotels........................................................                1,426              16,087
         Other.........................................................                  210                  --
                                                                                 -----------         -----------
                                                                                 $    65,972         $    41,033
                                                                                 ===========         ===========
</TABLE>



     During 1997, the Company sold a 69%  partnership  interest in the one hotel
it owned and operated.

                                       48

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 12  MORTGAGE SERVICING RIGHTS

     The Company  services for other investors  mortgage loans which it does not
own.  The total  amount of such loans  serviced  for others was  $5,509,819  and
$1,918,098 at December 31, 1997 and 1996, respectively.  Servicing fee income on
such loans amounted to $22,056, $2,414 and $493 for the years ended December 31,
1997, 1996 and 1995, respectively.

     The unamortized balance of mortgage servicing rights, which are included in
other assets, is as follows at December 31:

                                                   1997                1996
                                                -----------         -----------
         Unamortized balance.................   $     7,369         $     4,048
         Valuation allowance.................        (1,630)             (1,630)
                                                -----------         -----------
                                                $     5,739         $     2,418
                                                ===========         ===========

     Periodically,   the  Company  evaluates  the   recoverability  of  mortgage
servicing  rights based on the projected  value of future net servicing  income.
Future  prepayment  rates are  estimated  based on  current  interest  rates and
various  portfolio  characteristics,  including  loan type,  interest  rate, and
market prepayment estimates. If the estimated recovery is lower than the current
amount of mortgage servicing rights, a reduction to mortgage servicing rights is
recorded through an increase in the valuation  allowance.  Valuation  allowances
were established through charges to servicing fees and other charges during 1996
primarily as a result of higher than projected prepayment rates.



NOTE 13  INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS

     The carrying value of the Company's  investments in low-income  housing tax
credit interests are as follows at December 31:


<TABLE>
<CAPTION>
                                                                                    1997                1996
                                                                                 -----------         -----------
<S>                                                                              <C>                 <C>        
         Investments solely as a limited partner made
           prior to May 18, 1995.......................................          $    31,418         $    55,595
         Investments solely as a limited partner made on or after
           May 18, 1995................................................               47,153              12,887
         Investments as both a limited and, through subsidiaries,
           general partner.............................................               50,043              24,827
                                                                                 -----------         -----------
                                                                                 $   128,614         $    93,309
                                                                                 ===========         ===========
</TABLE>

 
     The  qualified   affordable  housing  projects   underlying  the  Company's
investments  in  low-income  housing  tax credit  interests  are  geographically
located  throughout  the United  States.  At December  31, 1997,  the  Company's
largest single  investment  was $9,693 which is in a project  located in Racine,
Wisconsin.

     Income on the Company's limited  partnership  investments made prior to May
18, 1995, is recorded  under the level yield method as a reduction of income tax
expense, and amounted to $6,846,  $8,144 and $7,709 for the years ended December
31, 1997, 1996 and 1995, respectively.  Had these investments been accounted for
under the equity  method,  net income would have been reduced by $2,779,  $2,223
and $2,798 for the years ended December 31, 1997,  1996 and 1995,  respectively.
For limited partnership investments made after May 18, 1995, and for investments
as a limited and, through subsidiaries,  general partner, the Company recognized
tax credits of $8,035 and $1,186 for the years ended December 31, 1997 and 1996,
respectively,  and  recorded  a loss of $4,935 and $636 from  operations  of the
underlying real estate after  depreciation for the years ended December 31, 1997
and 1996, respectively.

     Other  liabilities  include $0 and $9,105 at  December  31,  1997 and 1996,
respectively,  representing  contractual  obligations  to fund  certain  limited
partnerships which invest in low-income housing tax credit interests.

     Included in other income for the years ended December 31, 1997 and 1996 are
gains of $6,298 and $4,861, respectively, on the sales of certain investments in
low-income housing tax credit interests which had carrying values of $15,728 and
$19,806, respectively, at time of sale.

NOTE 14   PREMISES AND EQUIPMENT


<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                 -------------------------------
                                                                                    1997                1996
                                                                                 -----------         -----------


<S>                                                                              <C>                 <C>        
         Land .........................................................          $       773         $       485
         Leasehold improvements........................................                7,664               5,999
         Office and computer equipment.................................               28,675              15,950
         Less accumulated depreciation and amortization................              (15,570)             (7,815)
                                                                                 -----------         -----------
                                                                                 $    21,542         $    14,619
                                                                                 ===========         ===========
</TABLE>


                                                         49

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 15 DEPOSITS

The Company's deposits consist of the following at December 31: 


<TABLE>
<CAPTION>
                                                              1997                                     1996
                                               ---------------------------------         --------------------------------
                                                  Weighted               Book              Weighted               Book
                                                Average Rate             Value           Average Rate            Value
                                               -------------         -----------         ------------         -----------
<S>                                                 <C>              <C>                      <C>             <C>        
   Non-interest bearing deposits............          --%            $   130,372                --%           $    96,563
   NOW and money market
     checking accounts......................        4.73                  27,624              2.99                 22,208
   Savings accounts.........................        2.30                   1,664              2.30                  2,761
                                                                     -----------                              -----------
                                                                         159,660                                  121,532
                                                                     -----------                              -----------
   Certificates of deposit..................                           1,834,899                                1,809,098
   Unamortized deferred fees................                             (11,737)                                 (10,888)
                                                                     -----------                              -----------
                                                    6.00               1,823,162              5.80              1,798,210
                                                                     -----------                              -----------
   Total deposits...........................        5.95             $ 1,982,822              5.47            $ 1,919,742
                                                                     ===========                              ===========
</TABLE>


 
    At December 31, 1997 and 1996,  certificates of deposit include  $1,607,043
and $1,572,081,  respectively, of deposits originated through national, regional
and local investment  banking firms which solicit deposits from their customers,
all of which are  non-cancelable.  Additionally,  at December 31, 1997 and 1996,
$133,738 and $147,488,  respectively,  of certificates of deposit were issued on
an uninsured basis. Of the $133,738 of uninsured  deposits at December 31, 1997,
$98,069  were  from  political   subdivisions  in  New  Jersey  and  secured  or
collateralized  as  required  under  state law.  Non-interest  bearing  deposits
include  $96,518  and  $82,885  of  advance  payments  by  borrowers  for taxes,
insurance  and  principal  and  interest  collected  but  not  yet  remitted  in
accordance  with  loan  servicing  agreements  at  December  31,  1997 and 1996,
respectively.

     The  contractual  maturity  of the  Company's  certificates  of  deposit at
December 31, 1997 follows:

     CONTRACTUAL REMAINING MATURITY:
         Within one year....................................  $     840,463
         Within two years...................................        376,628
         Within three years.................................        234,244
         Within four years..................................        225,479
         Within five years..................................        146,013
         Thereafter.........................................            335
                                                              -------------
                                                              $   1,823,162
                                                              =============

The amortization of the deferred fees of $6,619, $5,384 and $4,729 for the years
ended  December 31, 1997,  1996 and 1995,  respectively,  is computed  using the
interest method and is included in interest  expense on certificates of deposit.
The  interest  expense  by type of deposit  account is as follows  for the years
ended December 31:


<TABLE>
<CAPTION>
                                                                              1997          1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         NOW accounts and money market checking........................    $   1,220     $     620     $   1,031
         Savings ......................................................           49            78           451
         Certificates of deposit.......................................      120,801        93,075        70,371
                                                                           ---------     ---------     ---------
                                                                           $ 122,070     $  93,773     $  71,853
                                                                           =========     =========     =========
</TABLE>


     Accrued  interest  payable on  deposits  amounted to $21,967 and $18,249 at
December 31, 1997 and 1996, respectively.

                                       50

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 16  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     The Company  periodically  enters into sales of securities under agreements
to repurchase the same securities (reverse repurchase agreements).  Fixed coupon
reverse  repurchase  agreements  with  maturities  of three  months  or less are
treated as financings,  and the  obligations to repurchase  securities  sold are
reflected  as  a  liability  in  the  accompanying  consolidated  statements  of
financial condition. All securities underlying reverse repurchase agreements are
reflected as assets in the  accompanying  consolidated  statements  of financial
condition and are held in safekeeping by broker/dealers.


<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                           -----------------------------------
                                                             1997           1996        1995
                                                           --------       --------    --------
Other information concerning securities sold
   under agreements to repurchase:
<S>                                                        <C>            <C>         <C>     
   Balance at end of year .............................    $108,250       $ 74,546    $ 84,761
   Accrued interest payable at end of year ............    $    306       $     12    $    153
   Weighted average interest rate at end of year ......        6.06%          5.46%       5.70%
   Average balance during the year ....................    $ 16,717       $ 19,581    $ 16,754
   Weighted average interest rate during the year .....        5.98%          5.62%       5.68%
   Maximum month-end balance ..........................    $108,250       $ 84,321    $ 84,761
</TABLE>



     Mortgage-related  securities  at  amortized  cost of $121,371  and a market
value of $120,168 were posted as collateral for securities sold under agreements
to repurchase at December 31, 1997.


                                                   51

<PAGE>


                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 17  NOTES, DEBENTURES AND OTHER INTEREST BEARING OBLIGATIONS

Notes, debentures and other interest bearing obligations mature as follows:


<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                 -------------------------------
                                                                                    1997                1996
                                                                                 -----------          ----------
<S>                                                                                  <C>                 <C>    
         1998:
         7.063% note due January 31....................................                1,975                  --
         2003:
         11.875% notes due October 1...................................              125,000             125,000
         2005:
         12% subordinated debentures due June 15.......................              100,000             100,000
         2014:
         0 - 8.5% mortgage loan due December 1.........................                   --                 573
                                                                                 -----------         -----------
                                                                                 $   226,975         $   225,573
                                                                                 ===========         ===========
</TABLE>


     On June 12, 1995, the Bank issued $100,000 of 12%  Subordinated  Debentures
due 2005 (the  "Debentures")  with interest payable  semiannually on June 15 and
December 15. The  Debentures are unsecured  general  obligations of the Bank and
are subordinated in right of payment to all existing and future senior debt.

     The  Debentures  may not be  redeemed  prior to June 15,  2000,  except  as
described  below.  On or after such date,  the Debentures may be redeemed at any
time at the option of the Bank,  in whole or in part,  together with accrued and
unpaid interest, if any, on not less than 30 nor more than 60 days notice at the
following redemption prices (expressed as a percentage of the principal amount),
if  redeemed  during  the twelve  month  period  beginning  June 15 of the years
indicated below:

                   Year                               Redemption Price
     --------------------------------        ---------------------------------
                   2000                                   105.333%
                   2001                                   104.000%
                   2002                                   102.667%
                   2003                                   101.333%
                   2004 and thereafter                    100.000%

     In addition,  the Bank may redeem,  at its option,  up to $35,000 principal
amount of the  Debentures  at any time prior to June 15,  1998 with the net cash
proceeds  received by the Bank from one or more  public  equity  offerings  at a
purchase  price of 112.000% of the principal  amount  thereof,  plus accrued and
unpaid interest.

     In  connection  with the  issuance  of the  Debentures,  the Bank  incurred
certain  costs  which  have  been  capitalized  and  are  being  amortized  on a
straight-line  basis over the expected life of the  Debentures.  The unamortized
balance of these issuance  costs amounted to $2,319 and $2,745,  at December 31,
1997 and 1996,  respectively,  and is included in other assets. Accrued interest
payable on the Debentures amounted to $500 at December 31, 1997 and 1996, and is
included in accrued expenses, payables and other liabilities.

     On  September  25,  1996,  the  Company  completed  the public  offering of
$125,000 aggregate  principal of 11.875% Notes due October 1, 2003 ("the Notes")
with  interest  payable  semi-annually  on April 1 and  October 1. The Notes are
unsecured  general  obligations of the Company and are  subordinated in right of
payment  to  the  claims  of  creditors   of  the  Company  and  the   Company's
subsidiaries.

     The Notes may not be redeemed  prior to October 1, 2001 except as described
below.  On or after  such  date,  the Notes may be  redeemed  at any time at the
option of the Company,  in whole or in part, at the following  redemption prices
(expressed  as a  percentage  of the  principal  amount) plus accrued and unpaid
interest,  if redeemed during the twelve-month period beginning October 1 of the
years indicated below:

                   Year                               Redemption Price
     --------------------------------        ----------------------------------
                   2001                                   105.938%
                   2002                                   102.969%

     In  addition,  the  Company may  redeem,  at its  option,  up to 35% of the
original  aggregate  principal  amount of the Notes at any time and from time to
time until  October 1, 1999 with the net cash  proceeds  received by the Company
from one or more public or private  equity  offerings at a  redemption  price of
111.875% of the principal amount thereof, plus accrued and unpaid interest.

                                       52

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     The indenture governing the Notes requires the Company to maintain,  at all
times when the Notes are not rated in an  investment  grade  category  by one or
more nationally recognized statistical rating organizations, unencumbered liquid
assets with a value equal to 100% of the required  interest  payments due on the
Notes on the next two succeeding semi-annual interest payment dates. The Company
maintained a $15,000  investment  in cash and cash  equivalents  at December 31,
1997  and 1996  that is  restricted  for  purposes  of  meeting  this  liquidity
requirement.  The  indenture  further  provides that the Company shall not sell,
transfer or  otherwise  dispose of shares of common  stock of the Bank or permit
the Bank to issue,  sell or  otherwise  dispose  of shares of its  common  stock
unless in either case the Bank remains a wholly-owned subsidiary of the Company.

     Proceeds from the offering of the Notes amounted to approximately  $120,156
(net of underwriting  discount).  On September 30, 1996, the Company contributed
$50,000 of such proceeds to the Bank to support future growth.  The remainder of
the proceeds  retained by the Company have been available for general  corporate
purposes,  with the exception of the liquidity maintenance requirement described
above.

     In connection with the issuance of the Notes,  the Company incurred certain
costs which have been  capitalized  and are being  amortized on a  straight-line
basis  over the life of the Notes.  The  unamortized  balance of these  issuance
costs amounted to $4,647 and $5,252 at December 31, 1997 and 1996, respectively,
and is included in other assets.  Accrued interest payable on the Notes amounted
to $3,711  and  $3,752 at  December  31,  1997 and  1996,  respectively,  and is
included in accrued expenses, payables and other liabilities.

                                       53

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 18  CAPITAL SECURITIES

     In August 1997,  OCT,  issued $125.0 million of 10 7/8% Capital  Securities
(the "Capital  Securities").  Proceeds  from issuance of the Capital  Securities
were invested in 10 7/8% Junior  Subordinated  Debentures  issued by Ocwen.  The
Junior  Subordinated  Debentures,  which  represent the sole assets of OCT, will
mature on August 1, 2027.

     Holders of the Capital  Securities  will be entitled to receive  cumulative
cash  distributions  accruing  from the date of  original  issuance  and payable
semi-annually in arrears on February 1 and August 1 of each year,  commencing on
February  1, 1998,  at an annual  rate of 10 7/8% of the  liquidation  amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities,  are
guaranteed by the Company to the extent OCT has funds available.  If the Company
does  not  make  principal  or  interest  payments  on the  Junior  Subordinated
Debentures,  OCT will not have  sufficient  funds to make  distributions  on the
Capital  Securities,  in which  event  the  guarantee  shall  not  apply to such
distributions  until OCT has sufficient  funds available  therefor.  Accumulated
distributions  payable on the Capital Securities  amounted to $5,249 at December
31, 1997 and is included in accrued interest payable.

     The  Company  has the right to defer  payment  of  interest  on the  Junior
Subordinated  Debentures  at any  time or from  time to time  for a  period  not
exceeding 10  consecutive  semi-annual  periods  with  respect to each  deferral
period,  provided that no extension period may extend beyond the stated maturity
of the  Junior  Subordinated  Debentures.  Upon  the  termination  of  any  such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly,  there
could be multiple  extension  periods of varying lengths  throughout the term of
the  Junior  Subordinated  Debentures.   If  interest  payments  on  the  Junior
Subordinated  Debentures are deferred,  distributions on the Capital  Securities
will also be deferred and the Company may not, and may not permit any subsidiary
of the Company  to, (i) declare or pay any  dividends  or  distributions  on, or
redeem,  purchase,  acquire,  or make a liquidation payment with respect to, the
Company's  capital  stock or (ii) make any  payment of  principal,  interest  or
premium, if any, on or repay, repurchase or redeem any debt securities that rank
pari  passu  with or junior to the  Junior  Subordinated  Debentures.  During an
extension period,  interest on the Junior Subordinated  Debentures will continue
to accrue at the rate of 10 7/8% per annum, compounded semi-annually.

     The Junior Subordinated  Debentures are redeemable prior to maturity at the
option of the Company,  subject to the receipt of any necessary prior regulatory
approval,  (i) in whole or in part on or after  August 1,  2007 at a  redemption
price  equal to  105.438%  of the  principal  amount  thereof  on August 1, 2007
declining  ratably on each  August 1  thereafter  to 100% on or after  August 1,
2017, plus accrued interest  thereon,  or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event,  regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the  principal  amount  thereof or (b)
the sum of the present values of the principal  amount and premium  payable with
respect to an optional  redemption  of such Junior  Subordinated  Debentures  on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the  adjusted  Treasury  rate plus  accrued  interest  thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated  Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated  Debentures  maturing or being  redeemed and at a redemption  price
equal  to the  redemption  price of the  Junior  Subordinated  Debentures,  plus
accumulated and unpaid distributions thereon to the date of redemption.

     For  financial  reporting  purposes,  OCT is treated as a subsidiary of the
Company and,  accordingly,  the accounts of OCT are included in the consolidated
financial statements of the Company.  Intercompany  transactions between OCT and
the Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated  financial  statements of the Company.  The Capital  Securities are
presented as a separate caption between liabilities and stockholders'  equity in
the   consolidated   statement  of   financial   condition  of  the  Company  as
"Company-obligated,   mandatorily  redeemable  securities  of  subsidiary  trust
holding solely junior subordinated debentures of the Company".  Distributions on
the Capital Securities are recorded as a separate caption immediately  following
non-interest expense in the consolidated statement of operations of the Company.
The Company intends to continue this method of accounting going forward.

     In  connection  with the  issuance of the Capital  Securities,  the Company
incurred  certain costs which have been capitalized and are being amortized over
the term of the Capital  Securities.  The unamortized  balance of these issuance
costs amounted to $4,262 at December 31, 1997 and is included in other assets.

                                       54

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

NOTE 19  BASIC AND DILUTED EARNINGS PER SHARE

     The Company is  required to present  both basic and diluted EPS on the face
of its statement of operations.  Basic EPS, which replaced  primary EPS required
by APB 15, is calculated by dividing net income by the weighted  average  number
of common  shares  outstanding  during the year.  Diluted EPS is  calculated  by
dividing net income by the weighted average number of common shares  outstanding
and the dilutive  potential common shares related to outstanding  stock options.
The following is a  reconciliation  of the  calculation  of basic EPS to diluted
EPS.


<TABLE>
<CAPTION>
                                                                             1997          1996          1995
                                                                          ----------    ----------    ----------
<S>                                                                       <C>           <C>           <C>       
Net income.............................................................   $   78,932    $   50,142    $   25,467
                                                                          ==========    ==========    ==========

Basic EPS:
Weighted average shares of common stock................................   56,185,956    50,556,572    51,712,415
                                                                          ==========    ==========    ==========
   Basic EPS...........................................................       $ 1.40    $     0.99    $     0.49
                                                                          ==========    ==========    ==========

Diluted EPS:
Weighted average shares of common stock................................   56,185,956    50,556,572    51,712,415
Effect of dilutive securities:
   Stock options                                                             650,528     2,822,310     3,825,745
                                                                          ----------    ----------    ----------
                                                                          56,836,484    53,378,882    55,538,160
                                                                          ==========    ==========    ==========
   Diluted EPS.........................................................   $     1.39    $     0.94    $     0.46
                                                                          ==========    ==========    ==========
</TABLE>


                                                          55

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 20  INTEREST RATE RISK MANAGEMENT INSTRUMENTS

     In managing its  interest  rate risk,  the Company on occasion  enters into
swaps.  Under  swaps,  the Company  agrees with other  parties to  exchange,  at
specified  intervals,   the  difference  between  fixed-rate  and  floating-rate
interest amounts calculated by reference to an agreed notional amount. The terms
of the swaps  provide  for the  Company to receive a floating  rate of  interest
based on the London  Interbank  Offered Rate ("LIBOR") and to pay fixed interest
rates.  The  notional  amount of the swap  outstanding  at December  31, 1997 is
amortized (i.e., reduced) monthly based on estimated prepayment rates. The terms
of the outstanding swap, at December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                                Notional                                             Floating Rate
           Maturity              Amount           LIBOR Index       Fixed Rate       at End of Year      Fair Value
      ------------------      ------------      ---------------    -------------    ---------------     -------------
<S>                             <C>                   <C>               <C>               <C>              <C>    
      December 31, 1997         $ 36,860              1-Month           6.18%             5.69%            $  (94)
      December 31, 1996         $ 45,720              1-Month           6.18%             5.67%            $ (103)
</TABLE>


     The 1-month LIBOR was 5.72% on December 31, 1997.  The interest  expense or
benefit  of the swaps had the effect of  increasing  (decreasing)  net  interest
income by $(198), $(58) and $358 for the years ended December 31, 1997, 1996 and
1995, respectively.

     The Company also enters into short sales of  Eurodollar  and U.S.  Treasury
interest  rate  futures  contracts  as part of its  overall  interest  rate risk
management  activity.  Interest rate futures contracts are commitments to either
purchase  or sell  designated  financial  instruments  at a  future  date  for a
specified price and may be settled in cash or through  delivery.  The Eurodollar
futures  contracts  have been sold by the Company to hedge the maturity  risk of
certain short duration mortgage-related  securities.  U.S. Treasury futures have
been sold by the Company to hedge the risk of a reduction in the market value of
fixed rate  mortgage  loans and certain fixed rate  mortgage-backed  and related
securities available for sale in a rising interest rate environment.

     Terms and other  information on interest rate futures  contracts sold short
are as follows:


<TABLE>
<CAPTION>
                                                                                         Notional         Fair
                                                                          Maturity      Principal         Value
                                                                         -----------   -----------      ---------
December 31, 1997:
<S>                                                                          <C>         <C>             <C>    
   U.S. Treasury futures...............................................      1998        $ 194,500       $ 1,996

December 31, 1996:
   Eurodollar futures..................................................      1997        $ 365,000       $  (558)
                                                                             1998           40,000           (87)

   U.S. Treasury futures...............................................      1997          165,100           498
</TABLE>


     The  following  table  summarizes  the  Company's use of interest rate risk
management instruments.


<TABLE>
<CAPTION>
                                                                                     Notional Amount
                                                                          -------------------------------------
                                                                                         Short         Short
                                                                                       Eurodollar   U.S. Treasury
                                                                            Swaps       Futures       Futures
                                                                          ---------    ----------    ----------
<S>                                                                       <C>           <C>            <C>     
Balance, December 31, 1995.............................................   $      --     $ 412,000      $ 11,100
   Purchases...........................................................      47,350       564,000     3,362,400
   Maturities..........................................................      (1,630)          --            --
   Terminations........................................................          --      (571,000)   (3,208,400)
                                                                          ---------     ---------    ----------
Balance, December 31, 1996.............................................      45,720       405,000       165,100
   Purchases...........................................................          --            --       966,400
   Maturities..........................................................      (8,860)           --            --
   Terminations........................................................          --      (405,000)     (937,000)
                                                                          ---------     ---------    ----------
Balance, December 31, 1997.............................................   $  36,860     $      --    $  194,500
                                                                          =========     =========    ==========
</TABLE>


     Because  interest rate futures  contracts are exchange  traded,  holders of
these instruments look to the exchange for performance under these contracts and
not the entity holding the offsetting  futures contract,  thereby minimizing the
risk of nonperformance  under these contracts.  The Company is exposed to credit
loss in the event of nonperformance by the counterparty to the swap and controls
this risk through credit monitoring  procedures.  The notional  principal amount
does not represent the Company's exposure to credit loss.

     U.S.  Treasury  Bills with a carrying value of $2,055 and $3,138 and a fair
value of $2,055  and $3,138  were  pledged by the  Company as  security  for the
obligations  under these swaps and interest  rate futures  contracts at December
31, 1997 and 1996, respectively.

                                       56

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 21  INCOME TAXES

Total income tax expense (benefit) was allocated as follows:


<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                           -------------------------------------
                                                                              1997          1996          1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
   Income from continuing operations...................................    $  21,309     $  11,159     $   4,562
   Discontinued operations.............................................           --            --        (4,097)
   Benefit of tax  deduction  in  excess of  amounts  recognized  for 
     financial reporting purposes related to employee stock options
     reflected in stockholders' equity.................................       (1,965)       (2,987)         (375)
                                                                           ---------     ---------     ---------
                                                                           $  19,344     $   8,172     $      90
                                                                           =========     =========     =========
</TABLE>


     The components of income tax expense (benefit)  attributable to income from
continuing operations were as follows:


<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                           -------------------------------------
                                                                              1997          1996         1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
         Current:
           Federal.....................................................    $  42,482     $  (6,844)    $   1,673
           State.......................................................        3,579          (576)        5,011
                                                                           ---------     ---------     ---------
                                                                              46,061        (7,420)        6,684
                                                                           ---------     ---------     ---------
         Deferred:
           Federal.....................................................      (23,085)       16,616         1,762
           State.......................................................       (1,667)        1,963        (3,884)
                                                                           ---------     ---------     ---------
                                                                             (24,752)       18,579        (2,122)
                                                                           ---------     ---------     ---------
             Total.....................................................    $  21,309     $  11,159     $   4,562
                                                                           =========     =========     =========
</TABLE>


     Income tax expense  differs from the amounts  computed by applying the U.S.
Federal corporate income tax rate of 35% as follows:


<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                           -------------------------------------
                                                                              1997         1996           1995
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>      
Expected income tax expense at statutory rate..........................    $  34,838     $  21,455     $  13,196
Differences between expected and actual tax:
Excess of cost over net assets acquired adjustments....................          (30)          (76)          (76)
Tax effect of utilization of net operating loss........................         (906)       (1,782)       (1,380)
State tax (after Federal tax benefit)..................................        1,243           901           733
Low-income housing tax credits.........................................      (14,881)       (9,330)       (7,709)
Adjustments resulting from IRS audit...................................          921            --            --
Other..................................................................          124            (9)         (202)
                                                                           ---------     ---------     ---------
   Actual income tax expense...........................................    $  21,309     $  11,159     $   4,562
                                                                           =========     =========     =========
</TABLE>


     For taxable years beginning prior to January 1, 1996, a savings institution
that met certain  definitional  tests relating to the  composition of its assets
and the sources of its income (a "qualifying savings institution") was permitted
to establish  reserves for bad debts and make annual additions thereto under the
experience method. Alternatively,  a qualifying savings institution could elect,
on an annual basis,  to use the  percentage of taxable  income method to compute
its allowable addition to its bad debt reserve on qualifying real property loans
(generally loans secured by an interest in improved real estate). The applicable
percentage  was 8% for tax periods after 1987.  The Bank utilized the percentage
of taxable income method for these years.

     On August  20,  1996,  President  Clinton  signed  the Small  Business  Job
Protection  Act (the "Act") into law.  One  provision  of the Act  repealed  the
reserve  method of accounting for bad debts for savings  institutions  effective
for taxable years beginning after 1995. The Bank, therefore, was required to use
the specific  charge-off  method on its 1996 and  subsequent  federal income tax
returns.  The  Bank  will  be  required  to  recapture  its  "applicable  excess
reserves",  which are its  federal  tax bad debt  reserves in excess of the base
year reserve amount described in the following paragraph.  The Bank will include
one-sixth of its applicable  excess reserves in taxable income in each year from
1996 through 2001.  As of December 31, 1995,  the Bank had  approximately  $42.4
million of applicable  excess  reserves.  As of December 31, 1996,  the Bank had
fully provided for the tax related to this recapture.

                                       57

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


     The base year  reserves  will  continue to be subject to recapture  and the
Bank could be required to  recognize a tax  liability  if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes,  (2) certain  distributions
are made with  respect to the stock of the Bank,  (3) the bad debt  reserves are
used for any  purpose  other than to absorb bad debt  losses,  or (4) there is a
change in federal tax law. The enactment of this legislation is expected to have
no  material  impact on the  Bank's or the  Company's  operations  or  financial
position.

     In accordance  with SFAS No. 109  "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the tax bad debt base year reserves of
the Bank.  The base year  reserves are  generally  the balance of reserves as of
December  31, 1987 reduced  proportionately  for  reductions  in the Bank's loan
portfolio  between that date and  December  31,  1995.  At December 31, 1997 and
1996, the amount of those reserves was approximately $5.7 million.  This reserve
could  be  recognized  in the  future  under  the  conditions  described  in the
preceding paragraph.

     The net deferred tax asset was comprised of the following:


<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                 -------------------------------
                                                                                    1997                1996
                                                                                 -----------         -----------

Deferred Tax Assets:
<S>                                                                              <C>                    <C>     
   Tax residuals and deferred income on tax residuals..................          $     3,497            $  3,712
   State taxes.........................................................                2,203                 552
   Application of purchase accounting..................................                  655               1,503
   Accrued profit sharing..............................................                3,234               1,422
   Accrued other liabilities...........................................                2,495                 420
   Deferred interest expense on discount loan portfolio................                7,685               3,989
   Mark-to-market and reserves on REO properties.......................                3,187               3,513
   Gain on loan foreclosure............................................                5,635                  --
   Bad debt and loan loss reserves.....................................                9,770                  --
   Reserves on securities held for sale................................                4,007                  --
   Other...............................................................                  495                  --
                                                                                 -----------         -----------
                                                                                      42,863              15,111
                                                                                 -----------         -----------

Deferred Tax Liabilities:
   Bad debt and loan loss reserves.....................................                   --                 810
   Deferred interest income on discount loan portfolio.................                2,254               4,632
   Partnership losses..................................................                1,386               1,205
   Other...............................................................                  763                 500
                                                                                 -----------         -----------
                                                                                       4,403               7,147
                                                                                 -----------         -----------
                                                                                      38,460               7,964
   Mark-to-market on certain mortgage-backed and
     related securities available for sale.............................                6,688              (2,104)
                                                                                 -----------         -----------
                                                                                      45,148               5,860
                                                                                 -----------         -----------
   Deferred tax asset valuation allowance..............................                   --                  --
                                                                                 -----------         -----------
   Net deferred tax assets.............................................          $    45,148         $     5,860
                                                                                 ===========         ===========
</TABLE>


     Deferred tax assets,  net of deferred  fees,  include tax  residuals  which
result from the ownership of Real Estate Mortgage Investment Conduits ("REMIC").
While a tax residual is  anticipated to have little or no future cash flows from
the REMIC from which it has been issued,  the tax residual  does bear the income
tax  liability and benefit  resulting  from the annual  differences  between the
interest  paid on the debt  instruments  issued by the  REMIC  and the  interest
received on the  mortgage  loans held by the REMIC.  Typically  this  difference
generates  taxable income to the Company in the first several years of the REMIC
and equal amounts of tax losses  thereafter,  thus resulting in the deferred tax
asset.  As a result of the manner in which REMIC residual  interests are treated
for tax  purposes,  at  December  31,  1997,  1996 and  1995,  the  Company  had
approximately  $0,  $10,228 and $55,000,  respectively,  of net  operating  loss
carryforwards for tax purposes.

     IMI, a wholly owned  subsidiary  of the  Company,  had at December 31, 1997
approximately  $9,680 of Separate Return  Limitation Year ("SRLY") net operating
loss  carryforward.  These SRLY net operating loss carryforwards can only offset
IMI future taxable income.  Net operating loss carryforward of $8,044 and $1,636
will  expire,  if unused,  in years 2005 and 2007,  respectively.  In  addition,
International  Hotel Group ("IHG"),  a wholly owned subsidiary of IMI, and IHG's
subsidiaries had at December 31, 1997  approximately  $828 of SRLY net operating
loss carryforwards. The SRLY net operating loss carryforward can only offset IHG
and  its   subsidiaries'   future  taxable  income.   The  $828  operating  loss
carryforward will expire, if unused, in the year 2008.

                                       58

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     As a result of the  Company's  earnings  history,  current tax position and
taxable  income  projections,   the  Company  believes  that  it  will  generate
sufficient  taxable income in future years to realize the net deferred tax asset
position as of December 31, 1997. In evaluating  the  expectation  of sufficient
future taxable  income,  the Company  considered  future  reversals of temporary
differences and available tax planning strategies that could be implemented,  if
required.

     A valuation  allowance was not required as of December 31, 1997 and 1996 as
it was the Company's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance  will be  established  in the  future to the extent of a change in the
Company's  assessment  of the  amount  of the net  deferred  tax  asset  that is
expected to be realized.


NOTE 22  RETIREMENT PLAN

     The  Company  maintains a defined  contribution  401(k)  plan.  The Company
matches 50% of each  employee's  contributions,  limited to 2% of the employee's
compensation.

     In connection with its acquisition of Berkeley Federal Savings Bank in June
1993, the Bank assumed the obligations under a  noncontributory  defined benefit
pension  plan (the  "Plan")  covering  substantially  all  employees  upon their
eligibility  under the terms of the Plan.  The Plan was frozen for the plan year
ended December 31, 1993 and has been fully funded.

     The  Company's  combined  contributions  to 401(k)  plan in the years ended
December 31, 1997, 1996 and 1995 were $368, $258 and $248, respectively.


                                       59

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 23  STOCKHOLDERS' EQUITY

     On July 12, 1996  stockholders of the Company  approved an amendment to the
Company's  articles of incorporation to increase the authorized number of common
shares from 20,000,000 to 200,000,000  shares, to increase the authorized number
of preferred  shares from 250,000 to  20,000,000  shares and to decrease the par
value of the authorized  preferred shares from $1.00 to $0.01 per share. On July
30, 1996, the Company's  Board of Directors  declared a 10-for-1 stock split for
each share of common  stock  then  outstanding  in the form of a stock  dividend
which was paid to holders of record on July 31, 1996.  On October 29, 1997,  the
Company's  Board of Directors  approved a 2-for-1  stock split of its issued and
outstanding  common stock. The stock split was effected through the distribution
of authorized  but unissued  shares of its common stock on November 20, 1997, to
holders of record of its common  stock at the close of business on November  12,
1997. All references in the consolidated  financial  statements to the number of
shares  and  per  share  amounts  have  been  adjusted   retroactively  for  the
recapitalization and the stock splits.

     During  September  1996,  2,928,830  shares of common  stock were issued in
connection with the exercise of vested stock options by certain of the Company's
and the Bank's  current and former  officers and  directors.  The Company loaned
$6,654 to certain of such officers to fund their  exercise of the stock options.
Such notes,  which are presented as a reduction of shareholders'  equity, had an
unpaid  principal  balance  of $0 and  $3,832  at  December  31,  1997 and 1996,
respectively,  bear  interest  at 10.5%  per  annum,  are  payable  in two equal
installments  on March 1, 1998 and March 1, 1999 and are  secured by the related
shares of common stock. These notes were repaid during 1997.

         On  September  25, 1996,  certain  stockholders  of Ocwen  completed an
initial public offering of 2,300,000 shares of Ocwen common stock. At that time,
the Company's  common stock began trading on the NASDAQ  National  Market System
under  the  symbol  "OCWEN".  Prior to this  offering,  there had been no public
trading  market for the common  stock.  The  Company  did not receive any of the
proceeds from this common stock offering.

     On August 12, 1997, the Company completed a secondary stock offering to the
public of 3,450,000 shares which resulted in net proceeds of $141,898. Effective
August 1, 1997,  shares of the  Company's  common stock began trading on the New
York Stock Exchange ("NYSE") under the symbol "OCN".  Upon  effectiveness of the
NYSE listing, the Company delisted its common stock from NASDAQ.

     During  1995,  the  Company   repurchased  from  stockholders  and  retired
8,815,060 shares of common stock for the aggregate price of $41,997.

     In December 1991, as part of its annual  incentive  compensation  plan, the
Company adopted a Non-Qualified  Stock Option Plan (the "Stock Plan"). The Stock
Plan  provides  for the issuance of stock  options to key  employees to purchase
shares of common stock at prices less than the fair market value of the stock at
the date of grant.


<TABLE>
<CAPTION>
                                 Options          Exercise            Options        Forfeited or         Options
                                 Granted            Price            Exercised        Repurchased         Vested
                                ----------       ----------        -------------    ---------------     ----------
<S>                               <C>              <C>                <C>               <C>                <C>    
      1995:................       594,760          $ 2.880            194,232           231,148            169,380
      1995:................        14,220            0.472                 --                --             14,220
      1996:................     1,147,370           11.000                 --            63,158          1,084,212
      1997:................     1,083,794           20.350                 --                --                 --
</TABLE>


     The  difference  between the fair market  value of the stock at the date of
grant and the exercise  price is treated as  compensation  expense.  Included in
compensation expense is $5,514, $2,725, and $65 for the years ended December 31,
1997, 1996 and 1995, respectively, related to options granted.


                                       60

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

     The  Company  adopted  SFAS No. 123 during  1996.  In  accordance  with the
provisions  of SFAS No. 123,  the Company has  retained  its current  accounting
method for its stock-based  employee  compensation plans under the provisions of
APB 25.  However,  entities  continuing to apply APB 25 are required to disclose
pro forma net  income  and  earnings  per share as if the fair  value  method of
accounting for stock-based employee compensation plans as prescribed by SFAS No.
123 had been  utilized.  The  following is a summary of the  Company's pro forma
information:


<TABLE>
<CAPTION>
                                                                                     Years ending December 31,
                                                                                    ----------------------------
                                                                                      1997                1996
                                                                                    --------            --------

<S>                                                                                 <C>                 <C>     
         Net income (as reported)......................................             $ 78,932            $ 50,142
         Pro forma net income..........................................             $ 72,668            $ 47,777
         Earnings per share (as reported): ............................
           Basic.......................................................             $   1.40            $   0.99
           Diluted.....................................................             $   1.39            $   0.94
         Pro forma earnings per share: ................................
           Basic.......................................................             $   1.29            $   0.95
           Diluted.....................................................             $   1.28            $   0.90
</TABLE>


The fair value of the  option  grants  were  estimated  using the  Black-Scholes
option-pricing model with the following assumptions:


<TABLE>
<CAPTION>
                                                                                         Years ending December 31,
                                                                                        ---------------------------
                                                                                          1997              1996
                                                                                        -------            -------
<S>                                                                                      <C>                 <C>  
         Expected dividend yield.......................................                  0.00%               0.00%

         Expected stock price volatility...............................                 48.00%              21.00%
         Risk-free interest rate.......................................                  5.71%               6.20%
         Expected life of options......................................                 5 years             5 years
</TABLE>


                                                           61

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 24  REGULATORY REQUIREMENTS

     The Financial  Institutions  Reform,  Recovery and  Enforcement Act of 1989
("FIRREA")  and  the  regulations  promulgated  thereunder  established  certain
minimum  levels of regulatory  capital for savings  institutions  subject to OTS
supervision.  The Bank must follow specific capital guidelines stipulated by the
OTS which involve  quantitative  measures of the Bank's assets,  liabilities and
certain  off-balance  sheet items. An institution  that fails to comply with its
regulatory  capital  requirements must obtain OTS approval of a capital plan and
can  be  subject  to  a  capital  directive  and  certain  restrictions  on  its
operations.  At December 31, 1997, the minimum regulatory  capital  requirements
were:

o    Tangible  and core  capital of 1.5 percent and 3 percent of total  adjusted
     assets,  respectively,  consisting principally of stockholders' equity, but
     excluding most intangible  assets,  such as goodwill and any net unrealized
     holding gains or losses on debt securities available for sale.

o    Risk-based  capital  consisting  of core capital plus certain  subordinated
     debt and other capital  instruments  and,  subject to certain  limitations,
     general valuation allowances on loans receivable, equal to 8 percent of the
     value of risk-weighted assets.

o    At December  31,  1997,  the Bank was "well  capitalized"  under the prompt
     corrective  action ("PCA")  regulations  adopted by the OTS pursuant to the
     Federal Deposit Insurance  Corporation  Improvement Act of 1991 ("FDICIA").
     To be categorized  as "well  capitalized",  the Bank must maintain  minimum
     core capital,  Tier 1 risk-based  capital and risk-based  capital ratios as
     set forth in the table below. The Bank's capital amounts and classification
     are   subject   to  review  by   federal   regulators   about   components,
     risk-weightings and other factors.  There are no conditions or events since
     December 31, 1997 that management  believes have changed the  institution's
     category.

     The following  tables  summarize the Bank's actual and required  regulatory
capital at December 31, 1997 and 1996.

DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                                         To Be
                                                                                                    Well Capitalized   Agreed Upon
                                                                              Minimum For Capital For Prompt Corrective  Capital
                                                                Actual         Adequacy Purposes   Action Provisions   Requirements
                                                          ------------------  -------------------- -------------------   -------
                                                          Ratio    Amount        Ratio    Amount     Ratio    Amount      Ratio
                                                          ------ -----------    ------  ---------- --------  ---------   -------
<S>                                                       <C>        <C>         <C>     <C>         <C>    <C>           <C>
Stockholders'  equity,  and  ratio  to total  assets.     10.62%     276,277
Net unrealized loss on certain  available for 
  sale securities ...................................                  2,378
Excess mortgage servicing rights and deferred tax
  assets ............................................                 (1,029)
                                                                 -----------
Tangible capital, and ratio to adjusted total 
  assets. ...........................................     10.66% $   277,626     1.50%  $  39,060
                                                                 ===========            =========
Tier 1 (core) capital, and ratio to adjusted total
  assets ............................................     10.66% $   277,626     3.00%  $  78,120    5.00%  $ 130,200     9.00%
                                                                 ===========            =========           =========
Tier 1 capital, and ratio to risk-weighted assets....     10.17% $   277,626                         6.00%  $ 163,837
                                                                 ===========                                =========
Allowance for loan and lease losses..................                 27,436
Subordinated debentures..............................                100,000
                                                                 -----------
Tier 2 Capital.......................................                127,436
                                                                 -----------
Total risk-based capital, and ratio to risk-weighted 
  assets ............................................     14.83% $   405,062     8.00%  $ 218,449   10.00%  $ 273,062    13.00%
                                                                 ===========            =========           =========
Total regulatory assets..............................            $ 2,602,642
                                                                 ===========
Adjusted total assets................................            $ 2,603,991
                                                                 ===========
Risk-weighted assets.................................            $ 2,730,616
                                                                 ===========
</TABLE>


                                                                        62

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                                         To Be Well Capitalized
                                                                                  Minimum For Capital     For Prompt Corrective
                                                                 Actual            Adequacy Purposes        Action Provisions
                                                           ------------------     -------------------   -----------------------
                                                           Ratio      Amount       Ratio      Amount       Ratio      Amount
                                                           ------ -----------     -------  ----------   ---------- ----------
<S>                                                        <C>    <C>               <C>    <C>              <C>    <C>
Stockholders' equity, and ratio to total assets......      9.49%  $   228,153
Net unrealized gain on certain available for sale 
  securities ........................................                  (3,526)
Excess mortgage servicing rights.....................                    (242)
Tangible capital, and ratio to adjusted total assets.      9.33%  $   224,385       1.50%  $   36,057
                                                                  ===========              ==========
Tier 1 (core) capital, and ratio to adjusted total
  assets ............................................      9.33%  $   224,385       3.00%  $   72,114        5.00%  $  120,190
                                                                  ===========              ==========               ==========
Tier 1 capital, and ratio to risk-weighted assets....      8.47%  $   224,385                                6.00%  $  159,011
                                                                  ===========                                       ==========
Allowance for loan and lease losses..................                  16,057
Subordinated debentures..............................                 100,000
                                                                  -----------
Tier 2 Capital.......................................                 116,057
                                                                  -----------
Total risk-based capital, and ratio to risk-weighted
  assets ............................................     12.85%  $   340,442       8.00%  $  212,014       10.00%  $  265,018
                                                                  ===========              ==========               ==========
Total regulatory assets..............................             $ 2,405,188
                                                                  ===========
Adjusted total assets................................             $ 2,403,790
                                                                  ===========
Risk-weighted assets.................................             $ 2,650,175
                                                                  ===========
</TABLE>



     The OTS has promulgated a regulation governing capital  distributions.  The
Bank is considered to be a Tier 1 association  under this regulation  because it
met or exceeded its fully phased-in capital requirements at December 31, 1996. A
Tier 1 association that before and after a proposed capital  distribution  meets
or  exceeds  its  fully  phased-in   capital   requirements   may  make  capital
distributions  during any calendar  year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus  capital ratio" at
the  beginning  of the year or (ii) 75% of its net income  over the most  recent
four-quarter period. In order to make these capital distributions, the Bank must
submit written notice to the OTS 30 days in advance of making the distribution.

     In addition to these OTS regulations governing capital  distributions,  the
indenture  governing the Bank's  debentures limits the declaration or payment of
dividends  and the purchase or  redemption  of common or preferred  stock in the
aggregate to the sum of 50% of  consolidated  net income and 100% of all capital
contributions  and  proceeds  from  the  issuance  or  sale  (other  than  to  a
subsidiary) of common stock, since the date the Debentures were issued (see Note
17).

     In connection  with an examination of the Bank in late 1996 and early 1997,
the staff of the OTS expressed concern about many of the Bank's  non-traditional
operations,  which  generally  are  deemed by the OTS to  involve  higher  risk,
certain of the Bank's accounting policies and the adequacy of the Bank's capital
in light of the Bank's lending and investment  strategies.  The activities which
were  of  concern  to  the  OTS  included  the  Bank's  subprime  single  family
residential   lending   activities,   the  Bank's  origination  of  acquisition,
development  and  construction   loans  with  terms  which  provide  for  shared
participation in the results of the underlying real estate,  the Bank's discount
loan activities,  which involve significantly higher investment in nonperforming
and classified  assets than the majority of the savings and loan  industry,  and
the Bank's  investment in subordinated  classes of  mortgage-related  securities
issued  in  connection  with the  Bank's  asset  securitization  activities  and
otherwise.

     Although  the  Bank  has  expressed  disagreement  with  the  level of risk
perceived by the OTS in its  business,  the Bank has taken various other actions
to  address  OTS  concerns  with  respect  to its risk  profile,  including  the
following:  (i) the sale to the Company in 1996 of  subordinated,  participating
interests in a total of eleven acquisition,  development and construction loans,
which  interests  had an  aggregate  principal  balance  of  $16,949;  (ii)  the
cessation of originating  mortgage loans with profit  participation  features in
the underlying real estate,  with the exception of existing  commitments,  which
consisted of commitments  for nine loans with an aggregate  principal  amount of
$79,197 at December 31, 1997;  (iii) the transfer of its subprime  single family
residential  lending  operations  and its  large  multi-family  residential  and
commercial real estate lending operations to OFS and OCC, respectively;  (iv) an
agreement  (a)  to   discontinue   the  purchase  of   subordinate   classes  of
mortgage-related  securities  created by unaffiliated  parties,  (b) to sell the
five such securities held by it at March 31, 1997 (aggregate book value of $32.0
million),  which was  completed  by a sale to OAIC on May 19, 1997 (at a gain of
$2.6 million to the  Company),  and (c) subject to the  requirements  of the OTS
capital  distribution  regulation,  to dividend  to the Company all  subordinate
mortgage-related  securities  acquired  by  the  Bank  in  connection  with  its
securitization   activities,   including  two  subordinate  securities  with  an
aggregate book value of $19.5 million which were dividend to the Company in June
1997 and one  subordinate  security and one residual  security with an aggregate
book value of $14.4  million  which were  dividended  to the Company in November
1997; (v) the  establishment as of December 31, 1996 of requested write downs of
cost  basis,  which  amounted  to $7.2  million,  against  loans and  securities
resulting  from its  investment in loans acquired from HUD; (vi) an agreement to
employ a senior  officer to head its Credit  Management  Department  and to take
other  steps to  improve  the  effectiveness  of 

                                       63

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)

its independent asset review function; and (vii) an agreement to provide the OTS
with certain reports on a regular basis. In addition to the foregoing, and based
on  discussions  with the OTS, the Company  modified  certain of its  accounting
policies  in a manner  which will  result in more  conservative  recognition  of
income.  Specifically,  the Company (i) ceased  accreting  into interest  income
discount on nonperforming  residential  loans,  effective  January 1, 1997; (ii)
discontinued  the  capitalization  of  period  expenses  to real  estate  owned,
effective  January  1,  1997;  and (iii)  agreed to  classify  as  doubtful  for
regulatory purposes all real estate owned which are not generating cash flow and
which have been held for more than three  years.  If the new policy on accretion
of  discount on  nonperforming  residential  loans had been  applied in 1996 and
1995, the Company's  income from continuing  operations  before income taxes, as
adjusted  for  related   profit  sharing   expense,   would  have  decreased  by
approximately $1.4 million and $1.1 million,  respectively. If the new policy on
capitalization  of period expenses on real estate owned had been adopted in 1996
and 1995, the Company's income from continuing  operations  before income taxes,
as  adjusted  for  related  profit  sharing  expense,  would have  increased  by
approximately  $610,000 in 1996 and would have decreased by  approximately  $2.3
million  during 1995.  In light of the  foregoing,  the Company does not believe
that the  above-referenced  accounting  changes  had a  material  effect  on the
Company's financial condition or results of operations.

     In connection  with the foregoing  actions,  the Bank also committed to the
OTS to maintain a core capital ratio and a total risk-based  capital ratio of at
least  9% and  13%,  respectively,  effective  June  30,  1997.  Although  these
individual regulatory capital requirements have been agreed to by the OTS, there
can be no assurance  that in the future the OTS will agree to a decrease in such
requirements  or will not seek to increase such  requirements or will not impose
these or other  individual  regulatory  capital  requirements  in a manner which
affects the Bank's status as a  "well-capitalized"  institution under applicable
laws and regulations.

                                       64

<PAGE>

                                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        DECEMBER 31, 1997, 1996 and 1995
                                    (Dollars in Thousands, except share data)


NOTE 25   OTHER EXPENSES

<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                                           -------------------------------------
                                                                              1997          1996          1995
                                                                           ---------     ---------     ---------
         OTHER OPERATING EXPENSES:
<S>                                                                        <C>           <C>           <C>      
         Loan related expenses ........................................    $   7,014     $   4,111     $   2,383
         Professional fees.............................................        4,909         2,293         1,884
         Travel, lodging, meals and entertainment......................        2,636         1,522         1,151
         Due diligence costs...........................................        1,977           564           784
         FDIC insurance................................................        1,593         3,098         2,212
         Amortization of offering costs................................        1,302           622           234
         Marketing.....................................................          774           701           968
         Conferences and seminars......................................          666           295           173
         Corporate insurance...........................................          611           441           410
         Investment and treasury services..............................          458           438           387
         OTS assessment................................................          375           293           257
         Deposit related expenses......................................          255            91           304
         Other.........................................................        4,201           458           932
                                                                           ---------     ---------     ---------
                                                                           $  26,771     $  14,927     $  12,079
                                                                           =========     =========     =========
</TABLE>


     Included in the 1996 results of  operations is a  non-recurring  expense of
$7,140  related to the Federal  Deposit  Corporation's  ("FDIC")  assessment  to
recapitalize  the Savings  Association  Insurance  Fund  ("SAIF") as a result of
federal legislation passed into law on September 30, 1996.

NOTE 26  BUSINESS LINE REPORTING

     The Company  considers itself to be involved in the single business segment
of providing  financial  services and conducts a variety of business  activities
within this segment. Such activities are as follows:

<TABLE>
<CAPTION>

                                               Net Interest   Non-Interest    Net Income      Total
                                                  Income       Income (1)      (Loss)         Assets
                                               -----------    -----------    -----------    -----------
<S>                                            <C>            <C>            <C>            <C>        
DECEMBER 31, 1997:
Discount Loans:
   Single family residential loans .........   $    (8,293)   $    68,829    $    22,384    $   844,164
   Large Commercial ........................        33,684         20,299         23,476        582,877
   Small Commercial ........................        15,749          1,949          5,194        288,029
Investment in low-income housing tax credits        (4,311)         6,053          9,353        128,614
Commercial lending .........................        29,152         (1,634)        11,802        253,496
Subprime single family lending .............         7,170         17,533         (1,526)       225,813
Mortgage loan servicing ....................         3,128         26,966          3,780         13,411
Investment securities ......................        12,814          6,902          5,615        642,335
Other ......................................        (5,069)           659         (1,146)        90,426
                                               -----------    -----------    -----------    -----------
                                               $    84,024    $   147,556    $    78,932    $ 3,069,165
                                               ===========    ===========    ===========    ===========
DECEMBER 31, 1996:
Discount Loans:
   Single family residential loans .........   $     3,787    $    34,095    $    12,580    $   650,261
   Large Commercial ........................        14,046         21,745         16,179        516,622
   Small Commercial ........................        11,993           (189)         3,687        283,466
Investment in low-income housing tax credits        (3,857)         4,470          7,269         93,309
Commercial lending .........................        14,843           (389)         3,785        402,582
Subprime single family lending .............         4,787          6,423          4,115        128,878
Mortgage loan servicing ....................         1,697          7,495          2,559          5,020
Investment securities ......................        15,783         (2,244)         2,226        342,801
Other ......................................        (7,795)         4,217         (2,258)        60,746
                                               -----------    -----------    -----------    -----------
                                               $    55,284    $    75,623    $    50,142    $ 2,483,685
                                               ===========    ===========    ===========    ===========
</TABLE>


                                                   65

<PAGE>

<TABLE>
<CAPTION>

                                         OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 1997, 1996 and 1995
                                          (Dollars in Thousands, except share data)


DECEMBER 31, 1995:
<S>                                                   <C>                <C>                  <C>                <C>        
Discount Loans:
   Single family residential loans................    $   14,889         $     2,507          $    4,778         $   360,742
   Large Commercial...............................        12,986              12,953               9,824             376,823
   Small Commercial...............................         8,864               2,436               4,395             173,114
Investment in low-income housing tax credits......        (3,549)              1,923               3,538              81,362
Commercial lending................................         5,839                 362               3,041             256,166
Subprime single family lending....................         2,333               (291)                 364             224,722
Mortgage loan servicing...........................           192               2,717                 175               2,263
Investment securities.............................         9,377               4,708               2,454             410,777
Other.............................................         1,202               3,826              (3,102)             87,621
                                                      ----------         -----------          ----------         -----------
                                                      $   52,133         $    31,141          $   25,467         $ 1,973,590
                                                      ==========         ===========          ==========         ===========
</TABLE>

- -------------------
(1)  Non-interest  income includes  $23,688 and $38,320 of equity in earnings of
     investment in joint venture for the years ended December 31, 1997 and 1996,
     respectively.

     The Company's discount loan activities include asset acquisition, servicing
and  resolution  of  single  family  residential,  large  commercial  and  small
commercial  loans and the related real estate  owned.  Investment  in low-income
housing  tax credits  includes  the  Company's  investments,  primarily  through
limited partnerships,  in qualified low-income rental housing for the purpose of
obtaining  Federal  income  tax  credits  pursuant  to  Section  42 of the Code.
Low-income  housing tax credits and  benefits of $14,881,  $9,330 and $7,709 are
included as credits  against income tax expense for the years ended December 31,
1997, 1996 and 1995,  respectively.  Commercial  lending  includes the Company's
origination of multi-family and commercial real estate loans held for investment
and the origination and purchase of multi-family residential loans available for
sale.  Subprime  single family lending  includes the Company's  acquisition  and
origination  of single family  residential  loans to  non-conforming  borrowers,
which began in late 1994 and which are recorded as available  for sale,  and the
Company's  historical loan portfolio of single family residential loans held for
investment.  Mortgage loan  servicing  includes the  Company's  fee-for-services
business of providing loan servicing,  including asset management and resolution
services,  to third-party owners of nonperforming,  underperforming and subprime
assets.  Investment securities includes the results of the securities portfolio,
whether  available for sale,  trading or investment,  other than REMIC residuals
and subordinate  interests  related to the Company's  securitization  activities
which have been included in the related business activity.

     Interest  income and expense have been  allocated to each business  segment
for the investment of funds raised or funding of investments made at an interest
rate based upon the  Treasury  swap yield curve  taking into  consideration  the
actual  duration of such  liabilities  or assets.  Allocations  of  non-interest
expense  generated  by corporate  support  services  were made to each  business
segment  based  upon  management's  estimate  of time  and  effort  spent in the
respective  activity.  As such,  the  resulting  net  income  amounts  represent
estimates of the contribution of each business activity to the Company.

                                       66

<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 27    COMMITMENTS AND CONTINGENCIES

   Certain  premises are leased under various  noncancellable  operating  leases
with terms  expiring at various times through 2006,  exclusive of renewal option
periods.  The annual aggregate minimum rental commitments under these leases are
summarized as follows:

    1998.....................................................     $    3,833
    1999.....................................................          3,687
    2000.....................................................          2,954
    2001.....................................................          2,598
    2002.....................................................          2,508
    2003-2006................................................          5,974
                                                                  ----------
    Minimum lease payments...................................     $   21,554
                                                                  ==========


     Rent  expense  for the years ended  December  31,  1997,  1996 and 1995 was
$2,877,  $1,563 and $1,601,  respectively,  which are net of sublease rentals of
$0, $0 and $68, respectively.

     At  December  31,  1997 the Company  was  committed  to purchase  $9,848 of
commercial  discount  loans.  The Company also had  commitments to originate (i)
$29,956 of loans secured by multi-family residential buildings,  (ii) $16,798 of
mortgage  loans  secured by office  buildings,  (iii) $5,125 of loans secured by
hotel properties and (iv) $120,368 of loans secured by single family residential
buildings.  In connection with its 1993  acquisition of Berkeley Federal Savings
Bank,  the  Company  has a  recourse  obligation  of  $2,720  on  single  family
residential loans sold to the Federal Home Loan Mortgage Corporation  ("FHLMC").
The  Company,  through  its  investment  in  subordinated  securities  and REMIC
residuals,  which had a carrying value of $97,571 at December 31, 1997, supports
senior  classes  of  securities  having  an  outstanding  principal  balance  of
$1,905,171.

     At December  31, 1996 the Company was  committed to lend up to $5,744 under
outstanding  unused  lines  of  credit.  The  Company  also had  commitments  to
originate (i) $105,490 of loans secured by  multi-family  residential  buildings
(ii)  $19,849  of loans  secured  by office  buildings,  (iii)  $55,949 of loans
secured  by hotel  properties  and (iv)  $12,840 of loans  secured  by land.  In
connection  with its  acquisition of Berkeley  Federal Savings Bank, the Company
had a recourse  obligation of $3,486 on single family  residential loans sold to
the Federal Home Loan Mortgage Corporation.  The Company, through its investment
in subordinated securities which had a carrying value of $76,699 at December 31,
1996,  supports  senior classes of securities  having an  outstanding  principal
balance of $1,453,573.

     The Company is subject to various pending legal proceedings.  Management is
of the  opinion  that the  resolution  of these  claims will not have a material
effect on the consolidated financial statements.

                                       67


<PAGE>

                  OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 and 1995
                    (Dollars in Thousands, except share data)


NOTE 28    PARENT COMPANY ONLY FINANCIAL INFORMATION

CONDENSED STATEMENTS OF FINANCIAL CONDITION:

                                                     December 31,
                                                 -------------------
                                                   1997       1996
                                                 --------   --------
ASSETS
Cash and cash equivalents ....................   $ 62,586   $ 32,348
Securities available for sale, at market value    116,943     13,062
Investment securities, net ...................     11,115         --
Investment in bank subsidiary ................    272,401    221,094
Investments in non-bank subsidiaries .........    120,059     29,657
Loan portfolio, net ..........................      7,285     12,365
Discount loan portfolio, net .................     48,413         --
Investment in real estate ....................     10,675      9,680
Income taxes receivable ......................     13,739     10,003
Deferred tax asset ...........................      6,636         --
Other assets .................................     11,063      5,618
                                                 --------   --------
                                                 $680,915   $333,827
                                                 ========   ========
LIABILITIES

Notes payable ................................   $250,000   $125,000
Securities sold under agreements to repurchase      3,075         --
Deferred tax liability .......................         --        194
Other liabilities ............................     15,008      5,037
                                                 --------   --------
     Total liabilities .......................    268,083    130,231

Stockholders' Equity
Total stockholders' equity ...................    412,832    203,596
                                                 --------   --------
                                                 $680,915   $333,827
                                                 ========   ========


<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS:
                                                                Years Ended December 31,
                                                            --------------------------------
                                                              1997         1996       1995
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>     
Interest income .........................................   $ 10,019    $  1,645    $    401
Non-interest income .....................................         --         266           8
                                                            --------    --------    --------
                                                              10,019       1,911         409
Interest expense ........................................    (20,367)     (4,406)       (654)
Non-interest expense ....................................     (3,942)     (1,131)       (277)
Loss before income taxes ................................    (14,290)     (3,626)       (522)
Income tax benefit ......................................      5,083       2,925       1,533
                                                            --------    --------    --------
(Loss) income before equity in net income of subsidiaries     (9,207)       (701)      1,011
Equity in net income of bank subsidiary .................     88,598      49,186      24,773
Equity in net (loss) income of non-bank subsidiaries ....       (459)      1,657        (317)
                                                            --------    --------    --------
Net income ..............................................   $ 78,932    $ 50,142    $ 25,467
                                                            ========    ========    ========
</TABLE>


                                              68

<PAGE>


<TABLE>
<CAPTION>
                              OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    DECEMBER 31, 1997, 1996 and 1995
                               (Dollars in Thousands, except share data)

CONDENSED STATEMENTS OF CASH FLOWS:
                                                                    For The Years Ended December 31,
                                                                   -----------------------------------
                                                                      1997        1996         1995
                                                                   ---------    ---------    ---------
<S>                                                                <C>          <C>          <C>      
Cash flows from operating activities:
   Net income ..................................................   $  78,932    $  50,142    $  25,467

   Adjustments to reconcile net income to net cash provided
     (used) by operating activities:
     Equity in income of bank subsidiary .......................     (88,598)     (49,186)     (24,773)
     Equity in (income) loss of non-bank subsidiaries ..........         459       (1,657)         317
     Premium amortization, net .................................      11,467           --           --
     Increase in deferred tax assets ...........................      (6,830)          --           --
     (Increase) decrease in other assets .......................      (5,662)       4,067       (2,254)
     Increase in income taxes receivable .......................      (3,736)     (10,003)          --
     Increase (decrease) in accrued expenses,
        payables and other liabilities .........................       9,970       (3,286)       5,209
                                                                   ---------    ---------    ---------
   Net cash provided (used) by operating activities ............      (3,998)      (9,923)       3,966
                                                                   ---------    ---------    ---------

Cash flows from investing activities:
   Purchase of securities available for sale ...................    (146,643)     (13,125)          --
   Maturities of and principal payments received
     on securities available for sale ..........................         579           63           --
   Net distributions from (investments in) bank subsidiary .....      37,291      (49,707)      39,216
   Net (investments in) distributions from non-bank subsidiaries     (86,599)       5,410      (10,450)
   Proceeds from sales of securities available for sale ........      15,574           --           --
   Purchase of securities held for investment ..................     (11,115)          --           --
   Purchase of discount loans ..................................     (48,413)          --           --
   Proceeds from sales of loans held for investment ............       5,080           --           --
   Purchase of real estate held for investment .................        (995)      (9,680)          --
   Purchase of loans held for investment .......................          --      (11,845)        (520)
                                                                   ---------    ---------    ---------
Net cash provided (used) by investing activities ...............    (235,241)     (78,884)      28,246
                                                                   ---------    ---------    ---------

Cash flows from financing activities:
   Proceeds from issuance of notes and debentures ..............     120,738      125,000        7,615
   Payment of debt issuance costs ..............................          --       (5,252)          --
   Repayment of notes payable ..................................          --       (8,628)          --
   Increase in securities sold under agreements to repurchase ..       3,075           --           --
   Repayments (originations) of loans to executive officers, net       3,832       (3,832)          --
   Exercise of common stock options ............................       3,037       12,993        1,420
   Issuance of shares of common stock ..........................     142,003           --           --
   Repurchase of common stock options and common stock .........      (3,208)        (177)     (42,129)
   Other .......................................................          --           23           --
                                                                   ---------    ---------    ---------
Net cash provided (used) by financing activities ...............     269,477      120,127      (33,094)
                                                                   ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ...........      30,238       31,320         (882)
Cash and cash equivalents at beginning of year .................      32,348        1,028        1,910
                                                                   ---------    ---------    ---------
Cash and cash equivalents at end of year .......................   $  62,586    $  32,348    $   1,028
                                                                   =========    =========    =========
</TABLE>


                                                   69

<PAGE>

<TABLE>
<CAPTION>

                                     OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                           DECEMBER 31, 1997, 1996 and 1995
                                      (Dollars in Thousands, except share data)

NOTE 29   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

                                                                                Quarters Ended
                                                         -----------------------------------------------------------
                                                         December 31,   September 30,     June 30,         March 31,
                                                             1997            1997           1997             1997
                                                         ------------   -------------     --------         ---------
<S>                                                        <C>             <C>            <C>              <C>     
Interest income ...................................        $ 73,736        $ 77,326       $ 66,942         $ 54,527
Interest expense ..................................         (40,313)        (39,944)       (38,868)         (37,164)
Provision for loan losses .........................         (10,479)         (4,088)        (7,909)          (9,742)
                                                           --------        --------       --------         --------
Net interest income after provision
   for loan losses ................................          22,944          33,294         20,165            7,621
Non-interest income ...............................          43,798          25,431         33,289           21,351
Non-interest expense ..............................         (41,798)        (31,219)       (31,080)         (22,697)
Distributions on Company-obligated
   mandatorily redeemable securities of
   subsidiary trust holding solely junior
   subordinated debentures of the Company .........          (3,399)         (1,850)            --               --
Equity in earnings of investment in
   joint venture ..................................           7,468             546          1,301           14,372
                                                           --------        --------       --------         --------
Income before income taxes ........................          29,013          26,202         23,675           20,647
Income taxes (expense) benefit ....................          (6,398)         (6,179)        (5,126)          (3,606)
Minority interest in net loss of
   consolidated subsidiary ........................             319             142            243               --
                                                           --------        --------       --------         --------
Net income ........................................        $ 22,934        $ 20,165       $ 18,792         $ 17,041
                                                           ========        ========       ========         ========

Earnings per share:
   Basic ..........................................        $   0.38        $   0.35       $   0.35         $   0.32
   Diluted ........................................        $   0.37        $   0.35       $   0.35         $   0.31

                                                                                Quarters Ended
                                                         -----------------------------------------------------------
                                                         December 31,   September 30,     June 30,         March 31,
                                                             1996            1996           1996             1996
                                                         ------------   -------------     --------         ---------

Interest income ...................................        $ 50,292        $ 44,145       $ 51,501         $ 47,956
Interest expense ..................................         (33,907)        (27,217)       (26,904)         (28,132)
Provision for loan losses .........................          (3,611)         (4,469)        (4,963)          (9,407)
                                                           --------        --------       --------         --------
Net interest income after provision for
   loan losses ....................................          12,774          12,459         19,634           10,417
Non-interest income ...............................          10,795          15,146          8,069            3,292
Non-interest expense ..............................         (22,520)        (21,531)       (13,871)         (11,683)
Equity in earnings of investment in
   joint venture ..................................          33,103           4,139          1,078                0
                                                           --------        --------       --------         --------
Income before income taxes ........................          34,152          10,213         14,910            2,026
Income taxes (expense) benefit ....................          (9,092)           (157)        (2,913)           1,003
                                                           --------        --------       --------         --------
Net income ........................................        $ 25,060        $ 10,056       $ 11,997         $  3,029
                                                           --------        --------       --------         --------
Earnings per share:
   Basic ..........................................        $   0.47        $   0.19       $   0.25         $   0.06
   Diluted ........................................        $   0.46        $   0.19       $   0.23         $   0.06
</TABLE>



                                                         70

<PAGE>


SHAREHOLDER INFORMATION

Price Range of the Company's Common Stock

     The Company's common stock was traded on The NASDAQ Stock Market's National
Market  ("NASDAQ")  from September 25, 1996 until July 31, 1997 under the symbol
"OCWN" and has been traded on the New York Stock Exchange  ("NYSE") since August
1, 1997 under the symbol "OCN." There was no  established  market for the common
stock  prior to  September  25,  1996.  The  following  table sets forth for the
indicated  periods the high and low bid prices (for the period  through July 31,
1997) and high and low sales  prices (for the period  beginning  August 1, 1997)
for the common  stock,  as traded on such market and  exchange.  The share price
information below has been  retroactively  adjusted to reflect the 2-for-1 stock
split  effective  November  20, 1997 to  stockholders  of record on November 12,
1997.

<TABLE>
<CAPTION>
                                                             High                 Low
                                                        ---------------     ---------------
<S>                                    <C>                <C>                 <C>     
         1996
         Third quarter (from September 25)...........     $ 10.5000          $  9.5000
         Fourth quarter..............................       15.2500            10.1250

         1997
         First quarter...............................     $ 17.3750          $ 12.6250
         Second quarter..............................       16.4375            12.7500
         Third quarter...............................       22.6250            15.7500
         Fourth quarter..............................       28.8125            21.0000
</TABLE>



     At the close of business on February 27, 1998,  the Company's  common stock
price was $30.00.

     The Company does not currently  pay cash  dividends on the common stock and
has no  current  plans to do so in the  future.  In the  future,  the timing and
amount of dividends, if any, will be determined by the Board of Directors of the
Company and will  depend,  among other  factors,  upon the  Company's  earnings,
financial condition, cash requirements, the capital requirements of the Bank and
other subsidiaries and investment  opportunities at the time any such payment is
considered.  In addition,  the  indentures  relating to the Notes and the Junior
Subordinated  Debentures contain certain limitations on the payment of dividends
by the Company.

     As a holding  company,  the payment of any dividends by the Company will be
significantly  dependent on dividends and other payments received by the Company
from its  subsidiaries,  including the Bank. For a description of limitations on
the  ability of the  Company  to pay  dividends  on the common  stock and on the
ability of the Bank to pay  dividends on its capital  stock to the Company,  see
Notes 17, 18 and 24 to the Consolidated  Financial  Statements.  The Company has
not paid any cash dividends on its common stock in recent years.

Number of Holders of Common Stock

     At  February  27,  1998,  60,708,520  shares of Company  common  stock were
outstanding and held by  approximately  1,431 holders of record.  Such number of
stockholders  does not  reflect  the  number  of  individuals  or  institutional
investors  holding  stock in nominee name  through  banks,  brokerage  firms and
others.

                                       71

<PAGE>


CORPORATE INFORMATION

Corporate Headquarters

Ocwen Financial Corporation
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(561) 681-8000


Annual Meeting

The Annual Meeting of Ocwen Shareholders will be held on May 13, 1998.

1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401


Investor Relations

All  investor  inquiries  may be directed to or copies of Ocwen Form 10-K may be
obtained from:

Investor Relations
Ocwen Financial Corporation
The Forum, Suite 1003
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(561) 681-8400


Listing

The  common  stock of Ocwen  Financial  Corporation  is listed on the NYSE.  Its
symbol is "OCN".

Registrar and Transfer Agent

Transfer Agent for Stock

The Bank of New York
Shareholder Relations Department 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
(800) 524-4458


Send certificates for transfer and address change notices to:

The Bank of New York
Receive and Deliver Department 11W
P.O. Box 11002
Church Street Station
New York, NY 10286


                                       72

<PAGE>

NOTES:


                                       73

<PAGE>

NOTES:


                                       74

<PAGE>

NOTES:


                                       75

<PAGE>

NOTES:


                                       76




               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement  on  Form  S-8   (Registration   No.  333-44999)  of  Ocwen  Financial
Corporation  of our report dated January 27, 1998  relating to the  consolidated
balance sheets of Ocwen Financial  Corporation  and  subsidiaries as of December
31, 1997 and 1996 and the related  consolidated  statements  of  earnings,  cash
flows and shareholders' equity and financial data schedule for each of the years
in the three year period ended  December  31, 1997,  which report is included as
Exhibit 13.1 and Exhibits 27.1 through 27.2  (financial data schedules) of Ocwen
Financial  Corporation's  Annual Report on Form 10-K. We further  consent to the
incorporation   by  reference  in  the   Registration   Statement  on  Form  S-8
(Registration  No.  333-44999)  of our report dated January 27, 1998 relating to
the statement of financial condition of BCBF, L.L.C. as of December 31, 1997 and
1996 and the statements of  operations,  changes in owners' equity and cash flow
for each of the periods March 13, 1996 through  December 31, 1996 and January 1,
1997  through  December  31,  1997,  which report is included as Exhibit 99.0 of
Ocwen Financial Corporation's
 Annual Report on form 10-K.

/s/ PRICE WATERHOUSE LLP
- ----------------------------------------------
    PRICE WATERHOUSE LLP
    Fort Lauderdale, Florida
    January 27, 1998






                                                                    EXHIBIT 99.0

                                  BCBF, L.L.C.
                              FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996






<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS







To the Partners of BCBF, L.L.C.

In our opinion,  the  accompanying  statements  of financial  condition  and the
related statements of operations, of changes in owners' equity and of cash flows
present fairly, in all material respects, the financial position of BCBF, L.L.C.
(the "Company") at December 31, 1997 and 1996, and the results of its operations
and its cash flows for the year ended  December 31, 1997 and for the period from
March 13, 1996 through December 31, 1996, in conformity with generally  accepted

accounting principles.  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  audit.  We  conducted  our  audit of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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,  assessing
 the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for the opinion expressed above.



/s/ Price Waterhouse LLP
- ------------------------
    Price Waterhouse LLP

Fort Lauderdale, Florida

January 27, 1998



                                       1


<PAGE>


                                  BCBF, L.L.C.
                        STATEMENTS OF FINANCIAL CONDITION
                             (DOLLARS IN THOUSANDS)


                                                            December 31,
                                                        -------------------
                                                          1997       1996
                                                        --------   --------

Assets:
Cash ................................................   $     --   $     10
Loans held for sale, at lower of cost or 
  market value ......................................         --    110,702
Real estate owned, net ..............................         --     25,595
Other assets ........................................         --     10,526
                                                        --------   --------
                                                        $     --   $146,833
                                                        ========   ========
Liabilities and Owners' Equity:
Liabilities:
  Accrued expenses, payables and other liabilities...   $     --   $    787
                                                        --------   --------
    Total liabilities ...............................         --        787
                                                        --------   --------

Owner's Equity:
  Ocwen Federal Bank FSB ............................         --     73,023
  BlackRock Capital Finance L.P. ....................         --     73,023
                                                        --------   --------
    Total owners' equity ............................         --    146,046
                                                        --------   --------
                                                        $     --   $146,833
                                                        ========   ========

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                       2


<PAGE>


                                  BCBF, L.L.C.
                            STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                  For the Period         For the Period
                                                  January 1, 1997        March 13, 1996
                                                      Through               Through
                                                 December 31, 1997     December 31, 1996
                                                 -----------------     -----------------

<S>                                                <C>                    <C>        
Interest income................................... $     8,928            $    38,647
Interest expense..................................          --                (18,503)
                                                   -----------            -----------
   Net interest income............................       8,928                 20,144
                                                   -----------            -----------


Non-interest income:

   Gain on sale of loans held for sale............      27,994                 71,156
   Gain on sale of loan servicing rights..........          --                  1,048
   Loss on real estate owned, net.................         (93)                  (130)
   Loan fees......................................          23                     50
                                                   -----------            -----------
                                                        27,924                 72,124
                                                   -----------            -----------


Non-interest expense:
   Loan servicing fees............................       1,850                  5,743
   Other loan expenses............................          13                    273
                                                   -----------            -----------
                                                         1,863                  6,016
                                                   -----------            -----------

     Net income................................... $    34,989            $    86,252
                                                   ===========            ===========
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                       3



<PAGE>


                                  BCBF, L.L.C.
                     STATEMENTS OF CHANGES IN OWNERS' EQUITY
            FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
             AND THE PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                              Ocwen         BlackRock 
                                                                             Federal        Capital
                                                                             Bank FSB      Finance L.P.      Total
                                                                            ---------      -----------     ---------

<S>                                                                         <C>             <C>            <C>      
Contributions of capital.............................................       $  66,204       $  66,204      $ 132,408

Net income...........................................................          43,126          43,126         86,252

Distributions of cash................................................         (16,534)        (16,534)       (33,068)

Distributions of securities..........................................         (19,773)        (19,773)       (39,546)
                                                                            ---------       ---------      ---------

Balances at December 31, 1996........................................          73,023          73,023        146,046

Net income...........................................................          17,494          17,495         34,989

Distribution of securities...........................................          (1,989)         (1,989)        (3,978)

Distributions of cash................................................         (77,576)        (77,577)      (155,153)

Liquidating distribution.............................................         (10,952)        (10,952)       (21,904)
                                                                            ---------       ---------      ---------

Balances at December 31, 1997........................................       $      --       $      --      $      --
                                                                            =========       =========      =========
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                       4

<PAGE>


                                  BCBF, L.L.C.
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                            For the Period    For the Period
                                                            January 1, 1997   March 13, 1996
                                                               Through            Through
                                                           December 31, 1997 December 31, 1996
                                                           ----------------- -----------------
Cash flows from operating activities:
<S>                                                           <C>               <C>      
   Net income .............................................   $  34,989         $  86,252
   Adjustments to reconcile net income to net cash provided
    by (used) in operating activities:
     Provision for losses on real estate owned ............       1,110               636
     Gain on sale of loans held for sale ..................     (27,994)          (71,156)
     Gain on sale of real estate owned ....................      (6,619)             (775)
     Gain on sale of loan servicing rights ................          --            (1,048)
     Purchase of loans held for sale ......................          --          (626,400)
     Proceeds from sale of loans held for sale, net .......      89,044           466,806
     Principal repayments on loans held for sale ..........       3,478            42,210
     Proceeds from sale of real estate owned ..............      57,359             4,364
     Proceeds from sale of loan servicing rights ..........          --             1,048
     Decrease (increase) in other assets ..................       4,563            (2,054)
     (Decrease) increase in accrued expenses, payables
      and other liabilities ...............................        (787)              787
                                                              ---------         ---------
Net cash provided (used) in operating activities ..........     155,143           (99,330)
                                                              ---------         ---------

Cash flows from financing activities:
    Proceeds from note payable ............................          --           473,042
    Repayment of note payable .............................          --          (473,042)
    Proceeds from capital contributions ...................          --           132,408
    Distributions of capital ..............................    (155,153)          (33,068)
                                                              ---------         ---------
Net cash (used) provided by financing activities ..........    (155,153)           99,340
                                                              ---------         ---------

Net (decrease) increase in cash and cash equivalents ......         (10)               10
Cash and cash equivalents at beginning of period ..........          10                --
                                                              ---------         ---------
Cash and cash equivalents at end of period ................   $      --         $      10
                                                              =========         =========

Supplemental  disclosure of cash flow  information:
  Cash paid during the period for:
    Interest ..............................................   $      --         $ (18,503)
                                                              =========         =========

Supplemental schedule of non-cash activities:
   Exchange of loans for mortgage-backed securities .......   $  60,593         $ 394,234
                                                              =========         =========
   Real estate owned acquired through foreclosure .........   $  37,059         $  29,820
                                                              =========         =========
   Distribution of securities to Partners .................   $  (3,978)        $ (39,546)
                                                              =========         =========
   Liquidating distribution of non-cash assets to Partners    $ (21,904)        $      --
                                                              =========         =========
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                       5

<PAGE>

                                  BCBF, L.L.C.

                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)


NOTE 1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

         BCBF, L.L.C. (the "LLC") is a limited liability company formed on March
13, 1996 between Ocwen Federal Bank FSB ("Ocwen") and BlackRock  Capital Finance
L.P. ("BlackRock"),  or collectively,  the "Partners".  The Partners each have a
50% interest in the LLC and share equally in net income or loss.

         On March 22, 1996,  the LLC was notified by the  Department  of Housing
and Urban  Development  ("HUD")  that it was the  successful  bidder to purchase
16,196  single-family  residential  loans offered by HUD at an auction (the "HUD
Loans"). On April 10, 1996 the LLC consummated the acquisition of the HUD Loans,
which had an aggregate unpaid principal balance of $741,176 for a purchase price
of $626,400.  The  purchase  was  financed by $117,647 in equity  contributions,
$35,711 of proceeds  from the LLC's  concurrent  sale of 1,631 HUD Loans and the
proceeds from a $473,042 note payable from an unaffiliated party. No significant
activity occurred prior to April 10, 1996.

         On December 12, 1997,  the LLC  distributed  all of its assets to Ocwen
and BlackRock. No significant activity occurred subsequent to this date.

STATEMENT OF CASH FLOWS

         For purposes of reporting cash flows, cash and cash equivalents include
cash on hand,  interest and non-interest  bearing deposits and all highly liquid
debt instruments purchased with an original maturity of three months or less.

HUD LOANS HELD FOR SALE

         The HUD Loans  purchased  by the LLC were  designated  as held for sale
because it was the LLC's  intent to  securitize  and sell the  majority of these
loans.  Loans held for sale are carried at the lower of aggregate cost or market
value.  Market value is  determined  based upon current  market  yields at which
recent pools of similar  mortgages have been traded.  There was no allowance for
market value losses on loans held for sale at December 31, 1996.

         All  of  the  HUD  Loans  were  secured  by  first  mortgage  liens  on
single-family residences. The HUD Loans were acquired by HUD pursuant to various
assignment programs of the Federal Housing Authority ("FHA").  Under programs of
the FHA, a lending  institution may assign an FHA-insured loan to HUD because of
an economic  hardship on the part of the borrower  which  precludes the borrower
from  making  the  scheduled  principal  and  interest  payments  on  the  loan.
FHA-insured  loans  are  also  automatically  assigned  to  HUD  upon  the  20th
anniversary  of the mortgage  loan. In most cases,  loans  assigned to HUD after
this 20 year period are performing  under the original terms of the loan. Once a
loan is  assigned  to HUD,  the FHA  insurance  has been paid and the loan is no
longer insured. As a result, none of the HUD Loans were insured by the FHA.

         The HUD Loans were  purchased by the LLC at a  substantial  discount to
the  unpaid  principal  balance  of the loans as many of the HUD Loans  were not
performing in accordance  with the original  terms of the loans or an applicable
forbearance agreement.  The cost of acquiring the pool of loans was allocated to
each  individual  loan within the pool based on the LLC's  pricing  methodology.
Loans are considered  performing if they are less than 90 days past due based on
the original terms of the mortgage loan. Interest


                                       6

<PAGE>

                                 BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)

income on performing loans is recognized on the accrual method.  Interest income
on all other  loans is  recognized  on a cash  basis due to the  uncertainty  of
collection.  Gains and losses on the repayment and the  discharging of loans are
also reported as part of interest income.  In situations where the collateral is
foreclosed  upon, the loans are transferred to real estate owned upon receipt of
title to the property.

REAL ESTATE OWNED

         Properties  acquired through foreclosure or deed-in-lieu of foreclosure
were  valued at the lower of the  adjusted  basis of the loan or fair value less
estimated  costs  of  disposal  of the  property  at the  date  of  foreclosure.
Properties held are  periodically  re-evaluated to determine that they are being
carried at the lower of cost or fair value less estimated costs to dispose.  All
of the LLC's real estate  owned was held for sale.  Gains and losses on the sale
of REO are  recognized  with the passage of title and all risks of  ownership to
the buyer.  Rental income related to properties is reported as income as earned.
Holding and maintenance costs related to properties are reported as period costs
as incurred.  No depreciation expense related to foreclosed real estate held for
sale is recorded. Decreases in market value of foreclosed real estate subsequent
to foreclosure  are recognized as a valuation  allowance on a property  specific
basis.  Subsequent  increases in market value of the foreclosed  real estate are
reflected as  reductions in the valuation  allowance,  but not below zero.  Such
changes in the valuation allowance are charged or credited to income. Additional
valuation  allowances  are also  established  for the inherent risks in the real
estate owned portfolio which have yet to be specifically identified.

INCOME TAXES

        Because  the  LLC  is a  pass-through  entity  for  federal  income  tax
purposes,  provisions  for income taxes are  established by each of the Partners
and not the LLC.

USE OF ESTIMATES

         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 and the
reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


NOTE 2   ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS

         On  January  1,  1997,  the  Company  adopted  Statement  of  Financial
Accounting  Standards ("SFAS") No. 125,  "Accounting for Transfers and Servicing
of Financial Assets and  Extinguishments  of Liabilities." SFAS No. 125 (i) sets
forth the criteria for (a) determining when to recognize financial and servicing
assets and liabilities;  and (b) accounting for transfers of financial assets as
sales or borrowings;  and (ii) requires (a) liabilities and derivatives  related
to a transfer of financial  assets to be recorded at fair value;  (b)  servicing
assets  and  retained  interests  in  transferred  assets  carrying  amounts  be
determined by allocating  carrying amounts based on fair value; (c) amortization
of servicing  assets and  liabilities be in proportion to net servicing  income;
(d) impairment measurement based on fair value; and (e) pledged financial assets
to be classified as collateral.  SFAS No. 125 provides  implementation  guidance
for assessing  isolation of transferred  assets and for accounting for transfers
of partial interests, servicing of financial assets, securitizations,  transfers
of  sales-type  and  direct  financing  lease  receivables,  securities  lending
transactions, repurchase agreements including "dollar rolls", "wash sales", loan
syndications and participations,  risk  participations in banker's  acceptances,
factoring   arrangements,   transfers   of   receivables   with   recourse   and
extinguishments of liabilities.  In December 1996, the FASB issued SFAS No. 127,
"Deferral  of the  Effective  Date of FASB  Statement  No. 125",  which  delayed
implementation of certain provisions of SFAS No. 125.


                                       7

<PAGE>


                                 BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)

NOTE 3   FAIR VALUE OF FINANCIAL INSTRUMENTS

         Substantially  all of the  LLC's  assets  at  December  31,  1996  were
considered  financial  instruments.  The LLC had no  assets  or  liabilities  at
December  31,  1997.  For  loans  held for sale,  fair  values  are not  readily
available  since there are no  available  trading  markets as  characterized  by
current exchanges between willing parties.  Accordingly, fair values can only be
derived or estimated using various valuation  techniques,  such as computing the
present value of the estimated cash flows using discount rates commensurate with
the risks involved. However, the determination of estimated future cash flows is
inherently subjective and imprecise.

         The fair values  reflected  below are  indicative  of the interest rate
environments  as of  December  31, 1996 and do not take into  consideration  the
effects of interest rate fluctuations.  In different interest rate environments,
fair value results can differ  significantly,  especially for certain fixed-rate
financial  instruments  and  non-accrual  assets.  In addition,  the fair values
presented  do not attempt to  estimate  the value of the LLC's  future  business
activities.  In other words,  they do not  represent  the LLC's value as a going
concern.  Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized.

         Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted  valuation  techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective  pricing  standards  introduces a degree of  subjectivity  to these
derived or estimated  values.  Therefore,  while  disclosure  of estimated  fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the LLC.

         The methodologies used and key assumptions made to estimate fair value,
the estimated fair values determined and recorded carrying values follow:

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable  estimates of fair value given the relatively  short period
of time between origination of the instruments and their expected realization.

LOANS HELD FOR SALE

         The HUD Loans, which were designated held for sale, have been valued at
their carrying amount which  approximates  fair value given that the assumptions
used to value such  loans at their date of  purchase  have  remained  relatively
constant.

REAL ESTATE OWNED

         Real estate owned, although not a financial instrument,  is an integral
part of the  LLC's  loan  business.  The fair  value of real  estate  owned  was
estimated  based upon  appraisals,  broker  price  opinions  and other  standard
industry valuation methods, less anticipated selling costs.


                                       8

<PAGE>


                                 BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)


         As mentioned  above,  on December 12, 1997, the LLC  distributed all of
its assets to Ocwen and BlackRock.  The carrying  amounts and the estimated fair
values of the LLC's financial  instruments and real estate owned at December 31,
1996 were as follows:

                                               CARRYING AMOUNT      FAIR VALUE
                                               ---------------      ----------
FINANCIAL ASSETS:
   Cash and cash equivalents..............        $       10        $       10
   Loans held for sale....................           110,702           110,702
   Real estate owned, net.................            25,595            31,738


NOTE 4   HUD LOAN PORTFOLIO

         The LLC  acquired the HUD Loans  through an auction at a discount  with
the intent of securitizing  and selling the majority of the loans.  Because many
of the  mortgage  loan  borrowers  were either not current as to  principal  and
interest  payments  or there  was doubt as to their  ability  to pay in full the
contractual principal and interest, the LLC estimated the amounts expected to be
realized through foreclosure, collection efforts or other resolution of each HUD
loan and the length of time  required  to  complete  the  collection  process in
determining the amount it bid to acquire the HUD Loans.

         At  December  31,  1997,  the  LLC  had no  loans  outstanding,  having
previously  distributed  all assets to its  Partners.  At December  31, 1996 the
LLC's HUD Loan portfolio,  which was designated held for sale,  consisted of the
following:

Unpaid principal balance...................................        $    159,405
Discount...................................................             (48,703)
                                                                   ------------
                                                                   $    110,702
                                                                   ============

         The  following  table sets forth  information  relating  to the payment
status of the HUD Loans at December 31, 1996:

                                                                       % of HUD
                                                          Amount         Loans
                                                        ----------     ---------
Loans without Forbearance Agreements:
  Past due less than 31 days.......................     $    6,709        4.21%
  Past due 31 to 90 days...........................          3,011        1.89
  Past due 90 days or more.........................         84,509       53.02
                                                        ----------       -----
                                                            94,229       59.12
                                                        ----------       -----
Loans with Forbearance Agreements:
  Past due less than 31 days.......................          4,867        3.05
  Past due 31 to 90 days...........................          5,168        3.24
  Past due 90 days or more.........................         55,141       34.59
                                                        ----------       -----
                                                            65,176       40.88
                                                        ----------       -----
     Total.........................................     $  159,405      100.00%
                                                        ==========      ======


                                       9

<PAGE>

                                  BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)


         Forbearance  agreements are  agreements  entered into by HUD or the LLC
with the borrower for the repayment of delinquent payments over a period and for
forbearance from foreclosure during the term for such agreement. HUD forbearance
agreements  are  generally  twelve  months in duration  and the  borrower may be
granted up to a maximum of three consecutive twelve month plans. Under the terms
of the contract  governing the sale of the HUD Loans,  the LLC and Ocwen, as the
servicer  of the  loans,  are  obligated  to  comply  with the  terms of the HUD
forbearance  agreements,  which may be written or oral in nature, until the term
of the forbearance agreement expires or there is a default under the forbearance
agreement.

         The  HUD  loans  at  December  31,  1996  were  geographically  located
throughout the United States and Puerto Rico. The following table sets forth the
five  states  in which  the  largest  amount of  properties  securing  the LLC's
discounted loans were located at December 31, 1996:



Texas.................................................       $       30,382
California............................................               26,596
Connecticut...........................................               11,729
Maryland..............................................                9,487
Colorado..............................................                9,018
Other ................................................               72,193
                                                             --------------
 Total................................................       $      159,405
                                                             ==============

NOTE 5   MORTGAGE LOAN SALES AND SECURITIZATION OF MORTGAGE LOANS

         In March 1997, as part of a larger  transaction  involving Ocwen and an
affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid principal
balance  of  $51,714,  past due  interest  of  $14,209  and a net book  value of
$40,454.  Net  proceeds  from the sale of the  related  securities  amounted  to
$58,866.  In December 1997, as part of a larger transaction  involving Ocwen and
BlackRock,  the LLC  securitized 534 loans with an unpaid  principal  balance of
$26,644,  past due  interest  of $8,303  and a net book  value of  $20,139.  Net
proceeds from the sale of the related securities amounted to $30,178.

         In April  1996,  the LLC sold  1,631  loans  with an  unpaid  principal
balance of $61,885 and a net book value of $34,388 for  $35,711  resulting  in a
gain on sale of loans of $1,323.

         In  October  1996,  the  LLC  securitized  9,825  loans  with an unpaid
principal  balance of $419,382 and a net book value of $394,234.  Certain of the
mortgage related securities created from the securitization were sold in October
1996 for  $431,095,  resulting  in a gain of  $69,833  which  includes a gain of
$12,863 on the sale of $79,411 of  securities  directly to Ocwen.  Certain other
mortgage related securities created from the securitization  were distributed to
the Partners at their allocated book values which amounted to $39,546.

NOTE 6   REAL ESTATE OWNED

         Real estate owned,  net of valuation  allowances,  is held for sale. At
December  31,  1997,  the LLC  held  no real  estate  owned,  having  previously
distributed  all assets to its  Partners.  At December 31, 1996,  the LLC's real
estate  owned  portfolio,   acquired  through  foreclosure  or  deed-in-lieu  of
foreclosure, consisted of the following:

Single-family residential................................    $       26,106
Valuation allowance......................................              (511)
                                                             --------------
   Real estate owned, net................................    $       25,595
                                                             ==============


                                       10

<PAGE>

                                  BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)


         The following schedule presents the activity in the valuation allowance
on real estate owned for the indicated periods:


<TABLE>
<CAPTION>
                                                                For the Period          For the Period
                                                                January 1, 1997         March 13, 1996
                                                                    Through                through
                                                               December 31, 1997      December 31, 1996
                                                               -----------------      -----------------

<S>                                                              <C>                    <C>          
Balance, beginning of period...............................      $         511          $          --
Provision for losses.......................................              1,110                    636
Charge-offs and sales......................................             (1,621)                  (125)
                                                                 -------------          -------------
 Balance, end of period....................................      $          --          $         511
                                                                 =============          =============
</TABLE>


         Real  estate  owned is  geographically  located  throughout  the United
States and Puerto Rico. The following  table sets forth the five states with the
largest amount of properties owned by the LLC at December 31, 1996:


Texas                                                            $       7,782
California.................................................              6,992
Maryland...................................................              2,692
Virginia...................................................              1,318
Georgia....................................................              1,274
Other .....................................................              5,537
                                                                 -------------
  Total....................................................      $      25,595
                                                                 =============

         The following  table sets forth the results of the LLC's  investment in
real estate owned during the following periods:


<TABLE>
<CAPTION>
                                                               For the Period        For the Period
                                                              January 1, 1997        March 13, 1996
                                                                   Through               through
                                                             December 31, 1997      December 31, 1996
                                                             -----------------      -----------------
<S>                                                              <C>                   <C>       
DESCRIPTION:
Gains on sales........................................           $    6,619            $      775
Provision for losses..................................               (1,110)                 (636)
Carrying costs, net of rental income..................               (5,602)                 (269)
                                                                 ----------            ----------
 Loss on real estate owned, net.......................           $      (93)           $     (130)
                                                                 ==========            ==========
</TABLE>


NOTE 7   NOTE PAYABLE ACQUISITION DEBT

         In April 1996,  the LLC financed the  acquisition of the HUD Loans with
the proceeds from a $473,042 note payable from an unaffiliated  party.  Interest
on the note  payable  was  payable  monthly and accrued at a rate equal to LIBOR
plus 2.25%. The note payable, which was scheduled to mature in January 1997, was
secured by a first position lien on the HUD Loans  purchased.  The cash proceeds
from the sale of securities  resulting from the  securitization of the 9,825 HUD
Loans in October, 1996 and additional capital contributions by the Partners were
used to fully repay the note payable in 1996.


                                       11

<PAGE>


                                  BCBF, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)


NOTE 8   RELATED PARTY TRANSACTIONS

         In  connection  with the  LLC's  acquisition  of the HUD  Loans,  Ocwen
entered  into an agreement  with the LLC to service the HUD Loans in  accordance
with its loan servicing and loan default  resolution  procedures.  In return for
such  servicing,  Ocwen received  specified fees which were payable on a monthly
basis.  For the year ended  December  31, 1997 and for the period from March 13,
1996 to December 31,  1996,  Ocwen  earned  $1,850 and $5,743 in such  servicing
fees, respectively.

         As the  servicer  for the HUD  Loans,  Ocwen  was  responsible  for the
collection  of the payments due from  borrowers and the payment of certain costs
incurred in connection  with the operation and  maintenance of real estate owned
properties. A cash settlement was made monthly between Ocwen and the LLC for the
net of such collections and payments.  At December 31, 1996, $5,447 was due from
Ocwen and is included in other assets.  Such amount was paid by Ocwen to the LLC
in January, 1997.

         In connection with the 1996  securitization  transactions (see Note 5),
the LLC sold $79,411 of securities to Ocwen for a gain of $12,863. Additionally,
also in 1996,  the LLC sold certain rights to service the  securitized  loans to
Ocwen for $1,048.

NOTE 9   DISTRIBUTION OF ASSETS

         On December 12, 1997, in accordance  with the decision of the Partners,
the assets of the LLC were distributed as follows:


<TABLE>
<CAPTION>
                                                        Ocwen            BlackRock            Total
                                                    ------------       ------------       ------------
<S>                                                  <C>                <C>                <C>        
Cash.........................................       $          5       $          5       $         10
Loans held for sale at book value............              4,501              4,501              9,002
Real estate owned at book value..............              5,402              5,402             10,804
Amount due from loan servicer................                295                295                590
Escrow advances..............................                537                537              1,074
Other advances...............................                212                212                424
                                                    ------------       ------------       ------------
                                                    $     10,952       $     10,952       $     21,904
                                                    ============       ============       ============
</TABLE>



                                       12





<TABLE> <S> <C>

<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK>                                      0000873860
<NAME>                                      Ocwen Financial Corp.
<MULTIPLIER>                                    1,000
<CURRENCY>                                        USD
       
<S>                                               <C>
<PERIOD-TYPE>                                    YEAR
<FISCAL-YEAR-END>                           DEC-31-1997
<PERIOD-START>                              JAN-01-1997
<PERIOD-END>                                DEC-01-1997
<EXCHANGE-RATE>                                     1
<CASH>                                         12,243
<INT-BEARING-DEPOSITS>                        140,001
<FED-FUNDS-SOLD>                                    0
<TRADING-ASSETS>                                    0
<INVESTMENTS-HELD-FOR-SALE>                   430,524
<INVESTMENTS-CARRYING>                         59,567
<INVESTMENTS-MARKET>                           59,567
<LOANS>                                      1,877,516<F1>
<ALLOWANCE>                                     27,188<F2>
<TOTAL-ASSETS>                              3,069,165
<DEPOSITS>                                  1,982,822
<SHORT-TERM>                                  226,554
<LIABILITIES-OTHER>                            87,709
<LONG-TERM>                                   226,975
<PREFERRED-MANDATORY>                               0
<PREFERRED>                                         0
<COMMON>                                          606
<OTHER-SE>                                    419,086
<TOTAL-LIABILITIES-AND-EQUITY>              3,069,165
<INTEREST-LOAN>                               230,718<F3>
<INTEREST-INVEST>                              32,854
<INTEREST-OTHER>                                8,959
<INTEREST-TOTAL>                              272,531
<INTEREST-DEPOSIT>                            122,070
<INTEREST-EXPENSE>                            156,289
<INTEREST-INCOME-NET>                         116,242
<LOAN-LOSSES>                                  32,218
<SECURITIES-GAINS>                             77,979
<EXPENSE-OTHER>                                132,042<F4>
<INCOME-PRETAX>                                99,538
<INCOME-PRE-EXTRAORDINARY>                     99,538
<EXTRAORDINARY>                                     0
<CHANGES>                                           0
<NET-INCOME>                                   78,932
<EPS-PRIMARY>
                                    1.40
<EPS-DILUTED>                                    1.39
<YIELD-ACTUAL>                                  11.50
<LOANS-NON>                                   880,357
<LOANS-PAST>                                        0
<LOANS-TROUBLED>                                    0
<LOANS-PROBLEM>                                     0
<ALLOWANCE-OPEN>                               15,061
<CHARGE-OFFS>                                  20,501
<RECOVERIES>                                      410
<ALLOWANCE-CLOSE>                              27,188
<ALLOWANCE-DOMESTIC>                           27,188
<ALLOWANCE-FOREIGN>                                 0
<ALLOWANCE-UNALLOCATED>                             0
        
<FN>
<F1>  Tag 18 includes  Loans  Available for Sale of $177,041  Loan  Portfolio of
      $266,299 and Discount Loan Portfolio of $1,434,176.
<F2>  Tag 19 includes  allowance for loan losses on loan portfolio of $3,695 and
      on discount loan portfolio of $23,493.
<F3>  Tag 30 includes  Interest  Income on Loans  Available for Sale of $18,368.
      Loans of $54,701 and Discount Loans of $157,649.
<F4>  Tag 39 includes  Non-interest  expense of $126,793  and  Distributions  on
      Company-Obligated,  Mandatorily  Reedemable Securities of Subsidiary Trust
      Holding Solely Junior Subordinated Debentures of the Company of $5,249.
</FN>

</TABLE>




<TABLE> <S> <C>

<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK>                                           0000873860
<NAME>                                           Ocwen Financial Corp.
<MULTIPLIER>                                         1,000
<CURRENCY>                                             USD
       
<S>                                                    <C>
<PERIOD-TYPE>                                         YEAR
<FISCAL-YEAR-END>                                DEC-31-1996
<PERIOD-START>                                   JAN-01-1996
<PERIOD-END>                                     DEC-31-1996
<EXCHANGE-RATE>                                          1
<CASH>                                               6,878
<INT-BEARING-DEPOSITS>                              13,341
<FED-FUNDS-SOLD>                                    32,000
<TRADING-ASSETS>                                    75,606
<INVESTMENTS-HELD-FOR-SALE>                        354,005
<INVESTMENTS-CARRYING>                               8,901
<INVESTMENTS-MARKET>                                     0
<LOANS>                                          1,589,901<F1>
<ALLOWANCE>                                         15,061<F2>
<TOTAL-ASSETS>                                   2,483,685
<DEPOSITS>                                       1,919,742
<SHORT-TERM>                                        74,945
<LIABILITIES-OTHER>                                 59,829
<LONG-TERM>                                        225,573
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               535
<OTHER-SE>                                         203,061
<TOTAL-LIABILITIES-AND-EQUITY>                   2,483,685
<INTEREST-LOAN>                                    157,075<F3>
<INTEREST-INVEST>                                   32,138
<INTEREST-OTHER>                                     4,681
<INTEREST-TOTAL>                                   193,894
<INTEREST-DEPOSIT>                                  93,773
<INTEREST-EXPENSE>                                 116,160
<INTEREST-INCOME-NET>                               77,734
<LOAN-LOSSES>                                       22,450
<SECURITIES-GAINS>                                  15,291
<EXPENSE-OTHER>                                     69,578
<INCOME-PRETAX>                                     61,301
<INCOME-PRE-EXTRAORDINARY>                          61,301
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        50,142
<EPS-PRIMARY>
                                         0.99<F4>
<EPS-DILUTED>                                         0.94<F5>
<YIELD-ACTUAL>                                      12.075
<LOANS-NON>                                        517,774
<LOANS-PAST>                                        45,635
<LOANS-TROUBLED>                                   100,343
<LOANS-PROBLEM>                                          0
<ALLOWANCE-OPEN>                                     1,947
<CHARGE-OFFS>                                        9,512
<RECOVERIES>                                           176
<ALLOWANCE-CLOSE>                                   15,061
<ALLOWANCE-DOMESTIC>                                15,061
<ALLOWANCE-FOREIGN>                                      0
<ALLOWANCE-UNALLOCATED>                                  0
        
<FN>
<F1>  Tag 18 includes  loans  available for sale of $126,366  loan  portfolio of
      $402,582 and discount loan portfolio of $1,060,953.
<F2>  Tag 19 includes allowances for loan losses on loan portfolio of $3,523 and
      on discount loan portfolio of $11,538.
<F3>  Tag 30 includes  interest  income on loans  available for sale of $17,092,
      Loans of $36,818, and discount loans of $103,165.
<F4>  Tag 45  EPS-Primary  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
<F5>  Tag 46  EPS-Diluted  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
</FN>

</TABLE>




<TABLE> <S> <C>

<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK>                                   0000873860
<NAME>                       Ocwen Financial Corp.
<MULTIPLIER>                                 1,000
<CURRENCY>                                     USD
       
<S>                                                    <C>
<PERIOD-TYPE>                                        9-MOS
<FISCAL-YEAR-END>                                DEC-31-1996
<PERIOD-START>                                   JAN-01-1996
<PERIOD-END>                                     SEP-30-1996
<EXCHANGE-RATE>                                          1
<CASH>                                               7,278
<INT-BEARING-DEPOSITS>                              17,173
<FED-FUNDS-SOLD>                                   185,000
<TRADING-ASSETS>                                         0
<INVESTMENTS-HELD-FOR-SALE>                        235,305
<INVESTMENTS-CARRYING>                               8,902
<INVESTMENTS-MARKET>                                     0
<LOANS>                                          1,347,983<F1>
<ALLOWANCE>                                         16,200<F2>
<TOTAL-ASSETS>                                   2,200,772
<DEPOSITS>                                       1,650,323
<SHORT-TERM>                                             0
<LIABILITIES-OTHER>                                137,113
<LONG-TERM>                                        240,669
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               534
<OTHER-SE>                                         172,133
<TOTAL-LIABILITIES-AND-EQUITY>                   2,200,772
<INTEREST-LOAN>                                    116,755
<INTEREST-INVEST>                                   23,007
<INTEREST-OTHER>                                     3,840
<INTEREST-TOTAL>                                   143,602
<INTEREST-DEPOSIT>                                  68,234
<INTEREST-EXPENSE>                                  82,253
<INTEREST-INCOME-NET>                               61,349
<LOAN-LOSSES>                                       18,839
<SECURITIES-GAINS>                                  17,580
<EXPENSE-OTHER>                                     47,038
<INCOME-PRETAX>                                     27,149
<INCOME-PRE-EXTRAORDINARY>                          25,082
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        25,082
<EPS-PRIMARY>                                         0.50<F3>

<EPS-DILUTED>                                         0.48<F4>
<YIELD-ACTUAL>                                      12.259
<LOANS-NON>                                        332,352
<LOANS-PAST>                                        50,264
<LOANS-TROUBLED>                                   110,348
<LOANS-PROBLEM>                                          0
<ALLOWANCE-OPEN>                                     2,271
<CHARGE-OFFS>                                        5,875
<RECOVERIES>                                            94
<ALLOWANCE-CLOSE>                                   16,200
<ALLOWANCE-DOMESTIC>                                16,200
<ALLOWANCE-FOREIGN>                                      0
<ALLOWANCE-UNALLOCATED>                                  0
        
<FN>
<F1>  Tag 18 includes  Loans  Available  for sale of $70,248  Loan  Portfolio of
      $369,651 and Discounted Loan Portfolio of $906,084.
<F2>  Tag 19 includes  Allowance for Loan Losses on Loans  Available for Sale of
      $1,196 on Loan  Portfolio of $3,400 and on  Discounted  Loan  Portfolio of
      $11,604.
<F3>  Tag 45  EPS-Primary  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
<F4>  Tag 46  EPS-Diluted  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
</FN>

</TABLE>




<TABLE> <S> <C>

<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK>                                   0000873860
<NAME>                       Ocwen Financial Corp.
<MULTIPLIER>                                 1,000
<CURRENCY>                                     USD
       
<S>                             <C>
<PERIOD-TYPE>                                        3-MOS
<FISCAL-YEAR-END>                              DEC-31-1997
<PERIOD-START>                                 JAN-01-1997
<PERIOD-END>                                   MAR-31-1997
<EXCHANGE-RATE>                                          1
<CASH>                                               8,966
<INT-BEARING-DEPOSITS>                               8,802
<FED-FUNDS-SOLD>                                    99,000
<TRADING-ASSETS>                                         0
<INVESTMENTS-HELD-FOR-SALE>                        348,066
<INVESTMENTS-CARRYING>                              11,201
<INVESTMENTS-MARKET>                                     0
<LOANS>                                          1,791,715<F1>
<ALLOWANCE>                                         21,642<F2>
<TOTAL-ASSETS>                                   2,649,471
<DEPOSITS>                                       2,106,829
<SHORT-TERM>                                        39,623
<LIABILITIES-OTHER>                                 52,290
<LONG-TERM>                                        225,573
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               536
<OTHER-SE>                                         224,620
<TOTAL-LIABILITIES-AND-EQUITY>                   2,649,471
<INTEREST-LOAN>                                     43,767
<INTEREST-INVEST>                                    9,102
<INTEREST-OTHER>                                     1,658
<INTEREST-TOTAL>                                    54,527
<INTEREST-DEPOSIT>                                  29,894
<INTEREST-EXPENSE>                                  37,164
<INTEREST-INCOME-NET>                               17,363
<LOAN-LOSSES>                                        9,742
<SECURITIES-GAINS>                                  10,563
<EXPENSE-OTHER>                                     22,697
<INCOME-PRETAX>                                     20,647
<INCOME-PRE-EXTRAORDINARY>                          20,647
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        17,041
<EPS-PRIMARY>                                         0.32<F4>

<EPS-DILUTED>                                         0.31<F5>
<YIELD-ACTUAL>                                      10.062
<LOANS-NON>                                        811,376
<LOANS-PAST>                                             0
<LOANS-TROUBLED>                                         0
<LOANS-PROBLEM>                                          0
<ALLOWANCE-OPEN>                                    15,061
<CHARGE-OFFS>                                        3,209
<RECOVERIES>                                            47
<ALLOWANCE-CLOSE>                                   21,642
<ALLOWANCE-DOMESTIC>                                21,642
<ALLOWANCE-FOREIGN>                                      0
<ALLOWANCE-UNALLOCATED>                                  0
        
<FN>
<F1>  Tag 18 includes  loans  available  for sale of $88,511  loan  portfolio of
      $422,232 and discount loan portfolio of $1,280,972.
<F2>  Tag 19 includes  allowance  for loan losses on  portfolio of $4,834 and on
      discount loan portfolio of $16,808.
<F3>  Tag 45  EPS-Primary  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
<F4>  Tag 46  EPS-Diluted  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
</FN>


</TABLE>




<TABLE> <S> <C>


<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK>                                            0000873860
<NAME>                                Ocwen Financial Corp.
<MULTIPLIER>                                          1,000
<CURRENCY>                                              USD
       
<S>                             <C>
<PERIOD-TYPE>                                         6-MOS
<FISCAL-YEAR-END>                               DEC-31-1997
<PERIOD-START>                                  JAN-01-1997
<PERIOD-END>                                    JUN-30-1997
<EXCHANGE-RATE>                                          1
<CASH>                                               6,911
<INT-BEARING-DEPOSITS>                              29,992
<FED-FUNDS-SOLD>                                   189,844
<TRADING-ASSETS>                                         0
<INVESTMENTS-HELD-FOR-SALE>                        263,412
<INVESTMENTS-CARRYING>                              38,821
<INVESTMENTS-MARKET>                                     0
<LOANS>                                          1,832,410<F1>
<ALLOWANCE>                                         24,825<F2>
<TOTAL-ASSETS>                                   2,786,879
<DEPOSITS>                                       2,198,603
<SHORT-TERM>                                             0
<LIABILITIES-OTHER>                                 55,927
<LONG-TERM>                                        286,972
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               536
<OTHER-SE>                                         243,328
<TOTAL-LIABILITIES-AND-EQUITY>                   2,786,879
<INTEREST-LOAN>                                    102,660
<INTEREST-INVEST>                                   16,356
<INTEREST-OTHER>                                     2,453
<INTEREST-TOTAL>                                   121,469
<INTEREST-DEPOSIT>                                  61,264
<INTEREST-EXPENSE>                                  76,032
<INTEREST-INCOME-NET>                               45,437
<LOAN-LOSSES>                                       17,651
<SECURITIES-GAINS>                                  29,593
<EXPENSE-OTHER>                                     53,777
<INCOME-PRETAX>                                     44,323
<INCOME-PRE-EXTRAORDINARY>                          44,323
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        35,833
<EPS-PRIMARY>                                         0.67<F3>

<EPS-DILUTED>                                         0.66<F4>
<YIELD-ACTUAL>                                       10.79
<LOANS-NON>                                        847,655
<LOANS-PAST>                                             0
<LOANS-TROUBLED>                                         0
<LOANS-PROBLEM>                                          0
<ALLOWANCE-OPEN>                                    15,061
<CHARGE-OFFS>                                        7,982
<RECOVERIES>                                            95
<ALLOWANCE-CLOSE>                                   24,825
<ALLOWANCE-DOMESTIC>                                24,825
<ALLOWANCE-FOREIGN>                                      0
<ALLOWANCE-UNALLOCATED>                                  0
        
<FN>
<F1>  Tag 18 includes  loans  available for sale of $103,627  loan  portfolio of
      $433,663 and discount loan portfolio of $1,295,120.
<F2>  Tag 19 includes  allowance for loan losses of loan portfolio of $4,974 and
      on discount loan portfolio of $19,851.
<F3>  Tag 45  EPS-Primary  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
<F4>  Tag 46  EPS-Diluted  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
</FN>


</TABLE>


WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.


<TABLE> <S> <C>


<ARTICLE>                                            9
<LEGEND>
This  schedule  contains  summary  financial  information  extracted  from Ocwen
Financial  Corporation's  consolidated  statement  of  financial  condition  and
statement  of  operations  and is qualified in its entirety by reference to such
financial statements.
<RESTATED>
[/LEGEND]
<CIK>                                           0000873860
<NAME>                               Ocwen Financial Corp.
<MULTIPLIER>                                         1,000
<CURRENCY>                                             USD
       
<S>                             <C>
<PERIOD-TYPE>                                        9-MOS
<FISCAL-YEAR-END>                              DEC-31-1997
<PERIOD-START>                                 JAN-01-1997
<PERIOD-END>                                   SEP-30-1997
<EXCHANGE-RATE>                                          1
<CASH>                                              15,641
<INT-BEARING-DEPOSITS>                               7,469
<FED-FUNDS-SOLD>                                    82,844
<TRADING-ASSETS>                                         0
<INVESTMENTS-HELD-FOR-SALE>                        264,723
<INVESTMENTS-CARRYING>                              54,042
<INVESTMENTS-MARKET>                                54,042
<LOANS>                                          2,053,786<F1>
<ALLOWANCE>                                         23,071<F2>
<TOTAL-ASSETS>                                   2,956,300
<DEPOSITS>                                       1,970,952
<SHORT-TERM>                                         3,075
<LIABILITIES-OTHER>                                 69,556
<LONG-TERM>                                         368,287<F3>
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               605
<OTHER-SE>                                         417,439
<TOTAL-LIABILITIES-AND-EQUITY>                   2,956,300
<INTEREST-LOAN>                                    165,722<F4>
<INTEREST-INVEST>                                   25,777
<INTEREST-OTHER>                                     7,296
<INTEREST-TOTAL>                                   198,795
<INTEREST-DEPOSIT>                                  92,321
<INTEREST-EXPENSE>                                 115,976
<INTEREST-INCOME-NET>                               82,819
<LOAN-LOSSES>                                       21,739
<SECURITIES-GAINS>                                  31,081
<EXPENSE-OTHER>                                     86,845<F5>
<INCOME-PRETAX>                                     70,525

<INCOME-PRE-EXTRAORDINARY>                          70,525
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        55,998
<EPS-PRIMARY>                                         1.02<F6>
<EPS-DILUTED>                                         1.01<F7>
<YIELD-ACTUAL>                                       11.48
<LOANS-NON>                                      1,119,261
<LOANS-PAST>                                             0
<LOANS-TROUBLED>                                         0
<LOANS-PROBLEM>                                          0
<ALLOWANCE-OPEN>                                    15,061
<CHARGE-OFFS>                                       14,064
<RECOVERIES>                                           335
<ALLOWANCE-CLOSE>                                   23,071
<ALLOWANCE-DOMESTIC>                                23,071
<ALLOWANCE-FOREIGN>                                      0
<ALLOWANCE-UNALLOCATED>                                  0
        
<FN>

<F1>  Tag 18 includes  loan  available  for sale of $190,012  loan  portfolio of
      $392,523 and discount loan portfolio of $1,471,251.
<F2>  Tag 19 includes  allowance for loan losses on loan portfolio of $4,734 and
      on discount loan portfolio of $18,337.
<F3>  Tag 24 includes $141,188 in lines of credit which have a one year term.
<F4>  Tag 30 interest  income on loans  available  for sale of $11,091  loans of
      $37,991 and discount loans of $116,840.
<F5>  Tag 39  includes  non-interest  expense of $84,995  and  distributions  on
      company-obligated,  mandatorily  redeemable securities of subsidiary trust
      holding solely junior subordinated debentures of the company of $1,850.
<F6>  Tag 45  EPS-Primary  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
<F7>  Tag 46  EPS-Diluted  has been  restated in  accordance  with SFAS No. 128,
      "Earnings  per Share" and for the  2-for-1  stock  split  approved  by the
      Company's Board of Directors on October 29, 1997.
</FN>

</TABLE>