SEC Filing | Ocwen Financial Corporation

View:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-21341 Ocwen Financial Corporation --------------------------- (Exact name of registrant as specified in its charter) Florida 65-0039856 ------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (561) 682-8000 -------------- (Registrant's telephone number, including area code) 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 . --- --- Number of shares of Common Stock, $.01 par value, outstanding as of August 9, 2002: 67,336,276 shares

OCWEN FINANCIAL CORPORATION FORM 10-Q I N D E X - -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION Page ---- Item 1. Interim Consolidated Financial Statements (Unaudited).............. 3 Consolidated Statements of Financial Condition at June 30, 2002 and December 31, 2001.............................................. 3 Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001....................................... 4 Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2002 and 2001.................. 5 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2002..................................... 6 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001............................................. 7 Notes to Consolidated Financial Statements......................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 53 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................. 58 Item 4. Submission of Matters to a Vote of Security Holders................ 58 Item 6. Exhibits and Reports on Form 8-K................................... 58 Signature................................................................... 61 2

PART I - FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited) OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) June 30, December 31, 2002 2001 --------------- --------------- Assets Cash and amounts due from depository institutions ..................................... $ 34,213 $ 23,076 Interest earning deposits ............................................................. 122,161 111,579 Federal funds sold and repurchase agreements .......................................... 88,000 126,000 Trading securities, at fair value: Collateralized mortgage obligations (AAA-rated) .................................... 90,338 161,191 Subordinates, residuals and other securities ....................................... 41,210 65,058 Real estate held for sale ............................................................. -- 13,418 Investment in real estate ............................................................. 59,598 116,896 Affordable housing properties ......................................................... 37,941 102,069 Loans, net ............................................................................ 122,009 185,293 Match funded assets ................................................................... 159,220 174,351 Real estate owned, net ................................................................ 84,101 110,465 Premises and equipment, net ........................................................... 47,333 44,589 Income taxes receivable ............................................................... 20,441 20,842 Advances on loans and loans serviced for others ....................................... 254,734 283,183 Mortgage servicing rights ............................................................. 133,677 101,107 Other assets .......................................................................... 96,805 72,033 --------------- --------------- $ 1,391,781 $ 1,711,150 =============== =============== Liabilities and Stockholders' Equity Liabilities Deposits ............................................................................ $ 441,863 $ 656,878 Escrow deposits on loans and loans serviced for others .............................. 88,773 73,565 Securities sold under agreements to repurchase ...................................... 66,817 79,405 Bonds - match funded agreements ..................................................... 146,214 156,908 Obligations outstanding under lines of credit ....................................... 68,883 84,304 Notes, debentures and other interest bearing obligations ............................ 157,580 160,305 Accrued interest payable ............................................................ 8,794 12,836 Excess of net assets acquired over purchase price ................................... -- 18,333 Accrued expenses, payables and other liabilities .................................... 30,333 28,351 --------------- --------------- Total liabilities .................................................................. 1,009,257 1,270,885 --------------- --------------- Minority interest in subsidiary ....................................................... 1,625 -- Company obligated, mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company ................................ 56,249 61,159 Commitments and contingencies (Note 9) 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; 67,333,477 and 67,289,313 673 673 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively Additional paid-in capital ........................................................... 224,375 224,142 Retained earnings .................................................................... 99,722 154,412 Accumulated other comprehensive loss, net of taxes: Net unrealized foreign currency translation loss ................................... (120) (121) --------------- --------------- Total stockholders' equity ....................................................... 324,650 379,106 --------------- --------------- $ 1,391,781 $ 1,711,150 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. 3

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) Three Months Six Months --------------------------- --------------------------- For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest expense Income ............................................................ $ 8,806 $ 25,218 $ 21,520 $ 50,035 Expense ........................................................... 14,714 24,728 31,110 51,608 ------------ ------------ ------------ ------------ Net interest income (expense) before provision for loan losses .... (5,908) 490 (9,590) (1,573) Provision for loan losses ......................................... 10,732 10,297 11,411 18,417 ------------ ------------ ------------ ------------ Net interest expense after provision for loan losses .............. (16,640) (9,807) (21,001) (19,990) ------------ ------------ ------------ ------------ Non-interest income Servicing and other fees .......................................... 35,848 33,740 71,574 64,857 Gain (loss) on interest earning assets, net ....................... (996) 422 (2,773) (1,409) Gain on trading and match funded securities, net .................. 161 4,550 2,953 9,739 Loss on real estate owned, net .................................... (11,858) (1,885) (15,970) (3,090) Loss on other non-interest earning assets, net .................... (93) (975) (841) (519) Net operating gains (losses) on investments in real estate ........ (13,993) 490 (9,339) 3,265 Amortization of excess of net assets acquired over purchase price . -- 4,583 -- 9,166 Gain on repurchases of debt ....................................... 1,070 385 1,074 3,819 Equity in income of investment in unconsolidated entities ......... 40 139 31 184 Other income ...................................................... 2,328 2,437 7,357 4,483 ------------ ------------ ------------ ------------ 12,507 43,886 54,066 90,495 ------------ ------------ ------------ ------------ Non-interest expense Compensation and employee benefits ................................ 19,708 21,309 40,781 42,244 Occupancy and equipment ........................................... 3,331 3,174 6,045 6,267 Technology and communication costs ................................ 6,009 5,556 11,061 15,704 Loan expenses ..................................................... 3,436 2,835 7,371 7,070 Net operating losses on investments in affordable housing properties ...................................................... 6,228 2,756 21,910 7,818 Amortization of excess of purchase price over net assets acquired . -- 778 -- 1,556 Professional services and regulatory fees ......................... 3,172 3,934 7,768 7,750 Other operating expenses .......................................... 2,615 2,514 4,590 5,303 ------------ ------------ ------------ ------------ 44,499 42,856 99,526 93,712 ------------ ------------ ------------ ------------ Distributions on Company-obligated, mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company .......................... 1,566 1,697 3,229 3,750 ------------ ------------ ------------ ------------ Loss before income taxes and effect of change in accounting principle (50,198) (10,474) (69,690) (26,957) Income tax expense .................................................. -- 10,967 1,166 18,000 ------------ ------------ ------------ ------------ Net loss before effect of change in accounting principle ............ (50,198) (21,441) (70,856) (44,957) Effect of change in accounting principle, net of taxes .............. -- -- 16,166 -- ------------ ------------ ------------ ------------ Net loss ............................................................ $ (50,198) $ (21,441) $ (54,690) $ (44,957) ============ ============ ============ ============ Earnings (loss) per share Basic and Diluted Net loss before effect of change in accounting principle ........ $ (0.75) $ (0.32) $ (1.05) $ (0.67) Effect of change in accounting principle, net of taxes .......... -- -- 0.24 -- ------------ ------------ ------------ ------------ Net loss ........................................................ $ (0.75) $ (0.32) $ (0.81) $ (0.67) ============ ============ ============ ============ Weighted average common shares outstanding .......................... 67,317,005 67,198,359 67,305,747 67,175,361 The accompanying notes are an integral part of these consolidated financial statements. 4

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Dollars in thousands) Three Months Six Months ------------------------ ------------------------ For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------------------------------------------- ---------- ---------- ---------- ---------- Net loss............................................................. $ (50,198) $ (21,441) $ (54,690) $ (44,957) ---------- ---------- ---------- ---------- Other comprehensive loss, net of taxes: Change in unrealized foreign currency translation adjustment arising during the period (1).................................... 161 363 1 (508) ---------- ---------- ---------- ---------- Change in accounting principle for derivative financial instruments -- -- -- 59 Reclassification of gain on derivative financial instruments to earnings......................................................... -- 20 -- (59) ---------- ---------- ---------- ---------- Change in unrealized gain on derivative financial instruments...... -- 20 -- -- ---------- ---------- ---------- ---------- Other comprehensive loss........................................... 161 383 1 (508) ---------- ---------- ---------- ---------- Comprehensive loss................................................... $ (50,037) $ (21,058) $ (54,689) $ (45,465) ========== ========== ========== ========== (1) Net of tax benefit of $(95) and $106 for the three months ended June 30, 2002 and 2001, respectively, and $15 and $292 for the six months ended June 30, 2002 and 2001, respectively. The accompanying notes are an integral part of these consolidated financial statements. 5

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2002 (Dollars in thousands) Accumulated Other Common Stock Additional Comprehensive -------------------------- Paid-in Retained Loss, Shares Amount Capital Earnings Net of Taxes Total ------------- ------- ----------- --------- ---------- ---------- Balances at December 31, 2001............. 67,289,313 $ 673 $ 224,142 $ 154,412 $ (121) $ 379,106 Net loss.................................. -- -- -- (54,690) -- (54,690) Directors' compensation................... 14,026 -- 38 -- -- 38 Stock options exercised................... 30,138 -- 195 -- -- 195 Other comprehensive loss, net of taxes: Change in unrealized foreign currency translation loss.................... -- -- -- -- 1 1 ------------- ------- ----------- --------- ---------- ---------- Balances at June 30, 2002................. 67,333,477 $ 673 $ 224,375 $ 99,722 $ (120) $ 324,650 ============= ======= =========== ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 6

OCWEN FINANCIAL COPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the six months ended June 30, 2002 2001 - --------------------------------------------------------------------------------------------- ----------- ----------- Cash flows from operating activities Net loss..................................................................................... $ (54,690) $ (44,957) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Net cash provided by trading activities.................................................... 103,679 244,508 Premium amortization on securities, net.................................................... 574 3,022 Depreciation and amortization.............................................................. 26,836 42,265 Provision for loan losses.................................................................. 11,411 18,417 Provision for real estate owned............................................................ 19,076 9,702 Loss on interest-earning assets, net....................................................... 2,773 1,409 Gain on trading and match funded securities................................................ (2,953) (9,739) Loss on sale of other non-interest earning assets.......................................... 841 519 Impairment charges on investment in real estate............................................ 15,317 1,471 Provision for losses on affordable housing properties...................................... 21,294 6,993 Gain on sale of real estate owned, net..................................................... (2,563) (9,523) Gain on repurchase of long-term debt....................................................... (1,074) (3,819) Effect of change in accounting principle before taxes...................................... (15,000) -- Decrease in income taxes receivable........................................................ 401 1,849 (Increase) decrease in advances and match funded advances on loans and loans serviced for others................................................................................... 29,974 (117,455) (Increase) decrease in other assets, net................................................... 8,669 (28,770) Decrease in accrued expenses, interest payable and other liabilities....................... (1,743) (13,848) ----------- ----------- Net cash provided (used) by operating activities............................................. 162,822 102,044 ----------- ----------- Cash flows from investing activities Principal payments received on match funded loans.......................................... 9,971 14,901 Investment in affordable housing properties................................................ (3,288) (8,335) Proceeds from sales of affordable housing properties....................................... 11,524 34,044 Purchase of mortgage servicing rights...................................................... (56,997) (43,263) Proceeds from sales of loans............................................................... 45,394 151,887 Proceeds from sale of real estate held for sale............................................ 4,779 1,000 Proceeds from sales of real estate held for investment..................................... 47,686 7,034 Purchase, originations and funded commitments of loans, net of undisbursed loan funds...... (8,334) (20,120) Capital improvements to real estate held for investment.................................... (7,627) (810) Principal payments received on loans....................................................... 15,157 47,008 Proceeds from sale of real estate owned.................................................... 18,741 69,663 Capital improvements to real estate owned.................................................. (1,592) (7,246) Additions to premises and equipment........................................................ (9,112) (3,858) ----------- ----------- Net cash provided (used) by investing activities............................................. 66,302 241,905 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 7

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Dollars in thousands) For the six months ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------- ----------- ----------- Cash flows from financing activities Decrease in deposits and escrow deposits on loans and loans serviced for others.......... (199,807) (213,997) Decrease in securities sold under agreements to repurchase............................... (12,588) -- Proceeds from (repayment of) obligations under lines of credit, net...................... (15,421) 71,612 Payments on bonds-match funded agreements, net........................................... (11,220) (26,672) Repurchase of Capital Securities......................................................... (3,796) (14,247) Repurchases of notes..................................................................... (728) (4,267) Repayment of other interest bearing obligations, net..................................... (1,997) -- Exercise of stock options................................................................ 152 784 ----------- ----------- Net cash provided (used) by financing activities........................................... (245,405) (186,787) ----------- ----------- Net increase (decrease) in cash and cash equivalents....................................... (16,281) 157,162 Cash and cash equivalents at beginning of period........................................... 260,655 153,736 ----------- ----------- Cash and cash equivalents at end of period................................................. $ 244,374 $ 310,898 =========== =========== Reconciliation of cash and cash equivalents at end of period Cash and amounts due from depository institutions........................................ $ 34,213 $ 52,381 Interest-earning deposits................................................................ 122,161 9,517 Federal funds sold and repurchase agreements............................................. 88,000 249,000 ----------- ----------- $ 244,374 $ 310,898 =========== =========== Supplemental disclosure of cash flow information Cash paid during the period for Interest................................................................................. $ 35,152 $ 53,989 =========== =========== Income tax payments...................................................................... $ 32 $ 2,461 =========== =========== Supplemental schedule of non-cash investing and financing activities Real estate owned acquired through foreclosure........................................... $ 7,572 $ 40,545 =========== =========== Exchange of real estate held for sale for loans.......................................... $ 9,153 $ -- =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 8

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. Ocwen Financial Corporation's ("OCN") interim consolidated financial statements include the accounts of OCN and its subsidiaries. OCN owns directly and indirectly all of the outstanding common and preferred stock of its primary subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance Holding Company ("IMI"), Ocwen Technology Xchange, Inc. ("OTX") and Ocwen Asset Investment Corp. ("OAC"). OCN also owns 99.6% of Ocwen Financial Services, Inc. ("OFS"), with the remaining 0.4% owned by the shareholders of Admiral Home Loan. 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"). Ocwen is a registered savings and loan holding company under the Home Owner's Loan Act and as such is also regulated by the OTS. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of our financial condition at June 30, 2002 and December 31, 2001, the results of our operations for the three and six months ended June 30, 2002 and 2001, our comprehensive loss for the three and six months ended June 30, 2002 and 2001, our changes in stockholders' equity for the six months ended June 30, 2002 and our cash flows for the six months ended June 30, 2002 and 2001, respectively. The results of operations and other data for the three and six month periods ended June 30, 2002 and 2001, are not necessarily indicative of the results that may be expected for any other interim periods or the entire year ending December 31, 2002. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001. Certain reclassifications have been made to the prior periods' interim consolidated financial statements to conform to the June 30, 2002 presentation. In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the statements of financial condition and revenues and expenses for the periods covered. Material estimates that are particularly significant in the near or medium term relate to our determination of the allowance for loan losses and our valuation of securities, real estate, affordable housing properties, servicing rights, intangibles and our deferred tax asset. Actual results could differ from those estimates and assumptions. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Excess of Cost over Net Assets Acquired We report the excess of purchase price over net assets of acquired businesses ("goodwill") at cost. Prior to our adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002, we amortized goodwill on a straight-line basis over the estimated future periods to be benefited, ranging from 3 to 7 years. Effective January 1, 2002 we no longer amortize our goodwill, but do review the carrying value at least annually for impairment in accordance with the provisions of SFAS No. 142. SFAS 142 prescribes a new methodology for performing the impairment analyses for goodwill and other intangibles, which changes to an approach based on fair value of the assets rather than undiscounted cash flows as used prior to adoption. We perform this analysis using projections of future income discounted at a market rate. The determination of market discount rates is subjective and may vary by product based on the type of product, stage of development and sales to date. See Note 3 below for a discussion of the initial impact on our financial statements from the adoption of SFAS No. 142. 9

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 3: CURRENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Except for goodwill and intangible assets acquired after June 30, 2001, which are immediately subject to its provisions, SFAS No. 142 is effective starting with fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized. Both goodwill and intangible assets that are not being amortized must be tested at least annually for impairment. In addition, SFAS No. 142 requires additional disclosures regarding goodwill and other intangible assets, including changes in the carrying amount of goodwill from period to period, the carrying amount of intangible assets by major intangible asset class and the estimated intangible asset amortization for the next five years. We adopted the provisions of SFAS No. 142 effective January 1, 2002. As a result, we reversed the unamortized balance of the excess of net assets acquired over purchase price. This reversal resulted in a credit to income of $18,333. The impact from the adoption of other elements of SFAS No. 142 resulted in impairment charges of $3,333 on goodwill and intangible assets originally recorded in connection with the formation of REALSynergy, Inc. in 1999. These amounts have been reported as the effect of a change in accounting principle, net of income tax benefit of $1,166. 10

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- The following tables restate the prior period for the effect of the adoption of SFAS No. 142: Three Months Six Months ------------------------- ------------------------- For the periods ended June 30, 2002 2001 2002 2001 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Loss before effect of change in accounting principle ..................... $ (50,198) $ (21,441) $ (70,856) $ (44,957) Adjustments related to adoption of SFAS No. 142: Deduct amortization of excess of net assets acquired over purchase price -- (4,583) -- (9,166) Add back amortization of goodwill ...................................... -- 778 -- 1,556 Add back amortization of intellectual property ......................... -- 265 -- 530 ----------- ----------- ----------- ----------- Total adjustments .................................................... -- (3,540) -- (7,080) ----------- ----------- ----------- ----------- Adjusted loss before effect of change in accounting principle ............ $ (50,198) $ (24,981) $ (70,856) $ (52,037) =========== =========== =========== =========== Net loss ................................................................. $ (50,198) $ (21,441) $ (54,690) $ (44,957) Adjustments related to adoption of SFAS No. 142: Deduct amortization of excess of net assets acquired over purchase price -- (4,583) -- (9,166) Add back amortization of goodwill ...................................... -- 778 -- 1,556 Add back amortization of intellectual property ......................... -- 265 -- 530 ----------- ----------- ----------- ----------- Total adjustments .................................................... -- (3,540) -- (7,080) ----------- ----------- ----------- ----------- Adjusted net loss ........................................................ $ (50,198) $ (24,981) $ (54,690) $ (52,037) =========== =========== =========== =========== Earnings (loss) per share: Loss before effect of change in accounting principle ..................... $ (0.75) $ (0.32) $ (1.05) $ (0.67) Adjustments related to adoption of SFAS No. 142: Deduct amortization of excess of net assets acquired over purchase price -- (0.07) -- (0.14) Add back amortization of goodwill and intellectual property ............ -- 0.02 -- 0.04 ----------- ----------- ----------- ----------- Adjusted loss before effect of change in accounting principle ............ $ (0.75) $ (0.37) $ (1.05) $ (0.77) =========== =========== =========== =========== Net loss ................................................................. $ (0.75) $ (0.32) $ (0.81) $ (0.67) Adjustments related to adoption of SFAS No. 142: Deduct amortization of excess of net assets acquired over purchase price -- (0.07) -- (0.14) Add back amortization of goodwill and intellectual property ............ -- 0.02 -- 0.04 ----------- ----------- ----------- ----------- Adjusted net loss ........................................................ $ (0.75) $ (0.37) $ (0.81) $ (0.77) =========== =========== =========== =========== Weighted average common shares outstanding ............................... 67,317,005 67,198,359 67,305,747 67,175,361 On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 is designed to establish a single model for long-lived assets to be disposed of and, as such, supercedes SFAS 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" as they relate to the disposal of a business segment. We adopted the provisions of SFAS No. 144 effective January 1, 2002. Adoption of SFAS No. 144 did not have a material impact on our results of operations, financial positions or cash flows. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 4 required that gains or losses from the extinguishment of debt, net of taxes, be reported as an extraordinary item in the statement of 11

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- operations. We immediately adopted the provisions of SFAS No. 145 as they relate to the rescission of SFAS No. 4. Effective with the rescission of SFAS No. 4, the reporting of gains or losses from the extinguishment of debt are reported as a component of non-interest income in the statement of operations. Results of operations for prior periods have been reclassified to conform with this presentation. NOTE 4: COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY In August 1997, the Ocwen Capital Trust ("OCT") issued $125,000 of 10.875% Capital Securities (the "Capital Securities"). Proceeds from the issuance of the Capital Securities were invested in 10.875% Junior Subordinated Debentures issued by OCN. The Junior Subordinated Debentures, which represent the sole assets of OCT, will mature on August 1, 2027. To date, OCT has repurchased $68,751 of its Capital Securities. During the six months ended June 30, 2002, OCT repurchased $4,910 of its Capital Securities in the open market resulting in a gain of $1,074. Holders of the Capital Securities are entitled to receive cumulative cash distributions accruing from the date of original issuance and payable semiannually in arrears on February 1 and August 1 of each year, commencing on February 1, 1998, at an annual rate of 10.875% 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 OCN to the extent OCT has funds available. If OCN 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 therefore. Accumulated distributions payable on the Capital Securities amounted to $2,549 and $2,771 at June 30, 2002 and December 31, 2001, respectively, and are included in accrued interest payable. OCN 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 semiannual 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, we 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 OCN may not permit any subsidiary to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, our 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 10.875% per annum, compounded semiannually. The Junior Subordinated Debentures are redeemable prior to maturity at our option, 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 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 semiannual 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. 12

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- Foreign Currency Management We enter into foreign currency derivatives to hedge our investments in foreign subsidiaries that own residual interests backed by residential loans originated in the UK ("UK residuals") and in the shopping center located in Halifax, Nova Scotia (the "Nova Scotia Shopping Center"). It is our policy to periodically adjust the amount of foreign currency derivative contracts we have entered into in response to changes in our recorded investments in these assets. As hedges of our investment in foreign operations, changes in the fair value of these contracts are included in the net unrealized foreign currency translation adjustment in accumulated other comprehensive income. The following table sets forth the terms and values of these foreign currency financial instruments at June 30, 2002 and December 31, 2001: Strike Position Maturity Notional Amount Rate Fair Value ------------ -------------- ----------------- --------- -------------- June 30, 2002: Canadian Dollar currency futures........... Short September 2002 C$ 11,400 $0.6598 $ 14 British Pound currency futures............. Short September 2002 (pound) 16,938 $1.4680 (955) ---------- $ (941) ========== December 31, 2001: Canadian Dollar currency futures........... Short March 2002 C$ 34,000 $0.6380 $ 353 British Pound currency futures............. Short March 2002 (pound) 17,250 $1.4350 (235) ---------- $ 118 ========== NOTE 6: REGULATORY REQUIREMENTS The Financial Institutions Reform, Recovery and Enforcement Act of 1989 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 that 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 June 30, 2002, the minimum regulatory capital requirements were: o Tangible and core capital of 1.50% and 3.00% of total adjusted assets, respectively, consisting principally of stockholders' equity, but excluding most intangible assets, such as goodwill and any net unrealized gains or losses on debt securities available for sale. The OTS minimum core capital ratio provides that only those institutions with a Uniform Financial Institution Rating System rating of "1" are subject to a 3% minimum core capital ratio. All other institutions are subject to a 4% minimum core capital ratio. 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 8.00% of the value of risk-weighted assets. At June 30, 2002, the Bank was "well capitalized" under the prompt corrective action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. 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 following table. 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 June 30, 2002 that management believes have changed the institution's category. Following an examination by the OTS in late 1996 and early 1997, 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 and with the regulatory capital requirements of general applicability (as indicated below). 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. As a result of an examination in 2000, the Bank was required to submit a written plan to the OTS by October 16, 2000 to address issues raised by the agency under Part 570 of the rules and regulations. Under the plan, the Bank will take certain actions regarding its operations with respect to asset 14

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) JUNE 30, 2002 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- Net Interest Provision Non- Non- Pre-Tax Income for Loan Interest Interest Income Total (Expense) Losses Income Expense (Loss) Assets ----------- ----------- ----------- ----------- ----------- ----------- At or for the six months ended June 30, 2002: Residential Loan Servicing .................. $ (8,737) $ -- $ 60,587 $ 36,218 $ 15,631 $ 497,612 OTX ......................................... -- -- 3,143 13,329 (10,186) 9,276 Ocwen Realty Advisors ....................... -- -- 7,628 6,609 1,019 451 Unsecured Collections ....................... -- (251) 5,465 3,633 2,083 312 Residential Discount Loans .................. 4,049 (2,302) (1,768) 2,862 1,720 54,461 Commercial Finance .......................... (3,588) 10,025 (24,606) 4,523 (42,744) 257,182 Affordable Housing .......................... (2,872) 3,939 312 23,161 (29,658) 94,803 Subprime Finance ............................ 4,143 -- 3,170 2,505 4,809 53,001 Corporate items and other ................... (2,585) -- 135 6,686 (12,364) 424,683 ----------- ----------- ----------- ----------- ----------- ----------- $ (9,590) $ 11,411 $ 54,066 $ 99,526 $ (69,690) $ 1,391,781 =========== =========== =========== =========== =========== =========== At or for the six months ended June 30, 2001: Residential Loan Servicing .................. $ (8,188) $ -- $ 57,786 $ 32,577 $ 17,021 $ 347,970 OTX ......................................... (263) -- 991 22,286 (21,558) 15,651 Ocwen Realty Advisors ....................... -- -- 5,109 4,762 346 872 Unsecured Collections ....................... 36 1,522 922 3,775 (4,341) 2,983 Residential Discount Loans .................. 8,213 9,279 (1,359) 3,874 (6,299) 250,165 Commercial Finance .......................... (433) 7,595 4,829 7,974 (11,175) 494,036 Affordable Housing .......................... (4,204) 21 (541) 10,049 (14,816) 142,262 Subprime Finance ............................ 601 -- 6,325 1,374 5,551 97,435 Corporate items and other ................... 2,665 -- 16,433 7,041 8,314 645,851 ----------- ----------- ----------- ----------- ----------- ----------- $ (1,573) $ 18,417 $ 90,495 $ 93,712 $ (26,957) $ 1,997,225 =========== =========== =========== =========== =========== =========== NOTE 9: COMMITMENTS AND CONTINGENCIES At June 30, 2002, we had commitments of $1,151 to fund construction loans (including loans accounted for as investments in real estate) secured by multi-family and commercial properties. In addition, we had commitments under outstanding letters of credit in the amount of $210. Through our investment in subordinated securities and subprime residuals, which had a fair value of $41,210 at June 30, 2002, we support senior classes of securities. On April 20, 1999, a complaint was filed on behalf of a putative class of public shareholders of the Company in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida against OCN and OAC. On April 23, 1999, a complaint was filed on behalf of a putative class of public shareholders of OAC in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida, against OAC and certain directors of OAC. The plaintiffs in both complaints sought to enjoin consummation of the acquisition of OAC by OCN. The cases were consolidated, and on September 13, 1999 a consolidated amended complaint was filed. The injunction was denied, and on October 14, 1999 OCN was dismissed as a party. Plaintiffs' remaining claims were for damages for alleged breaches of common law fiduciary duties. In October 2001, the parties reached an agreement in principle. On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit against OAC and Ocwen Partnership, L.P. in the Circuit Court of Cook County, Illinois. Walton has alleged that OAC committed an anticipatory breach of contract with respect to the proposed sale by OAC of all of its interest in its commercial mortgage-backed securities portfolio to Walton. Walton has claimed damages in an amount in excess of $20,000. As of October 20, 2000, both Walton and OAC filed motions for Summary Judgement. On December 21, 2000, the Circuit Court granted Walton's Limited Motion for Summary Judgement concerning liability. On February 20, 2001, Ocwen filed a motion for reconsideration requesting the Circuit Court vacate its order granting summary judgment to Walton. On January 29, 2002, after oral argument, the Circuit Court reversed its earlier ruling by vacating the order granting summary judgment. The parties are engaged in discovery. 18

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- General Our primary businesses are the servicing and special servicing of nonconforming, subperforming and nonperforming residential and commercial mortgage loans. We also specialize in the development of related loan servicing technology and business-to-business e-commerce solutions for the mortgage and real estate industries. Ocwen is a registered savings and loan holding company subject to regulation by the OTS. The Bank is subject to regulation by the OTS, its chartering authority, and by the Federal Deposit Insurance Corporation (the "FDIC") as a result of its membership in the Savings Association Insurance Fund, which insures the Bank's deposits up to the maximum extent permitted by law. The Bank is also subject to regulation by the Board of Governors of the Federal Reserve System and is currently a member of the Federal Home Loan Bank ("FHLB") of New York, one of the 12 regional banks that comprise the FHLB System. The following discussion of our consolidated financial condition, results of operations, capital resources and liquidity should be read in conjunction with the Interim Consolidated Financial Statements and related Notes included in Item 1 herein (which is incorporated herein by reference). Selected Consolidated Financial Information June 30, December 31, Increase 2002 2001 (Decrease) -------------- -------------- ---------- Balance Sheet Data Total assets........................................................... $ 1,391,781 $ 1,711,150 (19)% Trading securities, at fair value...................................... 131,548 226,249 (42) Affordable housing properties.......................................... 37,941 102,069 (63) Loans, net............................................................. 122,009 185,293 (34) Match funded assets, net............................................... 159,220 174,351 (9) Real estate owned, net................................................. 84,101 110,465 (24) Investments in real estate and real estate held for sale............... 59,598 116,896 (49) Advances on loans and loans serviced for others........................ 254,734 283,183 (10) Mortgage servicing rights.............................................. 133,677 101,107 32 Deposits and escrow deposits on loans and loans serviced for others.... 530,636 730,443 (27) Bonds-match funded agreements.......................................... 146,214 156,908 (7) Borrowings and other interest-bearing obligations...................... 293,280 324,014 (9) Company-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company...... 56,249 61,159 (8) Stockholders' equity................................................... 324,650 379,106 (14) 20

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- At or for the Three Months Ended June 30, ------------------------------------------- Favorable 2002 2001 (Unfavorable) ---------- ----------- ------------- Operations Data Net interest income (expense)............................................... $ (5,908) $ 490 (1,306)% Provision for loan losses................................................... 10,732 10,297 (4)% Non-interest income......................................................... 12,507 43,886 (72)% Non-interest expense........................................................ 44,499 42,856 (4)% Distributions on Capital Securities......................................... 1,566 1,697 8% Income tax expense.......................................................... -- 10,967 100% Net loss.................................................................... (50,198) (21,441) (134)% Per Common Share Net loss: Basic.................................................................... $ (0.75) $ (0.32) (134)% Diluted.................................................................. (0.75) (0.32) (134)% Stock price: High..................................................................... $ 7.50 $ 10.44 (28)% Low ..................................................................... 5.31 8.54 (38)% Close.................................................................... 5.50 10.25 (46)% Key Ratios Annualized return on average assets......................................... (13.08)% (4.11)% (218)% Annualized return on average equity......................................... (57.04) (18.19) (214)% Efficiency ratio (1)........................................................ 674.33 96.57 (598)% Core (leverage) capital ratio............................................... 14.88 12.87 16% Risk-based capital ratio.................................................... 23.13 20.15 15% 21

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- At or for the Six Months Ended June 30, ------------------------------------------- Favorable 2002 2001 (Unfavorable) ---------- ----------- ------------- Operations Data Net interest expense........................................................ $ (9,590) $ (1,573) (510)% Provision for loan losses................................................... 11,411 18,417 38% Non-interest income......................................................... 54,066 90,495 (40)% Non-interest expense........................................................ 99,526 93,712 (6)% Distributions on Capital Securities......................................... 3,229 3,750 14% Income tax expense.......................................................... 1,166 18,000 94% Effect of change in accounting principle, net of taxes...................... 16,166 -- 100% Net loss.................................................................... (54,690) (44,957) (22)% Per Common Share Net loss: Basic.................................................................... $ (0.81) $ (0.67) (21)% Diluted.................................................................. (0.81) (0.67) (21)% Stock price: High..................................................................... $ 8.48 $ 10.44 (19)% Low ..................................................................... 5.31 5.44 (2)% Key Ratios Annualized return on average assets......................................... (6.90)% (4.19)% (65)% Annualized return on average equity......................................... (29.76) (18.56) (60)% Efficiency ratio (1)........................................................ 223.77 105.39 (112)% (1) 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 income (losses) of investment in unconsolidated entities. Overview of Risks and Related Critical Accounting Policies For the past several years, we have been undergoing a fundamental transition in the nature of our business. We are exiting our capital-intensive businesses and growing our fee-based revenue sources. Both of these strategies are affected by risks in the marketplace, and our ability to measure and report our operating results and financial position is heavily impacted by the need to estimate the impact or outcome of these risks or other future events. Our critical accounting policies are those that relate to the estimation and measurement of these risks; an understanding of these policies is fundamental to understanding Management's Discussion and Analysis of Results of Operations and Financial Condition. Our significant accounting policies are discussed in detail in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2001 and in Note 2 of our Interim Consolidated Financial Statements (which are incorporated herein by reference). The following is a summary of our more subjective and complex accounting policies, as they relate to our overall business strategy. Our exit from our capital intensive discount loan, real estate and affordable housing businesses is largely focused on the orderly disposition or resolution of the assets associated with these lines of business. The critical accounting policies that affect the measurement of these businesses are those that determine the valuation of real estate and affordable housing assets as well as the determination of the allowance for loan losses. Real estate-related assets include real estate owned, investments in real estate, and investments in affordable housing properties. These assets are carried at different bases by asset class and at different amounts within each asset class, depending on whether the assets are classified as held for investment or held for sale. In addition, all of these assets are subject to ongoing impairment tests using various impairment methodologies that differ by asset class. In general, none of the assets have readily determinable fair values based on quoted market prices. In certain cases, we utilize appraisals or other market value estimates, in conjunction with estimates of completion costs or costs of disposition, to determine asset values. In other cases, we value these assets based on future cash flow analyses. These cash flow analyses involve assumptions such as discount rates, anticipated rents received, etc. that are highly subject to management judgment and estimation. Our task of estimation is even more challenging given the current risks in the economic 22

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- environment, which can result in material and sometimes rapid changes in valuation estimates. Individual assumptions between and within asset classes can vary significantly, with variances in assumptions resulting in substantially different asset values. The allowance for loan losses is established and maintained at levels we deem adequate to cover losses resulting from the inability of borrowers to make contractually required loan payments. Estimates for loan losses are developed by analyzing historical loan losses, current trends in delinquencies and charge offs, plans for problem loan administration and resolution, the views of our regulators, changes in the size and composition of the loan portfolio, and peer group information. Where there is a question as to the impairment of specific loans, we obtain valuations of the property or other collateral securing the loan, and, if applicable, the borrower's current financial information. We also include in our estimates of inherent probable loan losses the impact of economic events, the outcome of which are uncertain. These events may include, but are not limited to, deterioration in general economic conditions, increases or decreases in overall lending rates, political conditions, legislation that directly and indirectly affects the banking industry, and regional economic conditions affecting specific geographical areas in which we conduct business. Our most significant area of growth during the past year has been our residential loan servicing business, which virtually doubled the transaction volumes processed during the course of 2001. Inherent in our growth of this business has been an increase in purchased mortgage servicing rights, an intangible asset representing the present value of the right to service loans in a portfolio. Our ability to continue to expand the business at this rate may be limited by liquidity or regulatory constraints. The most critical accounting policy for this business line is the methodology we use to determine the valuation of mortgage servicing rights. Application of this methodology requires the development of a number of estimates, including anticipated amortization and periodic revaluation. Both our initial and ongoing valuations and the rate of amortization of mortgage servicing rights are significantly affected by interest rates, prepayment speeds and the payment performance of the underlying loans. In general, during periods of declining interest rates, the value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. We amortize mortgage servicing rights over the period of estimated net servicing income based on our projections of the amount and timing of future cash flows. The amount and timing of servicing asset amortization is adjusted periodically based on actual results and updated projections. Our other core business line is Ocwen Technology Xchange ("OTX"), our technology solutions business. We have goodwill and intellectual property recorded as a result of the acquisitions of three predecessor technology companies, as well as capitalized software development costs for the period of early development, which ended in 1999. Effective January 1, 2002 we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangibles. SFAS 142 prescribes a new methodology for performing the impairment analyses for goodwill and other intangibles, which changed to an approach based on fair value of the assets rather than undiscounted cash flows as used prior to adoption. We have performed this analysis using our previously developed projections of future income discounted at a market rate. The determination of market discount rates is also subjective and may vary by product based on the type of product, stage of development and sales to date. This impairment analysis resulted in a write-down of $3,333 related to the remaining balance of goodwill and intangible assets recorded in connection with our formation of REALSynergy, Inc. in 1999, which is reported as the effect of a change in accounting principle net of income tax benefit of $1,166. Another risk factor affecting all of our business lines is the determination of our overall tax provision. This is a complex task and requires extensive judgment, particularly in evaluating the realizability of the gross deferred tax assets in the near term. During 2001 we recorded a substantial increase to our valuation allowance, and as of June 30, 2002 our remaining net deferred tax asset amounted to $8,720. The evaluation of the need for a valuation allowance takes into consideration our recent earnings history, current tax position, and estimates of taxable income in the near term. The tax character (ordinary versus capital) and the carryforward periods of certain tax attributes (e.g., capital losses and tax credits) must also be considered. Significant judgment is required in considering the relative impact of negative and positive evidence related to realizability of the deferred tax assets. The determination of the amount of the aggregate valuation allowance is based on scenario analyses of the projected results of operations by line of business resulting in a range of potential valuation allowances, within which a final amount is determined. Results of Operations General. We recorded a net loss of $(50,198) for the second quarter of 2002, as compared to a net loss of $(21,441) for the second quarter of 2001. Our loss per share was $(0.75) for the second quarter of 2002, as compared with a loss per share of $(0.32) for the second quarter of 2001. For the first six months of 2002 we recorded a net loss of $(54,690) or $(0.81) per share compared to a net loss of $(44,957) or $(0.67) per share for the first six months of 2001. The loss for the second quarter of 2002 includes $45,191 of loss provisions and impairment charges on our remaining assets not associated with our core loan servicing and technology businesses (non-core assets), reflecting an increase in reserve levels. During 2002, we have continued our transition in business strategy from capital-intensive businesses to fee-based businesses: loan servicing and technology solutions for the mortgage and real estate industries. Our results reflect growth in our residential loan servicing businesses, continued investment in the development of our technology products, 23

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- cessation of loan origination and acquisition activities and continuing sales of non-core assets. The following table presents a summary of our non-core assets that remain to be sold. June 30, March 31, December 31, 2002 2002 2001 ------------ ------------ ------------ Loans, net: Affordable housing................................................... $ 11,882 $ 15,198 $ 17,215 All other............................................................ 110,127 135,359 168,078 Real estate held for sale............................................... -- -- 13,418 Investment in real estate............................................... 59,598 91,664 116,896 Real estate owned, net.................................................. 84,101 100,490 110,465 Subordinates, residuals and other trading securities.................... 41,210 39,899 65,058 Affordable housing properties (1)....................................... 18,877 19,729 52,176 ------------ ------------ ------------ $ 325,795 $ 402,339 $ 543,306 ============ ============ ============ (1) Excludes those properties subject to completed sales contracts that have not met accounting criteria for sales treatment. The combined results of our core business segments, Residual Loan Servicing, OTX, Ocwen Realty Advisors and Unsecured Collections improved in both the three and six month periods ended June 30, 2002 as compared to the same periods of the prior year. See "Segment Profitability" below. Results for the first six months of 2002 included a net increase to income during the first quarter of $16,166 from the adoption of SFAS No. 141 and No. 142. This is comprised of a credit to income of $18,333 for the reversal of the unamortized balance of the excess of net assets acquired over purchase price and a write-down of $2,167 (net of tax benefit of $1,166) of unamortized goodwill and intangible assets at OTX. Segment Profitability. The following is a discussion of the income (loss) before income taxes and effect of change in accounting principle of each of our reportable segments for the three and six months ended June 30, 2002 and 2001: o Residential Loan Servicing. Segment income declined from $8,509 for the three months ended June 30, 2001 to $8,083 for the three months ended June 30, 2002. Residential servicing and other fees amounted to $29,869 for the three months ended June 30, 2002 as compared to $30,484 for the same period of the prior year. Although gross servicing fees increased during the second quarter of 2002 as compared to 2001 as a result of continued growth, the increase in servicing fees was offset by an increase in amortization of servicing rights. The average balance of residential loans we service for others amounted to $24,794,375 and $12,880,434 for the three months ended June 30, 2002 and 2001, respectively. Results for 2002 continue to be impacted negatively by lower earnings on collection account or float balances as a result of the lower short-term interest rate environment we have experienced since the first quarter of 2001. See "Non-Interest Income - Servicing and Other Fees." Segment income declined from $17,021 for the six months ended June 30, 2001 to $15,631 for the six months ended June 30, 2002. Results for 2002 include a provision of $1,000 in the first quarter related to a pending settlement of a class action litigation claim. Residential servicing and other fees amounted to $59,466 for the six months ended June 30, 2002 as compared to $57,439 for the same period of the prior year, reflecting continued growth in residential loans we service for others. The average balance of residential loans we service for others amounted to $23,850,396 and $11,780,930 for the six months ended June 30, 2002 and 2001, respectively. Offsetting the increase in servicing and other fees was a $2,641 increase in non-interest expenses (excluding the $1,000 litigation reserve noted above) for the six months ended June 30, 2002 as compared to the same period of the prior year. o OTX. Segment losses declined from $(7,790) for the three months ended June 30, 2001 to $(4,904) for the same period in 2002.The net losses incurred by OTX reflect our continuing investment in the development and marketing of our technology businesses. Non-interest expenses for the three months ended June 30, 2002 declined by $1,416 as compared to the same period of the prior year. Non-interest expense for the three months ended June 30, 2001 included $1,043 of goodwill and intellectual property amortization that has not been recognized in 2002 as a result of the adoption of SFAS No. 142 on January 1,2002. Segment losses declined from $(21,558) for the six months ended June 30, 2001 to $(10,186) for the same period in 2002. Non-interest expenses for the six months ended June 30, 2002 declined by $8,957 as compared to the same period of the prior year. Losses for the six months ended June 30, 2001 included $4,685 of nonrecurring expenses in the first quarter, including $3,185 for a payment due in connection with the 1997 acquisition of Amos, Inc. Non-interest expense for the first six months of 2001 also 24

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- included $2,086 of goodwill and intellectual property amortization that has not been recognized in 2002 as a result of the adoption of SFAS No. 142. o Ocwen Realty Advisors. Segment income was $499 and $205 for the three months ended June 30, 2002 and 2001, respectively, and $1,019 and $346 for the six months ended June 30, 2002 and 2001, respectively. Through Ocwen Realty Advisors ("ORA") we provide property valuation services and real estate research for residential and commercial properties, including those that we own or service for others. o Unsecured Collections. Segment results improved from a loss of $(2,141) for the three months ended June 30, 2001 to income of $1,139 for the three months ended June 30, 2002. This segment is primarily comprised of activities related to our charged-off unsecured credit card receivables, which we acquired at a discount, as well as collections we make on behalf of others. We accounted for collections of our unsecured credit card receivables under the cost recovery method, until the fourth quarter of 2001, when we reduced the net book value of our unsecured receivables to zero as a result of collections and reserves. We report collections as non-interest income, and they amounted to $1,083 for the second quarter of 2002. Servicing fees for this segment amounted to $1,764 and $477 during the three months ended June 30, 2002 and 2001, respectively. Results for the three months ended June 30, 2001 included provisions for losses of $781. Segment results improved from a loss of $(4,341) for the six months ended June 30, 2001 to income of $2,083 for the six months ended June 30, 2002. Collections amounted to $2,490 for the six months ended June 30, 2002. Servicing fees for this segment amounted to $2,972 and $922 during the six months ended June 30, 2002 and 2001, respectively. Results for the six months ended June 30, 2001 included provisions for losses of $1,522. o Residential Discount Loans. Segment income improved from a loss of $(4,542) for the three months ended June 30, 2001 to income of $609 for the three months ended June 30, 2002. Results for the second quarter of 2002 included $(427) of losses from the sale of loans as compared to $1,129 of gains from loan sales during the second quarter of 2001. Provisions for loan losses declined from $7,677 for the second quarter of 2001 to a negative provision of $(165) for the second quarter of 2002. Gains from the sale and operation of real estate owned improved to $336 for the three months ended June 30, 2002 as compared to a loss of $(1,943) for the same period of the prior year. As a result of sales, the amount of loans and real estate owned remaining in this segment declined to $6,303 at June 30, 2002, from $11,734 at March 31, 2002 and $53,813 at December 31, 2001. Segment income improved from a loss of $(6,299) for the six months ended June 30, 2001 to income of $1,720 for the six months ended June 30, 2002. Results for the first six months of 2002 included $(2,436) of losses from the sale of loans as compared to $1,130 of gains from loan sales during the same period of 2001. Provisions for loan losses declined from $9,279 for the first six months of 2001 to a negative provision of $(2,302) for the first six months of 2002. Gains from the sale and operation of real estate owned improved to $500 for the six months ended June 30, 2002 as compared to a loss of $(5,503) for the same period of the prior year. Net trading gains on residential subordinate securities amounted to $147 and $2,497 for the six months ended June 30, 2002 and 2001, respectively. o Commercial Finance. Segment losses increased from $(3,161) for the three months ended June 30, 2001 to $(38,324) for the three months ended June 30, 2002. The increased loss for the second quarter of 2002 is primarily due to $35,184 of loss provisions and impairment charges on real estate owned, loans and investments in real estate. The results for the three months ended June 30, 2002 include losses of $(12,142) from the sale and operation of real estate owned as compared to income of $106 for the same period of the prior year, reflecting an increase in the provision for losses from $798 in 2001 to $12,553 in 2002. The provision for loan losses increased to $7,313 during the three months ended June 30, 2002 from $1,851 for the same period of the prior year. Net operating gains on investments in real estate declined from income of $523 for the second quarter of 2001 to a loss of $(13,993) for the second quarter of 2002. The net operating loss on investments in real estate for the second quarter of 2002 included $15,317 of impairment charges, as compared to $1,471 for the second quarter of 2001. Total loans, investments in real estate and real estate owned held by this segment have declined from $354,159 at December 31, 2001, and $315,385 at March 31,2002 to $247,221 at June 30, 2002. The combined ratio of allowance for losses as a percentage of loans and real estate owned increased from 9.3% at December 31, 2001 to 11% at March 31, 2002 and 19.7% at June 30, 2002. Segment losses increased from $(11,175) for the six months ended June 30, 2001 to $(42,744) for the six months ended June 30, 2002. Results for the second quarter of 2001 includes $(2,631) of losses from sales of commercial loans. The provision for loan losses increased to $10,025 during the six months ended June 30, 2002 from $7,595 for the same period of the prior year. Non-interest expenses for this segment declined by $3,451 during the first six months of 2002 as compared to the same period of 2001. The results for the six months ended June 30, 2002 include losses of $(16,331) from the sale and operation of real estate owned as compared to income of 25

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- $2,738 for the same period of the prior year, reflecting an increase in the provision for losses from $2,519 in 2001 to $17,754 in 2002. Operating income on investments in real estate declined from income of $3,305 for the first six months of 2001 to a loss of $(9,339) for the same period of 2002. This decline in operating income is primarily due to impairment charges on investments in real estate, which amounted to $15,317 and $1,471 for the six months ended June 30, 2002 and 2001 respectively. o Affordable Housing. Segment losses increased from $(6,964) for the three months ended June 30, 2001 to $(11,675) for the three months ended June 30, 2002. Contributing to the losses were charges of $2,054 and $2,490 for the three months ended June 30, 2002 and 2001, respectively, to reserve for estimated losses from the sale of properties. The loss for the second quarter of 2002 also includes a $3,944 charge to record a discount on a long-term sale of seven properties with a book value of $29,124. This discount will accrete to income over the term of the related receivable balance, which extends through June 2014. The provision for loan losses increased to $3,770 for the second quarter of 2002 as compared to $(12) for the second quarter of 2001. The net book value of our remaining properties amounted to $37,941 at June 30, 2002, of which $19,064 is subject to sales contracts although they have not yet qualified as sales for accounting purposes. During 2000, we began reducing our investment in affordable housing properties both as part of our shift in strategy to fee-based businesses and because the volume of tax credits being generated was exceeding our ability to utilize them effectively. See "Changes in Financial Condition - Affordable Housing Properties." Segment losses increased from $(14,816) for the six months ended June 30, 2001 to $(29,685) for the six months ended June 30, 2002. Charges of $17,350 and $7,358 were recorded during the first six months of 2002 and 2001, respectively, to reserve for estimated losses from the sale of properties. As disclosed above, the loss for 2002 also includes the $3,944 charge to record a discount on the long-term sale of properties in the second quarter. The provision for loan losses increased to $3,939 for the first six months of 2002 as compared to $22 for the same period of 2001. o Subprime Finance. Our domestic subprime origination business was closed in 1999. Assets remaining in this segment at June 30, 2002 are primarily comprised of subprime residual trading securities with a fair value of $36,493 and match funded securities with a fair value of $14,899. Segment results declined from income of $3,832 for the three months ended June 30, 2001 to $316 for the three months ended June 30, 2002. Results for the three months ended June 30, 2002 include $(65) of net trading losses on subprime residual and match funded securities, as compared to net trading gains of $3,979 for the same period of the prior year. Segment results declined from income of $5,551 for the six months ended June 30, 2001 to $4,809 for the six months ended June 30, 2002. Results for the six months ended June 30, 2002 include $3,338 of net trading gains on subprime residual and match funded securities, including $3,871 of realized gains from sales, as compared to net trading gains of $6,520 for the same period of the prior year. o Corporate Items and Other. Segment results were a loss of $(5,941) and income of $1,578 for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, pre-tax results declined to a loss of $(12,364) from income of $8,314 for the same period in 2001. Pre-tax results for this segment consist of our business activities that are individually insignificant, amounts we do not allocate to our operating segments, distributions on our Capital Securities, transfer pricing mismatches, other general corporate expenses and the results of the collateralized mortgage obligation ("CMO") trading portfolio. Results for the three and six months ended June 30, 2001 included $4,583 and $9,166, respectively, of amortization of the excess of net assets acquired over purchase price. See Note 8 to the Interim Consolidated Financial Statements, included in Item 1 herein (which is incorporated herein by reference), for additional information related to our operating segments. Net Interest Income (Expense): Net interest income (expense) is the difference between interest income earned from our interest-earning assets and interest expense incurred on our interest-bearing liabilities. Net interest income (expense) is determined by net interest spread (i.e., the difference between the yield earned on our interest-earning assets and the rates incurred on our 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 our interest-earning assets and interest-bearing liabilities. 26

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following tables set 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: Three Months Ended June 30, -------------------------------------------------------------------------- 2002 2001 ----------------------------------- ------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ----------- ----------- --------- ------------ ----------- ---------- Average Assets: Federal funds sold and repurchase agreements........ $ 151,017 $ 693 1.84% $ 226,748 $ 2,454 4.33% Trading securities (1): CMOs (AAA-rated)................................. 114,132 830 2.91 73,969 1,185 6.41 Subordinates, residuals and other................ 62,466 3,329 21.32 113,457 2,989 10.54 Investment securities and other..................... 55,313 69 0.50 13,894 251 7.23 Match funded loans and securities (2)............... 69,532 1,808 10.40 109,602 2,737 9.99 Loans, net (2)...................................... 179,763 2,077 4.62 506,500 15,602 12.32 ---------- -------- ---------- -------- Total interest earning assets.................... 632,223 8,806 5.57 1,044,170 25,218 9.66 -------- -------- Non-interest earning cash........................... 25,994 65,057 Allowance for loan losses........................... (17,980) (18,412) Real estate held for sale........................... -- 21,135 Affordable housing properties....................... 61,595 129,142 Real estate owned, net.............................. 97,216 134,245 Investment in real estate........................... 90,187 115,937 Advances on loans and loans serviced for others..... 265,109 324,379 Mortgage servicing rights........................... 122,075 75,547 Match funded advances on loans serviced for others.. 97,523 -- Other assets........................................ 160,761 194,083 ---------- ---------- Total assets..................................... $1,534,703 $2,085,283 ========== ========== Average Liabilities and Stockholders' Equity: Interest-bearing demand deposits.................... $ 13,569 $ 56 1.65% $ 11,088 $ 103 3.72% Savings deposits.................................... 1,764 5 1.13 1,417 8 2.26 Certificates of deposit............................. 483,880 7,021 5.80 1,005,445 16,196 6.44 ---------- -------- ---------- -------- Total interest-bearing deposits.................. 499,213 7,082 5.68 1,017,950 16,307 6.41 Securities sold under agreements to repurchase...... 15,341 71 1.85 -- -- -- Bonds-match funded agreements....................... 148,755 1,807 4.86 91,000 1,742 7.66 Obligations outstanding under lines of credit....... 92,772 1,107 4.77 85,330 1,737 8.14 Notes, debentures and other......................... 159,928 4,647 11.62 169,030 4,942 11.69 ---------- -------- ---------- -------- Total interest-bearing liabilities............... 916,009 14,714 6.43 1,363,310 24,728 7.26 -------- -------- Non-interest bearing deposits....................... 9,661 15,025 Escrow deposits..................................... 83,744 66,786 Excess of net assets acquired over purchase price... 1,478 31,001 Other liabilities................................... 114,223 75,193 ---------- ---------- Total liabilities................................ 1,125,115 1,551,315 Capital Securities.................................. 57,592 62,408 Stockholders' equity................................ 351,996 471,560 ---------- ---------- Total liabilities and stockholders' equity....... $1,534,703 $2,085,283 ========== ========== Net interest income (expense)....................... $ (5,908) $ 490 ======== ======== Net interest spread................................. (0.86)% 2.40% Net interest margin................................. (3.74)% 0.19% Ratio of interest-earning assets to interest-bearing liabilities........................ 69% 76% (1) Excludes effect of unrealized gains or losses on securities. (2) The average balances include non-performing loans, interest on which is recognized on a cash basis. 27

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Six Months Ended June 30, -------------------------------------------------------------------------- 2002 2001 ----------------------------------- ------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ----------- ----------- --------- ------------ ----------- ---------- Average Assets: Federal funds sold and repurchase agreements........ $ 144,290 $ 1,272 1.76% $ 178,227 $ 4,098 4.60% Trading securities (1): CMOs (AAA-rated)................................. 124,913 2,144 3.43 138,373 4,477 6.47 Subordinates, residuals and other................ 65,853 6,373 19.36 115,597 5,396 9.34 Investment securities and other..................... 47,814 161 0.67 14,195 598 8.43 Match funded loans and securities (2)............... 72,750 4,057 11.15 116,686 5,220 8.95 Loans, net (2)...................................... 199,684 7,513 7.52 584,202 30,246 10.35 ---------- -------- ---------- -------- Total interest earning assets.................... 655,304 21,520 6.57 1,147,280 50,035 8.72 -------- -------- Non-interest earning cash........................... 27,672 55,930 Allowance for loan losses........................... (19,601) (20,120) Real estate held for sale........................... 6,637 21,437 Affordable housing properties....................... 82,086 135,441 Real estate owned, net.............................. 104,274 134,372 Investment in real estate........................... 99,916 118,862 Advances on loans and loans serviced for others..... 269,054 284,836 Mortgage servicing rights........................... 112,768 63,240 Match funded advances on loans serviced for others.. 100,495 -- Other assets........................................ 145,838 205,526 ---------- ---------- Total assets..................................... $1,584,443 $2,146,804 ========== ========== Average Liabilities and Stockholders' Equity: Interest-bearing demand deposits.................... $ 14,936 $ 123 1.65% $ 12,769 $ 239 3.74% Savings deposits.................................... 1,587 9 1.13 1,365 16 2.34 Certificates of deposit............................. 523,933 15,567 5.94 1,057,011 34,124 6.46 ---------- -------- ---------- -------- Total interest-bearing deposits.................. 540,456 15,699 5.81 1,071,145 34,379 6.42 Securities sold under agreements to repurchase...... 21,420 198 1.85 -- -- -- Bonds-match funded agreements....................... 151,148 3,716 4.92 97,936 4,708 9.61 Obligations outstanding under lines of credit....... 92,222 2,149 4.66 59,108 2,456 8.31 Notes, debentures and other......................... 161,272 9,348 11.59 171,411 10,065 11.74 ---------- -------- ---------- -------- Total interest-bearing liabilities............... 966,518 31,110 6.44 1,399,600 51,608 7.37 -------- -------- Non-interest bearing deposits....................... 9,195 15,094 Escrow deposits..................................... 81,607 59,400 Excess of net assets acquired over purchase price... 1,478 33,052 Other liabilities................................... 98,688 86,371 ---------- ---------- Total liabilities................................ 1,157,486 1,593,517 Capital Securities.................................. 59,376 68,793 Stockholders' equity................................ 367,581 484,494 ---------- ---------- Total liabilities and stockholders' equity....... $1,584,443 $2,146,804 ========== ========== Net interest income (expense)....................... $ (9,590) $ (1,573) ======== ======== Net interest spread................................. 0.13% 1.35% Net interest margin................................. (2.93)% (0.27)% Ratio of interest-earning assets to interest-bearing liabilities........................ 68% 81% (1) Excludes effect of unrealized gains or losses on securities. (2) The average balances include non-performing loans, interest on which is recognized on a cash basis. 28

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- 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 our 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. Three Months Six Months -------------------------------- --------------------------------- 2002 vs. 2001 2002 vs. 2001 -------------------------------- --------------------------------- Increase (Decrease) Due To Increase (Decrease) Due To -------------------------------- --------------------------------- For the periods ended June 30, Rate Volume Total Rate Volume Total - ------------------------------------------------------ -------- -------- -------- -------- --------- --------- Interest-Earning Assets: Federal funds sold and repurchase agreements.......... $ (1,114) $ (647) $ (1,761) $ (2,159) $ (667) $ (2,826) Trading securities: CMOs (AAA-rated)................................... (823) 468 (355) (1,933) (400) (2,333) Subordinates, residuals and other.................. 2,102 (1,762) 340 4,012 (3,035) 977 Investment securities and other....................... (400) 218 (182) (915) 478 (437) Match funded loans and securities..................... 109 (1,038) (929) 1,095 (2,258) (1,163) Loans................................................. (6,956) (6,569) (13,525) (5,193) (17,540) (22,733) -------- -------- -------- -------- --------- --------- Total interest-earning assets...................... (7,082) (9,330) (16,412) (5,093) (23,422) (28,515) -------- -------- -------- -------- --------- --------- Interest-Bearing Liabilities: Interest-bearing demand deposits...................... $ (66) $ 19 $ (47) $ (92) $ (24) $ (116) Savings deposits...................................... (5) 2 (3) (9) 2 (7) Certificates of deposit............................... (1,473) (7,702) (9,175) (2,531) (16,026) (18,557) -------- -------- -------- -------- --------- --------- Total interest-bearing deposits.................... (1,544) (7,681) (9,225) (2,632) (16,048) (18,680) Securities sold under agreements to repurchase........ -- 71 71 -- 198 198 Bonds-match funded agreements......................... (785) 850 65 (2,892) 1,900 (992) Obligations outstanding under lines of credit......... (770) 140 (630) (1,344) 1,037 (307) Notes, debentures and other interest-bearing obligations......................................... (31) (264) (295) (128) (589) (717) -------- -------- -------- -------- --------- --------- Total interest-bearing liabilities............... (3,130) (6,884) (10,014) (6,996) (13,502) (20,498) -------- -------- -------- -------- --------- --------- Increase (decrease) in net interest income............ $ (3,952) $ (2,446) $ (6,398) $ 1,903 $ (9,920) $ (8,017) ======== ======== ======== ======== ========= ========= We incurred net interest expense before provision for loan losses of $(5,908) for the three months ended June 30, 2002 as compared to net interest income of $490 for the same period of the prior year, a decline of $6,398 or 1,306%. The decline in net interest income was due to a decrease in the balance of our average interest-earning assets and a decrease in the net interest spread, offset by a decrease in the balance of our average interest-bearing liabilities. The average balance of our interest-earning assets decreased by $411,947 or 39% during the second quarter of 2002 and reduced interest income by $9,330. The average balance of our interest-bearing liabilities decreased by $447,301 or 33% during the second quarter of 2002 and decreased interest expense by $6,884. The net impact of these volume changes resulted in a $2,446 decrease in net interest income. The net interest spread decreased 326 basis points as a result of a 409 basis-point decrease in the weighted average yield on our interest-earning assets, offset by an 83 basis-point decline in the weighted average rate on our interest-bearing liabilities. The net impact of these rate changes resulted in a $3,952 decrease in net interest income. We incurred net interest expense before provision for loan losses of $(9,590) for the six months ended June 30, 2002 as compared to net interest expense of $(1,573) for the same period of the prior year, an increase of $8,017 or 510%. The increase was due to a decrease in the balance of our average interest-earning assets and a decrease in the net interest spread, offset by a decrease in the balance of our average interest-bearing liabilities. The average balance of our interest-earning assets decreased by $491,976 or 43% during 2002 and reduced interest income by $23,422. The average balance of our interest-bearing liabilities decreased by $433,082 or 31% during 2002 and decreased interest expense by $13,502. The net impact of these volume changes resulted in a $9,920 decrease in net interest income. The net interest spread decreased 122 basis points as a result of a 215 basis-point decrease in the weighted average yield on our interest-earning assets, offset by a 93 basis-point decline in the weighted average rate on our interest-earning liabilities. The net impact of these rate changes resulted in a $1,903 increase in net interest income. 29

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Annualized Average Balance Increase Average Yield Increase --------------------------- (Decrease) ------------------- (Decrease) For the three months ended June 30, 2002 2001 $ 2002 2001 Basis Points - --------------------------------------- ----------- ----------- ----------- -------- -------- ------------- Federal funds sold and repurchase agreements............................ $ 151,017 $ 226,748 $ (75,731) 1.84% 4.33% (249) Trading securities: CMOs (AAA-rated)..................... 114,132 73,969 40,163 2.91% 6.41% (350) Subordinates, residuals and other.... 62,466 113,457 (50,991) 21.32% 10.54% 1,078 Investment securities and other........ 55,313 13,894 41,419 0.50% 7.23% (673) Match funded loans and securities...... 69,532 109,602 (40,070) 10.40% 9.99% 41 Loans, net............................. 179,763 506,500 (326,737) 4.62% 12.32% (770) ----------- ----------- ----------- $ 632,223 $ 1,044,170 $ (411,947) 5.57% 9.66% (409) =========== =========== =========== Annualized Average Balance Increase Average Yield Increase --------------------------- (Decrease) ------------------- (Decrease) For the six months ended June 30, 2002 2001 $ 2002 2001 Basis Points - --------------------------------------- ----------- ----------- ----------- -------- -------- ------------- Federal funds sold and repurchase agreements............................ $ 144,290 $ 178,227 $ (33,937) 1.76% 4.60% (284) Trading securities: CMOs (AAA-rated)..................... 124,913 138,373 (13,460) 3.43% 6.47% (304) Subordinates, residuals and other.... 65,853 115,597 (49,744) 19.36% 9.34% 1,002 Investment securities and other........ 47,814 14,195 33,619 0.67% 8.43% (776) Match funded loans and securities...... 72,750 116,686 (43,936) 11.15% 8.95% 220 Loans, net............................. 199,684 584,202 (384,518) 7.52% 10.35% (283) ----------- ----------- ----------- $ 655,304 $ 1,147,280 $ (491,976) 6.57% 8.72% (215) =========== =========== =========== Interest income earned from our investment of available cash in federal funds sold and repurchase agreements declined $1,761 or 72% during the second quarter of 2002 as compared to the same period of 2001 as a result of a 249 basis-point decline in the average yield and a $75,731 or 33% decline in the average balance. For the six month periods, interest income declined $2,826 or 69% in 2002 as compared to 2001 due to a 284 basis-point decline in the average yield and a $33,937 or 19% decline in the average balance. The decline in the average yield in 2002 is due to a decline in interest rates on overnight funds. Interest income we earned from our securities portfolio declined from $9,873 during the six months ended June 30, 2001 to $8,517 in the same period of 2002, a $1,356 or 14% decline. The decline in interest income is due to a decline in the average balances of our investment in CMOs, subordinates and residuals and a decline in the average yield earned on CMOs, offset by an increase in the average yield earned on subordinates and residuals. Our average investment in CMOs declined $13,460 or 10% and our average investment in subordinates and residuals declined $49,744 or 43%. The decline in the average balance of our CMOs during 2002 reflects our planned reduction in the use of these securities to meet the Qualified Thrift Lender requirements. The decline in the average balance of our subordinate and residuals during 2002 was primarily due to sales of subprime residuals and amortization. Because CMOs have less cash flow variability, their average lives and yields to maturity are more stable, and therefore, CMOs are priced to yield less than classes of mortgage-related securities such as subordinates and residuals that are less stable. Interest income we earned on loans decreased by $13,525 or 87% during the three months ended June 30, 2002 as compared to the same period of the prior year as a result of a $326,737 or a 65% decline in the average balance and a decline in the average yield of 770 basis points. For the six month periods, interest income we earned on loans decreased by $22,733 or 75% during 2002 as compared to the same period of 2001 as a result of a $384,518 or 66% decline in the average balance and a 283 basis point decrease in the average yield. Sales, foreclosures and the absence of acquisitions have resulted in the declines in the average balance of loans during 2002. The yield on loans is likely to fluctuate from period to period as a result of the timing of resolutions, particularly the resolution of large multi-family residential and commercial real estate loans, and the mix of the overall portfolio between performing and non-performing loans. Resolution income declined from $3,215 and $6,496 for the three and six months ended June 30, 2001, respectively, to $161 and $2,691 for the same periods of 2002, respectively. See "Changes in Financial Condition - Loans, Net." 30

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Annualized Average Balance Increase Average Yield Increase -------------------------- (Decrease) ------------------- (Decrease) For the three months ended June 30, 2002 2001 $ 2002 2001 Basis Points - --------------------------------------------------- ----------- ----------- ----------- -------- -------- ------------ Interest-bearing deposits........................... $ 499,213 $ 1,017,950 $ (518,737) 5.68% 6.41% (73) Securities sold under agreements to repurchase...... 15,341 -- 15,341 1.85% --% 185 Bonds-match funded agreements....................... 148,755 91,000 57,755 4.86% 7.66% (280) Obligations outstanding under lines of credit ...... 92,772 85,330 7,442 4.77% 8.14% (337) Notes, debentures and other......................... 159,928 169,030 (9,102) 11.62% 11.69% (7) ----------- ----------- ----------- $ 916,009 $ 1,363,310 $ (447,301) 6.43% 7.26% (83) =========== =========== =========== Annualized Average Balance Increase Average Yield Increase -------------------------- (Decrease) ------------------- (Decrease) For the six months ended June 30, 2002 2001 $ 2002 2001 Basis Points - --------------------------------------------------- ----------- ----------- ----------- -------- -------- ------------ Interest-bearing deposits........................... $ 540,456 $ 1,071,145 $ (530,689) 5.81% 6.42% (61) Securities sold under agreements to repurchase...... 21,420 -- 21,420 1.85% --% 185 Bonds-match funded agreements....................... 151,148 97,936 53,212 4.92% 9.61% (469) Obligations outstanding under lines of credit ...... 92,222 59,108 33,114 4.66% 8.31% (365) Notes, debentures and other......................... 161,272 171,411 (10,139) 11.59% 11.74% (15) ----------- ----------- ----------- $ 966,518 $ 1,399,600 $ (433,082) 6.44% 7.37% (93) =========== =========== =========== Interest expense we incurred on our interest-bearing deposits decreased $9,225 or 57% during the three months ended June 30, 2002 as compared to the same period of the prior year primarily due to a $518,737 or 51% decrease in the average balance. For the six month periods, interest expense we incurred on our interest-bearing deposits decreased $18,680 or 54% during the six months ended June 30, 2002 as compared to the same period of the prior year primarily due to a $530,689 or 50% decrease in the average balance. The decline in the average balance of deposits during 2002 resulted primarily from maturing brokered certificates of deposit. We did not issue any new brokered certificates of deposit during 2002 and, at this time, do not intend to issue any such deposits in the foreseeable future. The decline in average deposits is consistent with the decline in average total assets during 2002 as compared to the same period in the prior year as we continue our transition in business strategy from capital-intensive businesses to fee-based businesses. See "Changes in Financial Condition - Deposits." Interest expense we incurred on bonds-match funded agreements declined $992 or 21% during the six months ended June 30, 2002 as compared to the same period of the prior year as a result of a 469 basis-point decline in the average rate, offset in part by a $53,212 or 54% increase in the average balance outstanding. The decline in the average rate during 2002 is largely due to declines in LIBOR. The increase in the average balance during 2002 is due to new match funded debt that resulted from our transfer of certain residential loan servicing related advances to a third party in December 2001, offset in part by principal repayments. See "Changes in Financial Condition - Bonds - Match Funded Agreements." Provisions for Loan Losses. Provisions we record for losses on our loans are charged to operations to maintain an allowance for losses on our loans and match funded loans at a level that we consider adequate based upon an evaluation of known and inherent risks in such portfolios. Our ongoing evaluation is based on an analysis of our loans and match funded loans, historical loss experience, current economic conditions and trends, collateral values and other relevant factors. The following table presents the provisions for loan losses for the periods indicated: Three Months Six Months -------------------- -------------------- For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------- -------- -------- -------- -------- Loans: Residential ................... $ (423) $ 7,644 $ (2,601) $ 9,018 Nonresidential ................ 11,086 2,648 13,964 9,216 -------- -------- -------- -------- 10,663 10,292 11,363 18,234 Match funded loans .............. 69 5 48 183 -------- -------- -------- -------- $ 10,732 $ 10,297 $ 11,411 $ 18,417 ======== ======== ======== ======== 31

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The decline in the provision we recorded on loans during the six months ended June 30, 2002 as compared to the same periods in 2001 is primarily due to sales and resolutions of residential loans, offset in part by an increase in reserves on commercial and affordable housing (multi-family) loans. As indicated in the table below, we have increased our allowance as a percentage of loan value at June 30, 2002. The following table sets forth the allowance for loan losses as a percentage of the respective loan balances at the dates indicated: Allowance Loan as a % of Allowance Balance Loans --------- --------- --------- June 30, 2002: Loans (1) ............................ $ 18,528 $ 140,537 13.2% Match funded loans ................... 218 44,599 0.5% --------- --------- $ 18,746 $ 185,136 10.1% ========= ========= December 31, 2001: Loans ................................ 10,414 195,707 5.3% Match funded loans ................... 170 53,123 0.3% --------- --------- $ 10,584 $ 248,830 4.3% ========= ========= June 30, 2001: Loans ................................ $ 19,191 $ 404,706 4.7% Match funded loans ................... 232 67,096 0.3% --------- --------- $ 19,423 $ 471,802 4.1% ========= ========= (1) The increase in reserves at June 30, 2002 relates to nonresidential loans and is in response to adverse changes in current market conditions and our analysis of recent events and underlying collateral values. For additional information regarding our allowance for loan losses on the above portfolios, see "Changes in Financial Condition - Allowance for Loan Losses." For information relating to our valuation allowance on real estate owned, see "Changes in Financial Condition - Real Estate Owned." Non-Interest Income. The following table sets forth the principal components of our non-interest income during the periods indicated: Three Months Six Months ------------------------ ------------------------ For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------------------------------------------- ---------- ---------- ---------- ---------- Servicing and other fees............................................. $ 35,848 $ 33,740 $ 71,574 $ 64,857 Gain (loss) on interest earning assets, net.......................... (996) 422 (2,773) (1,409) Gain on trading and match funded securities, net..................... 161 4,550 2,953 9,739 Loss on real estate owned, net....................................... (11,858) (1,885) (15,970) (3,090) Loss on other non-interest earning assets, net....................... (93) (975) (841) (519) Net operating gains (losses) on investments in real estate........... (13,993) 490 (9,339) 3,265 Amortization of excess of net assets acquired over purchase price.... -- 4,583 -- 9,166 Gain on repurchase of debt........................................... 1,070 385 1,074 3,819 Equity in income of investment in unconsolidated entities............ 40 139 31 184 Other income......................................................... 2,328 2,437 7,357 4,483 ---------- ---------- ---------- ---------- $ 12,507 $ 43,886 $ 54,066 $ 90,495 ========== ========== ========== ========== 32

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Servicing and Other Fees. Our servicing and other fees are primarily comprised of fees we earned from investors for servicing mortgage loans (primarily residential) on their behalf. The increase in servicing fees is largely due to the growth in residential loans we service for others. The average unpaid principal balance of all loans we serviced amounted to $26,235,201 and $13,761,392 during the three months ended June 30, 2002 and 2001, respectively, $25,291,305 and $12,654,882 during the six months ended June 30, 2002 and 2001, respectively. The following table sets forth the principal components of our servicing and other fees for the periods indicated: Three Months Six Months ------------------------ ------------------------ For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------------------------------------------- ---------- ---------- ---------- ---------- Loan servicing and related fees: Loan servicing fees.................................................. $ 35,585 $ 27,136 $ 68,263 $ 49,744 Late charges......................................................... 6,956 4,509 14,034 8,807 Interest on custodial accounts (1)................................... 2,131 2,097 3,737 3,772 Special servicing fees (2)........................................... 920 2,279 2,273 4,525 Other, net........................................................... 3,014 3,060 4,845 5,484 Servicer expenses (3)................................................ (6,300) (3,001) (11,816) (5,350) Amortization of servicing rights..................................... (13,459) (7,054) (24,193) (11,761) ---------- ---------- ---------- ---------- 28,847 29,026 57,143 55,221 Other fees: Property valuation fees (ORA)........................................ 3,507 2,386 7,742 5,109 Default servicing fees............................................... 1,131 993 2,413 2,175 Retail banking fees.................................................. 1,123 577 2,089 985 Other................................................................ 1,240 758 2,187 1,367 ---------- ---------- ---------- ---------- $ 35,848 $ 33,740 $ 71,574 $ 64,857 ========== ========== ========== ========== (1) Interest we earned on custodial accounts during the holding period between collection of borrower payments and remittance to investors. (2) Fees we earned under special servicing arrangements wherein we act as a special servicer for third parties, typically as part of a securitization. Under these arrangements, we service loans that become greater than 90 days past due and receive base special servicing fees plus incentive fees to the extent we achieve certain loss mitigation parameters. (3) Servicer expenses are largely comprised of expense resulting from the difference between a full month of interest and the interest collected on loans that are repaid before the end of a calendar month. 33

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table sets forth loans we serviced at the dates indicated: Subprime Loans (1) Other Loans Total ------------------------- ------------------------- ------------------------- No. of No. of No. of Amount Loans Amount Loans Amount Loans ----------- ----------- ----------- ----------- ----------- ----------- June 30, 2002: Performing: Residential servicing .................. $22,357,644 266,660 $ 1,060,175 17,977 $23,417,819 284,637 Commercial servicing ................... -- -- 988,237 508 988,237 508 ----------- ----------- ----------- ----------- ----------- ----------- $22,357,644 266,660 $ 2,048,412 18,485 $24,406,056 285,145 =========== =========== =========== =========== =========== =========== Non-performing: Residential servicing .................. $ 2,308,427 30,016 $ 263,233 4,340 $ 2,571,660 34,356 Commercial servicing ................... -- -- 462,951 186 462,951 186 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,308,427 30,016 $ 726,184 4,526 $ 3,034,611 34,542 =========== =========== =========== =========== =========== =========== Total loans serviced for others: Residential servicing .................. $24,666,071 296,676 $ 1,323,408 22,317 $25,989,479 318,993 Commercial servicing ................... -- -- 1,451,188 694 1,451,188 694 ----------- ----------- ----------- ----------- ----------- ----------- $24,666,071 296,676 $ 2,774,596 23,011 $27,440,667 319,687 =========== =========== =========== =========== =========== =========== December 31, 2001: Performing: Residential servicing .................. $18,068,542 242,664 $ 926,667 18,335 $18,995,209 260,999 Commercial servicing ................... -- -- 1,055,317 1,701 1,055,317 1,701 ----------- ----------- ----------- ----------- ----------- ----------- $18,068,542 242,664 $ 1,981,984 20,036 $20,050,526 262,700 =========== =========== =========== =========== =========== =========== Non-performing: Residential servicing .................. $ 2,638,235 35,585 $ 318,652 5,068 $ 2,956,887 40,653 Commercial servicing ................... -- -- 156,599 200 156,599 200 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,638,235 35,585 $ 475,251 5,268 $ 3,113,486 40,853 =========== =========== =========== =========== =========== =========== Total loans serviced for others: Residential servicing .................. $20,706,777 278,249 $ 1,245,319 23,403 $21,952,096 301,652 Commercial servicing ................... -- -- 1,211,916 1,901 1,211,916 1,901 ----------- ----------- ----------- ----------- ----------- ----------- $20,706,777 278,249 $ 2,457,235 25,304 $23,164,012 303,553 =========== =========== =========== =========== =========== =========== (1) Subprime loans represent loans we service that were made by others to borrowers who did not qualify under guidelines of the FNMA and FHLMC ("nonconforming loans"). Loss on Interest Earning Assets, Net. For the three months ended June 30, 2002, the net loss we incurred on interest-earning assets is primarily comprised of $(472) of losses from sales of single family loans and $(541) of losses we incurred on sales of commercial loans. Net gain on interest-earning assets for the three months ended June 30, 2001 resulted primarily from gains of $1,114 from sales of single family loans offset in part by losses of $(732) incurred on sales of commercial loans. For the six months ended June 30, 2002, the net loss we incurred on interest-earning assets is primarily comprised of $(2,822) of losses on the sale of single family loans and $(541) of losses from sales of commercial loans. Net loss on interest-earning assets for the six months ended June 30, 2001 resulted primarily from losses of $(2,631) incurred on sales of commercial loans, offset by gains of $1,114 from the sale of single family loans. 34

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Gain on Trading and Match Funded Securities, Net. The gain on trading and match funded securities, net, includes both unrealized gains and losses on securities and realized gains and losses resulting from sales thereof. Changes in fair value are reported in income in the period of change. Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Unrealized gain (loss): Trading securities.................................................. $ 663 $ (912) $ (1,191) $ 2,734 Match funded securities............................................. 96 331 273 1,596 --------- --------- --------- --------- 759 (581) (918) 4,330 --------- --------- --------- --------- Realized gain (loss): Trading securities.................................................. (598) 5,131 3,871 5,408 Match funded securities............................................. -- -- -- -- --------- --------- --------- --------- (598) 5,131 3,871 5,408 --------- --------- --------- --------- $ 161 $ 4,550 $ 2,953 $ 9,739 ========= ========= ========= ========= Loss on Real Estate Owned, Net. The following table sets forth the results of our real estate owned (which does not include investments in real estate that are discussed below), during the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Gains on sales........................................................ $ 1,002 $ 3,147 $ 2,563 $ 9,523 Provision for losses in fair value.................................... (12,954) (3,522) (19,076) (9,703) Carrying costs, net................................................... 94 (1,510) 543 (2,910) --------- --------- --------- --------- Loss on real estate owned, net........................................ $ (11,858) $ (1,885) $ (15,970) $ (3,090) ========= ========= ========= ========= See "Changes in Financial Condition - Real Estate Owned" for additional information regarding real estate owned and related reserves for losses in fair value. Net Operating Gains on Investments in Real Estate. The following table sets forth the results of our investment in real estate operations during the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Operating income, net (1)............................................. $ 833 $ 2,799 $ 2,069 $ 4,268 Equity in earnings of loans accounted for as investments in real estate (2)......................................................... 491 (838) 3,909 468 Impairment charges (3)................................................ (15,317) (1,471) (15,317) (1,471) --------- --------- --------- --------- $ (13,993) $ 490 $ (9,339) $ 3,265 ========= ========= ========= ========= (1) Operating income declined principally because, in the second quarter of 2001, we received past-due rent of approximately $1,600 from a tenant of an office building in Jacksonville, Florida, as a result of a settlement agreement with the tenant. (2) The increase in equity in earnings related to certain loans accounted for as investments in real estate is primarily due to the repayment of loans during the first quarter of 2002, which generated significant resolution gains. (3) In 2002, impairment charges principally represent write-downs totaling $14,549 of the carrying value of our remaining properties held for investment. In 2001, the charges represent the write-down of the carrying value of our investment in a property that was sold in 2002. These changes were recorded to reduce the carrying value of these properties to our estimate of their net realizable values. See "Changes in Financial Condition - Investments in Real Estate." Amortization of Excess of Net Assets Acquired over Purchase Price. The amortization of excess of net assets acquired over purchase price resulted from our acquisition of OAC on October 7, 1999. The acquisition resulted in an excess of net assets acquired over purchase price of $60,042, which was amortized on a straight-line basis through 2001. Effective January 1, 2002, upon adoption of 35

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- SFAS No. 142, we reversed the unamortized balance of $18,333 to income as the effect of a change in accounting principle as required by this statement. See Note 3 to our Interim Consolidated Financial Statements included in Item 1. Gain on Repurchase of Debt. The following table sets forth the components of the net gains resulting from repurchases of our debt securities during the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Capital Securities: Face amount repurchased............................................ $ 4,910 $ 2,526 $ 4,910 $ 18,371 ========= ========= ========= ========= Gain............................................................... $ 1,074 $ 385 $ 1,074 $ 3,722 ========= ========= ========= ========= 11.875% Notes due October 1, 2003: Face amount repurchased............................................ $ 500 $ -- $ 725 $ 4,200 ========= ========= ========= ========= Loss............................................................... $ (4) $ -- $ -- $ 97 ========= ========= ========= ========= Total Debt Repurchases: Face amount repurchased............................................ $ 5,410 $ 2,526 $ 5,635 $ 22,571 ========= ========= ========= ========= Net gain........................................................... $ 1,070 $ 385 $ 1,074 $ 3,819 ========= ========= ========= ========= Other income. Other income is primarily comprised of revenues generated from collections of unsecured receivables, consulting revenues generated by a joint venture in Jamaica, real estate commissions from the sale of real estate owned properties and software revenue. The increase in other income during 2002 as compared to the prior year was primarily due to the revenues we generated from collections of unsecured receivables that are accounted for under the cost recovery method and that had been reduced to zero as of December 31, 2001 through collections and reserves. Non-Interest Expense. The following table sets forth the principal components of our non-interest expense during the periods indicated: Three Months Six Months ------------------------ ------------------------ For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- ---------- ---------- ---------- ---------- Compensation and employee benefits.................................. $ 19,708 $ 21,309 $ 40,781 $ 42,244 Occupancy and equipment............................................. 3,331 3,174 6,045 6,267 Technology and communication costs.................................. 6,009 5,556 11,061 15,704 Loan expenses....................................................... 3,436 2,835 7,371 7,070 Net operating losses on investments in affordable housing properties........................................................ 6,228 2,756 21,910 7,818 Amortization of excess of purchase price over net assets acquired... -- 778 -- 1,556 Professional services and regulatory fees........................... 3,172 3,934 7,768 7,750 Other operating expenses............................................ 2,615 2,514 4,590 5,303 ---------- ---------- ---------- ---------- $ 44,499 $ 42,856 $ 99,526 $ 93,712 ========== ========== ========== ========== 36

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Compensation and Employee Benefits. The following table presents the principal components of compensation and benefits we incurred for the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Salaries (1).......................................................... $ 13,765 $ 14,534 $ 27,847 $ 27,933 Bonuses (2)........................................................... 2,187 2,294 4,582 4,564 Payroll taxes......................................................... 1,092 1,223 2,609 2,782 Commissions........................................................... 1,148 1,165 2,022 2,159 Insurance............................................................. 718 699 1,386 1,518 Severance............................................................. 93 212 601 913 Contract programmers.................................................. 144 253 389 745 Relocation............................................................ 129 345 248 492 Other................................................................. 432 584 1,097 1,138 --------- --------- --------- --------- $ 19,708 $ 21,309 $ 40,781 $ 42,244 ========= ========= ========= ========= (1) Salaries includes fees paid for the services of temporary employees. (2) Bonus expense includes compensation related to stock options we granted to employees at an exercise price below fair market value. Occupancy and Equipment. Occupancy and equipment costs consist principally of rents, depreciation, mail and delivery expenses and other costs of our office operations. Technology and Communication Costs. Technology and communication costs consist primarily of depreciation on our computer hardware and software, technology-related consulting fees (primarily OTX), imaging and telephone expenses. Technology cost for the first quarter of 2001 included $4,685 of one-time expense comprised primarily of a $3,185 payment related to the acquisition of an OTX subsidiary in 1997. Loan Expenses. Loan expenses are largely comprised of appraisal fees incurred in connection with property valuation services we provided through ORA. Net Operating Losses on Investments in Affordable Housing Properties. The increase in net operating losses we recorded on investments in affordable housing properties during 2002 is primarily the result of charges we recorded in the amount of $2,054 and $17,350 during the three and six months ended June 30, 2002, respectively, as compared to $2,490 and $7,358, respectively, for the same periods of the prior year. These charges represent expected losses from the sale of properties and reflect revisions to completion cost estimates and modifications to projected sales results. Losses for 2002 also include a $3,944 charge to record a discount on a long-term sale of seven properties during the second quarter. This discount will be accreted to income over the term of the related receivable balance, which extends through June 2014. Professional Services and Regulatory Fees. Professional services and regulatory fees are primarily comprised of non-technology related consulting fees, legal and audit fees and FDIC insurance. Other Operating Expenses. Other operating expenses include travel costs, check processing costs, marketing costs and amortization of deferred costs. Distributions on Company Obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company. Cash distributions on the Capital Securities are payable semi-annually in arrears on February 1 and August 1 of each year at an annual rate of 10.875%. We recorded $1,566 and $1,697 of distributions to holders of the Capital Securities during the three months ended June 30, 2002 and 2001, respectively, and $3,229 and $3,750 during the six months ended June 30, 2002 and 2001, respectively. The decline in distributions is the result of repurchases during 2002 and 2001. See Note 4 to the Interim Consolidated Financial Statements included in Item 1 (which is incorporated herein by reference) and "Changes in Financial Condition - Company-Obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company." 37

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Income Tax Expense (Benefit). The following table provides details of our income tax expense (benefit) and effective tax rates for the periods indicated: Three Months Six Months ------------------------ ------------------------ For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- ---------- ---------- ---------- ---------- Income tax expense on loss before taxes and effect of change in accounting principle............................................... $ (18,197) $ (7,420) $ (25,879) $ (11,800) Provision for valuation allowance on current year's deferred tax asset 18,197 10,387 27,045 11,800 Provision for valuation allowance on prior year's deferred tax asset.. -- 8,000 -- 18,000 ---------- ---------- ---------- ---------- Income tax expense................................................. -- 10,967 1,166 18,000 Income tax benefit on effect of change in accounting principle........ -- -- (1,166) -- ---------- ---------- ---------- ---------- Total income tax expense.............................................. $ -- $ 10,967 $ -- $ 18,000 ========== ========== ========== ========== For the three months ended June 30, 2002, our effective tax rate was 0%. The provision for valuation allowance on current year's deferred tax asset in the second quarter of 2001 includes $2,967 to provide for the current year's deferred tax asset recognized in the first quarter of 2001. Income tax expense includes the effects of tax credits of $628 and $657 during the three months ended June 30, 2002 and 2001, respectively, resulting from our investment in affordable housing properties. For the six months ended June 30, 2002, our effective tax rate was 0%. Income tax expense of $1,166 offsets the benefit of $1,166 related to the effect of the change in accounting principle recorded during the quarter. Income tax expense includes the effects of tax credits of $1,487 and $952 during the six months ended June 30, 2002 and 2001, respectively, resulting from our investment in affordable housing properties. The provision for deferred tax asset valuation allowance is a non-cash charge increasing the aggregate valuation allowance based on our estimate under the applicable accounting rules of the amount of the deferred tax asset that we are more likely than not to realize. Changes in Financial Condition Trading Securities. The following table sets forth the fair value of our trading securities at the dates indicated: June 30, December 31, 2002 2001 ------------ ------------ Mortgage-related securities: Collateralized mortgage obligations (AAA-rated) (1).................................. $ 90,338 $ 161,191 ============ ============ Subordinates and residuals (2): Single family residential: BB-rated subordinates........................................................... 611 625 B-rated subordinates............................................................ 762 799 Unrated subordinates........................................................... 767 1,008 Unrated subprime residuals...................................................... 36,493 60,049 ------------ ------------ 38,633 62,481 Multi-family residential and commercial unrated subordinates.................... 2,577 2,577 ------------ ------------ $ 41,210 $ 65,058 ============ ============ (1) During the six months ended June 30, 2002, CMO trading securities declined $70,853. This decline was primarily due to $140,276 of maturities and principal repayments offset in part by purchases of $70,964. (2) During the six months ended June 30, 2002, subordinate and residual trading securities declined by $23,848. This decline was primarily due to $26,023 of sales. Residual and subordinate securities at June 30, 2002 and December 31, 2001 include retained interests with a fair value of $1,967 and $25,274, respectively, from securitizations of loans that we completed in prior years. We determine the present value of anticipated cash flows utilizing valuation 38

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- assumptions appropriate for each particular transaction. The significant valuation assumptions have included the anticipated prepayment speeds and the anticipated credit losses related to the underlying mortgages. In order to determine the present value of this estimated excess cash flow, we currently apply a discount rate of 9.63% to 25.00% to the projected cash flows on the unrated classes of securities. The annual prepayment rate of the securitized loans is a function of full and partial prepayments and defaults. We make assumptions as to the prepayment rates of the underlying loans, which we believe are reasonable, in estimating fair values of the subordinate securities and residual securities retained. During 2002, we utilized proprietary prepayment curves (reaching an approximate range of annualized rates of 14.60% to 18.62%). During 2002, we estimated annual losses of between 0.76% and 4.92% of the unpaid principal balance of the underlying loans. Subordinate and residual interests are affected by the rate and timing of payments of principal (including prepayments, repurchase, defaults and liquidations) on the mortgage loans underlying a series of mortgage-related securities. The rate of principal payments may vary significantly over time depending on a variety of factors, such as the level of prevailing mortgage loan interest rates and economic, demographic, tax, legal and other factors. Prepayments on the mortgage loans underlying a series of mortgage-related securities are generally allocated to the more senior classes of mortgage-related securities. Although in the absence of defaults or interest shortfalls all subordinates receive interest, amounts otherwise allocable to residuals generally are used to make payments on more senior classes or to fund a reserve account for the protection of senior classes until overcollateralization or the balance in the reserve account reaches a specified level. In general, in periods of declining interest rates, rates of prepayments on mortgage loans generally increase, and if the rate of prepayments is faster than anticipated, then the yield on subordinates will be positively affected and the yield on residuals will be negatively affected. We periodically assess the carrying value of our subordinate securities and residual securities retained. There can be no assurance that our estimates used to determine the value of the subordinate securities and residual securities retained will remain appropriate for the life of each securitization. If actual loan prepayments or defaults exceed our estimates, the carrying value of our subordinate securities and residual securities retained may be decreased during the period our management recognizes the disparity. Other factors may also result in a write-down of our subordinate securities and residual securities in subsequent months. 39

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table presents information regarding our subordinate and residual trading securities summarized by classification and rating at June 30, 2002: Anticipated Original Anticipated Weighted Anticipated Yield to Average Prospective Percent Yield to Maturity at Remaining Yield at Rating/Description (1) Fair Value Owned Maturity (2) 6/30/02 (3) Coupon Life (4) 6/30/02 (5) - ---------------------------------- ------------ ---------- ------------- ------------- ---------- -------------- ------------- Single-family residential: BB-rated subordinates...... $ 611 100.00% 16.80% 7.15% 6.63% 2.74 72.45% B-rated subordinates....... 762 100.00 17.49 27.88 7.02 1.96 73.15 Unrated subordinates....... 767 99.87 15.44 21.01 7.21 0.31 106.88 Unrated subprime residuals. 36,493 100.00 19.65 28.85 N/A 4.87 61.53 ---------- 38,633 Commercial: Unrated subordinates....... 2,577 25.00 22.15 12.10 N/A 1.35 14.06 ---------- $ 41,210 ========== N/A - Not Available (1) Refers to the credit rating designated by the rating agency for each securitization transaction. Classes designated "A" have a superior claim on payment to those rated "B", which are superior to those rated "C." Additionally, multiple letters have a superior claim to designations with fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior to "B." The lower class designations in any securitization will receive interest payments after senior classes and will experience losses before any senior class. The lowest potential class designation is unrated which, if included in a securitization, will always receive interest last and experience losses first. (2) Represents the effective yield from inception to maturity based on the purchase price and anticipated future cash flows under pricing assumptions. (3) Represents the effective yield based on the purchase price, actual cash flows received from inception until the respective date, and the then current estimate of future cash flows under the assumptions at the respective date. Changes in the June 30, 2002 anticipated yield to maturity from that originally anticipated are primarily the result of changes in prepayment assumptions and loss assumptions. (4) Represents the weighted average life based on the June 30, 2002 book value. (5) Represents the effective yield based on the book value of the investment and the then current estimate of the future cash flows under assumptions at the respective date. Prospective yields are considerably higher than the anticipated yield to maturity because book values include impairments recorded on the securities when they were classified as available for sale. The following table sets forth the principal amount of mortgage loans by the geographic location of the property securing the mortgages that underlie our subordinate and residual trading securities at June 30, 2002: Description U.K. California New Jersey Texas New York Other (1) Total - ----------- --------- ---------- ---------- --------- ---------- ---------- ---------- Single family residential...... $ 101,453 $ 69,858 $ 39,508 $ 38,918 $ 38,557 $ 326,222 $ 614,516 Commercial..................... -- 16,846 -- -- -- 42,484 59,330 Multi-family................... -- -- 206 -- -- 285 491 --------- ---------- ---------- --------- ---------- ---------- ---------- Total ......................... $ 101,453 $ 86,704 $ 39,714 $ 38,918 $ 38,557 $ 368,991 $ 674,337 ========= ========== ========== ========= ========== ========== ========== Percentage (2)................. 15.04% 12.86% 5.89% 5.77% 5.72% 54.72% 100.00% ========= ========== ========== ========= ========== ========== ========== (1) Consists of properties located in 46 other states, none of which aggregated over $37,385 in any one state. (2) Based on a percentage of the total unpaid principal balance of the underlying loans. 40

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Real Estate Held for Sale. Our real estate held for sale at December 31, 2001 consisted of three assisted living facilities with a carrying value of $13,418. These properties were sold during the first quarter of 2002 for a gain of $677. Investments in Real Estate. Our investment in real estate consisted of the following at the dates indicated: June 30, December 31, 2002 2001 ----------- ----------- Properties held for investment: Office buildings................................................................... $ 27,592 $ 32,132 Retail............................................................................. 9,452 29,637 Building improvements.............................................................. 16,453 17,513 Tenant improvements and lease commissions.......................................... 1,650 4,537 Furniture and fixtures............................................................. 55 52 ----------- ----------- 55,202 83,871 Accumulated depreciation........................................................... (4,687) (5,327) ----------- ----------- 50,515 78,544 ----------- ----------- Loans accounted for as investments in real estate: Nonresidential..................................................................... 2,172 30,436 ----------- ----------- Investment in real estate partnerships................................................ 6,911 7,916 ----------- ----------- $ 59,598 $ 116,896 =========== =========== Properties Held for Investment. Properties held for investment at June 30, 2002 consisted of one office building (approximately 95.65% leased) located in Jacksonville, Florida and one shopping center (approximately 64.25% leased) located in Halifax, Nova Scotia. The $28,029 decline in the aggregate net carrying value of our investments in real estate during 2002 was primarily due to the sale of our shopping center in Bradenton, Florida, which had a carrying value of $19,902, impairment charges of $14,459 to reduce the properties to our estimate of their net realizable value, offset in part by $7,627 of capitalized improvements. Loans Accounted for as Investments in Real Estate. We acquired certain acquisition, development and construction loans in January 2000 in which we participate in the expected residual profits of the underlying real estate, and where the borrower has not contributed substantial equity to the project. As such, we have accounted for these loans under the equity method of accounting as though we had an investment in a real estate limited partnership. The decline in the balance during 2002 is primarily due to repayments of loans. Investments in Real Estate Partnerships. Consists of interests in four limited partnerships operating as real estate ventures, consisting of multi-family type properties. The decline in carrying value during 2002 is primarily the result of a $768 impairment write-down recorded during the second quarter. Affordable Housing Properties. We invested in multi-family residential projects that have been allocated low-income housing tax credits under Section 42 of the Internal Revenue Code of 1986, as amended, by a state tax credit allocating agency. The carrying values of our investments in affordable housing properties are as follows at the dates indicated: June 30, December 31, 2002 2001 ----------- ----------- Properties subject to sales agreements (1)....... $ 19,064 $ 49,893 Properties not yet sold.......................... 18,877 52,176 ----------- ----------- Total....................................... $ 37,941 $ 102,069 =========== =========== (1) These sales agreements have not yet met all the accounting criteria to qualify for sales treatment. The decline in the balances during the six months ended June 30, 2002 was primarily due to sales of projects with a book value of approximately $49,334 and loss provisions of $17,350 (including $2,054 during the second quarter) to reserve for estimated losses from future sales, offset by additional investments in projects under construction of approximately $3,288. 41

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The qualified affordable housing projects underlying our investments in low-income housing tax credit interests are geographically located throughout the United States. At June 30, 2002, our largest single investment was $10,743, which relates to a project located in North Wildwood, N.J. Low-income housing tax credit partnerships in which we invest both as a limited and, through a subsidiary, as general partner are presented on a consolidated basis and totaled $35,550 and $73,463 at June 30, 2002 and December 31, 2001, respectively. We recorded a loss from operations after depreciation of $6,228 and $2,756 for the three months ended June 30, 2002 and 2001, respectively, and $21,910 and $7,818 for the six months ended June 30, 2002 and 2001, respectively, including the $17,350 of loss provisions and the $3,944 charge to record a discount on the long-term sale of seven properties with a book value of $29,124. Loans, Net. The following table sets forth the composition of our loans, net, by portfolio type at the dates indicated: June 30, December 31, 2002 2001 -------------- -------------- Discount loan portfolio................................................................... $ 64,957 $ 119,327 Loan portfolio............................................................................ 56,978 64,925 Loans available for sale.................................................................. 74 1,041 -------------- -------------- $ 122,009 $ 185,293 ============== ============== Composition of Loans, Net. The following table sets forth the composition of our loans by type of loan at the dates indicated: June 30, December 31, 2002 2001 -------------- -------------- Single family residential loans........................................................... $ 3,122 $ 58,118 -------------- -------------- Multi-family residential loans............................................................ 37,530 33,319 -------------- -------------- Commercial real estate loans: Office buildings..................................................................... 52,636 56,713 Hotels............................................................................... 28,938 38,576 Retail properties.................................................................... 30,129 47,492 Other properties..................................................................... 1,038 607 -------------- -------------- 112,741 143,388 -------------- -------------- Other loans............................................................................... 200 231 -------------- -------------- 153,593 235,056 -------------- -------------- Unaccreted discount and deferred fees: Single family residential loans...................................................... (1,128) (16,467) Multi-family residential loans....................................................... (564) (650) Commercial real estate and other loans............................................... (10,213) (19,318) -------------- -------------- (11,905) (36,435) -------------- -------------- 141,688 198,621 Undisbursed loan funds.................................................................... (1,151) (2,914) Allowance for loan losses................................................................. (18,528) (10,414) -------------- -------------- Loans, net................................................................................ $ 122,009 $ 185,293 ============== ============== 42

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Loans are secured by mortgages on property located throughout the United States. The following table sets forth the five states in which the largest amount of properties securing our loans were located at June 30, 2002: Commercial Single Family Multi-Family Real Estate Residential Residential and Other Total ------------ ------------ ------------ ------------ New York..................................... $ 195 $ -- $ 43,111 $ 43,306 Wisconsin.................................... -- -- 34,222 34,222 Connecticut.................................. 75 -- 11,705 11,780 California................................... 11 8,563 -- 8,574 Florida...................................... 142 5,644 1,824 7,610 Other (1).................................... 1,571 22,759 11,866 36,196 ------------ ------------ ------------ ------------ Total..................................... $ 1,994 $ 36,966 $ 102,728 $ 141,688 ============ ============ ============ ============ (1) Consists of properties located in 19 other states, none of which aggregated over $7,318 in any one state. Activity in Loans. The following table sets forth our loan activity during the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Amount: Balance at beginning of period........................................ $ 150,557 $ 527,728 $ 185,293 $ 640,052 Originations (1): Single-family residential loans.................................... 879 -- 879 -- Multi-family residential loans..................................... -- -- 9,501 -- Commercial real estate loans and other............................. -- 2,916 7,068 13,959 --------- --------- --------- --------- 879 2,916 17,448 13,959 --------- --------- --------- --------- Resolutions and repayments (2)........................................ (2,700) (24,217) (21,692) (68,409) Loans transferred to real estate owned................................ (5,877) (15,417) (13,215) (65,552) Sales................................................................. (14,172) (113,086) (64,002) (170,837) Decrease (increase) in undisbursed loan proceeds...................... 1,066 (612) 1,762 4,943 Decrease in discount and deferred fees................................ 2,909 18,362 24,531 39,681 Increase in allowance for loan losses................................. (10,653) (7,177) (8,116) (5,340) --------- --------- --------- --------- Balance at end of period.............................................. $ 122,009 $ 388,497 $ 122,009 $ 388,497 ========= ========= ========= ========= (1) Multifamily and commercial real estate originations represent loans made to facilitate sales of our own assets and fundings of construction loans we originated in prior years. The total includes a loan of $9,153 that we made to facilitate the sale of three assisted living facilities during the first quarter of 2002. Single-family originations represents repurchases of loans previously sold. (2) Resolutions and repayments consists of loans that were resolved in a manner that resulted in partial or full repayment of the loan to us, as well as principal payments on loans that have been brought current in accordance with their original or modified terms (whether pursuant to forbearance agreements or otherwise) or on other loans that have not been resolved. 43

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table sets forth certain information relating to our non-performing loans at the dates indicated: June 30, December 31, 2002 2001 ------------ ------------ Non-performing loans (1): Single family residential loans............................................ $ 1,832 $ 32,430 Multi-family residential loans............................................. 25,959 23,637 Commercial real estate and other........................................... 32,887 38,240 ------------ ------------ Total................................................................... $ 60,678 $ 94,307 ============ ============ Non-performing loans as a percentage of (1): Total loans (2)............................................................ 43.18% 48.19% Total assets............................................................... 4.36% 5.51% Allowance for loan losses as a percentage of: Total loans (2)............................................................ 13.18% 5.32% Non-performing loans (1)................................................... 30.53% 11.04% (1) Loans that are contractually past due 90 days or more in accordance with the original terms of the loan agreement. (2) Total loans are net of unaccreted discount, unamortized deferred fees and undisbursed loan funds. See "Changes in Financial Condition - Allowance for Loan Losses" below for additional information regarding the allowance for loan losses. Match Funded Assets. Match funded assets are comprised of the following at the dates indicated: June 30, December 31, 2002 2001 ------------- ------------- Single family residential loans (1)................................................... $ 44,599 $ 53,123 Allowance for loan losses............................................................. (218) (170) ------------- ------------- Match funded loans, net.............................................................. 44,381 52,953 ------------- ------------- Match funded securities............................................................... 14,899 19,435 ------------- ------------- Match funded advances on loans serviced for others: Principal and interest............................................................... 61,288 65,705 Taxes and insurance.................................................................. 26,047 21,900 Other................................................................................ 12,605 14,358 ------------- ------------- 99,940 101,963 ------------- ------------- $ 159,220 $ 174,351 ============= ============= (1) Includes $3,222 and $4,405 of non-performing loans at June 30, 2002 and December 31, 2001, respectively. Match funded loans were securitized and transferred by OAC to a real estate mortgage investment conduit on November 13, 1998. The transfer did not qualify as a sale for accounting purposes. Accordingly, we recorded the proceeds that we received from the transfer as a liability (bonds-match funded agreements). The $8,524 decline in the balance during the first half of 2002 was largely due to repayment of loan principal. 44

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The match funded loans are secured by mortgages on properties located throughout the United States. The following table sets forth the five states in which the largest amount of properties securing our loans were located at June 30, 2002: Michigan.................................................. $ 7,453 Texas..................................................... 3,968 California................................................ 3,730 Florida................................................... 2,764 Massachusetts............................................. 2,569 Other (1)................................................. 24,115 --------------- Total..................................................... $ 44,599 =============== (1) Consists of properties located in 37 other states, none of which aggregated over $2,182 in any one state. Match funded securities resulted from our transfer of four unrated residual securities to a trust on December 16, 1999 in exchange for non-recourse notes. The transfer did not qualify as a sale for accounting purposes. Accordingly, we reported the amount of proceeds we received from the transfer as a secured borrowing with pledge of collateral (bonds-match funded agreements). The decline of $4,536 in the balance during the first half of 2002 was primarily due to principal repayments. The following table presents information regarding our match funded securities at June 30, 2002: Anticipated Original Anticipated Weighted Anticipated Yield to Average Prospective Yield to Maturity at Remaining Yield at Fair Value Percent Owned Maturity 6/30/02 (1) Coupon Life(2) 6/30/02 ---------- ------------- -------- ----------- ------ ------- ------- Unrated residuals.............. $ 14,899 100.00% 17.39% 3.91% N/A 9.05 11.38% ======== N/A - Not Available (1) Changes in the June 30, 2002 anticipated yield to maturity from that originally anticipated are primarily the result of changes in prepayment assumptions and, to a lesser extent, loss assumptions. (2) Equals the weighted average duration based on the June 30, 2002 book value. The following table sets forth the principal amount of mortgage loans by the geographic location of the property securing the mortgages that underlie our match-funded securities at June 30, 2002: Description California Florida Illinois New York Oregon Other (1) Total - ----------- ---------- --------- --------- ---------- --------- ---------- ---------- Single family residential..... $ 34,679 $ 27,310 $ 11,639 $ 9,851 $ 9,438 $ 137,471 $ 230,388 Multi-family.................. 1,316 314 612 601 -- 4,045 6,888 ---------- --------- --------- ---------- --------- ---------- ---------- Total ........................ $ 35,995 $ 27,624 $ 12,251 $ 10,452 $ 9,438 $ 141,516 $ 237,276 ========== ========= ========= ========== ========= ========== ========== Percentage (2)................ 15.17% 11.64% 5.16% 4.40% 3.98% 59.65% 100.00% ========== ========= ========= ========== ========= ========== ========== (1) Consists of properties located in 44 other states, none of which aggregated over $9,104 in any one state. (2) Based on a percentage of the total unpaid principal balance of the underlying loans. Match funded advances on loans serviced for others resulted from our transfer of certain residential loan servicing related advances to a third party in exchange for cash in 2001. The original and subsequent transfers did not qualify as a sale for accounting purposes. Accordingly, we report the amount of proceeds we received from the sale as a secured borrowing with pledge of collateral (bonds-match funded agreements.) See "Bonds-Match Funded Agreements." 45

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Allowances for Loan Losses. We maintain an allowance for loan losses for each of our loan and match funded loan portfolios at a level that we consider adequate to provide for inherent losses in each portfolio based upon an ongoing evaluation of known and inherent risks in such portfolios. The following table sets forth the breakdown of the allowance for loan losses on our loans and match funded loans by loan category and the percentage of allowance and loans in each category to totals in the respective portfolios at the dates indicated: June 30, 2002 December 31, 2001 -------------------------------------------- -------------------------------------------- Allowance Loan Balance Allowance Loan Balance -------------------- -------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent -------- -------- -------- -------- -------- -------- -------- -------- Loans: Single family ........ $ 176 1.0% $ 1,994 1.4% $ 3,401 32.7% $ 41,651 21.3% Multi-family ......... 7,789 42.0 36,455 25.9 2,186 21.0 31,239 16.0 Commercial real estate and other .......... 10,563 57.0 102,088 72.7 4,827 46.3 122,817 62.7 -------- -------- -------- -------- -------- -------- -------- -------- $ 18,528 100.0% $140,537 100.0% $ 10,414 100.0% $195,707 100.0% ======== ======== ======== ======== ======== ======== ======== ======== Match funded loans: Single family ........ $ 218 100.0% $ 44,599 100.0% $ 170 100.0% $ 53,123 100.0% ======== ======== ======== ======== ======== ======== ======== ======== The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict 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 our loans and match funded loans during the six months ended June 30, 2002: Balance Balance December 31, June 30, 2001 Provision Charge-offs Recoveries 2002 ------------ ---------- ----------- ---------- ---------- Loans: Single family............................. $ 3,401 $ (2,601) $ (875) $ 251 $ 176 Multi-family.............................. 2,186 5,836 (233) -- 7,789 Commercial real estate and other.......... 4,827 8,128 (2,549) 157 10,563 ---------- ---------- ---------- ---------- ---------- $ 10,414 $ 11,363 $ (3,657) $ 408 $ 18,528 ========== ========== ========== ========== ========== Match funded loans: Single family............................. $ 170 $ 48 $ -- $ -- $ 218 ========== ========== ========== ========== ========== Real Estate Owned, Net. Real estate owned consists almost entirely of properties acquired by foreclosure or deed-in-lieu thereof on loans in our discount loan portfolio. The following table sets forth certain information relating to our real estate owned at the dates indicated: June 30, December 31, 2002 2001 ------------ ------------ Single family residential................... $ 4,788 $ 16,424 Commercial real estate...................... 79,313 94,041 ------------ ------------ Total.................................... $ 84,101 $ 110,465 ============ ============ 46

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table sets forth certain geographical information by type of property at June 30, 2002 related to our real estate owned: Single Family Residential Commercial Real Estate Total ------------------------- ------------------------ ------------------------ No. of No. of No. of Amount Properties Amount Properties Amount Properties ---------- ---------- ---------- ---------- ---------- ---------- Florida................................. $ -- -- $ 41,527 3 $ 41,527 3 Michigan................................ 298 8 18,612 1 18,810 9 Georgia................................. 270 2 12,520 1 12,790 3 Minnesota............................... 8 1 4,398 1 4,406 2 Washington.............................. -- -- 1,720 1 1,720 1 Other (1)............................... 4,212 113 536 1 4,748 114 --------- -------- --------- -------- --------- -------- Total................................ $ 4,788 124 $ 79,313 8 $ 84,101 132 ========= ======== ========= ======== ========= ======== (1) Consists of properties located in 26 other states, none of which aggregated over $994 in any one state. The following tables set forth the activity in the real estate owned during the periods indicated: Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Amount: Balance at beginning of period........................................ $ 100,490 $ 136,267 $ 110,465 $ 146,419 Properties acquired through foreclosure or deed-in-lieu thereof: Loans............................................................... 5,877 15,417 13,215 65,552 Less discount transferred........................................... (2,596) (5,780) (5,854) (25,012) Add advances transferred............................................ 42 1,235 211 5,402 --------- --------- --------- --------- 103,813 147,139 118,037 192,361 --------- --------- --------- --------- Capital improvements.................................................. 806 5,640 1,592 7,246 Sales................................................................. (9,821) (23,830) (20,857) (72,906) Decrease (increase) in valuation allowance............................ (10,697) 93 (14,671) 2,341 --------- --------- --------- --------- Balance at end of period.............................................. $ 84,101 $ 129,042 $ 84,101 $ 129,042 ========= ========= ========= ========= Three Months Six Months ----------------------- ----------------------- For the periods ended June 30, 2002 2001 2002 2001 - ---------------------------------------------------------------------- --------- --------- --------- --------- Number of Properties: Balance at beginning of period........................................ 232 994 389 1,298 Properties acquired through foreclosure or deed-in-lieu thereof....... 4 220 19 563 Sales................................................................. (104) (471) (276) (1,118) --------- --------- --------- --------- Balance at end of period.............................................. 132 743 132 743 ========= ========= ========= ========= The following table sets forth the amount of time that we had held our real estate owned at the dates indicated: June 30, December 31, 2002 2001 ------------ ------------ One to two months........................... $ 28 $ 2,251 Three to four months........................ 159 1,655 Five to seven months........................ 261 2,244 Seven to 12 months.......................... 1,216 27,422 Over 12 months (1).......................... 82,437 76,893 ------------ ------------ $ 84,101 $ 110,465 ============ ============ (1) Real estate owned that we have held in excess of one year includes seven commercial properties with a carrying value of $79,314 at June 30, 2002, including a large retail property with a carrying value of $40,962. These properties are being repositioned for sale. 47

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- We actively manage our real estate owned. Sales of real estate owned resulted in losses, net of the provision for loss in fair value, of $(11,952) during the three months ended June 30, 2002 as compared to $(375) during the same period of the prior year. For the six month periods, net losses from sales were $(16,513) for 2002 and $(180) for 2001. The average period during which we held our real estate owned, which was sold during the three months ended June 30, 2002 and 2001, was 12 and 11 months, respectively. For sales that occurred during the six months ended June 30, 2002 and 2001, the average holding period was 11 and 9 months, respectively. The following table sets forth the activity, in aggregate, in the valuation allowances on real estate owned during the periods indicated: Three Months Six Months ---------------------- ---------------------- For the periods ended June 30, 2002 2001 2002 2001 - --------------------------------------------------------------------------- -------- -------- -------- -------- Balance at beginning of period............................................. $ 23,072 $ 15,894 $ 19,098 $ 18,142 Provisions for losses ..................................................... 12,954 3,522 19,076 9,703 Charge-offs and sales...................................................... (2,257) (3,615) (4,405) (12,044) -------- -------- -------- -------- Balance at end of period................................................... $ 33,769 $ 15,801 $ 33,769 $ 15,801 ======== ======== ======== ======== Valuation allowance as a percentage of total gross real estate owned (1)... 28.65% 10.91% (1) At December 31, 2001, the valuation allowance as a percentage of total gross real estate owned was 14.74%. This increase in the ratio reflects an increasing valuation allowance and a declining balance of gross real estate owned. The valuation allowance has not declined proportionately primarily because of the large commercial properties we are repositioning for sale, as discussed above. Advances on Loans and Loans Serviced for Others. Advances related to loan portfolios and loans serviced for others consisted of the following at the dates indicated: June 30, December 31, 2002 2001 ----------- ----------- Loan portfolios: Taxes and insurance....................... $ 153 $ 2,214 Other..................................... 1,254 4,135 ----------- ----------- 1,407 6,349 ----------- ----------- Loans serviced for others: Principal and interest.................... 70,506 107,319 Taxes and insurance....................... 96,039 99,972 Other..................................... 86,782 69,543 ---------- ---------- 253,327 276,834 ---------- ---------- $ 254,734 $ 283,183 ========== ========== Mortgage Servicing Rights. The unamortized balance of our mortgage servicing rights are predominantly residential and amounted to $133,677 and $101,107 at June 30, 2002 and December 31, 2001, respectively. The $32,570 increase during the six months ended June 30, 2002 was primarily due to $56,997 of purchases offset by $24,193 of amortization. Of the $56,997 of purchases during 2002, all were residential and $25,518 were acquired under flow agreements with third party lenders whereby we have committed to purchase newly originated mortgage servicing rights up to an agreed upon amount. 48

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Deposits. The following table sets forth information related to our deposits at the dates indicated: June 30, 2002 December 31, 2001 -------------------------- ------------------------- % of Total % of Total Amount Deposits Amount Deposits ----------- ----------- ----------- ----------- Non-interest bearing checking accounts......................... $ 6,373 1.4% $ 5,624 0.9% NOW and money market checking accounts......................... 20,138 4.6 15,479 2.4 Savings accounts............................................... 1,711 0.4 1,287 0.2 ----------- ----------- ----------- ----------- 28,222 6.4 22,390 3.5 ----------- ----------- Certificates of deposit........................................ 414,618 636,037 Unamortized deferred fees...................................... (977) (1,549) ----------- ----------- Total certificates of deposit (1).............................. 413,641 93.6 634,488 96.5 ----------- ----------- ----------- ----------- Total deposits.............................................. $ 441,863 100.0% $ 656,878 100.0% =========== =========== =========== =========== (1) Certificates of deposit included $255,744 and $499,710 at June 30, 2002 and December 31, 2001, respectively, of deposits originated through national, regional and local investment banking firms that solicit deposits from their customers, all of which are non-cancelable. Certificates of deposit with a face value of $18,214, which carry an interest rate of 6% and mature December 16, 2008, are callable on their semiannual interest payment dates with thirty days notice. At June 30, 2002 and December 31, 2001, certificates of deposit with outstanding balances of $100 or more amounted to $89,459 and $82,771, respectively. Of the $89,459 of certificates of deposits with balances of $100 or more at June 30, 2002, $11,049 were from political subdivisions in New Jersey and secured or collateralized as required under state law. The remaining time until maturity of certificates of deposit with balances of $100 or more as of June 30, 2002 is as follows: Matures within three months................................. $ 39,740 Matures after three through six months...................... 14,181 Matures after six through twelve months..................... 24,254 Matures after twelve months................................. 11,284 ------------ $ 89,459 ============ Escrow Deposits on Loans and Loans Serviced for Others. Escrow deposits on our loans and loans we serviced for others amounted to $88,773 and $73,565 at June 30, 2002 and December 31, 2001, respectively. The balance consisted principally of custodial deposit balances representing collections we received from borrowers for the payment of taxes and insurance premiums on mortgage properties underlying loans we serviced for others. The balance increased during 2002 principally because of an increase in loans we serviced for others. See "Results of Operations - Non-Interest Income - Servicing and Other Fees." Bonds-Match Funded Agreements. Bonds-match funded agreements were comprised of the following at the dates indicated: June 30, December 31, 2002 2001 ------------ ------------ Collateral (Interest Rate) Single family loans (LIBOR plus 65 basis points) (1).................................... $ 19,965 $ 24,005 Single family loans (LIBOR plus 70 basis points (1)..................................... 17,728 22,140 Unrated residual securities (9.50%) (1)................................................. 14,987 18,997 Advances on loans serviced for others (LIBOR plus 160 basis points) (2)................. 93,534 91,766 ------------ ------------ $ 146,214 $ 156,908 ============ ============ (1) The decline in the balance outstanding during the six months ended June 30, 2002 was due to principal repayments, offset by amortization of discount. (2) Under the terms of the agreement, we are eligible to sell certain additional advances on loans serviced for others up to a maximum balance of $200,000. 49

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Obligations Outstanding Under Lines of Credit. We have obtained secured line of credit arrangements from unaffiliated financial institutions as follows at the dates indicated: Balance Amount of Committed Maturity Entity Outstanding Facility Amount Date Interest Rate(1) - ------------------------------------------ ------------- ------------- ------------- -------------- -------------------------- June 30, 2002: Advances on loans serviced for others $ 68,883 $ 100,000 $ 100,000 October 2002 LIBOR + 200 basis points ========== ========== ========== December 31, 2001: Real estate investments and commercial loans.............................. $ 32,463 $ 200,000 $ 115,580 June 2002 LIBOR + 240 basis points Advances on loans serviced for others 51,841 100,000 51,841 October 2002 LIBOR + 200 basis points ---------- ---------- ---------- $ 84,304 $ 300,000 $ 167,421 ========== ========== ========== (1) 1-month LIBOR was 1.84% and 1.87% at June 30, 2002 and December 31, 2001, respectively. Notes, Debentures and Other Interest-Bearing Obligations. Notes, debentures and other interest-bearing obligations mature as follows: June 30, December 31, 2002 2001 ----------- ----------- 2003: 11.875% Notes due October 1............................................................ $ 86,300 $ 87,025 Loan due September 30 (LIBOR plus 250 basis-points).................................... 4,235 -- 2004: Loan due May 24 (LIBOR plus 250 basis points).......................................... -- 6,235 2005: 12% Subordinated Debentures due June 15................................................ 67,000 67,000 11.5% Redeemable Notes due July 1...................................................... 45 45 ----------- ----------- $ 157,580 $ 160,305 =========== =========== The $725 decline in the balance of the 11.875% Notes during the six months ended June 30, 2002 is due to repurchases. See "Results of Operations - Gain on Repurchases of Debt." In connection with the sale of three assisted living facilities during the three months ended June 30, 2002, we repaid the loan due May 24, 2004 and entered into a new loan due September 30, 2003. The new loan is secured by the loan for $9,153 that we made to facilitate the sale of the assisted living facilities. See "Changes in Financial Condition - Loans, Net" and "- Real Estate Held for Sale." Company Obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company. The outstanding balance of the 10.875% Capital Securities due August 1, 2027 of $56,249 at June 30, 2002, declined $4,910 from December 31, 2001. During the second quarter of 2002, we repurchased $4,910 of Capital Securities in the open market for a gain of $1,074. See Note 4 to the Interim Consolidated Financial Statements included in Item 1 hereof (which is incorporated herein by reference). Minority Interest in Subsidiary. Minority interest of $1,625 at June 30, 2002, represents the investment by others in certain of our subisdiaries that we formed during the second quarter of 2002 to establish, license and operate distressed asset management servicing companies in various countries around the world. The minority interest represents 37% of the investment in these companies as of June 30, 2002. Stockholders' Equity. Stockholders' equity decreased $54,456 or 14% during the six months ended June 30, 2002. The decrease was primarily due to the net loss of $(54,690) for the first half of 2002. See Consolidated Statements of Changes in Stockholders' Equity of the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference). 50

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Liquidity, Commitments and Off-Balance Sheet Risks Our primary sources of funds for liquidity are: o Deposits o Maturities and payments received on loans, o FHLB advances securities and advances o Securities sold under agreements to repurchase o Proceeds from sales of assets o Lines of credit o Servicing fees o Match funded debt At June 30, 2002, we were eligible to borrow up to an aggregate of $79,443 from the FHLB of New York (based on the availability of acceptable collateral) and had $69,123 of short duration CMOs pledged as security for any such borrowings as of June 30, 2002. At June 30, 2002, we also had contractual relationships with eleven brokerage firms and the FHLB of New York pursuant to which we could obtain funds from securities sales under agreements to repurchase. In addition, under a match funding agreement that we entered into on December 20, 2001, we were eligible to sell advances on loans serviced for others up to a maximum debt balance of $200,000 at any one time. At June 30, 2002, we had $93,534 of bonds-match funded agreements outstanding under this facility, which is expected to mature in December 2003. The sales of advances did not qualify as sales for accounting purposes; therefore, we report them as secured borrowings with pledges of collateral. We will account for additional sales under this facility in the same manner. At June 30, 2002, we also had $227,603 of unrestricted cash and cash equivalents and $13,689 of short duration CMOs that we could use to secure additional borrowings. We had no outstanding FHLB advances at June 30, 2002. Securities we sold under agreements to repurchase from the FHLB amounted to $66,817 at June 30, 2002. We continuously monitor our liquidity position and ongoing funding requirements. Among the risks and challenges associated with our funding activities are the following: o At this time we do not intend to utilize brokered certificates of deposit, a significant portion of which mature during 2002, as a source of funding in the foreseeable future. o Scheduled maturities of all certificates of deposit for the 12 months ending June 30, 2003, the 12 months ended June 30, 2004 and thereafter amounted to $249,127, $87,316 and $77,551, respectively. o Expiration of existing collateralized lines of credit at various times through 2002. o Potential extension of resolution and sale timelines for non-core assets in the current weak economic environment. o Ongoing cash requirements to fund operations of our holding company and OTX. o Cash requirements to fund our acquisition of additional servicing rights and related advances, as well as the need to fund the unfinanced portion of our existing servicing advances. We believe that our existing sources of liquidity, including internally generated funds, will be adequate to fund our planned activities for the foreseeable future, although there can be no assurances in this regard. We continue to evaluate other sources of liquidity, such as lines of credit from unaffiliated parties, match funded debt and other secured borrowings. Our operating activities provided $162,820 and $102,044 of cash flows during the six months ended June 30, 2002 and 2001, respectively. Cash flows were provided primarily by proceeds from the sale of trading securities and maturities and principal repayments received thereon. The increase in net cash flows provided by operating activities during the six months ended June 30, 2002 as compared to the same period of the prior year, was due primarily to the decrease in cash used to fund advances and match funded advances on loans serviced by others offset by the decrease in cash provided by trading securities. Our investing activities provided cash flows totaling $66,302 and $241,905 during the six months ended June 30, 2002 and 2001, respectively. During these periods, cash flows from investing activities were used primarily to purchase mortgage servicing rights, fund commitments for loans, make capital improvements to real estate held for investment and purchase equipment. Cash flows from investing activities were provided primarily by proceeds from sales of and principal payments received on loans and proceeds from sales of real estate owned, real estate held for sale and real estate held for investment. The decrease in net cash provided by investing activities during the six months ended June 30, 2002 as compared to the same period of the prior year was due primarily to declines in proceeds from the sales of loans, proceeds from the sales of real estate owned and principal payments on loans. Our financing activities used cash flows of $245,404 and $186,787 during the six months ended June 30, 2002 and 2001, respectively. Cash flows from financing activities were primarily utilized to repay maturing deposits. The increase in cash flow used by financing activities is principally related to a decrease in cash from lines of credit offset by a decline in the amount of maturing deposits and repurchases of debt. 51

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The Bank was previously 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 (not less than 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less). Effective March 15, 2001 the OTS issued an interim final rule eliminating the 4% liquidity requirement. However, the rule continues to require that savings associations maintain sufficient liquidity to ensure its safe and sound operation. At June 30, 2002, we had commitments of $1,151 related to the funding of construction loans. Our management believes that we have adequate resources to fund all such unfunded commitments to the extent required and that substantially all of such unfunded commitments will be funded during 2002. See Note 9 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference). In addition to commitments to extend credit, we are party to various off-balance sheet financial instruments in the normal course of our business in order to manage our interest rate risk and foreign currency exchange rate risk. See Note 5 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference) and "Asset and Liability Management" included in Item 3 herein. Regulatory Capital and Other Requirements See Note 6 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated by reference). 52

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- Asset and Liability Management Asset and liability management is concerned with the timing and magnitude of the repricing of assets and liabilities. It is our objective to attempt to control risks associated with interest rate and foreign currency exchange rate movements. In general, management's strategy is to match asset and liability balances within maturity categories and to manage foreign currency rate exposure related to our investments in non-U.S. dollar functional currency operations in order to limit our exposure to earnings variations and variations in the value of assets and liabilities as interest rates and foreign currency exchange rates change over time. Our asset and liability management strategy is formulated and monitored by the Asset/Liability Management Committee (the "Committee"), which is composed of OCN's directors and officers, in accordance with policies approved by OCN's Board of Directors. The Committee meets to review, among other things, the sensitivity of our assets and liabilities to interest rate changes and foreign currency exchange 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 Committee also approves and establishes pricing and funding decisions with respect to overall asset and liability composition. The Committee's methods for evaluating interest rate risk include an analysis of our 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 our interest-earning assets and interest-bearing liabilities at June 30, 2002. 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: o 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, o Fixed-rate mortgage-related securities reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model that we use and empirical data, o Non-performing discount loans reflect the estimated timing of resolutions that result in repayment to us, o NOW and money market checking deposits and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on our detailed studies of each such category of deposit , and o Escrow deposits and other non-interest bearing checking accounts, which amounted to $95,146 at June 30, 2002, are excluded. 53

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- Our management believes that these assumptions approximate actual experience and considers them reasonable; however, the interest rate sensitivity of our assets and liabilities in the table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. June 30, 2002 ------------------------------------------------------------------------ Four to More Than Within Three Twelve One Year to Three Years Months Months Three Years and Over Total ------------ ------------ ------------ ------------ ------------ Rate-Sensitive Assets: Interest-earning deposits...................... $ 122,161 $ -- $ -- $ -- $ 122,161 Federal funds sold and repurchase agreements... 88,000 -- -- -- 88,000 Trading securities............................. 43,005 46,812 18,290 23,441 131,548 Loans, net (1)................................. 14,897 53,424 53,511 177 122,009 Investment securities, net..................... 7,105 -- -- -- 7,105 Match funded loans and securities (1).......... 2,585 5,317 11,046 40,332 59,280 ------------ ------------ ------------ ------------ ------------ Total rate-sensitive assets................... 277,753 105,553 82,847 63,950 530,103 ------------ ------------ ------------ ------------ ------------ Rate-Sensitive Liabilities: NOW and money market checking deposits......... 18,165 226 485 1,262 20,138 Savings deposits............................... 119 245 485 862 1,711 Certificates of deposit........................ 57,948 190,725 136,467 28,501 413,641 ------------ ------------ ------------ ------------ ------------ Total interest-bearing deposits................ 76,232 191,196 137,437 30,625 435,490 Securities sold under agreements to repurchase. 66,817 -- -- -- 66,817 Bond-match funded loan agreements.............. 134,802 5,824 5,588 -- 146,214 Obligations outstanding under lines of credit.. 68,883 -- -- -- 68,883 Notes, debentures and other.................... 4,235 -- 153,300 45 157,580 ------------ ------------ ------------ ------------ ------------ Total rate-sensitive liabilities.............. 350,969 197,020 296,325 30,670 874,984 ------------ ------------ ------------ ------------ ------------ Interest rate sensitivity gap excluding financial instruments.................................... (73,216) (91,467) (213,478) 33,280 (344,881) Financial Instruments: Interest rate caps............................... -- -- 6 -- 6 Interest rate floors............................. -- -- 349 -- 349 ------------- ------------- ------------ ------------- ------------ Total rate-sensitive financial instruments....... -- -- 355 -- 355 ------------- ------------- ------------ ------------- ------------ Interest rate sensitivity gap including financial instruments.................................... $ (73,216) $ (91,467) $ (213,123) $ 33,280 $ (344,526) ============ ============ ============ ============ ============ Cumulative interest rate sensitivity gap......... $ (73,216) $ (164,683) $ (377,806) $ (344,526) ============ ============ ============ ============ Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets...... (13.81)% (31.07)% (71.27)% (64.99)% (1) Balances have not been reduced for non-performing loans. We have experienced an increasingly large negative interest rate sensitivity gap in recent years. This change has been the result of both our acquisition of OAC and our change in strategic focus away from capital-intensive businesses and into fee-based sources of income. The result has been an increase in the relative amount of noninterest-bearing assets, such as real estate assets and loan servicing assets that are funded by interest-bearing liabilities. Consequently, the amount of the negative interest rate sensitivity gap may continue to increase as we continue the transition to fee-based businesses. The OTS has established specific minimum guidelines for thrift institutions to observe in the area of interest rate risk as described in Thrift Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to establish and demonstrate quarterly compliance with board-approved limits on interest rate risk that are defined in terms of net portfolio value ("NPV"), which is defined as the net present value of an institution's existing assets, liabilities and off-balance sheet instruments. These limits specify the minimum net portfolio value ratio ("NPV Ratio") allowable under current interest rates and hypothetical interest rate scenarios. An institution's NPV Ratio for a given interest rate scenario is calculated by dividing the NPV that would result in that scenario by the present value of the institution's assets in that same scenario. The hypothetical scenarios are represented by immediate, permanent, parallel movements (shocks) in the term structure of interest rates of plus and minus 100, 200 and 300 basis points from the actual term structure observed at 54

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- quarter end. The current NPV Ratio for each of the seven rate scenarios and the corresponding limits approved by OCN's Board of Directors, and as applied to OCN, are as follows at June 30, 2002: Board Limits Current Rate Shock in basis points (minimum NPV Ratios) NPV Ratios - -------------------------- -------------------------- -------------------------- +300 5.00% 27.38% +200 6.00% 27.18% +100 7.00% 26.98% 0 8.00% 26.82% -100 7.00% 26.79% -200 6.00% 26.79% -300 5.00% 26.85% The Committee also regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and NPV and evaluating such impacts against the maximum potential changes in net interest income and NPV that is authorized by OCN's Board of Directors, and as applied to OCN. The following table quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The cash flows associated with loans and securities are calculated based on prepayment and default rates that vary by asset. Projected losses, as well as prepayments, are generated based upon the actual experience with the subject pool, as well as similar, more seasoned pools. To the extent available, loan characteristics such as loan-to-value ratio, interest rate, credit history, prepayment penalty terms and product types are used to produce the projected loss and prepayment assumptions that are included in the cash flow projections of the assets. When interest rates are shocked, these projected loss and prepayment assumptions are further adjusted. The base interest rate scenario assumes interest rates at June 30, 2002. Actual results could differ significantly from the OCN results estimated in the following table: Estimated Changes in ----------------------------------------------------- Rate Shock in basis points Net Interest NPV - -------------------------- -------------------------- -------------------------- +300 11.17% 0.50% +200 7.45% 0.26% +100 3.72% 0.07% 0 --% --% -100 (3.72)% 0.51% -200 (7.45)% 1.04% -300 (11.17)% 1.79% The Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist it in the management of interest rate risk and foreign currency exchange rate risk. These techniques include interest rate exchange or "swap" agreements, interest rate caps and floors and foreign currency futures contracts. Interest Rate Risk Management. We have purchased amortizing caps and floors to hedge our interest rate exposure relating to match funded loans and securities. We had entered into caps and floors with an aggregate notional amount of $118,675 and $32,404, respectively, at June 30, 2002, as compared to caps and floors with an aggregate notional amount of $125,933 and $34,100, respectively, at December 31, 2001. See Note 5 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference) for additional disclosures regarding our interest rate derivative financial instruments. Foreign Currency Exchange Rate Risk Management. We have entered into foreign currency futures to hedge our investments in foreign subsidiaries that own residual interests backed by residential loans originated in the UK and in the shopping center located in Halifax, Nova Scotia. 55

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- Our hedges, the related investments in foreign subsidiaries, and the net exposures as of June 30, 2002 and December 31, 2001 were as follows: Investment Hedge Net Exposure ------------ ------------ ------------ June 30, 2002: UK residuals........................................................... $ 27,008 $ 24,865 $ 2,143 Nova Scotia Shopping Center............................................ $ 12,679 $ 7,522 $ 5,157 December 31, 2001: UK residuals........................................................... $ 25,535 $ 24,754 $ 781 Nova Scotia Shopping Center............................................ $ 21,648 $ 21,691 $ (43) The net exposures are subject to gain or loss if foreign currency exchange rates fluctuate. See the "Foreign Currency Management" section of Note 5 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference) for additional disclosures regarding our foreign currency derivative financial instruments. 56

Forward-Looking Statements Certain statements contained herein are not, and certain statements contained in our future filings with the Securities and Exchange Commission (the "Commission"), in our press releases or in the our 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. These forward-looking statements, which are based on various assumptions (some of which are beyond our control), may be identified by reference to a future period(s) or by the use of forward-looking terminology such as "anticipate," "believe," "commitment," "consider," "continue," "could," "estimate," "expect," "foresee," "intend," "in the event of," "may," "plan," "propose," "prospect," "whether," "will," "would," future or conditional verb tenses, similar terms, variations on such terms or negatives of such terms. Although we believe the anticipated results or other expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that those results or expectations will be attained. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of factors, including, but not limited to, international, national, regional or local economic environments (particularly in the market areas where we operate), government fiscal and monetary policies (particularly in the market areas where we operate), prevailing interest or currency exchange rates, effectiveness of interest rate, currency and other hedging strategies, laws and regulations affecting financial institutions, investment companies and real estate (including regulatory fees, capital requirements, access for disabled persons and environmental compliance), uncertainty of foreign laws and potential political issues related to operations outside of the USA, competitive products, pricing and conditions (including from competitors that have significantly greater resources than our Company), credit, prepayment, basis, default, subordination and asset/liability risks, loan servicing effectiveness, ability to identify acquisitions and investment opportunities meeting our investment strategy, the course of negotiations and the ability to reach agreement with respect to the material terms of any particular transaction, satisfactory due diligence results, satisfaction or fulfillment of agreed upon terms and conditions of closing or performance, the timing of transaction closings, software integration, development and licensing, damage to our computer equipment and the information stored our data centers, availability of and costs associated with obtaining adequate and timely sources of liquidity, ability to repay or refinance indebtedness (at maturity or upon acceleration), to meet collateral calls by lenders (upon re-valuation of the underlying assets or otherwise), to generate revenues sufficient to meet debt service payments and other operating expenses, availability of discount loans and servicing rights for purchase, size of, nature of and yields available with respect to the secondary market for mortgage loans, financial, securities and securitization markets in general, adequacy of allowances for loan losses, changes in real estate conditions (including liquidity, valuation, revenues, rental rates, occupancy levels and competing properties), adequacy of insurance coverage in the event of a loss, other factors generally understood to affect the real estate acquisition, mortgage, servicing and leasing markets, securities investments and the software and technology industry, and other risks detailed from time to time in our reports and filings with the Commission, including our periodic reports on Forms 10-Q, 8-K and 10-K and Exhibit 99.1, titled Risk Factors, to our Form 10-K for the year ended December 31, 2001, which filings are available from the SEC. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. We do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that 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. 57

Part II - Other Information Item 1. Legal Proceedings. See "Note 9: Commitments and Contingencies" of Ocwen Financial Coporation's Interim Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders. At OCN's Annual Meeting of Shareholders held on May 16, 2002, the following individuals were elected to the Board of Directors Votes For Votes Withheld -------------- -------------- William C. Erbey............................. 64,120,596 511,679 Thomas F. Lewis.............................. 64,120,596 511,679 W. C. Martin................................. 64,120,596 511,679 Barry N. Wish................................ 64,215,710 417,175 Ratification of PricewaterhouseCoopers LLP as the independent auditors of OCN for the fiscal year ending December 31, 2002 was also voted on and approved by the shareholders. The votes were as follows: Votes for.................................................... 64,286,738 Votes against................................................ 338,346 Abstentions.................................................. 7,201 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen Financial Corporation, Ocwen Asset Investment Corp. and Ocwen Acquisition Company (1) 3.1 Amended and Restated Articles of Incorporation (2) 3.2 Amended and Restated Bylaws (3) 4.0 Form of Certificate of Common Stock (2) 4.1 Form of Indenture between OCN and Bank One, Columbus, NA as Trustee (2) 4.2 Form of Note due 2003 (Included in Exhibit 4.1) (2) 4.3 Certificate of Trust of Ocwen Capital Trust I (4) 4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust I (4) 4.5 Form of Capital Security of Ocwen Capital Trust I (Included in Exhibit 4.4) (4) 4.6 Form of Indenture relating to 10.875% Junior Subordinated Debentures due 2027 of OCN (4) 4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of OCN (Included in Exhibit 4.6) (4) 4.8 Form of Guarantee of the OCN relating to the Capital Securities of Ocwen Capital Trust I (4) 4.9 Form of Indenture between Ocwen Federal Bank FSB and The Bank of New York as Trustee (5) 4.10 Form of Subordinated Debentures due 2005 (5) 4.11 Form of Indenture between OAC and Norwest Bank Minnesota, National Association, as Trustee thereunder for the 11.5% Redeemable Notes due 2005 (6) 4.12 Form of 11.5% Redeemable Notes due 2005 (7) 4.13 Form of Second Supplemental Indenture between OAC and Wells Fargo Bank Minnesota, National Association, as successor to Norwest Bank Minnesota, National Association, as trustee thereunder for the 11.5% Redeemable Notes due 2005 (8) 10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as amended (9) 10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (10) 10.3 Amended and Restated Loan Agreement, dated as of June 10, 1998, among, inter alia, OAIC California Partnership, L.P., OAIC California Partnership II, L.P., Salomon Brothers Realty Corp. and LaSalle National Bank (11) 10.4 Compensation and Indemnification Agreement, dated as of May 6, 1999, between OAC and the independent committee of the Board of Directors (12) 58

Part II - Other Information 10.5 Second Amendment to Guarantee of Payment, dated as of July 9, 1999, between Salomon Brothers Realty Corp. and Ocwen Partnership, L.P. (12) 10.6 Indemnity agreement, dated August 24, 1999, among OCN and OAC's Board of Directors (13) 10.7 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock Option Plan, dated October 26, 1999 (13) 10.8 First Amendment to Agreement, dated March 31, 2000, between HCT Investments, Inc. and OAIC Partnership I, L. P. (13) 10.9 Form of Separation Agreement and Full Release, dated as of February 28, 2001, by and among Christine A. Reich, Ocwen Federal Bank FSB and Ocwen Financial Corporation (14) 10.10 Form of Employment Agreement dated as of April 1, 2001, by and between Ocwen Financial Corporation and Arthur D. Ringwald (15) 10.11 Form of Employment Agreement dated as of August 1, 2001 by and between Ocwen Technology Exchange and Jack Timpe (15) 99.1 Risk factors (15) 99.2 Certifications pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) (1) Incorporated by reference from the similarly described exhibit included with the Registrant's Current Report on Form 8-K filed with the Commission on July 26, 1999. (2) Incorporated by reference from the similarly described exhibit filed in connection with the Registrant's Registration Statement on Form S-1 (File No. 333-5153), as amended, declared effective by the Commission on September 25, 1996. (3) Incorporated by reference from the similarly described exhibit included with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. (4) Incorporated by reference from the similarly described exhibit filed in connection with Ocwen Financial Corporation's Registration Statement on Form S-1 (File No. 333-28889), as amended, declared effective by the Commission on August 6, 1997. (5) Incorporated by reference from 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 from OAC's Current Report on Form 8-K filed with the Commission on July 11, 1998. (7) Incorporated by reference from OAC's Registration Statement on Form S-4 (File No. 333-64047), as amended, declared effective by the Commission on February 12, 1999. (8) Pursuant to Item 601 of Regulation S-K, Instruction (4)(iii), the Registrant agrees to furnish a copy to the Commission upon request. (9) Incorporated by reference from the similarly described exhibit filed in connection with the Registrant's Registration Statement on Form S-8 (File No. 333-44999), effective when filed with the Commission on January 28, 1998. (10) Incorporated by reference from the similarly described exhibit to Ocwen Financial Corporation's Definitive Proxy Statement with respect to Ocwen Financial Corporation's 1998 Annual Meeting of Shareholders filed with the Commission on March 31, 1998. (11) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (12) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999. (13) Incorporated by reference from the similarly described exhibit included with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. 59

Part II - Other Information (14) Incorporated by reference from the similarly described exhibit included with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. (15) Incorporated by reference from the similarly described exhibit included with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. (b) Reports on Form 8-K Filed during the Quarter Ended June 30, 2002. (1) A Form 8-K was filed by OCN on May 7, 2002 that contained a news release announcing Ocwen Financial Corporation's financial results for the quarter ended March 31, 2002. 60

SIGNATURES 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/ Mark S. Zeidman ----------------------------------- Mark S. Zeidman, Senior Vice President and Chief Financial Officer (On behalf of the Registrant and as its principal financial officer) Date: August 14, 2002 61

Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ocwen Financial Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William C. Erbey, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ WILLIAM C ERBEY - ----------------------- William C. Erbey Chief Executive Officer August 14, 2002 1

Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ocwen Financial Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark S. Zeidman, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MARK S. ZEIDMAN - ----------------------- Mark S. Zeidman Chief Financial Officer August 14, 2002 2