SEC Filing | Ocwen Financial Corporation

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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, 2001 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 8, 2001: 67,265,576 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, 2001 and December 31, 2000................................................... 3 Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000........................................ 4 Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2001 and 2000......................... 5 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2001...................................... 6 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000................................................... 7 Notes to Consolidated Financial Statements.......................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 62 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................... 67 Item 6. Exhibits and Reports on Form 8-K.................................... 67 Signature................................................................... 69 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, 2001 December 31, 2000 ---------------- ----------------- Assets: Cash and amounts due from depository institutions.............................. $ 52,381 $ 18,749 Interest earning deposits...................................................... 9,517 134,987 Federal funds sold and repurchase agreements................................... 249,000 -- Trading securities, at fair value: Collateralized mortgage obligations (AAA-rated).............................. 62,080 277,595 Subordinates, residuals and other securities................................. 88,050 112,647 Loans available for sale, at lower of cost or market........................... 4,450 10,610 Real estate held for sale...................................................... 20,165 22,670 Low-income housing tax credit interests held for sale.......................... 31,789 87,083 Investment in real estate...................................................... 115,661 122,761 Investments in low-income housing tax credit interests......................... 85,893 55,729 Investment securities, at cost................................................. 13,257 13,257 Loan portfolio, net............................................................ 77,105 93,414 Discount loan portfolio, net................................................... 306,942 536,028 Match funded loans and securities, net......................................... 91,462 116,987 Investments in unconsolidated entities......................................... 821 430 Real estate owned, net......................................................... 129,042 146,419 Premises and equipment, net.................................................... 41,982 43,152 Income taxes receivable........................................................ 28,412 30,261 Deferred tax asset, net........................................................ 77,991 95,991 Advances on loans and loans serviced for others................................ 349,912 227,055 Mortgage servicing rights...................................................... 82,928 51,426 Other assets................................................................... 78,385 52,169 ---------------- ---------------- $ 1,997,225 $ 2,249,420 ================ ================ Liabilities and Stockholders' Equity Liabilities: Deposits..................................................................... $ 1,044,363 $ 1,258,360 Bonds - match funded agreements.............................................. 80,821 107,050 Obligations outstanding under lines of credit................................ 104,545 32,933 Notes, debentures and other interest bearing obligations..................... 169,130 173,330 Accrued interest payable..................................................... 19,714 22,096 Excess of net assets acquired over purchase price............................ 27,499 36,665 Accrued expenses, payables and other liabilities............................. 31,299 36,030 ---------------- ---------------- Total liabilities......................................................... 1,477,371 1,666,464 ---------------- ---------------- Company obligated, mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company.............. 61,159 79,530 Commitments and Contingencies (Note 10) 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; 67,259,927 and 67,152,363 shares issued and outstanding at June 30, 2001, and December 31, 2000, respectively.................................................... 673 672 Additional paid-in capital.................................................. 223,896 223,163 Retained earnings........................................................... 234,237 279,194 Accumulated other comprehensive (loss) income, net of taxes: Net unrealized foreign currency translation (loss) gain................... (111) 397 ---------------- ---------------- Total stockholders' equity.................................................. 458,695 503,426 ---------------- ---------------- $ 1,997,225 $ 2,249,420 ================ ================ 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, 2001 2000 2001 2000 - -------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest income: Income................................................ $ 25,218 $ 50,455 $ 50,035 $ 98,545 Expense............................................... 24,728 45,661 51,608 89,057 ------------ ------------ ------------ ------------ Net interest income (expense) before provision for loan losses......................................... 490 4,794 (1,573) 9,488 Provision for loan losses............................. 10,297 3,135 18,417 5,743 ------------ ------------ ------------ ------------ Net interest (expense) income after provision for loan losses......................................... (9,807) 1,659 (19,990) 3,745 ------------- ------------ ------------ ------------ Non-interest income: Servicing and other fees.............................. 33,740 22,559 64,857 46,725 Gain (loss) on interest earning assets, net........... 422 5,270 (1,409) 16,264 Gain on trading and match funded securities, net...... 4,550 -- 9,739 -- Impairment charges on securities available for sale... -- (4,764) -- (11,597) Loss on real estate owned, net........................ (1,881) (3,006) (2,865) (10,013) (Loss) gain on other non interest earning assets, net. (975) 5,044 (519) 5,182 Net operating gains on investments in real estate..... 486 8,063 3,040 13,616 Amortization of excess of net assets acquired over purchase price...................................... 4,583 2,998 9,166 5,792 Other income.......................................... 2,437 1,070 4,483 2,209 ------------ ------------ ------------ ------------ 43,362 37,234 86,492 68,178 ------------ ------------ ------------ ------------ Non-interest expense: Compensation and employee benefits.................... 21,309 22,397 42,244 38,980 Occupancy and equipment............................... 3,174 2,952 6,267 6,215 Technology and communication costs.................... 5,556 5,754 15,704 11,375 Loan expenses......................................... 2,835 2,987 7,070 6,917 Net operating losses on investments in certain low-income housing tax credit interests............. 2,756 840 7,818 2,339 Amortization of excess of purchase price over net assets acquired..................................... 778 795 1,556 1,568 Professional services and regulatory fees............. 3,994 2,965 8,020 6,804 Other operating expenses.............................. 2,454 3,154 5,033 5,720 ------------ ------------ ------------ ------------ 42,856 41,844 93,712 79,918 ------------ ------------ ------------ ------------ Distributions on Company-obligated, mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the Company .......................... 1,697 2,918 3,750 6,112 Equity in income (losses) of investments in unconsolidated entities............................. 139 (1,812) 184 (4,072) ------------ ------------ ------------ ------------ Loss before income taxes and extraordinary gain......... (10,859) (7,681) (30,776) (18,179) Income tax (expense) benefit............................ (10,825) 2,380 (16,587) 5,635 ------------ ------------ ------------ ------------ Loss before extraordinary gain.......................... (21,684) (5,301) (47,363) (12,544) Extraordinary gain on repurchase of debt, net of taxes.. 243 3,902 2,406 6,047 ------------ ------------ ------------ ------------ Net loss................................................ $ (21,441) $ (1,399) $ (44,957) $ (6,497) ============ ============ ============ ============ (Loss) earnings per share: Basic: Loss before extraordinary gain...................... $ (0.33) $ (0.08) $ (0.71) $ (0.19) Extraordinary gain.................................. 0.01 0.06 0.04 0.09 ------------ ------------ ------------ ------------ Net loss............................................ $ (0.32) $ (0.02) $ (0.67) $ (0.10) ============ ============ ============ ============ Diluted: Loss before extraordinary gain...................... $ (0.33) $ (0.08) $ (0.71) $ (0.19) Extraordinary gain.................................. 0.01 0.06 0.04 0.09 ------------ ------------ ------------ ------------ Net loss............................................ $ (0.32) $ (0.02) $ (0.67) $ (0.10) ============ ============ ============ ============ Weighted average common shares outstanding: Basic................................................. 67,198,359 67,182,395 67,175,361 67,702,961 ============ ============ ============ ============ Diluted............................................... 67,198,359 67,182,395 67,175,361 67,702,961 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Dollars in thousands) Three Months Six Months -------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ---------------------------------------------------------------- ---------- ---------- ---------- ---------- Net loss........................................................ $ (21,441) $ (1,399) $ (44,957) $ (6,497) ---------- ---------- ---------- ---------- Other comprehensive (loss) income, net of taxes: Change in unrealized loss on securities available for sale arising during the period (1) .............................. -- 8,792 -- 5,160 Less: Reclassification adjustment............................. -- (7,162) -- (6,618) ---------- ---------- ---------- ---------- Net change in unrealized loss on securities available for sale (2).................................................... -- 1,630 -- (1,458) ---------- ---------- ---------- ---------- Change in unrealized foreign currency translation adjustment arising during the period (3)............................... 363 207 (508) 368 ---------- ---------- ---------- ---------- Change in accounting principle for derivative financial instruments................................................. -- -- 59 -- Adjustment to unrealized gain on derivative financial instruments................................................. 20 -- (59) -- ---------- ---------- ---------- ---------- Change in unrealized gain on derivative financial instruments. 20 -- -- -- ---------- ---------- ---------- ---------- Other comprehensive income (loss)............................. 383 1,837 (508) (1,090) ---------- ---------- ---------- ---------- Comprehensive (loss) income..................................... $ (21,058) $ 438 $ (45,465) $ (7,587) ========== ========== ========== ========== Disclosure of reclassification adjustment: Unrealized holding gains arising during the period on securities sold or impaired................................. $ -- $ (401) $ -- $ (4,609) Add: Adjustment for realized gains and impairment charges on securities available for sale included in net loss.......... -- (6,761) -- (2,009) ---------- ---------- ---------- ---------- Net reclassification adjustment for gains recognized in other comprehensive loss in prior years (4)....................... $ -- $ (7,162) $ -- $ (6,618) ========== ========== ========== ========== (1) Net of tax benefit (expense) of $5,567 and $(4,273) for the three and six months ended June 30, 2000. (2) Net of tax (expense) benefit of $(612) and $1,072 for the three and six months ended June 30, 2000, respectively. (3) Net of tax benefit (expense) of $106 and $(116) for the three months ended June 30,2001 and 2000, respectively, and $292 and $(201) for the six months ended June 30, 2001 and 2000, respectively. (4) Net of tax benefit (expense) of $4,955 and $4,978 for the three and six months ended June 30, 2000, 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, 2001 (Dollars in thousands) Accumulated Other Common Stock Additional Comprehensive ------------------------- Paid-in Retained Income (Loss), Shares Amount Capital Earnings Net of Taxes Total ------------ -------- ----------- --------- -------------- ---------- Balances at December 31, 2000............. 67,152,363 $ 672 $ 223,163 $ 279,194 $ 397 $ 503,426 Net loss.................................. -- -- -- (44,957) -- (44,957) Directors' compensation................... 8,795 -- -- -- -- -- Stock options exercised................... 98,769 1 733 -- -- 734 Other comprehensive loss, net of taxes: Change in unrealized foreign currency translation loss....................... -- -- -- -- (508) (508) ------------ -------- ----------- --------- ---------- ---------- Balances at June 30, 2001................. 67,259,927 $ 673 $ 223,896 $ 234,237 $ (111) $ 458,695 ============ ======== =========== ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 6

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the six months ended June 30, 2001 2000 - ------------------------------------------------------------------------------------------ ----------- ----------- Cash flows from operating activities: Net loss.................................................................................. $ (44,957) $ (6,497) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Net cash provided by trading securities................................................. 243,200 -- Proceeds from sales of loans available for sale......................................... 4,234 7,144 Principal payments received on loans available for sale................................. 1,439 4,216 Premium amortization (discount accretion) on securities, net............................ 16,368 (32,993) Depreciation and amortization........................................................... 30,390 2,653 Provision for loan losses............................................................... 18,417 5,743 Provision for real estate owned......................................................... 9,703 16,964 Loss (gain) on interest-earning assets, net............................................. 1,409 (16,264) Gain on trading and match funded securities............................................. (9,739) -- Impairment charges on securities available for sale..................................... -- 11,597 Extraordinary gain on repurchase of long-term debt...................................... (3,819) (8,764) Loss on other non-interest earning assets............................................... 519 (5,182) Impairment charges on low-income housing tax credits held for investment................ 6,993 261 Gain on sale of real estate owned, net.................................................. (9,523) (11,683) Equity in (income) losses of unconsolidated entities.................................... (184) 4,072 Decrease (increase) in income taxes receivable.......................................... 1,849 (14,000) Decrease in income tax payable.......................................................... -- (6,369) Decrease (increase) in deferred tax asset............................................... 18,000 (3,299) Increase in advances on loans and loans serviced for others............................. (122,857) (42,718) (Increase) decrease in other assets, net................................................ (47,094) 30,396 Decrease in accrued expenses, interest payable and other liabilities.................... (13,848) (22,332) ----------- ----------- Net cash provided (used) by operating activities.......................................... 100,500 (87,055) ----------- ----------- Cash flows from investing activities: Proceeds from sales of securities available for sale.................................... -- 324,278 Purchase of securities available for sale............................................... -- (833,704) Maturities of and principal payments received on securities available for sale.......... -- 284,523 Acquisition of Federal Home Loan Bank stock............................................. -- (2,432) Principal payments received on match funded loans and securities........................ 14,901 15,224 Investment in low-income housing tax credit investments................................. (8,335) (22,980) Proceeds from sales of low-income housing tax credit interests.......................... 34,044 27,587 Purchase of mortgage servicing rights................................................... (43,263) -- Proceeds from sales of discount loans, net.............................................. 133,335 118,674 Proceeds from sale of real estate held for sale......................................... 1,000 9,000 Proceeds from sale of real estate held for investment................................... 6,224 3,008 Proceeds from sales of loans held for investment........................................ 14,318 7,727 Purchase, originations and funded commitments of loans held for investment, net of undisbursed loan funds................................................................ (18,902) (22,868) Purchase and funded commitments of discount loans, net.................................. (1,220) (157,609) (Increase) decrease in investment in unconsolidated entities............................ (207) 481 Purchase of and capital improvements to real estate held for investment................. -- (111,824) Principal payments received on loans held for investment................................ 5,504 26,386 Capital improvements to real estate held for sale....................................... -- (2,829) Principal payments received on discount loans, net...................................... 40,065 71,333 Proceeds from sale of real estate owned................................................. 69,843 88,056 Purchase of real estate owned in connection with discount loan purchases................ -- (8,593) Additions to premises and equipment..................................................... (3,858) (3,152) ----------- ----------- Net cash provided (used) by investing activities.......................................... 243,449 (189,714) ----------- ----------- 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, 2001 2000 - ------------------------------------------------------------------------------------------- ----------- ----------- Cash flows from financing activities: Decrease in deposits..................................................................... $ (213,997) $ (200,153) Increase in securities sold under agreements to repurchase............................... -- 373,685 Proceeds from (repayment of) obligations under lines of credit, net...................... 71,612 (3,116) Payments on bonds-match funded agreements................................................ (26,672) (17,716) Repurchase of Capital Securities......................................................... (14,247 (4,979) Repurchases of notes and subordinated debentures......................................... (4,267) (24,996) Exercise of stock options................................................................ 784 -- Repurchase of common stock............................................................... -- (8,996) ----------- ----------- Net cash (used) provided by financing activities........................................... (186,787) 113,729 ----------- ----------- Net increase (decrease) in cash and cash equivalents....................................... 157,162 (163,040) Cash and cash equivalents at beginning of period........................................... 153,736 381,858 ----------- ----------- Cash and cash equivalents at end of period................................................. $ 310,898 $ 218,818 =========== =========== Reconciliation of cash and cash equivalents at end of period: Cash and amounts due from depository institutions........................................ $ 52,381 $ 26,080 Interest-earning deposits................................................................ 9,517 19,238 Federal funds sold and repurchase agreements............................................. 249,000 173,500 ----------- ----------- $ 310,898 $ 218,818 =========== =========== Supplemental disclosure of cash flow information: Cash received (paid) during the period for: Interest................................................................................. $ 80,869 $ 85,283 =========== =========== Income tax refunds (payments)............................................................ $ 2,461 $ (18,820) ============ =========== Supplemental schedule of non-cash investing and financing activities: Real estate owned acquired through foreclosure........................................... $ 40,545 $ 91,820 =========== =========== Reclassification of properties from investment in real estate to real estate held for sale.................................................................................. $ -- $ 218,514 =========== =========== Reclassification of low-income housing tax credit interests held for sale to investments in low-income housing tax credit interests, net....................................... $ 24,021 $ -- =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 8

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2001 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION The accompanying unaudited 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. The Company's consolidated financial statements include the accounts of Ocwen Financial Corporation ("OCN" or the "Company") and its subsidiaries. The Company owns directly and indirectly all of the outstanding common and preferred stock of its primary subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance Holding Company ("IMI"), Ocwen Technology Xchange, Inc. ("OTX") and Ocwen Asset Investment Corp. ("OAC"). The Company 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"). The Company 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 the opinion of management, the accompanying financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial condition at June 30, 2001 and December 31, 2000, the results of its operations for the three and six months ended June 30, 2001 and 2000, its comprehensive (loss) income for the three and six months ended June 30, 2001 and 2000, its changes in stockholders' equity for the six months ended June 30, 2001 and its cash flows for the six months ended June 30, 2001 and 2000. The results of operations and other data for the three and six month periods ended June 30, 2001 and 2000, are not necessarily indicative of the results that may be expected for any other interim periods or the entire year ending December 31, 2001. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made to the prior periods' consolidated financial statements to conform to the June 30, 2001 presentation. In preparing the consolidated financial statements, management is 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. Actual results could differ from those estimates and assumptions. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Derivative Financial Instruments The Company uses derivative financial instruments for the purpose of managing its exposure to adverse fluctuations in interest and foreign currency exchange rates. While these instruments are subject to fluctuations in value, such fluctuations are generally offset by the change in value of the underlying exposures being hedged. The Company does not enter into any derivative financial instruments for trading purposes. All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive (loss) income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction and the effectiveness of the hedge. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability or a forecasted transaction, the effective portions of the changes in the fair value of the derivative instruments are reported in other comprehensive (loss) income. The gains and losses on the derivative instruments that are reported in other comprehensive (loss) income are reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. For hedge transactions of net investments in foreign operations, the effective portions of the changes in fair value of the derivative instruments are recorded as a cumulative translation adjustment and included as a component of accumulated other comprehensive (loss) income in stockholders' equity. The ineffective portions of all hedges are recognized in current period earnings. 9

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2001 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- All other derivative instruments used by the Company for risk management purposes that do not meet the hedge accounting criteria and, therefore, do not qualify for hedge accounting are accounted for at fair value with changes in fair value recorded in the consolidated income statement of operations. NOTE 3: CURRENT ACCOUNTING PRONOUNCEMENTS On January 1, 2001, the Company adopted the provision of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS No. 133") and recorded a net of tax, a cumulative effect adjustment in accumulated other comprehensive income to recognize at fair value the interest rate swap that was designated as a cash-flow hedging of an outstanding line of credit. The swap matured in April 2001, and the Company has reclassified to earnings all of this transition adjustment. Adoption of SFAS 133 did not have a material impact on the Company's use of futures contracts to hedge the net investments in its foreign subsidiaries, as the SFAS 133 accounting is similar to the pre-existing accounting. In addition, adoption of SFAS 133 did not have an impact on the Company's other risk management instruments that do not meet the hedge criteria as these derivatives were already accounted for at fair value with changes in fair value recognized currently in earnings. As of December 31, 2000, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as they relate to recognition and reclassification of collateral and for disclosures relating to securitization transactions, mortgage servicing rights and collateral. As of April 1, 2001, the Company adopted the other provisions of SFAS 140 as they relate to transfers and servicing of financial assets and extinguishments of liabilities. Adoption of SFAS 140 did not have a material impact on the Company's results of operations, financial position or cash flows. The Emerging Issues Task Force issued EITF 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Assets" effective for fiscal quarters beginning after March 15, 2001. On April 1, 2001, the Company adopted the provisions of EITF 99-20. Adoption of EITF 99-20 did not have a material impact on the Company's results of operations, financial position or cash flows. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations leaving only the purchase method of accounting. In addition, SFAS No. 141 requires that intangible assets be recognized separately from goodwill if they meet one of two criteria - the contractual-legal criterion or the separability criterion. SFAS No. 141 also expands upon disclosure requirements by requiring the disclosure of the primary reasons for the business combination, the allocation of the purchase price to the assets acquired and liabilities assumed and, if significant, the amount of goodwill by segment and the amount of the purchase price assigned to each major class of intangible asset. As of July 1, 2001, the Company adopted the provisions of SFAS No. 141. The impact from the adoption of SFAS No. 141 on the Company's results of operations, financial position or cash flows results from the anticipated reversal, as discussed below, of the unamortized balance of the excess of net assets acquired over purchase price upon the adoption of SFAS No. 142. The FASB has also issued 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. 10

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2001 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- 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 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. The Company will adopt the provisions of SFAS No. 142 effective January 1, 2002. The Company expects that the elimination of goodwill amortization after the adoption of SFAS No. 142 will positively impact pretax net income by approximately $3,000 in 2002. In addition, the Company will be required to reverse the unamortized balance of the excess of net assets acquired over purchase price. This reversal will result in a credit to income of approximately $18,000 on January 1, 2002 that will be reported as the effect of a change in accounting principle. However, the Company has not yet fully determined the impact that the adoption of other elements of SFAS No. 142 may have on its financial position or results of operations. 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 $63,841 of its Capital Securities. During the three months ended June 30, 2001, OCT repurchased $2,526 of its Capital Securities in the open market, resulting in extraordinary gains of $386 ($243 net of taxes). During the six months ended June 30, 2001, OCT repurchased $18,371 of its Capital Securities in the open market, resulting in an extraordinary gain of $3,722 ($2,345 net of taxes). 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 the Company to the extent OCT has funds available. If the Company does not make principal or interest payments on the Junior Subordinated Debentures, OCT will not have sufficient funds to make distributions on the Capital Securities, in which event the guarantee shall not apply to such distributions until OCT has sufficient funds available therefore. Accumulated distributions payable on the Capital Securities amounted to $2,716 and $3,533 at June 30, 2001 and December 31, 2000, respectively, and are included in accrued interest payable. The Company has the right to defer payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 10 consecutive 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, the Company may elect to begin a new extension period. Accordingly, there could be multiple extension periods of varying lengths throughout the term of the Junior Subordinated Debentures. If interest payments on the Junior Subordinated Debentures are deferred, distributions on the Capital Securities will also be deferred and the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an extension period, interest on the Junior Subordinated Debentures will continue to accrue at the rate of 10.875% per annum, compounded semiannually. The Junior Subordinated Debentures are redeemable prior to maturity at the option of the Company, subject to the receipt of any necessary prior regulatory approval, (i) in whole or in part on or after August 1, 2007, at a redemption price equal to 105.438% of the principal amount thereof on August 1, 2007, declining ratably on each August 1 thereafter to 100% on or after August 1, 2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in part), upon the occurrence and continuation of a special event (defined as a tax event, regulatory capital event or 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 11

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2001 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 8: NET INTEREST INCOME (EXPENSE) BEFORE PROVISION FOR LOAN LOSSES Three Months Six Months ----------------------------- ----------------------------- For the periods ended June 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Interest income: Federal funds sold and repurchase agreements............... $ 2,454 $ 864 $ 4,098 $ 2,573 Trading securities......................................... 4,173 -- 9,873 -- Securities available for sale.............................. -- 16,808 -- 29,677 Loans available for sale................................... 143 917 364 1,724 Investment securities and other............................ 251 502 597 829 Loan portfolio............................................. 1,619 5,337 3,502 9,305 Match funded loans and securities.......................... 2,737 2,952 5,220 6,263 Discount loan portfolio.................................... 13,841 23,075 26,381 48,174 ------------ ------------ ------------ ------------ 25,218 50,455 50,035 98,545 ------------ ------------ ------------ ------------ Interest expense: Deposits................................................... 16,308 24,793 34,379 49,478 Securities sold under agreements to repurchase............. -- 5,284 -- 7,924 Bonds - match funded agreements............................ 1,742 2,790 4,708 6,146 Obligations outstanding under lines of credit.............. 1,736 3,942 2,456 7,413 Notes, debentures and other interest-bearing obligations... 4,942 8,852 10,065 18,096 ------------ ------------ ------------ ------------ 24,728 45,661 51,608 89,057 ------------ ------------ ------------ ------------ Net interest income (expense) before provision for loan losses................................................... $ 490 $ 4,794 $ (1,573) $ 9,488 ============ ============ ============ ============ 16

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2001 (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 10: COMMITMENTS AND CONTINGENCIES At June 30, 2001, the Company had commitments of $6,464 to fund construction loans (including loans accounted for as investments in real estate) secured by multi-family and commercial properties. In addition, the Company, through the Bank, had commitments under outstanding letters of credit in the amount of $6,410. The Company, through its investment in subordinated securities and subprime residuals, which had a fair value of $88,050 at June 30, 2001, supports senior classes of securities. At June 30, 2001, the Company had $7,035 outstanding in guarantees to third parties related to debt obligations and lease commitments of its subsidiaries. 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 are for damages for alleged breaches of common law fiduciary duties. On January 10, 2001, OAC was granted a protective order limiting the scope of discovery. Discovery is ongoing. 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. Ocwen filed a Motion for Certification of an Interlocutory Appeal and is seeking an Entry of Stay pending appeal. OAC believes this suit is without merit and continues to vigorously defend against the same. The Company is subject to various other pending legal proceedings. In management's opinion, the resolution of these other claims will not have a material effect on the consolidated financial statements. 19

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- General The Company's primary businesses are the servicing and special servicing of nonconforming, subperforming and nonperforming residential and commercial mortgage loans. Ocwen also specializes in the development of related loan servicing technology and software for the mortgage and real estate industries. The Company 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 is administered by the FDIC and 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 the 12 regional banks that comprise the FHLB System. The following discussion of the Company's 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 2001 2000 (Decrease) -------------- -------------- ---------- Balance Sheet Data Total assets........................................................... $ 1,997,225 $ 2,249,420 (11)% Trading securities, at fair value: Collateralized mortgage obligations (AAA-rated)................... 62,080 277,595 (78) Subordinates, residuals and other securities...................... 88,050 112,647 (22) Real estate held for sale.............................................. 20,165 22,670 (11) Low-income housing tax credits held for sale........................... 31,789 87,083 (63) Investments in real estate............................................. 115,661 122,761 (6) Investment in low-income housing tax credit interests.................. 85,893 55,729 54 Loan portfolio, net.................................................... 77,105 93,414 (17) Discount loan portfolio, net........................................... 306,942 536,028 (43) Match funded loans and securities, net................................. 91,462 116,987 (22) Real estate owned, net................................................. 129,042 146,419 (12) Deferred tax asset, net................................................ 77,991 95,991 (19) Advances on loans and loans serviced for others........................ 349,912 227,055 54 Mortgage servicing rights.............................................. 82,928 51,426 61 Total liabilities...................................................... 1,477,371 1,666,464 (11) Deposits............................................................... 1,044,363 1,258,360 (17) Bonds-match funded agreements.......................................... 80,821 107,050 (25) Obligations outstanding under lines of credit.......................... 104,545 32,933 217 Notes, debentures and other interest bearing obligations............... 169,130 173,330 (2) Capital Securities..................................................... 61,159 79,530 (23) Stockholders' equity................................................... 458,695 503,426 (9) 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 2001 2000 (Unfavorable) ------------- ------------- ------------- Operations Data Net interest income......................................................... $ 490 $ 4,794 (90)% Provision for loan losses................................................... 10,297 3,135 (228)% Non-interest income......................................................... 43,362 37,234 16% Non-interest expense........................................................ 42,856 41,844 (2)% Distributions on Capital Securities......................................... 1,697 2,918 42% Equity in income (losses) of investment in unconsolidated entities.......... 139 (1,812) 108% Income tax (expense) benefit................................................ (10,825) 2,380 (555)% Extraordinary gain on repurchase of debt, net of taxes...................... 243 3,902 (94)% Net loss.................................................................... (21,441) (1,399) (1,433)% Per Common Share Net loss: Basic.................................................................... $ (0.32) $ (0.02) (1,500)% Diluted.................................................................. (0.32) (0.02) (1,500)% Stock price: High..................................................................... $ 10.44 $ 8.63 21% Low ..................................................................... 8.54 5.44 57% Close.................................................................... 10.25 5.56 84% Key Ratios Annualized return on average assets......................................... (4.16)% (0.17)% (2,347)% Annualized return on average equity......................................... (18.19) (1.14) (1,496)% Efficiency ratio (1)........................................................ 97.42 104.05 6% Core (leverage) capital ratio............................................... 12.87 9.24 39% Risk-based capital ratio.................................................... 20.15 17.14 18% (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. 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 2001 2000 (Unfavorable) ------------- ------------- ------------- Operations Data Net interest (expense) income............................................... $ (1,573) $ 9,488 (117)% Provision for loan losses................................................... 18,417 5,743 (221)% Non-interest income......................................................... 86,492 68,178 27% Non-interest expense........................................................ 93,712 79,918 (17)% Distributions on Capital Securities......................................... 3,750 6,112 (38)% Equity in income (losses) of investment in unconsolidated entities.......... 184 (4,072) 105% Income tax (expense) benefit................................................ (16,587) 5,635 (394)% Extraordinary gain on repurchase of debt, net of taxes...................... 2,406 6,047 (60)% Net loss.................................................................... (44,957) (6,497) (592)% Per Common Share Net (loss) income: Basic.................................................................... $ (0.67) $ (0.10) (570)% Diluted.................................................................. (0.67) (0.10) (570)% Stock price: High..................................................................... $ 10.44 $ 8.63 21% Low ..................................................................... 5.44 5.31 2% Close.................................................................... 10.25 5.56 84% Key Ratios Annualized return on average asset.......................................... (4.25)% (0.39)% (990)% Annualized return on average equity......................................... (18.54) (2.62) (608)% Efficiency ratio (1)........................................................ 106.19 108.59 2% Core (leverage) capital ratio............................................... 12.87 9.24 39% Risk-based capital ratio.................................................... 20.15 17.14 18% (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. Results of Operations: Three and Six Months Ended June 30, 2001 versus Three and Six Months Ended June 30, 2000 General. The Company recorded a net loss of $(21,441) or $(0.32) per share, for the second quarter of 2001, as compared to a net loss of $(1,399), or $(0.02) per share, for the second quarter of 2000. There were a number of key factors and transactions that contributed to the results for the second quarter of 2001 as compared to the second quarter of 2000, including: a decline in net interest income from $4,794 in the second quarter of 2000 to $490 in the second quarter of 2001 primarily because of decreases in interest earning assets and related decreases in deposits and borrowings as the Company continues its transition from capital-intensive lines of business to fee-based lines of business; an increase in the provision for loan losses from $3,135 in the second quarter of 2000 to $10,297 in the second quarter of 2001 primarily related to a strengthening of reserves on single family discount loans in response to changes in credit quality; a decline in gains on sales of investments in real estate of $5,213 and in operating gains on investments in real estate of $7,577 as a result of the sale of properties during 2000; impairment charges of $2,490 on low-income housing tax credit interests held for investment recorded during the second quarter of 2001; an $8,000 provision recorded in the second quarter of 2001 to increase the valuation allowance on the deferred tax asset; and a $3,659 decline in extraordinary gains on repurchases of debt. Segment Profitability. The following is a discussion of the contribution by business segment to the Company's net loss for the three and six months ended June 30, 2001 and 2000: o Single Family Residential Discount Loans. The segment had a net loss for the three months ended June 30, 2001 of $(2,816) as compared to income of $4,369 for the three months ended June 30, 2000. Results included gains of $1,114 and $4,470 from the sale of loans during the three months ended June 30, 2001 and 2000, respectively. Losses from the sale and operation of real estate owned amounted to $1,943 and $1,020 for the three months ended June 30, 2001 and 2000, respectively. The results for the three 22

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- months ended June 30, 2001 also reflect an increase of $8,177 in the provision for loan losses, as compared to the same period in the prior year. The segment had a net loss for the six months ended June 30, 2001 of $(3,905) as compared to income of $7,455 for the three months ended June 30, 2000. Results for the six months ended June 30, 2001 and 2000 included gains of $1,114 and $12,269, respectively, from the sale of loans. Impairment charges on residential subordinate securities amounted to $667 for the six months ended June 30, 2000 as compared to net trading gains on residential subordinate securities of $1,856 for the same period of 2001. Losses from the sale and operation of real estate owned amounted to $5,503 and $7,536 for the six months ended June 30, 2001 and 2000, respectively. The results for the six months ended June 30, 2001 also reflect an increase of $9,401 in the provision for loan losses, as compared to the same period in the prior year. o Commercial Loans. Segment net income declined from $746 for the three months ended June 30, 2000 to a loss of $(2,297) for the three months ended June 30, 2001. The results for the three months ended June 30, 2001 reflect an increase of $1,461 in gains from the sale and operation of real estate owned as compared to the same period of 2000. Gain on loan sales was $675 for the three months ended June 30, 2000, while for the three months ended June 30, 2001 losses of ($733) were recorded. Equity in earnings related to loans accounted for as investments in real estate was $2,783 during the three months ended June 30, 2000 as compared to equity in losses of $(838) during the three months ended June 30, 2001. Gains on sales of such loans amounted to $1,316 for the first quarter of 2000 as compared to $0 for the first quarter of 2001. Segment net income declined from $1,440 for the six months ended June 30, 2000 to a loss of $(7,328) for the six months ended June 30, 2001. The results for the six months ended June 30, 2001 reflect an increase of $4,073 in gains from the sale and operation of real estate owned as compared to the same period of 2000. Gain on loan sales was $576 for the six months ended June 30, 2000, while for the six months ended June 30, 2001 a loss of ($2,631) was recorded. Equity in earnings related to loans accounted for as investments in real estate decreased from $4,544 to $468 for the six months ended June 30, 2000 and 2001, respectively. Gains on sales of loans accounted for as investments in real estate for the six months ended June 30, 2001 and 2000 amounted to $0 and $1,316, respectively. The results for the six months ended June 30, 2001 also reflect increases in the provision for loan losses of $4,106 primarily related to discount loans. o Domestic Residential Mortgage Loan Servicing. Segment net income was $5,275 and $2,701 for the three months ended June 30, 2001 and 2000, respectively. Domestic residential servicing and other fees amounted to $30,485 for the three months ended June 30, 2001 as compared to $20,166 for the three months ended June 30, 2000. Similarly, segment net income was $10,553 and $6,432 for the six months ended June 30, 2001 and 2000, respectively. Domestic residential servicing and other fees amounted to $57,439 for the six months ended June 30, 2001 as compared to $39,154 for the six months ended June 30, 2000. The increase in servicing fees in both the three and six month periods ended June 30, 2001 reflects an increase in the average balance of loans serviced for others. See "Results of Operations--Non-interest Income." o Investment in Low-Income Housing Tax Credits. Segment net income declined from $5 for the three months ended June 30, 2000 to a loss of $(3,624) for the three months ended June 30, 2001. Contributing to the loss in 2001 were impairment charges of $2,490 provided on projects held for investment. Similarly, segment net income declined from $1,222 for the six months ended June 30, 2000 to a loss of $(8,234) for the six months ended June 30, 2000. Contributing to the loss in 2001 were impairment charges of $6,992 provided on projects held for investment. See "Changes in Financial Condition - Investment in Low-Income Housing Tax Credit Interests." o UK Operations. Losses for 2000 relate to the Company's equity investment in Kensington, which was sold November 22, 2000. See "Results of Operations - Equity in Losses of Investments in Unconsolidated Entities." o OTX. Segment losses were $(4,831) and $(5,271) for the three months ended June 30, 2001 and 2000, respectively. Segment losses were $(13,366) and $(9,746) for the six months ended June 30, 2001 and 2000, respectively. The net losses incurred by OTX reflect the Company's ongoing commitment to the development of its technology business. In addition, during the first quarter of 2001, the Company recorded $4,685 for nonrecurring expenses, including $3,185 for a payment due in connection with the 1997 acquisition of Amos, Inc. o Commercial Real Estate. Segment net income was $299 and $2,005 for the three months ended June 30, 2001 and 2000, respectively. Results for the three months ended June 30, 2001 included $2,795 of net operating gains on investments in real estate, which compared to $5,280 for the three months ended June 30, 2000. Results for the first quarter of 2001 included a charge of 23

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- $1,471 to write-down the carrying value of a real estate property held for sale. Results for the three months ended June 30, 2000 included a gain of $3,897 from the sale of a property held for sale. There were no such gains recorded in the three months ended June 30, 2001. In addition, interest on lines of credit declined by $2,467 during the three months ended June 30, 2001 as compared to the same period in 2000. See "Results of Operations - Non-Interest Income." Segment net income was $399 and $2,698 for the six months ended June 30, 2001 and 2000, respectively. Results for the six months ended June 30, 2001 included $4,043 of net operating gains on investments in real estate, which compared to $9,072 for the six months ended June 30, 2000. Results for the six months ended June 30, 2001 included the charge of $1,471 to write-down a real estate property held for sale. Results for the six months ended June 30, 2000 included a $2,768 gain on the sale of a subordinate security and a $3,897 gain from the sale of a property held for sale. There were no such gains recorded during the six months ended June 30, 2001. In addition, interest on lines of credit and declined by $4,578 during the six months ended June 30, 2001 as compared to the same period in 2000. See "Results of Operations - Non-Interest Income." o Subprime Single Family Residential Lending. Segment results improved from a loss of $(3,347) for the three months ended June 30, 2000 to $2,376 of income for the three months ended June 30, 2001. Results for the three months ended June 30, 2000 included $4,696 of impairment charges on subprime residual securities, whereas the results for the three months ended June 30, 2001 include $3,979 of net trading gains on subprime residual securities. Segment results improved from a loss of $(7,908) for the six months ended June 30, 2000 to $3,442 of income for the six months ended June 30, 2001. Results for the six months ended June 30, 2000 included $10,930 of impairment charges on subprime residual securities, whereas results for the six months ended June 30, 2001 include $6,520 of net trading gains on subprime residual securities. In 1999, the Company closed its domestic subprime origination business, which had been conducted primarily through OFS. o Unsecured Collections. Segment losses were $(1,328) and $(2,191) for the three months ended June 30, 2001 and 2000, respectively. Unsecured collections is primarily comprised of activities related to the Company's charged-off unsecured credit card receivables which were acquired at a discount. Collections of unsecured credit card receivables are accounted for under the cost recovery method. Results for the three months ended June 30, 2001 included provisions for loan losses of $781 as compared to $1,280 for the three months ended June 30, 2000. Segment losses were $(2,692) and $(4,364) for the six months ended June 30, 2001 and 2000, respectively. Results for the six months ended June 30, 2001 included provisions for loan losses of $1,522 as compared to $2,767 for the six months ended June 30, 2000. o Ocwen Realty Advisors. Segment income was $128 and $148 for the three months ended June 30, 2001 and 2000, respectively, and $215 and $290 for the six months ended June 30, 2001 and 2000, respectively. Ocwen Realty Advisors ("ORA") provides property valuation services and real estate research for residential and commercial properties. o Corporate Items and Other. Segment results were a loss of $(14,623) and income of $826 for the three months ended June 30, 2001 and 2000, respectively. This segment consists of extraordinary gains on repurchases of debt, amortization of the excess of net assets acquired over purchase price, business activities that are individually insignificant, amounts not allocated to the operating segments, distributions on the Capital Securities, transfer pricing mismatches, other general corporate expenses and the results of the collateralized mortgage obligation ("CMO") securities portfolio. Net loss for the three months ended June 30, 2000 includes $3,902 of extraordinary gains, net of taxes, on repurchases of debt as compared to $243 of such gains, net of taxes, during the same period of 2001. Results for the second quarter of 2001 also include a provision of $8,000 for an additional valuation allowance on the deferred tax asset. For the six months ended June 30, 2001 and 2000, segment losses were $(24,041) and $(1,084), respectively. Net loss for the six months ended June 30, 2000 includes $6,047 of extraordinary gains, net of taxes, on repurchases of debt as compared to $2,406 of such gains, net of taxes, during the same period of 2001. Results for 2001 also include a provision of $18,000 for an additional valuation allowance on the deferred tax asset. See Note 9 to the Consolidated Financial Statements, included in Item 1 herein (which is incorporated herein by reference), for additional information related to the Company's operating segments. 24

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Net Interest Income (Expense): Net interest income (expense) is the difference between interest income earned from interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income (expense) is determined by net interest spread (i.e., the difference between the yield earned on interest-earning assets and the rates incurred on interest-bearing liabilities), the relative amount of interest-earning assets and interest-bearing liabilities and the degree of mismatch in the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities. 25

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, --------------------------------------------------------------------------- 2001 2000 ------------------------------------- ------------------------------------ Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------- ----------- --------- ----------- ----------- ---------- Average Assets: Federal funds sold and repurchase agreements........ $ 226,748 $ 2,454 4.33% $ 52,442 $ 864 6.59% Trading securities (1).............................. 177,869 4,173 9.38 -- -- -- Securities available for sale (1)................... -- -- -- 863,513 16,808 7.79 Loans available for sale (2)........................ 10,227 143 5.59 38,279 917 9.58 Investment securities and other..................... 13,895 251 7.23 21,044 502 9.54 Loan portfolio (2).................................. 76,803 1,619 8.43 157,667 5,337 13.54 Match funded loans and securities (2)............... 109,601 2,737 9.99 146,748 2,952 8.05 Discount loan portfolio (2)......................... 401,313 13,841 13.80 837,944 23,075 11.02 ---------- -------- ---------- -------- Total interest earning assets.................... 1,016,456 25,218 9.92 2,117,637 50,455 9.53 -------- -------- Non-interest earning cash........................... 65,157 53,031 Allowance for loan losses........................... (18,412) (27,360) Investment in low-income housing tax credit interests.......................................... 65,611 141,691 Investment in unconsolidated entities............... 384 32,629 Real estate owned, net.............................. 134,245 183,550 Low-income housing tax credit interests held for sale............................................... 63,719 -- Investment in real estate........................... 115,937 206,151 Real estate held for sale........................... 21,135 194,596 Escrow advances on loans and loans serviced for others............................................. 324,379 180,459 Mortgage servicing rights, net...................... 75,548 14,900 Other assets........................................ 195,752 276,513 ---------- ---------- Total assets..................................... $2,059,911 $3,373,797 ========== ========== Average Liabilities and Stockholders' Equity: Interest-bearing demand deposits.................... $ 11,283 $ 103 3.65% $ 12,668 $ 76 2.40% Savings deposits.................................... 1,416 8 2.26 1,704 10 2.35 Certificates of deposit............................. 1,005,446 16,197 6.44 1,564,871 24,707 6.32 ---------- -------- --------- -------- Total interest-bearing deposits.................. 1,018,145 16,308 6.41 1,579,243 24,793 6.28 Securities sold under agreements to repurchase...... -- -- -- 336,634 5,284 6.28 Bonds-match funded agreements....................... 91,000 1,742 7.66 126,700 2,790 8.81 Obligations outstanding under lines of credit....... 85,330 1,736 8.14 182,644 3,942 8.63 Notes, debentures and other......................... 169,130 4,942 11.69 298,845 8,852 11.85 ---------- -------- ---------- -------- Total interest-bearing liabilities............... 1,363,605 24,728 7.25 2,524,066 45,661 7.24 -------- -------- Non-interest bearing deposits....................... 10,826 6,017 Escrow deposits..................................... 66,786 126,000 Excess of net assets acquired over purchase price... 31,001 52,649 Other liabilities................................... 53,725 67,351 ---------- ---------- Total liabilities................................ 1,525,943 2,776,083 Capital Securities.................................. 62,408 108,565 Stockholders' equity................................ 471,560 489,149 ---------- ---------- Total liabilities and stockholders' equity....... $2,059,911 $3,373,797 ========== ========== Net interest income................................. $ 490 $ 4,794 ======== ======== Net interest spread................................. 2.67% 2.29% Net interest margin................................. 0.19% 0.91% Ratio of interest-earning assets to interest-bearing liabilities....................... 75% 84% (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. 26

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, --------------------------------------------------------------------------- 2001 2000 ------------------------------------- ------------------------------------ Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------- ----------- --------- ----------- ----------- ---------- Average Assets: Federal funds sold and repurchase agreements........ $ 178,227 $ 4,098 4.60% $ 87,198 $ 2,573 5.90% Trading securities (1).............................. 243,334 9,873 8.11 -- -- -- Securities available for sale (1)................... -- -- -- 759,398 29,677 7.82 Loans available for sale (2)........................ 10,838 364 6.72 41,386 1,724 8.33 Investment securities and other..................... 14,195 597 8.41 24,990 829 6.63 Loan portfolio (2).................................. 86,450 3,502 8.10 162,012 9,305 11.49 Match funded loans and securities (2)............... 116,686 5,220 8.95 151,908 6,263 8.25 Discount loan portfolio (2)......................... 467,191 26,381 11.29 912,686 48,174 10.56 ---------- -------- ---------- -------- Total interest earning assets.................... 1,116,921 50,035 8.96 2,139,578 98,545 9.21 -------- -------- Non-interest earning cash........................... 55,988 54,134 Allowance for loan losses........................... (20,120) (27,389) Investment in low-income housing tax credit interests.......................................... 56,244 148,701 Investment in unconsolidated entities............... 403 33,860 Real estate owned, net.............................. 134,372 182,715 Low-income housing tax credit interests held for sale............................................... 79,290 -- Investment in real estate........................... 118,861 256,517 Real estate held for sale........................... 21,437 98,313 Escrow advances on loans and loans serviced for others............................................. 284,836 180,545 Mortgage servicing rights, net...................... 63,240 13,353 Other assets........................................ 205,981 270,657 ---------- ---------- Total assets..................................... $2,117,453 $3,350,984 ========== ========== Average Liabilities and Stockholders' Equity: Interest-bearing demand deposits.................... $ 12,882 $ 240 3.73% $ 12,722 $ 253 3.98% Savings deposits.................................... 1,365 16 2.34 1,577 20 2.54 Certificates of deposit............................. 1,057,012 34,123 6.46 1,566,673 49,205 6.28 ---------- -------- ---------- -------- Total interest-bearing deposits.................. 1,071,259 34,379 6.42 1,580,972 49,478 6.26 Securities sold under agreements to repurchase...... -- -- -- 251,597 7,924 6.30 Bonds-match funded agreements....................... 97,936 4,708 9.61 132,439 6,146 9.28 Obligations outstanding under lines of credit....... 59,108 2,456 8.31 180,937 7,413 8.19 Notes, debentures and other......................... 171,288 10,065 11.75 298,719 18,096 12.12 ---------- -------- ---------- -------- Total interest-bearing liabilities............... 1,399,591 51,608 7.37 2,444,664 89,057 7.29 -------- -------- Non-interest bearing deposits....................... 11,669 7,462 Escrow deposits..................................... 59,399 166,469 Excess of net assets acquired over purchase price... 33,052 54,306 Other liabilities................................... 59,955 73,130 ---------- ---------- Total liabilities................................ 1,563,666 2,746,031 Capital Securities.................................. 68,793 109,283 Stockholders' equity................................ 484,994 495,670 --------- ---------- Total liabilities and stockholders' equity....... $2,117,453 $3,350,984 ========== ========== Net interest (expense) income....................... $ (1,573) $ 9,488 ======== ======== Net interest spread................................. 1.59% 1.92% Net interest margin................................. (0.28)% 0.89% Ratio of interest-earning assets to interest-bearing liabilities....................... 80% 88% The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior rate), (ii) changes in rate (change in rate multiplied by prior volume) and (iii) total change in rate and volume. 27

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- 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 ---------------------------------- -------------------------------- 2001 vs. 2000 2001 vs. 2000 ---------------------------------- -------------------------------- 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......... $ (388) $ 1,978 $ 1,590 $ (672) $ 2,197 $ 1,525 Securities available for sale........................ -- (16,808) (16,808) -- (29,677) (29,677) Trading securities................................... 2,083 2,090 4,173 1,053 8,820 9,873 Loans available for sale............................. (281) (493) (774) (283) (1,077) (1,360) Investment securities and other...................... (105) (146) (251) 185 (417) (232) Loan portfolio....................................... (1,576) (2,142) (3,718) (2,247) (3,556) (5,803) Match funded loans and securities.................... 625 (840) (215) 500 (1,543) (1,043) Discount loan portfolio.............................. 4,835 (14,069) (9,234) 3,158 (24,951) (21,793) -------- --------- --------- -------- --------- --------- Total interest-earning assets..................... 5,193 (30,430) (25,237) 1,694 (50,204) (48,510) -------- --------- -------- -------- --------- --------- Interest-Bearing Liabilities: Interest-bearing demand deposits..................... 36 (9) 27 (16) 3 (13) Savings deposits..................................... -- (2) (2) (2) (2) (4) Certificates of deposit.............................. 492 (9,002) (8,510) 1,336 (16,418) (15,082) -------- --------- -------- -------- --------- --------- Total interest-bearing deposits................... 528 (9,013) (8,485) 1,318 (16,417) (15,099) Securities sold under agreements to repurchase....... -- (5,284) (5,284) -- (7,924) (7,924) Bonds-match funded agreements........................ (332) (716) (1,048) 214 (1,652) (1,438) Obligations outstanding under lines of credit........ (214) (1,992) (2,206) 104 (5,061) (4,957) Notes, debentures and other interest-bearing obligations......................................... (118) (3,792) (3,910) (528) (7,503) (8,031) -------- --------- -------- -------- --------- --------- Total interest-bearing liabilities.............. (136) (20,797) (20,933) 1,108 (38,557) (37,449) -------- --------- -------- -------- --------- --------- $ 5,329 $ (9,633) $ (4,304) $ 586 $ (11,647) $ (11,061) ======== ========= ======== ======== ========= ========== The Company's net interest income before provision for loan losses amounted to $490 for the three months ended June 30, 2001 as compared to net interest income of $4,794 for the three months ended June 30, 2000, a decline of $4,304 or 90%. The decrease was due to a decrease in average interest-earning assets, offset by an increase in the net interest spread and a decrease in average interest-bearing liabilities. Average interest-earning assets decreased by $1,101,181 or 52% during the three months ended June 30, 2001 and reduced interest income by $30,430. Average interest-bearing liabilities decreased by $1,160,461 or 46% during the three months ended June 30, 2001 and decreased interest expense by $20,797. The impact of these volume changes resulted in an $9,633 decrease in net interest income. The net interest spread increased 38 basis points as a result of a 39 basis-point increase in the weighted average rate on interest-earning assets, offset by 1 basis-point increase in the weighted average rate on interest-bearing liabilities. The impact of these rate changes resulted in a $5,329 increase in net interest income. The Company's net interest expense before provision for loan losses amounted to $1,573 for the six months ended June 30, 2001 as compared to net interest income of $9,488 for the six months ended June 30, 2000, a decline of $11,061 or 117%. The decrease was due to a decrease in average interest-earning assets and a decrease in the net interest spread, offset by a decrease in average interest-bearing liabilities. Average interest-earning assets decreased by $1,022,657 or 48% during the six months ended June 30, 2001 and reduced interest income by $50,204. Average interest-bearing liabilities decreased by $1,041,036 or 43% during the six months ended June 30, 2001 and decreased interest expense by $38,557. The impact of these volume changes resulted in a $11,647 decrease in net interest income. The net interest spread decreased 33 basis points as a result of a 25 basis-point decrease in the weighted average rate on interest-earning assets and a 8 basis-point increase in the weighted average rate on interest-bearing liabilities. The impact of these rate changes resulted in a $586 increase in net interest income. 28

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Average Balance Increase Average Yield Increase -------------------------- (Decrease) ------------------ (Decrease) For the three months ended June 30, 2001 2000 $ 2001 2000 Basis Points - --------------------------------------- ----------- ----------- ----------- ------- ------- ------------ Federal funds sold and repurchase agreements........................... $ 226,748 $ 52,442 $ 174,306 4.33% 6.59% (226) Trading securities..................... 177,869 -- 177,869 9.38 -- 938 Securities available for sale.......... -- 863,513 (863,513) -- 7.79 (779) Loans available for sale............... 10,227 38,279 (28,052) 5.59 9.58 (399) Investment securities and other........ 13,895 21,044 (7,149) 7.23 9.54 (231) Loan portfolio......................... 76,803 157,667 (80,864) 8.43 13.54 (511) Match funded loans and securities...... 109,601 146,748 (37,147) 9.99 8.05 194 Discount loan portfolio................ 401,313 837,944 (436,631) 13.80 11.02 278 ----------- ----------- ----------- $ 1,016,456 $ 2,117,637 $(1,101,181) 9.92 9.53 39 =========== =========== =========== Increase Increase Average Balance (Decrease) Average Yield (Decrease) For the six months ended June 30, 2001 2000 $ 2001 2000 Basis Points - --------------------------------------- ----------- ----------- ----------- ------- ------- ------------ Federal funds sold and repurchase agreements........................... $ 178,227 $ 87,198 $ 91,029 4.60% 5.90% (130) Trading securities..................... 243,334 -- 243,334 8.11 -- 811 Securities available for sale.......... -- 759,398 (759,398) -- 7.82 (782) Loans available for sale............... 10,838 41,386 (30,548) 6.72 8.33 (161) Investment securities and other........ 14,195 24,990 (10,795) 8.41 6.63 178 Loan portfolio......................... 86,450 162,012 (75,562) 8.10 11.49 (339) Match funded loans and securities...... 116,686 151,908 (35,222) 8.95 8.25 70 Discount loan portfolio................ 467,191 912,686 (445,495) 11.29 10.56 73 ----------- ----------- ----------- $ 1,116,921 $ 2,139,578 $(1,022,657) 8.96 9.21 (25) =========== =========== =========== Interest income on trading securities amounted to $4,173 during the second quarter of 2001 as compared to $0 during the second quarter of 2000. This increase resulted from the Company's change in its policy for securities available for sale on September 30, 2000 to account for them as trading. The table below indicates the composition of the portfolio of trading securities during the three and six months ended June 30, 2001: Average Balance -------------------------------------------------- Annualized For the periods ended June 30, 2001 Three Months Six Months Average Yield - ----------------------------------- ---------------------- ---------------------- ---------------------------- Amount Percent Amount Percent Three Months Six Months --------- -------- --------- -------- ------------ ------------ CMOs (AAA-rated)................... $ 72,801 41% $ 136,716 56% 5.48% 6.55% Subordinates and residuals......... 105,068 59 106,618 44 12.09% 10.12% --------- -------- --------- -------- $ 177,869 100% $ 243,334 100% 9.38% 8.11% ========= ======== ========= ======== 29

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Interest income on securities available for sale amounted to $0 and $16,808 during the second quarter of 2001 and 2000, respectively. As noted above, on September 30, 2000 the Company changed its policy for securities available for sale and transferred those securities to the trading category. The following table indicates the composition of the portfolio of securities available for sale during the three and six months ended June 30, 2000: Average Balance --------------------------------------------------- Annualized Three Months Six Months Average Yield ----------------------- ----------------------- ---------------------------- Amount Percent Amount Percent Three Months Six Months ---------- -------- ---------- -------- ------------ ------------ CMOs (AAA-rated)................... $ 726,224 84% $ 607,863 80% 6.40% 6.34% Subordinates and residuals......... 137,289 16 151,535 20% 15.10% 13.73% ---------- -------- ---------- -------- $ 863,513 100% $ 759,398 100% 7.79% 7.82% ========== ======== ========== ======== The decline in the average balance of CMOs during 2000 and 2001 reflects a planned reduction in the use of these securities to meet the Qualified Thrift Lender requirements. Interest income on the loan portfolio decreased by $3,718 or 70% during the three months ended June 30, 2001 versus the same period in 2000 due to a $80,864 or 51% decrease in the average balance and a 511 basis-point decrease in the average yield. Interest income on the loan portfolio decreased by $5,803 or 62% during the six months ended June 30, 2001 versus the same period in 2000 due to a $75,562 or 47% decrease in the average balance and a 339 basis-point decrease in the average yield. During 1999, the Company ceased origination of multifamily and commercial loans. See "Changes in Financial Condition - Loan Portfolio." Interest income on match funded loans and securities is comprised of income earned on match funded loans acquired in connection with the acquisition of OAC in October 1999 and on four unrated residual securities transferred by the Company to Ocwen NIMS Corp. in exchange for non-recourse notes. The loans were previously securitized by OAC under a securitization accounted for as a financing transaction. See "Changes in Financial Condition - Match Funded Loans and Securities." Interest income on discount loans decreased by $9,234 or 40% during the three months ended June 30, 2001 as compared to the same period in 2000 as a result of a $436,631 or 52% decline in the average balance offset by a 278 basis-point increase in the average yield. Interest income on discount loans decreased by $21,793 or 45% during the six months ended June 30, 2001 as compared to the same period in 2000 as a result of a $445,495 or 49% decline in the average balance partially offset by a 73 basis-point increase in the average yield. See "Changes in Financial Condition - Discount Loans, Net." The yield on the discount loan portfolio 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. Average Balance Increase Average Rate Increase ------------------------- (Decrease) --------------- (Decrease) For the three months ended June 30, 2001 2000 $ 2001 2000 Basis Points - ---------------------------------------------------- ----------- ----------- ----------- ------ ------ ------------ Interest-bearing deposits........................... $1,018,145 $1,579,243 $ (561,098) 6.41% 6.28% 13 Securities sold under agreements to repurchase...... -- 336,634 (336,634) --% 6.28% (628) Bonds-match funded agreements....................... 91,000 126,700 (35,700) 7.66% 8.81% (115) Obligations outstanding under lines of credit ...... 85,330 182,644 (97,314) 8.14% 8.63% (49) Notes, debentures and other......................... 169,130 298,845 (129,715) 11.69% 11.85% (16) ---------- ---------- ----------- $1,363,605 $2,524,066 $(1,160,461) 7.25% 7.24% 1 ========== ========== =========== 30

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Average Balance Increase Average Rate Increase ------------------------- (Decrease) --------------- (Decrease) For the six months ended June 30, 2001 2000 $ 2001 2000 Basis Points - ---------------------------------------------------- ----------- ----------- ----------- ------ ------ ------------ Interest-bearing deposits........................... $1,071,259 $1,580,972 $ (509,713) 6.42% 6.26% 16 Securities sold under agreements to repurchase...... -- 251,597 (251,597) --% 6.30% (630) Bonds-match funded agreements....................... 97,936 132,439 (34,503) 9.61% 9.28% 33 Obligations outstanding under lines of credit ...... 59,108 180,937 (121,829) 8.31% 8.19% 12 Notes, debentures and other......................... 171,288 298,719 (127,431) 11.75% 12.12% (37) ---------- ---------- ----------- $1,399,591 $2,444,664 $(1,045,073) 7.37% 7.29% 8 ========== ========== =========== Interest expense on interest-bearing deposits decreased $8,485 or 34% during the three months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $561,098 or 36% decrease in the average balance. Interest expense on interest-bearing deposits decreased $15,099 or 31% during the six months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $509,713 or 32% decrease in the average balance. The decline in the average balance was primarily related to certificates of deposit. The decline in average deposits is consistent with the decline in average assets as the Company moves from capital-intensive businesses to fee-based businesses. See "Changes in Financial Condition - Deposits." The Company held no securities sold under agreements to repurchase during the three months ended June 30, 2001. During the three months ended June 30, 2000, securities sold under agreements to repurchase were used primarily to fund the purchase of CMOs, the average balance of which declined significantly for the second quarter of 2001 as compared to the second quarter of 2000. Interest expense on bonds-match funded agreements is comprised of interest incurred on bonds-match funded agreements acquired as a result of the OAC acquisition in October 1999 and on non-recourse notes which resulted from the Company's transfer of four unrated residual securities in December 1999 to Ocwen NIMS Corp. in exchange for non-recourse notes. See "Changes in Financial Condition - Bonds - Match Funded Agreements." Interest expense on obligations outstanding under lines of credit decreased $2,206 or 56% during the three months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $97,314 or 53% decrease in the average balance. Interest expense on obligations outstanding under lines of credit decreased $4,957 or 67% during the six months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $121,829 or 67% decrease in the average balance. Average balances outstanding under lines of credit decreased between the six months ended June 30, 2000 and the same period in 2001, primarily because of the sale during 2000 and 2001 of real estate properties and loans at OAC. During the six months ended June 30, 2001, lines of credit were used to fund the investment in real estate and construction loans at OAC and, beginning in the second quarter of 2001, to fund servicing advances that were purchased in connection with the acquisition of loans serviced for others under servicing agreements entered into by the Company. See "Changes in Financial Condition - Obligations Outstanding Under Lines of Credit." Interest expense on notes, debentures and other interest bearing obligations decreased $3,910 or 44% during the three months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $129,715 or 43% decrease in the average balance. Interest expense on notes, debentures and other interest bearing obligations decreased $8,031 or 44% during the six months ended June 30, 2001 as compared to the same period in 2000 primarily due to a $127,413 or 43% decrease in the average balance. The decrease in the average balances is primarily due to the Company's repurchases of debt during 2001 and 2000. See "Changes in Financial Condition - Notes, Debentures and Other." Provisions for Loan Losses. Provisions for losses on loans are charged to operations to maintain an allowance for losses on the loan portfolio, the discount loan portfolio and match funded loans at a level which management considers adequate based upon an evaluation of known and inherent risks in such portfolios. Management's periodic evaluation is based on an analysis of the discount loan portfolio, the loan portfolio and match funded loans, historical loss experience, current economic conditions and trends, collateral values and other relevant factors. 31

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table presents the provisions for loan losses by loan portfolio type for the periods indicated: Three Months Six Months --------------------------- --------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------- ---------- --------- ---------- --------- Discount loan portfolio................................ $ 9,417 $ 4,489 $ 16,148 $ 7,220 Loan portfolio......................................... 875 (1,261) 2,086 (1,415) Match funded loans..................................... 5 (93) 183 (62) ---------- --------- ---------- --------- $ 10,297 $ 3,135 $ 18,417 $ 5,743 ========== ========= ========== ========= The increased provisions for loan losses in 2001 reflect a strengthening of reserves on both the discount loan and loan portfolios in response to changes in loss experience and credit quality of the loans. The following table sets forth the allowance for loan losses as a percentage of the respective loan balances at the dates indicated: June 30, 2001 December 31, 2000 June 30, 2000 -------------------------- ------------------------ ------------------------- Allowance as Allowance as Allowance as Allowance a % of loans Allowance a % of loans Allowance a % of loans ---------- ------------ --------- ------------ ---------- ------------ Discount loan portfolio................ $ 25,679 7.72% $ 20,871 3.75% $ 22,387 2.71% Loan portfolio......................... 2,940 3.67% 2,408 2.51% 5,439 3.53% Match funded loans..................... 232 0.35% 285 0.35% 433 0.47% -------- -------- -------- $ 28,851 6.01% $ 23,564 3.21% $ 28,259 2.63% ======== ======== ======== For additional information regarding the Company's allowance for loan losses on the above portfolios, see "Changes in Financial Condition - Allowance for Loan Losses." For information relating to the Company's 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 the Company's non-interest income during the periods indicated: Three Months Six Months -------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ---------------------------------------------------------------- ----------- ----------- ----------- ----------- Servicing and other fees........................................ $ 33,740 $ 22,559 $ 64,857 $ 46,725 Gain (loss) on interest-earning assets, net..................... 422 5,270 (1,409) 16,264 Gain on trading and match funded securities, net................ 4,550 -- 9,739 -- Impairment charges on securities available for sale............. -- (4,764) -- (11,597) Loss on real estate owned, net.................................. (1,881) (3,006) (2,865) (10,013) (Loss) gain on other non-interest earning assets, net........... (975) 5,044 (519) 5,182 Net operating gains on investments in real estate............... 486 8,063 3,040 13,616 Amortization of excess of net assets acquired over purchase 4,583 2,998 9,166 5,792 price........................................................... Other income.................................................... 2,437 1,070 4,483 2,209 ----------- ----------- ----------- ----------- Total........................................................... $ 43,362 $ 37,234 $ 86,492 $ 68,178 =========== =========== =========== =========== Servicing and other fees are primarily comprised of fees from investors for servicing mortgage loans. Servicing and other fees for the three months ended June 30, 2001 increased $11,181 largely due to the growth in loans serviced for others. The average unpaid principal balance of loans serviced for others amounted to $13,761,392 during the three months ended June 30, 2001 as compared to $10,799,002 for the three months ended June 30, 2000. In addition to servicing fees, the increase in servicing and other fees during the second quarter of 2001 included increases in interest earned on custodial accounts during the holding period between collection of borrower payments and remittance to investors, in late charges on residential loans and in other miscellaneous servicing related fees. Servicing and other fees for the six months ended June 30, 2001 increased $18,132 as compared to the same period in 2000. The average unpaid principal balance of loans serviced for others amounted to $12,654,883 during the six months ended June 30, 2001 as compared to $10,801,888 for the six months ended June 30, 2000. Interest earned on custodial accounts during the holding period 32

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- between collection of borrower payments and remittance to investors, late charges on residential loans and other miscellaneous servicing related fees also contributed to the increase in servicing and other fees during 2001. The following table sets forth the Company's loans serviced for others at the dates indicated: Discount Loans Subprime Loans Other Loans Total --------------------- --------------------- --------------------- --------------------- No. of No. of No. of No. of Amount Loans Amount Loans Amount Loans Amount Loans ----------- ------- ----------- ------- ----------- ------- ----------- ------- June 30, 2001 (1): Loans securitized: Residential loans........... $ 778,732 13,085 $ 582,203 6,206 $ -- -- $ 1,360,935 19,291 Commercial loans............ 4,299 27 -- -- -- -- 4,299 27 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 783,031 13,112 $ 582,203 6,206 $ -- -- $ 1,365,234 19,318 =========== ======= =========== ======= =========== ======= =========== ======= Residential loans........... $ 634,636 12,727 $13,381,528 212,107 $ 33,523 373 $14,049,687 225,207 Commercial loans............ 71,680 67 906 10 825,813 182 898,399 259 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 706,316 12,794 $13,382,434 212,117 $ 859,336 555 $14,948,086 225,466 =========== ======= =========== ======= =========== ======= =========== ======= Total loans serviced for others: Residential loans........... $ 1,413,368 25,812 $13,963,731 218,313 $ 33,523 373 $15,410,622 244,498 Commercial loans............ 75,979 94 906 10 825,813 182 902,698 286 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 1,489,347 25,906 $13,964,637 218,323 $ 859,336 555 $16,313,320 244,784 =========== ======= =========== ======= =========== ======= =========== ======= December 31, 2000 (2): Loans securitized: Residential loans........... $ 858,549 14,232 $ 719,231 7,456 $ -- -- $ 1,577,780 21,688 Commercial loans............ 6,884 38 -- -- -- -- 6,884 38 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 865,433 14,270 $ 719,231 7,456 $ -- -- $ 1,584,664 21,726 =========== ======= =========== ======= =========== ======= =========== ======= Loans serviced for third parties: Residential loans........... $ 668,736 13,397 $ 8,210,658 128,964 $ 37,510 402 $ 8,916,904 142,763 Commercial loans............ 77,551 81 1,422 16 779,983 167 858,956 264 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 746,287 13,478 $ 8,212,080 128,980 $ 817,493 569 $ 9,775,860 143,027 =========== ======= =========== ======= =========== ======= =========== ======= Total loans serviced for others: Residential loans........... $ 1,527,285 27,629 $ 8,929,889 136,420 $ 37,510 402 $10,494,684 164,451 Commercial loans............ 84,435 119 1,422 16 779,983 167 865,840 302 ----------- ------- ----------- ------- ----------- ------- ----------- ------- $ 1,611,720 27,748 $ 8,931,311 136,436 $ 817,493 569 $11,360,524 164,753 =========== ======= =========== ======= =========== ======= =========== ======= (1) Does not include approximately 48,700 loans with an aggregate unpaid principal balance of $4,471,300 that were acquired under servicing agreements during the first half of 2001, but had not been boarded in the Company's loan servicing system as of June 30, 2001. (2) Does not include approximately 38,500 loans with an unpaid principal balance of approximately $1,027,600 that were acquired on December 31, 2000 but were not boarded in the Company's loan servicing system until 2001. For the three months ended June 30, 2001, net gain on interest-earning assets of $422 was primarily comprised of $380 of gains on the sale of loans. Net gain on interest-earning assets for the three months ended June 30, 2000 of $5,270 was primarily comprised of $5,060 of gains on the sale of loans, primarily single family residential discount loans. For the six months ended June 30, 2001, net loss on interest-earning assets of $(1,409) was primarily comprised of $(1,517) of losses on the sale of loans. Net gain on interest-earning assets for the six months ended June 30, 2000 of $16,264 was primarily comprised of $12,640 of gains on the sale of loans, primarily single family residential discount loans, and a gain of $2,768 on the sale of a commercial subordinate security. The gain or loss on trading and match funded securities, net, includes both unrealized gains and losses on securities and realized gains and losses resulting from sales thereof. For trading securities, changes in fair value are reported in income in the period of change. The net gain on trading and match funded securities of $4,550 for the three months ended June 30, 2001 is primarily comprised of a $4,544 gain from the sale of $17,343 of subprime residual securities. The net gain on trading and match funded 33

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- securities of $9,739 for the six months ended June 30, 2001 is primarily comprised of the $4,544 gain in the second quarter (see above) and an increase in net unrealized gains. Impairment charges on securities available for sale during the three and six months ended June 30, 2000 represent declines in fair value that were deemed to be other-than-temporary. See "Changes in Financial Condition - Securities Available for Sale." The following table sets forth the results of the Company's 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, 2001 2000 2001 2000 - ------------------------------------------ -------- ------- ------- ------- Gains on sales............................ $ 3,147 $ 7,127 $ 9,523 $11,683 Provision for losses in fair value........ (3,522) (7,752) (9,703) (16,964) Carrying costs, net....................... (1,506) (2,381) (2,685) (4,732) -------- ------- ------- ------- Loss on real estate owned, net............ $(1,881) $(3,006) $(2,865) $(10,013) ======= ======= ======= ======== See "Changes in Financial Condition - Real Estate Owned" for additional information regarding real estate owned. Losses on other non-interest earning assets during the first six months of 2001 resulted primarily from sales of investments in low-income housing tax credit interests. For the first six months of 2000, gains on other non-interest earning assets resulted primarily from $5,213 of gains on sales of real estate during the second quarter. The following table sets forth the results of the Company's investments in real estate during the periods indicated: Three Months Six Months ------------------ ------------------ For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------ ------- ------- ------- ------- Operating income, net (1)................. $ 2,795 $ 5,280 $ 4,043 $ 9,072 Equity in (losses) earnings of loans accounted for as investments in real estate (2).............................. (838) 2,783 468 4,544 Impairment write-down (3)................. (1,471) -- (1,471) -- ------- ------- ------- ------- $ 486 $ 8,063 $ 3,040 $13,616 ======= ======= ======= ======= (1) The decrease in operating income from investments in real estate during 2001 is primarily due to sales of properties during 2000. (2) The decline in equity in earnings related to certain loans accounted for as investments in real estate during 2001 is primarily due to the repayment of loans and an increase in non-performing loans. (3) Write-down of the carrying value of the Company's investment in a shopping center in Bradenton, Florida that is classified as real estate held for sale. See "Changes in Financial Condition - Investments in Real Estate" and "Changes in Financial Condition - Real Estate Held for Sale." The amortization of excess of net assets acquired over purchase price resulted from the Company's acquisition of OAC on October 7, 1999. The acquisition resulted in an excess of net assets acquired over the purchase price of $60,042, which is being amortized on a straight-line basis. Effective October 1, 2000, the amortization period was reduced from 60 months to 39 months, which accounts for the increase in amortization to $4,583 for the second quarter of 2001 as compared to $2,998 for the second quarter of 2000. The change in amortization period is also responsible for the increase in amortization from $5,792 to $9,166 during the six months ended June 30, 2000 and 2001, respectively. The unamortized balance of the excess of net assets acquired over purchase price at June 30, 2001 was $27,499, as compared to $36,665 at December 31, 2000. 34

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Non-Interest Expense. The following table sets forth the principal components of the Company's non-interest expense during the periods indicated: Three Months Six Months -------------------- -------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------- -------- -------- -------- -------- Compensation and employee benefits... $ 21,309 $ 22,397 $ 42,244 $ 38,980 Occupancy and equipment.............. 3,174 2,952 6,267 6,215 Technology and communication costs... 5,556 5,754 15,704 11,375 Loan expenses........................ 2,835 2,987 7,070 6,917 Net operating losses on investments in certain low-income housing tax credit interests................... 2,756 840 7,818 2,339 Amortization of excess of purchase price over net assets acquired..... 778 795 1,556 1,568 Professional services and regulatory fees............................... 3,994 2,965 8,020 6,804 Other operating expenses............. 2,454 3,154 5,033 5,720 -------- -------- -------- -------- Total.............................. $ 42,856 $ 41,844 $ 93,712 $ 79,918 ======== ======== ======== ======== The $1,088 decrease in compensation and employee benefits for the three months ended June 30, 2001 as compared to the same period in 2000 was due in large part to a $1,422 decline in compensation expense related to contract programmers. The $3,264 increase in compensation and employee benefits for the six months ended June 30, 2001 as compared to the same period in 2000 was due in large part to the reversal of accrued profit sharing expense in the amount of $6,012 during the first quarter of 2000 as a result of the Company's decision to suspend its long-term incentive plan. Excluding the $6,012 accrual reversal, compensation and employee benefits decreased $2,748 during the six months ended June 30, 2001. This decrease is primarily due to a $2,706 decline in compensation expense related to contract programmers. Occupancy and equipment costs consist primarily of rent, depreciation and office operations costs. Technology and communication costs consists primarily of depreciation of computer hardware and software, technology-related consulting fees (primarily OTX) and telephone expense. The $4,329 increase in technology and communication costs for the six months ended June 30, 2001 is primarily due to $4,685 of nonrecurring expenses, including a $3,185 charge to record a payment due on the 1997 acquisition of AMOS, Inc. Net operating losses on investments in certain low-income housing tax credit interests increased $1,916 and $5,479 during the three and six months ended June 30, 2001, respectively, as compared to the same periods in 2000. These increases are largely the result of impairment charges of $2,490 and $4,503 recorded in the first and second quarters of 2001, respectively. See "Changes in Financial Condition - Investment in Low-Income Housing Tax Credit Interests." Other operating expenses are primarily comprised of marketing costs, depository expenses and travel expense. 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%. The Company recorded $1,697 and $2,918 of distributions to holders of the Capital Securities during the three months ended June 30, 2001 and 2000, respectively, and $3,750 and $6,112 during the six months ended June 30, 2001 and 2000, respectively. The decline in distributions is the result of repurchases during 2000 and 2001. See Note 4 to the 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." Equity in Income (Losses) of Investments in Unconsolidated Entities. During the three and six months ended June 30, 2001, the Company recorded equity in the income of investments in unconsolidated entities of $139 and $184, respectively. This compares to losses of $(1,812) and $(4,072) for the three and six months ended June 30, 2000, respectively. The three and six months ended June 30, 2000 included equity in losses of Kensington Group plc of $1,778 and $4,112, respectively, including goodwill amortization. The Company sold its equity investment in Kensington on November 22, 2000. 35

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 the Company's income tax (expense) benefit and effective tax rates for the periods indicated: Three Months Six Months ---------------------------- ---------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ----------------------------------------------------- ---------- ---------- ----------- ---------- Income tax (expense) benefit on loss before taxes and extraordinary gain............................ $ 7,562 $ 2,380 $ 11,800 $ 5,635 Provision for valuation allowance on current year's deferred tax asset................................ (10,387) -- (10,387) -- Provision for valuation allowance on prior year's deferred tax asset................................ (8,000) -- (18,000) -- --------------------------------------------------------------- Income tax (expense) benefit...................... (10,825) 2,380 (16,587) 5,635 Income tax expense on extraordinary gain............. (143) (1,752) (1,413) (2,716) --------------------------------------------------------------- Total income tax (expense) benefit................ $ (10,968) $ 628 $ (18,000) $ 2,919 =============================================================== For the six months ended June 30, 2000, the Company's effective tax rate before the provision for the valuation allowance on the deferred tax asset was 31% and reflects tax credits of $2,702 and $6,417 during the three and six month ending June 30, 2000, respectively, resulting from the Company's investment in low-income housing tax credit interests. For the six months ended June 30, 2001, the Company's effective tax rate before the provision for the deferred tax valuation allowance was 39% and reflected tax credits of $656 and $952 during the three and six month ending June 30, 2001, respectively. The provision for deferred tax asset valuation allowance is a non-cash charge increasing the aggregate valuation allowance to $87,260 based on management's estimate of the amount of the deferred tax asset that more likely than not will be realized under the applicable accounting rules. See "Changes in Financial Condition - Deferred Tax Asset, Net." 36

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Extraordinary Gain on Repurchase of Debt, Net of Taxes. The following table sets forth the components of the extraordinary gain resulting from the repurchase of the Company's debt securities during the periods indicated: Three Months Six Months -------------------- -------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------- -------- -------- -------- -------- Capital Securities: Face amount repurchased............ $ 2,526 $ 8,610 $ 18,371 $ 8,610 ======== ======== ======== ======== Extraordinary gain................. 386 3,671 3,722 3,671 Income taxes....................... 143 1,138 1,377 1,138 -------- -------- -------- -------- Net extraordinary gain............ $ 243 $ 2,533 $ 2,345 $ 2,533 ======== ======== ======== ======== 11.875% Notes due October 1, 2003: Face amount repurchased............ $ -- $ -- $ 4,200 $ -- ======== ======== ======== ======== Extraordinary gain................. -- -- 97 -- Income taxes....................... -- -- 36 -- -------- -------- -------- -------- Net extraordinary gain............ $ -- $ -- $ 61 $ -- ======== ======== ======== ======== 11.5% Redeemable Notes due July 1, 2005: Face amount repurchased............ $ -- $ 9,880 $ -- $ 20,000 ======== ======== ======== ======== Extraordinary gain................. -- 1,984 -- 5,092 Income taxes....................... -- 615 -- 1,578 -------- -------- -------- -------- Net extraordinary gain............ $ -- $ 1,369 $ -- $ 3,514 ======== ======== ======== ======== Grand Totals: Face amount repurchased............ $ 2,526 $ 18,490 $ 22,571 $ 28,610 ======== ======== ======== ======== Extraordinary gain................. 386 5,655 3,819 8,763 Income taxes....................... 143 1,753 1,413 2,716 -------- -------- -------- -------- Net extraordinary gain............ $ 243 $ 3,902 $ 2,406 $ 6,047 ======== ======== ======== ======== 37

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Changes in Financial Condition Trading Securities. The following table sets forth the fair value of the Company's trading securities at the dates indicated: June 30, December 31, 2001 2000 -------- -------- Mortgage-related securities: Collateralized mortgage obligations (AAA-rated)..... $ 62,080 $277,595 -------- -------- Subordinates, residuals and other securities: Single family residential: BB-rated subordinates............................ 4,280 4,563 B-rated subordinates............................. 2,431 2,911 Unrated subordinates............................. 9,142 9,361 Unrated subprime residuals....................... 69,620 93,176 Multi-family residential and commercial: Unrated subordinates............................. 2,577 2,636 -------- -------- 88,050 112,647 Trading securities.................................... $150,130 $390,242 ======== ======== During the six months ended June 30, 2001, trading securities declined $240,112. This decline was primarily due to $129,309 of maturities and principal repayments, $126,339 of sales and $3,022 of net premium amortization, offset in part by purchases of $24,093. Residual and subordinate securities at June 30, 2001 and December 31, 2000 include retained interests with a fair value of $39,649 and $43,016, respectively, from securitizations of loans completed by the Company in prior years. The Company determines the present value of anticipated cash flows utilizing valuation 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, the Company currently applies a discount rate of 17% to 20% 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. The Company makes assumptions as to the prepayment rates of the underlying loans, which the Company believes are reasonable, in estimating fair values of the subordinate securities and residual securities retained. During 2001, the Company utilized proprietary prepayment curves (reaching an approximate range of annualized rates of 11% to 45%). During 2001, the Company estimated annual losses of between 0.9% and 5.5% of the unpaid principal balance of the underlying loans. See Note 5 to the Interim Consolidated Financial Statements included in Item 1 herein. 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. The Company periodically assesses the carrying value of its subordinate securities and residual securities retained. There can be no assurance that the Company's 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 the Company's estimates, the carrying value of the Company's subordinate securities and residual securities retained may be decreased during the period management recognizes the disparity. Other factors may also result in a write-down of the Company's subordinate securities and residual securities in subsequent months. During the six months ended June 30, 2000, which was prior to the transfer of securities available for sale to trading, 38

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- the Company recorded $11,597 of impairment charges on its portfolio of subordinate and residual securities as a result of declines in value that were deemed to be "other-than-temporary." The following tables detail the Company's residual and subordinate trading securities portfolio at June 30, 2001, and its estimates of expected yields on such securities, taking into consideration expected prepayment and loss rates together with other factors: Anticipated Subordi- Yield to Class Size nation/OC Maturity at Prospective Issue Rating ---------- Interest Level at: ----------- Yield at Securitization (issuer) Security Date Rating Agencies Issuance 6/30/01 % 6/30/01 Purchase 6/30/01 6/30/01 - ----------------------- -------- ---- ------ -------- -------- ------- -------- ------- -------- ------- ------- Single-family residential Subordinates: BCF 1996 R1(1)........... B3 Oct-96 UR (a), (b) $ 70,773 $ 32,811 50.00% None 15.70% 8.51% 39.05% CSFB 1996-1R (ITT 94-P1) (2).......... 4B2, Oct-96 UR (b), (c) 1,046 95 100.00 None N/A N/A (A) BCF 1997 R2 (1).......... B4 Jun-97 Ba2, BB (b), (c) 6,358 5,443 73.54 7.57% 9.58 11.28 50.45 B5 B2,B 6,264 5,364 73.54 2.81 10.74 12.08 N/M B6 UR 13,883 3,162 73.54 None 15.98 4.78 (A) SBMS 1997-HUD1 (3) B5 Apr-97 B2, n.a. (b), (d) 9,785 5,465 100.00 -- 16.87 (22.50) 1.02 ORMBS 1998 R1 (4)........ B4 Mar-98 UR (b), (d) 101,774 36,070 82.48 None 20.50 (30.33) 7.72 ORMBS 1998 R2 (4)........ B4A Jun-98 Ba2 (b) 1,056 941 100.00 5.91 13.22 5.18 N/M B4F Ba2 937 842 100.00 5.39 19.23 4.12 70.06 B5A B2 880 770 100.00 3.72 23.78 9.16 N/M B5F B2 937 842 100.00 2.22 11.78 2.44 N/M B6A UR 3,696 1,307 100.00 None 16.72 24.83 N/M B6F UR 3,345 592 100.00 None 19.50 (16.75) (A) ORMBS 1998 R3 (4)........ B4 Sep-98 Ba2, BB (b), (d) 11,765 7,503 85.87 -- 11.71 (47.25) N/M ORMBS 1999 R1 (4)........ B5A Mar-99 B2, B (b), (d) 1,630 1,482 100.00 3.36 17.73 34.07 50.40 B5F B2, B 1,843 1,531 100.00 3.29 17.74 41.51 N/M B6A UR 3,586 1,145 100.00 None 18.00 57.57 (36.38) B6F UR 4,299 1,655 100.00 None 18.00 101.04 (A) ORMBS 1999 R2 (4) ....... B4 Jun-99 BB (a),(c),(d) 10,530 10,080 100.00 2.69 13.45 38.97 B5 B 4,680 1,820 100.00 -- 18.45 85.42 (A) Subprime residuals: SBMS 1996 3 (5).......... R Jun-96 UR (a), (b) 130,062 19,925 100.00 25.47OC 15.52 1.82 25.91 MLM1 1996 1 (6).......... R Sep-96 UR (a), (b) 81,142 10,600 100.00 42.46OC 15.16 3.48 28.12 MS 1997 1 (7)............ X1 Jun-97 UR (a), (b) 17,727 7,376 100.00 6.06OC 21.47 15.75 20.11 X2 87,118 9,519 100.00 25.45OC 20.38 0.68 11.11 1997 OFS 2 (8)........... X Sep-97 UR (a), (b) 102,201 17,618 100.00 12.77OC 19.65 (1.88) 20.66 1997 OFS 3 (8)........... X Dec-97 UR (a), (b) 208,784 46,585 100.00 15.48OC 19.59 5.91 19.06 1998 OFS 1 (8)........... X Mar-98 UR (b), (d) 161,400 35,744 100.00 4.28OC 18.00 (2.61) 7.49 1998 OFS 2 (8)........... X Jun-98 UR (a), (b) 382,715 96,880 100.00 3.91OC 19.46 (0.22) 10.11 1998 OFS 3 (8)........... X Sep-98 UR (a), (d) 261,649 97,627 100.00 5.70OC 18.00 4.23 24.28 1998 OFS 4 (8)........... X Dec-98 UR (a),(b),(c) 349,000 166,399 100.00 2.16OC 18.00 (118.65) (412.24) 1999 OFS 1 (8) .......... X Jun-99 UR (a), (b) 148,628 95,437 100.00 5.81OC 18.00 (1.97) (3.35) PANAM 1997-1 (9)......... X Dec-97 UR (a), (b) 113,544 17,845 100.00 11.31OC 22.45 (0.55) 18.86 Prepay UR 25.69 2.35 (24.01) Pen. 39

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Anticipated Subordi- Yield to Class Size nation/OC Maturity at Prospective Issue Rating ---------- Interest Level at: ----------- Yield at Securitization (issuer) Security Date Rating Agencies Issuance 6/30/01 % 6/30/01 Purchase 6/30/01 6/30/01 - ----------------------- -------- ---- ------ -------- -------- ------- -------- ------- -------- ------- ------- Single-family residential EQUICON 1994-2 (10)...... B Fix Oct-94 UR (a),(b),(c) 78,846 $ 13,048 100.00% 8.00%OC 18.00% 104.09% 14.18% B Var. UR 32,306 1,042 100.00 77.81OC 18.00 31.21 26.17 EQUICON 1995-1 (10)...... B Fix, May-95 UR (a),(b),(c) 70,024 8,607 100.00 13.75OC 18.00 27.35 (A) B Var. UR 40,519 4,191 100.00 12.53OC 18.00 104.57 (A) EQUICON 1995-2 (10)...... B Fix Oct-95 UR (a), (b) 79,288 13,093 100.00 14.56OC 18.00 26.33 N/M B Var. UR 39,667 2,696 100.00 21.01OC 18.00 108.66 (A) ACCESS 1996-1 (11)....... B Fix, Feb-96 UR (a), (b) 120,015 21,548 100.00 8.08OC 18.00 28.93 212.18 B Var. UR 55,362 5,038 100.00 16.20OC 18.00 41.47 (A) ACCESS 1996-2 (11)....... B-I,BI-S May-96 UR (a), (b) 142,259 26,639 100.00 11.71OC 18.00 29.66 (A) B-II UR 68,345 5,715 100.00 18.37OC 18.00 15.48 638.53 BII-S ACCESS 1996-3 (11)....... B-I,BI-S Aug-96 UR (a), (b) 107,712 20,379 100.00 19.42OC 18.00 16.19 265.89 B-II UR 99,885 8,451 100.00 29.24OC 18.00 18.51 (A) BII-S ACCESS 1997-2 (11)....... B, B-S May-97 UR (a), (b) 185,197 31,555 100.00 29.37OC 18.00 4.71 24.47 ACCESS 1997-3 (11)....... B, B-S Oct-97 UR (a), (b) 199,884 36,200 100.00 21.57OC 18.00 9.38 29.88 UK Subprime Subordinates: CMR1 (12)................ Deferred Apr-96 UR (a), (c) 48,450(B) 10,004(C) 100.00 17.95RF 18.69 20.34 22.15 Comp CMR2 (12)................ Deferred Oct-96 UR (a), (c) 97,627(B) 22,802(C) 100.00 18.01RF 18.69 34.26 41.94 Comp CMR3 (12)................ Deferred Oct-96 UR (a), (c) 176,047(B) 38,876(C) 100.00 27.51RF 18.69 73.46 269.29 Comp CMR4 (12)................ Deferred Jan-97 UR (a), (c) 103,031(B) 25,207(C) 100.00 13.36RF 18.69 37.97 54.64 Comp CMR5 (12)................ Deferred Jan-97 UR (a), (c) 54,686(B) 14,064(C) 100.00 66.22RF N/A N/A N/A Comp CMR6 (12)................ Deferred Apr-97 UR (a), (c) 90,498(B) 19,648(C) 100.00 15.07RF 18.69 49.61 101.84 Comp Commercial Subordinates: BT97-SI (13)............. Equity Dec-97 UR None 57,750 30,593 25.00 -- 22.15 12.10 22.15 Cert. 40

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Weighted Weighted Total Actual Life Actual Life Average Average Delinquency To Date To Date Collateral Balance Coupon at LTV at CPR at Losses at Product Type at ------------------ Securitization (issuer) 6/30/01 at 6/30/01 6/30/01 6/30/01 6/30/01 6/30/01 Issuance 6/30/01 - ----------------------- ------- ---------- ------- ------- ------- ------- -------- ------- Single-family residential Subordinates: BCF 1996 R1 (1).......... 10.00% 84.02% 12.06% 13.56% $ 33,365 98% Fixed, 2% ARM $ 505,513 $ 226,187 CSFB 1996 1R (ITT 94-P1) (2) ......... N/A N/A N/A N/A N/A 100% 1-Year CMT 32,487 67,609 BCF 1997 R2 (1).......... 8.60 76.63 18.02 13.92 9,185 25% Fixed, 75% ARM 251,790 112,615 SBMS 1997-HUD1 (3)....... 9.76 91.04 10.52 15.56 19 97% Fixed, 3% ARM 326,147 145,511 ORMBS 1998 R1 (4)........ 8.86 91.53 25.00 12.08 60,357 98% Fixed, 2% ARM 565,411 359,371 ORMBS 1998 R2 (4)........ 9.20 78.42 27.81 15.86 4,600 43% Fixed, 57% ARM 123,917 61,781 ORMBS 1998 R3 (4)........ 8.83 91.31 34.90 15.43 37,627 98% Fixed, 2% ARM 261,452 164,881 ORMBS 1999 R1 (4)........ 9.18 76.46 31.18 19.76 4,072 60% Fixed, 40% ARM 147,101 84,373 ORMBS 1999 R2 (4)........ 9.21 87.31 38.60 15.58 9,087 100% Fixed 117,004 67,609 Subprime residuals: SBMS 1996 3 (5).......... 11.26 67.96 18.92 31.07 3,746 67% Fixed, 33% ARM 130,062 19,925 MLM1 1996 1 (6).......... 12.07 71.43 23.63 34.65 2,533 36% Fixed, 64% ARM 81,142 10,600 MS 1997 1 (7) X1......... 11.43 73.80 25.65 36.67 3,649 100% Fixed, 17,727 7,376 MS 1997 1 (7) X2......... 100% ARM 87,118 9,519 1997 OFS 2 (8)........... 11.84 75.66 20.94 37.63 4,559 30% Fixed, 70% ARM 102,201 17,618 1997 OFS 3 (8)........... 11.14 78.14 29.73 34.80 8,609 28% Fixed, 72% ARM 208,784 46,585 1998 OFS 1 (8)........... 11.76 79.55 28.16 37.17 7,402 22% Fixed, 78% ARM 161,400 35,744 1998 OFS 2 (8)........... 11.47 75.16 24.26 36.83 13,949 53% Fixed, 47% ARM 382,715 96,880 1998 OFS 3 (8)........... 11.07 77.08 29.78 30.10 10,454 42% Fixed, 58% ARM 261,649 97,627 1998 OFS 4 (8)........... 10.59 78.24 29.26 25.71 19,379 52% Fixed, 48% ARM 349,000 166,399 1999 OFS 1 (8)........... 9.90 77.28 18.80 20.64 4,496 70% Fixed, 30% ARM 148,628 95,437 PANAM 1997-1(9).......... 11.76 85.77 32.73 41.09 6,698 100% ARM 113,544 17,845 EQUICON 1994-2 (10)...... 10.04 80.71 16.98 29.89 2,875 100% Fixed 78,846 13,048 100% ARM 32,306 1,042 EQUICON 1995-1 (10)...... 12.09 110.12 35.48 27.23 5,612 100% Fixed 70,024 8,607 100% ARM 40,519 4,191 EQUICON 1995-2 (10)...... 11.07 81.67 31.05 30.85 3,952 100% Fixed 79,288 13,093 100% ARM 39,667 2,696 ACCESS 1996-1 (11)....... 11.02 75.89 33.44 29.34 6,659 100% Fixed 120,015 21,548 100% ARM 55,362 5,038 ACCESS 1996-2 (11)....... 11.17 74.01 33.73 31.03 7,415 100% Fixed 142,259 26,639 100% ARM 68,345 5,715 ACCESS 1996-3 (11)....... 11.87 76.58 40.80 33.67 6,907 100% Fixed 107,712 20,379 100% ARM 99,885 8,451 ACCESS 1997-2 (11)....... 11.70 81.75 37.48 36.90 7,131 66% Fixed, 34% ARM 185,197 31,555 ACCESS 1997-3 (11)....... 11.92 85.30 40.58 37.63 6,285 60% Fixed, 40% ARM 199,884 36,200 UK Subprime Subordinates: CMR1 (12)................ 13.37 N/A 37.70 24.47 1,134 100% ARM 48,450(B) 10,004(C) CMR2 (12)................ 12.37 N/A 31.53 24.50 1,563 9% Fixed, 91% ARM 97,627(B) 22,802(C) CMR3 (12)................ 13.37 N/A 18.05 23.65 3,906 28% Fixed, 72% ARM 176,047(B) 38,876(C) CMR4 (12)................ 13.59 N/A 38.46 24.97 2,309 13% Fixed, 87% ARM 103,031(B) 25,207(C) CMR5 (12)................ 15.64 N/A 62.85 23.94 7,362 19% Fixed, 81% ARM 54,686(B) 14,064(C) CMR6 (12)................ 13.68 N/A 34.86 27.78 1,435 5% Fixed, 95% ARM 90,498(B) 19,648(C) Commercial Subordinates: BT97-SI (13)............. 7.37 N/A 63.91 N/A 10,549 N/A 295,925 65,913 41

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Issuers: Rating Agencies: (1) BlackRock Capital Finance L.P. (a) S&P (2) Credit Suisse First Boston (ITT Federal Bank, (b) Moody's FSB) (c) Fitch (3) Salomon Brothers Mortgage Securities (d) DCR (4) Ocwen Residential MBS Corporation (5) Salomon Brothers Mortgage Securities VII Other: (6) Merrill Lynch Mortgage Investors, Inc. N/A - Not Available (7) Morgan Stanley ABS Capital I, Inc. N/M - As a result of impairment charge write-downs of the security while (8) Ocwen Mortgage Loan Asset Backed classified as available for sale, the prospective yield at 6/30/01 Certificates is not meaningful. (9) Pan American Bank, FSB (A) - As a result of impairment charge write-downs of the security while (10) Equicon Mortgage Loan Trust classified as available for sale, the book value is zero, therefore, (11) Access Financial Mortgage Loan Trust there is no prospective yield on the security. (12) City Mortgage Receivable (B) - Dollar equivalent of amounts in British pounds at the rate of exchange (13) Bankers Trust Corporation Mortgage that prevailed at the time of issuance. Investors Trust (C) - Dollar equivalent of amounts in British pounds at the rate of exchange at 6/30/01. The following table sets forth the principal amount of mortgage loans by the geographic location of the property securing the mortgages that underlie the Company's subordinate and residual trading securities at June 30, 2001: Description California Florida Texas U.K. New York Other (1) Total - ----------- ---------- ---------- --------- --------- --------- ---------- --------- Single family residential....... $ 385,586 $ 177,214 $ 165,103 $ 130,600 $ 124,668 $1,180,500 $2,163,671 Commercial...................... 20,298 -- -- -- 74 45,622 65,994 Multi-family.................... 457 80 34 -- 4,362 4,000 8,933 --------- ---------- --------- --------- --------- ---------- --------- Total .......................... $ 406,341 $ 177,294 $ 165,137 $ 130,600 $ 129,104 $1,230,122 $2,238,598 ========= ========== ========= ========= ========= ========== ========== Percentage (2).................. 18.15% 7.92% 7.38% 5.83% 5.77% 54.95% 100.00% ========= ========== ========= ========= ========= ========== ========== (1) Consists of properties located in 46 other states, none of which aggregated over $85,893 in any one state. (2) Based on a percentage of the total unpaid principal balance of the underlying loans. The following table presents information regarding subordinate and residual trading securities summarized by classification and rating at June 30, 2001: Anticipated Original Anticipated Weighted Anticipated Yield to Average Prospective Percent Yield to Maturity at Remaining Yield at Rating/Description Fair Value Owned Maturity 6/30/01 (1) Coupon Life (2) 6/30/01 - -------------------------------- ---------- --------- ----------- ----------- -------- ----------- ----------- Single-family residential: BB-rated subordinates....... $ 4,280 89.92% 11.67% 13.61% 6.99% 2.55 55.07% B-rated subordinates........ 2,431 91.78 15.53 3.83 7.60 1.49 87.30 Unrated subordinates........ 9,142 69.34 17.76 (7.14) 8.13 3.23 24.72 Unrated subprime residuals.. 69,620 100.00 18.47 (5.44) N/A 4.33 (18.70) Commercial: Unrated subordinates........ 2,577 25.00 22.15 12.10 7.37 2.08 22.15 ---------- $ 88,050 ========== (1) Changes in the June 30, 2001 anticipated yield to maturity from that originally anticipated are primarily the result of changes in prepayment assumptions, loss assumptions and charges taken to reduce the value of the securities while classified as available for sale. (2) Equals the weighted average life based on the June 30, 2001 amortized cost. 42

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following is a glossary of terms included in the above tables: Actual Life to Date CPR - The Constant Prepayment Rate is used to measure the average prepayment rate for the underlying mortgage pool(s) over the period of time lapsed since the issuance of the securities through the date indicated and is calculated as follows: -- -- | / 1-Final Aggregate Balance \ / \ | | | actual | | 12 | | Actual Life to Date CPR = 100 x | | -------------------------------- | X | ---------------- | | | | Final Aggregate Balance | | Months In Period | | | \ scheduled / \ / | -- -- Actual Life-to-Date Losses - Represents cumulative losses of the original collateral at the indicated date. Anticipated Yield to Maturity at June 30, 2001- 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. Anticipated Yield to Maturity at Purchase - Effective yield from inception to maturity based on the purchase price and anticipated future cash flows under pricing assumptions. Class Size - Represents the dollar size of a particular class. Class Size for subprime residuals is equal to the Collateral Balance at the respective date. Collateral Balance - Represents the unpaid principal balance including arrearage of the underlying collateral of the entire securities at the indicated date. Interest Percentage - Represents the percentage of the particular class of security owned by the Company. Issue Date - Represents the date on which the indicated securities were issued. Over-Collaterization Level - For residual interest in residential mortgage-backed securities, over-collateralization ("OC") is the amount by which the collateral balance exceeds the sum of the bond principal amounts. OC is achieved by applying monthly a portion of the interest payments of the underlying mortgages toward the reduction of the class certificate principal amounts, causing them to amortize more rapidly than the aggregate loan balance. The OC percentage, expressed as a percentage of the outstanding collateral balance, represents the first tier of loss protection afforded to the non-residual holders. The OC percentage also determines whether the over-collateralization target has been satisfied as of a specific date, such that cash flows to the residual holder are warranted. To the extent not consumed by losses on more highly rated bonds, OC is remitted to the residual holders. Prospective Yield - Effective yield based on the amortized cost of the investment, after impairments, and the then current estimate of the future cash flows under the assumptions at the respective date. Rating - 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 subsequent to senior classes and will experience losses prior to any senior class. The lowest potential class designation is not rated ("UR") which, if included in a securitization, will always receive interest last and experience losses first. Securitization - Series description. Security - Represents the name of the class associated with each securitization held by the Company. This has no relationship to a formal rating but is for identification purposes (although the names are usually in alphabetical or numeric order from the highest rated to the lowest rated). Subordination Level - Represents the credit support for each mortgage-backed security by indicating the percentage of outstanding bonds whose right to receive payment is subordinate to the referenced security. The subordinate classes must experience a complete loss before any additional losses would affect the particular referenced security. 43

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Total Delinquency - Represents the total unpaid principal balance of loans more than 30 days delinquent at the indicated date as a percentage of the unpaid principal balance of the collateral at such date. Weighted Average Coupon - Represents the interest rate of the underlying mortgage loans weighted by the unpaid principal balance of the underlying mortgage loans at the respective date. Weighted Average LTV - Represents the ratio of the unpaid principal balance including arrearage to the value of the underlying collateral and applies to the single-family residential securities. Real Estate Held for Sale. The Company's real estate held for sale at June 30, 2001 consisted of one shopping center in Bradenton, Florida with 291,220 square feet of space and an aggregate carrying value of $20,165, a $2,505 decrease from December 31, 2000. The shopping center was approximately 93.43% leased at June 30, 2001. The Company has engaged an unaffiliated third party to market and sell the property, which was previously held for investment and was reclassified to held for sale during the second quarter of 2000. Impairment charges of $1,471 were recorded on this property in May 2001. During the first quarter of 2001, the Company sold its other shopping center located in Havre, Montana, which had a book value of $1,000, for no gain. Low-Income Housing Tax Credit Interests Held for Sale. During 2000, the Company entered into transactions to sell twenty-five of its low-income housing tax credit properties, together with the related tax credits. Although these transactions resulted in the transfer of tax credits and operating results for these properties to the purchaser, they did not qualify as sales for accounting purposes. As a result, the Company has reclassified these properties as held for sale and has valued them at the lower of cost or fair value less disposal costs. During the six months ended June 30, 2001, seven projects with an aggregate carrying value of $39,906 were transferred to held for investment, three projects with an aggregate carrying value of $15,885 were transferred from held for investment and eleven projects with an aggregate carrying value of $25,883 qualified as sales for accounting purposes. The carrying value of the Company's investments in low-income housing tax credit interests held for sale are as follows at the dates indicated: June 30, December 31, 2001 2000 ----------- ----------- Investments solely as a limited partner made prior to May 18, 1995................... $ 26,418 $ 32,229 Investments solely as a limited partner made on or after May 18, 1995................ -- 8,922 Investments both as a limited and, through subsidiaries, as a general partner........ 5,371 45,932 ----------- ----------- $ 31,789 $ 87,083 =========== =========== 44

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Investments in Real Estate. The Company's investment in real estate consisted of the following at the dates indicated: June 30, December 31, 2001 2000 ------------- ------------- Properties held for investment (1): Office buildings................................................................. $ 32,122 $ 32,112 Retail........................................................................... 9,426 9,515 Building improvements............................................................ 11,968 11,346 Tenant improvements and lease commissions........................................ 2,192 1,744 Furniture and fixtures........................................................... 55 52 ------------- ------------- 55,763 54,769 Accumulated depreciation......................................................... (3,013) (2,359) ------------- ------------- 52,750 52,410 ------------- ------------- Loans accounted for as investments in real estate (2): Multi-family residential......................................................... 97 97 Nonresidential................................................................... 38,655 45,689 ------------- ------------- 38,752 45,786 ------------- ------------- Properties held for lease: Land and land improvements....................................................... 1,256 1,256 Building......................................................................... 15,640 15,641 Accumulated depreciation......................................................... (1,154) (855) ------------- ------------- 15,742 16,042 ------------- ------------- Investment in real estate partnerships (3).......................................... 8,417 8,523 ------------- ------------- $ 115,661 $ 122,761 ============= ============= (1) The Company's properties held for investment at June 30, 2001 consist of the following: Date % Acquired Property Location Square Feet Property Type Leased Carrying Value - -------------- ------------------------ -------------------- ------------ --------------- ------- ---------------- 07/22/98 841 Prudential Drive.... Jacksonville, FL 480,817 Office Bldg. 99.3% $ 34,782 04/09/98 7075 Bayers Road........ Halifax, Nova Scotia 406,343 Shopping Ctr. 65.8 20,981 Accumulated depreciation (3,013) ---------- $ 52,750 ========== (2) Certain acquisition, development and construction loans were acquired in January 2000 in which the Company participates in the expected residual profits of the underlying real estate and the borrower has not contributed substantial equity to the project. As such, the Company has accounted for these loans under the equity method of accounting as though it had an investment in a real estate limited partnership. (3) Consists of interests in four limited partnerships operating as real estate ventures, consisting of multi-family type properties. Investments in Low-Income Housing Tax Credit Interests. The Company invested in multi-family residential projects which 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. 45

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The carrying values of the Company's investments in low-income housing tax credit interests are as follows at the dates indicated: June 30, December 31, 2001 2000 ----------- ----------- Investments solely as a limited partner made prior to May 18, 1995.................... $ 3,557 $ 21,170 Investments solely as a limited partner made on or after May 18, 1995................. 7,424 6,263 Investments both as a limited and, through subsidiaries, as a general partner......... 74,912 28,296 ----------- ----------- Total (1)........................................................................ $ 85,893 $ 55,729 =========== =========== (1) The increase in the balance during the six months ended June 30, 2001 is due to the transfer from held for sale of seven projects that, at December 31, 2000, had an aggregate carrying value of $39,906. Also contributing to the increase was additional investment in existing projects. Offsetting these increases, impairment charges of $6,993 were recorded on eight projects and three projects with an aggregate carrying value of $15,885 at December 31, 2000 were transferred to held for sale. See "Low-Income Housing Tax Credit Interests Held for Sale." The qualified affordable housing projects underlying the Company's investments in low-income housing tax credit interests are geographically located throughout the United States. At June 30, 2001, the Company's largest single investment was $11,049, which relates to a project located in North Wildwood, New Jersey. Investments by the Company in low-income housing tax credit interests made on or after May 18, 1995, in which the Company invests solely as a limited partner, are accounted for using the equity method in accordance with the consensus of the Emerging Issues Task Force as recorded in Issue Number 94-1. Limited partnership investments made prior to May 18, 1995, are accounted for under the effective yield method as a reduction of income tax expense. Low-income housing tax credit partnerships in which the Company invests both as a limited and, through a subsidiary, as general partner are presented on a consolidated basis. Income on the Company's limited partnership investments made prior to May 18, 1995 is recorded under the level yield method as a reduction of income tax expense, and amounted to $151 and $658 for the second quarter of 2001 and 2000, respectively. For limited partnership investments made after May 18, 1995, and for investments as a limited partner and, through subsidiaries, as a general partner, the Company recognized tax credits of $505 and $2,044 for the second quarter of 2001 and 2000, respectively, which are also reported as a reduction of income tax expense. The Company also recorded a loss from operations on the underlying real estate after depreciation of $2,756 and $839 for the second quarter of 2001 and 2000, respectively. The loss for the second quarter of 2001 included $2,490 of impairment charges noted above. For the six months ended June 30, 2001 and 2000, income on the Company's limited partnership investments made prior to May 18, 1995 that is recorded under the level yield method as a reduction of income tax expense and amounted to $272 and $1,341, respectively. For limited partnership investments made after May 18, 1995, and for investments as a limited partner and, through subsidiaries, as a general partner, the Company recognized tax credits of $680 and $5,076 for the six months ended June 30, 2001 and 2000, respectively, which are also reported as a reduction of income tax expense. The Company also recorded a loss from operations on the underlying real estate after depreciation of $7,818 and $2,339 for the six months ended June 30, 2001 and 2000, respectively. The loss for the second quarter of 2001 included the $6,993 of impairment charges noted above. See "Low-Income Housing Tax Credit Interests Held for Sale" below. 46

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Loan Portfolio, Net. Loans held for investment in the Company's loan portfolio are carried at amortized cost, less an allowance for loan losses, because the Company has the ability and presently intends to hold them to maturity. Composition of Loan Portfolio. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Single family residential loans................ $ 484 $ 848 ------------ ------------ Multi-family residential loans: Permanent.................................. 2,969 6,083 Construction............................... 24,810 39,123 ------------ ------------ Total multi-family residential.......... 27,779 45,206 ------------ ------------ Commercial real estate: Hotels: Construction............................ 30,514 38,153 Office buildings.......................... 25,388 20,817 Land...................................... -- 1 ------------ ------------ Total commercial real estate............. 55,902 58,971 ------------ ------------ Consumer....................................... 32 48 ------------ ------------ Loans, gross................................... 84,197 105,073 Undisbursed loan proceeds...................... (3,936) (8,879) Unamortized deferred fees...................... (216) (372) ------------ ------------ Total loans............................... 80,045 95,822 Allowance for loan losses...................... (2,940) (2,408) ------------ ------------ Loans, net................................ $ 77,105 $ 93,414 ============ ============ The loan portfolio is 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 the Company's loans were located at June 30, 2001: Single Family Multi-family Commercial Residential Residential Real Estate Consumer Total ------------ ------------ ------------ ------------ ------------ New York........................ $ -- $ 2,724 $ 15,799 $ 12 $ 18,535 Delaware........................ 248 -- 14,604 -- 14,852 Connecticut..................... -- -- 12,800 8 12,808 California...................... -- 8,948 -- -- 8,948 Virginia........................ -- -- 7,650 -- 7,650 Other (1)....................... 236 16,107 5,049 12 21,404 ------------ ------------ ------------ ------------ ------------ Total........................... $ 484 $ 27,779 $ 55,902 $ 32 $ 84,197 ============ ============ ============ ============ ============ (1) Consists of properties located in 8 other states, none of which aggregated over $5,883 in any one state. 47

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Activity in the Loan Portfolio. The following table sets forth the activity in the Company's gross loan portfolio during the periods indicated: Three Months Six Months -------------------------- ------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------------- ---------- ---------- ---------- ---------- Balance at beginning of period............................... $ 77,983 $ 156,119 $ 93,414 $ 157,408 ---------- ---------- ---------- ---------- Originations: Commercial non-mortgage and consumer loans................ -- 2,277 -- 12,490 Commercial real estate loans.............................. 2,916 186 13,959 1,156 ---------- ---------- ---------- ---------- Total loans originated (1).............................. 2,916 2,463 13,959 13,646 ---------- ---------- ---------- ---------- Sales........................................................ (2,675) (7,500) (16,160) (7,751) Principal repayments and other............................... (249) (15,075) (18,675) (26,383) Transfer to real estate owned................................ -- (431) -- (705) Decrease (increase) in undisbursed loan proceeds............. (612) 10,617 4,943 9,222 Decrease in unamortized deferred fees........................ 30 632 156 1,233 (Increase) decrease in allowance for loan losses............. (288) 1,665 (532) 1,820 ---------- ---------- ---------- ---------- Net decrease in loans........................................ (878) (7,629) (16,309) (8,918) ---------- ---------- ---------- ---------- Balance at end of period.................................. $ 77,105 $ 148,490 $ 77,105 $ 148,490 ========== ========== ========== ========== (1) Originations for the three and six months ended June 30, 2001 and 2000 represent loans to facilitate sales of real estate owned and fundings on previously originated construction loans. The following table sets forth certain information relating to the Company's non-performing loans in its loan portfolio at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Non-performing loans: Single family residential loans............................................ $ -- $ 316 Multi-family residential loans (1)......................................... 17,292 13,373 Commercial real estate and other (2)....................................... 5,062 4,581 ------------ ------------ Total................................................................... $ 22,354 $ 18,270 ============ ============ Non-performing loans as a percentage of: Total loans................................................................ 27.93% 19.07% Total assets............................................................... 1.12% 0.81% Allowance for loan losses as a percentage of: Total loans................................................................ 3.67% 2.51% Non-performing loans....................................................... 13.15% 13.18% (1) Non-performing multi-family residential loans at June 30, 2001 were comprised of 8 loans, all of which management believes are adequately collateralized and reserved. (2) Non-performing commercial real estate loans at June 30, 2001 were comprised of 4 loans, all of which management believes are adequately collateralized and reserved. 48

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Discount Loan Portfolio, Net. Composition of the Discount Loan Portfolio. The following table sets forth the composition of the Company's discount loan portfolio by type of loan at the dates indicated: June 30, December 31, 2001 2000 ------------- ------------ Single family residential loans.............................................. $ 169,166 $ 289,883 ------------- ------------ Multi-family residential loans............................................... 15,298 105,591 ------------- ------------ Commercial real estate loans: Office buildings........................................................ 72,273 77,608 Hotels.................................................................. 41,295 63,967 Retail properties....................................................... 77,726 85,924 Other properties........................................................ 23,752 36,511 ------------- ------------ 215,046 264,010 ------------- ------------ Unsecured (1)................................................................ 13,359 17,188 ------------- ------------ Discount loans, gross........................................................ 412,869 676,672 ------------- ------------ Unaccreted discount: Single family residential loans......................................... (45,806) (74,184) Multi-family residential loans......................................... (2,211) (5,176) Commercial real estate loans............................................ (32,231) (40,413) ------------- ------------ (80,248) (119,773) ------------- ------------ Total discount loans.................................................. 332,621 556,899 Allowance for loan losses.................................................... (25,679) (20,871) ------------- ------------ Discount loans, net.......................................................... $ 306,942 $ 536,028 ============= ============ (1) Balances represent charged-off unsecured credit card receivables, which were acquired at a discount. Collections are accounted for under the cost recovery method. The discount loan portfolio is 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 the Company's total discount loans were located at June 30, 2001: Commercial Single Family Multi-Family Real Estate Residential Residential and Other Total --------------- -------------- -------------- -------------- California............................. $ 10,035 $ -- $ 53,077 $ 63,112 New York............................... 12,621 -- 26,901 39,522 Wisconsin.............................. 1,029 -- 34,598 35,627 Tennessee.............................. 2,256 -- 26,786 29,042 Florida................................ 8,345 213 10,570 19,128 Other (1).............................. 89,074 12,874 44,242 146,190 ----------- ----------- ----------- ----------- Total............................... $ 123,360 $ 13,087 $ 196,174 $ 332,621 =========== =========== =========== =========== (1) Consists of properties located in 44 other states, none of which aggregated over $13,108 in any one state. 49

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Activity in the Discount Loan Portfolio. The following table sets forth the activity in the Company's net discount loan portfolio during the periods indicated: Three Months Six Months -------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - -------------------------------------------------------------- ----------- ----------- ----------- ----------- Amount: Balance at beginning of period................................ $ 439,649 $ 842,178 $ 536,028 $ 913,229 Acquisitions (1): Single family residential loans............................ -- 90,222 -- 149,159 Multi-family residential loans.............................. -- 5,977 -- 21,294 Commercial real estate loans................................ -- 11,332 -- 18,119 Unsecured................................................... -- 4,537 -- 10,030 ----------- ----------- ----------- ----------- -- 112,068 -- 198,602 ----------- ----------- ----------- ----------- Resolutions and repayments (2)................................ (22,815) (49,791) (48,294) (91,718) Loans transferred to real estate owned........................ (15,423) (52,631) (65,331) (124,066) Sales......................................................... (105,912) (60,035) (150,178) (131,024) Increase in undisbursed loan proceeds......................... -- (201) -- (201) Decrease in discount.......................................... 18,332 14,056 39,525 41,830 Decrease (increase) in allowance for loan losses.............. (6,889) (2,198) (4,808) (3,206) ----------- ----------- ----------- ----------- Balance at end of period...................................... $ 306,942 $ 803,446 $ 306,942 $ 803,446 =========== =========== =========== =========== Three Months Six Months -------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - -------------------------------------------------------------- ----------- ----------- ----------- ----------- Number of Loans: Balance at beginning of period................................ 3,430 7,031 4,021 8,064 Acquisitions (1): Single family residential loans............................ -- 1,027 -- 1,964 Multi-family residential loans.............................. -- 2 -- 9 Commercial real estate loans................................ -- 2 -- 6 Other....................................................... -- -- -- 1 ----------- ----------- ----------- ----------- -- 1,031 -- 1,980 ----------- ----------- ----------- ----------- Resolutions and repayments (2)................................ (156) (316) (391) (678) Loans transferred to real estate owned........................ (220) (647) (559) (1,421) Sales......................................................... (659) (736) (676) (1,582) ----------- ----------- ----------- ----------- Balance at end of period...................................... 2,395 6,363 2,395 6,363 =========== =========== =========== =========== (1) Acquisitions during the six months ended June 30, 2000 exclude certain commercial and multi-family loans which are accounted for as investments in real estate. See "Changes in Financial Condition - Investments in Real Estate." (2) Resolutions and repayments consists of loans which were resolved in a manner which resulted in partial or full repayment of the loan to the Company, as well as principal payments on loans which have been brought current in accordance with their original or modified terms (whether pursuant to forbearance agreements or otherwise) or on other loans which have not been resolved. 50

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Payment Status of Discount Loans. The following table sets forth certain information relating to the payment status of loans in the Company's discount loan portfolio at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Principal Amount Loans without Forbearance Agreements: Current....................................... $ 165,462 $ 295,616 Past due 31 days to 89 days................... 2,263 6,295 Past due 90 days or more...................... 159,637 295,226 ------------ ------------ Subtotal................................... 327,362 597,137 ------------ ------------ Loans with Forbearance Agreements: Current....................................... 2,833 3,888 Past due 31 days to 89 days................... 1,823 2,090 Past due 90 days or more(1)................... 80,851 73,557 ------------ ------------ Subtotal................................... 85,507 79,535 ------------ ------------ Total .......................................... $ 412,869 $ 676,672 ============ ============ (1) For loans with forbearance agreements that are contractually past due 90 or more days, the following table indicates the payment status of the loans under the terms of their forbearance agreements: June 30, December 31, 2001 2000 ------------ ------------ Current....................................... $ 61,092 $ 50,719 Past due 31 days to 89 days................... 8,892 2,278 Past due 90 days or more...................... 10,867 20,560 ------------ ------------ $ 80,851 $ 73,557 ============ ============ June 30, December 31, 2001 2000 ------------ ------------ Percentage of Loans Loans without Forbearance Agreements: Current....................................... 40.08% 43.69% Past due 31 days to 89 days................... 0.55 0.93 Past due 90 days or more...................... 38.67 43.63 ------------ ------------ Subtotal................................... 79.30 88.25 ------------ ------------ Loans with Forbearance Agreements: Current....................................... 0.68 0.57 Past due 31 days to 89 days................... 0.44 0.31 Past due 90 days or more...................... 19.58 10.87 ------------ ------------ Subtotal................................... 20.70 11.75 ------------ ------------ Total........................................... 100.00% 100.00% ============ ============ 51

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 the Company's allowance for loan losses on discount loans as of the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Allowances for loan losses as a percentage of: Total loans.................................. 7.72% 3.75% Total assets................................. 1.29% 0.93% See "Changes in Financial Condition - Allowance for Loan Losses" below for additional information regarding the allowance for discount loan losses. Match Funded Loans and Securities. Match funded loans and securities are comprised of the following at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Single family residential loans (1)............. $ 67,095 $ 80,834 Allowance for loan losses....................... (232) (285) ------------ ------------ Match funded loans, net....................... 66,863 80,549 Match funded securities......................... 24,599 36,438 ------------ ------------ Total......................................... $ 91,462 $ 116,987 ============ ============ (1) Includes $4,182 and $2,831 of non-performing loans at June 30, 2001 and December 31, 2000, 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, the proceeds received from the transfer are reported as a liability (bonds-match funded agreements). The $13,686 decline in the balance during the second quarter of 2001 was due to repayment of loan principal. Match funded securities resulted from the Company's 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, the amount of proceeds from the transfer are reported as a liability (bonds-match funded agreements). The decline of $11,839 in the balance during 2001 was due to principal repayments and amortization offset by a decrease in unrealized losses. For a glossary of the terms included in the tables below, see "Changes in Financial Condition -- Trading Securities." 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 the Company's loans were located at June 30, 2001: Michigan........................................................ $ 11,395 California...................................................... 7,714 Texas........................................................... 4,727 Florida......................................................... 4,098 Massachusetts................................................... 3,683 Other (1)....................................................... 35,478 ----------- Total........................................................... $ 67,095 =========== (1) Consists of properties located in 41 other states, none of which aggregated over $2,711 in any one state. 52

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following tables detail the Company's match funded securities at June 30, 2001, and its estimates of expected yields on such securities, taking into consideration expected prepayment and loss rates together with other factors: Over Class Collateral Balance Collateralization Issue Designation Rating ------------------ Level at Product Type at Securitization Security Date Letter Agencies Issuance 6/30/01 6/30/01 6/30/01 - ------------------------------------------------------------------------------------------------------------ ------------------ SASCO 1998-2 (1) X Jan-98 NR S&P, Fitch $ 600,052 $ 131,116 2.20% OC 57% Fixed, 43% ARM SASCO 1998-3 (1) X Mar-98 NR S&P, Fitch 769,671 150,343 3.50% OC 78% Fixed, 22% ARM MLMI 1998-FFI (2) X Jun-98 NR S&P, Fitch 198,155 26,962 10.45% OC 100% ARM LHELT 1998-2 (3) X Jun-98 NR Moody's, Fitch 209,225 71,900 7.98% OC 48% Fixed, 52% ARM ------------ ---------- $ 1,777,103 $ 380,321 ============ ========== Actual Actual Weighted Weighted Actual Life to Life to Average Average Delinquency Date Date Yield to Interest Rate LTV at at CPR at Losses at Maturity at Securitization Security at 6/30/01 6/30/01 6/30/01 6/30/01 6/30/01 Purchase 6/30/01 - ------------------ -------------- ------------- ---------------- ----------- --------------- ------------ ----------------------- SASCO 1998-2 X 11.38% 84.27% 23.28% 35.50% $ 14,384 16.00% 2.59% SASCO 1998-3 X 11.41 85.19 27.77 39.13 13,448 17.04 (3.18) MLMI 1998-FFI X 11.63 75.48 33.75 47.29 1,746 18.57 3.42 LHELT 1998-2 X 10.73 N/A 20.00 28.71 3,270 18.55 14.56 Issuers: (1) Structured Asset Securities Corp. (2) Merrill Lynch Mortgage Investors, Inc. (3) Lehman Home Equity Loan Trust The following table sets forth the principal amount of mortgage loans by the geographic location of the property securing the mortgages that underlie the Company's match-funded securities at June 30, 2001: Description California Florida Illinois Washington Oregon Other (1) Total - ----------- ---------- --------- --------- ---------- --------- ---------- ---------- Single family residential..... $ 58,608 $ 42,871 $ 16,834 $ 16,947 $ 14,699 $ 219,652 $ 369,611 Multi-family.................. 2,357 853 756 -- 873 5,871 10,710 ---------- --------- --------- ---------- --------- ---------- ---------- Total ........................ $ 60,965 $ 43,724 $ 17,590 $ 16,947 $ 15,572 $ 225,523 $ 380,321 ========== ========= ========= ========== ========= ========== ========== Percentage (2)................ 16.03% 11.50% 4.63% 4.46% 4.09% 59.29% 100.00% ========== ========= ========= ========== ========= ========== ========== (1) Consists of properties located in 45 other states, none of which aggregated over $14,450 in any one state. (2) Based on a percentage of the total unpaid principal balance of the underlying loans. The following table presents additional information regarding match funded securities at June 30, 2001: Anticipated Original Anticipated Weighted Anticipated Yield to Average Yield to Maturity at Remaining Fair Value Percent Owned Maturity 6/30/01 (1) Coupon Life(2) ---------- ------------- -------- ----------- ------ ------- Match-funded securities...................... $24,599 100.00% 17.66% 3.87% N/A 5.10 years ======= (1) Changes in the June 30, 2001 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, 2001 book value. 53

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Allowances for Loan Losses. The Company maintains an allowance for loan losses for each of its loan, discount loan and match funded loan portfolios at a level which management considers adequate to provide for inherent losses in each portfolio based upon an evaluation of known and inherent risks in such portfolios. The following table sets forth the breakdown of the allowance for loan losses on the Company's loan portfolio, discount 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, 2001 December 31, 2000 ----------------------------------------------- ----------------------------------------------- Allowance Loan Balance Allowance Loan Balance ---------------------- --------------------- -------------------- ----------------------- Amount Percent Amount Percent Amount Percent Amount Percent --------- --------- --------- --------- --------- --------- --------- --------- Loan portfolio: Single family........ $ 2 0.1% $ 469 0.6% $ 10 0.4% $ 812 0.8% Multi-family......... 1,106 37.6 25,220 31.5 993 41.2 38,942 40.6 Commercial real estate............... 1,832 62.3 54,356 67.9 1,405 58.4 56,068 58.6 --------- --------- --------- --------- --------- --------- --------- --------- $ 2,940 100.0% $ 80,045 100.0% $ 2,408 100.0% $ 95,822 100.0% ========= ========= ========= ========= ========= ========= ========= ========= Discount loans: Single family........ $ 9,071 35.3% $ 123,360 37.1% $ 3,483 16.7% $ 215,698 38.7% Multi-family......... 666 2.6 13,087 3.9 1,805 8.6 100,414 18.0 Commercial real estate............... 5,566 21.7 182,815 55.0 6,813 32.7 223,599 40.2 Unsecured............ 10,376 40.4 13,359 4.0 8,770 42.0 17,188 3.1 --------- --------- --------- --------- --------- --------- --------- --------- $ 25,679 100.0% $ 332,621 100.0% $ 20,871 100.0% $ 556,899 100.0% ========= ========= ========= ========= ========= ========= ========== ========= Match funded loans: Single family........ $ 232 100.0% $ 67,096 100.0% $ 285 100.0% $ 80,834 100.0% ========= ========= ========= ========= ========= ======== ========== ========= The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. The following table sets forth an analysis of activity in the allowance for loan losses relating to the Company's loan portfolio, discount loan portfolio and match funded loans during the six months ended June 30, 2001: Balance Balance December 31, June 30, 2000 Provision Charge-offs Recoveries 2001 ------------ ----------- ----------- ---------- ---------- Loan portfolio: Single family............................. $ 10 $ 165 $ (173) $ -- $ 2 Multi-family.............................. 993 985 (872) -- 1,106 Commercial real estate.................... 1,405 936 (509) -- 1,832 ---------- ---------- ---------- ---------- ---------- $ 2,408 $ 2,086 $ (1,554) $ -- $ 2,940 ========== ========== ========== ========== ========== Discount loans: Single family............................. $ 3,483 $ 8,853 $ (3,342) $ 77 $ 9,071 Multi-family.............................. 1,805 (1,139) -- -- 666 Commercial................................ 6,813 6,828 (8,075) -- 5,566 Unsecured................................. 8,770 1,606 -- -- 10,376 ---------- ---------- ---------- ---------- ---------- $ 20,871 $ 16,148 $ (11,417) $ 77 $ 25,679 ========== ========== ========== ========== ========== Match funded loans: Single family............................. $ 285 $ 183 $ (236) $ -- $ 232 ========== ========== ========== ========== ========== 54

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Real Estate Owned, Net. Real estate owned consists almost entirely of properties acquired by foreclosure or deed-in-lieu thereof on loans in the Company's discount loan portfolio. The following table sets forth certain information relating to the Company's real estate owned at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ Discount loan portfolio: Single family residential................... $ 34,566 $ 55,751 Multi-family residential.................... -- 149 Commercial real estate...................... 93,971 88,214 ------------ ------------ Total................................... 128,537 144,114 Loan portfolio................................. 426 1,384 Loans available for sale....................... 79 921 ------------ ------------ Total................................... $ 129,042 $ 146,419 ============ ============ The following table sets forth certain geographical information by type of property at June 30, 2001 related to the Company's real estate owned: Single Family Residential Commercial Real Estate Total ------------------------- ------------------------ ------------------------ No. of No. of No. of Amount Properties Amount Properties Amount Properties ---------- ---------- ---------- ---------- ---------- ---------- Florida................................. $ 1,935 32 $ 52,121 4 $ 54,056 36 Michigan................................ 3,196 78 19,071 1 22,267 79 Georgia................................. 1,067 12 14,361 1 15,428 13 Minnesota............................... 462 10 4,808 1 5,270 11 Pennsylvania............................ 3,299 86 -- -- 3,299 86 Other (1)............................... 24,686 514 4,036 4 28,722 518 --------- -------- --------- -------- --------- -------- Total................................ $ 34,645 732 $ 94,397 11 $ 129,042 743 ========= ======== ========= ======== ========= ======== (1) Consists of properties located in 41 other states, none of which aggregated over $3,061 in any one state. 55

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 the activity in the real estate owned during the periods indicated: Three Months Six Months --------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Amount: Balance at beginning of period............................... $ 136,267 $ 185,498 $ 146,419 $ 167,506 Properties acquired through foreclosure or deed-in-lieu thereof: Discount loans............................................. 15,423 52,631 65,331 124,066 Loans available for sale................................... -- 934 227 4,063 Loan portfolio............................................. -- 431 -- 705 Less discount transferred.................................. (5,780) (16,771) (25,012) (37,014) ----------- ----------- ----------- ----------- 9,643 37,225 40,546 91,820 ----------- ----------- ----------- ----------- Acquired in connection with acquisitions of discount loans... -- 5,002 -- 8,593 Sales........................................................ (16,961) (43,186) (60,264) (81,390) Decrease (increase) in valuation allowance................... 93 (1,863) 2,341 (3,853) ----------- ----------- ----------- ----------- Balance at end of period..................................... $ 129,042 $ 182,676 $ 129,042 $ 182,676 =========== =========== =========== =========== Three Months Six Months --------------------------- -------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Number of Properties: Balance at beginning of period................................ 994 1,716 1,298 1,672 Properties acquired through foreclosure or deed-in-lieu thereof: Discount loans.............................................. 220 647 559 1,421 Loans available for sale.................................... -- 18 4 39 Loan portfolio.............................................. -- 2 -- 5 ----------- ----------- ----------- ----------- 220 667 563 1,465 ----------- ----------- ----------- ----------- Acquired in connection with acquisitions of discount loans.... -- 154 -- 157 Sales......................................................... (471) (805) (1,118) (1,562) ----------- ----------- ----------- ----------- Balance at end of period...................................... 743 1,732 743 1,732 =========== =========== =========== =========== 56

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 the amount of time that the Company had held its real estate owned at the dates indicated: June 30, December 31, 2001 2000 ------------ ------------ One to two months............................. $ 8,364 $ 17,832 Three to four months.......................... 26,419 11,450 Five to six months............................ 5,663 9,494 Seven to 12 months............................ 9,262 18,426 Over 12 months................................ 79,334 89,217 ------------ ------------ $ 129,042 $ 146,419 ============ ============ The Company actively manages its real estate owned. Sales of real estate owned resulted in losses, net of the provision for loss in fair value, of $(375) and $(180) during the three and six months ended June 30, 2001, respectively, as compared to $(625) and $(5,281) during the three and six months ended June 30, 2000, respectively, which are included in determining the Company's (loss) income on real estate owned. The average period during which the Company held the $60,264 and $81,390 of real estate owned which was sold during the six months ended June 30, 2001 and 2000 was 9 and 6 months, respectively. The following table sets forth the activity, in the aggregate, in the valuation allowances on real estate owned during the periods indicated: Three Months Six Months ---------------------------- ---------------------------- For the periods ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------------ ----------- ----------- ----------- ----------- Balance at beginning of period.............................. $ 15,894 $ 19,171 $ 18,142 $ 17,181 Provisions for losses ...................................... 3,522 7,752 9,703 16,964 Charge-offs and sales....................................... (3,615) (5,889) (12,044) (13,111) ----------- ----------- ----------- ----------- Balance at end of period.................................... $ 15,801 $ 21,034 $ 15,801 $ 21,034 =========== =========== =========== =========== Valuation allowance as a percentage of total gross real estate owned (1)......................................... 10.91% 10.33% 10.91% 10.33% (1) At December 31, 2000, the valuation allowance as a percentage of total gross real estate owned was 11.02%. Deferred Tax Asset, Net. The following table provides details of the Company's net deferred tax asset as of the dates indicated: June 30, December 31, 2001 2000 Deferred tax asset, net of deferred tax liabilities $165,251 $154,864 -------- -------- Valuation allowance: OAC purchase accounting adjustment 36,771 36,771 Allowance on deferred tax asset arising prior to January 1, 2001 40,102 22,102 Allowance on deferred tax asset arising after January 1, 2001 10,387 -- -------- -------- 87,260 58,873 -------- -------- Deferred tax asset, net $ 77,991 $ 95,991 ======== ======== The $18,000 net decrease in the deferred tax asset during 2001 was due to an increase in the valuation allowance applicable to deferred tax assets that arose prior to January 1, 2001 resulting from the Company's evaluation of the future realizability of the deferred tax asset. Additions to the deferred tax asset after December 31, 2001 are fully provided for in the allowance. Depending on the results of operations in future periods, additional allowances may be required or the valuation allowance may be reversed to income to the extent the deferred tax assets are realizable as a reduction of taxes otherwise payable. See "Income Tax (Expense) Benefit." 57

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- 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, 2001 2000 ------------ ------------ Loan Portfolios: Taxes and insurance........................ $ 8,139 $ 11,168 Other...................................... 9,983 11,840 ------------ ------------ 18,122 23,008 Loans Serviced for Others: Principal and interest..................... 86,441 95,191 Taxes and insurance........................ 88,218 64,159 Other (1).................................. 157,131 44,697 ------------ ------------ 331,790 204,047 ------------ ------------ $ 349,912 $ 227,055 ============ ============ (1) The increase in other advances on loans serviced for others is principally the result of servicing advances purchased in connection with the acquisition of loans serviced for others under servicing agreements entered into during six months ended June 30, 2001. Mortgage Servicing Rights. The unamortized balance of mortgage servicing rights amounted to $82,928 and $51,426 at June 30, 2001 and December 31, 2000, respectively. The $31,502 increase during the six months ended June 30, 2001 was due to $43,263 of purchases, offset by $11,761 of amortization. Deposits. The following table sets forth information related to the Company's deposits at the dates indicated: June 30, 2001 December 31, 2000 ---------------------------- --------------------------- % of Total % of Total Amount Deposits Amount Deposits ------------- ----------- ------------- ----------- Non-interest bearing checking accounts and escrows.............. $ 98,122 9.4% $ 69,840 5.5% NOW and money market checking accounts.......................... 11,577 1.1 14,669 1.2 Savings accounts................................................ 1,261 0.1 1,274 0.1 ------------- ----------- ------------- ----------- 110,960 10.6 85,783 6.8 ------------- ------------- Certificates of deposit......................................... 935,972 1,176,566 Unamortized deferred fees....................................... (2,569) (3,989) ------------- ------------- Total certificates of deposit (1)............................... 933,403 89.4 1,172,577 93.2 ------------- ----------- ------------- ----------- Total deposits............................................... $ 1,044,363 100.0% $ 1,258,360 100.0% ============= =========== ============= =========== (1) Included $798,599 and $964,443 at June 30, 2001 and December 31, 2000, respectively, of deposits originated through national, regional and local investment banking firms which solicit deposits from their customers, all of which are non-cancelable. At June 30, 2001 and December 31, 2000, certificates of deposit issued on an uninsured basis (greater than $100) amounted to $75,894 and $75,417, respectively. Of the $75,894 of uninsured deposits at June 30, 2001, $13,582 were from political subdivisions in New Jersey and secured or collateralized as required under state law. 58

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- Bonds-Match Funded Agreements. Bonds-match funded agreements were comprised of the following at the dates indicated: June 30, 2001 December 31, 2000 ----------------- ----------------- OAIC Mortgage Residential Securities Holdings, LLC.............................. $ 57,186 $ 72,101 Ocwen NIMS Corp. ............................................................... 23,635 34,949 --------------- --------------- $ 80,821 $ 107,050 =============== =============== The $26,229 decline in total bonds-match funded agreements during the six months ended June 30, 2001 was due to principal repayments offset by discount amortization. Obligations Outstanding Under Lines of Credit. The Company has 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, 2001: OAC (2)........... $ 32,714 $ 200,000 $ 115,580 June 2002 LIBOR + 240 basis points OFB (3)........... 54,034 100,000 54,034 April 2002 LIBOR + 200 basis points 17,797 200,000 17,797 July 2001 LIBOR + 225 basis points ---------- ---------- ---------- $ 104,545 $ 500,000 $ 187,411 ========== ========== ========== December 31, 2000: OAC (2)........... $ 32,933 $ 200,000 $ 115,580 June 2001 LIBOR + 240 basis points =========== (1) 1-month LIBOR was 3.86% and 6.57% at June 30, 2001 and December 31, 2000, respectively. (2) Used to fund real estate investments and commercial construction loans. (3) Used to fund servicing advances purchased in connection with the acquisition of loans serviced for others under servicing agreements. These facilities were entered into in April, 2001. The line of credit maturing July 2001 was subsequently extended to September 2001. Notes, Debentures and Other Interest-Bearing Obligations. Notes, debentures and other interest-bearing obligations mature as follows: June 30, December 31, 2001 2000 ----------- ----------- 2003: 11.875% Notes due October 1............................................................ $ 95,850 $ 100,050 2004: Loan due May 24 (LIBOR plus 250 basis points).......................................... 6,235 6,235 2005: 12% Subordinated Debentures due June 15................................................ 67,000 67,000 11.5% Redeemable Notes due July 1...................................................... 45 45 ----------- ----------- $ 169,130 $ 173,330 =========== =========== The $4,200 decline in the balance of the 11.875% Notes during the six months ended June 30, 2001 is due to repurchases. These repurchases occurred during the first quarter of 2001 and resulted in an extraordinary gain of $61, net of tax ($97 before taxes). See "Results of Operations - Extraordinary Gain on Repurchases of Debt, Net of Taxes." 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 amounted to $61,159 at June 30, 2001, a decline of $18,371 from the balance outstanding at December 31, 2000. During the six months ended June 30, 2001, the Company 59

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- repurchased $18,371 of its Capital Securities in the open market, resulting in an extraordinary gain of $3,722 ($2,345 net of taxes). See Note 4 to the Interim Consolidated Financial Statements included in Item 1 hereof (which is incorporated herein by reference) and "Results of Operations - Extraordinary Gain on Repurchases of Debt, Net of Taxes." Stockholders' Equity. Stockholders' equity decreased $44,731 or 9% during the six months ended June 30, 2001. The decrease was primarily due to a net loss of $44,957 during the six months ended June 30, 2001. 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) and "Results of Operations - Extraordinary Gain on Repurchases of Debt, Net of Taxes." Liquidity, Commitments and Off-Balance Sheet Risks The primary sources of funds for liquidity consist of deposits, FHLB advances, reverse repurchase agreements, lines of credit and maturities and payments of principal and interest on loans and securities, proceeds from sales thereof and servicing fees. Sources of liquidity include certificates of deposit obtained primarily from wholesale sources. At June 30, 2001, the Company had $933,403 of certificates of deposit, net of deferred fees, including $798,599 of brokered certificates of deposit obtained through national, regional and local investment banking firms, all of which are non-cancelable. At the same date, scheduled maturities of certificates of deposit during the 12 months ending March 31, 2002 and 2003, and thereafter amounted to $662,631, $123,422 and $147,350, respectively. Sources of borrowings include FHLB advances, which are required to be secured by single family and/or multi-family residential loans or other acceptable collateral, and reverse repurchase agreements. At June 30, 2001, the Company was eligible to borrow up to an aggregate of $50,995 from the FHLB of New York (subject to the availability of acceptable collateral) and had $13,543 of residential loans and $41,712 of short duration CMOs (all of which were held by the Bank) pledged as security for any such advances. At June 30, 2001, the Company had contractual relationships with 11 brokerage firms and the FHLB of New York pursuant to which it could obtain funds from reverse repurchase agreements. At June 30, 2001, the Company had $293,434 of unrestricted cash and cash equivalents and $20,368 of short duration CMOs that could be used to secure additional borrowings. At June 30, 2001, the Company had no outstanding FHLB advances or reverse repurchase agreements. Sources of borrowing also include lines of credit. At June 30, 2001, the Company, through OAC, had a line of credit of $200,000 ($115,580 committed). The Company had $32,714 outstanding at June 30, 2001 under this line of credit. On April 18, 2001, the Company, through OFB, executed a Receivables Financing Facility agreement with Greenwich, whereby the Company has agreed to finance at least $200,000 of servicing advances with Greenwich over the course of the next two years. The Company had $17,797 outstanding at June 30, 2001 under this agreement. At April 20, 2001, the Company, through OFB, executed a Loan and Security Agreement with CSFB whereby the Company may borrow up to $100,000 over the next year collateralized by certain of the Company's servicing advances. At June 30, 2001, the Company had $54,034 outstanding under this agreement. The Company believes that its existing sources of liquidity, including internally generated funds, will be adequate to fund planned activities for the foreseeable future. Moreover, the Company continues to evaluate other sources of liquidity, such as lines of credit from unaffiliated parties, which will enhance the management of its liquidity and the costs thereof. The Company's operating activities provided $100,500 of cash flows and used $(87,055) of cash flows during the six months ended June 30, 2001 and 2000, respectively. During the six months ended June 30, 2001, cash flows used by operating activities primarily related to net increases in servicing advances. 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, 2001 as compared to the six months ended June 30, 2000, was due primarily to the increase in cash provided by trading securities offset by increases in advances on loans and loans serviced for others due to increases in the number and amount of loans serviced for others. The Company's investing activities provided cash flows totaling $243,449 and used $(189,714) of cash flows during the six months ended June 30, 2001 and 2000, respectively. During these periods, cash flows from investing activities were used primarily to 60

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands, except share data) - -------------------------------------------------------------------------------- purchase securities available for sale, discount loans, mortgage servicing rights and real estate held for investment. Cash flows from investing activities were provided primarily by proceeds from sales of and principal payments received on discount loans and securities available for sale and proceeds from sales of real estate owned. The increase in net cash provided by investing activities during the six months ended June 30, 2001 as compared to the six months ended June 30, 2000 was due primarily to a decline in purchases of securities available for sale (reclassified to trading), discount loans and real estate held for investment (primarily loans accounted for as investments in real estate). The Company's financing activities used cash flows of $(186,787) and provided cash flows of $113,729 during the six months ended June 30, 2001 and 2000, respectively. Cash flows utilized in connection with financing activities were primarily related to a decline in deposits, changes in the balance of securities sold under agreements to repurchase, repayment of bonds-match funded agreements, proceeds from and repayment of lines of credit and repurchases of debt and common stock. The decline in cash flow from financing activities is principally related to a decrease in cash flow provided by securities sold under agreements to repurchase. 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, 2001, the Company had commitments of $6,464 related to the funding of construction loans. Management believes that the Company has adequate resources to fund all such unfunded commitments to the extent required and that substantially all of such unfunded commitments will be funded during 2001. See Note 10 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference). In addition to commitments to extend credit, the Company is party to various off-balance sheet financial instruments in the normal course of the Company's business in order to manage its interest rate risk and foreign currency exchange rate risk. See Note 6 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 7 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated by reference). 61

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 the objective of the Company 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 its investments in non-U.S. dollar functional currency operations in order to limit the Company's exposure to earnings variations and variations in the value of assets and liabilities as interest rates and foreign currency exchange rates change over time. The Company's asset and liability management strategy is formulated and monitored by the Asset/Liability Management Committee ( the "Committee"), which is composed of directors and officers of the Company, in accordance with policies approved by the Board of Directors of the Company. The Committee meets to review, among other things, the sensitivity of the Company's 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 the Company's interest rate sensitivity "gap," which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. 62

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- The following table sets forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at June 30, 2001. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except (i) adjustable-rate loans, performing discount loans, securities and FHLB advances are included in the period in which they are first scheduled to adjust and not in the period in which they mature, (ii) fixed-rate mortgage-related securities reflect estimated prepayments, which were estimated based on analyses of broker estimates, the results of a prepayment model utilized by the Company and empirical data, (iii) non-performing discount loans reflect the estimated timing of resolutions which result in repayment to the Company, (iv) NOW and money market checking deposits and savings deposits, which do not have contractual maturities, reflect estimated levels of attrition, which are based on detailed studies of each such category of deposit by the Company, and (v) escrow deposits and other non-interest bearing checking accounts, which amounted to $98,122 at June 30, 2001, are excluded. Management believes that these assumptions approximate actual experience and considers them reasonable; however, the interest rate sensitivity of the Company's assets and liabilities in the table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. June 30, 2001 ------------------------------------------------------------------------ More Than Within Three Four to One Year to Three Years Months Twelve Months Three Years and Over Total ------------ ------------- ------------ ------------ ------------ Rate-Sensitive Assets: Interest-earning deposits...................... $ 9,517 $ -- $ -- $ -- $ 9,517 Federal funds sold............................. 249,000 -- -- -- 249,000 Trading securities............................. 18,433 40,531 36,119 55,047 150,130 Loans available for sale (1)................... 184 1,784 600 1,882 4,450 Investment securities, net..................... 13,257 -- -- -- 13,257 Loan portfolio, net (1)........................ 54,520 20,984 1,350 251 77,105 Discount loan portfolio, net (1)............... 68,107 120,583 68,525 49,727 306,942 Match funded loans and securities (1).......... 20,875 29,271 12,242 29,074 91,462 ------------ ------------ ------------ ------------ ------------ Total rate-sensitive assets................... 433,893 213,153 118,836 135,981 901,863 ------------ ------------ ------------ ------------ ------------ Rate-Sensitive Liabilities: NOW and money market checking deposits......... 9,986 183 391 1,017 11,577 Savings deposits............................... 82 182 359 638 1,261 Certificates of deposit........................ 189,619 473,012 200,626 70,146 933,403 ------------ ------------ ------------ ------------ ------------ Total interest-bearing deposits................ 199,687 473,377 201,376 71,801 946,241 Bond-match funded loan agreements.............. 62,474 5,768 7,269 5,310 80,821 Obligations outstanding under lines of credit.. 104,545 -- -- -- 104,545 Notes, debentures and other.................... 6,235 -- 95,850 67,045 169,130 ------------ ------------ ------------ ------------ ------------ Total rate-sensitive liabilities.............. 372,941 479,145 304,495 144,156 1,300,737 ------------ ------------ ------------ ------------ ------------ Interest rate sensitivity gap excluding financial instruments.................................... 60,952 (265,992) (185,659) (8,175) (398,874) Financial Instruments: Interest rate caps............................... -- -- 207 -- 207 Interest rate floors............................. 4 14 149 127 294 ------------ ------------ ------------ ------------ ------------ Total rate-sensitive financial instruments....... 4 14 356 127 501 ------------ ------------ ------------ ------------ ------------ Interest rate sensitivity gap including financial instruments.................................... $ 60,956 $ (265,978) $ (185,303) $ (8,048) $ (398,373) ============ ============ ============= ============ ============ Cumulative interest rate sensitivity gap......... $ 60,956 $ (205,022) $ (390,325) $ (398,373) ============ ============ ============ ============ Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets...... 6.76% (22.73)% (43.28)% (44.17)% (1) Balances have not been reduced for non-performing loans. 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 63

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- 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 quarter end. The current NPV Ratio for each of the seven rate scenarios and the corresponding limits approved by the Board of Directors, and as applied to OCN, are as follows at June 30, 2001: Board Limits Current Rate Shock in basis points (minimum NPV Ratios) NPV Ratios - ---------------------------- ---------------------------- --------------------- +300 5.00% 25.80% +200 6.00% 25.67% +100 7.00% 25.54% 0 8.00% 25.51% -100 7.00% 25.56% -200 6.00% 25.68% -300 5.00% 25.87% 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 the 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 the loan portfolios and securities available for sale 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 securities. 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, 2001. 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 19.50% (1.20)% +200 13.00% (0.95)% +100 6.50% (0.73)% 0 --% --% -100 (6.50)% 1.18% -200 (13.00)% 2.68% -300 (19.50)% 4.44% 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. The Company utilizes interest rate swaps to protect against the increase in borrowing cost from a short-term, fixed-rate liability, such as a line of credit, in an increasing interest-rate environment. The Company had outstanding interest rate swaps with an aggregate notional amount of $33,000 at December 31, 2000, which matured in April 2001. In addition, the Company purchased amortizing caps and floors to hedge its interest rate exposure relating to mortgage servicing rights and match funded loans and securities. The Company had entered into caps and floors with an aggregate notional amount of $133,592 and $47,493, respectively, at June 30, 2001, as compared to caps and floors with an aggregate notional amount of $141,674 and $37,787, respectively, at December 31, 2000. See Note 6 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference) for additional disclosures regarding the Company's interest rate derivative financial instruments. 64

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Dollars in thousands) - -------------------------------------------------------------------------------- Foreign Currency Exchange Rate Risk Management. The Company has entered into foreign currency futures to hedge its investments in foreign subsidiaries which own residual interests backed by residential loans originated in the UK and in the shopping center located in Halifax, Nova Scotia. The Company's hedges, the related investments in foreign subsidiaries, and the net exposures as of June 30, 2001 and December 31, 2000 were as follows: Investment Hedge Net Exposure -------------------- -------------------- -------------------- June 30, 2001: UK residuals....................... $ 26,189 $ 24,373 $ (1,816) Nova Scotia Shopping Center........ $ 22,290 $ 21,684 $ (606) December 31, 2000: UK residuals....................... $ 23,329 $ 22,236 $ (1,003) Nova Scotia Shopping Center........ $ 21,913 $ 22,423 $ 510 The net exposures are subject to gain or loss if foreign currency exchange rates fluctuate. See the "Foreign Currency Management" section of Note 6 to the Interim Consolidated Financial Statements included in Item 1 herein (which is incorporated herein by reference) for additional disclosures regarding the Company's foreign currency derivative financial instruments. 65

Forward-Looking Statements Certain statements contained herein are not, and certain statements contained in future filings by the Company with the Securities and Exchange Commission (the "Commission"), in the Company's press releases or in the Company's other public or shareholder communications may not be, based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period(s) or by the use of forward-looking terminology such as "anticipate," "believe," "commitment," "consider," "continue," "could," "estimate," "expect," "foresee," "intend," "may," "plan," "propose," "prospective," "whether," "will," "would," future or conditional verb tenses, similar terms, variations on such terms or negatives of such terms. Although the Company believes 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 the Company operates), government fiscal and monetary policies (particularly in the market areas where the Company operates), 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, competitive products, pricing and conditions (including from competitors that have significantly greater resources than the Company), credit, prepayment, basis, default, subordination and asset/liability risks, loan servicing effectiveness, ability to identify acquisitions and investment opportunities meeting the Company's 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 effectiveness, damage to the company's computer equipment and the information stored its 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 the Company's reports and filings with the Commission, including its periodic reports on Forms 10-Q, 8-K and 10-K and Exhibit 99.1, titled Risk Factors, to the Company's Form 10-K for the year ended December 31, 2000. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. The Company does not undertake, and specifically disclaims 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. 66

Part II - Other Information Item 1. Legal Proceedings. See "Note 10: Commitments and Contingencies" of the Company's Consolidated Financial Statements. 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 the Company 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 the Company (4) 4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of the Company (Included in Exhibit 4.6) (4) 4.8 Form of Guarantee of the Company 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) 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 30, 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) 99.1 Risk factors (14) (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. 67

Part II - Other Information (4) Incorporated by reference from the similarly described exhibit filed in connection with the Company's Registration Statement on Form S-1 (File No. 333-28889), as amended, declared effective by the Commission on August 6, 1997. (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 the Company's Definitive Proxy Statement with respect to the Company'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. (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. (b) Reports on Form 8-K Filed during the Quarter Ended June 30, 2001. (1) A Form 8-K was filed by the Company on May 9, 2001 that contained a news release announcing the Company's financial results for the quarter ended March 31, 2001. 68

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, 2001 69