Edgar Filing: NEW CENTURY FINANCIAL CORP

Period ended September 30, 2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-32314

NEW CENTURY FINANCIAL CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


MARYLAND		56-2451736
(State of Incorporation)		(I.R.S. Employer Identification No.)

18400 VON KARMAN, SUITE 1000,

IRVINE, CALIFORNIA 92612

(Address of principal executive offices)(Zip Code)

(949) 440-7030

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 the filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes ¨ No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 31, 2005, the registrant had 56,634,524 shares of common stock outstanding.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2005

INDEX


		Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		69
Item 4. Controls and Procedures		70
PART II—OTHER INFORMATION
Item 1. Legal Proceedings		70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		74
Item 4. Submission of Matters to a Vote of Security Holders		74
Item 6. Exhibits		74
SIGNATURES		75
EXHIBIT INDEX		76

Certain information included in this Quarterly Report on Form 10-Q may include “forward-looking” statements under federal securities laws, and the company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such statements include, without limitation, (i) the company’s expectation that the acquisition of certain assets and related liabilities of RBC Mortgage Company will enable it to expand its mortgage product offerings to include conventional mortgage loans, loans insured by the Federal Housing Administration and loans guaranteed by the Veterans Administration, its retail presence on a nationwide basis and its channels of distribution, particularly into the realtor and builder channels; (ii) management’s projections with respect to the company’s loan loss allowances; (iii) the estimates and assumptions used by the company in determining the value of its residual interests in securitizations; (iv) the company’s estimates with respect to the cumulative losses of its securitizations; (v) the company’s prepayment curve and default estimates for its adjustable-rate and fixed-rate securities; (vi) the company’s estimated weighted average life of its securitizations; (vii) the company’s estimates with respect to the average life of its securitized loan pools; (viii) the company’s intention to apply any excess taxable REIT income at year-end to its regular first quarter 2006 dividend payment; (ix) the company’s intention to fund its stock repurchase program with excess corporate liquidity; (x) the company’s expectation that stock repurchases will be made on the open market through block trades or in privately negotiated sales; (xi) the company’s expectation that the number of shares to be purchased under the stock repurchase program and the timing of the repurchases will be based on the level of the company’s cash balances, general business conditions and other factors including alternative investment opportunities; (xii) the company’s right to terminate, suspend, reduce or increase the size of its stock repurchase program at any time; (xiii) the company’s belief that its REIT structure provides the most tax-efficient way to hold loans on its balance sheet; (xiv) the company’s expectation that it will retain approximately 20% of its total loan production for investment on its balance sheet through securitizations structured as financings for 2005; (xv) the company’s expectation that a significant source of its revenues will be interest income generated from its portfolio of mortgage loans held by its REIT and its qualified REIT subsidiaries; (xvi) the company’s expectation that it will also be able to continue to generate revenue through its taxable REIT subsidiaries from the sale of loans, servicing income and loan origination fees; (xvii) the company’s expectation that the primary components of its expenses will be interest expense on its credit facilities, securitizations and other borrowings, general and administrative expenses and payroll and related expenses arising from the company’s loan origination and servicing business; (xviii) the company’s belief that being a full-service mortgage provider will allow it to build upon the success of its Home123 branding and marketing campaign; (xix) the company’s expectation that the RBC Mortgage Company acquisition will be slightly dilutive to its earnings per share in 2005 (by approximately $0.10 per share) and accretive to its earnings per share for the 12 months following the acquisition; (xx) the company’s intention that it will continue to raise its interest rates with a view toward expanding its overall operating margin; (xxi) the company’s intention to manage its cost structure to remain efficient even if loan origination volume declines; (xxii) the company’s expectation that its overall margins will remain at low levels during the fourth quarter of 2005; (xxiii) the company’s intention to continue to focus on maximizing the net execution of its whole loan sales and, to the extent advantageous, execute securitizations structured as sales at the taxable REIT subsidiary level; (xxiv) the company’s expectation that it will continue its cost-cutting strategies; (xxv) the company’s expectation that its loan production will be sold through whole loan sales and, to a lesser extent, securitizations structured as sales for the remainder of 2005 and in the near term; (xxvi) the company’s intention to concentrate significant efforts on a successful integration of the former RBC Mortgage Company business that the company expects will ultimately allow it to offer a wider range of products to all of its customers and add strong builder and realtor relationships to its loan origination business; (xxvii) the company’s assumption that its cumulative credit losses are approximately 3% of the original balance of the loans; (xxvii) the company’s belief that its loan production volume may decrease as a result of higher interest rates on the mortgages its originates; (xxviii) the company’s expectation that any positive impact of its steps to improve its operating margins will most likely occur in the first and second quarters of 2006; (xxix) the company’s expectation that it may continue to utilize securitizations structured as sales in order to maximize the secondary market value of its loan production; (xxx) the company’s expectation that it will measure the profitability of the loan origination platform acquired from RBC Mortgage Company using operating margin as the most important metric; (xxxi) the company’s intention to integrate its product channels in the coming quarters; (xxxii) the company’s belief that its stricter underwriting guidelines and the stronger credit characteristics of its interest-only loans mitigate their perceived higher risk; (xxxiii) the company’s intention to reduce the production volume of its interest-only product to 25% of total loan production through pricing increases, underwriting changes and new product offerings; (xxxiv) the company’s expectation that given the actual and anticipated timing of its investments and securitizations, its reported earnings in the second half of 2005 will exceed its reported earnings in the first half of 2005; (xxxv) the company’s expectation that the volume of discounted loan sales will likely return to normal levels in the fourth quarter of 2005; (xxxvi) the company’s underlying assumptions used to value its residual interests in securitizations and to determine the discount rates of projected cash flows for its residual interests and for residual interests through NIMS transactions (as described in this Quarterly Report on Form 10-Q); (xxxvii) the estimates and assumptions required by the company’s accounting policies; (xxxviii) the company’s estimates and assumptions with respect to the interest rate environment; (xxxix) the company’s estimates and assumptions with respect to the economic environment; (xl) the company’s estimates and assumptions with respect to secondary market conditions; (xli) the company’s estimates and assumptions with respect to the performance of the loans underlying its residual assets and mortgage loans held for investment; (xlii) the company’s estimates with respect to losses incurred as a result of the recent Gulf Coast hurricanes; (xliii) the company’s expectations with respect to the renewal or extension of its credit facilities; (xliv) the company’s expectations regarding its target levels of liquidity and capital; (xlv) the company’s successful execution of its liquidation strategy; (xlvi) the company’s expectation that its liquidity, credit facilities and capital resources will be sufficient to fund its operations for the foreseeable future while enabling it to maintain its qualification as a REIT under the requirements of the Internal Revenue Code of 1986, as amended; (xlvii) the company’s expectation that it will access the capital markets when appropriate to support its business operations; (xlviii) the company’s intention to execute its stock repurchase program while maintaining its targeted cash and liquidity levels and preserving its flexibility to engage in a modest level of off-balance sheet securitizations if the company believes such transactions to be advantageous; (xlix) that the company’s future declarations of dividends will be subject to its earnings, financial position, capital requirements, contractual restrictions and other relevant factors; and (l) the company’s beliefs with respect to its legal proceedings.

The company cautions that these statements are qualified by important factors that could cause its actual results to differ materially from expected results in the forward-looking statements. Such factors include, but are not limited to, (i) the condition of the U.S. economy and financial system; (ii) the interest rate environment; (iii) the effect of increasing competition in the company’s sector; (iv) the condition of the markets for whole loans and mortgage-backed securities; (v) the stability of residential property values; (vi) the company’s ability to comply with the requirements applicable to REITs; (vii) the company’s ability to increase its portfolio income; (viii) the company’s ability to continue to maintain low loan acquisition costs; (ix) the potential effect of new state or federal laws and regulations; (x) the company’s ability to maintain adequate credit facilities to finance its business; (xi) the outcome of litigation or regulatory actions pending against the company; (xii) the company’s ability to adequately hedge the fair value of its assets and cash flows; (xiii) the accuracy of the assumptions regarding the company’s repurchase allowance and residual valuations, prepayment speeds and loan loss allowance; (xiv) the ability to finalize forward sale commitments; (xv) the ability to deliver loans in accordance with the terms of forward sale commitments; (xvi) the assumptions underlying the company’s risk management practices; and (xvii) the ability of the company’s servicing platform to maintain high performance standards. Additional information on these and other factors is contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2004, the company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005 and the company’s other periodic filings with the Securities and Exchange Commission.

The company assumes no, and hereby disclaims any, obligation to update the forward-looking statements contained in this Quarterly Report on Form 10-Q.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

September 30, 2005 and December 31, 2004

(Dollars in thousands, except share amounts)


	September 30, 2005 (unaudited)			December 31, 2004
Assets
Cash and cash equivalents	$	530,059		842,854
Restricted cash		771,341		454,035
Mortgage loans held for sale		8,570,862		3,922,865
Mortgage loans held for investment, net of allowance of $177,759 and $90,227, respectively		18,330,313		13,195,324
Residual interests in securitizations		172,111		148,021
Mortgage servicing assets		54,310		8,249
Accrued interest receivable		112,151		66,208
Income taxes, net		111,335		180,840
Office property and equipment, net		80,085		47,266
Goodwill, net		93,211		12,717
Prepaid expenses and other assets		261,465		173,565

Total assets	$	29,087,243		19,051,944

Liabilities and Stockholders’ Equity
Credit facilities on mortgage loans held for sale	$	8,218,122		3,704,268
Financing on mortgage loans held for investment, net		18,226,819		13,105,973
Accounts payable and accrued liabilities		488,092		320,108
Convertible senior notes, net		4,931		5,392
Notes payable		45,318		37,638

Total liabilities		26,983,282		17,173,379

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, Authorized 10,000,000 shares; issued and outstanding 4,500,000 and zero shares at September 30, 2005 and December 31, 2004, respectively		45		—
Common stock, $0.01 par value, Authorized 300,000,000 shares; issued and outstanding 56,502,453 and 54,702,623 shares at September 30, 2005 and December 31, 2004, respectively		565		547
Additional paid-in capital		1,262,969		1,108,590
Accumulated other comprehensive income (loss)		48,084		(4,700	)
Retained earnings, restricted		809,006		781,627

		2,120,669		1,886,064
Deferred compensation costs		(16,708	)	(7,499	)

Total stockholders’ equity		2,103,961		1,878,565

Total liabilities and stockholders’ equity	$	29,087,243		19,051,944

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Dollars in thousands, except per share and share data)

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004
Interest income	$	494,621		264,923		1,246,553		609,186
Interest expense		(290,899	)	(106,784	)	(671,535	)	(230,054	)

Net interest income		203,722		158,139		575,018		379,132
Provision for losses on mortgage loans held for investment		(38,542	)	(25,769	)	(105,655	)	(62,750	)

Net interest income after provision for losses		165,180		132,370		469,363		316,382
Other operating income:
Gain on sale of mortgage loans		176,241		203,390		454,697		620,417
Servicing income		10,203		7,568		23,556		21,217
Other income		4,986		2,950		12,257		3,779

Total other operating income		191,430		213,908		490,510		645,413

Operating expenses:
Personnel		146,575		99,038		423,158		289,004
General and administrative		49,823		40,783		133,922		105,166
Advertising and promotion		25,661		16,978		66,204		46,227
Professional services		11,580		7,367		29,063		20,433

Total operating expenses		233,639		164,166		652,347		460,830

Earnings before income taxes		122,971		182,112		307,526		500,965
Income tax expense		2,867		74,833		7,583		204,064

Net earnings		120,104		107,279		299,943		296,901
Dividends on preferred stock		2,567		—		2,852		—

Net earnings available to common stockholders	$	117,537		107,279		297,091		296,901

Basic earnings per share	$	2.10		3.21		5.37		8.93
Diluted earnings per share	$	2.04		2.53		5.18		7.10
Basic weighted average shares outstanding		55,870,410		33,404,837		55,345,952		33,241,323
Diluted weighted average shares outstanding		57,598,055		42,908,655		57,421,474		42,362,084

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004
Net earnings	$	120,104		107,279		299,943		296,901
Net unrealized gains (losses) on derivative instruments designated as hedges		66,977		(51,454	)	44,371		(19,330	)
Reclassification adjustment into earnings for realized losses on derivative instruments		2,375		705		9,862		—
Tax effect		(600	)	20,977		(1,449	)	7,891

Comprehensive income	$	188,856		77,507		352,727		285,462

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2005

(In thousands, except per share amounts)


	Preferred shares outstanding	Preferred stock amount		Common shares outstanding		Common stock amount			Additional paid-in capital		Accumulated Other Comprehensive Income (Loss)		Retained earnings, restricted		Deferred compensation		Total
Balance December 31, 2004	—	$	—	54,703		$	547		1,108,590		(4,700	)	781,627		(7,499	)	1,878,565
Proceeds from issuance of common stock	—		—	1,744			17		24,851		—		—		—		24,868
Proceeds from issuance of preferred stock	4,500		45	—			—		108,619		—		—		—		108,664
Cancelled shares related to stock awards	—		—	(224	)		(2	)	(11,743	)	—		—				(11,745	)
Conversion of convertible senior notes	—		—	15			—		500		—		—		—		500
Issuance of restricted stock, net	—		—	264			3		14,863		—		—		(14,866	)	—
Amortization of deferred compensation	—		—	—			—		—		—		—		5,657		5,657
Net earnings	—		—	—			—		—		—		299,943		—		299,943
Tax benefit related to non-qualified stock options	—		—	—			—		17,289		—		—		—		17,289
Other comprehensive income, net of tax	—		—	—			—		—		52,784		—		—		52,784
Dividends declared on common stock, $4.80 per share	—		—	—			—		—		—		(269,712	)	—		(269,712	)
Dividends on preferred stock, $0.63 per share	—		—	—			—		—		—		(2,852	)	—		(2,852	)

Balance September 30, 2005 (unaudited)	4,500	$	45	56,502		$	565		1,262,969		48,084		809,006		(16,708	)	2,103,961

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Nine Months Ended
	September 30, 2005			September 30, 2004
Cash flows from operating activities:
Net earnings	$	299,943		296,901
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		95,411		17,433
Cash flows received from residual interests		15,021		43,391
Accretion of Net Interest Receivables, or “NIR”		(11,949	)	(18,629	)
NIR gains/discounts		36,106		(35,375	)
Initial deposits to over-collateralization accounts		(70,913	)	(20,040	)
Retained bond		—		(3,510	)
Servicing gains		(60,927	)	(4,508	)
Fair value adjustment of residual securities		7,645		6,361
Provision for losses on mortgage loans held for investment		105,655		62,750
Provision for repurchase losses		8,098		3,722
Mortgage loans originated or acquired for sale		(30,215,340	)	(23,072,756	)
Mortgage loan sales, net		25,453,537		22,464,159
Principal payments on mortgage loans held for sale		209,084		93,553
Increase in credit facilities on mortgage loans held for sale		4,513,854		510,371
Tax benefit related to non-qualified stock options		17,289		—
Net change in other assets and liabilities		39,746		(74,708	)

Net cash provided by operating activities		442,260		269,115

Cash flows from investing activities:
Mortgage loans originated or acquired for investment, net		(10,273,642	)	(7,622,891	)
Principal payments on mortgage loans held for investment		4,984,710		1,442,366
Purchases of office property and equipment		(46,761	)	(20,020	)
Acquisition of net assets		(80,573	)	—
Sale of mortgage servicing rights		8,477		15,184

Net cash used in investing activities		(5,407,789	)	(6,185,361	)

Cash flows from financing activities:
Proceeds from issuance of financing on mortgage loans held for investment, net		9,792,230		7,410,872
Repayments of financing on mortgage loans held for investment		(4,688,033	)	(1,365,980	)
Proceeds from issuance of preferred stock		108,664		—
Proceeds from notes payable		23,097		22,769
Repayment of notes payable		(15,417	)	(10,485	)
Change in restricted cash		(317,306	)	(242,468	)
Payment of dividends on common stock		(259,067	)	(18,930	)
Payment of dividends on preferred stock		(2,852	)	—
Net proceeds from issuance of stock		25,368		7,968
Purchase of common stock		(13,950	)	—

Net cash provided by financing activities		4,652,734		5,803,746

Net decrease in cash and cash equivalents		(312,795	)	(112,500	)
Cash and cash equivalents, beginning of period		842,854		278,598

Cash and cash equivalents, end of period	$	530,059		166,098

Supplemental cash flow disclosure:
Interest paid	$	280,871		217,811
Income taxes paid (refunded)		(72,509	)	284,595
Supplemental non-cash financing activity:
Restricted stock issued		14,866		5,782
Accrued dividends		93,183		7,838

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2005 and 2004

1. Basis of Presentation

New Century TRS Holdings, Inc. (formerly known as New Century Financial Corporation), a Delaware corporation (“New Century TRS”), was incorporated on November 17, 1995. New Century Mortgage Corporation, a wholly-owned subsidiary of New Century TRS (“New Century Mortgage”), commenced operations in February 1996 and is a mortgage finance company engaged in the business of originating, purchasing, selling and servicing mortgage loans secured primarily by first and second mortgages on single-family residences. NC Capital Corporation, a wholly-owned subsidiary of New Century Mortgage (“NC Capital”), was formed in December 1998 to conduct the secondary marketing activities of New Century (as defined below). New Century Credit Corporation (formerly known as Worth Funding Incorporated), a wholly-owned subsidiary of New Century (“New Century Credit”), was acquired in March 2000 by New Century Mortgage. NC Residual IV Corporation, a wholly-owned subsidiary of New Century (“NCRIV”), was formed in September 2004 to hold a portfolio of mortgage loans held for investment. After consummation of the Merger (defined below), New Century purchased New Century Credit from New Century Mortgage. The terms “New Century,” “Company,” “we,” “our,” and “us” refer to New Century Financial Corporation, except where the context otherwise requires.

On April 5, 2004, New Century TRS’s board of directors approved a plan to change New Century TRS’s capital structure to enable it to qualify as a real estate investment trust, or REIT, for United States federal income tax purposes. The decision to convert to a REIT was based on several factors, including the potential for increased stockholder return, tax efficiency and ability to achieve growth objectives. On April 19, 2004, New Century TRS’s board of directors approved certain legal and financial matters related to the proposed REIT conversion.

On April 12, 2004, New Century TRS formed New Century Financial Corporation (formerly known as New Century REIT, Inc.), a Maryland corporation (“New Century”). On September 15, 2004, New Century TRS’s stockholders approved and adopted the Agreement and Plan of Merger dated as of April 21, 2004 (the “Merger Agreement”), by and among New Century TRS, New Century and NC Merger Sub, Inc., a Delaware corporation formed by New Century for purposes of effecting the Merger (“Merger Sub”), which implemented the restructuring of New Century TRS in order for it to qualify as a REIT (the “Merger”).

Pursuant to the Merger Agreement, (i) Merger Sub merged with and into New Century TRS, with New Century TRS as the surviving corporation, (ii) each outstanding share of New Century TRS’s common stock was converted into the right to receive one share of common stock, par value of $0.01 per share, of New Century, (iii) New Century TRS became a wholly-owned subsidiary of New Century and changed its name from “New Century Financial Corporation” to “New Century TRS Holdings, Inc.,” and (iv) “New Century REIT, Inc.” changed its name to “New Century Financial Corporation.” The Merger was consummated and became effective on October 1, 2004, and was accounted for on an “as if pooling basis.” These condensed consolidated financial statements give retroactive effect to the Merger for the periods presented. Accordingly, under “as if pooling accounting,” the assets and liabilities of New Century TRS transferred to New Century in connection with the Merger have been accounted for at historical amounts as if New Century TRS was transferred to New Century as of the earliest date presented and the condensed consolidated financial statements of New Century prior to the Merger include the results of operations of New Century TRS. Stockholders’ equity amounts presented for years prior to the formation of New Century are those of New Century TRS, adjusted for the Merger exchange rate.

On September 29, 2004, in contemplation of the Merger, New Century TRS requested that The Nasdaq Stock Market, Inc. suspend the listing of the shares of New Century TRS’s common stock on the Nasdaq National Market prior to the commencement of trading on October 1, 2004. Shares of New Century’s common stock, which were issued in exchange for then outstanding shares of New Century TRS common stock on a one-for-one basis in connection with the Merger, were approved for listing on the New York Stock Exchange, Inc. and commenced trading on October 1, 2004 under the ticker symbol “NEW.”

On September 2, 2005, Home123 Corporation, an indirect wholly-owned subsidiary of the Company (“Home123”), purchased certain assets and assumed certain related liabilities of RBC Mortgage Company, or RBC Mortgage. Such net assets are primarily related to the RBC Mortgage origination platform. The Company expects that the acquisition will enable it to expand its mortgage product offerings to include conventional mortgage loans, loans insured by the Federal Housing Administration and loans guaranteed by the Veterans Administration, its retail presence on a nationwide basis and its channels of distribution.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

The purchase price for the net assets was $80.6 million, and was accounted for using the purchase method. Of the aggregate amount, $7.6 million was the fair value of assets acquired and $4.7 million was the fair value of liabilities assumed. The excess of the purchase price over the fair values of assets acquired and liabilities assumed was allocated to goodwill. Goodwill of $77.7 million was recorded at Home123. The initial purchase price allocations may be adjusted within one year of the purchase date for changes in estimates of the fair value of assets acquired and liabilities assumed.

The notes to the financial statements, where applicable, discuss the results of operations of the origination platform acquired by the Company from RBC Mortgage in September 2005. Where the results are discussed, “newly-acquired” operations refer to the operations of the origination platform acquired from RBC Mortgage and “historical” operations refer to the operations of New Century that existed prior to the RBC Mortgage transaction.

The accompanying condensed consolidated financial statements include the consolidated financial statements of the Company’s wholly-owned subsidiaries, New Century TRS, New Century Credit, NCRIV and Home123. All material intercompany balances and transactions are eliminated in consolidation.

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto included in New Century’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

Reclassification

Certain amounts from the prior year’s presentation have been reclassified to conform to the current year’s presentation.

Recent Accounting Developments

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 2003 except for mandatory redeemable financial instruments of nonpublic entities. The Company applied the provisions of SFAS 150 when the Company’s 9.125% Series A Cumulative Redeemable Preferred Stock was issued in the second quarter of 2005.

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Securities and Exchange Commission (“SEC”) registrants originally would have been required to adopt SFAS 123R’s provisions at the beginning of their first interim period after June 15, 2005. On April 14, 2005, the SEC announced that registrants could delay adoption of SFAS 123R’s provisions until the beginning of their next fiscal year. The Company currently expects to adopt SFAS 123R on January 1, 2006, using the “modified prospective” transition method. The scope of SFAS 123R includes a wide range of stock-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS 123R will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost must be recognized in the income statement over the vesting period of the award. Under the “modified prospective” transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with SFAS 123R. In addition, expense must be recognized in the statement of income for unvested awards that were granted prior to the date of adoption. The expense will be based on the fair value determined at the grant date.

The notes to financial statements disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements. The Company currently provides pro forma disclosure as to the impact of SFAS 123 or SFAS 123R in footnote 1 of the Notes to Condensed Consolidated Financial Statements—Stock-Based Compensation.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and due from banks.

Restricted Cash

As of September 30, 2005, restricted cash totaled $771.3 million, and included $57.0 million in cash held in a margin account associated with the Company’s interest rate risk management activities, $694.2 million in cash held in custodial accounts associated with its mortgage loans held for investment, $20.0 million in cash held in a cash reserve account in connection with its asset-backed commercial paper facility, and $166,000 in cash held in trust accounts on behalf of borrowers. As of December 31, 2004, restricted cash totaled $454.0 million, and included $58.2 million in cash held in a margin account associated with its interest rate risk management activities, $375.8 million in cash held in custodial accounts associated with its mortgage loans held for investment, and $20.0 million in cash held in a cash reserve account in connection with its asset-backed commercial paper facility.

Mortgage Loans Held for Sale

Mortgage loans held for sale are stated at the lower of amortized cost or fair value as determined by outstanding commitments from investors or current investor-yield requirements, calculated on an aggregate basis.

Mortgage Loans Held for Investment

Mortgage loans held for investment represent loans securitized through transactions structured as financings, or pending securitization through transactions that are expected to be structured as financings. Mortgage loans held for investment are stated at amortized cost, including the outstanding principal balance, less the allowance for loan losses, plus net deferred origination costs. The financing related to these securitizations is included in the Company’s condensed consolidated balance sheet as financing on mortgage loans held for investment.

Allowance for Losses on Mortgage Loans Held for Investment

In connection with its mortgage loans held for investment, the Company establishes an allowance for loan losses based on its estimate of losses inherent and probable as of its balance sheet date. The Company charges off uncollectible loans at the time of liquidation. The Company evaluates the adequacy of this allowance each quarter, giving consideration to factors such as the current performance of the loans, characteristics of the portfolio, the value of the underlying collateral and the general economic environment. In order to estimate an appropriate allowance for losses for loans held for investment, the Company estimates losses using “static pooling,” which stratifies the loans held for investment into separately identified vintage pools. Provision for losses is charged to the Company’s condensed consolidated statement of earnings. Losses incurred are charged to the allowance. Management considers the current allowance to be adequate.

Residual Interests in Securitizations

Residual interests in securitizations, or Residuals, are recorded as a result of the sale of loans through securitizations that the Company structures as sales rather than financings, referred to as “off-balance sheet securitizations.” The Company may also sell Residuals through what are sometimes referred to as net interest margin securities, or NIMS.

In a securitization structured as a sale, the Company sells a pool of loans to a trust for a cash purchase price and a certificate evidencing its residual interest ownership in the trust. The trust raises the cash portion of the purchase price by selling senior certificates representing senior interests in the loans in the trust. Following the securitization, purchasers of senior certificates receive the principal collected, including prepayments, on the loans in the trust. In addition, they receive a portion of the interest on the loans in the trust equal to the specified “investor pass-through interest rate” on the principal balance. The Company receives the cash flows from the Residuals after payment of servicing fees, guarantor fees and other trust expenses if the specified over-collateralization requirements are met. Over-collateralization requirements are generally based on a percentage of the original or current unpaid principal balance of the loans and may be increased during the life of the transaction depending upon actual delinquency or loss experience. A NIMS transaction, through which certificates are sold that represent a portion of the spread between the coupon rate on the loans and the investor pass-through interest rate, may also occur

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

concurrently with or shortly after a securitization. A NIMS transaction allows the Company to receive a substantial portion of the gain in cash at the closing of the NIMS transaction, rather than over the actual life of the loans.

The Annual Percentage Rate, or APR, on the mortgage loans is relatively high in comparison to the investor pass-through interest rate on the certificates. Accordingly, the Residuals described above are a significant asset of the Company. In determining the value of the Residuals, the Company estimates the future rate of prepayments, prepayment penalties that it will receive, delinquencies, defaults and default loss severity as they affect the amount and timing of the estimated cash flows. The Company estimates average cumulative losses as a percentage of the original principal balance of the mortgage loans of 1.68% to 4.71% for adjustable-rate securities and 1.45% to 5.22% for fixed-rate securities. The estimated cumulative losses of the two securitizations completed in 2005 was 2.7%. The Company bases these estimates on historical loss data for the loans, the specific characteristics of the loans, and the general economic environment. While the range of estimated cumulative pool losses is fairly broad, the weighted average cumulative pool loss estimate for the entire portfolio of residual assets was 3.76% at September 30, 2005. The Company estimates prepayments by evaluating historical prepayment performance of its loans and the impact of current trends. The Company uses a prepayment curve to estimate the prepayment characteristics of the mortgage loans. The rate of increase, duration, severity, and decrease of the curve depends on the age and nature of the mortgage loans, primarily whether the mortgage loans are fixed or adjustable and the interest rate adjustment characteristics of the mortgage loans (6-month, 1-year, 2-year, 3-year, or 5-year adjustment periods). These prepayment curve and default estimates have resulted in weighted average lives of between 2.26 to 2.58 years for the Company’s adjustable-rate securities and 2.38 to 3.47 years for its fixed-rate securities. The estimated weighted average life of the two securitizations completed in 2005 was 2.56 years.

During the nine months ended September 30, 2005, the Company completed two securitizations structured as sales totaling $3.0 billion. The gain on sale recorded for the two securitizations was $71.6 million and the Company’s retained interests totaled $34.8 million.

During the nine months ended September 30, 2005, the Residuals provided $15.0 million in net cash flow to the Company. The Company performs an evaluation of the Residuals quarterly, taking into consideration trends in actual cash flow performance, industry and economic developments, as well as other relevant factors. During the quarter ended September 30, 2005, the Company increased its prepayment rate assumptions based upon actual performance and made minor adjustments to certain other assumptions, resulting in a $3.2 million decrease in the fair value for the quarter that is recorded as a reduction to gain on sale of mortgage loans.

The bond and certificate holders and their securitization trusts have no recourse to the Company for failure of mortgage loan borrowers to pay when due. The Company’s Residuals are subordinate to the bonds and certificates until the bond and certificate holders are fully paid.

The Company is party to various transactions that have an off-balance sheet component. In connection with the Company’s off-balance sheet securitization transactions, as of September 30, 2005, there were $3.7 billion in loans owned by the off-balance sheet trusts. The trusts have issued bonds secured by these loans. The bondholders generally do not have recourse to the Company in the event that the loans in the various trusts do not perform as expected. Because these trusts are “qualifying special purpose entities,” in accordance with generally accepted accounting principles, the Company has included only its residual interest in these loans on its condensed consolidated balance sheet. The performance of the loans in the trusts will impact the Company’s ability to realize the current estimated fair value of these residual assets.

Derivative Instruments Designated as Hedges

The Company accounts for certain Euro Dollar futures and interest rate cap contracts designated and documented as cash flow hedges pursuant to the requirements of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Pursuant to SFAS 133, these contracts have been designated as hedging the exposure to variability of cash flows from the Company’s variable rate financing on mortgage loans held for investment attributable to changes in interest rates. Cash flow hedge accounting requires that the effective portion of the gain or loss in the fair value of a derivative instrument designated as a hedge be reported in other comprehensive income and the ineffective portion be reported in current earnings. Additionally, certain Euro Dollar futures contracts were designated as hedges of the fair values of certain mortgage loans held for investment and certain mortgage loans held for sale pursuant to SFAS 133. Fair value hedge accounting requires that for a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk be reported in current earnings.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

Comprehensive income

Comprehensive income includes unrealized gains and losses that are excluded from the Company’s consolidated statement of earnings and are reported as a separate component in stockholders’ equity as accumulated other comprehensive income (loss). The unrealized gains and losses include unrealized gains and losses on the effective portion of cash flow hedges.

The following table presents a summary of the activity for the accumulated other comprehensive income (loss) for the nine months ended September 30, 2005 (dollars in thousands):


Balance, beginning of period	$	(4,700	)
Net unrealized gain on derivative instruments designated as hedges		44,371
Reclassification adjustment into earnings for realized loss on derivative instruments		9,862
Tax effect		(1,449	)

Balance, end of period	$	48,084

Income Taxes

The Company is a REIT for federal income tax purposes and is not generally required to pay federal and most state income taxes if it meets the REIT requirements of the Internal Revenue Code of 1986, as amended, or the Code. Also, each of the Company’s subsidiaries that meet the requirements of the Code to be a qualified REIT subsidiary, or a QRS, are not generally required to pay federal and most state income taxes. However, the Company must recognize income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes,” (“SFAS 109”) for each of its taxable REIT subsidiaries, or TRS, whose income is fully taxable at regular corporate rates.

SFAS 109 requires that inter-period income tax allocation be based on the asset and liability method. Accordingly, the Company recognizes the tax effects of temporary differences between its tax and financial reporting bases of assets and liabilities that will result in taxable or deductible amounts in future periods.

Stock-Based Compensation

The Company has elected to follow APB 25 and related interpretations in accounting for employee stock options rather than the fair value accounting allowed by SFAS 123. APB 25 provides that compensation expense relative to the Company’s employee stock options is recorded over the vesting period if the current market price of the underlying stock exceeds the exercise price on the date of grant. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), which amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.

The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of stock options granted and the weighted average underlying assumptions used to estimate those values for the three and nine months ended September 30, 2005 and 2004 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005			2004	2005	2004
Fair value	$	10.87		26.21	9.23	19.66
Expected life (years)		4.5		4.5	4.5	4.5
Risk-free interest rate		3.9	%	3.4	4.2	3.3
Volatility		59.4	%	59.5	60.5	52.8
Expected annual dividend yield		12.5	%	1.6	13.7	1.8

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

As of September 30, 2005 and 2004, there were stock options outstanding for the purchase of 3,998,657 and 5,352,422 shares, respectively, of the Company’s common stock. The following table shows the pro forma net income as if the fair value method of SFAS 123 had been used to account for stock-based compensation expense (dollars in thousands, except per share amounts):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004
Basic net earnings available to common shareholders:
As reported	$	117,537		107,279		297,091		296,901
Compensation expense, net of related tax effects		(1,782	)	(1,562	)	(4,971	)	(4,066	)

Pro forma	$	115,755		105,717		292,120		292,835

Diluted net earnings available to common shareholders:
As reported	$	117,507		108,576		297,156		300,705
Compensation expense, net of related tax effects		(1,782	)	(1,562	)	(4,971	)	(4,066	)

Pro forma	$	115,725		107,014		292,185		296,639

Basic earnings per share:
As reported	$	2.10		3.21		5.37		8.93
Pro forma		2.07		3.16		5.28		8.81
Diluted earnings per share:
As reported	$	2.04		2.53		5.18		7.10
Pro forma		2.03		2.53		5.15		7.10
Basic weighted average shares outstanding:
As reported		55,870		33,405		55,346		33,241
Pro forma		55,870		33,405		55,346		33,241
Diluted weighted average shares outstanding:
As reported		57,598		42,909		57,421		42,362
Pro forma		56,909		42,241		56,747		41,754

2. Mortgage Loans Held for Sale

A summary of mortgage loans held for sale, at the lower of cost or market at September 30, 2005 and December 31, 2004, is as follows (dollars in thousands):


	September 30, 2005		December 31, 2004
First trust deeds	$	7,881,625	3,677,255
Second trust deeds		643,228	197,362
Net deferred origination costs and other		46,009	48,248

	$	8,570,862	3,922,865

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

At September 30, 2005, the Company had mortgage loans held for sale of approximately $58.6 million on which the accrual of interest had been discontinued. If these mortgage loans had been current throughout their terms, interest income would have increased by approximately $2.8 million for the nine months ended September 30, 2005.

3. Mortgage Loans Held for Investment

For the three and nine months ended September 30, 2005, the Company securitized $2.1 billion and $11.0 billion in loans, respectively, through transactions structured as financings, resulting in an increase in its mortgage loans held for investment. As of September 30, 2005, the balance of mortgage loans held for investment included $30.8 million of mortgage loans held for investment that were not yet securitized. A summary of the components of mortgage loans held for investment at September 30, 2005 and December 31, 2004 is as follows (dollars in thousands):


	September 30, 2005			December 31, 2004
Mortgage loans held for investment:
Unpaid principal balance of mortgage loans	$	18,358,892		13,169,595
Allowance for loan losses		(177,759	)	(90,227	)
Net deferred origination costs		149,180		115,956

	$	18,330,313		13,195,324

At September 30, 2005, the Company had mortgage loans held for investment of approximately $479.2 million on which the accrual of interest had been discontinued. If these mortgage loans had been current throughout their terms, interest income would have increased by approximately $20.0 million for the nine months ended September 30, 2005.

The following table presents a summary of the activity for the allowance for losses on mortgage loans held for investment for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004
Beginning balance	$	145,565		61,307		90,227		26,251
Additions		38,542		25,769		105,655		62,750
Charge-offs		(6,348	)	(2,420	)	(18,123	)	(4,345	)

	$	177,759		84,656		177,759		84,656

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

4. Residual Interests in Securitizations

Residual interests in securitizations consisted of the following components at September 30, 2005 and December 31, 2004 (dollars in thousands):


	September 30, 2005			December 31, 2004
Over-collateralization account	$	220,859		158,755
Net interest receivable (NIR)		(48,748	)	(10,734	)

	$	172,111		148,021

Residual interests in securitizations are recorded at estimated fair value, which is based on estimated discounted cash flows. The over-collateralization account in the table above represents the current, un-discounted balance of the over-collateralization accounts at period end. The net interest receivable, or NIR, balance represents the difference between the estimated discounted cash flows less the un-discounted value of the over-collateralization accounts, resulting in the presentation above.

The following table summarizes the activity in the over-collateralization, or OC, accounts for the nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Nine Months Ended September 30,
	2005			2004
Balance, beginning of period	$	158,755		169,905
Initial deposits to OC accounts		70,913		—
Additional deposits to OC accounts		1,834		20,880
Release of cash from OC accounts		(10,643	)	(10,052	)

Balance, end of period	$	220,859		180,733

The following table summarizes activity in the NIR accounts for the nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Nine Months Ended September 30,
	2005			2004
Balance, beginning of period	$	(10,734	)	9,593
NIR gains (discounts)		(36,106	)	35,375
Cash received from NIRs		(6,212	)	(34,179	)
Accretion of NIRs		11,949		18,629
Fair value adjustment		(7,645	)	(6,361	)

Balance, end of period	$	(48,748	)	23,057

During the nine months ended September 30, 2005, the Company completed two securitizations structured as sales totaling $3.0 billion. During the nine months ended September 30, 2004, the Company completed two securitizations structured as sales, related to its investment in Carrington Mortgage Credit Fund I, LP (“Carrington”). Purchasers of securitization bonds

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

and certificates have no recourse against the other assets of the Company, other than the assets of the trust. The value of the Company’s retained interests is subject to credit, prepayment and interest rate risk on the transferred financial assets.

5. Mortgage Servicing Assets

Mortgage servicing assets represent the estimated fair value of our mortgage loan servicing rights. The following table summarizes activity in the mortgage servicing assets for the nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Nine Months Ended September 30,
	2005			2004
Balance, beginning of period	$	8,249		1,900
Additions		60,927		4,508
Sales of servicing rights		(8,477	)	—
Amortization		(6,389	)	(1,113	)

Balance, end of period	$	54,310		5,295

The Company records mortgage servicing assets when it sells loans on a servicing-retained basis and when it sells loans through whole loan sales to an investor in the current period and sells the servicing rights to a third party in a subsequent period.

The addition of $60.9 million for the nine months ended September 30, 2005 includes: (i) $35.8 million of servicing rights retained by the Company in certain of its whole loan sales to Carrington, (ii) $8.7 million of servicing rights related to the securitization structured as a sale completed in June 2005 (which was subsequently sold to a third party in August 2005 for $8.5 million) and (iii) $16.4 million of servicing rights related to the securitization structured as a sale completed in September 2005 (which will be sold to a third party in November 2005 for $16.4 million).

6. Goodwill

Goodwill is recorded in connection with the acquisition of new subsidiaries or net assets and is included in prepaid expenses and other assets. As of September 30, 2005 and December 31, 2004, the Company had goodwill of $93.2 million and $12.7 million, respectively. No impairment was recognized during the nine months ended September 30, 2005.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

7. Credit Facilities and Other Short-Term Borrowings

Credit facilities and other short-term borrowings consist of the following at September 30, 2005 and December 31, 2004 (dollars in thousands):


	September 30, 2005		December 31, 2004
A $2.0 billion asset-backed commercial paper facility for Von Karman Funding LLC, a wholly-owned subsidiary of New Century Mortgage, expiring in September 2006, secured by mortgage loans held for sale and cash generated through the sale of loans, bearing interest based on a margin over one-month LIBOR.	$	—	—

A $2.0 billion master repurchase agreement ($1 billion of which is uncommitted) among New Century Mortgage, NC Capital, NC Residual II, New Century Credit and Bank of America, N.A. expiring in September 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		1,089,106	975,119

A $1.0 billion master repurchase agreement among New Century Mortgage, Home 123 and Bank of America expiring in September 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		76,504	—

A $1.0 billion master repurchase agreement among New Century Credit, NC Residual II Corporation, a wholly-owned subsidiary of NC Capital (“NC Residual II”), New Century Mortgage, NC Capital and Barclays Bank PLC expiring in November 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. This facility was temporarily increased to $2.0 billion until October 2005. The Company expects to either renew or extend this facility prior to its expiration.		1,399,878	43,917

An $800 million aggregation uncommitted facility from Bear Stearns Mortgage Capital Corporation expiring in November 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		358,471	428,397

An $850 million master repurchase agreement among New Century Credit, New Century Mortgage, NC Capital, NC Residual II, Home123 and IXIS Real Estate Capital Inc. expiring in October 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		605,338	617,141

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004


	September 30, 2005	December 31, 2004
A $150 million master repurchase agreement between New Century Funding SB-1, a Delaware business trust and wholly-owned subsidiary of New Century Mortgage, and Citigroup Global Markets Reality Corp., successor to Salomon Brothers Reality Corp., expiring in December 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.	—	—

A $650 million repurchase agreement among New Century Credit, NC Capital and Citigroup Global Markets expiring in December 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company has the ability to increase the size of this facility to $800 million provided that the value of the loans outstanding at any one time under this facility and the $150 million facility set forth immediately above may not exceed $800 million in the aggregate. The Company expects to renew or extend the termination date for this facility prior to its expiration.	556,124	260,025

A $150 million master loan and security agreement among New Century Mortgage, NC Capital, New Century and Citigroup Global Markets expiring in December 2005, secured by delinquent loans and REO properties, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.	74,919	959

A $250 million repurchase agreement between New Century Mortgage and Citigroup Global Markets expiring in December 2005, secured by small balance commercial mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.	43,658	54,398

A $1.0 billion master loan and security agreement among New Century Credit, New Century Mortgage, NC Capital, Home123 and Credit Suisse First Boston Mortgage Capital LLC expiring in November 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to renew or extend this facility prior to its expiration.	665,797	—

A $1.0 billion master repurchase agreement among New Century Credit, New Century Mortgage, NC Capital, Home123 and Deutsche Bank Securities Inc. expiring in September 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.	489,183	—

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004


	September 30, 2005			December 31, 2004
A $2.0 billion master loan and security agreement among New Century Credit, New Century Mortgage, NC Capital, NC Residual II, Morgan Stanley Bank, Concord Minutemen Capital Company, LLC and Morgan Stanley Mortgage Capital Inc. expiring in February 2007, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		1,110,629		959,822

A $2.0 billion asset-backed note purchase and security agreement ($500 million of which is uncommitted) between New Century Funding I, a special-purpose vehicle established as a Delaware statutory trust, which is a wholly-owned subsidiary of New Century Mortgage, and UBS Real Estate Securities Inc. expiring in June 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		1,763,745		1,141,167

Less: Credit facility amounts reclassified to financing on mortgage loans held for investment		(15,230	)	(776,677	)

	$	8,218,122		3,704,268

The various credit facilities contain certain restrictive financial and other covenants that require the Company to, among other things, restrict dividends, maintain certain levels of net worth, liquidity, available borrowing capacity and debt-to-net worth ratios and comply with regulatory and investor requirements. The Company was in compliance with these covenants at September 30, 2005.

8. Financing on Mortgage Loans Held for Investment

When the Company sells loans through securitizations structured as financings, the related bonds are added to its balance sheet. As of September 30, 2005 and December 31, 2004, the financing on mortgage loans held for investment consisted of the following (dollars in thousands):


	September 30, 2005			December 31, 2004
Securitized bonds	$	18,254,838		12,379,524
Short-term financing on retained bonds		4,884		23,616
2003-NC5 NIM bond		—		7,583
2005-NC3 NIM bond		22,827		—
Debt issuance costs		(70,960	)	(81,427	)
Credit facility amounts reclassified from warehouse credit facilities		15,230		776,677

Total financing on mortgage loans held for investment	$	18,226,819		13,105,973

The Company’s maturity of financing on mortgage loans held for investment is based on certain prepayment assumptions. The Company estimates the average life of its various securitized loan pools to be between 1.8 and 3.9 years. The following table

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

reflects the estimated maturity of the financing on mortgage loans held for investment as of September 30, 2005 (dollars in thousands):


Due in less than 1 year	$	5,298,181
Due in 2 years		5,254,780
Due in 3 years		2,259,611
Thereafter		5,414,247

	$	18,226,819

9. Convertible Senior Notes Private Offering

On July 8, 2003, New Century TRS closed a private offering of $175.0 million of convertible senior notes due July 3, 2008 pursuant to Rule 144A under the Securities Act of 1933. On July 14, 2003, the initial purchasers of the convertible senior notes exercised their option, in full, to acquire an additional $35.0 million principal amount of the convertible senior notes. The convertible senior notes bear interest at a rate of 3.50% per year, paid semi-annually, and, as of March 17, 2004, became convertible into New Century TRS common stock at a conversion price of $34.80 per share. The conversion price represents a 28.0% premium over the closing share price on July 8, 2003. Principal balance is not due until maturity. As a result of the Merger, the convertible senior notes became convertible into shares of New Century common stock. On February 14, 2005, New Century, New Century TRS and the trustee under the indenture governing the convertible senior notes entered into a second supplemental indenture pursuant to which New Century agreed to fully and unconditionally guarantee the due and punctual payment of the convertible senior notes.

On November 22, 2004, New Century TRS commenced an offer, upon the terms and subject to the conditions described in the prospectus related to the offer and the accompanying letter of transmittal, to convert all the outstanding convertible senior notes into shares of New Century common stock, cash, or a combination of both. The offer and withdrawal rights expired at midnight, New York City time, on December 23, 2004. On December 24, 2004, New Century TRS accepted for payment $204.5 million, or approximately 97.4%, of the $210.0 million aggregate principal amount of the convertible senior notes then outstanding, which constituted all of the convertible senior notes validly tendered and not withdrawn. In the aggregate, the holders who tendered their convertible senior notes for conversion in the offer received 6,236,431 shares of New Century common stock, which included 359,796 shares for additional consideration and an additional $3.4 million in cash for accrued interest through that date. On June 27, 2005, a holder of New Century TRS’s convertible senior notes proposed, and the Company agreed, to convert $500,000 principal amount of convertible senior notes into 15,014 shares of its common stock. In connection with the conversion, the Company made a cash payment to the holder of $51,104, which included a conversion incentive fee and accrued interest through that date.

As of September 30, 2005, the number of shares of New Century’s common stock into which the remaining convertible senior notes were convertible was 154,679, subject to certain adjustments under the terms of the convertible senior notes. For example, the terms of the convertible senior notes allow for the conversion rate to adjust if the Company’s dividend rate increases generally above a dividend yield of 1.75%, subject to certain other factors. As of September 30, 2005, the maximum number of shares of New Century’s common stock into which the remaining untendered convertible senior notes were convertible was 176,637, subject to certain adjustments under the terms of the convertible senior notes. On October 31, 2005, concurrent with the payment of a cash dividend of $1.65 per share, the number of shares into which the remaining convertible senior notes were convertible was adjusted to 159,009.

10. Series A Cumulative Redeemable Preferred Stock Offering

In June 2005, the Company sold 4,500,000 shares of its Series A Cumulative Redeemable Preferred Stock, including 300,000 shares to cover overallotments. The offering provided $108.7 million in net proceeds. The shares have a liquidation value of $25.00 per share and pay an annual coupon of 9.125% and are not convertible into any other securities. The Company may, at its option, redeem the Series A Cumulative Redeemable Preferred Stock, in the aggregate or in part, at any time on or after June 21, 2010. As such, this stock is not considered mandatorily or contingently redeemable under the

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

provisions of SFAS 150 and is therefore classified as a component of equity. The Company paid preferred stock dividends for the second and third quarters on September 30, 2005, and, as a result, accrued preferred stock dividends were zero as of September 30, 2005.

11. Interest Income

The following table presents the components of interest income for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2005		2004	2005	2004
Interest on mortgage loans held for investment	$	342,105	148,308	905,652	325,117
Interest on mortgage loans held for sale - Historical		144,440	112,382	319,470	270,445
Interest on mortgage loans held for sale - Newly-acquired		1,436	—	1,436	—
Residual interest income		4,022	4,193	11,949	13,551
Other interest income		2,618	40	8,046	73

	$	494,621	264,923	1,246,553	609,186

12. Interest Expense

The following table presents the components of interest expense for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2005		2004	2005	2004
Interest on financing on mortgage loans held for investment	$	196,376	62,347	474,742	128,762
Interest on credit facilities and other short-term borrowings - Historical		84,815	41,013	181,871	90,699
Interest on credit facilities and other short-term borrowings - Newly-acquired		1,115	—	1,115	—
Interest on convertible senior notes		67	2,126	190	6,376
Other interest expense		8,526	1,298	13,617	4,217

	$	290,899	106,784	671,535	230,054

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

13. Hedging Activities

In connection with the Company’s strategy to mitigate interest rate risk on its residual assets, mortgage loans held for sale and mortgage loans held for investment, the Company uses derivative financial instruments such as Euro Dollar futures and interest rate cap contracts. It is not the Company’s policy to use derivatives to speculate on interest rates. These derivative instruments have an active secondary market, and are intended to provide income and cash flow to offset potential reduced interest income and cash flow under certain interest rate environments, as well as to hedge the fair value of certain fixed-rate mortgage loans held for investment and certain mortgage loans held for sale. In accordance with SFAS 133, the derivative financial instruments and any related margin accounts are reported on the condensed consolidated balance sheets at their fair value.

In 2003, the Company began applying hedge accounting as defined by SFAS 133 for certain derivative financial instruments used to hedge cash flows related to its financing on mortgage loans held for investment. In June 2004, the Company began applying hedge accounting for certain derivative financial instruments to hedge the fair value of certain of its mortgage loans held for investment and certain of its mortgage loans held for sale. The Company designates certain derivative financial instruments, Euro Dollar futures and interest rate cap contracts as hedge instruments under SFAS 133, and, at trade date, these instruments and their hedging relationship are identified, designated and documented.

The Company documents the relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the condensed consolidated balance sheet. The Company also assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of the hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.

When hedge accounting is discontinued because the Company determines that the derivative no longer qualifies as an effective hedge, the derivative will continue to be recorded on the condensed consolidated balance sheet at its fair value. Any change in the fair value of a derivative no longer qualifying as an effective hedge is recognized in current period earnings. When a hedge is terminated, it is derecognized at the time of termination. For terminated cash flow hedges or cash flow hedges that no longer qualify as effective, the effective position previously recorded is recorded in earnings when the hedged item affects earnings.

Cash Flow Hedge Instruments - For derivative financial instruments designated as cash flow hedge instruments, the Company evaluates the effectiveness of these hedges against the variable rate interest payments related to its financing on mortgage loans held for investment being hedged to ensure there remains a highly effective correlation in the hedge relationship. To hedge the adverse effect of interest rate changes on the cash flows as a result of changes in the benchmark LIBOR interest rate, which affect the interest payments related to its financing on mortgage loans held for investment (variable rate debt) being hedged, the Company uses derivatives classified as cash flow hedges under SFAS 133. Once the hedge relationship is established, for those derivative instruments designated as qualifying cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income during the current period, and reclassified into earnings in the period(s) during which the hedged transaction affects earnings pursuant to SFAS 133. The ineffective portion and/or remaining gain or loss on the derivative instrument is recognized in earnings in the current period. During the three and nine months ended September 30, 2005, the Company recognized a gain of $2.2 million and $5.8 million, respectively, from the ineffective portion of these hedges. For the three and nine months ended September 30, 2004, the Company recorded a charge to earnings of approximately $0.7 million and zero, respectively, for the ineffective portion of these hedges.

As of September 30, 2005, the Company had open Euro Dollar futures contracts that were designated as hedging the variability in expected cash flows from the variable rate debt related to its financing on mortgage loans held for investment. The fair value of these contracts at September 30, 2005 was a $79.5 million asset and is included in prepaid expenses and other assets. The fair value of these contracts at September 30, 2004 was a $21.5 million liability, and is included in accounts payable and accrued liabilities. For the three and nine months ended September 30, 2005, the Company recognized a gain of $11.3 million and $31.9 million, respectively, attributable to cash flow hedges, which has been recorded as a reduction of interest expense related to the Company’s financing on mortgage loans held for investment. Additionally, certain Euro Dollar futures contracts were terminated during the fourth quarter of 2004 in connection with the transfer of certain assets from New Century TRS to New Century. The fair value of the contracts at the termination date of ($30.9) million is being amortized from other comprehensive income over the original hedge period, as the hedged transaction affects future earnings. The

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

amortization of $3.2 million and $9.3 million, respectively, for the three and nine months ended September 30, 2005 have been recorded as an increase in interest expense related to the Company’s financing on mortgage loans held for investment. As of September 30, 2005, the related other comprehensive income balance was ($21.6) million.

Fair Value Hedge Instruments - For derivative financial instruments designated as fair value hedge instruments, the Company evaluates the effectiveness of these hedges against the fair value of the asset being hedged to ensure that there remains a highly effective correlation in the hedge relationship. To hedge the adverse effect of interest rate changes on the fair value of the hedged assets as a result of changes in the benchmark LIBOR interest rate, the Company uses derivatives classified as fair value hedges under SFAS 133. Once the hedge relationship is established, for those derivative instruments designated as qualifying fair value hedges, changes in the fair value of the derivative instruments and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in current earnings pursuant to SFAS 133. For the three and nine months ended September 30, 2005, the Company recognized a gain of $6.2 million and $11.0 million, respectively, which was substantially offset by changes in the fair value of the hedged assets. The gain (loss) has been included as a component of gain on sale of mortgage loans.

As of September 30, 2005, the Company had open Euro Dollar futures contracts that were designated as fair value hedges. The fair value of these contracts at September 30, 2005 was a $0.5 million liability and is included in accounts payable and accrued liabilities. The fair value of these contracts was substantially offset by changes in the fair value of the hedged assets.

Interest Rate Cap - Certain of the Company’s securitizations structured as financings are subject to interest rate cap contracts, or caplets, designated and documented as cash flow hedges, used to mitigate interest rate risk. The change in the fair value of these interest rate cap contracts is recorded in other comprehensive income each period. Amounts are reclassified out of other comprehensive income as the hedged transactions impact earnings. For the three and nine months ended September 30, 2005, the Company recorded interest expense of $1.3 million and $6.3 million, respectively, related to the amortization of the caplets. The related net change to other comprehensive income due to the amortization and change in fair value of the caplets was $0.2 million. At September 30, 2004, such caplets were not designated as hedges. The fair value of these caplets was $1.1 million at September 30, 2005 and is included in prepaid expenses and other assets.

During the nine months ended September 30, 2004, certain of the Company’s securitizations structured as financings were subject to interest rate cap contracts, not designated and documented as hedges, used to mitigate interest rate risk. The change in the fair value of these interest rate cap contracts is recorded through earnings each period, and is included as a component of interest expense. For the three and nine months ended September 30, 2004, the Company recognized a loss of $0.4 million and $0.7 million, respectively, related to the change in fair value of these cap contracts. The fair value of these cap contracts at September 30, 2004 was $0.2 million and is included in prepaid expenses and other assets. At September 30, 2005, all cap contracts were designated as hedges.

Non-designated Hedge Instruments - For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the period in which the changes occur. The change in the fair value of Euro Dollar futures contracts not designated and documented as hedges used to hedge the fair value of the Company’s residual assets is recorded through earnings each period, and is included as a component of gain on sale. During the three and nine months ended September 30, 2005, the Company recognized a loss of $3.0 million and $2.6 million, respectively, related to the change in fair value of these contracts. For the three and nine months ended September 30, 2004, the Company recognized a loss of $0.6 million and a gain $0.4 million, respectively, related to the change in the fair value of these contracts. The fair value of these contracts at September 30, 2004 was a $0.3 million liability and is included in accounts payable and accrued liabilities.

Interest Rate Locks - The Company is exposed to interest rate risk from the time an interest rate lock commitment (“IRLC”) is made to a residential mortgage applicant to the time the related mortgage loan is sold. Such interest rate risk is primarily related to the Company’s newly-acquired operations. During this period, the Company is exposed to losses if the mortgage interest rates rise, because the value of the IRLC or mortgage loan declines. IRLCs are derivative instruments under SFAS 133 and are recorded at fair value with the changes in fair value recognized in current period earnings as a component of gain on sale of loans. To manage this interest rate risk, the Company utilizes primarily forward sales commitments. The forward sales commitments are derivatives under SFAS 133 and are recorded at fair value with the changes in fair value recognized in current period earnings as a component of gain on sales of loans. The aggregate fair value of derivative loan commitments on

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

the consolidated balance sheet was a net asset of $2.9 million at September 30, 2005, and is included in prepaids and other assets. The change in fair value that was recognized in the earnings during the third quarter was a gain of $2.8 million, and is included as a component of gain on sale of mortgage loans.

14. Income Taxes

Commencing in 2004, New Century has operated so as to qualify as a REIT for federal income tax purposes and filed a separate federal income tax return that does not include the operations of the Company’s non-REIT, or TRS, companies. Provided at least 90% of the taxable income of the REIT is distributed to stockholders in the manner prescribed by the Code, no income taxes are due on the income distributed in the form of dividends by the REIT. Effective tax rates for all periods reported upon in 2005 will therefore differ substantially from rates in 2004 when most of the operations of the Company were taxable. The table below outlines the calculation of tax expense and a comparison of the components comprising the differences in the tax rate for the consolidated group for the three and nine months ended 2005 and 2004 (dollars in thousands):


	Three Months Ended September 30,									Nine Months Ended September 30,
	2005							2004		2005						2004
	REIT			TRS		Total		Non-REIT		REIT		TRS		Total		Non-REIT
Earnings before income taxes	$	104,413		18,558		122,971		182,112		248,234		59,292		307,526		500,965
Taxable REIT earnings in excess of GAAP Earnings		39,234		29,559		68,793		N/A		104,639		328		104,967		N/A

Taxable REIT and taxable TRS income		143,647		48,117		191,764		182,112		352,873		59,620		412,493		500,965
Expected dividend paid deduction for REIT level companies		(143,647	)	N/A		(143,647	)	N/A		(352,873	)	N/A		(352,873	)	N/A

Taxable income after REIT dividend paid deduction	$	—		48,117		48,117		182,112		—		59,620		59,620		500,965

Income tax expense by entity		—		(2,867	)	(2,867	)	(74,833	)	—		(7,583	)	(7,583	)	(204,064	)
Add back earnings before income taxes		104,413		18,558		122,971		182,112		248,234		59,292		307,526		500,965

Net earnings by entity	$	104,413		15,691		120,104		107,279		248,234		51,709		299,943		296,901

Combined tax rate						2.33	%	41.09	%					2.47	%	40.73	%

For the nine months ended September 30, 2005, the Company’s taxable REIT income exceeded its dividends paid to date on its common and preferred stock by approximately $80 million and net earnings by approximately $27 million.

The Code makes available procedures and tax elections to allow a REIT to carry over such excess earnings into the first quarter of the next tax year to more evenly match its taxable income to generally accepted accounting principles income and facilitate a more orderly and evenly distributed dividend program. Properly employed, these elections allow a REIT to avoid paying either excise or regular income tax on any taxable earnings thus carried forward into 2006.

Accordingly, in order to more closely match its taxable REIT income and the long-term performance characteristics of its portfolio loan assets with its dividend program, the Company intends to apply any excess taxable REIT income at year-end to the regular first quarter 2006 dividend payment. Therefore, the Company has accrued no tax on the additional earnings of $80 million at September 30, 2005.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

The Company’s third quarter 2005 results include a tax benefit adjustment of $14.8 million, or $0.26 per share, from finalizing amendments to its federal and state tax returns prompted by the completion of a recent Internal Revenue Service examination.

Additionally, during the third quarter of 2005, the Company executed mortgage subservicing agreements by and between its TRS and QRS. These agreements reduced the taxable income in the TRS by approximately $24.0 million for the three and nine months ended September 30, 2005. Such reduction resulted in tax savings of approximately $9.9 million in those periods.

15. Earnings per Share

The following table illustrates the computation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005			2004	2005	2004
Basic:
Net earnings	$	120,104		107,279	299,943	296,901
Less: Preferred stock dividends		2,567		—	2,852	—

Net earnings available to common stockholders	$	117,537		107,279	297,091	296,901

Weighted average number of common shares outstanding		55,870		33,405	55,346	33,241

Earnings per share	$	2.10		3.21	5.37	8.93

Diluted:
Net earnings available to common stockholders	$	117,537		107,279	297,091	296,901
Add: Interest and amortization of debt issuance costs on convertible senior notes, net of tax		(30	)	1,297	65	3,804

Diluted net earnings	$	117,507		108,576	297,156	300,705

Weighted average number of common shares outstanding		55,870		33,405	55,346	33,241
Dilutive effect of convertible senior notes, stock options and restricted stock		1,728		9,504	2,075	9,121

		57,598		42,909	57,421	42,362

Earnings per share	$	2.04		2.53	5.18	7.10

For the three and nine months ended September 30, 2005, the Company has included the effect of approximately 155,000 and 160,000 shares of common stock, respectively, issuable upon conversion of its convertible senior notes in the computation of diluted earnings per share. For the three and nine months ended September 30, 2004, the Company has included the effect of approximately 6.0 million shares of common stock issuable upon conversion of its convertible senior notes in the computation of diluted earnings per share. Diluted earnings have been adjusted to add the interest expense and amortization of debt issuance costs recorded related to the convertible senior notes, net of the applicable income tax effect.

For the three months ended September 30, 2005 and 2004, options to purchase 1,100,000 and 437,000 shares, respectively, of the Company’s common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive. For the nine months ended September 30, 2005 and 2004, options to purchase 489,000 and 24,000 shares, respectively, of the Company’s common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

16. Consolidating Financial Information

On February 14, 2005, New Century and New Century TRS entered into a second supplemental indenture in connection with New Century’s agreement to guarantee the payment of New Century TRS’s obligations with respect to its convertible senior notes (see Note 9—Convertible Senior Notes Private Offering).

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule – Balance Sheet

September 30, 2005

(Dollars in thousands)

The following is consolidating information as to the financial condition, results of operations and cash flows of New Century:


	New Century Financial Corporation		New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated
Assets
Cash and cash equivalents	$	332,768	—		1,000		196,291		—		530,059
Restricted cash		—	583,146		—		188,195		—		771,341
Mortgage loans held for sale, net		—	—		—		8,570,862		—		8,570,862
Mortgage loans held for investment, net		—	15,797,551		30,845		2,611,568		(109,651	)	18,330,313
Residual interests in securitizations		—	—		—		172,111		—		172,111
Mortgage servicing assets		—	—		—		54,310		—		54,310
Accrued interest receivable		—	85,039		(122	)	27,234		—		112,151
Income taxes, net		—	—		—		111,335		—		111,335
Office property and equipment, net		—	—		—		80,085		—		80,085
Goodwill, net		—	—		—		93,211		—		93,211
Prepaid expenses and other assets		385	106,582		73,169		29,529		51,800		261,465
Due to (from) affiliates		241,883	(146,290	)	(27,954	)	(67,639	)	—		—
Investment in subsidiary		1,625,204	—		—		—		(1,625,204	)	—

Total assets	$	2,200,240	16,426,028		76,938		12,067,092		(1,683,055	)	29,087,243

Liabilities and Stockholders’ Equity
Credit facilities on mortgage loans held for sale	$	—	—		—		8,218,122		—		8,218,122
Financing on mortgage loans held for investment, net		—	15,614,811		15,230		2,607,368		(10,590	)	18,226,819
Accounts payable and accrued liabilities		96,279	37,486		3,878		350,449		—		488,092
Convertible senior notes, net		—	—		—		4,931		—		4,931
Notes payable		—	—		—		45,318		—		45,318

Total liabilities		96,279	15,652,297		19,108		11,226,188		(10,590	)	26,983,282

Commitments and contingencies
Stockholders’ equity:
Preferred stock		45	—		—		—		—		45
Common stock		565	—		—		—		—		565
Additional paid-in capital		1,246,261	450,152		3,000		—		(453,152	)	1,246,261
Accumulated other comprehensive income (loss)		48,084	65,645		—		(17,561	)	(48,084	)	48,084
Retained earnings, restricted		809,006	257,934		54,830		858,465		(1,171,229	)	809,006

Total stockholders’ equity		2,103,961	773,731		57,830		840,904		(1,672,465	)	2,103,961

Total liabilities and stockholders’ equity	$	2,200,240	16,426,028		76,938		12,067,092		(1,683,055	)	29,087,243

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidating Schedule – Balance Sheet

December 31, 2004

(Dollars in thousands)


	New Century Financial Corporation			New Century Residual IV Corporation	New Century Credit Corporation	New Century TRS Holdings, Inc.		Eliminations		Consolidated
Assets
Cash and cash equivalents	$	742,239		—	1,000	99,615		—		842,854
Restricted cash		9,000		274,408	—	170,627		—		454,035
Mortgage loans held for sale, net		—		—	—	3,922,865		—		3,922,865
Mortgage loans held for investment, net		—		8,582,010	806,479	3,834,614		(27,779	)	13,195,324
Residual interests in securitizations		—		—	—	148,021		—		148,021
Mortgage servicing assets		—		—	—	8,249		—		8,249
Accrued interest receivable		—		43,374	1,328	21,506		—		66,208
Income taxes, net		—		—	—	180,840		—		180,840
Office property and equipment, net		—		—	—	47,266		—		47,266
Goodwill, net		—		—	—	12,717		—		12,717
Prepaid expenses and other assets		213		40,062	1,694	113,349		18,247		173,565
Due to (from) affiliates		(30,568	)	44,288	39,006	(52,726	)	—		—
Investment in subsidiary		1,240,315		—	—	—		(1,240,315	)	—

Total assets	$	1,961,199		8,984,142	849,507	8,506,943		(1,249,847	)	19,051,944

Liabilities and Stockholders’ Equity
Credit facilities on mortgage loans held for sale	$	—		—	—	3,704,268		—		3,704,268
Financing on mortgage loans held for investment, net		—		8,467,650	776,676	3,861,647		—		13,105,973
Accounts payable and accrued liabilities		82,634		8,277	59,853	169,344		—		320,108
Convertible senior notes, net		—		—	—	5,392		—		5,392
Notes payable		—		—	—	37,638		—		37,638

Total liabilities		82,634		8,475,927	836,529	7,778,289		—		17,173,379
Commitments and contingencies
Stockholders’ equity:
Common stock		547		—	—	—		—		547
Additional paid-in capital		1,101,091		450,152	3,000	—		(453,152	)	1,101,091
Accumulated other comprehensive income (loss)		(4,700	)	23,608	—	(28,307	)	4,699		(4,700	)
Retained earnings, restricted		781,627		34,455	9,978	756,961		(801,394	)	781,627

Total stockholders’ equity		1,878,565		508,215	12,978	728,654		(1,249,847	)	1,878,565

Total liabilities and stockholders’ equity	$	1,961,199		8,984,142	849,507	8,506,943		(1,249,847	)	19,051,944

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule – Statements of Income

For the Three Months Ended

September 30, 2005 and 2004

(Dollars in thousands)


	September 30, 2005												September 30, 2004
	New Century Financial Corporation		New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Interest income	$	2,477	298,912		8,880		200,909		(16,557	)	494,621		264,923
Interest expense		—	(145,079	)	(4,827	)	(134,865	)	(6,128	)	(290,899	)	(106,784	)

Net interest income		2,477	153,833		4,053		66,044		(22,685	)	203,722		158,139
Provision for losses on mortgage loans held for investment		—	(38,500	)	—		(42	)	—		(38,542	)	(25,769	)

Net interest income after provision for losses		2,477	115,333		4,053		66,002		(22,685	)	165,180		132,370
Other operating income:
Gain on sale of mortgage loans		—	—		—		164,966		11,275		176,241		203,390
Servicing fees received (paid)		—	7,452		(142	)	2,893		—		10,203		7,568
Other income		—	444		3,824		718		—		4,986		2,950
Equity in net earnings of subsidiary		120,463	—		—		—		(120,463	)	—		—

Total other operating income		120,463	7,896		3,682		168,577		(109,188	)	191,430		213,908

Operating expenses:
Personnel		1,946	—		—		144,629		—		146,575		99,038
General and administrative		798	—		—		49,025		—		49,823		40,783
Advertising and promotion		—	—		—		25,661		—		25,661		16,978
Professional services		92	—		—		11,488		—		11,580		7,367

Total operating expenses		2,836	—		—		230,803		—		233,639		164,166

Earnings before income taxes		120,104	123,229		7,735		3,776		(131,873	)	122,971		182,112
Income tax expense		—	—		—		2,867		—		2,867		74,833

Net earnings	$	120,104	123,229		7,735		909		(131,873	)	120,104		107,279

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule – Statements of Income

For the Nine Months Ended

September 30, 2005 and 2004

(Dollars in thousands)


	September 30, 2005													September 30, 2004
	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Interest income	$	7,051		716,789		55,309		507,084		(39,680	)	1,246,553		609,186
Interest expense		(5,200	)	(313,764	)	(18,935	)	(327,508	)	(6,128	)	(671,535	)	(230,054	)

Net interest income		1,851		403,025		36,374		179,576		(45,808	)	575,018		379,132
Provision for losses on mortgage loans held for investment		—		(104,201	)	—		(1,454	)	—		(105,655	)	(62,750	)

Net interest income after provision for losses		1,851		298,824		36,374		178,122		(45,808	)	469,363		316,382
Other operating income:
Gain on sale of mortgage loans		—		—		—		446,618		8,079		454,697		620,417
Servicing fees received (paid)		—		(20,515	)	(638	)	44,709		—		23,556		21,217
Other income		—		1,331		9,116		1,810		—		12,257		3,779
Equity in net earnings of subsidiary		313,852		—		—		—		(313,852	)	—		—

Total other operating income		313,852		(19,184	)	8,478		493,137		(305,773	)	490,510		645,413

Operating expenses:
Personnel		8,155		—		—		415,003		—		423,158		289,004
General and administrative		7,251		—		—		126,671		—		133,922		105,166
Advertising and promotion		—		—		—		66,204		—		66,204		46,227
Professional services		354		—		—		28,709		—		29,063		20,433

Total operating expenses		15,760		—		—		636,587		—		652,347		460,830

Earnings before income taxes		299,943		279,640		44,852		34,672		(351,581	)	307,526		500,965
Income tax expense		—		—		—		7,583		—		7,583		204,064

Net earnings	$	299,943		279,640		44,852		27,089		(351,581	)	299,943		296,901

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2005 and 2004

(Dollars in thousands)


	September 30, 2005													September 30, 2004
	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Cash flows from operating activities:
Net earnings	$	299,943		279,640		44,852		27,089		(351,581	)	299,943		296,901
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		2,958		20,805		—		71,648		—		95,411		17,433
Cash flows received from residual interests		—		—		—		15,021		—		15,021		43,391
Accretion of NIRs		—		—		—		(11,949	)	—		(11,949	)	(18,629	)
NIR gains		—		—		—		36,106		—		36,106		(35,375	)
Initial deposits to over-collateralization accounts		—		—		—		(70,913	)	—		(70,913	)	(20,040	)
Retained bond		—		—		—		—		—		—		(3,510	)
Servicing gains		—		—		—		(60,927	)	—		(60,927	)	(4,508	)
Fair value adjustment of residual securities		—		—		—		7,645		—		7,645		6,361
Provision for losses on mortgage loans held for investment		—		104,201		—		1,454		—		105,655		62,750
Provision for repurchase losses		—		—		—		8,098		—		8,098		3,722
Mortgage loans originated or acquired for sale		—		—		—		(30,215,340	)	—		(30,215,340	)	(23,072,756	)
Mortgage loan sales, net		—		—		—		25,453,537		—		25,453,537		22,464,159
Principal payments on mortgage loans held for sale		—		—		—		209,084		—		209,084		93,553
Increase in credit facilities on mortgage loans held for sale		—		—		—		4,513,854		—		4,513,854		510,371
Due to (from) affiliates		(272,451	)	190,578		66,960		14,913		—		—		—
Tax benefit related to non-qualified stock options		—		—		—		17,289		—		17,289		—
Net change in other assets and liabilities		6,268		16,452		(126,000	)	187,169		(44,143	)	39,746		(74,708	)
Equity in undistributed earnings of subsidiaries		(313,852	)	—		—		—		313,852		—		—

Net cash provided by (used in) operating activities		(277,134	)	611,676		(14,188	)	203,778		(81,872	)	442,260		269,115

Cash flows from investing activities:
Mortgage loans originated or acquired for investment, net		—		(11,218,723	)	780,779		82,430		81,872		(10,273,642	)	(7,622,891	)
Principal payments on mortgage loans held for investment, net		—		3,769,560		(5,145	)	1,220,295		—		4,984,710		1,442,366
Purchases of office property and equipment		—		—		—		(46,761	)	—		(46,761	)	(20,020	)
Acquisition of net assets		—		—		—		(80,573	)	—		(80,573	)	—
Sale of mortgage servicing rights		—		—		—		8,477		—		8,477		15,184

Net cash provided by (used in) investing activities		—		(7,449,163	)	775,634		1,183,868		81,872		(5,407,789	)	(6,185,361	)

Cash flows from financing activities:
Proceeds from issuance of financing on mortgage loans held for investment, net		—		10,575,715		(761,446	)	(22,039	)	—		9,792,230		7,410,872
Repayments of financing on mortgage loans held for investment		—		(3,429,490	)	—		(1,258,543	)	—		(4,688,033	)	(1,365,980	)
Proceeds from issuance of preferred stock		108,664		—		—		—		—		108,664		—
Proceeds from notes payable		—		—		—		23,097		—		23,097		22,769
Repayments of notes payable		—		—		—		(15,417	)	—		(15,417	)	(10,485	)
Change in restricted cash		9,000		(308,738	)	—		(17,568	)	—		(317,306	)	(242,468	)
Payment of dividends on common stock		(259,067	)	—		—		—		—		(259,067	)	(18,930	)
Payment of dividends on preferred stock		(2,852	)	—		—		—		—		(2,852	)	—
Net proceeds from issuance of stock		25,868		—		—		(500	)	—		25,368		7,968
Purchase of common stock		(13,950	)	—		—		—		—		(13,950	)	—

Net cash provided by (used in) financing activities		(132,337	)	6,837,487		(761,446	)	(1,290,970	)	—		4,652,734		5,803,746

Net increase (decrease) in cash and cash equivalents		(409,471	)	—		—		96,676		—		(312,795	)	(112,500	)
Cash and cash equivalents, beginning of period		742,239		—		1,000		99,615		—		842,854		278,598

Cash and cash equivalents, end of period	$	332,768		—		1,000		196,291		—		530,059		166,098

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

17. Subsequent Events

On November 2, 2005, the Company’s board of directors authorized a stock repurchase program of up to an aggregate of 5 million shares of its common stock over the following 12 months. The Company expects to fund these repurchases with excess corporate liquidity. Stock repurchases may be made on the open market through block trades or in privately negotiated sales in accordance with applicable law. The number of shares to be purchased and the timing of the purchases will be based upon the level of the Company’s cash balances, general business conditions and other factors including alternative investment opportunities. The Company may terminate, suspend, reduce or increase the size of the stock repurchase program at any time.

18. Segment Reporting

The Company has three operating segments: portfolio, mortgage loan operations and servicing. Management tracks and evaluates these three segments separately in deciding how to allocate resources and assess performance.

The portfolio segment reflects the Company’s investment in its mortgage loan portfolio, which produces net interest income. The mortgage loan operations segment reflects purchases and originations of residential mortgage loans. The mortgage loan operations segment records (i) interest income, interest expense, provision for mortgage loan losses on the mortgage loans it holds prior to selling its loans to the portfolio segment or in the whole loan market, (ii) interest income, interest expense, provision for mortgage loan losses on mortgage loans it holds in its portfolio and (iii) gain on sale of mortgage loans. The Company’s recently acquired RBC Mortgage operations are included in the mortgage loan operations segment. They have not had a material impact on the Company’s three or nine month results of operations or financial position. The servicing segment services loans, seeking to ensure that loans are repaid in accordance with their terms and the Company earns a servicing fee based upon the dollar amount of the servicing portfolio.

For its portfolio segment, management evaluates mortgage assets at the segment level. As such, the quarter end balances of these assets are included herein.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004

For the three and nine months ended September 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended September 30, 2005
	Qualified REIT Subsidiary			Taxable REIT Subsidiary
	Portfolio			Portfolio		Mortgage Loan Operations		Servicing and other	Total
Interest income	$	293,706		52,414		148,501		—	494,621
Interest expense		(159,022	)	(37,354	)	(94,523	)	—	(290,899	)

Net interest income		134,684		15,060		53,978		—	203,722
Provision for losses on mortgage loans held for investment		(38,500	)	(42	)	—		—	(38,542	)

Net interest income after provision for losses		96,184		15,018		53,978		—	165,180
Other operating income:
Gain (loss) on sale of mortgage loans		(514	)	—		176,755		—	176,241
Servicing & other		11,579		—		(26,075	)	29,685	15,189

Total other operating income		11,065		—		150,680		29,685	191,430

Operating expenses		2,836		—		219,242		11,561	233,639

Earnings (loss) before income taxes	$	104,413		15,018		(14,584	)	18,124	122,971

Funding volume	$	—		—		16,711,598		—	16,711,598

Securitizations structured as financings	$	2,080,230		—		—		—	2,080,230

Mortgage assets at September 30, 2005	$	15,718,745		2,611,568		8,570,862		—	26,901,175

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004


	Three Months Ended September 30, 2004
	Taxable REIT Subsidiary
	Portfolio			Mortgage Loan Operations		Servicing and other	Total
Interest income	$	148,308		116,615		—	264,923
Interest expense		(62,347	)	(44,437	)	—	(106,784	)

Net interest income		85,961		72,178		—	158,139
Provision for losses on mortgage loans held for investment		(25,769	)	—		—	(25,769	)

Net interest income after provision for losses		60,192		72,178		—	132,370
Other operating income:
Gain on sale of mortgage loans		—		203,390		—	203,390
Servicing & other		—		(11,645	)	22,163	10,518

Total other operating income		—		191,745		22,163	213,908

Operating expenses		—		156,865		7,301	164,166

Earnings before income taxes	$	60,192		107,058		14,862	182,112

Funding volume	$	—		10,003,424		—	10,003,424

Securitizations structured as financings	$	4,165,116		—		—	4,165,116

Mortgage assets at September 30, 2004	$	10,890,455		3,937,062		—	14,827,517

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004


	Nine Months Ended September 30, 2005
	Qualified REIT Subsidiary			Taxable REIT Subsidiary
	Portfolio			Portfolio		Mortgage Loan Operations		Servicing and other	Total
Interest income	$	739,469		178,132		328,952		—	1,246,553
Interest expense		(360,569	)	(114,173	)	(196,793	)	—	(671,535	)

Net interest income		378,900		63,959		132,159		—	575,018
Provision for losses on mortgage loans held for investment		(104,201	)	(1,454	)	—		—	(105,655	)

Net interest income after provision for losses		274,699		62,505		132,159		—	469,363
Other operating income:
Gain on sale of mortgage loans		—		—		454,697		—	454,697
Servicing & other		(10,705	)	—		(36,694	)	83,212	35,813

Total other operating income (loss)		(10,705	)	—		418,003		83,212	490,510

Operating expenses		15,760		—		603,279		33,308	652,347

Earnings (loss) before income taxes	$	248,234		62,505		(53,117	)	49,904	307,526

Funding volume	$	—		—		40,407,335		—	40,407,335

Securitizations structured as financings	$	10,961,958		—		—		—	10,961,958

Mortgage assets at September 30, 2005	$	15,718,745		2,611,568		8,570,862		—	26,901,175

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

September 30, 2005 and 2004


	Nine Months Ended September 30, 2004
	Taxable REIT Subsidiary
	Portfolio			Mortgage Loan Operations		Servicing and other	Total
Interest income	$	325,117		284,069		—	609,186
Interest expense		(128,762	)	(101,292	)	—	(230,054	)

Net interest income		196,355		182,777		—	379,132
Provision for losses on mortgage loans held for investment		(62,750	)	—		—	(62,750	)

Net interest income after provision for losses		133,605		182,777		—	316,382
Other operating income:
Gain on sale of mortgage loans		—		620,417		—	620,417
Servicing & other		—		(24,363	)	49,359	24,996

Total other operating income		—		596,054		49,359	645,413

Operating expenses		—		441,687		19,143	460,830

Earnings before income taxes	$	133,605		337,144		30,216	500,965

Funding volume	$	—		30,695,647		—	30,695,647

Securitizations structured as financings	$	7,622,892		—		—	7,622,892

Mortgage assets at September 30, 2004	$	10,890,455		3,937,062		—	14,827,517

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2004. As such, a reading of the Annual Report on Form 10-K is necessary to an informed understanding of the following discussions.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes contained elsewhere herein. As used herein, except where the context suggests otherwise, for time periods on and after October 1, 2004, the terms “the company,” “our,” “its,” “we,” “the group,” and “us” refer to New Century Financial Corporation and its consolidated subsidiaries and, for the time periods before October 1, 2004, the terms “the company,” “our,” “its,” “we,” “the group,” and “us” mean New Century TRS Holdings, Inc. and its consolidated subsidiaries.

General

New Century Financial Corporation is a real estate investment trust, or REIT, that, through its taxable REIT subsidiaries, operates one of the nation’s largest full-service mortgage finance companies. We began originating and purchasing loans in 1996, and, in the fourth quarter of 2004, we began operating our business as a REIT. We formally elected to be taxed as a REIT with the filing of our 2004 tax returns. We converted to a REIT because we believe that the REIT structure provides the most tax-efficient way to hold mortgage loans on our balance sheet.

We originate and purchase primarily first mortgage loans nationwide. Historically, we have focused on lending to individuals whose borrowing needs are generally not fulfilled by traditional financial institutions because they do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers. We originate and purchase mortgage loans on the basis of the borrower’s ability to repay the loan, the borrower’s historical pattern of debt repayment and the amount of equity in the borrower’s property, as measured by the borrower’s loan-to-value ratio, or LTV. We believe we have developed a comprehensive and sophisticated process of credit evaluation and risk-based pricing. We recently acquired a mortgage origination platform from RBC Mortgage Company, or RBC Mortgage, that expands our offerings to include conventional mortgage loans, loans insured by the Federal Housing Administration and loans guaranteed by the Veterans Administration. A significant portion of the conventional loans, which are generally referred to as “conforming loans,” qualify for inclusion in guaranteed mortgage securities backed by Fannie Mae or Freddie Mac. Some of the conventional loans we produce either have an original loan amount in excess of the Fannie Mae and Freddie Mac loan limit for one-family loans or otherwise do not meet Fannie Mae or Freddie Mac guidelines.

We have historically sold our loans through both whole loan sales and securitizations structured as sales. Since 2003, we have retained a portion of our loan production for investment on our balance sheet through securitizations structured as financings rather than sales. For 2005, we expect to retain approximately 20% of our total loan production for investment on our balance sheet through securitizations structured as financings. For the remainder of 2005 and in the near term, we expect that our loan production will be sold through whole loan sales and, to a lesser extent, securitizations structured as sales.

The Merger and Related Transactions

On April 5, 2004, the board of directors of New Century TRS Holdings, Inc., or New Century TRS, formerly known as New Century Financial Corporation, approved a plan to change its capital structure to enable it to qualify as a REIT for U.S. federal income tax purposes. The board of directors of New Century TRS based its decision to convert New Century TRS to a REIT on several factors, including the potential for increased stockholder return, tax efficiency and ability to achieve growth objectives. On April 19, 2004, the board of directors of New Century TRS approved certain legal and financial matters related to the proposed REIT conversion.

On April 12, 2004, New Century TRS formed New Century Financial Corporation, or New Century, a Maryland corporation formerly known as New Century REIT, Inc. On September 15, 2004, the stockholders of both New Century and New Century TRS approved and adopted the merger agreement that implemented the restructuring of New Century TRS in order for it to qualify as a REIT.

Pursuant to the merger agreement, (i) a wholly-owned subsidiary of New Century merged with and into New Century TRS, with New Century TRS as the surviving corporation, (ii) each outstanding share of common stock of New Century TRS was converted into one share of New Century common stock, (iii) New Century TRS changed its name to “New Century TRS Holdings, Inc.” and became a wholly-owned subsidiary of New Century and (iv) New Century changed its name to “New Century Financial Corporation” and became the publicly-traded NYSE-listed parent company that succeeded to and

continued to operate substantially all of the existing businesses of New Century TRS. The merger was consummated and became effective on October 1, 2004.

The board of directors, committees of the board of directors and management of New Century immediately after the consummation of the merger had the same membership as the board of directors, committees of the board of directors and management of New Century TRS immediately prior to the consummation of the merger.

As a result of the merger and the related capital-raising activities, we expect that a significant source of our revenue prospectively will be interest income generated from our portfolio of mortgage loans held by our REIT and our qualified REIT subsidiaries. We also expect to continue to generate revenue through our taxable REIT subsidiaries from the sale of loans, servicing income and loan origination fees. We expect the primary components of our expenses to be (i) interest expense on our credit facilities, securitizations, and other borrowings, (ii) general and administrative expenses and (iii) payroll and related expenses arising from our loan origination and servicing businesses.

RBC Mortgage Acquisition

During the third quarter of 2005, Home123 Corporation, one of our wholly-owned subsidiaries, purchased certain assets and assumed certain related liabilities of RBC Mortgage. We initially announced the transaction in May 2005. We expect that the acquisition will enable us to expand our mortgage product offerings, our retail presence on a nationwide basis and our channels of distribution, particularly into the realtor and builder channels. Additionally, we believe that being a full-service mortgage provider allows us to build upon the success of our national Home123 branding and marketing campaign.

The newly-acquired RBC Mortgage origination platform, which is more heavily weighted towards purchase financing as opposed to refinancing transactions, includes approximately 140 branches nationwide and originates residential mortgage loans, consisting primarily of “Alt-A,” “jumbo” and “conforming” mortgages, as well as home equity lines of credit. While we expect this acquisition to be slightly dilutive to our earnings per share in 2005, we expect it to be accretive to our earnings per share for the 12 months following the acquisition.

The following discussion of the results of operations include the origination platform acquired by us from RBC Mortgage in September 2005. Where the results are discussed, “newly-acquired” operations refer to the operations of the origination platform acquired from RBC Mortgage and “historical” operations refer to the operations of New Century that existed prior to the RBC Mortgage transaction.

Executive Summary

For the first nine months of 2005, our strategy has been to continue to deploy the capital we raised in 2004 by building our REIT portfolio while trying to maintain and grow the profitability of our origination operations at our taxable REIT subsidiaries. We have now fully deployed that capital.

However, during this period our industry has experienced significant narrowing of margins as we and our competitors have kept the interest rates we offer to our customers at historically low levels while the underlying LIBOR indexes that determine our financing costs have continued to rise. As a result, our whole loan sale pricing and the execution for securitizations structured as financings and sales have deteriorated compared to our expectations earlier in the year.

During the third quarter of 2005, we began to increase our interest rates to keep pace with, or even exceed, the increases in underlying rates. We intend to continue this approach with a view to preserving or expanding our overall operating margin. We are also striving to manage our cost structure to remain efficient even if loan origination volume declines.

During the fourth quarter of 2005, we expect that our overall margins will remain at low levels. We will continue to focus on maximizing the net execution of our whole loan sales and, to the extent advantageous, execute securitizations structured as sales at the taxable REIT subsidiary, or TRS, level. We also expect to continue our cost-cutting strategies. To the extent we have extra cash and liquidity, our board of directors has authorized us to buy back our stock rather than add to our mortgage loan portfolios in the near term.

The other major development in our business in recent months has been the completion of our acquisition of certain assets of RBC Mortgage, consisting primarily of its origination platform. This acquisition expands our loan origination channel and product mix. We are concentrating significant efforts on a successful integration that we expect will ultimately allow us to offer a wider range of products to all of our customers and add strong builder and realtor relationships to our loan origination business.

Overview

Our two key business components are: (i) our mortgage loan portfolio held by our REIT and our taxable REIT subsidiaries; and (ii) our origination, sales, and servicing activities conducted through certain of our taxable REIT subsidiaries.

REIT and TRS Mortgage Loan Portfolios

The largest component of our revenue is derived from the income we earn on our portfolio of mortgage loans held for investment, which totaled $18.3 billion at September 30, 2005.

During 2003, we shifted our strategy to address the cyclical nature of our earnings with the goal of generating a more stable long-term earnings stream. Our principal strategy to achieve this goal is to hold loans on our balance sheet. Because our credit facilities are short-term in nature and generally do not allow loans to be financed through the facility for longer than 180 days, a securitization structure offers the most attractive means to finance loans on our balance sheet. To support the goal of matching the timing of cash flows with the recognition of earnings on our loans, we began to structure our securitizations as financings rather than sales during 2003. In a securitization structured as a financing, we make an initial cash investment so that the securitization trusts begin to return cash flow to us in the first month following securitization. Therefore, we require cash and capital to make the initial investment, as well as to support the loans on our balance sheet. During 2003 and 2004, we retained between 20% and 25% of our loan production through securitizations. During the first nine months of 2005, we retained approximately 27% of our loan production to support our balance sheet strategy to deploy the capital raised in 2004 by growing our portfolio of mortgage loans held for investment. For 2005, we expect to retain approximately 20% of our total loan production for investment on our balance sheet. Additionally, for the remainder of 2005 and in the near term, we expect that our loan production will be sold through whole loan sales and, to a lesser extent, securitizations structured as sales.

Our portfolio of mortgage loans held for investment generally consists of a representative cross-section of our overall loan production volume. This portfolio earns net interest income over its life, which is generally three years, on a weighted-average basis. The net interest income we earn from our portfolio is influenced by a variety of factors, including the performance of the loans and the level and direction of interest rates.

We measure the performance of the loans by monitoring prepayment rates and credit losses. Faster prepayments reduce the weighted average life of the portfolio, reducing net interest income. Cumulative credit losses, which we generally assume to be approximately 3% of the original balance of the loans, also reduce net interest income.

Generally, our loans have a fixed-rate for a period of time, while the underlying bonds that finance those loans are variable rate based on one-month LIBOR, resulting in interest rate risk. Our hedging strategies to mitigate this interest rate risk are designed to lock in our interest margin at the inception of each securitization.

Originations and Sales

The second major component of our business is our ability to originate and purchase mortgage loans at a reasonable cost and to sell a portion of those loans in the secondary mortgage market at prices that result in an attractive operating margin. We measure our operating margin as the sum of the price we receive for our loans, plus the net interest we earn for the period of time we hold the loans, less the cost to originate the loans. For the past several years, our secondary marketing strategy has included a combination of both whole loan sales and securitizations of our loans.

Loan origination volumes in our industry have historically fluctuated from year to year and are affected by such external factors as home values, the level of interest rates and consumer debt, and the overall condition of the economy. In addition, the premiums we receive from the secondary market for our loans have also fluctuated and are influenced by each of these factors, but predominantly the interest rate environment. As a consequence, the business of originating and selling loans is cyclical. In light of our current strategy to raise interest rates, our loan production volume may decrease as a result of higher interest rates on the mortgages we originate.

The operating margin of our origination franchise has three components: (i) net interest income; (ii) gain on sale of mortgage loans; and (iii) loan origination or acquisition costs. We use the operating margin as our principal metric to measure the value of our origination franchise.

Net interest income on mortgage loans held for investment—We record interest income on loans securitized in transactions structured as financings and interest expense on the bonds issued in the financing transaction over the life of the securitizations. During the nine months ended September 30, 2004, the difference between these interest rates was approximately 4.1%. This margin has decreased to 3.3% for the nine months ended September 30, 2005 as the financing rate on the bonds has increased more rapidly than our average coupon on the mortgage loans held for investment.

Net interest income on mortgage loans held for sale—We typically hold our mortgage loans held for sale for an average period of 30 to 50 days before they are sold in the secondary market or securitized. During that time, we earn the coupon rate of interest paid by the borrower and we pay interest to the lenders that provide our financing facilities. During 2004, the difference between these interest rates was approximately 4.5%. During the nine months ended September 30, 2005, this margin has decreased to 2.9% as short-term rates have increased more rapidly than our average coupon rates. We manage the timing of our sales to optimize the net interest income we earn on the loans, while preserving the ability to sell the loans at the maximum price.

Gain on sale of mortgage loans—Gain on sale of mortgage loans is affected by the condition of the secondary market for our loans. During the latter half of 2004 and the first nine months of 2005, as interest rates began to rise, the underlying factors

that affect secondary market pricing remained somewhat stable. However, as short-term rates rose faster than long-term rates (a flatter yield curve), the prices we received for our loans began to decline relative to historic levels. Further, as a result of competitive pressures, we have not previously raised the interest rates we charge our borrowers to the degree that underlying short-term rates have increased, reducing gain on sale margins in the first nine months of 2005 compared to the first nine months of 2004. More recently, we have taken steps to strategically increase our rates in an effort to improve our operating margins. Any positive impact of these steps will most likely occur in the first and second quarters of 2006 and, therefore, we expect the gain on sale of mortgage loans for the fourth quarter of 2005 to remain at lower margins until our rate increases take effect. During the first nine months of 2005, we completed two securitizations structured as sales totaling $3.0 billion. We may continue to utilize securitizations structured as sales in order to maximize the secondary market value of our loan production.

Loan origination or acquisition cost—We also measure and monitor the cost to originate our loans. We typically refer to this as our loan acquisition costs. Loan acquisition costs include the fees paid to wholesale brokers and correspondents, direct loan origination costs, including commissions and corporate overhead costs, less points and fees received from borrowers, divided by total loan production volume. Loan acquisition costs do not include profit-based compensation, servicing division overhead, parent company expenses and startup operations. During 2004 and through the first quarter of 2005, our loan acquisition costs remained relatively stable and generally fluctuated inversely with our loan production volume. As a result of the competitive environment and its impact on the value of our loans, in 2005 we began implementing cost-cutting measures designed to reduce our loan acquisition costs. The cost-cutting measures we implemented in the first quarter of 2005, which included changes to our sales compensation, controlling growth in non-sales overhead and more closely scrutinizing our discretionary spending, together with an increase in our loan production, have resulted in a significant reduction of our loan acquisition costs during the second and third quarters of 2005.

These two components of our business account for most of our operating revenues and expenses. Our origination platform provides the source of the loan volume to conduct both parts of our business.

While we have just begun originating loans through the loan origination platform acquired from RBC Mortgage, we expect to measure its profitability using operating margin as the most important metric. We sold a nominal amount of loans through this channel during the nine months ended September 30, 2005. The fourth quarter of 2005 will reflect a full quarter of the newly-acquired lending operations.

Loan Originations and Purchases

Our historical loan origination channel focuses on lending to individuals whose borrowing needs are generally not fulfilled by traditional financial institutions because they do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers. The newly-acquired loan origination platform acquired from RBC Mortgage originates residential mortgage loans, which consist primarily of “Alt-A,” “jumbo” and “conforming” mortgages, as well as home equity lines of credit. While we will likely maintain separate channels focusing on mortgage brokers, correspondents, realtors, builders and direct-to-consumer in the near term, we plan to integrate our product channels in the coming quarters.

As of September 30, 2005, our historical wholesale division operated through 29 regional operating centers and originated or purchased $35.7 billion in loans during the nine months ended September 30, 2005. Our historical retail division originated loans through 83 sales offices, including our centralized telemarketing unit, and originated $3.9 billion in loans during the nine months ended September 30, 2005. Our newly-acquired wholesale division operated through 5 operating centers and originated $360.6 million in loans during the nine months ended September 30, 2005, all of which occurred in September 2005. Our newly-acquired retail division operated through 133 sales offices and originated $494.0 million in loans during the nine months ended September 30, 2005, all of which occurred in September 2005.

During the nine months ended September 30, 2005, approximately $20.3 billion, or 50.3%, of our mortgage loan production consisted of cash-out refinancings, where the borrowers refinanced their existing mortgages and received cash representing a portion of the equity in their homes. For the same period, approximately $16.5 billion, or 40.8%, of our mortgage loan production consisted of home purchase finance loans. The remainder of our loan production, $3.6 billion, or 8.9%, consisted of transactions in which borrowers refinanced their existing mortgages to obtain a better interest rate, a lower payment or different loan maturity, or rate and term refinance transactions. For the nine months ended September 30, 2004, total originations consisted of $18.5 billion, or 60.2%, of cash-out refinancings, $10.7 billion, or 34.8%, of home purchase financings, and $1.5 billion, or 5.0%, of rate and term refinance transactions. Market and economic conditions, as well as our focus on increasing our home purchase business, have resulted in the shift in mix between cash-out refinancings and our home purchase business.

We have experienced considerable growth of our interest-only product. During the nine months ended September 30, 2005, originations of interest-only loans totaled $13.7 billion, or 34.0%, of total originations. Interest-only originations during the nine months ended September 30, 2004 totaled $5.7 billion, or 18.6%, of total originations during the period. We believe our stricter underwriting guidelines and the stronger credit characteristics of these loans mitigate their perceived higher risk.

In September 2005, we began to strategically increase the pricing on our loans to achieve targeted margins. Additionally, we have implemented pricing strategies to reduce the production volume of our interest-only product to 25% of total loan production through pricing increases, underwriting changes and new product offerings, including a 40-year mortgage product.

For the nine months ended September 30, 2005, full documentation loans as a percentage of originations totaled $21.6 billion, or 53.5%, limited documentation loans totaled $1.2 billion, or 3.0%, and stated documentation loans totaled $17.6 billion, or 43.5%. Full documentation loans generally require applicants to submit two written forms of verification of stable income for at least 12 months. Limited documentation loans generally require applicants to submit 12 consecutive monthly bank statements on their individual bank accounts. Stated income documentation loans are based upon stated monthly income if the applicant meets certain criteria. For the nine months ended September 30, 2004, full documentation loans as a percentage of total originations totaled $15.9 billion, or 51.7%, limited documentation loans totaled $1.4 billion, or 4.7%, and stated documentation loans totaled $13.4 billion, or 43.6%. Generally, economic and market conditions determine product mix, including product introductions and offerings by competitors. As these factors change, product mix, including required documentation, fluctuates as well. We designed our underwriting standards and quality assurance programs to insure that loan quality is consistent and meets our guidelines, even as the documentation type mix varies.

The following table sets forth selected information relating to loan originations and purchases during the periods shown (dollars in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005		2004
Wholesale originations - Historical	$	14,498,442		8,980,919		35,703,147		27,762,167
Wholesale originations - Newly-acquired		360,643		—		360,643		—
Retail originations - Historical		1,358,536		1,022,505		3,849,568		2,933,480
Retail originations - Newly-acquired		493,977		—		493,977		—

Total originations and purchases		16,711,598		10,003,424		40,407,335		30,695,647
Fixed-rate mortgages		4,779,182		1,900,910		10,138,759		8,560,522
Adjustable-rate mortgages:
Traditional		6,017,294		5,905,870		16,532,587		16,440,678
Interest Only		5,915,122		2,196,644		13,735,989		5,694,447

Total originations and purchases		16,711,598		10,003,424		40,407,335		30,695,647
Purchases		7,240,542		3,968,950		16,467,197		10,672,303
Refinances:
Cash-out refinances		7,898,753		5,627,128		20,340,406		18,477,283
Rate/term refinances		1,572,303		407,346		3,599,732		1,546,061

Total originations and purchases		16,711,598		10,003,424		40,407,335		30,695,647
Full documentation		9,239,966		4,929,039		21,589,751		15,876,137
Limited documentation		276,062		470,544		1,198,654		1,448,757
Stated documentation		7,195,570		4,603,841		17,618,930		13,370,753

Total originations and purchases	$	16,711,598		10,003,424		40,407,335		30,695,647
Average principal balance of loans originated and purchased	$	181		172		181		172
Weighted average FICO score of loans originated and purchased		636		627		632		628
Percent of loans secured by first mortgages		79.2	%	95.4	%	80.8	%	96.1	%
Weighted average LTV ratio(1)		81.1	%	81.1	%	81.2	%	81.1	%
Weighted average interest rates:
Fixed-rate mortgages - initial rate		7.5	%	8.0	%	7.6	%	7.2	%
Adjustable-rate mortgages - initial rate		7.1	%	7.1	%	7.1	%	6.9	%
Adjustable-rate mortgages - margin over index		5.8	%	5.5	%	5.7	%	5.5	%
Total originations and purchases		7.2	%	7.3	%	7.2	%	7.0	%
Percentage of loans originated in top two credit grades - Historical		85.6	%	84.9	%	87.6	%	85.6	%
Percentage of loans originated in bottom two credit grades - Historical		2.1	%	3.6	%	2.3	%	3.2	%

(1)	Weighted average LTV is the LTV of the first lien mortgages and combined LTV of the second lien mortgages.

Secondary Market Transactions

Historically, one of our major components of revenue has been the recognition of gain on sale of our loans through whole loan sales and securitizations structured as sales. In a whole loan sale, we recognize and receive a cash gain upon sale. In a securitization structured as a sale for financial reporting purposes, we typically recognize a gain on sale at the time the loans are sold, and receive cash flows over the actual life of the loans.

Since the first quarter of 2003, we have structured many of our securitizations as financings rather than sales. Such structures do not result in gain on sale at the time of the transaction, but rather yield interest income as the payments on the underlying mortgages are received. The following table sets forth secondary marketing transactions for the periods indicated (dollars in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2005				2004				2005				2004
	Amount		% of Sales		Amount		% of Sales		Amount		% of Sales		Amount		% of Sales
Premium whole loan sales	$	9,900,693	70.7	%	$	7,972,016	63.8	%	$	22,285,831	61.2	%	$	21,685,162	72.1	%
Securitizations structured as sales (1)		1,999,959	14.3	%		297,653	2.4	%		2,989,181	8.2	%		634,801	2.1	%

Total premium sales		11,900,652	85.0	%		8,269,669	66.2	%		25,275,012	69.4	%		22,319,963	74.2	%
Discounted whole loan sales		32,081	0.2	%