e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006. |
|
o
|
|
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
(Registrants 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.
þ
Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
Large accelerated filer þ |
Accelerated filer o |
Non accelerated filer o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). o Yes þ No
As of July 31, 2006, the registrant had
56,117,164 shares of common stock outstanding.
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2006
INDEX
|
|
|
|
|
|
|
|
Page | |
|
|
| |
PART I FINANCIAL INFORMATION
|
|
|
5 |
|
|
Item 1. Financial Statements
|
|
|
5 |
|
|
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
|
|
|
36 |
|
|
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
|
|
|
73 |
|
|
Item 4. Controls and Procedures
|
|
|
74 |
|
|
PART II OTHER INFORMATION
|
|
|
75 |
|
|
Item 1. Legal Proceedings
|
|
|
75 |
|
|
Item 1A. Risk Factors
|
|
|
77 |
|
|
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
|
|
|
77 |
|
|
Item 4. Submission of Matters to a Vote of
Security Holders
|
|
|
77 |
|
|
Item 6. Exhibits
|
|
|
78 |
|
|
SIGNATURES
|
|
|
79 |
|
|
EXHIBIT INDEX
|
|
|
80 |
|
2
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 companys business strategies;
(ii) the companys expectations with respect to market
trends; (iii) the companys projected sources and uses
of funds from operations; (iv) the companys potential
liability with respect to its legal proceedings; (v) the
potential effects of proposed legislation and regulatory
actions; (vi) the companys expectation that the
adoption of SFAS 155 will not have a material impact on the
companys financial statements; (vii) the
companys expectation that the initial adoption of
SFAS 156 will have an immaterial impact on the
Companys retained earnings; (viii) the companys
expectation that the initial adoption of FIN 48, the impact
of its adoption will not have a significant impact on the
companys financial statements; (ix) the
companys estimates it uses to determine the value of its
residual assets, including the future rate of prepayments,
prepayment penalties it will receive, delinquencies, defaults
and default loss severity as they affect the amount and timing
of estimated cash flows; (x) the companys estimates
with respect to average cumulative losses as a percentage of the
original principal balance of mortgage loans for adjustable-rate
and fixed-rate securities; (xi) the companys
estimates with respect to its prepayments; (xii) the
companys estimates with respect to the prepayment
characteristics of its mortgage loans; (xiii) the
companys expectations with respect to the performance of
the mortgage loans held in the securitization trusts and the
ability of the company to realize the current estimated fair
value of its Residual; (xiv) the companys
expectations with respect to renewing or extending its various
credit facilities; (xv) the companys expectation that
it may designate its interest rate swap contracts as hedge
instruments in the future; (xvi) the companys
expectation that the $29.2 million deferred gain that it
recorded at June 30, 2006 will be recognized in the third
quarter of 2006 due to the timing of related expired Euro Dollar
futures contracts, which hedge three months forward;
(xvii) the companys expectation that it will
reclassify an additional $20.3 million from OCI into
earnings during the remainder of 2006 related to expiring
contracts; (xviii) the companys expectation that the
remaining OCI will be reclassified into earnings by September
2009; (xix) the companys expectation that the
earnings attributable to the REIT will not be taxable due to the
benefit of the REITs dividend paid deduction;
(xx) the companys estimates with respect to the fair
value of its stock options; (xxi) the companys
expectation that its decisions regarding secondary marketing
transactions in 2006 will be influenced by market conditions and
the companys ability to access external sources of
capital; (xxii) the companys current intention that
it will not complete any securitizations structured as sales in
2006; (xxiii) the companys expectation that a
significant source of its revenue will continue to be interest
income generated from its portfolio of mortgage loans held by
the companys REIT and its taxable REIT subsidiaries;
(xxiv) the companys expectation that it will continue
to generate revenue through its taxable REIT subsidiaries from
the sale of loans, servicing income and loan origination fees;
(xxv) the companys expectation that the primary
components of its expenses will be (a) interest expense on
its credit facilities, securitizations and other borrowings,
(b) general and administrative expenses and
(c) payroll and related expenses arising from its
origination and servicing businesses; (xxvi) the
companys efforts to continue to reduce its costs to remain
efficient even if loan origination volume declines;
(xxvii) the companys focus to enhance the net
execution of its whole loan sales and its cost-cutting
strategies; (xxviii) the companys current strategy to
maintain interest rates at a level that will achieve its desired
operating margins, potentially resulting in a decrease in loan
production volume as a result of higher interest rates on the
mortgages the company originates; (xxix) the companys
expectation that its non-prime gain on sale margins will
continue their favorable trend; (xxx) the companys
expectation that its gain on sale execution will be negatively
impacted on a go-forward basis because its whole loan sale
prices will decrease by as much as 10 basis points as a result
of the recent changes to Standard and Poors LEVELs Model;
(xxxi) the companys belief that the lower initial
payment requirements of pay-option loans may increase the credit
risk inherent in its loans held for sale; (xxxii) the
companys expectation that as its portfolio of mortgage
loans held for investment seasons, certain loans will become
uncollectible; (xxxiii) the companys expectation that
as the size of its portfolio of loans increases, the number of
uncollectible mortgage loans, and related charge-offs, will
increase; (xxxiv) the companys beliefs, estimates and
assumptions with respect to its critical accounting policies;
(xxxv) the companys estimates and assumptions
relating to the interest rate environment, the economic
environment, secondary market conditions and the performance of
the loans underlying its residual assets and mortgage loans held
for investment; (xxxvi) the companys use of a
prepayment curve to estimate the prepayment characteristics of
its mortgage
3
loans; (xxxvii) the companys allowance for repurchase
losses; (xxxviii) the companys right to terminate,
reduce or increase the size of its stock purchase program at any
time; (xxxix) the companys principal strategies to
effectively manage its liquidity and capital; (xl) the
companys target levels of liquidity and capital;
(xli) the companys expectation that it will continue
to manage the percentage of loans sold through whole loan sales
transactions, off-balance sheet securitizations including the
use of NIM structures as appropriate, and securitizations
structured as financings, giving consideration to whole loan
prices, the amount of cash required to finance securitizations
structured as financings, the expected returns on such
securitizations and REIT qualification requirements;
(xlii) the companys intention to access the capital
markets when appropriate to support its business operations;
(xliii) the companys intention to execute its stock
repurchase program while maintaining its targeted cash and
liquidity levels; (xliv) the companys expectation
that its liquidity, credit facilities and capital resources will
be sufficient to fund its operations for the foreseeable future,
while enabling the company to maintain its qualification as a
REIT under the requirements of the Code; and (xlv) the
companys expectation that any future declarations of
dividends on its common stock will be subject to its earnings,
financial position, capital requirements, contractual
restrictions and other relevant factors.
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 companys sector;
(iv) the condition of the markets for whole loans and
mortgage-backed securities; (v) the stability of
residential property values; (vi) the companys
ability to comply with the requirements applicable to REITs;
(vii) the companys ability to increase its portfolio
income; (viii) the companys ability to continue to
maintain low loan acquisition costs; (ix) the potential
effect of new state or federal laws and regulations;
(x) the companys ability to maintain adequate credit
facilities to finance its business; (xi) the outcome of
litigation or regulatory actions pending against the company;
(xii) the companys ability to adequately hedge its
residual values, cash flows and fair values; (xiii) the
accuracy of the assumptions regarding the companys
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 companys risk
management practices; and (xvii) the ability of the
companys servicing platform to maintain high performance
standards. Additional information on these and other factors is
contained in the companys Annual Report on Form 10-K
for the year ended December 31, 2005 and the companys
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.
4
PART I FINANCIAL INFORMATION
|
|
Item 1. |
Financial Statements |
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
ASSETS |
Cash and cash equivalents
|
|
$ |
380,847 |
|
|
|
503,723 |
|
Restricted cash
|
|
|
717,201 |
|
|
|
726,697 |
|
Mortgage loans held for sale at lower of cost or market
|
|
|
9,303,086 |
|
|
|
7,825,175 |
|
Mortgage loans held for investment, net of allowance of $209,889
and $198,131, respectively
|
|
|
15,905,636 |
|
|
|
16,143,865 |
|
Residual interests in securitizations
held-for-trading
|
|
|
209,335 |
|
|
|
234,930 |
|
Mortgage servicing assets
|
|
|
42,096 |
|
|
|
69,315 |
|
Accrued interest receivable
|
|
|
113,920 |
|
|
|
101,945 |
|
Income taxes, net
|
|
|
65,520 |
|
|
|
80,823 |
|
Office property and equipment, net
|
|
|
89,384 |
|
|
|
86,886 |
|
Goodwill
|
|
|
95,792 |
|
|
|
92,980 |
|
Prepaid expenses and other assets
|
|
|
402,582 |
|
|
|
280,751 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
27,325,399 |
|
|
|
26,147,090 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Credit facilities on mortgage loans held for sale
|
|
$ |
8,786,300 |
|
|
|
7,439,685 |
|
Financing on mortgage loans held for investment, net
|
|
|
15,794,335 |
|
|
|
16,045,459 |
|
Accounts payable and accrued liabilities
|
|
|
578,475 |
|
|
|
508,163 |
|
Convertible senior notes, net
|
|
|
|
|
|
|
4,943 |
|
Notes payable
|
|
|
27,984 |
|
|
|
39,140 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,187,094 |
|
|
|
24,037,390 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value. Authorized
25,000,000 shares at June 30, 2006 and
10,000,000 shares at December 31, 2005; issued and
outstanding 4,500,000 shares at June 30, 2006 and
December 31, 2005
|
|
|
45 |
|
|
|
45 |
|
Common stock, $0.01 par value. Authorized
300,000,000 shares at June 30, 2006 and
December 31, 2005; issued and outstanding 56,076,773 and
55,723,267 shares at June 30, 2006 and
December 31, 2005, respectively
|
|
|
561 |
|
|
|
557 |
|
Additional paid-in capital
|
|
|
1,221,929 |
|
|
|
1,234,362 |
|
Accumulated other comprehensive income
|
|
|
83,040 |
|
|
|
61,045 |
|
Retained earnings
|
|
|
832,730 |
|
|
|
828,270 |
|
|
|
|
|
|
|
|
|
|
|
2,138,305 |
|
|
|
2,124,279 |
|
Deferred compensation costs
|
|
|
|
|
|
|
(14,579 |
) |
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,138,305 |
|
|
|
2,109,700 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
27,325,399 |
|
|
|
26,147,090 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
5
NEW CENTURY FINANCIAL CORPORATION SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Dollars in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
501,114 |
|
|
|
420,861 |
|
|
|
964,116 |
|
|
|
751,932 |
|
Interest expense
|
|
|
(361,111 |
) |
|
|
(218,555 |
) |
|
|
(644,324 |
) |
|
|
(380,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
140,003 |
|
|
|
202,306 |
|
|
|
319,792 |
|
|
|
371,296 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(32,325 |
) |
|
|
(36,875 |
) |
|
|
(60,150 |
) |
|
|
(67,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
107,678 |
|
|
|
165,431 |
|
|
|
259,642 |
|
|
|
304,183 |
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
195,160 |
|
|
|
110,604 |
|
|
|
324,687 |
|
|
|
233,556 |
|
|
Servicing income
|
|
|
14,012 |
|
|
|
6,631 |
|
|
|
29,654 |
|
|
|
13,353 |
|
|
Other income
|
|
|
24,961 |
|
|
|
3,398 |
|
|
|
39,592 |
|
|
|
7,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
234,133 |
|
|
|
120,633 |
|
|
|
393,933 |
|
|
|
254,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
126,922 |
|
|
|
119,961 |
|
|
|
243,643 |
|
|
|
231,683 |
|
|
General and administrative
|
|
|
55,113 |
|
|
|
42,324 |
|
|
|
112,588 |
|
|
|
84,099 |
|
|
Advertising and promotion
|
|
|
13,851 |
|
|
|
20,711 |
|
|
|
26,554 |
|
|
|
40,543 |
|
|
Professional services
|
|
|
11,103 |
|
|
|
9,677 |
|
|
|
20,293 |
|
|
|
17,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
206,989 |
|
|
|
192,673 |
|
|
|
403,078 |
|
|
|
373,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
134,822 |
|
|
|
93,391 |
|
|
|
250,497 |
|
|
|
184,555 |
|
|
Income tax expense (benefit)
|
|
|
29,279 |
|
|
|
(1,688 |
) |
|
|
41,219 |
|
|
|
4,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
105,543 |
|
|
|
95,079 |
|
|
|
209,278 |
|
|
|
179,839 |
|
Dividends paid on preferred stock
|
|
|
2,567 |
|
|
|
285 |
|
|
|
5,133 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$ |
102,976 |
|
|
|
94,794 |
|
|
|
204,145 |
|
|
|
179,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.85 |
|
|
|
1.71 |
|
|
|
3.67 |
|
|
|
3.26 |
|
Diluted earnings per share
|
|
$ |
1.81 |
|
|
|
1.65 |
|
|
|
3.59 |
|
|
|
3.13 |
|
Basic weighted average shares outstanding
|
|
|
55,784,919 |
|
|
|
55,376,001 |
|
|
|
55,652,977 |
|
|
|
55,079,377 |
|
Diluted weighted average shares outstanding
|
|
|
56,935,553 |
|
|
|
57,396,098 |
|
|
|
56,816,074 |
|
|
|
57,331,721 |
|
See accompanying notes to unaudited condensed consolidated
financial statements.
6
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net earnings
|
|
$ |
105,543 |
|
|
|
95,079 |
|
|
|
209,278 |
|
|
|
179,839 |
|
|
Net unrealized gains (losses) on derivative instruments
designated as hedges
|
|
|
15,135 |
|
|
|
(95,520 |
) |
|
|
20,396 |
|
|
|
(22,607 |
) |
|
Reclassification adjustment into earnings for derivative
instruments
|
|
|
812 |
|
|
|
2,227 |
|
|
|
1,605 |
|
|
|
7,488 |
|
|
Tax effect
|
|
|
77 |
|
|
|
1,488 |
|
|
|
(6 |
) |
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
121,567 |
|
|
|
3,274 |
|
|
|
231,273 |
|
|
|
163,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
7
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
Year Ended December 31, 2005 and Six Months Ended
June 30, 2006
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
Preferred | |
|
Preferred | |
|
Common | |
|
Common | |
|
Additional | |
|
Comprehensive | |
|
|
|
|
|
|
|
|
Shares | |
|
Stock | |
|
Shares | |
|
Stock | |
|
Paid-In | |
|
Income | |
|
Retained | |
|
Deferred | |
|
|
|
|
Outstanding | |
|
Amount | |
|
Outstanding | |
|
Amount | |
|
Capital | |
|
(Loss) | |
|
Earnings | |
|
Compensation | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
54,703 |
|
|
|
547 |
|
|
|
1,108,590 |
|
|
|
(4,700 |
) |
|
|
781,627 |
|
|
|
(7,499 |
) |
|
|
1,878,565 |
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,880 |
|
|
|
19 |
|
|
|
26,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,459 |
|
Proceeds from issuance of preferred stock
|
|
|
4,500 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
108,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,664 |
|
Repurchases and cancellation of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(879 |
) |
|
|
(9 |
) |
|
|
(29,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,474 |
) |
Cancelled shares related to stock options
|
|
|
|
|
|
|
|
|
|
|
(244 |
) |
|
|
(2 |
) |
|
|
(12,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,416 |
) |
Conversion of convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
2 |
|
|
|
14,493 |
|
|
|
|
|
|
|
|
|
|
|
(14,495 |
) |
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,415 |
|
|
|
7,415 |
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,543 |
|
|
|
|
|
|
|
416,543 |
|
Tax benefit related to non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,599 |
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,745 |
|
|
|
|
|
|
|
|
|
|
|
65,745 |
|
Dividends declared on common stock, $6.50 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(364,482 |
) |
|
|
|
|
|
|
(364,482 |
) |
Dividends declared on preferred stock, $1.20 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,418 |
) |
|
|
|
|
|
|
(5,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31. 2005
|
|
|
4,500 |
|
|
|
45 |
|
|
|
55,723 |
|
|
|
557 |
|
|
|
1,234,362 |
|
|
|
61,045 |
|
|
|
828,270 |
|
|
|
(14,579 |
) |
|
|
2,109,700 |
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
547 |
|
|
|
5 |
|
|
|
11,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,416 |
|
Repurchases and cancellation of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(552 |
) |
|
|
(5 |
) |
|
|
(25,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,139 |
) |
Cancelled shares related to stock options
|
|
|
|
|
|
|
|
|
|
|
(88 |
) |
|
|
(1 |
) |
|
|
(1,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,356 |
) |
Compensation expense related to common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
Excess tax benefits related to non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,944 |
|
Conversion of convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
2 |
|
|
|
4,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
3 |
|
|
|
(2,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,268 |
) |
Compensation expense related to restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,553 |
|
Reclassification of deferred compensation related to adoption of
SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,579 |
) |
|
|
|
|
|
|
|
|
|
|
14,579 |
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209,278 |
|
|
|
|
|
|
|
209,278 |
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,995 |
|
|
|
|
|
|
|
|
|
|
|
21,995 |
|
Dividends declared on common stock, $3.55 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199,685 |
) |
|
|
|
|
|
|
(199,685 |
) |
Dividends declared on preferred stock, $1.14 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,133 |
) |
|
|
|
|
|
|
(5,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
4,500 |
|
|
|
45 |
|
|
|
56,077 |
|
|
|
561 |
|
|
|
1,221,929 |
|
|
|
83,040 |
|
|
|
832,730 |
|
|
|
|
|
|
|
2,138,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
8
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
209,278 |
|
|
|
179,839 |
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of office property and equipment
|
|
|
15,689 |
|
|
|
10,111 |
|
|
Other amortization
|
|
|
53,369 |
|
|
|
43,402 |
|
|
Stock-based compensation
|
|
|
12,553 |
|
|
|
3,798 |
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,944 |
) |
|
|
|
|
|
Cash flows received from residual interests in securitizations
|
|
|
570 |
|
|
|
12,210 |
|
|
Accretion of Net Interest Receivables, or NIR
|
|
|
(13,737 |
) |
|
|
(7,927 |
) |
|
NIR gains
|
|
|
|
|
|
|
1,670 |
|
|
Initial deposits to over-collateralization accounts
|
|
|
|
|
|
|
(7,914 |
) |
|
Servicing gains
|
|
|
(6,796 |
) |
|
|
(35,893 |
) |
|
Fair value adjustment of residual interests in securitizations
|
|
|
38,762 |
|
|
|
4,419 |
|
|
Provision for losses on mortgage loans held for investment
|
|
|
60,150 |
|
|
|
67,113 |
|
|
Provision for repurchase losses
|
|
|
5,701 |
|
|
|
6,072 |
|
|
Mortgage loans originated or acquired for sale
|
|
|
(26,244,964 |
) |
|
|
(15,587,599 |
) |
|
Mortgage loan sales, net
|
|
|
24,823,375 |
|
|
|
13,520,803 |
|
|
Principal payments on mortgage loans held for sale
|
|
|
65,148 |
|
|
|
115,017 |
|
|
Increase in credit facilities on mortgage loans held for sale
|
|
|
1,346,615 |
|
|
|
1,922,939 |
|
|
Net change in other assets and liabilities
|
|
|
(150,468 |
) |
|
|
29,359 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
213,301 |
|
|
|
277,419 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated or acquired for investment, net
|
|
|
(3,376,627 |
) |
|
|
(8,174,316 |
) |
|
Principal payments on mortgage loans held for investment
|
|
|
3,527,676 |
|
|
|
2,759,900 |
|
|
Sale of mortgage servicing rights
|
|
|
24,516 |
|
|
|
|
|
|
Purchase of office property and equipment
|
|
|
(18,187 |
) |
|
|
(35,618 |
) |
|
Acquisition of net assets
|
|
|
(9,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
147,583 |
|
|
|
(5,450,034 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of financing on mortgage loans held for
investment, net
|
|
|
3,281,351 |
|
|
|
8,574,456 |
|
|
Repayments of financing on mortgage loans held for investment
|
|
|
(3,545,751 |
) |
|
|
(3,345,242 |
) |
|
(Increase) decrease in restricted cash
|
|
|
9,496 |
|
|
|
(282,224 |
) |
|
Net proceeds from issuance of common stock
|
|
|
11,416 |
|
|
|
17,433 |
|
|
Net proceeds from issuance of preferred stock
|
|
|
|
|
|
|
108,956 |
|
|
Increase (decrease) in notes payable, net
|
|
|
(11,156 |
) |
|
|
6,266 |
|
|
Payment of dividends on common stock
|
|
|
(197,164 |
) |
|
|
(168,938 |
) |
|
Payment of dividends on preferred stock
|
|
|
(5,133 |
) |
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,944 |
|
|
|
|
|
|
Purchase of common stock
|
|
|
(28,763 |
) |
|
|
(11,793 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(483,760 |
) |
|
|
4,898,914 |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(122,876 |
) |
|
|
(273,701 |
) |
|
Cash and cash equivalents, beginning of year
|
|
|
503,723 |
|
|
|
842,854 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
380,847 |
|
|
|
569,153 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
640,128 |
|
|
|
372,065 |
|
Income taxes paid
|
|
|
25,525 |
|
|
|
83,233 |
|
Supplemental noncash financing activity:
|
|
|
|
|
|
|
|
|
Restricted stock issued
|
|
$ |
6,553 |
|
|
|
17,966 |
|
Restricted stock cancelled
|
|
|
2,268 |
|
|
|
6,315 |
|
Accrued dividends on common stock
|
|
|
100,922 |
|
|
|
90,176 |
|
See accompanying notes to unaudited condensed consolidated
financial statements.
9
New Century TRS Holdings, Inc. (formerly known as New Century
Financial Corporation), a Delaware corporation (New
Century TRS), was formed on November 17, 1995. On
April 5, 2004, New Century TRSs board of directors
approved a plan to change New Century TRSs capital
structure to enable it to qualify as a real estate investment
trust, or REIT, for United States federal income tax purposes.
On April 12, 2004, New Century TRS formed New Century
Financial Corporation (formerly known as New Century REIT,
Inc.), a Maryland corporation (New Century). As used
herein, except where the context suggests otherwise, for 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, and 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.
Pursuant to the merger that implemented the restructuring of New
Century TRS in order for it to qualify as a REIT (the
Merger), New Century became the publicly-traded
parent listed on the New York Stock Exchange, or NYSE, traded
under the ticker symbol NEW, which succeeded to and
continued to operate substantially all of the existing
businesses of New Century TRS and its subsidiaries. The Merger
was consummated and became effective on October 1, 2004,
and was accounted for on an as if pooling basis.
These 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 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.
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. 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, New
Century purchased New Century Credit from New Century Mortgage.
On September 2, 2005, Home123 Corporation, an indirect
wholly owned subsidiary of New Century (Home123),
purchased the origination platform of RBC Mortgage Company, or
RBC Mortgage, that expanded the Companys retail presence
on a nationwide basis, its channels of distribution and its
mortgage product offerings to include conventional mortgage
loans, loans insured by the Federal Housing Administration and
loans guaranteed by the Veterans Administration. 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 $4.1 million was the fair value of liabilities assumed.
The excess of the purchase price over the fair value of assets
acquired and liabilities assumed was $77.1 million and was
allocated and recorded as goodwill at Home123.
On February 3, 2006, one of New Centurys indirect
subsidiaries, New Century Warehouse Corporation, completed the
purchase of the platform of Access Lending Corporation, or
Access Lending, that provides warehouse lending services to
middle-market residential mortgage bankers. The purchase price
for the net assets was $9.8 million, and was accounted for
using the purchase method. The fair value of the assets acquired
was $94.3 million and the fair value of the liabilities
assumed was $87.7 million. The excess of the purchase price
over the fair value of the assets acquired and liabilities
assumed was allocated to and recorded as goodwill. Additionally,
pursuant to the terms of the purchase and assumption agreement
governing the
10
transaction, Access Lending is entitled to receive additional
payments for two years following the consummation of the
transaction, based upon profitability. The results of operations
for the acquired platform have been included in the
Companys condensed consolidated financial statements since
the date of acquisition.
The accompanying condensed consolidated financial statements
include the consolidated financial statements of New
Centurys wholly-owned subsidiaries, New Century TRS, New
Century Credit, and NCRIV. 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 six months ended
June 30, 2006 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2006.
For further information, refer to the consolidated financial
statements and notes thereto included in New Centurys
Annual Report on
Form 10-K for the
year ended December 31, 2005 filed with the Securities and
Exchange Commission.
Reclassification
Certain amounts from the prior years presentation have
been reclassified to conform to the current years
presentation.
Recent Accounting
Developments
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid
Financial Instruments (SFAS 155), which
provides the following: (1) permits fair value
remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation,
(2) clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities,
(3) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (4) clarifies that concentrations of credit in
the form of subordination are not embedded derivatives and
(5) amends Statement of Financial Accounting Standards
No. 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a
replacement of FASB Statement 125 to eliminate the
prohibition of a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS 155 accounting for certain hybrid financial
instruments is effective for the Company beginning
January 1, 2007. Adoption of SFAS 155 is not expected
to have a material impact on the Companys financial
statements.
In March 2006, the FASB issued Statement of Financial Accounting
Standards No. 156, Accounting for Servicing of
Financial Assets (SFAS 156), which
provides the following: (1) revised guidance on when a
servicing asset and servicing liability should be recognized,
(2) requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if
practicable, (3) permits an entity to elect to measure
servicing assets and servicing liabilities at fair value each
reporting date and report changes in fair value in earnings in
the period in which the changes occur, (4) upon initial
adoption, permits a one-time reclassification of
available-for-sale securities to trading securities for
securities that are identified as offsetting the entitys
exposure to changes in the fair value of servicing assets or
liabilities that a servicer elects to subsequently measure at
fair value and (5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and
additional footnote disclosures. SFAS 156 is effective for
the Company beginning January 1, 2007, with the effects of
initial
11
adoption being reported as a cumulative-effect adjustment to
retained earnings. The impact to retained earnings as a result
of the initial adoption of SFAS 156 is expected to be
immaterial.
FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, was
issued in June 2006. FIN 48 clarifies the accounting for
uncertainty in tax positions recognized in an enterprises
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes.
FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition, and is effective for fiscal years
beginning after December 15, 2006. Earlier application of
the provisions of FIN 48 is encouraged if the enterprise
has not yet issued financial statements, including interim
financial statements, in the period FIN 48 is adopted. The
Companys accounting for its income tax contingency
reserves is not based on the provisions of FIN 48 because
its financial statements for the first quarter of 2006 have been
issued without the early adoption of the provisions of
FIN 48. Management is currently evaluating the impact of
adopting FIN 48; however, it is not expected to have a
significant effect on the Companys financial statements.
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 cash due from banks.
Restricted Cash
As of June 30, 2006, restricted cash totaled
$717.2 million, and included $43.5 million in cash
held in margin accounts associated with the Companys
interest rate risk management activities, $600.1 million in
cash held in custodial accounts associated with its mortgage
loans held for investment, $14.4 million in cash held in
trust associated with its credit facilities, $57.8 million
in cash held in a cash reserve account in connection with its
asset-backed commercial paper facility, and $1.4 million in
cash held in trust accounts on behalf of borrowers. As of
December 31, 2005, restricted cash totaled
$726.7 million, and included $73.4 million in cash
held in a margin account associated with the Companys
interest rate risk management activities, $633.0 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 $0.3 million in cash held in
trust accounts on behalf of borrowers.
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 Companys 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 the balance sheet
date. The Company charges
12
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 Companys consolidated
statement of income. 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. Residuals include the
over-collateralization account, or OC Account, and the net
interest receivable, or NIR, described below. The Company may
also sell Residuals through what are sometimes referred to as
net interest margin securities, or NIMS.
The Company generally structures loan securitizations as
follows: first, it sells a portfolio of mortgage loans to a
special purpose entity, or SPE, that has been established for
the limited purpose of buying and reselling mortgage loans. The
SPE then transfers the same mortgage loans to a Real Estate
Mortgage Investment Conduit or Owners Trust (the
REMIC or Trust), which is a qualifying
special purpose entity (QSPE) as defined under
Statement of Financial Accounting Standards No. 140
(SFAS 140). The Trust, in turn, issues
interest-bearing
asset-backed securities (the Certificates) generally
in an amount equal to the aggregate principal balance of the
mortgage loans. The Certificates are typically sold at face
value and without recourse except that the Company provides
representations and warranties customary to the mortgage banking
industry to the Trust. One or more investors purchase these
Certificates for cash. The Trust uses the cash proceeds to pay
the Company the cash portion of the purchase price for the
mortgage loans. The Trust also issues a certificate to the
Company representing a residual interest in the payments on the
securitized loans. In addition, the Company may provide a credit
enhancement for the benefit of the investors in the form of
additional collateral (the OC Account) held by the
Trust. The servicing agreements typically require that the OC
Account be maintained at certain levels.
At the closing of each off-balance sheet securitization, the
Company removes from its consolidated balance sheet the mortgage
loans held for sale and adds to its consolidated balance sheet
(i) the cash received, (ii) the estimated fair value
of the interest in the mortgage loans retained from the
securitizations (the Residuals), which consist of (a) the
OC Account and (b) NIR, and (iii) the estimated fair
value of the servicing asset. The NIR represents the discounted
estimated cash flows that the Company will receive in the
future. The excess of the cash received and the assets retained
over the carrying value of the loans sold, less transaction
costs, equals the net gain on sale of mortgage loans recorded by
the Company.
NIMS transactions are generally structured as follows: first,
the Company sells or contributes the Residuals to a SPE that it
has established for the limited purpose of receiving and selling
asset-backed residual
interests-in-securitization
certificates. Next, the SPE transfers the Residuals to the Trust
and the Trust, which is a QSPE as defined under SFAS 140,
in turn issues interest-bearing asset-backed securities (the
Bonds and Certificates). The Company sells the
Residuals without recourse except that it provides
representations and warranties customary to the mortgage banking
industry to the Trust. One or more investors purchase the Bonds
and Certificates and the proceeds from the sale of the Bonds and
Certificates, along with a residual interest certificate that is
subordinate to the Bonds and Certificates, represent the
consideration received by the Company for the sale of the
Residuals.
At closing of each NIMS transaction, the Company removes from
its consolidated balance sheet the carrying value of the
Residuals sold and adds to its consolidated balance sheet
(i) the cash received, and (ii) the estimated fair
value of the portion of the Residuals retained, which consists
of a NIR. The excess of the cash received and assets retained
over the carrying value of the Residuals sold, less transaction
costs, equals the net gain or loss on the sale of Residuals
recorded by the Company.
13
The Company allocates its basis in the mortgage loans and
Residuals between the portion of the mortgage loans and
Residuals sold through the Certificates and the portion retained
(the Residuals) based on the relative fair values of those
portions on the date of sale. The Company may recognize gains or
losses attributable to the changes in the fair value of the
Residuals, which are recorded at estimated fair value and
accounted for as held-for-trading securities as
permitted by SFAS 140. The Company is not aware of an
active market for the purchase or sale of Residuals and,
accordingly, it determines the estimated fair value of the
Residuals by discounting the expected cash flows released from
the OC Account (the cash out method) using a discount rate
commensurate with the risks involved. The Company utilizes a
discount rate of 12.0% on the estimated cash flows released from
the OC Account to value the Residuals through securitization
transactions and 14.0% on the estimated cash flows released from
the Trust to value Residuals through NIMS transactions. The
Company releases substantially all servicing rights relative to
its residual interests in securitizations.
The Company is entitled to the cash flows from the Residuals
that represent collections on the mortgage loans in excess of
the amounts required to pay the Certificates principal and
interest, the servicing fees and certain other fees, such as
trustee and custodial fees. At the end of each collection
period, the aggregate cash collections from the mortgage loans
are allocated first to the base servicing fees and certain other
fees, such as trustee and custodial fees, for the period, then
to the Certificate holders for interest at the pass-through rate
on the Certificates plus principal as defined in the servicing
agreements. If the amount of cash required for the above
allocations exceeds the amount collected during the collection
period, the shortfall is drawn from the OC Account. If the cash
collected during the period exceeds the amount necessary for the
above allocation, and there is no shortfall in the related OC
Account, the excess is released to the Company. If the OC
Account balance is not at the required credit enhancement level,
the excess cash collected is retained in the OC Account until
the specified level is achieved. The Company is restricted from
using the cash and collateral in the OC Account. Pursuant to
certain servicing agreements, the Company may use cash held in
the OC Account to make accelerated principal paydowns on the
Certificates to create additional excess collateral in the OC
Account, which is held by the Trusts on its behalf as the
Residual holder. The specified credit enhancement levels are
defined in these servicing agreements as the OC Account balance
expressed generally as a percentage of the current collateral
principal balance. For NIMS transactions, the Company receives
cash flows once the holders of the Bonds and Certificates
created in the NIMS transaction are fully paid.
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 range from 1.87% to 5.02% for adjustable-rate securities
and 1.48% to 5.67% for fixed-rate securities. 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 3.72%
at June 30, 2006. 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 2.25 to
2.63 years for the Companys adjustable-rate
securities and 2.26 to 3.51 years for its fixed-rate
securities.
During the six months ended June 30, 2006, the Residuals
provided $0.6 million in 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 June 30,
2006, the Company increased its prepayment rate assumptions
based upon actual
14
performance and made minor adjustments to certain other
assumptions, resulting in a $6.7 million decrease in the
fair value for the quarter that is recorded as a reduction to
gain on sale of mortgage loans. During the six months ended
June 30, 2006, the Company did not complete any
securitizations structured as sales. During the quarter ended
June 30, 2005, the Company completed a $989.2 million
securitization structured as a sale resulting in a gain on sale
of $21.2 million. In addition, the Companys retained
interest was $6.2 million.
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 Companys 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
Companys off-balance sheet securitization transactions, as
of June 30, 2006, there were $6.2 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 Companys ability
to realize the current estimated fair value of these residual
assets.
Derivative Instruments
Designated as Hedges
The Company accounted for certain Euro Dollar futures and
interest rate cap contracts, designated and documented as hedges
pursuant to the requirements of Statement of Financial
Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS 133. Pursuant to SFAS 133, these contracts have
been designated as hedging the exposure to variability of cash
flows from the Companys 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 cash flow hedge be reported in other
comprehensive income and the ineffective portion be reported in
current earnings.
The Company is exposed to interest rate risk from the time an
interest rate lock commitment, or IRLC, is made to a residential
mortgage applicant to the time the related mortgage loan is
sold. 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 the fair value recognized in current period earnings
as a component of gain on sale of mortgage loans. To manage this
interest rate risk, the Company primarily utilizes forward sales
commitments for its mortgage loan originations. The forward
sales commitments are derivatives under SFAS 133 and
recorded at fair value with the changes in fair value recognized
in current period earnings as a component of gain on sale of
mortgage loans.
Income Taxes
New Century is a REIT for federal income tax purposes and is not
generally required to pay federal and most state income taxes on
the income that it distributes to stockholders if it meets the
REIT requirements of the Internal Revenue Code of 1986, as
amended, or the Code. Also, each of New Centurys
subsidiaries that meet the requirements of the Code to be a
qualified REIT subsidiary, or a QRS, is not generally required
to pay federal and most state income taxes. However, New Century
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, New
Century 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.
15
|
|
2. |
Mortgage Loans Held for Sale |
A summary of mortgage loans held for sale, at the lower of cost
or fair value at June 30, 2006 and December 31, 2005,
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Mortgage loans held for sale:
|
|
|
|
|
|
|
|
|
|
First trust deeds
|
|
$ |
8,423,267 |
|
|
|
7,110,772 |
|
|
Second trust deeds
|
|
|
844,623 |
|
|
|
704,430 |
|
|
Net deferred origination costs and other(1)
|
|
|
35,196 |
|
|
|
9,973 |
|
|
|
|
|
|
|
|
|
|
$ |
9,303,086 |
|
|
|
7,825,175 |
|
|
|
|
|
|
|
|
|
|
(1) |
Other includes approximately $10.0 million of lower of cost
or market valuation allowance, primarily related to hurricane
exposure, at December 31, 2005. The amount is immaterial at
June 30, 2006. |
At June 30, 2006, the Company had mortgage loans held for
sale having an unpaid principal balance of approximately
$173.3 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 $6.0 million for the six months ended
June 30, 2006. At June 30, 2005, the Company had
mortgage loans held for sale of approximately $31.3 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 $1.2 million
for the six months ended June 30, 2005.
|
|
3. |
Mortgage Loans Held for Investment |
For the three and six months ended June 30, 2006, the
Company securitized $1.7 billion and $3.4 billion in
loans, respectively, through transactions structured as
financings, resulting in an increase in its mortgage loans held
for investment. As of June 30, 2006, the balance of
mortgage loans held for investment included $253,000 of mortgage
loans held for investment that were not yet securitized. A
summary of the components of mortgage loans held for investment
at June 30, 2006 and December 31, 2005 is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
|
First trust deeds
|
|
$ |
15,372,695 |
|
|
|
15,877,535 |
|
|
Second trust deeds
|
|
|
632,762 |
|
|
|
334,689 |
|
|
Allowance for loan losses
|
|
|
(209,889 |
) |
|
|
(198,131 |
) |
|
Net deferred origination costs
|
|
|
110,068 |
|
|
|
129,772 |
|
|
|
|
|
|
|
|
|
|
$ |
15,905,636 |
|
|
|
16,143,865 |
|
|
|
|
|
|
|
|
At June 30, 2006, the Company had mortgage loans held for
investment having an unpaid principal balance of approximately
$710.3 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 $22.1 million for the six months ended
June 30, 2006. At June 30, 2005, the Company had
mortgage loans held for investment having an unpaid principal
balance of approximately $319.5 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 $13.6 million for the
six months ended June 30, 2005.
16
The following table presents a summary of the activity for the
allowance for losses on mortgage loans held for investment for
the three and six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Balance, beginning of period
|
|
$ |
209,804 |
|
|
|
117,495 |
|
|
|
198,131 |
|
|
|
90,227 |
|
|
Additions
|
|
|
32,325 |
|
|
|
36,875 |
|
|
|
60,150 |
|
|
|
67,113 |
|
|
Charge-offs, net
|
|
|
(32,240 |
) |
|
|
(8,805 |
) |
|
|
(48,392 |
) |
|
|
(11,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
209,889 |
|
|
|
145,565 |
|
|
|
209,889 |
|
|
|
145,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. |
Residual Interests in Securitizations |
Residual interests in securitizations consisted of the following
components at June 30, 2006 and December 31, 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Over-collateralization account
|
|
$ |
348,742 |
|
|
|
350,785 |
|
Net interest receivable (NIR)
|
|
|
(139,407 |
) |
|
|
(115,855 |
) |
|
|
|
|
|
|
|
|
|
$ |
209,335 |
|
|
|
234,930 |
|
|
|
|
|
|
|
|
The Company allocates its basis in the mortgage loans and
retained interests between the portion of the assets sold and
the portion retained based on the relative fair values of those
portions on the date of sale. OC assets and NIR are subsequently
carried at estimated fair value and accounted for as
held-for-trading securities as permitted by
SFAS 140. The Company is not aware of an active market for
the purchase or sale of OC assets or NIR and, accordingly, it
determines the estimated fair value of the OC assets and NIR by
discounting the expected cash flows released from the
transactions (the cash out method) using a discount rate
commensurate with the risks involved. The Company currently
utilizes a discount rate of 12.0% for estimated cash flows
released from mortgage loan securitizations and 14.0% for
estimated cash flows released from NIMS transactions.
The OC Account in the table above represents the current,
un-discounted balance of the OC accounts at period end. The NIR
balance represents the difference between the estimated
discounted cash flows less the un-discounted value of the OC
accounts. The Company releases substantially all servicing
rights relative to its residual interests in securitizations.
The following table summarizes the activity in the OC accounts
for the six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
350,785 |
|
|
|
158,755 |
|
|
Initial deposits to OC accounts
|
|
|
|
|
|
|
7,914 |
|
|
Additional deposits to OC accounts
|
|
|
1,498 |
|
|
|
1,305 |
|
|
Release of cash from OC accounts
|
|
|
(3,541 |
) |
|
|
(9,353 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
348,742 |
|
|
|
158,621 |
|
|
|
|
|
|
|
|
17
The following table summarizes activity in the NIR accounts for
the six months ended June 30, 2006 and 2005 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
(115,855 |
) |
|
|
(10,734 |
) |
|
NIR gains
|
|
|
|
|
|
|
(1,670 |
) |
|
Cash received from NIRs
|
|
|
1,473 |
|
|
|
(4,162 |
) |
|
Accretion of NIRs
|
|
|
13,737 |
|
|
|
7,927 |
|
|
Fair value adjustment
|
|
|
(38,762 |
) |
|
|
(4,419 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
(139,407 |
) |
|
|
(13,058 |
) |
|
|
|
|
|
|
|
During the six months ended June 30, 2006, the Company did
not complete any securitizations structured as sales, resulting
in no additions to its Residuals. During the six months ended
June 30, 2005, the Company completed a $989.2 million
securitization structured as a sale. Purchasers of
securitization bonds and certificates have no recourse against
the other assets of the Company, other than the assets of the
Trust. The value of the Companys retained interests is
subject to credit, prepayment and interest rate risk on the
transferred financial assets. During the six months ended
June 30, 2006, the Company increased its prepayment rate
assumptions based upon actual and estimated performance and made
minor adjustments to certain other assumptions, resulting in a
$38.8 million decrease in the fair value for the period
that is recorded as a reduction to gain on sale of mortgage
loans. During the six months ended June 30, 2005, the
Company increased its prepayment assumptions and recorded a
$4.4 million decrease in the fair value of its Residuals.
|
|
5. |
Mortgage Servicing Assets |
The following table summarizes activity in the Companys
mortgage servicing assets for the six months ended June 30,
2006 and 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
69,315 |
|
|
|
8,249 |
|
|
Additions
|
|
|
6,796 |
|
|
|
35,893 |
|
|
Sales of servicing rights
|
|
|
(24,516 |
) |
|
|
|
|
|
Amortization
|
|
|
(9,499 |
) |
|
|
(3,747 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
42,096 |
|
|
|
40,395 |
|
|
|
|
|
|
|
|
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 $6.8 million for the six months ended
June 30, 2006 represents servicing rights retained by the
Company in certain of its whole loan sales to Carrington
Mortgage Credit Fund I, LP. The $24.5 million sales of
servicing rights reflected in the table above relates to the two
securitizations structured as sales completed in December 2005
that were sold during the first quarter of 2006. The additions
of $35.9 million for the six months ended June 30,
2005 represents the value of servicing rights retained by the
Company in certain of its whole loan sales.
18
Goodwill is recorded in connection with the acquisition of new
subsidiaries or net assets. As of June 30, 2006 and
December 31, 2005, the Company had goodwill of
$95.8 million and $93.0 million, respectively. No
impairment was recognized during the six months ended
June 30, 2006.
On February 3, 2006, one of the Companys indirect
subsidiaries, New Century Warehouse Corporation, completed the
purchase of Access Lendings platform that provides
warehouse lending services to middle market residential mortgage
bankers. The purchase price for the net assets was
$9.8 million, and was accounted for using the purchase
method. The fair value of the assets acquired was
$94.3 million and the fair value of the liabilities assumed
was $87.7 million. The excess of the purchase price over
the fair value of the assets acquired and liabilities assumed
was allocated to and recorded as goodwill. Additionally,
pursuant to the terms of the purchase and assumption agreement
governing the transaction, Access Lending is entitled to receive
additional payments for two years following the consummation of
the transaction, based upon profitability. The results of
operations for the acquired platform have been included in the
Companys condensed consolidated financial statements since
the date of acquisition.
The following table presents changes in the carrying amount of
goodwill as of June 30, 2006 (dollars in thousands):
|
|
|
|
|
|
Balance at January 1, 2006
|
|
$ |
92,980 |
|
Acquisition of Access Lending operating platform
|
|
|
3,200 |
|
Purchase price allocation adjustment related to acquisition of
RBC Mortgage origination platform
|
|
|
(388 |
) |
|
|
|
|
|
Balance at June 30, 2006
|
|
$ |
95,792 |
|
|
|
|
|
|
|
7. |
Credit Facilities and Other Short-Term Borrowings |
Credit facilities and other short-term borrowings consisted of
the following at June 30, 2006 and December 31, 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
|
|
2006 | |
|
2005 | |
|
|
|
|
| |
|
| |
|
|
A $2.0 billion asset-backed commercial paper facility for
Von Karman Funding Trust, a wholly-owned subsidiary of New
Century Mortgage, expiring in February 2009, secured by mortgage
loans held for sale and cash, bearing interest based on a margin
over one-month LIBOR.
|
|
$ |
980,308 |
|
|
|
|
|
|
|
A $2.0 billion master repurchase agreement ($1 billion
of which is uncommitted) among New Century Mortgage, NC Capital,
NC Asset Holding, L.P. (formerly known as NC Residual II
Corporation) (NC Asset Holding), 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. The Company expects to renew or extend
this facility before its expiration.
|
|
|
776,231 |
|
|
|
916,714 |
|
|
|
A $1.0 billion master repurchase agreement among New
Century Mortgage, Home 123 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. The Company
expects to renew or extend this facility before its
expiration.
|
|
|
367,558 |
|
|
|
277,484 |
|
|
|
A $1.0 billion master repurchase agreement among New
Century Credit, NC Asset Holding, New Century Mortgage, NC
Capital and Barclays Bank PLC expiring in March 2007, secured by
mortgage loans held for sale, bearing interest based on a margin
over one-month LIBOR.
|
|
|
706,655 |
|
|
|
821,856 |
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
|
|
2006 | |
|
2005 | |
|
|
|
|
| |
|
| |
|
|
An $800 million uncommitted master repurchase agreement
among NC Capital, NC Asset Holding, New Century Credit and Bear
Stearns Mortgage Capital expiring in November 2006, 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 before its expiration.
|
|
|
567,215 |
|
|
|
610,365 |
|
|
|
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
Realty Corp., which expired in July 2006, secured by mortgage
loans held for sale, bearing interest based on a margin over
one-month LIBOR. The Company did not renew this facility as it
has been replaced with a new Citigroup warehouse line of credit
facility.
|
|
|
|
|
|
|
|
|
|
|
A $650 million master repurchase agreement among New
Century Credit, NC Capital and Citigroup Global Markets Reality
Corp., which expired in July 2006, secured by mortgage loans
held for sale, bearing interest based on a margin over one-month
LIBOR. The Company did not renew this facility as it has been
replaced with a new Citigroup warehouse line of credit
facility.
|
|
|
100,009 |
|
|
|
276,816 |
|
|
|
A $250 million master repurchase agreement among New
Century Mortgage, NC Capital, New Century and Citigroup Global
Markets Realty Corp., which expired in July 2006, secured by
delinquent loans and real estate owned, or REO, properties,
bearing interest based on a margin over one-month LIBOR. The
Company did not renew this facility as it has been replaced with
a new Citigroup warehouse line of credit facility.
|
|
|
223,659 |
|
|
|
109,076 |
|
|
|
A $1.5 billion master repurchase agreement
($500 million of which is uncommitted) among New Century
Credit, New Century Mortgage, NC Capital, Home123 and Credit
Suisse First Boston Mortgage Capital LLC expiring in December
2006, 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.
|
|
|
922,391 |
|
|
|
452,239 |
|
|
|
A $1.0 billion master repurchase agreement among New
Century Credit, New Century Mortgage, NC Capital, Home123 and
Deutsche Bank expiring in September 2006, 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.
|
|
|
496,384 |
|
|
|
441,227 |
|
|
|
A $150 million master repurchase agreement among New
Century Mortgage, Home 123, NC Capital, and Deutsche Bank, Aspen
Funding Corp., Newport Funding Corp. and Gemini Securitization
Corp., LLC expiring in April 2007, secured by delinquent or real
estate owned, or REO, properties, bearing interest based on a
margin over one-month LIBOR.
|
|
|
|
|
|
|
|
|
|
|
An $850 million master repurchase agreement
($150 million of which is uncommitted) among New Century
Credit, New Century Mortgage, NC Capital, NC Asset Holding,
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. The Company expects to
renew or extend this facility prior to its expiration.
|
|
|
660,327 |
|
|
|
404,696 |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
|
|
2006 | |
|
2005 | |
|
|
|
|
| |
|
| |
|
|
A $3.0 billion master repurchase agreement among New
Century Credit, New Century Mortgage, NC Capital, NC Asset
Holding, Morgan Stanley Bank, 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.
|
|
|
1,447,266 |
|
|
|
1,469,860 |
|
|
|
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 2008, secured by
mortgage loans held for sale, bearing interest based on a margin
over one-month LIBOR.
|
|
|
1,342,052 |
|
|
|
1,673,225 |
|
|
|
A $450 million master repurchase agreement
($250 million of which is uncommitted) among New Century
Warehouse, New Century Mortgage, New Century, and Goldman Sachs
Mortgage Company expiring in February 2007, secured by mortgage
loans held for sale, bearing interest based on a margin over
one-month LIBOR.
|
|
|
81,752 |
|
|
|
|
|
|
|
A $55 million master repurchase agreement among New
Century, New Century Warehouse, Access Investments II
L.L.C. a direct subsidiary of New Century Warehouse, Access
Lending, Galleon Capital Corporation, State Street Capital
Markets, LLC and State Street Bank and Trust Company expiring in
August 2006, secured by mortgage loans held for sale, bearing
interest based on a margin over one-month commercial paper rate.
The Company expects to renew or extend this facility prior to
its expiration.
|
|
|
35,717 |
|
|
|
|
|
|
|
A $125 million master repurchase agreement among New
Century Warehouse and Guaranty Bank expiring in February 2007,
secured by mortgage loans held for sale, bearing interest based
on a margin over one-month LIBOR.
|
|
|
78,859 |
|
|
|
|
|
|
|
Less: Credit facility amounts reclassified to financing on
mortgage loans held for investment.
|
|
|
(83 |
) |
|
|
(13,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,786,300 |
|
|
|
7,439,685 |
|
|
|
|
|
|
|
|
|
|
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 June 30,
2006.
21
|
|
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 June 30, 2006 and December 31, 2005, the
financing on mortgage loans held for investment consisted of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Securitized bonds
|
|
$ |
15,837,897 |
|
|
|
16,071,460 |
|
Short-term financing on retained bonds
|
|
|
|
|
|
|
1,903 |
|
2005-NC3 NIM bond
|
|
|
23,596 |
|
|
|
21,405 |
|
Debt issuance costs
|
|
|
(67,241 |
) |
|
|
(63,182 |
) |
Credit facility amounts reclassified from warehouse credit
facilities
|
|
|
83 |
|
|
|
13,873 |
|
|
|
|
|
|
|
|
|
Total financing on mortgage loans held for investment
|
|
$ |
15,794,335 |
|
|
|
16,045,459 |
|
|
|
|
|
|
|
|
The Companys 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 1.3 and 3.8 years. The following
table reflects the estimated maturity of the financing on
mortgage loans held for investment as of June 30, 2006
(dollars in thousands):
|
|
|
|
|
Due in less than 1 year
|
|
$ |
5,549,244 |
|
Due in 2 years
|
|
|
3,548,834 |
|
Due in 3 years
|
|
|
1,989,899 |
|
Thereafter
|
|
|
4,706,358 |
|
|
|
|
|
|
|
$ |
15,794,335 |
|
|
|
|
|
|
|
9. |
Convertible Senior Notes |
On July 8, 2003, New Century TRS closed a private offering
of $210.0 million of 3.50% convertible senior notes
due July 3, 2008 pursuant to Rule 144A under the
Securities Act of 1933. On March 17, 2004, the convertible
senior notes became convertible into New Century TRS common
stock at a conversion price of $34.80 per share. As a
result of the Merger, the convertible senior notes became
convertible into shares of New Century common stock. In December
2004 and June 2005, through a series of transactions, all but
$5,000,000 of the original outstanding principal balance of the
convertible senior notes was converted into common stock of New
Century. On February 17, 2006, the holder of the remaining
$5,000,000 aggregate principal amount of convertible senior
notes elected to convert the convertible senior notes into
165,815 shares of New Centurys common stock.
|
|
10. |
Series A Cumulative Redeemable Preferred Stock |
In June 2005, the Company sold 4,500,000 shares of its
Series A Cumulative Redeemable Preferred Stock, or
Series A 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, 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 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 provisions of Statement of
Financial Accounting Standards No. 150, Accounting
for Certain Financial Investments with Characteristics of both
Liabilities and Equity, or SFAS 150, and is therefore
classified as a component of equity. The Company paid preferred
stock dividends of $2.6 million for the second quarter of
2006 on June 30, 2006, and, as a result, there were no
accrued preferred stock dividends as of June 30, 2006.
22
The following table presents the components of interest income
for the three and six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Interest on mortgage loans held for investment
|
|
$ |
301,856 |
|
|
|
315,887 |
|
|
|
591,487 |
|
|
|
563,547 |
|
Interest on mortgage loans held for sale
|
|
|
191,297 |
|
|
|
98,830 |
|
|
|
355,510 |
|
|
|
175,029 |
|
Residual interest income
|
|
|
6,430 |
|
|
|
3,903 |
|
|
|
13,737 |
|
|
|
7,927 |
|
Other interest income
|
|
|
1,531 |
|
|
|
2,241 |
|
|
|
3,382 |
|
|
|
5,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
501,114 |
|
|
|
420,861 |
|
|
|
964,116 |
|
|
|
751,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of interest expense
for the three and six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Interest on financing on mortgage loans held for investment
|
|
$ |
216,944 |
|
|
|
160,646 |
|
|
|
386,098 |
|
|
|
278,366 |
|
Interest on credit facilities and other short-term borrowings
|
|
|
132,696 |
|
|
|
54,850 |
|
|
|
240,070 |
|
|
|
97,056 |
|
Interest on convertible senior notes
|
|
|
|
|
|
|
60 |
|
|
|
59 |
|
|
|
123 |
|
Other interest expense
|
|
|
11,471 |
|
|
|
2,999 |
|
|
|
18,097 |
|
|
|
5,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
361,111 |
|
|
|
218,555 |
|
|
|
644,324 |
|
|
|
380,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Companys strategy to mitigate
interest rate risk on its financing on mortgage loans held for
sale, mortgage loans held for investment and its Residuals, the
Company uses derivative financial instruments such as Euro
Dollar futures, interest rate cap contracts, interest rate swap
contracts, options, interest rate lock and forward sale
commitments. It is not the Companys policy to use
derivatives to speculate on interest rates. These derivative
instruments are intended to provide income and cash flow to
offset potential reduced interest income and cash flow under
certain interest rate environments. In accordance with Statement
of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activity, or
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 sale. The Company designates certain derivative
financial instruments, such as 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 may designate its interest rate swap contracts as hedge
instruments in the future.
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
23
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 discontinues hedge accounting.
When hedge accounting is discontinued because the Company
determines that the derivative no longer qualifies as a 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 a hedge is
recognized in current period earnings. When a derivative 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
in accumulated other comprehensive income 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 that
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 as part of
interest expense in the period(s) during which the hedged
transaction affects earnings pursuant to SFAS 133. The
ineffective portion of the derivative instrument is recognized
in earnings in the current period and is included in other
income. During the three and six months ended June 30,
2006, the Company recognized a gain of $4.1 million and
$16.5 million, respectively, from the ineffective portion
of these hedges. For the three and six months ended
June 30, 2005, the Company recognized a gain of
$3.6 million from the ineffective portion of these hedges.
As of June 30, 2006, the Company had open Euro Dollar
futures contracts that are 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 June 30, 2006 and 2005 was an
$84.6 million and an $11.0 million asset,
respectively, and is included in prepaid expenses and other
assets. During the three and six months ended June 30,
2006, the Company recognized a gain of $9.7 million and
$50.4 million, respectively, attributable to cash flow
hedges, which has been recorded as a reduction of interest
expense related to the Companys financing on mortgage
loans held for investment. The Company also recognized a gain of
$12.8 million attributable to Euro Dollar futures contracts
not designated as hedges, which has been recorded in other
income during the three months ended June 30, 2006. For the
three and six months ended June 30, 2005, the Company
recognized a gain of $13.9 million and $20.6 million,
respectively, attributable to cash flow hedges, which has been
recorded as a reduction of interest expense. As of June 30,
2006, the balance of accumulated other comprehensive income, or
OCI, was $83.0 million, which relates to the fair value of
cash flow hedges. The Company expects to reclassify
$49.5 million from OCI into earnings during the remainder
of 2006 related to expiring contracts. The remaining OCI will be
reclassified into earnings by September 2009. 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 reclassified from OCI over the
original hedge period, as the hedged transaction affects future
earnings. Interest expense increased by $4.0 million and
$9.0 million for the three and six months ended
June 30, 2006, respectively, related to the
reclassification of the terminated contracts. For the three and
six months ended June 30, 2005, the Company reclassified
$3.1 million and $6.1 million, respectively, related
to these terminated contracts. As of June 30, 2006, the
related OCI balance was ($9.8) million.
24
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
derivative instruments 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. These contracts were settled at
March 31, 2006, and as such there were no fair value hedges
as of June 30, 2006. The Company recognized a loss of
$1.7 million during the first quarter of 2006, which was
substantially offset by changes in the fair value of the hedged
assets. For the three and six months ended June 30, 2005,
the Company recognized a loss of $3.8 million and a gain of
$4.8 million, respectively, related to fair value hedges.
The gain (loss) has been included as a component of gain on sale
of mortgage loans.
Interest Rate Cap Contracts Certain of the
Companys 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 OCI each period. Amounts are
reclassified out of OCI as the hedged transactions impact
earnings. During the three and six months ended June 30,
2006, the Company recorded $1.0 million and
$1.7 million, respectively, as an offset to interest
expense related to the effective portion of the caplets. For the
three and six months ended June 30, 2005, the Company
recorded $2.7 million and $5.0 million, respectively,
related to the effective portion of the caplets. The related net
change to OCI due to the earnings reclassification discussed
above and the change in fair value of the caplets was
$1.0 million and $2.3 million for June 30, 2006
and 2005, respectively. The fair value of these caplets at
June 30, 2006 and 2005 was $0.7 million and
$2.2 million, respectively, and is included in prepaid
expenses and other assets.
Non-designated Hedge Instruments As of
June 30, 2006, the Company had certain open Euro Dollar
futures contracts that hedge the variability in expected cash
flows from the variable-rate debt related to its financing on
mortgage loans held for investment, that are not designated as
hedges. 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 Companys residual interests in
securitizations, is recorded through earnings each period and is
included as a component of gain on sale of mortgage loans.
During the three and six months ended June 30, 2006, the
Company recognized gains of $6.8 million and
$16.7 million, respectively, related to the change in fair
value of these contracts. The fair value of these contracts at
June 30, 2006 was $10.0 million and is included in
prepaid expenses and other assets. For the three and six months
ended June 30, 2005, the Company recognized a gain of zero
and $0.4 million, respectively, related to the change in
fair value of these contracts.
Free-standing Derivatives (Interest Rate Locks, Forward Sales
Commitments and Interest Rate Swaps) The Company
is exposed to interest rate risk from the time an IRLC is made
to a residential mortgage applicant to the time the related
mortgage loan is sold. 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 the fair value recognized in
current period earnings as a component of gain on sale of
mortgage loans. To manage this interest rate risk, the Company
utilizes primarily forward sales commitments. The forward sales
commitments are derivatives under SFAS 133 and recorded at
fair value with the changes in fair value recognized in current
period earnings as a component of gain on sale of mortgage
loans. Also included in free-standing derivatives as of
June 30, 2006 were certain interest rate swap contracts and
options on Euro Dollar futures contracts related to the
Companys financing on mortgage loans held for investment.
The aggregate fair value of free-standing derivatives on the
condensed consolidated balance sheet was a $37.5 million
asset at June 30, 2006, and is included in prepaid expenses
and other assets. The change in fair value relating to IRLCs and
forward sales commitments that was recognized in earnings during
the three and six months ended June 30, 2006 was a gain of
$11.3 million and $24.3 million, respectively, and is
included as a component of gain on sale of mortgage loans. The
change in fair value relating to interest rate swaps and options
on Euro Dollar futures contracts that was recognized in earnings
during the three and six months ended June 30, 2006 was
$4.9 million and
25
$6.6 million, respectively, and is included in other
income. There were no free-standing derivatives during the six
months ended June 30, 2005.
Commencing in 2004, the Company has operated so as to qualify as
a REIT for U.S. federal income tax purposes. Provided the
Company complies with the REIT provisions of the Code, it is not
subject to corporate level income taxes on REIT taxable income
distributed in the form of dividends to stockholders. Operations
of the taxable REIT subsidiaries (the TRS),
including transactions by and between the TRS level and REIT
level companies are fully taxable and are filed on a separate
federal consolidated income tax return from the REIT.
During the three months ended June 30, 2006 and 2005, the
Company recorded an income tax provision (benefit) of
$29.3 million and $(1.7) million, respectively. The
provision for income taxes during the six months ended
June 30, 2006 and 2005 was $41.2 million and
$4.7 million, respectively.
Taxes are provided on substantially all income and expense items
included in the earnings of the TRS only, at a combined federal
and state rate of 40% for the three and six months ended
June 30, 2006 and 41% for the three and six months ended
June 30, 2005. Any deviation from the federal statutory
rate of 35% relates primarily to state and local income taxes.
In contrast, the earnings attributable to the REIT are not
expected to be taxable due to the benefit of the REITs
dividend paid deduction. Accordingly, the effective tax rate for
the Company (REIT and TRS consolidated) will vary from period to
period as summarized in the table below depending almost
exclusively on the relative contribution to consolidated
earnings before income taxes by the two separate federal tax
reporting groups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Six Months | |
|
|
Ended June 30, | |
|
Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Federal statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local taxes, net of federal benefit
|
|
|
5.0 |
% |
|
|
6.0 |
% |
|
|
5.0 |
% |
|
|
6.0 |
% |
Benefit of REIT election
|
|
|
(18.0) |
% |
|
|
(44.3) |
% |
|
|
(23.8) |
% |
|
|
(40.1) |
% |
Other
|
|
|
(0.3) |
% |
|
|
1.5 |
% |
|
|
0.3 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated effective tax rate
|
|
|
21.7 |
% |
|
|
(1.8) |
% |
|
|
16.5 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
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 | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
105,543 |
|
|
|
95,079 |
|
|
|
209,278 |
|
|
|
179,839 |
|
Less: Preferred stock dividends
|
|
|
2,567 |
|
|
|
285 |
|
|
|
5,133 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$ |
102,976 |
|
|
|
94,794 |
|
|
|
204,145 |
|
|
|
179,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
55,785 |
|
|
|
55,376 |
|
|
|
55,653 |
|
|
|
55,079 |
|
Earnings per share
|
|
$ |
1.85 |
|
|
|
1.71 |
|
|
|
3.67 |
|
|
|
3.26 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$ |
102,976 |
|
|
|
94,794 |
|
|
|
204,145 |
|
|
|
179,554 |
|
Add: Interest and amortization of debt issuance costs on
convertible senior notes, net of tax
|
|
|
44 |
|
|
|
77 |
|
|
|
102 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings
|
|
$ |
103,020 |
|
|
|
94,871 |
|
|
|
204,247 |
|
|
|
179,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
55,785 |
|
|
|
55,376 |
|
|
|
55,653 |
|
|
|
55,079 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
150 |
|
|
|
145 |
|
|
|
128 |
|
|
|
152 |
|
Stock options
|
|
|
998 |
|
|
|
1,708 |
|
|
|
992 |
|
|
|
1,936 |
|
Convertible senior notes
|
|
|
|
|
|
|
165 |
|
|
|
40 |
|
|
|
163 |
|
Directors deferred compensation plan awards
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,936 |
|
|
|
57,396 |
|
|
|
56,816 |
|
|
|
57,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$ |
1.81 |
|
|
|
1.65 |
|
|
|
3.59 |
|
|
|
3.13 |
|
For the three and six months ended June 30, 2006, the
Company has included the effect of the issuance of zero and
approximately 40,000 shares of common stock, respectively,
upon conversion of the New Century TRS convertible senior notes,
weighted for the portion of the period prior to the actual
conversion of the remaining notes. For the three and six months
ended June 30, 2005, the Company has included the effect of
the issuance of approximately 165,000 shares of common
stock upon conversion of the New Century TRS 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 June 30, 2006 and 2005, options
to purchase approximately 1,222,000 and 313,000 shares,
respectively, of common stock were excluded from the calculation
of diluted earnings per share because their effect was
anti-dilutive. For the six months ended June 30, 2006 and
2005, options to purchase approximately 1,552,000 and
196,000 shares, respectively, of common stock were excluded
from the calculation of diluted earnings per share because their
effect was anti-dilutive.
|
|
16. |
Stock-Based Compensation |
Through December 31, 2005, the Company historically
accounted for stock-based compensation using the intrinsic value
method under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and, accordingly, recognized no
compensation expense related to stock options and
27
employee stock purchases. For grants of restricted stock, the
fair value of the shares at the date of grant was amortized to
compensation expense over the awards vesting period. The
Company has historically reported pro forma results under the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure.
On December 16, 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R is a revision of
SFAS 123, supersedes APB 25 and amends Statement of
Financial Accounting Standards No. 95, Statement of Cash
Flows. SFAS 123R is similar to SFAS 123, however,
SFAS 123R requires all stock-based payments to employees,
including grants of employee stock options and discounts
associated with employee stock purchases, to be recognized as
compensation expense in the income statement based on their fair
values. Pro forma disclosure of compensation expense is no
longer an alternative. Additionally, excess tax benefits, which
result from actual tax benefits exceeding deferred tax benefits
previously recognized based on grant date fair value, are
recognized as additional
paid-in-capital and are
classified as financing cash flows in the consolidated statement
of cash flows.
The Company adopted SFAS 123R on January 1, 2006,
using the modified prospective transition method. Under the
modified prospective transition method, fair value accounting
and recognition provisions of SFAS 123R are applied to
stock-based awards granted on or modified subsequent to the date
of adoption and prior periods presented are not restated. In
addition, for awards granted prior to the effective date, the
unvested portion of the awards are recognized in periods
subsequent to the adoption based on the grant date fair value
determined for pro forma disclosure purposes under SFAS 123.
In 2004, the Company adopted and received stockholders
approval of the qualified 2004 Performance Incentive Plan, or
the Plan, pursuant to which the Companys board of
directors may grant equity awards, including stock options and
other forms of awards, to officers and key employees. The Plan
authorizes grants of equity awards, including stock options.
Stock options are granted for a fixed number of shares with an
exercise price at least equal to the market value of the shares
at the grant date. Stock options generally vest over a period of
three to five years. Certain of the stock options granted during
2005 and the six months ended June 30, 2006 contain cliff
vesting provisions, with vesting acceleration conditions. Such
conditions provide for varying degrees of partial vesting in the
event that certain market prices are maintained for ten
consecutive trading days. Stock options granted have contractual
terms of ten years.
Restricted stock awards are issued at the fair value of the
stock on the grant date. The restrictions generally lapse over a
period of three to seven years. During 2005, the Company began
granting certain restricted stock awards containing financial
performance conditions, which, if met, result in partial
acceleration of the lapse of the awards restrictions.
Prior to the adoption of SFAS 123R, unearned compensation
for grants of restricted stock equivalent to the fair value of
the shares at the date of grant was recorded as a separate
component of stockholders equity and subsequently
amortized to compensation expense over the awards vesting
period. In accordance with SFAS 123R, stockholders
equity is credited commensurate with the recognition of
compensation expense. All deferred compensation at
January 1, 2006 was reclassified to additional
paid-in-capital.
The Companys Employee Stock Purchase Plan defines purchase
price per share as 90% of the fair value of a share of common
stock on the last trading day of the plan quarter.
During the three and six months ended June 30, 2006, the
Company recognized stock-based compensation expense of
$4.8 million and $12.6 million, respectively, as well
as related tax benefits of $1.1 million and
$1.9 million, respectively, associated with the
Companys stock-based awards. For the three and six months
ended June 30, 2005, the Company recognized stock-based
compensation expense of $0.9 million and $3.8 million,
respectively, as well as related tax benefits of
$0.8 million and $1.3 million, respectively,
28
associated with the Companys stock-based awards. As a
result of the adoption of SFAS 123R effective
January 1, 2006, the Companys income before taxes for
the three and six months ended June 30, 2006 were
$3.0 million and $9.3 million lower, respectively,
than if the Company had continued to account for the stock-based
compensation programs under APB 25. The Companys net
income for the three and six months ended June 30, 2006
were $2.5 million and $8.4 million lower,
respectively, than if the Company had continued to account for
the stock-based compensation programs under APB 25.
SFAS 123R requires the disclosure of pro-forma information
for periods prior to adoption. The following table illustrates
the effect on net income and earnings per share for the three
and six months ended June 30, 2005 if the Company had
recognized compensation expense for all stock-based payments to
employees based on their fair values (dollars in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Six Months | |
|
|
Ended | |
|
Ended | |
|
|
June 30, 2005 | |
|
June 30, 2005 | |
|
|
| |
|
| |
Basic earnings available to common stockholders:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
94,794 |
|
|
|
179,554 |
|
|
Compensation expense, net of related tax effects
|
|
|
(1,664 |
) |
|
|
(3,189 |
) |
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
93,130 |
|
|
|
176,365 |
|
|
|
|
|
|
|
|
Diluted earnings available to common stockholders:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
94,871 |
|
|
|
179,649 |
|
|
Compensation expense, net of related tax effects
|
|
|
(1,664 |
) |
|
|
(3,189 |
) |
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
93,207 |
|
|
|
176,460 |
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.71 |
|
|
|
3.26 |
|
|
Pro forma
|
|
|
1.68 |
|
|
|
3.20 |
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.65 |
|
|
|
3.13 |
|
|
Pro forma
|
|
|
1.64 |
|
|
|
3.11 |
|
Basic weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
55,376 |
|
|
|
55,079 |
|
|
Pro forma
|
|
|
55,376 |
|
|
|
55,079 |
|
Diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
57,396 |
|
|
|
57,332 |
|
|
Pro forma
|
|
|
56,684 |
|
|
|
56,665 |
|
The Company historically used a Black-Scholes option pricing
model to estimate the fair value of stock options. The inputs
for volatility and expected term of the options were primarily
based on historical information. As of January 1, 2006, the
Company switched from the Black-Scholes pricing model to a
lattice model to estimate fair value at grant date for future
option grants. The lattice model is believed to provide a more
accurate estimate of the fair values of employee stock options
as it incorporates the impact of employee exercise behavior and
allows for the input of a range of assumptions. Expected
volatility assumptions used in the models are based on an
analysis of implied volatilities of publicly traded options on
the Companys common stock and historical volatility of the
Companys stock price. The range of risk-free interest
rates is based on a yield curve of interest rates at the time of
the grant based on the contractual life of the option. The
expected term of the options was derived from the outputs of the
lattice model, which incorporates post-vesting forfeiture
assumptions based on an analysis of historical data. The
dividend yield was based on the Companys estimate of
future dividend yields. Similar groups of employees that have
dissimilar exercise behavior are considered separately for
valuation purposes.
29
The following weighted-average assumptions were used to estimate
the fair values of options granted during the three and six
months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Fair value
|
|
$ |
8.00 |
|
|
|
8.98 |
|
|
|
6.31 |
|
|
|
9.21 |
|
Expected life (years)
|
|
|
2.9 |
|
|
|
4.5 |
|
|
|
4.0 |
|
|
|
4.5 |
|
Risk-free interest rate
|
|
|
5.1 - 5.2 |
% |
|
|
3.8 |
% |
|
|
4.4 - 4.7 |
% |
|
|
4.2 |
% |
Volatility
|
|
|
40.0 |
% |
|
|
60.0 |
% |
|
|
40.9 |
% |
|
|
60.5 |
% |
Expected annual dividend yield
|
|
|
10.9 |
% |
|
|
13.8 |
% |
|
|
11.1 |
% |
|
|
13.7 |
% |
Expected annual forfeiture rate
|
|
|
13.3 |
% |
|
|
|
|
|
|
11.1 |
% |
|
|
|
|
Stock option activity during the six months ended June 30,
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Number of | |
|
Excise | |
|
|
Shares | |
|
Price | |
|
|
| |
|
| |
Balance, beginning of period
|
|
|
3,819,533 |
|
|
$ |
27.29 |
|
|
Granted
|
|
|
386,959 |
|
|
|
40.25 |
|
|
Exercised
|
|
|
(417,577 |
) |
|
|
15.04 |
|
|
Cancelled
|
|
|
(95,853 |
) |
|
|
37.07 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
3,693,062 |
|
|
|
29.76 |
|
|
|
|
|
|
|
|
At June 30, 2006, the range of exercise prices, the number
outstanding, weighted average remaining term and weighted
average exercise price of options outstanding and the number
exercisable and weighted average price of options currently
exercisable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
Number of | |
|
Remaining | |
|
Average | |
|
Number of | |
|
Average | |
|
|
Stock | |
|
Term | |
|
Exercise | |
|
Stock | |
|
Exercise | |
Range of Exercise Prices |
|
Options | |
|
(in years) | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.33 - 5.59
|
|
|
90,533 |
|
|
|
1.44 |
|
|
$ |
5.27 |
|
|
|
90,533 |
|
|
$ |
5.27 |
|
6.00 - 6.79
|
|
|
400,350 |
|
|
|
5.16 |
|
|
|
6.65 |
|
|
|
363,600 |
|
|
|
6.65 |
|
7.33 - 9.27
|
|
|
234,298 |
|
|
|
4.01 |
|
|
|
8.38 |
|
|
|
112,575 |
|
|
|
7.87 |
|
10.47 - 12.17
|
|
|
240,981 |
|
|
|
5.61 |
|
|
|
10.49 |
|
|
|
190,356 |
|
|
|
10.49 |
|
14.43 - 17.83
|
|
|
228,719 |
|
|
|
6.22 |
|
|
|
15.18 |
|
|
|
85,244 |
|
|
|
15.53 |
|
18.65 - 18.66
|
|
|
355,066 |
|
|
|
6.48 |
|
|
|
18.66 |
|
|
|
164,116 |
|
|
|
18.66 |
|
19.47 - 26.97
|
|
|
228,524 |
|
|
|
6.96 |
|
|
|
26.30 |
|
|
|
91,260 |
|
|
|
26.61 |
|
35.74 - 39.10
|
|
|
387,676 |
|
|
|
9.27 |
|
|
|
38.32 |
|
|
|
98,865 |
|
|
|
38.31 |
|
41.60 - 44.06
|
|
|
448,724 |
|
|
|
8.73 |
|
|
|
44.01 |
|
|
|
28,717 |
|
|
|
43.99 |
|
45.04 - 45.96
|
|
|
364,496 |
|
|
|
7.61 |
|
|
|
45.86 |
|
|
|
286,070 |
|
|
|
45.87 |
|
46.02 - 46.78
|
|
|
373,568 |
|
|
|
8.30 |
|
|
|
46.62 |
|
|
|
248,562 |
|
|
|
46.63 |
|
47.29 - 49.92
|
|
|
225,025 |
|
|
|
8.80 |
|
|
|
49.18 |
|
|
|
16,011 |
|
|
|
47.59 |
|
50.47 - 60.47
|
|
|
115,102 |
|
|
|
8.25 |
|
|
|
55.18 |
|
|
|
83,955 |
|
|
|
56.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,693,062 |
|
|
|
|
|
|
|
|
|
|
|
1,859,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
At June 30, 2006, the total intrinsic value of stock
options outstanding and exercisable was $59.1 million and
$37.2 million, respectively.
Stock option information related to nonvested shares for the six
months ended June 30, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
|
Grant | |
|
|
Number of | |
|
Date Fair | |
|
|
Options | |
|
Value | |
|
|
| |
|
| |
Balance, beginning of period
|
|
|
2,075,965 |
|
|
$ |
11.26 |
|
|
Granted
|
|
|
386,959 |
|
|
|
40.25 |
|
|
Vested
|
|
|
(557,819 |
) |
|
|
10.73 |
|
|
Forfeited
|
|
|
(71,907 |
) |
|
|
11.19 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,833,198 |
|
|
|
10.38 |
|
|
|
|
|
|
|
|
A summary of nonvested restricted stock activity for the six
months ended June 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
|
Grant | |
|
|
Number of | |
|
Date Fair | |
|
|
Shares | |
|
Value | |
|
|
| |
|
| |
Balance, beginning of period
|
|
|
441,630 |
|
|
$ |
45.03 |
|
|
Granted
|
|
|
285,457 |
|
|
|
41.56 |
|
|
Vested
|
|
|
(149,905 |
) |
|
|
37.37 |
|
|
Forfeited
|
|
|
(4,593 |
) |
|
|
45.37 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
572,589 |
|
|
|
45.30 |
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the
six months ended June 30, 2006 and 2005 was
$12.3 million and $55.4 million, respectively. During
the six months ended June 30, 2006 and 2005, the Company
received cash of $6.2 million and $12.7 million,
respectively, from exercises of stock options and recognized
related tax benefits of $1.0 million and
$14.6 million, respectively.
During the three and six months ended June 30, 2006, 40,159
and 88,910 shares of common stock, respectively, were
purchased under the Companys Employee Stock Purchase Plan
resulting in compensation cost of approximately $294,000 and
$683,000, respectively.
As of June 30, 2006, the total remaining unrecognized cost
related to nonvested stock options and restricted stock amounted
to $15.5 million and $16.2 million, respectively,
which will be amortized over the weighted-average remaining
requisite service period of 30 months and 46 months,
respectively.
The Company issues new shares of common stock to satisfy
stock-based awards. At June 30, 2006, there were
approximately 1,530,000 shares available for grant under
the Plan. As of June 30, 2006, approximately
2.0 million shares were available for issuance under the
Companys Employee Stock Purchase Plan.
The Company has three operating segments: portfolio, mortgage
loan operations and servicing and other. Management tracks and
evaluates these three segments separately in deciding how to
allocate resources and assess performance.
|
|
|
The portfolio segment reflects the Companys investment in
its mortgage loan portfolio, which produces net interest income.
The mortgage loan operations segment reflects purchases and
originations of residential mortgage loans. |
31
|
|
|
The mortgage loan operations segment, comprised of the Wholesale
and Retail origination divisions, records (i) interest
income, interest expense and a 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 and a provision for
mortgage loan losses on mortgage loans it holds in its portfolio
and (iii) gain on sale of mortgage loans. |
|
|
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. The Companys recently acquired Access
Lending platform is included in the servicing and other segment,
although it has not had a material impact on the companys
results of operations or financial position for the first six
months of 2006. |
The elimination column in the table below represents:
(i) the difference between the segments fair value of
mortgage loans originated as if they were sold and the actual
gain recorded on loans sold by the Company and (ii) the
elimination of inter-company gains.
For the Companys portfolio segment, management evaluates
mortgage assets at the segment level. As such, the quarter end
balances of these assets are included in the table below.
For the three and six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Taxable REIT Subsidiary | |
|
|
|
|
|
|
| |
|
|
|
|
REIT & | |
|
|
|
|
|
|
|
|
|
|
Qualified | |
|
|
|
Mortgage Loan Operations | |
|
|
|
|
|
|
REIT | |
|
|
|
| |
|
|
|
|
|
|
Subsidiaries | |
|
|
|
Total | |
|
Total | |
|
Servicing | |
|
|
|
|
Portfolio | |
|
Portfolio | |
|
Wholesale | |
|
Retail | |
|
and Other | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
265,738 |
|
|
|
40,075 |
|
|
|
164,282 |
|
|
|
28,546 |
|
|
|
2,473 |
|
|
|
|
|
|
|
501,114 |
|
Interest expense
|
|
|
(189,888 |
) |
|
|
(25,361 |
) |
|
|
(121,476 |
) |
|
|
(22,691 |
) |
|
|
(1,695 |
) |
|
|
|
|
|
|
(361,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
75,850 |
|
|
|
14,714 |
|
|
|
42,806 |
|
|
|
5,855 |
|
|
|
778 |
|
|
|
|
|
|
|
140,003 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(30,675 |
) |
|
|
(1,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
45,175 |
|
|
|
13,064 |
|
|
|
42,806 |
|
|
|
5,855 |
|
|
|
778 |
|
|
|
|
|
|
|
107,678 |
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
263,100 |
|
|
|
86,236 |
|
|
|
1,131 |
|
|
|
(155,307 |
) |
|
|
195,160 |
|
|
Servicing & other income (loss)
|
|
|
14,139 |
|
|
|
|
|
|
|
(53 |
) |
|
|
(668 |
) |
|
|
25,555 |
|
|
|
|
|
|
|
38,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
14,139 |
|
|
|
|
|
|
|
263,047 |
|
|
|
85,568 |
|
|
|
26,686 |
|
|
|
(155,307 |
) |
|
|
234,133 |
|
Operating expenses
|
|
|
7,361 |
|
|
|
|
|
|
|
120,943 |
|
|
|
82,645 |
|
|
|
(3,960 |
) |
|
|
|
|
|
|
206,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$ |
51,953 |
|
|
|
13,064 |
|
|
|
184,910 |
|
|
|
8,778 |
|
|
|
31,424 |
|
|
|
(155,307 |
) |
|
|
134,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$ |
|
|
|
|
|
|
|
|
13,840,942 |
|
|
|
2,350,723 |
|
|
|
|
|
|
|
|
|
|
|
16,191,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as financings
|
|
$ |
1,714,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,714,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at June 30, 2006
|
|
$ |
13,293,312 |
|
|
|
1,916,406 |
|
|
|
10,339,548 |
|
|
|
1,808,977 |
|
|
|
|
|
|
|
(32,844 |
) |
|
|
27,325,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Taxable REIT Subsidiary | |
|
|
|
|
|
|
| |
|
|
|
|
REIT & | |
|
|
|
|
|
|
|
|
|
|
Qualified | |
|
|
|
Mortgage Loan Operations | |
|
|
|
|
|
|
REIT | |
|
|
|
| |
|
|
|
|
|
|
Subsidiaries | |
|
|
|
Total | |
|
Total | |
|
Servicing | |
|
|
|
|
Portfolio | |
|
Portfolio | |
|
Wholesale | |
|
Retail | |
|
and Other | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
519,695 |
|
|
|
81,875 |
|
|
|
304,896 |
|
|
|
53,996 |
|
|
|
3,654 |
|
|
|
|
|
|
|
964,116 |
|
Interest expense
|
|
|
(331,738 |
) |
|
|
(51,903 |
) |
|
|
(216,119 |
) |
|
|
(42,107 |
) |
|
|
(2,457 |
) |
|
|
|
|
|
|
(644,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
187,957 |
|
|
|
29,972 |
|
|
|
88,777 |
|
|
|
11,889 |
|
|
|
1,197 |
|
|
|
|
|
|
|
319,792 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(59,700 |
) |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
128,257 |
|
|
|
29,522 |
|
|
|
88,777 |
|
|
|
11,889 |
|
|
|
1,197 |
|
|
|
|
|
|
|
259,642 |
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
451,703 |
|
|
|
162,557 |
|
|
|
1,747 |
|
|
|
(291,320 |
) |
|
|
324,687 |
|
|
Servicing & other income (loss)
|
|
|
22,999 |
|
|
|
|
|
|
|
(144 |
) |
|
|
(1,468 |
) |
|
|
47,859 |
|
|
|
|
|
|
|
69,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
22,999 |
|
|
|
|
|
|
|
451,559 |
|
|
|
161,089 |
|
|
|
49,606 |
|
|
|
(291,320 |
) |
|
|
393,933 |
|
Operating expenses
|
|
|
15,996 |
|
|
|
|
|
|
|
236,692 |
|
|
|
162,132 |
|
|
|
(11,742 |
) |
|
|
|
|
|
|
403,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$ |
135,260 |
|
|
|
29,522 |
|
|
|
303,644 |
|
|
|
10,846 |
|
|
|
62,545 |
|
|
|
(291,320 |
) |
|
|
250,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$ |
|
|
|
|
|
|
|
|
25,201,565 |
|
|
|
4,409,192 |
|
|
|
|
|
|
|
|
|
|
|
29,610,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as financings
|
|
$ |
3,393,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,393,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at June 30, 2006
|
|
$ |
13,293,312 |
|
|
|
1,916,406 |
|
|
|
10,339,548 |
|
|
|
1,808,977 |
|
|
|
|
|
|
|
(32,844 |
) |
|
|
27,325,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Taxable REIT Subsidiary | |
|
|
|
|
|
|
| |
|
|
|
|
REIT & | |
|
|
|
|
|
|
|
|
|
|
Qualified | |
|
|
|
Mortgage Loan Operations | |
|
|
|
|
|
|
REIT | |
|
|
|
| |
|
|
|
|
|
|
Subsidiaries | |
|
|
|
Total | |
|
Total | |
|
Servicing | |
|
|
|
|
Portfolio | |
|
Portfolio | |
|
Wholesale | |
|
Retail | |
|
and Other | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
250,766 |
|
|
|
60,705 |
|
|
|
98,707 |
|
|
|
10,683 |
|
|
|
|
|
|
|
|
|
|
|
420,861 |
|
Interest expense
|
|
|
(114,081 |
) |
|
|
(46,565 |
) |
|
|
(52,254 |
) |
|
|
(5,655 |
) |
|
|
|
|
|
|
|
|
|
|
(218,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
136,685 |
|
|
|
14,140 |
|
|
|
46,453 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
202,306 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(36,550 |
) |
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
100,135 |
|
|
|
13,815 |
|
|
|
46,453 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
165,431 |
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
202,058 |
|
|
|
62,307 |
|
|
|
|
|
|
|
(153,761 |
) |
|
|
110,604 |
|
|
Servicing & other income (loss)
|
|
|
(12,942 |
) |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
22,966 |
|
|
|
|
|
|
|
10,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
(12,942 |
) |
|
|
|
|
|
|
202,063 |
|
|
|
62,307 |
|
|
|
22,966 |
|
|
|
(153,761 |
) |
|
|
120,633 |
|
Operating expenses
|
|
|
7,958 |
|
|
|
|
|
|
|
125,163 |
|
|
|
57,973 |
|
|
|
1,579 |
|
|
|
|
|
|
|
192,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$ |
79,235 |
|
|
|
13,815 |
|
|
|
123,353 |
|
|
|
9,362 |
|
|
|
21,387 |
|
|
|
(153,761 |
) |
|
|
93,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$ |
|
|
|
|
|
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
|
|
|
|
|
|
|
|
13,444,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as financings
|
|
$ |
5,890,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,890,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at June 30, 2005
|
|
$ |
14,482,306 |
|
|
|
3,071,569 |
|
|
|
7,976,870 |
|
|
|
937,086 |
|
|
|
|
|
|
|
(35,851 |
) |
|
|
26,431,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Taxable REIT Subsidiary | |
|
|
|
|
|
|
| |
|
|
|
|
REIT & | |
|
|
|
|
|
|
|
|
|
|
Qualified | |
|
|
|
Mortgage Loan Operations | |
|
|
|
|
|
|
REIT | |
|
|
|
| |
|
|
|
|
|
|
Subsidiaries | |
|
|
|
Total | |
|
Total | |
|
Servicing | |
|
|
|
|
Portfolio | |
|
Portfolio | |
|
Wholesale | |
|
Retail | |
|
and Other | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
432,210 |
|
|
|
125,717 |
|
|
|
173,610 |
|
|
|
20,395 |
|
|
|
|
|
|
|
|
|
|
|
751,932 |
|
Interest expense
|
|
|
(187,993 |
) |
|
|
(90,373 |
) |
|
|
(91,519 |
) |
|
|
(10,751 |
) |
|
|
|
|
|
|
|
|
|
|
(380,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
244,217 |
|
|
|
35,344 |
|
|
|
82,091 |
|
|
|
9,644 |
|
|
|
|
|
|
|
|
|
|
|
371,296 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(65,701 |
) |
|
|
(1,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
178,516 |
|
|
|
33,932 |
|
|
|
82,091 |
|
|
|
9,644 |
|
|
|
|
|
|
|
|
|
|
|
304,183 |
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
375,033 |
|
|
|
118,105 |
|
|
|
|
|
|
|
(259,582 |
) |
|
|
233,556 |
|
|
Servicing & other income (loss)
|
|
|
(22,285 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
42,908 |
|
|
|
|
|
|
|
20,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
(22,285 |
) |
|
|
|
|
|
|
375,034 |
|
|
|
118,105 |
|
|
|
42,908 |
|
|
|
(259,582 |
) |
|
|
254,180 |
|
Operating expenses
|
|
|
12,924 |
|
|
|
|
|
|
|
242,500 |
|
|
|
111,032 |
|
|
|
7,352 |
|
|
|
|
|
|
|
373,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$ |
143,307 |
|
|
|
33,932 |
|
|
|
214,625 |
|
|
|
16,717 |
|
|
|
35,556 |
|
|
|
(259,582 |
) |
|
|
184,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$ |
|
|
|
|
|
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
|
|
|
|
|
|
|
|
23,695,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as financings
|
|
$ |
8,881,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,881,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at June 30, 2005
|
|
$ |
14,482,306 |
|
|
|
3,071,569 |
|
|
|
7,976,870 |
|
|
|
937,086 |
|
|
|
|
|
|
|
(35,851 |
) |
|
|
26,431,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Item 2. |
Managements 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, 2005. 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 nations largest 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 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. In September 2005, we acquired a mortgage origination
platform from RBC Mortgage Company, or RBC Mortgage, that
expanded our offerings to include conventional mortgage loans,
including Alt-A mortgage loans, loans insured by the Federal
Housing Administration, or FHA, and loans guaranteed by the
Veterans Administration, or VA. A significant portion of the
conventional loans, which are generally referred to as
conforming loans, we produce qualify for inclusion
in guaranteed mortgage securities backed by the Federal National
Mortgage Association, or Fannie Mae, or the Federal Home Loan
Mortgage Corp., or Freddie Mac. At the same time, 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 single-family loans or otherwise do not meet Fannie Mae or
Freddie Mac guidelines.
Prior to 2003, we sold our loans through both whole loan sales
and securitizations structured as sales. Since 2003, we have
also retained a portion of our loan production for investment on
our balance sheet through securitizations structured as
financings rather than sales. Our decisions regarding secondary
marketing transactions in 2006 have been, and will continue to
be, influenced by market conditions and our ability to access
external sources of capital. We do not currently intend to
complete any securitizations structured as sales in 2006.
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. 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.
Pursuant to the merger that implemented the restructuring of New
Century TRS in order for it to qualify as a REIT, New Century
became the publicly-traded parent listed on the New York Stock
Exchange, or NYSE, traded under the ticker symbol
NEW, which succeeded to and continued to operate
substantially all of the existing businesses of New Century TRS
and its subsidiaries.
As a result of the merger and the related capital-raising
activities, a significant source of our revenue is, and we
expect will continue to be, interest income generated from our
portfolio of mortgage loans held by our REIT and our taxable
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
36
borrowings, (ii) general and administrative expenses, and
(iii) payroll and related expenses arising from our
origination and servicing businesses.
During the third quarter of 2005, Home123 Corporation, one of
New Centurys wholly owned subsidiaries, purchased the
origination platform of RBC Mortgage, which has enabled us to
expand our mortgage product offerings, our retail presence on a
nationwide basis and our channels of distribution, particularly
into the builder and realtor channels.
This 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.
In February 2006, we purchased from Access Lending Corporation a
platform that provides warehouse lines of credit to
middle-market residential mortgage bankers. This acquisition
enables us to offer warehouse lending services to our Wholesale
customers and to other middle-market mortgage bankers.
Executive Summary
Our business has two key components: (i) the mortgage loan
portfolio that provides net interest income over the life of our
mortgage loans; and (ii) the taxable REIT subsidiary
mortgage origination platform. During 2005, as we were building
our mortgage loan portfolio using the capital we raised in
October 2004, the net interest component of our earnings became
a more significant contributor to net earnings. During 2005, our
industry experienced significant narrowing of margins as most
originators kept the interest rates offered to customers at
historically low levels while the underlying LIBOR indexes that
determine the financing costs continued to rise. As a result,
our whole loan sale pricing deteriorated.
In the latter part of 2005, we began to increase our interest
rates to keep pace with, or exceed, the increase in our
financing costs. We continued this approach into 2006, with a
pricing strategy designed to improve our overall operating
margin. We continue to reduce our costs to remain efficient even
if loan origination volume declines. Our focus is to enhance the
net execution of our whole loan sales and our cost-cutting
strategies.
The other notable development in our business in recent months
has been the completion of our acquisition and integration of
the origination platform of RBC Mortgage. This acquisition
expands our loan origination channel and product mix by allowing
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 |
One of the largest components of our revenue is derived from the
interest income we earn on our portfolio of mortgage loans held
for investment, which totaled $15.9 billion at
June 30, 2006.
During 2003, we shifted our strategy in an effort 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 currently offers
the most
37
attractive means to finance loans on our balance sheet. In an
effort to match the timing of cash flows with the recognition of
earnings on our loans, we began to structure our securitizations
as financings during 2003. During the six months ended
June 30, 2006 and 2005, we completed four securitizations
totaling $3.4 billion and three securitizations totaling
$8.9 billion, respectively, which were structured as
on-balance sheet financings. 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. From 2003 through 2005,
we retained between 20% and 25% of our total loan production
through securitizations for investment on our balance sheet, as
we were building our mortgage loan portfolio. During the six
months ended June 30, 2006, we retained approximately 11%
of our total loan production on our balance sheet.
We attempt to maintain our portfolio of mortgage loans held for
investment so that it generally consists of a representative
cross-section of our overall loan production volume. During the
second quarter of 2006, we completed two securitizations
totaling $1.7 billion that were structured as financings,
including our first Alt-A securitization totaling
$522 million. The Alt-A transaction improved secondary
market execution related to this pool of mortgage loans and
diversified our portfolio of mortgage loans held for investment.
During the first quarter of 2006, we completed two
securitizations, one of which was a $313 million
transaction that consisted solely of second lien collateral.
Substantially all of the collateral in this securitization
represented second mortgage loans originated in connection with
our 80/20-mortgage product. We believe the securitization of
second lien collateral allowed us to capture the full economic
value over the life of the mortgage loans of that particular
pool of loans, particularly when compared to the value that may
have been recognized in a whole loan sale. This securitization
was the first transaction executed with collateral not
representative of a cross-section of our overall loan
production. The portfolio of mortgage loans held for investment
earns net interest income over its life, which is generally two
to 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 in the portfolio by
monitoring prepayment rates and credit losses. Faster
prepayments reduce the weighted average life of the portfolio,
thereby reducing net interest income. Cumulative credit losses,
which we generally assume to be in the range of 0.9% and 4.9% of
the original balance of the loans, also reduce net interest
income. While the range of estimated cumulative credit losses is
fairly broad, the weighted average cumulative credit loss
estimate for the entire portfolio of mortgage loans held for
investment was 2.40% at June 30, 2006.
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 reduce variability in our interest margin
over the period of each securitization.
The other 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. For the past several years, our secondary marketing
strategy has included a combination of both whole loan sales and
securitizations.
Loan origination volume in our industry has historically
fluctuated from year to year and is affected by external factors
such as home values, the level of interest rates, 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, predominately as a result of the interest rate
environment and, to a lesser extent, the other factors mentioned
above. As a consequence, the business of originating and selling
loans is cyclical. In light of our current strategy to maintain
interest rates at a level that will achieve our desired
operating margins, our loan production volume may decrease as a
result of higher interest rates on the mortgages we originate.
38
The operating margin of our loan 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 operating margin as our principal metric to
measure the value of our loan origination franchise.
Net interest income on mortgage loans held for
sale We typically hold our mortgage loans held
for sale for a 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 the six months ended June 30, 2005, the
difference between these interest rates was approximately 2.9%.
During the six months ended June 30, 2006, this margin
decreased to 2.4% as a result of short-term interest rates
increasing more rapidly than our average coupon rates over the
past eighteen months. We seek to manage the timing of our whole
loan sales to enhance 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. Beginning in the latter half of 2004 and
continuing through 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 did not
previously raise the interest rates we charged our borrowers to
the degree that underlying short-term rates increased, reducing
gain on sale margins. Gain on sale in 2006 increased as a result
of improved secondary market execution, which was primarily
driven by a higher weighted average coupon on our loans, a more
favorable product mix and stronger secondary market appetite for
our loans. While we expect our non-prime gain on sale margins to
continue their favorable trend, we do expect gain on sale
executions to be negatively impacted on a go-forward basis as a
result of the recent changes to Standard & Poors
LEVELs Model, which is widely used as a basis for whole loan
bids by the purchasers of our mortgage loans.
Standard & Poors updated their LEVELs model to
increase the expected default frequency of the 1st lien
loans with a piggy-back 2nd lien (i.e., 80/20
type loans) as well as a slowing of expected future prepayment
speeds. We estimate that the combined impact of these changes
will lower our whole loan sale prices by approximately
10 basis points.
Loan origination or acquisition cost We also
monitor the cost to originate our loans. We typically refer to
this as our loan acquisition costs. Loan acquisition costs are
comprised of the following: fees paid to wholesale brokers and
correspondents, plus 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, certain non-recurring
expenses or 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, we began
implementing in 2005 cost-cutting measures designed to reduce
our loan acquisition costs. The cost-cutting measures we
implemented during 2005 and continuing through the first six
months of 2006, 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, resulted in a significant
reduction of our loan acquisition costs for the three and six
months ended June 30, 2006.
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.
|
|
|
Loan Originations and Purchases |
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. In connection
with the loan origination platform acquired from RBC Mortgage,
we also originate Alt-A, jumbo and
conforming mortgages, as well as home equity lines
of credit. As a result of the integration of our non-prime and
prime/
39
Alt-A loan origination
platforms, both our Wholesale and Retail Divisions offer
non-prime, prime and Alt-A products.
As of June 30, 2006, our Wholesale Division operated
through 33 regional operating centers in 19 states and
originated or purchased $25.2 billion in loans during the
six months ended June 30, 2006. Of the $25.2 billion
in mortgage loans originated or purchased, $23.6 billion,
or 93.7%, were non-prime loans and $1.6 billion, or 6.3%,
were prime or Alt-A loans. Our Retail Division, which has a
Builder/ Realtor channel and a Consumer Direct channel,
originated loans through 246 sales offices in 35 states,
including our centralized telemarketing unit, and originated
$4.4 billion in mortgage loans during the six months ended
June 30, 2006. Of the $4.4 billion in loans
originated, $2.6 billion, or 59.1%, was originated through
our Builder/ Realtor channel and $1.8 billion, or 40.9%,
was originated through our Consumer Direct channel. In addition,
$2.0 billion, or 45.1%, of total retail originations were
non-prime loans and $2.4 billion, or 54.9%, were prime or
Alt-A loans. As of June 30, 2005, our Wholesale Division
operated through 27 regional operating centers in 17 states
and originated or purchased $21.2 billion in loans during
the six months ended June 30, 2005. Our Retail Division
originated loans through 76 sales offices in 30 states,
including our centralized telemarketing unit, and originated
$2.5 billion in loans during the six months ended
June 30, 2005, all of which was originated through our
Consumer Direct channel. We originated or purchased solely
non-prime loans during the six months ended June 30, 2005.
During the six months ended June 30, 2006, approximately
$13.1 billion, or 44.1%, of our total 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 $13.2 billion, or 44.8%, of our
total mortgage loan production consisted of home purchase
finance loans. The remainder of our loan production,
$3.3 billion, or 11.1%, consisted of rate and term
transactions, which are transactions in which borrowers
refinanced their existing mortgages to obtain a better interest
rate, a lower payment or different loan maturity. For the six
months ended June 30, 2005, total originations consisted of
$12.5 billion, or 52.5%, of cash-out refinancings,
$9.2 billion, or 38.9%, of home purchase financings, and
$2.0 billion, or 8.6%, of rate and term refinance
transactions. Over the last 12 months, we have made a
concerted effort to increase our home purchase business. These
efforts, coupled with market and economic conditions and the
addition of the RBC Mortgage loan origination platform, has
enabled us to decrease the percentage of
cash-out refinancings
as compared to home purchase finance loans.
During the six months ended June 30, 2006, originations of
interest-only mortgage loans totaled $5.0 billion, or
16.7%, of total originations. Interest-only originations during
the six months ended June 30, 2005 totaled
$7.8 billion, or 33.0%, of total originations. In the
latter part of 2005, we began implementing strategies to
maintain the mortgage loan production volume of our
interest-only product at a level no greater than 25% of total
mortgage loan production in order to increase our secondary
market execution. These strategies include pricing increases and
underwriting changes for the interest-only product and the
introduction of new products, including a
40-year mortgage
product.
For the six months ended June 30, 2006, originations of
pay-option loans totaled $161.1 million. We did not
originate this type of loans for the six months ended
June 30, 2005. Pay-option loans differ from
traditional monthly-amortizing loans by providing
borrowers with the option to make fully amortizing
interest-only, or negative-amortizing payments. We
view these loans as a profitable product that does not create
disproportionate credit risk. Our pay-option loan portfolio has
a high initial loan quality, with original average FICO scores
(a measure of credit rating) of 711 and combined loan-to-values
of 75.1%, respectively. We originate pay-option loans only to
borrowers who can qualify at the loans fully indexed
interest rates. This high credit quality notwithstanding, lower
initial payment requirements of pay-option loans may increase
the credit risk inherent in our loans held for sale. This is
because when the required monthly payments for pay-option loans
eventually increase, borrowers may be less able to pay the
increased amounts and, therefore, more likely to default on the
loan, than a borrower using a more traditional
monthly-amortizing loan.
40
For the six months ended June 30, 2006, full documentation
loans as a percentage of total mortgage loan originations were
$16.4 billion, or 55.5%, limited documentation loans were
$627.7 million, or 2.1%, and stated documentation loans
were $12.5 billion, or 42.4%. Full documentation loans
generally require applicants to submit two written forms of
verification of stable income for at least twelve months.
Limited documentation loans generally require applicants to
submit twelve 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 six months ended June 30, 2005, full
documentation loans as a percentage of total mortgage loan
originations were $12.3 billion, or 52.1%, limited
documentation loans were $923.0 million, or 3.9%, and
stated documentation loans were $10.4 billion, or 44.0%.
Generally, economic and market conditions, including product
introductions and offerings by competitors, influence our
product mix. The documentation that we require of our borrowers
is affected by these fluctuations in product mix. We designed
our underwriting standards and quality assurance programs to
ensure 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, | |
|
For the Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
Prime & | |
|
|
|
|
|
|
|
Prime & | |
|
|
|
|
|
|
Non-Prime | |
|
Alt-A | |
|
Total | |
|
% | |
|
Non-Prime | |
|
% | |
|
Non-Prime | |
|
Alt-A | |
|
Total | |
|
% | |
|
Non-Prime | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Wholesale
|
|
$ |
13,006,175 |
|
|
|
834,767 |
|
|
|
13,840,942 |
|
|
|
85.5 |
|
|
|
12,131,216 |
|
|
|
90.2 |
|
|
|
23,619,807 |
|
|
|
1,581,758 |
|
|
|
25,201,565 |
|
|
|
85.1 |
|
|
|
21,204,705 |
|
|
|
89.5 |
|
Retail
|
|
|
1,063,105 |
|
|
|
1,287,618 |
|
|
|
2,350,723 |
|
|
|
14.5 |
|
|
|
1,312,954 |
|
|
|
9.8 |
|
|
|
1,990,529 |
|
|
|
2,418,663 |
|
|
|
4,409,192 |
|
|
|
14.9 |
|
|
|
2,491,032 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
14,069,280 |
|
|
|
2,122,385 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
25,610,336 |
|
|
|
4,000,421 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15-30 year
|
|
|
2,367,738 |
|
|
|
1,402,886 |
|
|
|
3,770,624 |
|
|
|
23.3 |
|
|
|
3,032,998 |
|
|
|
22.6 |
|
|
|
4,149,196 |
|
|
|
2,565,732 |
|
|
|
6,714,928 |
|
|
|
22.7 |
|
|
|
5,359,577 |
|
|
|
22.6 |
|
|
Interest-Only
|
|
|
92,735 |
|
|
|
294,768 |
|
|
|
387,503 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
154,403 |
|
|
|
627,652 |
|
|
|
782,055 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
845,267 |
|
|
|
84,998 |
|
|
|
930,265 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
1,339,034 |
|
|
|
136,240 |
|
|
|
1,475,274 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Fixed
|
|
|
3,305,740 |
|
|
|
1,782,652 |
|
|
|
5,088,392 |
|
|
|
31.4 |
|
|
|
3,032,998 |
|
|
|
22.6 |
|
|
|
5,642,633 |
|
|
|
3,329,624 |
|
|
|
8,972,257 |
|
|
|
30.3 |
|
|
|
5,359,577 |
|
|
|
22.6 |
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid 30 year(1)
|
|
|
2,959,109 |
|
|
|
163,747 |
|
|
|
3,122,856 |
|
|
|
19.3 |
|
|
|
5,331,874 |
|
|
|
39.6 |
|
|
|
5,923,005 |
|
|
|
358,712 |
|
|
|
6,281,717 |
|
|
|
21.2 |
|
|
|
10,515,293 |
|
|
|
44.4 |
|
|
Interest-Only
|
|
|
2,384,712 |
|
|
|
157,113 |
|
|
|
2,541,825 |
|
|
|
15.7 |
|
|
|
5,079,298 |
|
|
|
37.8 |
|
|
|
3,890,353 |
|
|
|
278,197 |
|
|
|
4,168,550 |
|
|
|
14.1 |
|
|
|
7,820,867 |
|
|
|
33.0 |
|
|
Hybrid 40 year(1)
|
|
|
5,419,719 |
|
|
|
|
|
|
|
5,419,719 |
|
|
|
33.5 |
|
|
|
|
|
|
|
|
|
|
|
10,154,345 |
|
|
|
|
|
|
|
10,154,345 |
|
|
|
34.3 |
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
|
|
|
|
18,873 |
|
|
|
18,873 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,888 |
|
|
|
33,888 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total ARM
|
|
|
10,763,540 |
|
|
|
339,733 |
|
|
|
11,103,273 |
|
|
|
68.6 |
|
|
|
10,411,172 |
|
|
|
77.4 |
|
|
|
19,967,703 |
|
|
|
670,797 |
|
|
|
20,638,500 |
|
|
|
69.7 |
|
|
|
18,336,160 |
|
|
|
77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
14,069,280 |
|
|
|
2,122,385 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
25,610,336 |
|
|
|
4,000,421 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
5,986,237 |
|
|
|
1,366,360 |
|
|
|
7,352,597 |
|
|
|
45.4 |
|
|
|
5,602,698 |
|
|
|
41.7 |
|
|
|
10,751,093 |
|
|
|
2,505,775 |
|
|
|
13,256,868 |
|
|
|
44.8 |
|
|
|
9,226,655 |
|
|
|
38.9 |
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
6,846,819 |
|
|
|
208,497 |
|
|
|
7,055,316 |
|
|
|
43.6 |
|
|
|
6,695,743 |
|
|
|
49.8 |
|
|
|
12,645,446 |
|
|
|
412,295 |
|
|
|
13,057,741 |
|
|
|
44.1 |
|
|
|
12,441,653 |
|
|
|
52.5 |
|
|
Rate/term refinances
|
|
|
1,236,224 |
|
|
|
547,528 |
|
|
|
1,783,752 |
|
|
|
11.0 |
|
|
|
1,145,729 |
|
|
|
8.5 |
|
|
|
2,213,797 |
|
|
|
1,082,351 |
|
|
|
3,296,148 |
|
|
|
11.1 |
|
|
|
2,027,429 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
14,069,280 |
|
|
|
2,122,385 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
25,610,336 |
|
|
|
4,000,421 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
7,801,220 |
|
|
|
1,413,429 |
|
|
|
9,214,649 |
|
|
|
56.9 |
|
|
|
7,150,722 |
|
|
|
53.2 |
|
|
|
13,877,374 |
|
|
|
2,568,937 |
|
|
|
16,446,311 |
|
|
|
55.5 |
|
|
|
12,349,786 |
|
|
|
52.1 |
|
Limited documentation
|
|
|
326,602 |
|
|
|
|
|
|
|
326,602 |
|
|
|
2.0 |
|
|
|
353,661 |
|
|
|
2.6 |
|
|
|
627,725 |
|
|
|
|
|
|
|
627,725 |
|
|
|
2.1 |
|
|
|
922,591 |
|
|
|
3.9 |
|
Stated documentation
|
|
|
5,941,458 |
|
|
|
708,956 |
|
|
|
6,650,414 |
|
|
|
41.1 |
|
|
|
5,939,787 |
|
|
|
44.2 |
|
|
|
11,105,237 |
|
|
|
1,431,484 |
|
|
|
12,536,721 |
|
|
|
42.4 |
|
|
|
10,423,360 |
|
|
|
44.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$ |
14,069,280 |
|
|
|
2,122,385 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
25,610,336 |
|
|
|
4,000,421 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, | |
|
For the Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
Prime & | |
|
|
|
|
|
|
|
Prime & | |
|
|
|
|
|
|
Non-Prime | |
|
Alt-A | |
|
Total | |
|
% | |
|
Non-Prime | |
|
% | |
|
Non-Prime | |
|
Alt-A | |
|
Total | |
|
% | |
|
Non-Prime | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Average principal balance of loans originated and purchased
|
|
$ |
185 |
|
|
|
176 |
|
|
|
183 |
|
|
|
|
|
|
|
180 |
|
|
|
|
|
|
|
184 |
|
|
|
175 |
|
|
|
183 |
|
|
|
|
|
|
|
180 |
|
|
|
|
|
Weighted average FICO score of loans originated and purchased
|
|
|
623 |
|
|
|
707 |
|
|
|
634 |
|
|
|
|
|
|
|
632 |
|
|
|
|
|
|
|
622 |
|
|
|
708 |
|
|
|
634 |
|
|
|
|
|
|
|
630 |
|
|
|
|
|
Percent of loans secured by first mortgages
|
|
|
93.3 |
% |
|
|
92.7 |
% |
|
|
93.3 |
% |
|
|
|
|
|
|
93.8 |
% |
|
|
|
|
|
|
93.5 |
% |
|
|
92.6 |
% |
|
|
93.4 |
% |
|
|
|
|
|
|
94.5 |
% |
|
|
|
|
Weighted average loan-to-value ratio(2)
|
|
|
81.5 |
% |
|
|
78.3 |
% |
|
|
81.1 |
% |
|
|
|
|
|
|
81.5 |
% |
|
|
|
|
|
|
81.5 |
% |
|
|
78.1 |
% |
|
|
81.0 |
% |
|
|
|
|
|
|
81.3 |
% |
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
8.8 |
% |
|
|
6.9 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.8 |
% |
|
|
|
|
|
|
8.9 |
% |
|
|
6.8 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
7.7 |
% |
|
|
|
|
|
Adjustable-rate mortgages initial rate
|
|
|
8.3 |
% |
|
|
5.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
|
|
|
|
8.3 |
% |
|
|
5.5 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
|
|
|
Adjustable-rate mortgages margin over index
|
|
|
6.2 |
% |
|
|
2.0 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
|
|
|
|
6.2 |
% |
|
|
2.1 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
|
|
|
|
Total originations and purchases
|
|
|
8.5 |
% |
|
|
6.7 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.2 |
% |
|
|
|
|
|
|
8.5 |
% |
|
|
6.6 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.2 |
% |
|
|
|
|
Percentage of loans originated in AAA,
AA and A+ credit grades
|
|
|
87.8 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
90.3 |
% |
|
|
|
|
|
|
87.7 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
89.0 |
% |
|
|
|
|
Percentage of loans originated in bottom two credit grades
|
|
|
2.9 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
2.5 |
% |
|
|
|
|
|
|
(1) |
Majority of hybrid adjustable-rate mortgages have a fixed rate
for 2 or 3 years. |
|
(2) |
Weighted average loan-to-value (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 for financial
reporting purposes. In a whole loan sale, we recognize and
receive a cash gain upon the sale. In a securitization
structured as a sale, 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 most of our
securitizations as financings for financial reporting purposes
rather than as sales. Such structures do not result in gain on
sale at the time of the
42
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 June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Amount | |
|
% of Sales | |
|
Amount | |
|
% of Sales | |
|
Amount | |
|
% of Sales | |
|
Amount | |
|
% of Sales | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Non-prime whole loan sales
|
|
$ |
9,856,143 |
|
|
|
74.6 |
% |
|
|
5,933,841 |
|
|
|
46.0 |
% |
|
|
20,976,871 |
|
|
|
74.4 |
% |
|
|
12,385,139 |
|
|
|
55.3 |
% |
Prime and Alt-A whole loan sales
|
|
|
1,220,260 |
|
|
|
9.3 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
3,340,060 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
0.0 |
% |
Securitizations structured as sales
|
|
|
|
|
|
|
0.0 |
% |
|
|
989,221 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
989,221 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium sales
|
|
|
11,076,403 |
|
|
|
83.9 |
% |
|
|
6,923,062 |
|
|
|
53.7 |
% |
|
|
24,316,931 |
|
|
|
86.2 |
% |
|
|
13,374,360 |
|
|
|
59.7 |
% |
Discounted whole loan sales
|
|
|
415,077 |
|
|
|
3.1 |
% |
|
|
80,878 |
|
|
|
0.6 |
% |
|
|
506,444 |
|
|
|
1.8 |
% |
|
|
146,444 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
11,491,480 |
|
|
|
87.0 |
% |
|
|
7,003,940 |
|
|
|
54.3 |
% |
|
|
24,823,375 |
|
|
|
88.0 |
% |
|
|
13,520,804 |
|
|
|
60.4 |
% |
Securitizations structured as financings
|
|
|
1,714,853 |
|
|
|
13.0 |
% |
|
|
5,890,404 |
|
|
|
45.7 |
% |
|
|
3,393,531 |
|
|
|
12.0 |
% |
|
|
8,881,728 |
|
|
|
39.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secondary market transactions
|
|
$ |
13,206,333 |
|
|
|
100.0 |
% |
|
|
12,894,344 |
|
|
|
100.0 |
% |
|
|
28,216,906 |
|
|
|
100.0 |
% |
|
|
22,402,532 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2006, non-prime
whole loan sales accounted for $9.9 billion, or 74.6%, of
our total secondary market transactions. The weighted average
premium, including certain hedge gains and premiums received for
servicing rights, for the three months ended June 30, 2006,
received on non-prime whole loans sales was 2.10% of the
original principal balance of the loans sold. For the same
period in 2005, non-prime whole loan sales and securitizations
structured as sales accounted for $6.9 billion, or 53.7%,
of our total secondary market transactions and the weighted
average premium, including certain hedge gains and premiums
received for servicing rights, received was 2.28%. During the
three months ended June 30, 2006, prime and Alt-A whole
loan sales accounted for $1.2 billion, or 9.3%, of our
secondary market transactions. The weighted average premium
received on prime and Alt-A whole loan sales was 1.32% of the
original principal balance of the loans sold, including certain
hedge gains and pair-off fees. Since we did not begin
originating prime or Alt-A loans until September 2005, we did
not have any prime or Alt-A whole loan sales during the second
quarter of 2005.
During the six months ended June 30, 2006, non-prime whole
loan sales accounted for $21.0 billion, or 74.4%, of our
total secondary market transactions. The weighted average
premium, including certain hedge gains and premiums received for
servicing rights, for the six months ended June 30, 2006,
received on non-prime whole loan sales was 1.88% of the original
principal balance of the loans sold. For the same period in
2005, non-prime whole loan sales and securitizations structured
as sales accounted for $13.4 billion, or 59.7%, of our
total secondary market transactions and the weighted average
premium, including certain hedge gains and premium, received for
servicing rights, received was 2.63%. The increase in whole loan
sales for the six months ended June 30, 2006 compared to
the six months ended June 30, 2005, was due to the
deployment of capital by executing a greater amount of
securitizations structured as financings during 2005 to build
our REIT portfolio. During the six months ended June 30,
2006, prime and Alt-A whole loan sales accounted for
$3.3 billion, or 11.8% of our secondary market
transactions. The weighted average premium received on prime and
Alt-A whole loan sales was 1.07% of the original principal
balance of the loans sold, including certain hedge gains and
pair-off fees. As noted above, there were no prime or Alt-A
whole loan sales during the first half of 2005.
43
As short-term interest rates have risen faster than long-term
interest rates (a flatter yield curve), the prices we received
for our loans began to decline. Further, as a result of
competitive pressures, we have not previously raised the
interest rates we charge our borrowers to the same degree that
short-term rates have increased, thereby reducing gain on sale
margins in the three and six months ended June 30, 2006
compared to the same periods in 2005. However, we have seen an
improvement in our gain on sale margins during the three months
ended June 30, 2006 compared to the fourth quarter of 2005
and first quarter of 2006 primarily as a result of a higher
weighted average coupon on our loans, a more favorable product
mix and a stronger secondary market appetite for our loans.
During the three and six months ended June 30, 2006, we
sold $415.1 million and $506.4 million, respectively,
in mortgage loans at a discount to their outstanding principal
balance. Included in discounted loan sales for the three and six
months ended June 30, 2006 is approximately
$300 million in second lien mortgage loans that were sold
at a slight discount. There were no such sales for the same
period in 2005. The remaining $115 million and
$206 million of discounted loan sales loans, for the three
and six months ended June 30, 2006 consisted of repurchased
loans, loans with documentation defects or loans that whole loan
buyers rejected because of certain characteristics. For the
three and six months ended June 30, 2005, discounted loan
sales totaled $80.9 million and $146.4 million,
respectively. As a percentage of secondary market transactions,
when adjusting for the second lien transaction, discounted sales
increased from 0.6% for the three months ended June 30,
2005 to 0.9% for the three months ended June 30, 2006.
Discounted loan sales remained unchanged at 0.7% for the six
months ended June 30, 2005 and 2006. The severity of the
discount decreased slightly from 5.5% for the three months ended
June 30, 2005 to 5.0% for the three months ended
June 30, 2006. The severity of the discount increased from
3.9% for the six months ended June 30, 2005 to 5.3% for the
six months ended June 30, 2006 due to a less favorable
secondary market for these types of loans.
The table below illustrates the composition of discounted loan
sales for each of the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Principal | |
|
Discount | |
|
Principal | |
|
Discount | |
|
Principal | |
|
Discount | |
|
Principal | |
|
Discount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Repurchases from whole loan investors
|
|
$ |
45,911 |
|
|
|
(27.6 |
)% |
|
|
48,038 |
|
|
|
(9.4 |
)% |
|
|
60,377 |
|
|
|
(26.1 |
)% |
|
|
58,372 |
|
|
|
(10.6 |
)% |
|
Other discounted sales
|
|
|
369,166 |
|
|
|
(2.2 |
)% |
|
|
32,840 |
|
|
|
0.1 |
% |
|
|
446,067 |
|
|
|
(2.5 |
)% |
|
|
88,072 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discounted sales
|
|
$ |
415,077 |
|
|
|
(5.0 |
)% |
|
|
80,878 |
|
|
|
(5.5 |
)% |
|
|
506,444 |
|
|
|
(5.3 |
)% |
|
|
146,444 |
|
|
|
(3.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations Structured as Financings |
During the three and six months ended June 30, 2006, we
completed two securitizations structured as financings totaling
$1.7 billion, and four securitizations structured as
financings totaling $3.4 billion, respectively. The
portfolio-based accounting treatment for
securitizations structured as financings and recorded on-balance
sheet is designed to more closely match the recognition of
income with the receipt of cash payments. Because we do not
record gain on sale revenue in the period in which the
securitization structured as a financing occurs, the use of such
portfolio-based accounting structures will result in lower
income in the period in which the securitization occurs than
would a traditional securitization structured as a sale.
However, the recognition of income as interest payments are
received on the underlying mortgage loans is expected to result
in higher income recognition in future periods than would a
securitization structured as a sale. During the three months
ended June 30, 2005, we completed two securitizations
totaling $5.9 billion, and during the six months ended
June 30, 2005, we completed three securitizations totaling
$8.9 billion, which we structured as financings. The higher
amount of securitizations structured as financings in 2005 was
the result of our strategy to build our REIT portfolio.
44
|
|
|
Securitizations Structured as Sales |
During the six months ended June 30, 2006, we did not
complete any securitizations structured as sales. During the six
months ended June 30, 2005, we completed a
$989.2 million securitization structured as a sale
resulting in gain on sale of $21.2 million. In addition, we
continue to hold residual interests on our balance sheet related
to securitizations structured as sales closed in previous
periods. The mortgage servicing rights related to the
securitizations structured as sales are typically sold within 30
to 60 days after securitization. Purchasers of
securitization bonds and certificates have no recourse against
our other assets, other than the assets of the trust. The value
of our retained interests is subject to credit, prepayment and
interest rate risk on the transferred financial assets.
At the closing of a securitization structured as a sale, we add
to our balance sheet the residual interest retained based on our
calculation of the present value of estimated future cash flows
that we will receive. The residual interest we record consists
of the over-collateralization, or OC, account and the net
interest receivable, or NIR. On a combined basis, these are
referred to as the residual interests. Residuals are
subsequently carried at estimated fair value and accounted for
as held-for-trading securities as permitted by
SFAS 140. We are not aware of an active market for the
purchase or sale of NIR or OC assets and, accordingly, determine
the estimated fair value of the NIR and OC by discounting the
expected cash flows released from the transactions (the cash out
method) using a discount rate commensurate with the risks
involved. We currently utilize a discount rate of 12.0% for
estimated cash flows released from mortgage loan securitizations
and 14.0% for estimated cash flows released from net interest
margin securities, or NIMS, transactions.
On a quarterly basis, we review the underlying assumptions to
value each residual interest and adjust the carrying value of
the securities based on actual experience and industry trends.
To determine the residual asset value, we project the cash flow
for each security. To project cash flow, we use base assumptions
for the constant prepayment rate, or CPR, and losses for each
product type based on historical performance. We update each
security to reflect actual performance to date and we adjust
base assumptions for CPR and losses based on historical
experience to project performance of the security from that date
forward. Then, we use the LIBOR forward curve to project future
interest rates and compute cash flow projections for each
security. Next, we discount the projected cash flows at a rate
commensurate with the risk involved.
During the six months ended June 30, 2006 and 2005, as a
result of our quarterly evaluations of the residual interests,
we recorded a $38.8 million and a $4.4 million
decrease in the fair value of the residual assets, respectively.
These adjustments are recorded as a reduction to gain on sale.
These fair value adjustments represent the change in the
estimated present value of future cash flows from the residual
interests. Changes in the prepayment assumptions on certain
loans underlying our residual interests resulted in a reduction
in fair value.
45
Non-Performing Assets
Non-performing assets consist of loans which have ceased
accruing interest. Loans are placed on
non-accrual status when
any portion of principal or interest is 90 days past due,
or earlier when concern exists as to the ultimate collection of
principal or interest. We expect the amount of mortgage loans on
non-accrual status will change, from time to time, depending on
a number of factors, including the growth or decline of the
portfolio, the maturity of the portfolio, the number and dollar
value of problem loans that are recognized and resolved through
collections, the amount of loan sales and the amount of
charge-offs. The performance of any mortgage loan can be
affected by external factors, such as economic and employment
conditions, or factors related to a particular borrower. The
table below shows the comparative data for the dates shown of
non-accrual loans and delinquent loans for our mortgage loans
held for sale and mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
Principal | |
|
Principal | |
|
Principal | |
|
Principal | |
|
|
| |
|
| |
|
| |
|
| |
Mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
15,021,237 |
|
|
|
93.85 |
% |
|
$ |
15,231,245 |
|
|
|
93.95 |
% |
|
|
Delinquent 30-60 days (excluding non-accrual)
|
|
|
273,919 |
|
|
|
1.71 |
% |
|
|
314,416 |
|
|
|
1.94 |
% |
|
|
Non-Accrual
|
|
|
710,301 |
|
|
|
4.44 |
% |
|
|
666,563 |
|
|
|
4.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,005,457 |
|
|
|
100.00 |
% |
|
$ |
16,212,224 |
|
|
|
100.00 |
% |
Allowance for losses on mortgage loans held for investment:
|
|
$ |
209,889 |
|
|
|
1.31 |
% |
|
$ |
198,131 |
|
|
|
1.22 |
% |
|
Charge-offs(1)
|
|
|
48,392 |
|
|
|
0.30 |
% |
|
|
32,329 |
|
|
|
0.20 |
% |
Mortgage Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
9,044,054 |
|
|
|
97.58 |
% |
|
$ |
7,699,132 |
|
|
|
98.51 |
% |
|
|
Delinquent 30-60 days (excluding non-accrual)
|
|
|
50,514 |
|
|
|
0.55 |
% |
|
|
35,891 |
|
|
|
0.46 |
% |
|
|
Non-Accrual
|
|
|
173,322 |
|
|
|
1.87 |
% |
|
|
80,179 |
|
|
|
1.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,267,890 |
|
|
|
100.00 |
% |
|
$ |
7,815,202 |
|
|
|
100.00 |
% |
|
|
(1) |
Represents charge-offs for the six-month period ending
June 30, 2006 and the twelve-month period ending
December 31, 2005, respectively. |
Critical Accounting Policies
We have established various accounting policies that govern the
application of accounting principles generally accepted in the
United States in the preparation of our financial statements.
Certain accounting policies require us to make significant
estimates and assumptions that may have a material impact on
certain assets and liabilities or our results of operations, and
we consider these to be critical accounting policies. The
estimates and assumptions we use are based on historical
experience and other factors that we believe to be reasonable
under the circumstances. Actual results could differ materially
from these estimates and assumptions, which could have a
material impact on the carrying value of assets and liabilities
and our results of operations.
We believe the following are critical accounting policies that
require the most significant estimates and assumptions that are
subject to significant change in the preparation of our
consolidated financial statements. These estimates and
assumptions include, but are not limited to, the interest rate
environment, the economic environment, secondary market
conditions, and the performance of the loans underlying our
residual assets and mortgage loans held for investment.
46
|
|
|
Allowance for Losses on Mortgage Loans Held for Investment |
For our mortgage loans held for investment, we establish an
allowance for loan losses based on our estimate of losses
inherent and probable as of the balance sheet date. We charge
off uncollectible loans at the time of liquidation. We evaluate
the adequacy of this allowance each quarter, giving
consideration to factors such as the current performance of the
loans, credit characteristics of the portfolio, the value of the
underlying collateral and the general economic environment. In
order to estimate an appropriate allowance for losses on loans
held for investment, we estimate losses using static
pooling, which stratifies the loans held for investment
into separately identified vintage pools. Using historic
experience and taking into consideration the factors above, we
estimate an allowance for credit losses, which we believe is
adequate for known and inherent losses in the portfolio of
mortgage loans held for investment. We charge the loss provision
to our consolidated statement of income. We charge losses
incurred on mortgage loans held for investment to the allowance.
The allowance for losses on mortgage loans held for investment,
as a percentage of total mortgage loans held for investment was
approximately 1.31% of the unpaid principal balance of the loans
as of June 30, 2006 compared to 1.22% as of
December 31, 2005.
|
|
|
Residual Interests in Securitizations |
Residual interests in securitizations, or Residuals, are
recorded as a result of the sale of loans through
securitizations that we structure as sales rather than
financings, also referred to as off-balance sheet
securitizations. Residuals include the
over-collateralization account, or OC Account, and the net
interest receivable, or NIR, described below. We may also sell
residual interests in securitizations through NIMS.
We generally structures loan securitizations as follows: first,
we sell a portfolio of mortgage loans to a special purpose
entity, or SPE, that has been established for the limited
purpose of buying and reselling mortgage loans. The SPE then
transfers the same mortgage loans to a Real Estate Mortgage
Investment Conduit or Owners Trust (the REMIC or
Trust), which is a qualifying special purpose entity
(QSPE) as defined under Statement of Financial
Accounting Standards No. 140 (SFAS 140).
The Trust, in turn, issues interest-bearing asset-backed
securities (the Certificates) generally in an amount
equal to the aggregate principal balance of the mortgage loans.
The Certificates are typically sold at face value and without
recourse except that we provide representations and warranties
customary to the mortgage banking industry to the Trust. One or
more investors purchase these Certificates for cash. The Trust
uses the cash proceeds to pay us the cash portion of the
purchase price for the mortgage loans. The Trust also issues a
certificate to us representing a residual interest in the
payments on the securitized loans. In addition, we may provide a
credit enhancement for the benefit of the investors in the form
of additional collateral (Over-collateralization
Account or (the OC Account) held by the Trust.
The servicing agreements typically require that the OC Account
be maintained at certain levels.
At the closing of each off-balance sheet securitization, we
remove from our consolidated balance sheet the mortgage loans
held for sale and adds to our consolidated balance sheet
(i) the cash received, (ii) the estimated fair value
of the interest in the mortgage loans retained from the
securitizations (the Residuals), which consist of (a) the
OC Account and (b) the net interest receivable
(NIR), and (iii) the estimated fair value of
the servicing asset. The NIR represents the discounted estimated
cash flows that we will receive in the future. The excess of the
cash received and the assets retained over the carrying value of
the loans sold, less transaction costs, equals the net gain on
sale of mortgage loans recorded by us.
NIMS transactions are generally structured as follows: first, we
sell or contributes the Residuals to a SPE that it has
established for the limited purpose of receiving and selling
asset-backed residual
interests-in-securitization
certificates. Next, the SPE transfers the Residuals to the Trust
and the Trust, which is a QSPE as defined under SFAS 140,
in turn issues interest-bearing asset-backed securities (the
Bonds and Certificates). We sell the Residuals
without recourse except that it provides representations and
warranties customary to the mortgage banking industry to the
Trust. One or more investors purchase the Bonds and Certificates
and the proceeds from the sale of the Bonds and Certificates,
along with a residual interest
47
certificate that is subordinate to the Bonds and Certificates,
represent the consideration received by us for the sale of the
Residuals.
At closing of each NIMS transaction, we remove from our
consolidated balance sheet the carrying value of the Residuals
sold and we add to our consolidated balance sheet (i) the
cash received, and (ii) the estimated fair value of the
portion of the Residuals retained, which consists of a NIR. The
excess of the cash received and assets retained over the
carrying value of the Residuals sold, less transaction costs,
equals the net gain or loss on the sale of Residuals recorded by
us.
We allocate our basis in the mortgage loans and Residuals
between the portion of the mortgage loans and Residuals sold
through the Certificates and the portion retained (the Residuals
and servicing assets) based on the relative fair values of those
portions on the date of sale. We may recognize gains or losses
attributable to the changes in the fair value of the Residuals,
which are recorded at estimated fair value and accounted for as
held-for-trading securities as permitted by
SFAS 140. We are not aware of an active market for the
purchase or sale of Residuals and, accordingly, we determine the
estimated fair value of the Residuals by discounting the
expected cash flows released from the OC Account (the cash out
method) using a discount rate commensurate with the risks
involved. We utilize a discount rate of 12.0% on the estimated
cash flows released from the OC Account to value the Residuals
through securitization transactions and 14.0% on the estimated
cash flows released from the Trust to value Residuals through
NIMS transactions. We release substantially all servicing rights
relative to our residual interests in securitizations.
We are entitled to the cash flows from the Residuals that
represent collections on the mortgage loans in excess of the
amounts required to pay the Certificates principal and
interest, the servicing fees and certain other fees, such as
trustee and custodial fees. At the end of each collection
period, the aggregate cash collections from the mortgage loans
are allocated first to the base servicing fees and certain other
fees, such as trustee and custodial fees, for the period, then
to the Certificate holders for interest at the pass-through rate
on the Certificates plus principal as defined in the servicing
agreements. If the amount of cash required for the above
allocations exceeds the amount collected during the collection
period, the shortfall is drawn from the OC Account. If the cash
collected during the period exceeds the amount necessary for the
above allocation, and there is no shortfall in the related OC
Account, the excess is released to us. If the OC Account balance
is not at the required credit enhancement level, the excess cash
collected is retained in the OC Account until the specified
level is achieved. We are restricted from using the cash and
collateral in the OC Account. Pursuant to certain servicing
agreements, we may use cash held in the OC Account to make
accelerated principal paydowns on the Certificates to create
additional excess collateral in the OC Account, which is held by
the Trusts on our behalf as the Residual holder. The specified
credit enhancement levels are defined in these servicing
agreements as the OC Account balance expressed generally as a
percentage of the current collateral principal balance. For NIMS
transactions, we receive cash flows once the holders of the
Bonds and Certificates created in the NIMS transaction are fully
paid.
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. In determining the
value of the residuals, we estimate the future rate of
prepayments, prepayment penalties that we will receive,
delinquencies, defaults and default loss severity as they affect
the amount and timing of the estimated cash flows. We estimate
average cumulative losses as a percentage of the original
principal balance of the mortgage loans of 1.87% to 5.02% for
adjustable-rate securities and 1.48% to 5.67% for fixed-rate
securities. We base 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 3.72% as of June 30, 2006. We estimate
prepayments by evaluating historical prepayment performance of
our loans and the impact of current trends. We use 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
48
periods). These prepayment curve and default estimates have
resulted in weighted average lives of between 2.25 to
2.63 years for our adjustable-rate securities and 2.26 to
3.51 years for our fixed-rate securities.
During the six months ended June 30, 2006, the
residuals provided us with $0.6 million in cash flow. We
perform 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 three months ended June 30, 2006, we increased
our prepayment rate assumptions based upon actual performance
and made minor adjustments to certain other assumptions,
resulting in a $6.7 million decrease in the fair value for
the quarter that is recorded as a reduction to the gain on sale
of mortgage loans. During the three and six months ended
June 30, 2006, we did not complete any securitizations
structured as sales. During the three months ended June 30,
2005, we completed a $989.2 million securitization
structured as a sale resulting in a gain on sale of
$21.2 million. Our retained interest in this securitization
was $6.2 million.
The bond and certificate holders and their securitization trusts
have no recourse to us for failure of mortgage loan borrowers to
pay when due. Our residuals are subordinate to the bonds and
certificates until the bond and certificate holders are fully
paid.
We are party to various transactions that have an off-balance
sheet component. In connection with our off-balance sheet
securitization transactions, there were $6.2 billion in
loans owned by the off-balance sheet trusts as of June 30,
2006. The trusts have issued bonds secured by these loans. The
bondholders generally do not have recourse to us 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, we have included only our residual interest in these
loans on our balance sheet. The performance of the loans in the
trusts will impact our ability to realize the current estimated
fair value of these residual assets.
|
|
|
Allowance for Repurchase Losses |
The allowance for repurchase losses on loans sold relates to
expenses incurred due to the potential repurchase of loans or
indemnification of losses based on alleged violations of
representations and warranties that are customary to the
business. Generally, repurchases are required within
90 days from the date the loans are sold. Occasionally, we
may repurchase loans after 90 days have elapsed. Provisions
for losses are charged to gain on sale of loans and credited to
the allowance while actual losses are charged to the allowance.
In order to estimate an appropriate allowance for repurchase
losses we use historic experience, taking into consideration
factors such as premiums received on and volume of recent whole
loan sales and the general secondary market and general economic
environment. As of June 30, 2006 and December 31,
2005, the repurchase allowance totaled $14.4 million and
$7.0 million, respectively, and is included in accounts
payable and accrued liabilities on our condensed consolidated
balance sheet. We believe the allowance for repurchase losses is
adequate as of June 30, 2006 and December 31, 2005.
The activity in this allowance for the six months ended
June 30, 2006 is summarized as follows (dollars in
thousands):
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$ |
6,955 |
|
|
Provision for repurchases losses
|
|
|
10,062 |
|
|
Charge-offs, net
|
|
|
(2,594 |
) |
|
|
|
|
|
|
Balance, end of period
|
|
$ |
14,423 |
|
|
|
|
|
We recognize gains or losses resulting from sales or
securitizations of mortgage loans at the date of settlement
based on the difference between the selling price for the loans
sold or securitized and the carrying value of the loans sold.
Such gains and losses may be increased or decreased by the
amount of any servicing-released premiums received. We defer
recognition of non-refundable fees and direct costs associated
with the origination of mortgage loans until the loans are sold.
49
We account for loan sales and securitizations structured as
sales when we surrender control of the loans, to the extent that
we receive consideration other than beneficial interests in the
loans transferred in the exchange. Liabilities and derivatives
incurred or obtained by the transfer of loans are required to be
measured at fair value, if practicable. Also, we measure
servicing assets and other retained interests in the loans by
allocating the previous carrying value between the loans sold
and the interest retained, if any, based on their relative fair
values on the date of transfer.
Commencing in 2004, we have operated so as to qualify as a REIT
for federal income tax purposes and are not generally required
to pay federal and most state income taxes on the income that we
distribute to stockholders if we meet the REIT requirements of
the Internal Revenue Code of 1986, as amended, or the Code.
Also, our 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, we
must recognize income taxes in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for
Income Taxes, or SFAS 109, for our taxable REIT
subsidiaries, or TRS, whose income is fully taxable at regular
corporate rates.
SFAS 109 requires that deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of the
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period
that includes the enactment date.
|
|
|
Estimated REIT Taxable Income |
We are required to distribute at least 90% of our REIT taxable
income to our stockholders in order to comply with the REIT
provisions of the Code. The table below reconciles consolidated
earnings before income taxes reported for Generally Accepted
Accounting Principles (GAAP) to estimated REIT
taxable income for the three and six months ended
June 30, 2006 and 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
Estimated | |
|
Estimated | |
|
Estimated | |
|
Estimated | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
GAAP consolidated earnings before income taxes
|
|
$ |
134,822 |
|
|
|
93,391 |
|
|
|
250,497 |
|
|
|
184,555 |
|
GAAP/ Tax differences in accounting for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRS earnings before income taxes
|
|
|
(82,869 |
) |
|
|
(14,157 |
) |
|
|
(115,238 |
) |
|
|
(40,735 |
) |
|
Provision for loan losses
|
|
|
30,675 |
|
|
|
36,550 |
|
|
|
59,700 |
|
|
|
65,701 |
|
|
Realized loan losses
|
|
|
(17,643 |
) |
|
|
(3,491 |
) |
|
|
(27,296 |
) |
|
|
(4,163 |
) |
|
All other GAAP/ Tax differences, net
|
|
|
16,036 |
|
|
|
8,704 |
|
|
|
16,419 |
|
|
|
3,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income before preferred dividends
|
|
|
81,021 |
|
|
|
120,997 |
|
|
|
184,082 |
|
|
|
209,228 |
|
Preferred dividends
|
|
|
(2,567 |
) |
|
|
(285 |
) |
|
|
(5,133 |
) |
|
|
(285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income available to common shareholders
|
|
$ |
78,454 |
|
|
|
120,712 |
|
|
|
178,949 |
|
|
|
208,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income is a non-GAAP financial measure within the
meaning of Regulation G promulgated by the Securities and
Exchange Commission. The most directly comparable GAAP financial
measure is consolidated pre-tax income as reflected in the
income statement. We believe that the presentation of REIT
taxable income provides useful information to investors due to
the specific distribution requirements to report
50
and pay common share dividends in an amount at least equal to
90% of REIT taxable income each year, or elect to carry the
obligation to make those payments into the next fiscal year
pursuant to elections allowed under the Code. The presentation
of this additional information is not meant to be considered in
isolation or as a substitute for financial results prepared in
accordance with GAAP.
|
|
|
Derivative Instruments Designated as Hedges |
We account for certain Euro Dollar futures and interest rate cap
contracts, designated and documented as hedges, pursuant to the
requirements of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, or SFAS 133. Pursuant to
SFAS 133, these contracts have been designated as hedging
the exposure to variability of cash flows from our 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 cash flow hedge be
reported in other comprehensive income and the ineffective
portion be reported in current earnings.
We are exposed to interest rate risk from the time an interest
rate lock commitment, or IRLC, is made to a residential mortgage
applicant to the time the related mortgage loan is sold. During
this period, we are 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 the fair
value recognized in current period earnings as a component of
gain on sale of mortgage loans. To manage this interest rate
risk, we primarily utilize forward sales commitments for our
mortgage loan originations. The forward sales commitments are
derivatives under SFAS 133 and recorded at fair value with
the changes in fair value recognized in current period earnings
as a component of gain on sale of mortgage loans.
|
|
|
Securitizations Structured as Financings |
Since January 1, 2003, we have completed 18 securitizations
structured as financings under SFAS 140, totalling
$29.4 billion.
These securitizations are structured legally as sales, but for
accounting purposes are treated as financings under
SFAS 140. The securitization trusts do not meet the
qualifying special purpose entity criteria under SFAS 140
and related interpretations due to their ability to enter into
derivative contracts. Additionally, we have the option to
purchase loans from the Trusts at our discretion. Accordingly,
the loans, which we refer to as mortgage loans held for
investment, remain on our balance sheet, retained
interests are not created, and financing for mortgage loans held
for investment replaces the credit facility debt originally
financing the mortgage loans. We record interest income on
securitized loans and interest expense on the bonds issued in
the securitizations over the life of the securitizations.
Deferred debt issuance costs and discount related to the bonds
are amortized on a level yield basis over the estimated life of
the bonds.
Corporate Governance
We strive to maintain an ethical workplace in which the highest
standards of professional conduct are encouraged and practiced.
Accordingly, we would like to highlight the following components
of our corporate governance standards and practices:
|
|
|
The Board of Directors is composed of a majority of independent
directors, who are coordinated by our Lead Independent Director.
The Audit, Governance and Nominating and Compensation Committees
of the Board of Directors are composed exclusively of
independent directors. The Board of Directors (i) reviews
our financial results, policy compliance and strategic direction
on a quarterly basis and (ii) reviews our budget and
strategic plan annually. |
|
|
We have a Code of Business Conduct and Ethics that covers a wide
range of business practices and procedures that apply to all of
our Associates, officers and directors in order to foster the
highest standards of ethics and conduct in all of our business
relationships. In addition, we have a Code of Conduct, with |
51
|
|
|
standards applicable to our Associates and officers, and a Code
of Ethics for Senior Financial Officers applicable to our senior
officers who have financial responsibility or oversight. |
|
|
We have instituted and distributed policies and procedures
designed to encourage any of our Associates or officers to raise
concerns, including through anonymous means, regarding possible
violations of federal fraud or securities laws, which may
involve financial matters, such as accounting, auditing or
financial reporting, with our Corporate Ethics Officer or the
appropriate supervisors, officers or committees of the Board of
Directors. |
|
|
We have approved and implemented an Insider Trading Policy that
prohibits any of our directors, officers or Associates from
buying or selling our stock on the basis of material nonpublic
information or communicating material nonpublic information to
others. |
|
|
We have a formal internal audit function to further the
effective functioning of our internal controls and procedures.
Our internal audit plan is approved annually by the Audit
Committee of the Board of Directors and is based on a formal
risk assessment and is intended to provide management and the
Audit Committee with an effective tool to identify and address
areas of financial or operational concerns and ensure that
appropriate oversight, controls and procedures are in place.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we have completed and will complete annually an evaluation of
our internal control over financial reporting, as described
under the heading Controls and Procedures
Managements Annual Report on Internal Control over
Financial Reporting on page 90 of our Annual Report
on Form 10-K for
the year ended December 31, 2005. |
Our website address is www.ncen.com. We make available free of
charge, under the Investor Relations Financial
Information SEC Filings section of our
website, our annual report on
Form 10-K, our
quarterly reports on
Form 10-Q, our
current reports on
Form 8-K and any
amendments to those reports that we file or furnish pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. You may also find our Code of Business Conduct and Ethics
and Code of Ethics for Senior Financial Officers, as well as our
Corporate Governance Guidelines and the charters of the Audit
Committee, Governance and Nominating Committee and Compensation
Committee of the Board of Directors at our website under the
Investor Relations Corporate Governance
section. These documents are also available in print to anyone
who requests them by writing to us at the following address:
18400 Von Karman, Suite 1000, Irvine, California 92612, or
by phoning us at (949) 224-5745.
Results of Operations
Consolidated net earnings increased 11.0% to $105.5 million
for the three months ended June 30, 2006 from
$95.1 million in the three months ended June 30,
2005. Consolidated net earnings increased 16.4% to
$209.3 million for the six months ended June 30, 2006
from $179.8 million for the six months ended
June 30, 2005. In addition, diluted earnings per share
increased from $1.65 and $3.13 for the three and six months
ended June 30, 2005, respectively, to $1.81 and $3.59 for
the three and six months ended June 30, 2006,
respectively, due to the increase in net earnings as well as a
slight decrease in the weighted average diluted share count.
52
The following table sets forth our results of operations as a
percentage of total net interest income and other operating
income for the periods indicated (dollars in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
|
|
|
|
| |
|
|
Three Months Ended June 30, | |
|
|
|
2005 | |
|
|
| |
|
|
|
| |
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
140,003 |
|
|
|
40.96 |
% |
|
|
202,306 |
|
|
|
70.72 |
% |
|
|
319,792 |
|
|
|
48.93 |
% |
|
|
371,296 |
|
|
|
66.50 |
% |
|
Provision for losses on mortgage loans held for investment
|
|
|
(32,325 |
) |
|
|
(9.46 |
)% |
|
|
(36,875 |
) |
|
|
(12.89 |
)% |
|
|
(60,150 |
) |
|
|
(9.20 |
)% |
|
|
(67,113 |
) |
|
|
(12.02 |
)% |
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
195,160 |
|
|
|
57.10 |
% |
|
|
110,604 |
|
|
|
38.66 |
% |
|
|
324,687 |
|
|
|
49.68 |
% |
|
|
233,556 |
|
|
|
41.83 |
% |
|
Servicing income
|
|
|
14,012 |
|
|
|
4.10 |
% |
|
|
6,631 |
|
|
|
2.32 |
% |
|
|
29,654 |
|
|
|
4.53 |
% |
|
|
13,353 |
|
|
|
2.39 |
% |
|
Other income
|
|
|
24,961 |
|
|
|
7.30 |
% |
|
|
3,398 |
|
|
|
1.19 |
% |
|
|
39,592 |
|
|
|
6.06 |
% |
|
|
7,271 |
|
|
|
1.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and other operating income
|
|
|
341,811 |
|
|
|
100.00 |
% |
|
|
286,064 |
|
|
|
100.00 |
% |
|
|
653,575 |
|
|
|
100.00 |
% |
|
|
558,363 |
|
|
|
100.00 |
% |
Total operating expenses
|
|
|
206,989 |
|
|
|
60.56 |
% |
|
|
192,673 |
|
|
|
67.35 |
% |
|
|
403,078 |
|
|
|
61.67 |
% |
|
|
373,808 |
|
|
|
66.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
134,822 |
|
|
|
39.44 |
% |
|
|
93,391 |
|
|
|
32.65 |
% |
|
|
250,497 |
|
|
|
38.33 |
% |
|
|
184,555 |
|
|
|
33.05 |
% |
|
Income tax expense (benefit)
|
|
|
29,279 |
|
|
|
8.57 |
% |
|
|
(1,688 |
) |
|
|
(0.59 |
)% |
|
|
41,219 |
|
|
|
6.31 |
% |
|
|
4,716 |
|
|
|
0.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
105,543 |
|
|
|
30.87 |
% |
|
|
95,079 |
|
|
|
33.24 |
% |
|
|
209,278 |
|
|
|
32.02 |
% |
|
|
179,839 |
|
|
|
32.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.85 |
|
|
|
|
|
|
|
1.71 |
|
|
|
|
|
|
|
3.67 |
|
|
|
|
|
|
|
3.26 |
|
|
|
|
|
Diluted earnings per share
|
|
$ |
1.81 |
|
|
|
|
|
|
|
1.65 |
|
|
|
|
|
|
|
3.59 |
|
|
|
|
|
|
|
3.13 |
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
55,784,919 |
|
|
|
|
|
|
|
55,376,001 |
|
|
|
|
|
|
|
55,652,977 |
|
|
|
|
|
|
|
55,079,377 |
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
56,935,553 |
|
|
|
|
|
|
|
57,396,098 |
|
|
|
|
|
|
|
56,816,074 |
|
|
|
|
|
|
|
57,331,721 |
|
|
|
|
|
53
Six Months Ended June 30, 2006 Compared to Six Months
Ended June 30, 2005
|
|
|
Originations and Purchases |
The following table sets forth selected information relating to
loan originations and purchases during the periods shown
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2006 | |
|
For the Six Months Ended June 30, 2005 | |
|
|
| |
|
| |
|
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Non-Prime
|
|
$ |
23,619,807 |
|
|
|
1,990,529 |
|
|
|
25,610,336 |
|
|
|
86.5 |
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
Prime & Alt-A
|
|
|
1,581,758 |
|
|
|
2,418,663 |
|
|
|
4,000,421 |
|
|
|
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
25,201,565 |
|
|
|
4,409,192 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15-30 year
|
|
|
4,636,482 |
|
|
|
2,078,446 |
|
|
|
6,714,928 |
|
|
|
22.7 |
|
|
|
4,278,722 |
|
|
|
1,080,855 |
|
|
|
5,359,577 |
|
|
|
22.6 |
|
|
Interest-Only
|
|
|
413,808 |
|
|
|
368,247 |
|
|
|
782,055 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
1,097,918 |
|
|
|
377,356 |
|
|
|
1,475,274 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Fixed
|
|
|
6,148,208 |
|
|
|
2,824,049 |
|
|
|
8,972,257 |
|
|
|
30.3 |
|
|
|
4,278,722 |
|
|
|
1,080,855 |
|
|
|
5,359,577 |
|
|
|
22.6 |
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid-30 year(1)
|
|
|
5,749,257 |
|
|
|
532,460 |
|
|
|
6,281,717 |
|
|
|
21.2 |
|
|
|
9,485,690 |
|
|
|
1,029,603 |
|
|
|
10,515,293 |
|
|
|
44.4 |
|
|
Interest-Only
|
|
|
3,881,838 |
|
|
|
286,712 |
|
|
|
4,168,550 |
|
|
|
14.1 |
|
|
|
7,440,293 |
|
|
|
380,574 |
|
|
|
7,820,867 |
|
|
|
33.0 |
|
|
Hybrid-40 year(1)
|
|
|
9,413,133 |
|
|
|
741,212 |
|
|
|
10,154,345 |
|
|
|
34.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
9,129 |
|
|
|
24,759 |
|
|
|
33,888 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total ARM
|
|
|
19,053,357 |
|
|
|
1,585,143 |
|
|
|
20,638,500 |
|
|
|
69.7 |
|
|
|
16,925,983 |
|
|
|
1,410,177 |
|
|
|
18,336,160 |
|
|
|
77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
25,201,565 |
|
|
|
4,409,192 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
11,215,190 |
|
|
|
2,041,678 |
|
|
|
13,256,868 |
|
|
|
44.8 |
|
|
|
9,097,790 |
|
|
|
128,865 |
|
|
|
9,226,655 |
|
|
|
38.9 |
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
11,539,855 |
|
|
|
1,517,886 |
|
|
|
13,057,741 |
|
|
|
44.1 |
|
|
|
10,465,572 |
|
|
|
1,976,081 |
|
|
|
12,441,653 |
|
|
|
52.5 |
|
|
Rate/term refinances
|
|
|
2,446,520 |
|
|
|
849,628 |
|
|
|
3,296,148 |
|
|
|
11.1 |
|
|
|
1,641,343 |
|
|
|
386,086 |
|
|
|
2,027,429 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
25,201,565 |
|
|
|
4,409,192 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
13,309,386 |
|
|
|
3,136,925 |
|
|
|
16,446,311 |
|
|
|
55.5 |
|
|
|
10,556,976 |
|
|
|
1,792,810 |
|
|
|
12,349,786 |
|
|
|
52.1 |
|
Limited documentation
|
|
|
572,335 |
|
|
|
55,390 |
|
|
|
627,725 |
|
|
|
2.1 |
|
|
|
834,233 |
|
|
|
88,358 |
|
|
|
922,591 |
|
|
|
3.9 |
|
Stated documentation
|
|
|
11,319,844 |
|
|
|
1,216,877 |
|
|
|
12,536,721 |
|
|
|
42.4 |
|
|
|
9,813,496 |
|
|
|
609,864 |
|
|
|
10,423,360 |
|
|
|
44.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$ |
25,201,565 |
|
|
|
4,409,192 |
|
|
|
29,610,757 |
|
|
|
100.0 |
|
|
|
21,204,705 |
|
|
|
2,491,032 |
|
|
|
23,695,737 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance of loans originated and purchased
|
|
$ |
188 |
|
|
|
158 |
|
|
|
183 |
|
|
|
|
|
|
|
185 |
|
|
|
149 |
|
|
|
180 |
|
|
|
|
|
Weighted average FICO score of loans originated and purchased
|
|
|
629 |
|
|
|
664 |
|
|
|
634 |
|
|
|
|
|
|
|
632 |
|
|
|
613 |
|
|
|
630 |
|
|
|
|
|
Weighted average loan-to-value ratio(2)
|
|
|
81.3 |
% |
|
|
79.6 |
% |
|
|
81.0 |
% |
|
|
|
|
|
|
81.6 |
% |
|
|
78.7 |
% |
|
|
81.3 |
% |
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2006 | |
|
For the Six Months Ended June 30, 2005 | |
|
|
| |
|
| |
|
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
8.6 |
% |
|
|
7.1 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
7.9 |
% |
|
|
6.9 |
% |
|
|
7.7 |
% |
|
|
|
|
|
Adjustable-rate mortgages initial rate
|
|
|
8.3 |
% |
|
|
7.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
7.1 |
% |
|
|
|
|
|
Adjustable-rate mortgages margin over index
|
|
|
6.1 |
% |
|
|
5.3 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
5.8 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
Total originations and purchases
|
|
|
8.4 |
% |
|
|
7.3 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.2 |
% |
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
(1) |
Majority of hybrid adjustable-rate mortgages have a fixed rate
for 2 or 3 years. |
|
(2) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
We originated and purchased $29.6 billion in mortgage loans
for the six months ended June 30, 2006, compared to
$23.7 billion for the six months ended June 30, 2005.
Wholesale originations and purchases totaled $25.2 billion,
or 85.1%, of total originations and purchases for the six months
ended June 30, 2006. Wholesale originations and purchases
for the first half of 2006 consisted of $23.6 billion, or
93.7%, of non-prime and $1.6 billion, or 6.3%, of prime and
Alt-A originations and purchases. Our Retail originations
totaled $4.4 billion, or 14.9%, of total originations and
purchases for the six months ended June 30, 2006. Retail
originations and purchases for the first half of 2006 consisted
of $2.0 billion, or 45.1%, of non-prime and
$2.4 billion, or 54.9%, of prime and Alt-A originations.
Within our Retail Division, the Builder/Realtor channel
originated $2.6 billion in loans, representing 8.6% of
total originations and purchases for the six months ended
June 30, 2006. These originations consisted of
$146.6 million, or 5.7%, of non-prime and
$2.4 billion, or 94.3%, of prime and Alt-A originations.
The Consumer Direct channel originated $1.8 billion in
loans, representing 6.3% of total originations and purchases for
the six months ended June 30, 2006. These originations
consisted of $1.8 billion, or 99.5%, of non-prime and
$9.3 million, or 0.5%, of prime and Alt-A originations. For
the same period in 2005, Wholesale and Retail originations and
purchases totaled $21.2 billion and $2.5 billion,
respectively, representing 89.5% and 10.5%, respectively, of
total originations and purchases for that period. All
originations and purchases in the first half of 2005 were
non-prime.
The increase in originations for the first six months of 2006
was primarily the result of incremental volume generated in
connection with our acquisition of the mortgage loan origination
platform of RBC Mortgage, as well as overall growth in non-prime
industry volume.
|
|
|
Secondary Market Transactions |
Total secondary market transactions increased by 25.9% to
$28.2 billion for the six months ended June 30, 2006,
compared to $22.4 billion for the corresponding period in
2005. This increase was primarily the result of higher loan
production volume in the first six months of 2006 as compared to
the same period in 2005. Total loan sales for the six months
ended June 30, 2006 was $24.8 billion, compared to
$13.5 billion for the six months ended June 30, 2005.
Total loans sold through securitizations structured as
financings for the six months ended June 30, 2006 was
$3.4 billion, compared to $8.9 billion for the six
months ended June 30, 2005. The higher amount of
securitizations structured as financings in 2005 was the result
of our strategy to build our REIT portfolio.
55
Interest income increased by 28.2% to $964.1 million for
the six months ended June 30, 2006, compared to
$751.9 million for the same period in 2005. This increase
was primarily the result of higher average balances of mortgage
loans held for investment and held for sale in addition to an
increase in the weighted average interest rates of the mortgage
loans during 2006. The average balance on mortgage loans held
for investment increased by $341.0 million to
$16.2 billion for the six months ended June 30, 2006,
compared to $15.9 billion for the same period in 2005. The
weighted average interest rate on mortgage loans held for
investment increased to 7.30% for the six months ended
June 30, 2006 from 7.11% for the six months ended
June 30, 2005. The average balance on mortgage loans held
for sale increased by $3.7 billion to $8.8 billion for
the six months ended June 30, 2006, compared to
$5.1 billion for the same period in 2005. The weighted
average interest rate on mortgage loans held for sale increased
from 6.88% for the six months ended June 30, 2005 to 8.05%
for the six months ended June 30, 2006. The increase in
mortgage loans held for investment and held for sale in the
first half 2006 was the result of higher overall loan production
volume.
Interest expense increased by 69.3% to $644.3 million for
the six months ended June 30, 2006, compared to
$380.6 million for the same period in 2005. This increase
was the result of higher average outstanding balances of our
financing on mortgage loans held for investment and our credit
facilities used to finance our mortgage loans held for sale as
well as an increase in the associated financing costs consistent
with increases in the overall interest rate environment. The
average balance for the financing on mortgage loans held for
investment increased by $107.6 million to
$15.7 billion for the six months ended June 30, 2006,
compared to $15.6 billion for the same period in 2005. The
weighted average interest rate for the financing on mortgage
loans held for investment increased from 3.58% for the six
months ended June 30, 2005 to 4.93% for the six months
ended June 30, 2006. The average balance on our credit
facilities used to finance our mortgage loans held for sale
increased by $3.5 billion to $8.5 billion for the six
months ended June 30, 2006, compared to $5.0 billion
for the same period in 2005. The weighted average interest rate
for our credit facilities increased from 3.91% for the six
months ended June 30, 2005 to 5.64% for the six months
ended June 30, 2006.
The following table presents for the years indicated:
|
|
|
the average balance of our mortgage loans held for investment,
held for sale, cash, and the liabilities financing our assets; |
|
|
the average interest rates earned or paid; |
|
|
the actual amount of interest income and expense; and |
|
|
the overall interest margin earned on our balance sheet. |
56
Interest-earning asset and interest-bearing liability balances
used in the calculation represent annual balances computed using
the average of each months daily average balance during
the six months ended June 30, 2006 and 2005 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Yield | |
|
Income | |
|
Balance | |
|
Yield | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment(1)
|
|
$ |
16,200,590 |
|
|
|
7.30 |
% |
|
$ |
591,487 |
|
|
$ |
15,859,594 |
|
|
|
7.11 |
% |
|
$ |
563,547 |
|
|
Mortgage loans held for sale
|
|
|
8,833,368 |
|
|
|
8.05 |
|
|
|
355,510 |
|
|
|
5,088,122 |
|
|
|
6.88 |
|
|
|
175,029 |
|
|
Residual interests in securitizations
|
|
|
220,691 |
|
|
|
12.45 |
|
|
|
13,737 |
|
|
|
144,990 |
|
|
|
10.93 |
|
|
|
7,927 |
|
|
Cash and investments
|
|
|
833,178 |
|
|
|
0.81 |
|
|
|
3,382 |
|
|
|
916,903 |
|
|
|
1.18 |
|
|
|
5,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26,087,827 |
|
|
|
7.39 |
% |
|
$ |
964,116 |
|
|
$ |
22,009,609 |
|
|
|
6.83 |
% |
|
$ |
751,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Cost | |
|
Expense | |
|
Balance | |
|
Cost | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing on mortgage loans held for investment(2)
|
|
$ |
15,665,230 |
|
|
|
4.93 |
% |
|
$ |
386,098 |
|
|
$ |
15,557,646 |
|
|
|
3.58 |
% |
|
$ |
278,366 |
|
|
Credit facilities
|
|
|
8,516,945 |
|
|
|
5.64 |
|
|
|
240,070 |
|
|
|
4,968,269 |
|
|
|
3.91 |
|
|
|
97,056 |
|
|
Convertible senior notes
|
|
|
833 |
|
|
|
14.17 |
|
|
|
59 |
|
|
|
5,498 |
|
|
|
4.47 |
|
|
|
123 |
|
|
Notes payable
|
|
|
33,155 |
|
|
|
8.51 |
|
|
|
1,410 |
|
|
|
34,134 |
|
|
|
5.21 |
|
|
|
890 |
|
|
Other interest(3)
|
|
|
|
|
|
|
|
|
|
|
16,687 |
|
|
|
|
|
|
|
|
|
|
|
4,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
24,216,163 |
|
|
|
5.32 |
|
|
|
644,324 |
|
|
$ |
20,565,547 |
|
|
|
3.70 |
|
|
|
380,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread/income
|
|
|
|
|
|
|
2.07 |
% |
|
$ |
319,792 |
|
|
|
|
|
|
|
3.13 |
% |
|
$ |
371,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes impact of prepayment penalty income of
$45.4 million and $37.2 million for the six months
ended June 30, 2006 and 2005, respectively. |
|
(2) |
Includes impact of derivative instruments accounted for as
hedges of $50.4 million and $22.8 million for the six
months ended June 30, 2006 and 2005, respectively. |
|
(3) |
Other interest is comprised of interest related costs associated
with our servicing operation. |
|
|
|
Provision for losses on mortgage loans held for investment |
We establish an allowance for loan losses based on our estimate
of losses inherent and probable in our portfolio as of our
balance sheet date. The allowance for losses on mortgage loans
held for investment increased to $209.9 million as of
June 30, 2006 from $198.1 million as of
December 31, 2005. As a portfolio of mortgage loans held
for investment seasons, we expect that certain loans will become
uncollectible. In addition, as the size of the portfolio
increases, we expect that the number of uncollectible mortgage
loans, and related charge-offs, will increase. As a result of
these expectations and the current economic environment, we
increased our allowance for losses on mortgage loans held for
investment as a percentage of mortgage loans held for investment
from approximately 0.79% at June 30, 2005 of the unpaid
principal balance of the loans to 1.31% as of June 30,
2006. Our provision for loan losses was $60.2 million for
the six months ended June 30,
57
2006 compared to $67.1 million for the same period in 2005.
The provision for loan losses in 2005 is greater than the
provision in 2006 primarily as a result of the rapid growth of
the portfolio, and related allowance, in 2005 compared to 2006.
Mortgage loans held for investment was $15.9 billion at
June 30, 2006 and $16.1 billion at June 30, 2005.
The following table presents a summary of the activity for the
allowance for losses on mortgage loans held for investment for
the six months ended June 30, 2006 and 2005 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
198,131 |
|
|
|
90,227 |
|
|
Additions
|
|
|
60,150 |
|
|
|
67,113 |
|
|
Charge-offs, net
|
|
|
(48,392 |
) |
|
|
(11,775 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
209,889 |
|
|
|
145,565 |
|
|
|
|
|
|
|
|
Gain on sale Gain on sale of loans increased
from $233.6 million for the six months ended June 30,
2005 to $324.7 million for the six months ended
June 30, 2006, a 39.0% increase. The increase in gain on
sale of loans was primarily the result of an increase in loan
sale volume from $13.5 billion for the six months ended
June 30, 2005 to $24.8 billion for the same period in
2006. Partially offsetting this increase, we recorded a fair
value adjustment of $38.8 million related to our residual
interests for the six months ended June 30, 2006, compared
to $4.4 million for the six months ended June 30,
2005. In addition, net execution decreased from 2.63% for the
six months ended June 30, 2005 to 1.88% for the same period
in 2006. Net execution represents the premium paid to us by
third-party investors in whole loan sale transactions. Net
execution does not include the components of the gain on sale
execution, including premiums we pay to originate the loans,
fair value adjustments and net deferred origination fees. Each
of the components of the gain on sale of loans is illustrated in
the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash gain from whole loan sale transactions
|
|
$ |
404,626 |
|
|
|
302,478 |
|
Gain from securitization of loans
|
|
|
|
|
|
|
19,473 |
|
Non-cash gain from servicing assets related to securitizations
|
|
|
|
|
|
|
8,705 |
|
Non-cash gain from servicing rights related to whole loan sales
|
|
|
7,502 |
|
|
|
26,714 |
|
Securitization expenses
|
|
|
|
|
|
|
(1,947 |
) |
Accrued interest
|
|
|
|
|
|
|
(4,992 |
) |
Fair value adjustment of residual securities
|
|
|
(38,762 |
) |
|
|
(4,419 |
) |
Provision for repurchase losses
|
|
|
(5,701 |
) |
|
|
(6,072 |
) |
Non-refundable fees(1)
|
|
|
169,493 |
|
|
|
130,037 |
|
Premiums paid(2)
|
|
|
(106,256 |
) |
|
|
(126,835 |
) |
Origination costs
|
|
|
(145,800 |
) |
|
|
(114,300 |
) |
Derivative gains
|
|
|
39,585 |
|
|
|
4,714 |
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
$ |
324,687 |
|
|
|
233,556 |
|
|
|
|
|
|
|
|
|
|
(1) |
Non-refundable loan fees represent points and fees collected
from borrowers. |
|
(2) |
Premiums paid represent fees paid to brokers for wholesale loan
originations and purchases. |
58
Servicing income Servicing income increased
121.6% to $29.7 million for the six months ended
June 30, 2006, compared to $13.4 million for the same
period in 2005. This increase was due to a larger balance of
loans serviced with retained servicing rights and loans serviced
for others on an interim basis during the first half of 2006. We
only recognize servicing fees on the loans that are sold on a
servicing-retained basis and the loans serviced for others on an
interim basis pending transfer to investors.
As of June 30, 2006, the balance of our mortgage loan
servicing portfolio was $41.0 billion, which included
$15.1 billion of mortgage loans held for investment,
$9.3 billion of mortgage loans held for sale,
$6.5 billion of mortgage loans with retained servicing
rights, and $10.1 billion of mortgage loans interim
serviced pending transfer to the permanent investor. As of
June 30, 2005, the balance of our mortgage loan servicing
portfolio was $32.6 billion, which included
$17.1 billion of mortgage loans held for investment,
$6.0 billion of mortgage loans held for sale,
$5.7 billion of mortgage loans with retained servicing
rights, and $3.8 billion of mortgage loans interim serviced
pending transfer to the permanent investor.
Other Income For the six months ended
June 30, 2006, other income was $39.6 million, which
consisted primarily of $9.0 million related to hedge
ineffectiveness, $26.5 million in gains related to hedging
activities and $6.3 million related to our investment in
Carrington Investment Partners, LP, Carrington Mortgage Credit
Fund I, LP and Carrington Capital Management, LLC (collectively,
Carrington). For the six months ended June 30,
2005, other income was $7.3 million, which consisted
primarily of $4.8 million related to our investment in
Carrington.
Our other operating expenses for the six months ended
June 30, 2006 and 2005 are summarized below (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
$ |
243,643 |
|
|
|
231,683 |
|
|
General and administrative
|
|
|
112,588 |
|
|
|
84,099 |
|
|
Advertising and promotion
|
|
|
26,554 |
|
|
|
40,543 |
|
|
Professional services
|
|
|
20,293 |
|
|
|
17,483 |
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
403,078 |
|
|
|
373,808 |
|
|
|
|
|
|
|
|
Our overall operating expenses increased by $29.3 million,
or 7.8%, to $403.1 million for the six months ended
June 30, 2006, compared to $373.8 million for the same
period in 2005. This increase was due primarily to increases in
personnel and general and administrative expenses as a result of
our increased total loan production over the first half of 2005,
partially offset by a reduction in advertising and promotion
expense. The reduction in advertising and promotion expense was
due to expense reduction initiatives. Personnel and general and
administrative expenses increased primarily due to additional
headcount and operating expenses associated with the origination
platform acquired from RBC Mortgage and the operating platform
acquired from Access Lending. Neither of these platforms was
included in our operating costs in the first half of 2005.
Our average workforce increased from 5,350 for the six months
ended June 30, 2005 to 7,115 for the six months ended
June 30, 2006, an increase of 33.0%. This increase in
workforce was mainly due to our acquisition of the mortgage loan
origination platform of RBC Mortgage in September 2005. The
remainder of the increase was primarily due to growth in our
servicing platform and the mortgage loan portfolio.
59
Our average workforce for the six months ended June 30,
2006 and 2005 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months | |
|
|
Ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Average workforce:
|
|
|
|
|
|
|
|
|
|
Non-prime lending
|
|
|
4,037 |
|
|
|
4,103 |
|
|
Prime/Alt A lending
|
|
|
1,577 |
|
|
|
|
|
|
Servicing division
|
|
|
486 |
|
|
|
323 |
|
|
Corporate administration
|
|
|
1,015 |
|
|
|
924 |
|
|
|
|
|
|
|
|
Average workforce
|
|
|
7,115 |
|
|
|
5,350 |
|
|
|
|
|
|
|
|
Our income taxes increased to $41.2 million for the six
months ended June 30, 2006 from $4.7 million for the
comparable period in 2005. This increase was due mainly to
higher pretax income for the taxable REIT subsidiaries of
$115.2 million for the six months ended June 30, 2006,
compared to $40.7 million for the comparable period in 2005.
60
Three Months Ended June 30, 2006 Compared to Three
Months Ended June 30, 2005
|
|
|
Originations and Purchases |
The following table sets forth selected information relating to
loan originations and purchases during the periods shown
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2006 | |
|
For the Three Months Ended June 30, 2005 | |
|
|
| |
|
| |
|
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
Wholesale | |
|
Retail | |
|
Total | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Non-Prime
|
|
$ |
13,006,175 |
|
|
|
1,063,105 |
|
|
|
14,069,280 |
|
|
|
86.9 |
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
Prime & Alt-A
|
|
|
834,767 |
|
|
|
1,287,618 |
|
|
|
2,122,385 |
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,840,942 |
|
|
|
2,350,723 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 30 year
|
|
|
2,648,514 |
|
|
|
1,122,110 |
|
|
|
3,770,624 |
|
|
|
23.3 |
|
|
|
2,470,731 |
|
|
|
562,267 |
|
|
|
3,032,998 |
|
|
|
22.6 |
|
|
Interest-Only
|
|
|
219,142 |
|
|
|
168,361 |
|
|
|
387,503 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
682,062 |
|
|
|
248,203 |
|
|
|
930,265 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Fixed
|
|
|
3,549,718 |
|
|
|
1,538,674 |
|
|
|
5,088,392 |
|
|
|
31.4 |
|
|
|
2,470,731 |
|
|
|
562,267 |
|
|
|
3,032,998 |
|
|
|
22.6 |
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid 30 year(1)
|
|
|
2,872,177 |
|
|
|
250,679 |
|
|
|
3,122,856 |
|
|
|
19.3 |
|
|
|
4,821,767 |
|
|
|
510,107 |
|
|
|
5,331,874 |
|
|
|
39.6 |
|
|
Interest-Only
|
|
|
2,366,085 |
|
|
|
175,740 |
|
|
|
2,541,825 |
|
|
|
15.7 |
|
|
|
4,838,718 |
|
|
|
240,580 |
|
|
|
5,079,298 |
|
|
|
37.8 |
|
|
Hybrid 40 year(1)
|
|
|
5,048,706 |
|
|
|
371,013 |
|
|
|
5,419,719 |
|
|
|
33.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
4,256 |
|
|
|
14,617 |
|
|
|
18,873 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total ARM
|
|
|
10,291,224 |
|
|
|
812,049 |
|
|
|
11,103,273 |
|
|
|
68.6 |
|
|
|
9,660,485 |
|
|
|
750,687 |
|
|
|
10,411,172 |
|
|
|
77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,840,942 |
|
|
|
2,350,723 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
6,240,499 |
|
|
|
1,112,098 |
|
|
|
7,352,597 |
|
|
|
45.4 |
|
|
|
5,520,294 |
|
|
|
82,404 |
|
|
|
5,602,698 |
|
|
|
41.7 |
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
6,253,023 |
|
|
|
802,293 |
|
|
|
7,055,316 |
|
|
|
43.6 |
|
|
|
5,662,168 |
|
|
|
1,033,575 |
|
|
|
6,695,743 |
|
|
|
49.8 |
|
|
Rate/term refinances
|
|
|
1,347,420 |
|
|
|
436,332 |
|
|
|
1,783,752 |
|
|
|
11.0 |
|
|
|
948,754 |
|
|
|
196,975 |
|
|
|
1,145,729 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,840,942 |
|
|
|
2,350,723 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
7,492,167 |
|
|
|
1,722,482 |
|
|
|
9,214,649 |
|
|
|
56.9 |
|
|
|
6,174,424 |
|
|
|
976,298 |
|
|
|
7,150,722 |
|
|
|
53.2 |
|
Limited documentation
|
|
|
296,598 |
|
|
|
30,004 |
|
|
|
326,602 |
|
|
|
2.0 |
|
|
|
327,978 |
|
|
|
25,683 |
|
|
|
353,661 |
|
|
|
2.6 |
|
Stated documentation
|
|
|
6,052,177 |
|
|
|
598,237 |
|
|
|
6,650,414 |
|
|
|
41.1 |
|
|
|
5,628,814 |
|
|
|
310,973 |
|
|
|
5,939,787 |
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$ |
13,840,942 |
|
|
|
2,350,723 |
|
|
|
16,191,665 |
|
|
|
100.0 |
|
|
|
12,131,216 |
|
|
|
1,312,954 |
|
|
|
13,444,170 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance of loans originated and purchased
|
|
$ |
188 |
|
|
|
159 |
|
|
|
183 |
|
|
|
|
|
|
|
184 |
|
|
|
152 |
|
|
|
180 |
|
|
|
|
|
Weighted average FICO score of loans originated and purchased
|
|
|
629 |
|
|
|
664 |
|
|
|
634 |
|
|
|
|
|
|
|
634 |
|
|
|
615 |
|
|
|
632 |
|
|
|
|
|
Weighted average loan-to-value ratio(2)
|
|
|
81.3 |
% |
|
|
79.7 |
% |
|
|
81.1 |
% |
|
|
|
|
|
|
81.8 |
% |
|
|
78.9 |
% |
|
|
81.5 |
% |
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
8.6 |
% |
|
|
7.2 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
8.0 |
% |
|
|
6.9 |
% |
|
|
7.8 |
% |
|
|
|
|
|
Adjustable-rate mortgages initial rate
|
|
|
8.3 |
% |
|
|
7.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
7.1 |
% |
|
|
|
|
|
Adjustable-rate mortgages margin over index
|
|
|
6.1 |
% |
|
|
5.2 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
5.8 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
8.4 |
% |
|
|
7.3 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
7.3 |
% |
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
(1) |
Majority of hybrid adjustable-rate mortgages have a fixed rate
for 2 or 3 years. |
|
(2) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
61
We originated and purchased $16.2 billion in mortgage loans
for the three months ended June 30, 2006, compared to
$13.4 billion for the three months ended June 30,
2005. Wholesale originations and purchases totaled
$13.8 billion, or 85.5%, of total originations and
purchases for the three months ended June 30, 2006.
Wholesale originations and purchases for the quarter consisted
of $13.0 billion, or 94.0%, of non-prime and
$834.8 million, or 6.0%, of prime and Alt-A originations
and purchases. Our Retail originations totaled
$2.4 billion, or 14.5%, of total originations and purchases
for the three months ended June 30, 2006. Retail
originations and purchases for the quarter consisted of
$1.1 billion, or 45.2%, of non-prime and $1.3 billion,
or 54.8%, of prime and Alt-A originations. Within our Retail
Division, the Builder/ Realtor channel originated
$1.3 billion in loans, representing 8.3% of total
originations and purchases for the three months ended
June 30, 2006. These originations consisted of
$70.3 million, or 5.2%, of non-prime and $1.3 billion,
or 94.8%, of prime and Alt-A originations. The Consumer Direct
channel originated $1.0 billion in loans, representing 6.2%
of total originations and purchases for the three months ended
June 30, 2006. These originations consisted of
$992.8 million, or 99.2%, of non-prime and
$8.2 million, or 0.8%, of prime and Alt-A originations. For
the same period in 2005, Wholesale and Retail originations and
purchases totaled $12.1 billion and $1.3 billion,
respectively, representing 90.2% and 9.8%, respectively, of
total originations and purchases for that period. All
originations and purchases in the second quarter of 2005 were
non-prime.
The increase in originations for the second quarter of 2006 was
primarily the result of incremental volume generated in
connection with our acquisition of the mortgage loan origination
platform of RBC Mortgage, as well as overall growth in non-prime
industry volume.
|
|
|
Secondary Market Transactions |
Total secondary market transactions increased by 2.4% to
$13.2 billion for the three months ended June 30,
2006, compared to $12.9 billion for the corresponding
period in 2005. This increase was primarily the result of higher
loan production volume in the first three months of 2006 as
compared to the same period in 2005. Total loan sales for the
three months ended June 30, 2006 was $11.5 billion,
compared to $7.0 billion for the three months ended
June 30, 2005. Total loans sold through securitizations
structured as financings for the three months ended
June 30, 2006 was $1.7 billion, compared to
$5.9 billion for the three months ended June 30, 2005.
The higher amount of securitizations structured as financings in
2005 was the result of our strategy to build our REIT portfolio.
Interest income increased by 19.1% to $501.1 million for
the three months ended June 30, 2006, compared to
$420.9 million for the same period in 2005. This increase
was primarily the result of higher average balances of mortgage
loans held for sale in addition to an increase in the weighted
average interest rates of the mortgage loans during 2006. The
average balance on mortgage loans held for investment decreased
by $1.6 billion to $16.0 billion for the three months
ended June 30, 2006, compared to $17.6 billion for the
same period in 2005. The weighted average interest rate on
mortgage loans held for investment increased to 7.57% for the
three months ended June 30, 2006 from 7.18% for the three
months ended June 30, 2005. The average balance on mortgage
loans held for sale increased by $3.7 billion to
$9.3 billion for the three months ended June 30, 2006,
compared to $5.6 billion for the same period in 2005. The
weighted average interest rate on mortgage loans held for sale
increased from 7.09% for the three months ended June 30,
2005 to 8.20% for the three months ended June 30, 2006. The
increase in mortgage loans held for sale in the second quarter
of 2006 was the result of higher overall loan production volume
as compared to the same period in 2005.
Interest expense increased by 65.2% to $361.1 million for
the three months ended June 30, 2006, compared to
$218.6 million for the same period in 2005. This increase
was the result of higher average outstanding balances of our
credit facilities used to finance our mortgage loans held for
sale as well as an increase in the associated financing costs
consistent with increases in the overall interest rate
environment. The average balance for the
62
financing on mortgage loans held for investment decreased by
$1.8 billion to $15.3 billion for the three months
ended June 30, 2006, compared to $17.1 billion for the
same period in 2005. The weighted average interest rate for the
financing on mortgage loans held for investment increased from
3.76% for the three months ended June 30, 2005 to 5.66% for
the three months ended June 30, 2006. The average balance
on our credit facilities used to finance our mortgage loans held
for sale increased by $3.6 billion to $9.0 billion for
the three months ended June 30, 2006, compared to
$5.4 billion for the same period in 2005. The weighted
average interest rate for our credit facilities increased from
4.08% for the three months ended June 30, 2005 to 5.89% for
the three months ended June 30, 2006.
The following table presents for the years indicated:
|
|
|
the average balance of our mortgage loans held for investment,
held for sale, cash, and the liabilities financing our assets; |
|
|
the average interest rates earned or paid; |
|
|
the actual amount of interest income and expense; and |
|
|
the overall interest margin earned on our balance sheet. |
Interest-earning asset and interest-bearing liability balances
used in the calculation represent annual balances computed using
the average of each months daily average balance during
the three months ended June 30, 2006 and 2005 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
|
| |
|
|
2006 | |
|
|