e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2006.
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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COMMISSION FILE
NUMBER: 001-32314
NEW CENTURY FINANCIAL
CORPORATION
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
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MARYLAND
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56-2451736
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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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):
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Large
accelerated filer þ
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Accelerated
filer o
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Non
accelerated filer o
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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 October 31, 2006, the registrant had
55,470,607 shares of common stock outstanding.
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER
ENDED SEPTEMBER 30, 2006
INDEX
i
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 potential liability the
company faces with respect to its legal proceedings;
(v) the potential effects of proposed legislation and
regulatory actions; (vi) the companys expectation
that its adoption of SFAS 155 will not have a material
impact on its financial statements; (vii) the
companys expectation that its initial adoption of
SFAS 156 will not have a material impact to its retained
earnings; (viii) the companys expectation that its
adoption of FIN 48 will not have a significant impact on
its financial statements; (ix) the companys
expectation that its initial adoption of SAB 108 will not
have a material impact on its financial results; (x) the
estimates the company uses to establish its allowance for loan
losses; (xi) the estimates the company uses to determine
the value of its residual assets including the future rate of
prepayments, the prepayment premiums that it expects to receive
and the manner in which expected delinquencies, default and
default loss severity are expected to affect the amount and
timing of the estimated cash flows; (xii) 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;
(xiii) the companys estimates with respect to its
prepayments and the prepayment characteristics of its mortgage
loans; (xiv) the companys expectations with respect
to the performance of the mortgage loans held in securitization
trusts and the ability of the company to realize the current
estimated fair value of its residual assets; (xv) the
companys expectations with respect to renewing or
extending its various credit facilities; (xvi) the
companys expectation that it will reclassify an additional
$21.0 million from OCI into earnings during the remainder
of 2006 related to expiring contracts; (xvii) the
companys expectation that the remaining OCI will be
reclassified into earnings by September 2009; (xviii) the
companys expectation that the earnings attributable to the
REIT will not be taxable due to the benefit of the REITs
dividend paid deduction; (xix) the companys estimates
with respect to the fair value of its stock options;
(xx) 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; (xxi) 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; (xxii) 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; (xxiii) 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; (xxiv) the
companys expectation that industry consolidation will
continue into 2007; (xxv) the companys belief that
its hedging strategies are effective on an economic basis;
(xxvi) the companys expectation that the operating
environment will continue to be challenging in the fourth
quarter of 2006; (xxvii) the companys expectation
that loan production volume in the fourth quarter will be
moderately lower than the third quarter and the companys
non-prime net operating margin will be reduced in the fourth
quarter as a result of higher discounted loan sales;
(xxviii) the companys expectation that mortgage loan
portfolio income in the fourth quarter of 2006 will be lower
than the third quarter as the portfolio balance continues to
decline; (xxix) the companys strategy for next year
focusing on maximizing its core mortgage origination franchise
through loan origination process improvement, enhanced
productivity and increased efficiencies; (xxx) the
companys expectation that it will not add to the mortgage
loan portfolio simply to support a dividend target;
(xxxi) the companys expectation that it will continue
to evaluate whole loan sales versus securitizations on a
case-by-case
basis based on whole loan prices relative to its view of the
risk-adjusted returns on capital available through
securitization; (xxxii) the companys belief that the
current environment calls for a financial strategy that is
flexible enough to capitalize on the opportunities that arise
during 2007 giving consideration to secondary and capital market
conditions; (xxxiii) the companys belief that it is
well-positioned to meet the challenges next year;
(xxxiv) the companys expectation that overall
mortgage market volume will decline in 2007; (xxxv) the
companys belief that its size, scale, financial resources,
low loan acquisition costs and reputation will enable it to
compete successfully and profitably gain market share in the
consolidating mortgage industry; (xxxvi) the companys
expectation that, going forward, it will continue to be
opportunistic about whole loan sales versus securitization,
taking into account secondary market conditions and its capital
allocation strategy; (xxxvii) the companys belief
that it is adequately reserved for the expected higher level of
loan losses after giving consideration to the performance of its
newer vintages; (xxxviii) the execution of the
companys hedging strategies to mitigate the interest rate
risk associated with its loans and reduce the variability in its
interest margin over the period of each securitization;
(xxxix) the companys belief that the steps it is
taking with respect to its underwriting
ii
guidelines are prudent in light of the current market
environment and will help ensure that specific loan products are
appropriate for the circumstances of individual borrowers and
will improve the overall credit quality of the companys
loans; (xl) the companys plan to continue evaluating
its product line; (xli) the companys expectation that
its underwriting changes may result in a modest decline in
volume, but will not have a meaningful impact to profitability;
(xlii) the companys plan to manage the timing of its
whole loan sales to enhance the net interest income it earns on
its loans, while preserving the companys ability to sell
the loans at the maximum price; (xliii) the companys
expectation that the volume of discounted sales and the severity
of the discount will continue to challenge originators in the
Companys industry; (xliv) the companys belief
that its ongoing refinement of its underwriting guidelines and
continual focus on loan origination process improvement will
help mitigate the industry trend relating to higher discounted
loan sales; (xlv) 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;
(xlvi) the companys design of its underwriting
standards, including its recently adopted guidelines for
adjustable-rate and interest-only loans, and quality assurance
programs to ensure that loan quality is consistent and meets the
companys guidelines, even as the mix of documentation type
varies; (xlvii) the companys beliefs, estimates and
assumptions with respect to its critical accounting policies;
(xlviii) 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; (il) the companys use of a prepayment
curve to estimate the prepayment characteristics of its mortgage
loans; (l) the companys right to terminate, reduce or
increase the size of its stock purchase program at any time;
(li) the companys execution of its principal
strategies to effectively manage its liquidity and capital;
(lii) the companys target levels of liquidity and
capital; (liii) the companys expectation that
prepayment speeds will continue to be at more normal levels
through the fourth quarter of 2006; (liv) the
companys intention to access the capital markets when
appropriate to support its business operations; (lv) the
companys intention to execute its stock repurchase program
while maintaining its targeted cash and liquidity levels;
(lvi) the companys plan to return capital to
shareholders through a capital distribution program;
(lvii) the companys belief that the cash to fund its
stock repurchase and capital distribution program can come from
a variety of sources, including, but not limited to, cash flow
from its taxable REIT subsidiaries and mortgage banking
operations, cash flow from its portfolio of mortgage securities,
including the release of over-collateralization from such
securities, and through external capital sources;
(lviii) 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; (lix) the companys
expectation that its fourth quarter dividend will be paid in the
amount of $1.90 per share on January 31, 2007 to
stockholders of record at the close of business on
December 29, 2006; and (lx) 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 its 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.
iii
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(Dollars in thousands)
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September 30,
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December 31,
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2006
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2005
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(Unaudited)
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ASSETS
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Cash and cash equivalents
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$
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408,860
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503,723
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Restricted cash
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572,847
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726,697
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Mortgage loans held for sale at
lower of cost or market
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8,945,134
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7,825,175
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Mortgage loans held for investment,
net of allowance of $191,561 and $198,131, respectively
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14,030,999
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16,143,865
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Residual interests in
securitizations
held-for-trading
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223,680
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234,930
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Mortgage servicing assets
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59,878
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69,315
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Real estate owned, net of allowance
of $56,318 and $18,196, respectively
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84,021
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37,642
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Accrued interest receivable
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109,598
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101,945
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Income taxes, net
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80,551
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80,823
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Office property and equipment, net
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87,736
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86,886
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Goodwill
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95,792
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92,980
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Prepaid expenses and other assets
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360,672
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243,109
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Total assets
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$
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25,059,768
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26,147,090
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Credit facilities on mortgage loans
held for sale
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$
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8,487,850
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|
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7,439,685
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Financing on mortgage loans held
for investment, net
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|
|
13,858,940
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|
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16,045,459
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Accounts payable and accrued
liabilities
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|
|
574,258
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|
|
|
508,163
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Junior subordinated notes
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|
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51,545
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|
|
|
|
Convertible senior notes, net
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|
|
|
|
|
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4,943
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Notes payable
|
|
|
22,826
|
|
|
|
39,140
|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
22,995,419
|
|
|
|
24,037,390
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $0.01 par
value. Authorized 25,000,000 shares at September 30,
2006 and 10,000,000 shares at December 31, 2005;
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Series A preferred stock;
issued and outstanding 4,500,000 shares at
September 30, 2006 and December 31, 2005
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45
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|
|
45
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Series B preferred stock;
issued and outstanding 2,300,000 shares at
September 30, 2006 and none at December 31, 2005
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|
23
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|
|
|
|
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Common stock, $0.01 par value.
Authorized 300,000,000 shares at September 30, 2006
and December 31, 2005; issued and outstanding 55,329,184
and 55,723,267 shares at September 30, 2006 and
December 31, 2005, respectively
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|
|
553
|
|
|
|
557
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|
Additional paid-in capital
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|
1,246,451
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|
|
|
1,234,362
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Accumulated other comprehensive
income
|
|
|
23,450
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|
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|
61,045
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Retained earnings
|
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|
793,827
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|
|
|
828,270
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|
|
|
|
|
|
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|
|
|
|
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|
2,064,349
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|
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|
2,124,279
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Deferred compensation costs
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|
|
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(14,579
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)
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|
|
|
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|
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Total stockholders equity
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|
2,064,349
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|
|
|
2,109,700
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|
|
|
|
|
|
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Total liabilities and
stockholders equity
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|
$
|
25,059,768
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|
|
|
26,147,090
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|
|
|
|
|
|
|
|
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|
See accompanying notes to unaudited condensed consolidated
financial statements.
1
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements Of Earnings
(Dollars in thousands, except per share amounts)
(Unaudited)
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|
|
|
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|
Three Months Ended
|
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Nine Months Ended
|
|
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|
September 30,
|
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|
September 30,
|
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2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Interest income
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|
$
|
514,172
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|
|
|
494,621
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|
|
|
1,478,288
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|
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|
1,246,553
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Interest expense
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(375,228
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)
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|
|
(290,899
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)
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|
(1,019,552
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)
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|
|
(671,535
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)
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|
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Net interest income
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138,944
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203,722
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458,736
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575,018
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Provision for losses on mortgage
loans held for investment
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(20,756
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)
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(38,542
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)
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|
(80,906
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)
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|
|
(105,655
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)
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|
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Net interest income after
provision for losses
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|
118,188
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|
165,180
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|
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|
377,830
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|
469,363
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Other operating income:
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|
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Gain on sale of mortgage loans
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173,045
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176,241
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497,732
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409,797
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Servicing income
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17,770
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|
10,203
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47,424
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23,556
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|
Other income (loss)
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|
|
(20,747
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)
|
|
|
4,986
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|
|
|
18,845
|
|
|
|
12,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
170,068
|
|
|
|
191,430
|
|
|
|
564,001
|
|
|
|
445,610
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
112,575
|
|
|
|
146,575
|
|
|
|
356,218
|
|
|
|
378,258
|
|
General and administrative
|
|
|
57,498
|
|
|
|
49,823
|
|
|
|
170,086
|
|
|
|
133,922
|
|
Advertising and promotion
|
|
|
14,643
|
|
|
|
25,661
|
|
|
|
41,197
|
|
|
|
66,204
|
|
Professional services
|
|
|
13,295
|
|
|
|
11,580
|
|
|
|
33,588
|
|
|
|
29,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
198,011
|
|
|
|
233,639
|
|
|
|
601,089
|
|
|
|
607,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
90,245
|
|
|
|
122,971
|
|
|
|
340,742
|
|
|
|
307,526
|
|
Income tax expense
|
|
|
23,603
|
|
|
|
2,867
|
|
|
|
64,822
|
|
|
|
7,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
66,642
|
|
|
|
120,104
|
|
|
|
275,920
|
|
|
|
299,943
|
|
Dividends paid on preferred stock
|
|
|
3,174
|
|
|
|
2,567
|
|
|
|
8,307
|
|
|
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common
stockholders
|
|
$
|
63,468
|
|
|
|
117,537
|
|
|
|
267,613
|
|
|
|
297,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.14
|
|
|
|
2.10
|
|
|
|
4.81
|
|
|
|
5.37
|
|
Diluted earnings per share
|
|
$
|
1.12
|
|
|
|
2.04
|
|
|
|
4.72
|
|
|
|
5.18
|
|
Basic weighted average shares
outstanding
|
|
|
55,512,895
|
|
|
|
55,870,410
|
|
|
|
55,605,770
|
|
|
|
55,345,952
|
|
Diluted weighted average shares
outstanding
|
|
|
56,529,650
|
|
|
|
57,598,055
|
|
|
|
56,719,551
|
|
|
|
57,421,474
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
2
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Comprehensive Income
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings
|
|
$
|
66,642
|
|
|
|
120,104
|
|
|
|
275,920
|
|
|
|
299,943
|
|
Net unrealized gains (losses) on
derivative instruments designated as hedges
|
|
|
(60,792
|
)
|
|
|
66,977
|
|
|
|
(40,396
|
)
|
|
|
44,371
|
|
Reclassification adjustment into
earnings for derivative instruments
|
|
|
781
|
|
|
|
2,375
|
|
|
|
2,386
|
|
|
|
9,862
|
|
Tax effect
|
|
|
421
|
|
|
|
(600
|
)
|
|
|
415
|
|
|
|
(1,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
7,052
|
|
|
|
188,856
|
|
|
|
238,325
|
|
|
|
352,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
3
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Changes In Stockholders
Equity
Year Ended December 31, 2005 and Nine Months Ended
September 30, 2006
(In thousands, except per share amounts)
(Nine Months Ended September 30, 2006 Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
827
|
|
|
|
8
|
|
|
|
14,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,714
|
|
Proceeds from issuance of preferred
stock
|
|
|
2,300
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
55,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,603
|
|
Repurchases and cancellation of
treasury stock
|
|
|
|
|
|
|
|
|
|
|
(1,544
|
)
|
|
|
(15
|
)
|
|
|
(66,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,491
|
)
|
Cancelled shares related to stock
options
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
(1
|
)
|
|
|
(1,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,356
|
)
|
Compensation expense related to
common
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,318
|
|
Excess tax benefits related to
non-qualified
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,037
|
|
Conversion of convertible senior
notes
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
2
|
|
|
|
4,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Restricted stock, net
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
2
|
|
|
|
(2,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,478
|
)
|
Compensation expense related to
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,340
|
|
Reclassification of deferred
compensation
related to adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,579
|
)
|
|
|
|
|
|
|
|
|
|
|
14,579
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,920
|
|
|
|
|
|
|
|
275,920
|
|
Other comprehensive income, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,595
|
)
|
|
|
|
|
|
|
|
|
|
|
(37,595
|
)
|
Dividends declared on common
stock,
$5.40 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302,056
|
)
|
|
|
|
|
|
|
(302,056
|
)
|
Dividends declared on Series A
preferred stock, $1.71 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,700
|
)
|
|
|
|
|
|
|
(7,700
|
)
|
Dividends declared on Series B
preferred stock, $0.26 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
6,800
|
|
|
|
68
|
|
|
|
55,329
|
|
|
|
553
|
|
|
|
1,246,451
|
|
|
|
23,450
|
|
|
|
793,827
|
|
|
|
|
|
|
|
2,064,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
4
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
275,920
|
|
|
|
299,943
|
|
Adjustments to reconcile net
earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
office property and equipment
|
|
|
22,669
|
|
|
|
16,048
|
|
Amortization of deferred costs
related to mortgage loans held for investment
|
|
|
64,984
|
|
|
|
65,072
|
|
Amortization related to mortgage
servicing rights and other
|
|
|
15,004
|
|
|
|
8,634
|
|
Stock-based compensation
|
|
|
16,658
|
|
|
|
5,657
|
|
Cash flows received from residual
interests in securitizations
|
|
|
2,113
|
|
|
|
15,021
|
|
Accretion of Net Interest
Receivables, or NIR
|
|
|
(18,986
|
)
|
|
|
(11,949
|
)
|
NIR gains
|
|
|
|
|
|
|
(34,807
|
)
|
Servicing gains
|
|
|
(30,026
|
)
|
|
|
(60,927
|
)
|
Fair value adjustment of residual
interests in securitizations
|
|
|
28,123
|
|
|
|
7,645
|
|
Provision for losses on mortgage
loans held for investment
|
|
|
80,906
|
|
|
|
105,655
|
|
Provision for repurchase losses
|
|
|
5,261
|
|
|
|
4,300
|
|
Increase in real estate owned, net
|
|
|
(46,379
|
)
|
|
|
(16,558
|
)
|
Mortgage loans originated or
acquired for sale
|
|
|
(42,077,479
|
)
|
|
|
(30,215,340
|
)
|
Mortgage loan sales, net
|
|
|
40,630,368
|
|
|
|
25,453,537
|
|
Principal payments on mortgage
loans held for sale
|
|
|
446,841
|
|
|
|
209,084
|
|
Increase in credit facilities on
mortgage loans held for sale
|
|
|
1,048,165
|
|
|
|
4,513,854
|
|
Tax benefit (change) related to
non-qualified stock options
|
|
|
(5,037
|
)
|
|
|
|
|
Net change in other assets and
liabilities
|
|
|
(249,179
|
)
|
|
|
77,391
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
209,926
|
|
|
|
442,260
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Mortgage loans originated or
acquired for investment, net
|
|
|
(3,376,627
|
)
|
|
|
(10,273,642
|
)
|
Principal payments on mortgage
loans held for investment
|
|
|
5,370,993
|
|
|
|
4,984,710
|
|
Sale of mortgage servicing rights
|
|
|
29,479
|
|
|
|
8,477
|
|
Purchase of office property and
equipment
|
|
|
(23,519
|
)
|
|
|
(46,761
|
)
|
Acquisition of net assets
|
|
|
9,795
|
|
|
|
(80,573
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
2,010,121
|
|
|
|
(5,407,789
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of financing
on mortgage loans held for investment, net
|
|
|
3,280,904
|
|
|
|
9,792,230
|
|
Repayments of financing on mortgage
loans held for investment
|
|
|
(5,488,031
|
)
|
|
|
(4,688,033
|
)
|
(Increase) decrease in restricted
cash
|
|
|
153,850
|
|
|
|
(317,306
|
)
|
Proceeds from issuance of junior
subordinated notes
|
|
|
51,545
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
14,714
|
|
|
|
25,368
|
|
Net proceeds from issuance of
preferred stock
|
|
|
55,603
|
|
|
|
108,664
|
|
Increase (decrease) in notes
payable, net
|
|
|
(16,314
|
)
|
|
|
7,680
|
|
Payment of dividends on common stock
|
|
|
(294,193
|
)
|
|
|
(259,067
|
)
|
Payment of dividends on preferred
stock
|
|
|
(7,700
|
)
|
|
|
(2,852
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
5,037
|
|
|
|
|
|
Purchase of common stock
|
|
|
(70,325
|
)
|
|
|
(13,950
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(2,314,910
|
)
|
|
|
4,652,734
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(94,863
|
)
|
|
|
(312,795
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
503,723
|
|
|
|
842,854
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
408,860
|
|
|
|
530,059
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,014,275
|
|
|
|
652,937
|
|
Income taxes paid
|
|
|
60,720
|
|
|
|
24,746
|
|
Supplemental noncash financing
activity:
|
|
|
|
|
|
|
|
|
Restricted stock issued
|
|
$
|
8,340
|
|
|
|
14,866
|
|
Restricted stock cancelled
|
|
|
2,478
|
|
|
|
5,896
|
|
Accrued dividends on common stock
|
|
|
102,400
|
|
|
|
93,183
|
|
Accrued dividends on preferred stock
|
|
|
607
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
5
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2006 and 2005
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, began
trading under the ticker symbol NEW, and 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
6
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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 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 three and nine
months ended September 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
7
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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
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 impact on the Companys financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, (SFAS 157), which defines
fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements required
under other accounting pronouncements, but does not change
existing guidance as to whether or not an instrument is carried
at fair value. Additionally, it establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity
has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that
fiscal year. The Company is currently evaluating the impact, if
any, that SFAS 157 will have on its financial condition and
results of operations.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,
(SAB 108), which provides interpretive guidance
on the consideration of the effects of prior year misstatements
in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 must be applied to annual
financial statements for their first fiscal year ending after
November 15, 2006. SAB 108 will be effective beginning
January 1, 2007. The Company is evaluating the impact of
adopting SAB 108 on the Companys financial results.
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.
8
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
Restricted
Cash
As of September 30, 2006, restricted cash totaled
$572.8 million, and included $55.9 million in cash
held in margin accounts associated with the Companys
interest rate risk management activities, $443.0 million in
cash held in custodial accounts associated with its mortgage
loans held for investment, $37.5 million in cash held in a
cash reserve account and $34.7 million in cash held in a
funding trust account in connection with its asset-backed
commercial paper facility and $1.7 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 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 (the
Residuals) are recorded by the Company 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 present value
of the expected future cash flows that the Company will receive
as described below (the Cash Flows). The Company may
sell Residuals through net interest margin securities
(NIMS).
The Company generally structures off-balance sheet
securitizations as follows: first, it sells a portfolio of
mortgage loans to a special purpose entity (SPE)
that has been established for the limited purpose of buying
9
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
and reselling mortgage loans; then the SPE transfers the same
mortgage loans to a Real Estate Mortgage Investment Conduit (the
REMIC) or Owners Trust (the Trust),
which is a qualifying special purpose entity (QSPE)
as defined under Statement of Financial Accounting Standards
No. 140 (SFAS 140); and, finally, the
Trust issues (i) interest-bearing asset-backed securities
(the Bonds and Certificates) generally in an amount
equal to the aggregate principal balance of the mortgage loans
and (ii) a certificate to the Company representing a
residual interest in Cash Flows related to the payments made on
the securitized loans. The Bonds and Certificates are typically
sold at face value on a non-recourse basis, except that the
Company provides to the Trust representations and warranties
customary in the mortgage banking industry. One or more
investors typically purchase these Bonds and Certificates for
cash. The Trust uses the cash proceeds to pay the Company the
cash portion of the purchase price for the mortgage loans. In
addition, the Company may provide a credit enhancement 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 fair value of the
Residuals and (iii) the estimated fair value of the
servicing asset, if applicable. 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 in its consolidated
statement of earnings.
NIMS transactions are generally structured as follows: first,
the Company sells or contributes the Residuals to a SPE
established for the limited purpose of receiving and selling
asset-backed residual
interests-in-securitization
certificates; then, the SPE transfers the Residuals to the
Trust; and, finally, the Trust, which is a QSPE as defined under
SFAS 140, issues the Bonds and Certificates. The Company
sells the Residuals on a non-recourse basis, except that it
provides to the Trust representations and warranties customary
in the mortgage banking industry. One or more investors
typically 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 the 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. 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 in its
consolidated statement of earnings.
The Company allocates its basis in the mortgage loans and
Residuals between the portion of the mortgage loans and
Residuals sold through the Bonds and Certificates and the
portion retained based on the relative fair values of those
portions on the date of sale. The Company recognizes gains or
losses attributable to the changes in the fair value of the
Residuals in the consolidated statement of income, as the
Residuals are classified as 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 REMIC or
Trust (the cash out method) using a discount rate commensurate
with the then-perceived risks involved. The Company utilizes a
discount rate of 12.0% on the estimated cash flows released from
the REMIC or Trust 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 related to
its securitizations structured as sales.
10
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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 Bonds and Certificates
principal and interest, pay servicing fees and certain other
fees, such as trustee and custodial fees, and satisfy OC
requirements. 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 holders
of Bonds and Certificates for interest at the pass-through rate
on the Bonds and 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, a shortfall may occur which will have to be
reimbursed from future cash flows, if any. If the cash collected
during the period exceeds the amount necessary for the above
allocation, and there is no shortfall in the OC requirement, the
excess is released to the Company. If the OC balance is not at
the required credit enhancement level, the excess cash collected
is retained by the Trusts until the specified OC requirement is
achieved. The Company is restricted from using the excess
collateral in the OC. Pursuant to certain servicing agreements,
the Company may be required to use cash in excess of amounts
required to make accelerated principal paydowns to the holders
of Bonds and Certificates that have the effect of creating
additional excess collateral in the OC, 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 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 (the APR) on the mortgage
loans is relatively high in comparison to the investor
pass-through interest rate on the Bonds and 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, the
prepayment premiums that it expects to receive and the manner in
which expected delinquencies, default and default loss severity
are expected to affect the amount and timing of the estimated
cash flows. The Company estimates that average cumulative losses
as a percentage of the original principal balance of the
mortgage loans range from 1.89% to 5.1% for adjustable-rate
securities and 1.44% to 5.68% 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 3.75% at September 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 along 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
(i.e.,
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
2.19 and 2.58 years for the Companys adjustable-rate
securities and between 2.23 and 3.50 years for its
fixed-rate securities.
Real
Estate Owned
Real estate acquired through foreclosure is initially recorded
at the lower of cost or estimated fair value, net of an
allowance for estimated selling costs, on the date of
foreclosure and a mortgage loan charge-off is recorded.
11
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
A summary of real estate owned at September 30, 2006 and
December 31, 2005 at estimated fair value, is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Real estate owned, net
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
$
|
140,339
|
|
|
|
55,838
|
|
Valuation allowance
|
|
|
(56,318
|
)
|
|
|
(18,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,021
|
|
|
|
37,642
|
|
|
|
|
|
|
|
|
|
|
The following table presents a summary of the activity for the
valuation allowance for real estate owned for the three and nine
months ended September 30, 2006 and 2005 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of period
|
|
$
|
32,068
|
|
|
|
12,170
|
|
|
|
18,196
|
|
|
|
6,576
|
|
Additions(1)
|
|
|
41,885
|
|
|
|
6,006
|
|
|
|
88,764
|
|
|
|
18,948
|
|
Charge-offs(2)
|
|
|
(17,635
|
)
|
|
|
(5,977
|
)
|
|
|
(50,642
|
)
|
|
|
(13,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
56,318
|
|
|
|
12,199
|
|
|
|
56,318
|
|
|
|
12,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Additions to the valuation allowance consist of amounts
reclassified from the allowance for losses on mortgage loans
held for investment at the time the related mortgage loans are
foreclosed upon and reclassified from mortgage loans held for
investment to real estate owned. |
|
(2) |
|
Charge-off amounts presented above represent a portion of the
charge-offs included in the rollfoward of the allowance for
losses on mortgage loans held for investment. |
Derivative
Instruments
The Company accounts for certain Euro Dollar futures contracts,
interest rate cap contracts and interest rate swap 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. For
those derivative instruments not designated as hedges, changes
in the fair value of the derivative instrument are recorded
through earnings each period.
Interest
Rate Lock and Forward Sale Commitments
The Company is exposed to interest rate risk from the time an
interest rate lock commitment (IRLC) is made to a
residential mortgage applicant to the time the related mortgage
loan is sold. 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. The Company also
uses forward sale commitments for its mortgage loan originations
to manage interest rate risk. The Company enters into forward
sale commitments on a significant portion of production for
which there is no offsetting interest rate
12
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
lock. The forward sale 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 (the Code). Also, each of New Centurys
subsidiaries that meet the requirements of the Code to be a
qualified REIT subsidiary (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 (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.
|
|
2.
|
Mortgage
Loans Held for Sale
|
A summary of mortgage loans held for sale, at the lower of cost
or fair value at September 30, 2006 and December 31,
2005, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Mortgage loans held for sale:
|
|
|
|
|
|
|
|
|
First trust deeds
|
|
$
|
8,022,396
|
|
|
|
7,110,722
|
|
Second trust deeds
|
|
|
884,854
|
|
|
|
704,430
|
|
Net deferred origination costs and
other(1)
|
|
|
37,884
|
|
|
|
9,973
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,945,134
|
|
|
|
7,825,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
September 30, 2006. |
At September 30, 2006, the Company had mortgage loans held
for sale having an unpaid principal balance of approximately
$235.0 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 $10.1 million for the nine months ended
September 30, 2006. At September 30, 2005, the Company
had mortgage loans held for sale of approximately
$58.6 million on which the accrual of interest had been
discontinued. If these mortgage loans had been current
throughout their terms, interest income would have increased by
approximately $2.8 million for the nine months ended
September 30, 2005.
|
|
3.
|
Mortgage
Loans Held for Investment
|
During the nine months ended September 30, 2006, the
Company securitized $3.4 billion in loans through
transactions structured as financings. There were no
securitizations structured as financings for the three
13
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
months ended September 30, 2006. A summary of the
components of mortgage loans held for investment at
September 30, 2006 and December 31, 2005 is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
First trust deeds
|
|
$
|
13,560,995
|
|
|
|
15,877,535
|
|
Second trust deeds
|
|
|
570,299
|
|
|
|
334,689
|
|
Allowance for loan losses
|
|
|
(191,561
|
)
|
|
|
(198,131
|
)
|
Net deferred origination costs
|
|
|
91,266
|
|
|
|
129,772
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,030,999
|
|
|
|
16,143,865
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006, the Company had mortgage loans held
for investment having an unpaid principal balance of
approximately $817.8 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 $25.5 million for the nine
months ended September 30, 2006. At September 30,
2005, the Company had mortgage loans held for investment having
an unpaid principal balance of approximately $423.4 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 $15.3 million
for the nine months ended September 30, 2005.
The following table presents a summary of the activity for the
allowance for losses on mortgage loans held for investment for
the three and nine months ended September 30, 2006 and 2005
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of period
|
|
$
|
209,889
|
|
|
|
145,565
|
|
|
|
198,131
|
|
|
|
90,227
|
|
Additions
|
|
|
20,756
|
|
|
|
38,542
|
|
|
|
80,906
|
|
|
|
105,655
|
|
Charge-offs, net
|
|
|
(39,084
|
)
|
|
|
(6,348
|
)
|
|
|
(87,476
|
)
|
|
|
(18,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
191,561
|
|
|
|
177,759
|
|
|
|
191,561
|
|
|
|
177,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Residual
Interests in Securitizations
|
Residual interests in securitizations were $223.7 million
at September 30, 2006 and $172.1 million at
September 30, 2005 and consisted of the present value of
expected cash flows that the Company will receive in the future.
During the nine months ended September 30, 2006, the
Company did not complete any securitizations structured as
sales. During the nine months ended September 30, 2005, the
Company completed two securitizations structured as sales
totaling $3.0 billion. The gain on sale recorded for the
two securitizations was $71.6 million and the residual
interest created by the two securitizations totaled
$34.8 million.
During the nine months ended September 30, 2006, the
Residuals provided the Company with $2.1 million in cash.
The Company performs an evaluation of the Residuals quarterly,
taking into consideration trends in actual cash flow performance
and industry and economic developments, as well as other
relevant factors. During the nine months ended
September 30, 2006, the Company increased its prepayment
rate assumptions
14
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
based upon actual performance and made minor adjustments to
certain other assumptions, resulting in a $28.1 million
downward fair value adjustment.
Neither the Trusts nor the holders of the Bonds and Certificates
have recourse to the Company for failure of mortgage loan
borrowers to pay their obligations when due. The Companys
Residuals are subordinate to the Bonds and Certificates until
the holders of the Bonds and Certificates are fully paid.
The Company is a party to various transactions that have an
off-balance sheet component. In connection with the
Companys off-balance sheet securitization transactions, as
of September 30, 2006, there were $5.7 billion in
loans owned by the Trusts. The Trusts have issued Bonds and
Certificates secured by these loans. The holders of the Bonds
and Certificates 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 could
impact the Companys ability to realize the current
estimated fair value of the Residuals.
In determining the value of the Residuals, the Company estimates
the future rate of prepayments, the prepayment premiums that it
expects to receive and the manner in which expected
delinquencies, default and default loss severity are expected to
affect the amount and timing of the estimated cash flows. The
Company utilizes a discount rate of 12.0% on the estimated cash
flows released from the REMIC or Trust 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 following table summarizes the activity
for the Residuals for the nine months ended September 30,
2006 and 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of period
|
|
$
|
234,930
|
|
|
|
148,021
|
|
Additions
|
|
|
|
|
|
|
34,807
|
|
Cash received
|
|
|
(2,113
|
)
|
|
|
(15,021
|
)
|
Accretion
|
|
|
18,986
|
|
|
|
11,949
|
|
Fair value adjustment
|
|
|
(28,123
|
)
|
|
|
(7,645
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
223,680
|
|
|
|
172,111
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Mortgage
Servicing Assets
|
The following table summarizes activity in the Companys
mortgage servicing assets for the nine months ended
September 30, 2006 and 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of period
|
|
$
|
69,315
|
|
|
|
8,249
|
|
Additions
|
|
|
30,026
|
|
|
|
60,927
|
|
Sales of servicing rights
|
|
|
(24,516
|
)
|
|
|
(8,477
|
)
|
Amortization
|
|
|
(14,947
|
)
|
|
|
(6,389
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
59,878
|
|
|
|
54,310
|
|
|
|
|
|
|
|
|
|
|
15
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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 $30.0 million for the nine months ended
September 30, 2006 primarily represents servicing rights
retained by the Company in certain of its whole loan sales to
Carrington Mortgage Credit Fund I, LP
(Carrington). The $24.5 million in sales of
servicing rights for the nine months ended September 30,
2006 relates to the two securitizations structured as sales
completed in December 2005 for which the mortgage servicing
rights were sold during the first quarter of 2006. The addition
of $60.9 million for the nine months ended
September 30, 2005 includes: (i) $35.8 million of
servicing rights retained by the Company in certain of its whole
loan sales to Carrington, (ii) $8.7 million of
servicing rights related to the securitization structured as a
sale completed in June 2005 for which the mortgage servicing
rights were subsequently sold to a third party in August 2005
for $8.5 million and (iii) $16.4 million of
servicing rights related to the securitization structured as a
sale completed in September 2005 for which the mortgage
servicing rights were subsequently sold to a third party in
November 2005 for $16.4 million.
Goodwill is recorded in connection with the acquisition of new
subsidiaries or net assets. As of September 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 nine months ended
September 30, 2006.
On February 3, 2006, one of the Companys indirect
wholly-owned 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 September 30, 2006 (dollars in thousands):
|
|
|
|
|
Balance, beginning of period
|
|
$
|
92,980
|
|
Acquisition of Access Lending
operating platform
|
|
|
3,200
|
|
Purchase price allocation
adjustment related to acquisition of RBC Mortgage origination
platform
|
|
|
(388
|
)
|
|
|
|
|
|
Balance, end of period
|
|
$
|
95,792
|
|
|
|
|
|
|
16
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
7.
|
Credit
Facilities and Other Short-Term Borrowings
|
Credit facilities and other short-term borrowings consisted of
the following at September 30, 2006 and December 31,
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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. The
Company expects to renew or extend this facility prior to its
expiration
|
|
$
|
1,316,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$2.0 billion master
repurchase agreement ($1 billion of which is uncommitted)
among New Century Mortgage, NC Capital, Home 123, New Century
Credit and Bank of America, N.A. expiring in September 2007,
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
|
|
|
876,350
|
|
|
|
916,714
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$1.0 billion master
repurchase agreement among New Century Mortgage, Home 123 and
Bank of America, N.A. expiring in September 2007, 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
|
|
|
394,085
|
|
|
|
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. The Company
expects to renew or extend this facility prior to its expiration
|
|
|
217,701
|
|
|
|
821,856
|
|
|
|
|
|
|
|
|
|
|
|
|
An
|
|
$800 million master
repurchase agreement ($400 million of which is uncommitted)
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
|
|
|
636,333
|
|
|
|
610,365
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$650 million master
repurchase agreement among New Century Credit, NC Capital 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 by a new Citigroup
master repurchase agreement
|
|
|
|
|
|
|
276,816
|
|
17
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
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 by a new Citigroup master repurchase agreement
|
|
|
|
|
|
|
109,076
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$950 million uncommitted
master repurchase agreement among New Century Financial, New
Century Mortgage, Home123, NC Capital, New Century Credit and
Citigroup Global Markets Realty Corp., expiring in July 2007,
secured by mortgage loans held for sale, bearing interest based
on a margin over one-month LIBOR. The Company has the ability,
at any one time, to secure up to $150 million with
delinquent loans and real estate owned, or REO, properties. The
Company expects to renew or extend this facility prior to its
expiration
|
|
|
137,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
546,479
|
|
|
|
452,239
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$1.0 billion master
repurchase agreement among New Century Credit, New Century
Mortgage, NC Capital, Home123 and Deutsche Bank 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 prior to its expiration
|
|
|
582,545
|
|
|
|
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 loans or REO properties, bearing
interest based on a margin over one-month LIBOR. The Company
expects to renew or extend this facility prior to its expiration
|
|
|
129,371
|
|
|
|
|
|
18
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 prior to
its expiration
|
|
|
449,333
|
|
|
|
404,696
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The Company expects to renew
or extend this facility prior to its expiration
|
|
|
1,509,478
|
|
|
|
1,469,860
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$2.0 billion master
repurchase 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. The Company expects to renew or extend
this facility prior to its expiration
|
|
|
1,480,379
|
|
|
|
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. The Company expects to renew
or extend this facility prior to its expiration
|
|
|
91,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$100 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 2008, secured by mortgage loans
held for sale, bearing interest based on a margin over the
one-month commercial paper rate. The Company expects to renew or
extend this facility prior to its expiration
|
|
|
48,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The Company expects to renew or extend this facility
prior to its expiration
|
|
|
71,523
|
|
|
|
|
|
19
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Credit facility amounts
reclassified to financing on mortgage loans held for investment
|
|
|
|
|
|
|
(13,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,487,850
|
|
|
|
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 September 30, 2006.
|
|
8.
|
Financing
on Mortgage Loans Held for Investment
|
When the Company sells mortgage loans through securitizations
structured as financings, the related bonds are added to its
balance sheet. As of September 30, 2006 and
December 31, 2005, the financing on mortgage loans held for
investment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Securitized bonds
|
|
$
|
13,895,512
|
|
|
|
16,071,460
|
|
Short-term financing on retained
bonds
|
|
|
|
|
|
|
1,903
|
|
2005-NC3 NIM bond
|
|
|
23,784
|
|
|
|
21,405
|
|
Debt issuance costs
|
|
|
(60,356
|
)
|
|
|
(63,182
|
)
|
Credit facility amounts
reclassified from warehouse credit facilities
|
|
|
|
|
|
|
13,873
|
|
|
|
|
|
|
|
|
|
|
Total financing on mortgage loans
held for investment
|
|
$
|
13,858,940
|
|
|
|
16,045,459
|
|
|
|
|
|
|
|
|
|
|
The maturity of the Companys 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 September 30,
2006 (dollars in thousands):
|
|
|
|
|
Due in less than 1 year
|
|
$
|
5,066,814
|
|
Due in 2 years
|
|
|
2,919,213
|
|
Due in 3 years
|
|
|
1,517,554
|
|
Due thereafter
|
|
|
4,355,359
|
|
|
|
|
|
|
|
|
$
|
13,858,940
|
|
|
|
|
|
|
|
|
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
20
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
principal amount of convertible senior notes elected to convert
the convertible senior notes into 165,815 shares of New
Centurys common stock.
|
|
10.
|
Junior
Subordinated Notes
|
On September 13, 2006, the Company sold through New Century
Capital Trust I, a Delaware statutory trust (the
Trust), $50,000,000 in aggregate liquidation amount
of preferred securities of the Trust (the Preferred
Securities) in a private placement transaction. The
Preferred Securities require quarterly distributions at a fixed
rate of 8.65% through the distribution payment date in September
2011, whereupon the rate floats at three-month LIBOR plus 3.50%
thereafter.
The Trust simultaneously issued and sold 1,545 shares of
common securities of the Trust (the Common
Securities) to the Company for $1,545,000 in aggregate
liquidation amount. The 1,545 Common Securities constitute all
of the issued and outstanding Common Securities of the Trust.
The Trust used the proceeds from the sales of the Preferred
Securities and the Common Securities to purchase $51,545,000
aggregate principal amount of the Companys junior
subordinated notes due 2036 (the Junior Subordinated
Notes). The terms of the Junior Subordinated Notes are
substantially the same as the terms of the Preferred Securities.
The Junior Subordinated Notes mature on September 30, 2036,
but the Company may redeem the Junior Subordinated Notes, in
whole or in part, on or after September 30, 2011 without
penalty. If the Junior Subordinated Notes are redeemed, the
Trust must redeem a like amount of the Preferred Securities.
The assets and liabilities of the Trust are not consolidated
into the consolidated financial statements of the Company.
Accordingly, the Companys equity interest in the Trust is
accounted for using the equity method. Interest on the junior
subordinated debentures are presented on the consolidated
statements of income as a component of interest expense and the
Junior Subordinated Notes are presented as a separate category
on the consolidated balance sheets.
|
|
11.
|
Cumulative
Redeemable Preferred Stock
|
In June 2005, the Company sold 4,500,000 shares of its
Series A Cumulative Redeemable Preferred Stock (the
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
(SFAS 150), and is therefore classified as a
component of equity. The Company paid preferred stock dividends
of $2.6 million for the third quarter of 2006 on
September 29, 2006, and, as a result, there were no accrued
preferred stock dividends related to the Series A Preferred
Stock as of September 30, 2006.
In August 2006, the Company sold 2,300,000 shares of its
Series B Cumulative Redeemable Preferred Stock (the
Series B Preferred Stock), including
300,000 shares to cover overallotments. The offering
provided $55.6 million in net proceeds. The shares have a
liquidation value of $25.00 per share, pay an annual coupon
of 9.75% and are not convertible into any other securities. The
Company may, at its option, redeem the Series B Preferred
Stock, in the aggregate or in part, at any time on or after
August 22, 2011. As such, this stock is not considered
mandatorily or contingently redeemable under the provisions of
SFAS 150, and is therefore classified as a component of
equity. The Company had an accrual for preferred stock dividends
related to the Series B Preferred Stock of
$0.6 million as of September 30, 2006.
21
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
The following table presents the components of interest income
for the three and nine months ended September 30, 2006 and
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Interest on mortgage loans held
for investment
|
|
$
|
287,372
|
|
|
|
342,105
|
|
|
|
878,859
|
|
|
|
905,652
|
|
Interest on mortgage loans held
for sale
|
|
|
220,404
|
|
|
|
145,876
|
|
|
|
575,914
|
|
|
|
320,906
|
|
Residual interest income
|
|
|
5,249
|
|
|
|
4,022
|
|
|
|
18,986
|
|
|
|
11,949
|
|
Other interest income
|
|
|
1,147
|
|
|
|
2,618
|
|
|
|
4,529
|
|
|
|
8,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
514,172
|
|
|
|
494,621
|
|
|
|
1,478,288
|
|
|
|
1,246,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of interest expense
for the three and nine months ended September 30, 2006 and
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Interest on financing on mortgage
loans held for investment
|
|
$
|
205,555
|
|
|
|
196,376
|
|
|
|
591,652
|
|
|
|
474,742
|
|
Interest on credit facilities and
other short-term borrowings
|
|
|
157,975
|
|
|
|
85,930
|
|
|
|
398,046
|
|
|
|
182,986
|
|
Interest on junior subordinated
notes
|
|
|
215
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
Interest on convertible senior
notes
|
|
|
|
|
|
|
67
|
|
|
|
64
|
|
|
|
190
|
|
Other interest expense
|
|
|
11,483
|
|
|
|
8,526
|
|
|
|
29,575
|
|
|
|
13,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
375,228
|
|
|
|
290,899
|
|
|
|
1,019,552
|
|
|
|
671,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
14.
|
Derivative
Activities
|
The following table presents the fair value of the
Companys derivative instruments as of the periods
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Euro Dollar futures contracts
|
|
$
|
30,706
|
|
|
|
79,508
|
|
Interest rate swap contracts
|
|
|
(11,265
|
)
|
|
|
|
|
Interest rate cap contracts
|
|
|
38
|
|
|
|
1,104
|
|
Fair value hedges
|
|
|
|
|
|
|
517
|
|
Free-standing derivatives:
|
|
|
|
|
|
|
|
|
Euro Dollar futures contracts
|
|
|
800
|
|
|
|
663
|
|
Purchased options on Euro Dollar
futures contracts
|
|
|
2,749
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
377
|
|
|
|
|
|
Interest rate locks
|
|
|
4,571
|
|
|
|
(2,257
|
)
|
Forward sale commitments
|
|
|
(10,238
|
)
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,738
|
|
|
|
84,735
|
|
|
|
|
|
|
|
|
|
|
The following table presents derivative gains (losses) for the
periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Dollar futures contracts
|
|
$
|
26,728
|
|
|
|
8,142
|
|
|
|
71,013
|
|
|
|
22,636
|
|
Ineffectiveness
|
|
|
|
|
|
|
2,160
|
|
|
|
13,726
|
|
|
|
5,776
|
|
Interest rate cap contracts
|
|
|
(939
|
)
|
|
|
(1,346
|
)
|
|
|
(2,602
|
)
|
|
|
(6,340
|
)
|
Fair value hedge
|
|
|
(1,396
|
)
|
|
|
6,232
|
|
|
|
(3,112
|
)
|
|
|
10,994
|
|
Free-standing derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Dollar futures contracts
|
|
|
(17,830
|
)
|
|
|
(3,029
|
)
|
|
|
11,645
|
|
|
|
(2,612
|
)
|
Purchased options on Euro Dollar
futures contracts
|
|
|
(701
|
)
|
|
|
|
|
|
|
(5,754
|
)
|
|
|
|
|
Interest rate swap contracts
|
|
|
(15,084
|
)
|
|
|
|
|
|
|
(3,402
|
)
|
|
|
|
|
Interest rate locks
|
|
|
4,875
|
|
|
|
(4,938
|
)
|
|
|
4,578
|
|
|
|
(4,938
|
)
|
Forward sale commitments
|
|
|
(33,818
|
)
|
|
|
7,703
|
|
|
|
(9,195
|
)
|
|
|
7,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative gains (losses)
|
|
$
|
(38,165
|
)
|
|
|
14,924
|
|
|
|
76,897
|
|
|
|
33,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 contracts, interest rate cap contracts, interest
rate swap contracts, purchased options on Euro Dollar futures
contracts, interest rate locks and forward sale commitments.
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 SFAS 133, the derivative
23
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
financial instruments and any related margin accounts are
reported on the condensed consolidated balance sheets at their
fair value. It is not the Companys policy to use
derivatives to speculate on interest rates.
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 to certain derivative financial
instruments used 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
contracts, interest rate cap contracts and beginning in the
quarter ended September 30, 2006, certain of its interest
rate swap contracts, as hedge instruments under SFAS 133.
At the inception of the hedge, these instruments and their
hedging relationship are identified, designated and documented.
The Company documents the relationships between hedging
instruments and hedged items, as well as its risk management
objectives and strategies for undertaking various hedge
transactions. 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, or OCI, 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 accumulated OCI 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.
Euro Dollar futures contracts As of
September 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 Euro Dollar futures contracts at
September 30, 2006 and 2005 was a $30.7 million and a
$79.5 million asset, respectively, and is included in
prepaid expenses and other assets. During the three and nine
months ended September 30, 2006, the Company recognized a
gain of $28.5 million and $78.9 million, respectively,
attributable to these Euro Dollar futures contracts, which has
been recorded as a reduction of interest expense related to the
Companys financing on mortgage loans held for investment.
For the three and nine months ended September 30, 2005, the
Company recognized a gain of $11.3 million and
$31.9 million, respectively, attributable to cash flow
hedges, which has been recorded as a reduction of interest
expense. Additionally, certain Euro Dollar futures contracts
were terminated during the fourth quarter of 2004 in connection
with the transfer of certain assets
24
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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 $1.8 million and $7.9 million for the
three and nine months ended September 30, 2006,
respectively, related to the reclassification of the terminated
contracts. For the three and nine months ended
September 30, 2005, the Company reclassified into interest
expense $3.2 million and $9.3 million, respectively,
related to these terminated contracts. As of September 30,
2006, the related OCI balance was ($8.0) million.
Ineffectiveness During the nine months ended
September 30, 2006, the Company recognized other income of
$13.7 million from the ineffective portion of these hedges.
There was no ineffectiveness for the three months ended
September 30, 2006. For the three and nine months ended
September 30, 2005, the Company recognized other income of
$2.2 million and $5.8 million, respectively, from the
ineffective portion of these hedges.
Interest Rate Swap Contracts As of
September 30, 2006, the Company also had interest rate swap
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 interest rate swap contracts designated as cash flow hedges
at September 30, 2006 was an ($11.3) million liability and
is included in accounts payable and accrued liabilities. There
were no interest rate swap contracts designated as hedge
instruments during the nine months ended September 30, 2005.
Interest Rate Cap Contracts Certain of the
Companys securitizations structured as financings are
subject to interest rate cap contracts (the Caplets)
designated and documented as cash flow hedges used to mitigate
interest rate risk. The change in the fair value of these
Caplets is recorded in OCI each period. Amounts are reclassified
out of OCI as the hedged transactions impact earnings. During
the three and nine months ended September 30, 2006, the
Company recorded $0.9 million and $2.6 million,
respectively, as an increase to interest expense related to the
effective portion of the Caplets. For the three and nine months
ended September 30, 2005, the Company recorded
$1.3 million and $6.3 million, respectively, as an
increase to interest expense related to the effective portion of
the Caplets. The fair value of these Caplets at
September 30, 2006 and 2005 was $38,000 and
$1.1 million, respectively, and is included in prepaid
expenses and other assets.
Accumulated Other Comprehensive Income As of
September 30, 2006, the balance of accumulated OCI was
$23.5 million, which relates to the fair value of cash flow
hedges. The Company expects to reclassify $21.0 million
from OCI into earnings during the remainder of 2006. The
remaining OCI will be reclassified into earnings by September
2009.
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. For the three and nine months ended
September 30, 2006, the Company recognized a loss of
$1.4 million and $3.1 million, respectively, which
losses were substantially offset by changes in the fair value of
the hedged assets. At September 30, 2006, these contracts
were settled, and, as such, there were no fair value hedges
outstanding as of that date. For the three and nine months ended
September 30, 2005, the Company recognized a gain of
$6.2 million and $11.0 million, respectively, related
to fair value hedges. These gains or losses, as
25
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
applicable, have been included as a component of gain on sale of
mortgage loans. The fair value of these contracts at
September 30, 2005 was $0.5 million.
Free-standing
derivatives
Euro Dollar futures contracts As of
September 30, 2006, the Company had certain open Euro
Dollar futures contracts used to economically hedge the
variability in expected cash flows from the variable-rate debt
related to its financing on mortgage loans held for investment
and to economically hedge the fair value of the Companys
residual interests in securitizations that are not designated as
hedges under SFAS 133. During the three and nine months
ended September 30, 2006, the Company recognized a loss of
$17.8 million and a gain of $11.6 million,
respectively, related to the change in fair value of Euro Dollar
futures contracts used to economically hedge the interest rate
risk related to the Companys financing on mortgage loans
held for investment and residual interests. The fair value of
these contracts at September 30, 2006 was $0.8 million
and is included in prepaid expenses and other assets. For the
three and nine months ended September 30, 2005, the Company
recognized a loss of $3.0 million and $2.6 million,
respectively, related to the change in fair value of these
contracts. The fair value of Euro Dollar futures contracts at
September 30, 2005 was $0.7 million.
Purchased options on Euro Dollar futures contracts
The Company utilizes purchased options on Euro
Dollar futures contracts not designated as economic hedge
instruments related to the Companys financing on mortgage
loans held for investment. The change in fair value relating to
purchased options on Euro Dollar futures contracts that was
recognized in earnings during the three and nine months ended
September 30, 2006 was a loss of $0.7 million and
$5.8 million, respectively, and was included in other
income. The fair value of the purchased options on Euro Dollar
futures contracts at September 30, 2006 was
$2.7 million. There were no purchased options of Euro
Dollar futures contracts at September 30, 2005.
Interest Rate Swap contracts Also included in
free-standing derivatives as of September 2006 were certain
interest rate swap contracts not designated as hedge instruments
related to the Companys financing on mortgage loans held
for investment. The change in fair value relating to interest
rate swap contracts not designated as hedges that was recognized
in earnings during the three and nine months ended
September 30, 2006 was a loss of $15.1 million and
$3.4 million, respectively, and is included in other
income. The fair value of interest rate swap contracts not
designated as hedges was $0.4 million at September 30,
2006. There were no interest rate swap contracts at
September 30, 2005.
Interest Rate Locks 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. 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. The change in fair
value relating to IRLCs that was recognized in earnings during
the three and nine months ended September 30, 2006 was a
gain of $4.9 million and $4.6 million, respectively.
The fair value of IRLCs at September 30, 2006 was
$4.6 million. The change in fair value relating to IRLCs
during the three and nine months ended September 30, 2005
was a loss of $4.9 million. The fair value of IRLCs at
September 30, 2005 was ($2.3) million.
Forward Sale Commitments The Company also
utilizes forward sales commitments to manage the interest rate
risk related to the Companys financing on mortgage loans
held for sale. The forward sale commitments are derivatives
under SFAS 133 and are recorded at fair value with the
changes in fair value recognized in current period earnings as a
component of gain on sale of mortgage loans. The Company enters
into forward sale commitments on a significant portion of
mortgage loan production for which there is no offsetting
interest rate lock. The change in fair value relating to forward
sale commitments that was recognized in earnings during the
three and nine months ended September 30, 2006 was a loss
of $33.8 million and $9.2 million, respectively. The
fair value of forward sale commitments at September 30,
2006 was a ($10.2)
26
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
million liability and is included in accounts payable and
accrued liabilities. The change in fair value relating to
forward sale commitments for the three and nine months ended
September 30, 2005 was a gain of $7.7 million. The
fair value of forward sale commitments at September 30,
2005 was $5.2 million.
Commencing in 2004, the Company has operated so as to qualify as
a REIT for U.S. federal income tax purposes. Provided that
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 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.
During the three months ended September 30, 2006 and 2005,
the Company recorded an income tax provision of
$23.6 million and $2.9 million, respectively. The
provision for income taxes during the nine months ended
September 30, 2006 and 2005 was $64.8 million and
$7.6 million, respectively.
Taxes are provided on substantially all income and expense items
included in the earnings of the TRS, at a combined federal and
state rate of 40% for the three and nine months ended
September 30, 2006 and 41% for the three and nine months
ended September 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 consolidated 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 Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 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
|
|
|
−14.2%
|
|
|
|
−34.8%
|
|
|
|
−21.3%
|
|
|
|
−33.3%
|
|
Recapture of tax reserve
|
|
|
−2.4%
|
|
|
|
−12.0%
|
|
|
|
−0.6%
|
|
|
|
−4.8%
|
|
Other
|
|
|
2.8%
|
|
|
|
8.1%
|
|
|
|
0.9%
|
|
|
|
−0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated effective tax rate
|
|
|
26.2%
|
|
|
|
2.3%
|
|
|
|
19.0%
|
|
|
|
2.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
66,642
|
|
|
|
120,104
|
|
|
|
275,920
|
|
|
|
299,943
|
|
Less: Preferred stock dividends
|
|
|
3,174
|
|
|
|
2,567
|
|
|
|
8,307
|
|
|
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common
stock holders
|
|
$
|
63,468
|
|
|
|
117,537
|
|
|
|
267,613
|
|
|
|
297,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding
|
|
|
55,513
|
|
|
|
55,870
|
|
|
|
55,606
|
|
|
|
55,346
|
|
Earnings per share
|
|
$
|
1.14
|
|
|
|
2.10
|
|
|
|
4.81
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common
stockholders
|
|
$
|
63,468
|
|
|
|
117,537
|
|
|
|
267,613
|
|
|
|
297,091
|
|
Add: Interest and amortization of
debt issuance costs on convertible senior notes, net of tax
|
|
|
(16
|
)
|
|
|
(30
|
)
|
|
|
86
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings
|
|
$
|
63,452
|
|
|
|
117,507
|
|
|
|
267,699
|
|
|
|
297,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of
common shares outstanding
|
|
|
55,513
|
|
|
|
55,870
|
|
|
|
55,606
|
|
|
|
55,346
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
150
|
|
|
|
103
|
|
|
|
136
|
|
|
|
135
|
|
Stock options
|
|
|
864
|
|
|
|
1,468
|
|
|
|
948
|
|
|
|
1,778
|
|
Convertible senior notes
|
|
|
|
|
|
|
155
|
|
|
|
27
|
|
|
|
160
|
|
Directors deferred
compensation plan awards
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,530
|
|
|
|
57,598
|
|
|
|
56,720
|
|
|
|
57,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
1.12
|
|
|
|
2.04
|
|
|
|
4.72
|
|
|
|
5.18
|
|
For the nine months ended September 30, 2006, the Company
has included the effect of the issuance of approximately
27,000 shares of common stock related to the 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. There were no such issuances for the three
months ended September 30, 2006. For the three and nine
months ended September 30, 2005, the Company has included
the effect of the issuance of approximately 155,000 and
160,000 shares of common stock, respectively, issuable 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 September 30, 2006 and 2005,
options to purchase approximately 1,778,000 and
1,100,000 shares, respectively, of common stock were
excluded from the calculation of diluted earnings per share
because their effect was anti-dilutive. For the nine months
ended September 30, 2006 and 2005, options to purchase
approximately 1,628,000 and 489,000 shares, respectively,
of common stock were excluded from the calculation of diluted
earnings per share because their effect was anti-dilutive.
28
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
17.
|
Stock-Based
Compensation
|
Through December 31, 2005, the Company 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 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
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 (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 nine months ended September 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 for the Companys
common stock 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
Companys common 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.
29
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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 nine months ended September 30, 2006,
the Company recognized stock-based compensation expense of
$4.1 million and $16.7 million, respectively, as well
as related tax benefits of $1.0 million and
$3.0 million, respectively, associated with the
Companys stock-based awards. For the three and nine months
ended September 30, 2005, the Company recognized
stock-based compensation expense of $1.9 million and
$5.7 million, respectively, as well as related tax benefits
of $1.1 million and $2.4 million, respectively,
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 nine months ended September 30, 2006 was
$2.3 million and $11.6 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 nine months ended September 30,
2006 was $1.9 million and $10.3 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 nine months ended September 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
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Basic earnings available to common
stockholders:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
117,537
|
|
|
|
297,091
|
|
Compensation expense, net of
related tax effects
|
|
|
(1,782
|
)
|
|
|
(4,971
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
115,755
|
|
|
|
292,120
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings available to
common stockholders:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
117,507
|
|
|
|
297,156
|
|
Compensation expense, net of
related tax effects
|
|
|
(1,782
|
)
|
|
|
(4,971
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
115,725
|
|
|
|
292,185
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.10
|
|
|
|
5.37
|
|
Pro forma
|
|
|
2.07
|
|
|
|
5.28
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.04
|
|
|
|
5.18
|
|
Pro forma
|
|
|
2.03
|
|
|
|
5.15
|
|
Basic weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
As reported
|
|
|
55,870
|
|
|
|
55,346
|
|
Pro forma
|
|
|
55,870
|
|
|
|
55,346
|
|
Diluted weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
As reported
|
|
|
57,598
|
|
|
|
57,421
|
|
Pro forma
|
|
|
56,909
|
|
|
|
56,747
|
|
30
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
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.
The following weighted-average assumptions were used to estimate
the fair values of options granted during the three and nine
months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Fair value
|
|
$
|
8.01
|
|
|
|
10.87
|
|
|
|
6.32
|
|
|
|
9.23
|
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.5
|
|
|
|
4.0
|
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
4.8-5.1
|
%
|
|
|
3.9
|
%
|
|
|
4.4-4.7
|
%
|
|
|
4.2
|
%
|
Volatility
|
|
|
41.7
|
%
|
|
|
59.4
|
%
|
|
|
40.9
|
%
|
|
|
60.5
|
%
|
Expected annual dividend yield
|
|
|
11.1
|
%
|
|
|
12.5
|
%
|
|
|
11.1
|
%
|
|
|
13.7
|
%
|
Expected annual forfeiture rate
|
|
|
|
%
|
|
|
|
%
|
|
|
11.0
|
%
|
|
|
|
%
|
Stock option activity during the nine months ended
September 30, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Balance, beginning of period
|
|
|
3,819,533
|
|
|
$
|
27.29
|
|
Granted
|
|
|
388,459
|
|
|
|
40.27
|
|
Exercised
|
|
|
(660,120
|
)
|
|
|
12.44
|
|
Cancelled
|
|
|
(274,589
|
)
|
|
|
37.51
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
3,273,283
|
|
|
|
30.89
|
|
|
|
|
|
|
|
|
|
|
31
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
At September 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
|
|
|
$
|
6.00 - 6.79
|
|
|
|
349,768
|
|
|
|
4.77
|
|
|
$
|
6.58
|
|
|
|
349,768
|
|
|
$
|
6.58
|
|
|
7.33 - 9.27
|
|
|
|
160,000
|
|
|
|
4.86
|
|
|
|
8.71
|
|
|
|
64,599
|
|
|
|
8.47
|
|
|
10.47 - 12.17
|
|
|
|
240,418
|
|
|
|
5.37
|
|
|
|
10.49
|
|
|
|
206,668
|
|
|
|
10.49
|
|
|
14.43 - 17.83
|
|
|
|
202,331
|
|
|
|
5.96
|
|
|
|
15.15
|
|
|
|
91,706
|
|
|
|
15.38
|
|
|
18.65 - 18.66
|
|
|
|
343,347
|
|
|
|
6.24
|
|
|
|
18.66
|
|
|
|
181,797
|
|
|
|
18.66
|
|
|
19.47 - 26.97
|
|
|
|
192,939
|
|
|
|
6.71
|
|
|
|
26.22
|
|
|
|
98,349
|
|
|
|
26.53
|
|
|
35.74 - 39.10
|
|
|
|
366,425
|
|
|
|
9.00
|
|
|
|
38.32
|
|
|
|
100,293
|
|
|
|
38.30
|
|
|
41.60 - 44.06
|
|
|
|
405,169
|
|
|
|
8.47
|
|
|
|
44.01
|
|
|
|
33,391
|
|
|
|
43.96
|
|
|
45.04 - 45.96
|
|
|
|
364,496
|
|
|
|
7.35
|
|
|
|
45.86
|
|
|
|
316,362
|
|
|
|
45.87
|
|
|
46.02 - 46.78
|
|
|
|
306,760
|
|
|
|
8.13
|
|
|
|
46.60
|
|
|
|
218,129
|
|
|
|
46.63
|
|
|
47.00 - 49.92
|
|
|
|
226,525
|
|
|
|
8.56
|
|
|
|
49.16
|
|
|
|
16,194
|
|
|
|
47.59
|
|
|
50.47 - 60.47
|
|
|
|
115,105
|
|
|
|
8.00
|
|
|
|
55.18
|
|
|
|
91,117
|
|
|
|
56.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,273,283
|
|
|
|
|
|
|
|
|
|
|
|
1,768,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006, the total intrinsic value of stock
options outstanding and exercisable was $27.6 million and
$21.2 million, respectively.
Stock option information related to unvested shares for the nine
months ended September 30, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Options
|
|
|
Value
|
|
|
Balance, beginning of period
|
|
|
2,075,965
|
|
|
$
|
11.26
|
|
Granted
|
|
|
388,459
|
|
|
|
6.32
|
|
Vested
|
|
|
(768,483
|
)
|
|
|
10.95
|
|
Forfeited
|
|
|
(191,031
|
)
|
|
|
10.92
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,504,910
|
|
|
|
10.19
|
|
|
|
|
|
|
|
|
|
|
32
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
A summary of unvested restricted stock activity for the nine
months ended September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance, beginning of period
|
|
|
441,630
|
|
|
$
|
45.03
|
|
Granted
|
|
|
285,907
|
|
|
|
41.57
|
|
Vested
|
|
|
(161,719
|
)
|
|
|
36.30
|
|
Forfeited
|
|
|
(35,451
|
)
|
|
|
41.09
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
530,367
|
|
|
|
46.09
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the
nine months ended September 30, 2006 and 2005 was
$20.2 million and $64.2 million, respectively. During
the nine months ended September 30, 2006 and 2005, the
Company received cash of $8.2 million and
$16.2 million, respectively, from exercises of stock
options and recognized related tax benefits of $5.0 million
and $17.3 million, respectively.
During the three and nine months ended September 30, 2006,
38,049 and 126,959 shares of common stock, respectively,
were purchased under the Companys Employee Stock Purchase
Plan resulting in compensation cost of approximately $192,000
and $875,000, respectively.
As of September 30, 2006, the total remaining unrecognized
cost related to unvested stock options and restricted stock
amounted to $13.0 million and $14.3 million,
respectively, which will be amortized over the weighted-average
remaining requisite service period of 29 months and
46 months, respectively.
The Company issues new shares of common stock to satisfy
stock-based awards. At September 30, 2006, there were
approximately 1,737,000 shares available for grant under
the Plan. As of September 30, 2006, approximately
1.9 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
consisting of interest income less interest expense and a
provision for mortgage loan losses on mortgage loans it holds in
its portfolio.
|
|
|
|
The mortgage loan operations segment, consisting of the
Wholesale and Retail origination divisions, reflects purchases
and originations of residential mortgage loans and records
(i) net interest income comprised of interest income and
interest expense on the mortgage loans the Company holds prior
to selling its loans to the portfolio segment or in the whole
loan market and (ii) gain on sale of mortgage loans less
expenses to originate the mortgage loans.
|
|
|
|
The servicing and other 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. Operations not included in the
portfolio, mortgage loan operations or servicing segments are
considered other and are included in the servicing and other
segment. The Companys recently acquired
|
33
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
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 nine 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 nine months ended September 30, 2006 and
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
REIT &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Taxable REIT Subsidiary
|
|
|
|
|
|
|
|
|
|
REIT
|
|
|
|
|
|
Mortgage Loan Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Servicing
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Wholesale
|
|
|
Retail
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Interest income
|
|
$
|
258,233
|
|
|
|
30,176
|
|
|
|
176,676
|
|
|
|
37,035
|
|
|
|
12,052
|
|
|
|
|
|
|
|
514,172
|
|
Interest expense
|
|
|
(178,283
|
)
|
|
|
(24,384
|
)
|
|
|
(120,743
|
)
|
|
|
(31,386
|
)
|
|
|
(20,432
|
)
|
|
|
|
|
|
|
(375,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
79,950
|
|
|
|
5,792
|
|
|
|
55,933
|
|
|
|
5,649
|
|
|
|
(8,380
|
)
|
|
|
|
|
|
|
138,944
|
|
Provision for losses on mortgage
loans held for investment
|
|
|
(22,500
|
)
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for losses
|
|
|
57,450
|
|
|
|
7,536
|
|
|
|
55,933
|
|
|
|
5,649
|
|
|
|
(8,380
|
)
|
|
|
|
|
|
|
118,188
|
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
197,310
|
|
|
|
90,676
|
|
|
|
(67,517
|
)
|
|
|
(47,424
|
)
|
|
|
173,045
|
|
Servicing & other income
(loss)
|
|
|
(30,168
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
27,257
|
|
|
|
|
|
|
|
(2,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
(30,168
|
)
|
|
|
|
|
|
|
197,310
|
|
|
|
90,610
|
|
|
|
(40,260
|
)
|
|
|
(47,424
|
)
|
|
|
170,068
|
|
Operating expenses
|
|
|
4,246
|
|
|
|
|
|
|
|
158,202
|
|
|
|
98,116
|
|
|
|
(62,553
|
)
|
|
|
|
|
|
|
198,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
23,036
|
|
|
|
7,536
|
|
|
|
95,041
|
|
|
|
(1,857
|
)
|
|
|
13,913
|
|
|
|
(47,424
|
)
|
|
|
90,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$
|
|
|
|
|
|
|
|
|
13,482,612
|
|
|
|
2,349,903
|
|
|
|
|
|
|
|
|
|
|
|
15,832,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as
financings
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at September 30,
2006
|
|
$
|
11,426,092
|
|
|
|
1,683,192
|
|
|
|
10,196,797
|
|
|
|
1,781,636
|
|
|
|
|
|
|
|
(27,949
|
)
|
|
|
25,059,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
REIT &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Taxable REIT Subsidiary
|
|
|
|
|
|
|
|
|
|
REIT
|
|
|
|
|
|
Mortgage Loan Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Servicing
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Wholesale
|
|
|
Retail
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Interest income
|
|
$
|
777,928
|
|
|
|
112,077
|
|
|
|
473,807
|
|
|
|
90,166
|
|
|
|
24,310
|
|
|
|
|
|
|
|
1,478,288
|
|
Interest expense
|
|
|
(510,021
|
)
|
|
|
(76,286
|
)
|
|
|
(315,344
|
)
|
|
|
(73,784
|
)
|
|
|
(44,117
|
)
|
|
|
|
|
|
|
(1,019,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
267,907
|
|
|
|
35,791
|
|
|
|
158,463
|
|
|
|
16,382
|
|
|
|
(19,807
|
)
|
|
|
|
|
|
|
458,736
|
|
Provision for losses on mortgage
loans held for investment
|
|
|
(82,200
|
)
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for losses
|
|
|
185,707
|
|
|
|
37,085
|
|
|
|
158,463
|
|
|
|
16,382
|
|
|
|
(19,807
|
)
|
|
|
|
|
|
|
377,830
|
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
610,717
|
|
|
|
257,837
|
|
|
|
(205,513
|
)
|
|
|
(165,309
|
)
|
|
|
497,732
|
|
Servicing & other income
(loss)
|
|
|
(7,169
|
)
|
|
|
|
|
|
|
(144
|
)
|
|
|
(608
|
)
|
|
|
74,190
|
|
|
|
|
|
|
|
66,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
(7,169
|
)
|
|
|
|
|
|
|
610,573
|
|
|
|
257,229
|
|
|
|
(131,323
|
)
|
|
|
(165,309
|
)
|
|
|
564,001
|
|
Operating expenses
|
|
|
17,860
|
|
|
|
|
|
|
|
459,129
|
|
|
|
285,482
|
|
|
|
(161,382
|
)
|
|
|
|
|
|
|
601,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
160,678
|
|
|
|
37,085
|
|
|
|
309,907
|
|
|
|
(11,871
|
)
|
|
|
10,252
|
|
|
|
(165,309
|
)
|
|
|
340,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$
|
|
|
|
|
|
|
|
|
38,684,177
|
|
|
|
6,759,095
|
|
|
|
|
|
|
|
|
|
|
|
45,443,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as
financings
|
|
$
|
3,393,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,393,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at September 30,
2006
|
|
$
|
11,426,092
|
|
|
|
1,683,192
|
|
|
|
10,196,797
|
|
|
|
1,781,636
|
|
|
|
|
|
|
|
(27,949
|
)
|
|
|
25,059,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
NEW
CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005
|
|
|
|
REIT &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Taxable REIT Subsidiary
|
|
|
|
|
|
|
|
|
|
REIT
|
|
|
|
|
|
Mortgage Loan Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Servicing
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Wholesale
|
|
|
Retail
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Interest income
|
|
$
|
293,706
|
|
|
|
52,414
|
|
|
|
132,085
|
|
|
|
13,814
|
|
|
|
2,602
|
|
|
|
|
|
|
|
494,621
|
|
Interest expense
|
|
|
(159,022
|
)
|
|
|
(37,354
|
)
|
|
|
(77,602
|
)
|
|
|
(8,386
|
)
|
|
|
(8,535
|
)
|
|
|
|
|
|
|
(290,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
134,684
|
|
|
|
15,060
|
|
|
|
54,483
|
|
|
|
5,428
|
|
|
|
(5,933
|
)
|
|
|
|
|
|
|
203,722
|
|
Provision for losses on mortgage
loans held for investment
|
|
|
(38,500
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for losses
|
|
|
96,184
|
|
|
|
15,018
|
|
|
|
54,483
|
|
|
|
5,428
|
|
|
|
(5,933
|
)
|
|
|
|
|
|
|
165,180
|
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
165,399
|
|
|
|
75,394
|
|
|
|
(10,703
|
)
|
|
|
(53,849
|
)
|
|
|
176,241
|
|
Servicing & other income
(loss)
|
|
|
11,579
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
404
|
|
|
|
3,211
|
|
|
|
|
|
|
|
15,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
11,579
|
|
|
|
|
|
|
|
165,394
|
|
|
|
75,798
|
|
|
|
(7,492
|
)
|
|
|
(53,849
|
)
|
|
|
191,430
|
|
Operating expenses
|
|
|
2,836
|
|
|
|
|
|
|
|
161,880
|
|
|
|
92,588
|
|
|
|
(23,665
|
)
|
|
|
|
|
|
|
233,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
104,927
|
|
|
|
15,018
|
|
|
|
57,997
|
|
|
|
(11,362
|
)
|
|
|
10,240
|
|
|
|
(53,849
|
)
|
|
|
122,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$
|
|
|
|
|
|
|
|
|
14,859,085
|
|
|
|
1,852,513
|
|
|
|
|
|
|
|
|
|
|
|
16,711,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as
financings
|
|
$
|
2,080,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,080,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at September 30,
2005
|
|
$
|
15,110,803
|
|
|
|
2,611,568
|
|
|
|
10,194,849
|
|
|
|
1,227,874
|
|
|
|
|
|
|
|
(57,851
|
)
|
|
|
29,087,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
|
|
|
|
REIT &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Taxable REIT Subsidiary
|
|
|
|
|
|
|
|
|
|
REIT
|
|
|
|
|
|
Mortgage Loan Operations
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Servicing
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Wholesale
|
|
|
Retail
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Interest income
|
|
$
|
739,470
|
|
|
|
178,131
|
|
|
|
289,204
|
|
|
|
32,619
|
|
|
|
7,129
|
|
|
|
|
|
|
|
1,246,553
|
|
Interest expense
|
|
|
(360,569
|
)
|
|
|
(114,173
|
)
|
|
|
(164,067
|
)
|
|
|
(18,805
|
)
|
|
|
(13,921
|
)
|
|
|
|
|
|
|
(671,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
378,901
|
|
|
|
63,958
|
|
|
|
125,137
|
|
|
|
13,814
|
|
|
|
(6,792
|
)
|
|
|
|
|
|
|
575,018
|
|
Provision for losses on mortgage
loans held for investment
|
|
|
(104,201
|
)
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for losses
|
|
|
274,700
|
|
|
|
62,504
|
|
|
|
125,137
|
|
|
|
13,814
|
|
|
|
(6,792
|
)
|
|
|
|
|
|
|
469,363
|
|
Other operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
588,805
|
|
|
|
208,432
|
|
|
|
(231,754
|
)
|
|
|
(155,686
|
)
|
|
|
409,797
|
|
Servicing & other income
(loss)
|
|
|
(10,705
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
404
|
|
|
|
46,118
|
|
|
|
|
|
|
|
35,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income (loss)
|
|
|
(10,705
|
)
|
|
|
|
|
|
|
588,801
|
|
|
|
208,836
|
|
|
|
(185,636
|
)
|
|
|
(155,686
|
)
|
|
|
445,610
|
|
Operating expenses
|
|
|
15,760
|
|
|
|
|
|
|
|
452,782
|
|
|
|
218,552
|
|
|
|
(79,647
|
)
|
|
|
|
|
|
|
607,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
248,235
|
|
|
|
62,504
|
|
|
|
261,156
|
|
|
|
4,098
|
|
|
|
(112,781
|
)
|
|
|
(155,686
|
)
|
|
|
307,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding volume
|
|
$
|
|
|
|
|
|
|
|
|
36,063,790
|
|
|
|
4,343,545
|
|
|
|
|
|
|
|
|
|
|
|
40,407,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as
financings
|
|
$
|
10,961,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,961,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at September 30,
2005
|
|
$
|
15,110,803
|
|
|
|
2,611,568
|
|
|
|
10,194,849
|
|
|
|
1,227,874
|
|
|
|
|
|
|
|
(57,851
|
)
|
|
|
29,087,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
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.
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, began trading under the ticker symbol
NEW, and 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 the interest
income generated from our portfolio of mortgage loans held by
our REIT and our taxable REIT subsidiaries. We also continue to
generate revenue through our taxable REIT subsidiaries from the
sale of loans, servicing income and loan origination fees. We
expect the primary components of our expenses to be
(i) interest expense on our credit facilities,
securitizations, and other borrowings, (ii) general and
administrative expenses and (iii) payroll and related
expenses arising from our origination and servicing businesses.
38
Recent
Acquisitions
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, included 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
The first nine months of 2006 have been challenging for
originators of mortgage loans. Interest rates, while declining
slightly in the third quarter, steadily increased over the first
half of the year and remain at higher levels than the last few
years. Higher interest rates have caused consumer demand for
home purchase financings and refinancings to decrease from the
levels the industry enjoyed in the recent past. Lower consumer
demand for mortgage products has also created intense pricing
competition within the industry. The increasingly competitive
environment has lead to industry consolidation, which we expect
will continue into 2007.
Despite the difficult macroeconomic environment, many of our key
business metrics were solid in the third quarter of 2006. During
the quarter, we maintained loan production volume at a level
comparable to the second quarter of 2006. We also achieved
record low loan acquisition costs in the quarter and, while the
interest spread earned by our mortgage loan portfolio in the
third quarter decreased when compared with the second quarter,
the decrease was primary as a result of a loss from
hedging-related activities, a component unrelated to our core
business operations. Partially offsetting these positive trends,
gain-on-sale
declined in the quarter as a result of changes to rating agency
credit enhancement levels and higher loan repurchases and
discounted loan sales. In addition, our
gain-on-sale
for the quarter was affected by the accounting impact of the
value of the companys forward sale commitments and
interest rate locks, which are treated as derivative instruments
for accounting purposes but do not currently qualify for hedge
accounting. While our mortgage loan portfolio spread and
gain-on-sale
in the quarter were negatively affected by our hedging-related
activities, we still believe that our hedging strategies are
effective on an economic basis. Since we have little control
over the macroeconomic factors that affect the income we receive
from our hedging-related activities and the related accounting
impact, we will continue to focus on the factors affecting our
business that we can influence including our pricing strategy,
credit quality and cost reduction strategies.
For the fourth quarter of 2006, we expect the operating
environment to continue to be challenging. We expect our loan
production volume to be moderately lower than the third quarter
and our non-prime net operating margin to be reduced in the
fourth quarter as a result of higher discounted loan sales.
Additionally, we expect mortgage loan portfolio income to be
lower than the third quarter as the portfolio balance continues
to decline.
We expect 2007 will be a year of continued industry evolution
and opportunity. Our strategy for next year focuses on
maximizing our core mortgage origination franchise through loan
origination process improvement, enhanced productivity and
increased efficiencies. Our REIT status and the mortgage loan
portfolio are tools that help us execute our mortgage banking
strategy but we do not expect to add to the portfolio simply to
support a specific dividend target. We expect to continue to
evaluate whole loan sales versus securitizations on a
case-by-case
basis based on whole loan prices relative to our view of the
risk-adjusted returns on capital available through
securitization. The current economic environment calls for a
financial strategy that is flexible
39
enough to capitalize on the opportunities that arise during 2007
giving consideration to secondary and capital market conditions.
We believe that we are well positioned to meet the challenges
next year. We expect overall mortgage market volume to decline
in 2007, yet we believe our size, scale, financial resources,
low loan acquisition costs and reputation will enable us to
compete successfully and profitably gain market share in this
consolidating industry.
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 $14.0 billion at
September 30, 2006 and generated $81.8 million and
$287.2 million of interest income for the three and nine
month periods ended September 30, 2006, respectively.
During 2003, we shifted our strategy 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 attractive means to finance
loans on our balance sheet. Therefore, we began to structure our
securitizations as financings during 2003. During the nine
months ended September 30, 2006 and 2005, we completed four
securitizations totaling $3.4 billion and four
securitizations totaling $11.0 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. During the nine months ended September 30,
2006, we retained approximately 7.50% of our total loan
production on our balance sheet. During the third quarter of
2006, we chose to sell loans in the whole loan market rather
than adding assets to our REIT portfolio, resulting in a decline
in the portfolio balance. Going forward, we will continue to
evaluate the relative advantages and disadvantages of whole loan
sales versus securitizations, taking into account secondary
market conditions and our capital allocation strategy.
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 and credit losses. During
the first six months of 2006, prepayment speeds were faster than
originally expected. However, in the third quarter of 2006, the
prepayment speeds decreased to more normal levels. We anticipate
this trend to continue through the fourth quarter of 2006.
Cumulative credit losses, which we generally assume to be in the
range of 0.9% and 5.1% of the original balance of the pool of
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 2.24% at
September 30, 2006. At September 30, 2006, the
allowance for losses on mortgage loans held for investment was
$191.6 million compared with $209.9 million at
June 30, 2006. These amounts represent 1.36% and 1.31% of
the unpaid principal balance of the mortgage loan portfolio,
respectively. Our
60-day-plus
delinquency rate as of September 30, 2006 was 5.95%
compared with 4.61% as of June 30, 2006. The higher
delinquency rate as of the end of the third quarter was the
result of normal portfolio seasoning and higher delinquencies in
the 2005 and 2006 vintages compared with the 2003 and 2004
vintages. We planned for these higher delinquency rates and
believe we are adequately reserved for the expected higher level
of loan losses after giving consideration to the seasoning of
the portfolio and the performance of our newer vintages.
40
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.
Originations
and Sales
The other major component of our business is our ability to
originate and purchase mortgage loans at a reasonable cost and
to sell 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.
We recently announced our adoption of additional guidelines with
respect to our lending best practices. These guidelines include
heightened underwriting requirements for our adjustable-rate and
interest-only mortgage loan programs for potential borrowers in
owner-occupied properties who have FICO scores below 580 and
loan-to-value
ratios greater than 80%. We are requiring these borrowers to
qualify with a
debt-to-income
ratio that is less than 50% and use the fully-indexed rate minus
100 basis points rather than qualifying at the initial
interest rate. Less than 4 percent of our recent loan
production volume would not have qualified for a
30-year
adjustable-rate or interest-only loan under these guidelines. We
believe the steps we are taking are prudent in light of the
current market environment and are designed to help ensure that
specific loan products are appropriate for the circumstances of
individual borrowers and improve the overall credit quality of
our loans. We plan to continue evaluating our product line with
these goals in mind. While these underwriting changes may result
in a modest decline in volume, we do not expect a meaningful
impact to profitability.
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 retain 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 nine months ended September 30,
2005, the difference between these interest rates was
approximately 2.9%. During the nine months ended
September 30, 2006, this margin decreased to 2.3% as a
result of short-term interest rates increasing more rapidly than
our average coupon rates. 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, as
interest rates began to rise and 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. Beginning in the first quarter of 2006, we began to see
some improvement in our gain on sale 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. During the third quarter of 2006, our gain on sale
executions were negatively impacted as a result of increased
rating agency credit enhancement levels, the volume of
repurchases, discounted sales and the severity of the discount
and the accounting impact of the value of our forward sale and
interest rate lock commitments, which are treated as derivative
instruments for accounting purposes but do not currently qualify
for hedge accounting. We expect the volume of repurchases,
discounted sales and the severity of the discount to continue to
challenge originators in our industry. Loan buyers have
increased the number of loan files reviewed in their due
diligence process and decreased the percentage of loans they
ultimately purchase. In
41
addition, repurchases have increased as a result of higher early
payment defaults. While we expect this industry trend to
continue in the near-term, we believe the ongoing refinement of
our underwriting guidelines and continual focus on loan
origination process improvement will help mitigate this trend.
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, and certain
professional fees. During 2004 and through the first quarter of
2005, our loan acquisition costs remained relatively stable and
generally fluctuated inversely with our loan production volume.
As a result of the competitive environment and its impact on the
value of our loans in 2005, we began implementing cost-cutting
measures designed to reduce our loan acquisition costs. The
cost-cutting measures we implemented during 2005 have continued
through the first nine months of 2006 and include changes to our
sales compensation, controlling growth in non-sales overhead and
more closely scrutinizing our discretionary spending. These
cost-cutting measures resulted in a significant reduction of our
loan acquisition costs for the three and nine months ended
September 30, 2006 compared to previous quarters.
These two components of our business, our portfolio of mortgage
loans held for investment and our originations and sales,
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/Alt-A loan origination platforms, both our Wholesale and
Retail Divisions offer non-prime, prime and Alt-A products.
As of September 30, 2006, our Wholesale Division operated
through 33 regional operating centers in 19 states and
originated or purchased $38.6 billion in loans during the
nine months ended September 30, 2006. Of the
$38.6 billion in mortgage loans originated or purchased,
$36.3 billion, or 94.0%, were non-prime loans and
$2.3 billion, or 6.0%, were prime or Alt-A loans. Our
Retail Division, which has a Builder Realtor channel and a
Consumer Direct channel, originated loans through 235 sales
offices in 36 states, including our centralized
telemarketing unit, and originated $6.8 billion in mortgage
loans during the nine months ended September 30, 2006. Of
the $6.8 billion in loans originated, $3.9 billion, or
57.2%, was originated through our Builder Realtor channel and
$2.9 billion, or 42.8%, was originated through our Consumer
Direct channel. In addition, $3.1 billion, or 45.7%, of
total retail originations were non-prime loans and
$3.7 billion, or 54.3%, were prime or Alt-A loans.
As of September 30, 2005, our Wholesale Division operated
through 34 regional operating centers in 17 states and
originated or purchased $36.1 billion in loans during the
nine months ended September 30, 2005. Of the
$36.1 billion in mortgage loans originated or purchased,
$35.7 billion, or 99.0%, were non-prime loans and
$360.6 million, or 1%, were prime or Alt-A loans. Our
Retail Division originated loans through 216 sales offices in
35 states, including our centralized telemarketing unit,
and originated $4.3 billion in loans during the nine months
ended September 30, 2005. Of the $4.3 billion in loans
originated, $494.0 million, or 11.4%, was originated
through our Builder Realtor channel, all of which were prime and
Alt-A loans, and $3.8 billion, or 88.6%, was originated
through our Consumer Direct channel, all of which were non-prime
loans.
During the nine months ended September 30, 2006,
approximately $20.3 billion, or 44.8%, 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 $20.0 billion, or
44.1%, of our total mortgage loan production consisted of home
purchase
42
finance loans. The remainder of our loan production,
$5.1 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 nine
months ended September 30, 2005, total originations
consisted of $20.3 billion, or 50.3%, of cash-out
refinancings, $16.5 billion, or 40.8%, of home purchase
financings, and $3.6 billion, or 8.9%, 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, have
enabled us to decrease the percentage of cash-out refinancings
as compared to home purchase finance loans.
During the nine months ended September 30, 2006,
originations of interest-only mortgage loans totaled
$7.7 billion, or 17.0%, of total originations.
Interest-only originations during the nine months ended
September 30, 2005 totaled $13.7 billion, or 34.0%, 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 included pricing
increases and underwriting changes for the interest-only product
and the introduction of new alternative products, including a
40-year
mortgage product, that are in greater demand in the secondary
market.
For the nine months ended September 30, 2006, originations
of pay-option loans totaled $231.6 million. For the nine
months ended September 30, 2005, originations of pay-option
loans totaled $36.4 million. 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. Since the
required monthly payments for pay-option loans will eventually
increase, borrowers who initially decide to make
negative-amortizing payments may be less able to pay
the increased amounts and, therefore, may be more likely to
default on the loan than a borrower using a more traditional
monthly-amortizing
loan.
For the nine months ended September 30, 2006, full
documentation loans as a percentage of total mortgage loan
originations were $25.3 billion, or 55.7%, limited
documentation loans were $922.0 million, or 2.0%, and
stated documentation loans were $19.2 billion, or 42.3%.
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 nine months ended
September 30, 2005, full documentation loans as a
percentage of total mortgage loan originations were
$21.6 billion, or 53.4%, limited documentation loans were
$1.2 billion, or 3.0%, and stated documentation loans were
$17.6 billion, or 43.6%. 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, including
our recently adopted guidelines for adjustable-rate and
interest-only loans, and quality assurance programs to ensure
that loan quality is consistent and meets our guidelines, even
as the mix of documentation type varies. To further enhance loan
quality, we have also adopted additional steps and verifications
for our stated income documentation loans designed to decrease
the likelihood of borrower fraud or abuse.
43
The following tables set forth selected information relating to
loan originations and purchases during the periods shown
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
Prime &
|
|
|
|
|
|
|
|
|
|
|
|
Prime &
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Prime
|
|
|
Alt-A
|
|
|
Total
|
|
|
%
|
|
|
Non-Prime
|
|
|
Alt-A
|
|
|
Total
|
|
|
%
|
|
|
|
|
|
Wholesale
|
|
$
|
12,727,703
|
|
|
|
754,909
|
|
|
|
13,482,612
|
|
|
|
85.2
|
|
|
|
14,498,442
|
|
|
|
360,643
|
|
|
|
14,859,085
|
|
|
|
88.9
|
|
|
|
|
|
Retail
|
|
|
1,099,510
|
|
|
|
1,250,393
|
|
|
|
2,349,903
|
|
|
|
14.8
|
|
|
|
1,358,536
|
|
|
|
493,977
|
|
|
|
1,852,513
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,827,213
|
|
|
|
2,005,302
|
|
|
|
15,832,515
|
|
|
|
100.0
|
|
|
|
15,856,978
|
|
|
|
854,620
|
|
|
|
16,711,598
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 30 year
|
|
|
2,200,129
|
|
|
|
1,386,982
|
|
|
|
3,587,111
|
|
|
|
22.7
|
|
|
|
4,263,060
|
|
|
|
516,122
|
|
|
|
4,779,182
|
|
|
|
28.6
|
|
|
|
|
|
Interest-Only
|
|
|
93,831
|
|
|
|
216,480
|
|
|
|
310,311
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
843,288
|
|
|
|
85,042
|
|
|
|
928,330
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
Fixed
|
|
|
3,137,248
|
|
|
|
1,688,504
|
|
|
|
4,825,752
|
|
|
|
30.5
|
|
|
|
4,263,060
|
|
|
|
516,122
|
|
|
|
4,779,182
|
|
|
|
28.6
|
|
|
|
|
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid 30 year(1)
|
|
|
2,796,291
|
|
|
|
179,867
|
|
|
|
2,976,158
|
|
|
|
18.8
|
|
|
|
5,986,780
|
|
|
|
30,514
|
|
|
|
6,017,294
|
|
|
|
36.0
|
|
|
|
|
|
Interest-Only
|
|
|
2,394,570
|
|
|
|
116,452
|
|
|
|
2,511,022
|
|
|
|
15.9
|
|
|
|
5,607,138
|
|
|
|
307,984
|
|
|
|
5,915,122
|
|
|
|
35.4
|
|
|
|
|
|
Hybrid 40 year(1)
|
|
|
5,499,104
|
|
|
|
|
|
|
|
5,499,104
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
|
|
|
|
20,479
|
|
|
|
20,479
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
ARM
|
|
|
10,689,965
|
|
|
|
316,798
|
|
|
|
11,006,763
|
|
|
|
69.5
|
|
|
|
11,593,918
|
|
|
|
338,498
|
|
|
|
11,932,416
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,827,213
|
|
|
|
2,005,302
|
|
|
|
15,832,515
|
|
|
|
100.0
|
|
|
|
15,856,978
|
|
|
|
854,620
|
|
|
|
16,711,598
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
5,469,518
|
|
|
|
1,312,972
|
|
|
|
6,782,490
|
|
|
|
42.8
|
|
|
|
6,730,049
|
|
|
|
510,493
|
|
|
|
7,240,542
|
|
|
|
43.3
|
|
|
|
|
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
7,082,991
|
|
|
|
198,009
|
|
|
|
7,281,000
|
|
|
|
46.0
|
|
|
|
7,809,407
|
|
|
|
89,346
|
|
|
|
7,898,753
|
|
|
|
47.3
|
|
|
|
|
|
Rate/term refinances
|
|
|
1,274,704
|
|
|
|
494,321
|
|
|
|
1,769,025
|
|
|
|
11.2
|
|
|
|
1,317,522
|
|
|
|
254,781
|
|
|
|
1,572,303
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
13,827,213
|
|
|
|
2,005,302
|
|
|
|
15,832,515
|
|
|
|
100.0
|
|
|
|
15,856,978
|
|
|
|
854,620
|
|
|
|
16,711,598
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
7,628,488
|
|
|
|
1,228,637
|
|
|
|
8,857,125
|
|
|
|
55.9
|
|
|
|
8,663,510
|
|
|
|
576,456
|
|
|
|
9,239,966
|
|
|
|
55.3
|
|
|
|
|
|
Limited documentation
|
|
|
294,317
|
|
|
|
|
|
|
|
294,317
|
|
|
|
1.9
|
|
|
|
276,062
|
|
|
|
|
|
|
|
276,062
|
|
|
|
1.7
|
|
|
|
|
|
Stated documentation
|
|
|
5,904,408
|
|
|
|
776,665
|
|
|
|
6,681,073
|
|
|
|
42.2
|
|
|
|
6,917,406
|
|
|
|
278,164
|
|
|
|
7,195,570
|
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$
|
13,827,213
|
|
|
|
2,005,302
|
|
|
|
15,832,515
|
|
|
|
100.0
|
|
|
|
15,856,978
|
|
|
|
854,620
|
|
|
|
16,711,598
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance of loans
originated and purchased
|
|
$
|
191
|
|
|
|
177
|
|
|
|
189
|
|
|
|
|
|
|
|
181
|
|
|
|
182
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
Weighted average FICO score of
loans originated and purchased
|
|
|
624
|
|
|
|
712
|
|
|
|
635
|
|
|
|
|
|
|
|
631
|
|
|
|
718
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
Percent of loans secured by first
mortgages
|
|
|
94.0
|
%
|
|
|
92.9
|
%
|
|
|
93.8
|
%
|
|
|
|
|
|
|
93.3
|
%
|
|
|
94.0
|
%
|
|
|
93.4
|
%
|
|
|
|
|
|
|
|
|
Weighted average
loan-to-value
ratio(2)
|
|
|
81.7
|
%
|
|
|
79.1
|
%
|
|
|
81.4
|
%
|
|
|
|
|
|
|
81.3
|
%
|
|
|
76.3
|
%
|
|
|
81.1
|
%
|
|
|
|
|
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
8.9
|
%
|
|
|
7.1
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
7.7
|
%
|
|
|
6.1
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
Adjustable-rate
mortgages initial rate
|
|
|
8.4
|
%
|
|
|
5.8
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
7.1
|
%
|
|
|
5.3
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
Adjustable-rate
mortgages margin over index
|
|
|
6.2
|
%
|
|
|
2.7
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
5.9
|
%
|
|
|
2.9
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
8.5
|
%
|
|
|
6.9
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
7.3
|
%
|
|
|
5.9
|
%
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
Percentage of loans originated in
AAA, AA and A+ credit grades
|
|
|
87.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
90.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Percentage of loans originated in
bottom two credit grades
|
|
|
2.9
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
2.3
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Majority of hybrid products have a fixed rate for 2 or
3 years. |
44
|
|
|
(2) |
|
Weighted average
loan-to-value
(LTV) is the LTV of the first lien mortgages and combined LTV of
the second lien mortgages. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
|
|
|
Prime &
|
|
|
|
|
|
|
|
|
|
|
|
Prime &
|
|
|
|
|
|
|
|
|
|
Non-Prime
|
|
|
Alt-A
|
|
|
Total
|
|
|
%
|
|
|
Non-Prime
|
|
|
Alt-A
|
|
|
Total
|
|
|
%
|
|
|
Wholesale
|
|
$
|
36,347,510
|
|
|
|
2,336,667
|
|
|
|
38,684,177
|
|
|
|
85.1
|
|
|
|
35,703,147
|
|
|
|
360,643
|
|
|
|
36,063,790
|
|
|
|
89.3
|
|
Retail
|
|
|
3,090,039
|
|
|
|
3,669,056
|
|
|
|
6,759,095
|
|
|
|
14.9
|
|
|
|
3,849,568
|
|
|
|
493,977
|
|
|
|
4,343,545
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
39,437,549
|
|
|
|
6,005,723
|
|
|
|
45,443,272
|
|
|
|
100.0
|
|
|
|
39,552,715
|
|
|
|
854,620
|
|
|
|
40,407,335
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15-30 year
|
|
|
6,349,325
|
|
|
|
4,104,443
|
|
|
|
10,453,768
|
|
|
|
23.0
|
|
|
|
9,622,637
|
|
|
|
516,122
|
|
|
|
10,138,759
|
|
|
|
25.1
|
|
Interest-Only
|
|
|
248,234
|
|
|
|
848,717
|
|
|
|
1,096,951
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
2,182,322
|
|
|
|
221,282
|
|
|
|
2,403,604
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
|
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
Fixed
|
|
|
8,779,881
|
|
|
|
5,174,681
|
|
|
|
13,954,562
|
|
|
|
30.7
|
|
|
|
9,622,637
|
|
|
|
516,122
|
|
|
|
10,138,759
|
|
|
|
25.1
|
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid 30 year(1)
|
|
|
8,719,296
|
|
|
|
441,844
|
|
|
|
9,161,140
|
|
|
|
20.2
|
|
|
|
16,502,073
|
|
|
|
30,514
|
|
|
|
16,532,587
|
|
|
|
40.9
|
|
Interest-Only
|
|
|
6,284,923
|
|
|
|
336,086
|
|
|
|
6,621,009
|
|
|
|
14.6
|
|
|
|
13,428,005
|
|
|
|
307,984
|
|
|
|
13,735,989
|
|
|
|
34.0
|
|
Hybrid 40 year(1)
|
|
|
15,653,449
|
|
|
|
|
|
|
|
15,653,449
|
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
|
|
|
|
53,112
|
|
|
|
53,112
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
ARM
|
|
|
30,657,668
|
|
|
|
831,042
|
|
|
|
31,488,710
|
|
|
|
69.3
|
|
|
|
29,930,078
|
|
|
|
338,498
|
|
|
|
30,268,576
|
|
|
|
74.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
39,437,549
|
|
|
|
6,005,723
|
|
|
|
45,443,272
|
|
|
|
100.0
|
|
|
|
39,552,715
|
|
|
|
854,620
|
|
|
|
40,407,335
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
16,220,611
|
|
|
|
3,818,747
|
|
|
|
20,039,358
|
|
|
|
44.1
|
|
|
|
15,956,704
|
|
|
|
510,493
|
|
|
|
16,467,197
|
|
|
|
40.8
|
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
19,728,437
|
|
|
|
610,304
|
|
|
|
20,338,741
|
|
|
|
44.8
|
|
|
|
20,251,060
|
|
|
|
89,346
|
|
|
|
20,340,406
|
|
|
|
50.3
|
|
Rate/term refinances
|
|
|
3,488,501
|
|
|
|
1,576,672
|
|
|
|
5,065,173
|
|
|
|
11.1
|
|
|
|
3,344,951
|
|
|
|
254,781
|
|
|
|
3,599,732
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
39,437,549
|
|
|
|
6,005,723
|
|
|
|
45,443,272
|
|
|
|
100.0
|
|
|
|
39,552,715
|
|
|
|
854,620
|
|
|
|
40,407,335
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
21,505,862
|
|
|
|
3,797,574
|
|
|
|
25,303,436
|
|
|
|
55.7
|
|
|
|
21,013,295
|
|
|
|
576,456
|
|
|
|
21,589,751
|
|
|
|
53.4
|
|
Limited documentation
|
|
|
922,042
|
|
|
|
|
|
|
|
922,042
|
|
|
|
2.0
|
|
|
|
1,198,654
|
|
|
|
|
|
|
|
1,198,654
|
|
|
|
3.0
|
|
Stated documentation
|
|
|
17,009,645
|
|
|
|
2,208,149
|
|
|
|
19,217,794
|
|
|
|
42.3
|
|
|
|
17,340,766
|
|
|
|
278,164
|
|
|
|
17,618,930
|
|
|
|
43.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$
|
39,437,549
|
|
|
|
6,005,723
|
|
|
|
45,443,272
|
|
|
|
100.0
|
|
|
|
39,552,715
|
|
|
|
854,620
|
|
|
|
40,407,335
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance of loans
originated and purchased
|
|
$
|
186
|
|
|
|
176
|
|
|
|
185
|
|
|
|
|
|
|
|
181
|
|
|
|
182
|
|
|
|
181
|
|
|
|
|
|
Weighted average FICO score of
loans originated and purchased
|
|
|
623
|
|
|
|
710
|
|
|
|
634
|
|
|
|
|
|
|
|
631
|
|
|
|
718
|
|
|
|
632
|
|
|
|
|
|
Percent of loans secured by first
mortgages
|
|
|
93.7
|
%
|
|
|
92.7
|
%
|
|
|
93.5
|
%
|
|
|
|
|
|
|
94.0
|
%
|
|
|
94.0
|
%
|
|
|
94.0
|
%
|
|
|
|
|
Weighted average
loan-to-value
ratio(2)
|
|
|
81.6
|
%
|
|
|
78.4
|
%
|
|
|
81.1
|
%
|
|
|
|
|
|
|
81.3
|
%
|
|
|
76.3
|
%
|
|
|
81.2
|
%
|
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
8.9
|
%
|
|
|
6.9
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
7.7
|
%
|
|
|
6.1
|
%
|
|
|
7.6
|
%
|
|
|
|
|
Adjustable-rate
mortgages initial rate
|
|
|
8.4
|
%
|
|
|
5.4
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
7.1
|
%
|
|
|
5.3
|
%
|
|
|
7.1
|
%
|
|
|
|
|
Adjustable-rate
mortgages margin over index
|
|
|
6.2
|
%
|
|
|
2.7
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
5.8
|
%
|
|
|
2.9
|
%
|
|
|
5.7
|
%
|
|
|
|
|
Total originations and purchases
|
|
|
6.7
|
%
|
|
|
8.5
|
%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
7.2
|
%
|
|
|
5.9
|
%
|
|
|
7.2
|
%
|
|
|
|
|
Percentage of loans originated in
AAA, AA and A+ credit grades
|
|
|
87.6
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
89.9
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Percentage of loans originated in
bottom two credit grades
|
|
|
3.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
2.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
(1) |
|
Majority of hybrid adjustable-rate mortgage products 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. |
45
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 transaction, but rather yield interest
income as the payments on the underlying mortgages are received.
The following table sets forth secondary marketing transactions
for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Non-prime whole loan sales
|
|
$
|
13,877,545
|
|
|
|
87.5
|
%
|
|
|
9,983,362
|
|
|
|
71.3
|
%
|
|
|
35,170,037
|
|
|
|
79.8
|
%
|
|
|
22,507,439
|
|
|
|
61.8
|
%
|
Prime and Alt-A whole loan sales
|
|
|
1,715,503
|
|
|
|
10.8
|
%
|
|
|
19,358
|
|
|
|
0.1
|
%
|
|
|
5,058,310
|
|
|
|
11.5
|
%
|
|
|
19,358
|
|
|
|
0.1
|
%
|
Securitizations structured as sales
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1,999,959
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
2,989,181
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium sales
|
|
|
15,593,048
|
|
|
|
98.3
|
%
|
|
|
12,002,679
|
|
|
|
85.7
|
%
|
|
|
40,228,347
|
|
|
|
91.3
|
%
|
|
|
25,515,978
|
|
|
|
70.1
|
%
|
Discounted whole loan sales
|
|
|
409,896
|
|
|
|
2.6
|
%
|
|
|
32,081
|
|
|
|
0.2
|
%
|
|
|
916,340
|
|
|
|
2.1
|
%
|
|
|
178,525
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
16,002,944
|
|
|
|
100.9
|
%
|
|
|
12,034,760
|
|
|
|
85.9
|
%
|
|
|
41,144,687
|
|
|
|
93.4
|
%
|
|
|
25,694,503
|
|
|
|
70.6
|
%
|
Securitizations structured as
financings
|
|
|
|
|
|
|
0.0
|
%
|
|
|
2,080,230
|
|
|
|
14.8
|
%
|
|
|
3,393,531
|
|
|
|
7.7
|
%
|
|
|
10,961,958
|
|
|
|
30.1
|
%
|
Repurchases
|
|
|
(150,974
|
)
|
|
|
(0.9
|
)%
|
|
|
(102,027
|
)
|
|
|
(0.7
|
)%
|
|
|
(469,342
|
)
|
|
|
(1.1
|
)%
|
|
|
(240,966
|
)
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secondary market transactions
|
|
$
|
15,851,970
|
|
|
|
100.0
|
%
|
|
|
14,012,963
|
|
|
|
100.0
|
%
|
|
|
44,068,876
|
|
|
|
100.0
|
%
|
|
|
36,415,495
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole
Loan Sales
During the three months ended September 30, 2006, non-prime
whole loan sales accounted for $13.9 billion, or 87.5%, of
our total secondary market transactions. The weighted average
premium received on the non-prime whole loan sales for the three
months ended September 30, 2006, including certain hedge
gains and premiums received for servicing rights, was 1.59% 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 $12.0 billion, or 85.5%,
of our total secondary market transactions and the weighted
average premium, including certain hedge gains and premiums
received for servicing rights, was 2.05%.
During the three months ended September 30, 2006, prime and
Alt-A whole loan sales accounted for $1.7 billion, or
10.8%, of our secondary market transactions. The weighted
average premium received on prime and Alt-A whole loan sales was
0.7% of the original principal balance of the loans sold,
including certain hedge gains and pair-off fees for the three
months ended September 30, 2006. For the same period in
2005, the weighted average premium received on prime and Alt-A
whole loan sales was 0.6% of the original principal balance of
the loans sold, including certain hedge gains.
During the nine months ended September 30, 2006, non-prime
whole loan sales accounted for $35.2 billion, or 79.8%, of
our total secondary market transactions. The weighted average
premium received on the non-prime whole loan sales for the three
months ended September 30, 2005, including certain hedge
gains and premiums received for servicing rights, was 1.77% of
the original principal balance of the loans sold. For the
46
same period in 2005, non-prime whole loan sales and
securitizations structured as sales accounted for
$25.5 billion, or 70.0%, of our total secondary market
transactions and the weighted average premium, including certain
hedge gains and premiums received for servicing rights, was
2.36%. The increase in whole loan sales for the nine months
ended September 30, 2006 compared to the nine months ended
September 30, 2005 was due to our executing a greater
amount of securitizations structured as financings during 2005
to build our REIT mortgage loan portfolio.
During the nine months ended September 30, 2006, prime and
Alt-A whole loan sales accounted for $5.1 billion, or
11.5%, of our secondary market transactions. The weighted
average premium received on prime and Alt-A whole loan sales was
1.0% of the original principal balance of the loans sold,
including certain hedge gains and pair-off fees, for the nine
months ended September 30, 2006. For the same period in
2005, the weighted average premium received on prime and Alt-A
whole loan sales was 0.6% of the original principal balance of
the loans sold, including certain hedge gains and pair-off fees.
Discounted
Loan Sales
During the three and nine months ended September 30, 2006,
we sold $409.9 million and $916.3 million,
respectively, in mortgage loans at a discount to their
outstanding principal balance. Included in discounted loan sales
for the three and nine months ended September 30, 2006 is
approximately $152.1 million and $447.4 million,
respectively, of second lien mortgage loans that were sold at a
slight discount. There were no discounted second lien sales for
the same period in 2005. The remaining $257.7 million and
$468.9 million of discounted loan sales loans for the three
and nine months ended September 30, 2006, respectively,
consisted of repurchased loans, loans with documentation defects
or loans that whole loan buyers rejected because of certain
characteristics. For the three and nine months ended
September 30, 2005, discounted loan sales totaled
$32.1 million and $178.5 million, respectively. As a
percentage of secondary market transactions, when adjusting for
the second lien transaction, discounted sales increased from
0.2% for the three months ended September 30, 2005 to 1.6%
for the three months ended September 30, 2006. The severity
of the discount increased from 3.5% for the three months ended
September 30, 2005 to 12.9% for the three months ended
September 30, 2006. As a percentage of secondary market
transactions, when adjusting for the second lien transaction,
discounted sales increased from 0.5% for the nine months ended
September 30, 2005 to 1.1% for the nine months ended
September 30, 2006. The severity of the discount increased
from 3.9% for the nine months ended September 30, 2005 to
8.7% for the nine months ended September 30, 2006 due to a
less favorable secondary market for these types of loans as well
as the mix of loans sold as discounted sales.
The table below illustrates the composition of discounted loan
sales for each of the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Principal
|
|
|
Discount
|
|
|
Principal
|
|
|
Discount
|
|
|
Principal
|
|
|
Discount
|
|
|
Repurchases from whole loan
investors
|
|
$
|
181,871
|
|
|
|
(26.7
|
)%
|
|
|
32,081
|
|
|
|
(3.5
|
)%
|
|
|
242,248
|
|
|
|
(26.5
|
)%
|
|
|
90,453
|
|
|
|
(8.1
|
)%
|
Other discounted sales
|
|
|
228,025
|
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
674,093
|
|
|
|
(2.3
|
)%
|
|
|
88,072
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discounted sales
|
|
$
|
409,896
|
|
|
|
(12.9
|
)%
|
|
|
32,081
|
|
|
|
(3.5
|
)%
|
|
|
916,341
|
|
|
|
(8.7
|
)%
|
|
|
178,525
|
|
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations
Structured as Financings
During the three months ended September 30, 2006, we did
not complete any securitizations structured as financings as we
decided to sell our loans in the whole loan market. During the
nine months ended September 30, 2006, we completed four
securitizations structured as financings totaling
$3.4 billion. 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
47
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
September 30, 2005, we completed one securitization
totaling $2.1 billion, and during the nine months ended
September 30, 2005, we completed four securitizations
totaling $11.0 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
of mortgage loans.
Securitizations
Structured as Sales
During the nine months ended September 30, 2006, we did not
complete any securitizations structured as sales. During the
nine months ended September 30, 2005, we completed two
securitizations structured as sales totaling $3.0 billion
and resulting in gain on sale of $71.6 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
remove from our consolidated balance sheet the mortgage loans
held for sale and add to our consolidated balance sheet
(i) the cash received, (ii) the fair value of the
Residuals (as defined in Critical Accounting
Policies-Residual Interests in Securitizations below) and
(iii) the estimated fair value of the servicing asset, if
applicable. The excess of the cash received and the assets
retained over the carrying value of the loans sold, less
transactions costs, equals the net gain on sale of mortgage
loans recorded by us in our consolidated statement of earnings.
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 and adjust the carrying value of the
securities based on actual experience and industry trends. To
determine the value of the Residual 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 nine months ended September 30, 2006 and 2005,
as a result of our quarterly evaluations of the Residuals, we
recorded a $28.1 million and a $7.6 million decrease
in the fair value of the Residuals, respectively. During the
three months ended September 30, 2006, we recorded a
$10.6 million increase to the fair value of the Residuals.
This increase was offset by a corresponding decrease in the fair
value of the Euro Dollar future contracts used to mitigate
interest rate risk related to the Residuals. During the three
months ended September 30, 2005, we recorded a
$3.2 million decrease in the fair value of the Residuals.
These fair value adjustments represent the change in the
estimated present value of future cash flows from the Residuals
and are recorded as a reduction to gain on sale.
Non-Performing
Assets
Non-performing assets consist of loans that 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
48
portfolio, the maturity, or seasoning, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
Principal
|
|
|
Principal
|
|
|
Principal
|
|
|
Principal
|
|
|
Mortgage loans held for
investment: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
12,954,903
|
|
|
|
91.68
|
%
|
|
$
|
15,231,245
|
|
|
|
93.95
|
%
|
Delinquent
30-60 days (excluding non-accrual)
|
|
|
358,613
|
|
|
|
2.54
|
%
|
|
|
314,416
|
|
|
|
1.94
|
%
|
Non-Accrual
|
|
|
817,778
|
|
|
|
5.78
|
%
|
|
|
666,563
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,131,294
|
|
|
|
100.00
|
%
|
|
$
|
16,212,224
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|