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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
 
SECURITIES EXCHANGE ACT OF 1934
 
    
 
For the quarterly period ended June 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  
 
SECURITIES EXCHANGE ACT OF 1934
 
    
 
For the transition period from                      to                     
 
Commission file number 000-22633
 
 
NEW CENTURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
  
33-0683629
(State or other jurisdiction
of incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
18400 Von Karman, Suite 1000, Irvine, California 92612
(Zip code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (949) 440-7030
 
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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  ¨
 
As of July 31, 2002, 24,845,533 shares of common stock of New Century Financial Corporation were outstanding.
 

Table of Contents
 
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
 
INDEX
 
         
PAGE
PART I—FINANCIAL INFORMATION
     
Item 1.
        
Item 2.
      
16
Item 3.
      
29
PART II—OTHER INFORMATION
     
Item 1.
      
30
Item 2.
      
31
Item 4.
      
32
Item 6.
      
32
  
33
    

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Certain information included in this Form 10-Q may include “forward-looking” statements under federal securities laws, and we intend that such forward-looking statements be subject to the safe-harbor created thereby. Such statements include: (i) the expectation that the adoption of SFAS No. 145 and SFAS No. 146 will not have a material impact on our balance sheet or results of operations, (ii) the expectation that we will rebuild our servicing platform and begin servicing loans by the fourth quarter of 2002, (iii) the assumptions used to value our residual securities, including the assumptions relating to prepayment rates, losses and delinquencies, and the discount rates, (iv) our beliefs regarding the volume and anticipated losses on the loans we expect to repurchase from our securitized pools in the 3rd quarter 2002, (v) the expectation that we will continue to complete net interest margin security transactions in connection with our securitizations in order to realize higher cash proceeds, (vi) our expectations regarding the timing and method of repayment of the Salomon residual financing facility secured by our residual interests from our prior securitization transactions, (vii) our expectation that after repayment of our residual financing, the residual cash flows will be a significant source of liquidity and working capital to support future operations, (viii) our expectation that our liquidity, credit facilities and capital resources will be sufficient to fund our operations, (ix) our expectations regarding the sensitivity of our residual securities to interest rate changes, (x) our expectation regarding optimizing net interest income by holding loans for sale for a longer period, (xi) our expectation regarding reduced interest, (xii) the assumptions underlying our hedging strategy, (xiii) our expectation that we will continue to pay a quarterly dividend, (xiv) our expectations regarding our Stock Repurchase Program, (xv) our expectation that our eConduit subsidiary will provide a source of low-cost leads for our Retail origination units, (xvi) our expectation regarding integration of Worth Funding’s operations into our Wholesale Division, (xvii) our estimates regarding earnings per share for 2002 and (xviii) our expectation that our litigation will not have a material adverse effect on our business.
 
There are many factors that could cause our actual results to differ materially from expected results in the forward-looking statements. Such factors include, but are not limited to: (i) our ability to sustain and manage our growth, (ii) our ability to maintain, replace or add to our existing credit facilities on terms comparable to the current terms, (iii) our ability to maintain low loan acquisition costs, (iv) the condition of the whole loan and securitization markets, (v) the initiation of a margin call under any of our warehouse or aggregation facilities, (vi) the effect of competitive pressures from other lenders or suppliers of credit in our market, (vii) the general level of interest rates in the economy, (viii) our ability to implement our plans to re-establish our servicing platform, (ix) decreases in the value of residential real property in the markets we serve, (x) our ability to maintain credit quality and compliance with legal and underwriting requirements during a period of rapid growth, (xi) the effect of proposed legislation and regulations that could restrict our business, (xii) the outcome of our pending litigation and regulatory inquiries and (xiii) the other risks identified in our Annual Report on Form 10-K for the year end December 31, 2001 and our other filings with the Securities and Exchange Commission.

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NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
 
    
June 30,
2002
     
December 31,
2001
  
ASSETS:
                  
Cash and cash equivalents
   
$
61,716
 
   
$
106,679
 
Loans receivable held for sale, net (note 2)
   
 
1,139,406
 
   
 
1,011,122
 
Residual interests in securitizations (note 3)
   
 
281,158
 
   
 
306,908
 
Office property and equipment
   
 
12,794
 
   
 
10,860
 
Prepaid expenses and other assets (note 5)
   
 
20,693
 
   
 
15,749
 
    
  
TOTAL ASSETS
   
$
1,515,767
 
   
$
1,451,318
 
    
  
LIABILITIES AND STOCKHOLDERS' EQUITY:
                  
Warehouse and aggregation lines of credit (note 6)
   
$
1,055,701
 
   
$
987,568
 
Residual financing
   
 
24,000
 
   
 
79,941
 
Subordinated debt
   
 
—  
 
   
 
40,000
 
Notes payable
   
 
10,521
 
   
 
9,746
 
Income taxes payable
   
 
7,024
 
   
 
6,592
 
Accounts payable and accrued liabilities
   
 
66,612
 
   
 
45,457
 
Deferred income taxes
   
 
34,253
 
   
 
34,253
 
    
  
Total liabilities
   
 
1,198,111
 
   
 
1,203,557
 
Stockholders' equity:
                  
Preferred stock, $.01 par value. Authorized 7,500,000 shares; issued and outstanding 40,000 shares at December 31, 2001 and zero shares at June 30, 2002
   
 
—  
 
   
 
—  
 
Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 24,721,203 shares at June 30, 2002 and 20,504,444 shares at December 31, 2001
   
 
247
 
   
 
205
 
Additional paid-in capital
   
 
144,487
 
   
 
143,659
 
Retained earnings, restricted
   
 
176,631
 
   
 
105,547
 
    
  
    
 
321,365
 
   
 
249,411
 
Deferred compensation costs
   
 
(3,709
)
   
 
(1,650
)
    
  
Total stockholders' equity
   
 
317,656
 
   
 
247,761
 
    
  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   
$
1,515,767
 
   
$
1,451,318
 
    
  
 
See accompanying notes to unaudited condensed consolidated financial statements.

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NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
   
2001
     
2002
     
2001
  
Revenues:
                                  
Gain on sale of loans
   
$
103,587
   
$
38,129
 
   
$
182,020
 
   
$
58,679
 
Interest income
   
 
28,941
   
 
13,717
 
   
 
54,918
 
   
 
22,975
 
Residual interest income
   
 
8,328
   
 
9,530
 
   
 
16,168
 
   
 
20,684
 
Servicing income
   
 
21
   
 
2,998
 
   
 
62
 
   
 
9,504
 
Other income
   
 
—  
   
 
420
 
   
 
7
 
   
 
907
 
    
  
  
  
Total revenues
   
 
140,877
   
 
64,794
 
   
 
253,175
 
   
 
112,749
 
    
  
  
  
Expenses:
                                  
Personnel
   
 
30,830
   
 
18,908
 
   
 
60,188
 
   
 
37,008
 
Interest
   
 
12,207
   
 
12,967
 
   
 
23,477
 
   
 
29,062
 
General and administrative
   
 
17,535
   
 
11,635
 
   
 
31,296
 
   
 
24,800
 
Advertising and promotion
   
 
4,744
   
 
2,374
 
   
 
7,831
 
   
 
5,158
 
Professional services
   
 
2,821
   
 
1,551
 
   
 
4,380
 
   
 
2,557
 
    
  
  
  
Total expenses
   
 
68,137
   
 
47,435
 
   
 
127,172
 
   
 
98,585
 
    
  
  
  
Earnings before income taxes
   
 
72,740
   
 
17,359
 
   
 
126,003
 
   
 
14,164
 
Income taxes
   
 
29,823
   
 
7,466
 
   
 
52,168
 
   
 
6,123
 
    
  
  
  
Net earnings
   
$
42,917
   
$
9,893
 
   
$
73,835
 
   
$
8,041
 
Dividends on preferred stock
   
 
—  
   
 
(725
)
   
 
(442
)
   
 
(1,450
)
    
  
  
  
Net earnings available to common stockholders
   
$
42,917
   
$
9,168
 
   
$
73,393
 
   
$
6,591
 
    
  
  
  
Basic earnings per share (note 7)
   
$
1.82
   
$
0.61
 
   
$
3.33
 
   
$
0.44
 
    
  
  
  
Diluted earnings per share (note 7)
   
$
1.64
   
$
0.51
 
   
$
2.84
 
   
$
0.41
 
    
  
  
  
 
See accompanying notes to unaudited condensed consolidated financial statements.

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NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)
 
    
June 30,
2002
     
June 30,
2001
  
Cash flows from operating activities:
                  
Net earnings
   
$
73,835
 
   
$
8,041
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
4,340
 
   
 
3,326
 
NIR gains
   
 
12,050
 
   
 
(16,347
)
Initial deposits to OC accounts
   
 
(17,879
)
   
 
(2,853
)
Cash flows received from residual interests
   
 
47,805
 
   
 
28,878
 
Accretion of NIRs
   
 
(16,941
)
   
 
(20,684
)
Servicing gains
   
 
(4,611
)
   
 
(4,938
)
Fair value adjustment of residual securities
   
 
713
 
   
 
—  
 
Provision for losses
   
 
30,303
 
   
 
5,441
 
Loans originated or acquired for sale
   
 
(5,902,905
)
   
 
(2,412,559
)
Loan sales, net
   
 
5,764,694
 
   
 
2,219,658
 
Principal payments on loans receivable held for sale
   
 
9,927
 
   
 
6,642
 
Increase in warehouse and aggregation lines of credit
   
 
68,133
 
   
 
174,718
 
Net change in other assets and liabilities
   
 
(3,209
)
   
 
20,977
 
    
  
Net cash provided by operating activities
   
 
66,255
 
   
 
10,300
 
    
  
Cash flows from investing activities:
                  
Purchase of office property and equipment
   
 
(5,660
)
   
 
(1,171
)
Purchase price for acquisition of subsidiaries
   
 
(8,400
)
   
 
—  
 
Net proceeds from calls of residual interests
   
 
—  
 
   
 
22,204
 
Sale of mortgage servicing rights
   
 
4,561
 
   
 
22,754
 
    
  
Net cash provided by (used in) investing activities
   
 
(9,499
)
   
 
43,787
 
Cash flows from financing activities:
                  
Net repayments of residual financing