NEW CENTURY FINANCIAL CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
(MARK ONE)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

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NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0683629

(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 440-7030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 19, 1999 was approximately $68.6 million based on the
closing sales price for the Common Stock on such date of $11.13 as reported on
the Nasdaq National Market.

As of March 19, 1999, the Registrant had 14,601,462 shares of Common Stock
outstanding.

PART III INCORPORATES INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF STOCKHOLDERS TO BE
FILED WITH THE COMMISSION WITHIN 120 DAYS OF DECEMBER 31, 1998.

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PART I

ITEM 1. BUSINESS

GENERAL

New Century Financial Corporation ("New Century" or the "Company") is a
specialty finance company that originates, purchases, sells and services sub-
prime mortgage loans secured primarily by first mortgages on single family
residences. The Company was incorporated in Delaware in November 1995 and
commenced lending operations in February 1996.

Originations and Purchases. The Company originates and purchases loans
through both wholesale and retail channels. Wholesale originations and
purchases are through independent mortgage brokers, and represented 71.8% of
the Company's total originations and purchases in 1998. Retail originations
are made through the Company's network of retail offices and through its
Primewest subsidiary, and represented 28.2% of the Company's total
originations and purchases in 1998.

The Typical Borrower. The Company's borrowers generally have substantial
equity in the property securing their loan, but have impaired or limited
credit profiles or higher debt-to-income ratios than traditional mortgage
lenders allow. The Company's borrowers also include individuals who, due to
self-employment or other circumstances, have difficulty verifying their income
through conventional methods, and who prefer the prompt and personalized
service provided by the Company. These types of borrowers are generally
willing to pay higher loan origination fees and interest rates than those
charged by conventional lending sources.

Underwriting. Although the Company's underwriting guidelines include five
levels of credit risk classification, approximately 69.6% of the principal
balance of the loans originated and purchased by the Company in 1998 were to
borrowers within the Company's two highest credit grades. Approximately 88.7%
of its loans originated or purchased during 1998 were secured by borrowers'
primary residences. The average loan-to-value ratio on loans originated and
purchased by the Company in 1998 was approximately 78.2%. Approximately 97.0%
of the loans originated and purchased by the Company during 1998 were secured
by first mortgages, and the remainder of the loans the Company originated and
purchased for such period was secured by second mortgages. Approximately 78.2%
of the loans originated and purchased by the Company in 1998 were refinances
of existing loans, while the remaining 21.8% represented loans for a
borrower's purchase of a residential property.

Loan Sales and Securitizations. The Company sells virtually all of its loan
production through a combination of securitizations and bulk sales of whole
loans to institutional purchasers. In 1998, whole loan sales accounted for
39.5% of total loan sales, and securitizations accounted for the balance.

Servicing. The Company also receives revenue from servicing its loans on
behalf of the loan purchasers. At the end of 1998, the Company's servicing
portfolio, including loans held for sale, totaled $3.8 billion, of which
$457.3 million was being sub-serviced by a third party.

Net Interest Income. In 1998 the Company earned $7.3 million in net interest
income, which represented approximately 14% of the Company's pre-tax earnings.
Net interest income is earned on loans held in inventory for sale.

GROWTH AND OPERATING STRATEGIES

Improving Volume and Profitability of Retail Production. The Company intends
to continue to emphasize the growth of retail loan production during 1999
through geographic expansion and increased consumer marketing efforts. At the
same time, the Company intends to focus on improving the profitability of its
existing retail sales offices by controlling costs. In 1998 the Company opened
30 retail offices and closed 26 retail offices, for a net increase of four
offices.

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The Company targets markets for expansion based on demographics and its
ability to recruit sales office managers and other qualified personnel in
particular markets. The Company has not yet identified the exact locations of
its planned additional retail sales offices. The Company intends to coordinate
the opening of each new retail office with direct mail advertising and
telemarketing with the goals of generating revenues for each such office
within 60 to 90 days after opening, and achieving break-even operations within
five to eight months. In the event new retail offices do not meet these goals,
the Company intends to close them.

The Company also intends to increase its consumer marketing, which includes
the use of direct mail, a centralized retail originations program,
telemarketing and more traditional marketing methods, such as referrals and
individual loan officer sales efforts. The Retail Division and the Company's
Primewest subsidiary are also expanding efforts to receive loan applications
through the internet. Finally, the Company is in the early stages of planning
a broader regional and national marketing effort focused on increasing
consumer recognition of the New Century brand name. See "--Marketing."

Continuing Growth of Wholesale Production. The Company intends to continue
the growth of its Wholesale Division, primarily through geographic expansion
and greater penetration in existing markets by providing continued high levels
of service to brokers. By providing prompt, consistent service to its brokers,
the Company seeks to maximize the number of potential loans closed in the
short term and establish the basis for repeat business, referrals and other
future lending opportunities. To this end, the Company has placed decision-
makers closer to local brokers, enabling the Company to refine its procedures
to reflect local market practices and conditions and enabling the Company to
provide a higher level of service to brokers. The Company expects to further
improve service to brokers by (i) continuing improvements in the Company's
computer and other support systems, which are expected to improve the
Company's speed, efficiency and consistency in processing loan applications,
and (ii) expanding product offerings to provide brokers with a broader
selection of borrowing alternatives for their customers.

Reducing All-In Acquisition Costs Per loan. The "all-in acquisition cost"
per loan is the sum of points and fees received from retail borrowers, fees
paid to wholesale brokers and correspondents, and direct loan origination
costs (including commissions and corporate overhead costs) divided by total
production volume. During 1998, the Company was able to reduce the all-in
acquisition cost from 4.11% to 3.22% of the average original principal balance
of the Company's loans. During 1999, the Company intends to emphasize reducing
all-in acquisition costs further. The principal strategies to achieve this
goal are (i) increasing the origination fees received on retail loan
originations, (ii) decreasing the points and fees paid to wholesale brokers,
and (iii) decreasing corporate overhead and commission expenses. The increase
in retail origination fees and decrease in the points and fees paid to brokers
is expected to be achieved through pricing adjustments on loans and through
the establishment of incentive programs for the sales staff. The decrease in
the cost of origination is expected to be achieved by the increase in
productivity of relatively new retail branches and wholesale regions and by
closing or reducing staff in unprofitable offices and production units.

Diversifying Financing Sources. In 1998 a number of businesses in the
industry suffered severe liquidity problems when their principal financing
relationships reduced or withdrew their financing commitments. In 1999 the
Company intends to diversify its financing sources by identifying and entering
into relationships with additional investment or commercial banks who can
provide various forms of financing for the Company, including funding loan
originations, financing the Company's inventory of loans held for sale, and
financing residual interests received by the Company in its securitization
transactions.

Diversifying Loan Sales and Securitization Channels. In 1998 approximately
30.5% of the Company's loan sales and securitizations represented whole loan
sales to an affiliate of Salomon Smith Barney, Inc. In addition, all of the
Company's 1998 securitizations were effected through Salomon Smith Barney,
Inc. In 1999, the Company intends to continue its efforts to identify and
solicit bids from other purchasers of whole loans, and to explore establishing
relationships with other investment banks which underwrite and distribute
securitized loans.

Managing Cash Flow. The Company's objective is to achieve and then maintain
cash neutral operations. The Company's strategies for managing cash flow
include (i) reducing the all-in acquisition cost of the

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Company's loans, (ii) continuing to sell a significant portion of the
Company's production for cash in whole loan sales, (iii) obtaining financing
secured by the Company's loans and residual interests in securitizations, (iv)
increasing the cash generated by the Company's servicing operations, and (v)
selling residual interests in securitizations through excess cash flow private
placement transactions. For the year ended December 31, 1998, the Company's
operations used approximately $68.6 million in cash, which is primarily
attributable to cash invested in the over-collateralization accounts of the
Company's securitizations. As a result of its strategy to grow its loan
origination, purchase and securitization programs, the Company expects that
its operating uses of cash may continue to exceed its operating sources of
cash.

Increase Value of Loan Production. The Company intends to continue its
efforts to develop a system of communicating secondary market conditions to
its retail and wholesale production units so that loan officers and account
executives will have the incentive to produce loans with a strong secondary
market value and a disincentive to produce loans that are less profitable.
Because the demands in the secondary market evolve continually, New Century
believes it will have a competitive advantage if it can effectively
communicate the changing secondary market conditions to its production units.
The Company also continues to focus on ways to reduce the number of loans that
must be sold at a loss because of documentation errors, borrower fraud and
other reasons.

Implementing the U.S. Bancorp Strategic Alliance. The Company plans to
implement in 1999 the various aspects of its November 1998 strategic alliance
with U.S. Bancorp and its affiliates. The elements of the alliance include (i)
originating loans to U.S. Bank customers who did not qualify for a U.S. Bank
mortgage loan, (ii) assisting U.S. Bank to develop its sub-prime loan
origination capability, (iii) performing selected servicing functions for sub-
prime loans originated by U.S. Bank, and (iv) soliciting bids from U.S. Bank
for the Company's whole loan sales.

Making Selective Acquisitions and Strategic Alliances. On January 12, 1998,
the Company acquired Primewest Funding Corporation ("Primewest") a retail
originator of loans and one of the Company's largest correspondents. In 1998,
Primewest was responsible for $99.3 million in loan origination volume. In May
1998 the Company entered into a strategic alliance with Qualified Financial
Services, Inc. ("QFS"), a California-based mortgage broker. The Company
provided QFS with working capital financing. In exchange, the Company received
a loan production commitment from QFS, a small equity stake, and warrants to
purchase up to 30% of QFS. In 1998, the Company purchased a total of $31.3
million in loans from QFS pursuant to the strategic alliance. In 1999, the
Company will continue to evaluate potential acquisitions and strategic
alliances with mortgage originators.

MARKETING

Retail Division. The Company's Retail Division and Primewest emphasize high-
volume targeted direct mail and outbound telemarketing to attract borrowers.
Using database screening, they select the potential customers to whom they
send direct mail. The database screening involves a detailed marketing
analysis intended to identify current homeowners who are likely to be
qualified candidates for the Company's loan products. In identifying
homeowners for their mailing lists, the Retail Division and Primewest consider
factors including the length of time the homeowner has owned the home and the
individual's credit profile. Longer periods of home ownership increase the
likelihood that the homeowner has substantial equity in the home and will
satisfy the Company's loan-to-value requirements. Aspects of an individual's
credit profile, such as credit problems, limited credit history and prior
borrowings from consumer finance companies, also indicate that the individual
is a likely candidate for the Company's loan programs.

The Company tracks the success of its marketing efforts and regularly
assesses the accuracy of its database screening in identifying likely
candidates for its products. By limiting the mailing of direct mail pieces to
likely borrowers, the Company believes it derives more benefit from its
marketing expenditures.

Under the Company's centralized retail originations program, the Company
utilizes its direct marketing methodology to market where the Company does not
currently maintain a sales office. As part of this program,

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the Retail Division is attempting to improve and expand its capability to
receive inquiries and applications through its web-site. The Company also
continues to emphasize retail loan generation through more traditional
marketing methods, such as referrals and individual loan officer sales
efforts, and provides each sales office with a promotional budget to support
these activities.

Wholesale Division. The Company's wholesale marketing strategy is focused on
the sales efforts of its account executives, supported by the Company's
commitment to providing prompt, consistent service to brokers and their
customers. The Company expects that its growth in wholesale originations will
stem primarily from increasing the number of account executives, increasing
the number of markets served by such account executives and continuing efforts
to improve the service provided to brokers and their customers.

Brand Development. In addition to the targeted efforts of the Retail and
Wholesale Divisions, in 1999 the Company intends to begin a broader marketing
effort to build recognition of the "New Century" brand among potential
borrowers and mortgage brokers.

LOAN ORIGINATIONS AND PURCHASES

The Company originates and purchases loans through its Wholesale and Retail
Divisions and through its Primewest subsidiary. The Wholesale Division
originates and purchases loans through a network of independent mortgage
brokers and correspondents. The Retail Division and Primewest solicit loans
directly from prospective borrowers. During 1997, the Company also purchased
loans through bulk acquisitions from mortgage bankers and financial
institutions, but discontinued this origination channel in early 1998. All of
the Company's loans are secured by first or second mortgages on one-to-four
single family residences.

Wholesale Division. The Wholesale Division funded $2.4 billion in loans, or
71.8% of the Company's total loan production, during 1998. As of December 31,
1998, the Wholesale Division was operating through four regional operating
centers located in Southern California, Northern California, Chicago and
Atlanta and through 67 additional sales offices located in Arizona (2),
Arkansas, California (4), Colorado, Florida (8), Georgia, Hawaii, Idaho,
Indiana, Kentucky, Louisiana (2), Massachusetts (2), Maryland, Michigan (2),
Minnesota, Missouri (2), Mississippi, Montana, Nevada, New Jersey, New Mexico,
New York, North Carolina (3), Ohio (3), Oklahoma (2), Oregon (2), Pennsylvania
(2), South Carolina (2), Tennessee (3), Texas (4), Utah, Virginia (4),
Washington (2) and Wisconsin (2), employing a total of 182 account executives.
As of December 31, 1998, the Company had approximately 7,500 approved mortgage
brokers and during 1998 originated loans through approximately 4,000 brokers.
During 1998, New Century's ten largest producing brokers originated
approximately 9.1% of the Company's loans, with the largest broker, Qualified
Financial Services, accounting for approximately 1.8% of the division's
production.

In wholesale originations, the broker's role is to identify the applicant,
assist in completing the loan application form, gather necessary information
and documents and serve as the Company's liaison with the borrower through the
lending process. The Company reviews and underwrites the applications
submitted by the broker, approves or denies the application, sets the interest
rate and other terms of the loan and, upon acceptance by the borrower and
satisfaction of all conditions imposed by the Company, funds the loan. Because
brokers conduct their own marketing and employ their own personnel to complete
loan applications and maintain contact with borrowers, originating loans
through the Wholesale Division allows the Company to increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations.

Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The application is then
forwarded to the closest regional operating center where the loan is logged-in
for RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 hours of receipt. Because
mortgage brokers generally submit individual loan files to several prospective
lenders simultaneously, the Company attempts to respond to each application as
quickly as possible. If approved, the Company issues a "conditional approval"
to the broker with

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a list of specific conditions to be met (for example, credit verifications and
independent third-party appraisals) and additional documents to be supplied
prior to the funding of the loan. An account manager and the originating New
Century account executive will work directly with the submitting mortgage
broker to collect the requested information and to meet the underwriting
conditions and other requirements. In most cases, the Company funds loans
within 30 days after approval of the loan application.

The Wholesale Division also purchases closed loans on an individual or
"flow" basis from independent mortgage brokers and financial institutions. The
Company reviews an application for approval from each lender seeking to sell
the Company a closed loan. The Company analyzes the mortgage broker's
underwriting guidelines and financial condition, including its licenses and
financial statements. The Company requires each mortgage broker to enter into
a purchase and sale agreement with customary representations and warranties
regarding the loans such mortgage broker will sell to the Company, thereby
providing the Company with representations and warranties that are comparable
to those given by the Company to its loan purchasers.

The following table sets forth selected information relating to wholesale
loan originations and purchases during the periods shown:

FOR THE QUARTERS ENDED
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MARCH
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
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Principal balance (in
thousands)..................... $432,138 $587,425 $672,275 $696,116
Average principal balance per
loan
(in thousands)................. $102 $103 $98 $97
Combined weighted average
initial
loan-to-value ratio............ 76.3% 78.4% 79.6% 79.5%
Percent of first mortgage loans. 97.1% 98.1% 98.7% 98.2%
Property securing loans:
Owner occupied................ 88.9% 87.2% 86.6% 86.1%
Non-owner occupied............ 11.1% 12.8% 13.4% 13.9%
Weighted average interest rate:
Fixed-rate.................... 9.8% 9.9% 10.1% 10.3%
ARMs.......................... 9.6% 9.7% 9.7% 9.8%
Margin--ARMs.................. 5.9% 6.1% 6.2% 6.2%

Retail Division and Primewest. During 1998 the Company originated $837.6
million in loans, or 25.2% of its total loan production, through its Retail
Division and $99.3 million in loans, or 3.0% of its total loan production,
through its Primewest subsidiary. As of December 31, 1998, the Retail Division
employed 276 retail loan officers, located in 78 sales offices in Arizona (4),
California (22), Colorado (2), Delaware, Florida (6), Georgia, Hawaii (2),
Idaho, Illinois (3), Louisiana, Maryland, Massachusetts, Michigan, Minnesota
(2), Missouri (2), Montana, Nevada, New Jersey, New Mexico, North Carolina
(2), Ohio (4), Oklahoma, Oregon, Pennsylvania (2), Tennessee, Texas (8), Utah,
Virginia, Washington (2) and Wisconsin. As of December 31, 1998, Primewest
employed 35 loan officers at its headquarters in Irvine, California.

By creating a direct relationship with the borrower, retail lending provides
a more sustainable loan origination franchise and greater control over the
lending process while generating loan origination fees to offset the higher
costs of retail lending, which may contribute to profitability and cash flow.

The Company's Direct Mail Activities. The Company's direct mail programs are
managed by a centralized staff who create a targeted mailing list for each
branch market and oversee the completion of mailings by a third party mailing
vendor. All calls or written inquiries from potential borrowers which result
from the mailings are received at each branch location and handled by branch
loan officers. Under the Central Telemarketing Program, the telemarketing
staff solicits prospective borrowers, makes a preliminary evaluation of the
borrower's credit and the value of the collateral property and refers
qualified leads to loan officers in the retail branch closest to

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the customer. With the Direct Origination Center, direct mail is sent to areas
not serviced by retail branches which generates calls and inquiries to a
centralized staff of loan officers. In addition, the telemarketing staff
refers qualified leads to those central loan officers who work with the
borrower using telephone, fax and mail and who utilize document and signing
services to close the loan.

For the year ended December 31, 1998, the Retail Division's loan
originations and purchases included $42.2 million in loans funded through the
Company's Service Provider Program. Under that program, the Company
establishes relationships with banks and other financial institutions across
the country. The goal is to encourage participating financial institutions to
identify potential borrowers who do not qualify for a loan from the respective
financial institution but do meet the Company's target borrower profile.
Participating financial institutions are compensated by the Company based on
the level of services performed by the institution. As of December 31, 1998,
the Company had service provider relationships with 182 banks and other
financial institutions, 51 of which were producing loan volume for the
Company.

The following table sets forth selected information relating to retail loan
originations, including Primewest, during the periods shown:

FOR THE QUARTERS ENDED
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MARCH
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
-------- -------- ------------- ------------

Principal balance (in
thousands)..................... $222,812 $231,483 $241,990 $240,617
Average principal balance per
loan
(in thousands)................. $ 92 $ 88 $ 86 $ 85
Combined weighted average
initial
loan-to-value ratio............ 76.7% 77.0% 77.6% 76.8%
Percent of first mortgage loans. 94.6% 94.3% 94.5% 95.3%
Property securing loans:
Owner occupied................ 94.0% 93.4% 93.2% 92.4%
Non-owner occupied............ 6.0% 6.6% 6.8% 7.6%
Weighted average interest rate:
Fixed-rate.................... 9.4% 9.8% 10.0% 10.1%
ARMs.......................... 9.2% 9.5% 9.4% 9.4%
Margin--ARMs.................. 5.9% 6.4% 6.4% 6.4%

FINANCING LOAN ORIGINATIONS AND LOANS HELD FOR SALE

The Company requires access to credit facilities in order to originate or
purchase mortgage loans, and to hold them pending their sale or
securitization. The Company relies on a $320 million short-term warehouse
credit facility led by U.S. Bank National Association to fund its originations
and purchases. The Company also relies on a $603 million aggregation facility
with Salomon Brothers Realty Corp. to finance the loans pending their sale or
securitization. See "--Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources."

PRODUCT TYPES

The Company offers both fixed-rate and adjustable-rate loans ("ARMs"), as
well as loans with an interest rate that is initially fixed for a period of
time and subsequently converts to an adjustable rate. Most of the ARMs
originated by the Company are offered at a low initial interest rate,
sometimes referred to as a "start rate." At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the
amount of any single adjustment, until the rate charged equals the fully
indexed rate. There can be no assurance, however, that the interest rate on
these loans will reach the fully indexed rate if the loans are pre-paid or in
cases of foreclosure.

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The Company's borrowers fall into five sub-prime risk classifications and
products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "Business--Underwriting Standards").
Borrowers may choose to increase or decrease their interest rate through the
payment of different levels of origination fees and many of the Company's
fixed-rate borrowers, in particular, choose to "buy down" their interest rate
through the payment of additional origination fees. The Company's maximum loan
amounts are generally $500,000 with a loan-to-value ratio of up to 90%. The
Company does, however, offer larger loans with lower loan-to-value ratios on a
case-by-case basis, and also offers products that permit a loan-to-value ratio
of up to 95% for selected borrowers with a Company risk classification of "A+"
or "A-."

Loans originated or purchased by the Company in 1998 had an average loan
amount of approximately $96,008 and an average loan-to-value ratio of
approximately 78.2%. Unless prohibited by state law or otherwise waived by the
Company, the Company generally imposes a prepayment penalty on the borrower.
Approximately 72.7% of the loans the Company originated or purchased during
1998 provided for the payment by the borrower of a prepayment charge in
limited circumstances on certain full or partial prepayments and the duration
of the prepayment penalty coverage was an average of 2.72 years.

UNDERWRITING STANDARDS

New Century originates or purchases its mortgage loans in accordance with
the underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates or purchases generally do not satisfy
conventional underwriting standards, such as those utilized by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); therefore, the Company's loans are likely to result in
rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by portfolios of mortgage
loans underwritten in a more traditional manner.

The Underwriting Guidelines are intended to evaluate the credit history of
the potential borrower, the capacity of the borrower to repay the proposed
loan, the value of the security property and the adequacy of such property as
collateral for the proposed loan. Based upon the underwriter's review of the
loan application and related data and application of the Underwriting
Guidelines, the loan terms, including interest rate and maximum loan-to-value,
are determined.

Each loan applicant completes an application that includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. All mortgaged properties
are appraised by qualified independent appraisers prior to funding of the
loan. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and are generally on forms acceptable to FNMA and
FHLMC. The Underwriting Guidelines require a review of the appraisal by a
qualified employee of the Company or by a qualified appraiser retained by the
Company.

The Underwriting Guidelines currently include two levels of applicant
documentation requirements, referred to as the "Full Documentation" and
"Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use a qualifying rate that is equal to (i) the lesser
of the fully indexed interest rate on the loan being applied for or one
percent above the initial interest rate on such loan (in the case of

8

six-month LIBOR loans that do not provide for a delayed first adjustment) or
(ii) the initial interest rate on such loan (in the case of other LIBOR-based
loans). The Underwriting Guidelines require that mortgage loans be
underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires the Company's underwriters
to be satisfied that the value of the property being financed, as indicated by
an appraisal and a review of the appraisal, currently supports the outstanding
loan balance. In general, the maximum loan amount for mortgage loans
originated under the programs is $500,000. The Underwriting Guidelines permit
loans on one-to-four-family residential properties to have (i) a loan-to-value
ratio at origination of up to 90%, with respect to non-conforming first liens,
(ii) a combined loan-to-value ratio at origination of up to 90% with respect
to non-conforming second liens and (iii) a combined loan-to-value ratio at
origination of up to 100% with respect to conforming second liens, in each
case depending on, among other things, the purpose of the mortgage loan, a
borrower's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a borrower under a "lease option
purchase," the loan-to-value of the related mortgage loan is based on the
lower of the appraised value at the time of origination of such mortgage loan
or the sale price of the related mortgaged property if the "lease option
purchase price" was set less than twelve months prior to origination and is
based on the appraised value at the time of origination if the "lease option
purchase price" was set twelve months or more prior to origination.

The Underwriting Guidelines require that the income of each applicant be
verified. The specific income documentation required for the Company's various
programs is as follows: under the Full Documentation program, applicants
generally are required to submit two written forms of verification of stable
income for at least twelve months; under the Stated Income Documentation
program, an applicant may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that, with respect to salaried employees, there be
a telephone verification of the applicant's employment. Verification of the
source of funds (if any) required to be deposited by the applicant into escrow
in the case of a purchase money loan is required when the loan-to-value ratio
is greater than 70%.

In evaluating the credit quality of borrowers, the Company utilizes credit
bureau risk scores (a "FICO score"), a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company and the three national
credit data repositories--Equifax, TransUnion and Experian.

9

The Company's Underwriting Guidelines for first lien mortgage loans have the
following categories and criteria for grading the potential likelihood that an
applicant will satisfy the repayment obligations of a mortgage loan:

SUMMARY OF PRINCIPAL
UNDERWRITING GUIDELINES(1)

A+ RISK A- RISK B RISK C RISK C- RISK
------- ------- ------ ------ -------

Existing mortgage Maximum one Maximum three Maximum one Maximum of Maximum of
history................ 30-day late 30-day late 60-day late one 90-day two 90-day
payment and payments and payment late payment late
no 60-day no 60-day within last within last payments and
late late 12 months; 12 months; one 120-day
payments payments must be less must be less late payment
w/in last 12 w/in last 12 than 60 days than 90 days w/in last 12
mos.; mos.; late at late at months; less
required to required to funding. funding. than 90 days
be current be current late at
at funding; at funding. funding. No
must have a current NOD.
LTV of 90%
or less.
Other credit............ FICO score of FICO score of FICO score of Significant Significant
640 or 620 or 600 or prior defaults
higher; no higher; higher; some defaults acceptable;
open minor prior acceptable; generally,
collection derogatory defaults generally, not more
accounts or items acceptable; not more than $5,000
charge-offs allowed; not not more than $2,500 in open
open after more than than $1,000 in open charge-offs
funding. $500 in open in open collection or
collection collection accounts or collection
accounts or accounts or charge-offs accounts may
charge-offs charge-offs open after remain open
open after open after funding; on after
funding. funding. a case by funding; on
case basis. a case by
case basis.
Bankruptcy filings...... Generally, no Generally, no Generally, no Generally, no Generally, no
bankruptcy bankruptcy bankruptcy bankruptcy bankruptcy
or notice of filings in or notice of or notice of or notice of
default last 2 years default default default
filings in or notice of filings in filings in filings
last 3 default last 2 last 12 allowed in
years. filings in years. months. last 12
last 3 months from
years. discharge
date.
Debt service to income 42% to 45% 50% or less 55% or less 59% or less 59% or less
ratio..................
Maximum loan-to-value
ratio ("LTV"):(2)
Owner occupied:
single family.......... 90% 90% 80% 75% 70%
Owner occupied:
condo/two-to-four unit. 85% 85% 75% 70% 65%
Non-owner occupied..... 85% 85% 75% 70% 65%

- -------
(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value
ratio.
(2) The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced 5% for stated income applications, if
applicable. Additionally, if the borrower's FICO score meets or exceeds
the risk category and debt ratio guidelines, consumer credit may be
disregarded.

10

Mortgage Credit Only Program. In addition to the five risk grade categories
described above, the Company also has a Mortgage Credit Only program. The
Mortgage Credit Only program allows no more than three 30-day late payments
and no 60-day late payments within the last 12 months on an existing mortgage
loan. An existing mortgage loan is not required to be current at the time the
application is submitted. Derogatory credit report items are allowed as to
non-mortgage credit. Mortgage Credit Only loans are not available under the
Stated Income Documentation program. No bankruptcy or notice of default
filings may have occurred during the preceding two years; provided, however,
that if the borrower's bankruptcy has been discharged during the past two
years and the borrower has re-established a credit history otherwise complying
with the credit parameters set forth in this paragraph, the borrower may then
qualify under the Mortgage Credit Only program. The mortgaged property must be
in at least average condition. A maximum loan-to-value of 75% is permitted for
a mortgage loan on a single family owner-occupied property. A maximum loan-to-
value of 70% is permitted for a mortgage loan on a non-owner occupied
property, second home, owner-occupied condominium, or two- to four-family
residential property. The debt service-to-income ratio is generally limited to
a maximum of 55%.

Home Saver Program. The Company has established a sub-category of its C-
credit grade (the "Home Saver Program") for borrowers faced with at least one
of the following credit scenarios: (i) the borrower has an existing mortgage
currently in foreclosure, (ii) the borrower is subject to a notice of default
filing, (iii) the borrower has had a serious mortgage delinquency for more
than one 120 day period in the last 12 months or is more than 90 days late at
the time of funding, or (iv) the borrower is in an open Chapter 13 or Chapter
11 bankruptcy. The Home Saver Program is available only to Full Documentation
borrowers and permits a maximum loan-to-value of 65% and a maximum debt
service-to-income ratio of 59%. The maximum loan is $250,000 and all
derogatory credit report items must either be brought current or paid through
the loan proceeds. A maximum of 3% of the loan proceeds may be paid to the
borrower in cash. If the borrower is in an open Chapter 13 or Chapter 11
bankruptcy, the bankruptcy must be discharged though the proceeds of the loan.

Exceptions. The categories and criteria described in the above table are
guidelines only. On a case-by-case basis, the Company may determine that an
applicant warrants a loan-to-value exception, a debt service-to-income ratio
exception, or another exception to the Underwriting Guidelines. The Company
may allow such an exception if the application reflects certain compensating
factors such as low LTV, pride of ownership, a maximum of one 30-day late
payment on all mortgage loans during the last 12 months, and stable employment
or ownership of current residence for five or more years. The Company may also
allow an exception if the applicant places a down payment through escrow of at
least 20% of the purchase price of the mortgage property or if the new loan
reduces the applicant's monthly aggregate mortgage payment by 25% or more.

The Company evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. The
Company also maintains separate underwriting guidelines appropriate to its
conforming and non-conforming second lien mortgage loans, and adopts new
underwriting guidelines appropriate to new loan products offered by the
Company.

11

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following table sets forth information concerning the Company's
principal balance of fixed rate and adjustable rate loan production by
borrower risk classification for the periods shown:

FOR THE QUARTERS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------

A+ Risk Grade:
Percent of total purchases and
originations.................... 38.0% 38.8% 37.6% 37.3%
Combined weighted average initial
loan-to-value ratio............. 79.4 80.6 81.8 82.1
Weighted average interest rate:
Fixed-rate..................... 9.3 9.5 9.5 9.7
ARMs........................... 9.2 9.3 9.3 9.3
Margin--ARMs................... 5.6 5.8 5.9 5.8
A- Risk Grade:
Percent of total purchases and
originations.................... 33.8% 31.8% 31.8% 30.0%
Combined weighted average initial
loan-to-value ratio............. 76.8 78.8 79.8 80.3
Weighted average interest rate:
Fixed-rate..................... 9.4 9.6 9.8 9.9
ARMs........................... 9.3 9.5 9.5 9.6
Margin--ARMs................... 5.9 6.1 6.2 6.2
B Risk Grade:
Percent of total purchases and
originations.................... 15.9% 14.9% 15.6% 15.5%
Combined weighted average initial
loan-to-value ratio 74.8 76.6 77.9 77.1
Weighted average interest rate:
Fixed-rate..................... 10.0 10.2 10.3 10.4
ARMs........................... 9.7 9.9 9.8 9.9
Margin--ARMs................... 6.1 6.4 6.4 6.4
C Risk Grade:
Percent of total purchases and
originations.................... 7.7% 9.9% 10.9% 11.3%
Combined weighted average initial
loan-to-value ratio............. 70.5 72.4 73.7 73.3
Weighted average interest rate:
Fixed-rate..................... 10.6 10.9 11.2 11.4
ARMs........................... 10.3 10.5 10.5 10.6
Margin--ARMs................... 6.4 6.5 6.6 6.7
C- Risk Grade:
Percent of total purchases and
originations.................... 4.6% 4.6% 4.1% 5.9%
Combined weighted average initial
loan-to-value ratio............. 65.6 67.2 65.8 66.1
Weighted average interest rate:
Fixed-rate..................... 11.7 11.6 12.3 11.7
ARMs........................... 10.9 11.2 11.6 11.5
Margin--ARMs................... 6.5 6.6 6.7 6.6

12

GEOGRAPHIC DISTRIBUTION

The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans originated or purchased by the Company by state
for the periods shown:

FOR THE QUARTERS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
-------------- -------------- -------------- --------------
$ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- -----

California..... $242,271 37.0% $273,640 33.4% $283,798 31.0% $278,100 29.7%
Illinois....... 66,072 10.1% 68,284 8.3% 76,736 8.4% 73,551 7.9%
Florida........ 29,226 4.5% 43,571 5.3% 51,048 5.6% 55,999 6.0%
Texas.......... 16,842 2.6% 37,356 4.6% 35,993 3.9% 45,272 4.8%
Ohio........... 31,800 4.9% 41,329 5.0% 49,604 5.4% 42,839 4.6%
Minnesota...... 21,353 3.3% 22,749 2.8% 30,127 3.3% 32,106 3.4%
Washington..... 16,442 2.5% 28,035 3.4% 32,144 3.5% 31,358 3.3%
Pennsylvania... 18,254 2.8% 21,831 2.7% 27,637 3.0% 26,268 2.8%
Colorado....... 24,430 3.7% 27,812 3.4% 26,192 2.9% 25,132 2.7%
Arizona........ 20,075 3.1% 22,997 2.8% 23,617 2.6% 17,481 1.9%
Other.......... 168,185 25.5% 231,304 28.3% 277,369 30.4% 308,626 32.9%
-------- ----- -------- ----- -------- ----- -------- -----
Total......... $654,950 100.0% $818,908 100.0% $914,265 100.0% $936,732 100.0%
======== ===== ======== ===== ======== ===== ======== =====

LOAN SALES AND SECURITIZATIONS

The Company sells the loans it originates or purchases through both
securitizations and bulk sales to institutional purchasers of whole loans. In
order to better track the performance of its business segments, in December
1998 the Company restructured its operations so that all secondary marketing
functions are performed by a separate subsidiary, NC Capital Corporation. NC
Capital buys loans from the Wholesale and Retail Divisions of New Century
Mortgage Corporation and Primewest within a week or two after origination. The
purchase price approximates the secondary market value of the loans based on
current market conditions. NC Capital is then responsible for determining when
and through what channel to sell the loans, and bears the risks of market
fluctuations in the period between purchase and sale.

Whole Loan Sales. In a whole loan sale, the Company sells loans in bulk to a
purchaser for a cash price that represents a premium over the principal
balance of the loans sold. The sale may include releasing to the purchaser the
servicing rights to the loans (a "servicing-released" sale) or the Company may
retain the servicing rights (a "servicing-retained" sale). Until February
1997, the Company sold all loans through servicing-released whole loan sales.
In February 1997, the Company began to sell loans through securitization and
retain the servicing rights, while it continued to sell loans through whole
loan sales on a servicing-released basis. In December 1997, the Company began
selling loans through whole loan sales on a servicing-retained basis.

In 1998, whole loan sales accounted for $1.48 billion, or 39.5% of the
Company's total loan sales. Of this amount, 65.5% were sold servicing-retained
and 34.5% were sold servicing-released. In the servicing-retained sales, the
purchaser retained the Company to service the loans for a fee of 0.50% per
year of the outstanding principal balance of the loans. The weighted average
sales price of the Company's 1998 whole loans sales was equal to 104.3% of the
original principal balance of the loans sold.

The Company seeks to maximize its premium on whole loan sale revenue by
closely monitoring institutional purchasers' requirements and focusing on
originating or purchasing the types of loans that meet those requirements and
for which institutional purchasers tend to pay higher premiums. During 1998,
the Company sold loans to more than 20 institutional purchasers, including
Salomon Brothers Realty Corp., which accounted for 30.5% of total loan sales
and securitizations.

Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria applied by the Company and the origination
process. The Company, therefore, may be required to repurchase or substitute
loans in the event

13

of a breach of its representations and warranties. In addition, the Company
sometimes commits to repurchase or substitute a loan if a payment default
occurs within the initial months following the date the loan is funded, unless
other arrangements are made between the Company and the purchaser. The Company
is also required in some cases to repurchase or substitute a loan if the loan
documentation is alleged to contain fraudulent misrepresentations made by the
borrower.

Securitizations. The Company completed the sale of loans through five
securitization transactions during 1998. All of the Company's 1998
securitizations were underwritten by Salomon Smith Barney, Inc.

In a securitization, the Company sells a pool of loans to a special trust
for the following: (i) a cash purchase price and (ii) certificates evidencing
its "residual interest" ownership in the trust. The trust raises the cash
portion of the purchase price by selling senior certificates representing
senior interests in the loans in the trust. Following the securitization,
purchasers of senior certificates receive the principal collected, including
prepayments, on the loans in the trust. In addition, they receive a portion of
the interest on the loans in the trust equal to the specified "investor pass-
through interest rate" on the principal balance. The Company receives the cash
flows from the residual interests, after payment of servicing fees, guarantor
fees and other trust expenses, and provided the specified over-
collateralization requirements are met.

The Company recognizes gain on sale of the loans, which represents the
excess of the estimated fair value of the residual interests, less closing and
underwriting costs, over the carrying value of the loans sold, in the fiscal
quarter in which such loans are sold. At the same time as the Company
recognizes the gain on sale, the Company records the residual interests as
assets on its balance sheet. The recorded values of these residual interests
are amortized as distributions and are received from the trust holding the
respective loan pool.

One of the 1998 securitizations was credit enhanced by an insurance policy
provided through a monoline insurance company. The other four securitizations
were credit enhanced through the use of subordinated certificates instead of
an insurance policy. The Company used credit enhancements in each of its
securitizations to allow the senior certificates in the related trusts to
receive ratings of "AAA" from Standard & Poor's Rating Services and "Aaa" from
Moody's Investors Service, Inc. The Company also provides credit enhancement
in the form of an over-collateralization account.

There is no assurance that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residuals may increase or decrease, which may have a material
impact on the Company's results of operations, financial condition and
liquidity.

To date, the Company's overall cash flows on its residual interests are
higher than the Company had projected. However, three of the early 1997
securitizations (1997 NC-1, NC-2 and NC-3) have experienced high prepayment
speeds resulting in a remaining principal balance substantially lower than
projected. In addition, in 1998 the Company elected to repurchase certain
delinquent loans from these three securitizations, which further increased the
prepayment speeds of these three securitizations. Because the Company believes
the future cash flows from these securitizations will be less than modeled
cash flows, the Company recorded a $5.9 million reduction in the value of the
residual interests from these three transactions in the fourth quarter of
1998. See "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."

NIM-Excess Cash Flow Private Placements. In May 1998, the Company completed
its first "net interest margin" or "excess cash flow" private placement (a
"NIM" transaction) with respect to its residual interests in four of its prior
securitizations. In a NIM transaction the Company contributes and/or sells one
or more residual interests from prior securitizations to a special purpose
subsidiary. The subsidiary in turn sells the residual interests to a trust.
The trust pays for the residual interest partly in cash and partly with an
Owner Trust Certificate representing an ownership interest in the trust. The
trust raises the cash by selling bonds that represent

14

senior interests in the residual securities that were deposited into the
trust. In addition to the May 1998 NIM transaction, the Company also completed
a NIM transaction in December 1998, selling the residual interest from the
1998 NC-5 securitization.

While the Company is holding residual interests from securitizations, it is
able to pledge those interests to a lender in order to borrow against them.
The Company is able to pay down those borrowings with the proceeds of a NIM
transaction, thereby reducing its leverage ratios.

The Company completed its third NIM transaction in February 1999 with
respect to all of the remaining residual interests it was holding from prior
securitizations. The Company believes these transactions to be an important
part of its overall loan sales strategy, and expects to continue to pursue
them with its future residual interests if market conditions permit, in order
to improve liquidity and decrease borrowings.

LOAN SERVICING AND DELINQUENCIES

Servicing. Until February 1997, the Company sold all of its loan
originations and purchases on a servicing-released basis. Beginning with its
first securitization in February 1997, the Company has retained the servicing
rights on loans sold through its securitizations. In addition, during the
period from the date the Company originates or purchases loans and the date
the Company sells these loans, which generally ranges from thirty to ninety
days (the "Interim Period"), the Company is responsible for servicing the
loans it originates and purchases. Starting in December 1997, the Company also
began selling the majority of its whole loans on a servicing-retained basis.

Even as to those whole loan sales transactions in which the loans are sold
on a servicing-released basis, in some cases, whole loan purchasers may
request that the Company continue to service the loans purchased for an
interim period following the sale. Servicing includes collecting and remitting
loan payments, making required advances, accounting for principal and
interest, holding escrow or impound funds for payment of taxes and insurance,
and, if applicable, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines.

Advanta. Prior to September 1997, the Company outsourced substantially all
of its servicing operations to Advanta Mortgage Corp. USA ("Advanta"), an
approved third party sub-servicer. Advanta currently sub-services loans sold
through each of the Company's first five securitizations pursuant to the
Advanta Securitization Agreement. Under the Advanta Securitization Agreement,
the Company is obligated to pay Advanta a monthly servicing fee on the
declining principal balance of each loan serviced. Advanta is required to pay
all expenses related to the performance of its duties under the Advanta
Securitization Agreement, however the Company will reimburse Advanta for
certain expenses in accordance with the terms of the Advanta Securitization
Agreement.

If the Company terminates the Advanta Securitization Agreement without cause
or transfers the servicing of any amount of the mortgage loans serviced by
Advanta to another servicer, the Company must pay Advanta certain penalties,
fees and costs. With respect to mortgage loans securitized by the Company's
first five securitizations, the Company is not permitted to terminate the sub-
servicer without the approval of the trustee for such securitization.

Comerica. In September 1997, the Company began boarding loans on a joint
servicing platform with Comerica (the "Comerica Agreement"). Under the
Comerica Agreement, Comerica agreed to act as a sub-servicer for the Company,
providing certain servicing functions with respect to the Company's mortgage
loans. From September 1997 until June 1998, the Company boarded substantially
all of its loans on the joint servicing platform with Comerica, including the
loans it securitized in the fourth quarter of 1997 and the first quarter of
1998.

In early 1998 Comerica announced its intention to discontinue its loan
servicing operations. As a result, in July 1998 the Company and Comerica
mutually agreed to terminate their joint servicing platform. By that time the
Company had established the infrastructure necessary to perform all of the
servicing functions relating to its

15

loans previously serviced on the joint platform. Except for the loans in its
first five securitizations, which are still being sub-serviced by Advanta, the
Company now performs all servicing functions relating to its securitizations,
loans held for sale and loans sold on a servicing-retained basis. The Company
expects to begin servicing the loans currently sub-serviced by Advanta in the
second or third quarter of 1999. The Company may be required to pay Advanta a
small penalty for terminating the sub-servicing arrangement.

As of December 31, 1998, the Company's servicing portfolio consisted of
38,710 loans with an aggregate principal balance of approximately $3.8
billion, of which 3,907 loans with an aggregate principal balance of $357.5
million were held for sale and serviced on an interim basis, 34,704 loans with
an aggregate principal balance of $3.4 billion were serviced for trusts
created from the Company's securitizations, and 99 loans with an aggregate
principal balance of $13.1 million were serviced on behalf of the whole loan
purchasers thereof.

As of December 31, 1998, approximately $457.3 million, or 12.1%, of the
loans in the Company's servicing portfolio were serviced by Advanta, and
approximately $3.4 billion, or 87.9% of the loans in the Company's servicing
portfolio were serviced on the Company's own platform.

Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or non-judicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lien-holder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.

Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.

New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. The Company began selling loans
through securitizations in 1997 and in connection with these securitizations
has established reporting systems to track historical delinquency, bankruptcy,
foreclosure and default experience for the loans included in its
securitizations as well as the Company's total portfolio of loans. Because
most of the Company's securitized loans have been outstanding for a short
period of time, current delinquency and loss information is not necessarily
representative of future delinquencies and losses.

16

The following tables set forth certain delinquency statistics as of December
31, 1998 for the Company's 1997 and 1998 securitized loans (dollars in
thousands):

Securities Issued in 1997

DELINQUENCY (% OF CURRENT
BALANCE BY RISK GRADE)
---------------------------
ORIGINAL CURRENT 60-89 90+ FORECL./
RISK GRADE BALANCE WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE % **
---------- -------- ------ ------- ----- ---- -------- ----- ---------- ----

A+...................... $ 323,194 73.52% $210,220 0.11% 0.98% 2.50% 3.59% $ 1,786 0.85%
A- ..................... 410,273 73.68% 281,603 1.04% 1.36% 3.62% 6.02% 2,449 0.87%
B....................... 208,564 72.73% 133,404 1.59% 1.71% 4.35% 7.65% 2,173 1.63%
C....................... 98,916 68.07% 60,583 1.55% 3.66% 10.29% 15.50% 1,674 2.76%
C- ..................... 83,669 68.24% 47,342 2.69% 7.88% 14.83% 25.40% 2,013 4.25%
---------- ----- -------- ---- ---- ----- ----- ------- ----
$1,124,616 72.19% $733,152 1.02% 1.92% 4.71% 7.65% $10,095 1.38%

Securities Issued in 1998

DELINQUENCY (% OF CURRENT
BALANCE BY RISK GRADE)
---------------------------
ORIGINAL CURRENT 60-89 90+ FORECL./
RISK GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE % **
---------- ---------- ------ ------- ----- ---- -------- ----- ---------- ----

A+...................... $1,030,782 78.04% $ 976,802 0.13% 0.08% 0.97% 1.19% $ -- 0.00%
A- ..................... 929,750 77.09% 889,154 0.15% 0.07% 1.52% 1.75% -- 0.00%
B....................... 441,472 74.29% 419,569 0.28% 0.30% 2.57% 3.15% -- 0.00%
C....................... 282,514 70.24% 269,519 0.48% 0.66% 3.65% 4.79% -- 0.00%
C- ..................... 137,232 64.88% 127,404 0.77% 0.69% 5.67% 7.12% -- 0.00%
---------- ----- ---------- ---- ---- ---- ---- ------ ----
$2,821,750 75.72% $2,682,448 0.23% 0.20% 1.90% 2.32% $ -- 0.00%

- -------
*Weighted Average Loan-to-Value Ratio
**Repurchases as a % of Current Balance
***Includes loans sold in whole loan sale transactions that were securitized
by the purchasers.

The foregoing tables indicate that, as anticipated, the Company is
experiencing higher rates of delinquency on lower credit grade loans. In
addition, as indicated, the Company has repurchased loans from its first three
1997 securitizations. The agreements governing the securitizations permit such
repurchases, but only to the extent the loans being repurchased are more than
90 days delinquent. The Company elected to make the repurchases in order to
avoid disruption of cash flow from the 1997 NC-1, NC-2 and NC-3 trusts and to
provide the Company with maximum flexibility in resolving problem loans. The
Company may make additional repurchases from those or other securitizations in
1999 for the same reasons.

In order to provide the Company additional flexibility in trying to maximize
recovery on its delinquent loans and loans in foreclosure, the Company amended
its aggregation facility with Salomon Smith Barney to include financing of a
limited number of such loans at a reduced financing rate based on the value of
the underlying property. In addition, the Company entered into a $3 million
facility with a Salomon affiliate to finance real property owned ("REO") by
the Company upon foreclosure on delinquent loans. This facility allows the
Company additional flexibility in disposing of those properties for the
highest possible price.

U.S. BANCORP INVESTMENT AND STRATEGIC ALLIANCE

In November 1998, U.S. Bancorp purchased 20,000 shares of the Company's
Series 1998-A Convertible Preferred Stock for an aggregate purchase price of
$20 million. U.S. Bancorp is a bank holding company with assets of
approximately $76 billion at December 31, 1998. Each share of U.S. Bancorp's
Preferred Stock is convertible into 136.24 shares of the Company's Common
Stock that, upon conversion, will represent approximately 16% of the Company's
total outstanding

17

Common Stock. The Preferred Stock is also entitled to a liquidation preference
as well as a dividend payable quarterly at a rate of 7.5% per year. In
addition, as part of the transaction, U.S. Bancorp has the right to designate
nominees to the Company's Board of Directors roughly in proportion to its
ownership interest in the Company.

In addition to the investment, the Company and U.S. Bancorp agreed to work
to establish a multi-faceted strategic alliance. The principal aspects of the
alliance are that (i) the Company will assist U.S. Bank in originating loans
to bank customers who would not qualify for the loans under U.S. Bank's
traditional credit guidelines, (ii) the Company will provide some servicing
functions with respect to sub-prime mortgage loans originated by U.S. Bank,
(iii) the Company will receive referrals from U.S. Bank of its customers who
were turned down for mortgage loans, but who qualify for a loan under New
Century's underwriting guidelines, and (iv) U.S. Bank will bid on the
Company's whole loan sales. The parties are now implementing the various
aspects of the strategic alliance, and in February 1999 the Company originated
its first few loans resulting from U.S. Bank referrals. There can be no
assurance that the parties will be able to successfully implement all features
of the proposed alliance.

In late December 1998 U.S. Bancorp purchased 500,000 shares of the Company's
Common Stock in a privately negotiated transaction with a third party. After
giving effect to conversion of the Preferred Stock, U.S. Bancorp's ownership
stake in the Company is approximately 19% as of December 29, 1998.

COMERICA STRATEGIC ALLIANCE

In May 1997, the Company sold 545,000 shares of Common Stock of the Company
to Comerica for $4,087,500. Comerica is a bank holding company which had
assets of approximately $34 billion at December 31, 1998 and is the parent of
Comerica Bank. In connection with the sale of stock to Comerica, the Company
and Comerica agreed to enter into certain arrangements concerning servicing
and other strategic relationships. See "--Loan Servicing and Delinquencies."
In order to increase the likelihood of success of such strategic
relationships, the Company issued warrants, at an exercise price of $11.00 per
share, to purchase an aggregate of 100,000 shares of Common Stock to Comerica
and agreed to issue Comerica warrants to purchase an additional 233,333 shares
of Common Stock, subject to the completion by Comerica of certain performance
events related to the strategic relationships.

In 1998 the Company and Comerica discontinued their joint loan servicing
platform and also mutually agreed to terminate other aspects of their
strategic alliance. As a result, during 1998 Comerica forfeited its rights to
183,333 warrants that were to be issued upon completion of certain strategic
alliance performance events. As of December 31, 1998, Comerica held 545,000
shares of Common Stock as well as warrants to purchase an additional 150,000
shares.

INTEREST RATE RISK MANAGEMENT

The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse and aggregation financing facilities. The spread can be
adversely affected because of interest rate increases during the period from
the date the loans are originated or purchased until the closing of the sale
or securitization of such loans.

The Company from time to time may use various hedging strategies to provide
a level of protection against interest rate risks on its fixed-rate mortgage
loans. These strategies may include forward sales of mortgage loans or
mortgage-backed securities, interest rate caps and floors and buying and
selling of futures and options on futures. The Company's management determines
the nature and quantity of hedging transactions based on various factors,
including market conditions and the expected volume of mortgage loan
originations and purchases.

18

As of December 31, 1998, the Company did not have any open hedge positions.
While the Company believes hedging strategies are cost-effective and provide
some protection against interest rate risk, no hedging strategy can completely
protect the Company from such risks.

COMPETITION

Despite the recent bankruptcies of several of the Company's competitors, the
Company continues to face intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. In addition, many financial services organizations
that are much larger than the Company have formed national loan origination
networks offering loan products that are substantially similar to the
Company's loan programs. Competition among industry participants can take many
forms, including convenience in obtaining a loan, customer service, marketing
and distribution channels, amount and term of the loan, loan origination fees
and interest rates. Additional competition may lower the rates the Company can
charge borrowers, thereby potentially lowering gain on future loan sales and
securitizations. To the extent any of the Company's competitors significantly
expand their activities in the Company's markets, the Company could be
materially adversely affected. Fluctuations in interest rates and general
economic conditions may also affect the Company's competition. During periods
of rising rates, competitors that have locked in low borrowing costs may have
a competitive advantage. During periods of declining rates, competitors may
solicit the Company's customers to refinance their loans. The Company believes
that low interest rates combined with increased competition in the industry
have contributed to an increase in prepayment rates, which adversely impacts
the value of the Company's residual interests in its securitizations.

The Company believes that one of its key competitive strengths is its
employees, with their strong commitment to customer service and their team-
oriented approach. In addition to the strength of the Company's work force,
the Company believes that its competitive strengths include: (i) providing a
high level of service to brokers and their customers; (ii) offering
competitive loan programs for borrowers whose needs are not met by
conventional mortgage lenders; (iii) the Company's high-volume targeted direct
mail marketing program and database screening methodology; and (iv) its
performance-based compensation structure which allows the Company to attract,
retain and motivate qualified personnel.

REGULATION

The mortgage lending industry is a highly regulated industry. The Company's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal and state government authorities. These
regulations impose obligations and restrictions on the Company's loan
origination, loan purchase and servicing activities. In addition, these
regulations may limit the interest rates, finance charges and other fees the
Company may assess, mandate extensive disclosure to the Company's customers,
prohibit discrimination and impose multiple qualification and licensing
obligations on the Company. Failure to comply with these requirements may
result in, among other things, loss of approved licensing status, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management of the Company believes that the
Company is in compliance with these rules and regulations in all material
respects.

The Company's loan origination and loan purchase activities are subject to
the laws and regulations in each of the states in which those activities are
conducted. For example, state usury laws limit the interest rates the Company
can charge on its loans. As of December 31, 1998, the Company was licensed or
exempt from licensing requirements by the relevant state banking or consumer
credit agencies to originate first mortgages in 49 states and the District of
Columbia and second mortgages in 48 states and the District of Columbia. The
Company's lending activities are also subject to various federal laws,
including the Truth in Lending Act, Homeownership and Equity Protection Act of
1994, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act,
and their implementing regulations.

19

The Company is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is designed
to provide consumers with uniform, understandable information with respect to
the terms and conditions of loan and credit transactions. TILA gives
consumers, among other things, a three business day right to rescind certain
refinance loan transactions originated by the Company.

The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which amends TILA. The High Cost
Mortgage Act generally applies to consumer credit transactions secured by the
consumer's principal residence, other than residential mortgage transactions,
reverse mortgage transactions or transactions under an open end credit plan,
in which the loan has either (i) total points and fees upon origination in
excess of the greater of eight percent of the loan amount or $441, or (ii) an
annual percentage rate of more than ten percentage points higher than United
States Treasury securities of comparable maturity ("Covered Loans"). The High
Cost Mortgage Act imposes additional disclosure requirements on lenders
originating Covered Loans. In addition, it prohibits lenders from, among other
things, originating Covered Loans that are underwritten solely on the basis of
the borrower's home equity without regard to the borrower's ability to repay
the loan and including prepayment fee clauses in Covered Loans to borrowers
with a debt-to-income ratio in excess of 50% or Covered Loans used to
refinance existing loans originated by the same lender. The High Cost Mortgage
Act also restricts, among other things, certain balloon payments and negative
amortization features. The Company did not originate or purchase Covered Loans
in 1996, but the Company commenced originating and purchasing Covered Loans
during 1997. In 1998, Covered Loans accounted for approximately 3.68% of the
Company's total loan originations and purchases.

The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1974, as amended, and Regulation X promulgated thereunder and the Home
Mortgage Disclosure Act of 1975, as amended. ECOA prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age,
religion, national origin or marital status, because all or part of the
applicant's income is derived from a publicly assisted program; or because the
applicant has in good faith exercised any right under the Consumer Credit
Protection Act. Regulation B restricts creditors from requesting certain types
of information from loan applicants. The Fair Credit Reporting Act, as
amended, requires lenders, among other things, to supply an applicant with
certain information if the lender denied the applicant credit. The Real Estate
Settlement Procedures Act mandates certain disclosures concerning settlement
fees and charges and mortgage servicing transfer practices. It also prohibits
the payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services. In addition, beginning with loans
originated in 1997, the Company must file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act,
which requires the collection and reporting of statistical data concerning
mortgage loan transactions.

In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.

Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.

20

EMPLOYEES

At December 31, 1998, the Company employed 1,404 full-time employees and 13
part-time employees. None of the Company's employees is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name, age and position with the Company
of each person who is an executive officer or key employee of the Company.

NAME AGE POSITION
---- --- --------

EXECUTIVE OFFICERS:
Robert K. Cole.......... 52 Chairman of the Board, Chief Executive Officer, Director
Brad A. Morrice......... 42 Vice Chairman, President, Secretary, Director
Edward F. Gotschall..... 44 Vice Chairman, Chief Financial Officer, Director
Steven G. Holder........ 41 Vice Chairman, Chief Operating Officer Production/Operations,
Director
Patrick J. Flanagan..... 34 Executive Vice President of the Company; Director, Executive
Vice President and Chief Operating Officer, New Century
Mortgage(1), and President, NC Capital(2)
KEY EMPLOYEES:
George Anderson......... 58 President Retail Operations, New Century Mortgage(1)
Shahid S. Asghar........ 36 Director, President Wholesale Operations, New Century
Mortgage(1)
Paul L. Rigdon.......... 38 Director, Executive Vice President Retail Operations, New Century
Mortgage(1)

- --------
(1) New Century Mortgage Corporation ("New Century Mortgage") is a wholly-
owned subsidiary of the Company.

(2) NC Capital Corporation ("NC Capital") is a wholly-owned subsidiary of New
Century Mortgage.

ROBERT K. COLE has been the Chairman of the Board and Chief Executive
Officer of the Company since December 1995 and a director of the Company since
November 1995. Mr. Cole also serves as a director on the Board of Directors of
New Century Mortgage. From February 1994 to March 1995, he was the President
and Chief Operating Officer-Finance of Plaza Home Mortgage Corporation ("Plaza
Home Mortgage"), a publicly-traded savings and loan holding company
specializing in the origination and servicing of residential mortgage loans.
In addition, Mr. Cole served as a director of Option One Mortgage Corporation
("Option One"), a subsidiary of Plaza Home Mortgage specializing in the
origination, sale and servicing of sub-prime mortgage loans. From June 1990 to
January 1994, Mr. Cole was the President of Triple Five, Inc., an
international real estate development company. Previously, Mr. Cole was the
President of operating subsidiaries of NBD Bancorp and Public Storage, Inc.
Mr. Cole received a Masters of Business Administration degree from Wayne State
University.

BRAD A. MORRICE has been Vice Chairman of the Company since December 1996
and President, Secretary and a director of the Company since November 1995.
Mr. Morrice also served as the Company's General Counsel from December 1995 to
December 1997. In addition, Mr. Morrice serves as Co-Chairman of the Board and
Chief Executive Officer of New Century Mortgage. From February 1994 to March
1995, he was the President and Chief Operating Officer-Administration of Plaza
Home Mortgage, after serving as its Executive

21

Vice President, Chief Administrative Officer since February 1993. In addition,
Mr. Morrice served as General Counsel and a director of Option One. From
August 1990 to January 1993, Mr. Morrice was a partner in the law firm of
King, Purtich & Morrice, where he specialized in the legal representation of
mortgage banking companies. Mr. Morrice previously practiced law at the firms
of Fried, King, Holmes & August and Manatt, Phelps & Phillips. He received his
law degree from the University of California, Berkeley (Boalt Hall) and a
Masters of Business Administration degree from Stanford University.

EDWARD F. GOTSCHALL has been Vice Chairman of the Company since December
1996, Chief Financial Officer since August 1998, Chief Operating Officer
Finance/Administration of the Company from December 1995 to August 1998 and a
director of the Company since November 1995. Mr. Gotschall also serves as
Chief Financial Officer and a director of New Century Mortgage. From April
1994 to July 1995, he was the Executive Vice President/Chief Financial Officer
of Plaza Home Mortgage and a director of Option One. In December 1992, Mr.
Gotschall was one of the co-founders and principal architect of the initial
business plan for Option One and served as its Executive Vice President/Chief
Financial Officer until April 1994. From January 1991 to July 1992, he was the
Executive Vice President and Chief financial Officer of The Mortgage Network,
Inc., a retail mortgage banking company. Mr. Gotschall received his Bachelors
of Science Degree in Business Administration from Arizona State University and
received his CPA designation during his employment term with Touche Ross (now
Deloitte & Touche) in Phoenix, Arizona.

STEVEN G. HOLDER has been Vice Chairman of the Company since December 1996,
Chief Operating Officer Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of
New Century Mortgage. From February 1993 to August 1995, he was the Executive
Vice President of Long Beach Mortgage Company ("Long Beach Mortgage"). From
July 1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 21 years
experience in the consumer finance and mortgage business.

PATRICK J. FLANAGAN has been Executive Vice President of the Company since
August 1998. He has been President of NC Capital since December 1998 and a
director of New Century Mortgage since May 1997. Since January 1997, Mr.
Flanagan has also served as Executive Vice President and Chief Operating
Officer of New Century Mortgage. Mr. Flanagan initially joined New Century
Mortgage in May 1996 as Regional Vice President of Midwest Wholesale and
Retail operations. From August 1994 to April 1996, Mr. Flanagan was a Regional
Manager with Long Beach Mortgage. From July 1992 to July 1994, he was an
Assistant Vice President for First Chicago Bank, from February 1989 to
February 1991, he was Assistant Vice President for Banc One in Chicago and
from February 1991 to July 1992, he was a Business Development Manager for
Transamerica Financial Services. Mr. Flanagan received his Bachelor of Arts
degree from Monmouth College.

GEORGE ANDERSON has been President-Retail Lending of New Century Mortgage
since August 1998. From 1994 to July 1998, Mr. Anderson was the President and
CEO of Advanta Finance Corporation. From 1990 to 1994, Mr. Anderson served as
Executive Vice President for Transamerica Financial Services and from 1984 to
1990, Mr. Anderson served as President and CEO of Nova Financial Services
where he was responsible for the full spectrum of start-up activities
associated with building a multi-state consumer finance company. In 1990, Nova
was acquired by Transamerica Financial Services. From 1959 to 1984, Mr.
Anderson served as Area Vice President for Transamerica Financial Services and
was responsible for the mid-west and east coast operations of the company. Mr.
Anderson has over 35 years experience in the consumer finance and mortgage
business.

SHAHID S. ASGHAR has been President-Wholesale Lending of New Century
Mortgage since August 1998. He previously served as Senior Vice President-
Wholesale Lending from January 1996 to August 1998 and a director of New
Century Mortgage since May 1997. Mr. Asghar initially joined New Century
Mortgage as Vice President, Mortgage Banking Operations and he served in this
position from December 1995 to January 1996. From June 1995 to November 1995,
Mr. Asghar was the Southern California District Manager for Ford Consumer
Finance. From September 1992 to March 1995, he was an Area Sales Manager for
Long Beach

22

Mortgage and from June 1988 to September 1992, he was a Business Development
Manager for Transamerica Financial Services. Mr. Asghar received his Bachelor
of Science degree from California State University at Northridge.

PAUL L. RIGDON has been Executive Vice President-Retail Lending of New
Century Mortgage since August 1998. Mr. Rigdon served previously as Senior
Vice President-Retail Lending from February 1997 to August 1998 and a director
of New Century Mortgage since May 1997. Mr. Rigdon initially joined New
Century Mortgage as the Regional Manager in charge of expansion in the
Northwest Retail Region and served in this position from September 1996 to
February 1997. From May 1995 to September 1996, he was a District Manager for
Advanta Finance. From March 1990 to May 1995, he was an Area Manager for Long
Beach Mortgage. Mr. Rigdon received his Bachelor of Science degree in Business
Administration and Finance from San Jose State University.

23

RISK FACTORS

Stockholders and prospective purchasers of the Company's Common Stock should
consider carefully the following factors, as well as the other information
appearing elsewhere in this Form 10-K, in evaluating an investment in the
Company. This Form 10-K may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Form 10-K.

LIQUIDITY; ACCESS TO FUNDING SOURCES

The Company's business requires substantial cash to support its operating
activities and growth plans. At present, the Company's operating uses of cash
continue to exceed its operating sources of cash.

The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company also has a residual financing
agreement with Salomon pursuant to which Salomon will provide the Company with
financing upon the Company's retention of residual interests in
securitizations and NIM transactions on which Salomon is the lead underwriter
or placement agent. The amount of financing provided to the Company under its
aggregation credit facility and its residual financing agreement depends in
large part on Salomon's valuation of the mortgage loans and residual
interests, respectively, securing the financings. Salomon has the right to
reevaluate the collateral securing the Company's outstanding borrowings at any
time and, in the event it determines that the value of the collateral has
decreased, it has the right to initiate a margin call. A margin call would
require the Company to provide Salomon with additional collateral or to repay
the outstanding borrowings. Any such margin call could have a material adverse
effect on the Company's results of operations, financial condition and
business prospects.

In addition, to the extent that the Company is unable to renew or expand its
access to credit facilities, the Company may have to undertake larger and/or
more frequent capital markets financings than anticipated. Capital markets
financings may result in greater than anticipated interest expense and shares
outstanding, which may have a dilutive impact on operating earnings or have a
negative effect on the Company's financial condition.

As a result of concerns about the ability of sub-prime mortgage lenders to
sell their loans in the secondary market on favorable terms or at all, as well
as concerns about the value of the residual interests retained in
securitizations, a number of institutions have curtailed their lending to the
sub-prime mortgage industry. Consequently, there can be no assurance that the
Company will be able to renew, replace or add to its existing credit
facilities, or that it will be able to undertake capital markets financings on
favorable terms, if at all. To the extent that the Company is unable to access
adequate capital to fund its loan production or to the extent that the Company
is unable to access adequate capital to complete the desired level of
securitizations, the Company may have to curtail its loan origination,
purchase and securitization activities, which would have a material adverse
impact on the Company's results of operations, financial condition and
business prospects.

DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS

The Company plans to continue pooling and selling through securitizations a
majority of the loans it originates or purchases and expects that the gain on
sale from such securitizations will represent a significant portion of the
Company's future revenues and net earnings. The Company's ability to complete
securitizations of its loans will depend on a number of factors, including
conditions in the securities markets generally, conditions in the asset-backed
securities market specifically, the performance of the Company's portfolio of
securitized loans and the Company's ability to obtain credit enhancement from
monoline insurance companies. In the fourth quarter of 1998 the market for
mortgage-backed securities contracted. As a result, the Company had to offer
higher yields on its mortgage-backed securities, which in turn reduced
somewhat the gain recognized by the Company on the securitizations. Although
the Company has continued to sell its loans through

24

securitizations, unlike many of its competitors, there can be no assurance
that it will continue to be able to do so. If the Company were unable to
securitize profitably a sufficient number of its loans in a particular
quarter, then the Company's revenues for such quarter would decline, which
could result in lower earnings or a loss reported for such quarter.

DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS AND CASH

The gain on sale generated by whole loan sales also represents a source of
the Company's future earnings and a significant source of cash for the
Company. Due to the recent bankruptcies of a number of the Company's
competitors, there has been a large number of sub-prime mortgage loans for
sale on a whole loan basis, which has adversely affected the pricing of such
loans. In 1998, the Company sold 39.5% of its loan originations and purchases
in the secondary market to a limited number of institutional purchasers,
including Salomon Brothers Realty Corp., which accounted for 30.5% of all
purchases. There can be no assurance that such purchasers will continue to
purchase the Company's loans at favorable prices or at all and, to the extent
that the Company could not successfully replace such loan purchasers, the
Company's results of operations, financial condition and business prospects
could be materially adversely affected.

RESIDUAL INTERESTS IN SECURITIZATIONS

A substantial portion of the Company's revenues and earnings is derived by
recognizing gain on sale of loans through securitizations. In view of the
Company's limited loan performance data, it is extremely difficult to validate
the Company's loss or prepayment assumptions used to calculate its gain on
sale in connection with its securitizations. If the Company's actual
experience differs materially from the assumptions used in the determination
of the present value of the residual interests it retains in the
securitizations, future cash flows and earnings could be negatively impacted.
The Company could also be required to reduce the fair value of its residual
interests on its balance sheet, which could decrease the residual financing
available to the Company under the Salomon residual financing facility.

RISKS RELATED TO LOWER CREDIT GRADE BORROWERS

Loans made to lower credit grade borrowers, including credit-impaired
borrowers, may entail a higher risk of delinquency and higher losses than
loans made to borrowers with better credit. Virtually all of the Company's
loans are made to borrowers who do not qualify for loans from conventional
mortgage lenders and approximately 15.0% and 16.3% of the loans originated or
purchased by the Company during 1998 and 1997, respectively, were made to
borrowers in the Company's two lowest credit grade classifications. No
assurance can be given that the Company's underwriting criteria or methods
will afford adequate protection against the higher risks associated with loans
made to lower credit grade borrowers. The Company continues to be subject to
the risks of default and foreclosure following the sale of loans through
securitization to the extent such losses reduce the residual interest
distributions. Any such reduction in the Company's cash flows could have a
material adverse effect on the Company's results of operations, financial
condition and business prospects.

CHANGES IN INTEREST RATES

The Company's profitability may be directly affected by changes in interest
rates, which affect the Company's ability to earn a spread between the
interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase in
interest rates could adversely affect borrower demand for the Company's
products. During periods of rising interest rates, the value and profitability
of the Company's loans may also be negatively impacted from the date of
origination or purchase until the date the Company sells or securitizes such
loans. In addition, the Company's adjustable rate mortgage loans have a life
rate cap above which the interest rate on the loan may not rise. In the event
of general interest rate increases, the rate of interest on these mortgage
loans could be limited, while the rate payable on the senior certificates
representing interests in a securitization trust into which such loans are
sold may be uncapped, which would reduce the amount of

25

cash the Company receives over the life of its residual interests, thereby
reducing the fair value of such residual interests. Furthermore, a significant
decrease in interest rates could increase the rate at which loans are prepaid,
which would also reduce the amount of cash the Company receives over the life
of its residual interests. Either of these events could require the Company to
write down the carrying value of its residual interests, which would have a
material adverse effect on the Company's results of operations, financial
condition and business prospects.

ECONOMIC SLOWDOWN OR RECESSION

The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value ratios
of the home equity collateral. In addition, because the Company makes a
substantial number of loans to credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher during
economic slowdowns. Any sustained period of increased delinquencies,
foreclosures or losses could adversely affect the Company's ability to sell
loans or the prices the Company receives for its loans.

COMPETITION

The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. Many of the Company's competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. In the future, the Company may also face
competition from government-sponsored entities, such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, which may
target potential customers in the Company's highest credit grades, who
constitute a significant portion of the Company's customer base.

Certain large finance companies and conforming mortgage originators have
begun to originate non-conforming mortgage loans, and some of these large
mortgage companies, thrifts and commercial banks have begun offering non-
conforming loan products to customers similar to the borrowers targeted by the
Company. Competitors with lower costs of capital have a competitive advantage
over the Company. In addition, establishing a broker-sourced loan business
requires a substantially smaller commitment of capital and human resources
than a direct-sourced loan business. This relatively low barrier to entry
permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.

DEPENDENCE ON WHOLESALE BROKERS

The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's loan production. These independent mortgage brokers deal with
multiple lenders for each prospective borrower and are not obligated by
contract or otherwise to do business with the Company. The Company competes
with these lenders for the independent brokers' business on pricing, service,
loan fees, costs and other factors. The Company's future results of operations
and financial condition may be vulnerable to changes in the volume and cost of
its wholesale loans resulting from, among other things, competition from other
lenders and purchasers of such loans.

RISKS ASSOCIATED WITH SERVICING

In 1998, the Company established in-house servicing operations to service
the loans it originates and purchases, the loans in its securitizations, and
loans sold on a servicing-retained basis. There can be no assurance that the
Company will anticipate and respond effectively to all of the demands that
servicing its loans will have on the Company's management, infrastructure and
personnel. The failure of the Company to meet the challenges of servicing its
loans could have a material adverse effect on the Company's results of
operations, financial

26

condition and business prospects. For example, many of the Company's borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. Any failure of the Company to adequately
service its loans could cause a substantial increase in the Company's
delinquency or foreclosure rate, which could adversely impact the value of the
residual interests held by the Company and affect the Company's ability to
access equity or debt capital resources.

CONTINGENT RISKS

In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation or
warranty made by the Company. Likewise, in connection with its whole loan
sales, the Company enters into agreements which generally require the Company
to repurchase or substitute loans in the event of a breach of a representation
or warranty made by the Company to the loan purchaser, any misrepresentation
during the mortgage loan origination process or, in some cases, upon any fraud
or early default on such mortgage loans. The remedies available to a purchaser
of mortgage loans from the Company are generally broader than those available
to the Company against the sellers of such loans, and if a purchaser enforces
its remedies against the Company, the Company may not be able to enforce
whatever remedies the Company may have against such sellers.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") include provisions that could
delay, defer or prevent a takeover attempt that may be in the best interest of
stockholders. These provisions include the ability of the Board of Directors
to issue up to 7,500,000 shares of preferred stock (the "Preferred Stock")
without any further stockholder approval, a classified Board of Directors and
requirements that (i) stockholders give advance notice with respect to certain
proposals they may wish to present for a stockholder vote, (ii) stockholders
act only at annual or special meetings and (iii) two-thirds of all directors
approve a change in the number of directors of the Company. Issuance of
Preferred Stock could also discourage bids for the Common Stock at a premium
as well as create a depressive effect on the market price of the Common Stock.
In addition, under certain conditions, Section 203 of the Delaware General
Corporation Law (the "DGCL") would prohibit the Company from engaging in a
"business combination" with an "interested stockholder" (in general, a
stockholder owning 15% or more of the Company's outstanding voting stock) for
a period of three years unless the business combination is approved in a
prescribed manner. Finally, certain provisions in the Company's transaction
with U.S. Bancorp in 1998, including the stockholder agreements entered into
by the four founding managers, may discourage takeover attempts by third
parties.

POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK

The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry and
the financial services sector such as, among other things, interest rate
movements, quarterly variations or changes in financial estimates by
securities analysts and a significant reduction in the price of the stock of
another participant in the consumer finance industry. For example, in
September and October of 1998, the price of the Company's Common Stock
decreased dramatically based primarily on industry-related concerns about
liquidity and the bankruptcies of several competitors.

ITEM 2. PROPERTIES

The Company's executive and administrative offices are located in Irvine,
California and consist of approximately 143,000 square feet. The two leases
covering the executive and administrative offices expire in June 2002 and
December 2002 and the combined monthly rent is $224,240.

The Company leases space for its regional operating centers in Chicago,
Illinois, Atlanta, Georgia, Rancho Bernardo, California, and San Ramon,
California. The Company also leases space for its sales offices.

27

As of December 31, 1998, these facilities had an annual aggregate base rental
of approximately $4,322,883 and the sales offices ranged in size from 100 to
13,615 square feet with lease terms typically ranging from one to five years.
As of December 31, 1998, annual base rents for the sales offices ranged from
approximately $1,800 to $349,728. In general, the terms of these leases vary
as to duration and rent escalation provisions and the leases expire between
March 1999 and January 2004 and provide for rent escalations dependent upon
either increases in the lessors' operating expenses or fluctuations in the
consumer price index in the relevant geographical area.

ITEM 3. LEGAL PROCEEDINGS

The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability with respect
to such legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1998.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's Common Stock trades on the Nasdaq National Market under the
symbol "NCEN." The high and low bid prices of the Company's Common Stock
during each quarter since the Company's Common Stock began trading on June 26,
1997 were as follows:

FISCAL 1998 FISCAL 1997
------------ -------------
QUARTER HIGH LOW HIGH LOW
------- ------ ----- ------ ------

Fourth............................................ $13.13 $3.44 $19.50 $ 9.63
Third............................................. $11.50 $7.38 $19.25 $14.13
Second(1)......................................... $12.50 $8.50 $14.25 $13.63
First............................................. $11.50 $8.38 N/A N/A

- --------
(1) 1997 Second Quarter information represents trading from June 26, 1997 to
June 30, 1997

As of March 19, 1999 the closing sales price of the Company's Common Stock,
as reported on the Nasdaq National Market, was $11.13.

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. In addition, the Company is prohibited from paying
dividends under certain of its credit facilities without the prior approval of
the lenders.

As of March 19, 1999 the number of holders of record of the Company's Common
Stock was approximately 56, and as of March 19, 1999 there were approximately
1,193 beneficial owners of the Company's Common Stock.

RECENT SALES OF UNREGISTERED STOCK

On January 12, 1998, the Company issued 112,890 shares of Common Stock to
Kirk Redding and 75,260 shares of Common Stock to Paul Akers representing
$2,000,000 of the purchase price for the acquisition of PWF Corporation. The
sale and issuance of the shares were exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) of the Securities Act and
Regulation D thereunder.

On April 15, 1998, the Company issued 8,102 shares of restricted stock to
each of Mr. Cole and Mr. Morrice. The shares represented partial payment of
the bonus each was entitled to receive under the Company's Founding Managers'
Incentive Award Plan based on the Company's performance in 1997. The shares
vest in three equal installments on the first three anniversaries of the grant
date. The sale and issuance of the shares of restricted stock was exempt from
registration by virtue of Section 4(2) of the Securities Act and Regulation D
thereunder.

On September 17, 1998, the Company issued to Mr. Forster a non-qualified
option to purchase 10,000 shares of the Company's Common Stock at an exercise
price of $10.00 per share, subject to vesting in equal installments over three
years from the date of grant. This option terminates 10 years from the date of
grant. The sale and issuance of the non-qualified stock option was exempt from
registration by virtue of Section 4(2) of the Securities Act and Regulation D
thereunder.

On November 24, 1998, the Company issued 20,000 shares of Series 1998A
Convertible Preferred Stock to U.S. Bancorp for an aggregate cash
consideration of $20,000,000. The sale and issuance of the shares were exempt
from the registration requirements of the Securities Act by virtue of Section
4(2) of the Securities Act and Regulation D thereunder. Each share of
Preferred Stock is convertible at any time at the election of U.S. Bancorp
into 136.24 shares of the Company's Common Stock.

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ITEM 6. SELECTED FINANCIAL DATA (DOLL