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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period from __________ to ____________

Commission file number   000-22633

Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

As of October 31, 2002, 24,929,463 shares of common stock of New Century Financial Corporation were outstanding.

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NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002

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Certain information included in this Form 10-Q may include “forward-looking” statements under federal securities laws, and we intend that such forward-looking statements be subject to the safe-harbor created thereby.  Such statements include:  (i) the expectation that the adoption of SFAS No. 145 and SFAS No. 146 will not have a material impact on our balance sheet or results of operations, (ii) the assumptions used to value our residual securities, including the assumptions relating to prepayment rates, losses, delinquencies and the discount rates, (iii) the expectation that we will begin recording additions to our mortgage servicing assets in the fourth quarter of 2002, (iv) the belief that the goodwill reflected on our balance sheet is not impaired, (v) the assumptions used to project cash flow, (vi) the expectation that we will continue to complete net interest margin security transactions in connection with our securitizations in order to realize higher cash proceeds, (vii) the expectation that the residual cash flows will be a significant source of liquidity and working capital to support future operations for the foreseeable future, (viii) the expectation that our liquidity, credit facilities and capital resources will be sufficient to fund our operations, (ix) the expectations regarding the sensitivity of our residual securities to interest rate changes, (x) the assumptions underlying our hedging strategy, (xi) the expectation that we will continue to pay a quarterly dividend, (xii) the expectation that we will continue to fund repurchases pursuant to our Stock Repurchase Program with available corporate liquidity, (xiii) the expectation that the number of shares to be purchased pursuant to our Stock Repurchase Program and the time of the purchase will be based upon the level of cash balances, general business conditions and other factors including alternative investment opportunities, (xiv) the estimates regarding earnings per share for 2002 and 2003, (xv) the expectation that our production volume will be $16 billion and our operating margin will be 2.00% in 2003, (xvi) the expectation that our litigation will not have a material adverse effect on our business, results of operation or financial position, (xvii) the expectation that we will renew and expand the Salomon Aggregation Facility, the Salomon Warehouse Facility, the Salomon Loan Agreement for Delinquent and Problem Loans and the Mortgage Stanley Aggregation Facility prior to their expiration in December 2002 and (xviii) the expectation that we will increase the UBS Warburg Warehouse and Aggregation Facility from $400 million to $750 million before the end of 2002.

There are many factors that could cause our actual results to differ materially from expected results in the forward-looking statements.  Such factors include, but are not limited to: (i) our ability to sustain and manage our growth, (ii) our ability to maintain, replace or add to our existing credit facilities on terms comparable to the current terms, (iii) our ability to maintain low loan acquisition costs, (iv) the condition of the whole loan and securitization markets, (v) the initiation of a margin call under any of our warehouse or aggregation facilities, (vi) the effect of competitive pressures from other lenders or suppliers of credit in our market, (vii) the general level of interest rates in the economy, (viii) our ability to ramp up and manage the growth of our servicing platform, (ix) decreases in the value of residential real property in the markets we serve, (x) our ability to maintain credit quality and compliance with legal and underwriting requirements during a period of rapid growth, (xi) the effect of proposed legislation and regulations that could restrict our business, (xii) the outcome of our pending litigation and regulatory inquiries and (xiii) the other risks identified in our Annual Report on Form 10-K for the year ending December 31, 2001 and our other filings with the Securities and Exchange Commission.

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New Century Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

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New Century Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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New Century Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2002 and 2001

1.     Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

Recent accounting developments – In July 2001, FASB issued SFAS No. 141, “Accounting for Business Combinations” and SFAS No. 142, “Accounting for Goodwill and Intangible Assets.”  SFAS 142 eliminates the existing requirement to amortize goodwill through a periodic charge to earnings.  For existing goodwill, the elimination of the amortization requirement was effective for the Company beginning January 1, 2002.  As of that date, and at least annually thereafter, goodwill must be evaluated for impairment based on estimated fair value.  As of September 30, 2002, the Company had goodwill of $13.7 million.  Since the goodwill and related amortization has not been significant to the consolidated balance sheet and results of operations, the implementation of this standard did not have a material effect on the consolidated balance sheet or results of operations.

In August 2001, FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), which supersedes both FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (SFAS No. 121) and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion).  SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121.  For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale.  SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). 

The Company adopted SFAS No. 144 on January 1, 2002.  Adoption of SFAS No. 144 did not have a material impact on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”).  SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect.  As a result of SFAS No. 145, the criteria in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions will now be used to classify those gains and losses.  SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS

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No. 4 has been rescinded. SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980.  Since the transition has been completed, SFAS No. 44 is no longer necessary.  SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.  The Company expects that the adoption of SFAS No. 145 on January 1, 2003 will not have a material impact on the consolidated balance sheet or results of operations.

In July 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities.  It nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The principal difference between Statement 146 and Issue 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity.  Statement 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework.  In contrast, under Issue 94-3, a company recognized a liability for an exit cost when it committed to an exit plan.  Statement 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities.  Thus, the Statement affirms the Financial Accounting Standards Board’s view that fair value is the most relevant and faithful representation of the economics of a transaction. The Company expects that the adoption of SFAS No. 146 on January 1, 2003 will not have a material impact on the consolidated balance sheet or results of operations.

Residual interests in securitizations - Residual interests in securitizations (Residuals) are recorded as a result of the sale of loans through securitizations and the sale of residual interests in securitizations through what are sometimes referred to as net interest margin securities (NIMS).

The loan securitizations are generally structured as follows: First, the Company sells a portfolio of mortgage loans to a qualifying special purpose entity (QSPE) which has been established for the limited purpose of buying and reselling mortgage loans.  The QSPE then transfers the same mortgage loans to a real estate mortgage investment conduit or Owners Trust (the REMIC or Trust), and the Trust in turn issues interest-bearing asset-backed securities (the Certificates) generally in an amount equal to the aggregate principal balance of the mortgage loans.  The Certificates are typically sold at face value and without recourse except that representations and warranties customary to the mortgage banking industry are provided by the Company to the Trust.  One or more investors purchase these Certificates for cash.  The Trust uses the cash proceeds to pay the Company the cash portion of the purchase price for the mortgage loans.  The Trust also issues a certificate representing a residual interest in the payments on the securitized loans.  In addition, the Company may provide a credit enhancement for the benefit of the investors in the form of additional collateral (over-collateralization account or OC Account) held by the Trust. The servicing agreement typically requires that the OC Account is maintained at certain levels.

At the closing of each securitization, the Company removes from its consolidated balance sheet the mortgage loans held for sale and adds to its consolidated balance sheet (i) the cash received, (ii) the estimated fair value of the Residuals, which consist of (a) the OC Account and (b) the net interest receivable (NIR), and (iii) the estimated fair value of the servicing asset.  The NIR represents the discounted estimated cash flows to be received by the Company in the future.  The excess of the cash received and the assets retained by the Company over the carrying value of the loans sold, less transaction costs, equals the net gain on sale of mortgage loans recorded by the Company.

The NIMS are generally structured as follows: First, the Company sells or contributes the Residuals to a QSPE which has been established for the limited purpose of receiving and selling asset-backed residual interests in securitization certificates.  Next, the QSPE transfers the Residuals to an owner trust (the Trust) and the Trust in turn issues interest-bearing asset-backed securities (the Bonds and Certificates).  The Company sells these Residuals without recourse except that normal representations and warranties are provided by the Company to the Trust.  One or more investors purchase the Bonds and

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Certificates and the proceeds from the sale of the Bonds and Certificates, along with a residual interest certificate that is subordinate to the Bonds and Certificates, represent the consideration to the Company for the sale of the Residuals.

At the closing of each NIMS, the Company removes from its consolidated balance sheet the carrying value of the Residuals sold and adds to its consolidated balance sheet (i) the cash received and (ii) the estimated fair value of the portion of the Residuals retained, which consists of the NIR and the OC Account.  The excess of the cash received and assets retained over the carrying value of the Residuals sold, less transaction costs, equals the net gain or loss on the sale of Residuals recorded by the Company.

The Company allocates its basis in the mortgage loans and residual interests between the portion of the mortgage loans and residual interests sold through the Certificates and the portion retained (the Residuals and servicing assets) based on the relative fair values of those portions on the date of sale.  The Company may recognize gains or losses attributable to the changes in the fair value of the Residuals, which are recorded at estimated fair value and accounted for as “held-for-trading” securities.  The Company is not aware of an active market for the purchase or sale of Residuals and, accordingly, the Company determines the estimated fair value of the Residuals by discounting the expected cash flows released from the OC Account (the cash out method) using a discount rate commensurate with the risks involved.  As of September 30, 2002 the Company utilizes an effective discount rate of 12.0% on the estimated cash flows released from the OC Account to value the Residuals through securitization and a 14.0% discount rate on the estimated cash flows released from the Trust to value Residuals through NIMS transactions. 

The Company is entitled to the cash flows from the Residuals that represent collections on the mortgage loans in excess of the amounts required to pay the Certificate principal and interest, the servicing fees and certain other fees such as trustee and custodial fees.  At the end of each collection period, the aggregate cash collections from the mortgage loans are allocated first to the base servicing fees and certain other fees such as trustee and custodial fees for the period, then to the Certificateholders for interest at the pass-through rate on the Certificates plus principal as defined in the servicing agreements.  If the amount of cash required for the above allocations exceeds the amount collected during the collection period, the shortfall is drawn from the OC Account.  If the cash collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related OC Account, the excess is released to the Company.  If the OC Account balance is not at the required credit enhancement level, the excess cash collected is retained in the OC Account until the specified level is achieved.  The cash and collateral in the OC Account is restricted from use by the Company.  Pursuant to certain servicing agreements, cash held in the OC Accounts may be used to make accelerated principal paydowns on the Certificates to create additional excess collateral in the OC Account which is held by the Trusts on behalf of the Company as the Residual holder.  The specified credit enhancement levels are defined in the servicing agreements as the OC Account balance expressed generally as a percentage of the current collateral principal balance.

For NIMS transactions, the Company will receive cash flows once the holders of the Bonds and Certificates created in the NIMS transaction are fully repaid.

The Annual Percentage Rate (APR) on the mortgage loans is relatively high in comparison to the pass-through rate on the Certificates.  Accordingly, the Residuals described above are a significant asset of the Company.  In determining the value of the Residuals, the Company must estimate the future rates of prepayments, prepayment penalties to be received by the Company, delinquencies, defaults and default loss severity as they affect the amount and timing of the estimated cash flows.  The Company estimates average cumulative losses as a percentage of the original principal balance of the mortgage loans of 1.85% to 3.56% for adjustable-rate securities and 2.31% to 4.74% for fixed-rate securities.  These estimates are based on historical loss data and comparable loans, the specific characteristics of the loans originated by the Company, and the existence of mortgage insurance. The Company estimates prepayments by evaluating historical prepayment performance of comparable mortgage loans and the impact of trends in the industry.  The Company uses a prepayment curve to estimate the prepayment characteristics of the mortgage loans.  The rate of increase, duration, severity and decrease of the curve depends on the age and nature of the mortgage loans, primarily whether the mortgage loans are fixed or adjustable and the interest rate adjustment characteristics of the mortgage loans (6 month, 1 year, 2 year, 3 year or

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5 year adjustment periods).  The Company’s prepayment curve and default estimates have resulted in weighted average lives of between 2.58 to 3.00 years for its adjustable-rate securities and 2.72 to 3.79 years for its fixed-rate securities.

Historically, the Company performs a quarterly evaluation of its Residuals, which takes into consideration trends in actual cash flow performance, industry and economic developments, as well as other relevant factors.

The Bondholders and Certificateholders and the securitization trusts have no recourse to the Company for the failure of mortgage loan borrowers to pay when due.  The Company’s Residuals are subordinate to the Bonds and Certificates until the Bondholders and Certificateholders are fully paid. 

2.     Loans Receivable Held for Sale, Net

A summary of loans receivable held for sale, at the lower of cost or market at September 30, 2002 and December 31, 2001 follows (dollars in thousands):

3.     Residual Interests in Securitizations

Residual interests in securitizations consist of the following components at September 30, 2002 and December 31, 2001  (dollars in thousands):

The following table summarizes activity in the NIR amounts for the nine months ended September 30, 2002 and 2001 (dollars in thousands):

The $9.6 million fair value adjustment is a result of changes in the assumptions used to value the residual interests. Please refer to the residual interests section of Management’s Discussion and Analysis for further discussion.

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The call transactions in 2001 represent the effect of the January 2001 exercise of the call option for the Company’s 1998-NC5 securitization transaction, as well as the clean-up calls for the Company’s 1997-NC1, 1997-NC2, and 1997-NC3 securitization transactions.

The following table summarizes activity in the over-collateralization, or OC, accounts for the nine months ended September 30, 2002 and 2001 (dollars in thousands):

4.     Mortgage Servicing Assets

Mortgage servicing assets represent the carrying value of the Company’s portfolio of mortgage servicing rights.  The following table summarizes activity in mortgage servicing assets for the nine months ended September 30, 2002 and 2001 (dollars in thousands):

In the first quarter of 2001, the Company sold the majority of its mortgage servicing portfolio to Ocwen Federal Bank.  The Company engaged Ocwen to sub-service its loans receivable held for sale, as well as any loans that it sells servicing-retained.  In October 2002, the Company recommenced its own servicing operation.  Consequently, the Company expects to begin recording additions to its servicing assets in the fourth quarter of 2002.

5.     Goodwill

Goodwill is recorded pursuant to acquisitions of new subsidiaries and is included in prepaid expenses and other assets.  As of December 31, 2001, the Company had goodwill of $3.3 million.  During 2002, the Company entered into two transactions, which resulted in goodwill of $13.7 million as of September 30, 2002: (i) the Company made the final earn-out payment of $9.4 million for its acquisition of Worth Funding in 2000; and (ii) $1.0 million of goodwill was recorded in connection with the May 2002 acquisition of eConduit.  Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Impairment is measured by discounting the operating income at an appropriate discount rate.  The Company believes that its goodwill is not impaired as of September 30, 2002.

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6.     Warehouse and Aggregation Lines of Credit

Warehouse and aggregation lines of credit consist of the following at September 30, 2002 and December 31, 2001 (dollars in thousands):

The warehouse and aggregation line of credit agreements contain certain restrictive financial and other covenants which require the Company to, among other things, restrict dividends, maintain certain net worth and liquidity.

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levels, remain below specified debt-to-net-worth ratios and comply with regulatory and investor requirements.  At September 30, 2002, the Company was in compliance with all financial and other material covenants in its warehouse and aggregation facilities. 

7.     Earnings per Share

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

For the three months ended September 30, 2002, 141,750 stock options were excluded from the calculation of diluted earnings per share because their effect is anti-dilutive.  For the nine months ended September 30, 2002, 181,750 stock options were excluded from the calculation of diluted earnings per share because their effect is anti-dilutive.

For the three months ended September 30, 2001, 836,054 stock options and 50,000 warrants were excluded from the calculation of diluted earnings per share because their effect is anti-dilutive. For the nine months ended September 30, 2001, 1,584,550 stock options and 50,000 warrants were excluded from the calculation of diluted earnings per share because their effect is anti-dilutive.

8.   Litigation

We have previously disclosed our material litigation and regulatory issues in our 2001 Annual Report on Form 10-K, and our Quarterly Reports on Form 10-Q for the first and second quarters of 2002.  Below we have provided updates on those matters for which there were material developments during the third quarter of 2002.

Grimes. As previously disclosed in our Form 10-K for the year ended December 31, 2001, in June 2001, we were served with a class action complaint filed by Richard L. Grimes and Rosa L. Grimes against New Century Mortgage Corporation. The action was filed in the U.S. District Court for the Northern District of California, San Francisco Division, and seeks rescission, restitution and damages on behalf of the two plaintiffs, others similarly situated and on behalf of the general public. The complaint alleges a violation of TILA and Business & Professions Code § 17200. Specifically, the complaint alleges that we gave the borrowers the required three-day notice of their right to rescind before the loan transaction had technically been consummated. Our Motion for Summary Judgment was granted on January 25, 2002; the judge held that New Century had not violated TILA and dismissed the 17200 claim without prejudice. Plaintiff filed a notice of appeal; their opening brief was filed on July 1, 2002 and our responsive brief was filed in mid-August, 2002.

Perry. As previously disclosed in our Form 10-K for the year ended December 31, 2001, in July 2001, Charles Perry Jr. filed a class action complaint against New Century Mortgage Corporation and Noreast Mortgage Company, Inc. in the U.S. District Court for the District of Massachusetts. The complaint alleges that certain payments made to mortgage brokers, sometimes referred to as yield spread premiums, violate the federal Real Estate Settlement Procedures Act. The complaint also alleges that we induced mortgage brokers to breach their fiduciary duties to borrowers. The complaint was amended twice to add new plaintiffs, Eugene and Margaret Flood. Plaintiffs filed an Unopposed Motion to Strike Class Allegations on July 23, 2002 which was granted by the court on August 14, 2002.

Smith. As previously disclosed in our Form 10-K for the year ended December 31, 2001, in August 2001, a former employee named Dean Smith filed a class action complaint against New Century Financial Corporation and New Century Mortgage Corporation for alleged unpaid overtime, penalties and damages on behalf of himself and other loan officers. The action is pending in the United States District Court for the Southern District of California, in Santa Ana. We filed our answer in September 2001. Notices to potential class members were sent in early 2002; approximately 50 individuals timely opted in to join the class action. The case was resolved at mediation on July 26, 2002; the court approved the settlement and the case has been dismissed.  The amount of the settlement did not have a material adverse effect on our results of operations or financial position.

Barney. As previously disclosed in our Form 10-K for the year ended December 31, 2001, in December, 2001, Sandra Barney filed a class action complaint against New Century Mortgage Corporation in the Circuit Court in Cook County, Chicago, Illinois. The complaint alleges the unauthorized practice of law and violation of the Illinois Consumer Fraud Act for performing document preparation services for a fee by non-lawyers, and seeks to recover the fees charged for the document preparation, compensatory and punitive damages, attorneys’ fees and costs. We filed a motion to dismiss in February 2002; the case was then consolidated with other similar cases filed against other lenders. In late August, 2002, the court ordered plaintiffs to dismiss their cases with prejudice; our plaintiff filed her Notice of Appeal on September 1, 2002.  

Bernstein. As previously disclosed in our Form 10-Q for the first quarter of 2002, Paul Bernstein filed a class action complaint against New Century Mortgage Corporation in the Circuit Court of Cook County, Chicago, Illinois. The complaint seeks damages for receiving unsolicited advertisements to telephone facsimile machines in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227, and the Illinois Consumer Fraud Act. We timely removed the case to federal court on May 9, 2002. Plaintiff filed a motion to remand the case to state court on May 13, 2002; additional authorities were filed by the parties in October, 2002 and we await a ruling.

Overman.  In September, 2002, Robert E. Overman & Martin Lemp filed a class action complaint in the Superior Court for the Alameda County, California, against New Century Financial Corporation, New Century Mortgage Corporation, U.S. Bancorp, Loan Management Services, Inc., and certain individuals affiliated with Loan Management Services.  The complaint alleges violations of California Consumers Legal Remedies Act, Unfair, Unlawful and Deceptive Business and Advertising Practices in violation of Business & Professions Code Sections 17200 and 17500, Fraud-Misrepresentation and Concealment and Constructive Trust/Breach of Fiduciary Duty and damages including restitution, compensatory and punitive damages, and attorneys’ fees and costs.  Our response is due in mid-November, 2002.

We are also a party to various legal proceedings arising out of the ordinary course of business. Management believes that any liability with respect to our legal actions, individually or in the aggregate, will not have a material adverse effect on our business, results of operation or financial position.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We are a leading nationwide specialty mortgage banking company that originates, purchases, sells and services residential mortgage loans secured primarily by first mortgages on single-family residences.  Our borrowers generally have considerable equity in the property securing the loan, but have impaired or limited credit profiles or higher debt-to-income ratios than traditional mortgage lenders allow. Our borrowers also include individuals who, due to self-employment or other circumstances, have difficulty verifying their income, as well as individuals who prefer the prompt and personalized service we provide.

We originate and purchase loans through our wholesale and retail channels. Wholesale originations and purchases are through independent mortgage brokers who provide loans through the Wholesale Division of our wholly-owned subsidiary, New Century Mortgage Corporation.  We do not purchase bulk loans. Retail originations are made through New Century Mortgage Corporation’s network of branch offices and through its Central Retail Division.  We also originate loans through customized business arrangements with mortgage companies and other financial institutions established by our subsidiary, The Anyloan Company.  These relationships vary and include a combination of wholesale and retail elements. After originating or purchasing loans, we then sell those loans through whole loan sales or securitizations.  We were incorporated in Delaware in November 1995 and commenced lending operations in February 1996.

Loan Originations and Purchases

As of September 30, 2002, our Wholesale Division operated in 16 states through 10 regional operating centers.  Our Wholesale Division originated or purchased $8.3 billion in loans during the nine months ended September 30, 2002.  As of September 30, 2002, our Retail Branch Operations Division operated through 69 sales offices located in 26 states and our Central Retail Division and The Anyloan Company operated through their centralized offices.  Retail originations, including The Anyloan Company, totaled $1.4 billion in loans during the nine months ended September 30, 2002.

Loan Sales and Securitizations

One of our primary sources of revenue is the recognition of gain on sale of our loans through whole loan sales and securitizations.  In a whole loan sale, we recognize and receive a cash gain upon sale.  In a securitization, we recognize a gain on sale at the time the loans are sold, and receive cash flows over the actual life of the loans.  The use of a net interest margin security, or NIM, transaction concurrently with or shortly after a securitization, allows us to receive a substantial portion of the gain in cash at the closing of the NIM transaction, rather than over the actual life of the loans.

The following table sets forth loan sales and securitizations for the periods indicated (dollars in thousands):

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Total loan sales for the nine months ended September 30, 2002 were $9.3 billion, compared to $3.8 billion for the nine months ended September 30, 2001.  Whole loan sales represented 90.9% of total loan sales for the nine months ended September 30, 2002, compared to 77.3% for the same period last year.

Securitizations for the nine months ended September 30, 2002 were $845.5 million, compared to $898.2 million for the nine months ended September 30, 2001.  During 2002 and 2001, concurrently with or shortly after each of the securitizations, we completed a NIM transaction.  The combined securitization and accompanying NIM transactions yielded cash to us at closing of each NIM transaction comparable to cash received through whole loan sales during the respective periods.

Residual Interests

In a securitization transaction, we sell a portfolio of mortgage loans to a special purpose entity established for the limited purpose of buying and reselling mortgage loans.  The special purpose entity transfers the mortgage loans to a trust that in turn issues interest-bearing asset-backed securities generally in an amount equal to the aggregate principal balance of the mortgage loans.  One or more investors purchase these asset-backed securities for cash.  The trust uses the cash proceeds to pay us for the mortgage loans.  The trust also issues a certificate representing a residual interest in the payments on the securitized loans.  In addition, we provide credit enhancement for the benefit of the investors in the form of additional collateral, referred to as the over-collateralization account, or OC Account.

The over-collateralization requirement ranges from 0.75% to 4.75% of the initial securitization bond debt principal balance, or 1.5% to 9.5% of the remaining principal balance after 30 to 36 months of principal amortization.  The actual amount of the OC Account is determined by the rating agencies based upon their assessment of the loan pool characteristics.  When funding all of the OC Account up front, we begin to receive cash flow from our residual securities immediately.  When we do not fund the OC Account up front, we do not receive cash flow until the OC Account requirement is satisfied.  It typically takes between 12 to 24 months to satisfy the OC Account requirement. Cash flows from our residual interests are subject to certain delinquency or credit loss tests, as defined by the rating agencies or the bond insurance companies.  Over time, we receive distributions from the OC Account subject to the performance of the mortgage loans in each securitization. To date, we have elected to fund the required OC Account at the closing of most of our securitizations.

At the closing of each securitization, we add to our balance sheet the residual interest retained based on our calculation of the present value of estimated future cash flows to be received by us.  The residual interest we record consists of the OC Account and the net interest receivable, or NIR.  Combined, these are referred to as the residual interests.

We review quarterly the underlying assumptions used to value each residual interest and adjust the carrying value of the securities based on actual experience and trends in the industry.  To determine the residual asset value, we project cash flow for each security.  To project cash flow, we use base assumptions for the constant prepayment rate, or CPR, and losses for each product type based on historical performance. We update each security to reflect actual performance to date and then use the base assumptions for CPR and loss to project the performance of the security from that date forward.  If the actual performance of the security differs materially from the base assumptions with respect to CPR or loss, we adjust our assumptions of future performance. The London Interbank Offer Rate, or LIBOR, forward curve is then used to project future interest rates and finalize cash flow projections for each security. We then discount the projected cash flows at a rate commensurate with the risk involved.  At September 30, 2002, we used discount rates of 12.0% for residual interests and 14.0% for residual interests through NIM transactions.

Although residual cash flow was comparable to modeled cash flow for the nine months ended September 30, 2002, during the second quarter we modified some of our assumptions used to project future cash flows to reflect recent trends. The changes included the following:

Year-to-date we have recorded $26.0 million in losses on our euro futures contracts, offset by $26.5 million in increases in our residual asset value. These euro futures contracts serve as an economic hedge of interest rate exposure in the residual interest. The losses were the result of a decrease in forward

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LIBOR rates, which also resulted in a comparable increase in the value of the residual interests, due to an increase in the net interest spread to the residual holder.

Discounted Loan Sales

The following table illustrates the composition of discounted loan sales for each of the periods indicated (dollars in thousands):

For the quarter ended September 30, 2002, we sold $71.3 million in loans at a discount, compared to $17.3 million for the same period last year. For the nine months ended September 30, 2002, we sold $181.6 million in loans at a discount, compared to $207.9 million for the same period last year.

Elective pool repurchases totaled $11.9 million for the quarter ended September 30, 2002 and $80.0 million for the nine months ended September 30, 2002. These repurchases are discussed below.

Repurchases as a result of cleanup calls are repurchases from a securitization that typically occur when the principal balance of the securitization pool is less than 10% of the original principal balance of the pool.   No repurchases as the result of cleanup calls are projected during the remainder of 2002.

Repurchases from whole loan sales and other discounted sales are primarily 1) loans repurchased due to a first payment default, and 2) unsold loans with minor deficiencies (“scratch and dent” loans).  These loans are typically sold directly to investors or securitized depending upon the economic circumstances.  While the timing of sales impacts quarter-to-quarter comparisons, the year-to-date 2002 percentage of discounted loans sold within this category was approximately 1.1% of loan sales, an improvement from the 3.8% year-to-date percentage in 2001.

Elective Securitization Pool Repurchases

We periodically elect to repurchase loans in order to maximize cash flows from our residual interests that may otherwise be delayed due to loss or delinquency triggers.  The pooling and servicing agreements typically require the repurchase of the most delinquent loans first.  While the losses we recognize as a result of these repurchases

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are no less severe than if the loans had remained in the securitization trust, buying the loans from the pools allows us to accelerate cash flow from the residual interests.

Losses on the sale of loans repurchased from pools totaled $30.0 million for the nine months ended September 30, 2002.  As a result of the repurchases, we received $51.8 million in cash flows.  The difference in residual value with and without the repurchases was $39.8 million, or $9.8 million higher than the loss on the discounted sales.  The $9.8 million difference results from the immediate release of over-collateralization cash flows rather than delayed receipt that would have occurred absent the repurchases.

We evaluate each pool for the potential benefit of repurchasing loans, based on the economic merits of the particular transaction.  If the anticipated loss on the sale of repurchased loans is less than the anticipated loss in value of the residual asset that would result from disruption of residual cash flow, we generally elect to repurchase the loans.

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Results of Operations

The following table sets forth our results of operations as a percentage of total revenues for the periods indicated:

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Originations and Purchases

We originated and purchased $9.7 billion in loans for the nine months ended September 30, 2002, compared to $4.2 billion for the nine months ended September 30, 2001.  Wholesale loan originations and purchases were $8.3 billion, or 85.5% of total originations and purchases for the nine months ended September 30, 2002.  Retail loan originations were $1.4 million, or 14.5%, of total originations and purchases for the nine months ended September 30, 2002.  For the same period in 2001, wholesale and retail originations and purchases totaled $3.4 billion, or 80.6%, and $821.4 million, or 19.4%, respectively, of total originations and purchases.

Loan Sales and Securitizations

Whole loan sales increased to $8.3 billion for the nine months ended September 30, 2002, from $2.7 billion for the corresponding period in 2001, an increase of 207.5%.  This increase is the result of higher production volume. Securitizations totaled $845.5 million for the nine months ended September 30, 2002, compared to $898.2 million for the same period last year.

Revenues

Total revenues for the nine months ended September 30, 2002 increased by 107.9% to $419.6 million, from $201.8 million for the same period a year ago.  This increase was primarily due to a 158.5% increase in gain on sale of loans and a 97.7% increase in interest income earned on loans held for sale, partially offset by a decrease of 11.2% in residual interest income and a 98.7% decrease in servicing income.

Gain on Sale. Gain on sale of loans for the nine months ended September 30, 2002 increased by 158.5% to $310.4 million from $120.1 million for the same period a year ago. The increase in gain on sale of loans was the result of higher loan sale volume as well as improved whole loan sale prices.  The components of the gain on sale of loans are illustrated in the following table (dollars in thousands):

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Interest Income. Interest income increased by 97.7% to $84.4 million for the nine months ended September 30, 2002, compared to $42.7 million for the same period in 2001.  This increase was the result of higher average loan inventory during the first nine months of 2002.  Loan inventory was higher due to increased production volume.

Residual Interest Income. Residual interest income decreased by 11.2% to $24.6 million for the nine months ended September 30, 2002, from $27.7 million for the corresponding period in 2001. This decrease was primarily due to the decrease in the average balance of residual interests in securitizations.

Servicing Income. Servicing income decreased to $135,000 for the nine months ended September 30, 2002, from $10.3 million for the nine months ended September 30, 2001.  This decrease resulted from the sale of $4.8 billion in mortgage loan servicing rights to Ocwen Federal Bank FSB during the first quarter of 2001, as well as periodic sales of servicing rights to Ocwen since March 2001.

Expenses

Operating expenses increased to $205.9 million for the nine months ended September 30, 2002, from $158.7 million for the comparable period in 2001, an increase of 29.7%.  Personnel expenses increased to $101.4 million for the nine months ended September 30, 2002, from $61.6 million for the same period in 2001, an increase of 64.7% as a result of higher staffing to accommodate higher loan origination and purchase volume.  Headcount was 2,271 on September 30, 2002, compared to 1,431 on September 30, 2001, an increase of 58.7%.  Interest expense decreased to $36.2 million for the nine months ended September 30, 2002, from $43.3 million for the same period in 2001, primarily due to a significant decrease in interest rates on our warehouse and aggregation lines, partially offset by an increase in average outstanding balances.  In addition, interest expense was lower in 2002 due to the repayment of our subordinated debt with U.S. Bank and the substantially lower residual financing balances in 2002.

Income Taxes

Income taxes increased to $88.3 million for the nine months ended September 30, 2002, from $18.4 million for the comparable period in 2001.  This increase resulted from a $170.6 million increase in pretax income, partially

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offset by a 1.3% decrease from 42.6% to 41.3% in the effective tax rate for the nine months ended September 30, 2002.  The effective tax rate decreased as a result of our 2002 initiative to structure operations in a more tax-efficient manner.

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

Originations and Purchases

We originated and purchased $3.8 billion in loans for the three months ended September 30, 2002, compared to $1.8 billion for the three months ended September 30, 2001.  Wholesale loan originations and purchases were $3.3 billion, or 86.1% of total originations and purchases for the three months ended September 30, 2002.  Retail loan originations were $529.4 million, or 13.9%, of total originations and purchases for the three months ended September 30, 2002.  For the same period in 2001, wholesale and retail originations and purchases totaled $1.5 billion, or 82.3%, and $322.1 million, or 17.7%, respectively, of total originations and purchases.

Loan Sales and Securitizations

Whole loan sales increased to $3.5 billion for the three months ended September 30, 2002, from $1.1 billion for the corresponding period in 2001, an increase of 232.3%.  This increase resulted from higher production volume and the decision to sell 100% of loans through whole loan sales in the third quarter of 2002. Securitizations totaled $518.0 million for the three months ended September 30, 2001.

Revenues

Total revenues for the three months ended September 30, 2002 increased by 86.8% to $166.4 million, from $89.1 million for the same quarter a year ago.  This increase was primarily due to a 109.1% increase in gain on sale of loans, a 20.2% increase in residual interest income, and a 49.6% increase in interest income earned on loans held for sale.

Gain on Sale. Gain on sale of loans for the three months ended September 30, 2002 increased by 109.1% to $128.4 million, from $61.4 million for the same period a year ago. The increase in gain on sale of loans was the result of higher loan sale volume as well as improved whole loan sale prices.  The components of the gain on sale of loans are illustrated in the following table (dollars in thousands):

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