Original Source: FD (FAIR DISCLOSURE) WIRE
. Carrie Marrelli, New Century Financial Corp., Investor Relations
. Bob Cole, New Century Financial Corp., Chairman and CEO . Brad Morrice, New Century Financial Corp., Vice Chairman, President and COO . Patti Dodge, New Century Financial Corp, Executive Vice President and Chief Financial Officer . Matthew Howlett, Fox-Pitt Kelton, Analyst . Bob Napoli, Piper Jaffray, Analyst . Andy Wagstaff, Touchtone Investments, Analyst . Ken Bruce, Merrill Lynch, Analyst
. Richard Shane, Jefferies & Co., Analyst . Eric Wasserstrom, UBS, Analyst . Richard Eckert, Roth Capital Partners, Analyst . Casey Amert, Millennium Partners, Analyst . Scott Valentin, Friedman, Billings, Ramsey, Analyst . Bose George, KBW, Analyst . Robert Jordan, Morgan Stanley, Analyst . Darius Brawn, Endicott Partners, Analyst . Neil Abromavage, Deutsche Bank, Analyst . Adam Weinrick, Basswood Partners, Analyst . Ralph Deljudis, Friedman, Billings, Ramsey, Analyst . Scott Coren, Bear Stearns, Analyst . Vincent Daniels, Frontpoint, Analyst . Ben Atkinson, Gagnon Securities, Analyst
Management reported diluted EPS of $2.04 in 3Q05. In 3Q05, NEW set a quarterly record of $16.7b in mortgage loans originated, including about $900m in loans originated through the platform the Co. acquired in connection with its RBC Mortgage acquisition. The Board has authorized the Co. to purchase up to 5m common shares through utilization of a portion of its excess liquidity. For 2005 total dividend, NEW expects its REIT taxable income to exceed the $6.50 per share of dividend guidance.
A. Key Data From Call 1. 3Q05 diluted EPS = $2.04. 2. 3Q05 dividend = $1.65 per share. 3. 2006 dividend guidance = $7.30 per share.
S1. 3Q05 Results (B.C.) 1. Significant Highlights: 1. In light of the more challenging secondary market environments and the competitive pricing pressures discussed in the recent conference calls, NEW is quite pleased with its 3Q05 results of diluted EPS of $2.04, which produced an after-tax ROE of approx. 22%.
1. The REIT portfolio was the primary source of 3Q05 EPS of $2.04 and provides a greater stability of earnings and revenues.
2. 3Q05 dividend of $1.65 per share was fully covered by the REIT
taxable income of $2.49 per share. 1. The REIT portfolio, which averaged slightly under $16b for 3Q05 continues to outperform expectations and produced about $104m in pretax income or $1.81 per share on a GAAP basis, which reflects an approximate 32% increase over 2Q05 pretax income of about $79m. 2. Mortgage Origination Platform: 1. In 3Q05, NEW set a quarterly record of $16.7b in mortgage
loans originated, including about $900m in loans originated
through the platform the Co. acquired in connection with its
RBC Mortgage acquisition. 2. For the nine months ended 09/30/05, over $40b of production in 2005 compared quite favorably with about $30b of production for the same time last year. 3. The Co. just announced Oct. 2005 loan production for the month, which was $5.3b of loans, which does include the same $900m of loans from the newly acquired operations. 1. This brings total YTD production volume of about $45.7b and does keep the Co. well on track to achieve its expectation of originating between $50-55b in 2005 during these last two months of Nov. and Dec. 3. Loan Acquisition Costs: 1. On the last conference call, NEW talked about various
cost-cutting strategies it was executing. 2. The Co. was able to modestly reduce loan acquisition costs from 1.89% to 1.82% due to the increased volume and decreased fixed costs.
1. However, this effort is far from complete. 2. Expects further improvement in decreasing loan acquisition costs in future quarters. 4. RBC Mortgage Company: 1. In Sept., NEW completed its RBC Mortgage Company acquisition. 2. The integration of this new channel remains on track to achieve the objectives of:
1. Broadening product menu. 2. Contributing to long-term profitability. 5. REIT Portfolio: 1. The Co. is pleased to announce that the adoption of the REIT strategy achieves one of its goals.
2. REIT portfolio was the primary contributor to $2.04 of EPS in
3Q05. 3. 3Q05 dividend of $1.65 per share was in fact fully covered by REIT taxable income of $2.49 per share. 1. For 2005 total dividend, for that period, the Co. expects its REIT taxable income to exceed the $6.50 per share of dividend guidance.
2. Therefore, for full-year 2005, the Co. does expect the excess REIT taxable income to be approx. $1.50 per share. 3. As a result, the Co. intends to use an IRS code provision that allows this excess taxable income to be carried into FY06 and to distribute this excess taxable income as part of NEW's regularly quarterly dividend probably in April of 2006, while at the same time, avoiding excise or regular
income tax on this excess. 4. The combined REIT and TRS loan portfolios, which continued to exhibit strong performance, totaled about $18.3b at 09/30/05. 1. Delinquencies and losses were significantly lower than expected. 5. Given current margins, the Co.'s liquidity position and the intended use of cash for its common share repurchase program, NEW does not anticipate putting additional assets on the balance sheet in 4Q05. 1. Although this action is possible in the near term, the Co. expects to evaluate it on an ongoing basis based on market conditions and financial position. 6. In the short term, NEW's current trading range of stock price represents a very compelling investment opportunity to initiate a buyback program in 4Q05 and beyond. 6. Other Significant Highlights: 1. The Co. remains confident in its ability to deliver on its
2006 dividend guidance of $7.30 per share. 2. NEW projects that the total contribution of dividend from the portfolio will be $5. 1. Of this $5 contribution, $3.50 is coming from the projected
taxable income of the existing REIT portfolio and this is without any replenishment in 2006. 2. $1.50 is coming from 2005 REIT income, which is expected to be carried over into 2006. 3. $3.50 and $1.50 represents $5 of base projected dividend. 3. The Co. expects the remainder of the dividend to come from: 1. Potential additions to REIT portfolio in 2006. 2. Continued profitable operations of TRS. 7. Stock Repurchase Program: 1. NEW does not believe the Co. is being fairly valued in the marketplace at the present time. 1. As a result, the Co. believes that a stock repurchase program currently presents a compelling investment alternative and a means to improve shareholder value. 2. The Board has authorized the Co. to purchase up to 5m common shares through utilization of a portion of its excess liquidity. 1. Additional excess liquidity in future periods may be generated internally or through external financing sources. 3. The precise timing of any purchases will be subject to market conditions. 8. Synopsis: 1. The portfolio of loans is performing beyond the Co.'s expectations and has allowed it to reaffirm its dividend for 2005 and into 2006. 2. The Board of Directors has authorized the purchase of up to 5m shares. 3. NEW now offers a wider range of products to its borrowers.
S2. Business Operations Update (B.M.) 1. Significant Highlights:
1. There were dramatic crosscurrents in the operating environment
in 3Q05. 2. Production Volume: 1. NEW does have a very strong origination franchise and did produce an all-time quarterly record of $16.7b in volume in 3Q05. 2. 3Q05 volume does include one month of volume equal to about $900m from the origination platform acquired from RBC. 1. These results are not material to NEW's overall 3Q05 results. 3. RBC Deal: 1. Deal did close on schedule. 2. Integration is proceeding on track.
3. The Co. expects the deal to be accretive in 2006. 4. Remains excited about the strategic potential of the broader product line.
4. Total volume in Oct. was approx. $5.3b, including volume from
the acquired operations of approx. $950m, which brings to
$45.7b in total volume for 2005 and does keep the Co. on track
to deliver $50-55b in total volume for 2005. 1. Non-RBC volume has come down from the Aug. peak of about $6b a month to approx. $4.3b in Oct. 2. This is right in line with what the Co. thought the market to expect when it began meaningfully raising interest rates. 5. Looking forward, while NEW is by no means done raising rates, it is cautiously optimistic that significant borrower demand expects to remain intact in the face of these additional rate increases. 3. Recent Funded Coupon: 1. The weighted avg. coupon on funded loan has moved up from under 7% or around 7% at the beginning of Sept. to over 7.6% at the end of Oct.
2. Hindsight tells that the Co. should have begun raising rates
earlier. 1. Since 09/01/05, the Co. has raised rates on its funded loans as a regular basis. 3. From the time NEW raised rates on its rate sheet, it takes over 30 days on avg. for those changes to show up in funded loan coupons and another 45 days on avg. before those changes show up in the loans it sells.
1. If the Co. sells to a Wall Street securitizer, there is another lag before those loans show up in the weighted avg. coupons of the securitization. 2. There has been an inflection point. 1. Expects to be a lag period before the rate increases that have been made and will be made are fully recognized in the market.
3. Unfortunately, these rate increases are not yet translating
to improve gain on sale, because of the continuing increases in market rates and softening secondary market conditions. 1. This is the reason why the Co. has and expects to continue to raise rates until it can improve profit …