SAX Saxon Cap New

Saxon Capital, Inc. ("Saxon" or the "Company") (NYSE:SAX), a residential mortgage lending and servicing real estate investment trust (REIT), today announced third quarter 2005 net income of $11.6 million or $0.23 per share diluted, compared to net income of $38.3 million or $1.14 per share diluted for the third quarter of 2004, and $19.4 million or $0.38 per share diluted for the second quarter of 2005. During the third quarter of 2005, Saxon recorded a reserve of $6.8 million in connection with losses that may occur in the mortgage loan portfolio due to Hurricane Katrina. The Company has also recorded additional mortgage servicing right impairments related to Hurricane Katrina of $0.4 million. During the third quarter of 2005, Saxon recorded a cumulative adjustment to increase income tax benefit and increase deferred tax asset of approximately $3.7 million. The adjustment had no impact on cash flows, taxable income or the amount of dividends declared for any of these periods. "During the third quarter, we continued to see the unfavorable market conditions that we discussed in the second quarter", said Michael L. Sawyer, Chief Executive Officer of Saxon. "The continued rise in short-term interest rates, and accelerated prepayment speeds, coupled with the extended period of muted market pricing increases continue to adversely effect our results. We remain committed to prudent management through these times, concentrating on reducing general and administrative expenses, growing our centralized retail origination platform, focusing on capital preservation, and ensuring a strong balance sheet." Financial Performance Net interest income was $46.6 million for the third quarter of 2005, compared to $61.7 million for the third quarter of 2004 and $50.1 million for the second quarter of 2005. Net interest margin was 3.0% for the third quarter of 2005 compared to 4.6% for the third quarter of 2004 and 3.3% for the second quarter of 2005. Net interest margin is calculated as net interest income divided by average interest-earning assets. Average interest-earning assets are calculated using a daily average balance over the time period indicated. Net interest margin after provision for mortgage loan losses was 1.8% for the third quarter of 2005, compared to 3.5% for the third quarter of 2004 and 2.4% for the second quarter of 2005. Excluding the reserve of $6.8 million related to Hurricane Katrina, Saxon's net interest margin after provision for mortgage loan losses for the third quarter 2005 would have been 2.2%. Net interest margin after provision for mortgage loan losses is calculated as net interest income after provision for mortgage loan losses divided by average interest-earning assets. Faster prepayment of the higher weighted average coupon mortgage loan portfolio reduced gross interest income. Mortgage loans with a lower weighted average coupon produced during a period of intense pricing competition replaced the higher weighted average coupon loans. Gross interest expense increased due to the rise in 1-month LIBOR and its impact on Saxon's long- and short-term financing. As of September 30, 2005, 1-month LIBOR had increased approximately 202 basis points since September 30, 2004, and approximately 52 basis points since June 30, 2005. The increase in the 2/3-year swap curve positively impacted the Company's hedge values. At September 30, 2005, Saxon recognized an unrealized hedge gain of approximately $25.2 million (pre-tax), which is reflected as a component of shareholder's equity in accumulated other comprehensive income on the condensed consolidated balance sheet. The Company's unrealized hedge gain is accreted into income as a reduction of interest expense in the condensed consolidated statement of operations in future periods over the expected life of the related debt. Total delinquencies (excluding Hurricane Katrina) increased $53 million from the second quarter of 2005 to the third quarter of 2005. Saxon increased its provision for mortgage loan losses to $19.4 million, which includes a $6.8 million reserve related to Hurricane Katrina. Servicing income, net of amortization and impairment, was $19.1 million for the third quarter of 2005, compared to $8.4 million for the third quarter of 2004 and $17.2 million for the second quarter of 2005. During the quarter, the Company recorded a $3.4 million temporary impairment to mortgage servicing rights, $0.4 million of which was related to Hurricane Katrina and the remainder of which was related to faster prepayment speeds and lower market valuation on older third party servicing portfolios. Saxon's third party servicing portfolio grew 8.6% to $20.2 billion at September 30, 2005, compared to $18.6 billion at June 30, 2005. During the third quarter 2005, Saxon purchased servicing rights on $4.1 billion in mortgage loan pools. Total net revenues for the third quarter of 2005 were $46.3 million, compared to $55.6 million for the third quarter of 2004 and $54.5 million for the second quarter of 2005. Total expenses, which include payroll and related expenses, general and administrative expenses and other expenses, were $41.1 million for the third quarter of 2005, compared to $36.3 million for the third quarter of 2004 and $32.8 million for the second quarter of 2005. Total expenses increased in the third quarter 2005 from third quarter of 2004 due to $1.9 million of severance expense related to the departure of the Executive Vice President Capital Markets and Senior Vice President and Corporate Strategies Director, and an increase in accounting, consulting/outside services, and lease expenses. Total expenses increased in the third quarter 2005 from the second quarter of 2005 due to an increase in severance (as mentioned above), salary, lease and retail marketing expenses. In addition, the amount of FAS 91expenses deferred on a per loan basis was reduced in the third quarter 2005 by $1.2 million due to the impact of a lower retail cost structure. Cost to service was 17 basis points for the third quarter of 2005, compared to 20 basis points for the third quarter of 2004, and a 17 basis points cost in the second quarter of 2005. Total net cost to produce was 2.96% of total loan production for the third quarter of 2005, compared to 2.79% for the third quarter of 2004 and 2.84% for the second quarter of 2005. The increase in net cost to produce from the second quarter 2005 to the third quarter 2005 is primarily attributed to an increase in correspondent premiums paid. Cost to service and total net cost to produce are measures defined by the Securities and Exchange Commission as "non-GAAP financial measures." Management believes that such non-GAAP financial measures, when read in conjunction with the Company's reported results, can provide useful supplemental information about the efficiency of the Company's processes to its investors. Tables reconciling the Company's calculation of cost to service and total net cost to produce to GAAP results are set forth in Exhibit A. -0- *T REIT Taxable Income The following table is a reconciliation of GAAP net income to estimated REIT taxable net income for the three and nine months ended September 30, 2005: Three Nine months months ended ended September September 30, 2005 30, 2005 ---------- ---------- ($ in thousands) Consolidated GAAP income before taxes $5,296 $54,800 Estimated tax adjustments: Plus: Provision for losses 19,369 38,551 Elimination of intercompany income before taxes 2,095 15,515 Less: Taxable REIT subsidiary income before taxes 544 12,490 Securitized loan adjustments for tax (3,351) 5,901 Miscellaneous other 99 (907) ---------- ---------- Estimated REIT taxable income $29,468 $91,382 ========== ========== *T The estimated REIT taxable income for the three and nine months ended September 30, 2005 set forth in the table above is an estimate only and is subject to change until the Company files its 2005 REIT federal tax returns. To maintain the status as a REIT, Saxon is required to distribute at least 90% of its REIT taxable income each year to its shareholders. REIT taxable income is calculated under consolidated net income pursuant to GAAP. Saxon expects that consolidated GAAP net income may differ from REIT taxable income for many reasons, including the following: -- the provision for loan loss expense recognized for GAAP purposes is based upon the estimate of probable loan losses inherent in our current portfolio of loans held for investment, for which the Company has not yet recorded a charge-off (tax accounting rules allow a deduction for loan losses only in the period when a charge-off occurs); -- there are several differences between GAAP and tax methodologies for capitalization of origination expenses; and -- income of a taxable REIT subsidiary is generally included in the REIT's earnings for consolidated GAAP purposes, but is not recognized in REIT taxable income. Saxon expects that its REIT taxable income will continue to differ from GAAP consolidated income, particularly during the period in which the Company is building its mortgage loan portfolio. Estimated REIT taxable income is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Management believes that the presentation of REIT taxable income provides useful information to investors regarding our estimated annual distributions to our investors. The presentation of REIT taxable income is not to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. Portfolio Credit Performance Saxon's net mortgage loan portfolio totaled $6.2 billion at September 30, 2005, an increase of 10.7% from September 30, 2004 and an increase of 1.6% from June 30, 2005. Seriously delinquent (60+ days past due) loans were 6.4% of net mortgage loan portfolio at September 30, 2005, compared to 6.6% at September 30, 2004 and 6.0% at June 30, 2005. Saxon's allowance for loan losses was $49.2 million at September 30, 2005, compared to $36.3 million at September 30, 2004, and $36.3 million at June 30, 2005. Allowance for loan losses as a percentage of net mortgage loan portfolio balance increased to 0.79% at September 30, 2005 from 0.65% at September 30, 2004, and increased from 0.59% at June 30, 2005. Allowance for loan losses as a percentage of total delinquency and serious delinquency was 7.0% and 14.2% for the third quarter of 2005 compared to 5.9% and 11.3% for the third quarter of 2004 and 5.7% and 11.2% for the second quarter of 2005 (excluding real estate owned delinquencies). Saxon's total delinquent and seriously delinquent loans continue to trend in line with historical seasonal data and include approximately $32.2 million of loans impacted by Hurricane Katrina. The Company increased its allowance for loan losses by $6.8 million for the potential impact of Hurricane Katrina. Loan Production Mortgage loan production (excluding called loans from off balance sheet securitizations) was $847.76 million for the third quarter of 2005, a decrease of 15% compared to the third quarter of 2004, and an increase of 8% from the second quarter of 2005. Mortgage loan production (excluding called loans from off balance sheet securitizations) was $2.4 billion for the nine months ended September 30, 2005, compared to $2.7 billion for the nine months ended September 30, 2004. Saxon's wholesale mortgage loan production was $404.6 million during the third quarter of 2005, an increase of 2% from the third quarter of 2004, and an increase of 7% from the second quarter of 2005. Wholesale mortgage loan production was $1.1 billion for the nine months ended September 30, 2005, which was flat compared to the nine months ended September 30, 2004. Saxon's retail mortgage loan production was $170.3 million during the third quarter of 2005, a decrease of 31% from the third quarter of 2004, and a decrease of 4.5% from the second quarter of 2005. Retail mortgage loan production was $550.6 million for the nine months ended September 30, 2005, a decrease of 22% from the nine months ended September 30, 2004. Saxon's correspondent flow mortgage loan production was $228.7 million during the third quarter of 2005, a decrease of 14% from the third quarter of 2004, and an increase of 15% from the second quarter 2005. Correspondent flow mortgage loan production was $650.94 million for the nine months ended September 30, 2005, an increase of 11% from the nine months ended September 30, 2004. Correspondent bulk mortgage loan production was $44.2 million during the third quarter of 2005, a increase of 11% from the third quarter of 2004, and a increase of 33% from the second quarter 2005. Correspondent bulk mortgage loan production was $115.3 million for the nine months ended September 30, 2005, a decrease of 2% from the nine months ended September 30, 2004. Saxon's production in 2005 has been negatively impacted by the closing and/or divestiture of several retail branches, and the intense pricing competition existing in the marketplace throughout the first nine months of 2005. Loan Servicing Saxon's third party servicing portfolio was $20.2 billion at September 30, 2005, an increase of 92% from September 30, 2004, and an increase of 8% from June 30, 2005, resulting from the purchase of additional third party servicing rights. During the third quarter of 2005, Saxon purchased third party servicing rights to service approximately $4.1 billion of mortgage loans, which have annual servicing fees of approximately 50 basis points. Liquidity At September 30, 2005, Saxon had $1.7 billion in committed facilities and $154.0 million in working capital, compared to $1.6 billion in committed facilities and $333.0 million in working capital at September 30, 2004. It is common business practice to define working capital as current assets less current liabilities. However, the Company does not have a classified balance sheet and therefore calculates working capital using an internally defined formula, which is generally calculated as unrestricted cash and investments as well as unencumbered assets that can be pledged against existing committed facilities and converted to cash in five days or less. Management believes that this working capital calculation provides a better indication of the Company's liquidity available to conduct business at the time of calculation. A reconciliation between the Company's working capital calculation and the common definition of working capital is presented in exhibit A. During the third quarter of 2005, Saxon priced and closed a $900 million asset-backed securitization, Saxon Asset Securities Trust 2005-3. Recent Developments On October 18, 2005, Saxon announced its third quarter cash dividend of $0.50 per share of common stock payable November 10, 2005 to shareholders of record at the close of business on October 28, 2005. Conference Call Saxon will host a conference call for analysts and investors at 9 a.m. Eastern Time on Tuesday, November 8, 2005. For a live Internet broadcast of this conference call, please visit Saxon's investor relations website at www.saxoncapitalinc.com. To participate in the call, contact Ms. Bobbi Roberts at 804-967-7879 or Ms. Meagan Evans at 804-935-5281. A replay will be available shortly after the call and will remain available until 11:59 p.m. Eastern Time, November 15, 2005. The replay will be available on Saxon's website or at 800-475-6701 using the ID number 798960. About Saxon Saxon is a residential mortgage lender and servicer that manages a portfolio of mortgage assets. Saxon purchases, securitizes and services real property secured mortgages and elects to be treated as a real estate investment trust (REIT) for federal tax purposes. The company is headquartered in Glen Allen, Virginia and has additional primary facilities in Fort Worth, Texas and Foothill Ranch, California. Saxon's production subsidiaries, Saxon Mortgage, Inc., and America's MoneyLine, Inc. originate and purchase loans through wholesale, correspondent and retail business channels. Saxon currently originates and purchases loans throughout the United States through its network of brokers, correspondents, and retail branches. As of September 30, 2005, Saxon's servicing subsidiary, Saxon Mortgage Services, Inc., serviced a mortgage loan portfolio of $26.4 billion. For more information, visit www.saxoncapitalinc.com. Information Regarding Forward Looking Statements Statements in this news release other than statements of historical fact, are "forward-looking statements" that are based on current expectations and assumptions. These expectations and assumptions are subject to risks and uncertainty, which could affect Saxon's future plans. Saxon's actual results and the timing and occurrence of expected events could differ materially from its plans and expectations due to a number of factors, such as (i) changes in overall economic conditions and interest rates, (ii) Saxon's ability to successfully implement its growth strategy, (iii) Saxon's ability to sustain loan origination growth at levels sufficient to absorb costs of production and operational costs, (iv) continued availability of credit facilities and access to the securitization markets or other funding sources, (v) deterioration in the credit quality of Saxon's loan portfolio, (vi) lack of access to the capital markets for additional funding, (vii) challenges in successfully expanding Saxon's servicing platform and technological capabilities, (viii) Saxon's ability to remain in compliance with federal tax requirements applicable to REITs, (ix) Saxon's ability and the ability of its subsidiaries to operate effectively within the limitations imposed on REITs by federal tax rules, (x) changes in federal income tax laws and regulations applicable to REITs, (xi) unfavorable changes in capital market conditions, (xii) future litigation developments, (xiii) competitive conditions applicable to Saxon's industry, and (xiv) changes in the applicable legal and regulatory environment. You should also be aware that all information in this news release is as of November 7, 2005. Saxon undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations. -0- *T Saxon Capital, Inc. Condensed Consolidated Balance Sheets (Dollars in thousands, except per share data) (unaudited) September December 30, 31, 2005 2004 ----------- ----------- Assets Cash $9,493 $12,852 Accrued interest receivable 56,784 56,132 Trustee receivable 130,117 112,062 Mortgage loan portfolio 6,270,256 6,027,620 Allowance for loan loss (49,175) (37,310) ----------- ----------- Net mortgage loan portfolio 6,221,081 5,990,310 Restricted cash 142,233 1,495 Servicing related advances 155,812 113,129 Mortgage servicing rights, net 138,943 98,995 Real estate owned 26,654 24,860 Derivative assets 33,919 11,801 Deferred tax asset 56,767 27,825 Other assets 65,787 89,670 ----------- ----------- Total assets $7,037,590 $6,539,131 =========== =========== Liabilities and shareholders' equity Liabilities: Accrued interest payable $7,044 $8,045 Dividend payable - 28,909 Warehouse financing 144,100 600,646 Securitization financing 6,195,417 5,258,344 Derivative liabilities 5,262 1,809 Other liabilities 25,493 22,449 ----------- ----------- Total liabilities 6,377,316 5,920,202 ----------- ----------- Commitments and contingencies - - Shareholders' equity Common stock, $0.01 par value per share, 100,000,000 shares authorized; shares issued and outstanding: 49,980,135 as of September 30, 2005 and 49,849,386 as of December 31, 2004 501 498 Additional paid-in capital 632,702 625,123 Accumulated other comprehensive income (loss), net of tax effect of $2,705 and $2,446 22,932 (3,842) Net retained earnings (accumulated deficit): Cumulative dividends declared (170,395) (114,641) Retained earnings 174,534 111,791 ----------- ----------- Net retained earnings (accumulated deficit) 4,139 (2,850) ----------- ----------- Total shareholders' equity 660,274 618,929 ----------- ----------- Total liabilities and shareholders' equity $7,037,590 $6,539,131 =========== =========== Saxon Capital, Inc. Condensed Consolidated Statements of Operations (Dollars in thousands, except per share data) (unaudited) Quarter Quarter Quarter Quarter Quarter Ended Ended Ended Ended Ended September June 30, March 31, December September 30, 31, 30, 2005 2005 2005 2004 2004 --------- --------- --------- --------- --------- Revenues: Interest income $115,685 $111,638 $114,063 $105,640 $99,657 Interest expense (69,075) (61,568) (55,172) (48,660) (37,933) --------- --------- --------- --------- --------- Net interest income 46,610 50,070 58,891 56,980 61,724 Provision for mortgage loan losses (19,369) (13,483) (5,699) (12,879) (14,730) --------- --------- --------- --------- --------- Net interest income after provision for mortgage loan losses 27,241 36,587 53,192 44,101 46,994 Servicing income, net of amortization and impairment 19,064 17,223 13,566 13,442 8,371 Gain on sale of assets 44 706 1,701 421 220 --------- --------- --------- --------- --------- Total net revenues $46,349 $54,516 $68,459 $57,964 $55,585 Expenses: Payroll and related expenses 21,324 16,255 21,751 19,337 19,662 General and administrative expenses 16,918 15,339 16,020 19,063 14,311 Other expenses 2,811 1,219 2,918 2,919 2,371 --------- --------- --------- --------- --------- Total expenses 41,053 32,813 40,689 41,319 36,344 Income before taxes 5,296 21,703 27,770 16,645 19,241 Income tax expense (benefit) (6,314) 2,336 (3,965) (13,495) (19,044) --------- --------- --------- --------- --------- Net income before cumulative effect of change in accounting principle (SFAS 123R) $11,610 $19,367 $31,735 $30,140 $38,285 Cumulative effect of change in accounting principle (SFAS 123R) - 31 - - - --------- --------- --------- --------- --------- Net income $11,610 $19,398 $31,735 $30,140 $38,285 ========= ========= ========= ========= ========= Basic earnings per share $0.23 $0.39 $0.64 $0.60 $1.21 ========= ========= ========= ========= ========= Diluted earnings per share $0.23 $0.38 $0.63 $0.60 $1.14 ========= ========= ========= ========= ========= Saxon Capital, Inc. Supplemental Data The following supplemental data is considered to be either relevant GAAP information, non-GAAP information or operational data. Qtr Qtr Qtr ($ in thousands, except per share data) 9/30/2005 6/30/2005 3/31/2005 ---------------------------------------------------------------------- Production Statistics Volume ------ Wholesale $404,582 $376,784 $342,514 Retail 170,249 178,391 201,979 Correspondent flow 228,717 199,461 222,759 Correspondent bulk 44,219 33,195 37,900 Called loans (1) - - Net Cost to Produce (2) ----------------------- Wholesale 2.60% 2.54% 2.99% Retail 3.18% 3.12% 3.96% Correspondent (3) 3.34% 3.12% 3.11% Total Production 2.96% 2.84% 3.27% Cost to service (4) 0.17% 0.17% 0.20% Credit Quality (5) ------------------ Average loan-to-value 79.2% 79.5% 78.5% Credit score 613 618 617 Fixed weighted average coupon 7.5% 7.7% 7.9% ARM weighted average coupon 7.3% 7.2% 7.0% Total weighted average coupon 7.3% 7.3% 7.2% ---------------------------------------------------------------------- Portfolio Statistics Owned portfolio weighted average credit score 617 617 616 Owned portfolio weighted average coupon 7.4% 7.5% 7.5% Owned portfolio principal balance (at period end) $6,185,969 $6,104,889 $6,035,444 Owned portfolio seriously delinquent (6) 6.4% 6.0% 5.7% Non-GAAP owned net losses on liquidated loans - quarter ended trust basis (7) 9,496 13,074 11,273 GAAP owned net losses on liquidated loans - quarter ended (7) 8,618 9,209 8,893 Total serviced portfolio principal balance (at period end) 26,356,770 24,730,615 21,518,419 Total serviced portfolio seriously delinquent (6) 6.3% 5.5% 5.0% Total serviced net losses on liquidated loans - quarter ended trust basis 23,111 27,579 21,817 ---------------------------------------------------------------------- Key Ratios Average interest earning assets (8) $6,132,934 $6,051,182 $6,025,904 Average assets (9) 654,771 6,812,011 6,601,140 Average equity (9) 6,999,232 661,580 646,411 Return on average assets (ROA) (10) 0.7% 1.1% 1.9% Return on average equity (ROE) (10) 7.1% 11.7% 19.6% Average equity/average assets 9.4% 9.7% 9.8% Debt to equity 9.7 9.7 8.9 Interest income/average interest earning assets (10) 7.5% 7.4% 7.6% Interest expense/average interest earning assets (10) 4.5% 4.1% 3.7% Net interest margin/average interest earning assets (10) (11) 3.0% 3.3% 3.9% Net interest margin after provision for mortgage loans losses (10)(11) 1.8% 2.4% 3.5% Operating expenses/servicing portfolio (10) 0.6% 0.5% 0.8% Operating expenses/average assets (10) 2.3% 1.9% 2.5% Efficiency ratio (12) 88.6% 60.2% 59.4% Non-GAAP adjusted efficiency ratio (13) 59.6% 48.3% 55.7% Common Stock Data Basic earnings per share $0.23 $0.39 $0.64 Diluted earnings per share $0.23 $0.38 $0.63 Shares used to compute basic EPS 49,942 49,884 49,850 Shares used to compute diluted EPS 50,726 50,751 50,463 Shares outstanding (period end) 49,980 49,903 49,884 Common Stock Price (14) High $18.12 $18.25 $24.28 Low $10.98 $16.35 $16.33 Period End $11.87 $17.07 $17.20 Book value per share (period end) $13.21 $13.01 $13.51 ---------------------------------------------------------------------- (1) Called loans are mortgages purchased from the SAST 98-3, 98-4, 99- 1 and 99-4 securitizations pursuant to the clean-up call provision of the trust. (2) Net cost to produce is defined as production expenses and premium paid, net of fees collected, divided by loan production. See net cost to produce calculation in Exhibit A. (3) Beginning January 1, 2005, Correspondent flow and bulk g&a, premium, and fees are combined to calculate net cost to produce for the Correspondent business channel. Prior periods have been recalculated to conform to the new presentation. (4) Cost to service is defined as servicing expenses dividend by average total portfolio balance. See cost of service calculation in Exhibit A. (5) Credit quality statistics for quarters ended December 31, 2004 and September 30, 2004, include called loan statistics. In addition, all quarters presented include second mortgages originated and sold. (6) Seriously delinquent is defined as 60 plus days past due. (7) GAAP requires losses to be recognized immediately upon the loan transferring to real estate owned. The trust does not recognize a loss on real estate owned property until it is sold, which causes a timing difference between GAAP and trust losses. In addition, trust losses exclude losses resulting from a delinquent loan sale. Exhibit A provides a reconcilation of GAAP to trust losses. (8) Average interest earning assets is a daily average balance of loans in the net mortgage loan portfolio. (9) Average assets is calculated by adding current quarter and previous quarter total assets, then dividing by 2. Average equity is calculated by adding current quarter and previous quarter total shareholders' equity, then dividing by 2. (10) Ratios are annualized. (11) Net interest margin is calculated as the difference between interest income and interest expense divided by average interest earning assets. (12) Efficiency ratio is calculated as total expenses divided by total net revenues. (13) See Exhibit A for a reconciliation of the calculation for non- GAAP adjusted efficiency ratio. (14) Represents actual stock prices during quarter. A $4.00 per share merger consideration was paid during the third quarter 2004. Qtr Qtr ($ in thousands, except per share data) 12/31/2004 9/30/2004 ---------------------------------------------------------------------- Production Statistics Volume ------ Wholesale $378,790 $394,891 Retail 255,156 247,474 Correspondent flow 260,938 267,086 Correspondent bulk 64,198 39,660 Called loans (1) 83,269 50,476 Net Cost to Produce (2) ----------------------- Wholesale 2.83% 2.67% Retail 2.38% 2.62% Correspondent (3) 3.21% 3.07% Total Production 2.84% 2.79% Cost to service (4) 0.24% 0.20% Credit Quality (5) ------------------ Average loan-to-value 80.2% 80.3% Credit score 615 622 Fixed weighted average coupon 8.3% 8.2% ARM weighted average coupon 7.0% 7.0% Total weighted average coupon 7.3% 7.3% ---------------------------------------------------------------------- Portfolio Statistics Owned portfolio weighted average credit score 617 617 Owned portfolio weighted average coupon 7.6% 7.7% Owned portfolio principal balance (at period end) $5,950,965 $5,575,386 Owned portfolio seriously delinquent (6) 6.6% 6.6% Non-GAAP owned net losses on liquidated loans - quarter ended trust basis (7) 14,474 10,862 GAAP owned net losses on liquidated loans - quarter ended (7) 11,014 11,908 Total serviced portfolio principal balance (at period end) 20,165,942 16,098,212 Total serviced portfolio seriously delinquent (6) 5.3% 5.8% Total serviced net losses on liquidated loans - quarter ended trust basis 25,433 22,060 ---------------------------------------------------------------------- Key Ratios Average interest earning assets (8) $5,642,337 $5,375,840 Average assets (9) 6,429,964 5,984,834 Average equity (9) 659,747 545,933 Return on average assets (ROA) (10) 1.9% 2.6% Return on average equity (ROE) (10) 18.3% 28.1% Average equity/average assets 10.3% 9.1% Debt to equity 9.6 8.0 Interest income/average interest earning assets (10) 7.5% 7.4% Interest expense/average interest earning assets (10) 3.4% 2.8% Net interest margin/average interest earning assets (10) (11) 4.0% 4.6% Net interest margin after provision for mortgage loans losses (10)(11) 3.1% 3.5% Operating expenses/servicing portfolio (10) 0.8% 0.9% Operating expenses/average assets (10) 2.6% 2.4% Efficiency ratio (12) 71.3% 65.4% Non-GAAP adjusted efficiency ratio (13) 58.7% 46.8% Common Stock Data Basic earnings per share $0.60 $1.21 Diluted earnings per share $0.60 $1.14 Shares used to compute basic EPS 49,844 31,525 Shares used to compute diluted EPS 49,854 33,565 Shares outstanding (period end) 49,849 49,844 Common Stock Price (14) High $26.58 $29.15 Low $18.25 $20.85 Period End $23.99 $21.50 Book value per share (period end) $12.42 $14.06 ---------------------------------------------------------------------- (1) Called loans are mortgages purchased from the SAST 98-3, 98-4, 99- 1 and 99-4 securitizations pursuant to the clean-up call provision of the trust. (2) Net cost to produce is defined as production expenses and premium paid, net of fees collected, divided by loan production. See net cost to produce calculation in Exhibit A. (3) Beginning January 1, 2005, Correspondent flow and bulk g&a, premium, and fees are combined to calculate net cost to produce for the Correspondent business channel. Prior periods have been recalculated to conform to the new presentation. (4) Cost to service is defined as servicing expenses dividend by average total portfolio balance. See cost of service calculation in Exhibit A. (5) Credit quality statistics for quarters ended December 31, 2004 and September 30, 2004, include called loan statistics. In addition, all quarters presented include second mortgages originated and sold. (6) Seriously delinquent is defined as 60 plus days past due. (7) GAAP requires losses to be recognized immediately upon the loan transferring to real estate owned. The trust does not recognize a loss on real estate owned property until it is sold, which causes a timing difference between GAAP and trust losses. In addition, trust losses exclude losses resulting from a delinquent loan sale. Exhibit A provides a reconcilation of GAAP to trust losses. (8) Average interest earning assets is a daily average balance of loans in the net mortgage loan portfolio. (9) Average assets is calculated by adding current quarter and previous quarter total assets, then dividing by 2. Average equity is calculated by adding current quarter and previous quarter total shareholders' equity, then dividing by 2. (10) Ratios are annualized. (11) Net interest margin is calculated as the difference between interest income and interest expense divided by average interest earning assets. (12) Efficiency ratio is calculated as total expenses divided by total net revenues. (13) See Exhibit A for a reconciliation of the calculation for non- GAAP adjusted efficiency ratio. (14) Represents actual stock prices during quarter. A $4.00 per share merger consideration was paid during the third quarter 2004. Saxon Capital, Inc. Selected Quarterly Mortgage Loan Portfolio Data Qtr Qtr Qtr Qtr Qtr 9/30/2005 6/30/2005 3/31/2005 12/31/2004 9/30/2004 ---------- ---------- ---------- ----------- ---------- Summary by Product Type -------------- Adjustable rate - Floating 0.56% 0.36% 0.40% 0.45% 0.48% Adjustable rate - Interest only 26.06% 24.81% 21.95% 18.23% 14.38% Adjustable rate - 2 / 3 / 5 year hybrids 41.14% 42.59% 44.23% 45.48% 46.98% Fixed rate - 15 / 30 year 24.77% 24.80% 25.44% 27.00% 28.51% Fixed rate - Interest only 1.94% 2.02% 2.21% 2.38% 2.58% Fixed rate - Balloons / Other 5.53% 5.42% 5.77% 6.47% 7.07% Summary by Credit Grade -------------- Above 650 -------------- Percent of total 27.89% 28.12% 28.14% 29.01% 28.82% Weighted average coupon - Total 6.76% 6.71% 6.70% 6.74% 6.82% Weighted average coupon - Fixed 7.02% 6.99% 7.00% 7.05% 7.08% Weighted average coupon - Adjustable 6.58% 6.53% 6.48% 6.50% 6.58% Weighted average initial LTV 78.95% 79.06% 78.80% 78.43% 77.92% Weighted average median credit score 691 691 691 692 692 601 to 650 -------------- Percent of total 31.60% 31.05% 30.49% 30.00% 29.98% Weighted average coupon - Total 7.12% 7.10% 7.11% 7.19% 7.28% Weighted average coupon - Fixed 7.47% 7.48% 7.51% 7.56% 7.58% Weighted average coupon - Adjustable 6.93% 6.90% 6.89% 6.95% 7.07% Weighted average initial LTV 79.40% 79.47% 79.39% 79.34% 79.18% Weighted average median credit score 625 625 625 625 625 551 to 600 -------------- Percent of total 25.36% 25.18% 24.84% 24.08% 23.83% Weighted average coupon - Total 7.70% 7.72% 7.77% 7.89% 8.02% Weighted average coupon - Fixed 8.07% 8.13% 8.19% 8.24% 8.29% Weighted average coupon - Adjustable 7.56% 7.56% 7.61% 7.74% 7.88% Weighted average initial LTV 78.32% 78.47% 78.72% 78.93% 78.92% Weighted average median credit score 578 578 578 578 578 526 to 550 -------------- Percent of total 8.30% 8.49% 8.91% 9.00% 9.30% Weighted average coupon - Total 8.62% 8.67% 8.73% 8.86% 8.97% Weighted average coupon - Fixed 9.22% 9.24% 9.33% 9.41% 9.48% Weighted average coupon - Adjustable 8.47% 8.51% 8.57% 8.70% 8.81% Weighted average initial LTV 77.98% 78.38% 78.83% 79.57% 79.65% Weighted average median credit score 539 539 539 539 539 525 and below -------------- Percent of total 6.33% 6.59% 7.01% 7.24% 7.37% Weighted average coupon - Total 934.00% 9.41% 9.49% 9.64% 9.79% Weighted average coupon - Fixed 10.21% 10.29% 10.40% 10.48% 10.52% Weighted average coupon - Adjustable 9.15% 9.21% 9.28% 9.43% 9.60% Weighted average initial LTV 76.54% 77.21% 77.74% 78.19% 78.13% Weighted average median credit score 511 511 511 510 510 Unavailable -------------- Percent of total 0.52% 0.57% 0.61% 0.68% 0.70% Summary by Income Documentation -------------- Full documentation 73.81% 73.38% 72.91% 72.46% 72.15% Limited documentation 3.79% 3.99% 4.08% 4.26% 4.52% Stated income 22.40% 22.64% 23.02% 23.28% 23.33% Summary by Borrower Purpose -------------- Cash-out refinance 71.18% 70.08% 69.50% 68.38% 68.23% Purchase 21.31% 22.08% 22.34% 23.00% 22.75% Rate or term refinance 7.51% 7.84% 8.15% 8.61% 9.02% Saxon Capital, Inc. Selected Quarterly Mortgage Loan Production Data Qtr Qtr Qtr Qtr Qtr 9/30/2005 6/30/2005 3/31/2005 12/31/2004 9/30/2004 ---------- ---------- ---------- ----------- ---------- Overall Summary ($ in thousands) (1) -------------- Total Loan Production $847,767 $787,831 $805,151 $1,042,351 $999,588 Average principal balance per loan $174 $165 $165 $148 $147 Number of loans originated 4,880 4,761 4,870 7,063 6,799 Summary by Product Type (1) -------------- Adjustable rate - Floating 0.05% 0.11% 0.13% 0.28% 0.26% Adjustable rate - Interest only 35.54% 40.66% 41.84% 35.41% 37.04% Adjustable rate - 2 / 3 / 5 year hybrids 36.19% 38.21% 40.71% 43.15% 35.83% Adjustable rate - 40/30 3.48% - - - - Fixed rate - 15 / 30 year 18.65% 15.89% 12.41% 13.98% 17.64% Fixed rate - Interest only 1.19% 0.76% 0.41% 0.75% 1.38% Fixed rate - Balloons / Other 3.48% 4.37% 4.49% 6.44% 7.85% Fixed Rate - 40/30 1.42% - - - - Summary by Credit Grade (1) -------------- Above 650 -------------- Percent of total 23.97% 26.98% 27.66% 28.16% 31.97% Weighted average coupon - Total 7.06% 6.99% 6.86% 6.81% 6.92% Weighted average coupon - Fixed 7.44% 7.68% 7.82% 8.13% 8.07% Weighted average coupon - Adjustable 6.88% 6.74% 6.55% 6.30% 6.37% Weighted average initial LTV 82.55% 82.42% 81.67% 81.93% 81.79% Weighted average median credit score 687 688 688 688 690 601 to 650 -------------- Percent of total 34.85% 34.47% 32.78% 30.46% 31.07% Weighted average coupon - Total 7.09% 7.06% 6.93% 7.00% 7.10% Weighted average coupon - Fixed 7.37% 7.67% 7.81% 8.18% 8.13% Weighted average coupon - Adjustable 6.98% 6.88% 6.73% 6.66% 6.68% Weighted average initial LTV 80.98% 81.12% 78.83% 80.77% 80.34% Weighted average median credit score 624 625 625 624 624 551 to 600 -------------- Percent of total 28.23% 26.87% 26.14% 25.61% 23.40% Weighted average coupon - Total 7.41% 7.37% 7.24% 7.44% 7.49% Weighted average coupon - Fixed 7.58% 7.58% 7.77% 8.17% 8.14% Weighted average coupon - Adjustable 7.37% 7.33% 7.16% 7.29% 7.31% Weighted average initial LTV 77.37% 77.55% 77.10% 78.80% 78.97% Weighted average median credit score 576 576 576 578 579 526 to 550 -------------- Percent of total 7.34% 6.78% 7.75% 8.18% 7.33% Weighted average coupon - Total 8.04% 8.03% 7.92% 8.30% 8.32% Weighted average coupon - Fixed 8.41% 8.44% 8.65% 8.85% 9.10% Weighted average coupon - Adjustable 7.99% 7.98% 7.83% 8.20% 8.12% Weighted average initial LTV 73.93% 73.78% 74.14% 78.46% 78.97% Weighted average median credit score 537 537 539 539 544 525 and below -------------- Percent of total 5.47% 4.78% 5.56% 7.07% 6.01% Weighted average coupon - Total 8.59% 8.68% 8.58% 8.87% 9.00% Weighted average coupon - Fixed 8.76% 9.32% 9.16% 10.00% 9.78% Weighted average coupon - Adjustable 8.57% 8.62% 8.53% 8.74% 8.86% Weighted average initial LTV 69.84% 71.39% 73.16% 77.64% 79.11% Weighted average median credit score 511 512 512 512 521 Unavailable -------------- Percent of total 0.13% 0.12% 0.12% 0.52% 0.22% Summary by Income Documentation (1) -------------- Full documentation 74.47% 74.76% 70.17% 71.69% 69.38% Limited documentation 2.08% 2.42% 3.22% 3.03% 3.10% Stated income 23.45% 22.82% 26.60% 25.28% 27.52% Summary by Borrower Purpose (1) -------------- Cash-out refinance 80.00% 73.01% 73.67% 68.64% 65.39% Purchase 16.35% 21.73% 22.39% 25.94% 29.68% Rate or term refinance 3.65% 5.26% 3.94% 5.42% 4.93% (1) Includes called loans Saxon Capital, Inc. Exhibit A Qtr Qtr Qtr ($ in thousands) 9/30/2005 6/30/2005 3/31/2005 ----------- ----------- ------------ Reconciliation between GAAP and Trust Losses Losses trust basis $9,496 $13,074 $11,273 Loan transfers to real estate owned 7,772 7,900 6,855 Realized losses on real estate owned (7,789) (10,581) (8,597) Timing differences between liquidation and claims processing (258) (338) (198) Interest not advanced on warehouse (157) (220) (75) Other (446) (626) (364) ----------- ----------- ------------ GAAP losses $8,618 $9,209 $8,893 =========== =========== ============ Qtr Qtr ($ in thousands) 12/31/2004 9/30/2004 ----------- ----------- Reconciliation between GAAP and Trust Losses Losses trust basis $14,474 $10,862 Loan transfers to real estate owned 8,558 10,420 Realized losses on real estate owned (11,563) (9,139) Timing differences between liquidation and claims processing (151) (497) Interest not advanced on warehouse (173) (78) Other (131) 339 ----------- ----------- GAAP losses $11,014 $11,908 =========== =========== --------------------------------------------------------------------- Net Cost to Produce (1) Management believes net cost to produce is beneficial to investors because it provides a measurement of efficiency in the origination process. The following table demonstrates the Company's calculation of net cost to produce. There is no directly comparable GAAP financial measure to "net cost to produce", the components of which are calculated in accordance with GAAP. Qtr Qtr Qtr 9/30/2005 6/30/2005 3/31/2005 ------------ ------------ ------------ Total expenses Wholesale G&A $8,599 $7,348 $8,086 Retail G&A 10,195 10,379 13,171 Correspondent G&A (2) 2,221 2,015 2,319 Servicing G&A 11,122 10,349 10,205 Administrative G&A 13,759 10,460 11,826 Other (income)/expenses (3) 1,159 (117) 1,411 Capitalized expenses (4) (6,221) (7,620) (6,329) ------------ ------------ ------------ Total expenses $41,053 $32,813 $40,689 Fees Collected (5) Wholesale fees collected 1,230 1,139 $1,073 Retail fees collected 4,779 4,816 5,169 Correspondent fees collected (2) 235 208 222 ------------ ------------ ------------ Total fees collected $6,243 $6,163 $6,465 Premium Paid (5) Wholesale premium 3,161 3,364 $3,212 Correspondent premium (2) 7,137 5,456 6,013 ------------ ------------ ------------ Total premium (6) $10,297 $8,820 $9,225 Net Cost to Produce - dollars Wholesale $10,530 $9,573 $10,226 Retail 5,417 5,563 8,001 Correspondent (2) 9,123 7,263 8,110 ------------ ------------ ------------ Total $25,069 $22,398 $26,337 Volume Wholesale $404,582 $376,784 $342,514 Retail 170,249 178,391 201,979 Correspondent flow 228,717 199,461 222,759 Correspondent bulk 44,219 33,195 37,900 ------------ ------------ ------------ Total $847,767 $787,831 $805,152 Net Cost to Produce - basis points Wholesale 2.60% 2.54% 2.99% Retail 3.18% 3.12% 3.96% Correspondent (2) 3.34% 3.12% 3.11% ------------ ------------ ------------ Total (6) 2.96% 2.84% 3.27% Qtr Qtr 12/31/2004 9/30/2004 ------------ ------------ Total expenses Wholesale G&A $8,024 $7,994 Retail G&A 12,638 12,745 Correspondent G&A (2) 2,068 2,246 Servicing G&A 10,881 7,642 Administrative G&A 13,923 12,825 Other (income)/expenses (3) 1,459 978 Capitalized expenses (4) (7,674) (8,086) ------------ ------------ Total expenses $41,319 $36,344 Fees Collected (5) Wholesale fees collected $1,172 $1,240 Retail fees collected 6,569 6,259 Correspondent fees collected (2) 258 268 ------------ ------------ Total fees collected $7,999 $7,767 Premium Paid (5) Wholesale premium $3,860 $3,793 Correspondent premium (2) 8,616 7,427 ------------ ------------ Total premium (6) $12,476 $11,221 Net Cost to Produce - dollars Wholesale $10,711 $10,547 Retail 6,069 6,486 Correspondent (2) 10,427 9,406 ------------ ------------ Total $27,207 $26,439 Volume Wholesale $378,790 $394,891 Retail 255,156 247,474 Correspondent flow 260,938 267,086 Correspondent bulk 64,198 39,660 ------------ ------------ Total $959,082 $949,112 Net Cost to Produce - basis points Wholesale 2.83% 2.67% Retail 2.38% 2.62% Correspondent (2) 3.21% 3.07% ------------ ------------ Total (6) 2.84% 2.79% (1) Net cost to produce is defined as production expenses and premium paid, net of fees collected, divided by loan production. (2) Beginning January 1, 2005, Correspondent flow and bulk g&a, premium, and fees are combined to calculate net cost to produce for the Correspondent business channel. Prior periods have been recalculated to conform to the new presentation. (3) For purposes of net cost to produce, depreciation is removed from other expenses (as it is presented on the income statement) and is a component of the channel g&a expenses. (4) Capitalized expenses are origination expenses that are capitalized per FAS 91. (5) Fees collected and premium are capitalized and held on balance sheet as components of the net mortgage loan portfolio. (6) Third quarter 2004 premium paid increased by $276 thousand due to an adjustment. Total net cost to produce changed from 2.76% to 2.79% because of this adjustment. --------------------------------------------------------------------- Cost to Service Management believes cost to service is beneficial to investors because it provides a measurement of efficiency in the servicing channel. The following table demonstrates the Company's calculation of cost to service. Qtr Qtr Qtr ($ in thousands) 9/30/2005 6/30/2005 3/31/2005 ------------ ------------ ------------ Servicing G&A $11,122 $10,349 $10,205 Average total portfolio balance ($ in thousands) 26,662,657 24,499,778 $20,795,384 ------------ ------------ ------------ Cost to service (Annualized) 0.17% 0.17% 0.20% ============ ============ ============ Qtr Qtr ($ in thousands) 12/31/2004 9/30/2004 ------------ ------------ Servicing G&A $10,881 $7,642 Average total portfolio balance ($ in thousands) $18,371,194 $15,107,928 ------------ ------------ Cost to service (Annualized) 0.24% 0.20% ============ ============ --------------------------------------------------------------------- Reconciliation of non-GAAP adjusted efficiency ratio (1) Qtr Qtr Qtr Qtr Qtr 9/30/2005 6/30/2005 3/31/2005 12/31/2004 9/30/2004 ---------- ---------- ---------- ----------- ---------- Total expenses $41,053 $32,813 $40,689 $41,319 $36,344 Less: one- time expenses(2) 1,900 300 300 - 3,508 ---------- ---------- ---------- ----------- ---------- Total adjusted expenses $39,153 $32,513 $40,389 $41,319 $32,836 Total net revenues $46,349 $54,516 $68,459 $57,964 $55,585 Add: provision for mortgage loan losses 19,369 13,483 5,699 12,879 14,730 Less: gain on sale of assets 44 706 1,701 421 220 ---------- ---------- ---------- ----------- ---------- Total adjusted net revenues $65,674 $67,293 $72,457 $70,422 $70,095 ---------- ---------- ---------- ----------- ---------- Adjusted efficiency ratio (1) 59.6% 48.3% 55.7% 58.7% 46.8% ========== ========== ========== =========== ========== (1) Non-GAAP adjusted efficiency ratio is calculated as total adjusted expenses divided by total adjusted net revenues. (2) Total adjusted expenses for third quarter 200 excludes $1.9 million severance expense. Total adjusted expenses for second quarter 2005 excludes the $0.3 million expense associated with the six retail branch closings. Total adjusted expenses for first quarter 2005 excludes the $0.3 million expense associated with the four retail branch closings. Total adjusted expenses for third quarter 2004 excludes the $3.5 million expense associated with the REIT conversion. Total adjusted expenses for second quarter 2004 excludes a $2.6 million severance expense. ---------------------------------------------------------------------- Working Capital Reconciliation Management believes the Company's definition of working capital provides a better indication of how much liquidity the Company has available to conduct business at the time of the calculation. This following table provides a reconciliation between the Company's working capital calculation and the common definition of working capital. September 30, 2005 September 30, 2004 ------------------------ ------------------------- Saxon Commonly Saxon Commonly Defined Defined Defined Defined Working Working Working Working Capital Capital Capital Capital ----------- ------------ ------------ ------------ ($ in thousands) Unrestricted cash $9,493 $9,493 $226,807 $226,807 Borrowing availability 73,650 - 52,924 - Trustee receivable - 130,117 - 99,604 Accrued interest receivable - 56,784 - 56,767 Accrued interest payable - (7,044) - (9,116) Unsecuritized mortgage loans - payments less than one year 193,295 216,311 241,715 549,081 Warehouse financing facility - payments less than one year (122,473) (144,100) (188,420) (492,584) Servicing advances - 155,812 - 111,420 Financed advances - payments less than one year - (65,566) - (32,999) Securitized loans - payments less than one year - 2,300,057 - 1,585,145 Securitized debt - payments less than one year - (2,400,559) - (1,566,656) ----------- ------------ ------------ ------------ Total $153,965 $251,305 $333,026 $527,469 =========== ============ ============ ============ It is common business practice to define working capital as current assets less current liabilities. The Company does not have a classified balance sheet and therefore calculates its working capital using its own internally defined formula, which is generally calculated as unrestricted cash and investments as well as unencumbered assets that can be pledged against existing committed facilities and converted to cash in five days or less. ---------------------------------------------------------------------- *T