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 its financial results for the first quarter of 2006. Financial and Operational Highlights: -- First quarter 2006 net income of $26.4 million, or $0.52 per share diluted. -- Net mortgage loan portfolio at March 31, 2006 was $6.5 billion, an increase of 7% from March 31, 2005 and an increase of 2% from December 31, 2005. -- First quarter 2006 mortgage loan production was $746.3 million, a decrease of 7% from the first quarter of 2005 and a decrease of 18% from the fourth quarter of 2005. -- First quarter 2006 net cost to produce was 2.46%, compared to 3.27% for the first quarter of 2005 and 2.45% for the fourth quarter of 2005. -- First quarter 2006 cost to service was 17 basis points, compared to 20 basis points for the first quarter of 2005 and 15 basis points for the fourth quarter of 2005. "Our first quarter results reflect the ever competitive and evolving marketplace, and Saxon's continued strategy of profitably growing our portfolio, while continuing to strive to improve our operational efficiencies. While first quarter production volume reflected a traditional seasonal decline, our net cost to produce remained flat from the prior quarter. These progressive and continued improvements in operational efficiencies reflect our strategic plan of enhancing the economics and scalability of our origination and servicing platform," said Michael L. Sawyer, Chief Executive Officer of Saxon. Financial Results This press release reports Saxon's financial results under generally accepted accounting principles ("GAAP"). Also presented are non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission that management believes provide useful information to investors regarding Saxon's financial performance. The non-GAAP measures presented include core net income, core earnings per share diluted, core net interest income and margin, total net cost to produce, cost to service, securitization net losses on liquidated loans, and a Company defined working capital calculation. Additional information about each of these non-GAAP financial measures, including a definition and the reason management believes its presentation provides useful information and a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in Schedule B of this press release. The presentation of these non-GAAP financial measures is not to be considered in isolation or as a substitute for the Company's financial results prepared in accordance with GAAP. Net Income and Earnings Per Share Saxon reported net income for the first quarter of 2006 of $26.4 million, or $0.52 per share diluted, compared to $54.0 million, or $1.07 per share diluted for the first quarter of 2005, and $17.8 million, or $0.35 per share diluted for the fourth quarter of 2005. Core Net Income and Earnings Per Share Core net income for the first quarter of 2006 was $21.4 million, or $0.42 per share diluted, compared to $44.9 million, or $0.89 per share diluted for the first quarter of 2005, and $19.5 million, or $0.38 per share diluted for the fourth quarter of 2005. Core net income excludes the mark to market gains or losses recognized on derivative instruments. See Schedule B of this press release for a reconciliation of core net income to net income. Net Interest Income and Margin Net interest income was $35.5 million for the first quarter of 2006, compared to $57.4 million for the first quarter of 2005 and $40.5 million for the fourth quarter of 2005. Net interest margin was 2.2% for the first quarter of 2006, compared to 3.8% for the first quarter of 2005 and 2.6% for the fourth 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. Throughout the first quarter of 2006, interest expense increased due to the 197 basis point rise in 1-month LIBOR from March 31, 2005 to March 31, 2006 and the 44 basis point increase from December 31, 2005 to March 31, 2006. In addition, the Company also experienced slower prepayment speeds during the first quarter of 2006 compared to the fourth quarter of 2005, which reduced prepayment penalty income. Prepayment speeds for the first quarter of 2006 compared to the first quarter of 2005 were relatively flat; however, prepayment income for the first quarter of 2006 was lower due to a decline in the number of loans paying off in the portfolio that contain prepayment penalty features. Net interest income and margin do not include the effect of Saxon's economic hedge of its cost of financing. Core Net Interest Income and Margin Core net interest income was $41.1 million for the first quarter of 2006, compared to $69.6 million for the first quarter of 2005 and $48.7 million for the fourth quarter of 2005. Core net interest margin was 2.6% for the first quarter of 2006 compared to 4.6% for the first quarter of 2005 and 3.1% for the fourth quarter of 2005. Core net interest income is net interest income adjusted to include the net cash settlements received or paid on derivative instruments. Core net interest margin is calculated as core 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. See Schedule B for a reconciliation of core net interest income to net interest income, and core net interest margin to net interest margin. Core net interest income and margin were affected by the same factors as net interest income and margin, partially offset by the net cash settlement on the derivative instruments. Provision for Mortgage Loan Losses Provision for mortgage loan losses was $0.6 million for the first quarter of 2006, compared to $2.3 million for the first quarter of 2005 and $11.5 million for the fourth quarter of 2005. The changes in provision are impacted by the timing of charges-offs and by the seasonality of delinquency levels which are typically lower in the first quarter of the year. The first quarter of 2006 was an unusually strong collection period for the Company. It is expected that delinquencies will increase to a more normalized level in the second quarter of 2006. Servicing income, net Servicing income, net of amortization and impairment, was $19.6 million for the first quarter of 2006, compared to $13.6 million for the first quarter of 2005 and $21.4 million for the fourth quarter of 2005. Saxon's third party servicing portfolio was $20.3 billion at March 31, 2006, an increase of 38% from March 31, 2005, and an increase of 9% from December 31, 2005. During the first quarter of 2006, the Company purchased mortgage servicing rights from third parties relating to approximately $3.8 billion in principal balances of mortgage loans, compared to $3.1 billion in principal balances of mortgage loans in the first quarter of 2005. The Company's average purchase price for the mortgage servicing rights purchased in the first quarter of 2006 was 80 basis points, compared to 71 basis points for the first quarter of 2005. Operating Expenses Total operating expenses, which include payroll and related expenses, general and administrative expense, depreciation and other expenses, were $34.5 million for the first quarter of 2006, compared to $41.0 million for the first quarter of 2005 and $38.7 million for the fourth quarter of 2005. Total operating expenses decreased for the first quarter of 2006 compared to both the first quarter and fourth quarter of 2005 primarily due to a decrease in salary and related expenses, and general and administrative expenses across the production and shared services segments. These decreases were offset by an increase in the servicing segment operating expenses that relate to the growth in the servicing portfolio. Cost to Service and Total Net Cost to Produce Cost to service was 17 basis points for the first quarter of 2006, compared to 20 basis points for the first quarter of 2005, and 15 basis points cost in the fourth quarter of 2005. Total net cost to produce was 2.46% of total loan production for the first quarter of 2006, compared to 3.27% for the first quarter of 2005 and 2.45% for the fourth quarter of 2005. Total net cost to produce for the first quarter of 2006 decreased from the first quarter of 2005 due to the Company's continued focus on cost management, and remained flat from the fourth quarter of 2005 due to lower production volume. -0- *T Portfolio Performance The following table provides information regarding Saxon's portfolio performance. ($ in thousands) March 31, 2006 December 31, 2005 March 31, 2005 --------------- ----------------- --------------- Outstanding principal balance at period end $ 6,496,358 $ 6,394,873 $ 6,035,444 Portfolio weighted average credit score 615 616 616 Portfolio weighted average coupon 7.6% 7.5% 7.5% March 31, December 31, March 31, ($ in thousands) 2006 2005 2005 ------------------- ---------------- ---------------- Principal Principal Principal balance % balance % balance % ------------------- ---------------- ---------- ----- 30-59 days past due $ 273,044 4.20% $ 363,780 5.69% $ 237,332 3.93% 60-89 days past due $ 82,061 1.26% $ 98,907 1.55% $ 49,412 0.82% 90 days or more past due $ 58,311 0.90% $ 74,746 1.17% $ 51,861 0.86% Bankruptcies (1) $ 128,280 1.97% $ 154,787 2.42% $ 107,565 1.78% Foreclosures $ 118,140 1.82% $ 117,776 1.84% $ 111,241 1.84% Real estate owned (2) $ 50,039 0.77% $ 49,818 0.78% $ 46,248 0.77% Seriously delinquent % (3) $ 397,474 6.12% $ 442,805 6.92% $ 344,652 5.71% Securitization net losses on liquidated loans- quarter ended $ 11,184 0.69% $ 13,953 0.87% $ 11,273 0.75% Charge-offs- quarter ended (4) $ 10,282 0.63% $ 10,906 0.68% $ 8,493 0.56% (1) Bankruptcies include both non-performing and performing loans in which the related borrower is in bankruptcy. Amounts included for contractually current bankruptcies for the owned portfolio are: $30.6 million as of March 31, 2006, $43.3 million as of December 31, 2005; and $17.6 million as of March 31, 2005. (2) When a loan is deemed to be uncollectible and the property is foreclosed, it is transferred to REO at net realizable value and periodically evaluated for additional impairments. Net realizable value is defined as the property's fair value less estimated costs to sell. Costs of holding this real estate and related gains and losses on disposition are credited or charged to operations as incurred; and therefore, are not included as part of our allowance for loan and interest losses. (3) Seriously delinquent is defined as loans that are 60 or more days delinquent, foreclosed, REO, or held by a borrower who has declared bankruptcy and is 60 or more days contractually delinquent. (4) Charge-offs represent the losses recognized in our financial statements in accordance with GAAP. Quarter ended percentages are annualized. See reconciliation of securitization net losses on liquidated loans to charge-offs in Schedule B. *T Loan Production Mortgage loan production was $746.3 million for the first quarter of 2006, a decrease of 7% compared to the first quarter of 2005, and a decrease of 18% from the fourth quarter of 2005. The weighted average coupon on the Company's production in the first quarter of 2006 was 8.4%, compared to 7.2% for the first quarter of 2005 and 7.9% for the fourth quarter of 2005. Saxon's wholesale mortgage loan production was $363.6 million during the first quarter of 2006, an increase of 6% from the first quarter of 2005, and a decrease of 6% from the fourth quarter of 2005. Saxon's retail mortgage loan production was $138.5 million during the first quarter of 2006, a decrease of 31% from the first quarter of 2005, and a decrease of 15% from the fourth quarter of 2005. Saxon's correspondent flow mortgage loan production was $226.0 million during the first quarter of 2006, an increase of 1% from the first quarter of 2005, and a decrease of 21% from the fourth quarter of 2005. Saxon's correspondent bulk mortgage loan production was $18.1 million during the first quarter of 2006, a decrease of 52% from the first quarter of 2005, and a decrease of 74% from the fourth quarter of 2005. Liquidity At March 31, 2006, Saxon had $1.7 billion in committed facilities and $109.4 million in working capital, compared to $1.7 billion in committed facilities and $208.6 million in working capital at March 31, 2005. It is common business practice to define working capital as current assets less current liabilities. However, the Company does not have a classified balance sheet and therefore calculates working capital using an internally defined formula, which is generally calculated as unrestricted cash and investments as well as unencumbered assets that can be pledged against existing committed facilities and converted to cash in five days or less. Management believes that this working capital calculation provides a better indication of the Company's liquidity available to conduct business at the time of calculation. A reconciliation between the Company's working capital calculation and the common definition of working capital is presented in Schedule B. -0- *T REIT Taxable Income The following table is a reconciliation of GAAP net income to estimated REIT taxable net income for the three months ended March 31, 2006: For the three months ended March 31, 2006 ----------------------- ($ in thousands) Consolidated GAAP income before taxes $29,311 Estimated tax adjustments: Plus: Provision for losses - REIT portfolio 3,142 Miscellaneous 930 Less: Taxable REIT subsidiary pre-tax net income (loss) 765 Elimination of intercompany pre-tax net income (loss) 4,909 Hedging income (1) 2,993 Securitized loan adjustments for tax 987 ------- Estimated Qualified REIT taxable income $23,729 ======= (1) Although the Company has eliminated the use of hedge accounting under SFAS No. 133 for financial reporting purposes, it continues to account for certain of its derivative instruments as hedges for tax purposes. *T The estimated REIT taxable income for the quarter ended March 31, 2006 set forth in the table above is an estimate only and is subject to change until the Company files its 2006 REIT federal tax returns. To maintain its status as a REIT, Saxon is required to distribute at least 90% of its REIT taxable income each year to its shareholders. The calculation of REIT taxable income, under federal tax law, differs in certain respects, from the calculation of consolidated net income pursuant to GAAP. Saxon expects that consolidated GAAP net income may differ from REIT taxable income for many reasons, including, but not limited to, the following: -- the provision for loan loss expense recognized for GAAP purposes is based upon the estimate of probable loan losses inherent in the Company's existing portfolio of loans held for investment, for which the Company has not yet recorded a charge-off, whereas 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 mortgage loan origination expenses; -- there are differences between GAAP and tax related to the timing of recognition of income (loss) from derivative instruments; 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. Management believes that the presentation of estimated REIT taxable income provides useful information to investors regarding the Company's estimated annual distributions to its 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. Recent Developments On May 4, 2006, the Company closed its private offering of $150 million of senior notes due 2014. The notes bear interest at a fixed rate of 12% per annum, beginning May 4, 2006. The Company intends to use the net proceeds from the proposed offering for general corporate purposes, principally the acquisition of additional third-party mortgage servicing rights and whole loans in bulk. On April 28, 2006, the Company paid its first quarter 2006 cash dividend of $0.50 per share of common stock, which was declared on March 24, 2006 and payable to shareholders of record on April 3, 2006. On May 2, 2006, the Company closed a $494.7 million asset-backed securitization. Conference Call Saxon will host a conference call for analysts and investors at 9 a.m. Eastern Time on Tuesday, May 9, 2006. For a live Internet broadcast of this conference call, please visit Saxon's investor relations website at www.saxonmortgage.com. To participate in the call, contact Ms. Meagan Green at 804-935-5281. A replay will be available shortly after the call and will remain available until 11:59 p.m. Eastern Time, May 12, 2006. The replay will be available on Saxon's website or at 800-475-6701 using the ID number 827177. 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 mortgage loan production subsidiary, Saxon Mortgage, Inc., originates and purchases mortgage loans through indirect and direct lending channels using a network of brokers, correspondents, and its retail lending centers. As of March 31, 2006, Saxon's servicing subsidiary, Saxon Mortgage Services, Inc., serviced a mortgage loan portfolio of $26.8 billion. For more information, visit www.saxonmortgage.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 May 8, 2006. 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 (in thousands, except per share data) (unaudited) March 31, December 31, 2006 2005 ------------- ------------- Assets: Cash $ 14,190 $ 6,053 Trustee receivable 133,085 135,957 Accrued interest receivable, net of allowance of $13,921 and $16,086 respectively 40,139 38,182 Mortgage loan portfolio 6,554,332 6,444,872 Allowance for loan losses (31,663) (36,639) ------------- ------------ Net mortgage loan portfolio 6,522,669 6,408,233 Restricted cash 5,854 147,473 Servicing related advances 204,106 185,297 Mortgage servicing rights, net 143,748 129,742 Real estate owned 37,804 38,933 Derivative assets 32,765 19,954 Deferred tax asset 52,973 53,724 Other assets 63,405 68,530 ------------- ------------ Total assets $ 7,250,738 $ 7,232,078 ============= ============ Liabilities and shareholders' equity: Liabilities: Accrued interest payable $ 8,988 $ 8,357 Dividends payable 25,437 32,539 Warehouse financing 980,669 378,144 Securitization financing 5,599,832 6,182,389 Derivative liabilities 15,834 8,589 Other liabilities 24,710 28,925 ------------- ------------ Total liabilities 6,655,470 6,638,943 ------------- ------------ Commitments and contingencies - - Shareholders' equity: Common stock, $0.01 par value per share, 100,000,000 shares authorized; shares issued and outstanding: 50,054,212 and 50,001,909 as of March 31, 2006 and December 31, 2005, respectively 501 500 Additional paid-in capital 635,139 634,023 Accumulated other comprehensive loss, net of income tax of $(15) and $(16), respectively (334) (355) Accumulated deficit (40,038) (41,033) ------------- ------------ Total shareholders' equity 595,268 593,135 ------------- ------------ Total liabilities and shareholders' equity $ 7,250,738 $ 7,232,078 ============= ============ Saxon Capital, Inc. Consolidated Statements of Operations ( in thousands, except per share data) (unaudited) Three months ended ----------------------------------- March 31, March 31, December 31, 2005 (as 2006 2005 restated) ---------- ------------ ----------- Revenues: Interest income $ 121,280 $ 119,058 $ 112,422 Interest expense (85,767) (78,524) (54,991) -------- ---------- --------- Net interest income 35,513 40,534 57,431 Provision for mortgage loan losses (577) (11,516) (2,308) -------- ---------- --------- Net interest income after provision for mortgage loan losses 34,936 29,018 55,123 Servicing income, net of amortization and impairment 19,640 21,369 13,566 Derivative gains 10,639 6,396 21,234 (Loss) gain on sale of assets (1,422) (92) 1,701 -------- ---------- --------- Total net revenues 63,793 56,691 91,624 Expenses: Payroll and related expenses 17,749 18,105 21,751 General and administrative expenses 13,426 15,612 16,020 Depreciation 1,767 1,713 1,507 Other expense 1,540 3,229 1,704 -------- ---------- --------- Total operating expenses 34,482 38,659 40,982 Income before taxes 29,311 18,032 50,642 Income tax expense (benefit) 2,912 277 (3,327) -------- ---------- --------- Net income $ 26,399 $ 17,755 $ 53,969 ======== ========== ========= Earnings per common share: Average common shares - basic 50,015 49,980 49,850 Average common shares - diluted 51,227 51,036 50,463 Basic earnings per common share $ 0.53 $ 0.36 $ 1.08 Diluted earnings per common share$ 0.52 $ 0.35 $ 1.07 Saxon Capital, Inc. Schedule A - Supplemental Data (unaudited) First Fourth First Quarter Quarter Quarter ($ in thousands) 2006 2005 2005 ----------- ----------- ------------ Production Statistics Wholesale $ 363,632 $ 387,927 $ 342,514 Retail 138,523 162,705 201,979 Correspondent flow 226,023 287,207 222,759 Correspondent bulk 18,122 70,447 37,900 ---------- ---------- ---------- Total $ 746,300 $ 908,286 $ 805,152 ========== ========== ========== Number of loans produced 4,238 5,171 4,870 Average loan-to-value 78.9% 78.9% 78.5% Credit Score 608 609 617 Fixed weighted average coupon 8.3% 8.0% 7.9% ARM weighted average coupon 8.4% 7.9% 7.0% Total weighted average coupon 8.4% 7.9% 7.2% Summary of Product Type ARM - Interest Only 22.56% 23.92% 41.84% ARM - 2/3/5 yr hybrid 32.38% 35.39% 40.71% ARM - Floating 0.08% 0.06% 0.13% ARM - 40/30 18.36% 16.14% - Fixed - Interest Only 0.31% 0.32% 0.41% Fixed - 15/30 year 19.55% 18.17% 12.41% Fixed - 40/30 3.26% 2.48% - Fixed - Balloons / Other 3.49% 3.52% 4.49% Summary by Documentation Full documentation 63.75% 65.73% 70.17% Stated documentation 27.41% 28.56% 26.60% Limited documentation 3.05% 2.16% 3.23% 12 month bank statement 5.78% 3.55% - Summary by Purpose Cash out refinance 78.70% 77.57% 73.67% Purchase 16.49% 17.94% 22.39% Rate or term refinance 4.81% 4.48% 3.94% Key Ratios Average assets (1) $7,241,408 $7,121,570 $ 6,570,982 Average equity (1) $ 594,202 $ 612,559 $ 614,637 Return on average assets (2) 1.5% 1.0% 3.3% Return on average equity (2) 17.8% 11.6% 35.1% Average equity/average assets 8.2% 8.6% 9.4% Debt to equity 11.2 11.2 9.3 Book value per share $ 11.89 $ 11.86 $ 12.87 Operating expenses/servicing portfolio (2) 0.5% 0.6% 0.8% Operating expenses/average assets (1) 1.9% 2.2% 2.5% (1) Average assets is calculated by adding current quarter and prior quarter total assets and dividing by 2. Average equity is calculated by adding current quarter and prior quarter total equity and dividing by 2. (2) Ratios are annualized. Saxon Capital, Inc. Schedule B - Non-GAAP Financial Measures and Regulation G Reconciliations Core net income, core earnings per share diluted, core net interest income and margin, securitization net losses on liquidated loans, Company defined working capital, total net cost to produce, and cost to service are non-GAAP financial measures of Saxon's earnings within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Core net income is net income less the mark to market gains or losses on derivative instruments. Core earnings per share diluted is core net income divided by the weighted average diluted number of shares outstanding during the period. Core net interest income is net interest income adjusted to include net cash settlements received or paid on derivative instruments. Core net interest income margin is core 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. Securitization net losses on liquidated loans are losses recorded by the securitization trust at the time a REO loan is sold. GAAP requires losses to be recognized immediately upon a loan being transferred to REO. Company Defined Working Capital 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. Total net cost to produce is total production expenses, which include payroll and related expense and general and administrative expense attributable to our production segment, plus deferred capitalized costs and premiums paid, net of fees collected, divided by loan production. Capitalized expenses are origination expenses that are capitalized pursuant to FASB 91. Fees collected and premium are capitalized and recorded on balance sheet as components of net mortgage loan portfolio. Cost to service is total servicing related expenses, which include payroll and related expenses and general and administrative expenses, divided by the daily weighted average of the total servicing portfolio. Management believes the core financial measures are useful because they include the current period effects of Saxon's economic hedging program but exclude the mark to market derivative value changes. Saxon uses interest rate swaps, caps, futures and option agreements to create economic hedges of the variable rate debt it issues to finance its mortgage loan portfolio. Changes in the fair value of these derivatives, which reflect the potential future cash settlements over the remaining lives of the agreements according to the market's changing projections of interest rates, are recognized in the line item "Derivative gains" on the consolidated statements of operations. This single line item includes both the actual cash settlements related to the derivatives that occurred during the period and recognition of the changes in the fair value of the agreements over the period. The actual cash settlements include regular monthly payments or receipts under the terms of the agreements and amounts paid or received to terminate the agreements prior to maturity. The amounts of net cash settlements and changes in derivative value that were included in the line item "Derivative gains" were: Three Months Ended ---------------------------------------------- December 31, March 31, ($ in thousands) March 31, 2006 2005 (1) 2005 --------------------- ------------- ---------- Fair value gain (loss) $ 5,003 $ (1,741) $ 9,073 Net cash settlements 5,636 8,137 12,161 -------- --------- -------- Derivative gains 10,639 6,396 21,234 ======== ========= ======== (1) Three months ended December 31, 2005 has been updated from previously reported amounts to reclass cash received related to the daily cash settlement of future contracts from "Fair value gain (loss)" to "Net cash settlements". As required by Regulation G, a reconciliation of each of these non-GAAP financial measures to the most directly comparable measure under GAAP is provided below. Regulation G Reconciliation - Core Net Income and Core Earnings Per Share Diluted Three Months Ended --------------------------------- ($ in thousands except per share March 31, December 31, March 31, data ) 2006 2005 (1) 2005 --------- ------------ ---------- Core Net Income Reconciliation: Net Income $ 26,399 $ 17,755 $ 53,968 Fair value (gain) loss on derivatives (5,003) 1,741 (9,073) ------- ------- -------- Core Net Income $ 21,396 $ 19,496 $ 44,895 ======= ======= ======== Earnings per share - diluted $ 0.52 $ 0.35 $ 1.07 Core earnings per share-diluted $ 0.42 $ 0.38 $ 0.89 Diluted weighted average common shares outstanding. 51,227 51,036 50,463 (1) Three months ended December 31, 2005 has been updated from previously reported amounts to reclass cash received related to the daily cash settlement of future contracts from "Fair value gain (loss)" to "Net cash settlements." Regulation G Reconciliation - Core Net Interest Income & Core Interest Margin Analysis Three Months Ended --------------------------------------- March 31, December 31, March 31, ($ in thousands ) 2006 2005 (2) 2005 ------------ ------------ ------------- Core Net Interest Income Reconciliation Interest income $ 121,280 $ 119,058 $ 112,422 Interest expense (85,767) (78,524) (54,991) Plus: Net cash settlements 5,636 8,137 12,161 ---------- ---------- ----------- Core interest expense (80,131) (70,387) (42,830) ---------- ---------- ----------- Core net interest income 41,149 48,671 69,592 Provision for loan losses (577) (11,516) (2,308) ---------- ---------- ----------- Core net interest income loans after provision for loan losses $ 40,572 $ 37,155 $ 67,284 ========== ========== =========== Net Interest Margin and Core Net Interest Margin Analysis: Average Balance Data ------------------------------- Average interest earning assets 6,439,732 6,278,580 6,025,904 Average interest earning liabilities 6,601,800 6,413,791 6,132,280 Interest margin on loans 7.53% 7.59% 7.46% Cost of financing for loans (5.20)% (4.90)% (3.59)% ---------- ---------- ----------- Net interest margin (1) 2.21% 2.58% 3.81% Provision for mortgage loan losses (0.04)% (0.73)% (0.15)% ---------- ---------- ----------- Net interest margin after provision for loan losses 2.17% 1.85% 3.66% ========== ========== =========== Net interest margin 2.21% 2.58% 3.81% Plus: Net cash settlements 0.35% 0.524% 0.81% ---------- ---------- ----------- Core net interest margin 2.56% 3.10% 4.62% Provision for mortgage loan losses (0.04)% (0.73)% (0.15)% ---------- ---------- ----------- Core net interest margin on after provision for loan losses 2.52% 2.37% 4.47% ========== ========== =========== (1) Net interest margin does not equal the arithmetic difference between interest margin on loans and cost of financing for loans due to the difference between the principal balance of mortgage loans and the principal balance of the debt financing those loans. (2) Three months ended December 31, 2005 has been updated from previously reported amounts to reclass cash received related to the daily cash settlement of future contracts from "Fair value gain (loss)" to "Net cash settlements." Regulation G Reconciliation - Securitization Net Losses on Liquidated Loans Management believes that it is meaningful to show securitization net losses on liquidated loans and charge-offs as measures of losses since it is a widely accepted industry practice to evaluate securitization net losses on liquidated loans and the information is provided on a monthly basis to the investors in each securitization. GAAP requires losses to be recognized immediately upon a loan being transferred to REO, whereas securitization net losses on liquidated loans do not recognize a loss on REO until the loan is sold. This causes a timing difference between charge-offs and securitization net losses on liquidated loans. In addition, securitization net losses on liquidated loans exclude losses resulting from delinquent loan sales. Three Months Ended -------------------------------------- March 31, December 31, ($ in thousands) 2006 2005 March 31, 2005 --------- ------------ --------------- Securitization net losses on liquidated loans $ 11,184 $ 13,953 $ 11,273 Loan transfers to real estate owned 8,359 8,438 6,885 Realized losses on real estate owned (8,742) (10,370) (8,597) Timing differences between liquidation and claims processing (563) (401) (198) Interest not advanced on warehouse loans (8) (33) (75) Other 52 (681) (795) ------- -------- -------- Charge-offs (1) $ 10,282 $ 10,906 $ 8,493 ======= ======== ======== (1) Charge-offs represent the losses recognized in the financial statements in accordance with GAAP. Regulation G Reconciliation - Working Capital Management uses its internally derived working capital measure because the Company does not have a classified balance sheet. 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. March 31, 2006 March 31, 2005 Saxon Commonly Saxon Commonly Defined Defined Defined Defined Working Working Working Working ($ in thousands) Capital Capital Capital Capital ---------------------------------------------- Unrestricted cash $ 14,190 $ 14,190 $ 16,674 $ 16,674 Trustee receivable - 133,085 - 116,922 Accrued interest receivable - 40,139 - 37,289 Accrued interest payable - (8,988) - (8,210) Unsecuritized mortgage loans, MSR's, and mortgage bonds - payments less than one year 355,742 1,085,476 379,347 367,271 Warehouse financing - payments less than one year (260,524) (260,524) (187,405) (187,405) Repurchase financing - payments less than one year - (720,145) - (52,744) Servicing advances - 204,106 - 113,961 Financed advances - payments less than one year - (125,717) - (44,564) Securitized loans - payments less than one year - 2,276,672 - 2,002,370 Securitized financing - payments less than one year - (2,240,854) - (1,972,828) --------- ------------ --------- ----------- Total $ 109,408 $ 397,440 $ 208,616 $ 388,736 ========= ============ ========= =========== Regulation G Reconciliation - Total Net Cost to Produce Management believes net cost to produce is beneficial to investors because it provides a measurement of efficiency in the origination process. ($ in thousands) Three Months Ended --------------------------------- March 31, December 31, March 31, Total Operating Expenses 2006 2005 2005 ---------- ------------ --------- Wholesale G&A $ 6,890 $ 7,712 $ 8,086 Retail G&A 7,451 8,877 13,181 Correspondent G&A 2,181 1,996 2,319 --------- ----------- -------- Total Production Expenses $ 16,522 $ 18,585 $ 23,586 Servicing G&A 11,029 9,741 10,321 Administrative G&A 10,480 12,531 11,699 Other (income)/expenses 1,540 3,229 1,705 --------- ----------- -------- Gross Operating Expenses $ 39,570 $ 44,086 $ 47,311 Capitalized expenses (5,088) (5,427) (6,329) --------- ----------- -------- Total Operating Expenses $ 34,482 $ 38,659 $ 40,982 Fees Collected Wholesale fees collected $ 1,037 $ 1,137 $ 1,073 Retail fees collected 4,064 4,876 5,169 Correspondent fees collected 330 279 222 --------- ----------- -------- Total fees collected $ 5,431 $ 6,291 $ 6,464 Premium Paid Wholesale premium $ 2,188 $ 2,239 $ 3,212 Correspondent premium 5,063 7,738 6,013 --------- ----------- -------- Total premium $ 7,251 $ 9,977 $ 9,225 Net Cost to Produce - dollars Wholesale $ 8,041 $ 8,814 $ 10,226 Retail 3,387 4,001 8,011 Correspondent 6,914 9,455 8,110 --------- ----------- -------- Total $ 18,342 $ 22,270 $ 26,347 Volume Wholesale $ 363,632 $ 387,927 $342,514 Retail 138,523 162,705 201,979 Correspondent flow 226,023 287,207 222,759 Correspondent bulk 18,122 70,447 37,900 --------- ----------- -------- Total $ 746,300 $ 908,286 $805,152 Net Cost to Produce -basis pts Wholesale 2.21% 2.27% 2.99% Retail 2.45% 2. 46% 3.97% Correspondent 2.83% 2.64% 3.11% --------- ----------- -------- Total Production Net Cost to Produce 2.46% 2.45% 3.27% Regulation G Reconciliation - Cost to Service Management believes that cost to service is beneficial to investors because it provides a measurement of efficiency in the servicing channel. Three Months Ended ------------------------------------ March 31, December 31, March 31, ($ in thousands) 2006 2005 2005 ------------------------------------ Servicing G&A(1) $ 11,029 $ 9,741 $ 10,321 Average total portfolio balance (2) 26,305,271 25,504,321 20,433,459 ------------------------------------ Cost to service (annualized) 0.17% 0.15% 0.20% =========== =========== =========== (1) Servicing G&A is a component of total operating expenses on the consolidated statement of operations and is reconciled to total operating expenses in the Total Net Cost to Produce reconciliation table above. (2) Average total portfolio balance is a daily weighted average of the total servicing portfolio. *T