Saxon Capital, Inc. (�Saxon� or the �Company�) (NYSE: SAX), a
residential mortgage lending and servicing real estate investment
trust (REIT), today reported a net loss for the third quarter ended
September 30, 2006 of $26.4 million or $0.53 per share diluted,
compared to net income of $31.9 million, or $0.63 per share
diluted, for the third quarter of 2005. The net mortgage loan
portfolio grew to $6.8 billion at September 30, 2006, an increase
of 9% from September 30, 2005. The factors contributing to the net
loss in the third quarter of 2006 were increased short-term
interest rates, continued price competition, an increase in
delinquencies, as well as a decrease in the 2/3 year part of the
forward LIBOR curve, which negatively impacted the Company's
derivative valuations. Financial and Operational Highlights: Third
quarter 2006 net cost to produce was 2.13%, compared to 2.94% for
the third quarter of 2005 and 1.92% for the second quarter of 2006.
Third quarter 2006 cost to service was 17 basis points, compared to
17 basis points for both the third quarter of 2005 and the second
quarter of 2006. Third quarter 2006 operating expenses were $39.5
million, compared to $41.1 million for the third quarter of 2005
and $34.9 million for the second quarter of 2006. Third quarter
2006 operating expenses included $2.6 million of expenses in
connection with the Company�s pending merger with a subsidiary of
Morgan Stanley Mortgage Capital Inc. (�MSMC�). During the third
quarter of 2006, the Company purchased $2.7 billion of third party
servicing, compared to $4.1 billion for the third quarter of 2005
and $2.1 billion for the second quarter of 2006. Third quarter 2006
mortgage loan production was $846.3 million, a decrease of 0.2%
from the third quarter of 2005 and a decrease of 8.0% from the
second quarter of 2006. Net Interest Income and Margin The
following table provides information regarding Saxon�s net interest
income and margin. Three Months Ended ($ in thousands ) Sept. 30,
2006 June 30, 2006 Sept. 30, 2005 Interest income 126,903�
$124,114� $116,101� � Interest expense (108,932) (97,568) (68,807)
Net interest income 17,971� 26,546� 47,294� Provision for mortgage
loan losses (15,065) (13,410) (19,092) Net interest income loans
after provision for mortgage loan losses 2,906� $13,136� $28,202�
Net Interest Margin Analysis: Average Balance Data Average interest
earning assets (1) $6,639,306� 6,537,554� 6,132,934� Average
interest earning liabilities (2) $6,964,085� 6,761,545� 6,223,830�
� Interest margin on loans (3) 7.64% 7.59% 7.57% Cost of financing
for loans (4) (6.26)% (5.77)% (4.42)% Net interest margin (5) 1.08%
1.62% 3.08% Provision for mortgage loan losses (6) (0.91)% (0.82)%
(1.25)% Net interest margin after provision for loan losses (7)
0.18% 0.80% 1.84% (1) Average interest-earning assets are
calculated using a daily average balance over the time period
indicated. (2) Average interest-earning liabilities are calculated
using a daily average balance over the time period indicated. (3)
Interest margin on loans is interest income divided by average
interest-earning assets. (4) Cost of financing for loans is
interest expense divided by average interest-earning liabilities.
(5) 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.
Net interest margin is calculated as net interest income dividend
by average interest-earning assets. (6) Provision for mortgage loan
losses divided by average interest-earning assets. (7) Net interest
margin after provision for loan losses is calculated as net
interest income after provision for mortgage loan losses divided by
average interest-earning assets. REIT Taxable Income and
Dividend-Related Matters The merger agreement with MSMC provides
that the Company may pay up to 95% of estimated REIT taxable income
for the period from July 1, 2006 through the earlier of the merger
effective date or December 31, 2006. The Company estimates that it
incurred a loss for REIT taxable income purposes for the period of
July 1, 2006 through September 30, 2006 of $3.5 million, or $0.07
per share. Whether the Company pays any dividend for the period
from July 1, 2006 through the earlier of the effective time or
December 31, 2006, and the amount of any such dividend, will depend
on whether its estimated REIT taxable income improves from a loss
amount to an income amount. If the Company does not have positive
estimated REIT taxable income for the period, the Company will not
declare any dividend for the period. When the Company is able to
make a determination as to the timing and amount, if any, of the
dividend, the Company expects to announce such information.
Portfolio Results The following table provides information
regarding Saxon�s portfolio performance. ($ in thousands) Sept. 30,
2006 June 30, 2006 Sept. 30, 2005 Outstanding principal balance at
period end $6,794,992� $6,699,633� $6,185,969� Portfolio weighted
average credit score 615� 615� 617� Portfolio weighted average
coupon 7.96% 7.8% 7.4% ($ in thousands) Sept. 30, 2006 June 30,
2006 Sept. 30, 2005 Principal balance % Principal balance %
Principal balance % 30-59 days past due $416,159� 6.12% $370,309�
5.53% $357,960� 5.79% 60-89 days past due $136,128� 2.00% $92,635�
1.38% $85,159� 1.38% 90 days or more past due $93,124� 1.37%
$72,494� 1.08% $40,316� 0.65% Bankruptcies (1) $123,684� 1.82%
$121,559� 1.81% $125,780� 2.03% Foreclosures $141,962� 2.09%
$127,185� 1.90% $128,253� 2.07% Real estate owned (2) $59,508�
0.88% $53,234� 0.79% $46,310� 0.75% Seriously delinquent % (3)
$521,798� 7.68% $435,268� 6.50% $393,843� 6.37% Securitization net
losses on liquidated loans - quarter ended $13,891� 0.82% $11,578�
0.69% $9,496� 0.61% Charge-offs � quarter ended (4) $15,425� 0.91%
$11,529� 0.69% $8,618� 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: $22.6 million as of
September 30, 2006, $23.8 million as of June 30, 2006 and $24.5
million as of September 30, 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. Pending Acquisition by Morgan Stanley Mortgage Capital,
Inc. On August 9, 2006, the Company announced that it had entered
into a definitive agreement with MSMC pursuant to which MSMC will
acquire the Company for $14.10 per common share in cash, or
approximately $706 million, through a merger between the Company
and a wholly-owned subsidiary of MSMC. At a special meeting of the
Company�s shareholders held on October 31, 2006, the Company�s
shareholders approved the merger of the Company with and into a
wholly-owned subsidiary of MSMC. The merger was approved by
approximately 72% of the Company�s outstanding shares of common
stock. The Company expects the transaction to close in December
2006. Quarterly Report on Form 10-Q for the Period Ended September
30, 2006 The Company will not hold an investor conference call to
discuss its third quarter 2006 financial results due to the pending
merger with MSMC. For additional details on the Company�s third
quarter 2006 financial results, please see the Company�s Quarterly
report on Form 10-Q, which will be filed with the SEC shortly.
Non-GAAP Financial Measures 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 total net cost to produce, cost to
service, and securitization net losses on liquidated loans.
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. 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 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 September 30,
2006, Saxon�s servicing subsidiary, Saxon Mortgage Services, Inc.,
serviced a mortgage loan portfolio of $26.6 billion. For more
information, visit www.saxonmortgage.com. Information Regarding
Forward Looking Statements This press release contains
forward-looking statements within the meaning of the �safe harbor�
provisions of the Private Securities Litigation Reform Act of 1995.
Statements about the expected effects, timing and completion of the
proposed transaction and all other statements in this release,
other than historical facts, constitute forward-looking statements.
You can identify forward-looking statements because they contain
words such as "believes," "expects," "may," "will," "would,"
"should," "seeks," "approximately," "intends," "plans,"
"estimates," or "anticipates" or similar expressions which concern
our strategy, plans or intentions. All forward-looking statements
are subject to risks and uncertainties that may change at any time,
and, therefore, actual results may differ materially from what is
expected. While we believe that our assumptions and expectations
are reasonable, we caution that it is very difficult to predict the
impact of known factors, and, of course, it is impossible for us to
anticipate all factors that could affect actual results. In
particular, we may not be able to complete the proposed transaction
with Morgan Stanley Mortgage Capital Inc. on the terms summarized
above or other acceptable terms, or at all, due to a number of
factors, including the failure to obtain regulatory approvals or to
satisfy other customary closing conditions. The factors described
in this paragraph and other factors that may affect our business or
future financial results generally are discussed in our filings
with the Securities and Exchange Commission, including our Form
10-K for the year ended December 31, 2005, a copy of which may be
obtained from us without charge. You should not place undue
reliance on our forward-looking statements, which speak only as of
the date of this press release. Unless legally required, we assume
no obligation to update any written or oral forward-looking
statement made by us or on our behalf as a result of new
information, future events or otherwise. Saxon Capital, Inc.
Condensed Consolidated Balance Sheets (in thousands, except per
share data) (unaudited) � Sept. 30, 2006 Dec. 31, 2005 Assets: Cash
$13,027� $6,053� Trustee receivable 139,528� 135,957� Restricted
cash 6,092� 147,473� Accrued interest receivable, net of allowance
for past due interest of $15,942 and $16,086 respectively 47,025�
38,182� � Mortgage loan portfolio 6,830,880� 6,444,872� Allowance
for loan losses (37,853) (36,639) Net mortgage loan portfolio
6,793,027� 6,408,233� � Servicing related advances 234,895�
185,297� Mortgage servicing rights, net 149,158� 129,742� Real
estate owned 43,108� 38,933� Derivative assets 17,084� 19,954�
Deferred tax asset 68,640� 53,724� Other assets 73,113� 68,530�
Total assets $7,584,697� $7,232,078� Liabilities and shareholders�
equity: Liabilities: Accrued interest payable $16,939� $8,357�
Dividends payable -� 32,539� Warehouse financing 1,090,613�
378,144� Securitization financing 5,716,375� 6,182,389� Derivative
liabilities 15,793� 8,589� Senior notes 150,000� -� Other
liabilities 40,572� 28,925� Total liabilities 7,030,292� 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: 50,096,970 and 50,001,909 as of
September 30, 2006 and December 31, 2005, respectively 501� 500�
Additional paid-in capital 637,401� 634,023� Accumulated other
comprehensive loss, net of income tax of $(11) and $(16),
respectively ) (253) (355) � Accumulated deficit (83,244) (41,033)
� Total shareholders� equity 554,405� 593,135� Total liabilities
and shareholders� equity $7,584,697� $7,232,078� Saxon Capital,
Inc. Consolidated Statements of Operations (in thousands, except
per share data) (unaudited) � Three months ended Sept. 30, 2006
June 30, 2006 Sept. 30, 2005 Revenues: Interest income $126,903�
$124,114� $116,101� Interest expense (108,932) (97,568) (68,807)
Net interest income 17,971� 26,546� 47,294� Provision for mortgage
loan losses (15,065) (13,410) (19,092) Net interest income after
provision for mortgage loan losses 2,906� 13,136� 28,202� Servicing
income, net of amortization and impairment 17,891� 20,430� 19,063�
Derivative losses (gains) (19,913) 14,732� 19,890� (Loss) gain on
sale of mortgage assets (832) (346) 44� Total net revenues and
gains 52� 47,952� 67,199� Expenses: Payroll and related expenses
18,281� 17,578� 21,324� General and administrative expenses 16,613�
14,566� 16,918� Depreciation 1,724� 1,761� 1,558� Other expense,
net 2,927� 1,016� 1,286� Total operating expenses 39,545� 34,921�
41,086� (Loss) income before taxes (39,493) 13,031� 26,113� Income
tax (benefit) expense (13,086) 4,385� (5,796) Net (loss) income
$(26,407) $8,646� $31,909� (Loss) earnings per common share:
Average common shares � basic 50,080� 50,055� 49,942� Average
common shares � diluted 50,080� 51,045� 50,945� Basic (loss)
earnings per common share $(0.53) $0.17� $0.64� Diluted (loss)
earnings per common share $(0.53) $0.17� $0.63� Saxon Capital, Inc.
Schedule A � Supplemental Data (unaudited) � ($ in thousands) Third
Quarter 2006 Second Quarter 2006 Third Quarter 2005 Production
Statistics Wholesale $394,410� $436,932� $404,582� Retail 159,632�
171,777� 170,249� Correspondent flow 155,714� 191,936� 228,717�
Correspondent bulk -� -� 44,219� Conduit 136,572� 119,397� -� Total
$846,328� $920,042� $847,767� � NOTE: The following production data
excludes loans produced through the conduit bulk process. Number of
loans produced 3,858� 4,501� 4,880� Average loan-to-value 78.8%
78.8% 79.2% Credit Score 607� 608� 613� Fixed weighted average
coupon 8.5% 8.3% 7.5% ARM weighted average coupon 8.7% 8.5% 7.3%
Total weighted average coupon 8.6% 8.4% 7.3% Summary of Product
Type ARM � Interest Only 14.96% 19.33% 35.54% ARM � 2/3/5 yr hybrid
23.47% 28.01% 36.19% ARM � Floating -� -� 0.05% ARM � 40/30 &
50/30 28.74% 22.30% 3.48% Fixed � Interest Only 0.83% 0.79% 1.19%
Fixed � 15/30 year 20.79% 22.05% 18.65% Fixed � 40/30 & 50/30
7.08% 4.38% 1.42% Fixed � Balloons / Other 4.13% 3.14% 3.48%
Summary by Documentation Full documentation 62.73% 65.58% 74.47%
Stated documentation 30.46% 27.37% 23.45% Limited documentation
2.48% 2.08% 2.08% 12 month bank statement 4.34% 4.97% -� Summary by
Purpose Cash out refinance 78.00% 79.40% 80.00% Purchase 18.08%
16.41% 16.35% Rate or term refinance 3.92% 4.19% 3.65% Key Ratios
Average assets (1) $7,540,672� $7,373,693� $6,972,884� Average
equity (1) $567,043� $587,475� $627,321� Return on average assets
(2) N/A� 0.5% 1.8% Return on average equity (2) N/A� 5.9% 20.3%
Average equity/average assets 7.5% 8.0% 9.0% Debt to equity 12.7�
11.9� 10.1� Book value per share $11.07� $11.58� $12.64� Operating
expenses/servicing portfolio (2) 0.6% 0.5% 0.6% Operating
expenses/average assets (1) 2.1% 1.9% 2.4% (1) Average assets are
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 Securitization
net losses on liquidated loans, 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. 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. 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. 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 ($ in thousands) Sept. 30, 2006 June
30, 2006 Sept. 30, 2005 Securitization net losses on liquidated
loans $13,891� $11,578� $9,496� Loan transfers to real estate owned
12,695� 9,696� 7,530� Realized losses on real estate owned (11,649)
(8,932) (7,789) Timing differences between liquidation and claims
processing -� (262) (258) Interest not advanced on warehouse loans
(48) (68) (157) Other 536� (483) (204) Charge-offs (1) $15,425�
$11,529� $8,618� (1) Charge-offs represent the losses recognized in
the financial statements in accordance with GAAP. Regulation G
Reconciliation � Total Net Cost to Produce Management believes net
cost to produce is beneficial to investors because it provides a
measurement of efficiency in the origination process. � ($ in
thousands) Three Months Ended Total Operating Expenses Sept. 30,
2006 June 30, 2006 Sept. 30, 2005 Wholesale G&A $7,354� $7,734�
$8,592� Retail G&A 8,109� 8,201� 10,123� Correspondent G&A
1,692� 1,777� 2,148� Conduit G&A 556� 216� -� Total Production
Expenses $17,711� $17,928� $20,863� Servicing G&A 11,253�
11,102� 11,122� Administrative G&A 9,985� 10,521� 14,036� Other
(income)/expenses 2,927� 1,016� 1,286� MS Merger Expenses 2,602� -�
-� Gross Operating Expenses $44,478� $40,567� $47,307� Capitalized
expenses (4,933) (5,646) (6,221) Total Operating Expenses $39,545�
$34,921� $41,086� Fees Collected Wholesale fees collected $1,307�
$1,471� $1,230� Retail fees collected 5,024� 5,268� 4,779�
Correspondent fees collected 291� 381� 235� Total fees collected
$6,622� $7,120� $6,244� Premium Paid Wholesale premium $1,268�
$1,859� $3,161� Correspondent premium 2,594� 3,431� 7,137� Conduit
premium 3,118� 1,546� -� Total premium $6,980� $6,836� $10,298� Net
Cost to Produce - dollars Wholesale $7,315� $8,122� $10,523� Retail
3,085� 2,933� 5,344� Correspondent 3,995� 4,827� 9,050� Conduit
3,674� 1,762� -� Total $18,069� $17,644� $24,917� Volume Wholesale
$394,410� $436,932� $404,582� Retail 159,632� 171,777� 170,249�
Correspondent flow 155,714� 191,936� 228,717� Correspondent bulk -�
-� 44,219� Conduit 136,572� 119,397� -� Total $846,328� $920,042�
$847,767� Net Cost to Produce -basis pts Wholesale 1.85% 1.86%
2.60% Retail 1.93% 1.71% 3.14% Correspondent 2.57% 2.51% 3.32%
Conduit 2.69% 1.48% -� Total Production Net Cost to Produce 2.13%
1.92% 2.94% Regulation G Reconciliation � Cost to Service
Management believes that cost to service is beneficial to investors
because it provides a measurement of efficiency in the servicing
channel. � Three Months Ended ($ in thousands) Sept. 30, 2006 June
30, 2006 Sept. 30, 2005 Servicing G&A (1) 11,253� $11,102�
$11,122� � Average total portfolio balance (2) 25,817,786�
25,930,642� 26,264,268� � � � Cost to service (annualized) 0.17%
0.17% 0.17% (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. Saxon Capital, Inc. ("Saxon" or the "Company") (NYSE:
SAX), a residential mortgage lending and servicing real estate
investment trust (REIT), today reported a net loss for the third
quarter ended September 30, 2006 of $26.4 million or $0.53 per
share diluted, compared to net income of $31.9 million, or $0.63
per share diluted, for the third quarter of 2005. The net mortgage
loan portfolio grew to $6.8 billion at September 30, 2006, an
increase of 9% from September 30, 2005. The factors contributing to
the net loss in the third quarter of 2006 were increased short-term
interest rates, continued price competition, an increase in
delinquencies, as well as a decrease in the 2/3 year part of the
forward LIBOR curve, which negatively impacted the Company's
derivative valuations. Financial and Operational Highlights: --
Third quarter 2006 net cost to produce was 2.13%, compared to 2.94%
for the third quarter of 2005 and 1.92% for the second quarter of
2006. -- Third quarter 2006 cost to service was 17 basis points,
compared to 17 basis points for both the third quarter of 2005 and
the second quarter of 2006. -- Third quarter 2006 operating
expenses were $39.5 million, compared to $41.1 million for the
third quarter of 2005 and $34.9 million for the second quarter of
2006. Third quarter 2006 operating expenses included $2.6 million
of expenses in connection with the Company's pending merger with a
subsidiary of Morgan Stanley Mortgage Capital Inc. ("MSMC"). --
During the third quarter of 2006, the Company purchased $2.7
billion of third party servicing, compared to $4.1 billion for the
third quarter of 2005 and $2.1 billion for the second quarter of
2006. -- Third quarter 2006 mortgage loan production was $846.3
million, a decrease of 0.2% from the third quarter of 2005 and a
decrease of 8.0% from the second quarter of 2006. Net Interest
Income and Margin The following table provides information
regarding Saxon's net interest income and margin. -0- *T Three
Months Ended ------------------------------- Sept. 30, June 30,
Sept. 30, ($ in thousands ) 2006 2006 2005
------------------------------- Interest income 126,903 $124,114
$116,101 Interest expense (108,932) (97,568) (68,807) Net interest
income 17,971 26,546 47,294 Provision for mortgage loan losses
(15,065) (13,410) (19,092) ------------------------------- Net
interest income loans after provision for mortgage loan losses
2,906 $13,136 $28,202 =============================== Net Interest
Margin Analysis: Average Balance Data
--------------------------------------- Average interest earning
assets (1) $6,639,306 6,537,554 6,132,934 Average interest earning
liabilities (2) $6,964,085 6,761,545 6,223,830 Interest margin on
loans (3) 7.64% 7.59% 7.57% Cost of financing for loans (4) (6.26)%
(5.77)% (4.42)% ------------------------------- Net interest margin
(5) 1.08% 1.62% 3.08% Provision for mortgage loan losses (6)
(0.91)% (0.82)% (1.25)% ------------------------------- Net
interest margin after provision for loan losses (7) 0.18% 0.80%
1.84% =============================== *T (1) Average
interest-earning assets are calculated using a daily average
balance over the time period indicated. (2) Average
interest-earning liabilities are calculated using a daily average
balance over the time period indicated. (3) Interest margin on
loans is interest income divided by average interest-earning
assets. (4) Cost of financing for loans is interest expense divided
by average interest-earning liabilities. (5) 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. Net interest margin is
calculated as net interest income dividend by average
interest-earning assets. (6) Provision for mortgage loan losses
divided by average interest-earning assets. (7) Net interest margin
after provision for loan losses is calculated as net interest
income after provision for mortgage loan losses divided by average
interest-earning assets. REIT Taxable Income and Dividend-Related
Matters -- The merger agreement with MSMC provides that the Company
may pay up to 95% of estimated REIT taxable income for the period
from July 1, 2006 through the earlier of the merger effective date
or December 31, 2006. -- The Company estimates that it incurred a
loss for REIT taxable income purposes for the period of July 1,
2006 through September 30, 2006 of $3.5 million, or $0.07 per
share. Whether the Company pays any dividend for the period from
July 1, 2006 through the earlier of the effective time or December
31, 2006, and the amount of any such dividend, will depend on
whether its estimated REIT taxable income improves from a loss
amount to an income amount. If the Company does not have positive
estimated REIT taxable income for the period, the Company will not
declare any dividend for the period. When the Company is able to
make a determination as to the timing and amount, if any, of the
dividend, the Company expects to announce such information.
Portfolio Results The following table provides information
regarding Saxon's portfolio performance. -0- *T Sept. 30, June 30,
Sept. 30, ($ in thousands) 2006 2006 2005
--------------------------------- Outstanding principal balance at
period end $6,794,992 $6,699,633 $6,185,969 Portfolio weighted
average credit score 615 615 617 Portfolio weighted average coupon
7.96% 7.8% 7.4% *T -0- *T ($ in thousands) Sept. 30, 2006 June 30,
2006 Sept. 30, 2005 -------------- -------------- --------------
Principal Principal Principal balance % balance % balance %
-------------- -------------- -------------- 30-59 days past due
$416,159 6.12% $370,309 5.53% $357,960 5.79% 60-89 days past due
$136,128 2.00% $92,635 1.38% $85,159 1.38% 90 days or more past due
$93,124 1.37% $72,494 1.08% $40,316 0.65% Bankruptcies (1) $123,684
1.82% $121,559 1.81% $125,780 2.03% Foreclosures $141,962 2.09%
$127,185 1.90% $128,253 2.07% Real estate owned (2) $59,508 0.88%
$53,234 0.79% $46,310 0.75% Seriously delinquent % (3)$521,798
7.68% $435,268 6.50% $393,843 6.37% Securitization net losses on
liquidated loans - quarter ended $13,891 0.82% $11,578 0.69% $9,496
0.61% Charge-offs - quarter ended (4) $15,425 0.91% $11,529 0.69%
$8,618 0.56% *T (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: $22.6 million as of September 30, 2006, $23.8
million as of June 30, 2006 and $24.5 million as of September 30,
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. Pending Acquisition by Morgan Stanley
Mortgage Capital, Inc. On August 9, 2006, the Company announced
that it had entered into a definitive agreement with MSMC pursuant
to which MSMC will acquire the Company for $14.10 per common share
in cash, or approximately $706 million, through a merger between
the Company and a wholly-owned subsidiary of MSMC. -- At a special
meeting of the Company's shareholders held on October 31, 2006, the
Company's shareholders approved the merger of the Company with and
into a wholly-owned subsidiary of MSMC. The merger was approved by
approximately 72% of the Company's outstanding shares of common
stock. -- The Company expects the transaction to close in December
2006. Quarterly Report on Form 10-Q for the Period Ended September
30, 2006 The Company will not hold an investor conference call to
discuss its third quarter 2006 financial results due to the pending
merger with MSMC. For additional details on the Company's third
quarter 2006 financial results, please see the Company's Quarterly
report on Form 10-Q, which will be filed with the SEC shortly.
Non-GAAP Financial Measures 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 total net cost to produce, cost to
service, and securitization net losses on liquidated loans.
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. 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 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 September 30,
2006, Saxon's servicing subsidiary, Saxon Mortgage Services, Inc.,
serviced a mortgage loan portfolio of $26.6 billion. For more
information, visit www.saxonmortgage.com. Information Regarding
Forward Looking Statements This press release contains
forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Statements about the expected effects, timing and completion of the
proposed transaction and all other statements in this release,
other than historical facts, constitute forward-looking statements.
You can identify forward-looking statements because they contain
words such as "believes," "expects," "may," "will," "would,"
"should," "seeks," "approximately," "intends," "plans,"
"estimates," or "anticipates" or similar expressions which concern
our strategy, plans or intentions. All forward-looking statements
are subject to risks and uncertainties that may change at any time,
and, therefore, actual results may differ materially from what is
expected. While we believe that our assumptions and expectations
are reasonable, we caution that it is very difficult to predict the
impact of known factors, and, of course, it is impossible for us to
anticipate all factors that could affect actual results. In
particular, we may not be able to complete the proposed transaction
with Morgan Stanley Mortgage Capital Inc. on the terms summarized
above or other acceptable terms, or at all, due to a number of
factors, including the failure to obtain regulatory approvals or to
satisfy other customary closing conditions. The factors described
in this paragraph and other factors that may affect our business or
future financial results generally are discussed in our filings
with the Securities and Exchange Commission, including our Form
10-K for the year ended December 31, 2005, a copy of which may be
obtained from us without charge. You should not place undue
reliance on our forward-looking statements, which speak only as of
the date of this press release. Unless legally required, we assume
no obligation to update any written or oral forward-looking
statement made by us or on our behalf as a result of new
information, future events or otherwise. -0- *T Saxon Capital, Inc.
Condensed Consolidated Balance Sheets (in thousands, except per
share data) (unaudited) Sept. 30, Dec. 31, 2006 2005
---------------------- Assets: Cash $13,027 $6,053 Trustee
receivable 139,528 135,957 Restricted cash 6,092 147,473 Accrued
interest receivable, net of allowance for past due interest of
$15,942 and $16,086 respectively 47,025 38,182 Mortgage loan
portfolio 6,830,880 6,444,872 Allowance for loan losses (37,853)
(36,639) ---------------------- Net mortgage loan portfolio
6,793,027 6,408,233 Servicing related advances 234,895 185,297
Mortgage servicing rights, net 149,158 129,742 Real estate owned
43,108 38,933 Derivative assets 17,084 19,954 Deferred tax asset
68,640 53,724 Other assets 73,113 68,530 ----------------------
Total assets $7,584,697 $7,232,078 ======================
Liabilities and shareholders' equity: Liabilities: Accrued interest
payable $16,939 $8,357 Dividends payable - 32,539 Warehouse
financing 1,090,613 378,144 Securitization financing 5,716,375
6,182,389 Derivative liabilities 15,793 8,589 Senior notes 150,000
- Other liabilities 40,572 28,925 ---------------------- Total
liabilities 7,030,292 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: 50,096,970 and 50,001,909 as of September 30, 2006 and
December 31, 2005, respectively 501 500 Additional paid-in capital
637,401 634,023 Accumulated other comprehensive loss, net of income
tax of $(11) and $(16), respectively ) (253) (355) Accumulated
deficit (83,244) (41,033) ---------------------- Total
shareholders' equity 554,405 593,135 ---------------------- Total
liabilities and shareholders' equity $7,584,697 $7,232,078
====================== *T -0- *T Saxon Capital, Inc. Consolidated
Statements of Operations (in thousands, except per share data)
(unaudited) Three months ended ----------------------------- Sept.
30, June 30, Sept. 30, 2006 2006 2005 --------- --------- ---------
Revenues: Interest income $126,903 $124,114 $116,101 Interest
expense (108,932) (97,568) (68,807) --------- --------- ---------
Net interest income 17,971 26,546 47,294 Provision for mortgage
loan losses (15,065) (13,410) (19,092) --------- ---------
--------- Net interest income after provision for mortgage loan
losses 2,906 13,136 28,202 Servicing income, net of amortization
and impairment 17,891 20,430 19,063 Derivative losses (gains)
(19,913) 14,732 19,890 (Loss) gain on sale of mortgage assets (832)
(346) 44 --------- --------- --------- Total net revenues and gains
52 47,952 67,199 Expenses: Payroll and related expenses 18,281
17,578 21,324 General and administrative expenses 16,613 14,566
16,918 Depreciation 1,724 1,761 1,558 Other expense, net 2,927
1,016 1,286 --------- --------- --------- Total operating expenses
39,545 34,921 41,086 (Loss) income before taxes (39,493) 13,031
26,113 Income tax (benefit) expense (13,086) 4,385 (5,796)
--------- --------- --------- Net (loss) income $(26,407) $8,646
$31,909 ========= ========= ========= (Loss) earnings per common
share: Average common shares - basic 50,080 50,055 49,942 Average
common shares - diluted 50,080 51,045 50,945 Basic (loss) earnings
per common share $(0.53) $0.17 $0.64 Diluted (loss) earnings per
common share $(0.53) $0.17 $0.63 *T -0- *T Saxon Capital, Inc.
Schedule A - Supplemental Data (unaudited) Third Second Third
Quarter Quarter Quarter ($ in thousands) 2006 2006 2005 -----------
----------- ----------- Production Statistics Wholesale $394,410
$436,932 $404,582 Retail 159,632 171,777 170,249 Correspondent flow
155,714 191,936 228,717 Correspondent bulk - - 44,219 Conduit
136,572 119,397 - ----------- ----------- ----------- Total
$846,328 $920,042 $847,767 =========== =========== ===========
NOTE: The following production data excludes loans produced through
the conduit bulk process. Number of loans produced 3,858 4,501
4,880 Average loan-to-value 78.8% 78.8% 79.2% Credit Score 607 608
613 Fixed weighted average coupon 8.5% 8.3% 7.5% ARM weighted
average coupon 8.7% 8.5% 7.3% Total weighted average coupon 8.6%
8.4% 7.3% Summary of Product Type ARM - Interest Only 14.96% 19.33%
35.54% ARM - 2/3/5 yr hybrid 23.47% 28.01% 36.19% ARM - Floating -
- 0.05% ARM - 40/30 & 50/30 28.74% 22.30% 3.48% Fixed -
Interest Only 0.83% 0.79% 1.19% Fixed - 15/30 year 20.79% 22.05%
18.65% Fixed - 40/30 & 50/30 7.08% 4.38% 1.42% Fixed - Balloons
/ Other 4.13% 3.14% 3.48% Summary by Documentation Full
documentation 62.73% 65.58% 74.47% Stated documentation 30.46%
27.37% 23.45% Limited documentation 2.48% 2.08% 2.08% 12 month bank
statement 4.34% 4.97% - Summary by Purpose Cash out refinance
78.00% 79.40% 80.00% Purchase 18.08% 16.41% 16.35% Rate or term
refinance 3.92% 4.19% 3.65% Key Ratios Average assets (1)
$7,540,672 $7,373,693 $6,972,884 Average equity (1) $567,043
$587,475 $627,321 Return on average assets (2) N/A 0.5% 1.8% Return
on average equity (2) N/A 5.9% 20.3% Average equity/average assets
7.5% 8.0% 9.0% Debt to equity 12.7 11.9 10.1 Book value per share
$11.07 $11.58 $12.64 Operating expenses/servicing portfolio (2)
0.6% 0.5% 0.6% Operating expenses/average assets (1) 2.1% 1.9% 2.4%
*T (1) Average assets are 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 Securitization net losses on liquidated loans,
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.
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. 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. 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. -0- *T Three Months Ended
---------------------------------- Sept. 30, June 30, Sept. 30, ($
in thousands) 2006 2006 2005 ----------- ----------- ----------
Securitization net losses on liquidated loans $13,891 $11,578
$9,496 Loan transfers to real estate owned 12,695 9,696 7,530
Realized losses on real estate owned (11,649) (8,932) (7,789)
Timing differences between liquidation and claims processing -
(262) (258) Interest not advanced on warehouse loans (48) (68)
(157) Other 536 (483) (204) ----------- ----------- ----------
Charge-offs (1) $15,425 $11,529 $8,618 =========== ===========
========== *T (1) Charge-offs represent the losses recognized in
the financial statements in accordance with GAAP. -0- *T Regulation
G Reconciliation - Total Net Cost to Produce Management believes
net cost to produce is beneficial to investors because it provides
a measurement of efficiency in the origination process. ($ in
thousands) Three Months Ended ----------------------------- Sept.
30, June 30, Sept. 30, Total Operating Expenses 2006 2006 2005
--------- --------- --------- Wholesale G&A $7,354 $7,734
$8,592 Retail G&A 8,109 8,201 10,123 Correspondent G&A
1,692 1,777 2,148 Conduit G&A 556 216 - --------- ---------
--------- Total Production Expenses $17,711 $17,928 $20,863
Servicing G&A 11,253 11,102 11,122 Administrative G&A 9,985
10,521 14,036 Other (income)/expenses 2,927 1,016 1,286 MS Merger
Expenses 2,602 - - --------- --------- --------- Gross Operating
Expenses $44,478 $40,567 $47,307 Capitalized expenses (4,933)
(5,646) (6,221) --------- --------- --------- Total Operating
Expenses $39,545 $34,921 $41,086 Fees Collected Wholesale fees
collected $1,307 $1,471 $1,230 Retail fees collected 5,024 5,268
4,779 Correspondent fees collected 291 381 235 --------- ---------
--------- Total fees collected $6,622 $7,120 $6,244 Premium Paid
Wholesale premium $1,268 $1,859 $3,161 Correspondent premium 2,594
3,431 7,137 Conduit premium 3,118 1,546 - --------- ---------
--------- Total premium $6,980 $6,836 $10,298 Net Cost to Produce -
dollars Wholesale $7,315 $8,122 $10,523 Retail 3,085 2,933 5,344
Correspondent 3,995 4,827 9,050 Conduit 3,674 1,762 - ---------
--------- --------- Total $18,069 $17,644 $24,917 Volume Wholesale
$394,410 $436,932 $404,582 Retail 159,632 171,777 170,249
Correspondent flow 155,714 191,936 228,717 Correspondent bulk - -
44,219 Conduit 136,572 119,397 - --------- --------- ---------
Total $846,328 $920,042 $847,767 Net Cost to Produce -basis pts
Wholesale 1.85% 1.86% 2.60% Retail 1.93% 1.71% 3.14% Correspondent
2.57% 2.51% 3.32% Conduit 2.69% 1.48% - --------- ---------
--------- Total Production Net Cost to Produce 2.13% 1.92% 2.94% *T
-0- *T Regulation G Reconciliation - Cost to Service Management
believes that cost to service is beneficial to investors because it
provides a measurement of efficiency in the servicing channel.
Three Months Ended --------------------------------- Sept. 30, June
30, Sept. 30, ($ in thousands) 2006 2006 2005
--------------------------------- Servicing G&A (1) 11,253
$11,102 $11,122 Average total portfolio balance (2) 25,817,786
25,930,642 26,264,268 --------------------------------- Cost to
service (annualized) 0.17% 0.17% 0.17%
================================= *T (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.
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