Saxon Capital (NYSE:SAX)
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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 $38.7 million for
the fourth quarter of 2005.
Total operating expenses decreased for the first quarter of 2006
compared to both the first quarter and fourth quarter of 2005
primarily due to a decrease in salary and related expenses, and
general and administrative expenses across the production and shared
services segments. These decreases were offset by an increase in the
servicing segment operating expenses that relate to the growth in the
servicing portfolio.
Cost to Service and Total Net Cost to Produce
Cost to service was 17 basis points for the first quarter of 2006,
compared to 20 basis points for the first quarter of 2005, and 15
basis points cost in the fourth quarter of 2005. Total net cost to
produce was 2.46% of total loan production for the first quarter of
2006, compared to 3.27% for the first quarter of 2005 and 2.45% for
the fourth quarter of 2005. Total net cost to produce for the first
quarter of 2006 decreased from the first quarter of 2005 due to the
Company's continued focus on cost management, and remained flat from
the fourth quarter of 2005 due to lower production volume.
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*T
Portfolio Performance
The following table provides information regarding Saxon's portfolio
performance.
($ 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 $208.6 million in working capital at March
31, 2005. It is common business practice to define working capital as
current assets less current liabilities. However, the Company does not
have a classified balance sheet and therefore calculates working
capital using an internally defined formula, which is generally
calculated as unrestricted cash and investments as well as
unencumbered assets that can be pledged against existing committed
facilities and converted to cash in five days or less. Management
believes that this working capital calculation provides a better
indication of the Company's liquidity available to conduct business at
the time of calculation. A reconciliation between the Company's
working capital calculation and the common definition of working
capital is presented in Schedule B.
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*T
REIT Taxable Income
The following table is a reconciliation of GAAP net income to
estimated REIT taxable net income for the three months ended March 31,
2006:
For the three months
ended March 31, 2006
-----------------------
($ 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.
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*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