SAXON CAPITAL INC - 10-Q Quarterly Report

Robert G. Partlow (1)

24,408,687

946,405

David D. Wesselink

25,100,202

254,890

Thomas J. Wageman

25,100,202

254,890

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ____________ to ______________

Commission File Number: 000-33485

SAXON CAPITAL, INC.
(Exact name of Registrant as specified in its Charter)

DELAWARE		54-2036076
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

4951 LAKE BROOK DRIVE, SUITE 300
GLEN ALLEN, VIRGINIA
(Address of principal executive offices)

23060
(Zip Code)

(804) 967-7400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

As of July 31, 2002, there were 28,101,245 shares of our common stock, par value $0.01 per share, outstanding.

This document is available on Saxon Capital Inc.’s web site at www.saxoncapitalinc.com.

SAXON CAPITAL, INC.

Table of Contents

							Page

PART I – Financial Information

	Item 1. Financial Statements

				Condensed Consolidated Balance Sheets at June 30, 2002 (Unaudited) and December 31, 2001			3

			Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 (Saxon Capital, Inc.) (Unaudited) and the three and six months ended June 30, 2001 (SCI Services, Inc.) (Unaudited)				4

		Condensed Consolidated Statements of Cash Flows for the six months Ended June 30, 2002 (Saxon Capital, Inc.) (Unaudited) and the six months ended June 30, 2001 (SCI Services, Inc.) (Unaudited)					5

			Notes to Condensed Consolidated Financial Statements (Unaudited)				7

Item 2.						Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.						Quantitative and Qualitative Disclosures About Market Risk	61

PART II – Other Information

Item 1.					Legal Proceedings		65

Item 2.					Changes in Securities and Use of Proceeds		65

Item 3.					Defaults Upon Senior Securities		65

Item 4.					Submission of Matters to a Vote of Security Holders		65

Item 5.					Other Information		65

Item 6.					Exhibits and Reports on Form 8-K		66

Part I. Financial Information

Item 1. Financial Statements

Saxon Capital, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except for share data)

		June 30, 2002 (unaudited)			December 31, 2001

Assets:
Cash		$	932		$	5,629
Accrued interest receivable on unsecuritized mortgage loans			3,022			1,958
Mortgage loan portfolio:
Mortgage loans held prior to securitization			583,425			370,038
Securitized loans			2,130,207			1,371,816

	Gross mortgage loan portfolio		2,713,632			1,741,854
Loan loss reserve			(36,630	)		(21,327	)

	Net mortgage loan portfolio		2,677,002			1,720,527

Servicing related advances, net			99,361			104,796
Mortgage servicing rights, net			25,503			33,847
Deferred tax asset			14,600			11,772
Other assets			31,091			20,820

Total assets		$	2,851,511		$	1,899,349

Liabilities and Stockholders’ Equity:
Liabilities:
Accrued interest payable		$	959		$	289
Warehouse financing			487,719			283,370
Securitization financing			2,065,573			1,329,568
Note payable			25,000			25,000
Other liabilities			12,967			9,124

Total liabilities			2,592,218			1,647,351

Commitments and contingencies			—			—

Stockholders’ Equity:
Common stock, $0.01 par value per share, 100,000,000 shares authorized; 28,101,245 and 28,050,100 shares issued and outstanding, respectively			281			281
Additional paid-in capital			258,257			258,004
Retained earnings (accumulated deficit)			755			(6,287	)

Total stockholders’ equity			259,293			251,998

Total liabilities and stockholders’ equity		$	2,851,511		$	1,899,349

The accompanying notes are an integral part of these financial statements.

Condensed Consolidated Statements of Operations
(Dollars in thousands, except for share data)
(unaudited)

				Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

				Three Months Ended June 30,						Six Months Ended June 30,

				2002			2001			2002			2001

Revenues:
	Interest income			$	50,543		$	7,513		$	91,089		$	14,419
	Interest expense				(20,382	)		(5,423	)		(36,621	)		(10,962	)

			Net interest income		30,161			2,090			54,468			3,457
	Provision for loan losses				(7,987	)		(2,993	)		(15,081	)		(7,745	)

			Net interest income after provision for loan losses		22,174			(903	)		39,387			(4,288	)
	Gain on sale of loans				232			3,396			232			33,738
	Servicing income, net of amortization				7,462			8,570			15,187			16,785

		Total net revenues			29,868			11,063			54,806			46,235
Expenses:
	Payroll and related expenses				12,274			10,679			24,153			23,072
	General and administrative expenses				8,846			8,835			17,652			15,492
	Depreciation and amortization				394			1,764			684			3,669
	Impairment of assets, net				—			49,681			—			52,590
	Other expense (income)				357			(1,356	)		795			(1,931	)

		Total expenses			21,871			69,603			43,284			92,892
	Income (loss) before taxes				7,997			(58,540	)		11,522			(46,657	)
	Income tax expense (benefit)				2,940			(20,848	)		4,480			(19,121	)

	Net Income (Loss)			$	5,057		$	(37,692	)	$	7,042		$	(27,536	)

Earnings Per Common Share:(1)
	Average common shares – basic				28,088,753			28,050,100			28,079,960			28,050,100
	Average common shares – diluted				29,692,793			28,050,100			29,375,574			28,050,100
	Basic earnings per common share			$	0.18		$	(1.34	)	$	0.25		$	(0.98	)
	Diluted earnings per common share			$	0.17		$	(1.34	)	$	0.24		$	(0.98	)

(1)

Earnings per common share for the periods prior to July 6, 2001 was calculated based upon the assumption that the shares issued at the end of the period were outstanding throughout the periods presented.

The accompanying notes are an integral part of these financial statements.

Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)

				Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

				Six Months Ended June 30, 2002			Six Months Ended June 30, 2001

Operating Activities:
Net income (loss) from operations			$	7,042		$	(27,536	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization			7,439			15,794
	Deferred income tax (benefit) expense			(2,828	)		10
	Permanent impairment on assets			—			52,590
	Purchase and origination of mortgage loans, including premiums			—			(1,209,283	)
	Proceeds from securitization of mortgage loans			—			661,456
	Principal collections and liquidations on mortgage loans			—			11,140
	Interest-only residual assets retained from securitizations			—			(37,509	)
	Cash received from residuals			—			25,542
	Payments received on subordinate bonds			—			462
	Provision for loan losses			15,081			7,745
	Charge-off of mortgage loans			(3,025	)		(6,095	)
	Provision for advanced interest losses			3,247			—
	Net increase in fair value of mortgage loans and related derivative instruments			(16,721	)		—
	Decrease (increase) in servicing related advances			5,435			(56,267	)
	Increase in accrued interest receivable on securitized loans			(5,571	)		—
	Increase in accrued interest payable on securitization financing			1,713			—
	Net change in other assets and other liabilities			(2,672	)		(12,458	)

		Net cash provided by (used in) operating activities		9,140			(574,409	)

Investing Activities:
Origination of mortgage loans				(1,148,342	)		—
Principal payments on loans				171,304			—
Proceeds from the sale of mortgage loans				21,031			—
Acquisition of mortgage servicing rights				—			(8,230	)
Net capital expenditures				(1,997	)		(3,791	)

		Net cash used in investing activities		(958,004	)		(12,021	)

Financing Activities:
Securitization financing:
	Proceeds from issuance of securitization financing			921,689			—
	Principal payments on securitization financing			(182,446	)		—
Proceeds from warehouse financing, net				204,349			520,190
Proceeds received from issuance of stock				575			—
Repayment of note				—			(9,500	)
Contributions from parent				—			77,300

Net cash provided by financing activities				944,167			587,990

Net (decrease) increase in cash				(4,697	)		1,560
Cash at beginning of period				5,629			435

Cash at end of period			$	932		$	1,995

Supplemental Cash Flow Information:
Cash paid for interest			$	40,894		$	10,728
Cash paid (refunds received) for taxes			$	4,928		$	(2,475	)
Non-Cash Financing Activities:
Securitization of mortgage loans, net of basis adjustments			$	917,710			—

The accompanying notes are an integral part of these financial statements.

Notes to the Condensed Consolidated Financial Statements
June 30, 2002 (unaudited)

(1) Organization and Summary of Significant Accounting Policies

(a) The Company, Principles of Consolidation, and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of Saxon Capital, Inc.’s financial condition at June 30, 2002 and December 31, 2001, the results of Saxon Capital, Inc.’s and SCI Services, Inc.’s operations for the three and six months ended June 30, 2002 and 2001, and Saxon Capital, Inc.’s and SCI Services, Inc.’s cash flows for the six months ended June 30, 2002 and 2001. The results of operations and other data for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for any other interim periods or the entire year ending December 31, 2002. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Saxon Capital, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001.

Saxon Capital, Inc. (the “Company”) (NASDAQ: SAXN) was formed April 23, 2001. The Company acquired all of the issued and outstanding capital stock of SCI Services, Inc. (“Predecessor”) from Dominion Capital, Inc. (“Dominion Capital”) on July 6, 2001. The Company had no activities between April 23, 2001 and the acquisition of SCI Services, Inc. In connection with the acquisition of Predecessor, the Company sold 28.1 million shares in a private placement offering.

The Company, through its wholly-owned subsidiaries Saxon Mortgage, Inc. (“Saxon Mortgage”) and America’s MoneyLine, Inc. (“America’s MoneyLine”) is licensed to originate loans or is exempt from licensing requirements, in 49 states. Its activities consist primarily of originating and purchasing single–family residential mortgage loans and home equity loans through three production channels—brokers, correspondents, and direct consumers. The Company may also, from time to time, purchase loans from pre-divesture securitizations pursuant to the clean-up call provisions of the trusts. In addition, the Company, through its wholly–owned subsidiary Saxon Mortgage Services, Inc., formerly Meritech Mortgage Services, Inc. (“Saxon Mortgage Services”), services and sub–services single–family mortgage loans throughout the country that primarily have been purchased or originated by the Company. The Company, headquartered in Glen Allen, Virginia, has operation centers in Fort Worth, Texas and Foothill Ranch, California and 19 branch offices located throughout the country at June 30, 2002. The focus of the Company is on originating, purchasing and securitizing loans to homebuyers who generally do not meet the underwriting guidelines of one of the

government–sponsored agencies such as Freddie Mac, Fannie Mae, and Ginnie Mae. Loans originated or purchased by the Company are extended on the basis of equity in the borrower’s property and the creditworthiness of the borrower. The Company accumulates such loans in its warehouse until a sufficient volume has been reached to securitize into an asset–backed security.

The consolidated financial statements of the Company include the accounts of all wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

(b) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The recorded balances most affected by the use of estimates are allowance for loan losses, hedging activities, valuation of servicing rights, and the impairment assessment of goodwill.

(c) Mortgage Loans Held Prior to Securitization

Mortgage loans held prior to securitization are held for sale and consist of mortgage loans secured by single–family residential properties (which may include manufactured homes affixed to and classified as real property under applicable law), condominium, and one-to-four unit properties. Loan origination fees and certain direct loan origination costs, as well as any premiums or discounts from acquiring mortgage loans are deferred as an adjustment to the cost basis of the loans. These fees and costs are amortized over the life of the loan on a level yield basis. Mortgage loans held for sale are carried at the lower of cost or fair value in the aggregate.

(d) Securitization of Mortgage Loans

The Predecessor structured its securitizations as a sale of the loans, with a corresponding one-time recognition of gain or loss. As a result of this accounting treatment, the mortgage loans were removed from the balance sheet at the time of securitization except for certain residual interests retained in the Predecessor’s securitizations.

After July 6, 2001, the Company has structured securitizations as financing transactions. These securitizations do not meet the qualifying special purpose entity criteria because after the loans are securitized, the securitization trust may acquire derivatives relating to beneficial interests retained by the Company. Also, the Company, as servicer, subject to applicable contractual provisions, has sole discretion to use its best commercial judgment in determining whether to sell or work out any loans securitized through the securitization trust that become troubled. Accordingly, following a securitization, the mortgage loans remain on the balance sheet and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. The Company now records interest income on the mortgage loans and interest expense on the debt securities issued in the securitization over the life of the debt obligations, instead of recognizing a gain or loss upon completion of the securitization.

The Company records the principal balance of the loans on a scheduled basis as compared to the loans’ actual balance, which does not have a significant impact on the Company’s financial statement presentation. Accordingly, principal or interest that is delinquent is included as a component of Servicing Advances on the consolidated balance sheets. The amount of advanced interest is evaluated as a component of the allowance for loan loss valuation.

(e) Called Loans

Called loans represent the clean-up calls on older SASTA securitization that the Company may purchase from Dominion Capital, Inc. A clean-up call is the option to purchase the outstanding loans from a securitization when the amount falls to a level at which the cost to service those loans exceeds the benefits received, typically 10% of the original principal balance. The Company purchases the loans at their fair value. Upon the call, the Company will either securitize the loans or sell certain loans that may not fit into the securitization structure.

(f) Provision for Loan Loss

The Company periodically evaluates the adequacy of reserves for credit losses on its loans. In addition, the Company reviews the overall delinquency of the loans and determines the need for additional reserves. Provision for loan losses on mortgage loans is made in an amount to maintain loss reserves at an appropriate level for currently existing probable losses of principal, interest and fees, for uncollected and advanced interest, and unamortized basis adjustments. Provision amounts are charged as a current period expense to operations. The Company defines a loan as impaired at the time the loan becomes 30 days delinquent under its payment terms. Probable losses are determined based on segmenting the portfolio relating to their contractual delinquency status, applying our historical loss experience, and other relevant industry and economic data. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of the Company’s control and due to the characteristics of the portfolio and migration into various credit risks, such as mortgagee payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. For mortgage loans held prior to securitization, carrying values are written down to net realizable value when the loan is foreclosed, deemed uncollectible, and transferred to real estate owned.

(g) Real Estate Owned

Real estate acquired through foreclosure is recorded at the lower of cost or fair value less estimated costs to sell. These values are periodically reviewed and write-downs are recorded, if appropriate. Costs of holding this real estate and related gains and losses on disposition are credited or charged to operations as incurred. The balance of real estate owned at June 30, 2002 and December 31, 2001 was $1.8 million and $2.0 million, respectively, and is included in other assets on the Condensed Consolidated Balance Sheets.

(h) Interest Income

The Company earns interest income on mortgage loans held prior to securitization and securitized loans as contractually due on the mortgage loan. The Company does not accrue more than three months of interest on mortgage loans at any given point of time. Interest accrued on mortgage loans held prior to securitization is included in Accrued Interest Receivable on Unsecuritized Mortgage Loans on the consolidated balance sheets; while interest accrued on securitized loans is included as a component of the securitized loan balance as the amount is pledged to the related securitization trust.

Nonaccrual loans are loans on which accrual of interest has been suspended. Interest income is suspended on all mortgage loans when principal or interest payments are more than three months contractually past due. Accrual of income on nonaccrual mortgage loans is resumed if the receivable becomes less than three months contractually past due.

(i) Interest–only Residual Assets and Subordinate Bond Investments

In recording and accounting for interest-only residual assets (“I/O”s) prior to July 6, 2001, the Predecessor made assumptions, which were believed to reasonably reflect economic and other relevant conditions that affect fair value, which were then in effect, about rates of prepayments, and defaults and the value of collateral. Due to subsequent changes in economic and other relevant conditions, the actual rates of prepayments and defaults and the value of the collateral generally differed from the initial estimates, and these differences were sometimes material. The I/Os and related hedges, and subordinate bonds we had recorded at July 5, 2001 were assigned to Dominion Capital and are no longer included on our balance sheet.

(j) Mortgage Servicing Rights

The Company recognizes as a separate asset the rights to service mortgage loans for others once such rights are contractually separated from the underlying loans. Mortgage servicing rights are amortized in proportion to and over the period of the estimated net servicing income and are recorded at the lower of amortized cost or fair value on the consolidated balance sheets. Mortgage servicing rights are assessed periodically to determine if there has been any impairment to the recorded balance, based on fair value at the date of the assessment and by stratifying the mortgage servicing rights based on underlying loan characteristics, including the year of capitalization.

(k) Servicing Revenue Recognition

Mortgage loans serviced require regular monthly payments from borrowers. Income on loan servicing is generally recorded as payments are collected and is based on a percentage of the principal balance of loans serviced. Loan servicing expenses are charged to operations when incurred. The contractual servicing fee is recorded as a component of interest income on the consolidated statements of operations for securitized loans, and it is recorded as servicing income on the consolidated statements of operations for loans serviced for others.

(l) Derivative Financial Instruments

The Company may use a variety of financial instruments to hedge the exposure to changes in interest rates. The Company may enter into interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, financial forwards, financial futures and options on financial futures (“Interest Rate Agreements”) to manage the sensitivity to changes in market interest rates. The Interest Rate Agreements used have an active secondary market, and none are obtained for a speculative nature; for instance, trading. These Interest Rate Agreements are intended to provide income and cash flow to offset potential reduced net interest income and cash flow under certain interest rate environments. In accordance with Statement of Financial Accounting Standard (SFAS)133, Accounting for Derivative Instruments and Hedging Activities, as amended, at trade date, these instruments and their hedging relationship are identified, designated and documented.

For Interest Rate Agreements designated as hedge instruments, the Company evaluates the effectiveness of these hedges periodically against the financial asset being hedged to ensure there remains adequate correlation in the hedge relationship. Since the Company’s risk with interest rates is the potential change in fair market value of the loans, the Company is treating these as fair market value hedges per SFAS 133. Once the hedge relationship is established, the changes in fair value of both the hedge instruments and financial asset are recognized in the consolidated statements of operations in the period in which the changes occur. The net amount recorded in the consolidated statements of operations is referred to as hedge ineffectiveness.

(m) Reclassification

Certain amounts for 2001 have been reclassified to conform to the presentation for 2002.

(n) Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets after their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Accordingly, the Company will not amortize the $4.8 million of goodwill recorded from the acquisition of the Predecessor.

carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management does not expect the adoption of SFAS No. 143 to have an impact on the financial position, results of operations, or cash flows of the Company.

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long–Lived Assets. The adoption of SFAS No. 144 did not have a material impact on the Company’s consolidated results of operations and financial position.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 (rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements) requires that extinguishments of debt are to be classified in the income statement as ordinary income or loss and not to be included as an extraordinary item. SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. These corrections are not substantive in nature.

The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. The provisions of SFAS No. 145 that are related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. Management does not expect the adoption of SFAS No. 145 to have an impact on the financial position, results of operations, or cash flows of the Company.

(2) Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding, excluding any dilutive effects of options or warrants. Diluted earnings per share is based on the weighted average number of common shares, dilutive stock options and dilutive stock warrants outstanding during the year. Computations of earnings per common share for the three and six months ended June 30, 2002 and 2001 were as follows:

	Saxon Capital, Inc.		SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.		SCI Services, Inc. (Predecessor)

	Three Months Ended June 30,					Six Months Ended June 30,

	2002		2001 (1)			2002		2001 (1)

	(amounts in thousands, except per share amounts)
Basic:
Net income	$	5,057	$	(37,692	)	$	7,042	$	(27,536	)
Weighted average common shares outstanding	28,089			28,050			28,080		28,050

Earnings per share	$	0.18	$	(1.34	)	$	0.25	$	(0.98	)

Diluted:
Net income	$	5,057	$	(37,692	)	$	7,042	$	(27,536	)
Weighted average common shares outstanding		28,089		28,050			28,080		28,050
Dilutive effect of stock options and warrants		1,604		—			1,296		—

Weighted average common shares outstanding – diluted		29,693		28,050			29,376		28,050

Earnings per share	$	0.17	$	(1.34	)	$	0.24	$	(0.98	)

(1) Earnings per common share for periods prior to July 6, 2001 was calculated based upon the assumption that the shares issued at the end of the period were outstanding throughout the periods presented.

(3) Mortgage Loans Held Prior to Securitization

The Company purchases and originates fixed–rate and adjustable–rate mortgage loans that have a contractual maturity of up to 30 years. These loans are secured by single–family residential properties (which may include manufactured homes affixed to and classified as real property under applicable law), condominium and one-to-four unit properties, and are being recorded at the lower of cost or estimated fair value, adjusted for any hedge activity. Certain of these mortgages are pledged as collateral for a portion of the warehouse financing and other borrowings.

Approximately 20% and 24% of the property securing the Company’s mortgage loan portfolio is located in the state of California at June 30, 2002 and December 31, 2001, respectively. No other state comprised more than 8% of our mortgage loan portfolio at June 30, 2002 or December 31, 2001.

Mortgage loans held prior to securitization as of June 30, 2002 and December 31, 2001 were as follows:

	June 30, 2002		December 31, 2001

		($ in thousands)
Mortgage loan principal balance, including hedge basis adjustments	$	579,584	$	366,658
Unamortized basis adjustments, net (1)		3,841		3,380

Ending balance	$	583,425	$	370,038

(1) Included in the unamortized basis adjustments are premiums, discounts, and net deferred origination costs.

From time to time, the Company may choose to sell certain loans rather than securitize them. During the six months ended June 30, 2002, the Company sold $7.7 million in loans and $15.6 million in delinquent loans, net of $2.5 million of basis adjustments, resulting in a gain of $0.2 million. During the six months ended June 30, 2001, the Company sold $5.1 million in delinquent loans resulting in a loss of $1.1 million.

(4) Securitized Loans

During the six months ended June 30, 2002, the Company completed one securitization of mortgage loans ($900.0 million in principal balances and $17.7 million in unamortized basis adjustments). The components of securitized loans at June 30, 2002 and December 31, 2001 are as follows:

	June 30, 2002		December 31, 2001

		($ in thousands)
Mortgage loan principal balances	$	2,058,695	$	1,317,959
Unamortized basis adjustments, net		55,118		43,034
Accrued interest receivable (1)		16,394		10,823

Ending balance	$	2,130,207	$	1,371,816

(1) Included in securitized loans since amount is pledged to the related securitization trust.

(5) Loan Loss Reserve

The Company is exposed to risk of loss from its mortgage loan portfolio and establishes this reserve taking into account a variety of criteria including the contractual delinquency status and historical loss experience. The adequacy of this reserve is evaluated monthly and adjusted based on this review.

Activity related to the loan loss reserve for the mortgage loan portfolio for the three and six months ended June 30, 2002 and 2001 is as follows:

	Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.			SCI Services,Inc (Predecessor)

	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	($ in thousands)
Beginning balance	$	28,727		$	5,973		$	21,327		$	3,607
Provision for loan losses		9,480			2,993			18,328			7,745
Charge offs		(1,577	)		(5,528	)		(3,025	)		(7,914	)

Ending balance	$	36,630		$	3,438		$	36,630		$	3,438

Provision for losses on advanced interest in the amount of $1.5 million for the three months ended June 30, 2002 and in the amount of $3.2 million for the six months ended June 30, 2002 is included as a component of interest income in the consolidated statements of operations. There were no provisions made for losses on advanced interest in the corresponding 2001 periods.

(6) Mortgage Servicing Rights

Mortgage servicing rights represent the carrying value of the Company’s servicing portfolio. The gross carrying amount of the Company’s mortgage servicing rights at both June 30, 2002 and December 31, 2001 was $94.2 million, and the accumulated amortization was $68.6 million and $60.3 million, respectively. The following table summarizes activity in mortgage servicing rights, net of amortization, for the three and six months ended June 30, 2002 and 2001:

	Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)				Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

					($in thousands)
Balance, beginning of period	$	29,517		$	53,158		$	33,847		$	47,834
Retained from securitizations		¾			961			¾			5,440
Purchased		¾			1,261			¾			2,790
Amortization		(4,014	)		(13,520	)		(8,344	)		(14,204	)

Balance, end of period	$	25,503		$	41,860		$	25,503		$	41,860

The following table summarizes the estimated aggregate amortization expense for mortgage servicing rights for each of the five succeeding fiscal years:

	June 30,

	($ in thousands)

2002	$	5,652
2003		8,585
2004		5,807
2005		3,542
2006		1,441
Thereafter		476

Total	$	25,503

(7) Servicing Related Advances

When borrowers are delinquent in making monthly payments on loans included in a securitization, the Company is required to advance interest payments, insurance premiums, property taxes, and property protection costs with respect to the delinquent loans to the extent that the Company believes the advances are ultimately recoverable.

For servicing related advances made for loans associated with securitizations prior to July 6, 2001 there is no need to reserve for uncollectible amounts because the Company does not retain the credit risk associated with these securities . Losses related to servicing advances made for loans associated with securitizations subsequent to July 6, 2001 are reserved for within the loan loss reserve.

The balances of servicing related advances at June 30, 2002 and December 31, 2001 were as follows:

	June 30, 2002		December 31, 2001

	($ in thousands)
Escrow advances (taxes and insurance)	$	19,330	$	22,758
Foreclosure and other advances		14,767		15,500
Principal and interest advances		65,264		66,538

Total servicing related advances	$	99,361	$	104,796

(8) Warehouse Financing, Securitization Financing and Note Payable

A summary of the activity under these agreements at June 30, 2002 and December 31, 2001, respectively, is as follows:

	June 30, 2002		December 31, 2001

	($ in thousands)
Total Committed
Warehouse borrowing — loans	$	112,000	$	112,000
Warehouse borrowing — servicing advances		28,000		28,000
Repurchase agreements		1,125,000		1,200,000
Repurchase agreements — servicing advances		30,000		30,000
Securitization financing — loans		—		—
Securitization financing — prefunding cash		—		—
Note payable		—		—

Total	$	1,295,000	$	1,370,000

Amounts Outstanding
Warehouse borrowing — loans	$	105,689	$	58,980
Warehouse borrowing — servicing advances		25,000		6,000
Repurchase agreements		357,030		218,390
Securitization financing		2,065,573		1,329,568
Note payable		25,000		25,000

Total	$	2,578,292	$	1,637,938

Outstanding Collateral
Warehouse borrowing — loans	$	176,277	$	123,564
Warehouse borrowing — servicing advances		39,090		44,665
Repurchase agreements		362,420		221,496
Repurchase agreements — servicing advances		50,597		51,733
Securitization financing — loans		2,058,695		1,317,959
Securitization financing — prefunding cash		—		—
Note payable		—		—

Total	$	2,687,079	$	1,759,417

Remaining Capacity to Borrow
Warehouse borrowing — loans	$	6,311	$	53,020
Warehouse borrowing — servicing advances		3,000		22,000
Repurchase agreements		767,970		981,609
Repurchase agreements — servicing advances		30,000		30,000
Securitization financing — loans		—		—
Securitization financing — prefunding cash		—		—
Note payable		—		—

Total	$	807,281	$	1,086,629

The following table summarizes our contractual obligations at June 30, 2002:

Payments Due by Period	Total		Less than 1 year		1-3 years		4-5 years		After 5 years

	($in thousands)
Warehouse financing facility — line of credit	$	130,689	$	130,689	$	—	$	—	$	—
Warehouse financing facility — repurchase agreements		357,030		268,503		88,527		—		—
Securitization financing (1)		2,065,573		583,757		850,623		353,829		277,364
Note payable		25,000		—		—		25,000		—

Total contractual cash obligations	$	2,578,292	$	982,949	$	939,150	$	378,829	$	277,364

(1)

Amounts shown are estimated bond payments based on anticipated receipt of principal and interest on underlying mortgage loan collateral using historical prepayment speeds.

A summary of interest expense and the weighted average cost of funds for the three and six months ended June 30, 2002 and 2001 is as follows:

	Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

	Three Months Ended June 30,						Six Months Ended June 30,

	2002			2001			2002			2001

	($ in thousands)
Interest Expense
Warehouse borrowing	$	201		$	350		$	392		$	502
Repurchase agreements		1,625			3,553			3,798			6,378
Securitization financing		17,587			—			30,384			—
Note payable		499			—			997			—
Due to Dominion Capital		—			1,520			—			3,564
Other		470			—			1,050			518

Total	$	20,382		$	5,423		$	36,621		$	10,962

Weighted Average Cost of Funds
Warehouse borrowing		3.23	%		5.12	%		3.19	%		5.90	%
Repurchase agreements		2.58	%		5.57	%		2.53	%		5.89	%
Securitization financing		3.35	%		—			3.42	%		—
Note payable		7.98	%		—			7.98	%		—
Due to Dominion Capital		—			5.11	%		—			6.00	%

Under its borrowing agreements, the Company is subject to certain debt covenants and is required to maintain or satisfy specified financial ratios and tests, as well as other customary covenants, representations and warranties, and events of default. In the event of default, the Company may be prohibited from paying dividends and making distributions under certain of its credit facilities without the prior approval of its lenders. The Company was in compliance with all the covenants under the respective borrowing agreements.

(9) Derivatives

Accounting Policies

All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge, which hedges the fair value of a recognized asset. Changes in the fair value of derivatives and changes in the fair value of the hedged asset attributable to the hedged risk which are determined to be effective, are recorded in current period earnings. Accordingly, ineffective portions of changes in the fair value of hedging instruments are recognized in other income.

Some derivative instruments are acquired to hedge the changes in fair value of another derivative (interest rate lock commitments), with changes in fair value being recorded to current period earnings.

The Company documents the relationships between hedging instruments and hedged items, as well as the Company’s risk-management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific assets or liabilities on the balance sheet. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, the derivative will continue to be recorded on the balance sheet at its fair value. For terminated hedges or hedges no longer qualifying as effective, the formerly hedged asset will no longer be adjusted for changes in fair value and any previously recorded adjustment to the hedged asset will be included in the carrying basis. These amounts will be included in income (amortized or in a transactional gain or loss) based upon the disposition of the asset or liability.

If the hedged asset is sold or extinguished, the Company typically terminates any applicable hedges. However, if the Company continues to hold the derivatives, they continue to be recorded on the balance sheet at fair value with any changes being recorded to current period earnings.

Objectives for Holding Derivative Instruments

The Company’s risk management program addresses potential financial risks such as interest rate and counterparty risk. The Board of Directors determines limits for such risks and reviews and regularly approves the policies and procedures for such activities.

The Company generally funds its assets with liabilities that have similar interest rate features, which reduces any structural interest rate risk. Over time, customer demand for the mortgage loans shifts between fixed rate and floating rate products, based on market conditions and preferences. These shifts result in different funding strategies and produce different interest rate exposures. The Company maintains an overall risk management strategy that uses a variety of interest rate derivative financial instruments to mitigate the exposure to fluctuations caused by volatility in interest rates. The Company manages the exposure to interest rate risk primarily through the use of interest rate forwards, futures, options and swaps, and other risk management instruments. The Company does not use derivatives to speculate on interest rates and does not use leveraged derivative instruments for interest rate risk management.

By using derivative instruments as part of the risk management strategy, the Company is exposed to additional credit risk. The Company mitigates counterparty credit risk in derivative instruments by established credit approval policies and risk control limits, and by using only highly rated financial institutions and actively traded hedging instruments. Certain derivative

agreements require payments be made to, or be received from, the counterparty when the fair value of the derivative exceeds a prespecified contractual amount. At June 30, 2002 and December 31, 2001, the fair value hedges totaling $(4.7) million and $(0.8) million, respectively, were included in other assets. During the three and six months ended June 30, 2002, hedge ineffectiveness associated with fair value hedges was not material.

(10) Stockholders’ Equity

Pursuant to the Company’s Employee Stock Purchase Plan, participating employees of the Company can elect to purchase the Company’s common stock at a 15% discount. Activity related to the Company’s Employee Stock Purchase Plan for the six months ended June 30, 2002 was as follows:

Issuance Date	Shares Issued	Issuance Price		Proceeds

(amounts in thousands, except issuance price per share)
January 30, 2002	30.3	$	9.80	$	296.9
March 28, 2002	8.3	$	12.55	$	104.2
June 28, 2002	12.6	$	13.82	$	174.1

Total	51.2			$	575.2

The Company also capitalized $0.1 million and $0.2 million in costs associated with its stock issuance and registration fees during the three and six months ended June 30, 2002, respectively.

(11) Stock Options

The Company has established the Saxon Capital, Inc. 2001 Stock Incentive Plan (the "Stock Incentive Plan") which provides for the issuance of stock options to eligible employees and other eligible participants. The Stock Incentive Plan also authorizes the issuance to eligible participants of other awards, including, restricted common stock, stock appreciation rights, or unit awards based on the value of the Company's common stock; however, the Company has not issued any of such other types of awards. The maximum number of stock options or other awards under the Stock Incentive Plan is calculated as of January 1 of each year as the greatest of (i) 2,998,556; (ii) 10.69% of the total number of then outstanding shares of common stock of the Company as of January 1 of each year; or (iii) the maximum number that has been previously awarded or granted under the Stock Incentive Plan, provided that the total number of shares to be issued under the Stock Incentive Plan may not exceed 6,000,000.

The compensation committee administers the Stock Incentive Plan, and has full authority to select the recipients of awards, to decide when awards are to be made, to determine the type and number of awards, and to establish the vesting requirements and other features and conditions of each award.

All outstanding stock options granted by the Company vest over a 4-year period and have a 10-year life, except for 400,000 options granted to a former executive officer during 2001, which vested on June 26, 2002 and have a one-year life from that date. In addition to the 2,724,500 options outstanding at June 30, 2002 pursuant to the Stock Incentive Plan, 475,000 stock options were granted by the Company in 2001 to non-employee members of its Board of Directors and are outstanding at June 30, 2002. The following table summarizes the transactions relating to the Company’s stock options for the six months ended June 30, 2002:

	Number of Options	Weighted Average Exercise Price

Options outstanding, at January 1, 2002 (includes 2,730,500 options outstanding under the Stock Incentive Plan)	3,205,500	$	10.02

Options granted	—	$	—
Stock Incentive Plan options canceled	6,000	$	10.10

Options outstanding, at June 30, 2002 (includes 2,724,500 options outstanding pursuant to the Stock Incentive Plan)	3,199,500	$	10.02

The following table summarizes additional information concerning outstanding and exercisable stock options at June 30, 2002.

		Options Outstanding				Options Exercisable

	Range of Exercisable Prices	Number Outstanding	Remaining Contractual in Years		Weighted Average Exercise Price	Number Exercisable		Weighted Average Exercise Price

$	10.00	2,585,000	9.0	$	10.00	400,000	$	10.00
$	10.10	614,500	9.3	$	10.10	—		—

As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to follow APB 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans for stock options issued to employees and non-employee directors. Any options issued to consultants will be accounted for as prescribed by SFAS No. 123. As of June 30, 2002, no options have been granted to consultants. Under APB 25, the Company does not recognize compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. During the year ended December 31, 2001, the Company determined the pro-forma information as if the Company had accounted for stock options granted since May 31, 2001, under the fair value method of SFAS No. 123. The Black-Scholes option pricing model was used with the following weighted average assumptions for options issued during 2001:

	2001

Risk-free interest rate	4.60% — 5.41	%
Dividend yield	—
Volatility factor	23.56	%
Weighted average expected life	10 years

The weighted average fair values of options granted in 2001 were $4.83 per share. If the Company had recognized compensation expense based on this value, the Company’s pro-forma net earnings and both basic and diluted earnings per share would have been reduced by approximately $1.9 million or $0.07 per share for the six months ended June 30, 2002.

(12) Commitments and Contingencies

Leases

The Company is obligated under non-cancelable operating leases for property and both operating and capital leases for equipment. Minimum annual rental payments as of June 30, 2002 are as follows:

			Equipment

	Real Property Operating		Operating		Capital			Total

		($ in thousands)
2002	$	2,070	$	1,187	$	20		$	3,277
2003		4,101		1,428		40			5,569
2004		3,790		621		7			4,418
2005		3,086		20		—			3,106
2006		2,139		—		—			2,139
Thereafter		3,186		—		—			3,186

Total	$	18,372	$	3,256	$	67		$	21,695

Imputed interest rate						6.4	%
Present value of net minimum lease payments					$	59

Rent and lease expense amounted to $1.6 million and $1.4 million for the three months ended June 30, 2002 and 2001 and $3.3 million and $2.7 million for the six months ended June 30, 2002 and 2001, respectively.

Mortgage Loans

At June 30, 2002 and December 31, 2001, the Company had commitments to fund mortgage loans of approximately $163.9 million and $197.8 million, respectively. This does not necessarily represent future cash requirements, as some portion of the commitments are likely to expire without being drawn upon or may be subsequently declined for credit or other reasons.

As part of its representations and warranties made at the time of securitization, the Company agrees that it will repurchase any loan which is found to be materially and adversely affected by a violation of such representations and warranties. As of June 30, 2002 and December 31, 2001, the Company was not obligated to repurchase any loans that had been securitized.

Legal Matters

Because the nature of the Company’s business involves the collection of numerous accounts, the validity of liens and compliance with various state and federal lending laws, the Company is subject, in the normal course of business, to various legal proceedings. The resolution of these lawsuits, in management’s opinion, will not have a material adverse effect on the financial position or the results of operations of the Company.

Insurance Policies

As of June 30, 2002, the Company carried a mortgage impairment (errors and omissions) policy of $10 million, a banker’s professional/lenders liability policy of $10 million, a financial

institutions bond for $15 million, a fiduciary liability policy for $10 million, an employment practices liability policy for $10 million, and directors and officers liability insurance totaling $50 million.

(13) Related Party Transactions

At June 30, 2002 and December 31, 2001, the Company had $15.0 million and $10.9 million, respectively, of unpaid principal balances, related to mortgage loans originated for employees of the Company and certain officers of Dominion Resources. These mortgage loans were underwritten to the Company’s underwriting guidelines. When making loans to our employees, the Company waives loan origination fees that otherwise would be paid to us by the borrower, and reduces the interest rate by 25 basis points from the market rate.

For the six months ended June 30, 2002 and 2001, the Company paid $0.2 million and $0.2 million, respectively, to OIC Design, Inc. (“OIC”) for marketing and printing material. The owner and principal officer of OIC is the spouse of the Company’s Executive Vice President of Capital Markets. Payments made to OIC for services rendered are not in excess of fair market prices for similar services. This relationship with OIC has been discontinued.

(14) Segments

The operating segments reported below are the segments of the Company for which separate financial information is available and for which revenues and operating income amounts are evaluated regularly by management in deciding how to allocate resources and in assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (Note 1).

Segment revenues and operating income amounts are evaluated and include the economic value of mortgage loans originated, servicing income, other income and expense, and general and administrative expenses. Economic value of mortgage loans originated represents the amount in excess of the segment’s basis in its loan originations that generate a required after tax return of capital.

Certain amounts are not evaluated at the segment level and are included in the segment net operating income reconciliation below. The unallocated gain on securitizations represents the difference between the segment’s economic value of mortgage loans originated and the actual gain on securitization. For periods subsequent to July 6, 2001, the segment’s economic value of mortgage loans originated was required to be eliminated since the Company now structures its securitizations as financing transactions.

Management does not identify assets to the segments and evaluates assets only at the consolidated level. As such, only operating results for the segments are included herein.

				Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

				Three Months Ended June 30,						Six Months Ended June 30,

				2002			2001			2002			2001

					($ in thousands)
Segment Revenues:
	Wholesale			$	7,225		$	11,047		$	14,644		$	20,609
	Correspondent				2,825			3,433			5,263			8,796
	Retail				7,448			6,537			13,845			12,133
	Servicing				7,028			8,773			14,888			17,522

			Total Segment Revenues	$	24,526		$	29,790		$	48,640		$	59,060


Segment Operating Income:
	wholesale			$	2,973		$	7,619		$	6,021		$	13,578
	Correspondent				1,336			1,703			2,325			5,517
	Retail				2,094			2,467			3,250			3,912
	Servicing				2,095			4,136			4,993			8,713

		Total Segment Net Operating Income		$	8,498		$	15,925		$	16,589		$	31,720


Segment Net Operating Income (Loss) Reconciliation:
Total segment operating income				$	8,498		$	15,925		$	16,589		$	31,720
Net interest income					30,161			2,090			54,468			3,457
Provision for loan losses					(7,987	)		(2,993	)		(15,081	)		(7,745	)
Unallocated gain on sale of loans					232			3,396			232			33,738
Elimination of segment economic value of mortgage loans originated					(17,427	)		(17,503	)		(33,357	)		(6,224	)
Unallocated shared general and administrative expenses					(5,480	)		(9,774	)		(11,329	)		(49,013	)
Impairment of assets					—			(49,681	)		—			(52,590	)

Total consolidated income (loss) before taxes				$	7,997		$	(58,540	)	$	11,522		$	(46,657	)

(15) Subsequent Event

Pursuant to the Stock Incentive Plan, on July 22, 2002 the Company issued 90,000 stock options at a strike price of $11.63, which approximated fair value, to two officers of the Company.

On July 10, 2002, the Company closed a $605.0 million asset backed securitization.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and in the Saxon Capital, Inc. Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”) filed with the Securities and Exchange Commission. Management’s discussion and analysis may contain certain statements that may be forward-looking in nature under Section 27 of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Generally, forward-looking statements can be identified by the use of forward-looking terminology including, but not limited to, “may,” “will,” “expect,” “intend,” “should,” “anticipate,” “estimate,” or “believe” or comparable terminology. All statements addressing our operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to net interest income growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements. The forward-looking statements are based upon management’s views and assumptions, as of the date of this Form 10-Q, regarding future events and operating performance, and are applicable only as of the dates of such statements. By their nature, all forward-looking statements involve risk and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons. Factors which might cause actual results to differ from our plans and expectations and which could have a material adverse affect on our operations and future prospects include, but are not limited to: changes in overall economic conditions or unanticipated changes in interest rates; our ability to successfully implement our growth strategy; our ability to sustain loan origination growth at levels sufficient to absorb costs of production and operational costs; continued availability of credit facilities and access to the securitization markets or other funding sources; deterioration in the credit quality of our loan portfolio; challenges in successfully expanding our servicing platform and technological capabilities; and increased competitive conditions or changes in the legal and regulatory environment in our industry. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update publicly any of these statements in light of future events except as required in subsequent periodic reports we file with the SEC.

Acquisition of SCI Services, Inc.

We purchased all of the issued and outstanding shares of capital stock of SCI Services, Inc. on July 6, 2001. We accounted for the acquisition as a purchase in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, (SFAS No. 141). Historical results on or prior to July 5, 2001 are those of SCI Services, Inc. (“Predecessor”) and results after July 5, 2001 are those of Saxon Capital, Inc.

General

Our business is conducted through our operating subsidiaries. We conduct mortgage loan originations, purchases, and secondary marketing at Saxon Mortgage, Inc. (“Saxon Mortgage”), and retail loan origination activity at America’s MoneyLine, Inc. (“America’s MoneyLine”). We

conduct mortgage loan servicing at Saxon Mortgage Services, Inc., formerly Meritech Mortgage Services, Inc. (“Saxon Mortgage Services). Throughout our discussion of our business operations, words such as “we” and “our” are intended to include these operating subsidiaries and, for references to periods occurring prior to July 6, 2001, include our Predecessor.

We originate or purchase loans through three separate origination channels. Our wholesale channel originates or purchases loans through our network of approximately 3,000 brokers throughout the country. Our retail channel originates mortgage loans directly to borrowers through our retail branch network of 19 locations. Our correspondent channel purchases mortgage loans from approximately 300 correspondents following a complete re-underwriting of each mortgage loan. Once a loan is purchased or originated Saxon Mortgage Services, begins the process of performing the day-to-day administrative services for the loan, commonly referred to as “servicing.” Saxon Mortgage Services seeks to ensure that the loan is repaid in accordance with its terms.

Initially, we finance each of our mortgage loans under one or more of our several different secured and committed warehouse financing facilities. We then securitize our mortgage loans and pay off the associated warehouse borrowings. Historically our securitizations were structured as a sale of the loans, with a corresponding one-time recognition of gain or loss, under GAAP. As a result of this accounting treatment, the mortgage loans were removed from our balance sheet except for certain residual interests retained in our securitizations. Since May 1996 through June 30, 2002, we have securitized approximately $12.0 billion in mortgage loans through our quarterly securitization program. Beginning July 6, 2001, we have structured our securitizations as financing transactions. These securitizations do not meet the qualifying special-purpose entity criteria under SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125 and other related pronouncements and related interpretations because after the loans are securitized, the securitization trust may acquire derivatives relating to beneficial interests retained by us. We, as servicer, subject to applicable contractual provisions, have sole discretion to use our best commercial judgment in determining whether to sell or work out any loans securitized through the securitization trust that become troubled. Accordingly, following a securitization, the mortgage loans remain on our balance sheet, and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. We now record interest income on the mortgage loans and interest expense on the securities issued in the securitization over the life of the securitization, instead of recognizing a gain or loss upon completion of the securitization. This change to “portfolio-based” accounting will significantly impact our future results of operations compared to our historical results. Therefore, our historical results and management’s discussion of such results may not be indicative of our future results. This accounting treatment, however, more closely matches the recognition of income with the actual receipt of cash payments on individual loans, and is expected to decrease our earnings volatility compared to structuring securitizations as sales for GAAP purposes.

Critical Accounting Policies

We believe the following represent our critical accounting policies and are discussed in detail below:

	•		Securitizations;
	•		Reserve for Loan Losses;
	•		Mortgage Servicing Rights Valuation;
	•		Revenue Recognition;
	•		Hedging; and
	•		Deferred Taxes.

Securitizations

Accounting for Securitizations Structured as Sales

We engage in securitization activities in connection with our business. Gains and losses from securitizations are recognized in the consolidated statements of operations when we relinquish control of the transferred financial assets in accordance with SFAS No. 140 . The gain or loss on the sale of financial assets depends in part on the previous carrying amount of the assets involved in the transfer, allocated between the assets sold and the retained interests based upon their respective fair values at the date of sale. Prior to July 6, 2001, we recognized any interests in the transferred assets and any liabilities incurred in securitization transactions on our consolidated balance sheets at fair value. Subsequently, changes in the fair value of such interests were recognized in the consolidated statements of operations. The use of different pricing models or assumptions could produce different financial results.

Specifically, we sold our mortgage loans, while retaining certain residual interests, through securitizations structured as sales of the mortgage loans, with a corresponding one-time recognition of gain or loss under GAAP. In these securitizations, we sold our loans to a special-purpose corporation for a cash purchase price. The special-purpose corporation, in turn, financed the purchase of the pool of loans by selling securities or bonds, which represented undivided ownership interests in a trust. Holders of the securities were entitled to receive monthly distributions of all principal received on the underlying mortgages and a specified amount of interest, as determined at the time the bonds were sold.

When we sold a pool of loans to a securitization trust, we received the following economic interests in the trust: (1) the difference between the interest payments due on the mortgage loans sold to the trust, net of realized losses on the loans, other trust-related fees, and the interest payments made to the security-holders, represented by interest-only residual assets (“I/O”s); and (2) the right to service the loans on behalf of the trust and to earn a servicing fee paid out of interest collections, as well as to earn other ancillary servicing-related fees directly from the borrowers on the underlying loans. I/Os represent the right to future cash flows, excluding principal collected from the interest payments, net of interest expense, losses, and other trust expenses, made on the mortgage loans securitized.

Our net investment in the pool of loans sold at the date of securitization represented the amount originally paid to originate or purchase the loans, adjusted for the principal payments received during the period we held the loans before their securitization. Any corresponding

derivatives used to hedge these loans are recorded as distinct assets and liabilities with changes in the fair value recorded in the consolidated statement of operations.

Upon securitization of a pool of loans, we have historically recognized a gain on sale of loans equal to the difference between cash received from the trust and the investment in the loans remaining after the allocation of portions of that investment to record retained interests from the securitization in the form of I/Os or mortgage servicing rights (“MSR”s).

The I/Os we retained upon the securitization of a pool of loans were accounted for as trading investments. The amount initially allocated to the I/Os at the date of a securitization reflected the allocated original basis of the relative fair values of those interests. The amount recorded for the I/Os was reduced for distributions on I/Os, which we received from the related trust, and was adjusted for changes in the fair value of the I/Os, which were reflected in our consolidated statements of operations. Because there is not a highly liquid market for these assets, we estimated the fair value of the I/Os primarily based upon discount, prepayment and default (frequency and severity) rates we estimated that another market participant would use to purchase the I/Os. The estimated market assumptions were applied based upon the underlying loan portfolio grouped by loan types, terms, credit quality, interest rates, geographic location, and value of loan collateral, which are the predominant characteristics that affect prepayment and default rates.

In recording and accounting for I/Os, we made assumptions, which we believed reasonably reflected economic and other relevant conditions that affect fair value which were then in effect, about rates of prepayments, and defaults and the value of collateral. Due to subsequent changes in economic and other relevant conditions, the actual rates of prepayments and defaults and the value of the collateral generally differed from our initial estimates, and these differences were sometimes material. If actual prepayment and default rates were higher than previously assumed, the value of the I/Os would be impaired and the declines in fair value were recorded in our consolidated statements of operations. Conversely, if actual prepayment and default rates were lower than previously assumed, the value of the I/Os would be higher and the increases in fair value were recorded in our consolidated statements of operations.

MSRs were initially recorded by similarly allocating the carrying amount of the initial loan asset, based on estimated fair value of the MSRs, I/Os, and the sold loans. To determine estimated fair value for MSRs, we used market assumptions that we believed another industry participant would use to purchase the MSR, including discount, prepayment and default rates, servicing costs and ancillary fees. The estimates of MSR fair value are also based on the stated terms of the serviced loans.

The I/Os and related hedges, and subordinate bonds we had recorded at July 5, 2001 were assigned to Dominion Capital and are no longer be included on our balance sheet. We retained the MSRs, which will continue to be accounted for in the manner described below in “Mortgage Servicing Rights Valuation”.

Accounting for Securitizations Structured as Financings

After July 6, 2001, our securitizations have continued to be structured legally as sales, but for accounting purposes are treated as financings under SFAS No. 140. These securitizations do not meet the qualifying special purpose entity criteria under SFAS No. 140 and related interpretations because after the loans are securitized, the securitization trust may acquire derivatives relating to beneficial interests retained by us. We, as servicer, subject to applicable contractual provisions, have sole discretion to use our best commercial judgment in determining whether to sell or work out any loans securitized through the securitization trust that become troubled. Accordingly, the loans will remain on our balance sheet, retained interests are not created, and securitization indebtedness will replace warehouse debt originally associated with the securitized mortgage loans. We record the principal balance of our loans on a scheduled basis as compared to the loan’s actual balance, which does not have a significant impact on our financial statement presentation. Accordingly, principal or interest that is delinquent is included as a component of Servicing Advances on our consolidated balance sheet. Our historical losses are reported on a scheduled basis, which includes, interest advanced on a scheduled basis (commonly referred to as accrued interest). Therefore, a component of the reported losses is advanced interest. The amount of advanced interest is evaluated as a component of our allowance for loan loss valuation. A separate provision out of interest income is made for all uncollected accrued interest greater than three months. See “Revenue Recognition – Interest Income.”

We record interest income on the mortgage loans and interest expense on the issued securities, as well as contract servicing fees and ancillary fees related to servicing, over the life of the securitization, and we will not recognize a gain or loss upon completion of the securitization. This may result in material differences in expected future results from operations as compared to our historical results.

Reserve for Loan Losses

The allowance for loan losses is established through a charge to the provision for loan losses. Provisions are made to reserve for estimated existing losses in outstanding loan balances and for uncollected and advanced interest. The allowance for loan losses is a significant estimate and is regularly evaluated by management for adequacy by taking into consideration factors such as changes in the nature and volume of the loan portfolio; trends in actual and forecasted portfolio performance and credit quality, including delinquency, charge-off and bankruptcy rates; and current economic conditions that may affect a borrower’s ability to pay. The use of different estimates or assumptions could produce different provisions for loan losses.

Mortgage Servicing Rights Valuation

The recorded value of the MSRs are amortized in proportion to, and over the period of the anticipated net cash flows from servicing the loans. MSRs are assessed periodically to determine if there has been any impairment to the recorded balance, based on the fair value at the date of the assessment and by stratifying the MSRs based on underlying loan characteristics, including the year of capitalization.

Due to subsequent changes in economic and other relevant conditions, the actual rates of prepayments and defaults and the value of collateral generally differed from our initial estimates,

and these differences were sometimes material. If actual prepayment and default rates are higher than those assumed, less mortgage servicing income would be expected, which would adversely affect the value of the MSRs. Significant changes in prepayment speeds, delinquencies, and losses may result in impairment of most MSRs, and would be recorded in our consolidated statements of operations.

Revenue Recognition

Interest Income

We earn interest income on mortgage loans held prior to securitization and securitized loans as contractually due on the mortgage loan. We do not accrue more than three months of interest on mortgage loans at any given point of time.

Servicing Income

Hedging

We may use a variety of financial instruments to hedge our exposure to changes in interest rates. We may enter into interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, financial forwards, financial futures and options on financial futures (“Interest Rate Agreements”) to manage our sensitivity to changes in market interest rates. The Interest Rate Agreements we use have an active secondary market, and none are obtained for a speculative nature, for instance, trading. These Interest Rate Agreements are intended to provide income and cash flow to offset potential reduced net interest income and cash flow under certain interest rate environments. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, at trade date, these instruments and their hedging relationship are identified, designated, and documented.

For Interest Rate Agreements designated as hedge instruments, we evaluate the effectiveness of these hedges periodically against the financial asset being hedged to ensure there remains adequate correlation in the hedge relationship. Since our concern with interest rates is the potential change in fair market value of the loans, we are treating these as fair market value hedges per SFAS No. 133. Once the hedge relationship is established, the realized and unrealized changes in fair value of both the hedge instruments and financial asset are recognized in the consolidated statement of operations in the period in which the changes occur. The net amount recorded in our consolidated statement of operations is referred to as hedge ineffectiveness.

The impact of accounting for our risk management activities according to SFAS No. 133 may create a level of ongoing non-economic volatility to reported earnings not experienced in the past due to the application of the hedge accounting requirements.

Deferred Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance, if required, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

Mortgage Loan Production Operations

The following table sets forth selected information about our total loan originations and purchases for the three and six months ended June 30, 2002 and 2001.

		For the Three Months Ended June 30,						For the Six Months Ended June 30,

		2002			2001			2002			2001

		($ in thousands)
Loan originations (1)		$	619,424		$	706,003		$	1,139,990		$	1,205,880
Average principal balance per loan		$	120		$	106		$	123		$	105
Number of loans originated			5,162			6,660			9,268			11,485
Combined weighted average initial LTV			78.00	%		75.70	%		77.79	%		76.52	%
Percentage of first mortgage loans owner occupied			93.24	%		92.04	%		93.64	%		92.84	%
Percentage with prepayment penalty			77.78	%		82.00	%		77.11	%		82.83	%
Weighted average credit score (2)			602			605			601			599
Percentage fixed rate mortgages			33.88	%		58.45	%		35.45	%		57.78	%
Percentage adjustable rate mortgages			66.12	%		41.55	%		64.55	%		42.22	%
Weighted average interest rate:
	Fixed rate mortgages		9.23	%		9.72	%		9.16	%		9.93	%
	Adjustable rate mortgages		9.23	%		10.21	%		9.24	%		10.36	%
	Margin – adjustable rate mortgages (3)		5.57	%		5.85	%		5.54	%		5.96	%

(1)		Amount for the three months ended June 30, 2002 includes $42.5 million in purchases from SASTA 97-1 and $45.9 million in purchases from SASTA 97-2 pursuant to the clean-up provision of the trusts. Amounts for the six months ended June 30, 2002 also includes $41.3 million in purchases from SASTA 96-2 pursuant to the clean-up provision of the trust.

(2)		The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

(3)		The gross margin is the factor by which the interest rate can fluctuate.

The following tables highlight the net cost to produce loans for our total loan originations and purchases for the three and six months ended June 30, 2002 and 2001.

	For the Three Months Ended June 30, 2002							For the Three Months Ended June 30, 2001

		Incurred		Deferred (1)		Recognized		Incurred		Deferred (1)		Recognized

Fees collected (2) (3)		(93	)	81		(12	)	(57	)	46		(11	)
General and administrative production costs (2)(3)(4)		285		(76	)	209		192		(61	)	131
Premium paid (2)(3)		117		(117	)	—		181		(181	)	—

Net cost to produce (2)(3)		309		(112	)	197		316		(196	)	120

(1)		The Company defers certain non-refundable fees and costs associated with originating a loan in accordance with SFAS 91.

(2)		Excludes costs related to purchases from pre-divestiture securitizations pursuant to clean-up call provisions of the trusts.

(3)		In basis points.

(4)		Excludes corporate overhead costs of 99 and 65 basis points, respectively, and includes depreciation expense. Loan production figures used in this calculation are net of called loans.

	For the Six Months Ended June 30, 2002							For the Six Months Ended June 30, 2001

		Incurred		Deferred (1)		Recognized			Incurred		Deferred (1)		Recognized

Fees collected (2)(3)		(92	)	79		(13	)		(60	)	49		(11	)
General and administrative production costs (2)(3)(4)		294		(75	)	219			212		(58	)	154
Premium paid (2)(3)		112		(112	)	—			181		(181	)	—

Net cost to produce (2)(3)		314		(108	)	206			333		(190	)	143

(1)		The Company defers certain non-refundable fees and costs associated with originating a loan in accordance with SFAS 91.

(2)		Excludes costs related to purchases from pre-divestiture securitizations pursuant to clean-up call provisions of the trusts.

(3)		In basis points.

(4)		Excludes corporate overhead costs of 102 and 71 basis points, respectively, and includes depreciation expense. Loan production figures used in this calculation are net of called loans.

Loan Production by Product Type

We originate and purchase both adjustable rate mortgages (“ARMs”) and fixed rate mortgages (“FRMs”). The majority of our FRMs are 30-year mortgages. In turn, our ARM production is divided into two categories: floating ARMs and hybrid ARMs. A floating ARM is a loan on which the interest rate adjusts throughout the life of the loan, either every 6 or every 12-months. A hybrid ARM is a loan on which the interest rate is fixed for the initial 24 to 60-months on the loan term, and thereafter adjusts either every 6 or every 12-months. All of our ARMs adjust with reference to a defined index rate. The interest is determined by adding the “margin” amount to the “index” rate.

The interest rate on ARMs once the initial rate period has lapsed is determined by adding the “margin” amount to the “index” rate. The index most commonly used in our loan programs is the one-month London Inter-Bank Offered Rate (“LIBOR”). The margin is a predetermined percentage that, when added to the index, gives the borrower the rate that will eventually be due. It is common in the beginning stages of an ARM loan to allow the borrower to pay a rate lower than the rate that would be determined by adding the margin to the index. Over time, the rate adjusts upward such that eventually the interest rate the borrower pays will take into account the index plus the entire margin amount.

A substantial portion of our loans contain prepayment penalties. Borrowers who accept the prepayment penalty receive a lower interest rate on their mortgage loan. Borrowers always retain the right to refinance their loan, but may have to pay a charge of up to six-months interest on 80% of the remaining principal when prepaying their loans.

The following table sets forth information about our loan production based on product type (ARMs and FRMs) for the three and six months ended June 30, 2002 and 2001.

			For the Three Months Ended June 30,						For the Six Months Ended June 30,

			2002 (1)			2001			2002 (1)			2001

Product Type
ARMs	ARMs			5.69	%		0.10	%		3.93	%		0.08	%
	2 year hybrids			30.57	%		22.14	%		30.21	%		24.36	%
	3 year hybrids			29.59	%		19.30	%		29.94	%		17.78	%
	5 year hybrids			0.27	%		0.01	%		0.47	%		—

		Total ARMs		66.12	%		41.55	%		64.55	%		42.22	%

FRMs	Fifteen year			4.56	%		5.65	%		4.85	%		5.71	%
	Thirty year			20.36	%		26.86	%		21.94	%		23.69	%
	Balloons			6.02	%		22.84	%		5.85	%		28.38	%
	Other			2.94	%		3.10	%		2.81	%		—

		Total FRMs		33.88	%		58.45	%		35.45	%		57.78	%

(1) Includes all called loans.

Loan Production by Borrower Risk Classification

The following table sets forth information about our loan production by borrower risk classification for the three and six months ended June 30, 2002 and 2001.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2002 (2)			2001			2002 (2)			2001

A+ Credit Loans(1)
Percentage of total purchases and origination		23.48	%		23.89	%		23.30	%		19.14	%
Combined weighted average initial LTV		77.65	%		69.43	%		77.22	%		70.73	%
Weighted average credit score		657			696			660			691
Weighted average interest rate:
FRMs		8.05	%		7.77	%		8.00	%		7.89	%
ARMs		7.93	%		8.80	%		7.98	%		8.79	%
Margin – ARMs		4.77	%		4.88	%		4.77	%		4.87	%
A Credit Loans(1)
Percentage of total purchases and origination		25.02	%		18.13	%		25.96	%		17.47	%
Combined weighted average initial LTV		79.73	%		78.80	%		79.02	%		79.34	%
Weighted average credit score		615			620			615			621
Weighted average interest rate:
FRMs		9.51	%		9.83	%		9.35	%		9.75	%
ARMs		8.41	%		9.39	%		8.46	%		9.42	%
Margin – ARMs		4.92	%		5.24	%		4.97	%		5.30	%
A– Credit Loans(1)
Percentage of total purchases and origination		31.95	%		31.71	%		30.96	%		34.19	%
Combined weighted average initial LTV		79.59	%		80.88	%		79.94	%		80.88	%
Weighted average credit score		579			579			579			580
Weighted average interest rate:
FRMs		9.80	%		10.36	%		9.80	%		10.45	%
ARMs		9.46	%		10.01	%		9.41	%		10.15	%
Margin – ARMs		5.75	%		5.70	%		5.62	%		5.79	%
B Credit Loans(1)
Percentage of total purchases and origination		12.16	%		15.73	%		12.65	%		17.23	%
Combined weighted average initial LTV		75.84	%		75.97	%		75.67	%		76.45	%
Weighted average credit score		562			547			554			548
Weighted average interest rate:
FRMs		10.68	%		11.34	%		10.73	%		11.35	%
ARMs		10.16	%		10.83	%		10.10	%		10.83	%
Margin – ARMs		6.31	%		6.42	%		6.28	%		6.40	%
C Credit Loans(1)
Percentage of total purchases and origination		6.09	%		8.48	%		5.88	%		9.89	%
Combined weighted average initial LTV		71.52	%		70.76	%		71.11	%		71.29	%
Weighted average credit score		536			532			536			534
Weighted average interest rate:
FRMs		11.60	%		12.34	%		11.87	%		12.38	%
ARMs		11.10	%		11.87	%		11.14	%		11.72	%
Margin – ARMs		6.63	%		6.82	%		6.67	%		6.82	%
D Credit Loans(1)
Percentage of total purchases and origination		1.30	%		2.06	%		1.25	%		2.08	%
Combined weighted average initial LTV		62.52	%		59.74	%		61.18	%		59.60	%
Weighted average credit score		556			522			542			524
Weighted average interest rate:
FRMs		12.49	%		13.32	%		12.33	%		13.22	%
ARMs		11.64	%		12.91	%		11.96	%		12.88	%
Margin – ARMs		7.57	%		7.66	%		7.47	%		7.57	%

	(1)	The letter grade applied to each risk classification reflects our internal standards and do not necessarily correspond to classifications used by other mortgage lenders.

	(2)	Includes all called loans.

Loan Production by Income Documentation

The following table sets forth information about our loan production based on income documentation for the three and six months ended June 30, 2002 and 2001.

	For the Three Months Ended June 30,									For the Six Months Ended June 30,

Income documentation	2002 (1)					2001				2002 (1)				2001

	% of Originations			Average Credit Score		% of Originations		Average Credit Score		% of Originations		Average Credit Score		% of Originations		Average Credit Score
Full documentation		71.84	%		598	78.83	%		604	72.46	%		598	77.11	%		595
Limited documentation		7.56	%		616	5.81	%		621	7.41	%		618	5.65	%		616
Stated income		20.20	%		609	15.19	%		602	19.79	%		608	16.96	%		601
Other		0.40	%		658	0.17	%		610	0.34	%		634	0.28	%		611

(1) Includes all called loans.

Loan Production by Borrower Purpose

The following table sets forth information about our loan production based on borrower purpose for the three and six months ended June 30, 2002 and 2001.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

Borrower Purpose	2002 (1)			2001			2002 (1)			2001

Cash-out refinance		67.77	%		68.88	%		69.58	%		68.10	%
Purchase		20.96	%		20.45	%		20.13	%		21.11	%
Rate or term refinance		11.27	%		10.67	%		10.29	%		10.79	%

(1) Includes all called loans.

Loan Production Based Upon the Borrower’s Credit Score

The following table sets forth information about our loan production based on borrowers’ credit scores for the three and six months ended June 30, 2002 and 2001.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,

	2002 (2)		2001		2002 (2)		2001

>700	7.06	%	13.61	%	6.96	%	10.21	%
700 to 651	13.27	%	11.80	%	16.22	%	11.68	%
650 to 601	26.65	%	21.52	%	27.15	%	21.75	%
600 to 551	28.48	%	23.88	%	26.43	%	25.45	%
550 to 501	19.83	%	21.79	%	17.06	%	23.17	%
< 500	2.12	%	6.32	%	1.84	%	6.60	%
Unavailable	2.59	%	1.08	%	4.34	%	1.14	%
Average Credit Score (1)	602		605		601		599

	(1)	The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

	(2)	Includes all called loans.

Geographic Distribution

The following table sets forth the percentage of the mortgage loan portfolio at June 30, 2002 and 2001 by state.

		June 30,

		2002			2001

California			20.24	%		20.58	%
Florida			6.30	%		5.90	%
Georgia			5.37	%		4.23	%
Texas			4.91	%		4.86	%
Ohio			3.96	%		3.99	%
Pennsylvania			3.84	%		4.01	%
Virginia			3.76	%		3.24	%
Michigan			3.72	%		3.70	%
Illinois			3.62	%		4.21	%
Washington			2.94	%		3.63	%
Other			41.34	%		41.65	%

	Total		100.00	%		100.00	%

Mortgage Loan Coupon and Prepayment Penalties

The following table sets forth information about our securitized mortgage loan portfolio at June 30, 2002 and December 31, 2001.

																			Constant Prepayment Rate (Annual Percent) (1)

			Principal				Percent with Prepayment Penalty						Weighted Average Coupon						3 Month						LTD

	Issue Date		Original Balance		Current Balance		Fixed			Arm			Fixed			Arm			Fixed			Arm			Fixed			Arm

			($ in thousands)

June 30, 2002
SASTA 2001-2		8/2/2001	$	650,410	$	550,539		86.40	%		87.50	%		9.70	%		10.02	%		26.20	%		28.42	%		15.38	%		19.09	%
SASTA 2001-3		10/11/2001	$	699,999	$	633,390		83.76	%		86.90	%		10.04	%		9.69	%		19.46	%		20.21	%		27.18	%		30.14	%
SASTA 2002-1		3/14/2002	$	899,995	$	874,768		77.19	%		80.83	%		9.01	%		9.29	%		—			—			12.69	%		16.37	%
December 31, 2001
SASTA 2001-2		8/2/2001	$	650,410	$	625,563		81.83	%		83.50	%		9.79	%		10.02	%		7.75	%		12.98	%		7.86	%		13.24	%
SASTA 2001-3		10/11/2001	$	699,999	$	692,397		74.53	%		84.21	%		10.03	%		9.72	%		—			—			—			—

(1) The constant prepayment rate (CPR) means a prepayment assumption which represents a constant assumed rate of prepayment each month relative to the then outstanding principal balance of a pool of mortgage loans for the life of such mortgage loans.

Consolidated Results

Comparability of Saxon Capital, Inc. and SCI Services, Inc. (Predecessor)

Due to the varying time periods caused by our divestiture from Dominion Capital, Inc. and the nuances of changes in securitization structures more fully discussed previously, direct comparison of net earnings for Saxon Capital, Inc. versus Predecessor will be difficult. Specifically, the following line items from our statement of operations are impacted by the divestiture or change in securitization structure:

	•	Net interest income before provision for loan loss;

	•	Provision for loan loss;

	•	Gain on securitization;

	•	Impairment of residual assets, net; and

	•	Impairment of SCI Services, Inc. goodwill.

Three and Six Months Ended June 30, 2002 compared to Three and Six Months Ended June 30, 2001

General

We reported net income of $5.1 million and $7.0 million for the three and six months ended June 30, 2002, respectively, compared to a net loss of $37.7 million and $27.5 million for the three and six months ended June 30, 2001. The increase in net income in 2002 was primarily the result of the move away from gain on sale of loans to portfolio accounting and the decrease in impairment charges relating to residual assets that we no longer retain.

Net Revenues

Net revenues during the three-month period ended June 30, 2002 totaled $29.9 million, up 169.4% compared to $11.1 million during the same period in 2001. For the six-month period ended June 30, 2002, net revenues totaled $54.8 million, up 18.6% from $46.2 million during the same period in 2001. The increase in net revenues was primarily attributable to our change in securitization structure subsequent to July 5, 2001, as discussed previously. After July 5, 2001, we no longer record a gain at the time of securitization and we record interest income and loan loss provision over the life of the mortgage loans.

Net Interest Income After Provision For Loan Losses.

Interest income primarily represents the sum of interest earned on mortgage loans securitized and held prior to securitization, and interest earned on cash collection balances. Interest expense includes the borrowing costs to finance mortgage loan originations and purchases from our securitizations and from our credit facilities used to finance our mortgage loans prior to securitization. For the periods prior to July 6, 2001, the provision for mortgage loan loss includes expenses recorded for losses we incurred for defaults on loans held for sale before their securitization, and for losses incurred on certain defaulted loans repurchased from a securitization due to either noncompliance with certain representations and warranties or to decrease the level of delinquent loans in a securitization to release excess cash flow. For periods subsequent to July 6, 2001, the provision for mortgage loan loss includes expenses recorded for losses we incurred for defaults on loans held prior to securitization and for estimated losses on securitized mortgage loans.

Net interest income after provision for loan losses increased $23.1 million to $22.2 million for the three months ended June 30, 2002, from a loss of $0.9 million for the three months ended June 30, 2001. Net interest income after provision for loan losses increased $43.7 million to $39.4 million for the six months ended June 30, 2002, from a loss of $4.3 million for the six months ended June 30, 2001. The increase in net interest margin is in line with our portfolio growth and was due to the following:

Interest Income

Interest income increased $43.0 million to $50.5 million for the three months ended June 30, 2002, from $7.5 million for the three months ended June 30, 2001. Interest income increased $76.7 million to $91.1 million for the six months ended June 30, 2002, from $14.4 million for the

six months ended June 30, 2001. The increase in interest income is due primarily to our change in securitization structure, which requires portfolio accounting, as discussed previously. We are now recording interest income on our securitized loans and loans held prior to securitization. Prior to July 5, 2001, we only recorded interest income on loans held prior to securitization. Table 1 and Table 2 below represent the average yield on our interest-earning assets for the three and six months ended June 30, 2002 and 2001, respectively.

Table 1 – Interest Income Yield Analysis Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001

	Three Months Ended June 30, 2002								Three Months Ended June 30, 2001

	Average Balance		Interest			Average Yield			Average Balance		Interest (1)		Average Yield

	($ in thousands)
Loans held prior to securitization	$	371,571	$	7,999			8.61	%	$	358,533	$	9,298		10.37	%
Securitized loans:
SASTA 2001-2 – gross		565,662		13,473			9.53	%		—		—		—
Less amortization (2)		—		(2,180	)		(1.54	)%		—		—		—

SASTA 2001-2 – net		565,662		11,293			7.99	%		—		—		—

SASTA 2001-3 – gross		646,498		15,196			9.40	%		—		—		—
Less amortization (2)		—		(772	)		(0.48	)%		—		—		—

SASTA 2001-3 – net		646,498		14,424			8.92	%		—		—		—

SASTA 2002-1 – gross		764,351		17,067			8.93	%		—		—		—
Less amortization (2)		—		(240	)		(0.12	)%		—		—		—

SASTA 2002-1 – net		764,351		16,827			8.81	%		—		—		—

Warehouse lines of credit		18		—			2.67	%		—		—		—

Total interest-earning assets	$	2,348,100	$	50,543			8.61	%	$	358,533	$	9,298		10.37	%

(1)	Amount excludes residual and subordinated bond income.

(2)	Amount represents amortization of related premiums and deferred fees and costs.

Table 2– Interest Income Yield Analysis Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

	Six Months Ended June 30, 2002								Six Months Ended June 30, 2001

	Average Balance		Interest			Average Yield			Average Balance		Interest (1)		Average Yield

	($ in thousands)
Loans held prior to securitization	$	413,964	$	18,077			8.73	%	$	302,514	$	15,669		10.36	%
Securitized loans:
SASTA 2001-2 – gross		587,273		27,409			9.33	%		—		—		—
Less amortization (2)		—		(3,459	)		(1.18	)%		—		—		—

SASTA 2001-2 – net		587,273		23,950			8.15	%		—		—		—

SASTA 2001-3 – gross		662,504		30,741			9.28	%		—		—		—
Less amortization (2)		—		(1,219	)		(0.37	)%		—		—		—

SASTA 2001-3 – net		662,504		29,522			8.91	%		—		—		—

SASTA 2002-1 – gross		439,947		19,929			9.06	%		—		—		—
Less amortization (2)		—		(389	)		(0.18	)%		—		—		—

SASTA 2002-1 – net	$	439,947	$	19,540			8.88	%		—		—		—

Warehouse lines of credit		9		—			2.67	%		—		—		—

Total interest-earning assets	$	2,103,697	$	91,089			8.66	%	$	302,514	$	15,669		10.36	%

	(1)	Amount excludes residual and subordinated bond income.

	(2)	Amount represents amortization of related premiums and deferred fees and costs.

Interest Expense

Interest expense increased $15.0 million to $20.4 million for the three months ended June 30, 2002, from $5.4 million for the three months ended June 30, 2001. Interest expense increased $25.6 million to $36.6 million for the six months ended June 30, 2002, from $11.0 million for the six months ended June 30, 2001. The increase in interest expense is primarily related to our change in securitization structure, which requires portfolio accounting, as discussed previously. We are now recording interest expense on securitization financing debt used to finance our securitized loans and on warehouse financing prior to securitization. Prior to July 5, 2001, we only recorded interest expense to finance loans held prior to securitization. Table 3 and Table 4 below represent the average yield on our interest-bearing liabilities for the three and six months ended June 30, 2002 and 2001, respectively.

Table 3 – Interest Expense Yield Analysis Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001

	Three Months Ended June 30, 2002							Three Months Ended June 30, 2001

	Average Balance		Interest (1)		Average Yield			Average Balance		Interest (1)		Average Yield

	($ in thousands)
Warehouse borrowing	$	57,565	$	469		3.26	%	$	70,482	$	902		5.12	%
Repurchase agreements		252,136		1,625		2.58	%		261,620		3,645		5.57	%
Securitization financing:
SASTA 2001-2 – gross		564,085		5,266		3.73	%		—		—		—
Amortization (2)		—		158		0.11	%		—		—		—

SASTA 2001-2 – net		564,085		5,424		3.85	%		—		—		—

SASTA 2001-3 – gross		643,438		4,738		2.95	%		—		—		—
Amortization (2)		—		144		0.09	%		—		—		—

SASTA 2001-3 – net		643,438		4,882		3.03	%		—		—		—

SASTA 2002-1 – gross		891,867		7,182		3.22	%		—		—		—
Amortization (2)		—		99		0.04	%		—		—		—

SASTA 2002-1 – net		891,867		7,281		3.27	%		—		—		—

Due to Dominion Capital		—		—		—			119,027		1,520		5.11	%
Note payable		25,000		499		7.98	%		—		—		—

Total interest-bearing liabilities	$	2,434,091	$	20,180		3.32	%	$	451,129	$	6,067		5.38	%

	(1)	Amount excludes loan buydown and legal fees associated with the facility.

	(2)	Amount represents amortization of related premiums and bond issuance costs.

Table 4 – Interest Expense Yield Analysis Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

	Six Months Ended June 30, 2002							Six Months Ended June 30, 2001

	Average Balance		Interest (1)		Average Yield			Average Balance		Interest (1)		Average Yield

	($ in thousands)
Warehouse borrowing	$	46,257	$	741		3.20	%	$	70,094	$	2,068		5.90	%
Repurchase agreements		300,750		3,798		2.53	%		216,488		6,378		5.89	%
Securitization financing:
SASTA 2001-2 – gross		584,227		10,662		3.65	%		—		—		—
Amortization (2)		—		266		0.09	%		—		—		—

SASTA 2001-2 – net		584,227		10,928		3.74	%		—		—		—

SASTA 2001-3 – gross		660,926		10,135		3.07	%		—		—		—
Amortization (2)		—		240		0.07	%		—		—		—

SASTA 2001-3 – net		660,926		10,375		3.14	%		—		—		—

SASTA 2002-1 – gross		530,934		8,982		3.38	%		—		—		—
Amortization (2)		—		99		0.04	%		—		—		—

SASTA 2002-1 – net		530,934		9,081		3.42	%		—		—		—

Due to Dominion Capital		—		—		—			118,797		3,564		6.00	%
Note payable		25,000		997		7.98	%		—		—		—

Total interest-bearing liabilities	$	2,148,094	$	35,920		3.34	%	$	405,379	$	12,010		5.93	%

	(1)	Amount excludes loan buydown and legal fees associated with the facility.

	(2)	Amount represents amortization of related premiums and bond issuance costs.

Provision for Loan Losses

Provision for loan losses increased $5.0 million to $8.0 million for the three months ended June 30, 2002, from $3.0 for the three months ended June 30, 2001. Provision for loan losses increased $7.4 million to $15.1 million for the six months ended June 30, 2002, from $7.7 for the six months ended June 30, 2001. The increase is a result of our change in securitization structure and required use of portfolio accounting. We are now recording provisions for loan losses on securitized loans for likely losses in the retained portfolio in addition to likely losses in loans held prior to securitization. Before July 5, 2001, we only recorded provision for loan losses for mortgage loans held prior to securitization. Before July 5, 2001, estimated losses for securitized loans were accounted for as a component of our gain on sale of loans.

We did not make any significant changes in our reserve methodologies or assumptions during the six-month period ended June 30, 2002. Based on management’s assessments, there have not been any significant changes in our loan quality or loan concentrations during the six-month period ended June 30, 2002. However, we do expect that future delinquencies will increase primarily as a result of the aging of our loan portfolio. Therefore, we expect our future provision for loan losses to increase.

Gain on Sale of loans

Gain on sale of loans decreased $3.2 million to $0.2 million for the three months ended June 30, 2002, from $3.4 million for the three months ended June 30, 2001. Gain on sale of loans decreased $33.5 million to $0.2 million for the six months ended June 30, 2002, from $33.7 million for the six months ended June 30, 2001. This decrease was attributable to our change in securitization structure subsequent to July 5, 2001, as discussed previously. After July 5, 2001, we no longer record a gain at the time of securitization and we record interest income and loan loss provision over the life of the mortgage loans. The gain on sale of loans recorded during the three and six months ended June 30, 2002 was related to a cash sale of loans and was not a securitization.

Servicing Income

Servicing income, net of servicing rights amortization, represents all contractual and ancillary servicing revenue (primarily late fees and electronic payment processing fees) for loans we sold prior to July 6, 2001. Beginning July 6, 2001, contractual servicing fees relating to loans securitized thereafter is a component of interest income due to the move to portfolio accounting. Servicing income, net of servicing rights amortization, decreased $1.1 million to $7.5 million for the three months ended June 30, 2002, from $8.6 million for the three months ended June 30, 2001. Servicing income, net of servicing rights amortization, decreased $1.6 million to $15.2

million for the six months ended June 30, 2002, from $16.8 million for the six months ended June 30, 2001. The decrease was due primarily to the move to portfolio accounting as stated above. The information relating to servicing income is shown on Table 5 below:

Table 5–Servicing Income Three and Six Months Ended June 30, 2002 compared to Three and Six Months Ended June 30, 2001

	Three Months Ended June 30,				Six Months Ended June 30,

	2002		2001		2002		2001

				($ in thousands)
Average servicing portfolio (1)	$	4,069,389	$	5,901,370	$	4,320,272	$	5,986,324
Servicing income	$	8,999	$	13,566	$	19,949	$	26,834
Amortization of MSRs and prepayment penalties	$	4,014	$	1,613	$	8,344	$	6,900
Servicing fees (2)(3)(4)		82		48		79		48
Prepayment penalty income (2)(4)(5)		—		31		—		27
Other servicing income (2)(4)(6)		6		14		13		15
Total servicing income (2)(4)		88		92		92		90
Amortization of MSRs and prepayment penalties (2)(4)		39		11		39		23

(1)	Average servicing portfolio excludes the SCI portfolio as servicing income is not recognized separately for these loans, but rather as a component of interest income.

(2)	In basis points.

(3)	Includes master servicing fees for the three months ended June 30, 2002 of $0.6 million or 6 basis points and for the six months ended June 30, 2002 of $1.3 million or 6 basis points.

(4)	Annualized.

(5)	Prepayment penalty income decreased since July 6, 2001 as the right to prepayment penalty income related to loans securitized prior to July 6, 2001 was retained by Dominion Capital, Inc. Servicing income excluded the prepayment penalty income on the SCI portfolio of $2.5 million and $3.6 million in the three and six months ended June 30, 2002, respectively.

(6)	Includes primarily late fees and electronic processing fees.

Our mortgage loan servicing portfolio, including loans recorded on the consolidated balance sheet, increased $70.0 million to $6.42 billion at June 30, 2002, from $6.35 billion at December 31, 2001. The increase was due primarily to the origination and purchase of mortgage loans and acquisition of $69.3 million of loans during the first quarter 2002 and $79.8 million during the second quarter 2002, offset by decreases caused by prepayments and losses.

Expenses

Total expenses decreased $47.7 million to $21.9 million for the three months ended June 30, 2002, from $69.6 million for the three months ended June 30, 2001. Total expenses decreased $49.6 million to $43.3 million for the six months ended June 30, 2002, from $92.9 million for the six months ended June 30, 2001. The items that impacted this decrease are discussed in greater detail below.

Payroll and Related Expenses. Payroll and related expenses include salaries, benefits, and payroll taxes for all employees. Payroll and related expenses increased $1.6 million to $12.3 million for the three months ended June 30, 2002, from $10.7 million for the three months ended

June 30, 2001. Payroll and related expenses increased $1.1 million to $24.2 million for the six months ended June 30, 2002, from $23.1 million for the six months ended June 30, 2001. The increase was primarily due to the increase in employees in 2002 versus 2001.

We expect payroll and related expenses to increase in the future as we increase the number of employees based on loan origination growth and for additional employees needed for being a public company. We employed 1,007 full-time employees as of June 30, 2002, compared to 852 full-time employees as of June 30, 2001.

General and Administrative Expenses. General and administrative expenses consist primarily of office rent, insurance, telephone, license fees, legal and accounting fees, travel and entertainment expenses, and advertising and promotional expenses. General and administrative expenses remained consistent at $8.8 million for the three months ended June 30, 2002, compared to $8.8 million for the three months ended June 30, 2001. General and administrative expenses increased $2.2 million to $17.7 million for the six months ended June 30, 2002, from $15.5 million for the six months ended June 30, 2001. The increase was primarily due to increased costs associated with being a publicly traded company. We expect general and administration expenses to increase in future periods as we incur additional costs of being a publicly traded company and to some extent in proportion to future loan origination growth and increased occupancy costs related to geographic expansion.

Impairment of Assets. Impairment of assets decreased to $0.0 million for the three and six months ended June 30, 2002 from $49.7 million and $52.6 million for the three and six months ended June 30, 2001, respectively, which was related to the impairment of Predecessor goodwill. We do not expect to incur future goodwill impairment charges.

Income Taxes. We recorded tax expense of $2.9 million and a tax benefit of $20.8 million for the three months ended June 30, 2002 and 2001, respectively. We experienced a 36.8% effective tax rate for the three months ended June 30, 2002, compared to a 35.6% effective tax rate for the three months ended June 30, 2001. We recorded tax expense of $4.5 million and a tax benefit of $19.1 million for the six months ended June 30, 2002 and 2001, respectively. We experienced a 38.9% effective tax rate for the six months ended June 30, 2002, compared to a 41.0% effective tax rate for the six months ended June 30, 2001

Business Segment Results

Certain amounts are not evaluated at the segment level and are included in the segment net operating income reconciliation below. The unallocated gain on securitizations represents the difference between the segment’s economic value of mortgage loans originated and the actual gain on securitization. For periods subsequent to July 6, 2001, the segment’s economic value of mortgage loans originated was required to be eliminated since we now structure our securitizations as financing transactions.

Management does not identify assets to the segments and evaluates assets only at the consolidated level. As such, only operating results for the segments are included herein.

			Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)			Saxon Capital, Inc.			SCI Services, Inc. (Predecessor)

			Three Months Ended June 30,						Six Months Ended June 30,

			2002			2001			2002			2001

			($ in thousands)
Segment Revenues:
	Wholesale		$	7,225		$	11,047		$	14,644		$	20,609
	Correspondent			2,825			3,433			5,263			8,796
	Retail			7,448			6,537			13,845			12,133
	Servicing			7,028			8,773			14,888			17,522

		Total Segment Revenues	$	24,526		$	29,790		$	48,640		$	59,060

Segment Operating Income:
	Wholesale		$	2,973		$	7,619		$	6,021		$	13,578
	Correspondent			1,336			1,703			2,325			5,517
	Retail			2,094			2,467			3,250			3,912
	Servicing			2,095			4,136			4,993			8,713

		Total Segment Net Operating Income	$	8,498		$	15,925		$	16,589		$	31,720

Segment Net Operating Income (Loss) Reconciliation:
Total segment operating income			$	8,498		$	15,925		$	16,589		$	31,720
Net interest income				30,161			2,090			54,468			3,457
Provision for loan losses				(7,987	)		(2,993	)		(15,081	)		(7,745	)
Unallocated gain on sale of loans				232			3,396			232			33,738
Elimination of segment economic value of mortgage loans originated				(17,427	)		(17,503	)		(33,357	)		(6,224	)
Unallocated shared general and administrative expenses				(5,480	)		(9,774	)		(11,329	)		(49,013	)
Impairment of assets				—			(49,681	)		—			(52,590	)

Total consolidated income (loss) before taxes			$	7,997		$	(58,540	)	$	11,522		$	(46,657	)

Wholesale - Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Wholesale segment revenues decreased $3.8 million to $7.2 million for the three months ended June 30, 2002 compared to $11.0 million for the three months ended June 30, 2001. Wholesale segment revenues decreased $6.0 million to $14.6 million for the six months ended June 30, 2002 compared to $20.6 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, the decrease was due primarily to a lower segment economic value on mortgage loan originations, $3.3 million of which related to the interest rate environment, and $0.5 million related to a decrease in mortgage loan originations. For the six months ended June 30, 2002, the decrease was due primarily to a lower segment economic value on mortgage loan originations, $6.2 million of which was related to an increasing interest rate environment, offset by $0.2 million related to an increase in mortgage loan originations.

Wholesale segment net operating income decreased $4.6 million to $3.0 million for the three months ended June 30, 2002 compared to $7.6 million for the three months ended June 30, 2001. Wholesale segment net operating income decreased $7.6 million to $6.0 million for the six months ended June 30, 2002 compared to $13.6 million for the six months ended June 30, 2001. The decrease was due to lower segment revenues of $3.8 million and $6.0 million, as well as $0.8 million and $1.6 million in overall higher general and administrative costs for the three and six months ended June 30, 2002, respectively. The higher general and administrative costs for the wholesale segment was due to the increase in the number of sales representatives added in 2002.

The following table sets forth selected information about our wholesale loan originations for the three and six months ended June 30, 2002 and 2001:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,

		2002			2001			2002			2001

		($ in thousands)
Loan originations		$	235,827		$	251,619		$	461,211		$	454,130
Average principal balance per loan		$	136		$	104		$	135		$	101
Number of loans originated			1,734			2,419			3,416			4,496
Combined weighted average initial LTV			79.33	%		79.38	%		78.97	%		79.35	%
Percentage of first mortgage loans owner occupied			92.50	%		93.79	%		92.67	%		95.22	%
Percentage with prepayment penalty			82.77	%		83.44	%		80.92	%		79.41	%
Weighted average credit score (1)			598			593			597			591
Percentage FRMs			16.50	%		44.38	%		18.28	%		53.21	%
Percentage ARMs			83.50	%		55.62	%		81.72	%		46.79	%
Weighted average interest rate:
	FRMs		9.72	%		10.32	%		9.60	%		10.46	%
	ARMs		9.06	%		10.10	%		9.14	%		10.31	%
	Margin – ARMs (2)		5.19	%		5.61	%		5.29	%		5.67	%
Average number of account executives			118			110			112			105
Volume per account executive		$	1,999		$	2,287		$	4,118		$	4,325
Loans originated per account executive			15			22			31			43

(1)	The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

(2)	The gross margin is the factor by which the interest rate can fluctuate.

The following table highlights the net cost to produce loans for our wholesale channel for the three and six months ended June 30, 2002 and 2001:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2002			2001			2002			2001

Fees collected (1)		(45	)		(41	)		(45	)		(41	)
General and administrative costs (1)(2)		276			253			280			260
Premium paid (1)		95			116			95			123

Net cost to produce (1)		326			328			330			342

Net cost per loan (3)	$	4,448		$	3,391		$	4,446		$	3,439

(1)	In basis points.

(2)	Excludes corporate overhead costs and the impact of net deferred origination costs of 96 basis points, 116 basis points, 93 basis points, and 105 basis points, for the three and six months ended June 30, 2002 and 2001, respectively. Includes depreciation expense.

(3)	Defined as general and administrative costs and premium paid, net of fees collected, divided by units of loan origination.


	Correspondent - Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Correspondent segment revenues decreased $0.6 million to $2.8 million for the three months ended June 30, 2002 compared to $3.4 million for the three months ended June 30, 2001. Correspondent segment revenues decreased $3.5 million to $5.3 million for the six months ended June 30, 2002 compared to $8.8 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, the decrease was due primarily to a lower segment economic value on mortgage loan originations, of which $0.5 million was related to the interest rate environment, offset by $1.1 million related to a decrease in mortgage loan originations. For the six months ended June 30, 2002, the decrease was due primarily to a lower segment economic value on mortgage loan originations, $1.4 million of which was related to the interest rate environment and $1.9 million related to a decrease in mortgage loan originations.

Correspondent segment net operating income decreased $0.4 million to $1.3 million for the three months ended June 30, 2002 compared to $1.7 million for the three months ended June 30, 2001. Correspondent segment net operating income decreased $3.2 million to $2.3 million for the six months ended June 30, 2002 compared to $5.5 million for the six months ended June 30, 2001. The decrease was due to lower segment revenues of $0.6 million and $3.3 million offset by a decrease in general and administrative expenses of $0.2 million and $0.1 million for the three and six months ended June 30, 2002, respectively.

The decreased volume of bulk purchases was a result of a strategic decision to reduce the bulk production since volume in the more profitable retail channel have increased significantly in 2002.

The following table sets forth selected information about loans purchased by our correspondent channel through bulk delivery for the three and six months ended June 30, 2002 and 2001:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,

			2002			2001			2002			2001

		($ in thousands)
Loan originations		$	61,868		$	242,092		$	99,880		$	390,894
Average principal balance per loan		$	125		$	96		$	128		$	100
Number of loans originated			495			2,522			780			3,909
Combined weighted average initial LTV			79.00	%		74.78	%		78.04	%		74.78	%
Percentage of first mortgage loans owner occupied			96.41	%		87.38	%		95.50	%		89.64	%
Percentage with prepayment penalty			94.48	%		77.28	%		93.51	%		81.94	%
Weighted average credit score (1)			578			600			576			590
Percentage FRMs			28.47	%		59.31	%		26.98	%		45.66	%
Percentage ARMs			71.53	%		40.69	%		73.02	%		54.34	%
Weighted average interest rate:
	FRMs		9.02	%		10.12	%		9.15	%		10.27	%
	ARMs		9.49	%		10.60	%		9.56	%		10.58	%
	Margin – ARMs (2)		7.47	%		6.42	%		7.17	%		6.41	%
Average number of sales representatives			6			6			6			6
Volume per sales representative		$	10,311		$	40,349		$	16,647		$	65,149
Loans originated per sales representative			83			420			130			652

(1)	The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

(2)	The gross margin is the factor by which the interest rate can fluctuate.

The following table sets forth selected information about loans purchased by our correspondent channel through flow delivery for the three and six months ended June 30, 2002 and 2001:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,

			2002			2001			2002			2001

		($ in thousands)
Loan originations		$	89,735		$	106,368		$	172,858		$	168,288
Average principal balance per loan		$	141		$	141		$	137		$	126
Number of loans originated			664			754			1,262			1,336
Combined weighted average initial LTV			74.39	%		68.26	%		73.59	%		69.97	%
Percentage of first mortgage loans owner occupied			95.75	%		96.43	%		96.11	%		96.83	%
Percentage with prepayment penalty			86.51	%		89.33	%		86.29	%		77.70	%
Weighted average credit score (1)			602			637			604			619
Percentage FRMs			37.59	%		74.06	%		40.84	%		72.50	%
Percentage ARMs			62.41	%		25.94	%		59.16	%		27.50	%
Weighted average interest rate:
	FRMs		9.22	%		8.69	%		9.16	%		9.40	%
	ARMs		9.35	%		10.13	%		9.52	%		10.22	%
	Margin – ARMs (2)		5.31	%		5.46	%		5.36	%		5.45	%
Average number of sales representatives			6			6			6			6
Volume per sales representative		$	14,956		$	17,728		$	28,810		$	28,048
Loans originated per sales representative			111			126			210			223

(1)	The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

(2)	The gross margin is the factor by which the interest rate can fluctuate.

The following table highlights the net cost to produce loans for our correspondent channel through bulk delivery for the three and six months ended June 30, 2002 and 2001:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,

		2002		2001		2002		2001

General and administrative costs (1)(2)		103		39		127		49
Premium paid (1)		335		366		334		352

Net cost to produce (1)(3)		438		405		461		401

Net cost per loan (3)	$	5,495	$	3,721	$	5,892	$	3,919

(1)	In basis points.

(2)	Excludes corporate overhead costs. Includes depreciation expense.

(3)	Defined as general and administrative costs and premium paid, net of fees collected, divided by units of loan origination.

The following table highlights the net cost to produce loans for our correspondent channel through flow delivery for the three and six months ended June 30, 2002 and 2001:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

		2002			2001			2002			2001

Fees collected (1)		(12	)		(11	)		(13	)		(11	)
General and administrative costs (1)(2)		95			68			98			78
Premium paid (1)		213			139			213			173

Net cost to produce (1)(3)		296			196			298			240


Net cost per loan (3)	$	4,183		$	2,830		$	4,075		$	3,107

(1)	In basis points.

(2)	Excludes corporate overhead costs. Includes depreciation expense.

(3)	Defined as general and administrative costs and premium paid, net of fees collected, divided by units of loan origination.

	Retail - Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Retail segment revenues increased $0.9 million to $7.4 million for the three months ended June 30, 2002 compared to $6.5 million for the three months ended June 30, 2001. Retail segment revenues increased $1.7 million to $13.8 million for the six months ended June 30, 2002 compared to $12.1 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, the increase was due primarily to a higher segment economic value on mortgage loan originations, of which $1.8 million was related to an increase in mortgage loan originations,

offset by $0.9 million related to the interest rate environment. Internet originations accounted for 65% of the retail channel’s production during the three months ended June 30, 2002. For the six months ended June 30, 2002, the increase was due primarily to a higher segment economic value on mortgage loan originations of $3.2 million, of which $4.0 million of the increase was related to an increase in mortgage loan originations, offset by $0.8 million related to the interest rate environment. The increased gain on securitizations of $3.2 million was offset by lower origination fees of $1.5 million during the six months ended June 30, 2002.

Retail segment net operating income decreased $0.4 million to $2.1 million for the three months ended June 30, 2002 compared to income of $2.5 million for the three months ended June 30, 2001. Retail segment net operating income decreased $0.6 million to $3.3 million for the six months ended June 30, 2002 compared to income of $3.9 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, the decrease was due to $1.3 million in higher general and administrative costs related to the expansion of the branch network and call center, offset by higher segment revenues of $0.9 million. For the six months ended June 30, 2002, the decrease was due to $2.3 million in higher general and administrative costs related to the expansion of our branch network and call center, offset by higher segment revenues of $1.7 million.

The following table sets forth selected information about our retail loan originations for the three and six months ended June 30, 2002 and 2001:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,

			2002			2001			2002			2001

		($ in thousands)
Loan originations		$	143,565		$	105,924		$	277,073		$	192,568
Average principal balance per loan		$	126		$	113		$	126		$	114
Number of loans originated			1,139			937			2,199			1,689
Combined weighted average initial LTV			79.16	%		76.56	%		79.10	%		76.91	%
Percentage of first mortgage loans owner occupied			95.20	%		94.13	%		95.42	%		97.84	%
Percentage with prepayment penalty			77.49	%		82.05	%		77.28	%		78.30	%
Weighted average credit score (1)			614			612			613			619
Percentage FRMs			53.07	%		74.19	%		54.22	%		80.15	%
Percentage ARMs			46.93	%		25.81	%		45.78	%		19.85	%
Weighted average interest rate:
	FRMs		8.57	%		9.16	%		8.52	%		9.15	%
	ARMs		8.69	%		9.48	%		8.69	%		9.65	%
	Margin – ARMs (2)		5.73	%		5.36	%		5.59	%		5.68	%
	Average number of loan officers		164			123			159			125
	Volume per loan officer	$	875		$	861		$	1,743		$	1,541
	Loans originated per loan officer		7			8			14			14

(1)	The average credit score is determined based on a combination of FICO, Empirica, and Beacon credit scores.

(2)	The gross margin is the factor by which the interest rate can fluctuate.

The following table highlights the net cost to produce loans for our retail channel for the three and six months ended June 30, 2002 and 2001:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

		2002			2001			2002			2001

Fees collected (1)		(261	)		(269	)		(253	)		(266	)
General and administrative costs (1)(2)		498			518			501			541

Net cost to produce (1)(3)		237			249			248			275

Net cost per loan (3)	$	2,982		$	2,806		$	3,117		$	3,139

(1)	In basis points.

(2)	Excludes corporate overhead costs and the impact of net deferred origination costs of 125 basis points, 133 basis points, 118 basis points, and 115 basis points, for the three and six months ended June 30, 2002 and 2001, respectively. Includes depreciation expense.

(3)	Defined as general and administrative costs, net of fees collected, divided by units of loan origination.

Servicing

Our Delinquency and Loss Experience

The following tables set forth information about the delinquency and loss experience of our mortgage loan portfolio and the mortgage loans we service (which are primarily loans we have originated or purchased and have been or will be securitized for the periods indicated.)

					June 30,

					($ in thousands)
					2002						2001

Total Delinquencies and Loss Experience(1)						Saxon Capital, Inc. Portfolio			Total Servicing Portfolio			Saxon Capital, Inc. Portfolio (2)		Total Servicing Portfolio

Total outstanding principal balance (at period end)					$	2,594,160		$	6,416,708			—	$	6,319,811
Delinquency (at period end):
	30-59 days:
		Principal balance			$	162,258		$	512,902			—	$	415,434
		Delinquency percentage				6.25	%		7.99	%		—		6.57	%
	60-89 days:
			Principal balance		$	46,177		$	144,513			—	$	111,467
			Delinquency percentage			1.78	%		2.25	%		—		1.76	%
	90 days or more:
				Principal balance	$	35,802		$	111,758			—	$	46,256
				Delinquency percentage		1.38	%		1.74	%		—		0.73	%
Bankruptcies (3):
				Principal balance	$	28,617		$	242,742			—	$	205,167
				Delinquency percentage		1.10	%		3.78	%		—		3.25	%
Foreclosures:
				Principal balance	$	47,015		$	210,855			—	$	254,421
				Delinquency percentage		1.81	%		3.29	%		—		4.03	%
Real Estate Owned:
				Principal balance	$	10,389		$	119,986			—	$	96,106
				Delinquency percentage		0.40	%		1.87	%		—		1.52	%
Total Seriously Delinquent (4)						6.09	%		12.19	%		—		10.64	%
Net losses on liquidated loans (5)					$	2,773		$	57,566			—	$	34,858
Percentage of losses on liquidated loans (6)						0.21	%		1.79	%		—		1.10	%

(1)	Includes all loans serviced by Saxon Capital, Inc.

(2)	Saxon Capital, Inc. began structuring their securitizations as financing transactions beginning July 6, 2001; therefore there were no portfolio balances prior to July 6, 2001.

(3)	Bankruptcies include loans that are contractually current.

(4)	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 delinquent.

(5)	Loss amounts are cumulative for the year shown.

(6)	Annualized.

			June 30,

			($ in thousands)
			2002						2001

Bankruptcy Delinquencies and Loss Statistics(1)				Saxon Capital, Inc. Portfolio			Total Servicing Portfolio			Saxon Capital, Inc. Portfolio (2)		Total Servicing Portfolio

Contractually current bankruptcies:
	Principal balance		$	8,201		$	36,412			—	$	32,303
	Delinquency percentage			0.32	%		0.57	%		—		0.51	%
Bankruptcy delinquency (at period end) (3):
	30-59 days:
		Principal balance	$	1,524		$	11,068			—	$	8,514
		Delinquency percentage		0.06	%		0.17	%		—		0.13	%
	60-89 days:
		Principal balance	$	2,714		$	11,514			—	$	6,980
		Delinquency percentage		0.10	%		0.18	%		—		0.11	%
	90 days or more:
		Principal balance	$	16,178		$	183,748			—	$	157,370
		Delinquency percentage		0.62	%		2.86	%		—		2.49	%
Total bankruptcy delinquencies:
		Principal balance	$	20,416		$	206,330			—	$	172,864
		Delinquency percentage		0.79	%		3.22	%		—		2.74	%

(1)	Includes all loans serviced by Saxon Capital, Inc.

(2)	Saxon Capital, Inc. began structuring their securitizations as financing transactions beginning July 6, 2001; therefore there were no portfolio balances prior to July 6, 2001.

(3)	Delinquencies are measured versus contractual due dates. Payments that are less than the contractual amount, even if made under a court plan are reported as delinquent.

In addition to servicing mortgage loans that we originate or purchase, we service mortgage loans for other lenders and investors. Our loan servicing portfolio as of June 30, 2002 is summarized below:

		Number of Loans		Principal Balance		Average Balance

	($ in thousands)
Private Investors (1)		34,861	$	3,086,433	$	88.5
Saxon Capital, Inc. (2)		21,813		2,594,160		118.9
Credit Suisse First Boston		3,970		481,419		121.3
Dynex Capital, Inc.		1,143		120,344		105.3
Greenwich Capital, Inc.		1,006		67,397		67.0
Fannie Mae, Freddie Mac, and Ginnie Mae		1,500		42,700		28.5
Various government entities and other investors		616		24,255		39.4

Total		64,909	$	6,416,708	$	98.9

(1)	Includes loans securitized by SCI Services, Inc. from May 1996 to July 5, 2001.

(2)	Includes loans securitized by Saxon Capital, Inc. from July 6, 2001 to June 30, 2002.

Our Delinquency and Loss Experience

Delinquency by Credit Grade by Year Funded(1)(2)

					Percentage 60+ Days Delinquent(3)

Year		Original Balance		Balance Outstanding	Percentage of Original Remaining		A+/A		A-		B		C		D		Total		Cumulative Loss Percentage(4)

	($ in thousands)
1996	$	741,645	$	50,249	6.8	%	1.61	%	10.59	%	10.66	%	15.73	%	—		4.83	%	1.62	%
1997	$	1,769,538	$	199,407	11.3	%	5.89	%	11.82	%	12.51	%	17.39	%	21.74	%	10.55	%	2.60	%
1998	$	2,084,718	$	492,602	23.6	%	6.52	%	15.75	%	23.41	%	27.05	%	29.80	%	14.53	%	2.74	%
1999	$	2,381,387	$	974,054	40.9	%	9.40	%	16.67	%	23.77	%	29.50	%	35.06	%	18.21	%	2.45	%
2000	$	2,078,637	$	1,149,660	55.3	%	9.90	%	17.07	%	22.08	%	31.98	%	45.49	%	19.88	%	1.47	%
2001	$	2,364,234	$	1,825,604	77.2	%	3.44	%	11.80	%	14.39	%	20.27	%	30.25	%	10.29	%	0.18	%
2002	$	1,008,747	$	921,384	91.3	%	0.75	%	1.75	%	1.92	%	2.66	%	6.13	%	1.37	%	—

(1)	Includes loans originated by Saxon Capital, Inc. and Predecessor.

(2)	As of June 30, 2002.

(3)	The letter grade applied to each risk classification reflects our internal standards and do not necessarily correspond to classifications used by other mortgage lenders.

(4)	Includes securitization losses and losses incurred from loan repurchases, delinquent loan sales, and unsecuritized loans.

Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Servicing segment revenues decreased $1.8 million to $7.0 million for the three months ended June 30, 2002 compared to $8.8 million for the three months ended June 30, 2001. Servicing segment revenues decreased $2.6 million to $14.9 million for the six months ended June 30, 2002 compared to $17.5 million for the six months ended June 30, 2001. The decrease was due primarily to lower third party servicing income for the three and six months ended June 30, 2002.

Servicing segment net operating income decreased $2.0 million to $2.1 million for the three months ended June 30, 2002 compared to $4.1 million for the three months ended June 30, 2001. Servicing segment net operating income decreased $3.7 million to $5.0 million for the six months ended June 30, 2002 compared to $8.7 million for the six months ended June 30, 2001. For the three months ended June 30, 2002, the decrease was due to lower segment revenues of $1.8 million and $0.2 million in higher general and administrative expenses. For the six months ended June 30, 2002, the decrease was due to lower segment revenues of $2.6 million and $1.1 million in higher general and administrative expenses related to the increase in the servicing portfolio.

We continue to maintain an efficient 30 basis points cost to service while increasing our collection and mitigation efforts, improving cure rates, and receiving an above average rating for sub-prime servicing and an average rating for special servicing from Standard & Poors’.

Financial Condition

June 30, 2002 Compared to December 31, 2001

Mortgage loans held prior to securitization increased to $583.4 million at June 30, 2002, from $370.0 million at December 31, 2001. This increase was the result of the timing of our securitizations.

Securitized loans increased to $2.1 billion at June 30, 2002, from $1.4 billion at December 30, 2001. This increase was the result of the execution of the $900.0 million asset backed securitization during the first quarter 2002, offset by payoffs, prepayments, and losses during the six months ended June 30, 2002.

Mortgage servicing rights decreased to $25.5 million at June 30, 2002, from $33.8 million at December 31, 2001. The decrease was due to amortization of servicing rights of $8.3 million during the six months ended June 30, 2002. After July 6, 2001 our securitizations are structured as financing, and servicing assets are not recorded related to those transactions.

Warehouse financing increased $204.3 million to $487.7 million at June 30, 2002, from $283.4 million at December 31, 2001. This increase was the result of the timing of our securitizations.

Securitization financing increased to $2.1 billion at June 30, 2002 from $1.3 billion at December 31, 2001. This increase was the result of the execution of the $900.0 million asset backed securitization during the first quarter 2002, offset by payments made during the six months ended June 30, 2002.

Stockholders’ equity increased $7.3 million to $259.3 million at June 30, 2002, from $252.0 million at December 31, 2001. The increase in stockholders’ equity is due primarily to net income of $7.0 million for the six months ended June 30, 2002 and the issuance of common stock under the Employee Stock Purchase Plan.

Liquidity and Capital Resources

As a mortgage lending company, we need to borrow substantial sums of money each quarter to originate and purchase mortgage loans. Currently, our primary cash requirements include the funding of:

	•	mortgage originations and purchases pending their pooling and securitization,

	•	the points and expenses paid in connection with the acquisition of correspondent and wholesale loans,

	•	ongoing general and administrative expenses,

	•	overcollateralization requirements on our ABS securitzations,

	•	servicing advances,

	•	interest expense on our warehouse lines of credit,

	•	fees, expenses, and tax payments incurred in connection with our securitization program,

	•	hedge losses,

	•	margin requirements on hedging instruments.

We fund these cash requirements with cash received from:

	•	borrowings secured by our mortgage loan portfolio and servicing advances,

	•	principal and interest collections on our mortgage loan portfolio,

	•	cash distributions from our securitizations after July 6, 2001 (in conjunction with our divestiture, Dominion Capital will receive all residual cash flows from prior securitizations, excluding servicing fees),

	•	servicing fees and other servicing income,

	•	points and fees collected from the origination of retail and wholesale loans, and

	•	our issuance of equity and debt securities.

Liquidity Strategy

Our liquidity strategy is to finance our mortgage portfolio on a long-term basis by issuing asset-backed securities. We believe that issuing asset-backed securities provides us a low cost method of financing our mortgage portfolio. In addition, our strategy allows us to reduce our interest rate risk on our fixed rate loans by securitizing them. An integral part of our liquidity strategy is our requirement to have sufficient committed warehouse financing, with a diverse group of counterparties. This provides us with the ability to issue our asset-backed securities at optimal points in time. Our ability to issue asset-backed securities depends on the overall performance of our assets, as well as the strength of the capital markets. We seek to have committed financing facilities that approximate six months of our mortgage production, even though we expect to issue asset-backed securities on a quarterly basis. If it is not possible or economical for us to complete the securitization at optimal points in time, we may exceed our capacity under our warehouse financing. This could require us to sell the accumulated loans at a time when the market value of the loans is low, and potentially to incur a loss in the sale transaction. If we cannot generate sufficient liquidity, we will be unable to continue our operations, grow our loan portfolio, and maintain our hedging policy.

We use various hedging strategies to provide a level of protection against interest rate risks, but no hedging strategy can completely protect us. We cannot guarantee that our hedging transactions will offset the risks of changes in interest rates, and it is possible that there will be periods during which we will incur losses after accounting for our hedging activities. Additionally, the change in the fair market value of our hedges may require immediate payment of cash for margin requirements while the hedged cash flows will not generate cash until the future.

Another component of our liquidity strategy is to have sufficient working capital to enable us to fund operating cash flow requirements until our mortgage portfolio generates sufficient cash flows to cover our operating requirements. As of June 30, 2002, we have approximately $118.8 million of working capital. We anticipate using a substantial portion of this working capital to build our mortgage portfolio so that it generates sufficient cash flows to cover our operating requirements. We cannot be certain as to the amount or timing of the working capital that we will require for us to build our portfolio so that it will generate sufficient cash flows, as this can be impacted by several issues, including a prolonged economic downturn or recession, fluctuations in interest rates, and management’s short-term and long-term planning horizons.

Liquidity Resources

We need to borrow substantial sums of money each quarter in order to accumulate loans for securitization. We have relied upon several lenders to provide us with credit facilities to fund our loan originations and purchases, as well as fund a portion of our servicing advances. We must be able to securitize loans and obtain adequate credit facilities and other sources of funding to be able to continue to originate and purchase loans. Our ability to fund current operations and accumulate loans for securitization depends to a large extent upon our ability to secure short-term financing on acceptable terms. The availability of these financing sources depends to some extent on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit and the availability of bank liquidity in general. If we are unable to extend or replace any of these facilities, we will have to curtail our loan production activities, which would have a material adverse effect on our business, financial condition, liquidity, and results of operations.

To accumulate loans for securitization, we borrow money on a short-term basis through secured warehouse lines of credit and committed repurchase agreements. In addition to funding loans that are not securitized, we also use committed facilities to finance the advances required by our servicing contracts. As of June 30, 2002, we had $99.4 million of servicing advances, of which $25.0 million were financed.

When we acquired SCI Services, we entered into new credit agreements and re-negotiated the terms and conditions of four of our old credit agreements. These agreements require us to comply with various customary operating and financial covenants and cross default features. We do not believe that these existing financial covenants will restrict our operations or growth. We believe that we were in compliance with all such covenants under these agreements as of June 30, 2002. Failure to meet or satisfy any of these covenants, financial ratios, or financial tests could result in an event of default under these agreements. These agreements also contain cross-default provisions, so that if a default occurs under any agreement, the lenders could elect to declare all amounts outstanding under all of our agreements to be immediately due and payable, enforce their interests against collateral pledged under such agreements, and restrict our ability to make additional borrowings under these agreements. Our ability to meet those financial ratios and satisfy financial tests may be affected by general economic conditions. For example: an overall decline in residential mortgage interest rates may tend to accelerate refinancings of our loans, tending to reduce the value and performance of our residual interests in our securitization trusts; an economic recession or increase in unemployment levels may

adversely affect the performance of our loan portfolio; or an overall decline in the value of mortgage loan collateral within the capital markets of the United States may reduce or eliminate the amount of credit available to us through these facilities. We cannot assure you that we will continue to be able to meet those financial ratios and satisfy those financial tests.

Warehouse and Repurchase Facilities. Changes to our warehouse and repurchase facilities during the second quarter 2002 include: a reduction in the maximum committed amount on the Greenwich one year facility from $350 million to $150 million, the inception of a Greenwich two year facility that has a maximum committed amount of $175 million, and a reduction in the maximum committed amount of the Wachovia facility from $350 million to $300 million. On July 19, 2002 the Greenwich one year facility was extended from July 31, 2002 to July 18, 2003. At June 30, 2002 we had committed revolving warehouse and repurchase facilities in the amount of $1.3 billion. The table below summarizes our facilities and their expiration dates.

Counterparty	Facility Amount		Expiration Date

($ in thousands)

JP Morgan Chase Bank and CDC Mortgage Capital	$	140,000	December 10, 2002
Greenwich Capital Financial Products, Inc.		150,000	July 18, 2003
Greenwich Capital Financial Products, Inc.		175,000	June 26, 2004
Wachovia Bank, N.A.		300,000	June 26, 2003
CS First Boston Mortgage Capital, LLC		250,000	March 1, 2003
CS First Boston, New York Branch		30,000	August 2, 2002
Merrill Lynch Mortgage Capital, Inc.		250,000	March 21, 2003

Total commercial commitments	$	1,295,000

Contractual Obligations and Commercial Commitments

The following tables summarize our contractual obligations by payment due date and commercial commitments by expiration dates as of June 30, 2002.

Payments Due by Period ($ in thousands)

Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years

Warehouse financing facility – line of credit	$	130,689	$	130,689	$	—	$	—	$	—
Warehouse financing facility – repurchase agreements		357,030		268,503		88,527		—		—
Securitization financing (1)		2,065,573		583,757		850,623		353,829		277,364
Note payable		25,000		—		—		25,000		—
Capital lease obligations		67		20		47		—		—
Operating leases		21,628		5,329		9,642		4,203		2,454

Total contractual cash obligations	$	2,599,987	$	988,298	$	948,839	$	383,032	$	279,818

(1) Amounts shown are estimated bond payments based on anticipated receipt of principal and interest on underlying mortgage loan collateral using historical prepayment speeds.

Other Commercial Commitments	Amount of Commitment Expiration Per Period ($ in thousands)

	Total Amounts Committed		Less than 1 year		1-3 years		4-5 years		Over 5 years

Warehouse financing facility – line of credit	$	140,000	$	140,000	$	—	$	—	$	—
Warehouse financing facility – repurchase agreements		1,155,000		980,000		175,000		—		—

Total commercial commitments	$	1,295,000	$	1,120,000	$	175,000	$	—	$	—

Cash Flows

For the six months ended June 30, 2002 and 2001, we had operating cash flows of $9.1 million and negative operating cash flows of $574.4 million, respectively. Operating cash flows, as presented in our consolidated statements of cash flows, exclude the net proceeds from or repayments of mortgage warehouse financing.

Other Matters

Impact of New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.142,

Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets after their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Accordingly, we will not amortize the $4.8 million of goodwill recorded from the acquisition of the Predecessor.

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long–lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, we will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management does not expect the adoption of SFAS No. 143 to have an impact on our financial position, results of operations, or cash flows.

Effective January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long–Lived Assets. The adoption of SFAS No. 144 did not have a material impact on our consolidated results of operations and financial position.

The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. The provisions of SFAS No. 145 that are related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. Management does not expect the adoption of SFAS No. 145 to have an impact on our financial position, results of operations, or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company has yet to determine the impact, if any, of this statement on the Company’s financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Credit Risk Management

We seek to reduce credit risk through

	•	the review of each mortgage loan before origination or purchase to ensure that it meets our underwriting guidelines;

	•	use of early intervention, proactive collection, and loss mitigation techniques in the servicing process;

	•	maintenance of appropriate capital and reserve levels;

	•	obtaining representations and warranties, to the extent possible, from our correspondents; and

	•	analysis of performance trends of our portfolio and our peers to ensure the underwriting guidelines are consistent with our risk tolerances and rate of return requirements.

Although we do not set specific geographic diversification requirements, we monitor the geographic dispersion of the property securing mortgage loans and make decisions on a portfolio-by-portfolio basis about adding to specific concentrations.

Interest Rate Risk Management

The objective of interest rate risk management is to minimize the effects that interest rate fluctuations have on the net present value of our assets, liabilities, and derivative instruments. Interest rate risk is measured using asset/liability net present value sensitivity analyses. Simulation tools serve as the primary means to gauge interest rate exposure. The net present value sensitivity analysis is the means by which our long-term interest rate exposure is evaluated. These analyses provide an understanding of the range of potential impacts on net interest revenue and portfolio equity caused by interest rate movements.

Interest rate risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument due to fluctuations in interest rates. Interest rate risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of our interest rate risk management extends beyond derivatives to include all interest risk sensitive financial instruments.

Our profitability may be directly affected by the level of, and fluctuations in, interest rates, which affect our ability to earn a spread between interest received on our loans and the cost of our borrowings, which are tied to yields on various United States Treasury obligations, interest rate swaps, or LIBOR. Our profitability is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in

interest rates could adversely affect our ability to purchase and originate loans. A significant decline in interest rates could increase the level of loan prepayments, thereby adversely affecting our net interest income. Declining interest rates, which often lead to an increase in the rate of loan prepayment, could also adversely impact our servicing income. In an effort to mitigate the effect of interest rate risk, we have reviewed our various mortgage products and have identified and modified those that have proven historically more susceptible to prepayments. We cannot assure you, however, that such modifications to our product line will effectively mitigate prepayment risk in the future.

Fluctuating interest rates may affect the net interest income earned by us resulting from the difference between the yield to us on loans held pending securitization and the interest paid by us for funds borrowed under our warehouse facilities, although we undertake to hedge our exposure to this risk by using Eurodollar futures, options on futures, interest rate swaps, and swaptions. We monitor the aggregate cash flow, projected net yield, and market value of our investment portfolio under various interest rate and loss assumptions.

We use several tools and risk management strategies to monitor and address interest rate risk. Such tools allow us to monitor and evaluate our exposure to these risks and to manage the risk profile of our investment portfolio in response to changes in the market risk. We cannot assure you, however, that we will adequately offset all risks associated with our investment portfolio.

The measurement of interest rate risk is meaningful only when all related risk items are aggregated and the net positions are identified. Financial instruments that we use to manage interest rate sensitivity include: interest rate swaps, caps and floors; financial futures and forwards; and financial options (called hedges). Historically, we measured the sensitivity of the current fair value of our mortgage loans held prior to securitization, mortgage loan commitments, securitized mortgage loans, and all hedge positions to changes in interest rates. Changes in interest rates are defined as instantaneous and sustained interest rate movements in 50 basis point increments across the yield curve. We estimated the fair value of our collateral assuming there would be no changes in interest rates from those at period end. Once we established the base case, we projected cash flows for each of the defined interest rate scenarios. Those projections were then compared with the base case to determine the estimated change to the fair value of our collateral and hedges. The table below illustrates the simulation analysis of the impact of a 100 and 200 basis point parallel shift in the yield curve upward or downward in interest rates on the fair value of our collateral and hedges at June 30, 2002.

	Interest rate simulation sensitivity analysis

	Changes in fair value that are stated below are derived based upon a parallel shift in the yield curve over a 24-month period. The base yield curve used in this analysis is the forward curve posted upon the close of business June 30, 2002 (1):

	Increase						Decrease

	+100 Bp			+200 Bp			- 100 Bp			- 200 Bp

Change in fair value of fixed rate mortgage loans held prior to securitization	$	(6,690,327	)	$	(13,380,655	)	$	6,690,327		$	13,380,655
Change in fair value of hedges related to fixed rate mortgage loans held prior to securitization		6,414,135			12,828,269			(6,414,135	)		(12,828,269	)
Change in fair value of securitized mortgage loans		(51,116,856	)		(102,233,712	)		51,116,856			102,233,712
Change in fair value of hedges related to securitized mortgage loans		4,790,584			17,110,584			(19,849,416	)		(32,169,416	)

Net change	$	(46,602,464	)	$	(85,675,514	)	$	31,543,632		$	70,616,682


	(1) The forward yield curve produces an interpolated 30 day LIBOR rate of 1.9% one month from June 30, 2002; 3.4% one year from June 30, 2002; 4.9% two years from June 30, 2002; and 6.1% five years from June 30, 2002.

Changes in fair value that are stated below are derived based upon immediate and parallel shifts in the yield curve. The base yield curve used in this analysis is the forward curve posted upon the close of business December 31, 2001:

	Increase						Decrease

	+100 Bp			+200 Bp			-100 Bp			-200 Bp

Change in fair value of fixed rate mortgage loans held prior to securitization	$	(6,450,218	)	$	(12,900,436	)	$	6,450,218		$	12,900,436
Change in fair value of hedges related to fixed rate mortgage loans held prior to securitization		1,600,000			3,200,000			(1,600,000	)		(3,200,000	)
Change in fair value of securitized mortgage loans		(28,106,200	)		(56,212,400	)		28,106,200			56,212,400
Change in fair value of hedges related to securitized mortgage loans		13,860,624			25,285,624			(10,625,966	)		(20,983,299	)

Net change	$	(19,095,794	)	$	(40,627,212	)	$	22,330,452		$	44,929,537

	The simulation analysis reflects our efforts to balance the repricing characteristics of our interest-earning assets and supporting funds.

	Managing Interest Rate Risk With Derivative Instruments

	We do not intend to implement any new derivative activity that, when aggregated into our total interest rate exposure, would cause us to exceed our established interest rate risk limits. We will use financial futures, forwards, and options contracts provided that:


	•	the transactions occur in a market with a size that reasonably ensures sufficient liquidity;

	•	the contract is traded on an approved exchange or, in the case of over-the-counter option contracts, is transacted with credit-appointed counterparty; and

	•	the types of contracts have been authorized for use by our hedge committee.

These instruments provide us flexibility in adjusting our interest rate risk position without exposure to principal risk and funding requirements. By using derivative instruments to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower funding requirement and a higher return on assets and net interest margin, but with a comparable level of net interest revenue and return on equity. Use of derivative instruments for speculative purposes is not permitted.

Part II. Other Information

Item 1. Legal Proceedings

None

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

On May 16, 2002, we held our annual stockholders’ meeting. There were 28,088,616 shares of common stock outstanding entitled to vote, and a total of 25,355,092 (90.27%) were represented at the meeting in person or by proxy. The following summarizes vote results of proposals submitted to our stockholders:

1. Proposal to elect three Class I Directors for terms expiring in 2005

2. Proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2002

FOR	AGAINST	ABSTAIN

25,089,496	233,494	32,102

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K


	(a)	Exhibits

	3.1	Amended and Restated Certificate of Incorporation of Saxon Capital, Inc.⁽¹⁾

	3.2	Amended and Restated Bylaws of Saxon Capital, Inc.⁽¹⁾

	4.1	Form of Common Stock Certificate⁽¹⁾

	4.2	Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.

	99.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.2	Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	________________________
	(1)	Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (Registration Statement No. 333-71052) declared effective by the SEC on January 14, 2002

	(b)	Reports on Form 8-K

		On June 27, 2002, the Company filed a Form 8-K reporting the resignation of Robert G. Partlow from his duties as Director, Executive Vice President, Chief Financial Officer and Treasurer of the Company, and a copy of the press release was filed as an exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
	SAXON CAPITAL, INC.
Dated: August 14, 2002
		By: /s/ Michael L. Sawyer

		Michael L. Sawyer
		Chief Executive Officer (authorized officer of registrant)
Dated: August 14, 2002
		By: /s/ Robert B. Eastep

		Robert B. Eastep
		Principal Accounting Officer

WITHHELD

Robert G. Partlow (1)

24,408,687

946,405

David D. Wesselink

25,100,202

254,890

Thomas J. Wageman

25,100,202

254,890