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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2003

OR

[ ] 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.

Incorporated pursuant to the Laws of Delaware

_________________

Internal Revenue Service
Employer Identification No. 54-2036376

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4860 Cox Road, Suite 300,
Glen Allen, Virginia, 23060

(804) 967-7400

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         

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No

As of May 8, 2003 there were 28,508,006 shares of our common stock, par value $0.01 per share, outstanding.

SAXON CAPITAL, INC.

Table of Contents

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Part I. Financial Information

Item 1. Financial Statements

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

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

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

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

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Saxon Capital, Inc.
Consolidated Statement of Stockholders’ Equity
(Dollars in thousands)
(unaudited)

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

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Saxon Capital, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)

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Notes to Condensed Consolidated Financial Statements
March 31, 2003 (unaudited)

(1)      Organization and Summary of Significant Accounting Policies

        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 of normal recurring accruals, necessary for a fair presentation.. The results of operations and other data for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results that may be expected for any other interim periods or the entire year ending December 31, 2003. 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, 2002.

        Saxon Capital, Inc. (the “Company”) (NASDAQ: SAXN) was formed on 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 Predecessor.

        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 — wholesale, correspondent, and retail. The Company may also, as servicer of record, purchase loans from prior securitizations pursuant to the clean-up call provisions of the trusts. Loans originated or purchased by the Company are secured by a mortgage on the borrower’s property. The Company then either sells these loans or accumulates such loans until a sufficient volume has been reached to securitize into an asset-backed security. In addition, the Company, through its wholly-owned subsidiary Saxon 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 of its subsidiaries in Fort Worth, Texas and Foothill Ranch, California and 22 branch offices located throughout the country at March 31, 2003. The focus of the Company is on originating and purchasing loans to homebuyers who generally do not meet the underwriting guidelines of one of the government-sponsored entities such as the Federal Home Loan Mortgage Corporation, “Freddie Mac”, the Federal National Mortgage Association, “Fannie Mae”, and the Government National Mortgage Association, “Ginnie Mae”. Use of the term “Company” throughout these Notes to Condensed Consolidated Financial Statements shall be deemed to refer to or include the applicable subsidiaries of the Company.

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        The unaudited condensed consolidated financial statements of the Company include the accounts of all wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 the allowance for loan loss, valuation of servicing rights, hedging activities, and income taxes.

        On each bond payment date, each securitization trust distributes payments to their related bondholders. These loan payments are collected by the trust between bond payment cut-off dates, which is typically the 17th of each month. Therefore, all principal payments received subsequent to the cut-off date are recorded as a trustee receivable on the consolidated balance sheet to offset the bond payment liability. These principal payments are retained by the trustee until the following payment date.

        Mortgage loans are held for investment 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), condominiums, 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.

        The Company structures securitizations as financing transactions, and accordingly holds the securitized mortgage loans for investment, as opposed to recognizing a sale transaction that would generate a gain or loss. 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 mortgage loans securitized through a securitization trust that becomes troubled. Accordingly, following a securitization, the mortgage loans remain on the consolidated balance sheet and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. The Company 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 one-time gain or loss upon completion of a securitization that was structured as a sale.

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        The Company evaluates the propriety of its allowance for loan loss monthly. Provision for loan losses on both securitized and unsecuritized mortgage loans is recorded to maintain the allowance for loan loss at an appropriate level for currently existing probable losses of principal, interest and fees, uncollected and advanced interest, and associated unamortized basis adjustments. Provisions are made for securitized loans to the extent that probable losses on these loans are borne by the Company under the terms of the securitization transactions. Provision amounts are charged as a current period expense to operations. The Company charges off uncollectible loans at the time of liquidation or at the time the loan is transferred to real estate owned. The Company defines a mortgage 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 the Company’s historical loss experience, and other relevant economic data. Allowance for loan loss estimates are reviewed monthly 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.

        Called loans are performing or non-performing mortgage loans acquired from outstanding securitizations pursuant to the clean-up call option that the servicer has. This option permits the servicer to purchase the remaining securitized loans when the total outstanding amount falls to a specified level, typically 10% of the original principal balance. Called loans are recorded on the consolidated balance sheets at the price paid. The Company generally intends to either securitize or sell the mortgage loans that it acquires in these transactions.

        Restricted cash of the Company includes amounts related to the Company’s deferred compensation plan and cash pledged as collateral to certain trusts. It may also include amounts related to prefunded securitizations. Prefunded amounts are held in a trust account and made available during the prefunding period to purchase subsequent mortgage loans. At the end of the prefunding period, any prefunded amounts not used to purchase mortgage loans are distributed as principal prepayments to the certificate holders or may be returned to the Company.

        The Company has securitized a portion of its servicing related advances related to the principal or interest advances the Company is obligated to make as servicer. This securitization is structured as a financing transaction. Accordingly, the servicing related advances remain on the consolidated balance sheet and the securitization indebtedness is recorded.

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        The Company recognizes as a separate asset the rights to service mortgage loans for others where such rights have been contractually separated from the underlying mortgage 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, specifically by year of capitalization. In addition, the Company periodically evaluates its mortgage servicing rights for other than temporary impairment to determine if the carrying value before the application of the valuation allowance is recoverable. When the Company determines that a portion of the mortgage servicing rights are not recoverable, the related mortgage servicing rights and the previously established valuation allowance are correspondingly reduced to reflect the other than temporary impairment. Since July 6, 2001, the Company’s securitizations are treated as financings, and accordingly the Company has not capitalized any mortgage servicing rights upon securitization. However, the Company does purchase third party servicing rights and accordingly recognizes the right to service those mortgage loans as an asset on its condensed consolidated balance sheets.

        When a loan is deemed to be uncollectible and the property is foreclosed, it is transferred to real estate owned at the lower of cost or net realizable value. Net realizable value is defined as the property’s fair value less estimated costs to sell. Individual real estate owned properties are periodically reviewed and additional impairments are recorded, as required. Costs of holding this real estate and related gains and losses on disposition are credited or charged to operations as incurred.

        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 instruments (“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 speculation or 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. At trade date, these instruments and their hedging relationship are identified, designated and documented.

        The Company currently accounts for its derivative financial instruments as cash flow hedges with the objective of hedging interest rate risk. On the date the derivative contract is entered into, the Company designates the derivative as a cash flow hedge, which hedges the Company’s variable rate debt. The fair value of the Company’s derivative instruments, along with any margin accounts associated with the contracts, are included in other assets. Any changes in fair value of derivative instruments are reported in other comprehensive income. Other comprehensive income is amortized or accreted into earnings through interest expense as the hedged transaction affects earnings. Changes in fair value of derivative instruments related to hedge ineffectiveness and activity that does not qualify for hedge treatment are recorded as adjustments to current period earnings.

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        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. Any change in the fair value of a derivative no longer qualifying as an effective hedge is recognized in current period earnings. When a hedge is terminated it is derecognized at the time of termination. For terminated hedges or hedges that no longer qualify as effective, the effective position previously recorded remains in other comprehensive income and continues to be amortized or accreted into earnings with the hedged item.

        If the hedged transaction is 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.

        The Company earns interest income on mortgage loans as contractually due on the mortgage loan. Nonaccrual mortgage 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. Accrued interest losses are provided for within the allowance for loan loss.

        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 the respective loans. 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 loans owned by the Company, and it is recorded as servicing income on the consolidated statements of operations for loans serviced for others. Prepayment penalty income is included within servicing income on the condensed consolidated statements of operations and represents all contractual income received for loans in which a borrower chose to prepay before a contractual time period. Prepayment penalty income is recorded when collected.

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        The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, the intrinsic value method, in accounting for its stock option plans for stock options issued to employees and non-employee directors. Accordingly, 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. Any options issued to consultants are expensed. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value method to stock-based employee compensation using the Black-Scholes option pricing model.

        Certain amounts for 2002 have been reclassified to conform to presentations adopted in 2003.

        In April 2002, the Financial Accounting Standards Board, (“FASB”) issued Statement of Financial Accounting Standards, (“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. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are 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 adopted the remaining provisions of SFAS 145 on January 1, 2003, and it did not have a material impact on the financial position, results of operations, or cash flows of the Company.

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        In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which rescinds Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a liability be recognized when it is incurred and should initially be measured and recorded at fair value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Management adopted the provisions of SFAS 146 on January 1, 2003, and it did not have a material impact on the financial position, results of operations, or cash flows of the Company.

        In November 2002, FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which provides interpretation of FASB Statements No. 5, 57, and 107 and rescinds FASB Interpretation No. 34. This Interpretation clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has guaranteed to a creditor on behalf of a third party. It also elaborates on disclosures a guarantor is to make in its interim and annual financial statements about any obligations under certain guarantees it has issued. The effective date for the initial recognition and initial measurement provisions of this Interpretation is for guarantees issued or modified after December 31, 2002; however, the disclosure requirements are effective for financial statements ending after December 15, 2002. The Company adopted the provisions of FASB Interpretation No. 45 on January 1, 2003, and it did not have a material impact on the financial position, results of operations, or cash flows of the Company as the Company is not currently acting as guarantor in any capacity related to circumstances described by FASB Interpretation No. 45.

        In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses consolidation by business enterprises of variable interest entities and the reporting and disclosure requirements of such. Variable interests are defined as contractual, ownership or other pecuniary interests in an entity that change with changes in the entity’s net asset value. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. The primary beneficiary is one that absorbs a majority of the expected losses, residual returns, or both as a result of holding variable interests. If an entity has a variable interest in which it is the primary beneficiary, the entity must then include the variable interest entity’s assets, liabilities, and results of operations in its consolidated financial statements. This Interpretation is immediately effective and must be applied to variable interest entities created after January 31, 2003 or in which an enterprise obtains an interest in after that date. In connection with the loans the Company services for others, the Company does not own any interests in the related securitized trusts or loan pools or have any other economic interests other than those associated with acting as servicer for the related mortgage loans. Effective February 1, 2003, management adopted Interpretation No. 46, and it did not have a material impact on the Company’s financial position, results of operations, or cash flows.

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        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, with certain exceptions. Management has not yet determined the impact, if any, of adoption of SFAS No. 149.

(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 were as follows:

(3)      Mortgage Loan Portfolio

        The Company’s subsidiaries purchase and originate fixed-rate and adjustable-rate mortgage loans that have a contractual maturity of up to 30 years. These mortgage loans are secured by single-family residential properties (which may include manufactured homes affixed to and classified as real property under applicable law), condominiums and one-to-four unit properties, and are being recorded at amortized cost. Most of these mortgage loans are pledged as collateral for a portion of the warehouse financing and securitization financing.

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        Approximately 23% of the property securing the Company’s mortgage loan portfolio was located in the state of California at both March 31, 2003 and December 31, 2002. No other state comprised more than 8% of our mortgage loan portfolio at March 31, 2003 or December 31, 2002.

        During the three months ended March 31, 2003, the Company completed the final funding of Saxon Asset Securities Trust (“SAST”) 2002-3 ($300.2 million in principal balances and $4.4 million in unamortized basis adjustments) and one additional securitization of mortgage loans ($750.0 million in principal balances and $15.6 million in unamortized basis adjustments). During the three months ended March 31, 2002, the Company completed one securitization of mortgage loans ($611.7 million in principal balances and $11.4 million in unamortized basis adjustments).

        Mortgage loans as of March 31, 2003 and December 31, 2002 were as follows:

(4)      Allowance for Loan Loss

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

        Activity related to the allowance for loan loss for the mortgage loan portfolio for the three months ended March 31, 2003 and 2002 is as follows:

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(5)      Mortgage Servicing Rights

        Mortgage servicing rights represent the carrying value of the Company’s servicing portfolio. As of March 31, 2003, the fair value of the mortgage servicing rights was measured at $36.2 million. The following table summarizes activity in mortgage servicing rights for the three months ended March 31, 2003 and 2002:

        The following table summarizes the activity of our valuation allowance for the three months ended March 31, 2003 and 2002:

        As of March 31, 2003, the following table summarizes the remaining estimated projected amortization expense for mortgage servicing rights for each of the five succeeding years and thereafter:

(6)      Servicing Related Advances

        When borrowers are delinquent in making monthly payments on mortgage loans included in a securitization, the Company generally is required to advance principal payments, interest payments, insurance premiums, property taxes, and property protection costs with respect to the delinquent mortgage loans to the extent that the advances are ultimately recoverable from proceeds of the related loan or mortgaged property.

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        Servicing related advances at March 31, 2003 and December 31, 2002 were as follows:

(7)      Warehouse Financing, Securitization Financing and Note Payable

        A summary of the amounts outstanding and available under these agreements at March 31, 2003 and December 31, 2002, respectively, is as follows:

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        The following table summarizes our contractual obligations at March 31, 2003:

        A summary of interest expense and the weighted average cost of funds is as follows:

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        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. At March 31, 2003, the Company was in compliance with all the covenants under the respective borrowing agreements.

(8)      Derivatives

        The Company accounts for its derivative financial instruments as cash flow hedges, which hedges the Company’s variable rate debt. At March 31, 2003 and December 31, 2002, the fair value of the Company’s derivatives totaled $(0.7) million and $0.3 million, respectively. The derivative fair value is held on the balance sheet as part of other assets. As of March 31, 2003 and December 31, 2002, hedge effectiveness recorded in other comprehensive income was $(3.4) million with a tax benefit of $(1.3) million and $8.6 million with a tax expense of $3.4 million, respectively. Other comprehensive income relating to cash flow hedging is amortized into earnings through interest expense as the hedge transaction affects earnings. The expected effect of amortization of the other comprehensive income on earnings for the next twelve months is $0.6 million of expense. Hedge ineffectiveness associated with hedges resulted in $0.2 million of expense and $0.1 million of income for the three months ended March 31, 2003 and 2002, respectively.

        At March 31, 2003 and December 31, 2002 the Company had $66.4 million and $72.6 million, respectively of basis adjustments related to fair value hedging activity. The basis adjustment is amortized into earnings through interest income based on the life of the previously hedged loans.

(9)      Stockholders’ Equity

        In connection with the Company’s private offering in 2001, the Company granted warrants to Friedman, Billings, Ramsey & Co., Inc. (“FBR”) to purchase an aggregate of 1,200,000 shares of our common stock, of which 1,080,000 shares are beneficially owned by FBR, at an exercise price of $10.00 per share. The warrants are exercisable for a period of five years, commencing on July 6, 2001. As of March 31, 2003, no warrants have been exercised.

        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 three months ended March 31, 2003 and 2002 was as follows:

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(10)      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 authorized for issuance under the Stock Incentive Plan is reset as of January 1 of each year at the greater 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 authorized to be issued under the Stock Incentive Plan may not exceed 6,000,000.

        The Compensation Committee of the Board of Directors 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 1-year life from that date.

        In addition to the 2,542,375 options outstanding at March 31, 2003 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 were outstanding at March 31, 2003.

        The following table summarizes the transactions relating to the Company’s stock options for the three months ended March 31, 2003:

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        The following table summarizes additional information concerning outstanding and exercisable stock options at March 31, 2003.

        As of March 31, 2003, no options have been granted to consultants. 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. For the three months ended March 31, 2003, the Company determined the pro-forma information as if the Company had accounted for stock options granted during 2003, 2002, and 2001 under the fair value method of SFAS 123. The weighted average fair value of options granted in the first quarter 2003 was $8.18. The weighted average fair values of options granted in 2002 and 2001 were $7.91 per share and $4.83 per share, respectively. The Black-Scholes option pricing model was used with the following weighted average assumptions for options issued in the respective years:

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(11)      Commitments and Contingencies

        The Company’s subsidiaries are obligated under non-cancelable operating leases for property and both operating and capital leases for equipment. Minimum annual rental payments as of March 31, 2003 are as follows:

        For the three months ended March 31, 2003 and 2002, rental and lease expense amounted to $2.0 million and $1.6 million, respectively.

         Mortgage Loans

        At March 31, 2003 and December 31, 2002, the Company’s subsidiaries had commitments to fund mortgage loans of approximately $238.1 million and $339.3 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.

        In connection with the approximately $2.1 billion of mortgage loans securitized by us in off balance sheet transactions since May 1996 and which are still outstanding as of March 31, 2003, we made representations and warranties about certain characteristics of the loans, the borrowers, and the underlying properties. In the event of a breach of these representations and warranties, we may be required to remove loans from a securitization and replace them with cash or substitute loans. At March 31, 2003 there were no such breaches for any loans that had been securitized.

         Legal Matters

        Because the nature of the business of the Company’s subsidiaries involve the collection of numerous accounts, the validity of liens and compliance with various state and federal lending laws, the Company or its subsidiaries are 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.

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         Insurance Policies

        As of March 31, 2003, the Company carried a primary directors and officers liability insurance policy for $10 million, excess directors and officer’s liability insurance policies totaling $40 million and key man insurance policies in the amount of $9.6 million. In addition, the Company carried a banker’s professional/lenders liability policy, a mortgage protection policy, a fiduciary liability policy and an employment practices liability policy for $10 million each; a financial institutions bond and a commercial umbrella coverage for $15 million each; a commercial general liability policy and a property insurance policy for $2 million per occurrence; and a business auto policy and worker’s compensation policy for $1 million per occurrence.

(12)      Related Party Transactions

        At March 31, 2003 and December 31, 2002, the Company had $10.0 million and $8.1 million, respectively, of unpaid principal balances within its mortgage loan portfolio related to mortgage loans originated for executive directors, officers and employees of the Company. As of both March 31, 2003 and December 31, 2002, the Company had $0.8 million of unpaid principal balances within its mortgage loan portfolio related to mortgage loans originated for its executive officers. These mortgage loans were underwritten to the Company’s underwriting guidelines. When making loans to our executive officers and 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. Effective December 1, 2002, the Company no longer renews or makes any new loans to its executive officers or directors.

(13)      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.

        Segment revenues and operating income amounts are evaluated and include the estimated fair value of mortgage loans originated assuming they were sold, servicing income, other income and expense, and general and administrative expenses. Estimated fair value of mortgage loans originated represents the amount in excess of the segment’s basis in its loan production that would be generated assuming the mortgage loans were sold.

        Certain amounts are not evaluated at the segment level and are included in the segment net operating income reconciliation below. The segment’s estimated fair value from a gain on sale of mortgage loans originated is required to be eliminated since the Company structures its securitizations as financing transactions. Net interest income is not allocated at a segment level since it is recorded once the loan production process is complete, and it is therefore included as a reconciling item below.

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        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.

(14)      Subsequent Events

        The CS First Boston repurchase facility was renewed on April 4, 2003, with the maximum committed amount being reduced to $100 million from $250 million at March 31, 2003. The facility also has a maximum uncommitted amount of $150 million. The facility will terminate on April 3, 2004.

        Additionally, the Merrill Lynch repurchase facility was renewed on May 9, 2003, increasing the maximum committed amount to $400 million from $250 million at March 31, 2003. The facility will terminate on May 7, 2004.

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

        This discussion should be read in conjunction with the condensed 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, 2002 (the “2002 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”). This report 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,” “is likely to,” “could,” “are confident that,” 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; future litigation developments; 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.

General

        This report, our 2002 Form 10-K, as well as all of our quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC, free of charge, through our website. Our website address is www.saxoncapitalinc.com. Our common stock is listed on the Nasdaq National Market under the symbol “SAXN.”

        Our business is conducted through our operating subsidiaries. We conduct mortgage loan originations, purchases, secondary marketing, master servicing, and other administrative functions 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.(“Saxon Mortgage Services”). Throughout our discussion of our business operations, words such as “we” and “our” are intended to include these operating subsidiaries.

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        We originate or purchase loans through three separate origination channels. Our wholesale channel originates or purchases loans through our network of approximately 4,000 independent brokers throughout the country. Our retail channel originates mortgage loans directly to borrowers through our retail branch network of 22 locations. Our correspondent channel purchases mortgage loans from approximately 400 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 several different secured and committed warehouse financing facilities. We then securitize our mortgage loans and pay off the associated warehouse borrowings. Since May 1996, we have securitized approximately $13.9 billion in mortgage loans through our securitization program. Since July 6, 2001, we structure our securitizations as financing transactions. These securitizations do not meet the qualifying special purpose entity criteria under SFAS 140 and related interpretations because after the loans are securitized, the securitization trust may acquire derivatives relating to beneficial interests retained by us; also as servicer, subject to applicable contractual provisions, we 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 consolidated balance sheet, and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. We 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.

Critical Accounting Policies

        Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For additional discussion on the application of these and other accounting policies, see Note 1 in the notes to the condensed consolidated financial statements.

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

• Allowance for Loan Loss;
• Mortgage Servicing Rights Valuation;
• Hedging; and
• Accounting for Income Taxes.

   Allowance for Loan Loss

        The allowance for loan loss is established through the provision for loan losses, which is charged to earnings on a monthly basis. The accounting estimate of the allowance for loan loss is considered a critical accounting estimate as significant changes in the mortgage loan portfolio, which includes both securitized and unsecuritized mortgage loans, and/or economic conditions may affect the allowance for loan loss and our results of operations. The assumptions used by management regarding these key estimates are highly uncertain and involve a great deal of judgment.

        Provisions are made to the allowance for loan loss for currently existing losses in the outstanding mortgage loan portfolio balances. Charge-offs to the provision are recorded at the time of liquidation or at the time the loan is transferred to real estate owned. The allowance for loan losses is regularly evaluated by management for propriety 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. An internally developed roll rate analysis, static pool analysis and historical losses are the primary tools used in analyzing our allowance for loan loss. These tools take into consideration historical information regarding delinquency and loss severity experience and apply that information to the portfolio. If actual results differ from our estimates, we may be required to adjust our provision accordingly. Likewise, the use of different estimates or assumptions could produce different provisions for loan losses. For example, as of March 31, 2003, if we were to assume a 10% increase in both delinquencies and loss severities, our allowance for loan loss and related provision would have increased by $3.2 million.

Mortgage Servicing Rights Valuation

        Mortgage servicing rights (“MSRs”) are recorded based on the present value of the future cash flows related to servicing the loan in a portfolio. The valuation of MSRs requires that we make estimates of numerous market assumptions. Interest rates, prepayment speeds, servicing costs, discount rates, and the payment performance of the underlying loans significantly affects our ongoing valuations and the rate of amortization of MSRs. In general, during periods of declining interest rates, the value of MSRs decline due to increasing prepayments attributable to increased mortgage refinancing activity.

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        The recorded values 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. We obtained independent third-party appraisals to determine the fair value of our MSRs at March 31, 2003 and will regularly obtain these appraisals. At March 31, 2003, key economic assumptions and the sensitivity of the current fair value for the MSRs to immediate changes in those assumptions were as follows:

        These sensitivities are hypothetical and are for illustrative purposes only. As the table above demonstrates, the methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, our determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on the MSR fair value. Changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may be associated with changes in another (for example, increases in market interest rates may result in lower prepayments, but credit losses may increase), which may magnify or counteract the sensitivities. Any measurement of an MSRs’ fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

        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 are 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. As demonstrated above, 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.

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Hedging

        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. At trade date, these instruments and their hedging relationship are identified, designated, and documented. 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 counterparty 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.

        All derivatives are recognized on the consolidated balance sheets at their fair value. On the date the derivative contract is entered into, we designate the derivative as a cash flow hedge, which hedges our variable rate debt. Changes in the fair value of derivatives are recorded in other assets. The determination of effectiveness is the primary assumption and estimate used in hedging. The effectiveness attributable to the hedged risk is recorded in other comprehensive income. Other comprehensive income is amortized or accreted into earnings through interest expense as the hedged transaction affects earnings. Accordingly, ineffectiveness related to changes in the fair value of hedging instruments is recognized in current period earnings.

Accounting for Income Taxes

        Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax asset. As of March 31, 2003, we have not recorded a valuation allowance on the deferred tax asset based on management’s belief that operating income will, more likely than not, be sufficient to realize the benefit of these assets over time. The evaluation of the need for a valuation allowance takes into consideration our recent earnings history, current tax position, and estimates of taxable income in the near term. The tax character (ordinary versus capital) and the carryforward periods of certain tax attributes such as capital losses and tax credits are also considered. Significant judgment is required in considering the relative impact of negative and positive evidence related to the ability to realize deferred tax assets. In the event that actual results differ from these estimates or if our current trend of positive operating income changes, we may be required to record a valuation allowance on our deferred tax assets, which could have a material adverse effect on our consolidated financial condition and results of operations.

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Mortgage Loan Portfolio

        Characteristics of the mortgage loans we own such as credit grade, coupon, loan-to-value, and prepayment speeds are provided in the following tables. These characteristics are important as they provide key indicators of the credit and prepayment risks inherent in our mortgage loan portfolio, which have a direct impact on our past and future operating performance.

Mortgage Loan Portfolio 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. Our ARM production is then 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 rate on ARMs once the initial rate period has lapsed is determined by adding the “gross 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 gross 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.

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        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 mortgage loan portfolio based on product type as of March 31, 2003 and December 31, 2002.

             Product Type                                                 March 31,2003        December 31, 2002
                                                                                (1)                   (1)
                                                                        ----------------        ----------------
             Adjustable rate mortgages   Adjustable rate mortgages......           1.01%                1.24%
                                         2 year hybrids.................          36.63%               34.84%
                                         3 year hybrids.................          24.44%               26.10%
                                         5 year hybrids.................           0.25%                0.23%
                                                                        ----------------        ----------------
                                              Total adjustable rate
                                          mortgages                           62.33%               62.41%
                                                                        ================        ================
              Fixed rate mortgages       Fifteen year...................           4.04%                4.07%
                                         Thirty year....................          22.44%               21.58%
                                         Balloons.......................           7.84%                9.01%
                                         Other..........................           3.35%                2.93%
                                                                        ----------------        ----------------
                                              Total fixed rate mortgages          37.67%               37.59%
                                                                        ================        ================

Mortgage Loan Portfolio by Borrower Risk Classification

        The following table sets forth information about our mortgage loan portfolio by borrower risk classification as of March 31, 2003 and December 31, 2002.

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