Friedman, Billings, Ramsey Group, Inc. Q2 2008 Earnings Call Transcript

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 |  About: FBR & Co. (FBRC)
by: SA Transcripts

Friedman, Billings, Ramsey Group, Inc. (NYSE:FBR)

Q2 2008 Earnings Call

July 24, 2008 9:00 am ET

Executives

Paul Beattie - Director of Investor Relations

Eric F. Billings - Chairman and Chief Executive Officer

J. Rock Tonkel Jr. - President and Chief Operating Officer

Kurt Ross Harrington - Chief Financial Officer

Analysts

Larry Callahan – Huntleigh Securities

Operator

Welcome everyone to the FBR Group’s second quarter 2008 earnings conference call. (Operator Instructions) Mr. Beattie, you may begin your conference.

Paul Beattie

Before we begin this morning’s call, I would like to remind everyone that statements concerning future performance, developments, events, market forecasts, revenues, expenses, earnings, run rates, and any other guidance on present or future periods constitute forward-looking statements. These forward-looking statements are subject to a number of factors, risks, and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances.

These factors include, but are not limited to the effect of demand for public offerings, activity in the secondary securities markets, interest rates, our cost of borrowing, interest spread, mortgage prepayment fees, mortgage delinquencies and defaults, the risks associated with merchant banking investments, the realization of gains and losses on principal investments, available technologies, competition for business and personnel, and general economic, political, and market conditions. Additional information concerning these factors that could cause results to differ materially is contained in the FBR Group’s Annual Report on Form 10-K and in Quarterly Reports on Form 10-Q.

I would now like to turn the call over to Eric Billings, Chairman and Chief Executive Officer of FBR Group. Also joining us this morning are FBR Group’s President and Chief Operating Officer, Rock Tonkel, and Kurt Harrington, Chief Financial Officer of FBR Group.

Eric F. Billings

As you have seen in the release, FBR Group reported a net after tax loss of $25.1 million or $0.17 per share in the second quarter. At the FBR Group level, excluding FBR Capital Markets, the loss for the quarter was $12.1 million. The Group level loss included a $5.8 million loss relating primarily to write-downs and losses in nonprime mortgage investments and a $900,000 cash operating loss for Group’s business during the quarter. Currently the company’s core mortgage investment business is operating at breakeven on a cash basis. FBR Group’s balance sheet remains strong with $661 million in consolidated capital and $343 million of common equity at the close of the quarter. Book value net of AOCI as of June 30, 2008, was $2.89 per share. At the Group level, we had $414 million of tangible capital of which $270 million or $1.79 per share is in cash and highly liquid agency mortgage backed securities.

Other highlights of the Group level balance sheet were mortgage related investments consisted of $2.6 billion of mortgage-backed securities of which $2.3 billion are agency backed predominantly floaters. $270 million are in AAA securities and $11 million are in nonprime investments. Long-term investment of $51 million including $39 million of merchant banking equity investments and $12 million of other investments primarily investment partnerships. The overall mortgage backed securities portfolio earned a spread of 114 basis points on an average balance of $2.3 billion during the second quarter. At the end of the quarter, nearly 90% of our liabilities had a minimum term of 6 months and a weighted average term of 9 months. We are maintaining leverage of approximately five times and we will redeploy additional capital as market conditions permit.

As noted in the release, going forward, the company intends to focus on maximizing return on equity on a number of fronts. Continuing to examine strategic alternatives to maximize the potential economic benefits from operating in loss tax carry forwards totalling approximately $670 million, redeploying capital to agency mortgage backed securities from pre-payments of non-agency AAA mortgage and liquidation of merchant banking portfolio assets, and continuing to reduce all general and administrative expenses. The capital we expect to redeploy without including the revaluation of non-agency assets totals approximately $144 million. We expect to receive a $28 million IRS tax refund in the third quarter along with additional funds from pre-payments, liquidations and capital invested in non-agency AAA securities, and other investments. During the second quarter, pre-payments and liquidations totalled $18 million. In addition, there are likely to be capital recoveries from the revaluation of non-agency AAA mortgages.

FBR Capital Markets released its earnings yesterday, and its results like those of the rest of the securities industry continue to be adversely impacted by credit market conditions and the slowdown of capital market transactions. The firm reported a $25.2 million loss and the lowest level of investment banking revenue in more than 7 years while its institutional brokerage business maintained its strong upward trend during the quarter. FBR Group’s share of this loss was $13 million. Also, during the quarter, FBR Capital Markets took advantage of its strong balance sheet strength to broaden its corporate finance capabilities through the establishment of a new convertible security origination and trading operation and to strengthen its investment banking and sales training teams to a series of senior level hires. It is FBR Capital Markets’ view that the duration of the securities industry downturn will be prolonged with curtailed capital markets activity both here and overseas. Given that outlook, it is aggressively implementing a cost reduction plan initiated in the first quarter that positions all of its businesses to work through this difficult environment. It is the firm’s intention to accomplish this while continuing to selectively enhance revenue generating capabilities in new and existing businesses.

FBR’s focussed equity capital markets model has always exhibited volatility in this type of environment. It is part of the firm’s strategic plan to broaden its revenue stream through the expansion of its businesses such as the development of additional lines of business, like the convertible security unit. As market conditions evolve, we fully expect FBR Capital Markets to participate in substantial capital raising opportunities that will arise as financial institutions in particular re-capitalize. It is FBR Group’s belief that with a strong balance sheet, cost reductions, and a history of doing well in market dislocations, FBR Capital Markets is well prepared to take advantage of opportunities in both the current environment and the ensuing recovery.

In closing, I want to emphasis two points with respect to FBR Group’s core business. First, we are operating today at cash breakeven in our core mortgage investment business. Second, we expect going forward to produce improved earnings from the redeployment of capital to agency mortgage-backed security from non-agency assets, the reduction of G&A expenses, and as market conditions permit, the prudent use of increased leverage on the agency portfolio.

I will now open the call for questions.

Question and Answer Session

Operator

(Operator instructions) Your first question comes from Larry Callahan – Huntleigh Securities.

Larry Callahan – Huntleigh Securities

I was wondering if you could give me some idea of how much of the AOCI negative balance is a reserve against the nonprime mortgage portfolio versus the agency portfolio and how that would contrast with the March 31st number which I think was about $112 million or so.

Kurt Ross Harrington

AOCI is about $90 million at the end of the quarter, down from, as you said, about $111. Zero of the AOCI is related to subprime.

Larry Callahan – Huntleigh Securities

I am sorry, AAA I meant, non-agency.

Kurt Ross Harrington

Just under $60 million of the AOCI amount is related to the AAAs.

Larry Callahan – Huntleigh Securities

What was that balance at March 31 out of the $111?

Kurt Ross Harrington

It was about $65.

Operator

This does conclude today’s FBR Group’s second quarter 2008 earnings call.

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