Friedman, Billings, Ramsey Group, Inc. (NYSE: FBR) reported a net after-tax loss of $25.1 million for the quarter ended June 30, 2008, or $0.17 per share (diluted), compared to net after-tax earnings of $10.2 million, or $0.06 per share (diluted), for the second quarter of 2007.
FBR Group's net after-tax earnings for the first six months of 2008 were $20.1 million, or $0.13 per share (diluted), compared to a net after-tax loss of $177.5 million, or $1.03 per share (diluted) in first six months of 2007.
The second quarter 2008 results reflect:
-- a $0.9 million cash operating loss for FBR Group's core mortgage investment business during the quarter,
-- a $5.8 million loss relating primarily to write-downs and losses in non-prime mortgage investments, and
-- a $13.0 million loss, representing FBR Group's proportionate share of 51%-owned FBR Capital Markets Corporation's (FBR Capital Markets) (NASDAQ: FBCM) second quarter loss.
Book value net of Accumulated Other Comprehensive Income (AOCI) as of June 30, 2008 was $2.89 per share compared to book value net of AOCI of $3.02 as of March 31, 2008. Excluding FBR Group's 51% ownership interest in FBR Capital Markets, FBR Group had total tangible capital at the end of the second quarter of $414 million, including $318 million of trust preferred securities.
As of June 30, 2008, approximately $270 million of tangible capital, or $1.79 per share, was invested in cash and readily marketable agency securities. The company expects that the remaining $144 million of tangible capital, including a $28 million IRS tax refund expected in the third quarter of 2008, will be redeployed over time to agency mortgage-backed securities. During the second quarter, $18 million of liquidations and pay-downs of capital invested in non-agency AAA securities and other investments was recovered and will be redeployed to the agency portfolio. Remaining non-prime investments totaled approximately $11 million at the end of the quarter.
"Increased liquidity during the quarter afforded us the opportunity to patiently expand the agency portfolio and, correspondingly, net interest income while maintaining leverage of approximately five times," said J. Rock Tonkel, Jr., President and Chief Operating Officer of FBR Group. "As a consequence, operating results on a cash basis for the company's core mortgage investing business are now at breakeven."
Looking 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 benefit from operating and capital-loss tax carry-forwards totaling approximately $670 million,
-- redeploying capital realized from repayments and the revaluation of non-agency AAA mortgage and merchant banking portfolio assets, and
-- continuing to reduce all general and administrative expenses.
Mortgage Investment Portfolio
Excluding FBR Capital Markets, FBR Group's investments in mortgage-backed securities (MBS), primarily government agency securities, averaged $2.3 billion with a one-month CPR of 12.9, and an ending net premium of $5.8 million. The net yield on MBS for the second quarter was 3.96% with a corresponding cost of funds of 2.82% for a net spread of 1.14%. At the end of the quarter, total MBS was $2.5 billion with a yield of 3.68% and a cost of funds of 2.55% for a net spread of 1.13%.
Merchant Banking
Excluding FBR Capital Markets, the total value of the merchant banking investments held by FBR Group at the close of the second quarter was $38.9 million. During the quarter, $4.7 million in merchant banking investments were sold at a gain. No additional investments were made in the portfolio during the quarter.
FBR Capital Markets Corporation
FBR Capital Markets Corporation reported a net after-tax loss of $25.2 million, or $0.39 per share (diluted), for the quarter ended June 30, 2008 compared to net after-tax earnings of $21.8 million, or $0.34 per share (diluted) in the second quarter of 2007. For the six months ending June 30, 2008, FBR Capital Markets lost $35.4 million after tax, or $0.55 per share (diluted), compared to after-tax earnings of $32.8 million, or $0.51 per share (diluted), for the first half of 2007.
Net revenues for the second quarter were $50.5 million compared to net revenues of $104.0 million in the first quarter of 2008 and $169.5 million in the second quarter of 2007. Net revenues for the first six months of 2008 were $154.5 million compared to net revenues of $312.6 million for the first six months of 2007.
During the quarter, FBR Capital Markets broadened its corporate finance capabilities through the establishment of a new convertible securities origination and trading operation and strengthened its investment banking and sales/trading teams through a series of senior-level hires. At the same time, in light of what it believes will be a prolonged difficult economic environment for the securities industry, the firm also is taking steps to further reduce expenses across its entire organization. -- Friedman, Billings, Ramsey Group, Inc.
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