UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended June 30, 2000
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 1-15049
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FBR ASSET INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873198
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
Potomac Tower (703) 469-1000
1001 Nineteenth Street North (Registrant's telephone number
Arlington, Virginia 22209 including area code)
(Address of principal executive offices)
(zip code)
N/A
(former name)
Indicate by checkmark whether the Registrant (i) has filed all 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 short period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days:
Yes: X No
----- -----
As of August 10, 2000, the latest practicable date, there were 4,216,827 shares
of FBR Asset Investment Corporation's common stock outstanding.
FBR ASSET INVESTMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION Page
---------
ITEM 1 - Financial Statements and Notes
Statements of Financial Condition as of June 30, 2000
(unaudited) and as of December 31, 1999......................................................................... 1
Statements of Income for the Three and Six Months Ended
June 30, 2000 and 1999 (unaudited).............................................................................. 2
Statements of Changes in Shareholders' Equity for the
Six Months Ended June 30, 2000 (unaudited), and the Years
Ended December 31, 1999 and 1998................................................................................ 4
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (unaudited).............................................................................. 5
Notes to Financial Statements.................................................................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................................. 9
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................ 19
Item 2. Changes in Securities and Use of Proceeds................................................................ 19
Item 3. Defaults Upon Senior Securities.......................................................................... 19
Item 4. Submission of Matters to Vote of Security Holders........................................................ 19
Item 5. Other Information........................................................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................................................... 19
SIGNATURES......................................................................................................... 20
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES
FBR Asset Investment Corporation
Statements of Financial Condition as of June 30, 2000 (unaudited) and
December 31, 1999*
===========================================================================================================
As of June 30, 2000 As of December 31, 1999
-------------------- ------------------------
(unaudited)
ASSETS
Mortgage-backed securities, at fair value $193,366,426 $236,014,844
Cash and cash equivalents 6,494,041 13,417,467
Investments in equity securities, at fair value 44,278,609 49,647,865
Notes receivable 20,000,000 27,000,000
Dividends receivable 525,785 1,400,897
Prepaid expenses and other assets 303,472 253,516
Due from custodian -- 806,093
Interest receivable 1,197,086 1,639,778
------------ ------------
Total assets $266,165,419 $330,180,460
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Repurchase agreements $175,875,000 $221,714,000
Interest payable 185,552 487,222
Dividends payable 2,553,436 2,891,368
Management fees payable 297,280 237,167
Accounts payable and accrued expenses 106,179 129,677
Deferred revenue -- 178,305
------------ ------------
Total liabilities 179,017,447 225,637,739
------------ ------------
Shareholders' Equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized $ -- $ --
Common stock, par value $.01 per share,
200,000,000 shares authorized,
10,415,827 shares issued as of June
30, 2000, and December 31, 1999, respectively 104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (4,876,341) (12,982,359)
Retained deficit (21,585,172) (15,463,462)
Treasury stock, at cost, 6,160,100 shares
And 4,609,491 shares as of June 30,
2000 and December 31, 1999, respectively (80,591,866) (61,212,809)
------------ ------------
Total shareholders' equity 87,147,972 104,542,721
------------ ------------
Total liabilities and shareholders' equity $266,165,419 $330,180,460
============ ============
===========================================================================================================
*The accompanying notes are an integral part of these statements.
1
FBR Asset Investment Corporation
Statements of Income for the Three Months Ended June 30, 2000 and 1999
(unaudited)*
=====================================================================================================================
Three Months Ended June 30,
-----------------------------
2000 1999
---------- ----------
(unaudited) (unaudited)
Income:
Interest $4,558,480 $3,819,914
Dividends 1,355,641 1,599,349
---------- ----------
Total income 5,914,121 5,419,263
Expenses:
Interest expense 2,834,635 1,657,654
Management fee expense 226,174 328,425
Professional fees & other expenses 4,034 241,103
Amortization of stock options issued to manager -- 113,686
---------- ----------
Total expenses 3,064,843 2,340,868
---------- ----------
Realized (loss) gain on sale of available-for-sale equity securities (36,678) 743,353
Realized loss on sale of mortgage-backed securities (25,321) --
Recognized loss on available-for-sale equity securities (56,354) --
---------- ----------
Net income $2,730,925 $3,821,748
========== ==========
Basic and diluted earnings per share $0.59 $0.49
========== ==========
Weighted-average common and equivalent shares 4,643,526 7,769,314
========== ==========
=====================================================================================================================
*The accompanying notes are an integral part of these statements.
2
FBR Asset Investment Corporation
Statements of Income for the Six Months Ended June 30, 2000 and 1999
(unaudited)*
=====================================================================================================================
Six Months Ended June 30,
---------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
Income:
Interest $10,172,058 $ 7,745,578
Dividends 2,065,391 2,838,852
----------- -----------
Total income 12,237,449 10,584,430
Expenses:
Interest expense 5,807,444 3,382,129
Management fee expense 583,404 678,706
Professional fees & other expenses 264,411 509,383
Amortization of stock options issued to manager -- 227,373
----------- -----------
Total expenses 6,655,259 4,797,591
----------- -----------
Realized gain on sale of available-for-sale equity securities, net 579,207 743,353
Realized gain on sale of mortgage-backed securities, net 67,358 --
Recognized loss on available-for-sale equity securities (5,626,022) --
----------- -----------
Net income $ 602,733 $ 6,530,192
=========== ===========
Basic and diluted earnings per share $0.12 $0.81
=========== ===========
Weighted-average common and equivalent shares 5,021,065 8,109,353
=========== ===========
=====================================================================================================================
*The accompanying notes are an integral part of these statements.
3
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Six Months Ended
June 30, 2000 (unaudited), and the Years Ended December 31, 1999 and 1998
===================================================================================================================================
Additional Retained
Common Paid in Earnings Treasury
Stock Capital (Deficit) Stock
-------- ------------ ------------- -------------
Balance, December 31, 1997 $102,190 $189,528,668 $ 135,971 --
-------- ------------ ------------ ------------
Issuance of common stock 1,968 3,659,033 -- --
Repurchase of common stock -- -- -- (24,070,663)
Options issued to manager -- 909,492 -- --
Net income -- -- 1,588,235 --
Other comprehensive loss
Change in unrealized gain on available-for-sale securities -- -- -- --
Comprehensive loss
Dividends -- -- (11,149,785) --
-------- ------------ ------------ ------------
Balance, December 31, 1998 104,158 194,097,193 (9,425,579) (24,070,663)
-------- ------------ ------------ ------------
Repurchase of common stock -- -- -- (37,142,146)
Net income -- -- 5,142,589 --
Other comprehensive income
Change in unrealized loss on available-for-sale securities -- -- -- --
Comprehensive income
Dividends -- -- (11,180,472) --
-------- ------------ ------------ ------------
Balance, December 31, 1999 104,158 194,097,193 (15,463,462) (61,212,809)
-------- ------------ ------------ ------------
Repurchase of common stock -- -- -- (19,379,057)
Net Income -- -- 602,733 --
Other comprehensive income
Change in unrealized loss on available-for-sale securities -- -- -- --
Comprehensive income -- -- -- --
Dividends -- -- (6,724,443) --
-------- ------------ ------------ ------------
Balance, June 30, 2000 $104,158 $194,097,193 $(21,585,172) $(80,591,866)
======== ============ ============ ============
===================================================================================================================================
===================================================================================================================================
Accumulated
Other
Comprehensive Comprehensive
Income Income
(Loss) Total (Loss)
-------------- --------- ----------------
Balance, December 31, 1997 $ -- $ 189,766,829
------------- -------------
Issuance of common stock -- 3,661,001
Repurchase of common stock -- (24,070,663)
Options issued to manager -- 909,492
Net income -- 1,588,235 $ 1,588,235
Other comprehensive loss
Change in unrealized gain on available-for-sale securities (9,800,530) (9,800,530) (9,800,530)
-----------
Comprehensive loss $(8,212,295)
===========
Dividends -- (11,149,785)
------------- -----------
Balance, December 31, 1998 (9,800,530) 150,904,579
------------- -----------
Repurchase of common stock -- (37,142,146)
Net income -- 5,142,589 $ 5,142,589
Other comprehensive income
Change in unrealized loss on available-for-sale securities (3,181,829) (3,181,829) (3,181,829)
-----------
Comprehensive income $ 1,960,760
===========
Dividends -- (11,180,472)
------------- -----------
Balance, December 31, 1999 (12,982,359) 104,542,721
------------- -----------
Repurchase of common stock -- (19,379,057)
Net Income -- 602,733 $ 602,733
Other comprehensive income
Change in unrealized loss on available-for-sale securities 8,106,018 8,106,018 8,106,018
-----------
Comprehensive income -- -- $8,708.751
===========
Dividends -- (6,724,443)
------------- -----------
Balance, June 30, 2000 $ (4,876,341) $87,147,972
============= ===========
===================================================================================================================================
* The accompanying notes are an integral part of these Statements.
4
FBR Asset Investment Corporation
Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999
============================================================================================================================
For the Six Months Ended June 30,
-----------------------------------
2000 1999
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 602,733 $ 6,530,192
Adjustments to reconcile net income to net cash provided by operating
Activities
Realized and recognized losses on mortgage backed and available-for-sale
equity securities 7,078,039 --
Realized gain on sale of mortgage backed and available for sale equity
securities (2,098,582) (743,353)
Amortization 4,717 228,171
Premium amortization on mortgage-backed securities 140,290 385,264
Changes in operating assets and liabilities:
Due from custodian 806,093 --
Dividends receivable 875,112 141,742
Interest receivable 442,692 1,011,733
Prepaid expenses (49,956) --
Management fees payable 60,113 (1,129,460)
Accounts payable and accrued expenses (23,499) (85,485)
Interest payable (301,670) (129,011)
Due to custodian -- (2,041,230)
Deferred revenue (178,306) (166,397)
------------ ------------
Net cash provided by operating activities 7,357,776 4,002,166
Cash flows from investing activities:
Purchase of mortgage-backed securities (40,921,815) (9,888,384)
Investments in equity securities (1,801,410) (1,454,320)
Investments in notes receivable, net of repayments 7,000,000 1,847,862
Proceeds from sale of mortgage backed securities 69,687,543 --
Proceeds from sale of available-for-sale equity securities 12,348,207 6,690,173
Receipt of principal payments on mortgage-backed securities 11,686,705 16,969,474
------------ ------------
Net cash provided by investing activities 57,999,230 14,164,805
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (19,379,057) (18,913,675)
Repayments of repurchase agreements, net (45,839,000) (14,756,000)
Dividends paid (7,062,375) (5,304,929)
------------ ------------
Net cash used in financing activities (72,280,432) (38,974,604)
------------ ------------
Net decrease in cash and cash equivalents (6,923,426) (20,807,633)
Cash and cash equivalents, beginning of the period 13,417,467 41,144,326
------------ ------------
Cash and cash equivalents, end of the period 6,494,041 20,336,693
------------ ------------
Supplemental disclosure of non-cash investing activities:
Securities purchased but not settled $ __ $ 10,000,000
============================================================================================================================
*The accompanying notes are an integral part of these statements.
5
FBR ASSET INVESTMENT CORPORATION
Notes to Financial Statements (unaudited)
Note 1 Basis of Presentation
The financial statements of FBR Asset Investment Corp. ("FBR Asset" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q. Therefore, they do not include all information required by generally
accepted accounting principles for complete financial statements. The interim
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results for
the entire year. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999 and included on Form 10-K filed by the Company with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 Investments in Mortgage-Backed Securities
During the six months ended June 30, 2000, FBR Asset received proceeds of $69.7
million from the sale of mortgage-backed securities. The Company recorded $1.4
million in realized losses related to these sales. Concurrent with these sales,
FBR Asset terminated a related hedge position and recorded a $1.5 million gain.
During 1999, FBR Asset received proceeds of $160.8 million from the sale of
mortgage-backed securities. The Company recorded $851,464 in realized gains
related to this sale. Concurrent with this sale, FBR Asset terminated a related
hedge position and recorded a $1.2 million loss.
The following table summarizes FBR Asset's mortgage-backed securities as of June
30, 2000 and December 31, 1999:
Total Mortgage
June 30, 2000 Freddie Mac Fannie Mae Ginnie Mae Assets
- -------------------------------------------------- ------------ ------------- ------------ ---------------
Mortgage-backed securities,
Available-for-sale, principal $92,075,103 $ 62,896,042 $42,838,712 $197,809,857
Unamortized premium (discount) 468,015 763,712 611,676 1,843,403
----------- ------------ ----------- ------------
Amortized cost 92,543,118 63,659,754 43,450,388 199,653,260
Gross unrealized gains 32,629 6,615 __ 39,244
Gross unrealized losses (3,421,328) (1,828,894) (1,075,856) (6,326,078)
----------- ------------ ----------- ------------
Estimated fair value $89,154,419 $ 61,837,475 $42,374,532 $193,366,426
=========== ============ =========== ============
Total Mortgage
December 31, 1999 Freddie Mac Fannie Mae Ginnie Mae Assets
- -------------------------------------------------- ----------- ------------ ----------- --------------
Mortgage-backed securities,
Available-for-sale, principal $79,490,738 $107,859,276 $54,517,427 $241,867,441
Unamortized premium (discount) 359,594 (1,190,013) 829,206 (1,213)
----------- ------------ ----------- ------------
Amortized cost 79,850,332 106,669,263 55,346,633 241,866,228
Gross unrealized losses (2,797,261) (2,196,860) (857,263) (5,851,384)
----------- ------------ ----------- ------------
Estimated fair value $77,053,071 $104,472,403 $54,489,370 $236,014,844
=========== ============ =========== ============
6
Note 3 Repurchase Agreements
At June 30, 2000, FBR Asset had $175.9 million outstanding under repurchase
agreements with a weighted average borrowing rate of 6.66% as of the end of the
period and a remaining weighted-average term to maturity of 14 days. At June 30,
2000, mortgage-backed securities pledged against repurchase agreements had an
estimated fair value of $180.3 million. At June 30, 2000, the repurchase
agreements had remaining maturities of between 3 and 28 days.
As of December 31, 1999, FBR Asset had $221.7 million outstanding under
repurchase agreements with a weighted-average borrowing rate of 5.83% as of the
end of the period and a weighted-average remaining maturity of 45 days. At
December 31, 1999, mortgage-backed securities pledged had an estimated fair
value of $228.9 million. At December 31, 1999, the repurchase agreements had
remaining maturities of between 38 and 45 days.
Note 4 Interest Rate Swaps
At June 30, 2000 and December 31, 1999, FBR Asset was party to an interest rate
swap agreement that matures on June 1, 2001, and has a notional amount of $50
million, and a fair value of $582,388 and $468,422 at June 30, 2000, and
December 31, 1999, respectively. FBR Asset accounts for this interest rate swap
as a hedge and accordingly, its fair value has not been recorded in the
financial statements.
Note 5 Notes Receivable
As of June 30, 2000 and December 31, 1999, FBR Asset held a $20 million note
from Prime Retail, Inc. and Prime Retail, L.P. (together, "Prime Retail")
bearing interest at a rate of 15% per annum. The Prime Retail note matured June
30, 2000, but the maturity date was extended to August 14, 2000 with an
increased interest rate of 16% per annum for accrual periods after June 30,
2000. The Prime Retail note is secured by 49.9% equity interests in four
subsidiaries of Prime Retail, L.P. and by a 100% equity interest in another
subsidiary of Prime Retail, L.P., each of which subsidiaries owns commercial
real estate subject to mortgage debt.
Note 6 Comprehensive Income
Comprehensive income is a financial reporting methodology that includes certain
financial information that historically has not been recognized in the
calculation of net income. FBR Asset's only component of other comprehensive
income is the net unrealized loss on investments classified as available-for-
sale.
Note 7 Income Taxes
FBR Asset has elected to be taxed as a REIT under the Internal Revenue Code. To
qualify for tax treatment as a REIT, FBR Asset must meet certain income and
asset tests and distribution requirements. FBR Asset generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have a material adverse impact on FBR Asset's results or financial
condition. Furthermore, because FBR Asset's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize FBR
Asset's qualification as a REIT. No provision has been made for income taxes in
the accompanying financial statements, as FBR Asset believes it has met the
requirements, for all periods presented.
Note 8 Recent Accounting Pronouncements
In 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. This
statement is effective for all fiscal years beginning after June 15, 2000, and
generally requires that an entity recognize derivative financial instruments as
assets or liabilities and measure them at fair value. FBR Asset is currently
evaluating the impact of SFAS No. 133, but does not expect that the adoption
will have a material impact on its financial condition or future results of
operations based on its current hedging strategies.
Note 9 Shareholders' Equity
In September 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of FBR Asset's common stock. Through December 31, 1998, FBR
Asset had repurchased 1,872,300 shares for a cost of $24.1 million, or $12.86
average cost per share. On March 30, 1999, the Board of Directors authorized the
repurchase of up to an additional 2,000,000 shares of FBR Asset's common stock.
On December 16, 1999, the Board of Directors authorized the repurchase of up to
an additional 1,500,000
7
shares of FBR Asset's common stock. Between December 31, 1998, and December 31,
1999, FBR Asset repurchased an additional 2,737,191 shares of its common stock
for a cost of $37.1 million or $13.57 average cost per share. On March 16, 2000,
the Board of Directors authorized the repurchase of up to an additional
1,000,000 shares of FBR Asset's common stock. Between January 1, 2000, and June
30, 2000, FBR Asset repurchased 1,550,609 shares of its common stock for a cost
of $19.4 million or $12.50 average cost per share.
FBR Asset had outstanding, as of June 30, 2000 and December 31, 1999, 1,021,900
options to purchase common stock. These options have terms of eight to ten years
and have an exercise price of $20 per share.
Note 10 Equity Investments
At June 30, 2000, FBR Asset's equity investments had an aggregate cost basis of
$42.9 million, a fair value of $44.3 million, unrealized gains of $1.8 million
and unrealized losses of $0.4 million.
As of December 31, 1999, FBR Asset's equity investments had an aggregate cost
basis of $57.5 million, fair value of $49.6 million and unrealized losses of
$7.9 million.
Amount of Market Value at Market Value at
Equity Investments Investment(1) June 30, 2000 December 31, 1999
Anthracite Capital, Inc........................................ $10,084,268 $11,270,653 $10,084,268
Capital Automotive REIT........................................ 25,000,000 25,313,624 21,841,402
Chastain Capital Corporation................................... -- -- --
Imperial Credit Commercial Mortgage Inv. Corp.................. -- -- 10,237,500
Prime Retail, Inc.............................................. 270,156 156,304 694,688
Prime Retail, Inc., pfd........................................ 1,038,800 720,339 1,151,696
Resource Asset Investment Trust................................ 3,704,181 3,790,325 3,725,717
Encompass Services Corporation................................. 969,301 969,301 1,912,594
Atlas Pipeline Partners........................................ 1,801,410 2,058,063 --
----------- ----------- -----------
Total....................................................... $42,868,116 $44,278,609 $49,647,865
=========== =========== ===========
(1) As of June 30, 2000.
Note 11 Subsequent Events
On July 17, 2000, FBR Asset extended a $4 million loan to Prime Capital Funding
I, LLC ("Prime Capital"), pursuant to a Sixty-Day Loan and Security Agreement.
The note bears interest at a rate of 18% per annum and is secured by a pledge of
two mortgage notes owned by Prime Capital, with an aggregate principal balance
of approximately $11.25 million, both of which notes are secured by deeds of
trust on the same commercial property. This note is due in full on September
17, 2000.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, including,
without limitation, statements containing the words "believes," "plans,"
"anticipates," "expects" and words of similar import. Such forward-looking
statements related to future events and the future financial performance of FBR
Asset, involve known and unknown risk, uncertainties and other factors which may
cause the actual results, or performance and achievements of FBR Asset to be
materially different from the results or achievements expressed or implied by
such forward-looking statements. FBR Asset is not obligated to update any such
factors or to reflect the impact of actual future events or developments on such
forward-looking statements.
Overview
FBR Asset targets investments in real estate assets and real estate-related
companies. FBR Asset has invested, and intends to continue investing in, whole-
pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae, mortgage loans, mortgage-backed securities, real property, and
joint ventures formed to own real property. FBR Asset invests in some of these
assets indirectly through its investments in and loans made to REITs and other
companies.
As of June 30, 2000, FBR Asset had:
. mortgage-backed securities totaling $193.4 million, which were financed
with repurchase agreements totaling $175.9 million;
. investments in equity and debt securities of 6 companies with an original
total cost basis of $42.9 million and a total market value of $44.3
million; and
. a loan to 1 company totaling $20.0 million.
A summary of FBR Asset's current investments, cash and cash equivalents is set
forth at the end of this discussion.
Results of Operations
The following discussion sets forth the significant components of FBR Asset's
net income for the three-month periods ended June 30, 2000 and 1999.
Net Income
FBR Asset had net income for the three months ended June 30, 2000 of $2.7
million, or $0.59 per share, compared to net income of $3.8 million or $0.49 per
share for the corresponding period in 1999. The decrease in net income is
primarily attributable to a $1.2 million increase in interest expenses on FBR
Asset's repurchase agreements, quarter over quarter.
For the three months ended June 30, 2000, the weighted average annual yield on
FBR Asset's mortgage-backed securities was 6.43%. As of June 30, 2000, FBR Asset
had investments in 38 mortgage-backed securities. For the three months ended
June 30, 1999, the weighted average annual yield on FBR Asset's mortgage-backed
securities was 6.21%. As of June 30, 1999, FBR Asset had investments in 33
mortgage-backed securities.
FBR Asset's interest income and dividend income increased to $5.9 million for
the three months ended June 30, 2000 from $5.4 million for the three months
ended June 30, 1999. This 9.3% increase is primarily attributable to an increase
in FBR Asset's investment in mortgage-backed securities during the fourth
quarter of 1999, thereby increasing the amount of interest income generated by
the company's mortgage-backed security portfolio.
For the three months ended June 30, 2000, based on interest and dividend income
accrued on, and the weighted average carrying value of, equity securities and
promissory notes, the weighted average annual yield on FBR Asset's equity
securities and promissory notes was 14.77%, compared to 11.10% for the three
months ended June 30, 1999. The average annual yield on all investments
increased to 8.29% from 7.89%.The increase reflects the increase in investment
of cash in higher yielding promissory notes and the increase in the number of
higher yielding mortgage backed securities.
9
FBR Asset incurred interest expense of $2.8 million for the three months ended
June 30, 2000. This represents 90.3% of the total expenses for the period. FBR
Asset incurred interest expense of $1.7 million for the three months ended June
30,1999. This represents 73.9% of the total expenses for the period. This 64.7%
increase in interest expense reflects the 45.9% increase in weighted average
borrowings under repurchase agreements to $181.1 million from $124.1 million and
a corresponding increase in the borrowing rate for the three months ended June
30, 2000 compared to the three months ended June 30, 1999.
Management fees for the three months ended June 30, 2000, were $226,174 compared
to $328,425 for the three months ended June 30, 1999. The decrease is due to an
increase in FBR Asset's investment in mortgage-backed securities in 1999, and a
corresponding reduction in FBR Asset's cash account. The management fee FBR
Asset pays is greater for cash than for mortgage-backed securities.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $4,034 for the three months
ended June 30, 2000, and $241,103 for the three months ended June 30, 1999. The
decreased fees are attributable to the reduction of legal and audit fees related
to the recent registration statement of FBR Asset's stock.
The following discussion sets forth the significant components of FBR Asset's
net income for the six-month periods ended June 30, 2000 and 1999.
Net Income
FBR Asset had net income for the six months ended June 30, 2000 of $602,733, or
$0.12 per share, compared to net income of $6.5 million or $0.81 per share for
the corresponding period in 1999. The decrease in net income is primarily
attributable to a charge against income of $5.6 million, most of which was
recorded in the first quarter of 2000, to reflect the decline in value of four
of the company's available-for-sale equity investments.
For the six months ended June 30, 2000, the weighted average annual yield on FBR
Asset's mortgage-backed securities was 6.48%. For the six months ended June 30,
1999, the weighted average annual yield on FBR Asset's mortgage-backed
securities was 6.25%.
FBR Asset's interest income and dividend income increased to $12.2 million for
the six months ended June 30, 2000 from $10.6 million for the six months ended
June 30, 1999. This 15.1% increase is primarily attributable to an increase in
FBR Asset's investment in mortgage-backed securities during the fourth quarter
of 1999.
For the six months ended June 30, 2000, based on interest and dividend income
accrued on, and the weighted average carrying value of, equity securities and
promissory notes, the weighted average annual yield on FBR Asset's equity
securities and promissory notes was 12.80%, compared to 9.88% for the six months
ended June 30, 1999. The average annual yield on all investments increased to
8.00% from 7.46%.The increase reflects the increase in investment of cash in
higher yielding promissory notes and the increase in the number of higher
yielding mortgage backed securities.
FBR Asset incurred interest expense of $5.8 million for the six months ended
June 30, 2000. This represents 86.6% of the total expenses for the period. FBR
Asset incurred interest expense of $3.4 million for the six months ended June
30,1999. This represents 70.8% of the total expenses for the year. This 70.5%
increase reflects the 53.7% increase in weighted average borrowings under
repurchase agreements to $194.6 million from $126.6 million.
Management fees for the six months ended June 30, 2000, were $583,404 compared
to $678,706 for the six months ended June 30, 1999. The decrease is due to an
increase in FBR Asset's investment in mortgage-backed securities in 1999, and a
corresponding reduction in FBR Asset's cash account. The management fee FBR
Asset pays is greater for cash than for mortgage-backed securities.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $264,411 for the six months
ended June 30, 2000, and $509,383 for the six months ended June 30, 1999. The
decreased fees are attributable to the reduction of legal and audit fees related
to the recent registration statement of FBR Asset's stock.
Interest and Dividend Income
The following tables set forth information regarding the total amount of income
from interest and dividend earning assets and the resultant average yields for
the three and six months ended June 30, 2000 and 1999. Information is based on
daily average balances during the period.
10
Three Months Ended June 30, 2000
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
Mortgage securities available for sale $3,386,363 $211,154,403 6.43%
Investment in equity securities and
promissory notes/(1)/ 2,391,581 64,945,093 14.77%
Cash and cash equivalents 136,177 10,086,300 5.42%
---------- ------------ -----
Total/(3)/ $5,914,121 $286,185,796 8.29%
========== ============ =====
Three Months Ended June 30, 1999
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ----------- ------------
Mortgage securities available for sale $2,278,902 $147,306,489 6.21%
Investment in equity securities
and promissory notes/(2)/ 2,860,853 103,423,287 11.10%
Cash and cash equivalents 279,508 24,887,653 4.50%
---------- ------------ -----
Total/(3)/ $5,419,263 $275,617,429 7.89%
========== ============ =====
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC and Prime Retail, Inc.. Such amounts are
included as interest income in FBR Asset's statements of income included in
its financial statements.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Retail, Inc., Kennedy Wilson
Inc., and Brookdale Living Communities, Inc.. Such amounts are included as
interest income in FBR Asset's statements of income included in its
financial statements.
(3) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
Six Months Ended June 30, 2000
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ----------- ------------
Mortgage securities available for sale $ 7,214,051 $223,120,340 6.48%
Investment in equity securities and
promissory notes/(1)/ 4,752,578 74,502,397 12.80%
Cash and cash equivalents 270,820 9,178,834 5.92%
----------- ------------ -----
Total/(3)/ $12,237,449 $306,801,571 8.00%
=========== ============ =====
Six Months Ended June 30, 1999
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
Mortgage securities available for sale $ 4,701,607 $151,662,859 6.25%
Investment in equity securities
and promissory notes/(2)/ 5,267,293 107,497,152 9.88%
Cash and cash equivalents 615,530 26,767,566 4.64%
----------- ------------ ----
Total/(3)/ $10,584,430 $285,927,577 7.46%
=========== ============ ====
11
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC and Prime Retail, Inc.. Such amounts are
included as interest income in FBR Asset's statements of income included in
its financial statements.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Retail, Inc., Kennedy Wilson
Inc., and Brookdale Living Communities, Inc.. Such amounts are included as
interest income in FBR Asset's statements of income included in its
financial statements.
(3) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
Interest Expense
The following table sets forth information regarding the total amount of
interest expense from repurchase agreements, including the net amount payable
and receivable under the interest rate swap agreement and the resultant average
yields. Information is based on daily average balances during the reported
periods.
Weighted Weighted
Interest Average Average
Expense Balance Expense
---------- ----------------- ---------
Three Months Ended
June 30, 2000 $2,834,635 $181,101,846/(1)/ 6.28%
Three Months Ended
June 30, 1999 $1,657,654 $124,097,582/(2)/ 5.36%
Weighted Weighted
Interest Average Average
Expense Balance Expense
---------- ----------------- ---------
Six Months Ended
June 30, 2000 $5,807,444 $194,564,286/(1)/ 5.99%
Six Months Ended
June 30, 1999 $3,382,129 $126,557,757/(2)/ 5.39%
(1) At June 30, 2000, FBR Asset had $175,875,000 outstanding under repurchase
agreements, with a weighted-average remaining maturity of 14 days.
(2) At June 30, 1999, FBR Asset had $113,794,000 outstanding under repurchase
agreements, with a weighted-average remaining maturity of 19 days.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, among other assets.
FBR Asset held mortgage-backed securities of $193.4 million as of June 30, 2000.
FBR Asset held mortgage-backed securities of $140.9 million on June 30, 1999. At
December 31, 1999, FBR Asset held mortgage-backed securities equal to $236.0
million.
Premium and discount balances associated with the purchase of mortgage-backed
securities are amortized as a decrease or increase in interest income over the
life of the security. At June 30, 2000, the amount of unamortized premium, net
of discounts recorded in FBR Asset's statement of financial condition was $1.8
million. At December 31, 1999, the amount of unamortized discount, net of
premiums recorded in FBR Asset's statement of financial condition was $1,213.
12
Given FBR Asset's current portfolio composition, if mortgage principal repayment
rates increase over the life of the mortgage-backed securities comprising the
current portfolio, all other factors being equal, FBR Asset's net interest
income would decrease during the life of the mortgage-backed securities, as FBR
Asset would be required to amortize its net premium balance into income over a
shorter time period. Similarly, if mortgage principal repayment rates decrease
over the life of the mortgage-backed securities, all other factors being equal,
FBR Asset's net interest income would increase during the life of the mortgage-
backed securities, as FBR Asset would be required to amortize its net premium
balance over a longer time period.
FBR Asset received mortgage principal repayments equal to $11.7 million for the
six months ended June 30, 2000. FBR Asset received mortgage principal repayments
equal to $30.4 million for the year ended December 31, 1999.
At June 30, 2000, $1.4 million of net unrealized gains on equity securities and
$6.3 million of net unrealized losses on mortgage-backed securities were
included in FBR Asset's statement of financial condition as accumulated other
comprehensive loss. At December 31, 1999, $8.1 million of net unrealized losses
on equity securities and $4.9 million of net unrealized losses on mortgage-
backed securities were included in FBR Asset's statement of financial condition
as accumulated other comprehensive loss. See "Shareholders' Equity" elsewhere in
"Management's Discussion and Analysis" and Note 9 of Notes to Financial
Statements for further discussion.
Repurchase Agreements
To date, FBR Asset's debt has consisted mainly of borrowings collateralized by a
pledge of most of FBR Asset's mortgage-backed securities. FBR Asset has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with FBR Asset's financing
objectives.
FBR Asset had $175.9 million outstanding under repurchase agreements with
several financial institutions on June 30, 2000. FBR Asset had $221.7 million
outstanding under repurchase agreements on December 31, 1999. At June 30, 2000,
the ratio of the amounts due under repurchase agreement to shareholder's equity
was 2.02 to 1.
At June 30, 2000, the term to maturity of FBR Asset's borrowings had been
limited to 60 days with a weighted average remaining maturity of 14 days and a
weighted average cost of funds on outstanding borrowings of 6.66%.
At December 31, 1999, the term to maturity of FBR Asset's borrowings had been
limited to 60 days with a weighted average remaining maturity of 45 days and a
weighted average cost of funds on outstanding borrowings of 5.83%.
Contractual Commitments
FBR Asset is a party to an interest rate swap agreement to offset the potential
adverse effects of rising interest rates under some of its short-term repurchase
agreements. That agreement is with Salomon Brothers Holding Company Inc.
("Salomon") Salomon Smith Barney Holdings, Inc., the parent company of Salomon
Brothers Holding Inc., has a long-term debt rating of "A" by S&P. Under the swap
agreement with Salomon, FBR Asset receives quarterly payments of interest based
on three-month LIBOR and remits semi-annual payments based on a fixed interest
rate of approximately 5.96% based upon the $50 million notional amount of the
swap.
Capital Resources and Liquidity
Liquidity is a measurement of FBR Asset's ability to meet potential cash
requirements including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity consist of
repurchase agreements and maturities, distributions or principal payments on
mortgage- backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided FBR Asset with sufficient funding for its investment
needs. Potential future sources of liquidity for FBR Asset include existing cash
balances, borrowing capacity through margin accounts, and future issuances of
common, preferred stock or debt. FBR Asset believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives and fund operating expenses for at least the next twelve
months. FBR Asset may, however, seek debt or equity financings, in public or
private transactions, to provide capital for corporate purposes and/or strategic
business opportunities. There can be no assurance that FBR Asset will be able to
generate sufficient funds from future operations, or raise sufficient debt or
equity on acceptable terms, to take advantage of investment opportunities that
become available. Should FBR Asset's needs ever exceed these sources of
liquidity, management believes FBR Asset's mortgage-backed and equity securities
could be sold, in most circumstances, to provide cash.
13
For the six months ended June 30, 2000, FBR Asset's operating activities
resulted in net cash flows of $7.4 million. The primary source of operating cash
flow was interest on mortgage-backed securities, interest on notes receivable
and dividends from REIT investments. For the six months ended June 30, 1999, FBR
Asset's operating activities provided net cash flows of $4.0 million.
For the six months ended June 30, 2000, FBR Asset's investing activities
resulted in net cash provided of $58.0 million compared to net cash provided for
the six months ended June 30, 1999, of $14.2 million. The increase is primarily
attributable to proceeds from the sale of mortgage-backed securities.
For the six months ended June 30, 2000, net cash used in FBR Asset's financing
activities was $72.3 million compared to net cash used for the six months ended
June 30, 1999, of $39.0 million. The increase in cash used in financing
activities is primarily attributable to the repayment of amounts due under
repurchase agreements.
Shareholders' Equity
FBR Asset accounts for its investments in mortgage-backed securities and other
equity instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, FBR Asset has classified these investments
as "available-for-sale." Securities classified as available-for-sale are
reported at fair value, with temporary unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity as
accumulated other comprehensive income.
Also in accordance with SFAS 115, management must regularly evaluate whether
declines in the market value of its available-for-sale securities are other than
temporary. In performing this evaluation, FBR Asset looks to the financial
condition and business performance of each investment relative to that expected
at the time of purchase. FBR Asset also evaluates overall economic and industry-
specific conditions.
As of June 30, 2000, the value of the equity securities in FBR Asset's portfolio
had increased from the adjusted cost basis of $42.9 million to $44.3 million. As
of December 31, 1999, the value of the equity securities in FBR Asset's
portfolio had declined from the adjusted cost basis of $57.5 million to $49.6
million. Increases and declines are generally recorded as accumulated other
comprehensive income or loss in the statement of financial condition, except to
the extent they are deemed to be other than temporary.
If FBR Asset determines that declines are other than temporary, it records a
charge against income for the difference between an investment's cost basis and
its market value. For the six months ended June 30, 2000, FBR Asset recorded a
charge to reflect the decline in value of its investment in Prime Retail, Inc.'s
common and preferred stock, Encompass Service Corporation, and Resource Asset
Investment Trust of $5.6 million. For the year ended December 31, 1999, FBR
Asset recorded a charge to reflect the decline in value of its investment in
Anthracite Capital, Inc. and Imperial Credit Commercial Mortgage Investment
Corporation of $10.9 million which FBR Asset determined was other than
temporary.
In June 1998, FBR Asset's Board of Directors authorized a program to repurchase
up to 2,000,000 shares of FBR Asset's common stock. On March 30, 1999, FBR
Asset's Board authorized the repurchase of up to 2,000,000 additional shares of
FBR Asset's common stock. On December 16, 1999, the Board of Directors
authorized the repurchase of up to an additional 1,500,000 shares of FBR Asset's
common stock. On March 16, 2000, the Board of Directors authorized the
repurchase of up to an additional 1,000,000 shares of FBR Asset's common stock.
Between September 1998 and June 30, 2000, FBR Asset repurchased 6,160,100 shares
of its common stock for $80.6 million or $13.08 average cost per share.
Year 2000 Compliance
FBR Asset has dedicated resources over the past several years to address the
potential hardware, software, and other computer and technology issues and
related concerns associated with the transition to the Year 2000 and to confirm
that our service providers, BlackRock Financial Management, Inc. and Fixed
Income Discount Advisory Company, Inc., in particular, took similar measures. As
a result of those efforts, we have not experienced any material disruptions in
our operations in connection with, or following, the transition to the Year
2000. FBR Management and Friedman, Billings, Ramsey Group, Inc. have represented
to FBR Asset that the total cost to complete the Year 2000 compliance efforts is
estimated to have been less than $350,000.
14
FBR ASSET INVESTMENT CORPORATION
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of June 30, 2000, and
December 31, 1999.
As of June 30, 2000
--------------------------
Amount Percentage
Shares Percent Of Market Increase
Owned/(3)/ Ownership/(3 Investment Value (Decrease)
---------- ------------- ------------ ------------ ------------
Mortgage-Backed Securities N/A N/A $199,653,260 $193,366,426 (3.15%)
------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) 1,581,846 7.55% $ 10,084,268 $ 11,270,653 11.76%
Capital Automotive REIT
(CARS) 1,792,115 8.65% 25,000,000 25,313,624 1.25%
Chastain Capital
Corporation (CHAS) 700,000 9.53% -- -- 0.00%
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 900,000 3.16% -- -- 0.00%
Prime Retail, Inc. (PRT) 123,500 0.28% 270,156 156,304 (42.14%)
Prime Retail, Inc., pfd
(PRT pfd) 78,400 0.18% 1,038,800 720,339 (30.66%)
Resource Asset Investment
Trust (RAS) 344,575 5.56% 3,704,181 3,790,325 2.33%
Encompass Services
Corporation (ESR)/(4)/ 168,574 0.27% 969,301 969,301 0.00%
Atlas Pipeline Partners
(APL) 149,000 4.74% 1,801,410 2,058,063 14.25%
------------ ------------ ------
Total Equity Investments $ 42,868,116 $ 44,278,609 3.29%
------------ ------------ ------
Promissory Notes/(2)/
Prime Capital Holding,
LLC N/A N/A -- -- N/A
Prime Retail, L.P. N/A N/A 20,000,000 20,000,000 N/A
------------ ------------
Total Promissory Notes $ 20,000,000 $ 20,000,070 N/A
------------ ------------
Cash and Cash Equivalents N/A N/A $ 6,494,041 $ 6,494,041 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $269,015,417 $264,139,076 (1.81%)
============ ============
As of December 31, 1999
------------------------
Amount Percentage
of Market Increase
Investment Value (Decrease)
------------ ------------ ------------
Mortgage-Backed Securities $241,684,039 $236,014,844 (2.35%)
------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) $ 10,084,268 $ 10,084,268 0.00%
Capital Automotive REIT
(CARS) 25,000,000 21,841,402 (12.63%)
Chastain Capital
Corporation (CHAS) -- -- 0.00%
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 10,413,000 10,237,500 (1.69%)
Prime Retail, Inc. (PRT) 1,201,317 694,688 (42.17%)
Prime Retail, Inc., pfd
(PRT pfd) 1,454,320 1,151,696 (20.81%)
Resource Asset Investment
Trust (RAS) 5,292,516 3,725,717 (29.60%)
Encompass Services
Corporation (ESR)/(4)/ 4,053,180 1,912,594 (52.81%)
Atlas Pipeline Partners
(APL) -- -- 0.00%
------------ ------------
Total Equity Investments $ 57,498,601 $ 49,647,865 (13,65%)
------------ ------------ ------
Promissory Notes/(2)/
Prime Capital Holding,
LLC $ 7,000,000 $ 7,000,000 N/A
Prime Retail, L.P. 20,000,000 20,000,000 N/A
------------ ------------ ------
Total Promissory Notes $ 27,000,000 $ 27,000,000 N/A
------------ ------------
Cash and Cash Equivalents $ 13,417,467 $ 13,417,467 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $339,600,107 $326,080,176 (3.98)
============ ============ ------
(1) The symbols in parentheses next to the company names are the symbols of
those companies on Nasdaq or a national securities exchange. Each of these
companies is a reporting company under the Securities Exchange Act of 1934.
Information is available about these companies on the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates.
(3) As of March 31, 2000.
(4) Formerly Building One Services Corporation (BOSS)
15
FBR ASSET INVESTMENT CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that can result from a change
in the prices of equity securities in the equity market, a change in the value
of financial instruments as a result of changes in interest rates, a change in
the volatility of interest rates or, a change in the credit rating of an issuer.
FBR Asset is exposed to the following market risks as a result of its
investments in mortgage-backed securities and equity investments. None of these
investments are held for trading purposes.
Interest Rate Risk
FBR Asset is subject to interest rate risk as a result of its investments in
mortgage-backed securities and its financing with repurchase agreements, all of
which are interest rate sensitive financial instruments. FBR Asset is exposed to
interest rate risk that fluctuates based on changes in the level or volatility
of interest rates and mortgage prepayments and in the shape and slope of the
yield curve. FBR Asset attempts to hedge a portion of its exposure to interest
rate risk primarily through the use of interest rate swaps.
FBR Asset's primary risk is related to changes in both short and long term
interest rates, which affect the company in several ways. As interest rates
increase, the market value of the mortgage-backed securities may be expected to
decline, prepayment rates may be expected to go down and durations may be
expected to extend. An increase in interest rates is beneficial to the market
value of FBR Asset's swap position as the cash flows from the floating rate
portion increase under this scenario. The reverse is true for mortgage-backed
securities and the swap if interest rates decline.
The fair value of interest rate swap agreements that qualify as hedges is not
recorded for accounting purposes. The differential between amounts paid and
received under the swap agreements is recorded as an adjustment to the interest
expense incurred under the repurchase agreements. In the event of early
termination of a swap agreement, a gain or loss is recorded and the company
receives or makes a payment based on the fair value of the swap agreement.
The table that follows shows the expected change in market value for FBR Asset's
current mortgage-backed securities and interest rate swaps under several
interest rate "shocks." Interest rates are defined by the U.S. Treasury yield
curve. The changes in rates are assumed to occur instantaneously. It is further
assumed that the changes in rates occur uniformly across the yield curve and
that the level of LIBOR changes by the same amount as the yield curve. Actual
changes in market conditions are likely to be different from these assumptions.
Changes in value are measured as percentage changes from their respective values
presented in the column labeled "Value at 6/30/00." Actual results could differ
significantly from these estimates.
The change in value of the mortgage-backed securities also incorporates
assumptions regarding prepayments, which are based on a proprietary model. This
model forecasts prepayment speeds based, in part, on each security's issuing
agency (Fannie Mae, Ginnie Mae or Freddie Mac), coupon, age, prior exposure to
refinancing opportunities, the interest rate distribution of the underlying
loans, and an overall analysis of historical prepayment patterns under a variety
of past interest rate conditions.
16
Value at
6/30/00
with 100
Value at 6/30/00 basis point
with 100 basis decrease in
Value at point increase Percent interest Percent
6/30/00/(1)/ in interest rates Change rates Change
---------------- ----------------- ------- ---------------- -------
Assets
Mortgage securities $ 193,366,426 $ 186,928,005 (3.33%) $ 200,687,765 3.79%
Other 72,798,993 72,798,993 72,798,993
---------------- --------------- ---------------
Total Assets $ 266,165,419 $ 259,726,998 (2.42%) $ 273,486,758 2.75%
================ =============== ===============
Liabilities
Interest rate swap $ (582,388) $ (919,958)/(2)/ $ (237,684)/(2)/
Other 179,017,447 179,017,447 179,017,447
---------------- --------------- ---------------
Total Liabilities $ 178,435,059 $ 178,097,489 (0.19%) $ 178,779,763 0.19%
---------------- --------------- ---------------
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated other
comprehensive income (loss) $ (4,293,953) $ (10,394,804) (142.08%) 2,682,682 162.48%
Retained deficit (24,585,172) (21,585,172) (21,585,172)
Treasury stock $ (80,591,866) $ (80,591,866) (80,591,866)
---------------- --------------- ---------------
Total Shareholders' Equity $ 87,730,360/(2)/ $ 81,629,509 (6.95%) $ 94,706,995 7.95%
---------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity $ 266,165,419 $ 259,726,998 (2.42%) $ 273,486,758 2.75%
================ =============== ===============
(1) Includes Accrued Interest.
(2) In accordance with GAAP, the fair value of interest rate swaps accounted
for as hedges is not recorded. Accordingly, the carrying value of the
interest rate swap in the company's financial statements is $0. See Note 4
to Notes to Financial Statements. The fair value of the interest rate swap
is based on quoted market prices as of June 30, 2000. As of June 30, 2000,
interest payments received under the swap agreement were based on an
interest rate of 6.87% while interest payments made were based on an
interest rate of 5.96%.
As shown above, the portfolio generally will benefit more from a decline in
interest rates than it will be adversely affected by a similar-scale increase.
This effectively may limit investors' upside potential in a market rally.
The value of FBR Asset's investments in other companies is also likely to be
affected by significant changes in interest rates. First, many of the companies
are exposed to risks similar to those identified above as being applicable to
FBR Asset's direct investments. Second, the REITs in which FBR Asset has
invested tend to trade on a yield basis. As interest rates increase, the yield
required by investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally, changes in
interest rates often affect market prices of equity securities generally.
Because each of the companies in which FBR Asset invests has its own interest
rate risk management process, it is not feasible for us to quantify the
potential impact that interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which FBR Asset has
invested.
Equity Price Risk
FBR Asset is exposed to equity price risk as a result of its investments in
equity securities of REITs and other real estate related companies. Equity price
risk changes as the volatility of equity prices changes or the values of
corresponding equity indices change.
While it is impossible to exactly project what factors may affect the prices of
equity sectors and how much the affect might be, the table below illustrates the
impact a ten percent increase and a ten percent decrease in the price of the
equities held by FBR Asset would have on the value of the total assets and the
book value of FBR Asset as of June 30, 2000.
17
Value at Value at
June 30, 2000 with June 30, 2000 with
Value at 10% increase Percent 10% decrease Percent
June 30, 2000 in price Change in price Change
-------------- ------------------- -------- ------------------- --------
Assets
Equity securities $ 44,278,609 $ 48,706,470 10.00% $ 39,850,748 -10.00%
Other 221,886,810 221,886,810 221,886,810
------------ ------------ ------------
Total Assets $266,165,419 $270,593,280 1.66% $261,737,558 -1.66%
Liabilities $179,017,447 $179,017,447 $179,017,447
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated comprehensive
Loss (4,876,341) (448,480) 90.80% (9,304,202) -90.80%
Retained deficit (21,585,172) (21,585,172) (21,585,172)
Treasury stock (80,591,866) (80,591,866) (80,591,866)
------------ ------------ ------------
Total
Shareholders' Equity $ 87,147,972 $ 91,575,833 5.08% $ 82,720,111 -5.08%
Total Liabilities and Shareholders'
Equity $266,165,419 $270,593,280 1.66% $261,737,558 -1.66%
============ ============ ============
Book value per share $20.48 $21.52 5.08% $19.44 -5.08%
============ ============ ============
Except to the extent that FBR Asset sells its equity investments or a decrease
in market value is deemed to be other than temporary, an increase or decrease in
the market value of those assets will not directly affect FBR Asset's earnings,
however an increase or decrease in interest rates would affect the market value
of the assets owned by the companies in which FBR Asset invests. Consequently,
if those companies' earnings are affected by changes in the market value of
their assets, that could in turn impact their ability to pay dividends, which
could in turn affect FBR Asset's earnings. If FBR Asset had sold all of its
equity investments on June 30, 2000, the company would have realized a gain of
approximately $1.4 million which would have been included in earnings.
Developments Since June 30, 2000
On July 17, 2000, FBR Asset extended a $4 million loan to Prime Capital Funding
I, LLC ("Prime Capital"), pursuant to a Sixty-Day Loan and Security Agreement.
The note bears interest at a rate of 18% per annum and is secured by a pledge of
two mortgage notes owned by Prime Capital, with an aggregate principal balance
of approximately $11.25 million, both of which notes are secured by deeds of
trust on the same commercial property. This note is due in full on September
17, 2000.
18
FBR ASSET INVESTMENT CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its Annual meeting of Shareholders on June 15, 2000,
at which shareholders took the following actions:
1. The election of five directors nominated to serve until the next Annual
Meeting
2. The ratification of the appointment of Arthur Andersen LLP as the Company's
independent auditors for 2000
The results of the voting in connection with the preceding items were as
follows:
1. Election of Directors: A total of 4,288,758 votes were received for this
item
For Against Abstain
---------- --------- -------
Emanuel J. Friedman 4,287,258 --- 1,500
Eric F. Billings 4,287,258 --- 1,500
Stephen D. Harlan 4,287,258 --- 1,500
Russell C. Lindner 4,287,258 --- 1,500
William R. Swanson 4,287,258 --- 1,500
2. Ratification of the Appointment of Arthur Andersen LLP: A total of 4,288,758
votes were received for this item.
For Against Abstain
--------- ------------- -----------
4,287,258 1,500 ---
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and
Exchange Act of 1934 on September 27, 1999. The common stock is listed on the
American Stock Exchange and its symbol is "FB."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
19
SIGNATURE
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.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
Date: August 14, 2000 By: /s/ Kurt R. Harrington
-------------------------------------
Kurt R. Harrington
Chief Financial Officer and Treasurer/
Principal Financial and Accounting Officer
20