Exhibit 99.3
First Quarter 2003
Friedman, Billings, Ramsey Group, Inc.
Earnings Conference Call Script
Wednesday, May 7, 2003
[Speaker: Kurt Harrington ]
Good Morning. This is Kurt Harrington, Chief Financial Officer of Friedman,
Billings, Ramsey Group, Inc.
Before we begin this morning's earnings 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, interest spreads, mortgage prepayment
speeds, the risks associated with merchant banking investments, available
technologies, competition for business and personnel, and general economic,
political, and market conditions. Additional information concerning factors that
could cause results to differ materially is contained in FBR Group's Annual
Report on Form 10-K and quarterly reports on Form 10-Q.
I would now like to turn over the call to FBR Group's Co-Chairmen and
Co-Chief Executive Officers, Emanuel Friedman and Eric Billings. Also joining us
this morning are Robert Smith, FBR's Chief Operating Officer, Rock Tonkel, Head
of Investment Banking and Rick Hendrix, Chief Investment Officer.
[New speaker: Manny Friedman]
Thank you and good morning. Today we announced 1st quarter 2003
results. It was a great quarter for the company. We are very excited about the
closing of our merger during the quarter. It is one of the most significant
events in the history of the company. We are already seeing a major impact from
the merger on our capital markets business. We are presently engaged in 31 lead
managed capital raising merger and acquisition deals that represent more than
$3.5 billion of potential value. To put this in context, in the latest quarter
we completed two lead managed and five merger and acquisition deals worth a
total of $355 million. As you can see in our release this morning our $0.34
quarterly dividend is fully supported by the balance sheet alone.
For all but the last day of the quarter, our results reflect only the
pre-merger FBR Group. We are therefore also providing our results on a pro forma
basis for our merger with FBR Asset. In summary, our first quarter results are
the following:
- - $0.12 per share, which was comparable to the same quarter a year ago
had we been a full taxpayer.
- - $0.24 per share pro forma for the merger.
Note that the pro forma results include one time merger related
expenses equal to $0.02 per share and in addition the negative impact
of purchase accounting adjustments equaling an additional $0.02 per
share. Importantly, with the mortgage-backed portfolio at $ 5 billion
on March 31st our leverage in the mortgage-backed portfolio is at the
low end of our target range, and excess capital was not fully deployed,
pending the merger. Subsequent to the end of the quarter, we have
entered into contracts to purchase MBS that would result in a portfolio
of approximately $7.5 billion by June 30th, meeting our targeted asset
levels.
We clearly expect that our earnings in the coming quarters will support
our $0.34 dividend with the deployment of our excess capital at targeted
leverage levels in the mortgage backed portfolio.
Obviously, these numbers illustrate the tremendous strength of the new
combined platform. The diversification resulting from the merger allows the new
combined company to weather poor markets such as last quarter's, while
preserving the potential for growth.
Despite the pressures on the securities industry and our broker dealer
operations, we are very optimistic about FBR's prospects. Going forward, the
combined strength of our investment banking pipeline, which we just discussed,
our continued penetration of major institutional accounts, the growth of assets
under management, our continued expense discipline, and expanded capital base
with a relatively unleveraged balance sheet enable us to strengthen and expand
our platform through selective hiring and the prudent addition of new business.
In fact, the weakness that exists in the securities industry continues to
present significant opportunities for us. We have greater resources available to
us - in terms of both financial capital and human capital - than ever before, at
a time when there is great demand for our services from investors and issuers
alike, and at a time when many of our competitors are facing unprecedented
economic and regulatory pressures. Specifically, since the beginning of the
year, we have hired 6 investment bankers at the vice president level or above,
including 4 managing directors (in real estate, financial institutions,
technology and diversified industries). We have also added 5 research analysts
and 5 institutional brokers and traders.
In summary, we are excited about our prospects, and reiterate the 12
month guidance for earnings and dividends provided in February.
Now I would like to hand the call over to Eric Billings who will
discuss the quarterly results and outlook for the balance of the year.
[New Speaker: Eric Billings]
Thanks Manny.
I would like to speak about each of our five profit centers - mortgage
backed securities, merchant banking, investment banking, institutional brokerage
and asset management.
We take a conservative approach when deploying capital in the mortgage
backed strategy. As you have seen historically, we have consistently met and
exceeded our dividend targets while maintaining in many environments lower
leverage than industry levels. Preservation of capital is our guiding principal.
In fact, in achieving our new asset target of $7.5 billion, the company will
only have leverage of approximately 7.5x. We have constructed a portfolio with
the following strengths:
1. Triple A rated agency-backed MBS securities
2. low leverage
3. low premium
4. substantially all adjustable-rate securities
We believe this strategy combined with the balance provided by our merchant
banking business allows us to be opportunistic and patient in deploying our
mortgage-backed securities strategy to achieve very acceptable risk-adjusted
returns.
We manage our funding strategy by:
1. maintaining multiple counter-parties to diversify our funding resources 2.
holding assets that can be financed in varying market environments 3. hedging up
to two-thirds of our liabilities by locking in funding costs up to a one year
term.
For the first quarter, MBS assets averaged $5.74 billion at an average net
spread of 230 basis points and ended the quarter at $5.0 billion. The portfolio
continued to have a low duration of 1.21 at March 31, 2003 and 100% of our
mortgage-backed securities were in the form of adjustable rate mortgages. As
Manny mentioned, pursuant to contracts entered into during the second quarter we
will have increased our assets by June 30 to approximately $7.5 billion by
deploying, as we had previously stated, our excess capital. The additional $2.5
billion of mortgage-backed purchases will add substantially to earnings and
comfortably support the dividend.
Furthermore, starting in mid-July 2003, the company's cash cost of
financing will fall by approximately 80 basis points on $3 billion of funding,
which will reduce the overall cost of financing by approximately 40 basis points
as the interest rate swaps expire and are replaced by new swaps that have
already been executed that extend into 2004.
Our merchant banking investments at March 31, 2003 equaled $173 million.
During the first three months of 2003 we made 1 new merchant banking investment
totaling $6.8 million in Accredited Home Lenders. Since the end of the quarter,
we have seen substantial appreciation broadly throughout our mortgage-backed
portfolio.
Our internal discipline and strategy is to measure every merchant banking
investment continuously against the returns we achieve in the mortgage backed
securities portfolio. In fact, the historic FBR Asset merchant banking portfolio
has achieved returns which have exceeded the outstanding returns realized in the
mortgage backed securities portfolio. While the long term performance of this
portfolio has historically been extremely attractive, realized results have
varied from quarter to quarter.
In investment banking, during Q1 2003, a break-even quarter for FBR, we
lead-managed 2 underwritings and 5 M&A transactions totaling $355 million in
transaction value. Among these was one of only 4 U.S. issuer IPOs completed
during the quarter - Accredited Home Lenders - which has been the best
performing IPO of the year.
Looking forward, despite the difficult market conditions in the first part
of the year, we remain very optimistic about the prospects of our investment
banking business for the balance of the year. Specifically, our filed backlog
includes two large IPOs totaling approximately $740 million of filed transaction
value - one in diversified industries and one in real estate.
More important, as of today, we are engaged on 31 lead managed capital
raising and M&A transactions representing more than $3.5 billion of potential
transaction value. Again, this contrasts with the seven transactions and $355
million of value that we closed in the first quarter. We believe that this is
further evidence of the impact that our merger is having on our capital markets
business. We are already seeing a strong positive reaction among potential
middle market clients that leads us to believe that this is only the beginning
of these benefits.
As a result, we are reiterating the guidance that we provided in February
of $150 million in expected investment banking revenue for the full year, noting
as we always do that this is probably our most volatile revenue line, and the
most market-dependent.
In institutional brokerage, our revenue in the first quarter obviously
reflected a very difficult capital market, and our slow new issue calendar.
However, it is important to note that in the last 6 months we have added
salespeople, traders and research analysts, bringing our total to 54
institutional brokers, 32 traders and 67 research analysts as of March 31st. The
underlying potential of these new hires is indicated by the fact that our
brokerage activity in April was sharply higher. Furthermore, we expect that our
anticipated investment banking activity will result in considerably higher
brokerage activity. We therefore have great confidence that we can achieve
brokerage revenues of $78 million for the full year, consistent with our
February guideline.
As mentioned, we believe that this is one of the most opportune times we
have seen to implement our strategy to add and upgrade our personnel in the
capital markets business. At the same time, we have maintained our expense
discipline and despite active hiring continue to expect our breakeven revenue
levels in these two business lines - investment banking and brokerage - to
remain at the $115 million level that we discussed in February. Clearly, the
vacuum in the middle markets that has been created by the exit of so many
investment banks, combined with our greater capital base and total resources
following the merger coupled with our internal discipline, creates, we believe,
the greatest opportunity for future growth of the business that we have ever
seen.
Finally, our asset management business continues to grow. At March 31,
2003, FBR had $2.3 billion in gross assets under management, up 42% from March
31, 2002, excluding FBR Asset. Our mutual funds continued to have excellent
results during the quarter, with the five star FBR Small Cap Financial Fund
providing YTD returns of 6.51% through 4/30/03, and the FBR Small Cap Value Fund
providing YTD returns of 14.32% through 4/30/03. These two funds rank among the
very top of their respective classes, and we believe that our portfolio
managers, Dave Ellison and Chuck Akre, to be among the very finest equity
portfolio managers in the United States.
I would now like to open the call for any questions.
[At end of Q&A]
If there are no further questions, that concludes our conference call for
today. Thanks everyone for joining us. We appreciate it.