EXHIBIT 99.2
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
On March 31, 2003, Friedman, Billings, Ramsey Group, Inc. ("FBR Group")
and FBR Asset Investment Corporation ("FBR Asset"), completed their previously
announced merger pursuant to the Agreement and Plan of Merger among the
companies and certain of their subsidiaries dated as of November 14, 2002 (the
"merger"). The combined company assumed the name Friedman, Billings, Ramsey
Group, Inc.
The following unaudited condensed pro forma consolidated financial
statements are prepared in accordance with SEC Regulation S-X - Article 11, "Pro
Forma Financial Information," and are presented to illustrate the effects of the
merger on the historical operating results of FBR Group and FBR Asset. The
unaudited pro forma statements of operations are presented for the three month
periods ended June 30, 2002, September 30, 2002, and December
31, 2002, assuming the acquisition had occurred on January 1, 2002. The pro
forma statements of operations for the periods specified combine the historical
statements of earnings of FBR Group and FBR Asset on a consolidated basis.
The unaudited condensed pro forma consolidated financial statements
have been derived from, and should be read in conjunction with, the historical
consolidated financial statements, including the notes thereto, of each of FBR
Group and FBR Asset. FBR Group's Annual Report on Form 10-K for the year ended
December 31, 2002 includes the December 31, 2002 financial statements of both
FBR Group and FBR Asset.
The unaudited condensed pro forma consolidated financial statements are
presented for informational purposes only and are not necessarily indicative of
the results of operations of FBR Group that would have occurred had the merger
been consummated as of January 1, 2002. In addition, the unaudited condensed pro
forma consolidated financial statements are not necessarily indicative of the
future operating results of FBR Group.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(Dollars in thousands, except per share amounts)
Historical Pro Forma
FBR FB Adjustments Consolidated
Revenues:
Investment banking:
Underwriting (Note 1a) $ 25,248 $ - $ (6,914) $ 18,334
Corporate finance (Note 1b) 9,827 - 6 9,833
Investment gains 1,595 - - 1,595
Institutional brokerage:
Principal transactions (Note 1c) 8,372 - (1,081) 7,291
Agency commissions 9,954 - - 9,954
Asset management:
Base management fees (Note 1d) 7,633 - (1,975) 5,658
Incentive allocations and fees (Note 1d) 2,902 - (2,836) 66
Net investment income (loss) (Note 1e) 8,517 7,608 (8,761) 7,364
Technology sector net investment and incentive loss (2,432) - - (2,432)
Dividends and other (Note 1f) 419 1,709 13 2,141
Interest 1,219 42,845 (5,077) 38,987
-------- -------- --------- --------
Total revenues 73,254 52,162 (26,625) 98,791
Interest expense 430 14,924 (2,478) 12,876
-------- -------- --------- --------
Net revenues 72,824 37,238 (24,147) 85,915
-------- -------- --------- --------
Expenses:
Compensation and benefits (Note 1i) 38,411 - (987) 37,424
Business development and professional services (Note 1i) 7,982 724 (515) 8,191
Clearing and brokerage fees 1,817 - - 1,817
Occupancy and equipment 2,046 - - 2,046
Communications 2,187 - - 2,187
Other operating expenses (Note 1j) 2,602 4,816 (4,811) 2,607
------------ ------------- ------------- -------------
Total expenses 55,045 5,540 (6,313) 54,272
------------ ------------- ------------- -------------
Net income (loss) before taxes and extraordinary gain 17,779 31,698 (17,834) 31,643
Income tax provision (Note 1k) - 111 (111) -
------------ ------------- ------------- -------------
Net income (loss) before extraordinary gain $ 17,779 $ 31,587 $ (17,723) $ 31,643
============ ============= ============= =============
Basic earnings per share before extraordinary gain $ 0.39 $ 1.67 $ 0.30
============ ============= =============
Diluted earnings per share before extraordinary gain $ 0.36 $ 1.67 $ 0.29
============ ============= =============
Weighted average shares outstanding:
Basic (Note 1l) 45,944 18,893 60,254 106,198
============ ============= ============= =============
Diluted (Note 1l) 48,772 18,917 60,341 109,113
============ ============= ============= =============
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars in thousands, except per share amounts)
Historical Pro Forma
FBR FB Adjustments Consolidated
Revenues:
Investment banking:
Underwriting (Note 1a) $ 30,108 $ - $ 2,748 $ 32,856
Corporate finance (Note 1b) 26,175 - 2,816 28,991
Investment gains 2,627 - - 2,627
Institutional brokerage:
Principal transactions (Note 1c) 5,743 - (39) 5,704
Agency commissions 8,629 - - 8,629
Asset management:
Base management fees (Note 1d) 7,208 - (2,588) 4,620
Incentive allocations and fees (Note 1d) 4,282 - (4,199) 83
Net investment income (loss) (Note 1e) (2,737) 4,823 (3,588) (1,502)
Technology sector net investment and incentive loss (2,202) - - (2,202)
Dividends and other (Note 1f) 370 5,287 (5,564) 93
Interest 1,509 56,739 (4,450) 53,798
-------- -------- --------- ---------
Total revenues 81,712 66,849 (14,864) 133,697
Interest expense 608 22,511 (441) 22,678
-------- -------- --------- ---------
Net revenues 81,104 44,338 (14,423) 111,019
-------- -------- --------- ---------
Expenses:
Compensation and benefits (Note 1i) 45,725 - - 45,725
Business development and professional services (Note 1i) 8,650 771 - 9,421
Clearing and brokerage fees 1,443 - - 1,443
Occupancy and equipment 2,309 - - 2,309
Communications 2,009 - - 2,009
Other operating expenses (Note 1j) 2,976 6,787 (6,787) 2,976
-------- -------- -------- --------
Total expenses 63,112 7,558 (6,787) 63,883
-------- -------- -------- --------
Net income (loss) before taxes and extraordinary gain 17,992 36,780 (7,636) 47,136
-------- -------- -------- --------
Income tax provision (Note 1k) 2,343 2,115 (4,458) -
-------- -------- -------- --------
Net income (loss) before extraordinary gain $ 15,649 $ 34,665 $ (3,178) $ 47,136
============ ============= ============= =============
Basic earnings per share before extraordinary gain $ 0.34 $ 1.38 $ 0.37
============ ============= =============
Diluted earnings per share before extraordinary gain $ 0.32 $ 1.38 $ 0.36
============ ============= =============
Weighted average shares outstanding:
Basic (Note 1l) 46,370 25,054 81,957 128,327
============ ============= ============= =============
Diluted (Note 1l) 49,526 25,079 82,048 131,574
============ ============= ============= =============
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(Dollars in thousands, except per share amounts)
Historical Pro Forma
FBR FB Adjustments Consolidated
Revenues:
Investment banking:
Underwriting (Note 1a) $ 8,890 $ - $ 93 $ 8,983
Corporate finance (Note 1b) 11,119 - 440 11,559
Investment gains 4,312 - - 4,312
Institutional brokerage:
Principal transactions (Note 1c) 6,339 - - 6,339
Agency commissions 8,344 - - 8,344
Asset management:
Base management fees (Note 1d) 8,119 - (2,930) 5,189
Incentive allocations and fees (Note 1d) 5,291 - (5,036) 255
Net investment income (loss) (Note 1e) 4,474 8,777 (4,108) 9,143
Technology sector net investment and incentive loss 111 - - 111
Dividends and other (Note 1f) 491 1,936 (533) 1,894
Interest 1,377 57,038 (3,899) 54,516
-------- -------- --------- --------
Total revenues 58,867 67,751 (15,973) 110,645
Interest expense 665 23,488 (441) 23,712
-------- -------- --------- --------
Net revenues 58,202 44,263 (15,532) 86,933
-------- -------- --------- --------
Expenses:
Compensation and benefits (Note 1i) 31,617 - - 31,617
Business development and professional services (Note 1i) 7,545 3,180 - 10,725
Clearing and brokerage fees 1,467 - - 1,467
Occupancy and equipment 2,274 - - 2,274
Communications 1,910 - - 1,910
Other operating expenses (Note 1j) 2,608 7,961 (7,966) 2,603
-------- -------- -------- --------
Total expenses 47,421 11,141 (7,966) 50,596
-------- -------- -------- --------
Net income (loss) before taxes and extraordinary gain 10,781 33,122 (7,566) 36,337
Income tax provision (Note 1k) 692 208 (900) -
-------- -------- -------- --------
Net income (loss) before extraordinary gain $ 10,089 $ 32,914 $ (6,666) $ 36,337
============ ============= ============= =============
Basic earnings per share before extraordinary gain $ 0.22 $ 1.30 $ 0.28
============ ============= =============
Diluted earnings per share before extraordinary gain $ 0.21 $ 1.30 $ 0.28
============ ============= =============
Weighted average shares outstanding:
Basic (Note 1l) 46,403 25,317 82,917 129,320
============ ============= ============= =============
Diluted (Note 1l) 49,089 25,342 83,008 132,097
============ ============= ============= =============
Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements
For the Three Month Periods Ended
June 30, 2002, September 30, 2002, and December 31, 2002
(dollars in thousands)
(1) The following is a summary of the unaudited condensed pro forma
consolidated statements of operations adjustments to effect the merger.
(a) Underwriting -- These balances in the unaudited condensed pro forma
consolidated statements of operations reflect adjustments to eliminate FBR
Group's revenue generated from FBR Asset's secondary offerings of
$6,914 for the three months ended June 30, 2002,
$0 for the three months ended September 30, 2002,
$0 for the three months ended December 31, 2002, and
to reclassify to underwriting revenue amounts paid by FBR Group to FBR Asset
in connection with investment banking transactions pursuant to a fee sharing
agreement between the companies of
$0 for the three months ended June 30, 2002,
$2,748 for the three months ended September 30, 2002, and
$93 for the three months ended December 31, 2002.
(b) Corporate finance -- These balances in the unaudited condensed pro
forma consolidated statements of operations reflect adjustments to
reclassify to corporate finance revenue amounts paid by FBR Group to FBR
Asset in connection with investment banking transactions pursuant to a fee
sharing agreement between the companies of
$6 for the three months ended June 30, 2002,
$2,816 for the three months ended September 30, 2002, and
$440 for the three months ended December 31, 2002.
(c) Principal transactions -- These balances in the unaudited condensed
pro forma consolidated statements of operations reflect adjustments to
eliminate FBR Group's broker-dealer trading (gains) and losses generated
from transactions involving FBR Asset common stock of
$(1,081) for the three months ended June 30, 2002,
$(39) for the three months ended September 30, 2002, and
$0 for the three months ended December 31, 2002.
(d) Base management fees and incentive allocations and fees -- These
balances in the unaudited condensed pro forma consolidated statements of
operations reflect adjustments to eliminate FBR Group's base management and
incentive fees earned pursuant to its management agreement with FBR Asset of
$1,975 and $2,836, respectively for the three months ended June 30,
2002,
$2,588 and $4,199, respectively for the three months ended
September 30, 2002, and
$2,930 and $5,036, respectively for the three months ended December 31,
2002.
(e) Net investment income -- These balances in the unaudited condensed
pro forma consolidated statements of operations reflect adjustments to
eliminate FBR Group's income derived from its equity investment in FBR Asset
of
$8,761 for the three months ended June 30, 2002,
$3,588 for the three months ended September 30, 2002, and
$4,108 for the three months ended December 31, 2002.
(f) Dividends and other -- These balances in the unaudited condensed
pro forma consolidated statements of operations reflect adjustments to (1)
eliminate FBR Group's dividend income earned from its broker-dealer trading
inventory holdings of FBR Asset of
$(19) for the three months ended June 30, 2002,
$0 for the three months ended September 30, 2002, and
$0 for the three months ended December 31, 2002,
and (2) reclassify to underwriting revenue and corporate finance revenue
amounts paid by FBR Group to FBR Asset in connection with investment banking
transactions pursuant to a fee sharing agreement between the companies of
$6 for the three months ended June 30, 2002,
$5,564 for the three months ended September 30, 2002, and
$533 for the three months ended December 31, 2002.
(g) Interest -- These balances in the unaudited condensed pro forma
consolidated statements of operations reflect adjustments to record
amortization of premiums created in purchase accounting due to the new cost
basis of FBR Asset's mortgage-backed securities at the time of the merger of
$5,077 for the three months ended June 30, 2002,
$4,450 for the three months ended September 30, 2002, and
$3,899 for the three months ended December 31, 2002.
The adjustments discussed above to record amortization of premiums
established on FBR Asset's mortgage-backed securities have been prepared in
accordance with SEC Regulation S-X -- Article 11. These adjustments, however, do
not correspond to the mortgage-backed securities balances during the historical
periods but are reflective of amortization that would be recorded in the future
considering the March 31, 2003 value of FBR Asset's mortgage-backed securities
portfolio. In purchase accounting, the March 31, 2003 unrealized gain on these
FBR Asset securities contained in other comprehensive income was eliminated and
a new cost basis established. In this case, the unrealized gain creates a
premium that will be amortized over the remaining lives of the applicable March
31, 2003 mortgage-backed securities. The adjustments in the pro forma financial
statements reflect the amortization of this premium created in purchase
accounting calculated based on the application of the effective interest method
for recognizing interest income and includes management's assumptions with
respect to prepayment speeds as of March 31, 2003 as required by SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The total additional
premium established based on the March 31, 2003 balance sheet is $46,850 and
based upon prepayment speeds as of March 31, 2003 substantially all would be
amortized over approximately three and a half years.
(h) Interest expense -- These balances in the unaudited condensed pro
forma consolidated statements of operations reflect interest adjustments
created in purchase accounting related to FBR Asset's interest rate swaps as
of March 31, 2003 of
$2,478 for the three months ended June 30, 2002,
$441 for the three months ended September 30, 2002, and
$441 for the three months ended December 31, 2002.
These interest rate swaps are cash flow hedges of the debt recorded on the
balance sheet used to finance the mortgage-backed securities and convert a
portion of the variable interest rate borrowings to a fixed interest rate. In
purchase accounting, the March 31, 2003 unrealized loss on these FBR Asset
derivatives of approximately $10,480 contained in other comprehensive income was
eliminated. In this case, the unrealized loss created a credit balance (i.e., a
day-one value of the derivatives) which is recorded as a liability on the
balance sheet. The day-one value of the interest rate swaps recorded as a
liability reestablishes the market rate of interest on the derivatives and
reduces the fixed rate of interest expense over the remaining lives of the
derivatives, which range from four months to sixteen months. These adjustments
are based upon the fair value of the instruments and market rates as of March
31, 2003 using the effective interest method.
(i) Compensation and benefits and business development and professional
services -- These balances in the unaudited condensed pro forma consolidated
statements of operations reflect adjustments to eliminate FBR Group's
expenses incurred as a result of FBR Asset's secondary equity offerings.
(j) Other operating expenses -- These balances in the unaudited
condensed pro forma consolidated statements of operations reflect
adjustments to eliminate base management and incentive fees payable by FBR
Asset to FBR Group.
(k) Income tax provision (benefit) -- These balances in the unaudited
condensed pro forma consolidated statements of operations reflect
adjustments to present the tax provision of the combined entity's taxable
REIT subsidiaries based on the effective tax rate of these subsidiaries
during the period.
(l) Basic and diluted weighted average shares outstanding -- These
balances in the unaudited condensed pro forma consolidated statements of
operations reflect the conversion of historical FBR Asset shares not owned
by FBR Group based on the 3.65 exchange ratio.