The Moderator: Good afternoon, I'm Anne Marie Meridith, and I will be your
conference facilitator. At this time I would like to welcome everyone to the
Friedman Billings Ramsey acquisition of First NLC conference call. All lines
have been placed on mute to prevent any background noise. After the speakers'
remarks, there will be a question-and-answer period. If you would like to ask a
question during this time, please press star, then number one on your telephone
key pad. If you would like to withdraw your question, press star, then the
number two.
I would now like to turn the conference over to Kurt Harrington, Chief
Financial Officer. Please go ahead, sir. Kurt Harrington, Chief Financial
Officer: Thank you. Good afternoon. This is Kurt Harrington, Chief Financial
Officer of Friedman Billings Ramsey Group, Inc.
Before we begin this afternoon's call, we would like to remind everyone the
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 the demand for public offerings, activity in the
secondary securities markets, interest rates, or costs of borrowing, interest
spreads, mortgage prepayment speeds, risks associated with the nonperforming
mortgage business, the risks associated with merchant banking investments, the
realization of gains and losses on principal investments, available
technologies, competition for business and personnel, and general economic,
political and marketing conditions. Additional information concerning these
factors that could cause results to differ materially is contained in FBR
Group's Annual Report on Form 10-K and in quarterly reports on Form 10-Q.
I would now like to turn over the call to FBR Group's Co-Chairman and
Co-Chief Executive Officer, Eric Billings. Also joining us this afternoon are
Rick Hendrix, President and Chief Operating Officer; and Rock Tonkel, President
and Head of Investment Banking. In addition, Co-Chairman and Co-Chief Executive
Officer Emanual Friedman will be tied in on the call from the West Coast.
Eric Billings, Co-Chairman and Co-CEO: Good afternoon. By now, all of you
have seen our announcement of the definitive agreement to acquire First NLC, the
nonconforming mortgage origination company based in Deerfield Beach, Florida. I
would like to share some details of the transactions with you and discuss what
this means to FBR from a strategy perspective. I would then be happy to answer
questions.
First of all, I want to say that I am, and our whole team is looking
forward to welcoming all 1100 employees of NLC to FBR. The NLC management team
lead by Neal Henchel has built one of the leading companies in this industry,
and we look forward to partnering with them to continue the company's
extraordinary success.
With regard to the structure of the transaction, FBR will pay $88 million
in stock and cash to acquire a hundred percent of NLC. NLC will have
approximately 16 million of tangible book value at the time of closing, which we
expect to be in late February following the necessary regulatory approvals.
NLC is currently owned by an affiliate of Sun Capital Partners, a private
equity firm based in Florida. The mix of stock and cash in the transaction will
be 27.7 percent stock and 72.3 percent cash. Additionally, 6 million is being
paid to the senior managers of the company primarily in the form of restricted
stock. NLC's current run rate of originations is roughly $4 billion annually.
NLC will continue to be led by Neal and his team, and will become part of our
principal investment areas reporting to Rick Hendrix.
I would like to take everyone through our strategy for this business and
its impact on our mortgage portfolio. As you know, we currently manage a
mortgage portfolio of approximately 11 billion in agency mortgage-backed
securities. This acquisition is part of a broader mortgage investment strategy
that will span the type of mortgage assets we own. Specifically, we intend to
allocate 25 to 50 percent of our existing capital dedicated to mortgages to
nonconforming loans over the next two quarters, and we may allocate as much as
70 percent of our equity capital in the REIT by year end.
So, let me just talk generally now about how we are viewing this
acquisition, how we view the economic effect on our business, what we view the
structural integrity of the business to be post this merger, and the broad
implications it will have to the company generally.
So, first of all, as we have spoken to you a little bit in the past, you
know we have been looking at this potential opportunity and broadly speaking for
many months now. We have thoroughly investigated, and we have looked at many
companies. Obviously, we understand this industry. We believe very, very
thoroughly and deeply. As part of our deep due diligence and investigation, when
speaking to the Henchels, it was very clear to us that this was a team that was
very much consistent with our philosophy in terms of culturally running a
business, very dedicated people utterly committed to the execution of their
business plan. They have built the business and grown the origination platform
in an exceptional way through the last five years particularly.
With this acquisition, our plan will be to redeploy, roughly transfer about
$500 million of our equity capital over the first couple of quarters from the
agency-backed spread business to the nonconforming business through
securitization funding; and then, as we said earlier, possibly as much as 700
million of our equity capital. And, of course, these things will all depend on
market environments and so on and so forth.
Certainly, this gives us the ability to utilize that flexibility, to make
judgments at the market, to do the things that we have always tried to do, which
is based on circumstances, allocate our equity capital so that we could achieve
the highest risk-adjusted return, given different market environments. This adds
to that capacity very substantially, in our judgment.
Specifically, of course, we think the spread-based business, the agency
mortgage-backed spread-based business, is still a great business, and we don't
want there to be any confusion about that in any way. We don't want anybody to
take any assumption from this as to mean that we don't believe this business is
as good as every bit we assumed it was. Simply, as we have evolved, we look at
other alternatives, and when we see things that we think have even better
application, of course, we want to do that as is appropriate.
So, specifically, the agency business will today, it still will achieve a
return on equity which is broadly defined as 15 to 20 percent on equity in the
vast majority of times, and in our case will run an average of around 20 percent
and is a very fine business. It is nonetheless a business that does have some
rate risk, some rate volatility. This allocation of equity will provide a
business for us that, in our judgment, will allow us to achieve cash returns on
invested equity when securitized, utilizing approximately 7 percent equity
capital against the gross assets in a securitization, so run much like the
thrift or the bank industry, only with a little bit more capital. We expect to
achieve about a 30 percent cash return on invested equity in this process.
Therefore, the transferring of equity capital from our agency business to
the nonconforming business will allow us to increase our return on equity by
something in the vicinity of 15 percent on equity on average over time,
including the TRS earnings that we should achieve in--from the sale of excess
loans of First NLC.
So, the totality of this will not only allow us to achieve much higher cash
returns on invested equity, but it will also allow us to match-finance our
balance sheets so as to significantly eliminate interest rate risk in the total
portfolio. So, that's from a total return perspective. Clearly, this enhances
our returns immediately and significantly. From a rate-risk perspective, it
diminishes interest rate risk and volatility very substantially, and as we
execute the totality of the strategy.
As it relates to the credit worthiness of the portfolio, because while
these are a different type of mortgage, clearly they are nonetheless mortgages
as our agency-backed mortgages. These clearly have different credit
characteristics. We intend, as we have indicated in the past, to acquire
mortgage insurance, and we intend to mortgage-insure the portfolio down to at
least 60 percent loan to value, and we are investigating taking that down even
lower to as low as potentially 50 percent. In other words, effectively, to some
substantial degree, creating a credit portfolio, a credit worthiness of the
portfolio, is not meaningfully different than what we have today.
So, we believe the totality of this strategy will allow us again to achieve
considerably higher cash returns on equity to maintain more steady predictable
state of earnings because of the match funding, to maintain very high level of
credit quality in the portfolio; and, therefore, the totality of this, in our
judgment, is simply a superior business activity and a superior allocation of
our equity capital.
As you think about the business, clearly, one of the things that's very
important to us is that this business and industry is a very, very large
industry. Many of you have heard our macro discussions on this industry, and you
know what our views are on this business and industry over time. We believe that
this industry will be many times larger than the nonconforming part of the
mortgage industry over the next five to seven years. We believe that the ability
to invest equity capital at high returns on invested equity, match-funded with
very high credit worthiness through incremental not only loan to value but
obviously with mortgage insurance gives us the ability to not only deploy the
capital that we have now, but to potentially where it can be done accretively
add capital to our company where we would add to the broadcast of the earnings
and after the dividends, and be able to grow our business because of the size of
the asset class is so substantial.
So, we believe that the totality of this--and we believe that by acquiring
First NLC, which is a dynamic platform, which will certainly, in our judgment,
be able to grow with the industry, gives us the flexibility through First NLC to
direct the type of assets that we would like particularly to portfolio, gives us
greater flexibility to make sure that the portfolio maintains the
characteristics we are particularly interested in.
Further, because of our relationships with so many originators, we would
intend to acquire nonconforming assets, nonconforming mortgage assets, from
other originators in the early parts of the strategy, so that as we allocate our
equity capital to this strategy, we will be able to sufficiently acquire and/or
originate assets and quantity to get that capital effectively deployed
substantially over the course of the year.
And so, as we think about this strategy in totality, we believe, the
accretion we will accomplish simplistically, we think about it in our equity to
the degree that we redeploy approximately 700 million of equity through the
course of the year. And again, this needs to be recognized that, as markets
change, we may change that, but as we look at it today that will certainly be
our game plan. We believe that will allow us to earn about a hundred million
dollars more in earnings than we are currently from that redeployment. And we
will again take the earnings and the totality of the company and provide
tremendous interest rate protection, but that's a way for you to have a sense of
the effect, the accretive effect, to the company over the course of the
transferring of the equity capital and the deploying of these assets
effectively.
So, it's quite significant to our company. And then, as we are able to
raise capital accretively, in fact, if that happens, then the subsequent
earnings accretion would be even greater if, in fact, that comes to pass.
So, when we look at the totality of this, we recognize that acquiring
assets in the industry are still--is something we will be doing as well as
originating through NLC. That strategy, while good, does not give us the ability
to have quite as much control over the assets that we have accumulated. Also, it
doesn't allow us to achieve as high as return on equity. It's somewhere about 5
to 700 basis points lower. And further, we don't have the ability to sell excess
originated assets through the taxable REIT subsidiary, which we believe will
allow us to add about 7 to 10 percent return on our equity allocated from the
sale of assets through the GRS.
When we purchase, obviously, we would lose that ability. The totality of
the difference between purchasing nonconforming mortgage loans and owning the
originator, we believe, is about 15 percent higher return on equity in total.
And for that reason, it made great sense to us to acquire an originating
platform, particularly one of the quality of First NLC to deplore this strategy.
We, finally, do believe that this allows us to deploy a strategy in our
balance sheet capital, which maintains very high credit quality, again very much
better interest rate protection, highest return on equities that we believe we
can achieve on a risk-adjusted basis, great flexibility to grow and expand into
the future with very high returns on equity. We believe we have spoken to all of
the different companies in the industry that we have a relationship with, which
I think as most of you know is most of the other companies in the industry. We
don't believe that it will pose any difficulty whatsoever. In point of fact, we
believe they understand it will give us an even deeper knowledge of the industry
and the business, and therefore heighten our ability to articulate the
characteristics of this business to the investment community, and thereby speed
up the time in which the investment community comes to understand the investment
merits of this strategy broadly defined, which, of course, is greatly beneficial
to all of our companies and all of the companies in the business.
So, in total, we think that it's a great strategy. We are obviously
immensely excited about the effects of this on all of our business, and I think
with that we would like to open it up to questions that people may have.
The Moderator: At this time, I would like to remind everyone, if you would
like to ask a question, please press star, then the number one on your telephone
key pad. We will pause for just a moment to compile the Q-and-A roster.
Your first question is from Mark Alpert with Centurion.
Mark Alpert, Centurion: Good afternoon. I was wondering if you could give
us a couple of characteristics about the loans that are being originated, what
the origination platform is in terms of branches, wholesale, correspondent, and
maybe some FICO score, WAK, just some characteristics.
Rick Hendrix, Co-President and Chief Operating Officer: Sure, Mark. This is
Rick. The mix of the wholesale-retail is between 85-15 and 80-20. The company
has six operation centers, and between 20 and 30 retail branches. The last cut
of the originations had an average FICO of just below 640. It's about 50 percent
purchase, 50 percent re-fi, and a weighted average coupon of about 730.
Mark Alpert, Centurion: And you said you will be selling some of the
production, or you're going to keep it all? If you sell it, then you will have
the one-time gain on sale?
Rick Hendrix, Co-President and Chief Operating Officer: Right. We will sell
some of the production, but obviously our intent here is to portfolio the
assets, and so it's purely based on what the mix origination turns out to be and
what we intend to hold. We are going to hold primarily the arm product, which
means that we may sell somewhere in the neighborhood of 15 to 20 percent of the
production.
Mark Alpert, Centurion: And if you compare it to the existing portfolio, I
know that you had been saying a normal spread on the existing portfolio would be
about 220 basis points, but it was running about 150 at the end of last quarter.
What do you see on the spread on this portfolio, and has there been any
meaningful change in the spread of the agency?
Rick Hendrix, Co-President and Chief Operating Officer: Well, with regard
to our existing portfolio, we will be announcing earnings and information on the
portfolio in the next several weeks. We are not in a position to talk about our
fourth quarter results at this point.
Mark Alpert, Centurion: What about the norm? I mean, if you were expecting
the normal spread of 220 on the agencies, what do you expect a normal spread on
the subprime?
Rick Hendrix, Co-President and Chief Operating Officer: We expect the
normal spread on the subprime to be in the mid 200s, and because of the fact you
could finance these assets with very, very low rate risk, you can leverage these
14, 15 times, and so you will have the wider spread and the ability to leverage
this spread a little bit further.
Mark Alpert, Centurion: Thank you.
Eric Billings, Co-Chairman and Co-CEO: And clearly, Mark, right now,
spreads in the agency is not 200. It's obviously running at lower generally than
that. And as we saw in the third quarter, this kind of spread was roughly 150
basis points or so in the third quarter. So, this spread tends to be much less
volatile than the agency spread.
Mark Alpert, Centurion: Thank you.
The Moderator: Your next question is from Todd Halky with Sandler O'Neill.
Todd Halky, Sandler O'Neill: Hey, guys, how's it going? On the accretion,
the hundred million of earnings, I mean, is that something that we are going to
realize in the second half of this year, just kind of the timing of it, or are
you looking to realize that potentially in the second, third, fourth quarter
time frame? Would we be taking it as like a 25 per quarter, or is that on the
exit of the year?
Eric Billings, Co-Chairman and Co-CEO: It would be, in essence, the hundred
million would be on an annualized run rate, first of all, Todd, so let me take
sure I'm clear on this. And it will be achieved once the allocation of 700
million of equity capital would be transferred from the agency spread
based--from the agency spread base to the nonmortgage area. So, on an annualized
basis, once that's complete, you will see an annualized accretion, in our
judgment, of that amount. Obviously, things can change, ebb and flow, but that's
certainly our best estimate of it at this time.
So, the accretion will start, though, as soon as it's deployed, and we
intend to close the transaction at the end of February. We will have assets
deployed. We will anticipate almost immediately after that. So, we would start
to see accretion certainly by the second quarter, and it will build throughout
the rest of the year.
Todd Halky, Sandler O'Neill: Okay. In anticipation of this, were you
guys--have you been purchasing any nonconforming assets to date during this
first quarter or within the fourth quarter, or is it something that you are just
going to do that once the deal is closed?
Kurt R. Harrington, Chief Financial Officer: Well, in advance of the close
of the transaction, we're entering into a loan purchase agreement with an LC, a
warehouse agreement, so we will begin purchasing loans prior to the close, but
we have not begun purchasing nonprime loans prior to the signing is definitive.
Todd Halky, Sandler O'Neill: Okay. You talked about the 14, 15 kind of
leverage on this product. Would that mean that you anticipate growing the
portfolio to the 14, 15 billion level? Is that something that we should look for
in kind of the '06 time frame?
Eric Billings, Co-Chairman and Co-CEO: If you think about it this way,
Todd, you took 700 million of our capital and we leveraged that 14 times, that
would get us approximately 10 billion, 10 and a half billion of those assets,
including the equity. Then the 300 million in agency roughly, say, 10 times
would be roughly 3 billion. So, in total, maybe 13 and a half billion, so
something in probably that, 13 to 14 billion.
Todd Halky, Sandler O'Neill: Okay. And then just can you walk through,
because kind of the thing we are taking from this is that you guys are taking
control of the origination and you should be able to originate them at a lower
cost than what it will take you to buy them after you transition the business.
But from a risk-reward standpoint, you are clearly introducing some credit risk
into the model where it wasn't previously. Previously, there were agency's
business.
So I just kind of want to get a better feel for how you see the credit
risk, and with this mortgage insurance like what's the costs associated with
that are, and the spread you are giving up on that.
Eric Billings, Co-Chairman and Co-CEO: Sure, great questions. Let me say a
couple of things. If you think about this industry, and obviously the evolution
of the industry over the last 15 years has been very, very significant, and you
can look at the credit trends in the industry, and you may have had a chance to
do that, Todd, over the past 15 years. I do think it's important to recognize
that credit trends have basically gotten consistently better in this industry
through this time frame, and that goes to many things: The maturity of the
industry, the evolution of the industry, the ability of the credit score, better
the ability to check for fraud, do other types of things. They simply do far
better over the last 15 years than they did previously.
And so, the effect of that today is that actual losses--and again, this is
generalizations because it all depends on FICO scores, so it's broad
generalizations. Losses tend to be occurring today at an annualized level which
is around seven basis points of actual losses, and these companies are gladly
providing for anticipated losses of maybe three to three and a half percent
during the life of the pool, but that is down significantly.
Now, we would say to you that, therefore, there is a great case to be made,
that if you think about these assets, it's important to remember first and
foremost the collateral of these assets is among the best collateral that exists
in the United States. It's Jennie-Fannie-Freddie conforming collateral. Now, the
borrower is not, but the collateral is. The average loan size of 150,000, loan
to value 75 to 80 percent, and so there is very, very good aspects to the
collateral.
Now, obviously, the frequency of delinquency or default is higher in the
asset class because the borrower is less credit worthy, but when you look at the
severity, the severity doesn't track as it otherwise will because the collateral
is such good collateral.
So, in any case, there are very good actuarial statistics in the evidence
to be able to look at to make judgments on the credit worthiness of this asset
class, and we believe that as it is structured, it will prove to be a very high
quality asset class without mortgage insurance, that the provisioning that is
being allocated today by most of the companies in the business of 100-plus basis
points will prove to be far more than necessary, even in slowdowns and periods
of recession than will be necessary to facilitate actual loss experiences.
Having said that, because of the nature of our company, because
catastrophic risks and things like that are not risks that we are willing to
take, we will be acquiring, as stated, mortgage insurance, and we will be
ensuring these assets down to as low as 50 percent loan to value, which from our
perspective means 150,000-dollar loan. That would mean that the borrower
purchased $180,000 home, and the home would have to fall to less than $90,000
for us to be at risk as a broad generalization.
Because the nature of these securitizations are broad pool geographically
diverse, so on and so forth, you in essence would have to have a residential
mortgage calamity whereby the value of residential assets would have to drop by
50 percent for that to be realized. From our perspective, as a generalization,
we believe, therefore, we have credit worthiness, which is probably about the
same as agency-backed paper and an implicit guarantee on agency paper. In other
words, neither could survive it.
So, we think this gives us a very, very high credit quality, credit
worthiness in our portfolio. And even though we don't think per se the asset
needs it on its own right, we do take even catastrophic risk off the table.
Now, the cost of that will depend, and again depends on FICO scoring in
terms of many different things, but on average it's probably going to round
somewhere around a hundred basis points generally and then maybe 70 to maybe a
little over a hundred. I mean, it just depends.
But it also means that our reserving from credit losses would be lower.
Because of the way we originate the loans, we can do this and still achieve the
returns we are talking about, even after paying the potential insurance costs,
and so the totality of that for us is just very well worth the structure of
that.
Todd Halky, Sandler O'Neill: Okay. And this is the last question which is
on the dividends. All of this, if this plays out the way you guys are laying it
out here, once you are going to get to deploy that 700 million in capital, I
mean, in theory you should--you are giving an increase on a quarterly basis by
about 15 percent. Is that what you're looking at?
Eric Billings, Co-Chairman and Co-CEO: It would be something in that
vicinity. That's about right.
Todd Halky, Sandler O'Neill: Great. Thank you.
Eric Billings, Co-Chairman and Co-CEO: Thanks, Todd.
The Moderator: Again, I would like to remind everyone, if you would like to
ask a question, press star, then the number one on your telephone key pad.
The next question is from Bernhard Krieg with Haven Funds.
Bernhard Krieg, Haven Funds: Yes, hi. I just wanted to follow up a little
bit more on the timetable that you were talking about deploying $700 million of
equity by year end with a strategy that applied 10 billion roughly portfolio,
but the origination is only currently running at $4 billion, and I don't think
there is a lot of growth here. What's going to be the balance to get to that
number?
Eric Billings, Co-Chairman and Co-CEO: First of all, we are up to 700, so
to be clear, but the answer is really, first of all, we do believe First NLC
particularly now in the new partnership together with FBR will absolutely
continue to grow their originations, and they are, I think, quite excited about
that prospect, and I think our internal expectations are that they would
originate annually at a rate of 5 billion and even greater than that. So, that
would be one thing.
Secondly, as we indicated, we do intend to purchase incremental assets that
meet the criteria we are looking for to facilitate the totality of the buildout
of the platform in the early stages.
Bernhard Krieg, Haven Funds: In terms of the economics that you achieve in
that, you were indicating about 25 percent return on equity for top originated
assets and about a 15 percent RE spread in there, and so that means you would
deploy the capital about 10 REs? Am I making that comparison correctly?
Eric Billings, Co-Chairman and Co-CEO: Yes, you are, but the 15 actually is
more of a blend, assuming we will have a mix of acquired assets.
Bernhard Krieg, Haven Funds: In terms of getting out of the hybrid, just
the profits of leading out of the assets as they kind of get prepaid, or are you
looking to potentially fill the market as you find assets and replace them with?
Eric Billings, Co-Chairman and Co-CEO: We'll look at all sides of that. If
there are ways for us to effectively redeploy our capital, we will look at all
the different ways to do that.
Bernhard Krieg, Haven Funds: Okay, great. Then last, if you could talk a
little bit more about real or perceived conflict of interest, because I thought
you guys have been carving yourself out a fantastic niche in the mortgage space
to bring, to bring a lot of companies public, and usually the underwriter in the
investment banking side of the business. Can you talk a little bit more about
what was so reassuring for the companies that, on the one hand, you're an
advisor in an agency, and on the other hand you're a principal of that agency in
the exact same business?
Eric Billings, Co-Chairman and Co-CEO: Again, we are so intricately
involved in this industry that the only change here really is that we will
directly own the assets, but you know not only were we advisor and capital riser
in every way for virtually every company. We have been a very large merchant
investor in these companies for years, and so this is an incremental iteration
to our strategy. It's not meaningfully different. It doesn't, in our
judgment--and obviously we have spoken to all of the different companies and
they concur--it doesn't give us any insight into their particular businesses
that we wouldn't have anyway. And obviously, in an industry that's originating
now close to $500 billion a year probably going to a trillion over the next
five, six, seven years, with many competitors, what we're doing in this regard
doesn't really pose a competitive threat to anybody.
And so we don't believe--and we obviously have investigated this
thoroughly--that we will have any problems or any issues with that at all. We do
believe that our knowledge and our ability to understand the industry will allow
us to continue to be the dominant underwriter in this industry.
And again, remember Lehman Brothers owns, I think, three of these
companies. Other of the major underwriters own these companies. In addition, all
of them own the equity tranches that they originate loans, they purchase loans,
they own the equity tranches. They are all intricately involved in the industry
as are we, and so I don't think there will be any fallout from that at all.
Emanuel "Manny" Friedman, Co-Chairman and Co-CEO: This is Manny. We have a
similar example in the mortgage-backed area. We have a mortgage-backed
portfolio, yet we have done most of the underwriting for the mortgage-backed
REITs.
Bernhard Krieg, Haven Funds: They're a financial investment to me, whereas
the other one you are competing on a true operating company in their business.
That seems to me to be a little bit of a different ball game in that sense than
vying for financial assets. Okay, that's fine. Thank you.
Eric Billings, Co-Chairman and Co-CEO: Thank you.
The Moderator: Your next question is from Ariel Warszawski with Elm Ridge
Capital.
Ariel Warszawski, Elm Ridge Capital: Yes, hi, guys. Is there expected in
your minds to be a smooth transition in terms of earnings and dividends from now
through Q1, through Q2, in terms of the expectations that people might have?
Eric Billings, Co-Chairman and Co-CEO: You know, I don't think we would
quite steer people to think it's going to be precisely smooth. That's really the
objective, is just to redeploy the capital as effectively and efficiently as we
can to make our judgments and take--move as opportunistically as possible, and
that obviously may not lend itself to a smooth transition.
What we have given you is our intended approach, our intended model based
on changing market environments, and so it could move around these numbers
during the course of the year. But assuming that things stay as it appears from
our perspective that they will, I think it's better to just recognize that the
totality of this will occur during the course of the next three quarters, and it
will be more or less in different quarters. So, not precisely predictable.
Ariel Warszawski, Elm Ridge Capital: No, I guess I appreciate that. One
example might be if you had done this all at the end of last quarter, you have
to take a $77 million hit; right?
Eric Billings, Co-Chairman and Co-CEO: No.
Ariel Warszawski, Elm Ridge Capital: Just as one example, the OCI.
Eric Billings, Co-Chairman and Co-CEO: No, that would mean that we sold a
hundred percent of our portfolio at the then mark to market, so we would not
ever do that. That's not our intent at all. We don't intend to sell assets at a
loss or anything like that.
Kurt Harrington, Chief Financial Officer: What we have indicated is that in
the near term over the next couple of quarters that it will be 25 to 50 percent
of the mortgage capital, if we could comfortably achieve without the kind of
disruption that maybe you're alluding to or are concerned about. It could be as
much as 70 percent by the end of the year, but we intend to do it in a way that
is not disruptive to either earnings or dividend but should do nothing by
enhance both.
Ariel Warszawski, Elm Ridge Capital: And just in your thinking, what are
you assuming interest rates do over this time period? Stay around where they
are?
Eric Billings, Co-Chairman and Co-CEO: We really aren't making too many
judgments along those lines, Ariel. We are really looking more at what we could
do right now, what percentage of the portfolio we could deploy now, plus what we
anticipate will be the refinancing that will come in over the course of the
year, and it predominantly resolves around that.
Ariel Warszawski, Elm Ridge Capital: And have you already begun to depose
of agency MBS in the first quarter?
Eric Billings, Co-Chairman and Co-CEO: We are not going to comment on that,
Ariel. We'll comment on that at the end of the first quarter at the conference
call as we then disclose the activity of the quarter.
Ariel Warszawski, Elm Ridge Capital: Thank you very much, guys. I
appreciate it.
Eric Billings, Co-Chairman and Co-CEO: Thank you.
The Moderator: Thank you. At this time there are no further questions.
Gentleman, are there any closing remarks?
Eric Billings, Co-Chairman and Co-CEO: No, we just greatly appreciate
everybody's interest, and we know if people have any other questions, please
call, and we are happy to go through it with you. We're obviously very, very
excited, and we believe this acquisition and this team led by Neil and Jeff will
be tremendously beneficial to the FBR Group of companies and family, and so we
are very, very excited. We thank you all for participating.
The Moderator: Thank you. This concludes today's Friedman Billing Ramsey
acquisition of First NLC conference call. You may now disconnect.