Friedman, Billings, Ramsey Group, Inc.
                            2Q05 Earnings Transcript
                                     7/28/05

CORPORATE PARTICIPANTS
Kurt Harrington, Friedman Billings Ramsey - Chief Financial Officer
Eric Billings, Friedman Billings Ramsey - Chairman and Chief Exectutive Officer
Rick Hendrix, Friedman Billings Ramsey - President and Chief Operating Officer
Rock Tonkel, Friedman Billings Ramsey - President and Head of Investment Banking

CONFERENCE CALL PARTICIPANTS
Richard Herr, KBW - Analyst
Adam Weinbrich, Basswood Partners - Analyst
Steven Eisman, FrontPoint - Analyst
Richard Sloan, H&R Realty - Analyst

Operator

Good morning. My name is Nicole and I will be your conference facilitator. At
this time I would like to welcome everyone to the Friedman Billings Ramsey
second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) I would now
like to turn the call over to Mr. Kurt Harrington, Chief Financial Officer of
Friedman Billings Ramsey. Please go ahead, sir

Kurt Harrington - Friedman Billings Ramsey - Chief Financial Officer

Thank you. Good morning. This is Kurt Harrington, Chief Financial Officer of
Friedman, Billings, Ramsey Group. Before we begin this morning's 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; our
cost of borrowing; interest spreads; mortgage prepayment speeds; 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 market 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 Chairman and Chief
Executive Officer, Eric Billings. Also joining us this morning are Rick Hendrix,
President and Chief Operating Officer, and Rock Tonkel, President and Head of
Investment Banking.

Eric Billings - Friedman Billings Ramsey - Chairman & CEO

Good morning everybody. We apologize for our delay.

Last quarter we focused on our results and how our results might look for the
remainder of 2005, even in a difficult environment. Despite that kind of an
environment, the second quarter of 2005 puts us on track to fulfill those
expectations. More importantly, this quarter showed how the character of our
business lines allows us to achieve acceptable returns on equity for the Company
as a whole, even in these difficult environments. While we do believe that
producing a 14% return on equity for shareholders is acceptable in this
environment, we also expect the platform to produce higher returns over time.

Now let us take a deeper look at our businesses. In our equity capital markets
businesses we were very pleased with the performance and the accomplishments
that have taken place during a period of decreased US capital markets activity
and a flattening yield curve. Even in this environment, FBR has become the
number one book-running manager for common equity for companies with a market
cap of $2 billion or less. Our equity capital market franchise generated
revenues of $101.2 million, an increase of 63% over the same quarter last year.
But more than that, we are gaining market share and expanding our presence into
important new areas. While equity underwriting volume in United States dropped
by more than 20% in the first half of 2005 versus the year-ago period, FBR's
equity capital markets businesses grew at 24% and our client franchise continued
its steady growth across each of our industry sectors.

In the first two quarters of 2005 we completed 64 transactions valued at $18.7
billion. Lead managed volume was $8.6 billion. In the first half of 2004, by
comparison we completed 59 transactions valued at $12.1 billion with a lead
managed volume of $3.7 billion. For our full year of 2004 we completed 127
transactions valued at $27 billion. In addition, in the first half of 2005 we
completed $4.5 billion in IPO versus $1.1 billion in the first half of 2004. In
our fixed income banking business we completed 11 transactions at approximately
$8 billion versus 4 transactions valued at approximately $3 billion in the first
half of 2004. Private placements in 2005 were $1.7 billion versus $1.2 billion
in 2004. For the year-to-date 2005, FBR is the number 7th ranked book-running
manager in the equity capital markets industry in the United States.

In 1997 we identified the energy sector as an important opportunity. We
patiently built a great team, and for the first half of this year, FBR is the
number two book-running manager for domestic oil and gas equity capital raises.

We're continuing to execute in areas where our leadership is well known as well.
For the first half of this year FBR is the number one book-running manager for
real estate equity capital raises. In the second quarter we completed 4 equity
private placements with a combined value of $1.1 billion. We accomplished all of
this with severely rising short-term interest rates and a flattening yield
curve, which is often thought of as a difficult environment for our
traditionally strong real estate and financial services capital raising
businesses.

Last year we also made a commitment to become a stronger player in the
asset-backed security banking space. This year we have an established team that
completed 11 transactions in the first 2 quarters alone.

So we continue to be a dominant player in areas where our capabilities are known
and our efforts to diversify are bearing fruit.

We have long said one of the most important components of our growing capital
markets franchise is increased name recognition. As our successful track record
becomes more well known and our reputation building efforts, including investor
conferences in Washington, New York and London so far this year, continue to
build our brand, we're seeing increased transaction activity for a wide array of
companies. The most recent example of this kind of success is the equity capital
raise of $800 million we completed for Calpine Energy. And we continue to win
engagements from major private equity firms. It is these sorts of
high-visibility, early-stage transactions that often lead to future engagements.

The 12% return on equity achieved by our mortgage portfolio during the quarter
reflected the continued positive effect of the addition of non-prime loans
coupled with the negative effects of rising short-term interest rates and a
relatively flat yield curve. This has been a terrifically challenging rate
environment. Rates have risen nine times just since last June. The market as a
whole has experienced significant spread compression, due mainly to this
flattening yield curve.

Last fall we told you that we were making a strategic decision to grow and
diversify our mortgage business; that we were going to take steps to take the
opportunities in the non-prime sector to achieve higher blended returns. At the
end of the quarter we owned approximately $3 billion of non-prime loans, which
is a major reason why the portfolio as a whole achieved returns of approximately
12%.

Our spread for the quarter in the mortgage portfolio was 91 basis points
compared to 102 basis points in the first quarter. The reduction of spread
quarter over quarter was reduced by the impact of the shift in our asset mix,
and we believe that as we complete the transition, the benefits of the portfolio
mix will become more and more evident to investors. We anticipate that for the
third quarter we will have an average mortgage balance of approximately $15
billion with approximately $5.5 billion in non-prime loans. We believe that this
mix will allow us to maintain or possibly widen our net interest margin in the
third quarter, even as the impact of current and future Fed tightenings continue
to be felt.

One of the advantages we believe this strategy provides to investors, even
beyond the higher risk-adjusted returns, is the benefit of diversifying interest
rate and credit risk. For example, typically in a strong economy we will
ultimately see rising interest rates and flattening yield curves, as we do
today. While this is a challenging environment for the mortgage-backed
securities portfolio, the lower losses and the mortgage lending activity
accompanying the strong economy in the non-prime area benefits the overall
performance of the portfolio. Conversely, in a weaker economy, and with the job
market weakening, the benefits of ultimately falling rates on the whole
portfolio will typically offset and possibly more than offset any increase in
losses in non-prime mortgages driven by higher unemployment.

Our merchant banking business also continues to be strong. In May, one of our
private investments was sold to a strategic buyer in a transaction that resulted
in a $14.7 million gain. In June another completed an IPO and two more completed
IPOs in July. At June 30th the merchant banking portfolio totaled $351 million
and had net unrealized gains equal to $13.8 million. The portfolio also
currently earns about $8.5 million per quarter in dividends. We continue to see
opportunities to invest with excellent returns in this space as well as in the
non-prime area.

In our balance sheet and investment businesses as a whole we're seeing an
expansion of great investment opportunities. We continue to be optimistic about
the returns in our non-prime business. In addition, the growth of our investment
banking franchise has led to an increase in opportunities for the merchant bank.
Finally, for the first time in a while, we believe that there are beginning to
be some interesting opportunities to invest in agency mortgage-backed securities
once again.

You can also see that we are completing the transition period involving the
absorption of First NLC. This quarter is the first in which First NLC's
financial results have been fully consolidated into our operating performance.
FNLC originated a record number of mortgages with an aggregate value of $1.5
billion, an increase of 79% over its second quarter last year. The acquisition
has gone well. We're happy with FNLC's performance, and happy to have them as a
part of the FBR team.

As you look at our quarter it's important that you understand the components of
the increase in expenses. Expenses for the quarter were primarily impacted by
three items -- first, the addition of First NLC increased expenses by $22
million; second, capital markets activity increased by over 60%, increasing the
variable compensation in the capital markets area by 24%. In addition, the
increased activity led to a $13 million provision for taxes at the taxable REIT
subsidiary. Third, increased occupancy and professional expenses of $8.7 million
as a result of an expansion of our capital markets business.

We would expect that as the portfolio returns trend higher and make up a higher
percentage of our overall revenue, compensation expenses as a percentage will
trend back to the mid-30s. As FNLC continues to grow its origination volume we
anticipate increasing margins. The investment in our capital markets business is
supporting the profitable growth and market share gains we are enjoining in that
area. The break-even level in that business is now running at approximately $75
million per quarter.

Looking forward, in summary, we think there are several factors that will help
us return our business as a whole to profitability levels comparable to that of
a year or two ago. Chief among those are the repositioning of our balance sheet
to continue to add more higher-margin non-prime loans, the continued strength
and growth of our capital markets franchise, and growing opportunities to invest
in our businesses across many lines.

So with that, Operator, we're now happy to take questions.

QUESTION AND ANSWER

Operator

(OPERATOR INSTRUCTIONS)

Richard Herr - KBW - Analyst

Terrific performance in a tough quarter. Just a couple of questions and then I
will hop back in the queue. I guess the first really is could you tell us how
many loans were sold during the quarter? Clearly you had a good quarter in terms
of loan production with the $1.5 billion there, but I am curious how much
was actually sold.

Rick Hendrix - COO

We sold most of that production. The actual total dollar volume sold was $1.1
billion.

Richard Herr - KBW - Analyst

That's a gain on sale of about 1.2%. Is that what we should be thinking about
going forward, or maybe there is just more than 1.5% that we are talking prior..

Rick Hendrix - COO

No, if you look today at where the market is, I don't think there's anybody
that's generating a net 1.5% gain on sale.

Richard Herr - KBW - Analyst

That's helpful, thank you.

Secondly, just on the leverage, where do you guys feel that we could see this
eventually kind of peak? Clearly the expansion of the non-prime business might
be pulling it up slightly, and I know it is still within your targeted range.
But where do you think we can see this peak?

Rick Hendrix - COO

We're really targeting around 6% capital in the non-prime part of the balance
sheet. So if we get to the kind of 50-50 mix that we talked about, you're going
to kind of blend to between 13 and 14 times overall leverage in just the
mortgage portfolio. Obviously that's a much, much lower number on the whole
Company.

Richard Herr - KBW - Analyst

Absolutely. Just briefly on the expenses, is there anything still maybe a little
bit higher than normal in the professional line item?

Rick Hendrix - COO

We are running higher than normal or trend legal expenses, still kind of related
to some of the first-quarter issues. And we are running higher than normal
consultant expenses related to Sarbanes-Oxley as we bring FNLC up to where we
are at FBR, from a control standpoint.

Richard Herr - KBW - Analyst

That is helpful. Thanks a lot.

Operator

(OPERATOR INSTRUCTIONS)

Adam Weinbrich - Basswood Partners - Analyst

Just another question on the gain on sale. Maybe you could help me out; I'm
confused. The GAAP gain on sale that other sub-prime companies report typically
used to be in the high twos. Countrywide reported 1.92 in the last quarter. Is
the accounting for your line number somehow different? Or if not, why is it so
much lower?

Rick Hendrix - COO

When you're looking at -- it really depends on kind of what number you're
looking at. When you look at our number of gain on loans -- gain on sale of
loans net, that's not the gross number that we're receiving in that sale, and
so --

Adam Weinbrich - Basswood Partners - Analyst

I understand, but no one else is -- on the GAAP income statement of any other
company, they are reporting net of some expenses. Is that -I mean to say- you
sold for maybe, I don't know, 102.5 gross or something, and it's net of
(indiscernible)

Eric Billings- Chairman & CEO

Exactly. Our average sale price in the quarter was between 102.75 and 103.

Adam Weinbrich - Basswood Partners - Analyst

But I mean, even still, the GAAP number is a lot lower than what other companies
report. I mean back in the good old days the GAAP number for guys like New
Century was 3.5 and recently it's been 3.75. This last quarter it was 2. Is it
just a matter of scale here that the number would be lower?

Eric Billings - Chairman & CEO

Our number is running very consistent with where the industry was during the
quarter, which tends to be in the 102.75 to 103, occasionally higher. Again,
these are not precisely fungible because different assets have different
characteristics, and so gain numbers will be different to reflect that. But
we're very consistent; very, very much where the industry was last quarter.

Adam Weinbrich - Basswood Partners - Analyst

And then the increase in loans on the balance sheet for purchased sub-prime
loans, you sold your production and then purchased sub-prime loans in the
market.

Rick Hendrix - COO

That's correct.

Eric Billings - Chairman & CEO

And as we have said before, we are in a very good environment from this
perspective, and that gives us the advantage to be able to build out the
portfolio more completely, more thoroughly, more quickly because we can actually
acquire loans at very close to the same cost to originate loans. So it gives us
greater flexibility, and we'll take advantage of that as long as the environment
holds and allows us to do that.

Adam Weinbrich - Basswood Partners - Analyst

Thank you very much.

Operator

Richard Herr - KBW - Analyst

Just quickly on the press release this morning, the compensation change, are you
planning on accounting for the RSUs in the compensation on the P&L? Or is that
not going to -- how is that going to be treated?

Rick Hendrix - COO

It will run through the P&L over the course of the next three years as the stock
vests.
Richard Herr - KBW - Analyst

We might see a step down possibly in the compensation in the next few quarters
relative to where it was running the last few?

Rick Hendrix - COO

No, I think as a percentage, as Eric said in the remarks, as the portfolio
becomes a higher percentage of our overall income, you're going to see comps and
net revenues trend back toward kind of the mid to low 30s. But you're not going
to see any meaningful impact from restricted stock.

Richard Herr - KBW - Analyst

Just lastly on the dividends -- not your dividends, but the dividends you
received from your merchant banking investments -- I know last quarter you had
spoken a little bit about how some of them got paid late so they got paid in the
second quarter, so there was a nice jump up from Q1 to Q2. What do you think the
real core run rate here is? It's 8.4 in Q2; do you think it is more in the 5 or
6 range?

Rick Hendrix - COO

No, it is actually, we're pretty close to the core run rate, although all
these dividends are trending up right now. So the dividends that we missed
in the first quarter because they were pushed out are almost I think with
one exception all going be realized in the fourth quarter. So those
companies will pay both the third and fourth quarter dividend in the fourth
quarter this year. So saying the run rate is a little bit higher than the
8.4.

Eric Billings - Chairman & CEO

So we would expect for the third quarter it to be -- run at least at that level,
and then next quarter to be potentially as much as double that level, depending
on certain activity. And then again, we would anticipate probably realizing
gains in this quarter of somewhere in the vicinity of 5 to 12 million for the
quarter. Again, these are not precisely predictable and it could be different
than that. But that would be probably a current anticipation and would get us
back to a more normalized level of merchant banking activity, much as we saw in
this second quarter.

Richard Herr - KBW - Analyst

Thank you very much. That's very helpful.

Operator

Steven Eisman - FrontPoint - Analyst

You may have addressed this before. I had to jump off the call for a minute.
Could you just talk about the expenses? It just seems somewhat elevated given
the last couple of quarters, especially some of the non-comp expenses. Are there
any one timers there, or is this the run rate for the company?

Eric Billings - Chairman & CEO

Really the answer to that, Steve, is a couple of things. First of all, again,
remember about $22 million of the increase came from the acquisition of First
NLC. So apples to apples you would take $22 million out in a comparison, number
one. Number two, because of the mix shift in our revenues, because more was from
capital market and less from the spread business because of the flattening yield
curve, that causes compensation expenses to be higher because there are very
little compensation expenses in the spread business. As that spread starts to
trend back up and normalize and our assets continue to grow you would tend to
see that compensation number as a percentage of revenues come back to more
normalized levels. And thirdly, we do have increased expenses from certain legal
and other areas that would be nonrecurring in certainly the Sarbanes-Oxley
build-out and finishing of the First NLC.

So some portion of that will be nonrecurring. I think we think it's about $7 to
$8 million probably. And the rest we would anticipate to be fairly consistent.
And again, reflecting about a $75 million breakeven, up from about a $65 million
breakeven last year. But this is very much as we had anticipated and planned and
then built out all of the verticals and component parts of the Company very
substantially, completing this build out when we do anticipate that we will
continue to grow revenues disproportionately to this expense build out over the
next many quarters, providing very acceptable returns from that.

Steven Eisman - FrontPoint - Analyst

Do you expect -- assuming the yield curve doesn't flatten any more from here, do
you expect this to be the bottom of your net interest margin?

Eric Billings - Chairman & CEO

Again, we want to be very careful with these kinds of responses, Steve, because
it's so unpredictable. But as we said, we believe even in anticipating that the
Fed continues to raise rates through the end of the year that the growth of our
non-prime portfolio will allow us to maintain our spread and possibly even grow
our spread from the second quarter, even if the Fed raises rates. So clearly if
they were to stop raising rates we would anticipate that our spread would widen
very significantly.

Steven Eisman - FrontPoint - Analyst

Thank you very much.

Operator

Richard Sloan - H&R Realty - Analyst

Could you give us a little color on whether you think the dividend is
sustainable at the $0.34 level and whether there's any extra that's still
planned?

Eric Billings - Chairman & CEO

I think the best way to think about that question is that we need to achieve
roughly returns on equity in the 13% level on our common equity to do that.
Clearly we at this time believe that our Company and the character of our
business will do that, and will sustain that. And in fact, we believe, as we
have stated, the normalized return on equity level for our Company is higher
than that. And we believe as we see the environment as it exists as the ensuing
quarters go by with the growth of our portfolio, the change in the character of
our portfolio, the growth of our capital markets businesses as we described, we
would be expecting to have higher returns on equity and allow us certainly to
continue to pay the dividend. We would ideally look forward to a point where in
the future we could be paying the special dividends that historically we have
again. But these things are never precisely predictable, as you know, and
timeframes can ebb and flow based on different circumstances.

Richard Sloan - H&R Realty - Analyst

Thank you very much.

Operator

Adam Weinbrich - Basswood Partners - Analyst

Thanks for taking my second set of questions. Would you mind disclosing the cost
to originate for First NLC and if you have the portion that's deferred versus
the actual expense that shows up on the GAAP income statement?

Rick Hendrix - COO

I will give you just kind of a rough estimate of the cost to originate. There
are a number of different ways to look at that number, and we have some costs
running through NLC related to the acquisition which impact the overall expense
levels. But give or take, we're running around a 102.55 to 102.60 cost to
originate.

Adam Weinbrich - Basswood Partners - Analyst

Thank you very much.

Operator

At this time there are no further questions. Mr. Harrington, are there any
closing remarks?

Eric Billings - Chairman & CEO

First, we'd like to thank everybody for participating. Again, we're very pleased
with the character of the Company, the evolution and the growth of the business.
And we're very optimistic and excited about the Company and the future of the
business as we look forward. We appreciate everybody's participation and look
forward to talking to you all in the future. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.