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Friedman Billings' Bad Quarter

The investment bank posts a big loss and takes a big writedown.

Investment firm

Friedman Billings Ramsey


had a dismal third quarter, posting a $67.4 million loss in the period.

The Virginia-based firm, which has seen its stock crumble over the past two years, lost 39 cents a share in the quarter, compared with a profit of $23.0 million, or 14 cents a share, a year ago.

The quarter was a particularly messy one with Friedman Billings taking a noncash $146.8 million writedown on the value of its big mortgage portfolio, which has been hit hard by the narrowing of the spread between short- and long-term interest rates.

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The firm also took a $20 million impairment charge in its merchant banking -- or private equity -- portfolio. Friedman Billings says the majority of the writedown involved equity positions in businesses in the so-called subprime mortgage business -- firms that lend money to people with shaky credit histories.

Revenue plunged in the quarter to $82.4 million, down from $340 million a year ago. Equity capital market revenue fell to $36.7 million, down from $113.0 million.

"Banking revenues for the quarter were unusually low, consistent with the industry's relatively slow third quarter for new equity issues," the company said. "The firm believes this to be an anomaly and, in support of that view, the company has already generated more banking revenue during October than in the entire third quarter.''

Only two analysts follow Friedman Billings, according to Thomson Financial, and they were looking for 17 cents a share in the quarter. There was no revenue estimate. It's not clear if the analyst estimate had factored into the significant writedowns in the quarter.

"Clearly the last year has been both challenging and disappointing for the company and its shareholders," says Friedman Billings Chairman and CEO Eric Billings. "However, the noncash writedown of our mortgage loan and merchant banking portfolios should position our balance sheet to now generate higher and more consistent returns.''

This summer, Friedman Billings set up its investment banking division as a separate entity called FBR Capital Markets. In doing so, the firm sold a significant equity stake in the division to Crestview Partners, a private equity firm, for $270 million.

Shares closed Wednesday at $7.40. The stock has fallen more than 30% this year.