1209028--3/1/2007--FRIEDMAN_BILLINGS_RAMSEY_GROUP

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General Risks Related to our Business We may fail to realize the anticipated benefits of our acquisition of First NLC in February 2005, which could have an adverse effect on our earnings and in turn negatively affect the value of our common stock and our ability to make distributions to our shareholders. We may not be able to manage our growth efficiently, which may adversely affect our results and may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our shareholders. The voting power of our principal shareholders and other executive officers, directors and nominees may result in corporate action with which you do not agree and may discourage third party acquisitions of our company and prevent our shareholders from receiving any premium above market price for their shares. The trading prices of our Class A common stock may be adversely affected by factors outside of our control. We may experience significant fluctuations in quarterly operating results due to the volatile nature of the investment banking and securities business and the sensitivity of our principal investing business to changes in interest rates and fluctuations in the stock market and we may therefore fail to meet profitability or dividend expectations, which may, in turn, affect the market price of our Class A common stock and our ability to pay dividends to our stockholders. An increase in market interest rates may have an adverse effect on the market price of our common stock. We cannot assure you that we will be able to maintain or increase our current dividend rate. Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of our Class A common stock and the ability to pay dividends to our stockholders. Failure to procure adequate capital and funding would adversely affect our results and may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends to our stockholders. We face intense competition for personnel which could adversely affect our business and in turn negatively affect the market price of our common stock and our ability to pay dividends to our stockholders. We are dependent on a small number of key senior professionals and loss of the professionals could adversely affect our results and may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends. We are highly dependent on systems and third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our Class A common stock and our ability to pay dividends. We may not be able to keep up with rapid technological change, which may adversely affect the market price of our Class A common stock and our ability to pay dividends. Indemnification agreements with our affiliates may increase the costs to us of litigation against our company. Risks Related to Investment Banking, Institutional Brokerage, Sales and Trading, Asset Management and Other Fee-Based Financial Services Businesses Operated by us through our Taxable REIT Subsidiaries We depend on relatively few industries to generate a significant percentage of our revenue, which may limit our revenues and net income and may adversely affect our operating results and negatively impact the market price of our common stock. Our financial results may fluctuate substantially from quarter to quarter, which may impair our stock price. Our failure to acquire or internally develop the infrastructure needed to offer a complete range of M A services could negatively affect the growth of our business. Pricing and other competitive pressures may impair the revenues and profitability of our institutional brokerage business. We face strong competition from larger firms, some of which have greater resources and name recognition, which may impede our ability to grow our business. Our capital markets and strategic advisory engagements are singular in nature and our failure to capture repeat business from existing clients may harm our operating results. Larger and more frequent capital commitments in our trading, underwriting and other businesses increases the potential for us to incur significant losses. Limitations on our access to capital could impair our liquidity and our ability to conduct our businesses. Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could harm our business. Strategic investments or acquisitions and joint ventures may result in additional risks and uncertainties in our business. We have potential conflicts of interest with our executive officers and employees which could result in decisions that are not in your best interests. Our business is dependent on cash inflows to mutual funds and other pooled investment vehicles, which could result in our experiencing operating losses if cash flows slow, and negatively impact cash available for distribution to shareholders. Significantly expanded corporate governance and public disclosure requirements may result in fewer initial public offerings and distract existing public companies from engaging in capital market transactions which may reduce the number of investment banking opportunities available to pursue. Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions. Our exposure to legal liability is significant, and damages that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses. Employee misconduct could harm us and is difficult to detect and deter. Risks Related to our Principal Investing Activities Declines in the market values of our mortgage-backed securities and other investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders. Use of leverage could adversely affect our operations, particularly with respect to our mortgage-related assets portfolio and negatively affect cash available for distribution to our stockholders. Changes in interest rates could negatively affect the value of our mortgage-backed securities, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders. An increase in our borrowing costs relative to the interest we receive on our mortgage-related assets may adversely affect our profitability, which may negatively affect cash available for distribution to our stockholders. Prepayment rates could negatively affect the value of our mortgage-backed securities, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders. Rapid changes in the values of our mortgage-backed securities and other real estate assets may make it more difficult for us to maintain our REIT status or exemption from the 1940 Act. Hedging against interest rate exposure may adversely affect our earnings, which could adversely affect cash available for distribution to our shareholders. Our assets may include mezzanine or senior unsecured loans that may have greater risks of loss than secured senior loans and if those losses are realized, it could adversely affect our earnings, which could adversely affect our cash available for distribution to our stockholders. Loans that we may make to highly leveraged companies may have a greater risk of loss which, in turn, could adversely affect cash available for distribution to our stockholders. Our due diligence may not reveal all of a portfolio company s liabilities and may not reveal other weaknesses in a portfolio company s business. We depend on management and have limited ability to influence management of portfolio companies. We may make investments that have limited liquidity, which may reduce the return on those investments to our stockholders. The market for investment opportunities is competitive, which could make it difficult for us to purchase or originate investments at attractive yields, which could have an adverse effect on cash available for distribution to our stockholders. We may incur losses as a result of our sector investment activities, which could negatively affect the market price of our common stock and our ability to make distributions to our stockholders. Risks Related to our Non-Conforming Residential Mortgage Loan Origination Business Recent increased delinquencies and losses with respect to residential mortgage loans, particularly in the sub-prime sector, may cause our First NLC subsidiary to recognize increased losses, which would adversely affect our consolidated operating results. Our non-conforming residential mortgage loans are secured by interests in real property and we may suffer a loss if the value of any of the underlying properties declines. The geographic concentration of our mortgage loan originations and acquisitions increases our exposure to risks in those areas, especially California. We are subject to increased risk of default, foreclosure and losses associated with our strategy of focusing on non-conforming mortgage loan originations and acquisitions. We may underestimate the default risk of, and therefore under-price, the non-conforming mortgage loans that we originate or acquire. The residential mortgage loan origination business is a cyclical industry, and is expected to decline in 2007 and subsequent years, which could reduce our current levels of non-conforming mortgage loan originations and our ability to generate net income in the future. We face intense competition that could adversely affect our market share and our revenues. The poor performance of a pool of mortgage loans we securitize could increase the expense of our subsequent securitizations, which could have a material adverse effect on our results of operations, financial condition and business. Our ability to generate net interest income from the mortgage loans we retain in our portfolio is dependent upon the success of our portfolio-based model of securitizations, which is subject to several risks. We may incur additional losses in our securitized mortgage loan portfolio The use of securitizations with over-collateralization requirements may have a negative impact on our cash flow. An interruption or reduction in the securitization and whole loan markets would harm our financial position. Fluctuating or rising interest rates may adversely affect the amount of net interest income we receive. Changes in interest rates could negatively affect the value of our residual interests, mortgage loans held for sale and mortgage loans held for investment, which could result in reduced earnings or losses and could negatively affect the cash available for distribution to our stockholders. A decrease in the value of the mortgage loans used as collateral under our credit facilities could cause us to default under our credit facilities. If we are unable to realize cash proceeds from non-conforming mortgage loan sales in excess of the loan acquisition cost, our financial position would be adversely affected. We have limited experience hedging the interest rate risk associated with retaining a portfolio of non-conforming mortgage loans over the long term, and any hedging strategies we may use may not be successful in mitigating these risks. We may be required to repurchase or substitute mortgage loans that we have sold or securitized, as the case may be, or to indemnify holders of our asset-backed securities, which could have a material adverse effect on our results of operations, financial condition and business. The success of our investment portfolio management and securitization business will depend in part upon a third party s ability to effectively service the loans held in our investment portfolio and in our securitizations. A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our operations, particularly if it results in a decline in the real estate market. If we are unable to maintain our network of independent brokers, our mortgage loan origination business will decrease and if we are unable to grow our network of independent brokers our ability to increase our total mortgage loan originations volume may be hampered. We may be subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees. We will incur significant costs related to governmental regulation. If we do not obtain the necessary state licenses and approvals, we will not be allowed to acquire, fund or originate mortgage loans in some states, which would adversely affect our operations and may result in our inability to qualify as a REIT. Our inability to comply with the large body of complex laws and regulations at the Federal, state and local levels associated with our business could have a material adverse effect on our results of operations, and our ability to pay dividends to our stockholders. The complex federal, state and municipal laws governing loan servicing activities could increase our exposure to the risk of noncompliance. New legislation could restrict our ability to make or to acquire mortgage loans, which could adversely impact our results of operations, financial condition and business. We may be subject to various legal actions, which if decided adversely could have a material adverse effect on our financial condition. The conduct of the independent brokers through whom we originate our wholesale mortgage loans could subject us to fines or other penalties. Do not call registry and Do not fax rules may limit our ability to market our products and services. We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use, and security of customer information. Our inability to rely on the Alternative Mortgage Transactions Parity Act to preempt certain state law restrictions on prepayment charges could have a material adverse effect on our results of operations, financial condition and business. If many of our borrowers become subject to the Servicemembers Civil Relief Act of 2003, our cash flows and interest income may be adversely affected. We are exposed to environmental liabilities with respect to properties to which we take title. Tax Risks of our Business and Structure Our ownership limitation may restrict change of control or business combination opportunities in which our shareholders might receive a premium for their shares. U.S. federal income tax requirements may restrict our operations, which could restrict our ability to take advantage of attractive investment opportunities, which could negatively affect the cash available for distribution to our shareholders. Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax. Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our shareholders. Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our shareholders. The requirement that we distribute at least 90% of our taxable income to our shareholders, other than net capital gains and excluding the retained earnings of our taxable REIT subsidiaries, each year will result in our shareholders receiving periodic taxable distributions. A sale of assets acquired from FBR Group within ten years after the merger would result in corporate income tax, which would reduce the cash available for distribution to our shareholders. We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

Full 10-K form ▸

1209028--3/1/2007--FRIEDMAN_BILLINGS_RAMSEY_GROUP_INC