FICC Fieldstone Investment Corp (MM)

COLUMBIA, Md., May 11 /PRNewswire-FirstCall/ -- Fieldstone Investment Corporation (NASDAQ:FICC) today announced its results of operations for the first quarter of 2006. Financial Highlights -- Fieldstone's net income for the first quarter of 2006 was $12.9 million or $0.27 per share (diluted) compared to $10.8 million or $0.22 per share (diluted) for the fourth quarter of 2005. -- Fieldstone had core net income in the first quarter of 2006 of $10.2 million or $0.21 core net income per share (diluted), a $7.2 million decrease from the $17.4 million or $0.36 core net income per share (diluted) for the fourth quarter of 2005. -- The investment portfolio was $5.5 billion at March 31, 2006. -- Fieldstone funded $1.0 billion of loans by its non-conforming wholesale and retail divisions in the first quarter of 2006. -- Fieldstone sold $654.6 million of mortgage loans originated by its non- conforming wholesale and retail divisions in the first quarter of 2006 at an average gross premium net of derivative gains of 2.4%, compared to sales of $424.8 million in the fourth quarter of 2005 at an average gross premium net of derivative gain of 1.8%. "In the current market, our REIT portfolio has continued to experience very strong credit performance, but competition has reduced our net interest margins," stated Michael J. Sonnenfeld, President and Chief Executive Officer. "We have followed a disciplined approach in our origination business relative to credit standards and pricing, rather than focusing only on volume, and as a result we achieved strong sale margins on the loans we sold in the first quarter. We will invest in our origination franchise in 2006, expand our market presence and improve our operating systems, and are committed to reducing our loan origination expense. We remain very positive about our opportunity to expand our existing lines of business in the current market cycle." DIVIDEND GUIDANCE Fieldstone today reaffirmed management's previous guidance that dividends for common stockholders during the year 2006 are expected to total between $1.84 and $2.04 per share. The dividend guidance is based on management's current estimates and forecasts for the fiscal year 2006, including the following: -- Total annual non-conforming mortgage loan fundings of between $5.0 billion and $6.2 billion. -- Investment portfolio balance of $6.0 billion of non-conforming loans by year end 2006, which reflects a portfolio debt to equity leverage ratio of approximately 13 to 1. -- Average net interest spread on new loans added to the investment portfolio over the two year swap rate of 3.00%. -- Weighted average diluted common shares outstanding of 48.5 million. Fieldstone paid a regular quarterly dividend on April 28, 2006 of $0.48 per share for the first quarter of 2006, which was paid to stockholders of record on March 31, 2006. FINANCIAL RESULTS This press release discloses Fieldstone's financial results under accounting principles generally accepted in the United States of America (GAAP). Also presented are certain non-GAAP financial measures that management believes provide useful information to investors regarding Fieldstone's financial performance. The non-GAAP financial measures presented include core income from continuing operations, core earnings per share from continuing operations (diluted), core net income, core earnings per share (diluted), core return on average assets, core return on average equity, core net interest income and margin and cost to produce. Additional information about each of these non-GAAP financial measures, including a definition and the reason management believes its presentation provides useful information to investors and a reconciliation of each of these non-GAAP financial measures to the most directly comparable measure under GAAP is provided in Schedule 2 of this press release. Financial information in this press release presents the results of Fieldstone's previous conforming origination business as a discontinued operation, following the sales in the first quarter of 2006 of the assets related to that business, and has been restated for the three months ended March 31, 2005 to correct the timing of the Company's recognition of income tax expense, as previously announced on April 3, 2006. Fieldstone's continuing operations include its investment portfolio and its Non-Conforming Wholesale and its Retail origination divisions. Net Income and Earnings per Share Fieldstone's net income for the first quarter of 2006 was $12.9 million, or $0.27 per share (diluted) compared to $10.8 million or $0.22 per share (diluted) for the fourth quarter of 2005. Net income increased $2.1 million during the first quarter of 2006 from the fourth quarter of 2005 due primarily to an increase in the non-cash mark to market valuation gain on interest rate swap agreements and to an increase in gains on sales of mortgage loans. The first quarter of 2006 included a $1.9 million non-cash mark to market valuation gain on interest rate swap agreements, compared to a $7.2 million non-cash mark to market valuation loss in the fourth quarter of 2005. Gains on sales of mortgage loans increased $3.0 million to $10.3 million in the first quarter due to a higher volume of loans sold at higher average sale premiums. These revenue increases were partially offset by lower net interest income on loans held for investment and by the recognition of a $0.9 million pre-tax loss on disposal related to the discontinuation of the conforming division. Net income for the first quarter of 2006 was $28.9 million lower than the $41.8 million net income, or $0.86 per share (diluted), for the first quarter of 2005, primarily due to the decrease in the non-cash mark to market valuation gain on interest rate swap agreements and to decreased net interest income on loans held for investment. These decreases were partially offset by the increase in net cash settlements on swap agreements received in the first quarter of 2006 compared to the first quarter of 2005. Fieldstone's income from continuing operations for the first quarter of 2006 was $14.6 million or $0.30 per share (diluted) compared to $10.6 million or $0.22 per share (diluted) for the fourth quarter of 2005. Core Net Income and Core Earnings per Share Core net income for the first quarter of 2006 was $10.2 million, or $0.21 core net income per share (diluted), a $7.2 million decrease from the $17.4 million, or $0.36 core net income per share (diluted) in the fourth quarter of 2005. Core net income excludes the non-cash mark to market gains or losses on interest rate swap and cap agreements. Core net income decreased in the first quarter of 2006 due to higher core interest expense, partially offset by higher gain on sales of mortgage loans, and due to the recognition of a $0.9 million loss on disposal related to the discontinuation of the conforming division. Core net income for the first quarter of 2006 was $10.9 million lower than the $21.1 million, or $0.44 core net income per share (diluted), for the first quarter of 2005, primarily due to the decline in core net interest margin on loans held for investment in the first quarter of 2006 to 2.2%, from a core net interest margin of 3.2% in the comparable period of 2005. Fieldstone's core income from continuing operations for the first quarter of 2006 was $11.8 million or $0.24 per share (diluted) compared to $17.3 million or $0.36 per share (diluted) for the fourth quarter of 2005. Mortgage Loan Fundings Three Months Ended March 31, December 31, March 31, ($000) 2006 2005 2005 Non-Conforming Wholesale Division $860,523 1,261,186 975,905 Retail Division 150,795 164,892 171,956 Total Fundings by Continuing Operations 1,011,318 1,426,078 1,147,861 Discontinued Conforming Division 127,797 277,000 307,991 Total Fundings $1,139,115 1,703,078 1,455,852 Fieldstone funded a total of $1.1 billion of mortgage loans during the first quarter of 2006, which included $1.0 billion of loans by the non- conforming wholesale and retail divisions, and $0.1 billion of conforming loans originated by its discontinued conforming division. The decrease in non-conforming loan fundings from the prior quarter was due primarily to seasonal factors that tend to reduce new mortgage applications during the months of January and February, and to intense competition for new loans in the mortgage origination industry. Fieldstone's Retail Division funds a full range of non-conforming, conforming and government-sponsored residential mortgage loans. Net Interest Income and Margin Net interest margin on loans held for investment after provision for loan losses for the three months ended March 31, 2006, December 31, 2005, and March 31, 2005 was as follows: 1Q 2006 4Q 2005 1Q 2005 Coupon interest income 7.07% 6.77% 6.68% Amortization of deferred origination costs (0.50)% (0.43)% (0.46)% Prepayment fees 0.41% 0.60% 0.56% Yield on loans held for investment 6.98% 6.94% 6.78% Cost of financing loans held for investment (1) 5.17% 4.71% 3.28% Net yield on loans held for investment (2) 1.92% 2.33% 3.62% Provision for loan losses (0.40)% (0.55)% (0.37)% Yield on loans held for investment, after provision 1.52% 1.78% 3.25% (1) Cost of financing for loans held for investment does not include the effect of the interest rate swap agreements. (2) Net yield on loans held for investment does not equal the arithmetic difference between the yield on loans held for investment less the cost of financing loans held for investment due to the difference between the principal balance of the loans held for investment and the principal balance of the debt financing those loans. Net interest income on loans held for investment after provision for loan losses was $20.8 million for the first quarter of 2006, compared to $24.6 million for the fourth quarter of 2005 and $39.7 million for the first quarter of 2005. The decrease in Fieldstone's net interest margin after provision in the first quarter of 2006 was due primarily to the 0.46% rise in interest expense on the debt financing the loans in its portfolio as interest rates continued to rise during the first quarter, a decline of 0.19% of prepayment fee income as borrowers waited to refinance their loans until after their prepay fees expired and an increase of 0.07% in amortization of deferred expenses as borrowers refinanced their loans following the expiration of the prepay fee. These revenue declines were only partially offset by a 0.30% increase in coupon interest income in the first quarter, resulting in a 0.41% decrease to the net yield on the loans before provision for losses. Net interest income and margin do not include the effect of Fieldstone's economic hedge of its interest expense. Fieldstone was able to increase the average coupon on the loans in the portfolio in the first quarter by 0.30%, which was insufficient to offset the higher interest expense it recognized during the quarter. Market competition for new loans did not allow the coupon on new loans to increase at the same rate as the increase in the cost of financing the loans. In addition, older loans with higher net interest margins continue to prepay at a fast rate (consistent with Company and industry forecasts) as borrowers of Fieldstone's older adjustable rate mortgage loans refinance their loans around the time that the loans reset from their initial fixed rate to an adjusting rate. Net interest income on loans held for sale was $4.0 million for the first quarter of 2006, a 4.84% net interest margin, compared to $3.1 million for the fourth quarter of 2005, a 4.07% net interest margin, and $3.3 million for the first quarter of 2005, a 6.08% net interest margin. Core Net Interest Income and Margin Core net interest margin on loans held for investment after provision for loan losses for the three months ended March 31, 2006, December 31, 2005, and March 31, 2005 was as follows: 1Q 2006 4Q 2005 1Q 2005 Yield on loans held for investment* 6.98% 6.94% 6.78% Core cost of financing for loans held for investment 4.46% 3.71% 3.31% Core yield on loans held for investment 2.61% 3.31% 3.60% Provision for loan losses - loans held for investment (0.40)% (0.55)% (0.37)% Core yield on loans held for investment, after provision for loan losses 2.21% 2.76% 3.23% *Includes coupon interest income and prepayment fees, net of amortization of deferred costs. Core net interest income on loans held for investment after provision for loan losses was $30.2 million for the first quarter of 2006, compared to $38.1 million for the fourth quarter of 2005, and $39.4 million for the first quarter of 2005. The core net interest margin after provision in the first quarter of 2006 decreased compared to the fourth of 2005 due to a 0.75% rise in core interest expense on the debt financing the loans in the portfolio as older, lower rate swaps expired, a decline of 0.19% of prepayment fee income as borrowers waited to refinance their loans until after their prepay fees expired and an increase of 0.07% in amortization of deferred expenses as borrowers refinanced their loans following the expiration of the prepay fee. These decreases in revenue were only partially offset by a 0.30% increase in coupon interest income in the first quarter, resulting in a net 0.55% decrease to the core net yield on the loans. In addition, Fieldstone's fourth quarter 2005 core interest expense was reduced by 0.32% by the termination during the fourth quarter of a number of in-the-money swaps in connection with the pledge of replacement swaps with a rated counterparty to a securitization trust as part of the long-term financing of Fieldstone's loans held for investment. Gains on Sales of Mortgage Loans, Net For the first quarter of 2006, revenues from gains on sales of loans, net from Fieldstone's non-conforming wholesale and retail divisions were $10.3 million, an increase of $3.0 million from $7.3 million for the fourth quarter of 2005 and an increase of $1.8 million from $8.5 million for the first quarter of 2005. Gain on sale revenue increased in the first quarter of 2006 as compared to the prior periods due primarily to the higher volume of mortgage loan sales from Fieldstone's continuing non-conforming wholesale and retail divisions and an increase in the average sale premiums, net of derivative gains, received. Origination Expenses and Cost to Produce Fieldstone's cost to produce from continuing operations as a percentage of mortgage loan fundings increased to 3.52% in the first quarter of 2006, compared to 3.07% in the first quarter of 2005, and 2.71% in the fourth quarter of 2005. This increase reflected a rise in the Company's fixed production expenses, primarily sales personnel salaries and benefits, which were spread over a lower funding volume during the quarter. Total operating costs including deferred origination costs declined to $37.0 million in the first quarter of 2006, compared to $39.0 million in the fourth quarter of 2005, due primarily to lower commissions, as Fieldstone adjusted incentive compensation structures for the narrower margins in the current lending environment. Fieldstone has identified and begun to execute a number of cost reduction initiatives, and anticipates recognizing lowered operating costs throughout the remainder of 2006. Mortgage Loans Held for Investment, Net ($000) 1Q 2006 4Q 2005 1Q 2005 Beginning principal balance $5,530,216 5,272,479 4,735,063 Loans funded for investment 528,334 861,961 730,798 Less: Loan repayments (543,382) (592,069) (369,889) Transfers to real estate owned (19,463) (12,155) (4,642) Ending principal balance 5,495,705 5,530,216 5,091,330 Plus: Net deferred loan origination (fees)/costs 36,776 40,199 40,959 Ending balance mortgage loans held for investment 5,532,481 5,570,415 5,132,289 Allowance for loan losses - loans held for investment (45,744) (44,122) (26,379) Ending balance mortgage loans held for investment, net $5,486,737 5,526,293 5,105,910 Allowance for loan losses as a percentage of the principal balance of loans held for investment 0.83% 0.80% 0.52% The investment portfolio was $5.5 billion at March 31, 2006, a $34.5 million decrease to the principal balance of the portfolio during the quarter, as repayments slightly exceeded new fundings. Hybrid adjustable rate loans which reached their two year reset period from fixed to adjustable rate coupons during the first quarter of 2006 prepaid at an average constant prepayment rate of 91 during the first quarter of 2006. The portion of Fieldstone's non-conforming fundings that were funded as loans held for investment declined in the first quarter to 54% of non-conforming fundings, down from 62% in the fourth quarter of 2005 and from 66% in the first quarter of 2005, as a result of the coupon "filter" that Fieldstone uses to allocate loans to held for investment versus held for sale. The compressed net interest margins on loans originated in the quarter resulted in more of the loans being funded as loans held for sale rather than as loans held for investment. Delinquency, life to date losses and weighted average coupon as of March 31, 2006 of Fieldstone's loans held for investment by securitization pool were as follows: As of March 31, 2006 Current Current % of Principal Balance as Principal Balance Factor of Balance Original Seriously ($000) Principal Delinquent(1) Loans held for investment- securitized: FMIC Series 2003-1 $68,297 14% 19.6% FMIT Series 2004-1 (3) 115,364 17% 14.9% FMIT Series 2004-2 273,494 31% 8.9% FMIT Series 2004-3 517,735 52% 6.2% FMIT Series 2004-4 485,227 55% 8.8% FMIT Series 2004-5 545,245 61% 6.8% FMIT Series 2005-1 494,175 66% 6.1% FMIT Series 2005-2 867,977 90% 4.3% FMIT Series 2005-3 1,121,285 96% 2.3% FMIT Series 2006-1 697,825 100% 0.9% Total 5,186,624 62% 5.1% Loans held for investment- to be securitized 309,081 100% 0.1% Total loans held for investment $5,495,705 63% 4.8% As of March 31, 2006 Avg. Age % of of Loans Cumulative Weighted from Realized Avg. Funding ($000) Losses(2) Coupon (months) Loans held for investment- securitized: FMIC Series 2003-1 0.35% 9.17% 32 FMIT Series 2004-1 (3) 0.28% 9.35% 28 FMIT Series 2004-2 0.34% 8.41% 25 FMIT Series 2004-3 0.27% 6.49% 23 FMIT Series 2004-4 0.23% 6.95% 20 FMIT Series 2004-5 0.18% 6.78% 18 FMIT Series 2005-1 0.20% 6.90% 16 FMIT Series 2005-2 0.03% 7.13% 10 FMIT Series 2005-3 0.00% 7.32% 6 FMIT Series 2006-1 0.00% 7.92% 3 Total 0.18% 13 Loans held for investment- to be securitized 0.00% 1 Total loans held for investment 0.17% 7.32% 13 (1) Seriously delinquent is defined as a mortgage loan that is 60 plus days past due or in the process of foreclosure. (2) Realized losses include charge-offs to the allowance for loan losses- loans held for investment related to loan principal balances and do not include previously accrued but uncollected interest, which is reversed against current period interest income. (3) Series 2004-1 was called and paid in full in April 2006. The total portfolio delinquency status of mortgage loans held for investment at March 31, 2006, December 31, 2005, and March 31, 2005 was as follows: March 31, 2006 December 31, 2005 March 31, 2005 Principal % of Principal % of Principal % of ($000) Balance Total Balance Total Balance Total Current $4,897,817 89.1% 4,925,656 89.1% 4,768,154 93.7% 30 days past due 331,656 6.1% 359,074 6.5% 218,712 4.3% 60 days past due 94,519 1.7% 93,663 1.7% 41,156 0.8% 90+ days past due 59,063 1.1% 65,810 1.2% 19,606 0.4% In process of foreclosure 112,650 2.0% 86,013 1.5% 43,702 0.8% Total $5,495,705 100.0% 5,530,216 100.0% 5,091,330 100.0% Seriously delinquent % 4.8% 4.4% 2.0% The increase in the portfolio's seriously delinquent loans through the first quarter of 2006 is a result of the aging of the loans in the portfolio. This level of delinquency is lower than the level of delinquency initially modeled by management. Mortgage Loans Held for Sale, Net ($000) 1Q 2006 4Q 2005 1Q 2005 Beginning principal balance $591,840 526,016 356,408 Loans funded, held for sale 610,781 841,117 725,054 Less: Loans sold (880,930) (768,571) (802,732) Loans paid off /other (7,544) (6,722) (6,362) Ending principal balance 314,147 591,840 272,368 Plus: Net deferred loan origination fees (costs) 1,469 3,534 2,138 Less: Valuation allowances (2,780) (1,105) (2,056) Ending balance mortgage loans held for sale, net $312,836 594,269 272,450 Mortgage loans held for sale, net, totaled $312.8 million at March 31, 2006, which consisted of all conforming loans funded, together with a portion of the non-conforming fixed rate, second lien and adjustable rate loans originated by Fieldstone. Income Taxes Fieldstone recognized a total income tax benefit, including discontinued operations, of $1.8 million during the first quarter of 2006 primarily related to the $5.3 million pre-tax net loss of Fieldstone Mortgage Company (FMC), Fieldstone's taxable REIT subsidiary (TRS), for the first quarter of 2006. The $5.3 million pre-tax net loss of FMC in the first quarter of 2006 includes a $0.9 million loss on disposal of the conforming division. FMC had a pre-tax net loss of $2.5 million in the first quarter of 2005. Conference Call Fieldstone will hold a conference call on Friday, May 12, 2006 at 10:00 a.m. Eastern Time to discuss its first quarter 2006 operating results. The conference call may be accessed by dialing 800-475-3716 (domestic) or 719-457-2728 (international). Please dial in at least 10 minutes prior to the start of the call. The conference call also will be webcast live on the Internet at http://www.fieldstoneinvestment.com/. Interested participants should go to the Fieldstone website at least 15 minutes prior to the start of the call, select the "Press Room" tab, choose "Live Webcast of First Quarter 2006 Earnings Call" and follow the related instructions. A replay of the conference call will be available on Fieldstone's website at http://www.fieldstoneinvestment.com/ shortly after the conclusion of the call on May 12, 2006 and will be archived on Fieldstone's website for a minimum of 30 days following the conference call. About Fieldstone Fieldstone Investment Corporation owns and manages a portfolio of non- conforming mortgage loans originated primarily by its mortgage origination subsidiary, Fieldstone Mortgage Company, and has elected to be a real estate investment trust for federal income tax purposes. Founded in 1995, Fieldstone Mortgage Company is a nationwide residential mortgage banking company that originates non-conforming and conforming residential mortgage loans through over 4,300 independent mortgage brokers serviced by regional wholesale operations centers and a network of retail branch offices located throughout the country. Fieldstone is headquartered in Columbia, Maryland. Information Regarding Forward-Looking Statements Certain matters discussed in this press release may constitute "forward- looking statements" within the meaning of the federal securities laws, including, but not limited to (i) statements regarding the expected continued building of Fieldstone's investment portfolio in 2006; (ii) the expected achievement of targeted leveraged returns on new loans; (iii) the expected continued expansion of Fieldstone's origination business in 2006 and the achievement of reduced loan origination expenses and operating costs in 2006; and (iv) the reaffirmation of management's previous guidance on dividends, including management's current estimates and forecasts for 2006 on which this guidance is based, contained in the section titled "Dividend Guidance" of this press release. These statements are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results and the timing of certain events may differ materially from those indicated by such forward-looking statements due to a variety of risks and uncertainties, many of which are beyond Fieldstone's ability to control or predict, including but not limited to (i) Fieldstone's ability to successfully implement or change aspects of its portfolio strategy; (ii) interest rate volatility and the level of interest rates generally; (iii) the sustainability of loan origination volumes and levels of origination costs; (iv) continued availability of credit facilities for the liquidity we need to support our origination of mortgage loans; (v) the ability to sell or securitize mortgage loans on favorable economic terms; (vi) deterioration in the credit quality of Fieldstone's loan portfolio; (vii) the nature and amount of competition; (viii) the impact of changes to the fair value of Fieldstone's interest rate swaps on its net income, which will vary based upon changes in interest rates and could cause net income to vary significantly from quarter to quarter; and (ix) other risks and uncertainties outlined in Fieldstone Investment Corporation's periodic reports filed with the Securities and Exchange Commission. These statements are made as of the date of this press release, and Fieldstone undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition (In thousands, except share data) March 31, March 31, December 31, 2005 2006 2005 (As restated) Assets (Unaudited) (Unaudited) Cash $31,020 33,536 34,810 Restricted cash 255,305 7,888 5,947 Mortgage loans held for sale, net 312,836 594,269 272,450 Mortgage loans held for investment 5,532,481 5,570,415 5,132,289 Allowance for loan losses - loans held for investment (45,744) (44,122) (26,379) Mortgage loans held for investment, net 5,486,737 5,526,293 5,105,910 Accounts receivable 13,062 7,201 11,254 Accrued interest receivable 29,043 29,940 23,234 Trustee receivable 119,771 130,237 99,167 Prepaid expenses and other assets 38,227 31,197 22,368 Derivative assets 37,410 35,223 41,371 Deferred tax asset 16,855 17,679 17,277 Furniture and equipment, net 9,479 10,151 9,433 Total assets $6,349,745 6,423,614 5,643,221 Liabilities and Shareholders' Equity Warehouse financing - loans held for sale $252,814 434,061 174,081 Warehouse financing - loans held for investment 259,513 378,707 421,687 Securitization financing 5,241,266 4,998,620 4,422,465 Reserve for losses - loans sold 33,497 35,082 35,099 Dividends payable 23,298 26,689 - Accounts payable, accrued expenses and other liabilities 22,499 23,812 19,880 Total liabilities 5,832,887 5,896,971 5,073,212 Commitments and contingencies Shareholders' equity: Common stock $0.01 par value; 90,000,000 shares authorized; shares issued and outstanding of 48,536,485 as of March 31, 2006, 48,513,985 as of December 31, 2005, and 48,835,876 as of March 31, 2005 485 485 488 Paid-in capital 489,602 493,603 496,534 Accumulated earnings 26,771 37,093 78,184 Unearned compensation - (4,538) (5,197) Total shareholders' equity 516,858 526,643 570,009 Total liabilities and shareholders' equity $6,349,745 6,423,614 5,643,221 FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited; in thousands, except share and per share data) Three Months Ended March 31, March 31, December 31, 2005 2006 2005 (As restated) Revenues: Interest income: Loans held for investment $95,113 96,171 82,836 Loans held for sale 6,601 6,285 4,287 Total interest income 101,714 102,456 87,123 Interest expense: Loans held for investment 68,916 63,946 38,608 Loans held for sale 2,605 3,140 992 Total interest expense 71,521 67,086 39,600 Net interest income 30,193 35,370 47,523 Provision for loan losses - loans held for investment 5,393 7,663 4,494 Net interest income after provision for loan losses 24,800 27,707 43,029 Gains on sales of mortgage loans, net 10,295 7,257 8,469 Other income (expense) - portfolio derivatives 12,158 6,929 20,342 Fees and other income 350 159 286 Total revenues 47,603 42,052 72,126 Expenses: Salaries and employee benefits 20,869 19,516 17,704 Occupancy 1,823 1,718 1,499 Depreciation and amortization 935 843 760 Servicing fees 2,569 2,163 2,604 General and administration 7,563 8,580 7,321 Total expenses 33,759 32,820 29,888 Income from continuing operations before income taxes 13,844 9,232 42,238 Income tax benefit 729 1,391 157 Income from continuing operations 14,573 10,623 42,395 Discontinued operations, net of income tax (including loss on disposal of $0.9 million, pre-tax) (1,645) 162 (641) Net income $12,928 10,785 41,754 Earnings (loss) per share of common stock: Basic: Continuing operations $0.30 0.22 0.87 Discontinued operations (0.03) - (0.01) Total $0.27 0.22 0.86 Diluted: Continuing operations $0.30 0.22 0.87 Discontinued operations (0.03) - (0.01) Total $0.27 0.22 0.86 Basic weighted average common shares outstanding 48,273,985 48,411,119 48,461,987 Diluted weighted average common shares outstanding 48,273,985 48,429,693 48,519,518 FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES Schedule 1 - Supplemental Data (Unaudited; dollars in thousands) Three Months Ended March 31, December 31, March 31, 2006 2005 2005 Mortgage Loan Fundings Non-conforming wholesale division $860,523 1,261,186 975,905 Retail division 150,795 164,892 171,956 Total continuing operations 1,011,318 1,426,078 1,147,861 Discontinued operations 127,797 277,000 307,991 Total $1,139,115 1,703,078 1,455,852 Non-Conforming Mortgage Loan Funding Statistics Weighted average interest rate 8.5% 7.9% 7.4% Weighted average credit score 646 651 652 Weighted average loan to value 84.6% 84.2% 83.6% Full documentation (1) 54.1% 51.9% 55.8% Percentage held for investment 53.9% 62.3% 66.2% Mortgage Loan Sales Non-conforming wholesale and retail divisions $654,550 424,824 529,551 Discontinued operations 226,380 343,747 273,181 Total $880,930 768,571 802,732 Gain on Sale Margin (2) Gross premiums - loan sales, net of derivative gain/(loss) 2.4% 1.8% 2.6% Fees collected, net of premiums paid 0.2% 0.4% 0.3% Provision for loan losses - loans sold (3) (0.3)% 0.3% (0.4)% Direct origination costs (0.7)% (0.8)% (0.8)% Total 1.6% 1.7% 1.6% Gross premiums - loan sales, net of derivative gain/(loss) First lien mortgage loans 2.6% 2.3% 3.0% Second lien mortgage loans 1.2% 0.3% 1.9% Total 2.4% 1.8% 2.6% Statements of Condition Data Average equity as a percentage of average assets 8.6% 8.7% 10.1% Debt to capital 11.3 11.2 8.9 Book value per share $10.65 10.86 11.67 Seriously delinquent - mortgage loans held for sale (4) 3.9% 0.7% 1.1% Seriously delinquent - mortgage loans held for investment (4) 4.8% 4.4% 2.0% Weighted average credit score - mortgage loans held for investment 648 650 651 (1) Full documentation of non-conforming mortgage loan fundings also includes the bank statements program. (2) Gain on sale margin is calculated as gains on sales of mortgage loans from continuing operations, net (non-conforming wholesale and retail divisions) divided by mortgage loan sales from continuing operations. (3) Provision for loan losses - loans sold is calculated as provision for loan losses - loans sold divided by loan sales. The provision is recorded as a reduction of gains on sales of mortgage loans. A credit to the provision was recorded in the fourth quarter of 2005 relating to a decrease in the estimate of trailing losses on loans sold in 2003 and 2004. (4) Seriously delinquent is defined as a mortgage loan that is 60 plus days past due or in the process of foreclosure. FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES Schedule 2 -- Non-GAAP Financial Measures and Regulation G Reconciliations Core income from continuing operations, core earnings per share from continuing operations (diluted), core net income, core earnings per share (diluted), core net interest income and margin, core return on average assets, core return on average equity and cost to produce are non-GAAP financial measures of Fieldstone's earnings within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Core income from continuing operations is income from continuing operations less the non-cash mark to market gains (losses) on interest rate swap and cap agreements and the amortization of interest rate swap buydown payments. Core earnings per share from continuing operations (diluted) is core income from continuing operations available to common shareholders divided by the weighted average diluted number of shares outstanding during the period. Core net income is net income less the non-cash mark to market gains (losses) on interest rate swap and cap agreements and the amortization of interest rate swap buydown payments. Core earnings per share (diluted) is core net income available to common shareholders divided by the weighted average diluted number of shares outstanding during the period. Core return on average assets is core net income divided by average total assets. Core return on average equity is core net income divided by core average total equity, which is the equity balance at the end of the reporting period less the cumulative non-cash mark to market gains or losses on interest rate swap and cap agreements and the cumulative amortization of interest rate swap buydown payments. Core net interest income after provision for loan losses is net interest income after provision for loan losses adjusted to include (a) the net cash settlements on the existing interest rate swaps and caps economically hedging the variable rate debt financing Fieldstone's investment portfolio, (b) the net cash settlements incurred or paid to terminate these derivatives prior to maturity related to derivatives related to loans held for investment and (c) the amortization of interest rate swap buydown payments. Core net interest income after provision for loan losses does not include the net cash settlements incurred or paid to terminate swaps or caps related to loans ultimately sold, which are a component of "Gains on sales of mortgage loans, net" on the consolidated statements of operations. Cost to produce is total expenses plus deferred origination costs and premiums paid, net of fees collected, less internal and external servicing costs. Management believes the core financial measures are useful to investors because they include the current period effects of Fieldstone's economic hedging program but exclude the non-cash mark to market derivative value changes and the amortization of swap buydown payments. Fieldstone uses interest rate swap and cap agreements to create economic hedges of the variable rate debt it issues to finance its investment portfolio. Changes in the fair value of these agreements, which reflect the potential future cash settlements over the remaining lives of the agreements according to the market's changing projections of interest rates, are recognized in the line item "Other income (expense) - portfolio derivatives" on the consolidated statements of operations. This single line item includes both the actual cash settlements related to the agreements that occurred during the period and recognition of the non-cash changes in the fair value of the agreements over the period. The actual cash settlements include regular monthly payments or receipts under the terms of the swap agreements and amounts paid or received to terminate the agreements prior to maturity. The amounts of cash settlements and non-cash changes in derivative value that were included in the line item "Other income (expense) - portfolio derivatives" were: Three Months Ended March 31, December 31, March 31, ($000) 2006 2005 2005 Non-cash changes in fair value $1,894 (7,172) 20,628 Cash settlements received (paid) 10,264 14,101 (286) Other income (expense) - portfolio derivatives $12,158 6,929 20,342 Management believes that the presentation of cost to produce provides useful information to investors regarding financial performance because this measure includes additional costs to originate mortgage loans, both recognized when incurred and deferred costs, which are not all included in GAAP total expenses. As required by Regulation G, a reconciliation of each of these non-GAAP financial measures to the most directly comparable measure under GAAP is provided in the remainder of this Schedule 2. Regulation G Reconciliation Core Income From Continuing Operations, Core Earnings Per Share From Continuing Operations-Diluted Core Net Income and Core Earnings Per Share-Diluted Three Months Ended (Dollars in 000's, except share and March 31, December 31, March 31, per share data) 2006 2005 2005 Core Income From Continuing Operations and Core Net Income: Income from continuing operations $14,573 10,623 42,395 Discontinued operations, net of income tax (1,645) 162 (641) Net income 12,928 10,785 41,754 Less: Mark to market (gain) loss on portfolio derivatives included in "Other income (expense) - portfolio derivatives" Mark to market interest rate swaps (1,894) 7,172 (20,558) Mark to market interest rate cap - - (70) Total mark to market on portfolio derivatives (1,894) 7,172 (20,628) Less: Amortization of interest rate swap buydown payments (867) (531) - Core net income $10,167 17,426 21,126 Core Earnings per Share From Continuing Operations - Diluted and Core Earnings Per Share - Diluted: Income from continuing operations $14,573 10,623 42,395 Unvested restricted stock dividends (78) (157) - Income from continuing operations available to common shareholders 14,495 10,466 42,395 Discontinued operations, net of income tax (1,645) 162 (641) Net income available to common shareholders 12,850 10,628 41,754 Less: Mark to market (gain) loss on portfolio derivatives (1,894) 7,172 (20,628) Amortization of interest rate swap buydown payments (867) (531) - Core net income available to common shareholders $10,089 17,269 21,126 Earnings per share from continuing operations - diluted $0.30 0.22 0.87 Core earnings per share from continuing operations - diluted $0.24 0.36 0.45 Earnings per share - diluted $0.27 0.22 0.86 Core earnings per share - diluted $0.21 0.36 0.44 Diluted weighted average common shares outstanding 48,273,985 48,429,693 48,519,518 Core Return on Average Assets and Core Return on Average Equity: Average total equity $528,039 548,982 546,365 Average total assets 6,157,291 6,303,956 5,429,702 Core average total equity 500,692 516,960 519,519 Core average total assets 6,157,291 6,303,956 5,429,702 Return on average equity (annualized) 9.8% 7.9% 30.6% Return on average assets (annualized) 0.8% 0.7% 3.1% Core return on average equity (annualized) 8.1% 13.5% 16.3% Core return on average assets (annualized) 0.7% 1.1% 1.6% Average Balance Data Mortgage loans held for sale* $330,044 302,252 216,783 Mortgage loans held for investment 5,453,923 5,419,162 4,884,311 Warehouse financing - mortgage loans held for sale* 212,156 247,673 98,213 Warehouse financing - mortgage loans held for investment 510,867 630,900 518,852 Securitization financing 4,825,196 4,681,931 4,187,989 * Excludes average balance data relating to discontinued operations. Regulation G Reconciliation - Core Net Interest Income & Core Yield Analysis Three Months Ended March 31, December 31, March 31, (Dollars in 000's) 2006 2005 2005 Core net interest income after provision for loan losses Net interest income after provision for loan losses $24,800 27,707 43,029 Plus: Net cash settlements received (paid) on portfolio derivatives included in "Other income (expense) - portfolio derivatives 10,264 14,101 (286) Less: Amortization of interest rate swap buydown payments (867) (531) - Core net interest income after provision for loan losses $34,197 41,277 42,743 Interest income loans held for investment $95,113 96,171 82,836 Interest expense loans held for investment 68,916 63,946 38,608 Plus: Net cash settlements (received) paid on portfolio derivatives (10,264) (14,101) 286 Plus: Amortization of interest rate swap buydown payments 867 531 - Core interest expense - loans held for investment 59,519 50,376 38,894 Core net interest income loans held for investment 35,594 45,795 43,942 Provision for loan losses loans held for investment 5,393 7,663 4,494 Core net interest income loans held for investment after provision for loan losses 30,201 38,132 39,448 Net interest income loans held for sale 3,996 3,145 3,295 Core net interest income after provision for loan losses $34,197 41,277 42,743 Core Yield Analysis Core yield analysis - loans held for investment Coupon interest income on loans held for investment 7.07% 6.77% 6.68% Amortization of deferred origination costs (0.50)% (0.43)% (0.46)% Prepayment fees 0.41% 0.60% 0.56% Yield on loans held for investment 6.98% 6.94% 6.78% Cost of financing for loans held for investment 5.17% 4.71% 3.28% Net cash settlements (received) paid on portfolio derivatives (0.77)% (1.04)% 0.03% Amortization of interest rate swap buydown payments 0.06% 0.04% 0.00% Core cost of financing for loans held for investment 4.46% 3.71% 3.31% Net yield on loans held for investment 1.92% 2.33% 3.62% Net cash settlements received (paid) on portfolio derivatives 0.75% 1.02% (0.02)% Amortization of interest rate swap buydown payments (0.06)% (0.04)% 0.00% Core net yield on loans held for investment 2.61% 3.31% 3.60% Provision for loan losses - loans held for investment (0.40)% (0.55)% (0.37)% Core yield on loans held for investment after provision for loan losses 2.21% 2.76% 3.23% Yield analysis - loans held for sale Yield on loans held for sale 8.00% 8.14% 7.91% Cost of financing for loans held for sale 4.91% 4.96% 4.04% Net yield on loans held for sale 4.84% 4.07% 6.08% Core yield analysis - loans held for investment and loans held for sale Yield - net interest income on loans held for sale and loans held for investment after provision for loan losses 1.72% 1.90% 3.37% Net cash settlements received (paid) on portfolio derivatives 0.71% 0.96% (0.02)% Amortization of interest rate swap buydown payments (0.06)% (0.04)% 0.00% Core yield - net interest income on loans held for sale and loans held for investment after provision for loan losses 2.37% 2.82% 3.35% Regulation G Reconciliation - Cost to Produce Three Months Ended March 31, December 31, March 31, (Dollars in 000's) 2006 2005 2005 Total expenses $33,759 32,820 29,888 Deferred origination costs 6,506 8,985 8,061 Servicing costs - internal and external (3,255) (2,796) (3,319) Total general and administrative costs 37,010 39,009 34,630 Premiums paid, net of fees collected (1,398) (378) 592 Cost to produce* $35,612 38,631 35,222 Mortgage loan fundings* $1,011,318 1,427,078 1,147,861 Cost to produce as % of mortgage loan fundings 3.52% 2.71% 3.07% Cost to produce as % of mortgage loan fundings Total expenses 3.34% 2.30% 2.60% Deferred origination costs 0.64% 0.63% 0.70% Servicing costs - internal and external (0.32%) (0.20)% (0.28)% Total general and administrative costs 3.66% 2.73% 3.02% Premiums paid, net of fees collected (0.14)% (0.02)% 0.05% Cost to produce as % of mortgage loan fundings 3.52% 2.71% 3.07% * Excludes cost to produce and mortgage loan fundings relating to discontinued operations. DATASOURCE: Fieldstone Investment Corporation CONTACT: Investor Relations, Fieldstone Investment Corporation, +1-410-772-5160, Toll-free: +1-866-438-1088, Web site: http://www.fieldstoneinvestment.com/

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