After a few grueling years, investment banking is making a comeback. The IPO pipeline is building again. And, of course, M&A is back with a vengeance, with a string of high-profile deals like P&G (NYSE:PG)-Gillette (NYSE:G), and Sprint (NYSE:FON)-Nextel (NASDAQ:NXTL).

While big firms like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MWD) are benefiting from the boom, there are mid-tier players that are also doing very well. A case in point is Friedman, Billings, Ramsey Group (NYSE:FBR).

Yesterday, the company reported its fiscal year-end results. In fact, listening to the conference call, there was one phrase used frequently: "best ever."

In the fourth quarter, net revenues increased 11% to $245.1 million, compared to the same period in 2003. Net income was $86.6 million. In fact, the company sustained a return on equity of 22.3% in 2004.

FBR experienced strong growth in all segments. Last year, for example, the company managed 127 investment banking assignments with an aggregate value of more than $27 billion. What's more, the deals have spanned diverse industries, such as insurance, financials, energy, and real estate. More importantly, these clients are likely to call on FBR in 2005 to conduct further transactions, including M&A and secondary offerings.

However, FBR wants to sustain its growth over the long haul. Consequently, it has been making substantial investments in hiring senior employees, as well as technology upgrades and branding campaigns (such as the sponsorship of the FBR Open golf tournament).

As the cash flow streams in, FBR is trying to target high-return markets. Thinking unconventionally, the company is making a big bet on the mortgage market. For example, FBR recently spent $88 million for First NLC Financial Services LLC, which is a subprime mortgage originator. This firm specializes in higher-risk loans. However, FBR believes that credit scoring techniques are much better and that the business can generate strong risk-adjusted returns. Also, FBR plans to protect itself with private mortgage insurance options and other innovative strategies.

No doubt, there is skepticism about this strategy, as the mortgage business can be quite volatile. But, if FBR can achieve its goal of an ROE of 25% on the subprime mortgage portfolio, investors will certainly be happy.

Fool contributor Tom Taulli does not own shares mentioned in this article.