FBR Asset Investment 10-Q 2002 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the quarterly period ended September 30, 2002

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to

Commission File Number 1-15049

FBR ASSET INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	54-1873198
(State or other Jurisdiction of	(I.R.S. employer
Incorporation or Organization)	identification no.)

Potomac Tower

1001 Nineteenth Street North

Arlington, Virginia 22209

(Address of principal executive offices)

(zip code)

(703) 469-1000

(Registrant’s telephone number

including area code)

N/A

(former name)

     Indicate by checkmark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such short period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days: Yes x  No o

     As of November 8, 2002, the latest practicable date, 25,054,332 shares of FBR Asset Investment Corporation’s common stock were outstanding.

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements and Notes
		Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited) and December 31, 2001
		Consolidated Statements of Income for the Three Months Ended September 30, 2002 and 2001 (unaudited)
		Consolidated Statements of Income for the Nine Months Ended September 30, 2002 and 2001 (unaudited)
		Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2002 (unaudited), and the Year Ended December 31, 2001
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited)
FBR ASSET INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FBR ASSET INVESTMENT CORPORATION
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATION

FBR ASSET INVESTMENT CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements and Notes		1
		Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited) and December 31, 2001		1
		Consolidated Statements of Income for the Three Months Ended September 30, 2002 and 2001(unaudited)		2
		Consolidated Statements of Income for the Nine Months Ended September 30, 2002 and 2001 (unaudited)		3
		Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2002 (unaudited), and the Year Ended December 31, 2001		4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited)		5
		Notes to Consolidated Financial Statements (unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
	Item 4.	Controls and Procedures		19
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		20
	Item 2.	Changes in Securities and Use of Proceeds		20
	Item 3.	Defaults Upon Senior Securities		20
	Item 4.	Submission of Matters to Vote of Security Holders		20
	Item 5.	Other Information		20
	Item 6.	Exhibits and Reports on Form 8-K		20
SIGNATURE				21
CERTIFICATIONS				22

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Financial Condition

as of September 30, 2002 (unaudited) and December 31, 2001

				September 30, 2002			December 31, 2001
				(unaudited)
ASSETS
		Mortgage-backed securities, at fair value		$	5,822,504,819		$	1,238,365,511
		Cash and cash equivalents			12,670,252			6,630,379
		Deposits			4,117,157			—
		Investments in equity securities, at fair value			99,307,501			61,692,660
		Notes receivable			—			8,000,000
		Interest, dividends and fees receivable			43,764,092			10,241,837
		Prepaid expenses and other			1,214,569			194,831
			Total assets	$	5,983,578,390		$	1,325,125,218
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Liabilities:
		Repurchase agreements		$	5,151,038,600		$	1,105,145,000
		Interest-rate swaps			17,188,593			1,159,167
		Eurodollar futures			1,712,500			—
		Interest payable			9,143,915			2,177,892
		Dividends payable			31,317,915			10,645,659
		Management and incentive fees payable			6,787,220			1,117,458
		Accounts payable and accrued expenses			273,629			505,549
		Income taxes payable			2,180,890			473,403
		Due to broker			35,250,000			—
		Other			658,864			35,544
			Total liabilities		5,255,552,126			1,121,259,672
	Shareholders’ Equity:
		Preferred stock, par value $.01 per share, 50,000,000 shares authorized; none issued			—			—
		Common stock, par value $.01 per share, 200,000,000 shares authorized, 25,054,332 and 8,502,527 shares issued as of September 30, 2002, and December 31, 2001, respectively			250,543			85,025
		Additional paid-in capital			664,796,186			206,916,930
		Accumulated other comprehensive income			70,315,410			15,154,257
		Retained deficit			(7,335,875	)		(18,290,666	)
			Total shareholders’ equity		728,026,264			203,865,546
			Total liabilities and shareholders’ equity	$	5,983,578,390		$	1,325,125,218

The accompanying notes are an integral part of these statements.

1

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Income for the Three Months

Ended September 30, 2002 and 2001 (unaudited)

			Three Months Ended
			September 30,
			2002			2001
			(unaudited)			(unaudited)
Revenue:
	Interest		$	56,738,689		$	8,535,864
	Dividends			—			1,046,829
	Fees			5,286,491			—
		Total revenue		62,025,180			9,582,693
Expenses:
	Interest			22,510,562			4,120,112
	Management and incentive fees			6,787,220			955,446
	Professional fees & other			771,256			144,982
		Total expenses		30,069,038			5,220,540
Realized gain on sale of equity securities				1,918,788			—
Realized gain on sale of mortgage-backed securities, net				2,904,593			1,281,682
Net income before taxes				36,779,523			5,643,835
Income tax provision				(2,114,597	)		—
Net income			$	34,664,926		$	5,643,835
Basic earnings per share			$	1.38		$	0.88
Diluted earnings per share			$	1.38		$	0.86
Basic weighted-average common and equivalent shares				25,054,332			6,407,962
Diluted weighted-average common and equivalent shares				25,078,986			6,547,295

     The accompanying notes are an integral part of these statements.

2

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Income for the Nine Months

Ended September 30, 2002 and 2001 (unaudited)

			Nine Months Ended
			September 30,
			2002			2001
			(unaudited)			(unaudited)
Revenue:
	Interest		$	119,167,054		$	14,876,936
	Dividends			1,963,754			2,310,739
	Fees			5,858,000			1,701,828
		Total revenue		126,988,808			18,889,503
Expenses:
	Interest			44,069,621			7,793,700
	Management and incentive fees			14,450,428			1,774,337
	Professional fees & other			1,678,753			590,791
		Total expenses		60,198,802			10,158,828
Realized gain on sale of equity securities				16,637,023			503,389
Realized gain on sale of mortgage-backed securities, net				3,009,233			1,106,598
Recognized loss on available-for sale equity securities				—			(544,880	)
Net income before taxes				86,436,262			9,795,782
Income tax provision				(2,280,226	)		—
Net income			$	84,156,036		$	9,795,782
Basic earnings per share			$	4.48		$	2.17
Diluted earnings per share			$	4.47		$	2.12
Basic weighted-average common and equivalent shares				18,785,325			4,507,217
Diluted weighted-average common and equivalent shares				18,807,979			4,619,342

The accompanying notes are an integral part of these statements.

3

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

for the Nine Months Ended September 30, 2002 (unaudited),

and the Year Ended December 31, 2001

											Accumulated
											Other
					Additional			Retained			Comprehensive						Comprehensive
		Common			Paid in			Earnings			Income						Income
		Stock			Capital			(Deficit)			(Loss)			Total			(Loss)
Balance, January 1, 2001		$	38,844		$	107,529,063		$	(19,978,632	)	$	(748,691	)	$	86,840,584			—
Issuance of common stock			50,300			107,575,383			—			—			107,625,683
Repurchase of common stock			(4,119	)		(8,330,016	)		—			—			(8,334,135	)
Options granted			—			142,500			—			—			142,500
Net income			—			—			23,065,074			—			23,065,074		$	23,065,074
Other comprehensive income:
	Change in unrealized gain(loss) on available-for-sale securities		—			—			—			17,062,115			17,062,115			17,062,115
	Change in unrealized loss on cash flow hedge		—			—			—			(1,159,167	)		(1,159,167	)		(1,159,167	)
Dividends			—			—			(21,377,108	)		—			(21,377,108	)		—
Balance, December 31, 2001			85,025			206,916,930			(18,290,666	)		15,154,257			203,865,546		$	38,968,022
Issuance of common stock			165,518			457,879,256			—			—			458,044,774
Net income			—			—			84,156,036			—			84,156,036		$	84,156,036
Other comprehensive income:
	Reclassification adjustment for gains from disposition included in net income		—			—			—			(6,645,704	)		(6,645,704	)		(6,645,704	)
	Change in unrealized gain(loss) on available-for sale securities		—			—			—			79,548,783			79,548,783			79,548,783
	Change in unrealized loss on cash flow hedges		—			—			—			(17,741,926	)		(17,741,926	)		(17,741,926	)
Dividends			—			—			(73,201,245	)		—			(73,201,245	)		—
Balance, September 30, 2002		$	250,543		$	664,796,186		$	(7,335,875	)	$	70,315,410		$	728,026,264		$	139,317,189

The accompanying notes are an integral part of these statements.

4

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Cash Flows for the Nine Months

Ended September 30, 2002 and 2001 (unaudited)

		Nine Months Ended
		September 30,
		2002			2001
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net income		$	84,156,036		$	9,795,782
Adjustments to reconcile net income to net cash provided by operating activities:
	Realized and recognized gains on mortgage-backed and equity securities, net		(19,646,256	)		(1,065,108	)
	Compensation expense related to restricted stock and stock option grants		162,993			142,500
	Premium amortization on mortgage-backed securities		14,370,229			1,319,421
Changes in operating assets and liabilities:
	Dividends, interest and fees receivable		(33,522,255	)		(6,607,642	)
	Prepaid expenses and other assets		(432,470	)		(347,094	)
	Management and incentive fees payable		5,669,762			647,790
	Accounts payable and accrued expenses		(231,921	)		280,643
	Interest payable		6,966,023			(4,222	)
	Income taxes payable		1,707,487			—
	Due to broker		35,250,000			—
	Other		36,052			(54,786	)
	Net cash provided by operating activities		94,485,680			4,107,284
Cash flows from investing activities:
Purchase of mortgage-backed securities			(5,505,690,316	)		(1,104,522,134	)
Investments in equity securities			(74,900,030	)		(16,444,000	)
Investments in notes receivable			(33,137,333	)		(12,000,000	)
Proceeds from repayment of notes receivable			41,137,333			4,000,000
Proceeds from sale of equity securities			44,211,458			4,362,364
Proceeds from sale of mortgage-backed securities			326,153,636			98,220,114
Receipt of principal payments on mortgage-backed securities			666,650,209			56,734,378
Payment of Eurodollar futures deposits			(4,117,157	)		—
	Net cash used in investing activities		(4,539,692,200	)		(969,649,278	)
Cash flows from financing activities:
Repurchase of common stock			—			(8,334,135	)
Proceeds from issuance of common stock			457,881,782			97,385,872
Proceeds from (repayments of) repurchase agreements, net			4,045,893,600			849,718,000
Dividends paid			(52,528,989	)		(8,267,197	)
	Net cash provided by financing activities		4,451,246,393			930,502,540
Net increase (decrease) in cash and cash equivalents			6,039,873			(35,039,454	)
Cash and cash equivalents, beginning of the period			6,630,379			36,810,566
Cash and cash equivalents, end of the period		$	12,670,252		$	1,771,112
Supplemental disclosure:
	Cash payments for interest	$	37,103,598		$	7,797,922
	Cash payments for income taxes	$	572,739		$	—

The accompanying notes are an integral part of these statements.

5

FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. Basis of Presentation

     The consolidated financial statements of FBR Asset Investment Corporation (“FBR Asset” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Therefore, they do not include all information required by accounting principles generally accepted in the United States of America for complete financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 and included on Form 10-K filed by the Company with the Securities and Exchange Commission.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. Investments in Mortgage-Backed Securities

     For the three and nine months ended September 30, 2002 and 2001, the weighted average coupon rate on the Company’s mortgage-backed securities was 5.34% and 5.53% for 2002, and 6.63% and 6.71% for 2001, respectively.

     The following table summarizes the Company’s mortgage-backed securities:

Total Mortgage Assets	September 30, 2002			December 31, 2001
Mortgage-backed securities, available-for-sale, principal	$	5,650,527,780		$	1,211,550,848
Unamortized net premium		87,933,661			25,385,118
Amortized cost		5,738,461,441			1,236,935,966
Gross unrealized gains		84,131,150			4,092,851
Gross unrealized losses		(87,772	)		(2,663,306	)
Estimated fair value	$	5,822,504,819		$	1,238,365,511

     As of September 30, 2002 and December 31, 2001, respectively, $5.5 billion and $1.2 billion of the mortgage-backed securities were pledged as collateral for the repurchase agreements.

Investment Commitments

     As of September 30, 2002 and subsequently, FBR Asset has made commitments to purchase $348 million in hybrid ARM securities.

NOTE 3. Equity Investments

     At September 30, 2002, FBR Asset’s equity investments had an aggregate cost basis of $94.1 million, a fair value of $99.3 million, unrealized losses of $1.7 million, and unrealized gains of $6.9 million. At December 31, 2001, FBR Asset’s equity investments had an aggregate cost basis of $46.8 million, a fair value of $61.7 million and unrealized gains of $14.9 million.

     Equity investment transactions are recorded on the date the securities are purchased or sold. Any amounts payable for unsettled trades are recorded as “due to broker” in FBR Asset’s Statement of Financial Condition. At September 30, 2002, FBR Asset recorded a liability of $35.2 million related to its acquisition of Americredit Corp. common stock. This trade settled on October 1, 2002.

6

FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOTE 3. Equity Investments — (Continued)

		September 30, 2002						December 31, 2001
Equity Investments		Shares		Cost Basis		Fair Value		Shares		Cost Basis		Fair Value
American Financial Realty Trust (1)			3,763,441	$	35,000,001	$	35,000,001		—	$	—	$	—
Americredit Corp.			5,000,000		35,250,000		40,350,000		—		—		—
Annaly Mortgage Management, Inc.			—		—		—		800,000		7,144,000		12,800,000
Anworth Mortgage Asset Corporation			—		—		—		500,000		3,890,625		4,550,000
Capital Automotive REIT			—		—		—		920,115		12,835,604		18,301,087
MCG Capital Corporation			625,000		9,934,375		8,237,500		625,000		9,934,375		11,125,000
Oxford Financial Corp. (1)			500,000		4,650,000		4,650,000		—		—		—
Resource Asset Investment Trust			—		—		—		344,575		3,704,181		5,616,573
Saxon Capital Acquisition Corp. (2)			1,000,000		9,300,000		11,070,000		1,000,000		9,300,000		9,300,000
	Total			$	94,134,376	$	99,307,501			$	46,808,785	$	61,692,660

(1)	American Financial Realty and Oxford Financial shares are not currently registered for public trading. As of September 30, 2002, these investments are carried at cost.
(2)	Saxon Capital shares were registered with the SEC and began trading on the New York Stock Exchange in January 2002. As of December 31, 2001, the investment was carried at cost.

NOTE 4. Repurchase Agreements

     At September 30, 2002, the Company had borrowings of $5.2 billion outstanding under repurchase agreements with a weighted average borrowing rate of 1.77% and a remaining weighted-average term to maturity of 34 days. For the three and nine months ending September 30, 2002, the weighted average borrowing rates were 1.79% and 1.82%, respectively, and the weighted average repurchase agreement balances were $4.4 billion and $2.9 billion, respectively. For the three and nine months ended September 30, 2001, the weighted average borrowing rates were 3.63% and 4.27%, respectively, and the weighted average repurchase agreement balances were $450.2 million and $243.9 million, respectively.

NOTE 5. Derivative Financial Instruments and Hedging Activities

     The Company utilizes derivative financial instruments to hedge the interest rate risk associated with its borrowings. At September 30, 2002, FBR Asset was party to four interest rate swap agreements and two Eurodollar futures contracts. These derivative contracts are with primary broker dealers. Under the interest rate swap agreements, the Company receives a floating rate based on three-month LIBOR and pays a fixed rate, as summarized below. Eurodollar futures contracts are a proxy for the forward AA/ AAA LIBOR-based credit curve and allow the Company the ability to lock in three month LIBOR forward rates.

     The notional amount of each agreement is matched against a like amount of current and anticipated borrowings under repurchase agreements to hedge the variability in interest payments associated with the repurchase agreements. The interest rate swap agreements and Eurodollar futures contracts are highly effective hedges and qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and for Hedging Activities,” as amended (“FAS 133”). Accordingly, changes in the fair value of these derivatives are reported in other comprehensive income to the extent the hedge was perfectly effective, while changes in value attributable to hedge ineffectiveness are reported in earnings. The gains and losses on cash flow hedge transactions that are reported in other comprehensive income are reclassified to earnings in the periods in which the earnings are effected by the hedged cash flows.

7

FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOTE 5. Derivative Financial Instruments and Hedging Activities — (Continued)

     Derivative Financial Instruments at September 30, 2002:

Interest Rate Swaps

Current Notional		Average			Three-month
Amount		Fixed Rate			LIBOR Rate			Termination Date			Fair Value
$	3,000,000,000		2.195%	(1)		1.843%	(1)		July 24, 2003	(1)	$	(14,279,394	)
	50,000,000		4.970%			1.828%			July 27, 2004			(2,909,199	)
$	3,050,000,000										$	(17,188,593	)

(1)  Average of three, one billion dollar notional swaps

Eurodollar Futures Contracts

Current Notional				Average
Amount		Contract Description		Floating Rate		Termination Date		Fair Value
	$2,000,000,000		June 2003		N/A		June 18, 2003	$	(850,000	)
	$2,000,000,000		September 2003		N/A		September 17, 2003		(862,500	)
								$	(1,712,500	)

     Derivative Financial Instruments at December 31, 2001:

Interest Rate Swaps

Current Notional				Three-month
Amount		Fixed Rate		LIBOR Rate		Termination Date		Fair Value
	$50,000,000		4.970%		2.280%		July 27, 2004	$	(1,159,167	)

     The total change in the fair value of the Company’s derivative financial instruments was $(17.2) million and $(17.7) million for the three and nine months ended September 30, 2002, respectively. The Company’s derivative financial instruments at September 30, 2002 are deemed to be perfectly effective as hedges and accordingly these changes in value have been reported in other comprehensive income.

     As part of the Company’s interest rate risk management, on October 15, 2002, the Company closed out its Eurodollar futures contracts. These transactions resulted in a deferred gain of approximately $0.4 million. This deferred gain is currently recorded in other comprehensive income and will be amortized into income over the original hedge period of July through December 2003.

NOTE 6. Income Taxes

     FBR Asset has elected to be taxed as a real estate investment trust or REIT under the Internal Revenue Code. To qualify for tax treatment as a REIT, FBR Asset must meet certain income and asset tests and distribution requirements. FBR Asset generally will not be subject to federal income tax at the corporate level to the extent that it distributes at least 90 percent of its taxable income to its shareholders and complies with certain other requirements. Failure to meet these requirements could have a material adverse impact on FBR Asset’s results or financial condition. Furthermore, because FBR Asset’s investments include stock in other REITs, failure of those REITs to maintain their REIT status could jeopardize FBR Asset’s qualification as a REIT. During 2001, FBR asset acquired a registered broker-dealer in a taxable REIT subsidiary, established another taxable REIT subsidiary and created a holding company to hold the two subsidiaries. The income generated from the taxable REIT subsidiaries is taxed at normal corporate rates and will generally not be distributed to our shareholders. During the nine months ended September 30, 2002, FBR Asset recorded $2,280,226 of income tax provision from income attributable to the taxable REIT subsidiaries.

8

FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOTE 7. Shareholders’ Equity

Equity Offerings

     On January 28, 2002, the Company completed a follow-on offering of 5,520,000 shares (including over-allotment option) of common stock at a price of $26.50 per share. The lead underwriter for the offering was Friedman, Billings, Ramsey & Co., Inc. (“FBR”), a wholly owned subsidiary of Friedman, Billings, Ramsey Group, Inc. (“FBR Group”). The net proceeds after expenses to the Company were $138.6 million.

     On April 3, 2002, the Company completed a follow-on offering of 4,600,000 shares (including over-allotment option) of common stock at a price of $27.90 per share. The lead underwriter for the offering was FBR. The net proceeds after expenses to the Company were $121.7 million.

     On June 28, 2002, the Company completed a follow-on offering of 6,000,000 shares of common stock at a price of $33.35 per share. The lead underwriter for the offering was FBR. The net proceeds after expenses to the Company were $189.9 million.

Dividends

     On March 14, 2002, the Board of Directors declared a cash dividend of $1.25 per share payable April 15, 2002 to shareholders of record as of March 28, 2002. On June 12, 2002 the Board of Directors declared a cash dividend of $1.25 per share payable July 15, 2002 to shareholders of record as of June 24, 2002, and on September 12, 2002, the Board of Directors declared a cash dividend of $1.25 per share payable October 15, 2002 to shareholders of record as of September 27, 2002.

Options

     On February 14, 2002, a subsidiary of FBR Group exercised its remaining options to purchase 415,805 shares of FBR Asset common stock for $8.3 million, or $20 per share. FBR Group also advised FBR Asset that it has no current intention to sell any of the shares acquired via option exercises or any of its other shares held for investment purposes.

     As of September 30, 2002 and December 31, 2001, 66,095 and 481,900 options to purchase common stock were outstanding, respectively. These options have terms of eight to ten years and an exercise price of $20 per share. As a result, 24,654 and 22,654 shares were included during the three and nine-month periods ended September 30, 2002, respectively, to calculate diluted earnings per share. During 2002, we issued 16,000 shares of restricted stock and have recorded $162,993 in compensation expense related to these grants. On May 23, 2002, the shareholders approved an increase of 450,000 shares available for issuance under the stock incentive plan. As of September 30, 2002, 444,000 options were available for future grant.

NOTE 8. Related Party Transactions

     As of September 30, 2002, FBR Group, through various subsidiaries and affiliates, owned 2,844,700 shares or 11.35% of the outstanding common stock of the Company. As of December 31, 2001, FBR Group, through various subsidiaries and affiliates, owned 2,349,186 shares or 27.63% of the outstanding common stock of the Company.

     The Company has a management agreement with Friedman, Billings, Ramsey Investment Management, Inc. (“FBRIM”), a wholly owned subsidiary of FBR Group, expiring on December 17, 2002. FBRIM performs portfolio management services on behalf of the Company. These services include, but are not limited to, making investment purchases and sales, collecting market information, submitting reports pertaining to the Company’s assets, interest rates, and general economic conditions, and periodic review and evaluation of the performance of the Company’s portfolio of assets.

9

FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOTE 8. Related Party Transactions — (Continued)

     FBRIM is entitled to a quarterly “base” management fee equal to the sum of (1) 0.20 percent per annum (adjusted to reflect a quarterly period) of the average book value of the mortgage assets of the Company during each calendar quarter and (2) 0.75 percent per annum (adjusted to reflect a quarterly period) of the average book value of the remainder of the Company’s invested assets during each calendar quarter. The Company recorded $5.7 million in management fees during the first nine months of 2002 and $1.8 million for the year ended December 31, 2001.

     FBRIM is also entitled to receive incentive compensation based on the performance of the Company. FBRIM is entitled to an incentive fee calculated based upon the preceding four quarters. FBRIM is entitled to an incentive fee calculated as: Funds from operations, plus net realized gains or losses from asset sales, less the threshold amount (all computed on a weighted average outstanding share basis), multiplied by 25 percent. The threshold amount is calculated as the weighted average issuance price per share of all shares of the Company, which was $25.30 at September 30, 2002, multiplied by a rate equal to the average of the weekly closing rate of the ten-year U.S. Treasury note during the previous 52-week period plus five percent per annum. The Company recorded $8.7 million in incentive fees during the first nine months of 2002 and $1.7 million for the year ending December 31, 2001.

     The Company and its registered broker-dealer subsidiary, Pegasus Capital Corporation (“Pegasus”) entered into an agreement in August 2001 with FBR regarding the Company’s extension of credit to or investment in entities that are or may be FBR investment banking clients. During the first nine months of 2002, pursuant to this agreement, the Company earned $5.9 million in fees from FBR in connection with four investment banking transactions. Fees are recognized when the related investment banking transaction is completed. In 2001, pursuant to this agreement, the Company earned $2.9 million in fees from FBR in connection with three investment banking transactions and one unfunded commitment.

     FBR served as lead underwriter for three follow-on public offerings by the Company during the nine months ended September 30, 2002, and earned approximately $10.1 million (net of expenses) in underwriting fees in connection with the offerings.

10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, including, without limitation, statements containing the words “believes,” “plans,” “anticipates,” “expects” and words of similar meaning. Such forward-looking statements related to future events and the future financial performance of the Company involve known and unknown risks, uncertainties and other factors which may cause the actual results, or performance and achievements of the Company, to be materially different from the results or achievements expressed or implied by such forward-looking statements. The Company has filed certain of these risk factors as Exhibit 99.01 to its Annual Report on Form 10-K for the year ended December 31, 2001. The Company is not obligated to update any such factors or to reflect the impact of actual future events or developments on such forward-looking statements.

Overview

     The Company has invested, and intends to continue investing, in whole-pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, senior secured and mezzanine loans, real property, and joint ventures formed to own real property. The Company invests in some of these assets indirectly through its investments in REITs and other companies.

     In addition, subject to maintaining its REIT qualification, the Company invests from time to time in non-real estate related assets, including but not limited to, purchasing equity securities of and making senior secured, mezzanine and other loans to companies that are not involved primarily in the real estate business or in a real estate-related business.

Results of Operations

Net Income

Three months ended September 30, 2002

     The Company had net income for the three months ended September 30, 2002, of $34.7 million, or $1.38 per basic and diluted share, compared to $5.6 million, or $0.88 per basic share and $0.86 per diluted share for the corresponding period in 2001. The increase is primarily due to a wider net interest rate spread on the larger base of mortgage-backed securities, realized gains on the sale of mortgage-backed and equity securities, and fee income from investment banking transactions.

     For the three months ended September 30, 2002, the weighted average annual yield on the Company’s mortgage-backed securities was 4.73%. As of September 30, 2002, the Company had investments in 164 mortgage-backed securities that had a fair value of $5.8 billion. For the three months ended September 30, 2001, the weighted average annual yield on the Company’s mortgage-backed securities was 6.46%. As of September 30, 2001, the Company had investments in 53 mortgage-backed securities that had a fair value of $1.2 billion.

     The Company’s interest and dividend income increased to $56.7 million for the three months ended September 30, 2002, from $9.6 million for the three months ended September 30, 2001. The increase is primarily related to the increase in the weighted average balance of the Company’s mortgage-backed securities portfolio from $485.1 million for the three months ended September 30, 2001 to $5.5 billion for the three months ended September 30, 2002 offset by a substantial decrease in yields. For the three months ended September 30, 2002, the weighted average annual yield on the Company’s equity investments and promissory notes was 1.03%, compared to 12.55% for the three months ended September 30, 2001. The reduction is due to the timing of dividends on the Company’s investments in equity securities as well a reduction in investments in senior secured and mezzanine loans during the quarter ended September 30, 2002.

     For the three months ended September 30, 2002, the Company earned fee income of $5.3 million in connection with two investment banking transactions. For the three months ended September 30, 2001, the Company did not earn any such fee income.

11

Results of Operations — (Continued)

     The Company incurred interest expense of $22.5 million for the three months ended September 30, 2002. This represents 74.9% of the total expenses for the period. The Company incurred interest expense of $4.1 million for the three months ended September 30, 2001, representing 78.9% of the total expenses for that period. The $18.4 million increase in interest expense reflects the increase in weighted average borrowings under repurchase agreements to $4.4 billion from $450.2 million; partially offset by a substantial reduction in our average effective borrowing rate (including interest rate swaps) from 3.63% to 2.00%. Interest expense relating to interest rate swap agreements increased from $121,000 to $2.4 million, which increased the Company’s weighted average borrowing rate for the three months ended September 30, 2002 by 21 basis points.

     Management fees for the three months ended September 30, 2002, were $2.6 million compared to $539,143 for the three months ended September 30, 2001. The increase is due to a larger asset base during the three months ended September 30, 2002 compared to the same period in 2001 as the Company’s management fees are calculated based on the value of its mortgage-backed and other invested assets. During the three months ended September 30, 2002, the Company recorded incentive fee expense of $4.2 million, based on the performance of the Company over the preceding four quarters, compared to $416,303 for the three months ended September 30, 2001. The increase in incentive fees can be attributed to the increase in funds from operations and return on capital for the preceding four quarters used to calculate the incentive fees during the three months ended September 30, 2002 as compared to similar amounts used to calculate incentive fees during the three months ended September 30, 2001.

     Professional fees and other expenses consist primarily of director, legal, listing and accounting fees. Professional fees and other expenses were $771,256 for the three months ended September 30, 2002, compared to $144,982 for the three months ended September 30, 2001. The increase is mainly attributed to an increase in legal and audit fees, compensation expense associated with restricted stock awards, and increased directors and officer insurance premiums.

     During the three months ended September 30, 2002, FBR Asset recorded $2,114,597 of income tax provision from income attributable to its taxable REIT subsidiaries. During the three months ended September 30, 2001, FBR Asset did not record any income tax provision. The increase is due to the recording of taxes relating to fee income earned by Pegasus in connection with two investment banking transactions during the three months ended September 30, 2002.

Nine months ended September 30, 2002

     The Company had net income for the nine months ended September 30, 2002, of $84.2 million, or $4.48 per basic share and $4.47 per diluted share, compared to $9.8 million, or $2.17 per basic share and $2.12 per diluted share for the corresponding period in 2001. The increase is primarily due to a wider net interest rate spread on the larger base of mortgage-backed securities, realized gains on the sale of available for sale equity and mortgage-backed securities, and an increase in fee income.

     For the nine months ended September 30, 2002, the weighted average annual yield on the Company’s mortgage-backed securities was 4.83%. As of September 30, 2002, the Company had investments in 164 mortgage-backed securities that had a fair value of $5.8 billion. For the nine months ended September 30, 2001, the weighted average annual yield on the Company’s mortgage-backed securities was 6.29%. As of September 30, 2001, the Company had investments in 53 mortgage-backed securities that had a fair value of $1.2 billion.

     The Company’s interest and dividend income increased to $121.1 million for the nine months ended September 30, 2002 from $17.2 million for the nine months ended September 30, 2001. The increase is primarily related to the increase in the weighted average balance of the Company’s mortgage-backed securities portfolio from $274.6 million for the nine months ended September 30, 2001 to $3.5 billion for the nine months ended September 30, 2002 offset by a substantial decrease in yields. For the nine months ended September 30, 2002, the weighted average annual yield on the Company’s equity investments and promissory notes was 10.24%, compared to 11.26% for the nine months ended September 30, 2001. The reduction is due to the timing of dividends on the Company’s investments in equity securities as well as a reduction in investments in senior secured and mezzanine loans during the nine months ended September 30, 2002.

     For the nine months ended September 30, 2002, the Company earned fee income of $5.9 million in connection with four investment banking transactions. For the nine months ended September 30, 2001, the Company earned fee income of $1.7 million in connection with one investment banking transaction in 2001.

12

Results of Operations — (Continued)

     The Company incurred interest expense of $44.1 million for the nine months ended September 30, 2002. This represents 73.2% of the total expenses for the period. The Company incurred interest expense of $7.8 million for the nine months ended September 30, 2001, representing 76.7% of the total expenses for that period. The $36.3 million increase in interest expense reflects the increase in weighted average borrowings under repurchase agreements to $2.9 billion from $243.9 million; partially offset by a substantial reduction in our average effective borrowing rate (including interest swaps) from 4.27% to 1.92%. Interest expense related to its interest rate swap agreements increased from $215,771 to $3.1 million, which increased the Company’s weighted average borrowing rate for the nine months ended September 30, 2002 by 10 basis points.

     Management fees for the nine months ended September 30, 2002, were $5.7 million compared to $962,880 for the nine months ended September 30, 2001. The increase in management fees is attributed to a larger asset base used in calculating the fees for the nine months ended September 30, 2002 compared to the same period in 2001. During the nine months ended September 30, 2002, the Company recorded incentive fee expense of $8.7 million, based on the performance of the Company over the preceding four quarters, compared to $811,457 for the nine months ended September 30, 2001. The increase in incentive fees can be attributed to the increase in funds from operations and return on capital for the preceding four quarters used to calculate the incentive fees during the nine months ended September 30, 2002 as compared to similar amounts used to calculate the incentive fees during the nine months ended September 30, 2001.

     Professional fees and other expenses consist primarily of director, legal, listing and accounting fees. Professional fees and other expenses were $1.7 million for the nine months ending September 30, 2002, compared to $590,791 for the nine months ended September 30, 2001. The increase is mainly attributed to increased legal and audit fees, compensation expense associated with restricted stock awards, listing fees, and increased directors and officer insurance premiums.

     During the nine months ended September 30, 2002, FBR Asset recorded $2,280,226 of income tax provision from income attributable to its taxable REIT subsidiaries. During the nine months ended September 30, 2001, FBR Asset did not record any income tax provision. The increase is due to the recording of taxes relating to fee income earned by Pegasus in connection with four investment banking transactions during the nine months ended September 30, 2002.

Mortgage-backed Securities

     The mortgage-backed securities owned at September 30, 2002 and December 31, 2001 are summarized below:

September 30, 2002
							Weighted		Expected		Relevant
					Nominal		Average Life		Effective		Prepayment
Descriptive Title(1)	Face Amount		Market Value		Yield(2)		(years)		Duration		Assumptions(3)
HYBRID ARMS	$	5,618,770,045	$	5,789,144,573		4.74%		2.55		1.37		30.37 CPR
FIXED RATE SECURITIES		31,868,844		33,360,246		5.34%		2.27		1.00		56.71 CPR
Mortgage Portfolio(1)	$	5,650,638,889	$	5,822,504,819		4.75%		2.55		1.37		30.53 CPR

December 31, 2001
							Weighted		Expected		Relevant
					Nominal		Average Life		Effective		Prepayment
Descriptive Title(1)	Face Amount		Market Value		Yield(2)		(years)		Duration		Assumptions(3)
FLOATING RATE CMOs(4)	$	176,421,204	$	180,143,735		3.34%		5.86		1.21		43.14 CPR
HYBRID ARMS		785,648,800		805,192,368		4.90%		3.72		2.40		40.12 CPR
FIXED RATE SECURITIES		249,480,844		253,029,408		6.51%		5.33		2.77		17.62 CPR
Mortgage Portfolio Total(1)	$	1,211,550,848	$	1,238,365,511		5.01%		4.37		2.30		35.93 CPR

(1)	All of the mortgage-backed securities are backed by pools of fixed and adjustable rate mortgages and are principal and/or interest paying instruments.
(2)	The nominal yield is the internal rate of return of the security based on the given market price. It is the single discount rate that equates a security price (inclusive of accrued interest) with its projected cash

13

Results of Operations — (Continued)

	flows. For a mortgage product, it represents the yield for a given yield curve environment based on prepayments for that environment.
(3)	Constant Prepayment Rate (CPR). Annualized equivalents of single monthly mortality (SMM). CPR attempts to predict the percentage of principal that will prepay over the next 12 months based on historical principal paydowns. CPR is measured on 1 month, 3 month, 6 month, 12 month, or since issue basis.
(4)	CMOs are Collateralized Mortgage Obligations.

Repurchase Agreements

     To date, the Company’s debt has consisted solely of borrowings collateralized by a pledge of the Company’s mortgage-backed securities. The Company has obtained, and believes it will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with the Company’s financing objectives.

     The Company had $5.2 billion outstanding under repurchase agreements with several financial institutions on September 30, 2002. The Company had $1.1 billion outstanding under repurchase agreements on December 31, 2001. At September 30, 2002, the leverage ratio of our portfolio of mortgage-backed securities equal to 8.2 to 1 on a debt to equity basis.

     At September 30, 2002, the weighted average remaining maturity of the Company’s borrowings was 34 days and had a weighted average cost of funds on outstanding borrowings of 1.77%.

Capital Resources and Liquidity

     Liquidity is a measurement of the Company’s ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, loan acquisition and lending activities, and for other general business purposes. The primary sources of funds for liquidity consist of repurchase agreements, principal and interest payments on mortgage-backed securities, dividends on equity securities, and proceeds from sales of those securities. Potential future sources of liquidity for the Company include existing cash balances, borrowing capacity through margin accounts, and future issuances of common stock, preferred stock or debt. The Company believes that its existing cash balances, borrowing capacity through margin accounts and borrowing capacity under collateralized repurchase agreements will be sufficient to meet its investment objectives and fund operating expenses. The Company may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities. There can be no assurance that the Company will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should the Company’s needs ever exceed these sources of liquidity, management believes the Company’s mortgage-backed and equity securities could be sold, in most circumstances, to provide cash.

     For the nine months ended September 30, 2002, the Company’s operating activities resulted in net cash flow of $94.5 million. The primary source of operating cash flow was interest on mortgage-backed securities, interest on notes receivable, fee income, gains from the sale of mortgage-backed and equity securities, and dividends. For the nine months ended September 30, 2001, the Company’s operating activities provided net cash flows of $4.1 million. The increase is primarily due to an increase in income from the Company’s larger mortgage-backed security portfolio and an increase in fee income and gains from the sale of mortgage-backed and equity securities.

     For the nine months ended September 30, 2002, the Company’s investing activities resulted in net cash used of $4.5 billion compared to net cash used by investing activities for the nine months ended September 30, 2001, of $969.6 million. The change is primarily attributable to increased purchases of mortgage-backed securities during the first nine months of 2002 compared to the similar period in 2001.

     For the nine months ended September 30, 2002, net cash provided in the Company’s financing activities was $4.5 billion compared to net cash provided for the nine months ended September 30, 2001, of $930.5 million. The increase in cash from financing activities is primarily attributable to an increase in borrowings under repurchase agreements used to fund mortgage-backed securities purchases and proceeds from the Company’s follow-on common stock offerings.

14

Results of Operations — (Continued)

Equity Securities

     The value of the equity securities in the Company’s portfolio had a cost basis of $94.1 million compared to a market value of $99.3 million as of September 30, 2002. As of December 31, 2001, the value of the equity securities in the Company’s portfolio had an adjusted cost basis equal to $46.8 million compared to a market value equal to $61.7 million. Increases and declines are generally recorded as accumulated other comprehensive income in the statement of financial condition, except to the extent that declines are deemed to be other than temporary. If the Company determines that declines are other than temporary, we recognize a loss on the investment and reduce the investment’s carrying value to its current fair value.

15

FBR ASSET INVESTMENT CORPORATION

Summary of Investments and Cash and Cash Equivalents

The following table summarizes FBR Asset’s investments as of September 30, 2002, and December 31, 2001.

			As of September 30, 2002								As of December 31, 2001
			Shares		Percent		Cost of				Shares		Percent		Cost of
			Owned		Ownership(3)		Investment		Fair Value		Owned		Ownership(3)		Investment		Fair Value
Mortgage-Backed Securities				—		—	$	5,738,461,441	$	5,822,504,819		—		—	$	1,236,935,966	$	1,238,365,511
Equity Investments (1)(2)
	American Financial Realty Trust (AFRT) (4)			3,763,441		8.96%		35,000,001		35,000,001		—		—		—		—
	Americredit Corp.			5,000,000		3.27%		35,250,000		40,350,000		—		—		—		—
	Annaly Mortgage Management, Inc. (NLY)			—		—		—		—		800,000		1.36%		7,144,000		12,800,000
	Anworth Mortgage Asset Corporation (ANH)			—		—		—		—		500,000		4.50%		3,890,625		4,550,000
	Capital Automotive REIT (CARS)			—		—		—		—		920,115		3.54%		12,835,604		18,301,087
	MCG Capital Corporation (MCGC)			625,000		2.00%		9,934,375		8,237,500		625,000		2.21%		9,934,375		11,125,000
	Oxford Finance Corp.(4)			500,000		9.62%		4,650,000		4,650,000		—		—		—		—
	Resource Asset Investment Trust (RAS)			—		—		—		—		344,575		2.77%		3,704,181		5,616,573
	Saxon Capital Acquisition Corp. (SAXN)			1,000,000		3.56%		9,300,000		11,070,000		1,000,000		3.57%		9,300,000		9,300,000
		Total Equity Investments						94,134,376		99,307,501						46,808,785		61,692,660
Promissory Notes
	Prime Group Realty, L.P.			—		—		—		—		—		—		8,000,000		8,000,000
		Total Promissory Notes		—		—		—		—						8,000,000		8,000,000
Cash and Cash Equivalents				—		—		12,670,252		12,670,252		—		—		6,630,379		6,630,379
Total Investments and Cash and Cash Equivalents				—		—	$	5,845,266,069	$	5,934,482,572		—		—	$	1,298,375,130	$	1,314,688,550

(1)	The symbols in parentheses next to the company names are the symbols of those companies on NASDAQ or a national securities exchange. Each of these companies is a reporting company under the Securities Exchange Act of 1934. Information is available about these companies on the SEC’s website, www.sec.gov.
(2)	FBR has underwritten or privately placed securities of these companies or their affiliates.
(3)	Based on the most recent publicly available information.
(4)	American Financial Realty and Oxford Financial shares are not currently registered for public trading. As of September 30, 2002 these investments are carried at cost.

16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk generally represents the risk of loss through a change in realizable value that can result from a change in the prices of equity securities, a change in the value of financial instruments as a result of changes in interest rates, a change in the volatility of interest rates or, a change in the credit rating of an issuer. The Company is exposed to the following market risks as a result of its investments in mortgage-backed securities and equity investments. None of these investments are held for trading purposes.

Interest Rate Risk

     The Company is subject to interest-rate risk as a result of its investments in mortgage-backed securities and its financing with repurchase agreements, all of which are interest rate sensitive financial instruments. The Company is exposed to interest rate risk that fluctuates based on changes in the level or volatility of interest rates and mortgage prepayments and in the shape and slope of the yield curve. The Company attempts to hedge a portion of its exposure to rising interest rates primarily through the use of paying fixed and receiving floating interest rate swaps and Eurodollar futures contracts. These interest rate swap agreements and Eurodollar futures contracts are with primary broker-dealers.

     The Company’s primary risk is related to changes in both short and long term interest rates, which affect the Company in several ways. As interest rates increase, the market value of the mortgage-backed securities may be expected to decline, prepayment rates may be expected to go down and durations may be expected to extend. An increase in interest rates is beneficial to the market value of the Company’s swap position as the cash flows from receiving the floating rate portion increases over the fixed rate paid under this scenario. If interest rates decline, the reverse is true for mortgage-backed securities, paying fixed and receiving floating interest rate swaps, and Eurodollar futures contracts.

     The Company records its interest-rate swap agreements at fair value. The differential between amounts paid and received under the interest rate swap agreements is recorded as an adjustment to the interest expense incurred under the repurchase agreements. In addition, the Company records the ineffectiveness of its hedges, if any, in interest expense. In the event of early termination of an interest rate swap agreement, the Company receives or makes a payment based on the fair value of the instrument, and the related deferred gain or loss recorded in other comprehensive income is amortized into income or expense over the original hedge period.

     The Company records its Eurodollar futures at fair value. The differential between amounts paid and received under the futures contract is recorded as an adjustment to interest expense. In the event of early termination of a contract, the Company receives or makes a payment based on the fair value of the Eurodollar futures contract, and the related deferred gain or loss recorded in other comprehensive income is amortized into income or expense over the original hedge period.

     The table that follows shows the expected change in market value for the Company’s current mortgage-backed securities, eurodollar future contracts and interest-rate swaps under several interest-rate “shocks.” Interest rates are defined by the U.S. Treasury yield curve. The changes in rates are assumed to occur instantaneously. It is further assumed that the changes in rates occur uniformly across the yield curve and that the level of LIBOR changes by the same amount as the yield curve. Actual changes in market conditions are likely to be different from these assumptions.

     Changes in value are measured as percentage changes from their respective values presented in the column labeled “Value at 9/30/02.” Actual results could differ significantly from these estimates.

     The change in value of the mortgage-backed securities also incorporates assumptions regarding prepayments, which are based on a third party’s proprietary model. This model forecasts prepayment speeds based, in part, on each security’s issuing agency (Ginnie Mae, Fannie Mae or Freddie Mac), coupon, age, prior exposure to refinancing opportunities, the interest rate distribution of the underlying loans, and an overall analysis of historical prepayment patterns under a variety of past interest rate conditions.

17

Interest Rate Risk — (Continued)

						Value at						Value at
						September 30,						September 30,
						2002 with 100						2002 with 100
			Value at			basis point						basis point
			September 30,			increase in			Percent			decrease in			Percent
			2002(1)			interest rates			Change			interest rates			Change
Assets
	Mortgage-backed securities		$	5,822,504,819		$	5,789,140,819			(0.57	)%	$	5,837,643,331			0.26	%
	Other			161,073,571			161,073,571						161,073,571
		Total Assets	$	5,983,578,390		$	5,950,214,390			(0.56	)%	$	5,998,716,902			0.25	%
Liabilities
	Interest-rate swap(2)		$	17,188,593		$	(5,782,180	)		133.64	%	$	40,559,261			(135.97	)%
	Eurodollar futures			1,712,500			(3,287,500	)		291.97	%		6,712,500			(291.97	)%
	Other			5,236,651,033			5,236,651,033						5,236,651,033
		Total Liabilities		5,255,552,126			5,227,581,353			0.53	%		5,283,922,794			(0.54	)%
Shareholders’ Equity
	Common stock			250,543			250,543						250,543
	Paid-in-capital			664,796,186			664,796,186						664,796,186
	Accumulated other comprehensive income			70,315,410			64,922,183			(7.67	)%		57,083,254			(18.82	)%
	Retained deficit			(7,335,875	)		(7,335,875	)					(7,335,875	)
		Total Shareholders’ Equity		728,026,264			722,633,037			(0.74	)%		714,794,108			(1.82	)%
		Total Liabilities and Shareholders’ Equity	$	5,983,578,390		$	5,950,214,390			(0.56	)%	$	5,998,716,902			0.25	%
Book Value per Share				$29.06			$28.84			(0.76	)%		$28.53			(1.82	)%

(1)

Includes accrued interest.

(2)

The carrying value of the interest rate swaps and eurodollar futures in the Company’s financial statements equals $(18.9) million. See Note 5 to Notes to Financial Statements. The fair value of the interest rate swap is based on quoted market prices as of September 30, 2002. At September 30, 2002, the closing price of the June 2003 Eurodollar futures contract was 98.335 and the closing price of the September 2003 contract was 98.02. As of September 30, 2002, weighted average interest payments received under the swap agreements were based on an interest rate of 1.843% while interest payments made were based on a weighted average interest rate of 2.195%.

     As shown above, the mortgage-backed securities portfolio generally will benefit less from a decline in interest rates than it will be adversely affected by a same scale increase in interest rates. This may effectively limit an investor’s upside potential in a market rally.

     The value of the Company’s investments in other companies is also likely to be affected by significant changes in interest rates. First, many of the companies are exposed to risks similar to those identified above as being applicable to the Company’s direct investments. Second, the REITs in which the Company has invested tend to trade on a yield basis. As interest rates increase, the yield required by investors in REITs, thrifts and other financial institutions increases with the result that market values decline. Finally, changes in interest rates often affect market prices of equity securities. Because each of the companies in which the Company invests has its own interest rate risk management process, it is not feasible for us to quantify the potential impact that interest rate changes would have on the stock price or the future dividend payments by any of the companies in which the Company has invested.

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Equity Price Risk

     The Company is exposed to equity price risk as a result of its investments in equity securities of REITs and other companies. Equity price risk changes as the volatility of equity prices changes or the values of corresponding equity indices change.

     While it is impossible to exactly project what factors may affect the prices of equity sectors and how much the effect might be, the table below illustrates the impact a ten percent increase and a ten percent decrease in the price of the equities held by the Company would have on the value of the total assets and the book value of the Company as of September 30, 2002.

						Value at						Value at
						September 30, 2002						September 30, 2002
			Value at			with 10% Increase			Percent			with 10% Decrease			Percent
			September 30, 2002			in Price			Change			in Price			Change
Assets
	Equity securities		$	99,307,501		$	109,238,251			10.00	%	$	89,376,751			(10.00	)%
	Other			5,884,270,889			5,884,270,889						5,884,270,889
		Total Assets	$	5,983,578,390		$	5,993,509,140			0.17	%	$	5,973,647,640			(0.17	)%
Liabilities			$	5,255,552,126		$	5,255,552,126					$	5,255,552,126
Shareholders’ Equity
	Common stock			250,543			250,543						250,543
	Paid-in-capital			664,796,186			664,796,186						664,796,186
	Accumulated comprehensive income			70,315,410			80,246,160			14.12	%		60,384,660			(14.12	)%
	Retained deficit			(7,335,875	)		(7,335,875	)					(7,335,875	)
	Total Shareholders’ Equity			728,026,264			737,957,014			1.36	%		718,095,514			(1.36	)%
	Total Liabilities and Shareholders’ Equity		$	5,983,578,390		$	5,993,509,140			0.17	%	$	5,973,647,640			(0.17	)%
Book value per share				$29.06			$29.45			1.36	%		$28.66			(1.36	)%

     Except to the extent that the Company sells its equity investments or a decrease in market value is deemed to be other than temporary, an increase or decrease in the market value of those assets will not directly affect the Company’s earnings, however an increase or decrease in interest rates would affect the market value of the assets owned by the companies in which the Company invests. Consequently, if those companies’ earnings are affected by changes in the market value of their assets, that could in turn impact their ability to pay dividends, which could in turn affect the Company’s earnings. If the Company had sold all of its equity investments on September 30, 2002, the Company would have realized a gain of approximately $5.2 million that would have been included in earnings.

ITEM 4. CONTROLS AND PROCEDURES

     Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer, Eric F. Bilings and the Company’s principal financial officer, Kurt R. Harrington, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Eric F. Billings and Kurt R. Harrington concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

     Since the date of the evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION

     The registrant’s stock became registered under the Securities Exchange Act of 1934 on September 27, 1999. The common stock is listed on the New York Stock Exchange and its symbol is “FB.”

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     None

     (b) Reports on Form 8-K

1.	Current Report on Form 8-K, filed on July 25, 2002, pursuant to Item 9, disclosing the Company’s operating results for the second quarter ending June 30, 2002.
2.	Current Report on Form 8-K, filed on August 12, 2002, pursuant to Item 9, disclosing the filing of the certifications of the Company’s chief executive officer and chief financial officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FBR ASSET INVESTMENT CORPORATION

(Registrant)

By:  /s/ KURT R. HARRINGTON

Kurt R. Harrington

Chief Financial Officer, Treasurer and

Principal Financial and Accounting Officer

Date: November 14, 2002

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Certification

I, Eric F. Billings, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of FBR Asset Investment Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

         Date: November 14, 2002

/s/ ERIC F. BILLINGS

Eric F. Billings

Chairman and Chief Executive Officer

22

Certification

I, Kurt R. Harrington, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of FBR Asset Investment Corporation;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

         Date: November 14, 2002

/s/ KURT R. HARRINGTON

Kurt R. Harrington

Chief Financial Officer

23