FBR & Co (FBRC) 10-Q 2010 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

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-33518

FBR CAPITAL MARKETS CORPORATION

(Exact name of Registrant as specified in its charter)

Virginia	20-5164223
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1001 Nineteenth Street North Arlington, VA	22209
(Address of principal executive offices)	(Zip code)

(703) 312-9500

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, $0.001 par value per share, as of October 31, 2010 was 62,006,483 shares.

FBR CAPITAL MARKETS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

INDEX

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Financial Statements and Notes—(unaudited)
	Consolidated Balance Sheets—September 30, 2010 and December 31, 2009		1
	Consolidated Statements of Operations—Three Months Ended September 30, 2010 and 2009		2
	Consolidated Statements of Operations—Nine Months Ended September 30, 2010 and 2009		3
	Consolidated Statements of Changes in Shareholders’ Equity—Nine Months Ended September 30, 2010 and Year Ended December 31, 2009		4
	Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2010 and 2009		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.	Controls and Procedures		36
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		38
Item 6.	Exhibits		38
	Signature		39

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

(Unaudited)

	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents	$	177,174		$	275,506
Receivables:
Investment banking		6,303			4,846
Asset management fees		897			958
Due from affiliates		529			567
Other		6,812			9,380
Investments:
Trading securities, at fair value		104,420			94,478
Long-term investments, at fair value		142			317
Other long-term investments		69,706			43,303
Due from brokers, dealers and clearing organizations		28,838			96,477
Goodwill		5,882			5,882
Intangible assets, net		2,699			2,542
Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization		12,339			15,172
Prepaid expenses and other assets		10,963			6,897
Total assets	$	426,704		$	556,325
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Securities sold but not yet purchased, at fair value	$	60,221		$	51,669
Accrued compensation and benefits		33,534			72,537
Accounts payable, accrued expenses and other liabilities		20,456			22,452
Due to brokers, dealers and clearing organizations		26,850			90,168
Total liabilities		141,061			236,826
Commitments and Contingencies (Note 6)
Shareholders’ Equity:
Preferred stock, $0.001 par value, 100,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value, 300,000,000 shares authorized, 62,005,387 and 64,064,784 shares issued and outstanding, respectively		62			64
Additional paid-in capital		424,275			429,052
Employee stock loan receivable, including accrued interest (120,950 and 57,500 shares, respectively)		(729	)		(391	)
Restricted stock units		31,859			19,979
Accumulated other comprehensive loss		(50	)		(71	)
Accumulated deficit		(169,774	)		(129,134	)
Total shareholders’ equity		285,643			319,499
Total liabilities and shareholders’ equity	$	426,704		$	556,325

See notes to consolidated financial statements.

1

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,
	2010			2009
Revenues:
Investment banking:
Capital raising	$	23,118		$	28,977
Advisory		6,671			4,744
Institutional brokerage:
Principal transactions		5,595			10,468
Agency commissions		17,850			21,008
Asset management fees		3,346			3,624
Net investment income		47			29
Interest income, dividends and other		767			2,590
Total revenues		57,394			71,440
Interest expense		—			—
Revenues, net of interest expense		57,394			71,440
Non-Interest Expenses:
Compensation and benefits		41,433			47,129
Professional services		3,869			5,891
Business development		2,809			2,931
Clearing and brokerage fees		2,824			3,787
Occupancy and equipment		5,905			9,062
Communications		5,082			5,258
Other operating expenses		3,065			4,340
Total non-interest expenses		64,987			78,398
Loss before income taxes		(7,593	)		(6,958	)
Income tax (benefit) provision		(982	)		12
Net loss	$	(6,611	)	$	(6,970	)
Basic loss per share	$	(0.10	)	$	(0.11	)
Diluted loss per share	$	(0.10	)	$	(0.11	)
Weighted average shares outstanding:
Basic (in thousands)		63,547			63,181
Diluted (in thousands)		63,547			63,181

See notes to consolidated financial statements.

2

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Revenues:
Investment banking:
Capital raising	$	68,250		$	37,549
Advisory		13,127			12,726
Institutional brokerage:
Principal transactions		16,143			31,638
Agency commissions		59,116			73,184
Asset management fees		10,489			9,783
Net investment income (loss)		95			(49	)
Interest income, dividends and other		4,097			3,840
Total revenues		171,317			168,671
Interest expense		—			252
Revenues, net of interest expense		171,317			168,419
Non-Interest Expenses:
Compensation and benefits		135,468			119,680
Professional services		15,522			15,019
Business development		10,581			9,160
Clearing and brokerage fees		9,891			10,844
Occupancy and equipment		18,526			24,822
Communications		15,220			15,611
Impairment of intangible assets		—			5,350
Other operating expenses		10,398			12,089
Total non-interest expenses		215,606			212,575
Loss before income taxes		(44,289	)		(44,156	)
Income tax (benefit) provision		(3,649	)		725
Net loss	$	(40,640	)	$	(44,881	)
Basic loss per share	$	(0.64	)	$	(0.76	)
Diluted loss per share	$	(0.64	)	$	(0.76	)
Weighted average shares outstanding:
Basic (in thousands)		63,508			58,912
Diluted (in thousands)		63,508			58,912

See notes to consolidated financial statements.

3

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars and shares in thousands)

(Unaudited)

	Common Stock Shares			Common Stock Amount			Additional Paid-in Capital			Employee Stock Loan Receivable			Restricted Stock Units			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total			Comprehensive Loss
Balances at December 31, 2008		59,792		$	60		$	396,059		$	—		$	9,309		$	(218	)	$	(101,483	)	$	303,727
Net loss		—			—			—			—			—			—			(27,651	)		(27,651	)	$	(27,651	)
Contribution from FBR TRS Holdings, Inc		—			—			34			—			—			—			—			34
Issuance of common stock, net of forfeitures		20,940			21			100,852			(391	)		(1,540	)		—			—			98,942
Repurchase of common stock		(16,667	)		(17	)		(73,455	)		—			—			—			—			(73,472	)
Stock compensation expense for options granted to purchase common stock		—			—			5,562			—			—			—			—			5,562
Issuance of restricted stock units		—			—			—			—			12,210			—			—			12,210
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes		—			—			—			—			—			147			—			147			147
Comprehensive loss																									$	(27,504	)
Balances at December 31, 2009		64,065		$	64		$	429,052		$	(391	)	$	19,979		$	(71	)	$	(129,134	)	$	319,499
Net loss		—			—			—			—			—			—			(40,640	)		(40,640	)	$	(40,640	)
Issuance of common stock, net of forfeitures		708			—			5,843			(338	)		(4,047	)		—			—			1,458
Repurchase of common stock		(2,768	)		(2	)		(14,272	)		—			—			—			—			(14,274	)
Stock compensation expense for options granted to purchase common stock		—			—			3,652			—			—			—			—			3,652
Issuance of restricted stock units		—			—			—			—			15,927			—			—			15,927
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes		—			—			—			—			—			21			—			21			21
Comprehensive loss																									$	(40,619	)
Balances at September 30, 2010		62,005		$	62		$	424,275		$	(729	)	$	31,859		$	(50	)	$	(169,774	)	$	285,643

See notes to consolidated financial statements.

4

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(40,640	)	$	(44,881	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,847			8,648
Stock compensation		16,034			14,988
Net investment (income) loss from long-term and mortgage-backed securities		(95	)		49
Impairment of intangible assets		—			5,350
Securities received in exchange for services provided, at fair value at receipt date		(14,068	)		—
Other		801			732
Changes in operating assets:
Receivables:
Brokers, dealers and clearing organizations		67,639			(87,768	)
Investment banking		(2,273	)		(6,529	)
Asset management fees		61			(2,126	)
Affiliates		38			1,640
Interest, dividends and other		2,569			22,345
Trading securities, at fair value		(9,033	)		(34,141	)
Prepaid expenses and other assets		(4,066	)		4,465
Changes in operating liabilities:
Trading securities sold but not yet purchased, at fair value		15,858			14,999
Accrued compensation and benefits		(34,541	)		(4,023	)
Accounts payable, accrued expenses and other liabilities		(4,745	)		(4,841	)
Brokers, dealers and clearing organizations		(63,318	)		83,557
Net cash used in operating activities		(63,932	)		(27,536	)
Cash flows from investing activities:
Receipt of principal payments on mortgage-backed securities		—			2,441
Proceeds from sales of mortgage-backed securities		—			450,396
Purchases of long-term investments		(32,773	)		(150	)
Proceeds from sales of and distributions from investments		21,552			8,187
Securities sold but not yet purchased, net		(7,552	)		5,968
Purchases of furniture, equipment, software, and leasehold improvements		(2,682	)		(587	)
Acquisition of net assets		(488	)		(3,311	)
Net cash (used in) provided by investing activities		(21,943	)		462,944
Cash flows from financing activities:
Repayments of repurchase agreements, net		—			(416,037	)
Repurchases of common stock		(14,274	)		(73,472	)
Proceeds from sales of common stock		1,817			90,447
Net cash used in financing activities		(12,457	)		(399,062	)
Net (decrease) increase in cash and cash equivalents		(98,332	)		36,346
Cash and cash equivalents, beginning of period		275,506			207,801
Cash and cash equivalents, end of period	$	177,174		$	244,147
Supplemental Cash Flow Information:
Cash payments for interest	$	—		$	255
Cash payments for taxes	$	5,071		$	18
Non-cash investing activities
Securities received in exchange for services provided, fair value at receipt date	$	12,168		$	—

See notes to consolidated financial statements.

5

FBR CAPITAL MARKETS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

1. Basis of Presentation:

The consolidated financial statements of FBR Capital Markets Corporation and subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information 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 statement of the results for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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 affecting 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. Although the Company bases its estimates and assumptions on historical experience, when available, market information, and on various other factors that it believes to be reasonable under the circumstances, management exercises significant judgment in the final determination of its estimates. Actual results may differ from those estimates.

Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on the results of operations of the Company.

2. Financial Instruments and Long-Term Investments:

Fair Value of Financial Instruments

The Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

Level 1 Inputs	—	Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;
Level 2 Inputs	—	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs	—	Unobservable inputs for the asset or liability, including significant assumptions of the Company and other market participants.

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The Company determines fair values for the following assets and liabilities:

Long-term investments, at fair value—The Company’s long-term investments, at fair value, consist of marketable equity securities and, from time-to-time, investment securities—marked-to-market. The Company’s marketable equity securities are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices from an exchange. From time-to-time, as applicable, investment securities—marked-to-market will consist of warrants and non-public equity securities received in connection with certain capital raising transactions that are held in a broker-dealer subsidiary. Warrants are generally exercisable at the respective offering price of the transaction. Such warrants and non-public equity securities are classified within Level 3 of the fair value hierarchy as the value is determined by management based on valuation models and enterprise value, taking into consideration the financial performance of the companies relative to projections, trends within sectors, underlying business models and expected exit timing and strategy.

Trading securities and securities sold but not yet purchased, at fair value—The Company’s trading securities, at fair value, are securities owned by the Company’s broker-dealer subsidiaries and consist of marketable and non-public equity, convertible and fixed income debt instruments, and listed options. The Company’s securities sold but not yet purchased, at fair value, are trading securities sold by the Company’s broker-dealer subsidiaries and exchange-traded funds sold as part of the Company’s principal investing segment and consist of marketable equity, convertible and fixed income debt instruments, listed options, and exchange-traded funds. The Company classifies marketable equity, listed options, and exchange-traded funds within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Convertible and fixed income debt instruments are classified within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker or dealer, or alternative pricing services that provide reasonable levels of price transparency. Non-public equity and debt securities are classified within Level 3 of the fair value hierarchy if enterprise values are used to value these securities. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable market trading activity, which may be reported by The PORTAL Market^SM, a subsidiary of The NASDAQ Stock Market, Inc.

7

Fair Value Hierarchy

The following tables set forth, by level within the fair value hierarchy, financial instruments and long-term investments accounted for under ASC 820 as of September 30, 2010 and December 31, 2009. As required by ASC 820, assets and liabilities that are measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Items Measured at Fair Value on a Recurring Basis

	September 30, 2010		Level 1		Level 2		Level 3
Long-term investments, at fair value:
Marketable equity securities	$	142	$	142	$	—	$	—
Trading securities, at fair value:
Marketable and non-public equity securities	$	12,057	$	4,863	$	—	$	7,194
Listed options		700		700		—		—
Convertible and fixed income debt instruments		91,663		—		91,663		—
Total	$	104,420	$	5,563	$	91,663	$	7,194
Securities sold but not yet purchased, at fair value:
Marketable equity securities and exchange-traded funds	$	32,704	$	32,704	$	—	$	—
Listed options		1,071		1,071		—		—
Convertible and fixed income debt instruments		26,446		—		26,446		—
Total	$	60,221	$	33,775	$	26,446	$	—

As of September 30, 2010, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $7,194, or 1.7% of the Company’s total assets at that date.

	December 31, 2009		Level 1		Level 2		Level 3
Long-term investments, at fair value:
Marketable equity securities	$	317	$	317	$	—	$	—
Trading securities, at fair value:
Marketable and non-public equity securities	$	35,941	$	20,463	$	—	$	15,478
Listed options		4,086		4,086		—		—
Convertible and fixed income debt instruments		54,451		—		54,448		3
Total	$	94,478	$	24,549	$	54,448	$	15,481
Securities sold but not yet purchased, at fair value:
Marketable equity securities and exchange-traded funds	$	35,530	$	35,530	$	—	$	—
Listed options		1,098		1,098		—		—
Convertible and fixed income debt instruments		15,041		—		15,041		—
Total	$	51,669	$	36,628	$	15,041	$	—

As of December 31, 2009, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $15,481, or 2.8% of the Company’s total assets at that date.

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Level 3 Gains and Losses

The tables below set forth a summary of changes in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the three and nine months ended September 30, 2010 and 2009. Realized and unrealized gains (losses) on trading securities are included in “principal transactions” in the statement of operations. As of September 30, 2010 and 2009, the Company did not have any net unrealized gains (losses) included in accumulated other comprehensive income on Level 3 financial assets.

	Three Months Ended September 30,
	2010			2009
Beginning balance, July 1	$	154		$	2,114
Total net losses (realized/unrealized)
Included in earnings		(9	)		(451	)
Included in other comprehensive income		—			—
Purchases		16,862			21,787
Sales		(9,813	)		(20,839	)
Ending balance, September 30	$	7,194		$	2,611
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(7	)	$	10
	Nine Months Ended September 30,
	2010			2009
Beginning balance, January 1	$	15,481		$	3,207
Total net losses (realized/unrealized)
Included in earnings		(99	)		(453	)
Included in other comprehensive income		—			—
Purchases		141,483			88,802
Sales		(149,671	)		(88,945	)
Ending balance, September 30	$	7,194		$	2,611
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(3	)	$	(146	)

There were no transfers of securities in to, or out of, any of the financial asset levels during the three and nine months ended September 30, 2010.

Long-term Investments, at Fair Value

Long-term investments, at fair value, consisted of the following as of the dates indicated:

	September 30, 2010		December 31, 2009
Long-term investments, at fair value:
Marketable equity securities	$	142	$	317

As of September 30, 2010 and December 31, 2009, the Company had investments in marketable equity securities held by other than the Company’s broker-dealer subsidiaries that are classified as available-for-sale securities. In accordance with ASC 320, “Investments—Debt and Equity Securities”, these securities are carried

9

at fair value with resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities as of the dates indicated were as follows:

	September 30, 2010
	Cost Basis		Unrealized					Fair Value
			Gains		Losses(1)
Marketable equity securities	$	192	$	—		(50	)	$	142
	December 31, 2009
	Cost Basis		Unrealized					Fair Value
			Gains		Losses(1)
Marketable equity securities	$	388	$	—		(71	)	$	317

(1) Duration of unrealized losses is less than 12 months.

The Company evaluates its portfolio of marketable equity securities for impairment as of each reporting date. For the securities with unrealized losses, the Company will review the underlying cause for the impairments, as well as the severity and duration of the impairments. If the impairment is determined to be other-than-temporary, the Company will recognize an other-than-temporary impairment loss in its statement of operations. During the three and nine months ended September 30, 2010 and 2009, the Company did not record any other-than-temporary impairment losses in the statement of operations relating to marketable equity securities. As of September 30, 2010, the Company held one marketable equity security in an unrealized loss position. Based on the limited duration of the unrealized loss and consideration of market activity during the three months ended September 30, 2010, the Company does not consider this investment to be other-than-temporarily impaired as of September 30, 2010.

During the nine months ended September 30, 2010, the Company received $206 from sales of marketable equity securities resulting in gross gains of $10. There were no sales of marketable equity securities during the three months ended September 30, 2010. During the three and nine months ended September 30, 2009, the Company received $353 and $1,084, respectively, from sales of marketable equity securities resulting in gross gains of $60 and $117, respectively.

During the nine months ended September 30, 2009, the Company received $450,396 from sales of mortgage-backed securities, which had been previously impaired as of December 31, 2008, resulting in additional gross losses of $1,502.

Trading Securities and Securities Sold but Not Yet Purchased, at Fair Value

Institutional brokerage trading related securities consisted of the following as of the dates indicated:

	September 30, 2010				December 31, 2009
	Owned		Sold But Not Yet Purchased		Owned		Sold But Not Yet Purchased
Marketable and non-public equity securities and exchange-traded funds	$	12,057	$	32,704	$	35,941	$	35,530
Listed options		700		1,071		4,086		1,098
Convertible and fixed income debt instruments		91,663		26,446		54,451		15,041
	$	104,420	$	60,221	$	94,478	$	51,669

Securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, and thereby create a liability to purchase the security in the market at prevailing prices.

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These transactions when unrelated to over-allotments result in off-balance-sheet risk as the Company’s ultimate obligation to satisfy the sale of securities sold but not yet purchased may exceed the current value recorded in the consolidated balance sheets.

Other Long-Term Investments

Other long-term investments consisted of the following as of the dates indicated:

	September 30, 2010		December 31, 2009
Non-public equity securities	$	68,153	$	33,662
Investment funds		1,236		9,329
Note receivable		317		312
	$	69,706	$	43,303

The Company evaluates its portfolio of non-public equity securities, carried at cost, for impairment as of each reporting date. Based on its evaluations, including consideration of the severity and duration of factors affecting the fair values of the Company’s investments in non-public equity securities, the Company recorded no impairment losses during the three and nine months ended September 30, 2010 and 2009.

During the three and nine months ended September 30, 2010, the Company received $1,777 and $10,907, respectively, from sales of, or distributions from, non-public equity securities, resulting in gross gains of $32 and $211, respectively. During the nine months ended September 30, 2009, the Company received $1,747 from sales of, or distributions from, non-public equity securities, resulting in gross gains of $324. There were no sales of, or distributions from, non-public equity securities during the three months ended September 30, 2009.

During the three and nine months ended September 30, 2010, the Company received $217 and $8,440, respectively, from the redemption of investments in investment funds. During the three and nine months ended September 30, 2009, the Company received $201 and $5,355, respectively, from the redemption of investments in investment funds.

3. Income Taxes:

During the three and nine months ended September 30, 2010, the Company recorded tax benefits of $(982) and $(3,649), respectively. During the three and nine months ended September 30, 2009, the Company recorded tax provisions of $12 and $725, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2010 were 12.9% and 8.2%, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2009 were (0.2%) and (1.6%), respectively. The effective tax rates for the three and nine months ended September 30, 2010 and 2009 differed from the statutory tax rates primarily due to the full valuation allowance on the deferred tax benefit of the book losses incurred in these periods and as a result of the benefit of tax losses expected to be realized in 2010 and tax liability expected to be incurred in 2009.

As of September 30, 2010, the Company continues to provide a full valuation allowance against its net deferred tax assets since, based on the application of the criteria in ASC 740 “Income Taxes” (“ASC 740”), it is more likely than not that the benefits of these assets will not be realized in the future.

4. Net Capital Requirements:

FBR Capital Markets & Co. (“FBR & Co.”), the Company’s principal U.S. broker-dealer subsidiary, is registered with the Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Additionally, FBR Capital Markets International, Ltd. (“FBRIL”) is registered with the Financial Services Authority (“FSA”) of the United Kingdom. As such, they are subject to the

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minimum net capital requirements promulgated by the SEC and FSA. As of September 30, 2010, FBR & Co. had net capital of $31,724, which was $28,753 in excess of its required net capital of $2,971. As of September 30, 2010, FBRIL had net capital in excess of required amounts.

5. Earnings Per Share:

Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the impact of dilutive securities such as stock options, unvested shares of restricted stock and restricted stock units (“RSUs”), all of which are subject to forfeiture. Due to the Company’s reported net loss for the three and nine months ended September 30, 2010 and 2009, all stock options, unvested shares of restricted stock and unvested RSUs were considered anti-dilutive for these periods. The following table presents the computations of basic and diluted earnings per share for the periods indicated:

	Three Months Ended September 30, 2010						Three Months Ended September 30, 2009
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding:
Common stock (in thousands)		63,547			63,547			63,181			63,181
Stock options, unvested restricted stock and unvested RSUs (in thousands)		—			—			—			—
Weighted average common and common equivalent shares outstanding (in thousands)		63,547			63,547			63,181			63,181
Net loss applicable to common stock	$	(6,611	)	$	(6,611	)	$	(6,970	)	$	(6,970	)
Net loss per common share	$	(0.10	)	$	(0.10	)	$	(0.11	)	$	(0.11	)
	Nine Months Ended September 30, 2010						Nine Months Ended September 30, 2009
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding:
Common stock (in thousands)		63,508			63,508			58,912			58,912
Stock options, unvested restricted stock and unvested RSUs (in thousands)		—			—			—			—
												��
Weighted average common and common equivalent shares outstanding (in thousands)		63,508			63,508			58,912			58,912
Net loss applicable to common stock	$	(40,640	)	$	(40,640	)	$	(44,881	)	$	(44,881	)
Net loss per common share	$	(0.64	)	$	(0.64	)	$	(0.76	)	$	(0.76	)

The following table presents the number of anti-dilutive stock options, unvested restricted stock and unvested RSUs for the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Stock Options—Employees and directors		8,192		7,045		8,192		7,045
Stock Options—Non-employee		3,256		3,102		3,256		3,102
Restricted Stock, unvested		686		1,369		686		1,369
Restricted Stock Units, unvested		8,328		7,301		8,328		7,301
		20,462		18,817		20,462		18,817

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6. Commitments and Contingencies:

As of September 30, 2010, except as described below, the Company was neither a defendant nor plaintiff in any lawsuits or arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material adverse effect on its financial condition, results of operations or liquidity. The Company has been named as a defendant in a small number of civil lawsuits and arbitrations relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and self regulatory organizations. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Company’s financial condition or results of operations in a future period. However, based on management’s review with counsel, resolution of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Many aspects of the Company’s business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state securities laws, other Federal and state laws and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other personnel. FBR & Co. has been named as a defendant in a small number of securities claims involving investment banking clients of FBR & Co. as a result of FBR & Co.’s role as an underwriter. In these cases, the underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBR & Co. against certain claims or liabilities, including claims or liabilities under the Securities Act of 1933, as amended (the “Securities Act”), or contribute to payments which FBR & Co. is required to make as a result of the litigation. There can be no assurance that such indemnification or contribution will ultimately be available to the Company or that an investment banking client will be able to satisfy its indemnity or contribution obligations when due.

In May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBR & Co.) and eight other underwriters as defendants. The lawsuit, styledIn Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United States District Court for the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc. (“TMI”), and certain of its officers and directors, alleging material misrepresentations and omissions about,inter alia, the financial position of TMI. The amended complaint now includes claims under Sections 11 and 12 of the Securities Act against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two offerings in January 2008). The allegations against FBR & Co. relate only to its role as underwriter or member of the syndicate that underwrote TMI’s total of three offerings in September 2007 and January 2008—each of which occurred after the filing of the original complaint—with an aggregate offering price of approximately $818,000. The plaintiffs seek restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although FBR & Co. is contractually entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBR & Co. receives from TMI. On September 22, 2008, FBR & Co. filed a motion to dismiss the consolidated class action complaint as to FBR & Co. The District Court granted that motion on January 27, 2010. On July 5, 2010, the District Court ruled that it would allow the plaintiffs to file a motion for leave to amend the complaint; the District Court is also allowing plaintiffs to file a motion for reconsideration of the Court’s order dismissing the amended complaint. FBR & Co. will oppose those motions.

FBR & Co. has been named as a defendant in a case relating to its role as an underwriter in residential mortgage-backed securities (“RMBS”) offerings. FBR & Co. is among dozens of underwriter, securitization trust and depositor defendants in an individual action filed by Cambridge Place Investment Management, Inc. in Massachusetts state court(Cambridge Place Investment Management Inc. v. Morgan Stanley et al). Cambridge’s complaint relates to the more than $2.4 billion in RMBS purchases it made in numerous underwritten offerings (of which the claims concerning FBR & Co. are limited to Cambridge’s purchases of a combined $22 million of RMBS in two separate offerings) and alleges that each of the defendants made misrepresentations and omissions

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relating to, among other things, loan-to-value ratios, appraisals, and underwriting standards, in violation of state securities laws. FBR & Co. has contractual indemnification claims against the RMBS issuers and contribution claims against co-underwriters involved in the two offerings for which claims have been made against it.

Although these cases involving FBR & Co. are at a preliminary stage, based on management’s review with counsel and present information currently known by management, resolution of such matters is not expected to have a material effect on the Company’s financial condition, results of operations, or liquidity.

In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments. In recent years, there has been an increasing incidence of litigation and actions by government agencies and self regulatory organizations involving the securities industry, including class actions that seek substantial damages. The Company is also subject to the risk of litigation, including litigation that may be without merit. As the Company intends to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against the Company could materially affect its financial condition, operating results and liquidity.

7. Shareholders’ Equity:

Share Repurchases

In July 2010, the Board of Directors of the Company approved a 5,000,000 share increase to the number of shares of the Company’s common stock that the Company is authorized to repurchase. This directive increased the total number of shares authorized to repurchase to 5,650,500 shares. The Company did not repurchase any shares of its common stock during the three months ended September 30, 2010. During the nine months ended September 30, 2010, the Company repurchased 2,768,385 shares, of its common stock in open market transactions at a weighted average share price of $5.16 per share, for a total cost of $14,274.

In May 2009, the Company entered into an agreement with Arlington Asset Investment Corp. (“Arlington Asset”) and Arlington Asset’s direct, wholly-owned subsidiary, FBR TRS Holdings, Inc., pursuant to which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35 for a total cost of $72,501 plus transaction-related expenses of $971. See Note 8 for additional information regarding this transaction.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (the “Purchase Plan”), eligible employees may purchase common stock through payroll deductions at a price that is 85% of the lower of the market value of the common stock on the first day of the offering period or the last day of the offering period. The Company recognizes compensation expense relating to shares offered under the Purchase Plan. For the three and nine months ended September 30, 2010, the Company recognized compensation expense of $73 and $350, respectively. For the three and nine months ended September 30, 2009, the Company recognized compensation expense of $136 and $385, respectively.

Partner Leveraged Stock Purchase Program

The Company initiated the Partner Leveraged Stock Purchase Program (“PLSPP”) in December 2009. Under the PLSPP, non-executive officer employees who are members of the Company’s Partnership Group as well as the Company’s Chief Financial Officer and General Counsel were granted the right to purchase shares of the Company’s common stock on four specific offering dates during the fourth quarter of 2009 and the first half of 2010. Each participant was initially granted the right to purchase up to either 25,000 shares or 50,000 shares. The Company has offered to provide a full recourse loan to each non-executive officer participant for up to 50% of the aggregate purchase price, collateralized by the shares purchased, bearing interest at market rates, and maturing three years from the date of issuance. For each share purchased by the participant, the Company would grant two options (three options in the case of each of the Company’s Chief Financial Officer and General Counsel) to purchase the Company’s common stock under the FBR Capital Markets Long-Term Incentive Plan

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(described below) that are subject to a 3-year cliff vesting requirement. For the nine months ended September 30, 2010, participants purchased 264,535 shares for an aggregate purchase price of $1,286. There were no shares purchased by participants during the three months ended September 30, 2010. As of September 30, 2010, the Company had loans outstanding to participants of $729, including accrued interest.

Stock Compensation Plans

FBR Capital Markets Corporation 2006 Long-Term Incentive Plan (“FBR Capital Markets Long-Term Incentive Plan”)

Under the FBR Capital Markets Long-Term Incentive Plan, as amended, the Company may grant options to purchase stock, stock appreciation rights, performance awards, restricted and unrestricted stock and RSUs for up to an aggregate of 22,069,985 shares of common stock, subject to increase under certain provisions of the plan, to eligible participants. Participants include employees, officers and directors of the Company and its subsidiaries. The FBR Capital Markets Long-Term Incentive Plan has a term of 10 years and options granted may have an exercise period of up to 10 years. Options may be incentive stock options, as defined by Section 422 of the Internal Revenue Code, or nonqualified stock options.

The Company grants options to purchase stock, restricted shares of common stock and RSUs to employees that vest based on meeting specified service conditions of three to five years and in certain cases achievement of specified market conditions. The following table presents compensation expense related to these awards for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009
Stock options	$	1,019	$	1,392	$	3,102	$	4,055
Restricted shares	$	577	$	1,409	$	2,397	$	3,758
RSUs	$	2,981	$	2,525	$	9,015	$	6,487

The following table presents issuance activity related to grants of these awards for the periods indicated:

	Three Months Ended September 30, 2010						Nine Months Ended September 30, 2010
	Stock   Options		Restricted     Shares		RSUs		Stock   Options		Restricted     Shares		RSUs
Stock-based award issuances		—		—		89,528		1,513,530		—		2,635,972
Grant date fair value per share	$	—	$	—	$	3.44	$	2.19	$	—	$	5.31

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Due to the relatively short period in which the Company has been publicly-traded, the Company has not based its volatility assumption solely on historical data. The Company has used a combination of its historical volatility, historical industry comparisons, and other market data in order to determine the volatility assumption. The risk-free interest rate is based on the rates of the U.S. Treasury with similar maturities as the expected life of the award. The expected life of the award is based on the length of time from the grant date to the midpoint of the vesting date and the contractual expiration date of the award. The Company uses this methodology for determining expected life as the Company does not have sufficient historical data to estimate an expected life as a majority of the initial stock options issued by the Company since its inception became exercisable in the past year. The dividend yield is based on the expected dividend payout over the expected life of the award. The following weighted average assumptions used for options granted for the period indicated:

	Nine Months Ended September 30, 2010
Volatility		45.0	%
Risk-free interest rate		2.45	%
Expected life		5.1 years
Dividend yield		—

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The fair value of each RSU with a market condition is estimated on the date of grant using a lattice-pricing model. The methodology for determining the assumptions used for these valuations is similar to those described above for stock options. The assumptions used for 76,000 RSUs with a market condition granted during the nine months ended September 30, 2010 were a volatility of 45.0%, risk-free interest rate of 1.43% and an expected term based on the applicable service condition. The assumptions used for 64,002 RSUs with a market condition granted during nine months ended September 30, 2009 were a volatility of 56.8%, risk-free interest rate of 1.89% and an expected term based on the applicable service condition. There were no RSUs with a market condition granted during the three months ended September 30, 2010 and 2009, respectively.

The following table presents the unrecognized compensation related to unvested options to purchase stock, restricted shares of common stock, and RSUs and the weighted average vesting period in which the expense will be recognized:

	As of September 30, 2010
	Stock Options		Restricted Shares		RSUs
Unrecognized compensation	$	6,716	$	2,537	$	21,245
Unvested awards		5,136,195		685,830		8,327,750
Weighted average vesting period		2.9 years		1.6 years		3.0 years

In addition, as part of the Company’s satisfaction of incentive compensation earned for past service under the Company’s variable compensation programs, employees may receive RSUs in lieu of cash payments. These RSUs are issued to an irrevocable trust and are not returnable to the Company. In settlement of such accrued incentive compensation, the Company granted the following RSUs for the periods indicated:

	Three Months Ended September 30, 2010		Nine Months Ended September 30, 2010
RSU issuances		105,730		1,206,843
Aggregate grant date fair value	$	358	$	6,839

8. Related Party Transactions:

In October 2009, Arlington Asset and related affiliates (collectively, the Company’s former majority shareholder), sold 14,755,017 shares of the Company’s common stock in an underwritten public offering. As a result of this sale, Arlington Asset no longer maintains an ownership interest in the Company. Subsequent to this sale, the Company’s relationship with Arlington Asset has been limited to subleasing certain office space to Arlington Asset at a market rate. The paragraphs that follow provide additional detail regarding our historical relationship with Arlington Asset, including amounts reflected in our 2009 financial statements.

In July 2006, the Company entered into various inter-company and other contractual arrangements with Arlington Asset and Crestview Partners, L.P., a New York-based private equity firm (“Crestview”), including a professional services agreement and other related party contractual arrangements. In May 2009, the Company entered into a stock repurchase agreement with Arlington Asset (“Repurchase Agreement”) pursuant to which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35. As a result of this transaction, Arlington Asset ceased being the majority shareholder of the Company. Concurrently, the Company and Arlington Asset agreed to terminate various inter-company and other contractual arrangements between them.

Services Agreement

Under the services agreement with Arlington Asset, the Company was to provide or cause one or more of its subsidiaries to provide to Arlington Asset certain services, including various corporate overhead services, for

16

fees based on costs incurred by the Company and its subsidiaries in providing the services. Similarly, Arlington Asset was to provide to the Company and its subsidiaries under the same services agreement certain services, including certain asset management services, for fees based on costs incurred by Arlington Asset in providing the services. The costs being allocated under each of these agreements primarily consisted of total compensation and benefits of the employees providing the services, professional services, including consulting and legal fees, and facility costs for the employees providing the services.

This services agreement was terminated in connection with the Repurchase Agreement in May 2009 and replaced by a transition services agreement pursuant to which the Company agreed to provide Arlington Asset certain services for a fixed dollar amount. The services that the Company agreed to provide included the following: employee benefit services, human resources and financial related services, data and network services and infrastructure, and facilities services, in each case subject to reductions in services (and associated costs) as requested by Arlington Asset. Arlington Asset agreed to use all commercially reasonable efforts to transition away from the services provided by the Company as soon as practicable and, in any event, no later than one year after the date of agreement. As of December 31, 2009, all such services had been transitioned between the entities.

In connection with the services agreement, during the three and nine months ended September 30, 2009, the Company’s operating expenses are reported net of $47 and $370, respectively, representing overhead costs allocated to Arlington Asset.

Professional Services Agreement

Under the professional services agreement with Crestview, the Company agreed to pay Crestview Advisors, L.L.C. a $1,000 annual strategic advisory fee plus reimbursement of reasonable out-of-pocket expenses as long as Crestview continues to own at least 50% of the shares purchased by certain Crestview affiliates in our 2006 private offering. In September 2008, the Company and Crestview agreed to issue 502,268 options to purchase common shares of the Company to Crestview Advisors L.L.C. in lieu of cash payments for the strategic advisory fee for the period beginning October 1, 2008 through December 31, 2009.

In June 2010, the Company and Crestview agreed to amend the professional services agreement to allow Crestview the ability to elect to receive a portion of their fee in restricted stock and/or options to purchase shares of the Company’s common stock. Based on Crestview’s election, in June 2010, the Company issued 153,846 such options to Crestview Advisors, L.L.C. valued at $200. The remaining $800 of the 2010 strategic advisory fee will be payable in cash. During the three and nine months ended September 30, 2010, the Company recognized $250 and $750, respectively, of expense associated with this agreement. During the three and nine months ended September 30, 2009, the Company recognized $236 and $708, respectively, of expense associated with this agreement.

Receivables and Payables

From time to time, the Company has made advances to affiliates that were used for general operating purposes and are settled in cash on a regular basis. Receivables from affiliates, including private equity and hedge funds, totaled $529 and $567 as of September 30, 2010 and December 31, 2009, respectively.

9. Segment Information:

The Company considers its capital markets, asset management and principal investing operations to be separate reportable segments. The capital markets segment includes the Company’s investment banking and institutional sales, trading and research operations. These businesses operate as a single integrated unit to deliver capital raising, advisory and sales and trading services to corporate and institutional clients. Asset management includes the Company’s fee-based asset management operations. Principal investing includes investments in merchant banking and other long-term investments.

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The Company has developed systems and methodologies to allocate overhead costs to its business units and, accordingly, presents segment information consistent with internal management reporting. Revenue generating transactions between the individual segments have been included in the net revenue and pre-tax income of each segment. The Company’s revenues from foreign operations totaled $1,926 and $3,389 for the three months ended September 30, 2010 and 2009, respectively. The Company’s revenues from foreign operations totaled $7,602 and $8,625 for the nine months ended September 30, 2010 and 2009, respectively. The following tables illustrate the financial information for the Company’s segments for the periods indicated:

	Three Months Ended September 30, 2010
	Capital Markets			Asset Management			Principal Investing		Total
Revenues, net of interest expense:
Investment banking	$	29,789		$	—		$	—	$	29,789
Institutional brokerage		23,445			—			—		23,445
Asset management fees		—			3,346			—		3,346
Net investment income		—			17			30		47
Net interest income, dividends and other		537			4			226		767
Total		53,771			3,367			256		57,394
Operating Expenses:
Variable		19,588			1,736			5		21,329
Fixed		41,419			2,213			26		43,658
Total		61,007			3,949			31		64,987
Pre-tax (loss) income	$	(7,236	)	$	(582	)	$	225	$	(7,593	)
Compensation and benefits:
Variable	$	14,191		$	797		$	5	$	14,993
Fixed		25,236			1,190			15		26,441
Total	$	39,427		$	1,987		$	20	$	41,434
	Three Months Ended September 30, 2009
	Capital Markets			Asset Management			Principal Investing		Total
Revenues, net of interest expense:
Investment banking	$	33,721		$	—		$	—	$	33,721
Institutional brokerage		31,326			—			—		31,326
Asset management fees		—			3,624			—		3,624
Net investment income		—			—			29		29
Net interest income, dividends and other		376			157			2,207		2,740
Total		65,423			3,781			2,236		71,440
Operating Expenses:
Variable		27,014			2,325			21		29,360
Fixed		45,406			3,188			444		49,038
Total		72,420			5,513			465		78,398
Pre-tax (loss) income	$	(6,997	)	$	(1,732	)	$	1,771	$	(6,958	)
Compensation and benefits:
Variable	$	20,004		$	696		$	20	$	20,720
Fixed		24,717			1,483			209		26,409
Total	$	44,721		$	2,179		$	229	$	47,129

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	Nine Months Ended September 30, 2010
	Capital Markets			Asset Management			Principal Investing			Total
Revenues, net of interest expense:
Investment banking	$	81,377		$	—		$	—		$	81,377
Institutional brokerage		75,259			—			—			75,259
Asset management fees		—			10,489			—			10,489
Net investment income		—			17			78			95
Net interest income, dividends and other		1,541			14			2,542			4,097
Total		158,177			10,520			2,620			171,317
Operating Expenses:
Variable		67,658			5,459			23			73,140
Fixed		134,153			7,793			520			142,466
Total		201,811			13,252			543			215,606
Pre-tax (loss) income	$	(43,634	)	$	(2,732	)	$	2,077		$	(44,289	)
Compensation and benefits:
Variable	$	45,995		$	2,910		$	19		$	48,924
Fixed		82,031			4,191			323			86,545
Total	$	128,026		$	7,101		$	342		$	135,469
	Nine Months Ended September 30, 2009
	Capital Markets			Asset Management			Principal Investing			Total
Revenues, net of interest expense:
Investment banking	$	50,275		$	—		$	—		$	50,275
Institutional brokerage		104,332			—			—			104,332
Asset management fees		—			9,783			—			9,783
Net investment loss		—			—			(49	)		(49	)
Net interest income, dividends and other		865			507			2,706			4,078
Total		155,472			10,290			2,657			168,419
Operating Expenses:
Variable		63,209			6,654			45			69,908
Fixed		126,225			9,865			1,227			137,317
Impairment of intangible assets		—			5,350			—			5,350
Total		189,434			21,869			1,272			212,575
Pre-tax loss	$	(33,962	)	$	(11,579	)	$	1,385		$	(44,156	)
Compensation and benefits:
Variable	$	46,120		$	1,702		$	31		$	47,853
Fixed		66,861			4,620			346			71,827
Total	$	112,981		$	6,322		$	377		$	119,680

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10. Recent Accounting Pronouncements:

In January 2010, the Financial Accounting Standards Board (“FASB”) required additional disclosure requirements for fair value measurements under ASC 820. The new pronouncement requires a reporting entity to disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the reconciliation for fair value measurements using significant unobservable inputs (Level 3) should present separately information about purchases, sales, issuances and settlements. Previous disclosure requirements allowed for the net presentation of these activities within a single item on the reconciliation. These changes were effective for reporting periods beginning after December 15, 2009. The adoption did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued changes to the guidance for accounting for transfers of financial assets. These changes improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. These changes are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of these changes shall be applied to transfers that occur on or after the effective date. The adoption of these changes did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued changes to the guidance for variable interest entities. These changes are to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These changes are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. In January 2010, the FASB issued a deferral of these requirements for asset managers that are not obligated to fund significant losses incurred by the variable interest entities. The adoption of these changes did not have a material impact on the Company’s financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the consolidated financial condition and results of operations of FBR Capital Markets Corporation and its subsidiaries (collectively, “we”, “us”, “our” or the “Company”) should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report on Form 10-Q and the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

The discussion of the Company’s consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company’s future results, please see “Forward-Looking Statements” immediately preceding Part I of, and other items throughout, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Please also see “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year fiscal ended December 31, 2009.

Business Environment

During the third quarter of 2010, the U.S. equity markets recovered from the losses incurred during the second quarter. However, the quarter continued to demonstrate the significant uncertainty that still surrounds the strength of the economic recovery as investors were concerned of a possible double-dip recession in the U.S. economy. A weak domestic housing market despite record low mortgage interest rates, a high domestic unemployment rate, the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the global impact of European financial market instability resulting from high debt levels of certain members of the European Union have all contributed to this unsettled economic environment.

As previously disclosed, we expect economic conditions to remain challenging and volatile throughout the year, and our ability to complete investment banking transactions may continue to be negatively affected by uncertainty in the capital markets.

Executive Summary

For the three months ended September 30, 2010, our total revenues, net of interest expense, were $57.4 million, our pre-tax loss was $7.6 million and our net loss was $6.6 million, compared to total net revenues of $71.4 million, a pre-tax loss of $7.0 million and a net loss of $7.0 million for the three months ended September 30, 2009. Included in the three months ended September 30, 2010 net loss is a $1.0 million tax benefit as compared to a $12 thousand tax provision for the three months ended September 30, 2009. Our tax (benefit) provision for the three months ended September 30, 2010 and 2009 is recorded pursuant to an effective tax rate approach for calculating tax provisions in interim periods based on forecasted annual taxable and book income.

For the nine months ended September 30, 2010, our total revenues, net of interest expense, were $171.3 million, our pre-tax loss was $44.3 million and our net loss was $40.6 million, compared to total net revenues of $168.4 million, a pre-tax loss of $44.2 million and a net loss of $44.9 million for the nine months ended September 30, 2009. Included in the nine months ended September 30, 2010 net loss is a $3.6 million tax benefit as compared to a $0.7 million tax provision for the nine months ended September 30, 2009.

Our results for the nine months ended September 30, 2010 include severance charges of $5.9 million, $4.3 million of which was incurred during the three months ended June 30, 2010. These charges are the result of steps taken that will reduce our annual fixed compensation cost run rate by approximately $15.0 million and better position our cost structure for future periods. As a result of these steps and other initiatives to reduce fixed costs, third quarter 2010 fixed costs were approximately $4.0 million lower than the second quarter of 2010. The reductions contributed to the improvement in our overall performance in the third quarter of 2010 at lower revenue levels than the third quarter of 2009.

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The following is an analysis of our operating results by segment for the three and nine months ended September 30, 2010 and 2009.

Capital Markets

Our capital markets segment includes investment banking and institutional sales, trading and research. These business units operate as a single integrated segment to deliver capital raising, advisory and sales and trading services to corporate and institutional clients. Our investment banking and institutional brokerage businesses are focused on the consumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and telecommunications sectors. By their nature, our capital markets business activities are highly competitive and are subject to general market conditions, volatile trading markets, and fluctuations in the volume of market activity, as well as to the conditions affecting the companies and markets in our areas of focus. As a result, our capital markets revenues and profits are subject to significant volatility from period to period. The following tables provide a summary of our results within the capital markets segment (dollars in thousands).

	Three Months Ended September 30,
	2010			2009
Revenues, net of interest expense:
Investment banking	$	29,789		$	33,721
Institutional brokerage		23,445			31,326
Net interest income, dividends and other		537			376
Total		53,771			65,423
Operating Expenses:
Variable		19,588			27,014
Fixed		41,419			45,406
Total		61,007			72,420
Pre-tax loss	$	(7,236	)	$	(6,997	)

The pre-tax loss from our capital markets segment increased to $7.2 million for the three months ended September 30, 2010 from $7.0 million for the three months ended September 30, 2009. This increase in pre-tax loss is attributable to a decrease in revenues substantially offset by a decrease in both variable and fixed costs. Our institutional brokerage revenues decreased $7.9 million to $23.4 million for the three months ended September 30, 2010 from $31.3 million for the three months ended September 30, 2009, primarily as a result of an industry-wide decrease in overall trading volume and a decrease in trading gains from our convertible securities desk due primarily to narrower bid to offer spreads during the three months ended September 30, 2010.

Investment banking revenues decreased $3.9 million to $29.8 million during the three months ended September 30, 2010 from $33.7 million during the three months ended September 30, 2009. The results for the three months ended September 30, 2010 included the realization of $16.1 million of contingent revenue related to two previously completed transactions. The results for the three months ended September 30, 2009 include the completion of a $285 million sole-managed private equity offering in July 2009 as well as a higher volume of capital raising activity when compared to the three months ended September 30, 2010.

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Variable expenses decreased $7.4 million, or 27.4%, in 2010 reflecting a decrease in variable compensation due to changes in variable compensation plans and a decrease in clearing and brokerage costs associated with the decline in institutional brokerage activity for the quarter. Fixed expenses decreased $4.0 million, or 8.8%, in 2010, attributable to a reduction in employees and other non-compensation cost reduction initiatives.

	Nine Months Ended September 30,
	2010			2009
Revenues, net of interest expense:
Investment banking	$	81,377		$	50,275
Institutional brokerage		75,259			104,332
Net interest income, dividends and other		1,541			865
Total		158,177			155,472
Operating Expenses:
Variable		67,658			63,209
Fixed		134,153			126,225
Total		201,811			189,434
Pre-tax loss	$	(43,634	)	$	(33,962	)

The pre-tax loss from our capital markets segment increased to $43.6 million for the nine months ended September 30, 2010 from $34.0 million for the nine months ended September 30, 2009. The increase in pre-tax loss is primarily attributable to an increase in fixed expenses of $8.0 million and variable expenses of $4.5 million partially offset by an increase in net revenues. Fixed expenses increased $8.0 million, or 6.3%, to $134.2 million for the nine months ended September 30, 2010 as compared to $126.2 million for the nine months ended September 30, 2009. The increase in fixed expenses is attributable to severance costs of $5.5 million and an increase in fixed compensation costs, reflecting the addition of senior employees to our investment banking group and the expansion of our trading platform since the third quarter of 2009. Partially reflected within the 2010 fixed expenses are the results of steps taken to reduce our annual fixed compensation cost run rate in order to better position our cost structure for future periods. Variable expenses increased $4.5 million, or 7.1%, in 2010 as a result of increased investment banking activity, including increased transaction related expenses.

Investment banking revenues increased $31.1 million for the nine months ended September 30, 2010 to $81.4 million as compared to $50.3 million for the nine months ended September 30, 2009. This increase is a result of increased capital raising activity; including fees earned from a June 2010 private placement that in-total raised in excess of $1.2 billion of equity capital.

Institutional brokerage revenues decreased $29.0 million, or 27.8%, to $75.3 million for the nine months ended September 30, 2010 as compared to $104.3 million for the nine months ended September 30, 2009. This decrease is primarily attributable to a reduction in revenues from our convertible securities and equities trading desks in 2010 partially offset by revenues from our credit and listed-options trading desks in the first nine months of 2010 as these desks were launched during the second half of 2009. The decrease in our commission revenues was the result of lower trading volumes in the equity markets.

Asset Management

Our asset management segment consists primarily of the management of The FBR Funds, a family of mutual funds. Our mutual fund assets under management increased 7.1% to $1.5 billion at September 30, 2010 from $1.4 billion at June 30, 2010 and increased 15.4% from $1.3 billion at December 31, 2009. The increase in mutual fund assets under management during the three months ended September 30, 2010 is primarily the result of an 11% increase in market value, offset partially by net redemptions of $77.2 million. The increase in mutual fund assets under management during the nine months ended September 30, 2010 is primarily the result of a 6%

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increase in market value, as well as net inflows of $49.2 million, which included the addition of assets from the acquisition of the mutual fund operations of the Armed Forces Benefits Association 5Star Funds. The following tables provide a summary of our results within the asset management segment (dollars in thousands).

	Three Months Ended September 30,
	2010			2009
Revenues, net of interest expense:
Asset management fees	$	3,346		$	3,624
Other		21			157
Total		3,367			3,781
Operating Expenses:
Variable		1,736			2,325
Fixed		2,213			3,188
Total		3,949			5,513
Pre-tax loss	$	(582	)	$	(1,732	)

The pre-tax loss from our asset management segment decreased to $0.6 million for the three months ended September 30, 2010 from $1.7 million for the three months ended September 30, 2009. The decrease in pre-tax loss is a result of decreases in both fixed and variable expenses. The decreases in fixed and variable expenses were the result of non-compensation cost reduction initiatives, which included the decision to terminate a sub-advisory agreement related to the FBR Focus Fund in August 2009. The decrease in asset management fees is a result of a decrease in our average assets under management during the three months ended September 30, 2010 as compared to the three months ended September 30, 2009.

	Nine Months Ended September 30,
	2010			2009
Revenues, net of interest expense:
Asset management fees	$	10,489		$	9,783
Other		31			507
Total		10,520			10,290
Operating Expenses:
Variable		5,459			6,654
Fixed		7,793			9,865
Impairment of intangible assets		—			5,350
Total		13,252			21,869
Pre-tax loss	$	(2,732	)	$	(11,579	)

The pre-tax loss from our asset management segment decreased to $2.7 million for the nine months ended September 30, 2010 from $11.6 million for the nine months ended September 30, 2009. The pre-tax loss for the nine months ended September 30, 2009 included a $5.4 million impairment of an intangible asset related to a management contract for a money market mutual fund, which is not comparable to 2010. The decrease in pre-tax loss is also a result of decreases in both fixed and variable expenses, as well as increased asset management fees. The decreases in fixed and variable expenses were the result of cost reduction initiatives, which included the decision to terminate a sub-advisory agreement related to the FBR Focus Fund in August 2009 and a reduction in employees associated with the elimination of our private client group in May 2009. Fixed expenses for the nine months ended September 30, 2010 include $0.3 million of severance that is not comparable to 2009. The increase in asset management fees was a direct result of an increase in our average assets under management during the first nine months of 2010 as compared to the first nine months of 2009.

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The following table provides details relating to our assets under management (dollars in millions):

	September 30, 2010				December 31, 2009
	Gross(1)		Net(2)		Gross(1)		Net(2)
Mutual funds:
Equity	$	1,339.6	$	1,335.5	$	1,325.9	$	1,317.9
Balanced and fixed income		112.2		109.9		—		—
Private equity and hedge funds		6.9		6.0		10.1		9.3
Total	$	1,458.7	$	1,451.4	$	1,336.0	$	1,327.2

(1) Gross assets under management represent the amount of actual gross assets of our mutual funds and proprietary investment partnerships, including leverage.

(2) Net assets under management represent gross assets under management, net of any repurchase agreement debt, margin loans, securities sold but not yet purchased, lines of credit and any other liabilities.

Principal Investing

As of September 30, 2010, our principal investing activity consists primarily of investments in merchant banking and long-term equity investments and investments in mutual, hedge and venture funds. The following tables provide a summary of our results within the principal investing segment (dollars in thousands):

	Three Months Ended September 30,
	2010			2009
Revenues, net of interest expense:
Net investment income	$	30		$	29
Net interest income, dividends and other		226			2,207
Total		256			2,236
Operating Expenses:			��
Variable		5			21
Fixed		26			444
Total		31			465
Pre-tax income	$	225		$	1,771

The pre-tax income from our principal investing segment decreased to $0.2 million for the three months ended September 30, 2010 from $1.8 million for the three months ended September 30, 2009. The decrease in pre-tax income is primarily attributable to the decrease in dividend income from merchant banking investments, partially offset by a decrease in operating expenses.

	Nine Months Ended September 30,
	2010		2009
Revenues, net of interest expense:
Net investment income (loss)	$	78	$	(49	)
Net interest income, dividends and other		2,542		2,706
Total		2,620		2,657
Operating Expenses:
Variable		23		45
Fixed		520		1,227
Total		543		1,272
Pre-tax income	$	2,077	$	1,385

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The pre-tax income from our principal investing segment increased to $2.1 million for the nine months ended September 30, 2010 from $1.4 million for the nine months ended September 30, 2009. The increase in pre-tax income is primarily attributable to the $0.7 million, or 58.3%, decrease in fixed expenses to $0.5 million for the nine months ended September 30, 2010 from $1.2 million for the nine months ended September 30, 2009. The decrease in fixed expenses is associated with non-compensation cost reduction initiatives.

During the nine months ended September 30, 2009, we sold $454.3 million of mortgage-backed security positions and related hedging assets held as of December 31, 2008 and retired the repurchase agreements financing these positions resulting in net loss of $1.0 million, with no comparable activity in the nine months ended September 30, 2010. These losses were offset by gains from sales of merchant banking positions and the performance of investments in mutual funds during the nine months ended September 30, 2009.

Beginning in the third quarter of 2009, we have held short positions in certain exchange-traded funds in order to hedge the effects of the performance of our investments in mutual funds. As a result, subsequent to the second quarter of 2009, the net investment income (loss) from our mutual funds investments have not been significant. For the nine months ended September 30, 2009, we earned net investment income of $0.5 million related to our mutual fund investments.

Merchant Banking

The total value of our merchant banking portfolio and other long-term investments was $69.8 million as of September 30, 2010. Of this total, $68.6 million was held in the merchant banking portfolio and $1.2 million was held in investment funds.

The following table provides additional detail regarding our merchant banking and other long-term investments as of September 30, 2010 (dollars in thousands):

	September 30, 2010
	Number of Shares		Original Cost Basis/ Principal		Adjusted Basis(1)		Fair Value/ Carrying Value
Long-term investments, at fair value:
Merchant banking-marketable equity securities:
Cohen & Company, Inc.		32,000	$	192	$	192	$	142
Total long-term investments, at fair value			$	192	$	192	$	142
Other long-term investments:
Merchant banking—non-public securities:
Air Lease Corporation(2)		253,907	$	5,074	$	5,074	$	5,074
Banctec, Inc.(3)		495,145		2,476		2,476		2,476
Cohen & Company, Inc. (Note)(3)		n/a		312		317		317
Diana Containerships, Inc.(3)		1,073,830		15,469		15,469		15,469
Ellington Financial LLC(3)		1,438,750		27,049		21,581		21,581
NBH Holdings Corp.(2)		1,019,625		19,866		19,866		19,866
North American Financial Holdings, Inc.(2)		183,615		3,672		3,672		3,672
Total			$	73,918	$	68,455	$	68,455
Investment funds and other								1,251
Total other long-term investments							$	69,706

(1) Adjusted basis reflects the effects of other-than-temporary impairment charges, if any.

(2) As of September 30, 2010, the sale of these shares was subject to restrictive covenants.

(3) As of September 30, 2010, these securities cannot be traded in a public market (e.g., NYSE or Nasdaq) but may be sold in private transactions. As of October 8, 2010, shares of Ellington Financial LLC are tradable in a public market as a result of the completion of their initial public offering.

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Results of Operations

Three months ended September 30, 2010 compared to three months ended September 30, 2009

Net loss decreased to $6.6 million in the third quarter of 2010 from $7.0 million in the third quarter of 2009. The decrease in net loss was primarily the result of the effects of cost reduction initiatives that have been implemented during 2010, including an approximate 15% reduction in our headcount since the beginning of the year. Our third quarter 2010 net loss also includes a $1.0 million tax benefit as compared to a $12 thousand tax provision in the third quarter of 2009. Our pre-tax loss increased to $7.6 million in the third quarter of 2010 from $7.0 million in the third quarter of 2009 as a result of a decrease in net revenues to $57.4 million in 2010 from $71.4 million in 2009, partially offset by a decrease in operating expenses to $65.0 million in 2010 from $78.4 million in 2009.

The pre-tax loss in our capital markets segment increased to $7.2 million during the third quarter of 2010 from $7.0 million during the third quarter of 2009 due to a decrease in institutional brokerage revenues and investment banking capital raising revenues, partially offset by a decrease in operating expenses. The pre-tax loss from our asset management segment decreased to $0.6 million during the third quarter of 2010 from $1.7 million during the third quarter of 2009 primarily due to a decrease in operating expenses, partially offset by a decrease in asset management fees. Pre-tax income from our principal investing segment decreased to $0.2 million during the third quarter of 2010 from $1.8 million during the third quarter of 2009, reflecting a decrease in dividend income, partially offset by a decrease in operating expenses for the third quarter of 2010 as compared to the same period in 2009.

Our net revenues decreased 19.6% to $57.4 million during the third quarter of 2010 from $71.4 million during the third quarter of 2009 due to the changes in revenues discussed below.

Capital raising revenues decreased to $23.1 million in the third quarter of 2010 from $29.0 million in the third quarter of 2009. Capital raising revenues for the third quarter of 2010 included $16.1 million representing the realization of contingent revenue related to two previously completed transactions. During the third quarter of 2009, we were the lead manager of four public equity offerings raising $309.7 million and sole manager of a $285 million private placement.

Advisory revenues increased 42.6% to $6.7 million in the third quarter of 2010 from $4.7 million in the third quarter of 2009. We completed eight assignments in the third quarter of 2010 as compared to five assignments in the third quarter of 2009.

Institutional brokerage revenues from agency commissions and principal transactions decreased 25.7% to $23.4 million in the third quarter of 2010 from $31.5 million in the third quarter of 2009. This decrease is primarily a result of an industry-wide decrease in overall trading volume and a decrease in trading gains from our convertible securities desk due primarily to narrower bid to offer spreads during the three months ended September 30, 2010.

Asset management fees decreased 8.3% to $3.3 million in the third quarter of 2010 from $3.6 million in the third quarter of 2009. This decrease is primarily attributable to a decrease in average mutual fund assets under management.

Net investment income was $47 thousand in the third quarter of 2010 compared to $29 thousand in the third quarter of 2009. Beginning in the third quarter of 2009, we have held short positions in certain exchange-traded funds in order to hedge the effects of the performance of our investments in mutual funds. As a result, subsequent to the second quarter of 2009, the net investment income (loss) from our mutual funds investments have not been significant. Also, there were no significant realized gains or losses from sales of merchant banking investments during the 2010 and 2009 periods.

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Net interest income, dividends and other revenues decreased to $0.8 million in the third quarter of 2010 from $2.6 million in the third quarter of 2009. This decrease is primarily attributable to a reduction in dividend income related to one of our equity investments in our merchant banking portfolio.

Total non-interest expenses decreased 17.1% to $65.0 million in the third quarter of 2010 from $78.4 million in the third quarter of 2009. This decrease was caused by the changes in non-interest expenses described below.

Compensation and benefits expenses decreased 12.1% to $41.4 million in the third quarter of 2010 from $47.1 million in the third quarter of 2009. This decrease is due to a $5.7 million decrease in variable compensation during the third quarter of 2010 due to decreased institutional brokerage and investment banking revenues for the period, as compared to the third quarter of 2009. Fixed compensation remained consistent at $26.4 million reflecting the effects of the overall reduction in workforce during the current quarter, offset by the addition of senior employees in our investment banking group and the expansion of our trading platform in prior periods. Fixed compensation for the third quarter of 2010 included severance of $0.6 million compared to $0.2 million in the third quarter of 2009.

Professional services expenses decreased 33.9% to $3.9 million in the third quarter of 2010 from $5.9 million in the third quarter of 2009 primarily due to the reduction in sub-advisory fees as a result of our termination of the sub-advisory agreement related to the FBR Focus Fund in August 2009 and due to non-recurring transaction costs of $0.5 million incurred as part of our acquisition of Watch Hill Partners, LLC in August 2009.

Business development expenses decreased 3.4% to $2.8 million in the third quarter of 2010 from $2.9 million in the third quarter of 2009. This decrease is primarily the result of decreased costs associated with our investment banking transactions.

Clearing and brokerage fees decreased 26.3% to $2.8 million in the third quarter of 2010 from $3.8 million in the third quarter of 2009. The decrease is primarily due to a lower volume of trading activity, especially in our convertible securities and equity trading desks.

Occupancy and equipment expenses decreased 35.2% to $5.9 million in the third quarter of 2010 from $9.1 million in the third quarter of 2009. The decrease in occupancy costs is a result of facility right-sizing initiatives along with other cost reduction initiatives since the third quarter of 2009.

Communications expenses decreased 3.8% to $5.1 million in the third quarter of 2010 from $5.3 million in the third quarter of 2009. The decrease in these expenses is primarily due to decreased costs related to market data and customer trading services, as a result of the reduction in our workforce since the beginning of 2010.

Other operating expenses decreased 27.9% to $3.1 million in the third quarter of 2010 from $4.3 million in the third quarter of 2009. The decrease in expenses is primarily due to a decrease in intangible asset amortization associated with our acquisition of Watch Hill Partners, LLC, as well as a decrease in corporate insurance costs.

Our income tax provision decreased to a $1.0 million tax benefit in the third quarter of 2010 from $12 thousand in the third quarter of 2009. Our quarterly tax provision is determined pursuant to ASC 740, which requires using an estimated annual effective tax rate based on the forecasted taxable income for the full year. Based on this approach, our effective tax rate was 12.9% and (0.2%) in the third quarters of 2010 and 2009, respectively. These tax rates differed from statutory tax rates primarily due to a full valuation allowance on the deferred tax benefits of book losses incurred during these periods. The effective tax rate in third quarter of 2010 reflects the benefit of tax losses expected to be realized in this period.

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Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Net loss decreased to $40.6 million in the first nine months of 2010 from $44.9 million in the first nine months of 2009. Income taxes changed to a $3.6 million tax benefit in the first nine months of 2010 from a $0.7 million tax provision in the first nine months of 2009. Our pre-tax loss increased to $44.3 million in the first nine months of 2010 from $44.2 million in the first nine months of 2009.

Pre-tax loss from our capital markets segment increased to $43.6 million in the first nine months of 2010 from $34.0 million in the first nine months of 2009 due to a decrease in our institutional brokerage revenues and increases in operating expenses which included $5.5 million of severance charges, offset partially by increased revenues from investment banking. The pre-tax loss in our asset management segment decreased to $2.7 million in the first nine months of 2010 from $11.6 million in the first nine months of 2009 due to a $5.4 million impairment of an intangible asset related to a money market mutual fund management contract in 2009 that is not comparable to 2010, as well as reductions in operating expenses. Pre-tax income from our principal investing segment increased to $2.1 million during the first nine months of 2010 from $1.4 million during the first nine months of 2009, reflecting a decrease in operating expenses and an increase in net investment income, offset partially by a decrease in dividend income.

Our net revenues increased 1.7% to $171.3 million during the first nine months of 2010 from $168.4 million during the first nine months of 2009 due to the changes in revenues and interest expense discussed below.

Capital raising revenues increased to $68.3 million in the first nine months of 2010 from $37.5 million in the first nine months of 2009. Our revenues from private placements during the first nine months of 2010 were $41.6 million compared to $25.4 million during the first nine months of 2009. During the first nine months of 2010, we recognized $16.1 million of contingent revenue related to two transactions completed in the previous year. Also, our aggregate transaction value on public offerings increased from the first nine months of 2009 to the first nine months of 2010.

Advisory revenues increased 3.1% to $13.1 million generated in the first nine months of 2010 from $12.7 million in the first nine months of 2009. We completed 14 assignments in the first nine months of 2010 as compared to 13 assignments in the first nine months of 2009.

Institutional brokerage revenues from agency commissions and principal transactions decreased 28.1% to $75.3 million in the first nine months of 2010 from $104.8 million in the first nine months of 2009. The decrease is primarily attributable to a reduction in revenues from our convertible securities and equities trading desks in 2010 partially offset by revenues from our credit and listed-options trading desks in the first nine months of 2010 following the launch of these two businesses during the second half of 2009. The decrease in our commission revenues was primarily the result of decreased volume in the equity markets.

Asset management fees increased 7.1% to $10.5 million in the first nine months of 2010 from $9.8 million in the first nine months of 2009. The increase is primarily attributable to an increase in average mutual fund assets under management.

Net investment income was $95 thousand in the first nine months of 2010 compared to a loss $49 thousand in the first nine months of 2009. Net investment income for the first nine months of 2010 is related to income from investment funds due to fund performance and the sale of certain merchant banking investments, partially offset by losses on short positions in certain exchange-traded funds that are intended to hedge the fund investments. Net investment loss for the first nine months of 2009 includes $1.0 million of realized losses on the sale of mortgage-backed securities and derivative assets, offset by the income from investment funds as a result of fund performance and gains from the sale of certain merchant banking investments.

Net interest income, dividends and other revenues increased to $4.1 million in the first nine months of 2010 from $3.8 million in the first nine months of 2009. This increase is primarily attributable to increased dividend income from certain merchant banking investments.

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Total non-interest expenses increased 1.4% to $215.6 million in the first nine months of 2010 from $212.6 million in the first nine months of 2009. This increase was caused by the changes in non-interest expenses described below.

Compensation and benefits expenses increased 13.2% to $135.5 million in the first nine months of 2010 from $119.7 million in the first nine months of 2009. This increase is primarily due to severance costs of $5.9 million, an increase in fixed compensation reflecting the effects of the addition of senior employees in our investment banking group and the expansion of our trading platform noted above. Partially reflected within the 2010 expense are the results of steps taken to reduce our annual fixed compensation cost run rate by approximately $15.0 million and better position our cost structure for future periods. Variable compensation increased $1.1 million due to an increase in net revenues.

Professional services expenses increased 3.3% to $15.5 million in the first nine months of 2010 from $15.0 million in the first nine months of 2009 primarily due to increased expenses related to investment banking transactions in 2010 as compared to 2009. Partially offsetting this increase was a decrease in sub-advisory fees related to our management of mutual funds, along with non-recurring transaction costs of $0.5 million incurred as part of our acquisition of Watch Hill Partners, LLC in August 2009. The reduction in sub-advisory fees is the result of our termination of the sub-advisory agreement related to the FBR Focus Fund in August 2009.

Business development expenses increased 15.2% to $10.6 million in the first nine months of 2010 from $9.2 million in the first nine months of 2009. This increase is primarily the result of increased costs associated with our investment banking transactions, partially offset by a decrease in costs associated with our involvement in what had been known as the PGA Tour’s FBR Open in 2009.

Clearing and brokerage fees decreased 8.3% to $9.9 million in the first nine months of 2010 from $10.8 million in the first nine months of 2009. This decrease is primarily the result of decreased equity trading volumes, offset partially by the initiation of non-exchange traded product lines with higher clearing costs during the second half of 2009.

Occupancy and equipment expenses decreased 25.4% to $18.5 million in the first nine months of 2010 from $24.8 million in the first nine months of 2009. The decrease in occupancy costs is a result of facility right-sizing initiatives along with other cost reduction initiatives over the past year.

Communications expenses decreased 2.6% to $15.2 million in the first nine months of 2010 from $15.6 million in the first nine months of 2009. The decrease in these expenses is primarily due to the effects of cost reduction initiatives over the past year and decreased costs related to market data and customer trading services.

During the first nine months of 2009, we recognized a $5.4 million impairment of an intangible asset related to a money market fund managed by us. The impairment was the result of factors such as significantly reduced yields on short-term government investments and the requirement for us to both waive our management fees and reimburse certain expenses of the fund resulting in the management contract becoming unprofitable for us in the period. We also considered the cost structure of this fund, a forecasted continuation of the low rate environment for the fund’s investments and the forecasted ongoing waiver of our management fee in recognizing this impairment charge.

Other operating expenses decreased 14.0% to $10.4 million in the first nine months of 2010 from $12.1 million in the first nine months of 2009. The decrease in expenses is primarily due to a decrease in corporate insurance costs as well as a decrease in intangible asset amortization associated with our acquisition of Watch Hill Partners, LLC.

Income taxes changed to a $3.6 million tax benefit in the first nine months of 2010 from a $0.7 million tax provision in the first nine months of 2009. Our tax provision is determined pursuant to ASC 740, which requires using an estimated annual effective tax rate based on the forecasted taxable income for the full year. Based on

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this approach, our effective tax rate was 8.2% and (1.6%) in the first nine months of 2010 and 2009, respectively. These rates differed from statutory tax rates primarily due to a full valuation allowance on the deferred tax benefits of book losses incurred in these periods. The effective tax rates for nine months ended September 30, 2010 and 2009 also reflect tax benefit of losses and the expected tax liability for these periods, respectively.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing funding for investments, and for other general business purposes. Regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. The primary sources of funds for liquidity consist of existing cash balances (i.e., available liquid capital not invested in our operating businesses), proceeds from sales of securities, internally generated funds, dividends on equity securities that we own, and credit provided by margin accounts, banks, clearing brokers, and affiliates of our principal clearing broker. Potential future sources of liquidity for us include internally generated funds, borrowing capacity through margin accounts, corporate lines of credit and other credit facilities which we may enter into in the future, and future issuances of common stock, preferred stock or debt securities.

Cash Flows

As of September 30, 2010, our cash and cash equivalents totaled $177.2 million representing a net decrease of $98.3 million for the nine months ended September 30, 2010. The decrease is attributable to $63.9 million of cash used in operating activities, $21.9 million of cash used in investing activities and $12.5 million of cash used in financing activities. Due to the cyclical nature of our industry and the industries in which we provide services, we maintain liquid capital to cover potential cash outflows in periods of decreased revenues and earnings.

Net cash used in operating activities of $63.9 million during the first nine months of 2010 compares to $27.5 million during the first nine months of 2009. The cash used in operating activities for the first nine months of 2010 reflects net operating losses and our payment of previously accrued compensation associated with prior year operating results partially offset by decreased capital investment in our trading businesses.

Net cash used in investing activities of $21.9 million during the first nine months of 2010 compares to net cash provided by investing activities of $462.9 million during the first nine months of 2009, reflecting the difference in investing activity during the periods. The 2010 activity reflects the purchase and sale of certain merchant banking investments while the 2009 activity reflects the sale of the remaining mortgage-backed securities held at December 31, 2008.

Net cash used in financing activities of $12.5 million during the first nine months of 2010 compares to net cash used in financing activities of $399.1 million during the first nine months of 2009. The 2010 activity primarily represents the repurchase of 2.8 million shares of our common stock. The 2009 activity reflects the sale of mortgage-backed securities and repayment of related repurchase agreement financings as discussed above, as well as the net effects of repurchasing 16.7 million shares of common stock from Arlington Asset Investment Corporation (our former majority shareholder) and completing a follow-on offering of 20.0 million shares of our common stock.

Sources of Funding

We believe that our existing cash and cash equivalents balances (totaling $177.2 million at September 30, 2010) comprised primarily of investments in money market funds investing in short-term U.S. Treasury securities, cash flows from operations, borrowing capacity, other sources of liquidity and execution of our financing strategies will be sufficient to meet our cash requirements. We have obtained, and believe we will be able to continue to obtain, short-term financing, such as margin financing and temporary subordinated financing, in amounts and at interest rates consistent with our financing objectives. We may, however, seek debt or equity

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financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we 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 our needs ever exceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash.

We monitor and manage our leverage and liquidity risk through various committees and processes we have established. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as factors specific to us, including the amount of our available liquid capital (i.e., the amount of our cash and cash equivalents not invested in our operating business). At September 30, 2010, we had no outstanding borrowings.

Assets

As of September 30, 2010, our principal assets consist of cash and cash equivalents, receivables, securities held for trading purposes, long-term investments and due from brokers, dealers and clearing organizations. As of September 30, 2010 and December 31, 2009, liquid assets consisted primarily of cash and cash equivalents of $177.2 million and $275.5 million, respectively.

The decrease in our total assets to $426.7 million as of September 30, 2010 compared to $556.3 million as of December 31, 2009, is primarily the result of the decrease in cash and cash equivalents and a reduction of $57.7 million in trading-related assets associated with our credit-related trading activities.

As of September 30, 2010, our $69.8 million of long-term investments primarily consist of investments in non-public equity securities. Our investment portfolio is exposed to potential future downturns in the markets and private equity securities are exposed to deterioration of credit quality, defaults, and downward valuations. On a quarterly basis, we review the valuations of our private equity investments carried at cost, for impairment. If and when we determine that a decline in fair value less than our carrying value is “other-than-temporary”, we will reflect the reduction as an investment loss. Similarly, we review our portfolio of marketable equity securities on a quarterly basis. If we determine that a decline in value of an investment in a marketable equity security accounted for as available-for-sale below our cost basis is “other-than-temporary”, the loss will be recognized in the statement of operations during the period in which the liquidation or determination is made.

Our due from and to brokers, dealers, and clearing organizations balances primarily represent unsettled trades associated with our credit sales and trading platform. These transactions include trades in certain sectors of the corporate bond and syndicated loan markets. As part of this activity, we incur market and counterparty credit risk due to the extended settlement nature of most par and distressed bank loan transactions. Par loan and distressed loan trades have extended settlement periods due to the administrative and legal requirements associated with transferring title of such instruments. During this period whereby a trade has been executed but not settled, we are at risk if one of our counterparties defaults on a trade obligation and we have to meet this obligation at market prices that are adverse relative to the original trade. We manage this exposure by calculating the current and potential default exposure on each trade and by maintaining risk limits for each counterparty with whom we have outstanding bank loan trades. In addition, due to industry standards regarding required standard documentation and settlement procedures, we believe our exposure to default risk is low. The total amount of outstanding unsettled trade receivables and payables related to these instruments was $23.7 million and $26.9 million, respectively, as of September 30, 2010. The remaining components of the due from and to brokers, dealers, and clearing organizations includes receivables related to commissions and receivables and payables related to unsettled trades that are settled on a regular basis.

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Regulatory Capital

FBR & Co., our principal U.S. broker-dealer, is registered with the SEC and is a member of the FINRA. Additionally, FBRIL, our U.K. broker-dealer, is registered with the FSA of the United Kingdom. As such, they are subject to the minimum net capital requirements promulgated by the SEC and FSA, respectively. As of September 30, 2010, FBR & Co. had total regulatory net capital of $31.7 million, which exceeded its required net capital of $3.0 million by $28.7 million. In addition, FBRIL had regulatory capital as defined in excess of required amounts. Regulatory net capital requirements increase when the broker-dealers are involved in underwriting activities based upon a percentage of the amount being underwritten.

Share Repurchases

During the nine months ended September 30, 2010, we repurchased 2,768,385 shares of our common stock in open market transactions at a weighted average share price of $5.16 per share for a total cost of $14.3 million. There were no repurchases of common stock during the three months ended September 30, 2010. In July 2010, the Board of Directors approved a 5,000,000 share increase to the number of shares of our common stock that we are authorized to repurchase.

Off-Balance Sheet Arrangements

Through indemnification provisions in agreements with clearing organizations, customer activities may expose us to off-balance sheet credit risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle on a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer obligations. We seek to manage the risks associated with customer activities through customer screening and selection procedures as well as through requirements on customers to maintain margin collateral in compliance with various regulations and clearing organization policies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Overall Risk Management

We monitor market and business risk, including credit risk, operations, liquidity, compliance, legal, and reputational risk through a number of control procedures designed to identify and evaluate the various risks to which our business and investments are exposed. We have established various committees and processes to assess and to manage risk associated with our investment banking, trading, and merchant banking activities. We review, among other things, business and transactional risks associated with potential investment banking clients and engagements as well as our capital subjected to risk through our trading activities. We seek to manage the risks associated with our investment banking and merchant banking activities by review and approval of transactions by the relevant committee, prior to accepting an engagement or pursuing a material investment transaction.

Market Risk

Market risk is the risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as market liquidity, will result in losses for a position or portfolio. Our activities as an underwriter, market maker and principal investor, as well as our activities as a financial intermediary in customer trading transactions, expose us to market risk.

We use a number of quantitative measures to manage our exposure to market risk in our trading businesses. These measures include:

Inventory position limits—we establish inventory position limits on gross and net positions, at both the trading desk and individual position level, and we monitor exposures against limits on a daily basis.

Scenario analysis—we apply stress tests and scenario analysis to estimate the potential impact on our trading revenues of highly stressful market environments in both the credit and equity markets.

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Value at Risk—we utilize a statistical measure of potential trading loss, called Value at Risk (“VaR”), to estimate the potential loss from adverse market moves in an ordinary market environment. We also establish VaR limits, as appropriate.

Value at Risk. We calculate VaR for our trading businesses using a historical simulation model that isolates various risk elements associated with each of our trading positions over a one-day time horizon and at a 95% confidence level. The simulation is based on data for the previous twelve months. This approach assumes that historical changes in market values are representative of future changes.

Using the results of this simulation, VaR measures the potential gains and losses on net trading positions at a 95% confidence level over a one-day time horizon. A 95% confidence level implies that, on average, we anticipate that 5% of the time we may realize trading losses in excess of our VaR amount. Our one-day 95% VaR at September 30, 2010 was approximately $437 thousand.

VaR is a model that quantifies potential losses using historical data. We could incur losses greater than the reported VaR because the historical market prices used may not be an accurate measure of future market events and conditions, especially in highly stressful market environments. In addition, the VaR model measures the risk of the current net trading positions and does not take into account future position changes arising from transaction and/or hedging activity. Our VaR includes positions actively managed and held by our trading desks and does not include positions associated with investment banking transactions that may be held on our trading desk in order to facilitate distribution. In most instances, these positions are held only for a short period and sold at or above our costs. To the extent we hold these positions on a long-term basis, they are reflected as long-term investments and risk related to these positions are discussed below underEquity Price Risk.

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The comparison of actual daily trading revenue fluctuations with a daily VaR estimate is the primary method used to test the reasonableness of the VaR measure. The following table provides the distribution of daily trading revenues and losses during the nine months ended September 30, 2010. The table shows data reflecting that the actual lowest 5 percentile daily trading revenues during the nine months ended September 30, 2010 was $149 thousand. Over the same period, the worst one-day trading revenues were $105 thousand which is below the $571 thousand daily trading loss implied by the average one-day VaR for the first nine months of 2010.

Equity Price Risk. Equity price risk represents the potential loss in value of a position due to adverse changes in the level or volatility of equity prices. We generally attempt to limit exposure to equity price risk on securities held as a result of our daily equity trading activities by limiting our intra-day and overnight inventory of trading securities to that needed to provide the appropriate level of liquidity in the securities for which we are a market maker. We also seek to manage these risks by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities, principally through short sale transactions.

While it is impossible to project exactly what factors may affect the prices of equity securities and how much the effect might be, the impact of a ten percent increase and a ten percent decrease in the price of equities held by us would be as follows as of September 30, 2010. The fair value of the $12.1 million of trading portfolio equity securities held would increase or decrease to $13.3 million and $10.9 million, respectively, and the fair value of the $69.8 million of long-term investments would increase or decrease to $76.8 million and $62.8 million respectively.

Except to the extent that we sell our marketable equity securities or other long term investments, or a decrease in their fair value is deemed to be other-than-temporary, an increase or decrease in the fair value of those assets will not directly affect our earnings. However, an increase or decrease in the value of equity method investments as well as trading securities will directly affect our earnings.

Credit Risk.Our broker-dealer subsidiaries clear all of their securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreements between our broker-dealer subsidiaries and the clearing broker, the clearing broker has the right to charge us for losses that result from a counterparty’s failure to fulfill its contractual obligations. As the right to charge us has no maximum amount and applies to all trades executed through the clearing broker, we believe there is no maximum amount assignable to this right. At September 30, 2010 and December 31, 2009, we have recorded no liabilities with regard to this right. During the nine months ended September 30, 2010 and 2009, we did not make any payments to the clearing broker related to

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these guarantees. In addition, we have the right to pursue collection of performance from the counterparties who do not perform under their contractual obligations. We monitor the credit standing of the clearing broker and all counterparties with which we conduct business.

We attempt to limit our credit spread risk by offsetting long or short positions in various related securities, but may also hedge credit risk exposure through the use of credit derivatives such as credit default swaps.

The securities industry is subject to numerous risks, including the risk of loss associated with the underwriting, ownership, and trading of securities, and the risk of reduced revenues in periods of reduced demand for security offerings and activity in secondary trading markets. Changing economic and market trends may negatively impact the liquidity and value of our investments and the level of security offerings underwritten by us, which may adversely affect our revenues and profitability.

Our equity and debt investments include non-investment grade securities of privately held issuers with no ready markets. The concentration and illiquidity of these investments expose us to a higher degree of risk than associated with readily marketable securities.

Interest Rate Risk. Interest rate risk represents the potential loss in value of a position or portfolio from adverse changes in market interest rates. We are exposed to interest rate risk through our trading activities in convertible and fixed income securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, our management carried out an evaluation, with the participation of our Chief Executive Officer, Richard J. Hendrix, and our Chief Financial Officer, Bradley J. Wright, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2010, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Controls over Financial Reporting

During the nine months ended September 30, 2010, we have not made any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

As of September 30, 2010, except as described below, we were neither a defendant nor plaintiff in any lawsuits or arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material adverse effect on our financial condition, results of operations or liquidity. We have been named as a defendant in a small number of civil lawsuits and arbitrations relating to our various businesses. In addition, we are subject to various reviews, examinations, investigations and other inquiries by governmental agencies and self regulatory organizations. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on our financial condition or results of operations in a future period. However, based on management’s review with counsel, resolution of these matters is not expected to have a material adverse effect on our financial condition, results of operations or liquidity.

Many aspects of our business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state securities laws, other Federal and state laws and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other personnel. FBR & Co. has been named as a defendant in a small number of securities claims involving investment banking clients of FBR & Co. as a result of FBR & Co.’s role as an underwriter. In these cases, the underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBR & Co. against certain claims or liabilities, including claims or liabilities under the Securities Act of 1933, as amended (the “Securities Act”), or contribute to payments which FBR & Co. is required to make as a result of litigation. There can be no assurance that such indemnification or contribution will ultimately be available to us or that an investment banking client will be able to satisfy its indemnity or contribution obligations when due.

In May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBR & Co.) and eight other underwriters as defendants. The lawsuit, styledIn Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United States District Court for the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc. (“TMI”), and certain of its officers and directors, alleging material misrepresentations and omissions about,inter alia, the financial position of TMI. The amended complaint now includes claims under Sections 11 and 12 of the Securities Act against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two offerings in January 2008). The allegations against FBR & Co. relate only to its role as underwriter or member of the syndicate that underwrote TMI’s total of three offerings in September 2007 and January 2008—each of which occurred after the filing of the original complaint—with an aggregate offering price of approximately $818 million. The plaintiffs seek restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although FBR & Co. is contractually entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBR & Co. receives from TMI. On September 22, 2008, FBR & Co. filed a motion to dismiss the consolidated class action complaint as to FBR & Co. The District Court granted that motion on January 27, 2010. On July 5, 2010, the District Court ruled that it would allow the plaintiffs to file a motion for leave to amend the complaint; the District Court is also allowing plaintiffs to file a motion for reconsideration of the Court’s order dismissing the amended complaint. FBR & Co. is opposing those motions.

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FBR & Co. has been named as a defendant in a case relating to its role as an underwriter in residential mortgage-backed securities (“RMBS”) offerings. FBR & Co. is among dozens of underwriter, securitization trust and depositor defendants in an individual action filed by Cambridge Place Investment Management, Inc. in Massachusetts state court(Cambridge Place Investment Management Inc. v. Morgan Stanley et al). Cambridge’s complaint relates to the more than $2.4 billion in RMBS purchases it made in numerous underwritten offerings (of which the claims concerning FBR & Co. are limited to Cambridge’s purchases of a combined $22 million of RMBS in two separate offerings) and alleges that each of the defendants made misrepresentations and omissions relating to, among other things, loan-to-value ratios, appraisals, and underwriting standards, in violation of state securities laws. FBR & Co. has contractual indemnification claims against the RMBS issuers and contribution claims against co-underwriters involved in the two offerings for which claims have been made against it.

Although these cases involving FBR & Co. are at a preliminary stage, based on management’s review with counsel and present information currently known by management, resolution of such matters is not expected to have a material effect on our financial condition, results of operations, or liquidity.

In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments. In recent years, there has been an increasing incidence of litigation and actions by government agencies and self regulatory organizations involving the securities industry, including class actions that seek substantial damages. We are also subject to the risk of litigation, including litigation that may be without merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect its financial condition, operating results and liquidity.

Item 1A. Risk Factors

As of September 30, 2010, there have been no material changes to our risk factors as previously disclosed in Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 6. Exhibits

Exhibit Number	Exhibit Title
12.01	Statement regarding Computation of Ratio of Earnings to Fixed Charges.
31.01	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02	Certification of Chief Financial Officer pursuant to 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 Capital Markets Corporation
Date: November 8, 2010	By:	/s/    BRADLEY J. WRIGHT
		Bradley J. Wright
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)
Date: November 8, 2010	By:	/s/    ROBERT J. KIERNAN
		Robert J. Kiernan
		Senior Vice President, Controller and
		Chief Accounting Officer
		(Principal Accounting Officer)

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