FBR & Co. - FORM 10-Q

Attached files

file	filename
EX-32.02 - EXHIBIT 32.02 - FBR & Co.	dex3202.htm
EX-31.02 - EXHIBIT 31.02 - FBR & Co.	dex3102.htm
EX-31.01 - EXHIBIT 31.01 - FBR & Co.	dex3101.htm
EX-12.01 - EXHIBIT 12.01 - FBR & Co.	dex1201.htm
EX-32.01 - EXHIBIT 32.01 - FBR & Co.	dex3201.htm

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 March 31, 2011

¨	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 April 30, 2011 was 61,691,793 shares.

FBR CAPITAL MARKETS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2011

INDEX


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Financial Statements and Notes—(unaudited)

	Consolidated Balance Sheets—March 31, 2011 and December 31, 2010		1

	Consolidated Statements of Operations—Three Months Ended March 31, 2011 and 2010		2

	Consolidated Statements of Changes in Shareholders’ Equity—Three Months Ended March 31, 2011 and Year Ended December 31, 2010		3

	Consolidated Statements of Cash Flows—Three Months Ended March 31, 2011 and 2010		4

	Notes to Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24

Item 4.	Controls and Procedures		27

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		28

Item 1A.	Risk Factors		29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 6.	Exhibits		30

	Signature		31

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

(Unaudited)


	March 31, 2011			December 31, 2010
Assets
Cash and cash equivalents	$	149,475		$	236,077
Receivables:
Due from brokers, dealers and clearing organizations		14,097			15,463
Customers		7,112			10,280
Other		9,641			11,635
Financial instruments owned, at fair value		174,504			86,400
Other investments, at cost		30,308			45,224
Goodwill		5,882			5,882
Intangible assets, net		2,468			2,583
Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization		9,258			9,741
Prepaid expenses and other assets		6,276			8,182

Total assets	$	409,021		$	431,467

Liabilities and Shareholders’ Equity
Liabilities
Securities sold but not yet purchased, at fair value	$	80,044		$	55,444
Accrued compensation and benefits		11,213			53,305
Accounts payable, accrued expenses and other liabilities		20,193			23,904
Due to brokers, dealers and clearing organizations		11,682			7,323

Total liabilities		123,132			139,976

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, 61,680,631 and 61,717,837 shares issued and outstanding, respectively		62			62
Additional paid-in capital		427,522			424,641
Employee stock loan receivable, including accrued interest (115,950 and 115,950 shares, respectively)		(713	)		(706	)
Restricted stock units		30,103			34,239
Accumulated other comprehensive loss, net of taxes		(2,488	)		(53	)
Accumulated deficit		(168,597	)		(166,692	)

Total shareholders’ equity		285,889			291,491

Total liabilities and shareholders’ equity	$	409,021		$	431,467

See notes to consolidated financial statements.

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2011			2010
Revenues:
Investment banking:
Capital raising	$	15,110		$	7,711
Advisory		1,460			3,434
Institutional brokerage:
Principal transactions		5,836			7,870
Agency commissions		17,255			19,660
Asset management fees		3,981			3,328
Net investment income		5,599			2
Interest income, dividends and other		857			2,212

Total revenues		50,098			44,217
Interest expense		—			—

Revenues, net of interest expense		50,098			44,217

Non-Interest Expenses:
Compensation and benefits		29,001			42,744
Professional services		3,955			4,103
Business development		3,646			3,851
Clearing and brokerage fees		2,674			3,382
Occupancy and equipment		5,105			6,492
Communications		4,351			4,767
Other operating expenses		3,336			3,419

Total non-interest expenses		52,068			68,758

Loss before income taxes		(1,970	)		(24,541	)
Income tax benefit		(65	)		(16,279	)

Net loss	$	(1,905	)	$	(8,262	)

Basic and diluted loss per share	$	(0.03	)	$	(0.13	)

Basic and diluted weighted average shares outstanding (in thousands)		63,510			64,024

See notes to consolidated financial statements.

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, 2009		64,065		$	64		$	429,052		$	(391	)	$	19,979		$	(71	)	$	(129,134	)	$	319,499

Net loss		—			—			—			—			—			—			(37,558	)		(37,558	)	$	(37,558	)
Issuance of common stock, net of forfeitures		850			1			6,655			(315	)		(4,453	)		—			—			1,888
Repurchase of common stock		(3,197	)		(3	)		(15,902	)		—			—			—			—			(15,905	)
Stock compensation expense for options granted to purchase common stock		—			—			4,836			—			—			—			—			4,836
Issuance of restricted stock units		—			—			—			—			18,713			—			—			18,713
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes		—			—			—			—			—			18			—			18			18

Comprehensive loss																									$	(37,540	)

Balances at December 31, 2010		61,718		$	62		$	424,641		$	(706	)	$	34,239		$	(53	)	$	(166,692	)	$	291,491

Net loss		—			—			—			—			—			—			(1,905	)		(1,905	)	$	(1,905	)
Issuance of common stock, net of forfeitures		639			1			5,000			(7	)		(6,626	)		—			—			(1,632	)
Repurchase of common stock		(676	)		(1	)		(2,511	)		—			—			—			—			(2,512	)
Stock compensation expense for options granted to purchase common stock		—			—			392			—			—			—			—			392
Issuance of restricted stock units		—			—			—			—			2,490			—			—			2,490
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes		—			—			—			—			—			(2,435	)		—			(2,435	)		(2,435	)

Comprehensive loss																									$	(4,340	)

Balances at March 31, 2011		61,681		$	62		$	427,522		$	(713	)	$	30,103		$	(2,488	)	$	(168,597	)	$	285,889

See notes to consolidated financial statements.

FBR CAPITAL MARKETS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(1,905	)	$	(8,262	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,230			1,982
Stock compensation		2,236			5,196
Net investment income from investments		(5,599	)		(2	)
Other		435			199
Changes in operating assets:
Receivables:
Brokers, dealers and clearing organizations		1,366			(3,811	)
Customers		2,730			(2,208	)
Interest, dividends and other		1,796			(3,839	)
Trading securities		(65,325	)		(30,304	)
Prepaid expenses and other assets		1,905			(17,080	)
Changes in operating liabilities:
Trading securities sold but not yet purchased		24,600			27,786
Accrued compensation and benefits		(41,139	)		(51,834	)
Accounts payable, accrued expenses and other liabilities		(5,439	)		1,806
Brokers, dealers and clearing organizations		4,359			(11,733	)

Net cash used in operating activities		(78,750	)		(92,104	)

Cash flows from investing activities:
Purchases of investments		(10,204	)		(10,000	)
Proceeds from sales of and distributions from investments		5,500			11,811
Securities sold but not yet purchased, net		—			(25	)
Purchases of furniture, equipment, software, and leasehold improvements		(636	)		(1,883	)
Acquisition of net assets		—			(488	)

Net cash used in investing activities		(5,340	)		(585	)

Cash flows from financing activities:
Repurchases of common stock		(2,512	)		(11,718	)
Proceeds from sales of common stock		—			211

Net cash used in financing activities		(2,512	)		(11,507	)

Net decrease in cash and cash equivalents		(86,602	)		(104,196	)
Cash and cash equivalents, beginning of period		236,077			275,506

Cash and cash equivalents, end of period	$	149,475		$	171,310

Supplemental Cash Flow Information:
Income tax payments	$	26		$	5,052

See notes to consolidated financial statements.

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 months ended March 31, 2011 and 2010 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, 2010.

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.

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.

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

Equity securities and listed options—The Company classifies marketable equity securities and listed options within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Non-public equity 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.

Convertible and fixed income debt instruments—The Company classifies convertible and fixed income debt instruments 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.

Other—The Company invests in proprietary investment funds that are valued at net asset value (“NAV”) determined by the fund administrator. Investments in mutual funds are classified within Level 1 of the fair value hierarchy because investments within the funds are primarily exchange-traded securities and no restrictions exist on the redemption of the amounts invested by the Company. For investments in non-registered investment companies (private equity and fund of funds), the Company classifies these investments within Level 3 as the underlying securities held by these investment companies are primarily private-equity securities and restrictions exist on the redemption of amounts invested by the Company.

As a practical expedient, the Company relies on the NAV of these investments as their fair value. The NAVs that have been provided by investees are derived from the fair values of the underlying investments as of the reporting date.

Fair Value Hierarchy

The following tables set forth, by level within the fair value hierarchy, financial instruments accounted for under ASC 820 as of March 31, 2011 and December 31, 2010. 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


	March 31, 2011		Level 1		Level 2		Level 3
Financial instruments owned, at fair value:
Financial instruments held for trading activities at broker-dealer subsidiaries:
Marketable and non-public equity securities	$	32,855	$	28,684	$	—	$	4,171
Listed options		1,668		1,668		—		—
Convertible and fixed income debt instruments		112,103		—		112,103		—

		146,626		30,352		112,103		4,171
Financial instruments held for investment activities:
Designated as trading:
Corporate equity securities		13,477		13,477		—		—
Designated as available-for-sale:
Corporate equity securities		13,173		13,173		—		—

		26,650		26,650		—		—
Other		1,228		578		—		650

Total	$	174,504	$	57,580	$	112,103	$	4,821

Securities sold but not yet purchased, at fair value:
Marketable equity securities	$	61,845	$	61,845	$	—	$	—
Listed options		1,154		1,154		—		—
Convertible and fixed income debt instruments		17,045		—		17,045		—

Total	$	80,044	$	62,999	$	17,045	$	—

As of March 31, 2011, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $4,821, or 1.2% of the Company’s total assets at that date.


	December 31, 2010		Level 1		Level 2		Level 3
Financial instruments owned, at fair value:
Financial instruments held for trading activities at broker-dealer subsidiaries:
Marketable and non-public equity securities	$	14,165	$	9,703	$	—	$	4,462
Listed options		2,474		2,474		—		—
Convertible and fixed income debt instruments		65,215		—		65,215		—

		81,854		12,177		65,215		4,462
Financial instruments held for investment activities:
Designated as trading:
Corporate equity securities		3,484		3,484		—		—
Designated as available-for-sale:
Corporate equity securities		139		139		—		—

		3,623		3,623		—		—
Other		923		368		—		555

Total	$	86,400	$	16,168	$	65,215	$	5,017

Securities sold but not yet purchased, at fair value:
Marketable equity securities	$	34,448	$	34,448	$	—	$	—
Listed options		887		887		—		—
Convertible and fixed income debt instruments		20,109		—		20,109		—

Total	$	55,444	$	35,335	$	20,109	$	—

As of December 31, 2010, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $5,017, or 1.2% of the Company’s total assets at that date.

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 months ended March 31, 2011 and 2010. As of March 31, 2011 and 2010, the Company did not have any net unrealized gains (losses) included in accumulated other comprehensive income on Level 3 financial assets.


	Trading Securities			Other			Total
Beginning balance, January 1, 2011	$	4,462		$	555		$	5,017
Total net losses (realized/unrealized)
Included in earnings		(18	)		(55	)		(73	)
Included in other comprehensive income		—			—			—
Purchases		149,284			150			149,434
Sales/Distributions		(149,557	)		—			(149,557	)

Ending balance, March 31, 2011	$	4,171		$	650		$	4,821

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	$	(207	)	$	(55	)	$	(262	)


	Trading Securities			Other			Total
Beginning balance, January 1, 2010	$	15,481		$	914		$	16,395
Total net losses (realized/unrealized)
Included in earnings		(139	)		41			(98	)
Included in other comprehensive income		—			—			—
Purchases		71,679			—			71,679
Sales/Distributions		(77,580	)		(35	)		(77,615	)

Ending balance, March 31, 2010	$	9,441		$	920		$	10,361

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	$	324		$	41		$	365

There were no transfers of securities in to, or out of, Level 1, 2, and 3 financial assets during the three months ended March 31, 2011 and 2010.

Gains and losses from Level 3 financial assets that are measured at fair value on a recurring basis, included in earnings for the three months ended March 31, 2011 and 2010, are reported in the following line descriptions on the Company’s statements of operations:


	Three Months Ended March 31,
	2011			2010
Total gains and losses included in earnings for the period:
Principal transactions	$	(18	)	$	(139	)
Net investment (loss) income		(55	)		41
Change in unrealized gains or losses relating to assets still held at the end of the respective period:
Principal transactions	$	(207	)	$	324
Net investment (loss) income		(55	)		41

Financial Instruments Held for Investment—Designated as Trading

As of March 31, 2011, the Company has certain investments in marketable equity securities held by other than the Company’s broker-dealer subsidiaries that are classified as trading securities. These investments are designated as trading based on the Company’s intent at the time of designation. In accordance with ASC 320, these securities are carried at fair value with resulting realized and unrealized gains and losses reflected as net investment income (loss) in the statements of operations. Net gains and losses on these securities as of the dates indicated were as follows:


	Three Months Ended March 31,
	2011		2010
Net gains recognized on trading securities	$	129	$	—
Less: Net (gains) losses recognized on trading securities sold during the period		—		—

Unrealized gains recognized on trading securities still held at the reporting	$	129	$	—

Financial Instruments Held for Investment—Designated as Available-for-Sale

As of March 31, 2011 and December 31, 2010, the Company has certain investments in marketable equity securities held by other than the Company’s broker-dealer subsidiaries that are classified as available-for-sale

securities. These investments are designated as available-for-sale due to the Company’s intent at the time of designation to hold these securities for investment purposes over an extended period. However, these investments are available to be sold should economic conditions warrant such a transaction. In accordance with ASC 320, these securities are carried 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:


	March 31, 2011
	Cost Basis		Unrealized					Fair Value
	Cost Basis		Gains		Losses⁽¹⁾			Fair Value
Marketable equity securities	$	15,661	$	—	$	(2,488	)	$	13,173

	December 31, 2010
	Cost Basis		Unrealized					Fair Value
	Cost Basis		Gains		Losses⁽¹⁾			Fair Value
Marketable equity securities	$	192	$	—	$	(53	)	$	139

(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 months ended March 31, 2011 and 2010, the Company did not record any other-than-temporary impairment losses in the statements of operations relating to marketable equity securities. As of March 31, 2011, the Company held two marketable equity securities in unrealized loss positions, and based on the partial recovery of the values subsequent to quarter end combined with the limited duration of the losses, the Company does not consider these investments to be other than temporarily impaired.

There were no sales of marketable equity securities during the three months ended March 31, 2011 and 2010.

Other Investments, at Cost

Other investments consisted of the following as of the dates indicated:


	March 31, 2011		December 31, 2010
Non-public equity securities	$	29,991	$	44,907
Note receivable		317		317

	$	30,308	$	45,224

The Company evaluates its portfolio of investments, 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, the Company recorded no impairment losses during the three months ended March 31, 2011 and 2010.

During the three months ended March 31, 2011 and 2010, the Company received $5,500 and $8,507, respectively, from sales of, or distributions from, non-public equity securities, resulting in gross gains of $5,500 and $3, respectively.

During the three months ended March 31, 2011 and 2010, the Company received $-0- and $3,304, respectively, from the redemption of investments in investment funds.

3.	Income Taxes:

During the three months ended March 31, 2011 and 2010, the Company recorded a tax benefit of $(65) and $(16,279), respectively. The Company’s effective tax rates for the three months ended March 31, 2011 and 2010 were 3.3% and 66.3%, 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 for three months ended March 31, 2011 also incorporates the benefit of net operating losses expected to be utilized during 2011.

As of March 31, 2011, 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 minimum net capital requirements promulgated by the SEC and FSA. As of March 31, 2011, FBR & Co. had net capital of $46,867, which was $42,224 in excess of its required net capital of $4,643. As of March 31, 2011, 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 months ended March 31, 2011 and 2010, 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 March 31, 2011						Three Months Ended March 31, 2010
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding:
Common stock (in thousands)		63,510			63,510			64,024			64,024
Stock options, unvested restricted stock and unvested RSUs (in thousands)		—			—			—			—

Weighted average common and common equivalent shares outstanding (in thousands)		63,510			63,510			64,024			64,024

Net loss applicable to common stock	$	(1,905	)	$	(1,905	)	$	(8,262	)	$	(8,262	)

Net loss per common share	$	(0.03	)	$	(0.03	)	$	(0.13	)	$	(0.13	)

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 March 31,
	2011		2010
Stock Options—Employees and directors		7,931		8,335
Stock Options—Non-employee		3,256		3,102
Restricted Stock, unvested		517		1,173
Restricted Stock Units, unvested		7,279		9,449

		18,983		22,059

6.	Commitments and Contingencies:

As of March 31, 2011, 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, results of operations, or liquidity 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.

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. Plaintiffs were granted leave by the District court to file a motion for leave to amend the complaint and a motion for reconsideration of the Court’s order dismissing the amended complaint. FBR & Co. opposed those motions; briefing is complete and the motions were argued on November 3, 2010. The District Court’s decision is still pending.

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.

FBR & Co. has been named a defendant in the putative class action lawsuit MHC Mutual Conversion Fund, L.P. v. United Western Bancorp, Inc., et al. pending in the United States District Court for the District of Colorado. The complaint, filed in March 2011 against United Western Bancorp, Inc. (“the Bank”), its officers and directors, underwriters and outside auditors, alleges material misrepresentations and omissions in the registration statement and prospectus issued in connection with the Bank’s September 2009 offering. The complaint alleges claims under Sections 11 and 12 of the Securities Act against the lead underwriter of the offering and FBR & Co. as a member of the underwriting syndicate. The underwriters have notified the Bank that they are contractually entitled to be indemnified by the Bank as to all related expenses and losses incurred by the underwriters in connection with this action.

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

During the three months ended March 31, 2011, the Company repurchased 675,798 shares of its common stock in open market transactions at a weighted average share price of $3.72 per share for a total cost of $2,512. As a result of the repurchases during the three months ended March 31, 2011, the Company has remaining authority to repurchase 4,545,713 additional shares under the Board of Directors’ July 2010 directive.

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 months ended March 31, 2011 and 2010, the Company recognized compensation expense of $198 and $255, 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 offered to provide a full recourse loan at market rates and terms 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 (described below) that are subject to a 3-year cliff vesting requirement. For the three months ended March 31, 2010, participants purchased 66,635 shares for an aggregate purchase price of $382. As of March 31, 2011 and December 31, 2010, the Company had loans outstanding to participants of $713 and $706, respectively, including accrued interest. The employee stock loan receivable balance is included in shareholders’ equity in the balance sheets.

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 March 31,
	2011		2010
Stock options	$	193	$	1,039
Restricted shares	$	307	$	1,122
RSUs	$	1,538	$	2,780

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


	Three Months Ended March 31, 2011
	Stock Options		Restricted Shares		RSUs
Stock-based award issuances		—		—		1,251,683
Grant date fair value per share	$	—	$	—	$	3.69

There were no shares of restricted stock or options granted during the three months ended March 31, 2011.

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 March 31, 2011
	Stock Options		Restricted Shares		RSUs
Unrecognized compensation	$	4,707	$	1,316	$	18,234
Unvested awards		4,948,862		516,712		7,279,150
Weighted average vesting period		2.4 years		1.3 years		2.8 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 for the benefit of the employees and are not returnable to the Company. In settlement of such accrued incentive compensation, the Company granted the following RSUs for the period indicated:


	Three Months Ended March 31, 2011
RSU issuances		257,279
Aggregate grant date fair value	$	952

8.	Related Party Transactions:

Professional Services Agreement

Under the professional services agreement with Crestview Partners, L.P., 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. During the three months ended March 31, 2011 and 2010, the Company recognized $250 and $250, 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 $31 and $701 as of March 31, 2011 and December 31, 2010, 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 investments.

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 $1,828 and $2,949 for the three months ended March 31, 2011 and 2010, respectively. The following tables illustrate the financial information for the Company’s segments for the periods indicated:


	Three Months Ended March 31, 2011
	Capital Markets			Asset Management			Principal Investing		Total
Revenues, net of interest expense:
Investment banking	$	16,570		$	—		$	—	$	16,570
Institutional brokerage		23,091			—			—		23,091
Asset management fees		—			3,981			—		3,981
Net investment income		—			20			5,579		5,599
Net interest income, dividends and other		634			2			221		857

Total		40,295			4,003			5,800		50,098

Operating Expenses:
Variable		13,910			1,946			4		15,860
Fixed		33,998			2,085			125		36,208

Total		47,908			4,031			129		52,068

Pre-tax (loss) income	$	(7,613	)	$	(28	)	$	5,671	$	(1,970	)

Compensation and benefits:
Variable	$	6,958		$	993		$	1	$	7,952
Fixed		19,898			1,079			72		21,049

Total	$	26,856		$	2,072		$	73	$	29,001


	Three Months Ended March 31, 2010
	Capital Markets			Asset Management			Principal Investing		Total
Revenues, net of interest expense:
Investment banking	$	11,145		$	—		$	—	$	11,145
Institutional brokerage		27,530			—			—		27,530
Asset management fees		—			3,328			—		3,328
Net investment income		—			—			2		2
Net interest income, dividends and other		397			5			1,810		2,212

Total		39,072			3,333			1,812		44,217

Operating Expenses:
Variable		19,812			1,799			31		21,642
Fixed		43,772			2,866			478		47,116

Total		63,584			4,665			509		68,758

Pre-tax (loss) income	$	(24,512	)	$	(1,332	)	$	1,303	$	(24,541	)

Compensation and benefits:
Variable	$	13,594		$	1,013		$	27	$	14,634
Fixed		26,320			1,506			284		28,110

Total	$	39,914		$	2,519		$	311	$	42,744

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, 2010.

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, 2010. 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, 2010.

Business Environment

We expect the markets to continue to perform well during the Fed’s quantitative easing phase. In particular, we expect risk assets (equities and high yield debt) to benefit from historically low current yields offered as an alternative in the Treasury market and the related concern of potential losses should rates increase as the Federal Reserve ceases its purchases of Treasury debt as planned in the middle of this year. The outlook for late 2011 and 2012 is less clear and, we believe, is marked by specific risks, including: the end of the Fed purchases of U.S. Treasuries, continued high levels of unemployment, the continued overhang of foreclosed and unsold homes, the high cost of oil, world-wide sovereign debt challenges, political unrest in the Middle East, and, importantly, the ultimate deleveraging of the Federal Reserve balance sheet.

Despite the numerous issues confronting the financial markets and the economy, we believe that 2011 will present opportunities for issuers to access capital to meet refinancing and growth objectives at costs consistent with these objectives. We also expect the trading environment to continue be challenging, however we expect liquidity to slowly return to the equity markets as capital flows move away from fixed income and into equities. We continue to be cautious in our outlook because of both the fragility of the economic recovery in the U.S. and the heightened risks mentioned previously as markets continue to recover from a historic dislocation.

Executive Summary

For first quarter of 2011, our total revenues, net of interest expense, were $50.1 million, our pre-tax loss was $2.0 million and our net loss was $1.9 million, compared to total net revenues of $44.2 million, a pre-tax loss of $24.5 million and a net loss of $8.3 million for the three months ended March 31, 2010. Included in the first quarter of 2011 net loss is a $65 thousand tax benefit as compared to a $16.3 million tax benefit for the three months ended March 31, 2010. Our tax benefit for the first quarters of 2011 and 2010 is recorded pursuant to an effective tax rate approach for calculating tax provisions in interim periods based on forecasted annual taxable and book income.

The following is an analysis of our operating results by segment for the first quarters of 2011 and 2010.

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 table provides a summary of our results within the capital markets segment (dollars in thousands).


	Three Months Ended March 31,
	2011			2010
Revenues, net of interest expense:
Investment banking	$	16,570		$	11,145
Institutional brokerage		23,091			27,530
Net interest income, dividends and other		634			397

Total		40,295			39,072

Operating Expenses:
Variable		13,910			19,812
Fixed		33,998			43,772

Total		47,908			63,584

Pre-tax loss	$	(7,613	)	$	(24,512	)

The pre-tax loss from our capital markets segment decreased to $7.6 million for the first quarter of 2011 from $24.5 million for the first quarter of 2010. This decrease in pre-tax loss is attributable to a decrease in both variable and fixed costs, as well as an increase in total revenues. Variable expenses decreased $5.9 million, or 29.8%, in 2011 reflecting a decrease in variable compensation and a decrease in clearing and brokerage costs. The decrease in variable compensation is attributable to both a 22% reduction in employees since the end of the first quarter of 2010 and changes made to our variable compensation programs in 2011. The decrease in clearing and brokerage costs is directly related to the decline in institutional brokerage activity for the quarter. Fixed expenses decreased $9.8 million, or 22.3%, in 2011. This decrease is attributable to the reduction in employees noted above and the impact of other non-compensation cost reduction initiatives.

Investment banking revenues increased $5.4 million to $16.6 million during the first quarter of 2011 from $11.1 million during the first quarter of 2010. This increase is the result of our completion of a higher volume of public offerings in the financial institutions sector.

Our institutional brokerage revenues decreased $4.4 million to $23.1 million for the first quarter of 2011 from $27.5 million for the first quarter of 2010. This decrease was primarily a result of a decrease in overall industry-wide equity trading volume during the first quarter of 2011.

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 6.3% to $1.7 billion at March 31, 2011 from $1.6 billion at December 31, 2010 and increased 13.3% from $1.5 billion at March 31, 2010. The increase in mutual fund assets under management during the three months ended March 31, 2011 is primarily the result of net inflows of $54.8 million and a 3% increase in market value. The following table provides a summary of our results within the asset management segment (dollars in thousands).


	Three Months Ended March 31,
	2011			2010
Revenues, net of interest expense:
Asset management fees	$	3,981		$	3,328
Other		22			5

Total		4,003			3,333

Operating Expenses:
Variable		1,946			1,799
Fixed		2,085			2,866

Total		4,031			4,665

Pre-tax loss	$	(28	)	$	(1,332	)

The pre-tax loss from our asset management segment decreased to $28 thousand for the first quarter of 2011 from $1.3 million for the first quarter of 2010. The decrease in pre-tax loss is a result of increases in asset management fees as a result of an increase in our average assets under management during first quarter of 2011 as compared to the first quarter of 2010. Fixed expenses also decreased during the first quarter of 2011 due to compensation and non-compensation cost reduction initiatives undertaken during the second half of 2010. Variable expenses increased during the first quarter of 2011 as a result of the increased average assets under management compared to the first quarter of 2010.

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


	March 31, 2011		December 31, 2010
Mutual funds:
Equity	$	1,575.8	$	1,470.6
Balanced and fixed income		113.6		112.1
Private equity and hedge funds		4.2		4.3

Total	$	1,693.6	$	1,587.0

Principal Investing

As of March 31, 2011, our principal investing activity consists of investments in merchant banking and other equity investments and investment funds. The following table provides a summary of our results within the principal investing segment (dollars in thousands):


	Three Months Ended March 31,
	2011		2010
Revenues, net of interest expense:
Net investment income	$	5,579	$	2
Net interest income, dividends and other		221		1,810

Total		5,800		1,812

Operating Expenses:
Variable		4		31
Fixed		125		478

Total		129		509

Pre-tax income	$	5,671	$	1,303

The pre-tax income from our principal investing segment increased to $5.7 million for the first quarter of 2011 from $1.3 million for the first quarter of 2010. The increase in pre-tax income is primarily attributable to the increase in net investment income due to recognition of a realized gain of $5.5 million on the sale of a merchant banking investment, offset partially by a decrease in dividend income.

Investments

The total value of our investment portfolio was $57.6 million as of March 31, 2011. Of this total, $30.3 million was held in non-public investments recorded at cost associated with our merchant banking portfolio, $26.7 million was held in marketable equity securities and $0.6 million was held in investment funds.

The following table provides additional detail regarding our merchant banking and other long-term investments as of March 31, 2011 (dollars in thousands):

Merchant Banking and Other Investments


	Number of Shares		Carrying Value/ Fair Value
Merchant banking—non-public securities:
Air Lease Corporation⁽¹⁾		253,907	$	5,074
Institutional Financial Markets, Inc. (Note)		n/a		317
NBH Holdings Corp.⁽¹⁾		1,049,906		20,472
North American Financial Holdings, Inc.⁽¹⁾		227,509		4,445

Total			$	30,308
Marketable equity securities, at fair value				26,650
Investment funds				650

Total investments			$	57,608

(1)	As of March 31, 2011, the sale of these shares was subject to restrictive covenants.

Results of Operations

Three months ended March 31, 2011 compared to three months ended March 31, 2010

Net loss decreased to $1.9 million in the first quarter of 2011 from $8.3 million in the first quarter of 2010. The decrease in net loss was primarily the result of the effects of cost reduction initiatives that were implemented during the second half of 2010, including an approximate 22% reduction in our headcount since the end of the first quarter of 2010. Our net loss for the first quarter of 2011 also includes a $65 thousand tax benefit as compared to $16.3 million in the first quarter of 2010. Our pre-tax loss decreased to $2.0 million in the first quarter of 2011 from $24.5 million in the first quarter of 2010 as a result of an increase in net revenues to $50.1 million in 2011 from $44.2 million in 2010 and a decrease in operating expenses to $52.1 million in 2011 from $68.8 million in 2010.

The pre-tax loss in our capital markets segment decreased to $7.6 million during the first quarter of 2011 from $24.5 million during the first quarter of 2010 due to a decrease in operating expenses and an increase in investment banking capital raising revenues, partially offset by decreased institutional brokerage revenues. The pre-tax loss from our asset management segment decreased to $28 thousand during the first quarter of 2011 from $1.3 million during the first quarter of 2010 primarily due to an increase in asset management fees and a decrease in operating expenses. Pre-tax income from our principal investing segment increased to $5.7 million during the first quarter of 2011 from $1.3 million during the first quarter of 2010, reflecting an increase in net investment income resulting from the recognition of realized gains on the sale of a merchant banking investment and a decrease in operating expenses for the first quarter of 2011 as compared to the same period in 2010.

Our net revenues increased 13.3% to $50.1 million during the first quarter of 2011 from $44.2 million during the first quarter of 2010 due to the changes in revenues discussed below.

Capital raising revenues increased to $15.1 million in the first quarter of 2011 from $7.7 million in the first quarter of 2010. This increase is the result of our completion of a higher volume of public offerings in the financial institutions sector.

Advisory revenues decreased 55.9% to $1.5 million in the first quarter of 2011 from $3.4 million in the first quarter of 2010. We completed three assignments in the first quarter of 2011 as compared to four assignments in the first quarter of 2010.

Institutional brokerage revenues from agency commissions and principal transactions decreased 16.0% to $23.1 million in the first quarter of 2011 from $27.5 million in the first quarter of 2010. This decrease is primarily a result of a decrease in overall industry-wide equity trading volume during the first quarter of 2011.

Asset management fees increased 21.2% to $4.0 million in the first quarter of 2011 from $3.3 million in the first quarter of 2010. This increase is attributable to an increase in average mutual fund assets under management.

Net investment income was $5.6 million in the first quarter of 2011 compared to $2 thousand in the first quarter of 2010. The net investment income for the first quarter of 2011 is primarily related to the recognition of realized gains of $5.5 million on the sale of one of our merchant banking investments.

Net interest income, dividends and other revenues decreased to $0.9 million in the first quarter of 2011 from $2.2 million in the first quarter of 2010. 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 24.3% to $52.1 million in the first quarter of 2011 from $68.8 million in the first quarter of 2010. This decrease was caused by the changes in non-interest expenses described below.

Compensation and benefits expenses decreased 32.1% to $29.0 million in the first quarter of 2011 from $42.7 million in the first quarter of 2010. Fixed compensation decreased $7.1 million during the first quarter of 2011 as compared to the first quarter of 2010 reflecting the effects of the overall reduction in workforce and a reduction in stock-based compensation as previously granted awards vest. Fixed compensation for the first quarter of 2011 included severance of $0.8 million compared to $1.0 million in the first quarter of 2010. Despite an increase in revenues, variable compensation decreased $6.7 million during the first quarter of 2011. The decrease in variable compensation reflects the reduction of employees noted above and changes made to our variable compensation programs in 2011.

Professional services expenses decreased 2.4% to $4.0 million in the first quarter of 2011 from $4.1 million in the first quarter of 2010 primarily due to a decrease in corporate legal and consulting fees partially offset by an increase in investment banking deal expenses related to the higher volume of capital raising activity in the first quarter of 2011.

Business development expenses decreased 7.7% to $3.6 million in the first quarter of 2011 from $3.9 million in the first quarter of 2010. This decrease is primarily the result of decreased costs associated with our investment banking transactions.

Clearing and brokerage fees decreased 20.6% to $2.7 million in the first quarter of 2011 from $3.4 million in the first quarter of 2010. The decrease is primarily due to a lower volume of trading activity, in particular related to our equity trading desk.

Occupancy and equipment expenses decreased 21.5% to $5.1 million in the first quarter of 2011 from $6.5 million in the first quarter of 2010. The decrease in occupancy costs is primarily the result of reductions in depreciation expense associated with reduced capital expenditures over the past two years and reductions in our leased office space.

Communications expenses decreased 8.3% to $4.4 million in the first quarter of 2011 from $4.8 million in the first quarter of 2010. 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.

Other operating expenses decreased 2.9% to $3.3 million in the first quarter of 2011 from $3.4 million in the first quarter of 2010. The decrease in expenses is primarily due to a decrease in corporate insurance costs partially offset by increased 12b-1 fees, which is a result of increased assets under management.

Our income tax benefit decreased to $65 thousand in the first quarter of 2011 from $16.3 million in the first quarter of 2010. 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 3.3% in the first quarter of 2011. This rate differed from statutory tax rates due to a full valuation allowance on the deferred tax benefits of book losses in both the U.S. and U.K and the projected liability related to domestic operations in 2011 after accounting for the benefits of net operating losses to be utilized during the year. In comparison, our effective rate was 66.3% in the first quarter of 2010. This rate differed from statutory tax rates due to a full valuation allowance on the tax benefits of book losses in both the U.S. and U.K. and the projected tax liability related to domestic operations in 2010.

The Company believes there is potential for volatility in its 2011 effective tax rate from quarter-to-quarter due to the impact of any prospective changes in its forecasted earnings for the year.

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 March 31, 2011, our cash and cash equivalents totaled $149.5 million representing a net decrease of $86.6 million for the first quarter of 2011. The decrease is primarily attributable cash used in operating activities of $78.8 million, which includes $40.7 million invested in trading desk positions, a cash operating loss of $3.6 million, and $34.5 million of net changes in operating assets and liabilities. Cash used in investing activities of $5.3 million was associated with the purchase of $10.2 million in equity investments offset partially by the sale of $5.5 million of equity investments. Cash used in financing activities of $2.5 million was the result of repurchases of our common stock. 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 $78.8 million during the first quarter of 2011, compares to $92.1 million used during the first quarter of 2010. The cash used in operating activities reflects net operating losses in both periods, our annual payment of incentive compensation associated with prior year operating results, and capital investment in our trading desk positions.

Net cash used in investing activities of $5.3 million during the first quarter of 2011 compares to net cash used in investing activities of $0.6 million during the first quarter of 2010. The activity for both periods reflects the purchase and sale of equity investments.

Net cash used in financing activities of $2.5 million during the first quarter of 2011 compares to $11.5 million used during the first quarter of 2010. The 2011 activity primarily represents the repurchase of 675,798 shares of our common stock for $2.5 million. The 2010 activity reflects the repurchase of 2.2 million shares of our common stock for $11.7 million.

Sources of Funding

We believe that our existing cash and cash equivalents balances (totaling $149.5 million at March 31, 2011), 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 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 March 31, 2011, we had $149.5 million of cash and cash equivalents and no outstanding borrowings.

Assets

As of March 31, 2011, our principal assets consist of cash and cash equivalents, receivables, trading securities and investments. As of March 31, 2011 and December 31, 2010, liquid assets consisted primarily of cash and cash equivalents of $149.5 million and $236.1 million, respectively.

The decrease in our total assets to $409.0 million as of March 31, 2011 compared to $431.5 million as of December 31, 2010, is primarily the result of an $86.6 million decrease in cash and cash equivalents discussed above, offset partially by a $73.2 million increase in capital invested in financial instruments. 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 corporate bond and syndicated loan trades. A decrease in unsettled trades outstanding associated with these activities was the primary reason for the decrease in the receivable from and corresponding payable to brokers, dealers and clearing organization. The total amount of outstanding unsettled trade receivables and payables related to these instruments was $9.0 million and $11.7 million, respectively, as of March 31, 2011 compared to $11.4 million and $7.3 million, respectively, as of December 31, 2010. Due to the extended settlement nature of most par and distressed bank loan transactions, we are subject to certain market and counterparty credit risks. See our discussion related to these risks included in the Quantitative and Qualitative Disclosures about Market Risk. 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.

As of March 31, 2011, our $57.6 million of investments primarily consist of investments in non-public equity securities, marketable equity securities and investment funds. These investments are funded in cash and are not financed with debt. Accordingly, a decline in value of these assets, should it occur, would impact our return on our investment, however, it would not impact our current liquidity requirements.

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 March 31, 2011, FBR & Co. had total regulatory net capital of $46.9 million, which exceeded its required net capital of $4.7 million by $42.2 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 first quarter of 2011, we repurchased 675,798 shares of our common stock in open market transactions at a weighted average share price of $3.72 per share for a total cost of $2.5 million. As of March 31, 2011, we have a remaining authority to repurchase up to 4.5 million additional shares.

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.

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 March 31, 2011 was approximately $590 thousand.

LOGO

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 under Equity Price Risk.

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 three months ended March 31, 2011. The table shows data reflecting that the average of the lowest 5 percentile daily trading revenues during the three months ended March 31, 2011 was $88 thousand. Over the same period, the worst one-day trading revenues were $76 thousand; there were no days resulting in a net trading loss during the quarter. The average one-day VaR for the three months ended March 31, 2011 was $465 thousand.

LOGO

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 March 31, 2011. The fair value of the $32.9 million of trading equity securities held at our broker-dealer subsidiaries would increase or decrease to $36.2 million and $29.6 million, respectively, and the fair value of the $57.6 million of other equity investments would increase or decrease to $63.4 million and $51.8 million, respectively.

Except to the extent that we sell our equity securities designated as available-for-sale or our other equity 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 trading securities held by broker-dealer subsidiaries, investment securities designated as trading, or investment funds 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 March 31, 2011 and December 31, 2010, we have recorded no liabilities with regard to this right. During the three months ended March 31, 2011 and 2010, we did not incur any significant costs, with regard to this right. 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.

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 corporate bonds and syndicated loan trades. 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.

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 March 31, 2011, 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 three months ended March 31, 2011, 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).

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

As of March 31, 2011, 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, results of operations or liquidity 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.

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, styled In 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. Plaintiffs were granted leave by the District court to file a motion for leave to amend the complaint and a motion for reconsideration of the Court’s order dismissing the amended complaint. FBR & Co. opposed those motions; briefing is complete and the motions were argued on November 3, 2010. The District Court’s decision is still pending.

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.

Item 1A.

Risk Factors

As of March 31, 2011, 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, 2010.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on the Company’s share repurchases during the first quarter of 2011:


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31, 2011		—	$	—		—		5,221,511
February 1 to February 28, 2011		—		—		—		5,221,511
March 1 to March 31, 2011		675,798		3.72		675,798		4,545,713

Total		675,798	$	3.72		675,798		4,545,713

(1)

On July 27, 2010, the Board of Directors of the Company approved a 5,000,000 share increase to the number shares of 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 of which 4,545,713 shares remain authorized to be repurchased.

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.

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: May 9, 2011	By:	/s/ BRADLEY J. WRIGHT
		Bradley J. Wright
		*Executive Vice President, Chief Financial Officer*
		*(Principal Financial Officer)*

Date: May 9, 2011	By:	/s/ ROBERT J. KIERNAN
		Robert J. Kiernan
		*Senior Vice President, Controller and*
		*Chief Accounting Officer*
		*(Principal Accounting Officer)*

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