The following discussion and analysis of the consolidated financial condition and results of operations of FBR & Co. 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, 2011.

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, 2011. 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, 2011.

Business Environment

The capital markets have been affected by the global economic challenges facing the U.S. and many nations in the Eurozone and instability in investor confidence. In particular, weak flows into equity mutual funds, a reticence among investors to put capital at risk through new investments, and a decrease in trading volumes for both equity and fixed income securities have resulted in significantly diminished volume of equity capital markets activity. We expect the remainder of 2012 to continue to be marked by significant risks, including; high levels of unemployment, world-wide sovereign debt challenges, and uncertainty regarding both the statutory expiration of certain tax regulations that reduce the individual tax obligation of U.S. citizens, and the potential for significant reductions in government spending.

Executive Summary

Our net loss for the third quarter of 2012 was $3.4 million as compared to $26.1 million in the third quarter of 2011. For the nine months ended September 30, 2012, our net loss was $2.4 million as compared to $30.8 million in the comparable period in 2011.

In June 2012, we entered into a definitive agreement to sell the assets related to the management of the entire family of ten FBR Funds. As a result of the Company's decisions during the second quarter and this agreement to sell these assets, the Company now reports the results of its asset management operations as discontinued operations.

For the third quarter of 2012, our total revenues from continuing operations were $23.9 million, our pre-tax loss from continuing operations was $5.6 million and our net loss from continuing operations was $4.3 million, compared to total revenues from continuing operations of $16.7 million, a pre-tax loss from continuing operations of $26.0 million and a net loss from continuing operations of $26.4 million for the three months ended September 30, 2011. In addition, our income from discontinued operations, net of taxes, was $1.0 million in the third quarter 2012 compared to $0.3 million in the comparable period in 2011.

For the nine months ended September 30, 2012, our total revenues from continuing operations were $92.6 million, our pre-tax loss from continuing operations was $5.3 million and our net loss from continuing operations was $4.0 million, compared to total revenues from continuing operations of $108.0 million, a pre-tax loss from continuing operations of $31.6 million and a net loss from continuing operations of $31.7 million for the nine months ended September 30, 2011. In addition, for the nine months ended September 30, 2012, our income from discontinued operations, net of taxes, was $1.6 million compared to income from discontinued operations, net of taxes, of $0.9 million for the nine months ended September 30, 2011.

The improvement in our operating results in the three and nine months ended September 30, 2012 as compared to 2011 was primarily the result of the restructuring activities that we initiated in the fourth quarter of 2011 and the resulting reductions to our fixed costs that we realized during the nine months ended September 30, 2012. These cost reductions were primarily achieved through reductions in our workforce as our headcount in our continuing operations as of September 30, 2012 is down approximately 39% since September 30, 2011.

The following is an analysis of our operating results by segment for the three and nine months ended September 30, 2012 and 2011.

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,
                                                      2012          2011
         Revenues:
         Investment banking                         $ 10,743      $   5,032
         Institutional brokerage                      11,265         19,380
         Net interest income, dividends and other        297            984

         Total                                        22,305         25,396

         Operating Expenses:
         Variable                                      5,260          8,691
         Fixed                                        23,818         33,550

         Total(1)                                     29,078         42,241

         Pre-tax loss                               $ (6,773 )    $ (16,845 )

(1) For the three months ended September 30, 2012 and 2011, total operating expenses includes the allocation of corporate overhead costs of $5,942 and $8,051, respectively.

The pre-tax loss from our capital markets segment was $6.8 million for the third quarter of 2012 compared to $16.8 million for the third quarter of 2011. With revenues decreasing $3.1 million or 12% in 2012, the decrease in our pre-tax loss is attributable to decreases in both fixed and variable costs. Fixed expenses decreased $9.7 million, or 29%, in 2012 as a result of a reduction in employees since September 30, 2011 and the impact of other non-compensation cost reduction initiatives. Variable expenses decreased $3.4 million, or 39%, in 2012 reflecting a decrease in variable compensation and a decrease in clearing and brokerage costs. The decrease in variable compensation was attributable to the decrease in revenues and the reduction in our headcount. The decrease in clearing and brokerage costs is directly related to the decline in institutional brokerage activity in 2012.

Investment banking revenues increased $5.7 million to $10.7 million during the third quarter of 2012 from $5.0 million during the third quarter of 2011. In the third quarter of 2012, we completed 17 investment banking transactions, including one sole-managed private placement and five advisory assignments. Our investment banking revenues for the third quarter of 2011 were generated from seven transactions, including four advisory assignments.

Our institutional brokerage revenues decreased $8.1 million to $11.3 million for the third quarter of 2012 from $19.4 million for the third quarter of 2011. This decrease was primarily due to the continuing decrease in equity trading volumes being experienced industry-wide during the third quarter of 2012 resulting from lower volatility in the market and net outflows from domestic equity funds.

                                                       Nine Months Ended
                                                         September 30,
                                                      2012          2011
         Revenues:
         Investment banking                         $ 45,882      $  51,601
         Institutional brokerage                      39,637         63,563
         Net interest income, dividends and other      1,946          2,537

         Total                                        87,465        117,701

         Operating Expenses:
         Variable                                     21,933         35,693
         Fixed                                        74,445        102,417

         Total(1)                                     96,378        138,110

         Pre-tax loss                               $ (8,913 )    $ (20,409 )

(1) For the nine months ended September 30, 2012 and 2011, total operating expenses includes the allocation of corporate overhead costs of $18,807 and $24,953, respectively.

The pre-tax loss from our capital markets segment decreased to $8.9 million for the nine months ended September 30, 2012 from $20.4 million for the nine months ended September 30, 2011. With revenues decreasing $30.2 million or 26% in 2012, the decrease in our pre-tax loss is attributable to decreases in both fixed and variable costs. Fixed expenses decreased $28.0 million, or 27%, in 2012 as a result of a reduction in employees since September 30, 2011 and the impact of other non-compensation cost reduction initiatives. Variable expenses decreased $13.8 million, or 39%, in 2012 reflecting a decrease in variable compensation and a decrease in clearing and brokerage costs. The decrease in variable compensation was attributable to the decrease in revenues and the reduction in our headcount. The decrease in clearing and brokerage costs is directly related to the decline in institutional brokerage activity in 2012.

Investment banking revenues decreased $5.7 million to $45.9 million during the nine months ended September 30, 2012 from $51.6 million during the nine months ended September 30, 2011. In the nine months ended September 30, 2012, we completed 48 investment banking transactions, including four book-run initial public offerings and five sole-managed private placements. Our nine months ended September 30, 2011 investment banking revenues were generated from 42 transactions, including one book-run initial public offering and three sole-managed private placements.

Our institutional brokerage revenues decreased $23.9 million to $39.6 million for the nine months ended September 30, 2012 from $63.6 million for the nine months ended September 30, 2011. This decrease was primarily due to the continuing decrease in equity trading volumes being experienced industry-wide during the nine months ended September 30, 2012 resulting from lower volatility in the market and net outflows from domestic equity funds.

Principal Investing

As of September 30, 2012, our principal investing activity consists of
investments in merchant banking and other equity investments, investment funds
and corporate debt investments. The following tables provide a summary of our
results within the principal investing segment (dollars in thousands):



                                                      Three Months Ended
                                                         September 30,
                                                      2012           2011
         Revenues:
         Net investment income (loss)               $   1,231      $ (9,249 )
         Net interest income, dividends and other         353           511

         Total                                          1,584        (8,738 )

         Operating Expenses:
         Variable                                           0             2
         Fixed                                             71            93

         Total(1)                                          71            95

         Pre-tax income (loss)                      $   1,513      $ (8,833 )

(1) For the three months ended September 30, 2012 and 2011, total operating expenses includes the allocation of corporate overhead costs of $74 and $94, respectively.

The pre-tax income from our principal investing segment of $1.5 million for the third quarter of 2012 compares to a pre-tax loss of $8.8 million for the third quarter of 2011. Net investment income for the third quarter of 2012 is comprised of net realized and unrealized gains of $1.2 million on trading securities held for investment purposes, including net gains of $0.5 million on securities sold during the period. The pre-tax loss in 2011 was primarily attributable to $6.6 million in net unrealized losses on trading securities held for investment purposes and $2.6 million in net realized losses from the settlement of derivatives held for investment purposes and the sale of equity investments during the third quarter of 2011.

                                                       Nine Months Ended
                                                         September 30,
                                                       2012         2011
          Revenues:
          Net investment income (loss)               $  4,222     $ (10,880 )
          Net interest income, dividends and other        879         1,204

          Total                                         5,101        (9,676 )

          Operating Expenses:
          Variable                                        115             6
          Fixed                                           259           315

          Total(1)                                        374           321

          Pre-tax income (loss)                      $  4,727     $  (9,997 )

(1) For the nine months ended September 30, 2012 and 2011, total operating expenses includes the allocation of corporate overhead costs of $243 and $320, respectively.

The pre-tax income from our principal investing segment of $4.7 million for the nine months ended September 30, 2012 compares to a pre-tax loss of $10.0 million for the nine months ended September 30, 2011. Net investment income for the nine months ended September 30, 2012 includes net realized and unrealized gains of $4.2 million on trading securities held for investment purposes compared to a net investment loss for the nine months ended September 30, 2011 which includes other-than-temporary impairment losses of $7.5 million related to two equity investments and $7.1 million in net unrealized losses on trading securities held for investment purposes, offset partially by $3.8 million in net realized gains from the sale of several equity investments and settlement of derivatives held for investment purposes. The net realized and unrealized gains of $4.2 million for the nine months ended September 30, 2012 include net gains of $2.3 million on securities sold during the period.

Investments

The total value of our investment portfolio was $55.1 million as of September 30, 2012. Of this total, $8.4 million was held in non-public investments recorded at cost, $39.0 million was held in marketable and non-public equity and fixed income securities, at fair value, and $7.7 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, 2012 (dollars in thousands):

                                                          Number          Carrying Value/
                                                        of Shares           Fair Value
Investments, at cost:
American Residential Properties, Inc.                      125,000       $           2,390
GES Global Energy Services Inc.(Note)                          n/a                   5,000
Other                                                          n/a                     998

Total                                                                    $           8,388
Marketable and non-public equity securities and
warrants, at fair value                                                             38,985
Investment funds, at fair value                                                      7,709

Total investments                                                        $          55,082

Results of Operations

Three months ended September 30, 2012 compared to three months ended September 30, 2011

We incurred a net loss of $3.4 million in the third quarter of 2012 compared to $26.1 million in the third quarter of 2011. The decrease in the net loss was primarily the result of the effects of cost reduction initiatives that were implemented during the fourth quarter of 2011, including an approximate 39% reduction in our headcount since the third quarter of 2011. Our net loss for the third quarter of 2012 also includes a $1.3 million tax benefit as compared to a $387 thousand tax provision in the third quarter of 2011.

The pre-tax loss in our capital markets segment was $6.8 million for the third quarter of 2012 compared to $16.8 million for the third quarter of 2011. While capital markets revenues decreased in 2012, the reduction in our loss is due to a decrease in our operating expenses reflecting the impact of cost reduction initiatives. Offsetting these results was an increase in pre-tax income from our principal investing segment to $1.5 million during the third quarter of 2012 from a loss of $8.8 million during the third quarter of 2011, reflecting net investment income of $1.2 million for the third quarter of 2012 as compared to a net investment loss of $9.2 million in the same period in 2011. Our income from discontinued operations, net of taxes, was $1.0 million in the third quarter 2012 compared to $0.3 million in the comparable period in 2011.

Our revenues increased 43.1% to $23.9 million during the third quarter of 2012 from $16.7 million during the third quarter of 2011 due to the changes in revenues discussed below.

Capital raising revenues increased to $8.6 million in the third quarter of 2012 from $0.6 million in the third quarter of 2011. In the third quarter of 2012, we completed 12 capital raising transactions including one sole-managed private placement. Our capital raising revenues for the third quarter of 2011were generated from three co-managed transactions.

Advisory revenues decreased 50.0% to $2.2 million in the third quarter of 2012 from $4.4 million in the third quarter of 2011. We completed five assignments in the third quarter of 2012 compared to four assignments in the third quarter of 2011. Our 2011 results include one significant merger and acquisition transaction that generated a majority of the advisory revenues for this period.

Institutional brokerage revenues from agency commissions and principal transactions decreased 41.8% to $11.3 million in the third quarter of 2012 from $19.4 million in the third quarter of 2011. This decrease is primarily a result of a decrease in overall industry-wide trading volume during the third quarter of 2012 as compared to 2011.

Net investment income was $1.2 million in the third quarter of 2012 compared to net investment losses of $9.2 million in the third quarter of 2011. Net investment income for the third quarter of 2012 is comprised of net realized and unrealized gains of $1.2 million on trading securities held for investment purposes, including net gains of $0.5 million on securities sold during the period. The net investment loss in 2011 was primarily attributable to $6.6 million in net unrealized losses on trading securities held for investment purposes and $2.6 million in net realized losses from the settlement of derivatives held for investment purposes and the sale of equity investments during the third quarter of 2011.

Interest income, dividends and other revenues decreased 53.3% to $0.7 million in the third quarters of 2012 from $1.5 million in the third quarter of 2011. These revenues include interest from convertible and fixed income securities held on our trading desks as well as interest and dividends generated from our investment activities.

Total expenses decreased 30.9% to $29.5 million in the third quarter of 2012 from $42.7 million in the third quarter of 2011. This decrease was caused by the changes in expenses described below.

Compensation and benefits expenses decreased 38.6% to $14.8 million in the third quarter of 2012 from $24.1 million in the third quarter of 2011. Fixed compensation decreased $6.8 million in 2012 reflecting the effects of an approximate 39% reduction in our headcount since the end of the third quarter of 2011. Variable compensation decreased $2.5 million during the third quarter of 2012 as compared to third quarter of 2011 due to a decrease in revenues and a reduction in our headcount.

Professional services expenses increased 3.8% to $2.7 million in the third quarter of 2012 from $2.6 million in the third quarter of 2011, reflecting an increase of $0.8 million in transaction costs related to investment banking activity offset by a $0.7 million decrease in costs related to corporate activities.

Business development expenses decreased 20.0% to $1.6 million in the third quarter of 2012 from $2.0 million in the third quarter of 2011. This decrease is primarily the result of decreased travel costs associated with the overall reduction in our workforce.

Clearing and brokerage fees decreased 52.8% to $1.7 million in the third quarter of 2012 from $3.6 million in the third quarter of 2011. This decrease is primarily due to a lower volume of trading activity, in particular related to our equity trading desk.

Occupancy and equipment expenses decreased 4.7% to $4.1 million in the third quarter of 2012 from $4.3 million in the third quarter of 2011. We incurred a $0.6 million charge in the third quarter of 2012 related to the consolidation of office space with no comparable charge in third quarter of 2011. The decrease in occupancy costs is primarily the result of reductions in depreciation expense associated with reduced capital expenditures over the past several years and reductions in our leased office space.

Communications expenses decreased 26.8% to $3.0 million in the third quarter of 2012 from $4.1 million in the third quarter of 2011. 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 25.0% to $1.5 million in the third quarter of 2012 from $2.0 million in the third quarter of 2011. The decrease in expenses is primarily due to decreases in business licensing taxes and regulatory agency fees as a result of the reduction in our workforce and revenues, as well as, decreases in administrative operational expenses and corporate insurance costs.

We recognized a tax benefit of $1.3 million in the third quarter of 2012 compared to a tax provision of $387 thousand in the third quarter of 2011. The tax benefit from continuing operations for the third quarter of 2012 includes the recognition of $1.0 million of previously unrecognized tax benefits. 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, for the third quarter of 2012 was 22.6%. Our effective tax rate excluding the previously unrecognized tax benefits noted above, was 4.4% in the third quarter of 2012. In comparison, our effective rate was (1.5)% in the third quarter of 2011. Our effective tax rates for 2012 differed from statutory rates primarily due to the utilization of net operating losses which had a full valuation allowance recorded against them, state income taxes and the release of liability for uncertain tax positions.

The Company believes there is potential for volatility in its 2012 effective tax rate from quarter-to-quarter due to the impact of any prospective changes in its forecasted earnings for the year.

Income from discontinued operations, net of taxes, increased to $1.0 million for the third quarter of 2012 compared to $0.3 million in the third quarter of 2011. These 2012 results reflect an increase in asset management fees as a result of the increase in our average assets under management offset by $0.5 million in costs associated with the pending sale transaction in 2012 that are not comparable to 2011. Our mutual fund assets under management increased 29% to $2.2 billion at September 30, 2012 from $1.7 billion at December 31, 2011 and increased 57% from $1.4 billion at September 30, 2011. The increase in mutual fund assets under management during the nine months ended September 30, 2012 is primarily the result of net inflows of $313.7 million and an 11% increase in market value.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

We incurred a net loss of $2.4 million in the first nine months of 2012 compared to $30.8 million in the first nine months of 2011. The decrease in the net loss was primarily the result of the effects of cost reduction initiatives that were implemented during the fourth quarter of 2011, including an approximate 39% reduction in our headcount since the third quarter of 2011. Our net loss for the first nine months of 2012 also includes a $1.2 million tax benefit as compared to a $97 thousand tax provision in the first nine months of 2011.

The pre-tax loss in our capital markets segment decreased to $8.9 million during the first nine months of 2012 from $20.4 million during the first nine months of 2011. While capital markets revenues decreased in 2012, the reduction in our loss is due to a decrease in our operating expenses reflecting the impact of cost reduction initiatives. Offsetting the loss in our capital markets segment in 2012 was an increase in pre-tax income from our principal investing segment to $4.7 million during the first nine months of 2012 from a loss of $10.0 million during the first nine months of 2011. The improvement in these results is due to an increase in net investment income for the first nine months of 2012 as compared to the same period in 2011. Our income from discontinued operations, net of taxes increased to $1.6 million in the first nine months of 2012 from $0.9 million recognized in the comparable period in 2011.

Our revenues decreased 14.3% to $92.6 million during the first nine months of 2012 from $108.0 million during the first nine months of 2011 due to the changes in revenues discussed below.

Capital raising revenues increased 2.6% to $39.6 million in the first nine . . .