NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
1. Basis of Presentation:
The consolidated financial statements of FBR & Co. 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 annual financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of the results for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended
September 30, 2013 and 2012 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 Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
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
and market information (when available) 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.
In June 2012, the Company entered into a definitive agreement to sell the assets related to the management
of the FBR Funds and on October 26, 2012, completed this sale (sale of the FBR Funds). As a result of the Companys decisions, during the second quarter of 2012 the Company began reporting the results of its asset management
operations as discontinued operations (see Note 9). As a result of this change, certain previously reported amounts in the consolidated financial statements and notes have been reclassified to conform to the current period presentation. These
reclassifications had no effect on the results of operations of the Company.
On February 28, 2013, the Company affected
a one-for-four reverse stock split of the Companys issued and outstanding common stock. While this reverse stock split reduced the number of issued and outstanding common shares, and resulted in the conforming adjustments to certain previously
reported amounts in the consolidated financial statements, these adjustments had no effect on the Companys total shareholders equity. Pursuant to the requirements of the FBR & Co. Long Term Incentive Plan and the provisions of
the reverse stock split, all outstanding stock awards under the plan have been adjusted. These adjustments reduced the number of outstanding awards and, in addition for options to purchase common stock increased the applicable exercise price, but
had no effect on the unrecognized compensation expense applicable to these awards.
6
2. Financial Instruments and Long-Term Investments:
Fair Value of Financial Instruments
The Financial Accounting Standards Boards (FASB) 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, listed options and warrants
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 over-the-counter market trading activity. Warrants to purchase non-public
equity securities are classified as Level 3 as both enterprise value and Black-Scholes valuation are used to value these securities.
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.
Investment funds
The Company invests in proprietary investment funds that are valued at net asset value (NAV) determined by the fund administrator. For investments in
non-registered investment companies (private equity and debt funds and fund of funds), the Company classifies these investments within Level 3 as the underlying securities held by these investment companies are primarily corporate and asset-backed
fixed income 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 September 30, 2013 and December 31, 2012. 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.
7
Items Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments held for trading activities at broker-dealer subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
$
|
14,326
|
|
|
$
|
11,826
|
|
|
$
|
|
|
|
$
|
2,500
|
|
Listed options
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
29,929
|
|
|
|
|
|
|
|
29,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,281
|
|
|
|
11,852
|
|
|
|
29,929
|
|
|
|
2,500
|
|
Financial instruments held for investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
|
19,536
|
|
|
|
13,346
|
|
|
|
|
|
|
|
6,190
|
|
Warrants
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
1,416
|
|
Fixed income debt instruments
|
|
|
2,080
|
|
|
|
|
|
|
|
2,080
|
|
|
|
|
|
Designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
21,704
|
|
|
|
21,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,736
|
|
|
|
35,050
|
|
|
|
2,080
|
|
|
|
7,606
|
|
Investment funds
|
|
|
51,514
|
|
|
|
|
|
|
|
|
|
|
|
51,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,531
|
|
|
$
|
46,902
|
|
|
$
|
32,009
|
|
|
$
|
61,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
26,772
|
|
|
$
|
26,772
|
|
|
$
|
|
|
|
$
|
|
|
Listed options
|
|
|
438
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
5,810
|
|
|
|
|
|
|
|
5,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,020
|
|
|
$
|
27,210
|
|
|
$
|
5,810
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013, financial assets measured and reported at fair value on a recurring basis
and classified within Level 3 were $61,620, or 14.1% of the Companys total assets at that date. Regarding these Level 3 financial assets, in determining fair value, the Company analyzes various financial, performance and market factors to
estimate the value, including where applicable over-the-counter market trading activity. The following table provides the valuation technique and unobservable inputs primarily used in assessing the value of these securities as of September 30,
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
Fair Value
|
|
|
Unobservable Input
|
|
Range
|
|
Weighted
Average
|
|
Market approach
|
|
$
|
8,690
|
|
|
Over-the-counter trading activity
|
|
$0.77 $68.11/share
|
|
$
|
24.01
|
|
Black-Scholes
|
|
$
|
1,416
|
|
|
Volatility
|
|
30%
|
|
|
30
|
%
|
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
|
0
|
%
|
|
|
|
|
|
|
Interest rate
|
|
2.6%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
Discount rate
|
|
15%
|
|
|
15
|
%
|
For those non-public equity securities valued using a market approach, adverse industry market conditions
or events experienced by the underlying entities could result in lower over-the-counter trading prices for the securities. Such lower trading prices would result in a decline in the estimated fair value of these securities. For warrants valued using
Black-Scholes, adverse industry market conditions or events experienced by this entity could result in a lower over-the counter trading price for this security and therefore a lower value of these warrants. A reduction in the estimated volatility or
an increase in the discount rate would also result in a lower value of the warrants.
8
The table above excludes $51,514 of investments in 12 non-registered investment funds that
are valued at NAV as determined by the fund administrators. The underlying fund investments consist primarily of corporate and asset-backed fixed income securities. Considering the general lack of transparency necessary to conduct an independent
assessment of the fair value of the securities underlying each of the NAVs provided by the fund administrators, our quarterly reporting process includes a number of assessment processes to assist the Company in the evaluation of the information
provided by fund managers and fund administrators. These assessment processes include, but are not limited to regular review and discussion of each funds performance with its manager and regular evaluation of performance against applicable
benchmarks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments held for trading activities at broker-dealer subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
$
|
8,514
|
|
|
$
|
7,885
|
|
|
$
|
|
|
|
$
|
629
|
|
Listed options
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
65,692
|
|
|
|
|
|
|
|
65,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,226
|
|
|
|
7,905
|
|
|
|
65,692
|
|
|
|
629
|
|
Financial instruments held for investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
|
2,278
|
|
|
|
1,186
|
|
|
|
|
|
|
|
1,092
|
|
Warrants
|
|
|
894
|
|
|
|
|
|
|
|
|
|
|
|
894
|
|
Fixed income debt instruments
|
|
|
2,090
|
|
|
|
|
|
|
|
2,090
|
|
|
|
|
|
Designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
24,316
|
|
|
|
24,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,578
|
|
|
|
25,502
|
|
|
|
2,090
|
|
|
|
1,986
|
|
Investment funds
|
|
|
17,600
|
|
|
|
|
|
|
|
|
|
|
|
17,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,404
|
|
|
$
|
33,407
|
|
|
$
|
67,782
|
|
|
$
|
20,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
45,816
|
|
|
$
|
45,816
|
|
|
$
|
|
|
|
$
|
|
|
Listed options
|
|
|
287
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
10,826
|
|
|
|
|
|
|
|
10,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,929
|
|
|
$
|
46,103
|
|
|
$
|
10,826
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, financial assets measured and reported at fair value on a recurring basis
and classified within Level 3 were $20,215, or 6.1% of the Companys total assets at that date. Regarding these Level 3 financial assets, in determining fair value, the Company analyzes various financial, performance and market
factors to estimate the value, including where applicable over-the-counter market trading activity. The following table provides the valuation technique and unobservable inputs primarily used in assessing the value of these securities as of
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
Fair Value
|
|
|
Unobservable Input
|
|
Range
|
|
Weighted
Average
|
|
Market approach
|
|
$
|
1,721
|
|
|
Over-the-counter trading activity
|
|
$0.51 $20.50/share
|
|
$
|
7.78
|
|
Black-Scholes
|
|
$
|
894
|
|
|
Volatility
|
|
39%
|
|
|
39
|
%
|
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
|
0
|
%
|
|
|
|
|
|
|
Interest rate
|
|
2%
|
|
|
2
|
%
|
|
|
|
|
|
|
Discount rate
|
|
50%
|
|
|
50
|
%
|
9
For those non-public equity securities valued using a market approach, adverse industry
market conditions or events experienced by the underlying entities could result in lower over-the-counter trading prices for the securities. Such lower trading prices would result in a decline in the estimated fair value of these securities. For
warrants valued using Black-Scholes, adverse industry market conditions or events experienced by this entity could result in a lower over-the counter trading price for this security and therefore a lower value of these warrants. A reduction in the
estimated volatility or an increase in the discount rate would also result in a lower value of the warrants.
The table above
excludes $17,600 of investments in seven non-registered investment funds that are valued at NAV as determined by the fund administrators. The underlying fund investments consist primarily of corporate and asset-backed fixed income securities.
Considering the general lack of transparency necessary to conduct an independent assessment of the fair value of the securities underlying each of the NAVs provided by the fund administrators, our quarterly reporting process includes a number of
assessment processes to assist the Company in the evaluation of the information provided by fund managers and fund administrators. These assessment processes include, but are not limited to: regular review and discussion of each funds
performance with its manager and regular evaluation of performance against applicable benchmarks.
Level 3 Gains and Losses
The tables below set forth a summary of changes in the fair value of the Companys Level 3 financial assets that are
measured at fair value on a recurring basis for the three months ended September 30, 2013 and 2012. As of September 30, 2013 and 2012, 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, July 1, 2013
|
|
$
|
4,897
|
|
|
$
|
34,037
|
|
|
$
|
38,934
|
|
Total net gains (losses) (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
496
|
|
|
|
717
|
|
|
|
1,213
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
154,921
|
|
|
|
22,500
|
|
|
|
177,421
|
|
Sales/Distributions
|
|
|
(155,829
|
)
|
|
|
(119
|
)
|
|
|
(155,948
|
)
|
Transfers out of level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2013
|
|
$
|
4,485
|
|
|
$
|
57,135
|
|
|
$
|
61,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
25
|
|
|
$
|
717
|
|
|
$
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning balance, July 1, 2012
|
|
$
|
9,246
|
|
|
$
|
6,645
|
|
|
$
|
15,891
|
|
Total net gains (losses) (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
165
|
|
|
|
290
|
|
|
|
455
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
7,014
|
|
|
|
|
|
|
|
7,014
|
|
Sales/Distributions
|
|
|
(6,490
|
)
|
|
|
|
|
|
|
(6,490
|
)
|
Transfers out of level 3
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2012
|
|
$
|
8,050
|
|
|
$
|
6,935
|
|
|
$
|
14,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(57
|
)
|
|
$
|
290
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
There were no transfers of securities into, or out of, Level 1, 2 and 3 financial assets
during the three months ended September 30, 2013. There were no transfers of securities into or out of Level 2 financial assets during the three months ended September 30, 2012. One transfer was made out of Level 3 and into Level 1 during
the three months ended September 30, 2012 for an equity that was previously a non-public equity security and during the period became publicly traded.
The tables below set forth a summary of changes in the fair value of the Companys Level 3 financial assets that are measured at fair value on a recurring basis for the nine months ended
September 30, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning balance, January 1, 2013
|
|
$
|
2,615
|
|
|
$
|
17,600
|
|
|
$
|
20,215
|
|
Total net gains (losses) (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
983
|
|
|
|
4,623
|
|
|
|
5,606
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
386,289
|
|
|
|
36,342
|
|
|
|
422,631
|
|
Sales/Distributions
|
|
|
(385,394
|
)
|
|
|
(272
|
)
|
|
|
(385,666
|
)
|
Transfers out of level 3
|
|
|
(8
|
)
|
|
|
(1,158
|
)
|
|
|
(1,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2013
|
|
$
|
4,485
|
|
|
$
|
57,135
|
|
|
$
|
61,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
153
|
|
|
$
|
4,594
|
|
|
$
|
4,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning balance, January 1, 2012
|
|
$
|
7,826
|
|
|
$
|
516
|
|
|
$
|
8,342
|
|
Total net gains (losses) (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
831
|
|
|
|
319
|
|
|
|
1,150
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
149,775
|
|
|
|
6,150
|
|
|
|
155,925
|
|
Sales/Distributions
|
|
|
(148,497
|
)
|
|
|
(50
|
)
|
|
|
(148,547
|
)
|
Transfers out of level 3
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2012
|
|
$
|
8,050
|
|
|
$
|
6,935
|
|
|
$
|
14,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
397
|
|
|
$
|
319
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers of securities into, or out of, Level 2 financial assets during the nine months
ended September 30, 2013. One transfer was made out of Level 3 and into Level 1 during the nine months ended September 30, 2013 for an equity security that was previously a non-public equity security and during the period became publicly
traded.
There were no transfers of securities into, or out of, Level 2 financial assets during the nine months ended
September 30, 2012. One transfer was made out of Level 3 and into Level 1 during the nine months ended September 30, 2012 for an equity security that was previously a non-public equity security and during the period became publicly traded.
11
Gains and losses from Level 3 financial assets that are measured at fair value on a
recurring basis, included in earnings for the three and nine months ended September 30, 2013 and 2012, are reported in the following line descriptions on the Companys statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Total gains and losses included in earnings for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
496
|
|
|
$
|
72
|
|
|
$
|
983
|
|
|
$
|
264
|
|
Net investment income
|
|
|
717
|
|
|
|
383
|
|
|
|
4,623
|
|
|
|
885
|
|
Change in unrealized gains or losses relating to assets still held at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
25
|
|
|
$
|
31
|
|
|
$
|
153
|
|
|
$
|
12
|
|
Net investment income
|
|
|
717
|
|
|
|
202
|
|
|
|
4,594
|
|
|
|
704
|
|
Financial Instruments Held for InvestmentDesignated as Trading
As of September 30, 2013, the Company has certain investments in marketable equity securities held by other than its broker-dealer
subsidiary that are classified as trading securities. These investments are designated as trading based on the Companys intent at the time of designation. In accordance with ASC 320 Investments-Debt and Equity Securities
(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
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net gains recognized on trading securities
|
|
$
|
155
|
|
|
$
|
959
|
|
|
$
|
1,171
|
|
|
$
|
3,927
|
|
Less: Net (gains) losses recognized on trading securities
sold
during the period
|
|
|
361
|
|
|
|
(528
|
)
|
|
|
(262
|
)
|
|
|
(2,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains recognized on trading securities
still held
at the reporting date
|
|
$
|
516
|
|
|
$
|
431
|
|
|
$
|
909
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments Held for InvestmentDesignated as Available-for-Sale
As of September 30, 2013 and December 31, 2012, the Company has certain investments in marketable equity securities held by
other than the Companys broker-dealer subsidiary that are classified as available-for-sale securities. These investments are designated as available-for-sale due to the Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
|
Cost
Basis
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Marketable equity securities
|
|
$
|
20,572
|
|
|
$
|
1,131
|
|
|
$
|
0
|
|
|
$
|
21,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Cost
Basis
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Gains
|
|
|
Losses
(1)
|
|
|
Fair Value
|
|
Marketable equity securities
|
|
$
|
25,410
|
|
|
$
|
0
|
|
|
$
|
1,094
|
|
|
$
|
24,316
|
|
(1)
|
Duration of unrealized losses is less than 12 months
|
12
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 September 30, 2013, the Company did not recognize any other-than-temporary impairment losses, however during the
nine months ended September 30, 2013, the Company recorded an other-than-temporary impairment charge of $545 related to an investment in a company in the financial services industry. The Company recognized this impairment charge as a result of
a change in its intent to hold this investment for a period of time sufficient for a forecasted recovery of its fair value. In this case the change in intent was a result of changes in market conditions during the quarter specific to this
investment. The carrying value of this investment subsequent to the impairment was $4,257. During the three and nine months ended September 30, 2012, the Company did not record any other-than-temporary impairment losses in the statements of
operations relating to marketable equity securities.
There were no sales of marketable equity securities during the three
months ended September 30, 2013. During the nine months ended September 30, 2013, the Company received proceeds of $4,225 from sales of marketable equity securities resulting in gross losses of $(32). There were no sales of marketable
equity securities during the three and nine months ended September 30, 2012.
Other Comprehensive Income (Loss)
The following tables set forth the changes in the Companys accumulated other comprehensive income (loss) by
component for the period indicated along with detail regarding reclassifications from other comprehensive income (loss). All such reclassifications from other comprehensive income (loss) are included in net investment income in the Companys
consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, 2013
|
|
|
Nine Months
Ended
September 30, 2013
|
|
Accumulated Other Comprehensive Income (Loss), Beginning Balance
|
|
$
|
147
|
|
|
$
|
(1,094
|
)
|
Other comprehensive income before reclassifications
|
|
|
883
|
|
|
|
1,615
|
|
Amounts reclassified from other comprehensive loss
|
|
|
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income, September 30, 2013
|
|
$
|
1,030
|
|
|
$
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, 2013
|
|
|
Nine Months
Ended
September 30, 2013
|
|
Reclassifications from other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment loss
|
|
$
|
|
|
|
$
|
545
|
|
Realized gains on sale of securities
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
509
|
|
|
|
|
|
|
|
|
|
|
Other Investments, at Cost
Other investments consisted of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Non-public equity securities
|
|
$
|
681
|
|
|
$
|
3,071
|
|
Corporate debt investments
|
|
|
5,000
|
|
|
|
5,317
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,681
|
|
|
$
|
8,388
|
|
|
|
|
|
|
|
|
|
|
13
The Company evaluates its non-public equity securities and corporate debt investments,
carried at cost, for impairment as of each reporting date. This evaluation includes consideration of the operating performance of the respective companies, their financial condition and their near-term and long-term prospects. Based on its
evaluations of these investments, the Company recorded no impairment losses during the three and nine months ended September 30, 2013 and 2012.
During the three and nine months ended September 30, 2013, there were no sales of non-public equity securities or corporate debt investments carried at cost. During the nine months ended
September 30, 2013, the Company received $317 from the maturity of a note receivable that was carried at cost. In addition, during the nine months ended September 30, 2013, a non-public equity security carried at cost with a basis of
$2,390 became publicly traded during the period. The Company designated this security as trading at the time it became publicly traded. During the three and nine months ended September 30, 2012, the Company received proceeds of $0 and $52, from
sales of, or distributions from, non-public equity securities, resulting in gross gains of $0 and $52 respectively.
3. Income Taxes:
As of December 31, 2012 and March 31, 2013, the Company provided 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 concluded that it was more likely than not that the benefits of these assets would not be realized in the future.
Following the criteria in ASC 740, the Company reviews this valuation allowance on a quarterly basis assessing the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be
realized. Based on its assessment as of June 30, 2013, the Company determined that the release of a significant component of this valuation allowance was appropriate. This conclusion was based on managements consideration of various
factors, including the Companys improved operating performance, its cumulative operating results over the prior twelve quarters and the outlook regarding the Companys prospective operating performance. As of September 30, 2013, the
Companys valuation allowance relates primarily to capital loss carryforwards and other-than-temporary investment write downs. In addition, the Company maintains a valuation allowance for net operating loss carryforwards that are projected to
be utilized during the remainder of 2013 and are incorporated into the Companys effective tax rate. The Companys remaining valuation allowance as of September 30, 2013 is approximately $27,000.
During the three and nine months ended September 30, 2013, the Company recorded an income tax provision from continuing operations
of $361 and an income tax benefit from continuing operations, net of discrete items, of $(27,771), respectively. The Companys net tax benefit recognized for the nine months ended September 30, 2013, reflects the benefit for the valuation
allowance reversal recognized in the second quarter of 2013 offset by the provision for projected federal and state tax obligations. The Companys quarterly tax provision is determined pursuant to ASC 740, which requires using an estimated
annual effective rate based on forecasted taxable income for the full year. The Companys effective tax rates, net of discrete items, for the three and nine months ended September 30, 2013 were 11.5% and (51.7)%, respectively. The
effective tax rate for the three months ended September 30, 2013 differed from statutory rates primarily due to the net operating loss and capital loss carryforwards expected to be utilized during the period. The effective tax rate for the nine
months ended September 30, 2013 differed from statutory rates primarily due to the effects of the valuation allowance reversal recognized in the second quarter of 2013. As of September 30, 2013, the Company has no liability for uncertain
tax positions.
During the three and nine months ended September 30, 2012, the Company recorded tax benefits from
continuing operations of $(1,262) and $(1,240), respectively. The tax benefits from continuing operations for the three and nine months ended September 30, 2012 includes the recognition of $1,017 of previously unrecognized tax benefits. The
Companys effective tax rates for the three and nine months ended September 30, 2012 were 22.6% and 23.5%, respectively. The Companys effective tax rates, excluding the previously unrecognized tax benefits noted above for the
three and nine months ended September 30, 2012 were 4.4% and 4.2%, respectively.
14
These effective tax rates for the three and nine months ended September 30, 2012 differed from statutory tax 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.
4. Net Capital Requirements:
FBR Capital Markets & Co. (FBRCM), the Companys broker-dealer subsidiary, is registered with
the Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority, Inc. (FINRA). As such, it is subject to the minimum net capital requirements promulgated by the SEC. As of
September 30, 2013, FBRCM had net capital of $108,788 which was $103,818 in excess of its required net capital of $4,970.
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 and not subject to forfeiture 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. The following table presents the computations of basic and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, 2013
|
|
|
Three Months
Ended
September 30, 2012
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (in thousands)
|
|
|
12,137
|
|
|
|
12,137
|
|
|
|
12,545
|
|
|
|
12,545
|
|
Stock options, unvested restricted stock and unvested RSUs (in thousands)
|
|
|
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding (in thousands)
|
|
|
12,137
|
|
|
|
13,335
|
|
|
|
12,545
|
|
|
|
12,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
$
|
6,411
|
|
|
$
|
6,411
|
|
|
$
|
(3,357
|
)
|
|
$
|
(3,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
0.53
|
|
|
$
|
0.48
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
2013
|
|
|
Nine Months Ended
September 30,
2012
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (in thousands)
|
|
|
12,180
|
|
|
|
12,180
|
|
|
|
13,519
|
|
|
|
13,519
|
|
Stock options, unvested restricted stock and unvested RSUs (in thousands)
|
|
|
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding (in thousands)
|
|
|
12,180
|
|
|
|
13,157
|
|
|
|
13,519
|
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
$
|
88,204
|
|
|
$
|
88,204
|
|
|
$
|
(2,428
|
)
|
|
$
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
7.24
|
|
|
$
|
6.70
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following table presents the number of anti-dilutive stock options, unvested restricted stock and
unvested RSUs for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Stock OptionsEmployees and directors
|
|
|
776
|
|
|
|
1,301
|
|
|
|
855
|
|
|
|
1,301
|
|
Stock OptionsNon-employee
|
|
|
196
|
|
|
|
267
|
|
|
|
216
|
|
|
|
267
|
|
Restricted Stock, unvested
|
|
|
8
|
|
|
|
6
|
|
|
|
9
|
|
|
|
6
|
|
Restricted Stock Units, unvested
|
|
|
977
|
|
|
|
1,636
|
|
|
|
1,097
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,957
|
|
|
|
3,210
|
|
|
|
2,177
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Commitments and Contingencies:
As of September 30, 2013, 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 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 Companys financial condition, results of operations, or liquidity in a future period. However, based on managements
review with counsel, resolution of these matters is not expected to have a material adverse effect on the Companys financial condition, results of operations or liquidity.
Many aspects of the Companys 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. FBRCM has been named as a defendant in a small number of securities claims involving investment banking clients of FBRCM as a result of FBRCMs role as an underwriter.
In these cases, the underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBRCM 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 FBRCM 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.
FBRCM has been named as a defendant in a case relating to its role as an underwriter in residential mortgage-backed securities
(RMBS) offerings. FBRCM 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). Cambridges complaint relates to the more than $2,400,000 in RMBS purchases it made in numerous underwritten offerings (of which the claims concerning FBRCM are limited to Cambridges purchases of
a combined $22,000 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. In October 2013, FBRCM and Cambridge executed a final settlement and release agreement to settle the case. This settlement did not have a material adverse effect on the Companys financial condition, results of operations
or liquidity.
16
FBRCM 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 Banks September 2009 offering. The complaint alleges
claims under Sections 11 and 12 of the Securities Act against the lead underwriter of the offering and FBRCM as a member of the underwriting syndicate. Although FBRCM is contractually entitled to be indemnified by the Bank in connection with this
lawsuit, the Bank filed for bankruptcy on March 5, 2012 and this likely will decrease or eliminate the value of the indemnity that FBRCM receives from the Bank. On December 19, 2012 the Court granted Defendants motion to dismiss the
class action complaint with prejudice and entered final judgment for the underwriters. Class plaintiffs filed a timely notice of appeal to the 10
th
Circuit Court of Appeals, challenging the District Courts findings; briefing on the appeal is complete and oral
argument was heard on September 26, 2013.
FBRCM has been named a defendant in four putative class action lawsuits all
alleging substantially identical claims against Imperial Holdings, Inc. (Imperial), its officers and directors and underwriters for material misrepresentations and omissions in the registration statement and prospectus issued in
connection with Imperials February 2011 initial public offering. The cases, all currently pending in the Southern District of Florida, are captioned: Martin J. Fuller v. Imperial Holdings, Inc., et al.; City of Roseville Employees Retirement
System v. Imperial Holdings, et al.; Sauer v. Imperial Holdings, et al.; and Pondick v. Imperial Holdings, et al. The complaints allege claims under Sections 11 and 12 of the Securities Act against the lead underwriters of the offering.
Imperial has assumed its contractual obligation to indemnify the underwriters. As of July 31, 2013, Imperial and all other relevant parties, including FBRCM, executed a final settlement and release agreement to settle the class action lawsuits
with no direct contribution from FBRCM; all appropriate motions for preliminary court approval of the class-action settlement are expected to be filed in the fourth quarter of 2013.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters
when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not
establish an accrued liability. As a litigation or regulatory matter develops, management, in conjunction with counsel, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. The pending cases
discussed above involving the Company are at a preliminary stage, based on managements review with counsel and present information known by management, loss contingencies for these matters are not probable and estimable as of
September 30, 2013.
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 and nine months ended September 30, 2013, the Company repurchased 776,728 shares and 1,492,265 shares, respectively, of its common stock primarily in privately negotiated or open
market transactions at weighted average share prices of $26.28 per share and $21.91 per share, respectively, for a total cost, including transaction costs, of $20,416 and $32,700, respectively. As of September 30, 2013, the Company had
remaining
17
authority to repurchase 984 additional shares. See Note 8, Related Party Transactions, for additional information regarding the Companys share repurchases in 2013 and see Note
12, Subsequent Events, regarding changes in the Companys share repurchase authority made subsequent to quarter end.
During the three and nine months ended September 30, 2012, in privately negotiated or open market transactions the Company repurchased 43,476 and 537,996 shares, respectively, of its common stock at
weighted average share prices of $12.28 and $10.96 per share, respectively, for a total cost, including transaction costs, of $533 and $5,887, respectively.
In June 2012, the Company completed a tender offer to repurchase shares of its stock. Pursuant to the modified Dutch auction tender offer, the Company repurchased 1,276,750 shares of its
common stock at a weighted average share price of $11.00 per share for a total cost, including transaction costs, of $14,202.
Employee Stock Purchase Plan
Under the Companys Employee Stock Purchase Plan (the Purchase Plan), eligible employees may purchase common stock through payroll deductions at a price that is 85% of the lower of the
market value of the common stock on the first day of the offering period or the last day of the offering period. The Company recognizes compensation expense relating to shares offered under the Purchase Plan. For the three and nine months ended
September 30, 2013, the Company recognized compensation expense of $29 and $192, respectively. For the three and nine months ended September 30, 2012, the Company recognized compensation expense of $19 and $105, respectively.
Stock Compensation Plans
FBR & Co. 2006 Long-Term Incentive Plan (FBR & Co. Long-Term Incentive Plan or the Plan)
Under the FBR & Co. 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 5,517,496 shares of common stock as of September 30, 2013, 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 & Co. 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. See Note 12, Subsequent Events, regarding an amendment and restatement of the Plan that was approved by the
Companys shareholders subsequent to quarter end.
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 or performance goals. The following table presents compensation expense
related to these awards for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Stock options
|
|
$
|
96
|
|
|
$
|
393
|
|
|
$
|
429
|
|
|
$
|
1,190
|
|
Restricted shares
|
|
$
|
63
|
|
|
$
|
9
|
|
|
$
|
83
|
|
|
$
|
139
|
|
RSUs
|
|
$
|
2,025
|
|
|
$
|
1,546
|
|
|
$
|
5,536
|
|
|
$
|
4,234
|
|
18
The following table presents issuance activity related to grants of these awards for the
period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2013
|
|
|
Nine Months Ended September 30, 2013
|
|
|
|
Stock
Options
|
|
|
Restricted
Shares
|
|
|
RSUs
|
|
|
Stock
Options
|
|
|
Restricted
Shares
|
|
|
RSUs
|
|
Stock-based award issuances
|
|
|
|
|
|
|
|
|
|
|
41,031
|
|
|
|
|
|
|
|
10,241
|
|
|
|
727,942
|
|
Grant date fair value per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25.73
|
|
|
$
|
|
|
|
$
|
24.23
|
|
|
$
|
17.99
|
|
Included in the RSUs granted during the nine months ended September 30, 2013 are 375,000 RSU awards
that will vest based on both individual service requirements and the Companys achievement of a specified performance goal. For these awards, the performance goal will be met at (1) a 100% rate if the combined net worth of the Company,
measured on a per share basis has increased by an amount equal to a 7% compound annual growth rate over the three year period beginning on April 1, 2013 (the performance period), (2) a 50% rate if the combined net worth of
the Company, measured on a per share basis has increased by an amount equal to a 4% compound annual growth over the performance period and (3) a proportional rate between 50% and 100% in the event that the combined net worth of the
Company, measured on a per share basis has increased by an amount between 4% and 7% compound annual growth over the performance period.
The following table presents the unrecognized compensation related to unvested options to purchase stock, restricted shares of common stock, and RSUs and the weighted average vesting period in which the
expense will be recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
|
Stock
Options
|
|
|
Restricted
Shares
|
|
|
RSUs
|
|
Unrecognized compensation
|
|
$
|
191
|
|
|
$
|
175
|
|
|
$
|
16,156
|
|
Unvested awards
|
|
|
118,337
|
|
|
|
10,421
|
|
|
|
1,829,914
|
|
Weighted average vesting period
|
|
|
1.04 years
|
|
|
|
0.68 years
|
|
|
|
2.08 years
|
|
In addition, as part of the Companys satisfaction of incentive compensation earned for past service
under the Companys 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, for the nine months ended September 30, 2013, the Company granted 127,978 such RSUs with an aggregate fair value upon grant date of $2,099. There were no comparable grants in 2012.
8. Related Party Transactions:
Professional Services Agreement
Under the professional services agreement, as amended, with Crestview Partners, L.P. (together with its affiliates, Crestview), the Company agreed to pay Crestview Advisors, L.L.C. a $1,000
annual strategic advisory fee plus reimbursement of reasonable out-of-pocket expenses as long as Crestview continues to own at least 50% of the shares purchased by certain Crestview affiliates in our 2006 private offering. In June 2013 and 2012,
Crestview elected to receive a portion of the management fee in options to purchase shares of the Companys common stock as allowed for under the agreement. Based on Crestviews election, the Company issued 32,432 and 61,225 options,
respectively, to Crestview Advisors, L.L.C. valued at $270 and $240, respectively. During the three and nine months ended September 30, 2013, the Company recognized $250 and $750, respectively, of expense associated with this agreement. During
the three and nine months ended September 30, 2012, the Company recognized $250 and $750, respectively, of expense associated with this agreement.
19
Other
During the three months ended September 30, 2013, Crestview exercised options to purchase 54,369 shares of the Companys common stock at an average exercise price of $15.85 per share and an
aggregate cost of $862. Subsequently, in September 2013, the Company repurchased those 54,369 shares and 670,631 other shares from Crestview at $26.25 per share and a total cost of $19,031.
9. Discontinued Operations:
In June 2012, the Company entered into a definitive agreement to sell the assets related to the FBR Funds, a family of
mutual funds. This sale was completed in October 2012 and subsequent to the sale closing the Company has no continuing involvement in the management of these funds. As a result of this sale transaction, the Company reports the results of its asset
management operations as discontinued operations. The results related to the asset management operations reflected in the consolidated statements of operations are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenues
|
|
$
|
|
|
|
$
|
4,660
|
|
|
$
|
|
|
|
$
|
12,950
|
|
Gain on sale of assets, net
|
|
|
3,800
|
|
|
|
|
|
|
|
7,230
|
|
|
|
|
|
Expenses
|
|
|
(20
|
)
|
|
|
3,815
|
|
|
|
202
|
|
|
|
11,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
|
3,820
|
|
|
|
845
|
|
|
|
7028
|
|
|
|
1,536
|
|
Income tax provision (benefit)
|
|
|
198
|
|
|
|
(114
|
)
|
|
|
284
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
$
|
3,622
|
|
|
$
|
959
|
|
|
$
|
6,744
|
|
|
$
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2013, the Companys net income from
discontinued operations was primarily the result of the change in the estimated value of the Companys receivable from the sale of the FBR Funds. The Companys 2012 results from discontinued operations during the period prior to October
2012 reflect the activities of the Companys former fee-based asset management operations. In accordance with the asset sale agreement, the Company received an initial payment upon closing in October 2012 and will receive a subsequent payment
upon the first anniversary of closing in October 2013, in each case based on a percentage of assets under management for the applicable funds. Specifically, in October 2012, the Company received proceeds of $19,692 representing an initial payment
equal to 60% of the sales price as calculated on the closing date and the Company will receive the remaining 40% of the sales price in the fourth quarter of 2013 as calculated on the first anniversary of the closing.
As of September 30, 2013, the Company has valued this contingent payment at $17,493. This value reflects an approximate 5% discount
to the assets under management at September 30, 2013 and is recorded as a receivable on the Companys balance sheet. The value recorded reflects the Companys consideration of various factors, including the time period between
September 30, 2013 and the first anniversary of the closing and other factors outside of its control that can have a significant effect on the value of prospective assets under management, including, for example, uncertainties related to fund
performance, market conditions as well as investor demand for equity mutual funds. See Note 12, Subsequent Events, regarding the Companys receipt of this contingent payment in November 2013.
20
10. Segment Information:
The Company considers its capital markets and principal investing operations to be separate reportable segments. The
capital markets segment includes the Companys 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. 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. When applicable, revenue generating transactions between the individual segments are included in the net revenue and pre-tax income of each segment.
In prior periods, the Company included the results of its fee-based asset management operations in continuing operations and reported
these operations as a separate reportable segment. However, due to the transaction described in Note 9 and the reclassification of asset managements results as discontinued operations, the Company no longer includes the results of its asset
management operations in its segment information. Corporate overhead costs that were allocated to the asset management operations in 2012 are included in the segment disclosure as these costs would remain part of the Companys continuing
operations upon the disposal of the asset management operations. There are no comparable overhead allocations in 2013 as a result of the sale of the FBR Funds in October 2012.
The following tables illustrate the financial information for the Companys segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2013
|
|
|
|
Capital
Markets
|
|
|
Principal
Investing
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
19,614
|
|
|
$
|
|
|
|
$
|
19,614
|
|
Institutional brokerage
|
|
|
13,194
|
|
|
|
|
|
|
|
13,194
|
|
Net investment income
|
|
|
|
|
|
|
650
|
|
|
|
650
|
|
Net interest income, dividends and other
|
|
|
236
|
|
|
|
362
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33,044
|
|
|
|
1,012
|
|
|
|
34,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
6,633
|
|
|
|
(46
|
)
|
|
|
6,587
|
|
Fixed
|
|
|
23,902
|
|
|
|
417
|
|
|
|
24,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,535
|
|
|
|
371
|
|
|
|
30,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
2,509
|
|
|
$
|
641
|
|
|
$
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
4,717
|
|
|
$
|
(48
|
)
|
|
$
|
4,669
|
|
Fixed
|
|
|
13,074
|
|
|
|
249
|
|
|
|
13,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,791
|
|
|
$
|
201
|
|
|
$
|
17,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
|
Capital
Markets
|
|
|
Principal
Investing
|
|
|
Other
1
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
10,743
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,743
|
|
Institutional brokerage
|
|
|
11,265
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,265
|
|
Net investment income
|
|
|
0
|
|
|
|
1,231
|
|
|
|
0
|
|
|
|
1,231
|
|
Net interest income, dividends and other
|
|
|
297
|
|
|
|
353
|
|
|
|
0
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,305
|
|
|
|
1,584
|
|
|
|
0
|
|
|
|
23,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
5,260
|
|
|
|
0
|
|
|
|
3
|
|
|
|
5,263
|
|
Fixed
|
|
|
23,818
|
|
|
|
71
|
|
|
|
315
|
|
|
|
24,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,078
|
|
|
|
71
|
|
|
|
318
|
|
|
|
29,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
$
|
(6,773
|
)
|
|
$
|
1,513
|
|
|
$
|
(318
|
)
|
|
$
|
(5,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
1,499
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,499
|
|
Fixed
|
|
|
13,126
|
|
|
|
37
|
|
|
|
164
|
|
|
|
13,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,625
|
|
|
$
|
37
|
|
|
$
|
164
|
|
|
$
|
14,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Other are net revenues and operating expenses related to the Companys continuing operations that are allocated to the Asset Management
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2013
|
|
|
|
Capital
Markets
|
|
|
Principal
Investing
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
172,941
|
|
|
$
|
|
|
|
$
|
172,941
|
|
Institutional brokerage
|
|
|
40,021
|
|
|
|
|
|
|
|
40,021
|
|
Net investment income
|
|
|
|
|
|
|
3,957
|
|
|
|
3,957
|
|
Net interest income, dividends and other
|
|
|
1,204
|
|
|
|
1,101
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
214,166
|
|
|
|
5,058
|
|
|
|
219,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
93,412
|
|
|
|
713
|
|
|
|
94,125
|
|
Fixed
|
|
|
70,279
|
|
|
|
1,131
|
|
|
|
71,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
163,691
|
|
|
|
1,844
|
|
|
|
165,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
50,475
|
|
|
$
|
3,214
|
|
|
$
|
53,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
82,504
|
|
|
$
|
708
|
|
|
$
|
83,212
|
|
Fixed
|
|
|
38,376
|
|
|
|
737
|
|
|
|
39,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
120,880
|
|
|
$
|
1,445
|
|
|
$
|
122,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
Capital
Markets
|
|
|
Principal
Investing
|
|
|
Other
1
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
45,882
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
45,882
|
|
Institutional brokerage
|
|
|
39,637
|
|
|
|
0
|
|
|
|
0
|
|
|
|
39,637
|
|
Net investment income
|
|
|
0
|
|
|
|
4,222
|
|
|
|
0
|
|
|
|
4,222
|
|
Net interest income, dividends and other
|
|
|
1,946
|
|
|
|
879
|
|
|
|
0
|
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
87,465
|
|
|
|
5,101
|
|
|
|
0
|
|
|
|
92,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
21,933
|
|
|
|
115
|
|
|
|
23
|
|
|
|
22,071
|
|
Fixed
|
|
|
74,445
|
|
|
|
259
|
|
|
|
1,074
|
|
|
|
75,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96,378
|
|
|
|
374
|
|
|
|
1,097
|
|
|
|
97,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
$
|
(8,913
|
)
|
|
$
|
4,727
|
|
|
$
|
(1,097
|
)
|
|
$
|
(5,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
6,964
|
|
|
$
|
113
|
|
|
$
|
11
|
|
|
$
|
7,088
|
|
Fixed
|
|
|
41,790
|
|
|
|
122
|
|
|
|
554
|
|
|
|
42,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,754
|
|
|
$
|
235
|
|
|
$
|
565
|
|
|
$
|
49,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Other are net revenues and operating expenses related to the Companys continuing operations that are allocated to the Asset Management
segment.
|
11. Recent Accounting Pronouncements:
In December 2011, the FASB amended its guidance for disclosure of assets and liabilities netted for financial statement
purposes. This guidance was subsequently amended in January 2013 to clarify that its scope includes only certain financial instruments that are either offset on the balance sheet or are subject to an enforceable master netting arrangement or similar
agreement. These amendments are designed to enhance disclosures by requiring improved information about financial instruments and derivative instruments that are either offset in accordance with current standards or subject to an enforceable master
netting arrangement or similar agreement. The disclosure enhancements include providing in the notes to the financial statements the gross assets and gross liabilities recognized on the balance sheet, those amounts netted in accordance with current
standards, those net positions subject to an enforceable master netting arrangement or similar agreement, and the net positions presented on the balance sheet. This information should be presented in a tabular format. This amendment became effective
for annual reporting periods beginning January 1, 2013 and interim periods within those annual reporting periods. The adoption of this guidance did not have any effect on our disclosures, financial condition, results of operations or cash
flows.
In February 2013, the FASB issued guidance to improve the transparency of reporting classifications out of accumulated
other comprehensive income (AOCI). This guidance does not change the current requirements for reporting net income or comprehensive income in financial statements. However, it does require additional disclosures about the amounts
reclassified out of AOCI by component. In addition, the guidance requires that significant amounts reclassified out of AOCI be presented, either on the face of the financial statement where net income is presented or in the notes. These amounts must
be presented based on the respective lines of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their
entirety to net income, cross-reference to other required disclosures that provide additional detail about these other amounts is required. This guidance became effective for interim and annual periods beginning on January 1, 2013 and was
applied prospectively. The adoption of this guidance resulted in additional financial statement disclosures that are included in Note 2 to the financial statements, but did not have any effect on our financial condition, results of operations or
cash flows.
23
12. Subsequent Events:
Share Repurchase Authority
As of September 30, 2013, the Companys remaining share repurchase authority was less than 1,000 shares. In October 2013, the Companys Board of Directors authorized the Company to
repurchase up to an additional 2,500,000 shares of its common stock.
FBR & Co. Long Term Incentive Plan
In October 2013 the Companys shareholders approved an amendment and restatement of the FBR & Co.
Long-Term Incentive Plan to, among other changes, authorize an additional 1,700,000 shares of common stock for issuance under the Plan.
Discontinued Operations
In November 2013 the Company
received $19,294 representing the contingent payment due related to the sale of the FBR Funds. This payment represents the remaining sales price due to the Company and was calculated as of the first anniversary of the sale closing based on a
percentage of assets under management for the applicable funds sold at that date. The payment received is $1,801 greater than the Companys receivable balance as of September 30, 2013. This increase in value as well as related transaction and
other expenses that are not expected to exceed $200 will be reflected in the Companys results from discontinued operations in the fourth quarter of 2013.
24