Arlington-based investment bank FBR & Co., formerly known as FBR Capital Markets, is laying off more than 125 employees following a challenging quarter. The move follows years of downsizing to keep the company, once the Washington area’s largest homegrown investment house, profitable in a tough operating environment.

The head count reductions are concentrated in the back office, or “non-client-facing” positions, to preserve staff in the banking and institutional brokerage businesses, said chief executive Rick Hendrix, during a recent earnings call.

The company referred all questions to the transcript of the earnings call, during which Hendrix said the cuts will reduce FBR’s fixed costs from $140 million to $90 million a year.

“This last quarter,” Hendrix said, “presented an environment far more challenging than any of our prior estimates, and we must now take further actions to achieve consistent profitability.”

FBR saw its losses grow in the third quarter, to $26.1 million, or 43 cents a share, compared with a loss of $6.6 million, or 10 cents a share, during the same period a year ago. Hendrix said losses on merchant banking and other investment positions contributed to the decline, as did scant banking income.

Revenue from investment banking tumbled from $29.8 million in the third quarter of 2010 to $5 million last quarter, generated from seven transactions. All told, the company pulled in $20.1 million in revenue, less than half of the $57.4 million it earned for the same three months in 2010.

“We remain at our core an equity capital markets franchise. The virtual shutdown of that market in August and September is a clear reminder that this is among the most volatile areas within the overall financial markets, and our financial results reflect this,” Hendrix said.

The appetite for equity capital has waned over the course of this year as companies retreated from raising money through initial public offerings and other offerings, according to research firm Dealogic. About $22.7 billion in deals closed in the United States in the three months ending September, the lowest quarterly volume since the first quarter of 2009.

“The extreme market volatility and heightened level of macroeconomic uncertainty are weighing on clients’s willingness to do transactions,” said Devin Ryan, an analyst with Sandler O’Neill & Partners. “FBR is still optimistic about the future, but they are taking action on the things they can control.”

FBR has engaged in a series of cost-cutting measures in the past three years to weather the downturn and improve its financial standing. It has reduced its workforce from 780 to 426 employees, while subleasing nearly a third of the 98,417 square feet of space it has under contract at 1001 N. 19th St. in Arlington.

FBR’s troubles stem from severe losses in subprime mortgage investments incurred by its predecessor, Friedman, Billings, Ramsey Group. The parent company split itself in two, with the high-risk mortgages placed in one independent entity and other investment banking operations placed in another, FBR & Co.

The move eliminated a lot of risk and set the company on a course to recovery. Prior to its recent earnings, FBR was narrowing losses and had returned its asset management business to profitability. The company, despite its challenges, maintains a balance sheet flushed with capital and no debt. In August, it put that capital to use by repurchasing 6.1 million in stock at $2.55 a share to increase shareholder value.