Mortgage-Backed Securities ("MBS")

In January 2013, the Company executed an extension of one of the five securitization of mortgage-backed securities ("MBS TOB Trusts"). This extension securitized additional state issued MBS with a par value of approximately $2.5 million. The Company purchased the LIFERS issued by the MBS TOB Trust for approximately $500,000 and pledged the LIFERS to the trustee to secure certain reimbursement obligations of the Company as the holder of LIFERS.

During the fourth quarter of 2012, the Company purchased 100% of the LIFERs in five MBS TOB Trusts which securitized state issued MBS with a par value of $31.6 million. The Company purchased the LIFERS issued by the MBS TOB Trust for approximately $6.5 million and pledged the LIFERS to the trustee to secure certain reimbursement obligations of the Company as the holder of LIFERS. The MBS TOB Trusts have issued SPEARS of approximately $26.7 million to unaffiliated investors as of March 31, 2013. The SPEARS represent senior interests in the MBS TOB Trusts and have been credit enhanced by DB. The LIFERS entitle the Company to all principal and interest payments received by the MBS TOB Trust on the securitized MBS after payments due to the holders of the SPEARs and trust costs. The SPEARS bear interest at a variable rate based on Securities Industry and Financial Markets Association ("SIFMA").

The Company determined that the five MBS TOB trusts are variable interest entities and that the Company was the primary beneficiary of each of them. As a result, the Company reports the MBS TOB Trusts on a consolidated basis and the SPEARS as debt financing. In determining the primary beneficiary of these specific VIEs, the Company considered who has the power to control the activities of the VIEs which most significantly impact their financial performance, the risks that the entity was designed to create, and how each risk affects the VIE. The indenture for the MBS TOB trusts stipulates that the Company has the sole right to cause the MBS TOB trusts to sell the MBS. If they were sold, the extent to which the MBS TOB Trusts will be exposed to gains or losses associated with variability in the MBS' fair value arising from changes in municipal bond market rates therefore would result from decisions made by the Company.

The carrying value of the Company's MBS as of March 31, 2013 is as follows:



Agency Rating of MBS ⁽¹⁾	Cost adjusted for amortization of premium		Unrealized Gain		Unrealized Loss			Estimated Fair Value
"AAA"	$	13,121,934	$	—	$	(174,041	)	$	12,947,893
"AA"	21,509,965		—		(342,530		)	21,167,435
	$	34,631,899	$	—	$	(516,571	)	$	34,115,328

⁽¹⁾ MBS are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented.

The carrying value of the Company's MBS as of December 31, 2012 is as follows:



Agency Rating of MBS ⁽¹⁾	Cost adjusted for amortization of premium		Unrealized Gain		Unrealized Loss			Estimated Fair Value
"AAA"	$	13,127,402	$	—	$	(129,613	)	$	12,997,789
"AA"	19,407,675		—		(284,052		)	19,123,623
	$	32,535,077	$	—	$	(413,665	)	$	32,121,412

⁽¹⁾ MBS are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented.

Valuation - The Company values each MBS based upon prices obtained from a third party pricing service, which are indicative of market activity. The valuation methodology of the Company's third party pricing service incorporates commonly used market pricing methods, incorporates trading activity observed in the market place, and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; geography; and prepayment speeds. Management analyzes pricing data received from the third party pricing service by comparing it to valuation information obtained from at least one other third party pricing service and ensuring they are within a tolerable range of difference which the Company estimates as 7.5%. Management also looks at observations of trading activity observed in the market place when available. At March 31, 2013 and December 31, 2012, the range of effective yields on the individual MBS was 3.6% to 5.4%. Additionally, the Company calculated the sensitivity of the key assumption used in calculating the fair values of the MBS which is the effective yield on new issuances of similarly rated MBS. Assuming a 10% adverse change in that key assumption, the effective yields on the MBS would increase to a range of 4.0% to 5.9% and would result in additional unrealized losses on the bond portfolio of approximately $2.6 million. This sensitivity analysis is hypothetical and is as of a specific point in time. The results of the sensitivity analysis may not be indicative of actual changes in fair value and should be used with caution. Pricing services and management’s analysis provide indicative pricing only. The MBS have been in an unrealized loss position for less than twelve months.

The MBS are backed by residential mortgage loans and interest payable from the MBS is exempt from federal income taxation. Description of certain terms of the Company's MBS is as follows:



Agency Rating of MBS	Principal Outstanding March 31, 2013		Weighted Average Maturity Date	Weighted Average Coupon Interest Rate


"AAA"	$	12,675,000	January 14, 2036	4.22	%
"AA"	20,990,000		January 18, 2036	4.00	%
	$	33,665,000