Mortgage-Backed Securities (“MBS”)

At March 31, 2015, the Company held three securitizations of mortgage-backed securities (“MBS TOB Trusts”). The Company owns the LIFERS issued by the three MBS TOB Trusts which were purchased for approximately $2.8 million.

Each of the three MBS TOB Trusts issued SPEARS to unaffiliated investors. These SPEARS totaled approximately $11.9 million at March 31, 2015. 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”) index.

The Company determined that the three MBS TOB Trusts are VIEs 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 would result from decisions made by the Company.

The carrying value of the Company’s MBS as of March 31, 2015 and December 31, 2014 as follows:



Agency Rating of MBS ⁽¹⁾	Cost adjusted for amortization of premium		Unrealized Gain		Unrealized Loss			Estimated Fair Value at March 31, 2015
“AAA”	$	5,300,637	$	—	$	(251,537	)	$	5,049,100
“AA”	10,059,739		—		(224,500		)	9,835,239
	$	15,360,376	$	—	$	(476,037	)	$	14,884,339

⁽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.



Agency Rating of MBS ⁽¹⁾	Cost adjusted for amortization of premium		Unrealized Gain		Unrealized Loss			Estimated Fair Value at December 31, 2014
“AAA”	$	5,304,974	$	—	$	(250,624	)	$	5,054,350
“AA”	10,062,667		—		(275,459		)	9,787,208
	$	15,367,641	$	—	$	(526,083	)	$	14,841,558

⁽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, 2015, the range of effective yields on the individual MBS was 3.6% to 5.2% per annum. At December 31, 2014, the range of effective yields on the individual MBS was 3.7% to 5.2% per annum. 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 5.8% per annum and would result in additional unrealized losses on the bond portfolio of approximately $801,000. 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 more than twelve months and the Company does not believe the investment is other than temporarily impaired as of March 31, 2015 as it has the intent and ability to hold these investments until their estimated fair value recovers to the carrying cost or until final maturity.

The MBS are backed by residential mortgage loans and interest payable from the MBS is believed and expected to be 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, 2015		Weighted Average Maturity Date	Weighted Average Coupon Interest Rate


“AAA”	$	5,000,000	July 1, 2032	4.60	%
“AA”	9,765,000		July 9, 2036	4.20	%
	$	14,765,000