4. Mortgage-Backed Securities

All of the Company’s agency securities were classified as available-for-sale and, as such, are reported at their estimated fair value. The agency securities market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual agency securities. The Company estimates the fair value of the Company’s agency securities based on a market approach obtaining values for its securities primarily from third-party pricing services and dealer quotes. To ensure the Company’s fair value determinations are consistent with the ASC Topic on Fair Value Measurements and Disclosures, the Company regularly reviews the prices obtained and the methods used to derive those prices. The Company evaluates the pricing information it receives taking into account factors such as coupon, prepayment experience, fixed/adjustable rate, annual and life caps, coupon index, time to next reset and issuing agency, among other factors to ensure that estimated fair values are appropriate. The Company reviews the methods and inputs used by providers of pricing data to determine that the fair value of its assets and liabilities are properly classified in the fair value hierarchy.

The third-party pricing services gather trade data and use pricing models that incorporate such factors as coupons, primary mortgage rates, prepayment speeds, spread to the U.S. Treasury and interest rate swap curves, periodic and life caps and other similar factors. Traders at broker-dealers function as market-makers for these securities, and these brokers have a direct view of the trading activity. Brokers do not receive compensation for providing pricing information to the Company. The broker prices received are non-binding offers to trade. The brokers receive data from traders that participate in the active markets for these securities and directly observe numerous trades of securities similar to the securities owned by the Company. The Company’s analysis of fair value for these includes comparing the data received to other information, if available, such as repurchase agreement pricing or internal pricing models.

If the fair value of a security is not available using the Level 2 inputs as described above, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including, but not limited to, other independent pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2013, all of the Company’s agency securities values were based on third-party sources.

The Company’s investment portfolio consists solely of agency securities, which are backed by a U.S. Government agency or a U.S. Government sponsored entity. The following table presents certain information about the Company’s agency securities at June 30, 2013.


	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,043,290	$	(147,577)	$	153,385	$	14,049,098
Fixed Rate		2,127,131		(60,120)		-		2,067,011

Total Fannie Mae		16,170,421		(207,697)		153,385		16,116,109


Freddie Mac Certificates
ARMS		8,513,715		(115,264)		47,027		8,445,478
Fixed Rate		714,585		(20,129)		-		694,456

Total Freddie Mac		9,228,300		(135,393)		47,027		9,139,934



Total Agency Securities	$	25,398,721	$	(343,090)	$	200,412	$	25,256,043

The following table presents certain information about the Company’s agency securities at December 31, 2012.
	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,081,259	$	(100)	$	329,780	$	14,410,939
Fixed Rate		743,299				9,296		752,595

Total Fannie Mae		14,824,558		(100)		339,076		15,163,534


Freddie Mac Certificates
ARMS		7,850,630		(21)		149,114		7,999,723
Fixed Rate		744,720		-		11,274		755,994

Total Freddie Mac		8,595,350		(21)		160,388	$	8,755,717



Total Agency Securities	$	23,419,908	$	(121)	$	499,464	$	23,919,251

The components of the carrying value of available-for-sale agency securities at June 30, 2013 and December 31, 2012 are presented below.


	June 30, 2013		December 31, 2012
Principal balance		$24,662,486		$22,771,731
Unamortized premium		736,237		648,181
Unamortized discount		(2)		(4)
Gross unrealized gains		200,412		499,464
Gross unrealized losses		(343,090)		(121)

Carrying value/estimated fair value	$	25,256,043	$	23,919,251

The Company monitors the performance and market value of its agency securities portfolio on an ongoing basis. At June 30, 2013 and December 31, 2012, the Company had the following securities in a loss position presented below:


	Less than 12 months				Less than 12 months
	as of June 30, 2013				as of December 31, 2012

	Fair Market		Unrealized		Fair Market		Unrealized
	Value		Loss		Value		Loss

Fannie Mae Certificates
ARMS		$ 7,100,520		$ (147,577)		$ 149,954		$ (100)
Fixed Rate		2,067,011		(60,120)		-		-
Freddie Mac Certificates
ARMS		5,775,068		(115,264)		41,625		(21)
Fixed Rate		694,456		(20,129)		-		-

Total temporarily impaired securities		$15,637,055		$ (343,090)		$191,580		$ (121)

The Company did not make the decision to sell the above securities as of June 30, 2013 and December 31, 2012, nor was it deemed more likely than not the Company would be required to sell these securities before recovery of their amortized cost basis.

The following table presents components of interest income on the Company’s agency securities portfolio for the three months and six months ended June 30, 2013 and 2012:


	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Coupon interest on MBS		$163,964		$164,652		$331,397		$306,954
Net premium amortization		(48,849)		(35,932)		(92,041)		(65,474)

Interest income on MBS, net		$115,115		$128,720		$239,356		$241,480

The contractual maturity of the Company’s agency securities ranges from 15 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be significantly less than the stated maturity.

Unsettled Agency Securities Purchases

While most of the Company’s purchases of agency securities are accounted for using trade date accounting, some forward purchases, such as certain TBA’s do not qualify for trade date accounting and are considered derivatives for financial statement purposes. Pursuant to ASC 815, the Company accounts for these derivatives as all-in-one cash flow hedges. The net fair value of the forward commitment is reported on the balance sheet as an asset (or liability), with a corresponding unrealized gain (or loss) recognized in other comprehensive income. The following tables show the agency securities forward purchase commitments shown as a net liability in accounts payable and other liabilities on the balance sheets as of June 30, 2013 and shown as a net asset in other assets on the balance sheets as of December 31, 2012.

Fair Market

Due to

Net

Face

Cost

Value

Brokers (1)

Liability

June 30, 2013

$876,000

$906,063

$875,797

$906,063

$30,266

Fair Market

Due to

Net

Face

Cost

Value

Brokers (1)

Asset

December 31, 2012

$565,000

$585,100

$587,247

$585,100

$2,147

(1) Amounts due to brokers are usually settled within 30-90 days after period end.

Since the Company purchases forward for the purposes of holding the securities for investment, the Company considers all its agency securities, settled or unsettled, as part of its portfolio for the purposes of cash flow and interest rate sensitivity, and consequently hedging, duration measurement, and other related investment management activity.

At June 30, 2013 and December 31, 2012, the Company also had other forward purchase commitments treated as a derivatives liability in the amount of $13,458 and a derivative asset in the amount of $3,305, respectively.