jmi20130630_10q.htm

10-Q 1 jmi20130630_10q.htm FORM 10-Q jmi20130630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

JAVELIN MORTGAGE INVESTMENT CORP.

(Exact name of registrant as specified in its charter)

Maryland	001-35673	45-5517523
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

3001 Ocean Drive, Suite 201, Vero Beach, FL 32963

(Address of principal executive offices)(zip code)

(772) 617-4340

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The number of outstanding shares of the Registrant’s common stock as of August 2, 2013 was 13,500,050.

JAVELIN Mortgage Investment Corp.

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION 3

Item 1.
Financial Statements 3

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 28

Item 3.
Quantitative and Qualitative Disclosures about Market Risk 45

Item 4.
Controls and Procedures 47

PART II.
OTHER INFORMATION 48

Item 1.
Legal Proceedings 48

Item 1A.
Risk Factors 48

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 48

Item 3.
Defaults Upon Senior Securities 48

Item 4.
Mine Safety Disclosures 48

Item 5.
Other Information 48

Item 6.
Exhibits 48

JAVELIN MORTGAGE INVESTMENT CORP.

CONDENSED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	June 30, 2013			December 31, 2012
Assets
Cash	$	47,938		$	36,316
Cash collateral posted		52,101			273
Agency Securities, available for sale, at fair value (including pledged securities of $1,831,220 and $1,087,452)		1,831,970			1,112,358
Non-Agency Securities, trading, at fair value (including pledged securities of $136,743 and $129,946)		148,953			129,946
Linked Transactions, net, at fair value		8,727			-
Derivatives, at fair value		48,225			4,940
Accrued interest receivable		5,023			2,759
Prepaid and other assets		326			171
Total Assets	$	2,143,263		$	1,286,763

Liabilities and Stockholders’ Equity
Liabilities:
Repurchase agreements, net	$	1,658,953		$	1,135,830
Obligations to return securities received as collateral, at fair value		234,492			-
Cash collateral held		44,456			1,426
Derivatives, at fair value		-			365
Accrued interest payable		871			844
Accounts payable and other accrued expenses		425			251
Total Liabilities		1,939,197			1,138,716

Commitments and Contingencies (Note 15)

Stockholders’ Equity:
Preferred stock, $0.001 par value, 25,000 shares authorized, none issued and outstanding at June 30, 2013 and December 31, 2012		-			-
Common stock, $0.001 par value, 250,000 shares authorized, 13,500 and 7,500 shares issued and outstanding at June 30, 2013 and December 31, 2012		14			8
Additional paid-in capital		263,204			149,993
Retained Earnings		38,751			2,648
Accumulated other comprehensive loss		(97,903	)		(4,602	)
Total Stockholders’ Equity		204,066			148,047
Total Liabilities and Stockholders’ Equity	$	2,143,263		$	1,286,763

See notes to condensed financial statements.

JAVELIN MORTGAGE INVESTMENT CORP.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013			For the Period From June 21, 2012 Through June 30, 2012
Interest Income:
Agency Securities, net of amortization of premium	$	9,336		$	16,480		$	-
Non-Agency Securities, including discount accretion		1,832			3,692			-
Total Interest Income		11,168			20,172			-
Interest expense		(1,924	)		(3,651	)		-
Net interest income		9,244			16,521			-
Other (Loss) Income:
Realized net loss on Non-Agency Securities		(5,635	)		(3,426	)		-
Realized loss on short sale of U.S. Treasury Securities		(390	)		(390	)		-
Unrealized net loss and net interest income from Linked Transactions		(2,288	)		(2,288	)		-
Unrealized loss on sale of U.S. Treasury Securities sold short		(2,716	)		(2,716	)		-
Subtotal		(11,029	)		(8,820	)		-
Realized loss on derivatives (1)		(1,989	)		(2,939	)		-
Unrealized gain on derivatives		43,181			46,626			-
Subtotal		41,192			43,687			-
Total Other Income		30,163			34,867			-
Expenses:
Management fee		790			1,352			-
Professional fees		138			333			-
Insurance		56			112			-
Board compensation		67			150			-
Other		119			226			-
Total expenses		1,170			2,173			-
Net income before taxes		38,237			49,215			-
Income tax expense		-			(2	)		-
Net Income	$	38,237		$	49,213		$	-
Net Income per common share (Note 13)	$	3.56		$	5.39		$	-
Weighted average common shares outstanding		10,731			9,124			-
Dividends
Common stock dividends declared	$	7,935		$	13,110		$	-
Common stock dividends declared per share	$	0.69		$	1.38		$	-
Common shares of record-end of period		13,500			13,500			-

(1) Interest expense related to our interest rate swap contracts is recorded in realized loss on derivatives on the condensed statements of operations. For additional information, see Note 9 to the condensed financial statements.

See notes to condensed financial statements.

JAVELIN MORTGAGE INVESTMENT CORP.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013			For the Period From June 21, 2012 Through June 30, 2012
Net Income	$	38,237		$	49,213		$	-
Other comprehensive loss:
Net unrealized loss on available for sale Agency Securities		(77,461	)		(93,301	)		-
Other comprehensive loss		(77,461	)		(93,301	)		-
Comprehensive Loss	$	(39,224	)	$	(44,088	)	$	-

See notes to condensed financial statements.

JAVELIN MORTGAGE INVESTMENT CORP.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

	Shares		Par Amount		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, January 1, 2013		7,500	$	8	$	149,993	$	2,648		$	(4,602	)	$	148,047
Common stock dividends declared		-		-		-		(13,110	)		-			(13,110	)
Issuance of common stock, net		6,000		6		113,211		-			-			113,217
Net income		-		-		-		49,213			-			49,213
Other comprehensive loss		-		-		-		-			(93,301	)		(93,301	)
Balance, June 30, 2013		13,500	$	14	$	263,204	$	38,751		$	(97,903	)	$	204,066

See notes to condensed financial statements.

JAVELIN MORTGAGE INVESTMENT CORP.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Six Months Ended June 30, 2013			For the Period From June 21, 2012 Through June 30, 2012
Cash Flows From Operating Activities:
Net income	$	49,213		$	-
Adjustments to reconcile net income to net cash provided by operating activities:					-
Net amortization of premium on Agency Securities		2,627			-
Accretion of net discount on Non-Agency Securities		596			-
Realized net loss on Non-Agency Securities		3,426			-
Unrealized net loss and net interest income from Linked Transactions		2,288			-
Realized loss on short sale of U.S. Treasury Securities		390			-
Changes in operating assets and liabilities:					-
Increase in accrued interest receivable		(2,264	)		-
Increase in prepaid and other assets		(155	)		-
Increase in derivatives, at fair value		(43,650	)		-
Increase in accrued interest payable		27			-
Increase in accounts payable and other accrued expenses		174			-
Net cash provided by operating activities		12,672			-
Cash Flows From Investing Activities:
Purchases of Agency Securities		(858,581	)		-
Purchases of Non-Agency Securities		(33,275	)		-
Cash disbursements on Linked Transactions		(11,015	)		-
Principal repayments of Agency Securities		43,042			-
Principal repayments of Non-Agency Securities		10,246			-
Disbursements on reverse repurchase agreements		(1,008,393	)		-
Receipts from reverse repurchase agreements		771,375			-
Increase in cash collateral		(8,798	)		-
Net cash used in investing activities		(1,095,399	)		-
Cash Flows From Financing Activities:
Initial capital contribution		-			1
Issuance of common stock, net of expenses		113,217			-
Proceeds from repurchase agreements		5,207,875			-
Principal repayments on repurchase agreements		(4,447,735	)		-
Proceeds from sales of U.S. Treasury Securities		304,228			-
Purchases of U.S. Treasury Securities		(70,126	)		-
Common stock dividends paid		(13,110	)		-
Net cash provided by financing activities		1,094,349			1
Net increase in cash		11,622			1
Cash - beginning of period		36,316			-
Cash - end of period	$	47,938		$	1
Supplemental Disclosure:
Cash paid during the period for interest	$	3,560		$	-
Non-Cash Investing and Financing Activities:
Unrealized loss on investment in available for sale Agency Securities	$	93,301		$	-

See notes to condensed financial statements.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.”) (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 1001 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2013. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect 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. Actual results could differ from those estimates. Significant estimates affecting the accompanying financial statements include the valuation of MBS (as defined below) and derivative instruments.

Note 2 – Organization and Nature of Business Operations

References to “we,” “us,” “our,” "JAVELIN" or the “Company” are to JAVELIN Mortgage Investment Corp. References to "ARRM" are to ARMOUR Residential Management LLC, a Delaware limited liability company.

We are an externally managed Maryland corporation formed on June 18, 2012 and managed by ARRM (see Note 16, “Related Party Transactions” for additional discussion). On June 21, 2012, an initial capital contribution of $1,000 was made to us and we issued 50 shares of common stock. On September 24, 2012, we filed Articles of Amendment and Restatement ("Articles") with the Maryland State Department of Assessments and Taxation, which increased our authorized shares of common stock, par value $0.001 per share, from 1,000 shares to 250,000,000 shares and authorized 25,000,000 shares of preferred stock, par value $0.001 per share, for issuance. The registration statement for our initial public offering (“IPO”) was declared effective on October 2, 2012. On October 3, 2012, our common stock commenced trading on the New York Stock Exchange under the symbol “JMI”. We commenced operations upon consummation of our IPO and concurrent private placement (the “Private Placement”) of our common stock on October 9, 2012. Pursuant to our IPO and Private Placement, we sold to the public 7,250,000 shares of common stock and sold 250,000 shares of common stock to Staton Bell Blank Check LLC (“SBBC”), an entity jointly owned by two of our directors, at a price of $20.00 per share. Net proceeds from the IPO and Private Placement totaled $150.0 million. On November 2, 2012, the underwriters in the IPO decided not to exercise their over-allotment option to purchase up to an additional 1,087,500 shares of common stock.

We invest primarily in fixed rate and hybrid adjustable rate mortgage backed securities. Some of these securities are issued or guaranteed by a U.S. Government-sponsored entity (“GSE”), such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or guaranteed by the Government National Mortgage Administration (Ginnie Mae) (collectively, “Agency Securities”). Other Securities backed by residential mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency (collectively, “Non-Agency Securities” and together with Agency Securities, (“MBS”)) may benefit from credit enhancement derived from structural elements such as subordination, overcollateralization or insurance. We also may invest in collateralized commercial mortgage backed securities and other mortgage related investments, including mortgage loans, mortgage related derivatives and mortgage servicing rights. From time to time, a portion of our assets may be invested in unsecured notes and bonds issued by GSEs (collectively, “Agency Debt”), U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust (“REIT”). Our charter permits us to invest in Agency Securities and Non-Agency Securities.

We have elected to be taxed as a REIT under the Internal Revenue Code (“the Code”). Our qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes.

As a REIT, we will generally not be subject to federal income tax on the REIT taxable income that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Summary of Significant Accounting Policies

Cash

Cash includes cash on deposit with financial institutions. We may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes we are not exposed to significant credit risk due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

Cash Collateral

The following table presents information related to margin collateral posted (held) for MBS, interest rate swap contracts and interest rate swaptions which are included in cash collateral on the accompanying condensed balance sheets as of June 30, 2013 and December 31, 2012.

June 30, 2013

	Assets at Fair Value (1)		Liabilities at Fair Value (1)
	(in thousands)
MBS	$	52,101	$	(48	)
Interest rate swap contracts		-		(37,140	)
Interest rate swaptions		-		(7,268	)
Totals	$	52,101	$	(44,456	)

(1)	See Note 10, “Fair Value of Financial Instruments” for additional discussion.

December 31, 2012

	Assets at Fair Value (1)		Liabilities at Fair Value (1)
	(in thousands)
Interest rate swap contracts	$	273	$	-
Interest rate swaptions		-		(1,426	)
Totals	$	273	$	(1,426	)

(1)

See Note 10, “Fair Value of Financial Instruments” for additional discussion.

MBS, at Fair Value

We generally intend to hold most of our MBS for extended periods of time. We may, from time to time, sell any of our MBS as part of the overall management of our MBS portfolio. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.

Purchases and sales of our MBS are recorded on the trade date. However, if on the purchase settlement date, a repurchase agreement is used to finance the purchase of an MBS with the same counterparty and such transactions are determined to be linked, then the MBS and linked repurchase borrowing will be reported on the same settlement date as Linked Transactions (see below).

Agency Securities

As of June 30, 2013 and December 31, 2012, all of our Agency Securities were classified as available for sale securities. Agency Securities classified as available for sale are reported at their estimated fair values with unrealized gains and losses excluded from earnings and reported in net unrealized loss on available for sale securities in the statements of comprehensive income.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

We evaluate Agency Securities for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment to be other than temporary if we (1) have the intent to sell the Agency Securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) or (3) a credit loss exists.

Non-Agency Securities

As of June 30, 2013 and December 31, 2012, all of our Non-Agency Securities were classified as trading securities. Non-Agency Securities classified as trading are reported at their estimated fair values with unrealized gains and losses included in other (loss) income as a component of the statements of operations. We estimate future cash flows for each Non-Agency Security and then discount those cash flows based on our estimates of current market yield for each individual security. We then compare our calculated price with our pricing services and dealer marks. Our estimates for future cash flows and current market yields incorporate such factors as coupons, prepayment speeds, defaults, delinquencies and severities.

Repurchase Agreements, net

We finance the acquisition of our MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the London Interbank Offered Rate (“LIBOR”). Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender. A repurchase agreement operates as a financing arrangement (with the exception of repurchase agreements accounted for as a component of a Linked Transaction) under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

In addition to the repurchase agreement financing discussed above we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day.

Obligations to Return Securities Received as Collateral, at Fair Value

We also sell to third parties the U.S. Treasury Securities received as collateral for reverse repurchase agreements and recognize the resulting obligation to return said U.S. Treasury Securities as a liability on our condensed balance sheet. Interest is recorded on the repurchase agreements, reverse repurchase agreements and U.S. Treasury Securities on an accrual basis and presented as net interest expense. Both parties to the transaction have the right to make daily margin calls based on changes in the fair value of the collateral received and/or pledged.

Derivatives, at Fair Value

We recognize all derivatives as either assets or liabilities at fair value on our condensed balance sheets. We do not designate our derivatives as cash flow hedges, which, among other factors, would require us to match the pricing dates of both derivatives and repurchase agreements. Operational issues and credit market volatility make such matching impractical for us. Since we have not elected cash flow hedge accounting treatment as allowed by GAAP, all changes in the fair values of our derivatives are reflected in our condensed statements of operations. Accordingly, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We will continue to designate derivatives as hedges for tax purposes and any unrealized derivative gains or losses would not affect our distributable net taxable income.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Linked Transactions

The initial purchase of Non-Agency Securities and the related contemporaneous repurchase financing of such MBS with the same counterparty are considered part of the same arrangement, or a “Linked Transaction,” when certain criteria are met. The components of a Linked Transaction are evaluated on a combined basis and in totality, accounted for as a forward contract and reported as “Linked Transactions” on our condensed balance sheets. Changes in the fair value of the assets and liabilities underlying Linked Transactions and associated interest income and expense are reported as “unrealized net gains (losses) and net interest income from Linked Transactions” on our condensed statements of operations and are not included in other comprehensive income. When certain criteria are met, the initial transfer (i.e., the purchase of a security) and repurchase financing will no longer be treated as a Linked Transaction and will be evaluated and reported separately, as a MBS purchase and repurchase financing.

Accrued Interest Receivable and Payable

Accrued interest receivable includes interest accrued between payment dates on MBS. Accrued interest payable includes interest payable on our repurchase agreements.

Credit Risk

We have limited our exposure to credit losses on our Agency Securities in our MBS portfolio. The payment of principal and interest on the Fannie Mae and Freddie Mac Agency Securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae Agency Securities are backed by the full faith and credit of the U.S. Government.

In September 2008, both Fannie Mae and Freddie Mac were placed in the conservatorship of the U.S. Government. On August 5, 2011, Standard & Poor’s Corporation downgraded the U.S. Government’s credit rating from AAA to AA+ and on August 8, 2011, Fannie Mae and Freddie Mac’s credit ratings were downgraded from AAA to AA+. Fannie Mae and Freddie Mac remain in conservatorship of the U.S. Government. There can be no assurances as to how or when the U.S. Government will end these conservatorships or how the future profitability of Fannie Mae and Freddie Mac and any future credit rating actions may impact the credit risk associated with Agency Securities and, therefore, the value of the Agency Securities in our MBS portfolio.

We purchase Non-Agency Securities at prices which incorporate our expectations for prepayment speeds, defaults, delinquencies and severities. These expectations determine the yields we receive on our assets. If actual prepayment speeds, defaults, delinquencies and severities are different from our expectations, our actual yields could be higher or lower.

Market Risk

Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our MBS at an inopportune time when prices are depressed.

Preferred Stock

We are authorized to issue 25,000,000 shares of preferred stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors ("Board") or a committee thereof. We have not issued any preferred stock to date.

Common Stock

At June 30, 2013, we were authorized to issue up to 250,000,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had 13,500,050 shares of common stock issued and outstanding at June 30, 2013 and 7,500,050 issued and outstanding at December 31, 2012.

Comprehensive Income (loss)

Comprehensive income (loss) refers to changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Revenue Recognition

Interest income is earned and recognized on Agency Securities based on their unpaid principal amount and their contractual terms. Premiums and discounts associated with the purchase of Agency Securities are amortized or accreted into interest income over the actual lives of the securities.

Interest income on Non-Agency Securities is recognized using the effective yield method over the life of the securities based on the future cash flows expected to be received. Future cash flow projections and related effective yields are determined for each security and updated quarterly. Other than temporary impairments, which establish a new cost basis in the security for purposes of calculating effective yields, are recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security.

Reclassification

Cash collateral positions have been presented separately in the December 31, 2012 balance sheet to conform to the current presentation. No other reclassifications have been made to previously reported amounts.

Note 4 – Recent Accounting Pronouncements

Accounting Standards Adopted in 2013

In January 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, Balance Sheet (Topic 210). This update to ASU 2011-11 addressed implementation issues and applied to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The guidance was effective January 1, 2013 and was applied retrospectively. This guidance did not affect the presentation of Derivatives, at fair value on our condensed balance sheets.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, Comprehensive Income (Topic 220). This update to ASU 2011-12 addressed improving the reporting of reclassifications out of accumulated other comprehensive income by requiring reporting of the effect of significant reclassifications out of accumulated net income if the amount being reclassified is required under GAAP to be classified in its entirety to net income. For amounts not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about these amounts. The update did not change the current requirements for reporting net income or other comprehensive income and resulted in additional disclosure but had no significant effect on our condensed financial statements. The guidance was effective for reporting periods beginning after December 15, 2012 and was applied prospectively.

Note 5 – Agency Securities, Available for Sale

All of our Agency Securities are classified as available for sale and, as such, are reported at their estimated fair value and changes in fair value reported as part of the statements of comprehensive income. As of June 30, 2013 investments in Agency Securities accounted for 92.5% of our MBS portfolio and 89.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 7, “Linked Transactions” for additional discussion of Non-Agency Securities that are accounted for as a component of Linked Transactions).

As of June 30, 2013, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of June 30, 2013 are also presented below. All of our Agency Securities are fixed rate securities with a weighted average coupon of 3.30% as of June 30, 2013.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2013	Fannie Mae			Freddie Mac			Total Agency Securities
	(in thousands)
Principal amount	$	1,301,405		$	526,891		$	1,828,296
Net unamortized premium		72,044			29,533			101,577
Amortized cost		1,373,449			556,424			1,929,873
Unrealized gains		-			-			-
Unrealized losses		(64,421	)		(33,482	)		(97,903	)
Fair value	$	1,309,028		$	522,942		$	1,831,970

As of December 31, 2012, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of December 31, 2012 are also presented below. As of December 31, 2012 investments in Agency Securities accounted for 89.5% of our total MBS portfolio. There were no Linked Transactions as of December 31, 2012. All of our Agency Securities were fixed rate securities with a weighted average coupon of 3.14% as of December 31, 2012.

December 31, 2012	Fannie Mae			Freddie Mac			Total Agency Securities
	(in thousands)
Principal amount	$	651,867		$	403,589		$	1,055,456
Net unamortized premium		38,683			22,821			61,504
Amortized cost		690,550			426,410			1,116,960
Unrealized gains		86			4			90
Unrealized losses		(2,480	)		(2,212	)		(4,692	)
Fair value	$	688,156		$	424,202		$	1,112,358

Actual maturities of Agency Securities are generally shorter than stated contractual maturities because actual maturities of Agency Securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.

The following table summarizes the weighted average lives of our Agency Securities as of June 30, 2013 and December 31, 2012.

	June 30, 2013				December 31, 2012
	(in thousands)
Weighted Average Life of all Agency Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Less than one year	$	-	$	-	$	-	$	-
Greater than one year and less than three years		-		-		-		-
Greater than three years and less than five years		32,422		33,354		638,744		641,231
Greater than or equal to five years		1,799,548		1,896,519		473,614		475,729
Total Agency Securities	$	1,831,970	$	1,929,873	$	1,112,358	$	1,116,960

We use a third-party model to calculate the weighted average lives of our Agency Securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our Agency Securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of our Agency Securities as of June 30, 2013 and December 31, 2012 in the table above are based upon market factors, assumptions, models and estimates from the third-party model and also incorporate management’s judgment and experience. The actual weighted average lives of our Agency Securities could be longer or shorter than estimated.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the unrealized losses and estimated fair value of our Agency Securities by length of time that such securities have been in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012.

	Unrealized Loss Position For: (in thousands)
	Less than 12 Months					12 Months or More				Total
As of	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2013	$	1,831,970	$	(97,903	)	$	-	$	-	$	1,831,970	$	(97,903	)
December 31, 2012	$	1,032,421	$	(4,692	)	$	-	$	-	$	1,032,421	$	(4,692	)

We evaluated our Agency Securities with unrealized losses and determined that there was no other than temporary impairments as of June 30, 2013 or December 31, 2012. As of those dates, we did not intend to sell Agency Securities and believed it was more likely than not that we could meet our liquidity requirements and contractual obligations without selling Agency Securities. The decline in value of these Agency Securities is solely due to market conditions and not the credit quality of the assets. All of our Agency Securities are issued by the GSEs. The GSEs have a rating of AA+.

Note 6 – Non-Agency Securities, Trading

All of our Non-Agency Securities are classified as trading securities and reported at their estimated fair value. Fair value changes are reported in the statements of operations in the period in which they occur.

As of June 30, 2013, investments in Non-Agency Securities accounted for 7.5% of our MBS portfolio and 11.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 7, “Linked Transactions” for additional discussion of Non-Agency Securities that are accounted for as a component of Linked Transactions).

Non-Agency Securities

(in thousands)

June 30, 2013

Fair Value

Amortized

Cost

Principal

Amount

Weighted

Average

Coupon

Prime/Alt-A

148,953

148,628

180,344

5.03

As of December 31, 2012, investments in Non-Agency Securities accounted for 10.5% of our total MBS portfolio. There were no Linked Transactions as of December 31, 2012.

Non-Agency Securities

(in thousands)

December 31, 2012

Fair Value

Amortized

Cost

Principal

Amount

Weighted

Average

Coupon

Prime/Alt-A

129,946

127,037

156,957

5.29

Prime/Alt-A Non-Agency Securities as of June 30, 2013 and December 31, 2012 include senior tranches in securitization trusts issued between 2004 and 2007, and are collateralized by residential mortgages originated between 2002 and 2007. The loans were originally considered to be either prime or one tier below prime credit quality. Prime mortgage loans are residential mortgage loans that are considered the highest tier with the most stringent underwriting standards within the Non-agency mortgage market, but do not carry any credit guarantee from either a U.S. government agency or GSE. These loans were originated during a period when underwriting standards were generally weak and housing prices have dropped significantly subsequent to their origination. As a result, there is still material credit risk embedded in these vintage tranches. Alt-A, or alternative A-paper, mortgage loans are considered riskier than prime mortgage loans and less risky than sub-prime mortgage loans and are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan to value ratios and a higher percentage of investment properties. These securities were generally rated below investment grade as of June 30, 2013 and December 31, 2012.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the weighted average lives of our Non-Agency Securities as of June 30, 2013 and December 31, 2012.

	June 30, 2013				December 31, 2012
	(in thousands)
Weighted Average Life of all Non-Agency Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Less than one year	$	-	$	-	$	-	$	-
Greater than one year and less than three years		-		-		-		-
Greater than three years and less than five years		36,568		36,723		5,763		5,678
Greater than or equal to five years		112,385		111,905		124,183		121,359
Total Non-Agency Securities	$	148,953	$	148,628	$	129,946	$	127,037

The following table presents the unrealized losses and estimated fair value of our Non-Agency Securities by length of time that such securities have been in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012.

	Unrealized Loss Position For: (in thousands)
	Less than 12 months					12 Months or More				Total
As of	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2013	$	78,847	$	(1,558	)	$	-	$	-	$	78,847	$	(1,558	)
December 31, 2012	$	-	$	-		$	-	$	-	$	-	$	-

Our Non-Agency Securities are subject to risk of loss with regard to principal and interest payments and as of June 30, 2013 and December 31, 2012, have generally either been assigned below investment grade ratings by rating agencies, or have not been rated. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies.

Note 7 – Linked Transactions

Our Linked Transactions are evaluated on a combined basis, reported as forward (derivative) instruments and presented as assets on our condensed balance sheets at fair value. The fair value of Linked Transactions reflect the value of the underlying Non-Agency MBS, linked repurchase agreement borrowings and accrued interest receivable/payable on such instruments. Our Linked Transactions are not designated as hedging instruments and, as a result, the change in the fair value and net interest income from Linked Transactions is reported in other income on our condensed statements of operations.

The following tables present information about our Non-Agency Securities and repurchase agreements underlying our Linked Transactions at June 30, 2013. Our Non-Agency Securities underlying our Linked Transactions represent approximately 3.8% of our overall investment in MBS.

Linked Repurchase Agreements						Linked Non-Agency Securities
			Weighted										Weighted
			Average										Average
Maturity or Repricing	Balance		Interest Rate			Non-Agency MBS	Fair Value		Amortized Cost		Par/Current Face		Coupon Rate
Within 30 days	$	4,929		1.99	%	Prime	$	71,391	$	72,196	$	75,000		3.00	%
61 days to 90 days		64,125		0.70		Alt/A		6,390		6,500		7,269		5.75
Total	$	69,054		0.79	%	Total	$	77,781	$	78,696	$	82,269		3.23	%

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table presents certain information about the components of the unrealized net gains and net interest income from Linked Transactions included in our condensed statements of operations for the quarter and six months ended June 30, 2013.

Unrealized Net (loss) gain and Net Interest Income from Linked Transactions	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013
	(dollars in thousands)
Interest income attributable to MBS underlying Linked Transactions	$	39		$	39
Interest expense attributable to linked repurchase agreements underlying Linked Transactions		(915	)		(915	)
Change in fair value of Linked Transactions included in earnings		(1,412	)		(1,412	)
Unrealized net loss and net interest income from Linked Transactions	$	(2,288	)	$	(2,288	)

Note 8 – Repurchase Agreements, net

As of June 30, 2013 we had MRAs with 27 counterparties and had $1.7 billion, net in outstanding borrowings with 22 of those counterparties. As of December 31, 2012 we had MRAs with 26 counterparties and had $1.1 billion in outstanding borrowings with 18 of those counterparties. See Note 7, “Linked Transactions” for additional discussion of repurchase agreements that are accounted for as a component of Linked Transactions.

The following tables represent the contractual repricing and other information regarding our repurchase agreements, net to finance our MBS purchases as of June 30, 2013 and December 31, 2012.

June 30, 2013

	Repurchase Agreements (in thousands)		Weighted Average Contractual Rate			Weighted Average Maturity in days		Haircut for Repurchase Agreements (1)
Agency Securities	$	1,552,180		0.40	%		41		4.87	%
Non-Agency Securities		106,773		1.92			30		24.71
Total	$	1,658,953		0.48	%		41		6.26	%

(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

December 31, 2012

	Repurchase Agreements (in thousands)		Weighted Average Contractual Rate			Weighted Average Maturity in days		Haircut for Repurchase Agreements (1)
Agency Securities	$	1,033,496		0.48	%		43		4.83	%
Non-Agency Securities		102,334		2.07			25		22.35
Total	$	1,135,830		0.62	%		41		6.4	%

(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

Maturing or Repricing	June 30, 2013		December 31, 2012
	(in thousands)
Within 30 days (net of reverse repurchase agreements of $237.0 million at June 30, 2013)	$	395,895	$	280,435
31 days to 60 days		940,112		629,311
61 days to 90 days		322,946		226,084
Greater than 90 days		-		-
Total	$	1,658,953	$	1,135,830

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Obligations to return securities received as collateral associated with the reverse repurchase agreements of $234.5 million at June 30, 2013 are all due within 30 days.

The following tables present the gross and net securities purchased and sold under repurchase agreements as of June 30, 2013. As of December 31, 2012, there were no reverse repurchase agreement receivables or obligations.

June 30, 2013

							Amounts Not Offset in the Condensed Balance Sheet
Asset	Gross Amounts of Assets		Gross Amounts offset in the Condensed Balance Sheet		Net Amounts of Assets Presented in the Condensed Balance Sheet		Financial Instruments		Cash Collateral Held		Net Amount
	(in thousands)
Reverse Repurchase Agreements	$	237,018	$	237,018	$	-	$	-	$	-	$	-
Totals	$	237,018	$	237,018	$	-	$	-	$	-	$	-

									Amounts Not Offset in the Condensed Balance Sheet
Liability	Gross Amounts of Liabilities			Gross Amounts offset in the Condensed Balance Sheet		Net Amounts of Liabilities Presented in the Condensed Balance Sheet			Financial Instruments(1)		Cash Collateral Posted		Net Amount
	(in thousands)
Repurchase Agreements	$	(1,895,971	)	$	237,018	$	(1,658,953	)	$	1,658,953	$	52,053	$	52,053
Totals	$	(1,895,971	)	$	237,018	$	(1,658,953	)	$	1,658,953	$	52,053	$	52,053

(1)

The fair value of securities pledged against our repurchase agreements was $1.9 billion at June 30, 2013.

Note 9 – Derivatives

In addition to the Linked Transactions described in Note 7, “Linked Transactions”, we enter into transactions to manage our interest rate risk exposure. These transactions include entering into interest rate swap contracts and interest rate swaptions. These transactions are designed to lock in funding costs for repurchase agreements associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments on our Agency Securities which, if not realized, will cause transaction results to differ from expectations. Our derivatives are carried on our condensed balance sheets, as assets or as liabilities at their fair value. We do not designate our derivatives as cash flow hedges and as such, we recognize changes in the fair value of these derivatives through earnings.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

We have agreements with our swap (including swaption) counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts. Through this margin process, either we or our swap counterparty may be required to pledge cash or Agency Securities as collateral. Collateral requirements vary by counterparty and change over time based on the market value; notional amount and remaining term of the contracts. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg.

The following tables present information about interest rate swap contracts and interest rate swaptions which are included in derivatives on the accompanying condensed balance sheets as of June 30, 2013 and December 31, 2012.

June 30, 2013

	Notional Amount		Assets at Fair Value (1)		Liabilities at Fair Value (1)
	(in thousands)
Interest rate swap contracts	$	801,250	$	37,140	$	-
Interest rate swaptions		130,000		11,085		-
Totals	$	931,250	$	48,225	$	-

(1)

See Note 10, “Fair Value of Financial Instruments” for additional discussion.

December 31, 2012

	Notional Amount		Assets at Fair Value (1)		Liabilities at Fair Value (1)
	(in thousands)
Interest rate swap contracts	$	325,000	$	395	$	(365	)
Interest rate swaptions		130,000		4,545		-
Totals	$	455,000	$	4,940	$	(365	)

(1)

See Note 10, “Fair Value of Financial Instruments” for additional discussion.

June 30, 2013

			Gross Amounts Not Offset in the Condensed Balance Sheet
Assets	Gross Amounts of Assets Presented in the Condensed Balance Sheet		Financial Instruments		Cash Collateral Held			Net Amount
	(in thousands)
Interest rate swap contracts	$	37,140	$	-	$	(37,140	)	$	-
Interest rate swaptions		11,085		-		(7,268	)		3,817
Totals	$	48,225	$	-	$	(44,408	)	$	3,817

We did not have any derivatives in a liability position on our condensed balance sheet at June 30, 2013.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2012

			Gross Amounts Not Offset in the Condensed Balance Sheet
Assets	Gross Amounts of Assets Presented in the Condensed Balance Sheet		Financial Instruments			Cash Collateral Held			Net Amount
	(in thousands)
Interest rate swap contracts	$	395	$	(92	)	$	-		$	303
Interest rate swaptions		4,545		-			(1,426	)		3,119
Totals	$	4,940	$	(92	)	$	(1,426	)	$	3,422

				Gross Amounts Not Offset in the Condensed Balance Sheet
Liabilities	Gross Amounts of Liabilities Presented in the Condensed Balance Sheet			Financial Instruments		Cash Collateral Posted		Net Amount
	(in thousands)
Interest rate swap contracts	$	(365	)	$	92	$	273	$	-
Totals	$	(365	)	$	92	$	273	$	-

The following table represents the location and information regarding our derivatives which are included in Other Income in the accompanying condensed statements of operations for the quarter and six months ended June 30, 2013 and for the period from June 21, 2012 through June 30, 2012.

		Income (Loss) Recognized (in thousands)
Derivatives	Location on condensed statements of operations	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013			For the Period from June 21, 2012 Through June 30, 2012
Interest rate swap contracts:
Interest income	Realized loss on derivatives	$	204		$	317		$	-
Interest expense	Realized loss on derivatives		(2,193	)		(3,256	)		-
Changes in fair value	Unrealized gain on derivatives		36,970			40,086			-
			34,981			37,147			-
Interest rate swaptions:
Changes in fair value	Unrealized gain on derivatives		6,211			6,540			-
			6,211			6,540			-
Totals		$	41,192		$	43,687		$	-

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value of Financial Instruments

Our valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from third-party sources, while unobservable inputs reflect management’s market assumptions. The ASC Topic No. 820 “Fair Value Measurement” classifies these inputs into the following hierarchy:

Level 1 Inputs - Quoted prices for identical instruments in active markets.

Level 2 Inputs - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Prices determined using significant unobservable inputs. Unobservable inputs may be used in situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period). Unobservable inputs reflect management’s assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.

The following describes the valuation methodologies used for our assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Any transfers between levels are assumed to occur at the beginning of the reporting period.

Cash - Cash includes cash on deposit with financial institutions. The carrying amount of cash is deemed to be its fair value and is classified as Level 1. Cash balances posted to or held by counterparties as collateral are classified as Level 2.

Agency Securities Available for Sale - Fair value for the Agency Securities in our MBS portfolio is based on obtaining a valuation for each Agency Security from third-party pricing services and dealer quotes. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of an Agency Security is not available from the third-party pricing services or such data appears unreliable, we obtain valuations from up to three dealers who make markets in similar Agency Securities. In general, the dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular Agency Security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the Agency Security. Management reviews pricing used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a third-party pricing model. Fair values obtained from the third-party pricing services for similar instruments are classified as Level 2 securities if the inputs to the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the third-party pricing service, but dealer quotes are, the security will be classified as a Level 2 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information received from dealers and classify it as a Level 3 security. As of June 30, 2013 and December 31, 2012, all of our Agency Security fair values are based solely on third-party pricing services and dealer quotes and therefore were classified as Level 2.

Non-Agency Securities Trading - The fair value for the Non-Agency Securities in our MBS portfolio is based on estimates prepared by our Portfolio Management group, which organizationally reports to our Chief Investment Officer. In preparing the estimates, our Portfolio Management group uses commercially available and proprietary models and data as well as market intelligence gained from discussions with, and transactions by, other market participants. We estimate the fair value of our Non-Agency Securities by estimating the future cash flows for each Non-Agency Security and then discounting those cash flows based on our estimates of current market yield for each individual security. Our estimates for future cash flows and current market yields incorporate such factors as collateral type, bond structure and priority of payments, coupons, prepayment speeds, defaults, delinquencies and severities. Quarterly we compare our estimates of fair value of our Non-Agency Securities with pricing from third-party pricing services, dealer marks received and recent purchase and financing transaction history to validate our assumptions of cash flow and market yield and calibrate our models. Fair values calculated in this manner are considered Level 3.

Repurchase Agreements, net - The fair value of repurchase agreements, net reflects the present value of the contractual cash flows discounted at the estimated LIBOR based market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term to interest rate repricing, which may be at maturity, of our repurchase agreements. The fair value of the repurchase agreements, net approximates their carrying amount due to the short-term nature of these financial instruments. Both our repurchase agreements and reverse repurchase agreements shown together net are classified as Level 2.

Obligations to Return Securities Received as Collateral - The fair value of the obligations to return securities received as collateral are based upon the prices of the related U.S. Treasury Securities obtained from a third-party pricing service, which are indicative of market activity. Such obligations are classified as Level 1.

Derivative Transactions - The fair values of our interest rate swap contracts and interest rate swaptions are valued using third-party pricing services that incorporate common market pricing methods that may include current interest rate curves, forward interest rate curves and market spreads to interest rate curves. Management compares pricing used to dealer quotes to ensure that the current market conditions are properly reflected. The fair values of our interest rate swap contracts and our interest rate swaptions are classified as Level 2.

Linked Transactions - The Non-Agency Securities underlying our Linked Transactions are valued using similar techniques to those used for our other Non-Agency Securities. The value of the underlying Non-Agency Security is then netted against the carrying amount (which approximates fair value) of the repurchase agreement at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the Non-Agency Security and accrued interest payable on the underlying repurchase agreement. Our Linked Transactions are classified as Level 2.

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012.

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2013
	(in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	1,831,970	$	-	$	1,831,970
Non-Agency Securities, trading	$	-	$	-	$	148,953	$	148,953
Linked Transactions	$	-	$	8,727	$	-	$	8,727
Derivatives	$	-	$	48,225	$	-	$	48,225
Liabilities at Fair Value:
Obligations to return securities received as collateral	$	234,492	$	-	$	-	$	234,492

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012
	(in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	1,112,358	$	-	$	1,112,358
Non-Agency Securities, trading	$	-	$	-	$	129,946	$	129,946
Derivatives	$	-	$	4,940	$	-	$	4,940
Liabilities at Fair Value:
Derivatives	$	-	$	365	$	-	$	365

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following tables provide a summary of the carrying values and fair values of our financial assets and liabilities not carried at fair value but for which fair value is required to be disclosed as of June 30, 2013 and December 31, 2012.

	At June 30, 2013				Fair Value Measurements using:
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Cash	$	47,938	$	47,938	$	47,938	$	-	$	-
Cash collateral posted	$	52,101	$	52,101	$	-	$	52,101	$	-
Accrued interest receivable	$	5,023	$	5,023	$	-	$	5,023	$	-
Financial Liabilities:
Repurchase agreements, net	$	1,658,953	$	1,658,953	$	-	$	1,658,953	$	-
Cash collateral held	$	44,456	$	44,456	$	-	$	44,456	$	-
Accrued interest payable	$	871	$	871	$	-	$	871	$	-

	At December 31, 2012				Fair Value Measurements using:
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Assets:
Cash	$	36,316	$	36,316	$	36,316	$	-	$	-
Cash collateral posted	$	273	$	273	$	-	$	273	$	-
Accrued interest receivable	$	2,759	$	2,759	$	-	$	2,759	$	-
Financial Liabilities:
Repurchase agreements, net	$	1,135,830	$	1,135,830	$	-	$	1,135,830	$	-
Cash collateral held	$	1,426	$	1,426	$	-	$	1,426	$	-
Accrued interest payable	$	844	$	844	$	-	$	844	$	-

The following table provides a summary of the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter and six months ended June 30, 2013. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history.

	For the Quarter Ended June 30, 2013				For the Six Months Ended June 30, 2013
		(in thousands)
Balance, beginning of period	$	136,752		$	129,946
Purchase of securities, at cost		23,518			33,275
Principal repayments		(5,371	)		(10,246	)
Net loss		(5,635	)		(3,426	)
Discount accretion		(311	)		(596	)
Balance, end of period	$	148,953			148,953
Net losses for outstanding Level 3 Assets	$	(5,635	)	$	(3,426	)

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The significant unobservable inputs used in the fair value measurement of our Level 3 Non-Agency Securities include assumptions for underlying loan collateral default rates and loss severities in the event of default, as well as discount rates.

The following tables present the range of our estimates of cumulative default and loss severities, together with the discount rates implicit in our Level 3 Non-Agency Security fair values totaling $149.0 million and $129.9 million as of June 30, 2013 and December 31, 2012, respectively. See Note 7, “Linked Transactions” for additional discussion of Non-Agency Securities that are accounted for as a component of Linked Transactions.

June 30, 2013

Unobservable Level 3 Input	Minimum			Weighted Average			Maximum
Cumulative default		-	%		20.91	%		54.41	%
Loss severity (life)		9.30	%		39.62	%		58.00	%
Discount rate		3.64	%		5.63	%		8.25	%
Delinquency (life)		0.90	%		14.40	%		23.70	%
Voluntary prepayments (life)		6.40			9.6			13.8

December 31, 2012

Unobservable Level 3 Input	Minimum			Weighted Average			Maximum
Cumulative default		6.28	%		17.65	%		26.26	%
Loss severity (life)		36.70	%		48.52	%		56.00	%
Discount rate		4.50	%		5.17	%		5.54	%
Delinquency (life)		13.50	%		22.56	%		33.60	%
Voluntary prepayments (life)		4.60			8.30			11.40

Significant increases or decreases in any of these inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. However, given the interrelationship between loss estimates and the discount rate, overall Non-Agency Security market conditions would likely have a more significant impact on our Level 3 fair values than changes in any one unobservable input.

Note 11 – Stock Based Compensation

Stock Incentive Plan

On October 2, 2012, we adopted the 2012 Stock Incentive Plan (the "Plan") to attract, retain and reward directors and other persons who provide services to us in the course of operations (collectively "Eligible Individuals").

The Plan provides for grants of common stock, restricted shares of common stock, stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively “Awards”), and will be subject to a ceiling amount of shares available for issuance under the Plan. Pursuant to the Plan, the maximum number of shares of common stock reserved for the grant of awards thereunder is equal to 3.0% of the total issued and outstanding shares of common stock (on a fully diluted basis) at the time of the grant of the award (other than any shares of common stock issued or subject to awards made pursuant to the Plan).

The Plan allows for the Board to expand the types of awards available under the Plan and determine the maximum number of shares that may underlie these awards in any one year to any Eligible Individual. If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

Awards under the Plan

As of June 30, 2013 there were 405,001 shares reserved for award under the Plan. No awards have been made to date.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Stockholders’ Equity

Dividends

The following table presents our common stock dividend transactions for the six months ended June 30, 2013.

Record Date	Payment Date	Rate per common share		Aggregate amount paid to holders of record (in thousands)
January 15, 2013	January 30, 2013	$	0.23	$	1,725
February 15, 2013	February 27, 2013	$	0.23	$	1,725
March 15, 2013	March 27, 2013	$	0.23	$	1,725
April 15, 2013	April 29, 2013	$	0.23	$	1,725
May 15, 2013	May 30, 2013	$	0.23	$	3,105
June 14, 2013	June 27, 2013	$	0.23	$	3,105

Equity Capital Raising Activities

The following table presents our equity transactions for the six months ended June 30, 2013.

Transaction Type

Completion Date

Number of

Shares

Per Share

price

Net Proceeds

(in thousands)

Common stock follow-on public offering

May 13, 2013

6,000,000

18.93

113,217

Note 13 – Net Income per Common Share

GAAP requires earnings per share to be computed based on the weighted average number of shares outstanding during the period presented, calculated on a daily basis. Net income per common share was $3.56 and $5.39 for the quarter and six months ended June 30, 2013. We did not have any income or expense for the period from June 21, 2012 through June 30, 2012.

To date, we have not issued any dilutive securities.

Note 14 – Income Taxes

We have elected to be taxed as a REIT under the Code. We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our stockholders and as long as we satisfy the ongoing REIT requirements under the Code including meeting certain asset, income and stock ownership tests.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table reconciles our GAAP net income to estimated REIT taxable income for the quarter and six months ended June 30, 2013. We did not have any income for the period from June 21, 2012 through June 30, 2012.

	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013
	(in thousands)

GAAP net income	$	38,237		$	49,213
Book to tax differences:
Net book/tax differences on Non-Agency Securities and Linked Transactions		8,359			6,634
Unrealized gain on derivatives		(43,181	)		(46,626	)
Unrealized loss on U.S. Treasury Securities sold short		2,716			2,716
Realized capital loss on short sale of U.S. Treasury Securities		390			390
Income tax expense		-			2
Estimated taxable income	$	6,521		$	12,329

The aggregate tax basis of our assets and liabilities is greater than our total Stockholders’ Equity at June 30, 2013 by approximately $60.4 million, or approximately $4.47 per share (based on the 13,500,050 shares then outstanding).

We are required and intend to timely distribute substantially all of our REIT taxable income in order to maintain our REIT status under the Code. For the quarter ended June 30, 2013, we paid dividends of $0.23 per outstanding share of common stock for each month of the first and second quarter, resulting in total payments to stockholders of $7.9 million and $13.1 million for the quarter and six months ended June 30, 2013, respectively. Our estimated REIT taxable income available to pay dividends was $6.5 million and $12.3 million for the quarter and six months ended June 30, 2013, respectively. For tax purposes, capital losses do not affect the amount of our ordinary taxable income. Our REIT dividend requirements are based on the amount of our ordinary taxable income. These capital losses will generally be available to offset capital gains realized in the years 2013 through 2018. See Note 18, “Subsequent Events” for additional discussion.

As of June 30, 2013, undistributed retained earnings totaled $38.7 million or approximately $2.87 per share and under distributed estimated REIT taxable income was $1.2 million, or approximately $0.09 per share (per share amounts are based on the 13,500,050 shares then outstanding).

Our management is responsible for determining whether tax positions taken by us are more likely than not to be sustained on their merits. We have no material unrecognized tax benefits or material uncertain tax positions.

Note 15 – Commitments and Contingencies

Management Agreement with ARRM

As discussed in Note 16 “Related Party Transactions,” we are externally managed by ARRM pursuant to a management agreement, (the “Management Agreement”). The Management Agreement entitles ARRM to receive a management fee payable monthly in arrears in an amount equal to 1/12th of (a) 1.5% of gross equity raised (including our IPO and Private Placement equity) up to $1 billion plus (b) 1.0% of gross equity raised in excess of $1 billion. We are also obligated to reimburse certain expenses incurred by ARRM and its affiliates. For the quarter and six months ended June 30, 2013, we reimbursed ARRM $27,000 and $37,000 for other expenses incurred on our behalf. For the period from June 21, 2012 through June 30, 2012 we did not reimburse ARRM for any expenses.

ARRM is further entitled to receive a termination fee from us under certain circumstances. The ARRM monthly management fee is not calculated based on the performance of our assets. Accordingly, the payment of our monthly management fee may not decline in the event of a decline in our earnings and may cause us to incur losses.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Indemnifications and Litigation

We enter into certain contracts that contain a variety of indemnifications, principally with ARRM and underwriters, against third-party claims for errors and omissions in connection with their services to us. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements, as well as the maximum amount attributable to past events, is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2013 and December 31, 2012.

We are not party to any pending, threatened or contemplated litigation.

Note 16 – Related Party Transactions

We are externally managed by ARRM pursuant to the Management Agreement. All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board. The Management Agreement expires after an initial term of five years on October 5, 2017 and is thereafter automatically renewed for successive one-year terms, unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.

Under the terms of the Management Agreement, ARRM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ARRM is responsible for the following primary roles:

●

Advising us with respect to, arranging for and managing the acquisition, financing, management and disposition of, elements of our investment portfolio;

●

Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies;

●

Coordinating capital raising activities;

●

Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets and providing administrative and managerial services in connection with our day-to-day operations; and

●

Providing executive and administrative personnel, office space and other appropriate services required in rendering management services to us.

ARRM is also responsible for the payment of a sub-management fee payable monthly in arrears to SBBC LLC in an amount equal to a retainer of $115,000 plus 25% of the management fee earned by ARRM, net of expenses.

We are required to take actions as may be reasonably required to permit and enable ARRM to carry out its duties and obligations. We are also responsible for any costs and expenses that ARRM incurred solely on behalf of us other than the various overhead expenses specified in the terms of the Management Agreement. For the quarter and six months ended June 30, 2013, we reimbursed ARRM $27,000 and $37,000, respectively, for other expenses incurred on our behalf. For the period from June 21, 2012 through June 30, 2012, we did not reimburse ARRM for any expenses.

For the quarter and six months ended June 30, 2013, we incurred $0.8 million and $1.4 million, respectively, in management fees to ARRM. For the period from June 21, 2012 through June 30, 2012, we did not incur any management fees.

Note 17 – Interest Rate Risk

Our primary market risk is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned and the interest expense incurred in connection with the liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of MBS and our ability to realize gains from the sale of these assets. A decline in the value of the MBS pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.

JAVELIN MORTGAGE INVESTMENT CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 18 – Subsequent Events

On July 30, 2013, a cash dividend of $0.23 per outstanding common share, or $3.1 million in the aggregate, was paid to holders of record on July 15, 2013. We have also announced cash dividends of $0.23 per outstanding common share payable August 29, 2013 to holders of record on August 15, 2013 and payable September 27, 2013 to holders of record on September 16, 2013.

In response to increased interest rate and spread volatility since June 30, 2013, we sold approximately $329.5 million of Agency Securities resulting in realized capital losses of approximately $27.6 million. We also realized approximately $1.0 million of capital gains on the short sales of U.S. Treasury Securities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report.

Overview

We are a Maryland corporation formed to invest in and manage a leveraged portfolio of mortgage backed securities and mortgage loans. Some of these securities are issued or guaranteed by a U.S. Government-sponsored entity (“GSE”), such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or guaranteed by the Government National Mortgage Administration (Ginnie Mae), (collectively, “Agency Securities”), and other securities backed by residential and/or commercial mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency (collectively, “Non-Agency Securities” and, together with Agency Securities, (“MBS”)), which we refer to as our target assets. We also may invest in collateralized commercial mortgage backed securities ("CMBS") and other mortgage related investments, including mortgage loans, mortgage related derivatives and mortgage servicing rights. From time to time, a portion of our assets may be invested in unsecured notes and bonds issued by GSEs (collectively, “Agency Debt”), United States ("U.S.") Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust (“REIT”). Our charter permits us to invest in Agency Securities and Non-Agency Securities. As of June 30, 2013 investments in Agency Securities accounted for 92.5% of our MBS portfolio and 89.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions. As of June 30, 2013, investments in Non-Agency Securities accounted for 7.5% of our MBS portfolio and 11.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 6 to the condensed financial statements).

We are externally managed by ARRM, pursuant to a management agreement (the “Management Agreement”). ARRM is an investment advisor registered with the Securities and Exchange Commission (“SEC”). ARRM is also the external manager of ARMOUR Residential REIT, Inc. (“ARMOUR”), a publicly traded REIT, which invests in and manages a leveraged portfolio of hybrid adjustable rate, adjustable rate and fixed rate Agency Securities. Our executive officers also serve as the executive officers of ARMOUR.

We seek attractive long-term investment returns by investing our equity capital and borrowed funds in our targeted asset class. We earn returns on the spread between the yield on our assets and our costs, including the cost of the funds we borrow, after giving effect to our hedges. We identify and acquire our target assets, finance our acquisitions with borrowings under a series of short-term repurchase agreements at the most competitive interest rates available to us and then cost-effectively hedge our interest rate and other risks based on our entire portfolio of assets, liabilities and derivatives and our management’s view of the market. Successful implementation of this approach requires us to address interest rate risk, maintain adequate liquidity and effectively hedge interest rate risks. We believe that the residential mortgage market will undergo significant changes in the coming years as the role of GSEs, such as Fannie Mae and Freddie Mac, is diminished, which we expect will create attractive investment opportunities for us. We execute our business plan in a manner consistent with our intention of qualifying as a REIT under the Internal Revenue Code, (the “Code”) and avoid regulation as an investment company under the Investment Company Act of 1940 (the “1940 Act”).

Factors that Affect our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our target assets and the supply of, and demand for, such assets. We invest in financial assets and markets and recent events, such as those discussed below, may affect our business in ways that are difficult to predict. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. We invest across the spectrum of mortgage investments, from Agency Securities, for which the principal and interest payments are guaranteed by a GSE, to Non-Agency Securities, non-prime mortgage loans and unrated equity tranches of CMBS. As such, we expect our investments to be subject to risks arising from delinquencies and foreclosures, thereby exposing our investment portfolio to potential losses. We are exposed to changing credit spreads which could result in declines in the fair value of our investments. We believe ARRM’s in-depth investment expertise across multiple sectors of the mortgage market, prudent asset selection and our hedging strategy enable us to minimize our credit losses, our market value losses and financing costs. Prepayment rates, as reflected by the rate of principal pay downs, and interest rates vary according to the type of investment, conditions in financial markets, government actions, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment rates on our target assets purchased at a premium increase, related purchase premium amortization will increase, thereby reducing the net yield on such assets. Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT. In addition, since we have not elected to use cash flow hedge accounting, earnings reported in accordance with generally accepted accounting principles in the U.S. (“GAAP”) will fluctuate even in situations where our derivatives are operating as intended. As a result of this mark-to-market accounting treatment, our results of operations are likely to fluctuate far more than if we were to designate our derivative activities as cash flow hedges. Comparisons with companies that use cash flow hedge accounting for all or part of their derivative activities may not be meaningful.

For any period during which changes in the interest rates earned on our target assets do not coincide with interest rate changes on our borrowings, such assets will tend to reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. Interest rate increases tend to decrease our net interest income and the market value of our target assets and therefore, our book value. Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our stockholders.

Prepayments on our target assets are influenced by changes in market interest rates and a variety of economic and geographic factors, policy decisions by regulators, as well as other factors beyond our control. Consequently, prepayment rates cannot be predicted with certainty. To the extent we hold assets acquired at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our target assets increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may decline. The recent climate of government intervention in the housing finance markets significantly increases the risk associated with prepayments.

While we use strategies to economically hedge some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our MBS portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that allows us to seek attractive net spreads on our MBS portfolio.

In addition, a variety of other factors relating to our business may also impact our financial condition and operating performance; these factors include,

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our use of derivatives to hedge interest rate risk;

●

the REIT requirements under the Code; and

●

the requirements to qualify for an exemption under the 1940 Act and other regulatory and accounting policies related to our business.

Our Manager

We are externally managed by ARRM, pursuant to the Management Agreement. All of our executive officers are also employees of ARRM (see Note 16 to the condensed financial statements). ARRM manages our day-to-day operations, subject to the direction and oversight of the Board of Directors (“Board”). The Management Agreement expires after an initial term of five years on October 5, 2017 and is thereafter automatically renewed for additional one-year terms unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.

Pursuant to the Management Agreement, ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of (a) 1.5% of gross equity raised (including equity from our initial public offering and concurrent private placement) up to $1 billion, plus (b) 1.0% of gross equity raised in excess of $1 billion. We are also obligated to reimburse certain expenses incurred by ARRM and its affiliates. ARRM is further entitled to receive a termination fee from us under certain circumstances. ARRM is entitled to receive a monthly management fee regardless of the performance of our assets. Accordingly, the payment of our monthly management fee may not decline in the event of a decline in our earnings and may cause us to incur losses. For the quarter and six months ended June 30, 2013, we reimbursed ARRM $27,000 and $37,000, respectively, for other expenses incurred on our behalf. For the period from June 21, 2012 through June 30, 2012 we did not reimburse ARRM for any expenses.

Also, JAVELIN and ARRM entered into a sub-management agreement with Staton Bell Blank Check LLC (“SBBC”), an entity jointly owned by Daniel C. Staton and Marc H. Bell, each of whom is a member of our board of directors. Pursuant to the sub-management agreement, ARRM is responsible for paying a sub-management fee to the Sub-Manager in an amount equal to a monthly retainer of $115,000 and a sub-management fee of 25% of the net management fee earned by ARRM under the Management Agreement. The sub-management agreement continues in effect until it is terminated in accordance with its terms. SBBC is also the sub-manager of ARMOUR.

Market and Interest Rate Trends and the Effect on our MBS Portfolio

Developments at Fannie Mae and Freddie Mac

Payments of principal and interest on the Agency Securities in which we invest are guaranteed by Fannie Mae and Freddie Mac. Because of the guarantee and the underwriting standards associated with mortgages underlying Agency Securities, Agency Securities historically have had high stability in value and been considered to present low credit risk.

In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report entitled, “Reforming America’s Housing Finance Market” to the U.S. Congress outlining recommendations for reforming the U.S. housing system, specifically Fannie Mae and Freddie Mac and transforming the U.S. Government’s involvement in the housing market. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency Securities as the method of reform is undecided and has not yet been defined by the regulators. Without U.S. Government support for residential mortgages, we may not be able to execute our current business model in an efficient manner.

In March 2011, the U.S. Treasury announced that it would begin the orderly wind down of Agency Securities it had purchased from Fannie Mae, Freddie Mac and Ginnie Mae to stabilize the housing market, with sales up to $10.0 billion per month, subject to market conditions. We are unable to predict the timing or manner in which the U.S. Treasury or the U.S. Federal Reserve (“the Fed”) will liquidate their holdings or make further interventions in the Agency Securities markets, or what impact, if any, such action could have on the Agency Securities market, the Agency Securities we hold, our business, results of operations and financial condition.

On June 25, 2013, a bipartisan group of U.S. senators introduced a draft bill titled, "Housing Finance Reform and Taxpayer Protection Act of 2013" to the U.S. Senate, which would wind down Fannie Mae and Freddie Mac over a period of five years and replace the public securitization market used by the GSEs with a public-private alternative market. On July 11, 2013, members of the U.S. House Committee on Financial Services introduced a similar draft bill titled, "Protecting American Taxpayers and Homeowners Act" to the U.S. House of Representatives. While distinguishable in some respects from the Senate version, the House bill would also eliminate Fannie Mae and Freddie Mac and seek to increase the opportunities for private capital to participate in, and consequently bear the risk of loss in connection with, government-guaranteed MBS.

The passage of any new legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by the U.S. government through a new or existing successor entity to Fannie Mae and Freddie Mac. If Fannie Mae and Freddie Mac were reformed or wound down, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac Agency Securities. It is also possible that the above-referenced proposed legislation, if made law, could adversely impact the market for securities issued or guaranteed by the U.S. government and the spreads at which they trade. The foregoing could materially adversely affect the pricing, supply, liquidity and value of the Agency Securities in which we invest and otherwise materially adversely affect our business, operations and financial condition.

See the risk factor under Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for additional information regarding these bills.

We cannot predict whether or when new actions may occur, the timing and pace of current actions already implemented, or what impact if any, such actions, or future actions, could have on our business, results of operations and financial condition.

U.S. Government Mortgage Related Securities Market Intervention

In September 2012, the Fed announced a third “quantitative easing” program, popularly referred to as “QE3,” to purchase an additional $40 billion of Agency Securities per month until the unemployment rate and other economic indicators improve. QE3 plus its existing investment programs are expected to grow the Fed’s Agency Securities holding by approximately $85 billion per month at least through the end of 2012. On December 12, 2012, the Fed also announced that it will keep the target range for the Federal Funds Rate between zero and 0.25% for at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than 0.5% above the Fed’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored. On May 22, 2013, Chairman Bernanke, responding to a question, stated “If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings take a step down in our pace of purchases.” At the June 18-19, 2013 Federal Open Market Committee (“FOMC”) meeting, all but a few of the Committee members agreed to continue purchases of Agency securities at their current pace.

On June 19, 2013, at the FOMC Press Conference, Chairman Bernanke, responding to a journalist's question referring to a hypothetically optimistic economy, stated “In that case, we would expect probably to slow or moderate purchases some time later this year, and then through the middle of-through the early part of next year, and ending, in that scenario, somewhere in the middle of the year.”

The markets have become particularly sensitive to statements by and about the Fed and its officials. For example, during the period from May 21, 2013 to June 28, 2013 the 10-Year Treasury Rate rose 56 basis points from 1.93% to 2.49% (with a high of 2.61% on June 25, 2013) while the Primary Mortgage Rate rose 74 basis points from 3.65% to 4.39% (with a high of 4.58% on June 25, 2013). On July 5, 2013, the release of regularly scheduled monthly unemployment data by the Bureau of Labor Statistics caused the 10-Year Treasury Rate to temporarily spike to 2.74% over concerns about possible reactions from the Fed.

The Fed continues to maintain its position that the timing and scope of tapering its securities purchases is dependent upon improving economic indicators. More recently, in a press conference on July 12, 2013, Chairman Bernanke stated that “highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy.” Despite this statement, the markets appear to have priced in the expectation that tapering will occur in the near term as reflected in higher Treasury rates and lower Agency Securities values. Lower prices of Agency Securities reduces our book value and the amounts that we can borrow under repurchase agreements.

Financial Regulatory Reform Bill and Other Government Activity

We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company pursuant to the exclusion provided by Section 3(c)(5)(C) of the 1940 Act for entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate.” On August 31, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments) pursuant to which it is reviewing whether certain companies that invest in MBS and rely on the exclusion from registration under Section 3(c)(5)(C) of the 1940 Act (such as us) should continue to be allowed to rely on such exclusion from registration. If we fail to continue to qualify for this exclusion from registration as an investment company, or the SEC determines that companies that invest in MBS are no longer able to rely on this exclusion, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned, or we may be required to register as an investment company under the 1940 Act, either of which could negatively affect the value of shares of our stock and our ability to make distributions to our stockholders.

Certain programs initiated by the U.S. Government, through the Federal Housing Administration and the Federal Deposit Insurance Corporation (“FDIC”), to provide homeowners with assistance in avoiding residential mortgage loan foreclosures are currently in effect. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. While the effect of these programs has not been as extensive as originally expected, the effect of such programs for holders of Agency Securities could be that such holders would experience changes in the anticipated yields of their Agency Securities due to (i) increased prepayment rates and/or (ii) lower interest and principal payments.

In March 2009, the Home Affordable Modification Program (“HAMP”) was introduced to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. HAMP is designed to help at risk homeowners, both those who are in default and those who are at imminent risk of default, by providing the borrower with affordable and sustainable monthly payments.

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of banking, and a significant overhaul of many aspects of the regulation of the financial services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including our company, and other banks and institutions which are important to our business model. Certain notable rules are, among other things:

●

Requiring regulation and oversight of large, systemically important financial institutions by establishing an interagency council on systemic risk and implementation of heightened prudential standards and regulation by the Board of Governors of the Fed for systemically important financial institutions (including nonbank financial companies), as well as the implementation of the FDIC resolution procedures for liquidation of large financial companies to avoid market disruption;

●

Applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, savings and loan holding companies and systemically important nonbank financial companies;

●

Limiting the Fed’s emergency authority to lend to nondepository institutions to facilities with broad-based eligibility, and authorizing the FDIC to establish an emergency financial stabilization fund for solvent depository institutions and their holding companies, subject to the approval of Congress, the Secretary of the U.S. Treasury and the Fed;

●

Creating regimes for regulation of over-the-counter derivatives and non-admitted property and casualty insurers and reinsurers;

●

Implementing regulation of hedge fund and private equity advisers by requiring such advisers to register with the SEC;

●

Providing for the implementation of corporate governance provisions for all public companies concerning proxy access and executive compensation; and

●

Reforming regulation of credit rating agencies.

Many of the provisions of the Dodd-Frank Act, including certain provisions described above are subject to further study, rulemaking, and the discretion of regulatory bodies. As the hundreds of regulations called for by the Dodd-Frank Act are promulgated, we will continue to evaluate the impact of any such regulations. It is unclear how this legislation may impact the borrowing environment, investing environment for Agency Securities and interest rate swap contracts as much of the bill’s implementation has not yet been defined by the regulators.

In addition, in 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions (“Basel III”). Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” Beginning with the Tier 1 common equity and Tier 1 capital ratio requirements, Basel III will be phased in incrementally between January 1, 2013 and January 1, 2019. The final package of Basel III reforms were approved by the Group of Twenty Finance Ministers and Central Bank Governors in November 2010 and are subject to individual adoption by member nations, including the U.S.

In October 2011, the Federal Housing Finance Agency announced changes to the Home Affordable Refinance Program (“HARP”) to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan to value ratio above 125%. However, this would only apply to mortgages guaranteed by the GSEs. There are many challenging issues to this proposal, notably the question as to whether a loan with a loan to value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. The chances of this initiative’s success have created additional uncertainty in the Agency Securities market, particularly with respect to possible increases in prepayment rates.

On January 4, 2012, the Fed issued a white paper outlining additional ideas with regard to refinancings and loan modifications. It is likely that loan modifications would result in increased prepayments on some Agency Securities. These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the Agency Securities in which we invest.

In an effort to continue to provide meaningful solutions to the housing crisis, effective June 1, 2012, the Obama administration expanded the population of homeowners that may be eligible for HAMP.

On September 28, 2012, the United Kingdom Financial Services Authority (“FSA”) released the results of its review of the process for setting the London Interbank Offered Rate (“LIBOR”) interest rate for various currencies and maturities (“Wheatley Review”). Some of our derivative positions use various maturities of U.S. dollar LIBOR. Our borrowings in the repurchase market have also historically tracked these LIBOR rates. The Wheatley Review found, among other things, that potential conflicts of interests coupled with insufficient oversight and accountability resulted in some reported LIBOR rates that did not reflect the true cost of inter-bank borrowings they were meant to represent.

The Wheatley Review also proposes a number of remedial actions, including:

●

New statutory authority for the FSA to supervise and regulate the LIBOR setting process;

●

Establishing a new independent oversight body to administer the LIBOR setting process;

●

Eliminating LIBOR rates for certain currencies and maturities where markets are not sufficiently deep and liquid;

●

Ceasing immediate reporting of rates submitted by individual participating banks; and

●

Establishing controls to ensure that submitted rates represent actual transactions.

There can be no assurance whether or when the Wheatley Review recommendations will be implemented in whole or in part. Our derivative and repurchase borrowings are conducted in U.S. dollars for maturities with historically deep and liquid markets. However, there can be no assurance whether the implementation of any Wheatley Review recommendations would have a material impact on the future reported levels of LIBOR rates relevant to our derivative or repurchase borrowings.

On July 2, 2013, the Fed, in coordination with the FDIC and the Office of the Comptroller of the Currency (the "OCC"), approved a final rule that enhances bank regulatory capital requirements and implements certain elements of the Basel III capital reforms in the U.S. On July 9, 2013, the OCC approved the final rule and the FDIC approved the final rule as an interim rule. The final rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent and a common equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised U.S. financial institutions. The final rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all U.S. banking organizations. The final rule will continue to apply existing risk-based capital standards with respect to residential loans, including a 50 percent risk weight for safely underwritten first-lien mortgages that are not past due. "Advanced approaches banking organizations," those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures, will be required to comply with the final rule starting on January 1, 2014. Other banking organizations will be required to comply with the final rule starting January 1, 2015.

Also, on July 9, 2013, the Fed, the FDIC, and the OCC proposed a rule to change the leverage ratio standards for the largest U.S. banking organizations. Under the proposed rule, bank-holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody would be required to maintain a Tier 1 capital leverage buffer of at least 5 percent, which is 2 percent above the minimum supplementary leverage ratio requirement of 3 percent adopted by these three agencies in their Basel III capital reform rules on July 2, 2013. In addition to the leverage buffer, the proposed rule would require insured depository institutions of such large bank-holding companies to meet a 6 percent supplementary leverage ratio to be considered "well capitalized." The proposed rule would apply starting January 1, 2018. It is presently unclear how or whether the adoption of the above-mentioned reforms will affect our business, but it is expected that banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.

Credit Market Disruption and Current Conditions

During the past few years, the residential housing and mortgage markets in the U.S. have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the MBS we purchase and an increase in the average collateral requirements under our repurchase agreements we have obtained. While these markets have recovered significantly, further increased volatility and deterioration in the broader residential mortgage and residential mortgage backed securities (“RMBS”) markets may adversely affect the performance and market value of the Agency Securities and other high quality RMBS.

Short-term Interest Rates and Funding Costs

In December 2008, the Fed stated that it was adopting a policy of “quantitative easing” and would target keeping the Federal Funds Rate between 0.00% and 0.25%. To date, the Fed has maintained that target range. Our funding costs, which traditionally have tracked the 30-day LIBOR have generally benefited by this easing of monetary policy, although to a somewhat lesser extent. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.

Historically, 30-day LIBOR has closely tracked movements in the Federal Funds Rate and the Effective Federal Funds Rate. The Effective Federal Funds Rate can differ from the Federal Funds Rate in that the Effective index represents the volume weighted average of interest rates at which depository institutions lend balances at the Fed to other depository institutions overnight (actual transactions, rather than target rate).

Our borrowings in the repurchase market have also historically closely tracked the Federal Funds Rate and LIBOR. Traditionally, a lower Federal Funds rate has indicated a time of increased net interest margin and higher asset values. However, for the past several years, LIBOR and repurchase market rates have varied greatly, and often have been significantly higher than the target Federal Funds Rate. The difference between 30-day LIBOR and the Federal Funds rate has also been quite volatile, with the spread alternately returning to more normal levels and then widening out again. The continued volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our MBS portfolio. If this were to occur, our net interest margin and the value of our MBS portfolio might suffer as a result.

The following table shows 30-day LIBOR as compared to the Effective Federal Funds Rate at June 30, 2013 and June 30, 2012.

30-Day

LIBOR

Effective

Federal

Funds Rate

June 30, 2013

0.19

0.07

June 30, 2012

0.25

0.09

Results of Operations

As a result of our continued equity raising efforts, our earnings as reported in our condensed financial statements, particularly on a per share basis, may take time to reach a level in which we consider to be indicative of a full run-rate. Some period over period comparisons in the discussion below may not be meaningful.

Net Income Summary

Our primary source of income is the interest income we earn on our MBS portfolio. As of June 30, 2013 and December 31, 2012, our Agency Securities were carried at a net premium to par value with a weighted average amortized cost, of 105.56% and 105.83%, respectively, because the average interest rates on these securities are higher than prevailing market rates. As of June 30, 2013 and December 31, 2012, our Non-Agency Securities were carried at a net discount to par value with a weighted average amortized cost of 86.56% and 80.94%, respectively, because the average interest rates on these securities are lower than prevailing market rates.

The following table presents the components of the yield earned on our MBS portfolio and Linked Transactions for the quarter ended June 30, 2013. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history. See Note 7 to the condensed financial statements for additional discussion of Linked Transactions.

MBS	Asset Yield			Cost of Funds			Net Interest Margin			Interest Expense on Repurchase Agreements
Agency Securities		2.76	%		1.10	%		1.65	%		0.42	%
Non-Agency Securities (including Linked Transactions)		4.50			2.46			2.04			2.06
Total portfolio		2.95	%		1.20	%		1.75	%		0.53	%

The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. Our rate of portfolio repayment for the quarter ended June 30, 2013 was 4.8% on a constant prepayment basis. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history. Interest rates on Non-Agency Securities repurchase agreements are generally higher than those for Agency Securities repurchase agreements reflecting the relatively higher perceived risk.

The Federal Funds Rate was 0.07% and LIBOR was 0.19% at June 30, 2013. We increased our total interest rate swap contracts aggregate notional balance from $325.0 million at December 31, 2012 to $801.3 million at June 30, 2013. Our interest rate swap contracts had a weighted average swap rate of 1.7% and a weighted average term of 109 months at June 30, 2013. As of June 30, 2013, our total interest rate swaptions aggregate notional balance did not change from $130.0 million at December 31, 2012. Our swaptions had an underlying weighted average swap rate of 1.8% and a weighted average term of 3 months at June 30, 2013.

Net Interest Income

Our net interest income for the quarter and six months ended June 30, 2013 was $11.2 million and $20.2 million, respectively. We did not have any interest income for the period from June 21, 2012 through June 30, 2012. As of June 30, 2013, our MBS portfolio consisted of $1.8 billion current face amount of Agency Securities and $149.0 million current face amount of Non-Agency Securities.

Gains and Losses on Sale of MBS

During the quarter and six months ended June 30, 2013, and for the period from June 21, 2012 through June 30, 2012, we did not sell any MBS.

Gains and Losses on U.S. Treasury Securities

During the quarter and six months ended June 30, 2013, we sold short $302.9 million of U.S. Treasury Securities. We purchased $70.1 million resulting in a realized loss of $0.4 million. The outstanding balance resulted in a net unrealized loss of $2.7 million. For the period from June 21, 2012 through June 30, 2012, we did not purchase or sell any U.S. Treasury Securities.

Expenses

Our total expenses for the quarter and six months ended June 30, 2013, were $1.2 million and $2.2 million, respectively. We did not have any expenses for the period from June 21, 2012 through June 30, 2012.

Taxable Income

	For the Quarter Ended June 30, 2013			For the Six Months Ended June 30, 2013
	(in thousands)

GAAP Net income	$	38,237		$	49,213
Book to tax differences:
Net book/tax differences on Non-Agency Securities and Linked Transactions		8,359			6,634
Unrealized gain on derivatives		(43,181	)		(46,626	)
Unrealized loss on U.S. Treasury Securities		2,716			2,716
Realized capital loss on sale of U.S. Treasury Securities		390			390
Income tax expense		-			2
Estimated taxable income	$	6,521		$	12,329

We are required and intend to timely distribute substantially all of our REIT taxable income in order to maintain our REIT status under the Code. For the quarter ended June 30, 2013, we paid dividends of $0.23 per outstanding share of common stock for each month of the first and second quarter, resulting in total payments to stockholders of $7.9 million and $13.1 million for the quarter and six months ended June 30, 2013. Our estimated REIT taxable income available to pay dividends was $6.5 million and $12.3 million for the quarter and six months ended June 30, 2013. For tax purposes, capital losses do not affect the amount of our ordinary taxable income. Our REIT dividend requirements are based on the amount of our ordinary taxable income. These capital losses will generally be available to offset capital gains realized in the years 2013 through 2018. See Note 18 to the condensed financial statements for additional discussion.

Financial Condition

Agency Securities

We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the constant prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset and earnings, are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.

The tables below summarize certain characteristics of our Agency Securities as of June 30, 2013 and December 31, 2012 (dollars in thousands). All of our Agency Securities were fixed rate securities as of June 30, 2013 and December 31, 2012.

Agency Securities:

As of

Principal Amount

Net Unamortized

Premium

Amortized Cost

Amortized

Cost

divided by

Principal

Fair Value

Fair Value divided

Principal

Weighted Average

Coupon

June 30, 2013

1,828,296

101,577

1,929,873

105.56

1,831,970

100.20

3.30

December 31, 2012

1,055,456

61,504

1,116,960

105.83

1,112,358

105.39

3.14

Fixed Rate Agency Securities:

As of

Principal

Amount

Weighted

Average Coupon

Weighted

Average

Months to

Maturity

Percentage of

Total Agency Securities

June 30, 2013

1,828,296

3.30

345

100.0

December 31, 2012

1,055,456

3.14

342

100.0

The following table shows the average principal repayment rate for those securities which have settled for the quarterly period presented.

Quarter ended

Average

Quarterly

Principal

Repayment Rate

June 30, 2013

4.8

As of June 30, 2013, our MBS portfolio consisted of approximately $1.8 billion in market value of Agency Securities with fixed-interest rate periods of fifteen, twenty, twenty-five and thirty years. As of June 30, 2013, investments in Agency Securities accounted for 92.5% of our MBS portfolio and 89.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 7 to the condensed financial statements for additional discussion of Non-Agency Securities that are accounted for as a component of Linked Transactions).

Our net income is primarily a function of the difference between the yield on our assets and the financing cost of owning those assets. Since we tend to purchase Agency Securities at a premium to par, the main item that can affect the yield on our Agency Securities after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the homeowners’ regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage but can also result from repurchases of delinquent, defaulted, or modified loans, are less so. Being able to accurately estimate and manage these repayment rates is a critical portion of the management of our MBS portfolio, not only for estimating current yield but also for considering the rate of reinvestment of those proceeds into new securities, the yields which those new securities may add to our MBS portfolio and our hedging strategy. We expect that prepayment rates will be elevated due to repurchases of loans that reach 120 day or more delinquency by Fannie Mae and Freddie Mac on a continuing basis.

Non-Agency Securities and Linked Transactions

The table below summarizes certain characteristics of our Non-Agency Securities (including those underlying Linked Transactions) as of June 30, 2013 and December 31, 2012 (dollars in thousands).

Non-Agency Securities and Linked Transactions:

As of

Principal

Amount

Net

Unamortized

Discount

Amortized

Cost

Amortized

Cost

divided by

Principal

Fair

Value

Fair

Value

divided

Principal

Weighted

Average

Coupon

June 30, 2013

262,614

(35,290

)

227,324

86.56

226,734

86.34

4.41

December 31, 2012

156,957

(29,920

)

127,037

80.94

129,946

82.79

5.29

As of June 30, 2013, our overall investment in Non-Agency Securities (including those underlying Linked Transactions) represents 11.0% of our total investment in MBS.

Liabilities

We have entered into repurchase agreements to finance most of our MBS. Our repurchase agreements are secured by our MBS and bear interest at rates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. We have established borrowing relationships with several investment banking firms and other lenders, 22 of which we had done repurchase trades with as of June 30, 2013 and 18 of which we had done repurchase trades with as of December 31, 2012. We had outstanding balances under our repurchase agreements, net as of June 30, 2013 of $1.7 billion (net of reverse repurchase agreements of $237.0 million). Our outstanding repurchase agreements balance at December 31, 2012 was $1.1 billion. We had obligations to return securities received as collateral associated with our reverse repurchase agreements as of June 30, 2013 of $234.5 million. We did not have such obligations as of December 31, 2012.

Derivative Instruments

We generally hedge our interest rate risk as ARRM deems prudent in light of market conditions and the associated costs. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate or LIBOR. While our policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge, we maintain an overall target of hedging at least 40% of our non-adjustable rate mortgages. For interest rate risk mitigation purposes, we consider Agency Securities to be adjustable rate mortgages (“ARMs”) if their interest rate is either currently subject to adjustment according to prevailing rates or if they are within 18 months of the period where such adjustments will occur. No assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition. We have not elected cash flow hedge accounting treatment as allowed by GAAP. Since we do not designate our derivative activities as cash flow hedges, realized as well as unrealized gains/losses from these transactions will impact our earnings.

Use of derivative instruments may fail to protect or could adversely affect us because, among other things:

●

available derivatives may not correspond directly with the interest rate risk for which protection is sought (e.g., the difference in interest rate movements for long term U.S. Treasury Securities compared to Agency Securities);

●

the duration of the derivatives may not match the duration of the related liability;

●

the party owing money on the derivatives may default on its obligation to pay;

●

the credit-quality of the party owing money on the derivatives may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

●

the value of derivatives may be adjusted from time to time in accordance with GAAP to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss.

As of June 30, 2013 and December 31, 2012, we had interest rate swap contracts with an aggregate notional balance of $801.3 million and $325.0 million, respectively. As of June 30, 2013, our total interest rate swaptions aggregate notional balance did not change from the aggregate notional balance of $130.0 million at December 31, 2012. These derivative transactions are designed to lock in some funding costs for financing activities associated with our assets in such a way as to help assure the realization of attractive net interest margins and to vary inversely in value with our Agency Securities. Such contracts are based on assumptions about prepayments which, if not realized, will cause results to differ from expectations.

Although we attempt to structure our derivatives to offset the changes in asset prices, they are not perfectly correlated and depend on the corresponding durations and sections of the yield curve that moves to offset each other. For the quarter and six months ended June 30, 2013, we recognized net gains of $41.2 million and $43.7 million, respectively, related to our derivatives. The net unrealized loss on Agency Securities for the quarter and six months ended June 30, 2013 was $77.5 million and $93.3 million, respectively. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history.

As required by the Dodd-Frank Act, the Commodity Futures Trading Commission has adopted rules requiring certain interest rate swap contracts to be cleared through a derivatives clearing organization. We are required to clear certain new interest rate swap contracts as of June 2013. There can be no assurances as to what effects, if any, these interest rate swap clearing requirements will have on the availability, pricing, liquidity or margin requirements associated with cleared or un-cleared interest rate swap contracts that we might enter into in the future.

Liquidity and Capital Resources

Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our investments and cash generated from our operating results. Other sources of funds may include proceeds from equity and debt offerings and asset sales. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available to support our investments, repayments on borrowings and the payment of cash dividends as required for qualification as a REIT.

In addition to the repurchase agreement financing discussed above, we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell such U.S. Treasury Securities to third parties and recognize a liability to return the securities to the original borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day. The practical effect of these transactions is to replace a portion of our repurchase agreement financing of our MBS portfolio with short positions in U.S. Treasury Securities. We believe that this helps to reduce interest rate risk, and therefore counterparty credit and liquidity risk.

Both parties to the repurchase and reverse repurchase transactions have the right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged.

We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on repurchase borrowings, reacquisition of securities to be returned to borrowers and the payment of cash dividends as required for continued qualification as a REIT.

Our primary uses of cash are to purchase MBS, pay interest and principal on our borrowings, fund our operations and pay dividends. During the six months ended June 30, 2013, we purchased $891.8 million of MBS using proceeds from our equity raise, repurchase agreements and principal repayments. During the six months ended June 30, 2013, we received cash of $53.3 million from prepayments and scheduled principal payments on our MBS. We received net proceeds of $113.2 million from a common equity issuance during the six months ended June 30, 2013. Our total repurchase indebtedness was approximately $1.7 billion at June 30, 2013, and we made cash interest payments of approximately $3.6 million on our liabilities for the six months ended June 30, 2013. Part of funding our operations includes providing margin cash to offset liability balances on our derivatives. We recovered $51.8 million of cash collateral posted with counterparties and increased our liability by $43.0 million for cash collateral held as of June 30, 2013.

In response to the growth of our MBS portfolio and to the relatively weak financing market, we have continued to pursue additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets.

Repurchase and Related Facilities

As of June 30, 2013, we had MRAs with 27 counterparties and had $1.7 billion, net in outstanding borrowings with 22 of those counterparties. As of December 31, 2012, we had MRAs with 26 counterparties and had $1.1 billion in outstanding borrowings with 18 of those counterparties.

The following tables represent the contractual repricing and other information regarding our repurchase agreements, reverse repurchase agreements and Linked Transactions (see Notes 7 and 8 to the condensed financial statements for additional discussion of Linked Transactions).

June 30, 2013

	Repurchase Agreements (in thousands)		Weighted Average Contractual Rate			Weighted Average Maturity in days		Haircut for Repurchase Agreements (1)
Agency Securities, net with reverse repurchase agreements	$	1,552,180		0.40	%		41		4.87	%
Non-Agency Securities and Linked transactions		175,827		1.48			51		19.95
Total	$	1,728,007		0.49	%		42		6.45	%

(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

Obligations to return securities received as collateral associated with the reverse repurchase agreements of $234.5 million at June 30, 2013 are all due within 30 days.

December 31, 2012

	Repurchase Agreements (in thousands)		Weighted Average Contractual Rate			Weighted Average Maturity in days		Haircut for Repurchase Agreements (1)
Agency Securities	$	1,033,496		0.48	%		43		4.83	%
Non-Agency Securities		102,334		2.07			25		22.35
Total	$	1,135,830		0.62	%		41		6.4	%

(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

Maturing or Repricing	June 30, 2013		December 31, 2012
	(in thousands)
Within 30 days (net of reverse repurchase agreements of $237.0 million at June 30, 2013)	$	400,823	$	280,435
31 days to 60 days		940,113		629,311
61 days to 90 days		387,071		226,084
Greater than 90 days		-		-
Total	$	1,728,007	$	1,135,830

Declines in the value of our MBS portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately.

The residential mortgage market in the U.S. experienced difficult economic conditions over the last several years including:

●

increased volatility of many financial assets, including Agency Securities and other high-quality RMBS assets;

●

increased volatility and deterioration in the broader residential mortgage and RMBS markets; and

●

significant disruption in financing of RMBS.

While conditions have improved, should there be a reoccurrence of difficulties in the residential mortgage market, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards, or increase the amount of required equity capital or haircut, any of which could make it more difficult or costly for us to obtain financing.

Financial sector volatility can also lead to increased demand and prices for high quality debt securities, including Agency Securities. While increased prices may increase the value of our MBS, higher values may also reduce the return on reinvestment of capital, thereby lowering our future profitability.

The following graph represents the month-end outstanding balances of our repurchase agreements (before the effect of netting reverse repurchase agreements and Linked Transactions), which finance most of our MBS. The balance of repurchase agreements outstanding will fluctuate within any given month based on changes in the market value of the particular MBS pledged as collateral (including the effects of principal paydowns) and the level and timing of investment and reinvestment activity.

Effects of Margin Requirements, Leverage and Credit Spreads

Our MBS have values that fluctuate according to market conditions and, as discussed above, the market value of our MBS will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities, our lenders have full discretion to determine the value of the MBS we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled principal repayments are announced monthly.

We experience margin calls in the ordinary course of our business and under certain conditions, such as during a period of declining market value for MBS and we may experience margin calls monthly or as frequently as daily. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline and we may experience margin calls. We will use our liquidity to meet such margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. If we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital.

We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in MBS. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to involuntarily liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders’ equity to finance the Agency Securities in which we invest and between one and three times the amount of our stockholders’ equity to finance the Non-Agency Securities in which we invest, but we are not limited to those ranges. At June 30, 2013 and December 31, 2012, our total net borrowings were approximately $1.7 billion and $1.1 billion (excluding accrued interest), respectively, which represented a debt to equity ratio of approximately 9.28:1 and 7.67:1, respectively.

Forward-Looking Statements Regarding Liquidity

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and our ability to make timely portfolio adjustments, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, meet our financing obligations, pay fees under the Management Agreement, fund our distributions to stockholders and pay general corporate expenses.

We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, including classes of preferred stock, common stock and senior or subordinated notes to meet our long-term (greater than one year) liquidity. Such financing will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain any such financing.

Stockholders’ Equity

Dividends

The following table presents our common stock dividend transactions for the six months ended June 30, 2013.

Record Date	Payment Date	Rate per common share		Aggregate amount paid to holders of record (in thousands)
January 15, 2013	January 30, 2013	$	0.23	$	1,725
February 15, 2013	February 27, 2013	$	0.23	$	1,725
March 15, 2013	March 27, 2013	$	0.23	$	1,725
April 15, 2013	April 29, 2013	$	0.23	$	1,725
May 15, 2013	May 30, 2013	$	0.23	$	3,105
June 14, 2013	June 27, 2013	$	0.23	$	3,105

Equity Capital Raising Activities

The following table presents our equity transactions for the six months ended June 30, 2013.

Transaction Type

Completion Date

Number of

Shares

Per Share

price

Net Proceeds

(in thousands)

Common stock follow-on public offering

May 13, 2013

6,000,000

18.93

113,217

Off-Balance Sheet Arrangements

As of June 30, 2013 and December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Furthermore, as of June 30, 2013 and December 31, 2012, we had not guaranteed any obligations of any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on our financial statements. The following is a summary of our policies most affected by management’s judgments, estimates and assumptions.

Revenue Recognition

Agency Securities. Interest income is accrued based on the unpaid principal amount of the target assets we purchase and their contractual terms. Premiums and discounts associated with the purchase of our target assets are amortized or accreted into interest income over the actual lives of the securities.

Non-Agency Securities. Non-Agency Securities are carried at their estimated fair value and changes in those fair values are recognized in earnings in the periods in which they occur. The portion of those changes in fair value recognized as interest income are determined on an effective yield method based on estimates of future cash flows revised quarterly. Other than temporary impairments, which establish a new cost basis in the security for purposes of calculating effective yields, are recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security.

Fair Value of MBS

We invest in target assets representing interests in or obligations backed by pools of single-family adjustable rate, hybrid adjustable rate and fixed rate mortgage loans. The authoritative literature requires us to classify our investments as either trading, available for sale or held to maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We classify all of our Agency Securities as available for sale securities. All assets that are classified as available for sale securities are carried at fair value with unrealized gains and losses excluded from earnings and reported in net unrealized loss on available for sale securities in the statement of comprehensive income. We classify all of our Non-Agency Securities as trading assets. All assets that are classified as available for trading will be carried at fair value and unrealized gains and losses are included in other (loss) income as a component of the statements of operations.

The fair values for the securities in our MBS portfolio are based on obtaining a valuation for each MBS from third-party pricing services, dealer quotes and our estimates as described below. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement, as applicable. The dealer quotes and our estimates incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security, as applicable. Below is a description of the processes we use to value our MBS portfolio.

Agency Securities: We obtain pricing data from a third-party pricing service for each Agency Security and validate such data by obtaining pricing data from a second third-party pricing service. If the difference between pricing data obtained for an Agency Security from the two third-party pricing services exceeds a certain threshold, or pricing data is unavailable from the third-party pricing services, we obtain valuations from dealers who make markets in similar financial instruments.

Non-Agency Securities: The fair value for the Non-Agency Securities in our MBS portfolio is based on estimates prepared by our Portfolio Management group, which organizationally reports to our Chief Investment Officer. In preparing the estimates, the Portfolio Management group uses commercially available and proprietary models and data as well as market intelligence gained from discussions with and transactions by other market participants. We also periodically compare our estimates of fair value with those of our financing counterparties. We estimate the fair value of our Non-Agency Securities by estimating the future cash flows for each Non-Agency Security and then discounting those cash flows based on our estimates of current market yield for each individual security. Our estimates for future cash flows and current market yields incorporate such factors as collateral type, bond structure and priority of payments, coupons, prepayment speeds, defaults, delinquencies and severities.

We review all pricing of our MBS used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. We classify values obtained from the third-party pricing service for similar instruments as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, we classify the security as a Level 2 security. If neither is available, we determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information received from dealers and classify it as a Level 3 security.

Security purchase and sale transactions, including purchase of when issued securities, are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method.

Linked Transactions: The initial purchase of Non-Agency Securities and the related contemporaneous repurchase financing of such MBS with the same counterparty are considered part of the same arrangement, or a “Linked Transaction,” when certain criteria are met. The components of a Linked Transaction are evaluated on a combined basis and in totality, accounted for as a forward contract and reported as Linked Transactions on our condensed balance sheets. Changes in the fair value of the assets and liabilities underlying Linked Transactions and associated interest income and expense are reported as “unrealized net gains/(losses) and net interest income from Linked Transactions” on our condensed statements of operations and are not included in other comprehensive income. When certain criteria are met, the initial transfer (i.e., the purchase of a security) and repurchase financing will no longer be treated as a Linked Transaction and will be evaluated and reported separately, as a MBS purchase and repurchase financing.

Repurchase Agreements, net: We finance the acquisition of our MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the LIBOR. Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender. A repurchase agreement operates as a financing arrangement under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

In addition to the repurchase agreement financing discussed above, we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement, settlement through the same brokerage or clearing account and maturing on the same day.

Obligations to Return Securities Received as Collateral at Fair Value: We also sell to third parties the U.S. Treasury Securities received as collateral for reverse repurchase agreements and recognize the resulting obligation to return said U.S. Treasury Securities as a liability on our condensed balance sheet. Interest is recorded on the repurchase agreements, reverse repurchase agreements and U.S. Treasury Securities on an accrual basis and presented as net interest expense. Both parties to the transaction have the right to make daily margin calls based on changes in the fair value of the collateral received and/or pledged.

Impairment of Assets: We evaluate MBS for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment to be other than temporary if we (1) have the intent to sell the Agency Securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) or (3) a credit loss exists. In the case of Non-Agency Securities, we also consider whether there have been adverse changes in the estimates of future cash flows.

Derivative Instruments: We recognize all derivative instruments as either assets or liabilities at fair value on our balance sheets. We do not designate our derivative activities as cash flow hedges, which, among other factors, would require us to match the pricing dates of both derivative transactions and repurchase agreements. Operational issues and credit market volatility make such matching impractical for us. Since we have not elected cash flow hedge accounting treatment as allowed by GAAP, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We continue to designate derivative activities as hedges for tax purposes and any unrealized gains or losses would not affect our distributable net taxable income.

Inflation

Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our Board based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Subsequent Events

See Note 18 to the condensed financial statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains various “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. All forward-looking statements may be impacted by a number of risks and uncertainties, including statements regarding the following subjects:

●

our business and investment strategy;

●

our anticipated results of operations;

●

statements about future dividends;

●

our ability to obtain financing arrangements;

●

our understanding of our competition and ability to compete effectively;

●

market, industry and economic trends; and

●

interest rates.

The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our stock, along with the following factors that could cause actual results to vary from our forward-looking statements:

●

our limited operating history;

●

ARRM’s limited experience in acquiring or financing Non-Agency Securities;

●

the factors referenced in this report and those factors set forth in our filings with the SEC, including but not limited to, our other Quarterly Reports on Form 10-Q, our most recent Annual Report on Form 10-K, and our current reports on Form 8-K;

●

mortgage loan modification programs and future legislative action;

●

the impact of QE3 on the prices and liquidity of Agency Securities or other securities in which we invest;

●

actions by the Fed which could cause a flattening of the yield curve, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders;

●

availability, terms and deployment of capital;

●

changes in economic conditions generally;

●

changes in interest rates, interest rate spreads, the yield curve or prepayment rates;

●

general volatility of the financial markets, including markets for MBS;

●

the downgrade of the U.S. Government’s or certain European countries’ credit ratings and future downgrades of the U.S. Government’s or certain European countries’ credit ratings may materially adversely affect our business, financial condition and results of operations;

●

inflation or deflation;

●

the impact of the federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government and the Fed System;

●

the possible material adverse affect on our business if the U.S. Congress passed legislation reforming or winding down Fannie Mae or Freddie Mac;

●

availability of suitable investment opportunities;

●

the degree and nature of the competition for investments in our target assets;

●

changes in our business and investment strategy;

●

our limited operating history;

●

our failure to maintain an exemption from being regulated as a commodity pool operator;

●

our dependence on ARRM and ability to find a suitable replacement if ARRM were to terminate its management relationship with us;

●

the existence of conflicts of interest in our relationship with ARRM, ARMOUR, certain of our directors and our officers, which could result in decisions that are not in the best interest of our stockholders;

●

our management’s competing duties to other affiliated entities, which could result in decisions that are not in the best interests of our stockholders;

●

changes in personnel at our Manager or the availability of qualified personnel at our Manager;

●

limitations imposed on our business by our status as a REIT under the Code;

●

the potential burdens on our business of maintaining our exemption from the 1940 Act and possible consequences of losing that exemption;

●

changes in GAAP, including interpretations thereof; and

●

changes in applicable laws and regulations.

We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this report. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements set forth in this report to reflect new information, future events or otherwise, except as required under the U.S. Federal securities laws.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We seek to manage our risks related to the credit-quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Interest Rate, Cap and Mismatch Risk

We invest in fixed rate, hybrid adjustable rate and adjustable rate MBS. Hybrid mortgages are ARMs that have a fixed-interest rate for an initial period of time (typically three years or greater) and then convert to an adjustable rate for the remaining loan term. Our debt obligations are generally repurchase agreements of limited duration that are periodically refinanced at current market rates.

ARM-related assets are typically subject to periodic and lifetime interest rate caps that limit the amount an ARM-related asset’s interest rate can change during any given period. ARM securities are also typically subject to a minimum interest rate payable. Our borrowings are not subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on our borrowings could increase without limitation, while the interest rates on our mortgage related assets could be limited. This exposure would be magnified to the extent we acquire fixed rate MBS or ARM securities that are not fully indexed. Further, some ARM-related assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively impact our liquidity, net income and our ability to make distributions to stockholders.

We fund the purchase of a substantial portion of our ARM-related assets with borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our mortgage assets. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact our net interest income, dividend yield and the market price of our stock. Most of our adjustable rate assets are based on the one-year constant maturity treasury rate and the one-year LIBOR rate and our debt obligations are generally based on LIBOR. These indices generally move in the same direction, but there can be no assurance that this will continue to occur.

Our ARM-related assets and borrowings reset at various different dates for the specific asset or obligation. In general, the repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average, our cost of funds may rise or fall more quickly than does our earnings rate on our assets.

Furthermore, our net income may vary somewhat as the spread between one-month interest rates, the typical term for our repurchase agreements, and six-month and twelve-month interest rates, the typical reset term of adjustable rate MBS, varies.

Prepayment Risk

As we receive repayments of principal on our Agency Securities from prepayments and scheduled payments, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income as realized. Premiums arise when we acquire Agency Securities at prices in excess of the principal balance of the mortgage loans underlying such Agency Securities. Conversely, discounts arise when we acquire Agency Securities at prices below the principal balance of the mortgage loans underlying the Agency Securities. Currently, all of our Agency Securities were purchased at a premium.

Interest Rate Risk and Effect on Market Value Risk

Another component of interest rate risk is the effect changes in interest rates will have on the market value of our MBS. We face the risk that the market value of our MBS will increase or decrease at different rates than that of our liabilities, including our derivative instruments and obligations to return securities received as collateral.

We primarily assess our interest rate risk by estimating the effective duration of our assets and the effective duration of our liabilities and by estimating the time difference between the interest rate adjustment of our assets and the interest rate adjustment of our liabilities. Effective duration essentially measures the market price volatility of financial instruments as interest rates change. We generally estimate effective duration using various financial models and empirical data. Different models and methodologies can produce different effective duration estimates for the same securities.

The sensitivity analysis tables presented below reflect the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, at June 30, 2013 and December 31, 2012, assuming a static MBS portfolio. It assumes that the spread between the interest rates on Agency Securities and long term U.S. Treasury Securities remains constant. Actual interest rate movements over time will likely be different, and such differences may be material. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on ARRM’s expectations. The analysis presented utilized assumptions, models and estimates of the manager based on the manager’s judgment and experience.

As of June 30, 2013

Change in Interest Rates			Percentage Change in Projected Net Interest Income			Percentage Change in Projected Portfolio Value Including Derivatives
	1.00	%		(10.92	)%		(3.40	)%
	0.50			(5.44	)%		(1.68	)%
	(0.50	)		8.91	%		1.43	%
	(1.00	)		7.21	%		2.49	%

As of December 31, 2012

Change in Interest Rates			Percentage Change in Projected Net Interest Income			Percentage Change in Projected Portfolio Value Including Derivatives
	1.00	%		(12.26	)%		(1.95	)%
	0.50			(5.35	)%		(0.60	)%
	(0.50	)		2.91	%		0.66	%
	(1.00	)		(6.32	)%		0.51	%

While the tables above reflect the estimated immediate impact of interest rate increases and decreases on a static portfolio, we rebalance our MBS portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.

The above tables quantify the potential changes in net interest income and portfolio value, which includes the value of our derivatives, should interest rates immediately change. Given the low level of interest rates at June 30, 2013 and December 31, 2012, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Due to the presence of this floor, it is anticipated that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level; however, because prepayment speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization and the reinvestment of such prepaid principal in lower yielding assets. As a result, the presence of this floor limits the positive impact of any interest rate decrease on our funding costs. Therefore, at some point, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.

Market Value Risk

All of our Agency Securities are classified as available for sale securities. As such, they are reflected at fair value with the periodic adjustment to fair value (that is not considered to be an other than temporary impairment) reported as part of the separate statements of comprehensive income.

All of our Non-Agency Securities are classified as trading securities. As such, they are reflected at fair value with the periodic adjustment to fair value reflected as part of “Other (loss) income” reported as part of the statements of operations.

The market value of our assets can fluctuate due to changes in interest rates and other factors. Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our MBS at an inopportune time when prices are depressed. The principal and interest payments are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae on our Agency Securities.

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity MBS with short-term debt. The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable rate MBS. Accordingly, in a period of rising interest rates, our borrowing costs will usually increase faster than our interest earnings from MBS.

Item 4. Controls and Procedures

Our Co-Chief Executive Officers (“Co-CEOs”) and Chief Financial Officer (“CFO”) participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of our fiscal quarter that ended on June 30, 2013. Based on their participation in that evaluation, our Co-CEOs and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2013 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Exchange Act, is accumulated and communicated to our management, including our Co-CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosures. Our Co-CEOs and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2013. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Our company is not currently subject to any legal proceedings, as described in Item 103 of Regulation S-K.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 21, 2013 except as set forth below.

Separate legislation has been introduced in both houses of the U.S. Congress, which would, among other things, wind down Fannie Mae and Freddie Mac, and we could be materially adversely affected if these proposed laws were enacted.

On June 25, 2013, a bipartisan group of U.S. Senators introduced a draft bill titled, "Housing Finance Reform and Taxpayer Protection Act of 2013," which may serve as a catalyst for congressional discussion on the reform of Fannie Mae and Freddie Mac, to the U.S. Senate. Also, on July 11, 2013, members of the House Committee on Financial Services introduced a draft bill titled, "Protecting American Taxpayers and Homeowners Act" to the U.S. House of Representatives. Both bills call for the winding down of Fannie Mae and Freddie Mac and seek to increase the opportunities for private capital to participate in, and consequently bear the risk of loss in connection with, government-guaranteed MBS. Both bills also have considerable support in their respective houses of Congress, which suggests that efforts to reform and possibly eliminate Fannie Mae and Freddie Mac may be gaining momentum.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 5, 2013	JAVELIN MORTGAGE INVESTMENT CORP.
	/s/ James R. Mountain
	James R. Mountain
	Chief Financial Officer, Duly Authorized Officer and Principal Financial and Accounting Officer

EXHIBIT INDEX

Exhibit Number		Description
31.1		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
31.2		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
31.3		Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (2)
32.2		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (2)
32.3		Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 (2)
101.INS#		XBRL Instance Document
101.SCH#		XBRL Taxonomy Extension Schema Document
101.CAL#		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF#		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB#		XBRL Taxonomy Extension Label Linkbase Document
101.PRE#		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Filed herewith
(2)	Furnished herewith

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48