Edgar Filing: AG Mortgage Investment Trust, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

Commission file number 001-35151

AG MORTGAGE INVESTMENT TRUST, INC.

Maryland	27-5254382
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

245 Park Avenue, 26th Floor New York, New York	10167
(Address of Principal Executive Offices)	(Zip Code)

(212) 692-2000

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filed, 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. (Check one):

Large Accelerated filer ¨ Accelerated filer x Non-Accelerated filer ¨ Smaller reporting company ¨ (Do not check if a 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 x

As of July 31, 2013, there were 28,375,964 outstanding shares of common stock of AG Mortgage Investment Trust, Inc.

AG MORTGAGE INVESTMENT TRUST, INC.

TABLE OF CONTENTS

		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statement of Operations	2
	Consolidated Statement of Stockholders' Equity	3
	Consolidated Statement of Cash Flows	4

	Notes to Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	52

PART II. OTHER INFORMATION		52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

PART I

ITEM 1. FINANCIAL STATEMENTS

AG Mortgage Investment Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	June 30, 2013			December 31, 2012
Assets
Real estate securities, at fair value:
Agency - $2,895,273,756 and $3,536,876,135 pledged as collateral, respectively	$	3,086,759,132		$	3,785,867,151
Non-Agency - $739,782,694 and $529,455,020 pledged as collateral, respectively		740,789,967			568,858,645
ABS - $97,916,107 and $33,937,097 pledged as collateral, respectively		97,916,107			33,937,097
CMBS - $90,884,600 and $148,307,262 pledged as collateral, respectively		90,884,600			148,365,887
Commercial loans receivable, at fair value		30,000,000			2,500,000
Investment in affiliates		7,101,859			-
Linked transactions, net, at fair value		67,263,212			45,122,824
Cash and cash equivalents		70,511,846			149,594,782
Restricted cash		28,147,932			9,130,000
Interest receivable		15,291,075			14,242,453
Receivable on unsettled trades - $450,112,813 and $0 pledged as collateral, respectively		452,000,649			96,310,999
Derivative assets, at fair value		44,508,487			-
Other assets		93,181			454,069
Due from broker		3,967,179			884,605
Total Assets	$	4,735,235,226		$	4,855,268,512

Liabilities
Repurchase agreements	$	3,821,644,190		$	3,911,419,818
Payable on unsettled trades		124,438,752			84,658,035
Interest payable		3,227,749			3,204,205
Derivative liabilities, at fair value		10,632,030			36,375,947
Dividend payable		22,685,868			18,540,667
Due to affiliates		4,333,723			3,910,065
Accrued expenses		1,316,510			806,853
Taxes payable		3,655,779			1,731,141
Due to broker		21,190,000			-
Total Liabilities		4,013,124,601			4,060,646,731

Stockholders' Equity
Preferred stock - $0.01 par value; 50,000,000 shares authorized:
8.25% Series A Cumulative Redeemable Preferred Stock, 2,070,000 shares issued and outstanding ($51,750,000 aggregate liquidation preference) at June 30, 2013 and December 31, 2012		49,920,772			49,920,772
8.00% Series B Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding ($115,000,000 aggregate liquidation preference) at June 30, 2013 and December 31, 2012		111,293,233			111,293,233
Common stock, par value $0.01 per share; 450,000,000 shares of common stock authorized and 28,352,835 and 26,961,936 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		283,529			269,620
Additional paid-in capital		585,412,222			552,067,681
Retained earnings (deficit)		(24,799,131	)		81,070,475
		722,110,625			794,621,781

Total Liabilities & Equity	$	4,735,235,226		$	4,855,268,512

The accompanying notes are an integral part of these consolidated financial statements.

AG Mortgage Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Net Interest Income
Interest income	$	42,267,747		$	17,883,008		$	80,885,463		$	31,879,636
Interest expense		7,289,211			2,450,017			14,165,173			4,277,431
		34,978,536			15,432,991			66,720,290			27,602,205

Other Income
Net realized gain/(loss)		(76,576,762	)		7,552,780			(71,241,345	)		9,981,800
Gain/(loss) on linked transactions, net		(1,339,610	)		3,364,972			4,498,609			6,804,157
Realized loss on periodic interest settlements of interest rate swaps, net		(6,809,777	)		(2,132,414	)		(12,082,120	)		(3,590,364	)
Unrealized gain/(loss) on derivative instruments, net		67,905,018			(10,575,768	)		73,128,259			(13,421,647	)
Unrealized gain/(loss) on real estate securities and loans, net		(83,093,338	)		33,593,211			(100,804,719	)		32,837,659
		(99,914,469	)		31,802,781			(106,501,316	)		32,611,605

Expenses
Management fee to affiliate		2,813,003			1,196,383			5,672,343			2,245,677
Other operating expenses		2,686,584			760,915			4,960,954			1,574,239
Equity based compensation to affiliate		17,350			104,771			131,878			192,100
Excise tax		518,859			255,925			1,018,859			333,578
		6,035,796			2,317,994			11,784,034			4,345,594

Income/(loss) before provision for income taxes and equity in loss from affiliate		(70,971,729	)		44,917,778			(51,565,060	)		55,868,216
Provision for income taxes		(23,510	)		-			(2,655,779	)		-
Equity in loss from affiliate		(240,050	)		-			(243,641	)		-

Net Income/(Loss)		(71,235,289	)		44,917,778			(54,464,480	)		55,868,216

Dividends on preferred stock		3,367,354			-			6,734,708			-

Net Income/(Loss) Available to Common Stockholders	$	(74,602,643	)	$	44,917,778		$	(61,199,188	)	$	55,868,216

Earnings/(Loss) Per Share of Common Stock
Basic	$	(2.66	)	$	2.85		$	(2.21	)	$	3.73
Diluted	$	(2.66	)	$	2.85		$	(2.21	)	$	3.73

Weighted Average Number of Shares of Common Stock Outstanding
Basic		28,068,507			15,769,674			27,676,696			14,974,655
Diluted		28,068,507			15,772,853			27,676,696			14,976,123

Dividends Declared per Share of Common Stock	$	0.80		$	0.70		$	1.60		$	1.40

The accompanying notes are an integral part of these consolidated financial statements.

AG Mortgage Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

	Common Stock				8.25 % Series A Cumulative Redeemable		8.00 % Series B Cumulative Redeemable		Additional		Retained
	Shares		Amount		Preferred Stock		Preferred Stock		Paid-in Capital		Earnings/(Deficit)			Total
Balance at January 1, 2012		10,009,958	$	100,100	$	-	$	-	$	198,228,694	$	7,955,126		$	206,283,920
Net proceeds from issuance of common stock		5,750,000		57,500		-		-		103,848,019		-			103,905,519
Grant of restricted stock and amortization of equity based compensation		9,716		97		-		-		227,396		-			227,493
Common dividends declared		-		-		-		-		-		(22,082,532	)		(22,082,532	)
Net income		-		-		-		-		-		55,868,216			55,868,216
Balance at June 30, 2012		15,769,674	$	157,697	$	-	$	-	$	302,304,109	$	41,740,810		$	344,202,616

Balance at January 1, 2013		26,961,936	$	269,620	$	49,920,772	$	111,293,233	$	552,067,681	$	81,070,475		$	794,621,781
Net proceeds from issuance of common stock		1,381,739		13,817		-		-		33,156,015		-			33,169,832
Grant of restricted stock and amortization of equity based compensation		9,160		92		-		-		188,526		-			188,618
Common dividends declared		-		-		-		-		-		(44,670,418	)		(44,670,418	)
Preferred Series A dividends declared		-		-		-		-		-		(2,134,708	)		(2,134,708	)
Preferred Series B dividends declared		-		-		-		-		-		(4,600,000	)		(4,600,000	)
Net loss		-		-		-		-		-		(54,464,480	)		(54,464,480	)
Balance at June 30, 2013		28,352,835	$	283,529	$	49,920,772	$	111,293,233	$	585,412,222	$	(24,799,131	)	$	722,110,625

The accompanying notes are an integral part of these consolidated financial statements.

AG Mortgage Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended			Six Months Ended
	June 30, 2013			June 30, 2012
Cash Flows from Operating Activities
Net income/(loss)	$	(54,464,480	)	$	55,868,216
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gain)/loss		71,241,345			(9,981,800	)
Net amortization of premium related to real estate securities		28,730,150			13,098,144
Unrealized losses on equity method investments		3,046,213			-
Unrealized (gains)/losses on linked transactions, net		556,560			(2,859,986	)
Unrealized (gains)/losses on derivative instruments, net		(73,128,259	)		13,421,647
Unrealized (gains)/losses on real estate securities and loans, net		100,804,719			(32,837,659	)
Equity based compensation to affiliate		131,878			192,100
Equity based compensation expense		86,258			80,005
Change in operating assets/liabilities:
Interest receivable		(1,750,443	)		(4,122,045	)
Other assets		360,888			675,791
Due from affiliates		-			104,994
Due from broker		(3,082,574	)		-
Interest payable		2,849,871			1,977,035
Due to affiliates		423,658			426,042
Accrued expenses		509,658			153,979
Due to broker		-			(325,914	)
Taxes payable		1,924,638			-
Net cash provided by operating activities		78,240,080			35,870,549

Cash Flows from Investing Activities
Purchase of real estate securities		(1,697,546,369	)		(1,628,868,857	)
Investment in affiliates		(7,440,948	)		-
Purchase of securities underlying linked transactions		(213,985,589	)		(258,088,821	)
Proceeds from sale of real estate securities		1,432,787,283			438,488,138
Proceeds from sale of securities underlying linked transactions		-			17,536,406
Principal repayments on real estate securities		289,037,704			101,870,967
Principal repayments on securities underlying linked transactions		54,298,762			20,823,409
Purchase of commercial loans		(30,017,825	)		-
Net settlement of interest rate swaps		(4,600,942	)		(267,115	)
Net settlement of TBAs		(577,149	)		1,717,266
Restricted cash provided by (used in) investment activities		(6,797,000	)		2,208,001
Net cash used in investing activities		(184,842,073	)		(1,304,580,606	)

Cash Flows from Financing Activities
Net proceeds from issuance of common stock		33,169,832			103,905,519
Borrowings under repurchase agreements		14,009,772,199			8,998,701,429
Borrowings under repurchase agreements underlying linked transactions		2,213,040,474			981,637,451
Repayments of repurchase agreements		(14,099,547,827	)		(8,015,120,370	)
Repayments of repurchase agreements underlying linked transactions		(2,090,624,764	)		(799,282,876	)
Collateral received from derivative counterparty		21,190,000			-
Collateral held by derivative counterparty		(13,146,932	)		(340,000	)
Collateral received from (held by) repurchase counterparty		926,000			(1,134,124	)
Dividends paid on common stock		(40,525,217	)		(18,050,731	)
Dividends paid on preferred stock		(6,734,708	)		-
Net cash provided by financing activities		27,519,057			1,250,316,298

Net change in cash and cash equivalents		(79,082,936	)		(18,393,759	)
Cash and cash equivalents, Beginning of Period		149,594,782			35,851,249
Cash and cash equivalents, End of Period	$	70,511,846		$	17,457,490

Supplemental disclosure of cash flow information:
Cash paid for interest on repurchase agreements	$	14,060,754		$	3,960,904
Cash paid for income tax	$	1,750,187		$	-
Real estate securities recorded upon unlinking of Linked Transactions	$	13,192,824		$	-
Repurchase agreements recorded upon unlinking of Linked Transactions	$	11,562,000		$	-
Supplemental disclosure of non-cash financing activities:
Common stock dividends declared but not paid	$	22,685,868		$	11,042,972

The accompanying notes are an integral part of these consolidated financial statements.

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2013

1. Organization

AG Mortgage Investment Trust, Inc. (the “Company”) was organized in the state of Maryland on March 1, 2011. The Company is focused on investing in, acquiring and managing a diversified portfolio of residential mortgage-backed securities, or RMBS, issued or guaranteed by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, or any agency of the U.S. Government such as Ginnie Mae (collectively, “Agency RMBS”), and other real estate-related securities and financial assets, including Non-Agency RMBS, ABS, CMBS and loans (as defined below).

Non-Agency RMBS represent fixed-and floating-rate residential RMBS issued by entities or organizations other than a U.S. government-sponsored enterprise or agency of the U.S. government, including investment grade (AAA through BBB) and non investment grade classes (BB and below). The mortgage loan collateral for residential Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by U.S. government agencies or U.S. government-sponsored entities.

Asset Backed Securities (“ABS”) are securitized investments similar to the aforementioned investments except the underlying assets are diverse, not only representing real estate related assets.

Commercial Mortgage Backed Securities (“CMBS”) represent investments of fixed- and floating-rate CMBS, including investment grade (AAA through BBB) and non investment grade classes (BB and below). CMBS will be secured by, or evidence an ownership interest in, a single commercial mortgage loan or a pool of commercial mortgage loans.

Collectively, the Company refers to Agency RMBS, Non-Agency RMBS, ABS and CMBS assets types as real estate securities.

Commercial Loans Receivable (“loans”) are secured by an interest in commercial real estate and represent a contractual right to receive money on demand or on fixed or determinable dates.

The Company is externally managed by AG REIT Management, LLC (the “Manager”), a wholly-owned subsidiary of Angelo, Gordon & Co., L.P. (“Angelo, Gordon”), a privately-held, SEC-registered investment adviser. The Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo, Gordon the overall responsibility with respect to the Manager’s day-to-day duties and obligations arising under the management agreement.

The Company conducts its operations to qualify and be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

2. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain prior period amounts have been reclassified to conform to the current period’s presentation. In the opinion of management, all adjustments considered necessary for a fair presentation for the interim period of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Cash and cash equivalents

Cash is comprised of cash on deposit with financial institutions. We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. We place our cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. Any cash held by the Company as collateral would be included in a due to broker line item on the consolidated balance sheet and in cash flows from financing activities on the consolidated statement of cash flows.

Restricted cash

Restricted cash includes cash pledged as collateral for clearing and executing trades, interest rate swaps and repurchase agreements. Restricted cash is carried at cost, which approximates fair value.

Offering costs

The Company incurred costs in connection with common stock offerings and issuances of preferred stock. The offering costs were paid out of the proceeds of the respective offerings. Offering costs in connection with common stock offerings have been accounted for as a reduction of additional paid-in-capital and offering costs in connection with preferred stock offerings have been accounted for as a reduction of their respective gross proceeds.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Earnings/ (Loss) per share

In accordance with the provisions of Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” the Company calculates basic income/(loss) per share by dividing net income (loss) available to common stockholders for the period by weighted-average shares of the Company’s common stock outstanding for that period. Diluted income/(loss) per share takes into account the effect of dilutive instruments, such as stock options, warrants and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.

Valuation of financial instruments

The fair value of the financial instruments that the Company records at fair value will be determined by the Manager, subject to oversight of the board of directors, and in accordance with ASC 820, “Fair Value Measurements and Disclosures.” When possible, the Company determines fair value using independent data sources. ASC 820 establishes a hierarchy that prioritizes the inputs to valuation techniques giving the highest priority to readily available unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements) when market prices are not readily available or reliable. The three levels of the hierarchy under ASC 820 are described below:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

•

Level 3 – Prices determined using significant unobservable inputs. 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 may be used. Unobservable inputs reflect the Company’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.

Transfers between levels are assumed to occur at the beginning of the reporting period.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Accounting for real estate securities

Investments in real estate securities are recorded in accordance with ASC 320. The Company has chosen to make a fair value election pursuant to ASC 825 for its real estate securities portfolio. Real estate securities are recorded at fair market value on the consolidated balance sheet and the periodic change in fair market value is recorded in current period earnings on the consolidated statement of operations as a component of “Unrealized gain/(loss) on real estate securities and loans, net.”

These investments generally meet the requirements to be classified as available for sale under ASC 320-10-25, “Debt and Equity Securities,” which requires the securities to be carried at fair value on the consolidated balance sheet with changes in fair value charged to other comprehensive income, a component of Stockholders’ Equity. Electing the fair value option allows the Company to record changes in fair value in the statement of operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner.

We evaluate securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.”

When an investment security is impaired, an OTTI is considered to have occurred if (i) we intend to sell the security (i.e. a decision has been made as of the reporting date) or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or if it is more likely than not that we will be required to sell the investment security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as a realized loss and the cost basis of the security is adjusted to its fair value. For securities accounted for under ASC 325-40, “Beneficial Interests in Securitized Financial Assets,” an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments are reflected in the net realized gain/(loss) line item on the consolidated statement of operations.

Increases in interest income may be recognized on a security that an OTTI charge was taken, if the performance of such security subsequently improves. The determination as to whether an OTTI exists is subjective, given that such determination is based on information available at the time of assessment as well as the Company’s estimate of the future performance and cash flow projections for the individual security. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

For any securities in an unrealized loss position at June 30, 2013 such securities are not considered other than temporarily impaired as the Company has the ability and intent to hold the securities to maturity or for a period of time sufficient for a forecasted market price recovery up to or above the cost of the investment and the Company is not required to sell the security for regulatory or other reasons. See Note 3 for a summary of OTTI charges recorded.

Sales of securities

Sales of securities are driven by the Manager’s portfolio management process. The Manager seeks to mitigate risks including those associated with prepayments and will opportunistically rotate the portfolio into securities with more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes.

Realized gains or losses on sales of securities and derivatives, inclusive of linked transactions are included in the net realized gain/(loss) line item on the consolidated statement of operations. The cost of positions sold is calculated using a FIFO basis. Realized gains and losses are recorded in earnings at the time of disposition.

Accounting for loans

Investments in mortgage loans are recorded in accordance with ASC 310. The Company has chosen to make a fair value election pursuant to ASC 825 for its loan portfolio. Loans are recorded at fair market value on the consolidated balance sheet and any periodic change in fair market value will be recorded in current period earnings on the consolidated statement of operations as a component of “Unrealized gain/(loss) on real estate securities and loans, net.”

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The Company amortizes or accretes any premium or discount over the life of the related loan utilizing the effective interest method. On at least a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated and recorded accordingly. Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Investment in affiliates

The Company’s unconsolidated ownership interests in affiliates are generally accounted for using the equity method. As of June 30, 2013, the underlying entities have chosen to make a fair value election pursuant to ASC 825; as such the Company will treat its investment in affiliates consistently with this election. The investment in affiliates is recorded at fair market value on the consolidated balance sheet and periodic changes in fair market value will be recorded in current period earnings on the consolidated statement of operation as a component of “Equity in loss from affiliate.” Capital contributions, distributions and profits and losses of such entities are allocated in accordance with the terms of the applicable agreements.

Investment consolidation

For each investment made, the Company evaluates the underlying entity that issued the securities acquired or to which the Company makes a loan to determine the appropriate accounting. A similar analysis will be performed for each entity with which the Company enters into an agreement for management, servicing or related services. In performing the analysis, the Company will refer to guidance in ASC 810-10, “Consolidation.” In situations where the Company is the transferor of financial assets, the Company will refer to the guidance in ASC 860-10, “Transfers and Servicing.”

In variable interest entities (“VIEs”), an entity is subject to consolidation under ASC 810-10 if the equity investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. VIEs within the scope of ASC 810-10 are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This determination can sometimes involve complex and subjective analyses. Further, ASC 810-10 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. In accordance with ASC 810-10, all transferees, including variable interest entities, must be evaluated for consolidation. If the Company were to treat securitizations as sales in the future, the Company will analyze the transactions under the guidelines of ASC 810-10 for consolidation. All VIEs in which the Company has participated are non-recourse to the Company.

The Company may periodically enter into transactions in which it sells assets. Upon a transfer of financial assets, the Company will sometimes retain or acquire senior or subordinated interests in the related assets. Pursuant to ASC 860-10, a determination must be made as to whether a transferor has surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. The financial components approach under ASC 860-10 limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. It defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.

Under ASC 860-10, after a transfer of financial assets that meets the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transferred control—an entity recognizes the financial and servicing assets it acquired or retained and the liabilities it has incurred, derecognizes financial assets it has sold and derecognizes liabilities when extinguished. The transferor would then determine the gain or loss on sale of financial assets by allocating the carrying value of the underlying mortgage between securities or loans sold and the interests retained based on their fair values. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the securities or loans sold. When a transfer of financial assets does not qualify for sale accounting, ASC 860-10 requires the transfer to be accounted for as a secured borrowing with a pledge of collateral.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

From time to time, the Company may securitize mortgage loans it holds if such financing is available. These transactions will be recorded in accordance with ASC 860-10 and will be accounted for as either a “sale” and the loans will be removed from the balance sheet or as a “financing” and will be classified as “real estate securities” on the consolidated balance sheet, depending upon the structure of the securitization transaction. ASC 860-10 is a complex standard that may require the Company to exercise significant judgment in determining whether a transaction should be recorded as a “sale” or a “financing.”

Interest income recognition

Interest income on the Company’s real estate securities portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such securities. The Company has elected to record interest in accordance with ASC 835-30-35-2 using the effective interest method for all securities accounted for under the fair value option (ASC 825). As such, premiums and discounts are amortized or accreted into interest income over the lives of the securities in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs”, ASC 320-10 “Investments—Debt and Equity Securities” or ASC 325-40, “Beneficial Interests in Securitized Financial Assets,” as applicable. Total interest income will flow though the interest income line item on the Consolidated Statement of Operations.

On at least a quarterly basis for securities accounted for under ASC 320-10 and ASC 310-20 (generally Agency RMBS), prepayments of the underlying collateral must be estimated, which directly affect the speed at which we amortize such securities. If actual and anticipated cash flows differ from previous estimates, we recognize a “catch-up” adjustment in the current period to the amortization of premiums for the impact of the cumulative change in the effective yield through the reporting date.

Similarly, we also reassess the cash flows on at least a quarterly basis for securities accounted for under ASC 325-40 (generally Non-Agency RMBS, ABS, CMBS and interest only securities). In estimating these cash flows, there are a number of assumptions that will be subject to uncertainties and contingencies. These include the rate and timing of principal and interest receipts, (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be judgmentally estimated. Differences between previously estimated cash flows and current actual and anticipated cash flows are recognized prospectively through an adjustment of the yield over the remaining life of the security based on the current amortized cost of the investment as adjusted for credit impairment, if any.

Interest income on the Company’s loan portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such loans. The Company has elected to record interest in accordance with ASC 835-30-35-2 using the effective interest method for all loans accounted for under the fair value option (ASC 825). Any amortization will be reflected as an adjustment to interest income in the consolidated statements of operations.

For investments purchased with evidence of deterioration of credit quality for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, the Company will apply the provisions of ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” ASC 310-30 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. ASC 310-30 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. ASC 310-30 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

The Company’s accrual of interest, discount and premium for U.S. federal and other tax purposes differs from the financial accounting treatment of these items as described above.

Repurchase agreements

The Company finances the acquisition of certain assets within its portfolio through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at primarily their contractual amounts, including accrued interest, as specified in the respective agreements. The carrying amount of the Company’s repurchase agreements approximates fair value as the debt is short-term in nature.

The Company pledges certain securities as collateral under repurchase agreements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. The amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of June 30, 2013 and December 31, 2012, the Company has met all margin call requirements.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

In instances where the Company acquires assets through repurchase agreements with the same counterparty from whom the assets were purchased, the Company evaluates such transactions in accordance with ASC 860-10. This standard requires the initial transfer of a financial asset and repurchase financing that are entered into contemporaneously with, or in contemplation of, one another to be considered linked unless all of the criteria found in ASC 860-10 are met at the inception of the transaction. If the transaction meets all of the conditions, the initial transfer shall be accounted for separately from the repurchase financing, and the Company will record the assets and the related financing on a gross basis on its balance sheet with the corresponding interest income and interest expense in the statements of operations. If the transaction is determined to be linked, the Company will record the initial transfer and repurchase financing on a net basis and record a forward commitment to purchase assets as a derivative instrument with changes in market value being recorded on the consolidated statement of operations. Such forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. The Company refers to these transactions as Linked Transactions. When or if a transaction is no longer considered to be linked, the real estate security and related repurchase financing will be reported on a gross basis. The unlinking of a transaction causes a realized event in which the fair value of the real estate security at the time the transaction will become the cost basis of the real estate security. The difference between the fair value on the unlinking date and the existing cost basis of the security will be the realized gain or loss. Recognition of effective yield for such security will be calculated prospectively using the new cost basis.

Accounting for derivative financial instruments

The Company may enter into derivative contracts, including interest rate swaps and interest rate caps, as a means of mitigating its interest rate risk. The Company uses interest rate derivative instruments primarily to mitigate interest rate risk rather than to enhance returns. The Company accounts for derivative financial instruments in accordance with ASC 815-10, “Derivatives and Hedging.” ASC 815-10 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. As of June 30, 2013 and December 31, 2012, the Company did not have any interest rate derivatives designated as hedges. All derivatives have been recorded at fair value in accordance with ASC 820-10, with corresponding changes in value recognized in the consolidated statement of operations.

When derivative contracts are executed with the same counterparty for bilateral collateral arrangements, or the same Central Clearing Counterparty (“CCP”) and Futures Commission Merchants (“FCM”) under central clearing, the value of the derivative contracts is reported on a net-by-counterparty or net by CCP/FCM basis, as applicable on the balance sheet, where a legal right of off-set exists under an enforceable netting agreement. As a result, the net exposure to counterparties or CCP/FCM is reported as either an asset or liability on the consolidated balance sheet.

To-be-announced securities

A to-be-announced security (“TBA”) is a futures contract for the purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS delivered into or received from the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. TBAs are exempt from ASC 815 and are accounted for under ASC 320 if there is no other way to purchase or sell that security, if delivery or receipt of that security and settlement will occur within the shortest period possible for that type of security and if it is probable at inception and throughout the term of the individual contract that physical delivery or receipt of the security will occur (referred to as the “regular-way” exception). Unrealized gains and losses associated with TBA contracts not subject to the regular-way exception or not designated as hedging instruments are recognized in the consolidated statement of operations in the line item “unrealized gain/(loss) on derivative instruments, net.”

Manager compensation

The management agreement provides for payment to the Manager of a management fee. The management fee is accrued and expensed during the period for which it is calculated and earned. For a more detailed discussion on the fees payable under the management agreement, see Note 10.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Income taxes

The Company conducts its operations to qualify and be taxed as a REIT. Accordingly, the Company will generally not be subject to federal or state corporate income tax to the extent that the Company makes qualifying distributions to its stockholders, and provided that it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which the Company fails to qualify as a REIT.

The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported under GAAP in the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.

The Company has elected to treat AG MIT II, LLC, AG MITT RMAT 2013, LLC and AG MITT RMAT 2013 II, LLC as taxable REIT subsidiaries, (“TRS”) and may elect to treat other subsidiaries at TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. While a TRS will generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to stockholders. Conversely, if we retain earnings at the TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. A TRS is subject to federal, state and local corporate income taxes.

The Company’s financial results are generally not expected to reflect provisions for current or deferred income taxes, except for any activities conducted through one or more TRSs that are subject to corporate income taxation. The Company believes that it will operate in a manner that will allow it to qualify for taxation as a REIT. As a result of the Company’s expected REIT qualification, it does not generally expect to pay federal or state corporate income tax. Many of the REIT requirements, however, are highly technical and complex. If the Company were to fail to meet the REIT requirements, it would be subject to federal income taxes and applicable state and local taxes. During the six months ended June 30, 2013 the Company recognized an income tax provision of $2.7 million related to the income and sale of investments held within AG MITT RMAT 2013, LLC and AG MITT RMAT 2013 II, LLC.

As a REIT, if the Company fails to distribute in any calendar year at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid corporate income tax.

The Company evaluates uncertain income tax positions, if any, in accordance with ASC Topic 740, “Income Taxes”. The Company classifies interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income taxes. See Note 9 for further details.

Stock-based compensation

The Company applies the provisions of ASC 718, “Compensation—Stock Compensation” with regard to its equity incentive plans. ASC 718 covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans. ASC 718 requires that compensation cost relating to stock-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

Compensation cost related to restricted common shares issued to the Company’s directors is measured at its estimated fair value at the grant date, and is amortized and expensed over the vesting period on a straight-line basis. Compensation cost related to restricted common shares issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. The Company has elected to use the straight-line method to amortize compensation expense for the restricted common shares granted to the Manager.

Recent accounting pronouncements

In December 2011, the FASB issued Accounting Standards Updated 2011-11, “Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11). ASU 2011-11 amends Topic 210 to require additional disclosure information about offsetting and related arrangements. Entities will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of US GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (IFRS). The guidance is effective for periods beginning on or after January 1, 2013, and interim periods within those annual periods.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (ASU 2013 -1). ASU 2013-1 addresses implementation issues about ASU 2011-11 and applies to derivatives accounted for in accordance with ASC 815-10, 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 “Balance Sheet – Offsetting” or ASC 815 or subject to an enforceable master netting arrangement or similar agreement. The guidance was effective January 1, 2013 and was applied retrospectively. This guidance does not amend the circumstances in which the Company offsets its derivative positions. As a result, the guidance does not have a material effect on the Company's financial statements.

3. Real Estate Securities

The following tables present the current principal balance, premium or discount, amortized cost, gross unrealized gain, gross unrealized loss, fair market value, and weighted average coupon rate and effective yield of the Company’s real estate securities portfolio at June 30, 2013 and December 31, 2012. Real estate securities that are accounted for as a component of linked transactions are not reflected in the tables set forth in this note. See Note 7 for further details. The Company’s Agency RMBS are mortgage pass-through certificates or collateralized mortgage obligations representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed by Fannie Mae or Freddie Mac. The Non-Agency RMBS, ABS and CMBS portfolios are primarily not issued or guaranteed by Fannie Mae, Freddie Mac or any agency of the U.S. Government and are therefore subject to credit risk. The principal and interest payments on Agency RMBS securities have an explicit guarantee by either an agency of the U.S. government or a U.S government-sponsored enterprise.

The following table details the real estate securities portfolio as of June 30, 2013:

								Gross Unrealized (1)							Weighted Average
	Current Face		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon (2)			Yield
Agency RMBS:
15 Year Fixed Rate	$	514,575,981	$	15,682,629		$	530,258,610	$	3,555,549	$	(1,520,794	)	$	532,293,365		3.16	%		2.50	%
20 Year Fixed Rate		296,875,147		13,800,140			310,675,287		701,730		(8,056,835	)		303,320,182		3.28	%		2.58	%
30 Year Fixed Rate		1,998,841,682		77,870,676			2,076,712,358		458,477		(37,077,213	)		2,040,093,622		3.62	%		2.92	%
ARM		32,816,318		1,541,770			34,358,088		-		(1,143,248	)		33,214,840		2.96	%		2.44	%
Interest Only		973,733,259		(794,535,946	)		179,197,313		4,315,769		(5,675,959	)		177,837,123		5.10	%		6.58	%
Credit Investments:
Non-Agency RMBS		853,642,944		(122,230,672	)		731,412,272		18,562,224		(9,184,529	)		740,789,967		4.05	%		5.54	%
ABS		100,004,252		-			100,004,252		51,850		(2,139,995	)		97,916,107		3.78	%		3.88	%
CMBS		85,413,315		(1,125,835	)		84,287,480		1,024,137		(1,019,043	)		84,292,574		5.45	%		5.58	%
Interest Only		52,357,700		(45,504,749	)		6,852,951		-		(260,925	)		6,592,026		1.92	%		6.20	%
Total	$	4,908,260,598	$	(854,501,987	)	$	4,053,758,611	$	28,669,736	$	(66,078,541	)	$	4,016,349,806		3.93	%		3.57	%

(1) We have chosen to make a fair value election pursuant to ASC 825 for our real estate securities portfolio. Unrealized gains and losses are recognized in current period earnings in the unrealized gain (loss) on real estate securities and loans, net line item. The gross unrealized stated above represents inception to date unrealized gains (losses).

(2) Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table details the real estate securities portfolio as of December 31, 2012:

								Gross Unrealized (1)							Weighted Average
	Current Face		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon (2)			Yield
Agency RMBS:
15 Year Fixed Rate	$	1,177,320,487	$	46,922,089		$	1,224,242,576	$	24,223,576	$	(255,956	)	$	1,248,210,196		2.97	%		2.08	%
20 Year Fixed Rate		137,858,353		6,696,803			144,555,156		3,569,538		-			148,124,694		3.68	%		2.78	%
30 Year Fixed Rate		1,998,807,425		116,173,790			2,114,981,215		32,180,328		(3,423,448	)		2,143,738,095		3.63	%		2.75	%
ARM		36,228,319		1,584,714			37,813,033		362,721		-			38,175,754		2.96	%		2.34	%
Interest Only		972,543,812		(763,342,056	)		209,201,756		5,162,683		(6,746,027	)		207,618,412		6.00	%		7.00	%
Credit Investments:
Non-Agency RMBS		634,277,808		(87,414,086	)		546,863,722		6,704,413		(1,396,738	)		552,171,397		4.65	%		5.44	%
ABS		33,620,881		(36,289	)		33,584,592		352,505		-			33,937,097		5.34	%		5.44	%
CMBS		96,536,946		(2,094,604	)		94,442,342		2,956,780		(82,588	)		97,316,534		5.51	%		6.36	%
Interest Only		640,867,674		(572,685,926	)		68,181,748		1,338,054		(1,783,201	)		67,736,601		2.13	%		5.50	%
Total	$	5,728,061,705	$	(1,254,195,565	)	$	4,473,866,140	$	76,850,598	$	(13,687,958	)	$	4,537,028,780		3.92	%		3.22	%

(2) Equity residual investments with a zero coupon rate are excluded from this calculation.

As described in Note 2, we evaluate securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.”

The following table presents the gross unrealized losses, and estimated fair value of the Company’s real estate securities by length of time that such securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012.

	Less than 12 months					Greater than 12 months
As of	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2013	$	2,155,780,113	$	(64,748,611	)	$	3,105,657	$	(1,329,930	)
December 31, 2012		777,773,600		(11,267,980	)		4,872,469		(2,419,978	)

At June 30, 2013 the Company identified certain securities it intended to sell and as a result the Company recognized an OTTI charge of $41.3 million, which is included in net realized gain/(loss). This charge represents a write-down to fair value as of the reporting date. Additionally, for the three and six months ended June 30, 2013, the Company recognized a $0.8 million and $1.9 million OTTI charge, respectively, on certain securities. No OTTI was recorded for the three and six months ended June 30, 2012. The decline in value of the remaining real estate securities is solely due to market conditions and not the quality of the assets. The remaining investments are not considered other than temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments and the Company is not required to sell for regulatory or other reasons.

All of the principal and interest payments on the Agency RMBS have an explicit guarantee by either an agency of the U.S. government or a U.S. government-sponsored enterprise.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table details weighted average life by Agency RMBS, Agency Interest-Only (“IO”) and Other Securities as of June 30, 2013:

	Agency RMBS							Agency IO							Other Securities (1)
Weighted Average Life (2)	Fair Value		Amortized Cost		Weighted Average Coupon			Fair Value		Amortized Cost		Weighted Average Coupon			Fair Value		Amortized Cost		Weighted Average Coupon (3)
Less than or equal to 1 year	$	-	$	-		-		$	-	$	-		-		$	5,100,714	$	5,119,614		4.51	%
Greater than one year and less than or equal to five years		107,038,277		106,162,995		3.31	%		116,133,656		116,381,243		5.11	%		358,710,387		354,002,796		4.40	%
Greater than five years and less than or equal to ten years		1,384,150,099		1,402,575,820		3.53	%		61,703,467		62,816,070		5.07	%		539,791,851		538,097,091		4.19	%
Greater than ten years		1,417,733,633		1,443,265,528		3.47	%		-		-		-			25,987,722		25,337,454		5.23	%
Total	$	2,908,922,009	$	2,952,004,343		3.37	%	$	177,837,123	$	179,197,313		5.10	%	$	929,590,674	$	922,556,955		4.31	%

(1) For purposes of this table, Other Securities represents the following Credit Investments held as of June 30, 2013, Non-Agency RMBS, ABS, CMBS and Interest Only.

(2) Actual maturities of mortgage-backed securities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.

(3) Equity residual investments with a zero coupon rate are excluded from this calculation.

The following table details weighted average life by Agency RMBS, Agency IO and Other Securities as of December 31, 2012:

	Agency RMBS							Agency IO							Other Securities (1)
Weighted Average Life (2)	Fair Value		Amortized Cost		Weighted Average Coupon			Fair Value		Amortized Cost		Weighted Average Coupon			Fair Value		Amortized Cost		Weighted Average Coupon (3)
Less than or equal to 1 year	$	-	$	-		-		$	-	$	-		-		$	3,748,025	$	3,759,750		0.75	%
Greater than one year and less than or equal to five years		868,542,200		846,760,882		2.97	%		166,406,425		165,968,688		6.03	%		374,224,663		368,468,808		2.94	%
Greater than five years and less than or equal to ten years		2,458,784,128		2,424,996,350		3.58	%		41,211,988		43,233,067		5.91	%		354,247,135		351,908,850		5.16	%
Greater than ten years		250,922,410		249,834,748		3.13	%		-		-		-			18,941,806		18,934,995		1.12	%
Total	$	3,578,248,738	$	3,521,591,980		3.40	%	$	207,618,413	$	209,201,755		6.00	%	$	751,161,629	$	743,072,403		3.54	%

(1) For purposes of this table, Other Securities represents the following Credit Investments held as of December 31, 2012, Non-Agency RMBS, ABS, CMBS and Interest Only.

(3) Equity residual investments with a zero coupon rate are excluded from this calculation.

During the three months ended June 30, 2013, the Company sold 41 securities for total proceeds of $887.4 million, with an additional $449.1 million of proceeds on 16 unsettled security sales as of quarter end, recording realized gains of $4.6 million and realized losses of $30.5 million, respectively. For the six months ended June 30, 2013, the Company sold 62 securities for total proceeds of $1.3 billion, with additional proceeds on aforementioned unsettled security sales as of June 30, 2013, recording realized gains of $12.8 million and realized losses of $34.2 million, inclusive of related tax provisions. During the six months ended June 30, 2013, the Company received $96.3 million for the sale of three securities that were unsettled as of December 31, 2012. See Notes 4 and 7 for amounts realized on sales of loans and the settlement of certain derivatives, respectively.

During the quarter ended June 30, 2012, the Company sold nine securities for total proceeds of $214.9 million, with an additional $141.6 million of proceeds on four unsettled security sales as of quarter end, recording realized gains of $7.1 million and realized losses of $0.1 million. For the six months ended June 30, 2012, the Company sold fifteen securities for total proceeds of $438.5 million, with additional proceeds on four unsettled security sales as mentioned above as of June 30, 2012, recording realized gains of $9.3 million and realized losses of $1.7 million. See Note 7 for amounts realized on settlement of certain derivatives.

During the six months ended June 30, 2013, the Company invested in credit sensitive commercial real estate assets through an affiliated entity, and applies the equity method of accounting for such investments. As of June 30, 2013, the investments have a fair market value of $7.1 million and a weighted average yield of 12.30%. The Company has presented this investment separately on the consolidated balance sheet in the “Investment in affiliates” line item, and statement of operations as a component of “Equity in loss from affiliate.”

4. Loans

The following tables present the current principal balance, premium or discount, amortized cost, gross unrealized gain, gross unrealized loss, fair market value, coupon rate and effective yield of the Company’s loan portfolio at June 30, 2013 and December 31, 2012.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table details the loan portfolio as of June 30, 2013:

							Gross Unrealized (1)							Weighted Average
	Current Face		Premium (Discount)		Amortized Cost		Gains		Losses			Fair Value		Coupon			Yield			Life
Commerical Loans	$	30,000,000	$	122,936	$	30,122,936	$	-	$	(122,936	)	$	30,000,000		9.00	%		9.87	%		3.07

(1) We have chosen to make a fair value election pursuant to ASC 825 for our loan portfolio. Unrealized gains and losses are recognized in current period earnings in the unrealized gain/(loss) on real estate securities and loans, net line item. The gross unrealized stated above represents inception to date unrealized gains (losses).

The following table details the loan portfolio as of December 31, 2012:

							Gross Unrealized (1)						Weighted Average
	Current Face		Premium (Discount)		Amortized Cost		Gains		Losses		Fair Value		Coupon			Yield			Life
Commerical Loans	$	2,500,000	$	-	$	2,500,000	$	-	$	-	$	2,500,000		9.63	%		9.63	%		3.51

During the six months ended June 30, 2013, the Company sold one loan for total proceeds of $2.6 million, recording realized gains of $0.1 million and no realized losses. The Company did not have any loans during the six months ended June 30, 2012.

5. Fair Value Measurements

As described in Note 2, the fair value of financial instruments that are recorded at fair value will be determined by the Manager, subject to oversight of the Company’s board of directors, and in accordance with ASC 820, “Fair Value Measurements and Disclosures.” When possible, the Company determines fair value using independent data sources. ASC 820 establishes a hierarchy that prioritizes the inputs to valuation techniques giving the highest priority to readily available unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements) when market prices are not readily available or reliable. The three levels of the hierarchy under ASC 820 are described below:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

•

Values for the Company’s securities, derivatives and loan portfolios are based upon prices obtained from third party pricing services, which are indicative of market activity. The evaluation methodology of the Company’s third-party pricing services incorporates commonly used market pricing methods, including a spread measurement to various indices such as the one-year constant maturity treasury and LIBOR, which are observable inputs. The evaluation also considers the underlying characteristics of each investment, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; periodic and life cap; geography; and prepayment speeds. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available. As part of the Company’s risk management process, the Company reviews and analyzes all prices obtained by comparing prices to recently completed transactions involving the same or similar investments on or near the reporting date. If, in the opinion of the Manager, one or more prices reported to the Company are not reliable or unavailable, the Manager reviews the fair value based on characteristics of the investment it receives from the issuer and available market information.

In valuing its derivatives, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. All of the Company’s derivatives are either subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”). For its derivatives subject to bilateral collateral arrangements, the Company has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association (“ISDA”). For swaps cleared under the Dodd Frank Act, a CCP now stands between the Company and its over-the-counter derivative counterparties. In order to access clearing, the Company has entered into clearing agreements with FCMs. The Company is permitted to net all exposure with a common CCP and FCM. Consequently, no credit valuation adjustment was made in determining the fair value of the Company’s derivatives.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The Manager may also engage specialized third party valuation service providers to assess and corroborate the valuation of a selection of investments in the Company’s loan portfolio on a periodic basis. These specialized third party valuation service providers conduct independent valuation analyses based on a review of source documents, available market data, and comparable securities. The analyses provided by valuation service providers are reviewed and considered by the Manager.

The securities underlying the Company’s linked transactions are valued using similar techniques to those used for the Company’s securities portfolio. The value of the underlying security is then netted against the carrying amount (which approximates fair value) of the repurchase agreement at the valuation date. Additionally, TBA instruments are similar in form to the Company’s Agency RMBS portfolio, and the Company therefore estimates fair value based on similar methods.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2013:

	Fair Value at June 30, 2013
	Level 1		Level 2			Level 3		Total
Assets:
Agency RMBS:
15 Year Fixed Rate	$	-	$	532,293,365		$	-	$	532,293,365
20 Year Fixed Rate		-		303,320,182			-		303,320,182
30 Year Fixed Rate		-		2,040,093,622			-		2,040,093,622
ARM		-		33,214,840			-		33,214,840
Interest Only		-		177,837,123			-		177,837,123
Credit Investments:									-
Non-Agency RMBS		-		523,286,771			217,503,196		740,789,967
ABS		-		-			97,916,107		97,916,107
CMBS		-		61,512,844			22,779,730		84,292,574
Interest Only		-		-			6,592,026		6,592,026
Commercial loans		-		-			30,000,000		30,000,000
Linked transactions		-		61,174,129			6,089,083		67,263,212
Derivative assets				44,508,487			-		44,508,487
Total Assets Carried at Fair Value	$	-	$	3,777,241,363		$	380,880,142	$	4,158,121,505

Liabilities:
Derivative liabilities	$	-	$	(10,632,030	)	$	-	$	(10,632,030	)
Total Liabilities Carried at Fair Value	$	-	$	(10,632,030	)	$	-	$	(10,632,030	)

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2012:

	Fair Value at December 31, 2012
	Level 1		Level 2			Level 3		Total
Assets:
Agency RMBS:
15 Year Fixed Rate	$	-	$	1,248,210,196		$	-	$	1,248,210,196
20 Year Fixed Rate		-		148,124,694			-		148,124,694
30 Year Fixed Rate		-		2,143,738,095			-		2,143,738,095
ARM		-		38,175,754			-		38,175,754
Interest Only		-		207,618,412			-		207,618,412
Credit Investments:
Non-Agency RMBS		-		297,127,840			255,043,557		552,171,397
ABS		-		-			33,937,097		33,937,097
CMBS		-		63,249,824			34,066,710		97,316,534
Interest Only		-		67,736,601			-		67,736,601
Commercial Mortgage Loans		-		2,500,000			-		2,500,000
Linked transactions		-		38,617,525			6,505,299		45,122,824
Total Assets Carried at Fair Value	$	-	$	4,255,098,941		$	329,552,663	$	4,584,651,604

Liabilities:
Derivative liabilities	$	-	$	(36,375,947	)	$	-	$	(36,375,947	)
Total Liabilities Carried at Fair Value	$	-	$	(36,375,947	)	$	-	$	(36,375,947	)

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three and six months ended June 30, 2013 and June 30, 2012.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following tables present additional information about the Company’s investments which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Three Months Ended

June 30, 2013

	Non-Agency RMBS			ABS			CMBS			Interest Only			Commercial Loans		Linked Transactions
Beginning balance	$	192,389,167		$	18,490,547		$	34,346,520		$	6,906,230		$	30,000,000	$	8,143,675
Transfers (1):
Transfers into level 3		-			-			-			-			-		-
Transfers out of level 3		-			-			-			-			-		-
Purchases		74,890,704			100,000,000			-			-			-		-
Reclassification of security type (2)		-			-			-			-			-		-
Proceeds from sales		(38,343,305	)		(13,019,738	)		(10,041,297	)		-			-		-
Proceeds from settlement		(9,330,747	)		(5,242,820	)		-			-			-		(1,193,816	)
Total net gains/(losses) (3)
Included in net income		(2,102,623	)		(2,311,882	)		(1,525,493	)		(314,204	)		-		(860,776	)
Included in other comprehensive income (loss)		-			-			-			-			-		-
Ending Balance	$	217,503,196		$	97,916,107		$	22,779,730		$	6,592,026		$	30,000,000	$	6,089,083

Change in unrealized appreciation/depreciation for level 3 assets still held as of June 30, 2013 (4)	$	(2,493,386	)	$	(2,127,642	)	$	(1,525,493	)	$	(314,205	)	$	-	$	(643,474	)

(1) Transfers are assumed to occur at the beginning of the period.

(2) Represents an accounting reclassification from a linked transaction to a real estate security due to event occuring which breaks the link.

(3) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	(903,380	)
Unrealized gain/(loss) on real estate securities and loans, net		(6,467,442	)
Interest income		(86,792	)
Net realized gain		342,636
Total	$	(7,114,978	)

(4) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	(643,474	)
Unrealized gain/(loss) on real estate securities and loans, net		(6,260,085	)
Interest income		(200,641	)
Total	$	(7,104,200	)

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Three Months Ended

June 30, 2012

	Non-Agency RMBS			ABS			CMBS			Linked Transactions
Beginning balance	$	34,165,419		$	27,760,052		$	-		$	9,506,801
Transfers (1):
Transfers into level 3		-			-			-			-
Transfers out of level 3		-			-			-			-
Purchases		26,904,731			-			9,725,625			48,959,782
Proceeds from sales
Proceeds from settlement		(6,056,932	)		(14,575,792	)		(2,257,188	)		(44,296,830	)
Total net gains/(losses) (2)
Included in net income		(90,306	)		325,181			40,838			937,904
Included in other comprehensive income (loss)		-			-			-			-
Ending Balance	$	54,922,912		$	13,509,441		$	7,509,275		$	15,107,657

Change in unrealized appreciation/depreciation for level 3 assets still held as of June 30, 2012 (3)	$	(90,306	)	$	8,471		$	40,838		$	136,792

(1) Transfers are assumed to occur at the beginning of the period.

(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	937,904
Unrealized gain/(loss) on real estate securities and loans, net		299,949
Interest income		(24,236	)
Total	$	1,213,617

(3) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	136,792
Unrealized gain/(loss) on real estate securities and loans, net		(15,650	)
Interest income		(25,347	)
Total	$	95,795

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Six Months Ended

June 30, 2013

	Non-Agency RMBS			ABS			CMBS			Interest Only			Commercial Loans			Linked Transactions
Beginning balance	$	255,043,557		$	33,937,097		$	34,066,710		$	-		$	-		$	6,425,683
Transfers (1):
Transfers into level 3		-			-			-			-			-			-
Transfers out of level 3		-			-			-			-			-			-
Purchases		97,745,011			127,993,404			-			7,048,720			30,017,825			2,658,169
Reclassification of security type (2)		-			-			-			-			-			-
Proceeds from sales		(127,311,547	)		(41,105,832	)		(10,041,297	)		-			-			-
Proceeds from settlement		(12,387,311	)		(20,588,748	)		(58,631	)		-			-			(2,395,359	)
Total net gains/(losses) (3)
Included in net income		4,413,486			(2,319,814	)		(1,187,052	)		(456,694	)		(17,825	)		(599,410	)
Included in other comprehensive income (loss)		-			-			-			-			-			-
Ending Balance	$	217,503,196		$	97,916,107		$	22,779,730		$	6,592,026		$	30,000,000		$	6,089,083

Change in unrealized appreciation/depreciation for level 3 assets still held as of June 30, 2013 (4)	$	(950,266	)	$	(2,105,734	)	$	(823,367	)	$	(260,925	)	$	-		$	(689,478	)

(1) Transfers are assumed to occur at the beginning of the period.

(2) Represents an accounting reclassification from a linked transaction to a real estate security due to event occuring which breaks the link.

(3) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	(642,014	)
Unrealized gain/(loss) on real estate securities and loans, net		(4,183,907	)
Interest income		437,467
Net realized gain		4,221,145
Total	$	(167,309	)

(4) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	(689,478	)
Unrealized gain/(loss) on real estate securities and loans, net		(3,711,886	)
Interest income		(428,406	)
Total	$	(4,829,770	)

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Six Months Ended

June 30, 2012

	Non-Agency RMBS			ABS			CMBS			Linked Transactions
Beginning balance	$	28,407,005		$	4,526,620		$	-		$	5,277,317
Transfers (1):
Transfers into level 3		-			-			-			-
Transfers out of level 3		-			-						-
Purchases		38,509,731			23,504,164			9,725,625			66,959,260
Proceeds from sales		-			-			-			-
Proceeds from settlement		(12,014,170	)		(15,092,531	)		(2,257,188	)		(58,509,560	)
Total net gains/(losses) (2)
Included in net income		20,346			571,188			40,838			1,380,640
Included in other comprehensive income (loss)		-			-			-			-
Ending Balance	$	54,922,912		$	13,509,441		$	7,509,275		$	15,107,657
								-
Change in unrealized appreciation/depreciation for level 3 assets still held as of June 30, 2012 (3)	$	20,347		$	10,181		$	40,838		$	205,281

(1) Transfers are assumed to occur at the beginning of the period.

(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	1,380,640
Unrealized gain/(loss) on real estate securities and loans, net		670,274
Interest income		(37,902	)
Total	$	2,013,012

(3) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:

Gain/(loss) on linked transactions, net	$	205,281
Unrealized gain/(loss) on real estate securities and loans, net		113,951
Interest income		(42,585	)
Total	$	276,647

The Company did not have any transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy during the three and six months ended June 30, 2013 and June 30, 2012.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of investments for which the Company has utilized Level 3 inputs to determine fair value:

Asset Class	Fair Value at June 30, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
				Yield	3.35% - 8.48% (5.02%)
Non Agency RMBS	$	217,503,196	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 8.00% (5.39%)
				Projected Collateral Losses	0.20% - 30.00% (4.46%)
				Projected Collateral Severities	20.00% - 50.00% (23.04%)
ABS	$	97,916,107	Discounted Cash Flow	Yield	3.86% - 4.34% (12.53%)
				Projected Collateral Prepayments	0.00% - 5.00% (5.00%)
				Yield	4.14% - 5.79% (5.04%)
CMBS	$	22,779,730	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 0.00% (0.00%)
				Projected Collateral Losses	0.00% - 0.00% (0.00%)
				Projected Collateral Severities	0.00% - 0.00% (0.00%)
				Yield	6.16% - 6.21% (6.20%)
Interest Only	$	6,592,026	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 100.00% (74.21%)
				Projected Collateral Losses	0.00% - 0.00% (0.00%)
				Projected Collateral Severities	0.00% - 0.00% (0.00%)
Commercial Loans	$	30,000,000	Discounted Cash Flow	Yield	9.87% - 9.87% (9.87%)
				Yield	3.17% - 9.22% (5.65%)
Linked Transactions*	$	6,089,083	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 6.93% (1.55%)
				Projected Collateral Losses	0.00% - 30.00% (3.22%)
				Projected Collateral Severities	0.00% - 70.00% (14.83%)

*Linked Transactions are comprised of unobservable inputs from Non-Agency RMBS and CMBS investments.

Asset Class	Fair Value at December 31, 2012		Valuation Technique	Unobservable Input	Range (Weighted Average)
				Yield	4.43% - 9.60% (5.90%)
Non-Agency RMBS	$	255,043,557	Discounted Cash Flow	Projected Collateral Prepayments	1.00% - 9.00% (4.41%)
				Projected Collateral Losses	0.20% - 16.00% (2.03%)
				Projected Collateral Severities	40.00% - 75.00% (55.27%)
				Yield	4.66% - 7.05% (5.77%)
ABS	$	33,937,097	Discounted Cash Flow	Projected Collateral Prepayments	20.00% - 100.00% (59.72%)
				Projected Collateral Losses	0.00% - 0.00% (0.00%)
				Projected Collateral Severities	0.00% - 0.00% (0.00%)
				Yield	2.23% - 5.76% (5.05%)
CMBS	$	34,066,710	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 0.00% (0.00%)
				Projected Collateral Losses	0.00% - 0.00% (0.00%)
				Projected Collateral Severities	0.00% - 0.00% (0.00%)
				Yield	4.14% - 10.93% (5.59%)
Linked Transactions*	$	6,505,299	Discounted Cash Flow	Projected Collateral Prepayments	0.00% - 25.00% (0.94%)
				Projected Collateral Losses	0.00% - 35.00% (16.25%)
				Projected Collateral Severities	0.00% - 65.00% (34.32%)

*Linked Transactions are comprised of unobservable inputs from Non-Agency RMBS and CMBS investments.

As further described above, values for the Company’s securities portfolio are based upon prices obtained from third party pricing services. Broker quotations may also be used. The significant unobservable inputs used in the fair value measurement of the Company’s Non-Agency RMBS and CMBS securities classified as a component of Linked Transactions are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (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.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Also as described above, valuation of the Company’s loan portfolio is determined by the Manager using third-party pricing services where available, and specialized third party valuation service providers. The evaluation considers the underlying characteristics of each loan, which are observable inputs, including: coupon; maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. These valuations also require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. Changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently estimated. Analyses provided by valuation service providers are reviewed and considered by the Manager.

6. Repurchase Agreements

The Company pledges certain real estate securities as collateral under repurchase agreements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a “haircut.” Repurchase agreements entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each agreement’s term, typically 30 to 90 days. The carrying amount of the Company’s repurchase agreements approximates fair value as the debt is short-term in nature. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase agreement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase agreement at which time the Company may enter into a new repurchase agreement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Under the terms of the Company’s master repurchase agreements, the counterparties may, in certain cases, sell or re-hypothecate the pledged collateral.

The following table presents certain information regarding the Company’s repurchase agreements as of June 30, 2013:

Repurchase Agreements Maturing Within:	Balance		Weighted Average Rate			Weighted Average Haircut
30 days or less	$	2,072,730,680		0.77	%		6.17	%
31-60 days		1,056,008,000		0.50	%		1.90	%
61-90 days		220,476,000		0.52	%		5.32	%
Greater than 90 days		472,429,510		0.92	%		6.49	%
Total / Weighted Average	$	3,821,644,190		0.70	%		4.98	%

The following table presents certain information regarding the Company’s repurchase agreements as of December 31, 2012:

Repurchase Agreements Maturing Within:	Balance		Weighted Average Rate			Weighted Average Haircut
30 days or less	$	2,242,856,547		0.71	%		7.28	%
31-60 days		783,969,000		0.52	%		4.04	%
61-90 days		547,416,000		0.57	%		3.49	%
Greater than 90 days		337,178,271		1.30	%		11.95	%
Total / Weighted Average	$	3,911,419,818		0.70	%		6.50	%

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Although repurchase agreements are committed borrowings until maturity, the lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets resulting from changes in market conditions or factor changes would require the Company to provide additional collateral or cash to fund margin calls. The following table presents information with respect to the Company’s posting of collateral at June 30, 2013 and December 31, 2012:

	June 30, 2013		December 31, 2012
Repurchase agreements secured by Agency RMBS	$	3,056,371,000	$	3,346,676,000
Fair Value of Agency RMBS pledged as collateral under repurchase agreements		3,294,743,377		3,489,393,062
Repurchase agreements secured by Non-Agency RMBS, ABS and CMBS		765,273,190		564,743,818
Fair Value of Non-Agency RMBS, ABS and CMBS pledged as collateral under repurchase agreements		962,277,837		711,699,379
Cash pledged (i.e., restricted cash) under repurchase agreements		574,000		1,500,000

The following table presents both gross information and net information about repurchase agreements eligible for offset in the statement of financial position as of June 30, 2013:

									Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position			Financial Instruments (Posted)			Cash Collateral (Posted)		Net Amount
Repurchase Agreements	$	(3,821,644,190	)	$	-	$	(3,821,644,190	)	$	(3,821,644,190	)	$	-	$	-

The following table presents both gross information and net information about repurchase agreements eligible for offset in the statement of financial position as of December 31, 2012:

									Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position			Financial Instruments (Posted)			Cash Collateral (Posted)		Net Amount
Repurchase Agreements	$	(3,911,419,818	)	$	-	$	(3,911,419,818	)	$	(3,911,419,818	)	$	-	$	-

The Company seeks to transact with several different counterparties in order to reduce the exposure to any single counterparty. The Company entered into master repurchase agreements (“MRAs”) with 30 counterparties, under which it had outstanding debt with 26 and 29 counterparties at June 30, 2013 and December 31, 2012, respectively.

At June 30, 2013, the following table reflects amounts at risk under its repurchase agreements greater than 10% of the Company’s equity with any counterparty, excluding linked transactions.

Counterparty		Amount at Risk				Weighted Average Maturity (days)				Percentage of Stockholders' Equity
Credit Suisse		$	82,837,671				71				11.5	%

At June 30, 2013, the Company had repurchase agreements with Credit Suisse determined to be linked. The amount at risk including linked transactions to Credit Suisse is $90.5 million, with a weighted average maturity of 67 days, representing approximately 12.5% of stockholders’ equity.

At December 31, 2012, the Company did not have greater than 10% of stockholders’ equity at risk with any individual counterparty.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

On April 9, 2012, AG MIT, LLC (“AG MIT”), a direct, wholly-owned subsidiary of the Company, entered into a Master Repurchase and Securities Contract (the “Repurchase Agreement”) with Wells Fargo Bank, National Association to finance the Company’s acquisition of certain residential, Non-Agency RMBSs. Effective April 12, 2013, AG MIT entered into an Amended and Restated Master Repurchase and Securities Contract (the “Renewal Agreement”) to the Repurchase Agreement dated as of April 9, 2012. The Renewal Agreement was entered into for multiple purposes, including the amendment of the Repurchase Agreement to finance AG MIT’s acquisition of not only residential, non-Agency Securities, but also certain consumer asset-backed securities and commercial mortgage-backed securities. Each transaction under the Renewal Agreement will also have its own specific terms, such as identification of the assets subject to the transaction, sale price, repurchase price and rate. The Renewal Agreement increases the aggregate maximum borrowing capacity of the Repurchase Agreement from $75 million to $125 million and extends the maturity date from April 8, 2013 to April 11, 2014. The Renewal Agreement also includes the same provisions in the Repurchase Agreement permitting the maturity date to be extended for an additional 90 days.

The Renewal Agreement contains representations, warranties, covenants, events of default and indemnities that are substantially identical to those in the Repurchase Agreement and are customary for agreements of this type. The Renewal Agreement also contains amended financial covenants that require, as of the last business day of each quarter and on any funding date, the Company and AG MIT to maintain (i) their Total Indebtedness to their Adjusted Tangible Net Worth at a ratio less than the Leverage Ratio; (ii) an Adjusted Tangible Net Worth of not less than $430 million; and (iii) at all times, Liquidity of not less than $30 million and unrestricted cash of not less than $5 million.

As discussed in Note 2, for any transactions determined to be linked, the initial transfer and repurchase financing will be recorded as a forward commitment to purchase assets. At June 30, 2013 and December 31, 2012, the Company had repurchase agreements of $404.8 million and $282.3 million, respectively, that were accounted for as linked. These linked repurchase agreements are not included in the above tables. See Note 7 for details.

7. Derivatives

The Company's derivatives currently include interest rate swaps (“swaps”), to-be-announced forward contracts on specified Agency pools (“TBAs”), and linked transactions. Derivatives have not been designated as hedging instruments. The Company has also entered into non-derivative instruments to manage interest rate risk, including Agency IO securities.

The following table presents the fair value of the Company's derivative instruments and their balance sheet location at June 30, 2013 and December 31, 2012.

Derivative Instrument	Designation	Balance Sheet Location	June 30, 2013			December 31, 2012
Interest rate swaps, at fair value	Non-Hedge	Derivative liabilities, at fair value	$	(6,096,965	)	$	(36,238,250	)
Interest rate swaps, at fair value	Non-Hedge	Derivative assets, at fair value		42,332,701			-
TBAs	Non-Hedge	Derivative liabilities, at fair value		(4,535,065	)		(137,697	)
TBAs	Non-Hedge	Derivative assets, at fair value		2,175,786			-
Linked transactions, at fair value	Non-Hedge	Linked transactions, net, at fair value		67,263,212			45,122,824

The following table summarizes information related to derivatives:

	June 30, 2013		December 31, 2012
Non-hedge derivatives
Notional amount of Interest Rate Swap Agreements (1)	$	3,761,770,000	$	2,166,025,000
Net notional amount of TBAs		150,000,000		40,000,000
Notional amount of Linked Transactions (2)		515,652,058		349,775,342

(1) Includes forward starting swaps with a notional of $30.0 million and $100.0 million as of June 30, 2013 and December 31, 2012, respectively.

(2) Represents the current face of the securities comprising linked transactions.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table summarizes gains/(losses) related to derivatives:

		Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	Income Statement Location	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Non-hedge derivatives gain (loss):
Interest rate swaps	Unrealized loss on derivative instruments, net	$	70,258,831		$	(11,158,188	)	$	75,349,842		$	(12,516,488	)
Interest rate swaps	Net realized gain		(6,299,169	)		(420,836	)		(7,087,443	)		(267,115	)
TBAs	Unrealized loss on derivative instruments, net		(2,353,813	)		582,420			(2,221,583	)		(905,159	)
TBAs	Net realized gain		(237,891	)		10,547			(577,149	)		1,717,266
Linked transactions	Gain on linked transactions, net		(1,339,610	)		3,364,972			4,498,609			6,804,157
Linked transactions	Net realized gain		(2,021,952	)		993,422			(1,682,283	)		993,422

The following table presents both gross information and net information about derivative instruments eligible for offset in the statement of financial position as of June 30, 2013:

										Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position			Financial Instruments (Posted)			Cash Collateral (Posted)/Received			Net Amount
Derivative Assets (1)
Interest Rate Swaps	$	54,739,345		$	(4,886,004	)	$	49,853,341		$	-		$	21,190,000		$	28,663,341
TBAs		3,624,936			(1,449,150	)		2,175,786			-			-			2,175,786
Total Derivative Assets		58,364,281			(6,335,154	)		52,029,127			-			21,190,000			30,839,127

Derivative Liabilities (2)
Interest Rate Swaps		(7,107,275	)		2,163,514			(4,943,761	)		(4,943,761	)		-			-
TBAs		(4,535,065	)					(4,535,065	)		-			(4,535,065	)		-
Total Derivative Liabilities		(11,642,340	)		2,163,514			(9,478,826	)		(4,943,761	)		(4,535,065	)		-

Linked Transactions (3)		470,394,376			(404,759,166	)		65,635,210			-			-			65,635,210

(1) Included in Derivative Assets on the consolidated balance sheet is accrued interest of $(7,520,640).

(2) Included in Derivative Liabilities on the consolidated balance sheet is accrued interest of $(1,153,204).

(3) Included in Linked Transactions on the consolidated balance sheet is net accrued interest of $1,628,002.

The following table presents both gross information and net information about derivative instruments eligible for offset in the statement of financial position as of December 31, 2012:

										Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts of Recognized (Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of (Liabilities) Presented in the Statement of Financial Position			Financial Instruments (Posted)			Cash Collateral (Posted)		Net Amount
Derivative Liabilities (1)
Interest Rate Swaps	$	(30,698,913	)	$	396,348		$	(30,302,565	)	$	(30,302,565	)	$	-	$	-
TBAs		(137,696	)		-		$	(137,696	)		-			-		-
Total Derivative Liabilities		(30,836,609	)		396,348			(30,440,261	)		(30,302,565	)		-		-

Linked Transactions (2)		326,589,623			(282,343,454	)		44,246,169			-			-		-

(1) Included in Derivative Liabilities on the consolidated balance sheet is accrued interest of $(5,797,990) .

(2) Included in Linked Transactions on the consolidated balance sheet is net accrued interest of $876,655.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Interest Rate Swaps

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. This arrangement establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the swap agreements and actual borrowing rates.

The following table presents information about the Company’s interest rate swaps as of June 30, 2013:

Maturity	Notional Amount		Weighted Average Pay Rate			Weighted Average Receive Rate			Weighted Average Years to Maturity
2015	$	261,700,000		0.93	%		0.27	%		1.88
2016*		397,500,000		1.02	%		0.30	%		2.87
2017		445,000,000		1.03	%		0.28	%		4.18
2018		1,153,370,000		1.33	%		0.28	%		4.89
2019		375,000,000		1.41	%		0.28	%		6.03
2020		783,200,000		1.75	%		0.27	%		6.83
2022		50,000,000		1.69	%		0.27	%		9.18
2023		296,000,000		2.48	%		0.27	%		9.94
Total/Wtd Avg	$	3,761,770,000		1.43	%		0.28	%		5.36

* This figure includes a forward starting swap with a total notional of $30.0 million and a start date of July 2, 2013. Weighted average rates shown are inclusive of rates corresponding to the terms of the swap as if the swap were effective as of June 30, 2013.

The following table presents information about the Company’s interest rate swaps as of December 31, 2012:

Maturity	Notional Amount		Weighted Average Pay Rate			Weighted Average Receive Rate			Weighted Average Years to Maturity
2014	$	204,500,000		1.00	%		0.33	%		1.54
2015		364,025,000		1.08	%		0.30	%		2.42
2016		367,500,000		1.08	%		0.30	%		3.36
2017		410,000,000		1.02	%		0.31	%		4.70
2018*		320,000,000		1.31	%		0.31	%		5.56
2019*		450,000,000		1.39	%		0.31	%		6.56
2022		50,000,000		1.69	%		0.31	%		9.68
Total/Wtd Avg	$	2,166,025,000		1.17	%		0.31	%		4.42

* These figures include forward starting swaps with a total notional of $100.0 million and a weighted average start date of April 2, 2013. Weighted average rates shown are inclusive of rates corresponding to the terms of the swap as if the swap were effective as of December 31, 2012.

TBAs

The Company has entered into TBA positions to facilitate the future purchase of specified Agency RMBS. Pursuant to these TBAs, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered or received would not be identified until shortly, generally two days, before the TBA settlement date. The Company records TBA purchases and sales on the trade date and presents the purchase or sale net of the corresponding payable or receivable until the settlement date of the transaction. Contracts for the purchase or sale of specified Agency RMBS are accounted for as derivatives if the delivery of the specified Agency security and settlement extends beyond the shortest period possible for that type of security.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table presents information about the Company’s TBAs for the three and six months ended June 30, 2013 and June 30, 2012:

For the Three Months Ended June 30, 2013
	Beginning Notional Amount		Additions		Sale or Settlement			Ending Net Notional Amount			Net Fair Value as of Period End			Net Receivable from Broker		Derivative Asset		Derivative Liability
TBAs	$	40,000,000	$	710,000,000	$	(900,000,000	)	$	(150,000,000	)	$	(151,957,035	)	$	149,597,756	$	2,175,786	$	(4,535,065	)

For the Three Months Ended June 30, 2012
	Beginning Notional Amount		Additions		Sale or Settlement			Ending Net Notional Amount		Net Fair Value as of Period End		Net Payable to Broker		Derivative Asset		Derivative Liability
TBAs	$	95,000,000	$	-	$	(95,000,000	)	$	-	$	-	$	-	$	-	$	-

For the Six Months Ended June 30, 2013
	Beginning Notional Amount		Additions		Sale or Settlement			Ending Net Notional Amount			Net Fair Value as of Period End			Net Receivable from Broker		Derivative Asset		Derivative Liability
TBAs	$	40,000,000	$	920,000,000	$	(1,110,000,000	)	$	(150,000,000	)	$	(151,957,035	)	$	149,597,756	$	2,175,786	$	(4,535,065	)

For the Six Months Ended June 30, 2012
	Beginning Notional Amount		Additions		Sale or Settlement			Ending Net Notional Amount		Net Fair Value as of Period End		Net Payable to Broker		Derivative Asset		Derivative Liability
TBAs	$	100,000,000	$	220,000,000	$	(320,000,000	)	$	-	$	-	$	-	$	-	$	-

Linked Transactions

As discussed in Note 2, when the initial transfer of a financial asset and repurchase financing are entered into contemporaneously with, or in contemplation of, one another, the transaction will be considered linked unless all of the criteria found in ASC 860-10 are met at the inception of the transaction. If the transaction is determined to be linked, we will record the initial transfer and repurchase financing on a net basis and record a forward commitment to purchase assets as a derivative instrument with changes in market value being recorded on the consolidated statement of operations. When, or if a transaction is longer considered linked, the security and related repurchase agreement will be recorded on a gross basis. The fair value of linked transactions reflects the value of the underlying security’s fair market value netted with the respective linked repurchase agreement borrowings and net accrued interest. Certain of our Linked Transactions became unlinked during the periods presented. For the six months ended June 30, 2013 a Non-Agency RMBS with a security fair value of $13.2 million and the related repurchase agreement borrowing of $11.6 million were unlinked, and the Company recorded a net realized gain of $0.3 million from the unlinking of the Linked Transaction. No transactions became unlinked for the three months ended June 30, 2013. For the three and six months ended June 30, 2012 a Non-Agency RMBS with a security fair value of $6.9 million and the related repurchase agreement borrowing of $5.2 million were unlinked, and the Company recorded a net realized loss of $0.01 million from the unlinking of the Linked Transaction.

At June 30, 2013 the Company identified certain securities underlying linked transactions it intended to sell and as a result the Company recognized an OTTI charge of $2.0 million, which is included in net realized gain/(loss). This charge represents a write-down to fair value as of the reporting date. No OTTI was recorded for the three and six months ended June 30, 2012. The decline in value of the remaining securities underlying linked transactions is solely due to market conditions and not the quality of the assets. The remaining investments are not considered other than temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments and the Company is not required to sell for regulatory or other reasons.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The following table presents certain information related to the securities accounted for as a part of linked transactions for the three and six months ended June 30, 2013:

									For the Three Months Ended June 30, 2013											For the Six Months Ended June 30, 2013
Instrument	Current Face		Amortized Cost		Fair Value		Net Accrued Interest		Net Interest Income		Unrealized Gain			Net Realized Gain			Amount Included in Statement of Operations			Net Interest Income		Unrealized Gain			Net Realized Gain			Amount Included in Statement of Operations			Weighted Average Coupon			Weighted Average Life
Non-Agency RMBS	$	493,717,058	$	444,653,342	$	450,368,294	$	1,580,913	$	4,166,185	$	(4,665,513	)	$	(1,941,574	)	$	(2,440,902	)	$	7,219,062	$	(2,496,497	)	$	(1,601,905	)	$	3,120,660			4.85	%		5.95
CMBS		21,935,000		20,649,181		20,026,082		47,089		167,994		(1,008,276	)		(80,378	)		(920,660	)		325,760		(549,716	)		(80,378	)		(304,334	)		3.39	%		4.34
Total	$	515,652,058	$	465,302,523	$	470,394,376	$	1,628,002	$	4,334,179	$	(5,673,789	)	$	(2,021,952	)	$	(3,361,562	)	$	7,544,822	$	(3,046,213	)	$	(1,682,283	)	$	2,816,326			4.79	%		5.89

The following table presents certain information related to the securities accounted for as a part of linked transactions for the three and six months ended June 30, 2012:

									For the Three Months Ended June 30, 2012										For the Six Months Ended June 30, 2012
Instrument	Current Face		Amortized Cost		Fair Value		Net Accrued Interest		Net Interest Income		Unrealized Gain			Net Realized Gain			Amount Included in Statement of Operations		Net Interest Income		Unrealized Gain		Net Realized Gain			Amount Included in Statement of Operations		Weighted Average Coupon			Weighted Average Life
Non-Agency RMBS	$	242,943,875	$	220,738,264	$	221,805,266	$	733,884	$	1,992,884	$	1,007,535		$	(48,022	)	$	2,952,397	$	3,261,778	$	2,707,870	$	(48,022	)	$	5,921,626		5.04	%		6.01
ABS		-		-		-		-		72,110		(239,726	)		1,041,444			873,828		230,160		61,870		1,041,444			1,333,474		-			-
CMBS		45,134,672		43,682,348		43,778,213		81,608		441,923		90,246			-			532,169		452,233		90,246		-			542,479		3.90	%		3.80
Total	$	288,078,547	$	264,420,612	$	265,583,479	$	815,492	$	2,506,917	$	858,055		$	993,422		$	4,358,394	$	3,944,171	$	2,859,986	$	993,422		$	7,797,579		4.86	%		5.66

The following table presents certain information related to the repurchase agreements accounted for as a part of linked transactions as of June 30, 2013:

Instrument	Repurchase Agreement		Weighted Average Interest Rate			Weighted Average Years to Maturity
Non-Agency RMBS	$	389,199,013		1.90	%		0.06
CMBS		15,560,153		1.39	%		0.05
	$	404,759,166		1.88	%		0.06

The following table presents certain information related to the repurchase agreements accounted for as a part of linked transactions as of June 30, 2012:

Instrument	Repurchase Agreement		Weighted Average Interest Rate			Weighted Average Years to Maturity
Non-Agency RMBS	$	186,527,574		1.81	%		0.06
CMBS		34,981,000		1.75	%		0.06
	$	221,508,574		1.80	%		0.06

At June 30, 2013, the Company had real estate securities with a fair value of $16.9 million pledged as collateral against its derivatives. The Company also pledged assets accounted for within linked transactions with a fair value of $470.4 million as collateral against the related linked repurchase agreements. At June 30, 2012, the Company had real estate securities with a fair value of $29.2 million and restricted cash of $0.9 million pledged as collateral against its derivatives. The Company also pledged assets accounted for within linked transactions with a fair value of $265.6 million as collateral against the related linked repurchase agreements. The Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty or CCP/FCM upon occurrence of certain events.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

8. Earnings per Share

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) available to common stockholders for the period by the weighted- average shares of the Company’s common stock outstanding for that period that participate in dividends. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, warrants and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.

As of June 30, 2013 and June 30, 2012, the Company’s outstanding warrants and unvested shares of restricted common stock were as follows:

	June 30, 2013		June 30, 2012
Warrants		1,007,500		1,602,500
Restricted stock granted to the Manager		16,772		30,188
Restricted stock granted to the independent directors		4,500		6,000

Each warrant entitles the holder to purchase half a share of the company’s common stock at a fixed price upon exercise of the warrant. During the three and six months ended June 30, 2013, the Company excluded the effects of such from the computation of diluted earnings per share because their effect would be anti-dilutive. During the three and six months ended June 30, 2012, the average market value per share of the Company's common stock was above the exercise price of the warrants, and therefore the warrants were included in the Company’s diluted weighted average shares outstanding in accordance with ASC 260. Shares of restricted stock held by the Manager and independent directors accrue dividends, but are not paid until vested and are therefore not considered to be participating shares. The dilutive effects of these shares are only included in diluted weighted average shares outstanding.

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the three and six months ended June 30, 2013 and June 30, 2012:

	Three Months Ended			Three Months Ended		Six Months Ended			Six Months Ended
	June 30, 2013			June 30, 2012		June 30, 2013			June 30, 2012
Numerator:
Net income/(loss) available to common stockholders for basic and diluted earnings per share	$	(74,602,643	)	$	44,917,778	$	(61,199,188	)	$	55,868,216

Denominator:
Basic weighted average common shares outstanding		28,068,507			15,769,674		27,676,696			14,974,655
Dilutive effect of manager and director restricted stock and warrants		-			3,179		-			1,468
Dilutive weighted average common shares outstanding		28,068,507			15,772,853		27,676,696			14,976,123

Basic Earnings/(Loss) Per Share of Common Stock:	$	(2.66	)	$	2.85	$	(2.21	)	$	3.73
Diluted Earnings/(Loss) Per Share of Common Stock:	$	(2.66	)	$	2.85	$	(2.21	)	$	3.73

Excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were both manager and director restricted stock and warrants of 72,999 and 95,283 for the three and six months ended June 30, 2013, respectively.

9. Income Taxes

As a REIT, the Company is not subject to Federal income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. Most states recognize REIT status as well.

The Company files tax returns in several U.S jurisdictions. There are no ongoing U.S. federal, state and local tax examinations.

The Company has elected to treat AG MIT II, LLC, AG MITT RMAT 2013, LLC and AG MITT RMAT 2013 II, LLC as TRSs and may elect to treat other subsidiaries as TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly, and generally may engage in any real estate or non-real estate-related business. A TRS is subject to federal, state and local corporate income taxes. During the six months ended June 30, 2013 the Company recognized an income tax provision of $2.7 million related to the income and sale of investments held within AG MITT RMAT 2013, LLC and AG MITT RMAT 2013 II, LLC.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

Cash distributions declared by the Company that do not exceed its current or accumulated earnings and profits will be considered ordinary income to stockholders for income tax purposes unless all or a portion of a distribution is designated by the Company as a capital gain dividend. Distributions in excess of the Company’s current and accumulated earnings and profits will be characterized as return of capital or capital gains.

Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded it did not have any uncertain tax positions that meet the recognition or measurement criteria of ASC 740 as of June 30, 2013 and December 31, 2012. The Company’s federal income tax return for the 2012 and 2011 tax years are open to examination by the Internal Revenue Service. In the event that the Company incurs income tax related interest and penalties, its policy is to classify them as a component of provision for income taxes.

10. Related Party Transactions

The Company has entered into a management agreement with the Manager, which provides for an initial term through June 30, 2014, and will be deemed renewed automatically each year for an additional one-year period, subject to certain termination rights. The Company is externally managed and advised by the Manager. Pursuant to the terms of the management agreement, which became effective July 6, 2011 (upon the consummation of the Company’s IPO), the Manager provides the Company with its management team, including its officers, along with appropriate support personnel. Each of the Company’s officers is an employee of Angelo, Gordon. The Company does not have any employees. The Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo, Gordon the overall responsibility its day-to-day duties and obligations arising under the Company’s management agreement.

Management fee

The Manager is entitled to a management fee equal to 1.50% per annum, calculated and paid quarterly, of the Company’s Stockholders’ Equity. For purposes of calculating the management fee, “Stockholders’ Equity” means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus the Company’s retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that the Company pays for repurchases of its common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in the Company’s financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on the Company’s financial statements.

For the three and six months ended June 30, 2013, the Company incurred management fees of approximately $2.8 million and $5.7 million, respectively. For the three and six months ended June 30, 2012, the Company incurred management fees of approximately $1.2 million and $2.2 million, respectively.

Termination fee

The termination fee, payable for the Company’s termination of the management agreement without cause or the Manager’s termination of the management agreement upon a default in the performance of any material term of the management agreement, will be equal to three times the average annual management fee during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter. As of June 30, 2013 and December 31, 2012, no event of termination of the management agreement had occurred.

Expense reimbursement

The Company is required to reimburse the Manager for operating expenses related to the Company that are incurred by the Manager, including expenses relating to legal, accounting, due diligence and other services. The Company’s reimbursement obligation is not subject to any dollar limitation. The Company will not reimburse the Manager for the salaries and other compensation of its personnel except that the Company will be responsible for expenses incurred by the Manager in employing the Company’s chief financial officer, general counsel and other employees as further described below.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

The Company will reimburse the Manager or its affiliates for the allocable share of the compensation, including, without limitation, annual base salary, bonus, any related withholding taxes and employee benefits paid to (i) the Company’s chief financial officer based on the percentage of his time spent on Company affairs, (ii) the Company’s general counsel based on the percentage of his time spent on the Company’s affairs, and (iii) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment personnel of the Manager and its affiliates who spend all or a portion of their time managing the Company’s affairs based upon the percentage of time devoted by such personnel to the Company’s affairs. In their capacities as officers or personnel of the Manager or its affiliates, they will devote such portion of their time to the Company’s affairs as is necessary to enable the Company to operate its business. For the three and six months ended June 30, 2013, the Company has expensed into Other operating expenses $1.5 million and $2.8 million, respectively, of reimbursable expenses payable to the Manager. The Manager did not waive any expense reimbursements for the three and six months ended June 30, 2013. The Manager waived its right to receive expense reimbursement of $0.9 million and $1.8 million of expense reimbursement for the three and six months ended June 30, 2012, respectively.

Restricted stock grants

On July 6, 2011 (the date of consummation of the IPO), the Company entered into (i) a restricted stock award agreement with the Manager under the Manager Equity Incentive Plan, pursuant to which the Manager received 40,250 shares of the Company’s common stock, which vest ratably on a quarterly basis over a three-year period that began on October 1, 2011 and (ii) restricted stock award agreements with the Company’s four initial independent directors under the Equity Incentive Plan, pursuant to which each of the four initial independent directors received 1,500 shares of the Company’s common stock that vest in equal installments over three years on each annual anniversary of the grant date. Following the election of the fifth independent director at the 2013 Annual Meeting of Stockholders, 500 shares of the Company’s common stock were granted on June 1, 2013 to the fifth independent director under the Equity Incentive Plan. These shares will vest on July 6, 2014.

Pursuant to the Manager Equity Incentive Plan and the Equity Incentive Plan, 277,500 shares of common stock are available to be awarded. Awards under the equity incentive plans are forfeitable until they become vested. An award will become vested only if the vesting conditions set forth in the award agreement (as determined by the board of directors or the compensation committee, as applicable) are satisfied. The vesting conditions may include performance of services for a specified period, achievement of performance goal, or a combination of both. The board of directors or the compensation committee, as applicable, also has authority to provide for accelerated vesting upon the occurrence of certain events.

The Company also pays a $60,000 annual base director’s fee to each independent director. With respect to the fifth independent director elected at the 2013 Annual Meeting of Stockholders, the annual base director’s fee for 2013 will be prorated for the period of May 1, 2013 to December 31, 2013. Base director’s fees are paid 50% in cash and 50% in restricted common stock. The number of shares of restricted common stock to be issued each quarter to each independent director is determined based on the fair market value of the Company’s common stock equal to the closing price thereof on the New York Stock Exchange on the last business day of each fiscal quarter. To the extent that any fractional shares would otherwise be issuable and payable to each independent director, a cash payment is made to each independent director in lieu of any fractional shares. All directors’ fees are paid pro rata (and restricted stock grants determined) on a quarterly basis in arrears, and shares issued are fully vested and non-forfeitable. These shares may not be sold or transferred during the time of service as an independent member of the Company’s board.

11. Equity

On January 24, 2012, the Company completed a follow-on offering of 5,000,000 shares of its common stock and subsequently issued an additional 750,000 shares of common stock pursuant to the underwriters’ over-allotment option at a price of $19.00 per share, for aggregate gross proceeds of approximately $109.3 million. Net proceeds to the Company from the offering were approximately $104.0 million, net of issuance costs of approximately $5.3 million.

On July 13, 2012, the Company filed a shelf registration statement on Form S-3 with the SEC, offering up to $1.0 billion of capital stock. The registration statement was declared effective on July 20, 2012. At June 30, 2013, approximately $549.5 million of our capital stock was available for issuance under the registration statement.

On August 3, 2012, the Company completed a public offering of 1,800,000 shares of 8.25% Series A Cumulative Redeemable Preferred Stock and subsequently issued an additional 270,000 shares pursuant to the underwriters’ over-allotment option with a liquidation preference of $25.00 per share. The Company received total gross proceeds of approximately $51.8 million. Net proceeds to the Company from the offering were approximately $49.9 million, net of underwriting discounts, commissions and expenses. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption. Under certain circumstances upon a change of control, the Series A Preferred Stock is convertible to shares of the common stock. Holders of Series A Preferred Stock have no voting rights, except under limited conditions, and holders are entitled to receive cumulative cash dividends at a rate of 8.25% per annum of the $25.00 per share liquidation preference before holders of the common stock are entitled to receive any dividends. Shares of the Series A Preferred Stock are redeemable at $25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on August 3, 2017, or earlier under certain circumstances intended to preserve the Company’s qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 17th day of each March, June, September and December. As of June 30, 2013, the Company had declared all required quarterly dividends on the Series A Preferred Stock.

AG Mortgage Investment Trust Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

On August 15, 2012, the Company completed a public offering of 6,000,000 shares of its common stock and simultaneously issued an additional 900,000 shares pursuant to the underwriters’ over-allotment option at a price of $23.29 per share. The Company received total gross proceeds of approximately $160.7 million. Net proceeds to the Company from the offering were approximately $152.7 million, net of underwriting discounts, commissions and expenses.

On September 6, 2012, the Company entered into an equity distribution agreement with each of Mitsubishi UFJ Securities (USA), Inc., JMP Securities LLC and Brinson Patrick Securities Corporation (the “Sales Agents”), which the Company refers to as the Equity Distribution Agreements, pursuant to which the Company may sell up to 3,000,000 shares of common stock from time to time through the Sales Agents, as defined in Rule 415 under the Securities Act of 1933. As of June 30, 2013, the Company had sold 1,254,854 shares of common stock through the Sales Agents for net proceeds of approximately $31.3 million.

On September 27, 2012, the Company completed a public offering of 4,000,000 shares of 8.00% Series B Cumulative Redeemable Preferred Stock and issued an additional 600,000 shares pursuant to the underwriters’ over-allotment option with a liquidation preference of $25.00 per share. The Company received total gross proceeds of approximately $115.0 million. Net proceeds to the Company from the offering were approximately $111.3 million, net of underwriting discounts, commissions and expenses. The Series B Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption. Under certain circumstances upon a change of control, the Series B Preferred Stock is convertible to shares of the common stock. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and holders are entitled to receive cumulative cash dividends at a rate of 8.00% per annum of the $25.00 per share liquidation preference before holders of the common stock are entitled to receive any dividends. Shares of the Series B Preferred Stock are redeemable at $25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on September 27, 2017, or earlier under certain circumstances intended to preserve the Company’s qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 17th day of each March, June, September and December. As of June 30, 2013, the Company had declared all required quarterly dividends on the Series B Preferred Stock.

On December 26, 2012, the Company completed a public offering of 3,750,000 shares of its common stock at a price of $24.33 per share. The Company received total gross proceeds of approximately $91.2 million. Net proceeds to the Company from the offering were approximately $87.5 million, net of underwriting discounts, commissions and expenses.

For the three and six months ended June 30, 2013, warrants were exercised by the cashless exercise option, which resulted in the issuance of 8,730 and 20,101 shares of common stock, respectively. No proceeds were received in connection with the exercise of the cashless option. For the three and six months ended June 30, 2013, warrants were exercised by the cash exercise option, which resulted in the issuance of 50,000 and 196,250 shares of common stock for proceeds to the Company of $1.0 million and $4.0 million, respectively. No warrants were exercised during the three and six months ended June 30, 2012.

During the quarter ended June 30, 2013, the Company declared a quarterly dividend to common stockholders totaling $22.7 million, or $0.80 per share, which was paid on July 26, 2013. For the six months ended June 30, 2013, the Company declared dividends to common stockholders of $44.7 million or $1.60 per share. During the quarter ended June 30, 2012, the Company declared a quarterly dividend to common stockholders totaling $11.0 million or $0.70 per share, which was paid on July 27, 2012. For the six months ended June 30, 2012, the Company declared dividends to common stockholders of $22.1 million or $1.40 per share.

During the three months ended June 30, 2013, the board of directors declared a quarterly distribution to the holders of the Series A Preferred Stock and Series B Preferred Stock of $0.51563 per share and $0.50 per share, respectively. The distributions were paid on June 17, 2013 to stockholders of record as of May 31, 2013. During the six months ended June 30, 2013, the board of directors declared distributions to the holders of the Series A Preferred Stock and Series B Preferred Stock of $1.03126 per share and $1.00 per share, respectively.

12. Commitments and Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any significant contingencies at June 30, 2013.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this quarterly report on Form 10-Q, or this “report,” we refer to AG Mortgage Investment Trust, Inc. as “we,” “us,” the “Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, AG REIT Management, LLC, as our “Manager,” and we refer to the indirect parent company of our Manager, Angelo, Gordon & Co., L.P., as “Angelo, Gordon.”

The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Forward-Looking Statements

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, objectives, the composition of our portfolio, actions by governmental entities, including the Federal Reserve, and the potential effects of proposed legislation on us. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements.

These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012 (Commission File No. 001-35151), which is available on the Securities and Exchange Commission’s website at www.sec.gov. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate, except as may otherwise be required by law.

Overview

We are a Maryland real estate investment trust focused on investing in, acquiring and managing a diversified portfolio of residential mortgage assets, other real estate-related securities and financial assets, which we refer to our target assets. We are externally managed by our Manager, a wholly-owned subsidiary of Angelo, Gordon. Our Manager, pursuant to the delegation agreement dated as of June 29, 2011, has delegated to Angelo, Gordon the overall responsibility for its Manager’s day-to-day duties and obligations arising under our management agreement.

We are currently invested substantially in residential mortgage-backed securities, or RMBS, for which a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally-chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac, guarantees payments of principal and interest on the securities. We refer to these securities as Agency RMBS. Our Agency RMBS investments include mortgage pass-through securities and collateral mortgage obligations (“CMOs”). We expect our portfolio, over time, will include a more significant portion of RMBS that are not issued or guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or Non-Agency RMBS. Our Non-Agency RMBS investments may include fixed- and floating- rate securities, including investment grade and non-investment grade. We have invested in other target assets, including commercial mortgage-backed securities, or CMBS, and asset backed securities, or ABS, which, together with Agency RMBS and Non-Agency RMBS, we collectively refer to as real estate securities. We have also invested in commercial mortgage loans. We have the discretion to invest in other target assets such as residential mortgage loans, other real estate structured finance products, other real estate-related loans and securities and direct or indirect interests in real estate. Non-Agency RMBS, ABS, CMBS and residential and commercial loans are referred to as our credit portfolio, and residential and commercial mortgage loans are collectively referred to as loans.

We conduct our operations to qualify and be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to federal income tax on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. We operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act.

Market and interest rate trends

In September 2012, the U.S. Federal Reserve announced a third round of quantitative easing, known as QE3, pursuant to which it would purchase additional Agency RMBS at a pace of $40 billion per month until further notice. The Federal Reserve also announced that it would maintain its policy of reinvesting principal payments from its existing holdings of Agency RMBS into new such purchases until the employment rate, among other economic indicators, showed signs of improvement. The Federal Reserve further stated that it would maintain the target range for the Federal Funds Rate between zero and 0.25% through at least mid-2015, which is six months longer than previously announced.

The Federal Reserve Open Market Committee (the “FOMC”) meeting minutes released on April 10, 2013 revealed that the FOMC had begun considering when the Federal Reserve should begin tapering the pace of Agency RMBS purchases set in September 2012. The FOMC meeting minutes released on May 22, 2013 announced that the Federal Reserve was considering beginning to taper such purchase as early as June 2013. In minutes released on June 25, 2013, the FOMC stated that the Federal Reserve would begin to scale back Agency RMBS purchases later in 2013 and that such purchases would cease entirely when the unemployment rate reached 7%.

The market reaction to the tapering of QE3 occurring earlier than expected was extremely negative. The rate on ten-year Treasury notes moved sharply higher during the second quarter of 2013. After hitting an intra-quarter low of 1.63% in early May, the market sold off significantly, reaching a high above 2.60% before closing the quarter at 2.49%. During the course of these events, Agency RMBS underperformed dramatically. The fear of the largest buyer in the market curtailing its participation and support triggered many market participants selling Agency RMBS. REIT managers also sold assets as durations extended and the mortgage basis widened. The 30-year mortgage rate mirrored the move in the markets, rising from 3.57% at the end of the first quarter to 4.46% as of the end of June. Liquidity in the Agency RMBS market suffered as sellers were plentiful but few market participants elected to add risk during this period. Fixed income benchmark indices also suffered during the months of May and June, triggering redemptions out of many indexed mutual funds. We believe this phenomenon has the potential to continue to weigh on Agency RMBS in the coming months.

The significant move in benchmark rates triggered an overall weakening of the broader fixed income credit markets. Liquidity evaporated across many segments of the broader mortgage-backed securities market. The ABX 2006-2 AAA index dropped from a May 8, 2013 52-week high of $76.75 to a low of $67.563 on June 24 and closed the month at $70.250. The CMBX Series 3 AJ index price performance was similar, with a 52-week high of $79.75 on May 8, 2013, an intra-quarter low of $66.692 and a month-end close of $71.167. We believe the limited liquidity and volatility in the credit markets will continue while the markets seek to determine the right equilibrium levels for benchmark interest rates as the Federal Reserve stimulus leaves the market place.

Despite the challenges still facing the global macro-environment, sub-optimal growth in the United States and a U.S. unemployment rate of 7.6% in June 2013, recent commentary from the Federal Reserve, during both the Federal Reserve Chairman’s Congressional testimony on May 22, 2013 and the FOMC press conference on June 19, 2013, indicates that tapering is likely to begin as early as September 2013. Though the Chairman has indicated that there will be a time delay between tapering, the full curtailment of purchases and the first increase in the Federal Funds Rate, we expect rate increases could begin as soon as early 2015.

We continue to believe that 2012 marked a bottoming in the U.S. commercial and residential real estate markets. Despite the recent increase in mortgage rates, we remain optimistic about the prospects for home price appreciation over the course of 2013. Currently, the U.S. housing market benefits from favorable supply/demand dynamics, low mortgage rates, an increase in household formation and an influx of capital into the real estate-owned rental strategy. However, we expect that, without an increase in median income, the pace of home price appreciation is likely to moderate towards the end of 2013. Furthermore, we believe the deep dislocations that occurred in these markets have resulted or will result in an “over-correction” in pricing, creating a potential opportunity for us to capitalize on these market dislocations. As we look ahead to the remainder of 2013 and 2014, we believe further opportunities will arise from the evolution of the housing finance market.

The market movements outlined above have had a meaningful impact on our existing portfolio and may also have a significant impact on our operating results going forward. We believe current market dynamics may impact the availability and cost of financing. Furthermore, we may elect to apply a more dynamic hedging policy than we historically have employed, the cost of which may impact our earnings going forward. We expect that overall market conditions will continue to impact our operating results and will cause us to adjust our investment and financing strategies over time as new opportunities emerge and risk profiles of our business change.

Recent Government Activity

On June 25, 2013, Senators Bob Corker (R-TN) and Mark Warner (D-VA), with Senators Mike Johanns (R-NE), Jon Tester (D-MT), Dean Heller (R-NV), Heidi Heitkamp (D-ND), Jerry Moran (R-KS) and Kay Hagan (D-NC), formally introduced the Housing Finance Reform and Taxpayer Protection Act of 2013 (the “Corker-Warner Bill”) into the U.S. Senate. While the current draft of the Corker-Warner Bill will likely undergo significant changes as it is debated, it is expected to serve as a basis of discussion for congressional efforts to reform Fannie Mae and Freddie Mac.

As currently drafted, the Corker-Warner Bill has three key provisions:

the establishment of the Federal Mortgage Insurance Corporation (the “FMIC”);

ii.

the creation of a Mortgage Insurance Fund (the “Fund”); and

iii.

the wind-down of Fannie Mae and Freddie Mac.

The FMIC would be a government guarantor modeled after the Federal Deposit Insurance Corporation (the “FDIC”) in that it would collect insurance premiums and maintain a deposit fund on all outstanding obligations. Every mortgage-backed security issued through the FMIC would have a private investor bearing the first risk of loss and holding at least $0.10 in equity capital for every dollar of risk. This private capital buffer would serve to protect taxpayers from the risk of default on the mortgages underlying securities issued by the FMIC. Thus, the ultimate purpose of the FMIC would be to bring in credit investors to bear the risk of default while providing liquidity, transparency and access to mortgage credit for the housing finance system.

The Federal Housing Finance Authority (the “FHFA”) would be abolished after the establishment of the FMIC, and all current responsibilities of the FHFA, as well as its resources, would be transferred to the FMIC. In particular, the Corker-Warner Bill specifies that the FMIC would maintain a database of uniform loan-level information on eligible mortgages, develop standard uniform securitization agreements and oversee the common securitization platform currently being developed by the FHFA.

In the event losses due to default on underlying mortgages exceed the first position losses of private credit investors in securities issued by the FMIC, the FMIC would cover such losses out of the Fund. The Corker-Warner Bill specifies that the FMIC would endeavor to attain a reserve balance of 1.25% of the aggregate outstanding principal balance of covered securities within five years of the establishment of the FMIC and 2.50% of such amount within ten years of the establishment of the FMIC. The Fund would be paid with insurance premiums, akin to user fees, paid by private investors with various reporting and transparency requirements.

As currently proposed, the Corker-Warner Bill would revoke the charters of Fannie Mae and Freddie Mac upon the establishment of the FMIC. Fannie Mae and Freddie Mac would wind down as expeditiously as possible while maximizing returns to taxpayers as their assets are sold off.

On July 11, 2013, U.S. Representatives introduced the Protecting American Taxpayers and Homeowners Act (“PATH”), a broad financing reform bill that serves as a counterpart to the Corker-Warner Bill. PATH would also revoke the charters of Fannie Mae and Freddie Mac and remove barriers to private investment. However, PATH would maintain the FHFA and give it oversight over a new non-government, not-for-profit National Mortgage Market Utility, the mission of which would be to develop best practices standards for the private origination, servicing, pooling and securitizing of mortgages and operate a publicly accessible securitization outlet to match loan originators with investors. Additional provisions of PATH include the reduction in size and scope of the Federal Housing Administration, tailoring its mission specifically to first-time borrowers and low- and moderate- income borrowers except in periods of significant credit contraction.

There is no way to know if either proposal will become law or, should one of the proposals become law, if or how the enacted law will differ from the current draft of the bill. It is also unclear how these proposal would impact housing finance, and what impact, if any, they would have on mortgage REITs.

Factors impacting our operating results

Our operating results can be affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. Our net interest income, which reflects the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the Constant Prepayment Rate, (“CPR”), on our RMBS. Interest rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results can be impacted by unanticipated credit events experienced by borrowers whose mortgage loans are included in our RMBS.

Forward-looking statements regarding investment portfolio, leverage and operating results

Since the end of the second quarter of 2013, the continuation of volatile market conditions and our commitment to actively manage the risks in our portfolio have resulted in further sales of securities in our investment portfolio and a corresponding reduction of approximately 15% in the size of the portfolio as of July 31, 2013. Our GAAP leverage and leverage including borrowings on linked transactions has also decreased and was in the range of 4.3x to 4.4x and 4.7x to 4.8x, respectively, as of July 31, 2013. Our net interest margin, the difference between the interest earned on our assets and the interest accrued on our repurchase agreements, at July 31, 2013 did not differ materially from our net interest margin at the end of the second quarter of 2013. The combination of the recent reduction in the size of our investment portfolio compared to the size reported as of June 30, 2013 and the decrease in the amount of leverage we employ with respect to that portfolio are expected to have an adverse impact on our operating results going forward.

See the caption “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2012 (Commission File No. 001-35151), as amended, which is available on the Securities and Exchange Commission’s website at www.sec.gov.

Investment activities

We are currently invested in Agency RMBS, Non-Agency RMBS, CMBS, mortgage loans and other real estate-related assets. For the period from our IPO to December 31, 2011, the risk-reward profile of investment opportunities supported the deployment of a majority of our capital in Agency RMBS. Labor, housing and economic fundamentals, together with U.S. monetary policy designed to keep interest rates low, supported our Agency RMBS investments in this period. Overweighting of these investments was also favored by the relative ease of funding and superior liquidity. We also acquired a limited amount of Non-Agency RMBS, ABS and CMBS assets for our investment portfolio.

In 2012, we accomplished our goal of increasing our exposure to credit securities and leveraging the broader Angelo, Gordon platform. In particular, subsequent to the announcement of QE3 by the Federal Reserve in September 2012, we elected to minimize additional investments in Agency RMBS. Throughout the first part of 2013, we remained positioned in Agency RMBS assets that we believed would perform well in an ongoing elevated prepayment environment. However, we concurrently elected to increase our hedging activity, perceiving the potential for an increase in interest rate volatility and benchmark interest rates. We will continue to base our investment decisions on a variety of factors, including liquidity, duration and hedging, and the mix of assets in our portfolio may accordingly shift over time.

We finance our investments in real estate securities primarily through short-term borrowings structured as repurchase agreements. Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we utilize derivative financial instruments (or hedging instruments), including interest rate swap agreements and interest rate cap agreements, in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the cost of our financing.

As discussed in Note 2 to our financial statements, if we purchase a security and finance it with a repurchase agreement, and the transaction is considered linked under ASC 860-10, we will record the initial transfer and repurchase financing on a net basis and record a forward commitment to purchase assets as a derivative instrument with changes in market value being recorded on the statement of operations. Throughout this Item 2, where we disclose our unlinked investment portfolio and the related repurchase agreements that finance it, we have un-linked the transactions and used the gross presentation as used for all other securities, and we have presented a reconciliation to GAAP. The presentation inclusive of linked transactions is consistent with how the management evaluates the Company’s business, and management believes it provides the most accurate depiction of the Company’s investment portfolio and financial condition.

The following table presents a reconciliation of certain information related to securities inclusive of unlinked securities to securities on a GAAP basis as of June 30, 2013:

Instrument	Current Face		Amortized Cost		Unrealized MTM			Fair Value		Weighted Average Coupon (1)			Weighted Average Life
Agency RMBS:
15 Year Fixed Rate	$	514,575,981	$	530,258,610	$	2,034,755		$	532,293,365		3.16	%		5.21
20 Year Fixed Rate		296,875,147		310,675,287		(7,355,105	)		303,320,182		3.28	%		7.74
30 Year Fixed Rate		1,998,841,682		2,076,712,358		(36,618,736	)		2,040,093,622		3.62	%		10.29
ARM		32,816,318		34,358,088		(1,143,248	)		33,214,840		2.96	%		6.46
Interest Only		973,733,259		179,197,313		(1,360,190	)		177,837,123		5.10	%		4.57
Credit Investments:
Non-Agency RMBS		1,347,360,002		1,176,065,614		15,092,647			1,191,158,261		4.34	%		6.41
ABS		100,004,252		100,004,252		(2,088,145	)		97,916,107		3.78	%		1.48
CMBS		107,348,315		104,936,661		(618,005	)		104,318,656		5.03	%		4.47
Interest Only		52,357,700		6,852,951		(260,925	)		6,592,026		1.92	%		4.66
Total: Non-GAAP Basis - Including Linked Transactions	$	5,423,912,656	$	4,519,061,134	$	(32,316,952	)	$	4,486,744,182		4.01	%		7.32

Linked Transactions	$	515,652,058	$	465,302,523	$	5,091,853		$	470,394,376		4.79	%		5.89

Total: GAAP Basis - Excluding Linked Transactions	$	4,908,260,598	$	4,053,758,611	$	(37,408,805	)	$	4,016,349,806		3.93	%		7.47

(1) Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.

The following table presents a reconciliation of certain information related to securities inclusive of unlinked securities to securities on a GAAP basis as of December 31, 2012:

Instrument	Current Face		Amortized Cost		Unrealized MTM			Fair Value		Weighted Average Coupon (1)			Weighted Average Life
Agency RMBS:
15 Year Fixed Rate	$	1,177,320,487	$	1,224,242,576	$	23,967,620		$	1,248,210,196		2.97	%		4.90
20 Year Fixed Rate		137,858,353		144,555,156		3,569,538			148,124,694		3.68	%		6.29
30 Year Fixed Rate		1,998,807,425		2,114,981,215		28,756,880			2,143,738,095		3.63	%		8.38
ARM		36,228,319		37,813,033		362,721			38,175,754		2.96	%		5.84
Interest Only		972,543,812		209,201,756		(1,583,344	)		207,618,412		6.00	%		4.30
Credit Investments:
Non-Agency RMBS		970,183,150		852,498,516		13,519,124			866,017,640		4.72	%		7.04
ABS		33,620,881		33,584,592		352,505			33,937,097		5.34	%		1.37
CMBS		110,406,946		107,256,568		2,803,346			110,059,914		5.27	%		5.14
Interest Only		640,867,674		68,181,748		(445,147	)		67,736,601		2.13	%		4.06
Total: Non-GAAP Basis - Including Linked Transactions	$	6,077,837,047	$	4,792,315,160	$	71,303,243		$	4,863,618,403		3.97	%		6.22

Linked Transactions	$	349,775,342	$	318,449,020	$	8,140,603		$	326,589,623		4.79	%		6.54

Total: GAAP Basis - Excluding Linked Transactions	$	5,728,061,705	$	4,473,866,140	$	63,162,640		$	4,537,028,780		3.92	%		6.20

(1) Equity residual investments with a zero coupon rate are excluded from this calculation.

As mentioned above, our investments have been focused in Agency RMBS given the relative ease of funding and superior liquidity. We evaluate investments in Agency RMBS using factors including expected future prepayment trends, supply and demand, costs of financing, costs of hedging, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. Our Non-Agency RMBS, ABS, CMBS, mortgage loans and interest only securities are subject to risk of loss with regard to principal and interest payments. 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.

The Company has used leverage to complete the purchase of securities in its investment portfolio. Through June 30, 2013, leverage has been in the form of repurchase agreements. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a “haircut.” Repurchase agreements entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each agreement’s term, typically 30 to 90 days. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase agreement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase agreement at which time the Company may enter into a new repurchase agreement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. The Company finances certain of its Agency RMBS, Non-Agency RMBS, ABS and CMBS through the use of repurchase agreements.

On April 9, 2012, AG MIT, a direct, wholly-owned subsidiary of the Company, entered into a Master Repurchase and Securities Contract (the “Repurchase Agreement”) with Wells Fargo Bank, National Association to finance the Company’s acquisition of certain residential, Non-Agency RMBSs. Effective April 12, 2013, AG MIT entered into an Amended and Restated Master Repurchase and Securities Contract (the “Renewal Agreement”) to the Repurchase Agreement. The Renewal Agreement was entered into for multiple purposes, including the amendment of the Repurchase Agreement to finance AG MIT’s acquisition of not only residential, non-Agency Securities, but also certain consumer asset-backed securities and commercial mortgage-backed securities. Each transaction under the Renewal Agreement will also have its own specific terms, such as identification of the assets subject to the transaction, sale price, repurchase price and rate. The Renewal Agreement increases the aggregate maximum borrowing capacity of the Repurchase Agreement from $75 million to $125 million and extends the maturity date from April 8, 2013 to April 11, 2014. The Renewal Agreement also includes the same provisions in the Repurchase Agreement permitting the maturity date to be extended for an additional 90 days.

The following table presents a reconciliation of certain information related to repurchase agreements inclusive of unlinked repurchase agreements on a GAAP basis as of June 30, 2013:

Repurchase Agreements Maturing Within:	Balance		Weighted Average Rate			Weighted Average Days to Maturity		Weighted Average Haircut
30 days or less	$	2,465,385,846		0.95	%		14.2		7.3	%
31-60 days		1,056,008,000		0.50	%		43.5		1.9	%
61-90 days		232,580,000		0.60	%		76.5		5.9	%
Greater than 90 days		472,429,510		0.92	%		226.8		6.5	%
Total: Non-GAAP Basis - Including Linked Transactions	$	4,226,403,356		0.82	%		48.7		5.8	%

Linked Transactions	$	404,759,166		1.88	%		21.2		13.2	%

Total: GAAP Basis - Excluding Linked Transactions	$	3,821,644,190		0.70	%		51.6		5.0	%

The following table presents a reconciliation of certain information related to repurchase agreements inclusive of unlinked repurchase agreements on a GAAP basis as of December 31, 2012:

Repurchase Agreements Maturing Within:	Balance		Weighted Average Rate			Weighted Average Days to Maturity		Weighted Average Haircut
30 days or less	$	2,525,200,001		0.83	%		15.3		7.9	%
31-60 days		783,969,000		0.52	%		44.5		4.0	%
61-90 days		547,416,000		0.57	%		70.7		3.5	%
Greater than 90 days		337,178,271		1.30	%		125.7		11.9	%
Total: Non-GAAP Basis - Including Linked Transactions	$	4,193,763,272		0.78	%		36.9		6.9	%

Linked Transactions	$	282,343,454		1.85	%		14.8		12.7	%

Total: GAAP Basis - Excluding Linked Transactions	$	3,911,419,818		0.70	%		38.5		6.5	%

The following tables present a reconciliation of our leverage ratio at June 30, 2013 and December 31, 2012 inclusive of linked transactions to our leverage on a GAAP basis. Leverage numbers presented are inclusive of net payables/receivables on unsettled trades on our GAAP balance sheet, and the calculations divide leverage by our GAAP stockholders’ equity.

June 30, 2013:	Leverage (1)		Equity		Leverage Ratio
Non-GAAP Leverage	$	3,898,841,459	$	722,110,625		5.40	x
Non-GAAP Adjustments		404,759,166		-
GAAP Leverage		3,494,082,293		722,110,625		4.84	x

December 31, 2012:	Leverage (1)		Equity		Leverage Ratio
Non-GAAP Leverage	$	4,182,110,308	$	794,621,781		5.26	x
Non-GAAP Adjustments		282,343,454		-
GAAP Leverage		3,899,766,854		794,621,781