Drop income is a component of our net income accounted for as net gain from investments on our statement of operations and therefore excluded from our Core Earnings. During the second quarter of 2012, the Company generated drop income of approximately $15.0 million, or $0.13 per diluted share, compared to approximately $15.4 million, or $0.15 per diluted share, during the first quarter of 2012. During the second quarter of 2012, the Company sold Agency RMBS with fast projected prepayments, and replaced the sold assets with new issue forward settling purchases of approximately $5.1 billion of Agency RMBS. These purchases had a weighted average drop of approximately $0.18 per $100.00 par value per month, compared to forward purchases in the first quarter of 2012 of approximately $4.4 billion of Agency RMBS with a weighted average drop of approximately $0.21 per $100.00 par value per month. As a result of the portfolio transactions discussed above, the Company recognized $61.1 million of net realized gains on investments in the second quarter of 2012, as compared to $5.2 million in the first quarter of 2012.
The Company utilizes forward settling transactions for the majority of its purchases. The benefit of purchasing assets in forward settling transactions is that the Company can purchase assets with specified stipulations such as average loan size and percentage of loans in a particular state. This customization allows the Company to better manage prepayments. In addition, forward settling purchases allow the Company to obtain an asset at a discount (also referred to as “drop”) to its current market value; however, the Company does not receive any interest income on the asset until the forward transaction settles. Obtaining the asset at a discount to market value reduces the impact of prepayments and is accretive to net asset value.
The Company’s net asset value per share on June 30, 2012 was $13.52 after declaring a $0.50 dividend per share on June 8, 2012, compared with $13.14 at March 31, 2012. The increase was primarily the result of Agency RMBS outperforming swaps.
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