Two Harbors Investment Corp. Reports Second Quarter 2015 Financial Results
Protected Book Value While Advancing Operational Businesses

NEW YORK, August 4, 2015 - Two Harbors Investment Corp. (NYSE: TWO), a real estate investment trust that invests in residential mortgage-backed securities (RMBS), residential mortgage loans, mortgage servicing rights (MSR), commercial real estate and other financial assets, today announced its financial results for the quarter ended June 30, 2015.

Highlights

Book value was $10.81 per common share, representing a (0.1)%(1) total return on book value after accounting for a dividend of $0.26 per share, bringing the total return on book value for the first half of 2015 to 2.1%.(2) 

Delivered Comprehensive Income of $2.7 million, a return on average equity of 0.3%, or $0.01 per weighted average common share.

Reported Core Earnings of $80.2 million, or $0.22 per weighted average common share.(3)

Generated an aggregate portfolio yield of 4.16% and a net interest margin of 2.79% for the quarter ended June 30, 2015.

Completed two securitizations, issuing securities backed by approximately $493.3 million unpaid principal balance (UPB) of prime jumbo residential mortgage loans.



“We continue to shift capital from our legacy Agency and non-Agency portfolios to our operational businesses and are poised for growth in these segments over the next several quarters,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “We believe the expansion of these businesses has the potential to increase valuation and drive stockholder returns.”




(1)
Return on book value for the quarter ended June 30, 2015 is defined as the decrease in book value from March 31, 2015 to June 30, 2015 of $0.27, plus the dividend declared of $0.26 per share, divided by March 31, 2015 book value of $11.08 per share.
(2)
Return on book value for the six months ended June 30, 2015 is defined as the decrease in book value from December 31, 2014 to June 30, 2015 of $0.29, plus dividends declared of $0.52, divided by the December 31, 2014 book value of $11.10 per share.
(3)
Core Earnings is a non-GAAP measure that we define as GAAP net income, excluding impairment losses, realized and unrealized gains or losses on the aggregate portfolio, amortization of business combination intangible assets, reserve expense for representation and warranty obligations on MSR and certain upfront costs related to securitization transactions. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. Core Earnings is provided for purposes of comparability to other peer issuers.

- 1 -


Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the respective periods 2015:
Two Harbors Investment Corp. Operating Performance
 

 

 
 
 
 
 
 
(dollars in thousands, except per share data)
 
 
 
 
Three Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2015
Earnings
 Earnings
 
 Per weighted share
 
Annualized return on average equity
 
 Earnings
 
 Per weighted share
 
Annualized return on average equity
 
(unaudited)
 
(unaudited)
Core Earnings(1)
$
80,157

 
$
0.22

 
7.9
%
 
$
174,232

 
$
0.48

 
8.5
%
GAAP Net Income
$
221,501

 
$
0.60

 
21.8
%
 
$
316,294

 
$
0.86

 
15.5
%
Comprehensive Income
$
2,675

 
$
0.01

 
0.3
%
 
$
91,537

 
$
0.25

 
4.5
%


 

 

 
 
 
 
 
 
Operating Metrics
 
 
 
 
 
 
 
 
 
 
 
Dividend per common share
$0.26
 
 
 
 
 
 
 
 
 
 
Book value per share at period end
$10.81
 
 
 
 
 
 
 
 
 
 
Other operating expenses as a percentage of average equity
1.6%
 
 
 
 
 
 
 
 
 
 
____________________
(1)
Please see page 13 of this press release for a reconciliation of GAAP to non-GAAP financial information.

Earnings Summary
Two Harbors reported Core Earnings for the quarter ended June 30, 2015 of $80.2 million, or $0.22 per weighted average common share outstanding, as compared to Core Earnings for the quarter ended March 31, 2015 of $94.1 million, or $0.26 per weighted average common share outstanding. On a Core Earnings basis, the company recognized an annualized return on average equity of 7.9% and 9.2% for the quarters ended June 30, 2015 and March 31, 2015, respectively.

For the second quarter of 2015, the company recognized:
net realized gains on RMBS, trading securities and residential mortgage loans held-for-sale of $85.6 million, net of tax;
unrealized losses on trading securities and residential mortgage loans held-for-sale of $18.0 million, net of tax;
other-than-temporary impairment loss of $0.2 million, net of tax;
net losses of $70.9 million, net of tax, related to swap and swaption terminations and expirations;
net unrealized gains, net of tax, of $144.2 million associated with its interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and Federal Home Loan Bank of Des Moines (FHLB)advances;
net realized and unrealized losses on other derivative instruments of approximately $8.4 million, net of tax;
net realized and unrealized losses on consolidated financing securitizations of $17.6 million, net of tax;
a net increase in fair value of $17.1 million(2) on MSR, net of tax;
securitization deal costs of $1.6 million, net of tax; and
a reduction in representation and warranty reserve of $0.6 million, net of tax.




(2)
Increase in fair value on MSR, net of tax, of $17.1 million is comprised of a increase in fair value of $27.6 million, net of tax, excluded from Core Earnings and $10.5 million, net of tax, of estimated amortization included in Core Earnings.

- 2 -


The company reported GAAP Net Income of $221.5 million, or $0.60 per weighted average common share outstanding, for the quarter ended June 30, 2015, as compared to GAAP Net Income of $94.8 million, or $0.26 per weighted average common share outstanding, for the quarter ended March 31, 2015. On a GAAP Net Income basis, the company recognized an annualized return on average equity of 21.8% and 9.3% for the quarters ended June 30, 2015 and March 31, 2015, respectively.

The company reported Comprehensive Income of $2.7 million, or $0.01 per weighted average common share outstanding, for the quarter ended June 30, 2015, as compared to Comprehensive Income of $88.9 million, or $0.24 per weighted average common share outstanding, for the quarter ended March 31, 2015. The company records unrealized fair value gains and losses on RMBS, classified as available-for-sale, as Other Comprehensive Income. On a Comprehensive Income basis, the company recognized an annualized return on average equity of 0.3% and 8.7% for the quarters ended June 30, 2015 and March 31, 2015, respectively.
 
Other Key Metrics
Two Harbors declared a quarterly cash dividend of $0.26 per common share for the quarter ended June 30, 2015. The annualized dividend yield on the company’s common stock for the quarter, based on the June 30, 2015 closing price of $9.74, was 10.7%.
 
The company’s book value per share, after taking into account the second quarter 2015 dividend of $0.26 per share, was $10.81 as of June 30, 2015, compared to $11.08 as of March 31, 2015, which represented a total return on book value for the quarter of (0.1)%.(1)  

Other operating expenses for the quarter ended June 30, 2015 were approximately $15.8 million, or 1.6% of average equity, compared to approximately $16.1 million, or 1.6% of average equity, for the quarter ended March 31, 2015.

Portfolio Summary
The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities (Agency Derivatives), MSR, residential mortgage loans held-for-sale, net economic interests in consolidated securitization trusts and commercial real estate loans held-for-investment. As of June 30, 2015, the total value of the company’s portfolio was $14.9 billion.

The company’s portfolio includes rates, credit and commercial real estate strategies. The rates strategy consisted of $10.8 billion of Agency RMBS, Agency Derivatives and MSR as well as associated notional hedges as of June 30, 2015. The credit strategy consisted of $4.1 billion of non-Agency RMBS, net economic interests in consolidated securitization trusts, prime jumbo residential mortgage loans and credit sensitive residential mortgage loans, as well as their associated notional hedges as of June 30, 2015. The commercial real estate strategy consisted of a $45.6 million loan as of June 30, 2015.

For the quarter ended June 30, 2015, the annualized yield on the company’s average aggregate portfolio was 4.16% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.37%. This resulted in a net interest rate spread of 2.79%.







(1)
Return on book value for the quarter ended June 30, 2015 is defined as the decrease in book value from March 31, 2015 to June 30, 2015 of $0.27, plus the dividend declared of $0.26 per share, divided by March 31, 2015 book value of $11.08 per share.

- 3 -


RMBS and Agency Derivatives
For the quarter ended June 30, 2015, the annualized yield on average RMBS and Agency Derivatives was 4.0%, consisting of an annualized yield of 3.1% in Agency RMBS and Agency Derivatives and 7.9% in non-Agency RMBS.

The company experienced a three-month average constant prepayment rate (CPR) of 9.0% for Agency RMBS and Agency Derivatives held during the quarter ended June 30, 2015, compared to 8.2% for those securities held during the quarter ended March 31, 2015. The weighted average cost basis of the principal and interest Agency portfolio was 108.0% of par as of June 30, 2015, compared to 107.9% of par as of March 31, 2015. The net premium amortization was $40.3 million and $35.4 million as of June 30, 2015 and March 31, 2015, respectively. 

The company experienced a three-month average CPR of 6.0% for non-Agency principal and interest RMBS held during the quarter ended June 30, 2015, as compared to 5.1% for those securities held during the quarter ended March 31, 2015. The weighted average cost basis of the non-Agency portfolio was 63.0% of par as of June 30, 2015, compared to 62.0% of par as of March 31, 2015. The discount accretion was $25.3 million for the quarter ended June 30, 2015, compared to $27.5 million for the quarter ended March 31, 2015. The total net discount remaining was $1.5 billion as of June 30, 2015, compared to $1.6 billion as of March 31, 2015, with $0.7 billion designated as credit reserve as of June 30, 2015.

As of June 30, 2015, fixed-rate investments composed 80.5% and adjustable-rate investments composed 19.5% of the company’s RMBS and Agency Derivatives portfolio.

As of June 30, 2015, the company had residential mortgage loans held-for-investment with a carrying value of $2.4 billion and the company’s collateralized borrowings had a carrying value of $1.7 billion, resulting in net economic interests in consolidated securitization trusts of $734.5 million.

Mortgage Servicing Rights
The company held MSR on mortgage loans with UPB totaling $42.8 billion. The MSR had a fair market value of $437.6 million as of June 30, 2015, and recognized unrealized gains of $17.6 million during the quarter ended June 30, 2015.

The company does not directly service mortgage loans, but instead contracts with fully licensed subservicers to handle substantially all servicing functions for the loans underlying the company’s MSR. The company recognized $30.5 million of servicing income, $6.8 million of servicing expenses and a $0.9 million change in reserve expense for representation and warranty obligations during the quarter ended June 30, 2015.

Residential Mortgage Loans Held for Sale
As of June 30, 2015, the company held prime jumbo residential mortgage loans with a fair market value of $633.6 million and had outstanding purchase commitments to acquire an additional $626.7 million UPB of residential mortgage loans, subject to fallout if the loans do not close. For the quarter ended June 30, 2015, the annualized yield on the prime jumbo residential mortgage loan portfolio was 3.8%, compared to 3.9% for the quarter ended March 31, 2015.

During the quarter, the company completed two securitizations, Agate Bay Mortgage Trust 2015-3 and Agate Bay Mortgage Trust 2015-4. The trusts issued securities backed by approximately $493.3 million UPB of prime jumbo 30-year fixed residential mortgage loans.




- 4 -


Commercial Real Estate
As previously disclosed, the company intends to allocate $500 million in equity capital to its commercial real estate initiative, and expects to deploy the remainder of this allocation in the latter half of 2015 and into 2016. At June 30, 2015, the company held a $45.6 million senior mezzanine commercial real estate loan.

Other Investments and Risk Management Derivatives
The company held $1.0 billion notional of net short TBAs as of June 30, 2015, which are accounted for as derivative instruments in accordance with GAAP.

As of June 30, 2015, the company was a party to interest rate swaps and swaptions with a notional amount of  $25.6 billion. Of this amount, $10.5 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s LIBOR-based repurchase agreements and FHLB advances, $5.7 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s investment portfolio, and $9.4 billion net notional in swaptions were utilized as macroeconomic hedges.


- 5 -


The following tables summarize the company’s investment portfolio:
Two Harbors Investment Corp. Portfolio
(dollars in thousands)



 

Portfolio Composition

As of June 30, 2015


(unaudited)
Rates Strategy


 

Agency Bonds


 

Fixed Rate Bonds

$
9,981,103

 
67.0
%
Hybrid ARMs

119,710

 
0.8
%
Total Agency

10,100,813

 
67.8
%
Agency Derivatives

176,903

 
1.2
%
Mortgage servicing rights

437,576

 
2.9
%
Ginnie Mae buyout residential mortgage loans
 
50,650

 
0.4
%
Credit Strategy


 


Non-Agency Bonds


 


Senior Bonds

1,904,680

 
12.8
%
Mezzanine Bonds

795,071

 
5.3
%
Non-Agency Other

7,094

 
0.1
%
Total Non-Agency

2,706,845

 
18.2
%
Net Economic Interest in Securitization(1)

734,464

 
4.9
%
Residential mortgage loans held-for-sale

644,428

 
4.3
%
Commercial real estate loans held-for-investment
 
45,605

 
0.3
%
Aggregate Portfolio

$
14,897,284

 

Portfolio Metrics

Three Months Ended
June 30, 2015


(unaudited)
Annualized portfolio yield during the quarter


 
4.16
%
Rates Strategy



 


Agency RMBS, Agency Derivatives and mortgage servicing rights



 
3.4
%
Credit Strategy



 


Non-Agency RMBS, Legacy(2)



 
8.5
%
Non-Agency RMBS, New issue(2)
 
 
 
4.3
%
Net economic interest in securitizations
 
 
 
4.7
%
Residential mortgage loans held-for-sale



 


Prime nonconforming residential mortgage loans



 
3.8
%
Credit sensitive residential mortgage loans



 
4.6
%
Commercial Strategy



 
7.5
%
 
 
 
 
 
Annualized cost of funds on average borrowing balance during the quarter(3)



 
1.37
%
Annualized interest rate spread for aggregate portfolio during the quarter



 
2.79
%
Debt-to-equity ratio at period-end(4)



 
3.1
:1.0
 
 
 
 
 
Portfolio Metrics Specific to RMBS and Agency Derivatives as of June 30, 2015



 


Weighted average cost basis of principal and interest securities


 

Agency(5)

$
 
107.98

Non-Agency(6)

$
 
62.99

Weighted average three month CPR


 

Agency



 
9.0
%
Non-Agency



 
6.0
%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio



 
80.5
%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio



 
19.5
%
________________
(1)
Net economic interest in securitization consists of residential mortgage loans held-for-investment, net of collateralized borrowings in consolidated securitization trusts.
(2)
Legacy non-Agency RMBS includes non-Agency bonds issued up-to and including 2009.  New issue non-Agency RMBS includes bonds issued after 2009.
(3)
Cost of funds includes interest spread expense associated with the portfolio's interest rate swaps.
(4)
Defined as total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate loans held-for-investment and Agency Derivatives, divided by total equity.
(5)
Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(6)
Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, total non-Agency RMBS excluding the company's non-Agency interest-only portfolio would be $58.55 at June 30, 2015.


- 6 -


“We are proud to have protected book value despite volatility in the second quarter,” stated Bill Roth, Two Harbors’ Chief Investment Officer. “We believe that it is prudent to have a conservative risk profile in the current market environment and are focused on driving stockholder returns over time through our operational businesses.”

Financing Summary
The company reported a debt-to-equity ratio, defined as total borrowings under repurchase agreements and FHLB advances to fund RMBS, Agency Derivatives, residential mortgage loans held-for-sale and commercial real estate loans held-for-investment divided by total equity, of 3.1:1.0 and 3.4:1.0 as of June 30, 2015 and March 31, 2015, respectively.

As of June 30, 2015, the company had outstanding $9.4 billion of repurchase agreements funding RMBS, Agency Derivatives and residential mortgage loans held-for-sale with 23 different counterparties. Excluding the effect of the company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 0.75% and weighted average remaining maturity of 69 days as of June 30, 2015.

The company’s wholly owned subsidiary, TH Insurance Holdings Company LLC (TH Insurance), is a member of the FHLB.  As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances.  As of June 30, 2015, TH Insurance had $3.0 billion in outstanding secured advances, with a weighted average borrowing rate of 0.35% and a weighted average of 11.4 years to maturity, and had an additional $1.0 billion of available uncommitted credit for borrowings.

As of June 30, 2015, the company’s aggregate repurchase agreements and FHLB advances funding RMBS, Agency Derivatives and residential mortgage loans held-for-sale had a weighted average of 2.9 years to maturity.

The following table summarizes the company’s borrowings by collateral type under repurchase agreements and FHLB advances, excluding borrowings on U.S. Treasuries, and related cost of funds:
 
 
As of June 30, 2015
(in thousands)
 
(unaudited)
Collateral type:
 
 
Agency RMBS and Agency Derivatives
 
$
9,571,231

Mortgage servicing rights
 

Non-Agency RMBS
 
1,850,848

Net economic interests in consolidated securitization trusts(1)
 
535,202

Residential mortgage loans held-for-sale
 
 
Prime nonconforming residential mortgage loans
 
442,572

Credit sensitive residential mortgage loans
 

Commercial real estate loans held-for-investment
 
22,950

 
 
$
12,422,803

 
 

Cost of Funds Metrics
 
Three Months Ended
June 30, 2015
 
 
(unaudited)
Annualized cost of funds on average borrowings during the quarter:
 
0.7
%
Agency RMBS and Agency Derivatives
 
0.4
%
Mortgage servicing rights
 
%
Non-Agency RMBS
 
1.9
%
Net economic interests in consolidated securitization trusts(1)
 
0.6
%
Residential mortgage loans held-for-sale
 

Prime nonconforming residential mortgage loans
 
0.4
%
Credit sensitive residential mortgage loans
 
%
Commercial real estate loans held-for-investment
 
1.9
%
________________
(1)
Includes the retained interests from on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.

- 7 -


Conference Call
Two Harbors Investment Corp. will host a conference call on August 5, 2015 at 9:00 a.m. EDT to discuss second quarter 2015 financial results and related information. To participate in the teleconference, please call toll-free (877) 868-1835 (or (914) 495-8581 for international callers), Conference Code 80774414, approximately 10 minutes prior to the above start time. You may also listen to the teleconference live via the Internet on the company’s website at www.twoharborsinvestment.com in the Investor Relations section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. EDT on August 5, 2015, through 12:00 a.m. EDT on August 12, 2015. The playback can be accessed by calling (855) 859-2056 (or (404) 537-3406 for international callers), Conference Code 80774414. The call will also be archived on the company’s website in the Investor Relations section under the Events and Presentations link.


Two Harbors Investment Corp.
Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities, residential mortgage loans, mortgage servicing rights, commercial real estate and other financial assets. Two Harbors is headquartered in New York, New York, and is externally managed and advised by PRCM Advisers LLC, a wholly owned subsidiary of Pine River Capital Management L.P. Additional information is available at www.twoharborsinvestment.com.


Forward-Looking Statements
This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2014, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to successfully implement new strategies and to diversify our business into new asset classes; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire mortgage loans and successfully securitize the mortgage loans we acquire; our ability to acquire mortgage servicing rights (MSR) and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; the state of commercial real estate markets and our ability to acquire or originate commercial real estate loans or related assets; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based. Additional information concerning these and other risk factors

- 8 -


is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.

Non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as Core Earnings and Core Earnings per common share, that exclude certain items. Two Harbors’ management believes that these non-GAAP measures enable it to perform meaningful comparisons of past, present and future results of the company’s core business operations, and uses these measures to gain a comparative understanding of the company’s operating performance and business trends. The non-GAAP financial measures presented by the company represent supplemental information to assist investors in analyzing the results of its operations. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 13 of this release.

Additional Information
Stockholders of Two Harbors and other interested persons may find additional information regarding the company at the SEC’s Internet site at www.sec.gov or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 590 Madison Avenue, 36th Floor, New York, NY 10022, telephone (612) 629-2500.

Contact
July Hugen, Director of Investor and Media Relations, Two Harbors Investment Corp., (612) 629-2514 or
July.hugen@twoharborsinvestment.com

# # #

- 9 -


TWO HARBORS INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
 
 
 
 

June 30,
2015
 
December 31,
2014

(unaudited)
 
 
ASSETS
 
 
 
Available-for-sale securities, at fair value
$
12,807,658

 
$
14,341,102

Trading securities, at fair value

 
1,997,656

Residential mortgage loans held-for-sale, at fair value
695,078

 
535,712

Residential mortgage loans held-for-investment in securitization trusts, at fair value
2,449,199

 
1,744,746

Commercial real estate loans held-for-investment
45,605

 

Mortgage servicing rights, at fair value
437,576

 
452,006

Cash and cash equivalents
933,579

 
1,005,792

Restricted cash
410,903

 
336,771

Accrued interest receivable
57,011

 
65,529

Due from counterparties
27,230

 
35,625

Derivative assets, at fair value
347,322

 
380,791

Other assets
236,560

 
188,579

Total Assets
$
18,447,721

 
$
21,084,309


 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
   

Repurchase agreements
$
9,422,803

 
$
12,932,463

Collateralized borrowings in securitization trusts, at fair value
1,714,735

 
1,209,663

Federal Home Loan Bank advances
3,000,000

 
2,500,000

Derivative liabilities, at fair value
22,475

 
90,233

Due to counterparties
160,014

 
124,206

Dividends payable
95,557

 
95,263

Other liabilities
60,568

 
64,439

Total Liabilities
14,476,152

 
17,016,267


 
 
 
Stockholders’ Equity
 
 
 
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares issued and outstanding

 

Common stock, par value $0.01 per share; 900,000,000 shares authorized and 367,527,725 and 366,395,920 shares issued and outstanding, respectively
3,675

 
3,664

Additional paid-in capital
3,816,861

 
3,811,027

Accumulated other comprehensive income
631,032

 
855,789

Cumulative earnings
1,508,839

 
1,195,536

Cumulative distributions to stockholders
(1,988,838
)
 
(1,797,974
)
Total Stockholders’ Equity
3,971,569

 
4,068,042

Total Liabilities and Stockholders’ Equity
$
18,447,721

 
$
21,084,309


- 10 -


TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation


 

 
 
 
 

Three Months Ended
June 30,
 
Six Months Ended
June 30,

2015
 
2014
 
2015
 
2014

(unaudited)
 
(unaudited)
Interest income:

 

 

Available-for-sale securities
$
118,129

 
$
127,605

 
$
253,654

 
$
251,518

Trading securities
3,981

 
1,940

 
8,676

 
3,866

Residential mortgage loans held-for-sale
7,518

 
2,699

 
11,789

 
7,285

Residential mortgage loans held-for-investment in securitization trusts
21,830

 
7,761

 
40,067

 
15,654

Commercial real estate loans held-for-investment
850

 

 
894

 

Cash and cash equivalents
221

 
144

 
418

 
361

Total interest income
152,529

 
140,149

 
315,498

 
278,684

Interest expense:


 


 


 


Repurchase agreements
19,398

 
18,603

 
39,963

 
39,175

Collateralized borrowings in securitization trusts
13,131

 
5,592

 
23,839

 
10,945

Federal Home Loan Bank advances
2,500

 
755

 
4,730

 
908

Total interest expense
35,029

 
24,950

 
68,532

 
51,028

Net interest income
117,500

 
115,199

 
246,966

 
227,656

Other-than-temporary impairment losses
(170
)
 

 
(297
)
 
(212
)
Other income:

 

 

 

Gain (loss) on investment securities
69,932

 
37,688

 
199,389

 
(967
)
Gain (loss) on interest rate swap and swaption agreements
44,952

 
(116,019
)
 
(81,491
)
 
(221,547
)
Loss on other derivative instruments
(5,484
)
 
(24,202
)
 
(2,517
)
 
(18,401
)
(Loss) gain on residential mortgage loans held-for-sale
(6,832
)
 
11,801

 
2,260

 
8,620

Servicing income
30,516

 
33,868

 
62,603

 
64,309

Gain (loss) on servicing asset
17,635

 
(29,571
)
 
(34,768
)
 
(62,331
)
Other (loss) income
(16,609
)
 
21,003

 
(18,466
)
 
21,463

Total other income (loss)
134,110

 
(65,432
)
 
127,010

 
(208,854
)
Expenses:

 

 

 

Management fees
12,686

 
12,190

 
25,407

 
24,301

Securitization deal costs
2,484

 

 
5,095

 

Servicing expenses
5,899

 
6,857

 
12,615

 
12,082

Other operating expenses
15,827

 
14,323

 
31,882

 
28,857

Total expenses
36,896

 
33,370

 
74,999

 
65,240

Income (loss) before income taxes
214,544


16,397


298,680


(46,650
)
Benefit from income taxes
(6,957
)
 
(23,260
)
 
(17,614
)
 
(57,162
)
Net income
$
221,501

 
$
39,657

 
$
316,294

 
$
10,512

Basic and diluted earnings per weighted average common share
$
0.60

 
$
0.11

 
$
0.86

 
$
0.03

Dividends declared per common share
$
0.26

 
$
0.26

 
$
0.52

 
$
0.52

Basic and diluted weighted average number of shares of common stock outstanding
367,074,131

 
366,078,124

 
366,792,459

 
365,846,295

 
 
 
 
 
 
 
 

- 11 -


TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
Comprehensive income:
 
 


 


 


Net income
$
221,501

 
$
39,657

 
$
316,294

 
$
10,512

Other comprehensive (loss) income:
 
 


 


 


Unrealized (loss) gain on available-for-sale securities, net
(218,826
)
 
191,160

 
(224,757
)
 
372,895

Other comprehensive (loss) income
(218,826
)
 
191,160

 
(224,757
)
 
372,895

Comprehensive income
$
2,675

 
$
230,817

 
$
91,537

 
$
383,407


- 12 -


TWO HARBORS INVESTMENT CORP.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION
(dollars in thousands, except share data)
Certain prior period amounts have been reclassified to conform to the current period presentation




 

 


Three Months Ended
June 30,
 
Six Months Ended
June 30,

2015

2014
 
2015
 
2014

(unaudited)
 
(unaudited)
Reconciliation of net income to



 
 
 
 
Core Earnings:



 
 
 
 





 
 
 
 
Net income
$
221,501


$
39,657

 
$
316,294

 
$
10,512





 

 

Adjustments for non-core earnings:




 


 


(Gain) loss on sale of securities and residential mortgage loans, net of tax
(85,633
)

(34,772
)
 
(208,160
)
 
3,704

Unrealized loss (gain) on trading securities and residential mortgage loans held-for-sale, net of tax
18,032


(9,980
)
 
9,388

 
(7,687
)
Other-than-temporary impairment loss, net of tax
170



 
297

 
212

Realized loss on termination or expiration of swaps and swaptions, net of tax
70,877


4,399

 
63,598

 
6,380

Unrealized (gain) loss on interest rate swaps and swaptions economically hedging investment portfolio, repurchase agreements and FHLB advances, net of tax
(144,223
)

78,666

 
(46,754
)
 
138,353

Loss on other derivative instruments, net of tax
8,396


18,026

 
7,572

 
13,372

Realized and unrealized loss (gain) on financing securitizations, net of tax
17,593


(20,829
)
 
20,495

 
(21,142
)
Realized and unrealized (gain) loss on mortgage servicing rights, net of tax
(27,578
)

14,418

 
8,740

 
33,824

Securitization deal costs, net of tax
1,614



 
3,311

 

Amortization of business combination intangible assets, net of tax


86

 

 
346

Change in representation and warranty reserve, net of tax
(592
)


 
(549
)
 







 


 


Core Earnings
$
80,157


$
89,671

 
$
174,232

 
$
177,874





 

 

Weighted average shares outstanding
367,074,131


366,078,124

 
366,792,459

 
365,846,295





 

 

Core Earnings per weighted average share outstanding
$
0.22


$
0.24

 
$
0.48

 
$
0.49


- 13 -


TWO HARBORS INVESTMENT CORP.
SUMMARY OF QUARTERLY CORE EARNINGS
(dollars in millions, except per share data)
Certain prior period amounts have been reclassified to conform to the current period presentation


Three Months Ended

June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
 
June 30,
2014

(unaudited)
Net Interest Income:

 

 

 

 

Interest income
$
152.5

 
$
163.0

 
$
156.2

 
$
142.3

 
$
140.1

Interest expense
35.0

 
33.5

 
31.7

 
24.7

 
24.9

Net interest income
117.5

 
129.5

 
124.5

 
117.6

 
115.2

Other income:
 
 
 
 
 
 
 
 
 
Interest spread on interest rate swaps
(26.2
)
 
(27.5
)
 
(32.2
)
 
(26.8
)
 
(18.9
)
Interest spread on other derivative instruments
6.4

 
7.7

 
7.0

 
7.1

 
7.9

Servicing income, net of amortization(1)
17.2

 
19.1

 
17.9

 
17.6

 
19.9

Other income
1.0

 
1.0

 
0.7

 
0.6

 
0.2

Total other (loss) income
(1.6
)
 
0.3

 
(6.6
)
 
(1.5
)
 
9.1

Expenses
35.3

 
35.4

 
33.7

 
30.8

 
33.2

Core Earnings before income taxes
80.6

 
94.4

 
84.2

 
85.3

 
91.1

Income tax expense
0.4

 
0.3

 
1.1

 
2.5

 
1.4

Core Earnings
$
80.2

 
$
94.1

 
$
83.1

 
$
82.8

 
$
89.7

Basic and diluted weighted average Core EPS
$
0.22

 
$
0.26

 
$
0.23

 
$
0.23

 
$
0.24

________________
(1)
Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio. This amortization has been deducted from Core Earnings. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.

- 14 -