Two Harbors Investment Corp. Reports Fourth Quarter 2015 Financial Results
Significant Capital Reallocation in 2015
NEW YORK, February 3, 2016 - 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 December 31, 2015.
2015 Summary
Sponsored seven securitizations issuing securities backed by approximately $2.0 billion in unpaid principal balance (UPB) of prime jumbo residential mortgage loans, attaining stated goal of sponsoring six to ten during the year.
Substantially developed commercial real estate effort including adding senior and mezzanine commercial real estate assets with an aggregate carrying value of $661.0 million at December 31, 2015.
Added six flow-sale MSR relationships and completed four bulk MSR acquisitions.
Generated total annual return on book value of 0.5%, after accounting for dividends of $1.04.(1)
Repurchased 13.7 million shares, at an average price of $8.43 per share, which was accretive to book value by $0.07 per share.
Quarterly Summary
Repurchased 12.3 million shares of common stock at an average price of $8.37 per share, which was accretive to book value by $0.06 per share.
Added commercial real estate assets with an aggregate carrying value of $371.9 million.
Book value was $10.11 per common share, representing a 0.7%(2) quarterly total return on book value, after accounting for a dividend of $0.26 per share.
Reported Core Earnings of $72.1 million, or $0.20 per weighted average common share.(3)
Sponsored a securitization issuing securities backed by approximately $332.8 million UPB of prime jumbo residential mortgage loans.


“We are proud of our achievements in 2015. During the year, we sponsored seven prime jumbo securitizations and were a leading issuer in the market.  We also added MSR through both flow-sale and bulk purchases,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer.  “Additionally, we completed the build out of our commercial real estate team and began deploying capital to these assets.  We believe allocating resources and capital thusly will build franchise value for our stockholders over the long-term.”



(1)
Return on book value for the year ended December 31, 2015 is defined as the decrease in book value from December 31, 2014 to December 31, 2015 of $0.99, plus dividends declared of $1.04, divided by the December 31, 2014 book value of $11.10 per share.
(2)
Return on book value for the quarter ended December 31, 2015 is defined as the decrease in book value from September 30, 2015 to December 31, 2015 of $0.19, plus the dividend declared of $0.26 per share, divided by September 30, 2015 book value of $10.30 per share.
(3)
Core Earnings is a non-GAAP measure. Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.

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Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the respective periods in 2015:
Two Harbors Investment Corp. Operating Performance (unaudited)
 
 
 
 
 
 
 
 
(dollars in thousands, except per share data)
 
 
 
 
Three Months Ended
December 31, 2015
 
Year Ended
December 31, 2015
Earnings
 Earnings

 
 Per weighted share

 
Annualized return on average equity

 
 Earnings

 
 Per weighted share

 
Annualized return on average equity

Core Earnings(1)
$
72,133

 
$
0.20

 
7.8
 %
 
$
325,781

 
$
0.89

 
8.2
 %
GAAP Net Income
$
210,706

 
$
0.59

 
22.7
 %
 
$
492,210

 
$
1.35

 
12.5
 %
Comprehensive Loss
$
(3,234
)
 
$
(0.01
)
 
(0.3
)%
 
$
(4,518
)
 
$
(0.01
)
 
(0.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating Metrics
 
 
 
 
 
 
 
 
 
 
 
Dividend per common share
$0.26
 
 
 
 
 
 
 
 
 
 
Book value per share at period end
$10.11
 
 
 
 
 
 
 
 
 
 
Other operating expenses as a percentage of average equity
1.7%
 
 
 
 
 
 
 
 
 
 
________________
(1)
Please see page 13 for a reconciliation of GAAP to non-GAAP financial information.

Earnings Summary
Two Harbors reported Core Earnings for the quarter ended December 31, 2015 of $72.1 million, or $0.20 per weighted average common share outstanding, as compared to Core Earnings for the quarter ended September 30, 2015 of $79.4 million, or $0.22 per weighted average common share outstanding. On a Core Earnings basis, the company recognized an annualized return on average equity of 7.8% and 8.1% for the quarters ended December 31, 2015 and September 30, 2015, respectively.

For the fourth quarter of 2015, the company recognized:
net realized gains on RMBS and mortgage loans held-for-sale of $100.5 million, net of tax;
unrealized losses on RMBS and mortgage loans held-for-sale of $14.7 million, net of tax;
net losses of $77.7 million, net of tax, related to swap and swaption terminations and expirations;
net unrealized gains of $134.2 million, net of tax, associated with interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and Federal Home Loan Bank (FHLB) of Des Moines advances;
net realized and unrealized losses on other derivative instruments of approximately $6.9 million, net of tax;
net realized and unrealized losses on consolidated financing securitizations of $7.0 million, net of tax;
a net decrease in fair value of $0.2 million(2) on MSR, net of tax; and
securitization deal costs of $0.8 million, net of tax.









(2)
Decrease in fair value on MSR, net of tax, of $0.2 million is comprised of a increase in fair value of $11.3 million, net of tax, excluded from Core Earnings and $11.5 million, net of tax, of estimated amortization included in Core Earnings.

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The company reported GAAP Net Income of $210.7 million, or $0.59 per weighted average common share outstanding, for the quarter ended December 31, 2015, as compared to a GAAP Net Loss of $34.8 million, or $0.09 per weighted average common share outstanding, for the quarter ended September 30, 2015. On a GAAP Net Income basis, the company recognized an annualized return on average equity of 22.7% and (3.5%) for the quarters ended December 31, 2015 and September 30, 2015, respectively.
 
The company reported a Comprehensive Loss of $3.2 million, or $0.01 per weighted average common share outstanding, for the quarter ended December 31, 2015, as compared to a Comprehensive Loss of $92.8 million, or $0.25 per weighted average common share outstanding, for the quarter ended September 30, 2015. The company records unrealized fair value gains and losses on the majority of RMBS, classified as available-for-sale, in Other Comprehensive Income. On a Comprehensive Income basis, the company recognized an annualized return on average equity of (0.3%) and (9.4%) for the quarters ended December 31, 2015 and September 30, 2015, respectively.
 
Other Key Metrics
Two Harbors declared a quarterly cash dividend of $0.26 per common share for the quarter ended December 31, 2015. The annualized dividend yield on the company’s common stock for the fourth quarter of 2015, based on the December 31, 2015 closing price of $8.10, was 12.8%.
 
The company’s book value per share, after taking into account the fourth quarter 2015 dividend of $0.26 per share, was $10.11 as of December 31, 2015, compared to $10.30 as of September 30, 2015, which represented a total return on book value for the fourth quarter of 2015 of 0.7%.(1) For the year ended December 31, 2015, the company reported a total return on book value of 0.5%.(2) 

Other operating expenses for the quarter ended December 31, 2015 were approximately $16.1 million, or 1.7% of average equity, compared to approximately $16.1 million, or 1.6% of average equity, for the quarter ended September 30, 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 assets. As of December 31, 2015, the total value of the company’s portfolio was $11.1 billion.

The company’s portfolio includes rates, credit and commercial real estate strategies. The rates strategy consisted of $6.6 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of December 31, 2015. The credit strategy consisted of $3.8 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 December 31, 2015. The commercial strategy consisted of senior and mezzanine commercial real estate assets with an aggregate carrying value of $661.0 million as of December 31, 2015.

For the quarter ended December 31, 2015, the annualized yield on the company’s average aggregate portfolio was 4.56% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.30%. This resulted in a net interest rate spread of 3.26%.







(1)
Return on book value for the quarter ended December 31, 2015 is defined as the decrease in book value from September 30, 2015 to December 31, 2015 of $0.19, plus the dividend declared of $0.26 per share, divided by September 30, 2015 book value of $10.30 per share.
(2)
Return on book value for the year ended December 31, 2015 is defined as the decrease in book value from December 31, 2014 to December 31, 2015 of $0.99, plus dividends declared of $1.04, divided by the December 31, 2014 book value of $11.10 per share.

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RMBS and Agency Derivatives
For the quarter ended December 31, 2015, the annualized yield on average RMBS and Agency Derivatives was 4.4%, consisting of an annualized yield of 3.5% in Agency RMBS and Agency Derivatives and 7.8% in non-Agency RMBS.

The company experienced a three-month average constant prepayment rate (CPR) of 10.3% for Agency RMBS and Agency Derivatives held as of December 31, 2015, as compared to 9.7% for those securities held as of September 30, 2015. The weighted average cost basis of the principal and interest Agency portfolio was 108.1% of par as of December 31, 2015 and 108.0% of par as of September 30, 2015. The net premium amortization was $25.3 million and $34.7 million for the quarters ended December 31, 2015 and September 30, 2015, respectively. 

The company experienced a three-month average CPR of 6.2% for non-Agency principal and interest RMBS held as of December 31, 2015, as compared to 6.9% for those securities held as of September 30, 2015. The weighted average cost basis of the non-Agency portfolio was 60.4% of par as of December 31, 2015, compared to 63.7% of par as of September 30, 2015. The discount accretion was $19.2 million for the quarter ended December 31, 2015, compared to $24.1 million for the quarter ended September 30, 2015. The total net discount remaining was $1.1 billion as of December 31, 2015, compared to $1.3 billion as of September 30, 2015, with $0.4 billion designated as credit reserve as of December 31, 2015.

As of December 31, 2015, fixed-rate investments composed 75.7% and adjustable-rate investments composed 24.3% of the company’s RMBS and Agency Derivatives portfolio.

As of December 31, 2015, the company had residential mortgage loans held-for-investment with a carrying value of $3.2 billion and the company’s collateralized borrowings had a carrying value of $2.0 billion, resulting in net economic interests in consolidated securitization trusts of $1.2 billion.

Mortgage Servicing Rights
The company held MSR on mortgage loans with UPB totaling $51.4 billion as of December 31, 2015. The MSR had a fair market value of $493.7 million as of December 31, 2015, and the company recognized unrealized losses of $3.3 million during the quarter ended December 31, 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 $32.8 million of servicing income, $7.3 million in servicing expenses and $0.8 million in reserve expense for representation and warranty obligations during the quarter ended December 31, 2015.

Residential Mortgage Loans Held-for-Sale
As of December 31, 2015, the company held prime jumbo residential mortgage loans with a fair market value of $764.3 million and had outstanding purchase commitments to acquire an additional $286.1 million UPB of residential mortgage loans, subject to fallout if the loans do not close. For the quarter ended December 31, 2015, the annualized yield on the prime jumbo residential mortgage loan portfolio was 4.0%, as compared to 3.9% for the quarter ended September 30, 2015.

During the quarter, the company sponsored a securitization, Agate Bay Mortgage Trust 2015-7. The trust issued securities backed by approximately $332.8 million UPB of prime jumbo residential mortgage loans.











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Commercial Real Estate
The Company originates and acquires senior and mezzanine commercial real estate assets.  These assets are U.S.-domiciled and are secured by a diverse mix of property types, which includes office, retail, multifamily and hotel properties.

As of December 31, 2015, the company held commercial real estate assets with an aggregate carrying value of $661.0 million. For the quarter ended December 31, 2015 the annualized yield on commercial real estate assets was 6.0% as compared to 7.9% for the quarter ended September 30, 2015.

Other Investments and Risk Management Derivatives
The company held $297.0 million notional of net long TBAs as of December 31, 2015, which are accounted for as derivative instruments in accordance with U.S. GAAP.

As of December 31, 2015, the company was a party to interest rate swaps and swaptions with a notional amount of  $19.5 billion. Of this amount, $7.9 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s LIBOR-based repurchase agreements and FHLB advances, $6.4 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s investment portfolio, and $5.2 billion net notional in swaptions were utilized as macroeconomic hedges.

The following tables summarize the company’s investment portfolio:

Two Harbors Investment Corp. Portfolio
(dollars in thousands)
 
 
 
 
 
 
 
Portfolio Composition
 
As of December 31, 2015
 
As of December 31, 2014
 
 
(unaudited)
 
(unaudited)
Rates Strategy
 
 
 
 
 
 
 
 
Agency Bonds
 
 
 
 
 
 
 
 
Fixed Rate Bonds
 
$
5,864,294

 
52.7
%
 
$
11,164,032

 
69.6
%
Hybrid ARMs
 
108,596

 
1.0
%
 
128,285

 
0.8
%
Total Agency
 
5,972,890

 
53.7
%
 
11,292,317

 
70.4
%
Agency Derivatives
 
157,906

 
1.4
%
 
186,404

 
1.2
%
Mortgage servicing rights
 
493,688

 
4.4
%
 
452,006

 
2.8
%
Ginnie Mae buyout residential mortgage loans
 
36,069

 
0.3
%
 

 
%
Credit Strategy
 
 
 
 
 
 
 
 
Non-Agency Bonds
 
 
 
 
 
 
 
 
Senior Bonds
 
1,313,695

 
11.8
%
 
2,370,435

 
14.8
%
Mezzanine Bonds
 
532,572

 
4.8
%
 
670,421

 
4.2
%
Non-Agency Other
 
6,163

 
0.1
%
 
7,929

 
%
Total Non-Agency
 
1,852,430

 
16.7
%
 
3,048,785

 
19.0
%
Net Economic Interest in Securitization(1)
 
1,173,617

 
10.6
%
 
535,083

 
3.3
%
Residential mortgage loans held-for-sale
 
775,362

 
7.0
%
 
535,712

 
3.3
%
Commercial real estate assets
 
660,953

 
5.9
%
 

 
%
Aggregate Portfolio
 
$
11,122,915

 
 
 
$
16,050,307

 
 
________________
(1)
Net economic interest in securitization consists of residential mortgage loans held-for-investment, net of collateralized borrowings in consolidated securitization trusts.


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Portfolio Metrics
 
Three Months Ended
December 31, 2015
 
 
(unaudited)
Annualized portfolio yield during the quarter
 
 
 
4.56
%
Rates Strategy
 
 
 
 
Agency RMBS, Agency Derivatives and mortgage servicing rights
 
 
 
3.8
%
Credit Strategy
 
 
 
 
Non-Agency RMBS, Legacy(1)
 
 
 
8.4
%
Non-Agency RMBS, New issue(1)
 
 
 
4.0
%
Net economic interest in securitizations
 
 
 
4.6
%
Residential mortgage loans held-for-sale
 
 
 
 
Prime nonconforming residential mortgage loans
 
 
 
4.0
%
Credit sensitive residential mortgage loans
 
 
 
4.6
%
Commercial Strategy
 
 
 
6.0
%
 
 
 
 
 
Annualized cost of funds on average borrowing balance during the quarter(2)
 
 
 
1.30
%
Annualized interest rate spread for aggregate portfolio during the quarter
 
 
 
3.26
%
Debt-to-equity ratio at period-end(3)
 
 
 
2.5
:1.0
 
 
 
 
 
Portfolio Metrics Specific to RMBS and Agency Derivatives as of December 31, 2015
 
 
 
 
Weighted average cost basis of principal and interest securities
 
 
 
 
Agency(4)
 
$
 
108.10

Non-Agency(5)
 
$
 
60.42

Weighted average three month CPR
 
 
 
 
Agency
 
 
 
10.3
%
Non-Agency
 
 
 
6.2
%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
 
 
 
75.7
%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
 
 
 
24.3
%
________________
(1)
Legacy non-Agency RMBS includes non-Agency bonds issued up to and including 2009.  New issue non-Agency RMBS includes bonds issued after 2009.
(2)
Cost of funds includes interest spread expense associated with the portfolio's interest rate swaps.
(3)
Defined as total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate assets and Agency Derivatives, divided by total equity.
(4)
Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(5)
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 $55.80 at December 31, 2015.


“In 2015, we reallocated capital to the mortgage loan conduit, MSR and commercial real estate assets, increasing the capital allocation to 38% at year end from 22% at December 31, 2014, ” stated Bill Roth, Two Harbors’ Chief Investment Officer. “While this transition created a drag on core earnings, we believe this repositions our portfolio to drive attractive stockholder returns over the long-term.”

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 assets divided by total equity, of 2.5:1.0 and 3.1:1.0 as of December 31, 2015 and September 30, 2015, respectively.

As of December 31, 2015, the company had outstanding $5.0 billion of repurchase agreements funding RMBS, Agency Derivatives, residential mortgage loans held-for-sale and commercial real estate assets with 21 different counterparties. Excluding the effect of the company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 1.1% as of December 31, 2015.


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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 December 31, 2015, TH Insurance had $3.8 billion in outstanding secured advances with a weighted average borrowing rate of 0.58%, and had an additional $215.0 million of available uncommitted credit for borrowings.

As of December 31, 2015, the company’s aggregate repurchase agreements and FHLB advances funding RMBS, Agency Derivatives, residential mortgage loans held-for-sale and commercial real estate assets had 5.6 weighted average years to maturity.
 
The following table summarizes the company’s borrowings by collateral type under repurchase agreements and FHLB advances and the related cost of funds:

 
 
As of December 31, 2015
(in thousands)
 
(unaudited)
Collateral type:
 
 
Agency RMBS and Agency Derivatives
 
$
5,709,003

Mortgage servicing rights
 

Non-Agency RMBS
 
1,278,214

Net economic interests in consolidated securitization trusts(1)
 
983,290

Residential mortgage loans held-for-sale
 
 
Prime nonconforming residential mortgage loans
 
596,156

Credit sensitive residential mortgage loans
 

Commercial real estate assets
 
226,611

 
 
$
8,793,274

 
 
 
Cost of Funds Metrics
 
Three Months Ended
December 31, 2015
 
 
(unaudited)
Annualized cost of funds on average borrowings during the quarter:
 
0.8
%
Agency RMBS and Agency Derivatives
 
0.5
%
Mortgage servicing rights
 
%
Non-Agency RMBS
 
2.0
%
Net economic interests in consolidated securitization trusts(1)
 
0.8
%
Residential mortgage loans held-for-sale
 
 
Prime nonconforming residential mortgage loans
 
0.5
%
Credit sensitive residential mortgage loans
 
%
Commercial real estate assets
 
1.2
%
________________
(1)
Includes the retained interests from on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.

On January 12, 2016, the Federal Housing Finance Agency (FHFA) released final rules that exclude captive insurers from holding membership in the FHLB system. As a result, at the end of a 5-year grace period, TH Insurance's FHLB membership will terminate, though outstanding advances will be allowed to expire at their stated maturity.

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Share Repurchase Program
During the fourth quarter, the company repurchased 12.3 million shares of its common stock pursuant to its share repurchase program at an average price of $8.37 per share, which was accretive to book value by $0.06 per share, for a total cost of $102.7 million. For the year ended December 31, 2015, the company repurchased 13.7 million shares, for a total cost of $115.2 million. Since the inception of the program, through December 31, 2015, the company had repurchased an aggregate of 16.1 million shares at a cost of $139.1 million, with an additional 8.9 million shares remaining available for purchase pursuant to its share repurchase program.

Subsequent to year end, the company disclosed that its Board of Directors had authorized the repurchase of up to an additional 50 million shares of common stock pursuant to the company’s ongoing share repurchase program.

Dividends and Taxable Income
The company declared cash dividends to stockholders of $1.04 per share during the 2015 taxable year.  As a REIT, the company fulfilled its requirement to distribute at least 90% of its taxable income to stockholders.

2016 Dividend Outlook
The company expects to issue a dividend of $0.23 per share for the first quarter of 2016, subject to approval by its Board of Directors. The company anticipates that a quarterly dividend level of $0.23 per share will be sustainable for the year.


Conference Call
Two Harbors Investment Corp. will host a conference call on February 4, 2016 at 9:00 a.m. EST to discuss fourth 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 15148357, 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. EST on February 4, 2016, through 12:00 a.m. EST on February 11, 2016. The playback can be accessed by calling (855) 859-2056 (or (404) 537-3406 for international callers), Conference Code 15148357. 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

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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 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
# # #

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

December 31, 2015
 
December 31, 2014

(unaudited)
 
 
ASSETS
 
 
 
Available-for-sale securities, at fair value
$
7,825,320

 
$
14,341,102

Trading securities, at fair value

 
1,997,656

Residential mortgage loans held-for-sale, at fair value
811,431

 
535,712

Residential mortgage loans held-for-investment in securitization trusts, at fair value
3,173,727

 
1,744,746

Commercial real estate assets
660,953

 

Mortgage servicing rights, at fair value
493,688

 
452,006

Cash and cash equivalents
737,831

 
1,005,792

Restricted cash
262,562

 
336,771

Accrued interest receivable
49,970

 
65,529

Due from counterparties
17,206

 
35,625

Derivative assets, at fair value
271,509

 
380,791

Other assets
271,575

 
188,579

Total Assets
$
14,575,772

 
$
21,084,309

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
   

 
   

Repurchase agreements
$
5,008,274

 
$
12,932,463

Collateralized borrowings in securitization trusts, at fair value
2,000,110

 
1,209,663

Federal Home Loan Bank advances
3,785,000

 
2,500,000

Derivative liabilities, at fair value
7,285

 
90,233

Due to counterparties
34,294

 
124,206

Dividends payable
92,016

 
95,263

Other liabilities
72,232

 
64,439

Total Liabilities
$
10,999,211

 
$
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 353,906,807 and 366,395,920 shares issued and outstanding, respectively
3,539

 
3,664

Additional paid-in capital
3,705,519

 
3,811,027

Accumulated other comprehensive income
359,061

 
855,789

Cumulative earnings
1,684,755

 
1,195,536

Cumulative distributions to stockholders
(2,176,313
)
 
(1,797,974
)
Total Stockholders’ Equity
3,576,561

 
4,068,042

Total Liabilities and Stockholders’ Equity
$
14,575,772

 
$
21,084,309


- 10 -



TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
 
 
 
 
 
 
 
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
 
Interest income:
 
 
 
 
 
Available-for-sale securities
$
88,543

 
$
131,694

 
$
458,515

 
$
506,268

Trading securities

 
4,739

 
8,676

 
12,913

Residential mortgage loans held-for-sale
7,698

 
3,536

 
28,966

 
16,089

Residential mortgage loans held-for-investment in securitization trusts
30,832

 
16,040

 
95,740

 
41,220

Commercial real estate assets
6,297

 

 
9,138

 

Cash and cash equivalents
235

 
211

 
902

 
717

Total interest income
133,605

 
156,220

 
601,937

 
577,207

Interest expense:
 
 
 
 
 
 
 
Repurchase agreements
14,851

 
19,493

 
73,049

 
76,177

Collateralized borrowings in securitization trusts
17,815

 
10,137

 
57,216

 
26,760

Federal Home Loan Bank advances
3,909

 
2,074

 
11,921

 
4,513

Total interest expense
36,575

 
31,704

 
142,186

 
107,450

Net interest income
97,030

 
124,516

 
459,751

 
469,757

Other-than-temporary impairment losses

 
(180
)
 
(535
)
 
(392
)
Other income (loss):
 
 
 
 
 
 
 
Gain (loss) on investment securities
99,867

 
28,697

 
363,379

 
87,201

Gain (loss) on interest rate swap and swaption agreements
42,526

 
(152,619
)
 
(210,621
)
 
(345,647
)
Loss on other derivative instruments
(2,077
)
 
(5,184
)
 
(5,049
)
 
(17,529
)
(Loss) gain on residential mortgage loans held-for-sale
(4,015
)
 
11,064

 
14,285

 
17,297

Servicing income
32,799

 
31,587

 
127,412

 
128,160

Loss on servicing asset
(3,267
)
 
(55,346
)
 
(99,584
)
 
(128,388
)
Other (loss) income
(5,525
)
 
(1,409
)
 
(21,790
)
 
18,539

Total other income (loss)
160,308

 
(143,210
)
 
168,032

 
(240,367
)
Expenses:
 
 
 
 
 
 
 
Management fees
12,270

 
12,244

 
50,294

 
48,803

Securitization deal costs
1,200

 
1,283

 
8,971

 
4,638

Servicing expenses
8,252

 
1,330

 
28,101

 
25,925

Other operating expenses
16,130

 
14,950

 
64,162

 
56,231

Total expenses
37,852

 
29,807

 
151,528

 
135,597

Income (loss) before income taxes
219,486

 
(48,681
)
 
475,720

 
93,401

Provision for (benefit from) income taxes
8,780

 
(11,718
)
 
(16,490
)
 
(73,738
)
Net income (loss)
$
210,706

 
$
(36,963
)
 
$
492,210

 
$
167,139

Basic and diluted earnings (loss) per weighted average common share
$
0.59

 
$
(0.10
)
 
$
1.35

 
$
0.46

Dividends declared per common share
$
0.26

 
$
0.26

 
$
1.04

 
$
1.04

Basic and diluted weighted average number of shares of common stock outstanding
360,090,432

 
366,230,566

 
365,247,738

 
366,011,855

 
 
 
 
 
 
 
 

- 11 -



TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
 
 
 
 
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
 
Net income (loss)
$
210,706

 
$
(36,963
)
 
$
492,210

 
$
167,139

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
(213,940
)
 
79,141

 
(496,728
)
 
411,054

Other comprehensive (loss) income
(213,940
)
 
79,141

 
(496,728
)
 
411,054

Comprehensive (loss) income
$
(3,234
)
 
$
42,178

 
$
(4,518
)
 
$
578,193


- 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
December 31,
 
Year Ended
December 31,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
Reconciliation of net income (loss) to Core Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
210,706

 
$
(36,963
)
 
$
492,210

 
$
167,139

 
 
 
 
 
 
 
 
Adjustments for non-core earnings:
 
 
 
 
 
 
 
Gain on sale of securities and residential mortgage loans, net of tax
(100,548
)
 
(30,447
)
 
(371,080
)
 
(95,175
)
Unrealized loss (gain) on securities and residential mortgage loans held-for-sale, net of tax
14,668

 
(3,983
)
 
19,612

 
(1,191
)
Other-than-temporary impairment loss, net of tax

 
180

 
535

 
392

Realized loss on termination or expiration of swaps and swaptions, net of tax
77,672

 
8,458

 
190,242

 
42,938

Unrealized (gain) loss on interest rate swaps and swaptions economically hedging investment portfolio, repurchase agreements and FHLB advances, net of tax
(134,182
)
 
103,239

 
(91,874
)
 
157,972

Loss on other derivative instruments, net of tax
6,880

 
6,028

 
17,108

 
20,113

Realized and unrealized loss (gain) on financing securitizations, net of tax
6,997

 
2,129

 
26,384

 
(16,854
)
Realized and unrealized (gain) loss on mortgage servicing rights, net of tax
(11,342
)
 
36,978

 
36,607

 
64,320

Securitization deal costs, net of tax
780

 
834

 
5,831

 
3,015

Amortization of business combination intangible assets, net of tax

 

 

 
346

Change in representation and warranty reserve, net of tax
502

 
(3,345
)
 
206

 
793

Core Earnings(1)
$
72,133

 
$
83,108

 
$
325,781

(2) 
$
343,808

 
 
 
 
 
 
 
 
Weighted average shares outstanding
360,090,432

 
366,230,566

 
365,247,738

 
366,011,855

 
 
 
 
 
 
 
 
Core Earnings per weighted average share outstanding
$
0.20

 
$
0.23

 
$
0.89

 
$
0.94

________________
(1)
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.
(2)
Effective July 1, 2015, we refined the MSR amortization methodology utilized for Core Earnings. If this methodology was applied retroactively to the first 6 months of 2015, it would have resulted in an additional $8.6 million expense, net of tax, or $0.03 per weighted average share for that period.

- 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
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
Net Interest Income:
 
 
 
 
 
 
 
 
 
Interest income
$
133.6

 
$
152.8

 
$
152.5

 
$
163.0

 
$
156.2

Interest expense
36.6

 
37.0

 
35.0

 
33.5

 
31.7

Net interest income
97.0

 
115.8

 
117.5

 
129.5

 
124.5

Other income (loss):
 
 
 
 
 
 
 
 
 
Interest spread on interest rate swaps
(12.6
)
 
(19.4
)
 
(26.2
)
 
(27.5
)
 
(32.2
)
Interest spread on other derivative instruments
6.0

 
5.6

 
6.4

 
7.7

 
7.0

Servicing income, net of amortization(1)
16.8

 
10.8

 
17.2

 
19.1

 
17.9

Other income
1.4

 
1.1

 
1.0

 
1.0

 
0.7

Total other income (loss)
11.6

 
(1.9
)
 
(1.6
)
 
0.3

 
(6.6
)
Expenses
35.8

 
35.6

 
35.3

 
35.4

 
33.7

Core Earnings before income taxes
72.8

 
78.3

 
80.6

 
94.4

 
84.2

Income tax expense (benefit)
0.7

 
(1.1
)
 
0.4

 
0.3

 
1.1

Core Earnings
$
72.1

 
$
79.4

 
$
80.2

 
$
94.1

 
$
83.1

Basic and diluted weighted average Core EPS
$
0.20

 
$
0.22

 
$
0.22

 
$
0.26

 
$
0.23

________________
(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 -