Two Harbors Investment Corp. Reports First Quarter 2016 Financial Results
Investment Opportunities Become More Attractive

NEW YORK, May 4, 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 March 31, 2016.

Summary

Reported Core Earnings of $71.8 million, or $0.21 per weighted average common share.(1) 

Repurchased 8.0 million shares, representing 2.3% of common shares outstanding at December 31, 2015, at an average price of $7.64 per share, which was accretive to book value.

Closed on additional senior commercial real estate assets; aggregate portfolio carrying value of $744.3 million at March 31, 2016.

Added $5.0 billion unpaid principal balance (UPB) of MSR through expanded flow-sale relationships and bulk acquisition.

Sponsored two securitizations, issuing securities backed by approximately $628.3 million UPB of prime jumbo residential mortgage loans.

Reported book value of $9.70 per common share, representing a (1.8%)(2) total return on book value after accounting for a dividend of $0.23 per share.



“In the first quarter, we increased our capital allocation to commercial real estate assets due to the continued attractiveness of this sector,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer.  “We also opportunistically purchased Agency RMBS as spreads widened intra-quarter.  Our ability to dynamically allocate capital is important to our stockholders, as it allows us to take advantage of evolving market conditions.”








(1)
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.
(2)
Return on book value for the quarter ended March 31, 2016 is defined as the decrease in book value from December 31, 2015 to March 31, 2016 of $0.41, plus the dividend declared of $0.23 per share, divided by December 31, 2015 book value of $10.11 per share.

- 1 -


Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the first quarter of 2016:
Two Harbors Investment Corp. Operating Performance (unaudited)
 

(dollars in thousands, except per share data)
 
 
Three Months Ended
March 31, 2016
Earnings
 Earnings
 
 Per weighted share
 
Annualized return on average equity
Core Earnings(1)
$
71,844

 
$
0.21

 
8.3
 %
GAAP Net Loss
$
(88,930
)
 
$
(0.25
)
 
(10.2
)%
Comprehensive Loss
$
(67,585
)
 
$
(0.19
)
 
(7.8
)%


 

 

Operating Metrics
 
 
 
 
 
Dividend per common share
$0.23
 
 
 
 
Book value per share at period end
$9.70
 
 
 
 
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 March 31, 2016 of $71.8 million, or $0.21 per weighted average common share outstanding, as compared to Core Earnings for the quarter ended December 31, 2015 of $72.1 million, or $0.20 per weighted average common share outstanding. On a Core Earnings basis, the company recognized an annualized return on average equity of 8.3% and 7.8% for the quarters ended March 31, 2016 and December 31, 2015, respectively.

For the first quarter of 2016, the company recognized:
net realized gains on RMBS and mortgage loans held-for-sale of $16.7 million, net of tax;
net unrealized gains on certain RMBS and mortgage loans held-for-sale of $14.1 million, net of tax;
other-than-temporary impairment loss of $0.7 million, net of tax;
net gains of $9.6 million, net of tax, related to swap and swaption terminations and expirations;
net unrealized losses of $134.9 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 gains on other derivative instruments of approximately $9.4 million, net of tax;
net realized and unrealized gains on consolidated financing securitizations of $1.5 million, net of tax;
a net decrease in fair value of $88.7 million(2) on MSR, net of tax; and
securitization deal costs of $2.4 million, net of tax.









(2)
Decrease in fair value on MSR, net of tax, of $88.7 million is comprised of a decrease in fair value of $73.7 million, net of tax, excluded from Core Earnings and $15.0 million, net of tax, of estimated amortization included in Core Earnings.

- 2 -


The company reported a GAAP Net Loss of $88.9 million, or $0.25 per weighted average common share outstanding, for the quarter ended March 31, 2016, as compared to GAAP Net Income of $210.7 million, or $0.59 per weighted average common share outstanding, for the quarter ended December 31, 2015. On a GAAP Net Income basis, the company recognized an annualized return on average equity of (10.2%) and 22.7% for the quarters ended March 31, 2016 and December 31, 2015, respectively.

The company reported a Comprehensive Loss of $67.6 million, or $0.19 per weighted average common share outstanding, for the quarter ended March 31, 2016, as compared to a Comprehensive Loss of $3.2 million, or $0.01 per weighted average common share outstanding, for the quarter ended December 31, 2015. The company records unrealized fair value gains and losses on the majority of RMBS, classified as available-for-sale, in Other Comprehensive Income (Loss). On a Comprehensive Income (Loss) basis, the company recognized an annualized return on average equity of (7.8%) and (0.3%) for the quarters ended March 31, 2016 and December 31, 2015, respectively.
 
Other Key Metrics
Two Harbors declared a quarterly cash dividend of $0.23 per common share for the quarter ended March 31, 2016. The annualized dividend yield on the company’s common stock for the quarter, based on the March 31, 2016 closing price of $7.94, was 11.6%.
 
The company’s book value per share, after taking into account the first quarter 2016 dividend of $0.23 per share, was $9.70 as of March 31, 2016, compared to $10.11 as of December 31, 2015, which represented a total return on book value for the quarter of (1.8%).(1)  

Other operating expenses for the quarter ended March 31, 2016 were approximately $14.9 million, or 1.7% of average equity, compared to approximately $16.1 million, or 1.7% of average equity, for the quarter ended December 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 assets. As of March 31, 2016, the total value of the company’s portfolio was $12.2 billion.

The company’s portfolio includes rates, credit and commercial real estate strategies. The rates strategy consisted of $8.7 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of March 31, 2016. The credit strategy consisted of $2.8 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 March 31, 2016. The commercial strategy consisted of senior and mezzanine commercial real estate assets with an aggregate carrying value of $744.3 million as of March 31, 2016.

For the quarter ended March 31, 2016, the annualized yield on the company’s average aggregate portfolio was 4.58% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.21%. This resulted in a net interest rate spread of 3.37%.









(1)
Return on book value for the quarter ended March 31, 2016 is defined as the decrease in book value from December 31, 2015 to March 31, 2016 of $0.41, plus the dividend declared of $0.23 per share, divided by December 31, 2015 book value of $10.11 per share.

- 3 -


RMBS and Agency Derivatives
For the quarter ended March 31, 2016, the annualized yield on average RMBS and Agency Derivatives was 4.2%, consisting of an annualized yield of 3.3% in Agency RMBS and Agency Derivatives and 8.3% in non-Agency RMBS.

The company experienced a three-month average constant prepayment rate (CPR) of 9.2% for Agency RMBS and Agency Derivatives held as of March 31, 2016, compared to 10.3% for those securities held as of December 31, 2015. The weighted average cost basis of the principal and interest Agency portfolio was 106.6% of par as of March 31, 2016 and 108.1% of par as of December 31, 2015. The net premium amortization was $24.2 million and $25.3 million for the quarters ended March 31, 2016 and December 31, 2015, respectively. 

The company experienced a three-month average CPR of 5.3% for non-Agency principal and interest RMBS held as of March 31, 2016, as compared to 6.2% for those securities held as of December 31, 2015. The weighted average cost basis of the non-Agency portfolio was 58.2% of par as of March 31, 2016, compared to 60.4% of par as of December 31, 2015. The discount accretion was $16.8 million for the quarter ended March 31, 2016, compared to $19.2 million for the quarter ended December 31, 2015. The total net discount remaining was $1.0 billion as of March 31, 2016, compared to $1.1 billion as of December 31, 2015, with $0.4 billion designated as credit reserve as of March 31, 2016.

As of March 31, 2016, fixed-rate investments composed 83.7% and adjustable-rate investments composed 16.3% of the company’s RMBS and Agency Derivatives portfolio.

As of March 31, 2016, the company had residential mortgage loans held-for-investment with a carrying value of $3.7 billion and the company’s collateralized borrowings had a carrying value of $2.8 billion, resulting in net economic interests in consolidated securitization trusts of $896.0 million.

Mortgage Servicing Rights
The company held MSR on mortgage loans with UPB totaling $55.3 billion. The MSR had a fair market value of $446.2 million as of March 31, 2016, and the company recognized unrealized losses of $101.4 million during the quarter ended March 31, 2016.

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 $34.1 million of servicing income, $7.4 million of servicing expenses and $0.5 million in reserve expense for representation and warranty obligations during the quarter ended March 31, 2016.

Residential Mortgage Loans Held for Sale
As of March 31, 2016, the company held prime jumbo residential mortgage loans with a fair market value of $315.0 million and had outstanding purchase commitments to acquire an additional $252.2 million UPB of residential mortgage loans, subject to fallout if the loans do not close. For the quarter ended March 31, 2016, the annualized yield on the prime jumbo residential mortgage loan portfolio was 4.1%, compared to 4.0% for the quarter ended December 31, 2015.

During the quarter, the company sponsored two securitizations, Agate Bay Mortgage Trust 2016-1 and Agate Bay Mortgage Trust 2016-2. The trusts issued securities backed by approximately $628.3 million UPB of prime jumbo residential mortgage loans.

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.

- 4 -


As of March 31, 2016, the company held senior and mezzanine commercial real estate assets with an aggregate carrying value of $744.3 million. For the quarter ended March 31, 2016, the annualized yield on commercial real estate assets was 6.4% as compared to 6.0% for the quarter ended December 31, 2015.

Other Investments and Risk Management Derivatives
The company held $1.6 billion notional of net long TBAs as of March 31, 2016, which are accounted for as derivative instruments in accordance with GAAP.

As of March 31, 2016, the company was a party to interest rate swaps and swaptions with a notional amount of $20.6 billion. Of this amount, $6.5 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s LIBOR-based repurchase agreements and FHLB advances, $8.9 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 as of March 31, 2016 and December 31, 2015:
Two Harbors Investment Corp. Portfolio
(dollars in thousands)

Portfolio Composition

As of March 31, 2016

As of December 31, 2015


(unaudited)

(unaudited)
Rates Strategy








Agency Bonds








Fixed Rate Bonds

$
7,972,296


65.3
%

5,864,294


52.7
%
Hybrid ARMs

36,800


0.3
%

108,596


1.0
%
Total Agency

8,009,096


65.6
%

5,972,890


53.7
%
Agency Derivatives

157,219


1.3
%

157,906


1.4
%
Mortgage servicing rights

446,170


3.6
%

493,688


4.4
%
Residential mortgage loans held-for-sale

61,319


0.5
%

36,069


0.3
%
Credit Strategy











Non-Agency Bonds











Senior Bonds

1,172,288


9.6
%

1,313,695


11.8
%
Mezzanine Bonds

397,492


3.3
%

532,572


4.8
%
Non-Agency Other

5,578


%

6,163


0.1
%
Total Non-Agency

1,575,358


12.9
%

1,852,430


16.7
%
Net Economic Interest in Securitization(1)

896,020


7.3
%

1,173,617


10.6
%
Residential mortgage loans held-for-sale

325,940


2.7
%

775,362


7.0
%
Commercial real estate assets

744,259


6.1
%

660,953


5.9
%
Aggregate Portfolio

$
12,215,381




$
11,122,915



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


- 5 -











Portfolio Metrics

Three Months Ended
March 31, 2016

Three Months Ended
December 31, 2015


(unaudited)

(unaudited)
Annualized portfolio yield during the quarter



4.58
%



4.56
%
Rates Strategy










Agency RMBS, Agency Derivatives and mortgage servicing rights



3.7
%



3.8
%
Credit Strategy










Non-Agency RMBS, Legacy(1)



8.6
%



8.4
%
Non-Agency RMBS, New issue(1)



4.3
%



4.0
%
Net economic interest in securitizations



4.8
%



4.6
%
Residential mortgage loans held-for-sale



4.1
%



4.0
%
Commercial Strategy



6.4
%



6.0
%









Annualized cost of funds on average borrowing balance during the quarter(2)



1.21
%



1.30
%
Annualized interest rate spread for aggregate portfolio during the quarter



3.37
%



3.26
%
Debt-to-equity ratio at period-end(3)



3.0
:1.0



2.5
:1.0











Portfolio Metrics Specific to RMBS and Agency Derivatives as of March 31, 2016










Weighted average cost basis of principal and interest securities








Agency(4)

$

106.59


$

108.10
Non-Agency(5)

$

58.20


$

60.42
Weighted average three month CPR








Agency



9.2
%



10.3
%
Non-Agency



5.3
%



6.2
%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio



83.7
%



75.7
%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio



16.3
%



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 $53.89 at March 31, 2016 and $55.80 at December 31, 2015.


“There were exciting opportunities available in the market in the first quarter,”  stated Bill Roth, Two Harbors’ Chief Investment Officer. “We increased leverage to take advantage of wider Agency spreads, while adding to our MSR and commercial real estate holdings. We have continued this trend post-quarter end as we see attractive available spreads in various sectors.”

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 3.0:1.0 and 2.5:1.0 as of March 31, 2016 and December 31, 2015, respectively.

As of March 31, 2016, the company had outstanding $6.2 billion of repurchase agreements funding RMBS, Agency Derivatives, residential mortgage loans held-for-sale and commercial real estate assets with 20 different counterparties. Excluding the effect of the company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 1.15% as of March 31, 2016.

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 March 31, 2016, TH Insurance had $4.0 billion in outstanding secured advances, with a weighted average borrowing rate of 0.59%, and had no additional available uncommitted capacity for borrowings.

- 6 -


As of March 31, 2016, 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 a weighted average of 5.2 years to maturity.

The following table summarizes the company’s borrowings by collateral type under repurchase agreements and FHLB advances outstanding as of March 31, 2016 and December 31, 2015, and the related cost of funds for the three months ended March 31, 2016 and December 31, 2015:
 
 
As of March 31, 2016
 
As of December 31, 2015
(in thousands)
 
(unaudited)
 
(unaudited)
Collateral type:
 
 
 
 
Agency RMBS and Agency Derivatives
 
$
7,514,775

 
$
5,709,003

Mortgage servicing rights
 

 

Non-Agency MBS
 
1,072,780

 
1,278,214

Net economic interests in consolidated securitization trusts(1)
 
903,162

 
983,290

Residential mortgage loans held-for-sale
 
256,005

 
596,156

Commercial real estate assets
 
443,130

 
226,611

 
 
$
10,189,852

 
$
8,793,274

 
 

 
 
Cost of Funds Metrics
 
Three Months Ended
March 31, 2016
 
Three Months Ended
December 31, 2015
 
 
(unaudited)
 
(unaudited)
Annualized cost of funds on average borrowings during the quarter:
 
0.9
%
 
0.8
%
Agency RMBS and Agency Derivatives
 
0.7
%
 
0.5
%
Mortgage servicing rights
 
%
 
%
Non-Agency MBS
 
2.3
%
 
2.0
%
Net economic interests in consolidated securitization trusts(1)
 
0.9
%
 
0.8
%
Residential mortgage loans held-for-sale
 
0.7
%
 
0.5
%
Commercial real estate assets
 
1.7
%
 
1.2
%
________________
(1)
Includes the retained interests from on-balance sheet securitizations, which are eliminated in consolidation in accordance with GAAP.


Share Repurchase Program
During the first quarter of 2016, the company repurchased 8.0 million shares of common stock pursuant to its share repurchase program at an average price of $7.64 per share, which was accretive to book value, for a total cost of $61.3 million. From the inception of the program through March 31, 2016, the company had repurchased an aggregate of 24.1 million shares at a cost of $200.4 million, with an additional 50.9 million shares remaining available for purchase pursuant to the share repurchase program.


- 7 -


Conference Call
Two Harbors Investment Corp. will host a conference call on May 5, 2016 at 9:00 a.m. EST to discuss first quarter 2016 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 86760221, 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 May 5, 2016, through 12:00 a.m. EST on May 12, 2016. The playback can be accessed by calling (855) 859-2056 (or (404) 537-3406 for international callers), conference code 86760221. 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, 2015, 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 is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking

- 8 -


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)
 
 
 
 
 

March 31,
2016
 
December 31,
2015

(unaudited)
 
 
ASSETS
 
 
 
Available-for-sale securities, at fair value
$
9,584,454

 
$
7,825,320

Residential mortgage loans held-for-sale, at fair value
387,259

 
811,431

Residential mortgage loans held-for-investment in securitization trusts, at fair value
3,705,647

 
3,173,727

Commercial real estate assets
744,259

 
660,953

Mortgage servicing rights, at fair value
446,170

 
493,688

Cash and cash equivalents
754,827

 
737,831

Restricted cash
281,145

 
262,562

Accrued interest receivable
54,517

 
49,970

Due from counterparties
233,378

 
17,206

Derivative assets, at fair value
197,847

 
271,509

Other assets
295,102

 
271,575

Total Assets
$
16,684,605

 
$
14,575,772


 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
6,189,852

 
$
5,008,274

Collateralized borrowings in securitization trusts, at fair value
2,809,627

 
2,000,110

Federal Home Loan Bank advances
4,000,000

 
3,785,000

Derivative liabilities, at fair value
77,038

 
7,285

Due to counterparties
91,547

 
34,294

Dividends payable
79,939

 
92,016

Other liabilities
65,911

 
72,232

Total Liabilities
13,313,914

 
10,999,211


 
 
 
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 347,562,770 and 353,906,807 shares issued and outstanding, respectively
3,476

 
3,539

Additional paid-in capital
3,647,236

 
3,705,519

Accumulated other comprehensive income
380,406

 
359,061

Cumulative earnings
1,595,825

 
1,684,755

Cumulative distributions to stockholders
(2,256,252
)
 
(2,176,313
)
Total Stockholders’ Equity
3,370,691

 
3,576,561

Total Liabilities and Stockholders’ Equity
$
16,684,605

 
$
14,575,772


- 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
March 31,

2016
 
2015

(unaudited)
Interest income:

Available-for-sale securities
$
79,428

 
$
135,525

Trading securities

 
4,695

Residential mortgage loans held-for-sale
7,202

 
4,271

Residential mortgage loans held-for-investment in securitization trusts
32,771

 
18,237

Commercial real estate assets
11,072

 
44

Cash and cash equivalents
290

 
197

Total interest income
130,763

 
162,969

Interest expense:
 
 
 
Repurchase agreements
16,029

 
20,565

Collateralized borrowings in securitization trusts
19,359

 
10,708

Federal Home Loan Bank advances
5,972

 
2,230

Total interest expense
41,360

 
33,503

Net interest income
89,403

 
129,466

Other-than-temporary impairment losses
(717
)
 
(127
)
Other income (loss):
 
 
 
Gain on investment securities
29,474

 
129,457

Loss on interest rate swap and swaption agreements
(125,484
)
 
(126,443
)
Gain on other derivative instruments
16,015

 
2,967

Gain on residential mortgage loans held-for-sale
10,803

 
9,092

Servicing income
34,133

 
32,087

Loss on servicing asset
(101,440
)
 
(52,403
)
Other income (loss)
2,827

 
(1,857
)
Total other loss
(133,672
)
 
(7,100
)
Expenses:
 
 
 
Management fees
12,044

 
12,721

Securitization deal costs
3,732

 
2,611

Servicing expenses
7,861

 
6,716

Other operating expenses
14,856

 
16,055

Total expenses
38,493

 
38,103

(Loss) income before income taxes
(83,479
)
 
84,136

Provision for (benefit from) income taxes
5,451

 
(10,657
)
Net (loss) income
$
(88,930
)
 
$
94,793

Basic and diluted (loss) earnings per weighted average common share
$
(0.25
)
 
$
0.26

Dividends declared per common share
$
0.23

 
$
0.26

Basic and diluted weighted average number of shares of common stock outstanding
349,436,015

 
366,507,657

 
 
 
 

- 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
March 31,
 
2016
 
2015
 
(unaudited)
Comprehensive (loss) income:
 
 


Net (loss) income
$
(88,930
)
 
$
94,793

Other comprehensive income (loss), net of tax:
 
 


Unrealized gain (loss) on available-for-sale securities
21,345

 
(5,931
)
Other comprehensive income (loss)
21,345

 
(5,931
)
Comprehensive (loss) income
$
(67,585
)
 
$
88,862


- 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
March 31,

2016

2015

(unaudited)
Reconciliation of net (loss) income to Core Earnings:








Net (loss) income
$
(88,930
)

$
94,793





Adjustments for non-core earnings:




Gain on sale of securities and residential mortgage loans held-for-sale, net of tax
(16,749
)

(122,527
)
Unrealized gain on securities and residential mortgage loans held-for-sale, net of tax
(14,103
)

(8,644
)
Other-than-temporary impairment loss, net of tax
717


127

Realized gain on termination or expiration of swaps and swaptions, net of tax
(9,586
)

(7,279
)
Unrealized loss on interest rate swaps and swaptions economically hedging investment portfolio, repurchase agreements and FHLB advances, net of tax
134,942


97,469

Gain on other derivative instruments, net of tax
(9,393
)

(824
)
Realized and unrealized (gain) loss on financing securitizations, net of tax
(1,478
)

2,902

Realized and unrealized loss on mortgage servicing rights, net of tax
73,661


36,318

Securitization deal costs, net of tax
2,426


1,697

Change in representation and warranty reserve, net of tax
337


43

Core Earnings(1)
$
71,844


$
94,075





Weighted average shares outstanding
349,436,015


366,507,657





Core Earnings per weighted average share outstanding
$
0.21

 
$
0.26

________________
(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.



- 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

March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015

(unaudited)
Net Interest Income:

 

 

 

 

Interest income
$
130.8

 
$
133.6

 
$
152.8

 
$
152.5

 
$
163.0

Interest expense
41.4

 
36.6

 
37.0

 
35.0

 
33.5

Net interest income
89.4

 
97.0

 
115.8

 
117.5

 
129.5

Other income:
 
 
 
 
 
 
 
 
 
Interest spread on interest rate swaps
(6.2
)
 
(12.6
)
 
(19.4
)
 
(26.2
)
 
(27.5
)
Interest spread on other derivative instruments
5.4

 
6.0

 
5.6

 
6.4

 
7.7

Servicing income, net of amortization(1)
17.9

 
16.8

 
10.8

 
17.2

 
19.1

Other income
1.3

 
1.4

 
1.1

 
1.0

 
1.0

Total other (loss) income
18.4

 
11.6

 
(1.9
)
 
(1.6
)
 
0.3

Expenses
34.3

 
35.8

 
35.6

 
35.3

 
35.4

Core Earnings before income taxes
73.5

 
72.8

 
78.3

 
80.6

 
94.4

Income tax (benefit) expense
1.7

 
0.7

 
(1.1
)
 
0.4

 
0.3

Core Earnings
$
71.8

 
$
72.1

 
$
79.4

 
$
80.2

 
$
94.1

Basic and diluted weighted average Core EPS
$
0.21

 
$
0.20

 
$
0.22

 
$
0.22

 
$
0.26

________________
(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 -