Market Overview

Two Harbors Investment Corp. Reports Second Quarter 2018 Financial Results

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Strong Quarter Highlighted by Growth in Book Value and Core Earnings

Two
Harbors Investment Corp.
(NYSE:TWO), a leading hybrid mortgage real
estate investment trust (REIT) that invests in residential
mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and
other financial assets, today announced its financial results for the
quarter ended June 30, 2018.

Summary

  • Reported book value of $15.69 per common share, representing a 3.4%
    total quarterly return on book value.(1)
  • Generated Comprehensive Income of $90.8 million, or $0.52 per weighted
    average basic common share.
  • Reported Core Earnings, including dollar roll income, of $93.9
    million, or $0.53 per weighted average basic common share,
    representing a return on average common equity of 13.5%.(2)
    • Dollar roll income of $16.5 million, or $0.09 per weighted average
      basic common share.
  • Added $10.5 billion unpaid principal balance (UPB) of MSR through a
    bulk acquisition and monthly flow-sale arrangements, bringing total
    holdings to $119.5 billion UPB.
  • Added $330 million facility to finance conventional MSR collateral;
    continued to advance discussions with other potential MSR financing
    counterparties.
  • Post quarter-end, completed the acquisition of CYS Investments, Inc.
    on July 31, 2018, increasing the company's total capital to
    approximately $4.8 billion.
  • Post quarter-end, declared interim dividend of $0.158370 per share,
    representing a partial payment of Two Harbors' regular third quarter
    common stock dividend, which is expected to be $0.47 per share;
    anticipate declaring the remaining $0.311630 per common share portion
    in the ordinary course in September 2018.

"Our strong performance this quarter, highlighted by growth in both our
Core Earnings and book value, underscores that there is continued
opportunity in what can be viewed as a challenging environment," stated
Thomas Siering, Two Harbors' President and Chief Executive Officer.
"Additionally, post quarter end we completed the acquisition of CYS
Investments, Inc. Going forward, we believe that our larger company will
enhance our ability to drive returns for our stockholders."

(1) Return on book value for the quarter ended June 30, 2018 is defined
as the increase in book value per common share from March 31, 2018 to
June 30, 2018 of $0.06, plus the dividend declared of $0.47 per common
share, divided by March 31, 2018 book value of $15.63 per common share.
(2)
Core Earnings and Core Earnings, including dollar roll income, are
non-GAAP measures. Please see page 13 for a definition of Core Earnings
and a reconciliation of GAAP to non-GAAP financial information.

Operating Performance
The following table summarizes
the company's GAAP and non-GAAP earnings measurements and key metrics
for the second quarter of 2018:

 
Two Harbors Investment Corp. Operating Performance (unaudited)
(dollars in thousands, except per common share data)
 
  Three Months Ended
June 30, 2018
  Six Months Ended
June 30, 2018

Earnings attributable to common
stockholders

Earnings  

Per
weighted
average
basic
common
share

 

Annualized
return on
average
common
equity

Earnings  

Per
weighted
average
basic
common
share

 

Annualized
return on
average
common
equity

Comprehensive Income $ 90,856 $ 0.52 13.1% $ 67,141 $ 0.38 4.8%
GAAP Net Income $ 125,743 $ 0.72 18.1% $ 446,805 $ 2.55 31.8%
Core Earnings, including dollar roll income(1) $ 93,865 $ 0.53 13.5% $ 177,690 $ 1.01 12.6%
 

Operating Metrics

Dividend per common share $ 0.47
Dividend per Series A preferred share $ 0.50781
Dividend per Series B preferred share $ 0.47656
Dividend per Series C preferred share $ 0.45313
Book value per common share at period end $ 15.69
Other operating expenses as a percentage of average equity(2) 1.8 %

________________
(1) Please see page 13 for a definition of
Core Earnings and Core Earnings, including dollar roll income, and
a reconciliation of GAAP to non-GAAP financial information.
(2)
Includes non-cash equity compensation expense of $3.5 million.

 

Earnings Summary
Two Harbors generated
Comprehensive Income of $90.8 million, or $0.52 per weighted average
basic common share, for the quarter ended June 30, 2018, as compared to
a Comprehensive Loss of ($23.7) million, or ($0.14) per weighted average
basic common share, for the quarter ended March 31, 2018. 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 common equity of 13.1% and (3.3%) for the quarters ended
June 30, 2018 and March 31, 2018, respectively.

The company reported GAAP Net Income of $125.7 million, or $0.72 per
weighted average basic common share, for the quarter ended June 30,
2018, as compared to GAAP Net Income of $321.1 million, or $1.83 per
weighted average basic common share, for the quarter ended March 31,
2018. On a GAAP Net Income basis, the company recognized an annualized
return on average common equity of 18.1% and 45.2% for the quarters
ended June 30, 2018 and March 31, 2018, respectively.

For the second quarter of 2018, the company recognized non-Core Earnings
of:

  • net realized losses on RMBS and mortgage loans held-for-sale of $39.0
    million;
  • net unrealized gains on certain RMBS, equity securities and mortgage
    loans held-for-sale of $6.7 million;
  • other-than-temporary impairment loss of $0.2 million;
  • net losses of $20.5 million related to swap and swaption terminations
    and expirations;
  • net unrealized gains of $35.7 million associated with interest rate
    swaps and swaptions economically hedging interest rate exposure (or
    duration);
  • net realized and unrealized gains on other derivative instruments of
    $6.0 million;
  • net realized and unrealized gains on MSR of $55.8 million(1);
  • servicing reserve release of $0.2 million;
  • non-cash equity compensation expense of $3.5 million; and
  • net benefit from income taxes on non-Core Earnings of $7.1 million.

The company reported Core Earnings, including dollar roll, income for
the quarter ended June 30, 2018 of $93.9 million, or $0.53 per weighted
average basic common share outstanding. The company reported Core
Earnings, including dollar roll income, from the quarter ended March 31,
2018 of $83.8 million or $0.48 per weighted average basic common share
outstanding. On a Core Earnings, including dollar roll income basis, the
company recognized an annualized return on average common equity of
13.5% for the quarter ended June 30, 2018, compared to 11.8% for the
quarter ended March 31, 2018.

Other Key Metrics
Two Harbors declared
a quarterly cash dividend of $0.47 per common share for the quarter
ended June 30, 2018. The annualized dividend yield on the company's
common stock for the quarter, based on the June 30, 2018 closing price
of $15.80, was 11.9%.

Two Harbors declared quarterly dividends of $0.50781 per share on its
8.125% Series A fixed-to-floating rate cumulative redeemable preferred
stock, $0.47656 per share on its 7.625% Series B fixed-to-floating rate
cumulative redeemable preferred stock and a dividend of $0.45313 per
share of the 7.25% Series C fixed-to-floating rate cumulative redeemable
preferred stock. Each of the foregoing preferred dividends were paid on
July 27, 2018 to the applicable preferred stockholders of record at the
close of business on July 12, 2018.

The company's book value per common share, after taking into account the
second quarter 2018 common and preferred stock dividends, was $15.69 as
of June 30, 2018, compared to $15.63 as of March 31, 2018, which
represented a total return on book value for the quarter of 3.4%.(2)

Other operating expenses for the quarter ended June 30, 2018 were
approximately $15.5 million. The company's annualized expense ratio was
1.8% of average equity, compared to other operating expenses of $14.5
million, or 1.6% of average equity, for the quarter ended March 31,
2018. These include non-cash equity compensation expense of $3.5 million
and $2.3 million, respectively.

Portfolio Summary
The company's aggregate portfolio
is principally comprised of RMBS available-for-sale securities, inverse
interest-only securities (Agency Derivatives) and MSR. As of June 30,
2018, the total value of the company's portfolio was $20.8 billion.

The company's portfolio includes rates and credit strategies. The rates
strategy consisted of $17.3 billion of Agency RMBS, Agency Derivatives
and MSR as well as their associated notional hedges as of June 30, 2018.
The credit strategy consisted of $3.5 billion of non-Agency securities,
as well as their associated notional hedges as of June 30, 2018.

(1) Excludes estimated amortization of $42.2 million, net of tax,
included in Core Earnings, including dollar roll income.
(2) Return
on book value for the quarter ended June 30, 2018 is defined as the
increase in book value per common share from March 31, 2018 to June 30,
2018 of $0.06, plus the dividend declared of $0.47 per common share,
divided by March 31, 2018 book value of $15.63 per common share.

For the quarter ended June 30, 2018, the annualized yield on the
company's average aggregate portfolio was 3.91% and the annualized cost
of funds on the associated average borrowings, which includes net
interest rate spread on interest rate swaps, was 1.98%. This resulted in
a net interest rate spread of 1.93%.

RMBS and Agency Derivatives
For the
quarter ended June 30, 2018, the annualized yield on average RMBS and
Agency Derivatives was 3.7%, consisting of an annualized yield of 3.0%
in Agency RMBS and Agency Derivatives and 8.1% in non-Agency securities.

The company experienced a three-month average constant prepayment rate
(CPR) of 9.2% for Agency RMBS and Agency Derivatives held as of June 30,
2018, compared to 7.0% as of March 31, 2018. The weighted average cost
basis of the principal and interest Agency portfolio was 106.7% of par
and 106.4% of par as of June 30, 2018 and March 31, 2018, respectively.
The net premium amortization was $45.3 million and $44.2 million for the
quarters ended June 30, 2018 and March 31, 2018, respectively.

The company experienced a three-month average CPR of 6.9% for legacy
non-Agency securities held as of June 30, 2018, compared to 5.7% as of
March 31, 2018. The weighted average cost basis of the legacy non-Agency
securities was 61.2% of par as of June 30, 2018, compared to 59.5% of
par as of March 31, 2018. The discount accretion was $22.5 million for
the quarter ended June 30, 2018, compared to $22.2 million for the
quarter ended March 31, 2018. The total net discount remaining was $1.5
billion as of June 30, 2018, compared to $1.3 billion as of March 31,
2018, with $923.8 million designated as credit reserve as of June 30,
2018.

As of June 30, 2018, fixed-rate investments composed 83.1% and
adjustable-rate investments composed 16.9% of the company's RMBS and
Agency Derivatives portfolio.

Mortgage Servicing Rights
As of
June 30, 2018, the company held MSR on mortgage loans with UPB totaling
$119.5 billion.(1) The MSR had a fair market value of $1.5
billion, as of June 30, 2018, and the company recognized fair value
gains of $9.9 million during the quarter ended June 30, 2018.

The company does not directly service mortgage loans, but instead
contracts with appropriately licensed subservicers to handle
substantially all servicing functions in the name of the subservicer for
the loans underlying the company's MSR. The company recognized $77.7
million of servicing income, $11.6 million(1) of servicing
expenses and $0.2 million in servicing reserve release during the
quarter ended June 30, 2018.

Other Investments and Risk Management Derivatives
The
company held $3.0 billion notional of net long to-be-announced
securities ("TBAs") as of June 30, 2018, compared to $0.4 billion
notional of net long TBAs as of March 31, 2018, which are accounted for
as derivative instruments in accordance with GAAP.

As of June 30, 2018, the company was a party to interest rate swaps and
swaptions with a notional amount of $26.8 billion. Of this amount, $26.1
billion notional in swaps were utilized to economically hedge interest
rate exposure (or duration), and $0.7 billion net notional in swaptions
were utilized as macroeconomic hedges.

(1) Excludes residential mortgage loans in securitization trusts for
which the company is the named servicing administrator.

The following tables summarize the company's investment portfolio,
excluding the net TBA positions, as of June 30, 2018 and March 31, 2018:

 
Two Harbors Investment Corp. Portfolio
(dollars in thousands)
 
Portfolio Composition   As of June 30, 2018   As of March 31, 2018
(unaudited) (unaudited)
Rates Strategy        
Agency
Fixed Rate $ 15,768,380 75.6% $ 18,020,641 80.2%
Hybrid ARMs   20,611   0.1%   21,523   0.1%
Total Agency 15,788,991 75.7% 18,042,164 80.3%
Agency Derivatives 73,650 0.4% 81,628 0.4%
Mortgage servicing rights 1,450,261 7.0% 1,301,023 5.8%
Residential mortgage loans held-for-sale 19,490 0.1% 19,679 0.1%
Credit Strategy
Non-Agency
Senior 2,448,062 11.7% 2,026,035 9.0%
Mezzanine 981,326 4.7% 916,877 4.1%
Other   74,975   0.4%   74,301   0.3%
Total Non-Agency 3,504,363 16.8% 3,017,213 13.4%
Residential mortgage loans held-for-sale   9,323   —%   9,749   —%
Aggregate Portfolio $ 20,846,078   $ 22,471,456  
 
   
Portfolio Metrics

Three Months Ended
June 30, 2018

Three Months Ended
March 31, 2018

(unaudited) (unaudited)
Annualized portfolio yield during the quarter 3.91 % 3.77 %
Rates Strategy
Agency RMBS, Agency Derivatives and mortgage servicing rights 3.3 % 3.2 %
Credit Strategy
Non-Agency securities, Legacy(1) 7.8 % 7.5 %
Non-Agency securities, New issue(1) 9.7 % 10.9 %
Residential mortgage loans held-for-sale 4.5 % 4.7 %
 
Annualized cost of funds on average borrowing balance during the
quarter(2)
1.98 % 1.84 %
Annualized interest rate spread for aggregate portfolio during the
quarter
1.93 % 1.93 %
Debt-to-equity ratio at period-end(3) 5.3:1.0 5.9:1.0
Economic debt-to-equity ratio at period-end(4) 6.2:1.0 6.0:1.0
 
Portfolio Metrics Specific to RMBS and Agency Derivatives As of June 30, 2018 As of March 31, 2018
(unaudited) (unaudited)
Weighted average cost basis of principal and interest securities
Agency(5) $ 106.66 $ 106.41
Non-Agency(6) $ 61.15 $ 59.51
Weighted average three month CPR
Agency 9.2 % 7.0 %
Non-Agency 6.9 % 5.7 %
Fixed-rate investments as a percentage of aggregate RMBS and Agency
Derivatives portfolio
83.1 % 86.8 %
Adjustable-rate investments as a percentage of aggregate RMBS and
Agency Derivatives portfolio
16.9 % 13.2 %
 

________________
(1) Legacy non-Agency securities includes
non-Agency bonds issued up to and including 2009. New issue
non-Agency securities includes bonds issued after 2009.
(2)
Cost of funds includes interest spread income/expense associated
with the portfolio's interest rate swaps.
(3) Defined as
total borrowings to fund RMBS, MSR and Agency Derivatives, divided
by total equity.
(4) Defined as total borrowings to fund
RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA
positions, 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, the average purchase price for total legacy
non-Agency securities excluding the company's non-Agency
interest-only portfolio, would be $58.52 at June 30, 2018 and
$57.00 at March 31, 2018.

 

"In the second quarter, we increased our capital allocation to MSR and
non-Agency securities as we took advantage of attractive opportunities
in the market," stated Bill Roth, Two Harbors' Chief Investment Officer.
"Moreover, higher rates and a flatter yield curve during the quarter had
little impact on our performance, consistent with our expectations given
our low risk positioning."

Financing Summary
The company reported a
debt-to-equity ratio, defined as total borrowings under repurchase
agreements, FHLB advances, revolving credit facilities and convertible
senior notes to fund RMBS, Agency Derivatives and MSR divided by total
equity, of 5.3:1.0 as of June 30, 2018. The company reported an economic
debt-to-equity ratio, defined as total borrowings under repurchase
agreements, FHLB advances, revolving credit facilities and convertible
senior notes to fund RMBS, Agency Derivatives and MSR, plus the implied
debt on net TBA positions, divided by total equity, of 6.2:1.0 as of
June 30, 2018.

As of June 30, 2018, the company had outstanding $16.9 billion of
repurchase agreements funding RMBS and Agency Derivatives with 25
different counterparties. Excluding the effect of the company's interest
rate swaps, the repurchase agreements funding RMBS and Agency
Derivatives had a weighted average borrowing rate of 2.30% as of
June 30, 2018.

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, 2018, TH Insurance
had $865.0 million in outstanding secured advances funding RMBS, with a
weighted average borrowing rate of 2.39%.

As of June 30, 2018, the company had outstanding $170.0 million of short
and long-term borrowings secured by MSR collateral under revolving
credit facilities with a weighted average borrowing rate of 5.33% and
remaining maturities of 4.4 years and an additional $250.0 million of
available capacity for borrowings. Additionally, the company had
outstanding $300.0 million of long-term repurchase agreements for MSR,
with a weighted average borrowing rate of 4.26%, with additional
available capacity of $100.0 million.

As of June 30, 2018, the company's aggregate repurchase agreements, FHLB
advances, revolving credit facilities and convertible senior notes
funding RMBS, Agency Derivatives and MSR had a weighted average of 5.3
months to maturity.

The following table summarizes the company's borrowings by collateral
type under repurchase agreements, FHLB advances, revolving credit
facilities and convertible senior notes outstanding as of June 30, 2018
and March 31, 2018, and the related cost of funds for the three months
ended June 30, 2018 and March 31, 2018:

   
As of June 30, 2018 As of March 31, 2018
(in thousands) (unaudited) (unaudited)
Collateral type:
Agency RMBS and Agency Derivatives $ 15,442,916 $ 17,731,102
Mortgage servicing rights 470,000 270,000
Non-Agency securities 2,327,931 2,032,601
Other(1)   283,268     283,054  
$ 18,524,115   $ 20,316,757  
 
Cost of Funds Metrics

Three Months Ended
June 30, 2018

Three Months Ended
March 31, 2018

(unaudited) (unaudited)
Annualized cost of funds on average borrowings during the quarter: 2.3% 1.9%
Agency RMBS and Agency Derivatives 2.0% 1.7%
Mortgage servicing rights(2) 5.2% 5.2%
Non-Agency securities 3.5% 3.1%
Other(1)(2) 6.6% 6.7%

________________
(1) Includes unsecured convertible senior
notes.
(2) Includes amortization of debt issuance costs.

 

Acquisition of CYS Investments, Inc.
On July 31,
2018, the company completed its previously announced acquisition of CYS
Investments, Inc. Upon the closing of the merger, each share of CYS
common stock was converted into the right to receive 0.4680 newly issued
shares of Two Harbors common stock as well as cash consideration of
$0.0965 per share. Based on the number of CYS shares outstanding as of
the closing date, approximately 72.6 million shares of Two Harbors
common stock and $15 million in cash consideration will be issued to CYS
common stockholders in connection with the merger. Also in connection
with the merger, each share of CYS 7.75% Series A Cumulative Redeemable
Preferred Stock was converted into the right to receive one share of
newly classified TWO 7.75% Series D Cumulative Redeemable Preferred
Stock, and each share of CYS 7.50% Series B Cumulative Redeemable
Preferred Stock was converted into the right to receive one share of
newly classified TWO 7.50% Series E Cumulative Redeemable Preferred
Stock.

Additionally, in connection with the merger, the company announced an
interim dividend of $0.158370, which represented a partial payment of
its regular third quarter 2018 common stock dividend, which is expected
to be $0.47 per share. The company expects the remaining $0.311630 per
share portion of its regular third quarter common stock dividend to be
declared in the ordinary course in September 2018.

Conference Call
Two Harbors Investment Corp. will host a
conference call on August 8, 2018 at 9:00 a.m. EDT to discuss second
quarter 2018 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 4095063,
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 8, 2018, through 12:00 a.m. EDT on
August 15, 2018. The playback can be accessed by calling (855) 859-2056
(or (404) 537-3406 for international callers), conference code 4095063.
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, mortgage servicing rights 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, 2017, 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 effectively execute and to realize the benefits
of strategic transactions and initiatives we have pursued or may in the
future pursue; our acquisition of CYS and our ability to realize the
benefits related thereto; 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 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; 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, Core Earnings, including dollar roll income, Core
Earnings per basic common share and Core Earnings per basic common
share, including dollar roll income, 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, 575 Lexington Avenue, Suite 2930, New York, NY
10022, telephone (612) 629-2500.

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

June 30,
2018

 

December 31,
2017

(unaudited)
ASSETS
Available-for-sale securities, at fair value $ 19,293,354 $ 21,220,819
Mortgage servicing rights, at fair value 1,450,261 1,086,717
Residential mortgage loans held-for-sale, at fair value 28,813 30,414
Cash and cash equivalents 417,515 419,159
Restricted cash 564,705 635,836
Accrued interest receivable 61,108 68,309
Due from counterparties 35,385 842,303
Derivative assets, at fair value 257,917 309,918
Other assets   166,930     175,838  
Total Assets $ 22,275,988   $ 24,789,313  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Repurchase agreements $ 17,205,823 $ 19,451,207
Federal Home Loan Bank advances 865,024 1,215,024
Revolving credit facilities 170,000 20,000
Convertible senior notes 283,268 282,827
Derivative liabilities, at fair value 39,429 31,903
Due to counterparties 25,957 88,898
Dividends payable 96,219 12,552
Accrued interest payable 84,296 87,698
Other liabilities   25,727     27,780  
Total Liabilities 18,795,743 21,217,889
Stockholders' Equity
Preferred stock, par value $0.01 per share; 50,000,000 shares
authorized:
8.125% Series A cumulative redeemable: 5,750,000 and 5,750,000
shares issued and outstanding, respectively ($143,750 liquidation
preference)
138,872 138,872
7.625% Series B cumulative redeemable: 11,500,000 and 11,500,000
shares issued and outstanding, respectively ($287,500 liquidation
preference)
278,094 278,094
7.25% Series C cumulative redeemable: 11,800,000 and 11,800,000
shares issued and outstanding, respectively ($295,000 liquidation
preference)
285,584 285,571
Common stock, par value $0.01 per share; 450,000,000 shares
authorized and 175,470,398 and 174,496,587 shares issued and
outstanding, respectively
1,755 1,745
Additional paid-in capital 3,678,586 3,672,003
Accumulated other comprehensive (loss) income (34,933 ) 334,813
Cumulative earnings 2,850,985 2,386,604
Cumulative distributions to stockholders   (3,718,698 )   (3,526,278 )
Total Stockholders' Equity   3,480,245     3,571,424  
Total Liabilities and Stockholders' Equity $ 22,275,988   $ 24,789,313  
 
 
TWO HARBORS INVESTMENT CORP.
CONDENSED 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,
2018   2017 2018   2017
(unaudited) (unaudited)
Interest income:
Available-for-sale securities $ 183,467 $ 149,910 $ 374,183 $ 285,237
Residential mortgage loans held-for-investment in securitization
trusts
30,826 62,454
Residential mortgage loans held-for-sale 349 503 656 901
Other   3,544     3,502     6,540     5,303  
Total interest income 187,360 184,741 381,379 353,895
Interest expense:
Repurchase agreements 97,812 43,806 184,392 76,062
Collateralized borrowings in securitization trusts 24,843 50,229
Federal Home Loan Bank advances 4,896 11,444 9,354 20,237
Revolving credit facilities 999 597 1,803 1,026
Convertible senior notes   4,707     4,591     9,425     8,412  
Total interest expense   108,414     85,281     204,974     155,966  
Net interest income 78,946 99,460 176,405 197,929
Other-than-temporary impairment losses (174 ) (429 ) (268 ) (429 )
Other income (loss):
(Loss) gain on investment securities (31,882 ) 31,249 (52,553 ) (21,103 )
Servicing income 77,665 51,308 148,855 91,081
Gain (loss) on servicing asset 9,853 (46,630 ) 81,660 (61,195 )
Gain (loss) on interest rate swap and swaption agreements 29,133 (76,710 ) 179,678 (66,783 )
Gain (loss) on other derivative instruments 7,675 (19,540 ) 15,728 (47,404 )
Other income   730     3,126     1,788     12,622  
Total other income (loss) 93,174 (57,197 ) 375,156 (92,782 )
Expenses:
Management fees 11,453 9,847 23,161 19,655
Servicing expenses 11,539 11,296 26,093 16,594
Other operating expenses   15,515     17,471     30,007     31,235  
Total expenses   38,507     38,614     79,261     67,484  
Income from continuing operations before income taxes 133,439 3,220 472,032 37,234
(Benefit from) provision for income taxes   (6,051 )   8,759     (2,267 )   (15,758 )
Net income (loss) from continuing operations 139,490 (5,539 ) 474,299 52,992
Income from discontinued operations, net of tax       14,197         27,651  
Net income 139,490 8,658 474,299 80,643
Income from discontinued operations attributable to noncontrolling
interest
      40         40  
Net income attributable to Two Harbors Investment Corp. 139,490 8,618 474,299 80,603
Dividends on preferred stock   13,747     4,285     27,494     4,285  
Net income attributable to common stockholders $ 125,743   $ 4,333   $ 446,805   $ 76,318  
 
 
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME, continued
(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,

2018 2017 2018 2017
(unaudited) (unaudited)
Basic earnings per weighted average common share:
Continuing operations $ 0.72 $ (0.06 ) $ 2.55 $ 0.28
Discontinued operations       0.08         0.16  
Net income $ 0.72   $ 0.02   $ 2.55   $ 0.44  
Diluted earnings per weighted average common share:
Continuing operations $ 0.68 $ (0.06 ) $ 2.36 $ 0.28
Discontinued operations       0.08         0.16  
Net income $ 0.68   $ 0.02   $ 2.36   $ 0.44  
Dividends declared per common share $ 0.47   $ 0.52   $ 0.94   $ 1.02  
Weighted average number of shares of common stock:
Basic   175,451,989     174,473,168     175,299,822     174,378,095  
Diluted   193,212,877     174,473,168     193,016,793     174,378,095  
Comprehensive income:
Net income $ 139,490 $ 8,658 $ 474,299 $ 80,643
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on available-for-sale securities   (34,887 )   81,628     (379,664 )   155,390  
Other comprehensive (loss) income   (34,887 )   81,628     (379,664 )   155,390  
Comprehensive income 104,603 90,286 94,635 236,033
Comprehensive income attributable to noncontrolling interest       42         42  
Comprehensive income attributable to Two Harbors Investment Corp. 104,603 90,244 94,635 235,991
Dividends on preferred stock   13,747     4,285     27,494     4,285  
Comprehensive income attributable to common stockholders $ 90,856   $ 85,959   $ 67,141   $ 231,706  
 
 
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,

2018   2017 2018   2017
(unaudited) (unaudited)
Reconciliation of Comprehensive income to Core Earnings:
 
Comprehensive income attributable to common stockholders $ 90,856 $ 85,959 $ 67,141 $ 145,833
 
Adjustment for other comprehensive loss (income) attributable to
common stockholders:
Unrealized loss (gain) on available-for-sale securities attributable
to common stockholders
  34,887     (81,626 )   379,644     (155,388 )
Net income attributable to common stockholders $ 125,743   $ 4,333   $ 446,805   $ 76,318  
 
Adjustments for non-Core Earnings:
Realized loss (gain) on securities and residential mortgage loans
held-for-sale
39,040 (33,542 ) 58,771 15,507
Unrealized (gain) loss on securities and residential mortgage loans
held-for-sale
(6,735 ) 1,960 (5,482 ) 3,802
Other-than-temporary impairment loss 174 429 268 429
Realized losses (gains) on termination or expiration of swaps and
swaptions
20,450 30,083 (72,029 ) (35,948 )
Unrealized (gain) loss on interest rate swaps and swaptions
economically hedging interest rate exposure (or duration)
(35,743 ) 44,053 (90,000 ) 92,253
(Gain) loss on other derivative instruments (6,047 ) 22,873 (11,646 ) 54,562
Realized and unrealized gains on financing securitizations (1,415 ) (7,992 )
Realized and unrealized (gain) loss on mortgage servicing rights (55,793 ) 14,698 (170,485 ) 2,702
Change in servicing reserves (154 ) (25 ) 111 (2,848 )
Non-cash equity compensation expense 3,530 3,682 5,871 7,637
Net (benefit from) provision for income taxes on non-Core Earnings (7,139 ) 8,206 (4,487 ) (16,129 )
Transaction expenses associated with the contribution of TH
Commercial Holdings LLC to Granite Point
      2,193         2,193  
Core Earnings attributable to common stockholders(1) 77,326 $ 97,528   157,697 $ 192,486  
Dollar roll income   16,539     19,993  
Core Earnings attributable to common stockholders, including dollar
roll income(1)
$ 93,865   $ 177,690  
 
Weighted average basic common shares outstanding 175,451,989 174,473,168 175,299,822 174,378,095
Core Earnings attributable to common stockholders per weighted
average basic common share outstanding
$ 0.44 $ 0.56 $ 0.90 $ 1.10
Dollar roll income per weighted average basic common share
outstanding
  0.09     0.11  
Core Earnings, including dollar roll income, attributable to common
stockholders per weighted average basic common share outstanding
$ 0.53   $ 1.01  

_______________
(1) Core Earnings is a non-U.S. GAAP measure
that we define as comprehensive income attributable to common
stockholders, excluding "realized and unrealized gains and losses"
(impairment losses, realized and unrealized gains and losses on
the aggregate portfolio, reserve expense for representation and
warranty obligations on MSR and non-cash compensation expense
related to restricted common stock and transaction costs related
to the contribution of TH Commercial Holdings LLC to Granite
Point). 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. Dollar
roll income is the economic equivalent to holding and financing
Agency RMBS using short-term repurchase agreements. We believe the
presentation of Core Earnings, including dollar roll income,
provides investors greater transparency into our
period-over-period financial performance and facilitates
comparisons to peer REITs.

 
 
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,
2018
  March 31,
2018
  December 31,
2017
  September 30,
2017
  June 30,
2017
(unaudited)
Net Interest Income:
Interest income $ 187.3 $ 194.0 $ 195.1 $ 195.6 $ 184.7
Interest expense   108.4     96.6     94.8     99.0     85.3  
Net interest income 78.9 97.4 100.3 96.6 99.4
Other income:
Gain on investment securities 0.7 0.6 0.7
Servicing income, net of amortization(1) 31.7 28.3 19.8 18.0 19.4
Interest spread on interest rate swaps 13.8 3.8 2.0 (0.4 ) (2.6 )
Gain on other derivative instruments 1.7 2.5 2.8 2.8 3.3
Other income   0.5     0.7     1.1     1.2     1.4  
Total other income 48.4 35.9 26.4 21.6 21.5
Expenses   35.1     38.1     31.1     28.8     32.7  
Core Earnings before income taxes 92.2 95.2 95.6 89.4 88.2
Income tax expense   1.1     1.1     2.4     2.0     0.6  
Core Earnings from continuing operations 91.1 94.1 93.2 87.4 87.6
Core Earnings attributable to discontinued operations(2)               10.7     14.2  
Core Earnings 91.1 94.1 93.2 98.1 101.8
Dividends on preferred stock   13.7     13.7     11.9     8.9     4.3  
Core Earnings attributable to common stockholders(3) 77.4 80.4 $ 81.3   $ 89.2   $ 97.5  
Dollar roll income   16.5     3.4  
Core Earnings, including dollar roll income, attributable to
common stockholders
(3)
$ 93.9   $ 83.8  
 
Weighted average basic Core EPS $ 0.44   $ 0.46   $ 0.47   $ 0.51   $ 0.56  
Weighted average basic Core EPS, including dollar roll income $ 0.53   $ 0.48  
 
Core earnings return on average common equity 11.1% 11.3% 11.3%

(4)

10.2% 11.2%
Core earnings return on average common equity, including dollar roll
income
13.5% 11.8%

________________
(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.
(2) For the six months ended
December 31, 2017, Core Earnings excludes our controlling interest
in Granite Point's Core Earnings and, for the three months ended
September 30, 2017, includes our share of Granite Point's declared
dividend. We believe this presentation is the most accurate
reflection of our incoming cash associated with holding shares of
Granite Point common stock and assists with the understanding of
the forward-looking financial presentation of the company.
(3)
Please see page 13 for a definition of Core Earnings and a
reconciliation of GAAP to non-GAAP financial information.
(4)
Core Earnings return on average common equity for the quarter
ended December 31, 2017 excludes the company's controlling
interest in Granite Point equity.

 

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