Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2014 Earnings Presentation
26 slides from Two Harbors Investment's earnings presentation, Aug 6, 2014
Slide 1: Second Quarter 2014 Earnings Call
August 7 , 2014 Second Quarter 2014 Earnings Call
Slide 2: Safe Harbor Statement
Safe Harbor Statement F O R W A R D - L O O K I N G S T A T E M EN T S 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, estimate
Slide 3: Executive Summary
Executive Summary ST RO N G S E C O N D Q UA RT E R 2 014 R E S U LT S • Reported book value of $11.09 per share; total return on book value 6.0%(1) — Q2-2014 cash dividend of $0.26 per share • Delivered Comprehensive Income of $230.8 million — Return on average equity of 23.0%, or $0.63 per share •
Slide 4: Macroeconomic & Policy Considerations
Macroeconomic & Policy Considerations M AC RO E C O NO M IC C O N S I D E R AT I O NS • Home price appreciation continues; CoreLogic Home Price Index up 7.5% on rolling 12-month basis(1) • Unemployment recovery • Low interest rates overall • Muted volatility P O L I C Y C O N S I D E R AT IO N S • E
Slide 5: Book Value
Book Value 5 (Dollars in thousands, except per share data) Q2-2014 Book Value ($M) Q2-2014 Book Value per share YTD-2014 Book Value ($M) YTD-2014 Book Value per share Beginning stockholders’ equity – basic $3,919.0 $10.71 $3,855.0 $10.56 GAAP Net Income: Core Earnings, net of tax 89.7 177.9 Realized
Slide 6: Financial Summary
E X P E N S E R AT I O Financial Summary 6 Q 2 - 2 014 F I N A NC IAL H I G H L I G H TS C O R E E A R N I NGS (1 ) Q 2 - 2 014 AC C O U NT ING M AT T E R S (1) See footnote 2 on slide 3 for Core Earnings definition. For a reconciliation of GAAP to non-GAAP financials, refer to the GAAP to non-GAAP
Slide 7: Financing Profile
Financing Profile(1) 7 FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $1.5 billion; using total available borrowing capacity — Average maturity approximately 47 months; borrowing rate 0.4% — Pledged collateral includes Agency RMBS, non-Agency RMBS and prime jumbo residential
Slide 8: Portfolio Performance Summary
Portfolio Performance Summary 8 Q 2 - 2 014 P E R FO R M A NC E H I G H L I G H T S Q 2 - 2 014 N E T I N T E R E ST Y I E L D A N N UAL I ZE D Y I E L D S BY R M BS P O RT FO L I O (5 ) (1) See Appendix page 14 for calculation of second quarter return on book value. (2) Assets in “Rates” include Ag
Slide 9: Targeted Capital Allocation / Portfolio Composition
TA RG ET E D C A P I TAL A L LO C AT I O N Q 2 - 2 014 H I G H L I G H T S P O RT FO L I O C O M P O S I T I O N Portfolio Composition 9 • 57% capital allocation to Rates(4) — Sold approximately half of ARM holdings — Focused on higher coupon, shorter duration assets • 43% capital allocation to Cred
Slide 10: Key Portfolio Metrics
BV E X P O S U R E TO + 100BP S C H A N G E I N R AT E S (2 ) Q 2 - 2 014 H E D G I N G ST R AT E GY Q 2 - 2 014 P O RT FO L I O M E T R I C S Key Portfolio Metrics 10 • Low implied debt-to-equity ratio of 3.0x versus 2.7x at March 31, 2014(1) – Higher due to increased FHLB borrowings; lower short T
Slide 11: Mortgage Loan Conduit and Securitization
Mortgage Loan Conduit and Securitization C O N D U IT I N I T I AT IV E G A I N I NG M O M E N T U M • Prime jumbo holdings $377 million at June 30, 2014 • Pipeline (i.e., interest rate locks) approximately $650 million; up from $154 million at March 31, 2014 • Focus on building additional originato
Slide 12: Mortgage Servicing Rights
Mortgage Servicing Rights AC Q U IRE D $ 5 . 3 B I L L I O N U P B M S R T HRO U G H BU L K A N D F LOW • Completed $4.8 billion UPB bulk purchase from Flagstar Bank ― Underlying pool of Fannie Mae mortgage loans; primarily new production ― Purchase price of approximately $50 million • Purchased $54
Slide 13: Appendix
Appendix
Slide 14: Return on Book Value
Return on Book Value 14 Return on book value Q2-2014 (Per diluted share amounts, except for percentage) Book value at June 30, 2014 $11.09 Book value at March 31, 2014 10.71 Increase in book value 0.38 Dividend declared in Q2-2014 0.26 Return on book value Q2-2014 $0.64 Return on book value Q2-2014(
Slide 15: Financial Performance
D I V I D E NDS (2 ) Financial Performance 15 C O M P R E H E N S I V E I N C O M E ( LO S S ) BO O K VA LU E A N D D I V I DE ND P E R S H A R E (1 ) G A A P N E T I N C O M E ( LO S S ) (1) Diluted shares outstanding at end of period, which includes the effect of dilutive outstanding warrants dete
Slide 16: Operating Performance
Operating Performance 16 (In millions, except for per share data) Core Earnings Realized Gains Unrealized MTM Q1-2014 Financials Core Earnings Realized Gains Unrealized MTM Q2-2014 Financials Interest income $138.5 $ - $ - $138.5 $140.1 $ - $ - $140.1 Interest expense 26.0 - - 26.0 24.9 - - 24.9 Net
Slide 17: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation 17 (In thousands, except for per share data) Three Months Ended March 31, 2014 Three Months Ended June 30, 2014 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net (loss) income attributable to common stockholders $(29,145) $39,657 Adjustments for n
Slide 18: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 18 AGENCY RMBS CPR(5) AGENCY PORTFOLIO YIELDS AND METRICS (1) Agency yield includes impact of Agency Derivatives. Interest income on Agency Derivatives was $7.0 million and $7.9 million for the first and second quarters of 2014, respectively. (2) Cost of financing Agency R
Slide 19: Rates: Agency RMBS
Rates: Agency RMBS 19 As of June 30, 2014 Par Value (M) Market Value (M) % of Agency Portfolio Amortized Cost Basis (M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed 4.0-4.5% $5,328 $5,739 56.0% $5,765 4.2% 24 ≥ 5.0% 764 863 8.4% 829 5.5% 65 $6,092 $6,602 64.4% $6,594 4.4% 30 1
Slide 20: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights 20 As of March 31, 2014 As of June 30, 2014 Fair Value ($M) $476.7 $500.5 Unpaid Principal Balance ($M) $41,596.3 $45,629.2 Weighted Average Coupon 3.9% 3.9% Original FICO Score 738 740 Original LTV 75% 74% 60+ Day Delinquencies 1.0% 1.2% Net Servicing Spread 25 basi
Slide 21: Credit: Non-Agency RMBS Metrics
Credit: Non-Agency RMBS Metrics 21 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Cost of financing non-Agency RMBS includes interest spread expense associated with the portfolio’s interest rate swaps of $2.0 million and $3.1 million for the first and second quarters of
Slide 22: Credit: Non-Agency RMBS
Credit: Non-Agency RMBS 22 As of June 30, 2014 Senior Bonds Mezzanine Bonds Total P&I Portfolio Characteristics: Carrying Value ($M) $2,579.3 $469.5 $3,048.8 % of Credit Portfolio 84.6% 15.4% 100.0% Average Purchase Price(1) $54.68 $59.30 $55.39 Average Coupon 2.3% 1.7% 2.2% Weighted Average Market
Slide 23: FHLB Financing
FHLB Financing(1) 23 (1) As of June 30, 2014. (2) Excludes FHLB membership and activity stock totaling $60.0 million as of June 30, 2014 Collateral Amount ($M) Available–for-sale securities, at fair value $1,355.3 Net economic interests in consolidated securitization trusts 181.6 Mortgage loans held
Slide 24: Interest Rate Swaps and Repurchase Agreements
I N T E R E ST R AT E SWA P S (2 ) Repurchase Agreements(1) 24 (1) As of June 30, 2014. (2) Pledged collateral includes RMBS, Agency Derivatives and mortgage loans held-for-sale; does not include U.S. Treasuries with repurchase agreements of $1.0 billion outstanding. (3) Notional amounts do not incl
Slide 25: Interest Rate Swaptions Hedging Strategy
I N T E R E ST R AT E SWA P T I O NS Hedging Strategy(1) 25 (1) As of June 30, 2014. Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer ≥ 6 Months
Slide 26: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
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