Two Harbors Investment Corp · NYSE:TWO

Two Harbors Investment — Q1 2013 Earnings Presentation

22 slides from Two Harbors Investment's earnings presentation, May 7, 2013

  1. Slide 1: First Quarter 2013 Earnings Call

    Two Harbors Investment Corp. First Quarter 2013 Earnings Call May 8, 2013

  2. Slide 2: Forward-Looking Statements

    2 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, reade

  3. Slide 3: Executive Summary

    Executive Summary First Quarter Results – Exceptional Economic Return  Generated exceptional economic return in Q1-2013 with $248 million in comprehensive income, or $0.81 per diluted weighted average common share. ― Comprehensive income was driven by strong non-Agency performance.  Generated tota

  4. Slide 4: Macroeconomic Update

    Macroeconomic Update (1) Source: CoreLogic Home Price Index rolling 12-month change as of February 28, 2013. Key Macroeconomic Factors that Impact our Business Home Prices  The U.S. housing market continues to perform well, with the CoreLogic Home Price Index +10%1 on a rolling 12-month basis. Empl

  5. Slide 5: Investment Opportunities

    5 Investment Opportunities Expansion of Core Competency Set  Agency and non-Agency markets  Progress on several new opportunities: ― Mortgage Servicing Rights (MSRs) ― Securitization ― Credit Sensitive Loans (CSLs)  Criteria for evaluating investment opportunities includes the following: ― Based

  6. Slide 6: Financial Summary

    110 110 Financial Summary Financial Highlights Core Earnings1 Expense Ratio  Core Earnings1 of $0.29 per weighted average share represents an annualized ROE of 9.7%.  GAAP Earnings of $0.47 per weighted average share.  Expense ratio of 0.7% is in-line with fourth quarter.  Leverage declined to 3

  7. Slide 7: Book Value

    7 Book Value Book Value Q1-2013 Book Value ($M) Common Shares Outstanding Net Book Value Per Common Share Beginning stockholders’ equity $ 3,450.6 298.8 $ 11.55 GAAP Net Income: Core Earnings, net of tax 89.7 Realized gains and losses, net of tax (49.8) Unrealized mark-to-market losses, net of tax 1

  8. Slide 8: Financing Profile

    8 Financing Profile High-Quality Non-Agency Counterparties3 Diverse Agency Counterparties2  We continue to ladder repo maturities, and average 821 days to maturity. We currently have 24 counterparties.  The majority of repo is held with counterparties having a CDS spread of <1501, indicating low o

  9. Slide 9: Portfolio Performance Summary

    110  Agency portfolio underperformed as spreads widened  Performance driven by non-Agency strategy  Returned 8.5%1 on book value, outperforming the benchmark indices shown below Sector Q1-2013 Agency Strategy: Barclays US MBS Fixed Rate Index vs. duration-matched swap at 6:1 leverage -0.2% Credit

  10. Slide 10: Portfolio Composition

    110 110 Portfolio Composition 10 (1) Includes Agency Derivatives (“IIOs”) of $309.7 million. (2) Home Equity Conversion Mortgage loans (“HECM”) are loans that allow the homeowner to convert home equity into cash collateralized by the value of their home. (3) “Other” category includes CSLs of $123 mi

  11. Slide 11: Key Portfolio Metrics

    110 (0.9%) (3.1%) (1.1%) (1.8%) 0.1% (10%) (6%) (2%) 11 110 Key Portfolio Metrics  Continued to realize low and stable CPRs  98% of Agency securities with implicit or explicit prepayment protection  Targeted debt-to-equity ratios: ― Agency: 6.0-7.0x ― Non-Agency: 1.0-1.5x (1) Agency weighted aver

  12. Slide 12: Hybrid Model Provides Flexibility

    12 Hybrid Model Provides Flexibility Prime Jumbo Securitization  Opportunity to create attractive mortgage credit investment is beneficial to shareholders  Participated in a prime jumbo securitization in 1Q13  Continue building aggregation capabilities Credit Sensitive Loans (CSLs)  Very similar

  13. Slide 13: Appendix

    13 Appendix

  14. Slide 14: Q1-2013 Return on Book Value of 8.5%

    14 Q1-2013 Return on Book Value of 8.5% Return on book value1 (Per diluted share amounts, except for percentage) Book value at March 31, 2013 $ 11.19 Book value at December 31, 2012 11.54 Decrease in book value (0.35) Dividend declared in 1Q132 1.33 Return on book value ($) $ 0.98 Return on book val

  15. Slide 15: Operating Performance

    15 110 Operating Performance 110 110 $195.7 $141.6 $524.4 $185.4 $248.0 44.5% 26.6% 70.2% 21.6% 26.9% 0.0% 50.0% 100.0% $0.0 $200.0 $400.0 $600.0 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Comprehensive Income ($M) Comprehensive Income ROAE (%) (1) Diluted shares outstanding at end of period, which inc

  16. Slide 16: Operating Performance

    16 Operating Performance (1) First quarter 2013 loss on interest rate swap includes $14.0 million in interest costs, of which $1.2 million relates to swaps associated with U.S. Treasuries. (2) Core Earnings includes $3.8 million and $1.5 million of net premium amortization on credit default swaps fo

  17. Slide 17: Silver Bay Stock Dividend

    17 Silver Bay Stock Dividend1 Considerations for basis in Two Harbors common stock:  On or about April 24, 2013, Two Harbors distributed shares of Silver Bay common stock that, for tax purposes, equated to $0.95 per share. Two Harbors’ stockholders of record as of April 2, 2013 were entitled to rec

  18. Slide 18: Portfolio Yields and Metrics

    18 Portfolio Metrics 110 Portfolio Yield Realized Q4-2012 At Dec 31, 2012 Realized Q1-2013 At March 31, 2013 Annualized yield1 4.0% 4.0% 4.0% 3.8% Agency1 2.9% 2.9% 2.9% 2.9% Non-Agency 9.5% 9.4% 9.2% 9.2% Cost of financing2 1.1% 1.2% 1.1% 1.1% Net interest spread 2.9% 2.8% 2.9% 2.7% Portfolio Metri

  19. Slide 19: Financing and Hedging Strategy

    110 110 March 31, 2013 Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2013 $ 500 0.523% 0.288% 0.40 2014 900 0.316% 0.304% 0.79 2015 4,000 0.386% 0.305% 1.78 2016 2,550 0.583% 0.298% 2.92 2017 and after 7,735 0.975% 0.294% 4.81 $ 15,685 0.

  20. Slide 20: Agency Securities as of March 31, 2013

    20 Agency Securities as of March 31, 2013 Par Value ($M) Market Value ($M) % of Agency Portfolio Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed 3.0-3.5% $ 3,811 $ 3,960 32.4% $ 4,018 3.1% 6 4.0-4.5% 3,489 3,821 31.2% 3,786 4.2% 12 ≥ 5.0% 989 1,106 9.0%

  21. Slide 21: Non-Agency Securities as of March 31, 2013

    21 Non-Agency Securities as of March 31, 2013 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,451 $576 $3,027 % of Non-Agency Portfolio 81.0% 19.0% 100.0% Average Purchase Price1 $51.05 $57.35 $52.25 Average Coupon 1.8% 1.3% 1.7% Collateral Attributes Av

  22. Slide 22: Agency: Vintage & Prepayment Protection

    Agency: Vintage & Prepayment Protection Q4-2012 Q1-2013 High LTV (predominately MHA)1 27% 27% $85K Max Pools2 20% 22% HECM3 17% 15% Other Low Loan Balance Pools4 16% 15% Low FICO5 7% 7% Prepayment protected 5% 5% Seasoned (2005 and prior vintages) 4% 5% 2006 & subsequent vintages - Discount 2% 2% 20

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