Two Harbors Investment Corp · NYSE:TWO

Two Harbors Investment — Q3 2013 Earnings Presentation

23 slides from Two Harbors Investment's earnings presentation, Nov 5, 2013

  1. Slide 1: Third Quarter 2013 Earnings Call

    Two Harbors Investment Corp. Third Quarter 2013 Earnings Call November 6, 2013

  2. Slide 2: Forward-Looking Statements

    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

  3. Slide 3: Executive Summary

    Executive Summary 3 Third Quarter Results – Focus on Book Value Preservation  Portfolio positioned defensively to protect book value from potentially rising interest rates and wider mortgage spreads.  Reported book value of $10.35 per diluted common share and declared a dividend of $0.28 per share

  4. Slide 4: Progress on New Investment Initiatives

    Progress on New Investment Initiatives 4 Mortgage Servicing Rights (MSRs)  We made significant progress toward allocating capital to MSRs through: ― Two-year flow sale agreement with PHH Mortgage Corporation acquiring MSRs on newly originated residential mortgage loans ― Acquiring two small bulk MS

  5. Slide 5: Monitoring Key Macroeconomic Factors

    Monitoring Key Macroeconomic Factors 5 (1) Source: CoreLogic Home Price Index rolling 12-month change as of August 31, 2013. Interest Rates  Interest rates were relatively unchanged but highly volatile in the quarter.  We were positioned defensively against a rise in interest rates and wider mortg

  6. Slide 6: Financial Summary

    110 110 Financial Summary Financial Highlights Core Earnings(1) Expense Ratio  Core Earnings(1) of $0.19 per weighted average share represents an annualized return on average equity of 7.1%.  Debt-to-equity is 3.0x compared to 3.6x at June 30, 2013.  Expense ratio modestly increased to 1.0% from

  7. Slide 7: Book Value

    Book Value 7 Book Value Q3-2013 Book Value ($M) Q3-2013 Book Value per Share Year-to-date 2013(2) Book Value ($M) Year-to-date 2013(2) Book Value per Share Beginning Stockholders’ equity – basic $3,834.1 $10.48 $3,450.6 $11.55 GAAP Net Income: Core Earnings, net of tax 67.7 235.5 Realized gains and

  8. Slide 8: Financing Profile and Counterparties

    Diverse Agency Counterparties(2) Financing Profile 8 High-Quality Non-Agency Counterparties(3)  We continue to ladder repo maturities, and average 76 days to maturity. We had 24 counterparties at quarter-end.  As of today, substantially all of our repo maturities have been rolled past year-end. 

  9. Slide 9: Portfolio Performance Summary

    110  Significant outperformance vs. benchmark indices year-to-date as a result of prudent risk management  Defensive portfolio positioning in Q3-2013 led to modest return in the quarter  Yields increased due to a larger allocation to non- Agencies Portfolio Performance Summary Three Months Ended

  10. Slide 10: Portfolio Composition

    110 110 Portfolio Composition 10 (1) Home Equity Conversion Mortgage loans (HECMs) are loans that allow the homeowner to convert home equity into cash collateralized by the value of their home. (2) Includes Agency Derivatives (IIOs) of $223.7 million. (3) “Rates” category includes Agency securities

  11. Slide 11: Key Portfolio Metrics

    110 (1.1%) (1.8%) 0.1% 9.9% (1.2%) (10%) (6%) (2%) 2% 6% 10%Key Portfolio Metrics Portfolio Metrics Q2-2013 Q3-2013 Agency Weighted average 3-month CPR(3) 8.7% 8.7% Weighted average cost basis(4) $108.0 $108.0 Non-Agency Weighted average 3-month CPR 4.0% 4.0% Weighted average cost basis(4) $52.2 $52

  12. Slide 12: Mortgage Servicing Rights (MSRs)

    Mortgage Servicing Rights (MSRs) 12 Flow agreement with PHH Mortgage Corporation to acquire MSRs  Right to acquire MSRs on at least 50% of eligible new Fannie Mae and Ginnie Mae mortgage loans, subject to quarterly pricing  Subservicing agreement with PHH Mortgage Corporation to provide ongoing se

  13. Slide 13: Mortgage Loan Conduit and Securitization

    Mortgage Loan Conduit and Securitization 13 Completed a prime jumbo securitization using our own depositor  Agate Bay Mortgage Trust 2013-1, a $434 million securitization of prime jumbo loans Ongoing progress building out originator platform  Approximately 30 originators in various stages of appro

  14. Slide 14: Appendix

    14 Appendix

  15. Slide 15: Return on Book Value

    Return on Book Value Return on book value Q3-2013(1) (Per diluted share amounts, except for percentage) Book value at September 30, 2013 ($) $10.35 Book value at June 30, 2013 10.47 Decrease in book value (0.12) Dividend declared in Q3-2013 0.28 Return on book value Q3-2013 ($) $0.16 Return on book

  16. Slide 16: Operating Performance

    Operating Performance 16 110 110 $524.4 $185.4 $248.0 ($146.1) $54.0 70.2% 21.6% 26.9% (14.2%) 5.7% -50% 0% 50% 100% ($300) $0 $300 $600 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Comprehensive Income ($M) Comprehensive Income ROAE (%) (1) Historical dividends may not be indicative of future dividend d

  17. Slide 17: Operating Performance

    Operating Performance 17 (1) Q3-2013 loss on interest rate swap includes $15.1 million in interest costs, of which $1.5 million relates to swaps associated with U.S. Treasuries. (2) Core Earnings includes $3.7 million and $9.0 million of net premium amortization on credit default swaps for the secon

  18. Slide 18: Reconciliation of GAAP to non-GAAP Information

    Operating Performance 18 Three Months Ended September 30, 2013 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net (loss) income attributable to common stockholders $ (192,728) Adjustments for non-core earnings: Loss (gain) on sale of securities and mortgage loans, net of tax 240,223 U

  19. Slide 19: Portfolio Yields and Metrics

    Portfolio Metrics 19 110 Portfolio Yield Realized Q2-2013 At June 30, 2013 Realized Q3-2013 At September 30, 2013 Annualized yield(1) 3.7% 3.8% 4.0% 4.1% Agency(1) 2.7% 2.8% 2.8% 2.9% Non-Agency 9.1% 9.1% 9.0% 9.0% Cost of financing(2) 1.2% 1.2% 1.2% 1.2% Net interest spread 2.5% 2.6% 2.8% 2.9% Port

  20. Slide 20: Financing and Hedging Strategy

    110 110 Financing and Hedging Strategy Swaps Maturities Notional Amounts ($M) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) 2014 $ 900 0.318% 0.269% 0.29 2015 4,000 0.386% 0.270% 1.28 2016 2,650 0.579% 0.263% 2.42 2017 4,225 0.888% 0.263% 3.62 2018 and after 2,325 1.294% 0.259

  21. Slide 21: Agency Securities as of September 30, 2013

    Agency Securities as of September 30, 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% $736 $749 7.5% $783 3.5% 16 4.0-4.5% 3,942 4,166 41.9% 4,281 4.1% 16 ≥ 5.0% 877 969 9.8% 953 5.6% 57 $

  22. Slide 22: Non-Agency Securities as of September 30, 2013

    22 Non-Agency Securities as of September 30, 2013 Senior Bonds Mezzanine Bonds Total P&I Bonds Portfolio Characteristics Carrying Value ($M) $2,421 $525 $2,946 % of Non-Agency Portfolio 82.2% 17.8% 100.0% Average Purchase Price(1) $51.20 $59.21 $52.63 Average Coupon 1.8% 1.6% 1.7% Collateral Attribu

  23. Slide 23: Agency: Vintage & Prepayment Protection

    Agency: Vintage & Prepayment Protection Q2-2013 Q3-2013 High LTV (predominately MHA)(1) 26% 24% HECM 15% 18% $85K Max Pools(2) 20% 14% 2006 & subsequent vintages – Premium and IOs 8% 14% Low FICO(3) 6% 7% 2006 & subsequent vintages – Discount 2% 7% Seasoned (2005 and prior vintages) 5% 6% Other Low

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