Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2015 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, May 6, 2015
Slide 1: First Quarter 2015 Earnings Call
May 6 , 2015 First Quarter 2015 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: Financial Summary and Business Overview
Financial Summary and Business Overview SOLID F INANCIAL RESULTS • Total return on book value of 2.2%(1) — Q1-2015 cash dividend of $0.26 per share • Comprehensive Income of $88.9 million — Return on average equity of 8.7%, or $0.24 per share • Generated Core Earnings of $94.1 million, or $0.26 per
Slide 4: Market and Policy Update
Market and Policy Update MACROECONOMIC ENVIRONMENT & POLICY CONSIDERATIONS • Low, but volatile, interest rate environment – Roughly 60% probability the Federal Reserve will raise rates by at least 25 basis points by December; expected value of 35 basis points(1) • Home price appreciation continues –
Slide 5: Book Value
Book Value 5 (Dollars in millions, except per share data) Q4-2014 Book Value ($M) Q4-2014 Book Value per share Q1-2015 Book Value ($M) Q1-2015 Book Value per share Beginning stockholders’ equity $4,118.1 $11.25 $4,068.0 $11.10 Cumulative effect of adoption of new accounting principle (ASU 2014-13) n
Slide 6: Financial Summary Q1-2015 Financial Highlights
EXPENSE RATIO Financial Summary 6 Q1-2015 FINANCIAL HIGHLIGHTS CORE EARNINGS (1) (1) See footnote 2 on slide 3 for Core Earnings definition. For a reconciliation of GAAP to non-GAAP financials, refer to Appendix slide 16. (2) Implied debt-to-equity is calculated after including net long or short TBA
Slide 7: Financing Profile
Financing Profile(1) 7 FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $2.6 billion at quarter-end • Average maturity approximately 10.4 years; borrowing rate 0.4% • Capacity was increased to $4.0 billion during the quarter ― $125 million drawn subsequent to quarter-end ― $1.2
Slide 8: Targeted Capital Allocation
TARGETED CAPITAL ALLOCATION Q1-2015 ALLOCATION HIGHLIGHTS PORTFOLIO COMPOSITION Portfolio Composition 8 • 55% capital allocation to Rates — Added specified pools • 45% capital allocation to Credit — Continued sales of legacy non-Agency RMBS(8) — Capital allocation to conduit continued to increase —
Slide 9: Portfolio Performance and Hedging
Portfolio Performance and Hedging 9 Q 1 - 2 015 P E R FO R M A NC E H I G H L I G H TS (1) Assets in “Rates” include Agency RMBS, IIOs (or Agency Derivatives), MSR and Ginnie Mae buyout residential mortgage loans. (2) Assets in “Credit” include non-Agency RMBS, prime jumbo residential mortgage loans
Slide 10: Conduit Update
Conduit Update • Completed two securitizations during the quarter, totaling approximately $575 million unpaid principal balance (UPB) • Pipeline (interest rate locks and prime jumbo residential mortgage loan holdings) strong; approximately $1.2 billion UPB at March 31, 2015 • Retained interest inclu
Slide 11: MSR and Commercial Real Estate Update
• Opportunity has recently become more attractive • Aim to develop high-quality flow seller network • View MSR as an attractive asset for portfolio • Closed first Commercial Real Estate investment – Acquired a $46 million senior mezzanine real estate loan • Building out personnel and infrastructure
Slide 12: Appendix
Appendix
Slide 13: Return on Book Value
Return on Book Value 13 Return on book value Q1-2015 (Per share amounts, except for percentage) Book value at December 31, 2014 $11.10 Book value at March 31, 2015 $11.08 Decrease in book value ($0.02) Dividend declared in Q1-2015 $0.26 Return on book value Q1-2015 $0.24 Return on book value Q1-2015
Slide 14: Financial Performance
DIV IDENDS (1) Financial Performance 14 COMPREHENSIVE INCOME BOOK VALUE AND DIV IDEND PER SHARE (1) GAAP NET INCOME (LOSS) (1) Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes dividends based on its taxable income per common share, not G
Slide 15: Operating Performance
Operating Performance 15 (In millions, except for per share data) Core Earnings Realized Gains Unrealized MTM Q4-2014 Financials Core Earnings Realized Gains Unrealized MTM Q1-2015 Financials Interest income $156.2 $ - $ - $156.2 $163.0 $ - $ - $163.0 Interest expense 31.7 - - 31.7 33.5 - - 33.5 Net
Slide 16: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation (In thousands, except for per share data) Three Months Ended December 31, 2014 Three Months Ended March 31, 2015 Reconciliation of GAAP to non-GAAP Information Core Earnings: Net (loss) income $(36,963) $94,793 Adjustments for non-core earnings: Gain on sale of s
Slide 17: Rates: Agency RMBS Metrics
6.4% 8.5% 7.9% 7.5% 8.2% 0.0% 5.0% 10.0% 15.0% Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Agency RMBS CPR Rates: Agency RMBS Metrics 17 AGENCY RMBS CPR(3) AGENCY PORTFOLIO YIELDS AND METRICS (1) Securities collateralized by loans of less than or equal to $175K, but more than $85K. (2) Securities collat
Slide 18: Rates: Agency RMBS
Rates: Agency RMBS 18 As of March 31, 2015 Par Value ($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% $852 $902 7.7% $905 3.5% 3 4.0-4.5% $6,309 $6,898 58.9% $6,775 4.2% 22 ≥ 5.0% $664 $756 6.5% $719 5
Slide 19: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights 19 As of Jun. 30, 2014 As of Sept. 30, 2014 As of Dec. 31, 2014 As of Mar. 31, 2015 Fair Value ($M) $500.5 $498.5 $452.0 $410.2 Unpaid Principal Balance ($M) $45,629.2 $45,526.8 $44,949.1 $43,974.9 Weighted Average Coupon 3.9% 3.9% 3.9% 3.9% Original FICO Score 740 7
Slide 20: Credit: Non-Agency RMBS Metrics
Credit: Non-Agency RMBS Metrics 20 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for w
Slide 21: Credit: Non-Agency RMBS
Credit: Non-Agency RMBS 21 As of March 31, 2015 Senior Bonds Mezzanine Bonds Total P&I Portfolio Characteristics: Carrying Value ($M) $2,086.2 $722.2 $2,808.4 % of Credit Portfolio 74% 26% 100% Average Purchase Price(1) $57.63 $74.46 $61.96 Average Coupon 2.5% 2.6% 2.6% Weighted Average Market Price
Slide 22: Repo and FHLB Financing
Repo and FHLB Financing(1) 22 (1) As of March 31, 2015. (2) Repo pledged collateral does not include U.S. Treasuries with repurchase agreements of $2.0 billion outstanding, cash and cash equivalents (restricted and unrestricted) and collateral due from counterparties. (3) Excludes FHLB membership an
Slide 23: Interest Rate Swaps
Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers Hedging Repo and FHLB Advances 2016 $3.4 0.644% 0.268% 1.37 2017 $4.3 1.075% 0.266% 2.35 2018 $2.8 1.145% 0.266% 2.93 2019 and after $1.7 2.350% 0.260% 7.80 $12.2 1.152% 0.266% 2.98 Other Pay
Slide 24: Interest Rate Swaptions
Interest Rate Swaptions(1) 24 (1) As of March 31, 2015. Option Underlying Swap Swaption Expiration Cost ($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 $259.3 $112.1 53.14 $9,210 4.
Slide 25: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
Two Harbors Investment — Q1 2015 Earnings Presentation on 6ix