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Two Harbors Investment Corp. Reports Fourth Quarter 2016 Financial Results

Delivered Total Stockholder Return of 20% in 2016 (1)

MSR Instrumental to Fourth Quarter Book Value Stability

Category:

Monday, February 6, 2017 4:16 pm EST

Dateline:

NEW YORK

Public Company Information:

NYSE:
TWO
"We are excited about the year ahead and the opportunity to continue deploying capital in a manner that maximizes shareholder value."

NEW YORK--(BUSINESS WIRE)--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), commercial real estate and other financial assets, today announced its financial results for the quarter ended December 31, 2016.

Quarterly Summary

  • Reported book value of $9.78 per common share, representing a 0.1%(2) total quarterly return on book value after accounting for a dividend of $0.24 per share.
  • Delivered Comprehensive Income of $2.2 million, a return on average equity of 0.3%, or $0.01 per weighted average common share.
  • Reported Core Earnings of $83.4 million, or $0.24 per weighted average common share.(3)

2016 Summary

  • Delivered total stockholder return of 20% in 2016.(1)
  • Generated total annual return on book value of 5.9%, after accounting for dividends of $0.93 per share.(4)
  • Completed wind down of mortgage loan conduit consistent with our timeline and expense expectations; reallocated capital to assets with higher anticipated returns, including MSR and commercial real estate.
  • Added $32.0 billion unpaid principal balance (UPB) of MSR; total fair market value of $693.8 million at December 31, 2016.
  • Increased capital allocated to commercial real estate strategy; aggregate portfolio carrying value of $1.4 billion at December 31, 2016.
  • Repurchased 8.0 million shares, at an average price of $7.64 per share, representing 2.3% of shares outstanding at December 31, 2016.

“Despite the market volatility in the quarter, our ability to protect book value while generating strong earnings illustrates the merits of our approach to risk management,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “We delivered a 20% total shareholder return in 2016, and the progress we have made on our strategic plan has us well positioned to increase our earnings potential in the year ahead.”

 
(1) Two Harbors’ total stockholder return is calculated for the period December 31, 2015 to December 31, 2016. Total stockholder return is defined as stock price appreciation including dividends. Source: Bloomberg.
(2) Return on book value for the quarter ended December 31, 2016 is defined as the decrease in book value from September 30, 2016 to December 31, 2016 of $0.23, plus the dividend declared of $0.24 per share, divided by September 30, 2016 book value of $10.01 per share.
(3) Core Earnings is a non-GAAP measure. Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
(4) Return on book value for the year ended December 31, 2016 is defined as the decrease in book value from December 31, 2015 to December 31, 2016 of $0.33, plus dividends declared of $0.93 per share, divided by December 31, 2015 book value of $10.11 per share.
 

Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the fourth quarter of 2016:

 
Two Harbors Investment Corp. Operating Performance (unaudited)
(dollars in thousands, except per share data)
 
 

Three Months Ended
December 31, 2016

 

Year Ended
December 31, 2016

Earnings

Earnings  

Per
weighted
share

 

Annualized
return on
average
equity

Earnings  

Per
weighted
share

 

Annualized
return on
average
equity

Comprehensive Income $ 2,187 $ 0.01 0.3 % $ 193,444 $ 0.56 5.6 %
GAAP Net Income $ 341,403 $ 0.98 39.4 % $ 353,278 $ 1.01 10.2 %
Core Earnings(1) $ 83,392 $ 0.24 9.6 % $ 313,927 $ 0.90 9.1 %
 

Operating Metrics

Dividend per common share $0.24
Book value per share at period end $9.78

Other operating expenses as a percentage of average equity

1.9%

________________

(1) Please see page 13 for a reconciliation of GAAP to non-GAAP financial information.

 

Earnings Summary
Two Harbors reported Comprehensive Income of $2.2 million, or $0.01 per weighted average common share outstanding, for the quarter ended December 31, 2016, as compared to Comprehensive Income of $136.5 million, or $0.39 per weighted average common share outstanding, for the quarter ended September 30, 2016. 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 equity of 0.3% and 15.7% for the quarters ended December 31, 2016 and September 30, 2016, respectively.

The company reported GAAP Net Income of $341.4 million, or $0.98 per weighted average common share outstanding, for the quarter ended December 31, 2016, as compared to GAAP Net Income of $117.8 million, or $0.34 per weighted average common share outstanding, for the quarter ended September 30, 2016. On a GAAP Net Income basis, the company recognized an annualized return on average equity of 39.4% and 13.6% for the quarters ended December 31, 2016 and September 30, 2016, respectively.

For the fourth quarter of 2016, the company recognized:

  • net realized losses on RMBS and mortgage loans held-for-sale of $158.0 million, net of tax;
  • net unrealized gains on certain RMBS and mortgage loans held-for-sale of $14.8 million, net of tax;
  • net gains of $40.8 million, net of tax, related to swap and swaption terminations and expirations;
  • net unrealized gains of $138.5 million, net of tax, associated with interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and Federal Home Loan Bank (FHLB) of Des Moines advances;
  • net realized and unrealized gains on other derivative instruments of approximately $87.8 million, net of tax;
  • net realized and unrealized losses on consolidated financing securitizations of $6.7 million, net of tax;
  • net realized and unrealized gains of $142.7 million(1) on MSR, net of tax; and
  • restructuring charges of $1.8 million, net of tax.
(1)   Excludes estimated amortization of $31.6 million, net of tax, included in Core Earnings.

The company reported Core Earnings for the quarter ended December 31, 2016 of $83.4 million, or $0.24 per weighted average common share outstanding, as compared to Core Earnings for the quarter ended September 30, 2016 of $82.5 million, or $0.24 per weighted average common share outstanding. On a Core Earnings basis, the company recognized an annualized return on average equity of 9.6% and 9.5% for the quarters ended December 31, 2016 and September 30, 2016, respectively.

Other Key Metrics
Two Harbors declared a quarterly cash dividend of $0.24 per common share for the quarter ended December 31, 2016. The annualized dividend yield on the company’s common stock for the quarter, based on the December 31, 2016 closing price of $8.72, was 11.0%.

The company’s book value per share, after taking into account the fourth quarter 2016 dividend of $0.24 per share, was $9.78 as of December 31, 2016, compared to $10.01 as of September 30, 2016, which represented a total return on book value for the quarter of 0.1%.(1)

Other operating expenses for the quarter ended December 31, 2016 were approximately $16.2 million, or 1.9% of average equity, compared to approximately $14.8 million, or 1.7% of average equity, for the quarter ended September 30, 2016.

Portfolio Summary
The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities (Agency Derivatives), MSR, net economic interests in consolidated securitization trusts and commercial real estate assets. As of December 31, 2016, the total value of the company’s portfolio was $15.6 billion.

The company’s portfolio includes rates, credit and commercial real estate strategies. The rates strategy consisted of $12.1 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of December 31, 2016. The credit strategy consisted of $2.1 billion of non-Agency RMBS, net economic interests in consolidated securitization trusts, as well as their associated notional hedges as of December 31, 2016. The commercial strategy consisted of senior and mezzanine commercial real estate assets with an aggregate carrying value of $1.4 billion as of December 31, 2016.

For the quarter ended December 31, 2016, the annualized yield on the company’s average aggregate portfolio was 3.54% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.17%. This resulted in a net interest rate spread of 2.37%.

RMBS and Agency Derivatives
For the quarter ended December 31, 2016, the annualized yield on average RMBS and Agency Derivatives was 3.6%, consisting of an annualized yield of 3.0% in Agency RMBS and Agency Derivatives and 8.7% in non-Agency RMBS.

The company experienced a three-month average constant prepayment rate (CPR) of 7.1% for Agency RMBS and Agency Derivatives held as of December 31, 2016, compared to 9.7% for those securities held as of September 30, 2016. The weighted average cost basis of the principal and interest Agency portfolio was 105.9% of par as of December 31, 2016 and 105.6% of par as of September 30, 2016. The net premium amortization was $28.6 million and $33.0 million for the quarters ended December 31, 2016 and September 30, 2016, respectively.

(1)   Return on book value for the quarter ended December 31, 2016 is defined as the decrease in book value from September 30, 2016 to December 31, 2016 of $0.23, plus the dividend declared of $0.24 per share, divided by September 30, 2016 book value of $10.01 per share.

The company experienced a three-month average CPR of 6.2% for non-Agency principal and interest RMBS held as of December 31, 2016, as compared to 7.3% for those securities held as of September 30, 2016. The weighted average cost basis of the non-Agency portfolio was 57.9% of par as of December 31, 2016, compared to 59.1% of par as of September 30, 2016. The discount accretion was $20.3 million for the quarter ended December 31, 2016, compared to $18.3 million for the quarter ended September 30, 2016. The total net discount remaining was $1.2 billion as of December 31, 2016, compared to $1.1 billion as of September 30, 2016, with $0.4 billion designated as credit reserve as of December 31, 2016.

As of December 31, 2016, fixed-rate investments composed 86.9% and adjustable-rate investments composed 13.1% of the company’s RMBS and Agency Derivatives portfolio.

As of December 31, 2016, the company had residential mortgage loans held-for-investment with a carrying value of $3.3 billion and the company’s collateralized borrowings had a carrying value of $3.0 billion, resulting in net economic interests in consolidated securitization trusts of $234.1 million.

Mortgage Servicing Rights
As of December 31, 2016, the company held MSR on mortgage loans with UPB totaling $62.8 billion.(1) The MSR had a fair market value of $693.8 million, as of December 31, 2016, and the company recognized fair value gains of $127.9 million during the quarter ended December 31, 2016.

The company does not directly service mortgage loans, but instead contracts with fully licensed subservicers to handle substantially all servicing functions for the loans underlying the company’s MSR. The company recognized $34.9 million of servicing income, $7.2 million(1) of servicing expenses and $0.1 million in servicing reserve expense during the quarter ended December 31, 2016.

Commercial Real Estate
The company originates and acquires senior and mezzanine commercial real estate assets. These assets are U.S.-domiciled and are secured by a diverse mix of property types, which includes office, retail, multifamily, hotel and industrial properties. As of December 31, 2016, the company held senior and mezzanine commercial real estate assets with an aggregate carrying value of $1.4 billion. For the quarter ended December 31, 2016, the annualized yield on commercial real estate loans was 6.1%, as compared to 6.2% for the quarter ended September 30, 2016.

Residential Mortgage Loans Held for Sale
In the quarter, the company sold substantially all of its remaining portfolio of prime jumbo residential mortgage loans. As previously disclosed, the company discontinued its mortgage loan conduit and securitization business.

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

Other Investments and Risk Management Derivatives
The company held $1.5 billion notional of net short TBAs as of December 31, 2016, which are accounted for as derivative instruments in accordance with GAAP.

As of December 31, 2016, the company was a party to interest rate swaps and swaptions with a notional amount of $20.6 billion. Of this amount, $10.1 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s LIBOR-based repurchase agreements and FHLB advances, $10.3 billion notional in swaps were utilized to economically hedge interest rate risk associated with the company’s investment portfolio, and $0.2 billion net notional in swaptions were utilized as macroeconomic hedges.

The following tables summarize the company’s investment portfolio as of December 31, 2016 and September 30, 2016:

 
Two Harbors Investment Corp. Portfolio
(dollars in thousands)
 
Portfolio Composition   As of December 31, 2016   As of September 30, 2016
(unaudited) (unaudited)
Rates Strategy        
Agency Bonds
Fixed Rate Bonds $ 11,196,011 71.6 % $ 12,404,228 73.1 %
Hybrid ARMs   30,463   0.2 %   32,588   0.2 %
Total Agency 11,226,474 71.8 % 12,436,816 73.3 %
Agency Derivatives 126,599 0.8 % 141,232 0.8 %
Mortgage servicing rights 693,815 4.4 % 455,629 2.7 %
Residential mortgage loans held-for-sale 28,732 0.2 % 56,908 0.4 %
Credit Strategy
Non-Agency Bonds
Senior Bonds 1,210,462 7.8 % 1,192,975 7.1 %
Mezzanine Bonds 687,644 4.4 % 649,993 3.8 %
Non-Agency Other   4,277   %   4,841   %
Total Non-Agency 1,902,383 12.2 % 1,847,809 10.9 %
Net Economic Interest in Securitization(1) 234,121 1.5 % 244,131 1.4 %
Residential mortgage loans held-for-sale 11,414 0.1 % 666,266 3.9 %
Commercial real estate assets   1,412,543   9.0 %   1,114,548   6.6 %
Aggregate Portfolio $ 15,636,081   $ 16,963,339  

________________

(1) Net economic interest in securitization consists of residential mortgage loans held-for-investment, net of collateralized borrowings in consolidated securitization trusts.

 
   
Portfolio Metrics Three Months Ended
December 31, 2016

Three Months Ended
September 30, 2016

(unaudited) (unaudited)
Annualized portfolio yield during the quarter 3.54 % 3.50 %
Rates Strategy
Agency RMBS, Agency Derivatives and mortgage servicing rights 2.6 % 2.6 %
Credit Strategy
Non-Agency RMBS, Legacy(1) 9.1 % 9.1 %
Non-Agency MBS, New issue(1) 6.4 % 6.1 %
Net economic interest in securitizations 12.0 % 9.3 %
Residential mortgage loans held-for-sale 4.0 % 4.1 %
Commercial Strategy 6.1 % 6.2 %
 
Annualized cost of funds on average borrowing balance during the quarter(2) 1.17 % 1.08 %
Annualized interest rate spread for aggregate portfolio during the quarter 2.37 % 2.42 %
Debt-to-equity ratio at period-end(3) 3.9:1.0 4.2:1.0
 
Portfolio Metrics Specific to RMBS and Agency Derivatives As of December 31, 2016 As of September 30, 2016
(unaudited) (unaudited)
Weighted average cost basis of principal and interest securities
Agency(4) $ 105.85 $ 105.64
Non-Agency(5) $ 57.86 $ 59.05
Weighted average three month CPR
Agency 7.1 % 9.7 %
Non-Agency 6.2 % 7.3 %
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio 86.9 % 88.1 %
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio 13.1 % 11.9 %

________________

(1) Legacy non-Agency RMBS includes non-Agency bonds issued up to and including 2009. New issue non-Agency MBS includes bonds issued after 2009.
(2) Cost of funds includes interest spread expense associated with the portfolio's interest rate swaps.
(3) Defined as total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate assets, MSR and Agency Derivatives, divided by total equity.
(4) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(5) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, total non-Agency MBS excluding the company's non-Agency interest-only portfolio would be $55.46 at December 31, 2016 and $55.64 at September 30, 2016.
 

“Owning high quality MSR was a key element in the stable performance of our portfolio this quarter, as it provided an effective hedge against the rise in interest rates and the widening of Agency spreads,” stated Bill Roth, Two Harbors’ Chief Investment Officer. “We are excited about the year ahead and the opportunity to continue deploying capital in a manner that maximizes shareholder value.”

Financing Summary
The company reported a debt-to-equity ratio, defined as total borrowings under repurchase agreements, FHLB advances and revolving credit facilities to fund RMBS, Agency Derivatives, residential mortgage loans held-for-sale, commercial real estate assets and MSR divided by total equity, of 3.9:1.0 and 4.2:1.0 as of December 31, 2016 and September 30, 2016, respectively.

As of December 31, 2016, the company had outstanding $9.3 billion of repurchase agreements funding RMBS, Agency Derivatives and commercial real estate assets with 23 different counterparties. Excluding the effect of the company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 1.31% as of December 31, 2016.

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 December 31, 2016, TH Insurance had $4.0 billion in outstanding secured advances, with a weighted average borrowing rate of 0.85%, and had no additional available uncommitted capacity for borrowings.

As of December 31, 2016, the company had outstanding $70.0 million of short-term borrowings secured by MSR collateral under revolving credit facilities with a weighted average borrowing rate of 4.53% and remaining maturities of 306 days.

As of December 31, 2016, the company’s aggregate repurchase agreements, FHLB advances and revolving credit facilities funding RMBS, Agency Derivatives, commercial real estate assets and MSR had a weighted average of 3.8 years to maturity.

The following table summarizes the company’s borrowings by collateral type under repurchase agreements, FHLB advances and revolving credit facilities outstanding as of December 31, 2016 and September 30, 2016, and the related cost of funds for the three months ended December 31, 2016 and September 30, 2016:

   
As of December 31, 2016

As of September 30, 2016

(in thousands) (unaudited) (unaudited)
Collateral type:
Agency RMBS and Agency Derivatives $ 10,843,917 $ 11,994,502
Mortgage servicing rights 70,000 30,000
Non-Agency MBS 1,282,524 1,232,816
Net economic interests in consolidated securitization trusts(1) 153,231 159,393
Residential mortgage loans held-for-sale 485,411
Commercial real estate assets   1,036,679     765,251  
$ 13,386,351   $ 14,667,373  
 
Cost of Funds Metrics

Three Months Ended
December 31, 2016

Three Months Ended
September 30, 2016

(unaudited) (unaudited)
Annualized cost of funds on average borrowings during the quarter: 1.1 % 1.0 %
Agency RMBS and Agency Derivatives 0.8 % 0.8 %
Mortgage servicing rights(2) 5.4 % 5.4 %
Non-Agency MBS 2.7 % 2.5 %
Net economic interests in consolidated securitization trusts(1) 2.2 % 1.7 %
Residential mortgage loans held-for-sale 0.7 % 0.8 %
Commercial real estate assets(2) 1.8 % 1.8 %
________________
(1) Includes the retained interests from on-balance sheet securitizations, which are eliminated in consolidation in accordance with GAAP.
(2) Includes amortization of debt issuance costs.
 

Dividends and Taxable Income
The company declared cash dividends to stockholders of $0.93 per share during the 2016 taxable year. The company fulfilled its requirement as a REIT to distribute at least 90% of its taxable income to stockholders.

Conference Call
Two Harbors Investment Corp. will host a conference call on February 7, 2017 at 9:00 a.m. EST to discuss fourth quarter 2016 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 37202558, 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. EST on February 7, 2017, through 12:00 a.m. EST on February 14, 2017. The playback can be accessed by calling (855) 859-2056 (or (404) 537-3406 for international callers), conference code 37202558. 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, commercial real estate 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, 2015, 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 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 mortgage servicing rights (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; the state of commercial real estate markets and our ability to acquire or originate commercial real estate loans or related assets; 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 and Core Earnings per common share, 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, 590 Madison Avenue, 36th Floor, New York, NY 10022, telephone (612) 629-2500.

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

December 31,
2016

December 31,
2015

(unaudited)
ASSETS
Available-for-sale securities, at fair value $ 13,128,857 $ 7,825,320
Residential mortgage loans held-for-sale, at fair value 40,146 811,431
Residential mortgage loans held-for-investment in securitization trusts, at fair value 3,271,317 3,173,727
Commercial real estate assets 1,412,543 660,953
Mortgage servicing rights, at fair value 693,815 493,688
Cash and cash equivalents 406,883 737,831
Restricted cash 408,312 262,562
Accrued interest receivable 62,751 49,970
Due from counterparties 60,380 17,206
Derivative assets, at fair value 324,182 271,509
Other assets   302,870     271,575  
Total Assets $ 20,112,056   $ 14,575,772  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Repurchase agreements $ 9,316,351 $ 5,008,274
Collateralized borrowings in securitization trusts, at fair value 3,037,196 2,000,110
Federal Home Loan Bank advances 4,000,000 3,785,000
Revolving credit facilities 70,000
Derivative liabilities, at fair value 12,501 7,285
Due to counterparties 111,884 34,294
Dividends payable 83,437 92,016
Other liabilities   79,576     72,232  
Total Liabilities 16,710,945 10,999,211
 
Stockholders’ Equity
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares issued and outstanding
Common stock, par value $0.01 per share; 900,000,000 shares authorized and 347,652,326 and 353,906,807 shares issued and outstanding, respectively 3,477 3,539
Additional paid-in capital 3,659,973 3,705,519
Accumulated other comprehensive income 199,227 359,061
Cumulative earnings 2,038,033 1,684,755
Cumulative distributions to stockholders   (2,499,599 )   (2,176,313 )
Total Stockholders’ Equity   3,401,111     3,576,561  
Total Liabilities and Stockholders’ Equity $ 20,112,056   $ 14,575,772  
 
 
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
       

Three Months Ended
December 31,

Year Ended
December 31,

2016 2015 2016 2015
(unaudited) (unaudited)
Interest income:
Available-for-sale securities $ 122,719 $ 88,543 $ 415,052 $ 458,515
Trading securities 8,676
Residential mortgage loans held-for-sale 3,248 7,698 23,037 28,966
Residential mortgage loans held-for-investment in securitization trusts 33,228 30,832 133,993 95,740
Commercial real estate assets 19,540 6,297 59,819 9,138
Cash and cash equivalents   354     235     1,589     902  
Total interest income 179,089 133,605 633,490 601,937
Interest expense:
Repurchase agreements 31,679 14,851 97,461 73,049
Collateralized borrowings in securitization trusts 26,764 17,815 97,729 57,216
Federal Home Loan Bank advances 7,297 3,909 26,101 11,921
Revolving credit facilities   476             604        
Total interest expense   66,216     36,575     221,895     142,186  
Net interest income 112,873 97,030 411,595 459,751
Other-than-temporary impairment losses (1,822 ) (535 )
Other income:
(Loss) gain on investment securities (173,469 ) 99,867 (107,374 ) 363,379
Gain (loss) on interest rate swap and swaption agreements 177,979 42,526 45,371 (210,621 )
Gain (loss) on other derivative instruments 143,443 (2,077 ) 99,379 (5,049 )
(Loss) gain on residential mortgage loans held-for-sale (1,563 ) (4,015 ) 16,085 14,285
Servicing income 34,959 32,799 143,616 127,412
Gain (loss) on servicing asset 127,895 (3,267 ) (83,531 ) (99,584 )
Other loss   (4,978 )   (5,525 )   (5,955 )   (21,790 )
Total other income 304,266 160,308 107,591 168,032
Expenses:
Management fees 11,166 12,270 46,434 50,294
Securitization deal costs (89 ) 1,200 6,152 8,971
Servicing expenses 8,214 8,252 32,724 28,101
Other operating expenses 16,203 16,130 63,483 64,162
Restructuring charges   1,801         2,990      
Total expenses   37,295     37,852     151,783     151,528  
Income before income taxes 379,844 219,486 365,581 475,720
Provision for (benefit from) income taxes   38,441     8,780     12,303     (16,490 )
Net income $ 341,403   $ 210,706   $ 353,278   $ 492,210  
Basic and diluted earnings per weighted average common share $ 0.98   $ 0.59   $ 1.01   $ 1.35  
Dividends declared per common share $ 0.24   $ 0.26   $ 0.93   $ 1.04  
Basic and diluted weighted average number of shares of common stock outstanding   347,643,257     360,090,432     348,073,704       365,247,738  
 
 
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS), continued
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
 
Three Months Ended
December 31,
Year Ended
December 31,
2016 2015 2016 2015
(unaudited) (unaudited)
Comprehensive income (loss):
Net income $ 341,403 $ 210,706 $ 353,278 $ 492,210
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities   (339,216 )   (213,940 )   (159,834 )   (496,728 )
Other comprehensive loss   (339,216 )   (213,940 )   (159,834 )   (496,728 )
Comprehensive income (loss) $ 2,187   $ (3,234 ) $ 193,444   $ (4,518 )
 
 
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
December 31,
Year Ended
December 31,
2016 2015 2016 2015
(unaudited) (unaudited)
Reconciliation of Comprehensive income (loss) to Core Earnings:
 
Comprehensive income (loss) $ 2,187 $ (3,234 ) $ 193,444 $ (4,518 )
 
Adjustment for other comprehensive loss:
Unrealized loss on available-for-sale securities   339,216     213,940     159,834     496,728  
Net income $ 341,403   $ 210,706   $ 353,278   $ 492,210  
 
Adjustments for non-core earnings:
Loss (gain) on sale of securities and residential mortgage loans held-for-sale, net of tax 158,026 (100,548 ) 93,317 (371,080 )
Unrealized (gain) loss on securities and residential mortgage loans held-for-sale, net of tax (14,794 ) 14,668 (23,203 ) 19,612
Other-than-temporary impairment loss, net of tax 1,822 535
Realized (gain) loss on termination or expiration of swaps and swaptions, net of tax (40,793 ) 77,672 70,966 190,242
Unrealized gains on interest rate swaps and swaptions economically hedging investment portfolio, repurchase agreements and FHLB advances, net of tax (138,488 ) (134,182 ) (122,682 ) (91,874 )
(Gain) loss on other derivative instruments, net of tax (87,772 ) 6,880 (52,349 ) 17,108
Realized and unrealized losses on financing securitizations, net of tax 6,661 6,997 11,875 26,384
Realized and unrealized (gain) loss on mortgage servicing rights, net of tax (142,677 ) (11,342 ) (27,433 ) 36,607
Securitization deal costs, net of tax (58 ) 780 3,999 5,831
Change in servicing reserves, net of tax 83 502 1,347 206
Restructuring charges   1,801         2,990      
Core Earnings(1) $ 83,392   $ 72,133   $ 313,927   $ 325,781  

(2)

 
Weighted average shares outstanding 347,643,257 360,090,432 348,073,704 365,247,738
 
Core Earnings per weighted average share outstanding $ 0.24 $ 0.20 $ 0.90 $ 0.89
________________
(1) Core Earnings is a non-GAAP measure that we define as Comprehensive Income, excluding realized and unrealized gains or losses on the aggregate portfolio, impairment losses, amortization of business combination intangible assets, servicing reserve expenses on MSR, certain upfront costs related to securitization transactions and restructuring charges. 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. Core Earnings is provided for purposes of comparability to other peer issuers.
(2) Effective July 1, 2015, we refined the MSR amortization methodology utilized for Core Earnings. If this methodology was applied retroactively to the first 6 months of 2015, it would have resulted in an additional $8.6 million expense, net of tax, or $0.03 per weighted average share for that period.
 
 
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
December 31,
2016
  September 30,
2016
  June 30,
2016
  March 31,
2016
  December 31,
2015
(unaudited)
Net Interest Income:
Interest income $ 179.1 $ 168.9 $ 154.8 $ 130.8 $ 133.6
Interest expense   66.2     60.4     54.0     41.4     36.6  
Net interest income 112.9 108.5 100.8 89.4 97.0
Other income:
Interest spread on interest rate swaps (2.9 ) (4.3 ) (7.7 ) (6.2 ) (12.6 )
Interest spread on other derivative instruments 4.1 3.7 5.0 5.4 6.0
Servicing (expense) income, net of amortization(1) (0.4 ) 5.4 11.3 17.9 16.8
Other income   1.7     1.5     1.4     1.3     1.4  
Total other income 2.5 6.3 10.0 18.4 11.6
Expenses   35.5     34.2     36.6     34.3     35.8  
Core Earnings before income taxes 79.9 80.6 74.2 73.5 72.8
Income tax (benefit) expense   (3.5 )   (1.9 )   (2.0 )   1.7     0.7  
Core Earnings $ 83.4   $ 82.5   $ 76.2   $ 71.8   $ 72.1  
Basic and diluted weighted average Core EPS $ 0.24   $ 0.24   $ 0.22   $ 0.21   $ 0.20  
________________
(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.
 

Contact:

Two Harbors Investment Corp.
Tim Perrott, 612-629-2514
Senior Director of Investor Relations
tim.perrott@twoharborsinvestment.com