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Two Harbors Investment Corp. Reports First Quarter 2011 Financial Results

NEW YORK--(BUSINESS WIRE)-- Two Harbors Investment Corp. (NYSE: TWO; NYSE Amex: TWO.WS), a real estate investment trust that invests in residential mortgage-backed securities, today announced its financial results for the quarter ended March 31, 2011.

First Quarter 2011 Highlights:

    --  Achieved total Comprehensive Income of $31.5 million, or $0.69 per
        diluted weighted share, reflecting Agency and non-Agency portfolio
        appreciation.

    --  Increased Book Value 4.9% on a sequential quarter basis to $9.90 per
        diluted share.

    --  Declared a dividend of $0.40 per common share, or 15.3% dividend yield,
        based upon March 31, 2011 closing price of $10.47.

    --  Reported Adjusted GAAP Earnings of $0.39 per share, representing a 15.9%
        return on average equity on an annualized basis.

    --  Transferred listing of common stock to the New York Stock Exchange.

    --  Successfully completed an accretive secondary stock offering of 28.8
        million shares for net proceeds of approximately $287.8 million.

"We are delighted by another stellar quarter of portfolio performance which can best be measured by the total return metric of comprehensive income," said Thomas Siering, Two Harbors' President and Chief Executive Officer.

Operating Performance

The following table summarizes the company's GAAP and non-GAAP earnings measurements and key metrics for the first quarter of 2011:

Two Harbors Operating Performance

(dollars in thousands, except per   Q1-2011
share data)

                                                Per diluted     Return on

Earnings                            Earnings    weighted share  average equity

Core Earnings1                      $ 14,767    $ 0.32          13.1 %

GAAP Net Income                     $ 22,377    $ 0.49          19.9 %

Adjusted GAAP Earnings2             $ 17,875    $ 0.39          15.9 %

Comprehensive Income                $ 31,492    $ 0.69          27.9 %

Operating Metrics                   Q1-2011

Dividend per common share           $ 0.40

Book value per diluted share at     $ 9.90
period end

Operating expenses as a percentage  1.3      %
of average equity



     Core Earnings is a non-GAAP measure that the company defines as GAAP net
     income, excluding impairment losses, gains or losses on sales of securities
     and termination of interest rate swaps, unrealized gains or losses on
(1)  trading securities, interest rate swaps and swaptions, certain gains or
     losses on derivative instruments and non-recurring business combination
     expenses. As defined, Core Earnings includes interest income associated
     with the company's inverse interest-only securities ("Agency derivatives")
     and premium income on credit default swaps.

     Adjusted GAAP Earnings is a non-GAAP measure that the company defines as
     GAAP net income, excluding the unrealized fair value gains and losses
(2)  associated with the company's interest rate swaps and swaptions utilized to
     economically hedge interest rate risk associated with the company's
     short-term LIBOR-based repurchase agreements and available-for-sale
     securities.



Earnings Summary

Two Harbors reported Core Earnings for the quarter ended March 31, 2011 of $14.8 million, or $0.32 per diluted weighted average common share outstanding, as compared to Core Earnings for the quarter ended December 31, 2010 of $9.9 million, or $0.36 per diluted weighted average common share outstanding.

During the quarter, the company sold residential mortgage-backed securities (RMBS) and U.S. Treasuries for $270.9 million with an amortized cost of $269.8 million for a net realized gain of $1.3 million, net of tax, and recognized unrealized gains on our U.S. Treasury trading securities of $0.3 million, net of tax. During the quarter, the company terminated interest rate swap and swaption positions and realized a gain of $0.8 million, net of tax. In addition, the company recognized in earnings an unrealized gain, net of tax, of $4.5 million associated with its interest rate swaps and swaptions economically hedging its repurchase agreements and an unrealized loss, net of tax, of $0.5 million associated with its interest rate swap economically hedging its trading securities, as well as net gains on other derivative instruments of approximately $1.2 million, net of tax.

The company reported GAAP Net Income of $22.4 million, or $0.49 per diluted weighted average share outstanding, for the quarter ended March 31, 2011, as compared to $16.5 million, or $0.60 per diluted weighted average share outstanding, for the quarter ended December 31, 2010. On a GAAP basis, the company provided an annualized return on average equity of 19.9% and 25.1% for the quarters ended March 31, 2011 and December 31, 2010, respectively.

Two Harbors reported Adjusted GAAP Earnings for the quarter ended March 31, 2011 of $17.9 million, or $0.39 per diluted weighted average common share outstanding, as compared to Adjusted GAAP Earnings for the quarter ended December 31, 2010 of $11.2 million, or $0.41 per diluted weighted average common share outstanding. On an Adjusted GAAP Earnings basis, the company recognized an annualized return on average equity of 15.9% and 17.1% for the comparative periods.

The company reported Comprehensive Income of $31.5 million, or $0.69 per diluted weighted average share outstanding, for the quarter ended March 31, 2011, as compared to Comprehensive Income of $23.0 million, or $0.84 per diluted weighted average share outstanding, for the quarter ended December 31, 2010. On a Comprehensive Income basis, the company recognized an annualized return on average equity of 27.9% and 35.2% for the quarters ended March 31, 2011 and December 31, 2010, respectively.

Other Key Operating Metrics

Two Harbors declared a quarterly dividend of $0.40 per common share for the quarter ended March 31, 2011. The annualized dividend yield on the company's common stock for the quarter ended March 31, 2011, based on the March 31, 2011 closing price of $10.47, was 15.3%.

The company's book value per diluted share, after giving effect to the first quarter 2011 dividend of $0.40, was $9.90 as of March 31, 2011, compared to $9.44 as of December 31, 2010.

Operating expenses for the first quarter of 2011 were approximately $1.5 million, or 1.3% of average equity, compared to approximately $1.2 million, or 1.9%, for the fourth quarter of 2010.

Portfolio Summary

For the quarter ended March 31, 2011, the annualized yield on average RMBS and Agency derivatives was 5.2% and the annualized cost of funds on the average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.4%. This resulted in a net interest rate spread of 3.8%. The company reported debt-to-equity, defined as total borrowings to fund RMBS and Agency derivatives divided by total equity, of 3.4:1.0 and 2.5:1.0 at March 31, 2011 and December 31, 2010, respectively. In both periods, debt-to-equity ratios were lower than targeted ratios owing to unsettled trade positions, included in the financial statement line item due to counterparties on the condensed consolidated balance sheets, as capital continued to be deployed from the December 2010 and March 2011 offerings. If the open trade positions had settled as of March 31, 2011, the debt-to-equity ratio, as defined, would have increased from 3.4:1.0 to approximately 3.9:1.0.

The company's portfolio is principally comprised of RMBS available-for-sale securities and Agency derivatives. As of March 31, 2011, the total value of the portfolio was $3.0 billion, which was comprised of $2.4 billion of Agency RMBS, $83.0 million of Agency derivatives, and $525.0 million of non-Agency RMBS. As of March 31, 2011, fixed-rate securities comprised 74.3% of the company's portfolio and adjustable-rate securities comprised 25.7% of the company's portfolio. In addition, the company held $299.3 million of U.S. Treasuries classified on our balance sheet as trading securities.

Two Harbors was a party to interest rate swaps and swaptions as of March 31, 2011 with an aggregate notional amount of $2.7 billion, of which $2.4 billion was utilized to economically hedge interest rate risk associated with the company's short-term LIBOR-based repurchase agreements.

The following table summarizes the company's portfolio:

Two Harbors Portfolio

(dollars in thousands, except per share data)

RMBS and Agency Derivatives Portfolio Composition         As of March 31, 2011

Agency Bonds

Fixed Rate Bonds                                          $ 2,093,520    70.6 %

Hybrid ARMs                                               264,468        8.9  %

Total Agency                                              2,357,988      79.5 %

Agency Derivatives                                        82,954         2.8  %

Non-Agency Bonds

Senior Bonds                                              426,495        14.4 %

Mezzanine Bonds                                           98,509         3.3  %

Total Non-Agency                                          525,004        17.7 %

Aggregate Portfolio                                       $ 2,965,946

Fixed-rate investment securities as a percentage of       74.3        %
aggregate portfolio

Adjustable-rate investment securities as a percentage of  25.7        %
aggregate portfolio

                                                          For the Quarter Ended

Portfolio Metrics                                         March 31, 2011

Annualized yield on average RMBS and Agency derivatives
during the quarter

Agency                                                    3.9         %

Non-Agency                                                9.7         %

Aggregate Portfolio                                       5.2         %

Annualized cost of funds on average repurchase balance    1.4         %
during the quarter1

Annualized interest rate spread for aggregate portfolio   3.8         %
during the quarter

Weighted average cost basis of principal and interest
securities

Agency                                                    $ 102.93

Non-Agency                                                $ 61.91

Weighted average three month CPR for our RMBS portfolio

Agency                                                    6.3         %

Non-Agency                                                3.4         %

Debt-to-equity ratio at period-end2                       3.4 to 1.0



(1)  Cost of funds includes interest spread expense associated with the
     portfolio's interest rate swaps.

(2)  Defined as total borrowings to fund RMBS and Agency derivatives divided by
     total equity.



RMBS Agency securities owned by the company at March 31, 2011 experienced a three-month average Constant Prepayment Rate (CPR) of 6.3% during the first quarter of 2011, as compared to 8.0% during the fourth quarter of 2010. Including our Agency inverse interest-only derivatives, the company experienced a three-month average CPR of 6.6% during the first quarter of 2011, as compared to 8.2% during the fourth quarter of 2010. The weighted average cost basis of the Agency portfolio was 102.9% of par as of March 31, 2011 and 104.8% of par as of December 31, 2010. The net premium amortization was $7.8 million and $4.7 million for the quarters ended March 31, 2011 and December 31, 2010, respectively.

Non-Agency securities owned by the company at March 31, 2011 experienced a three-month average CPR of 3.4% during the first quarter of 2011 as compared to 4.0% during the fourth quarter of 2010. The weighted average cost basis of the non-Agency portfolio was 61.9% of par as of March 31, 2011 and 60.3% of par as of December 31, 2010. The discount accretion was $5.4 million and $4.2 million for the quarters ended March 31, 2011 and December 31, 2010, respectively. The total net discount remaining was $391.6 million and $275.8 million as of March 31, 2011 and December 31, 2010, respectively.

"Two Harbors' Agency and non-Agency portfolios again contributed to the growth in book value," said Bill Roth, Two Harbors' Co-Chief Investment Officer. "Our investment strategy, specifically our security selection process and hedging strategy, continues to deliver strong results."

Conference Call

Two Harbors Investment Corp. will host a conference call on May 5, 2011 at 10:00 a.m. EDT to discuss first quarter 2011 financial results and related information. To participate in the teleconference, please call toll-free 877-868-1835 (or 914-495-8581 for international callers) 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 1 p.m. EDT on May 5, 2011 through 9 p.m. EDT on May 12, 2011. The playback can be accessed by calling 800-642-1687 (or 706-645-9291 for international callers) and providing Confirmation Code 62231053. The call will also be archived on the company's website in the Investor Relations section under the Events and Presentations link.

About Two Harbors Investment Corp.

Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities. Two Harbors is headquartered in Minnetonka, Minnesota, 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 press release 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. Factors that could cause actual results to differ include, but are not limited to, higher than expected operation costs, changes in prepayment speeds of mortgages underlying our RMBS, the rates of default or decreased recovery on the mortgages underlying our non-Agency securities, failure to recover certain losses that are expected to be temporary, changes in interest rates, the impact of new legislation or regulatory changes on our operations, and unanticipated changes in overall market and economic conditions.

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 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 Two Harbors' operations; however, as these measures are not in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to Non-GAAP reconciliation table on page 9 of this release.

Additional Information

Stockholders and warrant holders 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., 601 Carlson Parkway, Suite 330, Minnetonka, MN 55305, telephone 612-238-3300.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

                                               March 31, 2011  December 31, 2010

                                               (unaudited)

ASSETS

Available-for-sale securities, at fair value   $ 2,882,992     $ 1,354,405

Trading securities, at fair value              299,262         199,523

Cash and cash equivalents                      302,263         163,900

Total earning assets                           3,484,517       1,717,828

Restricted cash                                38,991          22,548

Accrued interest receivable                    11,010          5,383

Due from counterparties                        21,459          12,304

Derivative assets, at fair value               106,153         38,109

Other assets                                   574             1,260

Total Assets                                   $ 3,662,704     $ 1,797,432

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Repurchase agreements                          $ 2,616,031     $ 1,169,803

Accrued interest payable                       1,305           785

Due to counterparties                          338,148         231,724

Accrued expenses and other liabilities         2,997           2,063

Dividends payable                              16,200          10,450

Other liabilities                              2,455           159

Total Liabilities                              2,977,136       1,414,984

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;
450,000,000 shares authorized and 69,251,757   693             405
and 40,501,212 shares issued and outstanding,
respectively

Additional paid-in capital                     654,514         366,974

Accumulated other comprehensive income (loss)  31,734          22,619

Cumulative (losses) earnings                   52,397          30,020

Cumulative distributions to stockholders       (53,770     )   (37,570     )

Total stockholders' equity                     685,568         382,448

Total Liabilities and Stockholders' Equity     $ 3,662,704     $ 1,797,432



TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands, except per share data)

                                                      Three Months Ended

                                                      March 31,

                                                      2011          2010

Interest income:

Available-for-sale securities                         $ 19,535      $ 6,153

Trading securities                                    272           --

Cash and cash equivalents                             63            6

Total interest income                                 19,870        6,159

Interest expense                                      2,499         518

Net interest income                                   17,371        5,641

Other income:

Gain on investment securities, net                    1,539         1,197

Gain (loss) on interest rate swap agreements          1,939         (1,547     )

Gain on other derivative instruments                  5,347         946

Total other income                                    8,825         596

Expenses:

Management fees                                       1,550         457

Operating expenses                                    1,512         987

Total expenses                                        3,062         1,444

Net income before income taxes                        23,134        4,793

Benefit from (provision for) income taxes             (757       )  534

Net income attributable to common stockholders        $ 22,377      $ 5,327

Net income available per share to common
stockholders:

Basic and Diluted                                     $ 0.49        $ 0.40

Weighted average shares outstanding:

Basic and Diluted                                     45,612,376    13,401,368

Comprehensive income:

Net income                                            $ 22,377      $ 5,327

Other comprehensive income

Net unrealized gain on available-for-sale securities  9,115         3,500

Other comprehensive income                            9,115         3,500

Comprehensive income                                  $ 31,492      $ 8,827



TWO HARBORS INVESTMENT CORP.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION

(UNAUDITED)

(dollars in thousands, except per share data)

                                                      Three Months Ended

                                                      March 31,

                                                      2011          2010

Reconciliation of net income attributable to common
stockholders to Core Earnings:

Net income attributable to common stockholders        $ 22,377      $ 5,327

Adjustments for non-core earnings:

Gain on sale of securities, net of tax                (1,308     )  (1,197     )

Unrealized gain on trading securities, net of tax     (265       )  --

Unrealized (gain) loss, net of tax, on interest rate
swap and swaptions economically hedging repurchase    (4,502     )  745
agreements and available-for-sale securities

Unrealized (gain) loss, net of tax, on interest rate  460           --
swap economically hedging trading securities

Realized gain on termination of swaps, net of tax     (827       )  --

Gain on other derivative instruments, net of tax      (1,168     )  (1,275     )

Core Earnings                                         $ 14,767      $ 3,600

Weighted average shares outstanding - basic and       45,612,376    13,401,368
diluted

Core Earnings per weighted average share outstanding  $ 0.32        $ 0.27
- basic and diluted

                                                      Three Months Ended

                                                      March 31,

                                                      2011          2010

Reconciliation of net income attributable to common
stockholders to Adjusted GAAP Earnings:

Net income attributable to common stockholders        $ 22,377      $ 5,327

Adjustments to GAAP Net Income:

Unrealized (gain) loss, net of tax, on interest rate
swap and swaptions economically hedging repurchase    (4,502     )  745
agreements and available-for-sale securities

Adjusted GAAP Earnings                                $ 17,875      $ 6,072

Weighted average shares outstanding - basic and       45,612,376    13,401,368
diluted

Adjusted GAAP Earnings per weighted avg. share        $ 0.39        $ 0.45
outstanding - basic and diluted



    Source: Two Harbors Investment Corp.
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