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 (RMBS), residential mortgage loans and other financial assets, today announced its financial results for the quarter ended September 30, 2011.

Highlights

• Increased Core Earnings 64.9% on a sequential quarter basis to $51.8 million, or $0.40 per diluted weighted average share.

• RMBS portfolio generated an aggregate yield of 5.5%, driven by non-Agency portfolio performance of 9.8% in the third quarter of 2011 as compared to 8.8% in the previous quarter.

• Declared a dividend of $0.40 per common share, or 18.1% annualized dividend yield, based upon September 30, 2011 closing price of $8.83.

• Completed accretive secondary stock offering in July, which resulted in the issuance of 48.3 million shares for net proceeds of approximately $483.6 million. The deployed proceeds increased the company's investment portfolio to $6.6 billion at September 30, 2011 compared to $4.6 billion at June 30, 2011.

• Continued development of infrastructure to support asset securitization program.

• Announced Board of Director authorization for a share repurchase program of up to 10 million shares.

"We are pleased with our investment team's performance against a backdrop of volatile market conditions," said Thomas Siering, Two Harbors' President and Chief Executive Officer. "Our relative portfolio performance this quarter exceeded many indices for the same period and we believe our continued focus on security selection, thoughtful capital allocation and sophisticated hedging strategies distinguishes Two Harbors from its peers."

Operating Performance

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

Earnings Summary

Two Harbors reported Core Earnings for the quarter ended September 30, 2011 of $51.8 million, or $0.40 per diluted weighted average common share outstanding, as compared to Core Earnings for the quarter ended June 30, 2011 of $31.4 million, or $0.41 per diluted weighted average common share outstanding.

In anticipation of the potential release of HARP 2.0 combined with the substantially lower interest rate environment, the company repositioned its Agency portfolio during the quarter. This resulted in the company selling RMBS for $681.1 million with an amortized cost of $660.4 million for a net realized gain of $20.7 million, net of tax. The company recognized additional sales of RMBS and U.S. Treasuries for $427.4 million with an amortized cost of $420.3 million for a net realized gain of $6.7 million, net of tax. In unison with the Agency RMBS portfolio adjustment, the company lowered its cost of financing through the termination of certain interest rate swap positions and realized a loss of $19.8 million, net of tax. The company recognized other-than-temporary impairment losses on its non-Agency RMBS securities of $3.4 million, net of tax, and recognized unrealized gains on its U.S. Treasury trading securities of $2.4 million, net of tax. In addition, the company recognized in earnings an unrealized loss, net of tax, of $16.7 million associated with its interest rate swaps and swaptions economically hedging its repurchase agreements and an unrealized gain, net of tax, of $4.7 million associated with its interest rate swaps economically hedging its trading securities and TBA contracts. The third quarter 2011 results also included net gains on other derivative instruments of approximately $8.1 million, net of tax, including $14.3 million of net unrealized gains on inverse interest-only securities, TBA contracts and credit default swaps.

The company reported GAAP Net Income of $54.6 million, or $0.42 per diluted weighted average share outstanding, for the quarter ended September 30, 2011, as compared to GAAP Net Loss of approximately $1.0 million, or negative $0.01 per diluted weighted average share outstanding, for the quarter ended June 30, 2011. This increase in GAAP Net Income, from a quarter ago, is primarily due to strong underlying RMBS performance and favorable hedging gains on TBAs, credit default swaps and U.S. Treasuries combined with higher prior quarter valuation deterioration in the company's swap and swaption hedges, which are recognized in the GAAP income statement. On a GAAP basis, the company earned an annualized return on average equity of 17.1% for the quarter ended September 30, 2011 and negative 0.5% for the quarter ended June 30, 2011.

Two Harbors reported Adjusted GAAP Earnings for the quarter ended September 30, 2011 of $71.3 million, or $0.55 per diluted weighted average common share outstanding, as compared to Adjusted GAAP Earnings for the quarter ended June 30, 2011 of $36.1 million, or $0.47 per diluted weighted average common share outstanding. Included in Adjusted GAAP are unrealized gains on other derivative hedging activity associated with inverse interest-only securities, TBA contracts and credit default swaps. On an Adjusted GAAP Earnings basis, the company recognized an annualized return on average equity of 22.3% and 18.7% for the comparative periods.

The company reported a Comprehensive Loss of $18.0 million, or negative $0.14 per diluted weighted average share outstanding, for the quarter ended September 30, 2011, as compared to Comprehensive Income of $13.5 million, or $0.18 per diluted weighted average share outstanding, for the quarter ended June 30, 2011. The third quarter 2011 was negatively impacted by a net unrealized fair value loss of $89.1 million on the company's non-Agency portfolio. The company records unrealized fair value gains and losses for RMBS, classified as available-for-sale, as Other Comprehensive Income in the Statement of Stockholders' Equity. On a Comprehensive Income basis, the company recognized an annualized loss on average equity of 5.6% and a return of 7.0% for the quarters ended September 30, 2011 and June 30, 2011, respectively.

Other Key Metrics

Two Harbors declared a quarterly dividend of $0.40 per common share for the quarter ended September 30, 2011. The annualized dividend yield on the company's common stock for the quarter ended September 30, 2011, based on the September 30, 2011 closing price of $8.83, was 18.1%.

The company's book value per diluted share, after giving effect to the third quarter 2011 dividend of $0.40, was $9.30 as of September 30, 2011, compared to $9.73 as of June 30, 2011. The company's book value for the third quarter 2011 was significantly impacted by valuation losses as described above on its non-Agency portfolio.

Other operating expenses for the third quarter of 2011 were approximately $2.9 million, or 0.9% of average equity, compared to approximately $2.2 million, or 1.1%, for the second quarter of 2011.

Portfolio Summary

"Our portfolio increased nearly sevenfold from a year ago due to the secondary offerings we completed over the last year,” said Bill Roth, Two Harbors' Co-Chief Investment Officer. "We continued our opportunistic approach in deploying capital, and are pleased with the expansion of our net interest margin as a result of strong performance on both Agency and non-Agency strategies."

For the quarter ended September 30, 2011, the annualized yield on average RMBS and Agency derivatives was 5.5% and the annualized cost of funds on the average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.3%. This resulted in a net interest rate spread of 4.2%, up from 4.1% in the prior quarter. The company reported debt-to-equity, defined as total borrowings to fund RMBS and Agency derivatives divided by total equity, of 4.4:1.0 and 4.2:1.0 at September 30, 2011 and June 30, 2011, respectively.

The company's portfolio is principally composed of RMBS available-for-sale securities and Agency derivatives. As of September 30, 2011, the total value of the portfolio was $6.6 billion, of which approximately $5.3 billion was Agency RMBS and derivatives and $1.3 billion was non-Agency RMBS. As of September 30, 2011, fixed-rate securities composed 78.0% of the company's portfolio and adjustable-rate securities composed 22.0% of the company's portfolio. In addition, the company held $1.5 billion of U.S. Treasuries classified on its balance sheet as trading securities.

Two Harbors was a party to interest rate swaps and swaptions as of September 30, 2011 with an aggregate notional amount of $8.2 billion, of which $6.1 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:

RMBS Agency securities owned by the company at period end experienced a three-month average Constant Prepayment Rate (CPR) of 5.0% during the second and third quarters of 2011. Including Agency inverse interest-only derivatives, the company experienced a three-month average CPR of 5.5% during the third quarter of 2011, as compared to 5.3% during the second quarter of 2011. The weighted average cost basis of the Agency portfolio was 106.3% of par as of September 30, 2011 and 105.1% of par as of June 30, 2011. The net premium amortization was $15.1 million and $9.3 million for the quarters ended September 30, 2011 and June 30, 2011, respectively.

Non-Agency securities owned by the company at September 30, 2011 experienced a three-month average CPR of 2.4% during the third quarter of 2011 as compared to 3.0% during the second quarter of 2011. The weighted average cost basis of the non-Agency portfolio was 55.8% of par as of September 30, 2011 and 59.3% of par as of June 30, 2011. The discount accretion was $19.9 million and $7.0 million for the quarters ended September 30, 2011 and June 30, 2011, respectively. The total net discount remaining was $1.3 billion and $0.7 billion as of September 30, 2011 and June 30, 2011, respectively.

Share Repurchase Plan Announced

On October 5, 2011, the company announced that its Board of Directors authorized the company to repurchase up to 10 million shares of its common stock. The shares may be repurchased from time to time through privately negotiated transactions or open market transactions, or by any combination of such methods.

Conference Call

Two Harbors Investment Corp. will host a conference call on November 3, 2011 at 9:00 a.m. EDT to discuss third 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 12 p.m. EDT on November 3, 2011 through 9 p.m. EDT on November 10, 2011. The playback can be accessed by calling 855-859-2056 (or 404-537-3406 for international callers) and providing Confirmation Code 19735201. 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, residential mortgage loans and other financial assets. 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 operating costs, changes in prepayment speeds of mortgages underlying the company's RMBS, the rates of default or decreased recovery on the mortgages underlying its non-Agency securities, failure to recover certain losses that are expected to be temporary, changes in interest rates or the availability of financing, the impact of new legislation or regulatory changes on its operations, the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process, the impact of new or modified government mortgage refinance or principal reduction programs, 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., Attn: Investor Relations, 601 Carlson Parkway, Suite 150, Minnetonka, MN 55305, telephone 612-629-2500.