Mortgage Loan | Two Harbors Investment Corp. Reports Fourth Quarter 2011 Financial Results

February 9, 2012 – 4:09 am

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, real estate and other financial assets, today announced its financial results for the quarter ended December31,2011.

Highlights

“We are particularly pleased with delivering a 12.6%¹ total return in 2011, considering volatile market conditions,” said Thomas Siering, Two Harbors ‘ President and Chief Executive Officer. “We are well positioned and believe our security selection, hedging methods and ability to deploy capital across sectors allows us to optimize portfolio results. This belief is validated by our alpha generation in 2011. Further, our expansion into complementary business lines, which leverage our core strengths, including credit analysis, will help diversify our business model for the benefit of our shareholders.”

(1) The term “total return” means (i) the change in Two Harbors’ book value per share at December 31, 2011 as compared to December 31, 2010, plus, (ii) dividends declared by Two Harbors in 2011, divided by Two Harbors’ book value per share at December 31, 2010.

Operating Performance

The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the respective periods in 2011:

Earnings Summary

Two Harbors reported Core Earnings for the quarter ended December31,2011 of $55.6 million, or $0.40 per diluted weighted average common share outstanding, as compared to Core Earnings for the quarter ended September30,2011 of $51.8 million, or $0.40 per diluted weighted average common share outstanding.

During the quarter, the company sold residential mortgage-backed securities and U.S. Treasuries for $1.8 billion with an amortized cost of $1.8 billion for a net realized gain of $2.0 million, net of tax, recognized a corresponding change in unrealized fair value losses on U.S. Treasury trading securities of $1.6 million, net of tax and recognized other-than-temporary impairment losses on our RMBS securities of $1.4 million, net of tax. During the quarter, the company had a net gain of $0.7 million, net of tax, related to swap terminations and a swaption expiration. In addition, the company recognized in earnings an unrealized gain, net of tax, of $6.0 million associated with its interest rate swaps and swaptions economically hedging its repurchase agreements and an unrealized gain, net of tax, of $0.7 million associated with its interest rate swaps economically hedging its trading securities as well as net losses on other derivative instruments of approximately $10.5 million, net of tax.

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The company reported GAAP Net Income of $51.4 million, or $0.37 per diluted weighted average share outstanding, for the quarter ended December31,2011, as compared to $54.6 million, or $0.42 per diluted weighted average share outstanding, for the quarter ended September30,2011. On a GAAP basis, the company earned an annualized return on average equity of 16.1% and 17.1% for the quarters ended December31,2011 and September30,2011, respectively.

Two Harbors reported Adjusted GAAP Earnings for the quarter ended December31,2011 of $45.4 million, or $0.32 per diluted weighted average common share outstanding, as compared to Adjusted GAAP Earnings for the quarter ended September30,2011 of $71.3 million, or $0.55 per diluted weighted average common share outstanding. Included in Adjusted GAAP Earnings are unrealized gains and losses on Agency Derivatives. Fourth quarter 2011 was negatively impacted by net unrealized fair value losses on hedging activity, compared to unrealized fair value gains on hedging activity in the third quarter of 2011. On an Adjusted GAAP Earnings basis, the company recognized an annualized return on average equity of 14.2% and 22.3% for the comparative periods.

The company reported Comprehensive Income of $19.0 million, or $0.14 per diluted weighted average share outstanding, for the quarter ended December31,2011, as compared to Comprehensive Loss of $18.0 million, or negative $0.14 per diluted weighted average share outstanding, for the quarter ended September30,2011. Fourth quarter 2011 was negatively impacted by a net unrealized decline in fair value of $65.6 million on the company’s non-Agency portfolio partially offset by a net unrealized increase in fair value on its 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 return on average equity of 6.0% and a loss of 5.6% for the quarters ended December31,2011 and September30,2011, respectively.

Other Key Metrics

Two Harbors declared a quarterly dividend of $0.40 per common share for the quarter ended December31,2011. The annualized dividend yield on the company’s common stock for the fourth quarter, based on the December31,2011 closing price of $9.24, was 17.3%.

The company’s book value per diluted share, after giving effect to the fourth quarter 2011 dividend of $0.40, was $9.03 as of December31,2011, compared to $9.30 as of September30,2011. The company’s book value for the fourth quarter 2011 was primarily impacted by fair value deterioration in its non-Agency portfolio partially offset by fair value gains on its Agency portfolio.

Other operating expenses for the fourth quarter 2011 were approximately $3.2 million, or 1.0% of average equity, compared to approximately $2.9 million, or 0.9%, for the third quarter 2011.

Portfolio Summary

“The solid performance in our portfolio this quarter was in line with our expectations,” stated Bill Roth, Two Harbors’ Co-Chief Investment Officer. “While we have favored non-Agencies recently, we have identified plenty of opportunities across sectors and have substantially completed deploying capital from the January offering.”

For the quarter ended December31,2011, the annualized yield on average RMBS and Agency Derivatives was 4.8% and the annualized cost of funds on the average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.0%. This resulted in a net interest rate spread of 3.8%, a decline from 4.2% in the prior quarter. This decline was primarily due to a lower yield on the Agency portfolio compared to the prior quarter. The company reported debt-to-equity, defined as total borrowings to fund RMBS and Agency Derivatives divided by total equity, of 4.5:1.0 and 4.4:1.0 at December31,2011 and September30,2011, respectively.

The company’s portfolio is principally composed of RMBS available-for-sale securities and Agency Derivatives. As of December31,2011, the total value of the portfolio was $6.4 billion, of which approximately $5.2 billion was Agency RMBS and Derivatives and $1.2 billion was non-Agency RMBS. As of December31,2011, fixed-rate securities composed 78.4% of the company’s portfolio and adjustable-rate securities composed 21.6% of the company’s portfolio, which are comparable percentages to the prior quarter. In addition, the company held $1.0 billion of U.S. Treasuries classified on its balance sheet as trading securities as of December 31, 2011, compared to $1.5 billion as of September 30, 2011.

Two Harbors was a party to interest rate swaps and swaptions as of December31,2011 with an aggregate notional amount of $8.7 billion, of which $7.3 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 5.6% during the fourth quarter of 2011, as compared to 5.0% during the third quarter of 2011. Including Agency Derivatives, the company experienced a three-month average CPR of 5.9% during the fourth quarter of 2011, as compared to 5.5% during the third quarter of 2011. The weighted average cost basis of the Agency portfolio was 106.5% of par as of December31,2011 and 106.3% of par as of September30,2011. The net premium amortization was $22.0 million and $15.1 million for the quarters ended December31,2011 and September30,2011, respectively.

Non-Agency securities owned by the company at both December31,2011 and

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