Third Quarter 2016 Earnings Call NOVEMBER 3, 2016
Safe Harbor Statement 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 successfully implement new strategies and to diversify our business into new asset classes; 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 successfully securitize or sell mortgage loans; 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; the state of commercial real estate markets and our ability to acquire or originate commercial real estate loans or related assets; 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; 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. This presentation may include industry and market data obtained through research, surveys, and studies conducted by third parties and industry publications. We have not independently verified any such market and industry data from third-party sources. This presentation is provided for discussion purposes only and may not be relied upon as legal or investment advice, nor is it intended to be inclusive of all the risks and uncertainties that should be considered. This presentation does not constitute an offer to purchase or sell any securities, nor shall it be construed to be indicative of the terms of an offer that the parties or their respective affiliates would accept. Readers are advised that the financial information in this presentation is based on company data available at the time of this presentation and, in certain circumstances, may not have been audited by the company’s independent auditors. 2
Financial Summary (1) DELIVERED STRONG RESULTS; WELL POSITIONED FOR FUTURE QUARTERLY FINANCIAL HIGHLIGHTS • Total return on book value of 4.2% (2) – Book value of $10.01 per share and cash dividend of $0.23 per share • Comprehensive Income of $136.5 million, or $0.39 per share • GAAP net income of $117.8 million, or $0.34 per share • Core Earnings (3) of $82.5 million, or $0.24 per share (1) Except as otherwise indicated in this presentation, reported data is as of or for the period ended September 30, 2016. (2) See Appendix slide 14 for calculation of Q3-2016 and 2016 year-to-date return on book value. 3 (3) Core Earnings is a non-GAAP measure. Please see Appendix slide 17 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
Strategic Overview STRATEGIC COMPONENTS • Flexible model • Opportunistic capital allocation • Disciplined risk management – Book value and income stability KEY AREAS OF FOCUS THROUGH 2017 INCREASE EARNINGS POWER AND SIMPLIFY BUSINESS MODEL • Continue to thoughtfully manage Agency portfolio and build out MSR position • Capitalize on tailwinds supporting non-Agency • Increase capital allocated to commercial strategy • Deploy capital to maximize returns – On track to substantially wind down conduit by end of 2016; cost savings and incremental investment income from capital redeployment expected to be about $20 million in 2017 BUILDING STRONG MOMENTUM FOR 2017 4
Book Value Q3-2016 YTD-2016 Q3-2016 Book Value YTD-2016 Book Value Book Value per share Book Value per share (Dollars in millions, except per share data) Beginning stockholders’ equity $3,418.1 $9.83 $3,576.6 $10.11 GAAP Net Income (Loss): Comprehensive Income (GAAP) Core Earnings, net of tax 82.5 230.5 Q3-2016 Comprehensive (125.9) (139.8) Realized gains and losses, net of tax Income of $136.5 million; $191.3 (78.8) Unrealized mark-to-market gains and losses, net of tax 161.2 million Income YTD-2016 Other comprehensive income 18.7 179.4 (80.0) (239.9) Dividend declaration Declared Q3-2016 dividend of $0.23 Other 3.5 11.2 per share; $0.69 per share YTD-2016 Balance before capital transactions 3,478.1 3,539.2 (61.3) Repurchase of common stock — Issuance of common stock, net of offering costs 0.1 0.3 Ending stockholders’ equity $3,478.2 $10.01 $3,478.2 $10.01 5
Core Earnings Summary (1) Q3-2016 FINANCIAL HIGHLIGHTS • Net interest income increased quarter- Q2-2016 Q3-2016 Variance ($) Variance (%) (Dollars in millions) over-quarter 9.1 % Interest income $154.8 $168.9 $14.1 – Higher overall leverage • Servicing income decreased due to (6.4) (11.8%) Interest expense 54.0 60.4 higher MSR amortization from 7.6 % Net interest income 100.8 108.5 7.7 increased prepayments, consistent with Loss on swaps and expectations (7.7) (4.3) 43.9% swaptions 3.4 • Other operating expenses decreased (1.3) (25.8%) Gain on other derivatives 5.0 3.7 $2.8 million quarter-over-quarter Servicing income, net of (5.9) (51.7%) amortization on MSR 11.3 5.4 – Lower amortization of restricted stock awards 5.2 % Other 1.4 1.5 0.1 – Early effects from the discontinuation of the mortgage loan conduit (3.7) Total other income 10.0 6.3 n/a (2.4) 6.9% Expenses 36.6 34.2 (2.0) (1.9) (0.1) Income taxes n/a Core Earnings (1) $76.2 $82.5 $6.3 8.4 % Basic and diluted weighted average Core EPS $0.22 $0.24 $0.02 6 (1) Core Earnings is a non-GAAP measure. Please see Appendix slide 17 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
Diversified Financing Profile REPURCHASE AGREEMENTS • Repo markets functioning without interruption • Outstanding borrowings of $10.6 billion with 22 active counterparties; 31 total counterparties • $441.8 million outstanding with direct lending counterparty FINANCING FOR MSR • Added $30 million revolving credit facility • Initial terms favorable – Advance rate of 60.0% – Spread over LIBOR of 375 basis points • Anticipate expanding upon this source of financing FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $4.0 billion • Weighted average borrowing rate of 0.67% FINANCING FOR COMMERCIAL REAL ESTATE ASSETS • Two $250 million financing facilities 7
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