Greetings, and welcome to the Two Harbors Investment Corp. Reports Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded.

I would now like to turn the call over to Paulina Sims, Head of Investor Relations. Thank you. You may begin..

Good morning, everyone, and welcome to our call to discuss Two Harbors Second Quarter 2022 Financial Results. With me on the call this morning are Bill Greenberg, our President, Chief Executive Officer, and Chief Investment Officer; and Mary Riskey, our Chief Financial Officer.

The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's Web site as well as the Investor Relations page of our Web site at twoharborsinvestment.com.

In our earnings release and presentation, we have provided a reconciliation of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call.

As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on Page two of the presentation and in our Form 10-K and subsequent reports filed with the SEC.

Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill..

Thank you, Paulina. Good morning, everyone, and welcome to our second quarter earnings call. Please turn to slide tree, at quarter-end, book value was $5.10 per share, representing a negative 4.7% total economic quarterly return.

Following the historic bond market re-pricing in the first quarter, elevated market volatility continued through the second quarter. Inflation continued to exceed expectations, leading the Federal Reserve to accelerate the pace of monetary tightening and, in turn, raising the possibility of a recession.

The risk-off sentiment across many asset classes, including mortgages, gathered steam during the quarter, and as a result mortgage performance in the first-half of 2022 ranked among the worst in decades.

Entering the year with mortgage spreads standing near record tight levels, we added significantly to our MSR portfolio, while reducing RMBS balances and overall leverage to help protect against spread widening.

While those actions significantly reduced losses during the last two quarters, we now find ourselves in the exact opposite situation, with mortgages currently standing at historically wide levels.

Despite plenty of uncertainty surrounding the economy, the future path of interest rates and monetary policy, we believe there are significant opportunities in both RMBS and MSR, and we have repositioned our portfolio again to take advantage of the market environment by increasing our RMBS exposure and leverage.

We have also positioned ourselves to further capitalize on our MSR assets. We are very excited to announce that we have agreed to acquire RoundPoint Mortgage Servicing Corporation from Freedom Mortgage Corporation. This transaction will mark a strategic shift for us as we transition to an in-house servicing model.

With the growth we have experienced in the MSR portfolio, bringing the servicing operations in-house will not only increase efficiencies and returns on our MSR asset, but enable us to better manage recapture and portfolio defense strategies, grow a third-party subservicing business, and position us to capitalize on other opportunities within the mortgage finance space.

Please turn to slide four for an overview of the transaction. We will purchase RoundPoint for a preliminary purchase price which is comprised of RoundPoint's tangible net book value plus a premium of $10.5 million, subject to certain post-closing purchase price adjustments.

Not included in the transaction will be an MSR servicing exchange, called RPX, and a retail origination platform, each of which RoundPoint will divest of prior to closing. Founded in 2007, RoundPoint is led by a veteran team with decades of industry experience.

By combining their established practices and experience with the size of the Two Harbors portfolio, we believe we will be able to efficiently make this transition from our subservicing model. Although the transaction is expected to close in 2023, we plan to begin transitioning loans to RoundPoint as a subservicer later this year.

As we bring RoundPoint to scale, we expect to achieve incremental annual pre-tax earnings of approximately $20 million. However, beyond the increased efficiency of servicing MSR, this acquisition will open the door to additional and diversified revenue streams.

With RoundPoint being an experienced subservicer, we plan to look for opportunities to expand that business to further capitalize on the economies of scale in servicing operations. Beyond that, we believe this will enable us to more closely work with our MSR flow sellers and develop deeper partnerships within the industry.

Overall, we're very excited for the integration of RoundPoint and the enhancement to our MSR strategy. Please turn to slide five, during the quarter, inflation continued to trend higher. As shown on figure one, the May and June CPI readings, at 8.6% and 9.1% respectively, marked the strongest annual inflation rate since 1981.

As seen in the light gray lines, inflation expectations have consistently underestimated reality, which in turn has caused the Feds to increase the pace of monetary tightening.

Indeed, the Fed has raised its benchmark rate by 225 basis points so far this year, including two 75 basis point hikes, one in June and one last Wednesday, which were the largest single-meeting hike since 1994.

Chairman Powell has expressed his strong commitment to contain inflation, and the market is pricing in 100 basis points in additional increases which would bring the implied Fed funds rate close to 3.5% by the end of the year, as seen in figure two.

Current pricing in the front-end of the yield curve implies the end of the hiking cycle later this year, with a cut being possible by mid-2023. With the aggressive measures being taken to bring price growth under control, many market participants believe that a hard landing for the economy is increasingly possible.

The consequent lack of clarity around the path of rates pushed bond market volatility in the second quarter to multi-decade highs. As examples, the two-year treasury rate began the quarter at 2.34%, rose 109 basis points to peak at 3.43%, before falling 47 basis points to finish the quarter at 2.96%.

Longer-term rates were equally volatile, and the 10-year treasury rate followed a similar path. Figure three shows the rolling three-month realized volatility for current coupon mortgage rates. As you can see, realized volatility continued to accelerate higher in the second quarter as the market adjusted to incoming economic data.

In the last 20 years, only the Great Recession and the pandemic periods have had as much rate volatility as we saw last quarter. Please turn to slide six, in a quarter marked with so much volatility and uncertainty, mortgage performance, unsurprisingly, struggled. Figure one shows a histogram of quarterly excess returns of the Bloomberg US MBS Index.

The index, which is heavily weighted to lower coupons and represents an unlevered hedge portfolio of RMBS, had negative 97 basis points of excess return for the second quarter, which was the fourth worst quarter in the last 20 years.

In combination with the first quarter excess returns of negative 74 basis points, the first-half of 2022 is the fourth worst six-month period in the last 20 years as well. Given the underperformance of mortgages over the last six months, we now see a lot of upside to owning RMBS at these levels.

As you can see in figure two, current coupon ZV spreads have moved from around 50 basis points at the start of the year, to 125 basis points at the end of June, and as of the end of July had tightened somewhat.

For the ZV spreads approximately 50 basis points over the average of periods when the Fed is not conducting quantitative easing, nominal spreads are very high, and have rarely stayed at levels this elevated for long. Much of the reasons for wide nominal spreads is due to the market pricing in a continuation of the volatility we have seen in Q2.

However, as you can see in the chart, even option-adjusted spreads were 14 basis points above the average non-QE periods as of the end of June.

One way to read this chart, that even if the high interest rate volatility of the second quarter continues mortgages are still cheap and should produce above-average positive returns absent further spread widening.

Another important and interesting current market feature is that the range of tradable RMBS coupons has expanded greatly, creating significant relative value investing opportunities. With a range of 2% to 5.5%, there has rarely been such a large number of liquid tradable coupons.

In figure three, we show the OAS and ZV spreads as a function of mortgage duration along the X axis. One very interesting characteristic that you can see in this chart is that the coupon labels all shifted right as we moved from 3/31 to 6/30 as interest rates rose and mortgage durations extended.

We think it's more relevant to compare spreads of bonds of similar durations rather than keeping the coupon fixed. It’s also worth noting the relative flatness of OAS curve compared to the steep ZV curve.

Low coupons such as were roughly 300 basis points out of the money and at $86 price as of 6:30, have very little convexity and therefore a very little option cost, meaning that the OAS and ZV spreads are reasonably close to each other. The higher recurrent coupons have higher convexity and higher option costs.

And so, there're larger differences between the OAS and ZV. Indeed at the end of June, the ZV of Fannie 2s was 64 basis and the OAS was 41 basis points for a spread of 23 basis points, while Fannie 4.5s, for example, had ZV and OAS of 132 and 35 basis points respectively for a spread of 97 basis.

The lower coupons with lower convexities are easier to hedge though their deep discount prices make them more exposed to prepayment risk. And their long spread duration makes their prices more sensitive to changes in spreads.

The higher coupons have shorter spread duration and dollar prices making them less sensitivity to prepayment speeds and spread changes. But, the higher convexity means frequent rebalancing is required to hedge.

Importantly, the fact that the OASs were similar to the low coupons as of the end of June anyway means that the projected high coupon return shouldn’t be worse even if volatility stays elevated. And if you happen to think of volatility will eventually decline like we do, then there is a significant upside for higher coupons to tighten spread.

For some investors earning a lower return with less convexity is interesting. But, we think the higher coupons offer more value in this environment. As low coupons tightened significantly in July, we feel they now offer low spread with limited potential for further spread compression.

As a result, we see the relative value offered by higher coupons to be considerable and similar to what it was in March in both ZV and OAS terms. Now, I will turn it over to Mary to discuss our financial results in more detail..

Thank you, Bill, and good morning, everyone. Please turn to slide seven. For the second quarter, the Company reported a comprehensive loss of $90.4 million, representing an annualized return on average common equity of -19.1%. Our book value was $5.10 per share compared to $5.53 at March 31.

Including the $0.17 common dividend, results in a quarterly economic return of -4.7%. The results primarily reflect the mortgage spread widening Bill discussed earlier and to a lesser degree higher hedging costs as a result of the elevated volatility we saw during the quarter.

Moving on to slide eight, earnings available for distribution was $0.22 per share compared to $0.18 for the first quarter. Interest income increased by $12.2 million as we grew the RMBS portfolio and rotated into higher coupon securities. Interest income also benefited from lower amortization as prepayment speeds declined.

Interest expense rose by $14.8 million to $37.1 million due to the combination of growth in MSR borrowing balances as well as an overall rise in rates. TBA dollar roll income increased to $57.7 million on a higher average notional position in a shift to higher coupon TBA which benefited from roll specialness.

As we noted earlier in the year, we expected roll specialness to fade in the second-half as supply catches up to demand in the production coupons. And currently, we aren’t seeing TBA persistently special in any coupon. Finally, our U.S.

Treasury futures income was also lower reflecting a larger short position which was used to hedge lengthening mortgage duration. Turning to MSR, net servicing revenue grew by roughly $6.7 million to approximately $76.1 million in conjunction with a larger average MSR portfolio.

Turning to page nine, the portfolio yield increased $94 basis points to 4.39% driven by our investment in higher coupon RMBS and higher yield on a larger average MSR portfolio. Our realized net spread in the quarter was 3.26% compared to 2.75% in the prior quarter as the higher portfolio yield more than offset an increase in the cost of funds.

Net spread as of June 30 is estimated at 3.18%. As noted on the bottom of the slide, beginning with the second quarter, we have incorporated the implied asset yield and financing of TBA. First quarter comparative data has been updated to reflect the change. Please turn to slide 10. Funding in the repo market remains liquid and well supported.

Similar to the first quarter, funding costs for Agency RMBS rose on an absolute basis. However, as shown in the chart in the upper right, the spread itself remains low. Currently right around 10 to 13 basis points for both three-month and six-month maturities. We maintained access to diverse funding sources for MSR.

Our unfunded and committed MSR asset financing capacity stood at $218.8 million at quarter end with additional capacity available on an uncommitted basis. Please turn to slide 11.

As I mentioned earlier, we grew our mortgage exposure during the second quarter deploying capital into RMBS and adding TBA which brought our portfolio leverage to what we would consider to be a neutral position at 6.4 times. Average economic debt to equity in the second quarter was 5.6 times compared to the first quarter average of 4.8 times.

I will now turn the call back to Bill for our portfolio update..

Thank you, Mary. With large re-pricing and mortgage spread since the beginning of the year, we felt that the historically cheap valuations currently available in the mortgage market no longer justified the underweight be had been carrying even despite continued market uncertainties.

Overall, our specified pool and TBA positions both grew by $1.7 billion respectively as we increased portfolio leverage. We aggressively moved our position up in coupon where we saw the best value with ZV spreads in the 125 to 150 basis point area.

During the quarter, we increased our total spec pool and TBA position in 4.5 and 5s coupons by over $7 billion while decreasing our position in 3 through 4 coupons by over $4 billion. Furthermore, after the material widening of lower coupons within the quarter, we increased our position in 2.5s by nearly $0.5 billion.

With roll specialness largely a thing of the past, we have added specified pools when we find ones that meet our criteria. Within specified pools, we have focused our purchases within higher loan balance 2k to 250k max pools investor properties in Florida geographies.

We view Florida geography as a particularly compelling story as it trade to a sizeable discount to loan balance collateral with similar prepayment profile. Overall, we view these stories as providing cheap prepayments options with low absolute pay ups and trade at spreads that are wider than TBA. Please turn to slide 12.

While all mortgages widened during the quarter, lower coupon suffered the most. As tenure rates rose towards 3.5% and mortgage rates approached 6%, a market wide rotation from lower coupons to current coupons caused that part of the stack to underperform 30 to 60 ticks.

In contrast, the 3.5 through 5 coupons where our portfolio was positioned for the majority of the quarter fared much better using between 5 and 25 ticks. Lastly, prepayment speeds shown in Figure 3, dropped as expected in commensurate with the rate move.

With most mortgage backed securities now trading at a discount, there is a point to remember that faster speeds are actually a cash flow advantage as more principal is returned at par more quickly. In contrast, slower speeds are cash flow disadvantaged for the opposite reason.

In furtherance of this fact, prepay speeds on TBA collateral are now below 5 CPR in most cases as those coupons reflect newly originated loans whose borrowers are just settling in and are very unlikely to prepay. As TBA, those slow paying bonds are the cheapest to deliver.

We have constructed our portfolio such that many of our specified pools have seasoning and borrower characteristics which result in faster speeds than the TBA. Please turn to slide 13. Activity in the MSR market remained very robust with approximately $144 billion of UPB offered during the second quarter and another $56 billion coming through in July.

As seen in Figure 1, our MSR portfolio declined by $3 billion UPB to $229 billion reflecting net portfolio runoff. Our MSR price multiple expanded marginally to 5.4 times result of higher interest rates and wider mortgage spreads.

During the quarter, we entered into agreements to sell roughly $21 billion UPB in the third quarter and intend to deploy the proceeds into historically attractive RMBS. Our 60-day delinquency rate continues to fall towards pre-COVID levels and in the quarter at 0.8%.

In Figure 2, we show the trend of our settled UPB for our flow and bulk channels over the last four quarters. Slow volumes continue to decline in conjunction with lower refinancing activity. In figure three, we compare our servicing prepayment speeds versus TBA. Overall, prepayments speeds on our MSR portfolio declined by 30%, from 14.2 to 10.0 CPR.

A moment ago, I told you about how faster speeds are a benefit for mortgage-backed securities, and slower speeds are detriment. But that is only true for principal-bearing securities. For interest-only instruments like MSR, slower speeds are always better than faster speeds.

Although, our MSR prepayment speeds are faster than newly-originated TBA collateral, that is just a consequence of having acquired our portfolio over time. The slow TBA speeds, as I mentioned, reflect newly-originated loans, and there just hasn’t been enough time at these new rate levels to generate MSR off of those loans in any real size.

Over time, as those loans move up to so-called seasoning ramp, those speeds should increase as well. Also over time, we will be able to purchase that newer at-the-money MSR, which will also increase our weighted average coupon. However, we view 10 CPR as already quite slow, and we expect it to move slower still.

We project our portfolio speeds to decline another 20 plus percent to 6.9 CPR, and expect further slowing throughout the third quarter. Please turn to slide 14.

Through a combination of our RMBS activity and the effect of the large sell-off in rates on our MSR, our exposure to mortgage spreads has increased significantly from where it stood for last quarter, and at the beginning of the year.

As seen in the lower right panel, a 25 basis point widening in RMBS spreads would have an impact of negative 7.6%, up in magnitude from negative 2.8% in Q1, and negative 0.8% at the beginning of the year. With no rates on the MSR portfolio being so low, our portfolio coupon is 3.2%, while primary mortgage rates are around 5%.

Any change in mortgage rates has little effect on our prepay speeds or current cash flows. Importantly, when RMBS spreads are normal or tight levels, the offsetting risk of at-the-money MSR is a huge advantage, by reducing volatility with high yielding assets.

In this unique period, with RMBS spreads so wide, you see the low sensitivity of the MSR asset as an advantage. We capture the upside if mortgage spreads tighten, while the MSR maintains a steady cash flow with low prepays. Over time, as we add new current coupon MSR, the duration and hedging effects of the MSR will return to normal.

Please turn to slide 15, where we show our interest rate and yield curve exposures. Interest rate sensitivity of the portfolio has little changed from the prior quarter, and is very low.

With the MSR almost fully extended, it has very little duration, and so, the duration gap between our RMBS and repo must be hedged primarily with interest rate products. A 25 basis point parallel shock up would have an effect of plus 1.1% on book value attributed to the MSR asset, as seen in figure one.

The RMBS position on the other hand had its sensitivity increased to minus 9.5%, and so, the rate hedge offset of 8.5% brings the total rate exposure in an up 25 basis point parallel move to a net positive 0.1%.

In today's environment, with the Fed in motion, we have been particularly focused on the very front-end of the curve, and we have been very careful to keep exposure in that part of the yield curve as low as possible. I often like to say that we are mortgage investors, and not Fed interest rate guessers.

In figure three, we show that our sensitivity changes in short-term rates are calculated to be 0.0%, impact the book value in an up 25 basis point there flattening shock. Finally, I would like to discuss our outlook for Two Harbors, and our return expectations for new investments, on slide 16.

Static return expectations are as interesting as they have been in a very long time. Lower coupon pools and TBA offer high single-digit returns with relatively low convexity risks. Projected returns on current coupon pools and TBA are in the mid-teens, having very wide spreads, and stand to benefit the most if and when rate volatility subsides.

The MSR paired strategy also continues to have low to mid teens returns and lower RMBS spread risk. All of these pairings currently offer very attractive returns with different risk profiles. Despite the uncertainty and near-term drag from volatility seen during the quarter, the longer term outlook for Two Harbors is very positive.

Historically, wide mortgage spreads present an excellent opportunity for investment, while the variety of tradeable coupons within the space allows us to take advantage of relative value opportunities. We expect interest rate volatility to eventually subside, and both the MSR and RMBS should benefit when that occurs.

Additionally, we're very excited for the evolution of our MSR strategy through the acquisition of RoundPoint. The increased operational efficiencies and the revenue opportunities it presents will add value for shareholders, while deepening our involvement in the industry. Thank you very much for joining us today.

And we'll now be happy to take any questions you might have..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question..

Thanks. Bill, since the Fed meeting mortgage spreads have tightening quite nicely.

I guess just one, can you talk about what that has done to book value quarter-to-date, and two, how that has impacted returns and whether that changes any of the attractiveness of assets today?.

Yes, thanks for the question, Doug. Good morning, nice to have you. The interest rate volatility and the spread volatility of mortgages has continued through the Fed meeting, price performances throughout July has been moving up and down.

Mortgage spreads, as you note, have been -- they can be a quarter-point, half-a-point wider one day, and the same tighter the next day. So, in terms of performance, our performance has also moved commensurately with that. I hesitate to give one number because it's been both higher than this and lower than this.

But as of the end of July, we were up around 1.5% in book value..

Great.

And then so I guess based on that, do you still see the return environment as relatively consistent with kind of what that outlook slide has?.

Yes, generally, given -- within the bounds of the volatility that we see on a daily basis, I do. I still see -- well, in certain ways I think the higher coupons are certainly what we show, both on the ZV and the OAS graph earlier in the presentation, as well as the returns that are on page 16.

The low coupons have tightened a lot, as you probably noticed. And they look closer to what they did at the end of March, I'd say..

Great, that makes sense. Thank you..

Thank you. Our next questions come from the line of Arren Cyganovich with Citi. Please proceed with your questions..

Thanks. I just wanted to dig into the acquisition a little bit more.

Can you talk about the rationale; is it more of a cost savings or a revenue opportunity that you see there? And maybe dig into some of the benefits of having your own servicer versus using a subservicer?.

Yes, sure. As I think there are -- there's many benefits here, which is one of the reasons why we're so excited about it actually. Over time, as our portfolio has grown, we've really just reached a scale where it makes sense for us to bring it in-house.

The cost savings that we can achieve from bringing in-house and then not paying subservicers is significant, it gives us more control over the servicing of the portfolio.

And it allows us to enter into the ancillary businesses, as I mentioned, such as subservicing and other ways to partner with our existing seller network and other counterparties in more meaningful ways as well. So, we think it has lots of benefits across our activities in the servicing and mortgage space.

But really one of -- maybe the main issue is the extra revenue and cost savings that we're going to generate..

Okay, got it. And in -- you had mentioned that it was a $10.5 million premium to tangible book.

Are you able to provide what the total sale price is and will you have to raise any equity capital associated with the acquisition?.

Hi, Arren, this is Mary. So, we can't disclose their book value, they're not a public company. However, we are acquiring their servicing platform, which is a capitalized business, so we're not acquiring any MSR. And they're divesting as certain businesses that would have capital. So, we don't expect the book value to be a material number..

Okay, thank you..

Thank you. Our next questions come from the line of Trevor Cranston with JMP Securities. Please proceed with your questions..

Great, thanks. Good morning. You mentioned the benefit of MSR being less rate-sensitive and spread-sensitive in the prepared remarks in terms of increasing your portfolio's spread exposure.

I guess where you stand today, does it make or would it make sense, potentially, to sell more of the MSR portfolio in order to reallocate capital to MBS or given the lower sensitivities, that's not going to be as meaningful of a benefit where we are today?.

Yes, thanks for that question. That's an ongoing relative value decision that we make all the time. RMBS is attractive here, but MSR, having very little spread exposure and interest rate exposure and cash flowing as much as us, is also attractive in a different way with a different risk profile.

So, I mentioned, prepayment speeds have fallen quite a bit already, as I said in my prepared remarks. We expect speeds in our servicing portfolio to be around 7 CPR for July. We expect them to go slower still in August.

My own view, obviously everyone can have their own views, but my view is that there's probably more possibility of speeds rising to the slow side than to the fast side here. So, we like having a bunch of servicing with low coupons and deep discounts, and exposed to turnover speeds here.

So, it's a combination of -- or the analysis is one of relative value and risk profiles. And we may sell more, and we may buy more, it depends on the prices in the market..

Okay, got it. And then on leverage, I think the current leverage level was characterized as a neutral position in the opening remarks.

Can you talk about how high you'd be willing to take leverage if you were to get more aggressive, and can you be kind of more outright positive on the market?.

Yes, thanks. So, when we talk about overall portfolio leverage, it's important to incorporate the amount of MSR that we have in our portfolio at any given time, right. So, more MSR because the leverage in that asset is lower than the leverage in the MBS asset will generally generate a lower overall portfolio leverage, right.

And we have more MSR today than we've had in the past, if you compare our portfolio to what it was pre-COVID. What I would say, as I said, neutral is right around here, mid-high sixes. I would say full overweight is probably in the high sevens, low eights kind of area.

But that would be like max overweight kind of thing, which, that's why I say, if you say that's one-and-a-half to two turns higher, go back one-and-a-half to two turns lower, that's what we were when we thought we were maximum underweight, right. So, that's why we say we're sort of in the midpoint here..

Okay, that makes sense. Thank you..

With today's portfolio, of course, right..

Thank you. Our next questions come from the line of Bose George with KBW. Please proceed with your questions..

Hey, everyone, good morning. Actually going back to RoundPoint, now that you'll have a service there you'll be, I guess, recapture will be a growing part of the mix, et cetera, or at least part of the mix.

Does it -- will you potentially look at origination capacity as well as another way to sort of obtain MSR?.

Yes, so it's not particularly our intention to compete in the origination space with retail participants or wholesale participants. As you point out, we are interested in recapturing other portfolio defense strategies, right, and other ways in which to partner in a complimentary way with our existing servicing seller network and other counterparties.

And so, we will be doing some things along that line, but we don't intend, at this time, to really compete any meaningful way in the retail or wholesale origination space..

Okay, great, thanks.

And than actually just in terms of servicing technology, is there a decision to be made in terms of that? Is RoundPoint, on MSB, is there any sort of cost saves that could be from a servicing technology standpoint?.

That's something we are all is going to be looking at over time as these things unfolds and as it develops..

Okay, great. Thanks..

Thank you..

Thank you. Our next question is coming from the line of Rick Shane with J.P. Morgan. Please proceed with your questions..

Thanks guys for taking my questions. So, a couple of things on the acquisition, there was question trying to denationalize the size of the acquisition, and it sounds like de minimis book value plus the 10.5 million.

Are we -- should we assume that consideration here is going to be 100% cash, and then when we think about things on an EPS basis, you talked about $20 million of net income accretion, I'm assuming that you see this is EPS accretive as well?.

Good morning, Rick. Thanks for joining. So, on an EPS basis we did disclose we expect incremental pre-tax income to be approximately 20 million once our portfolio has fully transferred, which on per share after-tax basis will be $0.45 accretive.

And I'm sorry, what was the first part of your question?.

Consideration, and again, the EPS accretion makes a lot of sense, and it sounds like the book value de minimis, so it's relatively small acquisition price for $20 million of pre-tax?.

Yes, you can expect that will be cash..

Got it. And then, when we think about the P&L on a go-forward basis, a servicing platform certainly brings on some additional operating expenses.

So, is there anything we need to consider there in terms of how much of an impact it will have on your OpEx side?.

So, I actually think we will have -- let's see, we will see some integration savings over time. So, we will expect our operating expense ratio to improve as we integrate common functions..

Got it, okay..

And obviously these expense will -- you know, is what it is, but on the OpEx side we would expect some integration savings..

Got it. And then, look, historically the plus and minus of being a servicer is that it is a business that doesn’t scale particularly well, but it is a business that at the same time has a very predictable stream of revenues.

And as a business that has historically relied upon outside servicing, you have been able to bulk up very quickly opportunistically.

Do you lose that by taking on the scalability issues of owing your own servicing platform?.

Well, I mean, yes and no. And I would phrase it this way, servicing is an integral core part of our strategy. It's going to continue to be so.

And having made that decision, then the best way to extract the most value from the assets and the platform is -- we decide is to have our own servicer, right? And so, you are not going to see us -- and our experience has been, our history has been not that we have moved our capital or moved our MSR balances up and down 50% over any periods of time, it's been steady or growing, we expect that to continue, and as long as that's going to be continuing, then owning your own servicer is going to be more efficient, and more able for us to extract the value of the platform of the borrower on all the ancillary opportunities that we see..

Got it. And then, last question, and this is for Mary, is there any reason, so you used their value counting for your MSR, many of the servicers use lower cost per market, is there any reason if you internalize your servicing that you need to change that accounting? I just don’t remember all the rules associated with us..

No, we will not change our accounting methodology for MSR. It will be continue to be valued at -- accounted for value..

Okay. Thank you, guys..

Thanks, Rick..

Thank you. There are no further questions at this time. I will now like to turn the call back over to Bill Greenberg for any closing comments..

I just want to thank you everyone for joining us again today, and as always, thanks for your interest in Two Harbors..

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day..