The company reported debt-to-equity, defined as total borrowings to fund RMBS securities, residential mortgage loans and Agency Derivatives divided by total equity, of 3.4:1.0 and 3.8:1.0 at December 31, 2012 and September 30, 2012, respectively.

The company's portfolio is principally comprised of RMBS available-for-sale securities and Agency Derivatives. As of December 31, 2012, the total value of the portfolio was $14.0 billion, of which approximately $11.3 billion was Agency RMBS and Agency Derivatives and $2.7 billion was non-Agency RMBS. As of December 31, 2012, fixed-rate securities composed 79.8% of the company's portfolio and adjustable-rate securities composed 20.2% of the company's portfolio. In addition, the company held $1.0 billion of U.S. Treasuries classified on its balance sheet as trading securities as of December 31, 2012.

Two Harbors was a party to interest rate swaps and swaptions as of December 31, 2012 with an aggregate notional amount of $19.0 billion, of which $17.5 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 investment portfolio:

Two Harbors Portfolio
(dollars in thousands, except per share data)
RMBS and Agency Derivatives Portfolio Composition

As of December 31, 2012
Agency Bonds
Fixed Rate Bonds $ 10,823,674 77.5 %
Hybrid ARMs 188,429   1.3 %
Total Agency 11,012,103 78.8 %
Agency Derivatives 301,264 2.2 %
Non-Agency Bonds
Senior Bonds 2,132,272 15.3 %
Mezzanine Bonds 518,466 3.7 %
Non-Agency Other 4,113    
Total Non-Agency 2,654,851 19.0 %
Aggregate Portfolio $ 13,968,218  
Fixed-rate investment securities as a percentage of aggregate portfolio 79.8 %
Adjustable-rate investment securities as a percentage of aggregate portfolio 20.2 %

Portfolio Metrics

For the Quarter EndedDecember 31, 2012
Annualized yield on average RMBS and Agency Derivatives during the quarter
Agency 2.9 %
Non-Agency 9.5 %
Aggregate Portfolio 4.0 %
Annualized cost of funds on average repurchase balance during the quarter 1 1.1 %
Annualized interest rate spread for aggregate portfolio during the quarter 2.9 %
Weighted average cost basis of principal and interest securities
Agency $ 108.18
Non-Agency 2 $ 52.17
Weighted average three month CPR for its RMBS and Agency Derivative portfolio
Agency 6.6 %
Non-Agency 3.2 %
Debt-to-equity ratio at period-end 3 3.4 to 1.0
(1) Cost of funds includes interest spread expense associated with the portfolio's interest rate swaps.
(2) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, total non-Agency RMBS excluding the company's non-Agency interest-only portfolio would be $47.88 at December 31, 3012.
(3) Defined as total borrowings to fund RMBS, residential mortgage loans and Agency Derivatives divided by total equity.

“The flexibility of Two Harbors' hybrid approach greatly benefited our stockholders in 2012,” said Bill Roth, Two Harbors' Chief Investment Officer. “The shifting investment landscape during the year provided us the opportunity to raise and deploy capital into non-Agency securities early in 2012, as well as to take advantage of an attractive opportunity in Agencies in the summer. We believe that our strong fourth quarter and full year performance is attributed to our nimble stance and opportunistic approach.”

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