Two Harbors Investment Corp. Reports Third Quarter 2021 Financial Results

(1)

Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by book value as of the beginning of the period.

(2)

Earnings Available for Distribution (formerly Core Earnings) is a non-GAAP measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended

September 30, 2021

Three Months Ended

June 30, 2021

Earnings attributable to common stockholders

Earnings

Per
weighted
average
basic
common
share

Annualized
return on
average
common
equity

Earnings

Per
weighted
average
basic
common
share

Annualized
return on
average
common
equity

Comprehensive Income (Loss)

$

45,226

$

0.15

9.1

%

$

(194,606)

$

(0.71)

(40.7)

%

GAAP Net Income (Loss)

$

52,576

$

0.17

10.5

%

$

(131,707)

$

(0.48)

(27.5)

%

Earnings Available for Distribution(1)(2)

$

73,607

$

0.24

14.7

%

$

51,519

$

0.19

10.8

%

Operating Metrics

Dividend per common share

$

0.17

$

0.17

Annualized dividend yield(3)

10.7

%

9.0

%

Book value per common share at period end

$

6.40

$

6.42

Return on book value(4)

2.3

%

(9.6)

%

Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses(5)

$

12,858

$

12,469

Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses, as a percentage of average equity(5)

1.9

%

1.9

%

(1)

Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.

(2)

EAD includes U.S. Treasury futures income of $0.03 per basic common share for the three months ended September 30, 2021. Had U.S. Treasury futures income been included for the three months ended June 30, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share.

(3)

Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.

(4)

Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.

(5)

Excludes non-cash equity compensation expense of $2.6 million for the third quarter of 2021 and $4.6 million for the second quarter of 2021 and nonrecurring expenses of $1.2 million for the third quarter of 2021 and $1.4 million for the second quarter of 2021.

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of September 30, 2021

As of June 30, 2021

(unaudited)

(unaudited)

Agency

Fixed Rate

$

6,647,517

74.5

%

$

7,824,889

78.9

%

Other Agency(1)

54,291

0.6

%

60,061

0.6

%

Total Agency

6,701,808

75.1

%

7,884,950

79.5

%

Mortgage servicing rights(2)

2,213,312

24.8

%

2,020,106

20.4

%

Other

8,173

0.1

%

5,559

0.1

%

Aggregate Portfolio

8,923,293

9,910,615

Net TBA position(3)

8,973,364

7,164,835

Total Portfolio

$

17,896,657

$

17,075,450

Portfolio Metrics

Three Months Ended
September 30, 2021

Three Months Ended
June 30, 2021

(unaudited)

(unaudited)

Annualized portfolio yield during the quarter(4)

3.33

%

2.72

%

Annualized cost of funds on average borrowing balance during the quarter(5)

0.78

%

0.79

%

Annualized net yield for aggregate portfolio during the quarter

2.55

%

1.93

%

(1)

Other Agency includes hybrid ARMs and Agency derivatives.

(2)

Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases.

(3)

Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP.

(4)

Includes interest income on RMBS and servicing income, net of servicing expenses and amortization on MSR.

(5)

Cost of funds includes interest spread income/expense associated with the portfolio's interest rate swaps.

Portfolio Metrics Specific to RMBS and Agency Derivatives

As of September 30, 2021

As of June 30, 2021

(unaudited)

(unaudited)

Weighted average cost basis of Agency principal and interest securities(1)

$

104.86

$

105.03

Weighted average three month CPR on Agency RMBS

30.1

%

32.3

%

Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio

99.1

%

99.2

%

Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio

0.9

%

0.8

%

(1)

Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.

Portfolio Metrics Specific to MSR(1)

As of September 30, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

194,393,942

$

185,209,738

Weighted average gross coupon

3.4

%

3.5

%

Weighted average current loan size

$

321

$

312

Weighted average original FICO score(2)

758

758

Weighted average original LTV

72

%

72

%

60+ day delinquencies

1.7

%

2.2

%

Net servicing fee

26.4 basis points

26.5 basis points

Three Months Ended
September 30, 2021

Three Months Ended
June 30, 2021

(unaudited)

(unaudited)

Fair value losses

$

(42,500)

$

(268,051)

Servicing income

$

122,960

$

112,816

Servicing expenses

$

21,401

$

18,503

Change in servicing reserves

$

(378)

$

163

(1)

Metrics exclude residential mortgage loans in securitization trusts for which the company is the named servicing administrator.

(2)

FICO represents a mortgage industry accepted credit score of a borrower.

Other Investments and Risk Management Metrics

As of September 30, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional amount(3)

$

8,742,000

$

6,854,000

Interest rate swaps notional, utilized to economically hedge interest rate exposure (or duration)

$

17,036,595

$

15,646,953

Swaptions net notional, utilized as macroeconomic hedges

(941,000)

(201,000)

Total interest rate swaps and swaptions notional

$

16,095,595

$

15,445,953

(3)

Accounted for as derivative instruments in accordance with GAAP.

September 30, 2021

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

6,998,701

0.18

%

3.61

16

Repurchase agreements collateralized by MSR

125,000

4.00

%

5.98

1

Total repurchase agreements

7,123,701

0.25

%

3.65

17

Revolving credit facilities collateralized by MSR and related servicing advance obligations

420,761

3.42

%

17.52

4

Term notes payable collateralized by MSR

396,479

2.89

%

32.84

n/a

Unsecured convertible senior notes

424,270

6.25

%

38.32

n/a

Total borrowings

$

8,365,211

June 30, 2021

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

8,225,622

0.22

%

2.47

15

Repurchase agreements collateralized by MSR

125,000

4.00

%

9.01

1

Total repurchase agreements

8,350,622

0.28

%

2.56

16

Revolving credit facilities collateralized by MSR and related servicing advance obligations

533,519

3.68

%

13.94

4

Term notes payable collateralized by MSR

396,183

2.89

%

35.87

n/a

Unsecured convertible senior notes

423,742

6.25

%

38.32

n/a

Total borrowings

$

9,704,066

Borrowings by Collateral Type

As of September 30, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Collateral type:

Agency RMBS and Agency Derivatives

$

6,997,972

$

8,224,426

Mortgage servicing rights and related servicing advance obligations

942,240

1,054,702

Other - secured

729

1,196

Other - unsecured(1)

424,270

423,742

Total

$

8,365,211

$

9,704,066

Debt-to-equity ratio at period-end(2)

3.1

:1.0

3.9

:1.0

Economic debt-to-equity ratio at period-end(3)

6.1

:1.0

6.5

:1.0

Cost of Funds Metrics

Three Months Ended
September 30, 2021

Three Months Ended
June 30, 2021

(unaudited)

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

1.0

%

0.9

%

Agency RMBS and Agency Derivatives

0.2

%

0.2

%

Mortgage servicing rights and related servicing advance obligations(4)

4.4

%

4.5

%

Other - secured

1.8

%

1.9

%

Other - unsecured(1)(4)

6.9

%

6.7

%

(1)

Unsecured convertible senior notes.

(2)

Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity.

(3)

Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.

(4)

Includes amortization of debt issuance costs.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

September 30,
2021

December 31,
2020

(unaudited)

ASSETS

Available-for-sale securities, at fair value (amortized cost $6,369,038 and $14,043,175, respectively; allowance for credit losses $15,429 and $22,528, respectively)

$

6,664,744

$

14,650,922

Mortgage servicing rights, at fair value

2,213,312

1,596,153

Cash and cash equivalents

1,076,216

1,384,764

Restricted cash

783,974

1,261,667

Accrued interest receivable

27,676

47,174

Due from counterparties

336,554

146,433

Derivative assets, at fair value

53,044

95,937

Reverse repurchase agreements

85,000

91,525

Other assets

244,028

241,346

Total Assets

$

11,484,548

$

19,515,921

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Repurchase agreements

$

7,123,701

$

15,143,898

Revolving credit facilities

420,761

283,830

Term notes payable

396,479

395,609

Convertible senior notes

424,270

286,183

Derivative liabilities, at fair value

82,895

11,058

Due to counterparties

112,255

135,838

Dividends payable

67,311

65,480

Accrued interest payable

10,523

21,666

Other liabilities

111,465

83,433

Total Liabilities

8,749,660

16,426,995

Stockholders’ Equity:

Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 29,050,000 and 40,050,000 shares issued and outstanding, respectively ($726,250 and $1,001,250 liquidation preference, respectively)

702,550

977,501

Common stock, par value $0.01 per share; 700,000,000 shares authorized and 313,900,227 and 273,703,882 shares issued and outstanding, respectively

3,139

2,737

Additional paid-in capital

5,429,155

5,163,794

Accumulated other comprehensive income

299,899

641,601

Cumulative earnings

1,214,277

1,025,756

Cumulative distributions to stockholders

(4,914,132)

(4,722,463)

Total Stockholders’ Equity

2,734,888

3,088,926

Total Liabilities and Stockholders’ Equity

$

11,484,548

$

19,515,921

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

35,837

$

89,200

$

134,581

$

443,614

Other

203

516

1,011

8,936

Total interest income

36,040

89,716

135,592

452,550

Interest expense:

Repurchase agreements

5,761

18,652

21,212

222,068

Revolving credit facilities

5,605

2,391

17,375

8,748

Term notes payable

3,249

3,321

9,685

11,678

Convertible senior notes

7,267

4,821

20,743

14,366

Federal Home Loan Bank advances

—

—

—

1,747

Total interest expense

21,882

29,185

69,015

258,607

Net interest income

14,158

60,531

66,577

193,943

Other income (loss):

Gain (loss) on investment securities

28,642

(9,107)

119,991

(1,037,222)

Servicing income

122,960

99,114

342,895

342,802

(Loss) gain on servicing asset

(42,500)

(112,763)

16,887

(938,219)

(Loss) gain on interest rate swap and swaption agreements

(3,947)

1,401

5,102

(296,117)

(Loss) gain on other derivative instruments

(15,019)

65,596

(239,718)

8,734

Other income (loss)

—

84

(5,701)

948

Total other income (loss)

90,136

44,325

239,456

(1,919,074)

Expenses:

Management fees

—

5,759

—

31,738

Servicing expenses

21,041

26,197

64,668

70,049

Compensation and benefits

9,198

10,099

28,645

26,503

Other operating expenses

7,406

8,877

22,111

21,389

Restructuring charges

—

(139,788)

—

6,000

Total expenses

37,645

(88,856)

115,424

155,679

Income (loss) before income taxes

66,649

193,712

190,609

(1,880,810)

Provision for (benefit from) income taxes

325

(8,202)

2,088

(39,504)

Net income (loss)

66,324

201,914

188,521

(1,841,306)

Dividends on preferred stock

13,748

18,950

44,711

56,851

Net income (loss) attributable to common stockholders

$

52,576

$

182,964

$

143,810

$

(1,898,157)

Basic earnings (loss) per weighted average common share

$

0.17

$

0.67

$

0.50

$

(6.94)

Diluted earnings (loss) per weighted average common share

$

0.17

$

0.64

$

0.49

$

(6.94)

Dividends declared per common share

$

0.17

$

0.14

$

0.51

$

0.33

Weighted average number of shares of common stock:

Basic

307,773,420

273,705,785

285,192,353

273,567,998

Diluted

346,730,073

291,876,935

319,966,115

273,567,998

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS), CONTINUED

(dollars in thousands)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

(unaudited)

(unaudited)

Comprehensive income (loss):

Net income (loss)

$

66,324

$

201,914

$

188,521

$

(1,841,306)

Other comprehensive (loss) income, net of tax:

Unrealized (loss) gain on available-for-sale securities

(7,350)

36,216

(341,702)

30,940

Other comprehensive (loss) income

(7,350)

36,216

(341,702)

30,940

Comprehensive income (loss)

58,974

238,130

(153,181)

(1,810,366)

Dividends on preferred stock

13,748

18,950

44,711

56,851

Comprehensive income (loss) attributable to common stockholders

$

45,226

$

219,180

$

(197,892)

$

(1,867,217)

TWO HARBORS INVESTMENT CORP.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION

(dollars in thousands, except share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended
September 30,

Three Months Ended
June 30,

2021

2021

(unaudited)

(unaudited)

Reconciliation of Comprehensive income (loss) to Earnings Available for Distribution:

Comprehensive income (loss) attributable to common stockholders

$

45,226

$

(194,606)

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities

7,350

62,899

Net income (loss) attributable to common stockholders

$

52,576

$

(131,707)

Adjustments for non-EAD:

Realized gain on securities

(21,087)

(15,493)

Unrealized (gain) loss on securities

(7,714)

49,620

Provision for credit losses

159

7,392

Realized and unrealized (gain) loss on mortgage servicing rights

(23,749)

202,651

Realized gain on termination or expiration of interest rate swaps and swaptions

(5,220)

(8,642)

Unrealized loss (gain) on interest rate swaps and swaptions

13,608

(13,607)

Loss (gain) on other derivative instruments

61,355

(24,721)

Change in servicing reserves

(378)

163

Non-cash equity compensation expense

2,559

4,611

Other nonrecurring expenses

1,187

1,397

Net provision for (benefit from) income taxes on non-EAD

311

(20,145)

Earnings available for distribution to common stockholders(1)

$

73,607

$

51,519

Weighted average basic common shares

307,773,420

273,718,561

Earnings available for distribution to common stockholders per weighted average basic common share(2)

$

0.24

$

0.19

(1)

Beginning with this reporting period for the three months ended September 30, 2021, the previously reported non-GAAP measure Core Earnings will be referred to as Earnings Available for Distribution, or EAD. EAD is a non-GAAP measure that we define as comprehensive income (loss) attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, provision for (reversal of) credit losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock, other nonrecurring expenses and restructuring charges). As defined, EAD includes net interest income, accrual and settlement of interest on derivatives, dollar roll income on TBAs, U.S. Treasury futures income, servicing income, net of estimated amortization on MSR, management fees and recurring cash related operating expenses. Dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements. EAD provides supplemental information to assist investors in analyzing the Company’s results of operations and helps facilitate comparisons to industry peers. EAD is one of several measures our board of directors considers to determine the amount of dividends to declare on our common stock and should not be considered an indication of our taxable income or as a proxy for the amount of dividends we may declare.

(2)

EAD includes U.S. Treasury futures income of $0.03 per basic common share for the three months ended September 30, 2021. Had U.S. Treasury futures income been included for the three months ended June 30, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share.

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY EARNINGS AVAILABLE FOR DISTRIBUTION

(dollars in millions, except per share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

(unaudited)

Net Interest Income:

Interest income

$

36.0

$

43.4

$

56.1

$

72.5

$

89.7

Interest expense

21.9

24.4

22.7

22.6

29.2

Net interest income

14.1

19.0

33.4

49.9

60.5

Other income:

Servicing income, net of amortization(1)

56.7

47.4

43.8

41.1

42.2

Interest spread on interest rate swaps

4.5

2.4

1.7

2.0

0.8

Gain on other derivative instruments

46.3

26.6

18.9

43.5

32.9

Other income

—

—

0.1

0.1

0.1

Total other income

107.5

76.4

64.5

86.7

76.0

Expenses

34.2

31.0

36.2

37.3

43.5

Earnings available for distribution before income taxes

87.4

64.4

61.7

99.3

93.0

Income tax (benefit) expense

—

(0.8)

(1.3)

(1.7)

(1.5)

Earnings available for distribution

87.4

65.2

63.0

101.0

94.5

Dividends on preferred stock

13.8

13.7

17.2

19.0

18.9

Earnings available for distribution to common stockholders(2)

$

73.6

$

51.5

$

45.8

$

82.0

$

75.6

Earnings available for distribution to common stockholders per weighted average basic common share(3)

$

0.24

$

0.19

$

0.17

$

0.30

$

0.28

Earnings available for distribution return on average common equity

14.7

%

10.8

%

8.8

%

15.9

%

15.7

%

(1)

Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio. This amortization has been deducted from Earnings Available for Distribution. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.

(2)

Earnings Available for Distribution, or EAD (formerly Core Earnings), is a non-GAAP measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.

(3)

EAD includes U.S. Treasury futures income of $0.03 per basic common share for the three months ended September 30, 2021. Had U.S. Treasury futures income been included for the three months ended June 30, 2021 and March 31, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share, and $0.01 higher, or $0.18 per basic common share, respectively. U.S. Treasury futures income was de minimis in prior quarters.