Two Harbors Investment Corp. Reports Third Quarter 2022 Financial Results

(1)

On November 1, 2022, the company completed its previously announced one-for-four reverse stock split of its outstanding shares of common stock. In accordance with generally accepted accounting principles, all common share and per common share amounts presented herein have been adjusted on a retroactive basis to reflect the reverse stock split.

(2)

Economic 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.

(3)

Earnings Available for Distribution 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.

(4)

Economic debt-to-equity is defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA cost basis, divided by total equity.

(5)

Net TBA Position represents the bond equivalent value of the company’s TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP.

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended
September 30, 2022

Three Months Ended
June 30, 2022

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 Loss

$

(287,808

)

$

(3.35

)

(67.9

) %

$

(90,379

)

$

(1.05

)

(19.1

)%

GAAP Net Income (Loss)

$

263,865

$

3.04

62.3

%

$

(86,168

)

$

(1.00

)

(18.2

)%

Earnings Available for Distribution (1)

$

55,173

$

0.64

13.0

%

$

75,250

$

0.87

15.9

%

Operating Metrics

Dividend per common share

$

0.68

$

0.68

Annualized dividend yield (2)

20.5

%

13.7

%

Book value per common share at period end

$

16.42

$

20.41

Economic return on book value (3)

(16.2

)%

(4.7

)%

Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses (4)

$

13,404

$

14,282

Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses, as a percentage of average equity (4)

2.2

%

2.2

%

(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)

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.

(3)

Economic 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.

(4)

Excludes non-cash equity compensation expense of $2.4 million for the third quarter of 2022 and $3.5 million for the second quarter of 2022 and nonrecurring expenses of $5.0 million for the third quarter of 2022 and $2.4 million for the second quarter of 2022.

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of September 30, 2022

As of June 30, 2022

(unaudited)

(unaudited)

Agency

Fixed Rate

$

9,237,881

73.8

%

$

8,694,737

72.2

%

Other Agency (1)

127,612

1.0

%

31,278

0.3

%

Total Agency

9,365,493

74.8

%

8,726,015

72.5

%

Mortgage servicing rights (2)

3,021,790

24.2

%

3,226,191

26.8

%

Other

124,860

1.0

%

87,490

0.7

%

Aggregate Portfolio

12,512,143

12,039,696

Net TBA position (3)

4,047,890

6,397,266

Total Portfolio

$

16,560,033

$

18,436,962

Portfolio Metrics

Three Months Ended
September 30, 2022

Three Months Ended
June 30, 2022

(unaudited)

(unaudited)

Average portfolio yield (4)

4.61

%

4.39

%

Average cost of financing (5)

2.84

%

1.69

%

Net spread

1.77

%

2.70

%

Note: Beginning with the third quarter of 2022, the above presentation of cost of financing and net spread includes U.S. Treasury futures income, which represents the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements. Second quarter 2022 comparative data has been updated to reflect this change.

(1)

Other Agency includes hybrid ARMs and inverse interest-only Agency securities classified as “Agency Derivatives” for purposes of GAAP.

(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)

Average portfolio yield includes interest income on Agency RMBS and non-Agency securities, MSR servicing income, net of estimated amortization, and servicing expenses, and the implied asset yield portion of TBA dollar roll income on TBAs. MSR estimated 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, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.

(5)

Average cost of financing includes interest expense and amortization of deferred debt issuance costs on borrowings, interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements, U.S. Treasury futures income, and the implied financing benefit/cost portion of dollar roll income on TBAs. TBA dollar roll income is the non-GAAP 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.

Portfolio Metrics Specific to RMBS and Agency Derivatives

As of September 30, 2022

As of June 30, 2022

(unaudited)

(unaudited)

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

$

102.84

$

102.24

Weighted average three month CPR on Agency RMBS

9.1

%

14.2

%

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

97.8

%

98.7

%

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

2.2

%

1.3

%

(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, 2022

As of June 30, 2022

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

206,613,560

$

227,074,413

Gross coupon rate

3.2

%

3.2

%

Current loan size

$

335

$

330

Original FICO (2)

760

760

Original LTV

72

%

71

%

60+ day delinquencies

0.7

%

0.8

%

Net servicing fee

26.4 basis points

26.2 basis points

Three Months Ended
September 30, 2022

Three Months Ended
June 30, 2022

(unaudited)

(unaudited)

Fair value (losses) gains

$

(6,720

)

$

85,557

Servicing income

$

148,833

$

157,526

Servicing expenses

$

22,144

$

24,095

Change in servicing reserves

$

(1,005

)

$

(1,119

)

Note: The company does not directly service mortgage loans, but instead contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the company’s MSR.

(1)

(2)

Other Investments and Risk Management Metrics

As of September 30, 2022

As of June 30, 2022

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional amount (1)

$

4,154,000

$

6,317,000

Futures notional

$

(15,296,550

)

$

(16,727,160

)

Interest rate swaps notional

$

—

$

14,850,336

Swaptions net notional

—

(1,680,000

)

Total interest rate swaps and swaptions notional

$

—

$

13,170,336

(1)

Accounted for as derivative instruments in accordance with GAAP.

September 30, 2022

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

9,640,018

3.19

%

3.15

21

Repurchase agreements collateralized by MSR

394,000

6.57

%

4.31

1

Total repurchase agreements

10,034,018

3.32

%

3.19

21

Revolving credit facilities collateralized by MSR and related servicing advance obligations

1,131,161

6.40

%

16.54

4

Term notes payable collateralized by MSR

397,697

5.88

%

20.84

n/a

Unsecured convertible senior notes

282,096

6.25

%

39.55

n/a

Total borrowings

$

11,844,972

June 30, 2022

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

7,558,247

1.28

%

2.53

21

Repurchase agreements collateralized by MSR

400,000

5.12

%

7.33

1

Total repurchase agreements

7,958,247

1.48

%

2.77

21

Revolving credit facilities collateralized by MSR and related servicing advance obligations

825,761

4.93

%

19.76

4

Term notes payable collateralized by MSR

397,383

4.42

%

23.87

n/a

Unsecured convertible senior notes

281,711

6.25

%

42.58

n/a

Total borrowings

$

9,463,102

Borrowings by Collateral Type

As of September 30, 2022

As of June 30, 2022

(dollars in thousands)

(unaudited)

(unaudited)

Agency RMBS and Agency Derivatives

$

9,563,755

$

7,510,313

Mortgage servicing rights and related servicing advance obligations

1,922,858

1,623,144

Other - secured

76,263

47,934

Other - unsecured (1)

282,096

281,711

Total

11,844,972

9,463,102

TBA cost basis

4,153,582

6,409,396

Total, including TBAs

$

15,998,554

$

15,872,498

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

5.5 :1.0

3.8 :1.0

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

7.5 :1.0

6.4 :1.0

Cost of Financing by Collateral Type

Three Months Ended
September 30, 2022

Three Months Ended
June 30, 2022

(unaudited)

(unaudited)

Agency RMBS and Agency Derivatives

2.30

%

0.74

%

Mortgage servicing rights and related servicing advance obligations (4)

6.19

%

4.73

%

Other - secured

4.00

%

2.50

%

Other - unsecured (1)(4)

6.92

%

6.82

%

Annualized cost of financing

3.04

%

1.66

%

Interest rate swaps (5)

(0.01

) %

0.19

%

U.S. Treasury futures (6)

0.61

%

0.92

%

TBAs (7)

1.31

%

—

%

Annualized cost of financing, including swaps, U.S. Treasury futures and TBAs

2.84

%

1.69

%

(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 cost basis, divided by total equity.

(4)

Includes amortization of debt issuance costs.

(5)

The cost of financing on interest rate swaps held to mitigate interest rate risk associated with the company’s outstanding borrowings includes interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements and is calculated using average borrowings balance as the denominator.

(6)

The cost of financing on U.S. Treasury futures held to mitigate interest rate risk associated with the company’s outstanding borrowings is calculated using average borrowings balance as the denominator. 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.

(7)

The implied financing benefit/cost of dollar roll income on TBAs is calculated using the average cost basis of TBAs as the denominator. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. TBAs are accounted for as derivative instruments in accordance with GAAP.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

September 30,
2022

December 31,
2021

(unaudited)

ASSETS

Available-for-sale securities, at fair value (amortized cost $10,228,511 and $7,005,013, respectively; allowance for credit losses $8,535 and $14,238, respectively)

$

9,473,843

$

7,161,703

Mortgage servicing rights, at fair value

3,021,790

2,191,578

Cash and cash equivalents

732,482

1,153,856

Restricted cash

842,534

934,814

Accrued interest receivable

37,701

26,266

Due from counterparties

215,473

168,449

Derivative assets, at fair value

18,406

80,134

Reverse repurchase agreements

207,206

134,682

Other assets

146,122

262,823

Total Assets

$

14,695,557

$

12,114,305

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Repurchase agreements

$

10,034,018

$

7,656,445

Revolving credit facilities

1,131,161

420,761

Term notes payable

397,697

396,776

Convertible senior notes

282,096

424,827

Derivative liabilities, at fair value

107,379

53,658

Due to counterparties

348,176

196,627

Dividends payable

72,802

72,412

Accrued interest payable

48,592

18,382

Other liabilities

129,159

130,464

Total Liabilities

12,551,080

9,370,352

Stockholders’ Equity:

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

702,550

702,550

Common stock, par value $0.01 per share; 175,000,000 shares authorized and 86,371,867 and 85,977,831 shares issued and outstanding, respectively

864

860

Additional paid-in capital

5,643,493

5,627,758

Accumulated other comprehensive (loss) income

(701,383

)

186,346

Cumulative earnings

1,703,445

1,212,983

Cumulative distributions to stockholders

(5,204,492

)

(4,986,544

)

Total Stockholders’ Equity

2,144,477

2,743,953

Total Liabilities and Stockholders’ Equity

$

14,695,557

$

12,114,305

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(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,

Nine Months Ended
September 30,

2022

2021

2022

2021

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

88,472

$

35,837

$

188,518

$

134,581

Other

5,916

203

7,719

1,011

Total interest income

94,388

36,040

196,237

135,592

Interest expense:

Repurchase agreements

57,868

5,761

85,480

21,212

Revolving credit facilities

15,178

5,605

29,960

17,375

Term notes payable

5,427

3,249

12,608

9,685

Convertible senior notes

4,877

7,267

14,720

20,743

Total interest expense

83,350

21,882

142,768

69,015

Net interest income

11,038

14,158

53,469

66,577

Other income:

(Loss) gain on investment securities

(6,426

)

28,642

(256,487

)

119,991

Servicing income

148,833

122,960

442,985

342,895

(Loss) gain on servicing asset

(6,720

)

(42,500

)

489,461

16,887

Gain (loss) on interest rate swap and swaption agreements

34,806

(3,947

)

29,499

5,102

Gain (loss) on other derivative instruments

159,044

(15,019

)

(43,991

)

(239,718

)

Other loss

—

—

(117

)

(5,701

)

Total other income

329,537

90,136

661,350

239,456

Expenses:

Servicing expenses

21,152

21,041

68,847

64,668

Compensation and benefits

10,100

9,198

33,312

28,645

Other operating expenses

10,688

7,406

26,465

22,111

Total expenses

41,940

37,645

128,624

115,424

Income before income taxes

298,635

66,649

586,195

190,609

Provision for income taxes

21,023

325

95,733

2,088

Net income

277,612

66,324

490,462

188,521

Dividends on preferred stock

13,747

13,748

41,242

44,711

Net income attributable to common stockholders

$

263,865

$

52,576

$

449,220

$

143,810

Basic earnings per weighted average common share

$

3.04

$

0.68

$

5.19

$

2.01

Diluted earnings per weighted average common share

$

2.78

$

0.66

$

4.80

$

1.95

Dividends declared per common share

$

0.68

$

0.68

$

2.04

$

2.04

Weighted average number of shares of common stock:

Basic

86,252,104

76,943,355

86,107,979

71,298,088

Diluted

96,132,100

86,682,518

96,120,844

79,991,529

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME, 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,

2022

2021

2022

2021

(unaudited)

(unaudited)

Comprehensive (loss) income:

Net income

$

277,612

$

66,324

$

490,462

$

188,521

Other comprehensive loss, net of tax:

Unrealized loss on available-for-sale securities

(551,673

)

(7,350

)

(887,729

)

(341,702

)

Other comprehensive loss

(551,673

)

(7,350

)

(887,729

)

(341,702

)

Comprehensive (loss) income

(274,061

)

58,974

(397,267

)

(153,181

)

Dividends on preferred stock

13,747

13,748

41,242

44,711

Comprehensive (loss) income attributable to common stockholders

$

(287,808

)

$

45,226

$

(438,509

)

$

(197,892

)

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,

2022

2022

(unaudited)

(unaudited)

Reconciliation of Comprehensive loss to Earnings Available for Distribution:

Comprehensive loss attributable to common stockholders

$

(287,808

)

$

(90,379

)

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities

551,673

4,211

Net income (loss) attributable to common stockholders

$

263,865

$

(86,168

)

Adjustments to exclude reported realized and unrealized (gains) losses:

Realized (gain) loss on securities

(18,265

)

187,542

Unrealized loss on securities

23,294

9,640

Provision for credit losses

1,397

537

Realized and unrealized loss (gain) on mortgage servicing rights

6,720

(85,557

)

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

146,750

(246,211

)

Unrealized (gain) loss on interest rate swaps and swaptions

(181,378

)

209,210

Realized and unrealized (gain) loss on other derivative instruments

(158,891

)

101,577

Other realized and unrealized losses

—

73

Other adjustments:

MSR amortization (1)

(75,585

)

(81,452

)

TBA dollar roll income (2)

37,832

57,702

U.S. Treasury futures income (3)

(16,643

)

(20,602

)

Change in servicing reserves

(1,005

)

(1,120

)

Non-cash equity compensation expense

2,355

3,461

Other nonrecurring expenses

5,029

2,428

Net provision for income taxes on non-EAD

19,698

24,190

Earnings available for distribution to common stockholders (4)

$

55,173

$

75,250

Weighted average basic common shares

86,252,104

86,069,431

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

$

0.64

$

0.87

(1)

MSR 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, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.

(2)

TBA dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.

(3)

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.

(4)

EAD is a non-GAAP measure that we define as comprehensive (loss) income attributable to common stockholders, excluding realized and unrealized gains and losses on the aggregate portfolio, provision for (reversal of) credit losses, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock and other nonrecurring expenses. 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 and recurring cash related operating expenses. 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.