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Two Harbors Investment Corp. Reports Fourth Quarter 2019 Financial Results

February 5, 2020 4:17 PM

Generated 23.6% Total Annual Return on Book Value(1)

NEW YORK--(BUSINESS WIRE)-- Two Harbors Investment Corp. (NYSE: TWO), a leading hybrid mortgage real estate investment trust (REIT) that invests in residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and other financial assets, today announced its financial results for the quarter ended December 31, 2019.

Quarterly Summary

2019 Summary

“We are quite proud of the returns that we generated in 2019. Notably, we drove a total stockholder return of 28.7%(3) and a return on book value of 23.6%(1) for the year,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “Book value preservation is our primary goal and the foundation for long-term stockholder returns.”

(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 the book value as of the beginning of the period.
(2) Core Earnings, including dollar roll income, is a non-GAAP measure. Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.
(3) Two Harbors’ total stockholder return is calculated for the period December 31, 2018 through December 31, 2019. Total stockholder return is defined as stock price appreciation including dividends. Source: Bloomberg.

Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the third and fourth quarters of 2019:

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended
December 31, 2019

Three Months Ended
September 30, 2019

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

$

56,850

$

0.21

5.7

%

$

257,585

$

0.94

25.7

%

GAAP Net Income

$

115,804

$

0.42

11.6

%

$

286,749

$

1.05

28.6

%

Core Earnings, including dollar roll income(1)

$

67,671

$

0.25

6.8

%

$

64,979

$

0.24

6.5

%

Operating Metrics

Dividend per common share

$

0.40

$

0.40

Annualized dividend yield(2)

10.9

%

12.2

%

Book value per common share at period end

$

14.54

$

14.72

Return on book value(3)

1.5

%

6.7

%

Other operating expenses, excluding non-cash LTIP amortization(4)

$

11,719

$

11,364

Other operating expenses, excluding non-cash LTIP amortization, as a percentage of average equity(4)

0.9

%

0.9

%

________________
(1) Please see page 11 for a definition of Core Earnings, including dollar roll income, 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) 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 fourth quarter 2019 and $2.0 million for the third quarter 2019.

“Our results in 2019 highlighted the effectiveness of our MSR portfolio construction, as we dynamically and successfully managed the portfolio through a volatile environment in rates and mortgage spreads,” stated Matt Koeppen, Two Harbors’ Co-Chief Investment Officer. “The actions we took this year were intended to preserve or increase book value, preserve or increase return expectancy, and to reduce risk. We believe that we were very successful in this regard.”

“We are very satisfied with our performance this quarter, as our active portfolio management resulted in positive total return despite market trends that were the opposite of those that prevailed through the first three quarters,” stated Bill Greenberg, Two Harbors’ Co-Chief Investment Officer. “Our Rates and Credit strategies complement each other and each have contributed to our success.”

Portfolio Summary
The company’s portfolio is comprised of a Rates strategy and a Credit strategy. The Rates strategy consisted of $29.8 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of December 31, 2019. Additionally, the company held $7.7 billion bond equivalent value of net long to-be-announced securities (TBAs) as part of the Rates strategy. The Credit strategy consisted of $3.6 billion of non-Agency securities, as well as their associated notional hedges as of December 31, 2019.

The following tables summarize the company’s investment portfolio as of December 31, 2019 and September 30, 2019:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of December 31, 2019

As of September 30, 2019

(unaudited)

(unaudited)

Rates Strategy

Agency

Fixed Rate

$

27,763,471

83.2%

$

24,750,521

82.4%

Other Agency(1)

83,509

0.2%

91,554

0.3%

Total Agency

27,846,980

83.4%

24,842,075

82.7%

Mortgage servicing rights

1,909,444

5.7%

1,651,556

5.5%

Credit Strategy

Non-Agency

Senior

3,073,098

9.2%

2,990,274

10.0%

Mezzanine

480,765

1.5%

483,009

1.6%

Other

74,410

0.2%

79,092

0.3%

Total Non-Agency

3,628,273

10.9%

3,552,375

11.9%

Aggregate Portfolio

33,384,697

30,046,006

Net TBA position(2)

7,656,187

10,264,428

Total Portfolio

$

41,040,884

$

40,310,434

Portfolio Metrics

Three Months Ended
December 31, 2019

Three Months Ended
September 30, 2019

(unaudited)

(unaudited)

Annualized portfolio yield during the quarter(3)

3.54%

3.67%

Rates Strategy

Agency RMBS, Agency Derivatives and mortgage servicing rights

3.20%

3.47%

Credit Strategy

Non-Agency securities

6.29%

5.26%

Annualized cost of funds on average borrowing balance during the quarter(4)

2.35%

2.51%

Annualized net yield for aggregate portfolio during the quarter

1.19%

1.16%

________________
(1) Other Agency includes hybrid ARMs and Agency derivatives.
(2) 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.
(3) Includes interest income on RMBS and servicing income net of servicing expenses and amortization on MSR.
(4) Cost of funds includes interest spread income/expense associated with the portfolio's interest rate swaps and caps.

Portfolio Metrics Specific to RMBS and Agency Derivatives

As of December 31, 2019

As of September 30, 2019

(unaudited)

(unaudited)

Weighted average cost basis of principal and interest securities

Agency(5)

$

103.96

$

104.23

Non-Agency(6)

$

63.86

$

63.63

Weighted average three month CPR

Agency

14.3

%

13.4

%

Non-Agency

6.4

%

5.9

%

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

89.1

%

88.2

%

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

10.9

%

11.8

%

______________
(5) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(6) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for total non-Agency securities excluding the company's non-Agency interest-only portfolio, would be $59.60 at December 31, 2019 and $59.41 at September 30, 2019.

Portfolio Metrics Specific to MSR(1)

As of December 31, 2019

As of September 30, 2019

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

175,882,142

$

165,332,533

Fair market value

$

1,909,444

$

1,651,556

Gross weighted average coupon

4.1

%

4.1

%

Weighted average original FICO score(2)

754

752

Weighted average original LTV

75

%

75

%

60+ day delinquencies

0.3

%

0.3

%

Net servicing spread

27.0 basis points

26.5 basis points

Three Months Ended
December 31, 2019

Three Months Ended
September 30, 2019

(unaudited)

(unaudited)

Fair value losses

$

(21,739

)

$

(234,514

)

Servicing income

$

127,690

$

126,025

Servicing expenses

$

20,149

$

17,962

Change in servicing reserves

$

72

$

(300

)

________________
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) 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 December 31, 2019

As of September 30, 2019

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional amount(3)

$

7,427,000

$

9,863,000

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

$

39,702,470

$

41,833,495

Swaptions net notional, utilized as macroeconomic hedges

1,257,000

1,750,000

Total interest rate swaps, caps and swaptions notional

$

40,959,470

$

43,583,495

________________
(3) Accounted for as derivative instruments in accordance with GAAP.

Financing Summary
The following tables summarize the company’s financing metrics and outstanding repurchase agreements, FHLB advances, revolving credit facilities, term notes and convertible senior notes as of December 31, 2019 and September 30, 2019:

December 31, 2019

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

28,884,848

2.12%

2.44

Repurchase agreements collateralized by MSR

262,615

3.51%

11.05

Total repurchase agreements

29,147,463

2.14%

2.52

24

FHLB advances collateralized by RMBS(4)

210,000

2.00%

42.56

1

Revolving credit facilities collateralized by MSR

300,000

4.26%

14.37

1

Term notes payable collateralized by MSR

394,502

4.59%

53.85

n/a

Unsecured convertible senior notes

284,954

6.25%

24.53

n/a

Total borrowings

$

30,336,919

________________
(4) The company’s wholly owned subsidiary, TH Insurance Holdings Company LLC (TH Insurance), is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances.

September 30, 2019

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

25,304,275

2.46%

2.54

Repurchase agreements collateralized by MSR

262,861

3.77%

14.07

Total repurchase agreements

25,567,136

2.47%

2.65

25

FHLB advances collateralized by RMBS(1)

50,000

2.99%

180.66

1

Revolving credit facilities collateralized by MSR

300,000

4.52%

17.39

1

Term notes payable collateralized by MSR

394,235

4.82%

56.88

n/a

Unsecured convertible senior notes

284,635

6.25%

27.53

n/a

Total borrowings

$

26,596,006

________________
(1) The company’s wholly owned subsidiary, TH Insurance Holdings Company LLC (TH Insurance), is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances.

Borrowings by Collateral Type

As of December 31, 2019

As of September 30, 2019

(dollars in thousands)

(unaudited)

(unaudited)

Collateral type:

Agency RMBS and Agency Derivatives

$

27,563,240

$

24,133,606

Mortgage servicing rights

957,117

957,096

Non-Agency securities

1,531,608

1,220,669

Other(2)

284,954

284,635

Total/Annualized cost of funds on average borrowings during the quarter

$

30,336,919

$

26,596,006

Debt-to-equity ratio at period-end(3)

6.1

:1.0

5.3

:1.0

Economic debt-to-equity ratio at period-end(4)

7.5

:1.0

7.2

:1.0

Cost of Funds Metrics

Three Months Ended
December 31, 2019

Three Months Ended
September 30, 2019

(unaudited)

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

2.4

%

2.8

%

Agency RMBS and Agency Derivatives

2.2

%

2.6

%

Mortgage servicing rights(5)

5.0

%

5.2

%

Non-Agency securities

3.0

%

3.5

%

Other(2)(5)

6.8

%

6.7

%

____________________
(2) Includes unsecured convertible senior notes.
(3) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity.
(4) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.
(5) Includes amortization of debt issuance costs.

Dividends and Taxable Income
The company declared dividends totaling $483.6 million for the 2019 taxable year. The company is required to distribute at least 90% of its taxable income to maintain its REIT status, and must distribute 100% of its taxable income to avoid federal income tax. The company distributed 94.7% of its 2019 taxable income to stockholders during 2019, and intends to distribute the remaining 5.3% during the 2020 calendar year. In addition, the tax characterization of each cash distribution made during 2019 will be treated as ordinary income to stockholders.

Conference Call
Two Harbors Investment Corp. will host a conference call on February 6, 2020 at 9:00 a.m. EST to discuss fourth quarter 2019 financial results and related information. To participate in the teleconference, please call toll-free (866) 548-4713, conference code 5688261, approximately 10 minutes prior to the above start time. You may also listen to the teleconference live via the Internet on the company’s website at www.twoharborsinvestment.com in the Investor Relations section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. EST on February 6, 2020, through 12:00 a.m. EST on March 7, 2020. The playback can be accessed by calling (888) 203-1112 , conference code 5688261. The call will also be archived on the company’s website in the Investor Relations section under the Events and Presentations link.

Two Harbors Investment Corp.
Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in New York, New York, and is externally managed and advised by PRCM Advisers LLC, a wholly owned subsidiary of Pine River Capital Management L.P. Additional information is available at www.twoharborsinvestment.com.

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, 2018, 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 effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; 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 acquire 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; 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.

Non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as Core Earnings, including dollar roll income and Core Earnings per basic common share, including dollar roll income, that exclude certain items. The non-GAAP financial measures presented by the company provide supplemental information to assist investors in analyzing the company’s results of operations and help facilitate comparisons to industry peers. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 12 of this release.

Additional Information
Stockholders of Two Harbors and other interested persons may find additional information regarding the company at the SEC’s Internet site at www.sec.gov or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 575 Lexington Avenue, Suite 2930, New York, NY 10022, telephone (612) 629-2500.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

December 31,
2019

December 31,
2018

(unaudited)

ASSETS

Available-for-sale securities, at fair value

$

31,406,328

$

25,552,604

Mortgage servicing rights, at fair value

1,909,444

1,993,440

Cash and cash equivalents

558,136

409,758

Restricted cash

1,058,690

688,006

Accrued interest receivable

92,634

86,589

Due from counterparties

318,963

154,626

Derivative assets, at fair value

188,051

319,981

Reverse repurchase agreements

220,000

761,815

Other assets

169,376

165,660

Total Assets

$

35,921,622

$

30,132,479

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Repurchase agreements

$

29,147,463

$

23,133,476

Federal Home Loan Bank advances

210,000

865,024

Revolving credit facilities

300,000

310,000

Term notes payable

394,502

—

Convertible senior notes

284,954

283,856

Derivative liabilities, at fair value

6,740

820,590

Due to counterparties

259,447

130,210

Dividends payable

128,125

135,551

Accrued interest payable

149,626

160,005

Other liabilities

70,299

39,278

Total Liabilities

30,951,156

25,877,990

Stockholders’ Equity

Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 40,050,000 shares issued and outstanding, respectively ($1,001,250 and $1,001,250 liquidation preference, respectively)

977,501

977,501

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 272,935,731 and 248,085,721 shares issued and outstanding, respectively

2,729

2,481

Additional paid-in capital

5,154,764

4,809,616

Accumulated other comprehensive income

689,400

110,817

Cumulative earnings

2,655,891

2,332,371

Cumulative distributions to stockholders

(4,509,819

)

(3,978,297

)

Total Stockholders’ Equity

4,970,466

4,254,489

Total Liabilities and Stockholders’ Equity

$

35,921,622

$

30,132,479

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
December 31,

Year Ended
December 31,

2019

2018

2019

2018

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

230,567

$

242,535

$

962,283

$

847,325

Other

7,871

9,420

32,407

22,707

Total interest income

238,438

251,955

994,690

870,032

Interest expense:

Repurchase agreements

152,919

146,702

654,280

469,437

Federal Home Loan Bank advances

514

5,762

10,920

20,417

Revolving credit facilities

4,038

5,044

19,354

10,820

Term notes payable

5,002

—

10,708

—

Convertible senior notes

4,811

4,793

19,067

18,997

Total interest expense

167,284

162,301

714,329

519,671

Net interest income

71,154

89,654

280,361

350,361

Other-than-temporary impairment losses

(3,308

)

(107

)

(14,312

)

(470

)

Other income (loss):

Gain (loss) on investment securities

28,141

(245,763

)

280,118

(341,312

)

Servicing income

127,690

104,623

501,612

343,096

Loss on servicing asset

(21,739

)

(171,284

)

(697,659

)

(69,033

)

(Loss) gain on interest rate swap, cap and swaption agreements

(6,875

)

(239,492

)

(108,289

)

16,043

(Loss) gain on other derivative instruments

(10,800

)

(39,122

)

259,998

(54,857

)

Other income

60

342

337

3,037

Total other income (loss)

116,477

(590,696

)

236,117

(103,026

)

Expenses:

Management fees

17,546

12,152

60,102

30,272

Servicing expenses

20,253

18,610

74,607

61,136

Other operating expenses

14,142

15,943

57,055

62,983

Acquisition transaction costs

—

—

—

86,703

Restructuring charges

—

—

—

8,238

Total expenses

51,941

46,705

191,764

249,332

Income (loss) before income taxes

132,382

(547,854

)

310,402

(2,467

)

(Benefit from) provision for income taxes

(2,372

)

6,681

(13,560

)

41,823

Net income (loss)

134,754

(554,535

)

323,962

(44,290

)

Dividends on preferred stock

18,950

18,950

75,801

65,395

Net income (loss) attributable to common stockholders

$

115,804

$

(573,485

)

$

248,161

$

(109,685

)

Basic earnings (loss) per weighted average common share

$

0.42

$

(2.31

)

$

0.93

$

(0.53

)

Diluted earnings (loss) per weighted average common share

$

0.41

$

(2.31

)

$

0.93

$

(0.53

)

Dividends declared per common share

$

0.40

$

0.47

$

1.67

$

1.88

Weighted average number of shares of common stock:

Basic

272,906,815

248,081,168

267,826,739

206,020,502

Diluted

291,070,864

248,081,168

267,826,739

206,020,502

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
December 31,

Year Ended
December 31,

2019

2018

2019

2018

(unaudited)

(unaudited)

Comprehensive income (loss):

Net income (loss)

$

134,754

$

(554,535

)

$

323,962

$

(44,290

)

Other comprehensive (loss) income, net of tax:

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

(58,954

)

265,546

578,583

(233,914

)

Other comprehensive (loss) income

(58,954

)

265,546

578,583

(233,914

)

Comprehensive income (loss)

75,800

(288,989

)

902,545

(278,204

)

Dividends on preferred stock

18,950

18,950

75,801

65,395

Comprehensive income (loss) attributable to common stockholders

$

56,850

$

(307,939

)

$

826,744

$

(343,599

)

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
December 31,

Three Months Ended
September 30,

2019

2019

(unaudited)

(unaudited)

Reconciliation of Comprehensive income to Core Earnings:

Comprehensive income attributable to common stockholders

$

56,850

$

257,585

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities attributable to common stockholders

58,954

29,164

Net income attributable to common stockholders

$

115,804

$

286,749

Adjustments for non-Core Earnings:

Other-than-temporary impairments and loss recovery adjustments

2,198

7,275

Realized gains on securities

(27,615

)

(250,267

)

Unrealized (gain) loss on securities

(526

)

1,439

Realized and unrealized (gain) loss on mortgage servicing rights

(51,387

)

161,214

Realized loss (gain) on termination or expiration of swaps, caps and swaptions

1,495

(75,409

)

Unrealized losses on interest rate swaps, caps and swaptions

10,148

23,940

Loss (gain) on other derivative instruments

19,833

(85,916

)

Other loss (income)

73

(114

)

Change in servicing reserves

72

(300

)

Non-cash equity compensation expense

2,423

1,980

Net benefit from income taxes on non-Core Earnings

(4,847

)

(5,612

)

Core Earnings attributable to common stockholders, including dollar roll income(1)

$

67,671

$

64,979

Weighted average basic common shares

272,906,815

272,897,575

Core Earnings, including dollar roll income, attributable to common stockholders per weighted average basic common share

$

0.25

$

0.24

_____________
(1) Core Earnings, including dollar roll income, is a non-U.S. GAAP measure that we define as comprehensive income (loss) attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment 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 and restructuring charges) and transaction costs associated with the acquisition of CYS. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. “Dollar roll income” is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. Core Earnings, including dollar roll income, provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers.

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY CORE EARNINGS

(dollars in millions, except per share data)

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

Three Months Ended

December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

December 31,
2018

(unaudited)

Net Interest Income:

Interest income

$

237.3

$

251.1

$

269.1

$

245.5

$

252.0

Interest expense

167.3

191.1

192.4

163.5

162.3

Net interest income

70.0

60.0

76.7

82.0

89.7

Other income:

Servicing income, net of amortization(1)

54.6

52.7

52.7

52.5

46.9

Interest spread on interest rate swaps and caps

4.8

19.1

22.9

23.7

15.3

Gain on other derivative instruments

9.0

—

16.7

28.7

29.8

Other income

0.1

0.4

0.5

0.5

0.6

Total other income

68.5

72.2

92.8

105.4

92.6

Expenses

49.4

46.2

42.9

45.2

42.3

Core Earnings, including dollar roll income before income taxes

89.1

86.0

126.6

142.2

140.0

Income tax expense

2.5

2.0

1.6

0.6

0.3

Core Earnings, including dollar roll income

86.6

84.0

125.0

141.6

139.7

Dividends on preferred stock

18.9

19.0

19.0

18.9

19.0

Core Earnings attributable to common stockholders, including dollar roll income(2)

$

67.7

$

65.0

$

106.0

$

122.7

$

120.7

Weighted average basic Core EPS, including dollar roll income

$

0.25

$

0.24

$

0.39

$

0.49

$

0.49

Core earnings return on average common equity, including dollar roll income

6.8

%

6.5

%

11.1

%

14.3

%

13.8

%

________________
(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 Core Earnings, including dollar roll income. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. As discussed on page 11, the company has refined the MSR amortization method utilized in the calculation of Core Earnings beginning with the period ended June 30, 2019. MSR amortization amounts for periods ending prior to June 30, 2019 have not be adjusted.
(2) Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.

Margaret Karr, Investor Relations, Two Harbors Investment Corp., (212) 364-3663 or [email protected]

Source: Two Harbors Investment Corp.

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