Two Harbors Investment Corp. Reports Second Quarter 2021 Financial Results

Overall Performance Driven by Spread Widening in High Coupon RMBS

Two Harbors Investment Corp. (NYSE: TWO), an Agency + MSR mortgage real estate investment trust (REIT), today announced its financial results for the quarter ended June 30, 2021.

Quarterly Summary

  • Reported book value of $6.42 per common share, representing a (9.6)% quarterly return on book value(1)
  • Generated Comprehensive Loss of $194.6 million, representing an annualized return on average common equity of (40.7)%
  • Reported Core Earnings of $51.5 million, or $0.19 per weighted average basic common share(2)
  • Declared a second quarter common stock dividend of $0.17 per share
  • Continued to grow mortgage servicing rights (MSR) portfolio
    • Settled $16.4 billion unpaid principal balance (UPB) generated through flow-sale program
    • Closed on $6.5 billion UPB through bulk transactions

Post Quarter End Update

  • Issued 40 million shares of common stock through an underwritten offering for net proceeds of approximately $256.5 million
  • Expect to settle on outstanding commitments of $17.5 billion UPB of MSR through bulk transactions

“The second quarter saw significant spread widening in high coupon RMBS, which impacted the performance of our portfolio,” stated Bill Greenberg, Two Harbors’ President, Chief Executive Officer and Chief Investment Officer. “While the investing environment in RMBS was challenging, our MSR portfolio has continued to deliver attractive returns. Our recent capital issuance together with our available cash positions the company to deploy capital in MSR, and in RMBS when spreads normalize.”

(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)

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

Operating Performance

The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the second quarter of 2021 and first quarter of 2021:

Two Harbors Investment Corp. Operating Performance (unaudited)

 

 

 

 

 

 

 

 

(dollars in thousands, except per common share data)

 

 

 

Three Months Ended

June 30, 2021

 

Three Months Ended

March 31, 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 Loss

$

(194,606

)

 

$

(0.71

)

 

(40.7

)%

 

$

(48,512

)

 

$

(0.18

)

 

(9.3

)%

GAAP Net (Loss) Income

$

(131,707

)

 

$

(0.48

)

 

(27.5

)%

 

$

222,941

 

 

$

0.81

 

 

42.8

%

Core Earnings(1)

$

51,519

 

 

$

0.19

 

 

10.8

%

 

$

45,830

 

 

$

0.17

 

 

8.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating Metrics

 

 

 

 

 

 

 

 

 

 

 

Dividend per common share

$

0.17

 

 

 

 

 

 

$

0.17

 

 

 

 

 

Annualized dividend yield(2)

9.0

%

 

 

 

 

 

9.3

%

 

 

 

 

Book value per common share at period end

$

6.42

 

 

 

 

 

 

$

7.29

 

 

 

 

 

Return on book value(3)

(9.6

)%

 

 

 

 

 

(2.2

)%

 

 

 

 

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

$

12,469

 

 

 

 

 

 

$

11,914

 

 

 

 

 

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

1.9

%

 

 

 

 

 

1.6

%

 

 

 

 

___________

(1)

Please see page 11 for a definition of Core Earnings 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 $4.6 million for the second quarter of 2021 and $1.8 million for the first quarter of 2021 and nonrecurring expenses of $1.4 million for the second quarter of 2021 and $2.0 million for the first quarter of 2021.

Portfolio Summary

The company’s portfolio was comprised of $9.9 billion of Agency residential mortgage-backed securities (RMBS), Agency Derivatives and MSR as well as their associated notional hedges as of June 30, 2021. Additionally, the company held $7.2 billion bond equivalent value of net long to-be-announced securities (TBAs).

The following tables summarize the company’s investment portfolio as of June 30, 2021 and March 31, 2021:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

 

Portfolio Composition

 

As of June 30, 2021

 

As of March 31, 2021

 

 

(unaudited)

 

(unaudited)

Agency

 

 

 

 

 

 

 

 

Fixed Rate

 

$

7,824,889

 

 

78.9

%

 

$

11,453,989

 

 

84.1

%

Other Agency(1)

 

60,061

 

 

0.6

%

 

64,011

 

 

0.4

%

Total Agency

 

7,884,950

 

 

79.5

%

 

11,518,000

 

 

84.5

%

Mortgage servicing rights(2)

 

2,020,106

 

 

20.4

%

 

2,091,761

 

 

15.4

%

Other

 

5,559

 

 

0.1

%

 

9,219

 

 

0.1

%

Aggregate Portfolio

 

$

9,910,615

 

 

 

 

$

13,618,980

 

 

 

Net TBA position(3)

 

7,164,835

 

 

 

5,024,575

 

 

Total Portfolio

 

$

17,075,450

 

 

 

 

$

18,643,555

 

 

 

Portfolio Metrics

 

Three Months Ended

June 30, 2021

 

Three Months Ended

March 31, 2021

 

 

(unaudited)

 

(unaudited)

Annualized portfolio yield during the quarter(4)

 

2.72

%

 

2.25

%

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

 

0.79

%

 

0.60

%

Annualized net yield for aggregate portfolio during the quarter

 

1.93

%

 

1.65

%

________________

(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 June 30, 2021

 

As of March 31, 2021

 

 

(unaudited)

 

(unaudited)

Weighted average cost basis of Agency principal and interest securities(6)

 

$

105.03

 

 

$

104.90

 

Weighted average three month CPR on Agency RMBS

 

32.3

%

 

30.8

%

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

 

99.2

%

 

99.4

%

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

 

0.8

%

 

0.6

%

______________

(6)

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 June 30, 2021

 

As of March 31, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Unpaid principal balance

 

$

185,209,738

 

 

$

179,014,244

 

Gross weighted average coupon

 

3.5

%

 

 

3.6

%

Weighted average original FICO score(2)

 

 

758

 

 

 

757

 

Weighted average original LTV

 

72

%

 

73

%

60+ day delinquencies

 

2.2

%

 

2.9

%

Net servicing fee

 

 

26.5 basis points

 

 

 

26.5 basis points

 

 

 

 

 

 

 

 

Three Months Ended

June 30, 2021

 

Three Months Ended

March 31, 2021

 

 

(unaudited)

 

(unaudited)

Fair value gains

 

$

(268,051

)

 

$

327,438

 

Servicing income

 

$

112,816

 

 

$

107,119

 

Servicing expenses

 

$

18,503

 

 

$

24,221

 

Change in servicing reserves

 

$

163

 

 

$

661

 

________________

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 June 30, 2021

 

As of March 31, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Net long TBA notional amount(3)

 

$

6,854,000

 

 

$

4,800,000

 

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

 

 

15,646,953

 

 

 

15,221,597

 

Swaptions net notional, utilized as macroeconomic hedges

 

(201,000

)

 

 

Total interest rate swaps and swaptions notional

 

$

15,847,953

 

 

$

15,221,597

 

________________

(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, revolving credit facilities, term notes and convertible senior notes as of June 30, 2021 and March 31, 2021:

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

 

 

 

 

 

 

 

March 31, 2021

 

Balance

 

Weighted

Average

Borrowing Rate

 

Weighted

Average Months

to Maturity

 

Number of

Distinct

Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

11,676,062

 

 

0.24

%

 

3.29

 

 

19

 

Revolving credit facilities collateralized by MSR and related servicing advance obligations

 

443,458

 

 

3.70

%

 

10.39

 

 

4

 

Term notes payable collateralized by MSR

 

395,891

 

 

2.91

%

 

38.86

 

 

n/a

Unsecured convertible senior notes

 

423,337

 

 

6.25

%

 

41.31

 

 

n/a

Total borrowings

 

$

12,938,748

 

 

 

 

 

 

 

Borrowings by Collateral Type

 

As of June 30, 2021

 

As of March 31, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Collateral type:

 

 

 

 

Agency RMBS and Agency Derivatives

 

$

8,224,426

 

 

$

11,674,486

 

Mortgage servicing rights and related servicing advance obligations

 

1,054,702

 

 

839,349

 

Other - secured

 

1,196

 

 

1,576

 

Other - unsecured(1)

 

423,742

 

 

423,337

 

Total

 

$

9,704,066

 

 

$

12,938,748

 

 

 

 

 

 

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

 

3.9

:1.0

 

4.8

:1.0

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

 

6.5

:1.0

 

6.4

:1.0

 

 

 

 

 

Cost of Funds Metrics

 

Three Months Ended

June 30, 2021

 

Three Months Ended

March 31, 2021

 

 

(unaudited)

 

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

 

0.9

%

 

0.6

%

Agency RMBS and Agency Derivatives

 

0.2

%

 

0.3

%

Mortgage servicing rights and related servicing advance obligations(4)

 

4.5

%

 

3.9

%

Other - secured

 

1.9

%

 

2.1

%

Other - unsecured(1)(4)

 

6.7

%

 

6.8

%

____________________

(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.

Conference Call

Two Harbors Investment Corp. will host a conference call on August 5, 2021 at 9:00 a.m. EDT to discuss second quarter 2021 financial results and related information. To participate in the teleconference, please call toll-free (877) 502-7185, 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 Investors section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. EDT on August 5, 2021, through 12:00 p.m. EDT on August 19, 2021. The playback can be accessed by calling (877) 660-6853, conference code 13721255. The call will also be archived on the company’s website in the Investors section under the Events and Presentations link.

Two Harbors Investment Corp.

Two Harbors Investment Corp., a Maryland corporation, is an internally managed real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in Minnetonka, MN. 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, 2020, 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; the ongoing impact of the COVID-19 pandemic, and the actions taken by federal and state governmental authorities and GSEs in response, on the U.S. economy, financial markets and our target assets; 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; 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 decision to terminate our management agreement with PRCM Advisers LLC and the ongoing litigation with PRCM Advisers related to such termination; 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 and Core Earnings per basic common share 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 11 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, 601 Carlson Parkway, Suite 1400, Minnetonka, MN, 55305, telephone (612) 453-4100.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

June 30,

2021

 

December 31,

2020

 

(unaudited)

 

 

ASSETS

 

 

 

Available-for-sale securities, at fair value (amortized cost $7,547,709 and $14,043,175, respectively; allowance for credit losses $17,765 and $22,528, respectively)

$

7,840,046

 

 

$

14,650,922

 

Mortgage servicing rights, at fair value

2,020,106

 

 

1,596,153

 

Cash and cash equivalents

1,281,230

 

 

1,384,764

 

Restricted cash

866,547

 

 

1,261,667

 

Accrued interest receivable

31,571

 

 

47,174

 

Due from counterparties

85,177

 

 

146,433

 

Derivative assets, at fair value

60,376

 

 

95,937

 

Reverse repurchase agreements

70,000

 

 

91,525

 

Other assets

247,059

 

 

241,346

 

Total Assets

$

12,502,112

 

 

$

19,515,921

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Liabilities:

 

 

 

Repurchase agreements

$

8,350,622

 

 

$

15,143,898

 

Revolving credit facilities

533,519

 

 

283,830

 

Term notes payable

396,183

 

 

395,609

 

Convertible senior notes

423,742

 

 

286,183

 

Derivative liabilities, at fair value

14,208

 

 

11,058

 

Due to counterparties

119,472

 

 

135,838

 

Dividends payable

60,507

 

 

65,480

 

Accrued interest payable

17,956

 

 

21,666

 

Other liabilities

101,848

 

 

83,433

 

Total Liabilities

10,018,057

 

 

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 273,718,311 and 273,703,882 shares issued and outstanding, respectively

2,737

 

 

2,737

 

Additional paid-in capital

5,170,387

 

 

5,163,794

 

Accumulated other comprehensive income

307,249

 

 

641,601

 

Cumulative earnings

1,147,953

 

 

1,025,756

 

Cumulative distributions to stockholders

(4,846,821

)

 

(4,722,463

)

Total Stockholders’ Equity

2,484,055

 

 

3,088,926

 

Total Liabilities and Stockholders’ Equity

$

12,502,112

$

19,515,921

 

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(dollars in thousands)

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

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2021

 

2020

 

2021

 

2020

 

(unaudited)

 

(unaudited)

Interest income:

 

 

 

 

 

Available-for-sale securities

$

43,092

 

 

$

105,730

 

 

$

98,744

 

 

$

354,414

 

Other

351

 

 

1,597

 

 

808

 

 

8,420

 

Total interest income

43,443

 

 

107,327

 

 

99,552

 

 

362,834

 

Interest expense:

 

 

 

 

 

 

 

Repurchase agreements

6,981

 

 

50,811

 

 

15,451

 

 

203,416

 

Revolving credit facilities

7,075

 

 

2,826

 

 

11,770

 

 

6,357

 

Term notes payable

3,225

 

 

3,553

 

 

6,436

 

 

8,357

 

Convertible senior notes

7,126

 

 

4,769

 

 

13,476

 

 

9,545

 

Federal Home Loan Bank advances

 

 

155

 

 

 

 

1,747

 

Total interest expense

24,407

 

 

62,114

 

 

47,133

 

 

229,422

 

Net interest income

19,036

 

 

45,213

 

 

52,419

 

 

133,412

 

Other (loss) income:

 

 

 

 

 

 

 

(Loss) gain on investment securities

(41,519

)

 

53,492

 

 

91,349

 

 

(1,028,115

)

Servicing income

112,816

 

 

112,891

 

 

219,935

 

 

243,688

 

(Loss) gain on servicing asset

(268,051

)

 

(238,791

)

 

59,387

 

 

(825,456

)

Gain (loss) on interest rate swap and swaption agreements

24,648

 

 

(46,922

)

 

9,049

 

 

(297,518

)

Gain (loss) on other derivative instruments

51,312

 

 

76,606

 

 

(224,699

)

 

(56,862

)

Other income (loss)

41

 

 

66

 

 

(5,701

)

 

864

 

Total other (loss) income

(120,753

)

 

(42,658

)

 

149,320

 

 

(1,963,399

)

Expenses:

 

 

 

 

 

 

 

Management fees

 

 

11,429

 

 

 

 

25,979

 

Servicing expenses

18,680

 

 

23,947

 

 

43,627

 

 

43,852

 

Compensation and benefits

11,259

 

 

8,127

 

 

19,447

 

 

16,404

 

Other operating expenses

7,218

 

 

5,711

 

 

14,705

 

 

12,512

 

Restructuring charges

 

 

145,069

 

 

 

 

145,788

 

Total expenses

37,157

 

 

194,283

 

 

77,779

 

 

244,535

 

(Loss) income before income taxes

(138,874

)

 

(191,728

)

 

123,960

 

 

(2,074,522

)

(Benefit from) provision for income taxes

(20,914

)

 

(18,164

)

 

1,763

 

 

(31,302

)

Net (loss) income

(117,960

)

 

(173,564

)

 

122,197

 

 

(2,043,220

)

Dividends on preferred stock

13,747

 

 

18,951

 

 

30,963

 

 

37,901

 

Net (loss) income attributable to common stockholders

$

(131,707

)

 

$

(192,515

)

 

$

91,234

 

 

$

(2,081,121

)

Basic (loss) earnings per weighted average common share

$

(0.48

)

 

$

(0.70

)

 

$

0.33

 

 

$

(7.61

)

Diluted (loss) earnings per weighted average common share

$

(0.48

)

 

$

(0.70

)

 

$

0.32

 

 

$

(7.61

)

Dividends declared per common share

$

0.17

 

 

$

0.19

 

 

$

0.34

 

 

$

0.19

 

Weighted average number of shares of common stock:

 

 

 

 

 

 

 

Basic

273,718,561

 

 

273,604,079

 

 

273,714,684

 

 

273,498,347

 

Diluted

273,718,561

 

 

273,604,079

 

 

305,999,203

 

 

273,498,347

 

 

 

 

 

 

 

 

 

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

June 30,

 

Six Months Ended

June 30,

 

2021

 

2020

 

2021

 

2020

 

(unaudited)

 

(unaudited)

Comprehensive (loss) income:

 

 

 

 

 

 

 

Net (loss) income

$

(117,960

)

 

$

(173,564

)

 

$

122,197

 

 

$

(2,043,220

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

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

(62,899

)

 

192,794

 

 

(334,352

)

 

(5,276

)

Other comprehensive (loss) income

(62,899

)

 

192,794

 

 

(334,352

)

 

(5,276

)

Comprehensive (loss) income

(180,859

)

 

19,230

 

 

(212,155

)

 

(2,048,496

)

Dividends on preferred stock

13,747

 

 

18,951

 

 

30,963

 

 

37,901

 

Comprehensive (loss) income attributable to common stockholders

$

(194,606

)

 

$

279

 

 

$

(243,118

)

 

$

(2,086,397

)

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

June 30,

 

Three Months Ended

March 31,

 

2021

 

2020

 

(unaudited)

 

(unaudited)

Reconciliation of Comprehensive loss to Core Earnings:

 

 

 

Comprehensive loss attributable to common stockholders

$

(194,606

)

 

$

(48,512

)

Adjustment for other comprehensive loss attributable to common stockholders:

 

 

 

Unrealized loss on available-for-sale securities

62,899

 

 

271,453

 

Net (loss) income attributable to common stockholders

$

(131,707

)

 

$

222,941

 

 

 

 

 

Adjustments for non-Core Earnings:

 

 

 

Realized gain on securities

(15,493

)

 

(69,194

)

Unrealized loss (gain) on securities

49,620

 

 

(62,539

)

Provision (reversal of provision) for credit losses

7,392

 

 

(1,135

)

Realized and unrealized loss (gain) on mortgage servicing rights

202,651

 

 

(390,704

)

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

(8,642

)

 

6,350

 

Unrealized (gain) loss on interest rate swaps and swaptions

(13,607

)

 

10,899

 

(Gain) loss on other derivative instruments

(24,721

)

 

294,952

 

Other loss

 

 

5,817

 

Change in servicing reserves

163

 

 

661

 

Non-cash equity compensation expense

4,611

 

 

1,790

 

Other nonrecurring expenses

1,397

 

 

1,971

 

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

(20,145

)

 

24,021

 

Core Earnings attributable to common stockholders(1)

$

51,519

 

 

$

45,830

 

 

 

 

 

Weighted average basic common shares

273,718,561

 

 

273,710,765

 

Core Earnings attributable to common stockholders per weighted average basic common share

$

0.19

 

 

$

0.17

 

_____________

(1)

Core Earnings is a non-U.S. GAAP measure that we define as comprehensive (loss) income attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, provision for 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, Core Earnings includes net interest income, accrual and settlement of interest on derivatives, dollar roll income on TBAs, 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. Core Earnings 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

 

June 30,

2021

 

March 31,

2021

 

December 31,

2020

 

September 30,

2020

 

June 30,

2020

 

(unaudited)

Net Interest Income:

 

 

 

 

 

 

 

 

 

Interest income

$

43.4

 

 

$

56.1

 

 

$

72.5

 

 

$

89.7

 

 

$

107.3

 

Interest expense

24.4

 

 

22.7

 

 

22.6

 

 

29.2

 

 

62.1

 

Net interest income

19.0

 

 

33.4

 

 

49.9

 

 

60.5

 

 

45.2

 

Other income:

 

 

 

 

 

 

 

 

 

Servicing income, net of amortization(1)

47.4

 

 

43.8

 

 

41.1

 

 

42.2

 

 

51.0

 

Interest spread on interest rate swaps

2.4

 

 

1.7

 

 

2.0

 

 

0.8

 

 

(56.3

)

Gain on other derivative instruments

26.6

 

 

18.9

 

 

43.5

 

 

32.9

 

 

11.9

 

Other income

 

 

0.1

 

 

0.1

 

 

0.1

 

 

0.1

 

Total other income

76.4

 

 

64.5

 

 

86.7

 

 

76.0

 

 

6.7

 

Expenses

31.0

 

 

36.2

 

 

37.3

 

 

43.5

 

 

46.8

 

Core Earnings before income taxes

64.4

 

 

61.7

 

 

99.3

 

 

93.0

 

 

5.1

 

Income tax (benefit) expense

(0.8

)

 

(1.3

)

 

(1.7

)

 

(1.5

)

 

0.6

 

Core Earnings

65.2

 

 

63.0

 

 

101.0

 

 

94.5

 

 

4.5

 

Dividends on preferred stock

13.7

 

 

17.2

 

 

19.0

 

 

18.9

 

 

19.0

 

Core Earnings attributable to common stockholders(2)

$

51.5

 

 

$

45.8

 

 

$

82.0

 

 

$

75.6

 

 

$

(14.5

)

Weighted average basic Core EPS

$

0.19

 

 

$

0.17

 

 

$

0.30

 

 

$

0.28

 

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

Core earnings return on average common equity

10.8

%

 

8.8

%

 

15.9

%

 

15.7

%

 

(3.1

)%

________________

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

(2)

Please see page 11 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.

 

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