TWO Two Harbors Investment Corporation

Tightening Mortgage Spreads Drove Increase in Book Value

Two Harbors Investment Corp. (NYSE: TWO), an Agency + MSR mortgage real estate investment trust (REIT), today announced its financial results for the quarter ended December 31, 2022.

Quarterly Summary(1)

• Reported book value of $17.72 per common share, and declared a fourth quarter common stock dividend of $0.60 per share, representing an 11.6% quarterly economic return on book value.(2)
• Generated Comprehensive Income of $160.2 million, or $1.85 per weighted average basic common share.
• Reported Earnings Available for Distribution (EAD) of $22.2 million, or $0.26 per weighted average basic common share.(3)
• Generated Income Excluding Market-Driven Value Changes of $0.73 per weighted average basic common share.(4)
• Effected the previously announced one-for-four reverse stock split of outstanding shares of common stock on November 1, 2022.
• Repurchased 2,957,950 shares of preferred stock, contributing approximately $0.26 to book value per common share.(5)

Annual Summary

• Declared dividends of $2.64 per common share.
• Yielded 2022 total economic return on book value of (13.3)%.(2)
• Announced that Matrix Financial Services Corporation, a wholly owned subsidiary of Two Harbors, agreed to acquire all equity interests in RoundPoint Mortgage Servicing Corporation, which is expected to close in the third quarter of 2023.

Post Quarter-End Update

• Estimate book value has increased 4% through January 31, 2023.
• Issued 10 million shares of common stock through an underwritten offering for net proceeds of approximately $175.6 million.

________________

(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)

Income Excluding Market-Driven Value Changes is a non-GAAP measure. Please see page 12 for a definition of Income Excluding Market-Driven Value Changes and a reconciliation of GAAP to non-GAAP financial information.

(5)

Includes 428,549 Series A, 786,846 Series B and 1,742,555 Series C preferred shares.

“Despite spread volatility in the fourth quarter, we generated a positive return on book value, with our portfolio benefitting from being positioned in low coupon MSR and higher coupon RMBS,” stated Bill Greenberg, Two Harbors’ President and Chief Executive Officer. “Across all asset types, this past year was one of the most challenging investment environments in decades. However, it provided an opportunity to demonstrate the value in Two Harbors' model: that Agency RMBS paired with MSR, and active portfolio management, can dampen volatility. We continue to be very constructive on forward-looking return potential in 2023.”

“In the fourth quarter, inflation moderated and rate expectations leveled off, but volatility remained stubbornly high,” stated Nick Letica, Two Harbors’ Chief Investment Officer. “We allowed our leverage to drift higher and captured positive performance from tightening spreads in November, before taking leverage back down again in December. We deliberately and actively managed our portfolio to have more high coupon mortgage exposure, which benefitted book value. We expect that volatility will moderate in 2023, which could result in tighter spreads and be a positive tailwind for mortgage securities.”

Operating Performance

The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the fourth quarter of 2022 and third quarter of 2022:

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

 

Three Months Ended

December 31, 2022

 

Three Months Ended

September 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 Income (Loss)

$

160,233

 

 

$

1.85

 

 

42.8

%

 

$

(287,808

)

 

$

(3.35

)

 

(67.9

)%

GAAP Net (Loss) Income

$

(262,439

)

 

$

(3.04

)

 

(70.1

)%

 

$

263,865

 

 

$

3.04

 

 

62.3

%

Earnings Available for Distribution(1)

$

22,209

 

 

$

0.26

 

 

5.9

%

 

$

55,173

 

 

$

0.64

 

 

13.0

%

Income Excluding Market-Driven Value Changes(2)

$

62,706

 

 

$

0.73

 

 

16.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Metrics

 

 

 

 

 

 

 

 

 

 

 

Dividend per common share

$

0.60

 

 

 

 

 

 

$

0.68

 

 

 

 

 

Annualized dividend yield(3)

 

15.2

%

 

 

 

 

 

 

20.5

%

 

 

 

 

Book value per common share at period end

$

17.72

 

 

 

 

 

 

$

16.42

 

 

 

 

 

Economic return on book value(4)

 

11.6

%

 

 

 

 

 

 

(16.2

)%

 

 

 

 

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

$

10,462

 

 

 

 

 

 

$

13,404

 

 

 

 

 

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

 

1.9

%

 

 

 

 

 

 

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)

Income Excluding Market-Driven Value Changes is a non-GAAP measure being introduced for the fourth quarter of 2022. Please see page 12 for a definition of Income Excluding Market-Driven Value Changes and a reconciliation of GAAP to non-GAAP financial information.

(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)

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.

(5)

Excludes non-cash equity compensation expense of $1.7 million for the fourth quarter of 2022 and $2.4 million for the third quarter of 2022 and nonrecurring expenses of $10.8 million for the fourth quarter of 2022 and $5.0 million for the third quarter of 2022.

Portfolio Summary

As of December 31, 2022, the company’s portfolio was comprised of $10.8 billion of Agency residential mortgage-backed securities (RMBS), Agency Derivatives and MSR as well as their associated notional debt hedges. Additionally, the company held $3.9 billion bond equivalent value of net long to-be-announced securities (TBAs).

The following tables summarize the company’s investment portfolio as of December 31, 2022 and September 30, 2022:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

 

Portfolio Composition

 

As of December 31, 2022

 

As of September 30, 2022

 

 

(unaudited)

 

(unaudited)

Agency

 

 

 

 

 

 

 

 

Fixed Rate

 

$

7,647,001

 

70.9

%

 

$

9,237,881

 

73.8

%

Other Agency(1)

 

 

21,751

 

0.2

%

 

 

127,612

 

1.0

%

Total Agency

 

 

7,668,752

 

71.1

%

 

 

9,365,493

 

74.8

%

Mortgage servicing rights(2)

 

 

2,984,937

 

27.7

%

 

 

3,021,790

 

24.2

%

Other

 

 

125,158

 

1.2

%

 

 

124,860

 

1.0

%

Aggregate Portfolio

 

 

10,778,847

 

 

 

 

12,512,143

 

 

Net TBA position(3)

 

 

3,900,395

 

 

 

 

4,047,890

 

 

Total Portfolio

 

$

14,679,242

 

 

 

$

16,560,033

 

 

Portfolio Metrics

 

Three Months Ended December 31, 2022

 

Three Months Ended September 30, 2022

 

 

(unaudited)

 

(unaudited)

Average portfolio yield(4)

 

4.92

%

 

4.61

%

Average cost of financing(5)

 

3.95

%

 

2.84

%

Net spread

 

0.97

%

 

1.77

%

________________

(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 under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes, 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 December 31, 2022

 

As of September 30, 2022

 

 

(unaudited)

 

(unaudited)

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

 

$

102.26

 

 

$

102.84

 

Weighted average three month CPR on Agency RMBS

 

 

5.9

%

 

 

9.1

%

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

 

 

98.6

%

 

 

97.8

%

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

 

 

1.4

%

 

 

2.2

%

______________

(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 December 31, 2022

 

As of September 30, 2022

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Unpaid principal balance

 

$

204,876,693

 

 

$

206,613,560

 

Gross coupon rate

 

 

3.3

%

 

 

3.2

%

Current loan size

 

$

334

 

 

$

335

 

Original FICO(2)

 

 

760

 

 

 

760

 

Original LTV

 

 

72

%

 

 

72

%

60+ day delinquencies

 

 

0.8

%

 

 

0.7

%

Net servicing fee

 

26.5 basis points

 

26.4 basis points

 

 

 

 

 

 

 

Three Months Ended December 31, 2022

 

Three Months Ended September 30, 2022

 

 

(unaudited)

 

(unaudited)

Fair value losses

 

$

(64,085

)

 

$

(6,720

)

Servicing income

 

$

160,926

 

 

$

148,833

 

Servicing expenses

 

$

24,542

 

 

$

22,144

 

Change in servicing reserves

 

$

713

 

 

$

(1,005

)

________________

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. Portfolio metrics, other than UPB, represent averages weighted by UPB.

(2)

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

Other Investments and Risk Management Metrics

 

As of December 31, 2022

 

As of September 30, 2022

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Net long TBA notional amount(1)

 

$

3,826,000

 

 

$

4,154,000

 

Futures notional

 

$

(18,285,452

)

 

$

(15,296,550

)

________________

(1)

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 December 31, 2022 and September 30, 2022:

December 31, 2022

 

Balance

 

Weighted Average Borrowing Rate

 

Weighted Average Months to Maturity

 

Number of Distinct Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

7,405,716

 

3.81

%

 

1.56

 

20

Repurchase agreements collateralized by MSR

 

 

309,000

 

7.91

%

 

11.93

 

1

Repurchase agreements collateralized by U.S. Treasuries(1)

 

 

888,295

 

4.49

%

 

1.95

 

3

Total repurchase agreements

 

 

8,603,011

 

3.95

%

 

1.93

 

20

Revolving credit facilities collateralized by MSR and related servicing advance obligations

 

 

1,118,831

 

7.68

%

 

13.48

 

4

Term notes payable collateralized by MSR

 

 

398,011

 

7.19

%

 

17.82

 

n/a

Unsecured convertible senior notes

 

 

282,496

 

6.25

%

 

36.53

 

n/a

Total borrowings

 

$

10,402,349

 

 

 

 

 

 

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

 

 

 

 

 

 

Borrowings by Collateral Type(2)

 

As of December 31, 2022

 

As of September 30, 2022

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Agency RMBS and Agency Derivatives

 

$

7,334,907

 

 

$

9,563,755

 

Mortgage servicing rights and related servicing advance obligations

 

 

1,825,842

 

 

 

1,922,858

 

Other - secured

 

 

70,809

 

 

 

76,263

 

Other - unsecured(3)

 

 

282,496

 

 

 

282,096

 

Total

 

 

9,514,054

 

 

 

11,844,972

 

TBA cost basis

 

 

3,923,298

 

 

 

4,153,582

 

Net payable (receivable) for unsettled RMBS

 

 

342,964

 

 

 

34,576

 

Total, including TBAs and net payable (receivable) for unsettled RMBS

 

$

13,780,316

 

 

$

16,033,130

 

 

 

 

 

 

Debt-to-equity ratio at period-end(4)

 

4.4 :1.0

 

5.5 :1.0

Economic debt-to-equity ratio at period-end(5)

 

6.3 :1.0

 

7.5 :1.0

 

 

 

 

 

Cost of Financing by Collateral Type(2)

 

Three Months Ended

December 31, 2022

 

Three Months Ended

September 30, 2022

 

 

(unaudited)

 

(unaudited)

Agency RMBS and Agency Derivatives

 

 

3.56

%

 

 

2.30

%

Mortgage servicing rights and related servicing advance obligations(6)

 

 

7.71

%

 

 

6.19

%

Other - secured

 

 

5.40

%

 

 

4.00

%

Other - unsecured(3)(6)

 

 

6.93

%

 

 

6.92

%

Annualized cost of financing

 

 

4.46

%

 

 

3.04

%

Interest rate swaps(7)

 

 

—

%

 

 

(0.01

)%

U.S. Treasury futures(8)

 

 

0.25

%

 

 

0.61

%

TBAs(9)

 

 

2.03

%

 

 

1.31

%

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

 

 

3.95

%

 

 

2.84

%

____________________

(1)

U.S. Treasury securities effectively borrowed under reverse repurchase agreements.

(2)

Excludes repurchase agreements collateralized by U.S. Treasuries.

(3)

Unsecured convertible senior notes.

(4)

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

(5)

Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. Effective as of December 31, 2022, net payable (receivable) on unsettled RMBS is now included in the calculation for economic debt-to-equity. Prior period metrics have been updated to conform to the current period methodology.

(6)

Includes amortization of debt issuance costs.

(7)

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.

(8)

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.

(9)

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.

Conference Call

Two Harbors Investment Corp. will host a conference call on February 9, 2023 at 9:00 a.m. ET to discuss fourth quarter 2022 financial results and related information. The conference call will be webcast live and accessible in the Investors section of the company’s website at www.twoharborsinvestment.com/investors. To participate in the teleconference, please call toll-free (877) 502-7185, approximately 10 minutes prior to the above start time. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. ET on February 9, 2023, through 12:00 p.m. ET on February 23, 2023. The playback can be accessed by calling (877) 660-6853, conference code 13734900. The call will also be archived on the company’s website in the News & Events section.

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 St. Louis Park, MN.

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, 2021, 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; 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 recognize the benefits of our pending acquisition of RoundPoint Mortgage Servicing Corporation; our decision to terminate our management agreement with PRCM Advisers LLC and the ongoing litigation 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 income excluding market-driven value changes, earnings available for distribution and related per basic common share measures. 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 tables on pages 11 and 12 of this release.

Additional Information

Stockholders of Two Harbors and other interested persons may find additional information regarding the company at www.twoharborsinvestment.com, at the Securities and Exchange Commissions’s Internet site at www.sec.gov or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 1601 Utica Avenue South, Suite 900, St. Louis Park, MN, 55416, telephone (612) 453-4100.

TWO HARBORS INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

December 31, 2022

 

December 31, 2021

 

(unaudited)

 

 

ASSETS

 

 

 

Available-for-sale securities, at fair value (amortized cost $8,114,627 and $7,005,013, respectively; allowance for credit losses $6,958 and $14,238, respectively)

$

7,778,734

 

 

$

7,161,703

 

Mortgage servicing rights, at fair value

 

2,984,937

 

 

 

2,191,578

 

Cash and cash equivalents

 

683,479

 

 

 

1,153,856

 

Restricted cash

 

443,026

 

 

 

934,814

 

Accrued interest receivable

 

36,018

 

 

 

26,266

 

Due from counterparties

 

253,374

 

 

 

168,449

 

Derivative assets, at fair value

 

26,438

 

 

 

80,134

 

Reverse repurchase agreements

 

1,066,935

 

 

 

134,682

 

Other assets

 

193,219

 

 

 

262,823

 

Total Assets

$

13,466,160

 

 

$

12,114,305

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Liabilities:

 

 

 

Repurchase agreements

$

8,603,011

 

 

$

7,656,445

 

Revolving credit facilities

 

1,118,831

 

 

 

420,761

 

Term notes payable

 

398,011

 

 

 

396,776

 

Convertible senior notes

 

282,496

 

 

 

424,827

 

Derivative liabilities, at fair value

 

34,048

 

 

 

53,658

 

Due to counterparties

 

541,709

 

 

 

196,627

 

Dividends payable

 

64,504

 

 

 

72,412

 

Accrued interest payable

 

94,034

 

 

 

18,382

 

Other liabilities

 

145,991

 

 

 

130,464

 

Total Liabilities

 

11,282,635

 

 

 

9,370,352

 

Stockholders’ Equity:

 

 

 

Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 26,092,050 and 29,050,000 shares issued and outstanding, respectively ($652,301 and $726,250 liquidation preference, respectively)

 

630,999

 

 

 

702,550

 

Common stock, par value $0.01 per share; 175,000,000 shares authorized and 86,428,845 and 85,977,831 shares issued and outstanding, respectively

 

864

 

 

 

860

 

Additional paid-in capital

 

5,645,998

 

 

 

5,627,758

 

Accumulated other comprehensive (loss) income

 

(278,711

)

 

 

186,346

 

Cumulative earnings

 

1,453,371

 

 

 

1,212,983

 

Cumulative distributions to stockholders

 

(5,268,996

)

 

 

(4,986,544

)

Total Stockholders’ Equity

 

2,183,525

 

 

 

2,743,953

 

Total Liabilities and Stockholders’ Equity

$

13,466,160

 

 

$

12,114,305 

 

TWO HARBORS INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(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,

 

Year Ended December 31,

 

2022

 

2021

 

2022

 

2021

 

(unaudited)

 

(unaudited)

 

 

Interest income:

 

 

 

 

 

Available-for-sale securities

$

83,712

 

 

$

32,729

 

 

$

272,230

 

 

$

167,310

 

Other

 

15,591

 

 

 

276

 

 

 

23,310

 

 

 

1,287

 

Total interest income

 

99,303

 

 

 

33,005

 

 

 

295,540

 

 

 

168,597

 

Interest expense:

 

 

 

 

 

 

 

Repurchase agreements

 

81,975

 

 

 

4,562

 

 

 

167,455

 

 

 

25,774

 

Revolving credit facilities

 

21,854

 

 

 

5,050

 

 

 

51,814

 

 

 

22,425

 

Term notes payable

 

6,906

 

 

 

3,251

 

 

 

19,514

 

 

 

12,936

 

Convertible senior notes

 

4,892

 

 

 

7,295

 

 

 

19,612

 

 

 

28,038

 

Total interest expense

 

115,627

 

 

 

20,158

 

 

 

258,395

 

 

 

89,173

 

Net interest (expense) income

 

(16,324

)

 

 

12,847

 

 

 

37,145

 

 

 

79,424

 

Other (loss) income:

 

 

 

 

 

 

 

(Loss) gain on investment securities

 

(347,450

)

 

 

1,626

 

 

 

(603,937

)

 

 

121,617

 

Servicing income

 

160,926

 

 

 

125,511

 

 

 

603,911

 

 

 

468,406

 

(Loss) gain on servicing asset

 

(64,085

)

 

 

(131,828

)

 

 

425,376

 

 

 

(114,941

)

Gain on interest rate swap and swaption agreements

 

—

 

 

 

36,989

 

 

 

29,499

 

 

 

42,091

 

Gain (loss) on other derivative instruments

 

53,301

 

 

 

(11,565

)

 

 

9,310

 

 

 

(251,283

)

Other income (loss)

 

112

 

 

 

1,856

 

 

 

(5

)

 

 

(3,845

)

Total other (loss) income

 

(197,196

)

 

 

22,589

 

 

 

464,154

 

 

 

262,045

 

Expenses:

 

 

 

 

 

 

 

Servicing expenses

 

25,272

 

 

 

21,582

 

 

 

94,119

 

 

 

86,250

 

Compensation and benefits

 

7,411

 

 

 

6,396

 

 

 

40,723

 

 

 

35,041

 

Other operating expenses

 

15,540

 

 

 

6,648

 

 

 

42,005

 

 

 

28,759

 

Total expenses

 

48,223

 

 

 

34,626

 

 

 

176,847

 

 

 

150,050

 

(Loss) income before income taxes

 

(261,743

)

 

 

810

 

 

 

324,452

 

 

 

191,419

 

Provision for income taxes

 

8,480

 

 

 

2,104

 

 

 

104,213

 

 

 

4,192

 

Net (loss) income

 

(270,223

)

 

 

(1,294

)

 

 

220,239

 

 

 

187,227

 

Dividends on preferred stock

 

(12,365

)

 

 

(13,747

)

 

 

(53,607

)

 

 

(58,458

)

Gain on repurchase and retirement of preferred stock

 

20,149

 

 

 

—

 

 

 

20,149

 

 

 

—

 

Net (loss) income attributable to common stockholders

$

(262,439

)

 

$

(15,041

)

 

$

186,781

 

 

$

128,769

 

Basic (loss) earnings per weighted average common share

$

(3.04

)

 

$

(0.18

)

 

$

2.15

 

 

$

1.72

 

Diluted (loss) earnings per weighted average common share

$

(3.04

)

 

$

(0.18

)

 

$

2.13

 

 

$

1.72

 

Dividends declared per common share

$

0.60

 

 

$

0.68

 

 

$

2.64

 

 

$

2.72

 

Weighted average number of shares of common stock:

 

 

 

 

 

 

 

Basic

 

86,391,405

 

 

 

83,775,184

 

 

 

86,179,418

 

 

 

74,443,000

 

Diluted

 

86,391,405

 

 

 

83,775,184

 

 

 

96,076,175

 

 

 

74,510,884

 

 

 

 

 

 

 

 

 

TWO HARBORS INVESTMENT CORP.

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,

 

2022

 

2021

 

2022

 

2021

 

(unaudited)

 

(unaudited)

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

Net (loss) income

$

(270,223

)

 

$

(1,294

)

 

$

220,239

 

 

$

187,227

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

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

 

422,672

 

 

 

(113,553

)

 

 

(465,057

)

 

 

(455,255

)

Other comprehensive income (loss)

 

422,672

 

 

 

(113,553

)

 

 

(465,057

)

 

 

(455,255

)

Comprehensive income (loss)

 

152,449

 

 

 

(114,847

)

 

 

(244,818

)

 

 

(268,028

)

Dividends on preferred stock

 

(12,365

)

 

 

(13,747

)

 

 

(53,607

)

 

 

(58,458

)

Gain on repurchase and retirement of preferred stock

 

20,149

 

 

 

—

 

 

 

20,149

 

 

 

—

 

Comprehensive income (loss) attributable to common stockholders

$

160,233

 

 

$

(128,594

)

 

$

(278,276

)

 

$

(326,486

)

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, 2022

 

September 30, 2022

 

(unaudited)

 

(unaudited)

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

 

 

 

Comprehensive income (loss) attributable to common stockholders

$

160,233

 

 

$

(287,808

)

Adjustment for other comprehensive (income) loss attributable to common stockholders:

 

 

 

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

 

(422,672

)

 

 

551,673

 

Net (loss) income attributable to common stockholders

$

(262,439

)

 

$

263,865

 

 

 

 

 

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

 

 

 

Realized loss (gain) on securities

 

341,316

 

 

 

(18,265

)

Unrealized loss on securities

 

6,453

 

 

 

23,294

 

(Reversal of) provision for credit losses

 

(318

)

 

 

1,397

 

Realized and unrealized loss on mortgage servicing rights

 

64,084

 

 

 

6,720

 

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

 

—

 

 

 

146,750

 

Unrealized gain on interest rate swaps and swaptions

 

—

 

 

 

(181,378

)

Realized and unrealized gain on other derivative instruments

 

(53,226

)

 

 

(158,891

)

Gain on repurchase and retirement of preferred stock

 

(20,149

)

 

 

—

 

Other realized and unrealized gains

 

(112

)

 

 

—

 

Other adjustments:

 

 

 

MSR amortization(1)

 

(83,190

)

 

 

(75,585

)

TBA dollar roll income(2)

 

16,193

 

 

 

37,832

 

U.S. Treasury futures income(3)

 

(6,408

)

 

 

(16,643

)

Change in servicing reserves

 

713

 

 

 

(1,005

)

Non-cash equity compensation expense

 

1,653

 

 

 

2,355

 

Other nonrecurring expenses

 

10,836

 

 

 

5,029

 

Net provision for income taxes on non-EAD

 

6,803

 

 

 

19,698

 

Earnings available for distribution to common stockholders(4)

$

22,209

 

 

$

55,173

 

 

 

 

 

Weighted average basic common shares

 

86,391,405

 

 

 

86,252,104

 

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

$

0.26

 

 

$

0.64

 

_____________

(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 income (loss) attributable to common stockholders, excluding realized and unrealized gains and losses on the aggregate portfolio, gains and losses on repurchases of preferred stock, 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. 

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, 2022

 

(unaudited)

Reconciliation of Comprehensive income (loss) to Income Excluding Market-Driven Value Changes:

 

Comprehensive income (loss) attributable to common stockholders

$

160,233

 

 

 

Adjustments to exclude market-driven value changes and nonrecurring operating expenses:

 

RMBS market-driven value changes(1)

 

(62,660

)

MSR market-driven value changes(2)

 

12,989

 

Realized and unrealized gains on TBAs, excluding TBA dollar roll income(3)

 

(32,040

)

Realized and unrealized gains on futures, excluding futures income(4)

 

(11,001

)

Other nonrecurring expenses

 

10,836

 

Gain on repurchase and retirement of preferred stock

 

(20,149

)

Net provision for income taxes associated with market-driven value changes

 

4,498

 

Income Excluding Market-Driven Value Changes(5)

$

62,706

 

 

 

Weighted average basic common shares

 

86,391,405

 

Income Excluding Market-Driven Value Changes per weighted average basic common share

$

0.73

 

_____________

(1)

RMBS market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS, less the sum of the realization of RMBS cash flows which incorporates actual prepayments, changes in RMBS accrued interest, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. RMBS includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP. RMBS market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS, less the sum of the realization of RMBS cash flows which incorporates actual prepayments, changes in RMBS accrued interest, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. RMBS includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP.

(2)

MSR market-driven value changes refers to the sum of servicing income, servicing expenses, realized and unrealized gains and losses on MSR, less the sum of the realization of MSR cash flows which incorporates actual prepayments, servicing income and servicing expenses, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged.

(3)

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

(4)

Futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver note or bond using short-term repurchase agreements.

(5)

Income Excluding Market-Driven Value Changes is a non-GAAP measure defined as comprehensive income attributable to common stockholders, excluding market-driven value changes on the aggregate portfolio, provision for income taxes associated with market-driven value changes, nonrecurring operating expenses and gain on the repurchase and retirement of preferred stock. As defined, Income Excluding Market-Driven Value Changes includes the realization of portfolio cash flows which incorporates actual prepayments, changes in portfolio accrued interest, servicing income and servicing expenses, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. This applies to RMBS, MSR and derivatives, as applicable, and is net of all recurring operating expenses and provision for income taxes associated with Income Excluding Market-Driven Value Changes. Income Excluding Market-Driven Value Changes provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers. Income Excluding Market-Driven Value Changes is one of several measures the company’s board of directors considers to determine the amount of dividends to declare on the company’s common stock and should not be considered an indication of taxable income or as a proxy for the amount of dividends the company may declare.

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20230208005777/en/

Margaret Karr, Head of Investor Relations, Two Harbors Investment Corp., (612)-453-4080, Margaret.Karr@twoharborsinvestment.com