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Two Harbors Investment Corp. Reports Fourth Quarter 2021 Financial Results

Overall Performance Driven by Spread Widening

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, 2021.

Quarterly Summary

  • Reported book value of $5.87 per common share, representing a (5.6)% quarterly return on book value(1)
  • Generated Comprehensive Loss of $128.6 million, representing an annualized return on average common equity of (24.7)%
  • Reported Earnings Available for Distribution (EAD) of $73.3 million, or $0.22 per weighted average basic common share(2)
  • Declared a fourth quarter common stock dividend of $0.17 per share
  • Continued strength in mortgage servicing rights (MSR) flow sale program, which offset impact of fast prepayment speeds

Annual Summary

  • Returned total dividends of $0.68 per common share, equivalent to an average dividend yield of 10%(3)
  • Reported book value of $5.87 per common share compared to $7.63 at December 31, 2020, representing a (14.2)% return on book value
  • Acquired $88.3 billion unpaid principal balance (UPB) of MSR through flow and bulk channels
  • Optimized liability and capital structure
    • Issued $287.5 million principal amount of 5-year convertible senior notes due 2026. Repurchased and retired $144 million principal amount of convertible senior notes due 2022
    • Redeemed $75 million Series D and $200 million Series E preferred shares
    • Issued 70 million of common shares for net proceeds of approximately $450 million

Post-Quarter End Update

  • Settled on $17 billion UPB of MSR through bulk channel
  • Expect to settle on additional commitments of $22 billion UPB of MSR through bulk transactions in the first quarter of 2022
  • Redeemed $144 million of convertible notes that matured in January 2022

“Our portfolio performance was impacted by spread widening and higher volatility during the fourth quarter. While the investment environment for RMBS was challenging, we capitalized on opportunities to purchase MSR at attractive levels.” stated Bill Greenberg, Two Harbors’ President, Chief Executive Officer and Chief Investment Officer. “With the Federal Reserve firmly on the path of quantitative tightening, we are well-positioned to deploy capital into a more constructive investing environment and are optimistic about the forward outlook for Two Harbors and our paired Agency + MSR strategy.”

(1)

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

(2)

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

(3)

Average dividend yield is calculated based on the dividends declared in the given period, divided by the average daily closing share price during the given period.

Operating Performance

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

Two Harbors Investment Corp. Operating Performance (unaudited)

 

 

 

 

 

 

 

 

(dollars in thousands, except per common share data)

 

 

 

Three Months Ended

December 31, 2021

 

Three Months Ended

September 30, 2021

Earnings attributable to common stockholders

Earnings

 

Per weighted

average basic

common share

 

Annualized return

on average

common equity

 

Earnings

 

Per weighted

average basic

common share

 

Annualized return

on average

common equity

Comprehensive (Loss) Income

$

(128,594

)

 

$

(0.38

)

 

(24.7

)%

 

$

45,226

 

 

$

0.15

 

9.1

%

GAAP Net (Loss) Income

$

(15,041

)

 

$

(0.05

)

 

(2.9

)%

 

$

52,576

 

 

$

0.17

 

10.5

%

Earnings Available for Distribution(1)

$

73,276

 

 

$

0.22

 

 

14.1

%

 

$

73,607

 

 

$

0.24

 

14.7

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating Metrics

 

 

 

 

 

 

 

 

 

 

 

Dividend per common share

$

0.17

 

 

 

 

 

 

$

0.17

 

 

 

 

 

Annualized dividend yield(2)

 

11.8

%

 

 

 

 

 

 

10.7

%

 

 

 

 

Book value per common share at period end

$

5.87

 

 

 

 

 

 

$

6.40

 

 

 

 

 

Return on book value(3)

(5.6

)%

 

 

 

 

 

 

2.3

%

 

 

 

 

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

$

9,854

 

 

 

 

 

 

$

12,858

 

 

 

 

 

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

 

1.4

%

 

 

 

 

 

 

1.9

%

 

 

 

 

________________

(1)

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

(2)

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 $2.5 million for the fourth quarter of 2021 and $2.6 million for the third quarter of 2021 and nonrecurring expenses of $0.7 million for the fourth quarter of 2021 and $1.2 million for the third quarter of 2021.

Portfolio Summary

As of December 31, 2021, the company’s portfolio was comprised of $9.4 billion of Agency residential mortgage-backed securities (RMBS), Agency Derivatives and MSR as well as their associated notional hedges. Additionally, the company held $4.2 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, 2021 and September 30, 2021:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

 

Portfolio Composition

 

As of December 31, 2021

 

As of September 30, 2021

 

 

(unaudited)

 

(unaudited)

Agency

 

 

 

 

 

 

 

 

Fixed Rate

 

$

7,140,913

 

76.0

%

 

$

6,647,517

 

74.5

%

Other Agency(1)

 

 

49,397

 

0.6

%

 

 

54,291

 

0.6

%

Total Agency

 

 

7,190,310

 

76.6

%

 

 

6,701,808

 

75.1

%

Mortgage servicing rights(2)

 

 

2,191,578

 

23.3

%

 

 

2,213,312

 

24.8

%

Other

 

 

12,304

 

0.1

%

 

 

8,173

 

0.1

%

Aggregate Portfolio

 

 

9,394,192

 

 

 

 

8,923,293

 

 

Net TBA position(3)

 

 

4,240,371

 

 

 

 

8,973,364

 

 

Total Portfolio

 

$

13,634,563

 

 

 

$

17,896,657

 

 

Portfolio Metrics

 

Three Months Ended

December 31, 2021

 

Three Months Ended

September 30, 2021

 

 

(unaudited)

 

(unaudited)

Annualized portfolio yield during the quarter(4)

 

3.72

%

 

3.33

%

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

 

0.73

%

 

0.78

%

Annualized net yield for aggregate portfolio during the quarter

 

2.99

%

 

2.55

%

________________

(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 December 31, 2021

 

As of September 30, 2021

 

 

(unaudited)

 

(unaudited)

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

 

$

104.66

 

 

$

104.86

 

Weighted average three month CPR on Agency RMBS

 

 

27.7

%

 

 

30.1

%

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

 

 

99.1

%

 

 

99.1

%

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

 

 

0.9

%

 

 

0.9

%

______________

(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, 2021

 

As of September 30, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Unpaid principal balance

 

$

193,770,566

 

 

$

194,393,942

 

Weighted average gross coupon

 

 

3.3

%

 

 

3.4

%

Weighted average current loan size

 

$

322

 

 

$

321

 

Weighted average original FICO score(2)

 

 

758

 

 

 

758

 

Weighted average original LTV

 

 

72

%

 

 

72

%

60+ day delinquencies

 

 

1.3

%

 

 

1.7

%

Net servicing fee

 

26.3 basis points

 

26.4 basis points

 

 

 

 

 

 

 

Three Months Ended

December 31, 2021

 

Three Months Ended

September 30, 2021

 

 

(unaudited)

 

(unaudited)

Fair value losses

 

$

(131,828

)

 

$

(42,500

)

Servicing income

 

$

125,511

 

 

$

122,960

 

Servicing expenses

 

$

21,605

 

 

$

21,401

 

Change in servicing reserves

 

$

(23

)

 

$

(378

)

________________

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, 2021

 

As of September 30, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Net long TBA notional amount(3)

 

$

4,116,000

 

 

$

8,742,000

 

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

 

$

20,387,300

 

 

$

17,036,595

 

Swaptions net notional, utilized as macroeconomic hedges

 

 

(1,761,000

)

 

 

(941,000

)

Total interest rate swaps and swaptions notional

 

$

18,626,300

 

 

$

16,095,595

 

________________

(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 December 31, 2021 and September 30, 2021:

December 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

 

$

7,531,445

 

0.17

%

 

2.15

 

19

Repurchase agreements collateralized by MSR

 

 

125,000

 

4.00

%

 

5.95

 

1

Total repurchase agreements

 

 

7,656,445

 

0.24

%

 

2.21

 

20

Revolving credit facilities collateralized by MSR and related servicing advance obligations

 

 

420,761

 

3.46

%

 

14.50

 

4

Term notes payable collateralized by MSR

 

 

396,776

 

2.90

%

 

29.82

 

n/a

Unsecured convertible senior notes

 

 

424,827

 

6.25

%

 

32.34

 

n/a

Total borrowings

 

$

8,898,809

 

 

 

 

 

 

September 30, 2021

 

Balance

 

Weighted

Average

Borrowing Rate

 

Weighted

Average Months

to Maturity

 

Number

of Distinct

Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

6,998,701

 

0.18

%

 

3.61

 

16

Repurchase agreements collateralized by MSR

 

 

125,000

 

4.00

%

 

5.98

 

1

Total repurchase agreements

 

 

7,123,701

 

0.25

%

 

3.65

 

17

Revolving credit facilities collateralized by MSR and related servicing advance obligations

 

 

420,761

 

3.42

%

 

17.52

 

4

Term notes payable collateralized by MSR

 

 

396,479

 

2.89

%

 

32.84

 

n/a

Unsecured convertible senior notes

 

 

424,270

 

6.25

%

 

35.33

 

n/a

Total borrowings

 

$

8,365,211

 

 

 

 

 

 

Borrowings by Collateral Type

 

As of December 31, 2021

 

As of September 30, 2021

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Collateral type:

 

 

 

 

Agency RMBS and Agency Derivatives

 

$

7,531,274

 

 

$

6,997,972

 

Mortgage servicing rights and related servicing advance obligations

 

 

942,537

 

 

 

942,240

 

Other - secured

 

 

171

 

 

 

729

 

Other - unsecured(1)

 

 

424,827

 

 

 

424,270

 

Total

 

$

8,898,809

 

 

$

8,365,211

 

 

 

 

 

 

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

 

3.2 :1.0

 

3.1 :1.0

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

 

4.7 :1.0

 

6.1 :1.0

 

 

 

 

 

Cost of Funds Metrics

 

Three Months Ended

December 31, 2021

 

Three Months Ended

September 30, 2021

 

 

(unaudited)

 

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

 

 

1.0

%

 

 

1.0

%

Agency RMBS and Agency Derivatives

 

 

0.2

%

 

 

0.2

%

Mortgage servicing rights and related servicing advance obligations(4)

 

 

4.2

%

 

 

4.4

%

Other - secured

 

 

1.8

%

 

 

1.8

%

Other - unsecured(1)(4)

 

 

6.9

%

 

 

6.9

%

____________________

(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 February 10, 2022 at 9:00 a.m. ET to discuss fourth quarter 2021 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 10, 2022, through 12:00 p.m. ET on February 24, 2022. The playback can be accessed by calling (877) 660-6853, conference code 13723524. 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 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 St. Louis Park, 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 earnings available for distribution and earnings available for distribution 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, 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,

2021

 

December 31,

2020

 

(unaudited)

 

 

ASSETS

 

 

 

Available-for-sale securities, at fair value (amortized cost $7,005,013 and $14,043,175, respectively; allowance for credit losses $14,238 and $22,528, respectively)

$

7,161,703

 

 

$

14,650,922

 

Mortgage servicing rights, at fair value

 

2,191,578

 

 

 

1,596,153

 

Cash and cash equivalents

 

1,153,856

 

 

 

1,384,764

 

Restricted cash

 

934,814

 

 

 

1,261,667

 

Accrued interest receivable

 

26,266

 

 

 

47,174

 

Due from counterparties

 

168,449

 

 

 

146,433

 

Derivative assets, at fair value

 

80,134

 

 

 

95,937

 

Reverse repurchase agreements

 

134,682

 

 

 

91,525

 

Other assets

 

262,823

 

 

 

241,346

 

Total Assets

$

12,114,305

 

 

$

19,515,921

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Liabilities:

 

 

 

Repurchase agreements

$

7,656,445

 

 

$

15,143,898

 

Revolving credit facilities

 

420,761

 

 

 

283,830

 

Term notes payable

 

396,776

 

 

 

395,609

 

Convertible senior notes

 

424,827

 

 

 

286,183

 

Derivative liabilities, at fair value

 

53,658

 

 

 

11,058

 

Due to counterparties

 

196,627

 

 

 

135,838

 

Dividends payable

 

72,412

 

 

 

65,480

 

Accrued interest payable

 

18,382

 

 

 

21,666

 

Other liabilities

 

130,464

 

 

 

83,433

 

Total Liabilities

 

9,370,352

 

 

 

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 343,911,324 and 273,703,882 shares issued and outstanding, respectively

 

3,439

 

 

 

2,737

 

Additional paid-in capital

 

5,625,179

 

 

 

5,163,794

 

Accumulated other comprehensive income

 

186,346

 

 

 

641,601

 

Cumulative earnings

 

1,212,983

 

 

 

1,025,756

 

Cumulative distributions to stockholders

 

(4,986,544

)

 

 

(4,722,463

)

Total Stockholders’ Equity

 

2,743,953

 

 

 

3,088,926

 

Total Liabilities and Stockholders’ Equity

$

12,114,305

 

 

$

19,515,921

 

 

TWO HARBORS INVESTMENT CORP.

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

December 31,

 

Year Ended

December 31,

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

 

(unaudited)

 

(unaudited)

Interest income:

 

 

 

 

 

Available-for-sale securities

$

32,729

 

 

$

72,071

 

 

$

167,310

 

 

$

515,685

 

Other

 

276

 

 

 

429

 

 

 

1,287

 

 

 

9,365

 

Total interest income

 

33,005

 

 

 

72,500

 

 

 

168,597

 

 

 

525,050

 

Interest expense:

 

 

 

 

 

 

 

Repurchase agreements

 

4,562

 

 

 

11,001

 

 

 

25,774

 

 

 

233,069

 

Revolving credit facilities

 

5,050

 

 

 

3,513

 

 

 

22,425

 

 

 

12,261

 

Term notes payable

 

3,251

 

 

 

3,296

 

 

 

12,936

 

 

 

14,974

 

Convertible senior notes

 

7,295

 

 

 

4,831

 

 

 

28,038

 

 

 

19,197

 

Federal Home Loan Bank advances

 

 

 

 

 

 

 

 

 

 

1,747

 

Total interest expense

 

20,158

 

 

 

22,641

 

 

 

89,173

 

 

 

281,248

 

Net interest income

 

12,847

 

 

 

49,859

 

 

 

79,424

 

 

 

243,802

 

Other income (loss):

 

 

 

 

 

 

 

Gain (loss) on investment securities

 

1,626

 

 

 

37,363

 

 

 

121,617

 

 

 

(999,859

)

Servicing income

 

125,511

 

 

 

100,549

 

 

 

468,406

 

 

 

443,351

 

(Loss) gain on servicing asset

 

(131,828

)

 

 

2,522

 

 

 

(114,941

)

 

 

(935,697

)

Gain (loss) on interest rate swap and swaption agreements

 

36,989

 

 

 

(14,689

)

 

 

42,091

 

 

 

(310,806

)

(Loss) gain on other derivative instruments

 

(11,565

)

 

 

81,289

 

 

 

(251,283

)

 

 

90,023

 

Other income (loss)

 

1,856

 

 

 

474

 

 

 

(3,845

)

 

 

1,422

 

Total other income (loss)

 

22,589

 

 

 

207,508

 

 

 

262,045

 

 

 

(1,711,566

)

Expenses:

 

 

 

 

 

 

 

Management fees

 

 

 

 

 

 

 

 

 

 

31,738

 

Servicing expenses

 

21,582

 

 

 

24,217

 

 

 

86,250

 

 

 

94,266

 

Compensation and benefits

 

6,396

 

 

 

11,220

 

 

 

35,041

 

 

 

37,723

 

Other operating expenses

 

6,648

 

 

 

7,237

 

 

 

28,759

 

 

 

28,626

 

Restructuring charges

 

 

 

 

(294

)

 

 

 

 

 

5,706

 

Total expenses

 

34,626

 

 

 

42,380

 

 

 

150,050

 

 

 

198,059

 

Income (loss) before income taxes

 

810

 

 

 

214,987

 

 

 

191,419

 

 

 

(1,665,823

)

Provision for (benefit from) income taxes

 

2,104

 

 

 

3,816

 

 

 

4,192

 

 

 

(35,688

)

Net (loss) income

 

(1,294

)

 

 

211,171

 

 

 

187,227

 

 

 

(1,630,135

)

Dividends on preferred stock

 

13,747

 

 

 

18,951

 

 

 

58,458

 

 

 

75,802

 

Net (loss) income attributable to common stockholders

$

(15,041

)

 

$

192,220

 

 

$

128,769

 

 

$

(1,705,937

)

Basic (loss) earnings per weighted average common share

$

(0.04

)

 

$

0.70

 

 

$

0.43

 

 

$

(6.24

)

Diluted (loss) earnings per weighted average common share

$

(0.04

)

 

$

0.68

 

 

$

0.43

 

 

$

(6.24

)

Dividends declared per common share

$

0.17

 

 

$

0.17

 

 

$

0.68

 

 

$

0.50

 

Weighted average number of shares of common stock:

 

 

 

 

 

 

 

Basic

 

335,100,737

 

 

 

273,699,079

 

 

 

297,772,001

 

 

 

273,600,947

 

Diluted

 

335,100,737

 

 

 

291,870,229

 

 

 

298,043,538

 

 

 

273,600,947

 

 

 

 

 

 

 

 

 

TWO HARBORS INVESTMENT CORP.

 

(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,

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

 

(unaudited)

 

(unaudited)

Comprehensive (loss) income:

 

 

 

 

 

 

 

Net (loss) income

$

(1,294

)

 

$

211,171

 

 

$

187,227

 

 

$

(1,630,135

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

(113,553

)

 

 

(78,739

)

 

 

(455,255

)

 

 

(47,799

)

Other comprehensive loss

 

(113,553

)

 

 

(78,739

)

 

 

(455,255

)

 

 

(47,799

)

Comprehensive (loss) income

 

(114,847

)

 

 

132,432

 

 

 

(268,028

)

 

 

(1,677,934

)

Dividends on preferred stock

 

13,747

 

 

 

18,951

 

 

 

58,458

 

 

 

75,802

 

Comprehensive (loss) income attributable to common stockholders

$

(128,594

)

 

$

113,481

 

 

$

(326,486

)

 

$

(1,753,736

)

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,

 

 

2021

 

 

 

2021

 

 

(unaudited)

 

(unaudited)

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

 

 

 

Comprehensive (loss) income attributable to common stockholders

$

(128,594

)

 

$

45,226

 

Adjustment for other comprehensive loss attributable to common stockholders:

 

 

 

Unrealized loss on available-for-sale securities

 

113,553

 

 

 

7,350

 

Net (loss) income attributable to common stockholders

$

(15,041

)

 

$

52,576

 

 

 

 

 

Adjustments for non-EAD:

 

 

 

  • Realized gain on securities

 

(28,912

)

 

 

(21,087

)

  • Unrealized loss (gain) on securities

 

23,939

 

 

 

(7,714

)

  • Provision for credit losses

 

3,347

 

 

 

159

 

  • Realized and unrealized loss (gain) on mortgage servicing rights

 

67,197

 

 

 

(23,749

)

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

 

5,143

 

 

 

(5,220

)

  • Unrealized (gain) loss on interest rate swaps and swaptions

 

(36,360

)

 

 

13,608

 

  • Loss on other derivative instruments

 

51,116

 

 

 

61,355

 

  • Change in servicing reserves

 

(22

)

 

 

(378

)

  • Non-cash equity compensation expense

 

2,525

 

 

 

2,559

 

  • Other nonrecurring expenses

Other nonrecurring expenses

 

665

 

 

 

1,187

 

  • Net provision for income taxes on non-EAD

 

1,535

 

 

 

311

 

Earnings available for distribution to common stockholders(1)

$

73,276

 

 

$

73,607

 

 

 

 

 

Weighted average basic common shares

 

335,100,737

 

 

 

307,773,420

 

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

$

0.22

 

 

$

0.24

 

_____________

(1)

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

 

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY EARNINGS AVAILABLE FOR DISTRIBUTION

(dollars in millions, except per share data)

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

 

 

Three Months Ended

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

December 31,

2020

 

(unaudited)

Net Interest Income:

 

 

 

 

 

 

 

 

 

Interest income

$

33.0

 

 

$

36.0

 

 

$

43.4

 

 

$

56.1

 

 

$

72.5

 

Interest expense

 

20.2

 

 

 

21.9

 

 

 

24.4

 

 

 

22.7

 

 

 

22.6

 

Net interest income

 

12.8

 

 

 

14.1

 

 

 

19.0

 

 

 

33.4

 

 

 

49.9

 

Other income:

 

 

 

 

 

 

 

 

 

Servicing income, net of amortization(1)

 

60.9

 

 

 

56.7

 

 

 

47.4

 

 

 

43.8

 

 

 

41.1

 

Interest spread on interest rate swaps

 

5.8

 

 

 

4.5

 

 

 

2.4

 

 

 

1.7

 

 

 

2.0

 

Gain on other derivative instruments

 

39.5

 

 

 

46.3

 

 

 

26.6

 

 

 

18.9

 

 

 

43.5

 

Other income

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Total other income

 

106.2

 

 

 

107.5

 

 

 

76.4

 

 

 

64.5

 

 

 

86.7

 

Expenses:

 

 

 

 

 

 

 

 

 

Servicing expenses

 

21.6

 

 

 

21.4

 

 

 

18.5

 

 

 

24.3

 

 

 

22.6

 

Operating expenses

 

9.8

 

 

 

12.8

 

 

 

12.5

 

 

 

11.9

 

 

 

14.7

 

Total expenses

 

31.4

 

 

 

34.2

 

 

 

31.0

 

 

 

36.2

 

 

 

37.3

 

Earnings available for distribution before income taxes

 

87.6

 

 

 

87.4

 

 

 

64.4

 

 

 

61.7

 

 

 

99.3

 

Income tax (benefit) expense

 

0.6

 

 

 

 

 

 

(0.8

)

 

 

(1.3

)

 

 

(1.7

)

Earnings available for distribution

 

87.0

 

 

 

87.4

 

 

 

65.2

 

 

 

63.0

 

 

 

101.0

 

Dividends on preferred stock

 

13.7

 

 

 

13.8

 

 

 

13.7

 

 

 

17.2

 

 

 

19.0

 

Earnings available for distribution to common stockholders(2)

$

73.3

 

 

$

73.6

 

 

$

51.5

 

 

$

45.8

 

 

$

82.0

 

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

$

0.22

 

 

$

0.24

 

 

$

0.19

 

 

$

0.17

 

 

$

0.30

 

Earnings available for distribution return on average common equity

 

14.1

%

 

 

14.7

%

 

 

10.8

%

 

 

8.8

%

 

 

15.9

%

________________

(1)

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

(2)

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

(3)

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

 

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