Investor Relations

Investors

Two Harbors Investment Corp. Reports Second Quarter 2019 Financial Results

Generated Strong 14.7% Return on Book Value for the First Half of 2019(1)

Category:

Tuesday, August 6, 2019 4:15 pm EDT

Dateline:

NEW YORK

Public Company Information:

NYSE:
TWO
"The second quarter was marked by lower rates, a flatter curve and wider spreads in the Agency RMBS market"

NEW YORK--(BUSINESS WIRE)--Two Harbors Investment Corp. (NYSE: TWO), a leading hybrid mortgage real estate investment trust (REIT) that invests in residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and other financial assets, today announced its financial results for the quarter ended June 30, 2019.

Quarterly Summary

  • Grew book value to $14.17 per common share, representing a 5.4% quarterly total return on book value.(1)
  • Generated Comprehensive Income of $201.0 million, or $0.74 per weighted average basic common share.
  • Reported Core Earnings, including dollar roll income, of $106.0 million, or $0.39 per weighted average basic common share, representing a return on average common equity of 11.1%.(2)
  • Closed first MSR securitization of $400 million 5-year term notes with attractive terms.

“Our strong return on book value was driven by our acute focus on portfolio positioning and hedging,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “Additionally, improvements in financing continue to present a long-term opportunity for our business. This quarter we completed our first MSR securitization, which has attractive terms and is scalable.”

(1) Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.
(2) Core Earnings, including dollar roll income, is a non-GAAP measure. Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.

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

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

 

Three Months Ended
June 30, 2019

 

Three Months Ended
March 31, 2019

Earnings attributable to common stockholders

Earnings

 

Per weighted average basic common share

 

Annualized return on average common equity

 

Earnings

 

Per weighted average basic common share

 

Annualized return on average common equity

Comprehensive Income

$

201,042

 

 

$

0.74

 

 

21.0

 %

 

$

311,267

 

 

$

1.23

 

 

36.2

 %

GAAP Net Loss

$

(109,507

)

 

$

(0.40

)

 

(11.4

)%

 

$

(44,885

)

 

$

(0.18

)

 

(5.2

)%

Core Earnings, including dollar roll income(1)

$

106,034

 

 

$

0.39

 

 

11.1

 %

 

$

122,683

 

 

$

0.49

 

 

14.3

 %

 

 

 

 

 

 

 

 

 

 

 

 

Operating Metrics

 

 

 

 

 

 

 

 

 

 

 

Dividend per common share

$

0.40

 

 

 

 

 

 

$

0.47

 

 

 

 

 

Annualized dividend yield(2)

12.6

%

 

 

 

 

 

13.9

%

 

 

 

 

Book value per common share at period end

$

14.17

 

 

 

 

 

 

$

13.83

 

 

 

 

 

Return on book value(3)

5.4

%

 

 

 

 

 

9.1

%

 

 

 

 

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

$

11,617

 

 

 

 

 

 

$

13,695

 

 

 

 

 

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

1.0

%

 

 

 

 

 

1.2

%

 

 

 

 

________________

(1) Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information. A description of the updated MSR amortization method utilized by the company to calculate Core Earnings, including dollar roll income, is also provided.
(2) Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.
(3) Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.
(4) Excludes non-cash equity compensation expense of $2.4 million for the second quarter 2019 and $1.9 million for the first quarter 2019.

“The second quarter was marked by lower rates, a flatter curve and wider spreads in the Agency RMBS market,” stated Bill Roth, Two Harbors’ Chief Investment Officer. “Given this backdrop, pairing Agencies with MSR remains particularly attractive, as we believe it generates a more stable risk-adjusted return throughout market cycles. Additionally, the lower rate environment is beneficial to our portfolio of discounted legacy non-Agencies.”

Portfolio Summary
The company’s portfolio is comprised of a Rates strategy and a Credit strategy. The Rates strategy consisted of $28.2 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of June 30, 2019. Additionally, the company held $9.4 billion notional of net long to-be-announced securities (TBAs) as part of the Rates strategy. The Credit strategy consisted of $3.9 billion of non-Agency securities, as well as their associated notional hedges as of June 30, 2019.

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

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

 

Portfolio Composition

 

As of June 30, 2019

 

As of March 31, 2019

 

 

(unaudited)

 

(unaudited)

Rates Strategy

 

 

 

 

 

 

 

 

Agency

 

 

 

 

 

 

 

 

Fixed Rate

 

$

26,291,937

 

 

82.0%

 

$

21,515,529

 

 

79.2%

Other Agency(1)

 

92,712

 

 

0.3%

 

89,433

 

 

0.3%

Total Agency

 

26,384,649

 

 

82.3%

 

21,604,962

 

 

79.5%

Mortgage servicing rights

 

1,800,826

 

 

5.6%

 

2,014,370

 

 

7.4%

Credit Strategy

 

 

 

 

 

 

 

 

Non-Agency

 

 

 

 

 

 

 

 

Senior

 

3,211,099

 

 

10.0%

 

2,885,449

 

 

10.7%

Mezzanine

 

575,246

 

 

1.8%

 

576,130

 

 

2.1%

Other

 

91,291

 

 

0.3%

 

82,933

 

 

0.3%

Total Non-Agency

 

3,877,636

 

 

12.1%

 

3,544,512

 

 

13.1%

Aggregate Portfolio

32,063,111

 

 

 

 

27,163,844

 

 

 

Net TBA position

 

9,422,000

 

 

 

 

10,168,000

 

 

 

Total Portfolio

 

$

41,485,111

 

 

 

 

$

37,331,844

 

 

 

Portfolio Metrics

 

Three Months Ended
June 30, 2019

 

Three Months Ended
March 31, 2019

 

 

(unaudited)

 

(unaudited)

Annualized portfolio yield during the quarter

 

3.93%

 

4.25%

Rates Strategy

 

 

 

 

Agency RMBS, Agency Derivatives and mortgage servicing rights

 

3.67%

 

3.89%

Credit Strategy

 

 

 

 

Non-Agency securities

 

6.00%

 

6.72%

 

 

 

 

 

Annualized cost of funds on average borrowing balance during the quarter(2)

 

2.55%

 

2.47%

Annualized interest rate spread for aggregate portfolio during the quarter

 

1.38%

 

1.78%

________________

(1) Other Agency includes hybrid ARMs and Agency derivatives.
(2) Cost of funds includes interest spread income/expense associated with the portfolio's interest rate swaps and caps.

Portfolio Metrics Specific to RMBS and Agency Derivatives

 

As of June 30, 2019

 

As of March 31, 2019

 

 

(unaudited)

 

(unaudited)

Weighted average cost basis of principal and interest securities

 

 

 

 

Agency(3)

 

$

104.31

 

 

$

104.87

 

Non-Agency(4)

 

$

61.70

 

 

$

62.04

 

Weighted average three month CPR

 

 

 

 

Agency

 

10.1

%

 

6.5

%

Non-Agency

 

5.3

%

 

4.9

%

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

 

87.8

%

 

86.7

%

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

 

12.2

%

 

13.3

%

______________

(3) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(4) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for total non-Agency securities excluding the company's non-Agency interest-only portfolio, would be $58.50 at June 30, 2019 and $58.95 at March 31, 2019.

Portfolio Metrics Specific to MSR(1)

 

As of June 30, 2019

 

 As of March 31, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

 

 

 

 

 

Unpaid principal balance

 

$

169,643,681

 

 

$

174,147,259

 

Fair market value

 

$

1,800,826

 

 

$

2,014,370

 

Weighted average coupon

 

4.1

%

 

4.1

%

Weighted average original FICO score(2)

 

751

 

751

Original LTV

 

75

%

 

75

%

60+ day delinquencies

 

0.3

%

 

0.3

%

Net servicing spread

 

26.3 basis points

 

26.1 basis points

 

 

 

 

 

 

 

Three Months Ended
June 30, 2019

 

Three Months Ended
March 31, 2019

 

 

(unaudited)

 

(unaudited)

Fair value losses

 

$

(252,432

)

 

$

(188,974

)

Servicing income

 

$

130,949

 

 

$

116,948

 

Servicing expenses

 

$

17,629

 

 

$

19,349

 

Servicing reserve (income) expense

 

$

(910

)

 

$

481

 

________________

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, 2019

 

As of March 31, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Net long TBA notional amount(3)

 

$

9,422,000

 

 

$

10,168,000

 

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

 

$

40,470,277

 

 

$

40,896,277

 

Swaptions net notional, utilized as macroeconomic hedges

 

3,875,000

 

 

5,900,000

 

Total interest rate swaps, caps and swaptions notional

 

$

44,345,277

 

 

$

46,796,277

 

________________

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

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

June 30, 2019

 

Balance

 

Weighted
Average
Borrowing Rate

 

Weighted
Average Months
to Maturity

 

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

27,868,044

 

2.70%

 

2.76

 

 

Repurchase agreements collateralized by MSR

 

300,000

 

4.15%

 

17.10

 

 

Total repurchase agreements

 

28,168,044

 

2.70%

 

2.90

 

26

FHLB advances collateralized by RMBS(4)

 

50,000

 

3.20%

 

183.68

 

1

Revolving credit facilities collateralized by MSR

 

 

—%

 

 

Term notes payable collateralized by MSR

 

394,061

 

5.20%

 

59.90

 

n/a

Unsecured convertible senior notes

 

284,331

 

6.25%

 

30.53

 

n/a

Total borrowings

 

$

28,896,436

 

 

 

 

 

 

________________

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

March 31, 2019

 

Balance

 

Weighted
Average
Borrowing Rate

 

Weighted
Average Months
to Maturity

 

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

19,429,691

 

2.83%

 

2.18

 

 

Repurchase agreements collateralized by MSR

 

300,000

 

4.25%

 

20.09

 

 

Total repurchase agreements

 

19,729,691

 

2.85%

 

2.46

 

30

FHLB advances collateralized by RMBS(1)

 

865,024

 

2.80%

 

12.83

 

1

Revolving credit facilities collateralized by MSR

 

375,294

 

5.50%

 

44.00

 

3

Unsecured convertible senior notes

 

284,099

 

6.25%

 

33.53

 

n/a

Total borrowings

 

$

21,254,108

 

 

 

 

 

 

________________

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

Borrowings by Collateral Type

 

As of June 30, 2019

 

As of March 31, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Collateral type:

 

 

 

 

Agency RMBS and Agency Derivatives

 

$

25,854,494

 

 

$

18,112,621

 

Mortgage servicing rights

 

694,061

 

 

675,294

 

Non-Agency securities

 

2,063,550

 

 

2,182,094

 

Other(2)

 

284,331

 

 

284,099

 

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

 

$

28,896,436

 

 

$

21,254,108

 

 

 

 

 

 

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

 

5.9:1.0

 

4.5:1.0

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

 

7.8:1.0

 

6.5:1.0

 

 

 

 

 

Cost of Funds Metrics

 

Three Months Ended
June 30, 2019

 

Three Months Ended
March 31, 2019

 

 

(unaudited)

 

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

 

2.9

%

 

2.9

%

Agency RMBS and Agency Derivatives

 

2.7

%

 

2.6

%

Mortgage servicing rights(5)

 

5.5

%

 

5.5

%

Non-Agency securities

 

3.7

%

 

3.7

%

Other(2)(5)

 

6.6

%

 

6.7

%

________________

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

Conference Call
Two Harbors Investment Corp. will host a conference call on August 7, 2019 at 9:00 a.m. EDT to discuss second quarter 2019 financial results and related information. To participate in the teleconference, please call toll-free 800-239-9838, conference code 4399018, approximately 10 minutes prior to the above start time. You may also listen to the teleconference live via the Internet on the company’s website at www.twoharborsinvestment.com in the Investor Relations section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. EDT on August 7, 2019, through 12:00 a.m. EDT on August 14, 2019. The playback can be accessed by calling (888) 203-1112 , conference code 4399018. The call will also be archived on the company’s website in the Investor Relations section under the Events and Presentations link.

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

Forward-Looking Statements
This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2018, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based. Additional information concerning these and other risk factors is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.

Non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as Core Earnings, including dollar roll income and Core Earnings per basic common share, including dollar roll income, that exclude certain items. Two Harbors’ management believes that these non-GAAP measures enable it to perform meaningful comparisons of past, present and future results of the company’s core business operations, and uses these measures to gain a comparative understanding of the company’s operating performance and business trends. The non-GAAP financial measures presented by the company represent supplemental information to assist investors in analyzing the results of its operations. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 12 of this release.

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

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

June 30,
2019

 

December 31,
2018

 

(unaudited)

 

 

ASSETS

 

 

 

Available-for-sale securities, at fair value

$

30,186,079

 

 

$

25,552,604

 

Mortgage servicing rights, at fair value

 

1,800,826

 

 

 

1,993,440

 

Cash and cash equivalents

 

433,579

 

 

 

409,758

 

Restricted cash

 

358,109

 

 

 

688,006

 

Accrued interest receivable

 

97,631

 

 

 

86,589

 

Due from counterparties

 

983,429

 

 

 

154,626

 

Derivative assets, at fair value

 

246,995

 

 

 

319,981

 

Reverse repurchase agreements

 

109,500

 

 

 

761,815

 

Other assets

 

124,088

 

 

 

165,660

 

Total Assets

$

34,340,236

 

 

$

30,132,479

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Liabilities

 

 

 

Repurchase agreements

$

28,168,044

 

 

$

23,133,476

 

Federal Home Loan Bank advances

 

50,000

 

 

 

865,024

 

Revolving credit facilities

 

 

 

310,000

 

Term notes payable

 

394,061

 

 

 

Convertible senior notes

 

284,331

 

 

 

283,856

 

Derivative liabilities, at fair value

 

255

 

 

 

820,590

 

Due to counterparties

 

255,281

 

 

 

130,210

 

Dividends payable

 

128,110

 

 

 

135,551

 

Accrued interest payable

 

145,850

 

 

 

160,005

 

Other liabilities

 

45,530

 

 

 

39,278

 

Total Liabilities

 

29,471,462

 

 

 

25,877,990

 

Stockholders’ Equity

 

 

 

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

 

977,501

 

 

 

977,501

 

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 272,899,638 and 248,085,721 shares issued and outstanding, respectively

 

2,729

 

 

 

2,481

 

Additional paid-in capital

 

5,149,175

 

 

 

4,809,616

 

Accumulated other comprehensive income

 

777,518

 

 

 

110,817

 

Cumulative earnings

 

2,215,437

 

 

 

2,332,371

 

Cumulative distributions to stockholders

 

(4,253,586

)

 

 

(3,978,297

)

Total Stockholders’ Equity

 

4,868,774

 

 

 

4,254,489

 

Total Liabilities and Stockholders’ Equity

$

34,340,236

 

 

$

30,132,479

 

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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,

 

2019

 

2018

 

2019

 

2018

 

(unaudited)

 

(unaudited)

Interest income:

 

 

 

 

 

Available-for-sale securities

$

253,807

 

 

$

183,467

 

 

$

489,693

 

 

$

374,183

 

Other

 

7,222

 

 

 

3,893

 

 

 

16,819

 

 

 

7,196

 

Total interest income

 

261,029

 

 

 

187,360

 

 

 

506,512

 

 

 

381,379

 

Interest expense:

 

 

 

 

 

 

 

Repurchase agreements

 

177,351

 

 

 

97,812

 

 

 

324,911

 

 

 

184,392

 

Federal Home Loan Bank advances

 

3,941

 

 

 

4,896

 

 

 

10,015

 

 

 

9,354

 

Revolving credit facilities

 

6,196

 

 

 

999

 

 

 

11,352

 

 

 

1,803

 

Term notes payable

 

231

 

 

 

 

 

231

 

 

 

Convertible senior notes

 

4,724

 

 

 

4,707

 

 

 

9,459

 

 

 

9,425

 

Total interest expense

 

192,443

 

 

 

108,414

 

 

 

355,968

 

 

 

204,974

 

Net interest income

 

68,586

 

 

 

78,946

 

 

 

150,544

 

 

 

176,405

 

Other-than-temporary impairment losses

 

(4,848

)

 

 

(174

)

 

 

(5,054

)

 

 

(268

)

Other (loss) income:

 

 

 

 

 

 

 

Gain (loss) on investment securities

 

22,441

 

 

 

(31,882

)

 

 

3,149

 

 

 

(52,553

)

Servicing income

 

130,949

 

 

 

77,665

 

 

 

247,897

 

 

 

148,855

 

(Loss) gain on servicing asset

 

(252,432

)

 

 

9,853

 

 

 

(441,406

)

 

 

81,660

 

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

 

(88,775

)

 

 

29,133

 

 

 

(172,034

)

 

 

179,678

 

Gain on other derivative instruments

 

80,664

 

 

 

7,675

 

 

 

184,942

 

 

 

15,728

 

Other (loss) income

 

(341

)

 

 

730

 

 

 

(218

)

 

 

1,788

 

Total other (loss) income

 

(107,494

)

 

 

93,174

 

 

 

(177,670

)

 

 

375,156

 

Expenses:

 

 

 

 

 

 

 

Management fees

 

13,635

 

 

 

11,453

 

 

 

25,717

 

 

 

23,161

 

Servicing expenses

 

16,746

 

 

 

11,539

 

 

 

36,658

 

 

 

26,093

 

Other operating expenses

 

14,013

 

 

 

15,515

 

 

 

29,569

 

 

 

30,007

 

Total expenses

 

44,394

 

 

 

38,507

 

 

 

91,944

 

 

 

79,261

 

(Loss) income before income taxes

 

(88,150

)

 

 

133,439

 

 

 

(124,124

)

 

 

472,032

 

Provision for (benefit from) income taxes

 

2,407

 

 

 

(6,051

)

 

 

(7,632

)

 

 

(2,267

)

Net (loss) income

 

(90,557

)

 

 

139,490

 

 

 

(116,492

)

 

 

474,299

 

Dividends on preferred stock

 

18,950

 

 

 

13,747

 

 

 

37,900

 

 

 

27,494

 

Net (loss) income attributable to common stockholders

$

(109,507

)

 

$

125,743

 

 

$

(154,392

)

 

$

446,805

 

Basic (loss) earnings per weighted average common share

$

(0.40

)

 

$

0.72

 

 

$

(0.59

)

 

$

2.55

 

Diluted (loss) earnings per weighted average common share

$

(0.40

)

 

$

0.68

 

 

$

(0.59

)

 

$

2.36

 

Dividends declared per common share

$

0.40

 

 

$

0.47

 

 

$

0.87

 

 

$

0.94

 

Weighted average number of shares of common stock:

 

 

 

 

 

 

 

Basic

 

272,863,153

 

 

 

175,451,989

 

 

 

262,667,160

 

 

 

175,299,822

 

Diluted

 

272,863,153

 

 

 

193,212,877

 

 

 

262,667,160

 

 

 

193,016,793

 

 

 

 

 

 

 

 

 

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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,

 

2019

 

2018

 

2019

 

2018

 

(unaudited)

 

(unaudited)

Comprehensive income:

 

 

 

 

 

 

 

Net (loss) income

$

(90,557

)

 

$

139,490

 

 

$

(116,492

)

 

$

474,299

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

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

 

310,549

 

 

 

(34,887

)

 

 

666,701

 

 

 

(379,664

)

Other comprehensive income (loss)

 

310,549

 

 

 

(34,887

)

 

 

666,701

 

 

 

(379,664

)

Comprehensive income

 

219,992

 

 

 

104,603

 

 

 

550,209

 

 

 

94,635

 

Dividends on preferred stock

 

18,950

 

 

 

13,747

 

 

 

37,900

 

 

 

27,494

 

Comprehensive income attributable to common stockholders

$

201,042

 

 

$

90,856

 

 

$

512,309

 

 

$

67,141

 

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,

 

2019

 

2019

 

(unaudited)

 

(unaudited)

Reconciliation of Comprehensive income to Core Earnings:

 

 

 

Comprehensive income attributable to common stockholders

$

201,042

 

 

$

311,267

 

Adjustment for other comprehensive income attributable to common stockholders:

 

 

 

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

 

(310,549

)

 

 

(356,152

)

Net loss attributable to common stockholders

$

(109,507

)

 

$

(44,885

)

 

 

 

 

Adjustments for non-Core Earnings:

 

 

 

Other-than-temporary impairments and loss recovery adjustments

 

12,895

 

 

 

206

 

Realized (gain) loss on securities

 

(23,589

)

 

 

17,457

 

Unrealized losses on securities

 

1,148

 

 

 

1,835

 

Realized and unrealized losses on mortgage servicing rights

 

174,212

 

 

 

124,569

 

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

 

(55,513

)

 

 

34,499

 

Unrealized losses on interest rate swaps, caps and swaptions

 

167,174

 

 

 

72,469

 

Gains on other derivative instruments

 

(63,953

)

 

 

(75,605

)

Other loss

 

899

 

 

 

439

 

Change in servicing reserves

 

(910

)

 

 

481

 

Non-cash equity compensation expense

 

2,396

 

 

 

1,861

 

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

 

782

 

 

 

(10,643

)

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

$

106,034 (2

)

 

$

122,683

 

 

 

 

 

Weighted average basic common shares

 

272,863,153

 

 

 

252,357,878

 

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

$

0.39

 

 

$

0.49

 

_____________

(1) Core Earnings, including dollar roll income, is a non-U.S. GAAP measure that we define as comprehensive income attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock and restructuring charges) and transaction costs associated with the acquisition of CYS. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. “Dollar roll income” is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. We believe the presentation of Core Earnings, including dollar roll income, provides investors greater transparency into our period-over-period financial performance and facilitates comparisons to peer REITs.
(2) Beginning with this reporting period, the company has refined the MSR amortization method utilized in the calculation of Core Earnings, including dollar roll income. The new method includes an adjustment for any gain or loss on the capital used to purchase the MSR and allows Core Earnings to better reflect how the carry earned on MSR varies as a function of prepayment rates. If the updated method was applied retroactively to the period ended March 31, 2019, it would have resulted in an additional $0.1 million expense, net of tax, which would have resulted in no change to Core Earnings, including dollar roll income, per weighted average share for that period.

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,
2019

 

March 31,
2019

 

December 31,
2018

 

September 30,
2018

 

June 30,
2018

 

(unaudited)

Net Interest Income:

 

 

 

 

 

 

 

 

 

Interest income

$

269.1

 

 

$

245.5

 

 

$

252.0

 

 

$

236.7

 

 

$

187.3

 

Interest expense

192.4

 

 

163.5

 

 

162.3

 

 

152.4

 

 

108.4

 

Net interest income

76.7

 

 

82.0

 

 

89.7

 

 

84.3

 

 

78.9

 

Other income:

 

 

 

 

 

 

 

 

 

Gain on investment securities

 

 

 

 

 

 

 

 

0.7

 

Servicing income, net of amortization(1)

52.7

 

 

52.5

 

 

46.9

 

 

37.1

 

 

31.7

 

Interest spread on interest rate swaps and caps

22.9

 

 

23.7

 

 

15.3

 

 

16.2

 

 

13.8

 

Gain on other derivative instruments

16.7

 

 

28.7

 

 

29.8

 

 

30.2

 

 

18.2

 

Other income

0.5

 

 

0.5

 

 

0.6

 

 

0.6

 

 

0.5

 

Total other income

92.8

 

 

105.4

 

 

92.6

 

 

84.1

 

 

64.9

 

Expenses

42.9

 

 

45.2

 

 

42.3

 

 

42.5

 

 

35.1

 

Core Earnings, including dollar roll income before income taxes

126.6

 

 

142.2

 

 

140.0

 

 

125.9

 

 

108.7

 

Income tax expense (benefit)

1.6

 

 

0.6

 

 

0.3

 

 

(0.1

)

 

1.1

 

Core Earnings, including dollar roll income

125.0

 

 

141.6

 

 

139.7

 

 

126.0

 

 

107.6

 

Dividends on preferred stock

19.0

 

 

18.9

 

 

19.0

 

 

19.0

 

 

13.7

 

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

$

106.0

 

 

$

122.7

 

 

$

120.7

 

 

$

107.0

 

 

$

93.9

 

Weighted average basic Core EPS, including dollar roll income

$

0.39

 

 

$

0.49

 

 

$

0.49

 

 

$

0.48

 

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

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

11.1

%

 

14.3

%

 

13.8

%

 

12.4

%

 

13.5

%

________________

(1) Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio. This amortization has been deducted from Core Earnings, including dollar roll income. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. As discussed on page 11, the company has refined the MSR amortization method utilized in the calculation of Core Earnings beginning with the period ended June 30, 2019. MSR amortization amounts for periods ending prior to June 30, 2019 have not be adjusted.
(2) Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.

 

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Contact:

Margaret Field, Investor Relations, Two Harbors Investment Corp., (212) 364-3663 or margaret.field@twoharborsinvestment.com