EX-99.1 2 twoq2-2019earningspres.htm PRESS RELEASE OF TWO HARBORS INVESTMENT CORP., DATED AUGUST 6, 2019. Exhibit
twologoca06.jpg

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) 

NEW YORK, August 6, 2019 - 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.



- 1 -

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.




- 2 -


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.



- 3 -

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. 


- 4 -

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.


- 5 -

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.



- 6 -

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.

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

# # #

- 7 -

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


- 8 -

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

 
 
 
 
 
 
 
 

- 9 -

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


- 10 -

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.


- 11 -

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.



- 12 -