Two Harbors Investment Corp. Reports Fourth Quarter 2022 Financial Results

Rhea-AI Summary

Two Harbors Investment Corp. (NYSE: TWO) reported its financial results for Q4 2022, showcasing a book value of $17.72 per share and a declared dividend of $0.60, resulting in an 11.6% quarterly economic return. The company generated comprehensive income of $160.2 million, equating to $1.85 per share. Additionally, earnings available for distribution were $22.2 million ($0.26 per share). The acquisition of RoundPoint Mortgage Servicing Corporation is expected to close in Q3 2023. Post quarter-end, book value increased 4% through January 31, 2023, following the issuance of 10 million shares for net proceeds of $175.6 million.

Positive

• Reported book value per share increased to $17.72.
• Quarterly dividend of $0.60 represents an 11.6% economic return.
• Generated comprehensive income of $160.2 million ($1.85 per share).
• Acquisition of RoundPoint Mortgage Servicing expected to enhance portfolio.
• Estimated 4% increase in book value post quarter-end.

Negative

• Total economic return on book value for 2022 was (13.3)%.
• Shareholder dilution due to issuance of 10 million shares.

Tightening Mortgage Spreads Drove Increase in Book Value

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

Quarterly Summary⁽¹⁾

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

Annual Summary

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

Post Quarter-End Update

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

________________

(1)		On November 1, 2022, the company completed its previously announced one-for-four reverse stock split of its outstanding shares of common stock. In accordance with generally accepted accounting principles, all common share and per common share amounts presented herein have been adjusted on a retroactive basis to reflect the reverse stock split.
(2)		Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by book value as of the beginning of the period.
(3)		Earnings Available for Distribution is a non-GAAP measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.
(4)		Income Excluding Market-Driven Value Changes is a non-GAAP measure. Please see page 12 for a definition of Income Excluding Market-Driven Value Changes and a reconciliation of GAAP to non-GAAP financial information.
(5)		Includes 428,549 Series A, 786,846 Series B and 1,742,555 Series C preferred shares.

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

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

Operating Performance

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

Two Harbors Investment Corp. Operating Performance (unaudited)
(dollars in thousands, except per common share data)
	Three Months Ended December 31, 2022											Three Months Ended September 30, 2022
Earnings attributable to common stockholders	Earnings				Per weighted average basic common share				Annualized return on average common equity			Earnings				Per weighted average basic common share				Annualized return on average common equity
Comprehensive Income (Loss)	$	160,233			$	1.85			42.8	%		$	(287,808	)		$	(3.35	)		(67.9	)%
GAAP Net (Loss) Income	$	(262,439	)		$	(3.04	)		(70.1	)%		$	263,865			$	3.04			62.3	%
Earnings Available for Distribution(1)	$	22,209			$	0.26			5.9	%		$	55,173			$	0.64			13.0	%
Income Excluding Market-Driven Value Changes(2)	$	62,706			$	0.73			16.7	%
Operating Metrics
Dividend per common share	$	0.60										$	0.68
Annualized dividend yield(3)		15.2	%										20.5	%
Book value per common share at period end	$	17.72										$	16.42
Economic return on book value(4)		11.6	%										(16.2	)%
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses(5)	$	10,462										$	13,404
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses, as a percentage of average equity(5)		1.9	%										2.2	%

_______________

(1)		Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.
(2)		Income Excluding Market-Driven Value Changes is a non-GAAP measure being introduced for the fourth quarter of 2022. Please see page 12 for a definition of Income Excluding Market-Driven Value Changes and a reconciliation of GAAP to non-GAAP financial information.
(3)		Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.
(4)		Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.
(5)		Excludes non-cash equity compensation expense of $1.7 million for the fourth quarter of 2022 and $2.4 million for the third quarter of 2022 and nonrecurring expenses of $10.8 million for the fourth quarter of 2022 and $5.0 million for the third quarter of 2022.

Portfolio Summary

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

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

Two Harbors Investment Corp. Portfolio
(dollars in thousands)
Portfolio Composition		As of December 31, 2022						As of September 30, 2022
		(unaudited)						(unaudited)
Agency
Fixed Rate		$	7,647,001		70.9	%		$	9,237,881		73.8	%
Other Agency(1)			21,751		0.2	%			127,612		1.0	%
Total Agency			7,668,752		71.1	%			9,365,493		74.8	%
Mortgage servicing rights(2)			2,984,937		27.7	%			3,021,790		24.2	%
Other			125,158		1.2	%			124,860		1.0	%
Aggregate Portfolio			10,778,847						12,512,143
Net TBA position(3)			3,900,395						4,047,890
Total Portfolio		$	14,679,242					$	16,560,033

Portfolio Metrics		Three Months Ended December 31, 2022			Three Months Ended September 30, 2022
		(unaudited)			(unaudited)
Average portfolio yield(4)		4.92	%		4.61	%
Average cost of financing(5)		3.95	%		2.84	%
Net spread		0.97	%		1.77	%

________________

(1)		Other Agency includes hybrid ARMs and inverse interest-only Agency securities classified as “Agency Derivatives” for purposes of GAAP.
(2)		Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases.
(3)		Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP.
(4)		Average portfolio yield includes interest income on Agency RMBS and non-Agency securities, MSR servicing income, net of estimated amortization, and servicing expenses, and the implied asset yield portion of TBA dollar roll income on TBAs. MSR estimated amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.
(5)		Average cost of financing includes interest expense and amortization of deferred debt issuance costs on borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes, interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements, U.S. Treasury futures income, and the implied financing benefit/cost portion of dollar roll income on TBAs. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements.

Portfolio Metrics Specific to RMBS and Agency Derivatives		As of December 31, 2022				As of September 30, 2022
		(unaudited)				(unaudited)
Weighted average cost basis of Agency principal and interest securities(1)		$	102.26			$	102.84
Weighted average three month CPR on Agency RMBS			5.9	%			9.1	%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio			98.6	%			97.8	%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio			1.4	%			2.2	%

______________

(1)

Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.

Portfolio Metrics Specific to MSR(1)		As of December 31, 2022				As of September 30, 2022
(dollars in thousands)		(unaudited)				(unaudited)
Unpaid principal balance		$	204,876,693			$	206,613,560
Gross coupon rate			3.3	%			3.2	%
Current loan size		$	334			$	335
Original FICO(2)			760				760
Original LTV			72	%			72	%
60+ day delinquencies			0.8	%			0.7	%
Net servicing fee		26.5 basis points				26.4 basis points
		Three Months Ended December 31, 2022				Three Months Ended September 30, 2022
		(unaudited)				(unaudited)
Fair value losses		$	(64,085	)		$	(6,720	)
Servicing income		$	160,926			$	148,833
Servicing expenses		$	24,542			$	22,144
Change in servicing reserves		$	713			$	(1,005	)

________________

Note:		The company does not directly service mortgage loans, but instead contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the company’s MSR.
(1)		Metrics exclude residential mortgage loans in securitization trusts for which the company is the named servicing administrator. Portfolio metrics, other than UPB, represent averages weighted by UPB.
(2)		FICO represents a mortgage industry accepted credit score of a borrower.

Other Investments and Risk Management Metrics		As of December 31, 2022				As of September 30, 2022
(dollars in thousands)		(unaudited)				(unaudited)
Net long TBA notional amount(1)		$	3,826,000			$	4,154,000
Futures notional		$	(18,285,452	)		$	(15,296,550	)

________________

(1)

Accounted for as derivative instruments in accordance with GAAP.

Financing Summary

The following tables summarize the company’s financing metrics and outstanding repurchase agreements, revolving credit facilities, term notes and convertible senior notes as of December 31, 2022 and September 30, 2022:

December 31, 2022		Balance			Weighted Average Borrowing Rate			Weighted Average Months to Maturity		Number of Distinct Counterparties
(dollars in thousands, unaudited)
Repurchase agreements collateralized by RMBS		$	7,405,716		3.81	%		1.56		20
Repurchase agreements collateralized by MSR			309,000		7.91	%		11.93		1
Repurchase agreements collateralized by U.S. Treasuries(1)			888,295		4.49	%		1.95		3
Total repurchase agreements			8,603,011		3.95	%		1.93		20
Revolving credit facilities collateralized by MSR and related servicing advance obligations			1,118,831		7.68	%		13.48		4
Term notes payable collateralized by MSR			398,011		7.19	%		17.82		n/a
Unsecured convertible senior notes			282,496		6.25	%		36.53		n/a
Total borrowings		$	10,402,349

September 30, 2022		Balance			Weighted Average Borrowing Rate			Weighted Average Months to Maturity		Number of Distinct Counterparties
(dollars in thousands, unaudited)
Repurchase agreements collateralized by RMBS		$	9,640,018		3.19	%		3.15		21
Repurchase agreements collateralized by MSR			394,000		6.57	%		4.31		1
Total repurchase agreements			10,034,018		3.32	%		3.19		21
Revolving credit facilities collateralized by MSR and related servicing advance obligations			1,131,161		6.40	%		16.54		4
Term notes payable collateralized by MSR			397,697		5.88	%		20.84		n/a
Unsecured convertible senior notes			282,096		6.25	%		39.55		n/a
Total borrowings		$	11,844,972

Borrowings by Collateral Type(2)		As of December 31, 2022				As of September 30, 2022
(dollars in thousands)		(unaudited)				(unaudited)
Agency RMBS and Agency Derivatives		$	7,334,907			$	9,563,755
Mortgage servicing rights and related servicing advance obligations			1,825,842				1,922,858
Other - secured			70,809				76,263
Other - unsecured(3)			282,496				282,096
Total			9,514,054				11,844,972
TBA cost basis			3,923,298				4,153,582
Net payable (receivable) for unsettled RMBS			342,964				34,576
Total, including TBAs and net payable (receivable) for unsettled RMBS		$	13,780,316			$	16,033,130
Debt-to-equity ratio at period-end(4)		4.4 :1.0				5.5 :1.0
Economic debt-to-equity ratio at period-end(5)		6.3 :1.0				7.5 :1.0
Cost of Financing by Collateral Type(2)		Three Months Ended December 31, 2022				Three Months Ended September 30, 2022
		(unaudited)				(unaudited)
Agency RMBS and Agency Derivatives			3.56	%			2.30	%
Mortgage servicing rights and related servicing advance obligations(6)			7.71	%			6.19	%
Other - secured			5.40	%			4.00	%
Other - unsecured(3)(6)			6.93	%			6.92	%
Annualized cost of financing			4.46	%			3.04	%
Interest rate swaps(7)			—	%			(0.01	)%
U.S. Treasury futures(8)			0.25	%			0.61	%
TBAs(9)			2.03	%			1.31	%
Annualized cost of financing, including swaps, U.S. Treasury futures and TBAs			3.95	%			2.84	%

____________________

(1)		U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
(2)		Excludes repurchase agreements collateralized by U.S. Treasuries.
(3)		Unsecured convertible senior notes.
(4)		Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity.
(5)		Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. Effective as of December 31, 2022, net payable (receivable) on unsettled RMBS is now included in the calculation for economic debt-to-equity. Prior period metrics have been updated to conform to the current period methodology.
(6)		Includes amortization of debt issuance costs.
(7)		The cost of financing on interest rate swaps held to mitigate interest rate risk associated with the company’s outstanding borrowings includes interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements and is calculated using average borrowings balance as the denominator.
(8)		The cost of financing on U.S. Treasury futures held to mitigate interest rate risk associated with the company’s outstanding borrowings is calculated using average borrowings balance as the denominator. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements.
(9)		The implied financing benefit/cost of dollar roll income on TBAs is calculated using the average cost basis of TBAs as the denominator. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. TBAs are accounted for as derivative instruments in accordance with GAAP.

Conference Call

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

Two Harbors Investment Corp.

Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in St. Louis Park, MN.

Forward-Looking Statements

This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2021, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our ability to recognize the benefits of our pending acquisition of RoundPoint Mortgage Servicing Corporation; our decision to terminate our management agreement with PRCM Advisers LLC and the ongoing litigation related to such termination; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

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

Non-GAAP Financial Measures

In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as income excluding market-driven value changes, earnings available for distribution and related per basic common share measures. The non-GAAP financial measures presented by the company provide supplemental information to assist investors in analyzing the company’s results of operations and help facilitate comparisons to industry peers. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation tables on pages 11 and 12 of this release.

Additional Information

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

TWO HARBORS INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
	December 31, 2022				December 31, 2021
	(unaudited)
ASSETS
Available-for-sale securities, at fair value (amortized cost $8,114,627 and $7,005,013, respectively; allowance for credit losses $6,958 and $14,238, respectively)	$	7,778,734			$	7,161,703
Mortgage servicing rights, at fair value		2,984,937				2,191,578
Cash and cash equivalents		683,479				1,153,856
Restricted cash		443,026				934,814
Accrued interest receivable		36,018				26,266
Due from counterparties		253,374				168,449
Derivative assets, at fair value		26,438				80,134
Reverse repurchase agreements		1,066,935				134,682
Other assets		193,219				262,823
Total Assets	$	13,466,160			$	12,114,305
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	8,603,011			$	7,656,445
Revolving credit facilities		1,118,831				420,761
Term notes payable		398,011				396,776
Convertible senior notes		282,496				424,827
Derivative liabilities, at fair value		34,048				53,658
Due to counterparties		541,709				196,627
Dividends payable		64,504				72,412
Accrued interest payable		94,034				18,382
Other liabilities		145,991				130,464
Total Liabilities		11,282,635				9,370,352
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 26,092,050 and 29,050,000 shares issued and outstanding, respectively ($652,301 and $726,250 liquidation preference, respectively)		630,999				702,550
Common stock, par value $0.01 per share; 175,000,000 shares authorized and 86,428,845 and 85,977,831 shares issued and outstanding, respectively		864				860
Additional paid-in capital		5,645,998				5,627,758
Accumulated other comprehensive (loss) income		(278,711	)			186,346
Cumulative earnings		1,453,371				1,212,983
Cumulative distributions to stockholders		(5,268,996	)			(4,986,544	)
Total Stockholders’ Equity		2,183,525				2,743,953
Total Liabilities and Stockholders’ Equity	$	13,466,160			$	12,114,305

TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share data)
Certain prior period amounts have been reclassified to conform to the current period presentation
	Three Months Ended December 31,								Year Ended December 31,
	2022				2021				2022				2021
	(unaudited)								(unaudited)
Interest income:
Available-for-sale securities	$	83,712			$	32,729			$	272,230			$	167,310
Other		15,591				276				23,310				1,287
Total interest income		99,303				33,005				295,540				168,597
Interest expense:
Repurchase agreements		81,975				4,562				167,455				25,774
Revolving credit facilities		21,854				5,050				51,814				22,425
Term notes payable		6,906				3,251				19,514				12,936
Convertible senior notes		4,892				7,295				19,612				28,038
Total interest expense		115,627				20,158				258,395				89,173
Net interest (expense) income		(16,324	)			12,847				37,145				79,424
Other (loss) income:
(Loss) gain on investment securities		(347,450	)			1,626				(603,937	)			121,617
Servicing income		160,926				125,511				603,911				468,406
(Loss) gain on servicing asset		(64,085	)			(131,828	)			425,376				(114,941	)
Gain on interest rate swap and swaption agreements		—				36,989				29,499				42,091
Gain (loss) on other derivative instruments		53,301				(11,565	)			9,310				(251,283	)
Other income (loss)		112				1,856				(5	)			(3,845	)
Total other (loss) income		(197,196	)			22,589				464,154				262,045
Expenses:
Servicing expenses		25,272				21,582				94,119				86,250
Compensation and benefits		7,411				6,396				40,723				35,041
Other operating expenses		15,540				6,648				42,005				28,759
Total expenses		48,223				34,626				176,847				150,050
(Loss) income before income taxes		(261,743	)			810				324,452				191,419
Provision for income taxes		8,480				2,104				104,213				4,192
Net (loss) income		(270,223	)			(1,294	)			220,239				187,227
Dividends on preferred stock		(12,365	)			(13,747	)			(53,607	)			(58,458	)
Gain on repurchase and retirement of preferred stock		20,149				—				20,149				—
Net (loss) income attributable to common stockholders	$	(262,439	)		$	(15,041	)		$	186,781			$	128,769
Basic (loss) earnings per weighted average common share	$	(3.04	)		$	(0.18	)		$	2.15			$	1.72
Diluted (loss) earnings per weighted average common share	$	(3.04	)		$	(0.18	)		$	2.13			$	1.72
Dividends declared per common share	$	0.60			$	0.68			$	2.64			$	2.72
Weighted average number of shares of common stock:
Basic		86,391,405				83,775,184				86,179,418				74,443,000
Diluted		86,391,405				83,775,184				96,076,175				74,510,884
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS), CONTINUED
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
	Three Months Ended December 31,								Year Ended December 31,
	2022				2021				2022				2021
	(unaudited)								(unaudited)
Comprehensive income (loss):
Net (loss) income	$	(270,223	)		$	(1,294	)		$	220,239			$	187,227
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities		422,672				(113,553	)			(465,057	)			(455,255	)
Other comprehensive income (loss)		422,672				(113,553	)			(465,057	)			(455,255	)
Comprehensive income (loss)		152,449				(114,847	)			(244,818	)			(268,028	)
Dividends on preferred stock		(12,365	)			(13,747	)			(53,607	)			(58,458	)
Gain on repurchase and retirement of preferred stock		20,149				—				20,149				—
Comprehensive income (loss) attributable to common stockholders	$	160,233			$	(128,594	)		$	(278,276	)		$	(326,486	)

TWO HARBORS INVESTMENT CORP.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION
(dollars in thousands, except share data)
Certain prior period amounts have been reclassified to conform to the current period presentation
	Three Months Ended
	December 31, 2022				September 30, 2022
	(unaudited)				(unaudited)
Reconciliation of Comprehensive income (loss) to Earnings Available for Distribution:
Comprehensive income (loss) attributable to common stockholders	$	160,233			$	(287,808	)
Adjustment for other comprehensive (income) loss attributable to common stockholders:
Unrealized (gain) loss on available-for-sale securities		(422,672	)			551,673
Net (loss) income attributable to common stockholders	$	(262,439	)		$	263,865
Adjustments to exclude reported realized and unrealized (gains) losses:
Realized loss (gain) on securities		341,316				(18,265	)
Unrealized loss on securities		6,453				23,294
(Reversal of) provision for credit losses		(318	)			1,397
Realized and unrealized loss on mortgage servicing rights		64,084				6,720
Realized loss on termination or expiration of interest rate swaps and swaptions		—				146,750
Unrealized gain on interest rate swaps and swaptions		—				(181,378	)
Realized and unrealized gain on other derivative instruments		(53,226	)			(158,891	)
Gain on repurchase and retirement of preferred stock		(20,149	)			—
Other realized and unrealized gains		(112	)			—
Other adjustments:
MSR amortization(1)		(83,190	)			(75,585	)
TBA dollar roll income(2)		16,193				37,832
U.S. Treasury futures income(3)		(6,408	)			(16,643	)
Change in servicing reserves		713				(1,005	)
Non-cash equity compensation expense		1,653				2,355
Other nonrecurring expenses		10,836				5,029
Net provision for income taxes on non-EAD		6,803				19,698
Earnings available for distribution to common stockholders(4)	$	22,209			$	55,173
Weighted average basic common shares		86,391,405				86,252,104
Earnings available for distribution to common stockholders per weighted average basic common share	$	0.26			$	0.64

_____________

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

TWO HARBORS INVESTMENT CORP.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION
(dollars in thousands, except share data)
Certain prior period amounts have been reclassified to conform to the current period presentation
	Three Months Ended
	December 31, 2022
	(unaudited)
Reconciliation of Comprehensive income (loss) to Income Excluding Market-Driven Value Changes:
Comprehensive income (loss) attributable to common stockholders	$	160,233
Adjustments to exclude market-driven value changes and nonrecurring operating expenses:
RMBS market-driven value changes(1)		(62,660	)
MSR market-driven value changes(2)		12,989
Realized and unrealized gains on TBAs, excluding TBA dollar roll income(3)		(32,040	)
Realized and unrealized gains on futures, excluding futures income(4)		(11,001	)
Other nonrecurring expenses		10,836
Gain on repurchase and retirement of preferred stock		(20,149	)
Net provision for income taxes associated with market-driven value changes		4,498
Income Excluding Market-Driven Value Changes(5)	$	62,706
Weighted average basic common shares		86,391,405
Income Excluding Market-Driven Value Changes per weighted average basic common share	$	0.73

_____________

(1)		RMBS market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS, less the sum of the realization of RMBS cash flows which incorporates actual prepayments, changes in RMBS accrued interest, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. RMBS includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP. RMBS market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS, less the sum of the realization of RMBS cash flows which incorporates actual prepayments, changes in RMBS accrued interest, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. RMBS includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP.
(2)		MSR market-driven value changes refers to the sum of servicing income, servicing expenses, realized and unrealized gains and losses on MSR, less the sum of the realization of MSR cash flows which incorporates actual prepayments, servicing income and servicing expenses, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged.
(3)		TBA dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.
(4)		Futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver note or bond using short-term repurchase agreements.
(5)		Income Excluding Market-Driven Value Changes is a non-GAAP measure defined as comprehensive income attributable to common stockholders, excluding market-driven value changes on the aggregate portfolio, provision for income taxes associated with market-driven value changes, nonrecurring operating expenses and gain on the repurchase and retirement of preferred stock. As defined, Income Excluding Market-Driven Value Changes includes the realization of portfolio cash flows which incorporates actual prepayments, changes in portfolio accrued interest, servicing income and servicing expenses, and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility factored into the previous day ending fair value are unchanged. This applies to RMBS, MSR and derivatives, as applicable, and is net of all recurring operating expenses and provision for income taxes associated with Income Excluding Market-Driven Value Changes. Income Excluding Market-Driven Value Changes provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers. Income Excluding Market-Driven Value Changes is one of several measures the company’s board of directors considers to determine the amount of dividends to declare on the company’s common stock and should not be considered an indication of taxable income or as a proxy for the amount of dividends the company may declare.

 

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

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

Source: Two Harbors Investment Corp.

FAQ

What were Two Harbors' financial results for Q4 2022?

Two Harbors reported a book value of $17.72 per share, with a dividend of $0.60 and comprehensive income of $160.2 million.

How much was the economic return on book value for Two Harbors in Q4 2022?

The economic return on book value for Q4 2022 was 11.6%.

What is the significance of the acquisition of RoundPoint Mortgage Servicing Corporation?

The acquisition is expected to close in Q3 2023 and could enhance Two Harbors' portfolio.

How did the book value change after Q4 2022?

Post quarter-end, the book value is estimated to have increased by 4% through January 31, 2023.

What was the total economic return on book value for Two Harbors in 2022?

The total economic return on book value for 2022 was (13.3)%.