Two Harbors Investment Corp. Reports Third Quarter 2020 Financial Results

Two Harbors Investment Corp. (NYSE: TWO), a mortgage real estate investment trust (REIT) that pairs investments in Agency mortgage servicing rights (MSR) with Agency residential mortgage-backed securities (RMBS), today announced its financial results for the quarter ended September 30, 2020.

Quarterly Summary

  • Reported book value of $7.37 per common share, representing a 12.1% quarterly return on book value; excluding the $0.51 reversal of the previously accrued management agreement termination fee, quarterly return on book value would have been 4.5%(1)
  • Generated Comprehensive Income of $219.2 million, representing an annualized return on average common equity of 45.6%
  • Reported Core Earnings of $75.6 million, or $0.28 per weighted average basic common share(2)
  • Declared a third quarter common stock dividend of $0.14 per share
  • Continued strength in MSR flow-sale program; settled on $14.5 billion unpaid principal balance (UPB) of MSR through these arrangements
  • Strengthened liquidity position by closing a $200 million financing facility for servicing advance receivables and a $100 million financing facility for MSR
  • Experienced reduced forbearance rates; 5.0% of our MSR portfolio by loan count in forbearance and 3.6% by loan count in forbearance and not current at September 30, 2020
  • Completed transition to self-management after the termination of the management agreement on August 14, 2020

Fourth Quarter Update

  • Settled on $14.5 billion UPB of MSR in three separate bulk transactions

“We are very pleased with our performance this quarter, which includes 4.5% economic return on book value,” stated Bill Greenberg, Two Harbors’ President and Chief Executive Officer. “These results demonstrate that our portfolio construction has lower mortgage spread risk than portfolios without MSR, and continues to validate our strategy as an Agency plus MSR REIT.”

(1)

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

(2)

Core Earnings is a non-GAAP measure. Please see page 11 for a definition of Core Earnings 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 second and third quarter of 2020:

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended
September 30, 2020

Three Months Ended
June 30, 2020

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

$

219,180

$

0.80

45.6

%

$

279

$

0.1

%

GAAP Net Income (Loss)

$

182,964

$

0.67

38.0

%

$

(192,515

)

$

(0.70

)

(40.7

)%

Core Earnings(1)

$

75,571

$

0.28

15.7

%

$

(14,491

)

$

(0.05

)

(3.1

)%

Operating Metrics

Dividend per common share

$

0.14

$

0.19

Annualized dividend yield(2)

11.0

%

15.1

%

Book value per common share at period end

$

7.37

$

6.70

Return on book value(3)

12.1

%

(1.0

)%

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

$

12,455

$

11,440

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

1.7

%

1.6

%

___________

(1)

Please see page 11 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.

(2)

Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.

(3)

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

(4)

Excludes non-cash equity compensation expense of $2.9 million for the third quarter of 2020 and $2.3 million for the second quarter of 2020 and nonrecurring expenses of $3.7 million for the third quarter of 2020.

“We are very encouraged by the amount of MSR we have been able to source at attractive levels,” stated Matt Koeppen, Two Harbors’ Chief Investment Officer. “We settled on $14.5 billion UPB through our flow program in the third quarter, and the fourth quarter is shaping up to be even higher. Based on our current flow volumes coupled with post-quarter end bulk settlements of an additional $14.5 billion UPB, our MSR portfolio has started to grow again.”

Portfolio Summary

The company’s portfolio is comprised of $17.9 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of September 30, 2020. Additionally, the company held $6.5 billion bond equivalent value of net long to-be-announced securities (TBAs).

The following tables summarize the company’s investment portfolio as of September 30, 2020 and June 30, 2020:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of September 30, 2020

As of June 30, 2020

(unaudited)

(unaudited)

Agency

Fixed Rate

$

16,544,530

92.4

%

$

17,637,205

92.7

%

Other Agency(1)

78,646

0.5

%

85,065

0.5

%

Total Agency

16,623,176

92.9

%

17,722,270

93.2

%

Mortgage servicing rights(2)

1,257,503

7.0

%

1,279,195

6.7

%

Other

17,993

0.1

%

23,180

0.1

%

Aggregate Portfolio

17,898,672

19,024,645

Net TBA position(3)

6,510,938

3,438,881

Total Portfolio

$

24,409,610

$

22,463,526

Portfolio Metrics

Three Months Ended
September 30, 2020

Three Months Ended
June 30, 2020

(unaudited)

(unaudited)

Annualized portfolio yield during the quarter(4)

2.42

%

2.84

%

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

0.64

%

2.61

%

Annualized net yield for aggregate portfolio during the quarter

1.78

%

0.23

%

________________

(1)

Other Agency includes hybrid ARMs and Agency derivatives.

(2)

Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases.

(3)

Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP.

(4)

Includes interest income on RMBS and servicing income net of servicing expenses and amortization on MSR.

(5)

Cost of funds includes interest spread income/expense associated with the portfolio's interest rate swaps.

Portfolio Metrics Specific to RMBS and Agency Derivatives

As of September 30, 2020

As of June 30, 2020

(unaudited)

(unaudited)

Weighted average cost basis of Agency principal and interest securities(6)

$

104.88

$

104.88

Weighted average three month CPR on Agency RMBS

23.1

%

19.9

%

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

99.4

%

99.4

%

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

0.6

%

0.6

%

______________

(6)

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 September 30, 2020

As of June 30, 2020

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

156,444,362

$

163,493,573

Gross weighted average coupon

3.9

%

4.0

%

Weighted average original FICO score(2)

754

754

Weighted average original LTV

74

%

75

%

60+ day delinquencies

4.1

%

3.9

%

Net servicing fee

27.2 basis points

27.3 basis points

Three Months Ended
September 30, 2020

Three Months Ended
June 30, 2020

(unaudited)

(unaudited)

Fair value losses

$

(112,763

)

$

(238,791

)

Servicing income

$

99,114

$

112,891

Servicing expenses

$

25,264

$

23,876

Change in servicing reserves

$

898

$

39

________________

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 September 30, 2020

As of June 30, 2020

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional amount(3)

$

6,236,000

$

3,236,000

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

$

12,394,818

$

4,479,000

Swaptions net notional, utilized as macroeconomic hedges

6,000,000

Total interest rate swaps and swaptions notional

$

18,394,818

$

4,479,000

________________

(3)

Accounted for as derivative instruments in accordance with GAAP.

Financing Summary

The following tables summarize the company’s financing metrics and outstanding repurchase agreements, revolving credit facilities, term notes and convertible senior notes as of September 30, 2020 and June 30, 2020:

September 30, 2020

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

16,376,696

0.29

%

2.74

20

Revolving credit facilities collateralized by MSR

274,830

2.94

%

39.65

2

Term notes payable collateralized by MSR

395,328

2.95

%

44.84

n/a

Unsecured convertible senior notes

285,843

6.25

%

15.53

n/a

Total borrowings

$

17,332,697

June 30, 2020

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

16,991,248

0.65

%

1.56

20

Revolving credit facilities collateralized by MSR

267,181

2.66

%

8.50

1

Term notes payable collateralized by MSR

395,048

2.98

%

47.87

n/a

Unsecured convertible senior notes

285,515

6.25

%

18.53

n/a

Total borrowings

$

17,938,992

Borrowings by Collateral Type

As of September 30, 2020

As of June 30, 2020

(dollars in thousands)

(unaudited)

(unaudited)

Collateral type:

Agency RMBS and Agency Derivatives

$

16,374,325

$

16,988,592

Mortgage servicing rights

670,158

662,229

Other - secured

2,371

2,656

Other - unsecured(1)

285,843

285,515

Total

$

17,332,697

$

17,938,992

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

5.7

:1.0

6.3

:1.0

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

7.7

:1.0

7.4

:1.0

Cost of Funds Metrics

Three Months Ended
September 30, 2020

Three Months Ended
June 30, 2020

(unaudited)

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

0.7

%

1.4

%

Agency RMBS and Agency Derivatives

0.4

%

1.2

%

Mortgage servicing rights(4)

3.6

%

3.8

%

Other - secured

2.5

%

2.7

%

Other - unsecured(1)(4)

6.7

%

6.7

%

____________________

(1)

Includes unsecured convertible senior notes.

(2)

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

(3)

Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.

(4)

Includes amortization of debt issuance costs.

Conference Call

Two Harbors Investment Corp. will host a conference call on November 5, 2020 at 9:00 a.m. EST to discuss third quarter 2020 financial results and related information. To participate in the teleconference, please call toll-free (800) 289-0438, conference code 2438642, 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. EST on November 5, 2020, through 12:00 a.m. EST on December 5, 2020. The playback can be accessed by calling (719) 457-0820 , conference code 2438642. 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 an internally managed real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in Minnetonka, MN. Additional information is available at www.twoharborsinvestment.com.

Forward-Looking Statements

This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2019, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; the ongoing impact of the COVID-19 pandemic, and the actions taken by federal and state authorities and GSEs response, on the U.S. economy, financial markets and our target assets; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; 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 decision to terminate our management agreement with PRCM Advisers LLC and the pending litigation related thereto; 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 and Core Earnings per basic common share that exclude certain items. The non-GAAP financial measures presented by the company provide supplemental information to assist investors in analyzing the company’s results of operations and help facilitate comparisons to industry peers. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 11 of this release.

Additional Information

Stockholders of Two Harbors and other interested persons may find additional information regarding the company at the SEC’s Internet site at www.sec.gov or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 601 Carlson Parkway, Suite 1400, Minnetonka, MN, 55305, telephone (612) 453-4100.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

September 30,
2020

December 31,
2019

(unaudited)

ASSETS

Available-for-sale securities, at fair value (amortized cost $15,879,431; allowance for credit losses $25,495)

$

16,574,321

$

31,406,328

Mortgage servicing rights, at fair value

1,257,503

1,909,444

Cash and cash equivalents

1,615,074

558,136

Restricted cash

596,951

1,058,690

Accrued interest receivable

50,140

92,634

Due from counterparties

118,819

318,963

Derivative assets, at fair value

97,889

188,051

Reverse repurchase agreements

82,410

220,000

Other assets

194,543

169,376

Total Assets

$

20,587,650

$

35,921,622

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Repurchase agreements

$

16,376,696

$

29,147,463

Federal Home Loan Bank advances

210,000

Revolving credit facilities

274,830

300,000

Term notes payable

395,328

394,502

Convertible senior notes

285,843

284,954

Derivative liabilities, at fair value

3,551

6,740

Due to counterparties

109,200

259,447

Dividends payable

57,268

128,125

Accrued interest payable

12,304

149,626

Other liabilities

52,958

70,299

Total Liabilities

17,567,978

30,951,156

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 273,694,411 and 272,935,731 shares issued and outstanding, respectively

2,737

2,729

Additional paid-in capital

5,161,491

5,154,764

Accumulated other comprehensive income

720,340

689,400

Cumulative earnings

814,585

2,655,891

Cumulative distributions to stockholders

(4,656,982

)

(4,509,819

)

Total Stockholders’ Equity

3,019,672

4,970,466

Total Liabilities and Stockholders’ Equity

$

20,587,650

$

35,921,622

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2020

2019

2020

2019

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

89,200

$

242,023

$

443,614

$

731,716

Other

516

7,717

8,936

24,536

Total interest income

89,716

249,740

452,550

756,252

Interest expense:

Repurchase agreements

18,652

176,450

222,068

501,361

Federal Home Loan Bank advances

391

1,747

10,406

Revolving credit facilities

2,391

3,964

8,748

15,316

Term notes payable

3,321

5,475

11,678

5,706

Convertible senior notes

4,821

4,797

14,366

14,256

Total interest expense

29,185

191,077

258,607

547,045

Net interest income

60,531

58,663

193,943

209,207

Other-than-temporary impairment losses

(5,950

)

(11,004

)

Other income (loss):

(Loss) gain on investment securities

(9,107

)

248,828

(1,037,222

)

251,977

Servicing income

99,114

126,025

342,802

373,922

Loss on servicing asset

(112,763

)

(234,514

)

(938,219

)

(675,920

)

Gain (loss) on interest rate swap, cap and swaption agreements

1,401

70,620

(296,117

)

(101,414

)

Gain on other derivative instruments

65,596

85,856

8,734

270,798

Other income

84

495

948

277

Total other income (loss)

44,325

297,310

(1,919,074

)

119,640

Expenses:

Management fees

5,759

16,839

31,738

42,556

Servicing expenses

26,197

17,696

70,049

54,354

Other operating expenses

18,976

13,344

47,892

42,913

Restructuring charges

(139,788

)

6,000

Total expenses

(88,856

)

47,879

155,679

139,823

Income (loss) before income taxes

193,712

302,144

(1,880,810

)

178,020

Benefit from income taxes

(8,202

)

(3,556

)

(39,504

)

(11,188

)

Net income (loss)

201,914

305,700

(1,841,306

)

189,208

Dividends on preferred stock

18,950

18,951

56,851

56,851

Net income (loss) attributable to common stockholders

$

182,964

$

286,749

$

(1,898,157

)

$

132,357

Basic earnings (loss) per weighted average common share

$

0.67

$

1.05

$

(6.94

)

$

0.50

Diluted earnings (loss) per weighted average common share

$

0.64

$

1.00

$

(6.94

)

$

0.50

Dividends declared per common share

$

0.14

$

0.40

$

0.33

$

1.27

Weighted average number of shares of common stock:

Basic

273,705,785

272,897,575

273,567,998

266,114,772

Diluted

291,876,935

291,053,718

273,567,998

266,114,772

TWO HARBORS INVESTMENT CORP.

CONDENSED 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
September 30,

Nine Months Ended
September 30,

2020

2019

2020

2019

(unaudited)

(unaudited)

Comprehensive income (loss):

Net income (loss)

$

201,914

$

305,700

$

(1,841,306

)

$

189,208

Other comprehensive income (loss), net of tax:

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

36,216

(29,164

)

30,940

637,537

Other comprehensive income (loss)

36,216

(29,164

)

30,940

637,537

Comprehensive income (loss)

238,130

276,536

(1,810,366

)

826,745

Dividends on preferred stock

18,950

18,951

56,851

56,851

Comprehensive income (loss) attributable to common stockholders

$

219,180

$

257,585

$

(1,867,217

)

$

769,894

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
September 30,

Three Months Ended
June 30,

2020

2019

(unaudited)

(unaudited)

Reconciliation of Comprehensive income to Core Earnings:

Comprehensive income attributable to common stockholders

$

219,180

$

279

Adjustment for other comprehensive income attributable to common stockholders:

Unrealized gain on available-for-sale securities

(36,216

)

(192,794

)

Net income (loss) attributable to common stockholders

$

182,964

$

(192,515

)

Adjustments for non-Core Earnings:

Realized loss (gain) on securities

1,725

(54,795

)

Unrealized loss on securities

281

110

Provision for credit losses

7,101

1,193

Realized and unrealized loss on mortgage servicing rights

55,858

176,916

Realized loss on termination or expiration of swaps and swaptions

747,055

Unrealized gain on interest rate swaps and swaptions

(583

)

(756,464

)

Gain on other derivative instruments

(32,696

)

(64,744

)

Other loss

5

61

Change in servicing reserves

898

39

Non-cash equity compensation expense

2,857

2,398

Other nonrecurring expenses

3,664

Change in restructuring charges

(139,788

)

145,069

Net benefit from income taxes on non-Core Earnings

(6,715

)

(18,814

)

Core Earnings attributable to common stockholders(1)

$

75,571

$

(14,491

)

Weighted average basic common shares

273,705,785

273,604,079

Core Earnings attributable to common stockholders per weighted average basic common share

$

0.28

$

(0.05

)

_____________

(1)

Core Earnings is a non-U.S. GAAP measure that we define as comprehensive income (loss) attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, provision for credit losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock, other nonrecurring expenses and restructuring charges). As defined, Core Earnings includes net interest income, accrual and settlement of interest on derivatives, dollar roll income on TBAs, servicing income, net of estimated amortization on MSR, management fees and recurring cash related operating expenses. Dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. Core Earnings provides supplemental information to assist investors in analyzing the Company’s results of operations and helps facilitate comparisons to industry peers.

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

September 30,
2020

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

(unaudited)

Net Interest Income:

Interest income

$

89.7

$

107.3

$

255.5

$

237.3

$

251.1

Interest expense

29.2

62.1

167.3

167.3

191.1

Net interest income

60.5

45.2

88.2

70.0

60.0

Other income:

Servicing income, net of amortization(1)

42.2

51.0

55.2

54.6

52.7

Interest spread on interest rate swaps

0.8

(56.3

)

(12.6

)

4.8

19.1

Gain on other derivative instruments

32.9

11.9

5.3

9.0

Other income

0.1

0.1

0.1

0.1

0.4

Total other income

76.0

6.7

48.0

68.5

72.2

Expenses

43.5

46.8

47.0

49.4

46.2

Core Earnings before income taxes

93.0

5.1

89.2

89.1

86.0

Income tax expense

(1.5

)

0.6

2.6

2.5

2.0

Core Earnings

94.5

4.5

86.6

86.6

84.0

Dividends on preferred stock

18.9

19.0

19.0

18.9

19.0

Core Earnings attributable to common stockholders(2)

$

75.6

$

(14.5

)

$

67.6

$

67.7

$

65.0

Weighted average basic Core EPS

$

0.28

$

(0.05

)

$

0.25

$

0.25

$

0.24

Core earnings return on average common equity

15.7

%

(3.1

)%

7.3

%

6.8

%

6.5

%

________________

(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. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.

(2)

Please see page 11 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.

Contacts:

Corey Stolhammer, Investor Relations, Two Harbors Investment Corp., (612) 453-4055 or
corey.stolhammer@twoharborsinvestment.com

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