Business Wire | Nov 8, 2021 04:15PM EST

Two Harbors Investment Corp. Reports Third Quarter 2021 Financial Results

Nov. 08, 2021

NEW YORK--(BUSINESS WIRE)--Nov. 08, 2021--Two Harbors Investment Corp. (NYSE: TWO), an Agency + MSR mortgage real estate investment trust (REIT), today announced its financial results for the quarter ended September 30, 2021.

Quarterly Summary

* Reported book value of $6.40 per common share, representing a 2.3% quarterly return on book value(1) * Generated Comprehensive Income of $45.2 million, representing an annualized return on average common equity of 9.1% * Reported Earnings Available for Distribution, or EAD (formerly Core Earnings), of $73.6 million, or $0.24 per weighted average basic common share(2) * Declared a third quarter common stock dividend of $0.17 per share * Continued to grow mortgage servicing rights (MSR) portfolio Settled on $14.0 billion unpaid principal balance (UPB) generated through flow-sale program Closed on $15.3 billion UPB through bulk transactions * Issued 40 million shares of common stock through an underwritten offering for net proceeds of approximately $256.5 million

Post-Quarter End Update

* Issued 30 million shares of common stock through an underwritten offering for net proceeds of approximately $193.7 million * Expect to settle on outstanding commitments of $21 billion UPB of MSR through bulk transactions in upcoming quarters

"We are pleased with our third quarter performance, which includes a 2.3% economic return on book value." stated Bill Greenberg, Two Harbors' President, Chief Executive Officer and Chief Investment Officer. "There was robust activity in our MSR program where we settled on $29 billion UPB during the quarter and committed to purchase another $21 billion UPB. With our recent capital issuances, we continue to position the company to deploy capital in MSR, and in RMBS as attractive opportunities arise."

Return on book value is defined as the increase (decrease) in book value(1) 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.

Earnings Available for Distribution (formerly Core Earnings) is a non-GAAP(2) measure. Please see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.

Beginning with this reporting period for the three months ended September 30, 2021, the previously reported non-GAAP measure Core Earnings will be referred to as Earnings Available for Distribution, or EAD(1). Also beginning with this reporting period, EAD includes U.S. Treasury futures income. 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.

Operating Performance

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

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended Three Months Ended September 30, 2021 June 30, 2021

Per Annualized Per AnnualizedEarnings weighted return on weighted return onattributable Earnings average average Earnings average averageto common basic common basic commonstockholders common equity common equity share share

Comprehensive $ 45,226 $ 0.15 9.1 % $ (194,606) $ (0.71) (40.7) %Income (Loss)

GAAP Net $ 52,576 $ 0.17 10.5 % $ (131,707) $ (0.48) (27.5) %Income (Loss)

EarningsAvailable for $ 73,607 $ 0.24 14.7 % $ 51,519 $ 0.19 10.8 %Distribution^(1)(2)



Operating Metrics

Dividend per $ 0.17 $ 0.17 common share

Annualizeddividend 10.7 % 9.0 % yield^(3)

Book valueper common $ 6.40 $ 6.42 share atperiod end

Return onbook value^ 2.3 % (9.6) % (4)

Operatingexpenses,excludingnon-cash LTIP $ 12,858 $ 12,469 amortizationandnonrecurringexpenses^(5)

Operatingexpenses,excludingnon-cash LTIPamortizationand 1.9 % 1.9 % nonrecurringexpenses, asa percentageof averageequity^(5)

________________

Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please(1) see page 11 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information.

EAD includes U.S. Treasury futures income of $0.03 per basic common share(2) for the three months ended September 30, 2021. Had U.S. Treasury futures income been included for the three months ended June 30, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share.

Dividend yield is calculated based on annualizing the dividends declared in(3) the given period, divided by the closing share price as of the end of the period.

Return on book value is defined as the increase (decrease) in book value(4) 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.

Excludes non-cash equity compensation expense of $2.6 million for the third(5) quarter of 2021 and $4.6 million for the second quarter of 2021 and nonrecurring expenses of $1.2 million for the third quarter of 2021 and $1.4 million for the second quarter of 2021.

Portfolio Summary

As of September 30, 2021, the company's portfolio was comprised of $8.9 billion of Agency residential mortgage-backed securities (RMBS), Agency Derivatives and MSR as well as their associated notional hedges. Additionally, the company held $9.0 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, 2021 and June 30, 2021:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)



Portfolio Composition As of September 30, As of June 30, 2021 2021

(unaudited) (unaudited)

Agency

Fixed Rate $ 6,647,517 74.5 % $ 7,824,889 78.9 %

Other Agency^(1) 54,291 0.6 % 60,061 0.6 %

Total Agency 6,701,808 75.1 % 7,884,950 79.5 %

Mortgage servicing rights^ 2,213,312 24.8 % 2,020,106 20.4 %(2)

Other 8,173 0.1 % 5,559 0.1 %

Aggregate Portfolio 8,923,293 9,910,615

Net TBA position^(3) 8,973,364 7,164,835

Total Portfolio $ 17,896,657 $ 17,075,450

Portfolio Metrics

Three Months Ended September 30, 2021

Three Months Ended June 30, 2021

(unaudited)

(unaudited)

Annualized portfolio yield during the quarter(4)

3.33

%

2.72

%

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

0.78

%

0.79

%

Annualized net yield for aggregate portfolio during the quarter

2.55

%

1.93

%

________________

Three Months Three MonthsPortfolio Metrics Ended Ended September June 30, 30, 2021 2021

(unaudited) (unaudited)

Annualized portfolio yield during the quarter^(4) 3.33 % 2.72 %

Annualized cost of funds on average borrowing 0.78 % 0.79 %balance during the quarter^(5)

Annualized net yield for aggregate portfolio 2.55 % 1.93 %during the quarter

________________

(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.

Represents bond equivalent value of TBA position. Bond equivalent value is(3) 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, 2021

As of June 30, 2021

(unaudited)

(unaudited)

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

$

104.86

$

105.03

Weighted average three month CPR on Agency RMBS

30.1

%

32.3

%

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

99.1

%

99.2

%

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

0.9

%

0.8

%

______________

Portfolio Metrics Specific to RMBS and Agency As of As of JuneDerivatives September 30, 30, 2021 2021

(unaudited) (unaudited)

Weighted average cost basis of Agency principal $ 104.86 $ 105.03 and interest securities^(1)

Weighted average three month CPR on Agency RMBS 30.1 % 32.3 %

Fixed-rate investments as a percentage of 99.1 % 99.2 %aggregate RMBS and Agency Derivatives portfolio

Adjustable-rate investments as a percentage of 0.9 % 0.8 %aggregate RMBS and Agency Derivatives portfolio

______________

Weighted average cost basis includes RMBS principal and interest securities(1) only. Average purchase price utilized carrying value for weighting purposes.

Portfolio Metrics Specific to MSR(1)

As of September 30, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

194,393,942

$

185,209,738

Weighted average gross coupon

3.4

%

3.5

%

Weighted average current loan size

$

321

$

312

Weighted average original FICO score(2)

758

758

Weighted average original LTV

72

%

72

%

60+ day delinquencies

1.7

%

2.2

%

Net servicing fee

26.4 basis points

26.5 basis points

Three Months EndedSeptember 30, 2021

Three Months EndedJune 30, 2021

(unaudited)

(unaudited)

Fair value losses

$

(42,500)

$

(268,051)

Servicing income

$

122,960

$

112,816

Servicing expenses

$

21,401

$

18,503

Change in servicing reserves

$

(378)

$

163

________________

Portfolio Metrics Specific to MSR^ As of September 30, As of June 30,(1) 2021 2021

(dollars in thousands) (unaudited) (unaudited)

Unpaid principal balance $ 194,393,942 $ 185,209,738

Weighted average gross coupon 3.4 % 3.5 %

Weighted average current loan size $ 321 $ 312

Weighted average original FICO 758 758 score^(2)

Weighted average original LTV 72 % 72 %

60+ day delinquencies 1.7 % 2.2 %

Net servicing fee 26.4 basis points 26.5 basis points



Three Months Ended Three Months September 30, 2021 Ended June 30, 2021

(unaudited) (unaudited)

Fair value losses $ (42,500) $ (268,051)

Servicing income $ 122,960 $ 112,816

Servicing expenses $ 21,401 $ 18,503

Change in servicing reserves $ (378) $ 163

________________

Note: The company does not directly service mortgage loans, but insteadcontracts with appropriately licensed subservicers to handle substantially allservicing functions in the name of the subservicer for the loans underlying thecompany'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, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional amount(3)

$

8,742,000

$

6,854,000

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

$

17,036,595

$

15,646,953

Swaptions net notional, utilized as macroeconomic hedges

(941,000)

(201,000)

Total interest rate swaps and swaptions notional

$

16,095,595

$

15,445,953

________________

As of As of June 30,Other Investments and Risk Management Metrics September 30, 2021 2021

(dollars in thousands) (unaudited) (unaudited)

Net long TBA notional amount^(3) $ 8,742,000 $ 6,854,000

Interest rate swaps notional, utilized toeconomically hedge interest rate exposure (or $ 17,036,595 $ 15,646,953 duration)

Swaptions net notional, utilized as (941,000) (201,000) macroeconomic hedges

Total interest rate swaps and swaptions $ 16,095,595 $ 15,445,953 notional

________________

(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, 2021 and June 30, 2021:

Weighted Weighted Average Average Number ofSeptember 30, 2021 Balance Borrowing Months Distinct Rate to Counterparties Maturity

(dollars in thousands, unaudited)

Repurchase agreements $ 6,998,701 0.18 % 3.61 16 collateralized by RMBS

Repurchase agreements 125,000 4.00 % 5.98 1 collateralized by MSR

Total repurchase 7,123,701 0.25 % 3.65 17 agreements

Revolving creditfacilitiescollateralized by MSR 420,761 3.42 % 17.52 4 and related servicingadvance obligations

Term notes payable 396,479 2.89 % 32.84 n/a collateralized by MSR

Unsecured convertible 424,270 6.25 % 38.32 n/a senior notes

Total borrowings $ 8,365,211

June 30, 2021

Balance

Weighted Average Borrowing Rate

Weighted Average Months to Maturity

Number of Distinct Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by RMBS

$

8,225,622

0.22

%

2.47

15

Repurchase agreements collateralized by MSR

125,000

4.00

%

9.01

1

Total repurchase agreements

8,350,622

0.28

%

2.56

16

Revolving credit facilities collateralized by MSR and related servicing advance obligations

533,519

3.68

%

13.94

4

Term notes payable collateralized by MSR

396,183

2.89

%

35.87

n/a

Unsecured convertible senior notes

423,742

6.25

%

38.32

n/a

Total borrowings

$

9,704,066

Weighted Weighted Average Average Number ofJune 30, 2021 Balance Borrowing Months Distinct Rate to Counterparties Maturity

(dollars in thousands, unaudited)

Repurchase agreements $ 8,225,622 0.22 % 2.47 15 collateralized by RMBS

Repurchase agreements 125,000 4.00 % 9.01 1 collateralized by MSR

Total repurchase 8,350,622 0.28 % 2.56 16 agreements

Revolving creditfacilitiescollateralized by MSR 533,519 3.68 % 13.94 4 and related servicingadvance obligations

Term notes payable 396,183 2.89 % 35.87 n/a collateralized by MSR

Unsecured convertible 423,742 6.25 % 38.32 n/a senior notes

Total borrowings $ 9,704,066

Borrowings by Collateral Type

As of September 30, 2021

As of June 30, 2021

(dollars in thousands)

(unaudited)

(unaudited)

Collateral type:

Agency RMBS and Agency Derivatives

$

6,997,972

$

8,224,426

Mortgage servicing rights and related servicing advance obligations

942,240

1,054,702

Other - secured

729

1,196

Other - unsecured(1)

424,270

423,742

Total

$

8,365,211

$

9,704,066

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

3.1

:1.0

3.9

:1.0

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

6.1

:1.0

6.5

:1.0

Cost of Funds Metrics

Three Months Ended September 30, 2021

Three Months Ended June 30, 2021

(unaudited)

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

1.0

%

0.9

%

Agency RMBS and Agency Derivatives

0.2

%

0.2

%

Mortgage servicing rights and related servicing advance obligations(4)

4.4

%

4.5

%

Other - secured

1.8

%

1.9

%

Other - unsecured(1)(4)

6.9

%

6.7

%

____________________

Borrowings by Collateral Type As of September As of June 30, 30, 2021 2021

(dollars in thousands) (unaudited) (unaudited)

Collateral type:

Agency RMBS and Agency Derivatives $ 6,997,972 $ 8,224,426

Mortgage servicing rights and related 942,240 1,054,702 servicing advance obligations

Other - secured 729 1,196

Other - unsecured^(1) 424,270 423,742

Total $ 8,365,211 $ 9,704,066



Debt-to-equity ratio at period-end^(2) 3.1 :1.0 3.9 :1.0

Economic debt-to-equity ratio at 6.1 :1.0 6.5 :1.0period-end^(3)



Three Months Three MonthsCost of Funds Metrics Ended Ended September 30, June 30, 2021 2021

(unaudited) (unaudited)

Annualized cost of funds on average 1.0 % 0.9 %borrowings during the quarter:

Agency RMBS and Agency Derivatives 0.2 % 0.2 %

Mortgage servicing rights and related 4.4 % 4.5 %servicing advance obligations^(4)

Other - secured 1.8 % 1.9 %

Other - unsecured^(1)(4) 6.9 % 6.7 %

____________________

(1) Unsecured convertible senior notes.

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

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

(4) Includes amortization of debt issuance costs.

Conference Call

Two Harbors Investment Corp. will host a conference call on November 9, 2021 at 9:00 a.m. ET to discuss third quarter 2021 financial results and related information. The conference call will be webcast live and accessible in the Investors section of the company's website at www.twoharborsinvestment.com/investors. To participate in the teleconference, please call toll-free (877) 502-7185, approximately 10 minutes prior to the above start time. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. ET on November 9, 2021, through 12:00 p.m. ET on November 23, 2021. The playback can be accessed by calling (877) 660-6853, conference code 13723524. The call will also be archived on the company's website in the News & Events section.

Two Harbors Investment Corp.

Two Harbors Investment Corp., a Maryland corporation, is an internally managed real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in St. Louis Park, MN. Additional information is available at www.twoharborsinvestment.com.

Forward-Looking Statements

This presentation includes "forward-looking statements" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as "expect," "target," "assume," "estimate," "project," "budget," "forecast," "anticipate," "intend," "plan," "may," "will," "could," "should," "believe," "predicts," "potential," "continue," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2020, and any subsequent Quarterly Reports on Form 10-Q, under the caption "Risk Factors." Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; the ongoing impact of the COVID-19 pandemic, and the actions taken by federal and state governmental authorities and GSEs in response, on the U.S. economy, financial markets and our target assets; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our decision to terminate our management agreement with PRCM Advisers LLC and the ongoing litigation with PRCM Advisers related to such termination; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

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

Non-GAAP Financial Measures

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

Additional Information

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

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

September 30, December 31, 2021 2020

(unaudited)

ASSETS

Available-for-sale securities, at fair value(amortized cost $6,369,038 and $14,043,175, $ 6,664,744 $ 14,650,922 respectively; allowance for credit losses$15,429 and $22,528, respectively)

Mortgage servicing rights, at fair value 2,213,312 1,596,153

Cash and cash equivalents 1,076,216 1,384,764

Restricted cash 783,974 1,261,667

Accrued interest receivable 27,676 47,174

Due from counterparties 336,554 146,433

Derivative assets, at fair value 53,044 95,937

Reverse repurchase agreements 85,000 91,525

Other assets 244,028 241,346

Total Assets $ 11,484,548 $ 19,515,921

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Repurchase agreements $ 7,123,701 $ 15,143,898

Revolving credit facilities 420,761 283,830

Term notes payable 396,479 395,609

Convertible senior notes 424,270 286,183

Derivative liabilities, at fair value 82,895 11,058

Due to counterparties 112,255 135,838

Dividends payable 67,311 65,480

Accrued interest payable 10,523 21,666

Other liabilities 111,465 83,433

Total Liabilities 8,749,660 16,426,995

Stockholders' Equity:

Preferred stock, par value $0.01 per share;100,000,000 shares authorized and 29,050,000and 40,050,000 shares issued and outstanding, 702,550 977,501 respectively ($726,250 and $1,001,250liquidation preference, respectively)

Common stock, par value $0.01 per share;700,000,000 shares authorized and 313,900,227 3,139 2,737 and 273,703,882 shares issued and outstanding,respectively

Additional paid-in capital 5,429,155 5,163,794

Accumulated other comprehensive income 299,899 641,601

Cumulative earnings 1,214,277 1,025,756

Cumulative distributions to stockholders (4,914,132) (4,722,463)

Total Stockholders' Equity 2,734,888 3,088,926

Total Liabilities and Stockholders' Equity $ 11,484,548 $ 19,515,921

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,

2021

2020

2021

2020

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

35,837

$

89,200

$

134,581

$

443,614

Other

203

516

1,011

8,936

Total interest income

36,040

89,716

135,592

452,550

Interest expense:

Repurchase agreements

5,761

18,652

21,212

222,068

Revolving credit facilities

5,605

2,391

17,375

8,748

Term notes payable

3,249

3,321

9,685

11,678

Convertible senior notes

7,267

4,821

20,743

14,366

Federal Home Loan Bank advances

-

-

-

1,747

Total interest expense

21,882

29,185

69,015

258,607

Net interest income

14,158

60,531

66,577

193,943

Other income (loss):

Gain (loss) on investment securities

28,642

(9,107)

119,991

(1,037,222)

Servicing income

122,960

99,114

342,895

342,802

(Loss) gain on servicing asset

(42,500)

(112,763)

16,887

(938,219)

(Loss) gain on interest rate swap and swaption agreements

(3,947)

1,401

5,102

(296,117)

(Loss) gain on other derivative instruments

(15,019)

65,596

(239,718)

8,734

Other income (loss)

-

84

(5,701)

948

Total other income (loss)

90,136

44,325

239,456

(1,919,074)

Expenses:

Management fees

-

5,759

-

31,738

Servicing expenses

21,041

26,197

64,668

70,049

Compensation and benefits

9,198

10,099

28,645

26,503

Other operating expenses

7,406

8,877

22,111

21,389

Restructuring charges

-

(139,788)

-

6,000

Total expenses

37,645

(88,856)

115,424

155,679

Income (loss) before income taxes

66,649

193,712

190,609

(1,880,810)

Provision for (benefit from) income taxes

325

(8,202)

2,088

(39,504)

Net income (loss)

66,324

201,914

188,521

(1,841,306)

Dividends on preferred stock

13,748

18,950

44,711

56,851

Net income (loss) attributable to common stockholders

$

52,576

$

182,964

$

143,810

$

(1,898,157)

Basic earnings (loss) per weighted average common share

$

0.17

$

0.67

$

0.50

$

(6.94)

Diluted earnings (loss) per weighted average common share

$

0.17

$

0.64

$

0.49

$

(6.94)

Dividends declared per common share

$

0.17

$

0.14

$

0.51

$

0.33

Weighted average number of shares of common stock:

Basic

307,773,420

273,705,785

285,192,353

273,567,998

Diluted

346,730,073

291,876,935

319,966,115

273,567,998

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,

2021

2020

2021

2020

(unaudited)

(unaudited)

Comprehensive income (loss):

Net income (loss)

$

66,324

$

201,914

$

188,521

$

(1,841,306)

Other comprehensive (loss) income, net of tax:

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

(7,350)

36,216

(341,702)

30,940

Other comprehensive (loss) income

(7,350)

36,216

(341,702)

30,940

Comprehensive income (loss)

58,974

238,130

(153,181)

(1,810,366)

Dividends on preferred stock

13,748

18,950

44,711

56,851

Comprehensive income (loss) attributable to common stockholders

$

45,226

$

219,180

$

(197,892)

$

(1,867,217)

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 currentperiod presentation

Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

(unaudited) (unaudited)

Interest income:

Available-for-sale $ 35,837 $ 89,200 $ 134,581 $ 443,614 securities

Other 203 516 1,011 8,936

Total interest 36,040 89,716 135,592 452,550 income

Interest expense:

Repurchase 5,761 18,652 21,212 222,068 agreements

Revolving credit 5,605 2,391 17,375 8,748 facilities

Term notes payable 3,249 3,321 9,685 11,678

Convertible senior 7,267 4,821 20,743 14,366 notes

Federal Home Loan - - - 1,747 Bank advances

Total interest 21,882 29,185 69,015 258,607 expense

Net interest 14,158 60,531 66,577 193,943 income

Other income (loss):

Gain (loss) oninvestment 28,642 (9,107) 119,991 (1,037,222) securities

Servicing income 122,960 99,114 342,895 342,802

(Loss) gain on (42,500) (112,763) 16,887 (938,219) servicing asset

(Loss) gain oninterest rate swap (3,947) 1,401 5,102 (296,117) and swaptionagreements

(Loss) gain onother derivative (15,019) 65,596 (239,718) 8,734 instruments

Other income - 84 (5,701) 948 (loss)

Total other income 90,136 44,325 239,456 (1,919,074) (loss)

Expenses:

Management fees - 5,759 - 31,738

Servicing expenses 21,041 26,197 64,668 70,049

Compensation and 9,198 10,099 28,645 26,503 benefits

Other operating 7,406 8,877 22,111 21,389 expenses

Restructuring - (139,788) - 6,000 charges

Total expenses 37,645 (88,856) 115,424 155,679

Income (loss)before income 66,649 193,712 190,609 (1,880,810) taxes

Provision for(benefit from) 325 (8,202) 2,088 (39,504) income taxes

Net income (loss) 66,324 201,914 188,521 (1,841,306)

Dividends on 13,748 18,950 44,711 56,851 preferred stock

Net income (loss)attributable to $ 52,576 $ 182,964 $ 143,810 $ (1,898,157) commonstockholders

Basic earnings(loss) per $ 0.17 $ 0.67 $ 0.50 $ (6.94) weighted averagecommon share

Diluted earnings(loss) per $ 0.17 $ 0.64 $ 0.49 $ (6.94) weighted averagecommon share

Dividends declared $ 0.17 $ 0.14 $ 0.51 $ 0.33 per common share

Weighted averagenumber of shares of common stock:

Basic 307,773,420 273,705,785 285,192,353 273,567,998

Diluted 346,730,073 291,876,935 319,966,115 273,567,998



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 currentperiod presentation

Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

(unaudited) (unaudited)

Comprehensive income (loss):

Net income (loss) $ 66,324 $ 201,914 $ 188,521 $ (1,841,306)

Othercomprehensive (loss) income, netof tax:

Unrealized (loss)gain on (7,350) 36,216 (341,702) 30,940 available-for-salesecurities

Othercomprehensive (7,350) 36,216 (341,702) 30,940 (loss) income

Comprehensive 58,974 238,130 (153,181) (1,810,366) income (loss)

Dividends on 13,748 18,950 44,711 56,851 preferred stock

Comprehensiveincome (loss)attributable to $ 45,226 $ 219,180 $ (197,892) $ (1,867,217) commonstockholders

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,

2021

2021

(unaudited)

(unaudited)

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

Comprehensive income (loss) attributable to common stockholders

$

45,226

$

(194,606)

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities

7,350

62,899

Net income (loss) attributable to common stockholders

$

52,576

$

(131,707)

Adjustments for non-EAD:

Realized gain on securities

(21,087)

(15,493)

Unrealized (gain) loss on securities

(7,714)

49,620

Provision for credit losses

159

7,392

Realized and unrealized (gain) loss on mortgage servicing rights

(23,749)

202,651

Realized gain on termination or expiration of interest rate swaps and swaptions

(5,220)

(8,642)

Unrealized loss (gain) on interest rate swaps and swaptions

13,608

(13,607)

Loss (gain) on other derivative instruments

61,355

(24,721)

Change in servicing reserves

(378)

163

Non-cash equity compensation expense

2,559

4,611

Other nonrecurring expenses

1,187

1,397

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

311

(20,145)

Earnings available for distribution to common stockholders(1)

$

73,607

$

51,519

Weighted average basic common shares

307,773,420

273,718,561

Earnings available for distribution to common stockholders per weighted average basic common share(2)

$

0.24

$

0.19

_____________

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 currentperiod presentation

Three Months Three Months Ended Ended September 30, June 30,

2021 2021

(unaudited) (unaudited)

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

Comprehensive income (loss) attributable to $ 45,226 $ (194,606) common stockholders

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities 7,350 62,899

Net income (loss) attributable to common $ 52,576 $ (131,707) stockholders



Adjustments for non-EAD:

Realized gain on securities (21,087) (15,493)

Unrealized (gain) loss on securities (7,714) 49,620

Provision for credit losses 159 7,392

Realized and unrealized (gain) loss on mortgage (23,749) 202,651 servicing rights

Realized gain on termination or expiration of (5,220) (8,642) interest rate swaps and swaptions

Unrealized loss (gain) on interest rate swaps and 13,608 (13,607) swaptions

Loss (gain) on other derivative instruments 61,355 (24,721)

Change in servicing reserves (378) 163

Non-cash equity compensation expense 2,559 4,611

Other nonrecurring expenses 1,187 1,397

Net provision for (benefit from) income taxes on 311 (20,145) non-EAD

Earnings available for distribution to common $ 73,607 $ 51,519 stockholders^(1)



Weighted average basic common shares 307,773,420 273,718,561

Earnings available for distribution to commonstockholders per weighted average basic common $ 0.24 $ 0.19 share^(2)

_____________

Beginning with this reporting period for the three months ended September 30, 2021, the previously reported non-GAAP measure Core Earnings will be referred to as Earnings Available for Distribution, or EAD. EAD is a non-GAAP measure that we define as comprehensive income (loss) attributable to common stockholders, excluding "realized and unrealized gains and losses" (impairment losses, provision for (reversal of) credit losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock, other nonrecurring expenses and restructuring charges). As defined, EAD includes net interest income, accrual and settlement of interest on derivatives,(1) dollar roll income on TBAs, U.S. Treasury futures income, 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. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements. EAD provides supplemental information to assist investors in analyzing the Company's results of operations and helps facilitate comparisons to industry peers. EAD is one of several measures our board of directors considers to determine the amount of dividends to declare on our common stock and should not be considered an indication of our taxable income or as a proxy for the amount of dividends we may declare.

EAD includes U.S. Treasury futures income of $0.03 per basic common share(2) for the three months ended September 30, 2021. Had U.S. Treasury futures income been included for the three months ended June 30, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share.

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY EARNINGS AVAILABLE FOR DISTRIBUTION

(dollars in millions, except per share data)

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

Three Months Ended

September 30,2021

June 30,2021

March 31,2021

December 31,2020

September 30,2020

(unaudited)

Net Interest Income:

Interest income

$

36.0

$

43.4

$

56.1

$

72.5

$

89.7

Interest expense

21.9

24.4

22.7

22.6

29.2

Net interest income

14.1

19.0

33.4

49.9

60.5

Other income:

Servicing income, net of amortization(1)

56.7

47.4

43.8

41.1

42.2

Interest spread on interest rate swaps

4.5

2.4

1.7

2.0

0.8

Gain on other derivative instruments

46.3

26.6

18.9

43.5

32.9

Other income

-

-

0.1

0.1

0.1

Total other income

107.5

76.4

64.5

86.7

76.0

Expenses

34.2

31.0

36.2

37.3

43.5

Earnings available for distribution before income taxes

87.4

64.4

61.7

99.3

93.0

Income tax (benefit) expense

-

(0.8)

(1.3)

(1.7)

(1.5)

Earnings available for distribution

87.4

65.2

63.0

101.0

94.5

Dividends on preferred stock

13.8

13.7

17.2

19.0

18.9

Earnings available for distribution to common stockholders(2)

$

73.6

$

51.5

$

45.8

$

82.0

$

75.6

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

$

0.24

$

0.19

$

0.17

$

0.30

$

0.28

Earnings available for distribution return on average common equity

14.7

%

10.8

%

8.8

%

15.9

%

15.7

%

________________

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY EARNINGS AVAILABLE FOR DISTRIBUTION

(dollars in millions, except per share data)

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



Three Months Ended

September June 30, March December September 30, 2021 31, 31, 30, 2021 2021 2020 2020

(unaudited)

Net Interest Income:

Interest income $ 36.0 $ 43.4 $ 56.1 $ 72.5 $ 89.7

Interest expense 21.9 24.4 22.7 22.6 29.2

Net interest income 14.1 19.0 33.4 49.9 60.5

Other income:

Servicing income, net of 56.7 47.4 43.8 41.1 42.2 amortization^(1)

Interest spread on 4.5 2.4 1.7 2.0 0.8 interest rate swaps

Gain on other derivative 46.3 26.6 18.9 43.5 32.9 instruments

Other income - - 0.1 0.1 0.1

Total other income 107.5 76.4 64.5 86.7 76.0

Expenses 34.2 31.0 36.2 37.3 43.5

Earnings available fordistribution before 87.4 64.4 61.7 99.3 93.0 income taxes

Income tax (benefit) - (0.8) (1.3) (1.7) (1.5) expense

Earnings available for 87.4 65.2 63.0 101.0 94.5 distribution

Dividends on preferred 13.8 13.7 17.2 19.0 18.9 stock

Earnings available fordistribution to common $ 73.6 $ 51.5 $ 45.8 $ 82.0 $ 75.6 stockholders^(2)

Earnings available fordistribution to commonstockholders per $ 0.24 $ 0.19 $ 0.17 $ 0.30 $ 0.28 weighted average basiccommon share^(3)

Earnings available fordistribution return on 14.7 % 10.8 % 8.8 % 15.9 % 15.7 %average common equity

________________

Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the(1) portfolio. This amortization has been deducted from Earnings Available for Distribution. Amortization of MSR is deemed a non-GAAP measure due to the company's decision to account for MSR at fair value.

Earnings Available for Distribution, or EAD (formerly Core Earnings), is a(2) 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.

EAD includes U.S. Treasury futures income of $0.03 per basic common share for the three months ended September 30, 2021. Had U.S. Treasury futures(3) income been included for the three months ended June 30, 2021 and March 31, 2021, EAD would have been $0.02 higher, or $0.21 per basic common share, and $0.01 higher, or $0.18 per basic common share, respectively. U.S. Treasury futures income was de minimis in prior quarters.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211108006074/en/

CONTACT: Paulina Sims, Senior Director, Investor Relations, Two Harbors Investment Corp., (612) 446-5431, Paulina.Sims@twoharborsinvestment.com