TWOD 8-K
Two Harbors Investment Corp. (TWOD)
8-K
2023-10-30
For: 2023-10-30
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: October 30, 2023
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) | |||||||||
(Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(612 ) 453-4100
Registrant's telephone number, including area code
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class: | Trading Symbol(s) | Name of Exchange on Which Registered: | ||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Item 2.02 Results of Operations and Financial Condition.
On October 30, 2023, Two Harbors Investment Corp. issued a press release announcing its financial results for the fiscal quarter ended September 30, 2023. A copy of the press release and the 2023 Third Quarter Earnings Call Presentation are attached hereto as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference.
The information in Item 2.02 of this Current Report, including Exhibits 99.1 and 99.2 attached hereto, is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for any other purpose, including for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in Item 2.02 of this Current Report, including Exhibits 99.1 and 99.2, shall not be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filings (unless the registrant specifically states that the information or exhibit in this Item 2.02 is incorporated by reference).
| Item 9.01 | Financial Statements and Exhibits. | ||||
(d) Exhibits.
| Exhibit No. | Description | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 104 | Cover Page Interactive Data File, formatted in Inline XBRL. | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| TWO HARBORS INVESTMENT CORP. | ||||||||
| By: | /s/ REBECCA B. SANDBERG | |||||||
| Rebecca B. Sandberg | ||||||||
| General Counsel and Secretary | ||||||||
| Date: October 30, 2023 | ||||||||
Two Harbors Investment Corp. Reports Third Quarter 2023 Financial Results
Completed Acquisition of RoundPoint Mortgage Servicing LLC
NEW YORK, October 30, 2023 - Two Harbors Investment Corp. (NYSE: TWO), an Agency RMBS + MSR real estate investment trust (REIT), today announced its financial results for the quarter ended September 30, 2023.
Quarterly Summary
•Reported book value of $15.36 per common share, and declared a third quarter common stock dividend of $0.45 per share, representing a (3.5)% quarterly economic return on book value.(1)
•Incurred Comprehensive Loss of $56.8 million, or $(0.61) per weighted average basic common share.
•Generated Income Excluding Market-Driven Value Changes (IXM) of $0.51 per weighted average basic common share.(2)
•Closed acquisition of RoundPoint Mortgage Servicing LLC, which is expected to be accretive to pre-tax earnings in 2024 of $25-30 million through additional revenues and cost savings achieved by vertically integrating self-servicing capabilities.
•Settled $472.2 million unpaid principal balance (UPB) of MSR through flow-sale acquisitions.
“In the third quarter, fixed income markets fluctuated as participants tried to understand the Fed’s future path. The correlation of higher rates, higher volatility and wider mortgage spreads remained in place, which impacted our book value and returns,” stated Bill Greenberg, Two Harbors’ President and CEO. “Notwithstanding the continued market volatility, the highlight of our quarter was undoubtedly closing the acquisition of RoundPoint Mortgage Servicing LLC. We anticipate that bringing our servicing in-house will be accretive to pre-tax earnings in 2024 by $25-30 million. We believe this is a tremendous opportunity for our stakeholders and for the growth of both Two Harbors and RoundPoint.”
“As interest rates increased, we actively managed our Agency RMBS exposure by rotating into higher coupons. Our MSR portfolio continued to perform well, with prepayment speeds declining quarter-over-quarter and coming in below expectations, which is a tailwind to this strategy,” stated Nick Letica, Two Harbors’ Chief Investment Officer. “While elevated interest rate and spread volatility can pose near-term challenges to the RMBS sector, the combination of wide spreads and longer-term tightening potential make this a very attractive time to invest in our assets. Additionally, with the weighted average coupon of our MSR so far out of the money, we have a low convexity, low duration asset with stable cash flows. The combination of these two attractive assets leads to our belief that we can generate a low-to-mid-teens return in this environment.”
________________
(1)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.
(2)Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please see page 11 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information.
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Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the third quarter of 2023 and second quarter of 2023:
| Two Harbors Investment Corp. Operating Performance (unaudited) | |||||||||||||||||||||||||||||||||||
| (dollars in thousands, except per common share data) | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||
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 (Loss) Income | $ | (56,845) | $ | (0.61) | (14.5) | % | $ | 31,478 | $ | 0.31 | 8.1 | % | |||||||||||||||||||||||
| GAAP Net Income | $ | 294,077 | $ | 3.04 | 75.0 | % | $ | 187,784 | $ | 1.94 | 48.3 | % | |||||||||||||||||||||||
Income Excluding Market-Driven Value Changes(1) | $ | 49,288 | $ | 0.51 | 12.6 | % | $ | 57,501 | $ | 0.60 | 14.8 | % | |||||||||||||||||||||||
Earnings Available for Distribution(2) | $ | (776) | $ | (0.01) | (0.2) | % | $ | (3,716) | $ | (0.04) | (1.0) | % | |||||||||||||||||||||||
Operating Metrics | |||||||||||||||||||||||||||||||||||
| Dividend per common share | $ | 0.45 | $ | 0.45 | |||||||||||||||||||||||||||||||
Annualized dividend yield(3) | 13.6 | % | 13.0 | % | |||||||||||||||||||||||||||||||
| Book value per common share at period end | $ | 15.36 | $ | 16.39 | |||||||||||||||||||||||||||||||
Economic return on book value(4) | (3.5) | % | 2.2 | % | |||||||||||||||||||||||||||||||
Operating expenses, excluding non-cash LTIP amortization and certain operating expenses(5) | $ | 12,629 | $ | 11,885 | |||||||||||||||||||||||||||||||
Operating expenses, excluding non-cash LTIP amortization and certain operating expenses, as a percentage of average equity(5) | 2.3 | % | 2.2 | % | |||||||||||||||||||||||||||||||
_______________
(1)Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please see page 11 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information.
(2)Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 12 for a definition of EAD 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 (decrease) increase 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 $1.6 million for the third quarter of 2023 and $1.7 million for the second quarter of 2023 and certain operating expenses of $10.4 million for the third quarter of 2023 and $7.1 million for the second quarter of 2023. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC.
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Portfolio Summary
As of September 30, 2023, the company’s portfolio was comprised of $12.0 billion of Agency RMBS, MSR and other investment securities as well as their associated notional debt hedges. Additionally, the company held $2.1 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, 2023 and June 30, 2023:
| Two Harbors Investment Corp. Portfolio | ||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||
| Portfolio Composition | As of September 30, 2023 | As of June 30, 2023 | ||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||
| Agency RMBS | $ | 8,832,783 | 73.3 | % | $ | 8,887,839 | 72.6 | % | ||||||||||||||||||
Mortgage servicing rights(1) | 3,213,113 | 26.6 | % | 3,273,956 | 26.7 | % | ||||||||||||||||||||
| Other | 7,861 | 0.1 | % | 87,808 | 0.7 | % | ||||||||||||||||||||
| Aggregate Portfolio | 12,053,757 | 12,249,603 | ||||||||||||||||||||||||
Net TBA position(2) | 2,134,444 | 2,894,560 | ||||||||||||||||||||||||
| Total Portfolio | $ | 14,188,201 | $ | 15,144,163 | ||||||||||||||||||||||
________________
(1)Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases.
(2)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.
| Portfolio Metrics Specific to Agency RMBS | As of September 30, 2023 | As of June 30, 2023 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||
Weighted average cost basis(1) | $ | 100.81 | $ | 101.41 | ||||||||||
| Weighted average experienced three-month CPR | 6.5 | % | 6.5 | % | ||||||||||
| Gross weighted average coupon rate | 5.5 | % | 5.6 | % | ||||||||||
| Weighted average loan age (months) | 24 | 22 | ||||||||||||
______________
(1)Weighted average cost basis includes Agency principal and interest RMBS only and utilizes carrying value for weighting purposes.
Portfolio Metrics Specific to MSR(1) | As of September 30, 2023 | As of June 30, 2023 | ||||||||||||
(dollars in thousands) | (unaudited) | (unaudited) | ||||||||||||
| Unpaid principal balance | $ | 218,662,270 | $ | 222,622,177 | ||||||||||
| Gross coupon rate | 3.4 | % | 3.4 | % | ||||||||||
| Current loan size | $ | 338 | $ | 340 | ||||||||||
Original FICO(2) | 759 | 759 | ||||||||||||
| Original LTV | 72 | % | 72 | % | ||||||||||
| 60+ day delinquencies | 0.7 | % | 0.6 | % | ||||||||||
| Net servicing fee | 25.2 basis points | 26.4 basis points | ||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended June 30, 2023 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||
| Fair value gains | $ | 67,369 | $ | 21,679 | ||||||||||
| Servicing income | $ | 178,625 | $ | 175,223 | ||||||||||
| Servicing expenses | $ | 28,894 | $ | 25,477 | ||||||||||
| Change in servicing reserves | $ | 994 | $ | (301) | ||||||||||
________________.
(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.
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Other Investments and Risk Management Metrics | As of September 30, 2023 | As of June 30, 2023 | ||||||||||||
(dollars in thousands) | (unaudited) | (unaudited) | ||||||||||||
Net long TBA notional(1) | $ | 2,194,000 | $ | 3,051,000 | ||||||||||
Futures notional | $ | (7,870,450) | $ | (6,624,550) | ||||||||||
Interest rate swaps notional | $ | 8,545,965 | $ | 8,977,714 | ||||||||||
| Swaptions net notional | $ | (200,000) | $ | (200,000) | ||||||||||
________________
(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 September 30, 2023 and June 30, 2023:
| September 30, 2023 | Balance | Weighted Average Borrowing Rate | Weighted Average Months to Maturity | Number of Distinct Counterparties | ||||||||||||||||||||||
| (dollars in thousands, unaudited) | ||||||||||||||||||||||||||
| Repurchase agreements collateralized by securities | $ | 8,835,454 | 5.56 | % | 3.25 | 17 | ||||||||||||||||||||
| Repurchase agreements collateralized by MSR | 277,816 | 7.06 | % | 2.34 | 3 | |||||||||||||||||||||
| Total repurchase agreements | 9,113,270 | 5.65 | % | 3.23 | 18 | |||||||||||||||||||||
Revolving credit facilities collateralized by MSR and related servicing advance obligations | 1,410,671 | 8.65 | % | 15.68 | 4 | |||||||||||||||||||||
| Term notes payable collateralized by MSR | 295,025 | 8.23 | % | 8.84 | n/a | |||||||||||||||||||||
| Unsecured convertible senior notes | 268,179 | 6.25 | % | 27.55 | n/a | |||||||||||||||||||||
| Total borrowings | $ | 11,087,145 | ||||||||||||||||||||||||
| June 30, 2023 | Balance | Weighted Average Borrowing Rate | Weighted Average Months to Maturity | Number of Distinct Counterparties | ||||||||||||||||||||||
| (dollars in thousands, unaudited) | ||||||||||||||||||||||||||
| Repurchase agreements collateralized by securities | $ | 8,807,824 | 5.23 | % | 2.19 | 18 | ||||||||||||||||||||
| Repurchase agreements collateralized by MSR | 260,000 | 8.67 | % | 5.98 | 1 | |||||||||||||||||||||
| Total repurchase agreements | 9,067,824 | 5.33 | % | 2.30 | 19 | |||||||||||||||||||||
Revolving credit facilities collateralized by MSR and related servicing advance obligations | 1,455,421 | 8.46 | % | 18.71 | 4 | |||||||||||||||||||||
| Term notes payable collateralized by MSR | 398,653 | 8.00 | % | 11.87 | n/a | |||||||||||||||||||||
| Unsecured convertible senior notes | 267,791 | 6.25 | % | 30.58 | n/a | |||||||||||||||||||||
| Total borrowings | $ | 11,189,689 | ||||||||||||||||||||||||
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| Borrowings by Collateral Type | As of September 30, 2023 | As of June 30, 2023 | ||||||||||||
| (dollars in thousands) | (unaudited) | (unaudited) | ||||||||||||
| Agency RMBS | $ | 8,835,221 | $ | 8,760,221 | ||||||||||
| Mortgage servicing rights and related servicing advance obligations | 1,983,512 | 2,114,074 | ||||||||||||
| Other - secured | 233 | 47,603 | ||||||||||||
Other - unsecured(1) | 268,179 | 267,791 | ||||||||||||
| Total | 11,087,145 | 11,189,689 | ||||||||||||
| TBA cost basis | 2,147,540 | 2,905,852 | ||||||||||||
| Net payable (receivable) for unsettled RMBS | — | 54,739 | ||||||||||||
| Total, including TBAs and net payable (receivable) for unsettled RMBS | $ | 13,234,685 | $ | 14,150,280 | ||||||||||
Debt-to-equity ratio at period-end(2) | 5.2 | :1.0 | 5.0 | :1.0 | ||||||||||
Economic debt-to-equity ratio at period-end(3) | 6.3 | :1.0 | 6.4 | :1.0 | ||||||||||
Cost of Financing by Collateral Type(4) | Three Months Ended September 30, 2023 | Three Months Ended June 30, 2023 | ||||||||||||
| (unaudited) | (unaudited) | |||||||||||||
| Agency RMBS | 5.61 | % | 5.20 | % | ||||||||||
Mortgage servicing rights and related servicing advance obligations(5) | 9.01 | % | 8.70 | % | ||||||||||
| Other - secured | 6.79 | % | 5.89 | % | ||||||||||
Other - unsecured(1)(5) | 6.92 | % | 6.88 | % | ||||||||||
| Annualized cost of financing | 6.26 | % | 5.89 | % | ||||||||||
Interest rate swaps(6) | (0.25) | % | (0.13) | % | ||||||||||
U.S. Treasury futures(7) | (0.40) | % | (0.21) | % | ||||||||||
TBAs(8) | 3.79 | % | 3.49 | % | ||||||||||
Annualized cost of financing, including swaps, U.S. Treasury futures and TBAs | 5.26 | % | 5.08 | % | ||||||||||
____________________
(1)Unsecured convertible senior notes.
(2)Defined as total borrowings to fund Agency and non-Agency investment securities and MSR, divided by total equity.
(3)Defined as total borrowings to fund Agency and non-Agency investment securities and MSR, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity.
(4)Excludes repurchase agreements collateralized by U.S. Treasuries.
(5)Includes amortization of debt issuance costs.
(6)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.
(7)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.
(8)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.
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Conference Call
Two Harbors Investment Corp. will host a conference call on October 31, 2023 at 10:00 a.m. ET to discuss third quarter 2023 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 October 31, 2023, through 12:00 p.m. ET on November 14, 2023. The playback can be accessed by calling (877) 660-6853, conference code 13740826. 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, 2022, 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 acquisition of RoundPoint Mortgage Servicing LLC and to manage the risks associated with operating a mortgage loan servicer; 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 to maintain our MSR portfolio; 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.
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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 Commission’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.
Contact
Margaret Karr, Head of Investor Relations, Two Harbors Investment Corp., (612)-453-4080, [email protected]
# # #
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| TWO HARBORS INVESTMENT CORP. | |||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
| (dollars in thousands, except share data) | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
Available-for-sale securities, at fair value (amortized cost $9,497,257 and $8,114,627, respectively; allowance for credit losses $4,556 and $6,958, respectively) | $ | 8,830,726 | $ | 7,778,734 | |||||||
| Mortgage servicing rights, at fair value | 3,213,113 | 2,984,937 | |||||||||
| Cash and cash equivalents | 644,184 | 683,479 | |||||||||
| Restricted cash | 400,777 | 443,026 | |||||||||
| Accrued interest receivable | 39,038 | 36,018 | |||||||||
| Due from counterparties | 315,467 | 253,374 | |||||||||
| Derivative assets, at fair value | 20,592 | 26,438 | |||||||||
| Reverse repurchase agreements | 282,767 | 1,066,935 | |||||||||
| Other assets | 170,065 | 193,219 | |||||||||
| Total Assets | $ | 13,916,729 | $ | 13,466,160 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Repurchase agreements | $ | 9,113,270 | $ | 8,603,011 | |||||||
| Revolving credit facilities | 1,410,671 | 1,118,831 | |||||||||
| Term notes payable | 295,025 | 398,011 | |||||||||
| Convertible senior notes | 268,179 | 282,496 | |||||||||
| Derivative liabilities, at fair value | 23,550 | 34,048 | |||||||||
| Due to counterparties | 312,248 | 541,709 | |||||||||
| Dividends payable | 55,675 | 64,504 | |||||||||
| Accrued interest payable | 90,709 | 94,034 | |||||||||
| Other liabilities | 230,174 | 145,991 | |||||||||
| Total Liabilities | 11,799,501 | 11,282,635 | |||||||||
| Stockholders’ Equity: | |||||||||||
| Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 25,578,232 and 26,092,050 shares issued and outstanding, respectively ($639,456 and $652,301 liquidation preference, respectively) | 618,579 | 630,999 | |||||||||
| Common stock, par value $0.01 per share; 175,000,000 shares authorized and 96,186,425 and 86,428,845 shares issued and outstanding, respectively | 962 | 864 | |||||||||
| Additional paid-in capital | 5,826,133 | 5,645,998 | |||||||||
| Accumulated other comprehensive loss | (660,008) | (278,711) | |||||||||
| Cumulative earnings | 1,782,654 | 1,453,371 | |||||||||
| Cumulative distributions to stockholders | (5,451,092) | (5,268,996) | |||||||||
| Total Stockholders’ Equity | 2,117,228 | 2,183,525 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,916,729 | $ | 13,466,160 | |||||||
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| TWO HARBORS INVESTMENT CORP. | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS | |||||||||||||||||||||||
| (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, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||
| Available-for-sale securities | $ | 107,827 | $ | 88,472 | $ | 309,060 | $ | 188,518 | |||||||||||||||
| Other | 15,781 | 5,916 | 48,903 | 7,719 | |||||||||||||||||||
| Total interest income | 123,608 | 94,388 | 357,963 | 196,237 | |||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||
| Repurchase agreements | 129,298 | 57,868 | 350,599 | 85,480 | |||||||||||||||||||
| Revolving credit facilities | 32,526 | 15,178 | 87,866 | 29,960 | |||||||||||||||||||
| Term notes payable | 6,634 | 5,427 | 22,516 | 12,608 | |||||||||||||||||||
| Convertible senior notes | 4,636 | 4,877 | 14,164 | 14,720 | |||||||||||||||||||
| Total interest expense | 173,094 | 83,350 | 475,145 | 142,768 | |||||||||||||||||||
| Net interest (expense) income | (49,486) | 11,038 | (117,182) | 53,469 | |||||||||||||||||||
| Other income: | |||||||||||||||||||||||
| (Loss) gain on investment securities | (471) | (6,426) | 12,499 | (256,487) | |||||||||||||||||||
| Servicing income | 178,625 | 148,833 | 507,168 | 442,985 | |||||||||||||||||||
| Gain (loss) on servicing asset | 67,369 | (6,720) | 60,969 | 489,461 | |||||||||||||||||||
| Gain on interest rate swap and swaption agreements | 111,909 | 34,806 | 86,288 | 29,499 | |||||||||||||||||||
| Gain (loss) on other derivative instruments | 86,212 | 159,044 | (22,398) | (43,991) | |||||||||||||||||||
| Other income (loss) | 2,903 | — | 5,103 | (117) | |||||||||||||||||||
| Total other income | 446,547 | 329,537 | 649,629 | 661,350 | |||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Servicing expenses | 29,903 | 21,152 | 83,459 | 68,847 | |||||||||||||||||||
| Compensation and benefits | 8,617 | 10,100 | 31,568 | 33,312 | |||||||||||||||||||
| Other operating expenses | 15,984 | 10,688 | 38,354 | 26,465 | |||||||||||||||||||
| Total expenses | 54,504 | 41,940 | 153,381 | 128,624 | |||||||||||||||||||
| Income before income taxes | 342,557 | 298,635 | 379,066 | 586,195 | |||||||||||||||||||
| Provision for income taxes | 36,365 | 21,023 | 52,237 | 95,733 | |||||||||||||||||||
| Net income | 306,192 | 277,612 | 326,829 | 490,462 | |||||||||||||||||||
| Dividends on preferred stock | (12,115) | (13,747) | (36,595) | (41,242) | |||||||||||||||||||
| Gain on repurchase and retirement of preferred stock | — | — | 2,454 | — | |||||||||||||||||||
| Net income attributable to common stockholders | $ | 294,077 | $ | 263,865 | $ | 292,688 | $ | 449,220 | |||||||||||||||
| Basic earnings per weighted average common share | $ | 3.04 | $ | 3.04 | $ | 3.06 | $ | 5.19 | |||||||||||||||
| Diluted earnings per weighted average common share | $ | 2.81 | $ | 2.78 | $ | 2.91 | $ | 4.80 | |||||||||||||||
| Dividends declared per common share | $ | 0.45 | $ | 0.68 | $ | 1.50 | $ | 2.04 | |||||||||||||||
| Weighted average number of shares of common stock: | |||||||||||||||||||||||
| Basic | 96,176,287 | 86,252,104 | 95,059,856 | 86,107,979 | |||||||||||||||||||
| Diluted | 105,628,130 | 96,132,100 | 104,849,018 | 96,120,844 | |||||||||||||||||||
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| TWO HARBORS INVESTMENT CORP. | |||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS, CONTINUED | |||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Certain prior period amounts have been reclassified to conform to the current period presentation | |||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||
| Net income | $ | 306,192 | $ | 277,612 | $ | 326,829 | $ | 490,462 | |||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | (350,922) | (551,673) | (381,297) | (887,729) | |||||||||||||||||||
| Other comprehensive loss | (350,922) | (551,673) | (381,297) | (887,729) | |||||||||||||||||||
| Comprehensive loss | (44,730) | (274,061) | (54,468) | (397,267) | |||||||||||||||||||
| Dividends on preferred stock | (12,115) | (13,747) | (36,595) | (41,242) | |||||||||||||||||||
| Gain on repurchase and retirement of preferred stock | — | — | 2,454 | — | |||||||||||||||||||
Comprehensive loss attributable to common stockholders | $ | (56,845) | $ | (287,808) | $ | (88,609) | $ | (438,509) | |||||||||||||||
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| 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, 2023 | June 30, 2023 | ||||||||||
| (unaudited) | (unaudited) | ||||||||||
| Reconciliation of Comprehensive (loss) income to Income Excluding Market-Driven Value Changes: | |||||||||||
| Comprehensive (loss) income attributable to common stockholders | $ | (56,845) | $ | 31,478 | |||||||
Adjustments to exclude market-driven value changes(1) and certain operating expenses: | |||||||||||
RMBS and other Agency securities market-driven value changes(2) | 391,159 | 195,343 | |||||||||
MSR market-driven value changes(3) | (138,182) | (94,172) | |||||||||
Swap and swaption market-driven value changes(4) | (110,764) | (57,085) | |||||||||
TBA market-driven value changes(5) | 98,613 | 87,800 | |||||||||
| Realized and unrealized gains on futures | (178,918) | (126,923) | |||||||||
| Other realized gains | (2,903) | (2,201) | |||||||||
| Change in servicing reserves | 994 | (301) | |||||||||
| Deboarding fees associated with RoundPoint acquisition | 3,336 | 2,368 | |||||||||
Certain operating expenses(6) | 10,396 | 7,134 | |||||||||
| Gain on repurchase and retirement of preferred stock | — | (2,454) | |||||||||
| Net provision for income taxes associated with market-driven value changes | 32,402 | 16,514 | |||||||||
Income Excluding Market-Driven Value Changes(7) | $ | 49,288 | $ | 57,501 | |||||||
| Weighted average basic common shares | 96,176,287 | 96,387,877 | |||||||||
Income Excluding Market-Driven Value Changes per weighted average basic common share | $ | 0.51 | $ | 0.60 | |||||||
_____________
(1)The market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA represents unexpected price changes for the referenced period. As defined, the calculation of IXM includes modeled price changes that are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. Unexpected price changes represent the differences between (a) actual spreads, forward interest rates, shape of the term structure and volatility, and (b) the spreads, forward interest rates, shape of the term structure and volatility that were factored into the previous day ending fair value. Unexpected price changes are measured daily and used to determine the portion of actual market price changes not attributable to modeled price changes. The reported market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA is the sum of all daily unexpected price changes for the referenced period. Please refer to end notes (2) through (5) below for further information.
(2)RMBS and other Agency securities market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS and other Agency securities, less the sum of the realization of RMBS and other Agency securities cash flows which incorporates actual prepayments, changes in RMBS and other Agency securities accrued interest, and modeled price changes. Modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. RMBS and other Agency securities includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP.
(3)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 modeled price changes. Modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged.
(4)Swap and swaption market-driven value changes refers to the net interest spread and realized and unrealized gains and losses on interest rate swap and swaption agreements, less the swaps daily IXM that is equal to the previous day ending fair value multiplied by the overnight SOFR and swaptions daily IXM that is equal to the previous day ending fair value multiplied by the realized forward rate.
(5)TBA market-driven value changes refers to the total realized and unrealized gains and losses, less the daily zero-volatility OAS less the implied repo spread, multiplied by the previous day ending fair value.
(6)Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC.
(7)Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure defined as total 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, certain operating expenses and gains on the repurchase and retirement of preferred stock and convertible senior notes. As defined, IXM includes the realization of portfolio cash flows which incorporates actual prepayments, changes in portfolio accrued interest, servicing income and servicing expenses, and certain modeled price changes. These modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. Assumptions for spreads, forward interest rates, shape of the term structure, volatility and the previous day ending fair value include applicable market data, data from third-party brokers and pricing vendors and management’s assessment. This applies to RMBS, MSR and derivatives, as applicable, and is net of all operating expenses and provision for income taxes associated with IXM. The purpose of presenting IXM, and the various adjustments related to market-driven value changes and certain legal expenses and acquisition transaction costs, is to provide management, analysts and investors with a profit and loss attribution that allows them to better understand the sources of returns from the company’s investment portfolio, operating expenses and tax expenses. IXM provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers. IXM 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.
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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, 2023 | June 30, 2023 | ||||||||||
(unaudited) | (unaudited) | ||||||||||
| Reconciliation of Comprehensive (loss) income to Earnings Available for Distribution: | |||||||||||
| Comprehensive (loss) income attributable to common stockholders | $ | (56,845) | $ | 31,478 | |||||||
| Adjustment for other comprehensive loss attributable to common stockholders: | |||||||||||
| Unrealized loss on available-for-sale securities | 350,922 | 156,306 | |||||||||
| Net income attributable to common stockholders | $ | 294,077 | $ | 187,784 | |||||||
| Adjustments to exclude reported realized and unrealized (gains) losses: | |||||||||||
| Realized loss on securities | 289 | 2,640 | |||||||||
| Unrealized loss (gain) on securities | 280 | (4,834) | |||||||||
| (Reversal of) provision for credit losses | (98) | 22 | |||||||||
| Realized and unrealized gain on mortgage servicing rights | (67,369) | (21,679) | |||||||||
| Realized loss on termination or expiration of interest rate swaps and swaptions | 5,176 | — | |||||||||
| Unrealized gain on interest rate swaps and swaptions | (110,234) | (53,080) | |||||||||
| Realized and unrealized gain on other derivative instruments | (86,121) | (47,063) | |||||||||
| Gain on repurchase and retirement of preferred stock | — | (2,454) | |||||||||
| Other realized and unrealized gains | (2,903) | (2,200) | |||||||||
| Other adjustments: | |||||||||||
MSR amortization(1) | (90,485) | (91,836) | |||||||||
TBA dollar roll (losses) income(2) | (2,106) | (3,526) | |||||||||
U.S. Treasury futures income(3) | 11,174 | 5,652 | |||||||||
Change in servicing reserves | 994 | (301) | |||||||||
Non-cash equity compensation expense | 1,576 | 1,735 | |||||||||
Certain operating expenses(4) | 10,396 | 7,134 | |||||||||
| Net provision for income taxes on non-EAD | 34,578 | 18,290 | |||||||||
Earnings available for distribution to common stockholders(5) | $ | (776) | $ | (3,716) | |||||||
Weighted average basic common shares | 96,176,287 | 96,387,877 | |||||||||
Earnings available for distribution to common stockholders per weighted average basic common share | $ | (0.01) | $ | (0.04) | |||||||
_____________
(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)Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC.
(5)EAD is a non-GAAP measure that we define as comprehensive (loss) income 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 certain operating 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 certain 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.
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An Agency + MSR REIT Third Quarter 2023 Earnings Call OCTOBER 31, 2023
Safe Harbor Statement 2 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, 2022, 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 acquisition of RoundPoint Mortgage Servicing LLC and to manage the risks associated with operating a mortgage loan servicer; 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 mortgage servicing rights (MSR) and to maintain our MSR portfolio; 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. This presentation may include industry and market data obtained through research, surveys, and studies conducted by third parties and industry publications. We have not independently verified any such market and industry data from third-party sources. This presentation is provided for discussion purposes only and may not be relied upon as legal or investment advice, nor is it intended to be inclusive of all the risks and uncertainties that should be considered. This presentation does not constitute an offer to purchase or sell any securities, nor shall it be construed to be indicative of the terms of an offer that the parties or their respective affiliates would accept. Readers are advised that the financial information in this presentation is based on company data available at the time of this presentation and, in certain circumstances, may not have been audited by the company’s independent auditors.
Financials Overview 3 Book Value $15.36 Common Stock Dividend $0.45 Economic Return on Book Value(1) (3.5)% Comprehensive Loss $(0.61) Portfolio(3) $14.1b Quarter-end Economic Debt-to-Equity(4) 6.3x Note: Financial data throughout this presentation is as of or for the quarter ended September 30, 2023, unless otherwise noted. Per share metrics utilize basic common shares as the denominator. The End Notes are an integral part of this presentation. See slides 30 through 36 at the back of this presentation for information related to certain financial metrics and defined terms used herein. Income Excluding Market- Driven Value Changes (IXM)(2) $0.51
RoundPoint Acquisition 4 A TRANSFORMATIVE ACQUISITION AND DEFINITIVE COMMITMENT TO MSR Benefits for Stakeholders • In-house servicing results in: ◦ Significant cost savings over use of third party subservicers; and ◦ Receipt of cashflows associated with MSR, including late fees and ancillary income • Accretive to pre-tax earnings in 2024 by an estimated $25-30 million • Potential additional revenue streams from new business opportunities Vision for RoundPoint • Establish premier mortgage servicing model • Expand current third party subservicing business • Explore new ways to participate in structured housing finance market, including new loan products, reverse mortgages, HELOCs, second liens and other ancillary products
Markets Overview 5 II. FED FUNDS RATE EXPECTATIONS(1)I. QUARTERLY YIELD CURVE CHANGE(1) • The Federal Reserve left interest rates unchanged at its September meeting, leading to higher expected interest rates • Market expectations have shifted, calling for fewer interest rate cuts in total over an extended period of time; projected short-term rate of 4.72% at the end of 2024 • Markets have embraced the soft landing and “higher for longer” scenario as inflation has moderated while economic data remains strong • Over the quarter, the yield curve, though still inverted, bear steepened with longer-end rates at their highest levels since 2008
Book Value Summary ($ millions, except per share data) Q3-2023 Book Value Q3-2023 Book Value per share Beginning common stockholders’ equity $ 1,576.5 $ 16.39 Net income 306.2 Other comprehensive loss (350.9) Comprehensive loss (44.7) Dividend declaration - preferred (12.1) Comprehensive loss attributable to common stockholders (56.8) Common stock dividends declared (43.6) Other 1.6 Ending common stockholders’ equity $ 1,477.7 $ 15.36 Total preferred stock liquidation preference 639.5 Ending total equity $ 2,117.2 • Book value of $15.36 per common share, resulting in a (3.5)% quarterly economic return on book value(1) ◦ Main driver of book value decline was spread widening across the mortgage index in August and September • Incurred Comprehensive Loss of $56.8 million, or $0.61 per weighted average common share 6
Results and Return Contributions Three Months Ended September 30, 2023 ($ in thousands) GAAP Net Income Other Comprehensive Loss Total Comprehensive Loss Market-Driven Value Changes and Certain Operating Expenses(1)(2) Income Excluding Market-Driven Value Changes(3) RMBS and other Agency securities(4) RMBS and other Agency securities income (loss) $ 105,312 $ (350,922) $ (245,610) $ (391,159) $ 145,549 RMBS and other Agency securities funding expense (122,919) (122,919) — (122,919) MSR MSR income 216,091 216,091 133,852 82,239 MSR funding expense (45,539) (45,539) — (45,539) Derivatives and other Swaps and swaptions 111,909 111,909 110,764 1,145 TBAs (90,662) (90,662) (98,613) 7,951 Futures and options on futures 178,918 178,918 178,918 — Interest on cash, reverse repurchase agreements and other 18,684 18,684 2,903 15,781 Expenses Convertible debt interest expense (4,636) (4,636) — (4,636) Operating expenses (24,601) (24,601) (10,396) (14,205) Tax expense (36,365) (36,365) (32,402) (3,963) Earnings (losses) attributable to Two Harbors 306,192 (350,922) (44,730) (106,133) 61,403 Dividends on preferred stock (12,115) (12,115) — (12,115) Earnings (losses) attributable to common stockholders $ 294,077 $ (350,922) $ (56,845) $ (106,133) $ 49,288 Annualized return on common equity 12.6 % Quarterly return per weighted average basic common share $ 0.51 7 Note: The columns labeled “GAAP Net Income,” “Other Comprehensive Loss,” and “Total Comprehensive Loss” are based on the company’s Comprehensive Loss, determined in accordance with GAAP, that has been reorganized into the categories that represent the company’s portfolio of target assets, unsecured and secured financing by asset collateral type, and derivatives and other items. This presentation illustrates both the positive and negative aspects of the company’s GAAP performance for the reporting period and provides a reconciliation with our non-GAAP measures shown in the columns labeled “Market- Driven Value Changes and Certain Operating Expenses” and “Income Excluding Market-Driven Value Changes.”
IXM Quarterly Review Income Excluding Market-Driven Value Changes(1) ($ in thousands) Q3-2023 Q2-2023 Variance RMBS and other Agency securities(2) RMBS and other Agency securities income $ 145,549 $ 142,725 $ 2,824 RMBS and other Agency securities funding expense (122,919) (111,317) (11,602) MSR MSR income 82,239 79,607 2,632 MSR funding expense (45,539) (43,552) (1,987) Derivatives and other Swaps and swaptions 1,145 (552) 1,697 TBAs 7,951 10,717 (2,766) Interest on cash, reverse repurchase agreements and other 15,781 13,566 2,215 Expenses Convertible debt interest expense (4,636) (4,692) 56 Operating expenses (14,205) (13,620) (585) Tax expense (3,963) (3,266) (697) Earnings attributable to Two Harbors 61,403 69,616 (8,213) Dividends on preferred stock (12,115) (12,115) — Earnings attributable to common stockholders $ 49,288 $ 57,501 $ (8,213) Annualized return on common equity 12.6 % 14.8 % Quarterly return per weighted average basic common share $ 0.51 $ 0.60 8 • Third quarter IXM primarily impacted by: ◦ Net decrease in asset balances and the large move higher in rates, which pushed the portfolio further out of the money, lowering the aggregate spread of the assets over the quarter as a whole
• $1.7 billion of outstanding borrowings under bilateral MSR asset financing facilities • $296 million of outstanding 5-year MSR term notes(2) • $504 million of unused MSR asset financing capacity; $99 million committed and $405 million uncommitted • $34 million outstanding borrowings and $166 million of unused, committed capacity for servicing advance receivables Strong Balance Sheet and Liquidity Position 9 MORTGAGE SERVICING RIGHTS AGENCY RMBSBALANCE SHEET AS OF SEPTEMBER 30, 2023 • $8.8 billion of outstanding repurchase agreements with 17 counterparties • Weighted average days to maturity of 99 days Av er ag e R ep o R at e - S O FR ( bp s) 3-month 6-month Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 25 50 2019 (1 ) Agency RMBS $8.8 billion MSR $3.2 billion Cash & cash equivalents $0.7 billion All other assets $1.2 billion Agency RMBS repurchase agreements $8.8 billion MSR financing $2.0 billion All other liabilities $0.7 billion Preferred equity $0.6 billion Common equity $1.5 billion Convertible debt $0.3 billion 2020 2021 2022 2023
Market Conditions CONTINUED CORRELATION AMONG HIGHER RATES, HIGHER VOLATILITY AND WIDER MORTGAGE SPREADS I. RMBS SPREADS REMAIN ATTRACTIVE(1) • Mortgage spreads widened in August and September as interest rates increased; current coupon nominal spreads widened 11 basis points to 151 basis points and option-adjusted spreads (OAS) increased 4 basis points to 48 basis points • Lower coupon RMBS underperformed given longer duration, leaving them close to their widest valuations of the year, flattening the coupon spread curve • Current spread levels are very attractive historically, but elevated rate and spread volatility can pose near-term challenges to the sector • Universe of 30-year fixed-rate Agency prepayment speeds remained slow, declining quarter-over-quarter to 5.4% CPR from 5.7% CPR, driven by high primary mortgage rates and low housing turnover • MSR spread performance bolstered by continued strong demand keeping pace with supply • MSR bulk packages remain well bid; $76 billion UPB of conventional MSR offered in the third quarter, bringing total to $445 billion UPB in the first nine months of 2023 10 II. COUPON/SPREAD CURVE STILL SLOPED BUT FLATTER(2)
Quarterly Activity and Portfolio Composition At September 30, 2023, $14.1 billion portfolio Includes $12.0 billion settled positions PORTFOLIO COMPOSITION(1) LEVERAGE AND RISK POSITIONING M ar ke t Va lu e Eq ui va le nt s ($ b ill io ns ) Econom ic D ebt-To-Equity 7.7 8.7 8.9 8.8 3.9 3.7 2.9 2.1 3.0 3.1 3.3 3.2 6.3x 6.5x 6.4x 6.3x Agency Net TBA Position MSR Other Economic Debt-to-Equity 12/31/22 3/31/23 6/30/23 9/30/23 0 5 10 15 20 25 30 0.0x 2.0x 4.0x 6.0x 8.0x (3) (2 ) (2) • Quarter-end economic debt-to-equity decreased slightly to 6.3x from 6.4x(3) ◦ Average economic debt-to-equity of 6.1x in the third quarter, compared to 6.3x in the second quarter(3) ◦ Maintained a neutral leverage position balancing wide nominal spreads against elevated rate volatility • Low book value exposure to changes in rates • Moved exposure up-in-coupon, mostly from outperforming “upper belly” 5% coupons to 6% and 6.5% coupons • Rotated exposure from TBA to specified pools, given strong valuation through a combination of better carry and higher OAS(4) • Added to specified pool 2.5% and 3% coupons(4) • Settled $472 million UPB in MSR recapture and flow sale purchases • Securitized approximately 1.2 basis points of servicing fee on our aggregate MSR portfolio through Fannie Mae and Freddie Mac PORTFOLIO ACTIVITY HIGHLIGHTS 14.10.1 15.214.7 15.8 0.1 0.3 11
Loan Balance, 40.0% Geography, 37.1% Investor, 4.3% Other, 18.6% II. RMBS QUARTERLY PERFORMANCE Coupon Ti ck s (3 2 nd s) 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6 -40 -30 -20 -10 0 10 C PR ( % ) Specified Pools I. SPECIFIED POOL PORTFOLIO(1) III. SPECIFIED POOL PREPAYMENT SPEEDS TWO Specified Pools(3)TBAs(2) TWO Specified Pools (Q3-2023)TBAs (Q3-2023)(5) TBAs (Q2-2023)(5) TWO Specified Pools (Q2-2023) Market Value(4) ($ billions) $— $0.34 $0.20 $0.07 $0.46 $2.61 $2.60 $1.34 $0.79 $0.01 Coupon QUARTERLY HIGHLIGHTS • Benefitted on a relative basis from a concentration in “upper belly” specified pools • Shifted up-in-coupon by moving $1.9 billion Fannie Mae 5% TBA to 6-6.5% TBAs • Rotated from lower coupon TBAs into semi-seasoned specified pools mainly in 2.5-3% coupons to capture better carry(1) • Weighted average specified pool portfolio prepayment speed of 6.7% compared to 6.6% in second quarter 2023(1) 5.5 4. 5 5.0 4.04. 5 5.0 5.5 6.0 12 6.0 2.5 5.5 4.5
• Completed acquisition of RoundPoint Mortgage Servicing LLC ◦ Approximately two thirds of our MSR has been transferred from our subservicing network to RoundPoint • Settled $472.2 million through flow purchases and recapture • MSR price multiple increased quarter-over-quarter to 5.8x from 5.5x • MSR prepay speeds decreased to 4.9% in the third quarter, from 5.4% in the second quarter Mortgage Servicing Rights III. 30-YEAR MSR PREPAYMENT SPEEDS(4) 9/30/2023 6/30/2023 Fair value ($ millions) $ 3,213 $ 3,274 Price multiple 5.8x 5.5x UPB ($ millions) $ 220,054 $ 224,327 Gross coupon rate 3.44 % 3.43 % Current loan size ($ thousands) $ 339 $ 340 Original FICO(2) 759 759 Original Loan-to-Value (LTV) 72 % 72 % 60+ day delinquencies 0.7 % 0.6 % Net servicing fee (bps) 25.2 26.4 Loan age (months) 39 36 3-month CPR 4.9 % 5.4 % I. MSR PORTFOLIO CHARACTERISTICS(1) TWO MSR (Q3-2023)TBAs (Q3-2023)(5) TBAs (Q2-2023)(5) TWO MSR (Q2-2023) UPB(4) ($ billions) $81.2 $36.6 $26.2 $14.0 $10.8 $8.3 $5.9 $2.2 $1.3 Coupon QUARTERLY HIGHLIGHTS II. MSR PORTFOLIO(3) LTV 5% FIC O 5% Investor 4 % G eo gr ap hy 14 % Generic 55% 30 Y, (3 ,4 ] 30Y, (4,5] 15Y 30Y, <=3.0 30Y, (5+] Loan Balance 17% C PR ( % ) 13
Return Potential and Outlook ATTRACTIVE RETURN OPPORTUNITIES FOR UNIQUELY POSITIONED AGENCY RMBS AND MSR PORTFOLIO PROSPECTIVE MARKET RETURNS As of September 30, 2023 PORTFOLIO MARKET VALUE ($ millions) INVESTED CAPITAL ALLOCATED(1) STATIC MARKET RETURN ESTIMATE(2) RMBS + MSR MSR 3,212 TBA(3) 2,316 Hedged MSR 5,528 62% 12% - 14% RMBS + RATES Pools 8,456 TBA(3) (177) Other Securities 521 Hedged Securities 8,800 38% 15% - 16% PROSPECTIVE TWO HARBORS RETURNS As of September 30, 2023 INVESTED CAPITAL ($ millions) STATIC TWO HARBORS RETURN ESTIMATE(4) Total Portfolio Before RoundPoint After- Tax Income and Expenses 12.8% - 15.1% RoundPoint After-Tax Income 0.8% - 1.0% Corporate Operating and Tax Expenses(5) (3.2)% - (3.2)% Total Portfolio After RoundPoint After- Tax Income and Expenses 10.4% - 12.9% INVESTED CAPITAL Convertible Notes 272 6.2% Preferred Equity 639 7.6% Common Equity 1,478 12.3% - 16.3% PROSPECTIVE QUARTERLY STATIC RETURN PER BASIC COMMON SHARE(6): $0.47 - $0.62 Note: This slide presents estimates for illustrative purposes only, using Two Harbors’ base case assumptions (e.g., spreads, prepayment speeds, financing costs and expenses), and does not contemplate market-driven value changes, active portfolio management, certain operating expenses. Actual results may differ materially. 14 • Market Presence: Our size allows us to be nimble and actively allocate capital to our paired Agency and MSR strategy • Investment Strategy: Our portfolio is uniquely constructed with Agency RMBS and MSR; we believe this strategy will further benefit from the acquisition of RoundPoint, which provides potential opportunities to more broadly participate in the mortgage finance space • Market Environment: Agency spreads are historically wide and we believe are very attractive at their current levels, even in the absence of spread tightening; MSR in this market environment generate a very stable cash flow, with speeds that are historically low and very little duration and convexity • Financing and Liquidity: We have a strong balance sheet and diversified financing for both Agency and MSR
Appendix 15
Effective Coupon Positioning Coupon (%) TBA Market Price(1) TBA Notional ($m) Specified Pools Par Value ($m)(2) MSR/Agency IO UPB ($m)(3) Combined ($m) 2.5% $ 79.41 $ — $ 429 $ — $ 429 3.0% $ 82.77 — 244 — 244 3.5% $ 86.04 300 79 — 379 4.0% $ 89.10 — 515 — 515 4.5% $ 91.87 189 2,823 — 3,012 5.0% $ 94.40 — 2,738 — 2,738 5.5% $ 96.69 50 1,380 — 1,430 6.0% $ 98.73 603 790 (1,188) 205 6.5% $ 100.50 1,052 — (1,156) (104) Total $ 2,194 $ 8,998 $ (2,344) $ 8,848 16
Note: Sensitivity data as of September 30, 2023. The above scenarios are provided for illustration purposes only and is not necessarily indicative of Two Harbors’ financial condition and operating results, nor are they necessarily indicative of the financial condition or results of operations that may be expected for any future period or date. Risk Positioning BOOK VALUE EXPOSURE TO CHANGES IN RATES % Change in Common Book Value 2-Year Rate (basis points) 10-Year Rate (basis points) Agency P&I RMBS/TBA MSR/Agency IO RMBS(1) Other(2) Combined -25 0 Bull Steepener(3) 2.4 % 0.7 % (2.4) % 0.7 % 0 -25 Bull Flattener(4) 7.4 % (2.3) % (6.7) % (1.6) % -50 -50 Parallel Shift(5) 19.4 % (3.7) % (18.5) % (2.8) % -25 -25 Parallel Shift(5) 9.9 % (1.7) % (9.1) % (0.9) % 0 0 Base — % — % — % — % +25 +25 Parallel Shift(5) (10.2) % 1.2 % 9.0 % — % +50 +50 Parallel Shift(5) (20.7) % 2.1 % 17.9 % (0.7) % +25 0 Bear Flattener(3) (2.2) % (0.5) % 2.4 % (0.3) % 0 +25 Bear Steepener(4) (8.0) % 1.7 % 6.6 % 0.3 % BOOK VALUE EXPOSURE TO CURRENT COUPON SPREAD(6) % Change in Common Book Value Parallel Shift in Spreads (basis points) Agency P&I RMBS/TBA MSR/Agency IO RMBS(1) Combined -25 8.7 % (1.9) % 6.8 % 0 — % — % — % +25 (9.0) % 1.6 % (7.4) % 17
$(287.8) $160.2 $(63.2) $31.5 $(56.8) Comprehensive Income ($ in millions) Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 $-300 $-150 $0 $150 $300 $16.42 $17.72 $16.48 $16.39 $15.36 $0.68 $0.60 $0.60 $0.45 $0.45 Book Value ($) Dividend Declared ($) Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 DIVIDEND YIELD(2) Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) (16.2)% 11.6% (3.6)% 2.2% (3.5)% Quarterly Return on Book Value Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 -20% -10% 0% 10% 20% 20.5% 15.2% 16.3% 13.0% 13.6% Dividend Yield Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 5% 10% 15% 20% 25% 18
Comparison of GAAP and non-GAAP Measures ($ in thousands) Comprehensive Income Earnings Available for Distribution (EAD)(1) Income Excluding Market-Driven Value Changes (IXM)(2) RMBS and other Agency securities(3) Coupon income $ 114,170 $ 114,170 $ 114,170 Amortization (6,252) (6,252) (6,252) Realized and unrealized, and provision for credit losses (353,528) — 37,631 (4) Funding expense (122,919) (122,919) (122,919) MSR Servicing fee income 141,816 141,816 141,816 Float, ancillary and other income 36,809 36,809 36,809 Servicing expenses (28,909) (28,909) (25,565) (5) Amortization (63,999) (90,485) (63,999) Realized and unrealized, including change in servicing reserves 130,374 — (6,822) (6) Funding expense (45,539) (45,539) (45,539) Derivatives and other Swaps net interest spread 6,851 6,851 6,851 Swaps and swaptions realized and unrealized 105,058 — (5,706) (7) TBAs (90,662) (2,106) 7,951 (8) U.S. Treasury futures 171,865 11,174 — Other futures and options on futures 7,053 — — Interest on cash, reverse repurchase agreements and other 18,684 15,781 15,781 (9) Expenses Convertible debt interest expense (4,636) (4,636) (4,636) Operating expenses (24,601) (12,629) (14,205) (10) Tax expense(11) (36,365) (1,787) (3,963) (Losses) earnings attributable to Two Harbors (44,730) 11,339 61,403 Dividends on preferred stock (12,115) (12,115) (12,115) (Losses) earnings attributable to common stockholders $ (56,845) $ (776) $ 49,288 Annualized return on common equity (14.5) % (0.2) % 12.6 % Quarterly return per weighted average basic common share $ (0.61) $ (0.01) $ 0.51 19 For each of RMBS and MSR, combination of amounts represents price changes under realized forwards method(2)
Note: Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure defined as total 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, certain operating expenses and gains on the repurchase and retirement of preferred stock and convertible senior notes. As defined, IXM includes the realization of portfolio cash flows which incorporates actual prepayments, changes in portfolio accrued interest, servicing income and servicing expenses, and certain modeled price changes. These modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. Assumptions for spreads, forward interest rates, shape of the term stricture, volatility and the previous day ending fair value include applicable market data, data from third-party brokers and pricing vendors and management’s assessment. This applies to RMBS, MSR and derivatives, as applicable, and is net of all certain operating expenses and provision for income taxes associated with IXM. The purpose of presenting IXM, and the various adjustments related to market-driven value changes and certain legal expenses and acquisition transaction costs, is to provide management, analysts and investors with a profit and loss attribution that allows them to better understand the sources of returns from the company’s investment portfolio, operating expenses and tax expenses. IXM provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers. IXM 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. GAAP to IXM Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) September 30, 2023 June 30, 2023 Comprehensive (loss) income attributable to common stockholders $ (56,845) $ 31,478 Adjustments to exclude market-driven value changes(1) and certain operating expenses: RMBS and other Agency securities market-driven value changes(2) 391,159 195,343 MSR market-driven value changes(3) (138,182) (94,172) Swap and swaption market-driven value changes(4) (110,764) (57,085) TBA market-driven value changes(5) 98,613 87,800 Realized and unrealized gains on futures (178,918) (126,923) Other realized gains (2,903) (2,201) Change in servicing reserves 994 (301) Deboarding fees associated with RoundPoint acquisition 3,336 2,368 Certain operating expenses(6) 10,396 7,134 Gain on repurchase and retirement of preferred stock — (2,454) Net provision for income taxes associated with market-driven value changes 32,402 16,514 Income Excluding Market-Driven Value Changes to common stockholders $ 49,288 $ 57,501 Weighted average basic common shares 96,176,287 96,387,877 Income Excluding Market-Driven Value Changes per weighted average basic common share $ 0.51 $ 0.60 20
($ millions, except per share data) Q3-2023 Q2-2023 Variance Interest income $ 123.6 $ 117.8 $ 5.8 Interest expense 173.1 159.6 (13.5) Net interest expense (49.5) (41.8) (7.7) Servicing income 178.6 175.2 3.4 MSR amortization(1) (90.5) (91.8) 1.3 Interest spread income on interest rate swaps 6.9 3.5 3.4 TBA dollar roll losses(2) (2.1) (3.5) 1.4 U.S. Treasury futures income(3) 11.2 5.6 5.6 Other derivatives income — 0.1 (0.1) Total other income 104.1 89.1 15.0 Servicing expenses 28.9 25.5 (3.4) Operating expenses 12.6 11.9 (0.7) Total expenses 41.5 37.4 (4.1) Provision for income taxes 1.8 1.5 (0.3) Earnings Available for Distribution(4) $ 11.3 $ 8.4 $ 2.9 Dividends on preferred stock (12.1) (12.1) — Earnings Available for Distribution available to common stockholders $ (0.8) $ (3.7) $ 2.9 Earnings Available for Distribution per weighted average basic common share $ (0.01) $ (0.04) Earnings Available for Disribution annualized return on average common equity (0.2) % (1.0) % Operating expenses, excluding non-cash LTIP amortization and certain operating expenses, as a percentage of average equity(5) 2.3 % 2.2 % Earnings Available for Distribution • EAD is expected to continue to diverge from ongoing earnings power(6) ◦ EAD for assets utilizes concepts of amortized cost and yield-to-maturity at purchase (RMBS) or amortized cost and original pricing yield (MSR), as opposed to market value and expected return ◦ EAD may not reflect total return of hedging derivatives, and impacts to EAD differ depending on the instrument utilized 21
Q3-2023 Portfolio Yields and Financing Costs ($ thousands) Portfolio Asset Type Measure Average Amortized Cost Income(1) Average Yield Available-for-sale securities GAAP $ 9,284,380 $ 107,827 4.65% Adjustments to include other portfolio items: Mortgage servicing rights(2)(3) Non-GAAP 2,029,201 59,276 11.68% Agency derivatives(2)(4) Non-GAAP 18,257 91 1.99 % TBAs(2)(5) Non-GAAP 2,599,044 22,517 3.47 % Total portfolio Non-GAAP $ 13,930,882 $ 189,711 5.45% Financing Collateral Type Measure Average Outstanding Balance Expense(6) Average Cost Borrowings collateralized by available-for-sale securities GAAP $ 8,757,647 $ 122,746 5.61% Adjustments to include other financing items: Borrowings collateralized by mortgage servicing rights and advances GAAP 2,021,279 45,539 9.01 % Borrowings collateralized by Agency derivatives(4) GAAP 11,679 173 5.93 % Convertible senior notes(7) GAAP 268,043 4,636 6.92 % Interest rate swaps(2)(8) Non-GAAP (6,851) (0.20) % U.S. Treasury futures(2)(9) Non-GAAP (11,174) (0.33) % TBAs(2)(5) Non-GAAP 2,599,044 24,623 3.79 % Total financing Non-GAAP $ 13,657,692 $ 179,692 5.26 % Net Spread Measure Average Yield, less Cost Net spread on AFS securities GAAP (0.96%) Net spread on total portfolio Non-GAAP 0.19% 22
GAAP to EAD Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) September 30, 2023 June 30, 2023 Comprehensive (loss) income attributable to common stockholders $ (56,845) $ 31,478 Adjustment for other comprehensive loss attributable to common stockholders: Unrealized loss on available-for-sale securities 350,922 156,306 Net income attributable to common stockholders $ 294,077 $ 187,784 Adjustments to exclude reported realized and unrealized (gains) losses: Realized loss on securities 289 2,640 Unrealized loss (gain) on securities 280 (4,834) (Reversal of) provision for credit losses (98) 22 Realized and unrealized gain on mortgage servicing rights (67,369) (21,679) Realized loss on termination or expiration of interest rate swaps and swaptions 5,176 — Unrealized gain on interest rate swaps and swaptions (110,234) (53,080) Realized and unrealized gain on other derivative instruments (86,121) (47,063) Gain on repurchase and retirement of preferred stock — (2,454) Other realized and unrealized gains (2,903) (2,200) Other adjustments: MSR amortization(1) (90,485) (91,836) TBA dollar roll losses(2) (2,106) (3,526) U.S. Treasury futures income(3) 11,174 5,652 Change in servicing reserves 994 (301) Non-cash equity compensation expense 1,576 1,735 Certain operating expenses(4) 10,396 7,134 Net provision for income taxes on non-EAD 34,578 18,290 Earnings available for distribution to common stockholders $ (776) $ (3,716) Weighted average basic common shares 96,176,287 96,387,877 Earnings available for distribution to common stockholders per weighted average basic common share $ (0.01) $ (0.04) Note: Earnings Available for Distribution, or EAD, is a non-GAAP measure that we define as comprehensive (loss) income 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 certain operating 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 certain 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. 23
Agency RMBS Portfolio Par Value ($ millions) Market Value ($ millions) Weighted Average CPR(1) % Prepay Protected(2) Amortized Cost Basis ($ millions) Gross Weighted Average Coupon Weighted Average Age (Months) 30-Year Fixed ≤ 2.5% $ 428 $ 341 4.6 % — % $ 365 3.3 % 27 3.0% 243 202 2.6 % 85.4 % 215 3.7 % 23 3.5% 79 68 5.9 % 75.3 % 73 4.3 % 20 4.0% 515 463 7.4 % 100.0 % 520 4.6 % 46 4.5% 2,820 2,613 6.0 % 100.0 % 2,877 5.2 % 34 5.0% 2,738 2,599 6.2 % 100.0 % 2,789 5.8 % 17 5.5% 1,380 1,340 6.6 % 99.8 % 1,394 6.4 % 15 6.0% 792 785 4.5 % 99.8 % 812 6.9 % 14 ≥ 6.5% 9 9 18.1 % 97.7 % 10 7.8 % 248 9,004 8,420 6.0 % 95.4 % 9,055 5.6 % 24 Other P&I(3) 382 351 1.1 % — % 373 5.1 % 11 IOs and IIOs(4) 1,078 62 8.1 % — % 79 4.7 % 117 Total Agency RMBS $ 10,464 $ 8,833 90.9 % $ 9,507 Notional Amount ($ millions) Bond Equivalent Value ($ millions)(5) Through-the-Box Speeds(6) TBA Positions ≤ 2.5% $ — $ — 2.3 % 3.0% — — 2.4 % 3.5% 300 258 2.4 % 4.0% — — 3.1 % 4.5% 189 176 3.1 % 5.0% — — 5.4 % 5.5% 50 48 7.8 % 6.0% 603 595 12.0 % ≥ 6.5% 1,052 1,057 16.5 % Net TBA Position $ 2,194 $ 2,134 24
Mortgage Servicing Rights Portfolio(1) Number of Loans Unpaid Principal Balance ($ millions) Gross Coupon Rate Current Loan Size ($ thousands) Loan Age (months) Original FICO(2) Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (bps) 30-Year Fixed < 3.25% 302,169 $ 96,221 2.8% $ 376 32 768 71% 0.4% 3.9% 25.1 3.25% - 3.75% 147,636 38,588 3.4% 331 45 753 74% 0.7% 5.1% 25.2 3.75% - 4.25% 107,554 22,550 3.9 % 275 67 751 76 % 1.0 % 6.0 % 25.5 4.25% - 4.75% 60,608 11,217 4.4 % 264 66 739 77 % 1.8 % 6.8 % 25.3 4.75% - 5.25% 41,743 9,778 4.9 % 355 35 746 79 % 1.5 % 5.2 % 25.2 > 5.25% 60,436 16,920 5.9 % 382 17 745 80 % 1.2 % 5.7 % 25.9 720,146 195,274 3.5 % 349 39 758 74 % 0.7 % 4.8 % 25.2 15-Year Fixed < 2.25% 22,852 6,074 2.0 % 313 29 777 59 % 0.1 % 3.8 % 25.0 2.25% - 2.75% 38,633 8,235 2.4 % 262 33 772 59 % 0.2 % 5.2 % 25.0 2.75% - 3.25% 34,763 4,781 2.9 % 193 59 766 61 % 0.3 % 7.1 % 25.3 3.25% - 3.75% 19,957 2,011 3.4 % 152 72 756 64 % 0.5 % 8.9 % 25.4 3.75% - 4.25% 9,350 800 3.9 % 141 68 742 65 % 0.8 % 8.4 % 25.3 > 4.25% 6,515 785 4.9 % 224 31 741 65 % 0.9 % 9.2 % 27.0 132,070 22,686 2.6 % 246 42 768 60 % 0.3 % 5.8 % 25.2 Total ARMs 2,600 702 4.4 % 359 54 761 70 % 1.0 % 16.6 % 25.4 Total Portfolio 854,816 $ 218,662 3.4 % $ 338 40 759 72 % 0.7 % 4.9 % 25.2 25
Mortgage Servicing Rights UPB Roll-Forward $ millions Q3-2023 Q2-2023 Q1-2023 Q4-2022 Q3-2022 UPB at beginning of period $ 222,622 $ 212,445 $ 204,877 $ 206,614 $ 227,074 Bulk purchases of mortgage servicing rights — 14,234 10,713 — — Flow purchases of mortgage servicing rights 472 539 669 2,678 4,449 Sales of mortgage servicing rights — — (143) — (19,807) Scheduled payments (1,640) (1,595) (1,527) (1,538) (1,565) Prepaid (2,787) (2,993) (2,120) (2,440) (3,709) Other changes (5) (8) (24) (437) 172 UPB at end of period $ 218,662 $ 222,622 $ 212,445 $ 204,877 $ 206,614 26
Financing $ millions Outstanding Borrowings and Maturities(1) Repurchase Agreements Revolving Credit Facilities Term Notes Payable Convertible Notes Total Outstanding Borrowings Percent (%) Within 30 days $ 1,717.6 $ — $ — $ — $ 1,717.6 15.5 % 30 to 59 days 1,129.0 — — — 1,129.0 10.2 % 60 to 89 days — — — — — — % 90 to 119 days 2,570.7 — — — 2,570.7 23.2 % 120 to 364 days 3,696.0 357.3 295.0 — 4,348.3 39.2 % One to three years — 1,053.4 — 268.2 1,321.6 11.9 % Three to five years — — — — — — % $ 9,113.3 $ 1,410.7 $ 295.0 $ 268.2 $ 11,087.2 100.0 % Collateral Pledged for Borrowings Repurchase Agreements(2) Revolving Credit Facilities(2) Term Notes Payable Convertible Notes Total Collateral Pledged Percent (%) Available-for-sale securities, at fair value $ 8,822.5 $ — $ — n/a $ 8,822.5 70.8 % Mortgage servicing rights, at fair value 503.6 2,307.3 398.4 n/a 3,209.3 25.7 % Restricted cash 343.1 — 0.2 n/a 343.3 2.8 % Due from counterparties 34.9 — — n/a 34.9 0.3 % Derivative assets, at fair value 9.6 — — n/a 9.6 0.1 % Other assets (includes servicing advances) — 42.7 — n/a 42.7 0.3 % U.S. Treasuries(3) — — — n/a — — % $ 9,713.7 $ 2,350.0 $ 398.6 n/a $ 12,462.3 100.0 % 27
Type & Maturity Notional Amount ($M) Carrying Value ($M)(1) Weighted Average Days to Expiration U.S. Treasury futures - 5 year $ (2,868) $ — 96 U.S. Treasury futures - 10 year (2,075) — 90 U.S. Treasury futures - 20 year (335) — 90 SOFR futures < 1 year (1,843) — 239 > 1 and < 2 years (750) — 581 Total futures $ (7,871) $ — 174 Futures 28
Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers 2023 $ — — % — % — 2024 — — % — % — 2025 2.6 4.730 % 5.310 % 1.5 2026 — — % — % — 2027 and Thereafter 3.1 3.570 % 5.310 % 8.7 $ 5.7 4.108 % 5.310 % 5.3 Maturities Notional Amounts ($B) Average Pay Rate Average Fixed Receive Rate Average Maturity (Years) Receivers 2023 $ — — % — % — 2024 — — % — % — 2025 1.8 5.310 % 3.899 % 1.5 2026 — — % — % — 2027 and Thereafter 1.0 5.310 % 3.314 % 7.1 $ 2.8 5.310 % 3.755 % 8.6 Interest Rate Swaps and Swaptions INTEREST RATE SWAPS Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Fixed Rate(1) Average Term (Years) Purchase Contracts: Payer <6 Months $ 0.5 $ 0.6 5.4 $ 200.0 5.13 % 1.0 Sale Contracts: Payer <6 Months $ (0.3) $ (0.4) 5.4 $ (400.0) 5.61 % 1.0 INTEREST RATE SWAPTIONS 29
PAGE 3 - Financials Overview 1. 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. 2. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 3. Includes $12.0 billion in settled positions and $2.1 billion net TBA position, which represents the bond equivalent value of the company’s TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. For additional detail on the portfolio, see slide 11 and Appendix slides 24 and 25. 4. Economic debt-to-equity is defined as total borrowings to fund Agency and non-Agency investment securities and MSR, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. PAGE 5 - Markets Overview 1. Bloomberg data as of the dates noted. PAGE 6 - Book Value Summary 1. 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. PAGE 7 - Results and Return Contributions 1. Market-Driven Value changes represents the company’s portfolio return from unexpected price changes. Unexpected price changes represent the differences between (a) actual spreads, forward interest rates, shape of the term structure and volatility, and (b) the spreads, forward interest rates, shape of the term structure and volatility that were factored into the previous day ending fair value. Unexpected price changes are measured daily and used to determine the portion of actual market price changes not attributable to modeled price changes. The reported market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA is the sum of all daily unexpected price changes for the referenced period. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 2. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC. 3. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 4. RMBS and other Agency securities includes inverse interest-only Agency RMBS, which are accounted for as derivative instruments in accordance with GAAP. End Notes 30
PAGE 8 - IXM Quarterly Review 1. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 2. RMBS and other Agency securities includes inverse interest-only Agency RMBS, which are accounted for as derivative instruments in accordance with GAAP. PAGE 9 - Strong Balance Sheet and Liquidity Position 1. Source: Bloomberg. Represents the average spread between repurchase rates and the Secured Overnight Financing Rate (SOFR) over trailing three-month and six-month periods between Q3 2019 and Q3 2023 (as of September 30, 2023). 2. Balance of five-year MSR term notes excludes deferred debt issuance costs. PAGE 10 - Market Conditions 1. Source: J.P. Morgan DataQuery. Data is model-based and represents universal mortgage-backed securities (UMBS) TBA spreads as of the dates noted. In 2023, J.P. Morgan updated their model affecting only 2023 data. 2. Source: Spreads generated using internal projections for prepayments. Data as of September 30, 2023. PAGE 11 - Quarterly Activity and Portfolio Composition 1. For additional detail on the portfolio, see Appendix slides 24 and 25. 2. Net TBA position represents the bond equivalent value of the company’s TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. 3. Economic debt-to-equity is defined as total borrowings to fund Agency and non-Agency investment securities and MSR, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. 4. Specified pools include securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans less than or equal to $300K of initial principal balance), higher LTVs (securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations, loans secured by investor-owned properties, and lower FICO scores, as well as securities without such protection, including large bank- serviced and others. PAGE 12 - Specified Pools 1. Specified pools include securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans less than or equal to $300K of initial principal balance), higher LTVs (securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations, loans secured by investor-owned properties, and lower FICO scores, as well as securities without such protection, including large bank- serviced and others. 2. Represents UMBS generic TBA performance during the quarter. 3. Specified pool performance excludes certain coupons in which we were not invested for the full duration of the quarter. 4. Specified pool market value by coupon as of September 30, 2023. 5. Three-month prepayment speeds of delivered TBA contracts; average of J.P. Morgan, Bank of America, and Citi data. End Notes (continued) 31
End Notes (continued) PAGE 13 - Mortgage Servicing Rights 1. MSR portfolio based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases. Portfolio metrics, other than fair value and UPB, represent averages weighted by UPB. 2. FICO represents a mortgage industry accepted credit score of a borrower. 3. MSR portfolio based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases and excluding unsettled MSR on loans for which the company is the named servicer. 4. MSR portfolio based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases and excluding unsettled MSR on loans for which the company is the named servicer as well as MSR on loans recently settled for which transfer to the company is not yet complete. 5. Three-month prepayment speeds of delivered TBA contracts; average of J.P. Morgan, Bank of America, and Citi data. PAGE 14 - Return Potential and Outlook 1. Capital allocated represents management’s internal allocation. Certain financing balances and associated interest expenses are allocated between investments based on management’s assessment of leverage ratios and required capital or liquidity to support the investment. 2. Market return estimates reflect static assumptions using quarter-end spreads and market data. 3. Net TBA position represents the bond equivalent value of the company’s TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. 4. Estimated return on invested capital reflects static return assumptions using quarter-end portfolio valuations. 5. Total expenses includes operating expenses and tax expense within the company’s taxable REIT subsidiaries. 6. Prospective quarterly static return estimate per basic common share reflects portfolio performance expectations given current market conditions and represents the comprehensive income attributable to common stockholders (net of dividends on preferred stock). PAGE 16 - Effective Coupon Positioning 1. Represents UMBS TBA market prices as of September 30, 2023. 2. Specified pools include securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans less than or equal to $300K of initial principal balance), higher LTVs (securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations, loans secured by investor-owned properties, and lower FICO scores, as well as securities without such protection, including large bank- serviced and others. 3. MSR/Agency IO represents an internally calculated exposure of a synthetic TBA position and the current coupon equivalents of our MSR, including the effect of unsettled MSR, and Agency IO RMBS. PAGE 17 - Risk Positioning 1. MSR/Agency IO RMBS includes the effect of unsettled MSR. 2. Other includes all other derivative assets and liabilities and borrowings. Other excludes TBAs, which are included in the Agency P&I RMBS/TBA category. 3. Bull Steepener/Bear Flattener is a shift in short-term rates that represents estimated change in common book value for theoretical non-parallel shifts in the yield curve. Analysis uses a +/- 25 basis point shift in 2-year rates while holding long-term rates constant. 4. Bull Flattener/Bear Steepener is a shift in long-term rates that represents estimated change in common book value for theoretical non-parallel shifts in the yield curve. Analysis uses a +/- 25 basis point shift in 10-year rates while holding short-term rates constant. 5. Parallel shift represents estimated change in common book value for theoretical parallel shift in interest rates. 6. Book value exposure to current coupon represents estimated change in common book value for theoretical parallel shifts in spreads. 32
End Notes (continued) PAGE 18 - Financial Performance 1. 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. 2. Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes dividends based on its taxable income per common share, not GAAP earnings. The annualized dividend yield on the company’s common stock is calculated based on the closing price of the last trading day of the relevant quarter. PAGE 19 - Comparison of GAAP and non-GAAP Measures 1. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 23 for a definition of EAD and a reconciliation of GAAP to non- GAAP financial information. 2. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 3. RMBS and other Agency securities includes inverse interest-only Agency RMBS, which are accounted for as derivative instruments in accordance with GAAP. 4. RMBS and other Agency securities daily price change based on Realized Forwards for IXM is equal to the previous day ending fair value multiplied by the sum of the risk-free rate and zero-volatility OAS, less coupon income. RMBS and other Agency securities daily price change for IXM is reflected as the sum of amortization and realized and unrealized, and provision for credit losses. 5. Servicing expenses for IXM excludes deboarding fees associated with one-time transfers of MSR. 6. MSR daily price change based on Realized Forwards for IXM is equal to the previous day ending fair value multiplied by the the sum of the risk-free rate and zero-volatility OAS, less service fee income and servicing expenses. MSR daily price change for IXM is reflected as the sum of amortization and realized and unrealized, including change in servicing reserves. 7. Swaps daily IXM is equal to the previous day ending fair value multiplied by the overnight SOFR, which is reflected as the sum of swap net interest spread and swap realized and unrealized. Swaptions daily IXM is equal to the previous day ending fair value multiplied by the realized forward rate. 8. TBAs daily income for IXM is equal to the zero-volatility OAS less the implied repo spread, multiplied by the previous day ending fair value. 9. Other income for IXM excludes gains on repurchases of convertible senior notes. 10. Operating expenses for IXM excludes certain operating expenses. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC. 11. Tax benefit (expense) for each GAAP and non-GAAP metric includes the estimated tax expense associated with each pre-tax GAAP and non-GAAP metric earned or incurred in the company's taxable REIT subsidiaries, or TRSs. 33
End Notes (continued) PAGE 20 - GAAP to IXM Reconciliation 1. The market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA represents unexpected price changes for the referenced period. As defined, the calculation of IXM includes modeled price changes that are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. Unexpected price changes represent the differences between (a) actual spreads, forward interest rates, shape of the term structure and volatility, and (b) the spreads, forward interest rates, shape of the term structure and volatility that were factored into the previous day ending fair value. Unexpected price changes are measured daily and used to determine the portion of actual market price changes not attributable to modeled price changes. The reported market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA is the sum of all daily unexpected price changes for the referenced period. Please refer to end notes (2) through (5) for this slide for further information. 2. RMBS and other Agency securities market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS and other Agency securities, less the sum of the realization of RMBS and other Agency securities cash flows which incorporates actual prepayments, changes in RMBS and other Agency securities accrued interest, and modeled price changes. Modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. RMBS and other Agency securities includes inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP. 3. 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 modeled price changes. Modeled price changes are measured daily based on a “Realized Forwards” methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored into the previous day ending fair value are unchanged. 4. Swap and swaption market-driven value changes refers to the net interest spread and realized and unrealized gains and losses on interest rate swap and swaption agreements, less the swaps daily IXM that is equal to the previous day ending fair value, multiplied by the overnight SOFR and swaptions daily IXM that is equal to the previous day ending fair value, multiplied by the realized forward rate. 5. TBA market-driven value changes refers to the total realized and unrealized gains and losses, less the daily zero-volatility OAS less the implied repo spread, multiplied by the previous day ending fair value. 6. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC. PAGE 21 - Earnings Available for Distribution 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. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 23 for a definition of EAD and a reconciliation of GAAP to non-GAAP financial information. 5. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC. 6. Agency fixed-rate RMBS use the GAAP concept of amortized cost and yield-to-maturity determined at time of purchase. Net servicing income and MSR amortization is based on original pricing yield and does not include the benefit of increased float income and lower compensating interest. Financing costs are largely variable and short-term, responding more quickly to rising rates than our longer-term assets. U.S. Treasury futures income represents the sum of the implied net cash and expected change in price of a financed U.S. Treasury security, but excludes unexpected price change. 34
PAGE 22 - Portfolio Yields and Financing Costs 1. Includes interest income, net of premium amortization/discount accretion, on Agency and non-Agency investment securities, servicing income, net of estimated amortization and servicing expenses, on MSR, and the implied asset yield portion of dollar roll income on TBAs. Amortization on MSR 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. 2. As reported elsewhere in the company’s filings with the Securities and Exchange Commission, MSR, Agency derivatives, TBA, interest rate swap agreements and U.S. Treasury futures are reported at fair value in the company’s consolidated financial statements in accordance with GAAP, and the GAAP presentation and disclosure requirements for these items do not define or include the concepts of yield or cost of financing, amortized cost, or outstanding borrowings. 3. Amortized cost on MSR for a given period equals the net present value of the remaining future cash flows (obtained by applying original prepayment assumptions to the actual unpaid principal balance at the start of the period) using a discount rate equal to the original pricing yield. Original pricing yield is the discount rate which makes the net present value of the cash flows projected at purchase equal to the purchase price. MSR amortized cost is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. 4. Represents inverse interest-only Agency RMBS which are accounted for as derivative instruments in accordance with GAAP. 5. Both the implied asset yield and implied financing benefit/cost of dollar roll income on TBAs are 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. 6. 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, 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. 7. Unsecured convertible senior notes. 8. The cost of financing on interest rate swaps held to mitigate interest rate risk associated with the company’s outstanding borrowings is calculated using average borrowings balance as the denominator. 9. 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. PAGE 23 - GAAP to EAD Reconciliation 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. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC. End Notes (continued) 35
End Notes (continued) PAGE 24 - Agency RMBS Portfolio 1. Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end. 2. Determination of the percentage of prepay protected 30-year fixed Agency RMBS includes securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans less than or equal to $300K of initial principal balance), higher LTVs (securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations, loans secured by investor-owned properties, and lower FICO scores. 3. Other P&I includes 15-year fixed, Hybrid ARMs, CMO and DUS pools. 4. IOs and IIOs represent market value of $9.9 million of Agency derivatives and $51.8 million of interest-only Agency RMBS. Agency derivatives are inverse interest-only Agency RMBS, which are accounted for as derivative instruments in accordance with GAAP. 5. Bond equivalent value is defined as the notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. 6. Three-month prepayment speeds of delivered TBA contracts; average of J.P. Morgan, Bank of America, and Citi data. PAGE 25 - Mortgage Servicing Rights Portfolio 1. MSR portfolio excludes residential mortgage loans for which the company is the named servicing administrator. Portfolio metrics, other than fair value and UPB, represent averages weighted by UPB. 2. FICO represents a mortgage industry-accepted credit score of a borrower. PAGE 27 - Financing 1. Outstanding borrowings have a weighted average of 5.6 months to maturity. 2. Repurchase agreements and revolving credit facilities secured by MSR and/or other assets may be over-collateralized due to operational considerations. PAGE 28 - Futures 1. Exchange-traded derivative instruments (futures and options on futures) require the posting of an “initial margin” amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single- day price movement. The company also exchanges “variation margin” based upon daily changes in fair value, as measured by the exchange. The exchange of variation margin is considered a settlement of the derivative instrument, as opposed to pledged collateral. Accordingly, the receipt or payment of variation margin is accounted for as a direct reduction to the carrying value of the exchange-traded derivative asset or liability. PAGE 29 - Interest Rate Swaps and Swaptions 1. As of September 30, 2023, all underlying swap floating rates were tied to SOFR. 36
