Form 10-Q Two Harbors Investment Corp.

Quarterly report [Sections 13 or 15(d)]

Published: 2019-08-07 14:28:51
Submitted: 2019-08-07
Period Ending In: 2019-06-30
two630201910qdocument.htm QUARTERLY REPORT


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34506
TWO HARBORS INVESTMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
27-0312904
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
575 Lexington Avenue, Suite 2930
 
 
New York,
New York
 
10022
(Address of Principal Executive Offices)
 
(Zip Code)
(612) 629-2500
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
 
Trading Symbol(s)
 
Name of Exchange on Which Registered:
Common Stock, par value $0.01 per share
 
 
New York Stock Exchange
8.125% Series A Cumulative Redeemable Preferred Stock
 
TWO PRA
 
New York Stock Exchange
7.625% Series B Cumulative Redeemable Preferred Stock
 
TWO PRB
 
New York Stock Exchange
7.25% Series C Cumulative Redeemable Preferred Stock
 
TWO PRC
 
New York Stock Exchange
7.75% Series D Cumulative Redeemable Preferred Stock
 
TWO PRD
 
New York Stock Exchange
7.50% Series E Cumulative Redeemable Preferred Stock
 
TWO PRE
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of August 6, 2019, there were 272,904,844 shares of outstanding common stock, par value $.01 per share, issued and outstanding.
 
 
 
 
 



TWO HARBORS INVESTMENT CORP.
INDEX

 
 
Page
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 


i


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30,
2019
 
December 31,
2018
ASSETS
(unaudited)
 
 
Available-for-sale securities, at fair value
$
30,186,079

 
$
25,552,604

Mortgage servicing rights, at fair value
1,800,826

 
1,993,440

Cash and cash equivalents
433,579

 
409,758

Restricted cash
358,109

 
688,006

Accrued interest receivable
97,631

 
86,589

Due from counterparties
983,429

 
154,626

Derivative assets, at fair value
246,995

 
319,981

Reverse repurchase agreements
109,500

 
761,815

Other assets
124,088

 
165,660

Total Assets (1)
$
34,340,236

 
$
30,132,479

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
28,168,044

 
$
23,133,476

Federal Home Loan Bank advances
50,000

 
865,024

Revolving credit facilities

 
310,000

Term notes payable
394,061

 

Convertible senior notes
284,331

 
283,856

Derivative liabilities, at fair value
255

 
820,590

Due to counterparties
255,281

 
130,210

Dividends payable
128,110

 
135,551

Accrued interest payable
145,850

 
160,005

Other liabilities
45,530

 
39,278

Total Liabilities (1)
29,471,462

 
25,877,990

Stockholders’ Equity
 
 
 
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 40,050,000 shares issued and outstanding, respectively ($1,001,250 and $1,001,250 liquidation preference, respectively)
977,501

 
977,501

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 272,899,638 and 248,085,721 shares issued and outstanding, respectively
2,729

 
2,481

Additional paid-in capital
5,149,175

 
4,809,616

Accumulated other comprehensive income
777,518

 
110,817

Cumulative earnings
2,215,437

 
2,332,371

Cumulative distributions to stockholders
(4,253,586
)
 
(3,978,297
)
Total Stockholders’ Equity
4,868,774

 
4,254,489

Total Liabilities and Stockholders’ Equity
$
34,340,236

 
$
30,132,479


____________________
(1)
The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2019 and December 31, 2018, assets of the VIEs totaled $396,060 and $0, and liabilities of the VIEs totaled $396,060 and $0, respectively. See Note 3 - Variable Interest Entities for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.

1


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
Available-for-sale securities
$
253,807

 
$
183,467

 
$
489,693

 
$
374,183

Other
7,222

 
3,893

 
16,819

 
7,196

Total interest income
261,029

 
187,360

 
506,512

 
381,379

Interest expense:
 
 
 
 
 
 
 
Repurchase agreements
177,351

 
97,812

 
324,911

 
184,392

Federal Home Loan Bank advances
3,941

 
4,896

 
10,015

 
9,354

Revolving credit facilities
6,196

 
999

 
11,352

 
1,803

Term notes payable
231

 

 
231

 

Convertible senior notes
4,724

 
4,707

 
9,459

 
9,425

Total interest expense
192,443

 
108,414

 
355,968

 
204,974

Net interest income
68,586

 
78,946

 
150,544

 
176,405

Other-than-temporary impairments:
 
 
 
 

 

Total other-than-temporary impairment losses
(4,848
)
 
(174
)
 
(5,054
)
 
(268
)
Other (loss) income:
 
 
 
 
 
 
 
Gain (loss) on investment securities
22,441

 
(31,882
)
 
3,149

 
(52,553
)
Servicing income
130,949

 
77,665

 
247,897

 
148,855

(Loss) gain on servicing asset
(252,432
)
 
9,853

 
(441,406
)
 
81,660

(Loss) gain on interest rate swap, cap and swaption agreements
(88,775
)
 
29,133

 
(172,034
)
 
179,678

Gain on other derivative instruments
80,664

 
7,675

 
184,942

 
15,728

Other (loss) income
(341
)
 
730

 
(218
)
 
1,788

Total other (loss) income
(107,494
)
 
93,174


(177,670
)
 
375,156

Expenses:
 
 
 
 
 
 
 
Management fees
13,635

 
11,453

 
25,717

 
23,161

Servicing expenses
16,746

 
11,539

 
36,658

 
26,093

Other operating expenses
14,013

 
15,515

 
29,569

 
30,007

Total expenses
44,394

 
38,507

 
91,944

 
79,261

(Loss) income before income taxes
(88,150
)
 
133,439

 
(124,124
)
 
472,032

Provision for (benefit from) income taxes
2,407

 
(6,051
)
 
(7,632
)
 
(2,267
)
Net (loss) income
(90,557
)
 
139,490

 
(116,492
)
 
474,299

Dividends on preferred stock
18,950

 
13,747

 
37,900

 
27,494

Net (loss) income attributable to common stockholders
$
(109,507
)
 
$
125,743

 
$
(154,392
)
 
$
446,805

Basic (loss) earnings per weighted average common share
$
(0.40
)
 
$
0.72

 
$
(0.59
)
 
$
2.55

Diluted (loss) earnings per weighted average common share
$
(0.40
)
 
$
0.68

 
$
(0.59
)
 
$
2.36

Dividends declared per common share
$
0.40

 
$
0.47

 
$
0.87

 
$
0.94

Weighted average number of shares of common stock:
 
 
 
 
 
 
 
Basic
272,863,153

 
175,451,989

 
262,667,160

 
175,299,822

Diluted
272,863,153

 
193,212,877

 
262,667,160

 
193,016,793

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited), continued
(in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Comprehensive income:
 
 
 
 
 
 
 
Net (loss) income
$
(90,557
)
 
$
139,490

 
$
(116,492
)
 
$
474,299

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
310,549

 
(34,887
)
 
666,701

 
(379,664
)
Other comprehensive income (loss)
310,549

 
(34,887
)
 
666,701

 
(379,664
)
Comprehensive income
219,992

 
104,603

 
550,209

 
94,635

Dividends on preferred stock
18,950

 
13,747

 
37,900

 
27,494

Comprehensive income attributable to common stockholders
$
201,042

 
$
90,856

 
$
512,309

 
$
67,141

The accompanying notes are an integral part of these condensed consolidated financial statements.


3


TWO HARBORS INVESTMENT CORP. 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands)
 
Preferred Stock
 
Common Stock Par Value
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Cumulative Earnings
 
Cumulative Distributions to Stockholders
 
Total Stockholders’ Equity
Balance, December 31, 2017
$
702,537

 
$
1,745

 
$
3,672,003

 
$
334,813

 
$
2,386,604

 
$
(3,526,278
)
 
$
3,571,424

Cumulative effect of adoption of new accounting principle

 

 

 
9,918

 
(9,918
)
 

 

Adjusted balance, January 1, 2018
702,537

 
1,745

 
3,672,003

 
344,731

 
2,376,686

 
(3,526,278
)
 
3,571,424

Net income

 

 

 

 
334,809

 

 
334,809

Other comprehensive loss before reclassifications, net of tax

 

 

 
(343,542
)
 

 

 
(343,542
)
Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
(1,235
)
 

 

 
(1,235
)
Other comprehensive loss, net of tax

 

 

 
(344,777
)
 

 

 
(344,777
)
Issuance of preferred stock, net of offering costs
13

 

 

 

 

 

 
13

Issuance of common stock, net of offering costs

 

 
76

 

 

 

 
76

Preferred dividends declared

 

 

 

 

 
(13,747
)
 
(13,747
)
Common dividends declared

 

 

 

 

 
(82,454
)
 
(82,454
)
Non-cash equity award compensation

 
9

 
2,332

 

 

 

 
2,341

Balance, March 31, 2018
702,550

 
1,754

 
3,674,411

 
(46
)
 
2,711,495

 
(3,622,479
)
 
3,467,685

Net income

 

 

 

 
139,490

 

 
139,490

Other comprehensive loss before reclassifications, net of tax

 

 

 
(58,676
)
 

 

 
(58,676
)
Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
23,789

 

 

 
23,789

Other comprehensive loss, net of tax

 

 

 
(34,887
)
 

 

 
(34,887
)
Issuance of common stock, net of offering costs

 

 
119

 

 

 

 
119

Preferred dividends declared

 

 

 

 

 
(13,747
)
 
(13,747
)
Common dividends declared

 

 

 

 

 
(82,472
)
 
(82,472
)
Non-cash equity award compensation

 
1

 
4,056

 

 

 

 
4,057

Balance, June 30, 2018
$
702,550

 
$
1,755

 
$
3,678,586

 
$
(34,933
)
 
$
2,850,985

 
$
(3,718,698
)
 
$
3,480,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
977,501

 
$
2,481

 
$
4,809,616

 
$
110,817

 
$
2,332,371

 
$
(3,978,297
)
 
$
4,254,489

Cumulative effect of adoption of new accounting principle

 

 

 

 
(442
)
 

 
(442
)
Adjusted balance, January 1, 2019
977,501

 
2,481

 
4,809,616

 
110,817

 
2,331,929

 
(3,978,297
)
 
4,254,047

Net loss

 

 

 

 
(25,935
)
 

 
(25,935
)
Other comprehensive income before reclassifications, net of tax

 

 

 
327,840

 

 

 
327,840

Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
28,312

 

 

 
28,312

Other comprehensive income, net of tax

 

 

 
356,152

 

 

 
356,152

Issuance of common stock, net of offering costs

 
243

 
335,035

 

 

 

 
335,278

Preferred dividends declared

 

 

 

 

 
(18,950
)
 
(18,950
)
Common dividends declared

 

 

 

 

 
(128,229
)
 
(128,229
)
Non-cash equity award compensation

 
4

 
1,857

 

 

 

 
1,861

Balance, March 31, 2019
977,501

 
2,728

 
5,146,508

 
466,969

 
2,305,994

 
(4,125,476
)
 
4,774,224

Net loss

 

 

 

 
(90,557
)
 

 
(90,557
)
Other comprehensive income before reclassifications, net of tax

 

 

 
296,637

 

 

 
296,637

Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
13,912

 

 

 
13,912

Other comprehensive income, net of tax

 

 

 
310,549

 

 

 
310,549

Issuance of common stock, net of offering costs

 

 
171

 

 

 

 
171

Preferred dividends declared

 

 

 

 

 
(18,950
)
 
(18,950
)
Common dividends declared

 

 

 

 

 
(109,160
)
 
(109,160
)
Non-cash equity award compensation

 
1

 
2,496

 

 

 

 
2,497

Balance, June 30, 2019
$
977,501

 
$
2,729

 
$
5,149,175

 
$
777,518

 
$
2,215,437

 
$
(4,253,586
)
 
$
4,868,774

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net (loss) income
$
(116,492
)
 
$
474,299

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on investment securities, net
65,126

 
44,891

Amortization of deferred debt issuance costs on convertible senior notes
475

 
441

Other-than-temporary impairment losses
5,054

 
268

Realized and unrealized (gains) losses on investment securities
(3,149
)
 
53,846

Loss (gain) on servicing asset
441,406

 
(81,660
)
Realized and unrealized loss (gain) on interest rate swaps, caps and swaptions
218,629

 
(162,029
)