Document

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2019



☐	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)

(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	TWO	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.

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

____________________

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.

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.

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.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)



	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



		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	77
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	78
Index of Exhibits		79
Signatures		80