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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: September 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
 
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 November 5, 2019, there were 272,899,932 shares of outstanding common stock, par value $.01 per share, issued and outstanding.
 
 
 
 
 


Table of Contents



TWO HARBORS INVESTMENT CORP.
INDEX

 
 
Page
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 


i

Table of Contents



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30,
2019
 
December 31,
2018
ASSETS
(unaudited)
 
 
Available-for-sale securities, at fair value
$
28,318,558

 
$
25,552,604

Mortgage servicing rights, at fair value
1,651,556

 
1,993,440

Cash and cash equivalents
740,698

 
409,758

Restricted cash
509,689

 
688,006

Accrued interest receivable
87,321

 
86,589

Due from counterparties
314,871

 
154,626

Derivative assets, at fair value
230,620

 
319,981

Reverse repurchase agreements
180,575

 
761,815

Other assets
130,339

 
165,660

Total Assets (1)
$
32,164,227

 
$
30,132,479

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
25,567,136

 
$
23,133,476

Federal Home Loan Bank advances
50,000

 
865,024

Revolving credit facilities
300,000

 
310,000

Term notes payable
394,235

 

Convertible senior notes
284,635

 
283,856

Derivative liabilities, at fair value
17,201

 
820,590

Due to counterparties
231,021

 
130,210

Dividends payable
128,109

 
135,551

Accrued interest payable
122,793

 
160,005

Other liabilities
49,517

 
39,278

Total Liabilities (1)
27,144,647

 
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 272,895,402 and 248,085,721 shares issued and outstanding, respectively
2,729

 
2,481

Additional paid-in capital
5,151,554

 
4,809,616

Accumulated other comprehensive income
748,354

 
110,817

Cumulative earnings
2,521,137

 
2,332,371

Cumulative distributions to stockholders
(4,381,695
)
 
(3,978,297
)
Total Stockholders’ Equity
5,019,580

 
4,254,489

Total Liabilities and Stockholders’ Equity
$
32,164,227

 
$
30,132,479


____________________
(1)
The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At September 30, 2019 and December 31, 2018, assets of the VIEs totaled $394,756 and $0, and liabilities of the VIEs totaled $394,756 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

Table of Contents



TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
Available-for-sale securities
$
242,023

 
$
230,607

 
$
731,716

 
$
604,790

Other
7,717

 
6,091

 
24,536

 
13,287

Total interest income
249,740

 
236,698

 
756,252

 
618,077

Interest expense:
 
 
 
 
 
 
 
Repurchase agreements
176,450

 
138,343

 
501,361

 
322,735

Federal Home Loan Bank advances
391

 
5,301

 
10,406

 
14,655

Revolving credit facilities
3,964

 
3,973

 
15,316

 
5,776

Term notes payable
5,475

 

 
5,706

 

Convertible senior notes
4,797

 
4,779

 
14,256

 
14,204

Total interest expense
191,077

 
152,396

 
547,045

 
357,370

Net interest income
58,663

 
84,302

 
209,207

 
260,707

Other-than-temporary impairments:
 
 
 
 

 

Total other-than-temporary impairment losses
(5,950
)
 
(95
)
 
(11,004
)
 
(363
)
Other income:
 
 
 
 
 
 
 
Gain (loss) on investment securities
248,828

 
(42,996
)
 
251,977

 
(95,549
)
Servicing income
126,025

 
89,618

 
373,922

 
238,473

(Loss) gain on servicing asset
(234,514
)
 
20,591

 
(675,920
)
 
102,251

Gain (loss) on interest rate swap, cap and swaption agreements
70,620

 
75,857

 
(101,414
)
 
255,535

Gain (loss) on other derivative instruments
85,856

 
(31,463
)
 
270,798

 
(15,735
)
Other income
495

 
907

 
277

 
2,695

Total other income
297,310

 
112,514


119,640

 
487,670

Expenses:
 
 
 
 
 
 
 
Management fees
16,839

 
(5,041
)
 
42,556

 
18,120

Servicing expenses
17,696

 
16,433

 
54,354

 
42,526

Other operating expenses
13,344

 
17,033

 
42,913

 
47,040

Acquisition transaction costs

 
86,703

 

 
86,703

Restructuring charges

 
8,238

 

 
8,238

Total expenses
47,879

 
123,366

 
139,823

 
202,627

Income before income taxes
302,144

 
73,355

 
178,020

 
545,387

(Benefit from) provision for income taxes
(3,556
)
 
37,409

 
(11,188
)
 
35,142

Net income
305,700

 
35,946

 
189,208

 
510,245

Dividends on preferred stock
18,951

 
18,951

 
56,851

 
46,445

Net income attributable to common stockholders
$
286,749

 
$
16,995

 
$
132,357

 
$
463,800

Basic earnings per weighted average common share
$
1.05

 
$
0.08

 
$
0.50

 
$
2.42

Diluted earnings per weighted average common share
$
1.00

 
$
0.08

 
$
0.50

 
$
2.28

Dividends declared per common share
$
0.40

 
$
0.47

 
$
1.27

 
$
1.41

Weighted average number of shares of common stock:
 
 
 
 
 
 
 
Basic
272,897,575

 
224,399,436

 
266,114,772

 
191,846,212

Diluted
291,053,718

 
224,399,436

 
266,114,772

 
209,607,146

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

2

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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited), continued
(in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
305,700

 
$
35,946

 
$
189,208

 
$
510,245

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
(29,164
)
 
(119,796
)
 
637,537

 
(499,460
)
Other comprehensive (loss) income
(29,164
)
 
(119,796
)
 
637,537

 
(499,460
)
Comprehensive income (loss)
276,536

 
(83,850
)
 
826,745

 
10,785

Dividends on preferred stock
18,951

 
18,951

 
56,851

 
46,445

Comprehensive income (loss) attributable to common stockholders
$
257,585

 
$
(102,801
)
 
$
769,894

 
$
(35,660
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents



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

Cumulative effect of adoption of new accounting principle

 

 
25

 

 
(25
)
 

 

Adjusted balance, July 1, 2018
702,550

 
1,755

 
3,678,611

 
(34,933
)
 
2,850,960

 
(3,718,698
)
 
3,480,245

Net income

 

 

 

 
35,946

 

 
35,946

Other comprehensive loss before reclassifications, net of tax

 

 

 
(150,259
)
 

 

 
(150,259
)
Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
30,463

 

 

 
30,463

Other comprehensive loss, net of tax

 

 

 
(119,796
)
 

 

 
(119,796
)
Acquisition of CYS Investments, Inc.
275,000

 
726

 
1,124,388

 

 

 

 
1,400,114

Issuance of common stock, net of offering costs

 

 
134

 

 

 

 
134

Preferred dividends declared

 

 

 

 

 
(18,951
)
 
(18,951
)
Common dividends declared

 

 

 

 

 
(105,097
)
 
(105,097
)
Non-cash equity award compensation

 

 
3,387

 

 

 

 
3,387

Balance, September 30, 2018
$
977,550

 
$
2,481

 
$
4,806,520

 
$
(154,729
)
 
$
2,886,906

 
$
(3,842,746
)
 
$
4,675,982

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

4

Table of Contents



TWO HARBORS INVESTMENT CORP. 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited), continued
(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, 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