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, 2017
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.) |
|
| | |
590 Madison Avenue, 36th Floor New York, New York | | 10022 |
(Address of Principal Executive Offices) | | (Zip Code) |
(612) 629-2500
(Registrant’s Telephone Number, Including Area Code)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
|
| | | |
Large accelerated filer x | | | Accelerated filer o |
Non-accelerated filer o | (Do not check if a smaller reporting company) | | Smaller reporting company o |
| | | Emerging growth company o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 7, 2017 there were 174,489,081 shares of outstanding common stock, par value $.01 per share, issued and outstanding.
TWO HARBORS INVESTMENT CORP.
INDEX
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| PART I - FINANCIAL INFORMATION | |
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| PART II - OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
|
| | | | | | | |
ASSETS | September 30, 2017 | | December 31, 2016 |
Available-for-sale securities, at fair value | $ | 20,199,094 |
| | $ | 13,128,857 |
|
Commercial real estate assets | 2,171,344 |
| | 1,412,543 |
|
Mortgage servicing rights, at fair value | 930,613 |
| | 693,815 |
|
Residential mortgage loans held-for-investment in securitization trusts, at fair value | 3,031,191 |
| | 3,271,317 |
|
Residential mortgage loans held-for-sale, at fair value | 31,197 |
| | 40,146 |
|
Cash and cash equivalents | 539,367 |
| | 406,883 |
|
Restricted cash | 343,813 |
| | 408,312 |
|
Accrued interest receivable | 85,445 |
| | 62,751 |
|
Due from counterparties | 26,445 |
| | 60,380 |
|
Derivative assets, at fair value | 238,305 |
| | 324,182 |
|
Other assets | 206,960 |
| | 302,870 |
|
Total Assets (1) | $ | 27,803,774 |
| | $ | 20,112,056 |
|
LIABILITIES AND EQUITY | | | |
Liabilities | | | |
Repurchase agreements | $ | 18,297,392 |
| | $ | 9,316,351 |
|
Collateralized borrowings in securitization trusts, at fair value | 2,785,413 |
| | 3,037,196 |
|
Federal Home Loan Bank advances | 1,998,762 |
| | 4,000,000 |
|
Revolving credit facilities | 40,000 |
| | 70,000 |
|
Convertible senior notes | 282,543 |
| | — |
|
Derivative liabilities, at fair value | 11,312 |
| | 12,501 |
|
Due to counterparties | 45,297 |
| | 111,884 |
|
Dividends payable | 102,799 |
| | 83,437 |
|
Other liabilities | 108,875 |
| | 79,576 |
|
Total Liabilities (1) | 23,672,393 |
| | 16,710,945 |
|
Stockholders’ Equity | | | |
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized: | | | |
8.125% Series A cumulative redeemable: 5,750,000 and 0 shares issued and outstanding, respectively ($143,750 liquidation preference) | 138,872 |
| | — |
|
7.625% Series B cumulative redeemable: 11,500,000 and 0 shares issued and outstanding, respectively ($287,500 liquidation preference) | 278,094 |
| | — |
|
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 174,489,356 and 173,826,163 shares issued and outstanding, respectively | 3,490 |
| | 3,477 |
|
Additional paid-in capital | 3,658,835 |
| | 3,659,973 |
|
Accumulated other comprehensive income | 423,042 |
| | 199,227 |
|
Cumulative earnings | 2,220,700 |
| | 2,038,033 |
|
Cumulative distributions to stockholders | (2,781,469 | ) | | (2,499,599 | ) |
Total Stockholders’ Equity | 3,941,564 |
| | 3,401,111 |
|
Noncontrolling interest | 189,817 |
| | — |
|
Total Equity | 4,131,381 |
| | 3,401,111 |
|
Total Liabilities and Equity | $ | 27,803,774 |
| | $ | 20,112,056 |
|
____________________
| |
(1) | The condensed consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of these VIEs, and liabilities of the consolidated VIEs for which creditors do not have recourse to Two Harbors Investment Corp. At September 30, 2017 and December 31, 2016, assets of the VIEs totaled $3,094,462 and $3,336,292, and liabilities of the VIEs totaled $2,804,685 and $3,058,278, 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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest income: | | | |
Available-for-sale securities | $ | 164,169 |
| | $ | 111,393 |
| | $ | 449,908 |
| | $ | 292,333 |
|
Commercial real estate assets | 30,595 |
| | 15,907 |
| | 80,005 |
| | 40,279 |
|
Residential mortgage loans held-for-investment in securitization trusts | 29,865 |
| | 33,495 |
| | 92,319 |
| | 100,765 |
|
Residential mortgage loans held-for-sale | 479 |
| | 7,627 |
| | 1,380 |
| | 19,789 |
|
Cash and cash equivalents | 1,408 |
| | 440 |
| | 3,087 |
| | 1,235 |
|
Total interest income | 226,516 |
| | 168,862 |
| | 626,699 |
| | 454,401 |
|
Interest expense: | | | | | | | |
Repurchase agreements | 71,754 |
| | 27,056 |
| | 158,065 |
| | 65,782 |
|
Collateralized borrowings in securitization trusts | 23,970 |
| | 26,422 |
| | 74,199 |
| | 70,965 |
|
Federal Home Loan Bank advances | 10,317 |
| | 6,744 |
| | 30,554 |
| | 18,804 |
|
Revolving credit facilities | 701 |
| | 128 |
| | 1,727 |
| | 128 |
|
Convertible senior notes | 4,745 |
| | — |
| | 13,157 |
| | — |
|
Total interest expense | 111,487 |
| | 60,350 |
| | 277,702 |
| | 155,679 |
|
Net interest income | 115,029 |
| | 108,512 |
| | 348,997 |
| | 298,722 |
|
Other-than-temporary impairments: | | | | |
| |
|
Total other-than-temporary impairment losses | — |
| | (1,015 | ) | | (429 | ) | | (1,822 | ) |
Other income (loss): | | | | | | | |
Gain (loss) on investment securities | 5,618 |
| | 28,290 |
| | (15,485 | ) | | 66,095 |
|
(Loss) gain on interest rate swap and swaption agreements | (207 | ) | | 5,584 |
| | (66,990 | ) | | (132,608 | ) |
Loss on other derivative instruments | (18,924 | ) | | (12,028 | ) | | (66,328 | ) | | (44,064 | ) |
Servicing income | 57,387 |
| | 38,708 |
| | 148,468 |
| | 108,657 |
|
Loss on servicing asset | (29,245 | ) | | (33,451 | ) | | (90,440 | ) | | (211,426 | ) |
Gain (loss) on residential mortgage loans held-for-sale | 355 |
| | (889 | ) | | 2,149 |
| | 17,648 |
|
Other income (loss) | 8,076 |
| | 5,757 |
| | 18,904 |
| | (977 | ) |
Total other income (loss) | 23,060 |
| | 31,971 |
| | (69,722 | ) | | (196,675 | ) |
Expenses: | | | | | | | |
Management fees | 13,276 |
| | 11,387 |
| | 36,518 |
| | 35,268 |
|
Servicing expenses | 8,893 |
| | 9,073 |
| | 26,116 |
| | 24,510 |
|
Securitization deal costs | — |
| | 2,080 |
| | — |
| | 6,241 |
|
Other operating expenses | 16,526 |
| | 14,780 |
| | 51,934 |
| | 47,280 |
|
Restructuring charges | — |
| | 1,189 |
| | — |
| | 1,189 |
|
Total expenses | 38,695 |
| | 38,509 |
| | 114,568 |
| | 114,488 |
|
Income (loss) before income taxes | 99,394 |
| | 100,959 |
| | 164,278 |
| | (14,263 | ) |
Benefit from income taxes | (5,344 | ) | | (16,827 | ) | | (21,103 | ) | | (26,138 | ) |
Net income | 104,738 |
| | 117,786 |
| | 185,381 |
| | 11,875 |
|
Net income attributable to noncontrolling interest | 2,674 |
| | — |
| | 2,714 |
| | — |
|
Net income attributable to Two Harbors Investment Corp. | 102,064 |
| | 117,786 |
| | 182,667 |
| | 11,875 |
|
Dividends on preferred stock | 8,888 |
| | — |
| | 13,173 |
| | — |
|
Net income attributable to common stockholders | $ | 93,176 |
| | $ | 117,786 |
| | $ | 169,494 |
| | $ | 11,875 |
|
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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Basic earnings per weighted average common share | $ | 0.53 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
Diluted earnings per weighted average common share | $ | 0.52 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
Dividends declared per common share | $ | 0.52 |
| | $ | 0.46 |
| | $ | 1.54 |
| | $ | 1.38 |
|
Weighted average number of shares of common stock: | | | | | | | |
Basic | 174,488,296 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
Diluted | 188,907,356 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
Comprehensive income: | | | | | | | |
Net income | $ | 104,738 |
| | $ | 117,786 |
| | $ | 185,381 |
| | $ | 11,875 |
|
Other comprehensive income, net of tax: | | | | | | | |
Unrealized gain on available-for-sale securities | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
Other comprehensive income | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
Comprehensive income | 173,171 |
| | 136,532 |
| | 409,204 |
| | 191,257 |
|
Comprehensive income attributable to noncontrolling interest | 2,682 |
| | — |
| | 2,724 |
| | — |
|
Comprehensive income attributable to Two Harbors Investment Corp. | 170,489 |
| | 136,532 |
| | 406,480 |
| | 191,257 |
|
Dividends on preferred stock | 8,888 |
| | — |
| | 13,173 |
| | — |
|
Comprehensive income attributable to common stockholders | $ | 161,601 |
| | $ | 136,532 |
| | $ | 393,307 |
| | $ | 191,257 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Preferred Stock | | Series B Preferred Stock | | Common Stock | | | | | | | | | | | | | | |
| Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total Stockholders’ Equity | | Non- controlling Interest | | Total Equity |
| | | | | | | | | | | | | | | | | | | | |
| | | | |
Balance, December 31, 2015 | — |
| | $ | — |
| | — |
| | $ | — |
| | 176,953,404 |
| | $ | 3,539 |
| | $ | 3,705,519 |
| | $ | 359,061 |
| | $ | 1,684,755 |
| | $ | (2,176,313 | ) | | $ | 3,576,561 |
| | $ | — |
| | $ | 3,576,561 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,875 |
| | — |
| | 11,875 |
| | — |
| | 11,875 |
|
Other comprehensive income before reclassifications, net of tax expense of $0.2 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 232,212 |
| | — |
| | — |
| | 232,212 |
| | — |
| | 232,212 |
|
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $6.4 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (52,830 | ) | | — |
| | — |
| | (52,830 | ) | | — |
| | (52,830 | ) |
Other comprehensive income, net of tax benefit of $6.2 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 179,382 |
| | — |
| | — |
| | 179,382 |
| | — |
| | 179,382 |
|
Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 21,882 |
| | — |
| | 356 |
| | — |
| | — |
| | — |
| | 356 |
| | — |
| | 356 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (4,010,000 | ) | | (80 | ) | | (61,227 | ) | | — |
| | — |
| | — |
| | (61,307 | ) | | — |
| | (61,307 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (239,849 | ) | | (239,849 | ) | | — |
| | (239,849 | ) |
Non-cash equity award compensation | — |
| | — |
| | — |
| | — |
| | 852,458 |
| | 17 |
| | 11,206 |
| | — |
| | — |
| | — |
| | 11,223 |
| | — |
| | 11,223 |
|
Balance, September 30, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
| | 173,817,744 |
| | $ | 3,476 |
| | $ | 3,655,854 |
| | $ | 538,443 |
| | $ | 1,696,630 |
| | $ | (2,416,162 | ) | | $ | 3,478,241 |
| | $ | — |
| | $ | 3,478,241 |
|
| | | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance, December 31, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
| | 173,826,163 |
| | $ | 3,477 |
| | $ | 3,659,973 |
| | $ | 199,227 |
| | $ | 2,038,033 |
| | $ | (2,499,599 | ) | | $ | 3,401,111 |
| | $ | — |
| | $ | 3,401,111 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 182,667 |
| | — |
| | 182,667 |
| | 2,714 |
| | 185,381 |
|
Other comprehensive income before reclassifications, net of tax expense of $35.7 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 215,994 |
| | — |
| | — |
| | 215,994 |
| | 10 |
| | 216,004 |
|
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $2.7 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,815 |
| | — |
| | — |
| | 7,815 |
| | — |
| | 7,815 |
|
Other comprehensive income, net of tax expense of $33.0 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 223,809 |
| | — |
| | — |
| | 223,809 |
| | 10 |
| | 223,819 |
|
Issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,777 | ) | | 6 |
| | — |
| | — |
| | (13,771 | ) | | 195,646 |
| | 181,875 |
|
Acquisition of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (69 | ) | | — |
| | — |
| | — |
| | (69 | ) | | (5,376 | ) | | (5,445 | ) |
Issuance of preferred stock, net of offering costs | 5,750,000 |
| | 138,872 |
| | 11,500,000 |
| | 278,094 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 416,966 |
| | — |
| | 416,966 |
|
Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 19,688 |
| | — |
| | 332 |
| | — |
| | — |
| | — |
| | 332 |
| | — |
| | 332 |
|
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,173 | ) | | (13,173 | ) | | — |
| | (13,173 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (268,697 | ) | | (268,697 | ) | | (3,177 | ) | | (271,874 | ) |
Non-cash equity award compensation | — |
| | — |
| | — |
| | — |
| | 643,505 |
| | 13 |
| | 12,376 |
| | — |
| | — |
| | — |
| | 12,389 |
| | — |
| | 12,389 |
|
Balance, September 30, 2017 | 5,750,000 |
| | $ | 138,872 |
| | 11,500,000 |
| | $ | 278,094 |
| | 174,489,356 |
| | $ | 3,490 |
| | $ | 3,658,835 |
| | $ | 423,042 |
| | $ | 2,220,700 |
| | $ | (2,781,469 | ) | | $ | 3,941,564 |
| | $ | 189,817 |
| | $ | 4,131,381 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
Cash Flows From Operating Activities: | |
Net income | $ | 185,381 |
| | $ | 11,875 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Amortization of premiums and discounts on investment securities and commercial real estate assets, net | 39,949 |
| | 29,469 |
|
Amortization of deferred debt issuance costs on convertible senior notes | 429 |
| | — |
|
Other-than-temporary impairment losses | 429 |
| | 1,822 |
|
Realized and unrealized losses (gains) on investment securities, net | 15,485 |
| | (66,095 | ) |
Loss on servicing asset | 90,440 |
| | 211,426 |
|
Gain on residential mortgage loans held-for-sale | (2,149 | ) | | (17,648 | ) |
(Gain) loss on residential mortgage loans held-for-investment and collateralized borrowings in securitization trusts | (14,884 | ) | | 5,173 |
|
(Gain) loss on termination and option expiration of interest rate swaps and swaptions | (68,855 | ) | | 119,548 |
|
Unrealized loss (gain) on interest rate swaps and swaptions | 124,978 |
| | (5,080 | ) |
Unrealized loss on other derivative instruments | 37,586 |
| | 2,025 |
|
Equity based compensation | 12,389 |
| | 11,223 |
|
Depreciation of fixed assets | 776 |
| | 981 |
|
Purchases of residential mortgage loans held-for-sale | (567 | ) | | (1,159,782 | ) |
Proceeds from sales of residential mortgage loans held-for-sale | 3,928 |
| | 95,331 |
|
Proceeds from repayment of residential mortgage loans held-for-sale | 4,799 |
| | 117,092 |
|
Net change in assets and liabilities: |
|
| | |
Increase in accrued interest receivable | (22,694 | ) | | (17,119 | ) |
Increase in deferred income taxes, net | (21,505 | ) | | (24,581 | ) |
Decrease in income taxes receivable | 1,412 |
| | 3,667 |
|
Increase in prepaid and fixed assets | (950 | ) | | (62 | ) |
(Increase) decrease in other receivables | (1,070 | ) | | 5,721 |
|
Decrease (increase) in servicing advances | 5,489 |
| | (8,965 | ) |
Increase in accrued interest payable | 33,227 |
| | 11,084 |
|
Increase (decrease) in income taxes payable | 142 |
| | (70 | ) |
Decrease in accrued expenses and other liabilities | (5,425 | ) | | (2,923 | ) |
Net cash provided by (used in) operating activities | $ | 418,740 |
| | $ | (675,888 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
Cash Flows From Investing Activities: | |
Purchases of available-for-sale securities | $ | (13,677,423 | ) | | $ | (13,734,884 | ) |
Proceeds from sales of available-for-sale securities | 5,726,616 |
| | 6,567,992 |
|
Principal payments on available-for-sale securities | 1,075,961 |
| | 910,386 |
|
(Purchases) short sales of derivative instruments, net | (93,812 | ) | | (13,953 | ) |
Proceeds from sales (payments for termination) of derivative instruments, net | 84,791 |
| | 3,209 |
|
Proceeds from repayment of residential mortgage loans held-for-investment in securitization trusts | 285,695 |
| | 649,134 |
|
Originations, acquisitions and additional fundings of commercial real estate assets, net of deferred fees | (759,905 | ) | | (463,680 | ) |
Proceeds from repayment of commercial real estate assets | 6,655 |
| | 15,296 |
|
Purchases of mortgage servicing rights, net of purchase price adjustments | (327,341 | ) | | (208,474 | ) |
Proceeds from sales of mortgage servicing rights | 132 |
| | 41,844 |
|
Purchases of Federal Home Loan Bank stock | — |
| | (11,206 | ) |
Redemptions of Federal Home Loan Bank stock | 82,681 |
| | — |
|
(Decrease) increase in due to counterparties, net | (32,652 | ) | | 4,996 |
|
Net cash used in investing activities | (7,628,602 | ) | | (6,239,340 | ) |
Cash Flows From Financing Activities: | | | |
Proceeds from repurchase agreements | 115,034,068 |
| | 70,805,165 |
|
Principal payments on repurchase agreements | (106,053,027 | ) | | (65,176,066 | ) |
Proceeds from issuance of collateralized borrowings in securitization trusts | — |
| | 1,875,371 |
|
Principal payments on collateralized borrowings in securitization trusts | (282,468 | ) | | (568,485 | ) |
Proceeds from Federal Home Loan Bank advances | — |
| | 215,000 |
|
Principal payments on Federal Home Loan Bank advances | (2,001,238 | ) | | — |
|
Proceeds from revolving credit facilities | 123,000 |
| | 30,000 |
|
Principal payments on revolving credit facilities | (153,000 | ) | | — |
|
Proceeds from convertible senior notes | 282,469 |
| | — |
|
Proceeds from issuance of preferred stock, net of offering costs | 416,966 |
| | — |
|
Proceeds from issuance of common stock, net of offering costs | 332 |
| | 356 |
|
Proceeds from issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs | 181,875 |
| | — |
|
Acquisition of noncontrolling interests | (5,445 | ) | | — |
|
Repurchase of common stock | — |
| | (61,307 | ) |
Dividends paid on preferred stock | (4,285 | ) | | — |
|
Dividends paid on common stock | (261,400 | ) | | (251,909 | ) |
Net cash provided by financing activities | 7,277,847 |
| | 6,868,125 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | 67,985 |
| | (47,103 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 815,195 |
| | 1,000,393 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 883,180 |
| | $ | 953,290 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
Supplemental Disclosure of Cash Flow Information: | |
Cash paid for interest | $ | 169,464 |
| | $ | 77,142 |
|
Cash received for taxes | $ | (1,152 | ) | | $ | (5,154 | ) |
Noncash Activities: | | | |
Transfers of residential mortgage loans held-for-sale to residential mortgage loans held-for-investment in securitization trusts | $ | — |
| | $ | 1,031,707 |
|
Transfers of residential mortgage loans held-for-sale to other receivables for foreclosed government-guaranteed loans | $ | 2,909 |
| | $ | 14,200 |
|
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | $ | 9 |
| | $ | 5,973 |
|
Additions to mortgage servicing rights due to sale of residential mortgage loans held-for-sale | $ | 20 |
| | $ | 764 |
|
Dividends declared but not paid at end of period | $ | 102,799 |
| | $ | 79,956 |
|
Reconciliation of residential mortgage loans held-for-sale: | | | |
Residential mortgage loans held-for-sale at beginning of period | $ | 40,146 |
| | $ | 811,431 |
|
Purchases of residential mortgage loans held-for-sale | 567 |
| | 1,159,782 |
|
Transfers to residential mortgage loans held-for-investment in securitization trusts | — |
| | (1,031,707 | ) |
Transfers to other receivables for foreclosed government-guaranteed loans | (2,909 | ) | | (14,200 | ) |
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | (9 | ) | | (5,973 | ) |
Proceeds from sales of residential mortgage loans held-for-sale | (3,928 | ) | | (95,331 | ) |
Proceeds from repayment of residential mortgage loans held-for-sale | (4,799 | ) | | (117,092 | ) |
Realized and unrealized gains on residential mortgage loans held-for-sale | 2,129 |
| | 16,264 |
|
Residential mortgage loans held-for-sale at end of period | $ | 31,197 |
| | $ | 723,174 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 1. Organization and Operations
Two Harbors Investment Corp., or the Company, is a Maryland corporation investing in, financing and managing Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, commercial real estate and other financial assets. The Company is externally managed and advised by PRCM Advisers LLC, or PRCM Advisers, which is a subsidiary of Pine River Capital Management L.P., or Pine River, a global multi-strategy asset management firm. The Company’s common stock is listed on the NYSE under the symbol “TWO”.
The Company was incorporated on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became a wholly owned indirect subsidiary of the Company as a result of the merger.
The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated certain of its subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and the Company may in the future form additional TRSs.
On June 28, 2017, the Company completed the contribution of its portfolio of commercial real estate assets to Granite Point Mortgage Trust Inc., or Granite Point, a newly organized Maryland corporation intended to qualify as a REIT, externally managed and advised by Pine River, and focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. The Company contributed its equity interests in its wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares of common stock of Granite Point, which represented approximately 76.5% of the outstanding stock of Granite Point upon completion of the initial public offering, or IPO, of its common stock on June 28, 2017. Subsequent to the end of the third quarter of 2017, on November 1, 2017, the Company distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock acquired in connection with the contribution to stockholders holding shares of Two Harbors common stock outstanding as of the close of business on October 20, 2017.
Note 2. Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. Certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - Equity for additional information). The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2017 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2017 should not be construed as indicative of the results to be expected for future periods or the full year.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The condensed consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make a number of significant estimates and assumptions. These estimates include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. The Company’s Chief Investment Officer manages the investment portfolio as a whole and resources are allocated and financial performance is assessed on a consolidated basis.
All trust entities in which the Company holds investments that are considered VIEs for financial reporting purposes were reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of a trust that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company consolidates the trust.
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of equity and comprehensive income not attributable to the Company. During this consolidation period, the Company’s financial condition and results of operations reflect all of Granite Point’s commercial real estate investments and financing. No other subsidiary of the Company invests in, finances or manages commercial real estate debt and related instruments. Effective November 1, 2017 (the date the 33.1 million shares of Granite Point common stock were distributed to the Company’s common stockholders), the Company no longer has a controlling interest in Granite Point and, therefore, will prospectively deconsolidate the financial condition and results of operations Granite Point and its subsidiaries from its financial statements.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 2016 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the nine months ended September 30, 2017.
Convertible Senior Notes
Convertible senior notes include unsecured convertible debt that are carried at their unpaid principal balance, net of any unamortized deferred issuance costs, on the Company’s condensed consolidated balance sheet. Interest on the notes is payable semiannually until such time the notes mature or are converted into shares of the Company’s common stock.
Noncontrolling Interest
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of Granite Point equity and comprehensive income not attributable to the Company. Noncontrolling interest is presented as a separate component of equity on the condensed consolidated balance sheets. In addition, the presentation of both net income and comprehensive income on the condensed consolidated statements of comprehensive income attributes earnings (losses) to the Company’s stockholders (controlling interest) and noncontrolling interests.
Pursuant to Accounting Standards Codification (ASC) 810, Consolidation, changes in a parent’s ownership interest (and transactions with noncontrolling interest stockholders in the subsidiary) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The Company adjusts the carrying amount of noncontrolling interest to reflect (i) changes in its ownership interest in Granite Point and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to the Company, with the offset to equity.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Earnings Per Share
Basic and diluted earnings per share are computed by dividing net income attributable to common stockholders by the weighted average number of common shares and potential common shares outstanding during the period. For both basic and diluted per share calculations, potential common shares represents issued and unvested shares of restricted stock, which have full rights to the common stock dividend declarations of the Company. If the assumed conversion of convertible notes into common shares is dilutive, diluted earnings per share is adjusted by adding back the periodic interest expense (net of any tax effects) associated with dilutive convertible notes to net income attributable to common stockholders and adding the shares issued in an assumed conversion to the diluted weighted average share count. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - Equity for additional information).
Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements, in the case of centrally cleared interest rate swaps. Additionally, the Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty.
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the Company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1) | | |
(in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
Assets | | | | | | | | | | | |
Derivative assets | $ | 279,300 |
| | $ | (40,995 | ) | | $ | 238,305 |
| | $ | (11,312 | ) | | $ | — |
| | $ | 226,993 |
|
Total Assets | $ | 279,300 |
| | $ | (40,995 | ) | | $ | 238,305 |
| | $ | (11,312 | ) | | $ | — |
| | $ | 226,993 |
|
Liabilities | | | | | | | | | | | |
Repurchase agreements | $ | (18,297,392 | ) | | $ | — |
| | $ | (18,297,392 | ) | | $ | 18,297,392 |
| | $ | — |
| | $ | — |
|
Derivative liabilities | (52,307 | ) | | 40,995 |
| | (11,312 | ) | | 11,312 |
| | — |
| | — |
|
Total Liabilities | $ | (18,349,699 | ) | | $ | 40,995 |
| | $ | (18,308,704 | ) | | $ | 18,308,704 |
| | $ | — |
| | $ | — |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1) | | |
(in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
Assets | | | | | | | | | | | |
Derivative assets | $ | 388,522 |
| | $ | (64,340 | ) | | $ | 324,182 |
| | $ | (12,501 | ) | | $ | — |
| | $ | 311,681 |
|
Total Assets | $ | 388,522 |
| | $ | (64,340 | ) | | $ | 324,182 |
| | $ | (12,501 | ) | | $ | — |
| | $ | 311,681 |
|
Liabilities | | | | | | | | | | | |
Repurchase agreements | $ | (9,316,351 | ) | | $ | — |
| | $ | (9,316,351 | ) | | $ | 9,316,351 |
| | $ | — |
| | $ | — |
|
Derivative liabilities | (76,841 | ) | | 64,340 |
| | (12,501 | ) | | 12,501 |
| | — |
| | — |
|
Total Liabilities | $ | (9,463,192 | ) | | $ | 64,340 |
| | $ | (9,398,852 | ) | | $ | 9,398,852 |
| | $ | — |
| | $ | — |
|
____________________
| |
(1) | Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets. |
Recently Issued and/or Adopted Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As a result of the issuance of ASU No. 2015-14 in August 2015 deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited. The Company has evaluated the new guidance and determined that interest income, gains and losses on financial instruments and income from servicing residential mortgage loans are outside the scope of ASC 606, Revenues from Contracts with Customers. For income from servicing residential mortgage loans, the Company considered that the FASB Transition Resource Group members generally agreed that an entity should look to ASC 860, Transfers and Servicing, to determine the appropriate accounting for these fees and ASC 606 contains a scope exception for contracts that fall under ASC 860. As a result, the Company has determined that the adoption of this ASU will not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU No. 2016-01, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. Early adoption of this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Lease Classification and Accounting
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on AFS debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings, with offsetting impacts to accumulated other comprehensive income.
Classification of Certain Cash Receipts and Cash Payments and Restricted Cash
In August 2016, the FASB issued ASU No. 2016-15, which clarifies how entities should classify certain cash receipts and cash payments and how the predominance principle should be applied on the statement of cash flows. Additionally, in November 2016, the FASB issued ASU No. 2016-18, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents, but no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. Both ASUs are effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. Early adoption of these ASUs did not impact the Company’s financial condition or results of operations but impacted the presentation of the statements of cash flows and related footnote disclosures. The Company included restricted cash of $343.8 million, $408.3 million, $264.9 million and $262.6 million as of September 30, 2017, December 31, 2016, September 30, 2016 and December 31, 2015, respectively, with cash and cash equivalents, as shown on the condensed consolidated statements of cash flows.
Note 3. Variable Interest Entities
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. Additionally, the Company is the sole certificate holder of a trust entity that holds a commercial real estate loan. All of these trusts are considered VIEs for financial reporting purposes and, thus, were reviewed for consolidation under the applicable consolidation guidance. Because the Company has both the power to direct the activities of the trusts that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company consolidates the trusts. As the Company is required to reassess VIE consolidation guidance each quarter, new facts and circumstances may change the Company’s determination. A change in the Company’s determination could result in a material impact to the Company’s condensed consolidated financial statements during subsequent reporting periods.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents a summary of the assets and liabilities of all consolidated trusts as reported on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
(in thousands) | September 30, 2017 | | December 31, 2016 |
Residential mortgage loans held-for-investment in securitization trusts | $ | 3,031,191 |
| | $ | 3,271,317 |
|
Commercial real estate assets | 45,889 |
| | 45,885 |
|
Accrued interest receivable | 17,382 |
| | 19,090 |
|
Total Assets | $ | 3,094,462 |
| | $ | 3,336,292 |
|
Collateralized borrowings in securitization trusts | $ | 2,785,413 |
| | $ | 3,037,196 |
|
Accrued interest payable | 7,894 |
| | 8,708 |
|
Other liabilities | 11,378 |
| | 12,374 |
|
Total Liabilities | $ | 2,804,685 |
| | $ | 3,058,278 |
|
The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $2.6 billion and $1.9 billion, respectively.
Note 4. Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
(in thousands) | September 30, 2017 | | December 31, 2016 |
Agency | | | |
Federal National Mortgage Association | $ | 13,057,102 |
| | $ | 8,274,507 |
|
Federal Home Loan Mortgage Corporation | 3,972,963 |
| | 2,742,630 |
|
Government National Mortgage Association | 524,306 |
| | 209,337 |
|
Non-Agency | 2,644,723 |
| | 1,902,383 |
|
Total available-for-sale securities | $ | 20,199,094 |
| | $ | 13,128,857 |
|
At September 30, 2017 and December 31, 2016, the Company pledged AFS securities with a carrying value of $20.0 billion and $13.1 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At September 30, 2017 and December 31, 2016, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | |
| September 30, 2017 |
(in thousands) | Agency | | Non-Agency | | Total |
Face Value | $ | 19,303,065 |
| | $ | 3,538,252 |
| | $ | 22,841,317 |
|
Unamortized premium | 1,038,789 |
| | — |
| | 1,038,789 |
|
Unamortized discount | | | | | |
Designated credit reserve | — |
| | (525,687 | ) | | (525,687 | ) |
Net, unamortized | (2,789,785 | ) | | (816,260 | ) | | (3,606,045 | ) |
Amortized Cost | 17,552,069 |
| | 2,196,305 |
| | 19,748,374 |
|
Gross unrealized gains | 120,236 |
| | 451,182 |
| | 571,418 |
|
Gross unrealized losses | (117,934 | ) | | (2,764 | ) | | (120,698 | ) |
Carrying Value | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
|
| | | | | | | | | | | |
| December 31, 2016 |
(in thousands) | Agency | | Non-Agency | | Total |
Face Value | $ | 13,571,417 |
|
| $ | 2,732,139 |
| | $ | 16,303,556 |
|
Unamortized premium | 571,749 |
|
| — |
| | 571,749 |
|
Unamortized discount | | | | | |
Designated credit reserve | — |
|
| (367,437 | ) | | (367,437 | ) |
Net, unamortized | (2,758,445 | ) |
| (808,975 | ) | | (3,567,420 | ) |
Amortized Cost | 11,384,721 |
|
| 1,555,727 |
| | 12,940,448 |
|
Gross unrealized gains | 79,040 |
|
| 353,358 |
| | 432,398 |
|
Gross unrealized losses | (237,287 | ) |
| (6,702 | ) | | (243,989 | ) |
Carrying Value | $ | 11,226,474 |
| | $ | 1,902,383 |
| | $ | 13,128,857 |
|
The following tables present the carrying value of the Company’s AFS securities by rate type as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | |
| September 30, 2017 |
(in thousands) | Agency | | Non-Agency | | Total |
Adjustable Rate | $ | 24,960 |
| | $ | 2,300,247 |
| | $ | 2,325,207 |
|
Fixed Rate | 17,529,411 |
| | 344,476 |
| | 17,873,887 |
|
Total | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
|
| | | | | | | | | | | |
| December 31, 2016 |
(in thousands) | Agency | | Non-Agency | | Total |
Adjustable Rate | $ | 30,463 |
| | $ | 1,574,850 |
| | $ | 1,605,313 |
|
Fixed Rate | 11,196,011 |
| | 327,533 |
| | 11,523,544 |
|
Total | $ | 11,226,474 |
| | $ | 1,902,383 |
| | $ | 13,128,857 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of September 30, 2017:
|
| | | | | | | | | | | |
| September 30, 2017 |
(in thousands) | Agency | | Non-Agency | | Total |
≤ 1 year | $ | 15,632 |
| | $ | 165,060 |
| | $ | 180,692 |
|
> 1 and ≤ 3 years | 38,357 |
| | 249,220 |
| | 287,577 |
|
> 3 and ≤ 5 years | 1,192,719 |
| | 435,531 |
| | 1,628,250 |
|
> 5 and ≤ 10 years | 16,285,575 |
| | 1,043,103 |
| | 17,328,678 |
|
> 10 years | 22,088 |
| | 751,809 |
| | 773,897 |
|
Total | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the three and nine months ended September 30, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(in thousands) | Designated Credit Reserve | | Unamortized Net Discount | | Total | | Designated Credit Reserve | | Unamortized Net Discount | | Total |
Beginning balance at January 1 | $ | (367,437 | ) | | $ | (808,975 | ) | | $ | (1,176,412 | ) | | $ | (409,077 | ) | | $ | (707,021 | ) | | $ | (1,116,098 | ) |
Acquisitions | (217,206 | ) | | (111,938 | ) | | (329,144 | ) | | (45,398 | ) | | (140,318 | ) | | (185,716 | ) |
Accretion of net discount | — |
| | 67,219 |
| | 67,219 |
| | — |
| | 50,596 |
| | 50,596 |
|
Realized credit losses | 11,385 |
| | — |
| | 11,385 |
| | 279 |
| | — |
| | 279 |
|
Reclassification adjustment for other-than-temporary impairments | (429 | ) | | — |
| | (429 | ) | | (1,226 | ) | | — |
| | (1,226 | ) |
Transfers from (to) | 44,412 |
| | (44,412 | ) | | — |
| | 70,371 |
| | (70,371 | ) | | — |
|
Sales, calls, other | 3,588 |
| | 81,846 |
| | 85,434 |
| | 32,562 |
| | 77,689 |
| | 110,251 |
|
Ending balance at September 30 | $ | (525,687 | ) | | $ | (816,260 | ) | | $ | (1,341,947 | ) | | $ | (352,489 | ) | | $ | (789,425 | ) | | $ | (1,141,914 | ) |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time that the securities had an unrealized loss position as of September 30, 2017 and December 31, 2016. At September 30, 2017, the Company held 1,380 AFS securities, of which 152 were in an unrealized loss position for less than twelve consecutive months and 164 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,239 AFS securities, of which 252 were in an unrealized loss position for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. Of the $4.1 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2017 and December 31, 2016, $3.9 billion, or 95.1%, and $6.1 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Loss Position for |
| Less than 12 Months | | 12 Months or More | | Total |
(in thousands) | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
September 30, 2017 | $ | 4,136,362 |
| | $ | (22,669 | ) | | $ | 2,341,707 |
| | $ | (98,029 | ) | | $ | 6,478,069 |
| | $ | (120,698 | ) |
December 31, 2016 | $ | 6,416,820 |
| | $ | (204,034 | ) | | $ | 504,978 |
| | $ | (39,955 | ) | | $ | 6,921,798 |
| | $ | (243,989 | ) |
Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income, net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
During the nine months ended September 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency security where the future expected cash flows for the security were less than its amortized cost. The Company did not record any other-than-temporary credit impairments during the three months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded $1.0 million and $1.8 million, respectively, in other-than-temporary credit impairments on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2017, impaired securities with a carrying value of $117.6 million had actual weighted average cumulative losses of 5.3%, weighted average three-month prepayment speed of 7.3%, weighted average 60+ day delinquency of 21.8% of the pool balance, and weighted average FICO score of 659. At September 30, 2017, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the changes in OTTI included in earnings for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Cumulative credit loss at beginning of period | $ | (6,035 | ) | | $ | (6,710 | ) | | $ | (5,606 | ) | | $ | (6,499 | ) |
Additions: | | | | | | | |
Other-than-temporary impairments not previously recognized | — |
| | (1,015 | ) | | (429 | ) | | (1,307 | ) |
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments | — |
| | — |
| | — |
| | (515 | ) |
Reductions: | | | | | | | |
Decreases related to other-than-temporary impairments on securities paid down | — |
| | — |
| | — |
| | — |
|
Decreases related to other-than-temporary impairments on securities sold | — |
| | — |
| | — |
| | 596 |
|
Cumulative credit loss at end of period | $ | (6,035 | ) | | $ | (7,725 | ) | | $ | (6,035 | ) | | $ | (7,725 | ) |
Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, the Company sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion for net realized losses of $3.9 million and $21.0 million, respectively. For the three and nine months ended September 30, 2016, the Company sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion for net realized gains of $31.8 million and $63.3 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Gross realized gains | $ | 408 |
| | $ | 31,942 |
| | $ | 57,133 |
| | $ | 77,836 |
|
Gross realized losses | (4,342 | ) | | (164 | ) | | (78,125 | ) | | (14,487 | ) |
Total realized (losses) gains on sales, net | $ | (3,934 | ) | | $ | 31,778 |
| | $ | (20,992 | ) | | $ | 63,349 |
|
Note 5. Commercial Real Estate Assets
The Company originates and purchases commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as commercial real estate assets on the condensed consolidated balance sheets. Additionally, the Company is the sole certificate holder of a trust entity that holds a commercial real estate loan. The underlying loan held by the trust is consolidated on the Company’s condensed consolidated balance sheet and classified as commercial real estate assets. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Commercial real estate assets are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following tables summarize the Company’s commercial real estate assets by asset type, property type and geographic location as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 |
(dollars in thousands) | First Mortgages | | Mezzanine Loans | | B-Notes | | Total |
Unpaid principal balance | $ | 2,041,767 |
| | $ | 132,605 |
| | $ | 14,892 |
| | $ | 2,189,264 |
|
Unamortized (discount) premium | (174 | ) | | (11 | ) | | — |
| | (185 | ) |
Unamortized net deferred origination fees | (17,695 | ) | | (40 | ) | | — |
| | (17,735 | ) |
Carrying value | $ | 2,023,898 |
|
| $ | 132,554 |
| | $ | 14,892 |
| | $ | 2,171,344 |
|
Unfunded commitments | $ | 270,654 |
| | $ | 1,580 |
| | $ | — |
| | $ | 272,234 |
|
Number of loans | 50 |
| | 6 |
| | 1 |
| | 57 |
|
Weighted average coupon | 5.6 | % | | 9.1 | % | | 8.0 | % | | 5.9 | % |
Weighted average years to maturity (1) | 2.5 |
| | 1.9 |
| | 9.3 |
| | 2.5 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
(dollars in thousands) | First Mortgages | | Mezzanine Loans | | B-Notes | | Total |
Unpaid principal balance | $ | 1,286,200 |
| | $ | 138,245 |
| | $ | — |
| | $ | 1,424,445 |
|
Unamortized (discount) premium | (185 | ) | | (15 | ) | | — |
| | (200 | ) |
Unamortized net deferred origination fees | (11,481 | ) | | (221 | ) | | — |
| | (11,702 | ) |
Carrying value | $ | 1,274,534 |
| | $ | 138,009 |
| | $ | — |
| | $ | 1,412,543 |
|
Unfunded commitments | $ | 170,890 |
| | 1,580 |
| | $ | — |
| | $ | 172,470 |
|
Number of loans | 30 |
| | 6 |
| | — |
| | 36 |
|
Weighted average coupon | 5.1 | % | | 8.6 | % | | — | % | | 5.4 | % |
Weighted average years to maturity (1) | 2.9 |
| | 1.5 |
| | 0.0 |
| | 2.8 |
|
____________________
| |
(1) | Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications. |
|
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2017 | | December 31, 2016 |
Property Type | | Carrying Value | | % of Commercial Portfolio | | Carrying Value | |