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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, 2018

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)

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 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 x No o
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 x
 
Accelerated filer o
Non-accelerated filer o
 
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 6, 2018 there were 248,081,058 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 (unaudited)
(in thousands, except share data)
ASSETS
September 30,
2018
 
December 31,
2017
Available-for-sale securities, at fair value
$
25,938,916

 
$
21,220,819

Mortgage servicing rights, at fair value
1,664,024

 
1,086,717

Residential mortgage loans held-for-sale, at fair value
27,537

 
30,414

Cash and cash equivalents
422,851

 
419,159

Restricted cash
888,632

 
635,836

Accrued interest receivable
85,257

 
68,309

Due from counterparties
1,217,828

 
842,303

Derivative assets, at fair value
403,231

 
309,918

Reverse repurchase agreements
759,375

 

Other assets
122,428

 
175,838

Total Assets
$
31,530,079

 
$
24,789,313

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
23,806,631

 
$
19,451,207

Federal Home Loan Bank advances
865,024

 
1,215,024

Revolving credit facilities
310,000

 
20,000

Convertible senior notes
283,555

 
282,827

Derivative liabilities, at fair value
797,504

 
31,903

Due to counterparties
556,992

 
88,898

Dividends payable
96,259

 
12,552

Accrued interest payable
117,008

 
87,698

Other liabilities
21,124

 
27,780

Total Liabilities
26,854,097

 
21,217,889

Stockholders’ Equity
 
 
 
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 29,050,000 shares issued and outstanding, respectively ($1,001,250 and $726,250 liquidation preference, respectively)
977,550

 
702,537

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 248,078,170 and 174,496,587 shares issued and outstanding, respectively
2,481

 
1,745

Additional paid-in capital
4,806,520

 
3,672,003

Accumulated other comprehensive (loss) income
(154,729
)
 
334,813

Cumulative earnings
2,886,906

 
2,386,604

Cumulative distributions to stockholders
(3,842,746
)
 
(3,526,278
)
Total Stockholders’ Equity
4,675,982

 
3,571,424

Total Liabilities and Stockholders’ Equity
$
31,530,079

 
$
24,789,313


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 (LOSS) INCOME (unaudited)
(in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
Available-for-sale securities
$
230,607

 
$
163,904

 
$
604,790

 
$
449,141

Residential mortgage loans held-for-investment in securitization trusts

 
29,865

 

 
92,319

Residential mortgage loans held-for-sale
332

 
479

 
988

 
1,380

Other
5,759

 
1,841

 
12,299

 
7,144

Total interest income
236,698

 
196,089

 
618,077

 
549,984

Interest expense:
 
 
 
 
 
 
 
Repurchase agreements
138,343

 
59,694

 
322,735

 
135,756

Collateralized borrowings in securitization trusts

 
23,970

 

 
74,199

Federal Home Loan Bank advances
5,301

 
10,317

 
14,655

 
30,554

Revolving credit facilities
3,973

 
701

 
5,776

 
1,727

Convertible senior notes
4,779

 
4,745

 
14,204

 
13,157

Total interest expense
152,396

 
99,427

 
357,370

 
255,393

Net interest income
84,302

 
96,662

 
260,707

 
294,591

Other-than-temporary impairments:
 
 
 
 

 

Total other-than-temporary impairment losses
(95
)
 

 
(363
)
 
(429
)
Other income (loss):
 
 
 
 
 
 
 
(Loss) gain on investment securities
(42,996
)
 
5,618

 
(95,549
)
 
(15,485
)
Servicing income
89,618

 
57,387

 
238,473

 
148,468

Gain (loss) on servicing asset
20,591

 
(29,245
)
 
102,251

 
(90,440
)
Gain (loss) on interest rate swap, cap and swaption agreements
75,857

 
(207
)
 
255,535

 
(66,990
)
Loss on other derivative instruments
(31,463
)
 
(18,924
)
 
(15,735
)
 
(66,328
)
Other income
907

 
8,431

 
2,695

 
21,053

Total other income (loss)
112,514

 
23,060

 
487,670

 
(69,722
)
Expenses:
 
 
 
 
 
 
 
Management fees
(5,041
)
 
10,146

 
18,120

 
29,801

Servicing expenses
16,433

 
8,560

 
42,526

 
25,154

Other operating expenses
17,033

 
13,138

 
47,040

 
44,373

Acquisition transaction costs
86,703

 

 
86,703

 

Restructuring charges
8,238

 

 
8,238

 

Total expenses
123,366

 
31,844

 
202,627

 
99,328

Income from continuing operations before income taxes
73,355

 
87,878

 
545,387

 
125,112

Provision for (benefit from) income taxes
37,409

 
(5,342
)
 
35,142

 
(21,100
)
Net income from continuing operations
35,946

 
93,220

 
510,245

 
146,212

Income from discontinued operations, net of tax

 
11,518

 

 
39,169

Net income
35,946

 
104,738

 
510,245

 
185,381

Income from discontinued operations attributable to noncontrolling interest

 
2,674

 

 
2,714

Net income attributable to Two Harbors Investment Corp.
35,946

 
102,064

 
510,245

 
182,667

Dividends on preferred stock
18,951

 
8,888

 
46,445

 
13,173

Net income attributable to common stockholders
$
16,995

 
$
93,176

 
$
463,800

 
$
169,494

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

2

Table of Contents



TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited), continued
(in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Basic earnings per weighted average common share:
 
 
 
 
 
 
 
Continuing operations
$
0.08

 
$
0.48

 
$
2.42

 
$
0.76

Discontinued operations

 
0.05

 

 
0.21

Net income
$
0.08

 
$
0.53

 
$
2.42

 
$
0.97

Diluted earnings per weighted average common share:
 
 
 
 
 
 
 
Continuing operations
$
0.08

 
$
0.47

 
$
2.28

 
$
0.76

Discontinued operations

 
0.05

 

 
0.21

Net income
$
0.08

 
$
0.52

 
$
2.28

 
$
0.97

Dividends declared per common share
$
0.47

 
$
0.52

 
$
1.41

 
$
1.54

Weighted average number of shares of common stock:
 
 
 
 
 
 
 
Basic
224,399,436

 
174,488,296

 
191,846,212

 
174,415,232

Diluted
224,399,436

 
188,907,356

 
209,607,146

 
174,415,232

Comprehensive (loss) income:
 
 
 
 
 
 
 
Net income
$
35,946

 
$
104,738

 
$
510,245

 
$
185,381

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
(119,796
)
 
68,433

 
(499,460
)
 
223,823

Other comprehensive (loss) income
(119,796
)
 
68,433

 
(499,460
)
 
223,823

Comprehensive (loss) income
(83,850
)
 
173,171

 
10,785

 
409,204

Comprehensive income attributable to noncontrolling interest

 
2,682

 

 
2,724

Comprehensive (loss) income attributable to Two Harbors Investment Corp.
(83,850
)
 
170,489

 
10,785

 
406,480

Dividends on preferred stock
18,951

 
8,888

 
46,445

 
13,173

Comprehensive (loss) income attributable to common stockholders
$
(102,801
)
 
$
161,601

 
$
(35,660
)
 
$
393,307

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
 
Non-
controlling Interest
 
Total Equity
Balance, December 31, 2016
$

 
$
1,738

 
$
3,661,712

 
$
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 $35,708

 

 

 
215,994

 

 

 
215,994

 
10

 
216,004

Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $2,722

 

 

 
7,815

 

 

 
7,815

 

 
7,815

Other comprehensive income, net of tax expense of $32,986

 

 

 
223,809

 

 

 
223,809

 
10

 
223,819

Contribution of TH Commercial Holdings LLC to Granite Point

 

 
(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
416,966

 

 

 

 

 

 
416,966

 

 
416,966

Issuance of common stock, net of offering costs

 

 
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

 
7

 
12,382

 

 

 

 
12,389

 

 
12,389

Balance, September 30, 2017
$
416,966

 
$
1,745

 
$
3,660,580

 
$
423,042

 
$
2,220,700

 
$
(2,781,469
)
 
$
3,941,564

 
$
189,817

 
$
4,131,381

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
Balance, December 31, 2017
$
702,537

 
$
1,745

 
$
3,672,003

 
$
334,813

 
$
2,386,604

 
$
(3,526,278
)
 
$
3,571,424

 
$

 
$
3,571,424

Cumulative effect of adoption of new accounting principles

 

 
25

 
9,918

 
(9,943
)
 

 

 

 

Adjusted balance, January 1, 2018
702,537

 
1,745

 
3,672,028

 
344,731

 
2,376,661

 
(3,526,278
)
 
3,571,424

 

 
3,571,424

Net income

 

 

 

 
510,245

 

 
510,245

 

 
510,245

Other comprehensive loss before reclassifications, net of tax benefit of $14,890

 

 

 
(552,477
)
 

 

 
(552,477
)
 

 
(552,477
)
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $0

 

 

 
53,017

 

 

 
53,017

 

 
53,017

Other comprehensive loss, net of tax benefit of $14,890

 

 

 
(499,460
)
 

 

 
(499,460
)
 

 
(499,460
)
Acquisition of CYS Investments, Inc.
275,000

 
726

 
1,124,388

 

 

 

 
1,400,114

 

 
1,400,114

Issuance of preferred stock, net of offering costs
13

 

 

 

 

 

 
13

 

 
13

Issuance of common stock, net of offering costs

 

 
329

 

 

 

 
329

 

 
329

Preferred dividends declared

 

 

 

 

 
(46,445
)
 
(46,445
)