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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2020
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.) |
| | | | | | | | | | | |
601 Carlson Parkway, Suite 1400 | | | |
Minnetonka, | Minnesota | | 55305 |
(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.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 4, 2020, there were 273,706,777 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 | |
Item 1. | Financial Statements (unaudited) | |
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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
(in thousands, except share data)
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| June 30, 2020 | | December 31, 2019 |
ASSETS | (unaudited) | | |
Available-for-sale securities, at fair value (amortized cost $17,030,405; allowance for credit losses $42,583) | $ | 17,673,289 | | | $ | 31,406,328 | |
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Mortgage servicing rights, at fair value | 1,279,195 | | | 1,909,444 | |
Cash and cash equivalents | 1,615,639 | | | 558,136 | |
Restricted cash | 434,644 | | | 1,058,690 | |
Accrued interest receivable | 53,480 | | | 92,634 | |
Due from counterparties | 72,010 | | | 318,963 | |
Derivative assets, at fair value | 110,527 | | | 188,051 | |
Reverse repurchase agreements | 76,416 | | | 220,000 | |
Other assets | 167,122 | | | 169,376 | |
Total Assets (1) | $ | 21,482,322 | | | $ | 35,921,622 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities | | | |
Repurchase agreements | $ | 16,991,248 | | | $ | 29,147,463 | |
Federal Home Loan Bank advances | — | | | 210,000 | |
Revolving credit facilities | 267,181 | | | 300,000 | |
Term notes payable | 395,048 | | | 394,502 | |
Convertible senior notes | 285,515 | | | 284,954 | |
Derivative liabilities, at fair value | 1,298 | | | 6,740 | |
Due to counterparties | 419,092 | | | 259,447 | |
Dividends payable | 57,269 | | | 128,125 | |
Accrued interest payable | 36,710 | | | 149,626 | |
Commitments and contingencies (see Note 16) | — | | | — | |
Other liabilities | 193,025 | | | 70,299 | |
Total Liabilities (1) | 18,646,386 | | | 30,951,156 | |
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 273,700,059 and 272,935,731 shares issued and outstanding, respectively | 2,737 | | | 2,729 | |
Additional paid-in capital | 5,158,559 | | | 5,154,764 | |
Accumulated other comprehensive income | 684,124 | | | 689,400 | |
Cumulative earnings | 612,671 | | | 2,655,891 | |
Cumulative distributions to stockholders | (4,599,656) | | | (4,509,819) | |
Total Stockholders’ Equity | 2,835,936 | | | 4,970,466 | |
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Total Liabilities and Stockholders’ Equity | $ | 21,482,322 | | | $ | 35,921,622 | |
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(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2020 and December 31, 2019, assets of the VIEs totaled $395,447 and $395,008, and liabilities of the VIEs totaled $395,447 and $395,008, 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 (LOSS) (unaudited)
(in thousands, except share data)
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| | Three Months Ended | | | | Six Months Ended | | | | |
| | June 30, | | | | June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Interest income: | | | | | | | | | | |
Available-for-sale securities | | $ | 105,730 | | | $ | 253,807 | | | $ | 354,414 | | | $ | 489,693 | | | |
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Other | | 1,597 | | | 7,222 | | | 8,420 | | | 16,819 | | | |
Total interest income | | 107,327 | | | 261,029 | | | 362,834 | | | 506,512 | | | |
Interest expense: | | | | | | | | | | |
Repurchase agreements | | 50,811 | | | 177,351 | | | 203,416 | | | 324,911 | | | |
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Federal Home Loan Bank advances | | 155 | | | 3,941 | | | 1,747 | | | 10,015 | | | |
Revolving credit facilities | | 2,826 | | | 6,196 | | | 6,357 | | | 11,352 | | | |
Term notes payable | | 3,553 | | | 231 | | | 8,357 | | | 231 | | | |
Convertible senior notes | | 4,769 | | | 4,724 | | | 9,545 | | | 9,459 | | | |
Total interest expense | | 62,114 | | | 192,443 | | | 229,422 | | | 355,968 | | | |
Net interest income | | 45,213 | | | 68,586 | | | 133,412 | | | 150,544 | | | |
Other-than-temporary impairments: | | | | | | | | | | |
Total other-than-temporary impairment losses | | — | | | (4,848) | | | — | | | (5,054) | | | |
Other income (loss): | | | | | | | | | | |
Gain (loss) on investment securities | | 53,492 | | | 22,441 | | | (1,028,115) | | | 3,149 | | | |
Servicing income | | 112,891 | | | 130,949 | | | 243,688 | | | 247,897 | | | |
Loss on servicing asset | | (238,791) | | | (252,432) | | | (825,456) | | | (441,406) | | | |
Loss on interest rate swap, cap and swaption agreements | | (46,922) | | | (88,775) | | | (297,518) | | | (172,034) | | | |
Gain (loss) on other derivative instruments | | 76,606 | | | 80,664 | | | (56,862) | | | 184,942 | | | |
Other income (loss) | | 66 | | | (341) | | | 864 | | | (218) | | | |
Total other loss | | (42,658) | | | (107,494) | | | (1,963,399) | | | (177,670) | | | |
Expenses: | | | | | | | | | | |
Management fees | | 11,429 | | | 13,635 | | | 25,979 | | | 25,717 | | | |
Servicing expenses | | 23,947 | | | 16,746 | | | 43,852 | | | 36,658 | | | |
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Other operating expenses | | 13,838 | | | 14,013 | | | 28,916 | | | 29,569 | | | |
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Restructuring charges | | 145,069 | | | — | | | 145,788 | | | — | | | |
Total expenses | | 194,283 | | | 44,394 | | | 244,535 | | | 91,944 | | | |
Loss before income taxes | | (191,728) | | | (88,150) | | | (2,074,522) | | | (124,124) | | | |
(Benefit from) provision for income taxes | | (18,164) | | | 2,407 | | | (31,302) | | | (7,632) | | | |
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Net loss | | (173,564) | | | (90,557) | | | (2,043,220) | | | (116,492) | | | |
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Dividends on preferred stock | | 18,951 | | | 18,950 | | | 37,901 | | | 37,900 | | | |
Net loss attributable to common stockholders | | $ | (192,515) | | | $ | (109,507) | | | $ | (2,081,121) | | | $ | (154,392) | | | |
Basic loss per weighted average common share | | $ | (0.70) | | | $ | (0.40) | | | $ | (7.61) | | | $ | (0.59) | | | |
Diluted loss per weighted average common share | | $ | (0.70) | | | $ | (0.40) | | | $ | (7.61) | | | $ | (0.59) | | | |
Dividends declared per common share | | $ | 0.19 | | | $ | 0.40 | | | $ | 0.19 | | | $ | 0.87 | | | |
Weighted average number of shares of common stock: | | | | | | | | | | |
Basic | | 273,604,079 | | | 272,863,153 | | | 273,498,347 | | | 262,667,160 | | | |
Diluted | | 273,604,079 | | | 272,863,153 | | | 273,498,347 | | | 262,667,160 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited), continued
(in thousands, except share data)
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| | Three Months Ended | | | | Six Months Ended | | | | |
| | June 30, | | | | June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
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Comprehensive income (loss): | | | | | | | | | | |
Net loss | | $ | (173,564) | | | $ | (90,557) | | | $ | (2,043,220) | | | $ | (116,492) | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | | 192,794 | | | 310,549 | | | (5,276) | | | 666,701 | | | |
Other comprehensive income (loss) | | 192,794 | | | 310,549 | | | (5,276) | | | 666,701 | | | |
Comprehensive income (loss) | | 19,230 | | | 219,992 | | | (2,048,496) | | | 550,209 | | | |
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Dividends on preferred stock | | 18,951 | | | 18,950 | | | 37,901 | | | 37,900 | | | |
Comprehensive income (loss) attributable to common stockholders | | $ | 279 | | | $ | 201,042 | | | $ | (2,086,397) | | | $ | 512,309 | | | |
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)
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| 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 | | | 2,481 | | | 4,809,616 | | | 110,817 | | | 2,331,929 | | | (3,978,297) | | | 4,254,047 | |
Net loss | — | | | — | | | — | | | — | | | (25,935) | | | — | | | (25,935) | |
Other comprehensive income before reclassifications, net of tax | — | | | — | | | — | | | 327,840 | | | — | | | — | | | 327,840 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | 28,312 | | | — | | | — | | | 28,312 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 356,152 | | | — | | | — | | | 356,152 | |
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Issuance of common stock, net of offering costs | — | | | 243 | | | 335,035 | | | — | | | — | | | — | | | 335,278 | |
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Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (18,950) | | | (18,950) | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (128,229) | | | (128,229) | |
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Non-cash equity award compensation | — | | | 4 | | | 1,857 | | | — | | | — | | | — | | | 1,861 | |
Balance, March 31, 2019 | 977,501 | | | 2,728 | | | 5,146,508 | | | 466,969 | | | 2,305,994 | | | (4,125,476) | | | 4,774,224 | |
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Net loss | — | | | — | | | — | | | — | | | (90,557) | | | — | | | (90,557) | |
Other comprehensive income before reclassifications, net of tax | — | | | — | | | — | | | 296,637 | | | — | | | — | | | 296,637 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | 13,912 | | | — | | | — | | | 13,912 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 310,549 | | | — | | | — | | | 310,549 | |
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Issuance of common stock, net of offering costs | — | | | — | | | 171 | | | — | | | — | | | — | | | 171 | |
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Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (18,950) | | | (18,950) | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (109,160) | | | (109,160) | |
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Non-cash equity award compensation | — | | | 1 | | | 2,496 | | | — | | | — | | | — | | | 2,497 | |
Balance, June 30, 2019 | $ | 977,501 | | | $ | 2,729 | | | $ | 5,149,175 | | | $ | 777,518 | | | $ | 2,215,437 | | | $ | (4,253,586) | | | $ | 4,868,774 | |
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Balance, December 31, 2019 | $ | 977,501 | | | $ | 2,729 | | | $ | 5,154,764 | | | $ | 689,400 | | | $ | 2,655,891 | | | $ | (4,509,819) | | | $ | 4,970,466 | |
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Net loss | — | | | — | | | — | | | — | | | (1,869,656) | | | — | | | (1,869,656) | |
Other comprehensive income before reclassifications, net of tax | — | | | — | | | — | | | 193,536 | | | — | | | — | | | 193,536 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (391,606) | | | — | | | — | | | (391,606) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (198,070) | | | — | | | — | | | (198,070) | |
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Issuance of common stock, net of offering costs | — | | | — | | | 142 | | | — | | | — | | | — | | | 142 | |
Repurchase of common stock | — | | | (1) | | | (1,063) | | | — | | | — | | | — | | | (1,064) | |
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Non-cash equity award compensation | — | | | 7 | | | 2,308 | | | — | | | — | | | — | | | 2,315 | |
Balance, March 31, 2020 | 977,501 | | | 2,735 | | | 5,156,151 | | | 491,330 | | | 786,235 | |