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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, 2021
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) 453-4100
(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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 3, 2021, there were 313,883,161 shares of outstanding common stock, par value $0.01 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)
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
ASSETS | (unaudited) | | |
Available-for-sale securities, at fair value (amortized cost $7,547,709 and $14,043,175, respectively; allowance for credit losses $17,765 and $22,528, respectively) | $ | 7,840,046 | | | $ | 14,650,922 | |
| | | |
Mortgage servicing rights, at fair value | 2,020,106 | | | 1,596,153 | |
Cash and cash equivalents | 1,281,230 | | | 1,384,764 | |
Restricted cash | 866,547 | | | 1,261,667 | |
Accrued interest receivable | 31,571 | | | 47,174 | |
Due from counterparties | 85,177 | | | 146,433 | |
Derivative assets, at fair value | 60,376 | | | 95,937 | |
Reverse repurchase agreements | 70,000 | | | 91,525 | |
Other assets | 247,059 | | | 241,346 | |
Total Assets (1) | $ | 12,502,112 | | | $ | 19,515,921 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Repurchase agreements | $ | 8,350,622 | | | $ | 15,143,898 | |
| | | |
Revolving credit facilities | 533,519 | | | 283,830 | |
Term notes payable | 396,183 | | | 395,609 | |
Convertible senior notes | 423,742 | | | 286,183 | |
Derivative liabilities, at fair value | 14,208 | | | 11,058 | |
Due to counterparties | 119,472 | | | 135,838 | |
Dividends payable | 60,507 | | | 65,480 | |
Accrued interest payable | 17,956 | | | 21,666 | |
Commitments and contingencies (see Note 15) | — | | | — | |
Other liabilities | 101,848 | | | 83,433 | |
Total Liabilities (1) | 10,018,057 | | | 16,426,995 | |
Stockholders’ Equity: | | | |
Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 29,050,000 and 40,050,000 shares issued and outstanding, respectively ($726,250 and $1,001,250 liquidation preference, respectively) | 702,550 | | | 977,501 | |
Common stock, par value $0.01 per share; 700,000,000 shares authorized and 273,718,311 and 273,703,882 shares issued and outstanding, respectively | 2,737 | | | 2,737 | |
Additional paid-in capital | 5,170,387 | | | 5,163,794 | |
Accumulated other comprehensive income | 307,249 | | | 641,601 | |
Cumulative earnings | 1,147,953 | | | 1,025,756 | |
Cumulative distributions to stockholders | (4,846,821) | | | (4,722,463) | |
Total Stockholders’ Equity | 2,484,055 | | | 3,088,926 | |
| | | |
| | | |
Total Liabilities and Stockholders’ Equity | $ | 12,502,112 | | | $ | 19,515,921 | |
____________________
(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2021 and December 31, 2020, assets of the VIEs totaled $448,077 and $496,810, and liabilities of the VIEs totaled $441,435 and $477,270, 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 (LOSS) INCOME (unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | |
Interest income: | | | | | | | | |
Available-for-sale securities | | $ | 43,092 | | | $ | 105,730 | | | $ | 98,744 | | | $ | 354,414 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other | | 351 | | | 1,597 | | | 808 | | | 8,420 | | | |
Total interest income | | 43,443 | | | 107,327 | | | 99,552 | | | 362,834 | | | |
Interest expense: | | | | | | | | | | |
Repurchase agreements | | 6,981 | | | 50,811 | | | 15,451 | | | 203,416 | | | |
| | | | | | | | | | |
Revolving credit facilities | | 7,075 | | | 2,826 | | | 11,770 | | | 6,357 | | | |
Term notes payable | | 3,225 | | | 3,553 | | | 6,436 | | | 8,357 | | | |
Convertible senior notes | | 7,126 | | | 4,769 | | | 13,476 | | | 9,545 | | | |
Federal Home Loan Bank advances | | — | | | 155 | | | — | | | 1,747 | | | |
Total interest expense | | 24,407 | | | 62,114 | | | 47,133 | | | 229,422 | | | |
Net interest income | | 19,036 | | | 45,213 | | | 52,419 | | | 133,412 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other (loss) income: | | | | | | | | | | |
(Loss) gain on investment securities | | (41,519) | | | 53,492 | | | 91,349 | | | (1,028,115) | | | |
Servicing income | | 112,816 | | | 112,891 | | | 219,935 | | | 243,688 | | | |
(Loss) gain on servicing asset | | (268,051) | | | (238,791) | | | 59,387 | | | (825,456) | | | |
Gain (loss) on interest rate swap and swaption agreements | | 24,648 | | | (46,922) | | | 9,049 | | | (297,518) | | | |
Gain (loss) on other derivative instruments | | 51,312 | | | 76,606 | | | (224,699) | | | (56,862) | | | |
Other income (loss) | | 41 | | | 66 | | | (5,701) | | | 864 | | | |
Total other (loss) income | | (120,753) | | | (42,658) | | | 149,320 | | | (1,963,399) | | | |
Expenses: | | | | | | | | | | |
Management fees | | — | | | 11,429 | | | — | | | 25,979 | | | |
Servicing expenses | | 18,680 | | | 23,947 | | | 43,627 | | | 43,852 | | | |
| | | | | | | | | | |
Compensation and benefits | | 11,259 | | | 8,127 | | | 19,447 | | | 16,404 | | | |
Other operating expenses | | 7,218 | | | 5,711 | | | 14,705 | | | 12,512 | | | |
| | | | | | | | | | |
Restructuring charges | | — | | | 145,069 | | | — | | | 145,788 | | | |
Total expenses | | 37,157 | | | 194,283 | | | 77,779 | | | 244,535 | | | |
(Loss) income before income taxes | | (138,874) | | | (191,728) | | | 123,960 | | | (2,074,522) | | | |
(Benefit from) provision for income taxes | | (20,914) | | | (18,164) | | | 1,763 | | | (31,302) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net (loss) income | | (117,960) | | | (173,564) | | | 122,197 | | | (2,043,220) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends on preferred stock | | 13,747 | | | 18,951 | | | 30,963 | | | 37,901 | | | |
Net (loss) income attributable to common stockholders | | $ | (131,707) | | | $ | (192,515) | | | $ | 91,234 | | | $ | (2,081,121) | | | |
Basic (loss) earnings per weighted average common share | | $ | (0.48) | | | $ | (0.70) | | | $ | 0.33 | | | $ | (7.61) | | | |
Diluted (loss) earnings per weighted average common share | | $ | (0.48) | | | $ | (0.70) | | | $ | 0.32 | | | $ | (7.61) | | | |
Dividends declared per common share | | $ | 0.17 | | | $ | 0.19 | | | $ | 0.34 | | | $ | 0.19 | | | |
Weighted average number of shares of common stock: | | | | | | | | | | |
Basic | | 273,718,561 | | | 273,604,079 | | | 273,714,684 | | | 273,498,347 | | | |
Diluted | | 273,718,561 | | | 273,604,079 | | | 305,999,203 | | | 273,498,347 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited), continued
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | |
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Comprehensive (loss) income: | | | | | | | | | | |
Net (loss) income | | $ | (117,960) | | | $ | (173,564) | | | $ | 122,197 | | | $ | (2,043,220) | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | |
Unrealized (loss) gain on available-for-sale securities | | (62,899) | | | 192,794 | | | (334,352) | | | (5,276) | | | |
Other comprehensive (loss) income | | (62,899) | | | 192,794 | | | (334,352) | | | (5,276) | | | |
Comprehensive (loss) income | | (180,859) | | | 19,230 | | | (212,155) | | | (2,048,496) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends on preferred stock | | 13,747 | | | 18,951 | | | 30,963 | | | 37,901 | | | |
Comprehensive (loss) income attributable to common stockholders | | $ | (194,606) | | | $ | 279 | | | $ | (243,118) | | | $ | (2,086,397) | | | |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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 | — | | | — | | | — | | | 234,926 | | | — | | | — | | | 234,926 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (432,996) | | | — | | | — | | | (432,996) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (198,070) | | | — | | | — | | | (198,070) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Issuance of common stock, net of offering costs | — | | | — | | | 142 | | | — | | | — | | | — | | | 142 | |
Repurchase of common stock | — | | | (1) | | | (1,063) | | | — | | | — | | | — | | | (1,064) | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
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 | | | (4,509,819) | | | 2,904,133 | |
| | | | | | | | | | | | | |
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Net loss | — | | | — | | | — | | | — | | | (173,564) | | | — | | | (173,564) | |
Other comprehensive income before reclassifications, net of tax | — | | | — | | | — | | | 231,099 | | | — | | | — | | | 231,099 | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (38,305) | | | — | | | — | | | (38,305) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 192,794 | | | — | | | — | | | 192,794 | |
| | | | | | | | | | | | | |
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Issuance of common stock, net of offering costs | — | | | — | | | 95 | | | — | | | — | | | — | | | 95 | |
| | | | | | | | | | | | | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (37,901) | | | (37,901) | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (51,936) | | | (51,936) | |
| | | | | | | | | | | | | |
Non-cash equity award compensation | — | | | 2 | | | 2,313 | | | — | | | — | | | — | | | 2,315 | |
Balance, June 30, 2020 | $ | 977,501 | | | $ | 2,737 | | | $ | 5,158,559 | | | $ | 684,124 | | | $ | 612,671 | | | $ | (4,599,656) | | | $ | 2,835,936 | |
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Balance, December 31, 2020 | $ | 977,501 | | | $ | 2,737 | | | $ | 5,163,794 | | | $ | 641,601 | | | $ | 1,025,756 | | | $ | (4,722,463) | | | $ | 3,088,926 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 240,157 | | | — | | | 240,157 | |
Other comprehensive loss before reclassifications, net of tax | — | | | — | | | — | | | (202,888) | | | — | | | — | | | (202,888) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (68,565) | | | — | | | — | | | (68,565) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (271,453) | | | — | | | — | | | (271,453) | |
| | | | | | | | | | | | | |
Redemption of preferred stock | (274,951) | | | — | | | — | | | — | | | — | | | — | | | (274,951) | |
Issuance of common stock, net of offering costs | — | | | — | | | 99 | | | — | | | — | | | — | | | 99 | |
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Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (17,216) | | | (17,216) | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (46,636) | | | (46,636) | |
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Non-cash equity award compensation | — | | | — | | | 1,790 | | | — | | | — | | | — | | | 1,790 | |
Balance, March 31, 2021 | 702,550 | | | 2,737 | | | 5,165,683 | | | 370,148 | | | 1,265,913 | | | (4,786,315) | | | 2,720,716 | |
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Net loss | — | | | — | | | — | | | — | | | (117,960) | | | — | | | (117,960) | |
Other comprehensive loss before reclassifications, net of tax | — | | | — | | | — | | | (57,799) | | | — | | | — | | | (57,799) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | — | | | — | | | — | | | (5,100) | | | — | | | — | | | (5,100) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (62,899) | | | — | | | — | | | (62,899) | |
| | | | | | | | | | | | | |
Issuance of common stock, net of offering costs | — | | | — | | | 93 | | | — | | | — | | | — | | | 93 | |
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Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (13,747) | | | (13,747) | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (46,759) | | | (46,759) | |
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Non-cash equity award compensation | — | | | — | | | 4,611 | | | — | | | — | | | — | | | 4,611 | |
Balance, June 30, 2021 | $ | 702,550 | | | $ | 2,737 | | | $ | 5,170,387 | | | $ | 307,249 | | | $ | 1,147,953 | | | $ | (4,846,821) | | | $ | 2,484,055 | |
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)
| | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2021 | | 2020 | | |
Cash Flows From Operating Activities: | | | | | | |
Net income (loss) | | $ | 122,197 | | | $ | (2,043,220) | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Amortization of premiums and discounts on investment securities, net | | 134,581 | | | 102,562 | | | |
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes | | 1,321 | | | 1,107 | | | |
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Provision for credit losses on investment securities | | 6,257 | | | 46,831 | | | |
Realized and unrealized (gains) losses on investment securities | | (97,606) | | | 981,284 | | | |
(Gain) loss on servicing asset | | (59,387) | | | 825,456 | | | |
| | | | | | |
Realized and unrealized (gain) loss on interest rate swaps and swaptions | | (5,001) | | | 228,571 | | | |
Unrealized loss (gain) on other derivative instruments | | 27,063 | | | (43,542) | | | |
Equity based compensation | | 6,401 | | | 4,630 | | | |
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Net change in assets and liabilities: | | | | | | |
Decrease in accrued interest receivable | | 15,603 | | | 39,154 | | | |
Decrease (increase) in deferred income taxes, net | | 3,534 | | | (50,265) | | | |
Decrease in accrued interest payable | | (3,710) | | | (112,916) | | | |
Change in other operating assets and liabilities, net | | (832) | | | 172,721 | | | |
| | | | | | |
Net cash provided by operating activities | | 150,421 | | | 152,373 | | | |
Cash Flows From Investing Activities: | | | | | | |
Purchases of available-for-sale securities | | (152,743) | | | (6,433,561) | | | |
Proceeds from sales of available-for-sale securities | | 4,600,545 | | | 16,969,870 | | | |
Principal payments on available-for-sale securities | | 1,985,490 | | | 2,059,816 | | | |
Purchases of trading securities | | — | | | (1,052,500) | | | |
Proceeds from sales of trading securities | | — | | | 1,053,477 | | | |
Purchases of mortgage servicing rights, net of purchase price adjustments | | (364,566) | | | (193,393) | | | |
(Payments for) proceeds from sales of mortgage servicing rights, net | | — | | | (1,814) | | | |
(Purchases) short sales of derivative instruments, net | | (1,232) | | | (19,042) | | | |
Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net | | 17,881 | | | (93,905) | | | |
| | | | | | |
| | | | | | |
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Payments for reverse repurchase agreements | | (480,344) | | | (1,802,388) | | | |
Proceeds from reverse repurchase agreements | | 501,869 | | | 1,945,972 | | | |
| | | | | | |
| | | | | | |
Increase in due to counterparties, net | | 44,890 | | | 406,598 | | | |
Change in other investing assets and liabilities, net | | 10,000 | | | 2,508 | | | |
| | | | | | |
Net cash provided by investing activities | | $ | 6,161,790 | | | $ | 12,841,638 | | | |
| | | | | | |
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)
| | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2021 | | 2020 | | |
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Cash Flows From Financing Activities: | | | | | | |
Proceeds from repurchase agreements | | $ | 19,730,790 | | | $ | 58,261,313 | | | |
Principal payments on repurchase agreements | | (26,524,066) | | | (70,417,528) | | | |
| | | | | | |
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Proceeds from revolving credit facilities | | 261,500 | | | 83,000 | | | |
Principal payments on revolving credit facilities | | (11,811) | | | (115,819) | | | |
| | | | | | |
| | | | | | |
Proceeds from convertible senior notes | | 279,930 | | | — | | | |
Repurchase of convertible senior notes | | (143,118) | | | — | | | |
Proceeds from Federal Home Loan Bank advances | | — | | | 585,000 | | | |
Principal payments on Federal Home Loan Bank advances | | — | | | (795,000) | | | |
| | | | | | |
Redemption of preferred stock | | (274,951) | | | — | | | |
Proceeds from issuance of common stock, net of offering costs | | 192 | | | 237 | | | |
| | | | | | |
| | | | | | |
Repurchase of common stock | | — | | | (1,064) | | | |
Dividends paid on preferred stock | | (36,165) | | | (37,901) | | | |
Dividends paid on common stock | | (93,166) | |