Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
ASSETS
|
(unaudited)
|
|
|
Available-for-sale securities, at fair value (amortized cost $11,067,188 and $14,043,175, respectively; allowance for credit losses $18,170 and $22,528, respectively)
|
$
|
11,473,390
|
|
|
$
|
14,650,922
|
|
|
|
|
|
Mortgage servicing rights, at fair value
|
2,091,761
|
|
|
1,596,153
|
|
Cash and cash equivalents
|
1,159,306
|
|
|
1,384,764
|
|
Restricted cash
|
812,654
|
|
|
1,261,667
|
|
Accrued interest receivable
|
40,527
|
|
|
47,174
|
|
Due from counterparties
|
60,293
|
|
|
146,433
|
|
Derivative assets, at fair value
|
55,145
|
|
|
95,937
|
|
Reverse repurchase agreements
|
76,000
|
|
|
91,525
|
|
Other assets
|
222,839
|
|
|
241,346
|
|
Total Assets (1)
|
$
|
15,991,915
|
|
|
$
|
19,515,921
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Liabilities:
|
|
|
|
Repurchase agreements
|
$
|
11,676,062
|
|
|
$
|
15,143,898
|
|
|
|
|
|
Revolving credit facilities
|
443,458
|
|
|
283,830
|
|
Term notes payable
|
395,891
|
|
|
395,609
|
|
Convertible senior notes
|
423,337
|
|
|
286,183
|
|
Derivative liabilities, at fair value
|
16,162
|
|
|
11,058
|
|
Due to counterparties
|
144,270
|
|
|
135,838
|
|
Dividends payable
|
60,384
|
|
|
65,480
|
|
Accrued interest payable
|
11,906
|
|
|
21,666
|
|
Commitments and contingencies (see Note 15)
|
—
|
|
|
—
|
|
Other liabilities
|
99,729
|
|
|
83,433
|
|
Total Liabilities (1)
|
13,271,199
|
|
|
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 273,718,537 and 273,703,882 shares issued and outstanding, respectively
|
2,737
|
|
|
2,737
|
|
Additional paid-in capital
|
5,165,683
|
|
|
5,163,794
|
|
Accumulated other comprehensive income
|
370,148
|
|
|
641,601
|
|
Cumulative earnings
|
1,265,913
|
|
|
1,025,756
|
|
Cumulative distributions to stockholders
|
(4,786,315)
|
|
|
(4,722,463)
|
|
Total Stockholders’ Equity
|
2,720,716
|
|
|
3,088,926
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
15,991,915
|
|
|
$
|
19,515,921
|
|
____________________
(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At March 31, 2021 and December 31, 2020, assets of the VIEs totaled $438,019 and $496,810, and liabilities of the VIEs totaled $432,059 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 (unaudited)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
55,652
|
|
|
$
|
248,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
457
|
|
|
6,823
|
|
|
|
|
|
|
|
Total interest income
|
|
56,109
|
|
|
255,507
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
8,470
|
|
|
152,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
4,695
|
|
|
3,531
|
|
|
|
|
|
|
|
Term notes payable
|
|
3,211
|
|
|
4,804
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
6,350
|
|
|
4,776
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
—
|
|
|
1,592
|
|
|
|
|
|
|
|
Total interest expense
|
|
22,726
|
|
|
167,308
|
|
|
|
|
|
|
|
Net interest income
|
|
33,383
|
|
|
88,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investment securities
|
|
132,868
|
|
|
(1,081,607)
|
|
|
|
|
|
|
|
Servicing income
|
|
107,119
|
|
|
130,797
|
|
|
|
|
|
|
|
Gain (loss) on servicing asset
|
|
327,438
|
|
|
(586,665)
|
|
|
|
|
|
|
|
Loss on interest rate swap and swaption agreements
|
|
(15,599)
|
|
|
(250,596)
|
|
|
|
|
|
|
|
Loss on other derivative instruments
|
|
(276,011)
|
|
|
(133,468)
|
|
|
|
|
|
|
|
Other (loss) income
|
|
(5,742)
|
|
|
798
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
270,073
|
|
|
(1,920,741)
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
—
|
|
|
14,550
|
|
|
|
|
|
|
|
Servicing expenses
|
|
24,947
|
|
|
19,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
8,188
|
|
|
8,277
|
|
|
|
|
|
|
|
Other operating expenses
|
|
7,487
|
|
|
6,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
—
|
|
|
719
|
|
|
|
|
|
|
|
Total expenses
|
|
40,622
|
|
|
50,252
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
262,834
|
|
|
(1,882,794)
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
22,677
|
|
|
(13,138)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
240,157
|
|
|
(1,869,656)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
17,216
|
|
|
18,950
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
222,941
|
|
|
$
|
(1,888,606)
|
|
|
|
|
|
|
|
Basic earnings (loss) per weighted average common share
|
|
$
|
0.81
|
|
|
$
|
(6.91)
|
|
|
|
|
|
|
|
Diluted earnings (loss) per weighted average common share
|
|
$
|
0.74
|
|
|
$
|
(6.91)
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.17
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
273,710,765
|
|
|
273,392,615
|
|
|
|
|
|
|
|
Diluted
|
|
311,465,060
|
|
|
273,392,615
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited), continued
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
240,157
|
|
|
$
|
(1,869,656)
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities
|
|
(271,453)
|
|
|
(198,070)
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
(271,453)
|
|
|
(198,070)
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
(31,296)
|
|
|
(2,067,726)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
17,216
|
|
|
18,950
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders
|
|
$
|
(48,512)
|
|
|
$
|
(2,086,676)
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,216)
|
|
|
(17,216)
|
|
|
|
|
|
Common dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46,636)
|
|
|
(46,636)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2021
|
|
2020
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
240,157
|
|
|
$
|
(1,869,656)
|
|
|
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
Amortization of premiums and discounts on investment securities, net
|
|
71,955
|
|
|
41,387
|
|
|
|
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes
|
|
642
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
(Reversal of) provision for credit losses on investment securities
|
|
(1,135)
|
|
|
45,638
|
|
|
|
Realized and unrealized (gains) losses on investment securities
|
|
(131,733)
|
|
|
1,035,969
|
|
|
|
(Gain) loss on servicing asset
|
|
(327,438)
|
|
|
586,665
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized loss on interest rate swaps and swaptions
|
|
17,249
|
|
|
237,980
|
|
|
|
Unrealized loss on other derivative instruments
|
|
43,466
|
|
|
64,589
|
|
|
|
Equity based compensation
|
|
1,790
|
|
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in assets and liabilities:
|
|
|
|
|
|
|
Decrease in accrued interest receivable
|
|
6,647
|
|
|
34,780
|
|
|
|
Decrease (increase) in deferred income taxes, net
|
|
24,546
|
|
|
(44,090)
|
|
|
|
Decrease in accrued interest payable
|
|
(9,760)
|
|
|
(70,083)
|
|
|
|
Change in other operating assets and liabilities, net
|
|
257
|
|
|
34,158
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
(63,357)
|
|
|
100,206
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
(131,315)
|
|
|
(4,354,636)
|
|
|
|
Proceeds from sales of available-for-sale securities
|
|
2,050,943
|
|
|
15,586,752
|
|
|
|
Principal payments on available-for-sale securities
|
|
1,047,364
|
|
|
1,119,117
|
|
|
|
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
|
|
(168,170)
|
|
|
(180,951)
|
|
|
|
(Payments for) proceeds from sales of mortgage servicing rights, net
|
|
—
|
|
|
(1,433)
|
|
|
|
(Purchases) short sales of derivative instruments, net
|
|
(64)
|
|
|
(3,630)
|
|
|
|
(Payments for termination and settlement) proceeds from sales and settlement of derivative instruments, net
|
|
(14,755)
|
|
|
(58,840)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for reverse repurchase agreements
|
|
(304,875)
|
|
|
(1,591,621)
|
|
|
|
Proceeds from reverse repurchase agreements
|
|
320,400
|
|
|
614,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in due to counterparties, net
|
|
94,572
|
|
|
(321,110)
|
|
|
|
Change in other investing assets and liabilities, net
|
|
10,000
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
$
|
2,904,100
|
|
|
$
|
10,809,889
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
Proceeds from repurchase agreements
|
|
$
|
11,976,033
|
|
|
$
|
35,793,417
|
|
|
|
Principal payments on repurchase agreements
|
|
(15,443,869)
|
|
|
(46,096,150)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facilities
|
|
164,000
|
|
|
25,000
|
|
|
|
Principal payments on revolving credit facilities
|
|
(4,372)
|
|
|
(72,857)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible senior notes
|
|
279,912
|
|
|
—
|
|
|
|
Repurchase of convertible senior notes
|
|
(143,118)
|
|
|
—
|
|
|
|
Proceeds from Federal Home Loan Bank advances
|
|
—
|
|
|
585,000
|
|
|
|
Principal payments on Federal Home Loan Bank advances
|
|
—
|
|
|
(745,000)
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred stock
|
|
(274,951)
|
|
|
—
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
99
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
—
|
|
|
(1,064)
|
|
|
|
Dividends paid on preferred stock
|
|
(22,418)
|
|
|
(18,950)
|
|
|
|
Dividends paid on common stock
|
|
(46,530)
|
|
|
(109,175)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(3,515,214)
|
|
|
(10,639,637)
|
|
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
|
(674,471)
|
|
|
270,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
2,646,431
|
|
|
1,616,826
|
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
1,971,960
|
|
|
$
|
1,887,284
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
Cash paid for interest
|
|
$
|
30,908
|
|
|
$
|
236,043
|
|
|
|
Cash paid for taxes, net
|
|
$
|
—
|
|
|
$
|
119
|
|
|
|
Noncash Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid at end of period
|
|
$
|
60,384
|
|
|
$
|
—
|
|
|
|
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. is a Maryland corporation that, through its wholly owned subsidiaries (collectively, the Company), invests in and manages Agency residential mortgage-backed securities, or Agency RMBS, mortgage servicing rights, or MSR, and other financial assets. The investment portfolio as a whole is managed by the Company’s Chief Investment Officer and resources are allocated and financial performance is assessed on a consolidated basis. The Company’s common stock is listed on the NYSE under the symbol “TWO”.
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.
In the first quarter of 2020, the Company experienced unprecedented market conditions as a result of the global COVID-19 pandemic, including unusually significant spread widening in both Agency RMBS and non-Agency securities. In response, the Company focused its efforts on raising excess liquidity and de-risking its portfolio. On March 25, 2020, the Company sold substantially all of its non-Agency securities in order to eliminate the risks posed by continued margin calls and ongoing funding concerns associated with the significant spread widening on these assets. The Company also sold approximately one-third of its Agency RMBS in order to reduce risk and raise cash to establish a strong defensive liquidity position to weather potential ongoing economic and market instability. Since then, the Company has focused on the composition of its Agency RMBS and MSR portfolio, deploying risk as the market entered a period of stabilization and asset price recovery. Going forward, management expects the Company’s capital to be fully allocated to its strategy of pairing Agency RMBS and MSR.
Through August 14, 2020, the Company was externally managed and advised by PRCM Advisers LLC, a subsidiary of Pine River Capital Management L.P., under the terms of a Management Agreement between the Company and PRCM Advisers. The Company terminated the Management Agreement effective August 14, 2020 for “cause” in accordance with Section 15(a) thereof. On August 15, 2020, the Company completed its transition to self-management and directly hired the senior management team and other personnel who had historically provided services to the Company.
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.
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. All trust entities in which the Company holds investments that are considered variable interest entities, or 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. Certain prior period amounts have been reclassified to conform to the current period presentation. 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, 2020. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2021 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2021 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)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain 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 in the market, 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.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 2020 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies.
Recently Issued and/or Adopted Accounting Standards
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets and certain other instruments. Allowances for credit losses on AFS debt securities are recognized, rather than direct reductions in the amortized cost of the investments, regardless of whether the impairment is considered to be other-than-temporary. 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.
The Company uses a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. The estimated allowance for credit losses is equal to the difference between the prepayment adjusted contractual cash flows with no credit losses and the prepayment adjusted expected cash flows with credit losses, discounted at the effective interest rate on the AFS security that was in effect upon adoption of the standard. The contractual cash flows and expected cash flows are based on management’s best estimate and take into consideration current prepayment assumptions, lifetime expected losses based on past loss experience, current market conditions, and reasonable and supportable forecasts of future conditions. The allowance for credit losses causes an increase in the AFS security amortized cost and recognizes an allowance for credit losses in the same amount. The allowance for credit losses recognized in connection with adopting the guidance in Topic 326 on January 1, 2020 was equal to the present value of the credit reserve in place on December 31, 2019. As a result, no cumulative effect adjustment to opening cumulative earnings was required.
The adoption of this ASU impacts the Company’s accounting for the purchase of certain beneficial interests with purchased credit deterioration or when there is a “significant” difference between contractual cash flows and expected cash flows. For these securities, the Company records an allowance for credit losses with an increase in amortized cost above the purchase price of the same amount. Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses, respectively. Adverse changes are reflected as an increase to the allowance for credit losses and favorable changes are reflected as a decrease to the allowance for credit losses. The allowance for credit losses is limited to the difference between the beneficial interest’s fair value and its amortized cost, and any remaining adverse changes in these circumstances are reflected as a prospective adjustment to accretable yield. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective adjustment to accretable yield. The Company does not adjust the effective interest rate in subsequent periods for prepayment assumption changes or variable-rate changes. Any changes in the allowance for credit losses due to the time-value-of-money are accounted for in the condensed consolidated statements of comprehensive loss as provision for credit losses rather than a reduction to interest income. Any portion of the AFS securities that is deemed uncollectible results in a write-off of the uncollectible amortized cost with a corresponding reduction to the allowance for credit losses. Recoveries of amounts previously written off results in an increase to the allowance for credit losses.
The standard applies to Agency and non-Agency securities that are accounted for as beneficial interests under Accounting Standards Codification (ASC) 325-40, Investments-Other: Beneficial Interests in Securitized Financial Assets, and ASC 310-30, Receivables: Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. Only beneficial interests that were previously accounted for as purchased credit impaired under ASC 310-30 were accounted for as purchased credit deteriorated under Topic 326 on the transition date.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Upon adoption of this ASU, the Company established an allowance for credit losses on AFS securities accounted for as purchased credit-impaired assets under ASC 310-30 in an unrealized loss position and with no other-than-temporary impairments, or OTTI, recognized in periods prior to transition. The effective interest rates on these debt securities remained unchanged. On January 1, 2020, the $30.7 billion net amortized cost basis of AFS securities was inclusive of a $244.9 million allowance for credit loss.
The Company used a prospective transition approach for debt securities for which OTTI had been recognized prior to January 1, 2020. As a result, the amortized cost basis remained the same before and after the effective date. The effective interest rate on these debt securities also remained unchanged. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flows expected to be collected are accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 are recorded in earnings when received.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, which provides temporary optional expedients and exceptions on accounting for contract modifications and hedging relationships in anticipation of the replacement of the London Interbank Offered Rate, or LIBOR, with another reference rate. The guidance also provides a one-time election to sell held-to-maturity debt securities or to transfer such securities to the available-for-sale or trading category. The ASU was effective immediately for all entities and expires after December 31, 2022. The Company’s adoption of this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.
Issuer’s Accounting for Debt and Equity Instruments
In August 2020, the FASB issued ASU No. 2020-06 to simplify an issuer’s accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity. Under the new guidance, only conversion features associated with a convertible debt instrument issued at a substantial premium and those that are considered embedded derivatives in accordance with derivatives guidance will be accounted for separate from the convertible instrument. Additionally, for contracts in an entity’s own equity, the new guidance eliminates some of the requirements for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2021, with early adoption permitted. The early adoption of the ASU’s guidance results in the Company accounting for a convertible debt instrument without separately presenting in stockholders’ equity an embedded conversion feature. The Company accounts for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815, Derivatives and Hedging, or ASC 815, or (2) a convertible debt instrument was issued at a substantial premium. The Company’s early adoption of this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.
Note 3. Variable Interest Entities
During the year ended December 31, 2019, the Company formed a trust entity, or the MSR Issuer Trust, for the purpose of financing MSR through securitization, pursuant to which, through two of the Company’s wholly owned subsidiaries, MSR is pledged to the MSR Issuer Trust and in return, the MSR Issuer Trust issues term notes to qualified institutional buyers and a variable funding note, or VFN, to one of the subsidiaries, in each case secured on a pari passu basis. In connection with the transaction, the Company also entered into a repurchase facility that is secured by the VFN issued in connection with the MSR securitization transaction, which is collateralized by the Company’s MSR.
During the year ended December 31, 2020, the Company formed a trust entity, or the Servicing Advance Receivables Issuer Trust, for the purpose of financing servicing advances through a revolving credit facility, pursuant to which the Servicing Advance Receivables Issuer Trust issued a VFN backed by servicing advances pledged to the financing counterparty.
Both the MSR Issuer Trust and the Servicing Advance Receivables Issuer Trust are considered VIEs for financial reporting purposes and, thus, were reviewed for consolidation under the applicable consolidation guidance. As 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. Additionally, in accordance with arrangements entered into in connection with the securitization transaction and the servicing advance revolving credit facility, the Company has direct financial obligations payable to both the MSR Issuer Trust and the Servicing Advance Receivables Issuer Trust, which, in turn, support the MSR Issuer Trust’s obligations to noteholders under the securitization transaction and the Servicing Advance Receivables Issuer Trust’s obligations to the financing counterparty.
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 March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31,
2020
|
Note receivable (1)
|
$
|
395,891
|
|
|
$
|
395,609
|
|
|
|
|
|
Restricted cash
|
15,942
|
|
|
72,530
|
|
Accrued interest receivable (1)
|
226
|
|
|
131
|
|
Other assets
|
25,960
|
|
|
28,540
|
|
Total Assets
|
$
|
438,019
|
|
|
$
|
496,810
|
|
Term notes payable
|
$
|
395,891
|
|
|
$
|
395,609
|
|
Revolving credit facilities
|
20,000
|
|
|
9,000
|
|
Accrued interest payable
|
286
|
|
|
156
|
|
Other liabilities
|
15,882
|
|
|
72,505
|
|
Total Liabilities
|
$
|
432,059
|
|
|
$
|
477,270
|
|
____________________
(1)Receivables due from a wholly owned subsidiary of the Company to the trusts are eliminated in consolidation in accordance with U.S. GAAP.
Note 4. Available-for-Sale Securities, at Fair Value
The Company holds both Agency and non-Agency AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. In the first quarter of 2020, the Company experienced unprecedented market conditions as a result of the global COVID-19 pandemic, including unusually significant spread widening in both Agency RMBS and non-Agency securities. In response, the Company focused its efforts on raising excess liquidity and de-risking its portfolio. On March 25, 2020, the Company sold substantially all of its non-Agency securities in order to eliminate the risks posed by continued margin calls and ongoing funding concerns associated with the significant spread widening on these assets. The Company also sold approximately one-third of its Agency RMBS in order to reduce risk and raise cash to establish a strong defensive liquidity position to weather potential ongoing economic and market instability. Since then, the Company has focused on the composition of its Agency RMBS portfolio, deploying risk as the market entered a period of stabilization and asset price recovery.
The following table presents the Company’s AFS investment securities by collateral type as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31,
2020
|
Agency:
|
|
|
|
Federal National Mortgage Association
|
$
|
8,604,120
|
|
|
$
|
11,486,658
|
|
Federal Home Loan Mortgage Corporation
|
2,578,406
|
|
|
2,837,103
|
|
Government National Mortgage Association
|
281,645
|
|
|
314,130
|
|
Non-Agency
|
9,219
|
|
|
13,031
|
|
Total available-for-sale securities
|
$
|
11,473,390
|
|
|
$
|
14,650,922
|
|
At March 31, 2021 and December 31, 2020, the Company pledged AFS securities with a carrying value of $11.5 billion and $14.6 billion, respectively, as collateral for repurchase agreements. See Note 11 - Repurchase Agreements.
At March 31, 2021 and December 31, 2020, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, to be considered linked transactions and, therefore, classified as derivatives.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company is not required to consolidate variable interest entities, or 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 all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of March 31, 2021 and December 31, 2020, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $9.2 million and $13.0 million, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
(in thousands)
|
Principal/ Current Face
|
|
Un-amortized Premium
|
|
Accretable Purchase Discount
|
|
|
|
Amortized Cost
|
|
Allowance for Credit Losses
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Carrying Value
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal and interest
|
$
|
10,170,349
|
|
|
$
|
456,318
|
|
|
$
|
(13)
|
|
|
|
|
$
|
10,626,654
|
|
|
$
|
—
|
|
|
$
|
393,005
|
|
|
$
|
(32,355)
|
|
|
$
|
10,987,304
|
|
Interest-only
|
4,381,919
|
|
|
423,461
|
|
|
—
|
|
|
|
|
423,461
|
|
|
(16,699)
|
|
|
78,836
|
|
|
(8,731)
|
|
|
476,867
|
|
Total Agency
|
14,552,268
|
|
|
879,779
|
|
|
(13)
|
|
|
|
|
11,050,115
|
|
|
(16,699)
|
|
|
471,841
|
|
|
(41,086)
|
|
|
11,464,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency
|
1,600,877
|
|
|
15,313
|
|
|
(1,783)
|
|
|
|
|
17,073
|
|
|
(1,471)
|
|
|
1,446
|
|
|
(7,829)
|
|
|
9,219
|
|
Total
|
$
|
16,153,145
|
|
|
$
|
895,092
|
|
|
$
|
(1,796)
|
|
|
|
|
$
|
11,067,188
|
|
|
$
|
(18,170)
|
|
|
$
|
473,287
|
|
|
$
|
(48,915)
|
|
|
$
|
11,473,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(in thousands)
|
Principal/ Current Face
|
|
Un-amortized Premium
|
|
Accretable Purchase Discount
|
|
|
|
Amortized Cost
|
|
Allowance for Credit Losses
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Carrying Value
|
Agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal and interest
|
$
|
13,103,355
|
|
|
$
|
605,253
|
|
|
$
|
(14)
|
|
|
|
|
$
|
13,708,594
|
|
|
$
|
—
|
|
|
$
|
629,079
|
|
|
$
|
(420)
|
|
|
$
|
14,337,253
|
|
Interest-only
|
3,649,556
|
|
|
315,876
|
|
|
—
|
|
|
|
|
315,876
|
|
|
(17,889)
|
|
|
15,680
|
|
|
(13,029)
|
|
|
300,638
|
|
Total Agency
|
16,752,911
|
|
|
921,129
|
|
|
(14)
|
|
|
|
|
14,024,470
|
|
|
$
|
(17,889)
|
|
|
644,759
|
|
|
(13,449)
|
|
|
14,637,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency
|
2,095,365
|
|
|
16,408
|
|
|
(36)
|
|
|
|
|
18,705
|
|
|
(4,639)
|
|
|
109
|
|
|
(1,144)
|
|
|
13,031
|
|
Total
|
$
|
18,848,276
|
|
|
$
|
937,537
|
|
|
$
|
(50)
|
|
|
|
|
$
|
14,043,175
|
|
|
(22,528)
|
|
|
$
|
644,868
|
|
|
$
|
(14,593)
|
|
|
$
|
14,650,922
|
|
The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
(in thousands)
|
Agency
|
|
Non-Agency
|
|
Total
|
< 1 year
|
$
|
5,155
|
|
|
$
|
1,236
|
|
|
$
|
6,391
|
|
≥ 1 and < 3 years
|
92,963
|
|
|
7,983
|
|
|
100,946
|
|
≥ 3 and < 5 years
|
1,482,174
|
|
|
—
|
|
|
1,482,174
|
|
≥ 5 and < 10 years
|
9,846,589
|
|
|
—
|
|
|
9,846,589
|
|
≥ 10 years
|
37,290
|
|
|
—
|
|
|
37,290
|
|
Total
|
$
|
11,464,171
|
|
|
$
|
9,219
|
|
|
$
|
11,473,390
|
|
Measurement of Allowances for Credit Losses on AFS Securities (Subsequent to the Adoption of Topic 326)
Following the adoption of Topic 326 on January 1, 2020, the Company uses a discounted cash flow method to estimate and recognize an allowance for credit losses on both Agency and non-Agency AFS securities that are not accounted for under the fair value option, as detailed in Note 2 - Basis of Presentation and Significant Accounting Policies.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the changes for the three months ended March 31, 2021 and 2020 in the allowance for credit losses on Agency and non-Agency AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
March 31, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Agency
|
|
Non-Agency
|
|
Total
|
|
Agency
|
|
Non-Agency
|
|
Total
|
Allowance for credit losses at beginning of period
|
|
|
|
|
|
|
$
|
(17,889)
|
|
|
$
|
(4,639)
|
|
|
$
|
(22,528)
|
|
|
$
|
—
|
|
|
$
|
(244,876)
|
|
|
$
|
(244,876)
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On securities for which credit losses were not previously recorded
|
|
|
|
|
|
|
(20)
|
|
|
—
|
|
|
(20)
|
|
|
(32,786)
|
|
|
(11,109)
|
|
|
(43,895)
|
|
Arising from purchases of securities accounted for as purchased credit deteriorated
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For securities sold
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
246,792
|
|
|
246,792
|
|
Due to the intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Decrease (increase) on securities with previously recorded credit losses
|
|
|
|
|
|
|
(1,840)
|
|
|
2,995
|
|
|
1,155
|
|
|
—
|
|
|
(1,743)
|
|
|
(1,743)
|
|
Write-offs
|
|
|
|
|
|
|
3,050
|
|
|
173
|
|
|
3,223
|
|
|
—
|
|
|
4,867
|
|
|
4,867
|
|
Recoveries of amounts previously written off
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,535)
|
|
|
(2,535)
|
|
Allowance for credit losses at end of period
|
|
|
|
|
|
|
$
|
(16,699)
|
|
|
$
|
(1,471)
|
|
|
$
|
(18,170)
|
|
|
$
|
(32,786)
|
|
|
$
|
(8,604)
|
|
|
$
|
(41,390)
|
|
The following table presents the components comprising the carrying value of AFS securities for which an allowance for credit losses has not been recorded by length of time that the securities had an unrealized loss position as of March 31, 2021 and December 31, 2020 (subsequent to the adoption of Topic 326). At March 31, 2021 and December 31, 2020, the Company held 817 and 823 AFS securities, respectively; of the securities for which an allowance for credit losses has not been recorded, 45 and 13 were in an unrealized loss position for less than twelve consecutive months and 0 and 13 were in an unrealized loss position for more than twelve consecutive months, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
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
|
Agency
|
$
|
1,461,068
|
|
|
$
|
(34,940)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,461,068
|
|
|
$
|
(34,940)
|
|
Non-Agency
|
3,223
|
|
|
(4,795)
|
|
|
—
|
|
|
—
|
|
|
3,223
|
|
|
(4,795)
|
|
Total
|
$
|
1,464,291
|
|
|
$
|
(39,735)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,464,291
|
|
|
$
|
(39,735)
|
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
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
|
Agency
|
$
|
367,660
|
|
|
$
|
(1,705)
|
|
|
$
|
24,006
|
|
|
$
|
(4,454)
|
|
|
$
|
391,666
|
|
|
$
|
(6,159)
|
|
Non-Agency
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
367,660
|
|
|
$
|
(1,705)
|
|
|
$
|
24,006
|
|
|
$
|
(4,454)
|
|
|
$
|
391,666
|
|
|
$
|
(6,159)
|
|
Evaluating AFS Securities for Other-Than-Temporary Impairments (Prior to the Adoption of Topic 326)
In evaluating AFS securities for OTTI prior to the adoption of Topic 326, the Company determined whether there had been a significant adverse quarterly change in the cash flow expectations for a security. The Company compared 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 considered whether there had been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security was greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment had occurred. If the Company did not intend to sell and would not be more likely than not required to sell the security, the credit loss was recognized in earnings and the balance of the unrealized loss was recognized in either other comprehensive loss, net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intended to sell the security or would be more likely than not required to sell the security, the full unrealized loss was recognized in earnings.
Cumulative credit losses related to OTTI are 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. As of December 31, 2019, the Company’s cumulative credit losses related to OTTI totaled $17.0 million. During the three months ended March 31, 2020, the Company sold all securities for which OTTI had been recognized prior to January 1, 2020, reducing the Company’s cumulative credit losses related to OTTI to zero. As of December 31, 2020, the Company no longer held any of the securities for which OTTI had been recognized prior to January 1, 2020.
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 loss. The following table presents details around sales of AFS securities during the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
|
|
Proceeds from sales of available-for-sale securities
|
|
|
|
|
$
|
2,050,943
|
|
|
$
|
15,586,752
|
|
|
|
Amortized cost of available-for-sale securities sold
|
|
|
|
|
(1,984,745)
|
|
|
(16,621,468)
|
|
|
|
Total realized gains (losses) on sales, net
|
|
|
|
|
$
|
66,198
|
|
|
$
|
(1,034,716)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
|
$
|
66,217
|
|
|
$
|
223,471
|
|
|
|
Gross realized losses
|
|
|
|
|
(19)
|
|
|
(1,258,187)
|
|
|
|
Total realized gains (losses) on sales, net
|
|
|
|
|
$
|
66,198
|
|
|
$
|
(1,034,716)
|
|
|
|
Note 5. Servicing Activities
Mortgage Servicing Rights, at Fair Value
A wholly owned subsidiary of the Company has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. The Company and its subsidiaries do not originate or directly service mortgage loans, and instead contract with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the Company’s MSR.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table summarizes activity related to MSR for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
|
|
Balance at beginning of period
|
|
|
|
|
$
|
1,596,153
|
|
|
$
|
1,909,444
|
|
|
|
Purchases of mortgage servicing rights
|
|
|
|
|
175,223
|
|
|
183,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of mortgage servicing rights
|
|
|
|
|
—
|
|
|
1,433
|
|
|
|
Changes in fair value due to:
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in the valuation model (1)
|
|
|
|
|
501,693
|
|
|
(500,763)
|
|
|
|
Other changes in fair value (2)
|
|
|
|
|
(174,255)
|
|
|
(85,902)
|
|
|
|
Other changes (3)
|
|
|
|
|
(7,053)
|
|
|
(2,832)
|
|
|
|
Balance at end of period (4)
|
|
|
|
|
$
|
2,091,761
|
|
|
$
|
1,505,163
|
|
|
|
____________________
(1)Includes the impact of acquiring MSR at a cost different from fair value.
(2)Primarily represents changes due to the realization of expected cash flows.
(3)Includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral.
(4)Based on the principal balance of the loans underlying the MSR reported by servicers on a month lag, adjusted for current month purchases.
At March 31, 2021 and December 31, 2020, the Company pledged MSR with a carrying value of $1.7 billion and $1.1 billion, respectively, as collateral for revolving credit facilities and term notes payable. See Note 12 - Revolving Credit Facilities and Note 13 - Term Notes Payable.
As of March 31, 2021 and December 31, 2020, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per loan data)
|
March 31,
2021
|
|
December 31,
2020
|
Weighted average prepayment speed:
|
13.1
|
%
|
|
19.4
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(116,846)
|
|
|
$
|
(121,973)
|
|
Impact on fair value of 20% adverse change
|
$
|
(224,711)
|
|
|
$
|
(229,676)
|
|
Weighted average delinquency:
|
1.9
|
%
|
|
2.2
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(3,179)
|
|
|
$
|
(2,038)
|
|
Impact on fair value of 20% adverse change
|
$
|
(5,871)
|
|
|
$
|
(4,161)
|
|
Weighted average option-adjusted spread:
|
4.8
|
%
|
|
4.8
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(41,396)
|
|
|
$
|
(28,678)
|
|
Impact on fair value of 20% adverse change
|
$
|
(81,621)
|
|
|
$
|
(56,211)
|
|
Weighted average per loan annual cost to service:
|
$
|
67.13
|
|
|
$
|
68.27
|
|
Impact on fair value of 10% adverse change
|
$
|
(24,969)
|
|
|
$
|
(21,708)
|
|
Impact on fair value of 20% adverse change
|
$
|
(50,084)
|
|
|
$
|
(43,527)
|
|
These assumptions and sensitivities are hypothetical and should be considered with caution. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSR is calculated without changing any other assumptions. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Risk Mitigation Activities
The primary risk associated with the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. The Company economically hedges the impact of these risks primarily with its Agency RMBS portfolio.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive loss for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
|
|
Servicing fee income
|
|
|
|
|
$
|
105,165
|
|
|
$
|
117,891
|
|
|
|
Ancillary and other fee income
|
|
|
|
|
616
|
|
|
521
|
|
|
|
Float income
|
|
|
|
|
1,338
|
|
|
12,385
|
|
|
|
Total
|
|
|
|
|
$
|
107,119
|
|
|
$
|
130,797
|
|
|
|
Mortgage Servicing Advances
As the servicer of record for the MSR assets, the Company may be required to advance principal and interest payments to security holders, and intermittent tax and insurance payments to local authorities and insurance companies on mortgage loans that are in forbearance, delinquency or default. The Company is responsible for funding these advances, potentially for an extended period of time, before receiving reimbursement from Fannie Mae and Freddie Mac. Servicing advances are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances totaled $92.4 million and $80.9 million and were included in other assets on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, mortgage loans in 60+ day delinquent status (whether or not subject to forbearance) accounted for approximately 2.9% and 3.2%, respectively, of the aggregate principal balance of loans for which the Company had servicing advance funding obligations.
During the year ended December 31, 2020, the Company entered into a new revolving credit facility to finance its servicing advance obligations. At March 31, 2021 and December 31, 2020, the Company had pledged servicing advances with a carrying value of $26.0 million and $28.5 million, respectively, as collateral for this revolving credit facility. See Note 12 - Revolving Credit Facilities.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of residential mortgage loans underlying its MSR assets, off-balance sheet residential mortgage loans owned by other entities for which the Company acts as servicing administrator and other assets. The following table presents the number of loans and unpaid principal balance of the mortgage assets for which the Company manages the servicing as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
(dollars in thousands)
|
Number of Loans
|
|
Unpaid Principal Balance
|
|
Number of Loans
|
|
Unpaid Principal Balance
|
Mortgage servicing rights
|
773,167
|
|
|
$
|
179,014,244
|
|
|
781,905
|
|
|
$
|
177,861,483
|
|
Residential mortgage loans
|
1,332
|
|
|
835,633
|
|
|
1,674
|
|
|
1,067,500
|
|
Other assets
|
1
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Total serviced mortgage assets
|
774,500
|
|
|
$
|
179,849,906
|
|
|
783,579
|
|
|
$
|
178,928,983
|
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 6. Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held in bank accounts and cash held in money market funds on an overnight basis.
The Company is required to maintain certain cash balances with counterparties for securities and derivatives trading activity, servicing activities and collateral for the Company’s borrowings in restricted accounts. The Company has also placed cash in a restricted account pursuant to a letter of credit on an office space lease.
The following table presents the Company’s restricted cash balances as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31,
2020
|
Restricted cash balances held by trading counterparties:
|
|
|
|
For securities trading activity
|
$
|
26,800
|
|
|
$
|
44,800
|
|
For derivatives trading activity
|
123,802
|
|
|
70,600
|
|
For servicing activities
|
18,920
|
|
|
19,768
|
|
As restricted collateral for borrowings
|
643,072
|
|
|
1,126,439
|
|
Total restricted cash balances held by trading counterparties
|
812,594
|
|
|
1,261,607
|
|
Restricted cash balance pursuant to letter of credit on office lease
|
60
|
|
|
60
|
|
Total
|
$
|
812,654
|
|
|
$
|
1,261,667
|
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 that sum to the total of the same such amounts shown in the statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2021
|
|
December 31,
2020
|
Cash and cash equivalents
|
$
|
1,159,306
|
|
|
$
|
1,384,764
|
|
Restricted cash
|
812,654
|
|
|
1,261,667
|
|
Total cash, cash equivalents and restricted cash
|
$
|
1,971,960
|
|
|
$
|
2,646,431
|
|
Note 7. Derivative Instruments and Hedging Activities
The Company enters into a variety of derivative and non-derivative instruments in connection with its risk management activities. The primary objective for executing these derivative and non-derivative instruments is to mitigate the Company’s economic exposure to future events that are outside its control, principally cash flow volatility associated with interest rate risk (including associated prepayment risk). Specifically, the Company enters into derivative and non-derivative instruments to economically hedge interest rate risk or “duration mismatch (or gap)” by adjusting the duration of its floating-rate borrowings into fixed-rate borrowings to more closely match the duration of its assets. This particularly applies to floating-rate borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (e.g., LIBOR or the overnight index swap, or OIS, rate) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed. The objective is to manage the cash flows associated with current and anticipated interest payments on borrowings, as well as the ability to roll or refinance borrowings at the desired amount by adjusting the duration.
To help manage the adverse impact of interest rate changes on the value of the Company’s portfolio as well as its cash flows, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps and total return swaps. In executing on the Company’s current risk management strategy, the Company has entered into TBAs, interest rate swap and swaption agreements and U.S. Treasury and Eurodollar futures. The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally MSR and Agency interest-only securities (see discussion below).
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following summarizes the Company’s significant asset and liability classes, the risk exposure for these classes, and the Company’s risk management activities used to mitigate these risks. The discussion includes both derivative and non-derivative instruments used as part of these risk management activities. Any of the Company’s derivative and non-derivative instruments may be entered into in conjunction with one another in order to mitigate risks. As a result, the following discussions of each type of instrument should be read as a collective representation of the Company’s risk mitigation efforts and should not be considered independent of one another. While the Company uses derivative and non-derivative instruments to achieve the Company’s risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company’s market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements.
Balance Sheet Presentation
In accordance with ASC 815, the Company records derivative financial instruments on its condensed consolidated balance sheets as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they are designated or qualifying as hedge instruments. Due to the volatility of the interest rate and credit markets and difficulty in effectively matching pricing or cash flows, the Company has not designated any current derivatives as hedging instruments.
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading derivatives as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(in thousands)
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
Notional
|
Inverse interest-only securities
|
|
$
|
54,384
|
|
|
$
|
300,597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
—
|
|
|
15,221,597
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaptions, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
TBAs
|
|
761
|
|
|
750,000
|
|
|
(5,584)
|
|
|
4,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Eurodollar futures, net
|
|
—
|
|
|
—
|
|
|
(10,578)
|
|
|
(1,185,100)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,145
|
|
|
$
|
16,272,194
|
|
|
$
|
(16,162)
|
|
|
$
|
2,864,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(in thousands)
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
Notional
|
Inverse interest-only securities
|
|
$
|
62,200
|
|
|
$
|
318,162
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,646,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaptions, net
|
|
—
|
|
|
—
|
|
|
(596)
|
|
|
3,750,000
|
|
TBAs
|
|
30,062
|
|
|
7,700,000
|
|
|
(10,462)
|
|
|
(2,503,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury futures, net
|
|
3,675
|
|
|
2,021,100
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,937
|
|
|
$
|
10,039,262
|
|
|
$
|
(11,058)
|
|
|
$
|
13,893,341
|
|
Comprehensive Loss Statement Presentation
The Company has not applied hedge accounting to its current derivative portfolio held to mitigate interest rate risk and credit risk. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its derivative instruments.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Location of Gain (Loss) Recognized in Income
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
Interest rate risk management
|
|
|
|
|
|
|
|
|
|
|
TBAs
|
|
Loss on other derivative instruments
|
|
|
|
|
|
$
|
(187,946)
|
|
|
$
|
(166,058)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Eurodollar futures
|
|
Loss on other derivative instruments
|
|
|
|
|
|
(85,141)
|
|
|
25,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - Payers
|
|
Loss on interest rate swap and swaption agreements
|
|
|
|
|
|
80,313
|
|
|
(1,037,335)
|
|
|
|
Interest rate swaps - Receivers
|
|
Loss on interest rate swap and swaption agreements
|
|
|
|
|
|
(106,373)
|
|
|
899,953
|
|
|
|
Swaptions
|
|
Loss on interest rate swap and swaption agreements
|
|
|
|
|
|
10,461
|
|
|
(113,214)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markit IOS total return swaps
|
|
Loss on other derivative instruments
|
|
|
|
|
|
—
|
|
|
(2,430)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-risk management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inverse interest-only securities
|
|
Loss on other derivative instruments
|
|
|
|
|
|
(2,924)
|
|
|
9,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
(291,610)
|
|
|
$
|
(384,064)
|
|
|
|
For the three months ended March 31, 2021 and 2020, the Company recognized $1.7 million of income and $12.6 million of expenses, respectively, for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The income/expenses result from receiving either LIBOR interest or a fixed interest rate and paying either a fixed interest rate or LIBOR interest on an average $13.5 billion and $42.7 billion, respectively.
The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
(in thousands)
|
Beginning of Period Notional Amount
|
|
Additions
|
|
Settlement, Termination, Expiration or Exercise
|
|
End of Period Notional Amount
|
|
Average Notional Amount
|
|
Realized Gain (Loss),
net (1)
|
Inverse interest-only securities
|
$
|
318,162
|
|
|
$
|
—
|
|
|
$
|
(17,565)
|
|
|
$
|
300,597
|
|
|
$
|
310,289
|
|
|
$
|
62
|
|
Interest rate swap agreements
|
12,646,341
|
|
|
3,112,507
|
|
|
(537,251)
|
|
|
15,221,597
|
|
|
13,476,318
|
|
|
(8,595)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaptions, net
|
3,750,000
|
|
|
—
|
|
|
(3,750,000)
|
|
|
—
|
|
|
322,222
|
|
|
2,245
|
|
TBAs, net
|
5,197,000
|
|
|
20,802,000
|
|
|
(21,199,000)
|
|
|
4,800,000
|
|
|
5,304,567
|
|
|
(163,523)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Eurodollar futures
|
2,021,100
|
|
|
970,300
|
|
|
(4,176,500)
|
|
|
(1,185,100)
|
|
|
573,478
|
|
|
(70,897)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markit IOS total return swaps
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
23,932,603
|
|
|
$
|
24,884,807
|
|
|
$
|
(29,680,316)
|
|
|
$
|
19,137,094
|
|
|
$
|
19,986,874
|
|
|
$
|
(240,708)
|
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
(in thousands)
|
Beginning of Period Notional Amount
|
|
Additions
|
|
Settlement, Termination, Expiration or Exercise
|
|
End of Period Notional Amount
|
|
Average Notional Amount
|
|
Realized Gain (Loss),
net (1)
|
Inverse interest-only securities
|
$
|
397,137
|
|
|
$
|
—
|
|
|
$
|
(17,898)
|
|
|
$
|
379,239
|
|
|
$
|
388,891
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
39,702,470
|
|
|
24,383,111
|
|
|
(7,927,513)
|
|
|
56,158,068
|
|
|
42,667,316
|
|
|
408,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaptions, net
|
1,257,000
|
|
|
430,000
|
|
|
(311,000)
|
|
|
1,376,000
|
|
|
2,055,484
|
|
|
(46,200)
|
|
TBAs, net
|
7,427,000
|
|
|
12,491,000
|
|
|
(18,157,000)
|
|
|
1,761,000
|
|
|
4,939,769
|
|
|
(98,795)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury futures
|
(380,000)
|
|
|
8,230,000
|
|
|
(6,975,000)
|
|
|
875,000
|
|
|
923,571
|
|
|
30,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markit IOS total return swaps
|
41,890
|
|
|
—
|
|
|
(41,890)
|
|
|
—
|
|
|
40,788
|
|
|
(2,077)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
48,445,497
|
|
|
$
|
45,534,111
|
|
|
$
|
(33,430,301)
|
|
|
$
|
60,549,307
|
|
|
$
|
51,015,819
|
|
|
$
|
291,480
|
|
____________________
(1)Excludes net interest paid or received in full settlement of the net interest spread liability.
Cash flow activity related to derivative instruments is reflected within the operating activities and investing activities sections of the condensed consolidated statements of cash flows. Realized gains and losses and derivative fair value adjustments are reflected within the realized and unrealized loss on interest rate swaps and swaptions and unrealized loss on other derivative instruments line items within the operating activities section of the condensed consolidated statements of cash flows. The remaining cash flow activity related to derivative instruments is reflected within the (purchases) short sales of other derivative instruments, (payments for termination and settlement) proceeds from sales and settlements of derivative instruments, net and increase (decrease) in due to counterparties, net line items within the investing activities section of the condensed consolidated statements of cash flows.
Interest Rate Sensitive Assets/Liabilities
The Company’s Agency RMBS portfolio is generally subject to change in value when interest rates decline or increase, depending on the type of investment. Rising interest rates generally result in a decline in the value of the Company’s fixed-rate Agency principal and interest (P&I) RMBS. To mitigate the impact of this risk on the Company’s fixed-rate Agency P&I RMBS portfolio, the Company maintains a portfolio of fixed-rate interest-only securities and MSR, which increase in value when interest rates increase. As of March 31, 2021 and December 31, 2020, the Company had $425.3 million and $245.9 million, respectively, of interest-only securities, and $2.1 billion and $1.6 billion, respectively, of MSR in place to primarily hedge its Agency RMBS. Interest-only securities are included in AFS securities, at fair value, in the condensed consolidated balance sheets.
The Company monitors its borrowings under repurchase agreements and revolving credit facilities, which are generally floating-rate debt, in relation to the rate profile of its portfolio. In connection with its risk management activities, the Company enters into a variety of derivative and non-derivative instruments to economically hedge interest rate risk or duration mismatch (or gap) by adjusting the duration of its floating-rate borrowings into fixed-rate borrowings to more closely match the duration of its assets. This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (e.g., LIBOR or the OIS rate) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed. The objective is to manage the cash flows associated with current and anticipated interest payments on borrowings, as well as the ability to roll or refinance borrowings at the desired amount by adjusting the duration. To help manage the adverse impact of interest rate changes on the value of the Company’s portfolio as well as its cash flows, the Company may, at times, enter into various forward contracts, including short securities, TBAs, options, futures, swaps, caps, credit default swaps and total return swaps. In executing on the Company’s current interest rate risk management strategy, the Company has entered into TBAs, interest rate swap and swaption agreements and U.S. Treasury and Eurodollar futures.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
TBAs. At times, the Company may use TBAs as a means of deploying capital until targeted investments are available or to take advantage of temporary displacements, funding advantages or valuation differentials in the marketplace. Additionally, the Company may use TBAs independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. TBAs are forward contracts for the purchase (long notional positions) or sale (short notional positions) of Agency RMBS. The issuer, coupon and stated maturity of the Agency RMBS are predetermined as well as the trade price, face amount and future settle date (published each month by the Securities Industry and Financial Markets Association). However, the specific Agency RMBS to be delivered upon settlement is not known at the time of the TBA transaction. As a result, and because physical delivery of the Agency RMBS upon settlement cannot be assured, the Company accounts for TBAs as derivative instruments.
The Company may hold both long and short notional TBA positions, which are disclosed on a gross basis according to the unrealized gain or loss position of each TBA contract regardless of long or short notional position. The following tables present the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
|
|
|
|
|
Net Carrying Value (4)
|
(in thousands)
|
Notional Amount (1)
|
|
Cost Basis (2)
|
|
Market Value (3)
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Purchase contracts
|
$
|
4,900,000
|
|
|
$
|
5,128,819
|
|
|
$
|
5,124,270
|
|
|
$
|
761
|
|
|
$
|
(5,310)
|
|
Sale contracts
|
(100,000)
|
|
|
(99,421)
|
|
|
(99,695)
|
|
|
—
|
|
|
(274)
|
|
TBAs, net
|
$
|
4,800,000
|
|
|
$
|
5,029,398
|
|
|
$
|
5,024,575
|
|
|
$
|
761
|
|
|
$
|
(5,584)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Net Carrying Value (4)
|
(in thousands)
|
Notional Amount (1)
|
|
Cost Basis (2)
|
|
Market Value (3)
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Purchase contracts
|
$
|
7,700,000
|
|
|
$
|
8,102,344
|
|
|
$
|
8,132,406
|
|
|
$
|
30,062
|
|
|
$
|
—
|
|
Sale contracts
|
(2,503,000)
|
|
|
(2,640,465)
|
|
|
(2,650,927)
|
|
|
—
|
|
|
(10,462)
|
|
TBAs, net
|
$
|
5,197,000
|
|
|
$
|
5,461,879
|
|
|
$
|
5,481,479
|
|
|
$
|
30,062
|
|
|
$
|
(10,462)
|
|
___________________
(1)Notional amount represents the face amount of the underlying Agency RMBS.
(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period-end.
(4)Net carrying value represents the difference between the market value of the TBA as of period-end and its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets.
U.S. Treasury and Eurodollar Futures. The Company may use U.S. Treasury and Eurodollar futures independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. The Company had a net short position in U.S. Treasury and Eurodollar futures with a notional amount of $1.2 billion and a fair market value of $10.6 million included in derivative liabilities, at fair value, on the condensed consolidated balance sheet as of March 31, 2021. The Company had a net long position in U.S. Treasury futures with a notional amount of $2.0 billion and a fair market value of $3.7 million included in derivative assets, at fair value, on the condensed consolidated balance sheet as of December 31, 2020.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Interest Rate Swap Agreements. The Company may use interest rate swaps independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of March 31, 2021 and December 31, 2020, the Company held the following interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a floating interest rate (LIBOR or the OIS rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(notional in thousands)
|
|
|
|
|
|
|
March 31, 2021
|
Swaps Maturities
|
|
Notional Amount
|
|
Weighted Average Fixed Pay Rate
|
|
Weighted Average Receive Rate
|
|
Weighted Average Maturity (Years)
|
2021
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2022
|
|
7,415,818
|
|
|
0.042
|
%
|
|
0.060
|
%
|
|
1.41
|
2023
|
|
2,281,500
|
|
|
0.023
|
%
|
|
0.060
|
%
|
|
2.23
|
2024
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2025 and Thereafter
|
|
1,697,500
|
|
|
0.358
|
%
|
|
0.079
|
%
|
|
6.66
|
Total
|
|
$
|
11,394,818
|
|
|
0.085
|
%
|
|
0.063
|
%
|
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(notional in thousands)
|
|
|
|
|
|
|
December 31, 2020
|
Swaps Maturities
|
|
Notional Amount
|
|
Weighted Average Fixed Pay Rate
|
|
Weighted Average Receive Rate
|
|
Weighted Average Maturity (Years)
|
2021
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2022
|
|
7,415,818
|
|
|
0.042
|
%
|
|
0.090
|
%
|
|
1.66
|
2023
|
|
2,281,500
|
|
|
0.023
|
%
|
|
0.090
|
%
|
|
2.48
|
2024
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2025 and Thereafter
|
|
1,497,500
|
|
|
0.257
|
%
|
|
0.090
|
%
|
|
6.49
|
Total
|
|
$
|
11,194,818
|
|
|
0.067
|
%
|
|
0.090
|
%
|
|
2.47
|
Additionally, as of March 31, 2021 and December 31, 2020, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk whereby the Company pays interest at a floating interest rate (LIBOR or the OIS rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(notional in thousands)
|
|
|
|
|
|
|
March 31, 2021
|
Swaps Maturities
|
|
Notional Amounts
|
|
Weighted Average Pay Rate
|
|
Weighted Average Fixed Receive Rate
|
|
Weighted Average Maturity (Years)
|
2021
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2022
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2023
|
|
2,221,658
|
|
|
0.060
|
%
|
|
0.118
|
%
|
|
1.94
|
2024
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2025 and Thereafter
|
|
1,605,121
|
|
|
0.060
|
%
|
|
0.608
|
%
|
|
9.34
|
Total
|
|
$
|
3,826,779
|
|
|
0.060
|
%
|
|
0.323
|
%
|
|
5.05
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(notional in thousands)
|
|
|
|
|
|
|
December 31, 2020
|
Swaps Maturities
|
|
Notional Amounts
|
|
Weighted Average Pay Rate
|
|
Weighted Average Fixed Receive Rate
|
|
Weighted Average Maturity (Years)
|
2021
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2022
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2023
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2024
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
0.00
|
2025 and Thereafter
|
|
1,451,523
|
|
|
0.090
|
%
|
|
0.468
|
%
|
|
9.49
|
Total
|
|
$
|
1,451,523
|
|
|
0.090
|
%
|
|
0.468
|
%
|
|
9.49
|
Interest Rate Swaptions. The Company may use interest rate swaptions (which provide the option to enter into interest rate swap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the future) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. The Company did not hold any swaptions as of March 31, 2021. As of December 31, 2020, the Company had the following outstanding interest rate swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(notional and dollars in thousands)
|
|
Option
|
|
Underlying Swap
|
Swaption
|
|
Expiration
|
|
Cost
|
|
Fair Value
|
|
Average Months to Expiration
|
|
Notional Amount
|
|
Average Pay Rate
|
|
Average Receive Rate
|
|
Average Term (Years)
|
Purchase contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer
|
|
< 6 Months
|
|
$
|
7,210
|
|
|
|