UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2017March 31, 2024
OR
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| ☐ | 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 |
| | |
Maryland | | 27-0312904 |
(State or Other Jurisdiction of
Incorporation or Organization)
| | (I.R.S. Employer
Identification No.)
|
| | | | | | | | | | | |
| 1601 Utica Avenue South, Suite 900 | | |
| St. Louis Park, | Minnesota | | 55416 |
| | |
590 Madison Avenue, 36th Floor
New York, New York
| | 10022 |
| (Address of Principal Executive Offices) | | (Zip Code) |
(612) 629-2500453-4100
(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 x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
| | | | | | | | | | | |
| | | |
Large accelerated filerx | ☒ | | Accelerated filero | ☐ |
Non-accelerated filero | (Do not check if a smaller reporting company)☐ | | Smaller reporting companyo | ☐ |
| | | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.☒
As of November 7, 2017April 26, 2024, there were 174,489,081103,494,421 shares of outstanding common stock, par value $.01$0.01 per share, issued and outstanding.
TWO HARBORS INVESTMENT CORP.
INDEX
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| PART I - FINANCIAL INFORMATION | |
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| PART II - OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
| | March 31,
2024 | | | March 31,
2024 | | December 31,
2023 |
| ASSETS | |
| Available-for-sale securities, at fair value (amortized cost $8,467,938 and $8,509,383, respectively; allowance for credit losses $3,607 and $3,943, respectively) | |
| Available-for-sale securities, at fair value (amortized cost $8,467,938 and $8,509,383, respectively; allowance for credit losses $3,607 and $3,943, respectively) | |
| Available-for-sale securities, at fair value (amortized cost $8,467,938 and $8,509,383, respectively; allowance for credit losses $3,607 and $3,943, respectively) | |
| | ASSETS | September 30,
2017 | | December 31,
2016 |
| Available-for-sale securities, at fair value | $ | 20,199,094 |
| | $ | 13,128,857 |
|
| Commercial real estate assets | 2,171,344 |
| | 1,412,543 |
|
| Mortgage servicing rights, at fair value | 930,613 |
| | 693,815 |
|
| Residential mortgage loans held-for-investment in securitization trusts, at fair value | 3,031,191 |
| | 3,271,317 |
|
| Residential mortgage loans held-for-sale, at fair value | 31,197 |
| | 40,146 |
|
| Mortgage servicing rights, at fair value | |
| Mortgage servicing rights, at fair value | |
| Cash and cash equivalents | 539,367 |
| | 406,883 |
|
| Restricted cash | 343,813 |
| | 408,312 |
|
| Accrued interest receivable | 85,445 |
| | 62,751 |
|
| Due from counterparties | 26,445 |
| | 60,380 |
|
| Derivative assets, at fair value | 238,305 |
| | 324,182 |
|
| Reverse repurchase agreements | |
| Other assets | 206,960 |
| | 302,870 |
|
Total Assets (1) | $ | 27,803,774 |
| | $ | 20,112,056 |
|
| LIABILITIES AND EQUITY | | | |
| Liabilities | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Liabilities: | |
| Liabilities: | |
| Liabilities: | |
| Repurchase agreements | $ | 18,297,392 |
| | $ | 9,316,351 |
|
| Collateralized borrowings in securitization trusts, at fair value | 2,785,413 |
| | 3,037,196 |
|
| Federal Home Loan Bank advances | 1,998,762 |
| | 4,000,000 |
|
| Repurchase agreements | |
| Repurchase agreements | |
| | Revolving credit facilities | 40,000 |
| | 70,000 |
|
| Revolving credit facilities | |
| Revolving credit facilities | |
| Term notes payable | |
| Convertible senior notes | 282,543 |
| | — |
|
| Derivative liabilities, at fair value | 11,312 |
| | 12,501 |
|
| Due to counterparties | 45,297 |
| | 111,884 |
|
| Dividends payable | 102,799 |
| | 83,437 |
|
| Accrued interest payable | |
| Commitments and contingencies (see Note 16) | |
| Other liabilities | 108,875 |
| | 79,576 |
|
Total Liabilities (1) | 23,672,393 |
| | 16,710,945 |
|
| Stockholders’ Equity | | | |
| Preferred stock, par value $0.01 per share; 50,000,000 shares authorized: | | | |
| 8.125% Series A cumulative redeemable: 5,750,000 and 0 shares issued and outstanding, respectively ($143,750 liquidation preference) | 138,872 |
| | — |
|
| 7.625% Series B cumulative redeemable: 11,500,000 and 0 shares issued and outstanding, respectively ($287,500 liquidation preference) | 278,094 |
| | — |
|
| Common stock, par value $0.01 per share; 450,000,000 shares authorized and 174,489,356 and 173,826,163 shares issued and outstanding, respectively | 3,490 |
| | 3,477 |
|
| Stockholders’ Equity: | |
| Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 24,870,817 and 25,356,426 shares issued and outstanding, respectively ($621,770 and $633,911 liquidation preference, respectively) | |
| Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 24,870,817 and 25,356,426 shares issued and outstanding, respectively ($621,770 and $633,911 liquidation preference, respectively) | |
| Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 24,870,817 and 25,356,426 shares issued and outstanding, respectively ($621,770 and $633,911 liquidation preference, respectively) | |
| Common stock, par value $0.01 per share; 175,000,000 shares authorized and 103,474,944 and 103,206,457 shares issued and outstanding, respectively | |
| Additional paid-in capital | 3,658,835 |
| | 3,659,973 |
|
| Accumulated other comprehensive income | 423,042 |
| | 199,227 |
|
| Accumulated other comprehensive loss | |
| Cumulative earnings | 2,220,700 |
| | 2,038,033 |
|
| Cumulative distributions to stockholders | (2,781,469 | ) | | (2,499,599 | ) |
| Total Stockholders’ Equity | 3,941,564 |
| | 3,401,111 |
|
| Noncontrolling interest | 189,817 |
| | — |
|
| Total Equity | 4,131,381 |
| | 3,401,111 |
|
| Total Liabilities and Equity | $ | 27,803,774 |
| | $ | 20,112,056 |
|
| | Total Liabilities and Stockholders’ Equity | |
| | Total Liabilities and Stockholders’ Equity | |
| | Total Liabilities and Stockholders’ Equity | |
____________________
| |
(1) | (1)The condensed consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of these VIEs, and liabilities of the consolidated VIEs for which creditors do not have recourse to Two Harbors Investment Corp. At September 30, 2017 and December 31, 2016, assets of the VIEs totaled $3,094,462 and $3,336,292, and liabilities of the VIEs totaled $2,804,685 and $3,058,278, respectively. See Note 3 - Variable Interest Entities for additional information. |
The accompanying notes are an integral part of these condensed consolidated financial statements.balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At March 31, 2024 and December 31, 2023, assets of the VIEs totaled $535,160 and $525,259, and liabilities of the VIEs totaled $500,608 and $479,810, respectively. See Note 4 - Variable Interest Entities for additional information.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands, except share data)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Interest income: | | | |
| Available-for-sale securities | $ | 164,169 |
| | $ | 111,393 |
| | $ | 449,908 |
| | $ | 292,333 |
|
| Commercial real estate assets | 30,595 |
| | 15,907 |
| | 80,005 |
| | 40,279 |
|
| Residential mortgage loans held-for-investment in securitization trusts | 29,865 |
| | 33,495 |
| | 92,319 |
| | 100,765 |
|
| Residential mortgage loans held-for-sale | 479 |
| | 7,627 |
| | 1,380 |
| | 19,789 |
|
| Cash and cash equivalents | 1,408 |
| | 440 |
| | 3,087 |
| | 1,235 |
|
| Total interest income | 226,516 |
| | 168,862 |
| | 626,699 |
| | 454,401 |
|
| Interest expense: | | | | | | | |
| Repurchase agreements | 71,754 |
| | 27,056 |
| | 158,065 |
| | 65,782 |
|
| Collateralized borrowings in securitization trusts | 23,970 |
| | 26,422 |
| | 74,199 |
| | 70,965 |
|
| Federal Home Loan Bank advances | 10,317 |
| | 6,744 |
| | 30,554 |
| | 18,804 |
|
| Revolving credit facilities | 701 |
| | 128 |
| | 1,727 |
| | 128 |
|
| Convertible senior notes | 4,745 |
| | — |
| | 13,157 |
| | — |
|
| Total interest expense | 111,487 |
| | 60,350 |
| | 277,702 |
| | 155,679 |
|
| Net interest income | 115,029 |
| | 108,512 |
| | 348,997 |
| | 298,722 |
|
| Other-than-temporary impairments: | | | | |
| |
|
| Total other-than-temporary impairment losses | — |
| | (1,015 | ) | | (429 | ) | | (1,822 | ) |
| Other income (loss): | | | | | | | |
| Gain (loss) on investment securities | 5,618 |
| | 28,290 |
| | (15,485 | ) | | 66,095 |
|
| (Loss) gain on interest rate swap and swaption agreements | (207 | ) | | 5,584 |
| | (66,990 | ) | | (132,608 | ) |
| Loss on other derivative instruments | (18,924 | ) | | (12,028 | ) | | (66,328 | ) | | (44,064 | ) |
| Servicing income | 57,387 |
| | 38,708 |
| | 148,468 |
| | 108,657 |
|
| Loss on servicing asset | (29,245 | ) | | (33,451 | ) | | (90,440 | ) | | (211,426 | ) |
| Gain (loss) on residential mortgage loans held-for-sale | 355 |
| | (889 | ) | | 2,149 |
| | 17,648 |
|
| Other income (loss) | 8,076 |
| | 5,757 |
| | 18,904 |
| | (977 | ) |
| Total other income (loss) | 23,060 |
| | 31,971 |
| | (69,722 | ) | | (196,675 | ) |
| Expenses: | | | | | | | |
| Management fees | 13,276 |
| | 11,387 |
| | 36,518 |
| | 35,268 |
|
| Servicing expenses | 8,893 |
| | 9,073 |
| | 26,116 |
| | 24,510 |
|
| Securitization deal costs | — |
| | 2,080 |
| | — |
| | 6,241 |
|
| Other operating expenses | 16,526 |
| | 14,780 |
| | 51,934 |
| | 47,280 |
|
| Restructuring charges | — |
| | 1,189 |
| | — |
| | 1,189 |
|
| Total expenses | 38,695 |
| | 38,509 |
| | 114,568 |
| | 114,488 |
|
| Income (loss) before income taxes | 99,394 |
| | 100,959 |
| | 164,278 |
| | (14,263 | ) |
| Benefit from income taxes | (5,344 | ) | | (16,827 | ) | | (21,103 | ) | | (26,138 | ) |
| Net income | 104,738 |
| | 117,786 |
| | 185,381 |
| | 11,875 |
|
| Net income attributable to noncontrolling interest | 2,674 |
| | — |
| | 2,714 |
| | — |
|
| Net income attributable to Two Harbors Investment Corp. | 102,064 |
| | 117,786 |
| | 182,667 |
| | 11,875 |
|
| Dividends on preferred stock | 8,888 |
| | — |
| | 13,173 |
| | — |
|
| Net income attributable to common stockholders | $ | 93,176 |
| | $ | 117,786 |
| | $ | 169,494 |
| | $ | 11,875 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited), continued
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2024 | | 2023 | | |
| Net interest income (expense): | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest income | | | | | $ | 117,783 | | | $ | 116,593 | | | |
| | | | | | | | | | |
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| Interest expense | | | | | 160,000 | | | 142,490 | | | |
| Net interest (expense) income | | | | | (42,217) | | | (25,897) | | | |
| Net servicing income: | | | | | | | | | |
| Servicing income | | | | | 166,333 | | | 153,320 | | | |
| Servicing costs | | | | | 7,119 | | | 28,366 | | | |
| Net servicing income | | | | | 159,214 | | | 124,954 | | | |
| Other income (loss): | | | | | | | | | |
| (Loss) gain on investment securities | | | | | (10,975) | | | 10,798 | | | |
| Gain (loss) on servicing asset | | | | | 11,012 | | | (28,079) | | | |
| Gain (loss) on interest rate swap and swaption agreements | | | | | 98,510 | | | (82,154) | | | |
| Gain (loss) on other derivative instruments | | | | | 47,599 | | | (155,771) | | | |
| Other (loss) income | | | | | (3) | | | — | | | |
| Total other income (loss) | | | | | 146,143 | | | (255,206) | | | |
| Expenses: | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Compensation and benefits | | | | | 26,529 | | | 14,083 | | | |
| Other operating expenses | | | | | 21,052 | | | 10,484 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total expenses | | | | | 47,581 | | | 24,567 | | | |
| Income (loss) before income taxes | | | | | 215,559 | | | (180,716) | | | |
| Provision for (benefit from) income taxes | | | | | 11,971 | | | (3,908) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | 203,588 | | | (176,808) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Dividends on preferred stock | | | | | (11,784) | | | (12,365) | | | |
| Gain on repurchase and retirement of preferred stock | | | | | 644 | | | — | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | 192,448 | | | $ | (189,173) | | | |
| Basic earnings (loss) per weighted average common share | | | | | $ | 1.85 | | | $ | (2.05) | | | |
| Diluted earnings (loss) per weighted average common share | | | | | $ | 1.73 | | | $ | (2.05) | | | |
| | | | | | | | | | |
| Weighted average number of shares of common stock: | | | | | | | | | |
| Basic | | | | | 103,401,940 | | | 92,575,840 | | | |
| Diluted | | | | | 112,973,317 | | | 92,575,840 | | | |
| Comprehensive income (loss): | | | | | | | | | |
| Net income (loss) | | | | | $ | 203,588 | | | $ | (176,808) | | | |
| Other comprehensive (loss) income: | | | | | | | | | |
| Unrealized (loss) gain on available-for-sale securities | | | | | (103,078) | | | 125,931 | | | |
| Other comprehensive (loss) income | | | | | (103,078) | | | 125,931 | | | |
| Comprehensive income (loss) | | | | | 100,510 | | | (50,877) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Dividends on preferred stock | | | | | (11,784) | | | (12,365) | | | |
| Gain on repurchase and retirement of preferred stock | | | | | 644 | | | — | | | |
| Comprehensive income (loss) attributable to common stockholders | | | | | $ | 89,370 | | | $ | (63,242) | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Basic earnings per weighted average common share | $ | 0.53 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
| Diluted earnings per weighted average common share | $ | 0.52 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
| Dividends declared per common share | $ | 0.52 |
| | $ | 0.46 |
| | $ | 1.54 |
| | $ | 1.38 |
|
| Weighted average number of shares of common stock: | | | | | | | |
| Basic | 174,488,296 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
| Diluted | 188,907,356 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
| Comprehensive income: | | | | | | | |
| Net income | $ | 104,738 |
| | $ | 117,786 |
| | $ | 185,381 |
| | $ | 11,875 |
|
| Other comprehensive income, net of tax: | | | | | | | |
| Unrealized gain on available-for-sale securities | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
| Other comprehensive income | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
| Comprehensive income | 173,171 |
| | 136,532 |
| | 409,204 |
| | 191,257 |
|
| Comprehensive income attributable to noncontrolling interest | 2,682 |
| | — |
| | 2,724 |
| | — |
|
| Comprehensive income attributable to Two Harbors Investment Corp. | 170,489 |
| | 136,532 |
| | 406,480 |
| | 191,257 |
|
| Dividends on preferred stock | 8,888 |
| | — |
| | 13,173 |
| | — |
|
| Comprehensive income attributable to common stockholders | $ | 161,601 |
| | $ | 136,532 |
| | $ | 393,307 |
| | $ | 191,257 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands, except share data)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 | | | | |
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| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2022 | $ | 630,999 | | | $ | 864 | | | $ | 5,645,998 | | | $ | (278,711) | | | $ | 1,453,371 | | | $ | (5,268,996) | | | $ | 2,183,525 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | (176,808) | | | — | | | (176,808) | | | | | |
| Other comprehensive income before reclassifications | — | | | — | | | — | | | 62,709 | | | — | | | — | | | 62,709 | | | | | |
| Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | 63,222 | | | — | | | — | | | 63,222 | | | | | |
| Other comprehensive income | — | | | — | | | — | | | 125,931 | | | — | | | — | | | 125,931 | | | | | |
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| Issuance of common stock, net of offering costs | — | | | 102 | | | 177,627 | | | — | | | — | | | — | | | 177,729 | | | | | |
| | | | | | | | | | | | | | | | | |
| Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (12,365) | | | (12,365) | | | | | |
| Common dividends declared | — | | | — | | | — | | | — | | | — | | | (58,381) | | | (58,381) | | | | | |
| | | | | | | | | | | | | | | | | |
| Non-cash equity award compensation | — | | | 1 | | | 6,051 | | | — | | | — | | | — | | | 6,052 | | | | | |
| Balance, March 31, 2023 | $ | 630,999 | | | $ | 967 | | | $ | 5,829,676 | | | $ | (152,780) | | | $ | 1,276,563 | | | $ | (5,339,742) | | | $ | 2,245,683 | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2023 | $ | 613,213 | | | $ | 1,032 | | | $ | 5,925,424 | | | $ | (176,429) | | | $ | 1,349,973 | | | $ | (5,509,823) | | | $ | 2,203,390 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 203,588 | | | — | | | 203,588 | | | | | |
| Other comprehensive loss before reclassifications | — | | | — | | | — | | | (109,658) | | | — | | | — | | | (109,658) | | | | | |
| Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | 6,580 | | | — | | | — | | | 6,580 | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | (103,078) | | | — | | | — | | | (103,078) | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Repurchase and retirement of preferred stock | (11,746) | | | — | | | — | | | — | | | 644 | | | — | | | (11,102) | | | | | |
| Issuance of common stock, net of offering costs | — | | | — | | | 54 | | | — | | | — | | | — | | | 54 | | | | | |
| | | | | | | | | | | | | | | | | |
| Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (11,784) | | | (11,784) | | | | | |
| Common dividends declared | — | | | — | | | — | | | — | | | — | | | (47,081) | | | (47,081) | | | | | |
| | | | | | | | | | | | | | | | | |
| Non-cash equity award compensation | — | | | 3 | | | 6,080 | | | — | | | — | | | — | | | 6,083 | | | | | |
| Balance, March 31, 2024 | $ | 601,467 | | | $ | 1,035 | | | $ | 5,931,558 | | | $ | (279,507) | | | $ | 1,554,205 | | | $ | (5,568,688) | | | $ | 2,240,070 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Preferred Stock | | Series B Preferred Stock | | Common Stock | | | | | | | | | | | | | | |
| | Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total Stockholders’ Equity | | Non- controlling Interest | | Total Equity |
| | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Balance, December 31, 2015 | — |
| | $ | — |
| | — |
| | $ | — |
| | 176,953,404 |
| | $ | 3,539 |
| | $ | 3,705,519 |
| | $ | 359,061 |
| | $ | 1,684,755 |
| | $ | (2,176,313 | ) | | $ | 3,576,561 |
| | $ | — |
| | $ | 3,576,561 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,875 |
| | — |
| | 11,875 |
| | — |
| | 11,875 |
|
| Other comprehensive income before reclassifications, net of tax expense of $0.2 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 232,212 |
| | — |
| | — |
| | 232,212 |
| | — |
| | 232,212 |
|
| Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $6.4 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (52,830 | ) | | — |
| | — |
| | (52,830 | ) | | — |
| | (52,830 | ) |
| Other comprehensive income, net of tax benefit of $6.2 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 179,382 |
| | — |
| | — |
| | 179,382 |
| | — |
| | 179,382 |
|
| Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 21,882 |
| | — |
| | 356 |
| | — |
| | — |
| | — |
| | 356 |
| | — |
| | 356 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (4,010,000 | ) | | (80 | ) | | (61,227 | ) | | — |
| | — |
| | — |
| | (61,307 | ) | | — |
| | (61,307 | ) |
| Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (239,849 | ) | | (239,849 | ) | | — |
| | (239,849 | ) |
| Non-cash equity award compensation | — |
| | — |
| | — |
| | — |
| | 852,458 |
| | 17 |
| | 11,206 |
| | — |
| | — |
| | — |
| | 11,223 |
| | — |
| | 11,223 |
|
| Balance, September 30, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
| | 173,817,744 |
| | $ | 3,476 |
| | $ | 3,655,854 |
| | $ | 538,443 |
| | $ | 1,696,630 |
| | $ | (2,416,162 | ) | | $ | 3,478,241 |
| | $ | — |
| | $ | 3,478,241 |
|
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
| Balance, December 31, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
| | 173,826,163 |
| | $ | 3,477 |
| | $ | 3,659,973 |
| | $ | 199,227 |
| | $ | 2,038,033 |
| | $ | (2,499,599 | ) | | $ | 3,401,111 |
| | $ | — |
| | $ | 3,401,111 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 182,667 |
| | — |
| | 182,667 |
| | 2,714 |
| | 185,381 |
|
| Other comprehensive income before reclassifications, net of tax expense of $35.7 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 215,994 |
| | — |
| | — |
| | 215,994 |
| | 10 |
| | 216,004 |
|
| Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $2.7 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,815 |
| | — |
| | — |
| | 7,815 |
| | — |
| | 7,815 |
|
| Other comprehensive income, net of tax expense of $33.0 million | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 223,809 |
| | — |
| | — |
| | 223,809 |
| | 10 |
| | 223,819 |
|
| Issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,777 | ) | | 6 |
| | — |
| | — |
| | (13,771 | ) | | 195,646 |
| | 181,875 |
|
| Acquisition of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (69 | ) | | — |
| | — |
| | — |
| | (69 | ) | | (5,376 | ) | | (5,445 | ) |
| Issuance of preferred stock, net of offering costs | 5,750,000 |
| | 138,872 |
| | 11,500,000 |
| | 278,094 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 416,966 |
| | — |
| | 416,966 |
|
| Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 19,688 |
| | — |
| | 332 |
| | — |
| | — |
| | — |
| | 332 |
| | — |
| | 332 |
|
| Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,173 | ) | | (13,173 | ) | | — |
| | (13,173 | ) |
| Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (268,697 | ) | | (268,697 | ) | | (3,177 | ) | | (271,874 | ) |
| Non-cash equity award compensation | — |
| | — |
| | — |
| | — |
| | 643,505 |
| | 13 |
| | 12,376 |
| | — |
| | — |
| | — |
| | 12,389 |
| | — |
| | 12,389 |
|
| Balance, September 30, 2017 | 5,750,000 |
| | $ | 138,872 |
| | 11,500,000 |
| | $ | 278,094 |
| | 174,489,356 |
| | $ | 3,490 |
| | $ | 3,658,835 |
| | $ | 423,042 |
| | $ | 2,220,700 |
| | $ | (2,781,469 | ) | | $ | 3,941,564 |
| | $ | 189,817 |
| | $ | 4,131,381 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2024 | | 2023 | | |
| Cash Flows From Operating Activities: | | | | | | |
| Net income (loss) | | $ | 203,588 | | | $ | (176,808) | | | |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | |
| Amortization of premiums and discounts on investment securities, net | | 3,559 | | | 7,978 | | | |
| Amortization of deferred debt issuance costs on term notes payable and convertible senior notes | | 620 | | | 659 | | | |
| Provision for (reversal of) credit losses on investment securities | | 80 | | | (142) | | | |
| Realized and unrealized losses (gains) on investment securities | | 10,895 | | | (10,656) | | | |
| (Gain) loss on servicing asset | | (11,012) | | | 28,079 | | | |
| | | | | | |
| Realized and unrealized (gain) loss on interest rate swaps and swaptions | | (84,216) | | | 85,765 | | | |
| Unrealized (gains) losses on other derivative instruments | | (75,520) | | | 67,484 | | | |
| | | | | | |
| | | | | | |
| Equity based compensation | | 6,083 | | | 6,052 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net change in assets and liabilities: | | | | | | |
| Increase in accrued interest receivable | | (148) | | | (4,808) | | | |
| Decrease (increase) in deferred income taxes, net | | 9,868 | | | (5,997) | | | |
| Decrease in accrued interest payable | | (61,783) | | | (19,118) | | | |
| Change in other operating assets and liabilities, net | | (10,684) | | | 21,627 | | | |
| | | | | | |
| Net cash (used in) provided by operating activities | | (8,670) | | | 115 | | | |
| Cash Flows From Investing Activities: | | | | | | |
| Purchases of available-for-sale securities | | (442,831) | | | (2,553,519) | | | |
| Proceeds from sales of available-for-sale securities | | 333,082 | | | 1,360,742 | | | |
| Principal payments on available-for-sale securities | | 136,742 | | | 139,442 | | | |
| | | | | | |
| | | | | | |
| Purchases of mortgage servicing rights, net of purchase price adjustments | | (40,072) | | | (117,441) | | | |
| Proceeds from sales of mortgage servicing rights | | 18,221 | | | 1,854 | | | |
| Short sales (purchases) of derivative instruments, net | | 22,170 | | | (227) | | | |
| Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net | | 179,981 | | | (224,952) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Payments for reverse repurchase agreements | | (1,080,847) | | | (966,485) | | | |
| Proceeds from reverse repurchase agreements | | 1,013,095 | | | 1,549,504 | | | |
| Acquisition of RoundPoint Mortgage Servicing LLC, net of cash acquired | | (20,976) | | | — | | | |
| | | | | | |
| Decrease in due to counterparties, net | | (466,272) | | | (258,903) | | | |
| | | | | | |
| | | | | | |
| Net cash used in investing activities | | $ | (347,707) | | | $ | (1,069,985) | | | |
| | | | | | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| Cash Flows From Operating Activities: | |
| Net income | $ | 185,381 |
| | $ | 11,875 |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
| Amortization of premiums and discounts on investment securities and commercial real estate assets, net | 39,949 |
| | 29,469 |
|
| Amortization of deferred debt issuance costs on convertible senior notes | 429 |
| | — |
|
| Other-than-temporary impairment losses | 429 |
| | 1,822 |
|
| Realized and unrealized losses (gains) on investment securities, net | 15,485 |
| | (66,095 | ) |
| Loss on servicing asset | 90,440 |
| | 211,426 |
|
| Gain on residential mortgage loans held-for-sale | (2,149 | ) | | (17,648 | ) |
| (Gain) loss on residential mortgage loans held-for-investment and collateralized borrowings in securitization trusts | (14,884 | ) | | 5,173 |
|
| (Gain) loss on termination and option expiration of interest rate swaps and swaptions | (68,855 | ) | | 119,548 |
|
| Unrealized loss (gain) on interest rate swaps and swaptions | 124,978 |
| | (5,080 | ) |
| Unrealized loss on other derivative instruments | 37,586 |
| | 2,025 |
|
| Equity based compensation | 12,389 |
| | 11,223 |
|
| Depreciation of fixed assets | 776 |
| | 981 |
|
| Purchases of residential mortgage loans held-for-sale | (567 | ) | | (1,159,782 | ) |
| Proceeds from sales of residential mortgage loans held-for-sale | 3,928 |
| | 95,331 |
|
| Proceeds from repayment of residential mortgage loans held-for-sale | 4,799 |
| | 117,092 |
|
| Net change in assets and liabilities: |
|
| | |
| Increase in accrued interest receivable | (22,694 | ) | | (17,119 | ) |
| Increase in deferred income taxes, net | (21,505 | ) | | (24,581 | ) |
| Decrease in income taxes receivable | 1,412 |
| | 3,667 |
|
| Increase in prepaid and fixed assets | (950 | ) | | (62 | ) |
| (Increase) decrease in other receivables | (1,070 | ) | | 5,721 |
|
| Decrease (increase) in servicing advances | 5,489 |
| | (8,965 | ) |
| Increase in accrued interest payable | 33,227 |
| | 11,084 |
|
| Increase (decrease) in income taxes payable | 142 |
| | (70 | ) |
| Decrease in accrued expenses and other liabilities | (5,425 | ) | | (2,923 | ) |
| Net cash provided by (used in) operating activities | $ | 418,740 |
| | $ | (675,888 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
| | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2024 | | 2023 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Cash Flows From Financing Activities: | | | | | | |
| Proceeds from repurchase agreements | | $ | 12,276,613 | | | $ | 11,321,136 | | | |
| Principal payments on repurchase agreements | | (11,935,182) | | | (10,839,435) | | | |
| | | | | | |
| | | | | | |
| Proceeds from revolving credit facilities | | 58,500 | | | 174,000 | | | |
| Principal payments on revolving credit facilities | | (30,000) | | | — | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Repurchase and retirement of preferred stock | | (11,102) | | | — | | | |
| Proceeds from issuance of common stock, net of offering costs | | 54 | | | 177,729 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Dividends paid on preferred stock | | (12,012) | | | (12,365) | | | |
| Dividends paid on common stock | | (46,899) | | | (52,139) | | | |
| | | | | | |
| Net cash provided by financing activities | | 299,972 | | | 768,926 | | | |
| Net decrease in cash, cash equivalents and restricted cash | | (56,405) | | | (300,944) | | | |
| | | | | | |
| | | | | | |
| Cash, cash equivalents and restricted cash at beginning of period | | 794,833 | | | 1,126,505 | | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 738,428 | | | $ | 825,561 | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | |
| Cash paid for interest | | $ | 215,337 | | | $ | 153,280 | | | |
| Cash paid for taxes, net | | $ | 103 | | | $ | 42 | | | |
| Noncash Activities: | | | | | | |
| | | | | | |
| | | | | | |
| Dividends declared but not paid at end of period | | $ | 58,685 | | | $ | 70,746 | | | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| Cash Flows From Investing Activities: | |
| Purchases of available-for-sale securities | $ | (13,677,423 | ) | | $ | (13,734,884 | ) |
| Proceeds from sales of available-for-sale securities | 5,726,616 |
| | 6,567,992 |
|
| Principal payments on available-for-sale securities | 1,075,961 |
| | 910,386 |
|
| (Purchases) short sales of derivative instruments, net | (93,812 | ) | | (13,953 | ) |
| Proceeds from sales (payments for termination) of derivative instruments, net | 84,791 |
| | 3,209 |
|
| Proceeds from repayment of residential mortgage loans held-for-investment in securitization trusts | 285,695 |
| | 649,134 |
|
| Originations, acquisitions and additional fundings of commercial real estate assets, net of deferred fees | (759,905 | ) | | (463,680 | ) |
| Proceeds from repayment of commercial real estate assets | 6,655 |
| | 15,296 |
|
| Purchases of mortgage servicing rights, net of purchase price adjustments | (327,341 | ) | | (208,474 | ) |
| Proceeds from sales of mortgage servicing rights | 132 |
| | 41,844 |
|
| Purchases of Federal Home Loan Bank stock | — |
| | (11,206 | ) |
| Redemptions of Federal Home Loan Bank stock | 82,681 |
| | — |
|
| (Decrease) increase in due to counterparties, net | (32,652 | ) | | 4,996 |
|
| Net cash used in investing activities | (7,628,602 | ) | | (6,239,340 | ) |
| Cash Flows From Financing Activities: | | | |
| Proceeds from repurchase agreements | 115,034,068 |
| | 70,805,165 |
|
| Principal payments on repurchase agreements | (106,053,027 | ) | | (65,176,066 | ) |
| Proceeds from issuance of collateralized borrowings in securitization trusts | — |
| | 1,875,371 |
|
| Principal payments on collateralized borrowings in securitization trusts | (282,468 | ) | | (568,485 | ) |
| Proceeds from Federal Home Loan Bank advances | — |
| | 215,000 |
|
| Principal payments on Federal Home Loan Bank advances | (2,001,238 | ) | | — |
|
| Proceeds from revolving credit facilities | 123,000 |
| | 30,000 |
|
| Principal payments on revolving credit facilities | (153,000 | ) | | — |
|
| Proceeds from convertible senior notes | 282,469 |
| | — |
|
| Proceeds from issuance of preferred stock, net of offering costs | 416,966 |
| | — |
|
| Proceeds from issuance of common stock, net of offering costs | 332 |
| | 356 |
|
| Proceeds from issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs | 181,875 |
| | — |
|
| Acquisition of noncontrolling interests | (5,445 | ) | | — |
|
| Repurchase of common stock | — |
| | (61,307 | ) |
| Dividends paid on preferred stock | (4,285 | ) | | — |
|
| Dividends paid on common stock | (261,400 | ) | | (251,909 | ) |
| Net cash provided by financing activities | 7,277,847 |
| | 6,868,125 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 67,985 |
| | (47,103 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 815,195 |
| | 1,000,393 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 883,180 |
| | $ | 953,290 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| Supplemental Disclosure of Cash Flow Information: | |
| Cash paid for interest | $ | 169,464 |
| | $ | 77,142 |
|
| Cash received for taxes | $ | (1,152 | ) | | $ | (5,154 | ) |
| Noncash Activities: | | | |
| Transfers of residential mortgage loans held-for-sale to residential mortgage loans held-for-investment in securitization trusts | $ | — |
| | $ | 1,031,707 |
|
| Transfers of residential mortgage loans held-for-sale to other receivables for foreclosed government-guaranteed loans | $ | 2,909 |
| | $ | 14,200 |
|
| Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | $ | 9 |
| | $ | 5,973 |
|
| Additions to mortgage servicing rights due to sale of residential mortgage loans held-for-sale | $ | 20 |
| | $ | 764 |
|
| Dividends declared but not paid at end of period | $ | 102,799 |
| | $ | 79,956 |
|
| Reconciliation of residential mortgage loans held-for-sale: | | | |
| Residential mortgage loans held-for-sale at beginning of period | $ | 40,146 |
| | $ | 811,431 |
|
| Purchases of residential mortgage loans held-for-sale | 567 |
| | 1,159,782 |
|
| Transfers to residential mortgage loans held-for-investment in securitization trusts | — |
| | (1,031,707 | ) |
| Transfers to other receivables for foreclosed government-guaranteed loans | (2,909 | ) | | (14,200 | ) |
| Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | (9 | ) | | (5,973 | ) |
| Proceeds from sales of residential mortgage loans held-for-sale | (3,928 | ) | | (95,331 | ) |
| Proceeds from repayment of residential mortgage loans held-for-sale | (4,799 | ) | | (117,092 | ) |
| Realized and unrealized gains on residential mortgage loans held-for-sale | 2,129 |
| | 16,264 |
|
| Residential mortgage loans held-for-sale at end of period | $ | 31,197 |
| | $ | 723,174 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 1. Organization and Operations
Two Harbors Investment Corp., or the Company, is a Maryland corporation investingfounded in financing2009 that, through its wholly owned subsidiaries (collectively, the Company), invests in, finances and managingmanages mortgage servicing rights, or MSR, Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights,and, through its operational platform, RoundPoint Mortgage Servicing LLC, or MSR, commercial real estate and other financial assets.RoundPoint, is one of the largest servicers of conventional loans in the country. Agency refers to a U.S. government sponsored enterprise, or GSE, such as the Federal National Mortgage Association (or Fannie Mae) or the Federal Home Loan Mortgage Corporation (or Freddie Mac), or a U.S. government agency such as the Government National Mortgage Association (or Ginnie Mae). The Company is externally managedstructured as an internally-managed real estate investment trust, or REIT, and advised by PRCM Advisers LLC, or PRCM Advisers, which is a subsidiary of Pine River Capital Management L.P., or Pine River, a global multi-strategy asset management firm. The Company’sits common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “TWO”.
The Company was incorporatedseeks to leverage its core competencies of understanding and managing interest rate and prepayment risk to invest in its portfolio of MSR and Agency RMBS, with the objective of delivering more stable performance, relative to RMBS portfolios without MSR, across changing market environments. The Company is acutely focused on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, uponcreating sustainable stockholder value over the long term.
Effective September 30, 2023, one of the Company’s wholly owned subsidiaries, Matrix Financial Services Corporation, or Matrix, acquired RoundPoint from Freedom Mortgage Corporation, or Freedom, after the completion of a mergercustomary closing conditions and receiving the required regulatory and GSE approvals. Upon closing, all servicing and origination licenses and operational capabilities remained with Capitol Acquisition Corp., or Capitol, whichRoundPoint, and RoundPoint became a wholly owned indirect subsidiary of Matrix. Management believes this acquisition will add value for stakeholders of the Company through cost savings achieved by bringing the servicing of its MSR portfolio in-house, greater control over the Company’s MSR portfolio and the associated cash flows, and the ability to participate more fully in the mortgage finance space as a result of the merger.opportunities arise.
The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated certain of its subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and the Company may in the future form additional TRSs.activities.
On June 28, 2017, the Company completed the contribution of its portfolio of commercial real estate assets to Granite Point Mortgage Trust Inc., or Granite Point, a newly organized Maryland corporation intended to qualify as a REIT, externally managed and advised by Pine River, and focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. The Company contributed its equity interests in its wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares of common stock of Granite Point, which represented approximately 76.5% of the outstanding stock of Granite Point upon completion of the initial public offering, or IPO, of its common stock on June 28, 2017. Subsequent to the end of the third quarter of 2017, on November 1, 2017, the Company distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock acquired in connection with the contribution to stockholders holding shares of Two Harbors common stock outstanding as of the close of business on October 20, 2017.
Note 2. Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. Certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - Equity for additional information). The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2017 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2017 should not be construed as indicative of the results to be expected for future periods or the full year.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The condensed consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make a number of significant estimates and assumptions. These estimates include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. The Company’s Chief Investment Officer manages the investment portfolio as a whole and resources are allocated and financial performance is assessed on a consolidated basis.
All trust entities in which the Company holds investments that are considered 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.
Due Certain prior period amounts have been reclassified to its controlling ownership interestconform to the current period presentation. The accompanying condensed consolidated financial statements should be read in Granite Point duringconjunction with the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interestnotes thereto included in the Company’s Annual Report on Form 10-K for the portionyear ended December 31, 2023. In the opinion of equitymanagement, all normal and comprehensive income not attributablerecurring adjustments necessary to present fairly the Company. During this consolidation period, the Company’s financial condition of the Company at March 31, 2024 and results of operations reflectfor all of Granite Point’s commercial real estate investments and financing. No other subsidiary of the Company invests in, finances or manages commercial real estate debt and related instruments. Effective November 1, 2017 (the date the 33.1 million shares of Granite Point common stock were distributed to the Company’s common stockholders), the Company no longer has a controlling interest in Granite Point and, therefore, will prospectively deconsolidate the financial condition andperiods presented have been made. The results of operations Granite Pointfor the three months ended March 31, 2024 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 its subsidiariesliabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities 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 financial statements.estimates and the differences may be material.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 20162023 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the nine months ended September 30, 2017.
Convertible Senior Notes
Convertible senior notes include unsecured convertible debt that are carried at their unpaid principal balance, net of any unamortized deferred issuance costs, on the Company’s condensed consolidated balance sheet. Interest on the notes is payable semiannually until such time the notes mature or are converted into shares of the Company’s common stock.
Noncontrolling Interest
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of Granite Point equity and comprehensive income not attributable to the Company. Noncontrolling interest is presented as a separate component of equity on the condensed consolidated balance sheets. In addition, the presentation of both net income and comprehensive income on the condensed consolidated statements of comprehensive income attributes earnings (losses) to the Company’s stockholders (controlling interest) and noncontrolling interests.
Pursuant to Accounting Standards Codification (ASC) 810, Consolidation, changes in a parent’s ownership interest (and transactions with noncontrolling interest stockholders in the subsidiary) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The Company adjusts the carrying amount of noncontrolling interest to reflect (i) changes in its ownership interest in Granite Point and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to the Company, with the offset to equity.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Earnings Per Share
Basic and diluted earnings per share are computed by dividing net income attributable to common stockholders by the weighted average number of common shares and potential common shares outstanding during the period. For both basic and diluted per share calculations, potential common shares represents issued and unvested shares of restricted stock, which have full rights to the common stock dividend declarations of the Company. If the assumed conversion of convertible notes into common shares is dilutive, diluted earnings per share is adjusted by adding back the periodic interest expense (net of any tax effects) associated with dilutive convertible notes to net income attributable to common stockholders and adding the shares issued in an assumed conversion to the diluted weighted average share count. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - Equity for additional information).
Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements, in the case of centrally cleared interest rate swaps. Additionally, the Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty.
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the Company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1) | | |
| (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
| Assets | | | | | | | | | | | |
| Derivative assets | $ | 279,300 |
| | $ | (40,995 | ) | | $ | 238,305 |
| | $ | (11,312 | ) | | $ | — |
| | $ | 226,993 |
|
| Total Assets | $ | 279,300 |
| | $ | (40,995 | ) | | $ | 238,305 |
| | $ | (11,312 | ) | | $ | — |
| | $ | 226,993 |
|
| Liabilities | | | | | | | | | | | |
| Repurchase agreements | $ | (18,297,392 | ) | | $ | — |
| | $ | (18,297,392 | ) | | $ | 18,297,392 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities | (52,307 | ) | | 40,995 |
| | (11,312 | ) | | 11,312 |
| | — |
| | — |
|
| Total Liabilities | $ | (18,349,699 | ) | | $ | 40,995 |
| | $ | (18,308,704 | ) | | $ | 18,308,704 |
| | $ | — |
| | $ | — |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1) | | |
| (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
| Assets | | | | | | | | | | | |
| Derivative assets | $ | 388,522 |
| | $ | (64,340 | ) | | $ | 324,182 |
| | $ | (12,501 | ) | | $ | — |
| | $ | 311,681 |
|
| Total Assets | $ | 388,522 |
| | $ | (64,340 | ) | | $ | 324,182 |
| | $ | (12,501 | ) | | $ | — |
| | $ | 311,681 |
|
| Liabilities | | | | | | | | | | | |
| Repurchase agreements | $ | (9,316,351 | ) | | $ | — |
| | $ | (9,316,351 | ) | | $ | 9,316,351 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities | (76,841 | ) | | 64,340 |
| | (12,501 | ) | | 12,501 |
| | — |
| | — |
|
| Total Liabilities | $ | (9,463,192 | ) | | $ | 64,340 |
| | $ | (9,398,852 | ) | | $ | 9,398,852 |
| | $ | — |
| | $ | — |
|
____________________
| |
(1) | Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets. |
Recently Issued and/or Adopted Accounting Standards
Revenue from Contracts with CustomersImprovements to Reportable Segment Disclosures
In May 2014,November 2023, the Financial Accounting Standards Board, or FASB issued ASU No. 2014-09,2023-07, which requires public entities to disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Public entities with a single reportable segment are required to provide the new disclosures and all the disclosures required under ASC 280, Segment Reporting. The ASU does not change how a public entity identifies its operating segments, aggregates them or applies the quantitative thresholds to determine its reportable segments. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. The guidance should be applied retrospectively to all periods presented in the financial statements, unless it is impracticable. The segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company has early adopted this ASU, which did not have a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goodsmaterial impact on the Company's financial condition, results of operations or servicesfinancial statement disclosures.
Improvements to customers in an amount that reflectsIncome Tax Disclosures
In December 2023, the consideration to which the entity expects to be entitled in exchange for those goods and services. As a result of the issuance ofFASB issued ASU No. 2015-142023-09, which requires entities to provide additional information about federal, state and foreign income taxes and reconciling items in August 2015 deferring the effective daterate reconciliation table, and to disclose further disaggregation of ASU No. 2014-09income taxes paid (net of refunds received) by one year,federal (national), state and foreign taxes by jurisdiction. For public business entities, the ASU is effective for annual periods and interim periods within those annual periods, beginning on or after December 15, 2017,2024, with early adoption prohibited.permitted. The guidance should be applied prospectively, but entities have the option to apply it retrospectively for each period presented. The Company has evaluated the new guidance and determined that interest income, gains and losses on financial instruments and income from servicing residential mortgage loans are outside the scope of ASC 606, Revenues from Contracts with Customers. For income from servicing residential mortgage loans, the Company considered that the FASB Transition Resource Group members generally agreed that an entity should look to ASC 860, Transfers and Servicing, to determine the appropriate accounting for these fees and ASC 606 contains a scope exception for contracts that fall under ASC 860. As a result, the Company has determined that the adoption of this ASU will not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.
RecognitionEnhancement and MeasurementStandardization of Financial Assets and Financial LiabilitiesClimate-Related Disclosures
In January 2016,March 2024, the FASBSecurities and Exchange Commission, or the SEC, issued ASURelease No. 2016-01, which changes how entities measure33-11275, its final rule on the enhancement and standardization of climate-related disclosures for investors requiring registrants to provide certain equity investmentsclimate-related information in their registration statements and present changes in the fair value of financial liabilities measured under the fair value optionannual reports. The rules require information about a registrant’s climate-related risks that are attributablereasonably likely to their own credit. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. Early adoption of this ASU did not have ana material impact on the Company’s financial condition,its business, results of operations, or financial statement disclosures.condition. The required information about climate-related risks will also include disclosure of a registrant’s greenhouse gas emissions. In addition, the rules will require registrants to present certain climate-related financial metrics in their audited financial statements. For large accelerated filers like the Company, the individual requirements will be phased-in with the first phase being effective for the fiscal year beginning January 1, 2025. Disclosures will be required prospectively, with information for prior periods required only to the extent it was previously disclosed in an SEC filing. On April 4, 2024, the SEC voluntarily stayed the final rules pending judicial review. The Company is currently evaluating the impact of these final rules on its consolidated financial statements and disclosure.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 3. Acquisition of RoundPoint Mortgage Servicing LLC
Lease ClassificationEffective September 30, 2023, the Company acquired RoundPoint from Freedom after the completion of customary closing conditions and Accounting
In February 2016,receiving the FASB issued ASU No. 2016-02, which requires lesseesrequired regulatory and GSE approvals. The provisional purchase price recognized was $44.7 million, with $23.6 million paid upon closing and $21.1 million recognized as a payable to recognize on their balance sheets both a lease liability forFreedom within the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impactother liabilities line item on the Company’s financial condition, results of operations or financial statement disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on AFS debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings, with offsetting impacts to accumulated other comprehensive income.
Classification of Certain Cash Receipts and Cash Payments and Restricted Cash
In August 2016, the FASB issued ASU No. 2016-15, which clarifies how entities should classify certain cash receipts and cash payments and how the predominance principle should be applied on the statement of cash flows. Additionally, in November 2016, the FASB issued ASU No. 2016-18, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents, but no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. Both ASUs are effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. Early adoption of these ASUs did not impact the Company’s financial condition or results of operations but impacted the presentation of the statements of cash flows and related footnote disclosures. The Company included restricted cash of $343.8 million, $408.3 million, $264.9 million and $262.6 millionbalance sheet as of September 30, 2017,2023. The Company performed a provisional allocation of the consideration of $44.7 million to RoundPoint’s assets and liabilities, as set forth below. During the three months ended December 31, 2016,2023, the Company recognized a total of $0.2 million in measurement period adjustments, resulting in a final purchase price of $44.5 million. The remaining payable to Freedom of $20.9 million was paid in January 2024. The allocation of the adjusted purchase price of $44.5 million to RoundPoint’s assets and liabilities is also set forth below. The estimate of fair value of assets and liabilities required the use of significant assumptions and estimates. Significant estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and discount rates. These estimates were based on assumptions that management believes to be reasonable as well as a third party-prepared valuation analysis; however, actual results may differ from these estimates. The measurement period adjustments made during the three months ended December 31, 2023 are set forth below. No measurement period adjustments were made subsequent to December 31, 2023.
| | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| (in thousands) | Acquisition Date Amounts Recognized | | Subsequent Measurement Period Adjustments | | Acquisition Date Amounts Recognized, as adjusted |
| Total Consideration | $ | 44,732 | | | $ | (188) | | | $ | 44,544 | |
| Assets: | | | | | |
| Cash and cash equivalents | $ | 50,366 | | | $ | — | | | $ | 50,366 | |
| | | | | |
| Intangible assets | 786 | | | 13 | | | 799 | |
| Other assets | 29,148 | | | — | | | 29,148 | |
| Total Assets Acquired | $ | 80,300 | | | $ | 13 | | | $ | 80,313 | |
| Liabilities: | | | | | |
| Accrued expenses | $ | 4,483 | | | $ | — | | | $ | 4,483 | |
| Other liabilities | 58,739 | | | — | | | 58,739 | |
| Total Liabilities Assumed | $ | 63,222 | | | $ | — | | | $ | 63,222 | |
| Net Assets | $ | 17,078 | | | $ | 13 | | | $ | 17,091 | |
| Goodwill | $ | 27,654 | | | $ | (201) | | | $ | 27,453 | |
As a result of the RoundPoint acquisition, the Company identified intangible assets in the form of mortgage servicing and origination state licenses, insurance state licenses, GSE servicing approvals and trade names. The Company recorded the intangible assets at fair value at the acquisition date and amortizes the value of finite-lived intangibles into expense over the expected useful life. Trade names, with a total acquisition date fair value of $0.2 million, are amortized straight-line over a finite life of six months based on the Company’s determination of the time to change a trade name. The Company determined the licenses and approvals, with a total acquisition date fair value of $0.6 million, have indefinite useful lives and are periodically evaluated for impairment given there are no legal, regulatory, contractual, competitive, or economic factors that would limit their useful lives.
The total goodwill of $27.5 million was calculated as the excess of the total consideration transferred over the net assets acquired and primarily includes the existence of an assembled workforce, synergies and benefits expected to result from combining operations with RoundPoint and adding in-house servicing. The full amount of goodwill for tax purposes of $27.5 million is expected to be deductible. The Company will assess the goodwill annually during the fourth quarter and in interim periods whenever events or circumstances make it more likely than not that an impairment may have occurred.
Acquisition-related costs are expensed in the period incurred and included within the other operating expenses line item in the Company’s condensed consolidated statements of comprehensive income (loss). During the three months ended March 31, 2023, the Company recognized $42 thousand of acquisition-related costs. The Company did not recognize any further acquisition-related costs in 2024.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
As discussed above, the acquisition of RoundPoint closed effective September 30, 20162023. Accordingly, RoundPoint’s consolidated balance sheet is included within the Company’s consolidated balance sheet as of March 31, 2024. Beginning October 1, 2023, RoundPoint’s results of operations have been consolidated with the Company’s in accordance with U.S. GAAP; inter-company accounts and Decembertransactions have been eliminated. The following table presents unaudited pro forma combined revenues and income before income taxes for the three months ended March 31, 2015, respectively, with cash2024 and cash equivalents,2023 prepared as shownif the RoundPoint acquisition had been consummated on January 1, 2023.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
Revenue (1) | | | | | $ | 430,259 | | | $ | 22,827 | | | |
| Income (loss) before income taxes | | | | | $ | 215,559 | | | $ | (192,735) | | | |
____________________
(1)The Company’s revenue is defined as the sum of the interest income, servicing income and total other income line items on the condensed consolidated statements of cash flows.comprehensive income (loss).
The above unaudited supplemental pro forma financial information has not been adjusted for transactions that are now considered inter-company as a result of the acquisition, the conforming of accounting policies, nor the divestiture of RoundPoint’s retail origination business and RPX servicing exchange platform, as required by the stock purchase agreement. The unaudited supplemental pro forma financial information also does not include any anticipated synergies or other anticipated benefits of the RoundPoint acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated on January 1, 2023. Additionally, in the third quarter of 2022, Matrix agreed to engage RoundPoint as a subservicer prior to the closing date and began transferring loans to RoundPoint in the fourth quarter of 2022. As such, prior to the acquisition on September 30, 2023, the Company incurred servicing expenses related to RoundPoint’s subservicing of the Company’s MSR of $5.2 million during the three months ended March 31, 2023. These subservicing expenses are included within the servicing costs line item on the Company’s condensed consolidated statements of comprehensive income (loss).
Note 3.4. Variable Interest Entities
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties orenters into transactions with subsidiary trust entities that are established for limited purposes. One of the Company’s subsidiaries. Additionally,subsidiary trust entities, MSR Issuer Trust, was formed for the purpose of financing MSR through securitization, pursuant to which, through two of the Company’s wholly owned subsidiaries, MSR is pledged to MSR Issuer Trust and in return, 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. The Company has one repurchase facility that is secured by the sole certificate holderVFN, which is collateralized by the Company’s MSR.
Another of the Company’s subsidiary trust entities, Servicing Advance Receivables Issuer Trust, was formed for the purpose of financing servicing advances through a trust entity that holdsrevolving credit facility, pursuant to which Servicing Advance Receivables Issuer Trust issued a commercial real estate loan. All of these trustsVFN backed by servicing advances pledged to the financing counterparty.
Both MSR Issuer Trust and Servicing Advance Receivables Issuer Trust are considered VIEs for financial reporting purposes and thus, were reviewed for consolidation under the applicable consolidation guidance. BecauseAs 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 is the primary beneficiary and, thus, consolidates the trusts. AsAdditionally, in accordance with arrangements entered into in connection with the securitization transaction and the servicing advance revolving credit facility, the Company is requiredhas direct financial obligations payable to reassess VIE consolidation guidance each quarter, new factsboth MSR Issuer Trust and circumstances may changeServicing Advance Receivables Issuer Trust, which, in turn, support MSR Issuer Trust’s obligations to noteholders under the Company’s determination. A change in the Company’s determination could result in a material impactsecuritization transaction and Servicing Advance Receivables Issuer Trust’s obligations to the Company’s condensed consolidated financial statements during subsequent reporting periods.
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 September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
Note receivable (1) | $ | 399,654 | | | $ | 399,317 | |
| | | |
| Restricted cash | 41,013 | | | 45,642 | |
Accrued interest receivable (1) | 641 | | | 551 | |
| Other assets | 93,852 | | | 79,749 | |
| Total Assets | $ | 535,160 | | | $ | 525,259 | |
| Term notes payable | $ | 399,654 | | | $ | 399,317 | |
| Revolving credit facilities | 59,300 | | | 34,300 | |
| Accrued interest payable | 1,066 | | | 816 | |
| Other liabilities | 40,588 | | | 45,377 | |
| Total Liabilities | $ | 500,608 | | | $ | 479,810 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Residential mortgage loans held-for-investment in securitization trusts | $ | 3,031,191 |
| | $ | 3,271,317 |
|
| Commercial real estate assets | 45,889 |
| | 45,885 |
|
| Accrued interest receivable | 17,382 |
| | 19,090 |
|
| Total Assets | $ | 3,094,462 |
| | $ | 3,336,292 |
|
| Collateralized borrowings in securitization trusts | $ | 2,785,413 |
| | $ | 3,037,196 |
|
| Accrued interest payable | 7,894 |
| | 8,708 |
|
| Other liabilities | 11,378 |
| | 12,374 |
|
| Total Liabilities | $ | 2,804,685 |
| | $ | 3,058,278 |
|
(1)Receivables due from a wholly owned subsidiary of the Company to the trusts are eliminated in consolidation in accordance with U.S. GAAP.
The
Additionally, the Company entered into a definitive stock purchase agreement on August 2, 2022 to acquire RoundPoint whereby the preliminary purchase price was subject to a post-closing adjustment based on RoundPoint’s aggregate “earnings” (as defined in the stock purchase agreement) from October 1, 2022 through the closing date, or the Interim Period, in addition to other post-closing adjustments. During the Interim Period, the manner in which the purchase price is not requiredcalculated represented an implicit guarantee of the value of RoundPoint’s net book value, in which the Company held the variable interests. These terms also indicated that RoundPoint met the criteria to consolidate VIEsbe considered a VIE that the Company must review for which it has concluded it doesconsolidation. As the Company had the obligation to absorb losses and the right to receive benefits of RoundPoint during the Interim Period that could be significant, but not have both the power to direct the activities of the VIEsRoundPoint that most significantly impactimpacted its performance, the entities’ performance,Company was not the primary beneficiary and, thus, did not consolidate RoundPoint during the obligationInterim Period. Effective September 30, 2023, the parties had satisfied customary closing conditions and received the required regulatory and GSE approvals to absorb losses orclose the right to receive benefitstransaction. Upon closing, RoundPoint became a consolidated wholly owned subsidiary of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of September 30, 2017Company and December 31, 2016, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $2.6 billion and $1.9 billion, respectively.no longer considered a VIE.
Note 4.5. 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. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Agency: | | | |
| Federal National Mortgage Association | $ | 5,205,459 | | | $ | 5,467,684 | |
| Federal Home Loan Mortgage Corporation | 2,913,167 | | | 2,790,662 | |
| Government National Mortgage Association | 59,965 | | | 64,653 | |
| | | |
| Non-Agency | 3,953 | | | 4,150 | |
| Total available-for-sale securities | $ | 8,182,544 | | | $ | 8,327,149 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Agency | | | |
| Federal National Mortgage Association | $ | 13,057,102 |
| | $ | 8,274,507 |
|
| Federal Home Loan Mortgage Corporation | 3,972,963 |
| | 2,742,630 |
|
| Government National Mortgage Association | 524,306 |
| | 209,337 |
|
| Non-Agency | 2,644,723 |
| | 1,902,383 |
|
| Total available-for-sale securities | $ | 20,199,094 |
| | $ | 13,128,857 |
|
At September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company pledged AFS securities with a carrying value of $20.0$8.2 billion and $13.1$8.1 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB.agreements. See Note 1512 - Repurchase Agreements.
At March 31, 2024 and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At September 30, 2017 and December 31, 2016,2023, 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 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, 2024 and December 31, 2023, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $4.0 million and $4.2 million, respectively.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (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 | $ | 8,380,115 | | | $ | 151,096 | | | $ | (123,837) | | | | | $ | 8,407,374 | | | $ | — | | | $ | 6,079 | | | $ | (283,136) | | | $ | 8,130,317 | |
| Interest-only | 787,501 | | | 55,875 | | | — | | | | | 55,875 | | | (3,217) | | | 620 | | | (5,004) | | | 48,274 | |
| Total Agency | 9,167,616 | | | 206,971 | | | (123,837) | | | | | 8,463,249 | | | (3,217) | | | 6,699 | | | (288,140) | | | 8,178,591 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Non-Agency | 551,699 | | | 4,082 | | | (19) | | | | | 4,689 | | | (390) | | | 164 | | | (510) | | | 3,953 | |
| Total | $ | 9,719,315 | | | $ | 211,053 | | | $ | (123,856) | | | | | $ | 8,467,938 | | | $ | (3,607) | | | $ | 6,863 | | | $ | (288,650) | | | $ | 8,182,544 | |
|
| | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Agency | | Non-Agency | | Total |
| Face Value | $ | 19,303,065 |
| | $ | 3,538,252 |
| | $ | 22,841,317 |
|
| Unamortized premium | 1,038,789 |
| | — |
| | 1,038,789 |
|
| Unamortized discount | | | | | |
| Designated credit reserve | — |
| | (525,687 | ) | | (525,687 | ) |
| Net, unamortized | (2,789,785 | ) | | (816,260 | ) | | (3,606,045 | ) |
| Amortized Cost | 17,552,069 |
| | 2,196,305 |
| | 19,748,374 |
|
| Gross unrealized gains | 120,236 |
| | 451,182 |
| | 571,418 |
|
| Gross unrealized losses | (117,934 | ) | | (2,764 | ) | | (120,698 | ) |
| Carrying Value | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| (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 | $ | 8,421,733 | | | $ | 155,171 | | | $ | (130,932) | | | | | $ | 8,445,972 | | | $ | — | | | $ | 22,677 | | | $ | (196,748) | | | $ | 8,271,901 | |
| Interest-only | 840,723 | | | 58,567 | | | — | | | | | 58,567 | | | (3,619) | | | 907 | | | (4,757) | | | 51,098 | |
| Total Agency | 9,262,456 | | | 213,738 | | | (130,932) | | | | | 8,504,539 | | | (3,619) | | | 23,584 | | | (201,505) | | | 8,322,999 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Non-Agency | 569,897 | | | 4,199 | | | (19) | | | | | 4,844 | | | (324) | | | 173 | | | (543) | | | 4,150 | |
| Total | $ | 9,832,353 | | | $ | 217,937 | | | $ | (130,951) | | | | | $ | 8,509,383 | | | $ | (3,943) | | | $ | 23,757 | | | $ | (202,048) | | | $ | 8,327,149 | |
|
| | | | | | | | | | | |
| | December 31, 2016 |
| (in thousands) | Agency | | Non-Agency | | Total |
| Face Value | $ | 13,571,417 |
|
| $ | 2,732,139 |
| | $ | 16,303,556 |
|
| Unamortized premium | 571,749 |
|
| — |
| | 571,749 |
|
| Unamortized discount | | | | | |
| Designated credit reserve | — |
|
| (367,437 | ) | | (367,437 | ) |
| Net, unamortized | (2,758,445 | ) |
| (808,975 | ) | | (3,567,420 | ) |
| Amortized Cost | 11,384,721 |
|
| 1,555,727 |
| | 12,940,448 |
|
| Gross unrealized gains | 79,040 |
|
| 353,358 |
| | 432,398 |
|
| Gross unrealized losses | (237,287 | ) |
| (6,702 | ) | | (243,989 | ) |
| Carrying Value | $ | 11,226,474 |
| | $ | 1,902,383 |
| | $ | 13,128,857 |
|
The following tables present the carrying value of the Company’s AFS securities by rate type as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Agency | | Non-Agency | | Total |
| Adjustable Rate | $ | 24,960 |
| | $ | 2,300,247 |
| | $ | 2,325,207 |
|
| Fixed Rate | 17,529,411 |
| | 344,476 |
| | 17,873,887 |
|
| Total | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
|
| | | | | | | | | | | |
| | December 31, 2016 |
| (in thousands) | Agency | | Non-Agency | | Total |
| Adjustable Rate | $ | 30,463 |
| | $ | 1,574,850 |
| | $ | 1,605,313 |
|
| Fixed Rate | 11,196,011 |
| | 327,533 |
| | 11,523,544 |
|
| Total | $ | 11,226,474 |
| | $ | 1,902,383 |
| | $ | 13,128,857 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of September 30, 2017:March 31, 2024:
| | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (in thousands) | Agency | | Non-Agency | | Total |
| < 1 year | $ | 282 | | | $ | — | | | $ | 282 | |
| ≥ 1 and < 3 years | 16,243 | | | — | | | 16,243 | |
| ≥ 3 and < 5 years | 177,196 | | | — | | | 177,196 | |
| ≥ 5 and < 10 years | 7,984,870 | | | 3,631 | | | 7,988,501 | |
| ≥ 10 years | — | | | 322 | | | 322 | |
| Total | $ | 8,178,591 | | | $ | 3,953 | | | $ | 8,182,544 | |
|
| | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Agency | | Non-Agency | | Total |
| ≤ 1 year | $ | 15,632 |
| | $ | 165,060 |
| | $ | 180,692 |
|
| > 1 and ≤ 3 years | 38,357 |
| | 249,220 |
| | 287,577 |
|
| > 3 and ≤ 5 years | 1,192,719 |
| | 435,531 |
| | 1,628,250 |
|
| > 5 and ≤ 10 years | 16,285,575 |
| | 1,043,103 |
| | 17,328,678 |
|
| > 10 years | 22,088 |
| | 751,809 |
| | 773,897 |
|
| Total | $ | 17,554,371 |
| | $ | 2,644,723 |
| | $ | 20,199,094 |
|
When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the three and nine months ended September 30, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| (in thousands) | Designated Credit Reserve | | Unamortized Net Discount | | Total | | Designated Credit Reserve | | Unamortized Net Discount | | Total |
| Beginning balance at January 1 | $ | (367,437 | ) | | $ | (808,975 | ) | | $ | (1,176,412 | ) | | $ | (409,077 | ) | | $ | (707,021 | ) | | $ | (1,116,098 | ) |
| Acquisitions | (217,206 | ) | | (111,938 | ) | | (329,144 | ) | | (45,398 | ) | | (140,318 | ) | | (185,716 | ) |
| Accretion of net discount | — |
| | 67,219 |
| | 67,219 |
| | — |
| | 50,596 |
| | 50,596 |
|
| Realized credit losses | 11,385 |
| | — |
| | 11,385 |
| | 279 |
| | — |
| | 279 |
|
| Reclassification adjustment for other-than-temporary impairments | (429 | ) | | — |
| | (429 | ) | | (1,226 | ) | | — |
| | (1,226 | ) |
| Transfers from (to) | 44,412 |
| | (44,412 | ) | | — |
| | 70,371 |
| | (70,371 | ) | | — |
|
| Sales, calls, other | 3,588 |
| | 81,846 |
| | 85,434 |
| | 32,562 |
| | 77,689 |
| | 110,251 |
|
| Ending balance at September 30 | $ | (525,687 | ) | | $ | (816,260 | ) | | $ | (1,341,947 | ) | | $ | (352,489 | ) | | $ | (789,425 | ) | | $ | (1,141,914 | ) |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Measurement of Allowances for Credit Losses on AFS Securities
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. The following table presents the changes for the three months ended March 31, 2024 and 2023 in the allowance for credit losses on Agency and non-Agency AFS securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Three Months Ended |
| March 31, 2024 | | | | March 31, 2023 |
| | | | | |
| (in thousands) | Agency | | Non-Agency | | Total | | | | | | | | Agency | | Non-Agency | | Total |
| Allowance for credit losses at beginning of period | $ | (3,619) | | | $ | (324) | | | $ | (3,943) | | | | | | | | | $ | (6,785) | | | $ | (173) | | | $ | (6,958) | |
| | | | | | | | | | | | | | | | | |
| Additions on securities for which credit losses were not previously recorded | (37) | | | (17) | | | (54) | | | | | | | | | — | | | (318) | | | (318) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Decrease (increase) on securities with previously recorded credit losses | 24 | | | (50) | | | (26) | | | | | | | | | 827 | | | (367) | | | 460 | |
| Write-offs | 415 | | | 1 | | | 416 | | | | | | | | | 684 | | | 210 | | | 894 | |
| | | | | | | | | | | | | | | | | |
| Allowance for credit losses at end of period | $ | (3,217) | | | $ | (390) | | | $ | (3,607) | | | | | | | | | $ | (5,274) | | | $ | (648) | | | $ | (5,922) | |
The following tables present the components comprising the carrying value of AFS securities for which an allowance for credit losses has not deemed to be other than temporarily impairedbeen recorded by length of time that the securities had an unrealized loss position as of September 30, 2017March 31, 2024 and December 31, 2016.2023. At September 30, 2017,March 31, 2024 and December 31, 2023, the Company held 1,380647 and 646 AFS securities, respectively; of the securities for which 152an allowance for credit losses has not been recorded, 530 and 477 were in an unrealized loss position for less than twelve consecutive monthsmonths. At both March 31, 2024 and 164December 31, 2023, none of the Company’s AFS securities were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,239 AFS securities, of which 252 were inmonths without an unrealized loss positionallowance for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. Of the $4.1 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2017 and December 31, 2016, $3.9 billion, or 95.1%, and $6.1 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.credit losses recorded.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| 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 | $ | 7,023,251 | | | $ | (285,881) | | | $ | — | | | $ | — | | | $ | 7,023,251 | | | $ | (285,881) | |
| Non-Agency | 249 | | | (73) | | | — | | | — | | | 249 | | | (73) | |
| Total | $ | 7,023,500 | | | $ | (285,954) | | | $ | — | | | $ | — | | | $ | 7,023,500 | | | $ | (285,954) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| 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 | $ | 6,269,848 | | | $ | (199,276) | | | $ | — | | | $ | — | | | $ | 6,269,848 | | | $ | (199,276) | |
| Non-Agency | 883 | | | (173) | | | — | | | — | | | 883 | | | (173) | |
| Total | $ | 6,270,731 | | | $ | (199,449) | | | $ | — | | | $ | — | | | $ | 6,270,731 | | | $ | (199,449) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Unrealized Loss Position for |
| | Less than 12 Months | | 12 Months or More | | Total |
| (in thousands) | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| September 30, 2017 | $ | 4,136,362 |
| | $ | (22,669 | ) | | $ | 2,341,707 |
| | $ | (98,029 | ) | | $ | 6,478,069 |
| | $ | (120,698 | ) |
| December 31, 2016 | $ | 6,416,820 |
| | $ | (204,034 | ) | | $ | 504,978 |
| | $ | (39,955 | ) | | $ | 6,921,798 |
| | $ | (243,989 | ) |
Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income, net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
During the nine months ended September 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency security where the future expected cash flows for the security were less than its amortized cost. The Company did not record any other-than-temporary credit impairments during the three months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded $1.0 million and $1.8 million, respectively, in other-than-temporary credit impairments on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2017, impaired securities with a carrying value of $117.6 million had actual weighted average cumulative losses of 5.3%, weighted average three-month prepayment speed of 7.3%, weighted average 60+ day delinquency of 21.8% of the pool balance, and weighted average FICO score of 659. At September 30, 2017, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the changes in OTTI included in earnings for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Cumulative credit loss at beginning of period | $ | (6,035 | ) | | $ | (6,710 | ) | | $ | (5,606 | ) | | $ | (6,499 | ) |
| Additions: | | | | | | | |
| Other-than-temporary impairments not previously recognized | — |
| | (1,015 | ) | | (429 | ) | | (1,307 | ) |
| Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments | — |
| | — |
| | — |
| | (515 | ) |
| Reductions: | | | | | | | |
| Decreases related to other-than-temporary impairments on securities paid down | — |
| | — |
| | — |
| | — |
|
| Decreases related to other-than-temporary impairments on securities sold | — |
| | — |
| | — |
| | 596 |
|
| Cumulative credit loss at end of period | $ | (6,035 | ) | | $ | (7,725 | ) | | $ | (6,035 | ) | | $ | (7,725 | ) |
Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within (loss) gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, the Company sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion for net realized losses of $3.9 million and $21.0 million, respectively. For the three and nine months ended September 30, 2016, the Company sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion for net realized gains of $31.8 million and $63.3 million, respectively.
income (loss). The following table presents the gross realized gains and losses ondetails around sales of AFS securities forduring the three and nine months ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
| Proceeds from sales of available-for-sale securities | | | | | $ | 333,082 | | | $ | 1,360,742 | | | |
| Amortized cost of available-for-sale securities sold | | | | | (343,245) | | | (1,393,484) | | | |
| Total realized losses on sales, net | | | | | $ | (10,163) | | | $ | (32,742) | | | |
| | | | | | | | | |
| Gross realized gains | | | | | $ | — | | | $ | 14,070 | | | |
| Gross realized losses | | | | | (10,163) | | | (46,812) | | | |
| Total realized losses on sales, net | | | | | $ | (10,163) | | | $ | (32,742) | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Gross realized gains | $ | 408 |
| | $ | 31,942 |
| | $ | 57,133 |
| | $ | 77,836 |
|
| Gross realized losses | (4,342 | ) | | (164 | ) | | (78,125 | ) | | (14,487 | ) |
| Total realized (losses) gains on sales, net | $ | (3,934 | ) | | $ | 31,778 |
| | $ | (20,992 | ) | | $ | 63,349 |
|
Note 5. Commercial Real Estate Assets
The Company originates and purchases commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as commercial real estate assets on the condensed consolidated balance sheets. Additionally, the Company is the sole certificate holder of a trust entity that holds a commercial real estate loan. The underlying loan held by the trust is consolidated on the Company’s condensed consolidated balance sheet and classified as commercial real estate assets. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Commercial real estate assets are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following tables summarize the Company’s commercial real estate assets by asset type, property type and geographic location as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | |
| | September 30,
2017 |
| (dollars in thousands) | First Mortgages | | Mezzanine Loans | | B-Notes | | Total |
| Unpaid principal balance | $ | 2,041,767 |
| | $ | 132,605 |
| | $ | 14,892 |
| | $ | 2,189,264 |
|
| Unamortized (discount) premium | (174 | ) | | (11 | ) | | — |
| | (185 | ) |
| Unamortized net deferred origination fees | (17,695 | ) | | (40 | ) | | — |
| | (17,735 | ) |
| Carrying value | $ | 2,023,898 |
|
| $ | 132,554 |
| | $ | 14,892 |
| | $ | 2,171,344 |
|
| Unfunded commitments | $ | 270,654 |
| | $ | 1,580 |
| | $ | — |
| | $ | 272,234 |
|
| Number of loans | 50 |
| | 6 |
| | 1 |
| | 57 |
|
| Weighted average coupon | 5.6 | % | | 9.1 | % | | 8.0 | % | | 5.9 | % |
Weighted average years to maturity (1) | 2.5 |
| | 1.9 |
| | 9.3 |
| | 2.5 |
|
|
| | | | | | | | | | | | | | | |
| | December 31,
2016 |
| (dollars in thousands) | First Mortgages | | Mezzanine Loans | | B-Notes | | Total |
| Unpaid principal balance | $ | 1,286,200 |
| | $ | 138,245 |
| | $ | — |
| | $ | 1,424,445 |
|
| Unamortized (discount) premium | (185 | ) | | (15 | ) | | — |
| | (200 | ) |
| Unamortized net deferred origination fees | (11,481 | ) | | (221 | ) | | — |
| | (11,702 | ) |
| Carrying value | $ | 1,274,534 |
| | $ | 138,009 |
| | $ | — |
| | $ | 1,412,543 |
|
| Unfunded commitments | $ | 170,890 |
| | 1,580 |
| | $ | — |
| | $ | 172,470 |
|
| Number of loans | 30 |
| | 6 |
| | — |
| | 36 |
|
| Weighted average coupon | 5.1 | % | | 8.6 | % | | — | % | | 5.4 | % |
Weighted average years to maturity (1) | 2.9 |
| | 1.5 |
| | 0.0 |
| | 2.8 |
|
____________________
| |
(1) | Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications. |
|
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2017 | | December 31,
2016 |
| Property Type | | Carrying Value | | % of Commercial Portfolio | | Carrying Value | | % of Commercial Portfolio |
| Office | | $ | 1,133,866 |
| | 52.2 | % | | $ | 718,780 |
| | 50.9 | % |
| Multifamily | | 385,222 |
| | 17.7 | % | | 260,683 |
| | 18.5 | % |
| Retail | | 247,196 |
| | 11.4 | % | | 237,414 |
| | 16.8 | % |
| Hotel | | 209,874 |
| | 9.7 | % | | 90,585 |
| | 6.4 | % |
| Industrial | | 195,186 |
| | 9.0 | % | | 105,081 |
| | 7.4 | % |
| Total | | $ | 2,171,344 |
| | 100.0 | % | | $ | 1,412,543 |
| | 100.0 | % |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2017 | | December 31,
2016 |
| Geographic Location | | Carrying Value | | % of Commercial Portfolio | | Carrying Value | | % of Commercial Portfolio |
| Northeast | | $ | 924,383 |
| | 42.6 | % | | $ | 578,762 |
| | 41.0 | % |
| West | | 414,612 |
| | 19.1 | % | | 250,044 |
| | 17.7 | % |
| Southwest | | 363,907 |
| | 16.8 | % | | 267,944 |
| | 19.0 | % |
| Southeast | | 350,407 |
| | 16.1 | % | | 239,194 |
| | 16.9 | % |
| Midwest | | 118,035 |
| | 5.4 | % | | 76,599 |
| | 5.4 | % |
| Total | | $ | 2,171,344 |
| | 100.0 | % | | $ | 1,412,543 |
| | 100.0 | % |
At September 30, 2017 and December 31, 2016, the Company pledged commercial real estate assets with a carrying value of $2.0 billion and $1.4 billion, respectively, as collateral for repurchase agreements and FHLB advances. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
The following table summarizes activity related to commercial real estate assets for the three and nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 1,782,749 |
| | $ | 926,377 |
| | $ | 1,412,543 |
| | $ | 660,953 |
|
| Originations, acquisitions and additional fundings | 393,425 |
| | 190,100 |
| | 771,473 |
| | 470,547 |
|
| Repayments | (409 | ) | | (908 | ) | | (6,655 | ) | | (15,295 | ) |
| Net (premium amortization) discount accretion | 6 |
| | 64 |
| | (11 | ) | | 204 |
|
| Increase in net deferred origination fees | (5,858 | ) | | (2,858 | ) | | (11,568 | ) | | (6,867 | ) |
| Amortization of net deferred origination fees | 1,431 |
| | 1,773 |
| | 5,562 |
| | 5,006 |
|
| Allowance for loan losses | — |
| | — |
| | — |
| | — |
|
| Balance at end of period | $ | 2,171,344 |
| | $ | 1,114,548 |
| | $ | 2,171,344 |
| | $ | 1,114,548 |
|
The Company evaluates each loan for impairment at least quarterly by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, project sponsorship, and other factors deemed necessary. Risk ratings are defined as follows:
| |
4 – | Higher Risk: A loan that has exhibited material deterioration in cash flows and/or other credit factors, which, if negative trends continue, could be indicative of future loss. |
| |
5 – | Impaired/Loss Likely: A loan that has a significantly increased probability of default or principal loss. |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the number of loans, unpaid principal balance and carrying value (amortized cost) by risk rating for commercial real estate assets as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | September 30,
2017 | | December 31,
2016 |
| Risk Rating | | Number of Loans | | Unpaid Principal Balance | | Carrying Value | | Number of Loans | | Unpaid Principal Balance | | Carrying Value |
| 1 – 3 | | 57 |
| | $ | 2,189,264 |
| | $ | 2,171,344 |
| | 36 |
| | $ | 1,424,445 |
| | $ | 1,412,543 |
|
| 4 – 5 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 57 |
| | $ | 2,189,264 |
| | $ | 2,171,344 |
| | 36 |
| | $ | 1,424,445 |
| | $ | 1,412,543 |
|
The Company has not recorded any allowances for losses as no loans are past-due and it is not deemed probable that the Company will not be able to collect all amounts due pursuant to the contractual terms of the loans.
Note 6. Servicing Activities
Mortgage Servicing Rights, at Fair Value
One of the Company’s wholly owned subsidiaries, Matrix, has approvals from Fannie Mae and Freddie Mac and Ginnie Mae to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. The CompanyMatrix acquires MSR from third-party originators through flow and its subsidiaries dobulk purchases but does not originate or directly service mortgage loans, andloans; instead, contractit contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the mortgage loans underlying the Company’s MSR. On October 1, 2023, the Company, through its newly acquired subsidiary RoundPoint, began directly servicing a portion of the mortgage loans underlying the Company’s MSR portfolio as well as servicing mortgage loans underlying MSR owned by third parties. RoundPoint has approvals from Fannie Mae and Freddie Mac to service residential mortgage loans.
The following table summarizes activity related to the Company’s MSR portfolio for the three and nine months ended September 30, 2017March 31, 2024 and 2016.2023.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 898,025 |
| | $ | 427,813 |
| | $ | 693,815 |
| | $ | 493,688 |
|
| Additions from purchases of mortgage servicing rights | 66,280 |
| | 98,224 |
| | 340,156 |
| | 204,435 |
|
| Additions from sales of residential mortgage loans | — |
| | 242 |
| | 20 |
| | 764 |
|
| Subtractions from sales of mortgage servicing rights | — |
| | (60,910 | ) | | (946 | ) | | (60,910 | ) |
| Changes in fair value due to: | | | | | | | |
| Changes in valuation inputs or assumptions used in the valuation model | (154 | ) | | 3,846 |
| | (23,083 | ) | | (139,587 | ) |
Other changes in fair value (1) | (28,595 | ) | | (18,231 | ) | | (66,543 | ) | | (52,773 | ) |
Other changes (2) | (4,943 | ) | | 4,645 |
| | (12,806 | ) | | 10,012 |
|
| Balance at end of period | $ | 930,613 |
| | $ | 455,629 |
| | $ | 930,613 |
| | $ | 455,629 |
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
| Balance at beginning of period | | | | | $ | 3,052,016 | | | $ | 2,984,937 | | | |
| Purchases of mortgage servicing rights | | | | | 40,335 | | | 118,341 | | | |
| | | | | | | | | |
| Sales of mortgage servicing rights | | | | | (12,871) | | | (2,693) | | | |
| Changes in fair value due to: | | | | | | | | | |
Changes in valuation inputs or assumptions used in the valuation model (1) | | | | | 54,430 | | | 20,421 | | | |
Other changes in fair value (2) | | | | | (48,768) | | | (47,661) | | | |
Other changes (3) | | | | | (263) | | | (900) | | | |
Balance at end of period (4) | | | | | $ | 3,084,879 | | | $ | 3,072,445 | | | |
____________________
| |
(1) | Other changes in fair value primarily represents changes due to the realization of expected cash flows. |
| |
(2) | Other changes includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral. |
(1)Includes the impact of acquiring MSR at a cost different from fair value.
(2)Primarily represents changes due to the realization of 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 September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company pledged MSR with a carrying value of $160.6 million$3.0 billion and $180.9 million,$3.0 billion, respectively, as collateral for repurchase agreements, revolving credit facilities.facilities and term notes payable. See Note 1812 - Repurchase Agreements, Note 13 - Revolving Credit Facilitiesand Note 14 - Term Notes Payable.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, 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,
2024 | | December 31,
2023 |
| Weighted average prepayment speed: | 6.2 | % | | 6.2 | % |
| Impact on fair value of 10% adverse change | $ | (78,387) | | | $ | (74,042) | |
| Impact on fair value of 20% adverse change | $ | (154,074) | | | $ | (146,237) | |
| Weighted average delinquency: | 1.0 | % | | 0.9 | % |
| Impact on fair value of 10% adverse change | $ | (5,445) | | | $ | (4,654) | |
| Impact on fair value of 20% adverse change | $ | (13,974) | | | $ | (12,376) | |
| Weighted average option-adjusted spread: | 5.4 | % | | 5.3 | % |
| Impact on fair value of 10% adverse change | $ | (71,353) | | | $ | (59,285) | |
| Impact on fair value of 20% adverse change | $ | (138,989) | | | $ | (119,776) | |
| Weighted average per loan annual cost to service: | $ | 68.47 | | | $ | 68.27 | |
| Impact on fair value of 10% adverse change | $ | (27,471) | | | $ | (24,111) | |
| Impact on fair value of 20% adverse change | $ | (55,188) | | | $ | (48,985) | |
|
| | | | | | | |
| (dollars in thousands) | September 30,
2017 | | December 31,
2016 |
| Weighted average prepayment speed: | 10.8 | % | | 9.2 | % |
| Impact on fair value of 10% adverse change | $ | (36,170 | ) | | $ | (25,012 | ) |
| Impact on fair value of 20% adverse change | $ | (69,455 | ) | | $ | (48,602 | ) |
| Weighted average delinquency: | 1.7 | % | | 1.9 | % |
| Impact on fair value of 10% adverse change | $ | (4,002 | ) | | $ | (1,908 | ) |
| Impact on fair value of 20% adverse change | $ | (8,065 | ) | | $ | (3,816 | ) |
| Weighted average discount rate: | 9.9 | % | | 9.4 | % |
| Impact on fair value of 10% adverse change | $ | (29,873 | ) | | $ | (23,590 | ) |
| Impact on fair value of 20% adverse change | $ | (57,481 | ) | | $ | (45,861 | ) |
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.
Risk Mitigation Activities
The primary riskrisks associated with the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant declineare changes in interest rates, could lead to higher-than-expected prepayments that could reduce the value of the MSR.mortgage spreads and prepayments. The Company economically hedges the impact of these risksinterest rate and mortgage spread risk primarily with its Agency RMBS portfolio. Prepayment risk is carefully monitored and partially mitigated through the Company’s ability to retain the MSR, in certain circumstances, through recapture agreements with its subservicers if the underlying loan is refinanced.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
| Servicing fee income | | | | | $ | 134,320 | | | $ | 129,237 | | | |
| Ancillary and other fee income | | | | | 3,857 | | | 369 | | | |
| Float income | | | | | 28,156 | | | 23,714 | | | |
| Total | | | | | $ | 166,333 | | | $ | 153,320 | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Servicing fee income | $ | 53,989 |
| | $ | 37,226 |
| | $ | 141,923 |
| | $ | 104,765 |
|
| Ancillary and other fee income | 310 |
| | 449 |
| | 615 |
| | 1,423 |
|
| Float income | 3,088 |
| | 1,033 |
| | 5,930 |
| | 2,469 |
|
| Total | $ | 57,387 |
| | $ | 38,708 |
| | $ | 148,468 |
| | $ | 108,657 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Mortgage Servicing Advances
In connection withAs the servicingservicer of loans,record for the Company’s subservicers make certain payments for property taxes and insurance premiums, default and property maintenance payments, as well as advances ofMSR 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 collecting themreceiving reimbursement from individual borrowers.Fannie Mae and Freddie Mac. Servicing advances including contractual interest, 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 which are funded by the Company, totaled $20.7$103.3 million and $26.1$143.2 million and were included in other assets on the condensed consolidated balance sheets as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of loans underlying MSR, loans held in consolidated VIEs classified as residential At March 31, 2024 and December 31, 2023, mortgage loans held-for-investment in securitization trusts60+ day delinquent status (whether or not subject to forbearance) accounted for approximately 0.7% and loans owned and classified as residential mortgage loans held-for-sale. The following table presents0.7%, respectively, of the number of loans and unpaidaggregate principal balance of the mortgage assetsloans for which the Company manages thehad servicing as of September 30, 2017advance funding obligations.
The Company has one revolving credit facility to finance its servicing advance obligations. At March 31, 2024 and December 31, 2016:
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (dollars in thousands) | Number of Loans | | Unpaid Principal Balance | | Number of Loans | | Unpaid Principal Balance |
| Mortgage servicing rights | 398,580 |
| | $ | 88,789,765 |
| | 280,185 |
| | $ | 62,827,975 |
|
| Residential mortgage loans held-for-investment in securitization trusts | 4,288 |
| | 2,948,349 |
| | 4,604 |
| | 3,234,044 |
|
| Residential mortgage loans held-for-sale | 245 |
| | 38,765 |
| | 333 |
| | 49,986 |
|
| Total serviced mortgage assets | 403,113 |
| | $ | 91,776,879 |
| | 285,122 |
| | $ | 66,112,005 |
|
Note 7. Residential Mortgage Loans Held-for-Investment in Securitization Trusts, at Fair Value
The2023, the Company retains subordinated debt and excesshad pledged servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. The underlying residential mortgage loans held by the trusts, which are consolidated on the Company’s condensed consolidated balance sheets, are classified as residential mortgage loans held-for-investment in securitization trusts and carried at fair value asadvances with a result of a fair value option election. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the securitization trusts. The following table presents the carrying value of the Company’s residential mortgage loans held-for-investment in securitization trusts$93.9 million and $79.7 million, respectively, as of September 30, 2017 and December 31, 2016:collateral for this revolving credit facility. See Note 13 - Revolving Credit Facilities.
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Unpaid principal balance | $ | 2,948,349 |
| | $ | 3,234,044 |
|
| Fair value adjustment | 82,842 |
| | 37,273 |
|
| Carrying value | $ | 3,031,191 |
| | $ | 3,271,317 |
|
Note 8. Residential Mortgage Loans Held-for-Sale, at Fair Value
Residential mortgage loans held-for-sale consists of residential mortgage loans carried at fair value as a result of a fair value option election. The following table presents the carrying value of the Company’s residential mortgage loans held-for-sale as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Unpaid principal balance | $ | 38,765 |
| | $ | 49,986 |
|
| Fair value adjustment | (7,568 | ) | | (9,840 | ) |
| Carrying value | $ | 31,197 |
| | $ | 40,146 |
|
Note 9.7. 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 repurchase agreements and FHLB advancesborrowings in restricted accounts. The Company has also placed cash in a restricted account pursuant to a letter of credit on an office space lease.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the Company’s restricted cash balances as of September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Restricted cash balances held by trading counterparties: | | | |
| For securities trading activity | $ | 450 | | | $ | 450 | |
| For derivatives trading activity | — | | | 1,669 | |
| For servicing activities | 45,099 | | | 50,345 | |
| As restricted collateral for borrowings | 26,572 | | | 12,575 | |
| Total restricted cash balances held by trading counterparties | 72,121 | | | 65,039 | |
| Restricted cash balance pursuant to letter of credit on office lease | 63 | | | 62 | |
| Total | $ | 72,184 | | | $ | 65,101 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Restricted cash balances held by trading counterparties: | | | |
| For securities and loan trading activity | $ | 27,823 |
| | $ | 26,310 |
|
| For derivatives trading activity | 165,799 |
| | 218,896 |
|
| As restricted collateral for repurchase agreements and Federal Home Loan Bank advances | 149,844 |
| | 162,759 |
|
| Total restricted cash balances held by trading counterparties | 343,466 |
| | 407,965 |
|
| Restricted cash balance pursuant to letter of credit on office lease | 347 |
| | 347 |
|
| Total | $ | 343,813 |
| | $ | 408,312 |
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of September 30, 2017March 31, 2024 and December 31, 20162023 that sum to the total of the same such amounts shown in the statements of cash flows:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Cash and cash equivalents | $ | 666,244 | | | $ | 729,732 | |
| Restricted cash | 72,184 | | | 65,101 | |
| Total cash, cash equivalents and restricted cash | $ | 738,428 | | | $ | 794,833 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Cash and cash equivalents | $ | 539,367 |
| | $ | 406,883 |
|
| Restricted cash | 343,813 |
| | 408,312 |
|
| Total cash, cash equivalents and restricted cash | $ | 883,180 |
| | $ | 815,195 |
|
Note 10. Accrued Interest Receivable
The following table presents the Company’s accrued interest receivable by collateral type as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Available-for-sale securities: | | | |
| Agency | | | |
| Federal National Mortgage Association | $ | 42,087 |
| | $ | 25,273 |
|
| Federal Home Loan Mortgage Corporation | 13,039 |
| | 8,914 |
|
| Government National Mortgage Association | 4,036 |
| | 3,068 |
|
| Non-Agency | 3,165 |
| | 2,705 |
|
| Total available-for-sale securities | 62,327 |
| | 39,960 |
|
| Commercial real estate assets | 5,740 |
| | 3,699 |
|
| Residential mortgage loans held-for-investment in securitization trusts | 17,219 |
| | 18,928 |
|
| Residential mortgage loans held-for-sale | 159 |
| | 164 |
|
| Total | $ | 85,445 |
| | $ | 62,751 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 11.8. 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 market risk and 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 (i.e.e.g., LIBOR)Overnight Index Swap Rate, or OIS, or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchaseborrowing agreement or FHLB advance 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, TBAs, putfutures and call options for TBAs, credit default swaps and total return swaps (based on the Markit IOS Index).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).
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, Derivatives and Hedging, or 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 qualify forare designated or qualifying as hedge accounting treatment.instruments. Due to the volatility of the interest rate and credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat allnot designated any current derivative contractsderivatives as tradinghedging instruments.
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading instrumentsderivatives as of September 30, 2017March 31, 2024 and December 31, 2016.2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | Derivative Assets | | Derivative Liabilities |
| (in thousands) | | Fair Value | | Notional | | Fair Value | | Notional |
| Inverse interest-only securities | | $ | 9,885 | | | $ | 156,527 | | | $ | — | | | $ | — | |
| Interest rate swap agreements | | — | | | 9,822,112 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| Swaptions, net | | — | | | — | | | — | | | — | |
| TBAs | | 14,512 | | | 3,968,000 | | | (3,027) | | | (518,000) | |
| | | | | | | | |
| | | | | | | | |
| Futures, net | | — | | | (5,638,800) | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 24,397 | | | $ | 8,307,839 | | | $ | (3,027) | | | $ | (518,000) | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2017 |
| | | Derivative Assets | | Derivative Liabilities |
| Trading instruments | | Fair Value | | Notional | | Fair Value | | Notional |
| Inverse interest-only securities | | $ | 102,235 |
| | $ | 621,549 |
| | $ | — |
| | $ | — |
|
| Interest rate swap agreements | | 120,423 |
| | 13,216,448 |
| | (11,312 | ) | | 6,800,429 |
|
| Swaptions, net | | 9,395 |
| | 2,814,000 |
| | — |
| | — |
|
| TBAs | | 5,703 |
| | 1,405,000 |
| | — |
| | — |
|
| Put and call options for TBAs, net | | 156 |
| | 2,000,000 |
| | — |
| | — |
|
| Markit IOS total return swaps | | 393 |
| | 65,895 |
| | — |
| | — |
|
| Total | | $ | 238,305 |
| | $ | 20,122,892 |
| | $ | (11,312 | ) | | $ | 6,800,429 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Derivative Assets | | Derivative Liabilities |
| (in thousands) | | Fair Value | | Notional | | Fair Value | | Notional |
| Inverse interest-only securities | | $ | 12,292 | | | $ | 163,735 | | | $ | — | | | $ | — | |
| Interest rate swap agreements | | — | | | — | | | — | | | 17,788,114 | |
| | | | | | | | |
| | | | | | | | |
| Swaptions, net | | 19 | | | (200,000) | | | — | | | — | |
| TBAs | | 72,980 | | | 2,979,000 | | | (21,506) | | | 518,000 | |
| | | | | | | | |
| | | | | | | | |
| Futures, net | | — | | | — | | | — | | | (6,203,050) | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 85,291 | | | $ | 2,942,735 | | | $ | (21,506) | | | $ | 12,103,064 | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2016 |
| | | Derivative Assets | | Derivative Liabilities |
| Trading instruments | | Fair Value | | Notional | | Fair Value | | Notional |
| Inverse interest-only securities | | $ | 127,843 |
| | $ | 740,844 |
| | $ | — |
| | $ | — |
|
| Interest rate swap agreements | | 109,531 |
| | 18,471,063 |
| | (495 | ) | | 1,900,000 |
|
| Swaptions, net | | 39,881 |
| | 825,000 |
| | (1,645 | ) | | 600,000 |
|
| TBAs | | 4,294 |
| | 536,000 |
| | (10,344 | ) | | 953,000 |
|
| Put and call options for TBAs, net | | 42,633 |
| | 1,136,000 |
| | — |
| | — |
|
| Markit IOS total return swaps | | — |
| | — |
| | (17 | ) | | 90,593 |
|
| Total | | $ | 324,182 |
| | $ | 21,708,907 |
| | $ | (12,501 | ) | | $ | 3,543,593 |
|
Comprehensive Income (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.
The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive income:income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Instruments | | Location of Gain (Loss) Recognized in Income | | | | | | Amount of Gain (Loss) Recognized in Income |
| | | | | | Three Months Ended |
| (in thousands) | | | | | | March 31, |
| | | | | | | | 2024 | | 2023 | | |
| Interest rate risk management: | | | | | | | | | | |
| TBAs | | Gain (loss) on other derivative instruments | | | | | | $ | (59,180) | | | $ | (17,164) | | | |
| | | | | | | | | | | | |
| Futures | | Gain (loss) on other derivative instruments | | | | | | 108,936 | | | (140,087) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Options on futures | | Gain (loss) on other derivative instruments | | | | | | (127) | | | — | | | |
| Interest rate swaps - Payers | | Gain (loss) on interest rate swap and swaption agreements | | | | | | 194,430 | | | (71,760) | | | |
| Interest rate swaps - Receivers | | Gain (loss) on interest rate swap and swaption agreements | | | | | | (95,951) | | | (10,368) | | | |
| Swaptions | | Gain (loss) on interest rate swap and swaption agreements | | | | | | 31 | | | (26) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Non-risk management: | | | | | | | | | | |
| | | | | | | | | | | | |
| Inverse interest-only securities | | Gain (loss) on other derivative instruments | | | | | | (2,030) | | | 1,480 | | | |
| | | | | | | | | | | | |
| Total | | | | | | | | $ | 146,109 | | | $ | (237,925) | | | |
|
| | | | | | | | | | | | | | | | | | |
| Trading Instruments | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| (in thousands) | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | | | 2017 | | 2016 | | 2017 | | 2016 |
| Interest rate risk management | | | | | | | | | | |
| TBAs | | Loss on other derivative instruments | | $ | (16,891 | ) | | $ | (522 | ) | | $ | (45,671 | ) | | $ | 26,369 |
|
| Put and call options for TBAs | | Loss on other derivative instruments | | (3,405 | ) | | (6,226 | ) | | (22,467 | ) | | (51,259 | ) |
| Interest rate swap agreements - Payers | | (Loss) gain on interest rate swap and swaption agreements | | 17,422 |
| | 48,359 |
| | (27,723 | ) | | (245,676 | ) |
| Interest rate swap agreements - Receivers | | (Loss) gain on interest rate swap and swaption agreements | | (5,280 | ) | | (18,381 | ) | | 22,813 |
| | 131,465 |
|
| Swaptions | | (Loss) gain on interest rate swap and swaption agreements | | (12,349 | ) | | (24,394 | ) | | (62,080 | ) | | (18,397 | ) |
| Markit IOS total return swaps | | Loss on other derivative instruments | | (134 | ) | | (6,550 | ) | | (821 | ) | | (41,541 | ) |
| Credit risk management | | | | | | | | | | |
| Credit default swaps - Receive protection | | Loss on other derivative instruments | | — |
| | (18 | ) | | — |
| | 364 |
|
| Non-risk management | | | | | | | | | | |
| Inverse interest-only securities | | Loss on other derivative instruments | | 1,506 |
| | 1,288 |
| | 2,631 |
| | 22,003 |
|
| Forward purchase commitments | | Gain (loss) on residential mortgage loans held-for-sale | | — |
| | 107 |
| | — |
| | 2,455 |
|
| Total | | | | $ | (19,131 | ) | | $ | (6,337 | ) | | $ | (133,318 | ) | | $ | (174,217 | ) |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
For the three and nine months ended September 30, 2017,March 31, 2024 and 2023, the Company recognized $0.4$14.3 million and $10.9$3.6 million respectively, of expensesincome, respectively, for the accrual and/or settlement of the net interest expensespread associated with its interest rate swaps. The expenses resultincome resulted from paying either a fixed interest rate or LIBORa floating interest rate (OIS or SOFR) and receiving either LIBORa floating interest rate (OIS or SOFR) or a fixed interest rate on an average $16.7$15.1 billion and $17.6 billion notional, respectively. For the three and nine months ended September 30, 2016, the Company recognized $4.3 million and $18.1 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $14.5 billion and $14.8$3.2 billion notional, respectively.
The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three and nine months ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| (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 | $ | 163,735 | | | $ | — | | | $ | (7,208) | | | $ | 156,527 | | | $ | 160,491 | | | $ | — | |
| Interest rate swap agreements | 17,788,114 | | | 6,567,062 | | | (14,533,064) | | | 9,822,112 | | | 15,136,445 | | | 13,988 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Swaptions, net | (200,000) | | | (500,000) | | | 700,000 | | | — | | | (232,967) | | | (98) | |
| TBAs, net | 3,497,000 | | | 12,173,000 | | | (12,220,000) | | | 3,450,000 | | | 3,037,747 | | | (19,190) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Futures, net | (6,203,050) | | | (7,738,100) | | | 8,302,350 | | | (5,638,800) | | | (6,576,900) | | | (8,714) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Options on futures, net | — | | | — | | | — | | | — | | | — | | | (127) | |
| Total | $ | 15,045,799 | | | $ | 10,501,962 | | | $ | (17,757,922) | | | $ | 7,789,839 | | | $ | 11,524,816 | | | $ | (14,141) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 |
| (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 | $ | 659,768 |
| | $ | — |
| | $ | (38,219 | ) | | $ | 621,549 |
| | $ | 642,143 |
| | $ | (40 | ) |
| Interest rate swap agreements | 14,764,719 |
| | 9,878,549 |
| | (4,626,391 | ) | | 20,016,877 |
| | 16,710,894 |
| | 36,171 |
|
| Swaptions, net | 1,350,000 |
| | 5,364,000 |
| | (3,900,000 | ) | | 2,814,000 |
| | 2,213,533 |
| | (3,264 | ) |
| TBAs, net | (1,140,000 | ) | | (1,585,000 | ) | | 1,320,000 |
| | (1,405,000 | ) | | (1,370,043 | ) | | (14,997 | ) |
| Put and call options for TBAs, net | 1,285,000 |
| | 1,905,000 |
| | (1,190,000 | ) | | 2,000,000 |
| | 54,402 |
| | (3,980 | ) |
| Markit IOS total return swaps | 68,629 |
| | — |
| | (2,734 | ) | | 65,895 |
| | 66,802 |
| | — |
|
| Total | $ | 16,988,116 |
| | $ | 15,562,549 |
| | $ | (8,437,344 | ) | | $ | 24,113,321 |
| | $ | 18,317,731 |
| | $ | 13,890 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
| (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 | $ | 834,866 |
| | $ | — |
| | $ | (50,043 | ) | | $ | 784,823 |
| | $ | 813,045 |
| | $ | — |
|
| Interest rate swap agreements | 13,697,000 |
| | 4,451,430 |
| | (1,203,000 | ) | | 16,945,430 |
| | 14,497,913 |
| | (39,369 | ) |
| Credit default swaps | 25,000 |
| | — |
| | — |
| | 25,000 |
| | 25,000 |
| | — |
|
| Swaptions, net | 1,800,000 |
| | (1,537,000 | ) | | 7,000 |
| | 270,000 |
| | 219,315 |
| | (55,692 | ) |
| TBAs, net | (337,000 | ) | | (5,622,000 | ) | | 5,370,000 |
| | (589,000 | ) | | (1,051,989 | ) | | (18,819 | ) |
| Put and call options for TBAs, net | 8,897,000 |
| | 2,269,000 |
| | (6,697,000 | ) | | 4,469,000 |
| | 5,607,728 |
| | (26,955 | ) |
| Markit IOS total return swaps | 588,037 |
| | 99,911 |
| | (591,700 | ) | | 96,248 |
| | 113,334 |
| | (13,897 | ) |
| Forward purchase commitments | 636,467 |
| | 315,787 |
| | (890,851 | ) | | 61,403 |
| | 418,333 |
| | 577 |
|
| Total | $ | 26,141,370 |
| | $ | (22,872 | ) | | $ | (4,055,594 | ) | | $ | 22,062,904 |
| | $ | 20,642,679 |
| | $ | (154,155 | ) |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| (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 | $ | 740,844 |
| | $ | — |
| | $ | (119,295 | ) | | $ | 621,549 |
| | $ | 681,126 |
| | $ | (40 | ) |
| Interest rate swap agreements | 20,371,063 |
| | 23,408,358 |
| | (23,762,544 | ) | | 20,016,877 |
| | 17,617,836 |
| | 47,691 |
|
| Swaptions, net | 225,000 |
| | 1,109,000 |
| | 1,480,000 |
| | 2,814,000 |
| | 669,377 |
| | 21,164 |
|
| TBAs, net | (1,489,000 | ) | | (5,710,400 | ) | | 5,794,400 |
| | (1,405,000 | ) | | (1,231,793 | ) | | (57,424 | ) |
| Put and call options for TBAs, net | (1,136,000 | ) | | 4,460,000 |
| | (1,324,000 | ) | | 2,000,000 |
| | (13,289 | ) | | 20,166 |
|
| Markit IOS total return swaps | 90,593 |
| | — |
| | (24,698 | ) | | 65,895 |
| | 76,670 |
| | (181 | ) |
| Total | $ | 18,802,500 |
| | $ | 23,266,958 |
| | $ | (17,956,137 | ) | | $ | 24,113,321 |
| | $ | 17,799,927 |
| | $ | 31,376 |
|
| | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2023 |
| (in thousands) | | (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 | |
| Interest rate swap agreements | |
| | Swaptions, net | |
| | Swaptions, net | |
| | Swaptions, net | |
| TBAs, net | |
| | Futures, net | |
| | Futures, net | |
| | Futures, net | |
| | | | Nine Months Ended September 30, 2016 |
| (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 | $ | 932,037 |
| | $ | — |
| | $ | (147,214 | ) | | $ | 784,823 |
| | $ | 860,920 |
| | $ | — |
|
| Interest rate swap agreements | 14,268,806 |
| | 16,553,456 |
| | (13,876,832 | ) | | 16,945,430 |
| | 14,751,923 |
| | (33,067 | ) |
| Credit default swaps | 125,000 |
| | 10,000 |
| | (110,000 | ) | | 25,000 |
| | 87,883 |
| | 412 |
|
| Swaptions, net | 5,200,000 |
| | 1,063,000 |
| | (5,993,000 | ) | | 270,000 |
| | 3,192,617 |
| | (86,481 | ) |
| TBAs, net | 297,000 |
| | (1,186,000 | ) | | 300,000 |
| | (589,000 | ) | | (239,493 | ) | | 12,932 |
|
| Put and call options for TBAs, net | — |
| | 13,166,000 |
| | (8,697,000 | ) | | 4,469,000 |
| | 3,091,679 |
| | (28,303 | ) |
| Markit IOS total return swaps | 889,418 |
| | 99,911 |
| | (893,081 | ) | | 96,248 |
| | 598,163 |
| | (13,374 | ) |
| Forward purchase commitments | 286,120 |
| | 1,548,027 |
| | (1,772,744 | ) | | 61,403 |
| | 357,448 |
| | 1,835 |
|
| Total | $ | 21,998,381 |
| | $ | 31,254,394 |
| | $ | (31,189,871 | ) | | $ | 22,062,904 |
| | $ | 22,701,140 |
| | $ | (146,046 | ) |
| | Total | |
| | Total | |
____________________
| |
(1) | Excludes net interest paid or received in full settlement of the net interest spread liability. |
(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. DerivativeRealized gains and losses and derivative fair value adjustments are reflected within the realized and unrealized (gain) loss (gain) on interest rate swaps and swaptions and unrealized loss(gains) losses on other derivative instruments and gain on residential mortgage loans held-for-sale line items within the operating activities section of the condensed consolidated statements of cash flows. Realized gains and losses on interest rate swap and swaption agreements are reflected within the (gain) loss on termination and option expiration of interest rate swaps and swaptions line item 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 (purchases) of other derivative instruments, net; proceeds from sales and settlement (payments for termination)termination and settlement) of other derivative instruments, netnet; and (decrease) increasedecrease 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 mortgageinterest rates declineor prepayment speeds decrease or increase, depending on the type of investment. Rising mortgagePeriods of rising interest rates with corresponding decreasing prepayment speeds generally result in a slowing of refinancing activity, which slows prepayments and results in a decline in the value of the Company’s fixed-rate Agency pools. To mitigate theprincipal and interest (P&I) RMBS. The impact of this riskeffect on the Company’s fixed-rate Agency poolP&I RMBS portfolio is partially mitigated by the Company maintains a portfoliopresence of fixed-rate interest-only securitiesAgency RMBS, which generally increase in value when prepayment speeds decrease and MSR, which generally increase in value when prepayment speeds decrease and interest rates increase. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company had $60.4$40.6 million and $71.1$41.9 million,, respectively, of interest-only securities, and $930.6 million$3.1 billion and $693.8 million,$3.1 billion, respectively, of MSR in place to economically hedge its Agency RMBS.MSR. Interest-only securities are included in AFS securities, at fair value, in the condensed consolidated balance sheets.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company monitors its borrowings under repurchase agreements and FHLB advances,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 “durationduration 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 (i.e.e.g., LIBOR)OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchaseborrowing agreement or FHLB advance 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, 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, put and call options for TBAs, interest rate swap and swaption agreements, futures and Markit IOS total return swaps.options on futures.
TBAs. At times, the The Company may use TBAs as a means of deploying capital until targeted investments are available andor 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.
As of September 30, 2017, $1.4 billion of the Company’sThe Company may hold both long and short notional TBA positions, were held in order to economically hedge portfolio risk. As of December 31, 2016, $1.5 billion of the Company’s long notional TBA positions and $3.0 billion of the Company’s short notional TBA positions were held in order to economically hedge portfolio risk. The Company discloses these positionswhich 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 September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | | | | | Net Carrying Value (4) |
| (in thousands) | Notional Amount (1) | | Cost Basis (2) | | Market Value (3) | | Derivative Assets | | Derivative Liabilities |
| Purchase contracts | $ | 4,193,000 | | | $ | 4,129,470 | | | $ | 4,143,411 | | | $ | 14,512 | | | $ | (571) | |
| Sale contracts | (743,000) | | | (707,538) | | | (709,994) | | | — | | | (2,456) | |
| TBAs, net | $ | 3,450,000 | | | $ | 3,421,932 | | | $ | 3,433,417 | | | $ | 14,512 | | | $ | (3,027) | |
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | | | | | | | Net Carrying Value (4) |
| (in thousands) | Notional Amount (1) | | Cost Basis (2) | | Market Value (3) | | Derivative Assets | | Derivative Liabilities |
| Purchase contracts | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Sale contracts | (1,405,000 | ) | | (1,447,566 | ) | | (1,441,863 | ) | | 5,703 |
| | — |
|
| TBAs, net | $ | (1,405,000 | ) | | $ | (1,447,566 | ) | | $ | (1,441,863 | ) | | $ | 5,703 |
| | $ | — |
|
| | | | December 31, 2016 |
| | | | | | | | Net Carrying Value (4) |
| December 31, 2023 | | | December 31, 2023 |
| | | | | | | Net Carrying Value (4) | | | | | | | | | Net Carrying Value (4) |
| (in thousands) | Notional Amount (1) | | Cost Basis (2) | | Market Value (3) | | Derivative Assets | | Derivative Liabilities | (in thousands) | Notional Amount (1) | | Cost Basis (2) | | Market Value (3) | | Derivative Assets | | Derivative Liabilities |
| Purchase contracts | $ | 1,500,000 |
| | $ | 1,576,270 |
| | $ | 1,576,875 |
| | $ | 605 |
| | $ | — |
|
| Sale contracts | (2,989,000 | ) | | (3,028,470 | ) | | (3,035,125 | ) | | 3,689 |
| | (10,344 | ) |
| TBAs, net | $ | (1,489,000 | ) | | $ | (1,452,200 | ) | | $ | (1,458,250 | ) | | $ | 4,294 |
| | $ | (10,344 | ) |
___________________
| |
(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. |
(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.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Put and Call Options for TBAs. Futures. The Company may use put and call options for TBAsa variety of types of futures independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. AsThe following table summarizes certain characteristics of September 30, 2017the Company’s futures as of March 31, 2024 and December 31, 2016, the Company had purchased put and call options for TBAs with a notional amount of $2.0 billion and $2.5 billion, respectively. As of December 31, 2016, the Company had also short sold put and call options for TBAs with a notional amount of $3.6 billion. The last of the options held at September 30, 2017 expired in October 2017. The put and call options had a fair market value of $0.2 million included in derivative assets, at fair value, on the condensed consolidated balance sheet as of September 30, 2017. As of December 31, 2016, put and call options for TBAs had a fair market value of $42.6 million included in derivative assets, at fair value, on the condensed consolidated balance sheet.2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | March 31, 2024 | | December 31, 2023 |
| Type & Maturity | | Notional Amount | | Carrying Value | | Weighted Average Months to Expiration | | Notional Amount | | Carrying Value | | Weighted Average Months to Expiration |
| U.S. Treasury futures - 2 year | | $ | (497,400) | | | $ | — | | | 2.93 | | $ | (549,600) | | | $ | — | | | 2.89 |
| U.S. Treasury futures - 5 year | | (1,354,200) | | | — | | | 2.93 | | (1,876,700) | | | — | | | 2.89 |
| U.S. Treasury futures - 10 year | | (1,925,500) | | | — | | | 2.60 | | (983,300) | | | — | | | 2.60 |
| U.S. Treasury futures - 20 year | | (40,700) | | | — | | | 2.60 | | (388,200) | | | — | | | 2.89 |
| Eris SOFR swap futures - 10 year | | (30,000) | | | — | | | 122.73 | | — | | | — | | | — |
| SOFR futures | | | | | | | | | | | | |
| ≤ 1 year | | (1,416,000) | | | — | | | 5.68 | | (1,842,750) | | | — | | | 6.05 |
| > 1 and ≤ 2 years | | (375,000) | | | — | | | 16.06 | | (562,500) | | | — | | | 17.56 |
| | | | | | | | | | | | |
| Total futures | | $ | (5,638,800) | | | $ | — | | | 5.01 | | $ | (6,203,050) | | | $ | — | | | 5.10 |
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 September 30, 2017March 31, 2024 and December 31, 2016,2023, 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 three-month LIBOR rate:floating interest rate (OIS or SOFR):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| March 31, 2024 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Fixed Pay Rate (2) | | Weighted Average Receive Rate | | Weighted Average Maturity (Years) |
| ≤ 1 year | | $ | 2,647,671 | | | 4.730 | % | | 5.340 | % | | 0.96 |
| > 1 and ≤ 3 years | | 1,968,891 | | | 4.087 | % | | 5.340 | % | | 1.76 |
| > 3 and ≤ 5 years | | 1,784,642 | | | 3.546 | % | | 5.340 | % | | 3.78 |
| > 5 and ≤ 7 years | | — | | | — | % | | — | % | | 0.00 |
| > 7 and ≤ 10 years | | 1,005,904 | | | 3.577 | % | | 5.340 | % | | 9.00 |
| > 10 years | | 466,637 | | | 3.753 | % | | 5.340 | % | | 14.32 |
| Total | | $ | 7,873,745 | | | 4.180 | % | | 5.340 | % | | 3.38 |
|
| | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| September 30, 2017 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Fixed Pay Rate (2) | | Weighted Average Receive Rate (2) | | Weighted Average Maturity (Years) (2) |
| 2017 | | $ | 875,000 |
| | 0.721 | % | | 1.322 | % | | 0.18 |
| 2018 | | 4,320,000 |
| | 1.155 | % | | 1.314 | % | | 0.75 |
| 2019 | | 1,020,000 |
| | 1.524 | % | | 1.313 | % | | 1.81 |
| 2020 | | 1,590,000 |
| | 1.542 | % | | 1.311 | % | | 2.96 |
| 2021 and Thereafter | | 7,806,201 |
| | 1.793 | % | | 1.321 | % | | 5.93 |
| Total | | $ | 15,611,201 |
| | 1.509 | % | | 1.317 | % | | 3.57 |
|
| | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| December 31, 2016 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Fixed Pay Rate (2) | | Weighted Average Receive Rate (2) | | Weighted Average Maturity (Years) (2) |
| 2017 | | $ | 2,375,000 |
| | 0.765 | % | | 0.934 | % | | 0.59 |
| 2018 | | 5,340,000 |
| | 1.232 | % | | 0.945 | % | | 1.59 |
| 2019 | | 350,000 |
| | 1.283 | % | | 0.895 | % | | 2.44 |
| 2020 | | 1,460,000 |
| | 1.481 | % | | 0.920 | % | | 3.74 |
| 2021 and Thereafter | | 5,782,063 |
| | 1.984 | % | | 0.955 | % | | 6.17 |
| Total | | $ | 15,307,063 |
| | 1.441 | % | | 0.943 | % | | 3.24 |
____________________
| |
(1) | Notional amount includes $200.0 million and $777.1 million in forward starting interest rate swaps as of September 30, 2017 and December 31, 2016, respectively. |
| |
(2) | Weighted averages exclude forward starting interest rate swaps. As of September 30, 2017 and December 31, 2016, the weighted average fixed pay rate on forward starting interest rate swaps was 2.7% and 2.0%, respectively. |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| December 31, 2023 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Fixed Pay Rate (2) | | Weighted Average Receive Rate | | Weighted Average Maturity (Years) |
| ≤ 1 year | | $ | — | | | — | % | | — | % | | 0.00 |
| > 1 and ≤ 3 years | | 6,796,772 | | | 4.551 | % | | 5.380 | % | | 1.44 |
| > 3 and ≤ 5 years | | 2,040,444 | | | 3.800 | % | | 5.380 | % | | 4.07 |
| > 5 and ≤ 7 years | | 697,800 | | | 4.282 | % | | 5.380 | % | | 6.67 |
| > 7 and ≤ 10 years | | 2,125,830 | | | 3.606 | % | | 5.380 | % | | 9.32 |
| > 10 years | | 466,637 | | | 3.753 | % | | 5.380 | % | | 14.57 |
| Total | | $ | 12,127,483 | | | 4.245 | % | | 5.380 | % | | 3.87 |
____________________
(1)Notional amount includes $1.1 billion and $1.1 billion in forward starting interest rate swaps as of March 31, 2024 and December 31, 2023, respectively.
(2)Weighted averages exclude forward starting interest rate swaps. As of March 31, 2024 and December 31, 2023, the weighted average fixed pay rate on forward starting interest rate swaps was 4.0% and 4.0%, respectively.
Additionally, as of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company held the following interest rate swaps in order to mitigate mortgagethat were utilized as economic hedges of interest rate exposure (or duration) risk whereby the Company pays interest at a three-month LIBOR rate:
|
| | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| September 30, 2017 |
| Swaps Maturities | | Notional Amounts | | Weighted Average Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Maturity (Years) |
| 2019 | | $ | 508,273 |
| | 1.314 | % | | 1.582 | % | | 1.88 |
| 2020 | | 200,000 |
| | 1.312 | % | | 1.642 | % | | 2.85 |
| 2021 and Thereafter | | 3,697,403 |
| | 1.316 | % | | 2.187 | % | | 7.21 |
| Total | | $ | 4,405,676 |
| | 1.316 | % | | 2.093 | % | | 6.39 |
|
| | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| December 31, 2016 |
| Swaps Maturities | | Notional Amounts | | Weighted Average Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Maturity (Years) |
| 2018 | | $ | 575,000 |
| | 0.911 | % | | 1.440 | % | | 1.89 |
| 2019 | | 500,000 |
| | 0.882 | % | | 1.042 | % | | 2.06 |
| 2020 | | 510,000 |
| | 0.881 | % | | 1.580 | % | | 3.59 |
| 2021 and Thereafter | | 3,479,000 |
| | 0.963 | % | | 2.137 | % | | 5.52 |
| Total | | $ | 5,064,000 |
| | 0.941 | % | | 1.894 | % | | 4.57 |
Interest Rate Swaptions. The Company may usefloating interest rate swaptions (agreements to enter into(OIS or SOFR):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| March 31, 2024 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Pay Rate (2) | | Weighted Average Fixed Receive Rate (2) | | Weighted Average Maturity (Years) (2) |
| ≤ 1 year | | $ | 786,641 | | | 5.340 | % | | 4.025 | % | | 0.97 |
| > 1 and ≤ 3 years | | 641,100 | | | — | % | | — | % | | 0.00 |
| > 3 and ≤ 5 years | | 260,000 | | | 5.340 | % | | 3.328 | % | | 3.50 |
| > 5 and ≤ 7 years | | — | | | — | % | | — | % | | 0.00 |
| > 7 and ≤ 10 years | | — | | | — | % | | — | % | | 0.00 |
| > 10 years | | 260,626 | | | 5.340 | % | | 3.444 | % | | 19.76 |
| Total | | $ | 1,948,367 | | | 5.340 | % | | 3.770 | % | | 5.22 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (notional in thousands) | | | | | | |
| December 31, 2023 |
| Swaps Maturities | | Notional Amount (1) | | Weighted Average Pay Rate (2) | | Weighted Average Fixed Receive Rate (2) | | Weighted Average Maturity (Years) (2) |
| ≤ 1 year | | $ | — | | | — | % | | — | % | | 0.00 |
| > 1 and ≤ 3 years | | 2,470,819 | | | 5.380 | % | | 4.204 | % | | 1.36 |
| > 3 and ≤ 5 years | | 780,000 | | | 5.380 | % | | 3.845 | % | | 1.36 |
| > 5 and ≤ 7 years | | 988,026 | | | 5.380 | % | | 4.023 | % | | 4.03 |
| > 7 and ≤ 10 years | | 1,161,160 | | | 5.380 | % | | 4.013 | % | | 9.57 |
| > 10 years | | 260,626 | | | 5.380 | % | | 3.444 | % | | 20.01 |
| Total | | $ | 5,660,631 | | | 5.380 | % | | 4.052 | % | | 5.00 |
____________________
(1)Notional amount includes $641.1 million and $645.2 million in forward starting interest rate swaps in the future for which the Company would either pay or receive a fixed rate) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. Asas of September 30, 2017March 31, 2024 and December 31, 2016, the Company had the following outstanding2023, respectively.
(2)Weighted averages exclude forward starting interest rate swaptions that were utilized as macro-economic hedges:swaps. As of March 31, 2024 and December 31, 2023, the weighted average fixed receive rate on forward starting interest rate swaps was 4.3% and 4.4%, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 |
| (notional and dollars in thousands) | | Option | | Underlying Swap |
| Swaption | | Expiration | | Cost Basis | | Fair Value | | Average Months to Expiration | | Notional Amount | | Average Pay Rate | | Average Receive Rate | | Average Term (Years) |
| Purchase contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | 9,260 |
| | $ | 6,295 |
| | 3.86 |
| | $ | 3,225,000 |
| | 2.25 | % | | 3M Libor | | 5.0 |
| Total Payer | | | | $ | 9,260 |
| | $ | 6,295 |
| | 3.86 |
| | $ | 3,225,000 |
| | 2.25 | % | | 3M Libor | | 5.0 |
| | | | | | | | | | | | | | | | | |
| Receiver | | < 6 Months | | $ | 17,570 |
| | $ | 7,716 |
| | 2.32 |
| | $ | 4,570,000 |
| | 3M Libor | | 1.96 | % | | 8.0 |
| Receiver | | ≥ 6 Months | | — |
| | 4,490 |
| | 7.80 |
| | 250,000 |
| | 3M Libor | | 2.35 | % | | 10.0 |
| Total Receiver | | | | $ | 17,570 |
| | $ | 12,206 |
| | 3.05 |
| | $ | 4,820,000 |
| | 3M Libor | | 1.98 | % | | 8.1 |
| | | | | | | | | | | | | | | | | |
| Sale contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | — |
| | $ | — |
| | 0.37 |
| | $ | (600,000 | ) | | 2.42 | % | | 3M Libor | | 5.0 |
| Total Payer | | | | $ | — |
| | $ | — |
| | 0.37 |
| | $ | (600,000 | ) | | 2.42 | % | | 3M Libor | | 5.0 |
| | | | | | | | | | | | | | | | | |
| Receiver | | < 6 Months | | $ | (9,260 | ) | | $ | (5,257 | ) | | 3.77 |
| | $ | (4,006,000 | ) | | 3M Libor | | 1.72 | % | | 5.0 |
| Receiver | | ≥ 6 Months | | (1,400 | ) | | (3,849 | ) | | 7.80 |
| | (625,000 | ) | | 3M Libor | | 1.95 | % | | 10.0 |
| Total Receiver | | | | $ | (10,660 | ) | | $ | (9,106 | ) | | 4.29 |
| | $ | (4,631,000 | ) | | 3M Libor | | 1.75 | % | | 5.7 |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 |
| (notional and dollars in thousands) | | Option | | Underlying Swap |
| Swaption | | Expiration | | Cost | | Fair Value | | Average Months to Expiration | | Notional Amount | | Average Fixed Pay Rate | | Average Receive Rate | | Average Term (Years) |
| Purchase contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | 29,360 |
| | $ | 42,149 |
| | 1.22 |
| | $ | 4,500,000 |
| | 2.16 | % | | 3M Libor | | 4.8 |
| Payer | | ≥ 6 Months | | 13,655 |
| | 792 |
| | 6.70 |
| | 300,000 |
| | 3.50 | % | | 3M Libor | | 10.0 |
| Total Payer | | | | $ | 43,015 |
| | $ | 42,941 |
| | 1.23 |
| | $ | 4,800,000 |
| | 2.24 | % | | 3M Libor | | 5.1 |
| | | | | | | | | | | | | | | | | |
| Sale contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | (51,355 | ) | | $ | (1,414 | ) | | 5.81 |
| | $ | (500,000 | ) | | 3.40 | % | | 3M Libor | | 10.0 |
| Payer | | ≥ 6 Months | | (29,893 | ) | | (938 | ) | | 6.77 |
| | (300,000 | ) | | 3.50 | % | | 3M Libor | | 10.0 |
| Total Payer | | | | $ | (81,248 | ) | | $ | (2,352 | ) | | 6.05 |
| | $ | (800,000 | ) | | 3.44 | % | | 3M Libor | | 10.0 |
| | | | | | | | | | | | | | | | | |
| Receiver | | < 6 Months | | $ | — |
| | $ | (2,353 | ) | | 2.30 |
| | $ | (3,775,000 | ) | | 3M Libor | | 1.19 | % | | 4.9 |
| Total Receiver | | | | $ | — |
| | $ | (2,353 | ) | | 2.30 |
| | $ | (3,775,000 | ) | | 3M Libor | | 1.19 | % | | 4.9 |
Markit IOS Total Return SwapsInterest Rate Swaptions. The Company may use total return swaps (agreements wherebyinterest rate swaptions (which provide the Company receives or makes payments based onoption to enter into interest rate swap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the total return of an underlying instrument or index, such as the Markit IOS Index, in exchange for fixed or floating rate interest payments)future) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. The Company enters into total return swaps to help mitigatedid not hold any interest rate swaptions as of March 31, 2024. As of December 31, 2023, the potential impact of larger increases or decreases in interest rates on the performance of our portfolio (referred to as “convexity risk”). Total return swaps based on the Markit IOS Index are intended to synthetically replicate the performance of interest-only securities. The Company had the following total return swap agreements in place at September 30, 2017 and December 31, 2016:outstanding interest rate swaptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| (notional and dollars in thousands) | | Option | | Underlying Swap |
| Swaption | | Expiration | | Cost | | Fair Value | | Average Months to Expiration | | Notional Amount | | Average Fixed Rate | | | | Average Term (Years) |
| Purchase contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | 480 | | | $ | 22 | | | 2.40 | | | $ | 200,000 | | | 5.13 | % | | | | 1.0 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Sale contracts: | | | | | | | | | | | | | | | | |
| Payer | | < 6 Months | | $ | (332) | | | $ | (3) | | | 2.40 | | | $ | (400,000) | | | 5.61 | % | | | | 1.0 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| (notional and dollars in thousands) | | | | | |
| September 30, 2017 |
| Maturity Date | | Current Notional Amount | | Fair Value | | Cost Basis | | Unrealized Gain (Loss) |
| January 12, 2043 | | $ | (25,262 | ) | | $ | 124 |
| | $ | (201 | ) | | $ | (77 | ) |
| January 12, 2044 | | (40,633 | ) | | 269 |
| | (366 | ) | | (97 | ) |
| Total | | $ | (65,895 | ) | | $ | 393 |
| | $ | (567 | ) | | $ | (174 | ) |
|
| | | | | | | | | | | | | | | | |
| (notional and dollars in thousands) | | | | | |
| December 31, 2016 |
| Maturity Date | | Current Notional Amount | | Fair Value | | Cost Basis | | Unrealized Gain (Loss) |
| January 12, 2043 | | $ | (45,083 | ) | | $ | (5 | ) | | $ | (320 | ) | | $ | (325 | ) |
| January 12, 2044 | | (45,510 | ) | | (12 | ) | | (366 | ) | | (378 | ) |
| Total | | $ | (90,593 | ) | | $ | (17 | ) | | $ | (686 | ) | | $ | (703 | ) |
Credit Risk
The Company’s exposure to credit losses on its Agency RMBS portfolio is limited due to implicit or explicit backing from the GSEs.either a GSE or a U.S. government agency. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government.government.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
For non-Agency investment securities, residential mortgage loans and commercial real estate assets, the Company may enter into credit default swaps to hedge credit risk. In future periods, the Company could enhance its credit risk protection, enter into further paired derivative positions, including both long and short credit default swaps, and/or seek opportunistic trades in the event of a market disruption (see discussion under “Non-Risk Management Activities”Activities” below). The Company also has processes and controls in place to monitor, analyze, manage and mitigate its credit risk with respect to non-Agency securities, residential mortgage loans and commercial real estate assets.securities.
Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe the Company under such contracts completely fail to perform under the terms of these contracts, assuming there are no recoveries of underlying collateral, as measured by the market value of the derivative financial instruments. As of September 30, 2017,March 31, 2024, the fair value of derivative financial instruments as an asset and liability position was $238.3$24.4 million and $11.3$3.0 million,, respectively.
The Company attempts to mitigate its credit risk exposure on derivative financial instruments by limiting its counterparties to banks and financial institutions that meet established internal credit guidelines. The Company also seeks to spread its credit risk exposure across multiple counterparties in order to reduce its exposure to any single counterparty. Additionally, the Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty or clearing agency in the case of centrally cleared interest rate swaps, upon the occurrence of certain events. To further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain of its counterparties and clearing agencies, which require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments exceed established thresholds. The Company’s centrally cleared interest rate swaps and exchange-traded futures and options on futures require the Company to post an “initial margin” amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single-day price movement. The Company also exchanges “variation margin” based upon daily changes in fair value, as measured by the exchange. The exchange of variation margin is considered a settlement of the derivative instrument, as opposed to pledged collateral. Accordingly, the Company accounts for the receipt or payment of variation margin as a direct reduction to the carrying value of the centrally cleared or exchange-traded derivative asset or liability.
Note 9. Reverse Repurchase Agreements
As of September 30, 2017,March 31, 2024 and December 31, 2023, the Company had received cash deposits from counterparties of $2.8$295.8 million and placed cash deposits of $167.6$286.1 million in accounts maintained by counterparties, of which the amounts are netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties on the Company’s condensed consolidated balance sheets.
Non-Risk Management Activities
The Company has entered into certain financial instrumentsas collateral for reverse repurchase agreements that are considered derivative contracts under ASC 815 that are not for purposes of hedging. These contracts are currently limited to inverse interest-only Agency RMBS.
Inverse Interest-Only Securities. As of September 30, 2017 and December 31, 2016, inverse interest-only securitiescould be pledged, delivered or otherwise used, with a carryingfair value of $102.2$351.8 million and $127.8$284.1 million, including accrued interest receivable of $1.0 million and $1.2 million, respectively, are accounted for as derivative financial instruments in the condensed consolidated financial statements. The following table presents the amortized cost and carrying value (which approximates fair value) of inverse interest-only securities as of September 30, 2017 and December 31, 2016:respectively.
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Face Value | $ | 621,549 |
| | $ | 740,844 |
|
| Unamortized premium | — |
| | — |
|
| Unamortized discount | | | |
| Designated credit reserve | — |
| | — |
|
| Net, unamortized | (529,809 | ) | | (631,082 | ) |
| Amortized Cost | 91,740 |
| | 109,762 |
|
| Gross unrealized gains | 11,121 |
| | 18,389 |
|
| Gross unrealized losses | (1,577 | ) | | (1,552 | ) |
| Market Value | $ | 101,284 |
| | $ | 126,599 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 10. Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements. The Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty. Additionally, the Company’s centrally cleared interest rate swaps and exchange-traded futures and options on futures require the Company to post an initial margin amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single-day price movement. The Company also exchanges variation margin based upon daily changes in fair value, as measured by the exchange.
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. Based on rules governing certain central clearing and exchange-trading activities, the exchange of variation margin is considered a settlement of the derivative instrument, as opposed to pledged collateral. Accordingly, the Company accounts for the receipt or payment of variation margin on Chicago Mercantile Exchange, or CME, and London Clearing House, or LCH, cleared positions as a direct reduction to the carrying value of the centrally cleared or exchange-traded derivative asset or liability. The receipt or payment of initial margin is accounted for separate from the derivative asset or liability.
Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Company’s condensed consolidated balance sheets when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the condensed consolidated statements of cash flows. The Company presents derivative assets and liabilities (other than centrally cleared or exchange-traded derivative instruments) subject to master netting arrangements or similar agreements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the Company presents cash collateral subject to such arrangements (other than variation margin on centrally cleared or exchange-traded derivative instruments) on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset repurchase agreements, reverse repurchase agreements or derivative assets and liabilities (other than centrally cleared or exchange-traded derivative instruments) with the associated cash collateral on its condensed consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets (1) | | |
| (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
| Assets: | | | | | | | | | | | |
| Derivative assets | $ | 126,128 | | | $ | (101,731) | | | $ | 24,397 | | | $ | (3,027) | | | $ | — | | | $ | 21,370 | |
| Reverse repurchase agreements | 351,843 | | | — | | | 351,843 | | | — | | | (295,774) | | | 56,069 | |
| Total Assets | $ | 477,971 | | | $ | (101,731) | | | $ | 376,240 | | | $ | (3,027) | | | $ | (295,774) | | | $ | 77,439 | |
| Liabilities: | | | | | | | | | | | |
| Repurchase agreements | $ | (8,361,638) | | | $ | — | | | $ | (8,361,638) | | | $ | 8,361,638 | | | $ | — | | | $ | — | |
| Derivative liabilities | (104,758) | | | 101,731 | | | (3,027) | | | 3,027 | | | — | | | — | |
| Total Liabilities | $ | (8,466,396) | | | $ | 101,731 | | | $ | (8,364,665) | | | $ | 8,364,665 | | | $ | — | | | $ | — | |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets (1) | | |
| (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
| Assets: | | | | | | | | | | | |
| Derivative assets | $ | 228,227 | | | $ | (142,936) | | | $ | 85,291 | | | $ | (21,506) | | | $ | — | | | $ | 63,785 | |
| Reverse repurchase agreements | 284,091 | | | — | | | 284,091 | | | — | | | (284,091) | | | — | |
| Total Assets | $ | 512,318 | | | $ | (142,936) | | | $ | 369,382 | | | $ | (21,506) | | | $ | (284,091) | | | $ | 63,785 | |
| Liabilities: | | | | | | | | | | | |
| Repurchase agreements | $ | (8,020,207) | | | $ | — | | | $ | (8,020,207) | | | $ | 8,020,207 | | | $ | — | | | $ | — | |
| Derivative liabilities | (164,442) | | | 142,936 | | | (21,506) | | | 21,506 | | | — | | | — | |
| Total Liabilities | $ | (8,184,649) | | | $ | 142,936 | | | $ | (8,041,713) | | | $ | 8,041,713 | | | $ | — | | | $ | — | |
____________________
(1)Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets.
Note 12. Other Assets
Other assets as of September 30, 2017 and December 31, 2016 are summarized in the following table:
|
| | | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Property and equipment at cost | $ | 6,754 |
| | | $ | 6,481 |
|
Accumulated depreciation (1) | (5,342 | ) | | | (4,566 | ) |
| Net property and equipment | 1,412 |
| | | 1,915 |
|
| Prepaid expenses | 2,083 |
| | | 1,406 |
|
| Income taxes receivable | 120 |
| | | 1,532 |
|
| Deferred tax assets, net | 45,880 |
| (2) | | 57,361 |
|
| Servicing advances | 20,658 |
| | | 26,147 |
|
| Federal Home Loan Bank stock | 85,175 |
| | | 167,856 |
|
| Equity investments | 3,000 |
| | | 3,000 |
|
| Other receivables | 48,632 |
| | | 43,653 |
|
| Total other assets | $ | 206,960 |
| | | $ | 302,870 |
|
____________________
| |
(1) | Depreciation expense for the three and nine months ended September 30, 2017 was $0.2 million and $0.8 million, respectively. |
| |
(2) | Net of valuation allowance of $4.3 million. |
Note 13. Other Liabilities
Other liabilities as of September 30, 2017 and December 31, 2016 are summarized in the following table:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Accrued expenses | $ | 28,392 |
| | $ | 28,944 |
|
| Accrued interest payable | 62,732 |
| | 29,505 |
|
| Income taxes payable | 142 |
| | — |
|
| Other | 17,609 |
| | 21,127 |
|
| Total other liabilities | $ | 108,875 |
| | $ | 79,576 |
|
Note 14.11. Fair Value
Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. FollowingThe following is a description of the three levels:
| |
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity. |
Level 1Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
Level 2Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.
Level 3Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
| |
Level 2 | Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. |
| |
Level 3 | Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation. |
FollowingThe following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
Available-for-sale securities. The Company holds a portfolio of AFS securities that are carried at fair value in the condensed consolidated balance sheets and primarily comprised of Agency RMBS and non-Agency investment securities. The Company determines the fair value of its Agency RMBS based upon prices obtained from third-party brokers and pricing providers or broker quotesvendors received using bid price, which are deemed indicative of market activity. The third-party pricing providers and brokersvendors use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. In determining the fair value of its non-Agency securities, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes receivedvendors and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses).
The Company classified 99.4%99.95% and 0.6%0.05% of its AFS securities as Level 2 and Level 3 fair value assets, respectively, at September 30, 2017. AFS securities account for 82.7% of all assets reported at fair value at September 30, 2017.March 31, 2024.
Mortgage servicing rights.The Company holds a portfolio of MSR that are carried at fair value on the condensed consolidated balance sheets. The Company determines fair value of its MSR based on prices obtained from third-party pricing providers.vendors. Although MSR transactions aremay be observable in the marketplace, the valuation is based upon cash flow models that includedetails of those transactions are not necessarily reflective of the value of the Company’s MSR portfolio. Third-party vendors use both observable market data and unobservable market data inputs (including forecasted prepayment speeds, delinquency levelsOAS and discount rates).cost to service) as inputs into models, which help to inform their best estimates of fair value market price. As a result, the Company classified 100% of its MSR as Level 3 fair value assets at September 30, 2017.March 31, 2024.
Residential mortgage loans held-for-investment in securitization trusts. The Company recognizes on its condensed consolidated balance sheets residential mortgage loans held-for-investment in securitization trusts that are carried at fair value as a result of a fair value option election. An entity is allowed to measure both the financial assets and financial liabilities of a qualifying collateralized financing entity, or CFE, it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s securitization trusts are considered qualifying CFEs, the Company determines the fair value of these residential mortgage loans based on the fair value of its collateralized borrowings in securitization trusts and its retained interests from the Company’s on-balance sheet securitizations (eliminated in consolidation in accordance with U.S. GAAP), as the fair value of these instruments is more observable. The Company classified 100% of its residential mortgage loans held-for-investment in securitization trusts as Level 2 fair value assets at September 30, 2017.
Residential mortgage loans held-for-sale. The Company holds residential mortgage loans held-for-sale that are carried at fair value in the condensed consolidated balance sheets as a result of a fair value option election. The Company determines fair value of its residential mortgage loans based on prices obtained from third-party pricing providers and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon cash flow models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels and credit losses). The Company classified 1.5% and 98.5% of its residential mortgage loans held-for-sale as Level 2 and Level 3 fair value assets, respectively, at September 30, 2017.
Derivative instruments. The Company may enter into a variety of derivative financial instruments as part of its hedging strategies. The Company principally executes over-the-counter, or OTC, derivative contracts, such as interest rate swaps swaptions, put and call options for TBAs and U.S. Treasuries, credit default swaps, constant maturity swaps and Markit IOS total return swaps.swaptions. The Company utilizes third-party pricing providersbrokers to value its financial derivative instruments. The Company classified 100% of theits interest rate swaps, swaptions, put and call options for TBAs and Markit IOS total returns swaps reported at fair value as Level 2 at September 30, 2017.March 31, 2024. The Company did not hold any interest rate swaptions at March 31, 2024.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company may also enter into certain other derivative financial instruments, such as TBAs, short U.S. Treasuries and inverse interest-only securities. Thesesecurities, TBAs, futures and options on futures. The Company utilizes third-party pricing vendors to value inverse interest-only securities, as these instruments are similar in form to the Company’s AFS securities and the Company utilizes a pricing service to value TBAs and broker quotes to value short U.S. Treasuries and inverse interest-only securities. The Company classified 100% of its inverse interest-only securities at fair value as Level 2 at September 30, 2017.March 31, 2024. TBAs, futures and options on futures are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information for identical instruments. The Company utilizes third-party pricing vendors to value TBAs, futures and options on futures. The Company reported 100% of its TBAs and futures as Level 1 as of September 30, 2017.March 31, 2024. The Company did not hold any short U.S. Treasuriesoptions on futures at September 30, 2017.March 31, 2024.
The Company’s risk management committee governs trading activity relating to derivative instruments. The Company’s policy is to minimize credit exposure related to financial derivatives used for hedging by limiting the hedge counterparties to major banks, financial institutions, exchanges, and private investors who meet established capital and credit guidelines as well as by limiting the amount of exposure to any individual counterparty.
The Company has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by ISDA or central clearing exchange agreements, in the case of centrally cleared interest rate swaps.agreements. Additionally, both the Company and the counterparty or clearing agency are required to post cash collateralmargin based upon the net underlying market value of the Company’s open positions with the counterparty. Posting of cash collateralmargin typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateralmargin posting at low posting thresholds, credit exposure to the Company and/or to the counterparty or clearing agency is considered materially mitigated. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.
Collateralized borrowings in securitization trusts. The Company recognizes on its condensed consolidated balance sheets collateralized borrowings that are carried at fair value as a result
TWO HARBORS INVESTMENT CORP.
Notes to the fair value of its collateralized borrowings, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company classified 100% of its collateralized borrowings in securitization trusts as Level 2 fair value liabilities at September 30, 2017.Condensed Consolidated Financial Statements (unaudited)
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis. The Company often economically hedges the fair value change of its assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items, and therefore do not directly display the impact of the Company’s risk management activities.activities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Recurring Fair Value Measurements |
| March 31, 2024 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Available-for-sale securities | $ | — | | | $ | 8,178,591 | | | $ | 3,953 | | | $ | 8,182,544 | |
| | | | | | | |
| Mortgage servicing rights | — | | | — | | | 3,084,879 | | | 3,084,879 | |
| | | | | | | |
| Derivative assets | 14,512 | | | 9,885 | | | — | | | 24,397 | |
| | | | | | | |
| Total assets | $ | 14,512 | | | $ | 8,188,476 | | | $ | 3,088,832 | | | $ | 11,291,820 | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Derivative liabilities | $ | 3,027 | | | $ | — | | | $ | — | | | $ | 3,027 | |
| Total liabilities | $ | 3,027 | | | $ | — | | | $ | — | | | $ | 3,027 | |
| | Recurring Fair Value Measurements | | | Recurring Fair Value Measurements |
| December 31, 2023 | | | December 31, 2023 |
| (in thousands) | | (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | |
| Available-for-sale securities | |
| Available-for-sale securities | |
| Available-for-sale securities | |
| | Mortgage servicing rights | |
| Mortgage servicing rights | |
| Mortgage servicing rights | |
| | Recurring Fair Value Measurements |
| Derivative assets | |
| Derivative assets | |
| Derivative assets | |
| | September 30, 2017 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Available-for-sale securities | $ | — |
| | $ | 20,085,812 |
| | $ | 113,282 |
| | $ | 20,199,094 |
|
| Mortgage servicing rights | — |
| | — |
| | 930,613 |
| | 930,613 |
|
| Residential mortgage loans held-for-investment in securitization trusts | — |
| | 3,031,191 |
| | — |
| | 3,031,191 |
|
| Residential mortgage loans held-for-sale | — |
| | 470 |
| | 30,727 |
| | 31,197 |
|
| Derivative assets | 5,703 |
| | 232,602 |
| | — |
| | 238,305 |
|
| Total assets | $ | 5,703 |
| | $ | 23,350,075 |
| | $ | 1,074,622 |
| | $ | 24,430,400 |
|
| Liabilities | | | | | | | |
| Collateralized borrowings in securitization trusts | $ | — |
| | $ | 2,785,413 |
| | $ | — |
| | $ | 2,785,413 |
|
| Total assets | |
| Total assets | |
| Liabilities: | |
| | Derivative liabilities | |
| | Derivative liabilities | |
| | Derivative liabilities | — |
| | 11,312 |
| | — |
| | 11,312 |
|
| Total liabilities | $ | — |
| | $ | 2,796,725 |
| | $ | — |
| | $ | 2,796,725 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | |
| | Recurring Fair Value Measurements |
| | December 31, 2016 |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Available-for-sale securities | $ | — |
| | $ | 13,128,857 |
| | $ | — |
| | $ | 13,128,857 |
|
| Mortgage servicing rights | — |
| | — |
| | 693,815 |
| | 693,815 |
|
| Residential mortgage loans held-for-investment in securitization trusts | — |
| | 3,271,317 |
| | — |
| | 3,271,317 |
|
| Residential mortgage loans held-for-sale | — |
| | 925 |
| | 39,221 |
| | 40,146 |
|
| Derivative assets | 4,294 |
| | 319,888 |
| | — |
| | 324,182 |
|
| Total assets | $ | 4,294 |
| | $ | 16,720,987 |
| | $ | 733,036 |
| | $ | 17,458,317 |
|
| Liabilities | | | | | | | |
| Collateralized borrowings in securitization trusts | $ | — |
| | $ | 3,037,196 |
| | $ | — |
| | $ | 3,037,196 |
|
| Derivative liabilities | 10,344 |
| | 2,157 |
| | — |
| | 12,501 |
|
| Total liabilities | $ | 10,344 |
| | $ | 3,039,353 |
| | $ | — |
| | $ | 3,049,697 |
|
The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under U.S. GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of September 30, 2017,March 31, 2024, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.
The valuation of Level 3 instruments requires significant judgment by the third-party pricing providersvendors and/or management. The third-party pricing providersvendors and/or management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the third-party pricing providervendors in the absence of market information. Assumptions used by the third-party pricing providervendors due to lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s condensed consolidated financial statements.
The Company’s valuation committee reviews all valuations that are based on pricing information received from a third-party pricing provider.vendors. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable. In addition, the Company performs back-testing of pricing information to validate price information and identify any pricing trends of a third-party price provider.pricing vendors.
In determining fair value, third-party pricing providersvendors use various valuation approaches, including market and income approaches. Inputs that are used in determining fair value of an instrument may include pricing information, credit data, volatility statistics, and other factors. In addition, inputs can be either observable or unobservable.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. The third-party pricing providervendor uses prices and inputs that are current as of the measurement date, including during periods of market dislocations. In periods of market dislocation, the availability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified to or from various levels within the fair value hierarchy.
Securities for which marketthat are priced using third-party broker quotations are readily available are valued at the bid price (in the case of long positions) or the ask price (in the case of short positions) at the close of trading on the date as of which value is determined. Exchange-traded securities for which no bid or ask price is available are valued at the last traded price. OTC derivative contracts, including interest rate swapsswap and swaption agreements, put and call options for TBAs and U.S. Treasuries, constant maturity swaps, credit default swaps and Markit IOS total return swaps, are valued by the Company using observable inputs, specifically quotations received from third-party pricing providers,brokers. Exchange-traded derivative instruments, including futures and options on futures, are therefore classified within Level 2.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
valued based on quoted prices for identical instruments in active markets.
The following tables presenttable presents the reconciliation for all of the Company’s Level 3 assets measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | | |
| | | March 31, 2024 | | | |
| (in thousands) | | | | | Available-For-Sale Securities | | Mortgage Servicing Rights | | | | | |
| Beginning of period level 3 fair value | | | | | $ | 4,150 | | | $ | 3,052,016 | | | | | | |
| Gains (losses) included in net income (loss): | | | | | | | | | | | | |
| Realized | | | | | (155) | | | (43,418) | | | | | | |
| Unrealized | | | | | — | | (1) | 54,430 | | (2) | | | | |
| Reversal of provision for credit losses | | | | | (65) | | | — | | | | | | |
| Net gains (losses) included in net income (loss) | | | | | (220) | | | 11,012 | | | | | | |
| Other comprehensive income | | | | | 23 | | | — | | | | | | |
| Purchases | | | | | — | | | 40,335 | | | | | | |
| Sales | | | | | — | | | (18,221) | | | | | | |
| Settlements | | | | | — | | | (263) | | | | | | |
| Gross transfers into level 3 | | | | | — | | | — | | | | | | |
| Gross transfers out of level 3 | | | | | — | | | — | | | | | | |
| End of period level 3 fair value | | | | | $ | 3,953 | | | $ | 3,084,879 | | | | | | |
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | | | | | $ | — | | (3) | $ | 61,247 | | (4) | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive (loss) income for assets held at the end of the reporting period | | | | | $ | 23 | | | $ | — | | | | | | |
|
| | | | | | | | | | | | |
| | Three Months Ended | |
| | September 30, 2017 | |
| (in thousands) | Available-For-Sale Securities | | Mortgage Servicing Rights | | Residential Mortgage Loans Held-For-Sale | |
| Beginning of period level 3 fair value | $ | — |
| | $ | 898,025 |
| | $ | 31,460 |
| |
| Gains (losses) included in net income: | | | | | | |
| Realized (losses) gains | — |
| | (29,092 | ) | | 145 |
| |
| Unrealized (losses) gains | — |
| | (154 | ) | (1) | 284 |
| (3) |
| Total gains (losses) included in net income | — |
| | (29,246 | ) | | 429 |
| |
| Other comprehensive income | 282 |
| | — |
| | — |
| |
| Purchases | 113,000 |
| | 66,280 |
| | — |
| |
| Sales | — |
| | 497 |
| | — |
| |
| Settlements | — |
| | (4,943 | ) | | (1,162 | ) | |
| Gross transfers into level 3 | — |
| | — |
| | — |
| |
| Gross transfers out of level 3 | — |
| | — |
| | — |
| |
| End of period level 3 fair value | $ | 113,282 |
| | $ | 930,613 |
| | $ | 30,727 |
| |
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | $ | 282 |
| | $ | (154 | ) | (2) | $ | 295 |
| (4) |
(1)The change in unrealized gains or losses on available-for-sale securities accounted for under the fair value option was recorded in (loss) gain on investment securities on the condensed consolidated statements of comprehensive income (loss).
(3)The change in unrealized gains or losses on available-for-sale securities accounted for under the fair value option that were held at the end of the reporting period was recorded in (loss) gain on investment securities on the condensed consolidated statements of comprehensive income (loss).
TWO HARBORS INVESTMENT CORP.(4)The change in unrealized gains or losses on MSR that were held at the end of the reporting period was recorded in gain (loss) on servicing asset on the condensed consolidated statements of comprehensive income (loss).
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended | |
| | September 30, 2017 | |
| (in thousands) | Available-For-Sale Securities | | Mortgage Servicing Rights | | Residential Mortgage Loans Held-For-Sale | |
| Beginning of period level 3 fair value | $ | — |
| | $ | 693,815 |
| | $ | 39,221 |
| |
| Gains (losses) included in net income: | | | | | | |
| Realized (losses) gains | — |
| | (67,357 | ) | | 1,833 |
| |
| Unrealized (losses) gains | — |
| | (23,083 | ) | (1) | 446 |
| (3) |
| Total gains (losses) included in net income | — |
| | (90,440 | ) | | 2,279 |
| |
| Other comprehensive income | 282 |
| | — |
| | — |
| |
| Purchases | 113,000 |
| | 340,176 |
| | 569 |
| |
| Sales | — |
| | (132 | ) | | (3,717 | ) | |
| Settlements | — |
| | (12,806 | ) | | (7,625 | ) | |
| Gross transfers into level 3 | — |
| | — |
| | — |
| |
| Gross transfers out of level 3 | — |
| | — |
| | — |
| |
| End of period level 3 fair value | $ | 113,282 |
| | $ | 930,613 |
| | $ | 30,727 |
| |
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | $ | 282 |
| | $ | (23,551 | ) | (2) | $ | 750 |
| (4) |
___________________
| |
(1) | The change in unrealized gains or losses on MSR was recorded in loss on servicing asset on the condensed consolidated statements of comprehensive income. |
| |
(2) | The change in unrealized gains or losses on MSR that were held at the end of the reporting period was recorded in loss on servicing asset on the condensed consolidated statements of comprehensive income. |
| |
(3) | The change in unrealized gains or losses on residential mortgage loans held-for-sale was recorded in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income. |
| |
(4) | The change in unrealized gains or losses on residential mortgage loans held-for-sale that were held at the end of the reporting period was recorded in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income. |
The Company did not incurNo transfers between Level 1, Level 2 or Level 3 were made during the ninethree months ended September 30, 2017.March 31, 2024 and 2023. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place.
The Company used broker quotes in the fair value measurement of its Level 3 available-for-sale securities. The significant unobservable inputs used by the broker included prepayment rate, probability of delinquency and discount rate. Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement.
The Company also used a third-party pricing provider in the fair value measurement of its Level 3 MSR. The table below presents information about the significant unobservable inputs used by the third-party pricing providers in the fair value measurement of the Company’s MSR classified as Level 3 fair value assets at September 30, 2017:
|
| | | | | | | | | |
| September 30, 2017 |
| Valuation Technique | | Unobservable Input (1) | | Range | | Weighted Average |
| Discounted cash flow | | Constant prepayment speed | | 9.2 | - | 12.2 | % | | 10.8% |
| | | Delinquency | | 1.4 | - | 2.0 | % | | 1.7% |
| | | Discount rate | | 8.6 | - | 11.0 | % | | 9.9% |
___________________
| |
(1) | Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of delinquency and a directionally opposite change in the assumption used for prepayment rates. |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company used amultiple third-party pricing providervendors in the fair value measurement of its Level 3 residential mortgage loans held-for-sale.AFS securities. The significant unobservable inputs used by the third-party pricing providervendors included expected default, severity and discount rate. Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement.
Fair Value Option for Financial Assets and Financial Liabilities
On July 1, 2015, theThe Company electedalso used multiple third-party pricing vendors in the fair value option for Agency interest-only securities and GSE credit risk transfer securities acquired on or after such date.measurement of its Level 3 MSR. The fair value option was electedtables below present information about the significant unobservable market data used by the third-party pricing vendors as inputs into models utilized to simplify the reportinginform their best estimates of changes in fair value. Agency interest-only securities and GSE credit risk transfer securities are carried within AFS securities on the condensed consolidated balance sheets. The Company’s policy is to separately record interest income, net of premium amortization or including discount accretion, on these fair value elected securities. Fair value adjustments are reported in gain (loss) on investment securities on the condensed consolidated statements of comprehensive income.
The Company also elected the fair value option for both the residential mortgage loans held-for-investment in securitization trusts and the collateralized borrowings in securitization trusts carried on the condensed consolidated balance sheets. The fair value option was elected to better reflect the economicsmeasurement of the Company’s retained interests. The Company’s policy is to separately record interest income onMSR classified as Level 3 fair value assets at March 31, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | |
| Valuation Technique | | Unobservable Input | | Range | | Weighted Average (1) | |
| Discounted cash flow | | Constant prepayment speed | | 5.6% | - | 6.8% | | | 6.2% | |
| | | | | | | | | | |
| | Option-adjusted spread | | 5.2% | - | 8.7% | | | 5.4% | |
| | Per loan annual cost to service | | $67.90 | - | $81.54 | | | $68.47 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | |
| Valuation Technique | | Unobservable Input | | Range | | Weighted Average (1) | |
| Discounted cash flow | | Constant prepayment speed | | 5.0% | - | 6.9% | | | 6.2% | |
| | | | | | | | | | |
| | Option-adjusted spread | | 4.8% | - | 8.6% | | | 5.3% | |
| | Per loan annual cost to service | | $66.31 | - | $81.30 | | | $68.27 | |
___________________
(1)Calculated by averaging the weighted average significant unobservable inputs used by the multiple third-party pricing vendors in the fair value elected loans and interest expensemeasurement of MSR.
Certain assets are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment. Upon the occurrence of certain events, the Company re-measures the fair value elected borrowings. Upfront feesof long-lived assets, including property, plant and costs are not deferredequipment, operating lease right of use assets, intangible assets and goodwill if an impairment or capitalized. Fair value adjustments are reported in other income (loss) on the condensed consolidated statements of comprehensive income.
The Company elected the fair value option for its residential mortgage loans held-for-sale. The fair value option was elected to mitigate earnings volatility by better matching the accounting for the assets with the related hedges. The mortgage loans are carried within residential mortgage loans held-for-sale on the condensed consolidated balance sheets. The Company’s policyobservable price adjustment is to separately record interest income on these fair value elected loans. Upfront fees and costs related to the fair value elected loans are not deferred or capitalized. Fair value adjustments are reported in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income. The fair value option is irrevocable once the loan is acquired.
The following tables summarize the fair value option elections and information regarding the line items and amounts recognized in the condensed consolidated statementscurrent period. No instances requiring re-measurement of comprehensive income for eachassets measured at fair value option-elected item.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 |
| (in thousands) | Interest income (expense) | | Gain (loss) on investment securities | | Gain (loss) on residential mortgage loans held-for-sale | | Other income (loss) | | Total included in net income | | Change in fair value due to credit risk |
| Assets | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (2,283 | ) | | | $ | 4,757 |
| | $ | — |
| | $ | — |
| | $ | 2,474 |
| | N/A |
| |
| Residential mortgage loans held-for-investment in securitization trusts | 29,865 |
| (1) | | — |
| | — |
| | 14,670 |
| | 44,535 |
| | $ | — |
| (2) |
| Residential mortgage loans held-for-sale | 479 |
| (1) | | — |
| | 355 |
| | — |
| | 834 |
| | (400 | ) | (3) |
| Liabilities | | | | | | | | | | | | | |
| Collateralized borrowings in securitization trusts | (23,970 | ) | | | — |
| | — |
| | (7,863 | ) | | (31,833 | ) | | — |
| (2) |
| Total | $ | 4,091 |
| | | $ | 4,757 |
| | $ | 355 |
| | $ | 6,807 |
| | $ | 16,010 |
| | $ | (400 | ) | |
TWO HARBORS INVESTMENT CORP.
Notes toon a nonrecurring basis occurred during the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
| (in thousands) | Interest income (expense) | | Gain (loss) on investment securities | | Gain (loss) on residential mortgage loans held-for-sale | | Other income (loss) | | Total included in net income | | Change in fair value due to credit risk |
| Assets | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (249 | ) | | | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | (237 | ) | | N/A |
| |
| Residential mortgage loans held-for-investment in securitization trusts | 33,495 |
| (1) | | — |
| | — |
| | 24,628 |
| | 58,123 |
| | $ | — |
| (2) |
| Residential mortgage loans held-for-sale | 7,627 |
| (1) | | — |
| | (419 | ) | | — |
| | 7,208 |
| | 145 |
| (3) |
| Liabilities | | | | | | | | | | | | | |
| Collateralized borrowings in securitization trusts | (26,422 | ) | | | — |
| | — |
| | (20,360 | ) | | (46,782 | ) | | — |
| (2) |
| Total | $ | 14,451 |
| | | $ | 12 |
| | $ | (419 | ) | | $ | 4,268 |
| | $ | 18,312 |
| | $ | 145 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| (in thousands) | Interest income (expense) | | Gain (loss) on investment securities | | Gain (loss) on residential mortgage loans held-for-sale | | Other income (loss) | | Total included in net income | | Change in fair value due to credit risk |
| Assets | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (5,565 | ) | | | $ | 9,124 |
| | $ | — |
| | $ | — |
| | $ | 3,559 |
| | N/A |
| |
| Residential mortgage loans held-for-investment in securitization trusts | 92,319 |
| (1) | | — |
| | — |
| | 45,569 |
| | 137,888 |
| | $ | — |
| (2) |
| Residential mortgage loans held-for-sale | 1,380 |
| (1) | | — |
| | 2,149 |
| | — |
| | 3,529 |
| | $ | (1,281 | ) | (3) |
| Liabilities | | | | | | | | | | | | | |
| Collateralized borrowings in securitization trusts | (74,199 | ) | | | — |
| | — |
| | (30,685 | ) | | (104,884 | ) | | — |
| (2) |
| Total | $ | 13,935 |
| | | $ | 9,124 |
| | $ | 2,149 |
| | $ | 14,884 |
| | $ | 40,092 |
| | $ | (1,281 | ) | |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
| (in thousands) | Interest income (expense) | | Gain (loss) on investment securities | | Gain (loss) on residential mortgage loans held-for-sale | | Other income (loss) | | Total included in net income | | Change in fair value due to credit risk |
| Assets | | | | | | | | | | | | | |
| Available-for-sale securities | $ | (132 | ) | | | $ | (1,262 | ) | | $ | — |
| | $ | — |
| | $ | (1,394 | ) | | N/A |
| |
| Residential mortgage loans held-for-investment in securitization trusts | 100,765 |
| (1) | | — |
| | — |
| | 63,737 |
| | 164,502 |
| | $ | — |
| (2) |
| Residential mortgage loans held-for-sale | 19,789 |
| (1) | | — |
| | 17,028 |
| | — |
| | 36,817 |
| | 209 |
| (3) |
| Liabilities | | | | | | | | | | | | | |
| Collateralized borrowings in securitization trusts | (70,965 | ) | | | — |
| | — |
| | (68,910 | ) | | (139,875 | ) | | — |
| (2) |
| Total | $ | 49,457 |
| | | $ | (1,262 | ) | | $ | 17,028 |
| | $ | (5,173 | ) | | $ | 60,050 |
| | $ | 209 |
| |
____________________
| |
(1) | Interest income on residential mortgage loans held-for-sale and residential mortgage loans held-for-investment in securitization trusts is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the number of days of interest due. |
| |
(2) | The change in fair value on residential mortgage loans held-for-investment in securitization trusts and collateralized borrowings in securitization trusts was due entirely to changes in market interest rates. |
| |
(3) | The change in fair value due to credit risk on residential mortgage loans held-for-sale was quantified by holding yield constant in the cash flow model in order to isolate credit risk component. |
The table below provides the fair valuethree months ended March 31, 2024 and the unpaid principal balance for the Company’s fair value option-elected loans and collateralized borrowings.
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (in thousands) | Unpaid Principal Balance | | Fair Value (1) | | Unpaid Principal Balance | | Fair Value (1) |
| Residential mortgage loans held-for-investment in securitization trusts | | | | | | | |
| Total loans | $ | 2,948,349 |
| | $ | 3,031,191 |
| | $ | 3,234,044 |
| | $ | 3,271,317 |
|
| Nonaccrual loans | $ | 2,812 |
| | $ | 2,892 |
| | $ | 2,373 |
| | $ | 2,408 |
|
| Loans 90+ days past due | $ | 1,618 |
| | $ | 1,666 |
| | $ | 1,401 |
| | $ | 1,419 |
|
| Residential mortgage loans held-for-sale | | | | | | | |
| Total loans | $ | 38,765 |
| | $ | 31,197 |
| | $ | 49,986 |
| | $ | 40,146 |
|
| Nonaccrual loans | $ | 14,257 |
| | $ | 11,775 |
| | $ | 25,445 |
| | $ | 21,162 |
|
| Loans 90+ days past due | $ | 11,180 |
| | $ | 9,047 |
| | $ | 21,759 |
| | $ | 18,203 |
|
| Collateralized borrowings in securitization trusts | | | | | | | |
| Total borrowings | $ | 2,732,694 |
| | $ | 2,785,413 |
| | $ | 3,015,162 |
| | $ | 3,037,196 |
|
____________________
| |
(1) | Excludes accrued interest receivable. |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
2023.
Fair Value of Financial Instruments
In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.
The following describes the Company’s methods for estimating the fair value for financial instruments. Descriptions are not provided for those items that have zero balances as of the current balance sheet date.
•AFS securities, residential mortgage loans held-for-sale, residential mortgage loans held-for-investment in securitization trusts, MSR, and derivative assets and liabilities and collateralized borrowings in securitization trusts are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the Fair Value Measurements section of this Note 14.
11.Commercial real estate assets are carried at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless deemed impaired. The Company estimates the fair value of its commercial real estate assets by assessing any changes in market interest rates, shifts in credit profiles and actual operating results for mezzanine commercial real estate loans and commercial real estate first mortgages, taking into consideration such factors as underlying property type, property competitive position within its market, market and submarket fundamentals, tenant mix, nature of business plan, sponsorship, extent of leverage and other loan terms. The Company categorizes the fair value measurement of these assets as Level 3.
•Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. The Company categorizes the fair value measurement of these assets as Level 1.
As•Reverse repurchase agreements have a condition to membership in the FHLB, the Company is required to purchase and hold a certain amount of FHLB stock, which is considered a non-marketable, long-term investment, and is carried at cost. Because this stock can only be redeemed or sold at its par value, and only to the FHLB, carrying value or cost,which approximates fair value.value due to their short-term nature. The Company categorizes the fair value measurement of these assets as Level 3.2.
Equity investments include cost method investments for which fair value is not estimated. Carrying value, or cost, approximates fair value. The Company categorizes the fair value measurement of these assets as Level 3.
•The carrying value of repurchase agreements FHLB advances and revolving credit facilities that mature in less than one year generally approximates fair value due to the short maturities. As of September 30, 2017,March 31, 2024, the Company held $1.4had outstanding borrowings of $1.0 billion of repurchase agreements and $2.0 billion of FHLB advancesunder revolving credit facilities that are considered long-term. The Company’s long-term repurchase agreements and FHLB advancesrevolving credit facilities have floating rates based on an index plus a spread and for members of the FHLB, the credit spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these borrowings are at market and thus carrying value approximates fair value. The Company categorizes the fair value measurement of these liabilities as Level 2.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
•Term notes payable are recorded at outstanding principal balance, net of any unamortized deferred debt issuance costs. In determining the fair value of term notes payable, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing vendors, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company categorizes the fair value measurement of these liabilities as Level 2.
•Convertible senior notes are carried at their unpaid principal balance, net of any unamortized deferred issuance costs. The Company estimates the fair value of its convertible senior notes using the market transaction price on September 30, 2017.nearest to March 31, 2024. The Company categorizes the fair value measurement of these assets as Level 2.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 2017March 31, 2024 and December 31, 2016.2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| (in thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Assets: | | | | | | | |
| Available-for-sale securities | $ | 8,182,544 | | | $ | 8,182,544 | | | $ | 8,327,149 | | | $ | 8,327,149 | |
| | | | | | | |
| | | | | | | |
| Mortgage servicing rights | $ | 3,084,879 | | | $ | 3,084,879 | | | $ | 3,052,016 | | | $ | 3,052,016 | |
| | | | | | | |
| Cash and cash equivalents | $ | 666,244 | | | $ | 666,244 | | | $ | 729,732 | | | $ | 729,732 | |
| Restricted cash | $ | 72,184 | | | $ | 72,184 | | | $ | 65,101 | | | $ | 65,101 | |
| Derivative assets | $ | 24,397 | | | $ | 24,397 | | | $ | 85,291 | | | $ | 85,291 | |
| Reverse repurchase agreements | $ | 351,843 | | | $ | 351,843 | | | $ | 284,091 | | | $ | 284,091 | |
| Other assets | $ | 31,562 | | | $ | 31,562 | | | $ | 31,704 | | | $ | 31,704 | |
| Liabilities: | | | | | | | |
| Repurchase agreements | $ | 8,361,638 | | | $ | 8,361,638 | | | $ | 8,020,207 | | | $ | 8,020,207 | |
| | | | | | | |
| | | | | | | |
| Revolving credit facilities | $ | 1,357,671 | | | $ | 1,357,671 | | | $ | 1,329,171 | | | $ | 1,329,171 | |
| Term notes payable | $ | 295,520 | | | $ | 292,552 | | | $ | 295,271 | | | $ | 289,653 | |
| Convertible senior notes | $ | 268,953 | | | $ | 259,507 | | | $ | 268,582 | | | $ | 254,232 | |
| Derivative liabilities | $ | 3,027 | | | $ | 3,027 | | | $ | 21,506 | | | $ | 21,506 | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (in thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Assets | | | | | | | |
| Available-for-sale securities | $ | 20,199,094 |
| | $ | 20,199,094 |
| | $ | 13,128,857 |
| | $ | 13,128,857 |
|
| Commercial real estate assets | $ | 2,171,344 |
| | $ | 2,187,721 |
| | $ | 1,412,543 |
| | $ | 1,411,733 |
|
| Mortgage servicing rights | $ | 930,613 |
| | $ | 930,613 |
| | $ | 693,815 |
| | $ | 693,815 |
|
| Residential mortgage loans held-for-investment in securitization trusts | $ | 3,031,191 |
| | $ | 3,031,191 |
| | $ | 3,271,317 |
| | $ | 3,271,317 |
|
| Residential mortgage loans held-for-sale | $ | 31,197 |
| | $ | 31,197 |
| | $ | 40,146 |
| | $ | 40,146 |
|
| Cash and cash equivalents | $ | 539,367 |
| | $ | 539,367 |
| | $ | 406,883 |
| | $ | 406,883 |
|
| Restricted cash | $ | 343,813 |
| | $ | 343,813 |
| | $ | 408,312 |
| | $ | 408,312 |
|
| Derivative assets | $ | 238,305 |
| | $ | 238,305 |
| | $ | 324,182 |
| | $ | 324,182 |
|
| Federal Home Loan Bank stock | $ | 85,175 |
| | $ | 85,175 |
| | $ | 167,856 |
| | $ | 167,856 |
|
| Equity investments | $ | 3,000 |
| | $ | 3,000 |
| | $ | 3,000 |
| | $ | 3,000 |
|
| Liabilities | | | | | | | |
| Repurchase agreements | $ | 18,297,392 |
| | $ | 18,297,392 |
| | $ | 9,316,351 |
| | $ | 9,316,351 |
|
| Collateralized borrowings in securitization trusts | $ | 2,785,413 |
| | $ | 2,785,413 |
| | $ | 3,037,196 |
| | $ | 3,037,196 |
|
| Federal Home Loan Bank advances | $ | 1,998,762 |
| | $ | 1,998,762 |
| | $ | 4,000,000 |
| | $ | 4,000,000 |
|
| Revolving credit facilities | $ | 40,000 |
| | $ | 40,000 |
| | $ | 70,000 |
| | $ | 70,000 |
|
| Convertible senior notes | $ | 282,543 |
| | $ | 306,906 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities | $ | 11,312 |
| | $ | 11,312 |
| | $ | 12,501 |
| | $ | 12,501 |
|
Note 15.12. Repurchase Agreements
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company had outstanding $18.3$8.4 billion and $9.3$8.0 billion, respectively, of repurchase agreements. Excluding the effect of the Company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 1.76%5.61% and 1.31%5.74% and weighted average remaining maturities of 15491 and 7755 days as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively.
At September 30, 2017 and December 31, 2016, the repurchase agreement balances were as follows:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Short-term | $ | 16,856,537 |
| | $ | 9,130,717 |
|
| Long-term | 1,440,855 |
| | 185,634 |
|
| Total | $ | 18,297,392 |
| | $ | 9,316,351 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
At September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company’s repurchase agreements had the following characteristics and remaining maturities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Collateral Type | | |
| (in thousands) | Agency RMBS | | | | Non-Agency Securities | | Agency Derivatives | | | | Mortgage Servicing Rights | | | | Total Amount Outstanding |
| Within 30 days | $ | 2,262,318 | | | | | $ | — | | | $ | 7,752 | | | | | $ | 58,977 | | | | | $ | 2,329,047 | |
| 30 to 59 days | 1,367,028 | | | | | — | | | — | | | | | — | | | | | 1,367,028 | |
| 60 to 89 days | 1,022,997 | | | | | — | | | — | | | | | — | | | | | 1,022,997 | |
| 90 to 119 days | 702,452 | | | | | — | | | — | | | | | — | | | | | 702,452 | |
| 120 to 364 days | 2,739,235 | | | | | 217 | | | 662 | | | | | 200,000 | | | | | 2,940,114 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | $ | 8,094,030 | | | | | $ | 217 | | | $ | 8,414 | | | | | $ | 258,977 | | | | | $ | 8,361,638 | |
| Weighted average borrowing rate | 5.51 | % | | | | 6.13 | % | | 6.10 | % | | | | 6.92 | % | | | | 5.61 | % |
| | | | September 30, 2017 |
| | Collateral Type | | |
| December 31, 2023 | |
| December 31, 2023 | |
| December 31, 2023 | |
| Collateral Type | |
| (in thousands) | |
| (in thousands) | |
| (in thousands) | Agency RMBS | | Non-Agency Securities (1) | | Agency Derivatives | | Commercial Real Estate Assets | | Total Amount Outstanding | Agency RMBS | | | | Non-Agency Securities | | Agency Derivatives | | | | Mortgage Servicing Rights | | | | Total Amount Outstanding |
| Within 30 days | $ | 2,398,041 |
| | $ | 746,438 |
| | $ | 23,038 |
| | $ | — |
| | $ | 3,167,517 |
| Within 30 days | $ | 2,772,975 | | | | $ | — | | $ | 1,615 | | | | $ | 58,572 | | | | $ | 2,833,162 |
| 30 to 59 days | 2,583,705 |
| | 250,472 |
| | 51,718 |
| | 25,934 |
| | 2,911,829 |
| 30 to 59 days | 1,918,818 | | | | — | | — | | | | — | | | | 1,918,818 |
| 60 to 89 days | — |
| | — |
| | — |
| | — |
| | — |
| 60 to 89 days | 2,058,518 | | | | 233 | | 687 | | | | — | | | | 2,059,438 |
| 90 to 119 days | 2,994,737 |
| | 303,896 |
| | — |
| | — |
| | 3,298,633 |
| 90 to 119 days | 989,045 | | | | — | | 5,744 | | | | — | | | | 994,789 |
| 120 to 364 days | 6,913,298 |
| | 562,782 |
| | 2,478 |
| | — |
| | 7,478,558 |
| 120 to 364 days | — | | | | — | | — | | | | 214,000 |
| One year and over | — |
| | — |
| | — |
| | 1,440,855 |
| | 1,440,855 |
|
| | Total | |
| | Total | |
| | Total | $ | 14,889,781 |
| | $ | 1,863,588 |
| | $ | 77,234 |
| | $ | 1,466,789 |
| | $ | 18,297,392 |
| $ | 7,739,356 | | | | $ | 233 | | $ | 8,046 | | | | $ | 272,572 | | | | $ | 8,020,207 |
| Weighted average borrowing rate | 1.43 | % | | 2.93 | % | | 2.10 | % | | 3.56 | % | | 1.76 | % | Weighted average borrowing rate | 5.64 | % | | | | 6.36 | % | | 6.14 | % | | | | 7.08 | % | | | | 5.74 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Collateral Type | | |
| (in thousands) | Agency RMBS | | Non-Agency Securities (1) | | Agency Derivatives | | Commercial Real Estate Assets | | Total Amount Outstanding |
| Within 30 days | $ | 2,511,773 |
| | $ | 688,667 |
| | $ | 30,672 |
| | $ | 21,933 |
| | $ | 3,253,045 |
|
| 30 to 59 days | 1,786,664 |
| | 334,590 |
| | 68,257 |
| | 28,991 |
| | 2,218,502 |
|
| 60 to 89 days | 1,035,806 |
| | 89,281 |
| | 3,307 |
| | — |
| | 1,128,394 |
|
| 90 to 119 days | 1,192,127 |
| | 251,929 |
| | — |
| | — |
| | 1,444,056 |
|
| 120 to 364 days | 810,552 |
| | 69,678 |
| | — |
| | 206,490 |
| | 1,086,720 |
|
| One year and over | — |
| | — |
| | — |
| | 185,634 |
| | 185,634 |
|
| Total | $ | 7,336,922 |
| | $ | 1,434,145 |
| | $ | 102,236 |
| | $ | 443,048 |
| | $ | 9,316,351 |
|
| Weighted average borrowing rate | 0.94 | % | | 2.60 | % | | 1.69 | % | | 3.16 | % | | 1.31 | % |
____________________
| |
(1) | Includes repurchase agreements collateralized by retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP. |
The following table summarizes assets at carrying values that are pledged or restricted as collateral for the future payment obligations of the Company’s repurchase agreements:
| | | (in thousands) | September 30,
2017 | | December 31,
2016 | (in thousands) | March 31,
2024 | | December 31,
2023 |
| Available-for-sale securities, at fair value | $ | 17,940,144 |
| | $ | 9,540,849 |
|
| Commercial real estate assets | 1,997,077 |
| | 648,885 |
|
Net economic interests in consolidated securitization trusts (1) | 224,394 |
| | 211,095 |
|
| Cash and cash equivalents | 14,796 |
| | 15,000 |
|
| Mortgage servicing rights, at fair value (1) | |
| Mortgage servicing rights, at fair value (1) | |
| Mortgage servicing rights, at fair value (1) | |
| | Restricted cash | |
| Restricted cash | |
| Restricted cash | 149,845 |
| | 162,759 |
|
| Due from counterparties | 23,602 |
| | 48,939 |
|
| Derivative assets, at fair value | 101,187 |
| | 126,341 |
|
| | Total | $ | 20,451,045 |
| | $ | 10,753,868 |
|
| Total | |
| Total | |
____________________
| |
(1) | Includes the retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP. |
(1)As of March 31, 2024 and December 31, 2023, MSR repurchase agreements of $200.0 million and $214.0 million, respectively, were secured by a VFN issued in connection with the Company’s securitization of MSR and MSR repurchase agreements of $59.0 million and $58.6 million, respectively, were secured by a portion of the term notes issued in connection with the Company’s securitization of MSR and repurchased by the Company. The VFN and the term notes are both collateralized by the Company’s MSR.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Although the transactions under repurchase agreements represent committed borrowings until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls.
The following table summarizes certain characteristics
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
As of both March 31, 2024 and December 31, 2023, the net carrying value of assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the Company’s repurchase agreements andliability, including accrued interest, with any individual counterparty concentration at September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (dollars in thousands) | Amount Outstanding | | Net Counterparty Exposure (1) | | Percent of Equity | | Weighted Average Days to Maturity | | Amount Outstanding | | Net Counterparty Exposure (1) | | Percent of Equity | | Weighted Average Days to Maturity |
| JP Morgan Chase | $ | 1,950,484 |
| | $ | 264,974 |
| | 6 | % | | 219 | | $ | 605,768 |
| | $ | 174,197 |
| | 5 | % | | 110 |
All other counterparties (2) | 16,346,908 |
| | 1,887,168 |
| | 46 | % | | 147 | | 8,710,583 |
| | 1,261,204 |
| | 37 | % | | 75 |
| Total | $ | 18,297,392 |
| | $ | 2,152,142 |
| | | | | | $ | 9,316,351 |
| | $ | 1,435,401 |
| | | | |
____________________
| |
(1) | Represents the net carrying value of the securities, residential mortgage loans held-for-sale and commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest. Payables due to broker counterparties for unsettled securities purchases of $17.9 million are not included in the September 30, 2017 amounts presented above. The Company did not have any such payables at December 31, 2016. |
| |
(2) | Represents amounts outstanding with 24 and 22 counterparties at September 30, 2017 and December 31, 2016, respectively. |
or group of related counterparties did not exceed 10% of total stockholders’ equity. The Company does not anticipate any defaults by its repurchase agreement counterparties. There can be no assurance, however, that any such default or defaults will not occur.
Note 16. Collateralized Borrowings in Securitization Trusts, at Fair Value
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. The debt associated with the underlying residential mortgage loans held by the trusts, which are consolidated on the Company’s condensed consolidated balance sheets, is classified as collateralized borrowings in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the securitization trusts. As of September 30, 2017 and December 31, 2016, collateralized borrowings in securitization trusts had a carrying value of $2.8 billion and $3.0 billion, respectively, with a weighted average interest rate of 3.4% for both periods. The stated maturity dates for all collateralized borrowings were more than five years from both September 30, 2017 and December 31, 2016.
Note 17. Federal Home Loan Bank of Des Moines Advances
The Company’s wholly owned subsidiary, TH Insurance Holdings Company LLC, or TH Insurance, is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances. As of September 30, 2017 and December 31, 2016, TH Insurance had $2.0 billion and $4.0 billion in outstanding secured advances with a weighted average borrowing rate of 1.56% and 0.85%, respectively. As of September 30, 2017, TH Insurance had an additional $1.4 billion of available uncommitted capacity for borrowings. TH Insurance had no additional uncommitted capacity to borrow as of December 31, 2016. To the extent TH Insurance has uncommitted capacity, it may be adjusted at the sole discretion of the FHLB.
The ability to borrow from the FHLB is subject to the Company’s continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines, as may be revised from time to time by the FHLB. Eligible collateral may include conventional 1-4 family residential mortgage loans, commercial real estate loans, Agency RMBS and certain non-Agency securities with a rating of A and above.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
On January 11, 2016, the Federal Housing Finance Agency, or FHFA, released a final rule regarding membership in the Federal Home Loan Bank system. Among other effects, the final rule excludes captive insurers from membership eligibility, including the Company’s subsidiary member, TH Insurance. Since TH Insurance was admitted as a member in 2013, it is eligible for a membership grace period that shall run through February 19, 2021, during which new advances or renewals that mature beyond the grace period will be prohibited; however, any existing advances that mature beyond this grace period will be permitted to remain in place subject to their terms insofar as the Company maintains good standing with the FHLB. If any new advances or renewals occur, TH Insurance’s outstanding advances will be limited to 40% of its total assets.
At September 30, 2017 and December 31, 2016, FHLB advances had the following remaining maturities:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| ≤ 1 year | $ | — |
| | $ | 651,238 |
|
| > 1 and ≤ 3 years | 815,024 |
| | 815,024 |
|
| > 3 and ≤ 5 years | — |
| | — |
|
| > 5 and ≤ 10 years | — |
| | — |
|
| > 10 years | 1,183,738 |
| | 2,533,738 |
|
| Total | $ | 1,998,762 |
| | $ | 4,000,000 |
|
The following table summarizes assets at carrying values that are pledged or restricted as collateral for the future payment obligations of FHLB advances:
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Available-for-sale securities, at fair value | $ | 2,048,924 |
| | $ | 3,576,481 |
|
| Commercial real estate assets | 33,626 |
| | 708,989 |
|
Net economic interests in consolidated securitization trusts (1) | 2,040 |
| | 2,015 |
|
| Total | $ | 2,084,590 |
| | $ | 4,287,485 |
|
____________________
| |
(1) | Includes the retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP. |
The FHLB retains the right to mark the underlying collateral for FHLB advances to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral. In addition, as a condition to membership in the FHLB, the Company is required to purchase and hold a certain amount of FHLB stock, which is based, in part, upon the outstanding principal balance of advances from the FHLB. At September 30, 2017 and December 31, 2016, the Company had stock in the FHLB totaling $85.2 million and $167.9 million, respectively, which is included in other assets on the condensed consolidated balance sheets. FHLB stock is considered a non-marketable, long-term investment, is carried at cost and is subject to recoverability testing under applicable accounting standards. This stock can only be redeemed or sold at its par value, and only to the FHLB. Accordingly, when evaluating FHLB stock for impairment, the Company considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of September 30, 2017 and December 31, 2016, the Company had not recognized an impairment charge related to its FHLB stock.
Note 18.13. Revolving Credit Facilities
To finance MSR assets and related servicing advance obligations, the Company entershas entered into revolving credit facilities collateralized by the value of the MSR and/or servicing advances pledged. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Company had outstanding short-termshort- and long-term borrowings under revolving credit facilities of $40.0 million$1.4 billion and $70.0 million$1.3 billion with a weighted average borrowing rate of 4.98%8.56% and 4.53%8.66% and weighted average remaining maturities of 2081.3 and 306 days,1.1 years, respectively.
At March 31, 2024 and December 31, 2023, borrowings under revolving credit facilities had the following remaining maturities:
Table of Contents | | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Within 30 days | $ | — | | | $ | — | |
| 30 to 59 days | — | | | — | |
| 60 to 89 days | — | | | — | |
| 90 to 119 days | — | | | — | |
| 120 to 364 days | 381,800 | | | 324,300 | |
| One year and over | 975,871 | | | 1,004,871 | |
| Total | $ | 1,357,671 | | | $ | 1,329,171 | |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Although the transactions under revolving credit facilities represent committed borrowings from the time of funding until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets below a designated threshold would require the Company to provide additional collateral or pay down the facility. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, MSR with a carrying value of $160.6 million$2.2 billion and $180.9 million,$2.2 billion, respectively, was pledged as collateral for the Company’s future payment obligations under its MSR revolving credit facilities. As of March 31, 2024 and December 31, 2023, servicing advances with a carrying value of $93.9 million and $79.7 million, respectively, were pledged as collateral for the Company’s future payment obligations under its servicing advance revolving credit facility. Additionally, as of March 31, 2024, $1.5 million of cash was held in restricted accounts as collateral for the future payment obligations of outstanding revolving credit facility balances. The Company does not anticipate any defaults by its revolving credit facility counterparties, although there can be no assurance that any such default or defaults will not occur.
Note 14. Term Notes Payable
The debt issued in connection with the Company’s on-balance sheet MSR securitization is classified as term notes payable and carried at outstanding principal balance, which was $295.8 million as of both March 31, 2024 and December 31, 2023, net of unamortized deferred debt issuance costs, on the Company’s condensed consolidated balance sheets. During the three months ended September 30, 2023, the Company repurchased $104.2 million principal amount of its MSR term notes in open market transactions for an aggregate cost of $101.0 million, resulting in a gain, net of unamortized deferred issuance costs, of $2.9 million recorded within the other (loss) income line item on the condensed consolidated statements of comprehensive income (loss). No notes were repurchased during the three months ended March 31, 2024 or 2023. As of March 31, 2024 and December 31, 2023, the outstanding amount due on term notes payable was $295.5 million and $295.3 million, net of deferred debt issuance costs, with a weighted average interest rate of 8.24% and 8.27% and weighted average remaining maturities of 0.2 years and 0.5 years.
At March 31, 2024 and December 31, 2023, the Company pledged MSR with a carrying value of $394.8 million and $397.9 million and weighted average underlying loan coupon of 3.31% and 3.32%, respectively, as collateral for term notes payable. Additionally, as of March 31, 2024 and December 31, 2023, $0.2 million and $0.2 million of cash was held in restricted accounts as collateral for the future payment obligations of outstanding term notes payable, respectively.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 19.15. Convertible Senior Notes
On January 19, 2017, the Company closed an underwritten public offering of $287.5 million aggregate principal amount ofThe Company’s convertible senior notes due 2022, which included $37.5 million aggregate principal amount sold by the Company to the underwriter of the offering pursuant to an overallotment option. The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The notes are unsecured, pay interest semiannually at a rate of 6.25% per annum and are convertible at the option of the holder into shares of the Company’s common stock. As of March 31, 2024 and December 31, 2023, the notes had a conversion rate of 33.8752 and 33.8752 shares of common stock per $1,000 principal amount of the notes, respectively. The notes will mature in January 2022,2026, unless earlier converted or repurchased in accordance with their terms.
The Company does not have the right to redeem theits convertible senior notes prior to maturity, but may repurchase the notes in open market or privately negotiated transactions at the same or differing price without giving prior notice to or obtaining any consent of the holders. The Company may also be required to repurchase the notes from holders under certain circumstances. As of SeptemberDuring the three months ended June 30, 2017,2023, the notes had a conversion rate of 50.2537 shares of common stock per $1,000Company repurchased $15.6 million principal amount of its convertible senior notes in open market transactions for an aggregate cost of $13.2 million, resulting in a gain, net of unamortized deferred issuance costs, of $2.2 million recorded within the notes (basedother (loss) income line item on the retroactive adjustment due tocondensed consolidated statements of comprehensive income (loss). No notes were repurchased during the Company’s one-for-two reverse stock split described in Note 20 - Equity).three months ended March 31, 2024 or 2023.
As of both March 31, 2024 and December 31, 2023, $271.9 million principal amount of convertible senior notes remained outstanding. The outstanding amount due on the convertible senior notes as of September 30, 2017March 31, 2024 and December 31, 2023 was $282.5$269.0 million and $268.6 million, respectively, net of unamortized deferred issuance costs.
Note 20. Equity16. Commitments and Contingencies
Preferred Stock
On March 14, 2017,The following represent the material commitments and contingencies of the Company issued 5,000,000 sharesas of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share,March 31, 2024:
Legal and regulatory. The Company and its subsidiaries are routinely involved in a public offering at a price of $25.00 per share. On March 21, 2017, an additional 750,000 shares were sold bynumerous legal and regulatory proceedings, including but not limited to judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the Company to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 8.125% per annum of the $25.00 liquidation preference. On and after April 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.66% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to the Company’s common stock and on parity with our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. Under certain circumstances upon a change of control, the preferred stock is convertible into sharesconduct of the Company’s business. These legal proceedings are at varying stages of adjudication, arbitration or investigation and may consist of a variety of claims, including common stock. The preferred stock will not be redeemable before April 27, 2027, exceptlaw tort and contract claims, consumer protection-related claims and claims under certain limited circumstances. Onother laws and regulations. Any legal proceedings or after April 27, 2027,actions brought against the Company may atresult in judgments, settlements, fines, penalties, injunctions, business improvement orders, consent orders, supervisory agreements, restrictions on business activities, or other results adverse to the Company, which could materially and negatively affect its option, redeem,business. The Company seeks to resolve all litigation and regulatory matters in wholethe manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing, and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. Under ASC 450, Contingencies, or ASC 450, liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established or the range of reasonably possible loss disclosed for those claims.
As previously disclosed, on July 15, 2020, the Company provided PRCM Advisers with a notice of termination of the Management Agreement for “cause” in accordance with Section 15(a) of the Management Agreement. The Company terminated the Management Agreement for “cause” on the basis of certain material breaches and certain events of gross negligence on the part atof PRCM Advisers in the performance of its duties under the Management Agreement. On July 21, 2020, PRCM Advisers filed a complaint against the Company in the United States District Court for the Southern District of New York, or the Court. Subsequently, Pine River Domestic Management L.P. and Pine River Capital Management L.P. were added as plaintiffs to the matter. As amended, the complaint, or the Federal Complaint, alleges, among other things, the misappropriation of trade secrets in violation of both the Defend Trade Secrets Act and New York common law, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition and business practices, unjust enrichment, conversion, and tortious interference with contract. The Federal Complaint seeks, among other things, an order enjoining the Company from making any timeuse of or from timedisclosing PRCM Advisers’ trade secret, proprietary, or confidential information; damages in an amount to time, the preferred stockbe determined at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether hearing and/or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $138.9 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.
On July 19, 2017, the Company issued 11,500,000 shares of 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share, which included 1,500,000 shares sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 7.625% per annum of the $25.00 liquidation preference. On and after July 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.352% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to the Company’s common stock and on parity with the Company’s 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. Under certain circumstances upon a change of control, the preferred stock is convertible into sharestrial; disgorgement of the Company’s common stock.wrongfully obtained profits; and fees and costs incurred by the plaintiffs in pursuing the action. The preferred stock will not be redeemable before July 27, 2027, except under certain limited circumstances.Company has filed its answer to the Federal Complaint and made counterclaims against PRCM Advisers and Pine River Capital Management L.P. On or after July 27, 2027,May 5, 2022, the plaintiffs filed a motion for judgment on the pleadings, seeking judgment in their favor on all but one of the Company’s counterclaims and on one of the Company’s affirmative defenses. The Company opposed the motion for judgment on the pleadings. On August 10, 2023, the motion for judgment on the pleadings was granted in part and denied in part. The discovery period has ended. On November 8, 2023, the Company may, at its option, redeem,and the plaintiffs filed motions for summary judgment, seeking judgment in whole or in part, at any time or from time to time,their favor on the preferred stock at a redemption pricepending claims and counterclaims. Each party opposed the other party’s motion for summary judgment. The motions for summary judgment are fully briefed. The Company’s board of $25.00 per share, plus any accumulateddirectors believes the Federal Complaint is without merit and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding,that the redemption date. The net proceeds fromCompany has fully complied with the offering were approximately $278.1 million, after deducting underwriting discounts and estimated offering expenses payable byterms of the Company.
Management Agreement.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
As of March 31, 2024, the Company’s condensed consolidated financial statements do not recognize a contingency liability or disclose a range of reasonably possible loss under ASC 450 because management does not believe that a loss or expense related to the Federal Complaint is probable or reasonably estimable. The specific factors that limit the Company’s ability to reasonably estimate a loss or expense related to the Federal Complaint are that the matter is not sufficiently advanced and the outcome of litigation is uncertain. If and when management believes losses associated with the Federal Complaint are a probable future event that may result in a loss or expense to the Company and the loss or expense is reasonably estimable, the Company will recognize a contingency liability and resulting loss in such period.
Based on information currently available, management is not aware of any other legal or regulatory claims that would have a material effect on the Company’s condensed consolidated financial statements and therefore no accrual is required as of March 31, 2024.
Note 17. Stockholders’ Equity
Redeemable Preferred Stock
The following is a summary of the Company’s series of cumulative redeemable preferred stock issued and outstanding as of March 31, 2024. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, each series of preferred stock will rank on parity with one another and rank senior to the Company’s common stock with respect to the payment of the dividends and the distribution of assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| (dollars in thousands) | | | | | | | | | | | | |
| Class of Stock | | Issuance Date | | Shares Issued and Outstanding | | Carrying Value | | Contractual Rate | | Redemption Eligible Date (1) | | Fixed to Floating Rate Conversion Date (2) | | Floating Annual Rate (3) |
| | | | | | | | | | | | |
| Series A | | March 14, 2017 | | 5,050,221 | | | $ | 121,971 | | | 8.125 | % | | April 27, 2027 | | April 27, 2027 | | 3M Rate + 5.660% |
| Series B | | July 19, 2017 | | 10,159,200 | | | 245,670 | | | 7.625 | % | | July 27, 2027 | | July 27, 2027 | | 3M Rate + 5.352% |
| Series C | | November 27, 2017 | | 9,661,396 | | | 233,826 | | | 7.250 | % | | January 27, 2025 | | January 27, 2025 | | 3M Rate + 5.011% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total | | | | 24,870,817 | | | $ | 601,467 | | | | | | | | | |
____________________
(1)Subject to the Company’s right under limited circumstances to redeem the preferred stock earlier than the redemption eligible date disclosed in order to preserve its qualification as a REIT or following a change in control of the Company.
(2)The dividend rate on the fixed-to-floating rate redeemable preferred stock will remain at an annual fixed rate of the $25.00 per share liquidation preference from the issuance date up to but not including the transition date disclosed within. Effective as of the fixed-to-floating rate conversion date and onward, dividends will accumulate on a floating rate basis according to the terms disclosed in footnote (3) below.
(3)On and after the fixed-to-floating rate conversion date, dividends will accumulate and be payable quarterly at a percentage of the $25.00 per share liquidation preference equal to a floating base rate plus the spread indicated with respect to each series of preferred stock. The original floating base rate applicable to each preferred series was three-month USD-LIBOR, which ceased to be published on June 30, 2023. Under the Adjustable Interest Rate (LIBOR) Act, and the regulations promulgated thereunder, the replacement reference rate for three-month USD-LIBOR is three-month CME Term SOFR plus a tenor spread adjustment of 0.26161%. As a result, based on the terms of the LIBOR Act, the Company expects that the floating base rate with respect to each series of preferred stock, following the applicable conversion date, will be three-month CME SOFR plus a tenor spread of 0.26161%.
For each series of preferred stock, the Company may redeem the stock on or after the redemption date in whole or in part, at any time or from time to time. The Company may also purchase shares of preferred stock from time to time in the open market by tender or in privately negotiated transactions. Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus any accumulated and unpaid dividends thereon up to, but excluding, the redemption date. Through March 31, 2024, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Preferred Share Repurchase Program
In June 2022, the Company’s board of directors authorized the repurchase of up to an aggregate of 5,000,000 shares of the Company’s preferred stock, which includes each series shown in the table above under the heading Redeemable Preferred Stock. Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of preferred share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The preferred share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The preferred share repurchase program does not have an expiration date. As of March 31, 2024, a total of 699,779 shares of the Company’s 8.125% Series A Cumulative Redeemable Preferred Stock, 1,340,800 shares of the Company’s 7.625% Series B Cumulative Redeemable Preferred Stock and 2,138,604 shares of the Company’s 7.25% Series C Cumulative Redeemable Preferred Stock had been repurchased by the Company under the program for an aggregate cost of $13.3 million, $25.5 million and $38.5 million, respectively, of which 35,047, 280,060 and 170,502 shares were repurchased for a total cost of $0.8 million, $6.4 million and $3.9 million, respectively, during the three months ended March 31, 2024. The difference between the consideration transferred and the carrying value of the preferred stock repurchased resulted in a gain attributable to common stockholders of $0.6 million for the three months ended March 31, 2024. No preferred shares were repurchased during the three months ended March 31, 2023.
Common Stock
Public Offerings
On February 6, 2023, the Company completed a public offering of 10,000,000 shares of its common stock. The underwriters purchased the shares from the Company at a price of $17.59 per share, for net proceeds to the Company of approximately $175.6 million after deducting offering expenses. The underwriters did not exercise any portion of their 30-day overallotment option to purchase up to 1,500,000 additional shares.
As of March 31, 2024, the Company had 103,474,944 shares of common stock outstanding. The following table presents a reconciliation of the common shares outstanding for the three months ended March 31, 2024 and 2023:
| | | | | |
| Number of common shares |
| |
| |
| |
| |
| |
| |
| Common shares outstanding, December 31, 2022 | 86,428,845 | |
| Issuance of common stock | 10,121,107 | |
| |
Non-cash equity award compensation (1) | 114,366 | |
| Common shares outstanding, March 31, 2023 | 96,664,318 | |
| |
| Common shares outstanding, December 31, 2023 | 103,206,457 | |
| Issuance of common stock | 4,058 | |
| |
Non-cash equity award compensation (1) | 264,429 | |
| Common shares outstanding, March 31, 2024 | 103,474,944 | |
____________________
(1)See Note 18 - Equity Incentive Plans for further details regarding the Company’s equity incentive plans.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Distributions to Preferred Stockholders
The following table presents cash dividends declared by the Company on its preferred stock during the three and nine months ended September 30, 2017:
|
| | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Cash Dividend Per Preferred Share |
| Series A Preferred Stock: | | | | | | |
| September 14, 2017 | | October 12, 2017 | | October 27, 2017 | | $ | 0.50781 |
|
| June 15, 2017 | | July 12, 2017 | | July 27, 2017 | | $ | 0.75043 |
|
| Series B Preferred Stock: | | | | | | |
| September 14, 2017 | | October 12, 2017 | | October 27, 2017 | | $ | 0.51892 |
|
Common Stock
Reverse Stock Split
On September 14, 2017, the Company’s board of directors approved a one-for-two reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of the Company’s common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of the Company’s common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of the Company’s common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
Distributions to Common Stockholders
The following table presents cash dividends declared by the Company on its common stock during the three months ended September 30, 2017,March 31, 2024 and the four immediately preceding quarters:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| (dollars in thousands) | | | | | | 2024 | | 2023 | | |
| Class of Stock | | | | | | | | | | Amount | | Per Share | | Amount | | Per Share | | | | |
| Series A Preferred Stock | | | | | | | | | | $ | 2,565 | | | $ | 0.51 | | | $ | 2,702 | | | $ | 0.51 | | | | | |
| Series B Preferred Stock | | | | | | | | | | $ | 4,841 | | | $ | 0.48 | | | $ | 5,106 | | | $ | 0.48 | | | | | |
| Series C Preferred Stock | | | | | | | | | | $ | 4,378 | | | $ | 0.45 | | | $ | 4,557 | | | $ | 0.45 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | $ | 47,081 | | | $ | 0.45 | | | $ | 58,381 | | | $ | 0.60 | | | | | |
|
| | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Cash Dividend Per Common Share |
| September 14, 2017 | | September 29, 2017 | | October 27, 2017 | | $ | 0.52 |
|
| June 15, 2017 | | June 30, 2017 | | July 27, 2017 | | $ | 0.52 |
|
| March 14, 2017 | | March 31, 2017 | | April 27, 2017 | | $ | 0.50 |
|
| December 15, 2016 | | December 30, 2016 | | January 27, 2017 | | $ | 0.48 |
|
| September 15, 2016 | | September 30, 2016 | | October 20, 2016 | | $ | 0.46 |
|
On September 14, 2017, the Company’s board of directors declared a special dividend pursuant to which the 33.1 million shares of Granite Point common stock acquired by the Company in exchange for the contribution of its equity interests in TH Commercial Holdings LLC to Granite Point on June 28, 2017 would be distributed, on a pro rata basis, to the holders of Two Harbors common stock outstanding at the close of business on October 20, 2017. The Granite Point common stock was distributed on November 1, 2017. Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and does not recognize the dividend declaration until November 1, 2017, the date the Company no longer held a controlling interest in Granite Point.
On September 18, 2017, Granite Point’s board of directors declared a quarterly cash dividend on its common stock of $0.32 per share. The dividend was payable on October 18, 2017 to common stockholders of record at the close of business on September 29, 2017.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Dividend Reinvestment and Direct Stock Purchase Plan
The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of the Company’s common stock by reinvesting some or all of the cash dividends received on shares of the Company’s common stock. Stockholders may also make optional cash purchases of shares of the Company’s common stock subject to certain limitations detailed in the plan prospectus. The plan allows for the issuance of up to an aggregate of 3,750,000937,500 shares of the Company’s common stock. As of September 30, 2017, 191,635March 31, 2024, 134,688 shares have been issued under the plan for total proceeds of approximately $3.8$6.3 million, of which 6,4694,058 and 19,6883,680 shares were issued for total proceeds of $0.1 million and $0.4$0.1 million during the three and nine months ended September 30, 2017, respectively. During the threeMarch 31, 2024 and nine months ended September 30, 2016, 7,310 and 21,882 shares were issued for total proceeds of $0.1 million and $0.4 million,2023, respectively.
Common Share Repurchase Program
The Company’s common share repurchase program allows for the repurchase of up to an aggregate of 37,500,0009,375,000 shares of the Company’s common stock. SharesCommon shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of common share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The common share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The common share repurchase program does not have an expiration date. As of September 30, 2017,March 31, 2024, a total of 12,067,5003,637,028 shares of common stock had been repurchased by the Company under the program for an aggregate cost of $200.4 million;$208.5 million. No shares of these, 4,010,000 shares were repurchased for a total cost of $61.3 million during the nine months ended September 30, 2016. No sharescommon stock were repurchased during the three months ended September 30, 2016,March 31, 2024 or the three and nine months ended September 30, 2017.2023.
At-the-Market OfferingOfferings
The Company has entered intois party to an equity distribution agreement under which the Company mayis authorized to sell up to an aggregate of 10,000,00011,000,000 shares of its common stock, of which 3,819,406 shares remain available for issuance, from time to time in any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. As of September 30, 2017, 3,792,935March 31, 2024, 9,315,703 shares of common stock havehad been sold under the current or prior equity distribution agreementagreements for total accumulated net proceeds of approximately $77.6$234.6 million,; however, no of which 117,427 shares were sold for net proceeds of $2.1 million during the three and nine months ended September 30, 2017 and 2016.March 31, 2023. No shares were sold under the “at the market” equity distribution agreements during the three months ended March 31, 2024.
Accumulated Other Comprehensive IncomeLoss
Accumulated other comprehensive incomeloss at September 30, 2017March 31, 2024 and December 31, 20162023 was as follows:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Available-for-sale securities: | | | |
| Unrealized gains | $ | 6,654 | | | $ | 23,305 | |
| Unrealized losses | (286,161) | | | (199,734) | |
| Accumulated other comprehensive loss | $ | (279,507) | | | $ | (176,429) | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Available-for-sale securities | | | |
| Unrealized gains | $ | 508,607 |
| | $ | 393,555 |
|
| Unrealized losses | (85,565 | ) | | (194,328 | ) |
| Accumulated other comprehensive income | $ | 423,042 |
| | $ | 199,227 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Reclassifications out of Accumulated Other Comprehensive IncomeLoss
The following table summarizes reclassifications out ofCompany reclassifies unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net income for(loss) upon the recognition of any realized gains and losses on sales as individual securities are sold. For the three and nine months ended September 30, 2017March 31, 2024 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| | | Affected Line Item in the Condensed Consolidated Statements of Comprehensive Income | | Amount Reclassified out of Accumulated Other Comprehensive Income |
| (in thousands) | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | | | 2017 | | 2016 | | 2017 | | 2016 |
| Other-than-temporary impairments on AFS securities | | Total other-than-temporary impairment losses | | $ | — |
| | $ | 1,015 |
| | $ | 429 |
| | $ | 1,822 |
|
| Realized gains on sales of certain AFS securities, net of tax | | Gain (loss) on investment securities | | 4,220 |
| | (30,396 | ) | | 7,386 |
| | (54,652 | ) |
| Total | | | | $ | 4,220 |
| | $ | (29,381 | ) | | $ | 7,815 |
| | $ | (52,830 | ) |
Noncontrolling Interest
On June 28, 2017,2023, the Company contributed its equity interestsreclassified $6.6 million in its wholly owned subsidiary, TH Commercial Holdings LLC,unrealized losses and $63.2 million in unrealized losses, respectively, on sold AFS securities from accumulated other comprehensive loss to Granite Point(loss) gain on investment securities on the condensed consolidated statements of comprehensive income (loss).
Note 18. Equity Incentive Plans
The Company’s 2021 Equity Incentive Plan, or the Equity Incentive Plan, provides incentive compensation to attract and in exchange for its contribution, received approximately 33.1 millionretain qualified directors, officers, personnel and other parties who may provide significant services to the Company. The Equity Incentive Plan is administered by the compensation committee of the Company’s board of directors. The compensation committee has the full authority to administer and interpret the Equity Incentive Plan, to authorize the granting of awards, to determine the eligibility of potential recipients to receive an award, to determine the number of shares of common stock to be covered by each award (subject to the individual participant limitations provided in the Equity Incentive Plan), to determine the terms, provisions and conditions of Granite Point, representing approximately 76.5%each award (which may not be inconsistent with the terms of the outstanding stockEquity Incentive Plan), to prescribe the form of Granite Point upon completion ofinstruments evidencing awards and to take any other actions and make all other determinations that it deems necessary or appropriate in connection with the IPO of its common stock on June 28, 2017. Granite Point issued 10,000,000 shares of its common stock inEquity Incentive Plan or the IPO at a price of $19.50 per share, for gross proceeds of $195.0 million. Net proceeds were approximately $181.9 million, net of issuance costs of approximately $13.1 million.
administration or interpretation thereof. In connection with this authority, the Granite Point IPO,compensation committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the Company agreed,restrictions on any such awards to lapse.
The Equity Incentive Plan provides for grants of restricted common stock, restricted stock units, or RSUs, performance-based awards (including performance share units, or PSUs), phantom shares, dividend equivalent rights and other equity-based awards. The Equity Incentive Plan is subject to certain conditions, to purchase up to $20 milliona ceiling of Granite Point common stock in the open market at designated prices below Granite Point’s publicly reported book value pursuant to a share purchase program that ended on November 1, 2017. During the three and nine months ended September 30, 2017, the Company purchased 285,6624,250,000 shares of Granite Pointthe Company’s common stock under the program for a total cost of $5.4 million.
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of equity and comprehensive income not attributable to the Company. During the three and nine months ended September 30, 2017, in accordance with ASC 810, Consolidation, the carrying amount of noncontrolling interest was adjusted to reflect (i) changes in its ownership interest in Granite Point as a result of the purchases of Granite Point common stock discussed above and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to the Company, with the offset to equity.
Note 21. Equity Incentive Plan
All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
During the nine months ended September 30, 2017 and 2016, the Company granted 34,559 and 40,869 shares of common stock, respectively, to its independent directors pursuant to thestock. The Company’s Second Restated 2009 Equity Incentive Plan, or the Plan. The estimated fair valuePrior Plan, was subject to a ceiling of these awards was $19.82 and $16.86 per share on grant date, based on the adjusted closing price1,625,000 shares of the Company’s common stock onstock; however, following stockholder approval of the NYSE onEquity Incentive Plan in May 2021, no new awards will be granted under the Prior Plan. All awards previously granted under the Prior Plan, which remained outstanding and valid in accordance with their terms, have since vested or been forfeited.
The Equity Incentive Plan allows for the Company’s board of directors to expand the types of awards available under the Equity Incentive Plan to include long-term incentive plan units in the future. If an award granted under the Equity Incentive Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless earlier terminated by the Company’s board of directors, no new award may be granted under the Equity Incentive Plan after the tenth anniversary of the date that the Equity Incentive Plan was approved by the Company’s board of directors. No award may be granted under the Equity Incentive Plan to any person who, assuming payment of all awards held by such date. person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock.
Restricted Stock Units
The grants vested immediately.following table summarizes the activity related to RSUs for the three months ended March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Units | | Weighted Average Grant Date Fair Market Value | | Units | | Weighted Average Grant Date Fair Market Value |
| Outstanding at Beginning of Period | 613,699 | | | $ | 19.11 | | | 468,632 | | | $ | 23.54 | |
| Granted | 340,376 | | | 14.17 | | | 282,090 | | | 17.43 | |
| Vested | (203,652) | | | (21.07) | | | (114,366) | | | (24.14) | |
| Forfeited | — | | | — | | | — | | | — | |
| Outstanding at End of Period | 750,423 | | | $ | 16.34 | | | 636,356 | | | $ | 20.72 | |
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Additionally, during the nine months ended September 30, 2017 and 2016, the Company granted 637,286 and 968,761 shares of restricted common stock, respectively, to key employees of PRCM Advisers pursuant to the terms of the Plan and the associated award agreements. The estimated fair value of these awards was $17.48 and $15.04 per shareRSUs on grant date is based on the adjusted closing market price of the Company’s common stock on the NYSE on such date. However, as the cost of these awards is measured at fair value at each reporting date based on the price of the Company’s stock as of period end in accordance with ASC 505, Equity, or ASC 505, the fair value of these awards as of September 30, 2017 was $20.16 per share based on the adjusted closing market price of the Company’s common stock on the NYSE on such date. The shares underlying the grantsRSUs granted to independent directors are subject to a one-year vesting period. RSUs granted to certain eligible employees vest in three equal annual installments commencing on the first anniversary of the grant date, as long as such grantee complies with the terms and conditions of histhe applicable RSU agreement. All RSUs entitle the grantee to receive dividend equivalent rights, or herDERs, during the vesting period. A DER represents the right to receive a payment equal to the amount of cash dividends declared and payable on the grantee’s unvested and outstanding equity incentive awards. In the case of RSUs, DERs are paid in cash within 60 days of the quarterly dividend payment date based on the number of unvested and outstanding RSUs held by the grantee on the applicable restricteddividend record date. In the event that an RSU is forfeited, the related DERs which have not yet been paid shall be forfeited.
Performance Share Units
The following table summarizes the activity related to PSUs for the three months ended March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Target Units | | Weighted Average Grant Date Fair Market Value | | Target Units | | Weighted Average Grant Date Fair Market Value |
| Outstanding at Beginning of Period | 485,822 | | | $ | 24.89 | | | 265,261 | | | $ | 26.93 | |
| Granted | 292,000 | | | 16.19 | | | 222,208 | | | 22.47 | |
| Vested | (60,777) | | | (34.68) | | | — | | | — | |
| Forfeited | (43,959) | | | (34.68) | | | — | | | — | |
| Outstanding at End of Period | 673,086 | | | $ | 19.60 | | | 487,469 | | | $ | 24.90 | |
The estimated fair value of PSUs on grant date is determined using a Monte Carlo simulation. PSUs vest promptly following the completion of a three year performance period, as long as such grantee complies with the terms and conditions of the applicable PSU award agreement. The number of underlying shares of common stock award agreement.that vest and that the grantee becomes entitled to receive at the time of vesting will be determined based on the level of achievement of certain Company performance goals during the performance period and will generally range from 0% to 200% of the target number of PSUs granted. All PSUs entitle the grantee to DERs during the vesting period, which accrue in the form of additional PSUs reflecting the value of any dividends declared on the Company’s common stock during the vesting period. In the event that a PSU is forfeited, the related accrued DERs shall be forfeited.
Restricted Common Stock
The following table summarizes the activity related to restricted common stock for the ninethree months ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Shares | | Weighted Average Grant Date Fair Market Value | | Shares | | Weighted Average Grant Date Fair Market Value |
| Outstanding at Beginning of Period | — | | | $ | — | | | 42,884 | | | $ | 60.91 | |
| Granted | — | | | — | | | — | | | — | |
| Vested | — | | | — | | | (42,884) | | | (60.91) | |
| Forfeited | — | | | — | | | — | | | — | |
| Outstanding at End of Period | — | | | $ | — | | | — | | | $ | — | |
|
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Market Value | | Shares | | Weighted Average Grant Date Fair Market Value |
| Outstanding at Beginning of Period | 1,319,712 |
| | $ | 17.10 |
| | 1,145,305 |
| | $ | 20.73 |
|
| Granted | 671,845 |
| | 17.60 |
| | 1,009,630 |
| | 15.11 |
|
| Vested | (645,325 | ) | | (17.90 | ) | | (604,557 | ) | | (20.39 | ) |
| Forfeited | (22,789 | ) | | (17.90 | ) | | (150,609 | ) | | (17.01 | ) |
| Outstanding at End of Period | 1,323,443 |
| | $ | 16.95 |
| | 1,399,769 |
| | $ | 17.23 |
|
For the three and nine months ended September 30, 2017, the Company recognized compensation related toThe estimated fair value of restricted common stock granted pursuant toon grant date is based on the Planclosing market price of $3.5 million and $11.7 million, respectively. For the three and nine months ended September 30, 2016,Company’s common stock on the Company recognized compensation related toNYSE on such date. The shares underlying restricted common stock granted pursuantgrants to the Plan of $3.5 million and $11.2 million, respectively.
Granite Point has adopted a 2017 Equity Incentive Plan, or the Granite Point Plan, to provide incentive compensation to attract and retain qualified directors, officers, advisors, consultants and other personnel. The Granite Point Plan permits the granting of stock options, restricted shares of common stock, phantom shares, dividend equivalent rights, and other equity-based awards. During the nine months ended September 30, 2017, Granite Point granted 14,103 shares of its restricted common stock to its independent directors and 150,000 shares of its restricted common stock to itsCompany’s executive officers and certain other personnel of an affiliate of its manager pursuant to the Granite Point Plan. The grants to Granite Point’s independent directorseligible individuals vested immediately, while the grants to its executive officers and certain other personnel will vest in three equal annual installments commencing on the first anniversary of the grant date, as long as such grantee compliescomplied with the terms and conditions of his or herthe applicable restricted stock award agreement. For both the three and nine months ended September 30, 2017, Granite Point recognized compensation related to restricted common stock granted pursuant to the Granite Point Plan of $0.7 million.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Non-Cash Equity Compensation Expense
For the three months ended March 31, 2024 and 2023, the Company recognized compensation related to RSUs, PSUs and restricted common stock granted pursuant to the Equity Incentive Plan and/or the Prior Plan of $6.1 million and $6.1 million, respectively. As of March 31, 2024, the Company had $8.0 million of total unrecognized compensation cost related to unvested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.7 years.
Note 22. Restructuring Charges19. Interest Income and Interest Expense
On July 28, 2016,The following table presents the Company announced that its boardcomponents of directors had approved a plan to discontinue the Company’s mortgage loan conduitinterest income and securitization business. In connection with the closure, the Company incurred the following charges, which are included within restructuring charges on the Company’s condensed consolidated statements of comprehensive income,interest expense for the three and nine months ended September 30, 2016:March 31, 2024 and 2023.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2024 | | 2023 | | |
| Interest income: | | | | | | | | | |
| Available-for-sale securities | | | | | $ | 100,605 | | | $ | 97,038 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other | | | | | 17,178 | | | 19,555 | | | |
| Total interest income | | | | | 117,783 | | | 116,593 | | | |
| Interest expense: | | | | | | | | | |
| Repurchase agreements | | | | | 118,716 | | | 104,355 | | | |
| | | | | | | | | | |
| Revolving credit facilities | | | | | 30,247 | | | 25,656 | | | |
| Term notes payable | | | | | 6,418 | | | 7,643 | | | |
| Convertible senior notes | | | | | 4,619 | | | 4,836 | | | |
| | | | | | | | | | |
| Total interest expense | | | | | 160,000 | | | 142,490 | | | |
| Net interest (expense) income | | | | | $ | (42,217) | | | $ | (25,897) | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Termination benefits | $ | — |
| | $ | 652 |
| | $ | — |
| | $ | 652 |
|
| Contract terminations | — |
| | 519 |
| | — |
| | 519 |
|
| Other associated costs | — |
| | 18 |
| | — |
| | 18 |
|
| Total | $ | — |
| | $ | 1,189 |
| | $ | — |
| | $ | 1,189 |
|
The mortgage loan conduit and securitization business wind down process was completed at the end of 2016. The Company did not incur any additional restructuring costs in 2017.
Note 23.20. Income Taxes
For the three and nine months ended September 30, 2017March 31, 2024 and 2016,2023, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, and does not engage in prohibited transactions. The Company intends to distribute 100% of its REIT taxable income and comply with all requirements to continue to qualify as a REIT. The majority of states also recognize the Company’s REIT status. The Company’s TRSs file separate tax returns and are fully taxed as standalone U.S. C-corporations.C corporations. It is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.
During the three and nine months ended September 30, 2017,March 31, 2024, the Company recognized a provision for income taxes of $12.0 million, which was primarily due to net income from MSR servicing activity and net gains recognized on MSR, offset by operating expenses incurred in the Company’s TRSsTRSs. During the three months ended March 31, 2023, the Company recognized a benefit from income taxes of $5.3$3.9 million, and $21.1 million, respectively, which was primarily due to realized losses on sales of AFS securities and net losses recognized on MSR and operating expenses incurred, on derivative instruments heldoffset by net income from MSR servicing activity in the Company’s TRSs. During the three and nine months ended September 30, 2016, the Company’s TRSs recognized a benefit from income taxes of $16.8 million and $26.1 million, respectively, which was primarily due to losses incurred on MSR and derivative instruments held in the Company’s TRSs. As of September 30, 2017, a $4.3 million valuation allowance was recorded because the Company determined that it is more likely than not that the associated deferred tax asset will not be realized. At December 31, 2016, the Company had not recorded a valuation allowance for any portion of its deferred tax assets as it did not believe, at a more likely than not level, that any portion of its deferred tax assets would not be realized.
Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 21. Earnings Per Share
The following table presents a reconciliation of the earnings (loss) and shares used in calculating basic and diluted earnings (loss) per share for the three months ended March 31, 2024 and 2023.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| (in thousands, except share data) | | | | | 2024 | | 2023 | | |
| Basic Earnings (Loss) Per Share: | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | $ | 203,588 | | | $ | (176,808) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Dividends on preferred stock | | | | | (11,784) | | | (12,365) | | | |
| Gain on repurchase and retirement of preferred stock | | | | | 644 | | | — | | | |
| Dividends and undistributed earnings allocated to participating restricted stock units | | | | | (1,441) | | | (382) | | | |
| Net income (loss) attributable to common stockholders, basic | | | | | $ | 191,007 | | | $ | (189,555) | | | |
| Basic weighted average common shares | | | | | 103,401,940 | | | 92,575,840 | | | |
| Basic earnings (loss) per weighted average common share | | | | | $ | 1.85 | | | $ | (2.05) | | | |
| Diluted Earnings (Loss) Per Share: | | | | | | | | | |
| Net income (loss) attributable to common stockholders, basic | | | | | $ | 191,007 | | | $ | (189,555) | | | |
| Reallocation impact of undistributed earnings to participating restricted stock units | | | | | 61 | | | — | | | |
| | | | | | | | | | |
| Interest expense attributable to convertible notes | | | | | 4,619 | | | — | | | |
| Net income (loss) attributable to common stockholders, diluted | | | | | $ | 195,687 | | | $ | (189,555) | | | |
| Basic weighted average common shares | | | | | 103,401,940 | | | 92,575,840 | | | |
| Effect of dilutive shares issued in an assumed vesting of performance share units | | | | | 361,286 | | | — | | | |
| Effect of dilutive shares issued in an assumed conversion | | | | | 9,210,091 | | | — | | | |
| Diluted weighted average common shares | | | | | 112,973,317 | | | 92,575,840 | | | |
| Diluted earnings (loss) per weighted average common share | | | | | $ | 1.73 | | | $ | (2.05) | | | |
For the three months ended March 31, 2024, participating RSUs were included in the calculations of basic and diluted earnings per share under the two-class method, as it was more dilutive than the alternative treasury stock method. For the three months ended March 31, 2023, excluded from the calculation of diluted earnings per share was the effect of adding undistributed earnings reallocated to 655,137 weighted average participating RSUs, respectively, as their inclusion would have been antidilutive.
For the three months ended March 31, 2024, the assumed vesting of outstanding PSUs was included in the calculation of diluted earnings per share under the two-class method, as it was more dilutive than the alternative treasury stock method. For the three months ended March 31, 2023, excluded from the calculation of diluted earnings per share was the effect of adding 304,739 weighted average common share equivalents, related to the assumed vesting of outstanding PSUs, as their inclusion would have been antidilutive.
For the three months ended March 31, 2024, the assumed conversion of the Company’s convertible senior notes was included in the calculation of diluted earnings per share under the if-converted method. For the three months ended March 31, 2023, excluded from the calculation of diluted earnings per share was the effect of adding back $4.8 million of interest expense and 9,739,120 weighted average common share equivalents, respectively, related to the assumed conversion of the Company’s convertible senior notes, as their inclusion would have been antidilutive.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 22. Segment Reporting
The Company generally derives its revenues from its investment portfolio of MSR and Agency RMBS, which includes servicing fee income, float income, ancillary and other fee income, and interest income, net of premium amortization and discount accretion. The Company’s investment portfolio is subject to market risks, primarily interest rate risk, basis risk and prepayment risk. Management seeks to offset a portion of its Agency pool market value exposure through its investment in MSR and interest-only Agency RMBS. The Company’s strategy of pairing Agency RMBS with MSR, with a focus on managing various associated risks, including interest rate, basis, prepayment, and credit and financing risk, is intended to generate more stable performance relative to an investment portfolio of RMBS without MSR, across changing market environments.
The Company’s investment portfolio is managed as a whole and resources are allocated and financial performance is assessed by the Company’s chief operating decision maker, or the CODM, based on total assets reported on the consolidated balance sheet and comprehensive income (loss) reported on the consolidated statement of comprehensive income (loss). The Company’s CODM views consolidated expense information related to interest expenses, compensation and benefits, other operating expenses and tax expenses to be significant. Consolidated comprehensive income (loss) is also used by the CODM to monitor actual results and benchmarking to that of its peers, the results of which are used to establish management’s compensation. Investment and hedging decisions are assessed collectively by the CODM, based on the inputs discussed above. Accordingly, the Company consists of a single operating and reportable segment and the condensed consolidated financial statements and notes thereto are presented as a single reportable segment.
Note 24. Earnings Per Share23. Subsequent Events
The following table presents a reconciliation ofEvents subsequent to March 31, 2024 were evaluated through the earnings and shares used in calculating basic and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands, except share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income | $ | 104,738 |
| | $ | 117,786 |
| | $ | 185,381 |
| | $ | 11,875 |
|
| Net income attributable to noncontrolling interest | 2,674 |
| | — |
| | 2,714 |
| | — |
|
| Net income attributable to Two Harbors Investment Corp. | 102,064 |
| | 117,786 |
| | 182,667 |
| | 11,875 |
|
| Dividends on preferred stock | 8,888 |
| | — |
| | 13,173 |
| | — |
|
| Net income attributable to common stockholders - basic | 93,176 |
| | 117,786 |
| | 169,494 |
| | 11,875 |
|
Interest expense attributable to convertible notes (1) | 4,727 |
| | — |
| | — |
| | — |
|
| Net income attributable to common stockholders - diluted | 97,903 |
| | 117,786 |
| | 169,494 |
| | 11,875 |
|
| Denominator: | | | | | | | |
| Weighted average common shares outstanding | 173,162,988 |
| | 172,372,459 |
| | 173,022,717 |
| | 172,545,883 |
|
| Weighted average restricted stock shares | 1,325,308 |
| | 1,441,154 |
| | 1,392,515 |
| | 1,563,234 |
|
| Basic weighted average shares outstanding | 174,488,296 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
| Effect of dilutive shares issued in an assumed conversion | 14,419,060 |
| | — |
| | — |
| | — |
|
| Diluted weighted average shares outstanding | 188,907,356 |
|
| 173,813,613 |
|
| 174,415,232 |
|
| 174,109,117 |
|
| Earnings Per Share |
| |
|
| |
| |
|
|
| Basic | $ | 0.53 |
|
| $ | 0.68 |
|
| $ | 0.97 |
|
| $ | 0.07 |
|
| Diluted | $ | 0.52 |
|
| $ | 0.68 |
|
| $ | 0.97 |
|
| $ | 0.07 |
|
___________________
| |
(1) | Includes a nondiscretionary adjustment for the assumed change in the management fee calculation. |
For the nine months ended September 30, 2017, excluded from the calculation of diluted earnings per share is the effect of adding back $13.1 million of interest expense, net of a nondiscretionary adjustment for the assumed change in the management fee calculation, and 13,447,072 weighted average common share equivalents related to the assumed conversion of the Company’s convertible senior notes, as their inclusion would be antidilutive.
Note 25. Related Party Transactions
The following summary provides disclosure of the material transactions with affiliates of the Company.
In accordance with its management agreement with PRCM Advisers, the Company incurred $10.2 million and $33.3 million as a management fee to PRCM Advisers for the three and nine months ended September 30, 2017, respectively, and $11.4 million and $35.3 million as a management fee to PRCM Advisers for the three and nine months ended September 30, 2016, respectively, which represents approximately 1.5% of stockholders’ equity on an annualized basis as defined by the management agreement. For purposes of calculating the management fee, stockholders’ equity is adjusted to exclude the consolidated stockholders’ equity of Granite Point and its subsidiaries included in the Company’sdate these condensed consolidated balance sheetfinancial statements were issued and any common stock repurchases, as well as any unrealized gains, losses orno other items that do not affect realized net income, among other adjustments,additional events were identified requiring further disclosure in accordance with the management agreement. In addition, the Company reimbursed PRCM Advisers for direct and allocated costs incurred by PRCM Advisers on behalf of the Company. These direct and allocated costs totaled approximately $4.8 million and $18.8 million for the three and nine months ended September 30, 2017, respectively, and $6.3 million and $19.1 million for the three and nine months ended September 30, 2016, respectively.
these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Upon the closing of its IPO on June 28, 2017, Granite Point entered into a management agreement with Pine River. In accordance with Granite Point’s management agreement with Pine River, the Company incurred $3.1 million and $3.2 million as a management fee to Pine River for the three and nine months ended September 30, 2017, respectively, which represents approximately 1.5% of Granite Point’s equity on an annualized basis as defined by the management agreement. For purposes of calculating the management fee, equity is adjusted to exclude any common stock repurchases as well as any unrealized gains, losses or other items that do not affect realized net income, among other adjustments, in accordance with the management agreement.
The Company has direct relationships with the majority of its third-party vendors. The Company will continue to have certain costs allocated to it by PRCM Advisers for compensation, data services, technology and certain office lease payments, but most direct expenses with third-party vendors are paid directly by the Company.
The Company recognized $3.5 million and $11.7 million of compensation during the three and nine months ended September 30, 2017, respectively, and $3.5 million and $11.2 million of compensation during the three and nine months ended September 30, 2016, respectively, related to restricted common stock issued to employees of PRCM Advisers and the Company’s independent directors pursuant to the Plan. In addition, Granite Point recognized $0.7 million of compensation during both the three and nine months ended September 30, 2017 related to restricted common stock issued to its independent directors, executive officers and certain other personnel of an affiliate of its manager pursuant to the Granite Point Plan. See Note 21 - Equity Incentive Plan for additional information.
Note 26. Subsequent Events
On September 14, 2017, the Company’s board of directors declared a special dividend pursuant to which the 33.1 million shares of Granite Point common stock acquired by the Company in exchange for the contribution of its equity interests in TH Commercial Holdings LLC to Granite Point on June 28, 2017 would be distributed, on a pro rata basis, to the holders of Two Harbors common stock outstanding as of the close of business on October 20, 2017. The special dividend was distributed on November 1, 2017.
Also on September 14, 2017, the Company’s board of directors approved a one-for-two reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of the Company’s common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of the Company’s common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of the Company’s common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged.
Events subsequent to September 30, 2017, were evaluated through the date these financial statements were issued and no additional events were identified requiring further disclosure in these condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensedthe consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2016.2023.
General
We are a Maryland corporation focused on investingthat invests in, financingfinances and managing Agency residential mortgage-backed securities, ormanages MSR, Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, and, other financial assets, whichthrough our operational platform, RoundPoint, we collectively refer toare one of the largest servicers of conventional loans in the country. We are structured as an internally-managed REIT and our target assets. We operate as a real estate investment trust, or REIT, as definedcommon stock is listed on the NYSE under the Internal Revenue Code of 1986, as amended, or the Code.symbol “TWO”.
We are externally managed by PRCM Advisers LLC, or PRCM Advisers, which is a wholly owned subsidiary of Pine River Capital Management L.P., or Pine River, a global multi-strategy asset management firm providing comprehensive portfolio management, transparency and liquidityseek to institutional and high net worth investors.
Our objective is to provide attractive risk-adjusted total return to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We selectively acquire and manage an investment portfolio of our target assets, which is constructed to generate attractive returns through market cycles. We focus on asset selection and implement a relative value investment approach across various sectors within the mortgage market. Our target assets include the following:
Agency RMBS (which includes inverse interest-only Agency securities classified as “Agency Derivatives” for purposes of U.S. generally accepted accounting principles, or U.S. GAAP), meaning RMBS whose principal and interest payments are guaranteed by the Government National Mortgage Association (or Ginnie Mae), the Federal National Mortgage Association (or Fannie Mae), or the Federal Home Loan Mortgage Corporation (or Freddie Mac), or collectively, the government sponsored entities, or GSEs;
Non-Agency securities, meaning securities that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac;
MSR; and
Other financial assets comprising approximately 5% to 10% of the portfolio.
We generally view our target assets in two strategies that are based onleverage our core competencies of understanding and managing prepayment and credit risk. Our rates strategy includes assets that are sensitive to changes in interest ratesrate and prepayment speeds, specifically Agency RMBS and MSR. Our credit strategy includes assets with inherent credit risk including non-Agency securities. Other assets include financial and mortgage-related assets other than the target assetsto invest in our rates and credit strategies, including residential mortgage loans (see discussion below) and certain non-hedging transactions that may produce non-qualifying income for purposes of the REIT gross income tests.
As opportunities in the residential mortgage marketplace change, we continue to evolve our business model. From a capital allocation perspective, we expect to continue to increase our allocation towards MSR over time. During the nine months ended September 30, 2017, however, we increased our allocation towards Agency RMBS slightly due to attractive market prices. Within our non-Agency securities portfolio, we have a substantial emphasis on “legacy” securities, which include securities issued prior to 2009. We also hold “new issue” non-Agency securities, which we believe have enabled us to find attractive returns and further diversify our non-Agency securities portfolio.
On June 28, 2017, we completed the contribution of our portfolio of commercial real estate assetsMSR and Agency RMBS. Our objective is to Granite Point Mortgage Trust Inc., or Granite Point, a newly organized Maryland corporation intendeddeliver more stable performance, relative to qualify as a REITRMBS portfolios without MSR, across changing market environments, and we are acutely focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. We contributed our equity interests increating sustainable stockholder value over the long term.
Effective September 30, 2023, one of our wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for our contribution, received approximately 33.1 million shares of common stock of Granite Point, representing approximately 76.5% ofsubsidiaries, Matrix, acquired RoundPoint from Freedom Mortgage Corporation after the outstanding stock of Granite Point upon completion of customary closing conditions and receiving the initial public offering, or IPO,required regulatory and GSE approvals. Upon closing, all servicing and origination licenses and operational capabilities remained with RoundPoint, and RoundPoint became a wholly owned subsidiary of its common stock on June 28, 2017. Subsequent toMatrix. Management believes this acquisition will add value for stakeholders of Two Harbors through cost savings achieved by bringing the end of the third quarter of 2017, on November 1, 2017, we distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock acquired in connection with the contribution to the holdersservicing of our common shares outstanding as of the close of business on October 20, 2017. Due to our controlling ownership interest in Granite Point during the periods presented, we consolidate Granite Point on our financial statements and reflect noncontrolling interest for the portion of equity and comprehensive income not attributable to us. During this consolidation period, our financial condition and results of operations reflect Granite Point’s commercial strategy, which includes as target assets first mortgages, mezzanine loans, B-notes and preferred equity. As of November 1, 2017, we no longer have a controlling interest in Granite Point and, therefore, will prospectively deconsolidate Granite Point and its subsidiaries from our financial statements.
In July 2016, we announced our plan to discontinue our mortgage loan conduit and securitization business. The wind down of this business was completed at the end of 2016, though we currently retain certain subordinated securities from our prior securitization transactions. In addition, we hold a small legacyMSR portfolio of credit sensitive residential mortgage loans, or CSL, which are loans where the borrower has previously experienced payment delinquencies and is more likely to be underwater (i.e., the amount owed on a mortgage loan exceeds the current market value of the home). As a result, there is a higher probability of default on CSL than on newly originated residential mortgage loans.
Withinin-house, greater control over our MSR business, we purchaseportfolio and the associated cash flows, and the ability to participate more fully in the mortgage finance space as opportunities arise.
Matrix holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loansloan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan. We acquire MSR from high-quality originators. We do notoriginators through flow and bulk purchases. On October 1, 2023, we began directly serviceservicing the mortgage loans we acquire, normajority of the mortgage loans underlying theour MSR we acquire; rather, wethrough our newly acquired subsidiary, RoundPoint. We also contract with appropriately licensed third-party subservicers to handle substantiallyservicing functions in the name of the subservicer for a portion of the loans underlying our MSR, although we expect our use of third-party subservicers will decline to minimal levels in 2024 as we continue to transfer the servicing of our MSR portfolio to RoundPoint. As the servicer of record on our MSR portfolio, we remain accountable to the GSEs for all servicing functions.
We believe our investment model allows management to allocate capital across various sectors within the mortgage market, with a focus on asset selectionmatters and, the implementationaccordingly, provide substantial oversight of a relative value investment approach. Our capital allocation decisions factor in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks. As a result, capital allocation reflects management’s flexible approach to investing in the marketplace. The following table provides our capital allocation in each of our investment strategies as of September 30, 2017subservicers. We believe MSR are a natural fit for our portfolio over the long term. Our MSR business leverages our core competencies in prepayment and interest rate risk analytics and the four immediately preceding period ends:MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
|
| | | | | | | | | |
| | As of |
| | September 30,
2017 | | June 30,
2017 | | March 31,
2017 | | December 31,
2016 | | September 30,
2016 |
| Rates strategy | 55% | | 54% | | 58% | | 58% | | 54% |
| Credit strategy | 29% | | 28% | | 27% | | 27% | | 31% |
Commercial strategy (1) | 16% | | 18% | | 15% | | 15% | | 15% |
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| |
(1) | Represents capital allocated to our controlling interest in Granite Point’s commercial strategy. |
AsOur Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans. All of our capital allocation shifts, our annualized yieldsprincipal and cost of financing shift. As previously discussed, our investment decisionsinterest Agency RMBS are not driven solelyFannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by annualized yields, but rather a multitude of macroeconomic drivers, including market environments and their respective impacts (e.g., uncertainty of prepayment speeds, extension risk and credit events).
For the three months ended September 30, 2017, our net yield realized on the portfolio was lower than recent periods. Yields on non-Agency securities were generally lower than recent quarters due to purchases at slightly lower yields; however, the main driver is an increase in our cost of financing as a result of increases in borrowing rates offered by counterparties, growth in and increased financingguarantee of the commercial real estate portfolio, the additionU.S. government. The majority of revolving credit facilities for financing of mortgage servicing rights and the issuance of convertible senior notes during the nine months ended September 30, 2017. The following table provides the average annualized yield on our assets, including Agency RMBS non-Agency securities, commercial real estate assets, MSR, residential mortgage loans held-for-investment, netportfolio is comprised of collateralized borrowings, in securitization trusts, and residential mortgage loans held-for-sale for the three months ended September 30, 2017, and the four immediately preceding quarters:
|
| | | | | | | | | |
| | Three Months Ended |
| | September 30,
2017 | | June 30,
2017 | | March 31,
2017 | | December 31,
2016 | | September 30,
2016 |
Average annualized portfolio yield (1) | 3.90% | | 3.96% | | 3.99% | | 3.54% | | 3.50% |
Cost of financing (2) | 1.83% | | 1.60% | | 1.52% | | 1.17% | | 1.08% |
| Net portfolio yield | 2.07% | | 2.36% | | 2.47% | | 2.37% | | 2.42% |
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| |
(1) | Average annualized yield incorporates future prepayment, credit loss and other assumptions, all of which are estimates and subject to change. |
| |
(2) | Cost of financing includes swap interest rate spread. |
whole pool certificates.
We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS and non-Agency securities, including retained interests from our previous on-balance sheet securitizations, and commercial real estate assets through short- and long-term borrowings structured as repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB.agreements. We also finance our MSR through revolving credit facilities. In addition, on January 19, 2017, we closed an underwritten public offering of $287.5 million aggregate principal amount offacilities, repurchase agreements, term notes payable and convertible senior notes due 2022, which included $37.5 million aggregate principal amount sold to the underwriter of the offering pursuant to an overallotment option. The notes are unsecured, pay interest semiannually at a rate of 6.25% per annum and are convertible at the option of the holder into shares of our common stock. The notes will mature in January 2022, unless earlier converted or repurchased in accordance with their terms. We do not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. As of September 30, 2017, the notes had a conversion rate of 50.2537 shares of common stock per $1,000 principal amount of the notes (based on the retroactive adjustment due to our one-for-two reverse stock split described below). The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses. The majority of these proceeds were used to help fund our MSR assets, which previously had largely been funded with cash.
Our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while non-Agency securities, commercial real estate assets and MSR, with less liquidity and/or more exposure to credit risk, utilize lower levels of leverage. We believe the debt-to-equity ratio funding our Agency RMBS, non-Agency securities, commercial real estate assets and MSR, which includes any unsecured debt we may use to fund our target assets, is the most meaningful leverage measure as collateralized borrowings on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity. As a result, our debt-to-equity ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the sustainability and price of our financing, diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. Over the past several quarters, we have generally maintained a debt-to-equity ratio range of 3.0 to 5.0 times to finance our securities portfolio, commercial real estate assets, MSR and residential mortgage loans held-for-sale, on a fully deployed capital basis. Our debt-to-equity ratio is directly correlated to the composition of our portfolio; specifically, the higher percentage of Agency RMBS we hold, the higher our debt-to-equity ratio is, while the higher percentage of non-Agency securities, commercial real estate assets and MSR we hold, the lower our debt-to-equity ratio is. We may alter the percentage allocation of our portfolio among our target assets depending on the relative value of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from common stock offerings we conduct. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Repurchase Agreements” for further discussion.
We recognize that investing in our target assets is competitive and we compete with other entities for attractive investment opportunities. We rely on our management team and our dedicated team of investment professionals provided by our external manager to identify investment opportunities. In addition, we have benefited and expect to continue to benefit from our external manager’s analytical and portfolio management expertise and infrastructure. We believe that our significant focus in the residential market, the extensive mortgage market expertise of our investment team, our strong analytics and our disciplined relative value investment approach give us a competitive advantage versus our peers.notes.
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and we may form additional TRSs in the future.activities. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. While we do not currently originate or service residential mortgage loans, certainCertain of our subsidiaries have obtained the requisite licenses and approvals to purchase and sell residential mortgage loans in the secondary market and to own and manage MSR. Additionally, certain subsidiaries of Granite Point are licensedMSR and to originate commercial real estateand directly service residential mortgage loans.
On September 14, 2017, our board of directors approved a one-for-two reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of our common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of our common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “target,” “believe,” “intend,” “seek,” “plan,” “goals,” “future,” “likely,” “may” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2016,2023, under the caption “Risk Factors.” Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, or SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.
Important factors, among others, that may affect our actual results include:
•changes in interest rates and the market value of our target assets;
•changes in prepayment rates of mortgages underlying our target assets;
the occurrence, extent and timing of credit losses within our portfolio;
our exposure to adjustable-rate and negative amortization mortgage loans underlying our target assets;
•the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets, and the credit status of borrowers;borrowers and home prices;
the concentration of the credit risks to which we are exposed;
•legislative and regulatory actions affecting our business;
•the availability and cost of our target assets;
•the availability and cost of financing for our target assets, including repurchase agreement financing, lines of credit, revolving credit facilities, term notes and financing through convertible notes;
•the FHLB;
declines in home prices;
impact of any increases in payment delinquencies and defaults on the mortgages comprising and underlying our target assets;assets, including additional servicing costs and servicing advance obligations on the MSR assets we own;
•changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale;
•changes in the values of securities we own and the impact of adjustments reflecting those changes on our condensed consolidated statements of comprehensive income (loss) and balance sheets, including our stockholders’ equity;
•our ability to generate cash flow from our target assets;
•our ability to effectively execute and realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue;
•our ability to recognize the benefits of our acquisition of RoundPoint Mortgage Servicing LLC and to manage the risks associated with operating a mortgage loan servicer;
•our decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation related to such termination;
•changes in the competitive landscape within our industry, including changes that may affect our ability to attract and retain personnel;
•our exposure to legal and regulatory claims, penalties or enforcement activities, including those arising from our involvement in securitization transactions and ownership and management of MSR;MSR and prior securitization transactions;
•our exposure to counterparties involved in our MSR business as well as our legacy mortgage loan conduit business,and prior securitization transactions and our ability to enforce representations and warranties made by them;
•our ability to acquire MSR and successfully operate our seller-servicer subsidiarysubsidiaries and oversee the activities of our subservicers;
our decision to contribute our portfolio of commercial real estate assets to Granite Point and the distribution of Granite Point shares to the holders of our common stock;
our ability to successfully diversify our business into new asset classes, and manage the new risks to which they may expose us;
•our ability to manage various operational and regulatory risks associated with our business;
•interruptions in or impairments to our communications and information technology systems;
•our ability to maintain appropriate internal controls over financial reporting;
•our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio;
•our ability to maintain our REIT qualification for U.S. federal income tax purposes; and
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act.
This Quarterly Report on Form 10-Q may contain statistics and other data that, in some cases, have been obtained or compiled from information made available by mortgage loan servicers and other third-party service providers.
Factors Affecting our Operating Results
Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts, and income from our commercial real estate assets and residential mortgage loans.discounts. Net interest income, as well as our servicing income, net of subservicing expenses,servicing costs, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results will also be affected by default rates and credit losses with respect to the mortgage loans underlying our non-Agency securities and in our commercial real estate and residential mortgage loan portfolios.
Fair Value Measurement
A significant portion of our assets and liabilities are reported at fair value and, therefore, our condensed consolidated balance sheets and statements of comprehensive income (loss) are significantly affected by fluctuations in market prices. At September 30, 2017,March 31, 2024, approximately 87.9%85.8% of our total assets, or $24.4$11.3 billion,, and approximately 11.8% of our total liabilities, or $2.8 billion, consisted of financial instruments recorded at fair value. See Note 1411 - Fair Value to the condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices. Although markets for asset-backed securities, including RMBS, have modestly stabilized since the severe dislocations experienced as a result of the financial crisis, these markets continue to experience volatility and, as a result, our assets and liabilities will be subject to valuation adjustment as well as changes in the inputs we use to measure fair value.
Any temporary change in the fair value of our available-for-sale, or AFS securities, excluding Agency interest-only mortgage-backedcertain AFS securities and GSE credit risk transfer securities,for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive incomeloss and does not impact our earnings. Our reported earningsincome (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, changes in the provision for credit losses on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP net income (loss) is also affected however, by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap, cap and swaption agreements and certain other derivative instruments (i.e., Agency to-be-announced securities, or TBAs, put and call options foron TBAs, Markit IOS total return swapsfutures, options on futures, and inverse interest-only securities), which are accounted for as derivative trading instruments under U.S. GAAP, Agency interest-only mortgage-backedfair value option elected AFS securities MSR, net economic interests in consolidated securitization trusts and residential mortgage loans held-for-sale.MSR.
We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. Our entire investment portfolio reported at fair value is priced by third-party brokers and/or by independent pricing providers.vendors. We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only Agency RMBS,and inverse interest-only Agency RMBS, and non-Agency securities.RMBS. We also currently receive threemultiple vendor quotes for the MSR in our investment portfolio. For Agency RMBS, the third-party pricing providersvendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period,periods, issuer, prepayment speeds, credit enhancements and expected life of the security. For non-Agency securities, the third-party pricing providers and brokers utilize both observable and unobservable inputs such as pool‑specific characteristics (i.e., loan age, loan size, credit quality of borrowers, vintage, servicer quality), floating rate indices, prepayment and default assumptions, and recent trading of the same or similar securities. For MSR, and residential mortgage loans, vendors use pricing models that generally incorporate observable inputs such as principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO, appraised value and other loan characteristics, along with observed market yields securitization economics and trading levels. Additionally for MSR, pricing providersPricing vendors will customarily incorporate loan servicing cost, servicing fee, ancillary income, and earnings rate on escrow as observable inputs. Unobservable or model-driven inputs include forecast per loan annual cost to service, forecast cumulative defaults, default curve, forecast loss severity and forecast voluntary prepayment.
We evaluate the prices we receive from both third-party brokers and independent pricing providersvendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods. We review and may challenge broker quotes and valuations from third-party brokers and pricing providersvendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, and we estimate the fair value of MSR based upon the average of prices received from independent providers,third-party vendors, subject to internally-established hierarchy and override procedures.
We utilize “bid side” pricing for our Agency RMBS and non-Agency securities and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs on available-for-sale securities not accounted for under the fair value option, any economic effect of this would be reflected in accumulated other comprehensive income.loss.
Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At March 31, 2024, 23.5% of our total assets were classified as Level 3 fair value assets.
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in preparation of the statements. Accounting estimates are considered critical if the estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. Our significant accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023. Our most critical accounting policies involve our fair valuation of AFS securities, MSR and derivative instruments.
The methods used by us to estimate fair value for AFS securities, MSR and derivative instruments may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 11 to the condensed consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q. Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 6 to the condensed consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.
Market Conditions and Outlook
Stronger than expected economic data and sticky inflation readings pushed interest rates higher in the first quarter of 2024, tempering the market’s expectations for interest rate cuts by the Federal Reserve, or the Fed, this year. The key macroeconomic factorsemployment report in each month of the quarter came in stronger than expected, averaging gains of 281,000 new jobs per month, robust results even after taking elevated immigration and seasonal distortions into account. Similarly, both consumer and producer price indices surprised higher, with 3-month annualized core CPI, a metric closely watched by the market and the Fed, reaching 4.5%, its highest level since June 2023. At the start of the year, Fed Funds futures implied more than six rate cuts in 2024, though by quarter-end the number had fallen to just under three, converging to the Fed’s Summary of Economic Projections released in December. The Fed reaffirmed their expectations for three rate cuts for the year at their March meeting but raised the median estimate for the Fed Funds target range in 2025 by 25 basis points.
With Fed Chair Powell preaching patience and not being overly reactive to any single data release, the consensus view remained that impact our businessa soft landing was the most likely outcome this year. Further guidance by the Fed that they are U.S. residential and commercial property prices, national employmentsoon to announce a significant cut in the runoff of their Treasury portfolio - it is expected they will slash the $60 billion monthly cap in half - limited tail scenarios of higher rates and dampened volatility. Ultimately, the interest10-year Treasury finished the quarter at a yield of 4.20%, 32 basis points above its starting level, with the 2-year rising by 37 basis points to finish at 4.62%, a net 5 basis point flattening of the yield curve. Though still high by historical standards, realized volatility across the yield curve fell from the prior quarter as did implied volatility for swaptions. Our preferred volatility gauge, 2-year options on 10-year rate, environment. Home prices increased modestly throughdeclined to about 97 basis points, close to the bottom end of its range since the beginning of 2023.
With volatility on the decline, the overall performance of the RMBS sector was positive in the first three quarters of 2017quarter, though performance varied widely. Higher coupons outperformed lower coupons and are expected to gradually appreciatespecified pools outperformed TBAs. The nominal spread for the current coupon finished at +119 basis points, essentially unchanged over the next several years. Credit standards remain tight, despite a modest easingquarter. Specified pools outperformed same coupon TBAs owing to investor concerns regarding potential fast prepayment speeds and elevated demand typical of the beginning of year period. Spreads for current coupons were further aided by lower than expected supply, strong fixed-income fund inflows, and tame prepayment rates. Lower coupons, like 30-year 2s and 2.5s, widened by 5 to 10 basis points on concerns of bank portfolio reallocations.
Mortgage rates drifted higher over the quarter, with 30-year rates averaging around 6.75%. Overall prepayment rates for 30-year Fannie Mae RMBS increased to 5.3% CPR in recent periods,the April report (March speeds) from 4.3% at the beginning of the quarter. This increase is largely related to seasonal factors and have limited borrowers’ abilitythe lag in response to refinance their mortgages notwithstanding low interestthe fall in mortgage rates in the fourth quarter of 2023. Prepayments on loans originated in 2023 were slower than expected in the first quarter, alleviating some concern about how responsive these loans would be to lower rates, and government programsproviding lift to higher coupon performance. On the other hand, partial prepayments (otherwise known as curtailments) on higher rate purchase loans are the one area where prepayments have surprised on the fast side. As mortgage rates have now been above 6% for over 18 months, evidence is building that promote refinancing. Employmentthe housing market conditions remain relatively solid as jobless claims, unemployment and payroll data are showing stability, although underemployment levels remain high and new job creation has not generated meaningful wage growth. Other than LTV ratios and cash reserves, we believe employment is the most powerful determinant of homeowners’ ongoing likelihoodbegun to pay their mortgages. Home price performance and employment are particularly importantnormalize to our non-Agency portfolio.
More recently, natural disasters have impacted certain geographic areas of the U.S. We continuously monitor and evaluate our portfolio for market value deterioration or asset impairment in light of these events and do not expect material impacts to our portfolio.
The Federal Reserve has continued to modestly raise the Federal Funds Target, recently noting a roughly balanced outlook, with two increasesthis environment. Existing home sales so far in 2017 and one more expected by year end. At2024 have tracked in line with last spring, while listings are up 5-10% year-over-year, which suggests the same time, due in part tomarket may pick up into the absence of meaningful inflation, longer term ratessecond quarter.
For the entire quarter, speeds for our MSR holdings paid 3.87% CPR, which was slower than projections. Activity in the U.S. areMSR market remained brisk, with bid wanted activity totaling $160 billion. Although a sizeable number, this is down from $223 billion in the first quarter of 2023 and $190 billion in the first quarter of 2022. We expect MSR supply to be lower compared to prior years given low origination volume and the large amount of low coupon servicing that has already traded hands. This lower supply combined with a growing investor base should keep MSR values well supported, as evidenced by the strong traded levels of servicing so far this year.
RMBS funding markets remained stable and liquid throughout the quarter with ample balance sheet available. Spreads on repurchase agreements tightened after year end with financing for RMBS between SOFR plus 18 to 24 basis points.
Given the levered returns available in the market, we remain optimistic about the return potential of our investments. While the market remains subject to periods of high realized rate volatility, which can negatively impact returns, nominal spreads for current coupon Agency RMBS continue to be wide on an historical basis and provide attractive levered returns when paired with MSR or simply hedged with interest rate curve is flatter. The Trump administration continuesproducts like futures or swaps. Assuming unchanged mortgage rates, we expect prepayment rates to focus on several issues that could impact interest rates, the U.S. economy and U.S. businesses, including but not limited to tax reform, deregulation, fiscal spending measures and trade. While there is much uncertainty regarding the timing and specifics of any policy changes, any such actions could affect our business. Nevertheless, interest rates remain at historically low levels and that environment is expected to persistrise modestly in the near term, as the Federal Reserve has reiterated it will take a measured and conservative approach to future interest rate decisions. While the Federal Reserve has announced plans to reduce its mortgage-backed securities holdings in the near term, the plan seems to be to focus on a gradual approach which reduces reinvestment of principal and interest but with a capped amount that increases over time.
We believe our blended Agency and non-Agency securities portfolio and our investing expertise, as well as our operational capabilities to invest in MSR, will allow us to better navigate the dynamic mortgage market while future regulatory and policy activities take shape. Having a diversified portfolio allows us to mitigate a variety of risks, including interest rate and RMBS spread volatility.
We expect that the majority of our assets will remain in whole-pool Agency RMBS in lightsecond quarter, reflecting turnover seasonality. Even so, less than 1% of the long-term attractivenessmortgage loans that back our MSR are likely to refinance at current rates and over 80% of the asset classbalances are at least 250 basis points below current mortgage rates. Overall, we expect our low duration and in orderlow convexity MSR portfolio to continue to satisfy the requirements of our exemption from registration under the 1940 Act. Interest-only Agency securities and MSR also provide a complementary investment and risk-management strategy to our principal and interest Agency RMBS investments. Risk-adjusted returns in our Agency RMBS portfolio may decline if we are required to pay higher purchase premiums due to lower interest rates or additional liquidity in the market. Additionally, the Federal Reserve’s prior quantitative easing programs and continued reinvestment of its mortgage-backed security principal repayments and other policy changes may impact the returns of our Agency RMBS portfolio.
generate attractive cashflows with low spread volatility.
The following table provides the carrying value of our securitiesinvestment portfolio by productasset type:
| | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | March 31,
2024 | | December 31,
2023 |
| Agency RMBS | $ | 8,188,432 | | | 72.6 | % | | $ | 8,335,245 | | | 73.2 | % |
| Mortgage servicing rights | 3,084,879 | | | 27.4 | % | | 3,052,016 | | | 26.8 | % |
| Other | 3,953 | | | — | % | | 4,150 | | | — | % |
| Total | $ | 11,277,264 | | | | | $ | 11,391,411 | | | |
|
| | | | | | | | | | | | | |
| (dollars in thousands) | September 30,
2017 | | December 31,
2016 |
| Agency | | | | | | | |
| Fixed Rate | $ | 17,529,411 |
| | 86.4 | % | | $ | 11,196,011 |
| | 84.5 | % |
| Hybrid ARM | 24,960 |
| | 0.1 | % | | 30,463 |
| | 0.2 | % |
| Total Agency | 17,554,371 |
| | 86.5 | % | | 11,226,474 |
| | 84.7 | % |
| Agency Derivatives | 101,284 |
| | 0.5 | % | | 126,599 |
| | 1.0 | % |
| Non-Agency | | | | | | | |
| Senior | 1,693,960 |
| | 8.3 | % | | 1,210,462 |
| | 9.1 | % |
| Mezzanine | 945,447 |
| | 4.7 | % | | 687,644 |
| | 5.2 | % |
| Interest-only securities | 5,316 |
| | — | % | | 4,277 |
| | — | % |
| Total Non-Agency | 2,644,723 |
| | 13.0 | % | | 1,902,383 |
| | 14.4 | % |
| Total | $ | 20,300,378 |
| | | | $ | 13,255,456 |
| | |
Prepayment speeds and volatility due to interest rates
Our Agency RMBS portfolio is subject to inherentmarket risks, primarily interest rate risk and prepayment risk. We seek to offset a portion of our Agency pool market value exposure to prepayment speeds through our MSR and interest-only Agency RMBS portfolios. Generally, a decline inDuring periods of decreasing interest rates that leads towith rising prepayment speeds, will causethe market value of our Agency pools generally increases and the market value of our interest-only securities and MSR to deteriorate, and our fixed coupon Agency pools to increase.generally decreases. The inverse relationship occurs when interest rates increaserise and prepayments slow. As previously discussed, despitefall. Average prepayment speeds for our overall portfolio decreased from the Federal Reserve raisingprior quarter due to mortgage rates againand seasonal factors. In addition to changes in March 2017 and June 2017, the low interest rate environment is expected to persist in the near term. However,rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, could causecan affect prepayment speeds to increase on many RMBS, which could lead to less attractive reinvestment opportunities. Nonetheless, wespeeds. We believe our active portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios, including an overall faster prepayment environment.
The following table provides the three-month weighted average constant prepayment rate, or CPR, on our Agency RMBS for the three months ended September 30, 2017, and the four immediately preceding quarters:
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| Agency RMBS | | September 30,
2017 | | June 30,
2017 | | March 31,
2017 | | December 31,
2016 | | September 30, 2016 |
| Weighted Average CPR | | 8.0 | % | | 8.0 | % | | 5.6 | % | | 7.1 | % | | 9.7 | % |
scenarios. Although we are unable to predict the movement infuture interest rates in the remainderrate movements, our strategy of 2017pairing MSR with Agency RMBS, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and beyond, our diversified portfolio management strategyfinancing risk, is intended to generate attractive yieldsstable performance, relative to RMBS portfolios without MSR, with a low level of sensitivity to changes in the yield curve, prepayments and interest rate cycles.
The following table provides the three-month average CPR experienced by our Agency RMBS and MSR during the three months ended March 31, 2024, and the four immediately preceding quarters:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31,
2024 | | December 31,
2023 | | September 30,
2023 | | June 30,
2023 | | March 31,
2023 |
| Agency RMBS | | 4.8 | % | | 5.2 | % | | 6.5 | % | | 6.5 | % | | 5.3 | % |
| | | | | | | | | | |
| Mortgage servicing rights | | 3.9 | % | | 3.8 | % | | 4.9 | % | | 5.5 | % | | 4.1 | % |
Our Agency RMBS are primarily collateralized by pools of fixed-rate mortgage loans and hybrid adjustable-rate mortgage loans, or hybrid ARMs, which are mortgage loans that have interest rates that are fixed for an initial period and adjustable thereafter.loans. Our Agency portfolio also includes securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans of less than $175,000$300,000 in initial principal balance), higher LTVs (securities collateralized by loans with LTVs greater than or equal to 80%), certain geographic concentrations, loans secured by investor-owned properties and lower FICO scores. Our overall allocation of Agency RMBS and holdings of pools with specific characteristics are viewed in the context of our aggregate ratesportfolio strategy, including MSR and related derivative hedging instruments. Additionally, the selection of securities with certain attributes is driven by the perceived relative value of the securities, which factors in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks. As a result,Accordingly, our Agency RMBS capital allocation reflects management’s flexible approach to investing in the marketplace.
The following tables provide the carrying value of our Agency RMBS portfolio by underlying mortgage loan rate type:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (dollars in thousands) | Principal/ Current Face | | Carrying Value | | % of Agency Portfolio | | % Prepayment Protected | | Weighted Average Coupon Rate | | Amortized Cost | | Weighted Average Loan Age (months) |
| Agency RMBS AFS: | | | | | | | | | | | | | |
| 30-Year Fixed | | | | | | | | | | | | | |
| 3.0-3.5% | $ | 4,465,427 |
| | $ | 4,622,661 |
| | 26.2 | % | | 76.1 | % | | 3.5 | % | | $ | 4,664,694 |
| | 12 |
|
| 4.0-4.5% | 11,045,306 |
| | 11,859,921 |
| | 67.2 | % | | 97.6 | % | | 4.2 | % | | 11,820,200 |
| | 17 |
|
| ≥ 5% | 552,223 |
| | 616,470 |
| | 3.5 | % | | 86.4 | % | | 5.4 | % | | 598,561 |
| | 76 |
|
| | 16,062,956 |
| | 17,099,052 |
| | 96.9 | % | | 91.3 | % | | 4.1 | % | | 17,083,455 |
| | 18 |
|
| 15-Year & Other Fixed | 224,041 |
| | 222,397 |
| | 1.3 | % | | 0.7 | % | | 4.6 | % | | 216,224 |
| | 148 |
|
| Hybrid ARM | 23,206 |
| | 24,960 |
| | 0.1 | % | | — | % | | 4.9 | % | | 24,481 |
| | 163 |
|
| Interest-only | 2,992,862 |
| | 207,962 |
| | 1.1 | % | | — | % | | 2.2 | % | | 227,909 |
| | 74 |
|
| Agency Derivatives | 621,549 |
| | 101,284 |
| | 0.6 | % | | — | % | | 5.2 | % | | 91,740 |
| | 160 |
|
| Total Agency RMBS | $ | 19,924,614 |
| | $ | 17,655,655 |
| | 100.0 | % | | 88.5 | % | | | | $ | 17,643,809 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (dollars in thousands) | Principal/ Current Face | | Carrying Value | | | | Weighted Average CPR (1) | | % Prepayment Protected | | Gross Weighted Average Coupon Rate | | Amortized Cost | | Allowance for Credit Losses | | Weighted Average Loan Age (months) |
| Agency RMBS AFS: | | | | | | | | | | | | | | | | | |
| 30-Year Fixed: | | | | | | | | | | | | | | | | | |
| ≤ 2.5% | $ | 414,571 | | | $ | 344,394 | | | | | — | % | | — | % | | 3.3 | % | | $ | 354,355 | | | $ | — | | | 33 | |
| 3.0% | 233,996 | | | 202,852 | | | | | 4.7 | % | | 85.4 | % | | 3.7 | % | | 207,592 | | | — | | | 29 | |
| 3.5% | 65,663 | | | 58,990 | | | | | 5.5 | % | | 71.8 | % | | 4.3 | % | | 57,698 | | | — | | | 26 | |
| 4.0% | 494,994 | | | 463,123 | | | | | 3.8 | % | | 100.0 | % | | 4.6 | % | | 499,676 | | | — | | | 52 | |
| 4.5% | 2,288,051 | | | 2,201,698 | | | | | 6.4 | % | | 100.0 | % | | 5.1 | % | | 2,339,802 | | | — | | | 43 | |
| 5.0% | 1,889,257 | | | 1,859,602 | | | | | 6.6 | % | | 100.0 | % | | 5.8 | % | | 1,925,202 | | | — | | | 24 | |
| 5.5% | 1,217,622 | | | 1,218,396 | | | | | 6.3 | % | | 99.8 | % | | 6.4 | % | | 1,228,376 | | | — | | | 21 | |
| 6.0% | 1,147,679 | | | 1,165,531 | | | | | 8.5 | % | | 95.9 | % | | 6.9 | % | | 1,173,316 | | | — | | | 17 | |
| ≥ 6.5% | 7,915 | | | 8,243 | | | | | — | % | | 97.8 | % | | 7.8 | % | | 8,498 | | | — | | | 251 | |
| 7,759,748 | | | 7,522,829 | | | | | 6.4 | % | | 94.1 | % | | 5.6 | % | | 7,794,515 | | | — | | | 31 | |
| Other P&I | 620,367 | | | 607,488 | | | | | 4.8 | % | | — | % | | 5.3 | % | | 612,859 | | | — | | | 11 | |
| Interest-only | 787,501 | | | 48,274 | | | | | 6.6 | % | | — | % | | 4.3 | % | | 55,875 | | | (3,217) | | | 101 | |
| Agency Derivatives | 156,527 | | | 9,841 | | | | | 9.3 | % | | — | % | | 6.6 | % | | 16,562 | | | — | | | 228 | |
| Total Agency RMBS | $ | 9,324,143 | | | $ | 8,188,432 | | | | | | | 86.5 | % | | | | $ | 8,479,811 | | | $ | (3,217) | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (dollars in thousands) | Principal/ Current Face | | Carrying Value | | % of Agency Portfolio | | % Prepayment Protected | | Weighted Average Coupon Rate | | Amortized Cost | | Weighted Average Loan Age (months) |
| Agency RMBS AFS: | | | | | | | | | | | | | |
| 30-Year Fixed | | | | | | | | | | | | | |
| 3.0-3.5% | $ | 6,652,972 |
| | $ | 6,762,130 |
| | 59.6 | % | | 70.5 | % | | 3.3 | % | | $ | 6,909,378 |
| | 5 |
|
| 4.0-4.5% | 3,237,989 |
| | 3,462,866 |
| | 30.5 | % | | 100.0 | % | | 4.2 | % | | 3,480,181 |
| | 42 |
|
| ≥ 5% | 455,030 |
| | 511,738 |
| | 4.5 | % | | 100.0 | % | | 5.5 | % | | 490,706 |
| | 96 |
|
| | 10,345,991 |
| | 10,736,734 |
| | 94.6 | % | | 81.4 | % | | 3.7 | % | | 10,880,265 |
| | 21 |
|
| 15-Year & Other Fixed | 234,949 |
| | 229,928 |
| | 2.0 | % | | 0.8 | % | | 4.6 | % | | 227,918 |
| | 141 |
|
| Hybrid ARM | 28,582 |
| | 30,463 |
| | 0.3 | % | | — | % | | 4.9 | % | | 30,165 |
| | 154 |
|
| Interest-only | 2,961,895 |
| | 229,349 |
| | 2.0 | % | | — | % | | 2.3 | % | | 246,373 |
| | 39 |
|
| Agency Derivatives | 740,844 |
| | 126,599 |
| | 1.1 | % | | — | % | | 5.2 | % | | 109,762 |
| | 152 |
|
| Total Agency RMBS | $ | 14,312,261 |
| | $ | 11,353,073 |
| | 100.0 | % | | 77.0 | % | | | | $ | 11,494,483 |
| | |
Our non-Agency securities yields are expected to increase if prepayment rates on such assets exceed our prepayment assumptions. To the extent that prepayment speeds increase due to macroeconomic factors, we expect to benefit from the ability to recognize the income from the heavily discounted prices that principally arose from credit or payment default expectations.
The following tables provide discount information on our non-Agency securities portfolio:
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Principal and Interest Securities | | Interest-Only Securities | | Total |
| | Senior | | Mezzanine | | |
| Face Value | $ | 2,161,983 |
| | $ | 1,210,506 |
| | $ | 165,763 |
| | $ | 3,538,252 |
|
| Unamortized discount | | | | | | | |
| Designated credit reserve | (401,820 | ) | | (123,867 | ) | | — |
| | (525,687 | ) |
| Unamortized net discount | (400,656 | ) | | (255,774 | ) | | (159,830 | ) | | (816,260 | ) |
| Amortized Cost | $ | 1,359,507 |
| | $ | 830,865 |
| | $ | 5,933 |
| | $ | 2,196,305 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| (dollars in thousands) | Principal/ Current Face | | Carrying Value | | | | Weighted Average CPR (1) | | % Prepayment Protected | | Gross Weighted Average Coupon Rate | | Amortized Cost | | Allowance for Credit Losses | | Weighted Average Loan Age (months) |
| Agency RMBS AFS: | | | | | | | | | | | | | | | | | |
| 30-Year Fixed: | | | | | | | | | | | | | | | | | |
| ≤ 2.5% | $ | 420,720 | | | $ | 359,801 | | | | | 3.6 | % | | — | % | | 3.3 | % | | $ | 359,188 | | | $ | — | | | — | |
| 3.0% | 237,874 | | | 211,852 | | | | | 2.6 | % | | 85.4 | % | | 3.7 | % | | 210,850 | | | — | | | 26 | |
| 3.5% | 125,647 | | | 115,675 | | | | | 2.0 | % | | 84.9 | % | | 4.3 | % | | 113,092 | | | — | | | 22 | |
| 4.0% | 503,451 | | | 479,715 | | | | | 5.2 | % | | 100.0 | % | | 4.6 | % | | 508,294 | | | — | | | 49 | |
| 4.5% | 2,331,021 | | | 2,281,535 | | | | | 5.2 | % | | 100.0 | % | | 5.1 | % | | 2,384,460 | | | — | | | 40 | |
| 5.0% | 2,084,422 | | | 2,078,510 | | | | | 3.6 | % | | 100.0 | % | | 5.8 | % | | 2,125,950 | | | — | | | 21 | |
| 5.5% | 1,358,288 | | | 1,370,920 | | | | | 5.4 | % | | 99.8 | % | | 6.4 | % | | 1,371,534 | | | — | | | 18 | |
| 6.0% | 779,560 | | | 795,963 | | | | | 6.1 | % | | 99.8 | % | | 6.9 | % | | 799,184 | | | — | | | 17 | |
| ≥ 6.5% | 8,448 | | | 8,853 | | | | | 7.4 | % | | 97.8 | % | | 7.8 | % | | 9,084 | | | — | | | 249 | |
| 7,849,431 | | | 7,702,824 | | | | | 4.7 | % | | 94.7 | % | | 5.5 | % | | 7,881,636 | | | — | | | 28 | |
| Other P&I | 572,302 | | | 569,077 | | | | | 0.8 | % | | — | % | | 5.3 | % | | 564,336 | | | — | | | 9 | |
| Interest-only | 840,723 | | | 51,098 | | | | | 5.3 | % | | — | % | | 4.3 | % | | 58,567 | | | (3,619) | | | 100 | |
| Agency Derivatives | 163,735 | | | 12,246 | | | | | 8.0 | % | | — | % | | 6.7 | % | | 17,814 | | | — | | | 225 | |
| Total Agency RMBS | $ | 9,426,191 | | | $ | 8,335,245 | | | | | | | 87.5 | % | | | | $ | 8,522,353 | | | $ | (3,619) | | | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (in thousands) | Principal and Interest Securities | | Interest-Only Securities | | Total |
| | Senior | | Mezzanine | | |
| Face Value | $ | 1,622,604 |
| | $ | 924,000 |
| | $ | 185,535 |
| | $ | 2,732,139 |
|
| Unamortized discount | | | | | | | |
| Designated credit reserve | (315,009 | ) | | (52,428 | ) | | — |
| | (367,437 | ) |
| Unamortized net discount | (377,017 | ) | | (250,786 | ) | | (181,172 | ) | | (808,975 | ) |
| Amortized Cost | $ | 930,578 |
| | $ | 620,786 |
| | $ | 4,363 |
| | $ | 1,555,727 |
|
Credit losses
AlthoughOur MSR portfolio offers attractive spreads and has many risk reducing characteristics when paired with our Agency portfolio is supported by U.S. government agency and federally chartered corporation guarantees of payment of principal and interest, we are exposed to credit risk in our non-Agency securities, commercial real estate assets and residential mortgage loans.
RMBS portfolio. The credit support built into non-Agency securities deal structures is designed to provide a level of protection from potential credit losses for more senior tranches. We evaluate credit risk on our non-Agency investments through a comprehensive asset selection process, which is predominantly focused on quantifying and pricing credit risk, including extensive initial modeling and scenario analysis. In addition, the discounted purchase prices paid for our non-Agency securities provide additional insulation from credit losses in the event we receive less than 100% of par on such assets. At purchase, we estimate the portion of the discount we do not expect to recover and factor that into our expected yield and accretion methodology. We may also record an other-than-temporary impairment, or OTTI, for a portion of our investment in a securityfollowing table summarizes activity related to the extent we believe thatunpaid principal balance, or UPB, of loans underlying our MSR portfolio for the amortized cost exceeds the present value of expected future cash flows. We review our non-Agency securities on an ongoing basis using quantitative and qualitative analysis of the risk-adjusted returns on such investments and through on-going asset surveillance. Nevertheless, unanticipated credit losses could occur, adversely impacting our operating results.
We evaluate credit risk on our commercial real estate assets through a comprehensive asset selection process, which includes valuing the underlying collateral property as well as the financial and operating capability of the borrower, borrowing entity or loan sponsor. We also assess the financial wherewithal of any loan guarantors, the borrower’s competency in managing and operating the properties,three months ended March 31, 2024, and the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. We evaluate each commercial real estate asset for impairment at least quarterly and may record an allowance to reduce the carrying value of the asset to the present value of expected future cash flows, if deemed impaired.four immediately preceding quarters:
We evaluate and review credit risk on our residential mortgage loans on an ongoing basis using quantitative and qualitative analysis and through on-going asset surveillance. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| (in thousands) | | March 31,
2024 | | December 31,
2023 | | September 30,
2023 | | June 30,
2023 | | March 31,
2023 |
| UPB at beginning of period | | $ | 215,647,172 | | | $ | 218,662,270 | | | $ | 222,622,177 | | | $ | 212,444,503 | | | $ | 204,876,693 | |
| Purchases of mortgage servicing rights | | 3,116,814 | | | 829,133 | | | 472,154 | | | 14,773,601 | | | 11,381,496 | |
| Sales of mortgage servicing rights | | (1,430,294) | | | (61,612) | | | — | | | — | | | (142,598) | |
| Scheduled payments | | (1,645,501) | | | (1,639,884) | | | (1,639,871) | | | (1,594,693) | | | (1,527,309) | |
| Prepaid | | (2,110,763) | | | (2,127,341) | | | (2,786,904) | | | (2,993,493) | | | (2,119,541) | |
| Other changes | | 19,452 | | | (15,394) | | | (5,286) | | | (7,741) | | | (24,238) | |
| UPB at end of period | | $ | 213,596,880 | | | $ | 215,647,172 | | | $ | 218,662,270 | | | $ | 222,622,177 | | | $ | 212,444,503 | |
Counterparty exposure and leverage ratio
We monitor counterparty exposure inamongst our broker, banking and lending counterparties on a daily basis. We believe our broker and banking counterparties are well-capitalized organizations, and we attempt to manage our cash balances across these organizations to reduce our exposure to aany single counterparty. We include in the following discussion the obligations and borrowing capacity of Granite Point due to its consolidation on our condensed consolidated balance sheet; however, we do not have access to their cash nor do we have any obligation to fund Granite Point’s investments or obligations with respect to Granite Point’s financing arrangements.
As of September 30, 2017,March 31, 2024, we had entered into repurchase agreements with 3337 counterparties, 2519 of which had outstanding balances at September 30, 2017, including five facilities that provide both short- and long-term financing for our commercial real estate collateral with outstanding balances at September 30, 2017.balances. In addition, we held short- and long-term secured advances from the FHLB, short-term borrowings under revolving credit facilities, term notes payable and long-term unsecured convertible senior notes. As of September 30, 2017, we had a total consolidated debt-to-equity ratio of 5.7:1.0. TheMarch 31, 2024, the debt-to-equity ratio funding our AFSAgency and non-Agency investment securities, commercial real estate assets, MSR and Agency Derivatives only,servicing advances, which includes unsecured borrowings under convertible senior notes, was 5.0:4.6:1.0. We believe the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR and Agency Derivatives is the most meaningful debt-to-equity measure as collateralized borrowings on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity.
As of September 30, 2017,March 31, 2024, we held $539.4$666.2 million in cash and cash equivalents, approximately $1.9$1.0 million of unpledged Agency securitiesRMBS and derivatives and $223.7$3.6 million of unpledged non-Agency securities and retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities and retained interests of approximately $145.6$3.0 million. We also held approximately $89.2 million of unpledged mezzanine commercial real estate loans and $51.5 million of unpledged commercial real estate first mortgages, and had an overall estimated unused borrowing capacity on unpledged commercial real estate assets of approximately $82.2 million, which may be used to fund Granite Point’s target assets. As of September 30, 2017,March 31, 2024, we held approximately $770.0$42.5 million of unpledged MSR and $9.5 million of unpledged servicing advances. Overall, on March 31, 2024, we had an overall estimated$135.4 million unused committed and $466.3 million unused uncommitted borrowing capacity on unpledged MSR of approximately $50.0 million. We also held approximately $31.2financing facilities, and $140.7 million of unpledged residential mortgage loans held-for-sale, for which we had noin unused committed borrowing capacity.capacity on servicing advance financing facilities. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes. If borrowing rates and collateral requirements change in the near term, we believe we are subject to less earnings volatility than if we carried higher leverage.
We also monitor exposure to our MSR and mortgage loan counterparties. In connection with our previous securitization transactions, we were required to make certain representations and warranties to the investors in the RMBS we issued. We may also be required to make representations and warranties to investors in the loans underlying the MSR we own; however, some of our MSR were purchased on a bifurcated basis, meaning the representation and warranty obligations remain with the seller. If the representations and warranties we make prove to be inaccurate, we may be obligated to repurchase certain mortgage loans, which may impact the profitability of our portfolio. Although we obtain similar representations and warranties from the counterparty from which we acquired the relevant asset, if those representations and warranties do not directly mirror those we make to the investor, or if we are unable to enforce the representations and warranties against the counterparty for a variety of reasons, including the financial condition or insolvency of the counterparty, we may not be able to seek indemnification from our counterparties for any losses attributable to the breach.
Summary of Results of Operations and Financial Condition
AllOur book value per common share amounts,for U.S. GAAP purposes was $15.64 at March 31, 2024, an increase from $15.21 per common shares outstandingshare at December 31, 2023. The rise in book value for the three months ended March 31, 2024 was primarily driven by net servicing and restricted shares for all periods presented have been adjustedderivative income, offset by net unrealized losses recognized on a retroactive basis to reflect the reverse stock split.AFS securities and dividends declared.
Our GAAP net income attributable to common stockholders was $93.2$192.4 million, and $169.5 million ($0.52 and $0.97or $1.73 per diluted weighted average share)share, for the three and nine months ended September 30, 2017,March 31, 2024, as compared to GAAP net incomeloss attributable to common stockholders of $117.8$189.2 million, and $11.9 million ($0.68 and $0.07or $(2.05) per diluted weighted average share)share, for the three and nine months ended September 30, 2016.March 31, 2023.
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding Agency interest-onlycertain AFS securities and GSE credit risk transfer securities,for which we have elected the fair value option, do not impact our GAAP net income (loss) or taxable income but are recognized on our condensed consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive income.loss.” As a result of this fair value accounting through stockholders’ equity, we expect our net income to have less significant fluctuations and result in less U.S. GAAP to taxable income timing differences, than if the portfolio were accounted for as trading instruments. For the three and nine months ended September 30, 2017,March 31, 2024 and 2023, net unrealized losses on AFS securities recognized as other comprehensive loss were $103.1 million and net unrealized gains on AFS securities recognized as other comprehensive income net of tax, were $68.4 million and $223.8$125.9 million, respectively. This, combined with GAAP net income attributable to common stockholders of $93.2$192.4 million and $169.5GAAP net loss attributable to common stockholders of $189.2 million for the three months ended March 31, 2024 and 2023, respectively, resulted in comprehensive income attributable to common stockholders of $161.6$89.4 million and $393.3 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, net unrealized gains on AFS securities recognized as other comprehensive income, net of tax, were $18.7 million and $179.4 million, respectively. This, combined with GAAP net incomeloss attributable to common stockholders of $117.8 million and $11.9 million, resulted in comprehensive income attributable to common stockholders of $136.5 million and $191.3$63.2 million for the three and nine months ended September 30, 2016,March 31, 2024 and 2023, respectively.
Our book value per common share for U.S. GAAP purposes was $20.12 at September 30, 2017, an increase from $19.56 book value per common share at December 31, 2016. During this nine month period, we recognized comprehensive income attributable to common stockholders of $393.3 million, which drove the overall increase in book value, offset by common dividends declared of $268.7 million.
The following tables presenttable presents the components of our comprehensive income (loss) for the three and nine months endedSeptember 30, 2017 March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share data) | | | | Three Months Ended |
| Income Statement Data: | | | | March 31, |
| | | | | | 2024 | | 2023 | | |
| | | | (unaudited) |
| Net interest income (expense): | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest income | | | | | | $ | 117,783 | | | $ | 116,593 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest expense | | | | | | 160,000 | | | 142,490 | | | |
| Net interest expense | | | | | | (42,217) | | | (25,897) | | | |
| Net servicing income: | | | | | | | | | | |
| Servicing income | | | | | | 166,333 | | | 153,320 | | | |
| Servicing costs | | | | | | 7,119 | | | 28,366 | | | |
| Net servicing income | | | | | | 159,214 | | | 124,954 | | | |
| Other income (loss): | | | | | | | | | | |
| (Loss) gain on investment securities | | | | | | (10,975) | | | 10,798 | | | |
| Gain (loss) on servicing asset | | | | | | 11,012 | | | (28,079) | | | |
| Gain (loss) on interest rate swap and swaption agreements | | | | | | 98,510 | | | (82,154) | | | |
| Gain (loss) on other derivative instruments | | | | | | 47,599 | | | (155,771) | | | |
| Other (loss) income | | | | | | (3) | | | — | | | |
| Total other income (loss) | | | | | | 146,143 | | | (255,206) | | | |
| Expenses: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Compensation and benefits | | | | | | 26,529 | | | 14,083 | | | |
| Other operating expenses | | | | | | 21,052 | | | 10,484 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total expenses | | | | | | 47,581 | | | 24,567 | | | |
| Income (loss) before income taxes | | | | | | 215,559 | | | (180,716) | | | |
| Provision for (benefit from) income taxes | | | | | | 11,971 | | | (3,908) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | | 203,588 | | | (176,808) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Dividends on preferred stock | | | | | | (11,784) | | | (12,365) | | | |
| Gain on repurchase and retirement of preferred stock | | | | | | 644 | | | — | | | |
| Net income (loss) attributable to common stockholders | | | | | | $ | 192,448 | | | $ | (189,173) | | | |
| Basic earnings (loss) per weighted average common share | | | | | | $ | 1.85 | | | $ | (2.05) | | | |
| Diluted earnings (loss) per weighted average common share | | | | | | $ | 1.73 | | | $ | (2.05) | | | |
| Dividends declared per common share | | | | | | $ | 0.45 | | | $ | 0.60 | | | |
| Weighted average number of shares of common stock: | | | | | | | | | | |
| Basic | | | | | | 103,401,940 | | | 92,575,840 | | | |
| Diluted | | | | | | 112,973,317 | | | 92,575,840 | | | |
| Comprehensive income (loss): | | | | | | | | | | |
| Net income (loss) | | | | | | $ | 203,588 | | | $ | (176,808) | | | |
| Other comprehensive (loss) income: | | | | | | | | | | |
| Unrealized (loss) gain on available-for-sale securities | | | | | | (103,078) | | | 125,931 | | | |
| Other comprehensive (loss) income | | | | | | (103,078) | | | 125,931 | | | |
| Comprehensive income (loss) | | | | | | 100,510 | | | (50,877) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Dividends on preferred stock | | | | | | (11,784) | | | (12,365) | | | |
| Gain on repurchase and retirement of preferred stock | | | | | | 644 | | | — | | | |
| Comprehensive income (loss) attributable to common stockholders | | | | | | $ | 89,370 | | | $ | (63,242) | | | |
|
| | | | | | | | | | | | | | | | |
| (in thousands, except share data) | | Three Months Ended | | Nine Months Ended |
| Income Statement Data: | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Interest income: | | (unaudited) | | (unaudited) |
| Available-for-sale securities | | $ | 164,169 |
| | $ | 111,393 |
| | $ | 449,908 |
| | $ | 292,333 |
|
| Commercial real estate assets | | 30,595 |
| | 15,907 |
| | 80,005 |
| | 40,279 |
|
| Residential mortgage loans held-for-investment in securitization trusts | | 29,865 |
| | 33,495 |
| | 92,319 |
| | 100,765 |
|
| Residential mortgage loans held-for-sale | | 479 |
| | 7,627 |
| | 1,380 |
| | 19,789 |
|
| Cash and cash equivalents | | 1,408 |
| | 440 |
| | 3,087 |
| | 1,235 |
|
| Total interest income | | 226,516 |
| | 168,862 |
| | 626,699 |
| | 454,401 |
|
| Interest expense: | | | | | | | | |
| Repurchase agreements | | 71,754 |
| | 27,056 |
| | 158,065 |
| | 65,782 |
|
| Collateralized borrowings in securitization trusts | | 23,970 |
| | 26,422 |
| | 74,199 |
| | 70,965 |
|
| Federal Home Loan Bank advances | | 10,317 |
| | 6,744 |
| | 30,554 |
| | 18,804 |
|
| Revolving credit facilities | | 701 |
| | 128 |
| | 1,727 |
| | 128 |
|
| Convertible senior notes | | 4,745 |
| | — |
| | 13,157 |
| | — |
|
| Total interest expense | | 111,487 |
| | 60,350 |
| | 277,702 |
| | 155,679 |
|
| Net interest income | | 115,029 |
| | 108,512 |
| | 348,997 |
| | 298,722 |
|
| Other-than-temporary impairment losses | | — |
| | (1,015 | ) | | (429 | ) | | (1,822 | ) |
| Other income (loss): | | | | | | | | |
| Gain (loss) on investment securities | | 5,618 |
| | 28,290 |
| | (15,485 | ) | | 66,095 |
|
| (Loss) gain on interest rate swap and swaption agreements | | (207 | ) | | 5,584 |
| | (66,990 | ) | | (132,608 | ) |
| Loss on other derivative instruments | | (18,924 | ) | | (12,028 | ) | | (66,328 | ) | | (44,064 | ) |
| Servicing income | | 57,387 |
| | 38,708 |
| | 148,468 |
| | 108,657 |
|
| Loss on servicing asset | | (29,245 | ) | | (33,451 | ) | | (90,440 | ) | | (211,426 | ) |
| Gain on residential mortgage loans held-for-sale | | 355 |
| | (889 | ) | | 2,149 |
| | 17,648 |
|
| Other income (loss) | | 8,076 |
| | 5,757 |
| | 18,904 |
| | (977 | ) |
| Total other income (loss) | | 23,060 |
| | 31,971 |
| | (69,722 | ) | | (196,675 | ) |
| Expenses: | | | | | | | | |
| Management fees | | 13,276 |
| | 11,387 |
| | 36,518 |
| | 35,268 |
|
| Servicing expenses | | 8,893 |
| | 9,073 |
| | 26,116 |
| | 24,510 |
|
| Securitization deal costs | | — |
| | 2,080 |
| | — |
| | 6,241 |
|
| Other operating expenses | | 16,526 |
| | 14,780 |
| | 51,934 |
| | 47,280 |
|
| Restructuring charges | | — |
| | 1,189 |
| | — |
| | 1,189 |
|
| Total expenses | | 38,695 |
| | 38,509 |
| | 114,568 |
| | 114,488 |
|
| Income (loss) before income taxes | | 99,394 |
| | 100,959 |
| | 164,278 |
| | (14,263 | ) |
| Benefit from income taxes | | (5,344 | ) | | (16,827 | ) | | (21,103 | ) | | (26,138 | ) |
| Net income | | 104,738 |
| | 117,786 |
| | 185,381 |
| | 11,875 |
|
| Net income attributable to noncontrolling interest | | 2,674 |
| | — |
| | 2,714 |
| | — |
|
| Net income attributable to Two Harbors Investment Corp. | | 102,064 |
| | 117,786 |
| | 182,667 |
| | 11,875 |
|
| Dividends on preferred stock | | 8,888 |
| | — |
| | 13,173 |
| | — |
|
| Net income attributable to common stockholders | | $ | 93,176 |
| | $ | 117,786 |
| | $ | 169,494 |
| | $ | 11,875 |
|
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2024 | | December 31,
2023 |
| Balance Sheet Data: | | |
| | | | |
| Available-for-sale securities | | $ | 8,182,544 | | | $ | 8,327,149 | |
| Mortgage servicing rights | | $ | 3,084,879 | | | $ | 3,052,016 | |
| Total assets | | $ | 13,161,925 | | | $ | 13,138,800 | |
| Repurchase agreements | | $ | 8,361,638 | | | $ | 8,020,207 | |
| | | | |
| Revolving credit facilities | | $ | 1,357,671 | | | $ | 1,329,171 | |
| Term notes payable | | $ | 295,520 | | | $ | 295,271 | |
| Convertible senior notes | | $ | 268,953 | | | $ | 268,582 | |
| Total stockholders’ equity | | $ | 2,240,070 | | | $ | 2,203,390 | |
| | | | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended | | Nine Months Ended |
| Income Statement Data: | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| | (unaudited) | | (unaudited) |
| Basic earnings per weighted average common share | | $ | 0.53 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
| Diluted earnings per weighted average common share | | $ | 0.52 |
| | $ | 0.68 |
| | $ | 0.97 |
| | $ | 0.07 |
|
| Dividends declared per common share | | $ | 0.52 |
| | $ | 0.46 |
| | $ | 1.54 |
| | $ | 1.38 |
|
| Weighted average number of shares of common stock: | | | | | | | | |
| Basic | | 174,488,296 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
| Diluted | | 188,907,356 |
| | 173,813,613 |
| | 174,415,232 |
| | 174,109,117 |
|
| Comprehensive income: | | | | | | | | |
| Net income | | $ | 104,738 |
| | $ | 117,786 |
| | $ | 185,381 |
| | $ | 11,875 |
|
| Other comprehensive income, net of tax: | | | | | | | | |
| Unrealized gain on available-for-sale securities | | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
| Other comprehensive income | | 68,433 |
| | 18,746 |
| | 223,823 |
| | 179,382 |
|
| Comprehensive income | | 173,171 |
| | 136,532 |
| | 409,204 |
| | 191,257 |
|
| Comprehensive income attributable to noncontrolling interest | | 2,682 |
| | — |
| | 2,724 |
| | — |
|
| Comprehensive income attributable to Two Harbors Investment Corp. | | 170,489 |
| | 136,532 |
| | 406,480 |
| | 191,257 |
|
| Dividends on preferred stock | | 8,888 |
| | — |
| | 13,173 |
| | — |
|
| Comprehensive income attributable to common stockholders | | $ | 161,601 |
| | $ | 136,532 |
| | $ | 393,307 |
| | $ | 191,257 |
|
|
| | | | | | | | |
| (in thousands) | | September 30,
2017 | | December 31,
2016 |
| Balance Sheet Data: | | |
| | | (unaudited) | | |
| Available-for-sale securities | | $ | 20,199,094 |
| | $ | 13,128,857 |
|
| Total assets | | $ | 27,803,774 |
| | $ | 20,112,056 |
|
| Repurchase agreements | | $ | 18,297,392 |
| | $ | 9,316,351 |
|
| Federal Home Loan Bank advances | | $ | 1,998,762 |
| | $ | 4,000,000 |
|
| Total stockholders’ equity | | $ | 3,941,564 |
| | $ | 3,401,111 |
|
| Total equity | | $ | 4,131,381 |
| | $ | 3,401,111 |
|
Results of Operations
The following analysis focuses on financial results during the three and nine months endedSeptember 30, 2017 March 31, 2024 and 2016.2023.
Interest Income
Interest income increased slightly from $168.9 million and $454.4$116.6 million for the three and nine months ended September 30, 2016, respectively,March 31, 2023 to $226.5 million and $626.7$117.8 million for the same periodsperiod in 20172024 due to lower amortization recognized on Agency RMBS from lower unamortized premium and higher interest on cash balances as a result of the growth of our AFS securities and commercial real estate portfolios,higher interest rate environment, offset by a decrease in the saleuse of substantially all of our remaining prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016.reverse repurchase agreements.
Interest Expense
Interest expense increased from $60.4 million and $155.7$142.5 million for the three and nine months ended September 30, 2016March 31, 2023 to $111.5 million and $277.7$160.0 million for the same periodsperiod in 20172024 due to increased financingincreases in interest rates and higher borrowing balances on MSR, offset by lower borrowing balances on AFS securities and commercial real estate assets due to purchases, increases in the borrowing rates offered by counterparties, increased interest expense on collateralized borrowings due to sales of retained interests from our on-balance sheet securitizations, the addition of revolving credit facilities for financing of mortgage servicing rights and the issuance of convertible senior notes during the nine months ended September 30, 2017.
securities.
Net Interest Income
The following tables present the components of interest income and average annualized net asset yield earned by asset type, the components of interest expense and average annualized cost of funds on borrowings incurred by liability and/or collateral type, and net interest income and average annualized net interest rate spread for the three and nine months endedSeptember 30, 2017 March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2024 | | Three Months Ended March 31, 2023 |
| (dollars in thousands) | | | | | | | Average Balance (1) | | Interest Income/Expense | | Net Yield/Cost of Funds | | Average Balance (1) | | Interest Income/Expense | | Net Yield/Cost of Funds |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | $ | 8,569,566 | | | $ | 100,605 | | | 4.7 | % | | $ | 8,649,865 | | | $ | 97,038 | | | 4.5 | % |
| Reverse repurchase agreements | | | | | | | 345,997 | | | 4,659 | | | 5.4 | % | | 816,780 | | | 8,562 | | | 4.2 | % |
| Other | | | | | | | | | 12,519 | | | | | | | 10,993 | | | |
| | | | | | | | | | | | | | | | | |
| Total interest income/net asset yield | | | | | | | $ | 8,915,563 | | | $ | 117,783 | | | 5.3 | % | | $ | 9,466,645 | | | $ | 116,593 | | | 4.9 | % |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Borrowings collateralized by: | | | | | | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | $ | 7,986,939 | | | $ | 112,353 | | | 5.6 | % | | $ | 8,181,110 | | | $ | 92,023 | | | 4.5 | % |
Agency Derivatives (2) | | | | | | | 8,393 | | | 130 | | | 6.2 | % | | 12,463 | | | 159 | | | 5.1 | % |
Mortgage servicing rights and advances (3) | | | | | | | 1,889,112 | | | 42,892 | | | 9.1 | % | | 1,878,322 | | | 38,895 | | | 8.3 | % |
U.S. Treasuries (4) | | | | | | | — | | | — | | | — | % | | 571,768 | | | 6,577 | | | 4.6 | % |
| | | | | | | | | | | | | | | | | |
| Unsecured borrowings: | | | | | | | | | | | | | | | | | |
| Convertible senior notes | | | | | | | 268,831 | | | 4,619 | | | 6.9 | % | | 282,729 | | | 4,836 | | | 6.8 | % |
| Other | | | | | | | | | 6 | | | | | | | — | | | |
| Total interest expense/cost of funds | | | | | | | $ | 10,153,275 | | | $ | 160,000 | | | 6.3 | % | | $ | 10,926,392 | | | 142,490 | | | 5.2 | % |
| Net interest expense/spread | | | | | | | | | $ | (42,217) | | | (1.0) | % | | | | $ | (25,897) | | | (0.3) | % |
____________________
(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on other assets.
(2)Yields on Agency Derivatives not shown as interest income is included in gain (loss) on other derivative instruments in the condensed consolidated statements of comprehensive income (loss).
(3)Yields on mortgage servicing rights and advances not shown as these assets do not earn interest.
(4)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| (dollars in thousands) | Average Balance (1) | | Interest Income/Expense | | Net Yield/Cost of Funds (2) | | Average Balance (1) | | Interest Income | | Net Asset Yield |
| Interest-earning assets | | | | | | | | | | | |
| Agency available-for-sale securities | $ | 16,470,462 |
| | $ | 122,130 |
| | 3.0 | % | | $ | 14,805,036 |
| | $ | 333,288 |
| | 3.0 | % |
| Non-Agency available-for-sale securities | 2,063,882 |
| | 42,039 |
| | 8.1 | % | | 1,839,868 |
| | 116,620 |
| | 8.5 | % |
| Commercial real estate assets | 1,924,222 |
| | 30,595 |
| | 6.4 | % | | 1,702,824 |
| | 80,005 |
| | 6.3 | % |
| Residential mortgage loans held-for-investment in securitization trusts | 3,068,728 |
| | 29,865 |
| | 3.9 | % | | 3,159,352 |
| | 92,319 |
| | 3.9 | % |
| Residential mortgage loans held-for-sale | 34,082 |
| | 479 |
| | 5.6 | % | | 36,324 |
| | 1,380 |
| | 5.1 | % |
| Other | | | 1,408 |
| | | | | | 3,087 |
| |
|
|
| Total interest income/net asset yield | $ | 23,561,376 |
| | $ | 226,516 |
| | 3.8 | % | | $ | 21,543,404 |
| | $ | 626,699 |
| | 3.9 | % |
| Interest-bearing liabilities | | | | | | | | | | | |
| Repurchase agreements, FHLB advances and borrowings in securitization trusts collateralized by: | | | | | | | | | | | |
| Agency available-for-sale securities | $ | 15,809,657 |
| | $ | 56,190 |
| | 1.4 | % | | $ | 14,084,616 |
| | $ | 127,495 |
| | 1.2 | % |
| Non-Agency available-for-sale securities | 1,592,472 |
| | 11,950 |
| | 3.0 | % | | 1,412,781 |
| | 30,716 |
| | 2.9 | % |
| Commercial real estate assets | 1,239,542 |
| | 12,427 |
| | 4.0 | % | | 1,175,731 |
| | 26,181 |
| | 3.0 | % |
| Residential mortgage loans held-for-investment in securitization trusts | 3,010,900 |
| | 25,056 |
| | 3.3 | % | | 3,096,905 |
| | 77,166 |
| | 3.3 | % |
| Residential mortgage loans held-for-sale | — |
| | — |
| | — | % | | — |
| | — |
| | — | % |
| Agency derivatives | 79,106 |
| | 418 |
| | 2.1 | % | | 85,334 |
| | 1,260 |
| | 2.0 | % |
Financing of mortgage servicing rights and other unassignable: (3) | | | | | | | | | | |
|
|
| Revolving credit facilities | 47,939 |
| | 701 |
| | 5.8 | % | | 38,092 |
| | 1,727 |
| | 6.0 | % |
| Convertible senior notes | 282,448 |
| | 4,745 |
| | 6.7 | % | | 268,886 |
| | 13,157 |
| | 6.5 | % |
| Total interest expense/cost of funds | $ | 22,062,064 |
| | 111,487 |
| | 2.0 | % | | $ | 20,162,345 |
| | 277,702 |
| | 1.8 | % |
Net interest income/spread (4) | | | $ | 115,029 |
| | 1.8 | % | | | | $ | 348,997 |
| | 2.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| (dollars in thousands) | Average Balance (1) | | Interest Income/Expense | | Net Yield/Cost of Funds (2) | | Average Balance (1) | | Interest Income/Expense | | Net Yield/Cost of Funds (2) |
| Interest-earning assets | | | | | | | | | | | |
| Agency available-for-sale securities | $ | 11,934,779 |
| | $ | 80,267 |
| | 2.7 | % | | $ | 9,624,519 |
| | $ | 204,860 |
| | 2.8 | % |
| Non-Agency available-for-sale securities | 1,424,635 |
| | 31,126 |
| | 8.7 | % | | 1,400,498 |
| | 87,473 |
| | 8.3 | % |
| Commercial real estate assets | 1,033,049 |
| | 15,907 |
| | 6.2 | % | | 861,090 |
| | 40,279 |
| | 6.2 | % |
| Residential mortgage loans held-for-investment in securitization trusts | 3,472,738 |
| | 33,495 |
| | 3.9 | % | | 3,475,782 |
| | 100,765 |
| | 3.9 | % |
| Residential mortgage loans held-for-sale | 741,589 |
| | 7,627 |
| | 4.1 | % | | 645,189 |
| | 19,789 |
| | 4.1 | % |
| Other | | | 440 |
| | | | | | 1,235 |
| |
|
|
| Total interest income/net asset yield | $ | 18,606,790 |
| | $ | 168,862 |
| | 3.6 | % | | $ | 16,007,078 |
| | $ | 454,401 |
| | 3.8 | % |
| Interest-bearing liabilities | | | | | | | | | | | |
| Repurchase agreements, FHLB advances and borrowings in securitization trusts collateralized by: | | | | | | | | | | | |
| Agency available-for-sale securities | $ | 11,431,995 |
| | $ | 21,277 |
| | 0.7 | % | | $ | 9,156,113 |
| | $ | 49,101 |
| | 0.7 | % |
| Non-Agency available-for-sale securities | 1,172,717 |
| | 7,207 |
| | 2.5 | % | | 1,139,236 |
| | 20,482 |
| | 2.4 | % |
| Commercial real estate assets | 647,967 |
| | 2,968 |
| | 1.8 | % | | 507,613 |
| | 6,884 |
| | 1.8 | % |
| Residential mortgage loans held-for-investment in securitization trusts | 3,389,061 |
| | 27,379 |
| | 3.2 | % | | 3,372,159 |
| | 75,413 |
| | 3.0 | % |
| Residential mortgage loans held-for-sale | 503,204 |
| | 950 |
| | 0.8 | % | | 438,516 |
| | 2,402 |
| | 0.7 | % |
| Agency derivatives | 112,283 |
| | 441 |
| | 1.6 | % | | 113,216 |
| | 1,269 |
| | 1.5 | % |
Financing of mortgage servicing rights and other unassignable: (3) | | | | | | | | | | |
|
|
| Revolving credit facilities | 9,457 |
| | 128 |
| | 5.4 | % | | 3,175 |
| | 128 |
| | 5.4 | % |
| Convertible senior notes | — |
| | — |
| | — | % | | — |
| | — |
| | — | % |
| Total interest expense/cost of funds | $ | 17,266,684 |
| | 60,350 |
| | 1.4 | % | | $ | 14,730,028 |
| | 155,679 |
| | 1.4 | % |
Net interest income/spread (4) | | | $ | 108,512 |
| | 2.2 | % | | | | $ | 298,722 |
| | 2.4 | % |
____________________
| |
(1) | Average balance represents average amortized cost on AFS securities, commercial real estate assets and Agency Derivatives and average unpaid principal balance, adjusted for purchase price changes, on residential mortgage loans held-for-investment in securitization trusts and residential mortgage loans held-for-sale. |
| |
(2) | Cost of funds does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in (loss) gain on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, our total average cost of funds on the assets assigned as collateral for borrowings shown in the table above, including interest spread expense associated with interest rate swaps, was 2.1% and 2.0%, respectively, compared to 1.5% and 1.6% for the same periods in 2016. |
| |
(3) | Yields on mortgage servicing rights not shown as these assets do not earn interest. |
| |
(4) | Net interest spread does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in (loss) gain on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, our total average net interest rate spread on the assets and liabilities shown in the table above, including interest spread expense associated with interest rate swaps, was 1.8% and 1.9%, respectively, compared to 2.2% and 2.3% for the same periods in 2016. |
The increase in yields on Agency AFS securities for the three and nine months ended September 30, 2017,March 31, 2024, as compared to the same periodsperiod in 2016,2023 was predominantly driven by purchases of pools with higher yields and sales of pools with lower yields.amortization recognized on Agency RMBS from lower unamortized premium. The increase in cost of funds associated with the financing of Agency AFS securities for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was the result of increases in the borrowing rates offered by counterparties.
The decrease in yields on non-Agency securities for the three months ended September 30, 2017,March 31, 2024, as compared to the same period in 2016,2023, was predominantly driven by purchasesthe result of non-Agency securities at lower yields than our existing portfolio. rising interest rates.
The increase in yields on non-Agency securitiesreverse repurchase agreements for the ninethree months ended September 30, 2017,March 31, 2024, as compared to the same period in 2016, was due to continued improvement in legacy non-Agency fundamentals, credit performance and prepayments. The increase in cost of funds associated with the financing of non-Agency AFS securities for the three and nine months ended September 30, 2017, as compared to the same periods in 2016,2023, was the result of increases in the borrowing rates offered by counterparties.
The increase in yields on commercial real estate assetsrising interest rates. However, for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was predominantly drivenMarch 31, 2023, these yields were offset by the origination of commercial real estate first mortgages at higher yields. The increase in cost of funds on commercial real estate assets forfinancing the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was primarily the result of increases in borrowing rates and secondarily the result of an increase in the proportion of total borrowings financed throughassociated repurchase agreements (relative to FHLB advances).
Yields on residential mortgage loans held-for-investment in securitization trusts for the three and nine months ended September 30, 2017 were generally consistent with those for the same periods in 2016. The increase in cost of funds associated with the financing of residential mortgage loans held-for-investment in securitization trusts for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was primarily the result of the sale of retained interests from our on-balance sheet securitizations in 2016, thereby increasing the amount of collateralized borrowings in securitization trusts.
The increase in yields on residential mortgage loans held-for-sale for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was due to the sale of substantially all of our remaining prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016.by U.S. Treasury securities. We did not havehold any financing of residential mortgage loans held-for-sale in place forrepurchase agreements collateralized by U.S. Treasury securities during the three and nine months ended September 30, 2017.March 31, 2024.
The increase in cost of funds associated with the financing of Agency Derivatives for the three and nine months ended September 30, 2017,March 31, 2024, as compared to the same periodsperiod in 2016,2023, was the result of increases in the borrowing rates offered by counterparties.rising interest rates.
The increase in cost of funds associated with the financing of MSR through revolving credit facilitiesassets and related servicing advance obligations for the three and nine months ended September 30, 2017,March 31, 2024, as compared to the same periodsperiod in 2016,2023, was the result of increasesdue to rising interest rates and an increase in the borrowing rates offered by counterparties as well as increased amortizationuse of deferred debt issuance costs.revolving credit facilities and repurchase agreement financing, which on average carry higher floating rate spreads than term notes. Additionally, during the three months ended September 30, 2023, we repurchased $104.2 million principal amount of our outstanding MSR term notes in open market transactions. These repurchased MSR term note bonds were then financed via existing master repurchase agreements. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our condensed consolidated balance sheets.
Our convertible senior notes were issuedThe slight increase in January 2017, are unsecured and pay interest semiannually at a rate of 6.25% per annum. The cost of funds associated with our convertible senior notes also includesfor the three months ended March 31, 2024, as compared to the same period in 2023, was due to an increase in amortization of deferred debt issuance costs.
The following tables present the components of the yield earned by investment type on our AFS securities portfolio as a percentage of our average amortized cost of securities for the three and nine months ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 |
| Gross yield/stated coupon | | | | | 4.9 | % | | 4.9 | % |
| Net (premium amortization) discount accretion | | | | | (0.2) | % | | (0.4) | % |
| Net yield | | | | | 4.7 | % | | 4.5 | % |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | Agency (1) | | Non-Agency | | Total | | Agency (1) | | Non-Agency | | Total |
| Gross yield/stated coupon | 4.1 | % | | 3.7 | % | | 4.0 | % | | 4.0 | % | | 3.6 | % | | 4.0 | % |
| Net (premium amortization) discount accretion | (1.1 | )% | | 4.4 | % | | (0.5 | )% | | (1.0 | )% | | 4.9 | % | | (0.4 | )% |
Net yield (2) | 3.0 | % | | 8.1 | % | | 3.5 | % | | 3.0 | % | | 8.5 | % | | 3.6 | % |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| | Agency (1) | | Non-Agency | | Total | | Agency (1) | | Non-Agency | | Total |
| Gross yield/stated coupon | 3.8 | % | | 3.6 | % | | 3.8 | % | | 4.0 | % | | 3.5 | % | | 4.0 | % |
| Net (premium amortization) discount accretion | (1.1 | )% | | 5.1 | % | | (0.5 | )% | | (1.2 | )% | | 4.8 | % | | (0.5 | )% |
Net yield (2) | 2.7 | % | | 8.7 | % | | 3.3 | % | | 2.8 | % | | 8.3 | % | | 3.5 | % |
____________________
| |
(1) | Excludes Agency Derivatives. For the three and nine months ended September 30, 2017, the average annualized net yield on total Agency RMBS, including Agency Derivatives, was 3.0% and 3.1%, respectively, compared to 2.8% and 3.0% for the same periods in 2016. |
| |
(2) | These yields have not been adjusted for cost of delay and cost to carry purchase premiums. |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
| Servicing fee income | | | | | $ | 134,320 | | | $ | 129,237 | | | |
| Ancillary and other fee income | | | | | 3,857 | | | 369 | | | |
| Float income | | | | | 28,156 | | | 23,714 | | | |
| Total servicing income | | | | | 166,333 | | | 153,320 | | | |
| Total servicing costs | | | | | 7,119 | | | 28,366 | | | |
| Net servicing income | | | | | $ | 159,214 | | | $ | 124,954 | | | |
Other-Than-Temporary Impairments
We review each of our securitiesRoundPoint, as well as higher servicing fee income on a quarterly basis to determine if an OTTI charge is necessary. Duringlarger MSR portfolio and higher float income as a result of the three and nine months ended September 30, 2017, we recorded $0.4 millionhigher interest rate environment. The decrease in other-than-temporary credit impairments on one non-Agency security where the future expected cash flows for the security were less than its amortized cost. We did not record any other-than-temporary credit impairmentsservicing costs during the three months ended September 30, 2017. DuringMarch 31, 2024, as compared to the same period in 2023, was the result of lower third-party subservicing fees due to the acquisition of RoundPoint.
(Loss) Gain On Investment Securities
The following table presents the components of (loss) gain on investment securities for the three and nine months ended September 30, 2016,March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 | | |
| Proceeds from sales | | | | | $ | 333,082 | | | $ | 1,360,742 | | | |
| Amortized cost of securities sold | | | | | (343,245) | | | (1,393,484) | | | |
| Total realized losses on sales | | | | | (10,163) | | | (32,742) | | | |
| (Provision for) reversal of provision for credit losses | | | | | (80) | | | 142 | | | |
| Other | | | | | (732) | | | 43,398 | | | |
| (Loss) gain on investment securities | | | | | $ | (10,975) | | | $ | 10,798 | | | |
In the ordinary course of our business, we recorded $1.0 millionmake investment decisions and $1.8 million, respectively,allocate capital in other-than-temporary credit impairmentsaccordance with our views on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. For further information about evaluating AFS securities for OTTI, refer to Note 4 - Available-for-Sale Securities, at Fair Value ofchanging risk/reward dynamics in the notes to the condensed consolidated financial statements.
Gain (Loss) on Investment Securities
During the threemarket and nine months ended September 30, 2017, we sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion, for net realized losses of $3.9 million and $21.0 million, respectively. During the three and nine months ended September 30, 2016, we sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion, for net realized gains of $31.8 million and $63.3 million, respectively.in our portfolio. We do not expect to sell assets on a frequent basis, but may sell assets to reallocate capital into new assets that we believe have higher risk-adjusted returns.
ForWe use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. 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 (within (loss) gain on investment securities).
The majority of the three and nine months ended September 30, 2017, Agency interest-only mortgage-backed“other” component of (loss) gain on investment securities experienced a changeis related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option. Fluctuations in this line item are primarily driven by the reclassification of $9.6 millionunrealized gains and $5.5 million, respectively. Forlosses to realized gains and losses upon sale, as well as changes in fair value assumptions.
Gain (Loss) On Servicing Asset
The following table presents the components of gain (loss) on servicing asset for the three and nine months ended September 30, 2016, Agency interest-only mortgage-backed securitiesMarch 31, 2024 and GSE credit risk transfer securities experienced a change in unrealized losses of $3.5 million and and a change in unrealized gains of $2.7 million, respectively. 2023:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 |
| Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model | | | | | $ | 54,430 | | | $ | 20,421 | |
| Changes in fair value due to realization of cash flows (runoff) | | | | | (48,768) | | | (47,661) | |
| Gains (losses) on sales | | | | | 5,350 | | | (839) | |
| Gain (loss) on servicing asset | | | | | $ | 11,012 | | | $ | (28,079) | |
The increase in change in unrealized gainsgain (decrease in losses)loss) on servicing asset for the three and nine months ended September 30, 2017,March 31, 2024, as compared to the same periodsperiod in 2016,2023, was predominantly driven by lower prepayment expectationshigher favorable change in valuation assumptions used in the fair valuation of MSR and gains realized on Agency interest-only mortgage-backed securities.sales of MSR, offset by slightly higher runoff on a larger MSR portfolio during the three months ended March 31, 2024.
Gain (Loss) Gain onOn Interest Rate Swap andAnd Swaption Agreements
ForThe following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and nine months ended September 30, 2017, weMarch 31, 2024 and 2023:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (in thousands) | | | | | 2024 | | 2023 |
| Net interest spread | | | | | $ | 14,295 | | | $ | 3,611 | |
| Early termination, agreement maturation and option expiration gains (losses) | | | | | 13,890 | | | (18,580) | |
| Change in unrealized gain (loss) on interest rate swap and swaption agreements, at fair value | | | | | 70,325 | | | (67,185) | |
| Gain (loss) on interest rate swap and swaption agreements | | | | | $ | 98,510 | | | $ | (82,154) | |
Net interest spread recognized $0.4 million and $10.9 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with our interest rate swaps. The expenses resultswaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixedfloating interest rate (OIS or SOFR) on an average $16.7 billion and $17.6 billion notional, respectively,positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. For the threeWe may elect to terminate certain swaps and nine months ended September 30, 2016, we recognized $4.3 million and $18.1 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associatedswaptions to align with our interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $14.5 billion and $14.8 billion notional, respectively, held to economically hedge/mitigateinvestment portfolio, interest rate exposure (or duration) risk.
During the three and nine months ended September 30, 2017, we terminated, had agreements may mature or had options may expire on 49 and 121 interest rate swap and swaption positions of $17.9 billion and $55.4 billion notional, respectively. Upon settlement of the early terminations and option expirations, we received $3.1 million and paid $19.5 millionresulting in full settlement of our net interest spread asset/liability and recognized $32.9 million and $68.9 million inthe recognition of realized gains on the swaps and swaptions for the three and nine months ended September 30, 2017, respectively,losses, including early termination penalties. During the three and nine months ended September 30, 2016, we terminated, had agreements mature or had options expire on 26 and 81 interest rate swap and swaption positions of $8.0 billion and $27.7 billion notional, respectively. Upon settlement of the early terminations and option expirations, we paid $0.7 million and $2.7 million in full settlement of our net interest spread liability and recognized $95.1 million and $119.5 million in realized losses on the swaps and swaptions for the three and nine months ended September 30, 2016, respectively, including early termination penalties. We elected to terminate certain swaps and swaptions during these periods to align with our investment portfolio.
Also included in our financial results for the three and nine months ended September 30, 2017, was the recognition of a change in unrealized valuation losses of $32.7 million and $125.0 million, respectively, on our interest rate swap and swaption agreements that were accounted for as trading instruments, compared to a change in unrealized valuation gains of $104.9 million and $5.1 million for the same periods in 2016. The change in fair value of interest rate swaps and swaptions during the three months ended March 31, 2024 and 2023 was a result of changes to LIBOR,floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates during the three and nine months ended September 30, 2017 and 2016.rates. Since these swaps and swaptions are used for purposes of hedging our interest rate exposure, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) are generally offset by unrealized losses and gains in our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive (loss) income net of tax, or to (loss) gain (loss) on investment securities, in the case of Agency interest-only securities.certain AFS securities for which we have elected the fair value option.
Gain (Loss) On Other Derivative Instruments
The following table provides a summary of the total net interest spread and gains and losses associated with our interest rate swap and swaption positions:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net interest spread | $ | (389 | ) | | $ | (4,294 | ) | | $ | (10,867 | ) | | $ | (18,140 | ) |
| Early termination, agreement maturation and option expiration gains (losses) | 32,906 |
| | (95,061 | ) | | 68,854 |
| | (119,548 | ) |
| Change in unrealized (loss) gain on interest rate swap and swaption agreements, at fair value | (32,724 | ) | | 104,939 |
| | (124,977 | ) | | 5,080 |
|
| (Loss) gain on interest rate swap and swaption agreements | $ | (207 | ) | | $ | 5,584 |
| | $ | (66,990 | ) | | $ | (132,608 | ) |
Loss on Other Derivative Instruments
Included in our financial results for the three and nine months ended September 30, 2017, was the recognition of $18.9 million and $66.3 million of losses, respectively,(losses) recognized on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, put and callfutures, options for TBAs, Markit IOS total return swapson futures, and inverse interest-only securities. Included within these results for the three and nine months ended September 30, 2017, was the recognition of $2.8 million and $10.0 million of interest income, net of accretion on inverse interest-only securities on an average amortized cost basis of $93.4 million and $96.7 million, respectively. The remainder represented realized and unrealized net gains (losses) on other derivative instruments. As these derivative instruments are considered trading instruments, our financial results include both realized and unrealized gains (losses) associated with these instruments.
Included in our financial results for the three and nine months ended September 30, 2016, was the recognition of $12.0 million and $44.1 million of losses, respectively, on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, put and call options for TBAs, Markit IOS total return swaps, credit default swaps and inverse interest-only securities. Included within these results for the three and nine months ended September 30, 2016, was the recognition of $4.0 million and $15.4 million of interest income, net of accretion on inverse interest-only securities on an average amortized cost basis of $119.0 million and $123.1 million, respectively. The remainder represented realized and unrealized net gains (losses) on other derivative instruments. Since our derivative instruments are generally used for purposes of hedging our interest rate and credit risk exposure, their unrealized valuation gains and losses are generally offset by unrealized losses and gains in our AFS securities and residential mortgage loan portfolios.
Servicing Income
For the three and nine months ended September 30, 2017, we recognized total servicing income from our MSR portfolio of $57.4 million and $148.5 million, respectively. These amounts include servicing fee income of $54.0 million and $141.9 million, ancillary and other fee income of $0.3 million and $0.6 million, and float income of $3.1 million and $6.0 million, respectively. For the three and nine months ended September 30, 2016, we recognized total servicing income of $38.7 million and $108.7 million, respectively. These amounts include servicing fee income of $37.2 million and $104.8 million, ancillary and other fee income of $0.4 million and $1.4 million, and float income of $1.0 million and $2.5 million, respectively. The increase in servicing income for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was the result of an increase in the size of our MSR portfolio.
Loss on Servicing Asset
For the three and nine months ended September 30, 2017, loss on servicing asset of $29.2 million and $90.4 million, respectively, includes a decrease in fair value of MSR due to realization of cash flows (runoff) of $28.6 million and $66.5 million, respectively, and a decrease in fair value of MSR due to changes in valuation inputs or assumptions of $0.2 million and $23.1 million, respectively. Additionally, we recognized losses on sales of MSR of $0.5 million and $0.8 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, loss on servicing asset of $33.5 million and $211.4 million, respectively, includes a decrease in fair value of MSR due to realization of cash flows (runoff) of $18.2 million and $52.8 million, respectively, and an increase in fair value of MSR due to changes in valuation inputs or assumptions of $3.8 million and a decrease in fair value of MSR due to changes in valuation inputs or assumptions of $139.6 million, respectively. The decrease in loss on servicing asset for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was predominantly driven by a decrease in prepayment speed assumptions, offset by portfolio runoff during the three and nine months ended September 30, 2017.
Gain (Loss) on Residential Mortgage Loans Held-for-Sale
For the three and nine months ended September 30, 2017, we recorded gains of $0.4 million and $2.1 million, respectively, on residential mortgage loans held-for-sale. For the three and nine months ended September 30, 2016, we recorded losses of $0.9 million and gains of $17.6 million, respectively, on residential mortgage loans held-for-sale. The increase in gains (decrease in losses) on residential mortgage loans held-for-sale during the three months ended September 30, 2017,March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| (in thousands) | | | March 31, |
| | | | | 2024 | | 2023 | | |
| TBAs | | | | | $ | (59,180) | | | $ | (17,164) | | | |
| | | | | | | | | |
| Futures | | | | | 108,936 | | | (140,087) | | | |
| | | | | | | | | |
| | | | | | | | | |
| Options on futures | | | | | (127) | | | — | | | |
| | | | | | | | | |
| | | | | | | | | |
| Inverse interest-only securities | | | | | (2,030) | | | 1,480 | | | |
| | | | | | | | | |
| Gain (loss) on other derivative instruments | | | | | $ | 47,599 | | | $ | (155,771) | | | |
For further details regarding our use of derivative instruments and related activity, refer to Note 8 - Derivative Instruments and Hedging Activities to the condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q.
Expenses
The following table presents the components of expenses for the three months ended March 31, 2024 and 2023:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (dollars in thousands) | | | | | 2024 | | 2023 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Compensation and benefits: | | | | | | | |
| Non-cash equity compensation expenses | | | | | $ | 6,083 | | | $ | 6,052 | |
| All other compensation and benefits | | | | | 20,446 | | | 8,031 | |
| Total compensation and benefits | | | | | $ | 26,529 | | | $ | 14,083 | |
| Other operating expenses: | | | | | | | |
Certain operating expenses (1) | | | | | $ | 1,198 | | | $ | 5,418 | |
| All other operating expenses | | | | | 19,854 | | | 5,066 | |
| Total other operating expenses | | | | | $ | 21,052 | | | $ | 10,484 | |
| Annualized operating expense ratio | | | | | 8.5 | % | | 4.3 | % |
Annualized operating expense ratio, excluding non-cash equity compensation and certain operating expenses (1) | | | | | 7.2 | % | | 2.3 | % |
____________________
(1)Certain operating expenses predominantly consists of expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC, as discussed within Note 16 to the condensed consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q. It also includes certain transaction expenses incurred in connection with the Company’s acquisition of RoundPoint.
The increase in total operating expenses during the three months ended March 31, 2024, as compared to the same period in 2016,2023, was driven by increases in interest rates during the three months ended September 30, 2017. The decrease in gains on residential mortgage loans held-for-sale during the nine months ended September 30, 2017, as compared to the same periods in 2016, was due to the saleaddition of substantially all of our prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016.
Other Income (Loss)
For the threeRoundPoint’s compensation, benefits, operating and nine months ended September 30, 2017, we recorded other income of $8.1 million and $18.9 million, which includes $14.7 million and $45.5 million in gains on residential mortgage loans held-for-investment in securitization trusts, $7.9 million and $30.7 million in losses on collateralized borrowings in securitization trusts, $1.2 million and $4.0 million of dividend income on our FHLB stock and $0.1 million and $0.1 million, respectively, of other miscellaneous income. For the three and nine months ended September 30, 2016, we recorded other income of $5.8 million and other loss of $1.0 million, which includes $24.6 million and $63.7 million in gains on residential mortgage loans held-for-investment in securitization trusts, $20.3 million and $68.9 million in losses on collateralized borrowings in securitization trusts, $1.4 million and $4.1 million of dividend income on our FHLB stock and $0.1 million and $0.1 million, respectively, of other miscellaneous income. The increase in other income for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was driven by increases in interest rates during the three and nine months ended September 30, 2017.
Management Fees
We incurred management fees of $10.2 million and $33.3 million for the three and nine months ended September 30, 2017 and $11.4 million and $35.3 million for the three and nine months ended September 30, 2016, respectively, which are payable to PRCM Advisers, our external manager, under our management agreement. The management fee is calculated based on our stockholders’ equity with certain adjustments outlined in the management agreement.
Additionally, in accordance with Granite Point’s management agreement with Pine River, we incurred management fees of $3.1 million and $3.2 million for the three and nine months ended September 30, 2017, respectively. Granite Point’s management fee is also calculated based on its equity with certain adjustments outlined in its management agreement. See further discussion of the management fee calculations in Note 25 - Related Party Transactions of the notes to the condensed consolidated financial statements.
Servicing Expenses
For the three and nine months ended September 30, 2017, we recognized $8.9 million and $26.1 million, respectively, in servicingloan level expenses, generally related to the subservicing of MSR, commercial real estate assets and residential mortgage loans, compared to $9.1 million and $24.5 million for the same periods in 2016. The decrease in servicing expenses during the three months ended September 30, 2017, as compared to the same period in 2016, was the result of efficiencies gained by repositioning our MSR portfolio across our subservicer network during the three months ended June 30, 2017 as well as the release of MSR representation and warranty reserves due to a higher concentration of MSR purchased on a bifurcated basis (meaning the representation and warranty obligations remain with the seller). The increase in servicing expenses during the nine months ended September 30, 2017, as compared to the same periods in 2016, was the result of an increase in the size of our MSR and commercial real estate portfolios as well as the recognition of de-boarding and transfer fees related to our subservicer network repositioning during the nine months ended September 30, 2017, offset by the release of MSR representation and warranty reserves due to a refinement of the reserve method and a higher concentration of MSR purchased on a bifurcated basis.
Securitization Deal Costs
Due to the discontinuation of our mortgage loan conduit and securitization business, we did not record any securitization deal costs related to the sponsoring of securitization trusts during the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, we recognized net upfront securitization deal costs of $2.1 million and $6.2 million. These costs are included when evaluating the economics of a securitization; however, the election of the fair value option for the assets and liabilities heldlower expenses incurred in the securitization trusts requires the expense to be recognized upfront on the condensed consolidated statements of comprehensive income. We do not expect to incur securitization deal costs going forward.
Other Operating Expenses
For the three and nine months ended September 30, 2017, we recognized $16.5 million and $51.9 million of other operating expenses, which, for the nine months ended September 30, 2017, includes $2.2 million of transaction expenses related to the initial public offering of Granite Point stock. Excluding these transaction expenses, our annualized expense ratio was 1.7% and 1.8% of average common equity for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, we recognized $14.8 million and $47.3 million of other operating expenses, which represents an annualized expense ratio of 1.7% and 1.8% of average common equity, respectively. Our operating expense ratios for the three and nine months ended September 30, 2017 were consistent with those for the the three and nine months ended September 30, 2016.
Included in other operating expenses are direct and allocated costs incurred by PRCM Advisers on our behalf and reimbursed by us. For the three and nine months ended September 30, 2017, these direct and allocated costs totaled approximately $4.8 million and $18.8 million, respectively, compared to $6.3 million and $19.1 million for the same periods in 2016. Included in these reimbursed costs was compensation paid to employees of Pine River serving as our principal financial officer and general counsel of $0.2 million and $1.6 million for the three and nine months ended September 30, 2017 and $0.2 million and $1.6 million for the three and nine months ended September 30, 2016, respectively. The allocation of compensation paid to employees of Pine River serving as our principal financial officer and general counsel is based on time spent overseeing our company’s activities in accordance with the management agreement; we do not reimburse PRCM Advisers for any expenses related to the compensation of our chief executive officer or chief investment officer. Equity based compensation expense for the three and nine months ended September 30, 2017 also includes the amortization of the restricted stock awarded to our executive officers in conjunctionconnection with the Company’s Second Restated 2009 Equity Incentive Plan, or the Plan (see discussion in Note 21 - Equity Incentive Plan), including our chief executive officer, chief investment officer, principal financial officer and general counsel of $2.0 million and $6.4 million, compared to $1.7 million and $5.6 million for the three and nine months ended September 30, 2016, respectively.
We have direct relationshipsongoing litigation with the majority of our third-party vendors. We will continue to have certain costs allocated to us by PRCM Advisers for compensation, data services, technology and certain office lease payments, but most of our expenses with third-party vendors are paid directly by us.
Restructuring Charges
On July 28, 2016, we announced that our board of directors had approved a plan to discontinue our mortgage loan conduit and securitization business. This decision was made due to the challenging market environment facing the business, combined with the intent to reduce operating complexity and costs, and allowed for the reallocation of capital to assets we believe will generate higher returns. The wind down process was completed at the end of 2016. In connection with the closure, we incurred restructuring charges, including termination benefits, contract terminations and other associated costs, of $1.2 million for both the three and nine months ended September 30, 2016.LLC.
Income Taxes
During the three and nine months ended September 30, 2017,March 31, 2024, we recognized a provision for income taxes of $12.0 million, which was primarily due to net income from MSR servicing activity and net gains recognized on MSR, offset by operating expenses incurred in our TRSsTRSs. During the three months ended March 31, 2023, we recognized a benefit from income taxes of $5.3$3.9 million, and $21.1 million, respectively, which was primarily due to realized losses on sales of AFS securities and net losses recognized on MSR and operating expenses incurred, on derivative instruments heldoffset by net income from MSR servicing activity in our TRSs. During the three and nine months ended September 30, 2016, our TRSs recognized a benefit from income taxes of $16.8 million and $26.1 million, respectively, which was primarily due to losses incurred on MSR and derivative instruments held in the TRSs. We currently intend to distribute 100% of our REIT taxable income and comply with all requirements to continue to qualify as a REIT.
Financial Condition
Available-for-Sale Securities, at Fair Value
Agency RMBS
Our Agency RMBSThe majority of our AFS investment securities portfolio is comprised of adjustablefixed rate and fixed rateAgency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $4.0 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. All of our principal and interest (“P&I”)&I Agency RMBS AFS wereare Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, that carry an implied rating of “AAA,” or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. Government.government. The majority of these securities consistour Agency RMBS portfolio is comprised of whole pools in which we own all of the investment interests in the securities.pool certificates.
The tabletables below summarizes certain characteristics of our Agency RMBS AFS at September 30, 2017:March 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (dollars in thousands, except purchase price) | Principal/ Current Face | | Net (Discount) Premium | | Amortized Cost | | Allowance for Credit Losses | | Unrealized Gain | | Unrealized Loss | | Carrying Value | | Weighted Average Coupon Rate | | Weighted Average Purchase Price |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| P&I securities | $ | 8,380,115 | | | $ | 27,259 | | | $ | 8,407,374 | | | $ | — | | | $ | 6,079 | | | $ | (283,136) | | | $ | 8,130,317 | | | 4.82 | % | | $ | 100.70 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest-only securities | 787,501 | | | 55,875 | | | 55,875 | | | (3,217) | | | 620 | | | (5,004) | | | 48,274 | | | 2.11 | % | | $ | 17.03 | |
| Total | $ | 9,167,616 | | | $ | 83,134 | | | $ | 8,463,249 | | | $ | (3,217) | | | $ | 6,699 | | | $ | (288,140) | | | $ | 8,178,591 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (dollars in thousands, except purchase price) | Principal/ Current Face | | Net (Discount) Premium | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Carrying Value | | Weighted Average Coupon Rate | | Weighted Average Purchase Price |
| Principal and interest securities | | | | | | | | | | | | | | | |
| Fixed | $ | 16,286,997 |
| | $ | 1,012,682 |
| | $ | 17,299,679 |
| | $ | 104,544 |
| | $ | (82,774 | ) | | $ | 17,321,449 |
| | 4.06 | % | | $ | 106.62 |
|
| Hybrid ARM | 23,206 |
| | 1,275 |
| | 24,481 |
| | 507 |
| | (28 | ) | | 24,960 |
| | 4.90 | % | | $ | 108.31 |
|
| Total P&I securities | 16,310,203 |
| | 1,013,957 |
| | 17,324,160 |
| | 105,051 |
| | (82,802 | ) | | 17,346,409 |
| | 4.06 | % | | $ | 106.62 |
|
| Interest-only securities | | | | | | | | | | | | | | | |
| Fixed | 351,071 |
| | (297,649 | ) | | 53,422 |
| | 2,452 |
| | (837 | ) | | 55,037 |
| | 3.81 | % | | $ | 17.39 |
|
Fixed Other (1) | 2,641,791 |
| | (2,467,304 | ) | | 174,487 |
| | 12,733 |
| | (34,295 | ) | | 152,925 |
| | 1.56 | % | | $ | 8.80 |
|
| Total | $ | 19,303,065 |
| | $ | (1,750,996 | ) | | $ | 17,552,069 |
| | $ | 120,236 |
| | $ | (117,934 | ) | | $ | 17,554,371 |
| | | | |
____________________
| |
(1) | Fixed Other represents weighted-average coupon interest-only securities that are not generally used for our interest-rate risk management purposes. These securities pay variable coupon interest based on the weighted average of the fixed rates of the underlying loans of the security, less the weighted average rates of the applicable issued principal and interest securities. |
Our three-month average constant prepayment rate, or CPR, experienced by Agency RMBS AFS owned by us as of September 30, 2017, on an annualized basis, was 8.0%.
The following table summarizes the number of months until the next reset for our floating or adjustable rate Agency RMBS AFS portfolio at September 30, 2017:
|
| | | |
| (in thousands) | September 30,
2017 |
| 0-12 months | $ | 24,698 |
|
| 13-36 months | 262 |
|
| Total | $ | 24,960 |
|
Non-Agency Securities
Our non-Agency securities portfolio is comprised of senior and mezzanine tranches of mortgage-backed and asset-backed securities, and excludes the retained interests from our on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table provides investment information on our non-Agency securities as of September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Principal/current face | | Accretable purchase discount | | Credit reserve purchase discount | | Amortized cost | | Unrealized gain | | Unrealized loss | | Carrying value |
| Principal and interest securities | | | | | | | | | | | | | |
| Senior | $ | 2,161,983 |
| | $ | (400,656 | ) | | $ | (401,820 | ) | | $ | 1,359,507 |
| | $ | 335,055 |
| | $ | (602 | ) | | $ | 1,693,960 |
|
| Mezzanine | 1,210,506 |
| | (255,774 | ) | | (123,867 | ) | | 830,865 |
| | 116,082 |
| | (1,500 | ) | | 945,447 |
|
| Total P&I Securities | 3,372,489 |
| | (656,430 | ) | | (525,687 | ) | | 2,190,372 |
| | 451,137 |
| | (2,102 | ) | | 2,639,407 |
|
| Interest-only securities | 165,763 |
| | (159,830 | ) | | — |
| | 5,933 |
| | 45 |
| | (662 | ) | | 5,316 |
|
| Total | $ | 3,538,252 |
| | $ | (816,260 | ) | | $ | (525,687 | ) | | $ | 2,196,305 |
| | $ | 451,182 |
| | $ | (2,764 | ) | | $ | 2,644,723 |
|
The majority of our non-Agency securities were rated at September 30, 2017. Note that credit ratings are based on the par value of the non-Agency securities, whereas the distressed non-Agency securities in our portfolio were acquired at heavily discounted prices. The following table summarizes the credit ratings of our non-Agency securities portfolio, based on the Bloomberg Index Rating, a composite of each of the four major credit rating agencies (i.e., DBRS Ltd., Moody’s Investors Services, Inc., Standard & Poor’s Corporation and Fitch, Inc.), as of September 30, 2017:
|
| | |
| September 30,
2017 |
AAA | — | % |
AA | — | % |
A | — | % |
BBB | 3.1 | % |
BB | 1.2 | % |
B | 3.1 | % |
Below B | 75.5 | % |
Not rated | 17.1 | % |
Total | 100.0 | % |
Within our non-Agency securities portfolio, we have a substantial emphasis on “legacy” securities, which include securities issued up to and including 2009, many of which are subprime. We believe these deeply discounted securities can add relative value as the economy and housing markets continue to improve, as there remains upside optionality to lower delinquencies, higher recoveries and faster prepays. We also hold “new issue” non-Agency securities (issued after 2009), which include commercial mortgage-backed securities, term notes backed by MSR-related collateral and other newly issued non-Agency securities. We believe these “new issue” securities have enabled us to find attractive returns and further diversify our non-Agency securities portfolio.
The following table provides the carrying value of our “legacy” and “new issue” non-Agency securities at September 30, 2017:
|
| | | | | | | |
| | | September 30,
2017 |
| (dollars in thousands) | | Carrying Value | | % of Non-Agency Portfolio |
| “Legacy” non-Agency principal and interest securities | | $ | 2,311,206 |
| | 87.4 | % |
| “Legacy” non-Agency interest-only securities | | 5,316 |
| | 0.2 | % |
| “New issue” non-Agency securities | | 328,201 |
| | 12.4 | % |
| Total | | $ | 2,644,723 |
| | 100.0 | % |
Due to acquisitions of “legacy” non-Agency securities, our designated credit reserve as a percentage of total discount increased slightly from September 30, 2016 to September 30, 2017 (as disclosed in Note 4 - Available-for-Sale Securities, at Fair Value of the notes to the condensed consolidated financial statements). When focused on principal and interest securities, from September 30, 2016 to September 30, 2017, our designated credit reserve as a percentage of total discount increased from 37.1% to 44.5%.
A subprime bond may generally be considered higher risk; however, if purchased at a discount that reflects a high expectation of credit losses, it could be viewed as less risky than a prime bond, which is subject to unanticipated credit loss performance. Accordingly, we believe our risk profile in owning a heavily discounted subprime bond with known delinquencies affords us the ability to assume a higher percentage of expected credit loss with comparable risk-adjusted returns to a less discounted prime bond with a lower percentage of expected credit loss.
The following tables present certain information by investment type and their respective underlying loan characteristics for our “legacy” senior and mezzanine non-Agency securities, excluding our non-Agency interest-only portfolio, at September 30, 2017:
|
| | | | | | | | | | | | |
| | | September 30, 2017 |
| “Legacy” Non-Agency P&I Securities | | Senior | | Mezzanine | | Total |
| Carrying Value (in thousands) | | $ | 1,558,361 |
| | $ | 752,845 |
| | $ | 2,311,206 |
|
| % of Total | | 67.4 | % | | 32.6 | % | | 100.0 | % |
Average Purchase Price (1) | | $ | 57.38 |
| | $ | 65.30 |
| | $ | 59.96 |
|
| Average Coupon | | 2.7 | % | | 2.0 | % | | 2.5 | % |
| Average Fixed Coupon | | 5.9 | % | | 5.4 | % | | 5.8 | % |
| Average Floating Coupon | | 2.4 | % | | 1.9 | % | | 2.2 | % |
| Average Hybrid Coupon | | 3.4 | % | | — | % | | 3.4 | % |
| Collateral Attributes | | | | | | |
| Average Loan Age (months) | | 134 |
| | 142 |
| | 137 |
|
| Average Loan Size (in thousands) | | $ | 369 |
| | $ | 358 |
| | $ | 366 |
|
| Average Original Loan-to-Value | | 69.8 | % | | 69.1 | % | | 69.6 | % |
Average Original FICO (2) | | 634 |
| | 574 |
| | 615 |
|
| Current Performance | | | | | | |
| 60+ day delinquencies | | 22.8 | % | | 20.0 | % | | 21.9 | % |
Average Credit Enhancement (3) | | 8.2 | % | | 15.8 | % | | 10.7 | % |
3-Month CPR (4) | | 5.6 | % | | 8.0 | % | | 6.4 | % |
____________________
| |
(1) | Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for senior, mezzanine, and total “legacy” non-Agency securities, excluding our non-Agency interest-only portfolio, would be $54.87, $62.66 and $57.40, respectively, at September 30, 2017.
|
| |
(2) | FICO represents a mortgage industry accepted credit score of a borrower, which was developed by Fair Isaac Corporation. |
| |
(3) | Average credit enhancement remaining on our “legacy” non-Agency securities portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying collateral. |
| |
(4) | Three-month CPR is reflective of the prepayment speed on the underlying securitization; however, it does not necessarily indicate the proceeds received on our investment tranche. Proceeds received for each security are dependent on the position of the individual security within the structure of each deal. |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (dollars in thousands) | Senior | | Mezzanine | | Total |
| Collateral Type | Carrying Value | | % of Senior | | Carrying Value | | % of Mezzanine | | Carrying Value | | % of Total |
| Prime | $ | 22,196 |
| | 1.4 | % | | $ | 13,944 |
| | 1.9 | % | | $ | 36,140 |
| | 1.6 | % |
| Alt-A | 120,202 |
| | 7.7 | % | | 91,944 |
| | 12.2 | % | | 212,146 |
| | 9.2 | % |
| POA | 90,267 |
| | 5.8 | % | | 144,621 |
| | 19.2 | % | | 234,888 |
| | 10.1 | % |
| Subprime | 1,325,696 |
| | 85.1 | % | | 502,336 |
| | 66.7 | % | | 1,828,032 |
| | 79.1 | % |
| Total | $ | 1,558,361 |
| | 100.0 | % | | $ | 752,845 |
| | 100.0 | % | | $ | 2,311,206 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (dollars in thousands) | Senior | | Mezzanine | | Total |
| Coupon Type | Carrying Value | | % of Senior | | Carrying Value | | % of Mezzanine | | Carrying Value | | % of Total |
| Fixed Rate | $ | 148,690 |
| | 9.5 | % | | $ | 19,901 |
| | 2.6 | % | | $ | 168,591 |
| | 7.3 | % |
| Hybrid or Floating | 1,409,671 |
| | 90.5 | % | | 732,944 |
| | 97.4 | % | | 2,142,615 |
| | 92.7 | % |
| Total | $ | 1,558,361 |
| | 100.0 | % | | $ | 752,845 |
| | 100.0 | % | | $ | 2,311,206 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (dollars in thousands) | Senior | | Mezzanine | | Total |
| Origination Year | Carrying Value | | % of Senior | | Carrying Value | | % of Mezzanine | | Carrying Value | | % of Total |
| 2006 and Thereafter | $ | 1,377,132 |
| | 88.4 | % | | $ | 293,992 |
| | 39.0 | % | | $ | 1,671,124 |
| | 72.3 | % |
| 2002-2005 | 176,427 |
| | 11.3 | % | | 457,378 |
| | 60.8 | % | | 633,805 |
| | 27.4 | % |
| Pre-2002 | 4,802 |
| | 0.3 | % | | 1,475 |
| | 0.2 | % | | 6,277 |
| | 0.3 | % |
| Total | $ | 1,558,361 |
| | 100.0 | % | | $ | 752,845 |
| | 100.0 | % | | $ | 2,311,206 |
| | 100.0 | % |
Commercial Real Estate Assets
Through our controlling interest in Granite Point, we originate and purchase commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as commercial real estate assets on our condensed consolidated balance sheets. Additionally, we are the sole certificate holder of a trust entity that holds a commercial real estate loan. The underlying loan held by the trust is consolidated on our condensed consolidated balance sheet and classified as commercial real estate assets. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Commercial real estate assets are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.
The following tables summarize our commercial real estate assets by asset type, property type and geographic location as of September 30, 2017:
|
| | | | | | | | | | | | | | | |
| | September 30,
2017 |
| (dollars in thousands) | First Mortgages | | Mezzanine Loans | | B-Notes | | Total |
| Unpaid principal balance | $ | 2,041,767 |
| | $ | 132,605 |
| | $ | 14,892 |
| | $ | 2,189,264 |
|
| Unamortized (discount) premium | (174 | ) | | (11 | ) | | — |
| | (185 | ) |
| Unamortized net deferred origination fees | (17,695 | ) | | (40 | ) | | — |
| | (17,735 | ) |
| Carrying value | $ | 2,023,898 |
| | $ | 132,554 |
| | $ | 14,892 |
| | $ | 2,171,344 |
|
| Unfunded commitments | $ | 270,654 |
| | $ | 1,580 |
| | $ | — |
| | $ | 272,234 |
|
| Number of loans | 50 |
| | 6 |
| | 1 |
| | 57 |
|
| Weighted average coupon | 5.6 | % | | 9.1 | % | | 8.0 | % | | 5.9 | % |
Weighted average years to maturity (1) | 2.5 |
| | 1.9 |
| | 9.3 |
| | 2.5 |
|
____________________
| |
(1) | Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. We may also extend contractual maturities in connection with loan modifications. |
|
| | | | | | | |
| (in thousands) | | September 30,
2017 |
| Property Type | | Carrying Value | | % of Commercial Portfolio |
| Office | | $ | 1,133,866 |
| | 52.2 | % |
| Multifamily | | 385,222 |
| | 17.7 | % |
| Retail | | 247,196 |
| | 11.4 | % |
| Hotel | | 209,874 |
| | 9.7 | % |
| Industrial | | 195,186 |
| | 9.0 | % |
| Total | | $ | 2,171,344 |
| | 100.0 | % |
|
| | | | | | | |
| (in thousands) | | September 30,
2017 |
| Geographic Location | | Carrying Value | | % of Commercial Portfolio |
| Northeast | | $ | 924,383 |
| | 42.6 | % |
| West | | 414,612 |
| | 19.1 | % |
| Southwest | | 363,907 |
| | 16.8 | % |
| Southeast | | 350,407 |
| | 16.1 | % |
| Midwest | | 118,035 |
| | 5.4 | % |
| Total | | $ | 2,171,344 |
| | 100.0 | % |
Mortgage Servicing Rights, at Fair Value
One of our wholly owned subsidiaries, Matrix, has approvals from Fannie Mae and Freddie Mac and Ginnie Mae to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. We do not directly service mortgageMatrix acquires MSR from third-party originators through flow and bulk purchases as well as through the recapture of MSR on loans and instead contract with appropriately licensed subservicers to handle substantially all servicing functions for the loans underlyingin our MSR.MSR portfolio that refinance. As of September 30, 2017,March 31, 2024, our MSR had a fair market value of $930.6 million.$3.1 billion.
As of September 30, 2017,March 31, 2024, our MSR portfolio included MSR on 398,580844,869 loans with an unpaid principal balance of approximately $88.8$213.6 billion. During 2016, we sold substantially all of our Ginnie Mae MSR portfolio. The following table summarizes certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at September 30, 2017:March 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| (dollars in thousands) | Number of Loans | | Unpaid Principal Balance | | Weighted Average Gross Coupon Rate | | Weighted Average Current Loan Size | | Weighted Average Loan Age (months) | | Weighted Average Original FICO | | Weighted Average Original LTV | | 60+ Day Delinquencies | | 3-Month CPR | | Net Servicing Fee (bps) |
| 30-Year Fixed: | | | | | | | | | | | | | | | | | | | |
| ≤ 3.25% | 299,570 | | | $ | 94,020,759 | | | 2.8 | % | | $ | 371 | | | 38 | | | 768 | | | 71.0 | % | | 0.4 | % | | 2.9 | % | | 25.1 | |
| > 3.25 - 3.75% | 145,100 | | | 37,407,578 | | | 3.4 | % | | 327 | | | 51 | | | 753 | | | 74.1 | % | | 0.8 | % | | 4.0 | % | | 25.2 | |
| > 3.75 - 4.25% | 104,829 | | | 21,665,686 | | | 3.9 | % | | 272 | | | 73 | | | 752 | | | 75.7 | % | | 1.0 | % | | 4.7 | % | | 25.5 | |
| > 4.25 - 4.75% | 58,640 | | | 10,710,595 | | | 4.4 | % | | 261 | | | 72 | | | 739 | | | 77.3 | % | | 1.9 | % | | 5.2 | % | | 25.3 | |
| > 4.75 - 5.25% | 40,852 | | | 9,577,376 | | | 4.9 | % | | 355 | | | 41 | | | 746 | | | 78.8 | % | | 1.5 | % | | 4.5 | % | | 25.2 | |
| > 5.25% | 64,614 | | | 18,252,578 | | | 6.0 | % | | 384 | | | 21 | | | 746 | | | 80.3 | % | | 1.3 | % | | 5.4 | % | | 26.5 | |
| 713,605 | | | 191,634,572 | | | 3.6 | % | | 345 | | | 45 | | | 758 | | | 73.7 | % | | 0.7 | % | | 3.7 | % | | 25.3 | |
| 15-Year Fixed: | | | | | | | | | | | | | | | | | | | |
| ≤ 2.25% | 22,588 | | | 5,765,007 | | | 2.0 | % | | 301 | | | 35 | | | 777 | | | 59.1 | % | | 0.1 | % | | 2.8 | % | | 25.0 | |
| > 2.25 - 2.75% | 38,118 | | | 7,796,755 | | | 2.4 | % | | 253 | | | 39 | | | 772 | | | 58.8 | % | | 0.2 | % | | 4.1 | % | | 25.0 | |
| > 2.75 - 3.25% | 33,658 | | | 4,398,261 | | | 2.9 | % | | 186 | | | 64 | | | 765 | | | 61.4 | % | | 0.2 | % | | 5.4 | % | | 25.0 | |
| > 3.25 - 3.75% | 19,008 | | | 1,815,588 | | | 3.4 | % | | 146 | | | 77 | | | 756 | | | 64.0 | % | | 0.4 | % | | 7.6 | % | | 25.3 | |
| > 3.75 - 4.25% | 8,872 | | | 725,040 | | | 3.9 | % | | 137 | | | 73 | | | 742 | | | 65.3 | % | | 0.9 | % | | 8.4 | % | | 25.4 | |
| > 4.25% | 6,579 | | | 795,133 | | | 5.0 | % | | 225 | | | 34 | | | 742 | | | 65.2 | % | | 0.8 | % | | 9.3 | % | | 28.0 | |
| 128,823 | | | 21,295,784 | | | 2.6 | % | | 238 | | | 47 | | | 769 | | | 60.3 | % | | 0.2 | % | | 4.7 | % | | 25.2 | |
| Total ARMs | 2,441 | | | 666,524 | | | 4.6 | % | | 364 | | | 56 | | | 760 | | | 71.0 | % | | 1.0 | % | | 12.9 | % | | 25.4 | |
| Total | 844,869 | | | $ | 213,596,880 | | | 3.5 | % | | $ | 335 | | | 45 | | | 759 | | | 72.4 | % | | 0.7 | % | | 3.9 | % | | 25.3 | |
|
| | | |
| | September 30,
2017 |
| Unpaid principal balance (in thousands) | $ | 88,789,765 |
|
| Number of loans | 398,580 |
|
| Average Coupon | 3.9 | % |
| Average Loan Age (months) | 26 |
|
| Average Loan Size (in thousands) | $ | 223 |
|
| Average Original Loan-to-Value | 73.3 | % |
| Average Original FICO | 753 |
|
| 60+ day delinquencies | 0.3 | % |
| 3-Month CPR | 10.1 | % |
Residential Mortgage Loans Held-for-Investment in Securitization Trusts, at Fair Value
We retain subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or our subsidiaries. The underlying residential mortgage loans held by the trusts, which are consolidated on our condensed consolidated balance sheets, are classified as residential mortgage loans held-for-investment in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities to the condensed consolidated financial statements for additional information regarding consolidation of the securitization trusts. As of September 30, 2017, residential mortgage loans held-for-investment in securitization trusts had a carrying value of $3.0 billion.
Residential Mortgage Loans Held-for-Sale, at Fair Value
As of September 30, 2017, we held prime nonconforming residential mortgage loans with a carrying value of $0.5 million. In July 2016, we announced our plan to discontinue our mortgage loan conduit and securitization business. During the remainder of 2016, all remaining commitments to purchase mortgage loans were funded, an additional securitization transaction was completed and substantially all of the remaining prime nonconforming residential loans were sold through whole loan sale transactions. The wind down process was completed at the end of 2016.
We also hold a small legacy portfolio of CSL, which are loans where the borrower has previously experienced payment delinquencies and is more likely to be underwater (i.e., the amount owed on a mortgage loan exceeds the current market value of the home). As a result, there is a higher probability of default than on newly originated residential mortgage loans. As of September 30, 2017, we held CSL with a carrying value of $9.0 million.
Additionally, as the previous owner of MSR on loans from securitizations guaranteed by Ginnie Mae, we were obligated to purchase these loans from time to time in order to complete modifications on the mortgage loans or to convey foreclosed properties to HUD. As of September 30, 2017, we held Ginnie Mae buyout residential mortgage loans with a carrying value of $21.7 million. During 2016, we sold substantially all of our Ginnie Mae MSR portfolio, and we anticipate that the remaining balance will continue to decline.
The following table presents our residential mortgage loans held-for-sale portfolio by loan type as of September 30, 2017:
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (in thousands) | Unpaid Principal Balance | | Fair Value - Purchase Price | | Fair Value - Unrealized | | Carrying Value |
| Prime nonconforming residential mortgage loans | $ | 471 |
| | $ | — |
| | $ | (1 | ) | | $ | 470 |
|
| Credit sensitive residential mortgage loans | 14,746 |
| | (4,012 | ) | | (1,716 | ) | | 9,018 |
|
| Ginnie Mae buyout residential mortgage loans | 23,548 |
| | (1,128 | ) | | (711 | ) | | 21,709 |
|
| Residential mortgage loans held-for-sale | $ | 38,765 |
| | $ | (5,140 | ) | | $ | (2,428 | ) | | $ | 31,197 |
|
Financing
Our borrowings consist primarily of repurchase agreements, FHLB advances and revolving credit facilities, term notes payable and convertible senior notes. Repurchase agreements, revolving credit facilities and term notes payable are collateralized by our pledge of AFS securities, derivative instruments, commercial real estate assets, MSR, servicing advances and certain cash balances. Substantially all of our Agency RMBS are currently pledged as collateral and the majorityfor repurchase agreements. Additionally, a substantial portion of our non-Agency securitiesMSR is currently pledged as collateral for repurchase agreements, revolving credit facilities and commercial real estate assetsterm notes payable, and a portion of our servicing advances have been pledged either throughas collateral for revolving credit facilities. In connection with our securitization of MSR and issuance of term notes payable, a variable funding note, or VFN, was issued to one of our subsidiaries. We have one repurchase agreements or FHLB advances. Additionally, on January 19, 2017, we closed an underwritten public offering of $287.5 million aggregate principal amount offacility that is secured by the VFN, which is collateralized by our MSR. Finally, our convertible senior notes due 2022, which included $37.5 million aggregate principal amount sold to the underwriter of the offering pursuant to an overallotment option. The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses. The majority of these proceeds were used to help fund our MSR assets, which previously had largely been funded with cash.
At September 30, 2017, borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes had the following characteristics:
|
| | | | | | | | | | |
| (dollars in thousands) | | September 30, 2017 |
| Collateral Type | | Amount Outstanding | | Weighted Average Borrowing Rate | | Weighted Average Haircut on Collateral Value |
| Agency RMBS | | $ | 16,859,426 |
| | 1.45 | % | | 4.9 | % |
Non-Agency securities (1) | | 1,865,247 |
| | 2.93 | % | | 27.9 | % |
| Agency Derivatives | | 77,234 |
| | 2.10 | % | | 26.7 | % |
| Commercial real estate assets | | 1,494,247 |
| | 3.52 | % | | 25.3 | % |
| Mortgage servicing rights | | 40,000 |
| | 4.98 | % | | 37.5 | % |
Other (2) | | 282,543 |
| | 6.25 | % | | NA |
|
| Total | | $ | 20,618,697 |
| | 1.81 | % | | 8.6 | % |
____________________
| |
(1) | Includes repurchase agreements and FHLB advances collateralized by retained interests from our on-balance sheet securitizations which are eliminated in consolidation in accordance with U.S. GAAP. |
| |
(2) | Includes unsecured convertible senior notes paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $287.5 million. |
As of September 30, 2017, we had outstanding $18.3 billion of repurchase agreements, and the term to maturity ranged from two days to over 33 months. Repurchase agreements had a weighted average borrowing rate of 1.76% and weighted average remaining maturities of 154 days as of September 30, 2017.
As of September 30, 2017, we had outstanding $2.0 billion of FHLB advances with a weighted average term to maturity of of 133 months, ranging from approximately 19 months to over 18 years. The weighted average cost of funds for our advances was 1.56% at September 30, 2017.
As of September 30, 2017, we had outstanding $40.0 million of short-term borrowings under revolving credit facilities with a weighted average borrowing rate of 4.98% and weighted average remaining maturities of 208 days.
As of September 30, 2017, the outstanding amount due on convertible senior notes was $282.5 million, net of deferred issuance costs. These notes2026 are unsecured and pay interest semiannually at a rate of 6.25% per annum.
At March 31, 2024, borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes had the following characteristics:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | March 31, 2024 | | |
| Borrowing Type | | Amount Outstanding | | Weighted Average Borrowing Rate | | Weighted Average Years to Maturity | | | | | | |
| Repurchase agreements | | $ | 8,361,638 | | | 5.61 | % | | 0.2 | | | | | | | |
| Revolving credit facilities | | 1,357,671 | | | 8.56 | % | | 1.3 | | | | | | | |
| Term notes payable | | 295,520 | | | 8.24 | % | | 0.2 | | | | | | | |
Convertible senior notes (1) | | 268,953 | | | 6.25 | % | | 1.8 | | | | | | | |
| Total | | $ | 10,283,782 | | | 6.09 | % | | 0.4 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | March 31, 2024 | | |
| Collateral Type | | Amount Outstanding | | Weighted Average Borrowing Rate | | Weighted Average Haircut on Collateral Value | | | | | | |
| Agency RMBS | | $ | 8,094,030 | | | 5.51 | % | | 3.7 | % | | | | | | |
| | | | | | | | | | | | |
| Non-Agency securities | | 217 | | | 6.13 | % | | 44.2 | % | | | | | | |
| Agency Derivatives | | 8,414 | | | 6.10 | % | | 18.5 | % | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Mortgage servicing rights | | 1,852,868 | | | 8.50 | % | | 32.1 | % | | | | | | |
| Mortgage servicing advances | | 59,300 | | | 8.49 | % | | 12.9 | % | | | | | | |
| | | | | | | | | | | | |
Other (1) | | 268,953 | | | 6.25 | % | | N/A | | | | | | |
| Total | | $ | 10,283,782 | | | 6.09 | % | | 8.8 | % | | | | | | |
____________________
(1)Includes unsecured convertible senior notes due 2026 paying interest semiannually at a rate of 6.25% per annum and mature in January 2022.on the aggregate principal amount of $287.5 million.
As of September 30, 2017,March 31, 2024, the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR, servicing advances and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 5.0:4.6:1.0. We believeOur Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while MSR, with less liquidity and/or more exposure to prepayment risk, utilize lower levels of leverage. Generally, our debt-to-equity ratio providesis directly correlated to the composition of our portfolio; typically, the higher the percentage of Agency RMBS we hold, the higher our debt-to-equity ratio will be. However, in addition to portfolio mix, our debt-to-equity ratio is a function of many other factors, including the liquidity of our portfolio, the availability and price of our financing, the diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. We may alter the percentage allocation of our portfolio among our target assets depending on the relative value of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from offerings we conduct. We believe the current degree of leverage within our portfolio helps ensure that we have access to unused borrowing capacity, and, thus improvessupporting our liquidity and the strength of our balance sheet.
The following table provides the quarterly average balances, the quarter-end balances, and the maximum balances at any month-end within that quarterly period,a summary of our borrowings under repurchase agreements FHLB advances,(excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes and our debt-to-equity ratios for the three months ended September 30, 2017, March 31, 2024, and the four immediately preceding quarters:
|
| | | | | | | | | | | | | |
| (dollars in thousands) | Quarterly Average (1) | | End of Period Balance (1) | | Maximum Balance of Any Month-End (1) | | End of Period Total Borrowings to Equity Ratio |
| For the Three Months Ended September 30, 2017 | $ | 19,207,645 |
| | $ | 20,618,697 |
| | $ | 20,618,697 |
| | 5.0:1.0 |
| For the Three Months Ended June 30, 2017 | $ | 17,156,888 |
| | $ | 16,877,933 |
| | $ | 17,521,935 |
| | 4.5:1.0 |
| For the Three Months Ended March 31, 2017 | $ | 15,297,535 |
| | $ | 17,509,745 |
| | $ | 17,509,745 |
| | 4.9:1.0 |
| For the Three Months Ended December 31, 2016 | $ | 14,492,271 |
| | $ | 13,386,351 |
| | $ | 15,636,929 |
| | 3.9:1.0 |
| For the Three Months Ended September 30, 2016 | $ | 14,098,192 |
| | $ | 14,667,373 |
| | $ | 14,667,373 |
| | 4.2:1.0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | | | | | | | | | | | |
| For the Three Months Ended | | Quarterly Average | | End of Period Balance | | Maximum Balance of Any Month-End | | End of Period Total Borrowings to Equity Ratio | | End of Period Net Long (Short) TBA Cost Basis | | End of Period Net Payable (Receivable) for Unsettled RMBS | | End of Period Economic Debt-to-Equity Ratio (1) |
| March 31, 2024 | | $ | 10,153,275 | | | $ | 10,283,782 | | | $ | 10,352,896 | | | 4.6:1.0 | | $ | 3,421,932 | | | $ | (213,264) | | | 6.0:1.0 |
| December 31, 2023 | | $ | 10,449,060 | | | $ | 9,913,231 | | | $ | 10,984,022 | | | 4.5:1.0 | | $ | 3,170,548 | | | $ | 196,644 | | | 6.0:1.0 |
| September 30, 2023 | | $ | 11,058,648 | | | $ | 11,087,145 | | | $ | 11,138,859 | | | 5.2:1.0 | | $ | 2,147,540 | | | $ | — | | | 6.3:1.0 |
| June 30, 2023 | | $ | 10,820,230 | | | $ | 11,189,689 | | | $ | 11,189,689 | | | 5.0:1.0 | | $ | 2,905,852 | | | $ | 54,739 | | | 6.4:1.0 |
| March 31, 2023 | | $ | 10,354,624 | | | $ | 11,058,709 | | | $ | 11,162,257 | | | 4.8:1.0 | | $ | 3,644,540 | | | $ | — | | | 6.5:1.0 |
____________________
| |
(1) | Includes borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes and excludes collateralized borrowings in securitization trusts. |
(1)Defined as total borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity.
Collateralized Borrowings in Securitization Trusts, at Fair Value
We retain subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or our subsidiaries. The underlying debt held by the trusts, which is consolidated on our condensed consolidated balance sheets, is classified as collateralized borrowings in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities to the condensed consolidated financial statements for additional information regarding consolidation of the securitization trusts. As of September 30, 2017, collateralized borrowings in securitization trusts had a carrying value of $2.8 billion with a weighted average interest rate of 3.4%. The stated maturity dates for all collateralized borrowings were greater than five years from September 30, 2017.
Net Economic Interests in Consolidated Securitization Trusts
The net of the underlying residential mortgage loans and the debt held by the securitization trusts discussed above represents the carrying value of the securities that we retained from these securitizations. Because we consolidate these securitization trusts on our condensed consolidated balance sheets, our retained interests are eliminated in consolidation in accordance with U.S. GAAP. However, the carrying value, characteristics and performance of these securities and those of the underlying collateral are relevant to our portfolio as a whole.Equity
The following table presents the carrying value and coupon of our net economic interests in consolidated securitization trusts and certain attributes of the underlying collateral as of September 30, 2017:
|
| | | |
| | September 30,
2017 |
| Carrying Value (in thousands) | $ | 241,906 |
|
| Average Coupon | 3.0 | % |
| Collateral Attributes | |
| Average Loan Age (months) | 33 |
|
| Average Loan Size (in thousands) | $ | 807 |
|
| Average Original Loan-to-Value | 64.7 | % |
| Average Original FICO | 772 |
|
| Current Performance | |
| 60+ day delinquencies | 0.04 | % |
The following table summarizes the carrying values and credit ratings of our net economic interests in consolidated securitization trusts, based on a composite of credit ratings received from DBRS Ltd., Standard & Poor’s Corporation and/or Fitch, Inc. upon issuance of the securities, as of September 30, 2017:
|
| | | | | | |
| | September 30,
2017 |
| (dollars in thousands) | Carrying Value | | % of Retained Portfolio |
| AAA | $ | 31,825 |
| | 13.2 | % |
| AA | 36,304 |
| | 15.0 | % |
| A | 27,602 |
| | 11.4 | % |
| BBB | 46,359 |
| | 19.2 | % |
| BB | 34,917 |
| | 14.4 | % |
| B | — |
| | — | % |
| Below B | — |
| | — | % |
| Not rated | 64,899 |
| | 26.8 | % |
| Total | $ | 241,906 |
| | 100.0 | % |
Equity
The table below provides details of our changes in stockholders’ equity from June 30, 2017December 31, 2023 to September 30, 2017. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.March 31, 2024.
| | | | | | | | | | | | | | | | | |
| (in millions, except per share amounts) | Book Value | | Common Shares Outstanding | | Common Book Value Per Share |
| Common stockholders’ equity at December 31, 2023 | $ | 1,569.5 | | | 103.2 | | | $ | 15.21 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net income | 203.6 | | | | | |
| Other comprehensive loss | (103.0) | | | | | |
| Comprehensive income | 100.6 | | | | | |
| Dividends on preferred stock | (11.8) | | | | | |
| Gain on repurchase and retirement of preferred stock | 0.6 | | | | | |
| Comprehensive income attributable to common stockholders | 89.4 | | | | | |
| Dividends on common stock | (47.1) | | | | | |
| Other | 6.1 | | | 0.3 | | | |
| Balance before capital transactions | 1,617.9 | | | 103.5 | | | |
| Repurchase and retirement of preferred stock | 0.4 | | | | | |
| | | | | |
| | | | | |
| Common stockholders’ equity at March 31, 2024 | $ | 1,618.3 | | | 103.5 | | | $ | 15.64 | |
| Total preferred stock liquidation preference | 621.8 | | | | | |
| Total stockholders’ equity at March 31, 2024 | $ | 2,240.1 | | | | | |
|
| | | | | | | | | | |
| (dollars in millions, except per share amounts) | Book Value | | Common Shares Outstanding | | Common Book Value Per Share |
| Common stockholders' equity at June 30, 2017 | $ | 3,444.6 |
| | 174.5 |
| | $ | 19.74 |
|
| Reconciliation of non-GAAP measures to GAAP net income and Comprehensive income: | | | | | |
| Core Earnings, net of tax expense of $2.0 million ⁽¹⁾⁽²⁾ | 98.1 |
| | | | |
| Dividends on preferred stock | (8.9 | ) | | | | |
| Core Earnings attributable to common stockholders, net of tax expense of $2.0 million ⁽¹⁾⁽²⁾ | 89.2 |
| | | | |
| Realized and unrealized gains and losses, net of tax benefit of $7.3 million | 4.0 |
| | | | |
| GAAP net income | 93.2 |
| | | | |
| Other comprehensive income, net of tax | 68.4 |
| | | | |
| Comprehensive income | 161.6 |
| | | | |
| Dividend declaration | (90.7 | ) | | | | |
| Other | 4.1 |
| | — |
| | |
| Balance before capital transactions | 3,519.6 |
| | 174.5 |
| | |
| Preferred stock issuance costs | (9.4 | ) | | | | |
| Issuance of common stock, net of offering costs | 0.1 |
| | — |
| | |
| Common stockholders' equity at September 30, 2017 | $ | 3,510.3 |
| | 174.5 |
| | $ | 20.12 |
|
| Total preferred stock liquidation preference | 431.3 |
| | | | |
| Noncontrolling interest | 189.8 |
| | | | |
| Total equity at September 30, 2017 | $ | 4,131.4 |
| | | | |
____________________
| |
(1) | Core Earnings is a non-U.S. GAAP measure that we define as comprehensive income attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, realized and unrealized gains or losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, certain upfront costs related to securitization transactions, non-cash compensation expense related to restricted common stock, restructuring charges and transaction costs related to Granite Point’s initial public offering). As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. We believe the presentation of Core Earnings provides investors greater transparency into our period-over-period financial performance and facilitates comparisons to peer REITs. |
| |
(2) | For the three months ended September 30, 2017, Core Earnings excludes our controlling interest in Granite Point’s Core Earnings and includes our share of Granite Point’s declared dividend. We believe this presentation is the most accurate reflection of our incoming cash associated with holding shares of Granite Point common stock and assists with the understanding of the forward-looking financial presentation of the company. |
Issuance of Preferred Stock
On March 14, 2017, we issued 5,000,000 shares of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share. On March 21, 2017, an additional 750,000 shares were sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 8.125% per annum of the $25.00 liquidation preference. On and after April 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.66% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to our common stock and on parity with our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the company. Under certain circumstances upon a change of control, the preferred stock is convertible into shares of our common stock. The preferred stock will not be redeemable before April 27, 2027, except under certain limited circumstances. On or after April 27, 2027, we may, at our option, redeem, in whole or in part, at any time or from time to time, the preferred stock at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $138.9 million, after deducting underwriting discounts and estimated offering expenses payable by us.
On July 19, 2017, we issued 11,500,000 shares of 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share, which included 1,500,000 shares sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 7.625% per annum of the $25.00 liquidation preference. On and after July 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.352% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to our common stock and on parity with our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the company. Under certain circumstances upon a change of control, the preferred stock is convertible into shares of our common stock. The preferred stock will not be redeemable before July 27, 2027, except under certain limited circumstances. On or after July 27, 2027, we may, at our option, redeem, in whole or in part, at any time or from time to time, the preferred stock at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $278.1 million, after deducting underwriting discounts and estimated offering expenses payable by us.
Noncontrolling Interest
On June 28, 2017, we completed the contribution of our portfolio of commercial real estate assets to Granite Point. We contributed our equity interests in our wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for our contribution, received approximately 33.1 million shares of common stock of Granite Point, representing approximately 76.5% of the outstanding stock of Granite Point upon completion of the IPO of its common stock on June 28, 2017. In connection with the Granite Point IPO, we agreed, subject to certain conditions, to purchase up to $20 million of Granite Point common stock in the open market at designated prices below Granite Point’s publicly reported book value pursuant to a share purchase program that ended on November 1, 2017. During the three and nine months ended September 30, 2017, we purchased 285,662 shares of Granite Point common stock under the program for a total cost of $5.4 million.
Due to our controlling ownership interest in Granite Point during the periods presented, we consolidate Granite Point on our financial statements and reflect noncontrolling interest for the portion of equity and comprehensive income not attributable to us. During the three and nine months ended September 30, 2017, in accordance with ASC 810, Consolidation, the carrying amount of noncontrolling interest was adjusted to reflect (i) changes in our ownership interest in Granite Point as a result of the purchases of Granite Point common stock discussed above and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to us, with the offset to equity.
As of November 1, 2017, we no longer have a controlling interest in Granite Point and, therefore, will prospectively deconsolidate the financial condition and results of operations of Granite Point and its subsidiaries from our financial statements.
Liquidity and Capital Resources
Our liquidity and capital resources are managed and forecastforecasted on a daily basis. We believe this ensures that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls, andcalls. We also believe that we haveit gives us the flexibility to manage our portfolio to take advantage of market opportunities.
Our principal sources of cash consist of borrowings under repurchase agreements, FHLB advances, revolving credit facilities, term notes payable, payments of principal and interest we receive on our target assets, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our repurchase agreements, FHLB advances and revolving credit facilities,borrowings, to purchase our target assets, to make dividend payments on our capital stock, and to fund our operations.
To the extent that we raise additional equity capital through capital market transactions, we anticipate using cash proceeds from such transactions to purchase additional Agency RMBS, non-Agency securities, MSR and otherour target assets and for other general corporate purposes. WeSuch general corporate purposes may include in the following discussionrefinancing or repayment of debt, the liquidityrepurchase or redemption of common and preferred equity securities, and other capital resourcesexpenditures.
As of September 30, 2017,March 31, 2024, we held $539.4$666.2 million in cash and cash equivalents available to support our operations; $26.6$11.3 billion of AFS securities, commercial real estate assets, MSR, residential mortgage loans held-for-investment in securitization trusts, residential mortgage loans held-for-sale and derivative assets held at fair value; and $23.4$10.3 billion of outstanding debt in the form of repurchase agreements, FHLB advances, borrowings under revolving credit facilities, term notes payable and convertible senior notes and collateralized borrowings in securitization trusts.notes. During the three months ended September 30, 2017, our total consolidated debt-to-equity ratio increased from 5.2:1.0 to 5.7:1.0. TheMarch 31, 2024, the debt-to-equity ratio funding our AFSAgency and non-Agency investment securities, commercial real estate assets, MSR and Agency Derivatives only,servicing advances, which includes unsecured borrowings under convertible senior notes, also increased from 4.5:1.0 to 5.0:4.6:1.0, predominantlywhich was driven by the purchase of and increaseda slight increase in financing on AFS securities and commercial real estate assets. We believeAgency RMBS. During the three months ended March 31, 2024, our economic debt-to-equity ratio funding our AFSAgency and non-Agency investment securities, commercial real estate assets, MSR and Agency Derivatives is the most meaningful debt-to-equity measure as collateralizedservicing advances, which includes unsecured borrowings under convertible senior notes, implied debt on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity.net TBA cost basis and net payable (receivable) for unsettled RMBS, remained consistent at 6.0:1.0.
As of September 30, 2017,March 31, 2024, we held approximately $1.9$1.0 million of unpledged Agency securitiesRMBS and derivatives and $223.7$3.6 million of unpledged non-Agency securities and retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.securities. As a result, we had an overall estimated unused borrowing capacity on unpledged securities and retained interests of approximately $145.6$3.0 million. We also held approximately $89.2 million of unpledged mezzanine commercial real estate loans and $51.5 million of unpledged commercial real estate first mortgages, and had an overall estimated unused borrowing capacity on unpledged commercial real estate assets of approximately $82.2 million, which may be used to fund Granite Point’s target assets. As of September 30, 2017,March 31, 2024, we held approximately $770.0$42.5 million of unpledged MSR and $9.5 million of unpledged servicing advances. Overall, on March 31, 2024, we had an overall estimated$135.4 million unused committed and $466.3 million unused uncommitted borrowing capacity on unpledged MSR of approximately $50.0 million. We also held approximately $31.2financing facilities, and $140.7 million of unpledged residential mortgage loans held-for-sale, for which we had noin unused committed borrowing capacity.capacity on servicing advance financing facilities. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes. On a daily basis, we monitor and forecast our available, or excess, liquidity. Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity. If borrowing rates and/or collateral requirements change in the near term, we believe we are subject to less earnings volatility than a more leveraged organization.
During the ninethree months ended September 30, 2017,March 31, 2024, we did not experience any restrictions tomaterial issues accessing our funding sources, although balance sheet capacity of counterparties have tightened due to compliance with the Basel III regulatory capital reform rules as well as management of perceived risk in the volatile interest rate environment.sources. We expect ongoing sources of financing to be primarily repurchase agreements, FHLB advances, revolving credit facilities, term notes payable, convertible notes and similar financing arrangements. We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.
As of September 30, 2017,March 31, 2024, we had master repurchase agreements in place with 3337 counterparties (lenders), the majority of which are U.S. domiciled financial institutions, and we continue to evaluate additional counterparties to manage and reduceoptimize counterparty risk. Under our repurchase agreements, we are required to pledge additional assets as collateral to our lenders when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders, through a margin call, demand additional collateral. Lenders generally make margin calls because of a perceived decline in the value of our assets collateralizing the repurchase agreements. This may occur following the monthly principal reduction of assets due to scheduled amortization and prepayments on the underlying mortgages, or may be caused by changes in market interest rates, a perceived decline in the market value of the investments and other market factors. To cover a margin call, we may pledge additional securitiesassets or cash. At maturity, any cash on deposit as collateral is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed. Should the value of our assets suddenly decrease, significant margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
The following table summarizes our repurchase agreements and counterparty geographical concentration at September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (dollars in thousands) | Amount Outstanding | | Net Counterparty Exposure(1) | | Percent of Funding | | Amount Outstanding | | Net Counterparty Exposure(1) | | Percent of Funding |
| North America | $ | 9,958,346 |
| | $ | 1,443,661 |
| | 67.1 | % | | $ | 4,916,309 |
| | $ | 965,621 |
| | 67.3 | % |
Europe (2) | 5,729,340 |
| | 565,723 |
| | 26.3 | % | | 2,617,372 |
| | 355,060 |
| | 24.7 | % |
Asia (2) | 2,609,706 |
| | 142,758 |
| | 6.6 | % | | 1,782,670 |
| | 114,720 |
| | 8.0 | % |
| Total | $ | 18,297,392 |
| | $ | 2,152,142 |
| | 100.0 | % | | $ | 9,316,351 |
| | $ | 1,435,401 |
| | 100.0 | % |
____________________
| |
(1) | Represents the net carrying value of the securities and commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest. Payables due to broker counterparties for unsettled securities purchases of $17.9 million are not included in the September 30, 2017 amounts presented above. The Company did not have any such payables at December 31, 2016. |
| |
(2) | Exposure to European and Asian domiciled banks and their U.S. subsidiaries. |
In addition to our master repurchase agreements tothat fund our Agency RMBS,and non-Agency securities and commercial real estate assets,as well as any repurchased MSR term note bonds (originally issued by our subsidiaries), we have sixone repurchase facility and three revolving credit facilities that provide short- and long-term financing for our commercial real estate assets and twoMSR portfolio. We also have one revolving credit facilitiesfacility that provide short-termprovides long-term financing for our servicing advances. A summary of our MSR portfolio. An overview of theand servicing advance facilities is presentedprovided in the table below:
|
| | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | | | | | |
| September 30, 2017 |
Expiration Date (1) | | Committed | | Amount Outstanding | | Unused Capacity | | Total Capacity | | Eligible Collateral |
| June 28, 2019 | | No | | $ | 330,024 |
| | $ | 169,976 |
| | $ | 500,000 |
| | Commercial real estate assets |
June 28, 2020 (2) | | No | | $ | 397,464 |
| | $ | 102,536 |
| | $ | 500,000 |
| | Commercial real estate assets |
June 28, 2019 (3) | | No | | $ | 447,840 |
| | $ | 25,955 |
| | $ | 473,795 |
| | Commercial real estate assets |
| May 2, 2019 | | No | | $ | 158,236 |
| | $ | 91,764 |
| | $ | 250,000 |
| | Commercial real estate assets |
| June 28, 2020 | | No | | $ | 107,291 |
| | $ | 142,709 |
| | $ | 250,000 |
| | Commercial real estate assets |
October 26, 2017 (4) | | No | | $ | — |
| | $ | 100,000 |
| | $ | 100,000 |
| | Commercial real estate assets |
| September 1, 2018 | | No | | $ | 20,000 |
| | $ | 30,000 |
| | $ | 50,000 |
| | Mortgage servicing rights |
| December 18, 2017 | | No | | $ | 20,000 |
| | $ | 20,000 |
| | $ | 40,000 |
| | Mortgage servicing rights |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | | | | | | |
| March 31, 2024 |
Expiration Date (1) | | Amount Outstanding | | Unused Committed Capacity (2) | | Unused Uncommitted Capacity | | Total Capacity | | Eligible Collateral |
| March 31, 2025 | | $ | 683,731 | | | $ | — | | | $ | 216,269 | | | $ | 900,000 | | | Mortgage servicing rights |
| March 8, 2027 | | $ | 292,140 | | | $ | 57,860 | | | $ | 150,000 | | | $ | 500,000 | | | Mortgage servicing rights (3) |
| September 30, 2024 | | $ | 322,500 | | | $ | 77,500 | | | $ | — | | | $ | 400,000 | | | Mortgage servicing rights |
| October 25, 2024 | | $ | 200,000 | | | $ | — | | | $ | 100,000 | | | $ | 300,000 | | | Mortgage servicing rights (4) |
| September 28, 2024 | | $ | 59,300 | | | $ | 140,700 | | | $ | — | | | $ | 200,000 | | | Mortgage servicing advances |
____________________
| |
(1) | The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms. |
| |
(2) | Includes an option, to be exercised at the Company’s discretion, to increase the maximum(1)The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms. (2)Represents unused capacity amounts to which commitment fees are charged. (3)The revolving period of this facility ceases on March 8, 2026, at which time the facility starts a 12-month amortization period. (4)This repurchase facility amount to $600.0 million, subject to certain customary conditions contained in the agreement. |
| |
(3) | Fixed pool of assets after ramp-up period. |
| |
(4) | This facility is a short-term bridge facility. |
Our wholly owned subsidiary, TH Insurance, is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances. As of September 30, 2017, TH Insurance had $2.0 billion in outstanding secured advances with a weighted average borrowing rate of 1.56%, and an additional $1.4 billion of available uncommitted capacity for borrowings. To the extent TH Insurance has uncommitted capacity, it may be adjusted at the sole discretion of the FHLB.
The ability to borrow from the FHLB is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collaterala VFN issued in accordanceconnection with the FHLB’s credit and collateral guidelines, as may be revised from time to timeour securitization of MSR, which is collateralized by the FHLB. Eligible collateral may include conventional 1-4 family residential mortgage loans, commercial real estate loans, Agency RMBS and certain non-Agency securities with a rating of A and above.our MSR.
In January 2016, the FHFA released a final rule regarding membership in the Federal Home Loan Bank system. Among other effects, the final rule excludes captive insurers from membership eligibility, including our subsidiary member, TH Insurance. Since TH Insurance was admitted as a member in 2013, it is eligible for a membership grace period that shall run through February 19, 2021, during which new advances or renewals that mature beyond the grace period will be prohibited; however, any existing advances that mature beyond this grace period will be permitted to remain in place subject to their terms insofar as we maintain good standing with the FHLB. If any new advances or renewals occur, TH Insurance’s outstanding advances will be limited to 40% of its total assets. Notwithstanding the FHFA’s ruling, we continue to believe our mission aligns well with that of the Federal Home Loan Bank system.
We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across theour lending agreements as of September 30, 2017:March 31, 2024:
•Total indebtedness to tangible net worth must be less than the specified threshold ratio in the repurchase agreement.8.0:1.0. As of September 30, 2017,March 31, 2024, our debttotal indebtedness to tangible net worth, as defined, was 5.7:1.0 while our threshold ratio, as defined, was 6.0:4.8:1.0.
Liquidity•Cash liquidity must be greater than $100.0$200.0 million. As of September 30, 2017,March 31, 2024, our liquidity, as defined, was $1.2 billion.$666.2 million.
•Net worth must be greater than $1.75 billion.the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior. As of September 30, 2017,March 31, 2024, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.3 billion and our net worth, as defined, was $4.1$2.2 billion.
Interest coverage must not be less than 2.0:1.0. As of September 30, 2017, our interest coverage ratio, as defined, was 2.2:1.0.
Subsequent to September 30, 2017, the debt to net worth and threshold ratios were redefined with all counterparties. Under the new definitions, our debt to net worth, as defined, would have been 5.0:1.0 and our threshold ratio, as defined, would have been 6.5:1.0 as of September 30, 2017.
We are also subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants.
The following table summarizes assets at carrying values that arewere pledged or restricted as collateral for the future payment obligations of repurchase agreements, FHLB advances and revolving credit facilities.facilities, term notes payable and derivative instruments at March 31, 2024 and December 31, 2023:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Available-for-sale securities, at fair value | $ | 8,178,289 | | | $ | 8,126,028 | |
| | | |
| | | |
| | | |
| Mortgage servicing rights, at fair value | 3,042,334 | | | 3,047,890 | |
| | | |
| | | |
| Restricted cash | 26,572 | | | 12,575 | |
| Due from counterparties | 237,711 | | | 36,420 | |
| Derivative assets, at fair value | 9,546 | | | 11,877 | |
| Other assets | 93,852 | | | 79,749 | |
| | | |
| Total | $ | 11,588,304 | | | $ | 11,314,539 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Available-for-sale securities, at fair value | $ | 19,989,068 |
| | $ | 13,117,330 |
|
| Commercial real estate assets | 2,030,703 |
| | 1,357,874 |
|
| Mortgage servicing rights, at fair value | 160,635 |
| | 180,948 |
|
Net economic interests in consolidated securitization trusts (1) | 226,434 |
| | 213,110 |
|
| Cash and cash equivalents | 14,796 |
| | 15,000 |
|
| Restricted cash | 149,844 |
| | 162,759 |
|
| Due from counterparties | 23,602 |
| | 48,939 |
|
| Derivative assets, at fair value | 101,187 |
| | 126,341 |
|
| Total | $ | 22,696,269 |
| | $ | 15,222,301 |
|
____________________
| |
(1) | Includes the retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP. |
Although we generally intend to hold our target assets as long-term investments, we may sell certain of our assets in order to manage our interest rate risk and liquidity needs, to meet other operating objectives and to adapt to market conditions. Our Agency RMBS and non-Agency securities are generally actively traded and thus, in most circumstances, readily liquid. However, certain of our assets, including commercial real estate assets, MSR, and residential mortgage loans, are subject to longer trade timelines, and, as a result, market conditions could significantly and adversely affect the liquidity of our assets. Any illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. Our ability to quickly sell certain assets, such as commercial real estate assets, MSR, and residential mortgage loans, may be limited by delays encountered while obtaining certain regulatoryAgency approvals required for such dispositions and may be further limited by delays due to the time period needed for negotiating transaction documents, conducting diligence, and complying with regulatoryAgency requirements regarding the transfer of such assets before settlement may occur. Consequently, even if we identify a buyer for our commercial real estate assets, MSR, and residential mortgage loans, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.
In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition.
We cannot predict the timing and impact of future sales of our assets, if any. Because many of our assets are financed with repurchase agreements, and FHLB advances, and may be financed withrevolving credit facilities (includingand term loans and revolving facilities),notes payable, a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization are used to repay balances under these financing sources.
The following table provides the maturities of our repurchase agreements, FHLB advances, revolving credit facilities, term notes payable and convertible senior notes as of September 30, 2017March 31, 2024 and December 31, 2016:2023:
| | | | | | | | | | | |
| (in thousands) | March 31,
2024 | | December 31,
2023 |
| Within 30 days | $ | 2,329,047 | | | $ | 2,833,162 | |
| 30 to 59 days | 1,367,028 | | | 1,918,818 | |
| 60 to 89 days | 1,318,517 | | | 2,059,438 | |
| 90 to 119 days | 702,452 | | | 994,789 | |
| 120 to 364 days | 3,321,914 | | | 833,571 | |
| One to three years | 1,244,824 | | | 1,273,453 | |
| | | |
| | | |
| | | |
| | | |
| Total | $ | 10,283,782 | | | $ | 9,913,231 | |
|
| | | | | | | |
| (in thousands) | September 30,
2017 | | December 31,
2016 |
| Within 30 days | $ | 3,167,517 |
| | $ | 3,286,783 |
|
| 30 to 59 days | 2,911,829 |
| | 2,376,002 |
|
| 60 to 89 days | 20,000 |
| | 1,365,394 |
|
| 90 to 119 days | 3,298,633 |
| | 1,504,056 |
|
| 120 to 364 days | 7,498,558 |
| | 1,319,720 |
|
| One to three years | 2,255,879 |
| | 1,000,658 |
|
| Three to five years | 282,543 |
| | — |
|
| Five to ten years | — |
| | — |
|
| Ten years and over | 1,183,738 |
| | 2,533,738 |
|
| Total | $ | 20,618,697 |
| | $ | 13,386,351 |
|
For the three months ended September 30, 2017, March 31, 2024, our restricted and unrestricted cash balance decreased approximately $18.3$56.4 million to $883.2$738.4 million at September 30, 2017.March 31, 2024. The cash movements can be summarized by the following:
•Cash flows from operating activities. For the three months ended September 30, 2017, March 31, 2024, operating activities increaseddecreased our cash balances by approximately $142.4$8.7 million, primarily driven by our financial results for the quarter.
•Cash flows from investing activities. For the three months ended September 30, 2017, March 31, 2024, investing activities decreased our cash balances by approximately $4.0 billion, primarily$347.7 million, driven by net purchases of AFS securities commercial real estate assets(including some fourth quarter purchases that settled during the first quarter) and MSR.
MSR, payments to counterparties for margin calls, net payments for reverse repurchase agreements, and the final payment made to Freedom for our acquisition of RoundPoint, offset by net sales/short sales of derivative instruments.•Cash flows from financing activities. For the three months ended September 30, 2017, March 31, 2024, financing activities increased our cash balance by approximately $3.8 billion,$300.0 million, primarily driven by proceeds froman increase in repurchase agreementsagreement and our secondrevolving credit facility financing, offset by repurchases of preferred stock offering, offset byand the repaymentpayment of a portion of our outstanding FHLB advances.
dividends.
Inflation
Substantially all of ourOur assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation.inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Our financial statements are prepared in accordance with U.S. GAAP and dividends are based upon net ordinary income and capital gains as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while providing an opportunity to stockholders to realize attractive risk-adjusted total return through ownership of our capital stock. Although we do not seek to avoid risk completely, we believe that risk can be quantified from historical experience, and we seek to manage our risk levels in order to earn sufficient compensation to justify the risks we undertake and to maintain capital levels consistent with taking such risks.
To reducemanage the risks to our portfolio, we employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations. Risk management tools include software and services licensed or purchased from third parties as well as proprietary and third-party analytical tools and models. There can be no guarantee that these tools and methods will protect us from market risks.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and related financing obligations.
Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate risk management techniques that seek to mitigate the influence of interest rate changes on the values of our assets.
We may enter 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 our floating-rate borrowings into fixed-rate borrowings to more closely match the duration of our assets. This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (i.e., LIBOR)OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchaseborrowing agreement or FHLB advance 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 our portfolio as well as our cash flows, we may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps, credit default swaps and total return swaps. In executing on the Company’sour current interest rate risk management strategy, the Company haswe have entered into TBAs, put and call options for TBAs, interest rate swap and swaption agreements, futures and Markit IOS total return swaps.options on futures. In addition, because MSR are negative duration assets, they may provide a natural hedge to interest rate exposure on our Agency RMBS portfolio. In hedging interest rate risk, we seek to reducemitigate the riskimpact of losseschanging interest rates on the value of our investments, that may result from changes in interest rates in the broader markets, improve risk-adjusted returns and, where possible, obtain a favorable spread between the yield on our assets and the cost of our financing. Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future interest rates.
Income of a REIT income arising from “clearly identified” hedging transactions that are entered into to manage the risk of interest rate or price changes with respect to borrowings, including gain from the disposition of such hedging transactions, to the extent the hedging transactions hedge indebtedness incurred, or to be incurred, by the REIT to acquire or carry real estate assets, will not be treated as gross income for purposes of the either the 75% or the 95% gross income tests. In general, for a hedging transaction to be “clearly identified,” (i) it must be identified as a hedging transaction before the end of the day on which it is acquired, originated, or entered into;into, and (ii) the items of risks being hedged must be identified “substantially contemporaneously” with entering into the hedging transaction (generally not more than 35 days after entering into the hedging transaction). We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT, although this determination depends on an analysis of the facts and circumstances concerning each hedging transaction. We also implement part of our hedging strategy through our TRSs, which are subject to U.S. federal, state and, if applicable, local income tax.
We treat our TBAs as qualifying assets for purposes of the 75% asset test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% asset test, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS. We also treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yieldscoupon interest earned on our existing portfolio of leveraged fixed-rate Agency RMBS and non-Agency securities and residential mortgage loans held-for-sale will remain static. Moreover, interest rates may rise at a faster pace than the yields earned on our leveraged adjustable-rate and hybrid securities and adjustable-rate residential mortgage loans held-for-sale. Both of these factors could result in a decline in our net interest spread and net interest margin. The inverse result may occur during a period of falling interest rates. The severity of any such decline or increase in our net interest spread and net interest margin would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.decrease.
Our hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investment will be longer or shorter, which could reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
We acquire adjustable-rate and hybrid Agency RMBS and non-Agency securities. These are assets in which some of the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which may limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements are not subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation, while the interest-rate yields on our adjustable-rate and hybrid securities could effectively be limited by caps. This issue will be magnified to the extent we acquire adjustable-rate and hybrid securities that are not based on mortgages that are fully indexed. In addition, adjustable-rate and hybrid securities may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. If this happens, we could receive less cash income on such assets than we would need to pay for interest costs on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.
Our adjustable-rate residential mortgage loans held-for-sale are typically subject to periodic and lifetime interest rate caps and floors, which may limit the amount by which the loan’s interest yield may change during any given period. Therefore, in a period of increasing interest rates, the interest-rate yields on our adjustable-rate residential mortgage loans held-for-sale could effectively be limited by caps.
Interest Rate Mismatch Risk
We fund the majority of our adjustable-rate and hybrid Agency RMBS and non-Agency securities and adjustable-rate commercial real estate assets with borrowings thatrisks are based on LIBOR, while the interest rates on these assets may be indexed to other index rates, such as the one-year Constant Maturity Treasury index, or CMT, the Monthly Treasury Average index, or MTA, or the 11th District Cost of Funds Index, or COFI. Accordingly, any increase in LIBOR relative to these indices may result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these assets. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders. To mitigate interest rate mismatches, we utilize the hedging strategies discussed above.
The following table provides the indices of our variable rate Agency RMBS, non-Agency securities, commercial real estate assets and residential mortgage loans held-for-sale of September 30, 2017 and December 31, 2016, respectively, based on carrying value (dollars in thousands).
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Index Type | | Floating | | Hybrid (1) | | Total | | Index % | | Floating | | Hybrid (1) | | Total | | Index % |
| CMT | | $ | 12,366 |
| | $ | 19,760 |
| | $ | 32,126 |
| | 1 | % | | $ | 13,188 |
| | $ | 23,953 |
| | $ | 37,141 |
| | 1 | % |
| LIBOR | | 4,464,894 |
| | 14,058 |
| | 4,478,952 |
| | 97 | % | | 3,043,945 |
| | 13,086 |
| | 3,057,031 |
| | 96 | % |
Other (2) | | 49,697 |
| | 63,045 |
| | 112,742 |
| | 2 | % | | 45,880 |
| | 41,760 |
| | 87,640 |
| | 3 | % |
| Total | | $ | 4,526,957 |
| | $ | 96,863 |
| | $ | 4,623,820 |
| | 100 | % | | $ | 3,103,013 |
| | $ | 78,799 |
| | $ | 3,181,812 |
| | 100 | % |
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| |
(1) | “Hybrid” amounts reflect those assets with greater than twelve months to reset. |
| |
(2) | “Other” includes COFI, MTA and other indices. |
Our analysis of risks is based on PRCM Advisers’ and its affiliates’ experience, estimates, models and assumptions. These analyses relyThe analysis is based on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by PRCM Advisers may produce results that differ significantly from the estimates and assumptions used in our models.
We use a variety of recognized industry models, as well as proprietary models, to perform sensitivity analyses which are derived from primary assumptions for prepayment rates, discount rates and credit losses. The primary assumption used in this model is implied market volatility of interest rates. The information presented in the following interest rate sensitivity table projects the potential impactanalyses on various measures of sudden parallel changes in interest rates on our financial results and financial condition by examining how our assets, financing and hedges will perform in various interest rate “shock” scenarios. Two of these measures are presented below in more detail. The first measure is change in annualized net interest income over the next 12 months, based onincluding interest spread from our interest sensitiverate swaps and float income from custodial accounts associated with our MSR. The second measure is change in value of financial instruments at September 30, 2017.
position, including the value of our derivative assets and liabilities. All changes in value are measured as the change from the September 30, 2017March 31, 2024 financial position. All projected changes in annualized net interest income are measured as the change from the projected annualized net interest income based off current performance returns.
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| | | | | | | | | | | | | | | |
| | Changes in Interest Rates |
| (dollars in thousands) | -100 bps | | -50 bps | | +50 bps | | +100 bps |
| Change in value of financial position: | | | | | | | |
| Available-for-sale securities | $ | 482,035 |
| | $ | 279,672 |
| | $ | (367,792 | ) | | $ | (798,770 | ) |
| As a % of September 30, 2017 total equity | 11.7 | % | | 6.8 | % | | (8.9 | )% | | (19.3 | )% |
| Commercial real estate assets | $ | 711 |
| | $ | 401 |
| | $ | (447 | ) | | $ | (894 | ) |
| As a % of September 30, 2017 total equity | — | % | | — | % | | — | % | | — | % |
| Mortgage servicing rights | $ | (323,324 | ) | | $ | (137,398 | ) | | $ | 94,395 |
| | $ | 158,371 |
|
| As a % of September 30, 2017 total equity | (7.8 | )% | | (3.3 | )% | | 2.3 | % | | 3.8 | % |
| Residential mortgage loans held-for-investment in securitization trusts | $ | 19,349 |
| | $ | 25,798 |
| | $ | (51,596 | ) | | $ | (118,855 | ) |
| As a % of September 30, 2017 total equity | 0.5 | % | | 0.6 | % | | (1.3 | )% | | (2.9 | )% |
| Residential mortgage loans held-for-sale | $ | 496 |
| | $ | 135 |
| | $ | (281 | ) | | $ | (924 | ) |
| As a % of September 30, 2017 total equity | — | % | | — | % | | — | % | | — | % |
| Derivatives, net | $ | (229,874 | ) | | $ | (131,520 | ) | | $ | 208,065 |
| | $ | 475,125 |
|
| As a % of September 30, 2017 total equity | (5.6 | )% | | (3.2 | )% | | 5.0 | % | | 11.5 | % |
| Repurchase agreements | $ | (48,610 | ) | | $ | (24,305 | ) | | $ | 24,305 |
| | $ | 48,610 |
|
| As a % of September 30, 2017 total equity | (1.2 | )% | | (0.6 | )% | | 0.6 | % | | 1.2 | % |
| Collateralized borrowings in securitization trusts | $ | (38,019 | ) | | $ | (35,054 | ) | | $ | 56,225 |
| | $ | 125,016 |
|
| As a % of September 30, 2017 total equity | (0.9 | )% | | (0.9 | )% | | 1.4 | % | | 3.0 | % |
| Federal Home Loan Bank advances | $ | (1,993 | ) | | $ | (997 | ) | | $ | 997 |
| | $ | 1,993 |
|
| As a % of September 30, 2017 total equity | (0.1 | )% | | — | % | | — | % | | — | % |
| Revolving credit facilities | $ | (17 | ) | | $ | (8 | ) | | $ | 8 |
| | $ | 17 |
|
| As a % of September 30, 2017 total equity | — | % | | — | % | | — | % | | — | % |
| Total Net Assets | $ | (139,246 | ) | | $ | (23,276 | ) | | $ | (36,121 | ) | | $ | (110,311 | ) |
| As a % of September 30, 2017 total assets | (0.5 | )% | | (0.1 | )% | | (0.1 | )% | | (0.4 | )% |
| As a % of September 30, 2017 total equity | (3.4 | )% | | (0.6 | )% | | (0.9 | )% | | (2.7 | )% |
| | -100 bps | | -50 bps | | +50 bps | | +100 bps |
| Change in annualized net interest income: | $ | 14,274 |
| | $ | 6,073 |
| | $ | (4,864 | ) | | $ | (9,728 | ) |
| % change in net interest income | 3.5 | % | | 1.5 | % | | (1.2 | )% | | (2.4 | )% |
The interest rate sensitivity table quantifiesComputation of the potential changescash flows for the rate-sensitive assets underpinning change in annualized net interest income including float income from custodial accounts associated with our MSR, and portfolio value, which includes the value of our derivative assets and liabilities, should interest rates immediately change. The interest rate sensitivity table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with the portfolio for each rate change are calculated based on assumptions includingrelated to, among other things, prepayment speeds, yield on future acquisitions, slope of the yield curve, and size of the portfolio.portfolio (for example, the assumption for prepayment speeds for Agency RMBS, and MSR is that they do not change in response to changes in interest rates). Assumptions made onfor the interest rate sensitive liabilities include anticipated interest rates,relate to, among other things, collateral requirements as a percentage of borrowings and amount and amount/term of borrowing. These assumptions may not hold in practice; realized net interest income results may therefore be significantly different from the net interest income produced in scenario analyses. We also note that the uncertainty associated with the estimate of a change in net interest income is directly related to the size of interest rate move considered.
Computation of results for portfolio value involves a two-step process. The first is the use of models to project how the value of interest rate sensitive instruments will change in the scenarios considered. The second, and equally important, step is the improvement of the model projections based on application of our experience in assessing how current market and macroeconomic conditions will affect the prices of various interest rate sensitive instruments. Judgment is best applied to localized (less than 25 basis points, or bps) interest rate moves. The more an instantaneous interest rate move exceeds 25 bps, the greater the likelihood that accompanying market events are significant enough to warrant reconsideration of interest rate sensitivities. As with net interest income, the uncertainty associated with the estimate of change in portfolio value is therefore directly related to the size of interest rate move considered.
The following interest rate sensitivity table displays the potential impact of instantaneous, parallel changes in interest rates of +/- 25 and +/- 50 bps on annualized net interest income and portfolio value, based on our interest sensitive financial instruments at March 31, 2024. The preceding discussion shows that the results for the 25 bps move scenarios are the best representation of our interest rate exposure, followed by those for the 50 bps move scenarios. This hierarchy reflects our localized approach to managing interest rate risk: monitoring rates and rebalancing our hedges on a day-to-day basis, where rate moves only rarely exceed 25 bps in either direction.
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| | | Changes in Interest Rates |
| (dollars in thousands) | | | -50 bps | | -25 bps | | +25 bps | | +50 bps | | |
Change in annualized net interest income (1): | | | $ | (513) | | | $ | (273) | | | $ | 298 | | | $ | 637 | | | |
% change in net interest income (1) | | | (0.3) | % | | (0.2) | % | | 0.2 | % | | 0.4 | % | | |
| Change in value of financial position: | | | | | | | | | | | |
| Available-for-sale securities | | | $ | 206,592 | | | $ | 105,294 | | | $ | (108,517) | | | $ | (220,231) | | | |
| As a % of common equity | | | 12.8 | % | | 6.5 | % | | (6.7) | % | | (13.6) | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Mortgage servicing rights (2) | | | $ | (64,784) | | | $ | (28,797) | | | $ | 28,902 | | | $ | 49,661 | | | |
As a % of common equity (2) | | | (4.0) | % | | (1.8) | % | | 1.8 | % | | 3.1 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Derivatives, net | | | $ | (161,611) | | | $ | (78,359) | | | $ | 73,581 | | | $ | 142,210 | | | |
| As a % of common equity | | | (10.0) | % | | (4.8) | % | | 4.5 | % | | 8.8 | % | | |
| Reverse repurchase agreements | | | $ | 73 | | | $ | 37 | | | $ | (37) | | | $ | (73) | | | |
| As a % of common equity | | | — | % | | — | % | | — | % | | — | % | | |
| Repurchase agreements | | | $ | (5,579) | | | $ | (2,790) | | | $ | 2,790 | | | $ | 5,579 | | | |
| As a % of common equity | | | (0.4) | % | | (0.2) | % | | 0.2 | % | | 0.3 | % | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Revolving credit facilities | | | $ | (378) | | | $ | (189) | | | $ | 189 | | | $ | 377 | | | |
| As a % of common equity | | | — | % | | — | % | | — | % | | — | % | | |
| Term notes payable | | | $ | (150) | | | $ | (75) | | | $ | 75 | | | $ | 150 | | | |
| As a % of common equity | | | — | % | | — | % | | — | % | | — | % | | |
| Convertible senior notes | | | $ | (1,045) | | | $ | (520) | | | $ | 517 | | | $ | 1,032 | | | |
| As a % of common equity | | | (0.1) | % | | — | % | | — | % | | 0.1 | % | | |
| Total Net Assets | | | $ | (26,882) | | | $ | (5,399) | | | $ | (2,500) | | | $ | (21,295) | | | |
| As a % of total assets | | | (0.2) | % | | — | % | | — | % | | (0.2) | % | | |
| As a % of common equity | | | (1.7) | % | | (0.3) | % | | (0.2) | % | | (1.3) | % | | |
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(1)Amounts include the effect of interest spread from our interest rate swaps and float income from custodial accounts associated with our MSR, but do not reflect any potential changes to dollar roll income associated with our TBA positions or U.S. Treasury futures income, which are accounted for as derivative instruments in accordance with U.S. GAAP.
(2)Includes the effect of unsettled MSR.
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at September 30, 2017. TheMarch 31, 2024. As discussed, the analysis utilizes assumptions and estimates based on management’s judgmentour experience and experience.judgment. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.
The change in annualized net interest income does not include any benefit or detriment from faster or slower prepayment rates on our Agency RMBS and non-Agency securities, instruments that represent the interest payments (but not the principal) on a pool of mortgages, or interest-only securities and MSR. We anticipate that faster prepayment speeds in lower interest rate scenarios will generate lower realized yields on Agency RMBS purchased at a premium premium, interest-only securities and MSR and higher realized yields on Agency RMBS and non-Agency securities purchased at a discount. Similarly, we anticipate that slower prepayment speeds in higher interest rate scenarios will generate higher realized yields on Agency RMBS purchased at a premium, interest-only securities and MSR and lower realized yields Agency RMBS and non-Agency securities purchased at a discount. Although we have sought to construct the portfolio to limit the effect of changes in prepayment speeds, there can be no assurance this will actually occur, and the realized yield of the portfolio may be significantly different than we anticipate in changing interest rate scenarios.
Given the low interest rate environment at September 30, 2017, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayment speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on Agency RMBS purchased at a premium, interest-only securities and MSR, and accretion of discount on our Agency RMBS and non-Agency securities purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. While this table reflects the estimated impact of interest rate changes on the static portfolio, we actively manage our portfolio and continuously make adjustments to the size and composition of our asset and hedge portfolio. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Prepayment Risk
Prepayment risk is the risk that the principal amount of a mortgage loan will be repaid at a different rate than anticipated. As we receive prepayments of principal on our Agency RMBS, and non-Agency securities, premiums paid on such assets will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the assets.
We believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.
MSR are also subject to prepayment risk in that, generally, an increase in prepayment rates on the mortgage loans underlying the MSR would result in a decline in value of the MSR.MSR as the prepayment acts to cut short the anticipated life of the servicing income stream.
Market Risk
Market Value Risk. Our AFS securities are reflected at their estimated fair value, with the difference between amortized cost net of allowance for credit losses and estimated fair value for all AFS securities except Agency interest-onlycertain AFS securities and GSE credit risk transfer securitiesfor which we have elected the fair value option reflected in accumulated other comprehensive income.loss. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, market valuation of credit risks, and other factors. Generally, in a rising interest rate environment, we would expect the fair value of these securities to decrease; conversely, in a decreasing interest rate environment, we would expect the fair value of these securities to increase. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted.
Our MSR are reflected at their estimated fair value. The estimated fair value fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, we would expect prepayments to decrease resulting in an increase inand the fair value of our MSR.MSR to increase. Conversely, in a decreasing interest rate environment, we would expect prepayments to increase resulting in a decline in fair value.
Our residential mortgage loans are reflected at their estimated fair value. The estimated fair value fluctuates primarily due to changes in interest rates, market valuation of credit risks and other factors. Generally in a rising rate environment, we would expect the fair value of these loansour MSR to decrease; conversely, in a decreasing rate environment, we would expect the fair value of these loans to increase. However, the fair value of the CSL and Ginnie Mae buyout residential mortgage loans included in residential mortgage loans held-for-sale is generally less sensitive to interest rate changes.decrease.
Real estate riskEstate Risk. Both residential and commercialResidential property values are subject to volatility and may be affected adversely by a number of factors, including national, regional and local economic conditions; local real estate conditions (such as an oversupplythe supply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and impacts of climate change, natural disasters and other catastrophes. Decreases in property values reduce the value of the collateral for commercial real estate and residential mortgage loans and the potential proceeds available to borrowers to repay the loans, which could cause usmay impact the value of our Agency RMBS due to suffer losses on our non-Agency securitieschanges in voluntary and commercial real estate andinvoluntary prepayment speeds, and/or may increase costs to service the residential mortgage loans.loans underlying our MSR.
Liquidity Risk
Our liquidity risk is principally associated with our financing of long-maturity assets with shorter-term borrowings in the form of repurchase agreements FHLB advances and borrowings under revolving credit facilities. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
Should the value of our assets pledged as collateral suddenly decrease, lender margin calls could increase, causing an adverse change in our liquidity position. Moreover, the portfolio construction of MSR, which generally have negative duration, combined with levered RMBS, which generally have positive duration, may in certain market scenarios lead to variation margin calls, which could negatively impact our excess cash position. Additionally, if the FHLB or one or more of our repurchase agreement or revolving credit facility counterparties chose not to provide ongoing funding, our ability to finance would decline or exist at possibly less advantageousfavorable terms. As such, we cannot assureprovide assurance that we will always be able to roll over our repurchase agreements FHLB advances and revolving credit facilities. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this Quarterly Report on Form 10-Q for further information about our liquidity and capital resource management.
Credit Risk
We believe that our investment strategy will generally keep our risk of credit losses low to moderate. However, we retain the risk of potential credit losses on all of the loans underlying our non-Agency securities and on our commercial real estate and residential mortgage loans. With respect to our non-Agency securities that are senior in the credit structure, credit support contained in deal structures provide a level of protection from losses. We seek to manage the remaining credit risk through our pre-acquisition due diligence process, which includes comprehensive underwriting, and by factoring assumed credit losses into the purchase prices we pay for non-Agency securities and commercial real estate and residential mortgage assets. In addition, with respect to any particular target asset, we evaluate relative valuation, supply and demand trends, shape of yield curves, prepayment rates, delinquency and default rates, recovery of various sectors and vintage of collateral. We further mitigate credit risk in our commercial real estate and and residential mortgage loan portfolios through (i) selecting servicers whose specialties are well matched against the underlying attributes of the borrowers contained in the loan pools, and (ii) an actively managed internal servicer oversight and surveillance program. At times, we enter into credit default swaps or other derivative instruments in an attempt to manage our credit risk. Nevertheless, unanticipated credit losses could adversely affect our operating results.securities.
Item 4. Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, were effective.effective as of March 31, 2024. Although our CEO and CFO have determined our disclosure controls and procedures were effective at the end of the period covered by this Quarterly Report on Form 10-Q, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Companycompany to disclose material information otherwise required to be set forth in the reports we submit under the Exchange Act.
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2017March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various legal claims and/or administrative proceedingsand regulatory matters that arise in the ordinary course of our business. As previously disclosed, on July 15, 2020, we provided PRCM Advisers with a notice of termination of the dateManagement Agreement for “cause” in accordance with Section 15(a) of this filing, we are not party to any litigationthe Management Agreement. We terminated the Management Agreement for “cause” on the basis of certain material breaches and certain events of gross negligence on the part of PRCM Advisers in the performance of its duties under the Management Agreement. On July 21, 2020, PRCM Advisers filed a complaint against us in the United States District Court for the Southern District of New York, or legal proceedings or,the Court. Subsequently, Pine River Domestic Management L.P. and Pine River Capital Management L.P. were added as plaintiffs to the bestmatter. As amended, the complaint, or the Federal Complaint, alleges, among other things, the misappropriation of trade secrets in violation of both the Defend Trade Secrets Act and New York common law, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition and business practices, unjust enrichment, conversion, and tortious interference with contract. The Federal Complaint seeks, among other things, an order enjoining us from making any use of or disclosing PRCM Advisers’ trade secret, proprietary, or confidential information; damages in an amount to be determined at a hearing and/or trial; disgorgement of our knowledge, any threatened litigation or legal proceedings, which,wrongfully obtained profits; and fees and costs incurred by the plaintiffs in pursuing the action. We have filed our opinion, individually oranswer to the Federal Complaint and made counterclaims against PRCM Advisers and Pine River Capital Management L.P. On May 5, 2022, the plaintiffs filed a motion for judgment on the pleadings, seeking judgment in their favor on all but one of our counterclaims and on one of our affirmative defenses. We opposed the aggregate, would have a material adverse effectmotion for judgment on our resultsthe pleadings. On August 10, 2023, the motion for judgment on the pleadings was granted in part and denied in part. The discovery period has ended. On November 8, 2023, the Company and the plaintiffs filed motions for summary judgment, seeking judgment in their favor on the pending claims and counterclaims. Each party opposed the other party’s motion for summary judgment. The motions for summary judgment are fully briefed. Our board of operations or financial condition.directors believes the Federal Complaint is without merit and that we fully complied with the terms of the Management Agreement.
Item 1A. Risk Factors
Except as set forth in our Quarterly Report on Form 10-Q for the period ended March 31, 2017, or the Q1 Form 10-Q, and our Quarterly Report on Form 10-Q for the period ended June 30, 2017, or the Q2 Form 10-Q, thereThere have been no material changes to the risk factors set forth under the heading “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016,2023, or the Form 10-K. The materialization of any risks and uncertainties identified in our Forward-Looking Statements contained in this Quarterly Report on Form 10-Q, together with those previously disclosed in the Form 10-K the Q1 Form 10-Q, the Q2 Form 10-Q, or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations, and cash flows. See Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)None.
(c)The Company’sOur preferred share repurchase program allows for the repurchase of up to an aggregate of 37,500,0005,000,000 shares of the Company’scompany’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock. Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of preferred share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The preferred share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The preferred share repurchase program does not have an expiration date.
The following table reflects purchases of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock under the preferred share repurchase program during the three months ended March 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| Series A Preferred Stock: | | | | | | | | |
| January 1, 2024 through Janaury 31, 2024 | | — | | | $ | — | | | — | | | N/A |
| February 1, 2024 through February 29, 2024 | | — | | | — | | | — | | | N/A |
| March 1, 2024 through March 31, 2024 | | 35,047 | | | 23.08 | | | 35,047 | | | N/A |
| Total | | 35,047 | | | $ | 23.08 | | | 35,047 | | | N/A |
| Series B Preferred Stock: | | | | | | | | |
| January 1, 2024 through Janaury 31, 2024 | | — | | | $ | — | | | — | | | N/A |
| February 1, 2024 through February 29, 2024 | | 88,174 | | | 22.66 | | | 88,174 | | | N/A |
| March 1, 2024 through March 31, 2024 | | 191,886 | | | 22.79 | | | 191,886 | | | N/A |
| Total | | 280,060 | | | $ | 22.75 | | | 280,060 | | | N/A |
| Series C Preferred Stock: | | | | | | | | |
| January 1, 2024 through Janaury 31, 2024 | | — | | | $ | — | | | — | | | N/A |
| February 1, 2024 through February 29, 2024 | | 116,200 | | | 23.07 | | | 116,200 | | | N/A |
| March 1, 2024 through March 31, 2024 | | 54,302 | | | 22.87 | | | 54,302 | | | N/A |
| Total | | 170,502 | | | $ | 23.01 | | | 170,502 | | | N/A |
____________________
(1)Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock. As of March 31, 2024, we had repurchased an aggregate of 4,179,183 preferred shares under the program and had remaining authorization to repurchase up to 820,817 preferred shares.
Our common share repurchase program allows for the repurchase of up to an aggregate of 9,375,000 shares of the company’s common stock. SharesCommon shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any combination of such methods. The manner, price, number and timing of common share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The common share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The common share repurchase program does not have an expiration date. As of September 30, 2017,March 31, 2024, we had repurchased 12,067,5003,637,028 common shares under the program for a total cost of $200.4$208.5 million. We did not repurchase common shares during the three months ended September 30, 2017.March 31, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
(a)None.
(b)None.
(c)During the three months ended March 31, 2024, the following executive officers adopted a written plan intended to satisfy affirmative defense conditions of Rule 10b5–1(c) of the Exchange Act. Each of these written plans relates to the sale of Two Harbors common stock for the purpose of satisfying tax obligations associated with future vestings of equity compensation, as permitted pursuant to the stock ownership guidelines applicable to our executive officers. In addition, each of these written plans was entered into during an open trading window and shall take effect ninety days after adoption. Each of the new plans shall remain in effect until amended or terminated.
On February 6, 2024, Rebecca Sandberg, our Chief Legal Officer and Secretary, adopted a written plan pursuant to which Ms. Sandberg has elected to sell a number of shares sufficient to cover the local, state and federal tax liability associated with each future vesting of equity compensation, subject to the maximum of fifty percent of shares vesting. This plan replaces and supersedes a prior written plan entered into by Ms. Sandberg related to the same.
On February 7, 2024, Nathan Boucher, Executive Vice President, General Counsel and Secretary of RoundPoint, adopted a written plan pursuant to which Mr. Boucher has elected to sell a number of shares sufficient to cover the local, state and federal tax liability associated with each future vesting of equity compensation, subject to the maximum of fifty percent of shares vesting.
On February 8, 2024, David Hughes, Executive Vice President, Servicing Operations at RoundPoint, adopted a written plan pursuant to which Mr. Hughes has elected to sell a number of shares sufficient to cover the local, state and federal tax liability associated with each future vesting of equity compensation, subject to the maximum of fifty percent of shares vesting.
Except as set forth above, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K, during the three months ended March 31, 2024.
Item 6. Exhibits
(a) Exhibits
Exhibits - TheA list of exhibits listedto this Quarterly Report on the accompanying Index of Exhibits are filed or incorporated by reference as a part of this report. Such IndexForm 10-Q is incorporated herein by reference.
set forth below.
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 3.1 | | |
Exhibit Number | | Exhibit Index |
3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
3.43.6 | | |
3.53.7 | | |
| 3.8 | | |
3.63.9 | | |
3.73.10 | | |
| 3.11 | | Articles Supplementary to the Articles of Amendment to the Articles of Amendment and Restatement of Two Harbors Investment Corp. reclassifying and redesignating (i) all 3,000,000 authorized but unissued shares of 7.75% Series D Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated preferred stock, and (ii) all 8,000,000 authorized but unissued shares of 7.50% Series E Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated preferred stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 19, 2021). |
| 3.12 | | |
31.110.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
| 101 | |
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 101 | | Financial statements from the Quarterly Report on Form 10-Q of Two Harbors Investment Corp. for the three months ended September 30, 2017,March 31, 2024, filed with the SEC on November 8, 2017,April 30, 2024, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements. (filed herewith) |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). (filed herewith) |
| | |
| | |
| | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | | | |
| | | TWO HARBORS INVESTMENT CORP. |
| Dated: | November 8, 2017April 30, 2024 | By: | /s/ Thomas E. SieringWilliam Greenberg |
| | | Thomas E. Siering
William Greenberg
President and Chief Executive Officer President and Director
(Principal Executive Officer)
|
| Dated: | November 8, 2017April 30, 2024 | By: | /s/ Brad Farrell |
| | | Brad Farrell
Chief Financial Officer and Treasurer
(Principal Financial Officer)
|
Dated: | November 8, 2017 | By: | /s/ Mary Riskey |
| | | Mary Riskey
Chief AccountingFinancial Officer
(Principal Financial and Accounting Officer)
|