two-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34506

TWO HARBORS INVESTMENT CORP.

(Exact Name of Registrant as Specified in Its Charter)


Maryland						27-0312904
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)


1601 Utica Avenue South, Suite 900
St. Louis Park,	Minnesota	55416
(Address of Principal Executive Offices)		(Zip Code)

(612) 453-4100

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol(s)

Name of Exchange on Which Registered:

Common Stock, par value $0.01 per share

TWO

New York Stock Exchange

8.125% Series A Cumulative Redeemable Preferred Stock

TWO PRA

New York Stock Exchange

7.625% Series B Cumulative Redeemable Preferred Stock

TWO PRB

New York Stock Exchange

7.25% Series C Cumulative Redeemable Preferred Stock

TWO PRC

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of July 27, 2023, there were 96,166,187 shares of outstanding common stock, par value $0.01 per share, issued and outstanding.

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TWO HARBORS INVESTMENT CORP.

INDEX


		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Comprehensive Income (Loss ) for the Three and Six Months Ended June 30, 2023 and 2022	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	68
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	71
Index of Exhibits		72
Signatures		74

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2023		December 31, 2022
ASSETS	(unaudited)
Available-for-sale securities, at fair value (amortized cost $9,278,950 and $8,114,627, respectively; allowance for credit losses $5,360 and $6,958, respectively)	$	8,963,203	$	7,778,734

Mortgage servicing rights, at fair value	3,273,956		2,984,937
Cash and cash equivalents	699,081		683,479
Restricted cash	322,603		443,026
Accrued interest receivable	39,700		36,018
Due from counterparties	248,607		253,374
Derivative assets, at fair value	16,469		26,438
Reverse repurchase agreements	289,288		1,066,935
Other assets	157,092		193,219
Total Assets (1)	$	14,009,999	$	13,466,160
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	9,067,824	$	8,603,011

Revolving credit facilities	1,455,421		1,118,831
Term notes payable	398,653		398,011
Convertible senior notes	267,791		282,496
Derivative liabilities, at fair value	14,976		34,048
Due to counterparties	267,050		541,709
Dividends payable	55,675		64,504
Accrued interest payable	120,504		94,034
Commitments and contingencies (see Note 15)	—		—
Other liabilities	146,096		145,991
Total Liabilities (1)	11,793,990		11,282,635
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 25,578,232 and 26,092,050 shares issued and outstanding, respectively ($639,456 and $652,301 liquidation preference, respectively)	618,579		630,999
Common stock, par value $0.01 per share; 175,000,000 shares authorized and 96,165,535 and 86,428,845 shares issued and outstanding, respectively	962		864
Additional paid-in capital	5,824,509		5,645,998
Accumulated other comprehensive loss	(309,086)		(278,711)
Cumulative earnings	1,476,462		1,453,371
Cumulative distributions to stockholders	(5,395,417)		(5,268,996)
Total Stockholders’ Equity	2,216,009		2,183,525


Total Liabilities and Stockholders’ Equity	$	14,009,999	$	13,466,160

____________________

(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2023 and December 31, 2022, assets of the VIEs totaled $472,108 and $497,921, and liabilities of the VIEs totaled $465,860 and $453,952, respectively. See Note 3 - Variable Interest Entities for additional information.

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

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TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands, except share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Interest income:
Available-for-sale securities	$	104,195	$	55,399	$	201,233	$	100,046


Other	13,567		1,604		33,122		1,803
Total interest income	117,762		57,003		234,355		101,849
Interest expense:
Repurchase agreements	116,946		19,269		221,301		27,612

Revolving credit facilities	29,684		9,106		55,340		14,782
Term notes payable	8,239		3,925		15,882		7,181
Convertible senior notes	4,692		4,801		9,528		9,843

Total interest expense	159,561		37,101		302,051		59,418
Net interest (expense) income	(41,799)		19,902		(67,696)		42,431


Other income (loss):
Gain (loss) on investment securities	2,172		(197,719)		12,970		(250,061)
Servicing income	175,223		157,526		328,543		294,152
Gain (loss) on servicing asset	21,679		85,557		(6,400)		496,181
Gain (loss) on interest rate swap and swaption agreements	56,533		32,734		(25,621)		(5,307)
Gain (loss) on other derivative instruments	47,161		(101,273)		(108,610)		(203,035)
Other income (loss)	2,200		(73)		2,200		(117)
Total other income (loss)	304,968		(23,248)		203,082		331,813
Expenses:

Servicing expenses	25,190		22,991		53,556		47,695

Compensation and benefits	8,868		11,019		22,951		23,212
Other operating expenses	11,886		9,152		22,370		15,777


Total expenses	45,944		43,162		98,877		86,684
Income (loss) before income taxes	217,225		(46,508)		36,509		287,560
Provision for income taxes	19,780		25,912		15,872		74,710


Net income (loss)	197,445		(72,420)		20,637		212,850


Dividends on preferred stock	(12,115)		(13,748)		(24,480)		(27,495)
Gain on repurchase and retirement of preferred stock	2,454		—		2,454		—
Net income (loss) attributable to common stockholders	$	187,784	$	(86,168)	$	(1,389)	$	185,355
Basic earnings (loss) per weighted average common share	$	1.94	$	(1.00)	$	(0.02)	$	2.14
Diluted earnings (loss) per weighted average common share	$	1.80	$	(1.00)	$	(0.02)	$	2.02
Dividends declared per common share	$	0.45	$	0.68	$	1.05	$	1.36
Weighted average number of shares of common stock:
Basic	96,387,877		86,069,431		94,492,389		86,034,722
Diluted	106,062,378		86,069,431		94,492,389		96,085,473

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

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TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited), continued

(in thousands, except share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022












Comprehensive income (loss):
Net income (loss)	$	197,445	$	(72,420)	$	20,637	$	212,850
Other comprehensive loss:
Unrealized loss on available-for-sale securities	(156,306)		(4,211)		(30,375)		(336,056)
Other comprehensive loss	(156,306)		(4,211)		(30,375)		(336,056)
Comprehensive income (loss)	41,139		(76,631)		(9,738)		(123,206)


Dividends on preferred stock	(12,115)		(13,748)		(24,480)		(27,495)
Gain on repurchase and retirement of preferred stock	2,454		—		2,454		—
Comprehensive income (loss) attributable to common stockholders	$	31,478	$	(90,379)	$	(31,764)	$	(150,701)

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

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TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands)


	Preferred Stock		Common Stock Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total Stockholders’ Equity
Balance, December 31, 2021	$	702,550	$	860	$	5,627,758	$	186,346	$	1,212,983	$	(4,986,544)	$	2,743,953


Net income	—		—		—		—		285,270		—		285,270
Other comprehensive loss before reclassifications	—		—		—		(323,490)		—		—		(323,490)
Amounts reclassified from accumulated other comprehensive income	—		—		—		(8,355)		—		—		(8,355)
Other comprehensive loss	—		—		—		(331,845)		—		—		(331,845)



Issuance of common stock, net of offering costs	—		—		323		—		—		—		323

Preferred dividends declared	—		—		—		—		—		(13,747)		(13,747)
Common dividends declared	—		—		—		—		—		(58,811)		(58,811)

Non-cash equity award compensation	—		—		4,161		—		—		—		4,161
Balance, March 31, 2022	702,550		860		5,632,242		(145,499)		1,498,253		(5,059,102)		2,629,304


Net loss	—		—		—		—		(72,420)		—		(72,420)
Other comprehensive loss before reclassifications	—		—		—		(141,843)		—		—		(141,843)
Amounts reclassified from accumulated other comprehensive income	—		—		—		137,632		—		—		137,632
Other comprehensive loss	—		—		—		(4,211)		—		—		(4,211)


Issuance of common stock, net of offering costs	—		—		82		—		—		—		82

Preferred dividends declared	—		—		—		—		—		(13,748)		(13,748)
Common dividends declared	—		—		—		—		—		(58,844)		(58,844)

Non-cash equity award compensation	—		1		3,460		—		—		—		3,461
Balance, June 30, 2022	$	702,550	$	861	$	5,635,784	$	(149,710)	$	1,425,833	$	(5,131,694)	$	2,483,624

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


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


Net income	—		—		—		—		197,445		—		197,445
Other comprehensive loss before reclassifications	—		—		—		(156,306)		—		—		(156,306)
Amounts reclassified from accumulated other comprehensive income	—		—		—		—		—		—		—
Other comprehensive loss	—		—		—		(156,306)		—		—		(156,306)

Repurchase and retirement of preferred stock	(12,420)		—		—		—		2,454		—		(9,966)
Issuance of common stock, net of offering costs	—		—		149		—		—		—		149
Repurchase of common stock	—		(6)		(7,050)		—		—		—		(7,056)
Preferred dividends declared	—		—		—		—		—		(12,115)		(12,115)
Common dividends declared	—		—		—		—		—		(43,560)		(43,560)

Non-cash equity award compensation	—		1		1,734		—		—		—		1,735
Balance, June 30, 2023	$	618,579	$	962	$	5,824,509	$	(309,086)	$	1,476,462	$	(5,395,417)	$	2,216,009

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

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TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2023		2022
Cash Flows From Operating Activities:
Net income	$	20,637	$	212,850
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities, net	15,826		55,287
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes	1,307		1,265
(Reversal of) provision for credit losses on investment securities	(119)		1,651
Realized and unrealized (gains) losses on investment securities	(12,851)		248,410
Loss (gain) on servicing asset	6,400		(496,181)

Realized and unrealized loss on interest rate swaps and swaptions	32,684		300
Unrealized gains on other derivative instruments	(17,055)		(92,309)

Gain on repurchase of convertible senior notes	(2,201)		—
Equity based compensation	7,787		7,622






Net change in assets and liabilities:
Increase in accrued interest receivable	(3,682)		(3,988)
Decrease in deferred income taxes, net	12,229		74,710
Increase in accrued interest payable	26,470		3,444
Change in other operating assets and liabilities, net	24,003		5,134

Net cash provided by operating activities	111,435		18,195
Cash Flows From Investing Activities:
Purchases of available-for-sale securities	(3,111,690)		(7,295,928)
Proceeds from sales of available-for-sale securities	1,575,796		4,339,148
Principal payments on available-for-sale securities	318,194		687,642


Purchases of mortgage servicing rights, net of purchase price adjustments	(297,273)		(538,432)
Proceeds from sales of mortgage servicing rights	1,854		—
(Purchases) short sales of derivative instruments, net	(338)		39,895
(Payments for termination and settlement) proceeds from sales and settlement of derivative instruments, net	(24,394)		160,024



Payments for reverse repurchase agreements	(1,306,894)		(1,135,374)
Proceeds from reverse repurchase agreements	2,084,541		1,111,085


(Decrease) increase in due to counterparties, net	(269,892)		1,246,227


Net cash used in investing activities	$	(1,030,096)	$	(1,385,713)

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

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TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

(in thousands)




	Six Months Ended
	June 30,
	2023		2022





















Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	19,769,476	$	17,611,046
Principal payments on repurchase agreements	(19,304,663)		(17,309,244)


Proceeds from revolving credit facilities	349,000		410,000
Principal payments on revolving credit facilities	(12,410)		(5,000)



Repurchase/repayment of convertible senior notes	(13,169)		(143,774)



Repurchase and retirement of preferred stock	(9,966)		—
Proceeds from issuance of common stock, net of offering costs	177,878		405


Repurchase of common stock	(7,056)		—
Dividends paid on preferred stock	(24,730)		(27,495)
Dividends paid on common stock	(110,520)		(117,476)

Net cash provided by financing activities	813,840		418,462
Net decrease in cash, cash equivalents and restricted cash	(104,821)		(949,056)


Cash, cash equivalents and restricted cash at beginning of period	1,126,505		2,088,670
Cash, cash equivalents and restricted cash at end of period	$	1,021,684	$	1,139,614
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	259,721	$	43,363
Cash paid (received) for taxes, net	$	2,736	$	(11)
Noncash Activities:


Dividends declared but not paid at end of period	$	55,675	$	72,591

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

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization and Operations

Two Harbors Investment Corp. is a Maryland corporation that, through its wholly owned subsidiaries (collectively, the Company), invests in and manages Agency residential mortgage-backed securities, or Agency RMBS, mortgage servicing rights, or MSR, and other financial assets. 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 investment portfolio is managed as a whole and resources are allocated and financial performance is assessed on a consolidated basis. The Company’s common stock is listed on the NYSE under the symbol “TWO”.

On August 2, 2022, Matrix Financial Services Corporation, or Matrix, a wholly owned subsidiary of the Company, entered into a definitive stock purchase agreement to acquire RoundPoint Mortgage Servicing LLC (formerly RoundPoint Mortgage Servicing Corporation), or RoundPoint, from Freedom Mortgage Corporation. In connection with the acquisition, Matrix has agreed to pay a purchase price upon closing in an amount equal to the tangible net book value of RoundPoint, plus a premium amount of $10.5 million, subject to certain additional post-closing adjustments. In connection with the transaction, RoundPoint will divest its retail origination business as well as its RPX servicing exchange platform. Matrix also agreed to engage RoundPoint as a subservicer prior to the closing date and began transferring loans to RoundPoint in the fourth quarter of 2022. Upon closing, all servicing licenses and operational capabilities will remain with RoundPoint, and RoundPoint will become a wholly owned subsidiary of Matrix. The parties expect to close the transaction in 2023, subject to the satisfaction of customary closing conditions and the receipt of required regulatory and GSE approvals.

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.

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.

The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. All trust entities in which the Company holds investments that are considered variable interest entities, or VIEs, for financial reporting purposes were reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of a trust that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company consolidates the trust. Certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts, common shares outstanding and common equity-based awards for all prior periods reflect the Company’s one-for-four reverse stock split effected on November 1, 2022 at 5:01 p.m. Eastern Time (refer to Note 16 - Stockholders’ 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, 2022. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2023 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2023 should not be construed as indicative of the results to be expected for future periods or the full year.

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand in the market, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.

Significant Accounting Policies

Included in Note 2 to the Consolidated Financial Statements of the Company’s 2022 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies.

Recently Issued and/or Adopted Accounting Standards

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

The London Interbank Offered Rate, or LIBOR, has been used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. On March 5, 2021, Intercontinental Exchange Inc. announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intended to stop publication of the majority of USD-LIBOR tenors on June 30, 2023. In the U.S., the Alternative Reference Rates Committee, or ARRC, has identified the Secured Overnight Financing Rate, or SOFR, and, in some cases, the forward-looking term rate based on SOFR published by CME Group Benchmark Administration Limited, or Term SOFR, plus, in each case, a recommended spread adjustment, as its preferred alternative rates for U.S. dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR were completed in connection with its phase-out on June 30, 2023.

In March 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-04, which provides temporary optional expedients and exceptions on accounting for contract modifications and hedging relationships for the purpose of the replacement of LIBOR with another reference rate. The guidance also provides a one-time election to sell held-to-maturity debt securities or to transfer such securities to the available-for-sale or trading category. The Company’s material contracts that are or were indexed to USD-LIBOR have been amended to transition to an alternative benchmark, where necessary. Any other unmodified agreements that incorporate LIBOR as the referenced rate either (i) already had provisions in place that provide for an alternative to LIBOR upon its phase-out, (ii) matured or (iii) were terminated prior to June 30, 2023. The ASU was effective immediately for all entities and expires after December 31, 2024. The Company’s adoption of this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.

Note 3. Variable Interest Entities

The Company enters into transactions with subsidiary trust entities that are established for limited purposes. One of the Company’s 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 VFN, 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 revolving credit facility, pursuant to which Servicing Advance Receivables Issuer Trust issued a VFN 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 were reviewed for consolidation under the applicable consolidation guidance. As the Company has both the power to direct the activities of the trusts that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company is the primary beneficiary and, thus, consolidates the trusts. Additionally, in accordance with arrangements entered into in connection with the securitization transaction and the servicing advance revolving credit facility, the Company has direct financial obligations payable to both MSR Issuer Trust and Servicing Advance Receivables Issuer Trust, which, in turn, support MSR Issuer Trust’s obligations to noteholders under the securitization transaction and Servicing Advance Receivables Issuer Trust’s obligations to the financing counterparty.

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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 June 30, 2023 and December 31, 2022:


(in thousands)	June 30, 2023		December 31, 2022
Note receivable (1)	$	398,653	$	398,011

Restricted cash	23,712		31,691
Accrued interest receivable (1)	445		400
Other assets	49,298		67,819
Total Assets	$	472,108	$	497,921
Term notes payable	$	398,653	$	398,011
Revolving credit facilities	43,050		23,850
Accrued interest payable	768		560
Other liabilities	23,389		31,531
Total Liabilities	$	465,860	$	453,952

____________________

(1)Receivables due from a wholly owned subsidiary of the Company to the trusts are eliminated in consolidation in accordance with U.S. GAAP.

Additionally, as discussed in Note 1 - Organization and Operations, the Company has entered into a definitive stock purchase agreement to acquire RoundPoint whereby the purchase price will be subject to an adjustment based on RoundPoint’s aggregate “earnings” (as defined in the agreement) from October 1, 2022 through the closing date, or the Interim Period, in addition to other post-closing adjustments. The manner in which the purchase price is calculated represents an implicit guarantee of the value of RoundPoint’s net book value, in which the Company holds the variable interests. These terms also indicate that RoundPoint meets the criteria to be considered a VIE that the Company must review for consolidation. As the Company has the obligation to absorb losses and the right to receive benefits of RoundPoint during the Interim Period that could be significant, but not the power to direct the activities of RoundPoint that most significantly impacts its performance, the Company is not the primary beneficiary and, thus, does not consolidate RoundPoint.

Note 4. Available-for-Sale Securities, at Fair Value

The Company holds both Agency and non-Agency available-for sale, or AFS, investment securities which are carried at fair value on the condensed consolidated balance sheets. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2023 and December 31, 2022:


(in thousands)	June 30, 2023		December 31, 2022
Agency:
Federal National Mortgage Association	$	5,251,614	$	4,112,556
Federal Home Loan Mortgage Corporation	3,554,055		3,332,314
Government National Mortgage Association	69,726		208,706

Non-Agency	87,808		125,158
Total available-for-sale securities	$	8,963,203	$	7,778,734

At June 30, 2023 and December 31, 2022, the Company pledged AFS securities with a carrying value of $8.9 billion and $7.4 billion, respectively, as collateral for repurchase agreements. See Note 11 - Repurchase Agreements.

At June 30, 2023 and December 31, 2022, 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.

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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 June 30, 2023 and December 31, 2022, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $87.8 million and $125.2 million, respectively.

The following tables present the amortized cost and carrying value of AFS securities by collateral type as of June 30, 2023 and December 31, 2022:


	June 30, 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	$	9,048,410	$	183,314	$	(80,080)	$	9,151,644	$	—	$	3,377	$	(309,519)	$	8,845,502
Interest-only	781,081		39,157		—		39,157		(5,087)		992		(5,169)		29,893
Total Agency	9,829,491		222,471		(80,080)		9,190,801		(5,087)		4,369		(314,688)		8,875,395



Non-Agency	1,175,430		7,829		(359)		88,149		(273)		786		(854)		87,808
Total	$	11,004,921	$	230,300	$	(80,439)	$	9,278,950	$	(5,360)	$	5,155	$	(315,542)	$	8,963,203


	December 31, 2022
(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	$	7,781,277	$	189,246	$	(33,413)	$	7,937,110	$	—	$	6,310	$	(325,960)	$	7,617,460
Interest-only	963,866		45,882		—		45,882		(6,785)		1,890		(4,871)		36,116
Total Agency	8,745,143		235,128		(33,413)		7,982,992		(6,785)		8,200		(330,831)		7,653,576



Non-Agency	1,263,789		8,511		(225)		131,635		(173)		545		(6,849)		125,158
Total	$	10,008,932	$	243,639	$	(33,638)	$	8,114,627	$	(6,958)	$	8,745	$	(337,680)	$	7,778,734

The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2023:


	June 30, 2023
(in thousands)	Agency		Non-Agency		Total
< 1 year	$	1,161	$	—	$	1,161
≥ 1 and < 3 years	21,249		—		21,249
≥ 3 and < 5 years	67,701		79,900		147,601
≥ 5 and < 10 years	8,162,712		4,118		8,166,830
≥ 10 years	622,572		3,790		626,362
Total	$	8,875,395	$	87,808	$	8,963,203

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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 tables present the changes for the three and six months ended June 30, 2023 and 2022 in the allowance for credit losses on Agency and non-Agency AFS securities:


	Three Months Ended						Six Months Ended
	June 30, 2023						June 30, 2023

(in thousands)	Agency		Non-Agency		Total		Agency		Non-Agency		Total
Allowance for credit losses at beginning of period	$	(5,274)	$	(648)	$	(5,922)	$	(6,785)	$	(173)	$	(6,958)

Additions on securities for which credit losses were not previously recorded	(9)		(40)		(49)		(9)		(358)		(367)




(Increase) decrease on securities with previously recorded credit losses	(389)		415		26		438		48		486
Write-offs	585		—		585		1,269		210		1,479

Allowance for credit losses at end of period