two-20240630

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, 2024


☐			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 26, 2024, there were 103,622,787 shares of outstanding common stock, par value $0.01 per share, issued and outstanding.

Table of Contents

TWO HARBORS INVESTMENT CORP.

INDEX


		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	69
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
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, 2024		December 31, 2023
ASSETS	(unaudited)
Available-for-sale securities, at fair value (amortized cost $8,359,346 and $8,509,383, respectively; allowance for credit losses $3,340 and $3,943, respectively)	$	8,029,955	$	8,327,149

Mortgage servicing rights, at fair value	3,065,415		3,052,016
Cash and cash equivalents	624,199		729,732
Restricted cash	162,623		65,101
Accrued interest receivable	35,993		35,339
Due from counterparties	372,192		323,224
Derivative assets, at fair value	13,519		85,291
Reverse repurchase agreements	349,660		284,091
Other assets	196,161		236,857
Total Assets (1)	$	12,849,717	$	13,138,800
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	8,434,910	$	8,020,207

Revolving credit facilities	1,279,271		1,329,171
Term notes payable	—		295,271
Convertible senior notes	259,412		268,582
Derivative liabilities, at fair value	14,264		21,506
Due to counterparties	352,117		574,735
Dividends payable	58,729		58,731
Accrued interest payable	85,680		141,773
Commitments and contingencies (see Note 16)	—		—
Other liabilities	170,037		225,434
Total Liabilities (1)	10,654,420		10,935,410
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)	601,467		613,213
Common stock, par value $0.01 per share; 175,000,000 shares authorized and 103,622,239 and 103,206,457 shares issued and outstanding, respectively	1,036		1,032
Additional paid-in capital	5,933,250		5,925,424
Accumulated other comprehensive loss	(323,580)		(176,429)
Cumulative earnings	1,610,541		1,349,973
Cumulative distributions to stockholders	(5,627,417)		(5,509,823)
Total Stockholders’ Equity	2,195,297		2,203,390


Total Liabilities and Stockholders’ Equity	$	12,849,717	$	13,138,800

____________________

(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2024 and December 31, 2023, assets of the VIEs totaled $146,214 and $525,259, and liabilities of the VIEs totaled $102,458 and $479,810, respectively. See Note 4 - 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,
	2024		2023		2024		2023
Net interest income (expense):




Interest income	$	115,953	$	117,762	$	233,736	$	234,355







Interest expense	154,207		159,561		314,207		302,051
Net interest expense	(38,254)		(41,799)		(80,471)		(67,696)
Net servicing income:
Servicing income	176,015		175,223		342,348		328,543
Servicing costs	4,475		25,190		11,594		53,556
Net servicing income	171,540		150,033		330,754		274,987
Other (loss) income:
(Loss) gain on investment securities	(22,437)		2,172		(33,412)		12,970
(Loss) gain on servicing asset	(22,857)		21,679		(11,845)		(6,400)
Gain (loss) on interest rate swap and swaption agreements	22,012		56,533		120,522		(25,621)
(Loss) gain on other derivative instruments	(750)		47,161		46,849		(108,610)
Other income	226		2,200		223		2,200
Total other (loss) income	(23,806)		129,745		122,337		(125,461)
Expenses:


Compensation and benefits	21,244		8,868		47,773		22,951
Other operating expenses	17,699		11,886		38,751		22,370


Total expenses	38,943		20,754		86,524		45,321
Income before income taxes	70,537		217,225		286,096		36,509
Provision for income taxes	14,201		19,780		26,172		15,872


Net income	56,336		197,445		259,924		20,637


Dividends on preferred stock	(11,784)		(12,115)		(23,568)		(24,480)
Gain on repurchase and retirement of preferred stock	—		2,454		644		2,454
Net income (loss) attributable to common stockholders	$	44,552	$	187,784	$	237,000	$	(1,389)
Basic earnings (loss) per weighted average common share	$	0.43	$	1.94	$	2.27	$	(0.02)
Diluted earnings (loss) per weighted average common share	$	0.43	$	1.80	$	2.16	$	(0.02)

Weighted average number of shares of common stock:
Basic	103,555,755		96,387,877		103,478,847		94,492,389
Diluted	103,910,812		106,062,378		113,136,629		94,492,389
Comprehensive income (loss):
Net income	$	56,336	$	197,445	$	259,924	$	20,637
Other comprehensive loss:
Unrealized loss on available-for-sale securities	(44,073)		(156,306)		(147,151)		(30,375)
Other comprehensive loss	(44,073)		(156,306)		(147,151)		(30,375)
Comprehensive income (loss)	12,263		41,139		112,773		(9,738)


Dividends on preferred stock	(11,784)		(12,115)		(23,568)		(24,480)
Gain on repurchase and retirement of preferred stock	—		2,454		644		2,454
Comprehensive income (loss) attributable to common stockholders	$	479	$	31,478	$	89,849	$	(31,764)

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, 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 STOCKHOLDERS’ EQUITY (unaudited), continued

(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, 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


Net income	—		—		—		—		56,336		—		56,336
Other comprehensive loss before reclassifications	—		—		—		(53,466)		—		—		(53,466)
Amounts reclassified from accumulated other comprehensive income	—		—		—		9,393		—		—		9,393
Other comprehensive loss	—		—		—		(44,073)		—		—		(44,073)


Issuance of common stock, net of offering costs	—		—		50		—		—		—		50

Preferred dividends declared	—		—		—		—		—		(11,784)		(11,784)
Common dividends declared	—		—		—		—		—		(46,945)		(46,945)

Non-cash equity award compensation	—		1		1,642		—		—		—		1,643
Balance, June 30, 2024	$	601,467	$	1,036	$	5,933,250	$	(323,580)	$	1,610,541	$	(5,627,417)	$	2,195,297

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,
	2024		2023
Cash Flows From Operating Activities:
Net income	$	259,924	$	20,637
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities, net	6,756		15,826
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes	1,236		1,307
Provision for (reversal of) credit losses on investment securities	251		(119)
Realized and unrealized losses (gains) on investment securities	33,161		(12,851)
Loss on servicing asset	11,845		6,400

Realized and unrealized (gain) loss on interest rate swaps and swaptions	(91,213)		32,684
Unrealized gains on other derivative instruments	(44,006)		(17,055)

Gain on repurchase of term notes payable and convertible senior notes	(226)		(2,201)
Equity based compensation	7,726		7,787






Net change in assets and liabilities:
Increase in accrued interest receivable	(654)		(3,682)
Decrease in deferred income taxes, net	22,017		12,229
(Decrease) increase in accrued interest payable	(56,093)		26,470
Change in other operating assets and liabilities, net	(15,742)		24,003

Net cash provided by operating activities	134,982		111,435
Cash Flows From Investing Activities:
Purchases of available-for-sale securities	(1,024,496)		(3,111,690)
Proceeds from sales of available-for-sale securities	805,405		1,575,796
Principal payments on available-for-sale securities	328,966		318,194


Purchases of mortgage servicing rights, net of purchase price adjustments	(43,425)		(297,273)
Proceeds from sales of mortgage servicing rights	18,181		1,854
Short sales (purchases) of derivative instruments, net	22,040		(338)
Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net	177,709		(24,394)



Payments for reverse repurchase agreements	(1,869,168)		(1,306,894)
Proceeds from reverse repurchase agreements	1,803,599		2,084,541
Acquisition of RoundPoint Mortgage Servicing LLC, net of cash acquired	(20,976)		—

Decrease in due to counterparties, net	(271,586)		(269,892)


Net cash used in investing activities	$	(73,751)	$	(1,030,096)

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,
	2024		2023





















Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	24,530,737	$	19,769,476
Principal payments on repurchase agreements	(24,116,034)		(19,304,663)


Proceeds from revolving credit facilities	58,500		349,000
Principal payments on revolving credit facilities	(108,400)		(12,410)

Repayment of term notes payable	(295,776)		—

Repurchase of convertible senior notes	(9,675)		(13,169)



Repurchase and retirement of preferred stock	(11,102)		(9,966)
Proceeds from issuance of common stock, net of offering costs	104		177,878


Repurchase of common stock	—		(7,056)
Dividends paid on preferred stock	(23,796)		(24,730)
Dividends paid on common stock	(93,800)		(110,520)

Net cash (used in) provided by financing activities	(69,242)		813,840
Net decrease in cash, cash equivalents and restricted cash	(8,011)		(104,821)


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	$	786,822	$	1,021,684
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	357,314	$	259,721
Cash paid for taxes, net	$	3,607	$	2,736
Noncash Activities:


Dividends declared but not paid at end of period	$	58,729	$	55,675

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 founded in 2009 that, through its wholly owned subsidiaries (collectively, the Company), invests in, finances and manages mortgage servicing rights, or MSR, and Agency residential mortgage-backed securities, or Agency RMBS, and, through its operational platform, RoundPoint Mortgage Servicing LLC, or 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 structured as an internally-managed real estate investment trust, or REIT, and its common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “TWO”.

The Company seeks 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 creating sustainable stockholder value over the long term.

Effective September 30, 2023, one of the Company’s wholly owned subsidiaries, TH MSR Holdings LLC (formerly Matrix Financial Services Corporation), acquired RoundPoint from Freedom Mortgage Corporation, or Freedom, after the completion of customary closing conditions and receiving the 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 TH MSR Holdings. 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 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.

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 entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company consolidates the trust. Certain prior period amounts have been reclassified to conform to the current period presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2024 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2024 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, 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 estimates and the differences may be material.

Significant Accounting Policies

Included in Note 2 to the Consolidated Financial Statements of the Company’s 2023 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies.

Recently Issued and/or Adopted Accounting Standards

Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU No. 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 material impact on the Company's financial condition, results of operations or financial statement disclosures.

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU No. 2023-09, which requires entities to provide additional information about federal, state and foreign income taxes and reconciling items in the rate reconciliation table, and to disclose further disaggregation of income taxes paid (net of refunds received) by federal (national), state and foreign taxes by jurisdiction. For public business entities, the ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The guidance should be applied prospectively, but entities have the option to apply it retrospectively for each period presented. The Company has determined this ASU will not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.

Enhancement and Standardization of Climate-Related Disclosures

In March 2024, the Securities and Exchange Commission, or the SEC, issued Release No. 33-11275, its final rule on the enhancement and standardization of climate-related disclosures for investors requiring registrants to provide certain climate-related information in their registration statements and annual reports. The rules require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial 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 disclosures.

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 3. Acquisition of RoundPoint Mortgage Servicing LLC

Effective September 30, 2023, the Company acquired RoundPoint from Freedom after the completion of customary closing conditions and receiving the required 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 Freedom within the other liabilities line item on the Company’s condensed consolidated balance sheet as of September 30, 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, 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 determination 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 and six months ended June 30, 2023, the Company recognized $55 thousand and $97 thousand, respectively, of acquisition-related costs. The Company did not recognize any further acquisition-related costs in 2024.

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

As discussed above, the acquisition of RoundPoint closed effective September 30, 2023. Accordingly, RoundPoint’s consolidated balance sheet is included within the Company’s consolidated balance sheet as of June 30, 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 transactions have been eliminated. The following table presents unaudited pro forma combined revenues and income before income taxes for the three and six months ended June 30, 2024 and 2023 prepared as if the RoundPoint acquisition had been consummated on January 1, 2023.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2024		2023		2024		2023
Revenue (1)	$	268,162	$	435,572	$	698,421	$	458,399
Income (loss) before income taxes	$	70,537	$	211,362	$	286,096	$	18,627

____________________

(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 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, TH MSR Holdings 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 $8.5 million and $13.7 million, respectively, during the three and six months ended June 30, 2023. These subservicing expenses are included within the servicing costs line item on the Company’s condensed consolidated statements of comprehensive income (loss).

Note 4. 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. During the three and six months ended June 30, 2024, all outstanding term notes previously issued by MSR Issuer Trust matured and were repaid.

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, 2024 and December 31, 2023:


(in thousands)	June 30, 2024		December 31, 2023
Note receivable (1)	$	—	$	399,317

Restricted cash	43,158		45,642
Accrued interest receivable (1)	—		551
Other assets	103,056		79,749
Total Assets	$	146,214	$	525,259
Term notes payable	$	—	$	399,317
Revolving credit facilities	59,300		34,300
Accrued interest payable	420		816
Other liabilities	42,738		45,377
Total Liabilities	$	102,458	$	479,810

____________________

(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, 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 calculated 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 be considered a VIE that the Company must review for consolidation. 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 the power to direct the activities of RoundPoint that most significantly impacted its performance, the Company was not the primary beneficiary and, thus, did not consolidate RoundPoint during the Interim Period. Effective September 30, 2023, the parties had satisfied customary closing conditions and received the required regulatory and GSE approvals to close the transaction. Upon closing, RoundPoint became a consolidated wholly owned subsidiary of the Company and was no longer considered a VIE.

Note 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. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2024 and December 31, 2023:


(in thousands)	June 30, 2024		December 31, 2023
Agency:
Federal National Mortgage Association	$	4,997,665	$	5,467,684
Federal Home Loan Mortgage Corporation	2,970,881		2,790,662
Government National Mortgage Association	57,467		64,653

Non-Agency	3,942		4,150
Total available-for-sale securities	$	8,029,955	$	8,327,149

At June 30, 2024 and December 31, 2023, the Company pledged AFS securities with a carrying value of $8.0 billion and $8.1 billion, respectively, as collateral for repurchase agreements. See Note 12 - Repurchase Agreements.

At June 30, 2024 and December 31, 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.

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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, 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 $3.9 million and $4.2 million, respectively.

The following tables present the amortized cost and carrying value of AFS securities by collateral type as of June 30, 2024 and December 31, 2023:


	June 30, 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	$	8,242,827	$	155,876	$	(74,444)	$	8,324,259	$	—	$	3,898	$	(325,434)	$	8,002,723
Interest-only	548,000		30,534		—		30,534		(2,893)		416		(4,767)		23,290
Total Agency	8,790,827		186,410		(74,444)		8,354,793		(2,893)		4,314		(330,201)		8,026,013



Non-Agency	533,287		3,965		(18)		4,553		(447)		190		(354)		3,942
Total	$	9,324,114	$	190,375	$	(74,462)	$	8,359,346	$	(3,340)	$	4,504	$	(330,555)	$	8,029,955


	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)