TWO HARBORS INVESTMENT CORP. [TWO] Filings

10-Q 1 two-20240930.htm 10-Q two-20240930

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: September 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 October 24, 2024, there were 103,650,126 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 September 30, 2024 and December 31, 2023	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	76
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	77
Item 1A.	Risk Factors	77
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	79
Index of Exhibits		80
Signatures		82

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2024		December 31, 2023
ASSETS	(unaudited)
Available-for-sale securities, at fair value (amortized cost $8,563,998 and $8,509,383, respectively; allowance for credit losses $2,962 and $3,943, respectively)	$	8,506,102	$	8,327,149

Mortgage servicing rights, at fair value	2,884,304		3,052,016
Mortgage loans held-for-sale, at fair value	3,344		332
Cash and cash equivalents	522,581		729,732
Restricted cash	89,125		65,101
Accrued interest receivable	36,561		35,339
Due from counterparties	298,283		323,224
Derivative assets, at fair value	12,572		85,291
Reverse repurchase agreements	359,180		284,091
Other assets	175,790		236,525
Total Assets (1)	$	12,887,842	$	13,138,800
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	8,763,400	$	8,020,207

Revolving credit facilities	999,171		1,329,171
Warehouse facilities	3,017		—
Term notes payable	—		295,271
Convertible senior notes	259,815		268,582
Derivative liabilities, at fair value	16,764		21,506
Due to counterparties	386,141		574,735
Dividends payable	58,730		58,731
Accrued interest payable	76,868		141,773
Commitments and contingencies (see Note 18)	—		—
Other liabilities	154,562		225,434
Total Liabilities (1)	10,718,468		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 103,650,126 and 103,206,457 shares issued and outstanding, respectively	1,037		1,032
Additional paid-in capital	5,934,920		5,925,424
Accumulated other comprehensive loss	(53,959)		(176,429)
Cumulative earnings	1,372,056		1,349,973
Cumulative distributions to stockholders	(5,686,147)		(5,509,823)
Total Stockholders’ Equity	2,169,374		2,203,390


Total Liabilities and Stockholders’ Equity	$	12,887,842	$	13,138,800

____________________

(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At September 30, 2024 and December 31, 2023, assets of the VIEs totaled $129,342 and $525,259, and liabilities of the VIEs totaled $101,996 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				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Net interest income (expense):





Interest income	$	112,642	$	123,608	$	346,378	$	357,963








Interest expense	154,931		173,094		469,138		475,145
Net interest expense	(42,289)		(49,486)		(122,760)		(117,182)
Net servicing income:
Servicing income	171,732		178,625		514,080		507,168
Servicing costs	3,900		29,903		15,494		83,459
Net servicing income	167,832		148,722		498,586		423,709
Other (loss) income:
Gain (loss) on investment securities	1,383		(471)		(32,029)		12,499
(Loss) gain on servicing asset	(133,349)		67,369		(145,194)		60,969
(Loss) gain on interest rate swap and swaption agreements	(172,263)		111,909		(51,741)		86,288
(Loss) gain on other derivative instruments	(32,722)		86,212		14,127		(22,398)
Gain on mortgage loans held-for-sale	927		—		924		—
Other income	123		2,903		349		5,103
Total other (loss) income	(335,901)		267,922		(213,564)		142,461
Expenses:


Compensation and benefits	20,180		8,617		67,953		31,568
Other operating expenses	18,405		15,984		57,156		38,354


Total expenses	38,585		24,601		125,109		69,922
(Loss) income before income taxes	(248,943)		342,557		37,153		379,066
(Benefit from) provision for income taxes	(10,458)		36,365		15,714		52,237


Net (loss) income	(238,485)		306,192		21,439		326,829


Dividends on preferred stock	(11,784)		(12,115)		(35,352)		(36,595)
Gain on repurchase and retirement of preferred stock	—		—		644		2,454
Net (loss) income attributable to common stockholders	$	(250,269)	$	294,077	$	(13,269)	$	292,688
Basic (loss) earnings per weighted average common share	$	(2.42)	$	3.04	$	(0.14)	$	3.06
Diluted (loss) earnings per weighted average common share	$	(2.42)	$	2.81	$	(0.14)	$	2.91




Comprehensive income (loss):
Net (loss) income	$	(238,485)	$	306,192	$	21,439	$	326,829
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities	269,621		(350,922)		122,470		(381,297)
Other comprehensive income (loss)	269,621		(350,922)		122,470		(381,297)
Comprehensive income (loss)	31,136		(44,730)		143,909		(54,468)


Dividends on preferred stock	(11,784)		(12,115)		(35,352)		(36,595)
Gain on repurchase and retirement of preferred stock	—		—		644		2,454
Comprehensive income (loss) attributable to common stockholders	$	19,352	$	(56,845)	$	109,201	$	(88,609)

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


Net income	—		—		—		—		306,192		—		306,192
Other comprehensive loss before reclassifications	—		—		—		(350,922)		—		—		(350,922)
Amounts reclassified from accumulated other comprehensive income	—		—		—		—		—		—		—
Other comprehensive loss	—		—		—		(350,922)		—		—		(350,922)


Issuance of common stock, net of offering costs	—		—		48		—		—		—		48

Preferred dividends declared	—		—		—		—		—		(12,115)		(12,115)
Common dividends declared	—		—		—		—		—		(43,560)		(43,560)

Non-cash equity award compensation	—		—		1,576		—		—		—		1,576
Balance, September 30, 2023	$	618,579	$	962	$	5,826,133	$	(660,008)	$	1,782,654	$	(5,451,092)	$	2,117,228

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


Net loss	—		—		—		—		(238,485)		—		(238,485)
Other comprehensive income before reclassifications	—		—		—		267,864		—		—		267,864
Amounts reclassified from accumulated other comprehensive income	—		—		—		1,757		—		—		1,757
Other comprehensive income	—		—		—		269,621		—		—		269,621


Issuance of common stock, net of offering costs	—		1		60		—		—		—		61

Preferred dividends declared	—		—		—		—		—		(11,784)		(11,784)
Common dividends declared	—		—		—		—		—		(46,946)		(46,946)

Non-cash equity award compensation	—		—		1,610		—		—		—		1,610
Balance, September 30, 2024	$	601,467	$	1,037	$	5,934,920	$	(53,959)	$	1,372,056	$	(5,686,147)	$	2,169,374

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)


	Nine Months Ended
	September 30,
	2024		2023
Cash Flows From Operating Activities:
Net income	$	21,439	$	326,829
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities, net	11,400		21,686
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes	1,639		1,940
Reversal of provision for credit losses on investment securities	(25)		(217)
Realized and unrealized losses (gains) on investment securities	32,054		(12,282)
Loss (gain) on servicing asset	145,194		(60,969)

Realized and unrealized loss (gain) on interest rate swaps and swaptions	98,109		(72,374)
Unrealized gains on other derivative instruments	(37,903)		(49,296)
Gains on mortgage loans held-for-sale	(924)		—
Gain on repurchase of term notes payable and convertible senior notes	(226)		(5,104)
Equity based compensation	9,336		9,363



Originations and purchases of mortgage loans held-for-sale	(22,444)		(79)
Proceeds from sales of mortgage loans held-for-sale	19,559		—
Proceeds from repayment of mortgage loans held-for-sale	143		30
Net change in assets and liabilities:
Increase in accrued interest receivable	(1,222)		(3,020)
Decrease in deferred income taxes, net	9,229		46,740
Decrease in accrued interest payable	(64,905)		(3,325)
Change in other operating assets and liabilities, net	1,610		33,848

Net cash provided by operating activities	222,063		233,770
Cash Flows From Investing Activities:
Purchases of available-for-sale securities	(1,513,681)		(3,644,567)
Proceeds from sales of available-for-sale securities	896,520		1,694,891
Principal payments on available-for-sale securities	517,249		507,200


Purchases of mortgage servicing rights, net of purchase price adjustments	(86,619)		(301,594)
Proceeds from sales of mortgage servicing rights	109,284		134,387
Short sales (purchases) of derivative instruments, net	21,955		(3,925)
(Payments for termination and settlement) proceeds from sales and settlement of derivative instruments, net	(13,677)		120,943



Payments for reverse repurchase agreements	(2,937,425)		(1,822,726)
Proceeds from reverse repurchase agreements	2,862,336		2,606,894
Acquisition of RoundPoint Mortgage Servicing LLC, net of cash acquired	(20,976)		26,798

Decrease in due to counterparties, net	(163,653)		(291,554)


Net cash used in investing activities	$	(328,687)	$	(973,253)

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)




	Nine Months Ended
	September 30,
	2024		2023





















Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	35,971,915	$	30,770,899
Principal payments on repurchase agreements	(35,228,722)		(30,260,640)


Proceeds from revolving credit facilities	58,500		349,000
Principal payments on revolving credit facilities	(388,500)		(57,160)
Proceeds from warehouse facilities	7,734		—
Principal payments on warehouse facilities	(4,717)		—

Repayment of term notes payable	(295,776)		(100,970)

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	165		177,926


Repurchase of common stock	—		(7,056)
Dividends paid on preferred stock	(35,580)		(36,845)
Dividends paid on common stock	(140,745)		(154,080)

Net cash (used in) provided by financing activities	(76,503)		657,939
Net decrease in cash, cash equivalents and restricted cash	(183,127)		(81,544)


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	$	611,706	$	1,044,961
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	506,654	$	455,678
Cash paid for taxes, net	$	3,648	$	5,830
Noncash Activities:


Dividends declared but not paid at end of period	$	58,730	$	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 September 30, 2024 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 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, the 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. Provided below is a summary of any additional and/or modified accounting policies that were significant to the Company’s financial condition and results of operations for the nine months ended September 30, 2024.

Mortgage Loans Held-for-Sale, at Fair Value

The Company originates residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held-for-sale, and the Company has elected to measure these loans held-for-sale at fair value. The Company estimates fair value of mortgage loans held-for-sale using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk; (ii) current commitments to purchase loans; or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. In connection with the Company’s election to measure originated mortgage loans held-for-sale at fair value, the Company records the loan origination fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees and underwriting fees are recorded within the other income line item in the condensed consolidated statements of comprehensive income (loss). Gains or losses recognized upon sale of loans and fair value adjustments are recorded within gain on mortgage loans held-for-sale in the condensed consolidated statements of comprehensive income (loss).

Interest income on mortgage loans held-for-sale is recognized at the loan coupon rate. Loans are considered past due when they are 30 days past their contractual due date. Interest income recognition is suspended when mortgage loans are placed on nonaccrual status. Generally, mortgage loans are placed on nonaccrual status when delinquent for more than 90 days or when determined not to be probable of full collection. Interest accrued, but not collected, at the date mortgage loans are placed on nonaccrual is reversed and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status. However, where there is doubt regarding the ultimate collectability of loan principal, all cash received is applied to reduce the carrying value of such loans. Mortgage loans are restored to accrual status only when contractually current or the collection of future payments is reasonably assured.

Derivative Financial Instruments, at Fair Value

In accordance with Accounting Standards Codification (ASC) 815, Derivatives and Hedging, or ASC 815, all derivative financial instruments, whether designated for hedging relationships or not, are recorded on the consolidated balance sheets as assets or liabilities and carried at fair value.

The Company enters into interest rate derivative contracts for a variety of reasons, including minimizing fluctuations in earnings or market values on certain assets or liabilities, including the Company’s loan origination pipeline, that may be caused by changes in interest rates. The pipeline refers to loan applications that have been initiated and offered to borrowers, which remain in the pipeline from the time they are locked until they fall out or are sold into the secondary mortgage market and consists of interest rate lock commitments, or IRLCs, and mortgage loans held-for-sale at fair value. 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, total return swaps and forward mortgage loan sale commitments.

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

At the inception of a derivative contract, the Company determines whether the instrument will be part of a qualifying hedge accounting relationship or whether the Company will account for the contract as a trading instrument. 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 all derivative contracts as trading instruments. Changes in fair value as well as the accrual and settlement of interest associated with derivatives accounted for as trading instruments are reported in the condensed consolidated statements of comprehensive income (loss) as (loss) gain on interest rate swap and swaption agreements, (loss) gain on other derivative instruments or gain on mortgage loans held-for-sale, depending on the type of derivative instrument.

Due to the nature of the Company’s derivative instruments, they may be in a receivable/asset position or a payable/liability position at the end of an accounting period. Amounts payable to and receivable from the same party under contracts may be offset as long as the following conditions are met: (i) each of the two parties owes the other determinable amounts; (ii) the reporting party has the right to offset the amount owed with the amount owed by the other party; (iii) the reporting party intends to offset; and (iv) the right of offset is enforceable by law. If the aforementioned conditions are not met, amounts payable to and receivable from are presented by the Company on a gross basis in its consolidated balance sheets. The Company’s centrally cleared interest rate swaps and exchange-traded futures and options on futures require that the Company posts 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. The receipt or payment of initial margin is accounted for separate from the derivative asset or liability and is 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.

The Company has provided specific disclosure regarding the location and amounts of derivative instruments in the consolidated financial statements and how derivative instruments and related hedged items are accounted for. See Note 9 - Derivative Instruments and Hedging Activities of these notes to the consolidated financial statements.

Warehouse Facilities

To finance origination activities, the Company enters into warehouse facilities collateralized by the value of the mortgage loans pledged for a period of up to 90 days per loan. Borrowings under these warehouse facilities are considered short-term debt. The Company’s warehouse facilities generally bear interest rates based on an index plus a spread. Borrowings under warehouse facilities are treated as collateralized financing transactions and are carried at contractual amounts, as specified in the respective agreements.

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.

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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.

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.



(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

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TWO HARBORS INVESTMENT CORP.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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 nine months ended September 30, 2023, the Company recognized $1.1 million and $1.2 million, respectively, of acquisition-related costs. The Company did not recognize any further acquisition-related costs in 2024.

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 September 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 nine months ended September 30, 2024 and 2023 prepared as if the

TWO HARBORS INVESTMENT CORP. [TWO] Filings
TWO HARBORS INVESTMENT CORP. [TWO-PA] Filings
TWO HARBORS INVESTMENT CORP. [TWO-PB] Filings
TWO HARBORS INVESTMENT CORP. [TWO-PC] Filings
10-Q	[2024-10-29]
10-Q	[2024-07-31]
10-Q	[2024-04-30]
10-K	[2024-02-20]
10-Q	[2023-10-31]
10-Q	[2023-08-01]
10-Q	[2023-05-02]
10-K	[2023-02-28]
10-Q	[2022-11-09]
10-Q	[2022-08-04]
10-Q	[2022-05-05]
10-K	[2022-03-01]
10-Q	[2021-11-09]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-02-25]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-Q	[2020-05-08]
10-K	[2020-02-26]
10-Q	[2019-11-06]
10-Q	[2019-08-07]
10-Q	[2019-05-08]
10-K	[2019-02-27]
10-Q	[2018-11-07]
10-Q	[2018-08-08]
10-Q	[2018-05-09]
10-K	[2018-02-27]
10-Q	[2017-11-08]
10-Q	[2017-08-08]
10-Q	[2017-05-04]
10-K	[2017-02-28]
10-Q	[2016-11-03]
10-Q	[2016-08-04]
10-Q	[2016-05-05]
10-K	[2016-02-26]
10-Q	[2015-11-05]
10-Q	[2015-08-05]
10-Q	[2015-05-07]
10-K	[2015-02-27]
10-Q	[2014-11-05]
10-Q	[2014-08-07]
10-Q	[2014-05-08]
10-K	[2014-02-27]
10-Q	[2013-11-06]
10-Q	[2013-08-07]
10-Q	[2013-05-08]
10-K	[2013-02-28]
10-Q	[2012-11-07]
10-Q	[2012-08-03]
10-Q	[2012-05-04]
10-K	[2012-02-28]

TWO HARBORS INVESTMENT CORP. [TWO] Filings

TWO HARBORS INVESTMENT CORP. [TWO-PA] Filings

TWO HARBORS INVESTMENT CORP. [TWO-PB] Filings

TWO HARBORS INVESTMENT CORP. [TWO-PC] Filings