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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
OR
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 shareTWONew York Stock Exchange
8.125% Series A Cumulative Redeemable Preferred StockTWO PRANew York Stock Exchange
7.625% Series B Cumulative Redeemable Preferred StockTWO PRBNew York Stock Exchange
7.25% Series C Cumulative Redeemable Preferred StockTWO PRCNew 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 filerAccelerated 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)
PART II - OTHER INFORMATION

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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 value2,884,304 3,052,016 
Mortgage loans held-for-sale, at fair value3,344 332 
Cash and cash equivalents522,581 729,732 
Restricted cash89,125 65,101 
Accrued interest receivable36,561 35,339 
Due from counterparties298,283 323,224 
Derivative assets, at fair value12,572 85,291 
Reverse repurchase agreements359,180 284,091 
Other assets175,790 236,525 
Total Assets (1)
$12,887,842 $13,138,800 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements$8,763,400 $8,020,207 
Revolving credit facilities999,171 1,329,171 
Warehouse facilities3,017  
Term notes payable 295,271 
Convertible senior notes259,815 268,582 
Derivative liabilities, at fair value16,764 21,506 
Due to counterparties386,141 574,735 
Dividends payable58,730 58,731 
Accrued interest payable76,868 141,773 
Commitments and contingencies (see Note 18)
  
Other liabilities154,562 225,434 
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 capital5,934,920 5,925,424 
Accumulated other comprehensive loss(53,959)(176,429)
Cumulative earnings1,372,056 1,349,973 
Cumulative distributions to stockholders(5,686,147)(5,509,823)
Total Stockholders’ Equity2,169,374 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 EndedNine Months Ended
September 30,September 30,
2024202320242023
Net interest income (expense):
Interest income$112,642 $123,608 $346,378 $357,963 
Interest expense154,931 173,094 469,138 475,145 
Net interest expense
(42,289)(49,486)(122,760)(117,182)
Net servicing income:
Servicing income171,732 178,625 514,080 507,168 
Servicing costs3,900 29,903 15,494 83,459 
Net servicing income167,832 148,722 498,586 423,709 
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 income123 2,903 349 5,103 
Total other (loss) income(335,901)267,922 (213,564)142,461 
Expenses:
Compensation and benefits20,180 8,617 67,953 31,568 
Other operating expenses18,405 15,984 57,156 38,354 
Total expenses38,585 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 StockCommon Stock Par ValueAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Cumulative EarningsCumulative Distributions to StockholdersTotal 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, 2023630,999 967 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, 2023618,579 962 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 StockCommon Stock Par ValueAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Cumulative EarningsCumulative Distributions to StockholdersTotal 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, 2024601,467 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, 2024601,467 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,
20242023
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 securities32,054 (12,282)
Loss (gain) on servicing asset145,194 (60,969)
Realized and unrealized loss (gain) on interest rate swaps and swaptions98,109 (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 compensation9,336 9,363 
Originations and purchases of mortgage loans held-for-sale(22,444)(79)
Proceeds from sales of mortgage loans held-for-sale19,559  
Proceeds from repayment of mortgage loans held-for-sale143 30 
Net change in assets and liabilities:
Increase in accrued interest receivable(1,222)(3,020)
Decrease in deferred income taxes, net9,229 46,740 
Decrease in accrued interest payable(64,905)(3,325)
Change in other operating assets and liabilities, net1,610 33,848 
Net cash provided by operating activities222,063 233,770 
Cash Flows From Investing Activities:
Purchases of available-for-sale securities(1,513,681)(3,644,567)
Proceeds from sales of available-for-sale securities896,520 1,694,891 
Principal payments on available-for-sale securities517,249 507,200 
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,
20242023
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 facilities58,500 349,000 
Principal payments on revolving credit facilities(388,500)(57,160)
Proceeds from warehouse facilities7,734  
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 costs165 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 period794,833 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 RecognizedSubsequent Measurement Period AdjustmentsAcquisition Date Amounts Recognized, as adjusted
Total Consideration$44,732 $(188)$44,544 
Assets:
Cash and cash equivalents$50,366 $ $50,366 
Intangible assets786 13 799 
Other assets29,148  29,148 
Total Assets Acquired$80,300 $13 $80,313 
Liabilities:
Accrued expenses$4,483 $ $4,483 
Other liabilities58,739  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 RoundPoint acquisition had been consummated on January 1, 2023.
Three Months EndedNine Months Ended
September 30,September 30,
(in thousands)2024202320242023
Revenue (1)
$(51,527)$585,641 $646,894 $1,044,039 
(Loss) income before income taxes
$(248,943)$339,009 $37,153 $357,636 
____________________
(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 $10.3 million and $23.9 million, respectively, during the three and nine months ended September 30, 2023. These subservicing expenses are included within the servicing costs line item on the Company’s condensed consolidated statements of comprehensive income (loss).

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
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 nine months ended September 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.
The following table presents a summary of the assets and liabilities of all consolidated trusts as reported on the condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023:
(in thousands)September 30,
2024
December 31,
2023
Note receivable (1)
$ $399,317 
Restricted cash42,696 45,642 
Accrued interest rece