________________

(1)

Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by book value as of the beginning of the period.

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended June 30, 2024

Three Months Ended March 31, 2024

Earnings attributable to common stockholders

Earnings

Per
weighted
average
basic
common share

Annualized
return on
average
common
equity

Earnings

Per
weighted
average
basic
common
share

Annualized
return on
average
common
equity

Comprehensive Income

$

479

$

—

0.1

%

$

89,370

$

0.85

22.4

%

GAAP Net Income

$

44,552

$

0.43

11.1

%

$

192,448

$

1.85

48.2

%

Earnings Available for Distribution⁽¹⁾

$

17,516

$

0.17

4.4

%

$

4,725

$

0.05

1.2

%

Operating Metrics

Dividend per common share

$

0.45

$

0.45

Annualized dividend yield⁽²⁾

13.6

%

13.6

%

Book value per common share at period end

$

15.19

$

15.64

Economic return on book value⁽³⁾

—

%

5.8

%

Operating expenses, excluding non-cash LTIP amortization and certain operating expenses⁽⁴⁾

$

37,924

$

40,300

Operating expenses, excluding non-cash LTIP amortization and certain operating expenses, as a percentage of average equity⁽⁴⁾

6.8

%

7.2

%

___________________

(1)

Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 11 for a definition of EAD and a reconciliation of GAAP to non-GAAP financial information.

(2)

Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.

(3)

Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.

(4)

Excludes non-cash equity compensation expense of $1.6 million for the second quarter of 2024 and $6.1 million for the first quarter of 2024 and certain operating credits of $0.6 million for the second quarter of 2024 and expenses of $1.2 million for the first quarter of 2024. Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred/reversed in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC.

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of June 30, 2024

As of March 31, 2024

(unaudited)

(unaudited)

Agency RMBS

$

8,035,395

72.4

%

$

8,188,432

72.6

%

Mortgage servicing rights⁽¹⁾

3,065,415

27.6

%

3,084,879

27.4

%

Other

3,942

—

%

3,953

—

%

Aggregate Portfolio

11,104,752

11,277,264

Net TBA position⁽²⁾

4,940,593

3,433,417

Total Portfolio

$

16,045,345

$

14,710,681

__________________

(1)

Based on the prior month-end’s principal balance of the loans underlying the company’s MSR, increased for current month purchases.

(2)

Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP

Portfolio Metrics Specific to Agency RMBS

As of June 30, 2024

As of March 31, 2024

(unaudited)

(unaudited)

Weighted average cost basis⁽¹⁾

$

101.28

$

100.70

Weighted average experienced three-month CPR

7.3

%

4.8

%

Gross weighted average coupon rate

5.8

%

5.6

%

Weighted average loan age (months)

31

30

__________________

(1)

Weighted average cost basis includes Agency principal and interest RMBS only and utilizes carrying value for weighting purposes.

Portfolio Metrics Specific to MSR⁽¹⁾

As of June 30, 2024

As of March 31, 2024

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

209,389,409

$

213,596,880

Gross coupon rate

3.5

%

3.5

%

Current loan size

$

333

$

335

Original FICO⁽²⁾

759

759

Original LTV

71

%

72

%

60+ day delinquencies

0.7

%

0.7

%

Net servicing fee

25.3 basis points

25.3 basis points

Three Months Ended
June 30, 2024

Three Months Ended
March 31, 2024

(unaudited)

(unaudited)

Fair value (losses) gains

$

(22,857

)

$

11,012

Servicing income

$

169,882

$

160,928

Servicing costs

$

5,214

$

6,904

Change in servicing reserves

$

(739

)

$

215

________________

(1)

Metrics exclude residential mortgage loans in securitization trusts for which the company is the named servicing administrator. Portfolio metrics, other than UPB, represent averages weighted by UPB.

(2)

FICO represents a mortgage industry accepted credit score of a borrower.

Other Investments and Risk Management Metrics

As of June 30, 2024

As of March 31, 2024

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional⁽¹⁾

$

4,983,000

$

3,450,000

Futures notional

$

(6,308,900

)

$

(5,638,800

)

Interest rate swaps notional

$

11,739,471

$

9,822,112

__________________

(1)

Accounted for as derivative instruments in accordance with GAAP.

June 30, 2024

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by securities

$

7,834,910

5.48

%

2.78

18

Repurchase agreements collateralized by MSR

600,000

8.49

%

22.72

1

Total repurchase agreements

8,434,910

5.69

%

4.20

19

Revolving credit facilities collateralized by MSR and related servicing advance obligations

1,279,271

8.45

%

20.25

4

Term notes payable collateralized by MSR

—

—

%

—

n/a

Unsecured convertible senior notes

259,412

6.25

%

18.54

n/a

Total borrowings

$

9,973,593

March 31, 2024

Balance

Weighted
Average
Borrowing Rate

Weighted
Average Months
to Maturity

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by securities

$

8,102,661

5.52

%

2.91

18

Repurchase agreements collateralized by MSR

258,977

6.92

%

5.28

3

Total repurchase agreements

8,361,638

5.61

%

2.98

19

Revolving credit facilities collateralized by MSR and related servicing advance obligations

1,357,671

8.56

%

15.32

4

Term notes payable collateralized by MSR

295,520

8.24

%

2.83

n/a

Unsecured convertible senior notes

268,953

6.25

%

21.53

n/a

Total borrowings

$

10,283,782

Borrowings by Collateral Type

As of June 30, 2024

As of March 31, 2024

(dollars in thousands)

(unaudited)

(unaudited)

Agency RMBS

$

7,834,693

$

8,102,444

Mortgage servicing rights and related servicing advance obligations

1,879,271

1,912,168

Other - secured

217

217

Other - unsecured⁽¹⁾

259,412

268,953

Total

9,973,593

10,283,782

TBA cost basis

4,950,762

3,421,932

Net payable (receivable) for unsettled RMBS

—

(213,264

)

Total, including TBAs and net payable (receivable) for unsettled RMBS

$

14,924,355

$

13,492,450

Debt-to-equity ratio at period-end⁽²⁾

4.5 :1.0

4.6 :1.0

Economic debt-to-equity ratio at period-end⁽³⁾

6.8 :1.0

6.0 :1.0

Cost of Financing by Collateral Type⁽⁴⁾

Three Months Ended
June 30, 2024

Three Months Ended
March 31, 2024

(unaudited)

(unaudited)

Agency RMBS

5.54

%

5.63

%

Mortgage servicing rights and related servicing advance obligations⁽⁵⁾

8.99

%

9.08

%

Other - secured

5.53

%

6.99

%

Other - unsecured⁽¹⁾⁽⁵⁾

6.89

%

6.87

%

Annualized cost of financing

6.23

%

6.30

%

Interest rate swaps⁽⁶⁾

(0.61

)%

(0.56

)%

U.S. Treasury futures⁽⁷⁾

(0.29

)%

(0.30

)%

TBAs⁽⁸⁾

3.44

%

3.57

%

Annualized cost of financing, including swaps, U.S. Treasury futures and TBAs

4.76

%

5.02

%

___________________

(1)

Unsecured convertible senior notes.

(2)

Defined as total borrowings to fund Agency and non-Agency investment securities and MSR, divided by total equity.

(3)

Defined as total borrowings to fund Agency and non-Agency investment securities and MSR, plus the implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity.

(4)

Excludes any repurchase agreements collateralized by U.S. Treasuries.

(5)

Includes amortization of debt issuance costs.

(6)

The cost of financing on interest rate swaps held to mitigate interest rate risk associated with the company’s outstanding borrowings includes interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements and is calculated using average borrowings balance as the denominator.

(7)

The cost of financing on U.S. Treasury futures held to mitigate interest rate risk associated with the company’s outstanding borrowings is calculated using average borrowings balance as the denominator. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements.

(8)

The implied financing benefit/cost of dollar roll income on TBAs is calculated using the average cost basis of TBAs as the denominator. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. TBAs are accounted for as derivative instruments in accordance with GAAP.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

June 30,
2024

December 31,
2023

(unaudited)

ASSETS

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

$

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

Other liabilities

170,037

225,434

Total Liabilities

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

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

(unaudited)

(unaudited)

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

)

Dividends declared per common share

$

0.45

$

0.45

$

0.90

$

1.05

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

)

TWO HARBORS INVESTMENT CORP.

INTEREST INCOME AND INTEREST EXPENSE

(dollars in thousands, except share data)

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

(unaudited)

(unaudited)

Interest income:

Available-for-sale securities

$

99,211

$

104,195

$

199,816

$

201,233

Other

16,742

13,567

33,920

33,122

Total interest income

115,953

117,762

233,736

234,355

Interest expense:

Repurchase agreements

113,714

116,946

232,430

221,301

Revolving credit facilities

29,906

29,684

60,153

55,340

Term notes payable

6,008

8,239

12,426

15,882

Convertible senior notes

4,579

4,692

9,198

9,528

Total interest expense

154,207

159,561

314,207

302,051

Net interest expense

$

(38,254

)

$

(41,799

)

$

(80,471

)

$

(67,696

)

TWO HARBORS INVESTMENT CORP.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION

(dollars in thousands, except share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

Three Months Ended

June 30,
2024

March 31,
2024

(unaudited)

(unaudited)

Reconciliation of comprehensive income to Earnings Available for Distribution:

Comprehensive income attributable to common stockholders

$

479

$

89,370

Adjustment for other comprehensive loss attributable to common stockholders:

Unrealized loss on available-for-sale securities

44,073

103,078

Net income attributable to common stockholders

$

44,552

$

192,448

Adjustments to exclude reported realized and unrealized (gains) losses:

Realized loss on securities

22,149

10,915

Unrealized loss (gain) on securities

117

(20

)

Provision for credit losses

171

80

Realized and unrealized loss (gain) on mortgage servicing rights

22,857

(11,012

)

Realized gain on termination or expiration of interest rate swaps and swaptions

(2,388

)

(13,890

)

Unrealized gain on interest rate swaps and swaptions

(4,609

)

(70,325

)

Realized and unrealized loss (gain) on other derivative instruments

852

(47,489

)

Gain on repurchase and retirement of preferred stock

—

(644

)

Other realized and unrealized (gains) losses

(226

)

3

Other adjustments:

MSR amortization⁽¹⁾

(89,058

)

(78,704

)

TBA dollar roll income (losses)⁽²⁾

4,019

(1,905

)

U.S. Treasury futures income⁽³⁾

7,211

7,694

Change in servicing reserves

(739

)

215

Non-cash equity compensation expense

1,643

6,083

Certain operating expenses⁽⁴⁾

(624

)

1,198

Net provision for income taxes on non-EAD

11,589

10,078

Earnings available for distribution to common stockholders⁽⁵⁾

$

17,516

$

4,725

Weighted average basic common shares

103,555,755

103,401,940

Earnings available for distribution to common stockholders per weighted average basic common share

$

0.17

$

0.05

________________

(1)

MSR amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value.

(2)

TBA dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.

(3)

U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements.

(4)

Certain operating expenses predominantly consists of expenses incurred in connection with the company’s ongoing litigation with PRCM Advisers LLC. It also includes certain transaction expenses incurred/reversed in connection with the company’s acquisition of RoundPoint Mortgage Servicing LLC.

(5)

EAD is a non-GAAP measure that we define as comprehensive income attributable to common stockholders, excluding realized and unrealized gains and losses on the aggregate portfolio, gains and losses on repurchases of preferred stock, provision for (reversal of) credit losses, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock and certain operating expenses. As defined, EAD includes net interest income, accrual and settlement of interest on derivatives, dollar roll income on TBAs, U.S. Treasury futures income, servicing income, net of estimated amortization on MSR and certain cash related operating expenses. EAD provides supplemental information to assist investors in analyzing the company’s results of operations and helps facilitate comparisons to industry peers. EAD is one of several measures our board of directors considers to determine the amount of dividends to declare on our common stock and should not be considered an indication of our taxable income or as a proxy for the amount of dividends we may declare.