(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.

Includes 35,047 Series A, 280,060 Series B and 170,502 Series C preferred shares for the three months ended March 31, 2024.

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

Three Months Ended March 31, 2024

Three Months Ended December 31, 2023

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

$

89,370

$

0.85

22.4%

$

38,886

$

0.40

10.5%

GAAP Net Income (Loss)

$

192,448

$

1.85

48.2%

$

(444,693)

$

(4.56)

(120.4)%

Earnings Available for Distribution⁽¹⁾

$

4,725

$

0.05

1.2%

$

(10,505)

$

(0.11)

(2.8)%

Operating Metrics

Dividend per common share

$

0.45

$

0.45

Annualized dividend yield⁽²⁾

13.6%

12.9%

Book value per common share at period end

$

15.64

$

15.21

Economic return on book value⁽³⁾

5.8%

2.0%

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

$

40,300

$

40,235

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

7.2%

7.6%

(1)

Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 10 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 $6.1 million for the first quarter of 2024 and $1.6 million for the fourth quarter of 2023 and certain operating expenses of $1.2 million for the first quarter of 2024 and $3.4 million for the fourth quarter of 2023. 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 in connection with the company's acquisition of RoundPoint Mortgage Servicing LLC.

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

Portfolio Composition

As of March 31, 2024

As of December 31, 2023

(unaudited)

(unaudited)

Agency RMBS

$

8,188,432

72.6%

$

8,335,245

73.2%

Mortgage servicing rights⁽¹⁾

3,084,879

27.4%

3,052,016

26.8%

Other

3,953

—%

4,150

—%

Aggregate Portfolio

11,277,264

11,391,411

Net TBA position⁽²⁾

3,433,417

3,222,022

Total Portfolio

$

14,710,681

$

14,613,433

(1)

Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted 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 March 31, 2024

As of December 31, 2023

(unaudited)

(unaudited)

Weighted average cost basis⁽¹⁾

$

100.70

$

100.65

Weighted average experienced three-month CPR

4.8%

5.2%

Gross weighted average coupon rate

5.6%

5.5%

Weighted average loan age (months)

30

28

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 March 31, 2024

As of December 31, 2023

(dollars in thousands)

(unaudited)

(unaudited)

Unpaid principal balance

$

213,596,880

$

215,647,172

Gross coupon rate

3.5%

3.5%

Current loan size

$

335

$

336

Original FICO⁽²⁾

759

759

Original LTV

72%

72%

60+ day delinquencies

0.7%

0.7%

Net servicing fee

25.3 basis points

25.3 basis points

Three Months Ended

March 31, 2024

Three Months Ended

December 31, 2023

(unaudited)

(unaudited)

Fair value gains (losses)

$

11,012

$

(172,589)

Servicing income

$

160,928

$

174,243

Servicing costs

$

6,904

$

13,259

Change in servicing reserves

$

215

$

(1,230)

(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 March 31, 2024

As of December 31, 2023

(dollars in thousands)

(unaudited)

(unaudited)

Net long TBA notional⁽¹⁾

$

3,450,000

$

3,497,000

Futures notional

$

(5,638,800)

$

(6,203,050)

Interest rate swaps notional

$

9,822,112

$

17,788,114

Swaptions net notional

$

—

$

(200,000)

Accounted for as derivative instruments in accordance with GAAP.

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

December 31, 2023

Balance

Weighted

Average

Borrowing Rate

Weighted

Average Months

to Maturity

Number of

Distinct

Counterparties

(dollars in thousands, unaudited)

Repurchase agreements collateralized by securities

$

7,747,635

5.64%

1.59

18

Repurchase agreements collateralized by MSR

272,572

7.08%

7.72

3

Total repurchase agreements

8,020,207

5.74%

1.80

19

Revolving credit facilities collateralized by MSR and related servicing advance obligations

1,329,171

8.66%

13.41

4

Term notes payable collateralized by MSR

295,271

8.27%

5.82

n/a

Unsecured convertible senior notes

268,582

6.25%

24.53

n/a

Total borrowings

$

9,913,231

Borrowings by Collateral Type

As of March 31, 2024

As of December 31, 2023

(dollars in thousands)

(unaudited)

(unaudited)

Agency RMBS

$

8,102,444

$

7,747,402

Mortgage servicing rights and related servicing advance obligations

1,912,168

1,897,014

Other - secured

217

233

Other - unsecured⁽¹⁾

268,953

268,582

Total

10,283,782

9,913,231

TBA cost basis

3,421,932

3,170,548

Net payable (receivable) for unsettled RMBS

(213,264)

196,644

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

$

13,492,450

$

13,280,423

Debt-to-equity ratio at period-end⁽²⁾

4.6 :1.0

4.5 :1.0

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

6.0 :1.0

6.0 :1.0

Cost of Financing by Collateral Type⁽⁴⁾

Three Months Ended

March 31, 2024

Three Months Ended

December 31, 2023

(unaudited)

(unaudited)

Agency RMBS

5.63%

5.74%

Mortgage servicing rights and related servicing advance obligations⁽⁵⁾

9.08%

9.19%

Other - secured

6.99%

6.87%

Other - unsecured⁽¹⁾⁽⁵⁾

6.87%

6.93%

Annualized cost of financing

6.30%

6.43%

Interest rate swaps⁽⁶⁾

(0.56)%

(0.28)%

U.S. Treasury futures⁽⁷⁾

(0.30)%

(0.20)%

TBAs⁽⁸⁾

3.57%

3.64%

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

5.02%

5.62%

(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)

March 31,
2024

December 31,
2023

(unaudited)

ASSETS

Available-for-sale securities, at fair value (amortized cost $8,467,938 and $8,509,383, respectively; allowance for credit losses $3,607 and $3,943, respectively)

$

8,182,544

$

8,327,149

Mortgage servicing rights, at fair value

3,084,879

3,052,016

Cash and cash equivalents

666,244

729,732

Restricted cash

72,184

65,101

Accrued interest receivable

35,487

35,339

Due from counterparties

545,312

323,224

Derivative assets, at fair value

24,397

85,291

Reverse repurchase agreements

351,843

284,091

Other assets

199,035

236,857

Total Assets

$

13,161,925

$

13,138,800

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Repurchase agreements

$

8,361,638

$

8,020,207

Revolving credit facilities

1,357,671

1,329,171

Term notes payable

295,520

295,271

Convertible senior notes

268,953

268,582

Derivative liabilities, at fair value

3,027

21,506

Due to counterparties

330,551

574,735

Dividends payable

58,685

58,731

Accrued interest payable

79,990

141,773

Other liabilities

165,820

225,434

Total Liabilities

10,921,855

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 103,474,944 and 103,206,457 shares issued and outstanding, respectively

1,035

1,032

Additional paid-in capital

5,931,558

5,925,424

Accumulated other comprehensive loss

(279,507)

(176,429)

Cumulative earnings

1,554,205

1,349,973

Cumulative distributions to stockholders

(5,568,688)

(5,509,823)

Total Stockholders' Equity

2,240,070

2,203,390

Total Liabilities and Stockholders' Equity

$

13,161,925

$

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 March 31, 2024

2024

2023

(unaudited)

Net interest income (expense):

Interest income

$

117,783

$

116,593

Interest expense

160,000

142,490

Net interest expense

(42,217)

(25,897)

Net servicing income:

Servicing income

166,333

153,320

Servicing costs

7,119

28,366

Net servicing income

159,214

124,954

Other income (loss):

(Loss) gain on investment securities

(10,975)

10,798

Gain (loss) on servicing asset

11,012

(28,079)

Gain (loss) on interest rate swap and swaption agreements

98,510

(82,154)

Gain (loss) on other derivative instruments

47,599

(155,771)

Other (loss) income

(3)

—

Total other income (loss)

146,143

(255,206)

Expenses:

Compensation and benefits

26,529

14,083

Other operating expenses

21,052

10,484

Total expenses

47,581

24,567

Income (loss) before income taxes

215,559

(180,716)

Provision for (benefit from) income taxes

11,971

(3,908)

Net income (loss)

203,588

(176,808)

Dividends on preferred stock

(11,784)

(12,365)

Gain on repurchase and retirement of preferred stock

644

—

Net income (loss) attributable to common stockholders

$

192,448

$

(189,173)

Basic earnings (loss) per weighted average common share

$

1.85

$

(2.05)

Diluted earnings (loss) per weighted average common share

$

1.73

$

(2.05)

Dividends declared per common share

$

0.45

$

0.60

Weighted average number of shares of common stock:

Basic

103,401,940

92,575,840

Diluted

112,973,317

92,575,840

Comprehensive income (loss):

Net income (loss)

$

203,588

$

(176,808)

Other comprehensive (loss) income:

Unrealized (loss) gain on available-for-sale securities

(103,078)

125,931

Other comprehensive (loss) income

(103,078)

125,931

Comprehensive income (loss)

100,510

(50,877)

Dividends on preferred stock

(11,784)

(12,365)

Gain on repurchase and retirement of preferred stock

644

—

Comprehensive income (loss) attributable to common stockholders

$

89,370

$

(63,242)

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

March 31,
2024

December 31,
2023

(unaudited)

(unaudited)

Reconciliation of Comprehensive income to Earnings Available for Distribution:

Comprehensive income attributable to common stockholders

$

89,370

$

38,886

Adjustment for other comprehensive loss (income) attributable to common stockholders:

Unrealized loss (gain) on available-for-sale securities

103,078

(483,579)

Net income (loss) attributable to common stockholders

$

192,448

$

(444,693)

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

Realized loss on securities

10,915

83,505

Unrealized gain on securities

(20)

(708)

Provision (reversal of provision) for credit losses

80

(328)

Realized and unrealized (gain) loss on mortgage servicing rights

(11,012)

172,589

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

(13,890)

12,438

Unrealized (gain) loss on interest rate swaps and swaptions

(70,325)

134,240

Realized and unrealized (gain) loss on other derivative instruments

(47,489)

143,906

Gain on repurchase and retirement of preferred stock

(644)

(519)

Other realized and unrealized losses

3

—

Other adjustments:

MSR amortization⁽¹⁾

(78,704)

(88,286)

TBA dollar roll (losses) income⁽²⁾

(1,905)

(777)

U.S. Treasury futures income⁽³⁾

7,694

5,143

Change in servicing reserves

215

(1,230)

Non-cash equity compensation expense

6,083

1,613

Certain operating expenses⁽⁴⁾

1,198

3,408

Net provision for (benefit from) income taxes on non-EAD

10,078

(30,806)

Earnings available for distribution to common stockholders⁽⁵⁾

$

4,725

$

(10,505)

Weighted average basic common shares

103,401,940

97,489,039

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

$

0.05

$

(0.11)

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.

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

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.

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 in connection with the company's acquisition of RoundPoint Mortgage Servicing LLC.

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.