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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, 2022
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,Minnesota55416
(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 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 November 7, 2022, there were 86,374,554 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

i
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,
2022		December 31,
2021
ASSETS(unaudited)
Available-for-sale securities, at fair value (amortized cost $10,228,511 and $7,005,013, respectively; allowance for credit losses $8,535 and $14,238, respectively)
$9,473,843 $7,161,703 
Mortgage servicing rights, at fair value3,021,790 2,191,578 
Cash and cash equivalents732,482 1,153,856 
Restricted cash842,534 934,814 
Accrued interest receivable37,701 26,266 
Due from counterparties215,473 168,449 
Derivative assets, at fair value18,406 80,134 
Reverse repurchase agreements207,206 134,682 
Other assets146,122 262,823 
Total Assets (1)
$14,695,557 $12,114,305 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements$10,034,018 $7,656,445 
Revolving credit facilities1,131,161 420,761 
Term notes payable397,697 396,776 
Convertible senior notes282,096 424,827 
Derivative liabilities, at fair value107,379 53,658 
Due to counterparties348,176 196,627 
Dividends payable72,802 72,412 
Accrued interest payable48,592 18,382 
Commitments and contingencies (see Note 15)
— — 
Other liabilities129,159 130,464 
Total Liabilities (1)
12,551,080 9,370,352 
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 29,050,000 shares issued and outstanding ($726,250 liquidation preference)
702,550 702,550 
Common stock, par value $0.01 per share; 175,000,000 shares authorized and 86,371,867 and 85,977,831 shares issued and outstanding, respectively
864 860 
Additional paid-in capital5,643,493 5,627,758 
Accumulated other comprehensive (loss) income(701,383)186,346 
Cumulative earnings1,703,445 1,212,983 
Cumulative distributions to stockholders(5,204,492)(4,986,544)
Total Stockholders’ Equity2,144,477 2,743,953 
Total Liabilities and Stockholders’ Equity$14,695,557 $12,114,305 
____________________
(1)The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At September 30, 2022 and December 31, 2021, assets of the VIEs totaled $438,784 and $454,596, and liabilities of the VIEs totaled $434,627 and $440,030, respectively. See Note 3 - Variable Interest Entities for additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

1
Table of Contents

TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
(in thousands, except share data)
Three Months EndedNine Months Ended
September 30,September 30,
2022202120222021
Interest income:
Available-for-sale securities$88,472 $35,837 $188,518 $134,581 
Other5,916 203 7,719 1,011 
Total interest income94,388 36,040 196,237 135,592 
Interest expense:
Repurchase agreements57,868 5,761 85,480 21,212 
Revolving credit facilities15,178 5,605 29,960 17,375 
Term notes payable5,427 3,249 12,608 9,685 
Convertible senior notes4,877 7,267 14,720 20,743 
Total interest expense83,350 21,882 142,768 69,015 
Net interest income11,038 14,158 53,469 66,577 
Other income:
(Loss) gain on investment securities
(6,426)28,642 (256,487)119,991 
Servicing income148,833 122,960 442,985 342,895 
(Loss) gain on servicing asset
(6,720)(42,500)489,461 16,887 
Gain (loss) on interest rate swap and swaption agreements
34,806 (3,947)29,499 5,102 
Gain (loss) on other derivative instruments
159,044 (15,019)(43,991)(239,718)
Other loss— — (117)(5,701)
Total other income329,537 90,136 661,350 239,456 
Expenses:
Servicing expenses21,152 21,041 68,847 64,668 
Compensation and benefits10,100 9,198 33,312 28,645 
Other operating expenses10,688 7,406 26,465 22,111 
Total expenses41,940 37,645 128,624 115,424 
Income before income taxes
298,635 66,649 586,195 190,609 
Provision for income taxes21,023 325 95,733 2,088 
Net income277,612 66,324 490,462 188,521 
Dividends on preferred stock13,747 13,748 41,242 44,711 
Net income attributable to common stockholders
$263,865 $52,576 $449,220 $143,810 
Basic earnings per weighted average common share
$3.04 $0.68 $5.19 $2.01 
Diluted earnings per weighted average common share
$2.78 $0.66 $4.80 $1.95 
Dividends declared per common share$0.68 $0.68 $2.04 $2.04 
Weighted average number of shares of common stock:
Basic
86,252,104 76,943,355 86,107,979 71,298,088 
Diluted
96,132,100 86,682,518 96,120,844 79,991,529 

The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents

TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited), continued
(in thousands, except share data)
Three Months EndedNine Months Ended
September 30,September 30,
2022202120222021
Comprehensive (loss) income:
Net income$277,612 $66,324 $490,462 $188,521 
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities
(551,673)(7,350)(887,729)(341,702)
Other comprehensive loss
(551,673)(7,350)(887,729)(341,702)
Comprehensive (loss) income
(274,061)58,974 (397,267)(153,181)
Dividends on preferred stock13,747 13,748 41,242 44,711 
Comprehensive (loss) income attributable to common stockholders
$(287,808)$45,226 $(438,509)$(197,892)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
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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, 2020$977,501 $684 $5,165,847 $641,601 $1,025,756 $(4,722,463)$3,088,926 
Net income— — — — 240,157 — 240,157 
Other comprehensive loss before reclassifications, net of tax
— — — (202,888)— — (202,888)
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — (68,565)— — (68,565)
Other comprehensive loss, net of tax
— — — (271,453)— — (271,453)
Redemption of preferred stock
(274,951)— — — — — (274,951)
Issuance of common stock, net of offering costs
— — 99 — — — 99 
Preferred dividends declared
— — — — — (17,216)(17,216)
Common dividends declared
— — — — — (46,636)(46,636)
Non-cash equity award compensation
— — 1,790 — — — 1,790 
Balance, March 31, 2021702,550 684 5,167,736 370,148 1,265,913 (4,786,315)2,720,716 
Net loss— — — — (117,960)— (117,960)
Other comprehensive loss before reclassifications, net of tax
— — — (57,799)— — (57,799)
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — (5,100)— — (5,100)
Other comprehensive loss, net of tax
— — — (62,899)— — (62,899)
Issuance of common stock, net of offering costs
— — 93 — — — 93 
Preferred dividends declared
— — — — — (13,747)(13,747)
Common dividends declared
— — — — — (46,759)(46,759)
Non-cash equity award compensation
— — 4,611 — — — 4,611 
Balance, June 30, 2021702,550 684 5,172,440 307,249 1,147,953 (4,846,821)2,484,055 
Net income— — — — 66,324 — 66,324 
Other comprehensive income before reclassifications, net of tax
— — — 11,415 — — 11,415 
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — (18,765)— — (18,765)
Other comprehensive loss, net of tax
— — — (7,350)— — (7,350)
Issuance of common stock, net of offering costs
— 100 256,511 — — — 256,611 
Preferred dividends declared
— — — — — (13,748)(13,748)
Common dividends declared
— — — — — (53,563)(53,563)
Non-cash equity award compensation
— 1 2,558 — — — 2,559 
Balance, September 30, 2021$702,550 $785 $5,431,509 $299,899 $1,214,277 $(4,914,132)$2,734,888 

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, 2021$702,550 $860 $5,627,758 $186,346 $1,212,983 $(4,986,544)$2,743,953 
Net income— — — — 285,270 — 285,270 
Other comprehensive loss before reclassifications, net of tax
— — — (323,490)— — (323,490)
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — (8,355)— — (8,355)
Other comprehensive loss, net of tax
— — — (331,845)— — (331,845)
Issuance of common stock, net of offering costs
— — 323 — — — 323 
Preferred dividends declared
— — — — — (13,747)(13,747)
Common dividends declared
— — — — — (58,811)(58,811)
Non-cash equity award compensation
— — 4,161 — — — 4,161 
Balance, March 31, 2022702,550 860 5,632,242 (145,499)1,498,253 (5,059,102)2,629,304 
Net loss— — — — (72,420)— (72,420)
Other comprehensive loss before reclassifications, net of tax
— — — (141,843)— — (141,843)
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — 137,632 — — 137,632 
Other comprehensive loss, net of tax
— — — (4,211)— — (4,211)
Issuance of common stock, net of offering costs
— — 82 — — — 82 
Preferred dividends declared
— — — — — (13,748)(13,748)
Common dividends declared
— — — — — (58,844)(58,844)
Non-cash equity award compensation
— 1 3,460 — — — 3,461 
Balance, June 30, 2022702,550 861 5,635,784 (149,710)1,425,833 (5,131,694)2,483,624 
Net income— — — — 277,612 — 277,612 
Other comprehensive loss before reclassifications, net of tax
— — — (534,923)— — (534,923)
Amounts reclassified from accumulated other comprehensive income, net of tax
— — — (16,750)— — (16,750)
Other comprehensive loss, net of tax
— — — (551,673)— — (551,673)
Issuance of common stock, net of offering costs
— 3 5,354 — — — 5,357 
Preferred dividends declared
— — — — — (13,747)(13,747)
Common dividends declared
— — — — — (59,051)(59,051)
Non-cash equity award compensation
— — 2,355 — — — 2,355 
Balance, September 30, 2022$702,550 $864 $5,643,493 $(701,383)$1,703,445 $(5,204,492)$2,144,477 

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,
20222021
Cash Flows From Operating Activities:
Net income$490,462 $188,521 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities, net
70,254 186,006 
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes
1,964 2,145 
Provision for credit losses on investment securities3,048 6,416 
Realized and unrealized losses (gains) on investment securities253,439 (126,407)
Gain on servicing asset(489,461)(16,887)
Realized and unrealized (gain) loss on interest rate swaps and swaptions(34,328)3,387 
Unrealized (gains) losses on other derivative instruments(52,105)104,201 
Equity based compensation9,977 8,960 
Net change in assets and liabilities:
(Increase) decrease in accrued interest receivable(11,435)19,498 
Decrease in deferred income taxes, net95,647 3,856 
Increase (decrease) in accrued interest payable30,210 (11,143)
Change in other operating assets and liabilities, net19,749 11,494 
Net cash provided by operating activities387,421 380,047 
Cash Flows From Investing Activities:
Purchases of available-for-sale securities(9,486,779)(157,102)
Proceeds from sales of available-for-sale securities5,022,894 5,102,894 
Principal payments on available-for-sale securities937,275 2,632,669 
Purchases of mortgage servicing rights, net of purchase price adjustments(599,314)(632,626)
(Payments for) proceeds from sales of mortgage servicing rights, net258,563 32,354 
Short sales (purchases) of derivative instruments, net(71,133)(1,275)
Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net
273,015 8,417 
Payments for reverse repurchase agreements(1,967,693)(780,520)
Proceeds from reverse repurchase agreements
1,895,169 787,045 
Increase (decrease) in due to counterparties, net104,525 (213,704)
Change in other investing assets and liabilities, net— 10,000 
Net cash (used in) provided by investing activities$(3,633,478)$6,788,152 

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,
20222021
Cash Flows From Financing Activities:
Proceeds from repurchase agreements$29,238,122 $25,612,501 
Principal payments on repurchase agreements(26,860,549)(33,632,698)
Proceeds from revolving credit facilities720,000 296,500 
Principal payments on revolving credit facilities(9,600)(159,569)
Proceeds from convertible senior notes— 279,930 
Repayment of convertible senior notes(143,774)(143,118)
Redemption of preferred stock— (274,951)
Proceeds from issuance of common stock, net of offering costs5,762 256,803 
Dividends paid on preferred stock(41,242)(49,913)
Dividends paid on common stock(176,316)(139,925)
Net cash provided by (used in) financing activities2,732,403 (7,954,440)
Net decrease in cash, cash equivalents and restricted cash(513,654)(786,241)
Cash, cash equivalents and restricted cash at beginning of period2,088,670 2,646,431 
Cash, cash equivalents and restricted cash at end of period$1,575,016 $1,860,190 
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$92,473 $72,023 
Cash received for taxes, net$(468)$(22,239)
Noncash Activities:
Dividends declared but not paid at end of period$72,802 $67,311 

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 that, through its wholly owned subsidiaries (collectively, the Company), invests in and manages Agency residential mortgage-backed securities, or Agency RMBS, mortgage servicing rights, or MSR, and other financial assets. 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 investment portfolio is managed as a whole and resources are allocated and financial performance is assessed on a consolidated basis. The Company’s common stock is listed on the NYSE under the symbol “TWO”.
On August 2, 2022, Matrix Financial Services Corporation, or Matrix, a wholly owned subsidiary of the Company, entered into a definitive stock purchase agreement to acquire RoundPoint Mortgage Servicing Corporation, or RoundPoint, from Freedom Mortgage Corporation. In connection with the acquisition, Matrix has agreed to pay a purchase price upon closing in an amount equal to the tangible net book value of RoundPoint, plus a premium amount of $10.5 million, subject to certain additional post-closing adjustments. In connection with the transaction, RoundPoint will divest its retail origination business as well as its RPX servicing exchange platform. Matrix also agreed to engage RoundPoint as a subservicer prior to the closing date and began transferring loans to RoundPoint in the fourth quarter of 2022. Upon closing, all servicing licenses and operational capabilities will remain with RoundPoint, and RoundPoint will become a wholly owned subsidiary of Matrix. The parties expect to close the transaction in 2023, subject to the satisfaction of customary closing conditions and the receipt of required regulatory and GSE approvals.
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 entities’ 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. All per share amounts, common shares outstanding and common equity-based awards for the three and nine months ended September 30, 2022 and all prior periods reflect the Company’s one-for-four reverse stock split effected on November 1, 2022 at 5:01 p.m. Eastern Time (refer to Note 16 - Stockholders’ Equity for additional information). 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, 2021. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2022 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2022 should not be construed as indicative of the results to be expected for future periods or the full year.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, 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 2021 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies.
Recently Issued and/or Adopted Accounting Standards
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The London Interbank Offered Rate, or LIBOR, has been used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. On March 5, 2021, Intercontinental Exchange Inc. announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intends to stop publication of the majority of USD-LIBOR tenors on June 30, 2023. In the U.S., the Alternative Reference Rates Committee, or ARRC, has identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate for U.S. dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR are in process, if not completed.
In March 2020, the FASB issued ASU No. 2020-04, which provides temporary optional expedients and exceptions on accounting for contract modifications and hedging relationships in anticipation of the replacement of LIBOR with another reference rate. The guidance also provides a one-time election to sell held-to-maturity debt securities or to transfer such securities to the available-for-sale or trading category. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity, evaluating the related risks and the Company’s exposure, and has already amended terms to transition to an alternative benchmark, where necessary. As of September 30, 2022, only the Company’s term notes incorporate LIBOR as the referenced rate and mature after the phase-out of LIBOR. However, the related agreements have provisions in place that provide for an alternative to LIBOR upon its phase-out. The Company had no other financing arrangements or derivative instruments that incorporate LIBOR as the referenced rate as of September 30, 2022. Additionally, each series of the Company’s fixed-to-floating preferred stock that becomes redeemable at the time the stock begins to pay a LIBOR-based rate has existing LIBOR cessation fallback language. The ASU was effective immediately for all entities and expires after December 31, 2022. The Company’s adoption of this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.

Note 3. 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, or the 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 the MSR Issuer Trust and in return, the 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.
Another of the Company’s subsidiary trust entities, or the Servicing Advance Receivables Issuer Trust, was formed for the purpose of financing servicing advances through a revolving credit facility, pursuant to which the Servicing Advance Receivables Issuer Trust issued a VFN backed by servicing advances pledged to the financing counterparty.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Both the MSR Issuer Trust and the Servicing Advance Receivables Issuer Trust are considered VIEs for financial reporting purposes and, thus, 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 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 the MSR Issuer Trust and the Servicing Advance Receivables Issuer Trust, which, in turn, support the MSR Issuer Trust’s obligations to noteholders under the securitization transaction and the 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, 2022 and December 31, 2021:
(in thousands)September 30,
2022		December 31,
2021
Note receivable (1)
$397,697 $396,776 
Restricted cash12,003 23,892 
Accrued interest receivable (1)
327 161 
Other assets28,757 33,767 
Total Assets$438,784 $454,596 
Term notes payable$397,697 $396,776 
Revolving credit facilities24,600 19,200 
Accrued interest payable451 216 
Other liabilities11,879 23,838 
Total Liabilities$434,627 $440,030 
____________________
(1)Receivables due from a wholly owned subsidiary of the Company to the trusts are eliminated in consolidation in accordance with U.S. GAAP.

Note 4. Available-for-Sale Securities, at Fair Value
The Company holds both Agency and non-Agency available-for sale, or AFS, investment securities which are carried at fair value on the condensed consolidated balance sheets. The following table presents the Company’s AFS investment securities by collateral type as of September 30, 2022 and December 31, 2021:
(in thousands)September 30,
2022		December 31,
2021
Agency:
Federal National Mortgage Association$5,129,315 $5,040,988 
Federal Home Loan Mortgage Corporation4,020,023 1,922,809 
Government National Mortgage Association199,645 185,602 
Non-Agency124,860 12,304 
Total available-for-sale securities$9,473,843 $7,161,703 

At September 30, 2022 and December 31, 2021, the Company pledged AFS securities with a carrying value of $9.4 billion and $7.0 billion, respectively, as collateral for repurchase agreements. See Note 11 - Repurchase Agreements.
At September 30, 2022 and December 31, 2021, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, to be considered linked transactions and, therefore, classified as derivatives.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $124.9 million and $12.3 million, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of September 30, 2022 and December 31, 2021:
September 30, 2022
(in thousands)Principal/ Current FaceUn-amortized PremiumAccretable Purchase DiscountAmortized CostAllowance for Credit LossesUnrealized GainUnrealized LossCarrying Value
Agency:
Principal and interest
$9,794,804 $269,242 $(17,875)$10,046,171 $— $65 $(735,797)$9,310,439 
Interest-only1,112,025 50,609 — 50,609 (8,325)1,544 (5,284)38,544 
Total Agency10,906,829 319,851 (17,875)10,096,780 (8,325)1,609 (741,081)9,348,983 
Non-Agency
1,284,894 8,747 (398)131,731 (210)700 (7,361)124,860 
Total$12,191,723 $328,598 $(18,273)$10,228,511 $(8,535)$2,309 $(748,442)$9,473,843 
December 31, 2021
(in thousands)Principal/ Current FaceUn-amortized PremiumAccretable Purchase DiscountAmortized CostAllowance for Credit LossesUnrealized GainUnrealized LossCarrying Value
Agency:
Principal and interest
$6,411,363 $270,699 $(12)$6,682,050 $— $171,308 $(4,855)$6,848,503 
Interest-only3,198,447 305,577 — 305,577 (12,851)20,699 (12,529)300,896 
Total Agency9,609,810 576,276 (12)6,987,627 (12,851)192,007 (17,384)7,149,399 
Non-Agency
1,940,815 16,533 (27)17,386 (1,387)33 (3,728)12,304 
Total$11,550,625 $592,809 $(39)$7,005,013 $(14,238)$192,040 $(21,112)$7,161,703 

The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of September 30, 2022:
September 30, 2022
(in thousands) Agency Non-Agency Total
< 1 year$1,574 $— $1,574 
≥ 1 and < 3 years31,829 — 31,829 
≥ 3 and < 5 years78,531 116,859 195,390 
≥ 5 and < 10 years9,236,225 8,001 9,244,226 
≥ 10 years824 — 824 
Total$9,348,983 $124,860 $9,473,843 

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Measurement of Allowances for Credit Losses on AFS Securities
The Company uses a discounted cash flow method to estimate and recognize an allowance for credit losses on both Agency and non-Agency AFS securities that are not accounted for under the fair value option. The following tables present the changes for the three and nine months ended September 30, 2022 and 2021 in the allowance for credit losses on Agency and non-Agency AFS securities:
Three Months EndedNine Months Ended
September 30, 2022September 30, 2022
(in thousands)AgencyNon-AgencyTotalAgencyNon-AgencyTotal
Allowance for credit losses at beginning of period
$(9,403)$(260)$(9,663)$(12,851)$(1,387)$(14,238)
Additions on securities for which credit losses were not previously recorded
(427)(178)(605)(462)(437)(899)
(Increase) decrease on securities with previously recorded credit losses
(1,020)228 (792)(3,763)1,614 (2,149)
Write-offs
2,525 — 2,525 8,751 — 8,751 
Allowance for credit losses at end of period
$(8,325)$(210)$(8,535)$(8,325)$(210)$(8,535)
Three Months EndedNine Months Ended
September 30, 2021September 30, 2021
(in thousands)AgencyNon-AgencyTotalAgencyNon-AgencyTotal
Allowance for credit losses at beginning of period
$(15,154)$(2,611)$(17,765)$(17,889)$(4,639)$(22,528)
Additions on securities for which credit losses were not previously recorded
(26)— (26)(57)(3,850)(3,907)
(Increase) decrease on securities with previously recorded credit losses
(1,156)1,023 (133)(3,293)784 (2,509)
Write-offs
2,336 159 2,495 7,239 6,276 13,515 
Allowance for credit losses at end of period
$(14,000)$(1,429)$(15,429)$(14,000)$(1,429)$(15,429)

The following tables present the components comprising the carrying value of AFS securities for which an allowance for credit losses has not been recorded by length of time that the securities had an unrealized loss position as of September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, the Company held 794 and 756 AFS securities, respectively; of the securities for which an allowance for credit losses has not been recorded, 655 and 45 were in an unrealized loss position for less than twelve consecutive months. At both September 30, 2022 and December 31, 2021, none of the Company’s AFS securities were in an unrealized loss position for more than twelve months without an allowance for credit losses recorded.
September 30, 2022
Unrealized Loss Position for
Less than 12 Months12 Months or MoreTotal
(in thousands)Estimated Fair ValueGross Unrealized LossesEstimated Fair ValueGross Unrealized LossesEstimated Fair ValueGross Unrealized Losses
Agency$9,317,451 $(738,513)$— $— $9,317,451 $(738,513)
Non-Agency118,264 (6,029)— — 118,264 (6,029)
Total$9,435,715 $(744,542)$— $— $9,435,715 $(744,542)
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
December 31, 2021
Unrealized Loss Position for
Less than 12 Months12 Months or MoreTotal
(in thousands)Estimated Fair ValueGross Unrealized LossesEstimated Fair ValueGross Unrealized LossesEstimated Fair ValueGross Unrealized Losses
Agency$2,371,216 $(12,031)$— $— $2,371,216 $(12,031)
Non-Agency9,613 (1,230)— — 9,613 (1,230)
Total$2,380,829 $(13,261)$— $— $2,380,829 $(13,261)

Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within (loss) gain on investment securities in the Company’s condensed consolidated statements of comprehensive (loss) income. The following table presents details around sales of AFS securities during the three and nine months ended September 30, 2022 and 2021:
Three Months EndedNine Months Ended
September 30,September 30,
(in thousands)2022202120222021
Proceeds from sales of available-for-sale securities$683,746 $502,349 $5,022,894 $5,102,894 
Amortized cost of available-for-sale securities sold(664,781)(481,751)(5,246,865)(4,998,583)
Total realized gains (losses) on sales, net$18,965 $20,598 $(223,971)$104,311 
Gross realized gains$18,995 $20,598 $40,574 $133,583 
Gross realized losses(30)— (264,545)(29,272)
Total realized gains (losses) on sales, net$18,965 $20,598 $(223,971)$104,311 

Note 5. Servicing Activities
Mortgage Servicing Rights, at Fair Value
A wholly owned subsidiary of the Company has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. The Company and its subsidiaries do not originate or directly service mortgage loans, and instead contract with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the Company’s MSR.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table summarizes activity related to MSR for the three and nine months ended September 30, 2022 and 2021.
Three Months EndedNine Months Ended
September 30,September 30,
(in thousands)2022202120222021
Balance at beginning of period$3,226,191 $2,020,106 $2,191,578 $1,596,153 
Purchases of mortgage servicing rights
56,391 282,719 601,141 656,468 
Sales of mortgage servicing rights
(259,059)(43,411)(259,059)(43,411)
Changes in fair value due to:
Changes in valuation inputs or assumptions used in the valuation model (1)
75,887 112,871 800,072 541,654 
Other changes in fair value (2)
(82,111)(144,314)(310,115)(513,710)
Other changes (3)
4,491 (14,659)(1,827)(23,842)
Balance at end of period (4)
$3,021,790 $2,213,312 $3,021,790 $2,213,312 
____________________
(1)Includes the impact of acquiring MSR at a cost different from fair value.
(2)Primarily represents changes due to the realization of cash flows.
(3)Includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral.
(4)Based on the principal balance of the loans underlying the MSR reported by servicers on a month lag, adjusted for current month purchases.

At September 30, 2022 and December 31, 2021, the Company pledged MSR with a carrying value of $3.0 billion and $2.1 billion, respectively, as collateral for repurchase agreements, revolving credit facilities and term notes payable. See Note 11 - Repurchase Agreements, Note 12 - Revolving Credit Facilities and Note 13 - Term Notes Payable.
As of September 30, 2022 and December 31, 2021, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
(dollars in thousands, except per loan data)September 30,
2022		December 31,
2021
Weighted average prepayment speed:6.9 %12.9 %
Impact on fair value of 10% adverse change$(50,494)$(110,222)
Impact on fair value of 20% adverse change$(100,112)$(210,406)
Weighted average delinquency:0.7 %1.3 %
Impact on fair value of 10% adverse change$(3,898)$(3,470)
Impact on fair value of 20% adverse change$(7,826)$(6,947)
Weighted average option-adjusted spread:5.0 %4.7 %
Impact on fair value of 10% adverse change$(43,287)$(42,188)
Impact on fair value of 20% adverse change$(84,217)$(82,126)
Weighted average per loan annual cost to service:$67.71 $66.76 
Impact on fair value of 10% adverse change$(20,095)$(25,919)
Impact on fair value of 20% adverse change$(39,132)$(51,911)

These assumptions and sensitivities are hypothetical and should be considered with caution. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSR is calculated without changing any other assumptions. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Risk Mitigation Activities
The primary risks associated with the Company’s MSR are changes in interest rates, mortgage spreads and prepayments. The Company economically hedges interest rate and mortgage spread risk primarily with its Agency RMBS portfolio. Prepayment risk is carefully monitored and partially mitigated through the Company’s ability to retain the MSR, in certain circumstances, through recapture agreements with its subservicers if the underlying loan is refinanced.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021:
Three Months EndedNine Months Ended
September 30,September 30,
(in thousands)2022202120222021
Servicing fee income$138,140 $121,221 $426,974 $337,469 
Ancillary and other fee income483 650 1,514 1,888 
Float income10,210 1,089 14,497 3,538 
Total$148,833 $122,960 $442,985 $342,895 

Mortgage Servicing Advances
As the servicer of record for the MSR assets, the Company may be required to advance principal and interest payments to security holders, and intermittent tax and insurance payments to local authorities and insurance companies on mortgage loans that are in forbearance, delinquency or default. The Company is responsible for funding these advances, potentially for an extended period of time, before receiving reimbursement from Fannie Mae and Freddie Mac. Servicing advances are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances totaled $72.3 million and $130.6 million and were included in other assets on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, mortgage loans in 60+ day delinquent status (whether or not subject to forbearance) accounted for approximately 0.7% and 1.3%, respectively, of the aggregate principal balance of loans for which the Company had servicing advance funding obligations.
The Company has one revolving credit facility to finance its servicing advance obligations. At September 30, 2022 and December 31, 2021, the Company had pledged servicing advances with a carrying value of $28.8 million and $33.8 million, respectively, as collateral for this revolving credit facility. See Note 12 - Revolving Credit Facilities.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of residential mortgage loans underlying its MSR assets, off-balance sheet residential mortgage loans owned by other entities for which the Company acts as servicing administrator and other assets. The following table presents the number of loans and unpaid principal balance of the mortgage assets for which the Company manages the servicing as of September 30, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
(dollars in thousands)Number of LoansUnpaid Principal BalanceNumber of LoansUnpaid Principal Balance
Mortgage servicing rights812,242 $206,613,560 796,205 $193,770,566 
Residential mortgage loans
647 382,436 868 519,270 
Other assets2 38 2 40 
Total serviced mortgage assets812,891 $206,996,034 797,075 $194,289,876 

Note 6. Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held in bank accounts and cash held in money market funds on an overnight basis.
The Company is required to maintain certain cash balances with counterparties for securities and derivatives trading activity, servicing activities and collateral for the Company’s borrowings in restricted accounts. The Company has also placed cash in a restricted account pursuant to a letter of credit on an office space lease.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the Company’s restricted cash balances as of September 30, 2022 and December 31, 2021:
(in thousands)September 30,
2022		December 31,
2021
Restricted cash balances held by trading counterparties:
For securities trading activity$5,890 $23,800 
For derivatives trading activity261,744 136,271 
For servicing activities15,348 26,704 
As restricted collateral for borrowings
559,492 747,979 
Total restricted cash balances held by trading counterparties842,474 934,754 
Restricted cash balance pursuant to letter of credit on office lease60 60 
Total$842,534 $934,814 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 that sum to the total of the same such amounts shown in the statements of cash flows:
(in thousands)September 30,
2022		December 31,
2021
Cash and cash equivalents$732,482 $1,153,856 
Restricted cash842,534 934,814 
Total cash, cash equivalents and restricted cash$1,575,016 $2,088,670 

Note 7. Derivative Instruments and Hedging Activities
The Company enters into a variety of derivative and non-derivative instruments in connection with its risk management activities. The primary objective for executing these derivative and non-derivative instruments is to mitigate the Company’s economic exposure to future events that are outside its control, principally cash flow volatility associated with interest rate risk (including associated prepayment risk). Specifically, the Company enters into derivative and non-derivative instruments to economically hedge interest rate risk or “duration mismatch (or gap)” by adjusting the duration of its floating-rate borrowings into fixed-rate borrowings to more closely match the duration of its assets. This particularly applies to floating-rate borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (e.g., LIBOR, Overnight Index Swap Rate, or OIS, or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed. The objective is to manage the cash flows associated with current and anticipated interest payments on borrowings, as well as the ability to roll or refinance borrowings at the desired amount by adjusting the duration.
To help manage the adverse impact of interest rate changes on the value of the Company’s portfolio as well as its cash flows, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps and total return swaps. In executing on the Company’s current risk management strategy, the Company has entered into TBAs, interest rate swap and swaption agreements, futures and options on futures. The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally MSR and interest-only securities (see discussion below).
The following summarizes the Company’s significant asset and liability classes, the risk exposure for these classes, and the Company’s risk management activities used to mitigate these risks. The discussion includes both derivative and non-derivative instruments used as part of these risk management activities. Any of the Company’s derivative and non-derivative instruments may be entered into in conjunction with one another in order to mitigate risks. As a result, the following discussions of each type of instrument should be read as a collective representation of the Company’s risk mitigation efforts and should not be considered independent of one another. While the Company uses derivative and non-derivative instruments to achieve the Company’s risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company’s market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Balance Sheet Presentation
In accordance with ASC 815, the Company records derivative financial instruments on its condensed consolidated balance sheets as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they are designated or qualifying as hedge instruments. Due to the volatility of the interest rate and credit markets and difficulty in effectively matching pricing or cash flows, the Company has not designated any current derivatives as hedging instruments.
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading derivatives as of September 30, 2022 and December 31, 2021:
September 30, 2022
Derivative AssetsDerivative Liabilities
(in thousands)Fair ValueNotionalFair ValueNotional
Inverse interest-only securities
$16,719 $206,224 $— $— 
Interest rate swap agreements
— — — — 
Swaptions, net— — — — 
TBAs1,687 (300,000)(107,379)4,454,000 
Futures, net— (15,296,550)— — 
Total$18,406 $(15,390,326)$(107,379)$4,454,000 
December 31, 2021
Derivative AssetsDerivative Liabilities
(in thousands)Fair ValueNotionalFair ValueNotional
Inverse interest-only securities
$41,367 $247,101 $— $— 
Interest rate swap agreements
— 20,387,300 — — 
Swaptions, net— — (51,743)(1,761,000)
TBAs3,405 3,523,000 (1,915)593,000 
Futures, net35,362 (5,829,600)— — 
Total$80,134 $18,327,801 $(53,658)$(1,168,000)

Comprehensive (Loss) Income Statement Presentation
The Company has not applied hedge accounting to its current derivative portfolio held to mitigate interest rate risk and credit risk. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its derivative instruments.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive (loss) income:
Derivative InstrumentsLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in Income
Three Months EndedNine Months Ended
(in thousands)September 30,September 30,
2022202120222021
Interest rate risk management:
TBAs
Gain (loss) on other derivative instruments
$(227,668)$(17,125)$(535,946)$(173,254)
Futures
Gain (loss) on other derivative instruments
392,044 3,026 509,451 (63,851)
Options on futures
Gain (loss) on other derivative instruments
— — (2,224)— 
Interest rate swaps - Payers
Gain (loss) on interest rate swap and swaption agreements
100,435 7,019 772,829 64,313 
Interest rate swaps - Receivers
Gain (loss) on interest rate swap and swaption agreements
(75,055)(15,316)(756,744)(67,460)
Swaptions
Gain (loss) on interest rate swap and swaption agreements
9,426 4,350 13,414 8,249 
Non-risk management:
Inverse interest-only securities
Gain (loss) on other derivative instruments
(5,332)(920)(15,272)(2,613)
Total$193,850 $(18,966)$(14,492)$(234,616)

For the three and nine months ended September 30, 2022, the Company recognized income of $0.2 million and expense of $4.8 million, respectively, for the accrual and/or settlement of the net interest expense associated with its interest rate swaps and caps. The income/expense results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on an average $5.0 billion and $16.6 billion notional, respectively. For the three and nine months ended September 30, 2021, the Company recognized income of $4.4 million and $8.5 million respectively, for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The income results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on an average $15.9 billion and $14.9 billion notional, respectively.
The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30, 2022
(in thousands)Beginning of Period Notional AmountAdditionsSettlement, Termination, Expiration or ExerciseEnd of Period Notional AmountAverage Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities$217,851 $— $(11,627)$206,224 $212,507 $3,640 
Interest rate swap agreements14,850,336 4,953,139 (19,803,475)— 5,047,637 (133,218)
Swaptions, net(1,680,000)— 1,680,000 — (978,696)(13,532)
TBAs, net6,317,000 18,421,000 (20,584,000)4,154,000 5,681,978 (134,107)
Futures, net
(16,727,160)(29,472,140)30,902,750 (15,296,550)(15,069,468)333,203 
Total$2,978,027 $(6,098,001)$(7,816,352)$(10,936,326)$(5,106,042)$55,986 
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Three Months Ended September 30, 2021
(in thousands)Beginning of Period Notional AmountAdditionsSettlement, Termination, Expiration or ExerciseEnd of Period Notional AmountAverage Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities$281,473 $— $(18,459)$263,014 $272,815 $(323)
Interest rate swap agreements15,646,953 1,909,792 (520,150)17,036,595 15,906,528 5,220 
Swaptions, net(201,000)