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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SeptemberJune 30, 20172022

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)

Maryland27-0312904
(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification No.)
590 Madison1601 Utica Avenue 36th Floor
New York, New York
South, Suite 900		10022
St. Louis Park,Minnesota55416
(Address of Principal Executive Offices)(Zip Code)
(612) 629-2500453-4100
(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 x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x☒ No o☐
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. (Check one):
Large accelerated filerx
☒
Accelerated filero
☐
Non-accelerated filero
(Do not check if a smaller reporting company)☐
Smaller reporting companyo
☐
Emerging growth companyo
☐
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. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.☒
As of November 7, 2017August 2, 2022, there were 174,489,081344,441,136 shares of outstanding common stock, par value $.01$0.01 per share, issued and outstanding.


Table of Contents




TWO HARBORS INVESTMENT CORP.
INDEX

Page
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
1
1
Condensed Consolidated Statements of Comprehensive IncomeLoss for the Three and NineSix Months Ended SeptemberJune 30 2017, 2022 and 20162021
2
Condensed Consolidated Statements of Stockholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30 2017, 2022 and 20162021
4
Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30 2017, 2022 and 20162021
5
87
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
5542
8764
9267
PART II - OTHER INFORMATION
9368
9368
9368
9369
9369
9369
9369
95
Index of Exhibits
9470
72



i
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
June 30,
2022		December 31,
2021
ASSETSSeptember 30,
2017		 December 31,
2016		ASSETS(unaudited)
Available-for-sale securities, at fair value$20,199,094
 $13,128,857
Commercial real estate assets2,171,344
 1,412,543
Available-for-sale securities, at fair value (amortized cost $8,969,612 and $7,005,013, respectively; allowance for credit losses $9,663 and $14,238, respectively)Available-for-sale securities, at fair value (amortized cost $8,969,612 and $7,005,013, respectively; allowance for credit losses $9,663 and $14,238, respectively)$8,789,437 $7,161,703 
Mortgage servicing rights, at fair value930,613
 693,815
Mortgage servicing rights, at fair value3,226,191 2,191,578 
Residential mortgage loans held-for-investment in securitization trusts, at fair value3,031,191
 3,271,317
Residential mortgage loans held-for-sale, at fair value31,197
 40,146
Cash and cash equivalents539,367
 406,883
Cash and cash equivalents511,889 1,153,856 
Restricted cash343,813
 408,312
Restricted cash627,725 934,814 
Accrued interest receivable85,445
 62,751
Accrued interest receivable30,254 26,266 
Due from counterparties26,445
 60,380
Due from counterparties186,156 168,449 
Derivative assets, at fair value238,305
 324,182
Derivative assets, at fair value29,330 80,134 
Reverse repurchase agreementsReverse repurchase agreements158,971 134,682 
Other assets206,960
 302,870
Other assets177,497 262,823 
Total Assets (1)
$27,803,774
 $20,112,056
Total Assets (1)
$13,737,450 $12,114,305 
LIABILITIES AND EQUITY   
Liabilities   
LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:Liabilities:
Repurchase agreements$18,297,392
 $9,316,351
Repurchase agreements$7,958,247 $7,656,445 
Collateralized borrowings in securitization trusts, at fair value2,785,413
 3,037,196
Federal Home Loan Bank advances1,998,762
 4,000,000
Revolving credit facilities40,000
 70,000
Revolving credit facilities825,761 420,761 
Term notes payableTerm notes payable397,383 396,776 
Convertible senior notes282,543
 —
Convertible senior notes281,711 424,827 
Derivative liabilities, at fair value11,312
 12,501
Derivative liabilities, at fair value110,764 53,658 
Due to counterparties45,297
 111,884
Due to counterparties1,460,561 196,627 
Dividends payable102,799
 83,437
Dividends payable72,591 72,412 
Accrued interest payableAccrued interest payable21,826 18,382 
Commitments and contingencies (see Note 15)Commitments and contingencies (see Note 15)— — 
Other liabilities108,875
 79,576
Other liabilities124,982 130,464 
Total Liabilities (1)
23,672,393
 16,710,945
Total Liabilities (1)
11,253,826 9,370,352 
Stockholders’ Equity   
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized:   
8.125% Series A cumulative redeemable: 5,750,000 and 0 shares issued and outstanding, respectively ($143,750 liquidation preference)138,872
 —
7.625% Series B cumulative redeemable: 11,500,000 and 0 shares issued and outstanding, respectively ($287,500 liquidation preference)278,094
 —
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 174,489,356 and 173,826,163 shares issued and outstanding, respectively3,490
 3,477
Stockholders’ Equity: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)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; 700,000,000 shares authorized and 344,433,109 and 343,911,324 shares issued and outstanding, respectivelyCommon stock, par value $0.01 per share; 700,000,000 shares authorized and 344,433,109 and 343,911,324 shares issued and outstanding, respectively3,444 3,439 
Additional paid-in capital3,658,835
 3,659,973
Additional paid-in capital5,633,201 5,625,179 
Accumulated other comprehensive income423,042
 199,227
Accumulated other comprehensive (loss) incomeAccumulated other comprehensive (loss) income(149,710)186,346 
Cumulative earnings2,220,700
 2,038,033
Cumulative earnings1,425,833 1,212,983 
Cumulative distributions to stockholders(2,781,469) (2,499,599)Cumulative distributions to stockholders(5,131,694)(4,986,544)
Total Stockholders’ Equity3,941,564
 3,401,111
Total Stockholders’ Equity2,483,624 2,743,953 
Noncontrolling interest189,817
 —
Total Equity4,131,381
 3,401,111
Total Liabilities and Equity$27,803,774
 $20,112,056
Total Liabilities and Stockholders’ EquityTotal Liabilities and Stockholders’ Equity$13,737,450 $12,114,305 
____________________
(1)
(1)The condensed consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of these VIEs, and liabilities of the consolidated VIEs for which creditors do not have recourse to Two Harbors Investment Corp. At September 30, 2017 and December 31, 2016, assets of the VIEs totaled $3,094,462 and $3,336,292, and liabilities of the VIEs totaled $2,804,685 and $3,058,278, respectively. See Note 3 - Variable Interest Entities for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At June 30, 2022 and December 31, 2021, assets of the VIEs totaled $449,853 and $454,596, and liabilities of the VIEs totaled $444,934 and $440,030, respectively. See Note 3 - Variable Interest Entities for additional information.

1
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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands, except share data)
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Interest income:   
Available-for-sale securities$164,169
 $111,393
 $449,908
 $292,333
Commercial real estate assets30,595
 15,907
 80,005
 40,279
Residential mortgage loans held-for-investment in securitization trusts29,865
 33,495
 92,319
 100,765
Residential mortgage loans held-for-sale479
 7,627
 1,380
 19,789
Cash and cash equivalents1,408
 440
 3,087
 1,235
Total interest income226,516
 168,862
 626,699
 454,401
Interest expense:       
Repurchase agreements71,754
 27,056
 158,065
 65,782
Collateralized borrowings in securitization trusts23,970
 26,422
 74,199
 70,965
Federal Home Loan Bank advances10,317
 6,744
 30,554
 18,804
Revolving credit facilities701
 128
 1,727
 128
Convertible senior notes4,745
 —
 13,157
 —
Total interest expense111,487
 60,350
 277,702
 155,679
Net interest income115,029
 108,512
 348,997
 298,722
Other-than-temporary impairments:    
 
Total other-than-temporary impairment losses—
 (1,015) (429) (1,822)
Other income (loss):       
Gain (loss) on investment securities5,618
 28,290
 (15,485) 66,095
(Loss) gain on interest rate swap and swaption agreements(207) 5,584
 (66,990) (132,608)
Loss on other derivative instruments(18,924) (12,028) (66,328) (44,064)
Servicing income57,387
 38,708
 148,468
 108,657
Loss on servicing asset(29,245) (33,451) (90,440) (211,426)
Gain (loss) on residential mortgage loans held-for-sale355
 (889) 2,149
 17,648
Other income (loss)8,076
 5,757
 18,904
 (977)
Total other income (loss)23,060
 31,971
 (69,722) (196,675)
Expenses:       
Management fees13,276
 11,387
 36,518
 35,268
Servicing expenses8,893
 9,073
 26,116
 24,510
Securitization deal costs—
 2,080
 —
 6,241
Other operating expenses16,526
 14,780
 51,934
 47,280
Restructuring charges—
 1,189
 —
 1,189
Total expenses38,695
 38,509
 114,568
 114,488
Income (loss) before income taxes99,394
 100,959
 164,278
 (14,263)
Benefit from income taxes(5,344) (16,827) (21,103) (26,138)
Net income104,738
 117,786
 185,381
 11,875
Net income attributable to noncontrolling interest2,674
 —
 2,714
 —
Net income attributable to Two Harbors Investment Corp.102,064
 117,786
 182,667
 11,875
Dividends on preferred stock8,888
 —
 13,173
 —
Net income attributable to common stockholders$93,176
 $117,786
 $169,494
 $11,875

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


2
1
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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS (unaudited), continued
(in thousands, except share data)
Three Months EndedSix Months Ended
June 30,June 30,
2022202120222021
Interest income:
Available-for-sale securities$55,399 $43,092 $100,046 $98,744 
Other1,604 351 1,803 808 
Total interest income57,003 43,443 101,849 99,552 
Interest expense:
Repurchase agreements19,269 6,981 27,612 15,451 
Revolving credit facilities9,106 7,075 14,782 11,770 
Term notes payable3,925 3,225 7,181 6,436 
Convertible senior notes4,801 7,126 9,843 13,476 
Total interest expense37,101 24,407 59,418 47,133 
Net interest income19,902 19,036 42,431 52,419 
Other (loss) income:
(Loss) gain on investment securities(197,719)(41,519)(250,061)91,349 
Servicing income157,526 112,816 294,152 219,935 
Gain (loss) on servicing asset85,557 (268,051)496,181 59,387 
Gain (loss) on interest rate swap and swaption agreements32,734 24,648 (5,307)9,049 
(Loss) gain on other derivative instruments(101,273)51,312 (203,035)(224,699)
Other (loss) income(73)41 (117)(5,701)
Total other (loss) income(23,248)(120,753)331,813 149,320 
Expenses:
Servicing expenses22,991 18,680 47,695 43,627 
Compensation and benefits11,019 11,259 23,212 19,447 
Other operating expenses9,152 7,218 15,777 14,705 
Total expenses43,162 37,157 86,684 77,779 
(Loss) income before income taxes(46,508)(138,874)287,560 123,960 
Provision for (benefit from) income taxes25,912 (20,914)74,710 1,763 
Net (loss) income(72,420)(117,960)212,850 122,197 
Dividends on preferred stock13,748 13,747 27,495 30,963 
Net (loss) income attributable to common stockholders$(86,168)$(131,707)$185,355 $91,234 
Basic (loss) earnings per weighted average common share$(0.25)$(0.48)$0.54 $0.33 
Diluted (loss) earnings per weighted average common share$(0.25)$(0.48)$0.51 $0.32 
Dividends declared per common share$0.17 $0.17 $0.34 $0.34 
Weighted average number of shares of common stock:
Basic344,277,723 273,718,561 344,138,889 273,714,684 
Diluted344,277,723 273,718,561 384,341,891 305,999,203 
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Basic earnings per weighted average common share$0.53
 $0.68
 $0.97
 $0.07
Diluted earnings per weighted average common share$0.52
 $0.68
 $0.97
 $0.07
Dividends declared per common share$0.52
 $0.46
 $1.54
 $1.38
Weighted average number of shares of common stock:       
Basic174,488,296
 173,813,613
 174,415,232
 174,109,117
Diluted188,907,356
 173,813,613
 174,415,232
 174,109,117
Comprehensive income:       
Net income$104,738
 $117,786
 $185,381
 $11,875
Other comprehensive income, net of tax:       
Unrealized gain on available-for-sale securities68,433
 18,746
 223,823
 179,382
Other comprehensive income68,433
 18,746
 223,823
 179,382
Comprehensive income173,171
 136,532
 409,204
 191,257
Comprehensive income attributable to noncontrolling interest2,682
 —
 2,724
 —
Comprehensive income attributable to Two Harbors Investment Corp.170,489
 136,532
 406,480
 191,257
Dividends on preferred stock8,888
 —
 13,173
 —
Comprehensive income attributable to common stockholders$161,601
 $136,532
 $393,307
 $191,257

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


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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited), continued
(in thousands, except share data)
Three Months EndedSix Months Ended
June 30,June 30,
2022202120222021
Comprehensive loss:
Net (loss) income$(72,420)$(117,960)$212,850 $122,197 
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities(4,211)(62,899)(336,056)(334,352)
Other comprehensive loss(4,211)(62,899)(336,056)(334,352)
Comprehensive loss(76,631)(180,859)(123,206)(212,155)
Dividends on preferred stock13,748 13,747 27,495 30,963 
Comprehensive loss attributable to common stockholders$(90,379)$(194,606)$(150,701)$(243,118)

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, except share data)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 $2,737 $5,163,794 $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 2,737 5,165,683 370,148 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, 2021$702,550 $2,737 $5,170,387 $307,249 $1,147,953 $(4,846,821)$2,484,055 
Balance, December 31, 2021$702,550 $3,439 $5,625,179 $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— 2 4,159 — — — 4,161 
Balance, March 31, 2022702,550 3,441 5,629,661 (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— 3 3,458 — — — 3,461 
Balance, June 30, 2022$702,550 $3,444 $5,633,201 $(149,710)$1,425,833 $(5,131,694)$2,483,624 
 
Series A
Preferred Stock
 
Series B
Preferred Stock
 Common Stock              
 Shares Par Value Shares Par Value Shares Par Value Additional Paid-in Capital Accumulated Other Comprehensive Income Cumulative Earnings Cumulative Distributions to Stockholders Total Stockholders’ Equity 
Non-
controlling Interest
 Total Equity
                     
    
Balance, December 31, 2015—
 $—
 —
 $—
 176,953,404
 $3,539
 $3,705,519
 $359,061
 $1,684,755
 $(2,176,313) $3,576,561
 $—
 $3,576,561
Net income—
 —
 —
 —
 —
 —
 —
 —
 11,875
 —
 11,875
 —
 11,875
Other comprehensive income before reclassifications, net of tax expense of $0.2 million—
 —
 —
 —
 —
 —
 —
 232,212
 —
 —
 232,212
 —
 232,212
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $6.4 million—
 —
 —
 —
 —
 —
 —
 (52,830) —
 —
 (52,830) —
 (52,830)
Other comprehensive income, net of tax benefit of $6.2 million—
 —
 —
 —
 —
 —
 —
 179,382
 —
 —
 179,382
 —
 179,382
Issuance of common stock, net of offering costs—
 —
 —
 —
 21,882
 —
 356
 —
 —
 —
 356
 —
 356
Repurchase of common stock—
 —
 —
 —
 (4,010,000) (80) (61,227) —
 —
 —
 (61,307) —
 (61,307)
Common dividends declared—
 —
 —
 —
 —
 —
 —
 —
 —
 (239,849) (239,849) —
 (239,849)
Non-cash equity award compensation—
 —
 —
 —
 852,458
 17
 11,206
 —
 —
 —
 11,223
 —
 11,223
Balance, September 30, 2016—
 $—
 —
 $—
 173,817,744
 $3,476
 $3,655,854
 $538,443
 $1,696,630
 $(2,416,162) $3,478,241
 $—
 $3,478,241
                     

    
Balance, December 31, 2016—
 $—
 —
 $—
 173,826,163
 $3,477
 $3,659,973
 $199,227
 $2,038,033
 $(2,499,599) $3,401,111
 $—
 $3,401,111
Net income—
 —
 —
 —
 —
 —
 —
 —
 182,667
 —
 182,667
 2,714
 185,381
Other comprehensive income before reclassifications, net of tax expense of $35.7 million—
 —
 —
 —
 —
 —
 —
 215,994
 —
 —
 215,994
 10
 216,004
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $2.7 million—
 —
 —
 —
 —
 —
 —
 7,815
 —
 —
 7,815
 —
 7,815
Other comprehensive income, net of tax expense of $33.0 million—
 —
 —
 —
 —
 —
 —
 223,809
 —
 —
 223,809
 10
 223,819
Issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs—
 —
 —
 —
 —
 —
 (13,777) 6
 —
 —
 (13,771) 195,646
 181,875
Acquisition of noncontrolling interests—
 —
 —
 —
 —
 —
 (69) —
 —
 —
 (69) (5,376) (5,445)
Issuance of preferred stock, net of offering costs5,750,000
 138,872
 11,500,000
 278,094
 —
 —
 —
 —
 —
 —
 416,966
 —
 416,966
Issuance of common stock, net of offering costs—
 —
 —
 —
 19,688
 —
 332
 —
 —
 —
 332
 —
 332
Preferred dividends declared—
 —
 —
 —
 —
 —
 —
 —
 —
 (13,173) (13,173) —
 (13,173)
Common dividends declared—
 —
 —
 —
 —
 —
 —
 —
 —
 (268,697) (268,697) (3,177) (271,874)
Non-cash equity award compensation—
 —
 —
 —
 643,505
 13
 12,376
 —
 —
 —
 12,389
 —
 12,389
Balance, September 30, 20175,750,000
 $138,872
 11,500,000
 $278,094
 174,489,356
 $3,490
 $3,658,835
 $423,042
 $2,220,700
 $(2,781,469) $3,941,564
 $189,817
 $4,131,381

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)
Six Months Ended
June 30,
20222021
Cash Flows From Operating Activities:
Net income$212,850 $122,197 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities, net55,287 134,581 
Amortization of deferred debt issuance costs on term notes payable and convertible senior notes1,265 1,321 
Provision for credit losses on investment securities1,651 6,257 
Realized and unrealized losses (gains) on investment securities248,410 (97,606)
Gain on servicing asset(496,181)(59,387)
Realized and unrealized loss (gain) on interest rate swaps and swaptions300 (5,001)
Unrealized (gains) losses on other derivative instruments(92,309)27,063 
Equity based compensation7,622 6,401 
Net change in assets and liabilities:
(Increase) decrease in accrued interest receivable(3,988)15,603 
Decrease in deferred income taxes, net74,710 3,534 
Increase (decrease) in accrued interest payable3,444 (3,710)
Change in other operating assets and liabilities, net5,134 (832)
Net cash provided by operating activities18,195 150,421 
Cash Flows From Investing Activities:
Purchases of available-for-sale securities(7,295,928)(152,743)
Proceeds from sales of available-for-sale securities4,339,148 4,600,545 
Principal payments on available-for-sale securities687,642 1,985,490 
Purchases of mortgage servicing rights, net of purchase price adjustments(538,432)(364,566)
Short sales (purchases) of derivative instruments, net39,895 (1,232)
Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net160,024 17,881 
Payments for reverse repurchase agreements(1,135,374)(480,344)
Proceeds from reverse repurchase agreements1,111,085 501,869 
Increase in due to counterparties, net1,246,227 44,890 
Change in other investing assets and liabilities, net— 10,000 
Net cash (used in) provided by investing activities$(1,385,713)$6,161,790 
 Nine Months Ended
 September 30,
 2017 2016
Cash Flows From Operating Activities: 
Net income$185,381
 $11,875
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   
Amortization of premiums and discounts on investment securities and commercial real estate assets, net39,949
 29,469
Amortization of deferred debt issuance costs on convertible senior notes429
 —
Other-than-temporary impairment losses429
 1,822
Realized and unrealized losses (gains) on investment securities, net15,485
 (66,095)
Loss on servicing asset90,440
 211,426
Gain on residential mortgage loans held-for-sale(2,149) (17,648)
(Gain) loss on residential mortgage loans held-for-investment and collateralized borrowings in securitization trusts(14,884) 5,173
(Gain) loss on termination and option expiration of interest rate swaps and swaptions(68,855) 119,548
Unrealized loss (gain) on interest rate swaps and swaptions124,978
 (5,080)
Unrealized loss on other derivative instruments37,586
 2,025
Equity based compensation12,389
 11,223
Depreciation of fixed assets776
 981
Purchases of residential mortgage loans held-for-sale(567) (1,159,782)
Proceeds from sales of residential mortgage loans held-for-sale3,928
 95,331
Proceeds from repayment of residential mortgage loans held-for-sale4,799
 117,092
Net change in assets and liabilities:

  
Increase in accrued interest receivable(22,694) (17,119)
Increase in deferred income taxes, net(21,505) (24,581)
Decrease in income taxes receivable1,412
 3,667
Increase in prepaid and fixed assets(950) (62)
(Increase) decrease in other receivables(1,070) 5,721
Decrease (increase) in servicing advances5,489
 (8,965)
Increase in accrued interest payable33,227
 11,084
Increase (decrease) in income taxes payable142
 (70)
Decrease in accrued expenses and other liabilities(5,425) (2,923)
Net cash provided by (used in) operating activities$418,740
 $(675,888)

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 CASH FLOWS (unaudited), continued
(in thousands)
Six Months Ended
June 30,
20222021
Cash Flows From Financing Activities:
Proceeds from repurchase agreements$17,611,046 $19,730,790 
Principal payments on repurchase agreements(17,309,244)(26,524,066)
Proceeds from revolving credit facilities410,000 261,500 
Principal payments on revolving credit facilities(5,000)(11,811)
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 costs405 192 
Dividends paid on preferred stock(27,495)(36,165)
Dividends paid on common stock(117,476)(93,166)
Net cash provided by (used in) financing activities418,462 (6,810,865)
Net decrease in cash, cash equivalents and restricted cash(949,056)(498,654)
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$1,139,614 $2,147,777 
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$43,363 $46,068 
Cash (received) paid for taxes, net$(11)$47 
Noncash Activities:
Dividends declared but not paid at end of period$72,591 $60,507 
 Nine Months Ended
 September 30,
 2017 2016
Cash Flows From Investing Activities: 
Purchases of available-for-sale securities$(13,677,423) $(13,734,884)
Proceeds from sales of available-for-sale securities5,726,616
 6,567,992
Principal payments on available-for-sale securities1,075,961
 910,386
(Purchases) short sales of derivative instruments, net(93,812) (13,953)
Proceeds from sales (payments for termination) of derivative instruments, net84,791
 3,209
Proceeds from repayment of residential mortgage loans held-for-investment in securitization trusts285,695
 649,134
Originations, acquisitions and additional fundings of commercial real estate assets, net of deferred fees(759,905) (463,680)
Proceeds from repayment of commercial real estate assets6,655
 15,296
Purchases of mortgage servicing rights, net of purchase price adjustments(327,341) (208,474)
Proceeds from sales of mortgage servicing rights132
 41,844
Purchases of Federal Home Loan Bank stock—
 (11,206)
Redemptions of Federal Home Loan Bank stock82,681
 —
(Decrease) increase in due to counterparties, net(32,652) 4,996
Net cash used in investing activities(7,628,602) (6,239,340)
Cash Flows From Financing Activities:   
Proceeds from repurchase agreements115,034,068
 70,805,165
Principal payments on repurchase agreements(106,053,027) (65,176,066)
Proceeds from issuance of collateralized borrowings in securitization trusts—
 1,875,371
Principal payments on collateralized borrowings in securitization trusts(282,468) (568,485)
Proceeds from Federal Home Loan Bank advances—
 215,000
Principal payments on Federal Home Loan Bank advances(2,001,238) —
Proceeds from revolving credit facilities123,000
 30,000
Principal payments on revolving credit facilities(153,000) —
Proceeds from convertible senior notes282,469
 —
Proceeds from issuance of preferred stock, net of offering costs416,966
 —
Proceeds from issuance of common stock, net of offering costs332
 356
Proceeds from issuance of Granite Point Mortgage Trust Inc. stock, net of offering costs181,875
 —
Acquisition of noncontrolling interests(5,445) —
Repurchase of common stock—
 (61,307)
Dividends paid on preferred stock(4,285) —
Dividends paid on common stock(261,400) (251,909)
Net cash provided by financing activities7,277,847
 6,868,125
Net increase (decrease) in cash, cash equivalents and restricted cash67,985
 (47,103)
Cash, cash equivalents and restricted cash at beginning of period815,195
 1,000,393
Cash, cash equivalents and restricted cash at end of period$883,180
 $953,290

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,
 2017 2016
Supplemental Disclosure of Cash Flow Information: 
Cash paid for interest$169,464
 $77,142
Cash received for taxes$(1,152) $(5,154)
Noncash Activities:   
Transfers of residential mortgage loans held-for-sale to residential mortgage loans held-for-investment in securitization trusts$—
 $1,031,707
Transfers of residential mortgage loans held-for-sale to other receivables for foreclosed government-guaranteed loans$2,909
 $14,200
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout$9
 $5,973
Additions to mortgage servicing rights due to sale of residential mortgage loans held-for-sale$20
 $764
Dividends declared but not paid at end of period$102,799
 $79,956
Reconciliation of residential mortgage loans held-for-sale:   
Residential mortgage loans held-for-sale at beginning of period$40,146
 $811,431
Purchases of residential mortgage loans held-for-sale567
 1,159,782
Transfers to residential mortgage loans held-for-investment in securitization trusts—
 (1,031,707)
Transfers to other receivables for foreclosed government-guaranteed loans(2,909) (14,200)
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout(9) (5,973)
Proceeds from sales of residential mortgage loans held-for-sale(3,928) (95,331)
Proceeds from repayment of residential mortgage loans held-for-sale(4,799) (117,092)
Realized and unrealized gains on residential mortgage loans held-for-sale2,129
 16,264
Residential mortgage loans held-for-sale at end of period$31,197
 $723,174
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., or the Company, is a Maryland corporation investingthat, through its wholly owned subsidiaries (collectively, the Company), invests in financing and managingmanages Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, commercial real estate and other financial assets. The Company is externally managed and advised by PRCM Advisers LLC,Agency refers to a U.S. government sponsored enterprise, or PRCM Advisers, which is a subsidiary of Pine River Capital Management L.P.GSE, such as the Federal National Mortgage Association (or Fannie Mae) or the Federal Home Loan Mortgage Corporation (or Freddie Mac), or Pine River, a global multi-strategy asset management firm.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”.
The Company was incorporated on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became a wholly owned indirect subsidiary of the Company as a result of the merger.
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, and the Company may in the future form additional TRSs.activities.
On June 28, 2017, the Company completed the contribution of its portfolio of commercial real estate assets to Granite Point Mortgage Trust Inc., or Granite Point, a newly organized Maryland corporation intended to qualify as a REIT, externally managed and advised by Pine River, and focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. The Company contributed its equity interests in its wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares of common stock of Granite Point, which represented approximately 76.5% of the outstanding stock of Granite Point upon completion of the initial public offering, or IPO, of its common stock on June 28, 2017. Subsequent to the end of the third quarter of 2017, on November 1, 2017, the Company distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock acquired in connection with the contribution to stockholders holding shares of Two Harbors common stock outstanding as of the close of business on October 20, 2017.

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. Certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - 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, 2016. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2017 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2017 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)

The condensed consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make a number of significant estimates and assumptions. These estimates include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent 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, 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.
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. The Company’s Chief Investment Officer manages the investment portfolio as a whole and resources are allocated and financial performance is assessed on a consolidated basis.
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.
Due Certain prior period amounts have been reclassified to its controlling ownership interestconform to the current period presentation. The accompanying condensed consolidated financial statements should be read in Granite Point duringconjunction with the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interestnotes thereto included in the Company’s Annual Report on Form 10-K for the portionyear ended December 31, 2021. In the opinion of equitymanagement, all normal and comprehensive income not attributablerecurring adjustments necessary to present fairly the Company. During this consolidation period, the Company’s financial condition of the Company at June 30, 2022 and results of operations reflectfor all of Granite Point’s commercial real estate investments and financing. No other subsidiary of the Company invests in, finances or manages commercial real estate debt and related instruments. Effective November 1, 2017 (the date the 33.1 million shares of Granite Point common stock were distributed to the Company’s common stockholders), the Company no longer has a controlling interest in Granite Point and, therefore, will prospectively deconsolidate the financial condition andperiods presented have been made. The results of operations Granite Pointfor the three and its subsidiariessix months ended June 30, 2022 should not be construed as indicative of the results to be expected for future periods or the full year.
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 financial statements.estimates and the differences may be material.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 20162021 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the nine months ended September 30, 2017.
Convertible Senior Notes
Convertible senior notes include unsecured convertible debt that are carried at their unpaid principal balance, net of any unamortized deferred issuance costs, on the Company’s condensed consolidated balance sheet. Interest on the notes is payable semiannually until such time the notes mature or are converted into shares of the Company’s common stock.
Noncontrolling Interest
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of Granite Point equity and comprehensive income not attributable to the Company. Noncontrolling interest is presented as a separate component of equity on the condensed consolidated balance sheets. In addition, the presentation of both net income and comprehensive income on the condensed consolidated statements of comprehensive income attributes earnings (losses) to the Company’s stockholders (controlling interest) and noncontrolling interests.
Pursuant to Accounting Standards Codification (ASC) 810, Consolidation, changes in a parent’s ownership interest (and transactions with noncontrolling interest stockholders in the subsidiary) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The Company adjusts the carrying amount of noncontrolling interest to reflect (i) changes in its ownership interest in Granite Point and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to the Company, with the offset to equity.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Earnings Per Share
Basic and diluted earnings per share are computed by dividing net income attributable to common stockholders by the weighted average number of common shares and potential common shares outstanding during the period. For both basic and diluted per share calculations, potential common shares represents issued and unvested shares of restricted stock, which have full rights to the common stock dividend declarations of the Company. If the assumed conversion of convertible notes into common shares is dilutive, diluted earnings per share is adjusted by adding back the periodic interest expense (net of any tax effects) associated with dilutive convertible notes to net income attributable to common stockholders and adding the shares issued in an assumed conversion to the diluted weighted average share count. All per share amounts, common shares outstanding and restricted shares for the three and nine months ended September 30, 2017 and all prior periods reflect the Company’s one-for-two reverse stock split, which was effected on November 1, 2017 at 5:01 p.m. Eastern Time (refer to Note 20 - Equity for additional information).
Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements, in the case of centrally cleared interest rate swaps. Additionally, the Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty.
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the Company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016:
 September 30, 2017
       
Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1)
  
(in thousands)Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Condensed Consolidated Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount
Assets           
Derivative assets$279,300
 $(40,995) $238,305
 $(11,312) $—
 $226,993
Total Assets$279,300
 $(40,995) $238,305
 $(11,312) $—
 $226,993
Liabilities           
Repurchase agreements$(18,297,392) $—
 $(18,297,392) $18,297,392
 $—
 $—
Derivative liabilities(52,307) 40,995
 (11,312) 11,312
 —
 —
Total Liabilities$(18,349,699) $40,995
 $(18,308,704) $18,308,704
 $—
 $—

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

 December 31, 2016
       
Gross Amounts Not Offset with Financial Assets (Liabilities) in the Condensed Consolidated Balance Sheets (1)
  
(in thousands)Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Condensed Consolidated Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount
Assets           
Derivative assets$388,522
 $(64,340) $324,182
 $(12,501) $—
 $311,681
Total Assets$388,522
 $(64,340) $324,182
 $(12,501) $—
 $311,681
Liabilities           
Repurchase agreements$(9,316,351) $—
 $(9,316,351) $9,316,351
 $—
 $—
Derivative liabilities(76,841) 64,340
 (12,501) 12,501
 —
 —
Total Liabilities$(9,463,192) $64,340
 $(9,398,852) $9,398,852
 $—
 $—
____________________
(1)Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets.

Recently Issued and/or Adopted Accounting Standards
Revenue from Contracts with CustomersFacilitation 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 May 2014, the Financial Accounting Standards Board,U.S., the Alternative Reference Rates Committee, or FASB, issued ASU No. 2014-09, whichARRC, has identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate for U.S. dollar-based LIBOR. SOFR is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As a resultmeasure of the issuancecost of ASU No. 2015-14borrowing 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 August 2015 deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited. The Company has evaluated the new guidance and determined that interest income, gains and losses on financial instruments and income from servicing residential mortgage loans are outside the scope of ASC 606, Revenues from Contracts with Customers. For income from servicing residential mortgage loans, the Company considered that the FASB Transition Resource Group members generally agreed that an entity should look to ASC 860, Transfers and Servicing, to determine the appropriate accounting for these fees and ASC 606 contains a scope exception for contracts that fall under ASC 860. As a result, the Company has determined that the adoption of this ASU willprocess, if not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.completed.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016,March 2020, the FASB issued ASU No. 2016-01,2020-04, which changes how entities measure certain equity investmentsprovides temporary optional expedients and present changesexceptions on accounting for contract modifications and hedging relationships in anticipation of the fair valuereplacement of financial liabilities measured underLIBOR 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 fair value optionavailable-for-sale or trading category. The Company has material contracts that are attributableindexed to their own credit.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. All of the Company’s financing arrangements and derivative instruments that incorporate LIBOR as the referenced rate either mature prior to the phase out of LIBOR or have provisions in place that provide for an alternative to LIBOR upon its phase-out. 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 requires certain recurring disclosureswas effective immediately for all entities and is effective for annual periods, and interim periods within those annual periods, beginning on orexpires after December 15, 2017, with early adoption permitted. Early31, 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.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Lease Classification and Accounting
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on AFS debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings, with offsetting impacts to accumulated other comprehensive income.
Classification of Certain Cash Receipts and Cash Payments and Restricted Cash
In August 2016, the FASB issued ASU No. 2016-15, which clarifies how entities should classify certain cash receipts and cash payments and how the predominance principle should be applied on the statement of cash flows. Additionally, in November 2016, the FASB issued ASU No. 2016-18, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents, but no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. Both ASUs are effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. Early adoption of these ASUs did not impact the Company’s financial condition or results of operations but impacted the presentation of the statements of cash flows and related footnote disclosures. The Company included restricted cash of $343.8 million, $408.3 million, $264.9 million and $262.6 million as of September 30, 2017, December 31, 2016, September 30, 2016 and December 31, 2015, respectively, with cash and cash equivalents, as shown on the condensed consolidated statements of cash flows.

Note 3. Variable Interest Entities
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third partiesenters 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 subsidiaries. Additionally,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 sole certificate holderVFN, 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 trust entity that holdsrevolving credit facility, pursuant to which the Servicing Advance Receivables Issuer Trust issued a commercial real estate loan. All of these trustsVFN backed by servicing advances pledged to the financing counterparty.
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. BecauseAs 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. AsAdditionally, in accordance with arrangements entered into in connection with the securitization transaction and the servicing advance revolving credit facility, the Company is requiredhas direct financial obligations payable to reassess VIE consolidation guidance each quarter, new factsboth the MSR Issuer Trust and circumstances may change the Company’s determination. A changeServicing Advance Receivables Issuer Trust, which, in turn, support the Company’s determination could result in a material impactMSR Issuer Trust’s obligations to noteholders under the securitization transaction and the Servicing Advance Receivables Issuer Trust’s obligations to the Company’s condensed consolidated financial statements during subsequent reporting periods.

financing counterparty.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

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 SeptemberJune 30, 20172022 and December 31, 2016:2021:
(in thousands)June 30,
2022		December 31,
2021
Note receivable (1)
$397,383 $396,776 
Restricted cash18,154 23,892 
Accrued interest receivable (1)
197 161 
Other assets34,119 33,767 
Total Assets$449,853 $454,596 
Term notes payable$397,383 $396,776 
Revolving credit facilities29,200 19,200 
Accrued interest payable308 216 
Other liabilities18,043 23,838 
Total Liabilities$444,934 $440,030 
(in thousands)September 30,
2017		 December 31,
2016
Residential mortgage loans held-for-investment in securitization trusts$3,031,191
 $3,271,317
Commercial real estate assets45,889
 45,885
Accrued interest receivable17,382
 19,090
Total Assets$3,094,462
 $3,336,292
Collateralized borrowings in securitization trusts$2,785,413
 $3,037,196
Accrued interest payable7,894
 8,708
Other liabilities11,378
 12,374
Total Liabilities$2,804,685
 $3,058,278
____________________

The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities(1)Receivables due from a wholly owned subsidiary of the VIEs that most significantly impactCompany to 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 investmentstrusts are eliminated in these unconsolidated VIEs include non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securitiesconsolidation in unconsolidated VIEs was $2.6 billion and $1.9 billion, respectively.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. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
(in thousands)June 30,
2022		December 31,
2021
Agency:
Federal National Mortgage Association$5,711,203 $5,040,988 
Federal Home Loan Mortgage Corporation2,847,222 1,922,809 
Government National Mortgage Association143,522 185,602 
Non-Agency87,490 12,304 
Total available-for-sale securities$8,789,437 $7,161,703 
(in thousands)September 30,
2017		 December 31,
2016
Agency   
Federal National Mortgage Association$13,057,102
 $8,274,507
Federal Home Loan Mortgage Corporation3,972,963
 2,742,630
Government National Mortgage Association524,306
 209,337
Non-Agency2,644,723
 1,902,383
Total available-for-sale securities$20,199,094
 $13,128,857


At SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company pledged AFS securities with a carrying value of $20.0$7.4 billion and $13.1$7.0 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB.agreements. See Note 1511 - Repurchase Agreements.
At June 30, 2022 and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At September 30, 2017 and December 31, 2016,2021, 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.

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 June 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 $87.5 million and $12.3 million, respectively.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
June 30, 2022
(in thousands)Principal/ Current FaceUn-amortized PremiumAccretable Purchase DiscountAmortized CostAllowance for Credit LossesUnrealized GainUnrealized LossCarrying Value
Agency:
Principal and interest$8,603,008 $223,912 $(62,948)$8,763,972 $— $17,675 $(197,154)$8,584,493 
Interest-only1,665,968 116,302 — 116,302 (9,403)15,941 (5,386)117,454 
Total Agency10,268,976 340,214 (62,948)8,880,274 (9,403)33,616 (202,540)8,701,947 
Non-Agency1,280,889 8,993 (408)89,338 (260)590 (2,178)87,490 
Total$11,549,865 $349,207 $(63,356)$8,969,612 $(9,663)$34,206 $(204,718)$8,789,437 
 September 30, 2017
(in thousands)Agency Non-Agency Total
Face Value$19,303,065
 $3,538,252
 $22,841,317
Unamortized premium1,038,789
 —
 1,038,789
Unamortized discount     
Designated credit reserve—
 (525,687) (525,687)
Net, unamortized(2,789,785) (816,260) (3,606,045)
Amortized Cost17,552,069
 2,196,305
 19,748,374
Gross unrealized gains120,236
 451,182
 571,418
Gross unrealized losses(117,934) (2,764) (120,698)
Carrying Value$17,554,371
 $2,644,723
 $20,199,094
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-Agency1,940,815 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 
 December 31, 2016
(in thousands)Agency Non-Agency Total
Face Value$13,571,417

$2,732,139
 $16,303,556
Unamortized premium571,749

—
 571,749
Unamortized discount     
Designated credit reserve—

(367,437) (367,437)
Net, unamortized(2,758,445)
(808,975) (3,567,420)
Amortized Cost11,384,721

1,555,727
 12,940,448
Gross unrealized gains79,040

353,358
 432,398
Gross unrealized losses(237,287)
(6,702) (243,989)
Carrying Value$11,226,474
 $1,902,383
 $13,128,857

The following tables present the carrying value of the Company’s AFS securities by rate type as of September 30, 2017 and December 31, 2016:
 September 30, 2017
(in thousands) Agency  Non-Agency  Total
Adjustable Rate$24,960
 $2,300,247
 $2,325,207
Fixed Rate17,529,411
 344,476
 17,873,887
Total$17,554,371
 $2,644,723
 $20,199,094
 December 31, 2016
(in thousands)Agency Non-Agency Total
Adjustable Rate$30,463
 $1,574,850
 $1,605,313
Fixed Rate11,196,011
 327,533
 11,523,544
Total$11,226,474
 $1,902,383
 $13,128,857


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)


The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of SeptemberJune 30, 2017:2022:
June 30, 2022
(in thousands) Agency Non-Agency Total
< 1 year$1,406 $— $1,406 
≥ 1 and < 3 years39,226 — 39,226 
≥ 3 and < 5 years112,934 79,600 192,534 
≥ 5 and < 10 years8,547,506 7,890 8,555,396 
≥ 10 years875 — 875 
Total$8,701,947 $87,490 $8,789,437 

10
 September 30, 2017
(in thousands) Agency  Non-Agency  Total
≤ 1 year$15,632
 $165,060
 $180,692
> 1 and ≤ 3 years38,357
 249,220
 287,577
> 3 and ≤ 5 years1,192,719
 435,531
 1,628,250
> 5 and ≤ 10 years16,285,575
 1,043,103
 17,328,678
> 10 years22,088
 751,809
 773,897
Total$17,554,371
 $2,644,723
 $20,199,094

When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the three and nine months ended September 30, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 Nine Months Ended September 30,
 2017 2016
(in thousands)Designated Credit Reserve Unamortized Net Discount Total Designated Credit Reserve Unamortized Net Discount Total
Beginning balance at January 1$(367,437) $(808,975) $(1,176,412) $(409,077) $(707,021) $(1,116,098)
Acquisitions(217,206) (111,938) (329,144) (45,398) (140,318) (185,716)
Accretion of net discount—
 67,219
 67,219
 —
 50,596
 50,596
Realized credit losses11,385
 —
 11,385
 279
 —
 279
Reclassification adjustment for other-than-temporary impairments(429) —
 (429) (1,226) —
 (1,226)
Transfers from (to)44,412
 (44,412) —
 70,371
 (70,371) —
Sales, calls, other3,588
 81,846
 85,434
 32,562
 77,689
 110,251
Ending balance at September 30$(525,687) $(816,260) $(1,341,947) $(352,489) $(789,425) $(1,141,914)


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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 table presentstables present the changes for the three and six months ended June 30, 2022 and 2021 in the allowance for credit losses on Agency and non-Agency AFS securities:
Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
(in thousands)AgencyNon-AgencyTotalAgencyNon-AgencyTotal
Allowance for credit losses at beginning of period$(11,567)$(6)$(11,573)$(12,851)$(1,387)$(14,238)
Additions on securities for which credit losses were not previously recorded(33)(259)(292)(35)(259)(294)
(Increase) decrease on securities with previously recorded credit losses(250)5 (245)(2,743)1,386 (1,357)
Write-offs2,447 — 2,447 6,226 — 6,226 
Allowance for credit losses at end of period$(9,403)$(260)$(9,663)$(9,403)$(260)$(9,663)
Three Months EndedSix Months Ended
June 30, 2021June 30, 2021
(in thousands)AgencyNon-AgencyTotalAgencyNon-AgencyTotal
Allowance for credit losses at beginning of period$(16,699)$(1,471)$(18,170)$(17,889)$(4,639)$(22,528)
Additions on securities for which credit losses were not previously recorded(11)(3,850)(3,861)(31)(3,850)(3,881)
(Increase) decrease on securities with previously recorded credit losses(297)(3,234)(3,531)(2,137)(239)(2,376)
Write-offs1,853 5,944 7,797 4,903 6,117 11,020 
Allowance for credit losses at end of period$(15,154)$(2,611)$(17,765)$(15,154)$(2,611)$(17,765)

The following tables present the components comprising the carrying value of AFS securities for which an allowance for credit losses has not deemed to be other than temporarily impairedbeen recorded by length of time that the securities had an unrealized loss position as of SeptemberJune 30, 20172022 and December 31, 2016.2021. At SeptemberJune 30, 2017,2022 and December 31, 2021, the Company held 1,380777 and 756 AFS securities, respectively; of the securities for which 152an allowance for credit losses has not been recorded, 368 and 45 were in an unrealized loss position for less than twelve consecutive monthsmonths. At both June 30, 2022 and 164December 31, 2021, none of the Company’s AFS securities were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,239 AFS securities, of which 252 were inmonths without an unrealized loss positionallowance for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. Of the $4.1 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2017 and December 31, 2016, $3.9 billion, or 95.1%, and $6.1 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.credit losses recorded.
June 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$7,099,362 $(199,745)$— $— $7,099,362 $(199,745)
Non-Agency82,244 (1,231)— — 82,244 (1,231)
Total$7,181,606 $(200,976)$— $— $7,181,606 $(200,976)
11
 Unrealized Loss Position for
 Less than 12 Months 12 Months or More Total
(in thousands)Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses
September 30, 2017$4,136,362
 $(22,669) $2,341,707
 $(98,029) $6,478,069
 $(120,698)
December 31, 2016$6,416,820
 $(204,034) $504,978
 $(39,955) $6,921,798
 $(243,989)

Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income, net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
During the nine months ended September 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency security where the future expected cash flows for the security were less than its amortized cost. The Company did not record any other-than-temporary credit impairments during the three months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded $1.0 million and $1.8 million, respectively, in other-than-temporary credit impairments on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2017, impaired securities with a carrying value of $117.6 million had actual weighted average cumulative losses of 5.3%, weighted average three-month prepayment speed of 7.3%, weighted average 60+ day delinquency of 21.8% of the pool balance, and weighted average FICO score of 659. At September 30, 2017, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.

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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 $(13,261)
The following table presents the changes in OTTI included in earnings for the three and nine months ended September 30, 2017 and 2016:
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Cumulative credit loss at beginning of period$(6,035) $(6,710) $(5,606) $(6,499)
Additions:       
Other-than-temporary impairments not previously recognized—
 (1,015) (429) (1,307)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments—
 —
 —
 (515)
Reductions:       
Decreases related to other-than-temporary impairments on securities paid down—
 —
 —
 —
Decreases related to other-than-temporary impairments on securities sold—
 —
 —
 596
Cumulative credit loss at end of period$(6,035) $(7,725) $(6,035) $(7,725)

Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within (loss) gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, the Company sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion for net realized losses of $3.9 million and $21.0 million, respectively. For the three and nine months ended September 30, 2016, the Company sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion for net realized gains of $31.8 million and $63.3 million, respectively.
loss. The following table presents the gross realized gains and losses ondetails around sales of AFS securities forduring the three and ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Proceeds from sales of available-for-sale securities$2,326,528 $2,549,602 $4,339,148 $4,600,545 
Amortized cost of available-for-sale securities sold(2,514,613)(2,532,087)(4,582,084)(4,516,832)
Total realized (losses) gains on sales, net$(188,085)$17,515 $(242,936)$83,713 
Gross realized gains$6,884 $46,768 $21,579 $112,985 
Gross realized losses(194,969)(29,253)(264,515)(29,272)
Total realized (losses) gains on sales, net$(188,085)$17,515 $(242,936)$83,713 

 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Gross realized gains$408
 $31,942
 $57,133
 $77,836
Gross realized losses(4,342) (164) (78,125) (14,487)
Total realized (losses) gains on sales, net$(3,934) $31,778
 $(20,992) $63,349

Note 5. Commercial Real Estate Assets
The Company originates and purchases commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as commercial real estate assets on the condensed consolidated balance sheets. Additionally, the Company is the sole certificate holder of a trust entity that holds a commercial real estate loan. The underlying loan held by the trust is consolidated on the Company’s condensed consolidated balance sheet and classified as commercial real estate assets. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Commercial real estate assets are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following tables summarize the Company’s commercial real estate assets by asset type, property type and geographic location as of September 30, 2017 and December 31, 2016:
 September 30,
2017
(dollars in thousands)First Mortgages Mezzanine Loans B-Notes Total
Unpaid principal balance$2,041,767
 $132,605
 $14,892
 $2,189,264
Unamortized (discount) premium(174) (11) —
 (185)
Unamortized net deferred origination fees(17,695) (40) —
 (17,735)
Carrying value$2,023,898

$132,554
 $14,892
 $2,171,344
Unfunded commitments$270,654
 $1,580
 $—
 $272,234
Number of loans50
 6
 1
 57
Weighted average coupon5.6% 9.1% 8.0% 5.9%
Weighted average years to maturity (1)
2.5
 1.9
 9.3
 2.5

 December 31,
2016
(dollars in thousands)First Mortgages Mezzanine Loans B-Notes Total
Unpaid principal balance$1,286,200
 $138,245
 $—
 $1,424,445
Unamortized (discount) premium(185) (15) —
 (200)
Unamortized net deferred origination fees(11,481) (221) —
 (11,702)
Carrying value$1,274,534
 $138,009
 $—
 $1,412,543
Unfunded commitments$170,890
 1,580
 $—
 $172,470
Number of loans30
 6
 —
 36
Weighted average coupon5.1% 8.6% —% 5.4%
Weighted average years to maturity (1)
2.9
 1.5
 0.0
 2.8
____________________
(1)Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications.

(in thousands) September 30,
2017		 December 31,
2016
Property Type Carrying Value % of Commercial Portfolio Carrying Value % of Commercial Portfolio
Office $1,133,866
 52.2% $718,780
 50.9%
Multifamily 385,222
 17.7% 260,683
 18.5%
Retail 247,196
 11.4% 237,414
 16.8%
Hotel 209,874
 9.7% 90,585
 6.4%
Industrial 195,186
 9.0% 105,081
 7.4%
Total $2,171,344
 100.0% $1,412,543
 100.0%

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

(in thousands) September 30,
2017		 December 31,
2016
Geographic Location Carrying Value % of Commercial Portfolio Carrying Value % of Commercial Portfolio
Northeast $924,383
 42.6% $578,762
 41.0%
West 414,612
 19.1% 250,044
 17.7%
Southwest 363,907
 16.8% 267,944
 19.0%
Southeast 350,407
 16.1% 239,194
 16.9%
Midwest 118,035
 5.4% 76,599
 5.4%
Total $2,171,344
 100.0% $1,412,543
 100.0%
At September 30, 2017 and December 31, 2016, the Company pledged commercial real estate assets with a carrying value of $2.0 billion and $1.4 billion, respectively, as collateral for repurchase agreements and FHLB advances. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
The following table summarizes activity related to commercial real estate assets for the three and nine months ended September 30, 2017 and 2016.
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(in thousands)2017 2016 2017 2016
Balance at beginning of period$1,782,749
 $926,377
 $1,412,543
 $660,953
Originations, acquisitions and additional fundings393,425
 190,100
 771,473
 470,547
Repayments(409) (908) (6,655) (15,295)
Net (premium amortization) discount accretion6
 64
 (11) 204
Increase in net deferred origination fees(5,858) (2,858) (11,568) (6,867)
Amortization of net deferred origination fees1,431
 1,773
 5,562
 5,006
Allowance for loan losses—
 —
 —
 —
Balance at end of period$2,171,344
 $1,114,548
 $2,171,344
 $1,114,548

The Company evaluates each loan for impairment at least quarterly by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, project sponsorship, and other factors deemed necessary. Risk ratings are defined as follows:

1 –Lower Risk
2 –Average Risk
3 –Acceptable Risk
4 –Higher Risk: A loan that has exhibited material deterioration in cash flows and/or other credit factors, which, if negative trends continue, could be indicative of future loss.
5 –Impaired/Loss Likely: A loan that has a significantly increased probability of default or principal loss.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table presents the number of loans, unpaid principal balance and carrying value (amortized cost) by risk rating for commercial real estate assets as of September 30, 2017 and December 31, 2016:
(dollars in thousands) September 30,
2017		 December 31,
2016
Risk Rating Number of Loans Unpaid Principal Balance Carrying Value Number of Loans Unpaid Principal Balance Carrying Value
1 – 3 57
 $2,189,264
 $2,171,344
 36
 $1,424,445
 $1,412,543
4 – 5 —
 —
 —
 —
 —
 —
Total 57
 $2,189,264
 $2,171,344
 36
 $1,424,445
 $1,412,543

The Company has not recorded any allowances for losses as no loans are past-due and it is not deemed probable that the Company will not be able to collect all amounts due pursuant to the contractual terms of the loans.

Note 6.5. Servicing Activities
Mortgage Servicing Rights, at Fair Value
OneA wholly owned subsidiary of the Company’s wholly owned subsidiariesCompany has approvals from Fannie Mae and Freddie Mac and Ginnie Mae 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.
The following table summarizes activity related to MSR for the three and nine months ended September 30, 2017 and 2016.
12
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Balance at beginning of period$898,025
 $427,813
 $693,815
 $493,688
Additions from purchases of mortgage servicing rights66,280
 98,224
 340,156
 204,435
Additions from sales of residential mortgage loans—
 242
 20
 764
Subtractions from sales of mortgage servicing rights—
 (60,910) (946) (60,910)
Changes in fair value due to:       
Changes in valuation inputs or assumptions used in the valuation model(154) 3,846
 (23,083) (139,587)
Other changes in fair value (1)
(28,595) (18,231) (66,543) (52,773)
Other changes (2)
(4,943) 4,645
 (12,806) 10,012
Balance at end of period$930,613
 $455,629
 $930,613
 $455,629
____________________
(1)Other changes in fair value primarily represents changes due to the realization of expected cash flows.
(2)Other changes includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral.

At September 30, 2017 and December 31, 2016, the Company pledged MSR with a carrying value of $160.6 million and $180.9 million, respectively, as collateral for revolving credit facilities. See Note 18 - Revolving Credit Facilities.

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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 six months ended June 30, 2022 and 2021.
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Balance at beginning of period$3,089,963 $2,091,761 $2,191,578 $1,596,153 
Purchases of mortgage servicing rights59,945 198,526 544,750 373,749 
Changes in fair value due to:
Changes in valuation inputs or assumptions used in the valuation model (1)
199,272 (72,910)724,185 428,783 
Other changes in fair value (2)
(113,715)(195,141)(228,004)(369,396)
Other changes (3)
(9,274)(2,130)(6,318)(9,183)
Balance at end of period (4)
$3,226,191 $2,020,106 $3,226,191 $2,020,106 
____________________
(1)Includes the impact of acquiring MSR at a cost different from fair value.
(2)Primarily represents changes due to the realization of expected 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 June 30, 2022 and December 31, 2021, the Company pledged MSR with a carrying value of $3.2 billion and $2.1 billion, respectively, as collateral for repurchase agreements, revolving credit facilities and term notes payable. See Note 11 - Repurchase Agreements, Note 12 - Revolving Credit Facilities and Note 13 - Term Notes Payable.
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
(dollars in thousands, except per loan data)June 30,
2022		December 31,
2021
Weighted average prepayment speed:7.4 %12.9 %
Impact on fair value of 10% adverse change$(69,057)$(110,222)
Impact on fair value of 20% adverse change$(139,968)$(210,406)
Weighted average delinquency:0.8 %1.3 %
Impact on fair value of 10% adverse change$(4,517)$(3,470)
Impact on fair value of 20% adverse change$(9,066)$(6,947)
Weighted average option-adjusted spread:5.0 %4.7 %
Impact on fair value of 10% adverse change$(50,651)$(42,188)
Impact on fair value of 20% adverse change$(101,512)$(82,126)
Weighted average per loan annual cost to service:$67.64 $66.76 
Impact on fair value of 10% adverse change$(24,196)$(25,919)
Impact on fair value of 20% adverse change$(49,038)$(51,911)
(dollars in thousands)September 30,
2017		 December 31,
2016
Weighted average prepayment speed:10.8% 9.2%
Impact on fair value of 10% adverse change$(36,170) $(25,012)
Impact on fair value of 20% adverse change$(69,455) $(48,602)
Weighted average delinquency:1.7% 1.9%
Impact on fair value of 10% adverse change$(4,002) $(1,908)
Impact on fair value of 20% adverse change$(8,065) $(3,816)
Weighted average discount rate:9.9% 9.4%
Impact on fair value of 10% adverse change$(29,873) $(23,590)
Impact on fair value of 20% adverse change$(57,481) $(45,861)


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 risk associated with the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. The Company economically hedges the impact of these risks primarily with its Agency RMBS portfolio.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive incomeloss for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Servicing fee income$153,620 $111,083 $288,834 $216,248 
Ancillary and other fee income561 622 1,031 1,238 
Float income3,345 1,111 4,287 2,449 
Total$157,526 $112,816 $294,152 $219,935 
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Servicing fee income$53,989
 $37,226
 $141,923
 $104,765
Ancillary and other fee income310
 449
 615
 1,423
Float income3,088
 1,033
 5,930
 2,469
Total$57,387
 $38,708
 $148,468
 $108,657


Mortgage Servicing Advances
In connection withAs the servicingservicer of loans,record for the Company’s subservicers make certain payments for property taxes and insurance premiums, default and property maintenance payments, as well as advances ofMSR 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 collecting themreceiving reimbursement from individual borrowers.Fannie Mae and Freddie Mac. Servicing advances including contractual interest, 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 which are funded by the Company, totaled $20.7$98.8 million and $26.1$130.6 million and were included in other assets on the condensed consolidated balance sheets as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. At June 30, 2022 and December 31, 2021, mortgage loans in 60+ day delinquent status (whether or not subject to forbearance) accounted for approximately 0.8% and 1.3%, respectively, of the aggregate principal balance of loans for which the Company had servicing advance funding obligations.

21
TableThe Company has one revolving credit facility to finance its servicing advance obligations. At June 30, 2022 and December 31, 2021, the Company had pledged servicing advances with a carrying value of Contents

TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

$34.1 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 loans underlying MSR, loans held in consolidated VIEs classified as residential mortgage loans held-for-investment in securitization trusts and loans owned and classified asunderlying its MSR assets, off-balance sheet residential mortgage loans held-for-sale.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 SeptemberJune 30, 20172022 and December 31, 2016:2021:
June 30, 2022December 31, 2021
(dollars in thousands)Number of LoansUnpaid Principal BalanceNumber of LoansUnpaid Principal Balance
Mortgage servicing rights901,244 $227,074,413 796,205 $193,770,566 
Residential mortgage loans677 399,718 868 519,270 
Other assets1 23 2 40 
Total serviced mortgage assets901,922 $227,474,154 797,075 $194,289,876 

 September 30, 2017 December 31, 2016
(dollars in thousands)Number of Loans Unpaid Principal Balance Number of Loans Unpaid Principal Balance
Mortgage servicing rights398,580
 $88,789,765
 280,185
 $62,827,975
Residential mortgage loans held-for-investment in securitization trusts4,288
 2,948,349
 4,604
 3,234,044
Residential mortgage loans held-for-sale245
 38,765
 333
 49,986
Total serviced mortgage assets403,113
 $91,776,879
 285,122
 $66,112,005

Note 7. Residential Mortgage Loans Held-for-Investment in Securitization Trusts, at Fair Value
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. The underlying residential mortgage loans held by the trusts, which are consolidated on the Company’s condensed consolidated balance sheets, are classified as residential mortgage loans held-for-investment in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the securitization trusts. The following table presents the carrying value of the Company’s residential mortgage loans held-for-investment in securitization trusts as of September 30, 2017 and December 31, 2016:
(in thousands)September 30,
2017		 December 31,
2016
Unpaid principal balance$2,948,349
 $3,234,044
Fair value adjustment82,842
 37,273
Carrying value$3,031,191
 $3,271,317

Note 8. Residential Mortgage Loans Held-for-Sale, at Fair Value
Residential mortgage loans held-for-sale consists of residential mortgage loans carried at fair value as a result of a fair value option election. The following table presents the carrying value of the Company’s residential mortgage loans held-for-sale as of September 30, 2017 and December 31, 2016:
(in thousands)September 30,
2017		 December 31,
2016
Unpaid principal balance$38,765
 $49,986
Fair value adjustment(7,568) (9,840)
Carrying value$31,197
 $40,146

Note 9.6. 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 repurchase agreements and FHLB advancesborrowings 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 SeptemberJune 30, 20172022 and December 31, 2016:2021:
(in thousands)June 30,
2022		December 31,
2021
Restricted cash balances held by trading counterparties:
For securities trading activity$2,951 $23,800 
For derivatives trading activity239,886 136,271 
For servicing activities21,691 26,704 
As restricted collateral for borrowings363,137 747,979 
Total restricted cash balances held by trading counterparties627,665 934,754 
Restricted cash balance pursuant to letter of credit on office lease60 60 
Total$627,725 $934,814 
(in thousands)September 30,
2017		 December 31,
2016
Restricted cash balances held by trading counterparties:   
For securities and loan trading activity$27,823
 $26,310
For derivatives trading activity165,799
 218,896
As restricted collateral for repurchase agreements and Federal Home Loan Bank advances149,844
 162,759
Total restricted cash balances held by trading counterparties343,466
 407,965
Restricted cash balance pursuant to letter of credit on office lease347
 347
Total$343,813
 $408,312


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of SeptemberJune 30, 20172022 and December 31, 20162021 that sum to the total of the same such amounts shown in the statements of cash flows:
(in thousands)June 30,
2022		December 31,
2021
Cash and cash equivalents$511,889 $1,153,856 
Restricted cash627,725 934,814 
Total cash, cash equivalents and restricted cash$1,139,614 $2,088,670 

(in thousands)September 30,
2017		 December 31,
2016
Cash and cash equivalents$539,367
 $406,883
Restricted cash343,813
 408,312
Total cash, cash equivalents and restricted cash$883,180
 $815,195

Note 10. Accrued Interest Receivable
The following table presents the Company’s accrued interest receivable by collateral type as of September 30, 2017 and December 31, 2016:
(in thousands)September 30,
2017		 December 31,
2016
Available-for-sale securities:   
Agency   
Federal National Mortgage Association$42,087
 $25,273
Federal Home Loan Mortgage Corporation13,039
 8,914
Government National Mortgage Association4,036
 3,068
Non-Agency3,165
 2,705
Total available-for-sale securities62,327
 39,960
Commercial real estate assets5,740
 3,699
Residential mortgage loans held-for-investment in securitization trusts17,219
 18,928
Residential mortgage loans held-for-sale159
 164
Total$85,445
 $62,751


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 11.7. 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 market risk and 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 (i.e.e.g., LIBOR)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 repurchaseborrowing agreement or FHLB advance 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, TBAs, putfutures and call options for TBAs, credit default swaps and total return swaps (based on the Markit IOS Index).futures. The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally MSR and Agency 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, Derivatives and Hedging, or 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 qualify forare designated or qualifying as hedge accounting treatment.instruments. Due to the volatility of the interest rate and credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat allnot designated any current derivative contractsderivatives as tradinghedging instruments.
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading instrumentsderivatives as of SeptemberJune 30, 20172022 and December 31, 2016.2021:
June 30, 2022
Derivative AssetsDerivative Liabilities
(in thousands)Fair ValueNotionalFair ValueNotional
Inverse interest-only securities$24,382 $217,851 $— $— 
Interest rate swap agreements— — — 14,850,336 
Swaptions, net541 — (94,227)(1,680,000)
TBAs4,407 422,000 (16,537)5,895,000 
Futures, net— (16,727,160)— — 
Total$29,330 $(16,087,309)$(110,764)$19,065,336 
December 31, 2021
Derivative AssetsDerivative Liabilities
(in thousands) September 30, 2017(in thousands)Fair ValueNotionalFair ValueNotional
 Derivative Assets Derivative Liabilities
Trading instruments Fair Value Notional Fair Value Notional
Inverse interest-only securities $102,235
 $621,549
 $—
 $—
Inverse interest-only securities$41,367 $247,101 $— $— 
Interest rate swap agreements 120,423
 13,216,448
 (11,312) 6,800,429
Interest rate swap agreements— 20,387,300 — — 
Swaptions, net 9,395
 2,814,000
 —
 —
Swaptions, net— — (51,743)(1,761,000)
TBAs 5,703
 1,405,000
 —
 —
TBAs3,405 3,523,000 (1,915)593,000 
Put and call options for TBAs, net 156
 2,000,000
 —
 —
Markit IOS total return swaps 393
 65,895
 —
 —
Futures, netFutures, net35,362 (5,829,600)— — 
Total $238,305
 $20,122,892
 $(11,312) $6,800,429
Total$80,134 $18,327,801 $(53,658)$(1,168,000)

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

(in thousands) December 31, 2016
  Derivative Assets Derivative Liabilities
Trading instruments Fair Value Notional Fair Value Notional
Inverse interest-only securities $127,843
 $740,844
 $—
 $—
Interest rate swap agreements 109,531
 18,471,063
 (495) 1,900,000
Swaptions, net 39,881
 825,000
 (1,645) 600,000
TBAs 4,294
 536,000
 (10,344) 953,000
Put and call options for TBAs, net 42,633
 1,136,000
 —
 —
Markit IOS total return swaps —
 —
 (17) 90,593
Total $324,182
 $21,708,907
 $(12,501) $3,543,593


Comprehensive IncomeLoss 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 income:loss:
Derivative InstrumentsLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in Income
Three Months EndedSix Months Ended
(in thousands)June 30,June 30,
2022202120222021
Interest rate risk management:
TBAs(Loss) gain on other derivative instruments$(109,442)$31,817 $(308,278)$(156,129)
Futures(Loss) gain on other derivative instruments11,312 18,264 117,407 (66,877)
Options on futures(Loss) gain on other derivative instruments(158)— (2,224)— 
Interest rate swaps - PayersGain (loss) on interest rate swap and swaption agreements235,234 (23,019)672,394 57,294 
Interest rate swaps - ReceiversGain (loss) on interest rate swap and swaption agreements(204,550)54,229 (681,689)(52,144)
SwaptionsGain (loss) on interest rate swap and swaption agreements2,050 (6,562)3,988 3,899 
Non-risk management:
Inverse interest-only securities(Loss) gain on other derivative instruments(2,985)1,231 (9,940)(1,693)
Total$(68,539)$75,960 $(208,342)$(215,650)
Trading Instruments Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives
(in thousands)   Three Months Ended
September 30,		 Nine Months Ended
September 30,
    2017 2016 2017 2016
Interest rate risk management          
TBAs Loss on other derivative instruments $(16,891) $(522) $(45,671) $26,369
Put and call options for TBAs Loss on other derivative instruments (3,405) (6,226) (22,467) (51,259)
Interest rate swap agreements - Payers (Loss) gain on interest rate swap and swaption agreements 17,422
 48,359
 (27,723) (245,676)
Interest rate swap agreements - Receivers (Loss) gain on interest rate swap and swaption agreements (5,280) (18,381) 22,813
 131,465
Swaptions (Loss) gain on interest rate swap and swaption agreements (12,349) (24,394) (62,080) (18,397)
Markit IOS total return swaps Loss on other derivative instruments (134) (6,550) (821) (41,541)
Credit risk management          
Credit default swaps - Receive protection Loss on other derivative instruments —
 (18) —
 364
Non-risk management          
Inverse interest-only securities Loss on other derivative instruments 1,506
 1,288
 2,631
 22,003
Forward purchase commitments Gain (loss) on residential mortgage loans held-for-sale —
 107
 —
 2,455
Total   $(19,131) $(6,337) $(133,318) $(174,217)



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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

For the three and ninesix months ended SeptemberJune 30, 2017,2022, the Company recognized $0.4expense of $4.3 million and $10.9$5.0 million, respectively, for the accrual and/or settlement of expensesthe net interest expense associated with its interest rate swaps and caps. The 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 $20.5 billion and $22.5 billion notional, respectively. For the three and six months ended June 30, 2021, the Company recognized income of $2.4 million and $4.0 million respectively, for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses resultincome results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or LIBORa floating interest and receiving either LIBOR interestrate (OIS, or a fixed interest rateSOFR) on an average $16.7$15.2 billion and $17.6 billion notional, respectively. For the three and nine months ended September 30, 2016, the Company recognized $4.3 million and $18.1 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $14.5 billion and $14.8$14.3 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 ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
Three Months Ended June 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$232,218 $— $(14,367)$217,851 $225,537 $(1,875)
Interest rate swap agreements24,299,647 6,653,204 (16,102,515)14,850,336 20,461,467 219,025 
Swaptions, net(2,761,000)— 1,081,000 (1,680,000)(1,901,286)27,186 
TBAs, net4,622,000 21,697,000 (20,002,000)6,317,000 5,568,560 (103,893)
Futures, net(7,516,650)(17,500,060)8,289,550 (16,727,160)(15,287,970)2,493 
Options on futures, net2,000 — (2,000)— 1,055 (2,224)
Total$18,878,215 $10,850,144 $(26,750,332)$2,978,027 $9,067,363 $140,712 
17
 Three Months Ended September 30, 2017
(in thousands)Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount 
Realized Gain (Loss), net (1)
Inverse interest-only securities$659,768
 $—
 $(38,219) $621,549
 $642,143
 $(40)
Interest rate swap agreements14,764,719
 9,878,549
 (4,626,391) 20,016,877
 16,710,894
 36,171
Swaptions, net1,350,000
 5,364,000
 (3,900,000) 2,814,000
 2,213,533
 (3,264)
TBAs, net(1,140,000) (1,585,000) 1,320,000
 (1,405,000) (1,370,043) (14,997)
Put and call options for TBAs, net1,285,000
 1,905,000
 (1,190,000) 2,000,000
 54,402
 (3,980)
Markit IOS total return swaps68,629
 —
 (2,734) 65,895
 66,802
 —
Total$16,988,116
 $15,562,549
 $(8,437,344) $24,113,321
 $18,317,731
 $13,890
 Three Months Ended September 30, 2016
(in thousands)Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount 
Realized Gain (Loss), net (1)
Inverse interest-only securities$834,866
 $—
 $(50,043) $784,823
 $813,045
 $—
Interest rate swap agreements13,697,000
 4,451,430
 (1,203,000) 16,945,430
 14,497,913
 (39,369)
Credit default swaps25,000
 —
 —
 25,000
 25,000
 —
Swaptions, net1,800,000
 (1,537,000) 7,000
 270,000
 219,315
 (55,692)
TBAs, net(337,000) (5,622,000) 5,370,000
 (589,000) (1,051,989) (18,819)
Put and call options for TBAs, net8,897,000
 2,269,000
 (6,697,000) 4,469,000
 5,607,728
 (26,955)
Markit IOS total return swaps588,037
 99,911
 (591,700) 96,248
 113,334
 (13,897)
Forward purchase commitments636,467
 315,787
 (890,851) 61,403
 418,333
 577
Total$26,141,370
 $(22,872) $(4,055,594) $22,062,904
 $20,642,679
 $(154,155)

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Three Months Ended June 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$300,597 $— $(19,124)$281,473 $291,985 $(25)
Interest rate swap agreements15,221,597 1,080,356 (655,000)15,646,953 15,198,601 8,642 
Swaptions, net— (201,000)— (201,000)(65,934)— 
TBAs, net4,800,000 20,912,000 (18,858,000)6,854,000 6,251,516 23,426 
Futures, net(1,185,100)6,952,500 (5,253,900)513,500 (94,869)10,175 
Total$19,137,094 $28,743,856 $(24,786,024)$23,094,926 $21,581,299 $42,218 
Six Months Ended June 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$247,101 $— $(29,250)$217,851 $232,750 $(3,640)
Interest rate swap agreements20,387,300 17,445,009 (22,981,973)14,850,336 22,478,619 162,761 
Swaptions, net(1,761,000)(1,000,000)1,081,000 (1,680,000)(2,071,862)27,186 
TBAs, net4,116,000 42,215,000 (40,014,000)6,317,000 4,595,387 (294,658)
Futures, net(5,829,600)(22,366,160)11,468,600 (16,727,160)(11,826,254)380 
Options on futures, net— 2,000 (2,000)— 840 (2,224)
Total$17,159,801 $36,295,849 $(50,477,623)$2,978,027 $13,409,480 $(110,195)
 Nine Months Ended September 30, 2017
(in thousands)Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount 
Realized Gain (Loss), net (1)
Inverse interest-only securities$740,844
 $—
 $(119,295) $621,549
 $681,126
 $(40)
Interest rate swap agreements20,371,063
 23,408,358
 (23,762,544) 20,016,877
 17,617,836
 47,691
Swaptions, net225,000
 1,109,000
 1,480,000
 2,814,000
 669,377
 21,164
TBAs, net(1,489,000) (5,710,400) 5,794,400
 (1,405,000) (1,231,793) (57,424)
Put and call options for TBAs, net(1,136,000) 4,460,000
 (1,324,000) 2,000,000
 (13,289) 20,166
Markit IOS total return swaps90,593
 —
 (24,698) 65,895
 76,670
 (181)
Total$18,802,500
 $23,266,958
 $(17,956,137) $24,113,321
 $17,799,927
 $31,376
Nine Months Ended September 30, 2016Six Months Ended June 30, 2021
(in thousands)Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount 
Realized Gain (Loss), net (1)
(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$932,037
 $—
 $(147,214) $784,823
 $860,920
 $—
Inverse interest-only securities$318,162 $— $(36,689)$281,473 $301,143 $37 
Interest rate swap agreements14,268,806
 16,553,456
 (13,876,832) 16,945,430
 14,751,923
 (33,067)Interest rate swap agreements12,646,341 4,192,863 (1,192,251)15,646,953 14,342,217 47 
Credit default swaps125,000
 10,000
 (110,000) 25,000
 87,883
 412
Swaptions, net5,200,000
 1,063,000
 (5,993,000) 270,000
 3,192,617
 (86,481)Swaptions, net3,750,000 (201,000)(3,750,000)(201,000)127,072 2,245 
TBAs, net297,000
 (1,186,000) 300,000
 (589,000) (239,493) 12,932
TBAs, net5,197,000 41,714,000 (40,057,000)6,854,000 5,780,657 (140,097)
Put and call options for TBAs, net—
 13,166,000
 (8,697,000) 4,469,000
 3,091,679
 (28,303)
Markit IOS total return swaps889,418
 99,911
 (893,081) 96,248
 598,163
 (13,374)
Forward purchase commitments286,120
 1,548,027
 (1,772,744) 61,403
 357,448
 1,835
Futures, netFutures, net2,021,100 7,922,800 (9,430,400)513,500 138,038 (60,722)
Total$21,998,381
 $31,254,394
 $(31,189,871) $22,062,904
 $22,701,140
 $(146,046)Total$23,932,603 $53,628,663 $(54,466,340)$23,094,926 $20,689,127 $(198,490)
____________________
(1)Excludes net interest paid or received in full settlement of the net interest spread liability.

(1)Excludes net interest paid or received in full settlement of the net interest spread liability.

Cash flow activity related to derivative instruments is reflected within the operating activities and investing activities sections of the condensed consolidated statements of cash flows. DerivativeRealized gains and losses and derivative fair value adjustments are reflected within the realized and unrealized loss (gain) on interest rate swaps and swaptions and unrealized loss(gains) losses on other derivative instruments and gain on residential mortgage loans held-for-sale line items within the operating activities section of the condensed consolidated statements of cash flows. Realized gains and losses on interest rate swap and swaption agreements are reflected within the (gain) loss on termination and option expiration of interest rate swaps and swaptions line item within the operating activities section of the condensed consolidated statements of cash flows. The remaining cash flow activity related to derivative instruments is reflected within the (purchases) short sales (purchases) of other derivative instruments, proceeds from sales and settlements (payments for termination)termination and settlement) of other derivative instruments, net and (decrease) increase in due to counterparties, net line items within the investing activities section of the condensed consolidated statements of cash flows.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Interest Rate Sensitive Assets/Liabilities
The Company’s Agency RMBS portfolio is generally subject to change in value when mortgageinterest rates declineor prepayment speeds decrease or increase, depending on the type of investment. Rising mortgagePeriods of rising interest rates with corresponding decreasing prepayment speeds generally result in a slowing of refinancing activity, which slows prepayments and results in a decline in the value of the Company’s fixed-rate Agency pools. To mitigate theprincipal and interest (P&I) RMBS. The impact of this riskeffect on the Company’s fixed-rate Agency poolP&I RMBS portfolio is partially mitigated by the Company maintains a portfoliopresence of fixed-rate interest-only securitiesAgency RMBS, which generally increase in value when prepayment speeds decrease and MSR, which generally increase in value when prepayment speeds decrease and interest rates increase. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had $60.4$98.0 million and $71.1$274.1 million,, respectively, of interest-only securities, and $930.6 million$3.2 billion and $693.8 million,$2.2 billion, respectively, of MSR in place to economically hedge its Agency RMBS.MSR. Interest-only securities are included in AFS securities, at fair value, in the condensed consolidated balance sheets.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company monitors its borrowings under repurchase agreements and FHLB advances,revolving credit facilities, which are generally floating-rate debt, in relation to the rate profile of its portfolio. In connection with its risk management activities, the Company enters into a variety of derivative and non-derivative instruments to economically hedge interest rate risk or “durationduration 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 borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (i.e.e.g., LIBOR)LIBOR, OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchaseborrowing agreement or FHLB advance 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, credit default swaps and total return swaps. In executing on the Company’s current interest rate risk management strategy, the Company has entered into TBAs, put and call options for TBAs, interest rate swap and swaption agreements, futures and Markit IOS total return swaps.options on futures.
The Company has certain derivative contracts that are indexed to LIBOR and is monitoring market transition plans as it relates to derivatives exposed to LIBOR and evaluating the related risks and the Company’s exposure. All of the Company’s derivative instruments that incorporate LIBOR as the referenced rate mature prior to the phase out of LIBOR. See Note 2 - Basis of Presentation and Significant Accounting Policies for further discussion of the transition away from LIBOR.
TBAs. At times, the The Company may use TBAs as a means of deploying capital until targeted investments are available andor to take advantage of temporary displacements, funding advantages or valuation differentials in the marketplace. Additionally, the Company may use TBAs independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. TBAs are forward contracts for the purchase (long notional positions) or sale (short notional positions) of Agency RMBS. The issuer, coupon and stated maturity of the Agency RMBS are predetermined as well as the trade price, face amount and future settle date (published each month by the Securities Industry and Financial Markets Association). However, the specific Agency RMBS to be delivered upon settlement is not known at the time of the TBA transaction. As a result, and because physical delivery of the Agency RMBS upon settlement cannot be assured, the Company accounts for TBAs as derivative instruments.
As of September 30, 2017, $1.4 billion of the Company’sThe Company may hold both long and short notional TBA positions, were held in order to economically hedge portfolio risk. As of December 31, 2016, $1.5 billion of the Company’s long notional TBA positions and $3.0 billion of the Company’s short notional TBA positions were held in order to economically hedge portfolio risk. The Company discloses these positionswhich are disclosed on a gross basis according to the unrealized gain or loss position of each TBA contract regardless of long or short notional position. The following tables present the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
June 30, 2022
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative AssetsDerivative Liabilities
Purchase contracts$6,317,000 $6,409,396 $6,397,266 $4,407 $(16,537)
Sale contracts— — — — — 
TBAs, net$6,317,000 $6,409,396 $6,397,266 $4,407 $(16,537)
19
 September 30, 2017
       
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 Derivative Assets Derivative Liabilities
Purchase contracts$—
 $—
 $—
 $—
 $—
Sale contracts(1,405,000) (1,447,566) (1,441,863) 5,703
 —
TBAs, net$(1,405,000) $(1,447,566) $(1,441,863) $5,703
 $—
 December 31, 2016
       
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 Derivative Assets Derivative Liabilities
Purchase contracts$1,500,000
 $1,576,270
 $1,576,875
 $605
 $—
Sale contracts(2,989,000) (3,028,470) (3,035,125) 3,689
 (10,344)
TBAs, net$(1,489,000) $(1,452,200) $(1,458,250) $4,294
 $(10,344)
___________________
(1)Notional amount represents the face amount of the underlying Agency RMBS.
(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period-end.
(4)Net carrying value represents the difference between the market value of the TBA as of period-end and its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

December 31, 2021
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative AssetsDerivative Liabilities
Purchase contracts$4,116,000 $4,238,881 $4,240,371 $3,405 $(1,915)
Sale contracts— — — — — 
TBAs, net$4,116,000 $4,238,881 $4,240,371 $3,405 $(1,915)
Put___________________
(1)Notional amount represents the face amount of the underlying Agency RMBS.
(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period-end.
(4)Net carrying value represents the difference between the market value of the TBA as of period-end and Call Options for TBAs. its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets.

Futures. The Company may use put and call options for TBAsa variety of types of futures independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. AsThe following table summarizes certain characteristics of Septemberthe Company’s futures as of June 30, 20172022 and December 31, 2016, the Company had purchased put and call options for TBAs with a notional amount of $2.0 billion and $2.5 billion, respectively. As of December 31, 2016, the Company had also short sold put and call options for TBAs with a notional amount of $3.6 billion. The last of the options held at September 30, 2017 expired in October 2017. The put and call options had a fair market value of $0.2 million included in derivative assets, at fair value, on the condensed consolidated balance sheet as of September 30, 2017. As of December 31, 2016, put and call options for TBAs had a fair market value of $42.6 million included in derivative assets, at fair value, on the condensed consolidated balance sheet.2021:
(dollars in thousands)June 30, 2022December 31, 2021
Type & MaturityNotional AmountCarrying ValueWeighted Average Days to ExpirationNotional AmountCarrying ValueWeighted Average Days to Expiration
U.S. Treasury futures - 2 year$(730,000)$— 97$— $— 0
U.S. Treasury futures - 5 year(3,369,200)— 97— — 0
U.S. Treasury futures - 10 year(2,988,300)— 92687,900 1,809 90
U.S. Treasury futures - 20 year(413,000)— 92— — 0
Federal Funds futures - 30 day(2,000,160)— 215— — 0
Eurodollar futures - 3 month
≤ 1 year(5,394,500)— 174(3,582,000)15,121 213
> 1 and ≤ 2 years(1,832,000)— 549(2,269,500)14,952 560
> 2 and ≤ 3 years— — 0(666,000)3,480 854
Total futures$(16,727,160)$— 185$(5,829,600)$35,362 370

Interest Rate Swap Agreements. The Company may use interest rate swaps independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company held the following interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a three-month LIBOR rate:floating interest rate (OIS or SOFR):
(notional in thousands)
June 30, 2022
Swaps MaturitiesNotional AmountWeighted Average Fixed Pay RateWeighted Average Receive RateWeighted Average Maturity (Years)
2023$300,584 0.793 %1.500 %1.24
2024499,213 0.948 %1.500 %1.55
2025727,531 2.120 %1.500 %3.22
2026500,819 0.767 %1.500 %4.22
2027 and Thereafter6,009,464 2.107 %1.500 %8.39
Total$8,037,611 1.904 %1.500 %6.97
20
(notional in thousands)      
September 30, 2017
Swaps Maturities 
Notional Amount (1)
 
Weighted Average Fixed Pay Rate (2)
 
Weighted Average Receive Rate (2)
 
Weighted Average Maturity (Years) (2)
2017 $875,000
 0.721% 1.322% 0.18
2018 4,320,000
 1.155% 1.314% 0.75
2019 1,020,000
 1.524% 1.313% 1.81
2020 1,590,000
 1.542% 1.311% 2.96
2021 and Thereafter 7,806,201
 1.793% 1.321% 5.93
Total $15,611,201
 1.509% 1.317% 3.57
(notional in thousands)      
December 31, 2016
Swaps Maturities 
Notional Amount (1)
 
Weighted Average Fixed Pay Rate (2)
 
Weighted Average Receive Rate (2)
 
Weighted Average Maturity (Years) (2)
2017 $2,375,000
 0.765% 0.934% 0.59
2018 5,340,000
 1.232% 0.945% 1.59
2019 350,000
 1.283% 0.895% 2.44
2020 1,460,000
 1.481% 0.920% 3.74
2021 and Thereafter 5,782,063
 1.984% 0.955% 6.17
Total $15,307,063
 1.441% 0.943% 3.24
____________________
(1)Notional amount includes $200.0 million and $777.1 million in forward starting interest rate swaps as of September 30, 2017 and December 31, 2016, respectively.
(2)Weighted averages exclude forward starting interest rate swaps. As of September 30, 2017 and December 31, 2016, the weighted average fixed pay rate on forward starting interest rate swaps was 2.7% and 2.0%, respectively.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

(notional in thousands)
December 31, 2021
Swaps MaturitiesNotional AmountWeighted Average Fixed Pay RateWeighted Average Receive RateWeighted Average Maturity (Years)
2022$7,415,818 0.420 %0.070 %0.66
20232,582,084 0.113 %0.068 %1.51
2024— — %— %0.00
2025377,610 1.030 %0.050 %3.96
2026 and Thereafter2,782,057 0.652 %0.063 %6.56
Total$13,157,569 0.213 %0.067 %2.17

Additionally, as of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk whereby the Company pays interest at a three-month LIBOR rate:floating interest rate (OIS or SOFR):
(notional in thousands)
June 30, 2022
Swaps Maturities
Notional Amount (1)
Weighted Average Pay Rate (2)
Weighted Average Fixed Receive Rate (2)
Weighted Average Maturity (Years) (2)
2023$— — %— %0.00
2024— — %— %0.00
2025— — %— %0.00
20261,626,290 1.500 %0.982 %4.39
2027 and Thereafter5,186,435 1.526 %1.619 %9.31
Total$6,812,725 1.523 %1.540 %8.70
(notional in thousands)
December 31, 2021
Swaps MaturitiesNotional AmountWeighted Average Pay RateWeighted Average Fixed Receive RateWeighted Average Maturity (Years)
2022$2,221,658 0.070 %0.118 %1.19
2023— — %— %0.00
2024— — %— %0.00
2025— — %— %0.00
2026 and Thereafter5,008,073 0.058 %1.049 %10.00
Total$7,229,731 0.062 %0.763 %7.29
____________________
(1)Notional amount includes $900.0 million in forward starting interest rate swaps as of June 30, 2022.
(2)Weighted averages exclude forward starting interest rate swaps. As of June 30, 2022, the weighted average fixed receive rate on forward starting interest rate swaps was 2.7%.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(notional in thousands)      
September 30, 2017
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2019 $508,273
 1.314% 1.582% 1.88
2020 200,000
 1.312% 1.642% 2.85
2021 and Thereafter 3,697,403
 1.316% 2.187% 7.21
Total $4,405,676
 1.316% 2.093% 6.39
(notional in thousands)      
December 31, 2016
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2018 $575,000
 0.911% 1.440% 1.89
2019 500,000
 0.882% 1.042% 2.06
2020 510,000
 0.881% 1.580% 3.59
2021 and Thereafter 3,479,000
 0.963% 2.137% 5.52
Total $5,064,000
 0.941% 1.894% 4.57

Interest Rate Swaptions. The Company may use interest rate swaptions (agreements(which provide the option to enter into interest rate swapsswap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the future for which the Company would either pay or receive a fixed rate)future) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had the following outstanding interest rate swaptions thatswaptions:
June 30, 2022
(notional and dollars in thousands)OptionUnderlying Swap
SwaptionExpirationCost BasisFair ValueAverage Months to ExpirationNotional Amount
Average Fixed Rate (1)
Average Term (Years)
Purchase contracts:
Receiver< 6 Months$1,229 $626 1.07 $100,000 2.60 %10.0
Sale contracts:
Payer≥ 6 Months$(35,778)$(82,834)18.19 $(840,000)1.86 %10.0
Receiver< 6 Months$(400)$(86)1.07 $(100,000)2.20 %10.0
Receiver≥ 6 Months$(35,778)$(11,392)18.92 $(840,000)1.86 %10.0
December 31, 2021
(notional and dollars in thousands)OptionUnderlying Swap
SwaptionExpirationCostFair ValueAverage Months to ExpirationNotional Amount
Average Fixed Rate (1)
Average Term (Years)
Purchase contracts:
Payer< 6 Months$11,314 $3,539 5.33 $886,000 2.26 %10.0
Sale contracts:
Payer≥ 6 Months$(26,329)$(23,958)17.79 $(780,000)1.72 %10.0
Receiver< 6 Months$(10,640)$(6,856)5.11 $(1,087,000)1.26 %10.0
Receiver≥ 6 Months$(26,329)$(24,468)18.91 $(780,000)1.72 %10.0
____________________
(1)As of June 30, 2022, 63.8% and 36.2% of the underlying swap floating rates were utilized as macro-economic hedges:
  September 30, 2017
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Basis Fair Value Average Months to Expiration Notional Amount Average Pay Rate Average Receive Rate Average Term (Years)
Purchase contracts:                
Payer < 6 Months $9,260
 $6,295
 3.86
 $3,225,000
 2.25% 3M Libor 5.0
Total Payer   $9,260
 $6,295
 3.86
 $3,225,000
 2.25% 3M Libor 5.0
                 
Receiver < 6 Months $17,570
 $7,716
 2.32
 $4,570,000
 3M Libor 1.96% 8.0
Receiver ≥ 6 Months —
 4,490
 7.80
 250,000
 3M Libor 2.35% 10.0
Total Receiver   $17,570
 $12,206
 3.05
 $4,820,000
 3M Libor 1.98% 8.1
                 
Sale contracts:                
Payer < 6 Months $—
 $—
 0.37
 $(600,000) 2.42% 3M Libor 5.0
Total Payer   $—
 $—
 0.37
 $(600,000) 2.42% 3M Libor 5.0
                 
Receiver < 6 Months $(9,260) $(5,257) 3.77
 $(4,006,000) 3M Libor 1.72% 5.0
Receiver ≥ 6 Months (1,400) (3,849) 7.80
 (625,000) 3M Libor 1.95% 10.0
Total Receiver   $(10,660) $(9,106) 4.29
 $(4,631,000) 3M Libor 1.75% 5.7

30
Tabletied to SOFR and 3-Month LIBOR, respectively. As of Contents

TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

  December 31, 2016
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Fair Value Average Months to Expiration Notional Amount Average Fixed Pay Rate Average Receive Rate Average Term (Years)
Purchase contracts:                
Payer < 6 Months $29,360
 $42,149
 1.22
 $4,500,000
 2.16% 3M Libor 4.8
Payer ≥ 6 Months 13,655
 792
 6.70
 300,000
 3.50% 3M Libor 10.0
Total Payer   $43,015
 $42,941
 1.23
 $4,800,000
 2.24% 3M Libor 5.1
                 
Sale contracts:                
Payer < 6 Months $(51,355) $(1,414) 5.81
 $(500,000) 3.40% 3M Libor 10.0
Payer ≥ 6 Months (29,893) (938) 6.77
 (300,000) 3.50% 3M Libor 10.0
Total Payer   $(81,248) $(2,352) 6.05
 $(800,000) 3.44% 3M Libor 10.0
                 
Receiver < 6 Months $—
 $(2,353) 2.30
 $(3,775,000) 3M Libor 1.19% 4.9
Total Receiver   $—
 $(2,353) 2.30
 $(3,775,000) 3M Libor 1.19% 4.9

Markit IOS Total Return Swaps. The Company may use total return swaps (agreements whereby the Company receives or makes payments based on the total return of an underlying instrument or index, such as the Markit IOS Index, in exchange for fixed or floating rate interest payments) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. The Company enters into total return swaps to help mitigate the potential impact of larger increases or decreases in interest rates on the performance of our portfolio (referred to as “convexity risk”). Total return swaps based on the Markit IOS Index are intended to synthetically replicate the performance of interest-only securities. The Company had the following total return swap agreements in place at September 30, 2017 and December 31, 2016:2021, 100.0% of the underlying swap floating rates were tied to 3-Month LIBOR.
(notional and dollars in thousands)     
September 30, 2017
Maturity Date Current Notional Amount Fair Value Cost Basis Unrealized Gain (Loss)
January 12, 2043 $(25,262) $124
 $(201) $(77)
January 12, 2044 (40,633) 269
 (366) (97)
Total $(65,895) $393
 $(567) $(174)
(notional and dollars in thousands)     
December 31, 2016
Maturity Date Current Notional Amount Fair Value Cost Basis Unrealized Gain (Loss)
January 12, 2043 $(45,083) $(5) $(320) $(325)
January 12, 2044 (45,510) (12) (366) (378)
Total $(90,593) $(17) $(686) $(703)


Credit Risk
The Company’s exposure to credit losses on its Agency RMBS portfolio is limited due to implicit or explicit backing from the GSEs.either a GSE or a U.S. government agency. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government.government.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

For non-Agency investment securities, residential mortgage loans and commercial real estate assets, the Company may enter into credit default swaps to hedge credit risk. In future periods, the Company could enhance its credit risk protection, enter into further paired derivative positions, including both long and short credit default swaps, and/or seek opportunistic trades in the event of a market disruption (see discussion under “Non-Risk Management Activities”Activities” below). The Company also has processes and controls in place to monitor, analyze, manage and mitigate its credit risk with respect to non-Agency securities, residential mortgage loans and commercial real estate assets.securities.
Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe the Company under such contracts completely fail to perform under the terms of these contracts, assuming there are no recoveries of underlying collateral, as measured by the market value of the derivative financial instruments. As of SeptemberJune 30, 2017,2022, the fair value of derivative financial instruments as an asset and liability position was $238.3$29.3 million and $11.3$110.8 million,, respectively.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company attempts to mitigate its credit risk exposure on derivative financial instruments by limiting its counterparties to banks and financial institutions that meet established internal credit guidelines. The Company also seeks to spread its credit risk exposure across multiple counterparties in order to reduce its exposure to any single counterparty. Additionally, the Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty or clearing agency in the case of centrally cleared interest rate swaps, upon the occurrence of certain events. To further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain of its counterparties and clearing agencies, which require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments exceed established thresholds. The Company’s centrally cleared interest rate swaps and exchange-traded futures and options on futures require the Company to post an “initial margin” amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single-day price movement. The Company also exchanges “variation margin” based upon daily changes in fair value, as measured by the exchange. The exchange of variation margin is considered a settlement of the derivative instrument, as opposed to pledged collateral. Accordingly, the Company accounts for the receipt or payment of variation margin as a direct reduction to the carrying value of the centrally cleared or exchange-traded derivative asset or liability.

Note 8. Reverse Repurchase Agreements
As of SeptemberJune 30, 2017,2022 and December 31, 2021, the Company had received cash deposits from counterparties of $2.8$159.2 million and placed cash deposits of $167.6$129.2 million in accounts maintained by counterparties, of which the amounts are netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties onas collateral for reverse repurchase agreements that could be pledged, delivered or otherwise used, with a fair value of $159.0 million and $134.7 million, respectively.

Note 9. Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements. The Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty. Additionally, the Company’s centrally cleared interest rate swaps and exchange-traded futures and options on futures require the Company to post an initial margin amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single-day price movement. The Company also exchanges variation margin based upon daily changes in fair value, as measured by the exchange.
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. Based on rules governing certain central clearing and exchange-trading activities, the exchange of variation margin is considered a settlement of the derivative instrument, as opposed to pledged collateral. Accordingly, the Company accounts for the receipt or payment of variation margin on Chicago Mercantile Exchange, or CME, and London Clearing House, or LCH, cleared positions as a direct reduction to the carrying value of the centrally cleared or exchange-traded derivative asset or liability. The receipt or payment of initial margin is accounted for separate from the derivative asset or liability.
Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Company’s condensed consolidated balance sheets.
Non-Risk Management Activities
sheets when the terms of the agreements meet the criteria to permit netting. The Company has entered into certain financial instruments that are considered derivative contracts under ASC 815 that are not for purposes of hedging. These contracts are currently limited to inverse interest-only Agency RMBS.
Inverse Interest-Only Securities. As of September 30, 2017reports cash flows on repurchase agreements as financing activities and December 31, 2016, inverse interest-only securities with a carrying value of $102.2 million and $127.8 million, including accrued interest receivable of $1.0 million and $1.2 million, respectively, are accounted forcash flows on reverse repurchase agreements as derivative financial instrumentsinvesting activities in the condensed consolidated statements of cash flows. The Company presents derivative assets and liabilities (other than centrally cleared or exchange-traded derivative instruments) subject to master netting arrangements or similar agreements on a net basis, based on derivative type and counterparty, in its condensed consolidated financial statements. The following tablebalance sheets. Separately, the Company presents cash collateral subject to such arrangements (other than variation margin on centrally cleared or exchange-traded derivative instruments) on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the amortized costCompany does not offset repurchase agreements, reverse repurchase agreements or derivative assets and carrying value (which approximates fair value) of inverse interest-only securities as of September 30, 2017 and December 31, 2016:liabilities (other than centrally cleared or exchange-traded derivative instruments) with the associated cash collateral on its condensed consolidated balance sheets.
23
(in thousands)September 30,
2017		 December 31,
2016
Face Value$621,549
 $740,844
Unamortized premium—
 —
Unamortized discount   
Designated credit reserve—
 —
Net, unamortized(529,809) (631,082)
Amortized Cost91,740
 109,762
Gross unrealized gains11,121
 18,389
Gross unrealized losses(1,577) (1,552)
Market Value$101,284
 $126,599


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021:
June 30, 2022
Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets (1)
(in thousands)Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in the Balance SheetsNet Amounts of Assets (Liabilities) Presented in the Balance SheetsFinancial InstrumentsCash Collateral (Received) PledgedNet Amount
Assets
Derivative assets$581,719 $(552,389)$29,330 $(29,330)$— $— 
Reverse repurchase agreements158,971 — 158,971 — (158,971)— 
Total Assets$740,690 $(552,389)$188,301 $(29,330)$(158,971)$— 
Liabilities
Repurchase agreements$(7,958,247)$— $(7,958,247)$7,958,247 $— $— 
Derivative liabilities(663,153)552,389 (110,764)29,330 — (81,434)
Total Liabilities$(8,621,400)$552,389 $(8,069,011)$7,987,577 $— $(81,434)
December 31, 2021
Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets (1)
(in thousands)Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in the Balance SheetsNet Amounts of Assets (Liabilities) Presented in the Balance SheetsFinancial InstrumentsCash Collateral (Received) PledgedNet Amount
Assets
Derivative assets$215,084 $(134,950)$80,134 $(53,658)$— $26,476 
Reverse repurchase agreements134,682 — 134,682 — (129,227)5,455 
Total Assets$349,766 $(134,950)$214,816 $(53,658)$(129,227)$31,931 
Liabilities
Repurchase agreements$(7,656,445)$— $(7,656,445)$7,656,445 $— $— 
Derivative liabilities(188,608)134,950 (53,658)53,658 — — 
Total Liabilities$(7,845,053)$134,950 $(7,710,103)$7,710,103 $— $— 
____________________
(1)Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 12. Other Assets
Other assets as of September 30, 2017 and December 31, 2016 are summarized in the following table:
(in thousands)September 30,
2017		 December 31,
2016
Property and equipment at cost$6,754
  $6,481
Accumulated depreciation (1)
(5,342)  (4,566)
Net property and equipment1,412
  1,915
Prepaid expenses2,083
  1,406
Income taxes receivable120
  1,532
Deferred tax assets, net45,880
(2) 
 57,361
Servicing advances20,658
  26,147
Federal Home Loan Bank stock85,175
  167,856
Equity investments3,000
  3,000
Other receivables48,632
  43,653
Total other assets$206,960
  $302,870
____________________
(1)Depreciation expense for the three and nine months ended September 30, 2017 was $0.2 million and $0.8 million, respectively.
(2)Net of valuation allowance of $4.3 million.

Note 13. Other Liabilities
Other liabilities as of September 30, 2017 and December 31, 2016 are summarized in the following table:
(in thousands)September 30,
2017		 December 31,
2016
Accrued expenses$28,392
 $28,944
Accrued interest payable62,732
 29,505
Income taxes payable142
 —
Other17,609
 21,127
Total other liabilities$108,875
 $79,576

Note 14.10. Fair Value
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, or ASC 820, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. FollowingThe following is a description of the three levels:

Level 1Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.


33
TableLevel 1Inputs are quoted prices in active markets for identical assets or liabilities as of Contentsthe measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.

Level 2Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.
TWO HARBORS INVESTMENT CORP.Level 3Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Notes to the Condensed Consolidated Financial Statements (unaudited)


Level 2Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.
Level 3Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

FollowingThe following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
Available-for-sale securities. The Company holds a portfolio of AFS securities that are carried at fair value in the condensed consolidated balance sheets and primarily comprised of Agency RMBS and non-Agency securities. The Company determines the fair value of its Agency RMBS based upon prices obtained from third-party brokers and pricing providers or broker quotesvendors received using bid price, which are deemed indicative of market activity. The third-party pricing providers and brokersvendors use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. In determining the fair value of its non-Agency securities, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes receivedvendors and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses).
The Company classified 99.4%99.0% and 0.6%1.0% of its AFS securities as Level 2 and Level 3 fair value assets, respectively, at SeptemberJune 30, 2017. AFS securities account for 82.7% of all assets reported at fair value at September 30, 2017.2022.
Mortgage servicing rights.The Company holds a portfolio of MSR that are carried at fair value on the condensed consolidated balance sheets. The Company determines fair value of its MSR based on prices obtained from third-party pricing providers.vendors. Although MSR transactions aremay be observable in the marketplace, the valuation is based upon cash flow models that includedetails of those transactions are not necessarily reflective of the value of the Company’s MSR portfolio. Third-party vendors use both observable market data and unobservable market data inputs (including forecasted prepayment speeds, delinquency levels, option-adjusted spread, or OAS, and discount rates).cost to service) as inputs into models, which help to inform their best estimates of fair value market price. As a result, the Company classified 100% of its MSR as Level 3 fair value assets at SeptemberJune 30, 2017.2022.
Residential mortgage loans held-for-investment in securitization trusts. The Company recognizes on its condensed consolidated balance sheets residential mortgage loans held-for-investment in securitization trusts that are carried at fair value as a result of a fair value option election. An entity is allowed to measure both the financial assets and financial liabilities of a qualifying collateralized financing entity, or CFE, it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s securitization trusts are considered qualifying CFEs, the Company determines the fair value of these residential mortgage loans based on the fair value of its collateralized borrowings in securitization trusts and its retained interests from the Company’s on-balance sheet securitizations (eliminated in consolidation in accordance with U.S. GAAP), as the fair value of these instruments is more observable. The Company classified 100% of its residential mortgage loans held-for-investment in securitization trusts as Level 2 fair value assets at September 30, 2017.
Residential mortgage loans held-for-sale. The Company holds residential mortgage loans held-for-sale that are carried at fair value in the condensed consolidated balance sheets as a result of a fair value option election. The Company determines fair value of its residential mortgage loans based on prices obtained from third-party pricing providers and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon cash flow models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels and credit losses). The Company classified 1.5% and 98.5% of its residential mortgage loans held-for-sale as Level 2 and Level 3 fair value assets, respectively, at September 30, 2017.
Derivative instruments. The Company may enter into a variety of derivative financial instruments as part of its hedging strategies. The Company principally executes over-the-counter, or OTC, derivative contracts, such as interest rate swaps swaptions, put and call options for TBAs and U.S. Treasuries, credit default swaps, constant maturity swaps and Markit IOS total return swaps.swaptions. The Company utilizes third-party pricing providersbrokers to value its financial derivative instruments. The Company classified 100% of the interest rate swaps swaptions, put and call options for TBAs and Markit IOS total returns swapsswaptions reported at fair value as Level 2 at SeptemberJune 30, 2017.

2022.
34
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company may also enter into certain other derivative financial instruments, such as TBAs, short U.S. Treasuries and inverse interest-only securities. Thesesecurities, TBAs, futures and options on futures. The Company utilizes third-party pricing vendors to value inverse interest-only securities, as these instruments are similar in form to the Company’s AFS securities and the Company utilizes a pricing service to value TBAs and broker quotes to value short U.S. Treasuries and inverse interest-only securities. The Company classified 100% of its inverse interest-only securities at fair value as Level 2 at SeptemberJune 30, 2017.2022. TBAs, futures and options on futures are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information for identical instruments. The Company utilizes third-party pricing vendors to value TBAs, futures and options on futures. The Company reported 100% of its TBAs and futures as Level 1 as of SeptemberJune 30, 2017.2022. The Company did not hold any short U.S. Treasuriesoptions on futures at SeptemberJune 30, 2017.2022.
The Company’s risk management committee governs trading activity relating to derivative instruments. The Company’s policy is to minimize credit exposure related to financial derivatives used for hedging by limiting the hedge counterparties to major banks, financial institutions, exchanges, and private investors who meet established capital and credit guidelines as well as by limiting the amount of exposure to any individual counterparty.
The Company has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by ISDA or central clearing exchange agreements, in the case of centrally cleared interest rate swaps.agreements. Additionally, both the Company and the counterparty or clearing agency are required to post cash collateralmargin based upon the net underlying market value of the Company’s open positions with the counterparty. Posting of cash collateralmargin typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateralmargin posting at low posting thresholds, credit exposure to the Company and/or to the counterparty or clearing agency is considered materially mitigated. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.
Collateralized borrowings in securitization trusts. The Company recognizes on its condensed consolidated balance sheets collateralized borrowings that are carried at fair value as a result of a fair value option election. In determining the fair value of its collateralized borrowings, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company classified 100% of its collateralized borrowings in securitization trusts as Level 2 fair value liabilities at September 30, 2017.
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis. The Company often economically hedges the fair value change of its assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items, and therefore do not directly display the impact of the Company’s risk management activities.activities:
Recurring Fair Value Measurements
June 30, 2022
(in thousands)Level 1Level 2Level 3Total
Assets:
Available-for-sale securities$— $8,701,947 $87,490 $8,789,437 
Mortgage servicing rights— — 3,226,191 3,226,191 
Derivative assets4,407 24,923 — 29,330 
Total assets$4,407 $8,726,870 $3,313,681 $12,044,958 
Liabilities:
Derivative liabilities$16,537 $94,227 $— $110,764 
Total liabilities$16,537 $94,227 $— $110,764 
Recurring Fair Value Measurements
December 31, 2021
(in thousands)Level 1Level 2Level 3Total
Assets:
Available-for-sale securities$— $7,149,399 $12,304 $7,161,703 
Mortgage servicing rights— — 2,191,578 2,191,578 
Derivative assets38,767 41,367 — 80,134 
Total assets$38,767 $7,190,766 $2,203,882 $9,433,415 
Liabilities:
Derivative liabilities$1,915 $51,743 $— $53,658 
Total liabilities$1,915 $51,743 $— $53,658 

26
 Recurring Fair Value Measurements
 September 30, 2017
(in thousands)Level 1 Level 2 Level 3 Total
Assets       
Available-for-sale securities$—
 $20,085,812
 $113,282
 $20,199,094
Mortgage servicing rights—
 —
 930,613
 930,613
Residential mortgage loans held-for-investment in securitization trusts—
 3,031,191
 —
 3,031,191
Residential mortgage loans held-for-sale—
 470
 30,727
 31,197
Derivative assets5,703
 232,602
 —
 238,305
Total assets$5,703
 $23,350,075
 $1,074,622
 $24,430,400
Liabilities       
Collateralized borrowings in securitization trusts$—
 $2,785,413
 $—
 $2,785,413
Derivative liabilities—
 11,312
 —
 11,312
Total liabilities$—
 $2,796,725
 $—
 $2,796,725

35


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

 Recurring Fair Value Measurements
 December 31, 2016
(in thousands)Level 1 Level 2 Level 3 Total
Assets       
Available-for-sale securities$—
 $13,128,857
 $—
 $13,128,857
Mortgage servicing rights—
 —
 693,815
 693,815
Residential mortgage loans held-for-investment in securitization trusts—
 3,271,317
 —
 3,271,317
Residential mortgage loans held-for-sale—
 925
 39,221
 40,146
Derivative assets4,294
 319,888
 —
 324,182
Total assets$4,294
 $16,720,987
 $733,036
 $17,458,317
Liabilities       
Collateralized borrowings in securitization trusts$—
 $3,037,196
 $—
 $3,037,196
Derivative liabilities10,344
 2,157
 —
 12,501
Total liabilities$10,344
 $3,039,353
 $—
 $3,049,697

The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under U.S. GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of SeptemberJune 30, 2017,2022, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented. 
The valuation of Level 3 instruments requires significant judgment by the third-party pricing providersvendors and/or management. The third-party pricing providersvendors and/or management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the third-party pricing providervendors in the absence of market information. Assumptions used by the third-party pricing providervendors due to lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s condensed consolidated financial statements.
The Company’s valuation committee reviews all valuations that are based on pricing information received from a third-party pricing provider.vendors. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable. In addition, the Company performs back-testing of pricing information to validate price information and identify any pricing trends of a third-party price provider.pricing vendors.
In determining fair value, third-party pricing providersvendors use various valuation approaches, including market and income approaches. Inputs that are used in determining fair value of an instrument may include pricing information, credit data, volatility statistics, and other factors. In addition, inputs can be either observable or unobservable.
The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. The third-party pricing providervendor uses prices and inputs that are current as of the measurement date, including during periods of market dislocations. In periods of market dislocation, the availability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified to or from various levels within the fair value hierarchy.
Securities for which marketthat are priced using third-party broker quotations are readily available are valued at the bid price (in the case of long positions) or the ask price (in the case of short positions) at the close of trading on the date as of which value is determined. Exchange-traded securities for which no bid or ask price is available are valued at the last traded price. OTC derivative contracts, including interest rate swapsswap and swaption agreements, put and call options for TBAs and U.S. Treasuries, constant maturity swaps, credit default swaps and Markit IOS total return swaps, are valued by the Company using observable inputs, specifically quotations received from third-party pricing providers,brokers. Exchange-traded derivative instruments, including futures and options on futures, are therefore classified within Level 2.

valued based on quoted prices for identical instruments in active markets.
36
27


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following tables presenttable presents the reconciliation for all of the Company’s Level 3 assets measured at fair value on a recurring basis:
Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
(in thousands)Available-For-Sale SecuritiesMortgage Servicing RightsAvailable-For-Sale SecuritiesMortgage Servicing Rights
Beginning of period level 3 fair value$12,530 $3,089,963 $12,304 $2,191,578 
Gains (losses) included in net (loss) income:
Realized(405)(113,715)(1,273)(228,004)
Unrealized753 (1)199,272 (2)1,680 (1)724,185 (2)
Reversal of (provision for) credit losses(254)— 1,127 — 
Net gains (losses) included in net (loss) income94 85,557 1,534 496,181 
Other comprehensive loss1,641 — 427 — 
Purchases79,600 59,945 79,600 544,750 
Sales(6,375)— (6,375)— 
Settlements— (9,274)— (6,318)
Gross transfers into level 3— — — — 
Gross transfers out of level 3— — — — 
End of period level 3 fair value$87,490 $3,226,191 $87,490 $3,226,191 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period$753 (3)$195,868 (4)$1,680 (3)$700,354 (4)
Change in unrealized gains or losses for the period included in other comprehensive (loss) income for assets held at the end of the reporting period$2,395 $— $2,108 $— 
 Three Months Ended 
 September 30, 2017 
(in thousands)Available-For-Sale Securities Mortgage Servicing Rights Residential Mortgage Loans Held-For-Sale 
Beginning of period level 3 fair value$—
 $898,025
 $31,460
 
Gains (losses) included in net income:      
Realized (losses) gains—
 (29,092) 145
 
Unrealized (losses) gains—
 (154)
(1) 
284
(3) 
Total gains (losses) included in net income—
 (29,246) 429
 
Other comprehensive income282
 —
 —
 
Purchases113,000
 66,280
 —
 
Sales—
 497
 —
 
Settlements—
 (4,943) (1,162) 
Gross transfers into level 3—
 —
 —
 
Gross transfers out of level 3—
 —
 —
 
End of period level 3 fair value$113,282
 $930,613
 $30,727
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period$282
 $(154)
(2) 
$295
(4) 
____________________

(1)The change in unrealized gains or losses on available-for-sale securities accounted for under the fair value option was recorded in (loss) gain on investment securities on the condensed consolidated statements of comprehensive loss.
37
Table(2)The change in unrealized gains or losses on MSR was recorded in gain (loss) on servicing asset on the condensed consolidated statements of Contentscomprehensive loss.

(3)The change in unrealized gains or losses on available-for-sale securities accounted for under the fair value option that were held at the end of the reporting period was recorded in (loss) gain on investment securities on the condensed consolidated statements of comprehensive loss.
TWO HARBORS INVESTMENT CORP.(4)The change in unrealized gains or losses on MSR that were held at the end of the reporting period was recorded in gain (loss) on servicing asset on the condensed consolidated statements of comprehensive loss.
Notes to the Condensed Consolidated Financial Statements (unaudited)


 Nine Months Ended 
 September 30, 2017 
(in thousands)Available-For-Sale Securities Mortgage Servicing Rights Residential Mortgage Loans Held-For-Sale 
Beginning of period level 3 fair value$—
 $693,815
 $39,221
 
Gains (losses) included in net income:      
Realized (losses) gains—
 (67,357) 1,833
 
Unrealized (losses) gains—
 (23,083)
(1) 
446
(3) 
Total gains (losses) included in net income—
 (90,440) 2,279
 
Other comprehensive income282
 —
 —
 
Purchases113,000
 340,176
 569
 
Sales—
 (132) (3,717) 
Settlements—
 (12,806) (7,625) 
Gross transfers into level 3—
 —
 —
 
Gross transfers out of level 3—
 —
 —
 
End of period level 3 fair value$113,282
 $930,613
 $30,727
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period$282
 $(23,551)
(2) 
$750
(4) 
___________________
(1)The change in unrealized gains or losses on MSR was recorded in loss on servicing asset on the condensed consolidated statements of comprehensive income.
(2)The change in unrealized gains or losses on MSR that were held at the end of the reporting period was recorded in loss on servicing asset on the condensed consolidated statements of comprehensive income.
(3)The change in unrealized gains or losses on residential mortgage loans held-for-sale was recorded in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income.
(4)The change in unrealized gains or losses on residential mortgage loans held-for-sale that were held at the end of the reporting period was recorded in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income.

The Company did not incurNo transfers between Level 1, Level 2 or Level 3 were made during the ninesix months ended SeptemberJune 30, 2017.2022. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place.
The Company used broker quotesmultiple third-party pricing vendors in the fair value measurement of its Level 3 available-for-saleAFS securities. The significant unobservable inputs used by the broker included prepayment rate, probability of delinquency and discount rate. Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement.
The Company also used a third-party pricing provider in the fair value measurement of its Level 3 MSR. The table below presents information about the significant unobservable inputs used by the third-party pricing providers in the fair value measurement of the Company’s MSR classified as Level 3 fair value assets at September 30, 2017:
September 30, 2017
Valuation Technique 
Unobservable Input (1)
 Range Weighted Average
Discounted cash flow Constant prepayment speed 9.2-12.2% 10.8%
  Delinquency 1.4-2.0% 1.7%
  Discount rate 8.6-11.0% 9.9%
___________________
(1)Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of delinquency and a directionally opposite change in the assumption used for prepayment rates.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company used a third-party pricing provider in the fair value measurement of its Level 3 residential mortgage loans held-for-sale. The significant unobservable inputs used by the third-party pricing providervendors included expected default, severity and discount rate. Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement.
Fair Value Option for Financial Assets and Financial Liabilities
On July 1, 2015, the Company elected the fair value option for Agency interest-only securities and GSE credit risk transfer securities acquired on or after such date. The fair value option was elected to simplify the reporting of changes in fair value. Agency interest-only securities and GSE credit risk transfer securities are carried within AFS securities on the condensed consolidated balance sheets. The Company’s policy is to separately record interest income, net of premium amortization or including discount accretion, on these fair value elected securities. Fair value adjustments are reported in gain (loss) on investment securities on the condensed consolidated statements of comprehensive income.
The Company also elected the fair value option for both the residential mortgage loans held-for-investment in securitization trusts and the collateralized borrowings in securitization trusts carried on the condensed consolidated balance sheets. The fair value option was elected to better reflect the economics of the Company’s retained interests. The Company’s policy is to separately record interest income on the fair value elected loans and interest expense on the fair value elected borrowings. Upfront fees and costs are not deferred or capitalized. Fair value adjustments are reported in other income (loss) on the condensed consolidated statements of comprehensive income.
The Company elected the fair value option for its residential mortgage loans held-for-sale. The fair value option was elected to mitigate earnings volatility by better matching the accounting for the assets with the related hedges. The mortgage loans are carried within residential mortgage loans held-for-sale on the condensed consolidated balance sheets. The Company’s policy is to separately record interest income on these fair value elected loans. Upfront fees and costs related to the fair value elected loans are not deferred or capitalized. Fair value adjustments are reported in gain (loss) on residential mortgage loans held-for-sale on the condensed consolidated statements of comprehensive income. The fair value option is irrevocable once the loan is acquired.
The following tables summarize the fair value option elections and information regarding the line items and amounts recognized in the condensed consolidated statements of comprehensive income for each fair value option-elected item.
28
 Three Months Ended September 30, 2017
(in thousands)Interest income (expense) Gain (loss) on investment securities Gain (loss) on residential mortgage loans held-for-sale Other income (loss) Total included in net income Change in fair value due to credit risk
Assets             
Available-for-sale securities$(2,283)  $4,757
 $—
 $—
 $2,474
 N/A
 
Residential mortgage loans held-for-investment in securitization trusts29,865
(1) 
 —
 —
 14,670
 44,535
 $—
(2) 
Residential mortgage loans held-for-sale479
(1) 
 —
 355
 —
 834
 (400)
(3) 
Liabilities             
Collateralized borrowings in securitization trusts(23,970)  —
 —
 (7,863) (31,833) —
(2) 
Total$4,091
  $4,757
 $355
 $6,807
 $16,010
 $(400) 

39


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

 Three Months Ended September 30, 2016
(in thousands)Interest income (expense) Gain (loss) on investment securities Gain (loss) on residential mortgage loans held-for-sale Other income (loss) Total included in net income Change in fair value due to credit risk
Assets             
Available-for-sale securities$(249)  $12
 $—
 $—
 $(237) N/A
 
Residential mortgage loans held-for-investment in securitization trusts33,495
(1) 
 —
 —
 24,628
 58,123
 $—
(2) 
Residential mortgage loans held-for-sale7,627
(1) 
 —
 (419) —
 7,208
 145
(3) 
Liabilities             
Collateralized borrowings in securitization trusts(26,422)  —
 —
 (20,360) (46,782) —
(2) 
Total$14,451
  $12
 $(419) $4,268
 $18,312
 $145
 
 Nine Months Ended September 30, 2017
(in thousands)Interest income (expense) Gain (loss) on investment securities Gain (loss) on residential mortgage loans held-for-sale Other income (loss) Total included in net income Change in fair value due to credit risk
Assets             
Available-for-sale securities$(5,565)  $9,124
 $—
 $—
 $3,559
 N/A
 
Residential mortgage loans held-for-investment in securitization trusts92,319
(1) 
 —
 —
 45,569
 137,888
 $—
(2) 
Residential mortgage loans held-for-sale1,380
(1) 
 —
 2,149
 —
 3,529
 $(1,281)
(3) 
Liabilities             
Collateralized borrowings in securitization trusts(74,199)  —
 —
 (30,685) (104,884) —
(2) 
Total$13,935
  $9,124
 $2,149
 $14,884
 $40,092
 $(1,281) 

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

 Nine Months Ended September 30, 2016
(in thousands)Interest income (expense) Gain (loss) on investment securities Gain (loss) on residential mortgage loans held-for-sale Other income (loss) Total included in net income Change in fair value due to credit risk
Assets             
Available-for-sale securities$(132)  $(1,262) $—
 $—
 $(1,394) N/A
 
Residential mortgage loans held-for-investment in securitization trusts100,765
(1) 
 —
 —
 63,737
 164,502
 $—
(2) 
Residential mortgage loans held-for-sale19,789
(1) 
 —
 17,028
 —
 36,817
 209
(3) 
Liabilities             
Collateralized borrowings in securitization trusts(70,965)  —
 —
 (68,910) (139,875) —
(2) 
Total$49,457
  $(1,262) $17,028
 $(5,173) $60,050
 $209
 
____________________
(1)Interest income on residential mortgage loans held-for-sale and residential mortgage loans held-for-investmentThe Company also used multiple third-party pricing vendors in securitization trusts is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the number of days of interest due.
(2)The change in fair value on residential mortgage loans held-for-investment in securitization trusts and collateralized borrowings in securitization trusts was due entirely to changes in market interest rates.
(3)The change in fair value due to credit risk on residential mortgage loans held-for-sale was quantified by holding yield constant in the cash flow model in order to isolate credit risk component.

The table below provides the fair value andmeasurement of its Level 3 MSR. The tables below present information about the unpaid principal balance forsignificant unobservable market data used by the third-party pricing vendors as inputs into models utilized to inform their best estimates of the fair value measurement of the Company’s MSR classified as Level 3 fair value option-elected loansassets at June 30, 2022 and collateralized borrowings.December 31, 2021:
June 30, 2022
Valuation TechniqueUnobservable InputRange
Weighted Average (1)
Discounted cash flowConstant prepayment speed6.8%-8.1%7.4%
Delinquency0.8%-0.8%0.8%
Option-adjusted spread4.9%-8.2%5.0%
Per loan annual cost to service$67.21-$80.55$67.64
 September 30, 2017 December 31, 2016
(in thousands)Unpaid Principal Balance 
Fair
Value (1)
 Unpaid Principal Balance 
Fair
Value (1)
Residential mortgage loans held-for-investment in securitization trusts       
Total loans$2,948,349
 $3,031,191
 $3,234,044
 $3,271,317
Nonaccrual loans$2,812
 $2,892
 $2,373
 $2,408
Loans 90+ days past due$1,618
 $1,666
 $1,401
 $1,419
Residential mortgage loans held-for-sale       
Total loans$38,765
 $31,197
 $49,986
 $40,146
Nonaccrual loans$14,257
 $11,775
 $25,445
 $21,162
Loans 90+ days past due$11,180
 $9,047
 $21,759
 $18,203
Collateralized borrowings in securitization trusts       
Total borrowings$2,732,694
 $2,785,413
 $3,015,162
 $3,037,196
December 31, 2021
Valuation TechniqueUnobservable InputRange
Weighted Average (1)
Discounted cash flowConstant prepayment speed10.0%-17.9%12.9%
Delinquency0.9%-1.8%1.3%
Option-adjusted spread4.6%-9.2%4.7%
Per loan annual cost to service$66.04-$83.91$66.76
____________________
(1)Excludes accrued interest receivable.

___________________

(1)Calculated by averaging the weighted average significant unobservable inputs used by the multiple third-party pricing vendors in the fair value measurement of MSR.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)


Fair Value of Financial Instruments
In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.
The following describes the Company’s methods for estimating the fair value for financial instruments. Descriptions are not provided for those items that have zero balances as of the current balance sheet date.
•AFS securities, residential mortgage loans held-for-sale, residential mortgage loans held-for-investment in securitization trusts, MSR, and derivative assets and liabilities and collateralized borrowings in securitization trusts are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the Fair Value Measurements section of this Note 14.
10.
Commercial real estate assets are carried at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless deemed impaired. The Company estimates the fair value of its commercial real estate assets by assessing any changes in market interest rates, shifts in credit profiles and actual operating results for mezzanine commercial real estate loans and commercial real estate first mortgages, taking into consideration such factors as underlying property type, property competitive position within its market, market and submarket fundamentals, tenant mix, nature of business plan, sponsorship, extent of leverage and other loan terms. The Company categorizes the fair value measurement of these assets as Level 3.
•Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. The Company categorizes the fair value measurement of these assets as Level 1.
As•Reverse repurchase agreements have a condition to membership in the FHLB, the Company is required to purchase and hold a certain amount of FHLB stock, which is considered a non-marketable, long-term investment, and is carried at cost. Because this stock can only be redeemed or sold at its par value, and only to the FHLB, carrying value or cost,which approximates fair value.value due to their short-term nature. The Company categorizes the fair value measurement of these assets as Level 3.2.
Equity investments include cost method investments for which fair value is not estimated. Carrying value, or cost, approximates fair value. The Company categorizes the fair value measurement of these assets as Level 3.
•The carrying value of repurchase agreements FHLB advances and revolving credit facilities that mature in less than one year generally approximates fair value due to the short maturities. As of SeptemberJune 30, 2017,2022, the Company held $1.4 billionhad outstanding borrowings of repurchase agreements and $2.0 billion of FHLB advances$796.6 million under revolving credit facilities that are considered long-term. The Company’s long-term repurchase agreements and FHLB advancesrevolving credit facilities have floating rates based on an index plus a spread and for members of the FHLB, the credit spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these borrowings are at market and thus carrying value approximates fair value. The Company categorizes the fair value measurement of these liabilities as Level 2.
•Term notes payable are recorded at outstanding principal balance, net of any unamortized deferred debt issuance costs. In determining the fair value of term notes payable, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing vendors, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company categorizes the fair value measurement of these liabilities as Level 2.
•Convertible senior notes are carried at their unpaid principal balance, net of any unamortized deferred issuance costs. The Company estimates the fair value of its convertible senior notes using the market transaction price on Septembernearest to June 30, 2017.2022. The Company categorizes the fair value measurement of these assets as Level 2.

42
29


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at SeptemberJune 30, 20172022 and December 31, 2016.2021:
June 30, 2022December 31, 2021
(in thousands)Carrying ValueFair ValueCarrying ValueFair Value
Assets:
Available-for-sale securities$8,789,437 $8,789,437 $7,161,703 $7,161,703 
Mortgage servicing rights$3,226,191 $3,226,191 $2,191,578 $2,191,578 
Cash and cash equivalents$511,889 $511,889 $1,153,856 $1,153,856 
Restricted cash$627,725 $627,725 $934,814 $934,814 
Derivative assets$29,330 $29,330 $80,134 $80,134 
Reverse repurchase agreements$158,971 $158,971 $134,682 $134,682 
Other assets$3,234 $3,234 $3,332 $3,332 
Liabilities:
Repurchase agreements$7,958,247 $7,958,247 $7,656,445 $7,656,445 
Revolving credit facilities$825,761 $825,761 $420,761 $420,761 
Term notes payable$397,383 $388,099 $396,776 $395,030 
Convertible senior notes$281,711 $257,106 $424,827 $435,774 
Derivative liabilities$110,764 $110,764 $53,658 $53,658 

 September 30, 2017 December 31, 2016
(in thousands)Carrying Value Fair Value Carrying Value Fair Value
Assets       
Available-for-sale securities$20,199,094
 $20,199,094
 $13,128,857
 $13,128,857
Commercial real estate assets$2,171,344
 $2,187,721
 $1,412,543
 $1,411,733
Mortgage servicing rights$930,613
 $930,613
 $693,815
 $693,815
Residential mortgage loans held-for-investment in securitization trusts$3,031,191
 $3,031,191
 $3,271,317
 $3,271,317
Residential mortgage loans held-for-sale$31,197
 $31,197
 $40,146
 $40,146
Cash and cash equivalents$539,367
 $539,367
 $406,883
 $406,883
Restricted cash$343,813
 $343,813
 $408,312
 $408,312
Derivative assets$238,305
 $238,305
 $324,182
 $324,182
Federal Home Loan Bank stock$85,175
 $85,175
 $167,856
 $167,856
Equity investments$3,000
 $3,000
 $3,000
 $3,000
Liabilities       
Repurchase agreements$18,297,392
 $18,297,392
 $9,316,351
 $9,316,351
Collateralized borrowings in securitization trusts$2,785,413
 $2,785,413
 $3,037,196
 $3,037,196
Federal Home Loan Bank advances$1,998,762
 $1,998,762
 $4,000,000
 $4,000,000
Revolving credit facilities$40,000
 $40,000
 $70,000
 $70,000
Convertible senior notes$282,543
 $306,906
 $—
 $—
Derivative liabilities$11,312
 $11,312
 $12,501
 $12,501

Note 15.11. Repurchase Agreements
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had outstanding $18.3$8.0 billion and $9.3$7.7 billion, respectively, of repurchase agreements. Excluding the effect of the Company’s interest rate swaps, the repurchase agreements had a weighted average borrowing rate of 1.76%1.48% and 1.31%0.24% and weighted average remaining maturities of 15484 and 7767 days as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. As of June 30, 2022, none of the Company’s repurchase agreements incorporated LIBOR as the referenced rate.
At SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company’s repurchase agreement balances were as follows:agreements had the following characteristics and remaining maturities:
June 30, 2022
Collateral Type
(in thousands)Agency RMBSNon-Agency SecuritiesAgency DerivativesMortgage Servicing RightsTotal Amount Outstanding
Within 30 days$2,342,564 $23,880 $6,818 $— $2,373,262 
30 to 59 days976,012 — — — 976,012 
60 to 89 days2,039,223 219 876 — 2,040,318 
90 to 119 days998,159 23,835 15,051 — 1,037,045 
120 to 364 days1,131,610 — — 400,000 1,531,610 
Total$7,487,568 $47,934 $22,745 $400,000 $7,958,247 
Weighted average borrowing rate1.27 %2.44 %1.89 %5.12 %1.48 %
30
(in thousands)September 30,
2017		 December 31,
2016
Short-term$16,856,537
 $9,130,717
Long-term1,440,855
 185,634
Total$18,297,392
 $9,316,351

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

December 31, 2021
Collateral Type
(in thousands)Agency RMBSNon-Agency SecuritiesAgency DerivativesMortgage Servicing RightsTotal Amount Outstanding
Within 30 days$1,617,186 $— $10,097 $— $1,627,283 
30 to 59 days1,807,544 — — — 1,807,544 
60 to 89 days1,979,717 171 1,168 — 1,981,056 
90 to 119 days1,240,915 — 8,520 — 1,249,435 
120 to 364 days849,868 — 16,259 125,000 991,127 
Total$7,495,230 $171 $36,044 $125,000 $7,656,445 
Weighted average borrowing rate0.17 %1.24 %0.74 %4.00 %0.24 %
At September 30, 2017 and December 31, 2016, the repurchase agreements had the following characteristics and remaining maturities:
 September 30, 2017
 Collateral Type  
(in thousands)Agency RMBS 
Non-Agency Securities (1)
 Agency Derivatives Commercial Real Estate Assets Total Amount Outstanding
Within 30 days$2,398,041
 $746,438
 $23,038
 $—
 $3,167,517
30 to 59 days2,583,705
 250,472
 51,718
 25,934
 2,911,829
60 to 89 days—
 —
 —
 —
 —
90 to 119 days2,994,737
 303,896
 —
 —
 3,298,633
120 to 364 days6,913,298
 562,782
 2,478
 —
 7,478,558
One year and over—
 —
 —
 1,440,855
 1,440,855
Total$14,889,781
 $1,863,588
 $77,234
 $1,466,789
 $18,297,392
Weighted average borrowing rate1.43% 2.93% 2.10% 3.56% 1.76%
 December 31, 2016
 Collateral Type  
(in thousands)Agency RMBS 
Non-Agency Securities (1)
 Agency Derivatives Commercial Real Estate Assets Total Amount Outstanding
Within 30 days$2,511,773
 $688,667
 $30,672
 $21,933
 $3,253,045
30 to 59 days1,786,664
 334,590
 68,257
 28,991
 2,218,502
60 to 89 days1,035,806
 89,281
 3,307
 —
 1,128,394
90 to 119 days1,192,127
 251,929
 —
 —
 1,444,056
120 to 364 days810,552
 69,678
 —
 206,490
 1,086,720
One year and over—
 —
 —
 185,634
 185,634
Total$7,336,922
 $1,434,145
 $102,236
 $443,048
 $9,316,351
Weighted average borrowing rate0.94% 2.60% 1.69% 3.16% 1.31%
____________________
(1)Includes repurchase agreements collateralized by retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.


The following table summarizes assets at carrying values that are pledged or restricted as collateral for the future payment obligations of the Company’s repurchase agreements:
(in thousands)September 30,
2017		 December 31,
2016		(in thousands)June 30,
2022		December 31,
2021
Available-for-sale securities, at fair value$17,940,144
 $9,540,849
Available-for-sale securities, at fair value$7,420,521 $7,009,449 
Commercial real estate assets1,997,077
 648,885
Net economic interests in consolidated securitization trusts (1)
224,394
 211,095
Cash and cash equivalents14,796
 15,000
Mortgage servicing rights, at fair value (1)
Mortgage servicing rights, at fair value (1)
1,089,448 725,985 
Restricted cash149,845
 162,759
Restricted cash362,937 747,779 
Due from counterparties23,602
 48,939
Due from counterparties111,724 30,764 
Derivative assets, at fair value101,187
 126,341
Derivative assets, at fair value23,336 39,609 
Total$20,451,045
 $10,753,868
Total$9,007,966 $8,553,586 
____________________
(1)Includes the retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.

(1)MSR repurchase agreements are secured by a VFN issued in connection with the Company’s securitization of MSR, which is collateralized by the Company’s MSR.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)



Although the transactions under repurchase agreements represent committed borrowings until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls.
The following table summarizes certain characteristics of the Company’s repurchase agreements and counterparty concentration at SeptemberJune 30, 20172022 and December 31, 2016:2021:
June 30, 2022December 31, 2021
(dollars in thousands)(dollars in thousands)Amount Outstanding
Net Counterparty Exposure (1)
Percent of EquityWeighted Average Days to MaturityAmount Outstanding
Net Counterparty Exposure (1)
Percent of EquityWeighted Average Days to Maturity
September 30, 2017 December 31, 2016
(dollars in thousands)Amount Outstanding 
Net Counterparty Exposure (1)
 Percent of Equity Weighted Average Days to Maturity Amount Outstanding 
Net Counterparty Exposure (1)
 Percent of Equity Weighted Average Days to Maturity
JP Morgan Chase$1,950,484
 $264,974
 6% 219 $605,768
 $174,197
 5% 110
Credit SuisseCredit Suisse$423,880 $94,723 4 %212$125,000 $353,975 13 %181
All other counterparties (2)
16,346,908
 1,887,168
 46% 147 8,710,583
 1,261,204
 37% 75
All other counterparties (2)
7,534,367 455,350 18 %777,531,445 314,258 11 %65
Total$18,297,392
 $2,152,142
   $9,316,351
 $1,435,401
   Total$7,958,247 $550,073 $7,656,445 $668,233 
____________________
(1)Represents the net carrying value of the securities, residential mortgage loans held-for-sale and commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest. Payables due to broker counterparties for unsettled securities purchases of $17.9 million are not included in the September 30, 2017 amounts presented above. The Company did not have any such payables at December 31, 2016.
(2)Represents amounts outstanding with 24 and 22 counterparties at September 30, 2017 and December 31, 2016, respectively.

(1)Represents the net carrying value of the assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest.
(2)Represents amounts outstanding with 20 and 19 counterparties at June 30, 2022 and December 31, 2021, respectively.

The Company does not anticipate any defaults by its repurchase agreement counterparties. There can be no assurance, however, that any such default or defaults will not occur.

Note 16. Collateralized Borrowings in Securitization Trusts, at Fair Value
The Company retains subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. The debt associated with the underlying residential mortgage loans held by the trusts, which are consolidated on the Company’s condensed consolidated balance sheets, is classified as collateralized borrowings in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the securitization trusts. As of September 30, 2017 and December 31, 2016, collateralized borrowings in securitization trusts had a carrying value of $2.8 billion and $3.0 billion, respectively, with a weighted average interest rate of 3.4% for both periods. The stated maturity dates for all collateralized borrowings were more than five years from both September 30, 2017 and December 31, 2016.

Note 17. Federal Home Loan Bank of Des Moines Advances
The Company’s wholly owned subsidiary, TH Insurance Holdings Company LLC, or TH Insurance, is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances. As of September 30, 2017 and December 31, 2016, TH Insurance had $2.0 billion and $4.0 billion in outstanding secured advances with a weighted average borrowing rate of 1.56% and 0.85%, respectively. As of September 30, 2017, TH Insurance had an additional $1.4 billion of available uncommitted capacity for borrowings. TH Insurance had no additional uncommitted capacity to borrow as of December 31, 2016. To the extent TH Insurance has uncommitted capacity, it may be adjusted at the sole discretion of the FHLB.
The ability to borrow from the FHLB is subject to the Company’s continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines, as may be revised from time to time by the FHLB. Eligible collateral may include conventional 1-4 family residential mortgage loans, commercial real estate loans, Agency RMBS and certain non-Agency securities with a rating of A and above.


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

On January 11, 2016, the Federal Housing Finance Agency, or FHFA, released a final rule regarding membership in the Federal Home Loan Bank system. Among other effects, the final rule excludes captive insurers from membership eligibility, including the Company’s subsidiary member, TH Insurance. Since TH Insurance was admitted as a member in 2013, it is eligible for a membership grace period that shall run through February 19, 2021, during which new advances or renewals that mature beyond the grace period will be prohibited; however, any existing advances that mature beyond this grace period will be permitted to remain in place subject to their terms insofar as the Company maintains good standing with the FHLB. If any new advances or renewals occur, TH Insurance’s outstanding advances will be limited to 40% of its total assets.
At September 30, 2017 and December 31, 2016, FHLB advances had the following remaining maturities:
(in thousands)September 30,
2017		 December 31,
2016
≤ 1 year$—
 $651,238
> 1 and ≤ 3 years815,024
 815,024
> 3 and ≤ 5 years—
 —
> 5 and ≤ 10 years—
 —
> 10 years1,183,738
 2,533,738
Total$1,998,762
 $4,000,000

The following table summarizes assets at carrying values that are pledged or restricted as collateral for the future payment obligations of FHLB advances:
(in thousands)September 30,
2017		 December 31,
2016
Available-for-sale securities, at fair value$2,048,924
 $3,576,481
Commercial real estate assets33,626
 708,989
Net economic interests in consolidated securitization trusts (1)
2,040
 2,015
Total$2,084,590
 $4,287,485
____________________
(1)Includes the retained interests from the Company’s on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.

The FHLB retains the right to mark the underlying collateral for FHLB advances to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral. In addition, as a condition to membership in the FHLB, the Company is required to purchase and hold a certain amount of FHLB stock, which is based, in part, upon the outstanding principal balance of advances from the FHLB. At September 30, 2017 and December 31, 2016, the Company had stock in the FHLB totaling $85.2 million and $167.9 million, respectively, which is included in other assets on the condensed consolidated balance sheets. FHLB stock is considered a non-marketable, long-term investment, is carried at cost and is subject to recoverability testing under applicable accounting standards. This stock can only be redeemed or sold at its par value, and only to the FHLB. Accordingly, when evaluating FHLB stock for impairment, the Company considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of September 30, 2017 and December 31, 2016, the Company had not recognized an impairment charge related to its FHLB stock.

Note 18.12. Revolving Credit Facilities
To finance MSR assets and related servicing advance obligations, the Company entershas entered into revolving credit facilities collateralized by the value of the MSR and/or servicing advances pledged. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had outstanding short-termshort- and long-term borrowings under revolving credit facilities of $40.0$825.8 million and $70.0$420.8 million with a weighted average borrowing rate of 4.98%4.93% and 4.53%3.46% and weighted average remaining maturities of 2081.6 and 306 days,1.2 years, respectively. As of June 30, 2022, the Company’s revolving credit facilities incorporated a variety of referenced rates. Any facilities that incorporate LIBOR as either the referenced rate or an alternative rate if the primary benchmark rate is unavailable have provisions in place that provide for an alternative to LIBOR upon its phase-out. See Note 2 - Basis of Presentation and Significant Accounting Policies for further discussion of the transition away from LIBOR.

At June 30, 2022 and December 31, 2021, borrowings under revolving credit facilities had the following remaining maturities:
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Table of Contents
(in thousands)June 30,
2022		December 31,
2021
Within 30 days$— $— 
30 to 59 days— — 
60 to 89 days— — 
90 to 119 days29,200 — 
120 to 364 days— 274,511 
One year and over796,561 146,250 
Total$825,761 $420,761 

TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)


Although the transactions under revolving credit facilities represent committed borrowings from the time of funding until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets below a designated threshold would require the Company to provide additional collateral or pay down the facility. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, MSR with a carrying value of $160.6 million$1.6 billion and $180.9$904.8 million, respectively, was pledged as collateral for the Company’s future payment obligations under its MSR revolving credit facilities. As of June 30, 2022 and December 31, 2021, servicing advances with a carrying value of $34.1 million and $33.8 million, respectively, were pledged as collateral for the Company’s future payment obligations under its servicing advance revolving credit facility. The Company does not anticipate any defaults by its revolving credit facility counterparties, although there can be no assurance that any such default or defaults will not occur.


Note 13. Term Notes Payable
The debt issued in connection with the Company’s on-balance sheet securitization is classified as term notes payable and carried at outstanding principal balance, which was $400.0 million as of both June 30, 2022 and December 31, 2021, net of any unamortized deferred debt issuance costs, on the Company’s condensed consolidated balance sheets. As of June 30, 2022 and December 31, 2021, the outstanding amount due on term notes payable was $397.4 million and $396.8 million, net of deferred debt issuance costs, with a weighted average interest rate of 4.42% and 2.90% and weighted average remaining maturities of 2.0 years and 2.5 years. 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. See Note 2 - Basis of Presentation and Significant Accounting Policies for further discussion of the transition away from LIBOR.
At June 30, 2022 and December 31, 2021, the Company pledged MSR with a carrying value of $500.0 million and $500.0 million and weighted average underlying loan coupon of 3.30% and 3.36%, respectively, as collateral for term notes payable. Additionally, as of June 30, 2022 and December 31, 2021, $0.2 million and $0.2 million of cash was held in restricted accounts as collateral for the future payment obligations of outstanding term notes payable, respectively.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 19.14. Convertible Senior Notes
OnIn January 19, 2017, the Company closed an underwritten public offering of $287.5 million aggregate principal amount of convertible senior notes due 2022 which included $37.5 million aggregate principal amount sold by the Company to the underwriter of the offering pursuant to an overallotment option.(“2022 notes”). The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The Company used a portion of the net proceeds from the offering of 2026 notes (defined below) to fund the repurchase via privately negotiated transactions of $143.7 million principal amount of its 2022 notes. As of December 31, 2021, $143.8 million principal amount of the 2022 notes remained outstanding, and these remaining 2022 notes matured pursuant to their terms in January 2022. The 2022 notes were unsecured, paid interest semiannually at a rate of 6.25% per annum and were convertible at the option of the holder into shares of the Company’s common stock. As of December 31, 2021, the 2022 notes had a conversion rate of 63.2040 shares of common stock per $1,000 principal amount of the notes.
In February 2021, the Company closed an underwritten public offering of $287.5 million aggregate principal amount of convertible senior notes due 2026 (“2026 notes”). The net proceeds from the offering were approximately $279.9 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The 2026 notes are unsecured, pay interest semiannually at a rate of 6.25% per annum and are convertible at the option of the holder into shares of the Company’s common stock. As of June 30, 2022 and December 31, 2021, the 2026 notes had a conversion rate of 135.5014 and 135.5014 shares of common stock per $1,000 principal amount of the notes, respectively. The 2026 notes will mature in January 2022,2026, unless earlier converted or repurchased in accordance with their terms. The Company does not have the right to redeem the 2026 notes prior to maturity, but may repurchase the 2026 notes in open market or privately negotiated transactions at the same or differing price without giving prior notice to or obtaining any consent of the holders. The Company may also be required to repurchase the notes from holders under certain circumstances. As of September 30, 2017, the notes had a conversion rate of 50.2537 shares of common stock per $1,000 principal amount of the notes (based on the retroactive adjustment due to the Company’s one-for-two reverse stock split described in Note 20 - Equity).
The aggregate outstanding amount due on the convertible senior2026 notes as of SeptemberJune 30, 20172022 and the 2022 notes and 2026 notes as of December 31, 2021 was $282.5$281.7 million and $424.8 million, respectively, net of deferred issuance costs.


Note 20. Equity15. Commitments and Contingencies
Preferred Stock
On March 14, 2017,The following represent the material commitments and contingencies of the Company issued 5,000,000 sharesas of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share. On March 21, 2017, an additional 750,000 shares were sold by the Company to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, whenJune 30, 2022:
Legal and as declared, a dividend at a fixed rate of 8.125% per annum of the $25.00 liquidation preference. On and after April 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.66% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to the Company’s common stock and on parity with our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. Under certain circumstances upon a change of control, the preferred stock is convertible into shares of the Company’s common stock. The preferred stock will not be redeemable before April 27, 2027, except under certain limited circumstances. On or after April 27, 2027, the Company may, at its option, redeem, in whole or in part, at any time or fromregulatory. From time to time, the preferred stockCompany may be subject to liability under laws and government regulations and various claims and legal actions arising in the ordinary course of business. Under ASC 450, Contingencies, or ASC 450, liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established or the range of reasonably possible loss disclosed for those claims.
As previously disclosed, on July 15, 2020, the Company provided PRCM Advisers with a notice of termination of the Management Agreement for “cause” in accordance with Section 15(a) of the Management Agreement. The Company terminated the Management Agreement for “cause” on the basis of certain material breaches and certain events of gross negligence on the part of PRCM Advisers in the performance of its duties under the Management Agreement. On July 21, 2020, PRCM Advisers filed a complaint against the Company in the United States District Court for the Southern District of New York, or the Court. Subsequently, Pine River Domestic Management L.P. and Pine River Capital Management L.P. were added as plaintiffs to the matter. As amended, the complaint, or the Federal Complaint, alleges, among other things, the misappropriation of trade secrets in violation of both the Defend Trade Secrets Act and New York common law, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition and business practices, unjust enrichment, conversion, and tortious interference with contract. The Federal Complaint seeks, among other things, an order enjoining the Company from making any use of or disclosing PRCM Advisers’ trade secret, proprietary, or confidential information; damages in an amount to be determined at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether hearing and/or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $138.9 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.
On July 19, 2017, the Company issued 11,500,000 shares of 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share, which included 1,500,000 shares sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 7.625% per annum of the $25.00 liquidation preference. On and after July 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.352% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to the Company’s common stock and on parity with the Company’s 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect to the payment of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. Under certain circumstances upon a change of control, the preferred stock is convertible into sharestrial; disgorgement of the Company’s common stock.wrongfully obtained profits; and fees and costs incurred by the plaintiffs in pursuing the action. The preferred stock will not be redeemable before July 27, 2027, except under certain limited circumstances.Company has filed its answer to the Federal Complaint and made counterclaims against PRCM Advisers and Pine River Capital Management L.P. On or after July 27, 2027,May 5, 2022, the plaintiffs filed a motion for judgement on the pleadings, seeking judgement in their favor on all but one of the Company’s counterclaims and on one of the Company’s affirmative defenses. The Company has opposed the motion for judgement on the pleadings, which is pending with the Court. Discovery has commenced and is ongoing. The Company’s board of directors believes the Federal Complaint is without merit and that the Company may, at its option, redeem, in whole or in part, at any time or from time to time,has fully complied with the preferred stock at a redemption priceterms of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $278.1 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.

Management Agreement.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

As of June 30, 2022, the Company’s condensed consolidated financial statements do not recognize a contingency liability or disclose a range of reasonably possible loss under ASC 450 because management does not believe that a loss or expense related to the Federal Complaint is probable or reasonably estimable. The specific factors that limit the Company’s ability to reasonably estimate a loss or expense related to the Federal Complaint include that the matter is in early stages and no amount of damages has been specified. If and when management believes losses associated with the Federal Complaint are a probable future event that may result in a loss or expense to the Company and the loss or expense is reasonably estimable, the Company will recognize a contingency liability and resulting loss in such period.

Based on information currently available, management is not aware of any other legal or regulatory claims that would have a material effect on the Company’s condensed consolidated financial statements and therefore no accrual is required as of June 30, 2022.

Note 16. Stockholders’ Equity
Redeemable Preferred Stock
The following is a summary of the Company’s series of cumulative redeemable preferred stock issued and outstanding as of June 30, 2022. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, each series of preferred stock will rank on parity with one another and rank senior to the Company’s common stock with respect to the payment of the dividends and the distribution of assets.
(dollars in thousands)
Class of StockIssuance DateShares Issued and OutstandingCarrying ValueContractual Rate
Redemption Eligible Date (1)
Fixed to Floating Rate Conversion Date (2)
Floating Annual Rate (3)
Series AMarch 14, 20175,750,000 $138,872 8.125 %April 27, 2027April 27, 20273M LIBOR + 5.660%
Series BJuly 19, 201711,500,000 278,094 7.625 %July 27, 2027July 27, 20273M LIBOR + 5.352%
Series CNovember 27, 201711,800,000 285,584 7.250 %January 27, 2025January 27, 20253M LIBOR + 5.011%
Total29,050,000 $702,550 
____________________
(1)Subject to the Company’s right under limited circumstances to redeem the preferred stock earlier than the redemption eligible date disclosed in order to preserve its qualification as a REIT or following a change in control of the Company.
(2)The dividend rate on the fixed-to-floating rate redeemable preferred stock will remain at an annual fixed rate of the $25.00 per share liquidation preference from the issuance date up to but not including the transition date disclosed within. Effective as of the fixed-to-floating rate conversion date and onward, dividends will accumulate on a floating rate basis according to the terms disclosed in footnote (3) below.
(3)On and after the fixed-to-floating rate conversion date, the dividend will accumulate and be payable quarterly at a percentage of the $25.00 per share liquidation preference equal to an annual floating rate of three-month LIBOR plus the spread indicated within each preferred class. Each series that becomes callable at the time the stock begins to pay a LIBOR-based rate has existing LIBOR cessation fallback language.

For each series of preferred stock, the Company may redeem the stock on or after the redemption date in whole or in part, at any time or from time to time. The Company may also purchase shares of preferred stock from time to time in the open market by tender or in privately negotiated transactions. Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus any accumulated and unpaid dividends thereon up to, but excluding, the redemption date. Through June 30, 2022, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.
On February 4, 2021, the Company announced the redemption of all outstanding shares of the Company’s 7.75% Series D Cumulative Redeemable Preferred Stock and 7.5% Series E Cumulative Redeemable Preferred Stock. The redemption date for each series was March 15, 2021 and holders of record as of such date received the redemption payment of $25.00, plus any accumulated and unpaid dividends thereon up to, but excluding, the redemption date.
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Notes to the Condensed Consolidated Financial Statements (unaudited)
Preferred Share Repurchase Program
On June 22, 2022, the Company’s Board of Directors authorized the repurchase of up to an aggregate of 5,000,000 shares of the Company’s preferred stock, which includes each series shown in the table above under the heading Redeemable Preferred Stock. Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of preferred share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The preferred share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The preferred share repurchase program does not have an expiration date. As of June 30, 2022, the Company had not yet repurchased any preferred shares.
Common Stock
Public Offerings
On July 14, 2021, the Company completed a public offering of 40,000,000 shares of its common stock. The underwriters purchased the shares from the Company at a price of $6.42 per share, for net proceeds to the Company of approximately $256.5 million after deducting offering expenses. The underwriters did not exercise any portion of their 30-day overallotment option to purchase up to 6,000,000 additional shares.
On October 28, 2021, the Company completed a public offering of 30,000,000 shares of its common stock. The underwriters purchased the shares from the Company at a price of $6.468 per share, for net proceeds to the Company of approximately $193.7 million after deducting offering expenses. The underwriters did not exercise any portion of their 30-day overallotment option to purchase up to 4,500,000 additional shares.
As of June 30, 2022, the Company had 344,433,109 shares of common stock outstanding. The following table presents a reconciliation of the common shares outstanding for the six months ended June 30, 2022 and 2021:
Number of common shares
Common shares outstanding, December 31, 2020273,703,882 
Issuance of common stock27,018 
Non-cash equity award compensation (1)
(12,589)
Common shares outstanding, June 30, 2021273,718,311 
Common shares outstanding, December 31, 2021343,911,324 
Issuance of common stock36,152 
Non-cash equity award compensation (1)
485,633 
Common shares outstanding, June 30, 2022344,433,109 
____________________
(1)See Note 17 - Equity Incentive Plans for further details regarding the Company’s Equity Incentive Plans.

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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Distributions to Preferred Stockholders
The following table presents cash dividends declared by the Company on its preferred and common stock during the three and ninesix months ended SeptemberJune 30, 2017:2022 and 2021:
0
Three Months EndedSix Months Ended
June 30,June 30,
(dollars in thousands)2022202120222021
Class of StockAmountPer ShareAmountPer ShareAmountPer ShareAmountPer Share
Series A Preferred Stock$2,920 $0.51 $2,920 $0.51 $5,840 $1.02 $5,840 $1.02 
Series B Preferred Stock$5,481 $0.48 $5,480 $0.48 $10,961 $0.96 $10,960 $0.96 
Series C Preferred Stock$5,347 $0.45 $5,347 $0.45 $10,694 $0.90 $10,694 $0.90 
Series D Preferred Stock (1)
$— $— $— $— $— $— $969 $0.32 
Series E Preferred Stock (1)
$— $— $— $— $— $— $2,500 $0.31 
Common Stock$58,844 $0.17 $46,759 $0.17 $117,655 $0.34 $93,395 $0.34 
Declaration Date Record Date Payment Date Cash Dividend Per Preferred Share
Series A Preferred Stock:      
September 14, 2017 October 12, 2017 October 27, 2017 $0.50781
June 15, 2017 July 12, 2017 July 27, 2017 $0.75043
Series B Preferred Stock:      
September 14, 2017 October 12, 2017 October 27, 2017 $0.51892
____________________

Common Stock
Reverse Stock Split
(1)On September 14, 2017,March 15, 2021, the Company’s board of directors approved a one-for-two reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued andCompany redeemed all outstanding shares of the Company’s common stock were converted into one shareSeries D Preferred Stock and Series E Preferred Stock. Holders of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieurecord as of such fractional shares, cash in an amount determined ondate received the basisredemption payment of $25.00, plus any accumulated and unpaid dividends thereon up to, but excluding, the volume weighted average price of the Company’s common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of the Company’s common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.redemption date.
Distributions to Common Stockholders
The following table presents cash dividends declared by the Company on its common stock during the three months ended September 30, 2017, and the four immediately preceding quarters:
Declaration Date Record Date Payment Date Cash Dividend Per Common Share
September 14, 2017 September 29, 2017 October 27, 2017 $0.52
June 15, 2017 June 30, 2017 July 27, 2017 $0.52
March 14, 2017 March 31, 2017 April 27, 2017 $0.50
December 15, 2016 December 30, 2016 January 27, 2017 $0.48
September 15, 2016 September 30, 2016 October 20, 2016 $0.46

On September 14, 2017, the Company’s board of directors declared a special dividend pursuant to which the 33.1 million shares of Granite Point common stock acquired by the Company in exchange for the contribution of its equity interests in TH Commercial Holdings LLC to Granite Point on June 28, 2017 would be distributed, on a pro rata basis, to the holders of Two Harbors common stock outstanding at the close of business on October 20, 2017. The Granite Point common stock was distributed on November 1, 2017. Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financial statements and does not recognize the dividend declaration until November 1, 2017, the date the Company no longer held a controlling interest in Granite Point.
On September 18, 2017, Granite Point’s board of directors declared a quarterly cash dividend on its common stock of $0.32 per share. The dividend was payable on October 18, 2017 to common stockholders of record at the close of business on September 29, 2017.

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Notes to the Condensed Consolidated Financial Statements (unaudited)


Dividend Reinvestment and Direct Stock Purchase Plan
The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of the Company’s common stock by reinvesting some or all of the cash dividends received on shares of the Company’s common stock. Stockholders may also make optional cash purchases of shares of the Company’s common stock subject to certain limitations detailed in the plan prospectus. The plan allows for the issuance of up to an aggregate of 3,750,000 shares of the Company’s common stock. As of SeptemberJune 30, 2017, 191,6352022, 420,184 shares have been issued under the plan for total proceeds of approximately $3.8$5.9 million, of which 6,46916,680 and 19,68836,152 shares were issued for total proceeds of $0.1 million and $0.4$0.2 million during the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively. During the three and ninesix months ended SeptemberJune 30, 2016, 7,3102021, 12,363 and 21,88227,018 shares were issued for a total proceeds of $0.1 million and $0.4$0.2 million, respectively.
Common Share Repurchase Program
The Company’s common share repurchase program allows for the repurchase of up to an aggregate of 37,500,000 shares of the Company’s common stock. SharesCommon shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of common share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The common share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The common share repurchase program does not have an expiration date. As of SeptemberJune 30, 2017,2022, a total of 12,067,50012,174,300 common shares had been repurchased by the Company under the program for an aggregate cost of $200.4 million; of these, 4,010,000 shares were repurchased for a total cost of $61.3 million during the nine months ended September 30, 2016.$201.5 million. No common shares were repurchased during the three and six months ended SeptemberJune 30, 2016,2022 or the three and nine months ended September 30, 2017.2021.
At-the-Market OfferingOfferings
The Company has entered intois party to an amended and restated equity distribution agreement under which the Company mayis authorized to sell up to an aggregate of 10,000,00035,000,000 shares of its common stock from time to time in any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. As of SeptemberJune 30, 2017, 3,792,9352022, 7,502,435 shares of common stock havehad been sold under the equity distribution agreementagreements for total accumulated net proceeds of approximately $77.6 million; however, no$128.7 million. No shares were sold during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income at September 30, 2017 and December 31, 2016 was as follows:2022 or 2021.
36
(in thousands)September 30,
2017		 December 31,
2016
Available-for-sale securities   
Unrealized gains$508,607
 $393,555
Unrealized losses(85,565) (194,328)
Accumulated other comprehensive income$423,042
 $199,227


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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income at June 30, 2022 and December 31, 2021 was as follows:
(in thousands)June 30,
2022		December 31,
2021
Available-for-sale securities:
Unrealized gains$57,769 $208,619 
Unrealized losses(207,479)(22,273)
Accumulated other comprehensive (loss) income$(149,710)$186,346 

Reclassifications out of Accumulated Other Comprehensive (Loss) Income
The following table summarizes reclassifications out ofCompany reclassifies unrealized gains and losses on AFS securities in accumulated other comprehensive (loss) income forto net (loss) income upon the recognition of any realized gains and losses on sales, net of income tax effects, if any, as individual securities are sold. For the three and ninesix months ended SeptemberJune 30, 2017 and 2016:
  Affected Line Item in the Condensed Consolidated Statements of Comprehensive Income Amount Reclassified out of Accumulated Other Comprehensive Income
(in thousands)   Three Months Ended
September 30,		 Nine Months Ended
September 30,
    2017 2016 2017 2016
Other-than-temporary impairments on AFS securities Total other-than-temporary impairment losses $—
 $1,015
 $429
 $1,822
Realized gains on sales of certain AFS securities, net of tax Gain (loss) on investment securities 4,220
 (30,396) 7,386
 (54,652)
Total   $4,220
 $(29,381) $7,815
 $(52,830)

Noncontrolling Interest
On June 28, 2017,2022 the Company contributed its equity interestsreclassified $137.6 million and $129.3 million, respectively, in its wholly owned subsidiary, TH Commercial Holdings LLC,unrealized gains on sold AFS securities from accumulated other comprehensive (loss) income to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares(loss) gain on investment securities on the condensed consolidated statements of common stock of Granite Point, representing approximately 76.5% of the outstanding stock of Granite Point upon completion of the IPO of its common stock on June 28, 2017. Granite Point issued 10,000,000 shares of its common stock in the IPO at a price of $19.50 per share, for gross proceeds of $195.0 million. Net proceeds were approximately $181.9 million, net of issuance costs of approximately $13.1 million.
In connection with the Granite Point IPO, the Company agreed, subject to certain conditions, to purchase up to $20 million of Granite Point common stock in the open market at designated prices below Granite Point’s publicly reported book value pursuant to a share purchase program that ended on November 1, 2017. Duringcomprehensive loss. For the three and ninesix months ended SeptemberJune 30, 2017,2021 the Company purchased 285,662 shares of Granite Point common stock underreclassified $5.1 million and $73.7 million, respectively, in unrealized gains on sold AFS securities from accumulated other comprehensive (loss) income to (loss) gain on investment securities on the program for a total cost of $5.4 million.
Due to its controlling ownership interest in Granite Point during the periods presented, the Company consolidates Granite Point on its financialcondensed consolidated statements and reflects noncontrolling interest for the portion of equity and comprehensive income not attributable to the Company. During the three and nine months ended September 30, 2017, in accordance with ASC 810, Consolidation, the carrying amount of noncontrolling interest was adjusted to reflect (i) changes in its ownership interest in Granite Point as a result of the purchases of Granite Point common stock discussed above and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to the Company, with the offset to equity.loss.

Note 21.17. Equity Incentive Plans
On May 19, 2021, the Company’s stockholders approved the 2021 Equity Incentive Plan,
All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect or the reverse stock split.
During2021 Plan, which replaced the nine months ended September 30, 2017 and 2016, the Company granted 34,559 and 40,869 shares of common stock, respectively, to its independent directors pursuant to the Company’s Second Restated 2009 Equity Incentive Plan, or the 2009 Plan. The estimated fair value2021 Plan provides for the issuance of these awards was $19.82 and $16.86 per share on grant date, based on the adjusted closing priceup to 17,000,000 shares of the Company’s common stock pursuant to awards granted thereunder. Awards previously granted under the 2009 Plan remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2009 Plan.
The Company’s 2009 Plan and 2021 Plan, or collectively, the Equity Incentive Plans, provide incentive compensation to attract and retain qualified directors, officers, personnel and other parties who may provide significant services to the Company. The Equity Incentive Plans are administered by the compensation committee of the Company’s board of directors. The compensation committee has the full authority to administer and interpret the Equity Incentive Plans, to authorize the granting of awards, to determine the eligibility of potential recipients to receive an award, to determine the number of shares of common stock to be covered by each award (subject to the individual participant limitations provided in the Equity Incentive Plans), to determine the terms, provisions and conditions of each award (which may not be inconsistent with the terms of the Equity Incentive Plans), to prescribe the form of instruments evidencing awards and to take any other actions and make all other determinations that it deems necessary or appropriate in connection with the Equity Incentive Plans or the administration or interpretation thereof. In connection with this authority, the compensation committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the restrictions on any such awards to lapse.
The Equity Incentive Plans provide for grants of restricted common stock, restricted stock units, or RSUs, performance-based awards (including performance share units, or PSUs), phantom shares, dividend equivalent rights and other equity-based awards. The 2021 Plan is subject to a ceiling of 17,000,000 shares and the NYSE on2009 Plan is subject to a ceiling of 6,500,000 shares of the Company’s common stock; however, following stockholder approval of the 2021 Plan, no new awards will be granted under the 2009 Plan. The Equity Incentive Plans allow for the Company’s board of directors to expand the types of awards available under the Equity Incentive Plans to include long-term incentive plan units in the future. If an award granted under the Equity Incentive Plans expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless earlier terminated by the Company’s board of directors, no new award may be granted under the Equity Incentive Plans after the tenth anniversary of the date that the Equity Incentive Plans were approved by the Company’s board of directors. No award may be granted under the Equity Incentive Plans to any person who, assuming payment of all awards held by such date. The grants vested immediately.

person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Restricted Stock Units
Additionally, duringThe following table summarizes the nineactivity related to RSUs for the six months ended SeptemberJune 30, 20172022 and 2016, the Company granted 637,286 and 968,761 shares of restricted common stock, respectively, to key employees of PRCM Advisers pursuant to the terms of the Plan and the associated award agreements. 2021:
Six Months Ended June 30,
20222021
UnitsWeighted Average Grant Date Fair Market ValueUnitsWeighted Average Grant Date Fair Market Value
Outstanding at Beginning of Period1,173,702 $7.10 — $— 
Granted1,075,437 5.25 1,336,717 7.10 
Vested(489,354)(7.11)— — 
Forfeited(52,609)(5.92)— — 
Outstanding at End of Period1,707,176 $5.97 1,336,717 $7.10 

The estimated fair value of these awards was $17.48 and $15.04 per shareRSUs on grant date is based on the adjusted closing market price of the Company’s common stock on the NYSE on such date. However, as the cost of these awards is measured at fair value at each reporting date based on the price of the Company’s stock as of period end in accordance with ASC 505, Equity, or ASC 505, the fair value of these awards as of September 30, 2017 was $20.16 per share based on the adjusted closing market price of the Company’s common stock on the NYSE on such date. The shares underlying the grantsRSUs granted to independent directors are subject to a one-year vesting period. RSUs granted to certain eligible employees vest in three equal annual installments commencing on the first anniversary of the grant date, as long as such grantee complies with the terms and conditions of histhe applicable RSU agreement. All RSUs entitle the grantee to receive dividend equivalent rights, or herDERs, during the vesting period. A DER represents the right to receive a payment equal to the amount of cash dividends declared and payable on the grantee’s unvested and outstanding equity incentive awards. In the case of RSUs, DERs are paid in cash within 60 days of the quarterly dividend payment date based on the number of unvested and outstanding RSUs held by the grantee on the applicable restricteddividend record date. In the event that an RSU is forfeited, the related DERs which have not yet been paid shall be forfeited.
Performance Share Units
The following table summarizes the activity related to PSUs for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30,
20222021
Target UnitsWeighted Average Grant Date Fair Market ValueTarget UnitsWeighted Average Grant Date Fair Market Value
Outstanding at Beginning of Period437,424 $8.67 — $— 
Granted605,251 5.45 511,473 8.67 
Vested— — — — 
Forfeited(32,891)(6.82)(73,077)(8.67)
Outstanding at End of Period1,009,784 $6.80 438,396 $8.67 

The estimated fair value of PSUs on grant date is determined using a Monte Carlo simulation. PSUs vest promptly following the completion of a three year performance period, as long as such grantee complies with the terms and conditions of the applicable PSU award agreement. The number of underlying shares of common stock award agreement.that vest and that the grantee becomes entitled to receive at the time of vesting will be determined based on the level of achievement of certain Company performance goals during the performance period and will generally range from 0% to 200% of the target number of PSUs granted. All PSUs entitle the grantee to DERs during the vesting period, which accrue in the form of additional PSUs reflecting the value of any dividends declared on the Company’s common stock during the vesting period. In the event that a PSU is forfeited, the related accrued DERs shall be forfeited.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Restricted Common Stock
The following table summarizes the activity related to restricted common stock for the ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
Six Months Ended June 30,
20222021
SharesWeighted Average Grant Date Fair Market ValueSharesWeighted Average Grant Date Fair Market Value
Outstanding at Beginning of Period452,957 $15.04 1,221,995 $13.61 
Granted— — 20,979 7.15 
Vested(276,765)(14.93)(681,514)(12.70)
Forfeited(3,721)(15.23)(33,568)(5.07)
Outstanding at End of Period172,471 $15.23 527,892 $15.06 
 Nine Months Ended September 30,
 2017 2016
 Shares Weighted Average Grant Date Fair Market Value Shares Weighted Average Grant Date Fair Market Value
Outstanding at Beginning of Period1,319,712
 $17.10
 1,145,305
 $20.73
Granted671,845
 17.60
 1,009,630
 15.11
Vested(645,325) (17.90) (604,557) (20.39)
Forfeited(22,789) (17.90) (150,609) (17.01)
Outstanding at End of Period1,323,443
 $16.95
 1,399,769
 $17.23


For the three and nine months ended September 30, 2017, the Company recognized compensation related toThe estimated fair value of restricted common stock granted pursuant toon grant date is based on the Planclosing market price of $3.5 million and $11.7 million, respectively. For the three and nine months ended September 30, 2016,Company’s common stock on the Company recognized compensation related toNYSE on such date. The shares underlying restricted common stock granted pursuantgrants to the Plan of $3.5 million and $11.2 million, respectively.
Granite Point has adopted a 2017 Equity Incentive Plan, or the Granite Point Plan, to provide incentive compensation to attract and retain qualifiedindependent directors officers, advisors, consultants and other personnel.in 2021 vested immediately. The Granite Point Plan permits the granting of stock options, restricted shares of common stock, phantom shares, dividend equivalent rights, and other equity-based awards. During the nine months ended September 30, 2017, Granite Point granted 14,103 shares of itsunderlying restricted common stock grants to its independent directors and 150,000prior to 2021 were subject to a one-year vesting period. The shares of itsunderlying restricted common stock grants to itsthe Company’s executive officers and certain other personnel of an affiliate of its manager pursuant to the Granite Point Plan. The grants to Granite Point’s independent directors vested immediately, while the grants to its executive officers and certain other personnel willeligible individuals vest in three equal annual installments commencing on the first anniversary of the grant date, as long as such grantee complies with the terms and conditions of his or herthe applicable restricted stock award agreement.
Non-Cash Equity Compensation Expense
For both the three and ninesix months ended SeptemberJune 30, 2017, Granite Point2022, the Company recognized compensation related to RSUs, PSUs and restricted common stock granted pursuant to the Equity Incentive Plans of $3.5 million and $7.6 million, respectively. For the three and six months ended June 30, 2021, the Company recognized compensation related to restricted common stock granted pursuant to the Granite Point PlanEquity Incentive Plans of $0.7 million.$4.6 million and $6.4 million, respectively. As of June 30, 2022, the Company had $6.7 million of total unrecognized compensation cost related to unvested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.2 years.



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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 22. Restructuring Charges
On July 28, 2016, the Company announced that its board of directors had approved a plan to discontinue the Company’s mortgage loan conduit and securitization business. In connection with the closure, the Company incurred the following charges, which are included within restructuring charges on the Company’s condensed consolidated statements of comprehensive income, for the three and nine months ended September 30, 2016:
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Termination benefits$—
 $652
 $—
 $652
Contract terminations—
 519
 —
 519
Other associated costs—
 18
 —
 18
Total$—
 $1,189
 $—
 $1,189

The mortgage loan conduit and securitization business wind down process was completed at the end of 2016. The Company did not incur any additional restructuring costs in 2017.

Note 23.18. Income Taxes
For the three and ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, and does not engage in prohibited transactions. The Company intends to distribute 100% of its REIT taxable income and comply with all requirements to continue to qualify as a REIT. The majority of states also recognize the Company’s REIT status. The Company’s TRSs file separate tax returns and are fully taxed as standalone U.S. C-corporations.C corporations. It is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.
During the three and ninesix months ended SeptemberJune 30, 2017,2022, the Company’s TRSs recognized a provision for income taxes of $25.9 million and $74.7 million, respectively, which was primarily due to income from MSR servicing activities and gains recognized on MSR, offset by net losses recognized on derivative instruments and operating expenses. During the three months ended June 30, 2021, the Company’s TRSs recognized a benefit from income taxes of $5.3$20.9 million, and $21.1 million, respectively, which was primarily due to realized losses recognized on sales of AFS securities andMSR, offset by net losses incurredgains recognized on derivative instruments held in the Company’s TRSs. During the three and ninesix months ended SeptemberJune 30, 2016,2021, the Company’s TRSs recognized a benefit fromprovision for income taxes of $16.8$1.8 million, and $26.1 million, respectively, which was primarily due to losses incurredgains recognized on MSR, andoffset by net losses recognized on derivative instruments held in the Company’s TRSs. As of September 30, 2017, a $4.3 million valuation allowance was recorded because the Company determined that it is more likely than not that the associated deferred tax asset will not be realized. At December 31, 2016, the Company had not recorded a valuation allowance for any portion of its deferred tax assets as it did not believe, at a more likely than not level, that any portion of its deferred tax assets would not be realized. 
Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these condensed consolidated financial statements.



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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 19. Earnings Per Share
The following table presents a reconciliation of the (loss) earnings and shares used in calculating basic and diluted (loss) earnings per share for the three and six months ended June 30, 2022 and 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands, except share data)2022202120222021
Basic (Loss) Earnings Per Share:
Net (loss) income$(72,420)$(117,960)$212,850 $122,197 
Dividends on preferred stock13,748 13,747 27,495 30,963 
Dividends and undistributed earnings allocated to participating restricted stock units290 227 910 331 
Net (loss) income attributable to common stockholders, basic$(86,458)$(131,934)$184,445 $90,903 
Basic weighted average common shares344,277,723 273,718,561 344,138,889 273,714,684 
Basic (loss) earnings per weighted average common share$(0.25)$(0.48)$0.54 $0.33 
Diluted (Loss) Earnings Per Share:
Net (loss) income attributable to common stockholders, basic$(86,458)$(131,934)$184,445 $90,903 
Reallocation impact of undistributed earnings to participating restricted stock units— — (8)(11)
Interest expense attributable to convertible notes (1)
— — 9,843 7,908 
Net (loss) income attributable to common stockholders, diluted$(86,458)$(131,934)$194,280 $98,800 
Basic weighted average common shares344,277,723 273,718,561 344,138,889 273,714,684 
Effect of dilutive shares issued in an assumed vesting of performance share units— — 543,480 — 
Effect of dilutive shares issued in an assumed conversion— — 39,659,522 32,284,519 
Diluted weighted average common shares344,277,723 273,718,561 384,341,891 305,999,203 
Diluted (loss) earnings per weighted average common share$(0.25)$(0.48)$0.51 $0.32 
___________________
(1)If applicable, includes a nondiscretionary adjustment for the assumed change in the management fee calculation.

For the three months ended June 30, 2022 and 2021, excluded from the calculation of diluted earnings per share was the effect of adding undistributed earnings reallocated to 1,775,985 and 954,763 weighted average participating RSUs, respectively, as their inclusion would have been antidilutive. For the six months ended June 30, 2022 and 2021, participating RSUs were included in the calculations of basic and diluted earnings per share under the two-class method, as it was more dilutive than the alternative treasury stock method.
For the three months ended June 30, 2022 and the three and six months ended June 30, 2021, PSUs were excluded from the calculation of diluted earnings per share, as their inclusion would have been antidilutive. For the six months ended June 30, 2022, the assumed vesting of outstanding PSUs was included in the calculation of diluted earnings per share under the two-class method, as it was more dilutive than the alternative treasury stock method.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
For the three months ended June 30, 2022, excluded from the calculation of diluted earnings per share was the effect of adding back $4.8 million of interest expense and 38,956,653 weighted average common share equivalents related to the assumed conversion of the Company’s convertible senior notes, as their inclusion would have been antidilutive. For the six months ended June 30, 2022, the assumed conversion of the Company’s convertible senior notes was included in the calculation of diluted earnings per share under the if-converted method.
For the three and six months ended June 30, 2021, excluded from the calculation of diluted earnings per share was the effect of adding back $7.1 million and $5.6 million of interest expense and 48,043,744 and 13,789,691 weighted average common share equivalents, respectively, related to the assumed conversion of the Company’s convertible senior notes, as their inclusion would have been antidilutive. For the three months ended June 30, 2021, both the 2022 notes and the 2026 notes were excluded from the calculation of diluted earnings per share. For the six months ended June 30, 2021, only the 2022 notes were excluded from the calculation of diluted earnings per share, and the assumed conversion of the Company’s 2026 notes was included in the calculation of diluted earnings per share under the if-converted method.

Note 24. Earnings Per Share20. Subsequent Events
The following table presentsOn August 2, 2022, Matrix Financial Services Corporation, or Matrix, a reconciliationwholly owned subsidiary of the earnings and shares usedCompany, 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 calculating basic and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands, except share data)2017 2016 2017 2016
Numerator:       
Net income$104,738
 $117,786
 $185,381
 $11,875
Net income attributable to noncontrolling interest2,674
 —
 2,714
 —
Net income attributable to Two Harbors Investment Corp.102,064
 117,786
 182,667
 11,875
Dividends on preferred stock8,888
 —
 13,173
 —
Net income attributable to common stockholders - basic93,176
 117,786
 169,494
 11,875
Interest expense attributable to convertible notes (1)
4,727
 —
 —
 —
Net income attributable to common stockholders - diluted97,903
 117,786
 169,494
 11,875
Denominator:       
Weighted average common shares outstanding173,162,988
 172,372,459
 173,022,717
 172,545,883
Weighted average restricted stock shares1,325,308
 1,441,154
 1,392,515
 1,563,234
Basic weighted average shares outstanding174,488,296
 173,813,613
 174,415,232
 174,109,117
Effect of dilutive shares issued in an assumed conversion14,419,060
 —
 —
 —
Diluted weighted average shares outstanding188,907,356

173,813,613

174,415,232

174,109,117
Earnings Per Share
 

 
 

Basic$0.53

$0.68

$0.97

$0.07
Diluted$0.52

$0.68

$0.97

$0.07
___________________
(1)Includes a nondiscretionary adjustment for the assumed change in the management fee calculation.

For the nine months ended September 30, 2017, excluded from the calculation of diluted earnings per share is the effect of adding back $13.1 million of interest expense, net of a nondiscretionary adjustment for the assumed change in the management fee calculation, and 13,447,072 weighted average common share equivalents relatedan amount equal to the assumed conversiontangible net book value of RoundPoint, plus a premium amount of $10.5 million, subject to certain additional post-closing adjustments.
In connection with the Company’s convertible senior notes, as their inclusion would be antidilutive.

Note 25. Related Party Transactions
The following summary provides disclosure of the material transactions with affiliates of the Company.
In accordance withtransaction, RoundPoint will divest its management agreement with PRCM Advisers, the Company incurred $10.2 million and $33.3 million as a management fee to PRCM Advisers for the three and nine months ended September 30, 2017, respectively, and $11.4 million and $35.3 million as a management fee to PRCM Advisers for the three and nine months ended September 30, 2016, respectively, which represents approximately 1.5% of stockholders’ equity on an annualized basis as defined by the management agreement. For purposes of calculating the management fee, stockholders’ equity is adjusted to exclude the consolidated stockholders’ equity of Granite Point and its subsidiaries included in the Company’s condensed consolidated balance sheet and any common stock repurchases,retail origination business as well as any unrealized gains, losses orits RPX servicing exchange platform. Matrix has also agreed to engage RoundPoint as a subservicer prior to the closing date and expects to begin 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.
Events subsequent to June 30, 2022 were evaluated through the date these condensed consolidated financial statements were issued and no other items that do not affect realized net income, among other adjustments,additional events were identified requiring further disclosure in accordance with the management agreement. In addition, the Company reimbursed PRCM Advisers for direct and allocated costs incurred by PRCM Advisers on behalf of the Company. These direct and allocated costs totaled approximately $4.8 million and $18.8 million for the three and nine months ended September 30, 2017, respectively, and $6.3 million and $19.1 million for the three and nine months ended September 30, 2016, respectively.

these condensed consolidated financial statements.
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TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Upon the closing of its IPO on June 28, 2017, Granite Point entered into a management agreement with Pine River. In accordance with Granite Point’s management agreement with Pine River, the Company incurred $3.1 million and $3.2 million as a management fee to Pine River for the three and nine months ended September 30, 2017, respectively, which represents approximately 1.5% of Granite Point’s equity on an annualized basis as defined by the management agreement. For purposes of calculating the management fee, equity is adjusted to exclude any common stock repurchases as well as any unrealized gains, losses or other items that do not affect realized net income, among other adjustments, in accordance with the management agreement.
The Company has direct relationships with the majority of its third-party vendors. The Company will continue to have certain costs allocated to it by PRCM Advisers for compensation, data services, technology and certain office lease payments, but most direct expenses with third-party vendors are paid directly by the Company.
The Company recognized $3.5 million and $11.7 million of compensation during the three and nine months ended September 30, 2017, respectively, and $3.5 million and $11.2 million of compensation during the three and nine months ended September 30, 2016, respectively, related to restricted common stock issued to employees of PRCM Advisers and the Company’s independent directors pursuant to the Plan. In addition, Granite Point recognized $0.7 million of compensation during both the three and nine months ended September 30, 2017 related to restricted common stock issued to its independent directors, executive officers and certain other personnel of an affiliate of its manager pursuant to the Granite Point Plan. See Note 21 - Equity Incentive Plan for additional information.

Note 26. Subsequent Events
On September 14, 2017, the Company’s board of directors declared a special dividend pursuant to which the 33.1 million shares of Granite Point common stock acquired by the Company in exchange for the contribution of its equity interests in TH Commercial Holdings LLC to Granite Point on June 28, 2017 would be distributed, on a pro rata basis, to the holders of Two Harbors common stock outstanding as of the close of business on October 20, 2017. The special dividend was distributed on November 1, 2017.
Also on September 14, 2017, the Company’s board of directors approved a one-for-two reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of the Company’s common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of the Company’s common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of the Company’s common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged.
Events subsequent to September 30, 2017, were evaluated through the date these financial statements were issued and no additional events were identified requiring further disclosure in these condensed consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensedthe consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2016.2021.


General
We are a Maryland corporation focused on investing in financing and managing Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, and other financial assets, which we collectively refer to as our target assets. We operate as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code.
We are externally managed by PRCM Advisers LLC, or PRCM Advisers, which is a wholly owned subsidiary of Pine River Capital Management L.P., or Pine River, a global multi-strategy asset management firm providing comprehensive portfolio management, transparency and liquidity to institutional and high net worth investors.
Our objective is to provide attractive risk-adjusted total return to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We selectively acquire and manage an investment portfolio of our target assets, which is constructed to generate attractive returns through market cycles. We focus on asset selection and implement a relative value investment approach across various sectors within the mortgage market. Our target assets include the following:
•Agency RMBS (which includes inverse interest-only Agency securities classified as “Agency Derivatives” for purposes of U.S. generally accepted accounting principles, or U.S. GAAP), meaning RMBS whose principal and interest payments are guaranteed by a U.S. government agency, such as the Government National Mortgage Association (or Ginnie Mae), or 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 collectively, the government sponsored entities, or GSEs;;
Non-Agency securities, meaning securities that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac;
•MSR; and
•Other financial assets comprising approximately 5% to 10% of the portfolio.
We generally view our target assets in two strategies that are based on our core competencies of understanding and managing prepayment and credit risk. Our rates strategy includes assets that are sensitive to changes in interest rates and prepayment speeds, specifically Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and MSR. Our credit strategy includes assets with inherent credit risk, including non-Agency securities. Other assets include financialmulti-family mortgage loans. All of our principal and mortgage-related assets other thaninterest Agency RMBS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations that carry an implied rating of “AAA,” or Ginnie Mae mortgage pass-through certificates, which are backed by the target assets in our rates and credit strategies, including residential mortgage loans (see discussion below) and certain non-hedging transactions that may produce non-qualifying income for purposesguarantee of the REIT gross income tests.
As opportunitiesU.S. government. The majority of these securities consist of whole pools in which we own all of the investment interests in the residential mortgage marketplace change, we continue to evolve our business model. From a capital allocation perspective, we expect to continue to increase our allocation towards MSR over time. During the nine months ended September 30, 2017, however, we increased our allocation towards Agency RMBS slightly due to attractive market prices. Within our non-Agency securities portfolio, we have a substantial emphasis on “legacy” securities, which include securities issued prior to 2009. We also hold “new issue” non-Agency securities, which we believe have enabled us to find attractive returns and further diversify our non-Agency securities portfolio.
On June 28, 2017, we completed the contribution of our portfolio of commercial real estate assets to Granite Point Mortgage Trust Inc., or Granite Point, a newly organized Maryland corporation intended to qualify as a REIT and focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. We contributed our equity interests in our wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for our contribution, received approximately 33.1 million shares of common stock of Granite Point, representing approximately 76.5% of the outstanding stock of Granite Point upon completion of the initial public offering, or IPO, of its common stock on June 28, 2017. Subsequent to the end of the third quarter of 2017, on November 1, 2017, we distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock acquired in connection with the contribution to the holders of our common shares outstanding as of the close of business on October 20, 2017. Due to our controlling ownership interest in Granite Point during the periods presented, we consolidate Granite Point on our financial statements and reflect noncontrolling interest for the portion of equity and comprehensive income not attributable to us. During this consolidation period, our financial condition and results of operations reflect Granite Point’s commercial strategy, which includes as target assets first mortgages, mezzanine loans, B-notes and preferred equity. As of November 1, 2017, we no longer have a controlling interest in Granite Point and, therefore, will prospectively deconsolidate Granite Point and its subsidiaries from our financial statements.

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In July 2016, we announced our plan to discontinue our mortgage loan conduit and securitization business. The wind down of this business was completed at the end of 2016, though we currently retain certain subordinated securities from our prior securitization transactions. In addition, we hold a small legacy portfolio of credit sensitive residential mortgage loans, or CSL, which are loans where the borrower has previously experienced payment delinquencies and is more likely to be underwater (i.e., the amount owed on a mortgage loan exceeds the current market value of the home). As a result, there is a higher probability of default on CSL than on newly originated residential mortgage loans. securities.
Within our MSR business, we purchaseacquire MSR assets, which represent the right to control the servicing of residential mortgage loans and the obligation to service the loans in accordance with relevant standards, from high-quality originators. We do not directly service the mortgage loans we acquire, nor the mortgage loans underlying the MSR we acquire; rather, we contract with appropriately licensed third-party subservicers to handle substantially all servicing functions.
We believe our investment model allows management to allocate capital across various sectors within the mortgage market, with a focus on asset selection and the implementation of a relative value investment approach. Our capital allocation decisions factorfunctions in the opportunities inname of the marketplace,subservicer. As the costservicer of financingrecord, however, we remain accountable to the GSEs for all servicing matters and, the costaccordingly, provide substantial oversight of hedging interest rate, prepayment, credit and other portfolio risks. As a result, capital allocation reflects management’s flexible approach to investing in the marketplace. The following table provides our capital allocation in each of our investment strategies as of September 30, 2017subservicers. We believe MSR are a natural fit for our portfolio over the long term. Our MSR business leverages our core competencies in prepayment and credit risk analytics and the four immediately preceding period ends:MSR assets provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
 As of
 September 30,
2017		 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016
Rates strategy55% 54% 58% 58% 54%
Credit strategy29% 28% 27% 27% 31%
Commercial strategy (1)
16% 18% 15% 15% 15%
____________________
(1)Represents capital allocated to our controlling interest in Granite Point’s commercial strategy.

As our capital allocation shifts, our annualized yields and cost of financing shift. As previously discussed, our investment decisions are not driven solely by annualized yields, but rather a multitude of macroeconomic drivers, including market environments and their respective impacts (e.g., uncertainty of prepayment speeds, extension risk and credit events).
For the three months ended SeptemberJune 30, 2017,2022, our net yieldspread realized on the portfolio was lower than recent periods. Yields on non-Agency securities were generally lowerhigher than recent quarters due to purchases at slightlyhigher MSR servicing income, net of estimated amortization, as well as higher coupon and lower yields; however, the main driver isamortization on Agency RMBS due to slower prepayment speeds, offset by higher cost of financing due to rising interest rates and an increase in our cost of financing as a result of increases in borrowing rates offered by counterparties, growth in and increased financing of the commercial real estate portfolio, the addition of revolving credit facilities for financing of mortgage servicing rights and the issuance of convertible senior notes during the nine months ended September 30, 2017.interest rate swap spread expense. The following table provides the average annualizedportfolio yield and cost of financing on our assets including Agency RMBS, non-Agency securities, commercial real estate assets, MSR, residential mortgage loans held-for-investment, net of collateralized borrowings, in securitization trusts, and residential mortgage loans held-for-sale for the three months ended September June 30, 2017,2022, and the four immediately preceding quarters:
 Three Months Ended
 September 30,
2017		 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30,
2016
Average annualized portfolio yield (1)
3.90% 3.96% 3.99% 3.54% 3.50%
Cost of financing (2)
1.83% 1.60% 1.52% 1.17% 1.08%
Net portfolio yield2.07% 2.36% 2.47% 2.37% 2.42%
Three Months Ended
June 30,
2022		March 31,
2022		December 31,
2021		September 30,
2021		June 30,
2021
Average portfolio yield (1)
4.39%3.90%3.72%3.33%2.72%
Average cost of financing (2)
1.13%1.01%0.73%0.78%0.79%
Net spread3.26%2.89%2.99%2.55%1.93%
____________________
(1)Average annualized yield incorporates future prepayment, credit loss and other assumptions, all of which are estimates and subject to change.
(2)Cost of financing includes swap interest rate spread.

(1)Average portfolio yield includes interest income on Agency RMBS and non-Agency securities and MSR servicing income, net of estimated amortization, and servicing expenses. Beginning with the three months ended June 30, 2022, average portfolio yield also includes the implied asset yield portion of dollar roll income on TBAs. MSR estimated 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 non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.

(2)Average cost of financing includes interest expense and amortization of deferred debt issuance costs on borrowings and interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements. Beginning with the three months ended June 30, 2022, average cost of financing also includes the implied financing benefit/cost portion of dollar roll income on TBAs. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.
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We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS and non-Agency securities including retained interests from our previous on-balance sheet securitizations, and commercial real estate assets through short- and long-term borrowings structured as repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB.agreements. We also finance our MSR through revolving credit facilities. In addition, on January 19, 2017, we closed an underwritten public offering of $287.5 million aggregate principal amount offacilities, repurchase agreements, term notes payable and convertible senior notes due 2022, which included $37.5 million aggregate principal amount sold to the underwriter of the offering pursuant to an overallotment option. The notes are unsecured, pay interest semiannually at a rate of 6.25% per annum and are convertible at the option of the holder into shares of our common stock. The notes will mature in January 2022, unless earlier converted or repurchased in accordance with their terms. We do not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. As of September 30, 2017, the notes had a conversion rate of 50.2537 shares of common stock per $1,000 principal amount of the notes (based on the retroactive adjustment due to our one-for-two reverse stock split described below). The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses. The majority of these proceeds were used to help fund our MSR assets, which previously had largely been funded with cash.notes.
Our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while non-Agency securities, commercial real estate assets and MSR, with less liquidity and/or more exposure to credit risk,prepayment, utilize lower levels of leverage. We believe the debt-to-equity ratio funding our Agency RMBS, non-Agency securities, commercial real estate assets and MSR, which includes any unsecured debt we may use to fund our target assets, is the most meaningful leverage measure as collateralized borrowings on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity. As a result, our debt-to-equity ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the sustainabilityavailability and price of our financing, the diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. Over the past several quarters, we have generally maintained a debt-to-equity ratio range of 3.0 to 5.0 times to finance our securities portfolio, commercial real estate assets, MSR and residential mortgage loans held-for-sale, on a fully deployed capital basis. Our debt-to-equity ratio is also directly correlated to the composition of our portfolio; specifically, the higher percentage of Agency RMBS we hold, the higher our debt-to-equity ratio is, while the higher percentage of non-Agency securities, commercial real estate assets and MSR we hold, the lower our debt-to-equity ratio is. We may alter the percentage allocation of our portfolio among our target assets depending on the relative value of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from common stock offerings we conduct. See the section titled Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Repurchase Agreements”Financing” for further discussion.
We recognize that investing in our target assets is competitive and we compete with other entities for attractive investment opportunities. We rely on our management team and our dedicated team of investment professionals provided by our external manager to identify investment opportunities. In addition, we have benefited and expect to continue to benefit from our external manager’s analytical and portfolio management expertise and infrastructure. We believe that our significant focus in the residential market, the extensive mortgage market expertise of our investment team, our operational capabilities to invest in MSR, our strong analytics and our disciplined relative value investment approach give us a competitive advantage versus our peers.
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and we may form additional TRSs in the future.activities. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. While we do not currently originate or directly service residential mortgage loans, certain of our subsidiaries have obtained the requisite licenses and approvals to purchase and sell residential mortgage loans in the secondary market and to own and manage MSR. Additionally, certain subsidiaries of Granite Point are licensed to originate commercial real estate loans.
On September 14, 2017, our board of directors approved a one-for-two reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of our common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of our common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.

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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “target,” “believe,” “intend,” “seek,” “plan,” “goals,” “future,” “likely,” “may” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, under the caption “Risk Factors.” Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, or SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.
Important factors, among others, that may affect our actual results include:
•changes in interest rates and the market value of our target assets;
•changes in prepayment rates of mortgages underlying our target assets;
the occurrence, extent and timing of credit losses within our portfolio;
our exposure to adjustable-rate and negative amortization mortgage loans underlying our target assets;
•the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets, and the credit status of borrowers;borrowers and home prices;
•the concentrationongoing impact of the credit risks to which we are exposed;COVID-19 pandemic, and the actions taken by federal and state governmental authorities and GSEs in response, on the U.S. economy, financial markets and our target assets;
•legislative and regulatory actions affecting our business;
•the availability and cost of our target assets;
•the availability and cost of financing for our target assets, including repurchase agreement financing, lines of credit, revolving credit facilities, term notes and financing through convertible notes;
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•the FHLB;
declines in home prices;
impact of any increases in payment delinquencies and defaults on the mortgages comprising and underlying our target assets;assets, including additional servicing costs and servicing advance obligations on the MSR assets we own;
•changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale;
•changes in the values of securities we own and the impact of adjustments reflecting those changes on our condensed consolidated statements of comprehensive income (loss) and balance sheets, including our stockholders’ equity;
•our ability to generate cash flow from our target assets;
•our ability to effectively execute and realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue;
•our decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation related to such termination;
•changes in the competitive landscape within our industry, including changes that may affect our ability to attract and retain personnel;
•our exposure to legal and regulatory claims, penalties or enforcement activities, including those arising from our involvement in securitization transactions and ownership and management of MSR;MSR and prior securitization transactions;
•our exposure to counterparties involved in our MSR business as well as our legacy mortgage loan conduit business,and prior securitization transactions and our ability to enforce representations and warranties made by them;
•our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee the activities of our subservicers;
our decision to contribute our portfolio of commercial real estate assets to Granite Point and the distribution of Granite Point shares to the holders of our common stock;
our ability to successfully diversify our business into new asset classes, and manage the new risks to which they may expose us;
•our ability to manage various operational and regulatory risks associated with our business;

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•interruptions in or impairments to our communications and information technology systems;
•our ability to maintain appropriate internal controls over financial reporting;
•our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio;
•our ability to maintain our REIT qualification for U.S. federal income tax purposes; and
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act.
This Quarterly Report on Form 10-Q may contain statistics and other data that, in some cases, have been obtained or compiled from information made available by mortgage loan servicers and other third-party service providers.


Factors Affecting our Operating Results
Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts, and income from our commercial real estate assets and residential mortgage loans.discounts. Net interest income, as well as our servicing income, net of subservicing expenses, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results will also be affected by default rates and credit losses with respect to the mortgage loans underlying our non-Agency securities and in our commercial real estate and residential mortgage loan portfolios.


Fair Value Measurement
A significant portion of our assets and liabilities are reported at fair value and, therefore, our condensed consolidated balance sheets and statements of comprehensive incomeloss are significantly affected by fluctuations in market prices. At SeptemberJune 30, 2017,2022, approximately 87.9%87.7% of our total assets, or $24.4$12.0 billion,, and approximately 11.8% of our total liabilities, or $2.8 billion, consisted of financial instruments recorded at fair value. See Note 1410 - Fair Value to the condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices. Although markets for asset-backed securities, including RMBS, have modestly stabilized since the severe dislocations experienced as a result of the financial crisis, these markets continue to experience volatility and, as a result, our assets and liabilities will be subject to valuation adjustment as well as changes in the inputs we use to measure fair value.
Any temporary change in the fair value of our available-for-sale, or AFS securities, excluding Agency interest-only mortgage-backedcertain AFS securities and GSE credit risk transfer securities,for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive (loss) income and does not impact our earnings. Our reported earningsincome (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, changes in the provision for credit losses on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP net income (loss) is also affected however, by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap, cap and swaption agreements and certain other derivative instruments (i.e., Agency to-be-announced securities, or TBAs, put and call options foron TBAs, Markit IOS total return swapsfutures, options on futures, and inverse interest-only securities), which are accounted for as derivative trading instruments under U.S. GAAP, Agency interest-only mortgage-backedfair value option elected AFS securities MSR, net economic interests in consolidated securitization trusts and residential mortgage loans held-for-sale.MSR.
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We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. Our entire investment portfolio reported at fair value is priced by third-party brokers and/or by independent pricing providers.vendors. We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only Agency RMBS and inverse interest-only Agency RMBS, and non-Agency securities.RMBS. We also currently receive threemultiple vendor quotes for the MSR in our investment portfolio. For Agency RMBS, the third-party pricing providersvendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period,periods, issuer, prepayment speeds, credit enhancements and expected life of the security. For non-Agency securities, the third-party pricing providers and brokers utilize both observable and unobservable inputs such as pool‑specific characteristics (i.e., loan age, loan size, credit quality of borrowers, vintage, servicer quality), floating rate indices, prepayment and default assumptions, and recent trading of the same or similar securities. For MSR, and residential mortgage loans, vendors use pricing models that generally incorporate observable inputs such as principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO, appraised value and other loan characteristics, along with observed market yields securitization economics and trading levels. Additionally for MSR, pricing providersPricing vendors will customarily incorporate loan servicing cost, servicing fee, ancillary income, and earnings rate on escrow as observable inputs. Unobservable or model-driven inputs include forecast cumulative defaults, default curve, forecast loss severity and forecast voluntary prepayment.

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We evaluate the prices we receive from both third-party brokers and independent pricing providersvendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods. We review and may challenge broker quotes and valuations from third-party brokers and pricing providersvendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, and we estimate the fair value of MSR based upon the average of prices received from independent providers,third-party vendors, subject to internally-established hierarchy and override procedures.
We utilize “bid side” pricing for our Agency RMBS and non-Agency securities and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs, any economic effect of this would be reflected in accumulated other comprehensive (loss) income.
Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At June 30, 2022, 24.1% of our total assets were classified as Level 3 fair value assets.


Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in preparation of the statements. Accounting estimates are considered critical if the estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. Our significant accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. Our most critical accounting policies involve our fair valuation of AFS securities, MSR and derivative instruments.
The methods used by us to estimate fair value for AFS securities, MSR and derivative instruments may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 10 to the condensed consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q. Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 5 to the condensed consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.

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Market Conditions and Outlook
The key macroeconomic factorsmarket continued to experience high interest rate and spread volatility during the second quarter as the combined effects of increasing inflation and a slowing economy created uncertainty. With headline inflation reaching 9.1% in June, the U.S. Federal Reserve, or the Fed, moved aggressively to tighten monetary policy. In total, the Fed raised its benchmark rate by 125 basis points during the second quarter, including a 75 basis point increase in June, the largest single meeting increase since 1994. The Fed has communicated that impact our business are U.S. residential and commercial property prices, national employment ratesit is strongly committed to continue to do whatever it takes to tame inflation, and the interest rate environment. Home prices increased modestly throughmarket is pricing in another 200 basis points of increases by the first three quartersend of 2017the year, which would bring the implied U.S. Federal Funds Rate close to 3.5%. Concurrently, U.S. economic growth forecasts have been deteriorating, with some economists now projecting negative GDP in the second quarter. The uncertainty in the path of inflation, growth and are expectedmonetary policy has contributed to gradually appreciatethe extreme bond market volatility during 2022.
Mortgage spreads continued to widen during the second quarter along with other risk assets amid the uncertain backdrop. Mortgage spreads were over 20 basis points wider, while the next several years. Credit standards remain tight, despiteS&P 500 was down over 16% as markets have priced in lower growth and a modest easing in recent periods, and have limited borrowers’ ability to refinance their mortgages notwithstanding lowhigher risk of recession. Primary mortgage interest rates and government programs that promote refinancing. Employment market conditions remain relatively solid as jobless claims, unemployment and payroll data are showing stability, although underemploymentbreached 6%, the highest levels remain high and new job creation has not generated meaningful wage growth. Other than LTV ratios and cash reserves, we believe employment issince 2008. With the most powerful determinantmajority of homeowners’ ongoing likelihood to pay their mortgages. Home price performance and employment are particularly important to our non-Agency portfolio.
More recently, natural disasters have impacted certain geographic areas of the U.S. We continuously monitor and evaluate our portfolio for market value deterioration or asset impairment in light of these events and do not expect material impacts to our portfolio.
The Federal Reserve has continued to modestly raise the Federal Funds Target, recently noting a roughly balanced outlook, with two increases so far in 2017 and one more expected by year end. At the same time, due in part to the absence of meaningful inflation, longer term rates in the U.S. are lower and the interest rate curve is flatter. The Trump administration continues to focus on several issues that could impactoutstanding mortgages having interest rates the U.S. economybelow 3.5%, cash out and U.S. businesses, including but not limited to tax reform, deregulation, fiscal spending measures and trade. While there is much uncertainty regarding the timing and specifics of any policy changes, any such actions could affect our business. Nevertheless, interest rates remain at historically low levels and that environmentturnover activity is expected to persist inbe greatly reduced due to the near term, aslarge rate disincentive, bringing prepayment speeds close to their turnover floor.
RMBS funding markets were stable and efficient despite the Federal Reserve has reiterated it will take a measured and conservative approach to futureFed interest rate decisions. Whileincreases and uncertainty of the Federal Reserve has announced plansforward path. Spreads on repurchase agreement financing remained attractive at 10 to reduce its mortgage-backed securities holdings in12 basis points to SOFR. The heavy use of the nearFed’s reverse repurchase agreement facility continued with increased balances hitting another new high at the end of the second quarter of $2.3 billion.
Despite the uncertainty and large re-pricing seen during the second quarter, we believe the longer term outlook for the plan seems to be to focus oncompany is positive. The current environment of wide mortgage spreads presents attractive investment opportunities across a gradual approach which reduces reinvestmentvariety of principal and interest but with a capped amount that increases over time.
We believe our blended Agency and non-Agency securities portfolio and our investing expertise, as well as our operational capabilities to invest in MSR, will allow us to better navigate the dynamic mortgage marketasset classes, while future regulatory and policy activities take shape. Having a diversified portfoliohigher volatility allows us to mitigate a varietytake advantage of risks, including interest rate and RMBS spread volatility.
relative value opportunities. We expect thatvolatility to eventually subside, which should benefit both MSR and RMBS. Higher mortgage rates should lead inexorably to slow prepayments, which would continue to be a tailwind for our MSR assets. Overall, we are optimistic about the majority offorward outlook for the company and our assets will remain in whole-poolpaired Agency RMBS in light of the long-term attractiveness of the asset class and in order to continue to satisfy the requirements of our exemption from registration under the 1940 Act. Interest-only Agency securities and MSR also provide a complementary investment and risk-management strategy to our principal and interest Agency RMBS investments. Risk-adjusted returns in our Agency RMBS portfolio may decline if we are required to pay higher purchase premiums due to lower interest rates or additional liquidity in the market. Additionally, the Federal Reserve’s prior quantitative easing programs and continued reinvestment of its mortgage-backed security principal repayments and other policy changes may impact the returns of our Agency RMBS portfolio.

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construction.
The following table provides the carrying value of our securitiesinvestment portfolio by product type:
(dollars in thousands)June 30,
2022		December 31,
2021
Agency RMBS$8,701,947 72.3 %$7,149,399 76.1 %
Mortgage servicing rights3,226,191 26.8 %2,191,578 23.3 %
Agency Derivatives24,068 0.2 %40,911 0.5 %
Non-Agency securities87,490 0.7 %12,304 0.1 %
Total$12,039,696 $9,394,192 
(dollars in thousands)September 30,
2017		 December 31,
2016
Agency       
Fixed Rate$17,529,411
 86.4% $11,196,011
 84.5%
Hybrid ARM24,960
 0.1% 30,463
 0.2%
Total Agency17,554,371
 86.5% 11,226,474
 84.7%
Agency Derivatives101,284
 0.5% 126,599
 1.0%
Non-Agency       
Senior1,693,960
 8.3% 1,210,462
 9.1%
Mezzanine945,447
 4.7% 687,644
 5.2%
Interest-only securities5,316
 —% 4,277
 —%
Total Non-Agency2,644,723
 13.0% 1,902,383
 14.4%
Total$20,300,378
   $13,255,456
  


Prepayment speeds and volatility due to interest rates
Our Agency RMBS portfolio is subject to inherentmarket risks, primarily interest rate risk and prepayment risk. We seek to offset a portion of our Agency pool market value exposure to prepayment speeds through our MSR and interest-only Agency RMBS portfolios. Generally, a decline inDuring periods of decreasing interest rates that leads towith rising prepayment speeds, will causethe market value of our Agency pools generally increases and the market value of our interest-only securities and MSR to deteriorate, and our fixed coupon Agency pools to increase.generally decreases. The inverse relationship occurs when interest rates increaserise and prepayments slow. As previously discussed, despitefall. Interest rates moved even higher during the Federal Reserve raising rates again in March 2017 and June 2017, the low interest rate environment issecond quarter, with most mortgages now having a large refinancing disincentive. Looking forward, prepayment speeds are expected to persistslow further, as even cash out refinance activity should be affected by the continued move in the near term. However,rates. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, could causecan affect prepayment speeds to increase on many RMBS, which could lead to less attractive reinvestment opportunities. Nonetheless, wespeeds. We believe our portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios, including an overall faster prepayment environment.
The following table provides the three-month weighted average constant prepayment rate, or CPR, on our Agency RMBS for the three months ended September 30, 2017, and the four immediately preceding quarters:
  Three Months Ended
Agency RMBS September 30,
2017		 June 30,
2017		 March 31,
2017		 December 31,
2016		 September 30, 2016
Weighted Average CPR 8.0% 8.0% 5.6% 7.1% 9.7%

scenarios. Although we are unable to predict the movement infuture interest rates in the remainderrate movements, our strategy of 2017pairing Agency RMBS with MSR, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and beyond, our diversified portfolio management strategyfinancing risk, is intended to generate attractive yields with a low level of sensitivity to changes in the yield curve, prepayments and interest rate cycles.
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The following table provides the three-month average constant prepayment rate, or CPR, experienced by our Agency RMBS and MSR during the three months ended June 30, 2022, and the four immediately preceding quarters:
Three Months Ended
June 30,
2022		March 31,
2022		December 31,
2021		September 30,
2021		June 30,
2021
Agency RMBS14.2 %17.3 %27.7 %30.1 %32.3 %
Mortgage servicing rights10.0 %14.2 %22.1 %26.7 %29.0 %

Our Agency RMBS are primarily collateralized by pools of fixed-rate mortgage loans and hybrid adjustable-rate mortgage loans, or hybrid ARMs, which are mortgage loans that have interest rates that are fixed for an initial period and adjustable thereafter.loans. Our Agency portfolio also includes securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans of less than $175,000$200,000 in initial principal balance), higher LTVs (securities collateralized by loans with LTVs greater than or equal to 80%), certain geographic concentrations, loans secured by investor-owned properties and lower FICO scores. Our overall allocation of Agency RMBS and holdings of pools with specific characteristics are viewed in the context of our aggregate ratesportfolio strategy, including MSR and related derivative hedging instruments. Additionally, the selection of securities with certain attributes is driven by the perceived relative value of the securities, which factors in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks. As a result, Agency RMBS capital allocation reflects management’s flexible approach to investing in the marketplace.

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The following tables provide the carrying value of our Agency RMBS portfolio by underlying mortgage loan rate type:
September 30, 2017June 30, 2022
(dollars in thousands)Principal/ Current Face Carrying Value % of Agency Portfolio % Prepayment Protected Weighted Average Coupon Rate Amortized Cost Weighted Average Loan Age (months)(dollars in thousands)Principal/ Current FaceCarrying Value
Weighted Average CPR (1)
% Prepayment ProtectedGross Weighted Average Coupon RateAmortized CostAllowance for Credit LossesWeighted Average Loan Age (months)
Agency RMBS AFS:             Agency RMBS AFS:
30-Year Fixed             30-Year Fixed
3.0-3.5%$4,465,427
 $4,622,661
 26.2% 76.1% 3.5% $4,664,694
 12
4.0-4.5%11,045,306
 11,859,921
 67.2% 97.6% 4.2% 11,820,200
 17
≥ 5%552,223
 616,470
 3.5% 86.4% 5.4% 598,561
 76
≤ 2.5%≤ 2.5%$512,388 $463,741 9.9 %84.2 %3.4 %$460,271 $— 16
3.0%3.0%— — — %— %— %— — — 
3.5%3.5%1,194,159 1,156,727 6.4 %100.0 %4.1 %1,232,720 — 10 
4.0%4.0%3,489,917 3,477,167 9.3 %100.0 %4.6 %3,553,206 — 21 
4.5%4.5%2,729,780 2,782,256 10.7 %100.0 %5.1 %2,812,136 — 23 
≥ 5.0%≥ 5.0%629,704 654,860 13.4 %99.1 %5.9 %653,683 — 40 
16,062,956
 17,099,052
 96.9% 91.3% 4.1% 17,083,455
 18
8,555,948 8,534,751 9.7 %99.1 %4.7 %8,712,016 — 22 
15-Year & Other Fixed224,041
 222,397
 1.3% 0.7% 4.6% 216,224
 148
Hybrid ARM23,206
 24,960
 0.1% —% 4.9% 24,481
 163
Other P&IOther P&I47,060 49,742 12.8 %— %6.5 %51,956 — 232 
Interest-only2,992,862
 207,962
 1.1% —% 2.2% 227,909
 74
Interest-only1,665,968 117,454 13.6 %— %3.8 %116,302 (9,403)71 
Agency Derivatives621,549
 101,284
 0.6% —% 5.2% 91,740
 160
Agency Derivatives217,851 24,068 14.1 %— %6.7 %27,360 — 212 
Total Agency RMBS$19,924,614
 $17,655,655
 100.0% 88.5%   $17,643,809
  Total Agency RMBS$10,486,827 $8,726,015 96.9 %$8,907,634 $(9,403)
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 December 31, 2016
(dollars in thousands)Principal/ Current Face Carrying Value % of Agency Portfolio % Prepayment Protected Weighted Average Coupon Rate Amortized Cost Weighted Average Loan Age (months)
Agency RMBS AFS:             
30-Year Fixed             
3.0-3.5%$6,652,972
 $6,762,130
 59.6% 70.5% 3.3% $6,909,378
 5
4.0-4.5%3,237,989
 3,462,866
 30.5% 100.0% 4.2% 3,480,181
 42
≥ 5%455,030
 511,738
 4.5% 100.0% 5.5% 490,706
 96
 10,345,991
 10,736,734
 94.6% 81.4% 3.7% 10,880,265
 21
15-Year & Other Fixed234,949
 229,928
 2.0% 0.8% 4.6% 227,918
 141
Hybrid ARM28,582
 30,463
 0.3% —% 4.9% 30,165
 154
Interest-only2,961,895
 229,349
 2.0% —% 2.3% 246,373
 39
Agency Derivatives740,844
 126,599
 1.1% —% 5.2% 109,762
 152
Total Agency RMBS$14,312,261
 $11,353,073
 100.0% 77.0%   $11,494,483
  

Our non-Agency securities yields are expected to increase if prepayment rates on such assets exceed our prepayment assumptions. To the extent that prepayment speeds increase due to macroeconomic factors, we expect to benefit from the ability to recognize the income from the heavily discounted prices that principally arose from credit or payment default expectations.
The following tables provide discount information on our non-Agency securities portfolio:
 September 30, 2017
(in thousands)Principal and Interest Securities Interest-Only Securities Total
 Senior Mezzanine  
Face Value$2,161,983
 $1,210,506
 $165,763
 $3,538,252
Unamortized discount       
Designated credit reserve(401,820) (123,867) —
 (525,687)
Unamortized net discount(400,656) (255,774) (159,830) (816,260)
Amortized Cost$1,359,507
 $830,865
 $5,933
 $2,196,305

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December 31, 2021
(dollars in thousands)Principal/ Current FaceCarrying Value
Weighted Average CPR (1)
% Prepayment ProtectedGross Weighted Average Coupon RateAmortized CostAllowance for Credit LossesWeighted Average Loan Age (months)
Agency RMBS AFS:
30-Year Fixed
≤ 2.5%$1,243,928 $1,271,382 5.9 %— %3.3 %$1,272,323 $— 3 
3.0%1,316,662 1,384,176 9.6 %100.0 %3.7 %1,381,936 — 8 
3.5%739,922 789,499 27.3 %100.0 %4.2 %769,989 — 29 
4.0%1,421,793 1,543,595 26.5 %100.0 %4.6 %1,478,444 — 49 
4.5%1,307,504 1,435,877 27.7 %100.0 %5.0 %1,373,076 — 47 
≥ 5.0%325,485 361,746 37.6 %98.0 %5.9 %344,543 — 84 
6,355,294 6,786,275 20.5 %81.2 %4.3 %6,620,311 — 31 
Other P&I56,069 62,228 53.9 %— %6.5 %61,739 — 224 
Interest-only3,198,447 300,896 20.2 %— %3.6 %305,577 (12,851)47 
Agency Derivatives247,101 40,911 18.6 %— %6.7 %33,237 — 206 
Total Agency RMBS$9,856,911 $7,190,310 76.6 %$7,020,864 $(12,851)
____________________
 December 31, 2016
(in thousands)Principal and Interest Securities Interest-Only Securities Total
 Senior Mezzanine  
Face Value$1,622,604
 $924,000
 $185,535
 $2,732,139
Unamortized discount       
Designated credit reserve(315,009) (52,428) —
 (367,437)
Unamortized net discount(377,017) (250,786) (181,172) (808,975)
Amortized Cost$930,578
 $620,786
 $4,363
 $1,555,727
(1)Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end.


Credit losses
AlthoughOur MSR business offers attractive spreads and has many risk reducing characteristics when paired with our Agency portfolio is supported by U.S. government agency and federally chartered corporation guarantees of payment of principal and interest, we are exposed to credit risk in our non-Agency securities, commercial real estate assets and residential mortgage loans.
RMBS portfolio. The credit support built into non-Agency securities deal structures is designed to provide a level of protection from potential credit losses for more senior tranches. We evaluate credit risk on our non-Agency investments through a comprehensive asset selection process, which is predominantly focused on quantifying and pricing credit risk, including extensive initial modeling and scenario analysis. In addition, the discounted purchase prices paid for our non-Agency securities provide additional insulation from credit losses in the event we receive less than 100% of par on such assets. At purchase, we estimate the portion of the discount we do not expect to recover and factor that into our expected yield and accretion methodology. We may also record an other-than-temporary impairment, or OTTI, for a portion of our investment in a securityfollowing table summarizes activity related to the extent we believe thatunpaid principal balance, or UPB, of loans underlying our MSR portfolio for the amortized cost exceeds the present value of expected future cash flows. We review our non-Agency securities on an ongoing basis using quantitative and qualitative analysis of the risk-adjusted returns on such investments and through on-going asset surveillance. Nevertheless, unanticipated credit losses could occur, adversely impacting our operating results.
We evaluate credit risk on our commercial real estate assets through a comprehensive asset selection process, which includes valuing the underlying collateral property as well as the financial and operating capability of the borrower, borrowing entity or loan sponsor. We also assess the financial wherewithal of any loan guarantors, the borrower’s competency in managing and operating the properties,three months ended June 30, 2022, and the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. We evaluate each commercial real estate asset for impairment at least quarterly and may record an allowance to reduce the carrying value of the asset to the present value of expected future cash flows, if deemed impaired.four immediately preceding quarters:
We evaluate and review credit risk on our residential mortgage loans on an ongoing basis using quantitative and qualitative analysis and through on-going asset surveillance.
Three Months Ended
(in thousands)June 30,
2022		March 31,
2022		December 31,
2021		September 30,
2021		June 30,
2021
UPB at beginning of period$229,415,913 $193,770,566 $194,393,942 $185,209,738 $179,014,244 
Purchases of mortgage servicing rights5,720,323 45,136,996 13,562,240 29,347,318 22,983,402 
Sales of mortgage servicing rights— — 9,065 (3,633,709)— 
Scheduled payments(1,697,237)(1,572,871)(1,441,835)(1,407,996)(1,283,474)
Prepaid(6,026,461)(8,249,432)(11,966,741)(14,564,141)(15,119,403)
Other changes(338,125)330,654 (786,105)(557,268)(385,031)
UPB at end of period$227,074,413 $229,415,913 $193,770,566 $194,393,942 $185,209,738 

Counterparty exposure and leverage ratio
We monitor counterparty exposure in our broker, banking and lending counterparties on a daily basis. We believe our broker and banking counterparties are well-capitalized organizations, and we attempt to manage our cash balances across these organizations to reduce our exposure to aany single counterparty. We include in the following discussion the obligations and borrowing capacity of Granite Point due to its consolidation on our condensed consolidated balance sheet; however, we do not have access to their cash nor do we have any obligation to fund Granite Point’s investments or obligations with respect to Granite Point’s financing arrangements.
As of SeptemberJune 30, 2017,2022, we had entered into repurchase agreements with 3339 counterparties, 2521 of which had outstanding balances at SeptemberJune 30, 2017, including five facilities that provide both short- and long-term financing for our commercial real estate collateral with outstanding balances at September 30, 2017.2022. In addition, we held short- and long-term secured advances from the FHLB, short-term borrowings under revolving credit facilities, long-term term notes payable and long-term unsecured convertible senior notes. As of SeptemberJune 30, 2017, we had a total consolidated debt-to-equity ratio of 5.7:1.0. The2022, the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR and Agency Derivatives, only, which includes unsecured borrowings under convertible senior notes, was 5.0:3.8:1.0. We believe the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR and Agency Derivatives is the most meaningful debt-to-equity measure as collateralized borrowings on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity.

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As of SeptemberJune 30, 2017,2022, we held $539.4$511.9 million in cash and cash equivalents, approximately $1.9$1.4 billion of unpledged AFS securities and Agency derivatives, which includes $1.3 billion of unsettled Agency RMBS purchases, and $7.6 million of unpledged Agency securities and derivatives and $223.7 million of unpledged non-Agency securities and retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities and retained interests of approximately $145.6$26.4 million. We also held approximately $89.2 million of unpledged mezzanine commercial real estate loans and $51.5 million of unpledged commercial real estate first mortgages, and had an overall estimated unused borrowing capacity on unpledged commercial real estate assets of approximately $82.2 million, which may be used to fund Granite Point’s target assets. As of SeptemberJune 30, 2017,2022, we held approximately $770.0$46.9 million of unpledged MSR and $64.7 million of unpledged servicing advances. Overall, we had an overall estimated unused committed borrowing capacity on unpledged MSR asset and servicing advance financing facilities of approximately $50.0 million. We also held approximately $31.2$218.8 million of unpledged residential mortgage loans held-for-sale, for which we had no unused borrowing capacity.and $170.8 million, respectively. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes. If borrowing rates and collateral requirements change in the near term, we believe we are subject to less earnings volatility than if we carried higher leverage.
We also monitor exposure to our MSR and mortgage loan counterparties. In connection with our previous securitization transactions, we were required to make certain representations and warranties to the investors in the RMBS we issued. We may also be required to make representations and warranties to investors in the loans underlying the MSR we own; however, some of our MSR were purchased on a bifurcated basis, meaning the representation and warranty obligations remain with the seller. If the representations and warranties we make prove to be inaccurate, we may be obligated to repurchase certain mortgage loans, which may impact the profitability of our portfolio. Although we obtain similar representations and warranties from the counterparty from which we acquired the relevant asset, if those representations and warranties do not directly mirror those we make to the investor, or if we are unable to enforce the representations and warranties against the counterparty for a variety of reasons, including the financial condition or insolvency of the counterparty, we may not be able to seek indemnification from our counterparties for any losses attributable to the breach.

LIBOR transition
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 complete. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity, evaluating the related risks and our exposure, and have already amended terms to transition to an alternative benchmark, where necessary. All of our financing arrangements and derivative instruments that incorporate LIBOR as the referenced rate either mature prior to the phase out of LIBOR or have provisions in place that provide for an alternative to LIBOR upon its phase-out. Additionally, each series of our 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.

Summary of Results of Operations and Financial Condition
All per share amounts,Our GAAP net loss attributable to common shares outstandingstockholders was $86.2 million and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.
Our GAAP net income attributable to common stockholders was $93.2$185.4 million ($(0.25) and $169.5 million ($0.52 and $0.97$0.51 per diluted weighted average share) for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, as compared to GAAP net loss attributable to common stockholders of $131.7 million and GAAP net income attributable to common stockholders of $117.8$91.2 million ($(0.48) and $11.9 million ($0.68 and $0.07$0.32 per diluted weighted average share) for the three and ninesix months ended SeptemberJune 30, 2016.2021, respectively.
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding Agency interest-onlycertain AFS securities for which we have elected the fair value option and GSEsecurities with an allowance for credit risk transfer securities,losses, do not impact our GAAP net (loss) income or taxable income but are recognized on our condensed consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive (loss) income.” As a result of this fair value accounting through stockholders’ equity, we expect our net income to have less significant fluctuations and result in less U.S. GAAP to taxable income timing differences, than if the portfolio were accounted for as trading instruments. For the three and ninesix months ended SeptemberJune 30, 2017,2022, net unrealized gainslosses on AFS securities recognized as other comprehensive income,loss, net of tax, were $68.4$4.2 million and $223.8$336.1 million, respectively. This, combined with GAAP net loss attributable to common stockholders of $86.2 million and GAAP net income attributable to common stockholders of $93.2$185.4 million for the three and $169.5 million,six months ended June 30, 2022, respectively, resulted in comprehensive incomeloss attributable to common stockholders of $161.6$90.4 million and $393.3$150.7 million for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively. For the three and ninesix months ended SeptemberJune 30, 2016,2021, net unrealized gainslosses on AFS securities recognized as other comprehensive income,loss, net of tax, were $18.7$62.9 million and $179.4$334.4 million, respectively. This, combined with GAAP net loss attributable to common stockholders of $131.7 million and GAAP net income attributable to common stockholders of $117.8 million and $11.9$91.2 million, resulted in comprehensive incomeloss attributable to common stockholders of $136.5$194.6 million and $191.3$243.1 million for the three and ninesix months ended SeptemberJune 30, 2016,2021, respectively.
Our book value per common share for U.S. GAAP purposes was $20.12$5.10 at SeptemberJune 30, 2017, an increase2022, a decrease from $19.56 book value$5.87 per common share at December 31, 2016. During this nine month period,2021. For the six months ended June 30, 2022, we recognized comprehensive incomeloss attributable to common stockholders of $393.3$150.7 million and declared common dividends of $117.7 million, which drove the overall increasedecrease in book value, offset by common dividends declared of $268.7 million.

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The following tables present the components of our comprehensive incomeloss for the three and ninesix months endedSeptember June 30, 20172022 and 2016:2021:
(in thousands, except share data)Three Months EndedSix Months Ended
Income Statement Data:June 30,June 30,
2022202120222021
(unaudited)(unaudited)
Interest income:
Available-for-sale securities$55,399 $43,092 $100,046 $98,744 
Other1,604 351 1,803 808 
Total interest income57,003 43,443 101,849 99,552 
Interest expense:
Repurchase agreements19,269 6,981 27,612 15,451 
Revolving credit facilities9,106 7,075 14,782 11,770 
Term notes payable3,925 3,225 7,181 6,436 
Convertible senior notes4,801 7,126 9,843 13,476 
Total interest expense37,101 24,407 59,418 47,133 
Net interest income19,902 19,036 42,431 52,419 
Other (loss) income:
(Loss) gain on investment securities(197,719)(41,519)(250,061)91,349 
Servicing income157,526 112,816 294,152 219,935 
Gain (loss) on servicing asset85,557 (268,051)496,181 59,387 
Gain (loss) on interest rate swap and swaption agreements32,734 24,648 (5,307)9,049 
(Loss) gain on other derivative instruments(101,273)51,312 (203,035)(224,699)
Other (loss) income(73)41 (117)(5,701)
Total other (loss) income(23,248)(120,753)331,813 149,320 
Expenses:
Servicing expenses22,991 18,680 47,695 43,627 
Compensation and benefits11,019 11,259 23,212 19,447 
Other operating expenses9,152 7,218 15,777 14,705 
Total expenses43,162 37,157 86,684 77,779 
(Loss) income before income taxes(46,508)(138,874)287,560 123,960 
Provision for (benefit from) income taxes25,912 (20,914)74,710 1,763 
Net (loss) income(72,420)(117,960)212,850 122,197 
Dividends on preferred stock13,748 13,747 27,495 30,963 
Net (loss) income attributable to common stockholders$(86,168)$(131,707)$185,355 $91,234 
Basic (loss) earnings per weighted average common share$(0.25)$(0.48)$0.54 $0.33 
Diluted (loss) earnings per weighted average common share$(0.25)$(0.48)$0.51 $0.32 
Dividends declared per common share$0.17 $0.17 $0.34 $0.34 
Weighted average number of shares of common stock:
Basic344,277,723 273,718,561 344,138,889 273,714,684 
Diluted344,277,723 273,718,561 384,341,891 305,999,203 
50
(in thousands, except share data) Three Months Ended Nine Months Ended
Income Statement Data: September 30, September 30,
  2017 2016 2017 2016
Interest income: (unaudited) (unaudited)
Available-for-sale securities $164,169
 $111,393
 $449,908
 $292,333
Commercial real estate assets 30,595
 15,907
 80,005
 40,279
Residential mortgage loans held-for-investment in securitization trusts 29,865
 33,495
 92,319
 100,765
Residential mortgage loans held-for-sale 479
 7,627
 1,380
 19,789
Cash and cash equivalents 1,408
 440
 3,087
 1,235
Total interest income 226,516
 168,862
 626,699
 454,401
Interest expense:        
Repurchase agreements 71,754
 27,056
 158,065
 65,782
Collateralized borrowings in securitization trusts 23,970
 26,422
 74,199
 70,965
Federal Home Loan Bank advances 10,317
 6,744
 30,554
 18,804
Revolving credit facilities 701
 128
 1,727
 128
Convertible senior notes 4,745
 —
 13,157
 —
Total interest expense 111,487
 60,350
 277,702
 155,679
Net interest income 115,029
 108,512
 348,997
 298,722
Other-than-temporary impairment losses —
 (1,015) (429) (1,822)
Other income (loss):        
Gain (loss) on investment securities 5,618
 28,290
 (15,485) 66,095
(Loss) gain on interest rate swap and swaption agreements (207) 5,584
 (66,990) (132,608)
Loss on other derivative instruments (18,924) (12,028) (66,328) (44,064)
Servicing income 57,387
 38,708
 148,468
 108,657
Loss on servicing asset (29,245) (33,451) (90,440) (211,426)
Gain on residential mortgage loans held-for-sale 355
 (889) 2,149
 17,648
Other income (loss) 8,076
 5,757
 18,904
 (977)
Total other income (loss) 23,060
 31,971
 (69,722) (196,675)
Expenses:        
Management fees 13,276
 11,387
 36,518
 35,268
Servicing expenses 8,893
 9,073
 26,116
 24,510
Securitization deal costs —
 2,080
 —
 6,241
Other operating expenses 16,526
 14,780
 51,934
 47,280
Restructuring charges —
 1,189
 —
 1,189
Total expenses 38,695
 38,509
 114,568
 114,488
Income (loss) before income taxes 99,394
 100,959
 164,278
 (14,263)
Benefit from income taxes (5,344) (16,827) (21,103) (26,138)
Net income 104,738
 117,786
 185,381
 11,875
Net income attributable to noncontrolling interest 2,674
 —
 2,714
 —
Net income attributable to Two Harbors Investment Corp. 102,064
 117,786
 182,667
 11,875
Dividends on preferred stock 8,888
 —
 13,173
 —
Net income attributable to common stockholders $93,176
 $117,786
 $169,494
 $11,875

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(in thousands)Three Months EndedSix Months Ended
Income Statement Data:June 30,June 30,
2022202120222021


(unaudited)(unaudited)
Comprehensive loss:
Net (loss) income$(72,420)$(117,960)$212,850 $122,197 
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities(4,211)(62,899)(336,056)(334,352)
Other comprehensive loss(4,211)(62,899)(336,056)(334,352)
Comprehensive loss(76,631)(180,859)(123,206)(212,155)
Dividends on preferred stock13,748 13,747 27,495 30,963 
Comprehensive loss attributable to common stockholders$(90,379)$(194,606)$(150,701)$(243,118)
(in thousands)June 30,
2022		December 31,
2021
Balance Sheet Data:
(unaudited)
Available-for-sale securities$8,789,437 $7,161,703 
Mortgage servicing rights$3,226,191 $2,191,578 
Total assets$13,737,450 $12,114,305 
Repurchase agreements$7,958,247 $7,656,445 
Revolving credit facilities$825,761 $420,761 
Term notes payable$397,383 $396,776 
Convertible senior notes$281,711 $424,827 
Total stockholders’ equity$2,483,624 $2,743,953 
(in thousands) Three Months Ended Nine Months Ended
Income Statement Data: September 30, September 30,
  2017 2016 2017 2016

 (unaudited) (unaudited)
Basic earnings per weighted average common share $0.53
 $0.68
 $0.97
 $0.07
Diluted earnings per weighted average common share $0.52
 $0.68
 $0.97
 $0.07
Dividends declared per common share $0.52
 $0.46
 $1.54
 $1.38
Weighted average number of shares of common stock:        
Basic 174,488,296
 173,813,613
 174,415,232
 174,109,117
Diluted 188,907,356
 173,813,613
 174,415,232
 174,109,117
Comprehensive income:        
Net income $104,738
 $117,786
 $185,381
 $11,875
Other comprehensive income, net of tax:        
Unrealized gain on available-for-sale securities 68,433
 18,746
 223,823
 179,382
Other comprehensive income 68,433
 18,746
 223,823
 179,382
Comprehensive income 173,171
 136,532
 409,204
 191,257
Comprehensive income attributable to noncontrolling interest 2,682
 —
 2,724
 —
Comprehensive income attributable to Two Harbors Investment Corp. 170,489
 136,532
 406,480
 191,257
Dividends on preferred stock 8,888
 —
 13,173
 —
Comprehensive income attributable to common stockholders $161,601
 $136,532
 $393,307
 $191,257

(in thousands) September 30,
2017		 December 31,
2016
Balance Sheet Data:  
  (unaudited)  
Available-for-sale securities $20,199,094
 $13,128,857
Total assets $27,803,774
 $20,112,056
Repurchase agreements $18,297,392
 $9,316,351
Federal Home Loan Bank advances $1,998,762
 $4,000,000
Total stockholders’ equity $3,941,564
 $3,401,111
Total equity $4,131,381
 $3,401,111

Results of Operations
The following analysis focuses on financial results during the three and ninesix months endedSeptember June 30, 20172022 and 2016.2021.
Interest Income
Interest income increased from $168.9$43.4 million and $454.4$99.6 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively,2021 to $226.5$57.0 million and $626.7$101.8 million for the same periods in 20172022 due to the growth of our AFS securitieshigher coupon and commercial real estate portfolios, offset by the sale of substantially all of our remaining prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016.lower amortization recognized on Agency RMBS due to slower prepayments.
Interest Expense
Interest expense increased from $60.4$24.4 million and $155.7$47.1 million for the three and ninesix months ended SeptemberJune 30, 20162021, respectively, to $111.5$37.1 million and $277.7$59.4 million for the same periods in 20172022 due primarily to increasedthe higher interest rate environment as well as an increase in financing on AFS securities and commercial real estate assets due to purchases, increasesMSR, offset by a decrease in the borrowing rates offered by counterparties, increased interest expensefinancing on collateralized borrowings due to sales of retained interests from our on-balance sheet securitizations, the addition of revolving credit facilities for financing of mortgage servicing rightsa smaller Agency RMBS portfolio and the issuancematurity of our convertible senior notes during the nine months ended September 30, 2017.

due 2022.
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Net Interest Income
The following tables present the components of interest income and average annualized net asset yield earned by asset type, the components of interest expense and average annualized cost of funds on borrowings incurred by liability and/or collateral type, and net interest income and average annualizednet interest spread for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
(dollars in thousands)
Average Balance (1)
Interest Income/Expense
Net Yield/Cost of Funds (2)
Average Balance (1)
Interest Income/Expense
Net Yield/Cost of Funds (2)
Interest-earning assets:
Available-for-sale securities$7,248,502 $55,399 3.1 %$7,275,550 $100,046 2.8 %
Other— 1,604 — %— 1,803 — %
Total interest income/net asset yield$7,248,502 $57,003 3.1 %$7,275,550 $101,849 2.8 %
Interest-bearing liabilities:
Borrowings collateralized by:
Available-for-sale securities$7,012,474 $12,955 0.7 %$7,301,518 $17,742 0.5 %
Agency Derivatives (3)
27,074 93 1.4 %30,997 158 1.0 %
Mortgage servicing rights and advances (4)
1,628,474 19,252 4.7 %1,420,473 31,675 4.5 %
Unsecured borrowings:
Convertible senior notes281,608 4,801 6.8 %292,637 9,843 6.7 %
Total interest expense/cost of funds$8,949,630 $37,101 1.7 %$9,045,625 $59,418 1.3 %
Net interest income/spread (5)
$19,902 1.4 %$42,431 1.5 %
Three Months Ended June 30, 2021Six Months Ended June 30, 2021
(dollars in thousands)
Average Balance (1)
Interest Income/Expense
Net Yield/Cost of Funds (2)
Average Balance (1)
Interest Income/Expense
Net Yield/Cost of Funds (2)
Interest-earning assets
Available-for-sale securities$9,073,951 $43,092 1.9 %$10,512,788 $98,744 1.9 %
Other— 351 — %— 808 — %
Total interest income/net asset yield$9,073,951 $43,443 1.9 %$10,512,788 $99,552 1.9 %
Interest-bearing liabilities
Borrowings collateralized by:
Available-for-sale securities$9,649,189 $5,687 0.2 %$11,217,274 $14,051 0.3 %
Agency Derivatives (3)
44,067 89 0.8 %46,645 195 0.8 %
Mortgage servicing rights and advances (4)
1,012,706 11,505 4.5 %909,365 19,411 4.3 %
Unsecured borrowings:
Convertible senior notes423,613 7,126 6.7 %399,852 13,476 6.7 %
Total interest expense/cost of funds$11,129,575 $24,407 0.9 %$12,573,136 $47,133 0.7 %
Net interest income/spread (5)
$19,036 1.0 %$52,419 1.2 %
____________________
(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on other assets.
(2)Cost of funds does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in gain (loss) on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive loss. For the three and six months ended June 30, 2022, our total average cost of funds on the assets assigned as collateral for borrowings shown in the table above, including interest spread expense associated with interest rate swaps, was 1.8% and 1.4%, respectively, compared to 0.8% and 0.7% for the same periods in 2021.
(3)Yields on Agency Derivatives not shown as interest income is included in (loss) gain on other derivative instruments in the condensed consolidated statements of comprehensive loss.
(4)Yields on mortgage servicing rights and advances not shown as these assets do not earn interest.
(5)Net interest spread does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in gain (loss) on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive loss. For the three and six months ended June 30, 2022, our total average net interest rate spread on the assets and liabilities shown in the table above, including interest spread expense associated with interest rate swaps, was 1.3% and 1.4%, respectively, compared to 1.1% and 1.2% for the three and nine months endedSeptember 30, 2017 and 2016:same periods in 2021.

52
 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
(dollars in thousands)
Average Balance (1)
 Interest Income/Expense 
Net Yield/Cost of Funds (2)
 
Average Balance (1)
 Interest Income Net Asset Yield
Interest-earning assets           
Agency available-for-sale securities$16,470,462
 $122,130
 3.0% $14,805,036
 $333,288
 3.0%
Non-Agency available-for-sale securities2,063,882
 42,039
 8.1% 1,839,868
 116,620
 8.5%
Commercial real estate assets1,924,222
 30,595
 6.4% 1,702,824
 80,005
 6.3%
Residential mortgage loans held-for-investment in securitization trusts3,068,728
 29,865
 3.9% 3,159,352
 92,319
 3.9%
Residential mortgage loans held-for-sale34,082
 479
 5.6% 36,324
 1,380
 5.1%
Other  1,408
     3,087
 

Total interest income/net asset yield$23,561,376
 $226,516
 3.8% $21,543,404
 $626,699
 3.9%
Interest-bearing liabilities           
Repurchase agreements, FHLB advances and borrowings in securitization trusts collateralized by:           
Agency available-for-sale securities$15,809,657
 $56,190
 1.4% $14,084,616
 $127,495
 1.2%
Non-Agency available-for-sale securities1,592,472
 11,950
 3.0% 1,412,781
 30,716
 2.9%
Commercial real estate assets1,239,542
 12,427
 4.0% 1,175,731
 26,181
 3.0%
Residential mortgage loans held-for-investment in securitization trusts3,010,900
 25,056
 3.3% 3,096,905
 77,166
 3.3%
Residential mortgage loans held-for-sale—
 —
 —% —
 —
 —%
Agency derivatives79,106
 418
 2.1% 85,334
 1,260
 2.0%
Financing of mortgage servicing rights and other unassignable: (3)
          

Revolving credit facilities47,939
 701
 5.8% 38,092
 1,727
 6.0%
Convertible senior notes282,448
 4,745
 6.7% 268,886
 13,157
 6.5%
Total interest expense/cost of funds$22,062,064
 111,487
 2.0% $20,162,345
 277,702
 1.8%
Net interest income/spread (4)
  $115,029
 1.8%   $348,997
 2.1%

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 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
(dollars in thousands)
Average Balance (1)
 Interest Income/Expense 
Net Yield/Cost of Funds (2)
 
Average Balance (1)
 Interest Income/Expense 
Net Yield/Cost of Funds (2)
Interest-earning assets           
Agency available-for-sale securities$11,934,779
 $80,267
 2.7% $9,624,519
 $204,860
 2.8%
Non-Agency available-for-sale securities1,424,635
 31,126
 8.7% 1,400,498
 87,473
 8.3%
Commercial real estate assets1,033,049
 15,907
 6.2% 861,090
 40,279
 6.2%
Residential mortgage loans held-for-investment in securitization trusts3,472,738
 33,495
 3.9% 3,475,782
 100,765
 3.9%
Residential mortgage loans held-for-sale741,589
 7,627
 4.1% 645,189
 19,789
 4.1%
Other  440
     1,235
 

Total interest income/net asset yield$18,606,790
 $168,862
 3.6% $16,007,078
 $454,401
 3.8%
Interest-bearing liabilities           
Repurchase agreements, FHLB advances and borrowings in securitization trusts collateralized by:           
Agency available-for-sale securities$11,431,995
 $21,277
 0.7% $9,156,113
 $49,101
 0.7%
Non-Agency available-for-sale securities1,172,717
 7,207
 2.5% 1,139,236
 20,482
 2.4%
Commercial real estate assets647,967
 2,968
 1.8% 507,613
 6,884
 1.8%
Residential mortgage loans held-for-investment in securitization trusts3,389,061
 27,379
 3.2% 3,372,159
 75,413
 3.0%
Residential mortgage loans held-for-sale503,204
 950
 0.8% 438,516
 2,402
 0.7%
Agency derivatives112,283
 441
 1.6% 113,216
 1,269
 1.5%
Financing of mortgage servicing rights and other unassignable: (3)
          

Revolving credit facilities9,457
 128
 5.4% 3,175
 128
 5.4%
Convertible senior notes—
 —
 —% —
 —
 —%
Total interest expense/cost of funds$17,266,684
 60,350
 1.4% $14,730,028
 155,679
 1.4%
Net interest income/spread (4)
  $108,512
 2.2%   $298,722
 2.4%
____________________
(1)Average balance represents average amortized cost on AFS securities, commercial real estate assets and Agency Derivatives and average unpaid principal balance, adjusted for purchase price changes, on residential mortgage loans held-for-investment in securitization trusts and residential mortgage loans held-for-sale.
(2)Cost of funds does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in (loss) gain on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, our total average cost of funds on the assets assigned as collateral for borrowings shown in the table above, including interest spread expense associated with interest rate swaps, was 2.1% and 2.0%, respectively, compared to 1.5% and 1.6% for the same periods in 2016.
(3)Yields on mortgage servicing rights not shown as these assets do not earn interest.
(4)Net interest spread does not include the accrual and settlement of interest associated with interest rate swaps. In accordance with U.S. GAAP, those costs are included in (loss) gain on interest rate swap and swaption agreements in the condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2017, our total average net interest rate spread on the assets and liabilities shown in the table above, including interest spread expense associated with interest rate swaps, was 1.8% and 1.9%, respectively, compared to 2.2% and 2.3% for the same periods in 2016.

The increase in yields on Agency AFS securities for the three and ninesix months ended SeptemberJune 30, 2017,2022, as compared to the same periods in 2016,2021 was predominantly driven by purchaseslower amortization as a result of pools with higher yields and sales of pools with lower yields.slower prepayment speeds. The increase in cost of funds associated with the financing of Agency AFS securities for the three and ninesix months ended SeptemberJune 30, 2017,2022, as compared to the same periods in 2016, was the result of increases in the borrowing rates offered by counterparties.

68

The decrease in yields on non-Agency securities for the three months ended September 30, 2017, as compared to the same period in 2016, was predominantly driven by purchases of non-Agency securities at lower yields than our existing portfolio. The increase in yields on non-Agency securities for the nine months ended September 30, 2017, as compared to the same period in 2016,2021, was due to continued improvement in legacy non-Agency fundamentals, credit performance and prepayments. The increase in cost of funds associated with the financing of non-Agency AFS securities for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was the result of increases in the borrowing rates offered by counterparties.
The increase in yields on commercial real estate assets for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was predominantly driven by the origination of commercial real estate first mortgages at higher yields. The increase in cost of funds on commercial real estate assets for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was primarily the result of increases in borrowing rates and secondarily the result of an increase in the proportion of total borrowings financed through repurchase agreements (relative to FHLB advances).
Yields on residential mortgage loans held-for-investment in securitization trusts for the three and nine months ended September 30, 2017 were generally consistent with those for the same periods in 2016. The increase in cost of funds associated with the financing of residential mortgage loans held-for-investment in securitization trusts for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was primarily the result of the sale of retained interests from our on-balance sheet securitizations in 2016, thereby increasing the amount of collateralized borrowings in securitization trusts.
The increase in yields on residential mortgage loans held-for-sale for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was due to the sale of substantially all of our remaining prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016. We did not have any financing of residential mortgage loans held-for-sale in place for the three and nine months ended September 30, 2017.rising interest rates.
The increase in cost of funds associated with the financing of Agency Derivatives for the three and ninesix months ended SeptemberJune 30, 2017,2022, as compared to the same periods in 2016,2021, was the result of increases in the borrowing rates offered by counterparties.rising interest rates.
The increase in cost of funds associated with the financing of MSR through revolving credit facilitiesassets and related servicing advance obligations for the three and ninesix months ended SeptemberJune 30, 2017,2022, as compared to the same periods in 2016,2021, was the result of increasesdue to rising interest rates and an increase in the borrowing rates offered by counterparties as well as increased amortizationuse of deferred debt issuance costs.revolving credit facility and repurchase agreement financing versus term notes financing, which carry lower rates. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our condensed consolidated balance sheets.
Our convertible senior notes were issued in January 2017, are unsecured and pay interest semiannually at a rate of 6.25% per annum. The cost of funds associated with our convertible senior notes also includes amortization of deferred debt issuance costs.for the three and six months ended June 30, 2022, as compared to the same periods in 2021, was consistent.
The following tables present the components of the yield earned by investment type on our AFS securities portfolio as a percentage of our average amortized cost of securities for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
 
Agency (1)
 Non-Agency Total 
Agency (1)
 Non-Agency Total
Gross yield/stated coupon4.1 % 3.7% 4.0 % 4.0 % 3.6% 4.0 %
Net (premium amortization) discount accretion(1.1)% 4.4% (0.5)% (1.0)% 4.9% (0.4)%
Net yield (2)
3.0 % 8.1% 3.5 % 3.0 % 8.5% 3.6 %
Three Months EndedSix Months Ended
Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016June 30,June 30,
Agency (1)
 Non-Agency Total 
Agency (1)
 Non-Agency Total
(in thousands)(in thousands)2022202120222021
Gross yield/stated coupon3.8 % 3.6% 3.8 % 4.0 % 3.5% 4.0 %Gross yield/stated coupon4.3 %4.7 %4.3 %4.4 %
Net (premium amortization) discount accretion(1.1)% 5.1% (0.5)% (1.2)% 4.8% (0.5)%Net (premium amortization) discount accretion(1.2)%(2.8)%(1.5)%(2.5)%
Net yield (2)(1)
2.7 % 8.7% 3.3 % 2.8 % 8.3% 3.5 %3.1 %1.9 %2.8 %1.9 %
____________________
(1)
(1)Excludes Agency Derivatives. For the three and nine months ended September 30, 2017, the average annualized net yield on total Agency RMBS, including Agency Derivatives, was 3.0% and 3.1%, respectively, compared to 2.8% and 3.0% for the same periods in 2016.
(2)These yields have not been adjusted for cost of delay and cost to carry purchase premiums.


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Other-Than-Temporary Impairments
We review each of our securities on a quarterly basis to determine if an OTTI charge is necessary. During the three and ninesix months ended SeptemberJune 30, 2017, we recorded $0.4 million2022, the average net yield on total RMBS, including Agency Derivatives, was 3.1% and 2.8%, respectively, compared to 1.9% for both of the same periods in other-than-temporary credit impairments2021. Yields have not been adjusted for cost of delay and cost to carry purchase premiums.

(Loss) Gain On Investment Securities
The following table presents the components of (loss) gain on one non-Agency security where the future expected cash flowsinvestment securities for the security were less than its amortized cost. We did not record any other-than-temporary credit impairments during the three months ended September 30, 2017. During the three and ninesix months ended SeptemberJune 30, 2016,2022 and 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Proceeds from sales$2,326,528 $2,549,602 $4,339,148 $4,600,545 
Amortized cost of securities sold(2,514,613)(2,532,087)(4,582,084)(4,516,832)
Total realized (losses) gains on sales(188,085)17,515 (242,936)83,713 
Provision for credit losses(537)(7,392)(1,651)(6,257)
Other(9,097)(51,642)(5,474)13,893 
(Loss) gain on investment securities$(197,719)$(41,519)$(250,061)$91,349 

In the ordinary course of our business, we recorded $1.0 millionmake investment decisions and $1.8 million, respectively,allocate capital in other-than-temporary credit impairmentsaccordance with our views on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. For further information about evaluating AFS securities for OTTI, refer to Note 4 - Available-for-Sale Securities, at Fair Value ofchanging risk/reward dynamics in the notes to the condensed consolidated financial statements.
Gain (Loss) on Investment Securities
During the threemarket and nine months ended September 30, 2017, we sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion, for net realized losses of $3.9 million and $21.0 million, respectively. During the three and nine months ended September 30, 2016, we sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion, for net realized gains of $31.8 million and $63.3 million, respectively.in our portfolio. We do not expect to sell assets on a frequent basis, but may sell assets to reallocate capital into new assets that we believe have higher risk-adjusted returns.
We use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses (within (loss) gain on investment securities).
The majority of the “other” component of (loss) gain on investment securities is related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option. For the three and ninesix months ended SeptemberJune 30, 2017, Agency interest-only mortgage-backed securities experienced a change in unrealized gains of $9.6 million and $5.5 million, respectively. For2022, the three and nine months ended September 30, 2016, Agency interest-only mortgage-backed securities and GSE credit risk transfer securities experienced a change in unrealized losses recognized were primarily due to faster prepayment assumptions.
53

Servicing Income
The following table presents the components of $2.7 million, respectively. The increase in change in unrealized gains (decrease in losses)servicing income for the three and ninesix months ended SeptemberJune 30, 2017,2022 and 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Servicing fee income$153,620 $111,083 $288,834 $216,248 
Ancillary and other fee income561 622 1,031 1,238 
Float income3,345 1,111 4,287 2,449 
Total$157,526 $112,816 $294,152 $219,935 

The increase in servicing income for the three and six months ended June 30, 2022, as compared to the same periods in 2016,2021, was predominantlydue to a higher portfolio balance, lower compensating interest and higher float income.
Gain (Loss) On Servicing Asset
The following table presents the components of gain (loss) on servicing asset for the three and six months ended June 30, 2022 and 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model$199,272 $(72,910)$724,185 $428,783 
Changes in fair value due to realization of cash flows (runoff)(113,715)(195,141)(228,004)(369,396)
Gain (loss) on servicing asset$85,557 $(268,051)$496,181 $59,387 

The increase in gain (decrease in loss) on servicing asset for the three and six months ended June 30, 2022, as compared to the same periods in 2021, was driven by lower prepayment expectations on Agency interest-only mortgage-backed securities.favorable change in valuation assumptions used in the fair valuation of MSR and a decrease in portfolio runoff.
Gain (Loss) Gain onOn Interest Rate Swap andAnd Swaption Agreements
ForThe following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and ninesix months ended SeptemberJune 30, 2017, we2022 and 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Net interest spread$(4,267)$2,399 $(5,008)$4,049 
Early termination, agreement maturation and option expiration gains246,211 8,642 189,947 2,292 
Change in unrealized (loss) gain on interest rate swap and swaption agreements, at fair value(209,210)13,607 (190,246)2,708 
Gain (loss) on interest rate swap and swaption agreements$32,734 $24,648 $(5,307)$9,049 

54

Net interest spread recognized $0.4 million and $10.9 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with our interest rate swaps. The expenses resultswaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixedfloating interest rate (OIS or SOFR) on an average $16.7 billion and $17.6 billion notional, respectively,positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. For the threeWe may elect to terminate certain swaps and nine months ended September 30, 2016, we recognized $4.3 million and $18.1 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associatedswaptions to align with our interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $14.5 billion and $14.8 billion notional, respectively, held to economically hedge/mitigateinvestment portfolio, interest rate exposure (or duration) risk.
During the three and nine months ended September 30, 2017, we terminated, had agreements may mature or had options may expire on 49 and 121 interest rate swap and swaption positions of $17.9 billion and $55.4 billion notional, respectively. Upon settlement of the early terminations and option expirations, we received $3.1 million and paid $19.5 millionresulting in full settlement of our net interest spread asset/liability and recognized $32.9 million and $68.9 million inthe recognition of realized gains on the swaps and swaptions for the three and nine months ended September 30, 2017, respectively,losses, including early termination penalties. During the three and nine months ended September 30, 2016, we terminated, had agreements mature or had options expire on 26 and 81 interest rate swap and swaption positions of $8.0 billion and $27.7 billion notional, respectively. Upon settlement of the early terminations and option expirations, we paid $0.7 million and $2.7 million in full settlement of our net interest spread liability and recognized $95.1 million and $119.5 million in realized losses on the swaps and swaptions for the three and nine months ended September 30, 2016, respectively, including early termination penalties. We elected to terminate certain swaps and swaptions during these periods to align with our investment portfolio.
Also included in our financial results for the three and nine months ended September 30, 2017, was the recognition of a change in unrealized valuation losses of $32.7 million and $125.0 million, respectively, on our interest rate swap and swaption agreements that were accounted for as trading instruments, compared to a change in unrealized valuation gains of $104.9 million and $5.1 million for the same periods in 2016. The change in fair value of interest rate swaps and swaptions during the three and six months ended June 30, 2022 and 2021 was a result of changes to LIBOR,floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates during the three and nine months ended September 30, 2017 and 2016.rates. Since these swaps and swaptions are used for purposes of hedging our interest rate exposure, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) are generally offset by unrealized losses and gains in our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive income,loss, net of tax, or to (loss) gain (loss) on investment securities, in the case of Agency interest-only securities.certain AFS securities for which we have elected the fair value option.

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(Loss) Gain On Other Derivative Instruments
The following table provides a summary of the total net interest spread and gains and losses associated with our interest rate swap and swaption positions:
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Net interest spread$(389) $(4,294) $(10,867) $(18,140)
Early termination, agreement maturation and option expiration gains (losses)32,906
 (95,061) 68,854
 (119,548)
Change in unrealized (loss) gain on interest rate swap and swaption agreements, at fair value(32,724) 104,939
 (124,977) 5,080
(Loss) gain on interest rate swap and swaption agreements$(207) $5,584
 $(66,990) $(132,608)

Loss on Other Derivative Instruments
Included in our financial results for the three and nine months ended September 30, 2017, was the recognition of $18.9 million and $66.3 million of losses, respectively,(losses) recognized on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, put and callfutures, options for TBAs, Markit IOS total return swapson futures, and inverse interest-only securities. Included within these results forsecurities during the three and ninesix months ended SeptemberJune 30, 2017, was the recognition of $2.8 million2022 and $10.0 million of interest income, net of accretion on inverse interest-only securities on an average amortized cost basis of $93.4 million and $96.7 million, respectively. The remainder represented realized and unrealized net gains (losses) on other derivative instruments. 2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2022202120222021
Interest income, net of accretion, on inverse interest-only securities$304 $1,309 $1,157 $3,184 
Realized and unrealized net gains (losses) on other derivative instruments (1)
(101,577)50,003 (204,192)(227,883)
(Loss) gain on other derivative instruments$(101,273)$51,312 $(203,035)$(224,699)
____________________
(1)As these derivative instruments are considered trading instruments, our financial results include both realized and unrealized gains (losses) associated with these instruments.
Included in
For further details regarding our financial results for the three and nine months ended September 30, 2016, was the recognitionuse of $12.0 million and $44.1 million of losses, respectively, on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, putrelated activity, refer to Note 7 - Derivative Instruments and call options for TBAs, Markit IOS total return swaps, credit default swaps and inverse interest-only securities. Included within these results for the three and nine months ended September 30, 2016, was the recognition of $4.0 million and $15.4 million of interest income, net of accretion on inverse interest-only securities on an average amortized cost basis of $119.0 million and $123.1 million, respectively. The remainder represented realized and unrealized net gains (losses) on other derivative instruments. Since our derivative instruments are generally used for purposes of hedging our interest rate and credit risk exposure, their unrealized valuation gains and losses are generally offset by unrealized losses and gains in our AFS securities and residential mortgage loan portfolios.
Servicing Income
For the three and nine months ended September 30, 2017, we recognized total servicing income from our MSR portfolio of $57.4 million and $148.5 million, respectively. These amounts include servicing fee income of $54.0 million and $141.9 million, ancillary and other fee income of $0.3 million and $0.6 million, and float income of $3.1 million and $6.0 million, respectively. For the three and nine months ended September 30, 2016, we recognized total servicing income of $38.7 million and $108.7 million, respectively. These amounts include servicing fee income of $37.2 million and $104.8 million, ancillary and other fee income of $0.4 million and $1.4 million, and float income of $1.0 million and $2.5 million, respectively. The increase in servicing income for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was the result of an increase in the size of our MSR portfolio.
Loss on Servicing Asset
For the three and nine months ended September 30, 2017, loss on servicing asset of $29.2 million and $90.4 million, respectively, includes a decrease in fair value of MSR due to realization of cash flows (runoff) of $28.6 million and $66.5 million, respectively, and a decrease in fair value of MSR due to changes in valuation inputs or assumptions of $0.2 million and $23.1 million, respectively. Additionally, we recognized losses on sales of MSR of $0.5 million and $0.8 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, loss on servicing asset of $33.5 million and $211.4 million, respectively, includes a decrease in fair value of MSR due to realization of cash flows (runoff) of $18.2 million and $52.8 million, respectively, and an increase in fair value of MSR due to changes in valuation inputs or assumptions of $3.8 million and a decrease in fair value of MSR due to changes in valuation inputs or assumptions of $139.6 million, respectively. The decrease in loss on servicing asset for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was predominantly driven by a decrease in prepayment speed assumptions, offset by portfolio runoff during the three and nine months ended September 30, 2017.

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Gain (Loss) on Residential Mortgage Loans Held-for-Sale
For the three and nine months ended September 30, 2017, we recorded gains of $0.4 million and $2.1 million, respectively, on residential mortgage loans held-for-sale. For the three and nine months ended September 30, 2016, we recorded losses of $0.9 million and gains of $17.6 million, respectively, on residential mortgage loans held-for-sale. The increase in gains (decrease in losses) on residential mortgage loans held-for-sale during the three months ended September 30, 2017, as compared to the same period in 2016, was driven by increases in interest rates during the three months ended September 30, 2017. The decrease in gains on residential mortgage loans held-for-sale during the nine months ended September 30, 2017, as compared to the same periods in 2016, was due to the sale of substantially all of our prime nonconforming residential mortgage loans held-for-sale during the latter half of 2016.
Other Income (Loss)
For the three and nine months ended September 30, 2017, we recorded other income of $8.1 million and $18.9 million, which includes $14.7 million and $45.5 million in gains on residential mortgage loans held-for-investment in securitization trusts, $7.9 million and $30.7 million in losses on collateralized borrowings in securitization trusts, $1.2 million and $4.0 million of dividend income on our FHLB stock and $0.1 million and $0.1 million, respectively, of other miscellaneous income. For the three and nine months ended September 30, 2016, we recorded other income of $5.8 million and other loss of $1.0 million, which includes $24.6 million and $63.7 million in gains on residential mortgage loans held-for-investment in securitization trusts, $20.3 million and $68.9 million in losses on collateralized borrowings in securitization trusts, $1.4 million and $4.1 million of dividend income on our FHLB stock and $0.1 million and $0.1 million, respectively, of other miscellaneous income. The increase in other income for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, was driven by increases in interest rates during the three and nine months ended September 30, 2017.
Management Fees
We incurred management fees of $10.2 million and $33.3 million for the three and nine months ended September 30, 2017 and $11.4 million and $35.3 million for the three and nine months ended September 30, 2016, respectively, which are payable to PRCM Advisers, our external manager, under our management agreement. The management fee is calculated based on our stockholders’ equity with certain adjustments outlined in the management agreement.
Additionally, in accordance with Granite Point’s management agreement with Pine River, we incurred management fees of $3.1 million and $3.2 million for the three and nine months ended September 30, 2017, respectively. Granite Point’s management fee is also calculated based on its equity with certain adjustments outlined in its management agreement. See further discussion of the management fee calculations in Note 25 - Related Party Transactions of the notesHedging Activities to the condensed consolidated financial statements.statements, included in this Quarterly Report on Form 10-Q.
Servicing
Expenses
ForThe following table presents the components of expenses for the three and ninesix months ended September June 30, 2017, we recognized $8.9 million2022 and $26.1 million, respectively, in2021:
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands, except share data)2022202120222021
Servicing expenses$22,991 $18,680 $47,695 $43,627 
Operating expenses:
Compensation and benefits:
Non-cash equity compensation expenses$3,461 $4,611 $7,622 $6,401 
All other compensation and benefits7,558 6,648 15,590 13,046 
Total compensation and benefits$11,019 $11,259 $23,212 $19,447 
Other operating expenses:
Nonrecurring expenses$2,428 $1,397 $3,117 $3,368 
All other operating expenses6,724 5,821 12,660 11,337 
Total other operating expenses$9,152 $7,218 $15,777 $14,705 
Annualized operating expense ratio3.1 %2.8 %2.9 %2.4 %
Annualized operating expense ratio, excluding non-cash equity compensation and other nonrecurring expenses2.2 %1.9 %2.1 %1.7 %

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We incur servicing expenses generally related to the subservicing of MSR, commercial real estate assets and residential mortgage loans, compared to $9.1 million and $24.5 million for the same periods in 2016.MSR. The decreaseincrease in servicing expenses during the three and six months ended SeptemberJune 30, 2017,2022, as compared to the same periods in 2021, was a result of an increase in portfolio size and subservicing fees.
The increase in total operating expenses during the three months ended June 30, 2022, as compared to the same period in 2016,2021, was the result of efficiencies gaineddriven by repositioning our MSR portfolio across our subservicer networkhigher cash compensation and benefits, nonrecurring and other operating expenses, offset by lower non-cash equity compensation expense. The increase in total operating expenses during the threesix months ended June 30, 2017 as well as the release of MSR representation and warranty reserves due to a higher concentration of MSR purchased on a bifurcated basis (meaning the representation and warranty obligations remain with the seller). The increase in servicing expenses during the nine months ended September 30, 2017,2022, as compared to the same periodsperiod in 2016,2021, was the result of an increase in the size of our MSRdriven by higher total compensation and commercial real estate portfolios as well as the recognition of de-boardingbenefits and transfer fees related to our subservicer network repositioning during the nine months ended September 30, 2017, offset by the release of MSR representation and warranty reserves due to a refinement of the reserve method and a higher concentration of MSR purchased on a bifurcated basis.
Securitization Deal Costs
Due to the discontinuation of our mortgage loan conduit and securitization business, we did not record any securitization deal costs related to the sponsoring of securitization trusts during the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, we recognized net upfront securitization deal costs of $2.1 million and $6.2 million. These costs are included when evaluating the economics of a securitization; however, the election of the fair value option for the assets and liabilities held in the securitization trusts requires the expense to be recognized upfront on the condensed consolidated statements of comprehensive income. We do not expect to incur securitization deal costs going forward.

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Other Operating Expenses
For the three and nine months ended September 30, 2017, we recognized $16.5 million and $51.9 million of other operating expenses, which, for the nine months ended September 30, 2017, includes $2.2 million of transaction expenses related to the initial public offering of Granite Point stock. Excluding these transaction expenses, our annualized expense ratio was 1.7% and 1.8% of average common equity for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, we recognized $14.8 million and $47.3 million of other operating expenses, which represents an annualized expense ratio of 1.7% and 1.8% of average common equity, respectively. Our operating expense ratios for the three and nine months ended September 30, 2017 were consistent with those for the the three and nine months ended September 30, 2016.
Includedoffset by a slight decrease in other operating expenses are direct and allocated costs incurred by PRCM Advisers on our behalf and reimbursed by us. For the three and nine months ended September 30, 2017, these direct and allocated costs totaled approximately $4.8 million and $18.8 million, respectively, compared to $6.3 million and $19.1 million for the same periods in 2016. Included in these reimbursed costs was compensation paid to employees of Pine River serving as our principal financial officer and general counsel of $0.2 million and $1.6 million for the three and nine months ended September 30, 2017 and $0.2 million and $1.6 million for the three and nine months ended September 30, 2016, respectively. The allocation of compensation paid to employees of Pine River serving as our principal financial officer and general counsel is based on time spent overseeing our company’s activities in accordance with the management agreement; we do not reimburse PRCM Advisers for any expenses related to the compensation of our chief executive officer or chief investment officer. Equity based compensation expense for the three and nine months ended September 30, 2017 also includes the amortization of the restricted stock awarded to our executive officers in conjunction with the Company’s Second Restated 2009 Equity Incentive Plan, or the Plan (see discussion in Note 21 - Equity Incentive Plan), including our chief executive officer, chief investment officer, principal financial officer and general counsel of $2.0 million and $6.4 million, compared to $1.7 million and $5.6 million for the three and nine months ended September 30, 2016, respectively.
We have direct relationships with the majority of our third-party vendors. We will continue to have certain costs allocated to us by PRCM Advisers for compensation, data services, technology and certain office lease payments, but most of our expenses with third-party vendors are paid directly by us.
Restructuring Charges
On July 28, 2016, we announced that our board of directors had approved a plan to discontinue our mortgage loan conduit and securitization business. This decision was made due to the challenging market environment facing the business, combined with the intent to reduce operating complexity and costs, and allowed for the reallocation of capital to assets we believe will generate higher returns. The wind down process was completed at the end of 2016. In connection with the closure, we incurred restructuring charges, including termination benefits, contract terminations and other associated costs, of $1.2 million for both the three and nine months ended September 30, 2016.nonrecurring expenses.
Income Taxes
During the three and ninesix months ended SeptemberJune 30, 2017, our2022, the Company’s TRSs recognized a provision for income taxes of $25.9 million and $74.7 million, respectively, which was primarily due to income from MSR servicing activities and gains recognized on MSR, offset by net losses recognized on derivative instruments and operating expenses. During the three months ended June 30, 2021, the Company’s TRSs recognized a benefit from income taxes of $5.3$20.9 million, and $21.1 million, respectively, which was primarily due to realized losses on sales of AFS securities and net losses incurred on derivative instruments held in our TRSs. During the three and nine months ended September 30, 2016, our TRSs recognized a benefit from income taxes of $16.8 million and $26.1 million, respectively, which was primarily due to losses incurredrecognized on MSR, andoffset by net gains recognized on derivative instruments held in the Company’s TRSs. We currently intendDuring the six months ended June 30, 2021, the Company’s TRSs recognized a provision for income taxes of $1.8 million, which was primarily due to distribute 100% of our REIT taxable income and comply with all requirements to continue to qualify as a REIT.gains recognized on MSR, offset by net losses recognized on derivative instruments held in the Company’s TRSs.


Financial Condition
Available-for-Sale Securities, at Fair Value
Agency RMBS
Our Agency RMBSThe majority of our AFS investment securities portfolio is comprised of adjustablefixed rate and fixed rateAgency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $87.5 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. All of our principal and interest (“P&I”)&I Agency RMBS AFS wereare Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations that carry an implied rating of “AAA,” or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. Government.government. The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.

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The table below summarizes certain characteristics of our Agency RMBS AFS at SeptemberJune 30, 2017:2022:
June 30, 2022
(dollars in thousands, except purchase price)Principal/ Current FaceNet (Discount) PremiumAmortized CostAllowance for Credit LossesUnrealized GainUnrealized LossCarrying ValueWeighted Average Coupon RateWeighted Average Purchase Price
P&I securities$8,603,008 $160,964 $8,763,972 $— $17,675 $(197,154)$8,584,493 4.11 %$102.24 
Interest-only securities1,665,968 116,302 116,302 (9,403)15,941 (5,386)117,454 2.91 %$15.18 
Total$10,268,976 $277,266 $8,880,274 $(9,403)$33,616 $(202,540)$8,701,947 
 September 30, 2017
(dollars in thousands, except purchase price)Principal/ Current Face Net (Discount) Premium Amortized Cost Unrealized Gain Unrealized Loss Carrying Value Weighted Average Coupon Rate Weighted Average Purchase Price
Principal and interest securities               
Fixed$16,286,997
 $1,012,682
 $17,299,679
 $104,544
 $(82,774) $17,321,449
 4.06% $106.62
Hybrid ARM23,206
 1,275
 24,481
 507
 (28) 24,960
 4.90% $108.31
Total P&I securities16,310,203
 1,013,957
 17,324,160
 105,051
 (82,802) 17,346,409
 4.06% $106.62
Interest-only securities               
Fixed351,071
 (297,649) 53,422
 2,452
 (837) 55,037
 3.81% $17.39
Fixed Other (1)
2,641,791
 (2,467,304) 174,487
 12,733
 (34,295) 152,925
 1.56% $8.80
Total$19,303,065
 $(1,750,996) $17,552,069
 $120,236
 $(117,934) $17,554,371
    
____________________
(1)Fixed Other represents weighted-average coupon interest-only securities that are not generally used for our interest-rate risk management purposes. These securities pay variable coupon interest based on the weighted average of the fixed rates of the underlying loans of the security, less the weighted average rates of the applicable issued principal and interest securities.

Our three-month average constant prepayment rate, or CPR, experienced by Agency RMBS AFS owned by us as of September 30, 2017, on an annualized basis, was 8.0%.
The following table summarizes the number of months until the next reset for our floating or adjustable rate Agency RMBS AFS portfolio at September 30, 2017:
(in thousands)September 30,
2017
0-12 months$24,698
13-36 months262
Total$24,960

Non-Agency Securities
Our non-Agency securities portfolio is comprised of senior and mezzanine tranches of mortgage-backed and asset-backed securities, and excludes the retained interests from our on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table provides investment information on our non-Agency securities as of September 30, 2017:
 September 30, 2017
(in thousands)Principal/current face Accretable purchase discount Credit reserve purchase discount Amortized cost Unrealized gain Unrealized loss Carrying value
Principal and interest securities             
Senior$2,161,983
 $(400,656) $(401,820) $1,359,507
 $335,055
 $(602) $1,693,960
Mezzanine1,210,506
 (255,774) (123,867) 830,865
 116,082
 (1,500) 945,447
Total P&I Securities3,372,489
 (656,430) (525,687) 2,190,372
 451,137
 (2,102) 2,639,407
Interest-only securities165,763
 (159,830) —
 5,933
 45
 (662) 5,316
Total$3,538,252
 $(816,260) $(525,687) $2,196,305
 $451,182
 $(2,764) $2,644,723


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The majority of our non-Agency securities were rated at September 30, 2017. Note that credit ratings are based on the par value of the non-Agency securities, whereas the distressed non-Agency securities in our portfolio were acquired at heavily discounted prices. The following table summarizes the credit ratings of our non-Agency securities portfolio, based on the Bloomberg Index Rating, a composite of each of the four major credit rating agencies (i.e., DBRS Ltd., Moody’s Investors Services, Inc., Standard & Poor’s Corporation and Fitch, Inc.), as of September 30, 2017:
September 30,
2017
AAA—%
AA—%
A—%
BBB3.1%
BB1.2%
B3.1%
Below B75.5%
Not rated17.1%
Total100.0%

Within our non-Agency securities portfolio, we have a substantial emphasis on “legacy” securities, which include securities issued up to and including 2009, many of which are subprime. We believe these deeply discounted securities can add relative value as the economy and housing markets continue to improve, as there remains upside optionality to lower delinquencies, higher recoveries and faster prepays. We also hold “new issue” non-Agency securities (issued after 2009), which include commercial mortgage-backed securities, term notes backed by MSR-related collateral and other newly issued non-Agency securities. We believe these “new issue” securities have enabled us to find attractive returns and further diversify our non-Agency securities portfolio.
The following table provides the carrying value of our “legacy” and “new issue” non-Agency securities at September 30, 2017:
  September 30,
2017
(dollars in thousands) Carrying Value % of Non-Agency Portfolio
“Legacy” non-Agency principal and interest securities $2,311,206
 87.4%
“Legacy” non-Agency interest-only securities 5,316
 0.2%
“New issue” non-Agency securities 328,201
 12.4%
Total $2,644,723
 100.0%

Due to acquisitions of “legacy” non-Agency securities, our designated credit reserve as a percentage of total discount increased slightly from September 30, 2016 to September 30, 2017 (as disclosed in Note 4 - Available-for-Sale Securities, at Fair Value of the notes to the condensed consolidated financial statements). When focused on principal and interest securities, from September 30, 2016 to September 30, 2017, our designated credit reserve as a percentage of total discount increased from 37.1% to 44.5%.
A subprime bond may generally be considered higher risk; however, if purchased at a discount that reflects a high expectation of credit losses, it could be viewed as less risky than a prime bond, which is subject to unanticipated credit loss performance. Accordingly, we believe our risk profile in owning a heavily discounted subprime bond with known delinquencies affords us the ability to assume a higher percentage of expected credit loss with comparable risk-adjusted returns to a less discounted prime bond with a lower percentage of expected credit loss.

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The following tables present certain information by investment type and their respective underlying loan characteristics for our “legacy” senior and mezzanine non-Agency securities, excluding our non-Agency interest-only portfolio, at September 30, 2017:
  September 30, 2017
“Legacy” Non-Agency P&I Securities Senior Mezzanine Total
Carrying Value (in thousands) $1,558,361
 $752,845
 $2,311,206
% of Total 67.4% 32.6% 100.0%
Average Purchase Price (1)
 $57.38
 $65.30
 $59.96
Average Coupon 2.7% 2.0% 2.5%
Average Fixed Coupon 5.9% 5.4% 5.8%
Average Floating Coupon 2.4% 1.9% 2.2%
Average Hybrid Coupon 3.4% —% 3.4%
Collateral Attributes      
Average Loan Age (months) 134
 142
 137
Average Loan Size (in thousands) $369
 $358
 $366
Average Original Loan-to-Value 69.8% 69.1% 69.6%
Average Original FICO (2)
 634
 574
 615
Current Performance      
60+ day delinquencies 22.8% 20.0% 21.9%
Average Credit Enhancement (3)
 8.2% 15.8% 10.7%
3-Month CPR (4)
 5.6% 8.0% 6.4%
____________________
(1)
Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for senior, mezzanine, and total “legacy” non-Agency securities, excluding our non-Agency interest-only portfolio, would be $54.87, $62.66 and $57.40, respectively, at September 30, 2017.
(2)FICO represents a mortgage industry accepted credit score of a borrower, which was developed by Fair Isaac Corporation.
(3)Average credit enhancement remaining on our “legacy” non-Agency securities portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying collateral.
(4)Three-month CPR is reflective of the prepayment speed on the underlying securitization; however, it does not necessarily indicate the proceeds received on our investment tranche. Proceeds received for each security are dependent on the position of the individual security within the structure of each deal.

 September 30, 2017
(dollars in thousands)Senior Mezzanine Total
Collateral TypeCarrying Value % of Senior Carrying Value % of Mezzanine Carrying Value % of Total
Prime$22,196
 1.4% $13,944
 1.9% $36,140
 1.6%
Alt-A120,202
 7.7% 91,944
 12.2% 212,146
 9.2%
POA90,267
 5.8% 144,621
 19.2% 234,888
 10.1%
Subprime1,325,696
 85.1% 502,336
 66.7% 1,828,032
 79.1%
Total$1,558,361
 100.0% $752,845
 100.0% $2,311,206
 100.0%
 September 30, 2017
(dollars in thousands)Senior Mezzanine Total
Coupon TypeCarrying Value % of Senior Carrying Value % of Mezzanine Carrying Value % of Total
Fixed Rate$148,690
 9.5% $19,901
 2.6% $168,591
 7.3%
Hybrid or Floating1,409,671
 90.5% 732,944
 97.4% 2,142,615
 92.7%
Total$1,558,361
 100.0% $752,845
 100.0% $2,311,206
 100.0%

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 September 30, 2017
(dollars in thousands)Senior Mezzanine Total
Origination YearCarrying Value % of Senior Carrying Value % of Mezzanine Carrying Value % of Total
2006 and Thereafter$1,377,132
 88.4% $293,992
 39.0% $1,671,124
 72.3%
2002-2005176,427
 11.3% 457,378
 60.8% 633,805
 27.4%
Pre-20024,802
 0.3% 1,475
 0.2% 6,277
 0.3%
Total$1,558,361
 100.0% $752,845
 100.0% $2,311,206
 100.0%

Commercial Real Estate Assets
Through our controlling interest in Granite Point, we originate and purchase commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as commercial real estate assets on our condensed consolidated balance sheets. Additionally, we are the sole certificate holder of a trust entity that holds a commercial real estate loan. The underlying loan held by the trust is consolidated on our condensed consolidated balance sheet and classified as commercial real estate assets. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Commercial real estate assets are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.
The following tables summarize our commercial real estate assets by asset type, property type and geographic location as of September 30, 2017:
 September 30,
2017
(dollars in thousands)First Mortgages Mezzanine Loans B-Notes Total
Unpaid principal balance$2,041,767
 $132,605
 $14,892
 $2,189,264
Unamortized (discount) premium(174) (11) —
 (185)
Unamortized net deferred origination fees(17,695) (40) —
 (17,735)
Carrying value$2,023,898
 $132,554
 $14,892
 $2,171,344
Unfunded commitments$270,654
 $1,580
 $—
 $272,234
Number of loans50
 6
 1
 57
Weighted average coupon5.6% 9.1% 8.0% 5.9%
Weighted average years to maturity (1)
2.5
 1.9
 9.3
 2.5
____________________
(1)Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. We may also extend contractual maturities in connection with loan modifications.

(in thousands) September 30,
2017
Property Type Carrying Value % of Commercial Portfolio
Office $1,133,866
 52.2%
Multifamily 385,222
 17.7%
Retail 247,196
 11.4%
Hotel 209,874
 9.7%
Industrial 195,186
 9.0%
Total $2,171,344
 100.0%

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(in thousands) September 30,
2017
Geographic Location Carrying Value % of Commercial Portfolio
Northeast $924,383
 42.6%
West 414,612
 19.1%
Southwest 363,907
 16.8%
Southeast 350,407
 16.1%
Midwest 118,035
 5.4%
Total $2,171,344
 100.0%


Mortgage Servicing Rights, at Fair Value
One of our wholly owned subsidiaries has approvals from Fannie Mae and Freddie Mac and Ginnie Mae to own and manage MSR, which represent the right to control the servicing of mortgage loans. We do not 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 our MSR. As of SeptemberJune 30, 2017,2022, our MSR had a fair market value of $930.6 million.$3.2 billion.
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As of SeptemberJune 30, 2017,2022, our MSR portfolio included MSR on 398,580901,244 loans with an unpaid principal balance of approximately $88.8$227.1 billion. During 2016, we sold substantially all of our Ginnie Mae MSR portfolio. The following table summarizes certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at SeptemberJune 30, 2017:2022:
June 30, 2022
(dollars in thousands)Number of LoansUnpaid Principal BalanceWeighted Average Gross Coupon RateWeighted Average Current Loan SizeWeighted Average Loan Age (months)Weighted Average Original FICOWeighted Average Original LTV60+ Day Delinquencies3-Month CPRNet Servicing Fee (bps)
30-Year Fixed:
≤ 3.25%317,255 $103,224,845 2.8 %$384 17 768 70.9 %0.3 %6.5 %25.8 
> 3.25 - 3.75%166,905 43,437,555 3.4 %323 31 754 74.3 %0.7 %10.6 %26.3 
> 3.75 - 4.25%121,848 25,817,483 3.9 %272 54 752 75.7 %1.3 %14.6 %27.3 
> 4.25 - 4.75%73,644 13,481,431 4.4 %247 58 737 77.4 %2.6 %18.8 %26.3 
> 4.75 - 5.25%36,249 6,123,075 4.9 %248 50 725 78.6 %3.9 %21.0 %27.2 
> 5.25%17,658 2,992,856 5.6 %273 34 718 80.0 %4.0 %24.0 %29.4 
733,559 195,077,245 3.3 %340 29 758 73.1 %80.0 %10.1 %26.2 
15-Year Fixed:
≤ 2.25%26,448 7,771,459 2.0 %344 14 777 58.7 %0.1 %5.2 %25.1 
> 2.25 - 2.75%49,704 11,528,442 2.4 %285 18 773 58.7 %0.1 %7.4 %25.8 
> 2.75 - 3.25%45,008 7,158,465 2.9 %216 43 767 61.3 %0.2 %11.0 %26.2 
> 3.25 - 3.75%26,269 3,163,141 3.4 %170 58 757 64.1 %0.6 %15.2 %27.4 
> 3.75 - 4.25%11,889 1,191,435 3.89152 57 743 65.2 %1.0 %16.4 %28.8 
> 4.25%5,462 466,547 4.5 %135 49 727 65.9 %1.9 %19.2 %31.2 
164,780 31,279,489 2.6 %265 29 769 60.2 %0.3 %9.1 %26.1 
Total ARMs2,905 717,679 3.1 %321 55 762 67.9 %1.6 %25.1 %25.4 
Total901,244 $227,074,413 3.2 %$330 29 760 71.3 %0.8 %10.0 %26.2 
 September 30,
2017
Unpaid principal balance (in thousands)$88,789,765
Number of loans398,580
Average Coupon3.9%
Average Loan Age (months)26
Average Loan Size (in thousands)$223
Average Original Loan-to-Value73.3%
Average Original FICO753
60+ day delinquencies0.3%
3-Month CPR10.1%

Residential Mortgage Loans Held-for-Investment in Securitization Trusts, at Fair Value
We retain subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or our subsidiaries. The underlying residential mortgage loans held by the trusts, which are consolidated on our condensed consolidated balance sheets, are classified as residential mortgage loans held-for-investment in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities to the condensed consolidated financial statements for additional information regarding consolidation of the securitization trusts. As of September 30, 2017, residential mortgage loans held-for-investment in securitization trusts had a carrying value of $3.0 billion.
Residential Mortgage Loans Held-for-Sale, at Fair Value
As of September 30, 2017, we held prime nonconforming residential mortgage loans with a carrying value of $0.5 million. In July 2016, we announced our plan to discontinue our mortgage loan conduit and securitization business. During the remainder of 2016, all remaining commitments to purchase mortgage loans were funded, an additional securitization transaction was completed and substantially all of the remaining prime nonconforming residential loans were sold through whole loan sale transactions. The wind down process was completed at the end of 2016.
We also hold a small legacy portfolio of CSL, which are loans where the borrower has previously experienced payment delinquencies and is more likely to be underwater (i.e., the amount owed on a mortgage loan exceeds the current market value of the home). As a result, there is a higher probability of default than on newly originated residential mortgage loans. As of September 30, 2017, we held CSL with a carrying value of $9.0 million.

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Additionally, as the previous owner of MSR on loans from securitizations guaranteed by Ginnie Mae, we were obligated to purchase these loans from time to time in order to complete modifications on the mortgage loans or to convey foreclosed properties to HUD. As of September 30, 2017, we held Ginnie Mae buyout residential mortgage loans with a carrying value of $21.7 million. During 2016, we sold substantially all of our Ginnie Mae MSR portfolio, and we anticipate that the remaining balance will continue to decline.
The following table presents our residential mortgage loans held-for-sale portfolio by loan type as of September 30, 2017:
 September 30, 2017
(in thousands)Unpaid Principal Balance Fair Value - Purchase Price Fair Value - Unrealized Carrying Value
Prime nonconforming residential mortgage loans$471
 $—
 $(1) $470
Credit sensitive residential mortgage loans14,746
 (4,012) (1,716) 9,018
Ginnie Mae buyout residential mortgage loans23,548
 (1,128) (711) 21,709
Residential mortgage loans held-for-sale$38,765
 $(5,140) $(2,428) $31,197


Financing
Our borrowings consist primarily of repurchase agreements, FHLB advances and revolving credit facilities, term notes payable and convertible senior notes. Repurchase agreements, revolving credit facilities and term notes payable are collateralized by our pledge of AFS securities, derivative instruments, commercial real estate assets, MSR, servicing advances and certain cash balances. Substantially all of our Agency RMBS are currently pledged as collateral, and the majoritya portion of our non-Agency securities and commercial real estate assets have been pledged either throughas collateral for repurchase agreements. Additionally, a substantial portion of our MSR is currently pledged as collateral for repurchase agreements, revolving credit facilities and term notes payable, and a portion of our servicing advances have been pledged as collateral for revolving credit facilities. In connection with our securitization of MSR and issuance of term notes payable, a variable funding note, or FHLB advances. Additionally, on January 19, 2017, we closed an underwritten public offeringVFN, was issued to one of $287.5 million aggregate principal amount ofour subsidiaries. We have one repurchase facility that is secured by the VFN, which is collateralized by our MSR. Finally, our convertible senior notes due 2022, which included $37.5 million aggregate principal amount sold to the underwriter of the offering pursuant to an overallotment option. The net proceeds from the offering were approximately $282.2 million after deducting underwriting discounts and estimated offering expenses. The majority of these proceeds were used to help fund our MSR assets, which previously had largely been funded with cash.
At September 30, 2017, borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes had the following characteristics:
(dollars in thousands) September 30, 2017
Collateral Type Amount Outstanding Weighted Average Borrowing Rate Weighted Average Haircut on Collateral Value
Agency RMBS $16,859,426
 1.45% 4.9%
Non-Agency securities (1)
 1,865,247
 2.93% 27.9%
Agency Derivatives 77,234
 2.10% 26.7%
Commercial real estate assets 1,494,247
 3.52% 25.3%
Mortgage servicing rights 40,000
 4.98% 37.5%
Other (2)
 282,543
 6.25% NA
Total $20,618,697
 1.81% 8.6%
____________________
(1)Includes repurchase agreements and FHLB advances collateralized by retained interests from our on-balance sheet securitizations which are eliminated in consolidation in accordance with U.S. GAAP.
(2)Includes unsecured convertible senior notes paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $287.5 million.

As of September 30, 2017, we had outstanding $18.3 billion of repurchase agreements, and the term to maturity ranged from two days to over 33 months. Repurchase agreements had a weighted average borrowing rate of 1.76% and weighted average remaining maturities of 154 days as of September 30, 2017.
As of September 30, 2017, we had outstanding $2.0 billion of FHLB advances with a weighted average term to maturity of of 133 months, ranging from approximately 19 months to over 18 years. The weighted average cost of funds for our advances was 1.56% at September 30, 2017.

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As of September 30, 2017, we had outstanding $40.0 million of short-term borrowings under revolving credit facilities with a weighted average borrowing rate of 4.98% and weighted average remaining maturities of 208 days.
As of September 30, 2017, the outstanding amount due on convertible senior notes was $282.5 million, net of deferred issuance costs. These notes2026 are unsecured and pay interest semiannually at a rate of 6.25% per annum.
Some of our financing arrangements incorporate LIBOR as the referenced rate; however all arrangements either mature prior to the phase out of LIBOR or have provisions in place that provide for an alternative to LIBOR upon its phase-out. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and Outlook - LIBOR transition” in this Quarterly Report on Form 10-Q for further discussion.
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At June 30, 2022, borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes had the following characteristics:
(dollars in thousands)June 30, 2022
Borrowing TypeAmount OutstandingWeighted Average Borrowing RateWeighted Average Years to Maturity
Repurchase agreements$7,958,247 1.48 %0.2 
Revolving credit facilities825,761 4.93 %1.6 
Term notes payable397,383 4.42 %2.0 
Convertible senior notes (1)
281,711 6.25 %3.5 
Total$9,463,102 2.04 %0.5 
(dollars in thousands)June 30, 2022
Collateral TypeAmount OutstandingWeighted Average Borrowing RateWeighted Average Haircut on Collateral Value
Agency RMBS$7,487,568 1.27 %4.1 %
Non-Agency securities47,934 2.44 %40.0 %
Agency Derivatives22,745 1.89 %17.9 %
Mortgage servicing rights1,593,944 4.86 %29.1 %
Mortgage servicing advances29,200 4.61 %13.9 %
Other (1)
281,711 6.25 %N/A
Total$9,463,102 2.04 %8.4 %
____________________
(1)Includes unsecured convertible senior notes due 2026 paying interest semiannually at a rate of 6.25% per annum and mature in January 2022.on the aggregate principal amount of $287.5 million.

As of SeptemberJune 30, 2017,2022, the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR, servicing advances and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 5.0:3.8:1.0. We believeAs previously discussed, our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while MSR, with less liquidity and/or more exposure to prepayment risk, utilize lower levels of leverage. Generally, our debt-to-equity ratio providesis directly correlated to the composition of our portfolio; typically, the higher the percentage of Agency RMBS we hold, the higher our debt-to-equity ratio will be. However, in addition to portfolio mix, our debt-to-equity ratio is a function of many other factors, including the liquidity of our portfolio, the availability and price of our financing, the diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. We may alter the percentage allocation of our portfolio among our target assets depending on the relative value of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from offerings we conduct. We believe the current degree of leverage within our portfolio helps ensure that we have access to unused borrowing capacity, and, thus improvessupporting our liquidity and the strength of our balance sheet.
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The following table provides the quarterly average balances, the quarter-end balances, and the maximum balances at any month-end within that quarterly period,a summary of our borrowings under repurchase agreements, FHLB advances, revolving credit facilities, term notes payable and convertible senior notes, our net TBA cost basis amounts and our debt-to-equity ratios for the three months ended September June 30, 2017,2022, and the four immediately preceding quarters:
(dollars in thousands)
Quarterly Average (1)
 
End of Period Balance (1)
 
Maximum Balance of Any Month-End (1)
 End of Period Total Borrowings to Equity Ratio
For the Three Months Ended September 30, 2017$19,207,645
 $20,618,697
 $20,618,697
 5.0:1.0
For the Three Months Ended June 30, 2017$17,156,888
 $16,877,933
 $17,521,935
 4.5:1.0
For the Three Months Ended March 31, 2017$15,297,535
 $17,509,745
 $17,509,745
 4.9:1.0
For the Three Months Ended December 31, 2016$14,492,271
 $13,386,351
 $15,636,929
 3.9:1.0
For the Three Months Ended September 30, 2016$14,098,192
 $14,667,373
 $14,667,373
 4.2:1.0
(dollars in thousands)
For the Three Months EndedQuarterly AverageEnd of Period BalanceMaximum Balance of Any Month-EndEnd of Period Total Borrowings to Equity RatioEnd of Period Net Long (Short) TBA Cost Basis
End of Period Economic Debt-to-Equity Ratio (1)
June 30, 2022$8,949,630 $9,463,102 $9,463,102 3.8:1.0$6,409,396 6.4:1.0
March 31, 2022$9,139,305 $9,121,894 $9,366,946 3.5:1.0$4,737,226 5.3:1.0
December 31, 2021$7,908,651 $8,898,809 $8,898,809 3.2:1.0$4,238,881 4.8:1.0
September 30, 2021$8,888,607 $8,365,211 $9,060,624 3.1:1.0$9,019,509 6.4:1.0
June 30, 2021$11,129,575 $9,704,066 $12,837,520 3.9:1.0$7,161,265 6.8:1.0
____________________
(1)Includes borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes and excludes collateralized borrowings in securitization trusts.

(1)Defined as total borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA cost basis, divided by total equity.
Collateralized Borrowings in Securitization Trusts, at Fair Value
We retain subordinated debt and excess servicing rights purchased from securitization trusts sponsored by either third parties or our subsidiaries. The underlying debt held by the trusts, which is consolidated on our condensed consolidated balance sheets, is classified as collateralized borrowings in securitization trusts and carried at fair value as a result of a fair value option election. See Note 3 - Variable Interest Entities to the condensed consolidated financial statements for additional information regarding consolidation of the securitization trusts. As of September 30, 2017, collateralized borrowings in securitization trusts had a carrying value of $2.8 billion with a weighted average interest rate of 3.4%. The stated maturity dates for all collateralized borrowings were greater than five years from September 30, 2017.
Net Economic Interests in Consolidated Securitization Trusts
The net of the underlying residential mortgage loans and the debt held by the securitization trusts discussed above represents the carrying value of the securities that we retained from these securitizations. Because we consolidate these securitization trusts on our condensed consolidated balance sheets, our retained interests are eliminated in consolidation in accordance with U.S. GAAP. However, the carrying value, characteristics and performance of these securities and those of the underlying collateral are relevant to our portfolio as a whole.Equity
The following table presents the carrying value and coupon of our net economic interests in consolidated securitization trusts and certain attributes of the underlying collateral as of September 30, 2017:
 September 30,
2017
Carrying Value (in thousands)$241,906
Average Coupon3.0%
Collateral Attributes 
Average Loan Age (months)33
Average Loan Size (in thousands)$807
Average Original Loan-to-Value64.7%
Average Original FICO772
Current Performance 
60+ day delinquencies0.04%


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The following table summarizes the carrying values and credit ratings of our net economic interests in consolidated securitization trusts, based on a composite of credit ratings received from DBRS Ltd., Standard & Poor’s Corporation and/or Fitch, Inc. upon issuance of the securities, as of September 30, 2017:
 September 30,
2017
(dollars in thousands)Carrying Value % of Retained Portfolio
AAA$31,825
 13.2%
AA36,304
 15.0%
A27,602
 11.4%
BBB46,359
 19.2%
BB34,917
 14.4%
B—
 —%
Below B—
 —%
Not rated64,899
 26.8%
Total$241,906
 100.0%


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Equity
The table below provides details of our changes in stockholders’ equity from March 31, 2022 to June 30, 2017 to September 30, 2017. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.2022:
(dollars in millions, except per share amounts)Book Value Common Shares Outstanding Common Book Value Per Share
Common stockholders' equity at June 30, 2017$3,444.6
 174.5
 $19.74
Reconciliation of non-GAAP measures to GAAP net income and Comprehensive income:     
Core Earnings, net of tax expense of $2.0 million ⁽¹⁾⁽²⁾98.1
    
Dividends on preferred stock(8.9)    
Core Earnings attributable to common stockholders, net of tax expense of $2.0 million ⁽¹⁾⁽²⁾89.2
    
Realized and unrealized gains and losses, net of tax benefit of $7.3 million4.0
    
GAAP net income93.2
    
Other comprehensive income, net of tax68.4
    
Comprehensive income161.6
    
Dividend declaration(90.7)    
Other4.1
 —
  
Balance before capital transactions3,519.6
 174.5
  
Preferred stock issuance costs(9.4)    
Issuance of common stock, net of offering costs0.1
 —
  
Common stockholders' equity at September 30, 2017$3,510.3
 174.5
 $20.12
Total preferred stock liquidation preference431.3
    
Noncontrolling interest189.8
    
Total equity at September 30, 2017$4,131.4
    
(dollars in millions, except per share amounts)Book ValueCommon Shares OutstandingCommon Book Value Per Share
Common stockholders’ equity at March 31, 2022$1,903.0 344.1 $5.53 
Earnings available for distribution, net of tax expense of $1.7 million (1)
89.0 
Dividends on preferred stock(13.7)
Earnings available for distribution to common stockholders, net of tax expense of $1.7 million (1)
75.3 
Realized and unrealized gains and losses, net of tax expense of $24.2 million(161.5)
Other comprehensive loss, net of tax(4.2)
Dividend declaration(58.9)
Other3.5 0.3 
Issuance of common stock, net of offering costs0.1 — 
Common stockholders’ equity at June 30, 2022$1,757.3 344.4 $5.10 
Total preferred stock liquidation preference726.3 
Total stockholders’ equity at June 30, 2022$2,483.6 
____________________
(1)Core Earnings is a non-U.S. GAAP measure that we define as comprehensive income attributable to common stockholders, excluding “realized
(1)Earnings Available for Distribution, or EAD, is a non-GAAP measure that we define as comprehensive loss attributable to common stockholders, excluding realized and unrealized gains and losses” (impairment losses, realized and unrealized gains or losses on the aggregate portfolio, 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 other nonrecurring 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 recurring 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 the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, certain upfront costs related to securitization transactions, non-cash compensation expense related to restricted common stock, restructuring charges and transaction costs related to Granite Point’s initial public offering). As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. We believe the presentation of Core Earnings provides investors greater transparency into our period-over-period financial performance and facilitates comparisons to peer REITs.
(2)For the three months ended September 30, 2017, Core Earnings excludes our controlling interest in Granite Point’s Core Earnings and includes our share of Granite Point’s declared dividend. We believe this presentation is the most accurate reflection of our incoming cash associated with holding shares of Granite Point common stock and assists with the understanding of the forward-looking financial presentation of the company.


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Issuance of Preferred Stock
On March 14, 2017, we issued 5,000,000 shares of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share. On March 21, 2017, an additional 750,000 shares were sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 8.125% per annum of the $25.00 liquidation preference. On and after April 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.66% per annum of the $25.00 liquidation preference. The preferred stock ranks senior to our common stock and on parity withshould not be considered an indication of our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respecttaxable income or as a proxy for the amount of dividends we may declare.

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The following table provides a reconciliation of comprehensive loss and GAAP net income to non-GAAP measures for the three months ended June 30, 2022:
Three Months Ended
(in millions)June 30,
2022
Comprehensive loss attributable to common stockholders$(90.4)
Adjustment for other comprehensive loss attributable to common stockholders:
Unrealized losses on available-for-sale securities4.2 
Net loss attributable to common stockholders(86.2)
Adjustments for non-EAD (1):
Realized losses on investment securities187.6 
Unrealized losses on investment securities9.6 
Provision for credit losses on investment securities0.5 
Realized and unrealized gains on mortgage servicing rights(85.6)
Realized gain on termination or expiration of interest rate swaps and swaptions(246.2)
Unrealized losses on interest rate swaps and swaptions209.2 
Realized and unrealized losses on other derivative instruments101.6 
Adjustments to exclude reported realized and unrealized (gains) losses:
MSR amortization (1)
(81.4)
TBA dollar roll income (2)
57.7 
U.S. Treasury futures income (3)
(20.6)
Change in servicing reserves(1.1)
Non-cash equity compensation expense3.5 
Other nonrecurring expenses2.4 
Net provision for income taxes on non-EAD (4)
24.2 
Earnings available for distribution to common stockholders (4)
$75.3 
____________________
(1)MSR amortization refers to the paymentportion 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)EAD is a non-GAAP measure that we define as comprehensive loss attributable to common stockholders, excluding realized and unrealized gains and losses on the aggregate portfolio, 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 other nonrecurring 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 recurring 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 and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the company. Under certain circumstances upon a change of control, the preferred stock is convertible into shares of our common stock. The preferred stock will not be redeemable before April 27, 2027, except under certain limited circumstances. On or after April 27, 2027, we may, at our option, redeem, in whole or in part, at any time or from time to time, the preferred stock at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $138.9 million, after deducting underwriting discounts and estimated offering expenses payable by us.
On July 19, 2017, we issued 11,500,000 shares of 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, in a public offering at a price of $25.00 per share, which included 1,500,000 shares sold to the underwriters of the offering pursuant to an overallotment option. Holders of the preferred stock are entitled to receive, when and as declared, a dividend at a fixed rate of 7.625% per annum of the $25.00 liquidation preference. On and after July 27, 2027, dividends will accumulate and be payable at a floating rate of three-month LIBOR plus a spread of 5.352% per annum of the $25.00 liquidation preference. The preferred stock ranks senior todeclare on our common stock and on parity withshould not be considered an indication of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with respect totaxable income or as a proxy for the paymentamount of dividends and the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the company. Under certain circumstances upon a change of control, the preferred stock is convertible into shares of our common stock. The preferred stock will not be redeemable before July 27, 2027, except under certain limited circumstances. On or after July 27, 2027, we may at our option, redeem, in whole or in part, at any time or from time to time, the preferred stock at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) up to, but excluding, the redemption date. The net proceeds from the offering were approximately $278.1 million, after deducting underwriting discounts and estimated offering expenses payable by us.declare.
Noncontrolling Interest
On June 28, 2017, we completed the contribution of our portfolio of commercial real estate assets to Granite Point. We contributed our equity interests in our wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for our contribution, received approximately 33.1 million shares of common stock of Granite Point, representing approximately 76.5% of the outstanding stock of Granite Point upon completion of the IPO of its common stock on June 28, 2017. In connection with the Granite Point IPO, we agreed, subject to certain conditions, to purchase up to $20 million of Granite Point common stock in the open market at designated prices below Granite Point’s publicly reported book value pursuant to a share purchase program that ended on November 1, 2017. During the three and nine months ended September 30, 2017, we purchased 285,662 shares of Granite Point common stock under the program for a total cost of $5.4 million.
Due to our controlling ownership interest in Granite Point during the periods presented, we consolidate Granite Point on our financial statements and reflect noncontrolling interest for the portion of equity and comprehensive income not attributable to us. During the three and nine months ended September 30, 2017, in accordance with ASC 810, Consolidation, the carrying amount of noncontrolling interest was adjusted to reflect (i) changes in our ownership interest in Granite Point as a result of the purchases of Granite Point common stock discussed above and (ii) the portion of comprehensive income and dividends declared by Granite Point that are not attributable to us, with the offset to equity.
As of November 1, 2017, we no longer have a controlling interest in Granite Point and, therefore, will prospectively deconsolidate the financial condition and results of operations of Granite Point and its subsidiaries from our financial statements.

Liquidity and Capital Resources
Our liquidity and capital resources are managed and forecastforecasted on a daily basis. We believe this ensures that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls, andcalls. We also believe that we haveit gives us the flexibility to manage our portfolio to take advantage of market opportunities.

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Our principal sources of cash consist of borrowings under repurchase agreements, FHLB advances, revolving credit facilities, term notes payable, payments of principal and interest we receive on our target assets, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our repurchase agreements, FHLB advances and revolving credit facilities,borrowings, to purchase our target assets, to make dividend payments on our capital stock, and to fund our operations.
To the extent that we raise additional equity capital through capital market transactions, we anticipate using cash proceeds from such transactions to purchase additional Agency RMBS, non-Agency securities, MSR and otherour target assets and for other general corporate purposes. WeSuch general corporate purposes may include in the following discussionrefinancing or repayment of debt, the liquidityrepurchase or redemption of common and preferred equity securities, and other capital resourcesexpenditures.
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As of SeptemberJune 30, 2017,2022, we held $539.4$511.9 million in cash and cash equivalents available to support our operations; $26.6$12.0 billion of AFS securities, commercial real estate assets, MSR, residential mortgage loans held-for-investment in securitization trusts, residential mortgage loans held-for-sale and derivative assets held at fair value; and $23.4$9.5 billion of outstanding debt in the form of repurchase agreements, FHLB advances, borrowings under revolving credit facilities, term notes payable and convertible senior notes and collateralized borrowings in securitization trusts.notes. During the three and six months ended SeptemberJune 30, 2017, our total consolidated debt-to-equity ratio increased from 5.2:1.0 to 5.7:1.0. The2022, the debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR and Agency Derivatives, only, which includes unsecured borrowings under convertible senior notes, also increased from 4.5:3.5:1.0 to 5.0:3.8:1.0 predominantly driven by the purchase of and 3.2:1.0 to 3.8:1.0, respectively. The increase was due to increased financing on AFS securitiesAgency RMBS and commercial real estate assets. We believeMSR purchases as well as a decrease in equity. During the three and six months ended June 30, 2022, our economic debt-to-equity ratio funding our AFS securities, commercial real estate assets, MSR and Agency Derivatives, is the most meaningful debt-to-equity measure as collateralizedwhich includes unsecured borrowings under convertible senior notes and implied debt on residential mortgage loans held-for-investment in securitization trusts represents term financing with no stated maturity.net TBA cost basis, increased from 5.3:1.0 to 6.4:1.0 and 4.8:1.0 to 6.4:1.0, respectively.
As of SeptemberJune 30, 2017,2022, we held approximately $1.9 million$1.4 billion of unpledged AgencyAFS securities and Agency derivatives, which includes $1.3 billion of unsettled Agency RMBS purchases, and $223.7$7.6 million of unpledged non-Agency securities and retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.securities. As a result, we had an overall estimated unused borrowing capacity on unpledged securities and retained interests of approximately $145.6$26.4 million. We also held approximately $89.2 million of unpledged mezzanine commercial real estate loans and $51.5 million of unpledged commercial real estate first mortgages, and had an overall estimated unused borrowing capacity on unpledged commercial real estate assets of approximately $82.2 million, which may be used to fund Granite Point’s target assets. As of SeptemberJune 30, 2017,2022, we held approximately $770.0$46.9 million of unpledged MSR and $64.7 million of unpledged servicing advances. Overall, we had an overall estimated unused committed borrowing capacity on unpledged MSR asset and servicing advance financing facilities of approximately $50.0 million. We also held approximately $31.2$218.8 million of unpledged residential mortgage loans held-for-sale, for which we had no unused borrowing capacity.and $170.8 million, respectively. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes. On a daily basis, we monitor and forecast our available, or excess, liquidity. Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity. If borrowing rates and/or collateral requirements change in the near term, we believe we are subject to less earnings volatility than a more leveraged organization.
During the ninesix months ended SeptemberJune 30, 2017,2022, we did not experience any restrictions tomaterial issues accessing our funding sources, although balance sheet capacity of counterparties have tightened due to compliance with the Basel III regulatory capital reform rules as well as management of perceived risk in the volatile interest rate environment.sources. We expect ongoing sources of financing to be primarily repurchase agreements, FHLB advances, revolving credit facilities, term notes payable, convertible notes and similar financing arrangements. We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.
As of SeptemberJune 30, 2017,2022, we had master repurchase agreements in place with 3339 counterparties (lenders), the majority of which are U.S. domiciled financial institutions, and we continue to evaluate additional counterparties to manage and reduceoptimize counterparty risk. Under our repurchase agreements, we are required to pledge additional assets as collateral to our lenders when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders, through a margin call, demand additional collateral. Lenders generally make margin calls because of a perceived decline in the value of our assets collateralizing the repurchase agreements. This may occur following the monthly principal reduction of assets due to scheduled amortization and prepayments on the underlying mortgages, or may be caused by changes in market interest rates, a perceived decline in the market value of the investments and other market factors. To cover a margin call, we may pledge additional securitiesassets or cash. At maturity, any cash on deposit as collateral is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed. Should the value of our assets suddenly decrease, significant margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

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The following table summarizes our repurchase agreements and counterparty geographical concentration at September 30, 2017 and December 31, 2016:
 September 30, 2017 December 31, 2016
(dollars in thousands)Amount Outstanding 
Net Counterparty Exposure(1)
 Percent of Funding Amount Outstanding 
Net Counterparty Exposure(1)
 Percent of Funding
North America$9,958,346
 $1,443,661
 67.1% $4,916,309
 $965,621
 67.3%
Europe (2)
5,729,340
 565,723
 26.3% 2,617,372
 355,060
 24.7%
Asia (2)
2,609,706
 142,758
 6.6% 1,782,670
 114,720
 8.0%
Total$18,297,392
 $2,152,142
 100.0% $9,316,351
 $1,435,401
 100.0%
____________________
(1)Represents the net carrying value of the securities and commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest. Payables due to broker counterparties for unsettled securities purchases of $17.9 million are not included in the September 30, 2017 amounts presented above. The Company did not have any such payables at December 31, 2016.
(2)Exposure to European and Asian domiciled banks and their U.S. subsidiaries.

In addition to our master repurchase agreements to fund our Agency RMBS,and non-Agency securities, and commercial real estate assets, we have sixone repurchase facility and three revolving credit facilities that provide short- and long-term financing for our commercial real estate assets and twoMSR portfolio. We also have one revolving credit facilitiesfacility that provideprovides short-term financing for our MSR portfolio.servicing advances. An overview of the facilities is presented in the table below:
(dollars in thousands)        
September 30, 2017
Expiration Date (1)
 Committed Amount Outstanding Unused Capacity Total Capacity Eligible Collateral
June 28, 2019 No $330,024
 $169,976
 $500,000
 Commercial real estate assets
June 28, 2020 (2)
 No $397,464
 $102,536
 $500,000
 Commercial real estate assets
June 28, 2019 (3)
 No $447,840
 $25,955
 $473,795
 Commercial real estate assets
May 2, 2019 No $158,236
 $91,764
 $250,000
 Commercial real estate assets
June 28, 2020 No $107,291
 $142,709
 $250,000
 Commercial real estate assets
October 26, 2017 (4)
 No $—
 $100,000
 $100,000
 Commercial real estate assets
September 1, 2018 No $20,000
 $30,000
 $50,000
 Mortgage servicing rights
December 18, 2017 No $20,000
 $20,000
 $40,000
 Mortgage servicing rights
(dollars in thousands)
June 30, 2022
Expiration Date (1)
Amount Outstanding
Unused Committed Capacity (2)
Unused Uncommitted CapacityTotal CapacityEligible Collateral
April 4, 2024$590,311 $— $109,689 $700,000 Mortgage servicing rights
February 8, 2023$400,000 $— $250,000 $650,000 
Mortgage servicing rights (3)
March 20, 2024$146,250 $78,750 $75,000 $300,000 
Mortgage servicing rights (4)
June 30, 2023$60,000 $140,000 $— $200,000 Mortgage servicing rights
September 28, 2022$29,200 $170,800 $— $200,000 Mortgage servicing advances
____________________
(1)The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms.
(2)Includes an option, to be exercised at the Company’s discretion, to increase the maximum
(1)The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms.
(2)Represents unused capacity amounts to which commitment fees are charged.
(3)This repurchase facility amount to $600.0 million, subject to certain customary conditions contained in the agreement.
(3)Fixed pool of assets after ramp-up period.
(4)This facility is a short-term bridge facility.

Our wholly owned subsidiary, TH Insurance, is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances. As of September 30, 2017, TH Insurance had $2.0 billion in outstanding secured advances with a weighted average borrowing rate of 1.56%, and an additional $1.4 billion of available uncommitted capacity for borrowings. To the extent TH Insurance has uncommitted capacity, it may be adjusted at the sole discretion of the FHLB.
The ability to borrow from the FHLB is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collaterala VFN issued in accordanceconnection with our securitization of MSR, which is collateralized by our MSR. During the FHLB’s credit and collateral guidelines, as may be revisedthree months ended June 30, 2022, the total capacity of this repurchase facility was temporarily upsized by $150.0 million, from $500.0 million to $650.0 million. This temporary upsizing expired on July 25, 2022, at which time the total capacity reverted to $500.0 million.
(4)The revolving period of this facility ceases on March 17, 2023, at which time by the FHLB. Eligible collateral may include conventional 1-4 family residential mortgage loans, commercial real estate loans, Agency RMBS and certain non-Agency securities withfacility starts a rating of A and above.12-month amortization period.

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In January 2016, the FHFA released a final rule regarding membership in the Federal Home Loan Bank system. Among other effects, the final rule excludes captive insurers from membership eligibility, including our subsidiary member, TH Insurance. Since TH Insurance was admitted as a member in 2013, it is eligible for a membership grace period that shall run through February 19, 2021, during which new advances or renewals that mature beyond the grace period will be prohibited; however, any existing advances that mature beyond this grace period will be permitted to remain in place subject to their terms insofar as we maintain good standing with the FHLB. If any new advances or renewals occur, TH Insurance’s outstanding advances will be limited to 40% of its total assets. Notwithstanding the FHFA’s ruling, we continue to believe our mission aligns well with that of the Federal Home Loan Bank system.
We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across theour lending agreements as of SeptemberJune 30, 2017:2022:
•Total indebtedness to tangible net worth must be less than the specified threshold ratio in the repurchase agreement.8.0:1.0. As of SeptemberJune 30, 2017,2022, our debttotal indebtedness to tangible net worth, as defined, was 5.7:1.0 while our threshold ratio, as defined, was 6.0:4.4:1.0.
Liquidity•Cash liquidity must be greater than $100.0$200.0 million. As of SeptemberJune 30, 2017,2022, our liquidity, as defined, was $1.2 billion.$511.9 million.
•Net worth must be greater than $1.75 billion.the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior, measured beginning March 31, 2020. As of SeptemberJune 30, 2017,2022, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.6 billion and our net worth, as defined, was $4.1$2.5 billion.
Interest coverage must not be less than 2.0:1.0. As of September 30, 2017, our interest coverage ratio, as defined, was 2.2:1.0.
Subsequent to September 30, 2017, the debt to net worth and threshold ratios were redefined with all counterparties. Under the new definitions, our debt to net worth, as defined, would have been 5.0:1.0 and our threshold ratio, as defined, would have been 6.5:1.0 as of September 30, 2017.
We are also subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants.
The following table summarizes assets at carrying values that arewere pledged or restricted as collateral for the future payment obligations of repurchase agreements, FHLB advances and revolving credit facilities.facilities, term notes payable and derivative instruments at June 30, 2022 and December 31, 2021:
(in thousands)June 30,
2022		December 31,
2021
Available-for-sale securities, at fair value$7,420,521 $7,009,449 
Mortgage servicing rights, at fair value3,179,285 2,130,807 
Restricted cash363,137 747,979 
Due from counterparties111,724 33,718 
Derivative assets, at fair value23,336 39,608 
Other assets34,119 33,767 
Total$11,132,122 $9,995,328 

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(in thousands)September 30,
2017		 December 31,
2016
Available-for-sale securities, at fair value$19,989,068
 $13,117,330
Commercial real estate assets2,030,703
 1,357,874
Mortgage servicing rights, at fair value160,635
 180,948
Net economic interests in consolidated securitization trusts (1)
226,434
 213,110
Cash and cash equivalents14,796
 15,000
Restricted cash149,844
 162,759
Due from counterparties23,602
 48,939
Derivative assets, at fair value101,187
 126,341
Total$22,696,269
 $15,222,301
____________________
(1)Includes the retained interests from our on-balance sheet securitizations, which are eliminated in consolidation in accordance with U.S. GAAP.

Although we generally intend to hold our target assets as long-term investments, we may sell certain of our assets in order to manage our interest rate risk and liquidity needs, to meet other operating objectives and to adapt to market conditions. Our Agency RMBS and non-Agency securities are generally actively traded and thus, in most circumstances, readily liquid. However, certain of our assets, including commercial real estate assets, MSR, and residential mortgage loans, are subject to longer trade timelines, and, as a result, market conditions could significantly and adversely affect the liquidity of our assets. Any illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. Our ability to quickly sell certain assets, such as commercial real estate assets, MSR and residential mortgage loans, may be limited by delays encountered while obtaining certain regulatory approvals required for such dispositions and may be further limited by delays due to the time period needed for negotiating transaction documents, conducting diligence, and complying with regulatory requirements regarding the transfer of such assets before settlement may occur. Consequently, even if we identify a buyer for our commercial real estate assets, MSR, and residential mortgage loans, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.

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In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition.
We cannot predict the timing and impact of future sales of our assets, if any. Because many of our assets are financed with repurchase agreements, and FHLB advances, and may be financed withrevolving credit facilities (includingand term loans and revolving facilities),notes payable, a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization are used to repay balances under these financing sources.
The following table provides the maturities of our repurchase agreements, FHLB advances, revolving credit facilities, term notes payable and convertible senior notes as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
(in thousands)June 30,
2022		December 31,
2021
Within 30 days$2,373,262 $1,771,027 
30 to 59 days976,012 1,807,544 
60 to 89 days2,040,318 1,981,056 
90 to 119 days1,066,245 1,249,435 
120 to 364 days1,531,610 1,265,638 
One to three years1,193,944 543,026 
Three to five years281,711 281,083 
Total$9,463,102 $8,898,809 
(in thousands)September 30,
2017		 December 31,
2016
Within 30 days$3,167,517
 $3,286,783
30 to 59 days2,911,829
 2,376,002
60 to 89 days20,000
 1,365,394
90 to 119 days3,298,633
 1,504,056
120 to 364 days7,498,558
 1,319,720
One to three years2,255,879
 1,000,658
Three to five years282,543
 —
Five to ten years—
 —
Ten years and over1,183,738
 2,533,738
Total$20,618,697
 $13,386,351

For the three months ended September June 30, 2017,2022, our restricted and unrestricted cash balance decreased approximately $18.3$336.5 million to $883.2 million$1.1 billion at SeptemberJune 30, 2017.2022. The cash movements can be summarized by the following:
•Cash flows from operating activities. For the three months ended September June 30, 2017,2022, operating activities increased our cash balances by approximately $142.4$69.5 million, primarily driven by our financial results for the quarter.
•Cash flows from investing activities. For the three months ended September June 30, 2017,2022, investing activities decreased our cash balances by approximately $4.0 billion,$674.2 million, primarily driven by net purchases of AFS securities commercial real estate assets and MSR.
MSR, offset by an increase in due to counterparties, which was largely the result of unsettled RMBS purchases outstanding at June 30, 2022.
•Cash flows from financing activities. For the three months ended September June 30, 2017,2022, financing activities increased our cash balance by approximately $3.8 billion,$268.1 million, primarily driven by proceeds froman increase in repurchase agreementsagreement and our second preferred stock offering,revolving credit facility financing, offset by the repaymentpayment of a portion of our outstanding FHLB advances.
dividends.


Inflation
Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation.inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Our financial statements are prepared in accordance with U.S. GAAP and dividends are based upon net ordinary income and capital gains as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while providing an opportunity to stockholders to realize attractive risk-adjusted total return through ownership of our capital stock. Although we do not seek to avoid risk completely, we believe that risk can be quantified from historical experience, and we seek to manage our risk levels in order to earn sufficient compensation to justify the risks we undertake and to maintain capital levels consistent with taking such risks.

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To reducemanage the risks to our portfolio, we employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations. Risk management tools include software and services licensed or purchased from third parties as well as proprietary and third-party analytical tools and models. There can be no guarantee that these tools and methods will protect us from market risks.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and related financing obligations.
LIBOR and other indices which had been deemed “benchmarks” for various commercial and financial contracts have been the subject of recent national, international, and other regulatory guidance and proposals for reform, and it appears likely that LIBOR will be phased out or the methodology for determining LIBOR will be modified by June 2023. We currently have agreements that are indexed to LIBOR and are monitoring related reform proposals and evaluating the related risks; however, it is not possible to predict the effects of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and Outlook - LIBOR transition” for further discussion.
Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate risk management techniques that seek to mitigate the influence of interest rate changes on the values of our assets.
We may enter into a variety of derivative and non-derivative instruments to economically hedge interest rate risk or “duration mismatch (or gap)” by adjusting the duration of our floating-rate borrowings into fixed-rate borrowings to more closely match the duration of our assets. This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (i.e., LIBOR)LIBOR, OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchaseborrowing agreement or FHLB advance 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 our portfolio as well as our cash flows, we may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps, credit default swaps and total return swaps. In executing on the Company’sour current interest rate risk management strategy, the Company haswe have entered into TBAs, put and call options for TBAs, interest rate swap and swaption agreements, futures and Markit IOS total return swaps.options on futures. In addition, because MSR are negative duration assets, they provide a natural hedge to interest rate exposure on our Agency RMBS portfolio. In hedging interest rate risk, we seek to reduce the risk of losses on the value of our investments that may result from changes in interest rates in the broader markets, improve risk-adjusted returns and, where possible, obtain a favorable spread between the yield on our assets and the cost of our financing.
Income of a REIT income arising from “clearly identified” hedging transactions that are entered into to manage the risk of interest rate or price changes with respect to borrowings, including gain from the disposition of such hedging transactions, to the extent the hedging transactions hedge indebtedness incurred, or to be incurred, by the REIT to acquire or carry real estate assets, will not be treated as gross income for purposes of the either the 75% or the 95% gross income tests. In general, for a hedging transaction to be “clearly identified,” (i) it must be identified as a hedging transaction before the end of the day on which it is acquired, originated, or entered into;into, and (ii) the items of risks being hedged must be identified “substantially contemporaneously” with entering into the hedging transaction (generally not more than 35 days after entering into the hedging transaction). We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT, although this determination depends on an analysis of the facts and circumstances concerning each hedging transaction. We also implement part of our hedging strategy through our TRSs, which are subject to U.S. federal, state and, if applicable, local income tax.
We treat our TBAs as qualifying assets for purposes of the 75% asset test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% asset test, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS. We also treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.
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Interest Rate Effect on Net Interest Income
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yieldscoupon interest earned on our existing portfolio of leveraged fixed-rate Agency RMBS and non-Agency securities and residential mortgage loans held-for-sale will remain static. Moreover, interest rates may rise at a faster pace than the yields earned on our leveraged adjustable-rate and hybrid securities and adjustable-rate residential mortgage loans held-for-sale. Both of these factors could result in a decline in our net interest spread and net interest margin. The inverse result may occur during a period of falling interest rates. The severity of any such decline or increase in our net interest spread and net interest margin would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.decrease.
Our hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investment will be longer or shorter, which could reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

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We acquire adjustable-rate and hybrid Agency RMBS and non-Agency securities. These are assets in which some of the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which may limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements are not subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation, while the interest-rate yields on our adjustable-rate and hybrid securities could effectively be limited by caps. This issue will be magnified to the extent we acquire adjustable-rate and hybrid securities that are not based on mortgages that are fully indexed. In addition, adjustable-rate and hybrid securities may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. If this happens, we could receive less cash income on such assets than we would need to pay for interest costs on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.
Our adjustable-rate residential mortgage loans held-for-sale are typically subject to periodic and lifetime interest rate caps and floors, which may limit the amount by which the loan’s interest yield may change during any given period. Therefore, in a period of increasing interest rates, the interest-rate yields on our adjustable-rate residential mortgage loans held-for-sale could effectively be limited by caps.
Interest Rate Mismatch Risk
We fund the majority of our adjustable-rate and hybrid Agency RMBS and non-Agency securities and adjustable-rate commercial real estate assets with borrowings thatrisks are based on LIBOR, while the interest rates on these assets may be indexed to other index rates, such as the one-year Constant Maturity Treasury index, or CMT, the Monthly Treasury Average index, or MTA, or the 11th District Cost of Funds Index, or COFI. Accordingly, any increase in LIBOR relative to these indices may result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these assets. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders. To mitigate interest rate mismatches, we utilize the hedging strategies discussed above.
The following table provides the indices of our variable rate Agency RMBS, non-Agency securities, commercial real estate assets and residential mortgage loans held-for-sale of September 30, 2017 and December 31, 2016, respectively, based on carrying value (dollars in thousands).
  September 30, 2017 December 31, 2016
Index Type Floating 
Hybrid (1)
 Total Index % Floating 
Hybrid (1)
 Total Index %
CMT $12,366
 $19,760
 $32,126
 1% $13,188
 $23,953
 $37,141
 1%
LIBOR 4,464,894
 14,058
 4,478,952
 97% 3,043,945
 13,086
 3,057,031
 96%
Other (2)
 49,697
 63,045
 112,742
 2% 45,880
 41,760
 87,640
 3%
Total $4,526,957
 $96,863
 $4,623,820
 100% $3,103,013
 $78,799
 $3,181,812
 100%
____________________
(1)“Hybrid” amounts reflect those assets with greater than twelve months to reset.
(2)“Other” includes COFI, MTA and other indices.

Our analysis of risks is based on PRCM Advisers’ and its affiliates’ experience, estimates, models and assumptions. These analyses relyThe analysis is based on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by PRCM Advisers may produce results that differ significantly from the estimates and assumptions used in our models.

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We use a variety of recognized industry models, as well as proprietary models, to perform sensitivity analyses which are derived from primary assumptions for prepayment rates, discount rates and credit losses. The primary assumption used in this model is implied market volatility of interest rates. The information presented in the following interest rate sensitivity table projects the potential impactanalyses on various measures of sudden parallel changes in interest rates on our financial results and financial condition by examining how our assets, financing, and hedges will perform in various interest rate “shock” scenarios. Two of these measures are presented below in more detail. The first measure is change in annualized net interest income over the next 12 months, based onincluding interest spread from our interest sensitiverate swaps and float income from custodial accounts associated with our MSR. The second measure is change in value of financial instruments at September 30, 2017.
position, including the value of our derivative assets and liabilities. All changes in value are measured as the change from the SeptemberJune 30, 20172022 financial position. All projected changes in annualized net interest income are measured as the change from the projected annualized net interest income based off current performance returns.
 Changes in Interest Rates
(dollars in thousands)-100 bps -50 bps +50 bps +100 bps
Change in value of financial position:       
Available-for-sale securities$482,035
 $279,672
 $(367,792) $(798,770)
As a % of September 30, 2017 total equity11.7 % 6.8 % (8.9)% (19.3)%
Commercial real estate assets$711
 $401
 $(447) $(894)
As a % of September 30, 2017 total equity— % — % — % — %
Mortgage servicing rights$(323,324) $(137,398) $94,395
 $158,371
As a % of September 30, 2017 total equity(7.8)% (3.3)% 2.3 % 3.8 %
Residential mortgage loans held-for-investment in securitization trusts$19,349
 $25,798
 $(51,596) $(118,855)
As a % of September 30, 2017 total equity0.5 % 0.6 % (1.3)% (2.9)%
Residential mortgage loans held-for-sale$496
 $135
 $(281) $(924)
As a % of September 30, 2017 total equity— % — % — % — %
Derivatives, net$(229,874) $(131,520) $208,065
 $475,125
As a % of September 30, 2017 total equity(5.6)% (3.2)% 5.0 % 11.5 %
Repurchase agreements$(48,610) $(24,305) $24,305
 $48,610
As a % of September 30, 2017 total equity(1.2)% (0.6)% 0.6 % 1.2 %
Collateralized borrowings in securitization trusts$(38,019) $(35,054) $56,225
 $125,016
As a % of September 30, 2017 total equity(0.9)% (0.9)% 1.4 % 3.0 %
Federal Home Loan Bank advances$(1,993) $(997) $997
 $1,993
As a % of September 30, 2017 total equity(0.1)% — % — % — %
Revolving credit facilities$(17) $(8) $8
 $17
As a % of September 30, 2017 total equity— % — % — % — %
Total Net Assets$(139,246) $(23,276) $(36,121) $(110,311)
As a % of September 30, 2017 total assets(0.5)% (0.1)% (0.1)% (0.4)%
As a % of September 30, 2017 total equity(3.4)% (0.6)% (0.9)% (2.7)%
 -100 bps -50 bps +50 bps +100 bps
Change in annualized net interest income:$14,274
 $6,073
 $(4,864) $(9,728)
% change in net interest income3.5 % 1.5 % (1.2)% (2.4)%

The interest rate sensitivity table quantifiesComputation of the potential changescash flows for the rate-sensitive assets underpinning change in annualized net interest income including float income from custodial accounts associated with our MSR, and portfolio value, which includes the value of our derivative assets and liabilities, should interest rates immediately change. The interest rate sensitivity table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with the portfolio for each rate change are calculated based on assumptions includingrelated to, among other things, prepayment speeds, yield on future acquisitions, slope of the yield curve, and size of the portfolio.portfolio (for example, the assumption for prepayment speeds for Agency RMBS, and MSR is that they do not change in response to changes in interest rates). Assumptions made onfor the interest rate sensitive liabilities include anticipated interest rates,relate to, among other things, collateral requirements as a percentage of borrowings and amount and amount/term of borrowing. These assumptions may not hold in practice; realized net interest income results may therefore be significantly different from the net interest income produced in scenario analyses. We also note that the uncertainty associated with the estimate of a change in net interest income is directly related to the size of interest rate move considered.

Computation of results for portfolio value involves a two-step process. The first is the use of models to project how the value of interest rate sensitive instruments will change in the scenarios considered. The second, and equally important, step is the improvement of the model projections based on application of our experience in assessing how current market and macroeconomic conditions will affect the prices of various interest rate sensitive instruments. Judgment is best applied to localized (less than 25 basis points, or bps) interest rate moves. The more an instantaneous interest rate move exceeds 25 bps, the greater the likelihood that accompanying market events are significant enough to warrant reconsideration of interest rate sensitivities. As with net interest income, the uncertainty associated with the estimate of change in portfolio value is therefore directly related to the size of interest rate move considered.
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The following interest rate sensitivity table displays the potential impact of instantaneous, parallel changes in interest rates of +/- 25 and +/- 50 bps on annualized net interest income and portfolio value, based on our interest sensitive financial instruments at June 30, 2022. The preceding discussion shows that the results for the 25 bps move scenarios are the best representation of our interest rate exposure, followed by those for the 50 bps move scenarios. This hierarchy reflects our localized approach to managing interest rate risk: monitoring rates and rebalancing our hedges on a day to day basis, where rate moves only rarely exceed 25 bps in either direction.
Changes in Interest Rates
(dollars in thousands)-50 bps-25 bps+25 bps+50 bps
Change in annualized net interest income (1):
$36,100 $17,837 $(17,396)$(34,778)
% change in net interest income (1)
20.6 %10.2 %(9.9)%(19.8)%
Change in value of financial position:
Available-for-sale securities$198,332 $101,917 $(106,762)$(217,555)
As a % of common equity11.3 %5.8 %(6.1)%(12.4)%
Mortgage servicing rights (2)
$(60,489)$(25,758)$20,262 $32,841 
As a % of common equity (2)
(3.4)%(1.5)%1.1 %1.9 %
Derivatives, net$(200,002)$(94,713)$83,919 $158,016 
As a % of common equity(11.4)%(5.4)%4.8 %9.0 %
Reverse repurchase agreements$33 $16 $(16)$(33)
As a % of common equity— %— %— %— %
Repurchase agreements$(8,325)$(4,162)$4,161 $8,323 
As a % of common equity(0.5)%(0.2)%0.2 %0.5 %
Revolving credit facilities$(167)$(83)$83 $165 
As a % of common equity— %— %— %— %
Term notes payable$(143)$(71)$71 $142 
As a % of common equity— %— %— %— %
Convertible senior notes$(1,851)$(917)$880 $1,761 
As a % of common equity(0.1)%(0.1)%0.1 %0.1 %
Total Net Assets$(72,612)$(23,771)$2,598 $(16,340)
As a % of total assets(0.5)%(0.2)%— %(0.1)%
As a % of common equity(4.1)%(1.4)%0.1 %(0.9)%
____________________
(1)Amounts include the effect of interest spread from our interest rate swaps and float income from custodial accounts associated with our MSR, but do not reflect any potential changes to dollar roll income associated with our TBA positions or U.S. Treasury futures income, which are accounted for as derivative instruments in accordance with U.S. GAAP.
(2)Includes the effect of unsettled MSR.

Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at SeptemberJune 30, 2017. The2022. As discussed, the analysis utilizes assumptions and estimates based on management’s judgmentour experience and experience.judgment. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.
The change in annualized net interest income does not include any benefit or detriment from faster or slower prepayment rates on our Agency RMBS and non-Agency securities, instruments that represent the interest payments (but not the principal) on a pool of mortgages, or interest-only securities and MSR. We anticipate that faster prepayment speeds in lower interest rate scenarios will generate lower realized yields on Agency RMBS purchased at a premium premium, interest-only securities and MSR and higher realized yields on Agency RMBS and non-Agency securities purchased at a discount. Similarly, we anticipate that slower prepayment speeds in higher interest rate scenarios will generate higher realized yields on Agency RMBS purchased at a premium, interest-only securities and MSR and lower realized yields Agency RMBS and non-Agency securities purchased at a discount. Although we have sought to construct the portfolio to limit the effect of changes in prepayment speeds, there can be no assurance this will actually occur, and the realized yield of the portfolio may be significantly different than we anticipate in changing interest rate scenarios.
Given the low interest rate environment at September 30, 2017, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayment speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on Agency RMBS purchased at a premium, interest-only securities and MSR, and accretion of discount on our Agency RMBS and non-Agency securities purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. While this table reflects the estimated impact of interest rate changes on the static portfolio, we actively manage our portfolio and continuously make adjustments to the size and composition of our asset and hedge portfolio. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Prepayment Risk
Prepayment risk is the risk that principal will be repaid at a different rate than anticipated. As we receive prepayments of principal on our Agency RMBS, and non-Agency securities, premiums paid on such assets will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion
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We believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.
MSR are also subject to prepayment risk in that, generally, an increase in prepayment rates would result in a decline in value of the MSR.
Market Risk
Market Value Risk. Our AFS securities are reflected at their estimated fair value, with the difference between amortized cost net of allowance for credit losses and estimated fair value for all AFS securities except Agency interest-onlycertain AFS securities and GSE credit risk transfer securitiesfor which we have elected the fair value option reflected in accumulated other comprehensive (loss) income. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, market valuation of credit risks, and other factors. Generally, in a rising interest rate environment, we would expect the fair value of these securities to decrease; conversely, in a decreasing interest rate environment, we would expect the fair value of these securities to increase. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted.
Our MSR are reflected at their estimated fair value. The estimated fair value fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, we would expect prepayments to decrease resulting in an increase inand the fair value of our MSR.MSR to increase. Conversely, in a decreasing interest rate environment, we would expect prepayments to increase resulting in a decline in fair value.

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Our residential mortgage loans are reflected at their estimated fair value. The estimated fair value fluctuates primarily due to changes in interest rates, market valuation of credit risks and other factors. Generally in a rising rate environment, we would expect the fair value of these loansour MSR to decrease; conversely, in a decreasing rate environment, we would expect the fair value of these loans to increase. However, the fair value of the CSL and Ginnie Mae buyout residential mortgage loans included in residential mortgage loans held-for-sale is generally less sensitive to interest rate changes.decrease.
Real estate riskEstate Risk. Both residential and commercialResidential property values are subject to volatility and may be affected adversely by a number of factors, including national, regional and local economic conditions; local real estate conditions (such as an oversupplythe supply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and natural disasters and other catastrophes. Decreases in property values reduce the value of the collateral for commercial real estate and residential mortgage loans and the potential proceeds available to borrowers to repay the loans, which could cause usmay increase costs to suffer losses on our non-Agency securities and commercial real estate andservice the residential mortgage loans.loans underlying our MSR.
Liquidity Risk
Our liquidity risk is principally associated with our financing of long-maturity assets with shorter-term borrowings in the form of repurchase agreements FHLB advances and borrowings under revolving credit facilities. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
Should the value of our assets pledged as collateral suddenly decrease, lender margin calls could increase, causing an adverse change in our liquidity position. Moreover, the portfolio construction of MSR, which generally have negative duration, combined with levered RMBS, which generally have positive duration, may in certain market scenarios lead to variation margin calls, which could negatively impact our excess cash position. Additionally, if the FHLB or one or more of our repurchase agreement or revolving credit facility counterparties chose not to provide ongoing funding, our ability to finance would decline or exist at possibly less advantageous terms. As such, we cannot assureprovide assurance that we will always be able to roll over our repurchase agreements FHLB advances and revolving credit facilities. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this Quarterly Report on Form 10-Q for further information about our liquidity and capital resource management.
Credit Risk
We believe that our investment strategy will generally keep our risk of credit losses low to moderate. However, we retain the risk of potential credit losses on all of the loans underlying our non-Agency securities and on our commercial real estate and residential mortgage loans. With respect to our non-Agency securities that are senior in the credit structure, credit support contained in deal structures provide a level of protection from losses. We seek to manage the remaining credit risk through our pre-acquisition due diligence process, which includes comprehensive underwriting, and by factoring assumed credit losses into the purchase prices we pay for non-Agency securities and commercial real estate and residential mortgage assets. In addition, with respect to any particular target asset, we evaluate relative valuation, supply and demand trends, shape of yield curves, prepayment rates, delinquency and default rates, recovery of various sectors and vintage of collateral. We further mitigate credit risk in our commercial real estate and and residential mortgage loan portfolios through (i) selecting servicers whose specialties are well matched against the underlying attributes of the borrowers contained in the loan pools, and (ii) an actively managed internal servicer oversight and surveillance program. At times, we enter into credit default swaps or other derivative instruments in an attempt to manage our credit risk. Nevertheless, unanticipated credit losses could adversely affect our operating results.securities.


Item 4. Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, were effective.effective as of June 30, 2022. Although our CEO and CFO have determined our disclosure controls and procedures were effective at the end of the period covered by this Quarterly Report on Form 10-Q, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Companycompany to disclose material information otherwise required to be set forth in the reports we submit under the Exchange Act.
There was no change in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION


Item 1. Legal Proceedings
From time to time, we may be involved in various legal claims and/or administrative proceedingsand regulatory matters that arise in the ordinary course of our business. As previously disclosed, on July 15, 2020, we provided PRCM Advisers with a notice of termination of the dateManagement Agreement for “cause” in accordance with Section 15(a) of this filing, we are not party to any litigationthe Management Agreement. We terminated the Management Agreement for “cause” on the basis of certain material breaches and certain events of gross negligence on the part of PRCM Advisers in the performance of its duties under the Management Agreement. On July 21, 2020, PRCM Advisers filed a complaint against us in the United States District Court for the Southern District of New York, or legal proceedings or,the Court. Subsequently, Pine River Domestic Management L.P. and Pine River Capital Management L.P. were added as plaintiffs to the bestmatter. As amended, the complaint, or the Federal Complaint, alleges, among other things, the misappropriation of trade secrets in violation of both the Defend Trade Secrets Act and New York common law, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition and business practices, unjust enrichment, conversion, and tortious interference with contract. The Federal Complaint seeks, among other things, an order enjoining us from making any use of or disclosing PRCM Advisers’ trade secret, proprietary, or confidential information; damages in an amount to be determined at a hearing and/or trial; disgorgement of our knowledge, any threatened litigation or legal proceedings,wrongfully obtained profits; and fees and costs incurred by the plaintiffs in pursuing the action. We have filed our answer to the Federal Complaint and made counterclaims against PRCM Advisers and Pine River Capital Management L.P. On May 5, 2022, the plaintiffs filed a motion for judgement on the pleadings, seeking judgement in their favor on all but one of our counterclaims and on one of our affirmative defenses. We have opposed the motion for judgement on the pleadings, which in our opinion, individually or inis pending with the aggregate, wouldCourt. Discovery has commenced and is ongoing. Our board of directors believes the Federal Complaint is without merit and that we have a material adverse effect on our resultsfully complied with the terms of operations or financial condition.the Management Agreement.


Item 1A. Risk Factors
Except as set forth in our Quarterly Report on Form 10-Q for the period ended March 31, 2017, or the Q1 Form 10-Q, and our Quarterly Report on Form 10-Q for the period ended June 30, 2017, or the Q2 Form 10-Q,below, there have been no material changes to the risk factors set forth under the heading “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016,2021, or the Form 10-K. The materialization of any risks and uncertainties identified in our Forward-Looking Statements contained in this Quarterly Report on Form 10-Q, together with those previously disclosed in the Form 10-K the Q1 Form 10-Q, the Q2 Form 10-Q, or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations, and cash flows. See Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Risks Related to the Acquisition of RoundPoint Mortgage Servicing Corporation
Completion of the proposed acquisition of RoundPoint Mortgage Servicing Corporation remains subject to conditions that we cannot control.
Our proposed acquisition of RoundPoint Mortgage Servicing Corporation, or RoundPoint, is subject to various closing conditions, including the receipt of certain regulatory and GSE approvals. There are no assurances that all of the conditions necessary to consummate the acquisition of RoundPoint will be satisfied or that the conditions will be satisfied within the anticipated time frame.
We may fail to realize all of the expected benefits of the proposed acquisition of RoundPoint or those benefits may take longer to realize than expected.
The full benefits of the proposed acquisition of RoundPoint may not be realized as expected or may not be achieved within the anticipated time frame, or at all. Failure to achieve the anticipated benefits of the acquisition of RoundPoint could adversely affect our business, results of operations and financial condition.
In addition, we will be required to devote significant attention and resources prior to closing to prepare for the post-closing operation of the combined company. Following the closing, we will be required to devote significant attention and resources to successfully integrate RoundPoint’s operations into our existing structure. This integration process may disrupt our business and, if ineffective, would limit the anticipated benefits of the acquisition of RoundPoint.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)None.
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(c)Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock. Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The Company’smanner, price, number and timing of preferred share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The preferred share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The preferred share repurchase program does not have an expiration date. As of June 30, 2022, we had not yet repurchased any preferred shares.
Our common share repurchase program allows for the repurchase of up to an aggregate of 37,500,000 shares of the Company’scompany’s common stock. SharesCommon shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any combination of such methods. The manner, price, number and timing of common share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The common share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The common share repurchase program does not have an expiration date. As of SeptemberJune 30, 2017,2022, we had repurchased 12,067,50012,174,300 common shares under the program for a total cost of $200.4$201.5 million. We did not repurchase common shares during the three months ended SeptemberJune 30, 2017.2022.


Item 3. Defaults Upon Senior Securities
None.


Item 4. Mine Safety Disclosures
None.


Item 5. Other Information
None.


Item 6. Exhibits
(a) Exhibits
Exhibits - TheA list of exhibits listedto this Quarterly Report on the accompanying Index of Exhibits are filed or incorporated by reference as a part of this report. Such IndexForm 10-Q is incorporated herein by reference.


set forth below.
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Table of Contents




Exhibit NumberExhibit IndexDescription
3.12.1
3.1
3.2
3.3
3.4
3.5
3.43.6
3.5
Articles Supplementary to the Articles of Amendment to the Articles of Amendment and Restatement of Two Harbors Investment Corp. designating the shares of 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 3.3 of the Company’sRegistrant’s Form 8-A filed with the SEC on March 13, 2017).
3.63.7
3.73.8
3.9
3.10
31.1
31.2
32.1
32.2
101*The annexes, schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of such annexes, schedules and exhibits, or any section thereof, to the Securities and Exchange Commission upon request.
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Table of Contents

Exhibit NumberExhibit Description
101Financial statements from the Quarterly Report on Form 10-Q of Two Harbors Investment Corp. for the three months ended SeptemberJune 30, 2017,2022, filed with the SEC on November 8, 2017,August 4, 2022, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income,Loss, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements. (filed herewith)
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). (filed herewith)

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TWO HARBORS INVESTMENT CORP.
Dated:November 8, 2017August 4, 2022By:/s/ Thomas E. SieringWilliam Greenberg
Thomas E. Siering
William Greenberg
President, Chief Executive Officer, President and Director
Chief Investment Officer
(Principal Executive Officer)
Dated:November 8, 2017August 4, 2022By:/s/ Brad Farrell
Brad Farrell
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Dated:November 8, 2017By:/s/ Mary Riskey
Mary Riskey

Chief AccountingFinancial Officer

(Principal Financial and Accounting Officer)



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