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Section 1: DEFM14A (DEFM14A)


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

o

 

Preliminary Proxy Statement

o

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

ý

 

Definitive Proxy Statement

o

 

Definitive Additional Materials

o

 

Soliciting Material under §240.14a-12

 

CYS Investments, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

ý

 

No fee required.

o

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
    (1)   Title of each class of securities to which transaction applies:
        
 
    (2)   Aggregate number of securities to which transaction applies:
        
 
    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        
 
    (4)   Proposed maximum aggregate value of transaction:
        
 
    (5)   Total fee paid:
        
 

o

 

Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        
 
    (2)   Form, Schedule or Registration Statement No.:
        
 
    (3)   Filing Party:
        
 
    (4)   Date Filed:
        
 

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JOINT PROXY STATEMENT/PROSPECTUS

LOGO   LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

             June 25, 2018

To the Stockholders of Two Harbors Investment Corp. and the Stockholders of CYS Investments, Inc.:

             The board of directors (the "Two Harbors Board") of Two Harbors Investment Corp. ("Two Harbors") and the board of directors (the "CYS Board") of CYS Investments, Inc. ("CYS"), each a Maryland corporation, each have approved an Agreement and Plan of Merger, dated as of April 25, 2018 (the "Merger Agreement"), by and among Two Harbors, Eiger Merger Subsidiary LLC ("Merger Sub") and CYS, pursuant to which Merger Sub will merge with and into CYS, with CYS continuing as the surviving corporation (the "Merger"). As a result of the Merger, the surviving corporation will become an indirect, wholly owned subsidiary of Two Harbors. The closing of the Merger will occur as promptly as practicable following satisfaction of all closing conditions set forth in the Merger Agreement, and either Two Harbors or CYS may terminate the Merger Agreement if closing has not occurred by October 31, 2018. After the Merger, the combined company of Two Harbors and CYS will retain the name "Two Harbors Investment Corp." and its shares will continue to trade on the New York Stock Exchange under the symbol "TWO".

             Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of CYS ("CYS Common Stock") will be converted into the right to receive from Two Harbors (a) a number of shares of common stock, par value $0.01 per share, of Two Harbors ("Two Harbors Common Stock") determined (to the nearest one-ten-thousandth) by dividing (i) CYS's adjusted book value per share, multiplied by 96.75%, by (ii) Two Harbors' adjusted book value per share, multiplied by 94.20%, each as calculated at a time and pursuant to certain calculation principles set forth in the Merger Agreement, and (b) $15,000,000 divided by the sum of the number of shares of CYS Common Stock issued and outstanding immediately prior to the effective time of the Merger (excluding any cancelled shares), including outstanding CYS restricted stock that will vest upon completion of the Merger pursuant to the Merger Agreement (less any shares surrendered for income tax purposes).

             Based on the number of shares of CYS Common Stock outstanding on June 22, 2018, the record date for the Two Harbors special meeting, and an assumed exchange ratio of 0.4872 based on the adjusted book value per share of Two Harbors Common Stock and CYS Common Stock as of March 31, 2018, calculated in accordance with the Merger Agreement, we expect approximately 75.7 million shares of Two Harbors Common Stock will be issued in connection with the Merger. The actual Exchange Ratio will be publicly announced at least five business days before each of the special meetings of stockholders described below.

             In addition, each share of 7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share, of CYS (the "CYS Series A Preferred Stock") will be converted into the right to receive one share of newly classified 7.75% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share, of Two Harbors (the "Two Harbors Series D Preferred Stock"), and each share of 7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share, of CYS (the "CYS Series B Preferred Stock") will be converted into the right to receive one share of newly classified 7.50% Series E Cumulative Redeemable Preferred Stock, par value $0.01 per share, of Two Harbors (the "Two Harbors Series E Preferred Stock").

             In connection with the Merger, PRCM Advisers LLC ("PRCM Advisers"), Two Harbors' external manager and a subsidiary of Pine River Capital Management L.P., has agreed to reduce the base management fee it charges Two Harbors with respect to the additional equity under management resulting from the Merger from 1.5% of stockholders' equity on an annualized basis to 0.75% through the first anniversary of Closing. PRCM Advisers will also make a one-time downward adjustment of $15,000,000 to the management fees payable by Two Harbors for the quarter in which the Merger closes as well as a downward adjustment to the management fees payable by Two Harbors of up to an additional $3.3 million to reimburse Two Harbors for certain transaction-related expenses.

             Two Harbors and CYS will each hold a special meeting of their respective common stockholders. Two Harbors' special meeting will be held at 601 Carlson Parkway, 2nd Floor, Minnetonka, Minnesota 55305 on July 27, 2018, at 9:00 a.m., Central Time. CYS's special meeting will be held at 50 Rowes Wharf, Boston, Massachusetts 02110 on July 27, 2018, at 9:00 a.m., Eastern Time. The preferred stockholders of each of CYS and Two Harbors are not entitled to vote on any of the matters to be considered and voted upon at the CYS special meeting or the Two Harbors special meeting, as applicable.

             At the Two Harbors special meeting, the Two Harbors common stockholders will be asked to (i) consider and vote on a proposal to approve the issuance of shares of Two Harbors Common Stock in the Merger and upon any conversion (upon certain future changes of control of Two Harbors, if any) of the Two Harbors Series D Preferred Stock and Two Harbors Series E Preferred Stock to be issued in the Merger (the "Two Harbors Common Stock Issuance Proposal") and (ii) approve the adjournment of the Two Harbors special meeting, if necessary or appropriate, for the purpose of soliciting additional votes for the approval of the Two Harbors Common Stock Issuance Proposal (the "Two Harbors Adjournment Proposal"). The Two Harbors Board has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the Merger and the issuance of shares of Two Harbors Common Stock (the "Two Harbors Common Stock Issuance"), are in the best interests of Two Harbors and its stockholders, (ii) approved the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, (iii) directed that the Two Harbors Common Stock Issuance Proposal be submitted to the holders of Two Harbors Common Stock for consideration at the Two Harbors special meeting and (iv) recommended that the holders of Two Harbors Common Stock approve the Two Harbors Common Stock Issuance Proposal. The Two Harbors Board unanimously recommends that the Two Harbors common stockholders vote "FOR" the Two Harbors Common Stock Issuance Proposal and "FOR" the Two Harbors Adjournment Proposal. Only those matters included in the Two Harbors Notice of Meeting may be considered and voted upon at the Two Harbors special meeting.

             At the CYS special meeting, the CYS common stockholders will be asked to (i) consider and vote on a proposal to approve the Merger (the "Merger Proposal"), (ii) consider and vote on a non-binding advisory proposal to approve the compensation that may be paid or become payable to CYS's named executive officers that is based on or otherwise relates to the Merger (the "CYS Non-Binding Compensation Advisory Proposal"), and (iii) approve the adjournment of the CYS special meeting, if necessary or appropriate, for the purpose of soliciting additional votes for the approval of the Merger Proposal (the "CYS Adjournment Proposal"). The CYS Board, acting upon the unanimous recommendation of a special committee of independent directors of CYS formed for the purpose of, among other things, evaluating and making a recommendation to the CYS Board with respect to the Merger Agreement and the other transactions contemplated therein, has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the merger of Merger Sub with and into CYS, are in the best interests of CYS and its stockholders, (ii) approved the Merger Agreement and declared that the transactions contemplated therein, including the Merger, are advisable, (iii) directed that the Merger and the other transactions contemplated by the Merger Agreement be submitted to the holders of CYS Common Stock for consideration at the CYS special meeting and (iv) recommended that the CYS common stockholders approve the Merger and the other transactions contemplated by the Merger Agreement.

             The CYS Board unanimously recommends that the CYS common stockholders vote "FOR" the Merger Proposal, "FOR" the CYS Non-Binding Compensation Advisory Proposal and "FOR" the CYS Adjournment Proposal. Only those matters included in the CYS Notice of Meeting may be considered and voted upon at the CYS special meeting.

             This joint proxy statement/prospectus provides detailed information about the special meetings of Two Harbors and CYS, the Merger Agreement, the Merger and other related matters. A copy of the Merger Agreement is included as Annex A to this joint proxy statement/prospectus. We encourage you to read this joint proxy statement/prospectus, the Merger Agreement and the other annexes to this joint proxy statement/prospectus carefully and in their entirety. In particular, you should carefully consider the discussion in the section of this joint proxy statement/prospectus entitled "Risk Factors" beginning on page 43. You may also obtain more information about each company from the documents they file with the Securities and Exchange Commission (the "SEC").

             Whether or not you plan to attend the Two Harbors special meeting or the CYS special meeting, as applicable, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying reply envelope or authorize a proxy to vote your shares through the Internet or by telephone. You may also authorize a proxy to vote your shares over the Internet using the Internet address on the enclosed proxy card or by telephone using the toll-free number on the enclosed proxy card. If you authorize a proxy to vote your shares through the Internet or by telephone, you will be asked to provide the company number and control number from the enclosed proxy card. If you attend a special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

             Your vote is very important, regardless of the number of shares of stock you own. Whether or not you plan to attend the Two Harbors special meeting or the CYS special meeting, as applicable, please authorize a proxy to vote your shares of stock as promptly as possible to make sure that your shares of stock are represented at the applicable special meeting. Please note that the failure to vote, or authorize a proxy to vote, your shares of stock of CYS is the equivalent of a vote against the Merger Proposal.

             Thank you in advance for your continued support.

             Sincerely,

  Thomas E. Siering   Kevin E. Grant    
  Chief Executive Officer, President and   Chief Executive Officer, Chairman,    
  Director   President, Chief Investment Officer and    
  Two Harbors Investment Corp.   Founder    
      CYS Investments, Inc.    

             Neither the SEC nor any state securities regulatory agency has approved or disapproved of the securities to be issued in connection with the Merger or passed upon the adequacy or accuracy of this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.

             This joint proxy statement/prospectus is dated June 25, 2018, and is first being mailed to the stockholders of Two Harbors and the stockholders of CYS on or about June 27, 2018.


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LOGO

575 Lexington Avenue
Suite 2930
New York, New York 10022



NOTICE OF SPECIAL MEETING OF TWO HARBORS COMMON STOCKHOLDERS
TO BE HELD ON JULY 27, 2018



        NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Two Harbors Investment Corp., a Maryland corporation ("Two Harbors"), will be held at 601 Carlson Parkway, 2nd Floor, Minnetonka, Minnesota 55305 on July 27, 2018 at 9:00 a.m., Central Time, for the following purposes:

        Two Harbors will transact no other business at the Two Harbors special meeting or any adjournment or postponement thereof. Please refer to the attached joint proxy statement/prospectus for further information with respect to the business to be transacted at the Two Harbors special meeting. The board of directors of Two Harbors (the "Two Harbors Board") has fixed the close of business on June 22, 2018 as the record date for the determination of Two Harbors stockholders entitled to notice of, and to vote at, the Two Harbors special meeting or any adjournments or postponements thereof. Accordingly, only common stockholders at the close of business on that date are entitled to notice of, and to vote at, the Two Harbors special meeting and any adjournments or postponements thereof.

        The Two Harbors Board has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the Merger and the issuance of shares of Two Harbors Common Stock (the "Two Harbors Common Stock Issuance"), are in the best interests of Two Harbors and its stockholders, (ii) approved the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, (iii) directed that the Two Harbors Common Stock Issuance Proposal be submitted to the holders of Two Harbors Common Stock for consideration at the Two Harbors special meeting and (iv) recommended that the holders of Two Harbors Common Stock approve the Two Harbors Common Stock Issuance Proposal. The Two Harbors Board unanimously recommends that the Two Harbors common stockholders vote "FOR" the Two Harbors Common Stock Issuance Proposal and "FOR" the Two Harbors Adjournment Proposal.

        Your vote is very important, regardless of the number of shares of Two Harbors Common Stock you own. Whether or not you plan to attend the Two Harbors special meeting, please authorize a proxy to vote your shares as promptly as possible to make sure that your shares are represented at the Two Harbors special meeting. Properly executed proxy cards with no instructions indicated on the proxy card will be voted "FOR" the Two Harbors Common Stock Issuance Proposal and "FOR" the Two


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Harbors Adjournment Proposal. Even if you plan to attend the Two Harbors special meeting in person, we urge you to authorize a proxy as promptly as possible by (1) accessing the Internet website specified on your proxy card, (2) calling the toll-free number specified on your proxy card or (3) completing, signing, dating and returning the enclosed proxy card in the accompanying postage-paid envelope prior to the Two Harbors special meeting to ensure that your shares will be represented and voted at the Two Harbors special meeting. If you hold your shares of Two Harbors Common Stock in "street name," which means through a bank, broker or other nominee, please follow the instructions on the voting instruction card furnished to you by such record holder.

        Please note that if you hold shares of stock in different accounts, it is important that you vote or authorize a proxy to vote the shares of stock represented by each account. If you attend the Two Harbors special meeting, you may revoke your proxy and vote in person, even if you have previously returned your proxy card or authorized a proxy to vote your shares through the Internet or by telephone. If your shares of Two Harbors Common Stock are held by a bank, broker or other nominee, and you plan to attend the Two Harbors special meeting in person, please bring to the special meeting your statement evidencing your beneficial ownership of your shares of Two Harbors Common Stock. Please carefully review the instructions in the enclosed joint proxy statement/prospectus and the enclosed proxy card or the information forwarded by your bank, broker or other nominee regarding each of these options.

        This notice and the enclosed proxy statement/prospectus are first being mailed to Two Harbors stockholders on or about June 27, 2018.

  By Order of the Board of Directors,



 

GRAPHIC

Rebecca B. Sandberg
Vice President, General Counsel and Secretary

New York, New York
June 25, 2018


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LOGO

500 Totten Pond Road, 6th Floor
Waltham, Massachusetts 02451



NOTICE OF SPECIAL MEETING OF CYS COMMON STOCKHOLDERS
TO BE HELD ON JULY 27, 2018



        NOTICE IS HEREBY GIVEN that a special meeting of stockholders of CYS Investments, Inc., a Maryland corporation ("CYS") will be held at 50 Rowes Wharf, Boston, Massachusetts 02110 on July 27, 2018 at 9:00 a.m., Eastern Time, for the following purposes:

        CYS will transact no other business at the special meeting or any adjournment or postponement thereof. These items of business are described in the enclosed joint proxy statement/prospectus. The CYS board of directors (the "CYS Board") has designated the close of business on June 22, 2018 as the record date for the purpose of determining the stockholders who are entitled to receive notice of, and to vote at, the CYS special meeting and any adjournments or postponements of the special meeting, unless a new record date is fixed in connection with an adjournment or postponement of the special meeting. Accordingly, only CYS common stockholders at the close of business on the record date are entitled to notice of the CYS special meeting and only CYS common stockholders are entitled to vote at the CYS special meeting and at any adjournment or postponement of the special meeting.

        The CYS Board, acting upon the unanimous recommendation of a special committee of independent directors of CYS formed for the purpose of, among other things, evaluating and making a recommendation to the CYS Board with respect to the Merger Agreement and the other transactions contemplated therein, has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the merger of Merger Sub with and into CYS, are in the best interests of CYS and its stockholders, (ii) approved the Merger Agreement and declared that the transactions contemplated therein, including the Merger, are advisable, (iii) directed that the Merger and the other transactions contemplated by the Merger Agreement be submitted to the holders of CYS Common Stock for consideration at the CYS special meeting and (iv) recommended that the CYS common stockholders approve the Merger and the other transactions contemplated by the Merger Agreement. The CYS Board unanimously recommends that the CYS common stockholders vote "FOR" the Merger Proposal, "FOR" the CYS Non-Binding Compensation Advisory Proposal and "FOR" the CYS Adjournment Proposal.


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        Your vote is very important, regardless of the number of shares of CYS you own. Whether or not you plan to attend the CYS special meeting, please authorize a proxy to vote your shares as promptly as possible to make sure that your shares are represented at the special meeting. Properly executed proxy cards with no instructions indicated on the proxy card will be voted "FOR" the Merger Proposal, "FOR" the CYS Non-Binding Compensation Advisory Proposal and "FOR" the CYS Adjournment Proposal. Even if you plan to attend the CYS special meeting in person, we request that you complete, sign, date and return the enclosed proxy card in the accompanying envelope prior to the special meeting to ensure that your shares will be represented and voted at the special meeting if you are unable to attend. If you hold your CYS shares in "street name," which means through a bank, broker or other nominee, you must obtain a legal proxy from this bank, broker or other nominee in order to vote in person at the CYS special meeting.

        If you do not vote on the Merger Proposal, this will have the same effect as a vote by you against the approval of the Merger Proposal.

        Please note that if you hold shares of stock in different accounts, it is important that you vote or authorize a proxy to vote the shares of stock represented by each account. If you attend the CYS special meeting, you may revoke your proxy and vote in person, even if you have previously returned your proxy card or authorized a proxy to vote your shares through the Internet or by telephone. If your CYS shares are held by a bank, broker or other nominee, and you plan to attend the CYS special meeting in person, please bring to the special meeting your statement evidencing your beneficial ownership of your CYS shares. Please carefully review the instructions in the enclosed joint proxy statement/prospectus and the enclosed proxy card or the information forwarded by your bank, broker or other nominee regarding each of these options.

  By Order of the Board of Directors,

 

 

GRAPHIC

 

Thomas A. Rosenbloom
Executive Vice President of Business Development, General Counsel, and Secretary

Waltham, Massachusetts
June 25, 2018


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ADDITIONAL INFORMATION

        This joint proxy statement/prospectus incorporates important business and financial information about Two Harbors and CYS from other documents that are not included in or delivered with this joint proxy statement/prospectus. This information is available to you without charge upon your request. To obtain timely delivery, you must request the information no later than five business days before the date of the applicable special meeting. You can obtain the documents incorporated by reference into this joint proxy statement/prospectus by requesting them from Two Harbors' or CYS's investor relations departments:

If you are a Two Harbors stockholder:   If you are a CYS stockholder:

D.F. King & Co., Inc.
48 Wall Street, 22nd floor
New York, New York 10005
(866) 530-8623 (toll free)
two@dfking.com

 

Georgeson LLC
1290 Avenue of the Americas, 9th Floor
New York, New York 10104
866-300-8594 (toll free)

or

 

or

575 Lexington Avenue
Suite 2930
New York, New York 10022
(612) 629-2500
Attention: Investor Relations

 

500 Totten Pond Road
6th Floor
Waltham, Massachusetts 02451
(617) 639-0440
Attention: Investor Relations

        Investors may also consult Two Harbors' or CYS's website for more information concerning the Merger and other related transactions described in this joint proxy statement/prospectus. Two Harbors' website is www.twoharborsinvestment.com. CYS's website is www.cysinv.com. Each company's public filings are also available at www.sec.gov. The information contained on Two Harbors' and CYS's websites is not part of this joint proxy statement/prospectus and is not incorporated herein by reference. The references to Two Harbors' and CYS's websites are intended to be inactive textual references only.

        If you would like to request any documents that are incorporated by reference into this joint proxy statement/prospectus, please do so by July 20, 2018 in order to receive them before the Two Harbors special meeting and by July 20, 2018 in order to receive them before the CYS special meeting.

        For more information, see "Where You Can Find More Information and Incorporation by Reference" beginning on page 212.


ABOUT THIS DOCUMENT

        This joint proxy statement/prospectus, which forms part of a registration statement on Form S-4 (Registration Statement No. 333-225242) filed by Two Harbors with the SEC, constitutes a prospectus of Two Harbors for purposes of the Securities Act of 1933, as amended (the "Securities Act"), with respect to (i) the shares of Two Harbors Common Stock to be issued to CYS common stockholders in exchange for shares of CYS Common Stock, (ii) the shares of Two Harbors Series D Preferred Stock to be issued to holders of CYS Series A Preferred Stock in exchange for shares of CYS Series A Preferred Stock and (iii) the shares of Two Harbors Series E Preferred Stock to be issued to holders of CYS Series B Preferred Stock in exchange for shares of CYS Series B Preferred Stock, in each case, pursuant to the Merger Agreement, as such agreement may be amended or modified from time to time. This joint proxy statement/prospectus also constitutes a proxy statement for each of Two Harbors and CYS for purposes of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, it constitutes a notice of special meeting with respect to the Two Harbors special meeting and a notice of special meeting with respect to the CYS special meeting.


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        You should rely only on the information contained or incorporated by reference in this joint proxy statement/ prospectus. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated June 25, 2018, and you should not assume that the information contained in, or incorporated by reference into, this joint proxy statement/prospectus is accurate as of any date other than that date (or, in the case of documents incorporated by reference, their respective dates). Neither the mailing of this joint proxy statement/prospectus to Two Harbors stockholders or CYS stockholders nor the Two Harbors Common Stock Issuance to CYS common stockholders in the Merger pursuant to the Merger Agreement will create any implication to the contrary.

        This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or to any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Information contained in this joint proxy statement/prospectus regarding Two Harbors has been provided by Two Harbors and information contained in this joint proxy statement/prospectus regarding CYS has been provided by CYS.


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS AND THE MERGER

    1  

SUMMARY

    17  

The Companies

    17  

The Merger

    18  

The Two Harbors Special Meeting

    21  

The CYS Special Meeting

    22  

Opinion of Two Harbors' Financial Advisor

    23  

Opinion of CYS's Financial Advisor, Barclays Capital Inc.

    23  

Opinion of CYS's Financial Advisor, Credit Suisse Securities (USA) LLC

    23  

Directors and Management of Two Harbors After the Merger

    24  

Interests of Two Harbors Directors and Executive Officers in the Merger

    24  

Interests of CYS's Directors and Executive Officers in the Merger

    25  

Treatment of CYS Restricted Stock

    26  

Fourth Amendment to the Management Agreement

    26  

Conditions to Complete the Merger

    26  

Regulatory Approvals Required for the Merger

    27  

Listing of Two Harbors Common Stock and Deregistration of CYS Common Stock

    27  

Accounting Treatment

    27  

Comparison of Rights of Two Harbors Common Stockholders and CYS Common Stockholders

    27  

Appraisal Rights

    27  

No Solicitation; Change in Recommendations

    27  

Termination of the Merger Agreement

    28  

Termination Fees and Expenses

    29  

Litigation Relating to the Merger

    29  

Material U.S. Federal Income Tax Consequences

    31  

Description of Two Harbors Common Stock

    31  

Selected Historical Financial Information of Two Harbors

    32  

Selected Historical Financial Information of CYS

    34  

Selected Unaudited Pro Forma Condensed Combined Financial Statements

    39  

Unaudited Comparative Per Share Information

    41  

RISK FACTORS

    43  

Risks Related to the Merger

    43  

Risks Related to the Combined Company Following the Merger

    47  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

    52  

THE COMPANIES

    54  

THE TWO HARBORS SPECIAL MEETING

    57  

PROPOSALS SUBMITTED TO THE TWO HARBORS COMMON STOCKHOLDERS

    60  

Proposal 1: Two Harbors Common Stock Issuance Proposal

    60  

Proposal 2: Two Harbors Adjournment Proposal

    60  

THE CYS SPECIAL MEETING

    62  

PROPOSALS SUBMITTED TO THE CYS COMMON STOCKHOLDERS

    65  

Proposal 1: Merger Proposal

    65  

Proposal 2: CYS Non-Binding Compensation Advisory Proposal

    65  

Proposal 3: CYS Adjournment Proposal

    66  

THE MERGER

    67  

General

    67  

Background of the Merger

    67  

Recommendation of the Two Harbors Board and Its Reasons for the Merger

    79  

Recommendation of the CYS Board and Its Reasons for the Merger

    82  

i


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Opinion of Two Harbors' Financial Advisor

    85  

Opinion of CYS's Financial Advisor, Barclays Capital Inc. 

    93  

Opinion of CYS's Financial Advisor, Credit Suisse Securities (USA) LLC

    102  

Certain Two Harbors Unaudited Prospective Financial Information

    111  

Certain CYS Unaudited Prospective Financial Information

    113  

Directors and Management of Two Harbors After the Merger

    116  

Interests of Two Harbors' Directors and Executive Officers in the Merger

    116  

Interests of CYS's Directors and Executive Officers in the Merger

    117  

Regulatory Approvals Required for the Merger

    121  

Accounting Treatment

    121  

Appraisal Rights

    122  

Exchange of Shares of Stock in the Merger

    122  

Dividends

    123  

Listing of Shares of Stock

    123  

Deregistration of CYS Common Stock and CYS Preferred Stock

    123  

Litigation Relating to the Merger

    124  

THE MERGER AGREEMENT

    126  

The Merger

    126  

Closing; Effective Time of the Merger

    126  

Organizational Documents

    126  

Consideration for the Merger

    127  

Tax Withholding

    128  

No Rights of Objection or Appraisal

    129  

Exchange Procedures

    129  

Representations and Warranties

    130  

Material Adverse Effect

    133  

Conduct of Business by CYS Pending the Merger

    134  

Conduct of Business by Two Harbors Pending the Merger

    137  

Agreement to Use Reasonable Best Efforts

    139  

Competing Proposals

    140  

Superior Proposals

    141  

Stockholder Meetings

    142  

Stockholder Votes

    143  

Directors' and Officers' Indemnification and Insurance

    143  

Conditions to Complete the Merger

    143  

Termination of the Merger Agreement

    145  

Termination Fees and Expenses

    146  

Amendment and Waiver

    149  

Specific Performance

    149  

FOURTH AMENDMENT TO THE MANAGEMENT AGREEMENT

    150  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

    151  

COMPARATIVE SHARE PRICES AND DIVIDENDS

    177  

UNAUDITED COMPARATIVE PER SHARE INFORMATION

    179  

DESCRIPTION OF TWO HARBORS CAPITAL STOCK

    180  

COMPARISON OF RIGHTS OF TWO HARBORS COMMON STOCKHOLDERS AND CYS COMMON STOCKHOLDERS

    197  

DESCRIPTION OF POLICIES OF TWO HARBORS

    201  

PRINCIPAL AND MANAGEMENT STOCKHOLDERS OF TWO HARBORS

    205  

PRINCIPAL AND MANAGEMENT STOCKHOLDERS OF CYS

    207  

EXPERTS

    209  

LEGAL MATTERS

    210  

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STOCKHOLDER PROPOSALS

    211  

WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION BY REFERENCE

    212  

MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS

    213  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

    214  

ANNEX A: Agreement and Plan of Merger

   
A-1
 

ANNEX B: Opinion of Two Harbors' Financial Advisor, JMP Securities LLC

    B-1  

ANNEX C: Opinion of CYS's Financial Advisor, Barclays Capital Inc. 

    C-1  

ANNEX D: Opinion of CYS's Financial Advisor, Credit Suisse Securities (USA) LLC

    D-1  

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS AND THE MERGER

        The following questions and answers are intended to address certain commonly asked questions regarding the Merger Agreement, the Merger and the Two Harbors and CYS special meetings. These questions and answers do not address all questions that may be important to you as a stockholder of Two Harbors or CYS. Please refer to the "Summary" beginning on page 17 and the more detailed information contained elsewhere in this joint proxy statement/prospectus and the annexes to this joint proxy statement/prospectus, which you should read carefully. Unless stated otherwise, all references in this joint proxy statement/prospectus to:

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Q:
What is the proposed transaction for which I am being asked to vote?

A:
The CYS common stockholders are being asked to approve the Merger. The approval of the Merger by the CYS common stockholders is a condition to the effectiveness of the Merger.

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Q:
Why are Two Harbors and CYS proposing the Merger?

A:
The Two Harbors Board and the CYS Board have determined that the Merger will provide a number of significant strategic opportunities and benefits and will be in the best interests of their respective stockholders. At Closing, the Combined Company will have a larger capital base, which will support continued growth across Two Harbors' target assets and will position Two Harbors to take advantage of market opportunities as they arise. The Combined Company is expected to provide improved scale, liquidity and capital alternatives for Two Harbors stockholders as a result of the increased equity capitalization and the increased stockholder base of the Combined Company. The combination of Two Harbors and CYS is also expected to create cost efficiencies and decrease Two Harbors' other operating expense ratio by 30 to 40 basis points. To review the reasons for the Merger in greater detail, see "The Merger—Recommendation of the Two Harbors Board and Its Reasons for the Merger" beginning on page 79 and "The Merger—Recommendation of the CYS Board and Its Reasons for the Merger" beginning on page 82.

Q:
Were appraisals or valuations performed on the assets and liabilities of Two Harbors and CYS in connection with the Merger?

A:
Except for the valuation to be performed on an office property owned by CYS (representing less than 1% of CYS's total assets), no third-party appraisals or valuations on the assets and liabilities of Two Harbors and CYS were obtained in connection with the Merger.

Q:
What happens if the market price of Two Harbors Common Stock or CYS Common Stock changes before the Closing?

A:
Changes in the market price of Two Harbors Common Stock or the market price of CYS Common Stock at or prior to the effective time of the Merger will not change the number of shares of Two Harbors Common Stock that CYS common stockholders will receive because the Exchange Ratio is linked to Two Harbors' adjusted book value per share and CYS's adjusted book value per share as of the Determination Date, and not to the market price of either stock.

Q:
What happens if the adjusted book value per share of Two Harbors or the adjusted book value per share of CYS changes before the Determination Date?

A:
The value of the merger consideration received by CYS common stockholders will depend on the Exchange Ratio and the value of a share of Two Harbors Common Stock at the effective time of the Merger. The Exchange Ratio will be based on Two Harbors' adjusted book value per share and CYS's adjusted book value per share as of the Determination Date. These adjusted book value per share amounts may vary from their respective amounts as of March 31, 2018. As a result, the Exchange Ratio may also vary. As of March 31, 2018, the adjusted book values per share for Two Harbors and CYS, on a pro forma basis, would have been $15.63 and $7.41, respectively, representing an illustrative Exchange Ratio of 0.4872, with each share of CYS being exchanged for the right to receive 0.4872 shares of Two Harbors (plus the Per Share Cash Consideration). The actual Exchange Ratio for the Merger will be based on each of the parties' adjusted book values per share as of the Determination Date, and such Exchange Ratio will be publicly announced at least five business days prior to the special meetings.

Q:
Are there any conditions to completion of the Merger?

A:
Yes. In addition to the approvals of the Two Harbors common stockholders and the CYS common stockholders, as described herein, there are a number of conditions that must be satisfied or waived for the Merger to be consummated. For a description of all the conditions to the Merger, see "The Merger Agreement—Conditions to Complete the Merger" beginning on page 143.

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The following questions and answers apply to Two Harbors stockholders only:

Q:
When and where is the Two Harbors special meeting?

A:
The special meeting of Two Harbors common stockholders will be held on July 27, 2018, at 601 Carlson Parkway, 2nd Floor, Minnetonka, Minnesota 55305, at 9:00 a.m., Central Time.

Q:
What matters will be voted on at the Two Harbors special meeting?

A:
Two Harbors common stockholders will be asked to consider and vote on the following proposals:

the Two Harbors Common Stock Issuance Proposal; and

the Two Harbors Adjournment Proposal.
Q:
How does the Two Harbors Board recommend that I vote on the proposals?

A:
The Two Harbors Board has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, are in the best interests of Two Harbors and its stockholders, (ii) approved the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, (iii) directed that the Two Harbors Common Stock Issuance Proposal be submitted to the holders of Two Harbors Common Stock for consideration at the Two Harbors special meeting and (iv) recommended that the holders of Two Harbors Common Stock approve the Two Harbors Common Stock Issuance Proposal. The Two Harbors Board unanimously recommends that the Two Harbors common stockholders vote "FOR" the Two Harbors Common Stock Issuance Proposal and "FOR" the Two Harbors Adjournment Proposal. For a more complete description of the recommendation of the Two Harbors Board, see "The Merger—Recommendation of the Two Harbors Board and Its Reasons for the Merger" beginning on page 79.

Q:
What constitutes a quorum for the Two Harbors special meeting?

A:
The presence, in person or by proxy, of the holders of shares of Two Harbors Common Stock entitled to cast a majority of all the votes entitled to be cast at the Two Harbors special meeting will constitute a quorum at the Two Harbors special meeting. Two Harbors will include abstentions in the calculation of the number of shares considered to be present at the Two Harbors special meeting for purposes of determining the presence of a quorum at the Two Harbors special meeting. As of the close of business on June 22, 2018, the record date for the Two Harbors special meeting, there were 175,468,801 shares of Two Harbors Common Stock outstanding.

Q:
What vote is required for Two Harbors common stockholders to approve the Two Harbors Common Stock Issuance Proposal?

A:
Approval of the Two Harbors Common Stock Issuance Proposal will require that the number of votes cast for the Two Harbors Common Stock Issuance Proposal exceeds the number of votes cast against and abstaining from the Two Harbors Common Stock Issuance Proposal, provided a quorum is present.

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Q:
What vote is required for Two Harbors common stockholders to approve the Two Harbors Adjournment Proposal?

A:
Approval of the Two Harbors Adjournment Proposal will require that the number of votes cast for the Two Harbors Adjournment Proposal exceeds the number of votes cast against the Two Harbors Adjournment Proposal, provided a quorum is present.

Q:
How are votes counted?

A:
For the Two Harbors Common Stock Issuance Proposal, you may vote "FOR", "AGAINST" or "ABSTAIN". If you do not return your proxy card or otherwise authorize a proxy to vote your shares or attend the meeting in person, your shares will not be considered present for the purpose of determining the presence of a quorum and will have no effect on the Two Harbors Common Stock Issuance Proposal. Under NYSE rules, abstentions will be considered as votes cast and, accordingly, will have the same effect as votes "AGAINST" the Two Harbors Common Stock Issuance Proposal.
Q:
Who is entitled to vote at the Two Harbors special meeting?

A:
All holders of Two Harbors Common Stock as of the close of business on June 22, 2018, the record date for the Two Harbors special meeting, are entitled to vote at the Two Harbors special meeting, unless a new record date is fixed for any adjournment or postponement of the Two Harbors special meeting. As of the record date, there were 175,468,801 issued and outstanding shares of Two Harbors Common Stock. Each holder of Two Harbors Common Stock on the record date is entitled to one vote per share.
Q:
How will Two Harbors common stockholders be affected by the Merger and the Two Harbors Common Stock Issuance?

A:
After the Merger, each Two Harbors common stockholder will continue to own the shares of Two Harbors Common Stock that such stockholder held immediately prior to the Merger. As a result, each Two Harbors common stockholder will continue to own common stock in the Combined Company, which will be a larger company with more assets. However, because Two Harbors will be issuing new shares of Two Harbors Common Stock to CYS common stockholders in the Merger, each outstanding share of Two Harbors Common Stock immediately prior to the Merger will represent a smaller percentage of the aggregate number of shares of Two Harbors Common Stock outstanding after the Merger.

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Q:
Do the Two Harbors directors and executive officers and its external manager, PRCM Advisers, have any interests in the Merger?

A:
Yes. The Combined Company will continue to be managed by PRCM Advisers under the terms of the Management Agreement. Under the Management Agreement, PRCM Advisers provides the day-to-day management of Two Harbors' business, including providing Two Harbors with its executive officers and all other personnel necessary to support its operations. In exchange for its services, Two Harbors pays PRCM Advisers a management fee and reimburses it for certain expenses incurred by it and its affiliates in rendering management services to Two Harbors. Pine River is the parent of PRCM Advisers. Certain directors and executive officers of Two Harbors are partners and employees of Pine River.

The following questions and answers apply to CYS common stockholders only:

Q:
What will I receive for my CYS Stock in the Merger?

A:
Under the terms of the Merger Agreement, each share of CYS Common Stock will be converted into the right to receive (i) the Per Share Cash Consideration and (ii) a number of shares of Two Harbors Common Stock based on the Exchange Ratio, which will be publicly announced at least five business days prior to the earlier of the CYS special meeting and the Two Harbors special meeting. Each share of CYS Series A Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series D Preferred Stock. Each share of CYS Series B Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series E Preferred Stock.

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Q:
How will I receive the merger consideration if the Merger is completed?

A:
For CYS stockholders, if you hold physical share certificates of CYS Common Stock or CYS Preferred Stock, you will be sent a letter of transmittal promptly after the Closing describing how you may exchange your shares for the merger consideration, and the exchange agent will forward to you the merger consideration to which you are entitled after receiving the proper documentation from you. If you hold your shares of CYS Common Stock or CYS Preferred Stock in uncertificated book-entry form, you are not required to take any specific actions to exchange your shares. After the consummation of the Merger, uncertificated shares of CYS Common Stock and CYS Preferred Stock will be automatically exchanged for the applicable merger consideration. For more information, see the section entitled "The Merger Agreement—Exchange Procedures" beginning on page 129.

Q:
When and where is the CYS special meeting?

A:
The special meeting of CYS common stockholders will be held on July 27, 2018, at 50 Rowes Wharf, Boston, Massachusetts 02110, starting at 9:00 a.m., Eastern Time.

Q:
What matters will be voted on at the CYS special meeting?

A:
You will be asked to consider and vote on the following proposals:

the Merger Proposal;

the CYS Non-Binding Compensation Advisory Proposal; and

the CYS Adjournment Proposal.
Q:
How does the CYS Board recommend that I vote on the proposals?

A:
The CYS Board, acting upon the unanimous recommendation of a special committee of independent directors of CYS formed for the purpose of, among other things, evaluating and making a recommendation to the CYS Board with respect to the Merger Agreement and the other transactions contemplated therein, has unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the merger of Merger Sub with and into CYS, are in the best interests of CYS and its stockholders, (ii) approved the Merger Agreement and declared that the transactions contemplated therein, including the Merger, are advisable, (iii) directed that the Merger and the other transactions contemplated by the Merger Agreement be submitted to the holders of CYS Common Stock for consideration at the CYS special meeting and (iv) recommended that the CYS common stockholders approve the Merger and the other transactions contemplated by the Merger Agreement.
Q:
Do the CYS directors and executive officers have any interests in the Merger?

A:
Yes. In considering the CYS Board's recommendation for CYS stockholders to approve the Merger Proposal and the CYS Non-Binding Compensation Advisory Proposal, CYS stockholders

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Q:
What constitutes a quorum for the CYS special meeting?

A:
The CYS Bylaws provide that the presence in person or by proxy of CYS stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum at each meeting of CYS stockholders. Abstentions will be counted for the purpose of determining a quorum.

Q:
What vote is required for CYS common stockholders to approve the Merger Proposal?

A:
Approval of the Merger Proposal will require the affirmative vote of the holders of at least a majority of all outstanding shares of CYS Common Stock entitled to vote on the Merger Proposal,

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Q:
What vote is required for CYS common stockholders to approve the CYS Non-Binding Compensation Advisory Proposal?

A:
Approval of the CYS Non-Binding Compensation Advisory Proposal will require the affirmative vote of a majority of the votes cast on the matter by holders of CYS Common Stock, provided a quorum is present, which is the only vote of the holders of any class or series of shares of capital stock of CYS required for such approval.

Q:
What vote is required for CYS common stockholders to approve the CYS Adjournment Proposal?

A:
Approval of the CYS Adjournment Proposal will require the affirmative vote of a majority of the votes cast on the matter by holders of shares of CYS Common Stock, provided a quorum is present, which is the only vote of the holders of any class or series of shares of capital stock of CYS required for such approval.

Q:
How are votes counted?

A:
For the Merger Proposal, you may vote "FOR", "AGAINST" or "ABSTAIN". If you abstain or fail to return your proxy card, it will have the same effect as a vote "AGAINST" the Merger Proposal.
Q:
Who is entitled to vote at the CYS special meeting?

A:
All holders of CYS Common Stock as of the close of business on June 22, 2018, the record date for the CYS special meeting, are entitled to vote at the CYS special meeting, unless a new record date is fixed for any adjournment or postponement of the CYS special meeting. As of the record date, there were 155,439,713 issued and outstanding shares of CYS Common Stock. Each holder of CYS Common Stock on the record date is entitled to one vote per share. Holders of CYS Preferred Stock will not be entitled to vote on any matter at the CYS special meeting.

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Q:
How will CYS stockholders be affected by the Merger?

A:
Under the terms of the Merger Agreement, holders of CYS Common Stock will receive (i) the Per Share Cash Consideration and (ii) a number of shares of Two Harbors Common Stock for each share of CYS Common Stock owned by them immediately prior to the completion of the Merger based on the Exchange Ratio, which will be publicly announced at least five business days prior to the special meeting of CYS stockholders. As such, after the Merger is completed, CYS Common Stock will no longer be listed on the NYSE and will be deregistered under the Exchange Act, and former CYS common stockholders are expected to own in the aggregate approximately 30% of the Combined Company's fully diluted equity. Also as a result of the Merger, each share of CYS Series A Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series D Preferred Stock, and each share of CYS Series B Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series E Preferred Stock.

The following questions and answers apply to Two Harbors stockholders and CYS stockholders:

Q:
Have any Two Harbors common stockholders or CYS common stockholders already agreed to vote in favor of the proposals?

A:
To either Two Harbors' or CYS's knowledge, no Two Harbors common stockholder has entered into any agreement to vote any of their shares of Two Harbors Common Stock either in favor or against any proposal at the Two Harbors special meeting, and no CYS common stockholder has entered into any agreement to vote any of their shares of CYS Common Stock either in favor or against any proposal at the CYS special meeting.

Q:
What happens if I sell my stock before the special meetings?

A:
The record date for each company's special meeting is earlier than the date of each company's special meeting and the date that the Merger is expected to be completed. If you sell your stock after your company's record date but before the date of your company's special meeting, you will retain any right to vote at your company's special meeting, but, for CYS stockholders, you will have transferred your right to receive the merger consideration. For CYS stockholders, in order to receive the merger consideration, you must hold your stock through completion of the Merger.

Q:
What is the difference between a stockholder of record and a beneficial owner?

A:
If your shares of Two Harbors Common Stock or CYS Common Stock are registered directly in your name with Two Harbors' or CYS's transfer agent, respectively, you are considered the stockholder of record with respect to those shares.

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Q:
How do I vote?

A:
Stockholders of Record. If you are a stockholder of record of Two Harbors or CYS, you may have your shares of Two Harbors Common Stock or CYS Common Stock voted on the matters to be presented at the applicable special meeting in any of the following ways:

To authorize a proxy through the Internet, visit the website set forth on the proxy card you received. You will be asked to provide the control number from the enclosed proxy card. Proxies authorized through the Internet must be received by 11:59 p.m., Eastern Time, on July 26, 2018.

To authorize a proxy by telephone, dial the toll free telephone number set forth on the proxy card you received using a touch tone phone and follow the recorded instructions. You will be asked to provide the control number from the enclosed proxy card. Proxies authorized by telephone or through the Internet must be received by 11:59 p.m., Eastern Time, on July 26, 2018.

To authorize a your proxy by mail, complete, date and sign each proxy card you receive and return it as promptly as practicable in the enclosed prepaid envelope. If you sign and return your proxy card, but do not mark the boxes showing how you wish to vote, your shares of common stock will be voted "FOR" the Two Harbors Common Stock Issuance Proposal, the Two Harbors Adjournment Proposal, the Merger Proposal, the CYS Non-Binding Compensation Advisory Proposal and the CYS Adjournment Proposal, as applicable.

If you intend to vote in person, please bring proper identification, together with proof that you are a record owner of shares of the applicable company.
Q:
What happens if I am both a Two Harbors common stockholder and a CYS common stockholder?

A:
If you are both a Two Harbors common stockholder and a CYS common stockholder, you are entitled to vote at the special meeting of each company. You will receive separate proxy cards for each company and must complete, sign and date each proxy card and return each proxy card in the appropriate preaddressed postage-paid envelope or, if available, by authorizing a proxy to vote your shares by one of the other methods specified in your proxy card or voting instruction card for each company.

Q:
If I am a beneficial owner of Two Harbors or CYS shares, will my broker, bank or other nominee vote my shares for me?

A:
No. If you hold your shares in a stock brokerage account or if your shares are held by a bank or other nominee (that is, in "street name"), you must provide your broker, bank or other nominee with instructions on how to vote your shares. Unless you instruct your broker, bank or other nominee to vote your shares held in street name, your shares will NOT be voted. You should follow the procedures provided by your bank, broker or nominee regarding the voting of your shares.

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Q:
How can I revoke or change my vote?

A:
You may revoke your proxy at any time before the vote is taken at the special meeting of the company of which you are a stockholder in any of the following ways:

authorizing a later proxy by telephone or through the Internet prior to 11:59 p.m., Eastern Time, on July 26, 2018;

filing with the Secretary of the applicable company, before the taking of the vote at the applicable company's special meeting, a written notice of revocation bearing a later date than the proxy card;

duly executing a later dated proxy card relating to the same shares and delivering it to the Secretary of the applicable company before the taking of the vote at the applicable company's special meeting; or

voting in person at the applicable company's special meeting.
Q:
When is the Merger expected to be consummated?

A:
The Merger is expected to be consummated by the end of the third quarter of 2018, although Two Harbors and CYS cannot assure completion by any particular date, if at all. Because the Merger is subject to a number of conditions, including the approval of the Two Harbors Common Stock Issuance Proposal by the requisite vote of the Two Harbors common stockholders and the Merger Proposal by the requisite vote of the CYS common stockholders, the exact timing of the Merger cannot be determined at this time and Two Harbors and CYS cannot guarantee that the Merger will be completed at all.

Q:
Following the Merger, what percentage of Two Harbors Common Stock will current Two Harbors common stockholders and CYS common stockholders own?

A:
Following the completion of the Merger:

the shares of Two Harbors Common Stock held by the current Two Harbors common stockholders are expected to represent in the aggregate approximately 70% of the Combined Company's fully diluted equity; and

former CYS common stockholders are expected to own in the aggregate the remaining approximately 30% of the Combined Company's fully diluted equity.

Q:
What happens if the Merger is not completed?

A:
If the Two Harbors Common Stock Issuance Proposal or the Merger Proposal is not approved by Two Harbors common stockholders or CYS common stockholders, respectively, or if the Merger is not completed for any other reason, CYS common stockholders will not have their CYS Common Stock exchanged for Two Harbors Common Stock and cash in connection with the Merger. Instead, CYS and Two Harbors would remain separate companies. Under certain circumstances, Two Harbors may be required to pay CYS a termination fee or an expense amount, or CYS may be required to pay Two Harbors a termination fee or expense amount, as described under "The Merger Agreement—Termination Fees and Expenses" beginning on page 146.

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Q:
Am I entitled to exercise appraisal rights?

A:
No. Neither holders of Two Harbors Common Stock nor holders of CYS Common Stock will be entitled to appraisal rights.

Q:
Will Two Harbors have the same business strategy as CYS following the Merger?

A:
No. The Combined Company will follow Two Harbors' current business strategy of investing in, financing and managing Agency residential mortgage-backed securities, non-Agency securities, MSR and other financial assets. See "Description of Policies of Two Harbors" on page 201.

Q:
Will my dividend payments continue after the Merger?

A:
Following completion of the Merger, holders of Two Harbors Common Stock will be entitled to receive dividend or other distributions when, as and if declared by the Two Harbors Board out of funds legally available therefor.

Q:
Are there risks associated with the Merger that I should consider in deciding how to vote?

A:
Yes. There are a number of risks related to the Merger that are discussed in this joint proxy statement/ prospectus described in the section entitled "Risk Factors" beginning on page 43.

Q:
What are the material U.S. federal income tax consequences of the Merger to CYS common stockholders and Two Harbors common stockholders?

A:
Assuming that the Merger is completed as currently contemplated, Two Harbors and CYS expect that the receipt of (i) cash and Two Harbors Common Stock in exchange for CYS Common Stock, (ii) Two Harbors Series D Preferred Stock in exchange for CYS Series A Preferred Stock, or (iii) Two Harbors Series E Preferred Stock in exchange for CYS Series B Preferred Stock, as applicable, by U.S. stockholders pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. Generally, for U.S. federal income tax purposes, U.S. stockholders of CYS Common Stock will recognize gain or loss as a result of the Merger measured by the difference, if any, between (i) the sum of the fair market value of the Two Harbors Common Stock received and the amount of any cash received, and (ii) the stockholder's adjusted tax basis in its CYS Common Stock. In addition, generally, for U.S. federal income tax purposes, U.S. stockholders of CYS Series A Preferred Stock or CYS Series B Preferred Stock will recognize gain or loss as a result of the Merger measured by the difference, if any, between (i) the fair market value of the Two Harbors Series D Preferred Stock or Two Harbors Series E Preferred Stock received, as applicable, and (ii) the stockholder's adjusted tax basis in its CYS Series A Preferred Stock or CYS Series B Preferred Stock, as applicable. Because the consideration to be given to stockholders of (i) CYS Common Stock consists primarily of Two Harbors Common Stock and (ii) CYS Series A Preferred Stock and CYS Series B Preferred Stock consists solely of Two Harbors Series D Preferred Stock and Two Harbors Series E Preferred Stock, respectively, U.S. stockholders of CYS Stock, may need to sell their Two Harbors stock received in the Merger, or raise cash from other sources, to pay any tax obligations resulting from the Merger. Generally, non-U.S. stockholders are not expected to be subject to U.S. federal income tax or U.S. federal withholding tax on any gain recognized from the Merger. See "Material U.S. Federal Income Tax Consequences—Consequences of the Merger to Non-U.S. Stockholders of CYS Stock." Two Harbors and CYS anticipate that the Merger will have no material U.S. federal income tax consequences to Two Harbors stockholders who do not own any CYS Stock.

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Q:
How can I obtain additional information about Two Harbors and CYS?

A:
Two Harbors and CYS each file annual, quarterly and current reports, proxy statements and other information with the SEC. Each company's filings with the SEC may be accessed on the Internet at http://www.sec.gov. Copies of the documents filed by Two Harbors with the SEC will be available free of charge on Two Harbors' website at https://www.twoharborsinvestment.com/ or by contacting Two Harbors Investor Relations at investors@twoharborsinvestment.com or at 612-629-2500. Copies of the documents filed by CYS with the SEC will be available free of charge on CYS's website at http://www.cysinv.com/home or by contacting CYS Investor Relations at ir@cysinv.com or at 617-639-0440. The information provided on each company's website is not part of this joint proxy statement/ prospectus and is not incorporated by reference into this joint proxy statement/prospectus. For a more detailed description of the information available and information incorporated by reference, please see "Where You Can Find More Information and Incorporation by Reference" on page 212.

Q:
What else do I need to do now?

A:
You are urged to read this joint proxy statement/prospectus carefully and in its entirety, including its annexes and the information incorporated by reference herein, and to consider how the Merger affects you. Even if you plan to attend your company's special meeting, please authorize a proxy to vote your shares by voting via the Internet, telephone or by completing, signing, dating and returning the enclosed proxy card. You can also attend your company's special meeting and vote, or change your prior proxy authorization, in person. If you hold your shares in "street name" through a bank, broker or other nominee, then you should have received this joint proxy statement/prospectus from that nominee, along with that nominee's proxy card which includes voting instructions and instructions on how to change your vote. Please see the question "How do I vote?" on page 12.

Q:
Will a proxy solicitor be used?

A:
Yes. Two Harbors has engaged D.F. King & Co., Inc. ("D.F. King"), to assist in the solicitation of proxies for the Two Harbors special meeting, and Two Harbors estimates it will pay D.F. King a fee of approximately $12,500. Two Harbors has also agreed to reimburse D.F. King for reasonable out-of-pocket expenses and disbursements incurred in connection with the proxy solicitation and to indemnify D.F. King against certain losses, costs and expenses. In addition to mailing proxy solicitation materials, Two Harbors' directors, officers and employees may also solicit proxies in person, by telephone or by any other electronic means of communication deemed appropriate. No additional compensation will be paid to Two Harbors' directors, officers or employees for such services.

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Q:
Who can answer my questions?

A:
If you have any questions about the Merger or the other matters to be voted on at the Two Harbors special meeting or the CYS special meeting, how to submit your proxy, or need additional copies of this joint proxy statement/prospectus, the enclosed proxy card or voting instructions, you should contact:
If you are a Two Harbors stockholder:   If you are a CYS stockholder:

D.F. King & Co., Inc.
48 Wall Street, 22nd floor
New York, New York 10005
(866) 530-8623 (toll free)
two@dfking.com

 

Georgeson LLC
1290 Avenue of the Americas, 9th Floor
New York, New York 10104
866-300-8594 (toll free)

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SUMMARY

        The following summary highlights selected information in this joint proxy statement/prospectus and may not contain all the information that may be important to you with respect to the Merger Agreement, the Merger or the special meetings. Accordingly, you are encouraged to read this joint proxy statement/prospectus, including its annexes and the information incorporated by reference herein, carefully and in its entirety. Each item in this summary includes a page reference directing you to a more complete description of that topic. See also "Where You Can Find More Information and Incorporation by Reference" on page 212.

The Companies

Two Harbors Investment Corp. (Page 54)

Two Harbors Investment Corp.
575 Lexington Avenue
Suite 2930
New York, New York 10022
(612) 629-2500

        Two Harbors is 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 Two Harbors collectively refers to as its target assets. Two Harbors operates as a REIT and is externally managed by PRCM Advisers.

        Two Harbors Common Stock is listed on the NYSE, trading under the symbol "TWO".

        Two Harbors' principal executive offices are located at 575 Lexington Avenue, Suite 2930, New York, New York 10022, and its telephone number is (612) 629-2500.

Eiger Merger Subsidiary LLC (Page 55)

Eiger Merger Subsidiary LLC
575 Lexington Avenue
Suite 2930
New York, New York 10022
(612) 629-2500

        Merger Sub is a Maryland limited liability company that was formed on April 24, 2018 solely for the purpose of effecting the Merger. Upon Closing, the Merger will be consummated whereby Merger Sub will be merged with and into CYS, with CYS continuing as the surviving corporation. Merger Sub has not conducted any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the Merger Agreement.

CYS Investments, Inc. (Page 55)

CYS Investments, Inc.
500 Totten Pond Road, 6th Floor
Waltham, Massachusetts 02451
(617) 639-0440

        CYS is a specialty finance company created with the objective of achieving consistent risk-adjusted investment income. CYS seeks to achieve this objective by investing, on a leveraged basis, in residential mortgage pass-through securities for which the principal and interest payments are guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association, and collateralized by single-family residential mortgage

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loans ("Agency RMBS"). In addition, CYS's investment guidelines permit investments in collateralized mortgage obligations issued by a government agency or a government-sponsored entity that are collateralized by Agency RMBS, or CMOs, debt securities issued by the U.S. Department of the Treasury or a government-sponsored entity that are not backed by collateral but, in the case of government agencies, are backed by the full faith and credit of the U.S. government, or U.S. Treasury Securities, and, in the case of government sponsored entities, are backed by the integrity and creditworthiness of the issuer, or U.S. Agency Debentures and credit risk transfer securities, such as Structured Agency Credit Risk ("STACR") debt securities issued by Freddie Mac, Connecticut Avenue Securities ("CAS") issued by Fannie Mae and similar securities issued by a GSE where their cash flows track the credit risk performance of a notional reference pool of mortage loans.

        CYS was formed as a Maryland corporation on January 3, 2006. CYS has elected to be taxed as a REIT for U.S. federal income tax purposes. The CYS Common Stock, CYS Series A Preferred Stock and CYS Series B Preferred Stock trade on the NYSE under the symbols "CYS", "CYS PrA" and "CYS PrB", respectively.

The Combined Company (Page 55)

        The Combined Company will retain the name "Two Harbors Investment Corp." and will continue to be a Maryland corporation, which has elected to be taxed as a REIT under the Code. The Combined Company will be a publicly traded corporation, focused on investing in, financing and managing Agency RMBS, non-Agency securities, MSR, and other financial assets. The Combined Company is expected to have a pro forma equity market capitalization of approximately $4.0 billion and a total capitalization of approximately $4.9 billion based on the $15.76 per share closing price of Two Harbors Common Stock on June 13, 2018. Following the completion of the Merger, the Combined Company will continue to be externally managed by PRCM Advisers.

        The business of the Combined Company will be operated through Two Harbors and its subsidiaries, which will include CYS and its subsidiaries. Upon completion of the Merger, the continuing Two Harbors common stockholders are expected to own in the aggregate approximately 70% of the Combined Company's fully diluted equity, and the former CYS common stockholders are expected to own in the aggregate the remaining approximately 30%. CYS preferred stockholders will continue to hold shares of preferred stock of Two Harbors with substantially similar terms following the Merger.

        The common stock of the Combined Company will continue to be listed on the NYSE, trading under the symbol "TWO". The newly issued shares of Two Harbors Series D Preferred Stock will trade under the symbol "TWO PRD", and the newly issued shares of Two Harbors Series E Preferred Stock will trade under the symbol "TWO PRE".

        The Combined Company's principal executive offices will be located at 575 Lexington Avenue, Suite 2930, New York, New York 10022, and its telephone number will be (612) 629-2500.

The Merger

The Merger Agreement (Page 126)

        Two Harbors, Merger Sub and CYS have entered into the Merger Agreement attached as Annex A to this joint proxy statement/prospectus, which is incorporated herein by reference. Two Harbors and CYS encourage you to carefully read the Merger Agreement in its entirety because it is the principal document governing the Merger and the other transactions contemplated by the Merger Agreement.

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The Merger (Page 67)

        Subject to the terms and conditions of the Merger Agreement, the Merger will be consummated whereby Merger Sub will merge with and into CYS, with CYS continuing as the surviving corporation. As a result of the Merger, CYS will be an indirect, wholly owned subsidiary of Two Harbors.

        Upon completion of the Merger, the continuing Two Harbors common stockholders are expected to own in the aggregate approximately 70% of the Combined Company's fully diluted equity, and the former CYS common stockholders are expected to own in the aggregate the remaining approximately 30%. Once the Merger is consummated, the Combined Company will retain the name "Two Harbors Investment Corp.", will continue to be listed on the NYSE, and its shares will trade under the symbol "TWO".

Consideration for the Merger (Page 127)

        Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of CYS Common Stock will be converted into the right to receive from Two Harbors (a) a number of shares of Two Harbors Common Stock equal to the "Exchange Ratio," determined by dividing (i) (a) CYS adjusted book value per share, multiplied by (b) 96.75% by (ii) (a) Two Harbors adjusted book value per share, multiplied by (b) 94.20%, in each case as determined in accordance with the Merger Agreement (the "Per Share Stock Consideration") and (b) $15,000,000 divided by the sum of the number of shares of CYS Common Stock issued and outstanding immediately prior to the effective time of the Merger (excluding any cancelled shares), including outstanding CYS Restricted Stock that will vest upon completion of the Merger (less any shares surrendered for income tax purposes) (the "Per Share Cash Consideration") pursuant to the Merger Agreement.

        Based on the number of shares of CYS Common Stock outstanding on March 31, 2018 and an assumed Exchange Ratio of 0.4872 based on the adjusted book value per share of Two Harbors Common Stock and CYS Common Stock as of March 31, 2018, calculated in accordance with the Merger Agreement, it is expected that approximately 75.7 million shares of Two Harbors Common Stock will be issued in connection with the Merger. The actual Exchange Ratio will be publicly announced at least five business days before the earlier of the special meetings of stockholders described below.

        Also at the effective time of the Merger, each outstanding share of CYS Series A Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series D Preferred Stock, and each outstanding share of CYS Series B Preferred Stock will be converted into the right to receive one share of newly classified Two Harbors Series E Preferred Stock.

        No fractional shares of Two Harbors Common Stock will be issued in the Merger, and the value of any fractional interests to which a holder would otherwise be entitled will be paid in cash.

Recommendation of the Two Harbors Board and Its Reasons for the Merger (Page 79)

        On April 25, 2018, following careful consideration, the Two Harbors Board unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, are in the best interests of Two Harbors and its stockholders, (ii) approved the Merger Agreement and the other transactions contemplated therein, including the Merger and the Two Harbors Common Stock Issuance, (iii) directed that the Two Harbors Common Stock Issuance Proposal be submitted to the holders of Two Harbors Common Stock for consideration at the Two Harbors special meeting and (iv) recommended that the holders of Two Harbors Common Stock approve the Two Harbors Common Stock Issuance Proposal. Certain factors considered by the Two Harbors Board in reaching its decision to authorize, approve and adopt the

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Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement can be found in the section entitled "The Merger—Recommendation of the Two Harbors Board and Its Reasons for the Merger" beginning on page 79.

        The Two Harbors Board unanimously recommends that Two Harbors common stockholders vote "FOR" the Two Harbors Common Stock Issuance Proposal and "FOR" the Two Harbors Adjournment Proposal.

Recommendation of the CYS Board and Its Reasons for the Merger (Page 82)

        On April 25, 2018, after careful consideration, the CYS Board, acting upon the unanimous recommendation of a special committee of independent directors of CYS formed for the purpose of, among other things, evaluating and making a recommendation to the CYS Board with respect to the Merger Agreement and the other transactions contemplated therein, unanimously (i) determined that the Merger Agreement and the other transactions contemplated therein, including the merger of Merger Sub with and into CYS, are in the best interests of CYS and its stockholders, (ii) approved the Merger Agreement and declared that the transactions contemplated therein, including the Merger, are advisable, (iii) directed that the Merger and the other transactions contemplated by the Merger Agreement be submitted to the holders of CYS Common Stock for consideration at the CYS special meeting and (iv) recommended that the CYS common stockholders approve the Merger and the other transactions contemplated by the Merger Agreement. Certain factors considered by the CYS Board in reaching its decision to approve the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement can be found in the section entitled "The Merger—Recommendation of the CYS Board and Its Reasons for the Merger" beginning on page 82.

        The CYS Board unanimously recommends that CYS stockholders vote "FOR" the Merger Proposal, "FOR" the CYS Non-Binding Compensation Advisory Proposal and "FOR" the CYS Adjournment Proposal.

Summary of Risk Factors Related to the Merger (Page 43)

        You should carefully consider the following important risks, together with all of the other information included in this joint proxy statement/prospectus and the risks related to the Merger and the related transactions described under the section "Risk Factors" beginning on page 43, before deciding how to vote:

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The Two Harbors Special Meeting (Page 57)

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        As of the close of business on the record date for the Two Harbors special meeting, the directors and executive officers of Two Harbors owned approximately 1.42% of the outstanding shares of Two Harbors Common Stock entitled to vote at the Two Harbors special meeting. Two Harbors currently expects that Two Harbors' directors and executive officers will vote their shares of Two Harbors Common Stock in favor of the Two Harbors Common Stock Issuance Proposal as well as the other proposals to be considered at the Two Harbors special meeting, although none of them are obligated to do so.

        Your vote as a Two Harbors common stockholder is very important. Accordingly, please sign and return the enclosed proxy card whether or not you plan to attend the Two Harbors special meeting in person.

The CYS Special Meeting (Page 62)

        As of the close of business on the record date for the CYS special meeting, the directors and executive officers of CYS owned approximately 1.04% of the outstanding CYS Common Stock entitled

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to vote at the CYS special meeting. CYS currently expects that the CYS directors and officers will vote their shares of CYS Common Stock in favor of the Merger Proposal, although none of them are obligated to do so.

Opinion of Two Harbors' Financial Advisor (Page 85)

        In connection with the Merger, the Two Harbors Board received a written opinion, dated April 25, 2018, from JMP, as to the fairness, from a financial point of view and as of the date of the opinion, to Two Harbors of the Per Share Stock Consideration (as defined in the Merger Agreement) to be paid by Two Harbors as part of the merger consideration. The full text of JMP's written opinion, which is attached to this joint proxy statement/prospectus as Annex B sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken. JMP's opinion was directed and addressed to the Two Harbors Board (in its capacity as such) in connection with its consideration of the Merger. JMP's opinion did not address the underlying decision of the Two Harbors Board to proceed with or effect the Merger or the relative merits of the Merger as compared to any alternative strategy or transaction that might exist for Two Harbors. JMP's opinion does not constitute a recommendation as to how the Two Harbors Board or any Two Harbors common stockholder should act or vote with respect to the Merger or any other matter.

Opinion of CYS's Financial Advisor, Barclays Capital Inc. (Page 93)

        Barclays was engaged to act as a financial advisor to the CYS board in connection with a potential transaction involving CYS. At the CYS board meeting on April 25, 2018, Barclays rendered its oral opinion (which was subsequently confirmed in writing) to the CYS board that, as of such date and based upon and subject to the qualifications, limitations and assumptions set forth in the written opinion, the merger consideration to be offered to the holders of CYS common stock in the merger was fair, from a financial point of view, to such holders.

        The full text of Barclays' written opinion, dated as of April 25, 2018, is attached to this joint proxy statement/prospectus as Annex C and incorporated by reference herein. Barclays' written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. You are encouraged to read the opinion carefully in its entirety. The summary of Barclays' opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion. Barclays' opinion is addressed to the CYS board, addresses only the fairness, from a financial point of view, of the merger consideration to be offered to the holders of CYS common stock and does not constitute a recommendation to any stockholder of CYS as to how such stockholder should vote with respect to the merger or any other matter.

        For more information, see "The Merger—Opinion of CYS's Financial Advisor, Barclays Capital Inc." beginning on page 93 and Annex C.

Opinion of CYS's Financial Advisor, Credit Suisse Securities (USA) LLC (Page 102)

        CYS has engaged Credit Suisse to act as a financial advisor to CYS in connection with the proposed merger. In connection with this engagement, Credit Suisse delivered an opinion, dated April 25, 2018, to the CYS board as to the fairness, from a financial point of view and as of the date of such opinion, of the merger consideration to be received by holders of CYS common stock (other than excluded holders (as defined below)) pursuant to the merger agreement. For purposes of Credit Suisse's analyses and opinion, the term "excluded holders" refers to, collectively, CYS, Two Harbors, Merger Sub and any of their respective wholly owned subsidiaries.

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        The full text of Credit Suisse's written opinion, dated April 25, 2018, is attached to this joint proxy statement/prospectus as Annex D and sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Credit Suisse in connection with such opinion. The description of Credit Suisse's opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of Credit Suisse's opinion. Credit Suisse's opinion was provided to the CYS board (in its capacity as such) for its information in connection with its evaluation of the merger consideration from a financial point of view and did not address any other terms, aspects or implications of the proposed merger, the relative merits of the proposed merger or related transactions as compared to alternative transactions or strategies that might be available to CYS or the underlying business decision of the CYS board or CYS to proceed with the proposed merger or related transactions. Credit Suisse's opinion does not constitute advice or a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the proposed merger or otherwise.

        For more information, see "The Merger—Opinion of CYS's Financial Advisor, Credit Suisse Securities (USA) LLC" beginning on page 102 and Annex D.

Directors and Management of Two Harbors After the Merger (Page 116)

        Following the consummation of the Merger, the number of directors on the Two Harbors Board will be increased to eleven, and will include all of the current nine directors of the Two Harbors Board and two additional independent directors from the CYS Board: James A. Stern and Karen Hammond. Each of the executive officers of Two Harbors immediately prior to the effective time of the Merger will continue as an executive officer of the Combined Company following the effective time of the Merger.

Interests of Two Harbors Directors and Executive Officers in the Merger (Page 116)

        In considering the recommendation of the Two Harbors Board to approve the Two Harbors Common Stock Issuance, Two Harbors common stockholders should be aware that directors and executive officers of Two Harbors have certain interests in the Merger that may be different from, or in addition to, the interests of Two Harbors common stockholders generally and that may present actual or potential conflicts of interests. The Two Harbors Board was aware of these interests and considered them, among other matters, in reaching its decision to approve the Merger Agreement and the transactions contemplated thereby.

        The Combined Company will continue to be managed by PRCM Advisers under the terms of the Management Agreement. Under the Management Agreement, PRCM Advisers provides the day-to-day management of Two Harbors' business, including providing Two Harbors with its executive officers and all other personnel necessary to support its operations. In exchange for its services, Two Harbors pays PRCM Advisers a management fee as well as reimburses it for certain expenses incurred by it and its affiliates in rendering management services to Two Harbors. Pine River is the parent of PRCM Advisers. Certain directors and executive officers of Two Harbors are partners and employees of Pine River.

        Pursuant to the Management Agreement, Two Harbors pays PRCM Advisers a base management fee equal to 1.5% per annum of its stockholders' equity, which is calculated and payable quarterly in arrears. Following the Merger, Two Harbors stockholders' equity will include the additional equity attributable to the acquisition of CYS, thus the amount of the management fees payable to PRCM Advisers will also increase, which gives PRCM Advisers and its parent, Pine River (and therefore, Two Harbors' management), an incentive, not shared by Two Harbors stockholders, to negotiate and effect the Merger, possibly on terms less favorable to Two Harbors than would otherwise have been achieved. However, in connection with the Merger, PRCM Advisers has agreed to amend the Management

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Agreement to provide for: (i) a reduction in the base management fee PRCM Advisers charges Two Harbors with respect to the additional equity under management resulting from the Merger from 1.5% of stockholders' equity on an annualized basis to 0.75% through the first anniversary of the Closing; (ii) a one-time downward adjustment of $15,000,000 to the management fees payable by Two Harbors for the quarter in which the Merger closes; and (iii) a one-time downward adjustment of up to $3.3 million in the management fees payable by Two Harbors for the quarter in which the Merger occurs in order to reimburse Two Harbors for certain expenses it incurs in connection with the Merger. In the event the total amount of the management fee payable for the quarter referenced in clauses (ii) and (iii) above is less than the aggregate amount of the Adjustments, PRCM Advisers will pay to Two Harbors in immediately available funds the difference between (i) such Adjustments and (ii) the base management fee payable to PRCM Advisers with respect to such quarter.

        The Fourth Amendment to the Management Agreement between Two Harbors and PRCM Advisers was negotiated between related parties, and the terms, including fees and other amounts payable, may not be as favorable to Two Harbors as if it had been negotiated with an unaffiliated third party.

        For additional information, see "The Merger—Interests of Two Harbors' Directors and Executive Officers in the Merger" beginning on page 116.

Interests of CYS's Directors and Executive Officers in the Merger (Page 117)

        In considering the CYS Board's recommendation for CYS stockholders to approve the Merger Proposal and the CYS Non-Binding Compensation Advisory Proposal, CYS stockholders should be aware that directors and executive officers of CYS have interests in the Merger that may be different from, or in addition to, the interests of CYS stockholders generally and that may present actual or potential conflicts of interests. These interests include:

        In addition, CYS maintains Employment Agreements with each of Messrs. Grant, DeCicco, Cleary, and Rosenbloom, which provide for payments and other benefits if the individual's employment terminates for a qualifying event or circumstance, such as being terminated without "cause" or leaving employment for "good reason," as these terms are defined in the Employment Agreements. Upon the termination of such individual's employment by CYS or Two Harbors other than for cause, or by such individual for good reason, the individual would be eligible to receive, among other benefits, (i) a lump sum severance payment equal to 2.5 in the case of Mr. Grant and 1.0 in the case of Messrs. DeCicco, Cleary, and Rosenbloom, multiplied by the average of the sum of such individual's base salary and bonus earned during the shorter of (a) the three (3) fiscal years immediately preceding the year in which the termination of employment occurs or (b) the period of time beginning on the date of the individual's employment agreement and ending on the termination date of such individual's employment, (ii) a pro rata bonus for the year of termination, and (iii) certain benefit continuation rights for up to 24 months for Mr. Grant and up to 12 months for Messrs. DeCicco, Cleary, and Rosenbloom, following termination. In addition, under the agreement, such individuals are eligible to receive a "gross-up" payment, if applicable, related to any excise taxes imposed under Section 4999 of the Code.

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        Upon Closing, each of James A. Stern and Karen Hammond, independent directors from the CYS Board, will be appointed to the Two Harbors Board and will be entitled to compensation pursuant to Two Harbors' independent director compensation program.

        In connection with the approval of the execution of the Merger Agreement, the CYS Board approved an amendment to the Employment Agreements to clarify payment mechanics and timing of severance amounts that may become payable pursuant to the Employment Agreements following a qualifying termination of employment with CYS.

Treatment of CYS Restricted Stock

        Pursuant to the Merger Agreement, immediately prior to the effective time of the Merger, each outstanding award of shares of CYS Restricted Stock granted pursuant to the CYS Stock Plan will automatically vest in full and any forfeiture restrictions applicable to such shares of CYS Restricted Stock shall immediately lapse. As a result, each share of CYS Restricted Stock (less any shares surrendered for income tax purposes) will be treated as a share of CYS Common Stock for all purposes of the Merger, including the right to receive the merger consideration.

Fourth Amendment to the Management Agreement (Page 150)

        In connection with the Merger Agreement, the Management Agreement was amended pursuant to the Fourth Amendment to the Management Agreement so as to (a) reduce PRCM Advisers' base management fee with respect to the additional equity under management resulting from the Merger and the transactions contemplated by the Merger Agreement to 0.75% from the effective time of the Merger through the first anniversary of such effective time and (b) for the fiscal quarter in which the Closing occurs, make a one-time downward adjustment of $15 million to the management fees payable by Two Harbors for such quarter to offset the Per Share Cash Consideration payable to stockholders of CYS, plus up to an additional $3.3 million downward adjustment for certain transaction-related expenses.

Conditions to Complete the Merger (Page 143)

        A number of conditions must be satisfied or, to the extent permitted by law, waived before the Merger can be consummated. These include, among others:

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Regulatory Approvals Required for the Merger (Page 121)

        Two Harbors and CYS are not aware of any material federal or state regulatory requirements that must be complied with, or approvals that must be obtained, in connection with the Merger or the other transactions contemplated by the Merger Agreement.

Listing of Two Harbors Common Stock and Deregistration of CYS Common Stock (Page 123)

        It is a condition to the completion of the Merger that the shares of Two Harbors Common Stock issuable in connection with the Merger be approved for listing on the NYSE, subject to official notice of issuance. After the Merger is completed, the CYS Common Stock will no longer be listed on the NYSE and will be deregistered under the Exchange Act.

Accounting Treatment (Page 121)

        Each of Two Harbors and CYS prepare their financial statements in accordance with GAAP. The Merger will be accounted for as an asset acquisition, with Two Harbors treated as the acquirer. For more information, see "Accounting Treatment" beginning on page 121.

Comparison of Rights of Two Harbors Common Stockholders and CYS Common Stockholders (Page 197)

        Holders of CYS Common Stock will have different rights following the effective time of the Merger because they will hold shares of Two Harbors Common Stock instead of shares of CYS Common Stock, and there are differences between the governing documents of Two Harbors and CYS. For more information regarding the differences in rights of Two Harbors common stockholders and CYS common stockholders, see "Comparison of Rights of Two Harbors Common Stockholders and CYS Common Stockholders" beginning on page 197.

Appraisal Rights (Page 122)

        Neither holders of Two Harbors Common Stock nor holders of CYS Common Stock will be entitled to appraisal rights.

No Solicitation; Change in Recommendations (Page 140)

        From and after the date of the Merger Agreement until the effective time of the Merger or if earlier, the termination of the Merger Agreement, each of Two Harbors and CYS will not, and will cause its subsidiaries and will instruct its representatives not to, among other things, directly or indirectly:

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        Notwithstanding the restrictions set forth above, at any time prior to obtaining the applicable approval of their stockholders at their respective stockholder meetings, each of Two Harbors and CYS may, directly or indirectly through one or more of its representatives, engage in discussions or negotiations with any person with respect to a Competing Proposal or furnish non-public information regarding Two Harbors or CYS or any of their subsidiaries, or access to the properties, assets or employees of Two Harbors or CYS or any of their subsidiaries, to any person in connection with or in response to a Competing Proposal, in either case, if certain conditions are met and such proposal is reasonably expected to lead to a Superior Proposal.

        At any time prior to obtaining the applicable approval of their stockholders at their respective stockholder meetings, each of Two Harbors and CYS may effect a change in its board recommendation (i) in response to a bona fide written Competing Proposal from a third party that was not solicited at any time following the execution of the Merger Agreement and did not arise from a material breach of the obligations set forth in certain provisions of the Merger Agreement, if the Two Harbors Board or the CYS Board, as applicable, so chooses, and (ii) if the Two Harbors Board or the CYS Board, as applicable, determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with its legal duties under applicable law and Two Harbors or CYS, as applicable, have given notice to the other party that it intends to effect a change in its board recommendation. Additionally, CYS may terminate the Merger Agreement, if prior to taking such action, among other things, the CYS Board determines in good faith after consultation with its financial advisors and outside legal counsel that such CYS Competing Proposal is a CYS Superior Proposal and the CYS Board has approved, and concurrently with the termination thereunder, CYS enters into, a definitive agreement providing for the implementation of such CYS Superior Proposal.

        For more information regarding what constitutes a "Competing Proposal" and what constitutes a "CYS Superior Proposal," see "The Merger Agreement—Competing Proposals" beginning on page 140.

Termination of the Merger Agreement (Page 145)

        The Merger Agreement may be terminated at any time before the effective time of the Merger by the mutual written consent of Two Harbors and CYS.

        The Merger Agreement may also be terminated prior to the effective time of the Merger by either Two Harbors or CYS if:

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        In addition to the termination rights set forth above, CYS may also terminate the Merger Agreement upon entering into a definitive agreement providing for the implementation of a CYS Superior Proposal.

        For more information regarding termination of the Merger Agreement, see "The Merger Agreement—Termination of the Merger Agreement" beginning on page 145.

Termination Fees and Expenses (Page 146)

        Generally, all fees and expenses incurred in connection with the Merger and the other transactions contemplated by the Merger Agreement will be paid by the party incurring those fees and expenses; provided that, in certain circumstances, Two Harbors may be obligated to pay to CYS a termination fee of $51.8 million or an expense amount equal to $20.6 million, or CYS may be obligated to pay to Two Harbors a termination fee of $43.2 million or an expense amount equal to $8.6 million.

        For further discussion of the termination fees, see "The Merger Agreement—Termination Fees and Expenses" beginning on page 146.

Litigation Relating to the Merger (Page 124)

        Six lawsuits have been filed by purported stockholders of CYS. The first suit, styled as Fran Stone v. CYS Investments, Inc., et al., No. 1:18-cv-11156 (the "Stone Lawsuit"), was filed in the United States District Court for the District of Massachusetts on June 1, 2018 and asserts claims against CYS, certain of its directors, Merger Sub and Two Harbors (collectively, the "Stone Defendants"). The second suit, styled as Jordan Rosenblatt v. CYS Investments, Inc., et al., No.1:18-cv-11220 (the "Rosenblatt Lawsuit"), was filed in the United States District Court for the District of Massachusetts on June 11, 2018 and asserts claims against the Stone Defendants and certain additional CYS directors not named in the Stone Lawsuit (collectively, the "Rosenblatt Defendants"). The third suit, styled as Peter Enzinna v. CYS Investments, Inc., et al., No. 1:18-cv-11238 (the "Enzinna Lawsuit"), was filed in the United States District Court for the District of Massachusetts on June 13, 2018 and asserts claims against CYS and certain of its directors (collectively, the "Enzinna Defendants"). The fourth suit, styled as Arthur Ruscher v. CYS Investments, Inc., et al., No. 1:18-cv-01763 (the "Ruscher Lawsuit"), was filed in the

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United States District Court for the District of Maryland on June 14, 2018 and asserts claims against the Enzinna Defendants (the "Ruscher Defendants"). The fifth suit, styled as Walter Penchuk v. CYS Investments, Inc. et al., No. V449557 (the "Penchuk Lawsuit"), was filed in the Circuit Court for Montgomery County, Maryland on June 14, 2018 and asserts claims against the Enzinna Defendants and certain additional directors not named in the Enzinna Lawsuit (collectively, the "Penchuk Defendants"). The sixth suit, styled as Shiva Stein v. CYS Investments, Inc. et al., No. 1:18-cv-01826 (the "Stein Lawsuit" and, with the Stone, Rosenblatt, Enzinna, Ruscher, and Penchuk Lawsuits, the "Lawsuits"), was filed in in the United States District Court for the District of Maryland on June 19, 2018 and asserts claims against the Enzinna Defendants (the "Stein Defendants").

        With the exception of the Penchuk Lawsuit, the Lawsuits allege that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and/or Section 20(a) of the Exchange Act by disseminating and/or causing to be disseminated an allegedly materially incomplete and misleading registration statement. The Penchuk Lawsuit alleges that the defendants breached their fiduciary duties in connection with the Merger.

        The Stone Lawsuit seeks, among other things: preliminary and permanent injunctive relief preventing the Stone Defendants from filing with the SEC (or otherwise disseminating) an amendment to the registration statement or consummating the Merger, in each case unless and until the Stone Defendants disclose additional information identified in the complaint; rescission of the Merger or rescissory damages if the Merger is consummated prior to entry of final judgment by the court; an accounting of any damages suffered as a result of the Stone Defendants' alleged wrongdoing; and litigation costs (including attorneys' and expert fees and expenses). The Rosenblatt Lawsuit seeks, among other things: preliminary and permanent injunctive relief preventing the Rosenblatt Defendants from proceeding with, consummating, or closing the Merger; rescission of the Merger or rescissory damages if the Merger is consummated prior to entry of final judgment by the court; the filing of an amendment to the registration statement that does not contain any untrue statements of material fact and that states all material facts required in it or necessary to make the statements contained therein not misleading; a declaration that the Rosenblatt Defendants violated Section 14(a) and/or Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder; and litigation costs (including attorneys' and expert fees and expenses). The Enzinna Lawsuit seeks, among other things: preliminary and permanent injunctive relief preventing the Enzinna Defendants from proceeding with, consummating, or closing the Merger unless and until the Enzinna Defendants disclose additional information identified in the complaint; rescission of the Merger or rescissory damages if the Merger is consummated prior to entry of final judgment by the court; a declaration that the Enzinna Defendants violated Section 14(a) and/or Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder; and litigation costs (including attorneys' and expert fees and expenses). The Ruscher Lawsuit seeks, among other things: injunctive relief preventing the Ruscher Defendants from proceeding with, consummating, or closing the Merger unless and until the Ruscher Defendants disclose additional information identified in the complaint; an accounting of any damages suffered as a result of the Ruscher Defendants' alleged wrongdoing; and litigation costs (including attorneys' and expert fees and expenses). The Penchuk Lawsuit seeks, among other things: injunctive relief preventing the Penchuk Defendants from proceeding with, consummating, or closing the Merger, or in the alternative, the amendment or removal of certain deal protection provisions from the Merger Agreement identified in the complaint; rescission of the Merger or rescissory damages if the Merger is consummated prior to entry of final judgment by the court; an accounting of any damages suffered as a result of the Penchuk Defendants' alleged wrongdoing; imposition of a constructive trust for the benefit of CYS stockholders to the extent the Penchuk Defendants have improperly benefitted from the alleged wrongdoing; and litigation costs (including attorneys' and expert fees and expenses). The Stein Lawsuit seeks, among other things: injunctive relief preventing the Stein Defendants from proceeding with, consummating, or closing the Merger unless and until the Stein Defendants disclose additional information identified in the complaint; an accounting of any damages suffered as a result of the Stein

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Defendants' alleged wrongdoing; and litigation costs (including attorneys' and expert fees and expenses).

        Two Harbors and CYS believe that the claims asserted in the Lawsuits are without merit and intend to defend vigorously against the Lawsuits.

        For more information, see "Litigation Relating to the Merger" on page 124.

Material U.S. Federal Income Tax Consequences (Page 151)

        Assuming that the Merger is completed as currently contemplated, CYS and Two Harbors expect that the receipt of (i) cash and Two Harbors Common Stock in exchange for CYS Common Stock, (ii) Two Harbors Series D Preferred Stock in exchange for CYS Series A Preferred Stock, or (iii) Two Harbors Series E Preferred Stock in exchange for CYS Series B Preferred Stock, as applicable, by U.S. stockholders pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. Generally, for U.S. federal income tax purposes, U.S. stockholders of CYS Common Stock will recognize gain or loss as a result of the Merger measured by the difference, if any, between (i) the sum of the fair market value of the Two Harbors Common Stock received and the amount of any cash received, and (ii) the stockholder's adjusted tax basis in its CYS Common Stock. In addition, generally, for U.S. federal income tax purposes, U.S. stockholders of CYS Series A Preferred Stock or CYS Series B Preferred Stock will recognize gain or loss as a result of the Merger measured by the difference, if any, between (i) the fair market value of the Two Harbors Series D Preferred Stock or Two Harbors Series E Preferred Stock received, as applicable, and (ii) the stockholder's adjusted tax basis in its CYS Series A Preferred Stock or CYS Series B Preferred Stock, as applicable. Because the consideration to be given to stockholders of (i) CYS Common Stock consists primarily of Two Harbors Common Stock and (ii) CYS Series A Preferred Stock and CYS Series B Preferred Stock consists solely of Two Harbors Series D Preferred Stock and Two Harbors Series E Preferred Stock, respectively, U.S. stockholders of CYS Stock may need to sell their Two Harbors stock received in the Merger, or raise cash from other sources, to pay any tax obligations resulting from the Merger. Generally, non-U.S. stockholders are not expected be subject to U.S. federal income tax or U.S. federal withholding tax on any gain recognized from the Merger. See "Material U.S. Federal Income Tax Consequences—Consequences of the Merger to Non-U.S. Stockholders of CYS Stock." CYS and Two Harbors anticipate that the Merger will have no material U.S. federal income tax consequences to Two Harbors stockholders who do not own any CYS stock.

        The tax consequences to you of the Merger will depend on your own situation. You should consult your tax advisor for a full understanding of the tax consequences to you of the Merger. For more information regarding the U.S. federal income tax consequences of the Merger to CYS stockholders, please see "Material U.S. Federal Income Tax Consequences of the Merger" beginning on page 151.

Description of Two Harbors Capital Stock (Page 180)

        As of June 13, 2018, 175,468,801 shares of Two Harbors Common Stock were issued and outstanding and 5,750,000 shares of Two Harbors Series A Preferred Stock, 11,500,000 shares of Two Harbors Series B Preferred Stock, and 11,800,000 shares of Two Harbors Series C Preferred Stock, were issued and outstanding. Based on an assumed exchange ratio of 0.4872 based on book values as of March 31, 2018, upon consummation of the Merger, the Combined Company would be expected to have approximately 251.1 million shares of Two Harbors Common Stock, 5,750,000 shares of Two Harbors Series A Preferred Stock, 11,500,000 shares of Two Harbors Series B Preferred Stock, 11,800,000 shares of Two Harbors Series C Preferred Stock, 3,000,000 shares of newly classified Two Harbors Series D Preferred Stock and 8,000,000 shares of newly classified Two Harbors Series E Preferred Stock issued and outstanding.

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        Voting rights are generally vested in the holders of the Two Harbors Common Stock, and such holders are entitled to receive dividends on such Two Harbors Common Stock if, as and when authorized by the Two Harbors Board, and declared by Two Harbors out of assets legally available therefor.

Selected Historical Financial Information of Two Harbors

        The following selected historical financial information for each of the years during the five-year period ended December 31, 2017 and the selected balance sheet data as of December 31 for each of the years in the five-year period ended December 31, 2017, have been derived from Two Harbors' audited consolidated financial statements.

        The selected historical financial information as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 have been derived from Two Harbors' unaudited interim consolidated financial statements included in Two Harbors' Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which is incorporated herein by reference. The following selected historical financial information as of March 31, 2017 has been derived from Two Harbors' unaudited interim consolidated financial statements not included or incorporated herein by reference.

        You should read the selected historical financial information presented below together with the consolidated financial statements and the related notes thereto and management's discussion and analysis of financial condition and results of operations of Two Harbors included in Two Harbors' Annual Report on Form 10-K for the year ended December 31, 2017 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which are incorporated herein by reference. See also "Where You Can Find More Information and Incorporation by Reference" on page 212.

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TWO HARBORS SELECTED FINANCIAL DATA

 
  For the three months
ended March 31,
  For the year ended December 31,  
(in thousands, except per share data)
  2018   2017   2017   2016   2015   2014   2013  
 
  unaudited
  unaudited
   
   
   
   
   
 

Statement of comprehensive income data:

                                           

Interest income:

                                           

Available-for-sale securities

  $ 190,716   $ 135,327   $ 631,853   $ 414,050   $ 458,515   $ 506,268   $ 507,180  

Trading securities

                    8,676     12,913     5,963  

Residential mortgage loans held-for-investment in securitization trusts

        31,628     102,886     133,993     95,740     41,220     19,220  

Residential mortgage loans held-for-sale

    307     398     1,704     23,037     28,966     16,089     22,185  

Other

    2,996     1,801     8,646     4,000     982     717     1,043  

Total interest income

    194,019     169,154     745,089     575,080     592,879     577,207     555,591  

Interest expense:

                                           

Repurchase agreements

    86,580     32,256     210,430     88,850     72,653     76,177     89,470  

Collateralized borrowings in securitization trusts

        25,386     82,573     97,729     57,216     26,760     10,937  

Federal Home Loan Bank advances

    4,458     8,793     36,911     26,101     11,921     4,513      

Revolving credit facilities

    804     429     2,341     604              

Convertible senior notes

    4,718     3,821     17,933                  

Total interest expense

    96,560     70,685     350,188     213,284     141,790     107,450     100,407  

Net interest income

    97,459     98,469     394,901     361,796     451,089     469,757     455,184  

Other-than-temporary impairments:

                                           

Total other-than-temporary impairment losses

    (94 )       (789 )   (1,822 )   (535 )   (392 )   (1,662 )

Other income (loss):

                                           

(Loss) gain on investment securities

    (20,671 )   (52,352 )   (34,695 )   (107,374 )   363,379     87,201     (54,430 )

Servicing income

    71,190     39,773     209,065     143,579     127,398     128,160     11,795  

Gain (loss) on servicing asset

    71,807     (14,565 )   (91,033 )   (83,531 )   (99,584 )   (128,388 )   13,881  

Gain (loss) on interest rate swaps and swaption agreements

    150,545     9,927     (9,753 )   45,371     (210,621 )   (345,647 )   245,229  

Gain (loss) on other derivative instruments

    8,053     (27,864 )   (70,159 )   99,379     (5,049 )   (17,529 )   95,345  

Other income (loss)

    1,058     9,496     30,141     9,964     (7,686 )   35,836     (19,011 )

Total other income (loss)

    281,982     (35,585 )   33,566     107,388     167,837     (240,367 )   292,809  

Expenses:

                                           

Management fees

    11,708     9,808     40,472     39,261     49,116     48,803     41,707  

Servicing expenses

    14,554     5,298     35,289     32,119     28,028     25,925     3,761  

Securitization deal costs

                6,152     8,971     4,638     4,153  

Other operating expenses

    14,492     13,764     54,160     56,605     56,764     56,231     37,259  

Restructuring charges

                2,990              

Total expenses

    40,754     28,870     129,921     137,127     142,879     135,597     86,880  

Income from continuing operations before income taxes

    338,593     34,014     297,757     330,235     475,512     93,401     659,451  

Provision for (benefit from) income taxes

    3,784     (24,517 )   (10,482 )   12,314     (16,560 )   (73,738 )   84,411  

Net income from continuing operations

    334,809     58,531     308,239     317,921     492,072     167,139     575,040  

Income from discontinued operations, net of tax

        13,454     44,146     35,357     138         3,999  

Net income

    334,809     71,985     352,385     353,278     492,210     167,139     579,039  

Income from discontinued operations attributable to non-controlling interest

            3,814                  

Net income attributable to Two Harbors Investment Corp

    334,809     71,985     348,571     353,278     492,210     167,139     579,039  

Dividends on preferred stock

    13,747         25,122                  

Net income attributable to common stockholders

  $ 321,062   $ 71,985   $ 323,449   $ 353,278   $ 492,210   $ 167,139   $ 579,039  

Basic per common share data:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net income from continuing operations per weighted average common share

  $ 1.83   $ 0.33   $ 1.62   $ 1.83   $ 2.70   $ 0.91   $ 3.28  

Income from discontinued operations per weighted average common share

        0.08     0.23     0.20             0.02  

Net income per weighted average common share

  $ 1.83   $ 0.41   $ 1.85   $ 2.03   $ 2.70   $ 0.91   $ 3.30  

Weighted average number of shares of common stock outstanding

    175,145,964     174,281,965     174,433,999     174,036,852     182,623,869     183,005,928     175,180,914  

Diluted per common share data:

                                           

Net income from continuing operations per weighted average common share

  $ 1.69   $ 0.33   $ 1.60   $ 1.83   $ 2.70   $ 0.91   $ 3.28  

Income from discontinued operations per weighted average common share

        0.08     0.21     0.20             0.02  

Net income per weighted average common share

  $ 1.69   $ 0.41   $ 1.81   $ 2.03   $ 2.70   $ 0.91   $ 3.30  

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  For the three months
ended March 31,
  For the year ended December 31,  
(in thousands, except per share data)
  2018   2017   2017   2016   2015   2014   2013  
 
  unaudited
  unaudited
   
   
   
   
   
 

Weighted average number of shares of common stock outstanding

    192,818,531     174,281,965     188,133,341     174,036,852     182,623,869     183,005,928     175,496,194  

Dividends declared per common share

 
$

0.47
 
$

0.50
 
$

2.01
 
$

1.86
 
$

2.08
 
$

2.08
 
$

2.34
 

Comprehensive income:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net income

  $ 334,809   $ 71,985   $ 352,385   $ 353,278   $ 492,210   $ 167,139   $ 579,039  

Other comprehensive (loss) income, net of tax:

                                           

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

    (344,777 )   73,762     135,586     (159,834 )   (496,728 )   411,054     (251,723 )

Other comprehensive (loss) income

    (344,777 )   73,762     135,586     (159,834 )   (496,728 )   411,054     (251,723 )

Comprehensive (loss) income

    (9,968 )   145,747     487,971     193,444     (4,518 )   578,193     327,316  

Comprehensive income attributable to non-controlling interest

            3,814                  

Comprehensive (loss) income attributable to Two Harbors Investment Corp

    (9,968 )   145,747     484,157     193,444     (4,518 )   578,193     327,316  

Dividends on preferred stock

    13,747         25,122                  

Comprehensive (loss) income attributable to common stockholders

  $ (23,715 ) $ 145,747   $ 459,035   $ 193,444   $ (4,518 ) $ 578,193   $ 327,316  

 

 
  As of March 31,   As of December 31,  
 
  2018   2017   2017   2016   2015   2014   2013  
 
  unaudited
  unaudited
   
   
   
   
   
 

Balance sheet data:

                                           

Available-for-sale securities

  $ 21,059,377   $ 17,318,697   $ 21,220,819   $ 13,116,171   $ 7,825,320   $ 14,341,102   $ 12,256,727  

Mortgage servicing rights

  $ 1,301,023   $ 747,580   $ 1,086,717   $ 693,815   $ 493,688   $ 452,006   $ 514,402  

Total assets

  $ 24,077,165   $ 24,270,844   $ 24,789,313   $ 20,112,056   $ 14,575,772   $ 21,084,309   $ 17,173,862  

Repurchase agreements

  $ 19,148,679   $ 13,640,720   $ 19,451,207   $ 8,865,184   $ 4,948,926   $ 12,932,463   $ 12,250,450  

Federal Home Loan Bank advances

  $ 865,024   $ 3,571,762   $ 1,215,024   $ 4,000,000   $ 3,785,000   $ 2,500,000   $  

Total stockholders' equity

  $ 3,467,685   $ 3,602,561   $ 3,571,424   $ 3,401,111   $ 3,576,561   $ 4,068,042   $ 3,854,995  

Selected Historical Financial Information of CYS

        The following selected historical financial information for each of the years during the five-year period ended December 31, 2017 and the selected balance sheet data as of December 31 for each of the years in the five-year period ended December 31, 2017 have been derived from CYS's audited consolidated financial statements. The selected historical financial information for the three months ended March 31, 2018 and the selected balance sheet data as of March 31, 2018 have been derived from CYS's unaudited interim consolidated financial statements. The "Key Performance Metrics" have been derived from CYS's underlying books and records.

        You should read the selected historical financial information presented below together with the consolidated financial statements and the related notes thereto and management's discussion and analysis of financial condition and results of operations of CYS included in CYS's Annual Report on Form 10-K for the year ended December 31, 2017, and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which are incorporated herein by reference. See also "Where You Can Find More Information and Incorporation by Reference" on page 212.

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CYS SELECTED FINANCIAL DATA

 
  For the
three
months
ended
March 31,
2018
  For the
three
months
ended
March 31,
2017
   
   
   
   
   
 
 
  For the year ended December 31,  
(In thousands, except per share numbers)
  2017   2016   2015   2014**   2013**  

Income Statement Data:

                                           

Interest income:

                                           

Agency RMBS

  $ 85,986   $ 73,227   $ 304,421   $ 291,097   $ 328,286   $ 301,996   $ 330,430  

Other

    2,692     86     6,362     3,440     2,909     15,080     1,481  

Total interest income

    88,678     73,313     310,783     294,537     331,195     317,076     331,911  

Interest expense:

                                           

Repurchase agreements

    41,117     21,221     114,616     70,230     40,700     33,825     52,763  

FHLBC Advances

                4,049     5,429          

Total interest expense

    41,117     21,221     114,616     74,279     46,129     33,825     52,763  

Net interest income

    47,561     52,092     196,167     220,258     285,066     283,251     279,148  

Other income (loss):

                                           

Net realized gain (loss) on investments

    (71,191 )   (66,044 )   (114,737 )   19,463     13,652     132,563     (595,116 )

Net unrealized gain (loss) on investments

    (166,009 )   63,478     94,463     (132,500 )   (129,764 )   233,763     (314,530 )

Net unrealized gain (loss) on FHLBC Advances           

                (1,299 )   1,299          

Other income

    39     47     163     1,361     867     269     120  

Net realized and unrealized gain (loss) on investments, FHLBC Advances and other income

    (237,161 )   (2,519 )   (20,111 )   (112,975 )   (113,946 )   366,595     (909,526 )

Interest rate hedge expense, net

    (2,508 )   (8,327 )   (29,550 )   (55,798 )   (100,110 )   (90,812 )   (93,497 )

Net realized and unrealized gain (loss) on derivative instruments

    89,468     (1,012 )   57,750     (11,483 )   (54,932 )   (110,542 )   269,128  

Net gain (loss) on derivative instruments

    86,960     (9,339 )   28,200     (67,281 )   (155,042 )   (201,354 )   175,631  

Total other income (loss)

    (150,201 )   (11,858 )   8,089     (180,256 )   (268,988 )   165,241     (733,895 )

Expenses:

                                           

Compensation and benefits

    3,192     3,776     13,759     12,934     12,121     14,105     12,599  

General, administrative and other

    2,676     2,438     9,236     10,677     8,722     8,778     8,436  

Total expenses

    5,868     6,214     22,995     23,611     20,843     22,883     21,035  

Net income (loss)

  $ (108,508 ) $ 34.020   $ 181,261   $ 16,391   $ (4,765 ) $ 425,609   $ (475,782 )

Dividend on preferred stock

    (5,203 )   (5,203 )   (20,812 )   (20,812 )   (20,813 )   (20,812 )   (15,854 )

Net income (loss) available to common stockholders

  $ (113,711 ) $ 28,817   $ 160,449   $ (4,421 ) $ (25,578 ) $ 404,797   $ (491,636 )

Net income (loss) per common share basic & diluted

  $ (0.74 ) $ 0.19   $ 1.05   $ (0.04 ) $ (0.17 ) $ 2.50   $ (2.90 )

Dividends per common share

  $ 0.22   $ 0.25   $ 1.00   $ 1.01   $ 1.10   $ 1.24   $ 1.32  

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  For the
three
months
ended
March 31,
2018
  For the
three
months
ended
March 31,
2017
   
   
   
   
   
 
 
  For the year ended December 31,  
(In thousands, except per share numbers)
  2017   2016   2015   2014**   2013**  

Key Balance Sheet Metrics

                                           

Average settled Debt Securities(1)

  $ 11,701,609   $ 10,819,433   $ 11,233,526   $ 11,781,920   $ 12,962,340   $ 12,198,178   $ 14,813,725  

Average total Debt Securities(2)

  $ 13,185,053   $ 12,485,920   $ 12,701,093   $ 13,212,278   $ 14,223,921   $ 13,910,227   $ 17,806,279  

Average repurchase agreements and FHLBC Advances(3)

  $ 10,215,763   $ 9,264,522   $ 9,697,163   $ 10,290,967   $ 11,395,383   $ 10,559,856   $ 12,836,246  

Average Debt Securities liabilities(4)

  $ 11,699,207   $ 10,931,009   $ 11,164,730   $ 11,721,325   $ 12,656,964   $ 12,271,905   $ 15,828,800  

Average stockholders' equity(5)

  $ 1,480,291   $ 1,539,245   $ 1,561,583   $ 1,704,701   $ 1,856,455   $ 1,922,938   $ 2,145,397  

Average common shares outstanding(6)

    155,198     151,572     152,700     151,522     156,686     161,950     170,803  

Leverage ratio (at period end)(7)

    8.06:1     7.15:1     7.33:1     7.06:1     6.77:1     6.44:1     6.97:1  

Liquidity as % of stockholders' equity(8)

    61 %   69 %   65 %   61 %   66 %   67 %   63 %

Hedge ratio(9)

    101 %   99 %   99 %   92 %   94 %   90 %   91 %

Book value per common share (at period end)(10)

  $ 7.41   $ 8.26   $ 8.38   $ 8.33   $ 9.36   $ 10.50   $ 9.24  

Weighted-average amortized cost of Agency RMBS and U.S. Treasuries(11)

  $ 102.95     103.26   $ 102.92   $ 103.78   $ 103.69   $ 103.98   $ 102.57  

 

 
  For the
three
months
ended
March 31,
2018
  For the
three
months
ended
March 31,
2017
   
   
   
   
   
 
 
  For the year ended December 31,  
(In thousands, except per share numbers)
  2017   2016   2015   2014**   2013**  

Key Performance Metrics*

                                           

Average yield on settled Debt Securities(12)

    3.02 %   2.71 %   2.77 %   2.50 %   2.56 %   2.60 %   2.24 %

Average yield on total Debt Securities including Drop Income(13)

    2.80 %   2.65 %   2.68 %   2.48 %   2.56 %   2.72 %   2.39 %

Average cost of funds(14)

    1.61 %   0.92 %   1.18 %   0.72 %   0.40 %   0.32 %   0.41 %

Average cost of funds and hedge(15)

    1.71 %   1.28 %   1.49 %   1.26 %   1.28 %   1.18 %   1.14 %

Adjusted average cost of funds and hedge(16)

    1.49 %   1.08 %   1.29 %   1.11 %   1.16 %   1.02 %   0.92 %

Interest rate spread net of hedge(17)

    1.31 %   1.43 %   1.28 %   1.24 %   1.28 %   1.42 %   1.10 %

Interest rate spread net of hedge including Drop Income(18)

    1.31 %   1.57 %   1.39 %   1.37 %   1.40 %   1.70 %   1.47 %

Operating expense ratio(19)

    1.59 %   1.61 %   1.47 %   1.39 %   1.12 %   1.19 %   0.98 %

Total stockholder return on common equity(20)

    (8.95 )%   2.16 %   12.61 %   (0.21 )%   (0.38 )%   27.06 %   (20.66 )%

CPR (weighted-average experienced 1-month)(21)

    7.1 %   8.1 %   8.6 %   12.1 %   10.4 %   7.9 %   11.6 %

(1)
The average settled Debt Securities is calculated by averaging the month end cost basis of settled Debt Securities during the period.

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(2)
The average total Debt Securities is calculated by averaging the month end cost basis of total Debt Securities and unsettled Debt Securities (inclusive of TBA Derivatives) during the period.

(3)
The average repurchase agreements and FHLBC Advances are calculated by averaging the month-end repurchase agreements and FHLBC Advances balances during the period.

(4)
The average Debt Securities liabilities are calculated by adding the average month-end repurchase agreements and FHLBC Advances balances plus average unsettled Debt Securities (inclusive of TBA Derivatives) during the period.

(5)
The average stockholders' equity is calculated by averaging the month-end stockholders' equity during the period.

(6)
The average common shares outstanding is calculated by averaging the daily common shares outstanding during the period.

(7)
The leverage ratio is calculated by dividing (i) CYS's repurchase agreements and FHLBC Advances balance plus payable for securities purchased minus receivable for securities sold, plus or minus the net TBA Derivatives positions by (ii) stockholders' equity.

(8)
Liquidity as % of stockholders' equity is calculated by dividing unencumbered liquid assets by stockholders' equity.

(9)
The hedge ratio for the period is calculated by dividing the combined total Interest Rate Swaps, Swaptions and Interest Rate Caps notional amount by total repurchase agreements and FHLBC Advances balances.

(10)
Book value per common share is calculated by dividing total stockholders' equity less the liquidation value of preferred stock at period end by common shares outstanding at period end.

(11)
The weighted-average amortized cost of Agency RMBS and U.S. Treasuries is calculated using the weighted-average amortized cost by security divided by the current face at period end.

(12)
The average yield on settled Debt Securities for the period is calculated by dividing total interest income by average settled Debt Securities.

(13)
Average yield on total Debt Securities including Drop Income for the period is calculated by dividing total interest income plus Drop Income by average total Debt Securities. Drop Income was $29.9 million, $32.9 million, $32.6 million, $60.7 million and $94.5 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively. Drop Income is a component of CYS's net realized and unrealized gain (loss) on investments and derivative instruments in the Consolidated Statements of Operations. Drop Income is the difference between the spot price and the forward-settlement price for the same security on the trade date.

(14)
The average cost of funds for the period is calculated by dividing repurchase agreement and FHLBC Advances interest expense by average repurchase agreements and FHLBC Advances for the period.

(15)
The average cost of funds and hedge for the period is calculated by dividing repurchase agreement and FHLBC Advances interest expense and interest rate hedge expense, net by average repurchase agreements and FHLBC Advances.

(16)
The adjusted average cost of funds and hedge for the period is calculated by dividing repurchase agreement and FHLBC Advances interest expense and interest rate hedge expense, net by average Debt Securities liabilities.

(17)
The interest rate spread net of hedge for the period is calculated by subtracting average cost of funds and hedge from average yield on settled Debt Securities.

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(18)
The interest rate spread net of hedge including Drop Income for the period is calculated by subtracting adjusted average cost of funds and hedge from average yield on total Debt Securities including Drop Income.

(19)
The operating expense ratio for the period is calculated by dividing operating expenses by average stockholders' equity.

(20)
The total stockholder return on common equity is calculated as the change in book value plus dividend distributions on common stock divided by book value at the beginning of the period.

(21)
CPR represents the weighted-average 1-month CPR of CYS's Agency RMBS during the period.

*
All percentages are annualized except total stockholder return on common equity.

**
Previously reported under specialized accounting, ASC 946—Financial Services—Investment Companies. See Notes to consolidated financial statements, in CYS's Form 10-K for the year ended December 31, 2017 and Form 10-Q for the quarterly period ended March 31, 2018.
 
   
   
  As of December 31,  
 
  As of
March 31,
2018
  As of
March 31,
2017
 
(in thousands, except per share numbers)
  2017   2016   2015   2014   2013  

Balance Sheet Data:

                                           

Investments in securities, at fair value

  $ 11,535,960   $ 11,060,851   $ 12,634,654   $ 12,648,731   $ 13,027,707   $ 14,601,507   $ 13,858,848  

Total assets

    12,930,261     11,240,918     13,145,582     13,245,268     14,330,704     14,895,863     14,633,064  

Repurchase agreements and other debt

    10,084,643     9,015,594     10,089,917     9,691,544     11,086,477     11,289,559     11,206,950  

Stockholders' equity

    1,426,945     1,527,670     1,574,247     1,535,719     1,694,614     1,975,168     1,768,656  

Book value per common share

  $ 7.41   $ 8.26   $ 8.38   $ 8.33   $ 9.36   $ 10.50   $ 9.24  

 

 
  For the
three
months
ended
March 31,
2018
  For the
three
months
ended
March 31,
2017
   
   
   
   
   
 
 
  For the year ended December 31,  
(in thousands, except per share
numbers)

  2017   2016   2015   2014   2013  

Non-GAAP Reconciliation:

                                           

Net income (loss) available to common stockholders

  $ (113,711 ) $ 28,817   $ 160,449   $ (4,421 ) $ (25,578 ) $ 404,797   $ (491,636 )

Net realized (gain) loss on investments

    71,191     66,044     114,737     (19,463 )   (13,652 )   (132,563 )   595,116  

Net unrealized (gain) loss on investments

    166,009     (63,478 )   (94,463 )   132,500     129,764     (233,763 )   314,530  

Net realized and unrealized (gain) loss on derivative instruments

    (89,468 )   1,012     (57,750 )   11,483     54,932     110,542     (269,128 )

Net unrealized (gain) loss on FHLBC Advances

                1,299     (1,299 )        

Core Earnings

  $ 34,021   $ 32,395   $ 122,973   $ 121,398   $ 144,167   $ 149,013   $ 148,882  

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Selected Unaudited Pro Forma Condensed Combined Financial Statements (Page 214)

        The following table shows summary unaudited pro forma condensed combined financial information about the combined financial condition and operating results of Two Harbors and CYS after giving effect to the Merger. The unaudited pro forma financial information assumes that the Merger is accounted for as an asset acquisition with Two Harbors as the acquiring entity. The unaudited pro forma condensed combined balance sheet data gives effect to the Merger as if it had occurred on March 31, 2018. The unaudited pro forma condensed combined statements of operations data gives effect to the Merger as if it had occurred on January 1, 2017. The summary unaudited pro forma condensed combined financial information listed below has been derived from and should be read in conjunction with (1) the more detailed unaudited pro forma condensed combined financial statements, including the notes thereto, appearing elsewhere in this joint proxy statement/prospectus and (2) the historical consolidated financial statements and related notes of both Two Harbors and CYS, incorporated herein by reference. See "Unaudited Pro Forma Condensed Combined Financial Statement" beginning on page 214 and "Where You Can Find More Information and Incorporation by Reference" beginning on page 212.

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  As of, or for the Three Months Ended, March 31, 2018
(in thousands, except for per share data)
 
 
  Two Harbors
Historical(1)
  CYS
Historical(1)
  Pro Forma
Adjustments
  Two Harbors
Pro Forma
 

Statement of Comprehensive Income (Loss) Data:

                         

Interest income

  $ 194,019   $ 88,678   $   $ 282,697  

Interest expense

    96,560     41,117         137,677  

Net interest income

    97,459     47,561         145,020  

Other-than-temporary impairment losses

    (94 )           (94 )

Other income (loss)

    281,982     (150,201 )   167,039     298,820  

Expenses

    40,754     5,868         46,622  

Provision for income taxes

    3,784             3,784  

Net income (loss)

    334,809     (108,508 )   167,039     393,340  

Dividends on preferred stock

    13,747     5,203         18,950  

Net income (loss) attributable to common stockholders

  $ 321,062   $ (113,711 ) $ 167,039   $ 374,390  

Per Share Data:

   
 
   
 
   
 
   
 
 

Net income (loss) per weighted average common share—basic

  $ 1.83   $ (0.74 ) $ 0.40   $ 1.49  

Net income (loss) per weighted average common share—diluted

  $ 1.69   $ (0.74 ) $ 0.46   $ 1.41  

Weighted average number of shares of common stock outstanding—basic

    175,145,964     154,230,144     (78,517,301 )   250,858,807  

Weighted average number of shares of common stock outstanding—diluted

    192,818,531     154,230,144     (78,517,301 )   268,531,374  

Comprehensive loss:

   
 
   
 
   
 
   
 
 

Net income (loss)

  $ 334,809   $ (108,508 ) $ 167,039   $ 393,340  

Other comprehensive loss, net of tax:

                         

Unrealized loss on available-for-sale securities

    (344,777 )       (167,039 )   (511,816 )

Other comprehensive loss

    (344,777 )       (167,039 )   (511,816 )

Comprehensive loss

    (9,968 )   (108,508 )       (118,476 )

Dividends on preferred stock

    13,747     5,203         18,950  

Comprehensive loss attributable to common stockholders

  $ (23,715 ) $ (113,711 ) $   $ (137,426 )

Balance sheet data:

   
 
   
 
   
 
   
 
 

Available-for-sale securities

  $ 21,059,377   $ 11,535,960   $   $ 32,595,337  

Mortgage servicing rights

  $ 1,301,023   $   $   $ 1,301,023  

Total assets

  $ 24,077,165   $ 12,930,261   $ (15,000 ) $ 36,992,426  

Repurchase agreements

  $ 19,148,679   $ 10,084,643   $   $ 29,233,322  

Federal Home Loan Bank advances

  $ 865,024   $   $   $ 865,024  

Total liabilities

  $ 20,609,480   $ 11,503,316   $ 21,061   $ 32,133,857  

Total stockholders' equity

  $ 3,467,685   $ 1,426,945   $ (36,061 ) $ 4,858,569  

(1)
The historical financial information of Two Harbors and CYS is derived from their respective Quarterly Reports filed on Form 10-Q for the three months ended March 31, 2018. Certain historical CYS amounts have been reclassified to conform to Two Harbors' financial statement presentation.

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  For the year ended December 31, 2017
(in thousands, except for per share data)
 
 
  Two Harbors
Historical(1)
  CYS
Historical(1)
  Pro Forma
Adjustments
  Two Harbors
Pro Forma
 

Statement of Comprehensive Income Data:

                         

Interest income

  $ 745,089   $ 310,783   $   $ 1,055,872  

Interest expense

    350,188     114,616         464,804  

Net interest income

    394,901     196,167         591,068  

Other-than-temporary impairment losses

    (789 )           (789 )

Other income (loss)

    33,566     8,089     (93,490 )   (51,835 )

Expenses

    129,921     22,995         152,916  

Benefit from income taxes

    (10,482 )           (10,482 )

Net income (loss) from continuing operations

    308,239     181,261     (93,490 )   396,010  

Income from discontinued operations, net of tax

    44,146             44,146  

Net income (loss)

    352,385     181,261     (93,490 )   440,156  

Income from discontinued operations attributable to non-controlling interest

    3,814             3,814  

Net income (loss) attributable to Two Harbors or CYS (as applicable)

    348,571     181,261     (93,490 )   436,342  

Dividends on preferred stock

    25,122     20,812         45,934  

Net income (loss) attributable to common stockholders

  $ 323,449   $ 160,449   $ (93,490 ) $ 390,408  

Per Share Data:

   
 
   
 
   
 
   
 
 

Net income (loss) per weighted average common stock—basic

  $ 1.85   $ 1.05   $ (1.34 ) $ 1.56  

Net income (loss) per weighted average common stock—diluted

  $ 1.81   $ 1.05   $ (1.32 ) $ 1.54  

Weighted average number of shares of common stock outstanding—basic

    174,433,999     151,757,485     (76,044,642 )   250,146,842  

Weighted average number of shares of common stock outstanding—diluted

    188,133,341     151,757,485     (76,044,642 )   263,846,184  

Comprehensive income:

   
 
   
 
   
 
   
 
 

Net income (loss) attributable to Two Harbors or CYS (as applicable)

  $ 348,571   $ 181,261   $ (93,490 ) $ 436,342  

Other comprehensive income, net of tax:

                         

Unrealized gain on available-for-sale securities

    135,586         93,490     229,076  

Other comprehensive income

    135,586         93,490     229,076  

Comprehensive income

    484,157     181,261         665,418  

Dividends on preferred stock

    25,122     20,812         45,934  

Comprehensive income attributable to common stockholders

  $ 459,035   $ 160,449   $   $ 619,484  

(1)
The historical financial information of Two Harbors and CYS is derived from their respective Annual Reports on Form 10-K for the year ended December 31, 2017. Certain historical CYS amounts have been reclassified to conform to Two Harbors' financial statement presentation.

Unaudited Comparative Per Share Information (Page 179)

        The following table sets forth for the year ended December 31, 2017 and as of, and for the three months ended, March 31, 2018, selected per share information for Two Harbors Common Stock on a historical and pro forma combined basis and for CYS Common Stock on a historical and pro forma equivalent basis. Except for the historical information for the year ended December 31, 2017, the

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information in the table is unaudited. You should read the table below together with the historical consolidated financial statements and related notes thereto of Two Harbors and CYS contained in Two Harbors' Annual Report on Form 10-K for the year ended December 31, 2017, CYS's Annual Report on Form 10-K for the year ended December 31, 2017, and each of Two Harbors' and CYS's respective Quarterly Reports on Form 10-Q for the quarter ended March 31, 2018, all of which are incorporated herein by reference into this joint proxy statement/prospectus. See "Where You Can Find More Information and Incorporation by Reference" beginning on page 212.

        The Two Harbors pro forma combined amounts were calculated using the methodology as described above under the heading "Unaudited Pro Forma Condensed Combined Financial Statements," and are subject to all the assumptions, adjustments and limitations described thereunder. The unaudited pro forma condensed combined balance sheet data gives effect to the Merger as if it occurred on March 31, 2018. The unaudited pro forma condensed combined statements of operations data gives effect to the Merger as if it occurred on January 1, 2017. The unaudited pro forma condensed combined financial statements are not necessarily indicative of what the actual financial position and operating results would have been had the Merger occurred on March 31, 2018 or January 1, 2017, respectively, nor do they purport to represent Two Harbors' future financial position or operating results. The CYS pro forma equivalent amounts were calculated by multiplying the Two Harbors pro forma combined amounts by the assumed Exchange Ratio of 0.4872 based on the adjusted book value per share of Two Harbors Common Stock and CYS Common Stock as of March 31, 2018, calculated in accordance with the Merger Agreement.

 
  CYS
Historical
  Two Harbors
Historical
  Pro Forma
Combined
  Pro Forma
Equivalent CYS
Share
 

For the year ended December 31, 2017

                         

Net income per weighted share of common stock, basic

  $ 1.05   $ 1.85   $ 1.56   $ 0.76  

Net income per weighted share of common stock, diluted

  $ 1.05   $ 1.81   $ 1.54   $ 0.75  

Dividends declared per share

  $ 1.00   $ 2.01 (1)     (2)     (2)

For the quarter ended March 31, 2018

   
 
   
 
   
 
   
 
 

Net income (loss) per weighted share of common stock, basic

  $ (0.74 ) $ 1.83   $ 1.49   $ 0.73  

Net income (loss) per weighted share of common stock, diluted

  $ (0.74 ) $ 1.69   $ 1.41   $ 0.69  

Dividends declared per share

  $ 0.22   $ 0.47       (2)     (2)

As of March 31, 2018

   
 
   
 
   
 
   
 
 

Net book value per share of common stock

  $ 7.41   $ 15.63   $ 15.36 (3) $ 7.48  

(1)
Excludes the special dividend of Granite Point common stock of $3.67 per common share.

(2)
Pro forma dividends per share of common stock are not presented as the dividend policy for the Combined Company will be determined by the Two Harbors board following the completion of the Merger. It is anticipated that the initial per share dividend for the first full quarter following Closing will be $0.47.

(3)
Net book value per share of common stock for Pro Forma Combined does not reflect approximately $9.0 million of compensation related expenses (i.e., non-executive severance, retention, etc.) which will be recognized subsequent to the Closing in accordance with GAAP.

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RISK FACTORS

        In addition to other information included elsewhere in this joint proxy statement/prospectus and in the annexes to this joint proxy statement/prospectus, including the matters addressed in the section entitled "Cautionary Statement Regarding Forward-Looking Statements" beginning on page 52, you should carefully consider the following risk factors in deciding whether to vote for the Two Harbors Common Stock Issuance Proposal or the Merger Proposal. In addition, you should read and consider the risks associated with the businesses of each of Two Harbors and CYS. These risks can be found in the Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 of CYS and the Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 of Two Harbors, which reports are incorporated by reference into this joint proxy statement/prospectus, including particularly the sections therein titled "Risk Factors" and "Tax Risks". You should also read and consider the other information in this joint proxy statement/prospectus and the other documents incorporated by reference into this joint proxy statement/prospectus. Please also see "Where You Can Find More Information and Incorporation by Reference" on page 212.

Risks Related to the Merger

The Merger is subject to a number of conditions which, if not satisfied or waived in a timely manner, would delay the Merger or adversely impact Two Harbors' and CYS's ability to complete the transaction.

        The completion of the Merger is subject to the satisfaction or waiver of a number of conditions. In addition, under circumstances specified in the Merger Agreement, Two Harbors or CYS may terminate the Merger Agreement. In particular, completion of the Merger requires (i) the approval of the Merger Proposal by the CYS common stockholders, and (ii) the approval of the Two Harbors Common Stock Issuance Proposal by Two Harbors common stockholders. While it is currently anticipated that the Merger will be completed shortly after the later of the CYS special meeting to approve the Merger Proposal and the Two Harbors special meeting to approve the Two Harbors Common Stock Issuance Proposal, there can be no assurance that the conditions to Closing will be satisfied in a timely manner or at all, or that an effect, event, circumstance, occurrence, development or change will not transpire that could delay or prevent these conditions from being satisfied. Accordingly, Two Harbors and CYS cannot provide any assurances with respect to the timing of the Closing, whether the Merger will be completed at all and when the CYS stockholders would receive the consideration for the Merger, if at all.

Failure to consummate the Merger as currently contemplated or at all could adversely affect the price of Two Harbors Common Stock or CYS Common Stock and the future business and financial results of Two Harbors and/or CYS.

        Completion of the Merger is subject to the satisfaction or waiver of a number of conditions, including approval by the Two Harbors common stockholders of the Two Harbors Common Stock Issuance Proposal and approval by the CYS common stockholders of the Merger Proposal. Two Harbors and CYS cannot guarantee when or if these conditions will be satisfied or that the Merger will be successfully completed. The consummation of the Merger may be delayed, the Merger may be consummated on terms different than those contemplated by the Merger Agreement, or the Merger may not be consummated at all. If the Merger is not completed, or is completed on different terms than as contemplated by the Merger Agreement, Two Harbors and CYS could be adversely affected and subject to a variety of risks associated with the failure to consummate the Merger, or to consummate the Merger as contemplated by the Merger Agreement, including the following:

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        Any delay in the consummation of the Merger or any uncertainty about the consummation of the Merger on terms other than those contemplated by the Merger Agreement, or if the Merger is not completed, could materially adversely affect the business, financial results and stock price of Two Harbors and CYS.

The Merger Agreement contains provisions that could discourage a potential competing acquirer of either Two Harbors or CYS or could result in any competing acquisition proposal being at a lower price than it might otherwise be.

        The merger agreement contains provisions that, subject to limited exceptions, restrict the ability of each of Two Harbors and CYS to solicit, initiate, knowingly encourage or facilitate any Competing Proposal. With respect to any written, bona fide Competing Proposal received by either Two Harbors or CYS, the other party generally has an opportunity to offer to modify the terms of the Merger Agreement in response to such proposal before the Two Harbors Board or CYS Board, as the case may be, or committee thereof, may withdraw or modify its recommendation to their respective stockholders in response to such Competing Proposal. In the event that either party's board of directors withdraws or modifies its recommendation, the other party may terminate the Merger Agreement, in which case CYS may be required to pay to Two Harbors a termination fee of $43.2 million or Two Harbors may be required to pay to CYS a termination fee of $51.8 million, payable by the party whose board withdrew or modified its recommendation. Similarly, such termination fees may be payable in certain circumstances if the Merger Agreement is terminated because of a failure to obtain stockholder approval following the announcement of a competing acquisition proposal. See "The Merger Agreement—Competing Proposals" beginning on page 140, "The Merger Agreement—Termination of the Merger Agreement" beginning on page 145 and "The Merger Agreement—Termination Fees and Expenses" beginning on page 146.

        These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Two Harbors or CYS from considering or proposing a competing acquisition, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than that market value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or expense amount that may become payable in certain circumstances under the Merger Agreement.

The pendency of the Merger could adversely affect Two Harbors' and CYS's business and operations.

        In connection with the pending Merger, some of the parties with whom Two Harbors or CYS does business may delay or defer decisions, which could negatively impact Two Harbors' or CYS's revenues, earnings, cash flows and expenses, regardless of whether the Merger is completed. In addition, under

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the Merger Agreement, Two Harbors and CYS are each subject to certain restrictions on the conduct of its respective business prior to completing the Merger. These restrictions may prevent Two Harbors or CYS from pursuing certain strategic transactions, acquiring and disposing assets, undertaking certain capital projects, undertaking certain financing transactions and otherwise pursuing other actions that are not in the ordinary course of business, even if such actions could prove beneficial. These restrictions may impede Two Harbors' or CYS's growth which could negatively impact its respective revenue, earnings and cash flows. Additionally, the pendency of the Merger may make it more difficult for Two Harbors or CYS to effectively retain and incentivize key personnel.

Because the number of shares of Two Harbors Common Stock exchanged per share of CYS Common Stock is not fixed, any change in Two Harbors' adjusted book value per share or CYS's adjusted book value per share prior to the Determination Date will affect the number of shares of Two Harbors Common Stock issued by Two Harbors and received by CYS common stockholders at the Closing.

        The number of shares of Two Harbors Common Stock to be received by CYS stockholders will be based on the Exchange Ratio to be determined by dividing 96.75% of the CYS adjusted book value per share by 94.20% of the Two Harbors adjusted book value per share. As defined in the Merger Agreement as "Company Adjusted Book Value Per Share" and "Parent Adjusted Book Value Per Share," as applicable, adjusted book value per share for each company means (i) such company's total consolidated common stockholders' equity after giving pro forma effect to any dividends or other distributions for which the record date is after the exchange ratio but prior to the Closing and as modified for potential transaction-related adjustments, divided by (ii) each respective company's number of shares of common stock issued and outstanding, including shares issuable upon the vesting of restricted stock (less any shares surrendered for income tax purposes). Changes in the adjusted book value per share of either Two Harbors or CYS prior to the Determination Date will affect the consideration that CYS stockholders will receive on the date of Closing.

        Changes in Two Harbors' adjusted book value per share and CYS's adjusted book value per share may result from a variety of factors (some of which may be beyond the control of Two Harbors and CYS), including the following factors:

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        Two Harbors' adjusted book value per share and CYS's adjusted book value per share at the Determination Date may vary from their respective adjusted book values per share on March 31, 2018, the date used to determine the illustrative Exchange Ratio of 0.4872 used in this joint proxy statement/prospectus and on the dates of Two Harbors' and CYS's special meetings. As a result, the market value of the consideration for the Merger represented by the Exchange Ratio may also vary. Therefore, Two Harbors common stockholders cannot be sure of the Exchange Ratio or the market value of the consideration that will be paid to CYS common stockholders upon completion of the Merger, and CYS common stockholders cannot be sure of the Exchange Ratio or the market value of the consideration they will receive upon completion of the Merger. Neither Two Harbors nor CYS has the right to terminate the Merger Agreement based on an increase or decrease in their respective adjusted book value per share or the market price of Two Harbors Common Stock.

The Merger and related transactions are subject to Two Harbors common stockholder approval and CYS common stockholder approval.

        The Merger cannot be completed unless (i) CYS common stockholders approve the Merger Proposal by the affirmative vote of the holders of at least a majority of all outstanding shares of CYS Common Stock entitled to vote on the Merger Proposal and (ii) Two Harbors common stockholders approve the Two Harbors Common Stock Issuance Proposal by the affirmative vote of a majority of the votes cast on such proposal, provided a quorum is present. Pursuant to the guidance of the NYSE, abstentions with regard to the Two Harbors Common Stock Issuance Proposal will have the effect of a vote against such proposal. If stockholder approval is not obtained from either CYS common stockholders or Two Harbors common stockholders, the Merger and related transactions cannot be completed.

Two Harbors common stockholders and CYS common stockholders will be diluted by the Merger.

        The Merger will dilute the ownership position of Two Harbors common stockholders and result in CYS common stockholders having an ownership stake in the Combined Company that is smaller than their current stake in CYS. Following the Two Harbors Common Stock Issuance, Two Harbors and CYS estimate that current Two Harbors common stockholders will own in the aggregate approximately 70% of outstanding Two Harbors Common Stock immediately after the Merger, and CYS common stockholders will own in the aggregate approximately 30% of outstanding Two Harbors Common Stock immediately after the Merger. Consequently, Two Harbors common stockholders and CYS common stockholders, as a general matter, will have less influence over the Combined Company's management and policies after the effective time of the Merger than they currently exercise over the management and policies of Two Harbors and CYS, respectively.

If the Merger is not consummated by October 31, 2018, Two Harbors or CYS may terminate the Merger Agreement.

        Either Two Harbors or CYS may terminate the Merger Agreement under certain circumstances, including if the Merger has not been consummated by October 31, 2018. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the cause of, or resulted in, the failure to consummate the Merger on or before such date.

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The market price of Two Harbors Common Stock may decline as a result of the Merger and the market price of Two Harbors Common Stock after the consummation of the Merger may be affected by factors different from those affecting the price of Two Harbors Common Stock or the price of CYS Common Stock before the Merger.

        The market price of Two Harbors Common Stock may decline as a result of the Merger if the Combined Company does not achieve the perceived benefits of the Merger or the effect of the Merger on the Combined Company's financial results is not consistent with the expectations of financial or industry analysts.

        In addition, upon consummation of the Merger, Two Harbors stockholders and CYS stockholders will own interests in the Combined Company operating an expanded business with a different mix of assets, risks and liabilities. Two Harbors current stockholders and CYS's current stockholders may not wish to continue to invest in the Combined Company, or for other reasons may wish to dispose of some or all of their shares of Two Harbors Common Stock. If, following the effective time of the Merger, a large amount of Two Harbors Common Stock is sold, the price of Two Harbors Common Stock could decline.

        Further, the Combined Company's results of operations, as well as the market price of Two Harbors Common Stock after the Merger may be affected by factors in addition to those currently affecting Two Harbors' or CYS's results of operations and the market prices of Two Harbors Common Stock and CYS Common Stock, particularly the increase in the Combined Company's leverage compared to that in place for Two Harbors and CYS today, and other differences in assets and capitalization. Accordingly, Two Harbors' and CYS's historical market prices and financial results may not be indicative of these matters for the Combined Company after the Merger.

An adverse judgment in any litigation challenging the Merger may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

        It is possible that Two Harbors stockholders or CYS stockholders may file lawsuits challenging the Merger or the other transactions contemplated by the Merger Agreement, which may name Two Harbors, CYS, Two Harbors Board and/or the CYS Board as defendants. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated altogether. Whether or not any plaintiff's claim is successful, this type of litigation may result in significant costs and divert management's attention and resources, which could adversely affect the operation of Two Harbors' business and/or CYS's business.

Risks Related to the Combined Company Following the Merger