TWO Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisition of CYS Investments, Inc.

Acquisition of CYS Investments, Inc.

9 Months Ended

Sep. 30, 2018

Acquisition of CYS Investments, Inc. [Abstract]

On July 31, 2018, the Company completed the acquisition of CYS through a merger of CYS with and into a wholly owned subsidiary of Two Harbors, in exchange for approximately 72.6 million shares of Two Harbors common stock, as well as aggregate cash consideration of $15.0 million. In accordance with the merger agreement, the number of shares of Two Harbors common stock issued was based on an exchange ratio of 0.4680 and the cash consideration received by CYS common stockholders was $0.0965 per share. In addition, the Company issued 3 million shares of newly classified Series D cumulative redeemable preferred stock and 8 million shares of newly classified Series E cumulative redeemable preferred stock in exchange for all shares of CYS’s Series A and Series B cumulative redeemable preferred stock outstanding prior to the effective time of the merger.

The total purchase price for the merger of $1.4 billion consists primarily of Two Harbors common stock issued in exchange for shares of CYS common stock and was calculated based on the closing price of Two Harbors common stock on July 31, 2018 of $15.50.



(dollars in thousands, except per share prices)	July 31, 2018
Common Stock Exchange:
CYS common stock outstanding	155,102,543
Common exchange ratio	0.4680
Two Harbors common stock to be issued	72,587,990
Less: fractional shares	218
Two Harbors common stock issued	72,587,772
Two Harbors share price	$	15.50
			$	1,125,114
Cash in Lieu of Common Stock:
Fractional shares	218
Cash in lieu rate	$	15.59
			$	3
Per Share Cash Consideration:
CYS common stock outstanding	155,102,543
Per share cash consideration	0.0965
			$	14,967

Preferred Stock Exchange:	Shares
Series D preferred stock	3,000,000		$	75,000
Series E preferred stock	8,000,000		$	200,000

Total Purchase Price			$	1,415,084

As discussed in Note 2 - Basis of Presentation and Significant Accounting Policies, the merger was accounted for as an asset acquisition. The total purchase price for the merger including direct transaction costs, which exceeded gross assets acquired less liabilities assumed in the merger, was allocated to the individual assets acquired and liabilities assumed on a relative fair value basis, as shown below:



(in thousands)	July 31, 2018
Assets:
Available-for-sale securities, at fair value	$	10,034,557
Cash and cash equivalents	386
Restricted cash	1,062
Accrued interest receivable	30,646
Due from counterparties	21,572
Derivative assets, at fair value	314,811
Reverse repurchase agreements	761,460
Other assets	11,947
Total Assets	$	11,176,441
Liabilities:
Repurchase agreements	$	8,743,527
Derivative liabilities, at fair value	765,837
Due to counterparties	301,287
Accrued interest payable	27,487
Other liabilities	821
Total Liabilities	9,838,959
Stockholders’ Equity
Cumulative deficit (acquisition transaction costs)	(77,602		)
Total Stockholders’ Equity	$	(77,602	)

Total Purchase Price	$	1,415,084

As there were no meaningful nonfinancial assets and non-current assets in this transaction and no identified intangible assets to assign value, the excess consideration and transaction costs were recognized in the condensed consolidated statements of comprehensive (loss) income as an expense and an associated reduction in stockholders’ equity.

The Company also incurred the following charges in connection with the acquisition of CYS, which are included within restructuring charges on the Company’s condensed consolidated statements of comprehensive (loss) income, for the three and nine months ended September 30, 2018:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2018		2018
Termination benefits	$	6,216	$	6,216
Contract terminations	979		979
Other associated costs	1,043		1,043
Total	$	8,238	$	8,238

The Company does not expect to incur additional restructuring costs related to the acquisition of CYS in 2018 or beyond.