Two Harbors Investment (TWO) - 2025 Q1 - Quarterly Report

Financial Instruments and Assets - As of March 31, 2025, approximately 84.8% of the company's total assets, or $11.6 billion, consisted of financial instruments recorded at fair value[221] - At March 31, 2025, 21.7% of the company's total assets were classified as Level 3 fair value assets, indicating significant judgment in valuation[228] - The carrying value of the investment portfolio as of March 31, 2025, was $11,591,094 thousand, up from $10,374,970 thousand as of December 31, 2024[238] - The total carrying value of the Agency RMBS portfolio was $8,627,708 thousand as of March 31, 2025, an increase from $7,376,965 thousand as of December 31, 2024[241] - The company held $11.6 billion in available-for-sale securities, mortgage servicing rights, mortgage loans held-for-sale, and derivative assets at fair value as of March 31, 2025[288] - Available-for-sale securities at fair value rose to $8.607 billion as of March 31, 2025, compared to $7.372 billion as of December 31, 2024[274] Interest Rates and Income - The company's net interest income is influenced by changes in market interest rates, financing costs, and prepayment speeds on its assets[220] - Interest rates for 2-year and 10-year U.S. Treasury notes decreased by 36 basis points to 3.88% and 4.21%, respectively, compared to year-end 2024[231] - Net interest income decreased from $117.8 million in Q1 2024 to $111.4 million in Q1 2025, primarily due to a decrease in the Agency RMBS portfolio size and lower average cash balances[250] - Interest expense decreased from $160.0 million in Q1 2024 to $131.7 million in Q1 2025, attributed to lower interest rates and reduced borrowing balances[251] - The average net asset yield for interest-earning assets was 5.1% for Q1 2025, down from 5.3% in Q1 2024, reflecting changes in the interest rate environment[252] - The interest rate sensitivity table indicates that a +25 bps change in interest rates would result in a decrease of $1,055,000 in annualized net interest income, representing a -0.7% change[320] - A +50 bps change in interest rates would lead to a decrease of $2,226,000 in annualized net interest income, representing a -1.5% change[320] Mortgage Servicing Rights (MSR) - The company's MSR business leverages core competencies in prepayment and interest rate risk analytics, providing offsetting risks to its Agency RMBS[213] - The MSR portfolio experienced an aggregate speed of 4.2% CPR for Q1 2025, down 0.7 percentage points compared to Q4 2024[235] - The MSR market remains well supported with limited bulk acquisition opportunities, indicating a stable market environment[235] - As of March 31, 2025, the fair market value of the Mortgage Servicing Rights (MSR) was $3.0 billion[277] - The MSR portfolio included 794,466 loans with an unpaid principal balance of approximately $196.8 billion[278] - The weighted average coupon rate for the total MSR portfolio was 3.5%[278] - An increase in prepayment rates on the mortgage loans underlying MSR would likely result in a decline in the value of MSR, cutting short the anticipated life of the servicing income stream[327] Financial Performance - Comprehensive income attributable to common stockholders for the three months ended March 31, 2025, was $64.9 million, compared to $89.4 million for the same period in 2024, indicating a decline of approximately 27.5%[248] - The net (loss) income attributable to common stockholders for the three months ended March 31, 2025, was $(92.2) million, compared to $192.4 million in the same period of 2024[249] - Other comprehensive income increased to $157.172 million in Q1 2025 from $(103.078) million in Q1 2024, driven by unrealized gains on available-for-sale securities[273] - The book value per common share increased to $14.66 at March 31, 2025, up from $14.47 at December 31, 2024, driven by unrealized gains on AFS securities and net servicing income[248] Leverage and Debt - The debt-to-equity ratio as of March 31, 2025, was 5.1:1.0, indicating a significant leverage position in funding investment securities and mortgage loans[245] - The debt-to-equity ratio increased from 4.3:1.0 to 5.1:1.0 during the three months ended March 31, 2025, primarily due to increased financing on Agency RMBS[288] - Total borrowings as of March 31, 2025, amounted to $10,942,563, with a weighted average borrowing rate of 4.99%[280] - Total outstanding debt as of March 31, 2025, was $10.9 billion, with significant amounts maturing within 30 days[302] - Total indebtedness to tangible net worth was 5.3:1.0 as of March 31, 2025, below the covenant limit of 8.0:1.0[298] Cash Flow and Liquidity - Cash and cash equivalents available to support operations amounted to $573.9 million as of March 31, 2025[288] - For the three months ended March 31, 2025, cash flows from operating activities increased cash balances by approximately $111.9 million, primarily driven by financial results for the quarter[304] - Cash flows from investing activities decreased cash balances by approximately $2.0 billion, primarily due to net purchases of AFS securities and MSR, and an increase in amounts due from counterparties[304] - Cash flows from financing activities increased cash balances by approximately $1.8 billion, primarily driven by increases in repurchase agreement and warehouse facility financing[304] Market Conditions and Risks - Forward-looking statements indicate potential risks including changes in interest rates, prepayment rates, and economic conditions that could affect actual results[218] - The Fed revised lower real GDP growth expectations for 2025 from 2.1% to 1.7% and increased the core personal consumption expenditures index from 2.5% to 2.8%[232] - The implementation of tariffs is expected to further depress home sales, impacting the housing market negatively[234] - Liquidity risk is associated with financing long-maturity assets with shorter-term borrowings, which may not always be matched[332] - A sudden decrease in asset value could lead to increased lender margin calls, adversely affecting liquidity[333] - The portfolio construction of MSR and RMBS may lead to variation margin calls in certain market scenarios[333] Investment Strategy - The company aims to maintain moderate leverage through financing strategies including repurchase agreements and revolving credit facilities[216] - The company plans to maintain muted portfolio leverage and risk levels until there is more clarity on the economic outlook[237] - The investment strategy aims to maintain low to moderate credit loss risk, particularly on mortgage loans held-for-sale[334] - The company believes it can reinvest proceeds from scheduled principal payments and prepayments at acceptable yields, although no assurances can be given regarding market conditions[326]