Two Harbors Investment (US:TWO)2025-10-28 13:02Financial Position and Assets - As of September 30, 2025, approximately 84.0% of the company's total assets, or $9.1 billion, consisted of financial instruments recorded at fair value[230]. - At September 30, 2025, 24.2% of the company's total assets were classified as Level 3 fair value assets, indicating significant judgment in fair value measurements[237]. - The carrying value of the investment portfolio as of September 30, 2025, was $9,107,684, a decrease from $10,374,970 at the end of 2024[246]. - Total assets as of September 30, 2025, were $10.9 billion, down from $12.2 billion as of December 31, 2024[287]. - The company held $770.5 million in cash and cash equivalents as of September 30, 2025, with total stockholders' equity amounting to $1,771.7 million[301]. - The total outstanding debt as of September 30, 2025, was $8.4 billion, with significant financing from repurchase agreements and revolving credit facilities[301]. - The company had $9.3 billion in assets pledged as collateral for financing obligations as of September 30, 2025[310]. Mortgage Servicing Rights (MSR) and Portfolio - The company’s MSR business leverages core competencies in prepayment and interest rate risk analytics, with TH MSR Holdings acquiring MSR from third-party originators and its subsidiary RoundPoint[222]. - RoundPoint began operating its in-house, direct-to-consumer originations platform in late Q2 2024, aimed at benefiting the MSR portfolio by retaining existing borrowers[223]. - The fair value of MSR is estimated using a discounted cash flow model, incorporating various market data and significant unobservable inputs such as prepayment speeds and servicing costs[236]. - The MSR portfolio included 720,038 loans with an unpaid principal balance of approximately $175.8 billion[291]. - The weighted average coupon rate for the total MSR portfolio was 3.6%[291]. - The average loan age in the MSR portfolio was 61 months[291]. - The company plans to acquire MSR on loans originated by its subsidiary, RoundPoint, starting in 2024[290]. Interest Rates and Market Conditions - The Federal Reserve cut its benchmark rate by 25 basis points in September 2025, marking the first cut since November 2024, with expectations of an additional 50 basis points of cuts by year-end[240]. - Primary mortgage rates dropped to approximately 6.25% by the end of Q3 2025, the lowest level of the year, contributing to a 45% month-over-month increase in refinancing speeds for higher coupon cohorts[242]. - The nominal spread for current coupon RMBS tightened by 26 basis points to 144 basis points during Q3 2025, while option-adjusted spreads finished 14 basis points tighter at 67 basis points[241]. - The company’s forward-looking statements are subject to numerous risks and uncertainties, including changes in interest rates and the state of credit markets[227]. Financial Performance - Comprehensive loss attributable to common stockholders was $80.2 million for the three months ended September 30, 2025, compared to a comprehensive income of $19.4 million for the same period in 2024[257]. - Interest income decreased to $93.6 million for the three months ended September 30, 2025, down from $112.6 million for the same period in 2024, primarily due to a decrease in the Agency RMBS portfolio size[258]. - Interest expense decreased to $117.1 million for the three months ended September 30, 2025, from $154.9 million for the same period in 2024, attributed to lower average borrowings and a lower interest rate environment[259]. - The company recorded a net loss attributable to common stockholders of $141.2 million for the three months ended September 30, 2025, compared to a net loss of $250.3 million for the same period in 2024[257]. - Total operating expenses for the three months ended September 30, 2025, were $44.4 million, an increase from $38.6 million in 2024[281]. Leverage and Debt Management - The debt-to-equity ratio as of September 30, 2025, was 4.8:1.0, indicating a high level of leverage in funding investment securities and mortgage servicing rights[253]. - The company had $127.1 million in unused committed borrowing capacity on MSR financing facilities as of September 30, 2025[254]. - The economic debt-to-equity ratio increased from 7.0:1.0 to 7.2:1.0 for the three months ended September 30, 2025, driven by a decrease in total stockholders' equity[301]. - Total indebtedness to tangible net worth was 5.1:1.0 as of September 30, 2025, below the covenant limit of 8.0:1.0[311]. Risk Management - The company is subject to interest rate risk, which could adversely impact the operational efficiency and profitability of its loan originations platform[321]. - The company employs various interest rate risk management techniques, including derivatives, to mitigate the impact of interest rate changes on asset values[322]. - The effectiveness of hedging strategies may be affected by actual prepayment speeds differing from assumptions, potentially leading to losses[327]. - Prepayment risk is a concern as increased prepayment rates could accelerate the amortization of purchase premiums, reducing interest income earned on Agency RMBS[339]. Cash Flow and Liquidity - Cash flows from operating activities decreased cash balances by approximately $239.2 million, primarily due to financial results and a $375.0 million settlement payment[317]. - Cash flows from investing activities increased cash balances by approximately $2.1 billion, driven by net sales of AFS securities and net proceeds from reverse repurchase agreements[317]. - Cash flows from financing activities decreased cash balances by approximately $1.8 billion, primarily due to net paydowns on repurchase agreements and the payment of dividends[317]. - Cash liquidity was reported at $770.5 million, exceeding the required minimum of $200.0 million[311].