TWO HARBORS INVESTMENT CORP. (TWO)·Q3 2025 Earnings Summary

Executive Summary

• Q3 headline prints were dominated by the $175.1M litigation settlement expense tied to the August Pine River resolution, driving GAAP net loss of $(141.2)M (−$1.36/sh) and comprehensive loss of $(80.2)M (−$0.77/sh) . Excluding the settlement, TWO generated $94.9M of comprehensive income ($0.91/sh) and a 7.6% adjusted economic return on book value .
• EAD rose to $37.2M ($0.36/sh), up from $29.5M ($0.28/sh) in Q2, helped by higher float/servicing fee income and lower financing costs; Street EPS consensus was ~$0.365, implying a modest miss of ~$0.005/sh* (see Estimates Context) .
• Book value fell to $11.04/sh (from $12.14 in Q2) and the dividend was set at $0.34; reported quarterly economic return was −6.3% (or +7.6% excl. settlement) .
• Strategic catalysts: (i) settlement clears legacy litigation overhang, (ii) subservicing scaled with ~$30B UPB sale on servicing-retained basis ($19.1B settled in Q3; ~$10B post-quarter) to seed a new client, (iii) DTC originations and recapture momentum, and (iv) plan to redeem $262M converts at maturity (Jan 2026) to normalize leverage .

What Went Well and What Went Wrong

• What Went Well

  • Adjusted quarter strong: excluding litigation, comprehensive income was $94.9M ($0.91/sh) and adjusted economic return +7.6% .
  • Positive portfolio dynamics: implied volatility normalized; RMBS spreads tightened; hedged RMBS performance positive; net TBA position increased to ~$4.4B BEV .
  • Strategic execution: onboarded a new subservicing client seeded by ~$30B MSR sale SR; DTC originations recorded most-ever locks in September; funded $49.8M first/second liens, brokered $60.1M second liens .
  • Quote: “Looking ahead, we now have a clean slate to capitalize on opportunities in the MSR and RMBS… and to further drive growth in our servicing and originations businesses.” — CEO Bill Greenberg .

• What Went Wrong

  • Litigation drove GAAP loss: $175.1M settlement expense (difference between $375M cash paid and prior $199.9M accrual) hit Q3 P&L and book value .
  • MSR mark-to-market loss: −$104.9M MSR fair value change as rates rallied and spreads tightened, partially offsetting RMBS/TBA gains .
  • Operating costs elevated: certain operating expenses (primarily litigation-related) rose to $4.1M in Q3 (vs. $2.8M in Q2), and management flagged focus on cost reductions post-settlement .
  • Analyst concern: expense ratio increased with lower capital base; management acknowledged need for cost saves; potential upside to static return estimates if saves realized .

Financial Results

Table 1: Core P&L, Book Value, and Distributions (oldest → newest)

Note: Asterisks (*) indicate values retrieved from S&P Global.

Table 2: Performance vs Wall Street Consensus (Q3 2025)

Note: Values retrieved from S&P Global. Given mREIT reporting, revenue is less indicative of operating performance than EAD and book value.

Table 3: Portfolio Composition (Balance Sheet view)

Table 4: Operating and Risk KPIs

KPIs commentary: Agency RMBS was reduced (sales) while increasing net TBA exposure; MSR UPB fell due to ~$19.1B SR sales in Q3 (with another ~$10B settling post-quarter), consistent with repositioning and subservicing growth .

Guidance Changes

Note: Management framed the static return range as illustrative outlook, not formal guidance .

Earnings Call Themes & Trends

Management Commentary

• “Excluding the litigation settlement expense, we had a strong quarter of performance, generating an adjusted total economic return of 7.6%.” — CEO Bill Greenberg .
• “Prospective returns on our core strategy of low rate MSR paired with Agency RMBS remain attractive… we are confident our portfolio construction…should generate attractive risk-adjusted returns.” — CIO Nick Letica .
• “Including [the settlement], comprehensive loss [was] $80.2M (−$0.77/sh); excluding, comprehensive income would have been $94.9M ($0.91/sh).” — CFO William Dellal .
• “We intend to redeem the full $262M UPB of our outstanding convertible notes when they mature in January 2026… [and] have in excess of $500M of cash on our balance sheet.” — CEO Bill Greenberg .
• “We signed a term sheet with a new sub-servicing client, which will bring our combined sub-servicing UPB to approximately $40B… Our originations team recorded the most ever locks for the month of September.” — CEO Bill Greenberg .

Q&A Highlights

• EAD drivers and trajectory: EAD improvement primarily from lower financing costs and liability mix (TBAs vs. spec pools); not viewed as a steady downtrend in funding costs from Fed cuts alone .
• Book value quarter-to-date: “As of last Friday, our book value was up about 1%.” — CEO .
• Risk posture: Leverage modestly higher, but spread risk reduced; management optimizes returns vs. risk rather than targeting a single metric .
• Cost savings: Return potential slide reflects today’s costs; cost reductions would be upside .
• Subservicing growth: Sales of low-WAC MSR on a servicing-retained basis seed sticky client relationships; potential to use similar structures to rotate MSR higher in coupon .
• Coupon positioning/hedging: Use of TBAs for flexibility; exposure managed around current coupons as rates move; not wed to specific coupon buckets .
• MSR valuations and financing: Low-WAC MSR remains hundreds of bps out of the money; financing markets for MSR repo deemed mature and stable; maturities ~1–2 years with ongoing renewals .

Estimates Context

• Q3 2025 EPS (EAD/share) of $0.36 was modestly below S&P Global consensus of ~$0.365; Q2 actual $0.28 vs. $0.356 est.; Q1 actual $0.24 vs. $0.398 est.*
• Q3 2025 revenue of ~$$201.4M vs. $(19.9)M consensus reflects the noisiness of mREIT revenue line; investors should anchor on EAD and book value.*
• FY 2025 Primary EPS consensus stands at ~1.245; target price consensus ~$10.92 (6 estimates).*
  Note: Values retrieved from S&P Global.

Table: S&P Global Consensus vs. Actuals

Note: Asterisks (*) indicate values retrieved from S&P Global.

Key Takeaways for Investors

• The settlement removes a major overhang; Q3 optics are GAAP-ugly but the underlying engine produced +7.6% adjusted economic return and rising EAD, aided by lower financing costs and higher servicing income .
• Subservicing is scaling with sticky, third-party UPB while retaining operational scale at RoundPoint; DTC/recapture momentum can help offset faster-than-expected speeds in refi episodes .
• Risk posture improved despite slightly higher leverage: spread sensitivity reduced; vol normalization and supportive demand keep static returns in a healthy 9.5–15.2% range to common, per company’s static analysis .
• Near-term catalysts: clarity on cost saves (not yet embedded); continued portfolio rotation and potential spread tailwinds; planned redemption of $262M converts in Jan 2026 reduces structural leverage .
• Trading lens: shares were at ~11% discount to BV at quarter-end per management; narrowing discount could be catalyzed by consistency in EAD, cost saves, and evidence of subservicing/DTC profitability .
• Watch items: MSR fair value sensitivity to rates; prepay trends; repo/MSR financing stability; and how much of the static return range management can deliver in reported EAD amid lower volatility .

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Supporting detail and sources:

• Q3 2025 8-K press release, earnings deck, and financial statements .
• Q3 2025 earnings call transcript (management remarks and Q&A) .
• Q2 2025 and Q1 2025 8-Ks/press releases and decks for trend analysis .
• August 20, 2025 business update (settlement, estimated BV, dividend) .

Note on S&P Global estimates: All asterisked estimate and actual values under “Primary EPS (EAD/share),” “Revenue,” and “Target Price” are values retrieved from S&P Global.