Two Harbors Investment (US:TWO)2025-07-29 13:02PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements for Two Harbors Investment Corp. as of June 30, 2025, highlighting a $259.0 million net loss for Q2, driven by a $199.9 million loss contingency accrual, and total assets increasing to $13.0 billion Consolidated Balance Sheets Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $12,959,138 | $12,204,319 | | Available-for-sale securities, at fair value | $8,320,757 | $7,371,711 | | Mortgage servicing rights, at fair value | $3,015,643 | $2,994,271 | | Cash and cash equivalents | $657,816 | $504,613 | | Total Liabilities | $11,073,112 | $10,081,810 | | Repurchase agreements | $8,782,622 | $7,805,057 | | Revolving credit facilities | $1,011,871 | $1,020,171 | | Loss contingency accrual | $199,935 | $— | | Total Stockholders' Equity | $1,886,026 | $2,122,509 | - Total assets increased to approximately $13.0 billion as of June 30, 2025, from $12.2 billion at December 31, 2024, primarily due to an increase in available-for-sale securities10 - A significant loss contingency accrual of $199.9 million was recorded as of June 30, 2025, which was not present at year-end 202410 Consolidated Statements of Comprehensive (Loss) Income Key Income Statement Data (in thousands, except per share amounts) | Metric | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Net interest expense | $(19,619) | $(38,254) | $(39,951) | $(80,471) | | Net servicing income | $155,968 | $171,540 | $309,630 | $330,754 | | Loss contingency accrual | $(199,935) | $— | $(199,935) | $— | | Net (loss) income | $(259,041) | $56,336 | $(338,096) | $259,924 | | Comprehensive (loss) income | $(208,568) | $12,263 | $(130,451) | $112,773 | | Diluted (loss) earnings per share | $(2.62) | $0.43 | $(3.51) | $2.16 | - The company reported a net loss of $259.0 million for Q2 2025, a significant shift from a net income of $56.3 million in Q2 2024, primarily driven by a $199.9 million loss contingency accrual13 Consolidated Statements of Stockholders' Equity - Total Stockholders' Equity decreased from $2.12 billion at December 31, 2024, to $1.89 billion at June 30, 202515 - The decrease in equity during the first six months of 2025 was primarily due to a net loss of $338.1 million and common and preferred dividends totaling $114.6 million, partially offset by $207.6 million in other comprehensive income1513 Consolidated Statements of Cash Flows Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $211,025 | $134,982 | | Net cash used in investing activities | $(1,198,638) | $(73,751) | | Net cash provided by (used in) financing activities | $968,269 | $(69,242) | | Net decrease in cash, cash equivalents and restricted cash | $(19,344) | $(8,011) | - Financing activities for the six months ended June 30, 2025, were dominated by proceeds from repurchase agreements of $25.4 billion and principal payments of $24.4 billion24 Notes to the Consolidated Financial Statements - The notes provide detailed explanations of the company's accounting policies and breakdowns of financial statement line items, including specifics on investments, financing, derivatives, and a significant legal contingency26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, market conditions, and strategy, noting a $199.9 million loss contingency accrual led to a net loss and a decrease in book value per share to $12.14, while the debt-to-equity ratio increased to 5.4:1.0 - Book value per common share decreased to $12.14 at June 30, 2025, from $14.47 at December 31, 2024, primarily due to the $199.9 million loss contingency accrual, net mark-to-market losses, and dividends268 - The company's core strategy is to pair Mortgage Servicing Rights (MSR) with Agency Residential Mortgage-Backed Securities (RMBS) to deliver more stable performance across different market environments232227 - Management notes that while Agency RMBS spreads remain historically wide, the MSR market is well-supported with declining supply, which benefits the company's existing portfolio257255 Debt-to-Equity Ratios | Metric | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Debt-to-Equity Ratio | 5.4:1.0 | 4.3:1.0 | | Economic Debt-to-Equity Ratio | 7.0:1.0 | 6.5:1.0 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate and prepayment, and hedging strategies, with a 50 basis point rate increase estimated to decrease total net asset value by $39.4 million - The company's primary market risks are interest rate risk and prepayment risk, employing a strategy of pairing MSR (negative duration) with Agency RMBS (positive duration) and using derivatives to mitigate these risks327331347 Interest Rate Sensitivity Analysis (as of June 30, 2025) | Change in Interest Rates | Change in Annualized Net Interest Income (in thousands) | Change in Value of Financial Position (Total Net Assets) (in thousands) | | :--- | :--- | :--- | | +50 bps | $(2,167) | $(39,361) | | +25 bps | $(1,123) | $(10,146) | | -25 bps | $1,138 | $(8,806) | | -50 bps | $2,211 | $(40,072) | - Liquidity risk is managed through daily monitoring and forecasting, with principal sources of cash being borrowings, asset payments, and operating results, maintaining master repurchase agreements with 34 counterparties to diversify funding sources309314354 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (June 30, 2025)357 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls358 PART II - OTHER INFORMATION Item 1. Legal Proceedings This section updates on ongoing litigation with PRCM Advisers, where a May 23, 2025, court ruling granted partial summary judgment to plaintiffs, finding no basis for termination for cause, leading to a loss contingency accrual - The company is involved in ongoing litigation with its former manager, PRCM Advisers, following the termination of the Management Agreement for "cause" in July 2020361 - On May 23, 2025, a court overruled the company's objections to a magistrate's report, granting summary judgment to the plaintiffs on the issue that the company lacked a basis to terminate the agreement for cause, with parties agreeing to mediation361 Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024 - There have been no material changes to the risk factors previously disclosed in the company's 2024 Form 10-K362 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the status of the company's stock repurchase programs, noting no common or preferred shares were repurchased during the three months ended June 30, 2025 - The company has authorized repurchase programs for up to 5,000,000 shares of preferred stock and 9,375,000 shares of common stock363364 - No common or preferred shares were repurchased during the three months ended June 30, 2025363364 Item 3. Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the reporting period - None365 Item 4. Mine Safety Disclosures The company reports that this item is not applicable - None366 Item 5. Other Information This section discloses that on May 22, 2025, CFO William Dellal adopted a Rule 10b5-1 trading plan to sell shares for tax liabilities from future equity compensation vesting - On May 22, 2025, CFO William Dellal adopted a Rule 10b5-1 plan to sell shares to cover tax liabilities from future vesting of equity awards367 Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, debt indentures, and CEO/CFO certifications - A list of exhibits filed with the Form 10-Q is provided, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act369372