Two Harbors Q2 2025 slides: litigation accrual drives $2.13 per share loss

Introduction & Market Context

Two Harbors Investment Corp . (NYSE:TWO) released its second quarter 2025 earnings presentation on July 29, revealing a significant comprehensive loss primarily driven by a litigation contingency accrual. The MSR-focused REIT reported results against a backdrop of heightened market volatility and a steepening yield curve, with the 10-year U.S. Treasury yield settling at 4.23% at quarter-end.

Despite rising inflation and political pressures, the Federal Reserve maintained its policy rate during the quarter. Market participants anticipate 50 to 75 basis points of cuts in the second half of 2025, as indicated in the company’s market overview.

Quarterly Performance Highlights

Two Harbors reported a comprehensive loss of $(2.13) per share for Q2 2025, a stark contrast to the $0.62 per share income reported in Q1. The primary driver of this loss was a $199.9 million litigation contingency accrual related to ongoing proceedings with PRCM Advisers LLC, which alone accounted for $(1.92) per share.

Book value per share declined to $12.14 as of June 30, 2025, down from $14.66 at the end of the previous quarter. This resulted in a quarterly economic return on book value of -14.5%, though excluding the litigation accrual, this figure improves to -1.4%. The company maintained its common stock dividend at $0.39 per share.

The company’s investment portfolio stood at $14.4 billion with a quarter-end economic debt-to-equity ratio of 7.0x. This represents a slight increase in leverage from previous quarters as shown in the portfolio composition slide.

Strategic Initiatives

Two Harbors continues to emphasize its RoundPoint operations as a strategic differentiator. The servicing platform now manages $204 billion in unpaid principal balance across 844,653 loans. The direct-to-consumer originations channel has built a pipeline exceeding $26.1 million UPB, with $48.6 million UPB in funded first lien loans and $44.0 million UPB in brokered second lien loans during the quarter.

A significant focus of the company’s strategic initiatives is the implementation of artificial intelligence technologies to enhance homeowner experience and operational efficiencies. The presentation highlights initial focus on AI within the contact center space, including call analysis to detect trending issues and AI-generated call summaries. The company plans to expand AI applications to automated interactions, quality assurance, and risk/compliance functions.

Detailed Financial Analysis

The waterfall chart of book value changes reveals the components contributing to the quarterly decline. Starting from $1,525.0 million ($14.66 per share) on March 31, the company recorded a GAAP net loss of $(259.1) million, partially offset by other comprehensive income of $50.5 million. After accounting for preferred stock dividends of $(13.2) million and common stock dividends of $(41.0) million, the ending common stockholders’ equity was $1,264.2 million ($12.14 per share).

Comparing Q2 to Q1 2025, net interest and servicing income remained relatively stable at $136.4 million versus $133.3 million in the previous quarter. Mark-to-market losses improved significantly to $(9.1) million from $(102.5) million in Q1. Operating expenses decreased to $(42.8) million from $(47.1) million. However, the $199.9 million loss contingency accrual was the dominant factor in the quarterly results.

The company’s financing profile shows $8.0 billion in outstanding repurchase agreements for Agency RMBS with 18 counterparties and a weighted average maturity of 60 days. For mortgage servicing rights, Two Harbors has $1.7 billion in outstanding borrowings under bilateral financing facilities, with $837 million in unused capacity.

Forward-Looking Statements

Two Harbors’ risk positioning indicates sensitivity to both interest rate and mortgage spread changes. The company’s portfolio shows negative returns in both rising and falling interest rate scenarios, suggesting challenges in the current volatile environment.

This represents a shift from the previous quarter when the company projected a static return potential of 8.7% to 12.3% before leverage and aimed for a static return on common equity between 9.1% and 14.7%, as noted in the Q1 earnings report.

The stock closed at $10.45 on July 28, 2025, down 1.15% for the day, and was trading slightly lower in after-hours at $10.44. This places the stock toward the lower end of its 52-week range of $9.76 to $14.28, reflecting investor concerns about the litigation impact and overall financial performance.

Despite these challenges, Two Harbors maintains its focus on technology implementation and operational efficiencies through the RoundPoint platform, positioning itself for potential recovery as the Federal Reserve is expected to begin easing monetary policy later this year.

Full presentation:

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