Two Harbors Investment (TWO) reported a net income of $193.59 million in the third quarter of 2014, up from $39.68 million in the second quarter. 2014’s third quarter was also a massive improvement over 2013’s third quarter, in which Two Harbors reported a net income loss of nearly $193 million.

For the year, Two Harbors recorded a net income of $204.1 million, down from $339.63 million in the first three quarters of 2013. But the third quarter of 2014 saw a massive reversal over the second quarter, when the company’s net income as down from $532.35 million in the first two quarters of 2013 to $10.51 million in the same period of 2014, a drop of more than 98%.

“I’m pleased to report that in the third quarter we delivered a total return on book value of 3.8%, resulting in a total return of 13.9% for the first nine months of the year,” stated Thomas Siering, Two Harbors’ president and chief executive officer.

“In the recent quarter, performance was driven by strong returns in both our rates and credit strategies, despite our defensive portfolio positioning and low leverage profile.”

According to the company’s earnings statement, the real estate investment trust reported core earnings for the third quarter of $82.8 million, or $0.23 per diluted weighted average common share outstanding, compared to core earnings for the second quarter of $89.7 million, or $0.24 per diluted weighted average common share outstanding.

“On a core earnings basis, the company recognized an annualized return on average equity of 8.1% and 8.9% for the quarters ended September 30, 2014 and June 30, 2014, respectively,” the company said.

The company also noted the following in its earnings release:

  • Net realized gains on RMBS, trading securities and mortgage loans held-for-sale of $68.4 million, net of tax
  • Unrealized losses on trading securities, mortgage loan forward purchase commitments and mortgage loans held-for-sale of $10.5 million, net of tax
  • Net losses of $28.1 million, net of tax, related to swap and swaption terminations and expirations
  • Net unrealized gains, net of tax, of $83.6 million associated with its interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and Federal Home Loan Bank of Des Moines advances
  • Net realized and unrealized losses on other derivative instruments of approximately $0.7 million, net of tax
  • Net realized and unrealized losses on consolidated financing securitizations of $2.2 million, net of tax
  • A net decrease in fair value of $6.7 million on mortgage servicing rights, net of tax
  • Representation and warranty expenses of $4.1 million, net of tax

The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities, MSRs, residential mortgage loans held-for-sale and net economic interests in consolidated securitization trusts.

As of September 30, 2014, the total value of the company’s portfolio was $14.3 billion, the company said.

The company’s portfolio includes the rates strategy, which consists of $10.4 billion of Agency RMBS, Agency Derivatives and MSR as well as associated notional hedges as of September 30, 2014. The remaining portfolio is invested in the credit strategy, which consists of $3.9 billion of non-Agency RMBS, net economic interests in consolidated securitization trusts, prime jumbo residential mortgage loans and credit sensitive loans, as well as their associated notional hedges as of the end of the third quarter.

The company also held MSRs on mortgage loans with $45.5 billion in unpaid principal balance, which had a fair market value of $498.5 million, as of September 30, 2014, the company said.

“The company does not directly service mortgage loans, but instead contracts with fully licensed subservicers to handle all servicing functions for the loans underlying the company’s MSRs,” the company said.

“The company recognized $32.3 million of servicing income, $6.1 million of subservicing expense and a $10.7 million decrease in fair market value of MSR during the three months ended September 30, 2014.”

During the third quarter, the company completed two securitizations, Agate Bay Mortgage Trust 2014-1 and Agate Bay Mortgage Trust 2014-2. The trusts issued securities backed by approximately $642 million UPB of prime jumbo 30-year fixed residential mortgage loans.

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