Two Harbors Investment (TWO) reported a net income of $39.68 million in the second quarter of 2014, down nearly 90% from the $388.64 million the real estate investment trust earned in the second quarter of 2013.

The sharp decline was driven by a nearly $117 million loss on interest rate swap and swaption agreements and a $24 million loss on other derivative instruments, according to the company’s earnings statement.

For the year, the company’s net income is down from $532.35 million in 2013 to $10.51 million in 2014, a drop of more than 98%.

On the other hand, the company’s comprehensive income, which factors in unrealized gains on available-for-sale securities, is up nearly 276% year-over-year, rising from $101.89 million in 2013 to $383.41 million in 2014.

In the second quarter, the REIT reported core earnings of $89.7 million, or $0.24 per diluted weighted average common share outstanding, for the second quarter of 2014, compared core earnings for the first quarter of $88.2 million, or $0.24 per diluted weighted average common share outstanding.

“We enjoyed strong performance throughout our business in the quarter, which resulted in a total return on book value of 6.0%,” stated Thomas Siering, Two Harbors’ president and CEO. “We acquired both bulk and flow mortgage servicing rights and made excellent progress on our mortgage loan conduit. We believe that both of these platforms will create tangible franchise value for the benefit of our stockholders.”

Last week, the company brought its second Agate Bay Mortgage Trust residential mortgage-backed securitization to market. The $267.67 million RMBS was backed by first-lien, fixed-rate jumbo residential mortgage loans secured primarily by one-to-two-family residences to prime borrowers.

The REIT reported a book value of $11.09 per diluted common share, representing a 6.0% total return on book value, after accounting for a dividend of $0.26 per share, bringing the total return on book value for the first half of 2014 to 9.9%.

Of note in the Two Harbors earnings statement, the company posted:

• Net realized gains on RMBS, trading securities and mortgage loans held-for-sale of $34.8 million, net of tax

• Unrealized gains on trading securities, mortgage loan forward purchase commitments and mortgage loans held-for-sale of $10.0 million, net of tax

• Net losses of $4.4 million, net of tax, related to swap and swaption terminations and expirations

• Unrealized losses, net of tax, of $78.7 million associated with its interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and FHLB advances

• Net realized and unrealized losses on other derivative instruments of approximately $18.0 million, net of tax

• Net realized and unrealized gains on consolidated financing securitizations of $20.8 million, net of tax

• A net decrease in fair value of $27.9 million on MSR, net of tax

• Amortization of intangible assets of $0.1 million, net of tax

The company is currently carrying a portfolio that totals $14.5 billion in residential mortgage-backed securities available for sale, inverse interest-only securities), MSRs, residential mortgage loans held-for-sale and net economic interests in consolidated securitization trusts.

The company’s portfolio includes the rates strategy, which consists of $10.8 billion of agency RMBS, agency derivatives and MSRs as well as associated notional hedges as of June 30.

The remaining portfolio is invested in the credit strategy, which consists of $3.7 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.

In the second quarter, the company’s annualized yield on average RMBS securities and agency derivatives was 4.4%, consisting of an annualized yield of 3.4% in agency RMBS and agency derivatives and 8.7% in non-agency RMBS.

The company held MSRs on mortgage loans having $45.6 billion in unpaid principal balance, which had a fair market value of $500.5 million.

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 recognized $33.9 million of servicing income; $6.2 million of subservicing expense and a $29.6 million decrease in fair market value of MSRs.

The company held prime jumbo residential mortgage loans with a fair market value of $377.0 million and had outstanding purchase commitments to acquire an additional $647.9 million of mortgage loans, subject to fallout if the loans do not close. For the quarter ended June 30, 2014, the annualized yield on the company’s prime jumbo residential mortgage loan portfolio was 4.1%.