Two Harbors Investment Corp

Good morning. My name is Melissa and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbor's second quarter 2024 financial results conference call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and an answer period. I would now like to turn the call over to Maggie Carr.

Good morning, everyone, and welcome to our call to discuss Two Harbor's second quarter 2024 financial results. With me on the call this morning are Bill Greenberg, our president and chief executive officer, Nick Letica, our chief investment officer, and Mary Riske, our chief financial officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the investor relations page of our website, at TwoHarborsInvestment.com. In our earnings release and presentation, we have provided reconciliations of gap to non-gap financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on page two of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill.

Thank you, Maggie. Good morning, everyone, and welcome to our second quarter earnings call. Before getting into our financial results, I would like to take a moment to recognize the retirement of our CFO, Mary Riske. As previously announced, Mary will retire in August after a long and distinguished career, the last 13 years of which were at Two Harbors. Mary was already at Two Harbors when I joined in 2012, and I remember having numerous conversations with her in those early years and being struck by her knowledge and command of very technical issues. In the 12 years I have known Mary, I've come to admire her for her honesty, character, commitment, and loyalty. There is no doubt Mary has left an indelible mark on our company, and we are grateful to her for her leadership. Mary, you'll be missed, and all of us at Two Harbors wish you the very best in your next chapter. We are also very excited to announce that William DeLau will be joining us as interim CFO, effective August 1st. William and I worked together for 10 years, from 1998 through 2008, and I couldn't be happier to join together again. Most recently, William worked at Caliber Mortgage, where he was CFO and then president through the completion of the sale of Caliber. Prior to that, William was head of capital markets at Citi Mortgage. He has vast experience in the mortgage industry with deep knowledge of servicing, origination, markets, and risk management. In this time of growth and change for our company, we are especially fortunate to be able to draw on William's wisdom and expertise. We will continue to search for a permanent CFO who will be able to help us grow, not from where we are currently, but from where we expect to be in the near future. William DeLalle's presence allows us to be careful and thoughtful in that search. Now, turning to our quarterly results, I'll start by providing an overview of our performance, followed by a discussion on the markets, and finish with an update on Round Point operations. Mary will cover our financial results in detail, and Nick will discuss our investment portfolio and return outlook. Let's begin with slide three. Our book value at June 30th decreased to $15.19 per share, representing a 0.0% total economic return for the quarter. For the first half of the year, we generated a total economic return of 5.8%. Our second quarter results were primarily affected by a small widening in RMBS spreads and higher realized volatility in the second quarter. compared to the first quarter. MSR performed well with stable cash flows supported by slow prepayment speeds. Please turn to slide four for a brief discussion on the markets. In the second quarter, there was no lack of conflicting economic data driving a pickup in volatility. Figure one on this slide shows CPI readings from the beginning of 2021 through the present. Both employment and CPI reports came in stronger than expected in April, followed by weaker-than-expected readings in May, and then stronger and better-than-expected reports in June. Unexpected developments in the U.S. presidential race, plus surprising results in French and British elections, also contributed to market volatility. After rising 50 basis points and then falling by 50 basis points, the 10-year Treasury yield ultimately rose again and finished the quarter about 20 basis points higher, at 4.40%. The 2-year Treasury yield followed a similar path, rising 40 basis points and falling by 30 basis points, finishing up 13 basis points to 4.75%. In June, the Fed left rates unchanged as they continued to wait for more good data showing that inflation was steadily declining towards their 2% target. Market expectations for interest rate cuts in 2024 declined from about three cuts, or 75 basis points, to about two cuts by quarter end, as seen in Figure 2. The Fed's own projections, the dot plots, moved the median expectation for Fed funds down from three cuts to one, though a plurality of members had two cuts in their forecasts. Inevitably, many forecasts shifted the first cut further out in time, reinforcing the higher-for-longer view. Post-quarter end, on the back of a weaker-than-expected inflation reading, Chairman Powell signaled that an interest rate cut is probable for September, and the market is now fully pricing in a September rate cut. We also expect that volatility will decrease as the Fed embarks on an easing cycle, which will benefit both RMBS and MSR valuations, and further supports the idea that this is an excellent environment for our current allocation to MSR and agency RMBS. Please turn to slide five for a brief discussion on RoundPoint's operations. Our goal in owning an operating mortgage company was to achieve economies of scale, improve MSR economics, and to be able to leverage a more expansive set of opportunities in the mortgage finance space, thus creating new sources of profitability for the company. In line with our previously articulated plan, we completed the transfer of all of our servicing to Roundpoint's platform in June. Roundpoint now services over 900,000 loans, or about $225 billion of UPB. We continue to be focused on implementing operational efficiencies to deliver low cost of service per loan, are pleased with our progress so far. In the second quarter, we also launched our direct-to-consumer originations platform, and we are actively taking loan applications from potential customers. In just the first few weeks of operations, through July 25th, we have taken locks on more than $25 million worth of loans. While this is still a very small number, we are pleased that we met the target that we set for ourselves, and we expect this number to grow over time, even if interest rates remain unchanged. As a reminder, this direct-to-consumer platform is designed to have small but steady and positive returns in a higher-rate environment like this, but should be able to generate larger returns in a refinance environment and to act as a hedge to faster-than-expected prepayment speeds. We also intend to begin offering ancillary and home equity products to our customers, including second lien loans, later this year. We added approximately 17,000 loans from one subservicing client in the quarter. We believe that we are the ideal partner to service MSR for new and existing MSR holders, and we are actively working on the ability to support various structures. Our results this quarter again demonstrate the benefits of our portfolio construction of MSR paired with agency RMBS. In addition, through owning an operating entity, we are able to more closely affect our returns through our own actions by lowering operating costs, hedging our existing portfolio through recapture originations, and expanding our opportunity set. Our investment strategy is designed to produce returns across different market environments. With the majority of our capital allocated to hedged MSR, our portfolio is less exposed to fluctuations in mortgage spreads than portfolios without MSR, while still preserving upside to falling volatility and spread tightening environments. With that, I'd like to hand the call over to Mary to discuss our financial results.