Form 10-Q Two Harbors Investment Corp.

Quarterly report [Sections 13 or 15(d)]

Published: 2019-05-08 13:06:05
Submitted: 2019-05-08
Period Ending In: 2019-03-31
two331201910qdocument.htm QUARTERLY REPORT


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0001465740 2018-01-01 2018-09-30 iso4217:USD xbrli:shares xbrli:shares iso4217:USD xbrli:pure two:position two:loan two:counterparty
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2019
Commission File Number 001-34506
TWO HARBORS INVESTMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
27-0312904
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
575 Lexington Avenue, Suite 2930
New York, New York
 
10022
(Address of Principal Executive Offices)
 
(Zip Code)
(612) 629-2500
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
 
Trading Symbol(s)
 
Name of Exchange on Which Registered:
Common Stock, par value $0.01 per share
 
 
New York Stock Exchange
8.125% Series A Cumulative Redeemable Preferred Stock
 
TWO PRA
 
New York Stock Exchange
7.625% Series B Cumulative Redeemable Preferred Stock
 
TWO PRB
 
New York Stock Exchange
7.25% Series C Cumulative Redeemable Preferred Stock
 
TWO PRC
 
New York Stock Exchange
7.75% Series D Cumulative Redeemable Preferred Stock
 
TWO PRD
 
New York Stock Exchange
7.50% Series E Cumulative Redeemable Preferred Stock
 
TWO PRE
 
New York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 7, 2019 there were 272,833,177 shares of outstanding common stock, par value $.01 per share, issued and outstanding.
 
 
 
 
 



TWO HARBORS INVESTMENT CORP.
INDEX

 
 
Page
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 


i


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31,
2019
 
December 31,
2018
ASSETS
(unaudited)
 
 
Available-for-sale securities, at fair value
$
25,077,710

 
$
25,552,604

Mortgage servicing rights, at fair value
2,014,370

 
1,993,440

Cash and cash equivalents
512,183

 
409,758

Restricted cash
266,752

 
688,006

Accrued interest receivable
77,934

 
86,589

Due from counterparties
35,816

 
154,626

Derivative assets, at fair value
336,112

 
319,981

Reverse repurchase agreements

 
761,815

Other assets
179,673

 
165,660

Total Assets
$
28,500,550

 
$
30,132,479

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
19,729,691

 
$
23,133,476

Federal Home Loan Bank advances
865,024

 
865,024

Revolving credit facilities
375,294

 
310,000

Convertible senior notes
284,099

 
283,856

Derivative liabilities, at fair value
231

 
820,590

Due to counterparties
2,175,221

 
130,210

Dividends payable
147,179

 
135,551

Accrued interest payable
109,313

 
160,005

Other liabilities
40,274

 
39,278

Total Liabilities
23,726,326

 
25,877,990

Stockholders’ Equity
 
 
 
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 40,050,000 shares issued and outstanding, respectively ($1,001,250 and $1,001,250 liquidation preference, respectively)
977,501

 
977,501

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 272,826,604 and 248,085,721 shares issued and outstanding, respectively
2,728

 
2,481

Additional paid-in capital
5,146,508

 
4,809,616

Accumulated other comprehensive income
466,969

 
110,817

Cumulative earnings
2,305,994

 
2,332,371

Cumulative distributions to stockholders
(4,125,476
)
 
(3,978,297
)
Total Stockholders’ Equity
4,774,224

 
4,254,489

Total Liabilities and Stockholders’ Equity
$
28,500,550

 
$
30,132,479


The accompanying notes are an integral part of these condensed consolidated financial statements.

1


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(in thousands, except share data)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Interest income:
 
Available-for-sale securities
$
235,886

 
$
190,716

Other
9,597

 
3,303

Total interest income
245,483

 
194,019

Interest expense:
 
 
 
Repurchase agreements
147,560

 
86,580

Federal Home Loan Bank advances
6,074

 
4,458

Revolving credit facilities
5,156

 
804

Convertible senior notes
4,735

 
4,718

Total interest expense
163,525

 
96,560

Net interest income
81,958

 
97,459

Other-than-temporary impairments:
 
 
 
Total other-than-temporary impairment losses
(206
)
 
(94
)
Other (loss) income:
 
 
 
Loss on investment securities
(19,292
)
 
(20,671
)
Servicing income
116,948

 
71,190

(Loss) gain on servicing asset
(188,974
)
 
71,807

(Loss) gain on interest rate swap, cap and swaption agreements
(83,259
)
 
150,545

Gain on other derivative instruments
104,278

 
8,053

Other income
123

 
1,058

Total other (loss) income
(70,176
)
 
281,982

Expenses:
 
 
 
Management fees
12,082

 
11,708

Servicing expenses
19,912

 
14,554

Other operating expenses
15,556

 
14,492

Total expenses
47,550

 
40,754

(Loss) income before income taxes
(35,974
)
 
338,593

(Benefit from) provision for income taxes
(10,039
)
 
3,784

Net (loss) income
(25,935
)
 
334,809

Dividends on preferred stock
18,950

 
13,747

Net (loss) income attributable to common stockholders
$
(44,885
)
 
$
321,062

Basic (loss) earnings per weighted average common share
$
(0.18
)
 
$
1.83

Diluted (loss) earnings per weighted average common share
$
(0.18
)
 
$
1.69

Dividends declared per common share
$
0.47

 
$
0.47

Weighted average number of shares of common stock:
 
 
 
Basic
252,357,878

 
175,145,964

Diluted
252,357,878

 
192,818,531

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited), continued
(in thousands, except share data)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Comprehensive income (loss):
 
 
 
Net (loss) income
$
(25,935
)
 
$
334,809

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gain (loss) on available-for-sale securities
356,152

 
(344,777
)
Other comprehensive income (loss)
356,152

 
(344,777
)
Comprehensive income (loss)
330,217

 
(9,968
)
Dividends on preferred stock
18,950

 
13,747

Comprehensive income (loss) attributable to common stockholders
$
311,267

 
$
(23,715
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


TWO HARBORS INVESTMENT CORP. 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands)
 
Preferred Stock
 
Common Stock Par Value
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Cumulative Earnings
 
Cumulative Distributions to Stockholders
 
Total Stockholders’ Equity
Balance, December 31, 2017
$
702,537

 
$
1,745

 
$
3,672,003

 
$
334,813

 
$
2,386,604

 
$
(3,526,278
)
 
$
3,571,424

Cumulative effect of adoption of new accounting principle

 

 

 
9,918

 
(9,918
)
 

 

Adjusted Balance, January 1, 2018
702,537

 
1,745

 
3,672,003

 
344,731

 
2,376,686

 
(3,526,278
)
 
3,571,424

Net income

 

 

 

 
334,809

 

 
334,809

Other comprehensive loss before reclassifications, net of tax benefit of $510

 

 

 
(343,542
)
 

 

 
(343,542
)
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $0

 

 

 
(1,235
)
 

 

 
(1,235
)
Other comprehensive loss, net of tax benefit of $510

 

 

 
(344,777
)
 

 

 
(344,777
)
Issuance of preferred stock, net of offering costs
13

 

 

 

 

 

 
13

Issuance of common stock, net of offering costs

 

 
76

 

 

 

 
76

Preferred dividends declared

 

 

 

 

 
(13,747
)
 
(13,747
)
Common dividends declared

 

 

 

 

 
(82,454
)
 
(82,454
)
Non-cash equity award compensation

 
9

 
2,332

 

 

 

 
2,341

Balance, March 31, 2018
$
702,550

 
$
1,754

 
$
3,674,411

 
$
(46
)
 
$
2,711,495

 
$
(3,622,479
)
 
$
3,467,685

 
 
 
 
 
 
 
 
 
 
 
 
 


Balance, December 31, 2018
$
977,501

 
$
2,481

 
$
4,809,616

 
$
110,817

 
$
2,332,371

 
$
(3,978,297
)
 
$
4,254,489

Cumulative effect of adoption of new accounting principle

 

 

 

 
(442
)
 

 
(442
)
Adjusted Balance, January 1, 2019
977,501

 
2,481

 
4,809,616

 
110,817

 
2,331,929

 
(3,978,297
)
 
4,254,047

Net loss

 

 

 

 
(25,935
)
 

 
(25,935
)
Other comprehensive income before reclassifications, net of tax expense of $30

 

 

 
327,840

 

 

 
327,840

Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $0

 

 

 
28,312

 

 

 
28,312

Other comprehensive income, net of tax expense of $30

 

 

 
356,152

 

 

 
356,152

Issuance of common stock, net of offering costs

 
243

 
335,035

 

 

 

 
335,278

Preferred dividends declared

 

 

 

 

 
(18,950
)
 
(18,950
)
Common dividends declared

 

 

 

 

 
(128,229
)
 
(128,229
)
Non-cash equity award compensation

 
4

 
1,857

 

 

 

 
1,861

Balance, March 31, 2019
$
977,501

 
$
2,728

 
$
5,146,508

 
$
466,969

 
$
2,305,994

 
$
(4,125,476
)
 
$
4,774,224

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net (loss) income
$
(25,935
)
 
$
334,809

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on investment securities, net
22,052

 
22,086

Amortization of deferred debt issuance costs on convertible senior notes
243

 
227

Other-than-temporary impairment losses
206

 
94

Realized and unrealized losses on investment securities
19,292

 
21,301

Loss (gain) on servicing asset
188,974

 
(71,807
)
Realized and unrealized loss (gain) on interest rate swaps, caps and swaptions
106,967

 
(146,736
)
Unrealized (gain) loss on other derivative instruments
(90,184
)
 
41,724

Equity based compensation
1,861

 
2,341

Net change in assets and liabilities:


 
 
Decrease in accrued interest receivable
8,655

 
939

(Increase) decrease in deferred income taxes, net
(10,037
)
 
4,508

Decrease in accrued interest payable
(50,692
)
 
(2,293
)
Change in other operating assets and liabilities, net
(5,588
)
 
(4,050
)
Net cash provided by operating activities
165,814

 
203,143

Cash Flows From Investing Activities:
 
 
 
Purchases of available-for-sale securities
(4,551,312
)
 
(2,720,032
)
Proceeds from sales of available-for-sale securities
4,853,189

 
2,047,032

Principal payments on available-for-sale securities
487,649

 
447,664

Purchases of mortgage servicing rights, net of purchase price adjustments
(210,193
)
 
(142,799
)
Proceeds from sales of mortgage servicing rights
289

 
300

(Purchases) short sales of derivative instruments, net
(17,344
)
 
(50,500
)
(Payments for termination and settlement) proceeds from sales and settlement of derivative instruments, net
(835,929
)
 
205,553

Proceeds from reverse repurchase agreements
1,663,190

 

Repayments of reverse repurchase agreements
(901,375
)
 

Increase in due to counterparties, net
2,163,821

 
707,895

Change in other investing assets and liabilities, net
2,136

 
12,981

Net cash provided by investing activities
$
2,654,121

 
$
508,094

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Cash Flows From Financing Activities:
 
 
 
Proceeds from repurchase agreements
$
58,853,279

 
$
35,053,094

Principal payments on repurchase agreements
(62,257,064
)
 
(35,355,622
)
Principal payments on Federal Home Loan Bank advances

 
(350,000
)
Proceeds from revolving credit facilities
75,000

 

Principal payments on revolving credit facilities
(9,706
)
 

Proceeds from issuance of preferred stock, net of offering costs

 
13

Proceeds from issuance of common stock, net of offering costs
335,278

 
76

Dividends paid on preferred stock
(18,950
)
 
(11,949
)
Dividends paid on common stock
(116,601
)
 
(603
)
Net cash used in financing activities
(3,138,764
)
 
(664,991
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(318,829
)
 
46,246

Cash, cash equivalents and restricted cash at beginning of period
1,097,764

 
1,054,995

Cash, cash equivalents and restricted cash at end of period
$
778,935

 
$
1,101,241

Supplemental Disclosure of Cash Flow Information:
 
Cash paid for interest
$
214,217

 
$
98,854

Cash paid for taxes
$
15

 
$

Noncash Activities:
 
 
 
Cumulative-effect adjustment to equity for adoption of new accounting principle
$
442

 
$
9,918

Dividends declared but not paid at end of period
$
147,179

 
$
96,201

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization and Operations
Two Harbors Investment Corp., or the Company, is a Maryland corporation investing in and managing Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, and other financial assets. The Company’s Chief Investment Officer manages the investment portfolio as a whole and resources are allocated and financial performance is assessed on a consolidated basis. The Company is externally managed and advised by PRCM Advisers LLC, or PRCM Advisers, which is a subsidiary of Pine River Capital Management L.P., or Pine River. The Company’s common stock is listed on the NYSE under the symbol “TWO”.
The Company was incorporated on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became a wholly owned indirect subsidiary of the Company as a result of the merger.
The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated certain of its subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities.
On April 26, 2018, the Company announced that it had entered into a definitive merger agreement to acquire CYS Investments, Inc., or CYS, a Maryland corporation that invested primarily in Agency RMBS and was treated as a REIT for U.S. federal income tax purposes. The transaction was approved by the stockholders of both the Company and CYS on July 27, 2018, and the merger was completed on July 31, 2018, at which time CYS became a wholly owned subsidiary of the Company. In exchange for all of the shares of CYS common stock outstanding immediately prior to the effective time of the merger, the Company issued approximately 72.6 million new shares of common stock, as well as aggregate cash consideration of $15.0 million, to CYS common stockholders. In addition, the Company issued 3 million shares of newly classified Series D cumulative redeemable preferred stock and 8 million shares of newly classified Series E cumulative redeemable preferred stock in exchange for all shares of CYS’s Series A and Series B cumulative redeemable preferred stock outstanding prior to the effective time of the merger.

Note 2. Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading.
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2019 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2019 should not be construed as indicative of the results to be expected for future periods or the full year.

7


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 2018 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies.
Recently Issued and/or Adopted Accounting Standards
Lease Classification and Accounting
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company’s adoption of this ASU was applied by recording a cumulative-effect adjustment to retained earnings as of January 1, 2019, which did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Valuation allowances for credit losses on AFS debt securities will be recognized, rather than direct reductions in the amortized cost of the investments, regardless of whether the impairment is considered to be other-than-temporary. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, will establish an allowance for credit losses on AFS securities which will be derived from the current designated credit reserve with a resulting increase to amortized cost on the securities. The Company also expects adoption of this ASU to impact the recording for the purchase of certain non-Agency securities with purchased credit deterioration by recording an allowance for credit losses with an increase in amortized cost above the purchase price of the same amount. Subsequent changes in expected credit losses will be recognized immediately in earnings as a provision for credit losses until the allowance is reduced to zero. Further favorable changes will result in prospective yield adjustments.
SEC Disclosure Update and Simplification
In August 2018, the SEC adopted a final rule that amends certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment. However, the guidance also added requirements for entities to include in their interim financial statements a reconciliation of changes in stockholders’ equity for each period for which an income statement is required (both year-to-date and quarterly periods). The final rule is effective for all filings made on or after November 5, 2018. However, the SEC staff said it would not object to a registrant waiting to comply with the new interim disclosure requirement until the filing of its Form 10-Q for the quarter that begins after the effective date. As a result, the Company adopted the new interim disclosure requirement during the current period. The Company’s adoption of this final rule did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.


8


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 3. Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. The following table presents the Company’s AFS investment securities by collateral type as of March 31, 2019 and December 31, 2018:
(in thousands)
March 31,
2019
 
December 31,
2018
Agency
 
 
 
Federal National Mortgage Association
$
15,154,220

 
$
15,812,696

Federal Home Loan Mortgage Corporation
5,505,096

 
4,930,963

Government National Mortgage Association
873,882

 
941,374

Non-Agency
3,544,512

 
3,867,571

Total available-for-sale securities
$
25,077,710

 
$
25,552,604



At March 31, 2019 and December 31, 2018, the Company pledged AFS securities with a carrying value of $21.8 billion and $25.2 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 9 - Repurchase Agreements and Note 11 - Federal Home Loan Bank of Des Moines Advances.
At March 31, 2019 and December 31, 2018, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
The Company is not required to consolidate variable interest entities, or VIEs, for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of March 31, 2019 and December 31, 2018, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $3.5 billion and $3.9 billion, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
(in thousands)
Principal/ Current Face
 
Un-amortized Premium
 
Accretable Purchase Discount
 
Credit Reserve Purchase Discount
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Carrying Value
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
$
20,330,071

 
$
933,891

 
$
(29
)
 
$

 
$
21,263,933

 
$
205,851

 
$
(103,596
)
 
$
21,366,188

Interest-only
3,011,335

 
201,152

 

 

 
201,152

 
13,745

 
(47,887
)
 
167,010

Total Agency
23,341,406

 
1,135,043

 
(29
)
 

 
21,465,085

 
219,596

 
(151,483
)
 
21,533,198

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
5,017,561

 
5,724

 
(575,185
)
 
(1,393,735
)
 
3,054,365

 
434,169

 
(26,955
)
 
3,461,579

Interest-only
5,011,522

 
83,466

 

 

 
83,466

 
2,714

 
(3,247
)
 
82,933

Total Non-Agency
10,029,083

 
89,190

 
(575,185
)
 
(1,393,735
)
 
3,137,831

 
436,883

 
(30,202
)
 
3,544,512

Total
$
33,370,489

 
$
1,224,233

 
$
(575,214
)
 
$
(1,393,735
)
 
$
24,602,916

 
$
656,479

 
$
(181,685
)
 
$
25,077,710



9


TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)

 
December 31, 2018
(in thousands)
Principal/ Current Face
 
Un-amortized Premium
 
Accretable Purchase Discount
 
Credit Reserve Purchase Discount
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Carrying Value
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
$
20,775,790

 
$
1,037,781

 
$
(25,085
)
 
$

 
$
21,788,486

 
$
61,128

 
$
(339,997
)
 
$
21,509,617

Interest-only
3,115,967

 
209,901

 

 

 
209,901

 
14,170

 
(48,655
)
 
175,416

Total Agency
23,891,757

 
1,247,682

 
(25,085
)
 

 
21,998,387

 
75,298

 
(388,652
)
 
21,685,033

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
5,360,124

 
6,682

 
(694,119
)
 
(1,322,762
)
 
3,349,925

 
478,095

 
(44,657
)
 
3,783,363

Interest-only
5,137,169

 
83,846

 

 

 
83,846

 
3,655