Document

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	TWO	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.

Table of Contents

TWO HARBORS INVESTMENT CORP.

INDEX



		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	72
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	73
Index of Exhibits		74
Signatures		75

Table of Contents

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

Table of Contents

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