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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, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
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 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 No
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 No
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of May 5, 2020, there were 273,531,853 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
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 


i

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,
2020
 
December 31,
2019
ASSETS
(unaudited)
 
 
Available-for-sale securities, at fair value (amortized cost $17,279,572; allowance for credit losses $41,390)
$
17,733,059

 
$
31,406,328

Mortgage servicing rights, at fair value
1,505,163

 
1,909,444

Cash and cash equivalents
1,206,889

 
558,136

Restricted cash
680,395

 
1,058,690

Accrued interest receivable
57,854

 
92,634

Due from counterparties
581,355

 
318,963

Derivative assets, at fair value
117,368

 
188,051

Reverse repurchase agreements
147,651

 
220,000

Other assets
172,914

 
169,376

Total Assets (1)
$
22,202,648

 
$
35,921,622

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
17,795,516

 
$
29,147,463

Federal Home Loan Bank advances
50,000

 
210,000

Revolving credit facilities
252,143

 
300,000

Term notes payable
394,772

 
394,502

Convertible senior notes
285,238

 
284,954

Derivative liabilities, at fair value
176,156

 
6,740

Due to counterparties
200,729

 
259,447

Dividends payable

 
128,125

Accrued interest payable
79,543

 
149,626

Other liabilities
64,418

 
70,299

Total Liabilities (1)
19,298,515

 
30,951,156

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 273,528,243 and 272,935,731 shares issued and outstanding, respectively
2,735

 
2,729

Additional paid-in capital
5,156,151

 
5,154,764

Accumulated other comprehensive income
491,330

 
689,400

Cumulative earnings
786,235

 
2,655,891

Cumulative distributions to stockholders
(4,509,819
)
 
(4,509,819
)
Total Stockholders’ Equity
2,904,133

 
4,970,466

Total Liabilities and Stockholders’ Equity
$
22,202,648

 
$
35,921,622


____________________
(1)
The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs. At March 31, 2020 and December 31, 2019, assets of the VIEs totaled $395,316 and $395,008, and liabilities of the VIEs totaled $395,316 and $395,008, respectively. See Note 3 - Variable Interest Entities for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.

1

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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
(in thousands, except share data)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Interest income:
 
Available-for-sale securities
$
248,684

 
$
235,886

Other
6,823

 
9,597

Total interest income
255,507

 
245,483

Interest expense:
 
 
 
Repurchase agreements
152,605

 
147,560

Federal Home Loan Bank advances
1,592

 
6,074

Revolving credit facilities
3,531

 
5,156

Term notes payable
4,804

 

Convertible senior notes
4,776

 
4,735

Total interest expense
167,308

 
163,525

Net interest income
88,199

 
81,958

Other-than-temporary impairments:
 
 
 
Total other-than-temporary impairment losses

 
(206
)
Other income (loss):
 
 
 
Loss on investment securities
(1,081,607
)
 
(19,292
)
Servicing income
130,797

 
116,948

Loss on servicing asset
(586,665
)
 
(188,974
)
Loss on interest rate swap, cap and swaption agreements
(250,596
)
 
(83,259
)
(Loss) gain on other derivative instruments
(133,468
)
 
104,278

Other income
798

 
123

Total other loss
(1,920,741
)
 
(70,176
)
Expenses:
 
 
 
Management fees
14,550

 
12,082

Servicing expenses
19,905

 
19,912

Other operating expenses
15,797

 
15,556

Total expenses
50,252

 
47,550

Loss before income taxes
(1,882,794
)
 
(35,974
)
Benefit from income taxes
(13,138
)
 
(10,039
)
Net loss
(1,869,656
)
 
(25,935
)
Dividends on preferred stock
18,950

 
18,950

Net loss attributable to common stockholders
$
(1,888,606
)
 
$
(44,885
)
Basic loss per weighted average common share
$
(6.91
)
 
$
(0.18
)
Diluted loss per weighted average common share
$
(6.91
)
 
$
(0.18
)
Dividends declared per common share
$

 
$
0.47

Weighted average number of shares of common stock:
 
 
 
Basic
273,392,615

 
252,357,878

Diluted
273,392,615

 
252,357,878

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

2

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TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited), continued
(in thousands, except share data)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Comprehensive (loss) income:
 
 
 
Net loss
$
(1,869,656
)
 
$
(25,935
)
Other comprehensive (loss) income, net of tax:
 
 
 
Unrealized (loss) gain on available-for-sale securities
(198,070
)
 
356,152

Other comprehensive (loss) income
(198,070
)
 
356,152

Comprehensive (loss) income
(2,067,726
)
 
330,217

Dividends on preferred stock
18,950

 
18,950

Comprehensive (loss) income attributable to common stockholders
$
(2,086,676
)
 
$
311,267

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


3

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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, 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

 

 

 
327,840

 

 

 
327,840

Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
28,312

 

 

 
28,312

Other comprehensive income, net of tax

 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
$
977,501

 
$
2,729

 
$
5,154,764

 
$
689,400

 
$
2,655,891

 
$
(4,509,819
)
 
$
4,970,466

Net loss

 

 

 

 
(1,869,656
)
 

 
(1,869,656
)
Other comprehensive income before reclassifications, net of tax

 

 

 
193,536

 

 

 
193,536

Amounts reclassified from accumulated other comprehensive income, net of tax

 

 

 
(391,606
)
 

 

 
(391,606
)
Other comprehensive loss, net of tax

 

 

 
(198,070
)
 

 

 
(198,070
)
Issuance of common stock, net of offering costs

 

 
142

 

 

 

 
142

Repurchase of common stock

 
(1
)
 
(1,063
)
 

 

 

 
(1,064
)
Preferred dividends declared

 

 

 

 

 

 

Common dividends declared

 

 

 

 

 

 

Non-cash equity award compensation

 
7

 
2,308

 

 

 

 
2,315

Balance, March 31, 2020
$
977,501

 
$
2,735

 
$
5,156,151

 
$
491,330

 
$
786,235

 
$
(4,509,819
)
 
$
2,904,133

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

4

Table of Contents



TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(1,869,656
)
 
$
(25,935
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on investment securities, net
41,387

 
22,052

Amortization of deferred debt issuance costs on term notes payable and convertible senior notes
554

 
243

Other-than-temporary impairment losses

 
206

Provision for credit losses on investment securities
45,638

 

Realized and unrealized losses on investment securities
1,035,969

 
19,292

Loss on servicing asset
586,665

 
188,974

Realized and unrealized loss on interest rate swaps, caps and swaptions
237,980

 
106,967

Unrealized loss (gain) on other derivative instruments
64,589

 
(90,184
)
Equity based compensation
2,315

 
1,861

Net change in assets and liabilities:


 
 
Decrease in accrued interest receivable
34,780

 
8,655

Increase in deferred income taxes, net
(44,090
)
 
(10,037
)
Decrease in accrued interest payable
(70,083
)
 
(50,692
)
Change in other operating assets and liabilities, net
34,158

 
(5,588
)
Net cash provided by operating activities
100,206

 
165,814

Cash Flows From Investing Activities:
 
 
 
Purchases of available-for-sale securities
(4,354,636
)
 
(4,551,312
)
Proceeds from sales of available-for-sale securities
15,586,752

 
4,853,189

Principal payments on available-for-sale securities
1,119,117

 
487,649

Purchases of trading securities
(1,052,500
)
 

Proceeds from sales of trading securities
1,053,477

 

Purchases of mortgage servicing rights, net of purchase price adjustments
(180,951
)
 
(210,193
)
(Payments for) proceeds from sales of mortgage servicing rights
(1,433
)
 
289

(Purchases) short sales of derivative instruments, net
(3,630
)
 
(17,344
)
(Payments for termination and settlement) proceeds from sales and settlement of derivative instruments, net
(58,840
)
 
(835,929
)
Payments for reverse repurchase agreements
(1,591,621
)
 
(901,375
)
Proceeds from reverse repurchase agreements
614,756

 
1,663,190

(Decrease) increase in due to counterparties, net
(321,110
)
 
2,163,821

Change in other investing assets and liabilities, net
508

 
2,136

Net cash provided by investing activities
$
10,809,889

 
$
2,654,121

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

5

Table of Contents



TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Cash Flows From Financing Activities:
 
 
 
Proceeds from repurchase agreements
$
35,793,417

 
$
58,853,279

Principal payments on repurchase agreements
(46,096,150
)
 
(62,257,064
)
Proceeds from Federal Home Loan Bank advances
585,000

 

Principal payments on Federal Home Loan Bank advances
(745,000
)
 

Proceeds from revolving credit facilities
25,000

 
75,000

Principal payments on revolving credit facilities
(72,857
)
 
(9,706
)
Proceeds from issuance of common stock, net of offering costs
142

 
335,278

Repurchase of common stock
(1,064
)
 

Dividends paid on preferred stock
(18,950
)
 
(18,950
)
Dividends paid on common stock
(109,175
)
 
(116,601
)
Net cash used in financing activities
(10,639,637
)
 
(3,138,764
)
Net increase (decrease) in cash, cash equivalents and restricted cash
270,458

 
(318,829
)
Cash, cash equivalents and restricted cash at beginning of period
1,616,826

 
1,097,764

Cash, cash equivalents and restricted cash at end of period
$
1,887,284

 
$
778,935

Supplemental Disclosure of Cash Flow Information:
 
Cash paid for interest
$
236,043

 
$
214,217

Cash paid for taxes, net
$
119

 
$
15

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

 
$
442

Dividends declared but not paid at end of period
$

 
$
147,179

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


6

Table of Contents



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 investment portfolio as a whole is managed by the Company’s Co-Chief Investment Officers 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.
As a result of the global COVID-19 pandemic, the Company experienced unprecedented market conditions during quarter ended March 31, 2020, including unusually significant spread widening in both Agency RMBS and non-Agency securities. In response, the Company focused its efforts on raising excess liquidity and de-risking its portfolio. On March 25, 2020, the Company sold substantially all of its non-Agency securities in order to eliminate the risks posed by continued outsized margin calls and ongoing funding concerns associated with the significant spread widening on these assets. The Company also sold approximately one-third of its Agency RMBS in order to reduce risk and raise cash to establish a strong defensive liquidity position to weather potential ongoing economic and market instability.

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. All trust entities in which the Company holds investments that are considered variable interest entities, or VIEs, for financial reporting purposes were reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of a trust 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 consolidates the trust. 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, 2019. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2020 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2020 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 in the market, 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 2019 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the three months ended March 31, 2020.
Recently Issued and/or Adopted Accounting Standards
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets and certain other instruments. Allowances for credit losses on available-for-sale, or AFS, debt securities are 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.
The Company uses a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. The estimated allowance for credit losses is equal to the difference between the prepayment adjusted contractual cash flows with no credit losses and the prepayment adjusted expected cash flows with credit losses, discounted at the effective interest rate on the AFS security that was in effect upon adoption of the standard. The contractual cash flows and expected cash flows are based on management’s best estimate and take into consideration current prepayment assumptions, lifetime expected losses based on past loss experience, current market conditions, and reasonable and supportable forecasts of future conditions. The allowance for credit losses causes an increase in the AFS security amortized cost and recognizes an allowance for credit losses in the same amount. The allowance for credit losses recognized in connection with adopting the guidance in Topic 326 on January 1, 2020 was equal to the present value of the credit reserve in place on December 31, 2019. As a result, no cumulative effect adjustment to opening cumulative earnings was required.
The adoption of this ASU impacts the Company’s accounting for the purchase of certain beneficial interests with purchased credit deterioration or when there is a “significant” difference between contractual cash flows and expected cash flows. For these securities, the Company records an allowance for credit losses with an increase in amortized cost above the purchase price of the same amount. Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reduction in credit losses, respectively. Adverse changes are reflected as an increase to the allowance for credit losses and favorable changes are reflected as a decrease to the allowance for credit losses. The allowance for credit losses is limited to the difference between the beneficial interest’s fair value and its amortized cost, and any remaining adverse changes in these circumstances are reflected as a prospective adjustment to accretable yield. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective adjustment to accretable yield. The Company does not adjust the effective interest rate in subsequent periods for prepayment assumption changes or variable-rate changes. Any changes in the allowance for credit losses due to the time-value-of-money are accounted for in the condensed consolidated statements of comprehensive (loss) income as provision for credit losses rather than a reduction to interest income.
The standard applies to Agency and non-Agency securities that are accounted for as beneficial interests under Accounting Standards Codification (ASC) 325-40, Investments-Other: Beneficial Interests in Securitized Financial Assets, or ASC 325-40, and ASC 310-30, Receivables: Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. Only beneficial interests that were previously accounted for as purchased credit impaired under ASC 310-30 were accounted for as purchased credit deteriorated under Topic 326 on the transition date.

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

Upon adoption of this ASU, the Company established an allowance for credit losses on AFS securities accounted for as purchased credit-impaired assets under ASC 310-30 in an unrealized loss position and with no other-than-temporary impairments, or OTTI, recognized in periods prior to transition. The effective interest rates on these debt securities remained unchanged. On January 1, 2020, the $30.7 billion net amortized cost basis of AFS securities was inclusive of a $244.9 million allowance for credit loss. 
The Company used a prospective transition approach for debt securities for which OTTI had been recognized prior to January 1, 2020. As a result, the amortized cost basis remained the same before and after the effective date. The effective interest rate on these debt securities also remained unchanged. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flows expected to be collected are accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 are recorded in earnings when received.

Note 3. Variable Interest Entities
During the second quarter of 2019, the Company formed a new trust entity, or the Issuer Trust, for the purpose of financing MSR through securitization. On June 27, 2019, the Company, through the Issuer Trust, completed an MSR securitization transaction pursuant to which, through two of the Company’s wholly owned subsidiaries, MSR is pledged to the Issuer Trust and in return, the Issuer Trust issued (a) an aggregate principal amount of $400.0 million in term notes to qualified institutional buyers and (b) a variable funding note, or VFN, with a maximum principal balance of $1.0 billion to one of the subsidiaries, in each case secured on a pari passu basis. The term notes bear interest at a rate equal to one-month LIBOR plus 2.80% per annum. The term notes will mature on June 25, 2024 or, if extended pursuant to the terms of the related indenture supplement, June 25, 2026 (unless earlier redeemed in accordance with their terms).
The Issuer Trust is considered a VIE for financial reporting purposes and, thus, was reviewed for consolidation under the applicable consolidation guidance. As the Company has both the power to direct the activities of the Issuer Trust that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidates the trust. Additionally, in accordance with arrangements entered into in connection with the securitization transaction, the Company has direct financial obligations payable to the Issuer Trust, which, in turn, support the Issuer Trust’s obligations to noteholders under the securitization transaction.
The following table presents a summary of the assets and liabilities of all consolidated trusts as reported on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019:
(in thousands)
March 31,
2020
 
December 31,
2019
Note receivable (1)
$
394,772

 
$
394,502

Cash and cash equivalents
200

 
200

Accrued interest receivable (1)
344

 
306

Total Assets
$
395,316

 
$
395,008

Term notes payable
$
394,772

 
$
394,502

Accrued interest payable
344

 
306

Other liabilities
200

 
200

Total Liabilities
$
395,316

 
$
395,008


____________________
(1)
Receivables due from a wholly owned subsidiary of the Company to the Issuer Trust are eliminated in consolidation in accordance with U.S. GAAP.


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

Note 4. Available-for-Sale Securities, at Fair Value
The Company holds both Agency and non-Agency AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. As a result of the global COVID-19 pandemic, the Company experienced unprecedented market conditions during the quarter ended March 31, 2020, including unusually significant spread widening in both Agency RMBS and non-Agency securities. In response, the Company focused its efforts on raising excess liquidity and de-risking its portfolio. On March 25, 2020, the Company sold substantially all of its non-Agency securities in order to eliminate the risks posed by continued outsized margin calls and ongoing funding concerns associated with the significant spread widening on these assets. The Company also sold approximately one-third of its Agency RMBS in order to reduce risk and raise cash to establish a strong defensive liquidity position to weather potential ongoing economic and market instability.
The following table presents the Company’s AFS investment securities by collateral type as of March 31, 2020 and December 31, 2019:
(in thousands)
March 31,
2020
 
December 31,
2019
Agency
 
 
 
Federal National Mortgage Association
$
14,362,782

 
$
21,252,575

Federal Home Loan Mortgage Corporation
2,907,220

 
6,070,500

Government National Mortgage Association
436,657

 
454,980

Non-Agency
26,400

 
3,628,273

Total available-for-sale securities
$
17,733,059

 
$
31,406,328



At March 31, 2020 and December 31, 2019, the Company pledged AFS securities with a carrying value of $17.7 billion and $29.8 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 11 - Repurchase Agreements and Note 12 - Federal Home Loan Bank of Des Moines Advances.
At March 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $26.4 million and $3.6 billion, respectively.

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

The following tables present the amortized cost and carrying value of AFS securities by collateral type as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
(in thousands)
Principal/ Current Face
 
Un-amortized Premium
 
Accretable Purchase Discount
 
Amortized Cost
 
Allowance for Credit Losses
 
Unrealized Gain
 
Unrealized Loss
 
Carrying Value
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
$
16,316,075

 
$
764,966

 
$
(17
)
 
$
17,081,024

 
$

 
$
505,055

 
$
(1,091
)
 
$
17,584,988

Interest-only
2,461,579

 
158,209

 

 
158,209

 
(32,786
)
 
14,194

 
(17,946
)
 
121,671

Total Agency
18,777,654

 
923,175

 
(17
)
 
17,239,233

 
(32,786
)
 
519,249

 
(19,037
)
 
17,706,659

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
2,591

 
8

 
(41
)
 
2,558

 

 
44

 
(9
)
 
2,593

Interest-only
3,770,437

 
37,781

 

 
37,781

 
(8,604
)
 
279

 
(5,649
)
 
23,807

Total Non-Agency
3,773,028

 
37,789

 
(41
)
 
40,339

 
(8,604
)
 
323

 
(5,658
)
 
26,400

Total
$
22,550,682

 
$
960,964

 
$
(58
)
 
$
17,279,572

 
$
(41,390
)
 
$
519,572

 
$
(24,695
)
 
$
17,733,059


 
December 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
$
26,239,544

 
$
986,343

 
$
(19
)
 
$

 
$
27,225,868

 
$
424,818

 
$
(8,815
)
 
$
27,641,871

Interest-only
2,601,693

 
169,811

 

 

 
169,811

 
13,724

 
(47,351
)
 
136,184

Total Agency
28,841,237

 
1,156,154

 
(19
)
 

 
27,395,679

 
438,542

 
(56,166
)
 
27,778,055

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
5,498,654

 
8,980

 
(560,140
)
 
(1,711,951
)
 
3,235,543

 
341,583

 
(23,263
)
 
3,553,863

Interest-only
4,356,603

 
79,935

 

 

 
79,935