8-K: Two Harbors Investment Corp. Announces Merger with CrossCountry Mortgage

Two Harbors Investment Corp. has entered into a definitive merger agreement with CrossCountry Mortgage, LLC, increasing the per-share cash consideration to $11.30.

Summary

• Two Harbors Investment Corp. (TWO) announced its first quarter 2026 financial results and a new definitive merger agreement with CrossCountry Mortgage, LLC (CCM).
• Under the terms of the new agreement, CCM will acquire all outstanding shares of TWO common stock for $11.30 per share in cash, an increase from the previously agreed-upon $10.80 per share.
• This new agreement replaces the previously announced merger agreement with UWM Holdings Corporation, which was terminated.
• Preferred stockholders will have their shares redeemed at $25.00 per share plus accumulated dividends.
• The company reported a book value of $10.57 per common share and declared a first quarter common stock dividend of $0.34 per share, resulting in a (2.0)% quarterly economic return on book value.
• TWO generated a comprehensive loss of $(24.7) million, or $(0.24) per weighted average basic common share for the quarter.
• The company added $151.8 million in unpaid principal balance (UPB) of MSR through acquisitions and recapture, maintaining a low delinquency rate of 0.81%.
• The transaction is expected to close in the second half of 2026, subject to stockholder approval and regulatory conditions.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed situation; while the merger terms have improved, the company reported a significant financial loss and negative economic return for the quarter.

Positives

• Increased cash consideration for common stockholders to $11.30 per share in the new merger agreement with CCM.
• Termination of the previous merger agreement with UWM Holdings Corporation, potentially avoiding unfavorable terms or market conditions.
• MSR portfolio remains strong with $151.8 million UPB added and a low 60+ day delinquency rate of 0.81%.
• The weighted average gross coupon rate on the MSR portfolio is 3.54%, and the 3-month CPR was 5.6%.
• The company funded $92.3 million UPB in loans and brokered an additional $38.2 million UPB in second lien loans.
• The merger with CCM is described as pairing a leading retail originator with a best-in-class servicing platform, creating a fully integrated mortgage company.
• Management is confident this is the best outcome for shareholders and the Board unanimously recommends voting in favor of the merger.

Negatives

• Reported a comprehensive loss of $(24.7) million, or $(0.24) per weighted average basic common share for the first quarter of 2026.
• Economic return on book value for the quarter was negative at (2.0)%.
• Book value per common share decreased to $10.57 from $11.13 in the prior quarter.
• The company's GAAP Net Income was $19.477 million, a significant decrease from $50.429 million in the previous quarter.
• The outbreak of conflict in the Middle East caused increased rates, volatility, hedging costs, and wider spreads in the first quarter.

Risks

• The expected timing and likelihood of completion of the proposed CCM Merger.
• The potential failure to receive required approvals for the CCM Merger, including stockholder approval.
• Risks related to disruption of management's attention from ongoing business operations due to the proposed CCM Merger.
• The risk that announcements relating to the CCM Merger could have adverse effects on the market price of TWO common stock.
• The risk that the CCM Merger and its announcement could adversely affect TWO's ability to retain and hire key personnel.
• The outcome of any legal proceedings relating to the proposed CCM Merger, including stockholder litigation.
• Restrictions during the pendency of the CCM Merger may impact TWO's ability to pursue certain business opportunities or strategic transactions.
• Adverse effects from other economic, business, or competitive factors, changes in interest rates, the yield curve, prepayment rates, financing availability, general economic and market conditions, and legislative/regulatory changes.

Future Outlook

The transaction with CrossCountry Mortgage, LLC is expected to close in the second half of 2026, subject to customary closing conditions including stockholder approval and regulatory approvals. Two Harbors intends to pay regular quarterly dividends in the ordinary course prior to closing.

Management Comments

• "In the first quarter, we executed a new merger agreement with CCM, and in connection with entering into this agreement, we terminated the prior merger agreement with UWM."
• "This combination pairs the countrys leading retail originator with RoundPoints best-in-class servicing platform, creating a fully integrated mortgage company."
• "I am confident that this is the best outcome for our shareholders, and our Board unanimously recommends that shareholders vote in favor of the merger."
• "The outbreak of the conflict in the Middle East caused an abrupt change in sentiment in the first quarter, leading to an increase in rates, rate volatility, hedging costs and a widening of spreads."
• "However, mortgage spreads outperformed the increase in volatility, due to the January directive from the Administration for the GSEs to purchase $200 billion of MBS, which added to the already positive supply/demand technicals."
• "The widening of spreads by quarter-end improved the return potential of our portfolio."

Industry Context

StockSavvy.ai notes that the mortgage industry is experiencing significant consolidation and strategic realignments, driven by evolving market conditions, interest rate volatility, and the pursuit of integrated business models. The merger between Two Harbors and CrossCountry Mortgage aligns with this trend, aiming to create a more robust, end-to-end mortgage company.

Comparison to Industry Standards

• The economic return on book value of (2.0)% for the quarter is below the positive 3.9% achieved in the prior quarter, indicating a challenging market environment.
• The reported book value per share of $10.57 is a key metric for REITs, and its decrease from $11.13 suggests a decline in underlying asset values or performance during the quarter.
• The MSR portfolio's 60+ day delinquency rate of 0.81% remains low and compares favorably to industry averages, indicating strong credit quality within the serviced loans.
• The weighted average coupon rate on MSRs of 3.54% is competitive, while the 3-month CPR of 5.6% reflects current market conditions for refinancing activity.

Legal Proceedings

• The outcome of any legal proceedings relating to the proposed CCM Merger, including stockholder litigation, is a risk.

Stakeholder Impact

• Shareholders will receive $11.30 per share in cash for their common stock upon closing of the CCM merger.
• Preferred stockholders will have their shares redeemed at $25.00 per share plus any accumulated and unpaid dividends.
• The merger may impact the ability of Two Harbors to retain and hire key personnel.

Next Steps

• Two Harbors Investment Corp. will host a conference call on April 29, 2026, at 9:00 a.m. ET to discuss its first quarter 2026 financial results.
• The proposed CCM Merger will be submitted to Two Harbors stockholders for their approval.
• The company intends to pay regular quarterly dividends in the ordinary course prior to the closing of the merger.

Key Dates

Recommendation

The improved merger consideration is a positive, but the company's recent financial performance shows a significant loss and negative economic return. The market will likely weigh the certainty of the cash-out against the potential for future recovery or the risks associated with the merger completion. A 'hold' recommendation reflects this balance, pending further clarity on merger closing and future market conditions.

Keywords

Two Harbors Investment Corp, TWO, Merger Agreement, CrossCountry Mortgage, CCM, MSR, REIT, Financial Results