CYS Investments, Inc. Announces Fourth Quarter and Year Ended 2012 Financial Results

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CYS Investments, Inc. Announces Fourth Quarter and Year Ended 2012 Financial Results

NEW YORK--(BUSINESS WIRE)-- CYS Investments, Inc. (NYS: CYS) ("CYS" or the "Company") today announced financial results for the quarter and year ended December 31, 2012.

Fourth Quarter 2012 Highlights

  • GAAP net loss available to common shares of $41.4 million, or $0.24 per diluted common share.
  • Core Earnings(a) of $37.6 million, or $0.21 per diluted common share.
  • Drop Income(b) of $30.1 million, or $0.18 per diluted common share.
  • Net realized gain from investments of $110.5 million.
  • Operating expenses of 0.76% of average net assets.
  • December 31, 2012 net asset value per common share of $13.31 per share after declaring a $0.40 dividend per common share and a $0.52 special dividend per common share on December 10, 2012.
  • Interest rate spread net of hedge of 0.94%. Adjusted interest rate spread net of hedge of 1.08%.
  • Weighted average amortized cost of Agency RMBS of $104.47.

2012 Highlights

  • GAAP net income available to common shares of $370.4 million, or $2.64 per diluted common share.
  • Core Earnings of $165.5 million, or $1.18 per diluted common share.
  • Drop Income of $97.4 million, or $0.69 per diluted common share.
  • Net realized gain from investments of $203.8 million.
  • Operating expenses of 1.05% of average net assets.
  • Total dividends on common shares of $2.37.
  • Interest rate spread net of hedge of 1.36%. Adjusted interest rate spread net of hedge of 1.50%.

Fourth Quarter 2012 Results

The Company had net loss available to common shares of $41.4 million during the fourth quarter of 2012, or $0.24 per diluted common share, compared to net income available to common shares of $241.0 million, or $1.46 per diluted common share, in the third quarter of 2012. For the fourth quarter of 2012 the Company had net investment income of $58.4 million and a net loss from investments of $96.0 million, compared to net investment income of $59.4 million and a net gain from investments of $221.1 million in the third quarter of 2012. The net loss from investments during the fourth quarter was primarily the result of Agency RMBS prices declining from the historically high levels at the end of September 2012.

For the fourth quarter of 2012, Core Earnings plus Drop Income was $67.7 million, or $0.39 per diluted common share ($0.21 Core Earnings and $0.18 Drop Income), a decrease of $10.4 million, or $0.09 per diluted common share, compared to $78.1 million, or $0.48 per diluted common share ($0.25 Core Earnings and $0.23 Drop Income) during the third quarter of 2012. This decrease was generally the result of a lower adjusted interest rate spread net of hedge, which declined to 1.08% during the fourth quarter of 2012, compared to 1.41% during the third quarter of 2012. The decline in adjusted interest rate spread net of hedge was primarily due to lower yields on our Agency RMBS while there was little change in the cost of funds.

(a) Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) available to common shares excluding (i) net gain (loss) from investments and termination of swap contracts and (ii) net unrealized appreciation (depreciation) on investments and swap and cap contracts.
(b) Drop Income is a component of our net income accounted for as net gain from investments on our statement of operations and therefore excluded from our Core Earnings. The Company utilizes forward settling transactions for the majority of its purchases. This enables the Company to purchase assets with specified stipulations, such as average loan size and/or age, and/or percentage of loans in a particular state. This customization enables the Company to more effectively manage prepayments. In addition, forward settling purchases allow the Company to obtain an asset at a discount (also referred to as "drop") to its current market value; however, the Company does not receive interest income on the asset until the forward transaction settles. Obtaining assets at a discount to market value reduces the prepayment impact and is accretive to net asset value.

The Company's net asset value per common share ("NAV") on December 31, 2012 was $13.31, after declaring a $0.40 dividend per common share and a $0.52 special dividend per common share on December 10, 2012, compared with $14.46 at September 30, 2012. The decrease in NAV was primarily the result of lower asset prices.

The Company had $110.5 million of net realized gain on investments during the fourth quarter of 2012, compared with $27.0 million of net realized gain on investments during the third quarter of 2012.

The Company's operating expenses were $4.8 million, or 0.76% of average net assets, for the fourth quarter of 2012, compared to $5.3 million, or 0.93% of average net assets, for the third quarter of 2012.

 
(dollars in thousands)Three Months Ended
Key Metrics*December 31, 2012 September 30, 2012
Average settled Agency RMBS (1)$16,036,574$13,442,454
Average repurchase agreements (2)$13,886,303$11,571,371
Average net assets (3)$2,516,860$2,300,096
Average common shares outstanding (4)174,938165,017
Average yield on Agency RMBS (5)1.97%2.25%
Average cost of funds and hedge (6)1.03%1.01%
Interest rate spread net of hedge (7)0.94%1.24%
Operating expense ratio (8)0.76%0.93%
Leverage ratio (at period end) (9)7.7:17.7:1
 

(1) The Company's average settled Agency RMBS for the period is calculated by averaging the month end cost basis of settled Agency RMBS during the period.
(2) The Company's average repurchase agreements for the period is calculated by averaging the month end repurchase agreements balance during the period.
(3) The Company's average net assets for the period is calculated by averaging the month end net assets during the period.
(4) Our average common shares outstanding is calculated by averaging the daily common shares outstanding during the period.
(5) The Company's average yield on Agency RMBS for the period is calculated by dividing interest income from Agency RMBS by average settled Agency RMBS.
(6) The Company's average cost of funds and hedge for the period is calculated by dividing total interest expense, including net swap and cap interest income (expense), by average repurchase agreements.
(7) The Company's interest rate spread net of hedge for the period is calculated by subtracting average cost of funds and hedge from average yield on Agency RMBS.
(8) The Company's operating expense ratio is calculated by dividing operating expenses by average net assets.
(9) The Company's leverage ratio is calculated by dividing (i) the Company's repurchase agreements balance plus payable for securities purchased minus receivable for securities sold by (ii) net assets.
* All percentages are annualized.

Adjusted Interest Rate Spread Net of Hedge

The Company's interest rate spread net of hedge may appear comparatively low due to timing characteristics of forward purchases. We seek to hedge our interest rate risk associated with forward purchases on trade date; however, the forward purchases do not begin to accrue income until settlement date. In order to provide a more proximate interest rate spread net of hedge, we allocate, on a pro rata basis, our total net swap and cap interest expense over our average settled positions, relative to average total positions. We believe this calculation provides a more reasonable comparative interest rate spread net of hedge given the nature of forward purchases.

 
(dollars in thousands)Three Months Ended
Key Metrics*December 31, 2012 September 30, 2012
Average settled Agency RMBS (1)$16,036,574$13,442,454

Average total Agency RMBS (2)

$21,135,234$18,751,053
Net swap and cap interest income (expense)$(19,328)$(17,255)
Net swap and cap interest income (expense) applied to settled Agency RMBS (3)$(14,665)$(12,370)
Adjusted average cost of funds and hedge (4)0.89%0.84%
Adjusted interest rate spread net of hedge (5)1.08%1.41%

________

(1) Our average settled Agency RMBS for the period is calculated by averaging the month end cost basis of our settled Agency RMBS during the period.
(2) Our average total Agency RMBS for the period is calculated by averaging the month end cost basis of our total Agency RMBS during the period.
(3) Our net swap and cap interest income (expense) applied to settled Agency RMBS is calculated by dividing average settled Agency RMBS by average total Agency RMBS multiplied by net swap and cap interest income (expense).
(4) Our adjusted average cost of funds and hedge for the period is calculated by dividing our total interest expense, including our net swap and cap interest income (expense) applied to settled Agency RMBS, by our average repurchase agreements.
(5) Our adjusted interest rate spread net of hedge for the period is calculated by subtracting our adjusted average cost of funds and hedge from our average yield on Agency RMBS.

Prepayments

For the fourth quarter of 2012, the portfolio recorded $949.6 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 17.6% and net amortization of premium of $42.6 million. This compared to $745.3 million in scheduled and unscheduled principal repayments and prepayments, which equated to a CPR of approximately 17.3% and net amortization of premium of $29.5 million for the third quarter of 2012. The CPR of the Company's Agency RMBS portfolio was approximately 19.3% for the month of January 2013.

Dividends

The Company declared a common dividend of $0.40 per share and a $0.52 special dividend per common share for the fourth quarter of 2012, compared to $0.45 for the third quarter of 2012. Using the closing share price of $11.81 on December 31, 2012, the fourth quarter dividend (excluding the special dividend) equates to an annualized dividend yield of 13.5%.

Portfolio

At December 31, 2012, the Company's $20.8 billion portfolio of Agency RMBS was backed by fixed-rate mortgages and hybrid adjustable-rate mortgages ("Hybrid ARMs") with 0 to 120 months to reset. The Agency RMBS portfolio is made up of 0.3% 2009 production; 3.4% 2010 production; 16.0% 2011 production; 58.6% 2012 production; and 21.7% of forward settling transactions that will be 2013 production when settled. Additional information about our Agency RMBS portfolio at December 31, 2012 is summarized below:

 
 Par Value Fair Value Weighted Average   
Asset Type(in thousands)Cost/Par Fair
Value/Par
 MTR(1) Coupon CPR(2)
10 Year Fixed Rate$207,091$219,747$103.60$106.11N/A3.50%19.4%
15 Year Fixed Rate11,092,37411,717,136104.32105.63N/A3.05%16.1%
20 Year Fixed Rate1,087,8351,148,932104.96105.62N/A3.17%10.1%
30 Year Fixed Rate3,571,6923,817,488105.78106.88N/A3.59%8.9%

Hybrid ARMs

3,722,510 3,900,840 103.54 104.79 74.3 2.71%19.1%

Total/Weighted Average

$19,681,502 $20,804,143 $104.47 $105.70 74.3 (3)3.10%15.8%

___

(1) MTR, or "Months to Reset" is the number of months remaining before the fixed rate on a Hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined by the margin and the pre-specified caps of the ARM. After the fixed period, 100% of the Hybrid ARMS in the portfolio reset annually.
(2) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate for those bonds held at December 31, 2012. Securities with no prepayment history are excluded from this calculation.
(3) Weighted average months to reset of our Hybrid ARM portfolio.

Financing, Leverage & Liquidity

At December 31, 2012, the Company had financed its portfolio with approximately $14.0 billion of borrowings under repurchase agreements with a weighted average interest rate of 0.48% and a weighted average maturity of approximately 19.6 days. In addition, the Company had payable for securities purchased of $4.5 billion. The Company's leverage ratio at December 31, 2012 was 7.7 to 1. At December 31, 2012, the Company's liquidity position was approximately $1.5 billion, consisting of unpledged Agency RMBS, U.S. Treasury securities and cash and cash equivalents. Below is a list of outstanding borrowings under repurchase agreements at December 31, 2012 (dollars in thousands):

    
CounterpartyTotal
Outstanding
Borrowings
% of
Total

% of Net
Assets
At Risk(1)

Weighted
Average
Maturity in
Days
Bank of America Securities LLC$1,143,2798.2%2.4%16
Bank of Nova Scotia660,8894.71.112
Barclays Capital, Inc.1,129,1068.12.330
BNP Paribas Securities Corp662,3604.71.517
Citigroup Global Markets, Inc.463,8153.31.121
Credit Suisse Securities (USA) LLC645,1794.61.215
Daiwa Securities America, Inc.305,9542.20.722
Deutsche Bank Securities, Inc.539,0943.81.421
Goldman Sachs & Co.1,058,1747.62.417
Guggenheim Liquidity Services, LLC281,2252.00.622
Industrial and Commercial Bank of China Financial Services LLC808,4145.81.720
ING Financial Markets LLC377,3532.70.914
KGS Alpha Capital Markets138,6971.00.419
LBBW Securities LLC140,9531.00.328
Mitsubishi UFJ Securities (USA), Inc.627,3154.51.417
Mizuho Securities USA, Inc.520,6383.71.118
Morgan Stanley & Co. Inc.634,1794.51.617
Nomura Securities International, Inc.623,5564.51.521
RBC Capital Markets, LLC791,6105.71.817
South Street Securities LLC375,2892.71.118
The Royal Bank of Scotland PLC167,6041.20.49
UBS Securities LLC936,3336.72.338
Wells Fargo Securities, LLC950,291 6.8 1.3 13
Total $13,981,307 100.0 %30.5 %

___

(1) Equal to the fair value of pledged securities plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense divided by net assets.

Hedging

The Company utilizes interest rate swap and cap contracts to hedge the interest rate risk associated with its Agency RMBS portfolio. These interest rate swap and cap contracts are described below (dollars in thousands):

   

 

Interest Rate Swaps

Weighted AverageNotionalFair
Expiration YearFixed Pay RateAmountValue
20131.33%$2,400,000$(19,602)
20141.41%1,290,000(22,177)
20152.15%500,000(18,564)
20161.71%550,000(22,316)
20170.91%2,750,000 (14,736)
Total1.27%$7,490,000 $(97,395)
 

Interest Rate Caps

Weighted AverageNotionalFair
Expiration YearCap RateAmountValue
20142.07%$200,000$38
20151.40%500,000688
20191.56%1,700,00049,373
20221.75%1,000,000 72,890 
Total1.62%$3,400,000 $122,989 
 

Results for the Year Ended December 31, 2012

The Company had net income available to common shareholders of $370.4 million during the year ended December 31, 2012, or $2.64 per diluted common share, compared to $291.9 million, or $3.66 per diluted common share, in 2011. The year-over-year decrease in net income per diluted common share was primarily the result of the decrease in net gain from investments. This decrease in net gain from investments was caused by the slowing decrease in yields on Agency MBS. For example, during the year ended December 31, 2011, the yield on par-priced Fannie Mae Agency RMBS backed by 15 year fixed rate mortgage loans decreased 133 basis points compared to only a 35 basis points decrease during the year ended December 31, 2012. During the year ended December 31, 2012, the Company had Core Earnings plus drop income of $262.9 million, or $1.87 per diluted common share ($1.18 Core Earnings and $0.69 Drop Income), compared to $167.7 million, or $2.10 per diluted common share ($1.69 Core Earnings and $0.41 Drop Income), in 2011. The year-over-year decrease in Core Earnings plus Drop Income per share was primarily the result of the decrease in interest rate spread net of hedge. During the year ended December 31, 2012, the Company's adjusted interest rate spread net of hedge was 1.50%, compared to 2.09% in 2011.

Conference Call

The Company will host a conference call at 8:30 AM Eastern Time on Thursday, February 7, 2013, to discuss its financial results for the quarter ended December 31, 2012. To participate in the call by telephone, please dial 888.895.5479 at least 10 minutes prior to the start time and reference the conference passcode 34160609. International callers should dial 847.619.6250 and reference the same passcode. The conference call will also be webcast live over the Internet and can be accessed at the Company's web site at

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