CYS Investments, Inc. Announces Third Quarter 2012 Financial Results

CYS Investments, Inc. Announces Third Quarter 2012 Financial Results

NEW YORK--(BUSINESS WIRE)-- CYS Investments, Inc. (NYS: CYS) ("CYS" or the "Company") today announced financial results for the quarter ended September 30, 2012.

Third Quarter 2012 Highlights

  • GAAP net income of $241.9 million, or $1.46 per diluted share.

  • Core Earnings of $41.2 million, or $0.25 per diluted share.

  • A component of the Company's net income for the quarter was $36.9 million, or $0.23 per diluted share, of appreciation on forward settling purchases (also referred to as "drop income") that was accounted for as net gain from investments on our statement of operations and therefore excluded from our Core Earnings.

  • Net realized gain from investments of $27.0 million for the third quarter of 2012 bringing the Company's net realized gain from investments to $93.3 million for the nine months ended September 30, 2012.

  • Operating expenses of 0.93% of average net assets.

  • September 30, 2012 net asset value per common share of $14.46 per share after declaring a $0.45 dividend per common share on September 11, 2012.

  • Interest rate spread net of hedge of 1.24%. Adjusted interest rate spread net of hedge 1.41%.

  • Weighted average amortized cost of Agency RMBS of $104.35.


Public Offerings

On July 16, 2012, the Company completed an underwritten public offering of 46,000,000 shares of common stock at a public offering price of $13.70 per share, raising approximately $622.2 million of net proceeds.

On August 3, 2012, the Company completed an underwritten public offering of 3,000,000 shares of its 7.75% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, raising approximately $72.5 million of net proceeds.

Third Quarter 2012 Results

The Company had net income of $241.9 million during the third quarter of 2012, or $1.46 per diluted share, compared to net income of $101.7 million, or $0.87 per diluted share, in the second quarter of 2012. During the third quarter of 2012, the Company had Core Earnings of $41.2 million, or $0.25 per diluted share, compared to $44.8 million, or $0.38 per diluted share, in the second quarter of 2012. Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) available to common shares excluding (i) net realized gain (loss) on investments and termination of swap contracts and (ii) net unrealized appreciation (depreciation) on investments and swap and cap contracts.

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. During the third quarter of 2012, the Company generated drop income of approximately $36.9 million, or $0.23 per diluted share, compared to approximately $15.0 million, or $0.13 per diluted share, during the second quarter of 2012. Core Earnings plus drop income was $0.48 per diluted share during the third quarter of 2012 compared to $0.51 during the second quarter of 2012. The $0.03 quarter-over-quarter decrease in Core Earnings plus drop income per diluted share was generally the result of a lower adjusted interest rate spread net of hedge, which decreased to 1.41% during the third quarter of 2012, compared to 1.82% during the second quarter of 2012. The Company sold approximately $5.5 billion of Agency RMBS during the third quarter of 2012 generating $27.3 million in net realized gain. By making these sales, the Company was able to reinvest in the forward market to take advantage of favorable pricing of Agency RMBS. As a result, drop income increased during third quarter of 2012. The Company made $10.9 billion of forward purchases during the third quarter of 2012, with weighted average drop of approximately $0.19 per $100.00 par value per month, compared to $5.1 billion of Agency RMBS forward purchases in the second quarter of 2012 with weighted average drop of approximately $0.18 per $100.00 par value per month.

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 interest rate spread net of hedge decreased to 1.24% for the third quarter of 2012 from 1.71% in the second quarter of 2012. The third quarter of 2012 interest rate spread is low due to the hedging of forward settling purchases in advance of their earning interest income, as mentioned above. During the third quarter of 2012, the average cost basis of the Company's settled Agency RMBS was $13.4 billion, average unsettled Agency RMBS was $5.3 billion, and average total Agency RMBS was $18.7 billion. By applying total net swap and cap interest expense of $17.3 million for the third quarter of 2012 pro rata over settled and unsettled Agency RMBS positions, swap and cap interest expense was $12.4 million relating to our settled Agency RMBS. The result is an adjusted interest rate spread net of hedge for our settled Agency RMBS positions of approximately 1.41%, compared to 1.82% in the second quarter of 2012. We believe this spread is generally more reflective of the economic return of our assets, and represents what we expect our interest rate spread net of hedge will be once forward purchases settle.

The Company's net asset value per common share on September 30, 2012 was $14.46, after declaring a $0.45 dividend per common share on September 11, 2012, compared with $13.52 at June 30, 2012. The increase was primarily the result of Agency RMBS outperforming swaps.

The Company had $27.0 million of net realized gain on all investments during the third quarter of 2012, compared with $61.1 million gain on investments during the second quarter of 2012.

The Company's operating expenses were $5.3 million, or 0.93% of average net assets, for the third quarter of 2012, compared to $5.3 million, or 1.33% of average net assets, for the second quarter of 2012. Operating expenses as a percentage of net assets decreased as a result of a larger asset base.

(dollars in thousands)

Three Months Ended

Key Metrics*

September 30, 2012

June 30, 2012

Average Agency RMBS (1)

$

13,442,454

$

10,737,980

Average unsettled Agency RMBS (2)

$

5,308,559

$

2,747,054

Average repurchase agreements (3)

$

11,571,371

$

9,497,267

Average net assets (4)

$

2,300,096

$

1,591,432

Average common shares outstanding (5)

165,017

116,881

Average yield on Agency RMBS (6)

2.25

%

2.62

%

Average cost of funds and hedge (7)

1.01

%

0.91

%

Interest rate spread net of hedge (8)

1.24

%

1.71

%

Operating expense ratio (9)

0.93

%

1.33

%

Leverage ratio (at period end) (10)

7.7:1

7.6:1

(1) The Company's average 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 unsettled Agency RMBS for the period is calculated by averaging the month end cost basis of unsettled Agency RMBS during the period.

(3) The Company's average repurchase agreements for the period is calculated by averaging the month end repurchase agreements balance during the period.

(4) The Company's average net assets for the period is calculated by averaging the month end net assets during the period.

(5) Our average common shares outstanding is calculated by averaging the daily common shares outstanding during the period.

(6) The Company's average yield on Agency RMBS for the period is calculated by dividing interest income from Agency RMBS by average Agency RMBS.

(7) 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.

(8) 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.

(9) The Company's operating expense ratio is calculated by dividing operating expenses by average net assets.

(10) 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.

Prepayments

The portfolio recorded $745.3 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 17.3% and net amortization of premium of $29.5 million for the third quarter of 2012. This compared to $651.7 million in scheduled and unscheduled principal repayments and prepayments, which equated to a CPR of approximately 18.1% and net amortization of premium of $22.7 million for the second quarter of 2012. The decrease in CPR during the third quarter of 2012 was consistent with seasonal trends. However, the Company expects the fourth quarter 2012 CPR will increase due in part to the Federal Reserve Board's (the "Federal Reserve") announcement of an open-ended program to purchase an additional $40 billion of Agency RMBS per month until the unemployment rate, among other economic indicators, show signs of improvement. This program, when combined with the Federal Reserve's existing programs to extend its holdings' average maturity, and reinvest principal payments from its holdings of agency debt and Agency RMBS into Agency RMBS, is expected to increase the Federal Reserve's holdings of long-term securities by approximately $85 billion per month through the end of 2012.

The CPR of the Company's Agency RMBS portfolio was approximately 15.4% for the month of October 2012.

Dividend

The Company declared a common dividend of $0.45 per share with respect to the third quarter of 2012, compared to $0.50 for the second quarter of 2012. Using the closing share price of $14.09 on September 28, 2012, the third quarter dividend equates to an annualized dividend yield of 12.8%.

Portfolio

At September 30, 2012, the Company's $22.6 billion portfolio of Agency RMBS was backed by fixed-rate mortgages and hybrid adjustable-rate mortgages ("Hybrid ARMs") with 0 to 84 months to reset. The Agency RMBS portfolio is made up of 0.7% 2009 production; 5.8% 2010 production; 24.2% 2011 production; and 69.3% 2012 production. Additional information about our Agency RMBS portfolio at September 30, 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

$

224,154

$

238,674

$

103.69

$

106.48

N/A

3.50

%

16.0

%

15 Year Fixed Rate

11,142,835

11,854,179

104.04

106.38

N/A

3.26

%

16.1

%

20 Year Fixed Rate

910,489

967,434

104.87

106.25

N/A

3.22

%

11.2

%

30 Year Fixed Rate

5,293,159

5,685,772

105.83

107.42

N/A

3.79

%

16.5

%

Hybrid ARMs

3,652,347

3,850,880

103.07

105.44

69.3

2.92

%

21.8

%

Total/Weighted Average

$

21,222,984

$

22,596,939

$

104.35

$

106.47

69.3

(3)

3.33

%

17.4

%

(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 September 30, 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 September 30, 2012, the Company had financed its portfolio with approximately $13.9 billion of borrowings under repurchase agreements with a weighted average interest rate of 0.42% and a weighted average maturity of approximately 29.2 days. In addition, the Company had payable for securities purchased of $6.1 billion. The Company's leverage ratio at September 30, 2012 was 7.7 to 1. At September 30, 2012, the Company's liquidity position was approximately $1.8 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 September 30, 2012 (dollars in thousands):

Counterparty

Total
Outstanding
Borrowings

% of
Total

% of Net
Assets
At Risk(1)

Weighted
Average
Maturity in
Days

Bank of America Securities LLC

$

1,153,279

8.3

%

2.5

%

47

Bank of Nova Scotia

651,503

4.7

0.8

43

Barclays Capital, Inc.

1,145,405

8.2

2.3

53

BNP Paribas Securities Corp

660,121

4.7

1.4

16

Cantor Fitzgerald & Co.

210,581

1.5

0.5

11

Citigroup Global Markets, Inc.

475,957

3.4

1.0

21

Credit Suisse Securities (USA) LLC

647,308

4.7

1.1

18

Daiwa Securities America, Inc.

293,674

2.1

0.6

42

Deutsche Bank Securities Inc.

537,262

3.9

1.2

21

Goldman Sachs & Co.

788,524

5.7

1.6

18

Guggenheim Liquidity Services, LLC

245,567

1.8

0.5

21

Industrial and Commercial Bank of China Financial Services LLC

825,251

5.9

1.6

18

ING Financial Markets LLC

394,666

2.8

0.9

14

Jefferies & Company, Inc.

82,559

0.6

0.2

17

KGS Alpha Capital Markets

94,653

0.7

0.2

23

LBBW Securities LLC

188,240

1.4

0.4

51

Mitsubishi UFJ Securities (USA), Inc.

498,179

3.6

1.0

45

Mizuho Securities USA, Inc.

556,893

4.0

1.3

13

Morgan Stanley & Co. Inc.

659,175

4.7

1.4

30

Nomura Securities International, Inc.

628,791

4.5

1.5

21

RBC Capital Markets, LLC

698,620

5.0

1.5

18

South Street Securities LLC

377,416

2.7

1.1

18

The Royal Bank of Scotland PLC

158,729

1.1

0.3

10

UBS Securities LLC

942,641

6.8

2.1

54

Wells Fargo Securities, LLC

996,983

7.2

1.4

18

$

13,911,977

100.0

%

28.4

%

___

(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. As of September 30, 2012, the Company had entered into 20 interest rate swap contracts with an aggregate notional amount of $7.0 billion, a weighted average fixed rate of 1.298%, and a weighted average expiration of 2.7 years. At September 30, 2012, the Company had entered into ten interest rate cap contracts with a notional amount of $3.4 billion, a weighted average cap rate of 1.622%, and a weighted average expiration of 6.8 years. These interest rate swap and cap contracts are described below (dollars in thousands):

Interest Rate Swaps

Expiration

Fixed

Floating

Notional

Fair

Counterparty

Date

Pay Rate

Receive Rate(1)

Amount

Value

The Royal Bank of Scotland plc

5/26/2013

1.600

%

0.427

%

$

100,000

$

(822

)

The Royal Bank of Scotland plc

6/30/2013

1.378

%

0.362

%

300,000

(2,315

)

The Royal Bank of Scotland plc

7/15/2013

1.365

%

0.455

%

300,000

(2,425

)

Goldman Sachs

12/15/2013

1.309

%

0.389

%

400,000

(4,670

)

Goldman Sachs

12/16/2013

1.264

%

0.389

%

400,000

(4,452

)

The Royal Bank of Scotland plc

12/16/2013

1.281

%

0.389

%

500,000

(5,625

)

Deutsche Bank Group

12/17/2013

1.323

%

0.389

%

400,000

(4,717

)

The Royal Bank of Scotland plc

7/1/2014

1.720

%

0.461

%

100,000

(2,377

)

Nomura Global Financial Products, Inc.

7/16/2014

1.733

%

0.455

%

250,000

(6,137

)

Deutsche Bank Group

8/16/2014

1.353

%

0.437

%

200,000

(3,711

)

Goldman Sachs

9/23/2014

1.312

%