CYS Investments, Inc. Announces Second Quarter 2013 Financial Results

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CYS Investments, Inc. Announces Second Quarter 2013 Financial Results

NEW YORK--(BUSINESS WIRE)-- CYS Investments, Inc. (NYS: CYS) ("CYS" or the "Company") today announced financial results for the quarter ended June 30, 2013.

Second Quarter 2013 Summary Results

  • June 30, 2013 net asset value per common share of $10.20 after declaring a $0.34 dividend per common share on June 10, 2013.
  • June 30, 2013 leverage ratio of 7.5 to 1.
  • GAAP net loss available to common shares of $402.3 million, or $2.32 per diluted common share. The main contributors were:
    • Net realized loss from investments of $211.4 million.
    • Net unrealized depreciation on investments of $444.9 million.
    • Net unrealized appreciation on swap and cap contracts of $215.5 million.
  • Core Earnings plus Drop Income of $63.4 million, or $0.37 per diluted common share ($0.18 Core Earnings and $0.19 Drop Income).
  • Operating expenses of 0.98% of average net assets.
  • Interest rate spread net of hedge including drop income of 1.36%.
  • Weighted average amortized cost of Agency RMBS of $104.32.

Second Quarter 2013 Agency RMBS Market Summary

In the second quarter of 2013, Agency RMBS markets reacted to a series of communications made by the U.S. Federal Reserve (the "Fed") regarding the timing of tapering its bond purchases known as "quantitative easing" or "QE3". As the perceived likelihood of QE3 tapering increased, Agency RMBS markets reacted, resulting in markedly lower prices. The following table illustrates the recent volatility of Agency RMBS prices and yields:

    

Fannie Mae 30 Year 3.5%

DatePress Release

Price Day Prior
to Release

  

Price Day of
Release

  Change  

Yield Day of
Release

May 22, 2013Minutes of the Federal Open Market Committee ("FOMC")105.359104.672(0.687)2.65%
May 28, 2013

Minutes of the Fed Board's discount rate meetings

104.578103.516(1.062)2.85%
June 19, 2013The Fed issues FOMC statement103.328101.984(1.344)3.04%
 

During this time, rates on U.S. Treasuries and swaps also increased however, not in the same order of magnitude as Agency RMBS yields. This caused Agency RMBS prices to decline considerably more than both U.S. Treasuries and interest rate swaps, creating a dislocation between the value of our assets and hedges. For example, from May 22, 2013 to June 30, 2013, the yield on a Fannie Mae 30 Year 3.5% increased 61 basis points to 3.14%, while the rate on a 4 year interest rate swap increased only 47 basis points to 1.20%.

Liquidity

At June 30, 2013, the Company's liquidity position, consisting of unpledged Agency RMBS, U.S. Treasuries and cash and cash equivalents, was approximately $1.3 billion, or 65.4% of net assets, compared to $1.5 billion, or 63.9% of net assets at March 31, 2013. Despite Agency RMBS price declines during the second quarter, the Company maintained liquidity as a percentage of net assets above 50%. To date, the Company has maintained sufficient liquidity to meet all margin calls.

Leverage

While Agency RMBS prices declined during the second quarter of 2013, the Company maintained its leverage discipline, ending the second quarter of 2013 with a leverage ratio of 7.5 to 1, compared to 7.8 to 1 at March 31, 2013.

Portfolio

During the second quarter of 2013, the Company reduced its Agency RMBS portfolio from $20.1 billion at March 31, 2013 to $17.2 billion at June 30, 2013. The following table details the Company's portfolio at June 30, 2013 and March 31, 2013.

  June 30, 2013  March 31, 2013
Fair Value (in billions) %Fair Value (in billions) %
15 Year Fixed Rate$5.834%$9.246%
20 Year Fixed Rate1.06%1.16%
30 Year Fixed Rate7.845%6.331%
Hybrid ARMs2.6 15%3.5 17%
Total$17.2 100%$20.1 100%
 

At June 30, 2013, the Company's Agency RMBS portfolio was backed by fixed-rate mortgages and hybrid adjustable-rate mortgages ("Hybrid ARMs") with 0 to 120 months to reset. The portfolio is comprised of 41.5% 2013 production; 46.1% 2012 production; 9.6% 2011 production; 2.6% 2010 production; and 0.2% 2009 production. Additional information about our Agency RMBS portfolio at June 30, 2013 is summarized below:

  Par Value  Fair Value  

Weighted Average

Asset Type

(in thousands)

Cost/Par  Fair Value/Par  Yield(1)  Coupon  CPR(2)
15 Year Fixed Rate$5,582,309$5,773,741$104.51$103.432.20%3.17%15.2%
20 Year Fixed Rate1,028,0571,044,339104.91101.582.29%3.15%7.6%
30 Year Fixed Rate7,683,2607,837,908104.30102.012.96%3.59%7.8%
Hybrid ARMs (3)2,511,2182,555,271103.74101.751.80%2.59%17.4%
Total/Weighted Average$16,804,844$17,211,259$104.32$102.422.49%3.27%13.5%
 

__________

(1) This is a forward yield and is calculated based on the cost basis of the security at June 30, 2013.

(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 June 30, 2013. Securities with no prepayment history are excluded from this calculation.

(3) The weighted average months to reset of our Hybrid ARM portfolio was 74.8 at June 30, 2013. 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.

Second Quarter 2013 Results

The Company had net loss available to common shares of $402.3 million during the second quarter of 2013, or $2.32 per diluted common share, compared to net loss of $17.7 million, or $0.10 per diluted common share, in the first quarter of 2013. During the second quarter of 2013, the Company had Core Earnings plus Drop Income of $63.4 million, or $0.37 per diluted common share (Core Earnings of $31.1 million, or $0.18 per diluted common share, and Drop Income of $32.3 million, or $0.19 per diluted common share), compared to $56.4 million, or $0.32 per diluted common share (Core Earnings of $29.1 million, or $0.17 per diluted common share, and Drop Income of $27.3 million, or $0.15 per diluted common share), in the first quarter of 2013.

The Company's interest rate spread net of hedge including drop income was 1.36% for the second quarter of 2013, compared to 1.16% for the first quarter of 2013.

The Company had a net realized loss on investments of $211.4 million for the second quarter of 2013, compared to a gain of $46.7 million for the first quarter of 2013.

The Company's net asset value per common share on June 30, 2013 was $10.20, after declaring a $0.34 dividend per common share on June 10, 2013, compared with $12.87 at March 31, 2013.

The Company's operating expenses were $5.7 million, or 0.98% of average net assets, for the second quarter of 2013, compared to $5.6 million, or 0.94% of average net assets, for the first quarter of 2013. Operating expenses were stable during the quarter; however, the increase as a percentage of average net assets was a result of lower average net assets.

(dollars in thousands)  

Three Months Ended

Key Balance Sheet MetricsJune 30, 2013  March 31, 2013
Average settled Agency RMBS (1)$15,974,500$16,066,672
Average total Agency RMBS (2)$19,944,791$20,200,479
Average repurchase agreements (3)$13,871,404$14,107,740
Average Agency RMBS liabilities (4)$17,841,695$18,241,547
Average net assets (5)$2,321,128$2,357,333
Average common shares outstanding (6)174,145174,864
Leverage ratio (at period end) (7)7.5:17.8:1
 
Key Performance Metrics*
Average yield on settled Agency RMBS (8)2.03%1.80%
Average yield on total Agency RMBS including drop income (9)2.27%1.97%
Average cost of funds and hedge (10)1.17%1.05%
Adjusted average cost of funds and hedge (11)0.91%0.81%
Interest rate spread net of hedge (12)0.86%0.75%
Interest rate spread net of hedge including drop income (13)1.36%1.16%
Operating expense ratio (14)0.98%0.94%
 

__________

(1) The average settled Agency RMBS is calculated by averaging the month end cost basis of settled Agency RMBS during the period.

(2) The average total Agency RMBS is calculated by averaging the month end cost basis of total Agency RMBS during the period.

(3) The average repurchase agreements are calculated by averaging the month end repurchase agreements balance during the period.

(4) The average Agency RMBS liabilities are calculated by averaging the month end repurchase agreements balance plus average unsettled Agency RMBS during the period.

(5) The average net assets are calculated by averaging the month end net assets during the period.

(6) The average common shares outstanding are calculated by averaging the daily common shares outstanding during the period.

(7) The 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.

(8) The average yield on settled Agency RMBS for the period is calculated by dividing interest income from Agency RMBS by average settled Agency RMBS.

(9) The average yield on total Agency RMBS including drop income for the period is calculated by dividing interest income from Agency RMBS plus drop income by average total Agency RMBS.

(10) The 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.

(11) The adjusted 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 Agency RMBS liabilities.

(12) The interest rate spread net of hedge for the period is calculated by subtracting average cost of funds and hedge from average yield on settled Agency RMBS.

(13) The interest rate spread net of hedge including drop income for the period is calculated by subtracting adjusted average cost of funds and hedge from average yield on total Agency RMBS including drop income.

(14) The operating expense ratio for the period is calculated by dividing operating expenses by average net assets.

* All percentages are annualized.

Financing

At June 30, 2013, the Company had financed its portfolio with approximately $13.8 billion of borrowings under repurchase agreements with a weighted average interest rate of 0.39% and a weighted average maturity of approximately 41.9 days. In addition, the Company had payable for securities purchased of $6.1 billion. During the second quarter of 2013, the Company did not experience material changes in the availability of repurchase agreement borrowings or to haircuts on the Agency RMBS that the Company uses as collateral for such borrowings. Below is a list of outstanding borrowings under repurchase agreements at June 30, 2013 (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$894,0946.5%2.3%27
Barclays Capital, Inc.938,7566.82.339
BNP Paribas Securities Corp957,7226.92.536
Cantor Fitzgerald & Co.75,6960.50.215
Citigroup Global Markets, Inc.522,4273.81.483
Credit Suisse Securities (USA) LLC642,9404.71.743
CRT Capital Group LLC45,0460.30.115
Daiwa Securities America, Inc.308,8742.20.852
Deutsche Bank Securities, Inc.378,0372.71.118
Goldman Sachs & Co.707,3485.11.744
Guggenheim Liquidity Services, LLC303,9022.20.828
Industrial and Commercial Bank of China Financial Services LLC822,8026.02.230
ING Financial Markets LLC712,6335.22.042
Jefferies & Company, Inc.65,5410.50.243
J.P. Morgan Securities LLC258,2331.90.515
KGS Alpha Capital Markets119,0650.90.486
LBBW Securities LLC134,8081.00.424
Mitsubishi UFJ Securities (USA), Inc.582,8194.21.651
Mizuho Securities USA, Inc.528,1773.81.448
Morgan Stanley & Co. Inc.732,7245.31.951
Nomura Securities International, Inc.536,9263.91.480
RBC Capital Markets, LLC803,7725.82.354
The Royal Bank of Scotland PLC189,6971.40.510
Bank of Nova Scotia654,3504.71.144
South Street Securities LLC370,5652.71.340
UBS Securities LLC648,2744.71.861
Wells Fargo Securities, LLC874,091 6.3 1.4 12
$13,809,319 100.0%35.3%
 

___

(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 the financing of its Agency RMBS portfolio. As of June 30, 2013, the Company had entered into interest rate swap contracts with an aggregate notional amount of $8.6 billion, a weighted average fixed rate of 1.215%, and a weighted average expiration of 2.71 years. At June 30, 2013, the Company had entered into interest rate cap contracts with a notional amount of $4.4 billion, a weighted average cap rate of 1.443%, and a weighted average expiration of 6.23 years. These interest rate swap and cap contracts are described below (dollars in thousands):

Interest Rate Swaps  Weighted Average  Notional  Fair
Expiration YearFixed Pay RateAmountValue
2013 Read Full Story

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