CYS Investments, Inc. Announces Third Quarter 2013 Financial Results

CYS Investments, Inc. Announces Third 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 September 30, 2013.

Third Quarter 2013 Summary Results

  • September 30, 2013 net asset value per common share of $10.10 after declaring a $0.34 dividend per common share on September 9, 2013.
  • September 30, 2013 leverage ratio of 6.5 to 1.
  • GAAP net income available to common shares of $25.4 million, or $0.14 per diluted common share.
  • Core Earnings plus Drop Income of $61.2 million, or $0.36 per diluted common share ($0.23 Core Earnings and $0.13 Drop Income).
  • Operating expenses of 1.13% of average net assets.
  • Interest rate spread net of hedge including drop income of 1.66%.
  • Weighted average amortized cost of Agency RMBS of $102.57.
  • The Company repurchased 5.9 million shares under its share repurchase program, with a weighted average purchase price of $7.77, for approximately $46.1 million in the aggregate.

Leverage & Liquidity

The Company continued to reduce its leverage during the quarter to minimize the adverse impacts of expected volatility in interest rates, ending the third quarter of 2013 with a leverage ratio of 6.5 to 1, compared to 7.5 to 1 at June 30, 2013.

At September 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 65.9% of net assets, compared to $1.3 billion, or 65.4% of net assets at June 30, 2013.

Portfolio

During the third quarter of 2013, the Company reduced its Agency RMBS portfolio from $17.2 billion at June 30, 2013 to $14.4 billion at September 30, 2013. The following table details the Company's portfolio at June 30, 2013 and September 30, 2013.

 September 30, 2013  June 30, 2013 
Fair Value (in billions) % of TotalFair Value (in billions) % of Total
15 Year Fixed Rate$6.243%$5.834%
20 Year Fixed Rate0.11%1.06%
30 Year Fixed Rate6.042%7.845%
Hybrid ARMs2.1 14%2.6 15%
Total$14.4 100%$17.2 100%
 

At September 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 68.1% 2013 production; 19.1% 2012 production; 9.8% 2011 production; 2.8% 2010 production; and 0.2% 2009 production. Additional information about our Agency RMBS portfolio at September 30, 2013 is summarized below:

 Face Value Fair Value Weighted Average
Asset Type(in thousands)Cost/Face Fair Value/Face Yield(1) Coupon CPR(2)
15 Year Fixed Rate$5,995,535$6,240,505$102.43$104.092.57%3.14%15.1%
20 Year Fixed Rate89,61596,644103.08107.843.48%4.50%31.3%
30 Year Fixed Rate5,813,5295,985,741102.33102.963.25%3.70%4.1%
Hybrid ARMs (3)2,088,601 2,126,417 103.59 101.81 1.65%2.57%19.1%
Total/Weighted Average$13,987,280 $14,449,307 $102.57 $103.30 2.72%3.30%12.4%

__________

(1) This is a forward yield and is calculated based on the cost basis of the security at September 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 September 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 68.9 at September 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.

Third Quarter 2013 Results

The Company had net income available to common shares of $25.4 million during the third quarter of 2013, or $0.14 per diluted common share, compared to net loss of $402.3 million, or $2.32 per diluted common share, in the second quarter of 2013. During the third quarter of 2013, the Company had Core Earnings plus Drop Income of $61.2 million, or $0.36 per diluted common share (Core Earnings of $39.1 million, or $0.23 per diluted common share, and Drop Income of $22.1 million, or $0.13 per diluted common share), compared to $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), in the second quarter of 2013.

The Company's interest rate spread net of hedge including drop income was 1.66% for the third quarter of 2013, compared to 1.36% for the second quarter of 2013.

The Company had a net gain from investments of $15.8 million, which included $407.7 million of net realized loss for the third quarter of 2013, compared to a net loss from investments of $656.3 million, which included $211.4 million of net realized loss, for the second quarter of 2013.

The Company's net asset value per common share on September 30, 2013 was $10.10, after declaring a $0.34 dividend per common share on September 9, 2013, compared with $10.20 at June 30, 2013.

The Company's operating expenses were $5.6 million, or 1.13% of average net assets, for the third quarter of 2013, compared to $5.7 million, or 0.98% of average net assets, for the second 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 MetricsSeptember 30, 2013 June 30, 2013
Average settled Agency RMBS (1)$14,143,340$15,974,500
Average total Agency RMBS (2)$16,135,672$19,944,791
Average repurchase agreements (3)$12,180,713$13,871,404
Average Agency RMBS liabilities (4)$14,173,045$17,841,695
Average net assets (5)$1,977,424$2,321,128
Average common shares outstanding (6)170,351174,145
Leverage ratio (at period end) (7)6.5:17.5:1
 
Key Performance Metrics*
Average yield on settled Agency RMBS (8)2.42%2.03%
Average yield on total Agency RMBS including drop income (9)2.67%2.27%
Average cost of funds and hedge (10)1.17%1.17%
Adjusted average cost of funds and hedge (11)1.01%0.91%
Interest rate spread net of hedge (12)1.25%0.86%
Interest rate spread net of hedge including drop income (13)1.66%1.36%
Operating expense ratio (14)1.13%0.98%

__________

(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 adding the average 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 September 30, 2013, the Company had financed its portfolio with approximately $11.7 billion of borrowings under repurchase agreements with a weighted average interest rate of 0.39% and a weighted average maturity of approximately 44.0 days. In addition, the Company had payable for securities purchased net of receivable for securities sold of $0.9 billion. This compared to $13.8 billion of borrowings under repurchase agreements and $1.5 billion of payable for securities purchased net of receivable for securities sold at June 30, 2013. During the third 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 September 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$676,8555.8%1.9%45
Bank of Nova Scotia643,7855.51.043
Barclays Capital, Inc.735,5456.31.815
BNP Paribas Securities Corp747,0856.42.048
Cantor Fitzgerald & Co.69,0890.60.218
Citigroup Global Markets, Inc.523,7144.51.580
Credit Suisse Securities (USA) LLC547,8064.81.810
Daiwa Securities America, Inc.288,1082.50.8127
Goldman Sachs & Co.621,6305.31.712
Guggenheim Liquidity Services, LLC376,0343.21.170
Industrial and Commercial Bank of China Financial Services LLC673,2945.71.751
ING Financial Markets LLC696,1665.92.038
J.P. Morgan Securities LLC321,3632.70.965
KGS Alpha Capital Markets115,1881.00.424
LBBW Securities LLC134,1021.10.524
Mitsubishi UFJ Securities (USA), Inc.578,9664.91.661
Mizuho Securities USA, Inc.528,9964.51.515
Morgan Stanley & Co. Inc.680,8345.81.858
Nomura Securities International, Inc.379,9423.21.094
RBC Capital Markets, LLC614,3795.21.849
The Royal Bank of Scotland PLC183,8921.60.69
South Street Securities LLC345,9882.91.349
UBS Securities LLC592,1195.01.654
Wells Fargo Securities, LLC660,191 5.6 1.9 9
$11,735,071 100.0%32.4%

___

(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 the financing of its Agency RMBS portfolio. As of September 30, 2013, the Company had entered into interest rate swap contracts with an aggregate notional amount of $7.1 billion, a weighted average fixed rate of 1.22%, and a weighted average expiration of 3.28 years. At September 30, 2013, the Company had entered into interest rate cap contracts with a notional amount of $3.9 billion, a weighted average cap rate of 1.40%, and a weighted average expiration of 5.61 years. In conjunction with reducing the leverage during the third quarter of 2013, the Company reduced the notional hedge balance outstanding at September 30, 2013 by $2.0 billion compared to June 30, 2013. All of the hedges terminated during the third quarter had a maturity of less than one year. The Company's interest rate swap and cap contracts outstanding at September 30, 2013 are described below (dollars in thousands):

Interest Rate Swaps Weighted Average Notional Fair
Expiration YearFixed Pay RateAmountValue
20141.41%$1,290,000$(12,720)
20152.15%500,000(12,309)
20161.71%550,000(14,969)
20170.91%2,750,00021,409
20181.16%2,000,000 20,469 
Total1.22%$7,090,000 $1,880 
 
Interest Rate CapsWeighted AverageNotionalFair
Expiration YearCap RateAmountValue
20151.40%$500,000$561
20191.56%1,700,00085,124
20201.25%1,700,000 130,307 
Total1.40%$3,900,000 $215,992 
 

Drop Income

Drop income is a component of our net gain (loss) from investments on our statement of operations, and is therefore excluded from Core Earnings. Drop income is the difference between the spot price and the forward settlement price for the same security on trade date. This difference is also the economic equivalent of the assumed net interest margin (yield minus financing costs) of the bond from trade date to settlement date. The Company derives drop income through utilization of forward settling transactions.

The Company had drop income of $22.1 million, or $0.13 per diluted common share during the third quarter of 2013, compared to $32.3 million, or $0.19 per diluted common share, in the second quarter of 2013. The decrease in drop income reflects the overall reduction in the portfolio and the shift to more settled bonds relative to forward settling transactions.

During the third quarter of 2013, the Federal Reserve ("the Fed"), under its quantitative easing program, purchased approximately $201.0 billion of Agency RMBS, creating a shortage of physical securities, and leading to higher current month Agency RMBS prices. Higher current month prices relative to forward month prices will increase drop income, or net interest margin available for forward settling transactions. For example, as of October 4, 2013, this shortage increased the net interest margin on forward transactions by approximately 41 basis points (annualized) on Agency RMBS backed by 30 year Fannie Mae 3.5% mortgages when compared to settling the same security in the current month.

Prepayments

The portfolio recorded $489.9 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 9.8% and net amortization of premium of $22.6 million for the third quarter of 2013. This compared to $689.8 million in scheduled and unscheduled principal repayments and prepayments, which equated to a CPR of approximately 12.2% and net amortization of premium of $35.7 million for the second quarter of 2013.

The CPR of the Company's Agency RMBS portfolio was approximately 5.5% for the month of October 2013.

Dividend

The Company declared a common dividend of $0.34 per share with respect to the third quarter of 2013, unchanged from the second quarter of 2013. Using the closing share price of $8.13 on September 30, 2013, the third quarter dividend equates to an annualized dividend yield of 16.7%.

Share Repurchase Program

In November 2012, the Company's board of directors authorized the repurchase of shares of common stock having an aggregate value of up to $250 million. During the third quarter of 2013, the Company repurchased 5.9 million shares with a weighted average purchase price of $7.77, or approximately $46.1 million in the aggregate. For the nine months ended September 30, 2013, the Company repurchased 8.4 million shares with a weighted average purchase price of $8.62, or approximately $72.4 million in the aggregate. These purchases were accretive to the Company's net asset value at the time the shares were repurchased.

Conference Call

The Company will host a conference call at 9:00 AM Eastern Time on Thursday, October 17, 2013, to discuss its financial results for the quarter ended September 30, 2013. To participate in the call by telephone, please dial 888.895.5271 at least 10 minutes prior to the start time and reference the conference passcode 35845088. International callers should dial 847.619.6547 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 http://www.cysinv.com. To listen to the live webcast, please visit http://www.cysinv.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software.

A dial-in replay will be available on Thursday, October 17, 2013, at approximately 12:00 PM Eastern Time. To access this replay, please dial 888.843.7419 and enter the conference ID number 35845088#. International callers should dial 630.652.3042 and enter the same conference ID number. A replay of the conference call will also be archived on the Company's website at

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