CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "our", or the
"Company") today announced financial results for the quarter ended
September 30, 2016 (the "Third Quarter").
Third Quarter 2016 Summary Results
- September 30, 2016 book value per
common share of $9.79, after declaring a $0.25 dividend per common
share on September 8, 2016, up from $9.55 at June 30,
2016.
- GAAP net income available to common
stockholders of $73.8 million, or $0.49 per diluted common
share.
- Core Earnings plus Drop Income of $39.1
million ($28.6 million Core Earnings and $10.5 million Drop
Income), or $0.26 per diluted common share ($0.19 Core Earnings and
$0.07 Drop Income).
- Interest rate spread, net of hedge,
including Drop Income, of 1.37%.
- Operating expense ratio of 1.42%.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $103.72.
- Leverage ratio of 6.96:1 at
September 30, 2016.
- Constant Prepayment Rate ("CPR") of
14.0%.
- Total stockholder return on common
equity of 5.13%.
Market Commentary
In the third quarter of 2016 (the "Third Quarter"), both
long-term and short-term interest rates moved somewhat higher,
reversing the trends of the first half of 2016 (the "First Half").
Short-term borrowing rates and longer-term rates moved higher as
the markets anticipated a Federal Reserve (the "Fed") rate hike in
the fourth quarter of 2016. Expectations continue to be for the
pace of these hikes to be very slow, which is reflected by the
modest rise in longer term interest rates experienced during the
Third Quarter. However, despite the Fed's desire to normalize
short-term interest rates, the emerging economic data continues to
be below the Fed's expectations, which has caused the bond market
to continue to push out its expectations for a rate hike into late
2016. The Federal Open Market Committee ("FOMC") decided to leave
the target federal funds rate (the "Fed Funds Target Rate")
unchanged in their July and September meetings. Much of the concern
about slow growth stems from sluggish economic conditions in Europe
and China. Domestically, payroll growth appears steady, albeit at a
moderate rate, and inflation continues to run below the Fed's two
percent target. This data serves to reduce any imminent pressure on
the Fed to continue its progress towards normalizing the Fed Funds
Target Rate. As prospects for sustained economic growth continued
to diminish during the Third Quarter, the bond market further
pushed down its expectations for the terminal level of the Fed
Funds Target Rate. Current FOMC guidance provides that the pace of
rate increases is likely to be slower with only one rate hike in
2016, not the four 2016 rate hikes anticipated in December 2015,
and a terminal Fed Funds Target Rate of less than 3% over the very
long run (2020 and beyond). While the FOMC’s projections continue
to move lower, they still remain substantially higher than bond
market expectations.
Reflecting the bond market’s recognition of the Fed’s commitment
to normalizing rates, despite the diminished prospects for economic
growth, the bond market backed up and the yield on the 10-year U.S.
Treasury rose to 1.59% at September 30, 2016, up 12 basis points
("bps") during the Third Quarter. Interest rate swaps, our primary
hedging instruments, rose by even more, with the 5-year swap rates
rising by 20 bps during the Third Quarter. While yields on U.S.
Treasuries and interest rate swaps rose during the quarter, the
prices of our Agency RMBS varied, with some increasing and others
decreasing during the Third Quarter. In the aggregate, we
recognized a net realized and unrealized loss on our investments of
approximately $(18.4) million during the Third Quarter, offset by a
$63.6 million net realized and unrealized gain on our interest rate
hedges, resulting in an increase in book value.
While prepayments picked up in the Third Quarter, the wave of
refinancing activity appears short-lived. CYS's portfolio prepaid
at a weighted-average rate of 14.0% in the Third Quarter. With the
rise in yields in the Third Quarter and the onset of slower housing
turnover during the winter months, in addition to lower day counts,
we expect that prepayments will fall over the next several
months.
As of September 30, 2016, we had substantial available liquidity
of $1.24 billion, or 70.3% of our equity. At September 30,
2016, leverage, on a debt to equity basis, including
to-be-announced ("TBA") securities accounted for as derivatives
("TBA Derivatives"), was stable at 6.96:1 compared to 6.91:1 at
June 30, 2016. At the beginning of the first quarter of 2016 (the
"First Quarter"), our net duration gap was 0.74 years; net duration
gap declined to 0.30 years at March 31, 2016; it was virtually
unchanged at 0.35 years on June 30, 2016, and was 0.50 years at
September 30, 2016.
Third Quarter 2016 Results
The Company’s book value per common share on September 30,
2016 was $9.79, compared to $9.55 at June 30, 2016, after
declaring a $0.25 dividend per common share on September 8, 2016.
The book value was positively impacted by an increase in the value
of the Company's interest rate swaps and caps during the Third
Quarter, which was partially offset by a net realized and
unrealized loss in the value of our investments.
The Company generated net income available to common
stockholders of $73.8 million in the Third Quarter, or $0.49 per
diluted common share, compared to $51.0 million, or $0.34 per
diluted common share, in the second quarter of 2016 (the "Second
Quarter"), the key components of which are explained below.
In the Third Quarter, the Company generated Core Earnings
(defined below) plus Drop Income (defined below) of $39.1 million,
or $0.26 per diluted common share, comprised of Core Earnings of
$28.6 million, or $0.19 per diluted common share, and Drop Income
of $10.5 million, or $0.07 per diluted common share. This compares
to Core Earnings plus Drop Income of $38.7 million, or $0.26 per
diluted common share, comprised of Core Earnings of $30.7 million,
or $0.20 per diluted common share, and Drop Income of $8.0 million,
or $0.06 per diluted common share in the Second Quarter. Core
Earnings decreased in the Third Quarter from the Second Quarter
primarily as a result of a $5.2 million decrease in total interest
income. The decrease in total interest income largely resulted from
an increase in prepayment speeds, a decline in average settled Debt
Securities and portfolio repositioning toward the end of the Second
Quarter when we recycled out of a portion of 30-Year 4.0% and 3.0%,
and 15-Year 3.0% Agency RMBS securities into 15-Year 2.5% Agency
RMBS and U.S. Treasuries in anticipation of an increase in
prepayments. For these reasons, despite an increase in prepayment
speeds during the Third Quarter, we recognized approximately $0.5
million less amortization expense compared to the Second Quarter.
The decrease in Core Earnings in the Third Quarter was offset by
(i) a $1.2 million decrease in interest expense on borrowings due
to a decrease in the average cost of funds and average borrowings
under repurchase agreements ("repo borrowings") and FHLBC Advances,
(ii) a $2.3 million decrease in swap and cap interest expense, and
(iii) a $0.5 million decrease in premium amortization. Drop Income
increased by $2.5 million in the Third Quarter driven by an
increase in activity resulting from the relative attractiveness of
the TBA securities market and a higher volume of forward settling
transactions from which we derive Drop Income.
In the Third Quarter, total interest income decreased to $69.7
million from $74.9 million in the Second Quarter as noted above,
causing the average yield on our settled Debt Securities to
decrease to 2.38% in the Third Quarter from 2.52% in the Second
Quarter. The Third Quarter weighted-average experienced CPR
increased to 14.0% from 12.9% in the Second Quarter, while
amortization expense decreased $0.5 million to $22.1 million from
$22.6 million in the Second Quarter for the reasons described
above, which include a decrease in the average settled Debt
Securities to $11.73 billion for the Third Quarter, compared to
$11.89 billion during the Second Quarter.
The Company's net interest income of $52.2 million in the Third
Quarter, down approximately $4.0 million from $56.2 million in the
Second Quarter, is largely due to the decrease in total interest
income described above. The decrease in total interest income was
partially offset by a decrease in interest expense on our combined
repo borrowings and Federal Home Loan Bank of Cincinnati ("FHLBC")
advances ("FHLBC Advances", and collectively with repo borrowings,
"Total Outstanding Borrowings") as a direct result of a decline in
the average cost of funds to 0.68% in the Third Quarter, as
compared to 0.72% in the Second Quarter, and due to lower average
Total Outstanding Borrowings.
Economic net interest income and expense are non-GAAP measures.
The following table presents a reconciliation of GAAP net interest
income and total interest expense to economic net interest income
and economic net interest expense, respectively, for each
respective period.
(dollars in thousands)
Three Months Ended
September 30, 2016 June 30, 2016
March 31, 2016 Net interest income $ 52,182 $ 56,170 $
63,506 Swap and cap interest expense 12,493 14,779
18,398 Economic net interest income $ 39,689 $ 41,391
$ 45,108 Total interest expense $ 17,479 $ 18,687 $ 17,945
Swap and cap interest expense 12,493 14,779 18,398
Economic interest expense $ 29,972 $ 33,466 $ 36,343
The Company's economic net interest income, which takes into
account swap and cap interest expense, as well as interest expense
on repo borrowings and FHLBC Advances, was $39.7 million in the
Third Quarter, a decline of approximately $1.7 million from $41.4
million in the Second Quarter. The decrease in the economic net
interest income was primarily due to lower net interest income, as
explained above, which was partially offset by a decrease in swap
and cap interest expense. A combination of the lower
weighted-average notional of swaps and caps outstanding of $9.3
billion in the Third Quarter, compared to $9.7 billion in the
Second Quarter, and an increase in the receive rate on resetting
swaps as a direct result of an increase in the London Interbank
Offered Rate ("LIBOR") during the Third Quarter, resulted in a $2.3
million decrease in swap and cap interest expense to $12.5 million
in the Third Quarter, from $14.8 million in the Second Quarter. The
weighted-average receive rate on our interest rate swaps was 0.77%
at September 30, 2016, compared to 0.65% at June 30, 2016.
In the Third Quarter, economic interest expense, comprised of
interest expense on repo borrowings and FHLBC Advances and swap and
cap interest expense, was $30.0 million, compared to $33.5 million
in the Second Quarter. Interest expense on repo borrowings and
FHLBC Advances decreased to $17.5 million in the Third Quarter from
$18.7 million in the Second Quarter due to a 4 bps decrease in the
average cost of funds while swap and cap interest expense decreased
to $12.5 million in the Third Quarter, from $14.8 million in the
Second Quarter, as previously explained. Overall, the adjusted
average cost of funds and hedge declined to 0.99% during
the Third Quarter, compared to 1.14% during the Second
Quarter. The Company’s interest rate spread net of hedge including
Drop Income was slightly higher at 1.37% in
the Third Quarter, compared to 1.36% in the Second
Quarter.
The Company recognized an aggregate net realized and unrealized
loss from investments of $(18.4) million in the Third Quarter,
compared to a net realized and unrealized gain from investments of
$65.3 million in the Second Quarter. The net loss on investments
during the Third Quarter was generally driven by a decrease in the
prices of our Agency RMBS. To illustrate, during the Third Quarter
prices of 15-year 4.0% and 15-year 3.5% Agency RMBS decreased by
$0.53 to $103.20 and by $0.56 to $105.42, respectively. These
decreases were partially offset by an increase in the price of
15-year 2.5% and 15-year 3.0% Agency RMBS. The price of 15-year
2.5% Agency RMBS increased by $0.06 to $103.58 while the price of
15-year 3.0% Agency RMBS increased by $0.12 to $104.98 during the
Third Quarter. During the Second Quarter, prices of 30-year 3.5%
and 15-year 3.5% Agency RMBS increased
by $0.63 to $105.55 and by
$0.31 to $105.98, respectively.
The Company recognized a net realized and unrealized gain on
derivative instruments of $63.6 million for the Third Quarter,
comprised of $51.2 million of net realized and unrealized gain on
swap and cap contracts, and $12.4 million of net realized and
unrealized gain on TBA Derivatives, compared to a net realized and
unrealized loss on derivative instruments of $(44.5) million in the
Second Quarter, comprised of $(51.0) million net realized and
unrealized loss on swap and cap contracts, and a $6.5 million net
realized and unrealized gain on TBA Derivatives. The change was
primarily due to higher interest rates during the Third Quarter,
which caused the value of our hedges to increase, while interest
rates decreased during the Second Quarter, causing the value our
hedges to decrease. To illustrate, 5-year swap rates increased by
20 bps during the Third Quarter, whereas they decreased by 19 bps
during the Second Quarter.
The Company’s operating expense ratio as a percentage of average
stockholders' equity was 1.42% in the Third Quarter, compared to
1.36% in the Second Quarter.
Set forth below are summary financial data for the Third
Quarter, Second Quarter and the First Quarter of 2016:
Summary Financial Data
(dollars in thousands except per share
data)
Three Months Ended Key
Balance Sheet Metrics September 30, 2016 June
30, 2016 March 31, 2016 Average settled Debt
Securities (1) $ 11,725,021 $ 11,887,351 $ 11,905,997 Average total
Debt Securities (2) $ 13,596,739 $ 13,230,800 $ 12,945,855 Average
repurchase agreements and FHLBC Advances (3) $ 10,223,051 $
10,412,784 $ 10,492,636 Average Debt Securities liabilities (4) $
12,094,769 $ 11,756,233 $ 11,532,494 Average stockholders' equity
(5) $ 1,749,543 $ 1,725,879 $ 1,714,728 Average common shares
outstanding (6) 151,414 151,452 151,788 Leverage ratio (at period
end) (7) 6.96:1 6.91:1 6.76:1 Book value per common share (at
period end) (8) $ 9.79 $ 9.55 $ 9.46 Weighted-average amortized
cost of Agency RMBS and U.S. Treasuries (9) $ 103.72 $ 103.42 $
103.76
Key Performance Metrics* Average yield on
settled Debt Securities (10) 2.38 % 2.52 % 2.74 % Average yield on
total Debt Securities including Drop Income (11) 2.36 % 2.50 % 2.71
% Average cost of funds (12) 0.68 % 0.72 % 0.68 % Average cost of
funds and hedge (13) 1.17 % 1.29 % 1.39 % Adjusted average cost of
funds and hedge (14) 0.99 % 1.14 % 1.26 % Interest rate spread net
of hedge (15) 1.21 % 1.23 % 1.35 % Interest rate spread net of
hedge including Drop Income (16) 1.37 % 1.36 % 1.45 % Operating
expense ratio (17) 1.42 % 1.36 % 1.48 % Total stockholder return on
common equity (18) 5.13 % 3.59 % 3.85 % Constant prepayment rate
(weighted-average experienced 1-month) (19) 14.0 % 12.9 % 7.6 %
__________
(1) The average settled Debt Securities is calculated by
averaging the month end cost basis of
settled Debt Securities during the period.
(2) The average total Debt Securities is calculated by
averaging the month end cost basis of
total Debt Securities and all TBA contracts during the period.
(3) The average repurchase agreements and FHLBC Advances are
calculated by averaging the month end
repurchase agreements and FHLBC Advances balances during the
period.
(4) The average Debt Securities liabilities are calculated by
adding the average month end
repurchase agreements and FHLBC Advances balances plus average
unsettled Debt Securities (inclusive of TBA Derivatives) during the
period.
(5) The average stockholders' equity is calculated by
averaging the month end stockholders'
equity 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
and FHLBC Advances balances plus
payable for securities purchased minus
receivable for securities sold plus
gross TBA Derivatives positions (as described below) by (ii)
stockholders' equity.
(8) Book value per common share is calculated by dividing total stockholders' equity less the liquidation value of preferred stock at
period end by common shares outstanding at period end.
(9) The weighted-average amortized cost of Agency RMBS and U.S.
Treasuries is calculated using the weighted-average amortized cost
by security divided by the current
face at period end.
(10) The average yield on settled Debt Securities for the period
is calculated by dividing total
interest income by average settled Debt Securities.
(11) The average yield on total Debt Securities including Drop
Income for the period is calculated by dividing total interest income plus Drop Income by
average total Debt Securities. Drop Income is a component of our
net realized and unrealized gain (loss) on investments and net
realized and unrealized gain (loss) on derivative instruments in
the consolidated statements of operations. 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. We derive Drop Income through
utilization of forward settling transactions.
(12) The average cost of funds for the period is calculated by
dividing repurchase agreement and
FHLBC Advances interest expense by average repurchase agreements
and FHLBC Advances for the period.
(13) The average cost of funds and hedge for the period is
calculated by dividing repurchase
agreement, FHLBC Advances and swap and cap interest expense by
average repurchase agreements and FHLBC Advances.
(14) The adjusted average cost of funds and hedge for the period
is calculated by dividing repurchase
agreement, FHLBC Advances and swap and cap interest expense by
average Debt Securities liabilities.
(15) 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 Debt
Securities.
(16) 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 Debt Securities including Drop
Income.
(17) The operating expense ratio for the period is calculated by
dividing operating expenses by average
stockholders' equity.
(18) The total stockholder return on common equity is calculated
as the change in book value plus
dividend distributions on common stock divided by book value at the
end of the prior period.
(19) CPR represents the weighted-average 1-month CPR of the
Company's Agency RMBS during the period.
* All percentages are annualized except total stockholder return
on common equity.
Portfolio
Effective January 1, 2016, the Company recognized TBAs that do
not qualify for the regular-way scope exception in the Financial
Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 815 - Derivatives and Hedging as derivatives
(which we refer to as "TBA Derivatives"). TBA Derivatives are
accounted for as a series of derivative transactions and are
recorded as either assets or liabilities at fair value in the
consolidated balance sheets with changes in fair value recognized
in the consolidated statements of operations in "Net realized and
unrealized gain (loss) on derivative instruments".
The Company's Debt Securities portfolio, including TBA
Derivatives, at fair value, increased to approximately $14.0
billion at September 30, 2016, from $13.6 billion at
June 30, 2016. During the Third Quarter we continued to reduce
our Agency RMBS 30-Year 4.0% and 15-Year 3.0% holdings while adding
15-Year 2.5% securities to the portfolio in anticipation of an
increase in prepayments.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $2.2 billion and $0.8 billion of TBA
Derivatives at September 30, 2016 and June 30, 2016,
respectively (dollars in thousands):
September 30, 2016 June 30,
2016 Fair Value % of Total Fair
Value % of Total 15-Year Fixed Rate $ 7,572,953
55 % $ 5,989,553 44 % 20-Year Fixed Rate 46,353 — % 49,494 — %
30-Year Fixed Rate 5,993,108 43 % 6,318,345 46 % Hybrid ARMs
323,851 2 % 349,814 3 % U.S. Treasuries 49,891 — % 884,213
7 % Total $ 13,986,156 100 % $ 13,591,419 100
%
Key metrics related to the Company’s Debt Securities portfolio,
inclusive of TBA Derivatives, as of September 30, 2016 are
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 $ 7,252,393 $ 7,572,953 $
102.91 $ 104.42 1.57 % 2.82 % 12.8 % 20-Year Fixed Rate 42,226
46,353 102.70 109.77 1.50 % 4.50 % 19.2 % 30-Year Fixed Rate
5,634,033 5,993,108 104.85 106.37 2.11 % 3.64 % 12.8 % Hybrid ARMs
(3) 311,042 323,851 102.76 104.12 1.67 % 2.90 % 24.4 % U.S.
Treasury Securities 50,000 49,891 99.89 99.78
0.75 % 0.63 % n/a Total $ 13,289,694 $ 13,986,156
$ 103.72 $ 105.24 1.80 % 3.17 % 13.2 %
__________
(1) Represents a forward yield and is calculated based on the
cost basis of the security at September 30, 2016.
(2) Represents CPR for those bonds held at September 30,
2016. CPR is a method of expressing the prepayment rate for a
mortgage pool that assumes a constant fraction of the remaining
principal is prepaid each month. Specifically, the constant
prepayment rate is an annualized version of the experienced prior
three-month prepayment rate. Securities with no prepayment history
are excluded from this calculation.
(3) The weighted-average months to reset of our Hybrid ARM
portfolio was 64.6 at September 30, 2016. 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 Hybrid ARM and will reset thereafter
annually.
In October 2016, the monthly weighted-average experienced CPR of
the Company's Debt Securities declined to 15.0% from 17.1% in
September 2016.
Leverage & Liquidity
Our leverage, which includes TBA Derivatives, was 6.96:1 at the
end of the Third Quarter, compared to 6.91:1 at the end of the
Second Quarter. As of September 30, 2016 and June 30,
2016, the Company financed its portfolio with approximately $9.6
billion and $10.4 billion, respectively, of Total Outstanding
Borrowings and recognized a payable for securities purchased net of
receivable for securities sold of approximately $0.4 billion and
$0.7 billion, respectively.
At September 30, 2016 and June 30, 2016, the Company’s
liquidity position, consisting of unpledged Agency RMBS, U.S.
Treasuries, and cash and cash equivalents, was approximately $1.24
billion, or 70.3%, and $1.15 billion, or 66.6%, of stockholders'
equity, respectively.
Financing
During the Third Quarter, the Company financed its investment
portfolio with average Total Outstanding Borrowings of $10.2
billion, with an average cost of funds of 0.68%, compared to $10.4
billion and 0.72%, respectively, during the Second Quarter. Total
interest expense decreased $1.2 million to $17.5 million in the
Third Quarter, compared to $18.7 million for the Second Quarter,
primarily due to lower average cost of funds and average Total
Outstanding Borrowings during the Third Quarter.
During the Third Quarter, the Company did not experience a
decline in the availability of repo borrowings. At
September 30, 2016 repo borrowings with any individual
counterparty were less than 8% of our Total Outstanding Borrowings.
As of September 30, 2016, we had 49 counterparties available
to finance the Company's operations through repo borrowings. During
the Third Quarter, the Company repaid all of its remaining FHLBC
Advances.
Below is a summary, by region, of our outstanding borrowings at
September 30, 2016 (dollars in thousands):
Counterparty Region Number of
Counterparties Total Outstanding Borrowings
% of Total North America 22 $6,010,967 62.5% Europe 8
2,232,537 23.2% Asia 5 1,377,137 14.3% Total 35 $9,620,641 100.0%
Hedging
The Company utilizes interest rate swap and cap contracts (a
"swap" or "cap", respectively) to manage interest rate risk
associated with the financing of its Debt Securities portfolio. As
of September 30, 2016, the Company held swaps with an
aggregate notional amount of $6.5 billion, a weighted-average fixed
rate of 1.23%, a weighted-average receive rate of 0.77%, a
weighted-average net pay rate of 0.46% and a weighted-average
expiration of 3.3 years. The receive rate on the Company's swaps is
the three-month LIBOR, which resets quarterly and stood at 0.85% at
September 30, 2016, up from 0.65% at June 30, 2016. At
September 30, 2016, the Company held caps with a notional
amount of $2.5 billion, a weighted-average cap rate of 1.28%, and a
weighted-average expiration of 3.3 years.
In the Third Quarter, we terminated a swap with a notional of
$0.5 billion, a weighted-average pay rate of 0.77% and a remaining
weighted-average expiration of 0.9 years. Our weighted-average
fixed pay rate on swaps increased to 1.23% at September 30,
2016, compared to 1.19% at June 30, 2016, while the net pay
rate on swaps decreased to 0.46% at September 30, 2016 from
0.54% at June 30, 2016 due to an increase in LIBOR during the
Third Quarter.
As of June 30, 2016, the Company held swaps with an
aggregate notional amount of $7.0 billion, a weighted-average
fixed rate of 1.19%, a weighted-average receive rate of 0.65%,
a weighted-average net pay rate of 0.54% and a weighted-average
expiration of 3.4 years. At June 30, 2016, the
Company held caps with a notional amount of $2.5 billion, a
weighted-average cap rate of 1.28%, and a weighted-average
expiration of 3.5 years.
Key provisions of the Company's outstanding swaps and caps at
September 30, 2016 are summarized below (dollars in
thousands):
Interest Rate Swaps
Weighted-Average Expiration Year
Fixed Pay Rate Receive Rate Net Pay
(Receive) Rate Notional Amount Fair Value 2017
0.82% 0.83% (0.01)% $ 1,000,000 $ 1,264 2018 1.00% 0.78% 0.22%
1,500,000 (557 ) 2020 1.45% 0.70% 0.75% 1,750,000 (22,083 ) 2021
1.21% 0.80% 0.41% 1,700,000 (3,157 ) 2022 1.98% 0.78% 1.20% 500,000
(20,887 ) Total 1.23% 0.77% 0.46% $ 6,450,000 $
(45,420 )
Interest Rate Caps Weighted-Average
Expiration Year Cap Rate Receive Rate Cap
Rate Notional Amount Fair Value 2019 1.34% n/a
1.34% $ 800,000 $ 2,988 2020 1.25% n/a 1.25% 1,700,000
12,929 Total 1.28% n/a 1.28% $ 2,500,000 $ 15,917
Duration Gap
Our net duration gap increased slightly to 0.50 at
September 30, 2016, from 0.35 at June 30, 2016.
Drop Income
"Drop Income" is a component of our net realized and unrealized
gain (loss) on investments and net realized and unrealized gain
(loss) on derivative instruments in the consolidated statements 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 Agency RMBS on the trade date. This
difference is also the economic equivalent of the assumed net
interest spread (yield less financing costs) of the Agency RMBS
from trade date to settlement date. The Company derives Drop Income
through utilization of forward settling transactions of Agency
RMBS. The Company's Drop Income and average market value of all
TBAs outstanding during the Third Quarter and Second Quarter follow
(dollars in thousands):
September 30, 2016 June 30, 2016
$ Change
Drop Income $ 10,524 $ 7,996 $ 2,528 Average market value of all
TBAs 1,851,353 1,290,798 560,555
Prepayments
The portfolio recognized $518.5 million in principal repayments
and prepayments, experienced a weighted-average CPR of
approximately 14.0% and net amortization expense of $22.1 million
in the Third Quarter, compared to $516.6 million in principal
repayments and prepayments, a weighted-average CPR of approximately
12.9% and net amortization expense of $22.6 million in the Second
Quarter. The increase in CPR in the Third Quarter was principally
due to lower mortgage interest rates persisting during the Second
and Third Quarters, bond seasoning factors and an increase in the
day count compared to the Second Quarter.
Dividend
The Company declared a common dividend of $0.25 per share for
the Third Quarter, unchanged from the Second Quarter. Using the
closing share price of $8.72 on September 30, 2016, the Third
Quarter dividend equates to an annualized dividend yield of
11.5%.
Share Repurchase Program
The Company did not repurchase any shares in the Third Quarter.
In the Second Quarter, we
repurchased 162,548 shares of the Company's common stock
at a weighted-average purchase price of $7.93 per share
for an aggregate of approximately $1.3 million. As of
September 30, 2016, the Company had approximately $155.5
million available under the share repurchase program to repurchase
shares of its common stock.
Conference Call
The Company will host a conference call at 9:00 AM Eastern Time
on Thursday, October 27, 2016, to discuss its financial
results for the Third Quarter. To participate in the call, please
dial (888) 647-8086 at least 10 minutes prior to the start time and
reference the conference passcode 1206064. International callers
should dial (484) 821-5013 and reference the same passcode. The
conference call will be webcast live over the Internet and can be
accessed at the Company’s web site at www.cysinv.com. To listen to
the live webcast, please visit 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 of the call will be available on Thursday,
October 27, 2016, at approximately 12:00 PM Eastern Time
through Thursday, November 10, 2016 at approximately 11:00 AM
Eastern Time. To access this replay, please dial (855) 859-2056 and
enter the conference ID number 1206064. International callers
should dial (404) 537-3406 and enter the same conference ID number.
A replay of the conference call will also be archived on the
Company’s website at www.cysinv.com.
Additional Information
The Company plans to make available a supplemental presentation
("Presentation") for the benefit of its stockholders at the
Company's website, www.cysinv.com, prior to the conference call.
The Presentation will be available on the Webcasts/Presentations
tab of the Investor Relations section of the Company's website.
About CYS Investments, Inc.
CYS Investments, Inc. is a specialty finance company that
primarily invests on a leveraged basis in residential mortgage
pass-through certificates for which the principal and interest
payments are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
The Company refers to these securities as Agency RMBS. CYS
Investments, Inc. has elected to be treated as a real estate
investment trust for federal income tax purposes.
Forward-Looking Statements Disclaimer
This release contains “forward-looking statements” made pursuant
to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including those relating to interest rates and
interest rate volatility, the prices, supply and volatility of
Agency RMBS, earnings, yields, investment environment, hedges,
forward settling transactions, liquidity, prepayments, and the
effect of actions of the U.S. government, including the Fed and the
FOMC on our results. Forward-looking statements typically are
identified by use of the terms such as “believe,” “expect,”
“anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,”
“may” or similar expressions. Forward-looking statements are based
on the Company's beliefs, assumptions and expectations of the
Company's future performance, taking into account all information
currently available to the Company. The Company cannot assure you
that actual results will not vary from the expectations contained
in the forward-looking statements. All of the forward-looking
statements are subject to numerous possible events, factors and
conditions, many of which are beyond the control of the Company and
not all of which are known to the Company, including, without
limitation, market conditions and those described in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2015, which has been filed with the Securities and Exchange
Commission. All forward-looking statements speak only as of the
date on which they are made. New risks and uncertainties arise over
time, and it is not possible to predict those events or how they
may affect us. Except as required by law, the Company is not
obligated to, and does not intend to, update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
CYS INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share
data)
September 30, 2016 June 30, 2016 March 31,
2016 December 31, 2015* (unaudited)
(unaudited) (unaudited)
Assets:
Cash and cash equivalents $ 2,192 $ 13,182 $ 6,262 $ 9,982
Investments in securities, at fair value: Agency mortgage-backed
securities (including pledged assets of $10,117,658, $10,106,787,
$10,868,773 and $11,587,014, respectively) 11,742,018 11,879,933
12,888,430 12,927,996 U.S. Treasury securities (including pledged
assets of $32,429, $884,213, $29,972 and $14,886, respectively)
49,891 884,213 29,972 99,711 Receivable for securities sold and
principal repayments 2,598 1,507 1,586 1,084,844 Receivable for
cash pledged as collateral 63,464 97,309 85,097 21,751 Interest
receivable 33,273 32,460 34,033 34,563 Derivative assets, at fair
value 29,869 24,650 32,701 100,778 Other investments 8,028 31,028
34,028 50,028 Other assets 2,787 1,625 1,219
1,051 Total assets $ 11,934,120 $ 12,965,907 $
13,113,328 $ 14,330,704
Liabilities and
stockholders' equity: Liabilities: Repurchase agreements
$ 9,620,641 $ 9,849,501 $ 9,656,969 $ 8,987,776 FHLBC Advances, at
fair value — 575,000 649,553 2,098,701 Payable for securities
purchased 424,476 652,619 937,163 1,475,974 Payable for cash
received as collateral 10,882 4,826 9,141 18,534 Accrued interest
payable 21,521 20,307 20,020 32,588 Accrued expenses and other
liabilities 6,111 4,857 3,113 4,083 Dividends payable 42,264 42,259
43,809 4,410 Derivative liabilities, at fair value 50,240
95,529 85,461 14,024 Total liabilities $
10,176,135 $ 11,244,898 $ 11,405,229 $
12,636,090
Stockholders' equity: Preferred Stock,
$0.01 par value, 50,000 shares authorized: 7.75% Series A
Cumulative Redeemable Preferred Stock, (3,000 shares issued and
outstanding, respectively, $75,000 in aggregate liquidation
preference) $ 72,369 $ 72,369 $ 72,369 $ 72,369 7.50% Series B
Cumulative Redeemable Preferred Stock, (8,000 shares issued and
outstanding, respectively, $200,000 in aggregate liquidation
preference) 193,531 193,531 193,531 193,531 Common Stock, $0.01 par
value, 500,000 shares authorized (151,415, 151,394, 151,535 and
151,740 shares issued and outstanding, respectively) 1,514 1,514
1,515 1,517 Additional paid in capital 1,943,952 1,942,930
1,943,177 1,946,419 Retained earnings (accumulated deficit)
(453,381 ) (489,335 ) (502,493 ) (519,222 ) Total stockholders'
equity $ 1,757,985 $ 1,721,009 $ 1,708,099 $
1,694,614
Total liabilities and stockholders' equity
$ 11,934,120 $ 12,965,907 $ 13,113,328 $
14,330,704
Book value per common share $ 9.79
$ 9.55 $ 9.46 $ 9.36
__________________
* Derived from audited consolidated financial statements.
CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
(dollars in thousands, except per share
data)
September 30, 2016 June 30, 2016
March 31, 2016 Interest income: Agency RMBS $ 68,602 $
74,176 $ 81,323 Other 1,059 681 128 Total
interest income 69,661 74,857 81,451 Interest
expense: Repurchase agreements 17,265 16,910 15,886 FHLBC Advances
214 1,777 2,059 Total interest expense 17,479
18,687 17,945 Net interest income 52,182
56,170 63,506 Other income (loss): Net
realized gain (loss) on investments 18,155 36,359 1,202 Net
unrealized gain (loss) on investments (36,540 ) 28,915 162,286 Net
unrealized gain (loss) on FHLBC Advances — (448 ) (851 ) Other
income 308 387 463 Net realized and unrealized
gain (loss) on investments, FHLBC Advances and other income (18,077
) 65,213 163,100 Swap and cap interest expense
(12,493 ) (14,779 ) (18,398 ) Net realized and unrealized gain
(loss) on derivative instruments 63,625 (44,535 ) (140,524 )
Net gain (loss) on derivative instruments 51,132 (59,314 )
(158,922 ) Total other income (loss) 33,055 5,899
4,178 Expenses: Compensation and benefits 3,619 3,565 3,865
General, administrative and other 2,608 2,294 2,488
Total expenses
6,227 5,859 6,353 Net income (loss) $ 79,010
$ 56,210 $ 61,331 Dividends on preferred stock
(5,203 ) (5,203 ) (5,203 ) Net income (loss) available to common
stockholders $ 73,807 $ 51,007 $ 56,128 Net
income (loss) per common share basic & diluted $ 0.49 $
0.34 $ 0.37
Core Earnings
"Core Earnings" represents a non-GAAP financial measure and is
defined as net income (loss) available to common stockholders
excluding net realized and unrealized gain (loss) on investments
and derivative instruments, and net unrealized gain (loss) on FHLBC
Advances. Management uses Core Earnings to evaluate the effective
yield of the portfolio after operating expenses. The Company
believes that providing users of the Company's financial
information with such measures, in addition to the related GAAP
measures, gives investors greater transparency and insight into the
information used by the Company's management in its financial and
operational decision-making.
The primary limitation associated with Core Earnings as a
measure of the Company's financial performance over any period is
that it excludes the effects of net realized and unrealized gain
(loss) on investments and derivative instruments, and net
unrealized gain (loss) on FHLBC Advances. In addition, the
Company's presentation of Core Earnings may not be comparable to
similarly-titled measures of other companies, which may use
different calculations. As a result, Core Earnings should not be
considered a substitute for the Company's GAAP net income (loss), a
measure of our financial performance or any measure of our
liquidity under GAAP.
The following table reconciles Net income to Core Earnings, a
non-GAAP measure, and summarizes Core Earning plus Drop Income for
the periods presented.
Three Months Ended
(dollars in thousands, except per share
data)
September 30, 2016 June 30, 2016
March 31, 2016 Net income (loss) available to common
stockholders $ 73,807 $ 51,007 $ 56,128 Net realized (gain) loss on
investments (18,155 ) (36,359 ) (1,202 ) Net unrealized (gain) loss
on investments 36,540 (28,915 ) (162,286 ) Net realized and
unrealized (gain) loss on derivative instruments (63,625 ) 44,535
140,524 Net unrealized (gain) loss on FHLBC Advances — 448
851 Core Earnings $ 28,567 $ 30,716 $
34,015 Core Earnings per average share $ 0.19 $ 0.20
$ 0.22 Drop Income $ 10,524 $ 7,996 $
6,315 Core Earnings plus Drop Income $ 39,091 $
38,712 $ 40,330 Core Earnings plus Drop Income per
average share $ 0.26 $ 0.26 $ 0.27
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161026006721/en/
CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
Cys Investments, Inc. (NYSE:CYS)
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