CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "our", or the
"Company") today announced financial results for the quarter ended
June 30, 2016 (the "Second Quarter").
Second Quarter 2016 Summary Results
- June 30, 2016 book value per
common share of $9.55, after declaring a $0.25 dividend per common
share on June 8, 2016, up from $9.46 at March 31, 2016.
- GAAP net income available to common
stockholders of $51.0 million, or $0.34 per diluted common
share.
- Core Earnings plus Drop Income of $38.7
million ($30.7 million Core Earnings and $8.0 million Drop Income),
or $0.26 per diluted common share ($0.20 Core Earnings and $0.06
Drop Income).
- Interest rate spread, net of hedge,
including Drop Income, of 1.36%.
- Operating expense ratio of 1.36%, down
from 1.48% in the prior quarter.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $103.42.
- Leverage ratio of 6.91:1 at
June 30, 2016.
- Constant Prepayment Rate ("CPR") of
12.9%.
- Repurchased 162,548 shares of the
Company's common stock at a weighted-average purchase price of
$7.93 per share or an aggregate of approximately $1.3 million.
- Total stockholder return on common
equity of 3.59%.
Market Commentary
In the second quarter of 2016 (the "Second Quarter"),
longer-term interest rates moved lower, continuing the trends of
the latter part of the first quarter of 2016 (the "First Quarter").
Short-term borrowing rates moved somewhat higher as the markets
anticipated further Federal Reserve (the "Fed") rate hikes in 2016,
though expectations are for the pace of these hikes to be very
slow. However, despite the Fed's desire to normalize short-term
interest rates, the emerging economic data continues to be below
the Fed's expectations and the bond market continues to push out
its expectations for rate hikes in 2016. Much of the concerns about
slow growth stem from sluggish economic conditions in Europe and
China. In a speech to the Economics Club of New York in April 2016
Janet Yellen, the Chair of the Fed, reiterated weak global
conditions as a reason to adjust U.S. domestic monetary policy.
Chair Yellen also highlighted the downside risks if the U.K. were
to vote (the "British Referendum") to exit the European Union,
though the surveys and polls at the time suggested even odds or a
greater likelihood of a "remain" vote. Domestically, payroll growth
appeared to have decelerated and inflation continued to run below
the Fed's two percent target. As prospects for global economic
growth continued to diminish, the bond market further pushed out
its expectations for additional Fed rate hikes. Indeed, some market
participants expected four rate hikes in 2016, but by the end of
June 2016, general market expectations suggested no hikes in 2016.
Additionally, lower oil prices, a strong U.S. dollar, and slower
growth in China and other global economies present a growing risk
of renewed deflationary pressures. Growth in the U.S. economy had
already slowed to 0.9% in the First Quarter, and some economists
now see Second Quarter growth at around 2.4%, but unlikely to
accelerate in the second half of 2016. Thus, the U.S. economy,
though apparently showing sustainable growth, is far from showing
signs of accelerating above a 2% annual growth rate. Payrolls
continued to rise in the First and Second Quarters, though payroll
gains have averaged below 150,000 jobs per month and wages continue
to be stagnant. While the unemployment rate rose to 4.9% in June
2016 and the U-6 underemployment rate fell slightly to 9.6% as of
June 30, 2016, inflation remains below the Fed’s 2% target.
Although the Federal Open Market Committee (the "FOMC")
continues to focus on its dual mandate of maximum employment and an
inflation objective of 2%, it has expressed heightened awareness of
the U.S. economy’s sensitivity to global economic conditions.
During its June 2016 meeting, the FOMC voted to keep the federal
funds rate at 0.25%, and as they did in March of 2016, specifically
cited global economic and financial developments as influencing
their decision and outlook on inflation. Current FOMC guidance
provides that the pace of rate increases is likely to be slower
with only two rate hikes in 2016, not the four anticipated in
December 2015 and a terminal Fed Funds target rate of 3.25% by the
end of 2018. The bond market and yield curve, however, suggest that
market consensus is for no hikes in 2016, just two hikes in 2017,
and a terminal Fed Funds target rate of 1.25% in 2019 and
beyond.
Reflecting the diminishing prospects for accelerating growth, in
the Second Quarter, the bond market rallied and the 10-year U.S.
Treasury yield, which began the year at 2.27%, hit a low for the
First Quarter of 1.66% in mid-February, closed at 1.77% on March
31, 2016, and rallied further in the Second Quarter to 1.47% on
June 30, 2016 following the unexpected outcome of the British
Referendum to exit the European Union. This continued to drive
Agency RMBS prices higher. Fannie Mae 30-year 3.5% RMBS prices rose
by 0.60% and Fannie Mae 15-year 3.0% RMBS prices rose by 0.33%
during the Second Quarter. Interest rates on swaps decreased during
the Second Quarter and spreads widened slightly, resulting in a
decrease in the value of our hedge book. Overall, the performance
of Agency RMBS prices more than offset the decrease in the value of
our hedges, and our book value increased. At the beginning of the
First Quarter, our net duration gap was 0.74 years, declined to
0.30 years at March 31, 2016, and was virtually unchanged at 0.35
years on June 30, 2016.
While prepayments picked up slightly in the Second Quarter, the
wave of refinancing activity was short-lived and CYS's portfolio
prepaid at 12.9% in the Second Quarter. Mortgage rates have
continued to lag the drop in U.S. Treasury yields but we should
anticipate a new round of prepayment activity. We expect homeowners
to respond to the lower rates and expect prepayments on our
portfolio assets to increase in the coming months, which would
impact our portfolio yield. With the current Fed position of
keeping interest rates lower for longer, we anticipate less
volatility in the prices of Agency RMBS securities. As of June 30,
2016, we had substantial available liquidity of $1.15 billion, or
66.6% of our equity, and leverage, on a debt to equity basis
including to-be-announced ("TBA") securities accounted for as
derivatives ("TBA Derivatives"), increased slightly to 6.91:1 from
the March 31, 2016 level of 6.76:1.
Second Quarter 2016 Results
The Company’s book value per common share on June 30, 2016
was $9.55, compared to $9.46 at March 31, 2016, after
declaring a $0.25 dividend per common share on June 8, 2016. The
book value was positively impacted by an increase in the value of
Agency RMBS during the Second Quarter, which was partially offset
by a decrease in the value of the Company's interest rate
hedges.
The Company generated net income available to common
stockholders of $51.0 million in the Second Quarter, or $0.34 per
diluted common share, compared to $56.1 million, or $0.37 per
diluted common share, in the First Quarter, the key components of
which are explained below.
In the Second Quarter, the Company had Core Earnings (defined
below) plus Drop Income (defined below) 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. This compares to First
Quarter Core Earnings plus Drop Income of $40.3 million, or $0.27
per diluted common share, comprised of Core Earnings of $34.0
million, or $0.22 per diluted common share, and Drop Income of $6.3
million, or $0.05 per diluted common share. Core Earnings decreased
in the Second Quarter from the First Quarter primarily due to (i) a
$6.6 million decrease in total interest income on an increase in
premium amortization as prepayment speeds increased from the prior
quarter, and (ii) a $0.7 million increase in interest expense on
borrowings due to higher cost of funds. The decrease was offset by
a $3.6 million decrease in swap and cap interest expense and a $0.5
million decrease in operating expenses. Drop Income increased by
$1.7 million in the Second Quarter driven by an increase in
activity resulting from the relative attractiveness of the TBA
securities market.
In the Second Quarter, total interest income decreased to $74.9
million from $81.5 million in the First Quarter primarily due to
higher prepayments and amortization expense as noted above, causing
the average yield on our settled Debt Securities to decrease to
2.52% in the Second Quarter from 2.74% in the First Quarter. The
Second Quarter weighted average experienced CPR increased to 12.9%
from 7.6% in the First Quarter, while amortization expense
increased $6.7 million to $22.6 million from $15.9 million in the
First Quarter. In addition, in the Second Quarter we had lower
average settled Debt Securities of $11.89 billion compared to
$11.91 billion in the First Quarter.
The Company's net interest income of $56.2 million in the Second
Quarter, down approximately $7.3 million from $63.5 million in the
First Quarter, largely due to the decrease in interest income and
an increase in interest expense on our combined borrowings under
repurchase agreements ("repo borrowings") and Federal Home Loan
Bank of Cincinnati ("FHLBC") advances ("FHLBC Advances") as a
direct result of an increase in the average cost of funds to 0.72%
in the Second Quarter, as compared to 0.68% in the First
Quarter.
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.
(in thousands)
June 30, 2016
March 31, 2016 Net interest income $ 56,170 $ 63,506 Swap
and cap interest expense 14,779 18,398 Economic net interest
income $ 41,391 $ 45,108 Total interest expense $
18,687 $ 17,945 Swap and cap interest expense 14,779 18,398
Economic interest expense $ 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 $41.4 million in the
Second Quarter, down approximately $3.7 million from $45.1 million
in the First 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 $9,700.0 million in the
Second Quarter, compared to $10,075.0 million in the First Quarter,
and an increase in the receive rate on resetting swaps, resulted in
a $3.6 million decrease in swap and cap interest expense to $14.8
million in the Second Quarter, from $18.4 million in the First
Quarter. The weighted average receive rate on our interest rate
swaps was 0.65% at June 30, 2016, compared to 0.62% at March
31, 2016.
In the Second Quarter, economic interest expense, comprised of
interest expense on repo borrowings and FHLBC Advances and swap and
cap interest expense, was $33.5 million, compared to $36.3 million
in the First Quarter. The increase in interest expense on repo
borrowings and FHLBC Advances to $18.7 million in the Second
Quarter from $17.9 million in the First Quarter was more than
offset by the decrease in swap and cap interest expense, which
decreased to $14.8 million in the Second Quarter, from $18.4
million in the First Quarter, as explained above. Overall, the
adjusted average cost of funds and hedge was lower
at 1.14% during the Second Quarter, compared to
1.26% during the First Quarter. The Company’s interest rate
spread net of hedge including Drop Income was also lower
at 1.36% in the Second Quarter, compared to 1.45% in
the First Quarter.
The Company recognized net realized and unrealized gain from
investments of $65.3 million in the Second Quarter, compared to a
net realized and unrealized gain from investments of $163.5 million
in the First Quarter. The net gain on investments in the Second
Quarter was generally driven by an increase in prices of our Agency
RMBS. However, prices increased less than in the prior quarter. For
example, prices of 30-year 3.5% Agency RMBS increased by $0.63 to
$105.55 and 15-year 3.0% Agency RMBS increased by $0.34 to $104.86
at the end of the Second Quarter, whereas prices of these
securities increased by $1.69 to $104.92 and by
$1.44 to $104.52, respectively, during the First
Quarter.
The Company recognized a net realized and unrealized loss on
derivative instruments of $(44.5) million for the Second Quarter,
comprised of $(51.0) million of net realized and unrealized loss on
swap and cap contracts, and $6.5 million of net realized and
unrealized gain on TBA Derivatives, compared to a net realized and
unrealized loss on derivative instruments of $(140.5) million in
the First Quarter, comprised of $(148.0) million net realized and
unrealized loss on swap and cap contracts, and a $7.5 million net
realized and unrealized gain on TBA Derivatives. The change was
primarily due to lower interest rates, which caused the value of
our hedges to decrease in both periods. For example, 5-year swap
rates decreased by 19 basis points ("bps") during the Second
Quarter, whereas they decreased by 57 bps during the First
Quarter.
The Company’s operating expense ratio as a percentage of average
stockholders' equity was 1.36% in the Second Quarter, compared to
1.48% in the First Quarter.
Set forth below are summary financial data for the Second
Quarter and First Quarter:
Summary Financial Data
(dollars in thousands except per share data)
Three Months Ended Key Balance Sheet Metrics June
30, 2016 March 31, 2016 Average settled
Debt Securities (1) $ 11,887,351 $ 11,905,997 Average total Debt
Securities (2) $ 13,230,800 $ 12,945,855 Average repurchase
agreements and FHLBC Advances (3) $ 10,412,784 $ 10,492,636 Average
Debt Securities liabilities (4) $ 11,756,233 $ 11,532,494 Average
stockholders' equity (5) $ 1,725,879 $ 1,714,728 Average common
shares outstanding (6) 151,452 151,788 Leverage ratio (at period
end) (7)
6.91:1
6.76:1
Book value per common share (at period end) (8) $ 9.55 $ 9.46
Weighted average amortized cost of Agency RMBS and U.S. Treasuries
(9) $ 103.42 $ 103.76
Key Performance Metrics*
Average yield on settled Debt Securities (10) 2.52 % 2.74 % Average
yield on total Debt Securities including Drop Income (11) 2.50 %
2.71 % Average cost of funds (12) 0.72 % 0.68 % Average cost of
funds and hedge (13) 1.29 % 1.39 % Adjusted average cost of funds
and hedge (14) 1.14 % 1.26 % Interest rate spread net of hedge (15)
1.23 % 1.35 % Interest rate spread net of hedge including Drop
Income (16) 1.36 % 1.45 % Operating expense ratio (17) 1.36 % 1.48
% Total stockholder return on common equity (18) 3.59 % 3.85 %
Constant prepayment rate (weighted average experienced 1-month)
(19) 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 total 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 using the change in book
value plus dividend distributions on
common stock.(19) The constant prepayment rate ("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 $13,591.4 million at
June 30, 2016, from $13,226.0 million at March 31, 2016.
As markets reset to lower rates during the Second Quarter, we
reduced our 30-Year 4.0% and 15-Year 3.0% holdings and purchased
U.S. Treasuries and 15-Year 2.5% securities in anticipation of an
increase in prepayments.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $827.3 million and $307.6 million of TBA
Derivatives at June 30, 2016 and March 31, 2016,
respectively:
June 30, 2016 March
31, 2016 Fair Value (in thousands) % of
Total Fair Value (in thousands) % of
Total 15-Year Fixed Rate $ 5,989,553 44 % $ 5,663,867 43 %
20-Year Fixed Rate 49,494 — % 52,505 — % 30-Year Fixed Rate
6,318,345 46 % 7,136,350 54 % Hybrid ARMs 349,814 3 % 343,353 3 %
U.S. Treasuries 884,213 7 % 29,972 — % Total $
13,591,419 100 % $ 13,226,047 100 %
Key metrics related to the Company’s Debt Securities portfolio,
inclusive of TBA Derivatives, as of June 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
$ 5,714,808 $ 5,989,553 $ 102.77 $ 104.81 1.41 % 2.96 % 10.8 %
20-Year Fixed Rate 45,186 49,494 102.75 109.53 1.54 % 4.50 % 17.1 %
30-Year Fixed Rate 5,939,447 6,318,345 104.59 106.38 1.80 % 3.67 %
10.6 % Hybrid ARMs (3) 335,330 349,814 102.79 104.32 1.50 % 2.93 %
21.7 % U.S. Treasury Securities 880,000 884,213
100.12 100.48 0.69 % 0.86 % n/a Total $ 12,914,771
$ 13,591,419 $ 103.42 $ 105.24 1.54 %
3.15 % 11.1 %
__________________
(1) Represents a forward yield and is calculated based on the
cost basis of the security at June 30, 2016.(2) 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 for those bonds held at June 30, 2016. Securities with no
prepayment history are excluded from this calculation.(3) The
weighted-average months to reset of our Hybrid ARM portfolio was
66.2 at June 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 July 2016, the weighted average experienced CPR of the
Company's Debt Securities was 12.6%.
Leverage & Liquidity
Our leverage, which includes TBA Derivatives, was 6.91:1 at the
end of the Second Quarter, compared to 6.76:1 at the end of the
First Quarter. As of June 30, 2016 and March 31, 2016,
the Company had financed its portfolio with approximately $10.4
billion and $10.3 billion, respectively, of repo borrowings and
FHLBC Advances (collectively “Total Outstanding Borrowings”) and
recognized a payable for securities purchased net of receivable for
securities sold of approximately $0.7 billion and $0.9 billion,
respectively.
At June 30, 2016, and March 31, 2016, the Company’s
liquidity position, consisting of unpledged Agency RMBS, U.S.
Treasuries and cash, was approximately $1.15 billion, or 66.6%, and
$1.14 billion or 66.6%, of stockholders' equity, respectively.
Financing
During the Second Quarter, the Company financed its investment
portfolio with average repo borrowings and FHLBC Advances of $10.4
billion, with an average cost of funds of 0.72%, compared to $10.5
billion and 0.68% during the First Quarter. Total interest expense
increased $0.8 million to $18.7 million in the Second Quarter,
compared to $17.9 million for the First Quarter primarily due to
higher average cost of funds during the Second Quarter.
During the Second Quarter, the Company did not experience any
reductions in the availability of repo borrowings. At June 30,
2016 repo borrowings with any individual counterparty were less
than 8% of our total outstanding borrowings. As of June 30,
2016, we had 48 counterparties available to finance the Company's
operations.
Below is a summary, by region, of our outstanding borrowings at
June 30, 2016 (dollars in thousands):
Counterparty Region Number of
Counterparties Total Outstanding
Borrowings % of Total North America 22 $
6,427,663 61.7% Europe 8 2,201,699 21.1% Asia 5 1,795,139
17.2% Total 35 $ 10,424,501 100.0%
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. In
the Second Quarter, we terminated swaps with a combined notional of
$2.2 billion and a weighted-average pay rate of 1.43% and entered
into new swaps with a combined notional of $1.7 billion and a
weighted-average pay rate of 1.21%. After the repositioning, our
weighted-average fixed pay rate on swaps decreased to 1.19% at
June 30, 2016, compared to 1.26% at March 31, 2016.
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. The receive rate on the Company's swaps is the
three-month London Interbank Offered Rate ("LIBOR"), which stood at
0.65% on June 30, 2016 up from 0.62% at March 31, 2016. 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.
As of March 31, 2016, the Company held swaps with an
aggregate notional amount of $7.5 billion, a weighted-average
fixed rate of 1.26%, a weighted average receive rate of 0.62%,
a weighted average net pay rate of 0.64% and a weighted-average
expiration of 3.1 years. At March 31, 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 3.8 years.
Key provisions of the Company's outstanding swaps and caps at
June 30, 2016 are summarized below (dollars in thousands):
Interest Rate Swaps Weighted-Average
Expiration Year Fixed
Pay Rate Receive Rate *
Net Pay Rate Notional Amount Fair Value
2017 0.80 % 0.68 % 0.12 % $ 1,500,000 $ (2,078 ) 2018 1.00 % 0.65 %
0.35 % 1,500,000 (7,018 ) 2020 1.45 % 0.64 % 0.81 % 1,750,000
(38,208 ) 2021 1.21 % 0.63 % 0.58 % 1,700,000 (18,091 ) 2022 1.98 %
0.63 % 1.35 % 500,000 (26,212 ) Total 1.19 % 0.65 %
0.54 % $ 6,950,000 $ (91,607 )
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 $
2,662 2020 1.25 % n/a 1.25 % 1,700,000 13,359
Total 1.28 % n/a 1.28 % $ 2,500,000 $ 16,021
* The receive rate on the Company's swaps is the three-month
LIBOR, which resets quarterly.
Duration Gap
Our net duration gap increased marginally to 0.35 at
June 30, 2016, compared to 0.30 at March 31, 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 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 Second Quarter and First Quarter are
shown in the chart below (dollars in thousands):
June 30, 2016 March
31, 2016
$ Change
Drop Income $ 7,996 $ 6,315 $ 1,681 Average market value of all
TBAs 1,290,798 1,060,866 229,932
Prepayments
The portfolio recognized $516.6 million in principal repayments
and prepayments, experienced a CPR of approximately 12.9% and net
amortization expense of $22.6 million in the Second Quarter,
compared to $348.5 million in principal repayments and prepayments,
a CPR of approximately 7.6% and net amortization expense of $15.9
million in the First Quarter. The increase in CPR in the Second
Quarter was principally due to lower mortgage interest rates
persisting during the First Quarter, subdued mortgage refinancings
and bond seasoning factors.
Dividend
The Company declared a common dividend of $0.25 per share for
the Second Quarter, compared to a $0.26 common dividend in the
First Quarter. Using the closing share price of $8.37 on
June 30, 2016, the Second Quarter dividend equates to an
annualized dividend yield of 11.9%.
Share Repurchase Program
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. In
the First Quarter, we
repurchased 510,618 shares of the Company's common stock
at a weighted-average purchase price of $7.82 per share
for an aggregate of approximately $4.0 million. As of
June 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, July 28, 2016, to discuss its financial results
for the Second 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 50195181. 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,
July 28, 2016, at approximately 12:00 PM Eastern Time through
Thursday, August 11, 2016 at approximately 11:00 AM Eastern Time.
To access this replay, please dial (855) 859-2056 and enter the
conference ID number 50195181. 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 Federal
Reserve (the "Fed") and the Federal Open Market Committee (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)
June 30, 2016 March 31, 2016 December 31,
2015* (unaudited) (unaudited) Assets: Cash
$ 13,182 $ 6,262 $ 9,982 Investments in securities, at fair value:
Agency mortgage-backed securities (including pledged assets of
$10,106,787, $10,868,773 and $11,587,014, respectively) 11,879,933
12,888,430 12,927,996 U.S. Treasury securities (including pledged
assets of $884,213, $29,972 and $14,886, respectively) 884,213
29,972 99,711 Receivable for securities sold and principal
repayments 1,507 1,586 1,084,844 Receivable for cash pledged as
collateral 97,309 85,097 21,751 Interest receivable 32,460 34,033
34,563 Derivative assets, at fair value 24,650 32,701 100,778 Other
investments 31,028 34,028 50,028 Other assets 1,625 1,219
1,051 Total assets $ 12,965,907 $ 13,113,328
$ 14,330,704
Liabilities and stockholders'
equity: Liabilities: Repurchase agreements $ 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 652,619 937,163
1,475,974 Payable for cash received as collateral 4,826 9,141
18,534 Accrued interest payable 20,307 20,020 32,588 Accrued
expenses and other liabilities 4,857 3,113 4,083 Dividends payable
42,259 43,809 4,410 Derivative liabilities, at fair value 95,529
85,461 14,024 Total liabilities $ 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 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
Common Stock, $0.01 par value, 500,000
shares authorized (151,394, 151,535 and 151,740 shares issued and
outstanding, respectively)
1,514 1,515 1,517 Additional paid in capital 1,942,930 1,943,177
1,946,419 Retained earnings (accumulated deficit) (489,335 )
(502,493 ) (519,222 ) Total stockholders' equity $ 1,721,009
$ 1,708,099 $ 1,694,614
Total liabilities and
stockholders' equity $ 12,965,907 $ 13,113,328 $
14,330,704
Book value per common share $ 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)
June 30,
2016 March 31, 2016 Interest income:
Agency RMBS $ 74,176 $ 81,323 Other 681 128 Total
interest income 74,857 81,451 Interest expense:
Repurchase agreements 16,910 15,886 FHLBC Advances 1,777
2,059 Total interest expense 18,687 17,945 Net
interest income 56,170 63,506 Other income (loss):
Net realized gain (loss) on investments 36,359 1,202 Net unrealized
gain (loss) on investments 28,915 162,286 Net unrealized gain
(loss) on FHLBC Advances (448 ) (851 ) Other income 387 463
Net realized and unrealized gain (loss) on investments,
FHLBC Advances and other income 65,213 163,100 Swap
and cap interest expense (14,779 ) (18,398 ) Net realized and
unrealized gain (loss) on derivative instruments (44,535 ) (140,524
) Net gain (loss) on derivative instruments (59,314 ) (158,922 )
Total other income (loss) 5,899 4,178 Expenses:
Compensation and benefits 3,565 3,865 General, administrative and
other 2,294 2,488 Total expenses 5,859 6,353
Net income (loss) $ 56,210 $ 61,331 Dividends
on preferred stock (5,203 ) (5,203 ) Net income (loss) available to
common stockholders $ 51,007 $ 56,128 Net income
(loss) per common share basic & diluted $ 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 gain (loss) on investments, net unrealized
gain (loss) on investments, net realized and unrealized gain (loss)
on 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 as a substitute for the Company's GAAP net income
(loss), as 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)
June 30, 2016
March 31, 2016 Net income (loss) available to common
stockholders $ 51,007 $ 56,128 Net realized (gain) loss on
investments (36,359 ) (1,202 ) Net unrealized (gain) loss on
investments (28,915 ) (162,286 ) Net realized and unrealized (gain)
loss on derivative instruments 44,535 140,524 Net unrealized (gain)
loss on FHLBC Advances 448 851 Core Earnings $ 30,716
$ 34,015 Core Earnings per average share $ 0.20
$ 0.22 Drop Income $ 7,996 $ 6,315 Core
Earnings plus Drop Income $ 38,712 $ 40,330 Core
Earnings plus Drop Income per average share $ 0.26 $ 0.27
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160727006456/en/
CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
Cys Investments, Inc. (NYSE:CYS)
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