CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "our", or the
"Company") today announced financial results for the quarter ended
(the "Fourth Quarter") and the year ended December 31,
2016.
Fourth Quarter 2016 Highlights
- December 31, 2016 book value per
common share of $8.33, after declaring a $0.25 dividend per common
share on December 12, 2016.
- GAAP net income (loss) available to
common stockholders of $(185.4) million, or $(1.23) per diluted
common share.
- Core Earnings plus Drop Income of $36.2
million ($28.1 million Core Earnings and $8.1 million Drop Income),
or $0.24 per diluted common share ($0.19 Core Earnings and $0.05
Drop Income).
- Interest rate spread net of hedge,
including Drop Income, of 1.28%.
- December 31, 2016 leverage ratio
of 7.06:1.
- Operating expenses of $5.2 million, or
1.26% of average stockholders' equity. Excluding the effects of a
$1.7 million non-recurring prior period tax charge, the Fourth
Quarter operating expense ratio was 0.85%.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $103.78.
- Constant Prepayment Rate ("CPR") of
14.2% for the quarter.
- The Company's duration gap extended to
1.02 at December 31, 2016 from 0.50 at September 30,
2016.
- Total stockholder return (loss) on
common equity of (12.36%).
Full Year 2016 Highlights
- Total dividends of $1.01 per common
share.
- GAAP net income (loss) available to
common stockholders of $(4.4) million, or $(0.04) per diluted
common share.
- Core Earnings plus Drop Income of
$154.3 million ($121.4 million Core Earnings and $32.9 million Drop
Income), or $1.02 per diluted common share ($0.81 Core Earnings and
$0.21 Drop Income).
- Interest rate spread net of hedge,
including Drop Income, of 1.37%.
- Operating expenses of $23.6 million, or
1.39% of average stockholders' equity, an increase from $20.8
million, or 1.12% for the year ended December 31, 2015.
Excluding the effects of $2.6 million of non-recurring charges, the
operating expense ratio for the year ended December 31, 2016 was
1.23%.
- Repurchased 673,166 shares of
the Company's common stock for an aggregate purchase price of
approximately $5.3 million at a weighted-average price
of $7.85 per share.
- Total stockholder return (loss) on
common equity of (0.21%).
Market Commentary
The Fourth Quarter began with a modest sell-off in U.S.
Treasuries and sovereign rates as markets reacted to heightened
expectations of a December Federal Reserve (the “Fed”) rate hike,
and to diminished expectations of global central banks' easing
efforts. The unexpected outcome of the U.S. Presidential Election
(the "Election") prompted a swift re-evaluation of interest rate
outlooks, resulting in a significant run-up in rates through
year-end.
Prior to the Election, markets generally expected a "status quo"
outcome: continuation of current fiscal policies, pricing in a slow
and deliberate Fed tightening cycle, lower long-term rates, and low
mortgage rates. Instead, November's turn of events introduced
uncertainty of a new Presidential administration's (the "New
Administration") changes to future fiscal policy actions,
including, but not limited to, tax reductions, provisions to
incentivize domestic corporations to repatriate liquid assets held
overseas, regulatory reform and measures to increase domestic
production of energy and manufacturing, which collectively are
expected to increase domestic growth and inflation. Although
program details have yet to be made clear, markets now anticipate
that the New Administration’s fiscal policy measures will likely
pull forward economic growth, and increase the federal budget
deficit. Whether this growth can be realized or not remains to be
seen, but markets now anticipate higher near-term domestic economic
growth and inflation. Based on recent Fed statements, these
expectations could compel the Fed to accelerate its interest rate
normalization program. As a result, following the Election, the
markets rapidly repriced for an environment of higher near-term
potential GDP growth and inflation, reversing the three-quarter
long bond market rally.
Post-election through December 31, 2016, the markets experienced
an increase in the 10-year U.S. Treasury yield, a steepening yield
curve, and a corresponding decline in the price of Agency RMBS. The
steepening of the yield curve during the Fourth Quarter improved
the near-term reinvestment outlook. Equity returns (at current
leverage levels) on our target assets are in the mid to low teens.
During the Fourth Quarter, the 5-year U.S. Treasury yield rose 78
bps, ending the year at 1.93%; similarly, the yield on the 10-year
U.S. Treasury rose by 85 bps, ending the year at 2.44%. For the
same period, the price of Agency RMBS fell 3.1% as the price of
30-year FNMA 3.5% Agency RMBS fell from $105.55 on September 30,
2016 to $102.33 on December 31, 2016. Over the course of 2016,
Agency RMBS prices declined with 30-year FNMA 3.5% Agency RMBS
falling by 0.87% year-over-year. On the financing side of our
business, during the Fourth Quarter we continued to benefit from
money market reforms put in place prior in the year, which served
to increase cash in the financial system seeking government
securities as collateral for short-term investments. This benefited
the financing side of our business by supporting Agency RMBS repo
funding costs, and reducing our net hedging costs relative to where
we believe costs would have been absent the increased liquidity in
the short term borrowing markets.
On December 14, 2016, the Fed raised the Federal funds rate 25
bps for the first time in 2016. At year-end, the Federal Open
Market Committee ("FOMC") and the financial markets were
anticipating two to three rate hikes in 2017. The financial markets
and the FOMC will continue to closely watch the New
Administration’s fiscal policy plans carefully to better gauge
inflation and interest rate expectations. The current outlook is
characterized by a considerable amount of uncertainty.
Fourth Quarter 2016 Results
The Company’s book value per common share on December 31,
2016 was $8.33, compared to $9.79 at September 30, 2016, after
declaring a $0.25 dividend per common share on December 12, 2016.
The book value was negatively impacted by an increase in interest
rates during the Fourth Quarter as we experienced a dramatic rise
in the 10-year U.S. Treasury yield and a corresponding decline in
the price of Agency RMBS. The decrease in the value of the
Company's Debt Securities during the Fourth Quarter was partially
offset by a net realized and unrealized gain in the value of our
derivative instruments.
In the Fourth Quarter, the Company generated Core Earnings plus
Drop Income (defined below) of $36.2 million, or $0.24 per diluted
common share, comprised of Core Earnings of $28.1 million, or $0.19
per diluted common share, and Drop Income of $8.1 million, or $0.05
per diluted common share. This compares to the quarter ended
September 30, 2016 (the "Third Quarter") Core Earnings plus
Drop Income of $39.1 million, or $0.26 per diluted common share,
consisting 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. In response to a steepening yield curve and a
more favorable reinvestment environment during the Fourth Quarter,
we recycled out of a portion of 15-Year 2.5% Agency RMBS securities
into 30-Year 3.5% and 4.0% Agency RMBS.
Core Earnings decreased by approximately $0.5 million in the
Fourth Quarter from the Third Quarter primarily as a result of a
$1.1 million decrease in total interest income and a $2.7 million
increase in interest expense due to an increase in the average cost
of funds on repurchase agreements ("repo borrowings") and Federal
Home Loan Bank of Cincinnati Advances ("FHLBC Advances") (FHLBC
Advances and collectively with repo borrowings, "Total Outstanding
Borrowings"). The decrease in total interest income largely
resulted from an increase in prepayment speeds and the
weighted-average cost of our Debt Securities portfolio during the
Fourth Quarter. The increase in prepayment speeds and
weighted-average cost of our Debt Securities portfolio during the
Fourth Quarter resulted in an additional $1.4 million of
amortization expense compared to the Third Quarter. The increase in
interest expense is a direct result of an increase in the average
cost of funds to 0.81% in the Fourth Quarter, as compared to 0.68%
in the Third Quarter. The increase in the average cost of funds was
partially offset by a decrease in average Total Outstanding
Borrowings during the Fourth Quarter. The decrease in Core Earnings
in the Fourth Quarter was partially offset by (i) a $2.4 million
decrease in swap and cap interest expense, and (ii) a $1.1 million
decrease in total expenses, as further described below. Drop Income
decreased by $2.4 million in the Fourth Quarter as a result of
lower volume of forward purchase settling transactions from which
we derive Drop Income.
In the Fourth Quarter, total interest income decreased to $68.6
million from $69.7 million in the Third Quarter as noted above,
while the average yield on our settled Debt Securities was
relatively flat at 2.39% in the Fourth Quarter, as compared to
2.38% in the Third Quarter. The Fourth Quarter weighted-average
experienced CPR increased to 14.2% from 14.0% in the Third Quarter,
while amortization expense increased $1.4 million to $23.5 million
from $22.1 million in the Third Quarter for the reasons described
above. The weighted-average cost basis of our Debt Securities
portfolio increased slightly to $103.78 at December 31, 2016
from $103.72 at September 30, 2016.
The Company's net interest income of $48.4 million in the Fourth
Quarter, down approximately $3.8 million from $52.2 million in the
Third Quarter, is largely due to the decrease in total interest
income and increase in total interest expense described above.
Economic Net Interest Income and Economic Net Interest 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.
Three Months Ended Year Ended (dollars
in thousands)
December 31,2016
September 30,2016
June 30,2016
March 31,2016
December 31,2016
December 31,2015
Net interest income $ 48,400 $ 52,182 $ 56,170 $ 63,506 $ 220,258 $
285,066 Swap and cap interest expense 10,128 12,493
14,779 18,398 55,798 100,110 Economic net
interest income $ 38,272 $ 39,689 $ 41,391 $
45,108 $ 164,460 $ 184,956 Total interest
expense $ 20,168 $ 17,479 $ 18,687 $ 17,945 $ 74,279 $ 46,129 Swap
and cap interest expense 10,128 12,493 14,779
18,938 55,798 100,110 Economic interest expense $
30,296 $ 29,972 $ 33,466 $ 36,883 $
130,077 $ 146,239
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 $38.3 million in the
Fourth Quarter, a decline of approximately $1.4 million from $39.7
million in the Third Quarter. The decrease in Economic Net Interest
Income was primarily due to lower net interest income, as
previously described, 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 $9.0
billion in the Fourth Quarter, compared to $9.3 billion in the
Third Quarter, and an increase in the receive rate on resetting
swaps as a direct result of an increase in the three-month London
Interbank Offered Rate ("LIBOR") during the Fourth Quarter,
resulted in a $2.4 million decrease in swap and cap interest
expense to $10.1 million in the Fourth Quarter, from $12.5 million
in the Third Quarter. The weighted-average receive rate on our
interest rate swaps was 0.89% at December 31, 2016, compared
to 0.77% at September 30, 2016.
In the Fourth Quarter, Economic Interest Expense, comprised of
interest expense on repo borrowings and swap and cap interest
expense, was $30.3 million, compared to $30.0 million in the Third
Quarter. Interest expense on Total Outstanding Borrowings increased
to $20.2 million in the Fourth Quarter from $17.5 million in the
Third Quarter due primarily to a 13 bps increase in the average
cost of funds while swap and cap interest expense decreased by $2.4
million during the Fourth Quarter, as previously noted. Overall,
the adjusted average cost of funds and hedge increased marginally
to 1.04% during the Fourth Quarter from 0.99% in the prior quarter.
The Company’s interest rate spread net of hedge including Drop
Income dipped to 1.28% in the Fourth Quarter from 1.37% in the
prior quarter.
The Company recognized an aggregate net realized and unrealized
loss from investments of $(323.4) million in the Fourth Quarter,
compared to a net realized and unrealized loss from investments of
$(18.4) million in the Third Quarter. The net loss on investments
during the Fourth Quarter was triggered by an increase in interest
rates during the Fourth Quarter resulting in a decrease in the
prices of our Agency RMBS as previously described. During the Third
Quarter, prices of 15-year 3.0% and 15-year 3.5% Agency RMBS
increased by $0.12 to $104.98 and by $0.56 to $105.42,
respectively.
The Company recognized a net realized and unrealized gain on
derivative instruments of $110.0 million for the Fourth Quarter,
comprised of $157.0 million of net realized and unrealized gain on
swap and cap contracts, and $(47.0) million of net realized and
unrealized loss on TBA Derivatives, compared to a net realized and
unrealized gain on derivative instruments of $63.6 million in 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. The net increase in value of our swaps and caps during
the Fourth Quarter was due primarily to an increase in interest
rates during the Fourth Quarter. For illustrative purposes, 5-year
swap rates increased by 80 and 20 bps during the Fourth and Third
Quarters, respectively.
The Company’s operating expense ratio as a percentage of average
stockholders' equity was 1.26% in the Fourth Quarter, compared to
1.42% in the Third Quarter. During the Fourth Quarter, the Company
decreased the incentive compensation accrual by $1.6 million as a
result of actual performance. The Company also recorded a $1.7
million non-recurring charge related to a prior period tax
liability, which is recorded in General, administrative and other
expenses in the Consolidated Statements of Operations. Excluding
the effect of the non-recurring charge, the Fourth Quarter
operating expense ratio was 0.85%.
Set forth below are summary financial data for the four quarters
in 2016, and the years ended December 31, 2016 and 2015:
(in thousands)
Three Months Ended * Year
Ended Key Balance Sheet Metrics
December 31,2016
September 30,2016
June 30,2016
March 31,2016
December 31,2016
December 31,2015
Average settled Debt Securities (1) $ 11,484,017 $ 11,725,021 $
11,887,351 $ 11,905,997 $ 11,781,920 $ 12,962,340 Average total
Debt Securities (2) $ 13,207,856 $ 13,596,739 $ 13,230,800 $
12,945,855 $ 13,212,278 $ 14,223,921 Average repurchase agreements
and FHLBC Advances (3) $ 9,905,199 $ 10,223,051 $ 10,412,784 $
10,492,636 $ 10,290,967 $ 11,395,383 Average Debt Securities
liabilities (4) $ 11,629,038 $ 12,094,769 $ 11,756,233 $ 11,532,494
$ 11,721,325 $ 12,656,964 Average stockholders' equity (5) $
1,646,903 $ 1,749,543 $ 1,725,879 $ 1,714,728 $ 1,704,701 $
1,856,455 Average common shares outstanding (6) 151,434 151,414
151,452 151,788 151,522 156,686 Leverage ratio (at period end) (7)
7.06:1 6.96:1 6.91:1 6.76:1 7.06:1 6.77:1 Book value per common
share (at period end) (8) $ 8.33 $ 9.79 $ 9.55 $ 9.46 $ 8.33 $ 9.36
Weighted-average amortized cost of Agency RMBS and U.S. Treasuries
(9) $ 103.78 $ 103.72 $ 103.42 $ 103.76 $ 103.78 $ 103.69
Key Performance Metrics Average yield on settled Debt
Securities (10) 2.39 % 2.38 % 2.52 % 2.74 % 2.50 % 2.56 % Average
yield on total Debt Securities including Drop Income (11) 2.32 %
2.36 % 2.50 % 2.71 % 2.48 % 2.56 % Average cost of funds (12) 0.81
% 0.68 % 0.72 % 0.68 % 0.72 % 0.40 % Average cost of funds and
hedge (13) 1.22 % 1.17 % 1.29 % 1.39 % 1.26 % 1.28 % Adjusted
average cost of funds and hedge (14) 1.04 % 0.99 % 1.14 % 1.26 %
1.11 % 1.16 % Interest rate spread net of hedge (15) 1.17 % 1.21 %
1.23 % 1.35 % 1.24 % 1.28 % Interest rate spread net of hedge
including Drop Income (16) 1.28 % 1.37 % 1.36 % 1.45 % 1.37 % 1.40
% Operating expense ratio (17) 1.26 % 1.42 % 1.36 % 1.48 % 1.39 %
1.12 % Total stockholder return on common equity (18) (12.36 %)
5.13 % 3.59 % 3.85 % (0.21 %) (0.38 %) Constant prepayment rate
(weighted-average experienced 1-month) (19) 14.2 % 14.0 % 12.9 %
7.6 % 12.1 % 10.4 %
__________
(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 net 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 value 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 net TBA
Derivatives positions, at fair value, was $12.3 billion at
December 31, 2016, a decrease of $1.7 billion from $14.0
billion at September 30, 2016. During the Fourth Quarter, in
response to a steepening yield curve, we sold lower yielding, and
purchased higher yielding, Agency RMBS.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $(0.3) billion, $2.2 billion, and $0 of net
TBA Derivative positions at December 31, 2016,
September 30, 2016, and December 31, 2015, respectively
(dollars in thousands):
December 31, 2016 September 30, 2016
December 31, 2015 Asset Type Fair Value
% ofTotal
Fair Value
% ofTotal
Fair Value
% ofTotal
15-Year Fixed Rate $ 4,443,735 36 % $ 7,572,953 55 % $ 6,458,865 50
% 20-Year Fixed Rate 42,348 — % 46,353 — % 56,102 — % 30-Year Fixed
Rate 7,418,624 60 % 5,993,108 43 % 6,045,212 46 % Hybrid ARMs
385,502 3 % 323,851 2 % 367,817 3 % U.S. Treasuries 49,686 1
% 49,891 — % 99,711 1 % Total $ 12,339,895 100
% $ 13,986,156 100 % $ 13,027,707 100 %
Key metrics related to the Company’s Debt Securities portfolio,
inclusive of $(0.3) billion net TBA Derivatives positions, as of
December 31, 2016 are summarized below:
Face Value Fair Value
Weighted-Average Asset Type (in thousands)
Cost/Face
FairValue/Face
Yield(1) Coupon
CPR(2) 15-Year Fixed Rate $ 4,323,608 $ 4,443,735 $
103.00 $ 102.78 2.29 % 3.05 % 12.4 % 20-Year Fixed Rate 39,328
42,348 102.66 107.68 2.45 % 4.50 % 19.6 % 30-Year Fixed Rate
7,179,523 7,418,624 104.34 103.33 3.09 % 3.64 % 13.1 % Hybrid ARMs
(3) 375,745 385,502 102.74 102.60 2.31
% 2.82 % 21.3 % Total Agency RMBS 11,918,204
12,290,209 103.80 103.12 2.78 % 3.40 % 13.1 %
U.S. Treasuries 50,000 49,686 99.90
99.37 1.05 % 0.63 % n/a Total $ 11,968,204 $
12,339,895 $ 103.78 $ 103.11 2.77 % 3.39 %
13.1 %
__________
(1) Represents a forward yield and is calculated based on the
market price of the security at December 31, 2016.
(2) Represents CPR for those bonds held at December 31,
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 CPR reflects the
annualized version of the experienced prior three-month prepayment
rate for the securities in the portfolio at December 31, 2016.
Securities with no prepayment history are excluded from this
calculation.
(3) The weighted-average months to reset of the Company's Hybrid
ARM portfolio was 67.1 at December 31, 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.
Leverage & Liquidity
Our leverage was 7.06:1 at December 31, 2016, compared to
6.96:1 at the end of the Third Quarter. As of December 31,
2016 and September 30, 2016, the Company had financed its
portfolio with approximately $9.7 billion and $9.6 billion of Total
Outstanding Borrowings, respectively, and recognized payable for
securities purchased net of receivable for securities sold of $1.5
billion and $0.4 billion, respectively.
At December 31, 2016, the Company’s liquidity position,
consisting of unpledged Agency RMBS, U.S. Treasuries and cash and
cash equivalents was approximately $0.9 billion, or 61.0% of
stockholders' equity, compared to $1.2 billion, or 70.3% of
stockholders' equity, at September 30, 2016.
Financing
During the Fourth Quarter, the Company financed its portfolio
with average Total Outstanding Borrowings of $9.9 billion, with an
average cost of funds of 0.81%, compared to $10.2 billion and
0.68%, respectively, during the Third Quarter.
During the Fourth Quarter, the Company did not experience a
decline in the availability of repo borrowings. At
December 31, 2016, repo borrowings with any individual
counterparty were less than 7.1% of our total repo borrowings. As
of December 31, 2016, we had 50 counterparties available to
finance the Company's operations through repo borrowings. Below is
a summary, by region, of our Total Outstanding Borrowings at
December 31, 2016 (dollars in thousands):
Counterparty Region Number of Counterparties
Total Outstanding Borrowings % of Total
North America 22 $5,853,544 60.4% Europe 8 2,214,476 22.8% Asia 5
1,623,524 16.8% Total 35 $9,691,544 100.0%
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 December 31, 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 0.89%, a
weighted-average net pay rate of 0.34% and a weighted-average
remaining expiration of 3.0 years. The receive rate on the
Company's swaps is the three-month LIBOR, which resets quarterly
and stood at 1.00% at December 31, 2016, up from 0.85% at
September 30, 2016. At December 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
remaining expiration of 3.0 years.
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
remaining expiration of 3.3 years. 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
remaining expiration of 3.3 years.
Key provisions of the Company's outstanding swaps and caps at
December 31, 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% 0.94% (0.12)% $
1,000,000 $ 2,316 2018 1.00% 0.91% 0.09% 1,500,000 4,359 2020 1.45%
0.86% 0.59% 1,750,000 23,474 2021 1.21% 0.89% 0.32% 1,700,000
48,931 2022 1.98% 0.88% 1.10% 500,000 1,528 Total 1.23%
0.89% 0.34% $ 6,450,000 $ 80,608
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 $ 8,051 2020 1.25%
n/a 1.25% 1,700,000 34,481 Total 1.28% n/a 1.28% $ 2,500,000
$ 42,532
Duration Gap
Our net duration gap increased to 1.02 at December 31, 2016
from 0.50 at September 30, 2016 as a direct result of an
increase in interest rates during the Fourth Quarter.
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 Fourth Quarter and Third Quarter, and
years ended December 31, 2016 and 2015 follow (dollars in
thousands):
Three Months Ended Year Ended (in
thousands)
December 31, 2016 September 30,
2016 December 31, 2016 December 31, 2015
Drop Income $ 8,061 $ 10,524 $ 32,896 $ 32,609 Average TBAs market
value 1,534,878 1,851,353 1,404,095 1,244,321
Prepayments
We received $534.7 million in principal repayments and
prepayments, experienced a weighted-average CPR of approximately
14.2% and net amortization expense of $23.5 million during the
Fourth Quarter. This compared to $518.5 million in principal
repayments and prepayments, a weighted-average CPR of approximately
14.0%, and net amortization expense of $22.1 million for the Third
Quarter. The Company believes that the increase in CPR was due
principally to higher refinancings resulting from the expected Fed
rate hike in December.
Dividend
The Company declared a common dividend of $0.25 per share for
the Fourth Quarter, unchanged from the Third Quarter. Using the
closing share price of $7.73 on December 31, 2016, the Fourth
Quarter dividend equates to an annualized dividend yield of
12.9%.
Share Repurchase Program
The Company did not repurchase any shares in the Third and
Fourth Quarters. As of December 31, 2016, the Company had
approximately $155.5 million available under the share repurchase
program to repurchase shares of its common stock.
Results for the Year Ended December 31, 2016
The Company generated net income (loss) available to common
stockholders of $(4.4) million for the year ended December 31,
2016, or $(0.04) per diluted common share, compared to net income
(loss) available to common stockholders of $(25.6) million, or
$(0.17) per diluted common share in 2015. Book value per common
share decreased to $8.33 at December 31, 2015 from $9.36 at
December 31, 2015, after declaring $1.01 per share in
dividends during 2016. The year-over-year decrease in book value
per common share and net income was due primarily to net losses on
investments as a result of an increase in interest rates during the
Fourth Quarter. The Company recognized an aggregate net realized
and unrealized gain (loss) on investments of $(113.0) million for
the year ended December 31, 2016, compared to a net realized
and unrealized loss of $(116.1) million in the prior year.
During the year ended December 31, 2016, the Company had
Core Earnings plus Drop Income of $154.3 million, or $1.02 per
diluted common share ($0.81 Core Earnings and $0.21 Drop Income),
compared to $176.8 million, or $1.13 per diluted common share
($0.92 Core Earnings and $0.21 Drop Income), in 2015. The
year-over-year decrease in Core Earnings plus Drop Income per share
was primarily the result of a decrease in the average interest rate
spread net of hedge to 1.24% from 1.28% for the years ended
December 31, 2016 and 2015, respectively, on a smaller
investment portfolio, with average total Debt Securities of $13.2
billion for the year ended December 31, 2016, compared to
$14.2 billion for the year ended December 31, 2015.
The Company recognized a net realized and unrealized gain (loss)
on derivative instruments of $(11.5) million for the year ended
December 31, 2016, comprised of $9.2 million of net realized
and unrealized gain on swap and cap contracts, and $(20.7) million
of net realized and unrealized loss on TBA Derivatives. During
2015, the company recognized a net realized and unrealized gain
(loss) on derivative instruments of $(54.9) million. The decrease
in net realized and unrealized gain (loss) on derivative
instruments during 2016 was primarily due to an increase in
interest rates during 2016, resulting in an increase in the value
of our swaps. For illustrative purposes, 5-year swap rates
increased by 24 bps and decreased by 3 bps during 2016 and 2015,
respectively.
Operating expenses were $23.6 million and $20.8 million for the
years ended December 31, 2016 and 2015, respectively, representing
an expense ratio of 1.39% for 2016, compared to 1.12% for 2015. The
increase in operating expenses during 2016 was due primarily to an
increase in compensation and benefits expense due to an increase in
headcount and $2.6 million of non-recurring charges, including a
$1.7 million prior period tax charge. Excluding the effects of
non-recurring charges, the operating expense ratio was 1.23% for
the year ended December 31, 2016.
Conference Call
The Company will host a conference call at 9:00 AM Eastern Time
on Thursday, February 16, 2017, to discuss its financial
results for the quarter and year ended December 31, 2016. To
participate in the call by telephone, please dial (888) 647-8086 at
least 10 minutes prior to the start time and reference the
conference passcode 66321343. 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 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,
February 16, 2017, at approximately 12:00 PM Eastern Time
through Thursday, March 2, 2017, at approximately 11:00 AM Eastern
Time. To access this replay, please dial (855) 859-2056 and enter
the conference ID number 66321343. 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 http://www.cysinv.com.
Additional Information
The Company will make available a supplemental presentation on
the Company's website, contemporaneously with the filing of this
Form 8-K. The supplemental presentation will be available on the
Webcasts/Presentations 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. The Company
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 rate
volatility, the prices and supply and demand of Agency RMBS,
earnings, equity returns, yields, investment environment, economic
growth, inflation, interest rates, hedges, prepayments, the U.S.
and global economies, and the effect of actions of the U.S.
government, including the Fed, and the FOMC on the Company's
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 and
Quarterly Reports on Form 10-Q for the quarters ended March 31,
2016, June 30, 2016 and September 30, 2016, which have 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)
December 31,2016
September 30,2016
June 30,2016
March 31,2016
December 31,2015
(1)
(unaudited) (unaudited) (unaudited)
(unaudited) Assets: Cash and cash
equivalents $ 1,260 $ 2,192 $ 13,182 $ 6,262 $ 9,982 Investments in
securities, at fair value: Agency RMBS (including pledged assets of
$10,233,165, $10,117,658, $10,106,787, $10,868,773 and $11,587,014,
respectively) 12,599,045 11,742,018 11,879,933 12,888,430
12,927,996 U.S. Treasury securities (including pledged assets of
$44,469, $32,429, $884,213, $29,972 and $14,886, respectively)
49,686 49,891 884,213 29,972 99,711 Receivable for securities sold
and principal repayments 409,849 2,598 1,507 1,586 1,084,844
Receivable for cash pledged as collateral 600 63,464 97,309 85,097
21,751 Interest receivable 31,825 33,273 32,460 34,033 34,563
Derivative assets, at fair value 142,556 29,869 24,650 32,701
100,778 Other investments 8,028 8,028 31,028 34,028 50,028 Other
assets 2,419 2,787 1,625 1,219
1,051 Total assets $ 13,245,268 $ 11,934,120
$ 12,965,907 $ 13,113,328 $ 14,330,704
Liabilities and stockholders' equity: Liabilities:
Repurchase agreements
$
9,691,544
$ 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 1,881,963 424,476 652,619 937,163
1,475,974 Payable for cash received as collateral 91,503 10,882
4,826 9,141 18,534 Accrued interest payable 27,908 21,521 20,307
20,020 32,588 Accrued expenses and other liabilities 6,170 6,111
4,857 3,113 4,083 Dividends payable 4,410 42,264 42,259 43,809
4,410 Derivative liabilities, at fair value 6,051
50,240 95,529 85,461 14,024
Total liabilities $ 11,709,549 $ 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 $ 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
193,531
Common Stock, $0.01 par value, 500,000 shares authorized (151,435,
151,415, 151,394, 151,535 and 151,740 shares issued and
outstanding, respectively) 1,514 1,514 1,514 1,515 1,517 Additional
paid in capital 1,944,908 1,943,952 1,942,930 1,943,177 1,946,419
Retained earnings (accumulated deficit) (676,603 ) (453,381
) (489,335 ) (502,493 ) (519,222 ) Total stockholders'
equity $ 1,535,719 $ 1,757,985 $ 1,721,009 $
1,708,099 $ 1,694,614
Total liabilities and
stockholders' equity $ 13,245,268 $ 11,934,120 $
12,965,907 $ 13,113,328 $ 14,330,704
Book
value per common share $ 8.33 $ 9.79 $ 9.55
$ 9.46 $ 9.36
__________________
(1) Derived from audited consolidated financial statements.
CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Year Ended
(In thousands, except per share data)
December 31,2016
September 30,2016
June 30,2016
March 31,2016
December 31,2016
December 31,2015
(1)
Interest income: Agency RMBS $ 66,996 $ 68,602 $ 74,176 $ 81,323 $
291,097 $ 328,286 Other 1,572 1,059 681 128
3,440 2,909 Total interest income $ 68,568
$ 69,661 $ 74,857 $ 81,451 $ 294,537
$ 331,195 Interest expense: Repurchase agreements $
20,168 $ 17,265 $ 16,910 $ 15,886 $ 70,230 $ 40,700 FHLBC Advances
— 214 1,777 2,059 4,049 5,429
Total interest expense 20,168 17,479 18,687
17,945 74,279 46,129 Net interest
income $ 48,400 $ 52,182 $ 56,170 $ 63,506
$ 220,258 $ 285,066 Other income (loss): Net
realized gain (loss) on investments $ (36,253 ) $ 18,155 $ 36,359 $
1,202 $ 19,463 $ 13,652 Net unrealized gain (loss) on investments
(287,161 ) (36,540 ) 28,915 162,286 (132,500 ) (129,764 ) Net
unrealized gain (loss) on FHLBC Advances — — (448 ) (851 ) (1,299 )
1,299 Other income 203 308 387 463
1,361 867 Net realized and unrealized gain (loss) on
investments, FHLBC Advances and other income (323,211 ) (18,077 )
65,213 163,100 (112,975 ) (113,946 ) Swap and cap
interest expense (10,128 ) (12,493 ) (14,779 ) (18,398 ) (55,798 )
(100,110 ) Net realized and unrealized gain (loss) on derivative
instruments 109,951 63,625 (44,535 ) (140,524 )
(11,483 ) (54,932 ) Net gain (loss) on derivative instruments
99,823 51,132 (59,314 ) (158,922 ) (67,281 ) (155,042
) Total other income (loss) $ (223,388 ) $ 33,055 $ 5,899
$ 4,178 $ (180,256 ) $ (268,988 ) Expenses:
Compensation and benefits $ 1,885 $ 3,619 $ 3,565 $ 3,865 $ 12,934
$ 12,121 General, administrative and other 3,287 2,608
2,294 2,488 10,677 8,722 Total
expenses 5,172 6,227 5,859 6,353 23,611
20,843 Net income (loss) $ (180,160 ) $ 79,010
$ 56,210 $ 61,331 $ 16,391 $ (4,765 )
Dividends on preferred stock (5,203 ) (5,203 ) (5,203 ) (5,203 )
(20,812 ) (20,813 ) Net income (loss) available to common
stockholders $ (185,363 ) $ 73,807 $ 51,007 $ 56,128
$ (4,421 ) $ (25,578 ) Net income (loss) per common share
basic & diluted $ (1.23 ) $ 0.49 $ 0.34 $ 0.37
$ (0.04 ) $ (0.17 )
__________________
(1) Derived from audited consolidated financial statements.
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 Year Ended (dollars
in thousands, except per share data)
December 31,2016
September 30,2016
June 30,2016
March 31,2016
December 31,2016
December 31,2015
Net income (loss) available to common stockholders $ (185,363 ) $
73,807 $ 51,007 $ 56,128 $ (4,421 ) $ (25,578 ) Net realized (gain)
loss on investments 36,253 (18,155 ) (36,359 ) (1,202 ) (19,463 )
(13,652 ) Net unrealized (gain) loss on investments 287,161 36,540
(28,915 ) (162,286 ) 132,500 129,764 Net realized and unrealized
(gain) loss on derivative instruments (109,951 ) (63,625 ) 44,535
140,524 11,483 54,932 Net unrealized (gain) loss on FHLBC Advances
— — 448 851 1,299 (1,299 ) Core
Earnings $ 28,100 $ 28,567 $ 30,716 $ 34,015
$ 121,398 $ 144,167 Core Earnings per
average share $ 0.19 $ 0.19 $ 0.20 $ 0.22
$ 0.81 $ 0.92 Drop Income $ 8,061 $
10,524 $ 7,996 $ 6,315 $ 32,896 $
32,609 Core Earnings plus Drop Income $ 36,161 $
39,091 $ 38,712 $ 40,330 $ 154,294 $
176,776 Core Earnings plus Drop Income per average share $
0.24 $ 0.26 $ 0.26 $ 0.27 $ 1.02
$ 1.13
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version on businesswire.com: http://www.businesswire.com/news/home/20170215006219/en/
CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
Cys Investments, Inc. (NYSE:CYS)
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