Market Overview

CYS Investments, Inc. Announces First Quarter 2018 Financial Results

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CYS Investments, Inc. (NYSE:CYS) ("CYS", "we", "us", "our", or the
"Company") today announced financial results for the quarter ended
March 31, 2018 (the "First Quarter").

First Quarter 2018 Summary Results

  • March 31, 2018 book value per common share of $7.41, after declaring a
    $0.22 dividend per common share, down from $8.38 at December 31, 2017.
  • GAAP net income (loss) available to common stockholders of $(113.7)
    million, or $(0.74) per diluted common share.
  • Core Earnings plus Drop Income of $37.9 million ($34.0 million Core
    Earnings and $3.9 million Drop Income), or $0.24 per diluted common
    share ($0.22 Core Earnings and $0.02 Drop Income).
  • Interest rate spread, net of hedge, including Drop Income, of 1.31%.
  • Operating expense ratio of 1.59%, or 1.48%, excluding a $0.4 million
    non-recurring charge.
  • Weighted-average amortized cost of Agency RMBS and U.S. Treasuries
    (collectively, "Debt Securities") of $102.95.
  • Leverage ratio of 8.06:1 at March 31, 2018.
  • Constant Prepayment Rate ("CPR") of 7.1% (weighted-average experienced
    1-month).
  • Total stockholder return (loss) on common equity of (8.95)%.
  • Expanded the nature and size of the hedge portfolio and added $1.25
    billion in notional of swaptions and established an $800 million
    10-year U.S. Treasury short position.

Market Commentary

2018 opened with a roar as interest rates staged their biggest quarterly
change since the 2016 presidential election. Short and long-term U.S.
Treasury yields moved significantly higher and equity markets surged to
new peaks in January (at its First Quarter peak, the S&P 500 had gained
7% in late January) as markets digested the effects of tax reform and
the likelihood of higher growth and inflation. The 10-year U.S. Treasury
yield ended the month of January at 2.71%, 30 basis points ("bps")
higher on a year-to-date basis and the highest yield recorded on a close
since early 2014. The equity markets took a dive in the first weeks of
February, decreasing almost 12% from the then year-to-date peak to
trough based on intraday trading. The "mini correction" appears to have
been spurred by inflation concerns. Treasury markets initially rallied
as equities declined, and the 10-year U.S. Treasury yield dropped from
2.84% to 2.71% during the first weeks of February while equities hit
their quarterly low. Thereafter, equity markets recovered somewhat and
the 10-year U.S. Treasury yield traded in a tight range between 2.80%
and 2.95%, as markets anticipated at least three and possibly four rate
hikes by the Federal Reserve (the "Fed") this year, a moderate
acceleration in inflation and falling unemployment. The equity markets
closed the First Quarter slumping again in late March, as newly
announced tariffs, talk of trade wars and technology sector
disappointments again caused market fear. The S&P 500 closed the First
Quarter down 1% and the 10-year U.S. Treasury yield closed at 2.74%, 33
bps higher than where it started the year.

Over the course of the First Quarter, U.S. Treasury yields shifted
higher across maturities and the yield curve flattened marginally by 6
bps between 2-year and 10-year bonds. In the backdrop, Congress was able
to agree to a budget in early February, and members of the Federal Open
Market Committee (the "FOMC") sounded somewhat more hawkish.

Jerome (Jay) Powell took the helm of the Fed in early February. As
expected, the transition from Chair Yellen to Powell appeared quite
smooth. In his first Humphrey Hawkins testimony before Congress in late
February, the new Chair expressed views similar to those expressed by
Yellen, but he sounded slightly more hawkish than markets had
anticipated. On March 21, 2018, the FOMC announced its first 25 bps rate
hike of 2018 and indicated two more hikes this year. The ‘dots' for 2019
and 2020 moved higher, however, indicating three and two hikes in each
of the next two years, respectively. Interestingly, the dots imply that
the Federal Funds Rate (the "Fed Funds Rate") in 2020 will be 50 bps
higher than the Fed's own estimate of the long-run neutral rate.

The FOMC remains short-handed. Former President of the Federal Reserve
Bank of San Francisco, John Williams, was named to the important post of
President of the Federal Reserve Bank of New York in early April. In
addition, plans have been announced to nominate Richard Clarida and
Michelle Bowman to the Federal Board of Governors in April, with Clarida
being nominated as vice chairman, which will take time to be confirmed
by Congress. The Federal Reserve President of San Francisco remains
vacant. Prior to Clarida and Bowman being confirmed by Congress, the
FOMC currently has seven voters compared with twelve voters for a
fully-staffed FOMC. As the remaining open positions are filled, there is
potential for the consensus view of the FOMC to change. Views likely
will be swayed by economic data as it is released.

During the First Quarter, 3-month London Interbank Offered Rate
("LIBOR") rose sharply and was one of the more notable market moves
through February and March. The increase in 3-month LIBOR outstripped
other short-term rate changes during the quarter, increasing 62 bps
during the First Quarter versus a 25 bps increase in the Fed Funds Rate.
The rapid rise in LIBOR has largely been attributed to a surplus of U.S.
Treasury bill issuance post-budget agreement as well as a notable
increase in commercial paper issuance (typically quoted in LIBOR) at a
time when prime money market funds and corporations have less demand for
these instruments as they redeploy their cash post-tax reform. The
higher LIBOR rates increase the receive rates and our cash flow on both
our interest rate swap and cap portfolios. At March 31, 2018, all except
four of our existing interest rate swap and cap positions at March 31,
2018 were net cash flow positive to us. We expect all of our swap and
cap positions to be cashflow positive to us by June of 2018 if 3-month
LIBOR remains at current levels.

Prices of Agency residential mortgage-backed securities ("Agency RMBS")
were soft during the First Quarter, dropping as rates rose and mortgage
spreads to U.S. Treasuries increased. 30-year Fannie Mae yields widened
by 4 bps relative to 7-year swap rates and by 11 bps relative to 7-year
U.S. Treasuries. 15-year Fannie Mae yields widened by 3 bps relative to
5-year swaps and 15 bps relative to 5-year U.S. Treasuries. The vast
majority of our Agency RMBS holdings decreased in price during the First
Quarter. The increase in rates during the First Quarter served to reduce
prepayment speeds on our Agency RMBS. As a result, we experienced a $2.1
million decrease in net premium amortization during the First Quarter
relative to the fourth quarter of 2017 (the "Prior Quarter").

First Quarter 2018 Results

The Company generated net income (loss) available to common stockholders
of $(113.7) million in the First Quarter, or $(0.74) per diluted common
share, compared to $3.6 million, or $0.02 per diluted common share, in
the Prior Quarter. The Company's book value per common share on
March 31, 2018 was $7.41, down from $8.38 at December 31, 2017, after
declaring a $0.22 dividend per common share on March 8, 2018. The book
value performance emanates from an increase in interest rates during the
First Quarter and an increase in Agency RMBS Option Adjusted Spreads
("OAS"), resulting in a sharp decline in the price of Agency RMBS. The
decline in the value of the Company's Debt Securities during the First
Quarter was partially offset by a net realized and unrealized gain in
the value of our derivative instruments as a direct result of an
increase in swap rates. The key components driving the First Quarter's
performance are described further below.

In the First Quarter, the Company generated Core Earnings plus Drop
Income (defined below) of $37.9 million, or $0.24 per diluted common
share, comprised of Core Earnings of $34.0 million, or $0.22 per diluted
common share, and Drop Income of $3.9 million, or $0.02 per diluted
common share. This compares to Core Earnings plus Drop Income of $33.6
million, or $0.22 per diluted common share during the Prior Quarter,
comprised of Core Earnings of $29.0 million, or $0.19 per diluted common
share, and Drop Income of $4.6 million, or $0.03 per diluted common
share. The increase in Core Earnings during the First Quarter relative
to the Prior Quarter largely resulted from a $7.3 million increase in
total interest income, a $3.3 million decrease in interest rate hedge
expense, net, and a $0.3 million decrease in total expenses, all of
which are described in more detail below.

During the First Quarter, our total interest income increased to $88.7
million from $81.4 million in the Prior Quarter due to the combined
impact of a decrease in the weighted-average experienced CPR and an
increase in the weighted average coupon, partially offset by a decrease
in the average settled Debt Securities. During the First Quarter, the
weighted average experienced CPR declined to 7.1% from 9.3% in the Prior
Quarter with a corresponding $2.1 million decrease in net premium
amortization expense relative to the Prior Quarter. The weighted-average
coupon on our settled Debt Securities increased to 3.59% in the First
Quarter, from 3.38% in the Prior Quarter. The increase in total interest
income was partially offset by a decrease in the average settled Debt
Securities to $11.7 billion during the First Quarter from $11.9
billion during the Prior Quarter.

The increase in interest expense largely stems from the Fed's 25 bps
rate hikes in December 2017 and March 2018, resulting in an increase in
the average cost of funds to 1.61% in the First Quarter, from 1.36% in
the Prior Quarter. The increase in total interest expense was partially
offset by a decrease in the average repo borrowings to $10.2 billion in
the First Quarter, from $10.3 billion in the Prior Quarter. The
Company's net interest income of $47.6 million in the First Quarter, up
approximately $1.4 million from $46.2 million in the Prior Quarter, is
due to the increase in total interest income, partially offset by the
increase in total interest expense described above.

Interest rate hedge expense, net decreased $3.3 million during the First
Quarter relative to the Prior Quarter, resulting from a combination of
repositioning a portion of our hedge portfolio (as further described
below) and an increase in the 3-month LIBOR during the First Quarter,
the index for the receive-leg of our swaps and caps, which resets
quarterly.

Total operating expenses decreased $0.3 million due to a decrease in
incentive compensation accrual during the First Quarter, partially
offset by a $0.4 million non-recurring charge during the First Quarter.
Non-recurring charges are not necessarily a part of the Company's
ongoing operations. The Company's operating expense ratio as a
percentage of average stockholders' equity was 1.59% in the First
Quarter, or 1.48% excluding the effect of a $0.4 million non-recurring
charge, compared to 1.57% and 1.49%, respectively, in the Prior Quarter.
The increase in the operating expense ratio during the First Quarter is
largely due to a decrease in average stockholders' equity to $1.48
billion during First Quarter from $1.58 billion in the Prior Quarter.

Drop Income decreased by $0.7 million in the First Quarter relative to
the Prior Quarter as a combined result of the timing of TBA trades, more
forward sales and less specialness during the First Quarter relative to
the Prior Quarter. "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 Company's 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.

Our Economic Net Interest Income, a non-GAAP measure, is generated
primarily from the net spread, or difference, between the interest
income we earn on our investment portfolio and the cost of our
borrowings and hedging activities. The amount of Economic Net Interest
Income we earn on our investments depends in part on our ability to
manage our financing costs, which represents a significant portion of
our total expenses. Economic Interest Expense consists of interest
expense, as computed in accordance with GAAP, plus interest rate hedge
expense, net used to hedge our cost of funds, a component of net gain
(loss) on derivative instruments in the Company's Consolidated
Statements of Operations. We present the non-GAAP measures Economic Net
Interest Income, and Economic Interest Expense to provide an economic
measure of our interest income and expense net of borrowing and hedge
expense, which management uses to evaluate the Company's investment
portfolio. We believe providing users of our financial information with
such measures in addition to the related GAAP measures gives users
additional transparency into the information used by our management in
its financial and operational decision-making, which is meaningful
information to consider in addition to the related GAAP measures as it
reflects the economic cost of financing our investment portfolio. The
following table presents a reconciliation of GAAP total net interest
income and interest expense to Economic Net Interest Income and Economic
Net Interest Expense, respectively, for each respective period.

   
(dollars in thousands) Three Months Ended
March 31, 2018     December 31, 2017
Net interest income $ 47,561 $ 46,179
Interest rate hedge expense, net 2,508   5,841
Economic Net Interest Income $ 45,053   $ 40,338
   
Total interest expense $ 41,117 $ 35,242
Interest rate hedge expense, net 2,508   5,841
Economic Interest Expense $ 43,625   $ 41,083
 

The Company's Economic Net Interest Income, which reflects interest rate
hedge expense, net, as well as interest expense on repo borrowings, was
$45.1 million in the First Quarter, an increase of approximately $4.8
million from $40.3 million in the Prior Quarter. The increase in
Economic Net Interest Income was primarily due to the increase in total
interest income and lower interest rate hedge expense, net, partially
offset by the increase in total interest expense, described above.

In the First Quarter, Economic Interest Expense totaled $43.6 million,
compared to $41.1 million in the Prior Quarter. Interest expense on repo
borrowings increased to $41.1 million in the First Quarter from $35.2
million in the Prior Quarter due to two separate 25 bps Fed rate hikes
in December 2017 and March 2018, while interest rate hedge expense, net
decreased by $3.3 million during the First Quarter as previously
described.

With respect to the asset portfolio, during the First Quarter, the
Company recognized an aggregate net realized and unrealized gain (loss)
from investments of $(237.2) million, compared to $(80.3) million in the
Prior Quarter. The asset portfolio performance during the First Quarter
emanates from an increase in interest rates and Agency RMBS OAS spread
widening during the First Quarter, resulting in a sharp decrease in the
prices of our Agency RMBS.

On the hedge side of the portfolio, the Company recognized a net
realized and unrealized gain (loss) on derivative instruments of $89.5
million in the First Quarter (comprised of $115.8 million of net
realized and unrealized gain on swap, swaptions and cap contracts,
$(16.0) million of net realized and unrealized loss on TBA dollar roll
transactions whereby the Company is not contractually obligated to
accept delivery on the settlement date (the "TBA Derivatives") and
$(10.3) million net realized and unrealized loss on the U.S. Treasury
short position), compared to a net realized and unrealized gain on
derivative instruments of $55.0 million in the Prior Quarter (comprised
of $57.3 million of net realized and unrealized gain on swap and cap
contracts, and $(2.3) million of net realized and unrealized loss on TBA
Derivatives). During the First Quarter we repositioned a portion of the
hedge portfolio by terminating swaps with a $1.0 billion notional, a
weighted-average pay rate of 0.99%, and a weighted-average remaining
maturity of 52 days, and replaced them with 3-month, 7-year swaptions
with a combined notional of $1.25 billion, and a weighted average strike
rate of 2.89%. We strategically rolled forward a few of these swaptions
toward the end of the First Quarter, prior to the end of the option
period, and simultaneously realized a gain of $2.0 million in the First
Quarter. In addition, during the First Quarter, in an effort to reduce
the volatility in book value in a rising interest rate environment, we
established an $800 million short position on 10-year U.S. Treasuries.

Set forth below are summary financial data for the First Quarter and
Prior Quarter:

Summary Financial Data

   
 
(dollars in thousands except per share data) Three Months Ended
Key Balance Sheet Metrics March 31, 2018     December 31, 2017
Average settled Debt Securities (1) $ 11,701,609 $ 11,910,563
Average total Debt Securities (2) $ 13,185,053 $ 13,068,179
Average repurchase agreements (3) $ 10,215,763 $ 10,346,783
Average Debt Securities liabilities (4) $ 11,699,207 $ 11,504,399
Average stockholders' equity (5) $ 1,480,291 $ 1,581,986
Average common shares outstanding (6) 155,198 155,009
Leverage ratio (at period end) (7) 8.06:1 7.33:1
Liquidity as % of stockholders' equity (8) 61 % 65 %
Hedge Ratio (9) 101 % 99 %
Net duration gap (10) 0.76 0.61
Book value per common share (at period end) (11) $ 7.41 $ 8.38
Weighted-average amortized cost of Agency RMBS and U.S. Treasuries (12) $ 102.95 $ 102.92
 
Key Performance Metrics*
Average yield on settled Debt Securities (13) 3.02 % 2.73 %
Average yield on total Debt Securities including Drop Income (14) 2.80 % 2.63 %
Average cost of funds (15) 1.61 % 1.36 %
Average cost of funds and hedge (16) 1.71 % 1.59 %
Adjusted average cost of funds and hedge (17) 1.49 % 1.43 %
Interest rate spread net of hedge (18) 1.31 % 1.14 %
Interest rate spread net of hedge including Drop Income (19) 1.31 % 1.20 %
Operating expense ratio (20) 1.59 % 1.57 %
Total stockholder return on common equity (21) (8.95 )% 0.35 %
Constant prepayment rate (weighted-average experienced 1-month) (22) 7.1 % 9.3 %

__________

(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 unsettled Debt
Securities (inclusive of TBA Derivatives) during the period.
(3)
The average repurchase agreements balance is calculated by averaging
the month-end repurchase agreements balances during the period.
(4)
The average Debt Securities liabilities are calculated by adding
the average month-end repurchase agreements 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 is calculated by averaging
the daily common shares outstanding during the period.
(7) The
leverage ratio is calculated by dividing
(i) the Company's repurchase agreements balance plus
payable for securities purchased minus
receivable for securities sold, plus or minus
the net TBA Derivatives positions by (ii) stockholders' equity at period
end.
(8) Liquidity as % of stockholders' equity is calculated by dividing
unencumbered liquid assets by stockholders' equity at period end.
(9)
The hedge ratio for the period is calculated by dividing
the combined total interest rate swaps, swaptions and interest rate caps
notional amount by total repurchase agreements balances.
(10) Net
duration gap is calculated as a weighted-average of the total portfolio
including the aggregate notional amount on our interest rate swaps,
swaptions, caps and U.S. Treasury short positions using DV01
methodology. Duration estimates in the table are calculated utilizing
Yield Book® software and may reflect adjustments based on our judgment.
(11)
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.
(12) 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.
(13) The average yield on
settled Debt Securities for the period is calculated by dividing
total interest income by average settled Debt Securities.
(14) 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 was $3.9 million and $4.6 million for
the First Quarter and Prior Quarter, respectively. Drop Income is a
component of our net realized and unrealized gain (loss) on investments
and 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 the trade date.
(15)
The average cost of funds for the period is calculated by dividing
repurchase agreement interest expense by average repurchase agreements
for the period.
(16) The average cost of funds and hedge for the
period is calculated by dividing repurchase
agreement interest expense and interest rate hedge expense, net by
average repurchase agreements for the period.
(17) The adjusted
average cost of funds and hedge for the period is calculated by dividing
repurchase agreement interest expense and interest rate hedge expense,
net by average Debt Securities liabilities.
(18) 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.
(19) 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.
(20) The operating expense
ratio for the period is calculated by dividing
annualized operating expenses by average stockholders' equity.
(21)
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 beginning of the period.
(22) 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

The Company's Debt Securities portfolio, including net TBA Derivatives,
at fair value, decreased to approximately $12.9 billion at March 31,
2018 from $13.1 billion at December 31, 2017. During the First Quarter,
we sold a portion of our lower coupon 30-year 3.5%, and 15-year 2.5% and
3.0% holdings in addition to all of our U.S. Treasuries as the special
financing that was available when we initially purchased the U.S.
Treasuries faded. We redeployed substantially all proceeds from these
sales into higher coupon 15-year 3.5% and 30-year 4.5% Agency RMBS due
to relative attractive yields and duration profile of the new cohorts,
resulting in an increase in the overall portfolio weighted average
coupon. As a result of the aforementioned repositioning, seasonal
factors and the increase in interest rates, we experienced a decrease in
weighted-average 1-month prepayment speeds during the First Quarter, as
further described above. The decrease in prepayment speeds, coupled with
the portfolio repositioning during the First Quarter, resulted in a 29
bps increase in the average yield on Debt Securities during the First
Quarter to 3.02% from 2.73% in the Prior Quarter. The weighted-average
cost basis of our Agency RMBS portfolio decreased to $102.95 at
March 31, 2018 from $103.20 at December 31, 2017.

The following tables detail the Company's Debt Securities portfolio,
inclusive of $1.4 billion and $0.5 billion of net TBA Derivatives at
March 31, 2018 and December 31, 2017, respectively (dollars in
thousands):

    March 31, 2018     December 31, 2017
Fair Value     % of Total Fair Value     % of Total
15-Year Fixed Rate $ 4,797,653 37 % $ 3,037,625 23 %
20-Year Fixed Rate 30,474 % 32,748 %
30-Year Fixed Rate 7,611,158 59 % 8,479,862 65 %
Hybrid ARMs 479,377 4 % 498,630 4 %
U.S. Treasuries   % 1,046,934   8 %
Total $ 12,918,662   100 % $ 13,095,799   100 %

Key metrics related to the Company 's Debt Securities portfolio,
inclusive of net TBA Derivatives, as of March 31, 2018 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 $ 4,741,199 $ 4,797,653 $ 102.15 $ 101.19 2.95 % 3.30 % 9.0 %
20-Year Fixed Rate 29,007 30,474 102.50 105.06 3.10 % 4.50 % 15.0 %
30-Year Fixed Rate 7,472,560 7,611,158 103.49 101.85 3.48 % 3.81 % 5.1 %
Hybrid ARMs (3) 475,571   479,377   102.42   100.80   2.96 % 3.06 % 7.7 %
Total $ 12,718,337   $ 12,918,662   $ 102.95   $ 101.58   3.26 % 3.59 % 6.5 %

__________

(1) Represents a forward yield and is calculated based on the
cost basis of the security at March 31, 2018.

(2) Represents CPR for those bonds held at March 31, 2018.
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 3-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 84.0 at March 31, 2018. 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 8.06:1 at the end of the First Quarter, up from 7.33:1
at the end of the Prior Quarter. As of March 31, 2018 and December 31,
2017, the Company financed its portfolio through repo borrowings
approximating $10.1 billion, and recognized a payable for securities
purchased net of receivable for securities sold, of approximately $20
million and $0.99 billion, respectively.

At March 31, 2018 and December 31, 2017, the Company's liquidity
position, consisting of unpledged Agency RMBS, U.S. Treasuries, and cash
and cash equivalents, was approximately $0.87 billion, or 60.7%, and
$1.02 billion, or 64.6%, respectively, of stockholders' equity.

Financing

During the First Quarter, the Company financed its investment portfolio
with average repo borrowings of $10.2 billion and an average cost of
funds of 1.61%, compared to $10.3 billion and 1.36%, respectively,
during the Prior Quarter.

During the First Quarter the Company did not experience a decline in the
availability of repo borrowings. At March 31, 2018, repo borrowings with
any individual counterparty were less than 6.1% of our total repo
borrowings. As of March 31, 2018, we had 36 active counterparties and 53
total counterparties available to finance the Company's operations
through repo borrowings.

Below is a summary, by region, of our outstanding borrowings at
March 31, 2018 (dollars in thousands):

Counterparty Region     Number of Counterparties     Total Outstanding Borrowings     % of Total
North America 22 $5,572,963 55.2%
Europe 8 2,436,690 24.2%
Asia 6 2,074,990 20.6%
Total 36 $10,084,643 100.0%

Hedging

The Company utilizes interest rate swap (cancellable and
non-cancellable), swaption and cap contracts (a "swap", a "swaption" or
"cap", respectively) to manage interest rate risk associated with the
financing of its Debt Securities portfolio. Effective during the First
Quarter, we began shorting 10-year U.S. Treasuries as an economic hedge
aimed at reducing volatility in book value in a rising interest rate
environment. At March 31, 2018 we had an $800 million short position on
10-year U.S. Treasuries with a fair market value of $767.1 million.

As of March 31, 2018, the Company held swaps with an aggregate notional
amount of $6.5 billion, a weighted-average fixed pay rate of 1.69%, a
weighted-average receive rate of 1.91%, a weighted-average net pay rate
of (0.22)% and a weighted-average remaining maturity of 4.0 years. The
receive rate on the Company's swaps was 1.91% at March 31, 2018, up from
1.45% at December 31, 2017. At March 31, 2018, the Company held caps
with a notional amount of $2.5 billion, all of which are now cash flow
positive to us, with a weighted-average cap rate of 1.28%, a
weighted-average receive rate of 2.02% and a weighted-average remaining
maturity of 1.8 years. As of March 31, 2018, the Company held swaptions
with an aggregate notional amount of $1.3 billion, a weighted-average
strike rate of 2.89% and an underlying swap term of 7 years.

As of December 31, 2017, the Company held swaps with an aggregate
notional amount of $7.5 billion, a weighted-average fixed pay rate of
1.59%, a weighted-average receive rate of 1.45%, a weighted-average net
pay rate of 0.14% and a weighted-average remaining maturity of 3.7
years. At December 31, 2017, 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 maturity of 2.0 years. We did not hold any
swaptions at December 31, 2017.

Key provisions of the Company's outstanding swaps, swaptions and caps at
March 31, 2018 are summarized below (dollars in thousands):

           
Interest Rate Swaps     Weighted-Average
Expiration Year Notional Amount Fair Value Fixed Pay Rate     Receive Rate     Net Pay (Receive) Rate
2020 2,250,000 57,267 1.60% 1.83% (0.23)%
2021 1,700,000 73,093 1.21% 1.80% (0.59)%
2022 1,500,000 37,787 2.12% 2.06% 0.06%
2024 625,000 31,874 1.88% 2.02% (0.14)%
2027 400,000   19,919   2.21% 2.14% 0.07%
Total $ 6,475,000   $ 219,940   1.69% 1.91% (0.22)%
 
Interest Rate Caps Weighted-Average
Expiration Year Notional Amount Fair Value Cap Rate Receive Rate Net Cap Pay Rate
2019 $ 800,000 $ 10,978 1.34% 1.71% (0.37)%
2020 1,700,000   43,691   1.25% 2.17% (0.92)%
Total $ 2,500,000   $ 54,669   1.28% 2.02% (0.74)%
 
Interest Rate Swaptions Weighted-Average
Expiration Year Notional Amount Fair Value Premium Strike Rate Term
2018 $ 1,250,000 $ 4,876 $10,393 2.89% 7 years
 

The net duration gap increased to 0.76 at March 31, 2018 from 0.61 at
December 31, 2017 as a direct result of the increase in interest rates
during the First Quarter and the resulting asset portfolio duration
extension, partially offset by the hedge portfolio expansion during the
First Quarter.

Drop Income

The Company's Drop Income and average market value of all TBAs
outstanding during the First Quarter and Prior Quarter follow (dollars
in thousands), the changes in which, are further describe above:

           
March 31, 2018 December 31, 2017 $ Change
Drop Income $ 3,899 $ 4,641 $ (742 )
Average market value of all TBAs $ 1,430,334 $ 1,034,786 $ 395,548
 

Prepayments

We received $295.1 million in principal repayments and prepayments from
our Agency RMBS portfolio during the First Quarter, representing a
weighted-average CPR of approximately 7.1%, which resulted in net
amortization expense of $11.6 million. During the Prior Quarter, we
received $349.9 million in principal repayments and prepayments from our
Agency RMBS portfolio, representing a weighted-average CPR of
approximately 9.3%, which resulted in net amortization expense of $13.7
million. The decrease in CPR in the First Quarter was principally due to
an increase in interest rates, bond seasoning factors and the portfolio
repositioning that took place during the First Quarter.

Dividend

The Company declared a common dividend of $0.22 per share for the First
Quarter, down from $0.25 in the Prior Quarter. Using the closing share
price of $6.72 on March 31, 2018, the First Quarter dividend equates to
an annualized dividend yield of 13.1%.

Dividend Reinvestment and Direct Stock Purchase Plan ("DRSPP")

On September 15, 2017, the Company renewed its DRSPP, whereby
stockholders may reinvest cash dividends and purchase up to 10,000,000
shares of our common stock. Stockholders may also make optional cash
purchases of shares of common stock subject to certain limitations
detailed in the respective plan prospectus. During the First Quarter,
the Company did not issue any shares under the DRSPP. As of March 31,
2018, $9.7 million shares of common stock remained available for
issuance under the DRSPP.

Conference Call

The Company will host a conference call at 9:00 AM Eastern Time on
Thursday, April 26, 2018, to discuss its financial results for the First
Quarter. To participate in the call by telephone, dial (888) 317-6016 in
the domestic United States, (855) 669-9657 in Canada or (412) 317-6016
outside North America, at least 10 minutes prior to the call's start
time. Please inform the operator that you are dialing into the CYS
Investments, Inc. conference call.

The conference call will also be webcast live over the Internet and can
be accessed at the Company's website at http://www.cysinv.com.
To listen to the live webcast, please visit http://www.cysinv.com at
least 10 minutes prior to the start of the call in order to register,
download and install necessary audio software.

A dial-in replay of the call will be available on Thursday, April 26,
2018 starting at approximately 12:00 PM Eastern Time through Thursday,
May 10, 2018 at approximately 11:00 AM Eastern Time. To access the
replay, please dial (877) 344-7529 in the domestic United States, (855)
669-9658 in Canada or (412) 317-0088 outside North America, and enter
conference ID number 10119401. A replay of the conference call will also
be archived on the Company's website at http://www.cysinv.com.

Additional Information

The Company plans to make available a supplemental presentation
("Presentation") for the benefit of its stockholders on 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 invests on a
leveraged basis primarily 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 market expectations, interest rates
and interest rate volatility, the prices, supply and volatility of
Agency RMBS, borrowing costs, earnings, yields, investment environment,
hedges, inflation, forward settling transactions, liquidity,
prepayments, the anticipated benefits of our portfolio and hedge
repositioning, and the effect of actions of the U.S. government, 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, 2017, 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)

       
March 31, 2018 December 31, 2017 *
(unaudited)
Assets:
Cash and cash equivalents $ 6,206 $ 4,132
Investments in securities, at fair value:
Agency mortgage-backed securities (including pledged assets of
$10,377,167 and $9,287,317, respectively)
11,535,960 11,587,720
U.S. Treasury securities (including pledged assets of $0
and$1,046,934, respectively)
1,046,934
Receivable for securities sold and principal repayments 287,360 301,398
Receivable for reverse repurchase agreements 767,422
Interest receivable 38,559 32,890
Derivative assets, at fair value 281,528 159,629
Other investments 9,765 9,765
Other assets 3,461   3,114  
Total assets $ 12,930,261   $ 13,145,582  
Liabilities and stockholders' equity:
Liabilities:
Repurchase agreements $ 10,084,643 $ 10,089,917
Obligation to return securities borrowed under reverse repurchase
agreements, at fair value
767,062
Payable for securities purchased 307,247 1,290,805
Payable for cash received as collateral 245,732 139,614
Accrued interest payable 47,911 41,468
Accrued expenses and other liabilities 2,371 4,969
Dividends payable 38,601 4,410
Derivative liabilities, at fair value 9,749   152  
Total liabilities $ 11,503,316   $ 11,571,335  
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
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
Common Stock, $0.01 par value, 500,000 shares authorized (155,416
and 155,010 shares issued and outstanding, respectively)
1,554 1,550
Additional paid in capital 1,976,906 1,976,310
Retained earnings (accumulated deficit) (817,415 ) (669,513 )
Total stockholders' equity $ 1,426,945   $ 1,574,247  
Total liabilities and stockholders' equity $ 12,930,261   $ 13,145,582  
Book value per common share $ 7.41   $ 8.38  

__________________

* Derived from audited consolidated financial statements.

 

CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)

   
Three Months Ended
(dollars in thousands, except per share data) March 31, 2018     December 31, 2017
Interest income:
Agency RMBS $ 85,986 $ 75,358
Other 2,692   6,063  
Total interest income 88,678   81,421  
Interest expense:
Repurchase agreements 41,117   35,242  
Total interest expense 41,117   35,242  
Net interest income 47,561   46,179  
Other income (loss):
Net realized gain (loss) on investments (71,191 ) (23,647 )
Net unrealized gain (loss) on investments (166,009 ) (56,651 )
Other income 39   39  
Net realized and unrealized gain (loss) on investments and other
income
(237,161 ) (80,259 )
Interest rate hedge expense, net (2,508 ) (5,841 )
Net realized and unrealized gain (loss) on derivative instruments 89,468   54,969  
Net gain (loss) on derivative instruments 86,960   49,128  
Total other income (loss) (150,201 ) (31,131 )
Expenses:
Compensation and benefits 3,192 3,985
General, administrative and other 2,676   2,232  
Total expenses 5,868   6,217  
Net income (loss) $ (108,508 ) $ 8,831  
Dividends on preferred stock (5,203 ) (5,203 )
Net income (loss) available to common stockholders $ (113,711 ) $ 3,628  
Net income (loss) per common share basic & diluted $ (0.74 ) $ 0.02  
 

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. 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
additional 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 our
financial performance over any period is that it excludes the effects of
net realized and unrealized gain (loss) on investments and derivative
instruments. In addition, our presentation of Core Earnings may not be
comparable to similarly-titled measures used by other companies, which
may employ different calculations. As a result, Core Earnings should not
be considered a substitute for our 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 Earnings, plus Drop Income for the periods
presented.

   
Three Months Ended
(dollars in thousands, except per share data) March 31, 2018     December 31, 2017
Net income (loss) available to common stockholders $ (113,711 ) $ 3,628
Net realized (gain) loss on investments 71,191 23,647
Net unrealized (gain) loss on investments 166,009 56,651
Net realized and unrealized (gain) loss on derivative instruments (89,468 ) (54,969 )
Core Earnings $ 34,021   $ 28,957  
Core Earnings per average share $ 0.22   $ 0.19  
Drop Income $ 3,899   $ 4,641  
Drop Income per average share $ 0.02   $ 0.03  
Core Earnings, plus Drop Income $ 37,920   $ 33,598  
Core Earnings, plus Drop Income per average share $ 0.24   $ 0.22  
 

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