CYS Investments, Inc. (CYS)

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CYS Investments Inc (CYS)

Q4 2013 CYS Investments, Inc. Earnings Conference Call.

February 11, 2014 / 9:00 A.M. E.T.


Rick Cleary – COO

Kevin Grant – CEO, President and Chairman

Frances Spark – CFO

Bill Shean – Managing Director


Steve DeLaney – JMP Securities

Dan Altscher – FBR

Joel Houck – Wells Fargo Securities, LLC

Douglas Harter – Credit Suisse

Mike Widner – Keefe, Bruyette & Woods

Jim Young – West Family Investments



Good morning and welcome to the CYS Investments, Inc. 2013 fourth-quarter earnings conference call. During management's presentation, your line will be in a listen-only mode. At the conclusion of management's remarks, there will be a question-and-answer session. I will provide you with instructions to enter the Q&A queue after management's comments.

For opening remarks and introductions, I will now turn the call over to Rick Cleary, CYS Chief Operating Officer. Please go ahead, Mr. Cleary.

Rick Cleary

Thank you. Good morning and welcome to CYS 2013 fourth-quarter earnings conference call. Today's call is being recorded and access to the recording of the call will be available on our website at beginning at 12 PM Eastern Time this afternoon.

Please be reminded that certain information presented and certain statements made during this morning's presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management's beliefs, assumptions, and expectations of CYS's future performance, taking into account information currently in the Company's possession. Beliefs, assumptions, and expectations are subject to change, risk, and uncertainty as a result of possible events or factors, not all of which are known to management or within management's control. If management's underlying beliefs, assumptions, and expectations prove incorrect or change, then the Company's performance and its business, financial condition, liquidity, and results of operation may vary materially from those expressed, anticipated, or contemplated in any of their forward-looking statements. In any event, actual results may differ.

You are invited to refer to the forward-looking statement disclaimer contained in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the SEC, which provide a description of some of the factors that could have a material impact on the Company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

Also, please note that the content of this conference call contains time-sensitive information that is accurate only as of today, Tuesday, February 11, 2014. The Company does not intend to and undertakes no duty to update the information to reflect future events or circumstances. To better understand our results, it would be helpful to have available the press release that we issued last night. As in past releases, the earnings release includes information regarding non-GAAP financial measures including reconciliation of those measures to GAAP measures, which may be discussed on the call.

I would now like to turn the call over to our CEO, Kevin Grant.

Kevin Grant

Thank you, Rick. Good morning and welcome to our fourth-quarter 2013 earnings conference call. As usual, joining Rick and myself this morning is our CFO, Frances Spark, and Bill Shean from our investment team. We look forward to your questions.

I’d like to divide my comments into three pieces. First, some thoughts on Q4; second, the bond market so far in 2014 and the almost complete reversal of Q4; and three, hedging, what it can do for us and what it cannot do for us. During the quarter, we continued to reduce our gross portfolio size in a disciplined fashion by about $500 million in the quarter. We continued to reduce our exposure to the more volatile 30-year sector while maintaining the earnings power of the business. The goal here is to reduce the NAV volatility, but to do so opportunistically and in a paced and very careful way.

The spread environment continues to be very good so the cash flows should continue to generate attractive dividends. However, the Agency at mortgage securities market continues to be quite volatile.

Q4 was a good example. Interest rates backed up by nearly 50 basis points through the quarter. This pushed down the price of our assets. Interestingly, prices have almost completely reversed that past year in 2014. Our net interest spread continued to climb during the quarter and our core plus drop income was very strong.

Prepayments continued to drop to extremely low levels and this is largely driven by the very narrow credit box that the regulators have defined for mortgage originators coupled with last year's backup in rates and, of course, the usual winter slowdown in refinancing activity and home purchases. Of course, the seasonals will begin to trend upwards, but the regulators show no signs that the very narrow credit box will broaden to help more homebuyers and re-financers.

The NAV was down in Q4, but we have so much liquidity that that does not create any issues for us. And mortgage securities prices nearly completely reversed in January anyway.

Turning to 2014, I think it is now clear to everyone and somewhat priced into the Treasury bond market, at least, that the Fed is on a path to eliminate asset purchases, almost regardless of the short-term noise in GDP and employment numbers. The Fed seems to recognize that there really is no amount of monetary accommodations that can reverse the contractionary effects of technology on labor markets and wages, shifting demographics, and the drags that the tax and regulatory environment impose on business investment, and actually homeowner investment as well.

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