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CYS Investments, Inc. (NYSE:CYS)

Q4 2012 Earnings Conference Call

February 7, 2013 8:30 am ET

Executives

Richard E. Cleary – Chief Operating Officer and Assistant Secretary

Kevin E. Grant – Founder, Chief Executive Officer, President, and Chairman of the Board

Frances Spark – Chief Financial Officer and Treasurer

William Sheehan – Managing Director, Investments

Analysts

Bill Carcache – Nomura Securities International, Inc.

Douglas Harter – Credit Suisse

Mark C. DeVries – Barclays Capital Inc.

Steve C. DeLaney – JMP Securities LLC

Joel J. Houck – Wells Fargo Securities

Jim Young – West Family Investments

Stephen A. Laws – Deutsche Bank Securities

Michael Widner – Stifel Nicolaus

Arren Cyganovich – Evercore Partners

Operator

Good morning and welcome to the CYS Investments Inc. Fourth Quarter 2012 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.

Management has asked me to remind you that certain information presented and certain statements made during management’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’ future performance taking into account information currently in the Company’s possession. Beliefs and 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 its 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 operations may vary materially from those expressed, anticipated, or contemplated in any form of their forward-looking statements.

In any event, actual results may differ. Management invites you to refer to the forward-looking statement disclaimer contained in the company’s Annual Report on Form 10-K filed with the SEC, which provides 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.

The company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, February 7, 2013. The company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

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

Richard E. Cleary

Thanks John and good morning. Welcome to the CYS’ 2012 fourth quarter earnings conference call. Today’s call is being recorded, and access to the recording of the call will be available on the Company’s website at cysinv.com beginning at 3 pm Eastern Time this afternoon.

To better understand our results, it’d be helpful to have 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 will be discussed on the call.

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

Kevin E. Grant

Thank you, Rick, and good morning everybody. Welcome to our fourth quarter earnings conference call. In addition to Rick, with me this morning is our CFO, Frances Spark; and Bill Sheehan from our investment team. As usual, we’d like to get to your questions, but first I have a few opening comments.

2012 was another solid year for CYS. We delivered $2.66 of shareholder value through a combination of $2.37 in dividends that includes the $0.52 special dividend and $0.29 of NAV appreciation through the year producing a shareholder return on net asset value over 20%.

Since our IPO in 2009, we have delivered a total return of 95% or about 32 points better than the S&P500. We have scaled the business well, and now we’ve gotten the expense ratio to be very competitive. We think this cost efficiency for CYS is a very important differentiator, especially in current times, when the returns in this industry are lower than they have been in the past several years.

We were able to deliver strong results last year because we did a very good job positioning the company a year ago for what we saw coming. we delivered this performance in an environment where the Fed was competing for our target assets, and the entire Federal Government was trying to stimulate the economy through refinancing from the agency mortgage securities market. I’d say they’ve succeeded, but I also say that we succeeded last year and that we were successful managing through the choppy waters of last year.

The environment today is a bit different than one year ago. net interest spreads are quite a bit tighter, and the opportunities for security selection are quite a bit narrower. The Q4 adjusted net interest spread of 108 basis points is actually a pretty good indicator of the current conditions in the marketplace, and the impact that the Fed has had on our markets.

Some mortgage researchers have estimated that the available supply of agency mortgage-backed securities will contract by nearly $400 billion in 2013. We know the Fed is buying around $85 billion a month, which is greater than the organic net supply. This involvement by the Fed has had multiple effects on the market and our business.

First, it has driven mortgage rates and therefore net interest spreads to new lows. Second, it has created the wave of refinancing activity as well as a strong stimulus to residential construction. Third, the tight spread levels are actually crowding out private capital as that capital seeks higher equity returns elsewhere. We think this is temporary, but we can’t wait for the Fed to get out of our markets. We’ve been effective at dodging the bulk of prepayment wave by selling vulnerable securities and replacing them with better mortgages. Refi applications have slowed down a little in the past several weeks, and Washington seems to be re-aiming its attention on the non-agency market; those mortgages that are trapped in non-agency securitization values, so maybe we will get some relief on prepayments within the Agency market.

Agency guarantee fees are slated to rise again in 2013, and a 10-year treasury has backed up a little bit as well; this should reduce prepayment risk on Agency’s and perhaps improve spread later this year.

Looking forward generically, just for modeling purposes, we see Agency mortgages yielding about 1.8% on average. It is possible to find specified pools that might be better, but every trader on the street is focused on the specified pool game, so it is tough to beat that 1.8% yield in today’s market at any volume.

Financing is currently printing at about 38 basis points, it’s been little bit pesky after year-end here, little bit sticky on the high side, and hedging costs are still quite modest at about 20 basis points. So, we see the net interest spread for new investment made today at about 120 basis points. For us, our quarterly portfolio runoff and reinvestment appetite therefore is about $900 million a quarter, so this is a good estimate for the refresh rates on our net interest spread going forward.

We expect our leverage to remain steady, so we see ROEs on this business at around 10%. However, with the Fed re-emphasizing its commitment to QE, one really has to be bullish on agency mortgage-backed securities prices in the near-term, so to be conservative, we should all use a tighter assumption in modeling. Maybe the curve will steepen down and mortgages will cheapen, but the shear magnitude of the Fed’s involvement, this really seems unlikely in the near term at least.

We now like to turn it over to questions. As I mentioned, our CFO, Frances Spark is here along with Bill Sheehan from the investment side.

John if you could collect the queue for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Bill Carcache from Nomura. Please go ahead.

Bill Carcache – Nomura Securities International, Inc.

Good morning. Thanks. Kevin, I was hoping if you could just share your thoughts from a big picture standpoint on the interest rate environment. Our interest rate strategist here has been calling for yields to decrease in the near-term as some of the uncertainty in Washington plays out over the coming months before they rise again in the second half of the year and into 2013. Can you share your views on kind of how you’re positioning CYS?

Kevin E. Grant

I think this year there is going to be an inflection point at some point. The economy seems better. It doesn’t seem to me like the Fed ought to be basically foreign gasoline on. We’ve got the political dynamic of a Fed Chairman who has got basically one year to being reappointed. And I think later this year, there will be a lot of discussion, and maybe he will make an announcement about what’s going to happen with him. So, the market at some point later this year is going to price-in whatever the sentiment is about Chairman Bernanke.

My personal sense, and this is just a sense, there is no way of knowing if he’d like to retire and that that’s going to get priced into the market, and whoever the front runner is, whoever that person is, sort of leaning from a monetary policy perspective will start to get priced in. So, I think it’s quite interesting.

Just to come back to the sequester and the budget cuts and so forth, that stuff is real and it’s a real headwind for GDP growth, so this 2% level on the ten-years for us it’s welcome, but it’s not enough. I mean we’d actually – we are rooted for a stronger economy and a 2.5%, 3% yield on the ten year. But with the sequester, and just the natural slowdown built in the government spending, it’s really, really tough to think that that’s going to happen anytime soon.

Bill Carcache – Nomura Securities International, Inc.

Okay that’s really helpful color, thank you. And also going back to last quarter’s call, I believe you shared your thought process on buybacks, and it seems like my sense was that you were not crazy about the attractiveness of buying back shares relative to your other alternatives. Yes, during the quarter, you guys announced a buyback program, did something change or can you just talk a little bit about the thought process there?

Kevin E. Grant

It’s really all about the math, nothing really changed, it’s just all about the math, where is the stock? What’s our reinvestment opportunity for the capital that we have got in house, and what’s the best way to drive ROE over the next several quarters. Most companies of this size have a buyback program in place, so that if you want to use it, it’s there available for you to use. So, there is probably time to put one in place. It’s a good size program, so we’ve got it at our fingertips if we think it’s helpful.

Bill Carcache – Nomura Securities International, Inc.

Understood, well that’s really helpful. That’s very much guys. I appreciate it.

Operator

Our next question comes from Douglas Harter from Credit Suisse. Please go ahead.

Douglas Harter – Credit Suisse

Thanks. I was wondering sort of – if your – in one of your last comments, you said you're rooting for the stronger economy and the higher ten year, can you just talk about how you think your book value might fair sort of– especially in light of the decline you saw on the book value this quarter?

Frances Spark

We publish an interest rate sensitivity table on a regular basis, and when the K comes out, you will get a refresh on that. So that should give you a pretty good idea. I think the real question is what happens to mortgages in that environment. And if the market senses a strong economy here in the near-term, I could see the 10-year treasury going up to, I don’t know, 2.5, that’s wishful thinking, and mortgages probably tightening in that just because of the magnitude of the Fed’s activity. So, it’s a big unknown, but the mismatch or the tracking error between mortgages and treasuries right now is, I don’t think it’s ever been higher.

Douglas Harter – Credit Suisse

I guess, isn’t there also the risk that as the economy gets stronger, people start to price the Fed out of the market and that could cause mortgages to widen?

Frances Spark

Wishful thinking on your part and my part, it’s just hard to get our arms around how much that might be. From our vantage point, the more, the better.

Douglas Harter – Credit Suisse

All right, thank you.

Operator

Our next question comes from Mark DeVries from Barclays. Please go ahead.

Mark C. DeVries – Barclays Capital Inc.

Yes thanks. Kevin is it right to think that the 108 adjusted spread you referenced kind of understates the actual economic spread, but it’s not factoring in the drop income?

Kevin E. Grant

Well, we’re trying to get to a normalized number, and that 108 is kind of a normalized number. The drop income -- the dynamics in the market right now are making this forward strategy that we use very special, and it’s pretty remarkable, so for what we can buy in the forward market, it’s adding a lot of value. Ordinarily, we’d say that it’s a good proxy for net interest spread, but the forward market is so special, it’s well beyond that. I wouldn’t extrapolate too many quarters out. It’s one of those things that if we can buy special in the forward market and benefit from that, great, but I wouldn’t annualize it, I wouldn’t model it.

Mark C. DeVries – Barclays Capital Inc.

Okay. Were the spreads that you ended up realizing in the quarter close to the 140, 150 range that you talked about in the last quarter? Or was a lot of stuff getting redeployed at that 108 level that you were referencing now?

Frances Spark

Yes, the last quarter that was before the full impact of the Fed and prepayments started to impact numbers. That discussion was in middle of October, and it’s a very lot of prepayments, and lot of noise in the quarter, once the Fed really got rolling.

Mark C. DeVries – Barclays Capital Inc.

Okay. When we last talked, I think you indicated that strategically you guys have decided to sell out most of your specified pools, but you’ve thought you were still selecting securities that had certain characteristics that the market may be under valuing. Did your experience in the past quarter either through performance relative to TVAs or just realized prepayment speeds, kind of reinforce that view?

Kevin E. Grant

Yes, I’d make a couple of observations, one is the more seasoned HARP bonds, these are new loans, so the new bond from our HARP refinancing -- those bonds are not paying at zero CPR. They’re at six or eight CPR, and you wonder where those CPRs are coming from. Well, they’re coming from delinquencies. So the re-delinquency rate, the re-default rate or a credit characteristics just as one for instance, and in some areas of the specified pool, all the premiums have come out, and at some other areas, the premiums have ballooned back out.

Mark C. DeVries – Barclays Capital Inc.

Okay.

Kevin E. Grant

I’d tell you the market for spec pools is -- it’s unbelievably efficient at this point.

Mark C. DeVries – Barclays Capital Inc.

Okay, got it. And then finally, what net duration are you running at and has the backup in rates that we’ve seen caused you to be more inclined to hedge than you have been of late?

Frances Spark

Yes. This gets back to the question of tracking between interest rate swaps, which is our hedging vehicle and mortgage prices, and with the Fed being so significant in the mortgage market, it is a little bit of tail wagging the dog. So, mortgage prices have been really pretty stable, and the backup in the 10-year, it’s only been about 20 basis points, I mean it feels like 2% is a long way from where we were, but it’s really only been about 20 basis points.

Mark C. DeVries – Barclays Capital Inc.

Okay. Thanks.

Operator

Our next question comes from Steve DeLaney from JMP Securities. Please go ahead.

Steve C. DeLaney – JMP Securities LLC

Thank you, good morning everyone, and Kevin, congrats on working the expense ratio down. I just have one question left, given what’s being covered already. We’ve seen about 8 basis points to 10 basis points come off on repo, and I was just curious as you guys talk to your counterparties, do you see the possibility of any additional relief on the repo cost front?

William Sheehan

Good morning, Steve. It’s Bill Sheehan.

Steve C. DeLaney – JMP Securities LLC

Hi, Bill.

William Sheehan

I would say, we’re continuing to think that those rates can fall some more. We’ve got, as you’ve said, we’ve dropped about 5 basis points to 7 basis points, and we think there could be another 5 basis points to 7 basis points more in there roughly certainly depending on the maturity mix that you utilize over the course of the year. So, we’re optimistic there will be more of a drop coming forward in 2013.

Steve C. DeLaney – JMP Securities LLC

Okay. Is there any specific driver of that that you can point to, I mean you sound fairly comfortable in that assessment, I’m just curious if there is some technical or structural issue support for the view?

Kevin E. Grant

I think – it’s Kevin again. I think in general, there is tons of cash around, that’s number one. And then with derivatives going to this clearing mechanism, there is the big need of collateral. So, in March through May kind of timeframe as the collateral, basically treasuries and government bonds including mortgages become a little bit more scarce and folks need to post collateral to the derivatives exchanges, it just creates a shortage of collateral because that collateral is taken out of the flow in the system.

Steve C. DeLaney – JMP Securities LLC

Sure.

Kevin E. Grant

That should push down repo too.

Steve C. DeLaney – JMP Securities LLC

That makes sense, and I recall you’d mentioned that before. Okay, well, thanks for the color on that funding cost. I appreciate it.

Kevin E. Grant

Yes, thanks.

Operator

Our next question comes from Joel Houck from Wells Fargo. Please go ahead.

Joel J. Houck – Wells Fargo Securities

Thank you. I guess question is more on the clarification of the run rate economics of the business. You mentioned a 10% ROE, but maybe I am confusing the math, it looks like with the 120 spread that’s a new investment, that’s higher than the 108 in the current quarter, and you guys are already in Q4 running about 12% ROE if I include the drop income. So, I guess I am not clear as to why the forward ROEs would move down to 10%? And then, I have a follow-up.

Kevin E. Grant

Yes, I guess Joel, I guess I am bullish on mortgages, and I just think that the impact of the Fed is going to push spreads tighter. I could be wrong on that, but I think, I’m one of the conservative here in just seeing what the Fed is doing to the market, just anticipate that, if we got 120, I’d be very pleased, but it might be tougher in the next couple of months.

Joel J. Houck – Wells Fargo Securities

Okay, so your comments are more forward looking than kind of the current margin, okay I got that. Yes, okay thanks. And then it looks like – it could be wrong, but it looks like prepayments are going to slow the balance of the year, and given your comments about spec pool market being very efficiently priced, I mean what does that do to your view in terms of maybe increasing leverage and increasing leverage on lower cost asset value TBA market.

Kevin E. Grant

Couple of things, lots of components for that question, one is pre-pays – a year is a long time Joel. So, what we’re seeing right now is the refi index, the application index has come off. It’s been coming off for several weeks now actually before even year-end, so prepayments actually printed this morning, and they have come off slightly and we expect that to continue. So, that’s unbalanced, that’s positive for us. The mortgage origination system, they are adding capacity to it, but at a pretty slow pace in my view, and I think that a lot of that capacity is focused around kind of a low hanging fruit, and that’s some loans that are in securitizations that are non-agency, because the agency -- the confirming market is pretty well refied out and we’re really kind of seeing if we are not already.

So, on leverage, we’re comfortable here. We are not seeing haircuts come down in the financing markets, and this is a good place to be. I don’t think this is our view of the Fed particularly with the potential change in the Fed Chairman a year from now, our view is that this is not a time to be cranking up leverage, this is the time to keep lots of flexibility in the business.

Joel J. Houck – Wells Fargo Securities

Okay. But net-net it sounds like it would take a fairly significant high-standard deviation event for you guys to not deliver at least 10% or 11% ROE going forward.

Kevin E. Grant

Well, that’s our feeling. It looks to us like the volatility around that ten number is probably pretty small.

Joel J. Houck – Wells Fargo Securities

Okay, great. Thank you very much.

Kevin E. Grant

Yes.

Operator

Our next question comes from Jim Young from West Family Investments. Please go ahead.

Jim Young – West Family Investments

Yes, Kevin. Could you clarify the 10% ROE that you mentioned, is that a growth or net ROE, and secondly can you walk us through your math as to how you get down to the 10% number. Thank you.

Kevin E. Grant

Yes, happy to do it. That’s real. I am thinking that’s a net number, that’s kind of where I see expenses and where I see spread and so forth through the years, so it is probably a net number, and you can pick your spread, but if you use 100 basis points just for round numbers, multiply it by the leverage, and you can use 7.7 if you want, add back the unlevered yield on the piece that there is no financing against. Put the hedge in there and basically multiply that out and you get to about 10%.

Jim Young – West Family Investments

Okay. Thank you.

Kevin E. Grant

Yes.

Operator

Our next question comes from Stephen Laws from Deutsche Bank. Please go ahead.

Stephen A. Laws – Deutsche Bank Securities

Hi, good morning, thanks for taking my question. Majority of the stuff has already been covered, and I apologize if I missed this early. Can you may be touch on -- you guys have done a great job of driving down expenses as a percentage of equity. Kind of where – at what point do we see that somewhat plateau to where you have really kind of driven the scale benefits and not much left to achieve, can you maybe talk on the accomplishments there and where we can see that go from here?

Frances Spark

Well, on expenses, the big expense is comp. And what we do with comp, as you know, we are paid for performance, we are not paid for AUL. So at the beginning of the year, I guess, maybe we are really confident in what we can deliver for the year, so we accrue based on a pretty conservative assumption of our compensation meaning the compensation bonus pool will get maxed out.

And as we go through the year, obviously we get better information and we know better, so mechanically quarter-to-quarter, what you will see is some noise, and that’s what you saw last year, but it was even noisier last year, because we scale the business from beginning to end of year.

In terms of where we can take the expense ratio from here, it’s pretty skinny to calibrate in your mind where Q4 specifically came out. If you take the -- there is an iShare ETF, it’s $3.5 billion of market cap, it is a good size; MBB is the iShare ETF, and that’s just a, it’s an ETF, it’s a passive ETF. It’s the mortgage index, and they just passively buy the securities, TBA. So there is no value added from securities selection and so forth.

The expense ratio on that is 31 basis points, and of course it is unlevered, so if you were to leverage adjust that assuming you could efficiently do it, you would have an expense ratio of 240 basis points, so for a public company, I think this expense ratio is pretty darn low.

Stephen A. Laws – Deutsche Bank Securities

Yes you guys have done a great job driving those down, thanks for the time to take the question.

Kevin E. Grant

Yes.

Operator

Our next question comes from Mike Widner from Stifel Nicolaus. Please go ahead.

Michael Widner – Stifel Nicolaus

Good morning guys. I’ve got a handful of questions, I mean the first one is on, kind of looking through the numbers, it looks like you turned over fair amount of assets in the quarter, and I am just wondering if you could talk about sort of how much you sold either in fair value, principal value, what it was and kind of what you’re shifting out of and into, and how we might expect that to continue or change going forward?

Kevin E. Grant

Yes, Q3 and Q4 were very active, and the prepayment environment really warranted that activity. I don’t see Q1 2013 as being nearly as active (Indiscernible)

Frances Spark

Agreed, yes. There will be less activity. We think as – just as you have noticed historically, our prepayment levels on the portfolio have been very consistent over time, and that is due to securities selection, and as Kevin said, the activity was a function of the pickup in prepayments during the third and fourth quarter, and we don’t think we are going to see that coming through the first and second quarter of this year, that same kind of pickup, if anything leveling off may be slightly lower in prepayments going forward.

Michael Widner – Stifel Nicolaus

And so -- but I mean specifically, I don’t know, I mean you guys might not want to give a number, but I mean it looks to me like you sold something in the low-single digit billions, somewhere $2 billion to $5 billion worth of MBS in the quarter driving to realize gains, but also because you tend to use a lot of forward purchases, your average portfolio was basically exactly the same as what it was at the end of within rounding error, what it was at the end of Q3. And so, (Indiscernible) modeling purposes, we look out going forward, just trying to figure out what is that average portfolio look like, is it going to hang around $16 billion in change or is it going to ramp back up to your full portfolio size of $20 billion et cetera, and again if you could comment on sort of what you are selling versus what you are buying, I think you said earlier, you’ve been selling out specified pools that had gotten pretty rich, which certainly makes sense to me, but are you moving more just generic Fannie 3s or what’s going on now?

Frances Spark

So, just if you look at the balance sheet in the release, because that’s got some pretty good hints, actually much bigger than hints. If you look at the liabilities, you’ll see a full line for securities purchased of $4.5 billion. That gives you a pretty good idea of what was purchased that spanned over quarter-end, and you’ll see at the end of September that number was $6 billion. So, that’s a kind of an indicator that we’re little less busy in Q4 than we were in Q3. The other thing is just to make sure we distinguish between average assets over the quarter, and a balance sheet number, which is the snapshot obviously at the end of the quarter, so that total asset number was $21 billion at the end of December. So hopefully, that gives you a little bit of color on that, and I don’t see us being anywhere near that active in Q1.

Michael Widner – Stifel Nicolaus

All right, great. (Indiscernible)action this year?

Frances Spark

Well, so again and again, if I look at that, yes, you’re standing at $21 billion at the end of the year, but it’s only really -- you’ve got $4.5 billion unsettled. so again, you’re sitting sort of somewhere around 16 (indiscernible unsettled, and if I look back over the course of 2012, pretty much every quarter, at the end of the quarter you had something above 20% of your overall assets unsettled.

And so again, just because that obviously affects -- it affects the whole bunch of things in projecting out income. you’re not getting really interest income on that, and it’s a mix of the drop versus core income, but it also impacts our view of sort of how swapped you are. So I don’t know, I mean again, the real question is just, should we continue to look for something in the $4 billion, $3 billion range of unsettled kind of every quarter going forward or is there an expectation that that will eventually kind of contract?

Kevin E. Grant

We know and it’s in the release that we had $949 million of pay-downs in scheduled and unscheduled principal coming in during the quarter, so that’s the reinvestment appetite in the quarter, so you know you’re going to have that. Anything over and above that is a result of an active decision to sell a bond, it’s just way too expensive, but I think right now just looking at it right now, pretty much -- portfolio, I really like what we have right now. But Mike, things could change tomorrow and this is an active strategy, and it has to be active, you got to be able to dodge all the issues that pop up in the mortgage market, and that’s just the name of the game in this business.

Michael Widner – Stifel Nicolaus

I would think that is prudent, and I would agree with that entirely, let me ask one more on the 75 basis pointish kind of run-rate on expenses that you are going? I mean have you got your families eating Ramen noodles and mac & cheese, is that sort of the secret to the lower numbers there relative to what some of the other guys are?

Kevin E. Grant

I actually like Udon, that’s my favorite right now.

Michael Widner – Stifel Nicolaus

Okay Udon, well, so I mean there is high sodium stuff in there, so you need to think about that, but we do appreciate the low cost structure, I think that puts you guys lowest in the industry right now, if I am not mistaken.

Kevin E. Grant

Yes, go back to my comments a couple of minutes ago about how we do comp, don’t take the mid 70’s and just assume that that’s a forever thing, that’s just once Q4 washed out, and we had a better idea in compensation, so I think it’s probably better to use kind of the 105 kind of neighborhood, and we don’t know whether there will be any capital raising this year, we are assuming not, but you just never know. And as obviously, this is a scale game.

Michael Widner – Stifel Nicolaus

For some of you, yes it is. But thanks for…

Kevin E. Grant

For us it is a scale game.

Michael Widner – Stifel Nicolaus

Well, thanks for taking the questions. And congrats on the solid year.

Kevin E. Grant

Scale game that is, so okay, thanks Mike.

Operator

Our next question comes from Arren Cyganovich from Evercore. Please go ahead.

Arren Cyganovich – Evercore Partners

Thanks. I just have a quick question on prepayments. I saw the January number picked up to a little over 19% from 17.6% for the quarter. You talked about prepayment is expected to come down or at least level off, are you thinking more leveling off around the January number or kind of more in line with the last quarter?

Kevin E. Grant

Talk about February Bill, just generically.

William Sheehan

Yes, generically today we got the – last night we got the numbers and the 15 year 3% coupon was down 3%, and the cohort, and then the 30-year 3.5 cohort was down about 7%. So, we are optimistic that if you continue to see the interest rates around these levels, but I think -- we are thinking there could be a little bit of a drop off from where we were recently.

Arren Cyganovich – Evercore Partners

Okay, thank you.

Kevin E. Grant

You are welcome.

Operator

(Operator Instructions) At the moment, we have no questions. I will now turn it back to you Mr. Cleary for closing remarks.

Richard E. Cleary

Thank you. And on behalf of Kevin, Frances, Bill, and the entire CYS management team, I would like to thank you for taking the time to participate and speak with us this morning, and have a great day. Thank you.

Operator

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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