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| HBC-P > SEC Filings for HBC-P > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing later in this Report.
Summary
Year Ended December 31, 2008 Compared to December 31, 2007
The Company's net income for 2008 was $20.7 million. This represented a 6.3% decrease from 2007 net income of $22.1 million. Earnings decreased primarily because of lower interest income on earning assets.
Interest income on securities purchased under agreement to resell for the year ended December 31, 2008 was $1 million on an average balance of $42 million with an average yield of 2.3% compared to interest income of $3.9 million on an average balance of $84 million with an average yield of 4.7% for 2007. Interest income on the Notes for 2008 totaled $302 thousand and yielded 6.4% on $4.7 million of average principal outstanding compared to $364 thousand and a 6.4% yield on $5.7 million average principal outstanding for 2007. The decrease in interest income from the Notes was attributable to a reduction in the Note balance because of customer payoffs in the Securing Mortgage Loans. The average outstanding balance of the Securing Mortgage Loans was $6 million for 2008 and $7 million for 2007. Interest income on securities available-for-sale for 2008 was $20 million, resulting in a yield of 4.5% on an average balance of $444 million compared to interest income of $18.2 million with a yield of 4.6% on an average balance of $395 million for 2007. There were no Company borrowings during either year.
Operating expenses for the year ended December 31, 2008 totaled $597 thousand compared to $437 thousand a year ago. Loan servicing expenses for 2008 totaled $15 thousand, a decrease of $3 thousand from 2007. This decrease was attributable to the reduction in the principal balance of the Notes. Advisory fees for the year ended December 31, 2008 were $208 thousand compared to $119 thousand, a 75% increase from 2007, primarily due to increased costs for processing and management services. General and administrative expenses totaled $374 thousand for 2008 and $300 thousand for 2007, a 25% increase from 2007 primarily as a result of increased costs for printing and insurance.
Year Ended December 31, 2007 Compared to December 31, 2006
The Company's net income for 2007 was $22.1 million. This represented a 5.7% increase from 2006 net income of $20.9 million. Earnings increased primarily because of higher interest income on earning assets.
Interest income on securities purchased under agreement to resell for the year ended December 31, 2007 was $3.9 million on an average balance of $84 million with an average yield of 4.7% compared to interest income of $4.1 million on an average balance of $91 million with an average yield of 4.6% for 2006. Interest income on the Notes for 2007 totaled $364 thousand and yielded 6.4% on $5.7 million of average principal outstanding compared to $466 thousand and a 6.4% yield on $7.3 million average principal outstanding for 2006. The decrease in interest income from the Notes was attributable to a reduction in the Note balance because of customer payoffs in the Securing Mortgage Loans. The average outstanding balance of the Securing Mortgage Loans was $7 million for 2007 and $9 million for 2006. Interest income on securities available-for-sale for 2007 was $18.2 million, resulting in a yield of 4.6% on an average balance of $395 million compared to interest income of $16.8 million with a yield of 4.4% on an average balance of $382 million for 2006. There were no Company borrowings during either year.
Operating expenses for the year ended December 31, 2007 totaled $437 thousand compared to $492 thousand a year ago. Loan servicing expenses for 2007 totaled $18 thousand, a decrease of $5 thousand from 2006. This decrease was attributable to the reduction in the principal balance of the Notes. Advisory fees for the year ended December 31, 2007 were $119 thousand compared to $127 thousand for the same period a year ago. General and administrative expenses totaled $300 thousand for 2007 and $342 thousand for 2006, a 12% decrease from 2006. The decrease is partially due to lower insurance and processing costs in 2007.
The Company made the election under Internal Revenue Code Section 858 (a) to treat the September 2008 and 2007 Common Stock distributions as having been made during tax years 2007 and 2006, respectively. The
Company made the election under Internal Revenue Code Section 857(6)(9) to treat the dividend paid on January 4, 2008 as paid on December 31, 2007.
At December 31, 2008 and 2007, there were no Securing Mortgage Loans on nonaccrual status and there was no allowance for loan losses.
Quarter Ended December 31, 2008 Compared to Quarter Ended December 31, 2007
The Company's net income for the fourth quarter of 2008 was $5.1 million compared to $5.3 million for the same period in 2007.
Interest income on securities available-for-sale for the current quarter was $5.1 million resulting in a yield of 4.6% on an average balance of $447 million, compared to interest income of $4.3 million with a yield of 4.5% on an average balance of $383 million for the same period a year ago. Interest income on securities purchased under agreement to resell for the current quarter was $53 thousand on an average balance of $40 million resulting in an average yield of 0.5% compared to interest income of $1.1 million on an average balance of $101 million with an average yield of 4.3% for the same period in the year-ago quarter.
There were no Company borrowings during the fourth quarter of 2008 or 2007.
Fourth quarter 2008 operating expenses totaled $193 thousand, an increase of $54 thousand from the fourth quarter of 2007. Advisory fees for the fourth quarter of 2008 were $54 thousand compared to $16 thousand in the prior year's fourth quarter due to increased costs for investment advisory services and administration. General and administrative expenses totaled $136 thousand in the current quarter compared to $119 thousand for the same period in 2007, reflecting increased costs for printing, legal and expert services.
Allowance for Loan Losses
The Company does not currently maintain an allowance for loan losses due to the over-collateralization of the Securing Mortgage Loans and the prior and expected credit performance of the collateral pool and because the Company can, under certain conditions, require the Bank to dispose of nonperforming Mortgage Loans.
Concentrations of Credit Risk
The MBS portfolio securities currently held by the Company are all various issues of federal agency guaranteed conventional pass-through securities. The credit guarantees extended by the Federal National Mortgage Association and Federal Home Loan Mortgage Association are characterized as full modification guarantees whereby the timely payment of both interest and principal is assured by the respective sponsoring federal agency.
A majority of the collateral underlying the Securing Mortgage Loans is located in Illinois. The financial viability of customers in this state is, in part, dependent on the state's economy. The collateral may be subject to a greater risk of default than other comparable loans in the event of adverse economic, political or business developments or natural hazards that may affect such region and the ability of property owners in such region to make payments of principal and interest on the underlying mortgages. The Company's maximum risk of accounting loss, should all customers in Illinois fail to perform according to contract terms and all collateral prove to be worthless, was approximately $3.2 million at December 31, 2008 and $4.4 million at December 31, 2007.
Interest Rate Risk
The Company's income consists primarily of interest payments on the Mortgage Assets and the securities it holds. If there is a decline in interest rates during a period of time when the Company must reinvest payments of interest and principal with respect to its Mortgage Assets and other interest earning assets, the Company may find it difficult to purchase additional earning assets that generate sufficient income to support payment of dividends on the Preferred Shares. Because the rate at which dividends, if, when and as authorized and declared, are payable on the Preferred Shares is fixed, there can be no assurance that an interest rate environment in which there is a decline in interest rates would not adversely affect the Company's ability to pay dividends on the Preferred Shares.
Competition
The Company does not engage in the business of originating mortgage loans. While the Company may acquire additional Mortgage Assets, it anticipates that such assets will be acquired from the Bank, affiliates of the Bank or unaffiliated parties. Accordingly, the Company does not expect to compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in originating Mortgage Assets.
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company's financial commitments. In managing liquidity, the Company takes into account various legal limitations placed on a REIT.
The Company's principal liquidity needs are to maintain the current portfolio size through the acquisition of additional qualifying assets and to pay dividends to its stockholders after satisfying obligations to creditors. The acquisition of additional qualifying assets is funded with the proceeds obtained from repayment of principal balances by individual mortgages or maturities of securities held for sale on a reinvested basis. The payment of dividends on the Preferred Shares will be made from legally available funds, principally arising from operating activities of the Company. The Company's cash flows from operating activities principally consist of the collection of interest on short term qualifying investments, the Notes and mortgage-backed securities. The Company does not have and does not anticipate having any material capital expenditures.
In order to remain qualified as a REIT, the Company must distribute annually at least 90% of its adjusted REIT ordinary taxable income, as provided for under the Code, to its common and preferred stockholders. The Company currently expects to distribute dividends annually equal to 90% or more of its adjusted REIT ordinary taxable income.
The Company anticipates that cash and cash equivalents on hand and the cash flow from the Notes, short-term investments and mortgage-backed securities will provide adequate liquidity for its operating, investing and financing needs including the capacity to continue preferred dividend payments on an uninterrupted basis. In addition, the Company believes that the recent March, 2009 $80 million capital contribution from the Company's parent should provide additional opportunity to invest in earning assets.
As presented in the accompanying Statement of Cash Flows, the primary sources of funds in addition to $20.3 million provided from operations during 2008 were $257.8 million from the maturities and sales of securities available-for-sale. In 2007, the primary sources of funds other than $22.2 million provided from operations were $360.6 million from the maturities and sales of securities available-for-sale. The primary uses of funds for 2008 were $265.2 million in purchases of securities available-for-sale and $1.1 million of sales proceeds from securities purchased from Harris N.A. under agreement to resell and $18.4 million and $5.6 million in Preferred Share dividends and Common Stock dividends paid, respectively. In 2007, the primary uses of funds were $358.7 million in purchases of securities available-for-sale and $23 million and $511 thousand in preferred stock dividends and common stock dividends paid, respectively.
Accounting Pronouncements
The Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115," as of January 1, 2008. The Statement permits entities to choose to measure certain eligible items at fair value at specified election dates. Although most of the provisions are elective, the amendment to SFAS 115 applies to all entities with available-for-sale and trading securities. The adoption of this Statement did not have a material effect on the Company's financial position or results of operations. The Company did not elect to adopt the fair value option for financial instruments recorded in the Company's Consolidated Statement of Condition on January 1, 2008.
The Company adopted SFAS No. 157, "Fair Value Measurements," as of January 1, 2008. The Statement provides guidance for using fair value to measure assets and liabilities. It clarifies the methods for measuring fair value, establishes a fair value hierarchy and requires expanded disclosure. SFAS 157 applies when other standards
require or permit assets or liabilities to be measured at fair value. The adoption of the Statement did not have a material effect on the Company's financial position or results of operations. The FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157," in February 2008. The FSP delayed the effective date of FAS 157 for non-financial assets and liabilities that are measured at fair value on a nonrecurring basis to fiscal years beginning after November 15, 2008. The Company adopted FSP 157-2 upon issuance and, as a result, the Company delayed adopting the provisions of FAS 157 for non-financial assets and liabilities that are measured at fair value on a nonrecurring basis. The FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active," in October 2008. The FSP clarifies the application of the Statement in a market that is not active and identifies key considerations. The Company adopted FSP 157-3 upon issuance.
Other Matters
As of December 31, 2008, the Company believes that it is in full compliance with the REIT tax rules, and expects to qualify as a REIT under the provisions of the Code. The Company expects to meet all REIT requirements regarding the ownership of its stock and anticipates meeting the annual distribution requirements.
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