Capital Mortgage Holdings, Inc. (Amex: HCM) reported net income for the quarter ended June 30, 2006 of $0.9 million, or $0.10 per share on a fully diluted basis, compared to a net loss of $0.2 million, or $0.02 per share on a fully diluted basis, for the same period in 2005. The Board of Directors declared a second quarterly dividend of $0.20 per share on August 7, 2006 to be paid on September 5, 2006 to stockholders of record as of August 21, 2006.
For the three months ended June 30, 2006, the Company's net income of $0.9 million was $1.0 million higher than the Company's net loss of $0.2 million for the corresponding quarter of 2005. This increase is primarily attributed to the higher operating income of the REIT and the reduced operating loss of the HanoverTrade segment. The majority of the Company's net income for the three months ended June 30, 2006 and 2005 is attributable to the REIT. The REIT's increase in operating income is primarily due to a decrease of $1.6 million in compensation expense. Of the $1.6 million, $1.4 million was due to compensation expenses incurred in June 2005 for four of the Company's executive officers pursuant to a 1997 contribution agreement, as amended, that were not incurred in 2006. The remainder of the reduction in compensation expense represents reduced expenses associated with reductions in staff. The increase in net income is partially offset by a decrease in gain on sale of mortgage assets to $0.7 million for 2006 from $1.9 million for 2005.
During the second quarter of 2006, Hanover changed the methodology by which it determines estimated fair value for its Subordinate Mortgage-Backed Securities ("MBS") portfolio to an enhanced proprietary valuation model developed by Hanover. Hanover's management believes the estimates used and developed by its proprietary model reasonably reflect the values the Company may be able to receive for the securities in its Subordinate MBS portfolio should the Company choose to sell them. The impact of the change in estimate was to increase the estimated fair value of Hanover's Subordinate MBS by $7.1 million, decrease unrealized loss included in other comprehensive income by the same amount and increase book value per share by $0.86. For a full discussion of the change in estimate, see Hanover's Form 10-Q for the quarter ended June 30, 2006 that is available through Hanover's.
As shown in the attached tables, the returns on the Company's primary investments in Subordinate MBS yielded 24.35% for the three months ended June 30, 2006 versus 19.45% for the corresponding quarter in 2005 despite an increase in the effective interest expense rate on this portfolio to 6.32% from 4.46% in 2005. The total increase was achieved with higher yielding assets and an increased leverage ratio. The credit performance on the Subordinate MBS continues to be good with negligible credit losses for the second quarter.
"The second quarterly dividend was set by the Board at $0.20 per share based in part on the results for the second quarter and also on the projected improvement in results for the remaining quarters and our changing focus from gains to net interest income. The Board performs similar evaluations for each quarterly dividend," concluded John A. Burchett, President and Chief Executive Officer.
HCM will host an investor conference call on Thursday, August 10, 2006 at 11:00 AM ET. The call will be broadcast on the Internet. To listen to the call, please go to the Web site at least fifteen minutes prior to the call to register, download, and install any necessary audio software. For those not able to listen to the live broadcast, a replay will be available for a period of 30 days.
To access the live call by phone, dial 877-407-8035 (international callers dial 201-689-8035) several minutes before the call. A recorded replay may be heard through Monday, August 14 at 11:59 PM ET by dialing 877-660-6853 (international callers dial 201-612-7415) and using playback account #286 and conference ID # 210302.
Hanover Capital Mortgage Holdings, Inc. is a mortgage REIT staffed by seasoned mortgage capital markets professionals. HCM invests in mortgage-backed securities and mortgage loans and engages in non-interest income-generating activities through its subsidiary, Hanover Capital Partners 2, Ltd., which operates two separate divisions, Hanover Capital Partners and HanoverTrade. Hanover Capital Partners provides consulting and outsourcing services to the mortgage industry. HanoverTrade provides technology solutions for the mortgage industry.
Certain statements in this press release may constitute "forward-looking" statements as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 as amended. HCM is including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements, to differ materially from future results, performance or achievements. The forward-looking statements are based on HCM's current belief, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties that are described in Item 1A of HCM's Annual Report on Form 10-K for the year ended December 31, 2005 and in other securities filings by HCM. HCM's future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this press release are made only as of the date hereof and HCM undertakes no obligation to update or revise the information contained in this announcement whether as a result of new information, subsequent events or circumstances or otherwise, unless otherwise required by law.