##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the quarterly period ended March 31, 2006
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from            to
 Commission File Number: 000-31828
 
 LUMINENT MORTGAGE CAPITAL, INC.
  Maryland
    
    06-1694835(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)
 One Market, Spear Tower,
30thFloor, San Francisco, California
(Address of principal executive offices)
    
    
    
    94105
(Zip Code)
 (415) 978-3000
 N/A
 
 þ o
  o þ o
 o þ




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##### 



INDEX
 PAGEPART IITEM 1. FINANCIAL STATEMENTS
    
    
    1ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    22ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    40ITEM 4. CONTROLS AND PROCEDURES
    
    
    45PART IIITEM 1. LEGAL PROCEEDINGS
    
    
    46ITEM 1A. RISK FACTORS
    
    
    46ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    47ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    47ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    47ITEM 5. OTHER INFORMATION
    
    
    47ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    47SIGNATURES
    
    
    48EXHIBIT INDEX
    
    
    49EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    the flattening of, or other changes in the yield curve, on our investment strategies;
    
    interest rate mismatches between our mortgage loans and mortgage-backed securities and the borrowings we
use to fund our purchases of such loans and securities;
    
    changes in interest rates and mortgage prepayment rates;
    
    our ability to obtain or renew sufficient funding to maintain our leverage strategies;
    
    continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
    
    the possible effect of negative amortization of mortgages on our financial condition and REIT qualification;
    
    potential impacts of our leveraging policies on our net income and cash available for distribution;
    
    the ability of our board of directors to change our operating policies and strategies without stockholder
approval or notice to you;
    
    effects of interest rate caps on our adjustable-rate and hybrid adjustable-rate loans and mortgage-backed
securities;
    
    the degree to which our hedging strategies may or may not protect us from interest rate volatility;
    
    the fact that our manager could be motivated to recommend riskier investments in an effort to maximize its
incentive compensation under its management agreement with us;
    
    potential conflicts of interest arising out of our relationship with our manager, on the one hand, and our
managers relationships with other third parties, on the other hand;
    
    our ability to invest up to 10% of our investment portfolio in residuals, leveraged mortgage derivative
securities and shares of other REITs as well as other investments;
    
    volatility in the timing and amount of our cash distributions;
    
    your inability to review the assets that we will acquire with the net proceeds of any securities we offer
before you purchase our securities; and
    
    the other important factors described in this Quarterly Report on Form 10-Q, including those under the
captions Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk
Factors and Quantitative and Qualitative Disclosures about Market Risk.
   ii




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INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
 Condensed Consolidated Balance Sheets (unaudited) at March 31, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three months ended
March 31, 2006 and March 31, 2005
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the three
months ended March 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended
March 31, 2006 and March 31, 2005
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6
 1




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2006
    
    
    2005Assets:Cash and cash equivalents
    
    $
    164,943
    
    
    $
    11,466Restricted cash
    
    
    17
    
    
    
    794Mortgage-backed securities available-for-sale, at fair value
    
    
    292,496
    
    
    
    219,148Mortgage-backed securities available-for-sale, pledged as collateral, at fair value
    
    
    1,984,550
    
    
    
    4,140,455Loans held-for-investment
    
    
    2,148,734
    
    
    
    507,177Interest receivable
    
    
    17,201
    
    
    
    21,543Principal receivable
    
    
    4,430
    
    
    
    13,645Derivatives, fair value
    
    
    15,168
    
    
    
    10,720Other assets
    
    
    11,860
    
    
    
    8,523Total assets
    
    $
    4,639,399
    
    
    $
    4,933,471Liabilities:Repurchase agreements
    
    $
    1,957,468
    
    
    $
    3,928,505Mortgage-backed notes
    
    
    1,743,872
    
    
    
    486,302Warehouse lending facilities
    
    
    259,477
    
    
    
    Unsettled security purchases
    
    
    179,773
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Margin debt
    
    
    
    
    
    
    3,548Derivatives, at fair value
    
    
    491
    
    
    
    Cash distributions payable
    
    
    1,984
    
    
    
    1,218Accrued interest expense
    
    
    6,349
    
    
    
    21,123Management compensation payable, incentive compensation payable and other related
party liabilities
    
    
    1,503
    
    
    
    1,282Accounts payable and accrued expenses
    
    
    2,023
    
    
    
    2,384Total liabilities
    
    
    4,245,728
    
    
    
    4,537,150Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at March 31,
2006 and December 31, 2005
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 39,813,045 and 40,587,245 shares issued and
outstanding at March 31, 2006 and December 31, 2005, respectively
    
    
    40
    
    
    
    41Additional paid-in capital
    
    
    504,132
    
    
    
    511,941Accumulated other comprehensive income (loss)
    
    
    (3,559
    )
    
    
    7,076Accumulated distributions in excess of accumulated earnings
    
    
    (106,942
    )
    
    
    (122,737
    )Total stockholders equity
    
    
    393,671
    
    
    
    396,321Total liabilities and stockholders equity
    
    $
    4,639,399
    
    
    $
    4,933,471
  2




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended March 31,(in thousands, except share and per share amounts)
    
    2006
    
    
    2005Net Interest Income:Interest income:Spread portfolio
    
    $
    30,965
    
    
    $
    42,314Mortgage loan and securitization portfolio
    
    
    22,611
    
    
    
    Credit sensitive bond portfolio
    
    
    8,016
    
    
    
    201Total interest income
    
    
    61,592
    
    
    
    42,515Interest expense
    
    
    46,072
    
    
    
    20,539Net interest income
    
    
    15,520
    
    
    
    21,976Other Income (Expenses):Other income
    
    
    8,217
    
    
    
    Impairment losses on mortgage-backed securities
    
    
    (1,717
    )
    
    
    Gains on sales of mortgage-backed securities
    
    
    2,063
    
    
    
    Total other income
    
    
    8,563
    
    
    
    Expenses:Management compensation expense to related party
    
    
    712
    
    
    
    1,098Incentive compensation expense to related parties
    
    
    98
    
    
    
    470Salaries and benefits
    
    
    2,423
    
    
    
    208Servicing expense
    
    
    1,482
    
    
    
    Professional services
    
    
    622
    
    
    
    562Board of directors expense
    
    
    113
    
    
    
    119Insurance expense
    
    
    141
    
    
    
    138Custody expense
    
    
    112
    
    
    
    51Other general and administrative expenses
    
    
    601
    
    
    
    361Total expenses
    
    
    6,304
    
    
    
    3,007Net income
    
    $
    17,779
    
    
    $
    18,969Net income per share  basic
    
    $
    0.45
    
    
    $
    0.51Net income per share  diluted
    
    $
    0.45
    
    
    $
    0.51Weighted-average number of shares outstanding  basic
    
    
    39,491,786
    
    
    
    37,207,135Weighted-average number of shares outstanding  diluted
    
    
    39,718,552
    
    
    
    37,376,107Dividend per share
    
    $
    0.05
    
    
    $
    0.36
  3




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (Unaudited)
 AccumulatedAccumulated
    
    
    DistributionsCommon Stock
    
    
    Additional
    
    
    Other
    
    
    in Excess ofPar
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    TotalBalance, January 1, 2006
    
    
    40,587
    
    
    $
    41
    
    
    $
    511,941
    
    
    $
    7,076
    
    
    $
    (122,737
    )
    
    
    
    
    
    $
    396,321Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,779
    
    
    $
    17,779
    
    
    
    17,779Mortgage-backed securities
available-for-sale, fair
value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,826
    )
    
    
    
    
    
    
    (8,826
    )
    
    
    (8,826
    )Amortization of derivative
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,809
    )
    
    
    
    
    
    
    (1,809
    )
    
    
    (1,809
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,144Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,984
    )
    
    
    
    
    
    
    (1,984
    )Issuance and amortization of
restricted common stock
    
    
    300
    
    
    
    
    
    
    
    1,198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,198Repurchase of common stock
    
    
    (1,074
    )
    
    
    (1
    )
    
    
    (9,007
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,008
    )Balance, March 31, 2006
    
    
    39,813
    
    
    $
    40
    
    
    $
    504,132
    
    
    $
    (3,559
    )
    
    $
    (106,942
    )
    
    
    
    
    
    $
    393,671
  4




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended March 31,(in thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    17,779
    
    
    $
    18,969Adjustments to reconcile net income to net cash provided by (used in) operating activities:Amortization
of premium/(discount) on loans held-for-investment and mortgage-backed securities
available-for-sale
    
    
    (1,733
    )
    
    
    5,821Impairment losses on mortgage-backed securities
    
    
    1,717
    
    
    
    Negative amortization of loans held-for-investment
    
    
    (3,428
    )
    
    
    Share-based compensation
    
    
    1,199
    
    
    
    1Realized and unrealized gains on derivative instruments
    
    
    (5,209
    )
    
    
    (5,436
    )Net gain on sales of mortgage-backed-securities available-for-sale
    
    
    (2,063
    )
    
    
    Changes in operating assets and liabilities:Decrease in interest receivable, net of purchased interest
    
    
    6,106
    
    
    
    1,156(Increase) in other assets
    
    
    (245
    )
    
    
    (2,146
    )Increase/(decrease) in accounts payable and accrued expenses
    
    
    (361
    )
    
    
    488Increase/(decrease) in accrued interest expense
    
    
    (14,774
    )
    
    
    10,826Increase in management compensation payable, incentive compensation payable and other
related-party payable
    
    
    221
    
    
    
    440Net cash provided by (used in) operating activities
    
    
    (791
    )
    
    
    30,119Cash flows from investing activities:Purchases of mortgage-backed securities available-for-sale
    
    
    (1,079,321
    )
    
    
    (6,183
    )Proceeds from sales of mortgage-backed securities available-for-sale
    
    
    3,151,447
    
    
    
    Principal payments of mortgage-backed securities available-for-sale
    
    
    201,647
    
    
    
    335,534Purchases of loans held-for-investment, net
    
    
    (1,671,093
    )
    
    
    Purchases of derivative instruments
    
    
    (77
    )
    
    
    Principal payments of loans held-for-investment
    
    
    21,744
    
    
    
    Net change in restricted cash
    
    
    777
    
    
    
    Net cash provided by investing activities
    
    
    625,124
    
    
    
    329,351Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    
    
    
    
    9,875Repurchases of common stock
    
    
    (9,008
    )
    
    
    Borrowings under repurchase agreements
    
    
    12,975,841
    
    
    
    3,429,257Principal payments on repurchase agreements
    
    
    (14,946,878
    )
    
    
    (3,830,791
    )Borrowings under warehouse lending facilities
    
    
    1,634,658
    
    
    
    Paydown of warehouse lending facilities
    
    
    (1,375,181
    )
    
    
    Distributions to stockholders
    
    
    (1,218
    )
    
    
    (15,959
    )Borrowing under junior subordinated notes
    
    
    
    
    
    
    49,951Proceeds from issuance of mortgage-backed notes
    
    
    1,280,538
    
    
    
    Principal payments on mortgage-backed notes
    
    
    (26,060
    )
    
    
    Principal payments on margin debt
    
    
    (3,548
    )
    
    
    Net realized gains on Eurodollar futures contracts
    
    
    
    
    
    
    (4
    )Net cash used in financing activities
    
    
    (470,856
    )
    
    
    (357,671
    )Net increase in cash and cash equivalents
    
    
    153,477
    
    
    
    1,799Cash and cash equivalents, beginning of the period
    
    
    11,466
    
    
    
    10,581Cash and cash equivalents, end of the period
    
    $
    164,943
    
    
    $
    12,380Supplemental disclosure of cash flow information:Interest paid
    
    $
    48,795
    
    
    $
    15,848Non-cash investing and financing activities:Increase in unsettled security purchases
    
    $
    179,773
    
    
    $
    Decrease in principal receivable
    
    
    9,215
    
    
    
    2,444Incentive compensation payable settled through issuance of restricted common stock
    
    
    
    
    
    
    2,250Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    
    
    
    
    55Deferred compensation reclassified to stockholders equity upon issuance of restricted common stock
    
    
    
    
    
    
    (1,611
    )
  5




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
 Recent Accounting Pronouncements
 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
 6




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 (Unaudited)
 .
   NOTE 2MORTGAGE-BACKED SECURITIES
  March 31,
    
    
    December 31,2006
    
    
    2005Amortized cost
    
    $
    2,290,192
    
    
    $
    4,363,923Unrealized gains
    
    
    2,207
    
    
    
    8,357Unrealized losses
    
    
    (15,353
    )
    
    
    (12,677
    )Fair value
    
    $
    2,277,046
    
    
    $
    4,359,603
   7




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LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  WeightedAmortized
    
    
    -AverageWeighted-Average Life
    
    Fair Value
    
    
    Cost
    
    
    CouponLess than one year
    
    $
    496,870
    
    
    $
    497,302
    
    
    
    3.52
    %Greater than one year and less than five years
    
    
    1,640,374
    
    
    
    1,641,521
    
    
    
    5.03Greater than five years
    
    
    139,802
    
    
    
    151,369
    
    
    
    6.60Total
    
    $
    2,277,046
    
    
    $
    2,290,192
    
    
    
    4.81
    %
  WeightedAmortized
    
    
    -AverageWeighted-Average Life
    
    Fair Value
    
    
    Cost
    
    
    CouponLess than one year
    
    $
    690,568
    
    
    $
    690,539
    
    
    
    4.51
    %Greater than one year and less than five years
    
    
    3,489,302
    
    
    
    3,489,179
    
    
    
    4.35Greater than five years
    
    
    179,733
    
    
    
    184,205
    
    
    
    6.15Total
    
    $
    4,359,603
    
    
    $
    4,363,923
    
    
    
    4.46
    %
    8




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LUMINENT MORTGAGE CAPITAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    140,211
    
    
    $
    (517
    )
    
    $
    
    
    
    $
    
    
    
    $
    140,211
    
    
    $
    (517
    )Non-agency-backed
mortgage-backed securities
    
    
    352,668
    
    
    
    (14,836
    )
    
    
    
    
    
    
    
    
    
    
    352,668
    
    
    
    (14,836
    )Total temporarily impaired
mortgage-backed securities
    
    $
    492,879
    
    
    $
    (15,353
    )
    
    $
    
    
    
    $
    
    
    
    $
    492,879
    
    
    $
    (15,353
    )
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Non-agency-backed
mortgage-backed securities
    
    
    172,646
    
    
    
    (12,677
    )
    
    
    
    
    
    
    
    
    
    
    172,646
    
    
    
    (12,677
    )Total temporarily impaired
mortgage-backed securities
    
    $
    172,646
    
    
    $
    (12,677
    )
    
    $
    
    
    
    $
    
    
    
    $
    172,646
    
    
    $
    (12,677
    )
    9




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
    NOTE 3LOANS HELD-FOR-INVESTMENT
  Unamortized
    
    AmortizedPrincipal
    
    Premium
    
    CostResidential mortgage loans
    
    $
    2,123,730
    
    
    $
    25,004
    
    
    $
    2,148,734
  Unamortized
    
    AmortizedPrincipal
    
    Premium
    
    CostResidential mortgage loans
    
    $
    506,498
    
    
    $
    679
    
    
    $
    507,177
  10




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 NOTE 4BORROWINGS
   Weighted-AverageOutstanding
    
    
    Interest
    
    
    Fair Value ofBorrowings
    
    
    Rate
    
    
    Collateral (1)Repurchase agreements
    
    $
    1,957,468
    
    
    
    4.59
    %
    
    $
    2,122,553LUM 2005-1
    
    
    467,542
    
    
    
    5.10
    
    
    
    472,742LUM 2006-1
    
    
    532,791
    
    
    
    5.11
    
    
    
    536,762LUM 2006-2
    
    
    743,539
    
    
    
    5.05
    
    
    
    743,592Warehouse lending facilities
    
    
    259,477
    
    
    
    5.33
    
    
    
    267,994Junior subordinated notes
    
    
    92,788
    
    
    
    8.38
    
    
    
    noneTotal
    
    $
    4,053,605
    
    
    
    4.94
    %
    
    $
    4,143,643
 
 (1)
    
    Collateral for borrowings consist of mortgage-backed securities
available-for-sale and loans held-for-investment.  Weighted-AverageOutstanding
    
    
    Interest
    
    
    Fair Value ofBorrowings
    
    
    Rate
    
    
    Collateral (1)Repurchase agreements
    
    $
    3,928,505
    
    
    
    4.25
    %
    
    $
    4,157,117LUM 2005-1
    
    
    486,302
    
    
    
    4.66
    
    
    
    486,304Junior subordinated notes
    
    
    92,788
    
    
    
    8.18
    
    

    
    noneMargin lending facility
    
    
    3,548
    
    
    
    3.85
    
    
    
    3,548Total
    
    $
    4,511,143
    
    
    
    4.37
    %
    
    $
    4,646,969
 
 (1)
    
    Collateral for borrowings consist of mortgage-backed securities available-for-sale
and loans held-for-investment. Repurchase Agreements
  11




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   Overnight 1 day or less
    
    $
    9,002Between 2 and 30 days
    
    
    1,250,097Between 31 and 90 days
    
    
    227,145Between 91 and 147 days
    
    
    471,224Total
    
    $
    1,957,468
  Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    1,917,214Between 31 and 90 days
    
    
    929,023Between 91 and 237 days
    
    
    1,082,268Total
    
    $
    3,928,505
  Weighted-AverageMaturity ofRepurchaseAmount at
    
    
    AgreementsRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    (in days)Banc of America Securities LLC
    
    $
    7,271
    
    
    
    35Barclays Capital
    
    
    3,841
    
    
    
    18Bear Stearns & Co.
    
    
    29,171
    
    
    
    41Countrywide Securities Corporation
    
    
    24,570
    
    
    
    35Credit Suisse First Boston
    
    
    3,095
    
    
    
    47Deutsche Bank Securities Inc.
    
    
    5,101
    
    
    
    27Greenwich Capital Markets
    
    
    24,909
    
    
    
    24HSBC Securities Inc.
    
    
    2,677
    
    
    
    21JPMorgan
    
    
    1,591
    
    
    
    15Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    7,600
    
    
    
    89Morgan Stanley & Co. Inc.
    
    
    2,870
    
    
    
    10Nomura Securities International, Inc.
    
    
    3,925
    
    
    
    111UBS Paine Weber
    
    
    23,359
    
    
    
    127Wachovia Securities, LLC
    
    
    1,747
    
    
    
    111Washington Mutual
    
    
    22,482
    
    
    
    21Total
    
    $
    164,209
    
    
    
    51
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued
interest income and the fair value of loans pledged as collateral minus
the sum of repurchase agreement liabilities and accrued interest
expense. 12




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Weighted-AverageMaturity ofRepurchaseAmount at
    
    
    AgreementsRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    (in days)Banc of America Securities LLC
    
    $
    6,992
    
    
    
    153Barclays Capital
    
    
    3,656
    
    
    
    27Bear Stearns & Co.
    
    
    63,412
    
    
    
    46Citigroup
    
    
    8,367
    
    
    
    172Countrywide Securities Corporation
    
    
    9,618
    
    
    
    129Credit Suisse First Boston
    
    
    3,293
    
    
    
    17Deutsche Bank Securities Inc.
    
    
    28,326
    
    
    
    63Goldman Sachs & Co.
    
    
    17,421
    
    
    
    28Greenwich Capital Markets
    
    
    7,618
    
    
    
    15Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    24,018
    
    
    
    78Morgan Stanley & Co. Inc.
    
    
    5,922
    
    
    
    21Nomura Securities International, Inc.
    
    
    16,682
    
    
    
    86UBS Securities LLC
    
    
    22,331
    
    
    
    170Wachovia Securities, LLC
    
    
    3,950
    
    
    
    19Washington Mutual
    
    
    3,478
    
    
    
    27Total
    
    $
    225,084
    
    
    
    76
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and
accrued interest income and the fair value of loans pledged as
collateral minus the sum of repurchase agreement liabilities and
accrued interest expense. Mortgage-backed Notes
   Warehouse Lending Facilities
  13




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
    Junior Subordinated Notes
  March 31, 2006
    
    
    December 31, 2005Borrowings
    
    
    Interest
    
    
    Borrowings
    
    
    InterestOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateJunior subordinated notes:DST I
    
    $
    51,550
    
    
    
    8.16
    %
    
    $
    51,550
    
    
    
    8.16
    %DST II
    
    
    41,238
    
    
    
    8.66
    
    
    
    41,238
    
    
    
    8.21Total
    
    $
    92,788
    
    
    
    8.38
    %
    
    $
    92,788
    
    
    
    8.18
    %
   14




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Margin Lending Facility
  NOTE 5CAPITAL STOCK AND EARNINGS PER SHARE
     Three Months Ended March 31,2006
    
    
    2005Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    17,779
    
    
    $
    17,779
    
    
    $
    18,969
    
    
    $
    18,969Weighted-average number
of common shares
outstanding
    
    
    39,491,786
    
    
    
    39,491,786
    
    
    
    37,207,135
    
    
    
    37,207,135Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    226,766
    
    
    
    
    
    
    
    168,972Adjusted
weighted-average number
of common shares
outstanding
    
    
    39,491,786
    
    
    
    39,718,552
    
    
    
    37,207,135
    
    
    
    37,376,107Net income per share
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    0.51
    
    
    $
    0.51
 15




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 NOTE 62003 STOCK INCENTIVE PLANS
   2003 Outside2003 Stock
    
    
    Advisors StockIncentive Plan
    
    
    Incentive Plan
    
    
    TotalShares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    562,666
    
    
    
    
    
    
    
    562,666Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    1,287,334
    
    
    
    150,000
    
    
    
    1,437,334
  2006Weighted-Number
    
    
    Averageof
    
    
    ExerciseOptions
    
    
    PriceOutstanding, beginning of period
    
    
    55,000
    
    
    $
    14.82Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, end of period
    
    
    55,000
    
    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Remaining
    
    Weighted-
    
    
    
    
    
    Remaining
    
    WeightedExercise
    
    Number of
    
    Life
    
    Average
    
    Number of
    
    Life
    
    -AveragePrices
    
    Options
    
    (in years)
    
    Exercise Price
    
    Options
    
    (in years)
    
    Exercise Price$13.00-$14.00
    
    
    5,000
    
    
    
    7.6
    
    
    $
    13.00
    
    
    
    3,334
    
    
    
    7.6
    
    
    $
    13.00$14.01-$15.00
    
    
    50,000
    
    
    
    7.3
    
    
    
    15.00
    
    
    
    33,333
    
    
    
    7.3
    
    
    
    15.00$13.00-$15.00
    
    
    55,000
    
    
    
    
    
    
    $
    14.82
    
    
    
    36,667
    
    
    
    
    
    
    $
    14.82
 16




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   Weighted-AverageNumber of
    
    
    Grant-DateOptions
    
    
    Fair ValueNonvested, beginning of the period
    
    
    18,333
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    18,333
    
    
    $
    0.22
  Number of
    
    
    Weighted-Common
    
    
    Average IssueShares
    
    
    PriceOutstanding, beginning of period
    
    
    202,829
    
    
    $
    10.53Issued
    
    
    300,000
    
    
    
    7.76Repurchased
    
    
    
    
    
    
    Outstanding, end of period
    
    
    502,829
    
    
    $
    8.88
   Weighted-Number of
    
    
    AverageCommon
    
    
    Grant-DateShares
    
    
    Fair ValueNonvested, beginning of the period
    
    
    194,453
    
    
    $
    10.46Granted
    
    
    300,000
    
    
    
    7.76Vested
    
    
    (133,320
    )
    
    
    8.68Repurchased
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    361,133
    
    
    $
    8.88
  17




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 NOTE 7THE MANAGEMENT AGREEMENT
  
    
    base management compensation equal to a percentage of the Companys
applicable average net worth, as defined in the Amended Agreement,
payable quarterly in arrears, calculated at the following rates per
annum: (1) 0.90% of the first $750 million; plus (2) 0.70% of the next
$750 million plus (3) 0.50% of the amount in excess of $1.5 billion;
    
    incentive management compensation equal to a percentage of applicable
average net worth, as defined in the Amended Agreement, payable
annually, calculated at the following rates per annum: (1) 0.35% for
the first $750 million of applicable average net worth; (2) 0.20% for
the next $750 million of applicable average net worth and (3) 0.15%
for the applicable average net worth in excess of $1.5 billion if the
return on assets, as defined in the Amended Agreement, for any such
fiscal year exceeds the threshold return, which is defined as the
average of the weekly values for any period of the sum of (i) the
10-year U.S. Treasury rate for such period plus (ii) two percent (2%);
and
    
    out-of-pocket expenses and certain other costs incurred by the Manager
and related directly to the Company.
       18




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosure About Fair Value of Financial Instruments
 NOTE 9ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
  March 31,
    
    
    December 31,2006
    
    
    2005Unrealized holding losses on mortgage-backed securities
available-for-sale
    
    $
    (12,800
    )
    
    $
    (116,397
    )Reclassification adjustment for net losses on mortgage-backed
securities available-for-sale included in net income
    
    
    (2,063
    )
    
    
    69Impairment losses on mortgage-backed securities
    
    
    1,717
    
    
    
    112,008Net unrealized losses on mortgage-backed securities available-for-sale
    
    
    (13,146
    )
    
    
    (4,320
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    9,587
    
    
    
    11,396Accumulated other comprehensive income (loss)
    
    $
    (3,559
    )
    
    $
    7,076
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  19




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  EstimatedFair ValueFree Standing Derivatives:Eurodollar futures contracts sold short
    
    $
    1,329Interest rate swap contracts
    
    
    10,559Swaption contracts
    
    
    3,146Interest rate cap contracts
    
    
    134
  EstimatedFair ValueFree Standing Derivatives:Swaption contracts
    
    $
    1,531Interest rate cap contracts
    
    
    74Cash Flow Hedges:Eurodollar futures contracts sold short
    
    
    4,895Interest rate swap contracts
    
    
    4,220
 Free Standing Derivatives
  Cash Flow Hedging Strategies
   20




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##### Table of Contents



LUMINENT
MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Purchase Commitment Derivatives
  NOTE 11SUBSEQUENT EVENTS
  21




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##### Table of Contents



The following discussion of our financial condition and results of operations should be read
in conjunction with the financial statements and notes to those statements included in Item 1 of
this Quarterly Report on Form 10-Q. This discussion may contain certain forward-looking statements
that involve risks and uncertainties. Forward-looking statements are those that are not historical
in nature. The words anticipate, estimate, should, expect, believe, intend and similar
expressions or the negatives of these words or phrases are intended to identify forward-looking
statements. As a result of many factors, such as those set forth under Risk Factors in Item 1A of
this Quarterly Report on Form 10-Q, Item 1A of our 2005 Annual Report on Form 10-K, elsewhere in
this Quarterly Report or incorporated by reference herein, our actual results may differ materially
from those anticipated in such forward-looking statements.
 Overview
 Executive Summary
     
    
    Interest rate trends and changes in the yield curve;
    
    rates of prepayment on our mortgage loans and the mortgages underlying our mortgage-backed
securities;
 22




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##### Table of Contents




    
    continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
    
    highly competitive markets for investment opportunities; and
    
    other market developments.
  
    
    Credit risk as defined by prepayments, delinquencies and defaults on
our mortgage loans and the mortgage loans underlying our
mortgage-backed securities;
    
    overall leverage of our portfolio;
    
    access to funding and adequate borrowing capacity;
    
    negative amortization;
    
    increases in our borrowing costs;
    
    the ability to use derivatives to mitigate our interest rate and prepayment risks;
    
    the market value of our investments; and
    
    compliance with REIT requirements and the requirements to qualify for
an exemption under the Investment Company Act of 1940.
  Critical Accounting Policies
  Classifications of Investment Securities
  23




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##### Table of Contents



Valuations of Mortgage-backed Securities
      Loans Held-for-Investment
  Allowance and Provision for Loan Losses
  24




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##### Table of Contents



Interest Income Recognition
 Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets
  Securitizations
 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Consolidation of Variable Interest Entities
 Accounting for Derivative Financial Instruments and Hedging Activities
   25




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##### Table of Contents



Recent Accounting Pronouncements
  .
   Results of Operations
     26




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    2005Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    5.46
    %
    
    
    3.65
    %Weighted-average cost of total liabilities
    
    
    4.51
    
    
    
    1.91Net interest spread
    
    
    0.95
    %
    
    
    1.74
    %
    Three Months
    
    
    Percentage
    
    
    Three Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageMarch 31,
    
    
    Financing
    
    
    March 31,
    
    
    Financing2006
    
    
    Liabilities
    
    
    2005
    
    
    LiabilitiesInterest expense on repurchase agreement liabilities
    
    $
    28,015
    
    
    
    2.74
    %
    
    $
    26,498
    
    
    
    2.47
    %Interest expense on mortgage-backed notes
    
    
    13,774
    
    
    
    1.35
    
    
    
    
    
    
    
    Interest expense on warehouse lending facilities
    
    
    3,201
    
    
    
    0.31
    
    
    
    
    
    
    
    Interest expense on junior subordinated notes
    
    
    1,891
    
    
    
    0.18
    
    
    
    178
    
    
    
    0.02Net hedge ineffectiveness gains on futures and
interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    (592
    )
    
    
    (0.06
    )Amortization of net realized (gains)/losses on
futures contracts
    
    
    (1,414
    )
    
    
    (0.13
    )
    
    
    (4,728
    )
    
    
    (0.44
    )Net interest (income) expense on interest rate swap
contracts
    
    
    605
    
    
    
    0.06
    
    
    
    (819
    )
    
    
    (0.08
    )Other
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    nmTotal interest expense
    
    $
    46,072
    
    
    
    4.51
    %
    
    $
    20,539
    
    
    
    1.91
    %nm = not meaningful
  27
    Table of Contents         REIT taxable net income
   28




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##### Table of Contents



Adjustments toGAAP
    
    
    GAAP
    
    
    REIT TaxableStatement of
    
    
    Statement of
    
    
    Statement ofOperations
    
    
    Operations
    
    
    OperationsNet Interest Income:Interest Income:Spread portfolio
    
    $
    30,965
    
    
    $
    (6,062
    )
    
    $
    24,903Mortgage loan and securitization portfolio
    
    
    22,611
    
    
    
    (12,948
    )
    
    
    9,663Credit sensitive bond portfolio
    
    
    8,016
    
    
    
    (7
    )
    
    
    8,009Total interest income
    
    
    61,592
    
    
    
    (19,017
    )
    
    
    42,575Interest expense
    
    
    46,072
    
    
    
    (16,797
    )
    
    
    29,275Net interest income
    
    
    15,520
    
    
    
    (2,220
    )
    
    
    13,300Other Income (expense):Other income (expense)
    
    
    8,217
    
    
    
    (8,270
    )
    
    
    (53
    )Impairment losses on mortgage-backed securities
    
    
    (1,717
    )
    
    
    1,717
    
    
    
    Gains on sales of mortgage-backed securities
    
    
    2,063
    
    
    
    (2,063
    )
    
    
    Total other income (expense)
    
    
    8,563
    
    
    
    (8,616
    )
    
    
    (53
    )Expenses:Management fee expense to related party
    
    
    712
    
    
    
    (108
    )
    
    
    604Incentive compensation expense to related party
    
    
    98
    
    
    
    202
    
    
    
    300Salaries and benefits
    
    
    2,423
    
    
    
    (323
    )
    
    
    2,100Professional services
    
    
    622
    
    
    
    (134
    )
    
    
    488Servicing expense
    
    
    1,482
    
    
    
    (1,019
    )
    
    
    463Board of directors expense
    
    
    113
    
    
    
    
    
    
    
    113Insurance expense
    
    
    141
    
    
    
    
    
    
    
    141Custody expense
    
    
    112
    
    
    
    
    
    
    
    112Other general and administrative expenses
    
    
    601
    
    
    
    (2
    )
    
    
    599Total expenses
    
    
    6,304
    
    
    
    (1,384
    )
    
    
    4,920Net income
    
    $
    17,779
    
    
    $
    (9,452
    )
    
    $
    8,327Net income per share  basic
    
    $
    0.45Net income per share  diluted
    
    $
    0.45Weighted-average number of shares outstanding  basic
    
    
    39,491,786Weighted-average number of shares outstanding  diluted
    
    
    39,718,552REIT taxable net income per share
    
    
    
    
    
    
    
    
    
    $
    0.21Actual shares outstanding on dividend record date
    
    
    
    
    
    
    
    
    
    
    39,681,445
 29




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##### Table of Contents



Adjustments toGAAP
    
    
    GAAP
    
    
    REIT TaxableStatement of
    
    
    Statement of
    
    
    Statement ofOperations
    
    
    Operations
    
    
    OperationsNet Interest Income:Interest income:Spread portfolio
    
    $
    42,314
    
    
    $
    
    
    
    $
    42,314Credit sensitive bond portfolio
    
    
    201
    
    
    
    
    
    
    
    201Total interest income
    
    
    42,515
    
    
    
    
    
    
    
    42,515Interest expense
    
    
    20,539
    
    
    
    5,440
    
    
    
    25,979Net interest income
    
    
    21,976
    
    
    
    (5,440
    )
    
    
    16,536Expenses:Management fee expense to related party
    
    
    1,098
    
    
    
    
    
    
    
    1,098Incentive compensation expense to related party
    
    
    470
    
    
    
    (365
    )
    
    
    105Salaries and benefits
    
    
    208
    
    
    
    (37
    )
    
    
    171Professional services
    
    
    562
    
    
    
    
    
    
    
    562Servicing expense
    
    
    
    
    
    
    
    
    
    
    Board of directors expense
    
    
    119
    
    
    
    
    
    
    
    119Insurance expense
    
    
    138
    
    
    
    
    
    
    
    138Custody expense
    
    
    51
    
    
    
    
    
    
    
    51Other general and administrative expenses
    
    
    361
    
    
    
    190
    
    
    
    551Total expenses
    
    
    3,007
    
    
    
    (212
    )
    
    
    2,795Net income
    
    $
    18,969
    
    
    $
    (5,228
    )
    
    $
    13,741Net income per share  basic
    
    $
    0.51Net income per share  diluted
    
    $
    0.51Weighted-average number of shares outstanding  basic
    
    
    37,207,135Weighted-average number of shares outstanding  diluted
    
    
    37,376,107REIT taxable net income per share
    
    
    
    
    
    
    
    
    
    $
    0.36Actual shares outstanding on dividend record date
    
    
    
    
    
    
    
    
    
    
    38,248,817
  March 31,2006
    
    2005Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    3.78
    %
    
    
    3.65
    %Weighted-average cost of total liabilities
    
    
    2.86
    
    
    
    2.42Net interest spread
    
    
    0.92
    %
    
    
    1.23
    %
 30




---



##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Undistributed REIT taxable net income, beginning of period
    
    $
    3,154
    
    
    $
    1,794REIT taxable net income earned during period
    
    
    8,327
    
    
    
    13,741Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    (1,954
    )
    
    
    (13,588
    )Undistributed REIT taxable net income, end of period
    
    $
    9,527
    
    
    $
    1,947Cash distributions per share declared during period
    
    $
    0.05
    
    
    $
    0.36Percentage of REIT taxable net income distributed
    
    
    23.5
    %
    
    
    98.9
    %
  Financial Condition
 Mortgage Assets
 Mortgage-backed securities
  31




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalMortgage-
    
    
    
    
    
    
    Mortgage-Market
    
    
    backed
    
    
    Market
    
    
    backed(dollars in thousands)
    
    Value
    
    
    securities
    
    
    Value
    
    
    securitiesResidential Mortgage Credit
PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    101,910
    
    
    
    4.5
    %
    
    $
    30,623
    
    
    
    0.7
    %A/A rating
    
    
    165,288
    
    
    
    7.3
    
    
    
    64,957
    
    
    
    1.5BBB/Baa rating
    
    
    29,334
    
    
    
    1.2
    
    
    
    28,546
    
    
    
    0.6Total Investment-grade MBS
    
    
    296,532
    
    
    
    13.0
    
    
    
    124,126
    
    
    
    2.8Non-investment-grade MBS:BB/Ba rating
    
    
    112,719
    
    
    
    5.0
    
    
    
    121,128
    
    
    
    2.8Not rated
    
    
    9,224
    
    
    
    0.4
    
    
    
    20,818
    
    
    
    0.5Total non-investment-grade
MBS
    
    
    121,943
    
    
    
    5.4
    
    
    
    141,946
    
    
    
    3.3
    %Total Residential Mortgage
Credit portfolio
    
    
    418,475
    
    
    
    18.4
    
    
    
    266,072
    
    
    
    6.1Spread PortfolioAgency MBS
    
    
    764,722
    
    
    
    33.6
    
    
    
    1,203,255
    
    
    
    27.6AAA/Aaa rating
    
    
    1,093,849
    
    
    
    48.0
    
    
    
    2,890,276
    
    
    
    66.3Total Spread portfolio
    
    
    1,858,571
    
    
    
    81.6
    
    
    
    4,093,531
    
    
    
    93.9Total mortgage-backed securities
    
    $
    2,277,046
    
    
    
    100.0
    %
    
    $
    4,359,603
    
    
    
    100.0
    %
 Loans held-for-investment
  32




---



##### Table of Contents



LoansWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    
    
    
    
    Principal Amount
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    of Loans
    
    
    90 days as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Principal
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Rate
    
    
    Date
    
    
    Reset (1)
    
    
    Balance
    
    

> 90 days
    
    
    Total PrincipalFloating rate mortgage
    
    
    6.46
    %
    
    
    2036
    
    
    
    1
    
    
    $
    1,440,820
    
    
    $
    
    
    
    
    
    %3-Year hybrid mortgage
    
    
    6.25
    %
    
    
    2035
    
    
    
    33
    
    
    
    81,038
    
    
    
    
    
    
    
    5-Year hybrid mortgage
    
    
    6.20
    %
    
    
    2035
    
    
    
    56
    
    
    
    601,872
    
    
    
    4,267
    
    
    
    0.2Total
    
    
    6.38
    %
    
    
    2035
    
    
    
    18
    
    
    $
    2,123,730
    
    
    $
    4,267
    
    
    
    0.2
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities
related to our 3-year and 5-year hybrid residential mortgage loans. Including the effect of
these hedges, at March 31, 2006 the weighted-average months to reset of our 3-year and
5-year hybrid residential mortgage loans was one month.  Weighted-
    
    
    Weighted-
    
    
    
    
    
    
    PrincipalWeighted-
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Amount of LoansAverage Interest
    
    
    Maturity
    
    
    Months to
    
    
    Principal
    
    
    DelinquentDescription
    
    Rate
    
    
    Date
    
    
    reset (1)
    
    
    Balance
    
    
    > 90 days3-Year hybrid mortgage
    
    
    5.83
    %
    
    
    2035
    
    
    
    34
    
    
    $
    32,890
    
    
    $
    5-Year hybrid mortgage
    
    
    6.11
    %
    
    
    2035
    
    
    
    57
    
    
    
    473,608
    
    
    
    Total
    
    
    6.09
    %
    
    
    2035
    
    
    
    56
    
    
    $
    506,498
    
    
    $
    
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities
related to our 3-year and 5-year hybrid residential mortgage loans. Including the effect of
these hedges, at December 31, 2005 the weighted-average months to reset of our 3-year and
5-year hybrid residential mortgage loans was one month.  Unpaid principal balance
    
    $
    2,123,730Number of loans
    
    
    4,973Average loan balance
    
    $
    427Weighted-average coupon rate
    
    
    6.38
    %Weighted-average lifetime cap
    
    
    10.60
    %Weighted-average original term, in months
    
    
    361Weighted-average remaining term, in months
    
    
    358Weighted-average loan-to-value ratio (LTV)
    
    
    75.9
    %Weighted-average FICO score
    
    
    706Top five geographic concentrations (% exposure):California
    
    
    59.0
    %Florida
    
    
    8.9
    %Virginia
    
    
    4.7
    %Nevada
    
    
    3.9
    %Arizona
    
    
    3.8
    %Occupancy status:Owner occupied
    
    
    87.6
    %Investor
    
    
    12.4
    %Property type:Single-family
    
    
    83.0
    %Condominium
    
    
    10.0
    %Other residential
    
    
    7.0
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
 33




---



##### Table of Contents



Unpaid principal balance
    
    $
    506,498Number of loans
    
    
    1,163Average loan balance
    
    $
    436Weighted-average coupon rate
    
    
    6.09
    %Weighted-average lifetime cap
    
    
    11.31
    %Weighted-average original term, in months
    
    
    360Weighted-average remaining term, in months
    
    
    357Weighted-average loan-to-value ratio (LTV)
    
    
    75.1
    %Weighted-average FICO score
    
    
    712Top five geographic concentrations (% exposure):California
    
    
    38.9
    %Virginia
    
    
    11.1
    %Florida
    
    
    8.5
    %Arizona
    
    
    6.2
    %Maryland
    
    
    5.4
    %Occupancy status:Owner occupied
    
    
    93.7
    %Investor
    
    
    6.3
    %Property type:Single-family
    
    
    87.0
    %Condominium
    
    
    9.7
    %Other residential
    
    
    3.3
    %Collateral type:Alt A-first lien
    
    
    100
    %
  Mortgage-Backed Notes
   34




---



##### Table of Contents



LUM 2005-1
    
    LUM 2006-1
    
    LUM 2006-2Loans, unpaid principal balance
    
    $
    520,568
    
    
    $
    576,122
    
    
    $
    801,474Mortgage-backed notes issued
    
    
    517,706
    
    
    
    576,122
    
    
    
    801,474Mortgage-backed notes retained
    
    
    17,439
    
    
    
    39,465
    
    
    
    54,501Retained investment grade % (1)
    
    
    3.1
    %
    
    
    3.9
    %
    
    
    3.7
    %Retained non-investment grade % (1)
    
    
    0.3
    %
    
    
    3.0
    %
    
    
    3.1
    %Cost of debt on non-retained
mortgage-backed notes  spread to LIBOR
    
    
    0.28
    %
    
    
    0.29
    %
    
    
    0.23
    %
 
 (1)
    
    Retained tranches as a percentage of total mortgage-backed notes issued. 35




---



##### Table of Contents



Asset Repricing Characteristics
  March 31, 2006
    
    
    December 31, 2005Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    1,440,820
    
    
    
    32.6
    %
    
    $
    
    
    
    
    
    %Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60 months (1)
    
    
    682,910
    
    
    
    15.4
    
    
    
    506,498
    
    
    
    10.4Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unamortized premium
    
    
    25,004
    
    
    
    0.6
    
    
    
    679
    
    
    
    nmSub-total
    
    
    2,148,734
    
    
    
    48.6
    
    
    
    507,177
    
    
    
    10.4ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    418,475
    
    
    
    9.4
    
    
    
    266,072
    
    
    
    5.5Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    418,475
    
    
    
    9.4
    
    
    
    266,072
    
    
    
    5.5Spread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    1,047,701
    
    
    
    23.7
    
    
    
    8,610
    
    
    
    0.2Reset >1 month but < 12 months
    
    
    423,717
    
    
    
    9.6
    
    
    
    476,828
    
    
    
    9.8Reset >12 months but < 60 months
    
    
    314,515
    
    
    
    7.1
    
    
    
    2,756,195
    
    
    
    56.6Reset > 60 months
    
    
    72,638
    
    
    
    1.6
    
    
    
    851,898
    
    
    
    17.5Sub-total
    
    
    1,858,571
    
    
    
    42.0
    
    
    
    4,093,531
    
    
    
    84.1Total Mortgage Assets
    
    $
    4,425,780
    
    
    
    100.0
    %
    
    $
    4,866,780
    
    
    
    100.0
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities
related to our 3-year and 5-year hybrid residential mortgage loans. Including the effect of
these hedges, at March 31, 2006 the weighted-average months to reset of our 3-year and
5-year hybrid residential mortgage loans was one month.     LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    90
    %
    
    
    10
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    32
    
    
    
    
    
    
    
    68
    
    
    
    
 36




---



##### Table of Contents



LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    65
    %
    
    
    35
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
  Liquidity and Capital Resources
     37




---



##### Table of Contents



38




---



##### Table of Contents



Inflation
  Contractual Obligations and Commitments
  Payments Due by PeriodMoreLess than
    
    
    1  3
    
    
    3  5
    
    
    than 5(in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsRepurchase agreements
    
    $
    1,957.5
    
    
    $
    1,957.5
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage-backed notes (1)
    
    
    1,743.9
    
    
    
    303.0
    
    
    
    849.2
    
    
    
    520.5
    
    
    
    71.2Warehouse lending
facilities
    
    
    259.5
    
    
    
    259.5
    
    
    
    
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    92.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92.8Management fees
    
    
    5.1
    
    
    
    3.4
    
    
    
    1.7
    
    
    
    
    
    
    
    Total
    
    $
    4,058.8
    
    
    $
    2,523.4
    
    
    $
    850.9
    
    
    $
    520.5
    
    
    $
    164.0
 
 (1)
    
    The mortgage-backed notes have stated maturities through 2036; however, the expected maturity is subject to change
based on the prepayments and loan losses of the underlying mortgage loans. In addition, we may exercise a redemption option
and thereby effect termination and early retirement of the mortgage-backed notes. The payments represented reflect our
assumptions for prepayment and credit losses at March 31, 2006 and assume we will exercise our redemption option.  Off-Balance Sheet Arrangements
  39




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##### Table of Contents



Payments Due by PeriodLess than 1
    
    1  3
    
    3  5
    
    More than(in millions)
    
    Total
    
    year
    
    years
    
    years
    
    5 yearsJunior subordinated
notes
    
    $
    92.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    92.8
 
   Credit Risk
     Concentration Risk
  40




---



##### Table of Contents



Interest Rate Risk
  Effect on Net Interest Income
     Extension Risk
  41




---



##### Table of Contents



Interest Rate Cap Risk
     42




---



##### Table of Contents



Prepayment Risk
  Effect on Fair Value
   43




---



##### Table of Contents



Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200(in millions)
    
    Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis PointsMortgage-Backed SecuritiesFair value
    
    $
    2,290.9
    
    
    $
    2,277.0
    
    
    $
    2,263.2
    
    
    $
    2,249.3Change in fair value
    
    
    13.9
    
    
    
    
    
    
    
    (13.8
    )
    
    
    (27.7
    )Change as a percent of fair value
    
    
    0.6
    %
    
    
    
    
    
    
    (0.6
    )%
    
    
    (1.2
    )%Mortgage Loans Held-for-Investment (2)Fair value
    
    $
    2,190.8
    
    
    $
    2,159.1
    
    
    $
    2,127.4
    
    
    $
    2,095.6Change in fair value
    
    
    31.7
    
    
    
    
    
    
    
    (31.7
    )
    
    
    (63.5
    )Change as a percent of fair value
    
    
    1.5
    %
    
    
    
    
    
    
    (1.5
    )%
    
    
    (2.9
    )%Repurchase Agreements (1)(2)Fair value
    
    $
    1,957.5
    
    
    $
    1,957.5
    
    
    $
    1,957.5
    
    
    $
    1,957.5Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed Notes (1)(2)Fair value
    
    $
    1,743.9
    
    
    $
    1,743.9
    
    
    $
    1,743.9
    
    
    $
    1,743.9Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warehouse Lending Facility (1)(2)Fair value
    
    $
    259.4
    
    
    $
    259.4
    
    
    $
    259.4
    
    
    $
    259.4Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior Subordinated Notes (2)Fair value
    
    $
    94.7
    
    
    $
    90.9
    
    
    $
    87.3
    
    
    $
    83.8Change in fair value
    
    
    3.8
    
    
    
    
    
    
    
    (3.6
    )
    
    
    (7.1
    )Change as a percent of fair value
    
    
    4.2
    %
    
    
    
    
    
    
    (4.0
    )%
    
    
    (7.8
    )%Hedge InstrumentsFair value
    
    $
    0.7
    
    
    $
    15.2
    
    
    $
    23.2
    
    
    $
    33.6Change in fair value
    
    
    (14.5
    )
    
    
    
    
    
    
    8.0
    
    
    
    18.4Change as a percent of fair value
    
    
    (95.4
    )%
    
    
    
    
    
    
    52.6
    %
    
    
    121.1
    %
 
 (1)
    
    The fair value of the repurchase agreements, mortgage-backed notes and warehouse
lending facilities would not change materially due to the short-term nature of these
instruments .(2)
    
    This liability is carried on the consolidated balance sheet at amortized cost and
therefore a change in interest rates would not affect the carrying value of the liability.   44




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##### Table of Contents



Risk Management
  
    
    monitoring and adjusting, if necessary, the reset index and interest rate related to
our mortgage-backed securities and our borrowings;
    
    attempting to structure our borrowing agreements to have a range of different
maturities, terms, amortizations and interest rate adjustment periods;
    
    using derivatives, financial futures, swaps, options, caps, floors and forward sales to
adjust the interest rate sensitivity of our mortgage-backed securities and our borrowings;
and
    
    actively managing, on an aggregate basis, the interest rate indices, interest rate
adjustment periods and gross reset margins of our mortgage-backed securities and the
interest rate indices and adjustment periods of our borrowings.
 
  Conclusion Regarding Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  45




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##### Table of Contents



A significant portion of our mortgages permit negative amortization. Negative amortization
can increase the overall risk of our Residential Mortgage Credit portfolio and could adversely
impact our results of operations or financial condition.
     The timing and amount of our cash distributions may experience volatility.
  46




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47




---



##### Table of Contents



SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.By:
    
    /s/ GAIL P. SENECA

Gail P. SenecaChief Executive Officer(Principal Executive Officer)Date:
    
    May 10, 2006By:
    
    /s/ CHRISTOPHER J. ZYDA

Christopher J. ZydaChief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    May 10, 2006
 48




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##### Table of Contents



EXHIBIT INDEX
   ExhibitNumber
    
    
    Description3.1
    
    
    Second Articles of Amendment and Restatement (4)3.2
    
    
    Third Amended and Restated Bylaws (9)4.1
    
    
    Form of Common Stock Certificate (1)4.2
    
    
    Registration Rights Agreement, dated as of June 11, 2003, by and between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. (for itself and for the benefit of the holders from
time to time of registrable securities issued in the Registrants June 2003, private offering)
(1)10.1
    
    
    Amended and Restated Management Agreement, dated as of March 1, 2005, by and between the
Registrant and Seneca Capital Management LLC (Seneca) (7)10.2
    
    
    Cost-Sharing Agreement, dated as of June 11, 2003, by and between the Registrant and Seneca (1)10.3
    
    
    2003 Stock Incentive Plan, as amended (10)10.4
    
    
    Form of Incentive Stock Option under the 2003 Stock Incentive Plan (1)10.5
    
    
    Form of Non Qualified Stock Option under the 2003 Stock Incentive Plan (1)10.6
    
    
    2003 Outside Advisors Stock Incentive Plan, as amended (10)10.7
    
    
    Form of Non Qualified Stock Option under the 2003 Outside Advisors Stock Incentive Plan (1)10.8
    
    
    Form of Indemnity Agreement (1)10.9
    
    
    Employment Agreement dated as of December 20, 2005, by and between the Registrant and
Christopher J. Zyda (12)10.10
    
    
    Form of Restricted Stock Award Agreement for Christopher J. Zyda (1)10.11
    
    
    Form of Restricted Stock Award Agreement for Seneca (3)10.12
    
    
    Controlled Equity Offering Sales Agreement dated February 7, 2005, between the Registrant and
Cantor Fitzgerald & Co. (6)10.13
    
    
    Employment Agreement dated December 20, 2005, between the Registrant and S. Trezevant Moore,
Jr. (12)10.14
    
    
    Employment Agreement dated December 20, 2005, between the Registrant and Gail P. Seneca (12)10.15
    
    
    Direct Stock Purchase and Dividend Reinvestment Plan dated June 29, 2005 (11)
 49




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##### Table of Contents



ExhibitNumber
    
    
    Description14.1
    
    
    Code of Business Conduct and Ethics (1)14.2
    
    
    Corporate Governance Guidelines (5)31.1
    *
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive
Officer of the Registrant, pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    *
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    *
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive
Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    *
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    
    Charter of the Audit Committee of the Board of Directors (1)99.2
    
    
    Charter of the Compensation Committee of the Board of Directors (1)99.3
    
    
    Charter of the Governance and Nominating Committee of the Registrants Board of Directors (1)
 
 (1)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-107984)
which became effective under the Securities Act of 1933, as amended, on December 18, 2003.(2)
    
    Incorporated by reference to our Current Report Form 8-K filed on December 23, 2003.(3)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-107981)
which became effective under the Securities Act of 1933, as amended, on February 13, 2004.(4)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.(5)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-113493)
which became effective under the Securities act of 1933, as amended, on March 30, 2004.(6)
    
    Incorporated by reference to our Current Report on Form 8-K filed on February 8, 2005.(7)
    
    Incorporated by reference to our Current Report on Form 8-K filed on April 1, 2005.(8)
    
    Incorporated by reference to our Current Report on Form 8-K filed on March 14, 2005.(9)
    
    Incorporated by reference to our Current Report on Form 8-K filed on August 9, 2005.(10)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference to our Registration Statement on Form S-3 (Registration No. 333-125479)
which became effective under the Securities act of 1933, as amended, on June 28, 2005.(12)
    
    Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2005.*
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan. 50