##### 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 September 30, 2005
 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
(State or other jurisdiction of incorporation or
organization)
    
    06-1694835
(I.R.S. Employer
Identification No.)
 One Market, Spear Tower,
30th Floor, San Francisco, California
(Address of principal executive offices)
    
    94105
(Zip Code)
 (415) 978-3000
 N/A
 
 þ o
 o þ
 þ o




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##### Table of Contents



INDEX
 PAGEPART IITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    1ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    28ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    59ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    63PART IIITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    64ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    64ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    64ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    64ITEM 5.
    
    OTHER INFORMATION
    
    
    64ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    64SIGNATURES
    
    
    
    
    65EXHIBIT INDEX
    
    
    
    
    66
 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;
    
    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 Seneca 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 Seneca, on the one hand,
and Seneca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;
    
    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 September 30, 2005 and December 31, 2004
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2005 and September 30, 2004
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the nine months ended September 30, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2005 and September 30, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  1




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2005
    
    
    2004Assets:Cash and cash equivalents
    
    $
    10,690
    
    
    $
    10,581Mortgage-backed securities available-for-sale, at fair value
    
    
    193,917
    
    
    
    186,351Mortgage-backed securities available-for-sale, pledged as collateral, at fair value
    
    
    4,457,724
    
    
    
    4,641,604Loans held-for-investment, net
    
    
    143,848
    
    
    
    Interest receivable
    
    
    21,404
    
    
    
    18,861Principal receivable
    
    
    23,303
    
    
    
    13,426Derivative contracts, at fair value
    
    
    9,451
    
    
    
    7,900Other assets
    
    
    4,888
    
    
    
    1,105Total assets
    
    $
    4,865,225
    
    
    $
    4,879,828Liabilities:Repurchase agreements
    
    $
    4,239,040
    
    
    $
    4,436,456Warehouse lending facilities
    
    
    140,378
    
    
    
    Junior subordinated notes
    
    
    49,978
    
    
    
    Cash distributions payable
    
    
    4,502
    
    
    
    15,959Derivatives, at fair value
    
    
    
    
    
    
    1,073Accrued interest expense
    
    
    14,338
    
    
    
    17,333Management compensation payable, incentive compensation payable, and other related
party liabilities
    
    
    1,543
    
    
    
    2,952Accounts payable and accrued expenses
    
    
    660
    
    
    
    552Total liabilities
    
    
    4,450,439
    
    
    
    4,474,325Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at September 30,
2005 and December 31, 2004
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 40,770,410 and 37,113,011 shares issued and
outstanding at September 30, 2005 and December 31, 2004, respectively
    
    
    41
    
    
    
    37Additional paid-in capital
    
    
    515,973
    
    
    
    478,457Deferred compensation
    
    
    (2,366
    )
    
    
    (2,207
    )Accumulated other comprehensive loss
    
    
    (90,706
    )
    
    
    (61,368
    )Accumulated distributions in excess of accumulated earnings
    
    
    (8,156
    )
    
    
    (9,416
    )Total stockholders equity
    
    
    414,786
    
    
    
    405,503Total liabilities and stockholders equity
    
    $
    4,865,225
    
    
    $
    4,879,828
  2




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except share and per share amounts)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Net interest income:Interest income
    
    $
    46,346
    
    
    $
    34,261
    
    
    $
    131,324
    
    
    $
    81,683Interest expense
    
    
    38,241
    
    
    
    16,632
    
    
    
    90,878
    
    
    
    32,649Net interest income
    
    
    8,105
    
    
    
    17,629
    
    
    
    40,446
    
    
    
    49,034Other income (losses):Other income (losses)
    
    
    588
    
    
    
    
    
    
    
    (311
    )
    
    
    Losses on sales of mortgage-backed securities
    
    
    (69
    )
    
    
    
    
    
    
    (69
    )
    
    
    Total other income (losses)
    
    
    519
    
    
    
    
    
    
    
    (380
    )
    
    
    Expenses:Management compensation expense to related party
    
    
    1,074
    
    
    
    1,096
    
    
    
    3,254
    
    
    
    2,969Incentive compensation expense to related parties
    
    
    255
    
    
    
    1,367
    
    
    
    1,128
    
    
    
    3,463Salaries and benefits
    
    
    846
    
    
    
    112
    
    
    
    1,702
    
    
    
    318Professional services
    
    
    512
    
    
    
    191
    
    
    
    1,588
    
    
    
    836Board of directors expense
    
    
    116
    
    
    
    52
    
    
    
    351
    
    
    
    171Insurance expense
    
    
    140
    
    
    
    137
    
    
    
    415
    
    
    
    494Custody expense
    
    
    125
    
    
    
    113
    
    
    
    319
    
    
    
    274Other general and administrative expenses
    
    
    327
    
    
    
    67
    
    
    
    937
    
    
    
    261Total expenses
    
    
    3,395
    
    
    
    3,135
    
    
    
    9,694
    
    
    
    8,786Net income
    
    $
    5,229
    
    
    $
    14,494
    
    
    $
    30,372
    
    
    $
    40,248Net income per share  basic
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.79
    
    
    $
    1.22Net income per share  diluted
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.79
    
    
    $
    1.22Weighted-average number of shares outstanding  basic
    
    
    40,021,698
    
    
    
    36,814,000
    
    
    
    38,478,679
    
    
    
    32,916,190Weighted-average number of shares outstanding  diluted
    
    
    40,226,523
    
    
    
    36,867,233
    
    
    
    38,615,869
    
    
    
    32,938,893
  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
    
    
    Deferred
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Compensation
    
    
    Loss
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    TotalBalance, January 1, 2005
    
    
    37,113
    
    
    $
    37
    
    
    $
    478,457
    
    
    $
    (2,207
    )
    
    $
    (61,368
    )
    
    $
    (9,416
    )
    
    
    
    
    
    $
    405,503Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,372
    
    
    $
    30,372
    
    
    
    30,372Mortgage-backed securities
Available-for-sale, fair
value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,304
    )
    
    
    
    
    
    
    (30,304
    )
    
    
    (30,304
    )Derivatives, fair value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    961
    
    
    
    
    
    
    
    961
    
    
    
    961Futures contracts, net
realized losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    5Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,034Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,112
    )
    
    
    
    
    
    
    (29,112
    )Issuance of common stock
    
    
    3,657
    
    
    
    4
    
    
    
    37,514
    
    
    
    (1,529
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,989Amortization of stock options
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Amortization of restricted
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,370Balance, September 30, 2005
    
    
    40,770
    
    
    $
    41
    
    
    $
    515,973
    
    
    $
    (2,366
    )
    
    $
    (90,706
    )
    
    $
    (8,156
    )
    
    
    
    
    
    $
    414,786
  4




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine months ended September 30,(in thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    30,372
    
    
    $
    40,248Adjustments to reconcile net income to net cash provided by operating activities:Amortization of premium/discount on loans held-for-investment and mortgage-backed securities
available-for-sale
    
    
    20,671
    
    
    
    21,855Amortization of stock options
    
    
    2
    
    
    
    4Ineffectiveness (gains)/losses on cash flow hedges
    
    
    (187
    )
    
    
    108Losses on other derivative instruments
    
    
    229
    
    
    
    Net loss on sales of mortgage-backed-securities available-for-sale
    
    
    69
    
    
    
    Changes in operating assets and liabilities:Decrease/(increase) in interest receivable, net of purchased interest
    
    
    2,408
    
    
    
    (1,126
    )Increase in other assets
    
    
    (3,942
    )
    
    
    (4,476
    )Increase/(decrease) in accounts payable and accrued expenses
    
    
    163
    
    
    
    (984
    )Increase/(decrease) in accrued interest expense
    
    
    (2,995
    )
    
    
    2,015Increase in management compensation payable, incentive compensation payable and other related
party liabilities
    
    
    251
    
    
    
    4,478Net cash provided by operating activities
    
    
    47,041
    
    
    
    62,122Cash flows from investing activities:Purchases of mortgage-backed securities available-for-sale
    
    
    (1,220,271
    )
    
    
    (3,378,328
    )Proceeds from sales of mortgage-backed securities available-for-sale
    
    
    136,549
    
    
    
    Principal payments of mortgage-backed securities
    
    
    1,194,191
    
    
    
    789,645Purchase of loans held-for-investment
    
    
    (146,541
    )
    
    
    Principal payments of loans held-for-investment
    
    
    2,836
    
    
    
    Net cash used in investing activities
    
    
    (33,236
    )
    
    
    (2,588,683
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    35,802
    
    
    
    157,508Borrowings under repurchase agreements
    
    
    15,337,837
    
    
    
    24,883,625Borrowings under warehouse lending facilities
    
    
    140,378
    
    
    
    Principal payments on repurchase agreements
    
    
    (15,535,253
    )
    
    
    (22,491,079
    )Distributions to stockholders
    
    
    (40,569
    )
    
    
    (31,567
    )Borrowing under junior subordinated notes, net of debt issuance costs
    
    
    49,978
    
    
    
    Borrowing under margin loan
    
    
    
    
    
    
    2,278Borrowing under note payable, net
    
    
    
    
    
    
    (92
    )Amortization of net realized gains on Eurodollar futures contracts
    
    
    (1,395
    )
    
    
    Realized gains on Eurodollar futures contracts
    
    
    1,400
    
    
    
    2,475Purchases of other derivative instruments
    
    
    (1,874
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (13,696
    )
    
    
    2,523,148Net increase (decrease) in cash and cash equivalents
    
    
    109
    
    
    
    (3,413
    )Cash and cash equivalents, beginning of the period
    
    
    10,581
    
    
    
    7,219Cash and cash equivalents, end of the period
    
    $
    10,690
    
    
    $
    3,806Supplemental disclosure of cash flow information:Interest paid
    
    $
    102,608
    
    
    $
    30,373Non-cash investing and financing activities:Decrease in unsettled security purchases
    
    $
    
    
    
    $
    (156,127
    )Increase in principal receivable
    
    
    (9,877
    )
    
    
    (13,208
    )Incentive compensation payable settled through issuance of restricted common stock
    
    
    1,660
    
    
    
    2,384Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    55
    
    
    
    Deferred compensation reclassified to stockholders equity upon issuance of restricted common stock
    
    
    (159
    )
    
    
    (1,588
    )
  5




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LUMINENT MORTGAGE CAPITAL, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Loans Held-for-Investment
  Loan Interest Income Recognition
  Allowance and Provision for Loan Losses
  6




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 Borrowings
  Investment in Subsidiary Trust and Junior Subordinated Notes
 Consolidation
of Variable Interest Entities
   Purchased Beneficial Interests
 Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets
  Share-based Compensation
 Share-Based Payment
 7




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
  NOTE 2MORTGAGE-BACKED SECURITIES
  TotalAdjustable-
    
    
    Hybrid
    
    
    Balloon
    
    
    
    
    
    
    Mortgage-Rate
    
    
    Adjustable-Rate
    
    
    Maturity
    
    
    Other
    
    
    Backed(in thousands)
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmortized cost
    
    $
    81,494
    
    
    $
    4,430,804
    
    
    $
    54,509
    
    
    $
    184,435
    
    
    $
    4,751,242Unrealized gains
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    921
    
    
    
    953Unrealized losses
    
    
    (1,384
    )
    
    
    (95,948
    )
    
    
    (1,555
    )
    
    
    (1,667
    )
    
    
    (100,554
    )Fair value
    
    $
    80,110
    
    
    $
    4,334,888
    
    
    $
    52,954
    
    
    $
    183,689
    
    
    $
    4,651,641% of total
    
    
    1.7
    %
    
    
    93.2
    %
    
    
    1.1
    %
    
    
    4.0
    %
    
    
    100.0
    %
 8




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  TotalAdjustable-
    
    
    Hybrid
    
    
    Balloon
    
    
    Mortgage-Rate
    
    
    Adjustable-Rate
    
    
    Maturity
    
    
    Backed(in thousands)
    
    Securities
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmortized cost
    
    $
    127,360
    
    
    $
    4,714,759
    
    
    $
    55,134
    
    
    $
    4,897,253Unrealized gains
    
    
    33
    
    
    
    739
    
    
    
    
    
    
    
    772Unrealized losses
    
    
    (1,618
    )
    
    
    (67,340
    )
    
    
    (1,112
    )
    
    
    (70,070
    )Fair value
    
    $
    125,775
    
    
    $
    4,648,158
    
    
    $
    54,022
    
    
    $
    4,827,955% of total
    
    
    2.6
    %
    
    
    96.3
    %
    
    
    1.1
    %
    
    
    100.0
    %
    Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    Coupon(in thousands)Less than one year
    
    $
    483,235
    
    
    $
    492,221
    
    
    
    3.97
    %Greater than one year and less than five years
    
    
    4,025,268
    
    
    
    4,114,686
    
    
    
    4.42Greater than five years
    
    
    143,138
    
    
    
    144,335
    
    
    
    5.09Total
    
    $
    4,651,641
    
    
    $
    4,751,242
    
    
    
    4.40
    %
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    Coupon(in thousands)Less than one year
    
    $
    211,475
    
    
    $
    215,099
    
    
    
    3.76
    %Greater than one year and less than five years
    
    
    4,616,480
    
    
    
    4,682,154
    
    
    
    4.24Greater than five years
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,827,955
    
    
    $
    4,897,253
    
    
    
    4.22
    %
 9




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
     Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(in thousands)
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    1,356,496
    
    
    $
    (18,122
    )
    
    $
    1,756,550
    
    
    $
    (43,358
    )
    
    $
    3,113,046
    
    
    $
    (61,480
    )Non-agency-backed
mortgage-backed securities
    
    
    473,911
    
    
    
    (9,159
    )
    
    
    977,615
    
    
    
    (29,915
    )
    
    
    1,451,526
    
    
    
    (39,074
    )Total temporarily impaired
securities
    
    $
    1,830,407
    
    
    $
    (27,281
    )
    
    $
    2,734,165
    
    
    $
    (73,273
    )
    
    $
    4,564,572
    
    
    $
    (100,554
    )
 10




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(in thousands)
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    2,473,670
    
    
    $
    (35,605
    )
    
    $
    379,814
    
    
    $
    (5,701
    )
    
    $
    2,853,484
    
    
    $
    (41,306
    )Non-agency-backed
mortgage-backed securities
    
    
    1,468,329
    
    
    
    (22,189
    )
    
    
    251,452
    
    
    
    (6,575
    )
    
    
    1,719,781
    
    
    
    (28,764
    )Total temporarily impaired
securities
    
    $
    3,941,999
    
    
    $
    (57,794
    )
    
    $
    631,266
    
    
    $
    (12,276
    )
    
    $
    4,573,265
    
    
    $
    (70,070
    )
  NOTE 3LOANS HELD-FOR-INVESTMENT
  Unamortized
    
    Amortized(in thousands)
    
    Principal
    
    Premium
    
    CostResidential mortgage loans
    
    $
    142,757
    
    
    $
    1,091
    
    
    $
    143,848
  11




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  DelinquentInterest
    
    
    Maturity

    
    Principal
    
    
    Balance(in thousands)
    
    Interest Rate Type
    
    
    Rate
    
    
    Date

    
    Balance
    
    
    (90 Days)First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year Hybrid
    
    
    4.00  5.00
    %
    
    
    2035
    
    
    $
    456
    
    
    $
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year Hybrid
    
    
    5.01  6.00
    %
    
    
    2035
    
    
    
    25,362
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year Hybrid
    
    
    6.01  7.00
    %
    
    
    2035
    
    
    
    7,999
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year Hybrid
    
    
    7.01  7.50
    %
    
    
    2035
    
    
    
    128
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year Hybrid
    
    
    4.00  5.00
    %
    
    
    2035
    
    
    
    453
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year Hybrid
    
    
    5.01  6.00
    %
    
    
    2035
    
    
    
    61,441
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year Hybrid
    
    
    6.01  7.00
    %
    
    
    2035
    
    
    
    46,918
    
    
    
    $
    142,757
    
    
    $
    
   NOTE 4
    
    REPURCHASE AGREEMENTS, WAREHOUSE LENDING FACILITIES AND OTHER BORROWINGS
  12




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Overnight
    
    Between
    
    Between
    
    Between(1 day or
    
    2 and 30
    
    31 and 90
    
    91 and 329(in thousands)
    
    less)
    
    days
    
    days
    
    days
    
    TotalAgency-backed mortgage-backed securities:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    390,860
    
    
    $
    1,519,040
    
    
    $
    1,124,750
    
    
    $
    3,034,650Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    385,081
    
    
    
    1,487,882
    
    
    
    1,102,366
    
    
    
    2,975,329Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    366,612
    
    
    
    1,412,778
    
    
    
    1,044,580
    
    
    
    2,823,970Weighted-average interest rate of
repurchase agreement liabilities
    
    
    
    %
    
    
    3.80
    %
    
    
    3.83
    %
    
    
    3.78
    %
    
    
    3.81
    %Non-agency-backed mortgage-backed
securities:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    166,451
    
    
    $
    695,846
    
    
    $
    677,939
    
    
    $
    1,540,236Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    163,804
    
    
    
    678,784
    
    
    
    659,605
    
    
    
    1,502,193Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    147,012
    
    
    
    640,734
    
    
    
    627,324
    
    
    
    1,415,070Weighted-average interest rate of
repurchase agreement liabilities
    
    
    
    %
    
    
    4.13
    %
    
    
    3.85
    %
    
    
    3.87
    %
    
    
    3.89
    %Total:Amortized cost of securities sold,
including accrued interest
    
    $
    
    
    
    $
    557,311
    
    
    $
    2,214,886
    
    
    $
    1,802,689
    
    
    $
    4,574,886Fair market value of securities sold,
including accrued interest
    
    
    
    
    
    
    548,885
    
    
    
    2,166,666
    
    
    
    1,761,971
    
    
    
    4,477,522Repurchase agreement liabilities
associated with these securities
    
    
    
    
    
    
    513,624
    
    
    
    2,053,512
    
    
    
    1,671,904
    
    
    
    4,239,040Weighted-average interest rate of
repurchase agreement liabilities
    
    
    
    %
    
    
    3.90
    %
    
    
    3.83
    %
    
    
    3.81
    %
    
    
    3.83
    %
 13




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Overnight
    
    Between
    
    Between
    
    Between(1 day or
    
    2 and 30
    
    31 and 90
    
    91 and 602(in thousands)
    
    less)
    
    days
    
    days
    
    days
    
    TotalAgency-backed mortgage-backed securities:Amortized cost of securities sold,
including accrued interest
    
    $
    20,203
    
    
    $
    153,656
    
    
    $
    1,017,753
    
    
    $
    1,702,727
    
    
    $
    2,894,339Fair market value of securities sold,
including accrued interest
    
    
    20,010
    
    
    
    152,100
    
    
    
    1,005,208
    
    
    
    1,677,425
    
    
    
    2,854,743Repurchase agreement liabilities
associated with these securities
    
    
    19,058
    
    
    
    144,512
    
    
    
    956,307
    
    
    
    1,596,914
    
    
    
    2,716,791Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.28
    %
    
    
    2.41
    %
    
    
    2.35
    %
    
    
    2.37
    %Non-agency-backed mortgage-backed
securities:Amortized cost of securities sold,
including accrued interest
    
    $
    17,795
    
    
    $
    53,278
    
    
    $
    998,982
    
    
    $
    763,429
    
    
    $
    1,833,484Fair market value of securities sold,
including accrued interest
    
    
    17,555
    
    
    
    52,706
    
    
    
    982,301
    
    
    
    752,376
    
    
    
    1,804,938Repurchase agreement liabilities
associated with these securities
    
    
    16,719
    
    
    
    50,132
    
    
    
    936,901
    
    
    
    715,913
    
    
    
    1,719,665Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.27
    %
    
    
    2.44
    %
    
    
    2.35
    %
    
    
    2.35
    %Total:Amortized cost of securities sold,
including accrued interest
    
    $
    37,998
    
    
    $
    206,934
    
    
    $
    2,016,735
    
    
    $
    2,466,156
    
    
    $
    4,727,823Fair market value of securities sold,
including accrued interest
    
    
    37,565
    
    
    
    204,806
    
    
    
    1,987,509
    
    
    
    2,429,801
    
    
    
    4,659,681Repurchase agreement liabilities
associated with these securities
    
    
    35,777
    
    
    
    194,644
    
    
    
    1,893,208
    
    
    
    2,312,827
    
    
    
    4,436,456Weighted-average interest rate of
repurchase agreement liabilities
    
    
    2.36
    %
    
    
    2.28
    %
    
    
    2.43
    %
    
    
    2.35
    %
    
    
    2.38
    %
 14




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageMaturity ofAmount at
    
    
    RepurchaseRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    Agreements(in thousands)
    
    
    (in days)Banc of America Securities LLC
    
    $
    7,113
    
    
    
    245Barclays Capital
    
    
    3,504
    
    
    
    25Bear Stearns & Co.
    
    
    68,718
    
    
    
    92Countrywide Securities Corporation
    
    
    7,918
    
    
    
    187Credit Suisse First Bank
    
    
    2,597
    
    
    
    12Deutsche Bank Securities Inc.
    
    
    30,061
    
    
    
    153Goldman Sachs & Co.
    
    
    8,352
    
    
    
    77Greenwich Capital Markets
    
    
    9,673
    
    
    
    50Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    21,026
    
    
    
    125Morgan Stanley & Co. Inc.
    
    
    2,525
    
    
    
    66Nomura Securities International, Inc.
    
    
    23,636
    
    
    
    169Salomon Smith Barney
    
    
    7,642
    
    
    
    266UBS Securities LLC
    
    
    24,438
    
    
    
    238Wachovia Securities, LLC
    
    
    4,937
    
    
    
    169Washington Mutual
    
    
    3,015
    
    
    
    25Total
    
    $
    225,155
    
    
    
    131
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued interest income
minus the sum of repurchase agreement liabilities and accrued interest expense.  Weighted-AverageMaturity ofAmount at
    
    
    RepurchaseRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    Agreements(in thousands)
    
    
    (in days)Banc of America Securities LLC
    
    $
    11,970
    
    
    
    61Bear Stearns & Co.
    
    
    60,106
    
    
    
    100Countrywide Securities Corporation
    
    
    4,534
    
    
    
    115Deutsche Bank Securities Inc.
    
    
    42,589
    
    
    
    142Goldman Sachs & Co.
    
    
    23,489
    
    
    
    51Lehman Brothers, Inc.
    
    
    4,244
    
    
    
    151Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith Inc.
    
    
    8,509
    
    
    
    125Morgan Stanley & Co. Inc.
    
    
    2,039
    
    
    
    124Nomura Securities International, Inc.
    
    
    9,355
    
    
    
    114Salomon Smith Barney
    
    
    12,151
    
    
    
    69UBS Securities LLC
    
    
    23,413
    
    
    
    314Wachovia Securities, LLC
    
    
    3,493
    
    
    
    154Total
    
    $
    205,892
    
    
    
    133
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued interest
income minus the sum of repurchase agreement liabilities and accrued interest expense. 15




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   NOTE 5CAPITAL STOCK AND NET INCOME PER SHARE
      16




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
    For the Three Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2005Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    5,229
    
    
    $
    5,229
    
    
    $
    30,372
    
    
    $
    30,372Weighted-average number
of common shares
outstanding
    
    
    40,021,698
    
    
    
    40,021,698
    
    
    
    38,478,679
    
    
    
    38,478,679Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    204,825
    
    
    
    
    
    
    
    137,190Adjusted
weighted-average number
of common shares
outstanding
    
    
    40,021,698
    
    
    
    40,226,523
    
    
    
    38,478,679
    
    
    
    38,615,869Net income per share
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.79
    
    
    $
    0.79
  For the Three Months
    
    
    For the Nine MonthsEnded September 30, 2004
    
    
    Ended September 30, 2004Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    14,494
    
    
    $
    14,494
    
    
    $
    40,248
    
    
    $
    40,248Weighted-average number
of common shares
outstanding
    
    
    36,814,000
    
    
    
    36,814,000
    
    
    
    32,916,190
    
    
    
    32,916,190Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    53,233
    
    
    
    
    
    
    
    22,703Adjusted
weighted-average number
of common shares
outstanding
    
    
    36,814,000
    
    
    
    36,867,233
    
    
    
    32,916,190
    
    
    
    32,938,893Net income per share
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    1.22
    
    
    $
    1.22
 NOTE 62003 STOCK INCENTIVE PLANS
  17




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   2003 Outside2003 Stock
    
    Advisors StockIncentive Plan
    
    Incentive Plan
    
    TotalShares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    216,666
    
    
    
    
    
    
    
    216,666Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    1,633,334
    
    
    
    150,000
    
    
    
    1,783,334
  Weighted-Number of

    
    AverageOptions

    
    Exercise PriceOutstanding, beginning of period
    
    
    55,000
    
    
    $
    14.82Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, end of period
    
    
    55,000
    
    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Average
    
    Number
    
    AverageRange of
    
    of
    
    Life (in
    
    Exercise
    
    of
    
    ExerciseExercise Prices
    
    Options
    
    years)
    
    Price
    
    Options
    
    Price$13.00-$14.00
    
    
    5,000
    
    
    
    8.1
    
    
    $
    13.00
    
    
    
    1,667
    
    
    $
    13.00$14.01-$15.00
    
    
    50,000
    
    
    
    7.8
    
    
    
    15.00
    
    
    
    33,333
    
    
    
    15.00$13.00-$15.00
    
    
    55,000
    
    
    
    
    
    
    $
    14.82
    
    
    
    35,000
    
    
    $
    14.90
 18




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageNumber of

    
    Grant-DateOptions

    
    Fair ValueNonvested, beginning of the period
    
    
    36,666
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Vested
    
    
    (16,666
    )
    
    
    0.22Forfeited
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    20,000
    
    
    $
    0.22
   Weighted-Number of
    
    Average IssueCommon Shares
    
    PriceOutstanding, beginning of period
    
    
    25,122
    
    
    $
    12.06Issued
    
    
    131,707
    
    
    
    11.37Repurchased
    
    
    
    
    
    
    Outstanding, end of period
    
    
    156,829
    
    
    $
    11.48
  Weighted-AverageNumber of
    
    Grant-DateCommon Shares
    
    Fair ValueNonvested, beginning of the period
    
    
    25,122
    
    
    $
    12.06Granted
    
    
    131,707
    
    
    
    11.37Vested
    
    
    (3,302
    )
    
    
    12.14Repurchased
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    153,527
    
    
    $
    11.47
  19




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO 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, paid 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, paid 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, 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 and (ii) two percent (2%);
and
    
    out-of-pocket expenses and certain other costs incurred by the Manager and related
directly to the Company.
     20




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   
    
    a base management compensation equal to a percentage of the Companys average net worth
during each fiscal year, as defined in the Prior Agreement (1% of the first $300 million plus 0.8%
of the amount in excess of $300 million);
    
    incentive compensation based on the excess of a tiered percentage (as defined in the
Prior Agreement as the weighted-average of the following rates based upon the Companys average net
invested assets, as defined in the Prior Agreement: (1) 20% for the first $400 million of average
net invested assets; and (2) 10% for the average net invested assets in excess of $400 million) of
the difference between the Companys net income (defined in the Prior Agreement as taxable income
before incentive compensation, net operating losses from prior periods and items permitted by the
Internal Revenue Code when calculating taxable income for a REIT) and the threshold return (the
amount of net income for the period that would produce an annualized return on equity, calculated
by dividing the net income, as defined in the Prior Agreement, by the average net invested assets,
as defined in the Prior Agreement, equal to the 10-year U.S. Treasury rate for the period plus
2.0%) for the fiscal period; and
    
    out-of-pocket expenses and certain other costs incurred by the Manager and related directly
to the Company.
    21




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
     NOTE 8RELATED PARTY TRANSACTIONS
   22




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  NOTE 9FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosure About Fair Value of Financial Instruments
 NOTE 10ACCUMULATED OTHER COMPREHENSIVE LOSS
  September 30,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Unrealized holding losses on mortgage-backed securities available-for-sale
    
    $
    (99,670
    )
    
    $
    (69,297
    )Reclassification adjustment for net losses on mortgage-backed securities
available-for-sale included in net income
    
    
    69
    
    
    
    Net unrealized losses on mortgage-backed securities available-for-sale
    
    
    (99,601
    )
    
    
    (69,297
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    8,895
    
    
    
    7,929Accumulated other comprehensive loss
    
    $
    (90,706
    )
    
    $
    (61,368
    )
 NOTE 11DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  23




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Estimated(in thousands)
    
    Fair ValueEurodollar futures contracts sold short
    
    $
    4,404Interest rate swap contracts
    
    
    3,571Swaption contracts
    
    
    1,476
  Estimated(in thousands)
    
    Fair ValueEurodollar futures contracts sold short
    
    $
    (1,073
    )Interest rate swap contracts
    
    
    7,900
 Cash Flow Hedging Strategies
  Hedging Strategies for Short-Term Debt
    24




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Hedging Strategies for Long-Term Debt
      25




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Free Standing Derivatives
  NOTE 12

    PREFERRED SECURITIES OF SUBSIDIARY TRUST AND JUNIOR SUBORDINATED NOTES
     26




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 NOTE 13SUBSEQUENT EVENTS
     27




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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 elsewhere in
this Form 10-Q Report. This discussion may contain forward-looking statements that involve risks
and uncertainties. The words believe, expect, anticipate, estimate, may, or could 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 and elsewhere in this Form 10-Q Report, our actual results may differ materially from
those anticipated in such forward-looking statements.
 Executive Summary
   General
   28




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##### Table of Contents




    
    interest rate trends and changes in the yield curve;
    
    rates of prepayment on our mortgage loans and the mortgages underlying
our mortgage-backed securities;
    
    highly competitive markets for investment opportunities; and
    
    other market developments, including changes in the yield curve
  
    
    overall leverage of our portfolio;
    
    access to funding and adequate borrowing capacity;
    
    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
  29




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##### Table of Contents



Valuations of Mortgage-backed Securities
      Loans Held-for-Investment
  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
 30




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Allowance and Provision for Loan Losses
  Accounting for Derivative Financial Instruments and Hedging Activities
     31




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Management Incentive Compensation Expense
  Accounting for Stock-based Compensation Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
     32




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Financial Condition
  Mortgage-Backed Securities
     33




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September 30, 2005
    
    December 31, 2004Weighted-
    
    
    
    
    
    Weighted-Average Final
    
    % of
    
    Average Final
    
    % ofAsset
    
    Maturity
    
    Total
    
    Maturity
    
    TotalAdjustable-Rate MBS
    
    
    2033
    
    
    
    1.7
    %
    
    
    2033
    
    
    
    2.6
    %Hybrid Adjustable-Rate MBS
    
    
    2034
    
    
    
    93.2
    
    
    
    2034
    
    
    
    96.3Balloon MBS
    
    
    2008
    
    
    
    1.1
    
    
    
    2008
    
    
    
    1.1Other MBS
    
    
    2038
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/a
   Weighted-Amortized
    
    
    AverageWeighted-Average Life
    
    Fair Value
    
    
    Cost
    
    
    Coupon(in thousands)Less than one year
    
    $
    483,235
    
    
    $
    492,221
    
    
    
    3.97
    %Greater than one year and less than five years
    
    
    4,025,268
    
    
    
    4,114,686
    
    
    
    4.42Greater than five years
    
    
    143,138
    
    
    
    144,335
    
    
    
    5.09Total
    
    $
    4,651,641
    
    
    $
    4,751,242
    
    
    
    4.40
    %
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    Coupon(in thousands)Less than one year
    
    $
    211,475
    
    
    $
    215,099
    
    
    
    3.76
    %Greater than one year and less than five years
    
    
    4,616,480
    
    
    
    4,682,154
    
    
    
    4.24Greater than five years
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,827,955
    
    
    $
    4,897,253
    
    
    
    4.22
    %
    34




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Loans Held-for-Investment
    35




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##### Table of Contents



DelinquentInterest
    
    
    Maturity
    
    
    Principal
    
    
    BalanceInterest Rate Type
    
    
    Rate
    
    
    Date
    
    
    Balance
    
    
    (90 Days)(in thousands)First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year  Hybrid
    
    
    4.00  5.00
    %
    
    
    2035
    
    
    $
    456
    
    
    $
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year  Hybrid
    
    
    5.01  6.00
    %
    
    
    2035
    
    
    
    25,362
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year  Hybrid
    
    
    6.01  7.00
    %
    
    
    2035
    
    
    
    7,999
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    3-Year  Hybrid
    
    
    7.01  7.50
    %
    
    
    2035
    
    
    
    128
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year  Hybrid
    
    
    4.00  5.00
    %
    
    
    2035
    
    
    
    453
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year  Hybrid
    
    
    5.01  6.00
    %
    
    
    2035
    
    
    
    61,441
    
    
    
    First Lien
AdjustableRate
Residential Mortgage
Loans
    
    5-Year  Hybrid
    
    
    6.01  7.00
    %
    
    
    2035
    
    
    
    46,918
    
    
    
    $
    142,757
    
    
    $
    
   Equity Securities
  Unsettled Securities Purchases
  Other Assets
  36




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Hedging Instruments
     Liabilities
  37




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Stockholders Equity
  38




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TotalStockholders
    
    
    Book Value perEquity
    
    
    Share(1)(in thousands, except per share amounts)Total stockholders equity (GAAP)
    
    $
    414,786
    
    
    $
    10.17Addback/(Subtract)Accumulated other comprehensive loss on mortgage-backed securities
    
    
    99,601
    
    
    
    2.44Accumulated other comprehensive income on interest rate swap contracts
    
    
    (3,558
    )
    
    
    (0.08
    )Total stockholders equity, excluding accumulated other comprehensive
income and loss on mortgage-backed securities and interest rate swap
contracts (NON-GAAP)
    
    $
    510,829
    
    
    $
    12.53
 
 (1)
    
    Based on 40,770,410 shares outstanding at September 30, 2005.  TotalStockholders
    
    
    Book Value perEquity
    
    
    Share(1)(in thousands, except per share amounts)Total stockholders equity (GAAP)
    
    $
    405,503
    
    
    $
    10.93Addback/(Subtract)Accumulated other comprehensive loss on mortgage-backed securities
    
    
    69,298
    
    
    
    1.86Accumulated other comprehensive income on interest rate swap contracts
    
    
    (7,748
    )
    
    
    (0.21
    )Total stockholders equity, excluding accumulated other comprehensive
income and loss on mortgage-backed securities and interest rate swap
contracts (NON-GAAP)
    
    $
    467,053
    
    
    $
    12.58
 
 (1)
    
    Based on 37,113,011 shares outstanding at December 31, 2004.  Results of Operations
   39




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Three MonthsEnded
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    PercentageSeptember 30,
    
    
    of Average
    
    
    September 30,
    
    
    of Average2005
    
    
    Liabilities
    
    
    2005
    
    
    Liabilities(in thousands)Interest expense on repurchase agreement liabilities
    
    $
    39,578
    
    
    
    3.41
    %
    
    $
    96,865
    
    
    
    2.92
    %Interest expense on warehouse lending facilities
    
    
    585
    
    
    
    0.05
    
    
    
    585
    
    
    
    0.02Interest expense on junior subordinated notes
    
    
    1,034
    
    
    
    0.09
    
    
    
    2,239
    
    
    
    0.06Net hedge ineffectiveness (gains)/losses on futures
and interest rate swap contracts
    
    
    430
    
    
    
    0.03
    
    
    
    (42
    )
    
    nmAmortization of net realized (gains)/losses on
futures contracts
    
    
    799
    
    
    
    0.07
    
    
    
    (1,395
    )
    
    
    (0.04
    )Net interest income on interest rate swap contracts
    
    
    (4,196
    )
    
    
    (0.36
    )
    
    
    (7,395
    )
    
    
    (0.22
    )Other
    
    
    11
    
    
    nm
    

    
    
    21
    
    
    nmTotal interest expense
    
    $
    38,241
    
    
    
    3.29
    %
    
    $
    90,878
    
    
    
    2.74
    %
 
 nm = not meaningful 40




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##### Table of Contents



Three MonthsEnded
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    PercentageSeptember 30,
    
    
    of Average
    
    
    September 30,
    
    
    of Average2004
    
    
    Liabilities
    
    
    2004
    
    
    Liabilities(in thousands)Interest expense on repurchase agreement liabilities
    
    $
    15,133
    
    
    
    1.56
    %
    
    $
    32,193
    
    
    
    1.34
    %Net hedge ineffectiveness (gains)/losses on futures
and interest rate swap contracts
    
    
    244
    
    
    
    0.03
    
    
    
    (1,740
    )
    
    
    (0.07
    )Amortization of net realized gains on futures
contracts
    
    
    (685
    )
    
    
    (0.07
    )
    
    
    (272
    )
    
    
    (0.01
    )Net interest expense on interest rate swap contracts
    
    
    1,901
    
    
    
    0.20
    
    
    
    2,412
    
    
    
    0.10Other
    
    
    39
    
    
    nm
    

    
    
    56
    
    
    nmTotal interest expense
    
    $
    16,632
    
    
    
    1.72
    %
    
    $
    32,649
    
    
    
    1.36
    %
 
 nm = not meaningful      41




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42




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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004GAAP net income
    
    $
    5,229
    
    
    $
    14,494
    
    
    $
    30,372
    
    
    $
    40,248Adjustments to GAAP net income:Amortization of organizational costs
    
    
    (8
    )
    
    
    (8
    )
    
    
    (24
    )
    
    
    (24
    )Add back of stock compensation expense for unvested stock options
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    5Add back stock compensation expense for unvested restricted stock
    
    
    358
    
    
    
    458
    
    
    
    1,370
    
    
    
    899Subtract stock compensation expense for vested restricted stock
    
    
    (328
    )
    
    
    
    
    
    
    (631
    )
    
    
    Add back (subtract) net hedge ineffectiveness (gains)/losses on
futures and interest rate swap contracts
    
    
    590
    
    
    
    244
    
    
    
    (187
    )
    
    
    108Subtract dividend equivalent rights on restricted stock
    
    
    (49
    )
    
    
    (81
    )
    
    
    (362
    )
    
    
    (130
    )Add back (subtract) amortization of net realized (gains)/losses on
futures instruments
    
    
    799
    
    
    
    (685
    )
    
    
    (1,395
    )
    
    
    Add back net losses on sales of mortgage-backed securities
    
    
    69
    
    
    
    
    
    
    
    69
    
    
    
    Add back/(subtract) realized and unrealized (gains)/losses on other
derivative instruments
    
    
    (592
    )
    
    
    
    
    
    
    307
    
    
    
    Add back net realized gains on futures contracts
    
    
    1,415
    
    
    
    2,514
    
    
    
    1,400
    
    
    
    2,475Net adjustments to GAAP net income
    
    
    2,254
    
    
    
    2,443
    
    
    
    549
    
    
    
    3,333REIT taxable net income
    
    $
    7,483
    
    
    $
    16,937
    
    
    $
    30,921
    
    
    $
    43,581
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Undistributed REIT taxable net income, beginning of
period
    
    $
    934
    
    
    $
    673
    
    
    $
    1,794
    
    
    $
    281REIT taxable net income earned during period
    
    
    7,483
    
    
    
    16,937
    
    
    
    30,921
    
    
    
    43,581Distributions declared during period, net of
dividend equivalent rights on restricted common
stock
    
    
    (4,452
    )
    
    
    (15,830
    )
    
    
    (28,750
    )
    
    
    (42,082
    )Undistributed REIT taxable net income, end of period
    
    $
    3,965
    
    
    $
    1,780
    
    
    $
    3,965
    
    
    $
    1,780Cash distributions per share declared during period
    
    $
    0.11
    
    
    $
    0.43
    
    
    $
    0.74
    
    
    $
    1.28Percentage of REIT taxable net income distributed
    
    
    59.5
    %
    
    
    93.5
    %
    
    
    93.0
    %
    
    
    96.6
    %
   Liquidity and Capital Resources
  43




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44




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##### Table of Contents



45




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##### Table of Contents



Inflation
  Contractual Obligations and Commitments
  Payments Due by PeriodMore than(in
millions)
    
    Total
    
    
    Less than 1 year
    
    
    1  3 years
    
    
    3  5 years
    
    
    5 yearsRepurchase agreements
    
    $
    4,239.0
    
    
    $
    4,239.0
    
    
    $
    
    
    
    $
    
    
    
    $
    Warehouse lending
facility
    
    
    140.4
    
    
    
    140.4
    
    
    
    
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    51.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51.6Total
    
    $
    4,431.0
    
    
    $
    4,379.4
    
    
    $
    
    
    
    $
    
    
    
    $
    51.6
  Off-Balance Sheet Arrangements
  Risk Factors
 As used in this Quarterly Report, Luminent, Company, we, our, and us, refer to
Luminent Mortgage Capital, Inc. and its subsidiaries, except where the context otherwise requires.
The occurrence of one or more of these risk factors could adversely impact our results of
operations or financial condition.
 General Risks Related to our Business
 We might not be able to find mortgage loans or mortgage-backed securities that meet our investment
criteria or at favorable spreads over our borrowing costs, which would adversely impact our
results of operations or financial condition.
  46




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##### Table of Contents



Our mortgage loans and mortgage-backed securities are subject to prepayments, and increased
prepayment rates could adversely impact our results of operations or financial condition.
    Our stockholders equity or book value is volatile and is subject to changes in interest rates.
  47




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##### Table of Contents



Our mortgage loans and mortgage-backed securities are subject to defaults, which could adversely
impact our results of operations or financial condition.
     The representations and warranties that we will make in our securitizations may subject us to
liability, which could adversely impact our results of operations or financial condition.
  Our mortgage loans and mortgage-backed securities are subject to interest rate caps and resets
that could adversely impact our results of operations or financial condition.
  48




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##### Table of Contents



The use of securitizations with over-collateralization requirements could restrict our cash
flow and adversely impact our results of operations or financial condition.
  We purchase subordinated mortgage-backed securities that are structured to absorb a
disproportionate amount of any losses on the underlying mortgage loans. These purchases could
adversely impact our results of operations or financial condition.
  Our mortgage loans and mortgage-backed securities are subject to potential illiquidity, which
might prevent us from selling them at reasonable prices when we found it necessary to sell them.
This factor could adversely impact our results of operations or financial condition.
  Our mortgage loans and mortgage-backed securities are subject to the overall health of the U.S.
economy, and a national or regional economic slowdown could adversely impact our results of
operations or financial condition.
  49




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##### Table of Contents



We might not be able to obtain financing for our mortgage loans or mortgage-backed securities,
which would adversely impact our results of operations or financial condition.
  Our investment strategies employ a significant amount of leverage, and are subject to daily
fluctuations in market pricing and margin calls, which could adversely impact our results of
operations or financial condition.
     Interest rate mismatches between our mortgage loans and mortgage-backed securities and our
borrowings could adversely impact our results of operations or financial condition.
  50




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##### Table of Contents



Our use of certain types of financing may give our lenders greater rights in the event that
either we or any of our lenders file for bankruptcy.
  Our hedging activities might be unsuccessful and adversely impact our results of operations and
book value.
  Accounting for Derivative Instruments and Hedging
Activities
 Our mortgage loans may not be serviced effectively, which might adversely impact our results of
operations or financial condition.
  If we are unable to securitize our mortgage loans successfully, we may be unable to grow or fully
execute our business strategies and our earnings my decrease.
  51




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##### Table of Contents



Risks Related to Seneca
 Seneca might fail to comply with the terms of the Amended Agreement, manage our Spread portfolio
poorly, or lose key personnel that are important to our Spread portfolio, which could adversely
impact our results of operations or financial condition.
  Because Seneca is entitled to a fee that may be significant if we terminate the Amended
Agreement without cause, economic considerations might preclude us from terminating the Amended
Agreement in the event that Senecas performance fails to meet our expectations but does not
constitute cause.
   Senecas liability is limited under the Amended Agreement and we have agreed to indemnify
Seneca against certain liabilities.
  Legal and Tax Risks
 If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face
substantial tax liability.
  52




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##### Table of Contents




    
    we would be taxed as a regular domestic corporation, which, among other things, means
that we would be unable to deduct distributions to our stockholders in computing taxable
income and we would be subject to U.S. federal income tax on our taxable income at regular
corporate rates;
    
    any resulting tax liability could be substantial, would reduce the amount of cash
available for distribution to our stockholders and could force us to liquidate assets at
inopportune times, causing lower income or higher losses than would result if these assets
were not liquidated; and
    
    unless we were entitled to relief under applicable statutory provisions, we would be
disqualified from treatment as a REIT for the subsequent four taxable years following the
year during which we lost our qualification and, thus, our cash available for distribution
to our stockholders would be reduced for each of the years during which we did not qualify
as a REIT.
  Complying with REIT requirements might cause us to forego otherwise attractive opportunities.
   Complying with REIT requirements may limit our ability to hedge effectively.
  Complying with the REIT requirements may force us to borrow to make distributions to our
stockholders.
  53




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##### Table of Contents



Complying with the REIT requirements may force us to liquidate otherwise attractive
investments.
  Failure to maintain an exemption from the Investment Company Act would harm our results of
operations.
        54




---



##### Table of Contents



Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities
could result in a failure to comply with REIT income or assets tests.
  One-action rules may harm the value of the underlying property.
  We may be harmed by changes in various laws and regulations.
  We may incur excess inclusion income that would increase the tax liability of our
stockholders.
   55




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##### Table of Contents



Risks Related to Investing in Our Securities
 The timing and amount of our cash distributions may be volatile over time.
  Our declared cash distributions may force us to liquidate mortgage loans or mortgage-backed
securities or borrow additional funds.
  Future offerings of debt securities by us, which would be senior to our common stock upon
liquidation, or equity securities, which would dilute our existing stockholders and may be senior
to our common stock for the purposes of distributions, may harm the value of our common stock.
  Changes in yields may harm the market price of our common stock.
  56




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##### Table of Contents



The market price and trading volume of our common stock may be volatile; broad market fluctuations
could harm the market price of our common stock.
   The market price of our common stock may be adversely affected by future sales of a substantial
number of shares of our common stock in the public market or the availability of such shares for
sale.
   Issuance of large amounts of our stock could cause our price to decline.
  Restrictions on ownership of a controlling percentage of our capital stock might limit your
opportunity to receive a premium on our stock.
  57




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##### Table of Contents



Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a
change in control of our company.
  
    
    Classified Board of Directors.Our board of directors is divided into three classes
with staggered terms of office of three years each. The classification and staggered terms
of office of our directors make it more difficult for a third party to gain control of our
board of directors. At least two annual meetings of stockholders, instead of one, generally
would be required to effect a change in a majority of our board of directors.
    
    Removal of Directors.Under our charter, subject to the rights of one or more classes
or series of preferred stock to elect one or more directors, a director may be removed only
for cause and only by the affirmative vote of at least two-thirds of all votes entitled to
be cast by our stockholders generally in the election of directors.
    
    Number of Directors, Board Vacancies, Term of Office.We have elected to be subject to
certain provisions of Maryland law that vest in our board of directors the exclusive right
to determine the number of directors and the exclusive right, by the affirmative vote of a
majority of the remaining directors, to fill vacancies on the board even if the remaining
directors do not constitute a quorum. These provisions of Maryland law, which are
applicable even if other provisions of Maryland law or our charter or bylaws provide to the
contrary, also provide that any director elected to fill a vacancy shall hold office for
the remainder of the full term of the class of directors in which the vacancy occurred,
rather than the next annual meeting of stockholders as would otherwise be the case, and
until his or her successor is elected and qualifies.
    
    Preferred Stock.Under our charter, our board of directors has authority to issue
preferred stock from time to time in one or more series and to establish the terms,
preferences and rights of any such series of preferred stock, all without approval of our
stockholders.
    
    Duties of Directors with Respect to Unsolicited Takeovers.Maryland law provides
protection for Maryland corporations against unsolicited takeovers by limiting, among other
things, the duties of the directors in unsolicited takeover situations. The duties of
directors of Maryland corporations do not require them to (1) accept, recommend or respond
to any proposal by a person seeking to acquire control of the corporation, (2) authorize
the corporation to redeem any rights under, or modify or render inapplicable, any
stockholder rights plan, (3) make a determination under the Maryland Business Combination
Act or the Maryland Control Share Acquisition Act, or (4) act or fail to act solely because
of the effect the act or failure to act may have on an acquisition or potential acquisition
of control of the corporation or the amount or type of consideration that may be offered or
paid to the stockholders in an acquisition. Moreover, under Maryland law, the act of the
directors of a Maryland corporation relating to or affecting an acquisition or potential
acquisition of control is not subject to any higher duty or greater scrutiny than is
applied to any other act of a director. Maryland law also contains a statutory presumption
that an act of a director of a Maryland corporation satisfies the applicable standards of
conduct for directors under Maryland law.
    
    Ownership Limit.In order to preserve our status as a REIT under the Internal Revenue
Code, our charter generally prohibits any single stockholder, or any group of affiliated
stockholders, from beneficially owning more than 9.8% of our outstanding common and
preferred stock unless our board of directors waives or modifies this ownership limit.
    
    Maryland Business Combination Act.The Maryland Business Combination Act provides
that, unless exempted, a Maryland corporation may not engage in business combinations,
including mergers, dispositions of 10% or more of its assets, certain issuances of shares
of stock and other specified transactions, with an interested stockholder or an affiliate
of an interested stockholder for five years after the most recent date on which the
interested stockholder became an interested stockholder, and thereafter unless specified
criteria are
 58




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##### Table of Contents




    
    Maryland Control Share Acquisition Act.Maryland law provides that control shares of
a corporation acquired in a control share acquisition shall have no voting rights except
to the extent approved by a vote of two-thirds of the votes eligible to be cast on the
matter under the Maryland Control Share Acquisition Act. Control shares means shares of
stock that, if aggregated with all other shares of stock previously acquired by the
acquirer, would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of the voting power: one-tenth or more but less than one-third,
one-third or more but less than a majority or a majority or more of all voting power. A
control share acquisition means the acquisition of control shares, subject to certain
exceptions. If voting rights of control shares acquired in a control share acquisition are
not approved at a stockholders meeting, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares for fair value. If
voting rights of such control shares are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all
other stockholders may exercise appraisal rights. Our bylaws contain a provision exempting
acquisitions of our shares from the Maryland Control Share Acquisition Act. However, our
board of directors may amend our bylaws in the future to repeal or modify this exemption,
in which case any control shares of our company acquired in a control share acquisition
will be subject to the Maryland Control Share Acquisition Act.
 
   Interest Rate Risk
  Effect on Net Interest Income
   59




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Extension Risk
  Interest Rate Cap Risk
  Interest Rate Mismatch Risk
  60




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##### Table of Contents



Prepayment Risk
  Effect on Fair Value
   61




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##### Table of Contents



Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis Points(in millions)Adjustable-Rate Mortgage-Backed
SecuritiesFair value
    
    $
    80.5
    
    
    $
    80.1
    
    
    $
    79.7
    
    
    $
    79.3Change in fair value
    
    $
    0.4
    
    
    
    
    
    
    $
    (0.4
    )
    
    $
    (0.8
    )Change as a percent of fair value
    
    
    0.5
    %
    
    
    
    
    
    
    (0.5
    )%
    
    
    (1.0
    )%Hybrid Adjustable-Rate
Mortgage-Backed SecuritiesFair value
    
    $
    4,414.7
    
    
    $
    4,334.8
    
    
    $
    4,255.0
    
    
    $
    4,177.4Change in fair value
    
    $
    79.9
    
    
    
    
    
    
    $
    (79.8
    )
    
    $
    (157.4
    )Change as a percent of fair value
    
    
    1.8
    %
    
    
    
    
    
    
    (1.8
    )%
    
    
    (3.6
    )%Balloon Mortgage-Backed SecuritiesFair value
    
    $
    53.8
    
    
    $
    53.0
    
    
    $
    52.2
    
    
    $
    51.4Change in fair value
    
    $
    0.8
    
    
    
    
    
    
    $
    (0.8
    )
    
    $
    (1.6
    )Change as a percent of fair value
    
    
    1.5
    %
    
    
    
    
    
    
    (1.5
    )%
    
    
    (3.0
    )%Other Mortgage-Backed SecuritiesFair value
    
    $
    184.0
    
    
    $
    183.7
    
    
    $
    183.4
    
    
    $
    183.1Change in fair value
    
    $
    0.3
    
    
    
    
    
    
    $
    (0.3
    )
    
    $
    (0.6
    )Change as a percent of fair value
    
    
    0.2
    %
    
    
    
    
    
    
    (0.2
    )%
    
    
    (0.3
    )%Total Mortgage-Backed SecuritiesFair value
    
    $
    4,733.0
    
    
    $
    4,651.6
    
    
    $
    4,570.3
    
    
    $
    4,491.2Change in fair value
    
    $
    81.4
    
    
    
    
    
    
    $
    (81.3
    )
    
    $
    (160.4
    )Change as a percent of fair value
    
    
    1.7
    %
    
    
    
    
    
    
    (1.7
    )%
    
    
    (3.4
    )%Mortgage Loans Held-for-InvestmentFair value
    
    $
    145.4
    
    
    $
    143.0
    
    
    $
    140.6
    
    
    $
    138.2Change in fair value
    
    $
    2.4
    
    
    
    
    
    
    $
    (2.4
    )
    
    $
    (4.8
    )Change as a percent of fair value
    
    
    1.7
    %
    
    
    
    
    
    
    (1.7
    )%
    
    
    (3.4
    )%Repurchase Agreements (1)Fair value
    
    $
    4,239.0
    
    
    $
    4,239.0
    
    
    $
    4,239.0
    
    
    $
    4,239.0Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warehouse Lending Facility (1)Fair value
    
    $
    140.4
    
    
    $
    140.4
    
    
    $
    140.4
    
    
    $
    140.4Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior Subordinated NotesFair value
    
    $
    53.2
    
    
    $
    51.0
    
    
    $
    49.0
    
    
    $
    47.0Change in fair value
    
    $
    2.2
    
    
    $
    
    
    
    $
    (2.0
    )
    
    $
    (4.0
    )Change as a percent of fair value
    
    
    4.3
    %
    
    
    
    
    
    
    (3.9
    )%
    
    
    (7.8
    )%Hedge InstrumentsFair value
    
    $
    (9.3
    )
    
    $
    9.5
    
    
    $
    30.9
    
    
    $
    51.8Change in fair value
    
    $
    (18.8
    )
    
    
    
    
    
    $
    21.4
    
    
    $
    42.3Change as a percent of fair value
    
    
    nm
    
    
    
    
    
    
    
    nm
    

    
    
    nm
 
 (1)
    
    The fair value of the repurchase agreements and warehouse lending facility would not change
materially due to the short-term nature of these instruments.nm = not meaningful  62




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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
  63




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64




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

Gail P. SenecaChief Executive Officer(Principal Executive Officer)Date:
    
    November 9, 2005By:
    
    /s/ CHRISTOPHER J. ZYDA

Christopher J. ZydaChief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    November 9, 2005
 65




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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 (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 August 4, 2003 by and between the Registrant and Christopher J. Zyda (1)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 Luminent Mortgage Capital, Inc.
and Cantor Fitzgerald & Co. (6)10.13
    
    
    Letter Agreement dated March 8, 2005 between Luminent Mortgage Capital, Inc. and S. Trezevant Moore, Jr. (8)31.1
    *
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive Officer of the
Registrant, pursuant to Rule 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 Rule 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 2002
 66




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##### Table of Contents



(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 on 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 September 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.*
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan. 67