UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



ýþQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 20052006


or¨

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to .___________


Commission File No. 001-32171Number: 1-32171


BIMINI MORTGAGE MANAGEMENT, INC.Opteum Inc.

(Exact name of registrant as specified in its charter)


Maryland

72-1571637

Maryland
72-1571637
(State or other jurisdiction
of
incorporation or organization)

(I.R.S. Employer
Identification No.)

3305 Flamingo Drive, Vero Beach, Florida 32963

(Address of principal executive offices - zip code)

(772) 231-1400

(Registrant’s telephone number, including area code)


3305 Flamingo Drive, Vero Beach, Florida 32963
(Address of principal executive offices) (Zip Code)

(772) 231-1400
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesYES ýþ NO ¨ No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act).  Yes
YES o¨ NO þ No ý

At March 31, 2005,

As of May 5, 2006, the number of shares outstanding of the registrant’s Class A Common Stock, $0.001 par value, was 20,374,883;24,318,586; the number of shares outstanding of the registrant’s Class B Common Stock, $0.001 par value, was 319,388; and the number of shares outstanding of the registrant’s Class C Common Stock, $0.001 par value, was 319,388.







BIMINI MORTGAGE MANAGEMENT,OPTEUM INC.

INDEX




PART I. FINANCIAL INFORMATION

3

3

Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005

3

BALANCE SHEETSConsolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (unaudited)

3

4

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2006 (unaudited)

5

STATEMENTS OF INCOMEConsolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited)

4

6

Notes to Consolidated Financial Statements (unaudited)

8

5

STATEMENTS OF CASH FLOWS

6

NOTES TO FINANCIAL STATEMENTS

7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

32

27

47

33

55

PART II. OTHER INFORMATION

34

ITEM 1. LEGAL PROCEEDINGS

34

56

ITEM 1A. RISK FACTORS

56

34

56

34

57

34

57

34

57

34

57

2







PART I.1. FINANCIAL INFORMATION


ITEM 1. Financial Statements.                                                     FINANCIAL STATEMENTS

BIMINI MORTGAGE MANAGEMENT, INC.

BALANCE SHEETS

 

 

(Unaudited)
March 31, 2005

 

December 31, 2004

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

MORTGAGE-BACKED SECURITIES:

 

 

 

 

 

Pledged to counterparties, at fair value

 

$

3,287,521,075

 

$

2,901,158,559

 

Unpledged, at fair value

 

11,530,486

 

72,074,338

 

 

 

 

 

 

 

TOTAL MORTGAGE-BACKED SECURITIES

 

3,299,051,561

 

2,973,232,897

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

113,855,808

 

128,942,436

 

RESTRICTED CASH

 

29,590,000

 

8,662,000

 

PRINCIPAL PAYMENTS RECEIVABLE

 

5,875,514

 

3,419,199

 

ACCRUED INTEREST RECEIVABLE

 

13,681,819

 

11,377,807

 

PROPERTY AND EQUIPMENT, net

 

2,131,135

 

2,050,923

 

PREPAIDS AND OTHER ASSETS

 

5,774,331

 

732,469

 

 

 

 

 

 

 

 

 

$

3,469,960,168

 

$

3,128,417,731

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Repurchase agreements

 

$

3,181,655,356

 

$

2,771,162,957

 

Accrued interest payable

 

14,926,521

 

7,980,829

 

Unsettled security purchases

 

 

65,765,630

 

Dividends payable

 

11,241,953

 

 

Compensation and related benefits payable

 

116,279

 

87,323

 

Accounts payable, accrued expenses and other

 

402,429

 

458,665

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

3,208,342,538

 

2,845,455,404

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding

 

 

 

Class A common stock, $0.001 par value; 98,000,000 shares designated; issued and outstanding, 20,374,883 shares at March 31, 2005 and 20,368,915 shares at December  31, 2004

 

20,375

 

20,369

 

Class B common stock, $0.001 par value; 1,000,000 shares designated, 319,388 shares issued and outstanding each period

 

319

 

319

 

Class C common stock, $0.001 par value; 1,000,000 shares designated, 319,388 shares issued and outstanding each period

 

319

 

319

 

Additional paid-in capital

 

285,685,505

 

285,174,651

 

Accumulated other comprehensive loss

 

(22,677,214

)

(1,155,771

)

Accumulated deficit

 

(1,411,674

)

(1,077,560

)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY, net

 

261,617,630

 

282,962,327

 

 

 

 

 

 

 

 

 

$

3,469,960,168

 

$

3,128,417,731

 

See notes to financial statements.

3


OPTEUM INC.
CONSOLIDATED BALANCE SHEETS
  
(Unaudited)
  
  
March 31,
 
December 31,
ASSETS 
2006
 
2005
     
MORTGAGE BACKED SECURITIES:    
Pledged to counterparties, at fair value$3,528,646,943$3,493,490,046
Unpledged, at fair value 9,907,267 539,313
     
TOTAL MORTGAGE BACKED SECURITIES 3,538,554,210 3,494,029,359
     
Cash and cash equivalents 90,872,039 130,510,948
Restricted cash - 2,310,000
Mortgage loans held for sale, net 721,593,366 894,237,630
Retained interests, trading 105,196,205 98,010,592
Securities held for sale 1,847,248 2,782,548
Mortgage servicing rights, net 93,337,355 86,081,594
Receivables, net 6,656,880 24,512,118
Principal payments receivable 15,624,670 21,497,365
Accrued interest receivable 16,441,403 15,740,475
Property and equipment, net 17,038,985 16,067,170
Prepaid and other assets 18,882,146 19,321,766
 $4,626,044,507$4,805,101,565
LIABILITIES AND STOCKHOLDERS' EQUITY    
     
LIABILITIES:    
Repurchase agreements$3,413,954,826$3,337,598,362
Warehouse lines of credit and drafts payable 697,860,930 873,741,429
Other secured borrowings 105,452,119 104,886,339
Junior subordinated notes due to Bimini Capital Trust I & II 103,097,000 103,097,000
Accrued interest payable 34,639,214 30,232,719
Unsettled security purchases 1,709,728 58,278,701
Dividends payable 2,645,853 -
Deferred tax liability 16,243,642 18,360,679
Accounts payable, accrued expenses and other 18,850,263 26,417,996
     
TOTAL LIABILITIES 4,394,453,575 4,552,613,225
     
COMMITMENTS AND CONTINGENCIES    
     
STOCKHOLDERS' EQUITY:    
Preferred stock, $0.001 par value; 10,000,000 shares authorized; designated, 1,800,000 shares as Class A Redeemable and 2,000,000 shares as Class B Redeemable; shares issued and outstanding at March 31, 2006 and December 31, 2005, 1,223,208 Class A Redeemable and no Class B Redeemable 1,223 1,223
Class A common stock, $0.001 par value; 98,000,000 shares designated; 24,172,598 shares issued and 23,083,498 shares outstanding at March 31, 2006, and 24,129,042 shares issued and 23,567,242 shares outstanding at December 31, 2005 24,173 24,129
Class B common stock, $0.001 par value; 1,000,000 shares designated, 319,388 shares issued and outstanding at March 31, 2006 and December 31, 2005 319 319
Class C common stock, $0.001 par value; 1,000,000 shares designated, 319,388 shares issued and outstanding at March 31, 2006 and December 31, 2005 319 319
Additional paid-in capital 342,759,382 342,230,342
Accumulated other comprehensive loss (88,309,476) (76,494,378)
Accumulated deficit (13,148,327) (8,037,260)
Treasury Stock; Class A common stock, at cost; 1,089,100 shares at March 31, 2006 and 561,800 shares at December 31, 2005 (9,736,681) (5,236,354)
     
STOCKHOLDERS' EQUITY, NET 231,590,932 252,488,340
 $4,626,044,507$4,805,101,565
See notes to consolidated financial statements.


OPTEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
  
(Unaudited)
  
Three Months Ended March 31,
  
2006
 
2005
INTEREST INCOME:    
Interest income, net of amortization of premium and discount$60,690,122$31,069,934
Interest expense (56,206,771) (19,841,710)
     
NET INTEREST INCOME: 4,483,351 11,228,224
     
NON-INTEREST INCOME:    
GAIN OF SALE OF MORTGAGE LOANS 7,076,658 -
GAINS ON SALES OF MORTGAGE BACKED SECURITIES - 1,982,382
     
Servicing fee income 6,299,224 -
Fair Value adjustments to mortgage servicing rights (8,062,481) -
NET SERVICING (LOSS) (1,763,257) -
     
OTHER NON-INTEREST INCOME 1,748,142 -
TOTAL NON-INTEREST INCOME 7,061,543 1,982,382
     
TOTAL NET REVENUE 11,544,894 13,210,606
     
DIRECT OPERATING EXPENSES 319,250 589,973
GENERAL AND ADMINISTRATIVE EXPENSES:    
Compensation and related benefits 8,023,814 1,205,333
Directors' fees and liability insurance 209,896 156,450
Audit, legal and other professional fees 1,202,147 198,005
Other interest expense 1,731,785 -
Other administrative expenses 8,938,478 153,006
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 20,106,120 1,712,794
     
(LOSS) INCOME BEFORE INCOME TAXES (8,880,476) 10,907,839
     
INCOME TAX BENEFIT (3,793,344) -
NET (LOSS) INCOME$(5,087,132)$10,907,839
BASIC AND DILUTED NET (LOSS) INCOME:    
PER CLASS A REDEEMABLE PREFERRED SHARE$-$-
PER CLASS A COMMON SHARE$(0.21)$0.52
PER CLASS B COMMON SHARE$(0.21)$0.51
     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTING BASIC AND DILUTED PER SHARE AMOUNTS:    
CLASS A REDEEMABLE PREFERRED SHARES 1,223,208 N/A
CLASS A COMMON SHARES 23,436,534 20,795,612
CLASS B COMMON SHARES 319,388 319,388
CASH DIVIDENDS DECLARED PER:    
CLASS A REDEEMABLE PREFERRED SHARE$-$-
CLASS A COMMON SHARE$0.11$0.53
CLASS B COMMON SHARE$0.11$0.53
See notes to consolidated financial statements.




BIMINI MORTGAGE MANAGEMENT, INC.

STATEMENTS OF INCOME

 

 

(Unaudited)
Three months ended
March 31, 2005

 

(Unaudited)
Three months ended
March 31, 2004

 

 

 

 

 

 

 

Interest income, net of amortization of premium and discount

 

$

31,069,934

 

$

7,194,033

 

Interest expense

 

19,841,710

 

2,736,434

 

 

 

 

 

 

 

NET INTEREST INCOME

 

11,228,224

 

4,457,599

 

 

 

 

 

 

 

GAIN ON SALES OF MORTGAGE-BACKED SECURITIES

 

1,982,382

 

 

 

 

 

 

 

 

DIRECT OPERATING EXPENSES:

 

 

 

 

 

Trading costs, commissions, and other trading expenses

 

536,284

 

200,064

 

Other direct costs

 

53,689

 

25,919

 

 

 

 

 

 

 

TOTAL DIRECT OPERATING EXPENSES

 

589,973

 

225,983

 

 

 

 

 

 

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

 

 

 

 

Compensation and related benefit/costs

 

1,205,333

 

91,345

 

Directors’ fees

 

92,027

 

24,750

 

Directors’ liability insurance costs

 

64,423

 

41,082

 

Audit, legal and other professional fees

 

198,005

 

33,834

 

Other administrative expenses

 

153,006

 

97,443

 

 

 

 

 

 

 

TOTAL GENERAL AND ADMINISTRATIVE EXPENSES

 

1,712,794

 

288,454

 

 

 

 

 

 

 

NET INCOME

 

$

10,907,839

 

$

3,943,162

 

 

 

 

 

 

 

BASIC AND DILUTED INCOME PER CLASS A COMMON SHARE

 

$

0.52

 

$

0.49

 

 

 

 

 

 

 

BASIC AND DILUTED INCOME PER CLASS B COMMON SHARE

 

$

0.51

 

$

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF CLASS A COMMON SHARES OUTSTANDING USED IN COMPUTING PER SHARE AMOUNTS:

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

 

20,795,612

 

8,001,052

 

WEIGHTED AVERAGE NUMBER OF CLASS B COMMON SHARES OUTSTANDING USED IN COMPUTING PER SHARE AMOUNTS:

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

 

319,388

 

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER:

 

 

 

 

 

CLASS A COMMON SHARE

 

$

0.53

 

$

0.39

 

 

 

 

 

 

 

CLASS B COMMON SHARE

 

$

0.53

 

$

 

See notes to financial statements.

4


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Three Months Ended March 31, 2006
          
 
Common Stock,
Amounts at par value
Class A Redeemable PreferredTreasuryAdditional Paid-inAccumulated Other ComprehensiveAccumulated 
 Class AClass BClass CStockStockCapitalLossDeficitTotal
Balances, December 31, 2005$ 24,129$ 319$ 319$ 1,223$(5,236,354)$342,230,342$ (76,494,378)$(8,037,260)$ 252,488,340
          
Fair value adjustment upon adoption of SFAS No. 156 (see Note 5)-------2,621,9182,621,918
Issuance of Class A common shares for board compensation and plan phantom share exercises, net44----98,105--98,149
Treasury stock purchases----(4,500,327)---(4,500,327)
Cash dividends declared-------(2,645,853)(2,645,853)
Phantom shares vested and amortization of equity plan compensation, net-----559,318--559,318
Stock issuance costs-----(128,383)--(128,383)
Net loss-------(5,087,132))(5,087,132)
Unrealized loss on available for sale securities, net------(11,815,098)-(11,815,098)
Comprehensive loss--------(16,902,230)
          
Balances, March 31, 2006$ 24,173$ 319$ 319$ 1,223$(9,736,681)$ 342,759,382$(88,309,476)$(13,148,327)$ 231,590,932
          
See notes to consolidated financial statements.





OPTEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
     
  
(Unaudited)
  
Three Months Ended March 31,
  
2006
 
2005
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net (loss) income$(5,087,132)$10,907,839
Adjustments to reconcile net (loss) income to net cash provided by operating activities:    
Gain on sale of mortgage loans held for sale (7,076,658) -
Amortization of premium and discount on mortgage backed securities 3,080,393 8,097,698
Retained interest, trading (7,185,613) -
Securities held for sale 935,300 -
Mortgage servicing rights, net (4,633,843) -
Deferred tax liability (2,117,037) -
Gains on sales of mortgage backed securities - (1,982,382)
Stock compensation 808,614 554,784
Depreciation and amortization 1,027,644 11,974
Changes in operating assets and liabilities:    
   Mortgage loans held for sale 179,720,922 -
Receivables, net 17,855,238 -
Accrued interest receivable (700,928) (2,304,010)
Prepaids and other assets 282,625 (5,041,862)
Accrued interest payable 4,406,495 6,945,692
Accounts payable, accrued expenses and other 2,682,549 (27,280)
NET CASH PROVIDED BY OPERATING ACTIVITIES 183,998,569 17,162,453
     
CASH FLOWS FROM INVESTING ACTIVITIES:    
From available-for-sale securities:    
Purchases (432,101,377) (827,611,830)
Sales - 172,040,665
Principal repayments 321,984,757 233,893,795
Purchases of property and equipment (1,842,465) (92,180)
NET CASH USED IN INVESTING ACTIVITIES (111,959,085) (421,769,550)
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Decrease (increase) in restricted cash 2,310,000 (20,928,000)
Net borrowings under repurchase agreements 76,356,464 410,492,399
Decrease in warehouse lines of credit, drafts payable and other secured borrowings (185,565,000) -
Stock issuance and other costs (279,530) (43,930)
Purchases of treasury stock (4,500,327) -
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (111,678,393) 389,520,469
     
NET CHANGE IN CASH AND CASH EQUIVALENTS (39,638,909) (15,086,628)
     
CASH AND CASH EQUIVALENTS, Beginning of the period 130,510,948 128,942,436
     
CASH AND CASH EQUIVALENTS, End of the period$90,872,039$113,855,608
     





OPTEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D)
     
     
  
(Unaudited)
  
Three Months Ended March 31,
  
2006
 
2005
     
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:    
Cash paid during the period for interest$51,800,276$12,896,018
     
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:    
Cash dividends declared and payable, not yet paid$2,645,853$11,241,953
Unsettled security purchases$1,709,728$-
See notes to consolidated financial statements.






BIMINI MORTGAGE MANAGEMENT,OPTEUM INC.

STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 20052006



(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common stock,
Amounts at Par Value

 

Additional
Paid-in

 

Other
Comprehensive

 

Accumulated

 

 

 

 

 

Class A

 

Class B

 

Class C

 

Capital

 

Loss

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2004

 

$

20,369

 

$

319

 

$

319

 

$

285,174,651

 

$

(1,155,771

)

$

(1,077,560

)

$

282,962,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Class A common shares as board compensation

 

6

 

 

 

 

 

92,021

 

 

 

 

 

92,027

 

Cash dividends declared, March 2005

 

 

 

 

 

 

 

 

 

 

 

(11,241,953

)

(11,241,953

)

Amortization of equity plan compensation

 

 

 

 

 

 

 

462,763

 

 

 

 

 

462,763

 

Stock issuance costs

 

 

 

 

 

 

 

(43,930

)

 

 

 

 

(43,930

)

Reclassify unrealized loss on security sales

 

 

 

 

 

 

 

 

 

(1,982,382

)

 

 

(1,982,382

)

Net income

 

 

 

 

 

 

 

 

 

 

 

10,907,839

 

10,907,839

 

Unrealized loss on available for sale securities, net

 

 

 

 

 

 

 

 

 

(19,539,061

)

 

 

(19,539,061

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,613,604

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2005

 

$

20,375

 

$

319

 

$

319

 

$

285,685,505

 

$

(22,677,214

)

$

(1,411,674

)

$

261,617,630

 

5



BIMINI MORTGAGE MANAGEMENT, INC.

STATEMENTS OF CASH FLOWS

 

 

(Unaudited)
Three months ended
March 31, 2005

 

(Unaudited)
Three months ended
March 31, 2004

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

10,907,839

 

$

3,943,162

 

Amortization of premium and discount

 

8,097,698

 

1,898,016

 

Stock compensation and depreciation

 

566,758

 

28,473

 

Gain on sales of mortgage-backed securities

 

(1,982,382

)

 

Changes in certain assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

(2,304,010

)

(4,362,526

)

Prepaids and other assets

 

(5,041,862

)

(370,691

)

Accrued interest payable

 

6,945,692

 

1,993,227

 

Accounts payable, accrued expenses and other

 

(27,280

)

160,974

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

17,162,453

 

3,290,635

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

From available-for-sale securities:

 

 

 

 

 

Purchases

 

(827,611,830

)

(1,311,612,358

)

Sales

 

172,040,665

 

 

Principal repayments

 

233,893,795

 

22,972,383

 

Purchases of property and equipment

 

(92,180

)

(66,910

)

NET CASH USED IN INVESTING ACTIVITIES

 

(421,769,550

)

(1,288,706,885

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Increase in restricted cash

 

(20,928,000

)

 

Net borrowings under repurchase agreements

 

410,492,399

 

1,253,947,000

 

Stock issuance costs

 

(43,930

)

 

Proceeds from sales of common stock, net of costs of issuance

 

 

85,112,817

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

389,520,469

 

1,339,059,817

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(15,086,628

)

53,643,567

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, Beginning of the period

 

128,942,436

 

18,404,130

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, End of the period

 

$

113,855,808

 

$

72,047,697

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for interest

 

$

12,896,018

 

$

743,207

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Cash dividends declared and payable, not yet paid

 

$

11,241,953

 

$

3,903,569

 

See notes to financial statements.

6



BIMINI MORTGAGE MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

MARCH 31, 2005

NOTE 1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES


Organization and Business Description

Bimini Mortgage Management,


Opteum Inc. (the “Company”(“Opteum”) was incorporated in Maryland on September 24, 2003, and it commenced its planned business activities on December 19, 2003, the date of the initial closing of a private issuance of its common stock.


On February 6, 2006, Opteum announced that its Board of Directors voted unanimously to change its name from Bimini Mortgage Management, Inc. to Opteum Inc. On February 10, 2006, the corporate name change was effective and its New York Stock Exchange, ticker symbol was changed from “BMM” to “OPX.” The Companycorporate name change leverages the brand identity of Opteum Financial Services, LLC (our taxable REIT subsidiary - see Note 2), and further enhances the integration of Opteum and the associates of Opteum Financial Services, LLC. One company and one national brand now represent a unified image to investors, customers and associates.

Opteum was formed to invest primarily in, but not limited to, residential mortgage related securities issued by the Federal National Mortgage Association (more commonly known as Fannie Mae), the Federal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) and the Government National Mortgage Association (more commonly known as Ginnie Mae).

The Company Opteum funds investments in its portfolio of mortgage backed securities (“MBS”) through borrowings under repurchase agreements. Opteum earns a net interest spread between the yield on the investments in mortgage backed securities and the borrowing costs on the repurchase agreements.


Opteum has elected to be taxed as a real estate investment trust (“REIT”("REIT") under the Internal Revenue Code of 1986, as amended.amended (the “Code”). In order to maintain its REIT status, the Companyqualification, Opteum must comply with a number of requirements under Federalfederal tax law, including that it must distribute at least 90% of its annual REIT taxable net income to its stockholders, subject to certain adjustments. Such portfolio management activity mentioned above comprises the REIT qualifying operations of Opteum.

On September 29, 2005, Opteum executed a definitive merger agreement with Opteum Financial Services, LLC (“OFS”), a privately held home mortgage lender headquartered in Paramus, New Jersey. OFS has approximately 1,000 associates operating out of 35 offices and lending in 46 states. The transaction, in which OFS became a wholly-owned taxable REIT subsidiary (“TRS”) of Opteum, closed on November 3, 2005 (see Note 2). OFS acquires and originates mortgages that are either sold to third parties or securitized by Opteum Mortgage Acceptance Corporation (“OPMAC”). OFS services the mortgages securitized by OPMAC.

As aused in this document, the parent company, the registrant, “Opteum” and discussions related to REIT qualifying activities or the Company will routinely distribute substantially allgeneral management of its taxable income generated from operationsOpteum’s portfolio of mortgage backed securities (“MBS”) refers to its stockholders.  The Company will generally not be subject“Opteum Inc.” Further, as used in this document, “OFS,” the TRS or non REIT eligible assets refer to Federal income taxOpteum Financial Services, LLC. Discussions relating to the extent that it distributes its net income“Company” refer to the stockholders,consolidated entity (the combination of Opteum and satisfies the ongoingOFS). The assets and activities that are not REIT requirements including meeting certain asset, incomeeligible, such as mortgage origination, acquisition and stock ownership tests.

servicing activities, are conducted by OFS.

Interim Financial Statements


The accompanying interim financial statements reflect all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations, statement of stockholder equity and cash flows for the periods presented. These interim financial statements have been prepared in accordance with disclosure requirements for interim financial information and accordingly, they may not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for annual financial statements. The operating results for the interim period ended March 31, 20052006 are not necessarily indicative of results that can be expected for the year ended December 31, 2006. The operating results of the interim period ended March 31, 2005 do not include the results of OFS, as the merger closed in November 2005. The financial statements included as part of this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain prior year amounts have been reclassified to conform to the current year presentation.

2005.

Basis of Presentation and Use of Estimates


The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying financial statements include the fair values of mortgage-backedmortgage backed securities, (“MBS”) and the prepayment speeds used to calculate amortization and accretion of premiums and discounts on MBS.

7



Securitiesmortgage backed securities, the deferred tax liability valuation, the valuation allowance on mortgage loans held for sale, the valuation of derivative financial instruments and the fair value of mortgage servicing rights.


Consolidation

The accompanying March 31, 2006 consolidated financial statements include the accounts of Opteum and its wholly-owned subsidiary, OFS, as well the wholly-owned and majority owned subsidiaries of OFS. Opteum uses the equity method to account for other investments for which it has the ability to exercise significant influence over operating and financial policies. Consolidated net earnings of Opteum include Opteum’s share of the net earnings (losses) of these companies, if any. The inter-company loan and all other material inter-company accounts and transactions have been eliminated from the consolidated financial statements.

As further described in Note 11, Opteum has a common share investment in two trusts used to issue Opteum’s junior subordinated notes. Pursuant to the accounting guidance provided in Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Income RecognitionEntities

, Opteum’s common share investment in the trusts are not consolidated in the financial statements of Opteum, and accordingly, these investments are accounted for on the equity method.


Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The Company invests primarily in residential mortgagecarrying amount of cash equivalents approximates its fair value at March 31, 2006 and December 31, 2005.

Restricted cash represents cash held on deposit as collateral with certain repurchase agreement counter-parties (i.e. lenders). Such amounts may be used to make principal and interest payments on the related securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae.

repurchase agreements.


Valuation of Mortgage Backed Securities

In accordance with GAAP, the CompanyOpteum classifies its investments in MBS as either trading investments, available-for-sale investments or held-to-maturity investments. Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The CompanyAlthough Opteum intends to hold its MBS until maturity, it may, from time to time, sell any of its MBS as part of the overall management of the business. Opteum currently classifies all of its securities as available-for-sale, and assets so classified are carried on the balance sheet at fair value, and unrealized gains or losses arising from changes in market values are excluded from earnings and reported inas other comprehensive income or loss as a component of stockholders’stockholders' equity. PermanentOther-than-temporary impairment losses, if any, are reported in earnings.

When the fair value of an available-for-sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security.   The decision is based on the credit quality of the issue (agency versus non-agency, and for non-agency, the credit performance of the underlying collateral), the security prepayment speeds, the length of time the security has been in an unrealized loss position and our ability and intent to hold securities. At March 31, 2006, Opteum did not hold any non-agency securities in its portfolio. If, in management's judgment, an other-than-temporary impairment exists, the cost basis of the security is written down in the period to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment).

Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated and held pending sale to investors. The mortgages are carried at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Deferred net fees or costs are not amortized during the period the loans are held for sale, but are recognized when the loan is sold. OFS generally, but not always, sells or securitizes loans with servicing rights retained. These transfers of financial assets are accounted for as sales for financial reporting purposes when control over the assets has been surrendered. Control over transferred assets is surrendered when (i) the assets have been isolated from OFS; (ii) the investor obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and (iii) OFS does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. These transactions are treated as sales in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Gains or losses on such sales, are recognized at the time legal title transfers to the investor, are based upon the difference between the sales proceeds from the final investor and the allocated basis of the loan sold, adjusted for net deferred loan fees and certain direct costs and selling costs.
Valuation Allowance
A valuation allowance is recorded to adjust mortgage loans held for sale to the lower of cost or market.
Retained Interest, Trading
OFS uses warehouse loan arrangements to finance the origination and purchase of pools of principally fixed and adjustable-rate residential first mortgage loans (the “Mortgage Loans”). Subsequent to their origination or purchase, OFS either sells these loans to third party institutional investors through bulk sale arrangements, or through securitization transactions. OFS generally makes several representations and warranties regarding the performance of the Mortgage Loans in connection with each sale or securitization. OFS accumulates the desired amount of Mortgage Loans, and securitizes them in order to create marketable securities.

OFS, pursuant to a purchase and sale agreement, transfers the Mortgage Loans to OPMAC, the wholly-owned special purpose entity set-up for the execution of these securitizations.

OPMAC then sells the Mortgage Loans to an institutional third party to serve as Depositor, pursuant to a Mortgage Loan Purchase and Servicing Agreement (“P&S Agreement”). Under this P&S Agreement, OFS makes general representations and warranties for Mortgage Loans sold by OFS.

The Depositor then deposits the Mortgage Loans into a Real Estate Mortgage Investment Conduit trust (the “REMIC”) where the rights to such Mortgage Loans are pooled and converted into marketable debt securities pursuant to the P&S Agreement. These securities, issued by the REMIC, are divided into different classes of certificates (the “Certificates”) with varying claims to payments received on the Mortgage Loans. These Certificates are transferred to the Depositor in exchange for all of its rights in the Mortgage Loans deposited into the REMIC.

Certain Certificates are rated by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s (“S&P”). In all of the securitizations to date, all of the senior certificate classes were rated “AAA” by S&P, and “Aaa” by Moody’s, respectively. In addition, most of the mezzanine classes of Certificates, starting with Class M-1 through the lowest respective subordinate class for each offering, with each lower numerical class designation being subordinated to the previous designation, are each given investment grade ratings. The subordinate classes not given an investment grade rating are sold through a private placement offering memorandum. Certain of these Certificates are offered to the public (the “Public Certificates”) pursuant to a prospectus. These Public Certificates are sold to underwriters on the closing date pursuant to an underwriting agreement. The proceeds from the sale of the Public Certificates to the underwriters (less an underwriting discount) and the remaining non-publicly offered Certificates are transferred to OFS as consideration for the Mortgage Loans sold to the Depositor pursuant to the P&S Agreement.

Finally, OFS transfers the proceeds from the sale of the Public Certificates and the non-publicly offered Certificates representing the residual interest in the REMIC to OPMAC pursuant to the P&S Agreement. The additional non-publicly offered Certificates, representing prepayment penalties and over-collateralization fundings (the “Underlying Certificates”) are held by OPMAC in anticipation of a net interest margin (“NIM”) securitization. Subsequent to a securitization transaction as described above, OFS executes an additional securitization or “resecuritization” of the Underlying Certificates being held by OPMAC. This NIM securitization is typically transacted as follows:

OPMAC deposits the Underlying Certificates into a trust (the “NIM Trust”) pursuant to a deposit trust agreement. The NIM Trust is a Delaware statutory trust. The NIM Trust, pursuant to an indenture, issues (i) notes (the “NIM Notes”) representing interests in the Underlying Certificates and (ii) an owner trust certificate representing the residual interest in the NIM trust. The NIM Notes are sold to third parties via private placement transactions, and the Trust Certificate is transferred from OPMAC to OFS in consideration for the deposit of the Underlying Certificates.

Securities Held for Sale

Securities held for sale are recorded as of the date of purchase or sale at fair value. Changes in fair value subsequent to the purchase date are reflected in earnings as gains and losses from investments. Realized gains and losses are determined on a specific identified basis cost basis.

Mortgage Servicing Rights

OFS recognizes mortgage servicing rights (“MSRs”) as an asset when separated from the underlying mortgage loans, upon the sale of the loans. Upon sale of a loan, OFS measures the retained MSRs by allocating the total cost of originating a mortgage loan between the loan and the servicing right based on their relative fair values. Fair value is estimated based on expected cash flows considering market prepayment estimates, historical prepayment rates, portfolio characteristics, interest rates, and other economic factors. Gains or losses on the sale of MSRs are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets ("SFAS 156"). SFAS 156 amends SFAS 140 with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value measurement basis. Opteum elected to early adopt SFAS 156 as of January 1, 2006 and to measure all mortgage servicing assets at fair value (and as one class). Servicing assets and liabilities at December 31, 2005 were accounted for at the lower of amortized cost or market value basis. As a result of adopting SFAS 156, Opteum recognized $2.6 million after-tax increase ($4.3 million pre-tax) as a cumulative effect adjustment to opening retained earnings as of January 1, 2006, representing the effect of re-measuring all servicing assets and liabilities that existed at December 31, 2005 from a lower of amortized cost or market basis to a fair value basis.

Property and Equipment, net

Property and equipment, net, consisting primarily of computer equipment, office furniture, leasehold improvements, land and buildings, is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets. Asset lives range from five years for computer equipment to thirty years for the building. Property and equipment at March 31, 2006 and December 31, 2005 is net of accumulated depreciation of $1,477,539 and $606,889, respectively. Depreciation expense for the three months ended March 31, 2006 and 2005 was $870,650and$11,968, respectively.

Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Opteum’s goodwill all arose from the OFS merger. Contingent consideration paid in subsequent periods under the terms of the OFS purchase agreement, if any, would be considered acquisition costs and classified as goodwill. Goodwill was $3.0 million as of March 31, 2006.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, Opteum will subject its goodwill to at least an annual assessment for impairment by applying a fair value-based test. If the carrying value exceeds the fair value, goodwill is impaired. There has been no impairment charge recorded for the OFS goodwill.
See Note 2 to our 2005 10-K for a description of identified intangible assets associated with the acquisition.
Derivative Assets and Derivative Liabilities

OFS’s mortgage committed pipeline includes interest rate lock commitments (“IRLCs”) that have been extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. Effective with the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, OFS classifies and accounts for the IRLCs as freestanding derivatives. Accordingly, IRLCs are recorded at their fair value with changes in fair value recorded to current earnings. OFS uses other derivative instruments to economically hedge the IRLCs, which are also classified and accounted for as freestanding derivatives.
OFS’s risk management objective for its mortgage loans held for sale includes use of mortgage forward delivery contracts designed as fair value derivative instruments to protect earnings from an unexpected change due to a decline in value. Effective with the adoption of SFAS No. 133, OFS’s mortgage forward delivery contracts are recorded at their fair value with changes in fair value recorded to current earnings.
IRLCs and derivative assets or liabilities arising from OFS’s derivative activities are included in either receivables or accounts payable and accrued liabilities in the accompanying consolidated balance sheets. OFS also evaluates its contractual arrangements, assets and liabilities for the existence of embedded derivatives.
Repurchase Agreements

Opteum finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, Opteum transfers securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sales price that Opteum receives and the repurchase price that Opteum pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which Opteum pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. Opteum retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, Opteum is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, Opteum may renew such agreement at the then prevailing financing rate. These repurchase agreements may require Opteum to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines. As of March 31, 2006 and December 31, 2005, Opteum did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

Original terms to maturity of Opteum's repurchase agreements generally, but not always, range from one month to twelve months; however, Opteum is not precluded from entering into repurchase agreements with shorter or longer maturities. Should a counter-party decide not to renew a repurchase agreement at maturity, Opteum must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, Opteum might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender's assets for the difference between the amount loaned to Opteum and the estimated fair value of the collateral pledged to such lender. At March 31, 2006, Opteum had amounts outstanding under repurchase agreements with fifteen separate lenders with a maximum net exposure (the difference between the amount loaned to Opteum and the estimated fair value of the security pledged by Opteum as collateral) to any single lender of approximately $16.9 million. At December 31, 2005, Opteum had amounts outstanding under repurchase agreements with fourteen separate lenders with a maximum net exposure to any single lender of approximately $27.0 million.

Opteum has entered into contracts and paid commitment fees to three lenders providing for an aggregate of $1.65 billion in committed repurchase lines at pre-determined borrowing rates and haircuts for a 364 day period following the commencement date of each contract. Opteum has no obligation to utilize these repurchase lines and at March 31, 2006 had approximately $500 million outstanding.

At March 31, 2006, Opteum's repurchase agreements had the following counter-parties, amounts at risk and weighted average remaining maturities:

Repurchase Agreement Counter-parties
 
Amount
Outstanding
($000)
 
Amount
at Risk(1)
($000)
Weighted Average
Maturity of
Repurchase
Agreements
in Days
Percent
of Total
Amount
Outstanding
 
Deutsche Bank Securities, Inc.$963,877$11,9416628.23%
Nomura Securities International, Inc. 430,521 16,8628512.61 
Washington Mutual 410,994 12,625912.04 
Bear Stearns & Co. Inc. 299,764 7,788448.78 
UBS Investment Bank, LLC 246,670 8,448547.23 
Cantor Fitzgerald 209,148 10,256246.13 
Goldman Sachs 170,567 4,645505.00 
Morgan Stanley 165,555 5,053414.85 
JP Morgan Securities 149,603 4,665784.38 
Merrill Lynch 112,255 4,129553.29 
RBS Greenwich Capital 94,053 2,631552.75 
BNP Paribas 67,430 1,99381.98 
Lehman Brothers 56,782 1,499891.66 
Daiwa Securities America Inc. 19,732 884980.57 
Countrywide Securities Corp 17,004 491240.50 
Total
$
3,413,955
$
93,910
 
100.00
%

(1)Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

At December 31, 2005, Opteum's repurchase agreements had the following counter-parties, amounts at risk and weighted average remaining maturities:

Repurchase Agreement Counter-parties
 
Amount
Outstanding
($000)
 
Amount
at Risk(1)
($000)
Weighted Average
Maturity of
Repurchase
Agreements
in Days
Percent
of Total
Amount
Outstanding
 
Deutsche Bank Securities, Inc.$894,748$12,01813526.81%
Nomura Securities International, Inc. 623,631 27,01012218.69 
Cantor Fitzgerald 467,638 15,9587014.01 
Washington Mutual 375,345 11,630711.25 
Goldman Sachs 207,525 7,438446.22 
Bear Stearns & Co. Inc. 167,610 6,0961575.02 
UBS Investment Bank, LLC 158,781 5,059934.76 
Merrill Lynch 128,119 (7,949)963.84 
JP Morgan Securities 115,807 1,6521513.47 
Morgan Stanley 73,505 1,767262.20 
Lehman Brothers 62,643 2,399871.88 
Countrywide Securities Corp 22,930 1,238860.69 
Daiwa Securities America Inc. 19,732 391880.58 
Bank of America Securities, LLC 19,584 815270.58 
Total
$
3,337,598
$
85,170
 
100.00
%


(1)Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

Interest Income Recognition on MBS

Securities are recorded on the date the securities are purchased or sold, which is generally the trade date. Realized gains or losses from securities transactions are determined based on the specific identification method.

identified cost of the securities. Interest income is accrued based on the outstanding principal amount of the securities and their stated contractual terms. Premiums and discounts associated with the purchase of the securities are accretedamortized or amortizedaccreted into interest income over the estimated lives of the assets adjusted for estimated prepayments using the effective interest method. Adjustments are made using the retrospective method to the effective interest computation each reporting period based on the actual prepayment experiences to date, and the present expectation of future prepayments of the underlying mortgages.



Cash and Cash Equivalents

Cash and cash equivalents include cashGain on hand and highly liquid investments with original maturitiesSale of three months or less. The carrying amount of cash equivalents approximates its fair value at March 31, 2005 and December 31, 2004.

Restricted CashLoans

Restricted cash represents cash held on deposit as collateral with certain repurchase agreement counter-parties.  Such amounts may be used to make principal and interest payments


OFS recognizes gain (or loss) on the related repurchase agreements.

Credit Risk

At March 31, 2005, the Company had limited its exposure to creditsale of loans.  Gains or losses on its portfolio of securities by purchasing primarily securities from federal agencies or federally chartered entities, such as, but not limited to, Fannie Mae, Freddie Mac, and Ginnie Mae. The portfolio is diversified to avoid undue loan originator, geographic and other types of concentrations. The Company managessales are recognized at the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of prepayment characteristics.

The Company is engaged in various trading and brokerage activities in which counter-parties primarily include broker-dealers, banks, and other financial institutions. In the event counter-parties do not fulfill their obligations, the Company may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counter-party and/or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing for each counter-party.

8



Repurchase Agreements

The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paidtime legal title transfers to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines. As of March 31, 2005 and December 31, 2004, the Company did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

Original terms to maturity of the Company’s repurchase agreements generally range from one month to 36 months; however, the Company is not precluded from entering into repurchase agreements with longer maturities. Should a counter-party decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender’s assets forinvestor based upon the difference between the amount loaned tosales proceeds from the Companyfinal investor and the estimated fair value of the collateral pledged to such lender.  At March 31, 2005, the Company had amounts outstanding under repurchase agreements with fifteen separate lenders with a maximum net exposure (the difference between the amount loaned to the Company and the estimated fair value of the security pledged by the Company as collateral) to any single lender of approximately $25.0 million. At December 31, 2004, the Company had amounts outstanding under repurchase agreements with twelve separate lenders with a maximum net exposure to any single lender of approximately $29.0 million.

9



At March 31, 2005, the Company’s repurchase agreements had the following counter-parties, amounts at risk and weighted average remaining maturities (unaudited):

Repurchase Agreement Counter-parties

 

Amount
Outstanding

 

Amount
at Risk(1)

 

Weighted Average
Maturity of
Repurchase
Agreements
in Days

 

Percent
of Total
Amount
Outstanding

 

 

 

($000)

 

($000)

 

 

 

 

 

Nomura Securities International, Inc.

 

$

485,270

 

$

25,007

 

160

 

15.3

%

JP Morgan Securities

 

403,899

 

15,385

 

30

 

12.7

%

Deutsche Bank Securities, Inc.

 

385,439

 

16,638

 

142

 

12.1

%

Bear Stearns & Co. Inc.

 

297,251

 

11,808

 

98

 

9.3

%

Goldman Sachs

 

264,902

 

8,438

 

82

 

8.3

%

Cantor Fitzgerald

 

247,942

 

12,367

 

151

 

7.8

%

Washington Mutual

 

239,851

 

10,920

 

73

 

7.5

%

Banc of America Securities, LLC

 

239,290

 

11,932

 

93

 

7.5

%

UBS Investment Bank, LLC

 

148,360

 

6,534

 

70

 

4.7

%

Lehman Brothers

 

144,277

 

4,458

 

96

 

4.6

%

Countrywide Securities Corp.

 

131,062

 

6,235

 

39

 

4.1

%

Merrill Lynch

 

103,032

 

1

 

92

 

3.2

%

Daiwa Securities America Inc.

 

59,046

 

3,370

 

99

 

1.9

%

Morgan Stanley

 

28,288

 

1,213

 

12

 

0.9

%

REFCO Securities, LLC

 

3,746

 

208

 

55

 

0.1

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,181,655

 

$

134,514

 

 

 

100.0

%


(1)Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

At December 31, 2004, the Company’s repurchase agreements had the following counter–parties, amounts at risk and weighted average remaining maturities:

Repurchase Agreement Counter-parties

 

Amount
Outstanding

 

Amount
at Risk(1)

 

Weighted Average
Maturity of
Repurchase
Agreements
in Days

 

Percent
of Total
Amount
Outstanding

 

 

 

($000)

 

($000)

 

 

 

 

 

UBS Investment Bank, LLC

 

$

512,697

 

$

29,005

 

64

 

18.5

%

Nomura Securities International, Inc.

 

463,901

 

26,083

 

99

 

16.7

 

Banc of America Securities, LLC

 

309,270

 

18,079

 

66

 

11.2

 

Deutsche Bank Securities, Inc.

 

308,645

 

16,246

 

227

 

11.1

 

Lehman Brothers

 

257,191

 

8,793

 

81

 

9.3

 

Bear Stearns & Co. Inc.

 

255,229

 

14,068

 

127

 

9.2

 

Countrywide Securities Corp.

 

178,574

 

8,447

 

43

 

6.4

 

Morgan Stanley

 

119,659

 

352

 

65

 

4.3

 

Daiwa Securities America Inc.

 

114,436

 

5,287

 

67

 

4.2

 

Goldman Sachs

 

107,822

 

1,706

 

37

 

3.9

 

Merrill Lynch

 

83,561

 

2,268

 

172

 

3.0

 

JP Morgan Securities

 

60,178

 

3,152

 

37

 

2.2

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,771,163

 

$

133,486

 

 

 

100.0

%


(1)                                                       Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

Stock-Based Compensation

Stock-based compensation is accounted for using the fair value based method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The adoption of SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 is not expected to have an impact on the Company. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity

10



Instruments, the transactions are recorded on theallocated basis of the fair valueloan sold, adjusted for net deferred loan fees and certain direct costs and selling costs. OFS defers net loan origination costs and fees as a component of the service received orloan balance on the fair valuebalance sheet. Such costs are not amortized and are recognized into income as a component of the equity instruments issued, whichever is more readily measurable at the dategain or loss upon sale. The net gain on sale of issuance. The Company’s stock-based compensation transactions resulted in an aggregate of $554,784 and $24,750 of compensation expenseloans was $7.1 million for the three months ended March 31, 20052006.


Servicing Fee Income

Servicing fee income is generally a fee based on a percentage of the outstanding principal balances of the mortgage loans serviced by OFS (or by a subservicer where OFS is the master servicer) and is recorded as income as the installment payments on the mortgages are received by OFS or the subservicer.

Loan Origination Fees and Costs

Loan fees, discount points, and certain direct origination costs are recorded as an adjustment of the cost of the loan and are included in gain on sales of loans when the loan is sold. Accordingly, salaries, commissions, benefits and other operating expenses have been reduced by $16.0 million during the three months ended March 31, 2004, respectively.

Earnings Per Share

The Company follows2006, due to direct loan origination costs, including commission costs. Loan fees related to the provisionsorigination and funding of SFAS No. 128, “Earnings per Share,” (SFAS 128) and the guidance provided in EITF 03-6, “Participating Securities and the two-class method under FASB Statement No. 128, Earnings Per Share,” (EITF 03-6) which requires companies with complex capital structures, common stock equivalents, or two classes of participating securities to present both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstandingmortgage loans held for sale were $1.6 million during the period. Diluted EPS is calculated using the “if converted” method for common stock equivalents.

Effective July 9, 2004, the shares of Class B Common Stock, participating and convertible into Class A common stock, became entitled to receive dividends in an amount equal to the dividends declared on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors. Following the provisions of EITF 03-6, the Class B Common Stock, beginning in the three-month periodthree months ended September 30, 2004, is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A Common Stock. Prior to July 9, 2004, the Class B shares of common stock are not included in the basic EPS computation as the conditions to participate in earnings were not met, and they were not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.

The Class C common shares are not included in the basic EPS computation as these shares do not have participation rights. The Class C common shares totaling 319,388 are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.

11

March 31, 2006.



The table below reconciles the numerators and denominators of the basic and diluted EPS.

 

 

Three months
ended
March 31, 2005

 

Three months
ended
March 31, 2004

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

Basic and diluted EPS per Class A common share:

 

 

 

 

 

Numerator: net income allocated to the Class A common shares

 

$

10,743,594

 

$

3,943,162

 

 

 

 

 

 

 

Denominator—basic and diluted:

 

 

 

 

 

Class A common shares outstanding at the balance sheet date

 

20,374,883

 

10,009,150

 

Phantom shares issued as of the balance sheet date

 

516,961

 

 

Effect of weighting

 

(96,232

)

(2,008,098

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares—basic and diluted

 

20,795,612

 

8,001,052

 

 

 

 

 

 

 

Basic and diluted EPS per Class A common share

 

$

0.52

 

$

0.49

 

 

 

 

 

 

 

Basic and diluted EPS per Class B common share:

 

 

 

 

 

Numerator: net income allocated to the Class B common shares

 

$

164,245

 

$

 

 

 

 

 

 

 

Denominator—basic and diluted:

 

 

 

 

 

Class B common shares outstanding at the balance sheet date

 

319,388

 

319,388

 

Effect of weighting (based on the date the Class B shares participate in dividends)

 

 

(319,388

)

 

 

 

 

 

 

Weighted average shares—basic and diluted

 

319,388

 

 

 

 

 

 

 

 

Basic and diluted EPS per Class B common share

 

$

0.51

 

$

 

12



Comprehensive Income (Loss)

In accordance with SFAS No. 130, “ReportingReporting Comprehensive Income, the Company is required to separately report its comprehensive income.income (loss) each reporting period. Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are included in comprehensive income but are excluded from net income, as these amounts are recorded directly as an adjustment to stockholders’ equity. Other comprehensive income (loss) arises from unrealized gains or losses generated from changes in market values of its securities held as available-for-sale.

Comprehensive income (loss)(Loss) is as follows: 

  
(Unaudited)
  
Three Months Ended March 31,
  
2006
 
2005
Net (Loss)/Income$(5,087,132)$10,907,839
     
Realized gain on available for sale securities, net - (1,982,382)
     
Unrealized loss on available for sale securities, net (11,815,098) (19,539,061)
     
Comprehensive (Loss)$(16,902,230)$(10,613,604)

Stock-Based Compensation

The Company adopted SFAS No. 123(R), Share-Based Payment on January 1, 2006, and this adoption did not have an impact on the Company, as the Company had previously accounted for stock-based compensation using the fair value based method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for Opteum's common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. Opteum's stock-based compensation transactions resulted in an aggregate of $0.8 million and $0.6 million of compensation expense for the three months ended March 31, 2006 and 2005, respectively.

Earnings Per Share

The Company follows the provisions of SFAS No. 128, Earnings per Share, and the guidance provided in the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents, or two (or more) classes of securities that participate in the declared dividends to present both basic and diluted earnings per share (“EPS”) on the face of the statement of income. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the “if converted” method for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

Effective July 9, 2004, the shares of Class B common stock, participating and convertible into Class A common stock, became entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, as and when authorized and declared by the Board of Directors. Following the provisions of EITF 03-6, the Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock.

The Class C common shares are not included in the basic EPS computation as these shares do not have participation rights. The Class C common shares totaling 319,388 are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.

Effective November 3, 2005, the Company issued 1,223,208 shares of Class A Redeemable preferred stock, pursuant to the acquisition of OFS. After January 1, 2006 and prior to March 31, 2004, respectively,2006, holders of preferred stock are entitled to receive dividends according to the formula described in the Company’s amended charter. For the Company’s first quarter 2006 dividend, declared on March 10, 2006, the preferred shares, although considered to be participating securities, did not receive a dividend pursuant to the formula. Following the provisions of EITF 03-6, the preferred stock is a participating security and is included in the computation of basic EPS using the two-class method and is separately presented from the common stock classes.

EITF 03-6 also discusses the allocation of losses to nonconvertible and convertible participating securities when using the two-class method. Losses are only allocated to a participating security if this security has a contractual obligation to share in the loss, and there is no such obligation for the Class A Redeemable preferred stock. Therefore, for the three months ended March 31, 2006, the shares of Class A preferred stock are not allocated any of the loss in the computation of basic EPS, even though it is a participating security that is includable in the basic EPS presentation.

The shares of Class A Redeemable preferred stock are eligible to convert into shares of Class A common stock. Since this conversion was approved after March 31, 2006, the shares are not included in the computation of diluted Class A common stock EPS. (The conversion of the Class A Redeemable Preferred Stock was approved by a majority number of stockholders at the Company’s annual meeting on April 28, 2006).

The Company has dividend eligible stock incentive plan shares that were outstanding during the three months ended March 31, 2006. These stock incentive plan (or "phantom") shares have dividend participation rights, but like the preferred shares, the phantom shares have no contractual obligation to share in the loss; since there is no such obligation, phantom shares are not included, pursuant to EITF 03-6, in the March 31, 2006 basic EPS computation for the Class A common shares, even though they are considered to be a participating security. For the computation of diluted EPS for the Class A common shares, phantom shares, totaling 650,320 at March 31, 2006, are not included as follows:

 

 

Three months ended

 

 

 

March 31, 2005

 

March 31, 2004

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net Income

 

$

10,907,839

 

$

3,943,162

 

 

 

 

 

 

 

Realized gain on available for sale securities, net

 

(1,982,382)

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available for sale securities, net

 

(19,539,061

)

3,176,287

 

 

 

 

 

 

 

Comprehensive (Loss) Income

 

$

(10,613,604

)

$

7,119,449

 

13

their inclusion would be anti-dilutive.

The table below reconciles the numerators and denominators of the basic and diluted EPS.

  
(Unaudited)
  
Three Months Ended March 31,
  
2006
 
2005
Basic and diluted EPS per Class A common share:    
Numerator: net (loss) income allocated to the shares of Class A common shares$(5,018,738)$10,743,594
Denominator: basic and diluted:    
Class A common shares outstanding at the balance sheet date 23,083,498 20,374,883
Dividend eligible equity plan shares issued as of the balance sheet date - 516,961
Effect of weighting 353,036 (96,232)
Weighted average shares-basic and diluted 23,436,534 20,795,612
Basic and diluted EPS per Class A common share$(0.21)$0.52
     
Basic and diluted EPS per Class B common share:    
Numerator: net (loss) income allocated to Class B common shares$(68,394)$164,245
Denominator: basic and diluted:    
Class B common shares outstanding at the balance sheet date 319,388 319,388
Basic and diluted EPS per Class B common share$(0.21)$0.51
     
Basic and diluted EPS per Class A redeemable preferred share:    
Numerator: net (loss) income allocated to Class A redeemable preferred shares$-$N/A
Denominator: basic and diluted:    
Class A redeemable preferred shares outstanding at the balance sheet date 1,223,208 N/A
Basic and diluted EPS per Class A redeemable preferred share$-$N/A


Income Taxes

The Company has elected to be taxed as a REIT under the Code. As further described below, the Company’s TRS is a taxpaying entity for income tax purposes, and is taxed separately from Opteum. Opteum will generally not be subject to federal income tax on its taxable net income to the extent that Opteum distributes its taxable net income to its stockholders and satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests. A REIT must generally distribute at least 90% of its net taxable income to its stockholders of which 85% generally must be distributed within the taxable year in order to avoid the imposition of an excise tax. The remaining balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other requirements.

OFS is the Company’s TRS, and its activities are subject to corporate income taxes and the applicable provisions of SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140. SFAS 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. As permitted, the Company early adopted SFAS 155 in the first quarter of 2006. Adoption did not have any material effect on the Company’s financial condition, results of operations or cash flows.

See Note 5 for a description of the adoption of SFAS No. 156, Accounting for Servicing of Financial Assets.

NOTE 2.                             SECURITIES

ACQUISITION OF OPTEUM FINANCIAL SERVICES, LLC


On November 3, 2005, Opteum acquired 100% of the equity interests of OFS through a newly formed wholly-owned subsidiary of Opteum. OFS is a mortgage lender that originates loans nationwide. Opteum acquired OFS to diversify its revenue stream while remaining in Opteum’s area of expertise. For OFS, the acquisition provides increased access to capital to fund growth. The results of operations of OFS have been included in the Company’s consolidated financial statements since November 3, 2005. During the three months ended March 31, 2006, the Company has increased the aggregate purchase price by $0.6 million for additional legal and accounting fees incurred, and it has made insignificant modifications to the allocation of the purchase price to the net assets acquired, based on final valuations and completion of analysis . See Note 2 to the Company Form 10-K for the year ended 2005 for a complete description.

NOTE 3.MORTGAGE LOANS HELD FOR SALE, NET

Upon the closing of a residential mortgage loan or shortly thereafter, OFS will securitize the majority of its mortgage loan originations. OFS also sells mortgage loans insured or guaranteed by various government-sponsored entities and private insurance agencies. The insurance or guaranty is provided primarily on a nonrecourse basis to OFS, except where limited by the Federal Housing Administration and Veterans Administration and their respective loan programs. At March 31, 20052006, OFS serviced approximately $1.7 billion of mortgage loans sold into the secondary market. All of OFS’s loans held for sale are pledged as collateral under the various financing arrangements described in Note 8. Mortgage loans held for sale consist of the following as of March 31, 2006:
Mortgage loans held for sale$707,095,613
Deferred loan origination costs—and others 14,803,327
Valuation allowance (305,574)
   
 $721,593,366

NOTE 4.RETAINED INTEREST, TRADING

Subordinated interests retained represent the over-collateralization and net interest spread, which represents the estimated cash-flows to be received from the trust in the future from mortgage loan securitizations structured as sales in accordance with SFAS No. 140. Generally, to meet the sale treatment requirements of SFAS No. 140, the REMIC Trust is structured as a “qualifying special purpose entity” or QSPE, which specifically limits the trust’s activities, and OFS surrenders control over the mortgage loans upon their transfer to the REMIC Trust. All of OFS’s securitization issues were accounted for as a sale under SFAS No. 140. The subordinated interests retained are classified as “trading securities” and are reported at fair value with unrealized gains or losses reported in earnings.
Valuation of Investments. OFS classifies its retained interests as trading securities and therefore records these securities at their estimated fair value. In order to value the unrated, unquoted, investments, OFS will record these assets at their estimated fair value utilizing either pricing available directly from dealers or the present value calculated by projecting the future cash flows of an investment on a publicly available analytical system. When a publicly available analytical system is utilized, OFS will input the following variable factors which will have an impact on determining the market value:
Interest Rate Forecast. The forward London Interbank Offered Rate (“LIBOR”) interest rate curve.
Discount Rate. The present value of all future cash flows utilizing a discount rate assumption established at the discretion of OFS to represent market conditions and value.
Prepayment Forecast. The prepayment forecast may be expressed by OFS in accordance with one of the following standard market conventions: Constant Prepayment Rate (“CPR”) or Percentage of a Prepayment Vector. Prepayment forecasts may be changed as OFS observes trends in the underlying collateral as delineated in the Statement to Certificate Holders generated by the REMIC trust’s Trustee for each underlying security.
Credit Performance Forecast. A forecast of future credit performance of the underlying collateral pool will include an assumption of default frequency, loss severity and a recovery lag. In general, OFS will utilize the combination of default frequency and loss severity in conjunction with a collateral prepayment assumption to arrive at a target cumulative loss to the collateral pool over the life of the pool based on historical performance of similar collateral by the originator. The target cumulative loss forecast will be developed and noted at the pricing date of the individual security but may be updated by OFS consistent with observations of the actual collateral pool performance.
Default Frequency may be expressed by OFS in accordance with any of three standard market conventions: Constant Default Rate, Percentage of a Standard Default Assumption curve or a vector or curve established to meet forecasted performance for specific collateral pools.
Loss Severity will be expressed by OFS in accordance with historical performance of similar collateral and the standard market conventions of a percentage of the unpaid principal balance of the forecasted defaults lost during the foreclosure and liquidation process.
During the first year of a new issue OFS may balance positive or adverse effects of the prepayment forecast and the credit performance forecast allowing for deviation between actual and forecasted performance of the collateral pool. After the first year OFS will generally adjust the Prepayment and Credit Performance Forecasts to replicate actual performance trends without balancing adverse and positive effects.
The following table summarizes OFS’s residual interests in securitizations as of March 31, 2006 and December 31, 2004,2005:
Series
 
Issue Date
 
March 31, 2006
 
December 31, 2005
       
HMAC 2004-1 March 4, 2004$4,152,435$5,096,056
HMAC 2004-2 May 10, 2004 2,719,505 3,240,431
HMAC 2004-3 June 30, 2004 513,216 1,055,651
HMAC 2004-4 August 16, 2004 3,475,833 3,749,261
HMAC 2004-5 September 28, 2004 5,965,609 6,177,669
HMAC 2004-6 November 17, 2004 12,732,512 14,321,046
OpteMac 2005-1 January 31, 2005 15,049,058 14,720,910
OpteMac 2005-2 April 5, 2005 13,443,741 11,301,619
OpteMac 2005-3 June 17, 2005 15,627,247 14,656,477
OpteMac 2005-4 August 25, 2005 10,969,462 12,551,775
OpteMac 2005-5 November 23, 2005 8,985,248 11,139,697
OpteMac 2006-1 March 23, 2006 11,562,339 -
       
Total  $105,196,205$98,010,592

Key economic assumptions used in measuring the fair value of retained interests at the date of securitization resulting from securitizations completed during 2005 and 2006 were as follows:

 
2006
2005
Prepayment speeds (CPR)39.63%28.65%
Weighted-average-life4.8102.830
Expected credit losses0.640%1.069%
Discount rates16.710%14.896%
Interest ratesForward LIBOR Yield curveForward LIBOR Yield curve
At March 31, 2006 and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of residual cash flows to the immediate 10% and 20% adverse change in those assumptions are as follows:

  March 31, 2006 December 31, 2005
     
Balance Sheet Carrying value of retained interests - fair value$105,196,205$98,010,592
Weighted average life (in years) 3.81 2.62
Prepayment assumption (annual rate) 36.99% 32.53%
Impact on fair value of 10% adverse change$(10,788,268)$(7,817,000)
Impact on fair value of 20% adverse change$(19,670,422)$(16,089,000)
Expected Credit losses (annual rate) 0.545% 0.607%
Impact on fair value of 10% adverse change$(3,859,312)$(3,247,000)
Impact on fair value of 20% adverse change$(7,078,785)$(6,419,000)
Residual Cash-Flow Discount Rate 13.99% 13.96%
Impact on fair value of 10% adverse change$(5,761,154)$(3,804,000)
Impact on fair value of 20% adverse change$(11,014,808)$(7,392,000)
Interest rates on variable and adjustable loans and bonds Forward LIBOR Yield Curve Forward LIBOR Yield Curve
Impact on fair value of 10% adverse change$(31,560,231)$(21,265,000)
Impact on fair value of 20% adverse change$(58,145,201)$(34,365,000)


These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of the variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption, in reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. To estimate the impact of a 10% and 20% adverse change of the Forward LIBOR curve, a parallel shift in the forward LIBOR curve was assumed based on the Forward LIBOR curve at March 31, 2006.

Static pool losses are calculated by dividing projected future credit losses (at the time of securitization) and actual losses incurred as of the date indicated, by the original balance of each pool of assets. The amount shown here is calculated based upon all securitizations that have occurred to date.


Series
Issue Date
Original Unpaid Principal Balance
Projected Aggregate Credit Losses
Through March 31, 2006
Through December 31, 2005
      
HMAC 2004-1March 4, 2004$ 309,710,0050.985%0.034%0.007%
HMAC 2004-2May 10, 2004$ 388,737,5481.308%0.167%0.118%
HMAC 2004-3June 30, 2004$ 417,055,2851.516%0.098%0.055%
HMAC 2004-4August 16, 2004$ 410,122,7521.432%0.005%0.005%
HMAC 2004-5September 28, 2004$ 413,874,8561.619%0.002%0.003%
HMAC 2004-6November 17, 2004$ 761,026,6911.543%0.012%0.007%
OpteMac 2005-1January 31, 2005$ 802,625,1371.366%0.019%0.010%
OpteMac 2005-2April 5, 2005$ 883,987,4880.913%0.000%0.000%
OpteMac 2005-3June 17, 2005$ 937,116,7040.624%0.000%0.000%
OpteMac 2005-4August 25, 2005$ 1,321,738,6910.817%0.000%0.000%
OpteMac 2005-5November 23, 2005$ 986,276,6880.720%0.000%0.000%
OpteMac 2006-1March 23, 2006$ 934,441,0490.647%0.000%0.000%
      
Total $ 8,566,712,894   



The table below summarizes certain cash flows received from and paid to securitization trusts:

  
 
 
For the Three Months Ended March 31, 2006
 
 
For the Period November 3, 2005 (date of merger) through
December 31, 2005
Proceeds from securitizations$939,305,000$989,843,000
Servicing fees received 4,592,355 2,837,500
Servicing advances 335,270 290,952
Cash flows received on retained interests 1,016,108 261,269
Repayments of servicing advances$-$-

The following information presents quantitative information about delinquencies and credit losses on securitized financial assets as of March 31, 2006 and December 31, 2005:

As of Date
 
Total Principal Amount of Loans
 
Principal Amount of Loans Greater than 60 Days Past Due
 
Net Credit Losses
March 31, 2006$6,666,436,939$60,544,732$1,688,294
December 31, 2005$6,363,279,281$57,871,123$912,990

NOTE 5.MORTGAGE SERVICING RIGHTS, NET

Activities for MSRs are summarized as follows at March 31, 2006 and December 31, 2005, (there is no comparable three month period for 2005 owing to the date of the merger). As permitted by the effective date provisions of SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140, the Company has early adopted SFAS No. 156 as of January 1, 2006 with respect to the valuation of its MSRs. (See Note 1 - Mortgage Servicing Rights):
  For the Three Months Ended March 31, 2006 For the Period November 3, 2005 (date of merger) through December 31, 2005
     
Balance at beginning of period (at Cost)$86,081,594$87,079,777
     
Adjustment to fair value upon adoption of SFAS 156 at January 1, 2006 4,298,225 -
     
Additions 11,020,018 1,431,576
Changes in Fair Value:    
Changes in fair value due to run-off (5,104,756) -
Changes in fair value due to amortization/curtailment (418,255) -
Change in fair value due to market changes (1,394,738) -
     
Amortization - (2,429,759)
Valuation/impairment - -
     
Fair Value at end of period 94,482,088 86,081,594
     
Change in fair value due to change in valuation assumptions (1,144,733) -
     
Balance at end of period$93,337,355$86,081,594

The Company has elected to account for all originated mortgage servicing rights as one class and therefore all MSR will be carried at fair value. As a result of the early adoption of SFAS 156, the carrying value of the MSRs has been increased by approximately $4.3 million (pre tax) as of January 1, 2006. As required by the provisions of SFAS 156, the net of tax effect was recorded as a cumulative-effect adjustment to retained earnings of OFS as of January 1, 2006. In addition, changes in value due to run-offs of the portfolio are recorded as valuation adjustments instead of amortization.
The fair value of MSRs is determined using discounted cash flow techniques. During the first quarter of 2006, OFS decreased the MSR value in the aggregate by $2.5 million primarily as a result of changes in market conditions and adoption of a new valuation model. Estimates of fair value involve several assumptions, including the key valuation assumptions about market expectations of future prepayment rates, interest rates and discount rates. Prepayment rates are projected using a prepayment model. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the forward LIBOR/swap curve, as well as collateral specific information.
At March 31, 2006 and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of mortgage servicing rights cash flows to the immediate 10 percent and 20 percent adverse change in those assumptions are as follows:

  At March 31, 2006 At December 31, 2005
     
Prepayment assumption (annual rate) (PSA) 429 254
Impact on fair value of 10% adverse change$(3,216,413)$(3,615,000)
Impact on fair value of 20% adverse change$(6,139,467)$(6,936,000)
MSR Cash-Flow Discount Rate 15.16% 10.74%
Impact on fair value of 10% adverse change$(3,470,252)$(4,856,000)
Impact on fair value of 20% adverse change$(6,651,529)$(9,280,000)

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon a 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of the variation in a particular assumption on the fair value of the mortgage servicing right is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities.

NOTE 6.MORTGAGE BACKED SECURITIES

At March 31, 2006 and December 31, 2005, all of the Company’s securitiesOpteum's MBS were classified as available-for-sale and, as such, are reported at their estimated fair value. Estimated fair value was determined based on the average of third-party broker quotes received and/or independent pricing sources when available.

14



At March 31, 2006, Opteum had financed MBS with a historical amortized cost of $200.3 million with the party it acquired the MBS. Such securities are included in MBS at a fair value of $196.8 million and a corresponding repurchase agreement of $197.4 million at March 31, 2006.

The following are the carrying values of the Company’s securitiesOpteum's MBS portfolio at March 31, 20052006 and December 31, 2004:

 

 

March 31, 2005

 

December 31, 2004

 

 

 

(Unaudited)

 

 

 

Floating-Rate CMO’s

 

$

73,743,802

 

$

250,438,730

 

Hybrid Arms and Balloons

 

563,520,406

 

569,623,089

 

Adjustable-Rate Mortgages

 

1,674,786,388

 

1,403,381,666

 

Fixed-Rate Mortgages

 

987,000,965

 

749,789,412

 

 

 

 

 

 

 

 

 

$

3,299,051,561

 

$

2,973,232,897

 

2005:



  
March 31, 2006
 
December 31, 2005
Hybrid Arms and Balloons$770,860,599$753,895,705
Adjustable Rate Mortgages 2,005,867,897 2,006,767,437
Fixed Rate Mortgages 761,825,714 733,366,217
     
Totals$3,538,554,210$3,494,029,359
The following table presents the components of the carrying value of the Company’sOpteum's MBS portfolio at March 31, 20052006 and December 31, 2004:

 

 

March 31, 2005

 

December 31, 2004

 

 

 

(Unaudited)

 

 

 

Principal balance

 

$

3,212,516,823

 

$

2,876,568,150

 

Unamortized premium

 

110,136,659

 

98,202,287

 

Unaccreted discount

 

(924,706

)

(381,769

)

Gross unrealized gains

 

6,132,352

 

7,824,313

 

Gross unrealized losses

 

(28,809,567

)

(8,980,084

)

 

 

 

 

 

 

Carrying value/estimated fair value

 

$

3,299,051,561

 

$

2,973,232,897

 

2005:


  
March 31, 2006
 
December 31, 2005
     
Principal balance$3,515,112,798$3,457,887,912
Unamortized premium 114,165,772 115,133,248
Unaccreted discount (2,411,427) (2,497,423)
Gross unrealized gains 633,487 265,615
Gross unrealized losses (88,946,420) (76,759,993)
     
Carrying value/estimated fair value$3,538,554,210$3,494,029,359

The following table presents for the Company’sOpteum's MBS investments with gross unrealized losses, the estimated fair value and gross unrealized losses aggregated by investment category, at March 31, 2005(unaudited):

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Rate Mortgages

 

$

919,025,604

 

$

(11,477,797

)

$

 

$

 

$

919,025,604

 

(11,477,797

)

Floating-Rate CMOs

 

 

 

 

 

 

 

Adjustable-Rate Mortgages

 

1,133,574,693

 

(10,798,550

)

 

 

1,133,574,693

 

(10,798,550

)

Hybrid Arms & Balloons

 

462,130,424

 

(6,533,220

)

 

 

462,130,424

 

(6,533,220

)

 

 

$

2,514,730,721

 

$

(28,809,567

)

$

 

$

 

$

2,514,730,721

 

$

(28,809,567

)

15

2006:


 
Loss Position Less than 12 Months
Loss Position More than 12 Months
Total
  
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Hybrid Arms and Balloons$518,655,723$(8,158,572)$190,264,347$(6,963,295)$708,920,070$(15,121,867)
Adjustable Rate Mortgages 1,308,104,280 (22,605,886) 641,284,220 (20,290,457) 1,949,388,500 (42,896,343)
Fixed Rate Mortgages 225,934,463 (6,117,103) 534,452,912 (24,811,108) 760,387,375 (30,928,211)
 $2,052,694,466$(36,881,561)$1,366,001,479$(52,064,860)$3,418,695,945$(88,946,421)

The following table presents for the Company’sOpteum's MBS investments with gross unrealized losses, the estimated fair value and gross unrealized losses aggregated by investment category, at December 31, 2004:

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

Estimated
Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Floating-Rate CMOs

 

$

 

$

 

$

 

$

 

$

 

$

 

Hybrid Arms and Balloons

 

334,918,233

 

(1,974,605

)

31,954,324

 

(75,968

)

366,872,557

 

(2,050,573

)

Adjustable-Rate Mortgages

 

479,284,021

 

(2,930,772

)

9,374,573

 

(21,845

)

488,658,594

 

(2,952,617

)

Fixed-Rate Mortgages

 

519,546,019

 

(3,950,372

)

11,260,668

 

(26,522

)

530,806,687

 

(3,976,894

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,333,748,273

 

$

(8,855,749

)

$

52,589,565

 

$

(124,335

)

$

1,386,337,838

 

$

(8,980,084

)

All2005:

 
Loss Position Less than 12 Months
Loss Position More than 12 Months
Total
  
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Hybrid Arms and Balloons$563,661,156$(8,409,428)$$141,675,752$(4,510,901)$705,336,908$(12,920,329)
Adjustable Rate Mortgages 1,648,085,054 (27,917,630) 270,945,493 (8,944,837) 1,919,030,547 (36,862,467)
Fixed Rate Mortgages 425,260,838 (10,762,306) 346,435,009 (16,214,890) 771,695,847 (26,977,197)
 $2,637,007,048$(47,089,364)$759,056,254$(29,670,628)$3,396,063,302$(76,759,993)

At March 31, 2006, all of the Company’sOpteum's MBS investments have contractual maturities greater than two years.20 months. Actual maturities of MBS investments are generally shorter than stated contractual maturities. Actual maturities of the Company’sOpteum's MBS investments are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.


The unrealized losses on thedecline in fair value of MBS investments areis not considered other-than-temporary, and are therefore not written-downto be other-than-temporary. Accordingly, the write down to fair value is recorded in other comprehensive loss as being impaired.an unrealized loss. The factors considered in making this determination included:include: the expected cash flow from the MBS investment, the general quality of the MBS owned, any credit protection available, current market conditions, and the magnitude and duration of the historical decline in market prices as well as the Company’sOpteum's ability and intention to hold suchthe MBS owned.

NOTE 7.FAIR VALUE OF FINANCIAL INSTRUMENTS

The valuation of Opteum’s investments in MBS is governed by SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 107, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. All REIT securities owned.  Because management’s assessmentsare reflected in the financial statements at their estimated fair value as of March 31, 2006 and December 31, 2005. Estimated fair values for MBS are based on factualthe average of third-party broker quotes received and/or independent pricing sources when available. However, the fair values reported reflect estimates and may not necessarily be indicative of the amounts Opteum could realize in a current market exchange. Cash and cash equivalents, accrued interest receivable, repurchase agreements and accrued interest payable are reflected in the financial statements at their costs, which approximates their fair value because of the short-term nature of these instruments.

Fair value of mortgage loans held for sale, mortgage servicing rights, interest rate lock commitments and commitments to deliver mortgages are based on estimates. Fair value estimates are made as of a specific point in time based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.

Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company’s fair values should not be compared to those of other companies. All forward delivery commitments and option contracts to buy securities are to be contractually settled within six months of the balance sheet date.
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value of certain OFS assets and liabilities either equal to or approximate carrying value due to their short-term nature, terms of repayment, floating interest rate associated with the asset or liability or accounting principles applied. Such assets or liabilities include cash, receivables, retained interests, other trading securities, accounts payable and other liabilities, warehouse lines of credit and drafts payable.
The following describes the methods and assumptions used by OFS in estimating fair values of other financial instruments:
§  Mortgage Loans Held for Sale— Mortgage loans held for sale represent mortgage loans originated and held pending sale to investors. The mortgages are carried at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Deferred net fees or costs are not amortized during the period the loans are held for sale, but are recognized when the loan is sold.
§  Mortgage Servicing Rights— the estimated fair value of MSRs is determined by obtaining a market valuation from a specialist who brokers MSRs. To determine the market valuation, the broker uses a valuation model which incorporates assumptions relating to the estimate of the cost of servicing per loan, a discount rate, a float value, an inflation rate, ancillary income per loan, prepayment speeds, and default rates that market participants use for acquiring similar servicing rights.
§  Interest Rate Lock Commitments—The fair value of interest rate lock commitments is estimated using the fees and rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
§  Commitments to Deliver Mortgages—The fair value of these instruments is estimated using current market prices for dealer or investor commitments relative to the Company’s existing positions. These instruments contain an element of risk in the event that the counter-parties may be unable to meet the terms of such agreements. In the event a counter-party to a delivery commitment was unable to fulfill its obligation, the Company would not incur any material loss by replacing the position at market rates in effect at March 31, 2006. The Company minimizes its risk exposure by limiting the counter-parties to those major banks, investment bankers, and private investors who meet established credit and capital guidelines. Management does not expect any counter-party to default on its obligations and, therefore, does not expect to incur any loss due to counter-party default.
The following tables set forth information about financial instruments and other selected assets, except for those noted above for which the carrying value approximates fair value.
  
Notional Amounts
 
Carrying Amount
 
Estimated Fair Value
March 31, 2006      
Assets:      
Mortgage loans held for sale$-$707,095,613$709,910,926
Mortgage servicing rights - 93,337,355 93,337,355
       
Commitments and contingencies:      
Mortgage loans held for sale related asset (liability) positions:      
Interest Rate Lock Commitments$368,156,694$1,150,707$1,150,707
Interest Rate SWAP Agreements 533,700,000 1,494,429 1,494,429
Forward delivery commitments 213,000,000 876,966 876,966

NOTE 8.WAREHOUSE LINES OF CREDIT AND DRAFTS PAYABLE

OFS issues drafts or wires at loan settlement in order to facilitate the closing of mortgage loans held for sale. Drafts payable represent mortgage loans on which a closing has occurred prior to quarter end but the related drafts have not cleared the respective bank. Upon clearing the bank, the drafts are funded by the appropriate warehouse line of credit. Warehouse and aggregate lines of credit and loan sale agreements accounted for as well as subjective information availablefinancing consisted of the following at March 31, 2006:
Warehouse and aggregate lines of credit:
 
2006
   
A committed warehouse line of credit for $100.0 million between OFS and Residential Funding Corporation ("RFC"). The agreement expires on May 31, 2006. The agreement provides for interest rates based upon 1 month LIBOR plus a margin between 1.25% and 1.50% depending on the product that was originated or acquired.$7,095,775
   
A committed warehouse line of credit for $284.5 million between OFS and Colonial Bank. The agreement expires on May 30, 2006. The agreement provides for interest rates, based upon 1 month LIBOR, plus a margin of 1.25% to 2.00% depending on the product that was originated or acquired. 199,050,231
   
A committed warehouse line of credit for $150.0 million between OFS and JP Morgan Chase. The agreement expires on May 30, 2006 and is expected to be renewed prior to its expiration. The agreement provides for interest rates based upon 1 month LIBOR plus a margin of 1.25% to 2.00% depending on the product originated or acquired. 90,881,688
   
An aggregation facility for $1.0 billion between OFS and Citigroup Global Markets Realty Inc. to aggregate loans pending securitization. The agreement expires on February 28, 2007. The agreement provides for interest rates based upon 1 month LIBOR plus a margin of 0.50%. 273,213,144
   
A $750.0 million purchase and security agreement between OFS and UBS Warburg Real Estate Securities, Inc. (“UBS Warburg”). The facility is due upon demand and can be cancelled by either party upon notification to the counter-party. OFS incurs a charge for the facility based on 1 month LIBOR plus 1.00%. The facility is secured by loans held for sale and cash generated from sales to investors. 108,955,338
   
  679,196,176
   
Drafts payable 18,664,754
   
Total warehouse lines and drafts payable$697,860,930

In addition to the RFC, Colonial Bank, UBS Warburg, and Citigroup facilities, OFS has purchase and sale agreements with Greenwich Capital and Fannie Mae. The agreements allow for OFS to accelerate the sale of its mortgage loan inventory, resulting in a more effective use of its warehouse facilities. OFS has a combined capacity of $300.0 million under these purchase and sale agreements. There were no amounts sold and being held under these agreements at March 31, 2006. The agreements are not committed facilities and may be terminated at the timediscretion of assessment, the determination aseither party.
The facilities are secured by mortgage loans and other assets of OFS.  The facilities contain various covenants pertaining to whether an other-than-temporary decline existstangible net worth, net income, available cash and if so, the amount considered impaired is also subjectiveliquidity, leverage ratio, current ratio and therefore, constitutes material estimates that are susceptible to significant change.servicing delinquency.  At March 31, 2005 and December2006, OFS was not in compliance with respect to one covenant with one lender. The covenant pertained to net income at March 31, 2004,2006. OFS has obtained a waiver from the Company had no securities on which an impairment charge had been made.

covenant violation.

NOTE 3.9.                             REPURCHASE AGREEMENTS

The CompanyOTHER SECURED BORROWINGS


Other secured borrowings consisted of the following at March 31, 2006:

  
2006
A committed working capital line of credit for $82.5 million between OFS and Colonial Bank. The agreement expires on May 30, 2006. The agreement provides for an interest rate, based on 1 month LIBOR plus a margin of up to 2.60% and is secured by the servicing rights for FNMA, FHLMC and REMIC securitizations.$63,355,607
   
A committed warehouse line of credit for $150.0 million between OFS and JP Morgan Chase, that allows for a sublimit for mortgage servicing rights. The agreement expires May 30, 2006 and is expected to be renewed prior to its expiration. The agreement provides for an interest rate based on LIBOR plus 2.0% 7,710,000
   
Citigroup Global Realty Inc., working capital line of credit secured by the Retained interests in securitizations through OPMAC 2006-1. The facility expires on October 31, 2006. The agreement provides for an interest rate based on LIBOR plus 2.00% 34,386,512
 $105,452,119


NOTE 10.Repurchase Agreements

Opteum has entered into repurchase agreements to finance most of its securityMBS purchases. The repurchase agreements are short-term borrowings that bear interest at rates that have historically moved in close relationship to LIBOR (London Interbank Offered Rate).LIBOR. At March 31, 2005, the Company2006, Opteum had an outstanding amount of $3.18$3.4 billion with a net weighted average borrowing rate of 2.78%4.54%, and these agreements were collateralized by MBS with a fair value of $3.29$3.5 billion. At December 31, 2004, the Company2005, Opteum had an outstanding amount of $2.77$3.3 billion with a net weighted average borrowing rate of 2.28%4.15%, and these agreements were collateralized by MBS with a fair value of $2.90 billion.

16

$3.5 billion and restricted cash of $2.3 million.



At March 31, 2005, the Company’s2006, Opteum's repurchase agreements had remaining maturities as summarized below (unaudited):

 

 

OVERNIGHT
(1 DAY OR LESS)

 

BETWEEN 2 AND
30 DAYS

 

BETWEEN 31 AND
90 DAYS

 

GREATER THAN
90 DAYS

 

TOTAL

 

Agency-Backed Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost of securities sold, including accrued interest receivable

 

$

133,628,739

 

$

845,093,807

 

$

507,704,595

 

$

1,697,506,162

 

$

3,183,933,303

 

Fair market value of securities sold, including accrued interest receivable

 

$

133,041,311

 

$

846,271,283

 

$

503,411,543

 

$

1,683,751,845

 

$

3,166,475,982

 

Repurchase agreement liabilities associated with these securities

 

$

133,837,000

 

$

847,691,598

 

$

502,127,646

 

$

1,697,999,112

 

$

3,181,655,356

 

Average interest rate of repurchase agreement liabilities

 

2.57

 

2.59

 

2.68

 

2.93

 

2.78

 

17

below:


  
OVERNIGHT
(1 DAY OR LESS)
 
BETWEEN 2 AND
30 DAYS
 
BETWEEN 31 AND
90 DAYS
 
GREATER THAN
90 DAYS
 
TOTAL
Agency-Backed Mortgage Backed securities:          
Amortized cost of securities sold, including accrued interest receivable$$1,604,222,330$1,171,220,926$589,841,287$3,365,284,543
Fair market value of securities sold, including accrued interest receivable$$1,566,314,050$1,143,914,636$574,915,061$3,285,143,747
Repurchase agreement liabilities associated with these securities$$1,644,318,455$1,142,548,371$627,088,000$3,413,954,826
Net weighted average borrowing rate  4.49% 4.67% 4.43% 4.54%


At December 31, 2004, the Company’s2005, Opteum's repurchase agreements had remaining maturities as summarized below:

 

 

OVERNIGHT
(1 DAY OR LESS)

 

BETWEEN 2 AND
30 DAYS

 

BETWEEN 31 AND
90 DAYS

 

GREATER THAN
90 DAYS

 

TOTAL

 

Agency-Backed Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

Amortized cost of securities sold, including accrued interest receivable

 

$

 

$

821,387,879

 

$

975,251,727

 

$

1,028,522,165

 

$

2,825,161,771

 

Fair market value of securities sold, including accrued interest receivable

 

$

 

$

823,087,580

 

$

975,020,524

 

$

1,025,389,631

 

$

2,823,497,735

 

Repurchase agreement liabilities associated with these securities

 

$

 

$

797,655,321

 

$

968,417,528

 

$

1,005,090,108

 

$

2,771,162,957

 

Average interest rate of repurchase agreement liabilities

 

 

2.28

%

2.11

%

2.45

%

2.28

%

18



  
OVERNIGHT
(1 DAY OR LESS)
 
BETWEEN 2 AND
30 DAYS
 
BETWEEN 31 AND
90 DAYS
 
GREATER THAN
90 DAYS
 
TOTAL
Agency-Backed Mortgage Backed securities:          
Amortized cost of securities sold, including accrued interest receivable$$906,106,459$813,436,832$1,533,016,956$3,252,560,247
Fair market value of securities sold, including accrued interest receivable$$893,159,892$791,259,152$1,498,980,224$3,183,399,268
Repurchase agreement liabilities associated with these securities$$914,262,355$857,995,007$1,565,341,000$3,337,598,362
Net weighted average borrowing rate  4.22% 4.01% 4.19% 4.15%


NOTE 4.          11.TRUST PREFERRED SECURITIES
On May 17, 2005, Opteum completed a private offering of $50.0 million of trust preferred securities of Bimini Capital Trust I, a Delaware statutory business trust sponsored by Opteum.
Bimini Capital Trust I (“BCTI”) used the proceeds of the private offering, together with Opteum’s investment of $1.6 million in the BCTI common securities, to purchase $51.6 million aggregate principal amount of Opteum’s Junior Subordinated Notes with terms that parallel the terms of the trust preferred securities. The trust preferred securities have a fixed rate of interest until March 30, 2010 at 7.61% and thereafter through maturity in 2035 the rate will float at a spread of 3.30% over the prevailing three-month LIBOR rate.  The trust preferred securities require quarterly interest distributions and are redeemable at Opteum’s option, in whole or in part and without penalty, beginning March 30, 2010 and at any date thereafter.  The notes are subordinate and junior in right of payment of all present and future senior indebtedness. The proceeds from the private offering net of costs were approximately $48.5 million.
On October 5, 2005, Opteum completed a private offering of $50.0 million of trust preferred securities of Bimini Capital Trust II, a Delaware statutory business trust sponsored by Opteum.
Bimini Capital Trust II (“BCTII”) used the proceeds of the private offering, together with Opteum’s investment of $1.5 million in the BCTII common securities to purchase $51.5 million aggregate principal amount of Opteum’s Junior Subordinated Notes with terms that parallel the terms of the trust preferred securities. The trust preferred securities have a fixed rate of interest until December 15, 2010 at 7.8575% and thereafter through maturity in 2035 the rate will float at a spread of 3.50% over the prevailing three-month LIBOR rate. The trust preferred securities require quarterly interest distributions and are redeemable at Opteum’s option, in whole or in part and without penalty, beginning December 15, 2010 and at any date thereafter. The notes are subordinate and junior in right of payment of all present and future senior indebtedness. The proceeds from the private offering net of costs were approximately $48.5 million.

The trust is a variable interest entity pursuant to FIN No. 46, because the holders of the equity investment at risk do not have adequate decision making ability over the trust’s activities. Because Opteum’s investment in the trust’s common shares was financed directly by the trust as a result of its loan of the proceeds to Opteum, that investment is not considered to be an equity investment at risk pursuant to FIN No. 46. Since Opteum’s common shares investments in BCTI and BCTII are not a variable interest, Opteum is not the primary beneficiary of the trusts. Therefore, Opteum has not consolidated the financial statements of BCTI and BCTII into its financial statements.  Based on the aforementioned accounting guidance, the financial statements present the notes issued to the trusts as liabilities and the investments in BCTI and BCTII as assets. For financial statement purposes, Opteum records payments of interest on the corresponding notes issued to BCTI and BCTII as interest expense.
NOTE 12.CAPITAL STOCK


Issuances ofChanges in Class A Common Stock


During the three-monthsthree months ended March 31, 2005,2006, the Company issued a total of 10,115 shares of Class A Common Stock to its five independent directors for the payment of director fees for services rendered.

For the three months ended March 31, 2006, the Company issued 33,441 shares of its Class A Common Stock to two officers pursuant to the terms of the stock incentive plan phantom share grants (see Note 14).

During the three months ended March 31, 2006, the Company repurchased 527,300 shares of its Class A Common Stock for an aggregate of $4.5 million and recorded them as Treasury Stock on the accompanying balance sheet.

Dividends

On March 10, 2006, the Company's Board of Directors declared a $0.11 per share cash distribution to the holders of its dividend eligible securities. Dividends were payable on 23,083,498 shares of Class A Common Stock, 650,320 phantom shares granted under the Company's stock incentive plan (see Note 14) and 319,388 shares of Class B Common Stock. No dividends were paid on the Class A Redeemable Preferred Stock as the provisions of a formula in the Company’s amended charter were not met. The distribution totaling $2,645,853 was paid on April 7, 2006.

Other Classes of Common and Preferred Stock

There was no change in the issued and outstanding shares of the Company’s Class B and Class C Common Stock or its Class A Redeemable Preferred Stock during the three month period ended March 31, 2006. However, the conversion of the Class A Redeemable Preferred Stock to Class A Common Stock was approved by a majority number of stockholders at the Company’s annual meeting on April 28, 2006.

NOTE 13.TRANSACTIONS WITH RELATED PARTIES

In January 2006, the five independent directors received a total of 10,115 shares of Class A Common Stock, valued at $98,149, as compensation for their activities as directors.

OFS has a subordinated promissory agreement with Opteum for borrowings in the amount of $65.0 million at March 31, 2006. The note bears an annual interest rate of 11%. This promissory agreement matures on November 1, 2015. OFS also has a short term loan from Opteum in the amount of $8.1 million at March 31, 2006. This short term loan bears an annual interest rate of 11%. Interest accrued at March 31, 2006 was $0.7 million. These amounts are eliminated during the process of preparing consolidated financial statements for the Company. A portion of these loan proceeds were used to repay $18.3 million of debt to the former OFS owners immediately after the closing of the merger transaction.
In January 2005, the four independent directors received a total of 5,968 shares of Class A Common Stock, to its four independent directorsvalued at $92,027, as compensation for the payment of director fees for services rendered during the quarter.

their activities as directors.

Dividends

On March 9, 2005, the Board of Directors declared a regular quarterly cash dividend of $0.53 per share on the Company’s Class A and Class B Common Stock for the quarter ending March 31, 2005. The dividend was paid on April 8, 2005.

19



NOTE 5.14.STOCK INCENTIVE PLAN

On December 1, 2003, the CompanyOpteum adopted the 2003 Long Term Incentive Compensation Plan (the “2003 Plan”) to provide the CompanyOpteum with the flexibility to use stock options and other awards as part of an overall compensation package to provide a means of performance-based compensation to attract and retain qualified personnel.associates. The 2003 Plan was amended and restated in March 2004. Key employees, directors and consultants are eligible to be granted stock options, restricted stock, phantom shares, dividend equivalent rights and other stock-based awards under the 2003 Plan.

For Subject to adjustment upon certain corporate transactions or events, a maximum of 4,000,000 shares of the three monthsClass A Common Stock (but not more than 10% of the Class A Common Stock outstanding on the date of grant) may be subject to stock options, shares of restricted stock, phantom shares and dividend equivalent rights under the 2003 Plan.

During the period ended March 31, 2005, the Company2006, Opteum granted 203,361200,784 phantom shares to employees.employees with an aggregate fair value of $1.8 million. Each phantom share represents a right to receive a share of the Company’sOpteum’s Class A Common Stock, and a dividendStock. Dividend equivalent right wasrights were also granted on eachthese phantom share.  The phantomshares.
Phantom share awards wereare valued at the fair value of the Company’sOpteum’s Class A Common Stock at the date of the grant, for agrant. The total grant date value of $3,097,389.all awards since the 2003 Plan’s inception is $9.7 million. The phantom awards do not have an exercise price. The grant date value is being amortized to compensation expense on a straight-line basis over the vesting period.period of the respective award.  The phantom shares vest, based on the employees’ continuing employment, onfollowing a quarterly schedule as provided in the grant agreements, for periods from Februarythrough December 15, 2005 through November 15, 2008.

As of March 31, 2005,2006, a total of all719,245 phantom stock awards have been granted to date, 62,619since the inception of the 2003 Plan, however 2,090 shares were forfeited during 2005. The future compensation charge that was eliminated by the forfeiture totaled $31,852. Of the remaining shares, 224,637 shares have fully vested and 454,342492,518 shares remain unvested.  No phantom share awards have expired orexpired. Of the vested shares, 33,441 were issued to grantees during the period ended March 31, 2006, 16,809 were surrendered to pay for the income taxes due on the issued shares and a total of 65,335 shares have been forfeited by the grantee.distributed since inception. As of March 31, 2006, 651,820 phantom shares remain outstanding.  Total compensation cost recognized for the three months ended March 31, 2006 and 2005 was $0.7 million and 2004, was $462,763 and $0,$0.5 million, respectively. Dividends paid on phantom shares are charged to retained earnings when declared.

20



NOTE 15. SAVINGS INCENTIVE PLAN

ITEM 2.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be readOpteum’s employees have the option to participate in conjunction with our financial statements and related notes included elsewhere in this report.

Introduction and Overview

the Bimini Mortgage Management Inc. (“we”, “our” or “Company”401K Plan (the “Plan”) was formed. Under the terms of the Plan, eligible employees can make tax-deferred 401(k) contributions, and at Opteum’s sole discretion, Opteum can match the employees’ contributions. For the three months ended March 31, 2006 and 2005, Opteum made 401(k) matching contributions of $20,290 and zero, respectively.

OFS’s employees have the option to participate in September 2003The Company Savings and Incentive Plan (the “OFS Plan”). Under the terms of the OFS Plan, eligible employees can make tax-deferred 401(k) contributions, and at OFS’s sole discretion, OFS can match the employees’ contributions as well as make annual profit-sharing contributions to invest primarily in residentialthe OFS Plan. For the three months ended March 31, 2006, OFS made 401(k) matching contributions of $246,828.
NOTE 16.COMMITMENTS AND CONTINGENCIES

Loans Sold to Investors. Generally, OFS is not exposed to significant credit risk on its loans sold to investors. In the normal course of business, OFS provides certain representations and warranties during the sale of mortgage related securities issuedloans which obligate it to repurchase loans which are subsequently unable to be sold through the normal investor channels. The repurchased loans are secured by the Federal National Mortgage Association (more commonly known as Fannie Mae),related real estate properties, and can usually be sold directly to other permanent investors. There can be no assurance, however, that OFS will be able to recover the Federal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) andrepurchased loan value either through other investor channels or through the Government National Mortgage Association (more commonly known as Ginnie Mae). We earn returnsassumption of the secured real estate.
OFS recognizes a liability for the estimated fair value of this obligation at the inception of each mortgage loan sale based on the spread betweenanticipated repurchase levels and historical experience. The liability is recorded as a reduction of the yieldgain on our assetssale of mortgage loans and our costs, includingincluded as part of other liabilities in the accompanying financial statements.
Changes in the liability for the three months ended March 31, 2006:
Balance—Beginning of period$2,037,980
Provision 551,213
Charge-Offs (662,961)
   
Balance—End of period$1,926,232

Loan Funding and Delivery Commitments. At March 31, 2006, OFS has commitments to fund loans approximating $368.2 million. OFS hedges the interest expense onrate risk of such commitments primarily with mandatory delivery commitments. The remaining commitments to fund loans with agreed-upon rates are anticipated to be sold through “best-efforts” and investor programs. OFS does not anticipate any material losses from such sales.
Net Worth Requirements. OFS is required to maintain certain specified levels of minimum net worth to maintain its approved status with Fannie Mae, HUD, and other investors. At March 31, 2006, the funds we borrow. We intendhighest minimum net worth requirement applicable to borrow between eight and 12 timesOFS was approximately $55.0 million.

Outstanding Litigation. OFS is involved in litigation arising in the normal course of business. Although the amount of equity capital to attempt to enhance our returns to stockholders. We are self-managedany ultimate liability arising from these matters cannot presently be determined, OFS does not anticipate that any such liability will have a material effect on OFS’s consolidated financial position or results of operations.
NOTE 17.SEGMENTS

Opteum follows SFAS No. 131, Disclosures about Segments of an Enterprise and self-advised. We have elected to be taxedRelated Information. The Company operates in two reportable segments: as a real estate investment trust, or REIT, for federal income tax purposes commencing withand as an originator of mortgage loans.

Certain of our initial taxable period ended December 31, 2003.operations qualify as a REIT, under applicable provisions of the Code. The REIT activities primarily involve Opteum investing in residential mortgage-related securities. As a REIT, we generallythese activities are not subject to federal income tax onas long as the net taxable earnings from REIT taxable income that we distributeactivities are distributed to our stockholders. In evaluating our assets

On November 3, 2005, Opteum acquired OFS. OFS is a mortgage lender that originates loans. It offers retail and their performance, our management team primarily evaluates these critical factors: asset performancewholesale products including fixed- and adjustable-rate mortgages, 100% financing, interest-only products and home loans for the credit challenged. Opteum has 35 offices and lending in differing interest rate environments, duration of the security, yield to maturity, potential for prepayment of principal, and the market price of the investment.

Financial Condition

All of our assets46 states. Goodwill associated with OFS was $3.0 million at March 31, 2005 were acquired with2006.


The accounting policies of the proceedssegments are the same as those described in the summary of our private placementssignificant accounting policies in Note 1. The Company evaluates the performance of its REIT segment and public offeringsmortgage origination business segment results based on net income. Each of the business segments’ net income or loss includes direct costs incurred at each segment’s operating level, plus a minimal amount of allocated corporate-level expenses.

The following table shows first quarter 2006 summarized financial information concerning the Company’s reportable segments. Figures reflect the elimination of inter-company transactions between Opteum and use of leverage. We received net proceeds after offering costs of approximately $141.7 million in our private placements, which closed on December 19, 2003, January 30, 2004 and February 17, 2004. We received net proceeds of approximately $66.1 million in our initial public offering, which closed on September 21, 2004. On September 24, 2004 we received an additional $9.8 million of net proceeds pursuantOFS. 


(Amounts in thousands) REIT OFS TOTAL
       
Net interest income$1,508$2,975$4,483
Other revenues, net - 7,062 7,062
Income (loss) before income taxes 892 (9,772) (8,880)
Other interest expense - 1,732 1,732
Depreciation and amortization 184 844 1,028
Income tax expense (benefit) - (3,793) (3,793)
Total assets 3,668,317 957,728 4,626,045
Capital expenditures 392 1,450 1,842


The following information is needed to reconcile the segment amounts to the underwriters’ exercise of their over allotment option. We received net proceeds of approximately $66.7total information, which agrees to the amounts shown in the accompanying consolidated financial statements. During the consolidation process, loans receivable totaling $73.1 million, in a secondary public offering of our Class A Common Stockand the related interest income and accrued interest, which closedare recorded on December 21, 2004.

Mortgage Related Securities

At March 31, 2005, we held $3.3 billion of mortgageOpteum’s segment financial information, are eliminated against corresponding liabilities and expenses recorded on OFS’s segment financial statements. The interest income related securities at fair value. Our portfolio of mortgage related securities will typically be comprised of fixed-rate mortgage-backed securities, floating rate collateralized mortgage obligations, adjustable-rate mortgage-backed securities, hybrid adjustable-rate mortgage-backed securities and balloon maturity mortgage-backed securities. We seek to acquire low duration assets that offer high levels of protection from mortgage prepayments. Althoughthese loans is reported above as inter-segment interest income. There were no inter-segment gross revenues during the duration of an individual asset can change as a result of changes in interest rates, we plan to maintain a portfolio with an average effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of mortgage related securities generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancings of underlying mortgages and payoffs associated with sales of the underlying homes as people move.

For the three monthsperiod ended March 31, 2005, we had2006, except for this interest, and therefore all other revenues were from external sources.


No single customer accounted for more than 10% of revenues at OFS. For the REIT activities, approximately 94.8% of the interest income of $31.1 millionwas derived from MBS issued by U.S. Government agencies.

NOTE 18.INCOME TAXES

As more fully described in Note 2, Opteum acquired OFS on November 3, 2005. OFS is a TRS, which is a taxpaying entity for income tax purposes, and interest expense of $19.8 million. As of March 31, 2005, we had a weighted average yield on assets of 3.63% and a net weighted average borrowings cost of 2.78%. The constant prepayment rateis taxed separately from Opteum. There is no tax provision for the portfolio was 23.5% for March 2005, which reflects the annualized proportion of principal that was prepaid. Prepayments on the loans underlying our mortgage related securities can alter the timing of the cash flows from the underlying loans to the company. As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that

21



cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments. Although the fixed-rate mortgage-backed securities in our portfolio are collateralized by loans with a lower propensity to prepay when the contract rate is above prevailing rates, their price movements track securities with like contract rates and therefore exhibit similar effective duration. The value of our portfolio will change as interest rates rise or fall. See “Qualitative and Quantitative Disclosures about Market Risk—Interest Rate Risk—Effect on Fair Value.”

Over the course of the first quarter of 2005 there was a substantial move in the short end of the yield curve.  The yield associated with the on-the-run two year Treasury note increased 71 basis points from 3.069% to 3.779%.  During that same period the shorter 12-month LIBOR rate increased 74.5 basis points from 3.100% to 3.845%.  In the latter part of the quarter, large volumes of seasoned hybrid ARMs were sold by banks and money managers.  This selling put upward pressure on shorter resetting ARM spreads, widening them substantially.  Simultaneously, an increase in the generic prepayment consensus for ARMs and hybrid ARMs caused spreads to widen further.  The combination of higher interest rates and wider spreads resulted in approximately a $22.7 million dollar decline in the market value of our portfolio.

The following tables summarize our mortgage related securities as of March 31, 2005:

Asset
Category

 

Market Value

 

Percentage of
Entire
Portfolio

 

Weighted
Average
Coupon

 

Weighted
Average
Maturity in
Months

 

Longest
Maturity

 

Weighted
Average Coupon
Reset in Months

 

Weighted Average
Lifetime Cap

 

Weighted
Average Periodic Cap

 

 

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Rate Mortgage-Backed Securities

 

$

987,001

 

29.91

%

6.51

%

272

 

1-Mar-35

 

n/a

 

n/a

 

n/a

 

CMO Floaters

 

 

73,744

 

2.24

%

3.26

%

330

 

25-May-34

 

0.70

 

7.78

%

n/a

 

Adjustable-Rate Mortgage-Backed Securities

 

 

1,674,786

 

50.77

%

4.03

%

343

 

1-Dec-42

 

3.83

 

10.81

%

1.44

%

Hybrid Adjustable Rate Mortgage-Backed Securities

 

 

499,492

 

15.14

%

4.62

%

348

 

20-Jan-35

 

26.69

 

10.25

%

1.23

%

Balloon Maturity Mortgage-Backed Securities

 

 

64,029

 

1.94

%

4.07

%

57

 

1-Feb-11

 

n/a

 

n/a

 

n/a

 

Total Portfolio

 

$

3,299,052

 

100.00

%

4.84

%

317

 

1-Dec-42

 

8.81

 

10.59

%

1.37

%

Agency

 

Market Value

 

Percentage of Entire
Portfolio

 

 

 

($000)

 

 

 

Fannie Mae

 

$

2,148,247

 

65.12

%

Freddie Mac

 

 

514,470

 

15.59

%

Ginnie Mae

 

 

636,335

 

19.29

%

 

 

 

 

 

 

Total Portfolio

 

$

3,299,052

 

100.00

%

Entire Portfolio

Effective Duration

 

1.23

 

Weighted Average Purchase Price

 

$

103.45

 

Weighted Average Current Price

 

$

102.69

 

22



As of March 31, 2005, approximately 47.37% of our portfolio of 15-year fixed-rate coupon mortgage securities, and 30.93% of our 30-year fixed-rate coupon mortgage securities, contain only loans with principal balances of $85,000 or less. Because of the low loan balance on these mortgages, we believe borrowers have a lower economic incentive to refinance and have historically prepaid more slowly than comparable securities.

We had approximately $113.9 million of cash and cash equivalents as of March 31, 2005.

Liabilities

We have entered into repurchase agreements to finance acquisitions of mortgage related securities. None of the counter-parties to these agreements are affiliates of us. These agreements are secured by our mortgage related securities and bear interest rates that have historically moved in close relationship to LIBOR. As of March 31, 2005, we had 18 master repurchase agreements with various investment banking firms and other lenders and had outstanding balances under 15 of these agreements.

At March 31, 2005, we had approximately $3.18 billion outstanding under repurchase agreements with a net weighted average borrowing cost of 2.78%, $133.8 million of which matures in one day, $847.7 million of which matures between two and 30 days, $502.1 million of which matures between 31 and 90 days, and $1,698 million of which matures in more than 90 days. It is our present intention to seek to renew these repurchase agreements as they mature under the then-applicable borrowing terms of the counter-parties to our repurchase agreements. At March 31, 2005, the repurchase agreements were secured by mortgage related securities with an estimated fair value of $3.29 billion and a weighted average maturity of 317 months.

At March 31, 2005, our repurchase agreements had the following counter-parties, amounts outstanding, amounts at risk and weighted average remaining maturities:

Repurchase Agreement Counter-parties

 

Amount Outstanding

 

Amount
at Risk (1)

 

Weighted
Average
Maturity of
Repurchase
Agreements
in Days

 

Percent
of Total
Amount
Outstanding

 

 

 

($000)

 

($000)

 

 

 

 

 

Nomura Securities International, Inc.

 

$

485,270

 

$

25,007

 

160

 

15.3

%

JP Morgan Securities

 

403,899

 

15,385

 

30

 

12.7

%

Deutsche Bank Securities, Inc.

 

385,439

 

16,638

 

142

 

12.1

%

Bear Stearns & Co. Inc.

 

297,251

 

11,808

 

98

 

9.3

%

Goldman Sachs

 

264,902

 

8,438

 

82

 

8.3

%

Cantor Fitzgerald

 

247,942

 

12,367

 

151

 

7.8

%

Washington Mutual

 

239,851

 

10,920

 

73

 

7.5

%

Banc of America Securities, LLC

 

239,290

 

11,932

 

93

 

7.5

%

UBS Investment Bank, LLC

 

148,360

 

6,534

 

70

 

4.7

%

Lehman Brothers

 

144,277

 

4,458

 

96

 

4.6

%

Countrywide Securities Corp.

 

131,062

 

6,235

 

39

 

4.1

%

Merrill Lynch

 

103,032

 

1

 

92

 

3.2

%

Daiwa Securities America Inc.

 

59,046

 

3,370

 

99

 

1.9

%

Morgan Stanley

 

28,288

 

1,213

 

12

 

0.9

%

REFCO Securities, LLC

 

3,746

 

208

 

55

 

0.1

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,181,655

 

$

134,514

 

 

 

100.0

%


(1)           Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

23



Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

It should be noted that due to the significant growth in our assets as well as the completion of private equity raises in January 2004 and February 2004 and our public offerings in September 2004 and December 2004, the amount and components of our income and expenses for the three month period ending March 31, 2005 differ significantly from the same period in 2004.

In response to the changing interest rate environment, in the first quarter of 2005 we continued to modify the mix of mortgage related securities in our portfolio by purchasing greater percentages of adjustable-rate and hybrid adjustable-rate mortgage related securities and a smaller percentage of fixed-rate mortgage related securities than we owned prior to this quarter. This process began during the third quarter of 2004. During the first quarter of 2005, we sold floating-rate collateralized mortgage obligations in order to reduce exposure to 8.0% lifetime caps, for proceeds of $172.0 million. In connection with these sales, we recorded gains of approximately $1.98 million. With the proceeds of these sales we purchased a combination of monthly resetting eleventh district cost of funds indexed adjustable rate securities and low duration fixed rate agency debt with an average life tied to the prepayments of a Fannie Mae mortgage-backed security pool (the “reference” pool). These sales and subsequent purchases have altered the mix of mortgage related securities in our portfolio such that the percentage of adjustable-rate securities whose coupons reset in one year or less had increased to 50.8% from 47.2% at year end 2004. The percentage of floating rate collateralized mortgage obligations has decreased to 2.2% of the portfolio from 8.4% at year end 2004. We are generally using the proceeds of our monthly mortgage-backed securities principal payments to purchase greater percentages of adjustable-rate and hybrid-adjustable-rate mortgage related securities and a smaller percentage of fixed-rate mortgage backed pools than we owned at the beginning of the year.

For the three months ended March 31, 2005 and 2004, we recorded $10.9 million and $3.9 million in net income, respectively.  Our net interest incomeCompany for the three months ended March 31, 2005, as this was prior to the acquisition of the TRS, and 2004Opteum was $11.2solely a non-taxpaying REIT during this period. At the date of acquisition, OFS recorded a deferred tax liability of approximately $22.6 million related to the difference in the carrying amount and $4.5 million, respectively and our expenses were $2.3 million netthe tax basis of $1.98 millionthe originated mortgage servicing rights at the date of realized gains and $0.5 million, respectively, resulting in netthe business combination, among other items.


The income of $10.9 million or $0.52 per diluted Class A Common Share and $3.9 million or $0.49 per diluted Class A Common Share, respectively.

Fortax benefit computed on the OFS loss is as follows for the three months ended March 31, 2005 and 2004, comprehensive (loss)2006:


Deferred income tax benefit:
   
Federal$(6,401,371) 
State (713,295)(7,114,666)
Total deferred income tax benefit   
Deferred income tax expense:
   
Federal 2,987,557 
State 333,5663,321,123
Total deferred income tax expense   
    
Total deferred income tax (benefit)$ (3,793,543)

The effective income was ($10.6 milllion) includingtax (benefit) for the net unrealized loss onthree months ended March 31, 2006 differs from the available for sale securitiesamount determined by applying the statutory Federal rate of ($19.5 million) and $7.1 million including the net unrealized gain on available for sale securities of $3.2 million, respectively. The factors resulting in the unrealized loss on available for sale securities are described previously in the section, “Financial Conditions, Mortgage Related Securities” discussing the Company’s securities portfolio.

As a result of our public secondary offering in December of 2004, our assets increased substantially in the first quarter of 2005 as compared35% to the fourth quarter of 2004OFS loss before income tax as follows:


Net loss, if taxed at the Federal tax rate$(3,420,034)
Permanent tax differences7,780
State tax benefit, net of Federal tax effect(381,090)
Total deferred income tax (benefit)$(3,793,344)

The tax effected cumulative temporary differences that give rise to deferred tax assets and the first quarter of 2004. The proceeds from that secondary offering were deployed by the end of January 2005.

Liquidity and Capital Resources

Our primary source of fundsliabilities as of March 31, 2005 consisted of repurchase agreements totaling $3.18 billion, with a net weighted average borrowing cost of 2.78%. We expect2006 are as follows:


Deferred tax assets:
  
Federal tax loss carry-forward$8,723,698
State tax loss carry-forward 1,136,821
Mark-to-market adjustments 675,765
Total gross deferred tax assets
$10,536,284
   
Deferred tax liabilities:
  
Capitalized cost of mortgage servicing rights$21,616,169
Loan origination and other amounts 3,472,946
Intangibles assets 1,690,811
Total gross deferred tax liabilities
$26,779,926
   
Net deferred tax liabilities
$16,243,642

Management believes that the deferred tax assets will more likely than not be realized due to continue to borrow funds in the form of repurchase agreements. At March 31, 2005, we had master repurchase agreements in place with 18 counter-parties and had outstanding balances under 15 of these agreements. These master repurchase agreements have no stated expiration but can be terminated at any time at our option or at the optionreversal of the counter-party. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party.deferred tax liabilities and expected future taxable income. As of March 31, 2005, all2006, Opteum had an estimated Federal tax net operating loss carry-forward of our existing repurchase agreements matured$24.3 million, which expires in less than one year. Increases in short-term interest rates could negatively impact the valuation of our mortgage related securities, which could limit our borrowing ability or cause our lenders to initiate margin calls.

In December of 2004, the Company entered into contracts2025, and paid commitment fees to three lenders providing for an aggregate of $900 million in committed repurchase lines at pre-determined borrowing rates and haircuts for a 364 day period following the commencement date of each contract. The Company has no obligation to utilize these repurchase lines. During the first quarter of 2005, the Company commenced negotiations to increase the size and improve the terms of these agreements with one of the lenders. It is anticipated that this will be finalized during the second quarter of 2005.

24



For liquidity, we will also rely on cash flow from operations, primarily monthly principal and interest payments to be received on our mortgage related securities, as well as any primary securities offerings authorized by our Board of Directors.

We believe that equity capital, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable us to meet anticipated liquidity requirements. Various changes in market conditions could adversely affect our liquidity, including increases in interest rates and increases in prepayment rates substantially above our expectations. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may be required to pledge additional assets to meet margin calls, liquidate mortgage related securities or sell debt or additional equity securities. If required, the sale of mortgage related securities at prices lower than the carrying value of such assets would result in losses and reduced income.

We may in the future increase our capital resources by making additional offerings of equity and debt securities, including classes of preferred stock, common stock, commercial paper, medium-term notes, collateralized mortgage obligations and senior or subordinated notes. All debt securities, other borrowings, and classes of preferred stock will be senior to the Class A Common Stock in a liquidation of our Company. Additional equity offerings may be dilutive to stockholders’ equity or reduce the market price of our Class A Common Stock, or both. We are unable to estimate the amount, timing or nature of any additional offerings as they will depend upon market conditions and other factors.

Contractual Obligations and Commitments

The following table provides information with respect to our contractual obligations at March 31, 2005.

 

 

Payment due by period

 

Contractual Obligations

 

Total

 

Less than
1 year

 

 

 

 

 

 

 

Repurchase Agreements

 

$

3,181,655,356

 

$

3,181,655,356

 

 

 

 

 

 

 

Total

 

$

3,181,655,356

 

$

3,181,655,356

 

 

 

 

 

 

 

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments which could significantly affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon informationfully available to us at that time. For a description of the accounting policies that management believes are the most critical, refer to our Annual Reportoffset future taxable income.


Tax differences on Form 10-K for the year ended December 31, 2004.

Classifications of Investment SecuritiesREIT income

In accordance with applicable GAAP, our investments in mortgage related securities are classified


Taxable net income, as available-for-sale securities. As a result, changes in fair value are recorded as a balance sheet adjustment to accumulated other comprehensive income (loss), which is a component of stockholders’ equity, rather than through our statement of operations. If available-for-sale securities were classified as trading securities, there could be substantially greater volatility in earnings from period-to-period.

Valuations of Mortgage Related Securities

All investment securities are carried on the balance sheet at fair value. Our mortgage related securities have fair values determinedgenerated by management based on the average of third-party broker quotes received and/or by independent pricing sources when available. Because the price estimates may vary to some degree between sources, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in different presentations of value.

When the fair value of an available-for-sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security (for example, whether the security will be sold prior to the recovery of fair value). If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and this loss is realized and charged against earnings. The determination of other than temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

The decline in fair value of investments held in our portfolio at March 31, 2005, and December 31, 2004 is not considered to be other than temporary.  Accordingly the write down to fair value is recorded in other comprehensive loss as an unrealized loss.  The factors considered in making this determination included the expected cash flow from the investment, the general quality of the mortgage related security owned, any credit protection available, current market conditions, and the magnitude and duration of the historical decline in market prices as well as the Company’s ability and intention to hold such securities owned.

Interest Income Recognition

Interest income on our mortgage related securities is accrued based on the actual coupon rate and the outstanding principal amount of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income over the estimated lives of the securities using the effective yield method adjusted for the effects of estimated prepayments based on Statement of Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17. Adjustments are made using the retrospective method to the effective interest computation each reporting period based on the actual prepayment experiences to date and the present expectation of future prepayments of the underlying mortgages. To make assumptions as to future estimated rates of prepayments, we currently use actual market prepayment history for our securities and for similar securities that we do not own and current market conditions. If our estimate of prepayments is incorrect, we are required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

25



FutureOpteum’s qualifying REIT Taxable Income Distributions

In order to maintain our qualification as a REIT, we are required (among other provisions) to distribute dividends to our stockholders in an amount at least equal to 90% of our “REIT taxable income.” “REIT taxable income” is a term that describes our operating results following taxation rules and regulations governed by various provisions of the Internal Revenue Code.  REIT taxable incomeactivities, is computed differently from ourOpteum’s financial statement net income from REIT activities as computed in accordance with generally accepted accounting principles (“GAAP net income”).GAAP. Depending on the number and size of the various items or transactions being accounted for differently, the differences between REITOpteum’s taxable net income and GAAPOpteum’s financial statement net income from REIT activities can be substantial, and each item can affect several years. See our Annual Report on Form 10-KOpteum's most significant items and transactions currently being accounted for differently from REIT activities include restricted stock awards, depreciation of property and equipment, and the year ended December 31, 2004accounting for a more extensive description.

debt issuance costs.


For the three month periodmonths ended March 31, 2005, the Company’s REIT2006, Opteum's taxable net income was estimated to be approximately $370,000$0.4 million greater than the Company’s GAAPOpteum's financial statement net income and the Company therefore has declared and paidfrom REIT distributions (dividends) based on this higher amount.  The most significant portionactivities. Substantially all of this amount is attributable to the phantom stock awards, and the future deduction of this amount against REIT taxable net income is uncertain both as to the year (as the timing of the tax impact of each restricted stock award is up to each employee who has received a grant) and as to the amount.

Depending onamount (the amount of the actual sizetax impact is measured at the fair value of these timing or temporary differences, somethe shares as of which are not entirely in the Company’s control,a future REIT distributions (dividends)date, and this amount may be substantially greater than or less than the Company’s GAAP net income in any future fiscal reporting quarter or year.financial statement deduction already taken by Opteum). Since inception through March 31, 2005, the Company’s REIT2006, Opteum's taxable net income is estimated to be approximately $1,283,660$3.3 million greater than the Company’s GAAP net income.

Inflation

Virtually all of our assets and liabilities areOpteum's financial in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States and our distributions are determined by our board of directors based primarily on ourstatement net income from REIT activities as calculated for tax purposes;reported in each case, our activitiesits financial statements.







































At March 31, 2006, Opteum held $3.5 billion of agency or government mortgage related securities at fair value in Opteum’s portfolio. Opteum’s portfolio of mortgage related securities will typically be comprised of adjustable-rate mortgage backed securities, fixed-rate mortgage backed securities, hybrid adjustable-rate mortgage backed securities and balloon maturity mortgage backed securities. Opteum seeks to acquire low duration assets that offer high levels of protection from mortgage prepayments. Although the duration of an individual asset can change as a result of changes in interest rates, Opteum plans to maintain a portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying Opteum’s portfolio of mortgage related securities generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from Opteum’s investments substantially. Prepayments occur for various reasons, including refinancings of underlying mortgages and payoffs associated with sales of the underlying homes as people move. At March 31, 2006, Opteum’s TRS, OFS, owned $721.6 million of mortgage loans which were classified as mortgage loans held for sale. In addition, OFS owned approximately $105.2 million of residual interests in asset backed securities and $93.3 million of originated mortgage servicing rights. On going, it will be the intention of OFS to either sell the loans held for sale to a third party investor or issue asset backed securities with the mortgages on the OPMAC shelf. The period of time between issuing securities on the OPMAC shelf will typically be one full quarter, although market conditions may cause management to vary its issuance timing. In addition to general market conditions, prepayments, delinquencies, or defaults on these mortgage loans held for sale may affect the value of these loans in the future.

For the three months ended March 31, 2006, Opteum had consolidated interest income of $60.7 million and consolidated interest expense of $56.2 million. As of March 31, 2006, Opteum’s portfolio of MBS had a weighted average yield on assets of 4.44% and a net weighted average borrowing cost of 4.54%. Prepayments on the loans underlying Opteum’s mortgage related securities can alter the timing of the cash flows from the underlying loans to the Company. As a result, Opteum gauges the interest rate sensitivity of Opteum’s assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments. Although some of the fixed-rate mortgage backed securities in Opteum’s portfolio are collateralized by loans with a lower propensity to prepay when the contract rate is above prevailing rates, their price movements track securities with like contract rates and therefore exhibit similar effective duration. The value of Opteum’s portfolio will change as interest rates rise or fall. See "Qualitative and Quantitative Disclosures about Market Risk—Interest Rate Risk—Effect on Fair Value."


Asset Category
 
Market Value
Percentage of
Entire
Portfolio
Weighted
Average
Coupon
Weighted
Average
Maturity in
Months
Longest
Maturity
Weighted
Average Coupon
Reset in Months
Weighted
Average
Lifetime Cap
Weighted
Average
Periodic Cap
Adjustable-Rate Mortgage backed securities$2,005,867,89756.7%4.70%3311-Apr-443.9210.43%1.79%
Fixed-Rate Mortgage backed securities$715,618,09020.2%6.91%2771-Apr-36n/an/an/a
Hybrid Adjustable-Rate Mortgage backed securities$770,860,59921.8%4.33%3361-Nov-3517.439.89%1.75%
Balloon Maturity Mortgage backed securities$46,207,6241.3%4.05%451-Feb-11n/an/an/a
Total Portfolio
$
3,538,554,210
100.0%
4.96%
312
1-Apr-44
7.67
10.28%
1.78%

Agency
 
Market Value
Percentage of
Entire Portfolio
Fannie Mae$2,285,690,96164.59%
Freddie Mac 676,176,95319.11%
Ginnie Mae 576,686,29616.30%
Total Portfolio
$3,538,554,210100.00%

Entire Portfolio
  
Effective Duration (1) 1.59
Weighted Average Purchase Price$102.49
Weighted Average Current Price$100.67





Quarter Ended
 
Principal
Balance of
Investment
Securities Held
 
Unamortized
Premium (Net)
 
Amortized Cost of
Securities Held
Amortized
Cost/Principal
Balance Held
 
Fair Market
Value of
Investment
Securities Held
Fair Market
Value/Principal
Balance Held
At March 31,2006$3,515,112,798$111,754,082$3,626,866,880103.179$3,538,554,210100.667
At December 31, 2005$3,457,891,363$112,635,825$3,570,527,188103.257$3,494,029,359101.045
At September 30, 2005$3,797,400,645$113,392,661$3,910,793,306102.986$3,858,319,701101.604
At June 30, 2005$3,784,668,467$114,672,670$3,899,341,137103.030$3,876,205,996102.419
At March 31, 2005$3,212,516,823$109,389,703$3,321,906,527103.405$3,299,051,561102.694
At December 31, 2004$2,876,319,085$97,753,097$2,974,072,182103.399$2,973,232,897103.369
At September 30, 2004$1,589,828,988$48,498,955$1,638,327,943103.051$1,638,264,065103.047
At June 30, 2004$1,479,500,209$38,033,673$1,517,533,882102.571$1,508,421,270101.955
At March 31, 2004$1,473,583,661$39,535,014$1,513,118,676102.683$1,516,539,744102.915







Repurchase Agreement Counter-parties
 
Amount
Outstanding
($000)
 
Amount
at Risk(1)
($000)
Weighted Average
Maturity of
Repurchase
Agreements
in Days
Percent
of Total
Amount
Outstanding
 
Deutsche Bank Securities, Inc.$963,877$11,9416628.23%
Nomura Securities International, Inc. 430,521 16,8628512.61 
Washington Mutual 410,994 12,625912.04 
Bear Stearns & Co. Inc. 299,764 7,788448.78 
UBS Investment Bank, LLC 246,670 8,448547.23 
Cantor Fitzgerald 209,148 10,256246.13 
Goldman Sachs 170,567 4,645505.00 
Morgan Stanley 165,555 5,053414.85 
JP Morgan Securities 149,603 4,665784.38 
Merrill Lynch 112,255 4,129553.29 
RBS Greenwich Capital 94,053 2,631552.75 
BNP Paribas 67,430 1,99381.98 
Lehman Brothers 56,782 1,499891.66 
Daiwa Securities America Inc. 19,732 884980.57 
Countrywide Securities Corp 17,004 491240.50 
Total
$
3,413,955
$
93,910
 
100.00
%


Warehouse and aggregation lines of credit:
 
March 31, 2006
A committed warehouse line of credit for $100.0 million between the Company and Residential Funding Corporation ("RFC").$7,095,775
   
A committed warehouse line of credit for $284.5 million between the Company and Colonial Bank. 199,050,231
   
A committed warehouse line of credit for $150.0 million between the Company and JP Morgan Chase. 90,881,688
   
An Aggregation facility for $1.0 billion between the Company and Citigroup Global Markets Realty Inc. to aggregate loans pending securitization. 273,213,144
   
A $750.0 million purchase and security agreement among OFS and UBS Warburg Real Estate Securities, Inc. (“UBS Warburg”) 108,955,338
   
 $679,196,176

  
March 31, 2006
A committed working capital line of credit for $82.5 million between OFS and Colonial Bank$63,355,607
A committed warehouse line of credit for $150.0 million between OFS and JP Morgan Chase 7,710,000
Citigroup Global Realty Inc., working capital line of credit secured by the retained interests in securitizations through OPMAC 2005-4 34,386,512
   
 $105,452,119






Quarter Ended
 
Average
Investment
Securities Held
 
Total Interest Income
Yield on
Average Interest
Earning Assets
 
Average
Balance of
Repurchase
Agreements
Outstanding
 
Interest
Expense
Average
Cost of
Funds
 
Net
Interest
Income
Net
Interest
Spread
March 31, 2006$3,516,291,784$42,219,3274.803%$3,375,776,594$37,660,8574.462%$4,558,4700.340%
December 31, 2005$3,676,174,530$43,139,9114.694 %$3,533,486,002$35,912,9664.065 %$7,226,9450.629 %
September 30, 2005$3,867,262,849$43,574,3084.507 %$3,723,603,116$33,101,8473.556 %$10,472,4610.951 %
June 30, 2005$3,587,628,779$36,748,6404.097 %$3,449,743,973$26,703,4223.096 %$10,045,2181.001 %
March 31, 2005$3,136,142,229$31,069,9343.963 %$2,976,409,157$19,841,7102.667 %$11,228,2241.296 %
December 31, 2004$2,305,748,481$20,463,0713.550 %$2,159,890,886$10,824,1642.005 %$9,638,9071.545 %
September 30, 2004$1,573,342,668$11,017,3462.801 %$1,504,919,407$4,253,3371.131 %$6,764,0091.670 %
June 30, 2004$1,512,480,507$10,959,0982.898 %$1,452,004,000$4,344,0121.197 %$6,615,0861.702 %
March 31, 2004$871,140,453$7,194,0333.303 %$815,814,500$2,736,4341.342 %$4,457,5991.962 %






The Company earned $4.5 million of consolidated net interest income for the quarter ended March 31, 2006, and $11.2 million of net interest income for the quarter ended March 31, 2005. As measured against invested assets during each period, these net interest earnings represented an annualized net yield of approximately 0.13% for the quarter ended March 31, 2006 and 1.29% for the quarter ended March 31, 2005. These earnings are not representative of what can be expected for future periods, as Opteum only began to acquire investments in late December 2003, and the funds received during the year ended December 2004 from the private placements and public offerings were not fully invested for the entire twelve-month period. Borrowing rates increased during 2005 and during the first quarter of 2006 faster than the yields on Opteum’s current portfolio. The substantial decrease in the spread between the yields on assets and the costs to finance those assets will inevitably cause a decrease in net interest spread and net earnings. In 2005, Opteum issued $103.1 million of trust preferred securities, approximately half of which were used by Opteum to purchase mortgage related securities. The addition of these notes will make comparing Opteum’s first quarter 2006 results to past periods more difficult. The acquisition of OFS will create potential opportunities for earnings but will also add substantial expenses making the comparison of Opteum’s results to past reporting periods difficult.




Gains on Sales of Mortgage Assets and Losses on Derivative Instruments
(in thousands)

  
For the Period Ending March 31, 2006
For the Period Ending March 31, 2005
Fair Value adjustment of residuals interests, trading$(4,226)N/A
Gain on Sales 20,829N/A
Fees on brokered loans 1,549N/A
Gain on derivatives 3,402N/A
Direct loan origination expenses, deferred 1,238N/A
Fees earned, brokering servicing 771N/A
Write off purchased pipeline(Purchase Accounting Adjustment) (534)N/A
  23,029N/A
    
Direct loan origination expenses, reclassified (15,952)N/A
    
Net gain on sale of mortgage loans$7,077N/A


Taxable Net Income

Taxable net income, as generated by Opteum’s qualifying REIT activities, is computed differently from Opteum’s financial statement net income from REIT activities as computed in accordance with GAAP. Depending on the number and size of the various items or transactions being accounted for differently, the differences between Opteum’s taxable net income and Opteum’s financial statement net income from REIT activities can be substantial, and each item can affect several years. Opteum's most significant items and transactions currently being accounted for differently from REIT activities include restricted stock awards, depreciation of property and equipment, and the accounting for debt issuance costs.

For the three months ended March 31, 2006, Opteum's taxable net income was approximately $0.4 million greater than Opteum's financial statement net income from REIT activities. Substantially all of this amount is attributable to the phantom stock awards, and the future deduction of this amount against taxable net income is uncertain both as to the year (as the timing of the tax impact of each restricted stock award is up to each employee who has received a grant) and as to the amount (the amount of the tax impact is measured at the fair value of the shares as of a future date, and this amount may be greater than or less than the financial statement deduction already taken by Opteum). Since inception through March 31, 2006, Opteum's net taxable income is approximately $3.3 million greater than Opteum's financial statement net income from REIT activities as reported in its financial statements.

Future Taxable Income Distributions

In future periods, Opteum’s net taxable income may grow to be even greater than consolidated GAAP net income as the interest on the $65.0 million loan Opteum made to OFS could generate annual net taxable income of $7.2 million. This interest is not reported on the Company’s consolidated financial statements as it is eliminated in consolidation.

In order to maintain Opteum’s qualification as a REIT, Opteum is required (among other provisions) to distribute dividends to stockholders in an amount at least equal to, generally, 90% of its net taxable income. Net taxable income is a term that describes operating results following taxation rules and regulations governed by various provisions of the Code. Net taxable income is computed differently from net income as computed in accordance with GAAP ("GAAP net income"), which is included in the Company’s consolidated financial statements. Depending on the number and size of the various items or transactions being accounted for differently, the differences between net taxable income and GAAP net income can be substantial and each item can affect several reporting periods. Generally, these items are timing or temporary differences between years; for example, an item that may be a deduction for GAAP net income in the current year is not a deduction for net taxable income until a later year. As a REIT, Opteum may be subject to a federal excise tax. An excise tax is incurred if Opteum distributes less than 85 percent of its net taxable income by the end of the calendar year. Opteum's most significant item currently being accounted for differently are the restricted stock awards.

OFS is treated as a TRS of Opteum. OFS is subject to corporate income taxes and files stand-alone federal and state income tax returns. OFS had IRLCs along with other instruments that are hedges for both these IRLCs and mortgage loans held for sale and both are considered freestanding derivatives. The changes to the fair value of these freestanding derivatives from inception to the period end are recorded at their fair value with the resulting gain or loss reflected in current period earnings. The result of the changes in the fair value of these freestanding derivatives was a gain of approximately $3.5 million as of March 31, 2006. OFS can recognize a gain in the value of mortgages held for sale only when the loans are sold.

Liquidity and Capital Resources

Opteum’s primary source of funds as of March 31, 2006 consisted of repurchase agreements totaling $3.4 billion, with a net weighted average borrowing cost of 4.54%. Opteum expects to continue to borrow funds in the form of repurchase agreements. At March 31, 2006, Opteum had master repurchase agreements in place with 19counter-parties and had outstanding balances under 15 of these agreements. These master repurchase agreements have no stated expiration but can be terminated at any time at Opteum’s option or at the option of the counter-party. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. As of March 31, 2006, all of the existing repurchase agreements matured in less than one year. Increases in short-term interest rates could negatively impact the valuation of Opteum’s mortgage related securities, which could limit Opteum’s borrowing ability or cause Opteum’s lenders to initiate margin calls.

During 2005, Opteum entered into contracts and paid commitment fees to three lenders providing for an aggregate of $1.85 billion in committed repurchase lines at pre-determined borrowing rates and haircuts for a 364 day period following the commencement date of each contract. Opteum has no obligation to utilize these repurchase lines. Each one of these lines will be eligible for renewal at some point during 2006. It is the Company’s intention to renew these lines. However, market conditions could change making the renewal of these contractual arrangements more expensive or unattainable.

In addition, in order to facilitate the origination of mortgage loans, OFS had warehouse lines and aggregation lines of credit outstanding of approximately $697.9 million at March 31, 2006. OFS also had approximately $105.5 million outstanding on other lines of credit that are secured by the residual interests and the originated mortgage servicing rights with various lenders. The rates on these borrowings generally are based on a spread to LIBOR.

For liquidity, Opteum will also rely on cash flow from operations, primarily monthly principal and interest payments to be received on the mortgage related securities, as well as any primary securities offerings authorized by the Company’s Board of Directors. OFS may generate cash flow from residual interest in mortgage securitizations as well as receive funds from originated mortgage servicing rights and originated loan fees.

Opteum believes that equity and junior subordinated debt capital, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable Opteum to meet anticipated liquidity requirements. Various changes in market conditions could adversely affect liquidity, including increases in interest rates, increases in prepayment rates substantially above expectations, or the reduction of fee income generated through mortgage originations at OFS. If cash resources are at any time insufficient to satisfy the liquidity requirements, Opteum may be required to pledge additional assets to meet margin calls, liquidate mortgage related securities or sell debt or additional equity securities. If required, the sale of mortgage related securities or originated mortgage loans held for sale (by OFS) at prices lower than the carrying value of such assets would result in losses and reduced income.

Opteum may in the future increase capital resources by making additional offerings of equity and debt securities, including classes of preferred stock, common stock, commercial paper, medium-term notes, collateralized mortgage obligations and senior or subordinated notes. All debt securities, other borrowings, and classes of preferred stock will be senior to the Class A Common Stock in a liquidation of the company. Additional equity offerings may be dilutive to stockholders' equity or reduce the market price of the Class A Common Stock, or both. Opteum is unable to estimate the amount, timing or nature of any additional offerings as they will depend upon market conditions and other factors.

Off-Balance Sheet Arrangements

As discussed previously, OFS pools the loans they originate and purchase and securitizes them to obtain long-term financing for the assets. The loans are transferred to a trust where they serve as collateral for asset-backed bonds, which the trust issues to the public. During the first quarter of 2006 OFS executed one securitization collateralized by $934.4 million of loans. In addition, OFS held approximately $105.2 million of retained interests from securitizations as of March 31, 2006. OFS’s ability to use the securitization capital market is critical to the operations and overall profitability of the business.

External factors that are reasonably likely to affect OFS’s ability to continue to use these markets would be those factors that could disrupt the securitization capital market. A disruption in the market could prevent OFS from being able to sell the securities at a favorable price, or at all. Factors that could disrupt the securitization market include an international liquidity crisis such as occurred in the fall of 1998, a terrorist attack, outbreak of war or other significant event risk, or market specific events such as a default of a comparable type of securitization. If OFS were unable to access the securitization market, OFS may still be able to finance the mortgage operations by selling the loans to investors in the whole loan market but at lower than anticipated margins.

Specific items that may affect OFS’s ability to use the securitizations to finance their loans relate primarily to the performance of the loans that have been securitized. Extremely poor loan performance may lead to poor bond performance and investor unwillingness to buy bonds supported by OFS’s collateral. OFS’s financial condition could also have an adverse impact on their ability to access the securitization market if there was the perception that their financial condition had deteriorated to the point where investors would question OFS’s ability to stand behind their representations and warranties made in connection with their securitizations (Opteum has guaranteed the performance of OFS’s representation and warranties). The financial performance and condition of the past securitizations of OFS are too early to evaluate the impact of the underlying collateral’s performance. Additionally, past economic conditions that may have contributed to a favorable performance may not be an indication of future performance should economic conditions change unfavorably.
OFS has commitments to borrowers to fund residential mortgage loans as well as commitments to purchase and sell mortgage loans to third parties. As of March 31, 2006, OFS had outstanding commitments to originate loans of approximately $368.2 million. As of March 31, 2006, OFS had outstanding commitments to sell loans of approximately $213.0 million. The commitments to originate and purchase loans do not necessarily represent future cash requirements, as some portion of the commitments are likely to expire without being drawn upon or may be subsequently declined for credit or other reasons.

Inflation

Virtually all of the Company’s assets and liabilities are financial in nature. As a result, interest rates and other factors influence the Company’s performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company’s financial statements are prepared in accordance with GAAP and the Company’s distributions are determined by the Company’s Board of Directors based primarily on the Company’s net taxable income as calculated for federal income tax purposes; in each case, the Company’s activities and balance sheet are measured with reference to historical cost and or fair market value without considering inflation.

Credit Risk

At March 31, 2006, Opteum had limited its exposure to credit losses on its portfolio of securities by purchasing primarily securities from federal agencies or federally chartered entities, such as, but not limited to, Fannie Mae, Freddie Mac, and Ginnie Mae. The portfolio is diversified to avoid undue loan origination, geographic and other types of concentrations. Opteum manages the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of prepayment characteristics.

Opteum is engaged in various trading and brokerage activities in which counter-parties primarily include broker-dealers, banks, and other financial institutions. In the event counter-parties do not fulfill their obligations, Opteum may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counter-party and/or issuer of the instrument. It is Opteum’s policy to review, as necessary, the credit standing for each counter-party.

OFS has credit exposure to representation and warranties with respect to loans OFS sells to the whole loan market and loans OFS sells to securitization entities. When OFS sells loans to the whole loan market, OFS has exposure for loans that default within certain timeframes. In these cases, OFS may be obligated to repurchase the loans.  In addition, the credit performance of the loans originated or acquired by OFS will ultimately impact the performance of their retained interests in securitizations or the value of the originated mortgage servicing rights.  The valuation of both retained interests in securitizations and mortgage servicing rights is a function of both the credit performance of the underlying loans as well as the prepayment speeds realized.


Movements in interest rates can pose risks to Opteum either in a rising or declining interest rate environment. Opteum depends on substantial borrowings to conduct Opteum’s business. These borrowings are most typically done at variable interest rate terms which will increase as short-term interest rates rise. (Note that the interest rates on Opteum’s junior subordinated notes are fixed for the first five years.) Additionally, when interest rates rise, the prices of securities in Opteum’s portfolio, loans held for sale and any loan applications in process with locked-in rates at OFS decrease in value. To preserve the value of such loans or applications in process with locked-in rates, agreements may be executed for mandatory loan sales to be settled at future dates with fixed prices. These sales can take the form of forward sales of mortgage backed securities.

When interest rates decline, prepayments on Opteum’s portfolio may exceed its expectations. Opteum may reinvest the proceeds from the prepayments at lower yields than the original investments. Additionally, fallout in the originated mortgage loan pipeline may occur as a result of customers withdrawing their applications. In those instances, OFS may be required to purchase loans at current market prices to fulfill existing mandatory loan sale agreements, thereby incurring losses upon sale.

Movements in interest rates also impact the value of mortgage servicing rights. When interest rates decline, the loans underlying the mortgage servicing rights are generally expected to prepay faster, which reduces the market value of the mortgage servicing rights. OFS considers the expected increase in loan origination volumes and the resulting additional origination related income as a natural hedge against the expected change in the value of mortgage servicing rights.

Risk Management
Mortgage Pipeline
OFS’s mortgage committed pipeline includes IRLCs that have been extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. Effective with the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, OFS classifies and accounts for the IRLCs as freestanding derivatives. Accordingly, IRLCs are recorded at their fair value with changes in fair value recorded to current earnings. OFS uses other derivative instruments to economically hedge the IRLCs, which are also classified and accounted for as freestanding derivatives.
Mortgage Loans Held for Sale
OFS’s risk management objective for its mortgage loans held for sale includes use of mortgage forward delivery contracts designed as fair value derivative instruments to protect earnings from an unexpected change due to a decline in value. Effective with the adoption of SFAS No. 133, OFS’s mortgage forward delivery contracts are recorded at their fair value with changes in fair value recorded to current earnings. Gains (losses) on mortgage forward delivery contracts represent the change in value from contract inception to funding date.
IRLCs and derivative assets or liabilities arising from OFS’s derivative activities are included in mortgage loans held for sale in the accompanying consolidated financial statements. OFS also evaluates its contractual arrangements, assets and liabilities for the existence of embedded derivatives.
Swap Agreements

OFS enters into interest rate swap agreements ("Swap Agreements") to manage its interest rate exposure on IRLCs and mortgage loans held for sale that will be securitized. When OFS enters into a Swap Agreement, it generally agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on LIBOR.
The following tables summarize OFS's interest rate sensitive instruments as of March 31, 2006:

  
Notional
Amount
 
Carrying
Amount
 
Estimated
Fair Value
March 31, 2006      
Assets:      
Mortgage loans held for sale$ $707,095,613$709,910,926
Mortgage servicing rights$ $93,337,355$93,337,355
       
Commitments and contingencies:      
Mortgage loans held for sale related positions:      
Interest Rate Lock Commitments$368,156,694$1,150,707$1,150,707
Interest Rate SWAP Agreements$533,700,000$1,494,429$1,494,429
Forward delivery commitments$213,000,000$876,966$876,966

Contractual Obligations and Commitments

The following table provides information with respect to the Company’s contractual obligations at March 31, 2006 (dollars in thousands):

  Payments Due by Period
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
Repurchase agreements$3,413,954$3,413,954$-$-$-
Warehouse lines of credit 679,196 679,196 - - -
Drafts payable 18,665 18,665 - - -
Other secured borrowings 105,452 105,452      
Junior subordinated notes 103,097 - - 103,097 -
Operating leases 18,419 5,914 8,725 2,770 1,010
           
Total$4,338,783$4,223,181$8,725$105,867$1,010


ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOpteum

The Company


Opteum believes the primary risk inherent in its investments is the effect of movements in interest rates. This arises because the changes in interest rates on the Company’sOpteum's borrowings will not be perfectly coordinated with the effects of interest rate changes on the income from, or value of, its investments. The CompanyOpteum therefore follows an interest rate risk management program designed to offset the potential adverse effects resulting from the rate adjustment limitations on its mortgage related securities. The CompanyOpteum seeks to minimize differences between the interest rate indices and interest rate adjustment periods of its adjustable-rate mortgage-backedmortgage backed securities and those of its related borrowings.

The Company’s


Opteum's interest rate risk management program encompasses a number of procedures, including the following:

monitoring and adjusting, if necessary, the interest rate sensitivity of its mortgage related securities compared with the interest rate sensitivities of its borrowings;

attempting to structure its repurchase agreements that fund its purchases of adjustable-rate mortgage-backed securities to have a range of different maturities and interest rate adjustment periods. The Company attempts to structure these repurchase agreements to match the reset dates on its adjustable-rate mortgage-backed securities. At March 31, 2005, the weighted average months to reset of the Company’s adjustable-rate mortgage-backed securities was 3.83 months and the weighted average reset on the corresponding repurchase agreements was 2.5 months; and

actively managing, on an aggregate basis, the interest rate indices and interest rate adjustment periods of its mortgage related securities compared to the interest rate indices and adjustment periods of its borrowings. The Company’s liabilities under its repurchase agreements are all LIBOR-based, and the Company, among other considerations, selects its adjustable-rate mortgage-backed securities to favor LIBOR indexes. As of March 31, 2005, over 28.3% of its adjustable-rate mortgage-backed securities were LIBOR-based.


§monitoring and adjusting, if necessary, the interest rate sensitivity of its mortgage related securities compared with the interest rate sensitivities of its borrowings;

§attempting to structure its repurchase agreements that fund its purchases of adjustable-rate mortgage backed securities to have a range of different maturities and interest rate adjustment periods. Opteum attempts to structure these repurchase agreements to match the reset dates on its adjustable-rate mortgage backed securities. At March 31, 2006, the weighted average months to reset of Opteum's adjustable-rate mortgage backed securities was 3.9 months and the weighted average reset on the corresponding repurchase agreements was 1.6 months; and

§actively managing, on an aggregate basis, the interest rate indices and interest rate adjustment periods of its mortgage related securities compared to the interest rate indices and adjustment periods of its borrowings. Opteum's liabilities under its repurchase agreements are all LIBOR-based, and Opteum, among other considerations, selects its adjustable-rate mortgage backed securities to favor LIBOR indexes. As of March 31, 2006, over 31.6% of its adjustable-rate mortgage backed securities were LIBOR-based.

As a result, the CompanyOpteum expects to be able to adjust the average maturities and reset periods of its borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings mature or are renewed. Through the use of these procedures, the CompanyOpteum attempts to reduce the risk of differences between interest rate adjustment periods of its adjustable-rate mortgage-backedmortgage backed securities and those of its related borrowings.


Because the CompanyOpteum attempts to match its assets and liabilities from an interest rate perspective and hold its assets to maturity, it expects to have limited exposure to changes in interest rates. However, the CompanyOpteum will be exposed to changes in interest rates either (i) upon refinancing borrowings that expire before the related assets are repaid or (ii) upon reinvesting (and refinancing) proceeds following the maturity of current investments, if interest rates were to rise substantially.


As a further means of protecting its portfolio against the effects of major interest rate changes the CompanyOpteum may employ a limited hedging strategy under which it purchases interest rate cap contracts (under which it would generally be entitled to payment if interest rate indices exceed the agreed rates).

27




Interest Rate Risk

The Company


Opteum is subject to interest rate risk in connection with its investments in mortgage related securities and its related debt obligations, which are generally repurchase agreements of limited duration that are periodically refinanced at current market rates.


Effect on Net Interest Income

The Company


Opteum funds its investments in long-term fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities with short-term borrowings under repurchase agreements. During periods of rising interest rates, the borrowing costs associated with those fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities tend to increase while the income earned on such fixed-rate mortgage-backedmortgage backed securities and hybrid adjustable-rate mortgage-backedmortgage backed securities (during the fixed-rate component of such securities) may remain substantially unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses. The CompanyOpteum may enter into interest rate cap contracts or forward funding agreements seeking to mitigate the negative impact of a rising interest rate environment. Hedging techniques will be based, in part, on assumed levels of prepayments of the Company’sOpteum's fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities. If prepayments are slower or faster than assumed, the life of the mortgage related securities will be longer or shorter, which would reduce the effectiveness of any hedging techniques the CompanyOpteum may utilize and may result in losses on such transactions. Hedging techniques involving the use of derivative securities are highly complex and may produce volatile returns. The Company’sOpteum's hedging activity will also be limited by the asset and sources-of-income requirements applicable to it as a REIT.


Extension Risk

The Company


Opteum invests in fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities. Hybrid adjustable-rate mortgage-backedmortgage backed securities have interest rates that are fixed for the first few years of the loan—typically three, five, seven or 10 years—and thereafter their interest rates reset periodically on the same basis as adjustable-rate mortgage-backedmortgage backed securities. As of March 31, 2005,2006, approximately 15.1%21.8% of the Company’sOpteum's investment portfolio was comprised of hybrid adjustable-rate mortgage-backedmortgage backed securities. The CompanyOpteum computes the projected weighted average life of its fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities based on the market’smarket's assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate mortgage-backedmortgage backed security is acquired with borrowings, the CompanyOpteum may, but is not required to, enter into interest rate cap contracts or forward funding agreements that effectively cap or fix its borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related mortgage-backedmortgage backed security. This strategy is designed to protect the CompanyOpteum from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related mortgage-backedmortgage backed security. However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related mortgage-backedmortgage backed security could extend beyond the term of the swap agreement or other hedging instrument. This situation could negatively impact the CompanyOpteum as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the fixed-rate or hybrid adjustable-rate mortgage-backedmortgage backed security would remain fixed. This situation may also cause the market value of the Company’sOpteum's fixed-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities to decline with little or no offsetting gain from the related hedging transactions. In extreme situations, the CompanyOpteum may be forced to sell assets and incur losses to maintain adequate liquidity.


Adjustable-Rate and Hybrid Adjustable-Rate Mortgage-BackedMortgage Backed Security Interest Rate Cap Risk

The Company


Opteum also invests in adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities, which are based on mortgages that are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which an adjustable-rate or hybrid adjustable-rate mortgage-

28



mortgage backed security’ssecurity's interest yield may change during any given period. However, the Company’sOpteum's borrowing costs pursuant to its repurchase agreements will not be subject to similar restrictions. Hence, in a period of increasing interest rates, interest rate costs on the Company’sOpteum's borrowings could increase without limitation by caps, while the interest-rate yields on the Company’sOpteum's adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities would effectively be limited by caps. This problem will be magnified to the extent the CompanyOpteum acquires adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities that are not based on mortgages which are fully indexed. Further, the underlying mortgages may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in the Company’sOpteum's receipt of less cash income on its adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities than it needs in order to pay the interest cost on its related borrowings. These factors could lower the Company’sOpteum's net interest income or cause a net loss during periods of rising interest rates, which would negatively impact the Company’sOpteum's financial condition, cash flows and results of operations.


Interest Rate Mismatch Risk

The Company


Opteum intends to fund a substantial portion of its acquisitions of adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities with borrowings that have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the mortgage related securities it is financing. Thus, the CompanyOpteum anticipates that in most cases the interest rate indices and repricing terms of its mortgage related securities and its funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Therefore, the Company’sOpteum's cost of funds would likely rise or fall more quickly than would its earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact the Company’sOpteum's financial condition, cash flows and results of operations.


Prepayment Risk


Prepayment rates for existing mortgage related securities generally increase when prevailing interest rates fall below the market rate existing when the underlying mortgages were originated. In addition, prepayment rates on adjustable-rate and hybrid adjustable-rate mortgage-backedmortgage backed securities generally increase when the difference between long-term and short-term interest rates declines or becomes negative. Prepayments of mortgage related securities could harm the Company’sOpteum's results of operations in several ways. Some adjustable-rate mortgages underlying the Company’sOpteum's adjustable-rate mortgage-backedmortgage backed securities may bear initial “teaser”"teaser" interest rates that are lower than their “fully-indexed”"fully-indexed" rates, which refersrefer to the applicable index rates plus a margin. In the event that such an adjustable-rate mortgage is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the holder of the related mortgage-backedmortgage backed security would have held such security while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the expected life of the adjustable-rate mortgage-backedmortgage backed security. The CompanyOpteum currently owns mortgage related securities that were purchased at a premium. The prepayment of such mortgage related securities at a rate faster than anticipated would result in a write-off of any remaining capitalized premium amount and a consequent reduction of the Company’sOpteum's net interest income by such amount. Finally, in the event that the CompanyOpteum is unable to acquire new mortgage related securities to replace the prepaid mortgage related securities, its financial condition, cash flow and results of operations could be harmed.


Effect on Fair Value


Another component of interest rate risk is the effect changes in interest rates will have on the fairmarket value of the Company’sOpteum's assets. The CompanyOpteum faces the risk that the fairmarket value of its assets will increase or decrease at different rates than that of its liabilities, including its hedging instruments.

29




The CompanyOpteum primarily assesses its interest rate risk by estimating the duration of its assets and the duration of its liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. The CompanyOpteum generally calculates duration using various financial models and empirical data, and different models and methodologies can produce different duration numbers for the same securities.


The following sensitivity analysis table shows the estimated impact on the fair value of the Company’sOpteum's interest rate-sensitive investments at March 31, 2005,2006, assuming rates instantaneously fall 100 basis points, rise 100 basis points and rise 200 basis points:

 

 

Interest Rates Fall
100 BPS

 

Interest Rates Rise
100 BPS

 

Interest Rates Rise
200 BPS

 

Adjustable-Rate

 

 

 

 

 

 

 

Fair Value $1,674,786,388

 

 

 

 

 

 

 

Change in Fair Value

 

$

10,540,958

 

$

(10,540,958

)

$

(21,081,917

)

Change as a % of Fair Value

 

0.63

%

(0.63

)%

(1.26

)%

 

 

 

 

 

 

 

 

Fixed-Rate

 

 

 

 

 

 

 

Fair Value $987,000,965

 

 

 

 

 

 

 

Change in Fair Value

 

$

22,451,156

 

$

(22,451,156

)

$

(44,902,312

)

Change as a % of Fair Value

 

2.27

%

(2.27

)%

(4.55

)%

 

 

 

 

 

 

 

 

CMO Floaters

 

 

 

 

 

 

 

Fair Value $73,743,802

 

 

 

 

 

 

 

Change in Fair Value

 

$

(250,729

)

$

250,729

 

$

501,458

 

Change as a % of Fair Value

 

(0.34

)%

0.34

%

0.68

%

 

 

 

 

 

 

 

 

Hybrid

 

 

 

 

 

 

 

Fair Value $499,491,623

 

 

 

 

 

 

 

Change in Fair Value

 

$

7,287,583

 

$

(7,287,583

)

$

(14,575,166

)

Change as a % of Fair Value

 

1.46

%

(1.46

)%

(2.92

)%

 

 

 

 

 

 

 

 

Balloon

 

 

 

 

 

 

 

Fair Value $64,028,783

 

 

 

 

 

 

 

Change in Fair Value

 

$

1,805,612

 

$

(1,805,612

)

$

(3,611,223

)

Change as a % of Fair Value

 

2.82

%

(2.82

)%

(5.64

)%

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Fair Value $113,855,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Total

 

 

 

 

 

 

 

Fair Value $3,299,051,561

 

 

 

 

 

 

 

Change in Fair Value

 

$

41,834,580

 

$

(41,834,580

)

$

(83,669,160

)

Change as a % of Fair Value

 

1.27

%

(1.27

)%

(2.54

)%

30



  
Interest Rates Fall
100 Basis Points
 
Interest Rates Rise
100 Basis Points
 
Interest Rates Rise
200 Basis Points
Adjustable-Rate Mortgage backed securities 
      
(Fair Value $2,005,867,897)      
Change in fair value$16,166,632$(16,166,632)$(32,333,265)
Change as a percent of fair value 0.81% (0.81)% (1.61)%
Fixed-Rate Mortgage backed securities
      
(Fair Value $715,618,090)      
Change in fair value$20,237,576$(20,237,576)$(40,475,152)
Change as a percent of fair value 2.83% (2.83)% (5.66)%
Hybrid Adjustable-Rate Mortgage backed securities
      
(Fair Value $770,860,599)      
Change in fair value$18,999,423$(18,999,423)$(37,998,847)
Change as a percent of fair value 2.46% (2.46)% (4.93)%
Balloon Maturity Mortgage backed securities
      
(Fair Value $46,207,624)      
Change in fair value$1,014,616$(1,014,616)$(2,029,231)
Change as a percent of fair value 2.20% (2.20)% (4.39)%
Cash 
      
(Fair Value $90,872,039)      
Portfolio Total
      
(Fair Value $3,538,554,210)      
Change in fair value$56,418,247$(56,418,247)$(112,836,495)
Change as a percent of fair value 1.59% (1.59)% (3.19)%

The table below reflects the same analysis presented above but with the figures in the columns that indicate the estimated impact of a 100 basis point fall a 100 basis point rise, and a 200 basis pointor rise adjusted to reflect the impact of convexity.

 

 

Interest Rates Fall
100 BPS

 

Interest Rates Rise
100 BPS

 

Interest Rates Rise
200 BPS

 

Adjustable-Rate

 

 

 

 

 

 

 

Fair Value $1,674,786,388

 

 

 

 

 

 

 

Change in Fair Value

 

$

4,765,658

 

$

(13,792,514

)

$

(34,174,498

)

Change as a % of Fair Value

 

0.28

%

(0.82

)%

(2.04

)%

 

 

 

 

 

 

 

 

Fixed-Rate

 

 

 

 

 

 

 

Fair Value $987,000,965

 

 

 

 

 

 

 

Change in Fair Value

 

$

11,190,574

 

$

(22,979,582

)

$

(53,734,663

)

Change as a % of Fair Value

 

1.13

%

(2.33

)%

(5.44

)%

 

 

 

 

 

 

 

 

CMO Floaters

 

 

 

 

 

 

 

Fair Value $73,743,802

 

 

 

 

 

 

 

Change in Fair Value

 

$

(210,170

$

210,170

 

$

145,275

 

Change as a % of Fair Value

 

(0.29

)%

0.29

%

0.20

%

 

 

 

 

 

 

 

 

Hybrid

 

 

 

 

 

 

 

Fair Value $499,491,623

 

 

 

 

 

 

 

Change in Fair Value

 

$

3,616,319

 

$

(9,730,097

)

$

(22,542,056

)

Change as a % of Fair Value

 

0.72

%

(1.95

)%

(4.51

)%

 

 

 

 

 

 

 

 

Balloon

 

 

 

 

 

 

 

Fair Value $64,028,783

 

 

 

 

 

 

 

Change in Fair Value

 

$

1,326,036

 

$

(1,651,943

)

$

(3,345,504

)

Change as a % of Fair Value

 

2.07

%

(2.58

)%

(5.23

)%

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Fair Value $113,855,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Total

 

 

 

 

 

 

 

Fair Value $3,299,051,561

 

 

 

 

 

 

 

Change in Fair Value

 

$

20,688,417

 

$

(47,943,966

)

$

(113,651,446

)

Change as a % of Fair Value

 

0.63

%

(1.45

)%

(3.44

)%


  
Interest Rates Fall
100 Basis Points
 
Interest Rates Rise
100 Basis Points
 
Interest Rates Rise
200 Basis Points
Adjustable-Rate Mortgage backed securities 
      
(Fair Value $2,005,867,897)      
Change in fair value$11,147,725$(20,442,648)$(48,982,325)
Change as a percent of fair value 0.56% (1.02)% (2.44)%
Fixed-Rate Mortgage backed securities
      
(Fair Value $715,618,090)      
Change in fair value$15,462,859$(23,956,489)$(50,974,089)
Change as a percent of fair value 2.16% (3.35%) (7.12)%
Hybrid Adjustable-Rate Mortgage backed securities
      
(Fair Value $770,860,599)      
Change in fair value$16,355,201$(21,085,397)$(45,187,504)
Change as a percent of fair value 2.12% (2.74)% (5.86)%
Balloon Maturity Mortgage backed securities
      
(Fair Value $46,207,624)      
Change in fair value$959,434$(1,033,681)$(2,067,301)
Change as a percent of fair value 2.08% (2.24%) (4.47%)
Cash 
      
(Fair Value $90,872,039)      
Portfolio Total
      
(Fair Value $3,538,554,210)      
Change in fair value$43,925,219$(66,518,215)$(147,211,219)
Change as a percent of fair value 1.24% (1.88)% (4.16)%

In addition to changes in interest rates, other factors impact the fair value of the Company’sOpteum's interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of the Company’sOpteum's assets would likely differ from that shown above and such difference might be material and adverse to the Company’sOpteum's stockholders.

31




The Company’sOpteum's liabilities, consisting primarily of repurchase agreements, are also affected by changes in interest rates. As rates rise, the value of the underlying asset, or the collateral, declines. In certain circumstances, the CompanyOpteum could be required to post additional collateral in order to maintain the repurchase agreement position. The CompanyOpteum maintains a substantial cash position, as well as unpledged assets, to cover these types of situations. As an example, if interest rates increased 200 basis points, as shown on the prior table, the Company’sOpteum's collateral as of March 31, 20052006 would decline in value by approximately $113.7$147.2 million. Its cash


Opteum Financial Services

Risks associated with OFS’s mortgage origination business:

OFS may face loss exposure due to fraudulent and unpledged assetsnegligent acts on the part of loan applicants, employees, mortgage brokers and other third parties. When OFS originates or purchases mortgage loans, OFS relies heavily upon information provided to them by third parties, including information relating to the loan application, property appraisal, title information and employment and income documentation. If any of this information is fraudulently or negligently misrepresented to OFS and such misrepresentation is not detected by OFS prior to loan funding, the value of the loan may be significantly lower than OFS expected. Whether a misrepresentation is made by the loan applicant, the loan broker, one of OFS’s employees, or any other third party, OFS will generally bear the risk of loss associated with it.
OFS’s failure to comply with federal, state or local regulation of, or licensing requirements with respect to, mortgage lending, loan servicing, broker compensation programs, local branch operations or other aspects of OFS’s business could harm OFS’s operations and profitability. As a mortgage lender, loan servicer and broker, OFS is subject to an extensive body of both state and federal law. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan origination and servicing activities. As a result, it may be more difficult to comprehensively identify and accurately interpret all of these laws and regulations and to properly program OFS’s technology systems and effectively train OFS’s associates, thereby potentially increasing OFS’s exposure to the risks of noncompliance with these laws and regulations. 

OFS’s failure to comply with these laws can lead to:
§  civil and criminal liability;

§  loss of licensure;

§  damage to reputation in the industry;

§  inability to sell or securitize loans;

§  demands for indemnification or loan repurchases from purchasers of OFS’s loans;

§  fines and penalties and litigation, including class action lawsuits; or

§  administrative enforcement actions.


OFS’s business could be adversely affected if OFS experienced an interruption in or breach of its communication or information systems or if OFS were unable to safeguard the security and privacy of the personal financial information OFS receives. OFS relies heavily upon communications and information systems to conduct it business. Any material interruption or breach in security of OFS’s communication or information systems or the third-party systems on which OFS relies could cause delays in rendering an underwriting decision or other delays and could result in fewer loan applications being received, applications not closing, slower processing of applications and reduced efficiency in loan servicing. Additionally, in connection with OFS’s loan file due diligence reviews, OFS has access to the personal financial information of the borrowers which is highly sensitive and confidential, and subject to significant federal and state regulation. If a third party were to misappropriate this information, OFS potentially could be subject to both private and public legal actions. Although OFS has policies and procedures designed to safeguard confidential information, OFS can provide no assurance that these policies and safeguards are currently sufficient to cover such shortfall. There can be no assurance, however,prevent the misappropriation of confidential information, that the Companypolicies and safeguards will alwaysbe deemed compliant with any existing federal or state laws or regulations governing privacy, or with those laws or regulations that may be adopted in the future. Also, in selling its loans OFS must ship these files containing borrower’s confidential information. While in transit, the files may be out of the control of OFS’s safeguarding measures. OFS can still be held liable for access to this information while in transit.
Failure to renew or obtain adequate funding under warehouse repurchase agreements may harm OFS’s lending operations. OFS is currently dependent upon a number of credit facilities for funding of its mortgage loan originations and acquisitions. Any failure to renew or obtain adequate funding under these financing arrangements for any reason, including OFS’s inability to meet the covenants contained in such arrangements, could harm its lending operations and its overall performance.
OFS has credit exposure to representation and warranties with respect to loans OFS sells to the whole loan market. OFS has potential credit and liquidity exposure for loans that are the subject of fraud, irregularities in their loan files or process, or that result in OFS’s breaching the representations and warranties in the contract of sale. In addition, when OFS sells loans to the whole loan market OFS has exposure for loans that default, within certain timeframes. In these cases, OFS may be obligated to repurchase loans at principal value plus accrued interest and a pro-rata amount on any premium paid and any servicing released premium along with any escrow shortage and out of pockets that the buyer may have sufficientincurred, which could result in a significant decline in OFS’s available cash. When OFS purchases loans from a third party, through OFS’s Conduit division, that OFS sells into the whole loan market or to a securitization trust, OFS obtains representations and warranties from the counter-parties that sold the loans to OFS that generally parallel the representations and warranties OFS provides to OFS’s purchasers. As a result, OFS believes they have the potential for recourse against the seller of the loans. However, if the representations and warranties are not parallel, or if the original seller is not in a financial position to be able to repurchase the loan, OFS may have to use cash resources to repurchase loans which could adversely affect OFS’s liquidity.

Risks associated with movements in interest rates:
Changes in interest rates may harm OFS’s results of operations. OFS’s results of operations are likely to be harmed during any period of unexpected or unpledgedrapid changes in interest rates. Interest rate changes could affect OFS in the following ways:
§  a substantial or sustained increase in interest rates could harm OFS’s ability to originate or acquire mortgage loans in expected volumes, which could result in a decrease in OFS’s cash flow and in OFS’s ability to support OFS’s fixed overhead expense levels;

§  interest rate fluctuations may harm OFS’s earnings as a result of potential changes in the spread between the interest rates on OFS’s borrowings and the interest rates on OFS’s mortgage assets;

§  mortgage prepayment rates vary depending on such factors as mortgage interest rates and market conditions, and changes in anticipated prepayment rates may harm OFS’s earnings; and

§  when OFS securitizes loans, the value of the residual interests OFS retains and the income OFS receives from them are based primarily on LIBOR, and an increase in LIBOR reduces the net income OFS receives from, and the value of, these residual interests.
Hedging against interest rate exposure may adversely affect OFS’s earnings, which could adversely affect cash available for distribution to Opteum’s stockholders. OFS may enter into interest rate swap agreements or pursue other interest rate hedging strategies.
OFS’s hedging activity will vary in scope based on interest rates, the type of mortgage assets held, and other changing market conditions. Interest rate hedging may fail to cover shortfallsprotect or could adversely affect OFS because, among other things:
§  interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

§  hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities; consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions, and the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements;

§  available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

§  the duration of the hedge may not match the duration of the related liability or asset;

§  the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs OFS’s ability to sell or assign OFS’s side of the hedging transaction;

§  the party owing money in the hedging transaction may default on its obligation to pay, and a default by a party with whom OFS enters into a hedging transaction may result in the loss of unrealized profits; and 

§  OFS may not be able to dispose of or close out a hedging position without the consent of the hedging counter-party, and OFS may not be able to enter into an offsetting contract in order to cover OFS’s risks.  
When interest rates rise, loans held for sale and any applications in process with locked-in rates decrease in value. To preserve the value of such fixed-rate loans or applications in process with locked-in rates, agreements are executed for mandatory loan sales to be settled at future dates with fixed prices. These sales take the form of forward sales of mortgage backed securities.

When interest rates decline, fallout may occur as a result of customers withdrawing their applications. In such instances, OFS may be required to purchase back these mandatory delivery agreements at current market prices, possibly incurring losses upon settlement. OFS uses an interest rate hedging program to manage these risks. Through this program, mortgage backed securities are purchased and sold forward or options are acquired on treasury futures contracts.

Movements in interest rates also impact the value of MSRs. When interest rates decline, the loans underlying the MSRs are generally expected to prepay faster, which reduces the market value of the MSRs. OFS considers the expected increase in loan origination volumes and the resulting additional origination related income as a natural hedge against the expected change in the value of MSRs. Lower mortgage rates generally reduce the fair value of the MSRs, as increased prepayment speeds are highly correlated with lower levels of mortgage interest rates.

Risks associated with OFS’s securitization strategy:

An interruption or reduction in the securitization market or change in terms offered by this market would hurt OFS’s financial position. OFS is dependent on the securitization market for the sale of OFS’s loans and the securitization market is dependent upon a number of factors, including general economic conditions, conditions in the securities market generally and in the asset-backed securities market specifically. Similarly, poor performance of OFS’s previously securitized loans could harm OFS’s access to the securitization market.

Competition in the securitization market may negatively affect OFS’s net income. Competition in the business of sponsoring securitizations of the type OFS focuses on is increasing as Wall Street broker-dealers, other mortgage REITs, investment management companies, and other financial institutions expand their activities or enter this field. Increased competition could reduce OFS’s securitization margins if OFS has to pay a higher price for the long-term funding of these assets. To the extent that OFS’s securitization margins erode, OFS’s results of operations will be negatively impacted.

Risks associated with OFS’s retained interests in residuals and mortgage servicing rights:

Geographic concentration of mortgage loans OFS originates or purchases increases OFS’s exposure to risks in those areas, especially in California, Georgia and Florida. Over-concentration of loans OFS originates or purchases in any one geographic area increases OFS’s exposure to the economic and natural hazard risks associated with that area.
A prolonged economic slowdown or a decline in the real estate market could harm OFS’s results of operations. A substantial portion of OFS’s mortgage assets consist of single-family mortgage loans or mortgage securities—available-for-sale evidencing interests in single-family mortgage loans. Any sustained period of increased delinquencies, foreclosures or losses could harm OFS’s ability to sell loans, the prices OFS receives for OFS’s loans, the values of OFS’s mortgage loans held for sale or OFS’s residual interests in securitizations.
Current loan performance data may not be indicative of future results. When valuing OFS’s retained interests in securitizations or mortgage servicing rights OFS uses projections, estimates and assumptions based on OFS’s experience with mortgage loans. Actual results and the timing of certain events could differ materially in adverse ways from those projected, due to factors including changes in general economic conditions, fluctuations in interest rates, fluctuations in mortgage loan prepayment rates and fluctuations in losses due to defaults on mortgage loans.

The value of the retained interests in residuals and mortgage servicing rights are both sensitive to movements in interest rates, prepayment rates, the credit performance of the underlying loans, and market conventions regarding discount rates used to value such assets. The tables below provide results of sensitivity analysis performed on the valuation of retained interests in residuals and mortgage servicing rights. In each case, the underlying assumptions used by OFS to value these assets have been stressed to gauge the impact on carrying value.

At March 31, 2006 and December 31, 2005 key economic assumptions and the sensitivity of the current fair value of residual cash flows to the immediate 10% and 20% adverse change in those assumptions are as follows:

  At March 31, 2006At December 31, 2005
Balance Sheet Carrying value of retained interests - fair value$105,196,20598,010,592
Weighted average life (in years) 3.812.62
Prepayment assumption (annual rate) 36.99%32.53%
Impact on fair value of 10% adverse change$(10,788,268)(7,817,000)
Impact on fair value of 20% adverse change$(19,670,422)(16,089,000)
Expected Credit losses (annual rate) 0.545%0.607%
Impact on fair value of 10% adverse change$(3,859,312)(3,247,000)
Impact on fair value of 20% adverse change$(7,078,785)(6,419,000)
Residual Cash-Flow Discount Rate 13.99%13.96%
Impact on fair value of 10% adverse change$(5,761,154)(3,804,000)
Impact on fair value of 20% adverse change$(11,014,808)(7,392,000)
Interest rates on variable and adjustable loans and bonds Forward LIBOR Yield CurveForward LIBOR Yield Curve
Impact on fair value of 10% adverse change$(31,560,231)(21,265,000)
Impact on fair value of 20% adverse change$(58,145,201)(34,365,000)

Key economic assumptions used in measuring the fair value of retained interests at the date of securitization resulting from securitizations completed during 2005 and 2006 are listed below. Subsequent to the acquisition of OFS management has assessed all situations.

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assumptions used in the valuation of retained interests. As part of our effort to hedge our retained interest positions, certain of these assumptions have been adjusted to make them consistent with the assumptions underlying our hedging strategies.


 
2006
2005
Prepayment speeds (CPR)39.63%28.65%
Weighted-average-life4.8102.830
Expected credit losses0.640%1.069%
Discount rates16.710%14.896%
Interest ratesForward LIBOR Yield curveForward LIBOR Yield curve


ITEM 4.                  CONTROLS AND PROCEDURES

Controls And Procedures.


Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c)13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to


As of the dateend of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.


Changes in Internal Controls over Financial Reporting

There have been no significant changes in the Company’s internal controls over financial reporting identified in connection with the calculation of such internal controls that occurred during the Company’s last fiscal year or in other factors that could significantlyhave materially affected, or are reasonably likely to materially affect the Company’s internal controls subsequent to the date the Company completed its evaluation.

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Period
(a) Total Number of Shares (or Units) Purchased
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month#1
(1/1/06-1/31/06)
---1,238,200
Month#2
(2/01/06-2-28-06)
138,5008.85700,3001,099,700
Month#3 (3/01/06-3/31/06)388,8008.211,089,100710,900
Total527,3008.38  

·  The intention to acquire shares of its Class A common stock in the open market was authorized by the Company’s Board of Directors and announced October 7, 2005.
·  The share by-back program authorizes management to acquire up to 1,800,000 shares of the Company’s Class A Common Stock and will be in effect for a period of one year.



The Annual Meeting of Shareholders of the Company was held on March 24, 2005.

April 28, 2006.


1. Election of Directors.  At the meeting, two directorsJason Kaplan was elected for the term expiring in 2007, Peter R. Norden was elected for the term expiring in 2008, and Maureen A. Hendricks and Jeffrey J.  Zimmer were electedre-elected for terms expiring in 2008.2009. For each nominee, the number of votes cast for and withheld were as follows:

NOMINEE

 

FOR

 

WITHHELD

 

Robert E. Cauley

 

17,988,454

 

119,368

 

Buford H. Ortale

 

17,823,151

 

284,671

 


 NOMINEE
FOR
WITHHELD
Jason Kaplan
20,397,082
1,903,185
Peter R. Norden
20,370,492 1,903,185
Maureen A. Hendricks
20,387,997
1,912,270
Jeffrey J. Zimmer
20,363,840
1,936,427
The following directors continued in office after the meeting: Maureen A. Hendricks, Jeffrey J. Zimmer,
Kevin L. Bespolka, and
W. Christopher Mortenson.

Mortenson, Robert E. Cauley and Buford H. Ortale.

2.Ratification of Appointment of Independent Auditors.  At the meeting, the selection of Ernst & Young LLP as the Company’s independent auditors for the year ending December 31, 20052006 was ratified.  The number of votes cast for and against the selection of the auditors and the number of abstentions were as follows:

FOR

 

AGAINST

 

ABSTAIN

 

18,028,444

 

25,410

 

53,968

 


 FOR
AGAINST
ABSTAIN
21,677,556
519,370
103,341 

ITEM 5.3.                   OTHER INFORMATION

None

ITEM 6.Conversion Proposals                  EXHIBITS

31.1      Certification. At the meeting, (a) the conversion of Chief Executive Officer pursuant to Rule 13a-14(a)1,223,208 shares of the Securities Exchange Act,Company's Class A Redeemable Preferred Stock into shares of Class A Common Stock on a one-for-one basis and (b) the issuance of shares of Class A Common Stock in lieu of any shares of Class B Redeemable Preferred Stock which may be issuable by the Company under the terms of its agreement relating to the acquisition of OFS was authorized. The number of votes cast for and against the conversion proposals and the number of abstentions were as amended.

follows.


 
FOR
AGAINST
ABSTAIN
(a)15,269,107
664,225
205,807
(b)11,442,580
4,489,762
206,797


31.2ITEM 5. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.

32Other Information.


None.
ITEM 6. Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

34

Exhibits.

2.1Agreement of Plan of Merger, incorporated by reference to the Company’s Form 8-K, dated September 29, 2005, filed with the SEC on September 30, 2005
3.1Articles of Amendment and Restatement, incorporated by reference to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
3.2Articles Supplementary, incorporated by reference to the Company’s Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3Articles of Amendment, incorporated by reference to the Company’s Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4Amended and Restated Bylaws, incorporated by reference to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
4.1Specimen Common Stock Certificate filed herewith
10.12003 Long-Term Incentive Compensation Plan, incorporated by reference to the Company’s Form S-11/A, effective as of March 31, 2004, filed with the SEC on May 26, 2004
10.2Employment Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.3Employment Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.4Employment Agreement between Opteum Financial Services, LLC and Peter R. Norden, incorporated by reference to the Company’s Form 10-K, dated September 29, 2005, filed with the SEC on March 10, 2006
10.5Letter Agreement, dated November 4, 2003 from AVM, L.P. to Bimini Mortgage Management, Inc. with respect to consulting services to be provided by AVM, L.P. and Letter Agreement, dated February 10, 2004 from AVM, L.P. to Bimini Mortgage Management with respect to assignment of AVM, L.P.'s rights, interest and responsibilities to III Associates, incorporated by reference to the Company’s Form S-11/A, filed with the SEC on May 26, 2004
10.6Agency Agreement, dated November 20, 2003 between AVM, L.P. and Bimini Mortgage Management, Inc., incorporated by reference to the Company’s Form S-11/A, dated November 20, 2003, filed with the SEC on May 26, 2004
10.72004 Performance Bonus Plan, incorporated by reference to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.8Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.9Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.10
Voting Agreement, among certain stockholders of Bimini Mortgage Management, Inc., Jeffrey J. Zimmer, Robert E. Cauley, Amber K. Luedke, George H. Haas, IV, Kevin L. Bespolka, Maureen A. Hendricks, W. Christopher Mortenson, Buford H. Ortale, Peter Norden, certain of Mr. Norden’s affiliates, Jason Kaplan, certain of Mr. Kaplan’s affiliates and other former owners of Opteum Financial Services, LLC, incorporated by reference to the Company’s Schedule 13D, dated November 3, 2005, filed with the SEC on November 14, 2005
31.1Certification of the Chief Executive Officer , pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
31.2Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
32.1Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith





SIGNATURESSignatures


Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


BIMINI MORTGAGE MANAGEMENT,OPTEUM INC.

Date: May 8, 2006

By:

By:

  /s/

/s/ Robert E. Cauley

Robert E. Cauley

Chief Financial Officer, Chief Investment Office and Secretary

Date:

April 25, 2005

35