BIMINI CAPITAL MANAGEMENT, INC. - Quarter Report: 2006 June (Form 10-Q)

REIT taxable net income is calculated according to the requirements of the Internal Revenue Code rather than GAAP. For the year ending December 31, 2006, we intend to distribute at least 90% of our REIT taxable net income in order to retain our tax qualification status as a REIT. The following table reconciles GAAP net income to REIT taxable net income for the six and three months ended June 30, 2006:

 

		Six Months ended June 30, 2006		Three months ended June 30, 2006
GAAP net loss	$	(8,776,004)	$	(3,688,880)
Plus: GAAP net loss of taxable REIT subsidiary included above		15,357,749		11,211,895
GAAP net income from REIT operations		6,581,745		7,523,015
Add: inter-company interest paid on loans		4,048,871		2,216,542
Add: estimated book depreciation and amortization		174,690		87,345
Less: estimated tax depreciation and amortization		(171,826)		(85,913)
Phantom share book/tax differences, net		604,327		266,033
Other book/tax differences, net		(44,666)		(21,239)
REIT Taxable Net Income	$	11,193,141	$	9,985,783

We believe that the foregoing reconciliation of our REIT taxable net income is useful to investors because REIT taxable net income is directly related to the amount of dividends we are required to distribute in order to maintain our REIT tax qualification status. However, because REIT taxable net income is an incomplete measure of our financial performance and involves differences from net income computed in accordance with GAAP, our REIT taxable net income should be considered as supplementary to, and not as a substitute for, our net income computed in accordance with GAAP as a measure of our financial performance.

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

Forward-Looking Statements

 

When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (the “Commission”) or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those described or incorporated by reference in Part II - Item 1A - Risk Factors of this Form 10-Q. These and other risks, uncertainties and factors, including those described in reports that the Company files from time to time with the Commission, could cause the Company’s actual results to differ materially from those reflected in such forward-looking statements. All forward-looking statements speak only as of the date they are made and the Company does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

Introduction and Overview

As used in this document, discussions related to the parent company, the registrant, “Opteum” and to real estate investment trust (“REIT”) qualifying activities or the general management of Opteum’s portfolio of mortgage backed securities (“MBS”) refer to “Opteum Inc.” Further, as used in this document, “OFS,” Opteum’s taxable REIT subsidiary (“TRS”) or non-REIT eligible assets refer to Opteum Financial Services, LLC and its consolidated subsidiaries. Discussions relating to the “Company” refer to the consolidated entity (the combination of Opteum and OFS). The assets and activities that are not REIT eligible, such as mortgage origination, acquisition and servicing activities, are conducted by OFS.

Opteum Inc., formerly Bimini Mortgage Management, Inc., was formed in September 2003 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). Opteum attempts to earn a return on the spread between the yield on its assets and its costs, including the interest expense on the funds it borrows. It generally intends to borrow between eight and twelve times the amount of its equity capital in an attempt to enhance its returns to stockholders. This leverage may be adjusted above or below this range to the extent management or the Company’s Board of Directors deems necessary or appropriate. For purposes of this calculation, Opteum treats its junior subordinated notes as an equity capital equivalent. Opteum is self-managed and self-advised.

In evaluating Opteum’s assets and their performance, Opteum’s management team primarily evaluates these critical factors: asset performance in differing interest rate environments, duration of the security, yield to maturity, potential for prepayment of principal and the market price of the investment.

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 presently operates out of 42 offices and is active in 46 states. The transaction, in which OFS became a wholly-owned taxable REIT subsidiary (“TRS”) of Opteum, closed on November 3, 2005. At the Company’s 2006 Annual Meeting of Stockholders, which took place on April 28, 2006, the Company’s shareholders approved the conversion of 1,223,208 shares of Class A Redeemable Preferred Stock, which were issued in conjunction with the OFS merger, into shares of Class A Common Stock. OFS acquires and originates mortgages that are either sold to third parties or securitized by a wholly-owned special purpose entity, Opteum Mortgage Acceptance Corporation (“OMAC”). OFS services the mortgages securitized by OMAC.

Critical Accounting Policies

Opteum’s accounting policies are described in Note 1 to the Consolidated Financial Statements. Opteum has identified the following accounting policies that are critical to the presentation of our financial statements and that require critical accounting estimates by management.

Opteum’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require Opteum to make some complex and subjective decisions and assessments. Its most critical accounting policies involve decisions and assessments which could significantly affect its reported assets and liabilities, as well as its reported revenues and expenses. Opteum believes that all of the decisions and assessments upon which its financial statements are based were reasonable at the time made based upon information available to it at that time. Management has identified its most critical accounting policies to be the following:

Mortgage Backed Securities

The Company’s investments in MBS are classified 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 the statement of operations. The Company’s MBS have fair values determined 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. Alternatively, management could opt to have the value of all of its positions in MBS determined by either an independent third-party pricing source or do so internally based on managements own estimates. Management believes pricing on the basis of third-party broker quotes is the most consistent with the definition of fair value described in Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures about the Fair Value of Financial Instruments.

Retained Interest, Trading

Retained interest, trading is the subordinated interests retained by the Company from the Company’s various securitizations and includes the over-collateralization and residual net interest spread remaining after payments to the Public Certificates and NIM Notes. (See Notes 1 and 4 in the accompanying consolidated financial statements.) Retained interest, trading represents the present value of estimated cash flows to be received from these subordinated interests in the future. The subordinated interests retained are classified as “trading securities” and are reported at fair value with unrealized gains or losses reported in earnings. In order to value these unrated and unquoted retained interests, the Company utilizes either pricing available directly from dealers or calculates their present value by projecting their future cash flows on a publicly-available analytical system. When a publicly-available analytical system is employed, the Company uses the following variable factors in estimating the fair value of these assets:

 

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 the Company to represent market conditions and value.

 

Prepayment Forecast. The prepayment forecast may be expressed by the Company in accordance with one of the following standard market conventions: Constant Prepayment Rate (“CPR”) or Percentage of a Prepayment Vector. Prepayment forecasts are made utilizing Citigroup Global Markets Yield Book and/or management estimates based on historical experience. Conversely, prepayment speed forecasts could have been based on other market conventions or third-party analytical systems. 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, the Company 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 the Company consistent with observations of the actual collateral pool performance.

 

At June 30, 2006, and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of retained interests to the immediate 10% and 20% adverse change in those assumptions are as follows:

		June 30, 2006		December 31, 2005
Balance Sheet Carrying value of retained interests - fair value	$	88,395,952	$	98,010,592
Weighted average life (in years)		5.24		2.62
Prepayment assumption (annual rate)		32.28%		32.53%
Impact on fair value of 10% adverse change	$	(8,847,221)	$	(7,817,000)
Impact on fair value of 20% adverse change	$	(15,581,981)	$	(16,089,000)
Expected Credit losses (annual rate)		0.58%		0.61%
Impact on fair value of 10% adverse change	$	(3,461,968)	$	(3,247,000)
Impact on fair value of 20% adverse change	$	(6,898,938)	$	(6,419,000)
Residual Cash-Flow Discount Rate		12.78%		13.96%
Impact on fair value of 10% adverse change	$	(4,128,810)	$	(3,804,000)
Impact on fair value of 20% adverse change	$	(7,924,214)	$	(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	$	(33,543,511)	$	(21,265,000)
Impact on fair value of 20% adverse change	$	(52,553,733)	$	(34,365,000)

These sensitivities are entirely hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon 10% and 20% variations in assumptions generally cannot be extrapolated to greater or lesser percentage variations 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 subordinated interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another that 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 June 30, 2006.

Mortgage Servicing Rights

The Company recognizes mortgage servicing rights (“MSR”) as assets when separated from the underlying mortgage loans in connection with the sale of such loans. Upon sale of a loan, the Company 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. Gains or losses on the sale of MSRs are recognized when title and all risks and rewards have irrevocably passed to the purchaser of such MSRs and there are no significant unresolved contingencies.

 

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets ("SFAS 156"). The Company 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). (See Notes 1 and 5 in the accompanying consolidated financial statements.)

 

To facilitate hedging of the MSR portfolio, management has elected to utilize an internal model for valuation purposes. Accordingly, fair value is estimated based on internally generated expected cash flows considering market prepayment estimates, historical prepayment rates, portfolio characteristics, interest rates and other economic factors.

 

At June 30, 2006, and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of MSR cash flows to the immediate 10 percent and 20 percent adverse change in those assumptions are as follows:

		At June 30, 2006		At December 31, 2005
Prepayment assumption (annual rate) (PSA)		417.9		254.0
Impact on fair value of 10% adverse change	$	(3,467,265)	$	(3,615,000)
Impact on fair value of 20% adverse change	$	(6,596,466)	$	(6,936,000)
MSR Cash-Flow Discount Rate		14.30%		10.74%
Impact on fair value of 10% adverse change	$	(3,923,392)	$	(4,856,000)
Impact on fair value of 20% adverse change	$	(7,487,117)	$	(9,280,000)

These sensitivities are entirely hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon 10% and 20% variations in assumptions generally cannot be extrapolated to greater or lesser percentage variations 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 MSR 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.

Income Recognition

Interest income on MBS 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 MBS using the effective yield method adjusted for the effects of estimated prepayments based on 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, the Company currently uses actual market prepayment history for the securities it owns and for similar securities that the Company does not own and current market conditions. If the estimate of prepayments is incorrect, the Company is required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

With respect to mortgage loans held for sale, interest income and interest expense are recognized as earned or incurred. Loans are placed on a non-accrual status when concern exists as to the ultimate collectibility of principal or interest. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. The Company recognizes gain (or loss) on the sale of these loans.  Gains or losses on such sales are recognized at the time legal title transfers to the purchaser of such loans based upon the difference between the sales proceeds from the purchaser and the allocated basis of the loan sold, adjusted for net deferred loan fees and certain direct costs and selling costs. The Company defers net loan origination costs and fees as a component of the loan balance on the balance sheet. Such costs are not amortized and are recognized into income as a component of the gain or loss upon sale. Accordingly, salaries, commissions, benefits and other operating expenses of $30.2 million and $14.2 million during the six and three months ended June 30, 2006, respectively, were capitalized as direct loan origination costs.

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

Financial Condition

All of Opteum’s assets at June 30, 2006, were acquired with the proceeds of private placements and public offerings of Class A Common Stock, private placements of junior subordinated notes and the use of leverage. Opteum received net proceeds after offering costs of approximately $141.7 million in the private placements, which closed on December 19, 2003, January 30, 2004 and February 17, 2004. Opteum received net proceeds of approximately $66.1 million in the initial public offering, which closed on September 21, 2004. On September 24, 2004, Opteum received an additional $9.8 million of net proceeds pursuant to the underwriters' exercise of their over-allotment option. Opteum received net proceeds of approximately $66.7 million (including the underwriters’ exercise of their over-allotment option) in a secondary public offering of Class A Common Stock which closed on December 21, 2004. Opteum received total net proceeds of approximately $48.5 million in connection with the privately placed issuance of trust preferred securities of Bimini Capital Trust I on May 17, 2005. Opteum received total net proceeds of approximately $48.5 million in connection with the privately placed issuance of trust preferred securities of Bimini Capital Trust II in October 2005.

Mortgage Related Securities

At June 30, 2006, Opteum held $3.4 billion of agency or government MBS at fair value in Opteum’s portfolio. Opteum’s portfolio of MBS will typically be comprised of adjustable-rate MBS, fixed-rate MBS, hybrid adjustable-rate MBS and balloon maturity MBS. 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 strives 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 MBS 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 loan payoffs in connection with home sales. In order to reduce leverage and to reduce the effect of an increase in the forward yield curve and LIBOR curve, Opteum did not reinvest all of the proceeds of the mortgage loan prepayments and scheduled principal payments that occurred during the second quarter of 2006. The last time mortgage assets were added to the Opteum portfolio was on April 27, 2006.

As of June 30, 2006, Opteum’s portfolio of MBS had a weighted average yield on assets of 4.78% and a net weighted average borrowing cost of 5.08%. Prepayments on the loans underlying Opteum’s MBS 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 its 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 MBS 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 Effect on Fair Value below.

The following tables summarize Opteum’s agency and government mortgage related securities as of June 30, 2006:

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 MBS	$	2,319,096,678	68.06%	4.70%	329	1-Apr-44	5.09	10.22%	1.84%
Fixed-Rate MBS	$	653,659,358	19.18%	6.48%	254	1-Apr-36	n/a	n/a	n/a
Hybrid Adjustable-Rate MBS	$	391,045,826	11.48%	4.80%	333	1-Nov-35	18.16	10.04%	1.45%
Balloon Maturity MBS	$	43,486,152	1.28%	4.05%	42	1-Feb-11	n/a	n/a	n/a
Total Portfolio	$	3,407,288,014	100.00%	5.05%	311	1-Apr-44	6.98	10.20%	1.79%

Agency		Market Value	Percentage of Entire Portfolio
Fannie Mae	$	2,281,622,803	66.96%
Freddie Mac		608,951,562	17.87%
Ginnie Mae		516,713,649	15.17%
Total Portfolio	$	3,407,288,014	100.00%

Entire Portfolio
Effective Duration (1)		1.42
Weighted Average Purchase Price	$	102.34
Weighted Average Current Price	$	100.31

(1)	Effective duration of 1.42 indicates that an interest rate increase of 1% would be expected to cause a 1.42% decline in the value of the MBS in the Company’s investment portfolio.

As of June 30, 2006, approximately 49.6% of the Company’s investment portfolio of 15-year fixed-rate coupon MBS and approximately 46.2% of the 30-year fixed-rate coupon MBS contain only loans with principal balances of $85,000 or less. Because of the low loan balance on these mortgages, Opteum believes borrowers have a lower economic incentive to refinance and have historically prepaid more slowly than comparable securities.

For reference, the table below shows the principal balance of Opteum’s investment securities, the net unamortized premium, amortized cost of securities held, average cost expressed as a price, the fair market value of investments and the fair market value expressed as a price for the current quarter and each of the previous nine quarters for the portfolio of MBS securities only.  The data in the table below does not include information pertaining to OFS.

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 June 30, 2006	$	3,396,909,813	$	120,867,410	$	3,517,777,223	103.558	$	3,407,288,014	100.306
At March 31,2006		3,515,112,798		111,754,082		3,626,866,880	103.179		3,538,554,210	100.667
At December 31, 2005		3,457,891,363		112,635,825		3,570,527,188	103.257		3,494,029,359	101.045
At September 30, 2005		3,797,400,645		113,392,661		3,910,793,306	102.986		3,858,319,701	101.604
At June 30, 2005		3,784,668,467		114,672,670		3,899,341,137	103.030		3,876,205,996	102.419
At March 31, 2005		3,212,516,823		109,389,703		3,321,906,527	103.405		3,299,051,561	102.694
At December 31, 2004		2,876,319,085		97,753,097		2,974,072,182	103.399		2,973,232,897	103.369
At September 30, 2004		1,589,828,988		48,498,955		1,638,327,943	103.051		1,638,264,065	103.047
At June 30, 2004		1,479,500,209		38,033,673		1,517,533,882	102.571		1,508,421,270	101.955
At March 31, 2004		1,473,583,661		39,535,014		1,513,118,676	102.683		1,516,539,744	102.915

Effect on Fair Value

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

Opteum 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. Opteum 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 shows the estimated impact on the fair value of Opteum's interest rate-sensitive investments at June 30, 2006, assuming rates instantaneously fall 100 basis points, rise 100 basis points and rise 200 basis points:

		Interest Rates Fall 100 Basis Points		Interest Rates Rise 100 Basis Points		Interest Rates Rise 200 Basis Points
Adjustable-Rate MBS
(Fair Value $2,319,096,678)
Change in fair value	$	20,555,814	$	(20,555,814)	$	(41,111,628)
Change as a percent of fair value		0.89%		(0.89)%		(1.77)%
Fixed-Rate MBS
(Fair Value $653,659,358)
Change in fair value	$	20,366,423	$	(20,366,423)	$	(40,732,847)
Change as a percent of fair value		3.12%		(3.12)%		(6.23)%
Hybrid Adjustable-Rate MBS
(Fair Value $391,045,826)
Change in fair value	$	6,406,589	$	(6,406,589)	$	(12,813,177)
Change as a percent of fair value		1.64%		(1.64)%		(3.28)%
Balloon Maturity MBS
(Fair Value $43,486,152)
Change in fair value	$	975,069	$	(975,069)	$	(1,950,138)
Change as a percent of fair value		2.24%		(2.24)%		(4.48)%
Cash
(Fair Value $71,416,035)
Portfolio Total
(Fair Value $3,407,288,014)
Change in fair value	$	48,303,895	$	(48,303,895)	$	(96,607,790)
Change as a percent of fair value		1.42%		(1.42)%		(2.84)%

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 or rise adjusted to reflect the impact of convexity.

		Interest Rates Fall 100 Basis Points		Interest Rates Rise 100 Basis Points		Interest Rates Rise 200 Basis Points
Adjustable-Rate MBS
(Fair Value $2,319,096,678)
Change in fair value	$	15,621,036	$	(25,565,555)	$	(61,140,579)
Change as a percent of fair value		0.67%		(1.10)%		(2.64)%
Fixed-Rate MBS
(Fair Value $653,659,358)
Change in fair value	$	16,594,826	$	(22,914,841)	$	(48,400,748)
Change as a percent of fair value		2.54%		(3.51)%		(7.40)%
Hybrid Adjustable-Rate MBS
(Fair Value $391,045,826)
Change in fair value	$	5,098,245	$	(7,519,098)	$	(16,944,594)
Change as a percent of fair value		1.30%		(1.92)%		(4.33)%
Balloon Maturity MBS
(Fair Value $43,486,152)
Change in fair value	$	953,549	$	(975,682)	$	(1,926,500)
Change as a percent of fair value		2.19%		(2.24)%		(4.43)%
Cash
(Fair Value $71,416,035)
Portfolio Total
(Fair Value $3,407,288,014)
Change in fair value	$	38,267,656	$	(56,975,176)	$	(128,412,421)
Change as a percent of fair value		1.12%		(1.67)%		(3.77)%

In addition to changes in interest rates, other factors impact the fair value of Opteum'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 Opteum's assets would likely differ from that shown above and such difference might be material and adverse to Opteum's stockholders.

Liabilities

In May 2005, Opteum completed a private offering of $51.5 million of trust preferred securities of Bimini Capital Trust I (“BCTI”) resulting in the issuance by Opteum of $50 million of junior subordinated notes. The interest rate payable by Opteum on the BCTI junior subordinated notes is fixed for the first five years at 7.61% and then floats at a spread of 3.30% over three-month LIBOR for the remaining 25 years. However, the BCTI junior subordinated notes and the corresponding BCTI trust preferred securities are redeemable at Opteum’s option at the end of the first five year period and at any subsequent date that Opteum chooses. In addition, in October 2005, Opteum completed a private offering of an additional $51.5 million of trust preferred securities of Bimini Capital Trust II (“BCTII”) resulting in the issuance by Opteum of an additional $50 million of junior subordinated notes. The interest rate on the BCTII junior subordinated notes and the corresponding BCTII trust preferred securities is fixed for the first five years at 7.8575% and then floats at a spread of 3.50% over three-month LIBOR for the remaining 25 years. However, the BCTII junior subordinated notes and the corresponding BCTII trust preferred securities are redeemable at Opteum’s option at the end of the first five year period and at any subsequent date that Opteum chooses. Opteum attempts to ensure that the income generated from available investment opportunities, when the use of leverage is employed for the purchase of assets, exceeds the cost of its borrowings. However, the issuance of debt at a fixed rate for any long-term period, considering the use of leverage, could create an interest rate mismatch if Opteum is not able to invest at yields that exceed the interest rates of the Company’s junior subordinated notes and other borrowings.

Opteum has entered into repurchase agreements to finance acquisitions of primarily agency and government MBS. None of the counterparties to these agreements are affiliates of Opteum. These agreements are secured by the MBS and bear interest rates that are based on a spread to LIBOR. As of June 30, 2006, Opteum had 19 master repurchase agreements with various investment banking firms and other lenders and had outstanding balances under 14 of these agreements.

At June 30, 2006, Opteum had approximately $3.3 billion outstanding under repurchase agreements with a net weighted average borrowing cost of 5.08%, $1.8 billion of which matures between two and 30 days, $0.7 billion of which matures between 31 and 90 days and $0.8 billion of which matures in more than 90 days. It is Opteum’s present intention to seek to renew these repurchase agreements as they mature under the then-applicable borrowing terms of the counterparties to our repurchase agreements. At June 30, 2006, the repurchase agreements were secured by MBS with an estimated fair value of $3.4 billion and a weighted average maturity of 311 months.

At June 30, 2006, Opteum’s repurchase agreements had the following counterparties, amounts outstanding, amounts-at-risk and weighted average remaining maturities:

Repurchase Agreement Counterparties		Amount Outstanding ($000)		Amount at Risk(1) ($000)	Weighted Average Maturity of Repurchase Obligations in Days	Percent of Total Amount Outstanding
Deutsche Bank Securities, Inc.	$	980,859		11,419	194	29.66	%
JP Morgan Securities		747,306		22,796	24	22.60
Washington Mutual		357,109		13,420	10	10.80
Nomura Securities International, Inc.		312,260		10,782	44	9.44
RBS Greenwich Capital		198,199		5,861	37	5.99
Countrywide Securities Corp		194,649		6,641	113	5.89
BNP Paribas Securities Corp		167,528		5,834	64	5.07
UBS Investment Bank, LLC		131,313		3,405	55	3.97
Goldman Sachs		103,786		3,522	35	3.14
Merrill Lynch		53,952		1,481	3	1.63
Bear Stearns & Co. Inc.		22,399		1,462	7	0.68
Daiwa Securities America Inc.		19,732		(255)	7	0.60
Lehman Brothers		9,155		310	31	0.28
Cantor Fitzgerald		8,640		386	6	0.25
HSBC Securities (USA) Inc		0		483	0	0.00
Total	$	3,306,887		87,547		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.

Equity

 

Accumulated other comprehensive loss, as reflected in stockholders’ equity, increased approximately $34.0 million from December 31, 2005, to June 30, 2006.  This is reflective of an overall decline in the fair value of Opteum’s portfolio as compared to the original aggregate purchase price of the investments.  Changes in interest rates over time are the primary market factor for this value decline; generally, as interest rates rise, the value of long-term interest rate sensitive securities decline. The value of the majority of Opteum’s assets is driven by movements in short-term rates—rates typically inside two years and these rates increased substantially over the period. Additionally, as longer term rates decreased, prepayment expectations increased resulting in a widening in the spreads at which Opteum’s assets are priced.

 

The Company has negative retained earnings (titled “accumulated deficit” in the stockholders’ equity section of the accompanying consolidated financial statements) at June 30, 2006, partially because of the consequences of Opteum’s tax qualification as a REIT.  As is more fully described in the section titled “Future Taxable Income Distributions,” Opteum’s dividends are based on its net taxable income, as determined for federal income tax purposes and not on its net income computed in accordance with GAAP (as reported in the accompanying consolidated financial statements).  Taxable net income is computed differently from Opteum’s financial statement net income 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 computed in accordance with GAAP can be substantial and each item can affect several years. Opteum's most significant items and transactions currently being accounted for differently include restricted stock awards, depreciation of property and equipment and debt issuance costs.

For the six months ended June 30, 2006, Opteum's taxable net income was approximately $0.8 million greater than Opteum's financial statement net income. Substantially all of this amount is attributable to the phantom stock awards. The future deduction of this temporary difference 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 an award) 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 June 30, 2006, Opteum's taxable net income is approximately $3.7 million greater than Opteum's financial statement net income as reported in its financial statements.

Therefore, to the extent that Opteum’s cumulative net taxable income is greater than cumulative financial statement income and Opteum continues to pay out as dividends all of its net taxable income, the Company will report a deficit in retained earnings on its balance sheet.

REIT taxable net income is calculated according to the requirements of the Internal Revenue Code rather than GAAP. For the year ending December 31, 2006, we intend to distribute at least 90% of our REIT taxable net income in order to retain our tax qualification status as a REIT. The following table reconciles GAAP net income to REIT taxable net income for the six and three months ended June 30, 2006:

		Six Months ended June 30, 2006		Three months ended June 30, 2006
GAAP net loss	$	(8,776,004)	$	(3,688,880)
Plus: GAAP net loss of taxable REIT subsidiary included above		15,357,749		11,211,895
GAAP net income from REIT operations		6,581,745		7,523,015
Add: inter-company interest paid on loans		4,048,871		2,216,542
Add: estimated book depreciation and amortization		174,690		87,345
Less: estimated tax depreciation and amortization		(171,826)		(85,913)
Phantom share book/tax differences, net		604,327		266,033
Other book/tax differences, net		(44,666)		(21,239)
REIT Taxable Net Income	$	11,193,141	$	9,985,783

We believe that the foregoing reconciliation of our REIT taxable net income is useful to investors because REIT taxable net income is directly related to the amount of dividends we are required to distribute in order to maintain our REIT tax qualification status. However, because REIT taxable net income is an incomplete measure of our financial performance and involves differences from net income computed in accordance with GAAP, our REIT taxable net income should be considered as supplementary to, and not as a substitute for, our net income computed in accordance with GAAP as a measure of our financial performance.

Results of Operations

The table below shows Opteum’s average investments held, total interest income, yield on average earning assets, average repurchase obligations outstanding, interest expense, average cost of funds, net interest income and net interest spread for the quarter ended June 30, 2006, and the nine previous quarters for Opteum’s portfolio of MBS securities only.  The data in the table below does not include information pertaining to OFS’ results of operations.

RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED

Quarter Ended		Average Investment Securities Held		Total Interest Income	Yield on Average Interest Earning Assets		Average Balance of Repurchase Obligations Outstanding		Interest Expense	Average Cost of Funds		Net Interest Income	Net Interest Spread
June 30, 2006	$	3,472,921,112	$	56,745,891	6.536%	$	3,360,421,038	$	42,829,452	5.098%	$	13,916,439	1.438%
March 31, 2006		3,516,291,784		42,219,327	4.803%		3,375,776,594		37,660,857	4.462%		4,558,470	0.340%
December 31, 2005		3,676,174,530		43,139,911	4.694 %		3,533,486,002		35,912,966	4.065 %		7,226,945	0.629 %
September 30, 2005		3,867,262,849		43,574,308	4.507 %		3,723,603,116		33,101,847	3.556 %		10,472,461	0.951 %
June 30, 2005		3,587,628,779		36,748,640	4.097 %		3,449,743,973		26,703,422	3.096 %		10,045,218	1.001 %
March 31, 2005		3,136,142,229		31,069,934	3.963 %		2,976,409,157		19,841,710	2.667 %		11,228,224	1.296 %
December 31, 2004		2,305,748,481		20,463,071	3.550 %		2,159,890,886		10,824,164	2.005 %		9,638,907	1.545 %
September 30, 2004		1,573,342,668		11,017,346	2.801 %		1,504,919,407		4,253,337	1.131 %		6,764,009	1.670 %
June 30, 2004		1,512,480,507		10,959,098	2.898 %		1,452,004,000		4,344,012	1.197 %		6,615,086	1.702 %
March 31, 2004		871,140,453		7,194,033	3.303 %		815,814,500		2,736,434	1.342 %		4,457,599	1.962 %

As indicated in the table above, Net Interest Spread expanded substantially in the current quarter. The table below decomposes Total Interest Income by quarter. Interest income recorded for the quarter is impacted by adjustments that are made using the retrospective method to the effective interest computation. For each reporting period, the retrospective adjustment is based on the actual prepayment experiences to date and the present expectation of future prepayments of the underlying mortgages. The adjustment is also based on the realized index values underlying adjustable-rate MBS versus projected index values at the time of purchase. For the current quarter, the retrospective adjustment was quite large relative to interest income earned on the portfolio for the quarter. This is due to the combination of the cumulative nature of the adjustment and the magnitude of the movement in rates for the quarter. The adjustment was further impacted by the composition of the portfolio which is approximately 68.1% adjustable-rate MBS securities whose coupons reset within the next 12 months. In the case of such adjustable-rate securities, income going forward is established through application of the effective interest computation employing the ARM’s underlying index value in effect at the time of purchase and assuming that index value is constant going forward. During periods of rising interest rates as have occurred over the last two years, the values for such indices have been increasing above those in effect at the time of purchase. Such increases in the value of the index underlying ARM MBS are captured by the retrospective adjustment since coupon cash flows subsequent to purchase exceed those anticipated when the effective interest computation was made.

RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED

Quarter Ended	Total Interest Income	Yield on Average Interest Earning Assets	Quarterly Retrospective Adjustment	Expressed as a Yield on Average Interest Earning Assets	Interest Income from Investment Securities Held, Cash and Other	Expressed as a Yield on Average Interest Earning Assets
At June 30, 2006	$ 56,745,891	6.536%	$ 14,702,330	1.693%	$ 42,043,561	4.842%
At March 31,2006	42,219,327	4.803%	2,524,824	0.287%	39,694,503	4.515%
At December 31, 2005	43,139,911	4.694%	3,248,812	0.353%	39,891,099	4.341%
At September 30, 2005	43,574,308	4.507%	4,347,892	0.450%	39,226,416	4.057%
At June 30, 2005	36,748,640	4.097%	2,413,146	0.269%	34,335,494	3.828%
At March 31, 2005	31,069,934	3.963%	1,012,711	0.129%	30,057,223	3.834%
At December 31, 2004	20,463,071	3.550%	1,250,031	0.217%	19,213,040	3.333%
At September 30, 2004	11,017,346	2.801%	-	0.000%	11,017,346	2.801%
At June 30, 2004	10,959,098	2.898%	-	0.000%	10,959,098	2.898%
At March 31, 2004	7,194,033	3.303%	-	0.000%	7,194,033	3.303%

The acquisition of OFS in the fourth quarter of 2005 substantially impacted revenues earned and expenses incurred making the comparison of Opteum’s results for the six and three months ended June 30, 2006 to the comparable prior periods difficult.

Consolidated net loss for the six and three months ended June 30, 2006, was ($8.8) million and ($3.7) million, respectively, compared to $19.1 million and $8.2 million of net income for the six and three months ended June 30, 2005. Consolidated net loss per diluted share of Class A Common Stock was ($0.37) and ($0.15) in the six and three months ended June 30, 2006, respectively, compared to $0.90 and $0.39 of per share income, respectively, for the comparable prior periods. For the six and three months ended June 30, 2006, Opteum had consolidated interest income of $136.0 million and $75.3 million, respectively, and consolidated interest expense of $116.7 million and $60.5 million, respectively.

The Company earned $19.3 million and $14.8 million of consolidated net interest income for the six and three months ended June 30, 2006, and $21.3 million and $10.3 million of net interest income for the six and three months ended June 30, 2005, respectively. These figures are not reflected as annualized net yields on invested assets as was previously reported since the figures represent blended net interest earnings on both the portfolio of MBS and the mortgage loans held for sale by OFS.

Borrowing rates increased during the six and three months ended June 30, 2006, faster than the yields on Opteum’s current portfolio. This was driven by actions by the Federal Reserve and their resulting impact on various market interest rates, especially short-term rates. These actions are the primarily cause for the erosion of net interest spread earned on Opteum’s portfolio of MBS over Opteum’s repurchase agreement funding costs.  The increase in short-term rates also had a negative impact on the net interest spread earned by OFS on their mortgage loans held for sale over funding costs associated with their warehouse lines of credit used to fund mortgage loan originations.

At June 30, 2006, OFS owned $756.8 million of mortgage loans which were classified as mortgage loans held for sale. Gains realized on the sale of mortgage loans held for sale for the six and three months ended June 30, 2006, were $22.4 million and $11.1 million, respectively. Opteum had no such gains for the six and three months ended June 30, 2005, as those periods predate the acquisition of OFS by Opteum.

Gains on the sale of mortgage loans held for sale are reported net of changes in the fair value of retained interests in securitizations. Net of changes in fair value of retained interests in securitizations, OFS had losses from sales of mortgages held for sale of $2.1 million and $9.1 million for the six and three months ended June 30, 2006, respectively.

The retained interests in securitizations contain loans originated or purchased by OFS prior to securitization. These retained interests are classified on the accompanying consolidated balance sheet as Retained Interest, Trading. The total fair market value of these retained interests was approximately $88.4 million as of June 30, 2006. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve), the discount rate used to determine the present value of the residual cash flows and prepayment and loss estimates on the underlying mortgage loans. Due to adverse movements in interest rates, particularly forward LIBOR rates, the market value of the retained interests declined by $24.5 million and $20.2 million, respectively, for the six and three months ended June 30, 2006. It is the intention of management to hedge these retained interests so as to protect earnings from an unexpected change due to a decline in value of the retained interests. However, movements in the variables that affect the value of the retained interests, in particular forward LIBOR rates and prepayment estimates, also affect retrospective adjustments to the effective interest computation of the Opteum MBS portfolio and the value of the Company’s mortgage servicing assets or MSRs. Movements in these two variables have the opposite effect on the value of the retained interests and the retrospective adjustment to the effective interest computation of the Opteum MBS portfolio and the MSRs. Since movements in these two variables affect reported earnings in an offsetting fashion, they tend to naturally hedge the Company’s earnings when taken as a whole. Accordingly, management takes this fact into consideration when constructing and implementing its hedging strategy.

Changes in the fair value of retained interests described above are net of the results of any hedge transactions. The results above reflect net losses of $0.1 million and $0.1 million, respectively, on hedging transactions for the six and three months ended June 30, 2006, respectively. The results of the Company’s hedging strategies may have differed had the decline in value not been so materially driven by movements in forward LIBOR rates and had such movements not occurred so early in the quarter. The results of the hedge strategies were highly negatively correlated to the proportional mark to market changes in the retained interest positions, but were not in place for the full quarter. Hedge results also reflect the fact that movements in the other three variables that affect retained interest fair value moved in a favorable direction, offsetting the adverse movement in forward rates to some extent.

The table below provides the details of OFS’s gain/(loss) on the sale of mortgage loans held for sale for the six and three months ended June 30, 2006 and June 30, 2005.

Gains on Sales of Mortgage Assets and Losses on Derivative Instruments

(in thousands)

		For the Six months Ending June 30, 2006	For the Six months Ending June 30, 2005	For the Three months Ending June 30, 2006	For the Three months Ending June 30, 2005
Fair Value adjustment of retained interests, trading	$	(24,472)	N/A	(20,246)	N/A
Gain on Sales		45,487	N/A	24,658	N/A
Fees on brokered loans		3,135	N/A	1,586	N/A
Gain/(loss) on derivatives		2,521	N/A	(881)	N/A
Direct loan origination expenses, deferred		689	N/A	(549)	N/A
Fees earned, brokering servicing		1,306	N/A	535	N/A
Write off purchased pipeline (Purchase Accounting Adjustment)		(534)	N/A	-	N/A
		28,132	N/A	5,103	N/A
Direct loan origination expenses, reclassified		(30,204)	N/A	(14,252)	N/A
Net gain/(loss) on sale of mortgage loans	$	(2,072)	N/A	(9,149)	N/A

OFS held originated MSRs on approximately $8.4 billion in mortgages with a fair market value of approximately $96.6 million as of June 30, 2006. For the six months and three months ended June 30, 2006, OFS had net servicing income of $1.8 million and $3.6 million, respectively. The results for the six month period were impacted by negative fair value adjustments to the MSRs in the first quarter as a result of the Company’s early adoption of SFAS 156 on January 1, 2006. For the six and three months ended June 30, 2006, the net fair value adjustments to the MSRs were a decrease of ($10.8) million and ($2.8) million, respectively. In turn, the net fair value adjustments for the six and three months ended June 30, 2006, reflect declines in fair value due to run-off of $10.4 million and $4.9 million and adjustments due to (decreases)/increases in fair value of ($0.4) million and $2.1 million, respectively.

Opteum did not sell any MBS from the investment portfolio during the six months and three months ended June 30, 2006. For the six and three month periods ended June 30, 2005, Opteum reported $2.0 million and $0.0 million, respectively, in gains from sale of MBS.

For the six months and three months ended June 30, 2006, consolidated general and administrative costs at the Company were $42.9 million and $22.8 million, respectively. Operating expenses, which incorporate trading costs, commissions and other direct costs, were $0.5 million and $0.2 million for the six months and three months ended June 30, 2006, respectively.

For the six and three months ended June 30, 2006, comprehensive income (loss) was ($42.8) million including the net unrealized loss on the available-for-sale securities of ($34.0) million and ($25.9) million including the net unrealized loss on available-for sale securities of ($22.2) million, respectively. For the six and three months ended June 30, 2005, comprehensive income (loss) was ($2.8) million including the net unrealized loss on the available-for-sale securities of ($20.0) million and $7.8 million including the net unrealized loss on available-for-sale securities of ($0.5) million, respectively. The factors resulting in the unrealized loss on available-for-sale securities are described above.

Comprehensive (loss) income is as follows: 

		Six Months Ended June 30,			Three Months Ended June 30,
		2006		2005	2006		2005
Net (loss) income	$	(8,776,004)	$	19,126,238	$ (3,688,868)	$	8,218,399
Realized gain on available-for-sale securities, net		-		(1,982,382)	-		-
Unrealized loss on available-for-sale securities, net		(33,991,361)		(19,993,799)	(22,176,263)		(454,738)
Comprehensive (loss) income	$	(42,767,365)	$	(2,849,943)	$ (25,865,131)	$	7,763,661

Future Taxable Income Distributions

In future periods, Opteum’s REIT 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 Internal Revenue 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 accompanying 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% of its net taxable income by the end of the calendar year. Opteum's most significant item currently being accounted for differently are restricted stock awards.

OFS is treated as a taxable REIT subsidiary or TRS of Opteum. OFS is subject to corporate income taxes and files separate federal and state income tax returns. OFS had interest rate lock commitments (“IRLCs”), along with other instruments that are hedges for both these IRLCs and mortgage loans held for sale, and both are considered derivatives. The changes to the fair value of these 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 derivatives was a gain of approximately $2.5 million as of June 30, 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 June 30, 2006, consisted of repurchase agreements totaling $3.3 billion, with a net weighted average borrowing cost of 5.08%. Opteum expects to continue to finance it acquisitions of MBS using repurchase agreements. At June 30, 2006, Opteum had master repurchase agreements in place with 19 counterparties and had outstanding balances under 14 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 counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can take place but may involve a fee which would be paid by Opteum. As of June 30, 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 investment portfolio of MBS, which could limit Opteum’s borrowing ability or cause Opteum’s lenders to initiate margin calls.

During 2005 and the six months ended June 30, 2006, Opteum entered into contracts and paid commitment fees to three counterparties providing for an aggregate of $1.7 billion in committed repurchase agreement facilities 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 agreement facilities. Two of these facilities will be eligible for renewal at some point during the balance of 2006 and one will be eligible for renewal in 2007. It is the Company’s intention to renew these facilities. However, market conditions could change making the renewal of these contractual arrangements more expensive or unattainable. In addition, two of the agreements described above are available to provide financing for up to $150 million to cover margin requirements associated with monthly principal payments on the MBS portfolio. During the quarter ended June 30, 2006, $50 million of the $150 million aggregate financing available for such purposes was put in place with one counterparty.

In addition, in order to facilitate the origination of mortgage loans, OFS had warehouse lines and aggregation lines of credit outstanding of approximately $309.6 million at June 30, 2006. OFS also had approximately $104.8 million outstanding on other lines of credit that are secured by the retained interests and the originated MSRs with various lenders. The rates on these borrowings generally are based on a spread to LIBOR. During the quarter ended June 30, 2006, OFS entered into a new agreement with JP Morgan Chase that increased the borrowing capacity of the line it replaced by $633 million.

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 retained interests in mortgage securitizations as well as receive funds from originated MSRs 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 its assets. The loans are transferred to a trust where they serve as collateral for asset-backed bonds, which the trust primarily issues to the public. During the second quarter of 2006, OFS executed one securitization collateralized by $491.6 million of loans. In addition, OFS held approximately $88.4 million of retained interests from securitizations as of June 30, 2006. OFS’ ability to access the capital markets via the use of securitizations is critical to the operations and overall profitability of the business.

External factors that are reasonably likely to affect OFS’ ability to continue to complete securitizations 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 was unable to access the securitization market, OFS may still be able to finance its 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’ ability to use the securitizations to finance OFS’ specific 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’ collateral. OFS’ financial condition could also have an adverse impact on its ability to access the securitization market if there was the perception that its financial condition had deteriorated to the point where investors would question OFS’ ability to stand behind its representations and warranties made in connection with its securitizations even though Opteum has guaranteed the performance of OFS’ representation and warranties. It is too early to evaluate the impact of the underlying collateral’s performance attributable to the financial performance and condition of the past securitizations of OFS. 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 June 30, 2006, OFS had outstanding commitments to originate loans of approximately $341.9 million. As of June 30, 2006, OFS had outstanding commitments to sell loans of approximately $138.0 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes to the Company’s exposure to market risk since December 31, 2005. The information set forth under Item 7A - Quantitative and Qualitative Disclosures About Market Risk in the Company’s amended Annual Report on Form 10-K/A for the period ended December 31, 2005, is incorporated herein by reference.

ITEM 4. 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-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.

As of the end 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 were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION.

ITEM 1. LEGAL PROCEEDINGS.

The Company is involved in various lawsuits and claims, both actual and potential, including some that it has asserted against others, in which monetary and other damages are sought. These lawsuits and claims relate primarily to contractual disputes arising out of the ordinary course of the Company’s business. The outcome of such lawsuits and claims is inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving the Company will not have a material effect on the Company’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

 

ITEM 1A. RISK FACTORS.

During the period covered by this report, there were no material changes from the risk factors previously disclosed under Item 1A - Risk Factors in the Company’s amended Annual Report on Form 10-K/A for the period December 31, 2005. The information set forth under Item 1A - Risk Factors in the Company’s amended Annual Report on Form 10-K/A for the period ended December 31, 2005, is incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The information set forth under Part II - Item 4 - Submission of Matters to a Vote of Security Holders in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2006, is incorporated herein by reference.

ITEM 6. EXHIBITS.

2.1	Agreement and Plan of Merger, incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, dated September 29, 2005, filed with the SEC on September 30, 2005
3.1	Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
3.2	Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4	Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
4.1	Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q for the period ended March 31, 2006, filed with the SEC on May 8, 2006.
10.1	2003 Long-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.2 to the Company’s Form S-11/A, effective as of March 31, 2004, filed with the SEC on May 26, 2004
10.2	Employment Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.3 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.3	Employment Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.4 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.4	Employment Agreement between Opteum Financial Services, LLC and Peter R. Norden, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K, dated September 29, 2005, filed with the SEC on March 10, 2006
10.5	Letter 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 Exhibit 10.5 to the Company’s Form S-11/A, filed with the SEC on May 26, 2004
10.6	Agency Agreement, dated November 20, 2003 between AVM, L.P. and Bimini Mortgage Management, Inc., incorporated by reference to Exhibit 10.6 to the Company’s Form S-11/A, dated November 20, 2003, filed with the SEC on May 26, 2004
10.7	2004 Performance Bonus Plan, incorporated by reference to Exhibit 10.7 to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.8	Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.8 to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.9	Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.9 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 Exhibit 99(D) to the Company’s Schedule 13D, dated November 3, 2005, filed with the SEC on November 14, 2005
*31.1	Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2	Certification of the 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.

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Signatures

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.

	OPTEUM INC.
Date: August 7, 2006	By:	/s/ Robert E. Cauley Robert E. Cauley Chief Financial Officer, Chief Investment Officer and Secretary

 

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Exhibit Index

Exhibit No.

2.1	Agreement and Plan of Merger, incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, dated September 29, 2005, filed with the SEC on September 30, 2005
3.1	Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
3.2	Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4	Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
4.1	Specimen Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q for the period ended March 31, 2006, filed with the SEC on May 8, 2006.
10.1	2003 Long-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.2 to the Company’s Form S-11/A, effective as of March 31, 2004, filed with the SEC on May 26, 2004
10.2	Employment Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.3 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.3	Employment Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.4 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
10.4	Employment Agreement between Opteum Financial Services, LLC and Peter R. Norden, incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K, dated September 29, 2005, filed with the SEC on March 10, 2006
10.5	Letter 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 Exhibit 10.5 to the Company’s Form S-11/A, filed with the SEC on May 26, 2004
10.6	Agency Agreement, dated November 20, 2003 between AVM, L.P. and Bimini Mortgage Management, Inc., incorporated by reference to Exhibit 10.6 to the Company’s Form S-11/A, dated November 20, 2003, filed with the SEC on May 26, 2004
10.7	2004 Performance Bonus Plan, incorporated by reference to Exhibit 10.7 to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.8	Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.8 to the Company’s Form S-11/A, dated August 13, 2004, filed with the SEC on August 25, 2004
10.9	Phantom Share Award Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.9 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 Exhibit 99(D) to the Company’s Schedule 13D, dated November 3, 2005, filed with the SEC on November 14, 2005
*31.1	Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2	Certification of the 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.