What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 197 added, 170 removed, 714 unchanged (34% of the section changed)

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and its subsidiaries unless the context requires otherwise.

Unless otherwise indicated, the term “Angel Oak” refers collectively to Angel Oak Capital Advisors, LLC (“Angel Oak Capital”) and its affiliates, including Falcons I, LLC, our external manager (our “Manager”), Angel Oak Companies, LP (“Angel Oak Companies”), and the proprietary mortgage lending platform of affiliates, Angel Oak Mortgage Solutions LLC and Angel Oak Home Loans LLC (together, “Angel Oak Mortgage Lending”).

Unless otherwise indicated, the term “Angel Oak” refers collectively to Angel Oak Capital Advisors, LLC (“Angel Oak Capital”) and its affiliates, including Falcons I, LLC, our external manager (our “Manager”), Angel Oak Companies, LP (“Angel Oak Companies”), and the proprietary mortgage lending platform of its affiliate, Angel Oak Mortgage Solutions LLC (together with other non-operational affiliated originators, “Angel Oak Mortgage Lending”).

Cautionary Note Regarding Forward-Looking Statements

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mortgage market.

Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending, which currently operates primarily through a wholesale channel operated by Angel Oak Mortgage Solutions, LLC and has a national origination footprint.

We also may invest in other residential mortgage loans, RMBS, and other mortgage-related assets, which, collectively with non-QM loans, we refer to as our target assets.

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We are externally managed and advised by our Manager, Falcons I, LLC, a registered investment adviser under the Investment Advisers Act of 1940 and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of June 30, 2023, had originated over $17.8 billion in total non‑QM loan volume since its inception in 2011.

Angel Oak is headquartered in Atlanta and has over 300 employees across its enterprise.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of September 30, 2023, had originated over $18.2 billion in total non‑QM loan volume since its inception in 2011.

Through our relationship with our Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders.

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Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986 (the “Code”).

Our qualification as a REIT, and maintenance of such qualification, depends on our ability to meet, on a continuing basis,

various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels, and the concentration of ownership of our stock.

We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

Our qualification as a REIT, and maintenance of such qualification, depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels, and the concentration of ownership of our stock.

We also intend to operate our business in a manner that

will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

Our common stock commenced trading on the New York Stock Exchange on June 17, 2021.

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Overall macroeconomic environment and its effect on us

Economic uncertainty and the Federal Reserve Bank’s attempts to tame inflation while balancing unemployment and recession risk again dominated headlines during the second quarter of 2023.

Employment data remained strong throughout the quarter, contradicting many analyst’s expectations of an impending recessionary environment brought on by the Fed’s aggressive rate hike cycle of the past 18 months.

Though the Fed “skipped” a rate movement in its June 2023 meeting, it resumed the rate increase cycle in July, raising the federal funds rate by 25 basis points.

As the federal funds rate continues to tick upward, inflation and unemployment concerns become more prevalent as the Fed attempts a “soft landing”.

Thus far in 2023, the Fed has raised the federal funds rate by 100 basis points, bringing the current federal funds rate to 5.25% - 5.50%.

An increase in the federal funds rate and a more restrictive lending environment generally has the effect of raising borrowing rates for all types of consumer credit, including mortgages, as relatively high interest rates generally suppress mortgage origination and refinancing activity.

While the average 30-year fixed mortgage rate as of June 30, 2023 of approximately 6.7% is not historically high, American borrowers had acclimated to historically low rates over the prior decade, decreasing their appetite for elevated interest rates, which, combined with “sticky” high home prices, may continue to challenge many borrowers.

As high inflation demonstrated continued stubbornness in the second quarter, the two-year and five-year Treasury yields increased by approximately 82 basis points and 52 basis points, respectively, driving a negative mark-to-market impact to the value of our portfolio.

Additionally, securitizations backed by lower-coupon loans continue to be penalized by continued wide spreads.

As such, we observed a decrease of approximately 100 - 125 basis points in the weighted average price of our residential whole loans and loans in securitization trusts portfolios during the second quarter.

However, we have begun purchasing newly originated non-QM loans at current market rates, which, combined with the impact of the AOMT 2023-4 securitization, improved the weighted average coupon rate of our residential whole loan portfolio by over 20basis points to 4.84%.

We expect to continue to purchase newly originated loans, which should have the effect of improving portfolio valuations and securitization execution.

Investors maintained a close watch on key inflation, employment, and housing data during the third quarter of 2023 while the Federal Reserve Bank (“Fed”) continued to work toward a potential “soft landing” following cumulative federal funds rate increases of 5.25% since March of 2022.

The Fed increased the federal funds rate by 25 basis points in July 2023 before skipping a rate increase at its September 2023 meeting;

despite this skip, the Fed signaled that rates are likely to stay at this level for longer, which drove an increase in medium-term and long-term treasury yields.

With that said, interest rate and spread volatility has generally lessened as we have progressed through 2023.

For now, the Fed and investors alike continue to monitor economic data for consistent and/or sustained signs that suggest federal funds rate movements in either direction.

Commensurate with federal funds rate increases, residential mortgage rates have increased to nearly 8% for a 30 year-fixed mortgage, marking their highest level since 2002.

Two years ago, the average 30-year fixed residential mortgage rate was roughly 3%.

Though current mortgage rates are below average rates in the decades leading up to 2002, suppressed home sales activity suggests that borrowers are still in the process of acclimating to the accelerated increase in rates.

The two-year and five-year Treasury yields experienced modest increases of approximately 17 basis points and 47 basis points, respectively, during the third quarter.

However, spreads were more stable in line with the aforementioned reductions in volatility, which mitigated the overall mark-to-market impact on the value of our portfolio.

These movements drove a net decrease of approximately 123 basis points in the weighted average price of our residential whole loans portfolio during the third quarter (excluding newly-originated loans purchased during the quarter).

Additionally, we have increased the weighted average coupon of our residential whole loans portfolio by 99 basis points since the end of the second quarter to 5.83% as of the third quarter of 2023.

Since the quarter ended September 30, 2023, additional loan purchases and purchase commitments have increased the weighted average coupon of our residential whole loans portfolio by an additional 54 basis points to 6.37% as of November 6,2023.

We expect to continue to purchase newly originated loans, which should continue to improve portfolio valuations and securitization execution.

Our investment performance

Net Interest Margin (“NIM”).

We held fewer target assets in the first six months of 2023 as compared to the comparable period of 2022, thereby generating less interest income.

We held fewer target assets in the first nine months of 2023 as compared to the comparable period of 2022, thereby generating less interest income.

Though our borrowings decreased as well, higher variable interest rates caused our interest expense to increase.

Net realized loss .

Our net realized loss for the six months ended June 30, 2023 was primarily due to a realized loss on the sale of whole loans into the AOMT 2023-1 securitization during the first quarter of 2023.

As this securitization did not result in consolidation of the AOMT 2023-1 VIE entity, unlike our other post-initial public offering (“IPO”) securitizations, we recognized a loss on the sale of these loans;

however, the realized loss was less than the previous period’s unrealized loss for these loans, which drove overall positive economics for the securitization.

Additionally, our net realized gains on the economic hedges of our interest rate futures and TBAs were lower in the first six months of 2023 as compared to the first six months of 2022, as the magnitude of the impact from rate and spread movement has been lower in 2023 than it was in 2022.

Our net realized loss for the nine months ended September 30, 2023 was primarily due to realized losses on the sale of whole loans into the AOMT 2023-1 and AOMT 2023-5 securitizations during the first and third quarter of 2023, respectively.

Because these securitizations did not result in the consolidation of VIE entities, we recognized a loss on the sale of these loans;

however, the realized loss was less than the previous period’s unrealized loss for these loans, which drove overall positive economics for the securitizations.

Additionally, our net realized gains on the economic hedges of our interest rate futures and TBAs were lower in the first nine months of 2023 as compared to the first nine months of 2022, as the magnitude of the impact from rate and spread m

ovement has been lower in 2023 than it was in 2022.

Net unrealized gain .

Our net unrealized gain in the first six months of 2023 was primarily due to the reversal of the unrealized loss (and thereby the recognition of net realized loss discussed above) on the sale of residential mortgage loans into the AOMT 2023-1 securitization during the first quarter of 2023.

Our net unrealized gain in the first nine months of 2023 was primarily due to the reversal of the unrealized loss (and thereby the recognition of net realized loss discussed above) on the sale of residential mortgage loans into the AOMT 2023-1 and AOMT 2023-5 securitizations, offset by unrealized losses associated with valuations of securitized loans and whole pool loans.

The comparable period of 2022 saw unrealized losses related to valuation of residential and securitized loans.

Whole loans and securitization activity

During the three month period ended June 30, 2023, we purchased $11.7 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 8.25 %, weighted average loan-to-value of 72.11% and weighted average credit score of 748.

During the three month period ended September 30, 2023, we purchased $78.1 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 8.34%, weighted average loan-to-value of 71.65% and weighted average credit score of 753.

In January 2023, we participated in AOMT 2023-1, an approximately $580 million scheduled principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid balance of approximately $241.3 million.

On June 29, 2023, we issued AOMT 2023-4, securitizing a total of approximately $285 million on unpaid principal balance of seasoned non-QM Mortgage loans.

Unlike AOMT 2023-1, we issued AOMT 2023-4 as the sole participant in the securitization.

We own and hold the call rights on the XS tranche of bonds, which is the "controlling class" of the bonds, and are the sole member of the Depositor

entity in the 2023-4 securitization.

On August 22, 2023, we participated in AOMT 2023-5, an approximately $260.6 million scheduled

principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled principal balance of approximately $93.8 million.

We issued AOMT 2023-4 as the sole participant in the securitization.

We own and hold the call rights on the XS tranche of bonds, which is the "controlling class" of the bonds, and are the sole member of the Depositor entity in the 2023-4 securitization.

Given the accounting rules surrounding these types of transactions, we have consolidated the AOMT 2023-4 securitization, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of the applicable balance sheet date.

Similar to AOMT 2023-1, our securitizations prior to 2021 were securitization transactions entered into with other Angel Oak affiliates, for which we did not meet the accounting rules to be considered a "primary beneficiary" of the applicable securitization vehicle, and therefore, for these securitizations, including AOMT 2023-1, the bonds retained in the securitization are held on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2021 and we may strategically enter into similar securitization transactions in the future.

AOMT 2023-1 and AOMT 2023-5 were securitization transactions entered into with other Angel Oak affiliates, for which we are not considered to be a "primary beneficiary" of the applicable securitization vehicle.

Therefore, the bonds retained from these securitizations, as well as from our securitizations prior to 2021, are held on our condensed consolidated balance sheets as of September 30, 2023 and December 31, 2021.

We may strategically enter into similar securitization transactions in the future.

Whole loan financing facilities activity

We continuously evaluate our lender base and may enter into new agreements and / or exit agreements as we deem prudent, in accordance with our core financial strategy of purchasing whole loans and financing them until securitized.

Our whole loan financing activity during the six months ended June 30, 2023 maintained our lender base as of December 31, 2022, with the exception of the expiration of an unused line of credit with a regional bank in the first quarter of 2023 and the repayment of Institutional Investors A and B in the first quarter of 2023.

Subsequent to June 30, 2023, the Company renewed its loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods as provided for in the original Master Repurchase Agreement with Multinational Bank 1, dated April 13, 2022.

This loan financing facility has been extended to January 25, 2024 and the interest rate pricing spread decreased to 2.10%.

Our whole loan financing activity during the nine months ended September 30, 2023 maintained our lender base as of December 31, 2022, with the exception of the expiration of an unused line of credit with a regional bank in the first quarter of 2023 and the repayment of Institutional Investors A and B in the first quarter of 2023.

This loan financing facility has been extended to January 25, 2024 and as of July 25, 2023, the interest rate pricing spread decreased to 2.10%.

Additionally, subsequent to September 30, 2023, the Company converted its loan financing facility with Global Investment Bank 3 from static pool financing to a revolving facility with mark to market features.

The interest rate spread on this facility decreased to 2.00% and the economic interest rate hedging account requirement was eliminated.

The advance rate for performing non-seasoned loans to 85%.

Key Financial Metrics

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For information on the fees that are payable to our Manager under the Management Agreement, see “Note 11 – Related Party Transactions” in our unaudited condensed consolidated financial statements included in this report.

The table below sets forth a reconciliation of net income (loss) allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the three and six months ended June 30, 2023 and 2022:

Three Months Ended Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Three Months Ended Nine Months Ended

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

(in thousands)

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Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs.

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and six months ended June 30, 2023 and 2022:

Three Months Ended Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended Nine Months Ended

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

(in thousands)

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Book Value per Share of Common Stock

The following table sets forth the calculation of our book value per share of common stock as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

The following table sets forth the calculation of our book value per share of common stock as of September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

(in thousands except for share and per share data)

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These adjustments are also reflected in the table below in our end of period total stockholders’ equity.

Management considers economic book value to provide investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for our legally held retained bonds, irrespective of the accounting model applied for GAAP reporting purposes.

Economic book value does not represent and should not be

considered as a substitute for book value per share of common stock or stockholders’ equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table sets forth a reconciliation from GAAP total stockholders’ equity and book value per share of common stock to economic book value and economic book value per share of common stock as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

Management considers economic book value to provide investors with a useful

supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for our legally held retained bonds, irrespective of the accounting model applied for GAAP reporting purposes.

Economic book value does not represent and should not be considered as a substitute for book value per share of common stock or stockholders’ equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

September 30, 2023 December 31, 2022

(in thousands except for share and per share data)

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Results of Operations

Three Months Ended June 30, 2023 and 2022

The following table sets forth a summary of our results of operations for the three months ended June 30, 2023 and 2022:

Three Months Ended September 30, 2023 and 2022

The following table sets forth a summary of our results of operations for the three months ended September 30, 2023 and 2022:

Three Months Ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

(in thousands)

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Net Interest Income

The following table sets forth the components of net interest income for the three months ended June 30, 2023 and 2022:

The following table sets forth the components of net interest income for the three months ended September 30, 2023 and 2022:

Three Months Ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

(in thousands)

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Net interest income $ 7,410 $ 11,740

Net interest income for the three months ended June 30, 2023 and 2022 was $6.5 million and $16.4 million, respectively.

Net interest income decreased in the three months ended June 30, 2023 as compared to the same period in 2022, primarily due to the composition of the portfolio during June 30, 2023 having a lower average balance of residential mortgage loans and RMBS, which resulted in decreased interest income from these asset classes, partially offset by interest income generated from residential mortgage loans in securitization trusts.

Meanwhile, interest expense on notes payable increased due to an increase in the associated floating interest rates on our debt in the three months ended June 30, 2023 as compared to the same period in 2022, which resulted in an increased interest expense on lower interest income during the three months ended June 30, 2023 as compared to the comparative period.

Net interest income for the three months ended September 30, 2023 and 2022 was $7.4 million and $11.7 million, respectively.

Net interest income decreased in the three months ended September 30, 2023 as compared to the same period in 2022, primarily due to the composition of the portfolio during September 30, 2023 having a lower average balance of residential mortgage loans and RMBS, which resulted in decreased interest income from these asset classes, partially offset by interest income generated from residential mortgage loans in securitization trusts.

Meanwhile, interest expense decreased in the three months ended September 30, 2023 as compared to the same period in 2022 due to a lower average balance of notes payable offset by increases in the floating interest rates associated with this debt.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the three months ended June 30, 2023 and 2022 are set forth as follows:

The components of total realized and unrealized gains (losses), net for the three months ended September 30, 2023 and 2022 are set forth as follows:

Three Months Ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

(in thousands)

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Total realized and unrealized gains (losses), net $ 5,255 $ (83,565)

For the three months ended June 30, 2023 and 2022, total realized and unrealized gains and (losses), net resulted in net losses of $3.8 million and $61.3 million, respectively.

During the three months ended June 30, 2023, the valuation of our portfolio of residential and commercial mortgage loans declined but was offset by net realized and unrealized gains from TBAs and futures contracts.

During the three months ended June 30, 2022, market volatility resulting in widening interest rate spreads caused the valuation of our portfolio of mortgage loans to decrease, which further resulted in total realized and unrealized losses that were only partially offset by net gains from TBAs and futures contracts.

For the three months ended September 30, 2023 and 2022, total realized and unrealized gains and (losses), net resulted in net gains of $5.3 million and net losses $83.6 million, respectively.

During the three months ended September 30, 2023, the key driver of the net gain was the valuation of our residential mortgage loans in securitization trust, net of non-recourse securitization obligation portfolio.

During the three months ended September 30, 2022, market volatility resulting in widening interest rate spreads caused the valuation of our portfolio of mortgage loans to decrease, which further resulted in total realized and unrealized losses that were only partially offset by net gains from TBAs and futures contracts.

Operating Expenses

For the three months ended June 30, 2023 and 2022, our operating expenses were $2.2 million and $3.0 million, respectively.

For the three months ended September 30, 2023 and 2022, our operating expenses were $1.4 million and $2.8 million, respectively.

Our operating expenses decreased compared to the comparative period due to cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loans portfolios.

Operating Expenses Incurred with Affiliate

For the three months ended June 30, 2023 and 2022, our operating expenses incurred with affiliate were $0.6 million and $0.8 million, respectively.

For the three months ended September 30, 2023 and 2022, our operating expenses incurred with affiliate were $0.6 million and $2.1 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased during the comparative period primarily due to the separation of our former chief executive officer in September 2022.

Due Diligence and Transaction Costs

For the three months ended June 30, 2023 and 2022, our due diligence and transaction costs were $21 thousand and $519 thousand, respectively.

Our due diligence and transaction expenses decreased over the comparative period as we purchased fewer whole loans during the three months ended June 30, 2023 than the three months ended June 30, 2022.

For the three months ended September 30, 2023 and 2022, our due diligence and transaction costs were $115 thousand and $213 thousand, respectively.

Our due diligence and transaction expenses decreased over the comparative period as we purchased fewer whole loans during the three months ended September 30, 2023 than the three months ended September 30, 2022.

Stock Compensation

For the three months ended June 30, 2023 and 2022, our stock compensation expense was $0.2 million and $1.0 million, respectively.

Our stock compensation expense decreased for the three months ended June 30, 2023, due to stock forfeitures as well as no 2023 stock compensation expense related to our former chief executive officer.

For the three months ended September 30, 2023 and 2022, our stock compensation expense was $0.4 million and $3.3 million, respectively.

Our stock compensation expense decreased for the three months ended September 30, 2023, due to stock forfeitures as well as a one-time severance expense in the comparative period of 2022 associated with the departure of our former chief executive officer.

Other restricted stock awards vest over one, three, or four years (depending on the tranche of award), commencing on the one-year anniversary of the grant date.

Securitization Costs

For the three months ended June 30, 2023 and 2022, we incurred $1.0 million and $0.0 million of securitization expense, respectively.

The expense incurred in the second quarter of 2023 is in connection with the AOMT 2023-4 securitization.

There were no securitization costs incurred for the comparable period in 2022.

For the three months ended September 30, 2023 and 2022, we incurred $0.4 million and $1.1 million of securitization expense, respectively.

The expense incurred during the three months ended September 30, 2023 is related to the AOMT 2023-5 securitization.

The securitization costs incurred for the comparable period in 2022 were associated with the AOMT 2022-4 securitization.

Management Fee Incurred with Affiliate

For the three months ended June 30, 2023 and 2022, our management fee incurred with affiliate was $1.5 million and $2.0 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended June 30, 2023 as compared to the same period in 2022.

For the three months ended September 30, 2023 and 2022, our management fee incurred with affiliate was $1.4 million and $2.0 million, respectively.

The decrease is due to the decrease in our average Equity (as defined in the Management Agreement) for the three months ended September 30, 2023 as compared to the same period in 2022.

The Management Agreement includes an adjustment to “Equity” (as defined in the Management Agreement) for Distributable Earnings , which is the primary departure from equity as calculated in accordance with GAAP.

Six Months Ended June 30, 2023 and 2022

The following table sets forth a summary of our results of operations for the six months ended June 30, 2023 and 2022:

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended September 30, 2023 and 2022

The following table sets forth a summary of our results of operations for the nine months ended September 30, 2023 and 2022:

Nine Months Ended

September 30, 2023 September 30, 2022

(in thousands)

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Net Interest Income

The following table sets forth the components of net interest income for the six months ended June 30, 2023 and 2022:

Six Months Ended

June 30, 2023 June 30, 2022

The following table sets forth the components of net interest income for the nine months ended September 30, 2023 and 2022:

Nine Months Ended

September 30, 2023 September 30, 2022

(in thousands)

14 unchanged sentences

Net interest income $ 20,661 $ 45,110

Net interest income for the six months ended June 30, 2023 and 2022 was $13.3 million and $33.4 million, respectively.

Net interest income decreased in the six months ended June 30, 2023 as compared to the same period in 2022, primarily due to the composition of the portfolio during June 30, 2023 having a lower average balance of residential mortgage loans and RMBS, which resulted in decreased interest income from these asset classes, partially offset by interest income generated from residential mortgage loans in securitization trusts.

Meanwhile, interest expense on notes payable increased due to an increase in the associated floating interest rates on our debt in the six months ended June 30, 2023 as compared to the same period in 2022, which resulted in an increased interest expense on lower interest income during the six months ended June 30, 2023 as compared to the comparative period.

Net interest income for the nine months ended September 30, 2023 and 2022 was $20.7 million and $45.1 million, respectively.

Net interest income decreased in the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to the composition of our portfolio during September 30, 2023 having a lower average balance of residential mortgage loans and RMBS, which resulted in decreased interest income from these asset classes, partially offset by interest income generated from residential mortgage loans in securitization trusts.

Meanwhile, interest expense on non-recourse securitization obligations, collateralized by residential mortgage loans increased due to an increase in the average balance and securitization spread associated with these assets in the nine months ended September 30, 2023 as compared to the same period in 2022, which resulted in an increased interest expense on lower interest income during the nine months ended September 30, 2023 as compared to the comparative period.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the six months ended June 30, 2023 and 2022 are set forth as follows:

Six Months Ended

June 30, 2023 June 30, 2022

The components of total realized and unrealized gains (losses), net for the nine months ended September 30, 2023 and 2022 are set forth as follows:

Nine Months Ended

September 30, 2023 September 30, 2022

(in thousands)

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Total realized and unrealized gains (losses), net $ 812 $ (198,598)

For the six months ended June 30, 2023 and 2022, total realized and unrealized gains (losses), net resulted in a net loss position of $4.4 million and $115.0 million, respectively.

During the six months ended June 30, 2023, continued market volatility resulting in widening interest rate spreads caused the valuation of our residential loans in securitization trust and TBAs to decrease, which was only partially offset by gains in our residential mortgage loans portfolio.

In the six months ended June 30, 2022, the net realized and unrealized loss was primarily due to extreme interest rate and spread volatility as the Fed began its rate hike cycle, leading to large unrealized losses on residential loans and residential loans in securitization trust and realized losses on RMBS.

For the nine months ended September 30, 2023 and 2022, total realized and unrealized gains (losses), net resulted in a net gain position of $0.8 million and net loss $198.6 million, respectively.

During the nine months ended September 30, 2023, continued market volatility resulting in widening interest rate spreads caused the valuation of our residential mortgage loans in securitization trust and whole pool agency RMBS to decrease, which was offset by gains in our residential mortgage loans portfolio and interest rate futures.

In the nine months ended September 30, 2022, the net realized and unrealized loss was primarily due to extreme interest rate and spread volatility as the Fed began its rate hike cycle, leading to large unrealized losses on residential mortgage loans and residential mortgage loans in securitization trust and realized losses on RMBS.

Operating Expenses

For the six months ended June 30, 2023 and 2022, our operating expenses were $4.4 million and $6.7 million, respectively.

For the nine months ended September 30, 2023 and 2022, our operating expenses were $5.8 million and $9.5 million, respectively.

Our operating expenses decreased during the comparative period due to cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio.

Operating Expenses Incurred with Affiliate

For the six months ended June 30, 2023 and 2022, our operating expenses incurred with affiliate were $1.1 million and $1.8 million, respectively.

For the nine months ended September 30, 2023 and 2022, our operating expenses incurred with affiliate were $1.7 million and $3.8 million, respectively.

Due Diligence and Transaction Costs

For the six months ended June 30, 2023 and 2022, our due diligence and transaction costs were $21 thousand and $1.2 million, respectively.

Our due diligence and transaction expenses decreased over the comparative period as we purchased fewer whole loans during the six months ended June 30, 2023 than the six months ended June 30, 2022.

For the nine months ended September 30, 2023 and 2022, our due diligence and transaction costs were $136 thousand and $1.5 million, respectively.

Our due diligence and transaction expenses decreased over the comparative period as we purchased fewer whole loans during the nine months ended September 30, 2023 than the nine months ended September 30, 2022.

Stock Compensation

For the six months ended June 30, 2023 and 2022 our stock compensation expense was $748 thousand and $1.8 million, respectively.

Our stock compensation expense decreased for the six months ended June 30, 2023, due to stock forfeitures as well as no 2023 stock compensation expense related to our former chief executive officer.

Other restricted stock awards vest over one, three, or four years (depending on the tranche of award), commencing on the one-year anniversary of the grant date.

For the nine months ended September 30, 2023 and 2022 our stock compensation expense was $1.2 million and $5.2 million, respectively.

Our stock compensation expense decreased for the nine months ended September 30, 2023, due to stock forfeitures as well as no 2023 stock compensation expense related to our former chief executive officer.

Additionally, the nine months ended September 30, 2023 did not include a one-time severance expense associated with the departure of our former chief executive officer Other restricted stock awards vest over one, three, or four years (depending on the tranche of award), commencing on the one-year anniversary of the grant date.

Securitization Costs

Securitization costs of $1.9 million were incurred for the six months ended June 30, 2023 in connection with the AOMT 2023-1 and AOMT 2023-4 securitization transactions.

There were $2 million of securitization costs incurred for the comparable period in 2022.

Securitization costs of $2.3 million were incurred for the nine months ended September 30, 2023 in connection with the AOMT 2023-1, AOMT 2023-4, and AOMT 2023-5 securitization transactions.

There were $3.1 million of securitization costs incurred for the comparable period in 2022, associated with the AOMT 2022-1 and AOMT 2022-4 securitizations.

Management Fee Incurred with Affiliate

For the six months ended June 30, 2023 and 2022, our management fee incurred with affiliate was $3.0 million and $3.9 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the six months ended June 30, 2023 as compared to the same period in 2022.

For the nine months ended September 30, 2023 and 2022, our management fee incurred with affiliate was $4.5 million and $5.8 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the nine months ended September 30, 2023 as compared to the same period in 2022.

The Management Agreement includes an adjustment to “Equity” as defined in the Management Agreement for Distributable Earnings, which is the primary departure from equity as calculated in accordance with GAAP.

Our Portfolio

As of June 30, 2023, our portfolio consisted of approximately $2.0 billion of residential mortgage loans, RMBS, and other target assets.

As of September 30, 2023, our portfolio consisted of approximately $2.1 billion of residential mortgage loans, RMBS, and other target assets.

Certain of these portfolio assets are located in states such as Florida and California where natural disasters such as hurricanes and earthquakes may occasionally occur.

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The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans.

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of June 30, 2023:

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of September 30, 2023:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

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Total investment securities $ 736,229 $ 188,101 $ 548,128 236.4 %

Investment in Majority-Owned Affiliate $ 11,510 $ — $ 11,510 4.9 %

Investments in Majority-Owned Affiliates

$ 14,701 $ 14,701 6.3 %

Total investment portfolio $ 2,234,650 $ 1,547,194 $ 687,456 296.6 %

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Residential Mortgage Loans

The following table sets forth additional information on the residential mortgage loans in our portfolio as of June 30, 2023:

The following table sets forth additional information on the residential mortgage loans in our portfolio as of September 30, 2023:

Portfolio Range Portfolio Weighted Average

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Interest rate 2.99% - 12.5%

Maturity date 1/15/2037 - 5/25/2063 June 2053

Maturity date 9/27/2048 - 8/25/2063

September 2053

FICO score at loan origination 612 - 817

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Percentage of loans 90+ days delinquent (based on UPB) N/A 0.91%

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2023:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of September 30, 2023:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2022:

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of September 30, 2023, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of September 30, 2023:

No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of September 30, 2023 .

Numbers presented may add to more than 100% due to rounding.

The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2022, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of December 31, 2022:

No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2022.

Numbers presented may add to more than 100% due to rounding.

Residential Mortgage Loans Held in Securitization Trusts

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2023:

($ in thousands)

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(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2023 (percentages are based on the aggregate unpaid principal balance of such loans):

No state in “Other” represents more than a 4% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2023 .

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2023 (percentages are based on the aggregate unpaid principal balance of such loans):

No state in “Other” represents more than a 4% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2023 .

Numbers presented may add to more than 100% due to rounding.

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Numbers presented may add to more than 100% due to rounding.

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of June 30, 2023:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2022:

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of June 30, 2023, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of June 30, 2023:

No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of June 30, 2023 .

Numbers presented may add to more than 100% due to rounding.

Characteristics of Our Residential Mortgage Loans as of December 31, 2022:

No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2022.

Numbers presented may add to more than 100% due to rounding.

Commercial Mortgage Loans

The following table provides additional information on the commercial mortgage loans in our portfolio as of June 30, 2023:

The following table provides additional information on the commercial mortgage loans in our portfolio as of September 30, 2023:

Portfolio Range Portfolio Weighted Average

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Interest rate 5.50% - 8.38% 6.24%

Loan term 8.35 - 26.69 years 12.73 years

Loan term 8.10 - 26.44 years

LTV at loan origination 50.0% - 75.0%

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LTV at loan origination 46.7% - 75.0% 50.90%

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of June 30, 2023 and December 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of June 30, 2023:

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of September 30, 2023 and December 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of September 30, 2023:

Numbers presented may add to more than 100% due to rounding.

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Risk retention securities represent at least 5% of a horizontal or vertical slice of the bonds issued as part of the transaction.

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of June 30, 2023, unless otherwise stated:

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of September 30, 2023, unless otherwise stated:

AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 AOMT 2023-1 (5)

AOMT 2023-5 (5)

($ in thousands)

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(4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.

(5) The fair value of the first loss piece presented for AOMT 2023-1 is the total at risk for the Majority-Owned Affiliate.

(5) The fair value of the first loss pieces presented for AOMT 2023-1 and AOMT 2023-5 is the total at risk for the Majority-Owned Affiliate.

(6) AOMT 2023-5 reflects one-month CPR

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2022, unless otherwise stated:

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(4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.

The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of June 30, 2023:

The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of September 30, 2023:

RMBS Repurchase Debt (1)

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(1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

(2) The whole pool RMBS presented as of June 30, 2023 were purchased from a broker to whom the Company owes approximately $390.4 million, payable upon the settlement date of the trade.

(2) The whole pool RMBS presented as of September 30, 2023 were purchased from a broker to whom the Company owes approximately $512.0 million, payable upon the settlement date of the trade.

See Note 7 — Due to Broker in our unaudited condensed consolidated financial statements included in this report.

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These bonds, with a fair value of $110.5 million, are not reflected in the condensed consolidated balance sheets, as the Company reflects the assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets.

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of June 30, 2023:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

(in thousands)

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of September 30, 2023:

Mezzanine Subordinate Interest Only Whole Pool Total

Beginning fair value $ 9,533 $ 49,938 $ 12,438 $ 388,063 $ 459,972

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Ending fair value $ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2023 (percentages are based on the aggregate unpaid principal balance of such loans):

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2023 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Loans Underlying Our Portfolio

of RMBS Issued in AOMT Securitization Transactions

(as of June 30, 2023)

No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2023.

(as of September 30, 2023)

No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2023.

Numbers presented may add to more than 100% due to rounding.

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In November 2020, we participated in a securitization transaction of a pool of small balance commercial mortgage loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial mortgage loans with a carrying value of approximately $31.2 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million.

Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

($ in thousands)

4 unchanged sentences

Weighted average LTV at loan origination and deal date 56.2 % 58.4 %

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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Description of Existing Financing Arrangements

As of June 30, 2023, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $0.9 billion.

During the six months ended June 30, 2023, an unused loan financing facility with a regional bank expired in accordance

with its terms.

As of September 30, 2023, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $0.9 billion.

During the nine months ended September 30, 2023, an unused loan financing facility with a regional bank

expired in accordance with its terms.

We also refinanced a static pool financing facility held with institutional investors into a different static pool financing with another lender, and terminated the initial static pool financing facility.

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Our financing facilities are generally subject to limits on borrowings related to specific asset pools (“advance rates”) and other restrictive covenants, as is usual and customary.

As of June 30, 2023, the advance rates (when required) of our three active lenders ranged from 60% to 92%, depending on the asset type and loan delinquency status.

As of September 30, 2023, the advance rates (when required) of our three active lenders ranged from 60% to 92%, depending on the asset type and loan delinquency status.

Our most restrictive covenants (when covenants are required by any of our three active lenders) included (1) our minimum tangible net worth must not (i) decline 20% or more in the previous 30 days, 25% or more in the previous 90 days, or 35% or more in the previous year, or, if shorter, in the period from September 30, 2022 to the applicable date of determination, or (ii) fall below $200.0 million of tangible net worth as of September 30, 2022 plus 50% of any capital contribution made or raised after September 30, 2022;

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and (3) the maximum ratio of our and our subsidiaries’ total indebtedness to tangible net worth must not be greater than 5:1.

Our minimum liquidity requirement as of June 30, 2023 was $10.0 million.

Our minimum liquidity requirement as of September 30, 2023 was $10.0 million.

Other restrictive covenants with which we were bound to comply during the first quarter of 2023 related to a regional bank financing facility which we allowed to expire by its terms, and included additional requirements around GAAP net income.

A description of each loan financing facility in place during the quarter ended June 30, 2023 is set forth as follows:

A description of each loan financing facility in place during the nine-months ended September 30, 2023 is set forth as follows:

Multinational Bank 1 Loan Financing Facility.

3 unchanged sentences

Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every three months for a maximum six-month term.

This loan financing facility has been extended to January 25, 2024, and the interest rate pricing spread decreased to 2.10%.

This loan financing facility has been extended to January 25, 2024, and as of July 25, 2023, the interest rate pricing spread decreased to 2.10%.

The amount expected to be paid by Multinational Bank 1 for each eligible mortgage loan is based on an advance rate as a percentage of either the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less.

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From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Global Investment Bank 2.

Pursuant to the agreement, we or our subsidiary may sell to Global Investment Bank 2, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans.

Pursuant to the agreement, we or our subsidiary may sell to Global Investment Bank 2, and later repurchase, up to

$250.0 million aggregate borrowings on mortgage loans.

The agreement is set to terminate on February 2, 2024, unless terminated earlier pursuant to the terms of the agreement.

19 unchanged sentences

The term of the initial agreement was extended such that it terminates on December 19, 2023, as further described below.

Subsequent to September 30, 2023, the Company converted its loan financing facility with Global Investment Bank 3 from static pool financing to a revolving facility with mark to market features.

The amended facility has a maximum borrowing capacity of $200 million with a twelve month term and a termination date of November 7, 2024.

The base interest rate spread on this facility was reduced to 1.80%, plus a 0.20% basis points index spread adjustment, and the advance rate for performing non-seasoned loans was increased to 85%.

Additionally, the economic interest rate futures account (as defined below) requirement was eliminated.

On December 19, 2022, the facility was amended to increase the facility limit up to $286.0 million, finance a static pool of mortgage loans, and extend the termination date to December 19, 2023;

1 unchanged sentence

Additionally, the amendment generally removed “mark to market” provisions and now requires an economic interest rate hedging account (“interest rate futures account”) which account is for the benefit of Global Investment Bank 3 and under its sole control, subject to recoupment to meet hedging margin calls.

As of September 30, 2023, the facility limit was $8.7 million.

During 2022, interest accrued at the sum of Compounded SOFR and a SOFR adjustment of 20 basis points (though the SOFR adjustment was later amended by the December 19, 2022 amendment, as further described below).

3 unchanged sentences

Under those provisions, Global Investment Bank 3 could have required us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline.

These margin call provisions were largely removed pursuant to the amendment executed on December 19, 2022, as described above, and replaced with the interest rate futures account described above, maintained for the benefit of and under the sole control of Global Investment Bank 3.

These margin call

provisions were largely removed pursuant to the amendment executed on December 19, 2022, as described above, and replaced with the interest rate futures account described above, maintained for the benefit of and under the sole control of Global Investment Bank 3.

At times, we may hold certain cash collateral resulting from the interest rate futures account as restricted cash under this agreement.

1 unchanged sentence

The agreement also sets forth events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction.

The remedies for such events of default are also customary for this type of transaction and include the acceleration of the

principal amount outstanding under the agreement and Global Investment Bank 3’s right to liquidate the mortgage loans then subject to the agreement.

The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Global Investment Bank 3’s right to liquidate the mortgage loans then subject to the agreement.

We and our subsidiary are also required to pay certain customary fees to Global Investment Bank 3 and to reimburse Global Investment Bank 3 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the agreement.

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This financing facility was substantially unused, and expired by its terms on March 16, 2023.

The following table sets forth the details of our financing lines as of each of June 30, 2023 and December 31, 2022:

The following table sets forth the details of our financing lines as of each of September 30, 2023 and December 31, 2022:

Spread Drawn Amount

Note Payable Base Interest Rate June 30, 2023 December 31, 2022

Note Payable Base Interest Rate September 30, 2023 December 31, 2022

($ in thousands)

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Total $ 197,797 $ 639,870

(1) Subsequent to June 30, 2023, this financing facility was extended through January 25, 2024 with an interest rate pricing spread of 2.10%.

(1) On January 25, 2023, this financing facility was extended through July 25, 2023 in accordance with the terms of the agreement, which contemplates six-month renewals.

On July 25, 2023, the Company extended this financing facility through January 25, 2024, with an interest rate pricing spread of 2.10%.

(2) This financing facility expires on February 2, 2024.

(3) This static pool financing facility expires on December 19, 2023.

The interest rate pricing spread per the agreement began at 2.80% for the first three months following December 19, 2022, exclusive of a 20 basis point index spread adjustment, and increases by an additional 50 basis points every three months thereafter;

The interest rate pricing spread per the agreement began at 2.80% for the first three months following December 19, 2022, exclusive of a 20 basis points index spread adjustment, and increases by an additional 50 basis points every three months thereafter;

however, the facility does not, in general, contain “mark to market” provisions.

The agreement requires an economic interest rate hedging account (“interest rate futures account”) to be maintained to the reasonable satisfaction of Global Investment Bank 3, as described above, which account is for its benefit and under its sole control.

On November 7, 2023, this facility was renewed for a twelve month term with a new expiration date of November 7, 2024 and was converted from static pool financing to a revolving facility with mark to market features.

The amended facility has a maximum borrowing capacity of $200 million with an interest rate pricing spread of 180 basis points plus a 20 basis points index spread adjustment (see Note 16 — Subsequent Events ).

(4) On October 4, 2022, the Company and a subsidiary entered into two separate master repurchase facilities with two affiliates of an institutional investor (“Institutional Investors A and B”) regarding a specific pool of whole loans with financing of approximately $168.7 million on approximately $239.3 million of unpaid principal balance.

3 unchanged sentences

(5) This agreement expired by its terms on March 16, 2023.

The following table sets forth the total unused borrowing capacity of each financing line as of June 30, 2023:

The following table sets forth the total unused borrowing capacity of each financing line as of September 30, 2023:

Note Payable Borrowing Capacity Balance Outstanding Available Financing

8 unchanged sentences

(1) Although available financing is uncommitted, the Company’s unused borrowing capacity is available if it has eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements.

(2) As of June 30, 2023, this financing facility had no unused borrowing capacity as the outstanding borrowings were based on static pools of mortgage loans.

(2) As of September 30, 2023, this financing facility had no unused borrowing capacity as the outstanding borrowings were based on a static pool of mortgage loans.

Short‑Term Repurchase Facilities.

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Treasury securities, securities issued by AOMT, Angel Oak’s securitization platform, and other securities we may acquire in accordance with our investment guidelines.

The following table sets forth certain characteristics of our short-term repurchase facilities as of June 30, 2023 and December 31, 2022:

June 30, 2023

The following table sets forth certain characteristics of our short-term repurchase facilities as of September 30, 2023 and December 31, 2022:

September 30, 2023

Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days)

8 unchanged sentences

Total $ 52,544 6.07 % 13

(1) A portion of repurchase debt outstanding as of both June 30, 2023 and December 31, 2022 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

(1) A portion of repurchase debt outstanding as of both September 30, 2023 and December 31, 2022 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

The repurchase debt against the U.S.

10 unchanged sentences

Q1 2023 442,214 180,165 442,214

Q2 2023 340,701 101,731 340,701

340,701 101,731 340,701

188,101 87,279 188,101

We utilize short‑term repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes.

3 unchanged sentences

Securitization Transactions

In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 36% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-5 issued approximately $260.6 million in face value of bonds.

Our proportionate share of 34.42% of the retained bonds and investments in MOAs was approximately $8.7 million, including a retained discount on issuance of approximately $2.7 million.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $63.4 million and retained cash of $10.7 million, which was used for operational purposes.

Given the accounting rules surrounding this type of transaction, we derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliate located within “other assets” on our condensed consolidated balance sheet as of September 30, 2023.

In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured exclusively by first liens on one‑to‑four family residential properties.

2 unchanged sentences

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2023-4 securitization on our condensed consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.

In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 59% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of

Our proportionate share of 41.21% of the retained bonds and investment in MOAs was approximately $21.8 million, including a retained discount on issuance of approximately $6.8 million.

In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of bonds.

Our proportionate share of 41.21% of the retained bonds and investments in MOAs was approximately $21.8 million, including a retained discount on issuance of approximately $6.8 million.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $190.1 million and retained cash of $15.9 million, which was used for operational purposes.

Given the accounting rules surrounding this type of transaction, we derecognized the mortgage loans sold in this transaction and recorded an investment in majority-owned affiliate located within “other assets” on our condensed consolidated balance sheet as of June 30, 2023.

In July 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

2 unchanged sentences

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-4 securitization on our condensed consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.

In February 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 56% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

2 unchanged sentences

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-1 securitization on our condensed consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.

Leverage and Hedging Strategies

5 unchanged sentences

Cash and cash equivalents

Our cash balance as of June 30, 2023 was sufficient to meet our liquidity covenants under our financing facilities.

Our cash balance as of September 30, 2023 was sufficient to meet our liquidity covenants under our financing facilities.

We believe that we maintain sufficient cash to fund margin calls on our mark to market financing facilities or our economic hedge agreements, should such margin calls occur.

3 unchanged sentences

Restricted Cash

Restricted cash of approximately $9.6 million as of June 30, 2023 was comprised of:

Restricted cash of approximately $1.1 million as of September 30, 2023 was comprised of:

$0.8 million was held for the benefit of Global Investment Bank 3, the majority of which balance is in an economic interest rate hedging account under the control of Global Investment Bank 3, and may be drawn by Global Investment Bank 3 at its discretion, $0.3 million in interest rate futures margin collateral for the interest rate futures under our sole control;

and margin collateral for securities sold under agreements to repurchase of $5.0 million.

and margin collateral for securities sold under agreements to repurchase of zero.

Restricted cash of approximately $10.6 million as of December 31, 2022 was comprised of:

3 unchanged sentences

Our counterparties did not require any margin collateral for TBAs as of December 31, 2022.

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended

September 30, 2023 September 30, 2022

(in thousands)

1 unchanged sentence

Cash flows provided by (used in) investing activities $ (164,668) $ 502,541

Cash flows provided by financing activities $ 54,962 $ 102,856

Cash flows provided by (used in) financing activities

$ (171,318) $ (33,620)

Net increase in cash and restricted cash $ 3,101 $ (22,805)

The cash provided by operating activities of $280.6 million for the six months ended June 30, 2023 as compared to the use of cash of $635.8 million for the six months ended June 30, 2022 was primarily due to the sale of residential mortgage loans into an affiliate’s securitization trust during the first three months of 2023, while in 2022, we purchased residential mortgage loans.

The use of investing cash flows of $306.7 million for the six months ended June 30, 2023 as compared to cash provided by investing activities of $502.5 million for the six months ended June 30, 2022 were primarily due to the timing of purchases and maturities of U.S.

The cash provided by operating activities of $339.1 million for the nine months ended September 30, 2023 as compared to the use of cash of $635.8 million for the nine months ended September 30, 2022 was primarily due to the sale of residential mortgage loans into an affiliate’s securitization trust during the first three months of 2023, while in 2022, we purchased residential mortgage loans.

The use of investing cash flows of $164.7 million for the nine months ended September 30, 2023 as compared to cash provided by investing activities of $502.5 million for the nine months ended September 30, 2022 were primarily due to the timing of purchases and maturities of U.S.

Treasury securities in the comparative period.

Financing cash flows provided of $55 million for the six months ended June 30, 2023 as compared to $102.9 million provided for the six months ended June 30, 2022 were primarily due to the activity within net borrowings under repurchase agreements and notes payable for the comparative periods, and proceeds from non-recourse securitization transactions in the 2022 comparative period.

The use of financing cash flows of $171.3 million for the nine months ended September 30, 2023 as compared to the use of $33.6 million for the nine months ended September 30, 2022 were primarily due to the activity within net borrowings under repurchase agreements and notes payable for the comparative periods, and proceeds from non-recourse securitization transactions in the 2022 comparative period.

Cash Flows - Residential and Commercial Loan Classification

15 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis