What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-09 · 247 added, 148 removed, 637 unchanged (38% of the section changed)

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve numerous risks and uncertainties.

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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 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 Capital was established in 2009 and had approximately $17.5 billion in assets under management as of March 31, 2023 across its private credit strategies, public funds, and separately managed accounts, including approximately $10.6 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of March 31, 2023, had originated over $17.3 billion in total non‑QM loan volume since its inception in 2011.

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

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.

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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federal income tax purposes commencing with our taxable year ended December 31, 2019.

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.

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.

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Overall macroeconomic environment and its effect on us

The macroeconomic environment in the first quarter of 2023 showed some signs of stabilization compared to 2022.

However, while the magnitude of interest rate and spread volatility lessened, questions regarding forthcoming policy decisions of the Federal Reserve Bank of the United States (the “Fed”), as well as unemployment and recession concerns, persist.

Additionally, the failure of several prominent regional banks fueled investor apprehension, which created volatility in interest rates and securitization markets.

In the first quarter of 2023, the Fed raised the federal funds rate by 50 basis points, bringing the current federal funds rate to 4.75% - 5.00%.

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.

Interest rates remained at peak or near-peak levels into the first quarter of 2023, continuing to suppress mortgage origination and refinancing activity.

While the average 30-year fixed mortgage rate as of March 31, 2023 of approximately 6.5% 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.

Despite sustained high interest rates during the first quarter of 2023, the two-year and five-year Treasury yields rallied by approximately 35 basis points and 40 basis points, respectively, driving a positive impact to the value of our portfolio.

Though spreads remained wide, which is a limiting factor on the positive impact of the rate rally, we observed an increase of approximately 50-100 basis points in the weighted average price of our residential whole loans and loans in securitization trusts portfolios.

The securitization market was more active compared to late 2022, but remained choppy, which dampens our ability to recycle our portfolio into newly-originated, high-coupon loans.

We continue to believe that further increases in interest rates are unlikely to have a significant incremental impact on demand for non-QM mortgages.

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.

Our investment performance

Net Interest Margin (“NIM”).

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

Though our borrowings decreased as well, higher variable interest rates caused our interest expense to increase in the first quarter of 2023 compared to the first quarter of 2022.

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.

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 quarter ended March 31, 2023 was primarily due to a realized loss on the sale of whole loans into the AOMT 2023-1 securitization.

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 quarter of 2023 as compared to the first quarter of 2022.

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.

Net unrealized gain .

Our net unrealized gain in the first quarter of 2023 was primarily due to an increase in the valuation of our residential whole loans and loans in securitization trust portfolios, as well as 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.

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.

Whole loans and securitization activity

We did not purchase any whole loans during the first quarter of 2023;

however, subsequent to the end of the first quarter of 2023, we resumed sourcing and purchasing newly-originated higher-coupon loans.

In January 2023, we participated in AOMT 2023-1, an approximately $580.5 million scheduled principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $241.3 million.

This was our first securitization in which we participated alongside other Angel Oak entities since our IPO.

We may strategically enter into similar securitizations in the future.

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.

In January 2023, we participated in AOMT 2023-1, an approximately $285 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.

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.

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 retaining them until securitized.

Our whole loan financing activity

during the period ended March 31, 2023 maintained our lender base in existence as of December 31, 2022, with the exception of the expiration of an unused line of credit with a regional bank and the repayment of Institutional Investors A and B.

Subsequent to March 31, 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 October 25, 2023, and the interest rate pricing spread decreased to 2.15%.

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%.

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.

Distributable Earnings were approximately a loss of $9.1 million and earnings $37.3 million for the three months ended March 31, 2023 and 2022, respectively.

The primary drivers of this quarter’s Distributable Earnings loss are the adjustments to GAAP net income of the $28.6 million unrealized gain associated with the AOMT 2023-1 securitization and a $6.0 million unrealized gain from our residential loans and residential loans in trust portfolios, offset by the adjustment to GAAP net income of $24.5 million of net unrealized losses associated with our economic hedge (interest rate futures and TBA derivatives) portfolio.

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 months ended March 31, 2023 and 2022:

Three Months Ended

March 31, 2023 March 31, 2022

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

(in thousands)

Net income (loss) allocable to common stockholders $ (3,688) $ (52,148) $ (3,158) $ (95,694)

Net other-than-temporary credit impairment losses — —

Net unrealized (gains) losses on derivatives (12,179) 24,692 12,357 9,366

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Net unrealized (gains) losses on commercial loans (136) 489 (147) 985

Net unrealized (gains) losses on financial instruments at fair value — —

(Gains) losses on extinguishment of debt — —

Non-cash equity compensation expense 207 968 748 1,839

Incentive fee earned by the Manager — —

Realized gains (losses) on terminations of interest rate swaps — —

Total other non-recurring (gains) losses — —

Distributable Earnings $ (3,859) $ 22,805 $ (12,978) $ 60,097

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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 months ended March 31, 2023 and 2022:

Three Months Ended

March 31, 2023 March 31, 2022

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

(in thousands)

Annualized Distributable Earnings $ (15,436) $ 91,220 $ (25,956) $ 120,194

Average total stockholders’ equity $ 240,684 $ 456,415

Average total common stockholders' equity $ 239,991 $ 394,362 $ 238,345 $ 426,703

Distributable Earnings Return on Average Equity (6.4) % 23.1 % (10.9) % 28.2 %

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 March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

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

(in thousands except for share and per share data)

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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 March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

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.

June 30, 2023 December 31, 2022

(in thousands except for share and per share data)

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Results of Operations

Three Months Ended March 31, 2023 and 2022

The following table sets forth a summary of our results of operations for the three months ended March 31, 2023 and 2022:

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

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

(in thousands)

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INCOME (LOSS) BEFORE INCOME TAXES $ (2,907) $ (52,144)

Income tax benefit — (3,457)

Income tax expense (benefit) 781 —

NET INCOME (LOSS) $ (3,688) $ (52,144)

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Net Interest Income

The following table sets forth the components of net interest income for the three months ended March 31, 2023 and 2022:

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

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

(in thousands)

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Net interest income $ 6,452 $ 16,431

Net interest income for the three months ended March 31, 2023 and 2022 was $6.8 million and $16.9 million, respectively.

Net interest income decreased in the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to the composition of the portfolio during March 31, 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, which asset balance increased during the first quarter of 2023.

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 March 31, 2023 as compared to the same period in 2022, which resulted in an increased interest expense on lower interest income during the comparative period.

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.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the three months ended March 31, 2023 and 2022 are set forth as follows:

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:

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

(in thousands)

Realized and unrealized gain (loss) on securitization, net of unrealized gain (loss) on non-recourse securitization obligation $ (7,084) $ (30,240)

Realized and unrealized gain (loss) on residential mortgage loans in securitization trust, net of non-recourse securitization obligation $ (5,215) $ (12,834)

Realized gain (loss) on RMBS (856) (22,811)

Unrealized gain (loss) on Whole Pool Agency RMBS 1,610 —

Realized and unrealized gain (loss) on Whole Pool Agency RMBS (1,870) —

Realized gain (loss) on CMBS (90) (205)

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Total realized and unrealized gains (losses), net $ (3,790) $ (61,267)

For the three months ended March 31, 2023 and 2022, total realized and unrealized gains and (losses), net resulted in net losses of $0.7 million and loss of $53.8 million, respectively.

During the three months ended March 31, 2023, the valuation of our portfolio of portfolio of residential and commercial mortgage loans began to recover, which was partially offset by an unrealized loss in TBAs.

During the three months ended March 31, 2022, market volatility resulting in widening interest rate spreads caused the valuation of our portfolio of mortgage loans to decrease, which resulted in an unrealized loss.

This net unrealized loss was partially offset by realized and unrealized gains on interest rate futures and TBAs.

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.

Operating Expenses

For the three months ended March 31, 2023 and 2022, our operating expenses of $2.2 million and $3.8 million, respectively, decreased 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.

For the three months ended June 30, 2023 and 2022, our operating expenses were $2.2 million and $3.0 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 March 31, 2023 and 2022, our operating expenses incurred with affiliate were $0.5 million and $0.9 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased during the comparative period as we did not incur any payroll expense for our former chief executive officer for the period ended March 31, 2023.

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.

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 March 31, 2023 and 2022, our due diligence and transaction costs were zero and $0.8 million, respectively.

Our due diligence and transaction expenses decreased over the comparative period as we did not purchase any whole loans during the three months ended March 31, 2023.

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.

Stock Compensation

For the three months ended March 31, 2023 and 2022, our stock compensation expense was $0.5 million and $0.9 million, respectively.

Our stock compensation expense decreased for the three months ended March 31, 2023, as stock compensation expense for our former chief executive officer was not incurred during the three months ended March 31, 2023.

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.

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 March 31, 2023 and 2022, we incurred $0.9 million and $2.0 million of securitization expense, respectively.

The expense incurred in 2023 in connection with the AOMT 2023-1 transaction was a proportional allocation of expense in connection with our share of the expenses in a securitization in which we participated with other affiliated entities, while the expense incurred in 2022 resulted from a sole securitization transaction in which we incurred all the expense.

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.

Management Fee Incurred with Affiliate

For the three months ended March 31, 2023 and 2022, our management fee incurred with affiliate was $1.5 million and $1.9 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended March 31, 2023 as compared to the same period in 2022.

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

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.

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

(in thousands)

INTEREST INCOME, NET

Interest income $ 47,503 $ 56,811

Interest expense 34,252 23,441

NET INTEREST INCOME 13,251 33,370

REALIZED AND UNREALIZED GAINS (LOSSES), NET

Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS (15,012) 39,133

Net unrealized gain (loss) on trading securities, mortgage loans, debt at fair value option (see Note 2), and derivative contracts 10,569 (154,166)

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (4,443) (115,033)

Operating expenses 4,418 6,723

Operating expenses incurred with affiliate 1,073 1,838

Due diligence and transaction costs 21 1,182

Stock compensation 748 1,839

Securitization costs 1,910 2,019

Management fee incurred with affiliate 3,015 3,879

Total operating expenses 11,185 17,480

INCOME (LOSS) BEFORE INCOME TAXES (2,377) (99,143)

Income tax expense (benefit) 781 (3,457)

NET INCOME (LOSS) (3,158) (95,686)

Preferred dividends — (8)

NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ (3,158) $ (95,694)

Other comprehensive income (loss) 14,562 (1,752)

TOTAL COMPREHENSIVE INCOME (LOSS) $ 11,404 $ (97,446)

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

(in thousands)

Interest income Interest income / expense Average balance Interest income / expense Average balance

Residential mortgage loans $ 14,185 $ 544,607 $ 25,424 $ 1,167,990

Residential mortgage loans in securitization trusts 24,545 1,056,558 21,887 941,145

Commercial mortgage loans 399 9,489 648 19,632

RMBS 6,158 233,121 8,299 371,736

CMBS 643 6,427 472 9,925

Treasury securities 659 99,888 8 85,713

Other interest income 914 37,613 73 54,094

Total interest income 47,503 56,811

Interest expense

Notes payable 17,105 385,602 12,803 987,513

Non-recourse securitization obligation, collateralized by residential mortgage loans 15,165 1,053,686 10,262 898,104

Repurchase facilities 1,982 217,074 376 243,413

Total interest expense 34,252 23,441

Net interest income $ 13,251 $ 33,370

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.

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

(in thousands)

Realized and unrealized gain (loss) on residential mortgage loans in securitization trust, net of non-recourse securitization obligation $ (12,300) $ (43,074)

Realized loss on RMBS, net (947) (27,855)

Unrealized gain (loss) on Whole Pool Agency RMBS (260) —

Realized gain (loss) on CMBS (139) (246)

Realized gain (loss) on interest rate futures 5,770 43,052

Realized and unrealized gain (loss) on TBAs (12,828) 19,399

Realized and unrealized (loss) gain on residential mortgage loans 18,124 (106,625)

Realized and unrealized (loss) gain on commercial mortgage loans 148 (1,006)

Realized and unrealized loss on U.S.

Treasury securities 41 —

Unrealized appreciation on interest rate futures (2,052) 1,322

Total realized and unrealized gains (losses), net $ (4,443) $ (115,033)

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.

Operating Expenses

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

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.

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.

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.

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.

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 March 31, 2023, our portfolio consisted of approximately $2.1 billion of residential mortgage loans, RMBS, and other target assets.

As of June 30, 2023, our portfolio consisted of approximately $2.0 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 March 31, 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 June 30, 2023:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

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Residential Mortgage Loans

The following table sets forth additional information on the residential mortgage loans in our portfolio as of March 31, 2023:

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

Portfolio Range Portfolio Weighted Average

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Interest rate 2.88% - 10.88% 4.84%

Maturity date 1/25/2037 - 5/31/2062 March 2053

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

FICO score at loan origination 518 - 819 740

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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 March 31, 2023:

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:

($ 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 March 31, 2023:

(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2023 .

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 .

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

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Percentage of loans 90+ days delinquent (based on UPB) —%

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022:

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans):

No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022 .

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 March 31, 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 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 March 31, 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 March 31, 2023:

(1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of March 31, 2023 .

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.

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Commercial Mortgage Loans

The following table provides additional information on the commercial mortgage loans in our portfolio as of March 31, 2023:

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

Portfolio Range Portfolio Weighted Average

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LTV at loan origination 46.7% - 75.0% 50.9%

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of March 31, 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 March 31, 2023:

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:

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 March 31, 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 June 30, 2023, unless otherwise stated:

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

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90+ day delinquency (as a % of UPB) 12.3 % 11.5 % 3.3 % 5.5 % 0.7 %

90+ Delinquency (as a % of Original Balance) 2.28 % 2.23 % 0.95 % 1.89 % 0.86 %

Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2)

53.08 % 51.36 % 55.12 % 74.09 % 77.37 %

Fair value of first loss piece (3)

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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.

(2 AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”);

accordingly, original LTV is used.

(3) Represents the fair value of the securities we hold in the first loss tranche in each securitization.

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90+ day delinquency (as a % of UPB) 11.8 % 11.5 % 3.1 % 4.4 %

90+ Delinquency (as a % of Original Balance) 2.3 % 2.3 % 1.0 % 1.9 %

Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2)

53.0 % 51.4 % 54.4 % 74.1 %

Fair value of first loss piece (3)

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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.

(2) AOMT 2020-3 does not have LTV or FHFA HPI Estimates;

as such, original LTV is used.

(3) Represents the fair value of the securities we hold in the first loss tranche in each securitization.

(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 March 31, 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 June 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 March 31, 2023 were purchased from a broker to whom the Company owes approximately $447.6 million, payable upon the settlement date of the trade.

(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.

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 March 31, 2023:

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

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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 March 31, 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 June 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 March 31, 2023)

(1) 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 March 31, 2023.

(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.

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 March 31, 2023 and December 31, 2022:

March 31, 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 June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

($ in thousands)

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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 March 31, 2023 and December 31, 2022:

March 31, 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 June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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Securitizations may either take the form of the issuance of securitized bonds or the sale of “real estate mortgage investment conduit” securities backed by mortgage loans or other assets, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities.

We have sponsored and participated in securitization transactions with other entities that are managed by Angel Oak, and may continue to do so in the future, along with sponsoring sole securitization transactions.

We believe these identified sources of financing will be adequate for purposes of meeting our short‑term (within one year) and our longer‑term liquidity needs.

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Description of Existing Financing Arrangements

As of March 31, 2023, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $1.1 billion.

During the quarter ended March 31, 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.

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.

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.

Borrowings under warehouse loan financing lines or placed with institutional investors (in general, each a “loan financing facility”) may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes.

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 March 31, 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 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.

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 March 31, 2023 was $10.0 million.

Our minimum liquidity requirement as of June 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 March 31, 2023 is set forth as follows:

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

Multinational Bank 1 Loan Financing Facility.

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

As of March 31, 2023, the termination date of the master repurchase agreement was July 25, 2023;

however, subsequent to March 31, 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 October 25, 2023, and the interest rate pricing spread decreased to 2.15%.

This loan financing facility has been extended to January 25, 2024, and 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.

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The agreement requires us to maintain various financial and other customary covenants.

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 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.

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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Pursuant to the agreements, interest accrued under the master repurchase agreements at a rate based on one-month Term SOFR (defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and a spread of 3.5%, with one-month Term SOFR subject to a floor of 2.0%.

We and our subsidiary were also required to pay certain customary fees to Institutional Investors A and B, and to reimburse Institutional Investors A and B for certain costs and expenses incurred in connection with the structuring, management, and administration of the agreements.

The agreements contained provisions for a cash collateral account subject to a margin percentage.

As of December 31, 2022, the Company held restricted cash pertaining to this lender’s cash collateral requirements included in “restricted cash” of approximately $3.8 million on the Company’s condensed consolidated balance sheet as of December 31, 2022, which was released on January 4, 2023 at which time the facilities were terminated pursuant to their terms.

Regional Bank 1 Loan Financing Facility.

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Additionally, the amendment increased the aggregate purchase price limit to $75.0 million from $50.0 million, and beginning March 8, 2022, provided that interest accrued on any new transactions under the loan financing line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional pricing spread.

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

The amount paid by Regional Bank 1 for each mortgage loan was based on the loan type.

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We and our subsidiary were also required to pay certain customary fees to Regional Bank 1 and to reimburse Regional Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and administration of the agreement.

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

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:

Spread Drawn Amount

Note Payable Base Interest Rate March 31, 2023 December 31, 2022

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

($ in thousands)

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Total $ 233,970 $ 639,870

(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.

(1) Subsequent to June 30, 2023, this financing facility was extended 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, 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 point 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.

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(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 March 31, 2023:

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

Note Payable Borrowing Capacity Balance Outstanding Available Financing

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(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 March 31, 2023, this financing facility had no unused borrowing capacity as the outstanding borrowings were based on static pools of mortgage loans.

(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.

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 March 31, 2023 and December 31, 2022:

March 31, 2023

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

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

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Total $ 52,544 6.07 % 13

(1) A portion of repurchase debt outstanding as of both March 31, 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 June 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.

11 unchanged sentences

Q1 2023 442,214 180,165 442,214

Q2 2023 340,701 101,731 340,701

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

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Securitization Transactions

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 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.

In the transaction, AOMT 2023-4 issued approximately $259.4 million in face value of bonds.

Our proportionate share of 41.21% of the retained bonds 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 $197.3 million and retained cash of $35.7 million, which was used for new loan purchases and operational purposes.

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 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.

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 March 31, 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 March 31, 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 March 31, 2023 and December 31, 2022.

Leverage and Hedging Strategies

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Cash and cash equivalents

Our cash balance as of March 31, 2023 was sufficient to meet our liquidity covenants under our financing facilities.

Our cash balance as of June 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.

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Restricted Cash

Restricted cash of approximately $20.8 million as of March 31, 2023 was comprised of:

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

$4.2 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, $0.4 million in interest rate futures margin collateral for the interest rate futures under our sole control;

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

Three Months Ended

March 31, 2023 March 31, 2022

Six Months Ended

June 30, 2023 June 30, 2022

(in thousands)

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Net increase in cash and restricted cash $ 28,856 $ (30,433)

The cash provided by operating activities of $265.1 million for the three months ended March 31, 2023 as compared to the use of cash of $606.4 million for the three months ended March 31, 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 $409.5 million for the three months ended March 31, 2023 as compared to cash provided by investing activities of $261.4 million for the three months ended March 31, 2022 were primarily due to the timing of purchases and maturities of U.S.

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.

Treasury securities in the comparative period.

Financing cash flows provided of $162.2 million for the three months ended March 31, 2023 as compared to $388.6 million provided for the three months ended March 31, 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.

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.

Cash Flows - Residential and Commercial Loan Classification

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What changed 10-Q

Item 2. Management’s Discussion and Analysis