Angel Oak Mortgage REIT, Inc.

Good morning and welcome to the Angel Oak Mortgage Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, press star, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Randy Christman. Please go ahead.

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's third quarter 2023 earnings conference call. This morning, we filed a press release detailing these results. which is available in the Investors section on our website at www.angelogreat.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This morning's conference call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Srini Prabhu, Chief Financial Officer, Brandon Filson, and Angel Oak Capital's Co-CIO, Named Sinha. Management will first lead off the call by making some prepared comments, after which we will open up the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website at www.angeloaklead.com. Now, I will turn the call over to Srini.

Thank you, Randy, and thank you, everyone, for joining us today. Angel Oak started off the second half of the year very strong, with our results demonstrating the positive growth and the momentum we have built throughout the first half of the year. Late last year and at the beginning of this year, we set out to reposition our portfolio to reduce risk and increased liquidity. We accomplished that, and our emphasis then shifted to growth. You can see in this quarter's results that we are on our way to accomplishing this goal as well. Our focus is on optimizing the earnings levers that we can control, such as growing net interest margin and reducing operating expenses, while managing risk and maintaining liquidity. To that end, during the third quarter, we continued to pursue selective loan purchases at attractive rates and made further progress on reducing interest and operating expenses as we continued to grow the overall earnings power of our portfolio. In the third quarter, we drove a step-change improvement in net interest margin due to our strategic securitization activity and purchases of newly originated current coupon loans. As we stated in our second quarter earnings call, the reduction in interest expense driven by the AOMT 2023-4 securitization was demonstrated in our third quarter results. We have remained nimble in our securitization activity, completing two commingled deals alongside other Angel Oak entities in addition to a standalone AOMR deal. The AngelLog ecosystem affords us the ability to pursue securitization structures that provide the best strategic fit for the REIT. Current coupon loans purchased during the quarter buoyed net interest income despite lower unsecuritized loan balances. The weighted average coupon of our whole loan portfolio grew 99 basis points in the third quarter and including purchases and commitments to purchase since quarter end, currently sits at approximately 6.37%, a further increase of 54 basis points since quarter end. For context, these average coupons compared to 4.63% as of the end of Q1 2023. We are proud of the strategic progress we have made, and we feel we can maintain the momentum and drive further NIM growth in the following quarters as we redeploy capital into assets with significantly high yields. This effort will be supported by our ability to evaluate opportunities within our desired risk and return characteristics and actively acquire high-quality loans at attractive coupon rates. As with the recent quarters, we have remained focused on managing our expenses to maximize the operating effectiveness of AOMR. Throughout the first half of the year, we made significant progress reducing our operating expenses. In the third quarter, we captured additional savings reducing operating expenses excluding securitization by 12.5% versus the second quarter. We have also made efforts to optimize our financing in order to decrease our rated average rate on our funding costs. While there are signs that the Fed is near the end of the interest rate hike, mortgage applications and originations continue to be muted, with rates remaining elevated relative to recent years. Our non-QM loan origination volumes have been a bit more resilient than the GST loans, but given general market uncertainty, We'll continue to manage our whole loan position and expect that our nominal value in full loans will not exceed more than one and a half to two times the average nominal size of our securitization transaction expectations. We are proud to have reduced our overall warehouse debt by 69% this year and 82% since the high point of June 2022. We are committed to maintaining liquidity while redeploying capital into high-quality, high-yield assets. We are proud of our earnings growth. We have achieved this quarter. And though we are still dealing with elevated levels of market uncertainty, we believe that we have direct comparative advantage in our ability to assess and select where to allocate risk. We feel we are in great position to continue to grow earnings while keeping our focus on adequate liquidity and a low expense profile, establishing a very powerful earnings engine based on stable, resilient portfolio. I will now turn the call over to Brandon.