The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our business strategies, our expectations regarding the future performance of our business, and the other non-historical statements contained herein, are forward-looking statements. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and "Special Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K.
General
Angel Oak Mortgage REIT, Inc. is a real estate finance company focused on acquiring and investing in first lien non-QM loans and other mortgage-related assets in theU.S. 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 operates 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. Further, we may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act") and an affiliate ofAngel 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$17.4 billion in assets under management as ofDecember 31, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately$9.2 billion of mortgagerelated assets. Angel Oak Mortgage Lending is a market leader in nonQM loan production and, as ofDecember 31, 2022 , had originated over$17.1 billion in total nonQM loan volume since its inception in 2011. Angel Oak is headquartered inAtlanta and has approximately 400 employees across its enterprise. Through our relationship with our Manager, we benefit from Angel Oak's vertically integrated platform and inhouse expertise, providing us with the resources that we believe are necessary to generate attractive riskadjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to nonQM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak's analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities, and operational expertise. We have elected to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2019 . Commencing with our taxable year endedDecember 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 common stock commenced trading on theNew York Stock Exchange onJune 17, 2021 .
We expect to derive our returns primarily from the difference between the interest we earn on loans we make and our cost of capital, as well as the returns from bonds, including risk retention securities, that are retained after securitizing the underlying loan collateral.
SEC Order Regarding an Affiliate of Our Manager
OnAugust 10, 2022 , theSEC accepted offers of settlement fromAngel Oak Capital , an affiliate of our Manager, andAshish Negandhi , a former portfolio manager atAngel Oak Capital , and entered an administrative order against bothAngel Oak Capital andMr. Negandhi . The settlement and administrative order relate to AOMT 2018-PB1, a securitization issued in 2018. AOMT 2018-PB1 was issued before we commenced operations, and we were therefore not involved with and did not invest in AOMT 2018-PB1. AOMT 2018-PB1 was a one-off, first-of-its-kind,$90 million securitization with fix-and-flip loans as the underlying collateral. Fix-and-flip loans are loans made to borrowers for the purpose of purchasing, renovating, and selling residential properties. These loans were originated by an affiliate ofAngel Oak Capital ,Angel Oak Prime Bridge , which ceased originating loans in 2019. Angel Oak Capital and its affiliates have not issued another securitization solely backed by this type of collateral.
The
55 -------------------------------------------------------------------------------- the use of funds held in escrow accounts (funds held to reimburse borrowers for renovations to the properties) to cure loan delinquencies. Angel Oak Capital andMr. Negandhi did not admit or deny these findings. The order does not allege thatAngel Oak Capital orMr. Negandhi acted with fraudulent intent. TheSEC acceptedAngel Oak Capital's andMr. Negandhi's offers to settle the case. Angel Oak Capital andMr. Negandhi paid fines of$1,750,000 and$75,000 , respectively, were censured, and agreed to cease and desist from future violations.
Trends and Recent Developments
Overall macroeconomic environment and its effect on us
The 2022 macroeconomic environment was significantly more challenging than 2021, and was defined by volatility and uncertainty in the financial markets. In an effort to combat historically high inflation, theU.S. Federal Reserve Bank of the United States (the "Fed") approved an unprecedented seven increases to the federal funds rate over the course of the year, commencing inMarch 2022 . These increases took the benchmark interest rate from 0.25% as ofDecember 31, 2021 , to 4.75% as ofDecember 31, 2022 , marking its highest level in 15 years (i.e., prior to the Great Financial Crisis of 2008).The Fed has raised the federal funds rate by an additional 25 basis points to date in 2023, and has stated that it anticipates that "ongoing increases" in its target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to its goal of 2% per year. An increase in the federal funds rate generally has the effect of raising borrowing rates for all types of consumer credit, including mortgages. Sharply rising interest rates over 2022 resulted in a slowdown of mortgage origination and refinancing activity, as the average conforming 30-year mortgage rate with no points averaged approximately 6.7% by the end of the third quarter of 2022, remaining stable through the fourth quarter of 2022 - more than double that same metric as ofDecember 2021 . We believe that a further increase in interest rates from the previous historically low levels is unlikely to significantly affect demand for non-QM mortgages; however, in 2022, the rapid increase in interest rates, the widening of interest rate spreads, and widespread market uncertainty negatively affected the valuation of our portfolio, which incurred significant unrealized losses for the year, offset partially by realized gains from our interest rate hedging activity. Additionally, the sharp increase in interest rates over a short period of time resulted in a volatile and unpredictable environment for securitizing loans. Our investment performance Net Interest Margin ("NIM"). Our NIM compressed in 2022 as our portfolio of residential whole loans was primarily originated at lower coupons, while our interest expense increased due to floating rate increases based on the Secured Overnight Financing Rate ("SOFR"). Net realized loss. Our net realized loss for the year endedDecember 31, 2022 was primarily due to a bulk sale of certain residential mortgage loans during the fourth quarter of 2022, substantially offset by realized gains on interest rate futures and TBAs.
Net unrealized loss. Our net unrealized loss resulted primarily from mark-to-market valuations on our residential mortgage loans - at fair value and residential mortgage loans in securitization trusts - at fair value. Loan valuations decrease as interest rate spreads widen, and loans originated at lower coupons decrease in value as current interest rates increase.
Summary of Securitization Activity
Subsequent toDecember 31, 2022 , onJanuary 31, 2023 , we participated in an approximately$580.5 million scheduled principal balance securitization transaction (AOMT 2023-1) backed by a pool of residential mortgage loans. We contributed loans with a scheduled principal balance of$241.3 million , with other Angel Oak entities contributing the remaining balance. We may strategically enter into similar securitizations with other Angel Oak entities in the future, and / or issue securitizations where we are the sole participant, as we did in 2022 and 2021, as further described below. OnFebruary 11, 2022 , we issued AOMT 2022-1, securitizing a total of$537.6 million of unpaid principal balance of seasoned residential non-QM mortgage loans. OnJuly 13, 2022 , we issued AOMT 2022-4, securitizing a total of$184.7 million of unpaid principal balance of seasoned residential non-QM mortgage loans. The issuance of AOMT 2022-1 and AOMT 2022-4, along with our 2021 issuances of AOMT 2021-4 and AOMT 2021-7, securitized a total of approximately$1.4 billion of unpaid principal balance of seasoned residential non-QM mortgage loans. We issued these securitizations 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 these securitizations. Given the accounting rules surrounding these types of transactions, we have consolidated these securitizations, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of the applicable balance sheet dates. The securitizations in which we participated in 2020 and 2019 were securitization transactions entered into with other Angel Oak entities, where we contributed residential mortgage loans to securitization vehicles along with the other Angel Oak entities. For these securitizations, we did not meet the accounting rules to be considered a "primary beneficiary" of the applicable securitization vehicle, and 56 -------------------------------------------------------------------------------- therefore, for these securitizations, the bonds retained in the securitization are held on our consolidated balance sheets as ofDecember 31, 2022 andDecember 31, 2021 .
Purchases and Sale of Whole Loans
During the year endedDecember 31, 2022 , we purchased$995.2 million in residential whole loans. These purchases were completed by the third quarter of 2022. We paused purchases of residential whole loans in the fourth quarter of 2022 in order to preserve capital and increase flexibility. OnNovember 18, 2022 , we sold, on a servicing released basis, residential mortgage loans with a gross weighted average coupon of approximately 4.5%, and a cost basis of approximately$315.6 million and a carrying value of$267.6 million . The purchase price for the mortgage loans acquired by the buyer was$252.7 million , and in conjunction with the sale, we repaid$221.2 million of warehouse financing debt. The sale of these lower-coupon loans reduced debt and released cash, mitigating risk to our capital structure. Additionally, during the year endedDecember 31, 2022 , we sold commercial loans with an unpaid principal balance of$11.2 million and market value of$10.5 million for cash proceeds of$11.0 million .
Whole loan financing arrangements
Our lender base is fluid and we intend to enter into new agreements and / or exit agreements as we deem prudent, in accordance with our needs and in accordance with our core financial strategy of purchasing whole loans and retaining them until securitized. See Item 7, Liquidity and Capital Resources, for a full description of our financing arrangements. Our total borrowing capacity was$1.2 billion as ofDecember 31, 2022 . Highlights of whole loan financing facilities activity over 2022 is as follows: •OnApril 13, 2022 , we entered into a a master repurchase agreement with a multinational bank ("Multinational Bank 1"), the maximum borrowing base of which was increased onAugust 4, 2022 by$260.0 million to$600.0 million . •OnOctober 4, 2022 , we entered into short-term master repurchase agreements with two affiliated institutional investors ("Institutional Investors A and B") for a pool of loans with financing of approximately$168.7 million . This short-term financing was paid in full inJanuary 2023 , and the master repurchase agreements were terminated simultaneously therewith. •OnDecember 19, 2022 , the facility limit under a master repurchase agreement with a multinational bank ("Global Investment Bank 3") was increased by$86.0 million to$286.0 million by adding a static pool of additional mortgage loans to the facility. Furthermore, the termination date of the facility was extended toDecember 19, 2023 ; however, the amendment did not extend the revolving period, which ended onDecember 19, 2022 . Additionally, the amendment generally removed "mark to market" provisions from the previous agreement, and requires an economic interest rate hedging account to be maintained to the reasonable satisfaction ofGlobal Investment Bank 3, which is for its benefit of and under its sole control.
•During 2022, various financing facilities were either allowed to expire by their terms or were terminated by us.
Key Financial Metrics
As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity, Book Value per Share of Common Stock, and Economic Book Value per Share of Common Stock. 57 --------------------------------------------------------------------------------
Distributable Earnings
Distributable Earnings is a nonGAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), excluding (1) unrealized gains and losses on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses. We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. We believe Distributable Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. As a REIT, we are generally required to distribute at least 90% of our annual REIT taxable income and to payU.S. federal income tax at the regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors. Distributable Earnings is one of a number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings 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 may not be comparable to similar measures presented by other REITs. We also use Distributable Earnings to determine the incentive fee, if any, payable to our Manager pursuant to the management agreement (the "Management Agreement") that we andAngel Oak Mortgage Operating Partnership, LP (the "Operating Partnership") entered into with our Manager upon the completion of our initial public offering ("IPO") onJune 21, 2021 . For information on the fees that are payable to our Manager under the Management Agreement, see Part II, Item 8, Note 13 - Related Party Transactions. Distributable Earnings were approximately$19.4 million and$34.2 million for the years endedDecember 31, 2022 and 2021, respectively. The table below sets forth a reconciliation of net income allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the years endedDecember 31, 2022 and 2021: December 31, 2022 December 31, 2021 (in thousands) Net income (loss) allocable to common stockholders $ (187,847) $ 21,098
Adjustments:
Net other-than-temporary credit impairment losses - - Net unrealized (gains) losses on derivatives (13,054) 7,688
Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation
67,401 1,949 Net unrealized (gains) losses on residential loans 146,347 1,956 Net unrealized (gains) losses on commercial loans 844 (231)
Net unrealized (gains) losses on financial instruments at fair value
- - (Gains) losses on extinguishment of debt - - Non-cash equity compensation expense 5,753 1,715 Incentive fee earned by the Manager - - Realized gains (losses) on terminations of interest rate swaps - - Total other non-recurring (gains) losses - - Distributable Earnings $ 19,444 $ 34,175 58
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Distributable Earnings Return on Average Equity
Distributable Earnings Return on Average Equity is a non-GAAP measure and is defined as annual or annualized Distributable Earnings divided by average total common stockholders' equity. We believe that the presentation of Distributable Earnings Return on Average Equity provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. Additionally, we believe Distributable Earnings Return on Average Equity provides investors with additional detail on the Distributable Earnings generated by our invested equity capital. We believe Distributable Earnings Return on Average Equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Distributable Earnings Return on Average Equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. 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 years endedDecember 31, 2022 and 2021: December 31, 2022 December 31, 2021 ($ in thousands) Distributable Earnings $ 19,444 $ 34,175 Average total common stockholders' equity $ 355,944 $ 369,749 Distributable Earnings Return on Average Equity 5.46 % 9.24 %
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 each quarter-end date of 2022 and as ofDecember 31, 2021 : December 31, September 30, June 30, March 31, December 31, 2022 2022 2022 2022 2021 (in thousands except for share and per share data) Total stockholders' equity$ 236,479 $ 264,957 $ 367,284 $ 421,436 $ 491,390 Preferred stock - (101) (101) (101) (101) Common stockholders' equity$ 236,479 $ 264,856
24,925,357 24,925,357 24,925,930 25,085,796 25,227,328 Book value per share of common stock$ 9.49 $ 10.63 $ 14.73 $ 16.80 $ 19.47
Economic Book Value per Share of Common Stock
"Economic book value" is a non-GAAP financial measure of our financial position. To calculate our economic book value, the portions of our non-recourse financing obligation held at amortized cost are adjusted to fair value. These adjustments are also reflected in the table below in our end of period common 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 each quarter-end date of 2022 and as ofDecember 31, 2021 : 59 --------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, 2022 2022 2022 2022 2021
(in thousands except for share and per share data)
GAAP total stockholders' equity
- (101) (101) (101) (101) GAAP total common stockholders' equity for book value per share of common stock$ 236,479 $ 264,856 $ 367,183 $ 421,335 $ 491,289 Adjustments: Fair value adjustment for securitized debt held at amortized cost 90,348 57,596 32,863 20,443 1,079 Stockholders' equity including economic book value adjustments$ 326,827 $ 322,452
Number of shares of common stock outstanding at period end 24,925,357 24,925,357 24,925,930 25,085,796 25,227,328 Book value per share of common stock$ 9.49 $ 10.63 $ 14.73 $ 16.80 $ 19.47 Economic book value per share of common stock$ 13.11 $ 12.94 $ 16.05 $ 17.61 $ 19.52 Results of Operations Our results of operations presented herein for the year endedDecember 31, 2021 do not reflect the expenses typically associated with being a public company for a full reporting period, including increased insurance, legal, and accounting fees, full periods of equity compensation expense, expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), the payment of a base management fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement compared to the pre-IPO management agreement as among us, ourManager and Angel Oak Mortgage Fund, LP ("Angel Oak Mortgage Fund "), our sole common stockholder prior the IPO (the "pre-IPO management agreement"), and the payment of increased directors' fees for our independent directors. Additionally, pursuant to the Management Agreement, we are required to reimburse our Manager for its operating expenses, including thirdparty expenses, incurred on our behalf; and our Manager is also entitled to reimbursement for costs of the wages, salaries, and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our former Chief Executive Officer and President (who, after the completion of the IPO until his separation from the Company onSeptember 28, 2022 , dedicated a substantial majority of his business time to us) based on the percentage of his business time spent on our matters during his time of service, and any other dedicated or partially dedicated employees based on the percentage of each such person's working time spent on matters related to us. 60 --------------------------------------------------------------------------------
Year Ended
The following table sets forth a summary of our results of operations for the
years ended
December 31, 2022 December 31, 2021 (in thousands) INTEREST INCOME, NET Interest income $ 115,544 $ 60,555 Interest expense 63,024 11,476 NET INTEREST INCOME 52,520 49,079
REALIZED AND UNREALIZED LOSSES, NET Net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS
(8,717) (4,926)
Net unrealized loss on mortgage loans, debt at fair value option, and derivative contracts
(201,753) (2,392) TOTAL REALIZED AND UNREALIZED LOSSES, NET (210,470) (7,318) EXPENSES Operating expenses 12,179 6,060 Due diligence and transaction costs 1,376 2,551 Stock compensation 5,753 1,715 Operating expenses incurred with affiliate 3,096 2,828 Securitization costs 3,137 - Management fee incurred with affiliate 7,799 5,894 Total operating expenses 33,340 19,048 INCOME (LOSS) BEFORE INCOME TAXES (191,290) 22,713 Income tax expense (benefit) (3,457) 1,600 NET INCOME (LOSS) (187,833) 21,113 Preferred dividends (14) (15) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ (187,847) $ 21,098 Other comprehensive income (loss) (24,127) 4,039 TOTAL COMPREHENSIVE INCOME (LOSS) $ (211,974) $ 25,137 61
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Net Interest Income
The following table sets forth the components of net interest income for the
years ended
December 31, 2022 December 31, 2021 (in thousands) Interest income Interest income Average Interest income / expense Average balance / expense balance Residential mortgage loans$ 51,634 $
1,082,632
48,022 1,004,632 7,709 153,158 Commercial mortgage loans 1,137 15,392 641 9,284 RMBS 13,613 384,038 24,221 264,095 CMBS 778 8,886 2,266 11,142
U.S. Treasury Securities 8 46,153 7 58,076 Other interest income (1) 352 41,684 6 32,050 Total interest income 115,544 60,555 Interest expense Notes payable 35,621 916,772 8,682 350,919 Non-recourse securitization obligation, collateralized by residential mortgage loans 25,654 967,787 2,457 141,133 Repurchase facilities 1,749 155,856 337 209,502 Total interest expense 63,024 11,476 Net interest income$ 52,520 $ 49,079
(1) Primarily comprised of interest received on cash deposits, including interest earned on margin cash collateral.
Net interest income for the years endedDecember 31, 2022 and 2021 was$52.5 million and$49.1 million , respectively. Net interest income increased by approximately$3.4 million for the year endedDecember 31, 2022 as compared to 2021, primarily due to interest income generated from our target asset purchases, offset by increased borrowing rates on our warehouse loan facilities, which are based on a short-term SOFR plus a pricing spread, which borrowing rates increased during 2022.
Total Realized and Unrealized Gains (Losses)
The components of total realized and unrealized gains (losses), net for the
years ended
December 31 ,
2022
(in
thousands)
Realized and unrealized gain (loss) on residential mortgage loans
$ (213,528) $ 378 Realized and unrealized loss on residential loans held in securitization trusts (71,526) $ (3,427) Realized loss on RMBS (10,820) (15,113) Realized loss on CMBS (1,520) (971) Realized and unrealized gain (loss) on commercial mortgage loans (1,296) 355
Unrealized appreciation (depreciation) on interest rate futures
2,939 (530) Realized and unrealized gain (loss) on TBAs 17,411 (1,255) Realized gain on interest rate futures 67,870 13,253 Realized and unrealized loss onU.S. Treasury Securities - (8)
Total realized and unrealized gains (losses), net $ (210,470)
$ (7,318) For the years endedDecember 31, 2022 and 2021, total realized and unrealized gains (losses), net, were losses of$210.5 million and$7.3 million , respectively. For the year endedDecember 31, 2022 , a decrease in mark-to-market valuations on our portfolios of residential mortgage loans and loans in securitization trust were the primary drivers of the total unrealized loss. Additionally, the aforementioned sale of residential mortgage loans onNovember 18, 2022 contributed$63.5 million of realized losses to the total of realized losses, which were 62 -------------------------------------------------------------------------------- partially offset by realized gains on interest rate hedging activity. Comparatively, for the year endedDecember 31, 2021 , residential mortgage loan valuations were generally stable or favorable, and realized gain (loss) activity on residential mortgage loans was generally immaterial, limited to losses on loan premiums on loans paid in full. For the year endedDecember 31, 2021 , the total realized and unrealized loss was primarily due to realized loss on RMBS due to increased prepayment speeds during 2021 on the IO and XS tranches that we typically hold from prior securitizations. Our interest rate futures, as a partial economic hedge against residential loan valuations, performed as expected in 2021 and more than offset the unrealized losses experienced in our portfolio of residential loans held in securitization trusts. Expenses Operating Expenses For the years endedDecember 31, 2022 and 2021, our operating expenses were$12.2 million and$6.1 million , respectively. The increase in operating expenses during the year endedDecember 31, 2022 was due to an increase in costs due to being a newly-public company for a full year, including increased insurance, audit, and legal fees. We also experienced an increase in loan administration costs, commensurate with an increase in the number of loans in our overall portfolio during the comparative period, as our residential loans held in securitization trusts recorded on our balance sheets are administered by us.
Due Diligence and Transaction Costs
For the years endedDecember 31, 2022 and 2021, our due diligence and transaction costs were$1.4 million and$2.6 million , respectively. The decrease in these costs was due to whole loan acquisition diligence costs, which decreased over the comparative period as we purchased fewer whole loans during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , as we paused loan purchases in the fourth quarter of 2022.
Stock Compensation
For the years endedDecember 31, 2022 and 2021, our stock compensation expense was$5.8 million and$1.7 million , respectively. Our stock compensation expense for the year endedDecember 31, 2022 included a$2.6 million one-time expense resulting from the accelerated vesting of stock awards for our former Chief Executive Officer and President, due to his separation from the Company, in accordance with the Company's Executive Severance and Change in Control Plan (the "Executive Severance Agreement"). Our stock compensation expense for 2021 included approximately six months of expense, as the initial equity awards were granted on the IPO date ofJune 21, 2021 . Our restricted stock awards generally vest over one, three, or four years (depending on the tranche of award), commencing on the one year anniversary of the grant date.
Operating Expenses Incurred with Affiliate
For the years endedDecember 31, 2022 and 2021, our operating expenses incurred with affiliate were$3.1 million and$2.8 million , respectively. These expenses increased due to both a severance accrual as further described below, and the allocated time of partially and fully dedicated employees' compensation being reimbursed by us, which increased over the comparative period due to more partially and fully dedicated employees' time being allocated to us.
On
Securitization expenses
For the year endedDecember 31, 2022 , our securitization expenses were$3.1 million . There were no securitization expenses incurred during the year endedDecember 31, 2021 as the non-recourse securitization debt of the AOMT 2021-4 and AOMT 2021-7 securitizations is held at amortized cost, and thus, the debt issuance costs involved in those securitizations were capitalized against the securitization obligation and are amortized to interest expense over time.
Management Fee Incurred with Affiliate
Prior to the completion of the IPO, we were required to pay our Manager, in cash, a management fee pursuant to the pre-IPO management agreement. The management fee payable under the pre-IPO management agreement was calculated based on theActively Invested Capital (as defined in the pre-IPO management agreement) of the limited partners inAngel Oak Mortgage Fund , which we believe is reflective of a typical management fee payable by a private investment vehicle. The pre-IPO management agreement terminated on the completion of the IPO, and we and theOperating Partnership subsequently entered into the Management Agreement with our Manager effective as of the completion of the IPO. Pursuant to the Management 63 -------------------------------------------------------------------------------- Agreement, our Manager is entitled to a base management fee, which is calculated based on our Equity (as defined in the Management Agreement), and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the Management Agreement. For the years endedDecember 31, 2022 and 2021, our management fee incurred with affiliate was$7.8 million and$5.9 million , respectively. The increase is due to the increase in our average Equity (as defined in the Management Agreement) for the year endedDecember 31, 2022 as compared to the same period in 2021. The calculation of Equity for the purposes of the Management Agreement includes the addition of Distributable Earnings, which is the primary departure from the calculation of equity in accordance with GAAP, which has caused Equity (as defined in the Management Agreement) to increase despite a decrease in our equity calculated in accordance with GAAP.
Income Taxes
During the year endedDecember 31, 2022 , we recorded an income tax benefit of approximately$3.5 million based on our expectation of a recovery of income taxes arising from losses incurred relating to our taxable REIT subsidiary ("TRS"). During the year endedDecember 31, 2021 , we incurred an income tax expense of approximately$1.6 million based on an expectation of income taxes incurred on activities relating to income derived from our TRS.
Our Portfolio
As ofDecember 31, 2022 , our portfolio consisted of approximately$2.9 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as ofDecember 31, 2022 : Allocated Fair Value Collateralized Debt Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans$ 770,982 $ 639,870$ 131,112 55.4 % Residential mortgage loans in securitization trust 1,027,442 1,003,485 23,957 10.1 % Commercial mortgage loans 9,458 - 9,458 4.0 % Total whole loan portfolio$ 1,807,882 $ 1,643,355$ 164,527 69.5 % Investment securities RMBS$ 1,055,338 52,544$ 1,002,794 424.1 % CMBS 6,111 - 6,111 2.6 % Total investment securities$ 1,061,449 $ 52,544$ 1,008,905 426.7 % Total investment portfolio$ 2,869,331 $
1,695,899$ 1,173,432 496.2 % Target assets (1)$ 2,869,331 $ 1,695,899$ 1,173,432 496.2 % Cash$ 29,272 $ -$ 29,272 12.4 % Other assets and liabilities (2) (966,225) - (966,225) (408.6) % Total$ 1,932,378 $ 1,695,899$ 236,479 100.0 %
(1) "Target assets" as presented above comprises the total investment portfolio,
as there were no
(2) Other assets and liabilities presented is calculated as a net liability
substantially comprised of
64 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , our portfolio consisted of approximately$2.2 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio including the manner in which our equity capital was allocated among investment types, as ofDecember 31, 2021 : Allocated Fair Value Collateralized Debt Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans$ 1,061,912 $ 852,961$ 208,951 42.5 % Residential mortgage loans in securitization trust 667,365 616,557 50,808 10.3 % Commercial mortgage loans 18,664 447 18,217 3.7 % Total whole loan portfolio$ 1,747,941 $ 1,469,965$ 277,976 56.5 % Investment securities RMBS$ 485,634 $ 360,501$ 125,133 25.5 % CMBS 10,756 - 10,756 2.2 % U.S. Treasury Securities 249,999 248,750 1,249 0.3 % Total investment securities$ 746,389 $ 609,251$ 137,138 28.0 % Total investment portfolio$ 2,494,330 $ 2,079,216$ 415,114 84.5 % Target assets (1)$ 2,244,331 $ 1,830,466$ 413,865 84.2 % Cash$ 40,801 $ -$ 40,801 8.3 % Other assets and liabilities 35,475 - 35,475 7.2 % Total$ 2,570,606 $ 2,079,216$ 491,390 100.0 %
(1) "Target assets" as presented above includes the total investment portfolio
excluding
Residential Mortgage Loans
The following table sets forth additional information on the residential
mortgage loans in our portfolio as of
Portfolio Range
Portfolio Weighted Average
($ in
thousands)
Unpaid principal balance ("UPB")$59 -$3,441 $496 Interest rate 2.88% - 9.99% 4.80% Maturity date 9/21/2036 - 6/20/2062 February 2053 FICO score at loan origination 575 - 823 737 LTV at loan origination 8% - 95% 70% DTI at loan origination 1.20% - 59.06% 23% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.91% 65
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The following table sets forth additional information on the residential
mortgage loans in our portfolio as of
Portfolio Range
Portfolio Weighted Average
($ in thousands) UPB$48 -$3,410 $506 Interest rate 2.75% - 9.25% 4.49% Maturity date 10/1/2036 - 12/1/2061 April 2053 FICO score at loan origination 521 - 823 740 LTV at loan origination 12% - 95% 70% DTI at loan origination 1.60% - 59.06% 27% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.30% The following table sets forth the information regarding the underlying collateral of our residential loans held in securitization trusts as ofDecember 31, 2022 : ($ in thousands) UPB$1,151,332 Number of loans 2,664 Weighted average loan coupon
4.72%
Average loan amount
434
Weighted average LTV at loan origination and deal date
69%
Weighted average credit score at loan origination and deal date
743
Current 3-month CPR
5%
Percentage of loans 90+ days delinquent (based on UPB)
-%
The following chart illustrates the geographic distribution of the underlying
collateral of our residential loans held in securitization trusts as of
[[Image Removed: aomr-20221231_g1.jpg]]
Note: No state in "Other" represents more than a 3% concentration of the
geographic distribution of the underlying collateral of our residential loans
held in securitization trusts as ofDecember 31, 2022 . 66 -------------------------------------------------------------------------------- The following table sets forth the information regarding the underlying collateral of our residential loans held in securitization trusts as ofDecember 31, 2021 : ($ in thousands) UPB$642,951 Number of loans 1,494 Weighted average loan coupon
4.98%
Average loan amount
433
Weighted average LTV at loan origination and deal date
72%
Weighted average credit score at loan origination and deal date
741
Current 3-month CPR
35.1
Percentage of loans 90+ days delinquent (based on UPB)
0.13
The following chart illustrates the geographic distribution of the underlying
collateral of our residential loans held in securitization trusts as of
[[Image Removed: aomr-20221231_g2.jpg]]
Note: No state in "Other" represents more than a 3% concentration of the
geographic distribution of the underlying collateral of our residential loans
held in securitization trusts as ofDecember 31, 2021 . 67 --------------------------------------------------------------------------------
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
[[Image Removed: aomr-20221231_g3.jpg]] [[Image Removed: aomr-20221231_g4.jpg]]
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
[[Image Removed: aomr-20221231_g5.jpg]] [[Image Removed: aomr-20221231_g6.jpg]]
68 -------------------------------------------------------------------------------- The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as ofDecember 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 ofDecember 31, 2022 : [[Image Removed: aomr-20221231_g7.jpg]] [[Image Removed: aomr-20221231_g8.jpg]] [[Image Removed: aomr-20221231_g9.jpg]]
Note: No state in "Other" represents more than a 3% concentration of the
residential mortgage loans in our portfolio that we owned directly as ofDecember 31, 2022 . 69
-------------------------------------------------------------------------------- The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as ofDecember 31, 2021 , 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 ofDecember 31, 2021 : [[Image Removed: aomr-20221231_g10.jpg]] [[Image Removed: aomr-20221231_g11.jpg]] [[Image Removed: aomr-20221231_g12.jpg]]
Note: No state in "Other" represents more than a 3% concentration of the
residential mortgage loans in our portfolio that we owned directly as of
70 -------------------------------------------------------------------------------- Commercial Mortgage Loans
The following table provides additional information on the commercial mortgage
loans in our portfolio as of
Portfolio Range Portfolio Weighted Average ($ in thousands) UPB$242 -$4,300 $1,656 Interest rate 5.50% - 8.38% 7.03% Loan term 0.42 - 27.18 years 7.68 years LTV at loan origination 46.7% - 75.0% 50.9%
The following table provides additional information on the commercial mortgage
loans in our portfolio as of
Portfolio Range Portfolio Weighted Average ($ in thousands) UPB$244 -$4,300 $1,700 Interest rate 5.75% - 8.38% 6.25% Loan term 1.42 - 28.18 years 8.36 years LTV at loan origination 46.7% - 75.0% 59.8% 71
-------------------------------------------------------------------------------- The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as ofDecember 31, 2022 andDecember 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Our Commercial Mortgage Loans as ofDecember 31, 2022 : [[Image Removed: aomr-20221231_g13.jpg]] Geographic Diversification of Our Commercial Mortgage Loans as ofDecember 31, 2021 : [[Image Removed: aomr-20221231_g14.jpg]] Note: Amount in the charts above may not sum due to rounding. RMBS InMarch 2019 , we participated in our first securitization transaction pursuant to which we contributed to AOMT 20192 nonQM loans with a carrying value of approximately$255.7 million that we had accumulated and held on our balance sheet. We received bonds from AOMT 20192 with a fair value of approximately$55.8 million , including approximately$33.0 million in risk retention securities (representing 5% of each class of the bonds issued as part of the transaction). Additionally, inJuly 2019 , we participated in a second securitization transaction pursuant to which we contributed to AOMT 20194 nonQM loans with a carrying value of approximately$147.4 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 20194 with a fair value of approximately$16.8 million . Furthermore, inNovember 2019 , we participated in a third securitization transaction pursuant to which we contributed to AOMT 20196 nonQM loans with a carrying value of approximately$104.3 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 20196 with a fair value of approximately$10.7 million . InJune 2020 , we participated in a fourth securitization transaction pursuant to which we contributed to AOMT 20203 nonQM loans with a carrying value of approximately$482.9 million that we had accumulated and held on our balance sheet. We received bonds from 72 --------------------------------------------------------------------------------
AOMT 20203 with a fair value of approximately
Certain information regarding the mortgage loans underlying our portfolio of
RMBS issued in AOMT securitization transactions is set forth below as of
AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans$119,217 $120,242 $148,148 $189,763 Number of loans 409 421 555 578 Weighted average loan coupon 7.00 % 7.07 % 6.40 % 5.83 % Average loan amount$291 $286 $267 $328 Weighted average LTV at loan origination and deal date 73 % 72 % 69 % 74 % Weighted average credit score at loan origination and deal date 696 699 717 720 Current 3-month CPR (1) 12.14 % 18.30 % 12.32 % 5.56 % 90+ day delinquency (as a % of UPB) 11.79 % 11.54 % 3.06 % 4.37 % Fair value of first loss piece (2)$12,708 $3,669 $1,984 $20,106 Investment thickness (3) 29.17 % 13.24 % 13.78 % 16.35 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.
Certain information regarding the mortgage loans underlying our portfolio of
RMBS issued in AOMT securitization transactions is set forth below as of
AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans$183,489 $184,793 $206,392 $262,383 Number of loans 586 604 743 757 Weighted average loan coupon 7.082 % 7.066 % 6.441 % 5.905 % Average loan amount$313 $306 $278 $347 Weighted average LTV at loan origination and deal date 75 % 73 % 71 % 74 % Weighted average credit score at loan origination and deal date 695 703 716 717 Current 3-month CPR (1) 44.89 % 50.89 % 45.08 % 43.61 % 90+ day delinquency (as a % of UPB) 12.33 % 8.86 % 5.31 % 3.82 % Fair value of first loss piece (2)$13,634 $4,019 $2,334 $26,447 Investment thickness (3) 18.95 % 8.61 % 6.20 % 11.82 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 73 --------------------------------------------------------------------------------
The following table provides certain information with respect to our RMBS
portfolio received in AOMT securitization transactions and acquired from other
third parties as of
RMBS Repurchase Debt (1) Allocated Capital Third Party Third Party Third Party AOMT RMBS Total AOMT RMBS Total AOMT RMBS Total (in thousands) Mezzanine$ 1,958 $ -$ 1,958 $ 1,470 $ -$ 1,470 $ 488 $ -$ 488 Subordinate 49,578 - 49,578 24,982 - 24,982 24,596 -$ 24,596 Interest only / excess 10,424 - 10,424 1,506 - 1,506 8,918 -$ 8,918 Whole pool (2) - 993,378 993,378 - 0 24,586 - 968,792$ 968,792 Retained RMBS in VIEs - - - - 24,586 - - - - Total$ 61,960 $ 993,378 $ 1,055,338 $ 27,958 $ 24,586 $ 52,544 $ 34,002 $ 968,792 $ 1,002,794 (1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).(2) A portion of repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). These bonds, with a fair value of$110.5 million , are not reflected in the consolidated balance sheets, as the Company reflects the assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its consolidated balance sheets. (2) The whole pool RMBS presented as ofDecember 31, 2022 were purchased from a broker to whom the Company owes approximately$1.01 billion , payable upon the settlement date of the trade. See Item 8, Financial Statements and Supplementary Data, Note 8 - Due to Broker.
The following table provides certain information with respect to our RMBS
portfolio received in AOMT securitization transactions and acquired from other
third parties as of
RMBS Repurchase Debt Allocated Capital Third Party Third Party Third Party AOMT RMBS Total AOMT RMBS Total AOMT RMBS Total (in thousands) Senior$ 3,076 $ -$ 3,076 $ 4,089 $ -$ 4,089 $ (1,013) $ -$ (1,013) Mezzanine 2,178 - 2,178 1,631 - 1,631 547 -$ 547 Subordinate 80,058 10,292 90,350 - - - 80,058 10,292$ 90,350 Interest only / excess 15,052 2,923 17,975 - - - 15,052 2,923$ 17,975 Whole pool - 372,055 372,055 - 354,781 354,781 - 17,274$ 17,274 Total$ 100,364 $ 385,270 $ 485,634 $ 5,720 $ 354,781 $ 360,501 $ 94,644 $ 30,489 $ 125,133
The following table sets forth information with respect to our RMBS ending
balances, at fair value, as of
Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value$ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634 Acquisitions: Secondary market purchases of AOMT securities - - - - - - Third party securities - - - - 3,151,406 3,151,406 Effect of principal payments / called deals (3,041) (171) (29,612) (169) (2,533,834) (2,566,827) IO and excess servicing prepayments - - 2,256 (21,256) - (19,000) Changes in fair value, net (35) (49) (13,416) 13,874 3,751 4,125 Ending fair value $ -$ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338 74
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The following table sets forth information with respect to our RMBS ending
balances, at fair value, as of
Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value$ 18,297 $ 2,207 $ 97,614 $ 31,818 $ -$ 149,936 Acquisitions: Secondary market purchases of AOMT securities - - 2,209 - - 2,209 Third party securities - - 5,122 7,485 1,466,854 1,479,461 Effect of principal payments / called deals (15,029) - (19,576) (3,781) (1,096,112) (1,134,498) IO and excess servicing prepayments - - - (17,355) - (17,355) Changes in fair value, net (192) (29) 4,981 (192) 1,313 5,881 Ending fair value$ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as ofDecember 31, 2022 (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 December 31, 2022) [[Image Removed: aomr-20221231_g15.jpg]]
Note: No state in "Other" represents more than a 4% concentration of the loans
underlying our portfolio of RMBS issued in AOMT securitization transactions as ofDecember 31, 2022 . 75
-------------------------------------------------------------------------------- The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as ofDecember 31, 2021 (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 ofDecember 31, 2021 ) [[Image Removed: aomr-20221231_g16.jpg]]
Note: 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
CMBS
InNovember 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$8.9 million . Certain information regarding the commercial mortgage loans underlying our portfolio of commercial mortgage-backed securities "CMBS" issued in the AOMT 2020-SBC1 securitization transaction is shown below as ofDecember 31, 2022 andDecember 31, 2021 : December 31, 2022 December 31, 2021 ($ in thousands) UPB of loans$122,432 $140,360 Number of loans 160 189 Weighted average loan coupon 7.4 % 7.4 % Average loan amount$765 $743 Weighted average LTV at loan origination and deal date 58.4 % 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 ofDecember 31, 2022 andDecember 31, 2021 : December 31, 2022 December 31, 2021 Allocated Allocated CMBS Repurchase Debt Capital CMBS Repurchase Debt Capital (in thousands) Senior $ - $ - $ - $ - $ - $ - Mezzanine - - - - - - Subordinate 2,901 - 2,901 7,993 - 7,993 Interest only / excess 3,210 - 3,210 2,763 - 2,763 Total$ 6,111 $ -$ 6,111 $ 10,756 $ -$ 10,756 76
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Liquidity and Capital Resources
Overview
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our investments and operating costs, make distributions to our stockholders, and satisfy other general business needs. Our financing sources historically have included capital contributions from our investors prior to the IPO, the proceeds from the IPO and concurrent private placement (which aforementioned capital sources have all been deployed), payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our inplace loan financing lines and repurchase facilities, and securitizations of our whole loans. Going forward, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related, or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources, and the investment opportunities available to us. We have used and expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgagerelated assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we have financed and expect to continue to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides longterm financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. 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 as well as sponsoring sole securitization transactions, and may continue to do so in the future. We believe these identified sources of financing will be adequate for purposes of meeting our shortterm (within one year) and our longerterm liquidity needs. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and any potential changes in market conditions.
Description of Existing Financing Arrangements
As ofDecember 31, 2022 , we were a party to five loan financing lines, consisting of three uncommitted loan financing lines and two static pool borrowings, for a total borrowing capacity in an aggregate amount of up to$1.21 billion . Borrowings under uncommitted loan financing lines may be used to purchase whole loans for securitization or loans purchased for longterm investment purposes, while borrowings under static pool arrangements are used to hold loans for the short term, awaiting imminent securitization or other advantageous disposition. Our financing facilities are generally subject to limits on borrowings related to specific asset pools ("advance rates") and restrictive covenants, as is usual and customary. As ofDecember 31, 2022 , the advance rates (when required) of our five 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 five active lenders) included (1) (i) our minimum tangible net worth of must not 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 fromSeptember 30, 2022 to the applicable date of determination or; (ii) fall below$200.0 million of tangible net worth as ofSeptember 30, 2022 plus 50% of any capital contribution made or raised afterSeptember 30, 2022 . (2) our minimum liquidity must not fall below the greatest of (x) the product of 5% and the aggregate repurchase price as of such date of determination, (y)$10.0 million and (z) any other amount of liquidity that we have covenanted to maintain in any other note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction (including, without limitation, any repurchase agreement, loan and security agreement, or similar credit facility or agreement for borrowed funds); 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 ofDecember 31, 2022 was$10.0 million . Other restrictive covenants with which we were bound to comply during 2022 related to financing facilities which are were terminated by us, and included additional requirements around GAAP net income and EBITDA.
A description of each loan financing line is set forth as follows:
Multinational Bank 1 Loan Financing Facility. OnApril 13, 2022 , we and two of our subsidiaries entered into a master repurchase agreement with a multinational bank ("Multinational Bank 1"). Our subsidiaries are each considered a "Seller" under this agreement. From time to time and pursuant to the agreement, either of our subsidiaries may sell toMultinational Bank 1, and later repurchase, up to$600.0 million aggregate borrowings on mortgage loans, which was increased from$340.0 million in the third quarter of 2022. Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every six months for a maximum six-month term. The master repurchase agreement was initially set to terminate onOctober 13, 2022 , which was extended onJuly 21, 2022 as per the terms of the original agreement throughJanuary 20, 2023 , and was further extended onJanuary 25, 2023 throughJuly 25, 2023 , unless terminated earlier pursuant to the terms of the master repurchase agreement. 77 -------------------------------------------------------------------------------- The amount expected to be paid byMultinational 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. Pursuant to the agreement,Multinational Bank 1 retains the right to determine the market value of the mortgage loans in its sole commercially reasonable discretion. The loan financing line is markedtomarket. Additionally,Multinational Bank 1 is under no obligation to purchase the eligible mortgage loans we offer to sell to them. The interest rate on any outstanding balance under the master repurchase agreement that the applicable subsidiary is required to payMultinational Bank 1 is generally in line with other similar agreements that the Company or one or more of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a pricing spread of 1.95% and (2) the average SOFR for eachU.S. Government Securities Business Day (as defined in the master repurchase agreement) beginning onApril 11, 2022 and ending on the day that is twoU.S. Government Securities Business Days prior to the date the applicable loan is repurchased by the applicable subsidiary. The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement. In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) maintenance of a minimum tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity.
The agreement contains margin call provisions that provide
In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, 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 andMultinational Bank 1's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiaries are also required to pay certain customary fees toMultinational Bank 1 and to reimburseMultinational Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the master repurchase agreement.Multinational Bank 2 Loan Financing Facility. OnSeptember 20, 2021 , we and one of our subsidiaries (the "Subsidiary") entered into a$400.0 million repurchase facility with a multinational bank ("Multinational Bank 2") through the execution of a Master Repurchase Agreement (the "Master Repurchase Agreement") between theSubsidiary and Multinational Bank 2. Pursuant to the Master Repurchase Agreement, the Subsidiary may sell certain securities toMultinational Bank 2 representing whole loan assets and later repurchase such securities fromMultinational Bank 2. This agreement was set to expire onSeptember 20, 2022 . OnAugust 23, 2022 , this agreement was extended toSeptember 30, 2022 , and onSeptember 27, 2022 , this agreement was extended toOctober 14, 2022 , on which date it expired by its terms after being paid in full. The amount that was advanced byMultinational Bank 2 was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, which was a percentage of the unpaid principal balance or market value of the asset depending on the type of underlying asset. The interest rate on any outstanding balance under the Master Repurchase Agreement that the Subsidiary was required to payMultinational Bank 2 was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, where the interest rate was equal to the sum of (1) a pricing spread ranging from 1.70% to 3.50%, determined based on the type of underlying asset and similar to those of other repurchase agreements we have entered into, and (2) 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 (which was changed from one-month LIBOR onJanuary 7, 2022 ). Additionally,Multinational Bank 2 was under no obligation to purchase the securities we offered to sell to them. OnJanuary 27, 2022 , this repurchase facility was amended increase the maximum purchase price permitted under the Master Repurchase Agreement to$550.0 million from$400.0 million , which was subject to reduction to$400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred onFebruary 7, 2022 . The obligations of the Subsidiary under the Master Repurchase Agreement were guaranteed by the Company pursuant to a Guaranty (the "Guaranty") executed contemporaneously with the Master Repurchase Agreement. In addition, and similar to other repurchase agreements that the Company has entered into, the Company was subject to various financial and other covenants, including those relating to (1) declines in tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. The Guaranty expired by its terms in conjunction with the expiration of the Master Repurchase Agreement. In addition, the Master Repurchase Agreement and Guaranty contained 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, insolvency and other events of default customary for this type of transaction. The remedies for such events of default were also customary for this type of transaction and included the acceleration of the amounts outstanding under theMaster Repurchase Agreement and Multinational Bank 2's right to liquidate the purchased securities then subject to the Master Repurchase Agreement. 78 -------------------------------------------------------------------------------- The Subsidiary was also required to pay certain customary fees toMultinational Bank 2 and to reimburseMultinational Bank 2 for certain costs and expenses incurred in connection with its management and ongoing administration of the Master Repurchase Agreement.Global Investment Bank 1 Loan Financing Facility. OnDecember 6, 2018 , we and one of our subsidiaries entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 1"). We were considered the "Seller" under this agreement. From time to time, we and one of our subsidiaries amended such master repurchase agreement withGlobal Investment Bank 1. Pursuant to the agreement, we and our subsidiary could sell toGlobal Investment Bank 1, and later repurchase, up to$300.0 million aggregate borrowings on mortgage loans. This agreement was set to terminate onAugust 5, 2022 . OnAugust 8, 2022 , this agreement was extended throughOctober 5, 2022 , and interest accrued on any borrowings at a rate based on Term SOFR plus an additional pricing spread of 1.70% - 3.50%. This agreement expired in accordance with its terms onOctober 5, 2022 . The principal amount paid byGlobal Investment Bank 1 for each eligible mortgage loan was based on an advance rate as a percentage of both the market value, unpaid principal balance, and acquisition price of the mortgage loan (depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement,Global Investment Bank 1 retained the right to determine the market value of the mortgage loan collateral for certain mortgage loans in its sole and absolute discretion. Additionally,Global Investment Bank 1 was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Prior to the amendment effectiveAugust 5, 2022 , upon our or our subsidiary's repurchase of the mortgage loan, we were, or our subsidiary was, required to repayGlobal Investment Bank 1 the adjusted principal amount related to such mortgage loan plus accrued and unpaid interest at a rate based on the sum of (1) the greater of (a) one-month LIBOR or threemonth LIBOR (depending on the type of mortgage loan) and (b) the applicable LIBOR floor, and (2) a pricing spread generally ranging from 1.70% to 3.50% depending on the type of loan. After theAugust 5, 2022 amendment, "LIBOR" was replaced with "Term SOFR". The agreement, similar to other repurchase agreements that the Company has entered into, required us to maintain various financial and other covenants, relating to: (1) adjusted tangible net worth; (2) the ratio of indebtedness to adjusted tangible net worth, and (4) liquidity, on an aggregate basis. The agreement contained margin call provisions that providedGlobal Investment Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,Global Investment Bank 1 could require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contained events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default were also customary for this type of transaction and included the acceleration of the principal amount outstanding under the agreement andGlobal Investment Bank 1's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary were also required to pay certain customary fees toGlobal Investment Bank 1 and to reimburseGlobal Investment Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and administration of the agreement while the agreement was in place.Global Investment Bank 2 Loan Financing Facility. OnFebruary 13, 2020 , we and our subsidiary entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 2"). We are considered a "Seller" under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement withGlobal Investment Bank 2. Pursuant to the agreement, we or our subsidiary may sell toGlobal Investment Bank 2, and later repurchase, up to$250.0 million aggregate borrowings on mortgage loans. The agreement, as amended previously, was set to terminate onFebruary 11, 2022 . OnFebruary 4, 2022 , the agreement was amended to terminate onFebruary 2, 2024 , unless terminated earlier pursuant to the terms of the agreement. Prior to the amendment executed onFebruary 4, 2022 , the principal amount paid byGlobal Investment Bank 2 for each mortgage loan was based on a percentage of the market value, costbasis value or unpaid principal balance of the mortgage loan (depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement,Global Investment Bank 2 retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. Additionally,Global Investment Bank 2 was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Prior to theFebruary 4, 2022 amendment, upon our or our subsidiary's repurchase of the mortgage loan, we or our subsidiary were required to repayGlobal Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) onemonth LIBOR and (2) a pricing spread generally ranging from 2.00% to 3.25%. Effective as of the amendment executed onFebruary 4, 2022 , interest now accrues on any outstanding balance under the master repurchase agreement 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). Previously, interest accrued at a rate based on one-month LIBOR. Additionally, the agreement was also amended to remove any draw fees and adjust the pricing rate whereby upon the Company's or the subsidiary's repurchase of a mortgage loan, the Company or the subsidiary is required to repayGlobal Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 79 --------------------------------------------------------------------------------
0.00% and (ii) 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) and (B) a pricing spread generally ranging from 2.20% to 3.45%.
The agreement requires us to maintain various financial and other covenants, which include requirements surrounding: (1) adjusted tangible net worth; (2) liquidity; and (3) our indebtedness to our adjusted tangible net worth. The agreement contains margin call provisions that provideGlobal Investment Bank 2 with certain rights in the event of a decline in the market value or costbasis value of the purchased mortgage loans. Under these provisions,Global Investment Bank 2 may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, 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 andGlobal Investment Bank 2's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees toGlobal Investment Bank 2 and to reimburseGlobal Investment Bank 2 for certain costs and expenses incurred in connection with its structuring, management and ongoing administration of the agreement.Global Investment Bank 3 Static Loan Pool Financing. OnOctober 24, 2018 , we and one of our subsidiaries entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 3"). We, and our subsidiary, are considered a "Seller" under this agreement. Pursuant to the initial agreement (prior toDecember 19, 2022 , as further described below), we or our subsidiary could sell toGlobal Investment Bank 3, and later repurchase, up to$200.0 million aggregate borrowings on mortgage loans. The initial agreement was extended onMarch 2, 2022 to terminate onMarch 5, 2023 , which date was also modified onDecember 19, 2022 toDecember 19, 2023 , as further described below. OnDecember 19, 2022 , the facility was amended to increase the facility limit up to$286.0 million by adding a static pool of additional mortgage loans to the facility and extended the termination date toDecember 19, 2023 ; however, it did not extend the revolving period, which ended onDecember 19, 2022 . 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 ofGlobal Investment Bank 3 and under its sole control, subject to recoupment to meet hedging margin calls. The Company held restricted cash pertaining to thisGlobal Investment Bank 3's interest rate futures account included in "restricted cash" of approximately$1.7 million on the Company's consolidated balance sheet as ofDecember 31, 2022 . Prior toDecember 19, 2022 , the loan financing line was markedtomarket at fair value, whereGlobal Investment Bank 3 retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion and in a commercially reasonable manner and was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Further, the principal amount paid byGlobal Investment Bank 3 for each eligible mortgage loan prior to theDecember 19, 2022 amendment was based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever was less. Prior to theJanuary 1, 2022 amendment, which amendment was solely related to the reference rate transition to SOFR, upon our or our subsidiary's repurchase of the mortgage loan, we were, or our subsidiary was, required to repayGlobal Investment Bank 3 the principal amount related to such mortgage loan plus accrued interest generally at a rate based on threemonth LIBOR plus 2.25%. OnJanuary 1, 2022 , the LIBOR-based index was replaced by reference to the sum of Compounded SOFR and a SOFR adjustment of 20 basis points (though the SOFR adjustment was later amended by theDecember 19, 2022 amendment, as further described below). Compounded SOFR is determined on a one-month basis and is defined as a daily rate as determined byGlobal Investment Bank 3 to be the "USD-SOFR-Compound" rate as defined in theInternational Swaps and Derivatives Association, Inc. definitions. TheDecember 19, 2022 amendment amended the interest rate spread to 2.80% for the first three months following the amendment date, which will increase by an additional 50 basis points every three months thereafter. Prior toDecember 19, 2022 , the agreement contained margin call provisions that providedGlobal Investment Bank 3 with certain rights in the event of a decline in the market value of the purchased mortgage loans. 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 from the agreement with the amendment executed onDecember 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 ofGlobal Investment Bank 3. At times, we may hold certain cash collateral held in the interest rate futures account as restricted cash under this agreement. 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, crossdefaults, 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 andGlobal Investment Bank 3's right to liquidate the mortgage loans then subject to the agreement. 80 -------------------------------------------------------------------------------- We and our subsidiary are also required to pay certain customary fees toGlobal Investment Bank 3 and to reimburseGlobal Investment Bank 3 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the agreement. Institutional Investors A and B Static Loan Pool Financing. OnOctober 4, 2022 , 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. The master repurchase agreements were set to expire onJanuary 4, 2023 , with a one-time three month extension period option. The Company subsequently repaid this financing facility in full onJanuary 4, 2023 . Pursuant to the agreement, interest accrued under the master repurchase agreement at a rate based on 1-month 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) and a spread of 3.5%, with 1-month Term SOFR subject to a floor of 2.0%. The agreement contained provisions for a cash collateral account subject to a margin percentage. As ofDecember 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 consolidated balance sheet as ofDecember 31, 2022 , which was released onJanuary 4, 2023 and both repurchase facilities terminated. 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 agreement's structuring, management, and administration.Regional Bank 1 Loan Financing Facility. OnDecember 21, 2018 , we and our subsidiary entered into a master repurchase agreement with a regional bank ("Regional Bank 1"). From time to time, we and one of our subsidiaries have amended such master repurchase agreement withRegional Bank 1. We were considered a "Seller" under this agreement. Pursuant to the agreement, we or our subsidiary could sell toRegional Bank 1, and later repurchase, up to$50.0 million aggregate borrowings on mortgage loans. The agreement was amended onMarch 7, 2022 to extend the term toMarch 16, 2023 . Additionally, the amendment increased the aggregate purchase price limit to$75.0 million from$50.0 million , and beginningMarch 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. We have not utilized this financing facility in some time, and intend to allow it to expire by its terms onMarch 16, 2023 . The amount paid byRegional Bank 1 for each mortgage loan was based on the loan type. Pursuant to the agreement,Regional Bank 1 retained the right to determine the market value of the mortgage loan collateral in its sole discretion. Upon our or our subsidiary's repurchase of the mortgage loan, we were, or our subsidiary was, required to repayRegional Bank 1 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) a specified minimum rate (ranging from 3.50% to 4.13%) and (B) onemonth LIBOR plus a pricing spread ranging from 2.50% to 3.13%, and (2) in the case of loans with maturities over 364 days, the seasoned pricing spread of 1.0%. OnMarch 8, 2022 , the LIBOR reference rate was changed to SOFR. The agreement contained margin call provisions that providedRegional Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,Regional Bank 1 could have required us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline. The agreement required us to maintain various financial and other covenants, which included: (1) a minimum tangible net worth requirement; (2) minimum liquidity; (3) a maximum ratio of total liabilities to tangible net worth; and (4) a net income-based covenant. In addition, the agreement set forth events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default were also customary for this type of transaction and included the acceleration of the principal amount outstanding under the agreement andRegional Bank 1's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary were also required to pay certain customary fees toRegional Bank 1 and to reimburseRegional Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and administration of the agreement.Regional Bank 2 Loan Financing Facility. OnAugust 16, 2021 , we and our subsidiaries entered into a non-mark-to-market$50.0 million committed financing facility with a regional bank ("Regional Bank 2") through the execution of a Loan and Security Agreement (the "Loan and Security Agreement") and a Promissory Note (the "Promissory Note" and together with the Loan and Security Agreement, the "Facility Documents") among those subsidiaries andRegional Bank 2. Pursuant to the Facility Documents,Regional Bank 2 agreed to make one or more advances to one or more of the subsidiaries of the Company (together, the "Borrowers") secured by mortgage loans, notes, and related collateral (the "Regional Bank 2 Financing Line"). OnFebruary 11, 2022 , we amended the financing facility to increase the size of the financing facility to$75.0 million from$50.0 million .The Regional Bank 2 Financing Line was set to terminate, with amounts outstanding 81 --------------------------------------------------------------------------------
under the
The amount advanced byRegional Bank 2 for each eligible loan was based on the unpaid principal balance of the loan, the loan-to-value ratio of the loan, and the FICO score of the borrower, depending on the type of loan and the aforementioned criteria. Prior to theFebruary 11, 2022 amendment, the interest rate on any outstanding balance under the Facility Documents was the greater of (1) the sum of (A) one-month LIBOR and (B) 2.30%, and (2) 3.13%. After theFebruary 11, 2022 amendment, interest accrued on any outstanding balance 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 a pricing margin equal to 2.41% per annum; provided that the interest rate may not be less than 3.125% per annum. The obligations of the Borrowers under the Facility Documents were guaranteed by the Company pursuant to a Guaranty Agreement (the "Guaranty") executed contemporaneously with the Facility Documents. In addition, the Company was subject to various financial and other covenants, including, as of the last day of any fiscal quarter, requirements surrounding the Company's: (1) tangible net worth; (2) ratio of (A) EBITDA to (B) debt service; (3) ratio of total liabilities to total tangible net worth; and (4) liquidity. In addition, the Facility Documents contained 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 were customary for this type of transaction and included acceleration of the principal amount outstanding under theFacility Documents and Regional Bank 2's right to liquidate the collateral then subject to the Facility Documents. The Borrowers were also required to pay certain customary fees toRegional Bank 2 and to reimburseRegional Bank 2 for certain costs and expenses incurred in connection with its management and administration of this financing line. The following table sets forth the details of our financing lines as of each ofDecember 31, 2022 and 2021: Interest Drawn Amount Line of Credit (Note Rate Pricing December 31, December 31, Payable) Base Interest Rate Spread (A) 2022 2021 ($ in thousands) Multinational Bank 1 (1) Average Daily SOFR 1.95%$ 352,038 N/A Multinational Bank 2 (2) 1 month SOFR 1.95% - 2.00% N/A$ 362,899 Global Investment Bank 1 (3) 1 month or 3 month SOFR 1.70% - 3.50% N/A 103,149Global Investment Bank 2 (4) 1 month SOFR 2.20% - 3.45% - 231,981Global Investment Bank 3 (5) Compound SOFR 2.80% (5) 119,137 109,283 Institutional Investors A and B (6) 1 month Term SOFR 3.50% 168,695 N/A Regional Bank 1 (7) 1 month SOFR 2.50% - 3.50% - 34,838 Regional Bank 2 (8) 1 month SOFR 2.41% N/A 11,258 Total$ 639,870 $ 853,408 (A) See below descriptions for timing of applicable transitions from LIBOR to SOFR as base interest rate and corresponding applicable definitions of "Term" and "Average" SOFR, and "SOFR base". (1) OnApril 13, 2022 , the Company and two of its subsidiaries entered into a master repurchase agreement with a multinational bank ("Multinational Bank 1") through the execution of a master repurchase agreement between the Company as guarantor, and two of its subsidiaries, as sellers, andMultinational Bank 1 as buyer, with an original maximum facility limit of$340.0 million . Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every six months for a maximum six month term. OnAugust 4, 2022 , the maximum line of credit under the facility withMultinational Bank 1 was increased by$260.0 million to a maximum facility limit of$600.0 million . As ofDecember 31, 2022 , the loan financing facility had been set to expire onJanuary 26, 2023 ; however, onJanuary 25, 2023 , it was extended throughJuly 25, 2023 in accordance with the original terms of the agreement (see Note 17 - Subsequent Events).
(2) This agreement expired by its terms on
(3) This agreement expired by its terms on
(4) OnFebruary 4, 2022 , this facility was amended to extend the initial termination date of the master repurchase agreement fromFebruary 11, 2022 toFebruary 2, 2024 ; remove any draw fees; and adjust the pricing rate whereby upon the Company's or the subsidiary's repurchase of a mortgage loan, the Company or such subsidiary is required to repayGlobal Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 82 -------------------------------------------------------------------------------- 0.00% and (ii) Term SOFR and (B) a pricing spread generally ranging from 2.20% to 3.45%. Prior toFebruary 4, 2022 , interest was based on 1-month LIBOR plus a pricing spread of 2.00% - 3.25%. (5) OnMarch 2, 2022 , the agreement was extended to terminate onMarch 5, 2023 , unless terminated earlier pursuant to the terms of the agreement. OnJanuary 1, 2022 , the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a pricing spread equal to 20 basis points, plus the prior pricing spread. Prior toJanuary 1, 2022 , interest was based on 3-month LIBOR plus a pricing spread of 2.25%. OnDecember 19, 2022 , the facility was amended to increase the facility limit up to$286.0 million by adding a static pool of additional mortgage loans to the facility and extended the termination date toDecember 19, 2023 ; however, it did not extend the revolving period, which ended onDecember 19, 2022 . The interest rate pricing spread was also amended to 2.80% for the first three months following the amendment date, which will increase by an additional 50 basis points every three months thereafter. Additionally, the amendment generally removed "mark to market" provisions from the previous agreement, and requires an economic interest rate hedging account ("interest rate futures account") to be maintained to the reasonable satisfaction of theGlobal Investment Bank 3, which account is for its benefit and under its sole control. The Company held restricted cash pertaining toGlobal Investment Bank 3's interest rate futures account included in "restricted cash" of approximately$1.7 million on the Company's consolidated balance sheet as ofDecember 31, 2022 . (6) OnOctober 4, 2022 , 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. The master repurchase agreements were set to expire onJanuary 4, 2023 , with a one-time three month extension period option. The Company subsequently repaid this financing facility in full onJanuary 4, 2023 . 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 consolidated balance sheet as ofDecember 31, 2022 , which was released onJanuary 4, 2023 . (7) OnMarch 7, 2022 , the agreement was amended to terminate onMarch 16, 2023 , unless terminated earlier pursuant to the terms of the agreement. Additionally, the amendment increased the aggregate purchase price limit to$75.0 million from$50.0 million , and beginningMarch 8, 2022 , provided that interest will accrue on any new transactions under the loan financing line at a rate based on Term SOFR plus an additional pricing spread. Prior toMarch 7, 2022 , interest was based on 1-month LIBOR plus a pricing spread of 2.50% - 3.13%. We intend to allow this financing facility to expire in accordance with the terms of the agreement.
(8) This agreement was paid in full on
The following table sets forth the total unused borrowing capacity of each
financing line as of
Available Line of Credit (Note Payable) Borrowing Capacity Balance Outstanding Financing (in thousands) Multinational Bank 1 (1) $ 600,000 $ 352,038$ 247,962 Global Investment Bank 2 (1) 250,000 - 250,000 Global Investment Bank 3 (2) 119,137 119,137 - Institutional Investors A and B (2) 168,695 168,695 - Regional Bank 1 (1) 75,000 - 75,000 Total $ 1,212,832 $ 639,870$ 572,962 (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 ofDecember 31, 2022 , these financing facilities had no unused borrowing capacity as the outstanding borrowings were based on static pools of mortgage loans. ShortTerm Repurchase Facilities. In addition to our existing loan financing lines, we employ shortterm repurchase facilities to borrow againstU.S. 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
83 --------------------------------------------------------------------------------
December 31, 2022 Weighted Average Weighted Average Remaining Maturity Repurchase Agreements Amount Outstanding Interest Rate (Days) ($ in thousands) RMBS (1) $ 52,544 6.07 % 13 Total $ 52,544 6.07 % 13 December 31, 2021 Weighted Average Weighted Average Remaining Maturity Repurchase Agreements Amount Outstanding Interest Rate (Days) ($ in thousands) U.S Treasury Securities $ 248,750 0.12 % 6 RMBS 360,501 0.16 % 18 Total $ 609,251 0.15 % 13 (1) A portion of repurchase debt outstanding as ofDecember 31, 2022 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). See Item 8, Note 6 -Investment Securities . The following table presents the amounts of collateralized borrowings outstanding under repurchase facilities as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase facilities during the quarter and the highest balance of any month end during the quarter: Highest Month-End Balance in Quarter End Quarter End Balance Average Balance in Quarter Quarter (in thousands) Q1 2021 27,796 57,470 27,796 Q2 2021 787,176 407,486 787,176 Q3 2021 489,287 173,265 489,287 Q4 2021 609,251 206,897 609,251 Q1 2022 477,422 272,282 477,422 Q2 2022 128,365 92,598 132,629 Q3 2022 67,454 50,988 67,454 Q4 2022 52,544 56,426 63,357 We utilize shortterm repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes. Over time, the need to purchase securities for REIT asset test purposes will be reduced as we obtain and participate in additional securitizations and acquire assets directly for investment purposes. We will continue to use repurchase facilities on our RMBS portfolio to add additional leverage which increases the yield on those assets. Our use of repurchase facilities is generally highest at the end of any particular quarter, as shown in the table above, where the quarter-end balance and the highest month-end balance in each quarter are typically equivalent.
Securitization Transactions
Subsequent toDecember 31, 2022 , onJanuary 31, 2023 , we and otherAngel Oak Capital -managed entities contributed loans into an approximately$580.5 million scheduled principal balance securitization transaction (AOMT 2023-1) backed by a pool of residential mortgage loans. Our contributed mortgage loans had a scheduled principal balance of approximately$241.3 million . We may strategically enter into similar securitizations with otherAngel Oak Capital -managed entities in the future, and / or issue securitizations where we are the sole participant, as we did in 2022 and 2021, as further described below. InJuly 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 onetofour family residential properties. In the transaction, AOMT 2022-4 issued approximately$177.6 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$152.2 million and retained cash of$2.3 million , which was used for 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 84 -------------------------------------------------------------------------------- accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheet as ofDecember 31, 2022 . InFebruary 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 onetofour family residential properties. In the transaction, AOMT 2022-1 issued approximately$551.8 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$458.3 million and retained cash of$60.9 million , which was used to acquire additional nonQM loans, pay down repurchase facilities, and acquire other target assets. 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 consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheet as ofDecember 31, 2022 . InNovember 2021 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were nonQM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2021-7 issued approximately$386.9 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$331.8 million and retained cash of$39.8 million , which was used to acquire additional nonQM loans, pay down repurchase facilities, and acquire other target assets. 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 2021-7 securitization on our consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as ofDecember 31, 2022 and 2021. InAugust 2021 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were nonQM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2021-4 issued approximately$316.6 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$249.0 million and retained cash of$55.8 million , which was used to acquire additional nonQM loans, pay down repurchase facilities, and acquire other target assets. 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 securitization on our consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as ofDecember 31, 2022 and 2021.
Leverage and Hedging Strategies
We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing and market conditions. Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to continue to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may opportunistically enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Cash Availability Cash and cash equivalents Our cash balance as ofDecember 31, 2022 was sufficient to meet our liquidity covenants under our financing facilities. We believe that we maintain sufficient cash to continue to meet margin calls on our financing facilities, should such margin calls occur. Due to market volatility, some of our cash was restricted, as further described below, by margin maintenance requirements by certain whole loan financing facility counterparties, along with cash collateral held by counterparties for interest rate futures and repurchase obligations. We sold certain residential mortgage loans in a bulk sale in the fourth quarter of 2022, as part of our strategic initiative to reduce the more seasoned loans in our portfolio, reduce debt, and generate liquidity to protect our capital structure. We may also participate in upcoming securitizations either solely or with other Angel Oak entities. We also have the ability to leverage currently unleveraged securities or whole loan assets, if we deem those actions advisable.
Restricted Cash
Restricted cash of approximately$10.6 million as ofDecember 31, 2022 was comprised of:$5.6 million in margin collateral required by certain whole loan financing facility counterparties (as referred to above), the majority of which cash margin required was fully 85 -------------------------------------------------------------------------------- released subsequent toDecember 31, 2022 ;$1.1 million in interest rate futures margin collateral; and margin collateral for securities sold under agreements to repurchase of$3.9 million . Our counterparties did not require any margin collateral for TBAs as ofDecember 31, 2022 . Restricted cash of approximately$11.5 million as ofDecember 31, 2021 was comprised of:$4.3 million in interest rate futures margin collateral,$2.3 million in TBA margin collateral, and$4.9 million in margin collateral for securities sold under agreements to repurchase. Our whole loan financing facility counterparties did not require any margin collateral as ofDecember 31, 2021 . Cash Flows For the Years EndedDecember 31, 2022 December 31, 2021 (in
thousands)
Cash flows used in operating activities $ (331,127)$ (1,567,946) Cash flow provided by (used in) investing activities $ 664,333 $ (460,484) Cash flows provided by (used in) financing activities $ (345,654)$ 2,034,766 Net increase (decrease) in cash and restricted cash $ (12,448) $ 6,336 Cash flows used in operating activities of$331.1 million for the year endedDecember 31, 2022 as compared to$1.6 billion in outflows for the year endedDecember 31, 2021 were primarily due to a net loss for the year endedDecember 31, 2022 , compared to net income for 2021, along with the purchase of residential mortgage loans during the year endedDecember 31, 2022 (though fewer than in 2021), partially offset by the sale of residential mortgage loans in 2022. Investing cash net inflows of$664.3 million for the year endedDecember 31, 2022 as compared to net outflows of$460.5 million for the year endedDecember 31, 2021 were primarily due to fewer purchases of RMBS during the year endedDecember 31, 2022 as compared to 2021. Financing cash outflows of$345.7 million for the year endedDecember 31, 2022 as compared to inflows of$2.0 billion for the year endedDecember 31, 2021 was primarily due to the net payments nature of financing activities during 2022 including net repayment activities on both securities sold under agreements to repurchase and net payments on notes payable, while the net inflows of 2021 were primarily due to proceeds received from the IPO, contributions received from our former sole stockholder, and proceeds received from our private placement concurrent with the IPO.
Cash Flows - Residential and Commercial Loan Classification
Residential loan activity is recognized in the statement of cash flows as an operating activity, as our residential mortgage loans are generally held for a short period of time with the intent to securitize these loans. Commercial mortgage loan activity is recognized in the statement of cash flows as an investing activity, as our commercial mortgage loan portfolio is generally deemed to be held for investing purposes.
Recent Accounting Pronouncements
Refer to the notes to our consolidated financial statements included in Part II, Item 8, Footnote 2, of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements and any expected impact on us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, particularly changes in the fair values of consolidated assets and liabilities. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates.
Management discusses the ongoing development and selection of the critical accounting policies as set forth below with the Audit Committee of our Board of Directors:
Fair Value Measurements We report various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option. A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value. Inputs may be observable (reflecting assumptions that market participants would use in 86 --------------------------------------------------------------------------------
pricing the asset or liability based on market data obtained from sources independent of the reporting entity) or unobservable (the entity's own assumptions).
A fair value hierarchy for inputs is implemented in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs are used when available. The availability of valuation techniques and the ability to attain observable inputs can vary from investment to investment and are affected by a wide variety of factors, including the type of investment, whether the investment is newly issued and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction. The fair value hierarchy is categorized into three broad levels (Levels 1, 2, and 3) based on the inputs as described in Part II, Item 8, Note 11 - Fair Value Measurements. The degree of judgment exercised in determining fair value is significant for investments categorized in Level 2, and greatest for investments categorized in Level 3, as the inputs to these levels are less observable or unobservable in the market, and therefore the determination of fair value requires more judgment. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Valuation estimates are subject to uncertainty due to inherently subjective valuation inputs. The most significant valuation estimates to us regarding assets are those for residential mortgage loans (including residential mortgage loans in securitization trusts) and Non-Agency RMBS, as those two categories of assets are the largest asset classes on our balance sheet subject to Level 2 or Level 3 valuation estimates. The most significant valuation estimates to us regarding liabilities relates to the portion of the non-recourse securitization obligations, collateralized by residential mortgage loans, for which the fair value option was elected, which is subject to Level 2 valuation estimates. The assumptions regarding valuations for these asset and liability categories are described as follows: •Residential Mortgage Loans (including Residential Mortgage Loans in Securitization Trusts) - Our company recognizes residential mortgage loans at fair value. The fair value of the residential mortgage loans is predominantly based on trading activity observed in the marketplace, provided by a thirdparty pricing service. The thirdparty pricing service obtains comparative pricing from banks, brokers, hedge funds, REITs and from its own brokerage business. The thirdparty pricing service also maintains a spread matrix created from trading levels observed in the secondary market and from indications of holding values in client investments. The spreads are meant to depict the required spread demanded by investors in the current environment. The matrix is segregated by loan structure type (hybrid arm, fixed rate, home equity line of credit, second lien, pay option arm, etc.), delinquency status, and loan to value strata. Significant matrix inputs are analyzed at the loan level. The performing residential mortgage loans are categorized as Level 2 in the fair value hierarchy, while nonperforming loans are categorized as Level 3 given their limited marketability and availability of observable valuation inputs. Both Level 2 and Level 3 loans matrix inputs include collateral behavioral models including prepayment rates, default rates, loss severity, and discount rates. •NonAgency RMBS ("NonAgency") - NonAgencies consist of investments in collateralized mortgage obligations. Our company utilizes PriceServe, Bank of America's independent fixed income pricing service, as the primary valuation source for the investments. PriceServe obtains its price quotes from actual sales or quotes for sale of the same or similar securities and/or provides modelbased valuations that consider inputs derived from recent market activity including default rates, conditional prepayment rates, loss severity, expected yield to maturity, baseline Discount Margin/Yield, recovery assumptions, tranche type, collateral coupon, age and loan size and other inputs specific to each security. These quotes are most reflective of the price that would be achieved if the security was sold to an independent third party on the date of the consolidated financial statements. NonAgencies are categorized in Level 2 of the fair value hierarchy. •Non-recourse securitization obligations, collateralized by residential mortgage loans - The portion of this obligation for which we have elected the fair value option uses the prices of the underlying bonds securing the related residential mortgage loans in securitization trusts. Our company utilizes PriceServe, Bank of America's independent fixed income pricing service, as the primary valuation source for these bonds. PriceServe obtains its price quotes from actual sales or quotes for sale of the same or similar securities and/or provides modelbased valuations that consider inputs derived from recent market activity including default rates, conditional prepayment rates, loss severity, expected yield to maturity, baseline discount margin/yield, recovery assumptions, tranche type, collateral coupon, age and loan size, and other inputs specific to each security. We believe that these quotes are most reflective of the price that would be achieved if the bonds were sold to an independent third party on the date of the consolidated financial statements. The portion of this liability for which we have elected the fair value option is categorized as Level 2 in the fair value hierarchy. 87 --------------------------------------------------------------------------------
Variable Interest Entities
A VIE is defined as an entity in which equity investors (1) do not have the characteristics of a controlling financial interest, and/or (2) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (a) the power to control the activities that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIE's economic performance may be determined by an entity's involvement with the design and structure of the VIE.
VIEs for which we are considered to be the primary beneficiary:
Determining the primary beneficiary of a VIE requires judgment. We determined that for the securitizations we consolidate, our ownership provides us with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, we have the power to direct the activities of the VIEs that most significantly impact the VIEs' economic performance, or power, such as rights to replace the servicer without cause or we were determined to have power in connection with our involvement with the structure and design of the VIE. The securitization trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. Our risks associated with our involvement with these VIEs are limited to our risks and rights as a holder of the security we have retained as well as certain risks which may occur when we act as either the sponsor and/or depositor of and the seller, directly or indirectly to, the securitization entities. Our interest in the assets held by consolidated securitization vehicles, which are consolidated on our consolidated balance sheets, is restricted by the structural provisions of these trusts, and a recovery of our investment in the vehicles will be limited by each entity's distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on our consolidated balance sheets, are non-recourse to us, and can only be satisfied using proceeds from each securitization vehicle's respective asset pool.
The assets of securitization entities are comprised of RMBS or residential mortgage loans.
VIEs for which we are not considered to be the primary beneficiary:
We perform ongoing reassessments of whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion to change.
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