Good morning, and welcome to the Angel Oak Mortgage Third Quarter 2023 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Randy Chrisman. Please go ahead.

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

Thank you, Randy, and thank you, everyone, for joining us today. Angel Oak started off the second half of the year very strong with our results demonstrating the positive growth and the momentum we have built throughout the first half of the year. Late last year and at the beginning of this year, we set out to reposition our portfolio to reduce risk and increase liquidity. We accomplished that, and our emphasis then shifted to growth. You can see in this quarter's results that we are on our way to accomplishing this goal as well. Our focus is on optimizing the earnings levers that we can control, such as growing net interest margin and reducing operating expenses while managing risk and maintaining liquidity. To that end, during the third quarter, we continue to pursue selective loan purchases at attractive rates and made further progress on reducing interest and operating expenses as we continue to grow the overall earnings power of our portfolio. In the third quarter, we drove a step change improvement in net interest margin due to our strategic securitization activity and purchases of newly originated current coupon loans. As we stated in our second quarter earnings call, the reduction in interest expense driven by the AOMT 2023-4 securitization was demonstrated in our third quarter results. We have remained nimble in our securitization activity, completing 2 commingled deals alongside other Angel Oak entities in addition to a stand-alone AOMR deal. The Angel Oak ecosystem affords us the ability to pursue securitization structures that provide the best strategic fit for the REIT. Current coupon loans purchased during the quarter [indiscernible] net interest income despite lower unsecuritized loan balances. The weighted average coupon of our whole loan portfolio grew 99 basis points in the third quarter and including purchases and commitments…

Thank you, Sreeni. In the third quarter, we were able to showcase our ability to grow the earnings power of our portfolio as seen through the strong NIM and net income results. We feel there is more room for growth, and we are happy with how our portfolio is positioned from a risk and liquidity standpoint, especially given the current market environment. For the third quarter of 2023, we had GAAP net income of $8.3 million or $0.33 per diluted common share. Distributable earnings were negative $8.6 million or a loss of $0.35 per share. The key difference between net income and distributable earnings is that distributed earnings do not include the offsetting unrealized gain on the AOMT 2023-5 securitization. Excluding the accounting impact of the 2023-5 securitization, distributable earnings would have been $4.3 million. Interest income for the quarter was $23.9 million, and net interest margin was $7.4 million, reflecting a $1 million expansion versus the second quarter of 2023. As Sreeni mentioned, net interest margin should continue to expand in the coming quarters as we grow our current coupon loan book with consistent purchases and future securitizations reduced our warehouse debt. Total operating expenses were $4.4 million or $3.5 million, excluding securitization costs and noncash stock compensation. This represents a savings of $3.5 million versus Q3 2022 and $800,000 versus the prior quarter. Year-to-date, we have achieved operating expense, excluding securitization costs and stock compensation savings of $8.6 million versus the first 9 months of 2022. The largest factor driving our operating expense reduction efforts in the third quarter was lower D&O insurance premiums and other vendor and resource management. Turning to the balance sheet. As of September 30, 2023, we had $41.9 million in cash or about 18% of our total equity base. Our strong cash position…

Thank you, Brandon. Before turning the call over to the operator for Q&A, I would like to conclude with some brief remarks. We are pleased with our financial performance for the third quarter as this is the first quarter that truly demonstrated the earnings impact of strategic actions that we have taken this past year. We have a strong balance sheet and a liquidity position, and we are confident in what the future holds for our portfolio and its earnings generating ability. Additionally, the credit performance of our assets remains strong. Our focus on creating a resilient portfolio that generates growing and reliable earnings is evident. We are proud of what we have achieved despite headwinds from muted mortgage activity and rate volatility, and we expect to continue to grow earnings while maintaining our liquidity position and risk profile.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Don Fandetti with Wells Fargo.

Yes. It seems like the core business is kind of moving back to modest growth phase. You've improved the funding profile significantly. I guess on credit, it continued to be very good. Do you have any thoughts or concerns around the credit outlook based on what you're seeing in the economy and mortgage rates so high?

This is Namit. So on the credit side, as we mentioned, the credit performance looks very, very good, and we haven't seen any evidence of any deterioration there. Obviously, anecdotally, there are certain sectors that we have heard about where there are increases in delinquency and loss results, et cetera. But it is important to realize that the portfolio that we run is close to 740 average credit score and low 70s loan to value. That's not a credit profile that is the first to get impacted even in a slowdown or a recessionary environment. Like if we do go into a slowdown or a recession, you're going to start seeing the impact more on the subprimish part of the portfolio mix, which we really do not do much of. So our overall portfolio delinquencies are expected to be muted even under a more successful environment. But given that what we have seen so far, we have had a very, very good credit backdrop, our home prices have been very resilient and the economy has held up generally really well. So our portfolio credit performance has been pretty much spot on.

Got it. And in terms of future securitizations, do you plan on participating with other Angel Oak entities or more stand-alone? Or does it just depend on kind of how the market develops?

Yes. Don, we use commingled versus stand-alone opportunistically in our thought process. Right now, I'd expect us to come out with about one more smaller commingled deal at some point in the future. And then after that, we'll probably be back to a standalone deal only once we get that deal out.

Our next question comes from Chris Kotowski with Oppenheimer.

Brandon, you mentioned another distributable earnings calculation of, I think, $4.3 million you said. Can you take us through a little bit in detail exactly what that was and how it was calculated and how it differs from the distributable earnings that you've always reported?

Yes. No. What I was trying to do is I was just trying to add clarity of the bridge between the GAAP net income and distributable earnings. And as you know, distributable earnings eliminate unrealized gains and losses, but keeps in any realized gain or loss. So this quarter, when we did 2023-5 securitization, there was about a $13 million recovery of a previously recognized unrealized loss that's included in GAAP net income, but it's excluded from distributable earnings. And with that, that's the big driver and the delta between GAAP earnings and distributable earnings is that one particular thing, and that's just a one-off transactional base thing. So I wanted to highlight that because if you look at net interest margin, less cash expenses, the quarter, that widened out about $1.8 million. And then what we have in the bank so far from new loan purchases we mentioned to taking our coupon up to almost 6.4% is around another $1 million kind of in the bank as of today for this coming quarter.

When you say another $1 million in the bank, you mean like if you're thinking about your all-in net interest income of like $7.4 million that the base level going into the fourth quarter is like 8.4%?

That's right.

Okay. And presumably, it improves a bit if there's another securitization before year-end?

Well, it could improve with the securitization and really additional loan purchases for the last 2 months of the year.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Brandon Filson for any closing remarks.

Yes. Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter. In the meantime, if you have any additional questions, feel free to reach out to us. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.