Angel Oak Mortgage REIT, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 the U.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 currently operates primarily through a wholesale channel and has a national origination footprint. We also may invest in other residential mortgage loans, RMBS, and other mortgage-related assets, which, collectively with non-QM loans, we refer to as our target assets. 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, Falcons I, LLC, a registered investment adviser under the Investment Advisers Act of 1940 and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets. Angel Oak Mortgage Lending, an affiliated Angel Oak mortgage origination 53 platform, is a market leader in non‑QM loan production and, as of December 31, 2023, had originated over $18.6 billion in total non‑QM loan volume since its inception in 2011. Through our relationship with our Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non‑QM 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 for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the 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 the New York Stock Exchange on June 17, 2021. We expect to derive our returns primarily from the difference between the interest we earn on loans we invest in 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. Trends and Recent Developments Overall macroeconomic environment and its effect on us 2023 saw the continuation of the federal funds rate increase cycle that began in March 2022, pushing the federal funds rate to its highest level since 2001 and driving uncertainty and apprehension across capital markets throughout the year. However, the Federal Reserve Bank (the “Fed”) has held the rate steady since raising it by 25 basis points in its July meeting, and the Fed has indicated that it is likely at the peak of the rate hike cycle, citing a decrease in inflation from 6.4% to 3.1% from the beginning to the end of 2023. This generated positive momentum in fixed income markets in the fourth quarter of 2023, with expectations for a more constructive environment in 2024. Analysts are currently working to determine the timing and extent to which the Fed will cut interest rates, with each release of updated key economic data impacting expectations. Residential mortgage rates have begun to respond to expectations of potential rate cuts, and decreased by seventy (70) basis points in the fourth quarter of 2023 compared to the prior quarter. From an annual perspective, the average conforming 30-year mortgage rate with no points averaged approximately 6.61% as of the end of 2023, representing a net increase of approximately 19 basis points when compared to the end of 2022. Mortgage applications were suppressed over the course of the year, but appear to have begun to rebound in early 2024, suggesting that homebuyers are beginning to acclimate to a higher rate environment. However, an expectation of near-term decreases in mortgage rates could cause potential homebuyers to delay their purchase in anticipation of more favorable terms. Two-year and five-year Treasury yields capped off a volatile year with overall decreases of (17) basis points and (16) basis points, respectively, compared to the end of 2022. Ending the year at 4.25%, the two-year Treasury saw a high of 5.22% and a low of 3.78% over the course of the year. Similarly, the five-year Treasury ended the year at 3.85% while observing a high of 4.96% and a low of 3.31% over the course of the year. These rates are key benchmarks for the valuation of our portfolio, and drove corresponding volatility in our asset pricing. The weighted average price of our residential whole loans portfolio increased by 5.79 percentage points versus the third quarter to 98.23% of par (including newly-originated loan purchases during the quarter), and increased 9.02 percentage points over the course of the year. Additionally, the weighted average coupon of our residential whole loans portfolio increased by 95 basis points versus the third quarter, and by 198 basis points versus the end of 2022, to 6.78% as of December 31, 2023. We expect to continue to purchase newly originated loans, which should continue to improve portfolio valuations and securitization execution. Our investment performance Net Interest Margin (“NIM”). We held fewer target assets over the course of 2023 as compared to 2022, thereby generating less interest income. Though our borrowings decreased as well, higher variable interest rates associated with our notes payable and repurchase financing facilities caused our interest expense to increase, compressing our NIM for 2023 as compared to 2022. Net realized loss . Our net realized loss for the year ended December 31, 2023 was primarily driven by our participation in co-mingled securitizations with other Angel Oak entities (AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7). Because these securitizations did not result in the consolidation of VIE entities, we recognized a loss on the sale of these loans; however, the realized losses were less than the previous period’s unrealized losses for these loans, which drove overall positive GAAP net income for these securitizations. 54 Net unrealized gain . Our net unrealized gain for the year ended December 31, 2023 was driven by a more positive macroeconomic backdrop in 2023 as compared to 2022 which drove increased valuations of our target assets, as well as the reversal of the unrealized loss (and thereby the recognition of net realized loss as discussed above) on the sale of residential mortgage loans into the AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7 securitizations. Additionally, we purchased $222.7 million of newly-originated, market coupon loans during 2023, which generally saw an appreciation in value as of the end of the year. The comparable period of 2022 saw unrealized losses related to valuation of residential and securitized loans driven by historic interest rate increases and interest rate spread widening. Whole loans and securitization activity During the year ended December 31, 2023, we purchased $222.7 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 8.37%, weighted average loan-to-value of 70.1% and weighted average credit score of 754. Subsequent to December 31, 2023, on March 12, 2024, we participated in AOMT 2024-3, an approximately $439.6 million scheduled principal balance securitization transaction backed by a pool of residential mortgage loans. We contributed loans with a scheduled principal balance of $48.7 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 2023, 2022 and 2021, as further described below. In January 2023, we participated in AOMT 2023-1, an approximately $580.0 million scheduled principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $241.3 million. On June 29, 2023, we issued AOMT 2023-4, securitizing a total of approximately $285.0 million on unpaid principal balance of seasoned non-QM mortgage loans. On August 22, 2023, we participated in AOMT 2023-5, an approximately $260.6 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled principal balance of approximately $93.8 million. On December 19, 2023, we participated in AOMT 2023-7, an approximately $397 million unpaid scheduled principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $42.0 million. We issued AOMT 2023-4 as the sole participant in the securitization. As the primary beneficiary we have consolidated the AOMT 2023-4 securitization, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheet as of the applicable balance sheet date. AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7 were securitization transactions entered into with other Angel Oak affiliates, for which we are not considered to be a "primary beneficiary" of the applicable securitization vehicle. Therefore, the bonds retained from these securitizations, as well as from our securitizations prior to 2021, are held on our consolidated balance sheets as of December 31, 2023 and December 31, 2022. We may strategically enter into similar securitization transactions in the future. Whole loan financing facilities activity We continuously evaluate our lender base and may enter into new agreements and / or exit agreements as we deem prudent, in accordance with our core financial strategy of purchasing whole loans and financing them until securitized. See Liquidity and Capital Resources, for a full description of our financing arrangements. Our total borrowing capacity was $1.1 billion as of December 31, 2023. Highlights of whole loan financing facilities activity over 2023 are as follows: • During the year ended December 31, 2023, we maintained the same whole loan financing facility lender base as of December 31, 2022, with the exception of the expiration of an unused line of credit with a regional bank in the first quarter of 2023 and the repayment of Institutional Investors A and B in the first quarter of 2023 • In the fourth quarter of 2023, the Company extended its loan financing facility with Multinational Bank 1 through June 25, 2024. • In the fourth quarter of 2023, the Company converted its loan financing facility with Global Investment Bank 3 from static pool financing to a revolving facility with mark to market features. The interest rate spread on this facility decreased to 2.00% and the economic interest rate hedging account requirement was eliminated. The advance rate for performing non-seasoned loans increased to 85%. • Subsequent to December 31, 2023, the Company extended its loan financing facility with Global Investment Bank 2 through May 2, 2024. 55 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. Distributable Earnings Distributable Earnings is a non‑GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles in the 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 pay U.S. federal income tax at the regular corporate rate 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 that we and our operating partnership entered into with our Manager upon the completion of our IPO on June 21, 2021. For information on the fees that are payable to our Manager under the Management Agreement, see Part II, Item 8, Note 12 – Related Party Transactions in our audited consolidated financial statements included in this Annual Report on Form 10-K. Distributable Earnings were approximately $(28.1) million and $19.4 million for the years ended December 31, 2023 and 2022, respectively. The table below sets forth a reconciliation of net income allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 ($ in thousands) Net income (loss) allocable to common stockholders $ 33,714 $ (187,847) Adjustments: Net unrealized (gains) losses on trading securities (484) — Net unrealized (gains) losses on derivatives 16,985 (13,054) Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation (15,890) 67,401 Net unrealized (gains) losses on residential loans (64,009) 146,347 Net unrealized (gains) losses on commercial loans (91) 844 Non-cash equity compensation expense 1,689 5,753 Distributable Earnings $ (28,086) $ 19,444 56 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 ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 ($ in thousands) Distributable Earnings $ (28,086) $ 19,444 Average total common stockholders’ equity $ 240,524 $ 355,944 Distributable Earnings Return on Average Equity (11.68) % 5.46 % 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 2023 and as of December 31, 2022: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 (in thousands except for share and per share data) Common stockholders’ equity $ 256,106 $ 231,802 $ 232,676 $ 244,379 $ 236,479 Number of shares of common stock outstanding at period end 24,965,274 24,955,566 24,924,886 24,925,357 24,925,357 Book value per share of common stock $ 10.26 $ 9.29 $ 9.34 $ 9.80 $ 9.49 57 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 total stockholders’ equity. Management considers economic book value to provide investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for our legally held retained bonds, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for book value per share of common stock or stockholders’ equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies. The following table sets forth a reconciliation from GAAP total stockholders’ equity and book value per share of common stock to economic book value and economic book value per share of common stock as of each quarter-end date of 2023 and as of December 31, 2022: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 (in thousands except for share and per share data) GAAP total common stockholders’ equity for book value per share of common stock $ 256,106 $ 231,802 $ 232,676 $ 244,379 $ 236,479 Adjustments: Fair value adjustment for securitized debt held at amortized cost 81,942 97,592 95,326 89,284 90,348 Stockholders’ equity including economic book value adjustments $ 338,048 $ 329,394 $ 328,002 $ 333,663 $ 326,827 Number of shares of common stock outstanding at period end 24,965,274 24,955,566 24,924,886 24,925,357 24,925,357 Book value per share of common stock $ 10.26 $ 9.29 $ 9.34 $ 9.80 $ 9.49 Economic book value per share of common stock $ 13.54 $ 13.20 $ 13.16 $ 13.39 $ 13.11 58 Results of Operations Year Ended December 31, 2023, Compared to the Year Ended December 31, 2022 The following table sets forth a summary of our results of operations for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) INTEREST INCOME, NET Interest income $ 95,953 $ 115,544 Interest expense 67,052 63,024 NET INTEREST INCOME 28,901 52,520 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS (37,526) (8,717) Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 3), and derivative contracts 63,489 (201,753) TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET 25,963 (210,470) EXPENSES Operating expenses 7,474 12,179 Operating expenses incurred with affiliate 2,105 3,096 Due diligence and transaction costs 310 1,376 Stock compensation 1,689 5,753 Securitization costs 2,484 3,137 Management fee incurred with affiliate 5,842 7,799 Total operating expenses 19,904 33,340 INCOME (LOSS) BEFORE INCOME TAXES 34,960 (191,290) Income tax expense (benefit) 1,246 (3,457) NET INCOME (LOSS) 33,714 (187,833) Preferred dividends — (14) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 33,714 $ (187,847) Other comprehensive income (loss) 16,152 (24,127) TOTAL COMPREHENSIVE INCOME (LOSS) $ 49,866 $ (211,974) 59 Net Interest Income The following table sets forth the components of net interest income for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) Interest income Interest income / expense Average balance Interest income / expense Average balance Residential mortgage loans $ 23,951 $ 443,781 $ 51,634 $ 1,082,632 Residential mortgage loans in securitization trusts 54,494 1,128,332 48,022 1,004,632 Commercial mortgage loans 541 7,525 1,137 15,392 RMBS and Majority-Owned Affiliates 12,304 175,291 13,613 384,038 CMBS 1,315 6,434 778 8,886 U.S. Treasury Securities 1,462 39,001 8 46,153 Other interest income (1) 1,886 37,549 352 41,684 Total interest income 95,953 115,544 Interest expense Notes payable 26,042 366,032 35,621 916,772 Non-recourse securitization obligation, collateralized by residential mortgage loans 36,638 1,080,156 25,654 967,787 Repurchase facilities 4,372 89,726 1,749 155,856 Total interest expense 67,052 63,024 Net interest income $ 28,901 $ 52,520 (1) Primarily comprised of interest received on cash deposits, including interest earned on margin cash collateral. Net interest income for the years ended December 31, 2023 and 2022 was $28.9 million and $52.5 million, respectively. Net interest income decreased by approximately $23.6 million for the year ended December 31, 2023 as compared to 2022, primarily due to lower residential mortgage loan and RMBS asset balances, partially offset by increased interest income from residential mortgage loans in securitization trusts and U.S. Treasury Securities. Additionally, interest expense increased for the year ended December 31, 2023 as compared to 2022 due to increases in the floating interest rates associated with this debt despite lower notes payable and repurchase facility borrowings. Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the years ended December 31, 2023 and 2022 are set forth as follows: December 31, 2023 December 31, 2022 (in thousands) Realized and unrealized gain (loss) on residential mortgage loans $ 26,564 $ (213,528) Realized and unrealized gain (loss) on residential loans held in securitization trusts, net of non-recourse securitization obligation 13,031 (71,526) Realized loss on RMBS (2,152) (10,820) Realized and unrealized gain (loss) on Whole Pool Agency RMBS (16,458) — Realized loss on CMBS (260) (1,520) Realized and unrealized gain (loss) on commercial mortgage loans 121 (1,296) Unrealized appreciation (depreciation) on interest rate futures (3,948) 2,939 Realized and unrealized gain (loss) on TBAs 3,486 17,411 Realized gain on interest rate futures 5,493 67,870 Realized and unrealized loss on U.S. Treasury Securities 86 — Total realized and unrealized gains (losses), net $ 25,963 $ (210,470) 60 For the years ended December 31, 2023 and 2022, total realized and unrealized gains (losses), net, were a gain of $26.0 million and a loss of $210.5 million, respectively. For the year ended December 31, 2023, an increase 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 gain, offset by realized and unrealized losses on whole pool agency residential mortgage-backed securities (“Whole Pool Agency RMBS”). Comparatively, for the year ended December 31, 2022, residential mortgage loan valuations decreased dramatically, driving the majority of the total realized and unrealized loss. Expenses Operating Expenses For the years ended December 31, 2023 and 2022, our operating expenses were $7.5 million and $12.2 million, respectively. Our operating expenses decreased compared to the comparative period due to cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loans portfolios. Due Diligence and Transaction Costs For the years ended December 31, 2023 and 2022, our due diligence and transaction costs were $0.3 million and $1.4 million, respectively. Our due diligence and transaction expenses decreased over the comparative period as we negotiated improved pricing and purchased fewer whole loans in the year ended December 31, 2023 as compared to 2022. Stock Compensation For the years ended December 31, 2023 and 2022, our stock compensation expense was $1.7 million and $5.8 million, respectively. The primary driver of this decrease is a 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 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 ended December 31, 2023 and 2022, our operating expenses incurred with affiliate were $2.1 million and $3.1 million, respectively. These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased during the comparative period primarily due to the separation of our former Chief Executive Officer and President in 2022. Securitization expenses For the year ended December 31, 2023 and 2022, our securitization expenses were $2.5 million and $3.1 million, respectively. The expenses incurred during the year ended December 31, 2023 are related to the AOMT 2023-1, AOMT 2023-4, AOMT 2023-5, and AOMT 2023-7 securitizations. The securitization costs incurred for the comparable period in 2022 were associated with the AOMT 2022-1 and AOMT 2022-4 securitizations. Management Fee Incurred with Affiliate For the years ended December 31, 2023 and 2022, our management fee incurred with affiliate was $5.8 million and $7.8 million, respectively. The decrease is due to the decline in our average Equity (as defined in the Management Agreement) for the year ended December 31, 2023 as compared to the same period in 2022. 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 decrease. Income Taxes During the year ended December 31, 2023, we recorded an income tax expense of approximately $1.2 million based on our income taxes arising from income associated with assets held in our TRS. During the year ended December 31, 2022, we incurred an income tax benefit of approximately $3.5 million based on an expectation of a potential recovery of income taxes arising from losses associated with assets held in our TRS. 61 Our Portfolio As of December 31, 2023, our portfolio consisted of approximately $2.1 billion of residential mortgage loans, RMBS, and other target assets. Certain of these portfolio assets are located in states such as Florida and California where natural disasters such as hurricanes and earthquakes may occasionally occur. We require all of our collateral to be adequately insured. The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of December 31, 2023: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 380,040 $ 290,610 $ 89,430 34.9 % Residential mortgage loans in securitization trust 1,221,067 1,169,154 51,913 20.3 % Total whole loan portfolio $ 1,601,107 $ 1,459,764 $ 141,343 55.2 % Investment securities RMBS $ 472,058 $ 44,643 $ 427,415 166.9 % U.S. Treasury Securities 149,927 149,013 914 0.4 % Investment in Majority-Owned Affiliates 16,232 — 16,232 6.3 % Total investment securities $ 638,217 $ 193,656 $ 444,561 173.6 % Total investment portfolio $ 2,239,324 $ 1,653,420 $ 585,904 228.8 % Target assets (1) $ 2,089,397 $ 1,653,420 $ 585,904 228.8 % Cash $ 41,625 $ — $ 41,625 16.2 % Other assets and liabilities (2) (371,423) — (371,423) (145.0) % Total $ 1,909,526 $ 1,653,420 $ 256,106 100.0 % (1) “Target assets” as defined by us excludes U.S. Treasury securities. (2) Other assets and liabilities presented is calculated as a net liability substantially comprised of $392.0 million due to broker for our quarter-end purchase of certain Freddie Mac and Fannie Mae-issued Whole Pool Agency RMBS, and excluding the portion of “other assets” which includes our investment in a Majority-Owned Affiliates, which is considered a target asset. Additionally, other assets includes $5.2 million of commercial loans and $6.6 million of CMBS. 62 As of December 31, 2022, our portfolio consisted of approximately $2.9 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio including the manner in which our equity capital was allocated among investment types, as of December 31, 2022: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ 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 69.50 % 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 (956,767) — (966,225) (408.6) % Total $ 1,941,836 $ 1,695,899 $ 236,479 100.0 % (1) “Target assets” as presented above comprises the total investment portfolio, as there were no U.S. Treasury securities held as of December 31, 2022. (2) Other assets and liabilities presented is calculated as a net liability substantially comprised of $1.01 billion due to broker for our quarter-end purchase of certain Whole Pool Agency RMBS. Residential Mortgage Loans The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2023: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $18 - $3,410 $492 Interest rate 2.99% - 12.50% 6.8% Maturity date 9/27/2048 - 11/27/2063 December 2053 FICO score at loan origination 624 - 825 748 LTV at loan origination 9.00% - 90.00% 69.4% DTI at loan origination 1.90% - 59.10% 30.9% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.9% 63 The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2022: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $59 - $3,441 $496 Interest rate 2.88% - 9.99% 4.8% Maturity date 9/21/2036 - 6/20/2062 February 2053 FICO score at loan origination 575 - 823 737 LTV at loan origination 8.00% - 95.00% 70.0% DTI at loan origination 1.20% - 59.10% 23.0% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.9% The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2023: The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2022: 64 The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of December 31, 2023, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of December 31, 2023: 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 December 31, 2023. Numbers presented may not sum to 100% due to rounding. 65 The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2022, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of December 31, 2022: 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 December 31, 2022. Numbers presented may not sum to 100% due to rounding 66 Residential Mortgage Loans Held in Securitization Trusts The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023: ($ in thousands) UPB $1,334,963 Fair Value 1,221,067 Number of loans 3,112 Weighted average loan coupon 4.7% Average loan amount $429 Weighted average LTV at loan origination and deal date 68.0% Weighted average credit score at loan origination and deal date 742 Current 3-month constant prepayment rate (“CPR”) (1) 5.6% Percentage of loans 90+ days delinquent (based on UPB) 1.0% (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023 (percentages are based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 4% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023. Numbers presented may not sum to 100% due to rounding. 67 The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022: ($ in thousands) UPB $1,151,332 Fair Value 1,027,442 Number of loans 2,664 Weighted average loan coupon 4.72% Average loan amount 434 Weighted average LTV at loan origination and deal date 69% Weighted average credit score at loan origination and deal date 743 Current 3-month CPR 5.0% Percentage of loans 90+ days delinquent (based on UPB) —% The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 4% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2022. Numbers presented may not sum 100% due to rounding. 68 RMBS We have participated in numerous securitization transactions pursuant to which we contributed to a securitization trust under the purview of AOMT I, LLC, non‑QM loans that we had accumulated and held on our balance sheet. These loans were purchased from affiliated and unaffiliated entities. In return, we received bonds from these securitization trusts, and cash. At times, we were allocated certain risk retention securities as part of these transactions. Risk retention securities represent at least 5% of a horizontal or vertical slice of the bonds issued as part of the transaction. Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2023 and 2022 unless otherwise stated: As of December 31, 2023 AOMT 2019 Securitizations AOMT 2020 Securitizations AOMT 2023 Securitizations ($ in thousands) UPB of loans $331,376 $167,028 $1,192,450 Number of loans 1197 512 2288 Weighted average loan coupon 6.90 % 5.80 % 5.30 % Average loan amount $277 $326 $521 Weighted average LTV at loan origination and deal date 70 % 74 % 70 % Weighted average credit score at loan origination and deal date 707 720 733 Current 3-month CPR (1, 6) 14.3 % 5.4 % 4.3 % 90+ day delinquency (as a % of UPB) 9.0 % 3.0 % 1.6 % Weighted Average 90+ Delinquency (as a % of Original Balance) 1.5 % 1.1 % 1.3 % Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2) 50.8 % 74.1 % 72.8 % Fair value of first loss piece (3,5,6) $18,057 $21,389 $55,056 Investment thickness (4) 19.15 % 18.57 % 3.78 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”); accordingly, original LTV is used. (3) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. (5) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7 is the total at risk for the Majority-Owned Affiliates. (6) AOMT 2023-5 reflects one-month CPR 69 As of December 31, 2022 AOMT 2019 Securitizations AOMT 2020 Securitizations ($ in thousands) UPB of loans $387,607 $189,763 Number of loans 1385 578 Weighted average loan coupon 6.80 % 5.80 % Average loan amount $280 $328 Weighted average LTV at loan origination and deal date 71 % 74 % Weighted average credit score at loan origination and deal date 705 720 Current 3-month CPR (1) 14.10 % 5.60 % 90+ day delinquency (as a % of UPB) 8.40 % 4.40 % Weighted Average 90+ Delinquency (as a % of Original Balance) 1.80 % 1.90 % Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2) 53.00 % 74.10 % Fair value of first loss piece (3) $18,360 $20,106 Investment thickness (4) 18.35 % 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) AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”); accordingly, original LTV is used. (3) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 70 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 December 31, 2023: RMBS Repurchase Debt (1,3) Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Mezzanine $ 10,972 $ — $ 10,972 $ 844 $ — $ 844 $ 10,119 $ — $ 10,119 Subordinate 55,665 — 55,665 19,812 — 19,812 35,845 — $ 35,845 Interest only / excess 13,059 — 13,059 1,871 — 1,871 6,890 — $ 6,890 Whole pool (2) — 392,362 392,362 — — — — 392,362 $ 392,362 Retained RMBS in VIEs (3) — — — 22,116 — 22,116 (22,116) — $ (22,116) Subtotal $ 79,696 $ 392,362 $ 472,058 $ 44,643 $ — $ 44,643 $ 30,738 $ 392,362 $ 423,100 Investment in Majority Owned Affiliates $ 16,232 $ — $ 16,232 $ — $ — $ — $ 16,232 $ — $ 16,232 Total $ 95,928 $ 392,362 $ 488,290 $ 44,643 $ — $ 44,643 $ 46,970 $ 392,362 $ 439,332 (1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). (2) The whole pool RMBS presented as of December 31, 2023 were purchased from a broker to whom the Company owes approximately $392.0 million, payable upon the settlement date of the trade. See Part II, Item 8, Note 7 — Due to Broker in our audited consolidated financial statements included in this Annual Report on Form 10-K. (3) 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 $124.1 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. 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 December 31, 2022: RMBS Repurchase Debt (1,3) Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party 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 — — — — 993,378 $ 993,378 Retained RMBS in VIEs (3) — — — — 24,586 24,586 — (24,586) $ (24,586) Total $ 61,960 $ 993,378 $ 1,055,338 $ 27,958 $ 24,586 $ 52,544 $ 34,002 $ 968,792 $ 1,002,794 71 (1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). (2) The whole pool RMBS presented as of December 31, 2022 were purchased from a broker to whom the Company owed approximately $1.0 billion, payable upon the settlement date of the trade. See Part II, Item 8, Note 7 — Due to Broker in our audited consolidated financial statements included in this Annual Report on Form 10-K. (3) 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. The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2023: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value $ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338 Acquisitions: Retained bonds received in securitizations — 9,831 4,880 3,530 — 18,241 Third party securities — — — — 1,741,864 1,741,864 Effect of principal payments / called deals — (869) — — (2,339,028) (2,339,897) IO and excess servicing prepayments — — — (1,396) — (1,396) Changes in fair value, net — 52 1,207 501 (3,852) (2,092) Ending fair value $ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058 The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2022: 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: 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 72 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2023 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Loans Underlying Our Portfolio of RMBS Issued in AOMT Securitization Transactions (as of December 31, 2023) No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2023. Numbers presented may not sum to 100% due to rounding. 73 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 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) 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 December 31, 2022. Numbers presented may not sum to 100% due to rounding. Commercial Mortgage Loans The following table provides additional information on the commercial mortgage loans in our portfolio as of December 31, 2023: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $239 - $3,161 $1,118 Interest rate 5.50% - 8.38% 6.24% Loan term 26.25 - 28.08 years 27.61 years LTV at loan origination 50.00% - 75.00% 58.10% The following table provides additional information on the commercial mortgage loans in our portfolio as of December 31, 2022: Portfolio Range Portfolio Weighted Average ($ 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 46.70% - 75.00% 50.90% 74 The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of December 31, 2023 and December 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2023: Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2022: Numbers presented may not sum to 100% due to rounding. 75 CMBS In November 2020, we participated in a securitization transaction of a pool of small balance commercial mortgage loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial mortgage loans with a carrying value of approximately $31.2 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million. Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of December 31, 2023 and December 31, 2022: December 31, 2023 December 31, 2022 ($ in thousands) UPB of loans $112,302 $122,432 Number of loans 145 160 Weighted average loan coupon 7.5 % 7.4 % Average loan amount $774 $765 Weighted average LTV at loan origination and deal date 56.2 % 58.4 % The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of December 31, 2023 and December 31, 2022: December 31, 2023 December 31, 2022 CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital (in thousands) Senior $ — $ — $ — $ — $ — $ — Mezzanine — — — — — — Subordinate 2,706 — 2,706 2,901 — 2,901 Interest only / excess 3,886 — 3,886 3,210 — 3,210 Total $ 6,592 $ — $ 6,592 $ 6,111 $ — $ 6,111 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 currently include payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, and securitizations of our whole loans. Our financing sources historically have included the foregoing, as well as capital contributions from our investors prior to our IPO, and the proceeds from our IPO and concurrent private placement (which capital has all been deployed). 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 mortgage‑related 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 long‑term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. Securitization transactions may either take the form of the issuance of securitized bonds or the sale of “real estate mortgage investment conduit” securities backed by mortgage loans or other assets, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities. We have sponsored and participated in securitization transactions with other entities that are managed by Angel Oak, and may continue to do so in the future, along with sponsoring sole securitization transactions in which we are the sole participant and contributor. We believe these identified sources of financing will be adequate for purposes of meeting our short‑term (within one year) and our longer‑term liquidity needs. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to 76 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 of December 31, 2023, we were a party to three uncommitted loan financing lines for a total borrowing capacity in an aggregate amount of up to $1.1 billion. Borrowings under uncommitted loan financing lines may be used to purchase whole loans for eventual securitization or loans purchased for long‑term investment purposes. Our financing facilities are generally subject to limits on borrowings related to specific asset pools (“advance rates”) and restrictive covenants, as is usual and customary. As of December 31, 2023, the advance rates (when required) of our three active lenders ranged from 75% to 92%, depending on the asset type and loan delinquency status. Our most restrictive covenants (when covenants are required by any of our three active lenders) included: (1) our minimum tangible net worth must not (i) decline 20% or more in the previous 30 days, 25% or more in the previous 90 days, or 35% or more in the previous year, or, if shorter, in the period from September 30, 2022 to the applicable date of determination, or (ii) fall below $200.0 million of tangible net worth as of September 30, 2022 plus 50% of any capital contribution made or raised after September 30, 2022; (2) our minimum liquidity must not fall below the greatest of (x) the product of 5% and the aggregate repurchase price as it relates to Global Investment Bank 3 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 of December 31, 2023 was $10 million. Other restrictive covenants with which we were bound to comply during 2023 related to financing facilities which 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. On April 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 to Multinational Bank 1, and later repurchase, up to $600.0 million aggregate borrowings on mortgage loans. Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every six months for a maximum six-month term. On December 15, 2023, this master repurchase agreement was extended through June 25, 2024, unless terminated earlier pursuant to the terms of the master repurchase agreement. The amount expected to be paid by Multinational Bank 1 for each eligible mortgage loan is based on an advance rate as a percentage of either the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less. 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 marked‑to‑market. 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 pay Multinational 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, as of July 25, 2023, 2.10% and (2) the average SOFR for each U.S. Government Securities Business Day (as defined in the master repurchase agreement) beginning on April 11, 2022 and ending on the day that is two U.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 Multinational Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Multinational Bank 1 may require us or our subsidiaries 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, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Multinational 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 to Multinational Bank 1 and to reimburse Multinational Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the master repurchase agreement. 77 Multinational Bank 2 Loan Financing Facility. On September 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 between the Subsidiary and Multinational Bank 2. This agreement was set to expire on September 20, 2022. On August 23, 2022, this agreement was extended to September 30, 2022, and on September 27, 2022, this agreement was extended to October 14, 2022, on which date it expired by its terms after being paid in full. Global Investment Bank 1 Loan Financing Facility. On December 6, 2018, we and one of our subsidiaries entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 1”). This agreement expired in accordance with its terms on October 5, 2022. Global Investment Bank 2 Loan Financing Facility. On February 13, 2020, we and our subsidiary entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 2”). We and our subsidiary are each considered a “Seller” under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Global Investment Bank 2. Pursuant to the agreement, we or our subsidiary may sell to Global Investment Bank 2, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans. The agreement, as amended previously, was set to terminate on February 2, 2024. On January 19, 2023, the agreement was amended to terminate on May 2, 2024, unless terminated earlier pursuant to the terms of the agreement. Effective as of the amendment executed on February 4, 2022, interest 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 repay Global 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) 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 provide Global Investment Bank 2 with certain rights in the event of a decline in the market value or cost‑basis 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, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Global Investment Bank 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 to Global Investment Bank 2 and to reimburse Global 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 Loan Financing Facility. On October 24, 2018, two of our subsidiaries entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 3”) for which we serve as guarantor of our subsidiaries’ obligations. Our subsidiaries, are each considered a “Seller” under this agreement. Pursuant to the initial agreement (prior to December 19, 2022, as further described below), we or our subsidiary could sell to Global Investment Bank 3, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans. On December 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 to December 19, 2023; however, it did not extend the revolving period, which ended on December 19, 2022. Additionally, the amendment generally removed “mark to market” provisions and required an economic interest rate hedging account (“interest rate futures account”) which account was for the benefit of Global Investment Bank 3 and under its sole control, subject to recoupment to meet hedging margin calls. On November 7, 2023, the facility was amended converted from static pool financing to a revolving facility with “mark to market” features. The amendment also reduced the maximum borrowing capacity to $200.0 million, extend the termination date to November 7, 2024 and eliminated the interest rate futures account requirements. The base interest rate spread was reduced to 1.80% plus a 0.20% index spread adjustment for the first six (6) months of seasoning on this financing facility with an additional 0.25% increase following the first six (6) months. The advance rate for performing non-seasoned loans was increased to 85%. Prior to December 19, 2022 and subsequent to November 7, 2023, the loan financing line was marked‑to‑market at fair value, where Global Investment Bank 3 retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion and 78 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 by Global Investment Bank 3 for each eligible mortgage loan prior to the December 19, 2022 amendment and subsequent to the November 7, 2023 amendment is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less. On January 1, 2022, the facility was amended to transition the reference rate from a LIBOR-based index to Compounded SOFR Compounded SOFR is determined on a one-month basis and is defined as a daily rate as determined by Global Investment Bank 3 to be the “USD-SOFR-Compound” rate as defined in the International Swaps and Derivatives Association, Inc. definitions. Prior to December 19, 2022 and subsequent to November 7, 2023, the agreement contained margin call provisions that provided Global 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 require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. The agreement requires us to maintain various financial and other customary covenants. The agreement also sets forth events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Global Investment Bank 3’s right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees to Global Investment Bank 3 and to reimburse Global Investment Bank 3 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the agreement. Institutional Investors A and B Static Loan Pool Financing. On October 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 on January 4, 2023, with a one-time three month extension period option. The Company subsequently repaid this financing facility in full on January 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. 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. On December 21, 2018, we and our subsidiary entered into a master repurchase agreement with a regional bank (“Regional Bank 1”). This financing facility was substantially unused and expired by its terms on March 16, 2023. Prior to this facility’s expiration, from time to time, we and one of our subsidiaries amended such master repurchase agreement with Regional Bank 1. We were considered a “Seller” under this agreement. Pursuant to the agreement, we or our subsidiary could sell to Regional Bank 1, and later repurchase, up to $75.0 million, and beginning March 8, 2022, provided that interest accrued on any new transactions under the loan financing line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional pricing spread. The amount paid by Regional 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. The agreement contained margin call provisions that provided Regional 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 similar to the financial covenants required by our active lenders, as described above, along with a GAAP income-based covenant. In addition, the agreement set forth 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 and Regional Bank 1’s right to liquidate the mortgage loans then subject to the agreement. 79 We and our subsidiary were also required to pay certain customary fees to Regional Bank 1 and to reimburse Regional Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and administration of the agreement. Regional Bank 2 Loan Financing Facility. On August 16, 2021, we and our subsidiaries entered into a non-mark-to-market $50.0 million committed financing facility with a regional bank (“Regional Bank 2”) through the execution of a Loan and Security Agreement and a Promissory Note. The Regional Bank 2 Financing Line was set to terminate, with amounts outstanding under the Regional Bank 2 Financing Line due to mature, on August 16, 2023, subject to certain exceptions. This agreement was paid in full on December 15, 2022 and voluntarily terminated by the Company on that date. The following table sets forth the details of our financing lines as of each of December 31, 2023 and 2022: Interest Rate Pricing Spread Drawn Amount Line of Credit (Note Payable) Base Interest Rate December 31, 2023 December 31, 2022 ($ in thousands) Multinational Bank 1 (1) Average Daily SOFR 2.10% - 2.25% $ 206,183 352,038 Multinational Bank 2 (2) 1 month SOFR 1.95% - 2.00% — $ — Global Investment Bank 1 (3) 1 month or 3 month SOFR 1.70% - 3.50% — — Global Investment Bank 2 (4) 1 month SOFR 2.20% - 3.45% — — Global Investment Bank 3 (5) Compound SOFR 2.00% - 4.50% 84,427 119,137 Institutional Investors A and B (6) 1 month Term SOFR 3.50% — 168,695 Regional Bank 1 (7) 1 month SOFR 2.50% - 3.50% — — Regional Bank 2 (8) 1 month SOFR 2.41% — — Total $ 290,610 $ 639,870 (1) This loan financing facility expires on June 25, 2024. (2) This agreement expired by its terms on October 14, 2022, after being paid in full. (3) This agreement expired by its terms on October 5, 2022, after being paid in full. (4) On February 4, 2022, this facility was amended to extend the initial termination date of the master repurchase agreement from February 11, 2022 to February 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 repay Global 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) 0.00% and (ii) Term SOFR and (B) a pricing spread generally ranging from 2.20% to 3.45%. Prior to February 4, 2022, interest was based on 1-month LIBOR plus a pricing spread of 2.00% - 3.25%. On January 19, 2024, this financing facility was extended through May 2, 2024. (5) On November 7, 2023, the agreement was extended to terminate on November 7, 2024 and was converted from static pool financing to a revolving facility with mark to market features. The amended facility has a maximum borrowing capacity of $200 million with an interest rate spread of 180 basis points plus a 20 basis point index spread adjustment for the first six (6) months of dwell time. (6) On October 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 on January 4, 2023, with a one-time three month extension period option. The Company subsequently repaid this financing facility in full on January 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 of December 31, 2022, which was released on January 4, 2023. (7) This agreement expired by its terms on March 16, 2023. (8) This agreement was paid in full on December 15, 2022 and voluntarily terminated by the Company. 80 The following table sets forth the total unused borrowing capacity of each financing line as of December 31, 2023: Line of Credit (Note Payable) Borrowing Capacity Balance Outstanding Available Financing (in thousands) Multinational Bank 1 $ 600,000 $ 206,183 $ 393,817 Global Investment Bank 2 250,000 — 250,000 Global Investment Bank 3 200,000 84,427 115,573 Total $ 1,050,000 $ 290,610 $ 759,390 Although available financing is uncommitted for each of these lines of credit, 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. Short‑Term Repurchase Facilities. In addition to our existing loan financing lines, we employ short‑term repurchase facilities to borrow against U.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 December 31, 2023 and 2022: December 31, 2023 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury Securities $ 149,013 5.57 % 10 RMBS (1) $ 44,643 7.04 % 16 Total $ 193,656 5.91 % 11 December 31, 2022 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) AOMT RMBS 52,544,000 6.07 % 13 Total $ 52,544,000 6.07 % 13 81 (1) A portion of repurchase debt outstanding as of December 31, 2023 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). See Item 8, Note 5 — Investment Securities in our audited consolidated financial statements included in this Annual Report on Form 10-K. 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: Quarter End Quarter End Balance Average Balance in Quarter Highest Month-End Balance in Quarter (in thousands) 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 Q1 2023 442,214 180,165 442,214 Q2 2023 340,701 101,731 340,701 Q3 2023 188,101 87,279 188,101 Q4 2023 193,656 62,536 193,656 We utilize short‑term 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 In December 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 60% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-7 issued approximately $397.2 million in face value of bonds. Our proportionate share of 10.36% of the retained bonds and investments in majority owned affiliates (“MOAs”) was approximately $3.5 million, including a retained discount on issuance of approximately $1.4 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $30.9 million and retained cash of $3.6 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2023-7 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of December 31, 2023. In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 36% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-5 issued approximately $260.6 million in face value of bonds. Our proportionate share of 34.42% of the retained bonds and investments in MOAs was approximately $8.7 million, including a retained discount on issuance of approximately $2.7 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $63.4 million and retained cash of $10.7 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of December 31, 2023. In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured exclusively by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-4 issued approximately $259.4 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $197.3 million and retained cash of $35.7 million, which was used for new loan purchases and operational purposes. We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. We have consolidated the AOMT 2023-4 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 sheets as of December 31, 2023 and December 31, 2022. 82 In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 59% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of bonds. Our proportionate share of 41.21% of the retained bonds and investments in MOAs was approximately $21.8 million, including a retained discount on issuance of approximately $6.8 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $190.1 million and retained cash of $15.9 million, which was used for operational purposes. We derecognized the mortgage loans sold in this transaction and recorded an investment in majority-owned affiliate located within “other assets” on our consolidated balance sheet as of December 31, 2023. In July 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. 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. 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 sheets as of December 31, 2023 and December 31, 2022. In February 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 56% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. 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 non‑QM 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. 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 sheets as of December 31, 2023 and December 31, 2022. 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 utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may 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 of December 31, 2023 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 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 $2.9 million as of December 31, 2023 was comprised of: $2.5 million in interest rate futures margin collateral; and margin collateral for securities sold under agreements to repurchase of $0.3 million. Our counterparties did not require any margin collateral for TBAs as of December 31, 2023. Restricted cash of approximately $10.6 million as of December 31, 2022 was comprised of: $5.6 million in margin collateral required by certain whole loan financing facility counterparties; $1.1 million in interest rate futures margin collateral, and $3.9 million in 83 margin collateral for securities sold under agreements to repurchase. Our counterparties did not require any margin collateral for TBAs as of December 31, 2022. Cash Flows For the Years Ended December 31, 2023 December 31, 2022 (in thousands) Cash flows provided by (used in) operating activities $ 306,404 $ (331,127) Cash flow provided by (used in) investing activities $ (194,107) $ 664,333 Cash flows provided by (used in) financing activities $ (107,662) $ (345,654) Net increase (decrease) in cash and restricted cash $ 4,635 $ (12,448) Cash flows provided by operating activities of $306.4 million for the year ended December 31, 2023 as compared to $331.1 million in outflows for the year ended December 31, 2022 were primarily due to net income for the year ended December 31, 2023, compared to a net loss for 2022, along with activity related to the securitization of residential mortgage loans during the year ended December 31, 2023. Investing cash net outflows of $(194.1) million for the year ended December 31, 2023 as compared to net inflows of $664.3 million for the year ended December 31, 2022 were primarily due to an increase in purchases of RMBS during the year ended December 31, 2023 as compared to 2022. Financing cash outflows of $(107.7) million for the year ended December 31, 2023 as compared to outflows of $(345.7) million for the year ended December 31, 2022 was primarily due a reduction in loan financing driven by residential loan sale in 2022 and offset by loan purchases in 2023.. 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, Note 2 — Summary of Significant Accounting Policies , 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 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 84 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 10 – 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 third‑party pricing service. The third‑party pricing service obtains comparative pricing from banks, brokers, hedge funds, REITs and from its own brokerage business. The third‑party 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 non‑performing 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. • Non‑Agency RMBS (“Non‑Agency”) - Non‑Agencies 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 model‑based 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. Non‑Agencies 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 model‑based 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. Variable Interest Entities A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) 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: 85 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, 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide this information. 86