Angel Oak Mortgage REIT, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID 185 ) 88 Consolidated Balance Sheets 90 Consolidated Statements of Operations and Comprehensive Income (Loss) 91 Consolidated Statements of Changes in Stockholder(s)’ Equity 92 Consolidated Statements of Cash Flows 93 Notes to the Consolidated Financial Statements 95 Note 1. Organization 95 Note 2. Summary of Significant Accounting Policies 95 Note 3. Variable Interest Entities 101 Note 4. Residential Mortgage Loans 102 Note 5 . Investment Securities 103 Note 6 . Notes Payable 104 Note 7 . Due to Broker 106 Note 8 . Securities Sold Under Agreements to Repurchase 106 Note 9 . Derivative Financial Instruments 107 Note 1 0 . Fair Value Measurements 108 Note 1 1 . Income Taxes 114 Note 1 2 . Related Party Transactions 115 Note 1 3 . Commitments and Contingencies 116 Note 14. Accumulated Other Comprehensive Income /(Loss) 117 Note 15. Other Assets 117 Note 1 6 . Equity and Earnings per Share 118 Note 1 7 . Equity Compensation Plans 119 Note 1 8 . Subsequent Events 120 87 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Angel Oak Mortgage REIT, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Angel Oak Mortgage REIT, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the valuation of residential mortgage loans at fair value As discussed in Notes 2, 4, and 10 to the consolidated financial statements, the Company records performing residential mortgage loans and residential mortgage loans in securitization trusts (together, residential mortgage loans) at fair value on its consolidated balance sheet as a result of electing the fair value option at the time of acquisition. As of December 31, 2023, the recorded balance of the Company’s residential mortgage loans was $1.6 billion. The Company estimates the fair value of its residential mortgage loans using price information provided by third-party pricing services. These services determine price information predominately based on trading activity observed in the marketplace, using both market comparable information and discounted cash flow modeling techniques. We identified the assessment of the valuation of residential mortgage loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, was involved in evaluating the third-party pricing services’ valuation techniques and models as well as determining certain of the underlying valuation assumptions, including the prepayment rate, default rate, loss severity rate, and discount rate, which are subject to significant measurement uncertainty. The evaluation of these assumptions to 88 determine the fair value of residential mortgage loans required subjective and complex auditor judgment since the assumptions used were sensitive to variation. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s residential mortgage loan valuation process, including controls related to the evaluation of pricing service information and assumptions used in residential mortgage loan valuations. We involved valuation professionals with specialized skills and knowledge who assisted in: ◦ evaluating the design of the Company’s internal controls specific to the assessment of the third-party pricing services’ valuation techniques and models ◦ evaluating that the methodology used by the Company in determining residential mortgage loan fair value is in accordance with U.S. GAAP ◦ assessing the third-party pricing services’ valuation techniques and models through comparison to industry practices ◦ recalculating the fair value of a selection of residential mortgage loans using the Company’s assumptions and comparing the results of our recalculation to the Company’s fair value estimate ◦ developing an independent fair value estimate for a selection of residential mortgage loans at fair value based on independently developed valuation models and assumptions and comparing the results to the Company’s fair value estimate. /s/ KPMG We have served as the Company’s auditor since 2018. Atlanta, Georgia March 15, 2024 89 Angel Oak Mortgage REIT, Inc. Consolidated Balance Sheets (in thousands, except for share data) As of: December 31, 2023 December 31, 2022 ASSETS Residential mortgage loans - at fair value $ 380,040 $ 770,982 Residential mortgage loans in securitization trusts - at fair value 1,221,067 1,027,442 RMBS - at fair value 472,058 1,055,338 U.S. Treasury Securities - at fair value 149,927 — Cash and cash equivalents 41,625 29,272 Restricted cash 2,871 10,589 Principal and interest receivable 7,501 17,497 Unrealized appreciation on TBAs and interest rate futures contracts - at fair value — 14,756 Other assets 32,922 20,336 Total assets $ 2,308,011 $ 2,946,212 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Notes payable $ 290,610 $ 639,870 Non-recourse securitization obligations, collateralized by residential mortgage loans in securitization trusts (see Note 3) 1,169,154 1,003,485 Securities sold under agreements to repurchase 193,656 52,544 Unrealized depreciation on TBAs and interest rate futures contracts - at fair value 1,334 — Due to broker 391,964 1,006,022 Accrued expenses 985 1,288 Accrued expenses payable to affiliate 748 2,006 Interest payable 820 2,551 Income taxes payable 1,241 — Management fee payable to affiliate 1,393 1,967 Total liabilities $ 2,051,905 $ 2,709,733 Commitments and contingencies STOCKHOLDERS’ EQUITY Common stock, $ 0.01 par value. As of December 31, 2023: 350,000,000 shares authorized, 24,965,274 shares issued and outstanding. As of December 31, 2022: 350,000,000 shares authorized, 24,925,357 shares issued and outstanding. 249 249 Additional paid-in capital 477,068 475,379 Accumulated other comprehensive income (loss) ( 4,975 ) ( 21,127 ) Retained earnings (deficit) ( 216,236 ) ( 218,022 ) Total stockholders’ equity $ 256,106 $ 236,479 Total liabilities and stockholders’ equity $ 2,308,011 $ 2,946,212 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 90 Angel Oak Mortgage REIT, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except for share and per share data) For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 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 ) Basic earnings (loss) per common share $ 1.36 $ ( 7.65 ) Diluted earnings (loss) per common share $ 1.35 $ ( 7.65 ) Weighted average number of common shares outstanding: Basic 24,722,285 24,547,916 Diluted 24,941,758 24,547,916 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 91 Angel Oak Mortgage REIT, Inc. Consolidated Statements of Changes in Stockholder(s)’ Equity (in thousands) Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholders’ Equity Stockholder’s equity as of December 31, 2021 $ 101 $ 252 $ 476,510 $ 3,000 $ 11,527 $ 491,390 Redemption of preferred stock ( 101 ) — ( 24 ) — — ( 125 ) Dividends declared - preferred — — — — ( 14 ) ( 14 ) Repurchase of common stock — ( 3 ) ( 6,860 ) — — ( 6,863 ) Non-cash equity compensation — — 5,753 — — 5,753 Unrealized loss on RMBS and CMBS — — — ( 24,127 ) — ( 24,127 ) Dividends paid on common stock (1) — — — — ( 41,702 ) ( 41,702 ) Net income (loss) — — — — ( 187,833 ) ( 187,833 ) Stockholders’ equity as of December 31, 2022 $ — $ 249 $ 475,379 $ ( 21,127 ) $ ( 218,022 ) $ 236,479 Non-cash equity compensation — — 1,689 — — 1,689 Unrealized gain (loss) on RMBS and CMBS — — — 16,152 — 16,152 Dividends paid on common stock (2) — — — — ( 31,928 ) ( 31,928 ) Net income (loss) — — — — 33,714 33,714 Stockholders’ equity as of December 31, 2023 $ — $ 249 $ 477,068 $ ( 4,975 ) $ ( 216,236 ) $ 256,106 (1) Dividends paid on common stock for the year ended December 31, 2022 at $ 0.45 per share of common stock on March 31, 2022, May 31, 2022, August 31, 2022, and $ 0.32 per share of common stock on November 30, 2022. (2) Dividends paid on common stock for the year ended December 31, 2023 at $ 0.32 per share of common stock on March 31, 2023, May 31, 2023, August 31, 2023, and November 30, 2023. The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 92 Angel Oak Mortgage REIT, Inc. Consolidated Statements of Cash Flows (in thousands) For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 33,714 $ ( 187,833 ) Adjustments to reconcile net income to net cash provided by (used in) operating activities: 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, and derivative contracts ( 63,489 ) 201,753 Amortization of debt issuance costs 1,145 1,053 Net amortization of premiums and discounts on mortgage loans 2,855 9,370 Accretion of non-recourse securitized obligation discount 2,469 — Accretion of U.S. Treasury securities discount ( 1,462 ) — Non-cash stock compensation 1,689 5,753 Net change in: Purchases of residential mortgage loans from affiliates ( 199,793 ) ( 567,324 ) Purchases of residential mortgage loans from non-affiliates ( 27,390 ) ( 427,940 ) Sale of residential mortgage loans 4,941 252,709 Sale of residential mortgage loans into affiliates securitization trusts 350,304 — Principal payments on residential mortgage loans 34,731 84,190 Principal payments on mortgage loans in securitization trusts 100,904 201,607 Margin received from interest rate futures contracts 21,121 75,432 Principal and interest receivable 9,996 12,156 Other assets ( 233 ) ( 130 ) Management fee payable to affiliate ( 574 ) 122 Accrued expenses ( 302 ) 846 Accrued expenses payable to affiliate ( 1,258 ) 581 Income tax payable 1,241 ( 3,457 ) Interest payable ( 1,731 ) 1,268 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 306,404 $ ( 331,127 ) The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 93 Angel Oak Mortgage REIT, Inc. Consolidated Statements of Cash Flows (in thousands) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in RMBS, available for sale ( 1,022,010 ) ( 419,748 ) Purchases of investments in RMBS, trading ( 1,354,057 ) — Sale of investments in RMBS, available for sale 1,006,196 812,107 Sale of investments in RMBS, trading 1,332,832 — Purchases of investments in U.S. Treasury Securities ( 998,380 ) ( 349,992 ) Maturities of U.S. Treasury Securities 850,000 600,000 Purchases of investments in majority-owned affiliates ( 16,088 ) — Principal payments on RMBS and CMBS securities 3,063 14,067 Origination of commercial mortgage — ( 3,180 ) Sale of commercial mortgage loans to third parties 4,300 11,026 Principal payments on commercial mortgage loans 37 53 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ ( 194,107 ) $ 664,333 CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock — ( 6,863 ) Redemption of preferred stock — ( 125 ) Dividends paid to common stockholders ( 31,928 ) ( 41,702 ) Principal payments on loans held in securitization trusts ( 100,904 ) ( 201,607 ) Preferred dividends paid — ( 14 ) Cash paid for debt issuance costs — ( 457 ) Proceeds from securitizations 233,318 675,359 Net proceeds from (purchases of) securities sold under agreements to repurchase 141,112 ( 556,707 ) Net proceeds from the sale of residential loans — ( 221,229 ) Net proceeds from (payments on) notes payable ( 349,260 ) 7,691 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ ( 107,662 ) $ ( 345,654 ) CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH $ 4,635 $ ( 12,448 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of year 39,861 52,309 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of year $ 44,496 $ 39,861 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 65,169 $ 61,611 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 94 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements 1. Organization Angel Oak Mortgage REIT, Inc. (together with its subsidiaries the “Company”) is a real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (“non-QM”) loans and other mortgage‑related assets in the U.S. mortgage market. The Company’s 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 the proprietary mortgage lending platform of its affiliate, Angel Oak Mortgage Solutions LLC (together with other non-operational affiliated originators, “Angel Oak Mortgage Lending”), which currently operates primarily through a wholesale channel and has a national origination footprint. The Company may also invest in other residential mortgage loans, residential mortgage‑backed securities (“RMBS”), and other mortgage‑related assets. The Company’s objective is to generate attractive risk‑adjusted returns for its stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. The Company is a Maryland corporation incorporated on March 20, 2018. The Company achieves certain of its investment objectives by investing a portion of its assets in its wholly‑owned taxable REIT subsidiary, Angel Oak Mortgage REIT TRS, LLC (“AOMR TRS”), a Delaware limited liability company formed on March 21, 2018, which invests its assets in Angel Oak Mortgage Fund TRS, a Delaware statutory trust formed on June 15, 2018. The Company is traded on the New York Stock Exchange under the ticker symbol AOMR. The Operating Partnership On February 5, 2020, the Company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), through which substantially all of its assets are held and substantially all of its operations are conducted, either directly or through subsidiaries. The Company holds all of the limited partnership interests in the Operating Partnership and indirectly holds the sole general partnership interest in the Operating Partnership through the general partner, which is the Company’s wholly-owned subsidiary. The Company’s Manager and REIT status The Company is externally managed and advised by Falcons I, LLC (the “Manager”), a registered investment adviser with the SEC. The Company has elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2019. 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly‑owned subsidiaries. All significant inter‑company balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from the Company’s estimates and the differences could be material. 95 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements Reclassifications Certain amounts reported in prior periods in the consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the reported results of operations of prior years. For comparative purposes, and to simplify the presentation of the Company’s consolidated balance sheet, the Commercial mortgage loans - at fair value, CMBS - at fair value, and Deferred tax assets have been reclassified to “Other assets” on the consolidated balance sheet as of December 31, 2022. See Note 15 — Other Assets . Further, an adjustment has been made to the Consolidated Statements of Cash Flows for the year-ended December 31, 2022, to identify amortization of debt issuance costs, net amortization of premiums and discounts of mortgage loans, and principal payments on residential mortgage loans in securitization trusts. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). There were no recent ASUs that are expected to have a significant impact on the Company's consolidated financial statements when adopted or had a significant impact on the Company's consolidated financial statements upon adoption. Variable Interest Entities A variable interest entity (“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 (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) 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. The Company’s securitization trusts are structured as VIEs 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. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained as well as certain associated risks which may occur when the Company acts as either the sponsor and/or depositor of and the seller, directly or indirectly to, the securitization entities. Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities that most significantly impact the VIE’s economic performance. As of December 31, 2023 and 2022, the Company was considered to be a primary beneficiary in certain VIEs which held certain interests in the assets held by consolidated securitization vehicles which were created under the purview of its wholly-owned securitization shelf, Angel Oak Mortgage Trust (“AOMT”) II, LLC. These securitization vehicles are consolidated on the Company’s consolidated balance sheet, and are restricted by the structural provisions of the associated securitization trusts. The recovery of the Company’s investment in the securitization vehicles, if any, will be limited by each securitization vehicle’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s consolidated balance sheets as of December 31, 2023 and 2022, are non-recourse to the Company, 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. See Note 3 - Variable Interest Entities for further discussion of the characteristics of the securities and loans in the Company’s portfolio relating to asset pools arising from securitization transactions. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change. Segment Reporting Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined it currently operates in a single operating segment and has one reportable segment, which is to acquire, invest in, and finance mortgage‑related assets. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. 96 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements Cash and Cash Equivalents Cash represents cash deposits held at financial institutions. Cash equivalents include short‑term highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash and have maturities of three months or less at acquisition. The Company maintains its cash and cash equivalents with major financial institutions. Accounts at these institutions are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 for each bank. The Company is exposed to credit risk for amounts held in excess of the FDIC limit. The Company does not anticipate nonperformance by these financial institutions. Restricted Cash Restricted cash represents cash held at financial institutions for margin on whole loans required by certain counterparties, margin on futures trading activity, and short-term cash collateral for repurchase agreements. A reconciliation of the amounts of cash and cash equivalents and restricted cash in the consolidated balance sheets to the amount in the consolidated statements of cash flows is as follows: December 31, 2023 December 31, 2022 Cash and cash equivalents $ 41,625 $ 29,272 Restricted cash 2,871 10,589 Cash, cash equivalents and restricted cash as show in the statement of cash flows $ 44,496 $ 39,861 Fair Value Measurements The Company reports various investments at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurement . 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. In addition, the framework for measuring fair value establishes a three‑level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. See Note 10, Fair Value Measurements for further discussion on fair value measurements. The Company accounts for any purchases or sales of Investment Securities on a trade date basis. At the time of disposition, realized gains or losses on sales of Investment Securities are determined based on a specific identification basis and are a component of “net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS” in the consolidated statements of operations and comprehensive income (loss). RMBS, CMBS, and U.S. Treasury Securities (“Investment Securities”), at Fair Value; and Purchase and Sale of Investment Securities The Company classifies its investments in RMBS, CMBS, and U.S. Treasury Securities as either trading or available-for-sale (“AFS”). Trading Investment Securities are carried at their estimated fair values and coupon interest is recognized as interest income when earned and deemed collectible. Changes in fair value are reported in current earnings in “net unrealized loss on mortgage loans, debt at fair value option, and derivative contracts” in the consolidated statements of operations and comprehensive income (loss) Available-for-sale Investment Securities are carried at their estimated fair value with unrealized gains and losses reported in other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss). Residential Mortgage Loans, Residential Mortgage Loans in Securitization Trusts, and Commercial Mortgage Loans, at Fair Value The Company’s investments in residential mortgage loans, including those held in securitization trusts, and commercial loans are recorded using the fair value option in ASC Topic 825 - Financial Instruments , and therefore recorded at fair value in the consolidated balance sheets. Changes in fair value are reported in current earnings in “net unrealized loss on mortgage loans, debt at fair value option, and derivative contracts” in the consolidated statements of operations and comprehensive income (loss). Residential and commercial mortgage loans include loans that the Company may be marketing for sale to third parties, including transfers to securitization entities with either solely contributed loans or with loans contributed to securitization entities along with other Angel Oak entities. When the Company obtains possession of real property in connection with a foreclosure or similar action, the Company de-recognizes the associated mortgage loan according to ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”). Under the provisions of ASU 2014-04, the Company is deemed to have received physical possession of real estate property collateralizing a mortgage loan when it obtains legal title to the property upon completion of a foreclosure or when the borrower conveys all interest in the property to it through a deed in lieu of foreclosure or similar legal agreement. The Company’s cost basis in REO is equal to the lower of cost or fair value of the real estate associated with the foreclosed mortgage loan, less expected costs to sell. The fair value of such REO is typically based on management’s estimates which generally use information including 97 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements general economic data, broker opinions of value, recent sales, property appraisals, and bids, and takes into account the expected costs to sell the property. REO recorded at fair value on a non-recurring basis are classified as Level 3. Non-recourse securitization obligations, collateralized by residential mortgage loans (a portion of which is at Fair Value) 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 to determine fair value. Changes in fair value are reported in current earnings in “net unrealized loss on mortgage loans, debt at fair value option, and derivative contracts” in the consolidated statements of operations and comprehensive income (loss). The Company also discloses fair value for the portion of this obligation for which we have elected to hold at amortized cost. See Note 10, Fair Value Measurements. Derivative Financial Instruments, at Fair Value The Company uses a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. Derivatives are accounted for in accordance with ASC 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value on the consolidated balance sheets. These derivative financial instrument contracts are not designated as hedges for U.S. GAAP purposes; therefore, all changes in fair value are recognized in earnings. See Note 10, Derivative Financial Instruments for further information. Revenue Recognition Investment Securities Interest income on Investment Securities is recognized based on outstanding principal balances and contractual terms. Premiums and discounts are generally amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayments and impact net realized gains (losses). Residential and Commercial Mortgage Loans Interest income on residential mortgage loans and commercial mortgage loans is recognized using the effective interest method over the life of the loans. The amortization of any premiums and discounts is included in interest income. Interest income recognition is suspended when residential mortgage loans or commercial mortgage loans are placed on non-accrual status. Generally, residential mortgage loans and commercial mortgage loans are placed on non-accrual status when delinquent for more than ninety (90) days or when determined not to be probable of full collection. Interest accrued, but not collected, at the date residential mortgage loans or commercial mortgage loans are placed on nonaccrual status is reversed against interest income and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status. Interest received after the loan becomes past due or impaired is used to reduce the outstanding loan principal balance. Repurchase Agreements At times, the Company finances purchases of residential and commercial mortgage loans and Investment Securities through the use of repurchase agreements. The repurchase agreements are treated as collateralized financing transactions, which expire within approximately one year or less and are carried at their contractual amounts, including accrued interest as specified in the respective agreements. Interest paid and accrued in accordance with repurchase agreements is recorded as interest expense. Earnings Per Share The Company computes earnings per share (“EPS”) using the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings. Basic net income (loss) per share is computed by dividing net income (loss) allocable to common stockholders by the weighted‑average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing net income (loss) allocable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents and dividends related to unvested share-based awards, during each period, unless anti-dilutive. Share-Based Compensation The Company amortizes the fair value of previously granted share-based awards to expense over the vesting period using the straight line method. The initial cost of share-based awards is established at the Company’s closing share price on the grant date of the award. The Company recognizes adjustments for forfeitures as they occur. The Company has made annual grants of performance share units (“PSUs”), which allow for a 50 % vest after a three-year period and 50 % vest after a four-year period, subject to both continued employment and the achievement of certain performance criteria. Features of 98 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements the performance criteria constitute a “market condition,” which may impact the amount of compensation expense recognized for these awards. Income Taxes The Company has elected to be taxed as a REIT under the Code starting with its taxable year ended December 31, 2019. Accordingly, the Company will generally not be subject to corporate U.S. federal income tax to the extent that the Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution, and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal, state, and any applicable local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact on the Company’s results of operations and amounts available for distribution to stockholders. The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the consolidated statements of operations and comprehensive income (loss). Taxable income will generally differ from net income reported in the consolidated statements of operations and comprehensive income (loss) because the determination of taxable income is based on tax regulations and not U.S. GAAP. The Company has created and elected to treat AOMR TRS as a taxable REIT subsidiary (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non‑real estate‑related business. A domestic TRS is subject to U.S. federal, state, and local corporate income taxes, and the value of the securities of the TRS together with the value of the securities of any other TRS owned by the Company may not exceed 20% of the value of the Company’s total assets. If the TRS generates net income, it may declare dividends to the Company, which will be included in the Company’s taxable income and may necessitate a distribution to its stockholders to satisfy distribution requirements and to avoid U.S. federal income and excise tax. Conversely, if the Company retains earnings at the TRS level, no distribution is required. Effective for tax years beginning after December 31, 2022, the Inflation Reduction Act, which was signed into law on August 16, 2022, imposes a 15% alternative minimum tax (“AMT”) on the adjusted financial statement income (“AFSI”) of “Applicable Corporations”. The term “Applicable Corporations” does not include REITs but does include TRSs whose three-year average AFSI exceeds $1 billion. Current and deferred taxes are recorded on earnings (losses) recognized by AOMR TRS. Deferred income tax assets and liabilities are calculated based upon temporary differences between the Company’s U.S. GAAP consolidated financial statements and the U.S. federal and state tax basis of assets and liabilities as of the consolidated balance sheet date. If any deferred tax assets exist, the Company evaluates the realizability of such, and subsequently may recognize a valuation allowance if, based on available evidence, it is more likely than not that some or all of its deferred tax assets will not be realized. In evaluating the realizability of a deferred tax asset, the Company will consider expected future taxable income, existing and projected book to tax differences, and any tax planning strategies. Such an analysis is inherently subjective, as it is based on forecast earnings and business and economic activity. See Note 12 — Income Taxes , for further details regarding the Company’s deferred tax assets. As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a nondeductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid U.S. federal corporate income tax. Risks and Uncertainties Credit Risk The Company assumes credit risk through its investments in mortgage loans and other mortgage‑related assets. Credit losses on mortgage loans can occur for many reasons, including: fraud; poor underwriting; poor servicing practices; weak economic conditions; increases in payments required to be made by borrowers; declines in the value of real estate; declining rents on single‑ and multi‑family residential rental properties; natural disasters, including the effects of climate change (including flooding, drought, wildfires, and severe weather), and other natural events; uninsured property loss; over‑leveraging of the borrower; costs of remediation of environmental conditions, such as indoor mold; changes in zoning or building codes and the related costs of compliance; acts of war or terrorism; changes in legal protections for lenders and other changes in law or regulation; and personal events affecting borrowers, such as reduction in income, job loss, divorce, or health problems. In addition, the amount and timing of credit losses could be affected by loan modifications, delays in the liquidation process, documentation errors, and other action by servicers. Weakness in the U.S. economy or the housing market could cause the Company’s credit losses to increase. In addition, rising interest rates may increase the credit risk associated with certain residential mortgage loans. For example, the interest rate is adjustable for many of the loans held by the Company or within the securitization entities in which the Company participates. In addition, a portion of the loans the Company has pledged to secure loan financing lines have adjustable interest rates. Accordingly, when 99 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements short‑term interest rates rise, required monthly payments from homeowners will rise under the terms of these adjustable‑rate mortgages, and this may increase borrowers’ delinquencies and defaults. Credit losses on commercial mortgage loans can occur for many of the reasons noted above for residential mortgage loans. Moreover, these types of real estate loans may not be fully amortizing and, therefore, the borrower’s ability to repay the principal when due may depend upon the ability of the borrower to refinance or sell the property at maturity. Business purpose real estate loans are particularly sensitive to conditions in the rental housing market and to demand for rental residential properties. Within a securitization of residential, multi‑family, or business purpose real estate loans, various securities are created, each of which has varying degrees of credit risk. The Company may own the securities in which there is more (or the most) concentrated credit risk associated with the underlying real estate loans. In general, losses on an asset securing a loan or loan included as collateral to a securitization will be borne first by the owner of the property (i.e., the owner will first lose any equity invested in the property) and, thereafter, by the first loss security holder, and then by holders of more senior securities. In the event the losses incurred upon default on the loan exceed any classes in which the Company invests, the Company may not be able to recover all of its investment in the securities it holds. In addition, if the underlying properties have been overvalued by the originating appraiser or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related security, then the first‑loss securities may suffer a total loss of principal, followed by losses on the second‑loss and then third‑loss securities (or other residential and commercial securities that the Company owns). In addition, with respect to residential securities the Company owns, the Company may be subject to risks associated with the determination by a loan servicer to discontinue servicing advances (advances of mortgage interest payments not made by a delinquent borrower) if they deem continued advances to be unrecoverable, which could reduce the value of these securities or impair the Company’s ability to project and realize future cash flows from these securities. Investments in subordinated RMBS and CMBS involve greater credit risk than the senior classes of the issue or series. Many of the default‑related risks of whole loan mortgages will be magnified in subordinated securities. Default risks may be further pronounced in the case of RMBS and CMBS by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans. Certain subordinated securities absorb all losses from default before any other class of securities is at risk, particularly if such securities have been issued with little or no credit enhancement or equity. In addition, principal payments on subordinated securities may be subject to a “lockout” period in which some or all of the principal payments are directed to the related senior securities. This lock‑out period may be for a set period of time and/or may be determined based on pool performance criteria such as losses and delinquencies. Such securities therefore possess some of the attributes typically associated with equity investments. Interest Rate Risk Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. A significant portion of the Company’s financial assets and liabilities, including the Company’s whole loan investments (which include residential mortgage loans, residential mortgage loans held in securitization trusts, and commercial loans), investment securities, loan financing facilities, and security repurchase facilities, are interest earning or interest bearing and, as a result, the Company is subject to risks arising from fluctuations in the prevailing levels of market interest rates. In addition, all of the Company’s warehouse loan financing arrangements (notes payable) have a variable rate component or include rates which reset monthly and add additional risk due to fluctuations in market interest rates. Any excess cash and cash equivalents of the Company are invested in instruments earning short‑term market interest rates. Subject to maintaining its qualification as a REIT and maintaining its exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), the Company may utilize various derivative instruments and other hedging instruments to mitigate interest rate risk. Liquidity Risk An insufficient secondary market may prevent the liquidation of an asset or limit the funds that can be generated from selling an asset. A portion of the Company’s financial assets are considered to be illiquid and may be subject to high liquidity risk. Furthermore, the Company’s use of financial leverage exposes the Company to increased liquidity risks from margin calls and potential breaches of the financial covenants under its borrowing facilities, which could result in the Company being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements. Prepayment Risk The frequency at which prepayments occur on loans held and loans underlying RMBS and CMBS will be affected by a variety of factors including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Generally, mortgage obligors tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. Generally, whole loans, RMBS, and CMBS purchased at a premium are adversely affected by faster than anticipated prepayments; and whole loans, RMBS, and CMBS purchased at a discount are adversely affected by slower than anticipated prepayments. The adverse effects of prepayments may impact the Company in two ways. First, particular investments may experience outright losses, as in the case of an interest‑only security in an environment of faster actual or anticipated prepayments. Second, particular investments may underperform 100 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements relative to the financial instruments that the Company’s Manager may have constructed to reduce specific financial risks for these investments, resulting in a loss to the Company. In particular, prepayments (at par) may limit the potential upside of many whole loans, RMBS, and CMBS to their principal or par amounts, whereas their corresponding hedges, if any, often have the potential for unlimited loss. Extension Risk The Company’s Manager computes the projected weighted average life of the Company’s investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, when fixed rate, adjustable rate, or hybrid mortgage loans or other mortgage‑related assets are acquired via borrowings, the Company may, but is not required to, enter into an interest rate swap agreement or other economic hedging instrument that attempts to fix the Company’s borrowing costs for a period close to the anticipated average life of the fixed rate portion of the related assets, in each case subject to maintaining the Company’s qualification as a REIT and maintaining the Company’s exclusion from regulation as an investment company under the Investment Company Act. This strategy is designed to protect the Company from rising interest rates, as the borrowing costs are managed to maintain a net interest spread for the duration of the fixed rate portion of the related assets. However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have an adverse impact on the Company’s earnings, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the fixed rate, adjustable rate, or hybrid assets would remain fixed. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause the Company to incur losses. 3. Variable Interest Entities Since its inception, the Company has utilized VIEs for the purpose of securitizing whole mortgage loans to obtain long-term non-recourse financing. The Company evaluates its interest in each VIE to determine if it is the primary beneficiary. VIEs for Which the Company is the Primary Beneficiary The Company entered into securitization transactions that resulted in the Company consolidating the VIEs used to facilitate these transactions. See Note 2 “Variable Interest Entities” for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with financing transactions. The retained beneficial interest in VIEs for which the Company is the primary beneficiary is the subordinated tranches of the securitization and further interests in additional interest‑only tranches. The following table summarizes the key details of the Company’s loan securitization transactions currently outstanding as of December 31, 2023 and 2022: As of: December 31, 2023 December 31, 2022 ($ in thousands) Aggregate unpaid principal balance of residential whole loans sold $ 2,578,595 $ 2,236,515 Face amount of Non-recourse securitization obligation issued by the VIE and purchased by third-party investors 1,619,051 1,359,698 Outstanding amount of Non-recourse securitization obligation, at carrying value 1,220,067 1,084,039 Outstanding amount of Non-recourse securitization obligation, at fair value ( 50,912 ) ( 80,554 ) Outstanding amount of Non-recourse securitization obligation, total $ 1,169,154 $ 1,003,485 Weighted average fixed rate for Non-recourse securitization obligation issued 2.91 % 2.70 % Face amount of Senior Support Certificates received by the Company (3) $ 91,330 $ 66,149 Cash received $ 194,746 $ 159,007 During the years ended December 31, 2023 and 2022, the Company and it’s affiliates issued and sold bonds with a current face value of $ 259 million and $ 680 million to third-party investors for proceeds of $ 233 million and $ 675 million, respectively, before offering costs and accrued interest. The sold bonds issued during the years ended December 31, 2023 and 2022 are included in “Non-recourse securitization obligations, collateralized by residential mortgage loans in securitization trusts” on the Company’s consolidated balance sheets. As of December 31, 2023 and 2022, as a result of the transactions described above, securitized loans of approximately $ 1.3 billion and $ 1.2 billion are included in “Residential mortgage loans in securitization trusts” on the Company’s consolidated balance sheets, respectively. As of December 31, 2023 and 2022, the aggregate carrying value of sold bonds issued by consolidated VIEs was $ 1.2 billion and $ 1.1 billion, respectively. These sold bonds are disclosed as “Non-recourse securitization obligation, collateralized by residential mortgage loans in securitization trusts” on the Company’s consolidated balance sheets. The holders of the securitized debt have no recourse to 101 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential whole loans sold to the VIE. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE. The Company concluded that the entities created to facilitate the loan securitization transactions are VIEs. The Company completed an analysis of whether each VIE created to facilitate the securitization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed: • whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and • whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate the loan securitization transactions VIEs for Which the Company is Not the Primary Beneficiary The Company sponsored or participated along with other affiliates and entities managed by Angel Oak Capital in the formation of various entities that were considered to be VIEs. These VIEs were formed to facilitate securitization issuances that were comprised of secured residential whole loans and/or small balance commercial loans contributed to securitization trusts. These securities were issued as a result of the unconsolidated securitizations where the Company retained bonds from the issuances of securitizations issued by a depositor that the Company does not control. The Company determined that it was not then and is not now the primary beneficiary of any of these securitization entities, and thus has not consolidated the operating results or statements of financial position of any of these entities. The Company performs ongoing reassessments of all VIEs in which the Company has participated since its inception as to whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change, and the Company’s assessment of these VIEs remains unchanged. The securities received in the securitization transactions were classified as “available for sale” upon receipt and are included in “RMBS - at fair value” and “Other Assets” on the consolidated balance sheets as of December 31, 2023 and December 31, 2022, and details on the accounting treatment and fair value methodology of the securities can be found in Note 10 — Fair Value Measurements . See also Note 5 — Investment Securities , for the fair value of AOMT securities held by the Company, and Note 15 - Other Assets , for investments in MOAs, as of December 31, 2023 and December 31, 2022 that were retained by the Company as a result of these securitization transactions. 4. Residential Mortgage Loans Residential mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s residential mortgage loan portfolio as of December 31, 2023 and 2022: As of: December 31, 2023 December 31, 2022 ($ in thousands) Cost $ 393,443 $ 886,660 Unpaid principal balance $ 386,872 $ 864,171 Net premium on mortgage loans purchased 6,571 22,489 Change in fair value ( 13,403 ) ( 115,678 ) Fair value $ 380,040 $ 770,982 Weighted average interest rate 6.78 % 4.80 % Weighted average remaining maturity (years) 29 30 The following table sets forth data regarding the number of consumer mortgage loans secured by residential real property 90 or more days past due and also those in formal foreclosure proceedings, and the recorded investment and unpaid principal balance of such loans as of December 31, 2023 and 2022: 102 Angel Oak Mortgage REIT, Inc. Notes to the Consolidated Financial Statements As of: December 31, 2023 December 31, 2022 ($ in thousands) Number of mortgage loans 90 or more days past due 7 11 Recorded investment in mortgage loans 90 or more days past due $ 5,754 $ 7,230 Unpaid principal balance of loans 90 or more days past due $ 5,681 $ 7,043 Number of mortgage loans in foreclosure 2 2 Recorded investment in mortgage loans in foreclosure $ 1,956 $ 820 Unpaid principal balance of loans in foreclosure $ 1,889 $ 849 5. Investment Securities As of December 31, 2023, Investment Securities were comprised of non‑agency RMBS and Freddie Mac and Fannie Mae “whole pool agency RMBS” (together, “RMBS”), and U.S. Treasury securities. As of December 31, 2022, Investment Securities were comprised of RMBS and CMBS. The U.S. Treasury Securities held by the Company as of December 31, 2023 matured on January 9, 2024. The Company did not hold any U.S. Treasury securities as of December 31, 2022. The following table sets forth a summary of RMBS at cost as of December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) AOMT RMBS $ 84,957 $ 69,922 Whole Pool Agency RMBS $ 391,964 $ 1,006,022 The following table sets forth certain information about the Company’s investment in RMBS as of December 31, 2023: December 31, 2023 Real Estate Securities at Fair Value Repurchase Debt (2) Allocated Capital (in thousands) AOMT RMBS (1) Mezzanine $ 10,972 $ ( 844 ) $ 10,128 Subordinate 55,665 ( 19,812 ) 35,853 Interest Only/Excess 13,059 ( 1,871 ) 11,188 Retained RMBS in VIEs (2) — ( 22,116 ) ( 22,116 ) Total AOMT RMBS $ 79,696 $ ( 44,643 ) $ 35,053 Whole Pool Agency RMBS (3) Fannie Mae $ 278,510 $ — $ 278,510 Freddie Mac 113,852 — 113,852 Whole Pool Total Agency RMBS $ 392,362 $ — $ 392,362 Total RMBS $ 472,058 $ ( 44,643 ) $ 427,415 (1) AOMT RMBS held as of December 31, 2023 included both retained tranches of AOMT securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. (2) A portion of repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). These bonds, with a fair value of $ 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. (3) The whole pool RMBS presented as of December 31, 2023 were purchased from a broker to whom the Company owes approximately $ 392 million, payable upon the settlement date of the trade. See Note 8 - Due to Broker . 103 The following table sets forth certain information about the Company’s investment in RMBS as of December 31, 2022: December 31, 2022 Real Estate Securities at Fair Value Repurchase Debt Allocated Capital (in thousands) AOMT RMBS (1) Senior $ — $ — $ — Mezzanine 1,958 ( 1,470 ) 488 Subordinate 49,578 ( 24,982 ) 24,596 Interest Only/Excess 10,424 ( 1,506 ) 8,918 Retained RMBS in VIEs — ( 24,586 ) ( 24,586 ) Total AOMT RMBS $ 61,960 $ ( 52,544 ) $ 9,416 Other Non-Agency RMBS Subordinate $ — $ — $ — Interest Only/Excess — — — Total Other Non-Agency RMBS $ — $ — $ — Whole Pool Agency RMBS Fannie Mae $ 501,458 $ — $ 501,458 Freddie Mac 491,920 — 491,920 Whole Pool Total Agency RMBS $ 993,378 $ — $ 993,378 Total RMBS $ 1,055,338 $ ( 52,544 ) $ 1,002,794 (1) AOMT RMBS held as of December 31, 2022 included both retained tranches of AOMT securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. The following table sets forth certain information about the Company’s investment in U.S. Treasury Securities as of December 31, 2023. The Company did not hold any U.S. Treasury Securities as of December 31, 2022. Date Face Value Unamortized Discount, net Amortized Cost Unrealized Loss Fair Value Net Effective Yield ($ in thousands) December 31, 2023 $ 150,000 $ 159 $ 149,841 $ 86 $ 149,927 5.30 % 6. Notes Payable The Company has the ability to finance residential and commercial whole loans, utilizing lines of credit (notes payable) from various counterparties, as further described below. Outstanding borrowings bear interest at floating rates depending on the lending counterparty, the collateral pledged, and the rate in effect for each interest period, as the same may change from time to time at the end of each interest period. Some loans include upfront fees, fees on unused balances, covenants and concentration limits on types of collateral pledged; all vary based on the counterparty. Occasionally, a lender may require certain margin collateral to be posted on a warehouse line of credit. There was no margin collateral required as of December 31, 2023. Restricted cash as of December 31, 2022 included $ 5.6 million in margin collateral required by a certain lender. 104 The following table sets forth the details of all the lines of credit available to the Company for whole loan purchases during the years ended December 31, 2023 and 2022, and the drawn amounts as of December 31, 2023 and 2022: Interest Rate Pricing Spread Drawn Amount 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 % (5) 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) On April 13, 2022, the Company and two of its subsidiaries entered into a master repurchase agreement with a multinational bank (“Multinational Bank 1”) through the execution of a master repurchase agreement between the Company as guarantor, and two of its subsidiaries, as sellers, and Multinational Bank 1 as buyer, with an original maximum facility limit of $ 340.0 million. Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every six months for a maximum six months term. On August 4, 2022, the maximum line of credit under the facility with Multinational Bank 1 was increased by $ 260.0 million to a maximum facility limit of $ 600.0 million. On July 25, 2023 this facility was amended with an updated interest pricing spread of 2.10 % and extended until January 25, 2024. On December 15, 2023, the loan financing facility was extended through June 25, 2024, in accordance with the mechanism for six-month renewal periods. (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 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 facility was amended to extend the expiration date to May 2, 2024. (5) On March 2, 2022, the agreement was extended to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement. On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a pricing spread equal to 20 basis points, plus the prior pricing spread. Prior to January 1, 2022, interest was based on 3-month LIBOR plus a pricing spread of 2.25 %. 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. The interest rate pricing spread was also amended to 2.80 % for the first three months following the amendment date, which will increase by an additional 50 basis points every three months thereafter. Additionally, the amendment generally removed “mark to market” provisions from the previous agreement, and requires an economic interest rate hedging account (“interest rate futures account”) to be maintained to the reasonable satisfaction of Global Investment Bank 3, which account is for its benefit and under its sole control. On November 7, 2023, this facility was renewed for a 12 month term through 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 a base interest rate pricing spread of 180 basis points plus a 20 basis points index spread adjustment, with an expiration date of November 7, 2024. The Company held restricted cash pertaining to Global Investment Bank 3’s interest rate futures account included in “restricted cash” of approximately $ 1.7 million on the Company’s consolidated balance sheet as of December 31, 2022. There was no restricted cash related to this facility on the Company’s consolidated balance sheet as of December 31, 2023. (6) On October 4, 2022, the 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 months extension period option. The Company subsequently repaid this financing facility in full on January 4, 2023 and chose not to exercise the three months extension period option. 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 105 balance sheet as of December 31, 2022, which was released on January 4, 2023. There was no restricted cash related to this facility on the Company’s consolidated balance sheet as of December 31, 2023. (7) On March 7, 2022, this agreement was amended to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement. Additionally, the amendment increased the aggregate purchase price limit to $ 75.0 million from $ 50.0 million, and beginning March 8, 2022, provided that interest will accrue on any new transactions under the loan financing line at a rate based on Term SOFR plus an additional pricing spread. Prior to March 7, 2022, interest was based on 1-month LIBOR plus a spread of 2.50 % - 3.13 %. 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. 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. 7. Due to Broker The “Due to broker” account on the consolidated balance sheet as of December 31, 2023 and December 31, 2022 in the amount of $ 392 million and 1.0 billion, respectively, relates to the purchase of Whole Pool Agency RMBS. Purchases are accounted for on a trade date basis; and, at times, there may be a timing difference between the trade date and the settlement date of a trade. The trade date of this purchase was prior to the applicable year-end dates. These trades settled on January 16, 2024 and January 13, 2023, respectively, at which time these assets were simultaneously sold. The purchase transactions for the unsettled Whole Pool Agency RMBS are excluded from the consolidated statements of cash flows as they are non-cash transactions. 8. Securities Sold Under Agreements to Repurchase Transactions involving securities sold under agreements to repurchase are treated as collateralized financial transactions, and are recorded at their contracted repurchase amounts. Margin (if required) for securities sold under agreements to repurchase represents margin collateral amounts held to ensure that the Company has sufficient coverage for securities sold under agreements to repurchase in case of adverse price changes. As of December 31, 2023 and 2022, there was approximately $ 0.3 million and $ 3.9 million, respectively, held as margin cash collateral for repurchase agreements recorded in “restricted cash” on the consolidated balance sheets. 106 The following table summarizes certain characteristics of the Company’s repurchase agreements 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 AOMT 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 6.07 % 13 Total $ 52,544 6.07 % 13 (1) A portion of repurchase debt outstanding as of December 31, 2023 and December 31, 2022 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). See Note 5 - Investment Securities . Although the transactions under repurchase agreements represent committed borrowings until maturity, the lenders retain the right to mark the underlying collateral at fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. 9. Derivative Financial Instruments In the normal course of business, the Company enters into derivative financial instruments to manage its exposure to market risk, including interest rate risk and prepayment risk on its residential whole loans at fair value. The derivatives in which the Company invests, and the market risk that the economic hedge is intended to mitigate, are further discussed below. Restricted cash as of December 31, 2023 and 2022 included approximately $ 2.5 million and $ 1.1 million in interest rate futures margin collateral, respectively; and zero and approximately zero in TBA margin collateral, respectively. The Company uses interest rate futures as economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. The Company’s credit risk with respect to economic hedges is the risk of default on its investments that result from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. The Company may at times hold TBAs in order to mitigate its interest rate risk on certain specified mortgage-backed securities. Amounts or obligations owed by or to the Company are subject to the right of set-off with the TBA counterparty. As part of executing these trades, the Company may enter into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. Changes in the value of derivatives designed to protect against mortgage-backed securities fair value fluctuations, or economic hedging gains and losses, are reflected in the tables below. All realized and unrealized gains and losses on derivative contracts are recognized in earnings, in “net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS” for realized losses, and “net unrealized loss on mortgage loans, debt at fair value option, and derivative contracts” for unrealized gains and losses. The Company considers the notional amounts, categorized by primary underlying risk, to be representative of the volume of its derivative activities. 107 The following table sets forth the derivative instruments presented on the consolidated balance sheets and notional amounts as of December 31, 2023 and 2022: Notional Amounts As of: Derivatives Not Designated as Hedging Instruments Number of Contracts Assets Liabilities Long Exposure Short Exposure ($ in thousands) December 31, 2023 Interest rate futures 1,489 $ — $ 840 $ — $ 148,900 December 31, 2023 TBAs N/A $ — $ 494 $ — $ 386,700 December 31, 2022 Interest rate futures 4,928 $ 2,211 $ — $ — $ 492,800 December 31, 2022 TBAs N/A $ 12,545 $ — $ — $ 1,041,700 The gains and losses arising from these derivative instruments in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, and 2022 are set forth as follows: As of: Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) December 31, 2023 Interest rate futures $ 5,492 $ ( 3,947 ) December 31, 2023 TBAs $ 16,524 $ ( 13,038 ) December 31, 2022 Interest rate futures $ 67,767 $ 2,939 December 31, 2022 TBAs $ 7,295 $ 10,117 10. Fair Value Measurements Definition and Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable: • Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. • Unobservable inputs are inputs that reflect the reporting entity’s own assumptions. A fair value hierarchy for inputs is implemented in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs are used when available. The availability of valuation techniques and the ability to attain observable inputs can vary from investment to investment and are affected by a wide variety of factors, including the type of investment, whether the investment is newly issued and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction. The fair value hierarchy is categorized into three broad levels based on the inputs as follows: Level 1 - Valuations based on unadjusted, quoted prices in active markets for identical assets and liabilities. Level 2 - Valuations based on quoted prices in an inactive market, or whose values are based on models - but the inputs to those models are observable either directly or indirectly for substantially the full term of the assets and liabilities. Level 2 inputs include the following: a) Quoted prices for similar assets and liabilities in active markets (e.g. restricted stock); b) Quoted prices for identical or similar assets and liabilities in non‑active markets (e.g. corporate and municipal bonds); c) Pricing models whose inputs are observable for substantially the full term of the assets and liabilities (e.g. over‑the‑counter derivatives); and 108 d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability, (e.g. residential and commercial mortgage‑related assets, including whole loans securities and derivatives). Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Valuation of these assets is typically based on the Company’s Manager’s own assumptions or expectations based on the best information available. The degree of judgment exercised by the Company’s Manager in determining fair value is greatest for investments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the actual level is determined based on the level of inputs that is most significant to the fair value measurement in its entirety. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, 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. Accordingly, the degree of judgment exercised by the Company’s Manager in determining fair value is greatest for investments categorized in Level 3. Transfers, if any, between levels are determined by the Company on the first day of the reporting period. Valuation Techniques and Inputs Following are descriptions of the valuation methodologies used to measure the Company’s assets and liabilities measured at fair value: Investment Securities - U.S. Government and Agency Securities (“U.S. Treasury Securities” and “whole pool agency RMBS”) are valued based on unadjusted, quoted prices for identical assets or liabilities in an active market. U.S. Treasury Securities are generally categorized as Level 1 securities while whole pool agency RMBS are generally classified as level 2 securities. Futures Contracts - Futures contracts that are traded on an exchange are valued at their last reported sales price as of the valuation date. Listed futures contracts are categorized in Level 1 of the fair value hierarchy. Non‑Agency Residential Mortgage‑Backed Securities (“Non‑Agency”) - Non‑Agencies consist of investments in collateralized mortgage obligations. The Company utilizes Price Serve , Bank of America’s independent fixed income pricing service, as the primary valuation source for the investments. Price Serve 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. Commercial Mortgage Loans - Commercial mortgage loans, including in Other Assets, are recognized at fair value. The fair value of commercial mortgage loans at fair value is predominately based on trading activity observed in the marketplace, provided by a third‑party pricing service. The pricing service obtains comparative pricing from banks, brokers, hedge funds, REITs and from its own brokerage business. The 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 performing commercial mortgage loans are generally categorized as Level 2 securities in the fair value hierarchy, while non-performing loans are categorized as Level 3 given their limited marketability and availability of observable valuation inputs. Residential Mortgage Loans (including Residential Mortgage Loans in Securitization Trusts) - The 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-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 to determine fair value. The 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 109 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. Other assets and liabilities - The fair value of cash, restricted cash, principal and interest receivable, deferred tax assets and liabilities, other assets (principally consisting of prepaid assets), notes payable, securities sold under obligation to repurchase, amounts due to broker and accrued expenses (including those payable to an affiliate and management fees payable to an affiliate), and interest payable approximate their carrying values due to the nature of these assets and liabilities. Valuation Processes The Company’s Manager establishes valuation processes and procedures to ensure that the valuation techniques are fair and consistent, and valuation inputs are verifiable. The valuation committee of the Company’s Manager (the “Committee”) oversees the valuation process of the Company’s investments. The Committee is comprised of various personnel of the Company’s Manager, including those that are separate from the Company’s portfolio management and trading functions. The Committee is responsible for developing the Company’s written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies. The Committee meets on a monthly basis, or more frequently as needed, to review the valuations of the Company’s investments. If a security does not have a pricing source which is available or reliable, the Company’s Manager considers all appropriate factors relevant to determine the fair value of the security. Valuations determined by the Company’s Manager are required to be supported by market data, third‑party pricing sources, and industry accepted pricing models. 110 The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2023: Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 374,004 $ 6,036 $ 380,040 Residential mortgage loans in securitization trusts — 1,207,804 13,263 1,221,067 Investments in securities AOMT RMBS (1) — 79,696 — 79,696 Whole Pool Agency RMBS — 392,362 — 392,362 U.S. Treasury Securities. 149,927 — — 149,927 Other Assets, at fair value (2) — 32,923 — 32,923 Total assets, at fair value $ 149,927 $ 2,086,789 $ 19,299 $ 2,256,015 Liabilities, at fair value Non-recourse securitization obligation, collateralized by residential mortgage loans (3) $ — $ 743,189 $ — $ 743,189 Unrealized depreciation on futures contracts ( 840 ) — — ( 840 ) Unrealized depreciation on TBAs ( 494 ) — — ( 494 ) Total liabilities, at fair value $ ( 1,334 ) $ 743,189 $ — $ 741,855 (1) Non‑Agency RMBS held as of December 31, 2023 included both retained tranches of AOMT securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. All AOMT CMBS held as of December 31, 2023 was comprised of a small-balance commercial loan securitization issuance in which the Company participated. (2) Includes Commercial Loans and AOMT CMBS assets. All AOMT CMBS held as of December 31, 2023 was comprised of a small-balance commercial loan securitization issuance in which the Company participated. (3) Only the portion subject to fair value measurement, as adjusted for fair value, is presented above. See below for the disclosure of the full debt at fair value. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans, TBAs, and futures contracts are recognized in net income for the periods presented. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. Transfers between Level 2 and Level 3 were immaterial for the year ended December 31, 2023. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of December 31, 2023: 111 Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 6,036 Prepayment rate (annual CPR) 6.86 % - 19.93 % 13.40 % Default rate 12.69 % - 13.64 % 13.16 % Loss severity ( 25.00 )% - 40.13 % 4.12 % Expected remaining life 0.67 - 4.09 years 2.22 years Residential mortgage loans in securitization trust, at fair value $ 13,264 Prepayment rate (annual CPR) 5.97 % - 20.71 % 12.32 % Default rate 4.38 % - 28.66 % 16.92 % Loss severity ( 13.99 )% - 19.60 % 4.14 % Expected remaining life 0.67 - 5.67 years 2.72 years Assets and Liabilities Held at Amortized Cost - Fair Value Disclosure Portion of Non-Recourse Securitization Obligations, Collateralized by Residential Mortgage Loans - Held at Amortized Cost To determine the fair value of the Company’s non-recourse securitization obligations, collateralized by residential mortgage loans, net, held at amortized cost, the Company uses the same method of valuation as described previously in the discussion of Valuation Techniques and Inputs for both the portion of the obligation measured at fair value and the portion of the obligation held at amortized cost, for which fair value is disclosed, as below. As of December 31, 2023, the total amortized cost basis and fair value of our non-recourse securitization obligations was $ 1.24 billion and $ 1.09 billion, respectively, a difference of approximately $ 247.8 million (which includes AOMT 2022-1, AOMT 2022-4, and AOMT 2023-4, which are marked to fair value; and AOMT 2021-7 and AOMT 2021-4, which are carried at amortized cost, as the fair value option was not elected at the time of the creation of these obligations). The fair value solely attributable to AOMT 2021-4 and 2021-7 is approximately $ 81.9 million less than the amortized cost. The difference between the amortized cost basis value and the fair value is derived from the difference between the period-end market pricing of the underlying bonds, as referred to above, and the amortized cost of the obligation. The fair value of the non-recourse securitization debt is not indicative of the amounts at which we could settle this debt. As of December 31, 2022, the total amortized cost basis and fair value of our non-recourse securitization obligations was $ 1.1 billion and $ 914.3 million, respectively, a difference of approximately $ 170.9 million (which includes AOMT 2022-1 and AOMT 2022-4, which are marked to fair value; and AOMT 2021-7, and AOMT 2021-4, which are carried at amortized cost, as the fair value option was not elected at the time of the creation of these obligations). The difference between the amortized cost and fair value solely attributable to AOMT 2021-4 and 2021-7 is approximately $ 90.3 million. The difference between the amortized cost basis value and the fair value is derived from the difference between the period-end market pricing of the underlying bonds, as referred to above, and the amortized cost of the obligation. The fair value of the non-recourse securitization debt is not indicative of the amounts at which we could settle this debt. Investments in Majority-Owned Affiliates To determine the fair value of the Company’s investments in majority-owned affiliates, which are held at amortized cost and included in “other assets”, the Company uses the prices of the underlying bonds in the investments to determine fair value. The 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 amortized cost and fair value of these investments as of December 31, 2023 was approximately $ 16.2 million and $ 16.7 million, respectively. The amortized cost and fair value of these investments as of December 31, 2022 was zero . 112 The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2022 (1) : Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 763,786 $ 7,196 $ 770,982 Residential mortgage loans in securitization trusts — 1,018,686 8,756 1,027,442 Investments in securities Non-Agency RMBS (1) — 61,960 — 61,960 Agency whole pool loan securities — 993,378 — 993,378 Unrealized appreciation on futures contracts 2,211 — — 2,211 Unrealized appreciation on TBAs 12,545 — — 12,545 Other Assets, at fair value (2) — 20,337 — 20,337 Total assets, at fair value $ 14,756 $ 2,858,147 $ 15,952 $ 2,888,855 Liabilities, at fair value Non-recourse securitization obligation, collateralized by residential mortgage loans $ — $ 530,560 $ — $ 530,560 Total liabilities, at fair value $ — $ 530,560 $ — $ 530,560 (1) Non‑Agency RMBS held as of December 31, 2022 included both retained tranches of AOMT securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. All AOMT CMBS held as of December 31, 2022 was comprised of a small-balance commercial loan securitization issuance in which the Company participated. (2) Includes Commercial Loans and AOMT CMBS assets. All AOMT CMBS held as of December 31, 2022 was comprised of a small-balance commercial loan securitization issuance in which the Company participated. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans, TBAs, and futures contracts are recognized in net income for the periods presented. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. Transfers between Level 2 and Level 3 were immaterial for the year ended December 31, 2022. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of December 31, 2022: 113 Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 7,196 Prepayment rate (annual CPR) 4.92 % - 14.99 % 9.39 % Default rate 4.56 % - 24.36 % 11.43 % Loss severity ( 0.25 )% - 12.54 % 7.84 % Expected remaining life 0.62 - 3.43 years 2.75 years Residential mortgage loans in securitization trust, at fair value $ 8,756 Prepayment rate (annual CPR) 3.24 % - 14.55 % 7.84 % Default rate 7.42 % - 35.78 % 19.07 % Loss severity — % - 10.00 % 9.23 % Expected remaining life 1.42 - 3.72 years 2.32 years 11. Income Taxes The Company has elected to be taxed as a REIT commencing with its taxable year ended December 31, 2019. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its REIT taxable income to stockholders and does not engage in prohibited transactions (as further described below). Income tax (benefit) items arise at the Company’s TRS level. Certain sales by the group consisting of the Company and its subsidiaries may give rise to gain that could be treated as derived from “prohibited transactions” if carried out by the Company directly. Such transactions involve the purchase of residential mortgage loans and the subsequent sale of those mortgage loans or interests therein through the secondary whole loan market or the securitization markets. The Company has designated AOMR TRS to conduct such transactions rather than Angel Oak Mortgage REIT, Inc. The Company files separate U.S. federal and state corporate income tax returns for Angel Oak Mortgage REIT, Inc. and AOMR TRS. AOMR TRS is taxed as a standalone U.S. C‑corporation on all of its separately computed taxable income. The Company’s federal income tax returns for 2019 and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for 2019 and forward. The following table sets forth the income tax provision (benefit) as recorded in the Company’s consolidated statements of comprehensive income (loss) for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) Current Federal $ 4,774 $ — State 1,312 — Total current income tax expense 6,086 — Deferred Federal ( 3,800 ) ( 2,691 ) State ( 1,040 ) ( 766 ) Total deferred income tax expense (benefit) ( 4,840 ) ( 3,457 ) Total income tax expense (benefit) $ 1,246 $ ( 3,457 ) Deferred Tax Assets (“DTAs”) and Assessing the Realizability of the Company’s DTAs Realization of the Company’s DTAs as of December 31, 2023, is dependent on many factors, including generating sufficient taxable income prior to the expiration of net operating loss (“NOL”) carryforwards (where applicable). The Company determines the extent to which realization of its deferred assets is not assured and establishes a valuation allowance accordingly. As the Company’s TRS incurred a NOL during the year ended December 31, 2022, the Company closely analyzed its estimate of the realizability of its net DTAs in whole and in part. The NOLs incurred in 2022 can be carried forward indefinitely, until fully utilized. The Company evaluates its DTAs each period to determine if a valuation allowance is required based on whether it is “more likely than not” that some portion of the DTAs would not be realized. This evaluation requires significant judgment, and changes to the Company’s assumptions could result in a material change in the valuation allowance. The ultimate realization of these DTAs is dependent upon the generation of sufficient taxable income during future periods. The Company conducts its evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. Based 114 on this analysis, the Company continues to believe it is more likely than not that it will not fully realize its federal and state DTAs in future periods. Therefore, the Company has recorded a valuation allowance against the majority of its DTAs, as set forth in the table, below. The Company’s estimate of net DTAs could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. The Company assessed its tax positions for all open tax years and concluded that it had no uncertain tax positions that resulted in material unrecognized tax benefits. The tax effects of temporary differences that give rise to significant portions of the net DTA recorded at the TRS entity as of December 31, 2023 and 2022 are set forth in the following table: December 31, 2023 December 31, 2022 (in thousands) DTA Net operating loss carryforward $ 40,714 $ 41,583 Utilization of operating loss carryforwards ( 4,840 ) — Valuation allowance ( 32,417 ) ( 38,126 ) Total DTA 3,457 3,457 Reconciliation of Statutory Tax Rate to Effective Tax Rate The difference between the Company’s reported provision for income taxes and the U.S. federal statutory rate of 21% is set forth as follows for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Federal statutory rate 21.00 % ( 21.00 ) % State statutory rate, net of federal tax effect 5.75 % ( 5.98 ) % Change in valuation allowance ( 14.80 ) % 21.58 % Non-taxable REIT income ( 8.40 ) % 3.44 % Total provision 3.55 % ( 1.96 ) % 12. Related Party Transactions Residential Mortgage Loan Purchases The Company has residential mortgage loan purchase agreements with various affiliates of the Company. The purchase price of the loans is generally equal to the outstanding principal of the mortgage, adjusted by a premium or discount, depending on market conditions. The Company purchases the mortgage loans on a servicing retained basis. The residential mortgage loans are on residences located in various states with a concentration in California and Florida. The following table sets forth certain financial information pertaining to whole loan activity purchased from affiliates during the years ended and as of December 31, 2023 and 2022: As of and for the Year Ended: Amount of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates, Owned and Held at December 31 (1) : ($ in thousands) 2023 $ 199,793 475 589 2022 $ 567,324 1,141 845 (1) Excludes loans held in consolidated securitizations. Management Fee On and after June 21, 2021, management agreement (the “Management Agreement”) took effect among the Company, the Operating Partnership, and its Manager. Per the Management Agreement, on a quarterly basis in arrears, the Company shall pay its Manager an aggregate, fixed management fee equal to 1.5 % per annum of the Company’s Equity (as defined in the Management Agreement). 115 Incentive Fee Under the Management Agreement, the Manager is also entitled to an incentive fee, which is calculated and payable in cash with respect to each calendar quarter (or part thereof that the Management Agreement is in effect) in arrears in an amount, not less than zero , equal to the excess of (1) the product of (a) 15 % and (b) the excess of (i) the Company’s Distributable Earnings (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) the Company’s Equity in the previous 12-month period, and (B) 8 % per annum, over (2) the sum of any incentive fee earned by the Manager with respect to the first three calendar quarters of such previous 12-month period. To date, the incentive fee has not been earned. Operating Expense Reimbursements The Company is also required to pay the Manager reimbursements for certain general and administrative expenses pursuant to the Management Agreement. Accrued expenses payable to affiliate and operating expenses incurred with affiliate are substantially comprised of payroll reimbursements, which includes an executive severance expense accrual, as described below, to an affiliate of the Manager. On September 28, 2022, the Company’s Board of Directors appointed Mr. Sreeniwas Prabhu as the Company’s new Chief Executive Officer and President effective as of September 28, 2022. The Company did not reimburse the Manager for compensation paid to Mr. Prabhu for his service with the Company in 2022 or 2023. Mr. Prabhu is an equity owner of the Manager. Simultaneously with the appointment of Mr. Prabhu as the Company’s Chief Executive Officer and President, the Company’s previous Chief Executive Officer and President, Mr. Robert Williams, ceased serving as the Company’s Chief Executive Officer and President, effective September 28, 2022. Accordingly, the Company recorded a severance charge of approximately $ 1.4 million in connection with this event, in accordance with the Company’s Executive Severance and Change in Control Plan. This severance was fully paid in 2023. 13. Commitments and Contingencies The Company, from time to time, may be party to litigation relating to claims arising in the normal course of business. As of December 31, 2023, the Company was not aware of any legal claims that could materially impact its financial condition. As of December 31, 2023, the Company had no unfunded commitments. The Company has entered into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. As of December 31, 2023, the Company has a total purchase commitments of $ 28 million related to both Angel Oak Mortgage Lending and third parties. These commitments represent off-balance sheet risk where the Company may be required to extend credit. 116 14. Accumulated Other Comprehensive Income/(Loss) The following table sets forth the net unrealized gain/(loss) on AFS securities for the fiscal year ended December 31, 2023 and 2022, which is the s ole component of the changes in the Company’s Accumulated Other Comprehensive Income/(Loss) (“AOCI”) for the fiscal year concluded on December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) AOCI balance, beginning of period $ ( 21,127 ) $ 3,000 Net unrealized gain/(loss) on AFS securities 16,152 ( 24,127 ) AOCI balance, end of period $ ( 4,975 ) $ ( 21,127 ) 15. Other Assets The following table sets forth the detail of other assets included in the condensed consolidated balance sheets as of December 31, 2023 and December 31, 2022: December 31, 2023 December 31, 2022 ($ in thousands) Investments in Majority-Owned Affiliates $ 16,232 $ — Commercial Mortgage Loans 5,219 9,458 CMBS 6,592 6,111 Deferred tax asset 3,457 3,457 Prepaid expenses 1,137 1,310 Protective advances and other assets 285 — Total other assets $ 32,922 $ 20,336 Investments in Majority-Owned Affiliates (“MOA”) In 2023, the Company participated in securitization transactions AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7, which involved MOAs in which the Company received investments of 41.21 %, 34.42 %, and 10.35 %, respectively, in each case proportional to its share of the unpaid principal balance of the residential whole loans contributed to the securitizations. The purpose of the MOAs is to retain and hold risk retention bonds issued by the securitization trust. Each MOA is a limited liability company and is accounted for as an equity method investment and held at amortized cost. The investment will be tested for impairment at least annually utilizing undiscounted cash flows of the underlying risk retention bonds. See Note 10 — Fair Value Measurements . Commercial Mortgage Loans Commercial mortgage loans are measured at fair value. As of December 31, 2023 and December 31, 2022, the cost and unpaid principal balance of the assets was $ 5.6 million and $ 9.9 million, with a fair value of $ 5.2 million and $ 9.5 million, respectively. The weighted average interest rate was 6.24 % with a weighted average maturity of 12 years, as of December 31, 2023. There were no commercial mortgage loans more than 90 days past due or in foreclosure as of December 31, 2023 or December 31, 2022. Commercial Mortgage Backed Securities CMBS are held at fair value. As of December 31, 2023 and December 31, 2022, the cost of these assets were $ 6.3 million and $ 6.3 million, with a fair value of $ 6.6 million and $ 6.1 million, respectively. There was no repurchased debt held against these assets at December 31, 2023 or December 31, 2022. 117 16. Equity and Earnings per Share (“EPS”) In the calculations of basic and diluted earnings per common share for the years ended December 31, 2023 and 2022, the Company included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances, and the Company determined that this difference was not material. For the year ended December 31, 2023, there were 196,353 outstanding restricted stock awards included in the diluted weighted average common shares outstanding. For the year ended December 31, 2022, no equity awards were antidilutive. The following table sets forth the calculation of basic and diluted earnings per share for the year ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands, except share and per share data) Basic Earnings per Common Share: Net income allocable to common stockholders $ 33,714 $ ( 187,847 ) Dividends allocated to participating securities ( 89 ) — Net income (loss) to common stockholders - basic 33,625 ( 187,847 ) Basic weighted average common shares outstanding 24,722,285 24,547,916 Basic earnings per common share $ 1.36 $ ( 7.65 ) Diluted Earnings per Common Share: Net income (loss) to common stockholders - basic $ 33,714 $ ( 187,847 ) Dividends allocated to participating securities ( 89 ) — Net income (loss) to common stockholders - diluted 33,625 ( 187,847 ) Basic weighted average common shares outstanding 24,722,285 24,547,916 Net effect of dilutive equity awards 219,473 — Diluted weighted average common shares outstanding 24,941,758 24,547,916 Diluted earnings per common share $ 1.35 $ ( 7.65 ) Preferred Stock On December 9, 2022, the Company redeemed its Series A preferred stock and cancelled the previously outstanding shares. The Company paid a redemption price to the preferred shareholders equivalent to the original purchase price per share (with no premium or discount) plus accrued dividends payable through the redemption date. 118 17. Equity Compensation Plans On June 21, 2021, the Company established its sole equity compensation plan, the 2021 Equity Incentive Plan (the “Plan”), with 2,125,000 shares initially available for grant. As of December 31, 2023, 1,359,261 shares of common stock were available for grant under the Plan, which shares available are reduced by a maximum of 123,767 shares of common stock that may be issued upon the achievement of certain performance conditions under outstanding performance share awards (as further described below) and 196,353 of time-based restricted stock awards that will vest upon the participants’ meeting the contractual service-related terms. Compensation expense for the years ended December 31, 2023 and 2022 related to these awards was approximately $ 1.7 million and $ 5.8 million, respectively. The unamortized compensation expense of the restricted stock awards issued under the Plan totaled approximately $ 1.4 million as of December 31, 2023. This cost will be recognized over a weighted average period of 1.4 years. Restrictions on the restricted stock awards outstanding lapse through July 1, 2027, as service conditions are completed and the awards vest accordingly. Holders of unvested restricted stock awards receive non-forfeitable dividends along with other common stockholders. Restricted Stock Awards The following table summarizes activity for our restricted stock awards during the years ended December 31, 2023 and 2022: Number of awards Weighted average grant date fair market value Outstanding as of December 31, 2021 469,473 $ 19.00 Granted 142,820 14.08 Vested (1) ( 331,376 ) 18.54 Forfeited ( 11,393 ) 15.80 Outstanding as of December 31, 2022 269,524 17.09 Granted 101,456 8.05 Vested ( 113,088 ) 16.76 Forfeited ( 61,539 ) 16.28 Outstanding as of December 31, 2023 196,353 $ 12.86 (1) Includes the accelerated vesting of 155,937 shares in accordance with an executive severance event described in Note 12 - Related Party Transactions — Operating Expense Reimbursements. The expense associated with the accelerated stock vesting was approximately $ 2.6 million, and was included in stock compensation in the Company’s consolidated statements of operations and comprehensive income (loss) as of December 31, 2022. Performance Share Units Awarded The Board of Directors have awarded a total of 183,427 Performance Share Units (“PSUs”), at a weighted average grant date fair value of $ 11.11 per share, to certain employees of the Manager and its affiliates, of which 123,767 PSUs remained outstanding as of December 31, 2023, due to forfeitures of 59,660 PSUs. To date, the performance criteria has not been deemed “more likely than not” to be met, and so no expense or charge to stockholders’ equity has been recorded in conjunction with either the Performance Share Units or the associated dividend equivalents further described below. If the performance criteria are met, the PSUs shall vest 50 % on the third anniversary of the awards and 50 % on the fourth anniversary of the awards. The number of shares vested is based on the achievement of the performance goals set forth in the applicable award agreements over the relative performance periods. Dividend Equivalents Relating to Performance Share Units A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., a PSU) under the Plan. Should the performance criteria for these shares be met and the shares vest, the number of shares subject to the PSU awards shall increase by (i) the product of the total number of shares subject to the PSU award immediately prior to such dividend date multiplied by the dollar amount of the cash dividend paid per share of stock by the Company on such dividend date, divided by (ii) the fair market value of a share of stock on such dividend date (i.e., would be subject to dividend equivalents for any dividends paid between the grant date and the vesting date of the PSUs). Any such additional shares issued by virtue of the vesting of dividend equivalents are subject to the same vesting conditions and payment terms set forth as to the PSU shares to which they relate. 119 18. Subsequent Events Subsequent events of significance for disclosure purposes only (i.e., subsequent events that are not recognized in the financial statements as of and for the year ended December 31, 2023) are as follows: On January 19, 2024, the Company extended its loan financing facility with Global Investment Bank 2. The loan financing facility had previously been set to expire on February 2, 2024, and has been extended through May 2, 2024. On February 7, 2024, the Company declared a dividend of $ 0.32 per share of common stock, that was paid on February 29, 2024 to common stockholders of record as of February 22, 2024. On March 12, 2024, the Company contributed loans with a scheduled principal balance of approximately $ 48.7 million into an approximately $ 439.6 million scheduled principal balance securitization transaction backed by a pool of residential mortgage loans along with other affiliates of Angel Oak Capital, an affiliate of the Manager. 120 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.