Angel Oak Mortgage REIT, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of Angel Oak Mortgage REIT, Inc. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. References herein to our “Company,” “we,” “us,” or “our” refer to Angel Oak Mortgage REIT, Inc. and its subsidiaries including Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”), through which we hold substantially all of our assets and conduct our operations. Unless otherwise indicated, the term “Angel Oak” refers collectively to Angel Oak Capital Advisors, LLC (“Angel Oak Capital”) and its affiliates, including Falcons I, LLC, our external manager (our “Manager”), Angel Oak Companies, LP (“Angel Oak Companies”), and the proprietary mortgage lending platform of affiliates Angel Oak Mortgage Solutions LLC (together with other non-operational affiliated originators, “Angel Oak Mortgage Lending”). Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report on Form 10-K”). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in other reports we file with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to: • the effects of adverse conditions or developments in the financial markets and the economy upon our ability to acquire target assets such as non-qualified residential mortgage (“non-QM”) loans, particularly those sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending; • the level and volatility of prevailing interest rates and credit spreads; • changes in our industry, inflation, interest rates, business strategies, target assets, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and real estate markets specifically; • general volatility of the markets in which we invest; • changes in the availability of attractive loan and other investment opportunities, including non-QM loans sourced from Angel Oak Mortgage Lending; • the ability of our Manager to locate suitable investments for us, manage our portfolio, and implement our strategy; • our ability to profitably execute securitization transactions; • our ability to obtain and maintain financing arrangements on favorable terms, or at all; • the adequacy of collateral securing our investments and a decline in the fair value of our investments; • the timing of cash flows, if any, from our investments; • the operating performance, liquidity, and financial condition of borrowers; • increased rates of default and/or decreased recovery rates on our investments; • changes in prepayment rates on our investments; • the departure of any of the members of senior management of the Company, our Manager, or Angel Oak; • the availability of qualified personnel; • conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak; 25 • events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, including those resulting from global climate change, pandemics, acts of war or terrorism, the initiation or escalation of military conflicts (such as the Russian invasion of Ukraine), and others that may cause unanticipated and uninsured performance declines, disruptions in markets, and/or losses to us or the owners and operators of the real estate securing our investments; • impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters; • the level of governmental involvement in the U.S. mortgage market; • future changes with respect to the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac” and together with Fannie Mae, the “GSEs”) in the mortgage market and related events, including the lack of certainty as to the future roles of these entities and the U.S. Government in the mortgage market and changes to legislation and regulations affecting these entities; • effects of hedging instruments on our target assets and our returns, and the degree to which our hedging strategies may or may not protect us from interest rate volatility; • our ability to make distributions to our stockholders in the future at the level contemplated by our stockholders or the market generally, or at all; • our ability to continue to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes; and • our ability to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date such statements are made. The risks summarized under Item 1A. “Risk Factors” in the Annual Report on Form 10-K could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Important Information Regarding Our Disclosure to Investors We may use our website (www.angeloakreit.com) to communicate with our investors and disclose company information. The information disclosed through our website may be considered material, so investors should monitor our website in addition to press releases, SEC filings and public conference calls and webcasts. The contents of our website referenced herein are not incorporated by reference into this report. General Angel Oak Mortgage REIT, Inc. is a real estate finance company focused on acquiring and investing in first lien non-QM loans and other mortgage-related assets in the U.S. mortgage market. Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending, which currently operates primarily through a wholesale channel and has a national origination footprint. We also may invest in other residential mortgage loans, residential mortgage-backed securities (“RMBS”), and other mortgage-related assets, which, collectively with non-QM loans, we refer to as our target assets. Further, we also may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. We are externally managed and advised by our Manager, Falcons I, LLC, a registered investment adviser under the Investment Advisers Act of 1940, as amended, and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets. Angel Oak Mortgage Lending, an affiliated Angel Oak mortgage origination platform, is a market leader in non‑QM loan production. Through our relationship with our Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non‑QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak’s experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak’s analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities, and operational expertise. 26 We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. Commencing with our taxable year ended December 31, 2019, we believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Our qualification as a REIT, and maintenance of such qualification, depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels, and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act. Our common stock commenced trading on the New York Stock Exchange on June 17, 2021. We expect to derive our returns primarily from the difference between the interest we earn on loans we invest in and our cost of capital, as well as the returns from bonds, including risk retention securities, that are retained after securitizing the underlying loan collateral. Trends and Recent Developments Overall macroeconomic environment and its effect on us Over the course of the third quarter, signs of easing inflation and a stable employment sector that had emerged during the second quarter persisted, providing the Federal Reserve Bank of the United States (“the Fed”) with confidence to reduce interest rates at its September meeting for the first time since March of 2020. At that meeting, the Fed elected to reduce rates by what was perceived to be an aggressive 50 basis points (“bps”). Following the rate cut and now that an easing rate cycle has begun, analysts are split over the expected timing and extent of future rate cuts. As of the end of September 2024, markets were pricing in an additional 1.5 cuts through the end of the year. As of the end of September 2024, inflation was 2.4%, down from 2.9% as of the end of June but still above the Fed’s 2.0% target. 30 year fixed residential conforming mortgage rates also responded to the Fed rate cuts, with the average rate dropping 78bps, from from 6.86% at the end of June 2024 to 6.08% as of the end of September 2024. According to the U.S. Department of Housing and Urban Development, mortgage origination activity rose 9.6% in August 2024 on a month over month seasonally adjusted basis, driven by a 15.8% increase in single-family housing starts. Rate cuts are expected to drive increased home purchase and mortgage origination activity going forward, but the extent of such activity remains uncertain. On the heels of inflation data and the Fed rate cuts, the two-year and five-year Treasury yields decreased by 112bps and 82bps, respectively, in the third quarter of 2024 compared to the end of June 2024. Net of new loan purchases and securitizations, we observed an increase of approximately 261 basis points in the weighted average price of our residential whole loans portfolio since the end of second quarter 2024. The weighted average coupon of our residential whole loans portfolio held relatively flat at 7.73% as of the end of the third quarter of 2024 compared to 7.71% as of the end of the second quarter of 2024. Subsequent to the end of the third quarter of 2024, in October, we executed the AOMT 2024-10 securitization as the sole contributor of loans, contributing approximately $316.8 million in scheduled unpaid principal balance of residential mortgage loans. During the third quarter of 2024, we purchased $264.8 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.74%, weighted average loan-to-value ratio (“LTV”) of 70.0% and weighted average credit score of 754. Notes offering On July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029 (the “Notes”). The Notes bear interest at a rate of 9.500% per annum, payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on October 30, 2024. The Notes will mature on July 30, 2029, unless earlier redeemed or repurchased by us. We have deployed the majority of the net proceeds from the offering of the Notes for general corporate purposes, which included the acquisition of non-QM loans and other target assets primarily sourced from our affiliated proprietary mortgage lending platform and other target assets through the secondary market in a manner consistent with our strategy and investment guidelines. Additionally, we used a portion of the net proceeds from the offering of the Notes to repurchase 1,707,922 shares of our common stock owned by Xylem Finance LLC, an affiliate of Davidson Kempner Capital Management LP, for an aggregate repurchase price of approximately $20.0 million. Our investment performance Net Interest Margin (“NIM”). An increase in both the balance and yield of our target assets generated greater interest income in the third quarter of 2024 as compared to the third quarter of 2023. Interest income growth outpaced the growth in interest expense, leading to higher NIM in the third quarter of 2024 compared to the third quarter of 2023. Net realized loss . Our net realized loss for the quarter ended September 30, 2024 was primarily due to realized losses associated with rate hedge contracts, as well as paydowns on our residential loans and loans held in securitization trusts portfolios. Net unrealized gain . Our net unrealized gain for the quarter ended September 30, 2024 was driven by an increase in the valuation of our residential whole loans and the net valuation of loans in securitization trust and non-recourse securitization obligation portfolios. 27 Whole loans and securitization activity During the quarter ended September 30, 2024, we purchased $264.8 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.74%, weighted average LTV of 70.0% and weighted average credit score of 754. In March 2024, we participated in AOMT 2024-3, an approximately $439.6 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $48.7 million. We participated in this securitization alongside other Angel Oak entities, and may strategically enter into similar securitizations in the future. In April 2024, we issued AOMT 2024-4, an approximately $299.8 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans. We issued AOMT 2024-4 as the sole participant in the securitization. As the primary beneficiary we have consolidated the AOMT 2024-4 securitization, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of the applicable balance sheet date. In June 2024, we participated in AOMT 2024-6, an approximately $479.6 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $22.9 million. We participated in this securitization alongside other Angel Oak entities, and may strategically enter into similar securitizations in the future. Subsequent to quarter end, in October 2024, we issued AOMT 2024-10, an approximately $316.8 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans. We issued AOMT 2024-10 as the sole participant in the securitization. As the primary beneficiary we will consolidate the AOMT 2024-10 securitization, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of the applicable balance sheet date. Whole loan financing facilities activity We continuously evaluate our lender base and may enter into new agreements and / or exit agreements as we deem prudent, in accordance with our core financial strategy of purchasing whole loans and financing them until securitized. See “Liquidity and Capital Resources” below for a full description of our financing arrangements. Our total borrowing capacity was $1.1 billion as of September 30, 2024. Highlights of whole loan financing facilities activity over the third quarter of 2024 are as follows: • During the quarter ended September 30, 2024, we maintained the same whole loan financing facility lender base as of December 31, 2023. • During the quarter ended September 30, 2024, we (i) renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods. • Subsequent to quarter end, we (i) in October 2024, amended our loan financing facility with Global Investment Bank 2 to, among other changes, reduce the interest rate pricing spread to a range from 1.75% to 3.35% and (ii) in November 2024 amended our loan financing facility with Global Investment Bank 3 to, among other changes, (a) extend the termination date to November 1, 2025; (b) reduce the interest rate pricing spread to a range from1.90% to 4.75% based on collateral type, loan status, dwell time and other factors; and (c) eliminate the 20 basis point index spread adjustment. Key Financial Metrics As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity, Book Value per Share of Common Stock, and Economic Book Value per Share of Common Stock. Distributable Earnings Distributable Earnings is a non‑GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding (1) unrealized gains and losses on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses. We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. We believe Distributable Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. As a REIT, we are generally required to distribute at least 90% of our annual REIT taxable income and to pay U.S. federal income tax at the regular corporate rate to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors. Distributable Earnings is one of a 28 number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings may not be comparable to similar measures presented by other REITs. We also use Distributable Earnings to determine the incentive fee, if any, payable to our Manager pursuant to the management agreement that we and the Operating Partnership entered into with our Manager upon the completion of our initial public offering of common stock (“IPO”) on June 21, 2021 and amended and restated on May 1, 2024 (as amended and restated, the “Management Agreement”). For information on the fees that are payable to our Manager under the Management Agreement, see “Note 10 – Related Party Transactions” in our unaudited condensed consolidated financial statements included in this report. Distributable Earnings were a loss of $3.4 million and a loss of $8.6 million for the three months ended September 30, 2024 and 2023, respectively. The primary drivers of this quarter’s Distributable Earnings as compared to GAAP net income are the adjustments to remove unrealized gains associated with our residential loans and residential loans in securitization trusts and non-recourse securitization obligation portfolios. The table below sets forth a reconciliation of net income (loss) allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the three and nine months ended September 30, 2024 and 2023: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Net income (loss) allocable to common stockholders $ 31,204 $ 8,273 $ 43,806 $ 5,115 Adjustments: Net unrealized (gains) losses on trading securities (984) 4,857 829 7,134 Net unrealized (gains) losses on derivatives 51 (4,563) (2,985) 7,794 Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation (26,304) (5,319) (28,871) 5,784 Net unrealized (gains) losses on residential loans (7,935) (12,338) (17,438) (48,497) Net unrealized (gains) losses on commercial loans — 64 (49) (83) Non-cash equity compensation expense 604 447 1,864 1,195 Distributable Earnings $ (3,364) $ (8,579) $ (2,844) $ (21,558) Distributable Earnings Return on Average Equity Distributable Earnings Return on Average Equity is a non-GAAP measure and is defined as annual or annualized Distributable Earnings divided by average total stockholders’ equity. We believe that the presentation of Distributable Earnings Return on Average Equity provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. Additionally, we believe Distributable Earnings Return on Average Equity provides investors with additional detail on the Distributable Earnings generated by our invested equity capital. We believe Distributable Earnings Return on Average Equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Distributable Earnings Return on Average Equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs. Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and nine months ended September 30, 2024 and 2023: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 ($ in thousands) Annualized Distributable Earnings $ (13,460) $ (34,315) $ (3,793) $ (28,747) Average total stockholders’ equity $ 260,452 $ 232,575 260,083 $ 236,629 Distributable Earnings Return on Average Equity (5.2)% (14.8)% (1.5)% (12.1)% 29 Book Value per Share of Common Stock The following table sets forth the calculation of our book value per share of common stock as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 (in thousands except for share and per share data) Total stockholders’ equity $ 265,098 $ 256,106 Number of shares of common stock outstanding at period end 23,511,272 24,965,274 Book value per share of common stock $ 11.28 $ 10.26 Economic Book Value per Share of Common Stock “Economic book value” is a non-GAAP financial measure of our financial position. To calculate our economic book value, the portions of our non-recourse financing obligation held at amortized cost are adjusted to fair value. These adjustments are also reflected in the table below in our end of period total stockholders’ equity. Management considers economic book value to provide investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for our legally held retained bonds, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for book value per share of common stock or stockholders’ equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies. The following table sets forth a reconciliation from GAAP total stockholders’ equity and book value per share of common stock to economic book value and economic book value per share of common stock as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 (in thousands except for share and per share data) GAAP total stockholders’ equity $ 265,098 $ 256,106 Adjustments: Fair value adjustment for securitized debt held at amortized cost 64,522 81,942 Stockholders’ equity including economic book value adjustments $ 329,620 $ 338,048 Number of shares of common stock outstanding at period end 23,511,272 24,965,274 Book value per share of common stock $ 11.28 $ 10.26 Economic book value per share of common stock $ 14.02 $ 13.54 30 Results of Operations Three Months Ended September 30, 2024 and 2023 The following table sets forth a summary of our results of operations for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 September 30, 2023 (in thousands) INTEREST INCOME, NET Interest income $ 27,444 $ 23,900 Interest expense 18,424 16,490 NET INTEREST INCOME $ 9,020 $ 7,410 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS $ (6,335) $ (12,044) Net unrealized gain (loss) on trading securities, mortgage loans, portion of debt at fair value option, and derivative contracts 35,172 17,299 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET $ 28,837 $ 5,255 EXPENSES Operating expenses $ 1,287 $ 1,370 Operating expenses incurred with affiliate 472 599 Due diligence and transaction costs 254 115 Stock compensation 604 447 Securitization costs — 416 Management fee incurred with affiliate 1,204 1,445 Total operating expenses $ 3,821 $ 4,392 INCOME (LOSS) BEFORE INCOME TAXES $ 34,036 $ 8,273 Income tax expense 2,832 — NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 31,204 $ 8,273 Other comprehensive income (loss) 2,706 (1,607) TOTAL COMPREHENSIVE INCOME (LOSS) $ 33,910 $ 6,666 31 Net Interest Income The following table sets forth the components of net interest income for the three months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 September 30, 2023 (in thousands) Interest income Interest income / expense Average balance Interest income / expense Average balance Residential mortgage loans $ 4,659 $ 263,095 $ 4,272 $ 289,916 Residential mortgage loans in securitization trusts 18,580 1,454,736 15,208 1,228,074 Commercial mortgage loans 81 5,246 58 6,329 RMBS and Majority-Owned Affiliate 3,251 117,965 3,067 171,128 CMBS 417 6,239 147 6,453 U.S. Treasury securities 65 6,000 541 46,607 Other interest income 391 40,919 607 42,669 Total interest income 27,444 23,900 Interest expense Notes payable 2,830 176,159 4,117 205,915 Non-recourse securitization obligation, collateralized by residential mortgage loans 13,731 1,362,039 10,956 1,191,406 Repurchase facilities 900 57,842 1,417 87,279 Senior unsecured notes 963 40,538 — — Total interest expense 18,424 16,490 Net interest income $ 9,020 $ 7,410 Net interest income for the three months ended September 30, 2024 and 2023 was $9.0 million and $7.4 million, respectively. Net interest income increased in the three months ended September 30, 2024 as compared to the same period in 2023, primarily due to higher net interest income from our residential mortgage loans portfolio (residential mortgage loan interest income less notes payable interest expense) during the three months ended September 30, 2024 . We observed net interest income associated with our residential mortgage loan portfolio of $1.8 million in the three months ended September 30, 2024 compared to $0.1 million in the comparable period of 2023. This was primarily driven by an increase in the weighted average coupon rate of our residential mortgage loans portfolio versus the comparative period, as well as holding more unlevered loans, resulting in a proportionally lower notes payable balance. 32 Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the three months ended September 30, 2024 and 2023 are set forth as follows: Three Months Ended September 30, 2024 September 30, 2023 (in thousands) Realized and unrealized gain (loss) on securitization, net of unrealized gain (loss) on non-recourse securitization obligation $ 25,228 $ 4,352 Realized gain (loss) on RMBS (565) (598) Unrealized gain (loss) on Whole Pool Agency RMBS (2,138) (12,367) Realized gain (loss) on CMBS (67) (101) Realized gain (loss) on interest rate futures (4,461) 2,828 Realized and unrealized gain (loss) on TBAs 1,880 12,349 Realized and unrealized gain (loss) on residential mortgage loans 7,789 (856) Realized and unrealized gain (loss) on commercial mortgage loans — (35) Realized and unrealized loss on U.S. Treasury securities (13) 47 Unrealized appreciation (depreciation) on interest rate futures 1,184 (364) Total realized and unrealized gains (losses), net $ 28,837 $ 5,255 For the three months ended September 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in gains of $28.8 million and $5.3 million, respectively. During the three months ended September 30, 2024, gains on securitization, net of unrealized gain (loss) on non-recourse securitization obligation drove the majority of the overall gain to our portfolio as valuations increased during the quarter. Similarly, during the three months ended September 30, 2023 gains on securitization, net of unrealized gain (loss) on non-recourse securitization obligation drove the majority of the overall gain to our portfolio as well. Expenses Operating Expenses For the three months ended September 30, 2024 and 2023, our operating expenses were $1.3 million and $1.4 million, respectively. Our operating expenses decreased slightly compared to the comparative period due to continued cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio. Operating Expenses Incurred with Affiliate For the three months ended September 30, 2024 and 2023, our operating expenses incurred with affiliate were $0.5 million and $0.6 million, respectively. These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased slightly in the third quarter of 2024 compared to the same period of 2023 as a result of additional cost savings actions. Due Diligence and Transaction Costs For the three months ended September 30, 2024 and 2023, our due diligence and transaction costs were $254 thousand and $115 thousand, respectively. Our due diligence and transaction expenses increased over the comparative period due to increased purchases of whole loans during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Stock Compensation For the three months ended September 30, 2024 and 2023, our stock compensation expense was $0.6 million and $0.4 million, respectively. Our stock compensation expense increased for the three months ended September 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards. Securitization Costs For the three months ended September 30, 2024 and 2023, we incurred $0.0 million and $0.4 million of securitization costs, respectively. There was no securitization activity in the third quarter of 2024, and the securitization costs in the comparative period in 2023 were driven by our participation in the AOMT 2023-5 securitization. 33 Management Fee Incurred with Affiliate For the three months ended September 30, 2024 and 2023, our management fee incurred with affiliate was $1.2 million and $1.4 million, respectively. The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended September 30, 2024 as compared to the same period in 2023. A key driver of the decrease in the three months ended September 30, 2024 versus the comparative period of 2023 is the repurchase of 1,707,922 million shares of our common stock owned by Xylem Finance, LLC, an affiliate of Davidson Kempner Capital Management, LP, for an aggregate repurchase price of approximately $20 million. The calculation of Equity for the purposes of the Management Agreement includes the addition of Distributable Earnings, which is the primary departure from the calculation of equity in accordance with GAAP. Nine Months Ended September 30, 2024 and 2023 The following table sets forth a summary of our results of operations for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 September 30, 2023 (in thousands) INTEREST INCOME, NET Interest income $ 78,558 $ 71,403 Interest expense 51,495 50,742 NET INTEREST INCOME $ 27,063 $ 20,661 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS $ (14,527) $ (27,056) Net unrealized gain (loss) on trading securities, mortgage loans, portion of debt at fair value option, and derivative contracts 48,514 27,868 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET $ 33,987 $ 812 EXPENSES Operating expenses $ 4,619 $ 5,788 Operating expenses incurred with affiliate 1,444 1,672 Due diligence and transaction costs 663 136 Stock compensation 1,864 1,195 Securitization costs 1,583 2,326 Management fee incurred with affiliate 3,810 4,460 Total operating expenses $ 13,983 $ 15,577 INCOME (LOSS) BEFORE INCOME TAXES $ 47,067 $ 5,896 Income tax expense (benefit) 3,261 781 NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 43,806 $ 5,115 Other comprehensive income (loss) 4,534 12,955 TOTAL COMPREHENSIVE INCOME (LOSS) $ 48,340 $ 18,070 34 Net Interest Income The following table sets forth the components of net interest income for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 September 30, 2023 (in thousands) Interest income Interest income / expense Average balance Interest income / expense Average balance Residential mortgage loans $ 13,925 $ 284,211 $ 18,457 $ 467,538 Residential mortgage loans in securitization trusts 51,851 1,357,840 39,753 1,106,621 Commercial mortgage loans 258 5,231 458 8,215 RMBS and Majority Owned Affiliate 9,613 148,677 9,225 164,244 CMBS 1,097 6,428 790 6,394 U.S. Treasury securities 548 14,528 1,201 32,981 Other interest income 1,266 39,239 1,519 37,482 Total interest income 78,558 71,403 Interest expense Notes payable 9,928 199,644 21,222 366,032 Non-recourse securitization obligation, collateralized by residential mortgage loans 37,624 1,285,118 26,121 1,080,156 Repurchase facilities 2,980 64,431 3,399 89,726 Senior unsecured notes 963 35,681 — — Total interest expense 51,495 50,742 Net interest income $ 27,063 $ 20,661 Net interest income for the nine months ended September 30, 2024 and 2023 was $27.1 million and $20.7 million, respectively. Net interest income increased in the nine months ended September 30, 2024 as compared to the same period in 2023, primarily due to higher net interest income from our residential mortgage loans portfolio (residential mortgage loan interest income less notes payable interest expense) during the nine months ended September 30, 2024. We observed net interest income associated with our residential mortgage loan portfolio of $4 million in the nine months ended September 30, 2024 compared to a loss of $(2.8) million in the comparable period of 2023. This was primarily driven by an increase in the weighted average coupon rate of our residential mortgage loans portfolio versus the comparative period, as well as holding more unlevered loans, resulting in a proportionally lower notes payable balance. 35 Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the nine months ended September 30, 2024 and 2023 are set forth as follows: Nine Months Ended September 30, 2024 September 30, 2023 (in thousands) Realized and unrealized gain (loss) on securitization, net of unrealized gain (loss) on non-recourse securitization obligation $ 25,607 $ (7,948) Realized loss on RMBS (2,469) (1,545) Realized and unrealized gain (loss) on Whole Pool Agency RMBS (6,355) (12,627) Realized gain (loss) on CMBS (186) (241) Realized gain (loss) on interest rate futures (622) 8,599 Realized and unrealized gain (loss) on TBAs 5,992 (479) Realized and unrealized (loss) gain on residential mortgage loans 9,839 17,268 Realized and unrealized (loss) gain on commercial mortgage loans 48 113 Realized and unrealized loss on U.S. Treasury securities (99) 88 Unrealized appreciation on interest rate futures 2,232 (2,416) Total realized and unrealized gains (losses), net $ 33,987 $ 812 For the nine months ended September 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in a net gain of $34 million and a loss of $0.8 million, respectively. During the nine months ended September 30, 2024, gains on residential mortgage loans in securitization trust, net of unrealized gain (loss) on non-recourse securitization obligation, residential mortgage loans, TBAs, and interest rate futures were offset by losses on RMBS and whole pool agency RMBS. In the nine months ended September 30, 2023, market volatility caused the valuation of our residential mortgage loans in securitization trust and whole pool agency RMBS to decrease, which was offset by gains in our residential mortgage loans portfolio and interest rate futures. Expenses Operating Expenses For the nine months ended September 30, 2024 and 2023, our operating expenses were $4.6 million and $5.8 million, respectively. Our operating expenses decreased during the comparative period due to continued cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio. Operating Expenses Incurred with Affiliate For the nine months ended September 30, 2024 and 2023, our operating expenses incurred with affiliate were $1.44 million and $1.7 million, respectively. These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased versus the comparative period as a result of additional cost savings actions. Due Diligence and Transaction Costs For the nine months ended September 30, 2024 and 2023, our due diligence and transaction costs were $663 thousand and $136 thousand, respectively. Our due diligence and transaction expenses increased versus the comparative period as we purchased more whole loans during the nine months ended September 30, 2024 than the nine months ended September 30, 2023. Stock Compensation For the nine months ended September 30, 2024 and 2023 our stock compensation expense was $1.9 million and $1.2 million, respectively. Stock compensation expense increased for the nine months ended September 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards. 36 Securitization Costs Securitization costs of $1.6 million were incurred for the nine months ended September 30, 2024 in connection with the AOMT 2024-3, AOMT 2024-4, and AOMT 2024-6 securitization transactions. There were $2.3 million of securitization costs incurred for the comparable period in 2023, representing costs incurred in connection with the AOMT 2023-1, AOMT 2023-4, and AOMT 2023-5 securitizations. Management Fee Incurred with Affiliate For the nine months ended September 30, 2024 and 2023, our management fee incurred with affiliate was $3.8 million and $4.5 million, respectively. The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the nine months ended September 30, 2024 as compared to the same period in 2023. A key driver of the decrease in the nine months ended September 30, 2024 versus the comparative period of 2023 is the repurchase of 1,707,922 million shares of our common stock owned by Xylem Finance, LLC, an affiliate of Davidson Kempner Capital Management, LP, for an aggregate repurchase price of approximately $20 million. The calculation of Equity for the purposes of the Management Agreement includes the addition of Distributable Earnings, which is the primary departure from the calculation of equity in accordance with GAAP. 37 Our Portfolio As of September 30, 2024, our portfolio consisted of approximately $2.2 billion of residential mortgage loans, RMBS, and other target assets. Certain of these portfolio assets are located in states such as Florida and California where natural disasters such as hurricanes and earthquakes may occasionally occur. We require all of our collateral to be adequately insured. The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of September 30, 2024: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 428,909 $ 333,042 $ 95,867 36.2 % Residential mortgage loans in securitization trust 1,452,907 1,353,758 $ 99,149 37.4 % Total whole loan portfolio $ 1,881,816 $ 1,686,800 $ 195,016 73.6 % Investment securities RMBS $ 283,105 $ 53,164 $ 229,941 86.7 % U.S. Treasury securities 49,971 49,712 259 0.1 % Total investment securities $ 333,076 $ 102,876 $ 230,200 86.8 % Investment in Majority-Owned Affiliate $ 18,720 $ — $ 18,720 7.1 % Total investment portfolio $ 2,233,612 $ 1,789,676 $ 443,936 167.5 % Target assets (1) $ 2,183,641 $ 1,739,964 $ 443,677 167.4 % Cash $ 42,052 $ — $ 42,052 15.8 % Other assets and liabilities (2) (220,889) — (220,889) (83.3) % Total $ 2,054,775 $ 1,789,676 $ 265,099 100.0 % (1) “Target assets” as defined by us excludes U.S. Treasury securities, and includes our investment in a Majority-Owned Affiliates. (2) Other assets and liabilities presented is calculated as a net liability substantially comprised of $194.7 million due to broker for our quarter-end purchase of certain Freddie Mac and Fannie Mae-issued whole pool agency residential mortgage-backed securities (“Whole Pool Agency RMBS”), and excluding the portion of “other assets” which includes our investment in a Majority-Owned Affiliate, which is considered a target asset. 38 As of December 31, 2023, our portfolio consisted of approximately $2.1 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio including the manner in which our equity capital was allocated among investment types, as of December 31, 2023: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 380,040 $ 290,610 $ 89,430 34.9 % Residential mortgage loans in securitization trust 1,221,067 1,169,154 51,913 20.3 % Total whole loan portfolio $ 1,601,107 $ 1,459,764 $ 141,343 55.2 % Investment securities RMBS $ 472,058 44,643 $ 427,415 166.9 % Investment in Majority-Owned Affiliates 16,232 — 16,232 6.3 % U.S. Treasury Securities 149,927 149,013 914 0.4 % Total investment securities $ 638,217 $ 193,656 $ 444,561 173.6 % Total investment portfolio $ 2,239,324 $ 1,653,420 $ 585,904 228.8 % Target assets (1) $ 2,089,397 $ 1,504,407 $ 585,904 228.8 % Cash $ 41,625 $ — $ 41,625 16.2 % Other assets and liabilities (2) (371,423) — (371,423) (145.0) % Total $ 1,909,526 $ 1,653,420 $ 256,106 100.0 % (1) “Target assets” as defined by us excludes U.S. Treasury securities, and includes our investment in a Majority-Owned Affiliates. (2) Other assets and liabilities presented is calculated as a net liability substantially comprised of $392.0 million due to broker for our quarter-end purchase of certain Freddie Mac and Fannie Mae-issued Whole Pool Agency RMBS, and excluding the portion of “other assets” which includes our investment in a Majority-Owned Affiliates, which is considered a target asset. Additionally, other assets includes $5.2 million of commercial loans and $6.6 million of CMBS. Residential Mortgage Loans The following table sets forth additional information on the residential mortgage loans in our portfolio as of September 30, 2024: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $75 - $3,403 $481 Interest rate 3.63% - 11.88% 7.73% Maturity date 6/27/2044 - 8/15/2064 July 2054 FICO score at loan origination 628 - 823 754 LTV at loan origination 7.1% - 90.0% 70.6% DTI at loan origination 1.94% - 52.0% 31.6% Percentage of first lien loans N/A 98.9% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.7% 39 The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2023: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $18 - $3,410 $492 Interest rate 2.99% - 12.50% 6.8% Maturity date 9/27/2048 - 11/27/2063 December 2053 FICO score at loan origination 624 - 825 748 LTV at loan origination 9.00% - 90.00% 69.4% DTI at loan origination 1.90% - 59.10% 30.9% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.9% The following charts illustrate the distribution of the credit scores and coupon rates by the number of loans in our residential mortgage loan portfolio as of September 30, 2024: 40 The following charts illustrate the distribution of the credit scores and coupon rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2023: 41 The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of September 30, 2024, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of September 30, 2024: Note: No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of September 30, 2024 . Numbers presented may add to more than 100% due to rounding. 42 The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2023, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of December 31, 2023: Note: No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2023. Numbers presented may add to more than 100% due to rounding. 43 Residential Mortgage Loans Held in Securitization Trusts The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2024: ($ in thousands) UPB $1,512,722 Fair Value $1,452,907 Number of loans 3,594 Weighted average loan coupon 5.12% Average loan amount $422 Weighted average LTV at loan origination and deal date 67.0% Weighted average credit score at loan origination and deal date 741 Current 3-month constant prepayment rate (“CPR”) (1) 7.8% Percentage of loans 90+ days delinquent (based on UPB) 1.9% (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2024 . Numbers presented may add to more than 100% due to rounding. 44 The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023: ($ in thousands) UPB $1,334,963 Fair Value $1,221,067 Number of loans 3,112 Weighted average loan coupon 4.7% Average loan amount $429 Weighted average LTV at loan origination and deal date 68.0% Weighted average credit score at loan origination and deal date 742 Current 3-month CPR 5.6% Percentage of loans 90+ days delinquent (based on UPB) 1.0% The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023 (percentages are based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023 . Numbers presented may add to more than 100% due to rounding. 45 RMBS We have participated in numerous securitization transactions pursuant to which we contributed to a securitization trust under the purview of AOMT I, LLC, non‑QM loans that we had accumulated and held on our balance sheet. These loans were purchased from affiliated and unaffiliated entities. In return, we received bonds from these securitization trusts, and cash. At times, we were allocated certain risk retention securities as part of these transactions. Risk retention securities represent at least 5% of a horizontal or vertical slice of the bonds issued as part of the transaction. Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of September 30, 2024: AOMT 2019 Securitizations AOMT 2020 Securitizations AOMT 2023 Securitizations AOMT 2024 Securitizations ($ in thousands) UPB of loans $295,926 $154,043 $1,119,064 $882,348 Number of loans 1,081 477 2,165 2,032 Weighted average loan coupon 7.21 % 5.81 % 5.25 % 5.28 % Average loan amount $274 $323 $517 $434 Weighted average LTV at loan origination and deal date 69.0 % 74.1 % 68.7 % 68.4 % Weighted average credit score at loan origination and deal date 707 719 731 731 Current 3-month CPR (1) 13.4 % 8.7 % 7.0 % 8.3 % 90+ day delinquency (as a % of UPB) 8.1 % 2.9 % 1.4 % 1.2 % Weighted Average 90+ Delinquency (as a % of Original Balance) 1.2 % 1.0 % 1.3 % 1.1 % Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2) 49.5 % — % 68.8 % 68.0 % Fair value of first loss piece (3,4) 19,383 23,676 11,500 3,109 Investment thickness (5) 21.45 20.14 7.60 10.05 (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”); accordingly, original LTV is used. (3) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (4) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, AOMT 2023-7, AOMT 2024-3, and AOMT 2024-6 is the total at risk for the Majority-Owned Affiliates. (5) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 46 Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2023, unless otherwise stated: AOMT 2019 Securitizations AOMT 2020 Securitizations AOMT 2023 Securitizations ($ in thousands) UPB of loans $331,376 $167,028 $1,192,450 Number of loans 1197 512 2288 Weighted average loan coupon 6.90 % 5.80 % 5.30 % Average loan amount $277 $326 $521 Weighted average LTV at loan origination and deal date 70 % 74 % 70 % Weighted average credit score at loan origination and deal date 707 720 733 Current 3-month CPR (1, 6) 14.3 % 5.4 % 4.3 % 90+ day delinquency (as a % of UPB) 9.0 % 3.0 % 1.6 % Weighted Average 90+ Delinquency (as a % of Original Balance) 1.5 % 1.1 % 1.3 % Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2) 50.8 % 74.1 % 72.8 % Fair value of first loss piece (3,5) $18,057 $21,389 $13,003 Investment thickness (4) 19.15 % 18.57 % 3.78 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”); accordingly, original LTV is used. (3) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. (5) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7 is the total at risk for the Majority-Owned Affiliates. (6) AOMT 2023-5 reflects one-month CPR. 47 The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of September 30, 2024: RMBS Repurchase Debt (1) Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Mezzanine $ 13,463 $ — $ 13,463 $ 5,292 $ — $ 5,292 $ 8,171 $ — $ 8,171 Subordinate 62,223 — $ 62,223 20,175 — $ 20,175 $ 42,048 $ — $ 42,048 Interest only / excess 13,055 — $ 13,055 — — $ — $ 13,055 $ — $ 13,055 Whole pool (2) — 194,364 $ 194,364 — — $ — $ — $ 194,364 $ 194,364 Retained RMBS in VIEs (3) — — $ — 27,697 — $ 27,697 $ (27,697) $ — $ (27,697) Subtotal $ 88,741 $ 194,364 $ 283,105 $ 53,164 $ — $ 53,164 $ 35,577 $ 194,364 $ 229,941 Investment in Majority Owned Affiliates $ 18,720 $ — $ 18,720 $ — $ — $ — $ 18,720 $ — $ 18,720 Total $ 107,461 $ 194,364 $ 301,825 $ 53,164 $ — $ 53,164 $ 54,297 $ 194,364 $ 248,661 (1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). (2) The whole pool RMBS presented as of September 30, 2024 were purchased from a broker to whom the Company owes approximately $194.7 million, payable upon the settlement date of the trade. See Note 6 — Due to Broker in our unaudited condensed consolidated financial statements included in this report. (3) A portion of repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). These bonds, with a fair value of $143.5 million, are not reflected in the condensed consolidated balance sheets, as the Company reflects the assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets. 48 The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of December 31, 2023: RMBS Repurchase Debt (1,3) Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Mezzanine $ 10,972 $ — $ 10,972 $ 844 $ — $ 844 $ 10,128 $ — $ 10,128 Subordinate 55,665 — 55,665 19,812 — 19,812 35,853 — $ 35,853 Interest only / excess 13,059 — 13,059 1,871 — 1,871 11,188 — $ 11,188 Whole pool (2) — 392,362 392,362 — — — — 392,362 $ 392,362 Retained RMBS in VIEs (3) — — — 22,116 — 22,116 (22,116) — (22,116) Subtotal $ 79,696 $ 392,362 $ 472,058 $ 44,643 $ — $ 44,643 $ 35,053 $ 392,362 $ 427,415 Investment in Majority Owned Affiliates $ 16,232 $ — 16,232 $ — $ — — $ 16,232 $ — 16,232 Total $ 95,928 $ 392,362 $ 488,290 $ 44,643 $ — $ 44,643 $ 51,285 $ 392,362 $ 443,647 (1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). (2) The whole pool RMBS presented as of December 31, 2023 were purchased from a broker to whom the Company owes approximately $392.0 million, payable upon the settlement date of the trade. See Note 6 — Due to Broker in our unaudited condensed consolidated financial statements included in this report. (3) A portion of repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). These bonds, with a fair value of $124.1 million, are not reflected in the condensed consolidated balance sheets, as the Company reflects the assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets. 49 The following table sets forth information with respect to our RMBS ending balances, at fair value, for the period ended September 30, 2024: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value as of June 30, 2024 $ — $ 13,100 $ 60,107 $ 13,027 $ 180,518 $ 266,752 Acquisitions: Retained bonds received in securitizations — — — — — $ — Third party securities — — — — 194,697 $ 194,697 Effect of principal payments / sales — (280) — (178,702) $ (178,982) IO and excess servicing prepayments — — — (565) — $ (565) Changes in fair value, net — 644 2,115 593 (2,149) $ 1,203 Ending fair value as of September 30, 2024 $ — $ 13,464 $ 62,222 $ 13,055 $ 194,364 $ 283,105 The following table sets forth information with respect to our RMBS ending balances, at fair value, for the year ended December 31, 2023: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value as of December 31, 2022 $ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338 Acquisitions: Retained bonds received in securitizations — 9,831 4,880 3,530 — 18,241 Third party securities — — — — 1,741,864 1,741,864 Effect of principal payments / sales — (869) — — (2,339,028) (2,339,897) IO and excess servicing prepayments — — — (1,396) — (1,396) Changes in fair value, net — 52 1,207 501 (3,852) (2,092) Ending fair value as of December 31, 2023 $ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058 50 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Loans Underlying Our Portfolio of RMBS Issued in AOMT Securitization Transactions (as of September 30, 2024) Note: No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2024. Numbers presented may add to more than 100% due to rounding. The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2023 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Loans Underlying Our Portfolio of RMBS Issued in AOMT Securitization Transactions (as of December 31, 2023) Note: No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2023. Numbers presented may add to more than 100% due to rounding. 51 CMBS Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 ($ in thousands) UPB of loans $104,138 $112,302 Number of loans 134 145 Weighted average loan coupon 7.9 % 7.5 % Average loan amount $777 $774 Weighted average LTV at loan origination and deal date 56.2 % 56.2 % The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital (in thousands) Subordinate 2,674 — 2,674 2,706 — 2,706 Interest only / excess 3,262 — 3,262 3,886 — 3,886 Total $ 5,936 $ — $ 5,936 $ 6,592 $ — $ 6,592 Liquidity and Capital Resources Overview Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our investments and operating costs, make distributions to our stockholders, and satisfy other general business needs. Our financing sources currently include payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, securitizations of our whole loans, and our ATM Program (as defined below). Additionally, on July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029. We have deployed the majority of the net proceeds from the offering of the Notes for general corporate purposes, which included the acquisition of non-QM loans and other target assets primarily sourced from our affiliated proprietary mortgage lending platform and other target assets through the secondary market in a manner consistent with our strategy and investment guidelines. Additionally, we used the net proceeds from the offering of the Notes to repurchase 1,707,922 shares of our common stock owned by Xylem Finance LLC, an affiliate of Davidson Kempner Capital Management LP, for an aggregate repurchase price of approximately $20.0 million. See “—Trends and Recent Developments—Notes offering” in this report. Our financing sources historically have included the foregoing, as well as capital contributions from our investors prior to our IPO, and the proceeds from our IPO and concurrent private placement (which capital has all been deployed). Going forward, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related, or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources, and the investment opportunities available to us. We have used and expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage‑related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we have financed and expect to continue to finance a substantial portion of our mortgage loans utilizing fixed-rate term securitization funding that provides long‑term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. Securitizations may either take the form of the issuance of securitized bonds or the sale of “real estate mortgage investment conduit” securities backed by mortgage loans or other assets, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities. We have sponsored and participated in securitization transactions with other entities that are managed by Angel Oak, and may continue to do so in the future, along with sponsoring sole securitization transactions. We believe these identified sources of financing will be adequate for purposes of meeting our short‑term (within one year) and our longer‑term liquidity needs. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and any potential changes in market conditions. 52 Description of Existing Financing Arrangements As of September 30, 2024, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $1.1 billion. During the quarter ended September 30, 2024, we renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods. Subsequent to the end of the quarter, we (i) amended our loan financing facility with Global Investment Bank 2 to, among other changes, reduce the interest rate pricing spread to a range from 1.75% to 3.35% and (ii) amended our loan financing facility with Global Investment Bank 3 to, among other changes, extend the termination date to (a) November 1, 2025; (b) reduce the interest rate pricing spread to a range from 1.90% to 4.75% based on collateral type, loan status, dwell time and other factors; and (c) eliminate the 20 basis point index spread adjustment. Borrowings under warehouse loan financing lines (in general, each a “loan financing facility”) may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes. Our financing facilities are generally subject to limits on borrowings related to specific asset pools (“advance rates”) and other restrictive covenants, as is usual and customary. As of September 30, 2024, the advance rates (when required) of our three active lenders ranged from 65% to 92%, depending on the asset type and loan delinquency status. Our most restrictive covenants (when covenants are required by any of our three active lenders) included (1) our minimum tangible net worth must not (i) decline 20% or more in the previous 30 days, 25% or more in the previous 90 days, or 35% or more in the previous year, or (ii) fall below $200.0 million of tangible net worth as of September 30, 2022 plus 50% of any capital contribution made or raised after September 30, 2022; (2) our minimum liquidity must not fall below the greatest of (i) the product of 5% and the aggregate repurchase price for a specific loan financing facility as of such date of determination, (ii) $10.0 million and (iii) any other amount of liquidity that we have covenanted to maintain in any other note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction (including, without limitation, any repurchase agreement, loan and security agreement, or similar credit facility or agreement for borrowed funds); and (3) the maximum ratio of our and our subsidiaries’ total indebtedness to tangible net worth must not be greater than 5:1. Our minimum liquidity requirement as of September 30, 2024 was $10.0 million. A description of each loan financing facility in place during the quarter ended September 30, 2024 is set forth as follows: Multinational Bank 1 Loan Financing Facility. On April 13, 2022, we and two of our subsidiaries entered into a master repurchase agreement with a multinational bank (“Multinational Bank 1”). Our subsidiaries are each considered a “Seller” under this agreement. From time to time and pursuant to the agreement, either of our subsidiaries may sell to Multinational Bank 1, and later repurchase, up to $600.0 million aggregate borrowings on mortgage loans. Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every three months for a maximum six-month term. As of September 30, 2024, the termination date of the master repurchase agreement was March 25, 2025. The amount expected to be paid by Multinational Bank 1 for each eligible mortgage loan is based on an advance rate as a percentage of either the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less. Pursuant to the agreement, Multinational Bank 1 retains the right to determine the market value of the mortgage loans in its sole commercially reasonable discretion. The loan financing line is marked‑to‑market. Additionally, Multinational Bank 1 is under no obligation to purchase the eligible mortgage loans we offer to sell to them. The interest rate on any outstanding balance under the master repurchase agreement that the applicable subsidiary is required to pay Multinational Bank 1 is generally in line with other similar agreements that the Company or one or more of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a pricing spread generally ranging from 1.75% to 2.10% and (2) the average SOFR for each U.S. Government Securities Business Day (as defined in the master repurchase agreement) until two U.S. Government Securities Business Days prior to the date the applicable loan is repurchased by the applicable subsidiary. The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement. In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) maintenance of a minimum tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. The agreement contains margin call provisions that provide Multinational Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Multinational Bank 1 may require us or our subsidiaries to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Multinational Bank 1’s right to liquidate the mortgage loans then subject to the agreement. We and our subsidiaries are also required to pay certain customary fees to Multinational Bank 1 and to reimburse Multinational Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the master repurchase agreement. Global Investment Bank 2 Loan Financing Facility. On March 28, 2024, two of our subsidiaries entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 2”), replacing the existing master repurchase agreement with Global 53 Investment Bank 2 entered into on February 13, 2020. Our two subsidiaries are each considered a “Seller” under this agreement. Pursuant to the agreement, one of our subsidiaries may sell to Global Investment Bank 2, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans. The agreement is set to terminate on March 27, 2026, unless terminated earlier pursuant to the terms of the agreement. The principal amount paid by Global Investment Bank 2 for each mortgage loan is based on a percentage of the market value, cost‑basis value, or unpaid principal balance of the mortgage loan (depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement, Global Investment Bank 2 retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. Additionally, Global Investment Bank 2 is under no obligation to purchase the eligible mortgage loans we offer to sell to them. Upon our or our subsidiary’s repurchase of the mortgage loan, our subsidiaries are required to repay Global Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate based on the sum of (1) the greater of (A) the greater of (i) 0.00% and (ii) Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and (B) a pricing spread generally ranging from, as of October 25, 2024, 1.75% to 3.35%. The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement. In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) maintenance of a minimum tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. The agreement contains margin call provisions that provide Global Investment Bank 2 with certain rights in the event of a decline in the market value or cost‑basis value of the purchased mortgage loans. Under these provisions, Global Investment Bank 2 may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Global Investment Bank 2’s right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees to Global Investment Bank 2 and to reimburse Global Investment Bank 2 for certain costs and expenses incurred in connection with its structuring, management and ongoing administration of the agreement. Global Investment Bank 3 Loan Financing Facility. On October 24, 2018, two of our subsidiaries entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 3”) for which we serve as guarantor of our subsidiaries’ obligations. Our subsidiaries are each considered a “Seller” under this agreement. Pursuant to the initial agreement, our subsidiaries could sell to Global Investment Bank 3, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans, although Global Investment Bank 3 was under no obligation to purchase the loans our subsidiaries offered to sell to them. On January 1, 2022, the facility was amended to transition the reference rate from a LIBOR-based index to Compound SOFR. Compound SOFR is determined on a one-month basis and is defined as a daily rate as determined by Global Investment Bank 3 to be the “USD-SOFR-Compound” rate as defined in the International Swaps and Derivatives Association, Inc. definitions. On November 7, 2023, the facility’s termination date was extended to November 7, 2024. In addition, the base interest rate spread was reduced to 1.80% plus a 0.20% index spread adjustment. The advance rate for performing non-seasoned loans was increased to 85%. On November 1, 2024, the facility’s termination date was extended to November 1, 2025. In addition, the base interest rate spread was reduced to a range from 1.90% to 4.75% and the index spread adjustment of 0.20% was eliminated. The loan financing line is marked-to-market at fair value, where Global Investment Bank 3 retains the right to determine the market value of the mortgage loan collateral in its sole and good faith discretion and in a commercially reasonable manner and is under no obligation to purchase the eligible mortgage loans we offered to sell to them. Further, the principal amount paid by Global Investment Bank 3 for each eligible mortgage loan is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less. The Agreement contains margin call provisions that provide Global Investment Bank 3 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under those provisions, Global Investment Bank 3 could require us or our subsidiaries to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. The agreement requires us to maintain various financial and other customary covenants. The agreement also sets forth events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Global Investment Bank 3’s right to liquidate the mortgage loans then subject to the agreement. 54 We and our subsidiaries are also required to pay certain customary fees to Global Investment Bank 3 and to reimburse Global Investment Bank 3 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the agreement. Institutional Investors A and B Static Loan Pool Financing. On October 4, 2022, 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 $239.3 million of unpaid principal balance. The Company repaid these financing facilities in full on January 4, 2023, at which time the facilities were terminated pursuant to their terms. Regional Bank 1 Loan Financing Facility. On December 21, 2018, we and one of our subsidiaries entered into a master repurchase agreement with a regional bank (“Regional Bank 1”). This financing facility was substantially unused, and expired by its terms on March 16, 2023. The following table sets forth the details of our loan financing facilities as of each of September 30, 2024 and December 31, 2023: Interest Rate Pricing Spread Drawn Amount Note Payable Base Interest Rate September 30, 2024 December 31, 2023 ($ in thousands) Multinational Bank 1 (1) Average Daily SOFR 1.75% - 2.10% $ 292,060 $ 206,183 Global Investment Bank 2 (2) 1 month Term SOFR 2.10% - 3.45% — — Global Investment Bank 3 (3) Compound SOFR 2.00% - 4.50% 40,982 84,427 Institutional Investors A and B (4) 1 month Term SOFR 3.50% N/A — Regional Bank 1 (5) 1 month SOFR 2.50% - 3.50% N/A — Total $ 333,042 $ 290,610 (1) On September 25, 2024, this financing facility was extended through March 25, 2025 in accordance with the terms of the agreement, which contemplates six-month renewals. (2) On March 28, 2024 the amended and restated Master Repurchase Agreement was terminated and replaced with a new $250 million Master Repurchase Agreement which has a termination date of March 27, 2026. On October 25, 2024, this facility was amended, reducing the interest rate pricing spread to a range from 1.75% to 3.35%, based on loan status, dwell time and other factors. Prior to this extension the interest rate pricing spread ranged from 2.10% to 3.35%. (3) On November 1, 2024, this facility was amended to (i) reduce the interest rate pricing spread to a range from 1.90% to 4.75%, based on loan status, dwell time and other factors, (ii) eliminate the 20 basis point index spread adjustment, and (iii) extend the facility’s termination date to November 1, 2025. (4) These agreements expired by their terms on January 4, 2023. (5) This agreement expired by its terms on March 16, 2023. The following table sets forth the total unused borrowing capacity of each loan financing facility as of September 30, 2024: Note Payable Borrowing Capacity Balance Outstanding Available Financing (in thousands) Multinational Bank 1 $ 600,000 $ 292,060 $ 307,940 Global Investment Bank 2 250,000 — 250,000 Global Investment Bank 3 200,000 40,982 159,018 Total $ 1,050,000 $ 333,042 $ 716,958 Although available financing is uncommitted for each of our financing facilities, the Company’s unused borrowing capacity is available if it has eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements. Short‑Term Repurchase Facilities. In addition to our existing loan financing lines, we employ short‑term repurchase facilities to borrow against U.S. Treasury securities, securities issued by AOMT, Angel Oak’s securitization platform, and other securities we may acquire in accordance with our investment guidelines. The following table sets forth certain characteristics of our short-term repurchase facilities as of September 30, 2024 and December 31, 2023: 55 September 30, 2024 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury securities $ 49,712 4.90 % 3 RMBS (1) $ 53,164 6.35 % 18 Total $ 102,876 5.65 % 11 December 31, 2023 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury securities $ 149,013 5.57 % 10 RMBS (1) 44,643 7.04 % 16 Total $ 193,656 5.91 % 11 (1) A portion of repurchase debt outstanding as of both September 30, 2024 and December 31, 2023 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). The repurchase debt against the U.S. Treasury securities was repaid in full upon the maturity of the U.S. Treasury securities. The following table presents the amount of collateralized borrowings outstanding under repurchase facilities as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase facilities during the quarter and the highest balance of any month end during the quarter: Quarter End Quarter End Balance Average Balance in Quarter Highest Month-End Balance in Quarter (in thousands) Q4 2022 52,544 56,426 63,357 Q1 2023 442,214 180,165 442,214 Q2 2023 340,701 101,731 340,701 Q3 2023 188,101 87,279 188,101 Q4 2023 193,656 62,536 193,656 Q1 2024 193,493 69,254 193,493 Q2 2024 201,051 66,804 201,051 Q3 2024 102,876 57,842 102,876 We utilize short‑term repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes. Over time, the need to purchase securities for REIT asset test purposes will be reduced as we obtain and participate in additional securitizations and acquire assets directly for investment purposes. We will continue to use repurchase facilities on our RMBS portfolio to add additional leverage which increases the yield on those assets. Our use of repurchase facilities is generally highest at the end of any particular quarter, as shown in the table above, where the quarter-end balance and the highest month-end balance in each quarter are generally equivalent. Securitization Transactions Subsequent to the end of the quarter, in October 2024, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2024-10 issued approximately $316.8 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $260.4 million and retained cash of $39.4 million, which was used for new loan purchases and operational purposes. We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. We will consolidate the AOMT 2024-10 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets in future reporting periods. 56 In June 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2024-6 issued approximately $479.6 million in face value of bonds. Our proportionate share of 4.51% of the retained bonds and investments in MOAs was approximately $2.5 million, including a retained discount on issuance of approximately $0.8 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $15.8 million and retained cash of $1.8 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2024-6 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024. In April 2024, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2024-4 issued approximately $299.8 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $235.9 million and retained cash of $39.1 million, which was used for new loan purchases and operational purposes. We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. We have consolidated the AOMT 2024-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of September 30, 2024. In March 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2024-3 issued approximately $439.6 million in face value of bonds. Our proportionate share of 10.98% of the retained bonds and investments in MOAs was approximately $4.8 million, including a retained discount on issuance of approximately $1.6 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $35.9 million and retained cash of $4.6 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2024-3 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024. In December 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-7 issued approximately $397.2 million in face value of bonds. Our proportionate share of 10.36% of the retained bonds and investments in MOAs was approximately $3.5 million, including a retained discount on issuance of approximately $1.4 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $30.9 million and retained cash of $3.6 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2023-7 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024. In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-5 issued approximately $260.6 million in face value of bonds. Our proportionate share of 34.42% of the retained bonds and investments in MOAs was approximately $7.7 million, including a retained discount on issuance of approximately $2.7 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $63.4 million and retained cash of $10.7 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024. In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-4 issued approximately $259.4 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $197.3 million and retained cash of $35.7 million, which was used for new loan purchases and operational purposes. We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. We have consolidated the AOMT 2023-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of September 30, 2024. In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of bonds. Our proportionate share of 41.21% of the retained bonds and investments in MOAs was approximately $19.8 million, including a retained discount on issuance of approximately $6.8 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $190.1 million and retained cash of $15.9 million, which was used for operational purposes. We derecognized the mortgage loans sold in this transaction and recorded an investment in majority-owned affiliate located within “other assets” on our consolidated balance sheet as of September 30, 2024. 57 We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions. Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Notes Offering On July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029. The Notes bear interest at a rate of 9.500% per annum, payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on October 30, 2024. The Notes will mature on July 30, 2029, unless earlier redeemed or repurchased by us. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Operating Partnership, including the due and punctual payment of principal of premium, if any, and interest on the Notes, whether at the stated maturity, upon, acceleration, call for redemption or otherwise. We may redeem the Notes in whole or in part at any time or from time to time at our option on or after July 30, 2026 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon the occurrence of certain events relating to a change of control of us, we must make an offer to repurchase all outstanding Notes at a price in cash equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to, but excluding, the repurchase date. ATM Program On August 8, 2024, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) to sell shares of the Company’s common stock (“common stock”) from time to time having an aggregate gross sales price of up to $75 million, through an “at the market” equity offering program (the “ATM Program”). The Company issued and sold 188,456 shares of common stock through the ATM Program during the three-months and nine-months ended September 30, 2024 for net proceeds of $2.3 million. As of September 30, 2024, the Company had approximately $73 million of shares of common stock available for issuance under the ATM Program and Sales Agreement. Cash Availability Cash and cash equivalents Our cash balance as of September 30, 2024 was sufficient to meet our liquidity covenants under our financing facilities. We believe that we maintain sufficient cash to fund margin calls on our mark to market financing facilities or our economic hedge agreements, should such margin calls occur. We may also participate in upcoming securitizations either solely or with other Angel Oak entities. We also have the ability to leverage currently unleveraged securities or whole loan assets, if we deem those actions advisable. Restricted Cash Restricted cash of approximately $2.7 million as of September 30, 2024 was comprised of: no margin collateral held in support of our whole pool assets; $2.3 million in interest rate futures margin collateral for the interest rate futures under our sole control; and margin collateral for securities sold under agreements to repurchase of $0.3 million. Restricted cash of approximately $2.9 million as of December 31, 2023 was comprised of: $2.5 million in interest rate futures margin collateral; and margin collateral for securities sold under agreements to repurchase of $0.3 million. Our counterparties did not require any margin collateral for TBAs as of December 31, 2023. 58 Cash Flows Nine Months Ended September 30, 2024 September 30, 2023 (in thousands) Cash flows provided by (used in) operating activities $ (196,380) $ 353,744 Cash flows provided by (used in) investing activities $ 86,040 $ (179,325) Cash flows provided by (used in) financing activities $ 110,575 $ (171,318) Net increase (decrease) in cash and restricted cash $ 235 $ 3,101 The cash used in operating activities of $196.4 million for the nine months ended September 30, 2024 as compared to the cash provided by operating activities of $353.7 million for the nine months ended September 30, 2023 was primarily due to the volume of residential mortgage loans sold into an affiliate’s securitization trust during the first nine months of 2023, as compared to the first nine months of 2024. The cash provided by investing activities of $86.0 million for the nine months ended September 30, 2024 as compared to cash used in investing activities of $179.3 million for the nine months ended September 30, 2023 were primarily due to the timing of purchases and maturities of U.S. Treasury securities in the comparative period of 2023. Financing cash flows provided $110.6 million for the nine months ended September 30, 2024 as compared to cash used of $171.3 million for the nine months ended September 30, 2023 were primarily due to the activity within net borrowings under repurchase agreements and notes payable for the comparative periods. Cash Flows - Residential and Commercial Loan Classification Residential loan activity is recognized in the statement of cash flows as an operating activity, as our residential mortgage loans are generally held for a short period of time with the intent to securitize these loans. Commercial mortgage loan activity is recognized in the statement of cash flows as an investing activity, as our commercial mortgage loan portfolio is generally deemed to be held for investing purposes. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and estimates is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” section in the Annual Report on Form 10-K. Our critical accounting policies and estimates have not materially changed since December 31, 2023. Management discusses the ongoing development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, particularly changes in the fair values of consolidated assets and liabilities. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Recent Accounting Pronouncements Refer to the notes to our condensed consolidated financial statements included in this report for a discussion of recent accounting pronouncements and any expected impact on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information. 59