Angel Oak Mortgage REIT, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Angel Oak Mortgage REIT, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except for share data) As of: September 30, 2023 December 31, 2022 ASSETS Residential mortgage loans - at fair value $ 284,383 $ 770,982 Residential mortgage loans in securitization trusts - at fair value 1,194,119 1,027,442 Commercial mortgage loans - at fair value 5,219 9,458 RMBS - at fair value 579,985 1,055,338 CMBS - at fair value 6,338 6,111 U.S. Treasury securities - at fair value 149,906 — Cash and cash equivalents 41,894 29,272 Restricted cash 1,068 10,589 Principal and interest receivable 4,691 17,497 Unrealized appreciation on TBAs and interest rate futures contracts - at fair value 7,857 14,756 Other assets 20,140 4,767 Total assets $ 2,295,600 $ 2,946,212 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Notes payable $ 197,797 $ 639,870 Non-recourse securitization obligation, collateralized by residential mortgage loans in securitization trusts (see Note 2) 1,161,296 1,003,485 Securities sold under agreements to repurchase 188,101 52,544 Due to broker 511,953 1,006,022 Accrued expenses 1,540 1,288 Accrued expenses payable to affiliate 985 2,006 Interest payable 671 2,551 Management fee payable to affiliate 1,455 1,967 Total liabilities $ 2,063,798 $ 2,709,733 Commitments and contingencies STOCKHOLDERS’ EQUITY Common stock, $ 0.01 par value. As of September 30, 2023: 350,000,000 shares authorized, 24,955,566 shares issued and outstanding. As of December 31, 2022: 350,000,000 shares authorized, 24,925,357 shares issued and outstanding. $ 249 $ 249 Additional paid-in capital 476,574 475,379 Accumulated other comprehensive loss ( 8,172 ) ( 21,127 ) Retained earnings (deficit) ( 236,849 ) ( 218,022 ) Total stockholders’ equity $ 231,802 $ 236,479 Total liabilities and stockholders’ equity $ 2,295,600 $ 2,946,212 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 2 Angel Oak Mortgage REIT, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (in thousands, except for share and per share data) Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 INTEREST INCOME, NET Interest income $ 23,900 $ 30,148 $ 71,403 $ 86,959 Interest expense 16,490 18,408 50,742 41,849 NET INTEREST INCOME 7,410 11,740 20,661 45,110 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS ( 12,044 ) 17,290 ( 27,056 ) 56,423 Net unrealized gain (loss) on trading securities, mortgage loans, debt at fair value option (see Note 2), and derivative contracts 17,299 ( 100,855 ) 27,868 ( 255,021 ) TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET 5,255 ( 83,565 ) 812 ( 198,598 ) EXPENSES Operating expenses 1,370 2,764 5,788 9,525 Operating expenses incurred with affiliate 599 2,141 1,672 3,834 Due diligence and transaction costs 115 213 136 1,502 Stock compensation 447 3,340 1,195 5,179 Securitization costs 416 1,115 2,326 3,134 Management fee incurred with affiliate 1,445 1,951 4,460 5,830 Total operating expenses 4,392 11,524 15,577 29,004 INCOME (LOSS) BEFORE INCOME TAXES 8,273 ( 83,349 ) 5,896 ( 182,492 ) Income tax expense (benefit) — — 781 ( 3,457 ) NET INCOME (LOSS) $ 8,273 $ ( 83,349 ) $ 5,115 $ ( 179,035 ) Preferred dividends — ( 4 ) — ( 11 ) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 8,273 $ ( 83,353 ) $ 5,115 $ ( 179,046 ) Other comprehensive income (loss) ( 1,607 ) ( 10,227 ) 12,955 ( 11,979 ) TOTAL COMPREHENSIVE INCOME (LOSS) $ 6,666 $ ( 93,580 ) $ 18,070 $ ( 191,025 ) Basic earnings (loss) per common share $ 0.33 $ ( 3.40 ) $ 0.20 $ ( 7.30 ) Diluted earnings (loss) per common share $ 0.33 $ ( 3.40 ) $ 0.20 $ ( 7.30 ) Weighted average number of common shares outstanding: Basic 24,768,921 24,505,438 24,706,568 24,534.967 Diluted 24,957,668 24,505,438 24,933,833 24,534.967 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 3 Angel Oak Mortgage REIT, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands) Three Months Ended September 30, 2023 Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Retained Earnings (Deficit) Total Stockholders’ Equity Stockholders’ equity as of June 30, 2023 $ 249 $ 476,127 $ ( 6,565 ) $ ( 237,135 ) $ 232,676 Dividends paid on common stock ($ 0.32 per share) — — — ( 7,987 ) ( 7,987 ) Stock compensation — 447 — — 447 Unrealized gain on RMBS and CMBS — — ( 1,607 ) — ( 1,607 ) Net income (loss) — — — 8,273 8,273 Stockholders’ equity as of September 30, 2023 $ 249 $ 476,574 $ ( 8,172 ) $ ( 236,849 ) $ 231,802 Three Months Ended September 30, 2022 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Stockholders’ Equity Stockholders’ equity as of June 30, 2022 $ 101 $ 249 $ 472,356 $ 1,248 $ ( 106,670 ) 367,284 Repurchase of common stock — — ( 866 ) — — ( 866 ) Stock compensation — — 3,340 — — 3,340 Dividends declared - preferred — — — — ( 4 ) ( 4 ) Unrealized gain on RMBS and CMBS — — — ( 10,227 ) — ( 10,227 ) Dividends paid on common stock — — — — ( 11,221 ) ( 11,221 ) Net income (loss) — — — — ( 83,349 ) ( 83,349 ) Stockholders’ equity as of September 30, 2022 $ 101 $ 249 $ 474,830 $ ( 8,979 ) $ ( 201,244 ) $ 264,957 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4 Angel Oak Mortgage REIT, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands) Nine Months Ended September 30, 2023 Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Stockholders’ Equity Stockholders’ equity as of December 31, 2022 $ 249 $ 475,379 $ ( 21,127 ) $ ( 218,022 ) 236,479 Stock compensation — 1,195 — — 1,195 Unrealized gain on RMBS and CMBS — — 12,955 — 12,955 Dividends paid on common stock ($ 0.32 per share) — — — ( 23,942 ) ( 23,942 ) Net income (loss) — — — 5,115 5,115 Stockholders’ equity as of September 30, 2023 $ 249 $ 476,574 $ ( 8,172 ) $ ( 236,849 ) $ 231,802 Nine Months Ended September 30, 2022 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Stockholders’ Equity Stockholders’ equity as of December 31, 2021 $ 101 $ 252 $ 476,510 $ 3,000 $ 11,527 491,390 Repurchases of common stock — ( 3 ) ( 6,859 ) — — ( 6,862 ) Stock compensation — — 5,179 — — 5,179 Dividends declared - preferred — — — — ( 11 ) ( 11 ) Unrealized loss on RMBS and CMBS — — — ( 11,979 ) — ( 11,979 ) Dividends paid on common stock — — — — ( 33,725 ) ( 33,725 ) Net income (loss) — — — — ( 179,035 ) ( 179,035 ) Stockholders’ equity as of September 30, 2022 $ 101 $ 249 $ 474,830 $ ( 8,979 ) $ ( 201,244 ) $ 264,957 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 5 Angel Oak Mortgage REIT, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2023 September 30, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 5,115 $ ( 179,035 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 27,056 ( 56,423 ) Net unrealized gain (loss) on trading securities, mortgage loans, portion of debt at fair value option, and derivative contracts ( 27,868 ) 255,021 Accretion of discount on U.S. Treasury securities ( 1,201 ) — Amortization of debt issuance costs 1,040 1,099 Net amortization of premiums and discounts on mortgage loans 2,199 8,231 Accretion of non-recourse securitized obligation discount 1,251 Stock compensation 1,195 5,179 Net change in: Purchases of residential mortgage loans from non-affiliates ( 5,469 ) ( 427,940 ) Purchases of residential mortgage loans from affiliates ( 89,673 ) ( 567,324 ) Principal payments on residential mortgage loans in securitization trusts 74,179 177,846 Principal payments on residential mortgage loans 30,950 71,210 Collateral due to counterparties — ( 200 ) Margin received from interest rate futures contracts and TBAs 12,602 75,689 Sale of residential mortgage loans into affiliate’s securitization trust 313,438 — Principal and interest receivable on residential mortgage loans 12,806 ( 12,689 ) Other assets ( 15,373 ) 467 Accrued expenses ( 528 ) 3,084 Accrued expenses - affiliate ( 1,021 ) 1,634 Interest payable ( 1,880 ) 3,169 Management fee payable to affiliate ( 512 ) 161 Income tax expense (benefit) 781 ( 3,457 ) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 339,087 ( 644,278 ) The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 6 Angel Oak Mortgage REIT, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2023 September 30, 2022 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in RMBS, available for sale ( 1,006,023 ) ( 1,140,153 ) Purchases of investments in RMBS, trading ( 853,934 ) — Sale of investments in RMBS, available for sale 1,006,196 1,524,129 Sale of investments in RMBS, trading 832,542 — Purchase of investment in U.S. Treasury securities ( 848,617 ) ( 349,992 ) Maturity of U.S. Treasury securities 700,000 600,000 Principal payments on RMBS 816 13,219 Purchases of commercial mortgage loans — ( 3,180 ) Sale of commercial mortgage loans 4,326 11,026 Principal payments on commercial mortgage loans 26 44 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 164,668 ) 655,093 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to common stockholders ( 23,942 ) ( 33,725 ) Dividends paid to preferred shareholders — ( 11 ) Repurchases of common stock — ( 6,862 ) Principal payments on non-recourse securitization obligation ( 74,179 ) ( 177,111 ) Cash paid for debt issuance costs — ( 457 ) Proceeds from securitization 233,319 675,360 Net proceeds from (payments on) securities sold under agreements to repurchase 135,557 ( 543,727 ) Net proceeds from (payments on) notes payable ( 442,073 ) 52,913 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ( 171,318 ) ( 33,620 ) CHANGE IN CASH AND RESTRICTED CASH 3,101 ( 22,805 ) CASH AND RESTRICTED CASH, beginning of period (1) 39,861 52,309 CASH AND RESTRICTED CASH, end of period (1) $ 42,962 $ 29,504 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 48,862 $ 38,535 (1) Cash, cash equivalents, and restricted cash as of September 30, 2023 included cash and cash equivalents of $ 41.9 million and restricted cash of $ 1.1 million, and as of September 30, 2022 included cash and cash equivalents of $ 29.3 million and restricted cash of $ 10.6 million. The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 7 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Basis of Presentation Angel Oak Mortgage REIT, Inc. (together with its subsidiaries the “Company”), is a real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (“non-QM”) loans and other mortgage‑related assets in the U.S. mortgage market. The Company’s strategy is to make credit-sensitive investments primarily in newly-originated first lien non‑QM loans that are primarily made to higher‑quality non‑QM loan borrowers and primarily sourced from the proprietary mortgage lending platform of its affiliate, Angel Oak Mortgage Solutions LLC (together with other non-operational affiliated originators, “Angel Oak Mortgage Lending”), which currently operates primarily through a wholesale channel and has a national origination footprint. The Company may also invest in other residential mortgage loans, residential mortgage‑backed securities (“RMBS”), and other mortgage‑related assets. The Company’s objective is to generate attractive risk‑adjusted returns for its stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. The Company is a Maryland corporation incorporated on March 20, 2018. The Company achieves certain of its investment objectives by investing a portion of its assets in its wholly‑owned taxable REIT subsidiary, Angel Oak Mortgage REIT TRS, LLC (“AOMR TRS”), a Delaware limited liability company formed on March 21, 2018, which invests its assets in Angel Oak Mortgage Fund TRS, a Delaware statutory trust formed on June 15, 2018. The Company is traded on the New York Stock Exchange under the ticker symbol AOMR. The Operating Partnership On February 5, 2020, the Company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), through which substantially all of its assets are held and substantially all of its operations are conducted, either directly or through subsidiaries. The Company holds all of the limited partnership interests in the Operating Partnership and indirectly holds the sole general partnership interest in the Operating Partnership through the general partner, which is the Company’s wholly-owned subsidiary. The Company’s Manager and REIT status The Company is externally managed and advised by Falcons I, LLC (the “Manager”), a Securities and Exchange Commission-registered investment adviser and an affiliate of Angel Oak Capital Advisors, LLC (“Angel Oak Capital”). The Company has elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2019. Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report on Form 10-K”). In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. The condensed consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., fair value changes due to inputs and underlying assumptions as described in Note 10 — Fair Value Measurements , credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from the Company’s estimates and the differences could be material. 8 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) New Accounting Standards and Interpretations As of September 30, 2023, there were no new accounting standards or interpretations adopted by the Company that had a material effect on its condensed consolidated financial statements. Reclassifications Certain amounts reported in prior periods in the condensed consolidated financial statements have been reclassified to conform to the current year’s presentation. For comparative purposes, and to simplify the presentation of the Company’s condensed consolidated balance sheet, the deferred tax asset has been reclassified to “other assets” on the condensed consolidated balance sheet as of December 31, 2022. See Note 14 — Other Assets . Certain comparative period amounts have been reclassified for consistency with current period presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Condensed Consolidated Statements of Cash Flows for the nine months-ended September 30, 2022, to identify amortization of debt issuance costs, net amortization of premiums and discounts of mortgage loans, and principal payments on residential mortgage loans in securitization trusts. Summary of Significant Accounting Policies The Company’s summary of significant accounting policies as set forth in its Annual Report on Form 10-K remain unchanged. During the nine months ended September 30, 2023, the Company elected a new accounting classification regarding certain of its investments in debt securities, as further described below, as the Company classifies securities on a trade-by-trade basis upon purchase. The Company did not transfer any securities between classifications. The Company classifies its investments in debt securities in accordance with Accounting Standards Codification 320 - Investments - Debt Securities (“ASC 320”) as “trading,” “available for sale,” or “held to maturity”. Historically, the Company had classified all of its investments in debt securities as available for sale (“AFS”). In the first quarter of 2023, the Company began designating its purchases of Freddie Mac and Fannie Mae-issued whole pool agency residential mortgage-backed securities (“Whole Pool Agency RMBS”) and purchases of U.S. Treasury securities as trading securities. 2. Variable Interest Entities Since its inception, the Company has utilized Variable Interest Entities (“VIEs”) for the purpose of securitizing whole mortgage loans to obtain long-term non-recourse financing. The Company evaluates its interest in each VIE to determine if it is the primary beneficiary. Below are descriptions of VIEs for which the Company is and is not the primary beneficiary. VIEs for Which the Company is the Primary Beneficiary The Company entered into securitization transactions where it was determined that the Company was the primary beneficiary, as, with respect to each securitization vehicle, it controls the class of securities with call rights, or “controlling class” of securities, the XS tranche. The Company was the sole entity to contribute residential whole mortgage loans to these securitization vehicles. The retained beneficial interest in VIEs for which the Company is the primary beneficiary is the subordinated tranches of the securitization and further interests in additional interest‑only tranches. The table below sets forth the fair values of the assets and liabilities recorded in the condensed consolidated balance sheets related to these consolidated VIEs as of September 30, 2023 and December 31, 2022: 9 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) September 30, 2023 December 31, 2022 Assets: (in thousands) Residential mortgage loans in securitization trusts - cost $ 1,409,089 $ 1,193,879 Fair value adjustment ( 214,970 ) ( 166,437 ) Residential mortgage loans in securitization trusts - at fair value $ 1,194,119 $ 1,027,442 Liabilities (1) : Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, amortized cost $ 434,227 $ 474,070 Less: debt issuance costs capitalized ( 105 ) ( 1,145 ) Non-recourse securitization obligations, collateralized by residential mortgage loans, amortized cost, net $ 434,122 $ 472,925 Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, net of discount, subject to fair value adjustment $ 836,130 $ 611,114 Fair value adjustment ( 108,956 ) ( 80,554 ) Non-recourse securitization obligations, collateralized by residential mortgage loans - at fair value, net $ 727,174 $ 530,560 Total non-recourse securitization obligations, collateralized by residential mortgage loans, net $ 1,161,296 $ 1,003,485 (1) Debt issuance costs for non-recourse securitization obligations electing the fair value option are recorded to expense upon issuance of the securitization. Debt issuance costs incurred with the issuances of non-recourse securitization obligations for which the fair value option was not elected are presented at amortized cost. Income and expense amounts related to the consolidated VIEs recorded in the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 is set forth as follows: Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (in thousands) Interest income $ 15,733 $ 12,759 $ 41,213 $ 34,646 Interest expense, non-recourse liabilities (1) ( 10,956 ) ( 6,983 ) ( 26,121 ) ( 17,245 ) Net interest income $ 4,777 $ 5,776 $ 15,092 $ 17,401 Net unrealized gain (loss) on mortgage loans in securitization trusts - at fair value ( 16,863 ) ( 73,178 ) ( 9,404 ) ( 152,931 ) Unrealized gain (loss) on mark-to-market of non-recourse securitization obligation - at fair value 22,183 34,357 3,620 67,030 Securitization costs ( 416 ) ( 1,115 ) ( 2,326 ) ( 3,405 ) Realized losses and operating expenses ( 967 ) ( 247 ) ( 2,163 ) ( 695 ) Net gain/(loss) from consolidated VIEs $ 8,714 $ ( 34,407 ) $ 4,819 $ ( 72,600 ) (1) Interest expense includes amortization of debt issuance expense and accretion of non-recourse securitization obligation discount. 10 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) VIEs for Which the Company is Not the Primary Beneficiary The Company sponsored or participated along with other affiliates and entities managed by Angel Oak Capital in the formation of various entities that were considered to be VIEs. These VIEs were formed to facilitate securitization issuances that were comprised of secured residential whole loans and/or small balance commercial loans contributed to securitization trusts. These securities were issued as a result of the unconsolidated securitizations where the Company retained bonds from the issuances of securitizations issued by a depositor that the Company does not control. The Company determined that it was not then and is not now the primary beneficiary of any of these securitization entities, and thus has not consolidated the operating results or statements of financial position of any of these entities. The Company performs ongoing reassessments of all VIEs in which the Company has participated since its inception as to whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change, and the Company’s assessment of these VIEs remains unchanged. The securities received in the securitization transactions were classified as “available for sale” upon receipt and are included in “RMBS - at fair value” and “CMBS - at fair value” on the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, and details on the accounting treatment and fair value methodology of the securities can be found in Note 10 — Fair Value Measurements . See also Note 5 — Investment Securities , for the fair value of AOMT securities held by the Company, and Note 14 - Other Assets , for investments in MOAs, as of September 30, 2023 and December 31, 2022 that were retained by the Company as a result of these securitization transactions. 11 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 3. Residential Mortgage Loans Residential mortgage loans are mortgage loans on residences located in various states with concentrations in California, Florida, Texas, and Georgia. Residential mortgage loans are measured at fair value. The following table sets forth the cost, unpaid principal balance, net premium on mortgage loans purchased, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s residential mortgage loan portfolio as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 ($ in thousands) Cost $ 313,297 $ 886,661 Unpaid principal balance $ 307,638 $ 864,171 Net premium on mortgage loans purchased 5,659 22,489 Change in fair value ( 28,914 ) ( 115,678 ) Fair value $ 284,383 $ 770,982 Weighted average interest rate 5.83 % 4.80 % Weighted average remaining maturity (years) 29 30 At times, various forms of margin maintenance on residential mortgage loans may be required by certain financing facility counterparties. See Note 6 — Notes Payable . The following table sets forth data regarding the number of consumer mortgage loans secured by residential real property 90 or more days past due and also those in formal foreclosure proceedings, and the recorded investment and unpaid principal balance of such loans as of September 30, 2023 and December 31, 2022: As of: September 30, 2023 December 31, 2022 ($ in thousands) Number of mortgage loans 90 or more days past due 3 11 Recorded investment in mortgage loans 90 or more days past due $ 2,001 $ 7,230 Unpaid principal balance of loans 90 or more days past due $ 1,938 $ 7,043 Number of mortgage loans in foreclosure 8 2 Recorded investment in mortgage loans in foreclosure $ 6,665 $ 820 Unpaid principal balance of loans in foreclosure $ 6,462 $ 849 12 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Commercial Mortgage Loans Commercial mortgage loans are mortgage loans on commercial properties located in various states with concentrations in California and Tennessee. Commercial mortgage loans are measured at fair value. The following table sets forth the cost, unpaid principal balance, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s commercial mortgage loan portfolio as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 ($ in thousands) Cost $ 5,602 $ 9,928 Unpaid principal balance $ 5,606 $ 9,928 Change in fair value ( 387 ) ( 470 ) Fair value $ 5,219 $ 9,458 Weighted average interest rate 6.24 % 7.03 % Weighted average remaining maturity (years) 12 8 The net discount on commercial mortgage loans was fully amortized as of December 31, 2022. On July 3, 2023, a commercial mortgage loan was sold for $ 4.6 million representing the full outstanding principal balance and carrying amount, and accrued costs and fees. There were no commercial mortgage loans more than 90 days overdue or in foreclosure as of September 30, 2023 or December 31, 2022. 13 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 5. Investment Securities As of September 30, 2023, investment securities were comprised of non‑agency RMBS (“AOMT RMBS”), Whole Pool Agency RMBS, commercial mortgage backed securities (“CMBS”), and U.S. Treasury securities. The U.S. Treasury securities held by the Company as of September 30, 2023 subsequently matured on October 12, 2023. The Company did not hold any U.S. Treasury securities as of December 31, 2022. The following table sets forth a summary of AOMT RMBS, Whole Pool Agency RMBS, and AOMT CMBS at cost as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 (in thousands) AOMT RMBS $ 67,479 $ 69,922 Whole Pool Agency RMBS $ 511,953 $ 1,006,022 CMBS $ 6,319 $ 6,329 The following table sets forth certain information about the Company’s investments in RMBS and CMBS at fair value as of September 30, 2023 and December 31, 2022: Real Estate Securities at Fair Value Securities Sold Under Agreements to Repurchase Allocated Capital September 30, 2023: (in thousands) AOMT RMBS (1) Mezzanine $ 10,429 $ ( 1,029 ) $ 9,400 Subordinate 52,159 ( 21,384 ) 30,775 Interest Only/Excess 12,665 ( 1,944 ) 10,721 Retained RMBS in VIEs (2) — ( 15,504 ) ( 15,504 ) Total AOMT RMBS $ 75,253 $ ( 39,861 ) $ 35,392 Whole Pool Agency RMBS Fannie Mae $ 504,732 $ — $ 504,732 Freddie Mac — — — Whole Pool Total Agency RMBS $ 504,732 $ — $ 504,732 Total RMBS $ 579,985 $ ( 39,861 ) $ 540,124 AOMT CMBS Subordinate $ 2,933 $ — $ 2,933 Interest Only/Excess 3,405 — 3,405 Total AOMT CMBS $ 6,338 $ — $ 6,338 (1) AOMT RMBS held as of September 30, 2023 included both retained tranches of securitizations in which the Company participated where the Company was not deemed to be the primary beneficiary, and additional securities issued by affiliates of Angel Oak Capital which were purchased in secondary market transactions. (2) A portion of repurchase debt includes borrowings against retained bonds received from securitizations involving consolidated VIEs. These bonds have a fair value of $ 122.7 million. The Company reflects the underlying assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets rather than the bonds, due to the accounting rules around this type of securitization. 14 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Real Estate Securities at Fair Value Securities Sold Under Agreements to Repurchase Allocated Capital December 31, 2022: (in thousands) AOMT RMBS (1) Mezzanine $ 1,958 $ ( 1,470 ) $ 488 Subordinate 49,578 ( 24,982 ) 24,596 Interest Only/Excess 10,424 ( 1,506 ) 8,918 Retained RMBS in VIEs (2) — ( 24,586 ) ( 24,586 ) Total AOMT RMBS $ 61,960 $ ( 52,544 ) $ 9,416 Whole Pool Agency RMBS Fannie Mae $ 501,458 $ — $ 501,458 Freddie Mac 491,920 — 491,920 Whole Pool Total Agency RMBS $ 993,378 $ — $ 993,378 Total RMBS $ 1,055,338 $ ( 52,544 ) $ 1,002,794 AOMT CMBS Subordinate $ 2,901 $ — $ 2,901 Interest Only/Excess 3,210 — 3,210 Total AOMT CMBS $ 6,111 $ — $ 6,111 (1) AOMT RMBS held as of December 31, 2022 included both retained tranches of securitizations in which the Company participated where the Company was not deemed to be the primary beneficiary, and additional securities issued by affiliates of Angel Oak Capital which were purchased in secondary market transactions. (2) A portion of repurchase debt includes borrowings against retained bonds received from securitizations involving consolidated VIEs. These bonds have a fair value of $ 110.5 million. The Company reflects the underlying assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets rather than the bonds, due to the accounting rules around this type of securitization. The following table sets forth certain information about the Company’s investments in U.S. Treasury securities as of September 30, 2023 (1) : Date Face Value Unamortized Discount, net Amortized Cost Unrealized Gain (Loss) Fair Value Net Effective Yield ($ in thousands) September 30, 2023 $ 150,000 $ 182 $ 149,818 $ 88 $ 149,906 5.36 % (1) There were no U.S. Treasury securities held as of December 31, 2022. 6. Notes Payable The Company has the ability to finance residential and commercial whole loans utilizing repurchase agreements with various counterparties (“notes payable”), as further described below. Outstanding borrowings bear interest at floating rates depending on the lending counterparty, the collateral pledged, and the rate in effect for each interest period, as the same may change from time to time at the end of each interest period. Some agreements include upfront fees, fees on unused balances, covenants and concentration limits on types of collateral pledged. Each of these vary based on the counterparty. One of these agreements, as noted below, is a “static pool” financing facility, where the lender has agreed to finance a certain pool of loans contributed to such financing facility, which does not allow for any revolving financing terms. Occasionally, a lender may require cash collateral to be posted as margin collateral on such agreements. As of September 30, 2023, cash collateral for margin maintenance requirements of approximately $ 0.8 million was held for the benefit of Global Investment Bank 3 within “restricted cash” on the condensed consolidated balance sheet. The majority of this restricted cash balance is in an economic interest rate hedging account under the control of Global Investment Bank 3, and may be drawn by Global Investment Bank 3 at its discretion. As of December 31, 2022, cash collateral for margin maintenance requirements by whole loan financing counterparties was $ 5.6 million within “restricted cash” on the condensed consolidated balance sheet, of which $ 3.8 million was held in a segregated restricted cash account and 15 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) released to the Company by the applicable lender subsequent to December 31, 2022; the remainder of which was held in the economic interest rate hedging account referred to above. The following table sets forth the details of the Company’s notes payable and drawn amounts for whole loan purchases as of September 30, 2023 and December 31, 2022: Interest Rate Pricing Spread Drawn Amount Note Payable Base Interest Rate September 30, 2023 December 31, 2022 ($ in thousands) Multinational Bank 1 (1) Average Daily SOFR 2.10 % $ 189,066 $ 352,038 Global Investment Bank 2 (2) 1 month SOFR 2.20 % - 3.45 % — — Global Investment Bank 3 (3) Compound SOFR 2.80 % - 4.50 % 8,731 119,137 Institutional Investors A and B (4) 1 month Term SOFR 3.50 % N/A 168,695 Regional Bank 1 (5) 1 month SOFR 2.50 % - 3.50 % N/A — Total $ 197,797 $ 639,870 (1) On January 25, 2023, this financing facility was extended through July 25, 2023 in accordance with the terms of the agreement, which contemplates six-month renewals. On July 25, 2023, the Company extended this financing facility through January 25, 2024, with an interest rate pricing spread of 2.10 %. (2) This financing facility expires on February 2, 2024. (3) This static pool financing facility expires on December 19, 2023. The interest rate pricing spread per the agreement began at 2.80 % for the first three months following December 19, 2022, exclusive of a 20 basis points index spread adjustment, and increases by an additional 50 basis points every three months thereafter; however, the facility does not, in general, contain “mark to market” provisions. The agreement requires an economic interest rate hedging account (“interest rate futures account”) to be maintained to the reasonable satisfaction of Global Investment Bank 3, as described above, which account is for its benefit and under its sole control. On November 7, 2023, this facility was renewed for a twelve month term through November 7, 2024 and was converted from static pool financing to a revolving facility with mark to market features. The amended facility has a maximum borrowing capacity of $ 200 million with a base interest rate pricing spread of 180 basis points plus a 20 basis points index spread adjustment (see Note 16 — Subsequent Events ). (4) On October 4, 2022, the Company and a subsidiary entered into two separate master repurchase facilities with two affiliates of an institutional investor (“Institutional Investors A and B”) regarding a specific pool of whole loans with financing of approximately $ 168.7 million on approximately $ 239.3 million of unpaid principal balance. The master repurchase agreements were set to expire on January 4, 2023, subject to a one-time option to extend for three months, which the Company did not utilize. The Company repaid this financing facility in full on January 4, 2023. The Company held restricted cash pertaining to this lender’s cash collateral requirements included in “restricted cash” on the Company’s condensed consolidated balance sheet as of December 31, 2022, as described above, which was released 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 financing line as of September 30, 2023: Note Payable Borrowing Capacity Balance Outstanding Available Financing (in thousands) Multinational Bank 1 (1) $ 600,000 $ 189,066 $ 410,934 Global Investment Bank 2 (1) 250,000 — 250,000 Global Investment Bank 3 (2) 8,731 8,731 — Total $ 858,731 $ 197,797 $ 660,934 (1) Although available financing is uncommitted, the Company’s unused borrowing capacity is available if it has eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements. (2) As of September 30, 2023, this financing facility had no unused borrowing capacity as the outstanding borrowings were based on a static pool of mortgage loans. 16 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 7. Due to Broker The “Due to broker” account on the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, in the amounts of $ 512.0 million and $ 1.0 billion,respectively, relates to the purchase of Whole Pool Agency RMBS at quarter-end in the third and fourth quarters of 2023 and 2022, respectively. Purchases are accounted for on a trade date basis, and, at times, there may be a timing difference between the trade date and the settlement date of a trade. The trade dates of these purchases were prior to the applicable quarter-end dates. These trades settled on October 12, 2023 and January 13, 2023, respectively, at which time these assets were simultaneously sold. The purchase transactions for the unsettled Whole Pool Agency RMBS are excluded from the condensed consolidated statements of cash flows as they are noncash transactions. 8. Securities Sold Under Agreements to Repurchase Transactions involving securities sold under agreements to repurchase are treated as collateralized financial transactions, and are recorded at their contracted repurchase amounts. Margin (if required) for securities sold under agreements to repurchase represents margin collateral amounts held to ensure that the Company has sufficient coverage for securities sold under agreements to repurchase in case of adverse price changes. Restricted cash of margin collateral for securities sold under agreements to repurchase was $ 0.3 million and $ 3.9 million as of September 30, 2023 and December 31, 2022, respectively. The following table summarizes certain characteristics of the Company’s repurchase agreements as of September 30, 2023 and December 31, 2022: September 30, 2023 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) AOMT RMBS (1) $ 39,861 7.08 % 15 U.S. Treasury securities 148,240 5.40 % 11 Total $ 188,101 5.76 % 12 December 31, 2022 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) AOMT RMBS (1) 52,544 6.07 % 13 Total $ 52,544 6.07 % 13 (1) A portion of repurchase debt outstanding as of both September 30, 2023 and December 31, 2022 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs). See Note 5 — Investment Securities. The repurchase debt against the U.S. Treasury securities was repaid in full upon the maturity of the U.S. Treasury securities. Although the transactions under repurchase agreements represent committed borrowings until maturity, the lenders retain the right to mark the underlying collateral at fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. 9. Derivative Financial Instruments In the normal course of business, the Company enters into derivative financial instruments to manage its exposure to market risk, including interest rate risk and prepayment risk on its whole loan investments. The derivatives in which the Company invests, and the market risk that the economic hedge is intended to mitigate are further discussed below. Derivative instruments as of September 30, 2023 and December 31, 2022 included both To-Be-Announced (“TBA”) securities and interest rate futures contracts. Restricted cash relating to interest rate futures margin collateral in interest rate futures accounts under the Company’s sole control as of September 30, 2023 and December 31, 2022 included $ 0.3 million and $ 1.1 million, respectively. There was no TBA margin collateral required as of either September 30, 2023 or December 31, 2022. The Company uses interest rate futures as economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. The Company’s credit risk with respect to economic hedges is the risk of default on its investments that result from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. 17 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The Company may at times hold TBAs in order to mitigate its interest rate risk on certain specified mortgage-backed securities. Amounts or obligations owed by or to the Company are subject to the right of set-off with the TBA counterparty. As part of executing these trades, the Company may enter into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. Changes in the value of derivatives designed to protect against mortgage-backed securities fair value fluctuations, or economic hedging gains and losses, are reflected in the tables below. All realized and unrealized gains and losses on derivative contracts are recognized in earnings, in “net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS” for realized gains and losses, and “net unrealized gain (loss) on trading securities, mortgage loans, debt at fair value option, and derivative contracts” for unrealized gains and losses. The Company considers the notional amounts, categorized by primary underlying risk, to be representative of the volume of its derivative activities. The following table sets forth the derivative instruments presented on the condensed consolidated balance sheets and notional amounts as of September 30, 2023 and December 31, 2022: Notional Amounts As of: Derivatives Not Designated as Hedging Instruments Number of Contracts Assets Liabilities Long Exposure Short Exposure ($ in thousands) September 30, 2023 Interest rate futures 1,099 $ 691 $ — $ — $ 109,900 September 30, 2023 TBAs N/A $ 7,166 $ — $ — $ 523,900 December 31, 2022 Interest rate futures 4,928 $ 2,211 $ — $ — $ 492,800 December 31, 2022 TBAs N/A $ 12,545 $ — $ — $ 1,041,700 The gains and losses arising from these derivative instruments in the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 and September 30, 2022 are set forth as follows: Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) Three Months Ended September 30, 2023 Interest rate futures $ 2,828 $ ( 364 ) Three Months Ended September 30, 2023 TBAs $ 7,421 $ 4,927 Three Months Ended September 30, 2022 Interest rate futures $ 17,692 $ 6,027 Three Months Ended September 30, 2022 TBAs $ ( 10,147 ) $ 10,180 Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) Nine Months Ended September 30, 2023 Interest rate futures $ 8,599 $ ( 2,416 ) Nine Months Ended September 30, 2023 TBAs $ 4,900 $ ( 5,379 ) Nine Months Ended September 30, 2022 Interest rate futures $ 66,805 $ 7,349 Nine Months Ended September 30, 2022 TBAs $ 3,032 $ ( 506 ) 18 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 10. Fair Value Measurements For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. As of September 30, 2023, our valuation policy and processes had not changed from those described in our consolidated financial statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K. Included in Note 11 — Fair Value Measurements to the Consolidated Financial Statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K is a detailed description of our other financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy. The fair value of cash, restricted cash, principal and interest receivable, other assets (excluding investments in majority-owned affiliates), notes payable, securities sold under agreements to repurchase, amounts due to broker and accrued expenses (including those payable to an affiliate and management fees payable to an affiliate), and interest payable approximate their carrying values due to the nature of these assets and liabilities. The Company’s “investments in majority-owned affiliates” included in other assets (see Note 14 — Other Assets ) and a portion of “non-recourse securitization obligations, collateralized by residential mortgage loans” are held at amortized cost. The fair value of these assets and liabilities is disclosed further below in the section titled “ Assets and Liabilities Held at Amortized Cost - Fair Value Disclosure ”. 19 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2023: Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 277,373 $ 7,010 $ 284,383 Residential mortgage loans in securitization trusts — 1,185,006 9,113 1,194,119 Commercial mortgage loans — 5,219 — 5,219 Investments in securities Non-Agency RMBS (1) — 75,253 — 75,253 Whole Pool Agency RMBS — 504,731 — 504,731 AOMT CMBS (1) — 6,338 — 6,338 U.S Treasury Securities 149,906 — — 149,906 Unrealized appreciation on interest rate futures contracts 691 — — 691 Unrealized appreciation on TBAs 7,166 — — 7,166 Total assets, at fair value $ 157,763 $ 2,053,920 $ 16,123 $ 2,227,806 Liabilities, at fair value Non-recourse securitization obligation, collateralized by residential mortgage loans (2) — 727,174 — 727,174 Total liabilities, at fair value $ — $ 727,174 $ — $ 727,174 (1) Non‑Agency RMBS held as of September 30, 2023 included both retained tranches of securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. All AOMT CMBS held as of September 30, 2023 were comprised of a small-balance commercial loan securitization issuance in which the Company participated. (2) Only the portion subject to fair value measurement, as adjusted for fair value, is presented above. See below for the disclosure of the full debt at fair value. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure). Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. These transfers were not material. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. 20 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth information regarding the Company’s significant Level 3 inputs as of September 30, 2023: Input Values Asset Fair Value Unobservable Input Range Average ($ in thousands) Residential mortgage loans, at fair value $ 7,010 Prepayment rate (annual CPR) 8.99 % - 9.19 % 9.09 % Default rate 16.57 % - 24.37 % 20.47 % Loss severity ( 0.25 )% - 10.00 % 1.77 % Expected remaining life 0.63 - 2.89 years 2.11 years Residential mortgage loans in securitization trust, at fair value $ 9,113 Prepayment rate (annual CPR) 2.79 % - 12.53 % 7.82 % Default rate 9.22 % - 25.78 % 15.37 % Loss severity ( 0.16 )% - 12.81 % 6.66 % Expected remaining life 1.32 - 3.84 years 2.38 years Assets and Liabilities Held at Amortized Cost — Fair Value Disclosure Portion of Non-Recourse Securitization Obligations, Collateralized by Residential Mortgage Loans — Held at Amortized Cost To determine the fair value of the Company’s non-recourse securitization obligations, collateralized by residential mortgage loans, net, held at amortized cost, the Company uses the same method of valuation as described in the Annual Report on Form 10-K, Note 11 — Fair Value for both the portion of the obligation measured at fair value and the portion of the obligation held at amortized cost, for which fair value is disclosed below. As of September 30, 2023, the total amortized cost basis and fair value of our non-recourse securitization obligations was $ 1.4 billion and $ 1.1 billion, respectively, a difference of approximately $ 297.9 million (which includes AOMT 2022-1, AOMT 2022-4, and AOMT 2023-4, which are marked to fair value; and AOMT 2021-7 and AOMT 2021-4, which are carried at amortized cost, as the fair value option was not elected at the time of the creation of these obligations). The fair value solely attributable to AOMT 2021-4 and 2021-7 is approximately $ 121.4 million less than the amortized cost. The difference between the amortized cost basis value and the fair value is derived from the difference between the period-end market pricing of the underlying bonds, as referred to above, and the amortized cost of the obligation. The fair value of the non-recourse securitization debt is not indicative of the amounts at which we could settle this debt. As of December 31, 2022, the total amortized cost basis and fair value of our non-recourse securitization obligations was $ 1.1 billion and $ 914.3 million, respectively, a difference of approximately $ 170.9 million (which includes AOMT 2022-1 and AOMT 2022-4, which are marked to fair value; and AOMT 2021-7, and AOMT 2021-4, which are carried at amortized cost, as the fair value option was not elected at the time of the creation of these obligations). The difference between the amortized cost and fair value solely attributable to AOMT 2021-4 and 2021-7 is approximately $ 90.3 million. The difference between the amortized cost basis value and the fair value is derived from the difference between the period-end market pricing of the underlying bonds, as referred to above, and the amortized cost of the obligation. The fair value of the non-recourse securitization debt is not indicative of the amounts at which we could settle this debt. Investments in Majority-Owned Affiliates To determine the fair value of the Company’s investments in majority-owned affiliates, which are held at amortized cost and included in “other assets”, the Company uses the prices of the underlying bonds in the investments to determine fair value. The Company utilizes PriceServe, Bank of America’s independent fixed income pricing service, as the primary valuation source for these bonds. PriceServe obtains its price quotes from actual sales or quotes for sale of the same or similar securities and/or provides model‑based valuations that consider inputs derived from recent market activity including default rates, conditional prepayment rates, loss severity, expected yield to maturity, baseline discount margin/yield, recovery assumptions, tranche type, collateral coupon, age and loan size, and other inputs specific to each security. We believe that these quotes are most reflective of the price that would be achieved if the bonds were sold to an independent third party on the date of the condensed consolidated financial statements. The amortized cost and fair value of these investments as of September 30, 2023 was approximately $ 14.7 million and $ 13.3 million, respectively. 21 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2022: Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 763,786 $ 7,196 $ 770,982 Residential mortgage loans in securitization trusts — 1,018,686 8,756 1,027,442 Commercial mortgage loans — 9,458 — 9,458 Investments in securities Non-Agency RMBS (1) — 61,960 — 61,960 Whole Pool Agency RMBS — 993,378 — 993,378 AOMT CMBS (1) — 6,111 — 6,111 Unrealized appreciation on interest rate futures contracts 2,211 — — 2,211 Unrealized appreciation on TBAs 12,545 — — 12,545 Total assets, at fair value $ 14,756 $ 2,853,379 $ 15,952 $ 2,884,087 Liabilities, at fair value Non-recourse securitization obligation, collateralized by residential mortgage loans (2) $ — $ 530,560 $ — $ 530,560 Total liabilities, at fair value $ — $ 530,560 $ — $ 530,560 (1) Non‑Agency RMBS held as of December 31, 2022 included both retained tranches of AOMT securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. All AOMT CMBS held as of December 31, 2022 was comprised of a small-balance commercial loan securitization issuance in which the Company participated. (2) Only the portion subject to fair value measurement, as adjusted for fair value, is presented above. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. These transfers were not material. 22 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of December 31, 2022: Input Values Asset Fair Value Unobservable Input Range Average ($ in thousands) Residential mortgage loans, at fair value $ 7,196 Prepayment rate (annual CPR) 4.92 % - 14.99 % 9.39 % Default rate 4.56 % - 24.36 % 11.43 % Loss severity ( 0.25 )% - 12.54 % 7.84 % Expected remaining life 0.62 - 3.43 years 2.75 years Residential mortgage loans in securitization trust, at fair value $ 8,756 Prepayment rate (annual CPR) 3.24 % - 14.55 % 7.84 % Default rate 7.42 % - 35.78 % 19.07 % Loss severity 0 % - 10.00 % 9.23 % Expected remaining life 1.42 - 3.72 years 2.32 years 11. Related Party Transactions Residential Mortgage Loan Purchases The Company has residential loan purchase agreements with various affiliates of the Company. The purchase price of the loans is generally equal to the outstanding principal of the mortgage, adjusted by a premium or discount, depending on market conditions. The Company purchases the mortgage loans on a servicing released basis. The following table sets forth certain financial information pertaining to whole loan activity purchased from affiliates during the nine month period ended September 30, 2023 and 12 month period ended December 31, 2022: As of and for the Year-to-Date/Year Ended: Amount of Loans Purchased from Affiliates during the Year-to-Date/Year Ended Number of Loans Purchased from Affiliates during the Year-to-Date/Year Ended Number of Loans Purchased from Affiliates, Owned and Held as of the Periods Ended (1) ($ in thousands) September 30, 2023 $ 89,673 232 593 December 31, 2022 $ 567,324 1,141 845 (1) Excludes loans held in residential mortgage loans in securitization trust, at fair value 23 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Securitization Transactions and Majority-Owned Affiliate From time to time, the Company participates in securitization transactions with other affiliates of Angel Oak Capital. See Note 2 — Variable Interest Entities , “ VIEs for Which the Company is Not the Primary Beneficiary” and Note 14 — Other Assets . Management Fee The Company’s management agreement, effective as of June 21, 2021, by and among the Company, the Operating Partnership, and the Manager (the “Management Agreement”), provides that the Company will pay the Manager, in arrears, an aggregate fixed management fee equal to 1.5 % per annum of the Company’s Equity (as is defined in the Management Agreement). Incentive Fee Under the Management Agreement, the Manager is also entitled to an incentive fee, which is calculated and payable in cash with respect to each calendar quarter (or part thereof that the Management Agreement is in effect) in arrears in an amount, not less than zero , equal to the excess of (1) the product of (a) 15 % and (b) the excess of (i) the Company’s Distributable Earnings (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) the Company’s Equity (as defined in the Management Agreement) in the previous 12-month period, and (B) 8 % per annum, over (2) the sum of any incentive fee earned by the Manager with respect to the first three calendar quarters of such previous 12-month period. To date, the incentive fee has not been earned and no expense recognized in the Company’s financial statements. Operating Expense Reimbursements The Company is also required to pay the Manager reimbursements for certain general and administrative expenses pursuant to the Management Agreement. Accrued expenses payable to affiliate and operating expenses incurred with affiliate are substantially comprised of payroll reimbursements to an affiliate of the Manager. 12. Commitments and Contingencies The Company, from time to time, may be party to litigation relating to claims arising in the normal course of business. As of September 30, 2023, the Company was not aware of any legal claims that could materially impact its financial condition. As of September 30, 2023, the Company had no unfunded commitments. The Company has a loan release obligation on the facility with Global Investment Bank 3 that is eligible for up to a 100 % reduction based on certain criteria that may extended beyond the current term of the financing facility. The maximum potential liability is $ 0.7 million, which has not been recorded in the condensed consolidated financial statements as the actual liability is not currently determinable. The Company has entered into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. As of September 30, 2023, the Company has a total purchase commitments of $ 113 million related to both Angel Oak Mortgage Lending and third parties. These commitments represent off-balance sheet risk where the Company may be required to extend credit. 13. Accumulated Other Comprehensive Income/(Loss) The following table sets forth the net unrealized gain/(loss) on AFS securities for the three months ended September 30, 2023 and 2022, which is the s ole component of the changes in the Company’s Accumulated Other Comprehensive Income/(Loss) (“AOCI”) for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 (in thousands) AOCI balance, beginning of period $ ( 6,565 ) $ 1,248 Net unrealized gain/(loss) on AFS securities ( 1,607 ) ( 10,227 ) AOCI balance, end of period $ ( 8,172 ) $ ( 8,979 ) 24 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 (in thousands) AOCI balance, beginning of period $ ( 21,127 ) $ 3,000 Net unrealized gain/(loss) on AFS securities 12,955 ( 11,979 ) AOCI balance, end of period $ ( 8,172 ) $ ( 8,979 ) 14. Other Assets The following table sets forth the detail of other assets included in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 ($ in thousands) Investments in Majority-Owned Affiliates $ 14,701 $ — Deferred tax asset 3,457 3,457 Prepaid expenses 1,697 1,310 Protective advances and other assets 285 — Total other assets $ 20,140 $ 4,767 Investments in Majority-Owned Affiliates (“MOA”) In the first and third quarters of 2023, the Company participated in securitization transactions AOMT 2023-1 and AOMT 2023-5, which involved MOAs in which the Company received a 41.21 % investment and 34.42 % investment, respectively, in each case proportional to its share of the unpaid principal balance of the residential whole loans contributed to the securitizations. The purpose of the MOAs is to retain and hold risk retention bonds issued by the securitization trust. Each MOA is a limited liability company and is accounted for as an equity method investment and held at amortized cost. The investment will be tested for impairment at least annually utilizing undiscounted cash flows of the underlying risk retention bonds. See Note 10 — Fair Value Measurements . 15. Equity and Earnings per Share (“EPS”) In the calculations of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2023 and 2022, the Company included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances. For the three and nine month periods ended September 30, 2023, there were 186,645 anti-dilutive outstanding restricted stock awards and 95,832 performance shares, although the market-based “total stockholder return” conditions for performance share units had not been achieved and thus these units were not included in the diluted weighted average common shares outstanding. For the three and nine month periods ended September 30, 2022, there were 425,461 outstanding restricted stock awards that were anti-dilutive and thus not included in the diluted weighted average common shares outstanding. There were 56,978 market-based performance share units outstanding as of September 30, 2022. 25 Angel Oak Mortgage REIT, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the calculation of basic and diluted earnings per share for the three months ended September 30, 2023 and 2022: September 30, 2023 September 30, 2022 (in thousands, except share and per share data) Basic Earnings (Loss) per Common Share: Net income (loss) to common stockholders $ 8,273 $ ( 83,353 ) Dividends allocated to participating securities ( 60 ) — Net income (loss) to common stockholders - basic $ 8,213 $ ( 83,353 ) Basic weighted average common shares outstanding 24,768,921 24,505,438 Basic earnings (loss) per common share $ 0.33 $ ( 3.40 ) Diluted Earnings (Loss) per Common Share: Net income (loss) to common stockholders - basic $ 8,273 $ ( 83,353 ) Dividends allocated to participating securities ( 60 ) — Net income (loss) to common stockholders - diluted $ 8,213 $ ( 83,353 ) Basic weighted average common shares outstanding 24,768,921 24,505,438 Net effect of dilutive equity awards 188,747 — Diluted weighted average common shares outstanding 24,957,668 24,505,438 Diluted earnings (loss) per common share $ 0.33 $ ( 3.40 ) The following table sets forth the calculation of basic and diluted earnings per share for the nine months ended September 30, 2023 and 2022: September 30, 2023 September 30, 2022 (in thousands, except share and per share data) Basic Earnings (Loss) per Common Share: Net income (loss) to common stockholders $ 5,115 $ ( 179,046 ) Dividends allocated to participating securities ( 123 ) — Net income (loss) to common stockholders - basic $ 4,992 $ ( 179,046 ) Basic weighted average common shares outstanding 24,706,568 24,534,967 Basic earnings (loss) per common share $ 0.20 $ ( 7.30 ) Diluted Earnings (Loss) per Common Share: Net income (loss) to common stockholders - basic $ 5,115 $ ( 179,046 ) Dividends allocated to participating securities ( 123 ) — Net income (loss) to common stockholders - diluted $ 4,992 $ ( 179,046 ) Basic weighted average common shares outstanding 24,706,568 24,534,967 Net effect of dilutive equity awards 227,265 — Diluted weighted average common shares outstanding 24,933,833 24,534,967 Diluted earnings (loss) per common share $ 0.20 $ ( 7.30 ) 16. Subsequent Events On November 7, 2023, we converted our loan financing facility with Global Investment Bank 3 from static pool financing to a revolving facility with mark to market features. The amended facility has a maximum borrowing capacity of $ 200 million with a base interest rate pricing spread of 180 basis points plus a 20 basis points index spread adjustment and an expiration date of November 7, 2024. On November 8, 2023, the Company declared a dividend of $ 0.32 per share of common stock, to be paid on November 30, 2023 to common stockholders of record as of November 22, 2023. 26