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 (our “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; 22 • 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, 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 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. 23 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 (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 2024 kicked off with optimism around federal funds rate cuts over the course of the year, with variability in analyst projections of the number and size of rate reductions. However, in the first quarter, stubborn employment and inflation readings have delayed market expectations for when the Federal Reserve Bank (“Fed”) will begin to cut rates. In its May 2024 meeting, the Fed indicated that it still expects to cut rates in 2024, but the timing has been pushed to later in the year versus the initial analyst consensus. 30 year fixed residential conforming mortgage rates increased over the course of the first quarter, ending just below 7% before increasing back above 7% after the end of the quarter. Additionally, a new set of rules announced in conjunction with a landmark $418 million legal settlement by the National Association of Realtors will prohibit agent’s compensation from being included on multiple listing services (MLS), end a requirement that brokers subscribe to MLS, and introduce a requirement that MLS participants enter into written agreements with their buyers. Taken together, the effect is expected to drive down broker commissions and increase home purchases when implemented in July 2024. The two-year and five-year Treasury yields each experienced a modest increase of approximately 37 basis points during the first quarter, which, combined with relatively muted volatility, had a limited impact on the valuation of our portfolio. Net of new loan purchases and securitizations, we observed an increase of approximately 124 basis points in the weighted average price of our residential whole loans portfolio during the first quarter. Additionally, we have increased the weighted average coupon of our residential whole loans portfolio by 33 basis points since the end of 2023 to 7.11% as of the end of the first quarter of 2024. The AOMT 2024-4 securitization executed subsequent to March 31, 2024 reduced the unpaid principal balance of our residential whole loans portfolio by over 75%. Consistent with our loan acquisition and securitization process, we are refilling the balance of our residential whole loans portfolio with high-quality, current market coupon loans that we expect to contribute to future securitization transactions. Our investment performance Net Interest Margin (“NIM”). Despite holding fewer target assets in the first quarter of 2024 as compared to the first quarter of 2023, an increase in the yield of our target assets generated greater interest income than the first quarter of 2023. Borrowings on our whole loan portfolio decreased as well, reducing our overall interest expense, despite continued high variable interest rates in the first quarter of 2024 compared to the first quarter of 2023. Net realized loss . Our net realized loss for the quarter ended March 31, 2024 was primarily due to a realized loss on the sale of whole loans contributed into the AOMT 2024-3 securitization in which we participated. As this securitization did not result in consolidation of the AOMT 2024-3 VIE entity, we recognized a loss on the sale of these loans. This was partially offset by realized gains on the economic hedges of our interest rate futures and To-Be-Announced (“TBA”) securities. Net unrealized gain . Our net unrealized gain in the first quarter of 2024 was primarily due to an increase in the valuation of our residential whole loans and loans in securitization trust portfolios, as well as the reversal of the unrealized loss (and thereby the recognition of net realized loss discussed above) on the sale of residential mortgage loans into the AOMT 2024-3 securitization. Whole loans and securitization activity During the quarter ended March 31, 2024, we purchased $43.2 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 8.14%, weighted average loan-to-value ratio (“LTV”)of 68.7% and weighted average credit score of 747. In March 2024, we participated in AOMT 2024-3, an approximately $439.6 million scheduled principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $48.7 million. We participated in this securitization alongside other Angel Oak entities, and may strategically enter into similar securitizations in the future. Subsequent to March 31, 2024, we issued AOMT 2024-4, an approximately $300 million scheduled 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 24 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. Whole loan financing facilities activity We continuously evaluate our lender base and may enter into new agreements and / or exit agreements as we deem prudent, in accordance with our core financial strategy of purchasing whole loans and financing them until securitized. See Liquidity and Capital Resources, for a full description of our financing arrangements. Our total borrowing capacity was $1.1 billion as of March 31, 2024 Highlights of whole loan financing facilities activity over the first quarter of 2024 are as follows: • During the quarter ended March 31, 2024, we maintained the same whole loan financing facility lender base as of December 31, 2023. • During the quarter ended March 31, 2024, we (i) renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods simultaneously decreasing the interest rate pricing margin and (ii) replaced our existing $250 million loan financing facility with Global Investment Bank 2 with a new $250 million loan financing facility with Global Investment Bank 2. Key Financial Metrics As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity, Book Value per Share of Common Stock, and Economic Book Value per Share of Common Stock. Distributable Earnings Distributable Earnings is a non‑GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding (1) unrealized gains and losses on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses. We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. We believe Distributable Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. As a REIT, we are generally required to distribute at least 90% of our annual REIT taxable income and to pay U.S. federal income tax at the regular corporate rate to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors. Distributable Earnings is one of a number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings may not be comparable to similar measures presented by other REITs. We also use Distributable Earnings to determine the incentive fee, if any, payable to our Manager pursuant to the management agreement (the “Management Agreement”) that we and the Operating Partnership entered into with our Manager upon the completion of our IPO on June 21, 2021. For information on the fees that are payable to our Manager under the Management Agreement, see “Note 10 – Related Party Transactions” in our unaudited condensed consolidated financial statements included in this report. Distributable Earnings were approximately a gain of $2.8 million and a loss of $9.1 million for the three months ended March 31, 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. 25 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 months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Net income (loss) allocable to common stockholders $ 12,874 $ 530 Adjustments: Net unrealized (gains) losses on trading securities 1 (1,605) Net unrealized (gains) losses on derivatives (445) 24,536 Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation (5,147) 6,327 Net unrealized (gains) losses on residential loans (5,071) (39,437) Net unrealized (gains) losses on commercial loans (22) (11) Non-cash equity compensation expense 630 541 Distributable Earnings $ 2,820 $ (9,119) 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 months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 March 31, 2023 ($ in thousands) Annualized Distributable Earnings $ 11,280 $ (36,476) Average total stockholders’ equity 259,715 240,684 Distributable Earnings Return on Average Equity 4.3 % (15.2) % 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 March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 (in thousands except for share and per share data) Total stockholders’ equity $ 263,324 $ 256,106 Number of shares of common stock outstanding at period end 24,965,274 24,965,274 Book value per share of common stock $ 10.55 $ 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 26 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 March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 (in thousands except for share and per share data) GAAP total stockholders’ equity $ 263,324 $ 256,106 Adjustments: Fair value adjustment for securitized debt held at amortized cost 80,599 81,942 Stockholders’ equity including economic book value adjustments $ 343,923 $ 338,048 Number of shares of common stock outstanding at period end 24,965,274 24,965,274 Book value per share of common stock $ 10.55 $ 10.26 Economic book value per share of common stock $ 13.78 $ 13.54 27 Results of Operations Three Months Ended March 31, 2024 and 2023 The following table sets forth a summary of our results of operations for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 March 31, 2023 (in thousands) INTEREST INCOME, NET Interest income $ 25,212 $ 23,740 Interest expense 16,633 16,941 NET INTEREST INCOME $ 8,579 $ 6,799 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS $ (1,422) $ (10,843) Net unrealized gain (loss) on trading securities, mortgage loans, debt at fair value option (see Financial Statements — Note 2), and derivative contracts 10,684 10,190 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET $ 9,262 $ (653) EXPENSES Operating expenses $ 1,999 $ 2,204 Operating expenses incurred with affiliate 515 466 Due diligence and transaction costs 49 — Stock compensation 630 541 Securitization costs 174 883 Management fee incurred with affiliate 1,313 1,522 Total operating expenses $ 4,680 $ 5,616 INCOME (LOSS) BEFORE INCOME TAXES $ 13,161 $ 530 Income tax expense 287 — NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 12,874 $ 530 Other comprehensive income (loss) 1,703 14,804 TOTAL COMPREHENSIVE INCOME (LOSS) $ 14,577 $ 15,334 28 Net Interest Income The following table sets forth the components of net interest income for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Interest income Interest income / expense Average balance Interest income / expense Average balance Residential mortgage loans $ 6,432 $ 383,233 $ 7,692 $ 605,469 Residential mortgage loans in securitization trusts 14,546 1,211,143 12,220 1,031,245 Commercial mortgage loans 72 5,215 122 9,460 RMBS and Majority-Owned Affiliate 3,103 178,444 2,930 285,009 CMBS 418 6,571 317 6,193 U.S. Treasury securities 224 17,224 181 20,741 Other interest income 417 39,553 278 35,870 Total interest income 25,212 23,740 Interest expense Notes payable 5,460 293,300 8,596 491,867 Non-recourse securitization obligation, collateralized by residential mortgage loans 10,198 1,157,431 7,647 1,011,333 Repurchase facilities 975 69,254 698 70,968 Total interest expense 16,633 16,941 Net interest income $ 8,579 $ 6,799 Net interest income for the three months ended March 31, 2024 and 2023 was $8.6 million and $6.8 million, respectively. Interest income increased in the three months ended March 31, 2024 as compared to the same period in 2023, primarily due higher interest income generated from a larger asset balance of residential mortgage loans in securitization trusts. Meanwhile, interest expense was relatively flat, with less expense associated with notes payable offset by increased expense associated with non-recourse securitization obligation, collateralized by residential mortgage loans as compared to the same period in 2023. Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the three months ended March 31, 2024 and 2023 are set forth as follows: Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Realized and unrealized gain (loss) on securitization, net of unrealized gain (loss) on non-recourse securitization obligation $ 4,389 $ (7,084) Realized gain (loss) on RMBS (266) (91) Unrealized gain (loss) on Whole Pool Agency RMBS (289) 1,610 Realized gain (loss) on CMBS (45) (49) Realized gain (loss) on interest rate futures 3,549 8,374 Realized and unrealized gain (loss) on TBAs 547 (14,402) Realized and unrealized gain (loss) on residential mortgage loans 1,367 21,467 Realized and unrealized gain (loss) on commercial mortgage loans 21 11 Realized and unrealized loss on U.S. Treasury securities (86) (5) Unrealized appreciation (depreciation) on interest rate futures 204 (10,484) Realized gain/(loss) on AOMT MOA (129) — Total realized and unrealized gains (losses), net $ 9,262 $ (653) 29 For the three months ended March 31, 2024 and 2023, total realized and unrealized gains and (losses), net resulted in a net gain of $9.3 million and losses of $0.7 million, respectively. During the three months ended March 31, 2024, gains on securitization, net of unrealized gain (loss) on non-recourse securitization obligation, interest rate futures, and residential mortgage loans drove the overall gain to our portfolio. During the three months ended March 31, 2023, increased optimism and stability in interest rate markets drove gains in the valuation of our residential mortgage loans portfolio which were offset by losses associated with TBAs and interest rate futures. Expenses Operating Expenses For the three months ended March 31, 2024 and 2023, our operating expenses were $2.0 million and $2.2 million, respectively. Our operating expenses decreased compared to the comparative period due to cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loans. Operating Expenses Incurred with Affiliate For the three months ended March 31, 2024 and 2023, our operating expenses incurred with affiliate were $0.5 million and $0.5 million, respectively. These expenses, which are substantially comprised of payroll reimbursements to our Manager, were relatively flat in the first three months of 2024 compared to the first three months of 2023. Due Diligence and Transaction Costs For the three months ended March 31, 2024 and 2023, our due diligence and transaction costs were $49.5 thousand and $0.0 thousand, respectively. Our due diligence and transaction expenses increased slightly over the comparative period as we did not purchase any whole loans during the three months ended March 31, 2023. Stock Compensation For the three months ended March 31, 2024 and 2023, our stock compensation expense was $0.6 million and $0.5 million, respectively. Our stock compensation expense increased for the three months ended March 31, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards. Securitization Costs For the three months ended March 31, 2024 and 2023, we incurred $0.2 million and $0.9 million of securitization costs, respectively. The expense incurred in both periods was a proportional allocation of expenses in conjunction with our share of the loans contributed to the AOMT 2024-3 securitization in the first quarter of 2024 and AOMT 2023-1 securitization in the first quarter of 2023, respectively. Management Fee Incurred with Affiliate For the three months ended March 31, 2024 and 2023, our management fee incurred with affiliate was $1.3 million and $1.5 million, respectively. The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended March 31, 2024 as compared to the same period in 2023. The calculation of Equity for the purposes of the Management Agreement includes the addition of Distributable Earnings, which is the primary departure from the calculation of equity in accordance with GAAP, which has caused Equity (as defined in the Management Agreement) to decrease. 30 Our Portfolio As of March 31, 2024, our portfolio consisted of approximately $2.0 billion of residential mortgage loans, RMBS, and other target assets. Certain of these portfolio assets are located in states such as Florida and California where natural disasters such as hurricanes and earthquakes may occasionally occur. We require all of our collateral to be adequately insured. The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of March 31, 2024: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 368,446 $ 284,002 $ 84,444 32.1 % Residential mortgage loans in securitization trust 1,201,210 1,146,641 $ 54,569 20.7 % Total whole loan portfolio $ 1,569,656 $ 1,430,643 $ 139,013 52.8 % Investment securities RMBS $ 445,136 $ 44,501 $ 400,635 152.1 % U.S. Treasury securities 149,805 148,992 813 0.3 % Total investment securities $ 594,941 $ 193,493 $ 401,448 152.4 % Investment in Majority-Owned Affiliate $ 18,021 $ — $ 18,021 6.8 % Total investment portfolio $ 2,182,618 $ 1,624,136 $ 558,482 212.1 % Target assets (1) $ 2,032,813 $ 1,475,144 $ 557,669 211.8 % Cash $ 39,421 $ — $ 39,421 15.0 % Other assets and liabilities (2) (334,580) — (334,580) (127.1) % Total $ 1,887,459 $ 1,624,136 $ 263,323 100.0 % (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 $359.9 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. 31 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 $6.6 million of CMBS. Residential Mortgage Loans The following table sets forth additional information on the residential mortgage loans in our portfolio as of March 31, 2024: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $6 - $3,357 $441 Interest rate 2.99% - 12.50% 7.11% Maturity date 9/27/2048 - 11/27/2063 October 2053 FICO score at loan origination 628 - 825 748 LTV at loan origination 9.1% - 90.0% 70.0% DTI at loan origination 1.94% - 59.1% 30.6% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 2.2% 32 The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2023: Portfolio Range Portfolio Weighted Average ($ 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 interest rates by the number of loans in our residential mortgage loan portfolio as of March 31, 2024: 33 The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2023: 34 The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of March 31, 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 March 31, 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 March 31, 2024 . Numbers presented may add to more than 100% due to rounding. 35 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. 36 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 March 31, 2024: ($ in thousands) UPB $1,312,169 Fair Value $1,201,210 Number of loans 3,053 Weighted average loan coupon 4.66% Average loan amount $432 Weighted average LTV at loan origination and deal date 68.0% Weighted average credit score at loan origination and deal date 742 Current 3-month constant prepayment rate (“CPR”) (1) 5.0% Percentage of loans 90+ days delinquent (based on UPB) 1.3% (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2024 (percentages based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2024 . Numbers presented may add to more than 100% due to rounding. 37 The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023: ($ 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 $429 Weighted average LTV at loan origination and deal date 68.0% Weighted average credit score at loan origination and deal date 742 Current 3-month CPR 5.6% Percentage of loans 90+ days delinquent (based on UPB) 1.0% The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023 (percentages based on the aggregate unpaid principal balance of such loans): Note: No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2023 . Numbers presented may add to more than 100% due to rounding. 38 RMBS We have participated in numerous securitization transactions pursuant to which we contributed to a securitization trust under the purview of AOMT I, LLC, non‑QM loans that we had accumulated and held on our balance sheet. These loans were purchased from affiliated and unaffiliated entities. In return, we received bonds from these securitization trusts, and cash. At times, we were allocated certain risk retention securities as part of these transactions. Risk retention securities represent at least 5% of a horizontal or vertical slice of the bonds issued as part of the transaction. Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of March 31, 2024, unless otherwise stated: AOMT 2019 Securitizations AOMT 2020 Securitizations AOMT 2023 Securitizations AOMT 2024 Securitizations ($ in thousands) UPB of loans $318,671 $164,661 $1,168,534 $436,161 Number of loans 1,156 503 2,245 936 Weighted average loan coupon 7.10 % 5.80 % 5.30 % 5.30 % Average loan amount $276 $327 $521 $466 Weighted average LTV at loan origination and deal date 69.5 % 74.1 % 69.2 % 69.3 % Weighted average credit score at loan origination and deal date 707 720 731 733 Current 3-month CPR (1, 6) 12.9 % 3.9 % 6.5 % 7.7 % 90+ day delinquency (as a % of UPB) 8.3 % 3.4 % 0.9 % 0.1 % Weighted Average 90+ Delinquency (as a % of Original Balance) 1.4 % 1.3 % 0.9 % 0.1 % Weighted Average LTV of 90+ Delinquent Loans (FHFA HPI Estimate) (2) 52.6 % — % 69.9 % 70.4 % Fair value of first loss piece (3,5) $18,057 $21,389 $52,531 $31,406 Investment thickness (4) 19.92 18.84 7.27 10.15 (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. (4) The fair value of the first loss piece presented for AOMT 2023-1 is the total at risk for the Majority-Owned Affiliate. (5) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, AOMT 2023-7, and AOMT 2024-3 is the total at risk for the Majority-Owned Affiliates. (6) AOMT 2024-3 reflects the one-month CPR. 39 Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2023, unless otherwise stated: AOMT 2019 Securitizations AOMT 2020 Securitizations AOMT 2023 Securitizations ($ 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 (3,5,6) $18,057 $21,389 $55,056 Investment thickness (4) 19.15 % 18.57 % 3.78 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) AOMT 2020-3 does not have LTV or Federal Housing Finance Agency Home Price Index Estimates (“FHFA HPI Estimates”); accordingly, original LTV is used. (3) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (4) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. (5) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, and AOMT 2023-7 is the total at risk for the Majority-Owned Affiliates. (6) AOMT 2023-5 reflects one-month CPR. 40 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 March 31, 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 $ 11,824 $ — $ 11,824 $ 702 $ — $ 702 $ 11,122 $ — $ 11,122 Subordinate 58,955 — 58,955 19,726 — 19,726 39,229 — $ 39,229 Interest only / excess 13,982 — 13,982 1,830 — 1,830 12,152 — $ 12,152 Whole pool (2) — 360,375 360,375 — — — — 360,375 $ 360,375 Retained RMBS in VIEs (3) — — — 22,243 — 22,243 (22,243) — (22,243) Subtotal $ 84,761 $ 360,375 $ 445,136 $ 44,501 $ — $ 44,501 $ 40,260 $ 360,375 $ 400,635 Investment in Majority Owned Affiliates $ 18,021 $ — $ 18,021 $ — $ — $ — $ 18,021 $ — $ 18,021 Total $ 102,782 $ 360,375 $ 463,157 $ 44,501 $ — $ 44,501 $ 58,281 $ 360,375 $ 418,656 41 (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 March 31, 2024 were purchased from a broker to whom the Company owes approximately $360.0 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 $119.8 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. 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 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. 42 The following table sets forth information with respect to our RMBS ending balances, at fair value, for the period ended March 31, 2024: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value $ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058 Acquisitions: Retained bonds received in securitizations — 1,338 1,713 465 — 3,516 Third party securities — — — — 359,892 359,892 Effect of principal payments / called deals — (201) — (392,362) (392,563) IO and excess servicing prepayments — — — (341) — (341) Changes in fair value, net — (285) 1,577 798 483 2,573 Ending fair value $ — $ 11,824 $ 58,955 $ 13,981 $ 360,375 $ 445,135 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 $ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338 Acquisitions: Retained bonds received in securitizations — 9,831 4,880 3,530 — 18,241 Third party securities — — — — 1,741,864 1,741,864 Effect of principal payments / called deals — (869) — — (2,339,028) (2,339,897) IO and excess servicing prepayments — — — (1,396) — (1,396) Changes in fair value, net — 52 1,207 501 (3,852) (2,092) Ending fair value $ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058 43 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of March 31, 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 March 31, 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 March 31, 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. 44 CMBS In November 2020, we participated in a securitization transaction of a pool of small balance commercial mortgage loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial mortgage loans with a carrying value of approximately $31.2 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million. Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 ($ in thousands) UPB of loans $109,742 $112,302 Number of loans 142 145 Weighted average loan coupon 7.5 % 7.5 % Average loan amount $773 $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 March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital (in thousands) Subordinate 2,706 — 2,706 2,706 — 2,706 Interest only / excess 3,886 — 3,886 3,886 — 3,886 Total $ 6,592 $ — $ 6,592 $ 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, and securitizations of our whole loans. Our financing sources historically have included the foregoing, as well as capital contributions from our investors prior to our IPO, and the proceeds from our IPO and concurrent private placement (which capital has all been deployed). Going forward, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related, or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources, and the investment opportunities available to us. We have used and expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage‑related assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we have financed and expect to continue to finance a substantial portion of our mortgage loans utilizing fixed-rate term securitization funding that provides long‑term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. 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. 45 Description of Existing Financing Arrangements As of March 31, 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 March 31, 2024, we renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods simultaneously decreasing the interest rate pricing margin and replaced our existing $250 million loan financing facility with Global Investment Bank 2 with a new $250 million loan financing facility with Global Investment Bank 2 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 March 31, 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 March 31, 2024 was $10.0 million. A description of each loan financing facility in place during the quarter ended March 31, 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 March 31, 2024, the termination date of the master repurchase agreement was September 25, 2024. 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, as of March 25, 2024, 2.00% and (2) the average SOFR for each U.S. Government Securities Business Day (as defined in the master repurchase agreement) beginning on April 11, 2022 and ending on the day that is two U.S. Government Securities Business Days prior to the date the applicable loan is repurchased by the applicable subsidiary. The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement. In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) maintenance of a minimum tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. The agreement contains margin call provisions that provide Multinational Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Multinational Bank 1 may require us or our subsidiaries to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Multinational Bank 1’s right to liquidate the mortgage loans then subject to the agreement. We and our subsidiaries are also required to pay certain customary fees to Multinational Bank 1 and to reimburse Multinational Bank 1 for certain costs and expenses incurred in connection with its structuring, management, and ongoing administration of the master repurchase agreement. 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 Investment Bank 2 entered into on February 13, 2020. Our two subsidiaries are each considered a “Seller” under this agreement. Pursuant to the agreement, on 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. 46 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 2.10% to 3.35%. he 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%. 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. 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 $239.3 million of unpaid principal balance. The Company repaid these financing facilities in full on January 4, 2023, at which time the facilities were terminated pursuant to their terms. 47 Regional Bank 1 Loan Financing Facility. On December 21, 2018, we and one of our subsidiaries entered into a master repurchase agreement with a regional bank (“Regional Bank 1”). This financing facility was substantially unused, and expired by its terms on March 16, 2023. The following table sets forth the details of our financing lines as of each of March 31, 2024 and December 31, 2023: Interest Rate Pricing Spread Drawn Amount Note Payable Base Interest Rate March 31, 2024 December 31, 2023 ($ in thousands) Multinational Bank 1 (1) Average Daily SOFR 2.00% - 2.10% $ 188,918 $ 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% 95,084 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 $ 284,002 $ 290,610 (1) On March 25, 2024, this financing facility was extended through September 25, 2024 in accordance with the terms of the agreement, which contemplates six-month renewals, with an interest rate pricing spread of 2.00%. Prior to this extension the interest rate pricing spread was up to 2.10%. (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. Further, the interest rate pricing margin will range from 2.10% to 3.35%, based on loan status, dwell time and other factors. Prior to this extension the interest rate pricing spread was up to 3.45%. (3) This financing facility has a termination date of November 7, 2024. (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 financing line as of March 31, 2024: Note Payable Borrowing Capacity Balance Outstanding Available Financing (in thousands) Multinational Bank 1 $ 600,000 $ 188,918 $ 411,082 Global Investment Bank 2 250,000 — 250,000 Global Investment Bank 3 200,000 95,084 104,916 Total $ 1,050,000 $ 284,002 $ 765,998 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.March 31, 2024, this financing facility had no unused borrowing capacity as the outstanding borrowings were based on static pools of mortgage loans. 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 March 31, 2024 and December 31, 2023: 48 March 31, 2024 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury securities $ 148,992 5.50 % 9 RMBS (1) $ 44,501 6.96 % 17 Total $ 193,493 5.84 % 11 December 31, 2023 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) RMBS (1) 44,643 7.04 % 16 Total $ 193,656 5.91 % 11 (1) A portion of repurchase debt outstanding as of both March 31, 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) Q2 2022 128,365 92,598 132,629 Q3 2022 67,454 50,988 67,454 Q4 2022 52,544 56,426 63,357 Q1 2023 442,214 180,165 442,214 Q2 2023 340,701 101,731 340,701 Q3 2023 188,101 87,279 188,101 Q4 2023 193,656 62,536 193,656 Q1 2024 193,493 69,254 193,493 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 In March 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 60% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 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 majority owned affiliates (“MOAs”) was approximately $4.0 million, including a retained discount on issuance of approximately $0.9 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 March 31, 2024. 49 In December 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 60% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-7 issued approximately $397.2 million in face value of bonds. Our proportionate share of 10.36% of the retained bonds and investments in 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 March 31, 2024. In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 36% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-5 issued approximately $260.6 million in face value of bonds. Our proportionate share of 34.42% of the retained bonds and investments in MOAs was approximately $8.7 million, including a retained discount on issuance of approximately $2.7 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $63.4 million and retained cash of $10.7 million, which was used for operational purposes. We derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of March 31, 2024. In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured exclusively by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-4 issued approximately $259.4 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $197.3 million and retained cash of $35.7 million, which was used for new loan purchases and operational purposes. We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. We have consolidated the AOMT 2023-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of March 31, 2024. In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 59% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of bonds. Our proportionate share of 41.21% of the retained bonds and investments in MOAs was approximately $21.8 million, including a retained discount on issuance of approximately $6.8 million. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $190.1 million and retained cash of $15.9 million, which was used for operational purposes. We derecognized the mortgage loans sold in this transaction and recorded an investment in majority-owned affiliate located within “other assets” on our consolidated balance sheet as of March 31, 2024. We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions. Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Cash Availability Cash and cash equivalents Our cash balance as of March 31, 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. Due to the conversion of our financing facility with Global Investment Bank 3 to a static pool financing facility, which limited our mark-to-market exposure, some of our cash was restricted, as further described below, and held in an economic interest rate hedging account for the benefit of Global Investment Bank 3, for its benefit and under its control. 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. 50 Restricted Cash Restricted cash of approximately $2.8 million as of March 31, 2024 was comprised of: $0.1 million was held for the benefit of Global Investment Bank 3, the majority of which 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, $2.4 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. Cash Flows Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Cash flows provided by (used in) operating activities $ 40,222 $ 276,606 Cash flows provided by (used in) investing activities $ (4,819) $ (421,010) Cash flows provided by financing activities $ (37,679) $ 162,160 Net increase in cash and restricted cash $ (2,276) $ 17,756 The cash provided by operating activities of $40.2 million for the three months ended March 31, 2024 as compared to the cash provided of $276.6 million for the three months ended March 31, 2023 was primarily due to the volume of residential mortgage loans sold into affiliate’s securitization trust during the first three months of 2023, as compared to 2024. The use of investing cash flows of $(4.8) million for the three months ended March 31, 2024 as compared to cash provided by investing activities of $(421.0) million for the three months ended March 31, 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 used of $(37.7) million for the three months ended March 31, 2024 as compared to $162.2 million provided for the three months ended March 31, 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. 51 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information. 52